American Natural Energy (ANR) 10-Q 2008 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended September 30, 2008;

or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                    to                    .

Commission File Number0-18596

American Natural Energy Corporation

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

Oklahoma	73-1605215
(State or other jurisdiction of incorporation of organization)	(I.R.S employer identification no.)

One Warren Place, 6100 South Yale, Suite 300, Tulsa, Oklahoma 74136

(Address of principal executive offices, zip code)

(918) 481-1440
(Issuer’s Telephone Number, Including Area Code)

     Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

     As of November 12, 2008 52,997,673 shares of the Registrant’s Common Stock, $0.001 par value, were outstanding.

AMERICAN NATURAL ENERGY CORPORATION

QUARTERLY REPORT ON FORM 10-Q

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets —September 30, 2008 and December 31, 2007		3
	Condensed Consolidated Statements of Operations — Three Months and Nine Months Ended September 30, 2008 and September 30, 2007		4
	Condensed Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2008 and September 30, 2007		5
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis or Plan of Operation		13
Item 4.	Controls and Procedures		20
PART II — OTHER INFORMATION
Item 3.	Defaults Upon Senior Securities		22
Item 6.	Exhibits		22
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2008			December 31, 2007
	$			$
ASSETS
Current assets:
Cash and cash equivalents		121,312			136,856
Accounts receivable — joint interest billing, net of allowance for doubtful accounts of $66,282		7,154			8,822
Accounts receivable — oil and gas sales		84,835			48,794
Prepaid expenses and other		78,647			67,722
Oil inventory		19,949			12,273
Total current assets		311,897			274,467
Proved oil and natural gas properties, full cost method of accounting, net of accumulated depletion, depreciation, amortization and impairment of $20,350,794 and $20,087,252		2,840,455			2,819,355
Unproved oil and natural gas properties		—			9,095
Equipment and other fixed assets, net of accumulated depreciation of $914,420 and $764,931		263,811			523,551
Total assets		3,416,163			3,626,468
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities		2,731,316			2,066,376
Revenue payable		3,347,371			3,347,371
Accrued interest		2,182,732			1,533,229
Insurance note payable		—			17,700
Notes payable (Note 4)		75,217			75,217
Note payable — related party (Note 5)		135,851			195,850
Taxes due on dissolution of subsidiary (Note 7)		155,252			190,252
Convertible secured debentures (Note 4)		10,825,000			10,825,000
Other current liabilities		113,785			113,785
Total current liabilities		19,566,524			18,364,780
Asset retirement obligation (Note 9)		1,899,528			1,753,110
Total liabilities		21,466,052			20,117,890
Commitments and contingencies (Note 8)
Stockholders’ deficit:
Common stock
Authorized — 250,000,000 shares with par value of $0.001 Issued and outstanding — 52,997,673 shares		52,997			52,997
Additional paid-in capital		20,321,226			20,321,226
Accumulated deficit, since January 1, 2002 (in conjunction with the quasi- reorganization stated capital was reduced by an accumulated deficit of $2,015,495)		(42,011,483	)		(41,151,844	)
Accumulated other comprehensive income		3,587,371			4,286,199
Total stockholders’ deficit		(18,049,889	)		(16,491,422	)
Total liabilities and stockholders’ deficit		3,416,163			3,626,468

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

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AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
For the three-month and nine-month periods ended September 30, 2008 and 2007

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007
	$			$			$			$
Revenues:
Oil and gas sales		531,601			274,741			1,987,539			859,995
Operations income		31,969			39,645			128,993			132,104
Interest and other income		—			158			—			1,324
		563,570			314,544			2,116,532			993,423
Expenses:
Lease operating expense		366,769			85,776			1,245,138			202,470
Production taxes		54,080			26,032			213,072			70,259
General and administrative		285,167			274,931			954,403			875,732
Foreign exchange (gain) loss		(330,614	)		745,830			(698,828	)		1,701,998
Interest and financing costs		223,739			232,316			681,805			772,215
Related party interest		3,601			7,076			12,481			16,894
Depletion, depreciation and amortization — oil and gas properties		65,342			57,449			263,631			217,636
Accretion of asset retirement obligation		50,134			49,264			146,418			143,941
Depreciation and amortization — other assets		49,152			36,473			164,129			108,292
Doubtful accounts expense		40,087						40,087
Gain on settlement of notes payable		—			(836,660	)		(46,165	)		(836,660	)
Total expenses		807,457			678,487			2,976,171			3,272,777
Net loss		(243,887	)		(363,943	)		(859,639	)		(2,279,354	)
Other comprehensive income— net of tax:
Foreign exchange translation		(330,614	)		745,830			(698,828	)		1,701,998
Other comprehensive income (loss)		(330,614	)		745,830			(698,828	)		1,701,998
Comprehensive income (loss)		(574,501	)		381,887			(1,558,467	)		(577,356	)
Basic and diluted loss per share		0.00			(0.01	)		(0.02	)		(0.04	)
Weighted average number of shares outstanding
Basic		52,997,673			52,997,673			52,997,673			52,997,673
Diluted		52,997,673			52,997,673			52,997,673			52,997,673

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

4

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the nine-month periods ended September 30, 2008 and 2007

	2008			2007
	$			$
Cash flows from operating activities:
Net loss		(859,639	)		(2,279,354	)
Non cash items:
Depreciation, depletion and amortization		427,760			325,928
Accretion of asset retirement obligation		146,418			143,941
Foreign exchange (gain)/loss		(698,828	)		1,701,998
Gain on settlement of notes payable		(46,165	)		(836,660	)
Doubtful accounts expense		40,087			—
Changes in working capital items:
Accounts receivable		(189,510	)		414,677
Oil inventory		(7,765	)		3,380
Prepaid expenses		15,219			83,759
Accounts payable, accrued liabilities and interest		1,498,125			(633,430	)
Net cash provided (used) by operating activities		325,702			(1,075,762	)
Cash flows from investing activities:
Purchase and development of oil and gas properties		(275,547	)		(1,180,818	)
Purchase of fixed assets		—			(80,250	)
Proceeds from sale of fixed assets		12,000			21,500
Proceeds from sale of participation rights		—			2,946,419
Net cash provided (used) in investing activities		(263,547	)		1,706,851
Cash flows from financing activities:
Payment of notes payable		(17,699	)		(432,600	)
Payment of notes payable — related party		(60,000	)		—
Change in bank overdrafts outstanding		—			(6,728	)
Net cash used in financing activities		(77,699	)		(439,328	)
Increase (decrease) in cash and cash equivalents		(15,544	)		191,761
Cash beginning of period		136,856			491
Cash end of period		121,312			192,252

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

5

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)(continued)
For the nine-month periods ended September 30, 2008 and 2007

	2008			2007
	$			$
Supplemental disclosures:
Interest paid		13,019			109,144
Non cash investing and financing activities:
Change in fixed assets resulting from adjustment to amounts previously billed		(83,611	)		—
Change in accounts payable resulting from direct payment of obligation by third party		—			553,581
Change in accounts payable resulting from the purchase of oil and gas properties		—			(976,320	)

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

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

1	Significant accounting policies
	The accounting policies and methods followed in preparing these unaudited condensed consolidated financial statements are those used by American Natural Energy Corporation (the “Company”) as described in Note 1 of the notes to consolidated financial statements included in the Annual Report on Form 10-KSB. The unaudited condensed consolidated financial statements for the three and nine-month period ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and do not conform in all respects to the disclosure and information that is required for annual consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These interim condensed consolidated financial statements should be read in conjunction with the most recent annual consolidated financial statements of the Company.
	In the opinion of management, all adjustments, all of which are of a normal recurring nature, considered necessary for fair statement have been included in these interim condensed consolidated financial statements. Operating results for the nine-month period ended September 30, 2008 are not indicative of the results that may be expected for the full year ending December 31, 2008.
	Certain financial presentations for the periods presented for 2007 have been reclassified to conform to the 2008 presentation.
	Income tax expense
	SFAS 109,Accounting for Income Taxes, requires that the Company record a valuation allowance when it is more likely than not that a portion or all of its deferred tax asset will not be realized. As a result of such evaluation as of December 31, 2007 and September 30, 2008, the Company concluded that it is more likely than not that no benefit from deferred tax assets will be realized. Therefore, for all periods presented, a full valuation allowance was recorded, causing the effective income tax expense to be zero.
	Interest and financing costs
	Interest expense is recognized in the period incurred, and consists primarily of interest cost associated with the Company’s 8% convertible secured debentures (the “Debentures”) issued in October 2003.
	A portion of interest cost is capitalized on significant investments in unproved properties that were not being depreciated, depleted or amortized and on which exploration and development activities were in progress during the reporting period. The amount of interest cost to be capitalized is primarily determined using the weighted average interest rate on outstanding borrowings. No interest was capitalized during the nine months ended September 30, 2008 and September 30, 2007.
	Foreign exchange and currency translation

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

	The Company’s functional and reporting currency is the U.S. dollar. Transactions denominated in foreign currencies are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Exchange gains or losses on transactions are included in earnings.
	For Gothic, whose functional currency is the Canadian dollar, the results of operations are translated from local currencies into U.S. dollars using average exchange rates during each period; assets and liabilities are translated using exchange rates at the end of each period. Adjustments resulting from the translation process are reported in a separate component of other comprehensive income and are not included in the determination of the results of operations.
	New pronouncements
	In February 2007, the FASB issued Statement of Financial Accounting Standards, No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (“ SFAS No. 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 expands the use of fair value measurement and applies to entities that elect the fair value option. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company’s adoption of SFAS 159 did not have a significant impact on its financial position, results of operations or cash flows.
	In March 2008, the Financial Accounting Standards Board issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), an amendment of FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). SFAS 161 requires entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. The standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged but not required. SFAS 161 also requires entities to disclose more information about the location and amounts of derivative instruments in financial statements, how derivatives and related hedges are accounted for under SFAS 133, and how the hedges affect the entity’s financial position, financial performance, and cash flows. The Company does not believe the adoption of SFAS 161 will have an impact on its financial position, results of operations or cash flows.
2	Earnings (loss) per share
	Basic earnings (loss) per share is computed by dividing net income or loss (the numerator) by the weighted average number of shares outstanding during the period (the denominator). The computation of diluted earnings per share is the same as for basic earnings per share except the denominator is increased to include the weighted average additional number of shares that would have been outstanding if previously granted stock options had been exercised, unless they are anti-dilutive. Because of the net loss for the three months and nine months ended September 30, 2008 and 2007, the basic and diluted average outstanding shares are considered the same, since including the impact of the outstanding options would have an antidilutive effect on the net loss per share calculation.

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American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

3	Going Concern, Liquidity and Capital Resources
	The Company currently has a severe shortage of working capital and funds to pay its liabilities. The Company’s debentures in the amount of $10,825,000 which were due on September 30, 2006 have not been repaid or refinanced as of November 12, 2008 and are in default. As of September 30, 2008, interest in the amount of $2,165,000 on the debentures had been accrued and was unpaid when due. The Company has no current borrowing capacity with any lender. The Company incurred a net loss of $860,000 for the nine months ended September 30, 2008. The Company has sustained substantial losses during the year ended December 31, 2007, totaling approximately $3.2 million and has a working capital deficiency and an accumulated deficit at September 30, 2008 which leads to questions concerning the ability of the Company to meet its obligations as they come due. The Company also has a need for substantial funds to develop its oil and gas properties and repay borrowings as well as to meet its other current liabilities.
	The accompanying financial statements have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. The ability of the Company to continue as a going concern is dependent upon adequate sources of capital and the Company’s ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop its oil and gas reserves and pay its obligations.
	Management’s strategy has been to obtain additional financing or industry partners. Certain covenants included in the 8% convertible secured debentures in the amount of $10,825,000 which were due September 30, 2006, limit the amount of additional indebtedness the Company can incur to $2 million. It is management’s intention to raise additional debt or equity financing to either repay or refinance these debentures and to fund its operations and capital expenditures or to enter into another transaction in order to maximize shareholder value. Failure to obtain additional financing can be expected to adversely affect the Company’s ability to pay its obligations, further the development of its properties, including the ExxonMobil area of mutual interest (the “AMI”), grow revenues, oil and gas reserves and achieve and maintain a significant level of revenues, cash flows, and profitability. There can be no assurance that the Company will obtain this additional financing at the time required, at rates that are favorable to the Company, or at all. Further, any additional equity financing that is obtained may result in material dilution to the current holders of common stock.
4	Notes Payable and Long Term Debt
	8% Convertible secured debentures
	In October 2003, the Company completed financing transactions of $12 million by issuing the Convertible Secured Debentures (“Debentures). The Debentures are collateralized by substantially all of the Company’s assets and have covenants limiting unsecured borrowing to $2 million and restricting the payment of dividends and capital distributions. As amended, the Debentures were repayable on September 30, 2006 with interest payable quarterly commencing December 31, 2003 at

9

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

	8% per annum. The conversion rights applicable to the Debentures expired on September 29, 2006 and were not renewed.
	Since June 30, 2006, the Company has not made any interest payments due under the Debenture agreement. In addition, the Company failed to repay or redeem the Debentures by the due date of September 30, 2006. Pursuant to the Indenture governing the Debentures, the Trustee may, and upon request in writing from the holders of not less than 25% of the principal amount of the Debentures then outstanding, declare the outstanding principal of and all interest on the Debentures and other moneys outstanding under the Indenture to be immediately due and payable. In addition, the Trustee will have the right to enforce its rights on behalf of the Debenture holders against the collateral for the Debentures which are collateralized by substantially all of the Company’s assets. At September 30, 2008, the Debentures are outstanding in the principal amount of $10,825,000 and accrued and unpaid interest at that date amounts to $2,165,000. As of November 12, 2008, neither the Trustee nor the requisite holders of principal amount of Debentures have declared the Debentures to be immediately due and payable.
	On December 22, 2006, Dune Energy acquired $3.0 million principal amount of the Company’s Debentures held by TransAtlantic Petroleum. In January and February, 2007, Dune Energy acquired from the holders an additional $4,895,000 principal amount of Debentures bringing Dune Energy’s total holdings of the Company’s Debentures outstanding to $7,895,000 principal amount as of November 12, 2008.
	Notes payable
	On December 16, 2005, the Company converted its $99,000 accounts payable balance to Patterson Services to a note payable. Monthly payments of $8,710 which include interest at the rate of 10% per annum were to be made through December 2006. At September 30, 2008, nine payments were past due.
5	Note payable — related party
	On May 4, 2006, the Company entered into a note payable with Mike Paulk, an officer of the Company, in the amount of $198,000. On August 9, 2006 Mike Paulk loaned an additional $10,000 to the Company. To date, $72,000 has been repaid. Interest will accrue at the rate of 10% per annum.
6	Oil and gas properties
	On October 19, 2005 the Company executed the definitive Exploration and Development Agreement (the “Agreement”) with Dune Energy, Inc. (“Dune Energy”), that provided for the creation of an area of mutual interest covering an area of approximately 31,367 acres in which the Company and Dune Energy agreed to share all rights, title and interest owned or acquired on an equal basis. The area of mutual interest created by the Agreement includes the acreage covered by the Company’s Joint Development Agreement, as amended, with ExxonMobil Corporation that was originally executed in November 2002. On June 26, 2007 Dune Energy agreed to increase its participation to 75% of the Company’s interests under these agreements, excluding the area under the Bayou Couba lease itself, where Dune Energy retains a participation of 50% of the Company’s interest, in return for a payment

10

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

	of $3 million to the Company, which was received in July 2007. On September 1, 2007 Dune Energy was elected successor operator under the joint development agreement and paid the Company $500,000. These payments reduced the Company’s unproved oil and gas properties during the periods ended June 30 and September 30, 2007.
7	Taxes Payable
	On January 31, 2005, the Company made application with applicable Canadian authorities to dissolve and terminate Gothic Resources Inc. (“Gothic”), the Company’s Canadian subsidiary. In conjunction with the application for dissolution, the prior tax returns and tax status of Gothic have been reviewed by the Canada Customs and Revenue Agency (“CRA”). The CRA has assessed Gothic $190,000 (Cdn$187,000) in additional taxes and interest based on the review of such returns. Payments totaling $35,000 have been made against this liability during the first three quarters of 2008.
8	Commitments and Contingencies
	With respect to the acquisition of the Company’s Bayou Couba lease acreage, the Company agreed that the Class 7 creditors to the ANEC/Couba Reorganization Plan (“Plan”) would receive a contingent payable from future production of the properties in the amount of approximately $4.9 million. The contingent payable is in the form of a net profits interest (“NPI”). The amount of the NPI, which ranges from 6% to 50%, depends on whether the well existed as of the effective date of the Plan or, if not, where within the acreage the well was drilled. The Company is entitled to recover all capital and operating costs prior to the NPI becoming payable. At a minimum, the Class 7 creditors are to receive an overriding royalty interest that is in payment of the contingent payable. The Company is accounting for any contingent purchase price payments to the Class 7 creditors as additions to the full cost pool as production occurs.
	The Company agreed that, after repayment to the Company of 200% of all costs of bankruptcy, drilling, development and field operations from net revenues of the Bayou Couba Lease and the 23.5 square mile area of mutual interest, including payments made by the Company to all creditors of all classes under the Plan, the former holders of equity securities of Couba will be entitled to a working interest in the wells in the Bayou Couba Lease equal to 25% of the working interest obtained by the Company directly from Couba at the time of confirmation and as a result of the Plan of reorganization of Couba and a 25% interest in the Company’s interest in the 23.5 square mile area of mutual interest held by the Company on the effective date of the Plan.
	The Company is a defendant in various legal proceedings which it considers to be routine litigation that is incidental to its business. The Company does not expect to incur any material liability as a consequence of such litigation.
9	Asset retirement obligations
	Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143,Accounting for Asset Retirement Obligations(“SFAS 143”). This statement applies to

11

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2008 and 2007

obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction and development of the assets.

SFAS 143 requires that the fair value of a liability for a retirement obligation be recognized in the period in which the liability is incurred. For oil and gas properties, this is the period in which an oil or gas well is acquired or drilled. The asset retirement obligation, which for the Company consists of the cost of plugging and abandonment of oil and gas properties is capitalized as part of the carrying amount of the asset at its discounted fair value. The liability is then accreted each period until the liability is settled or the asset is sold, at which time the liability is reversed.

The components of the change in the Company’s asset retirement obligations for the period ended September 30, 2008 are shown below.

Asset retirement obligations, January 1	1,753,110
Additions and revisions	—
Settlements and disposals	—
Accretion expense	146,418
Asset retirement obligations, June 30, 2008	1,899,528

10	Stock-based compensation
	On January 1, 2006, the Company adopted FAS 123(R), which requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The Company has elected to use the modified prospective application method such that FAS 123(R) applies to new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled after the effective date. The Company has equity incentive plans that provide for the issuance of stock options. These plans are discussed more fully in the Company’s Form 10-KSB for the year ended December 31, 2007. All options expire five years from the date of grant. Generally, stock options granted to employees and directors vest ratably over two years from the grant date. The Company recognizes stock-based compensation expense over the vesting period of the individual grants.
	No new stock options have been granted subsequent to January 1, 2006. At September 30, 2008 there were 950,000 options outstanding and exercisable with a weighted average exercise price of $0.51. The weighted average remaining contractual term for these options at September 30, 2008 was 6 months. These options had no intrinsic value at September 30, 2008.

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Item 2. Management’s Discussion and Analysis or Plan of Operation

General

     We currently are experiencing a severe shortage of working capital and funds to pay our liabilities. Our debentures in the amount of $10,825,000 which were due on September 30, 2006 have not been repaid or refinanced as of November 12, 2008 and are in default. As of September 30, 2008, interest in the amount of $2,165,000 on the debentures had accrued and was unpaid when due. We have no current borrowing capacity with any lender. We have incurred a net loss of $860,000 for the nine months ended September 30, 2008. We have sustained substantial losses during the year ended December 31, 2007, totaling approximately $3.2 million, and we have a working capital deficiency and an accumulated deficit at September 30, 2008 which leads to questions concerning our ability to meet our obligations as they come due. We also have a need for substantial funds to develop our oil and gas properties and repay borrowings as well as to meet our other current liabilities.

     The accompanying financial statements in this Report have been prepared on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. The independent registered public accounting firm’s report on our financial statements as of and for the year ended December 31, 2007 includes an explanatory paragraph which states that we have sustained substantial losses in 2007 and 2006 and have a working capital deficiency and an accumulated deficit at December 31, 2007, that raise substantial doubt about our ability to continue as a going concern. As a result of our losses incurred and current negative working capital, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. Our ability to continue as a going concern is dependent upon adequate sources of capital and our ability to sustain positive results of operations and cash flows sufficient to continue to explore for and develop our oil and gas reserves and pay our obligations.

     As described above, we failed to repay the principal on our outstanding 8% Convertible Secured Debentures at their maturity on September 30, 2006 and also failed to meet any of the interest payments due quarterly from June 30, 2006 through November 12, 2008. Accordingly, pursuant to the Indenture governing the Debentures, an Event of Default has occurred and is continuing at this time. Under those circumstances, the Trustee may, and upon request in writing from the holders of not less than 25% of the principal amount of the Debentures then outstanding, declare the outstanding principal of and all interest on the Debentures and other moneys outstanding under the Indenture to be immediately due and payable. In addition, the Trustee will have the right to enforce its rights on behalf of the Debenture holders against the collateral for the Debentures which are collateralized by substantially all of our assets.

     As a consequence of filing certain annual financial statements and other reports with Canadian securities commissions and based upon orders subsequently issued on October 29, 2008 by the various Canadian securities commissions revoking the Cease Trade Orders previously issued by those securities commissions in 2007 and early 2008, we submitted a request to the TSX on October 30, 2008 for the reinstatement of trading of our shares on

13

common stock on that exchange. The TSX will be issuing a bulletin dated November 14, 2008 on the reinstatement of trading of the Company effective at the opening, November 17, 2008.

     A Comparison of Operating Results For The Nine Months Ended September 30, 2008 and September 30, 2007

     We incurred a net loss of $860,000 during the nine months ended September 30, 2008 compared to a net loss of $2,279,000 for the nine months ended September 30, 2007. During the nine months ended September 30, 2008, our revenues were comprised of oil sales and operations income totaling $2,117,000 compared with oil and gas sales and operations income of $992,000 during the same period of 2007. Our oil sales for the nine months ended September 30, 2008 were higher as a result of higher oil prices and increased production. Our net average daily production for the nine month period ended September 30, 2008 increased by 33% over the same period of the prior year, from 249 (48 net) barrels of oil equivalent per day to 369 (64 net) barrels of oil equivalent per day. Oil prices increased for the nine month period ended September 30, 2008 over the same period of the prior year from $65.09 per barrel of oil equivalent to $116.33 per barrel of oil equivalent. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production. Our operations income was $129,000 during the period ended September 30, 2008, versus $132,000 for the same period of the prior year. Since Dune Energy’s assumption of operations of the Bayou Couba field as of September 1, 2007, we no longer bill a portion of our overhead as operator to other working interest owners. We do however, bill depreciation expense to the joint account for field equipment we own that is used for the benefit of all owners in the Bayou Couba field and which accounts for our operations income for the first three quarters of 2008.

     Our total expenses were $2,976,000 for the nine months ended September 30, 2008 compared to total expenses of $3,273,000 for the nine months ended September 30, 2007. Our general and administrative expenses were higher for the nine months ended September 30, 2008 compared to the same period for 2007 at $954,000 and $876,000 respectively due to higher costs for professional services and regulatory filing fees.

     Interest and financing costs for the nine months ended September 30, 2008 were $694,000 compared to $789,000 for the nine months ended September 30, 2007. The decrease in interest expense was related to the decrease in our notes payable. Our interest expense primarily consists of interest costs related to our 8% convertible debentures.

     Lease operating expenses of $1,245,000, production taxes of $213,000 and depletion, depreciation and amortization of $574,000 during the nine months ended September 30, 2008 changed from $202,000, $70,000, and $470,000, respectively, during the nine months ended September 30, 2007. Lease operating expenses increased on a per unit basis of production after field operations were transferred to Dune. Production taxes increased principally as a result of higher prices realized for the sale of oil and higher production during the period. The increase in depletion, depreciation and amortization is due to a decrease in reserves which results in

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increased depletion costs per unit of production, higher production during the period and an increase in fixed assets which increases depreciation expense.

     During the nine months ended September 30, 2008, we had a foreign exchange gain of $699,000, compared to a $1,702,000 foreign exchange loss for the nine months ended September 30, 2007. Our foreign exchange gains and losses arise out of an inter-company indebtedness we owe to our wholly-owned subsidiary, Gothic, which is payable in Canadian dollars. The foreign exchange gain for the nine months ended September 30, 2008 was caused by the strengthening of the US dollar against the Canadian dollar.

     Through September 30, 2008, the Company settled $78,000 of vendor notes payable for a net gain of $46,000. During the same period in 2007, the Company settled $1,397,000 of vendor notes payable for a net gain of $837,000.

     We recorded an allowance for doubtful accounts of $40,000 in the third quarter of 2008. There was no such charge for the same period in 2007.

Liquidity and Capital Resources

General

     A decline in oil and natural gas production decreased revenues during the year ended December 31, 2007. However, revenues were favorably impacted by a 31% increase in oil production and a 79% increase in oil prices for the first three quarters of 2008. To date, our production has not been sufficient to fund our operations and drilling program. We have funded our capital expenditures and operating activities through a series of private and public debt and equity transactions and through an increase in vendor payables and note payables. At September 30, 2008, we do not have any available borrowing capacity and have negative working capital of approximately $19.3 million. Our current liabilities include $10.8 million of convertible secured debentures originally due on September 30, 2006, but which remain unpaid and outstanding as of November 12, 2008.

     We have substantial need for capital to develop our oil and gas prospects and opportunities we believe that have been identified in our ExxonMobil AMI. Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and through an increase in vendor payables and notes payable. We expect any future capital expenditures for drilling and development to be funded from the sale of drilling participations and equity capital. It is management’s plan to raise additional capital through the sale of interests in our drilling activities or other strategic transaction; however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future.

A Comparison of Cash Flow For The Nine Months Ended September 30, 2008 and September 30, 2007

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     Our net cash provided by operating activities was $326,000 for the nine months ended September 30, 2008 as compared to net cash used by operating activities of $1,076,000 for the nine months ended September 30, 2007, an increase of $1,402,000. The increase in net cash provided by operating activities for the nine months ended September 30, 2008 was primarily due to positive changes in accounts payable, partially offset by negative changes in accounts receivable during the period. Changes in working capital items had the effect of increasing cash flows from operating activities by $1.3 million during the nine months ended September 30, 2008 due to an increase in accounts payable of $1.5 million, partially offset by an increase in accounts receivable. Changes in working capital items had the effect of decreasing cash flows from operating activities by $132,000 during the nine months ended September 30, 2007 because accounts payable, revenues payable and accrued liabilities turnover exceeded that of accounts receivable.

     We used $264,000 of net cash in investing activities during the nine months ended September 30, 2008 compared to net cash provided of $1,707,000 in 2007. We used $276,000 of cash for the purchase and development of oil and gas properties, partially offset by proceeds of $12,000 received for the sale of fixed assets. The 2007 cash provided by investing activities included $2,946,000 in proceeds from the sale of participation rights (which were accounted for as a reduction in unproved properties), partially offset by $1,181,000 for the purchase and development of oil and gas properties. We used $80,000 for the purchase of fixed assets and received proceeds of $22,000 from the sale of fixed assets.

     We used $78,000 of net cash in financing activities for the nine months ended September 30, 2008 compared to $439,000 of net cash used in financing activities for the same period in 2007. For the nine months ended September 30, 2008 and 2007, net cash outflows from financing activities were primarily a result of payments against outstanding notes and bank overdrafts.

     We have no other commitments to expend additional funds for drilling activities for the rest of 2008.

How We Have Financed Our Activities

     Our activities since 2002 have been financed primarily from sales of debt and equity securities and drilling participations.

     On October 21, 2003 and October 31, 2003 we completed financing transactions of $11.695 million and $305,000, respectively, by issuing our Convertible Secured Debentures (the “Debentures”). Initially, the Debentures were repayable on September 30, 2005 with interest payable quarterly commencing December 31, 2003 at 8% per annum. At the dates of issuance, the outstanding principal of the Debentures was convertible by the holders into our common shares at a conversion price of $0.45 per share, subject to antidilution adjustment. The Debentures are collateralized by substantially all of our assets and have covenants limiting unsecured borrowings to $2 million and restricting the payment of dividends and capital

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distributions. A finder’s fee in the amount of $360,000 was paid to Middlemarch Partners Limited of London, England in connection with the financing.

     In June 2005, the Debentures were amended with approval by approximately 86% of the Debentureholders. The amendments extended the maturity date of the Debentures by one year to September 30, 2006, reduced through the maturity date of the Debentures the per share price at which the principal of the Debentures could be converted into shares of common stock to $0.15 per share, and provided for the partial release of the lien collateralizing the Debentures in the event a third party entered into an agreement with us pursuant to which the third party is granted the right to drill one or more wells on our properties and commenced that drilling activity. Under the amendments, 72,166,667 shares were issuable upon full conversion of the Debentures at the reduced conversion price; however, the conversion rights feature expired on September 29, 2006 and was not renewed.

     Out of the proceeds from the sale of the Debentures in 2003, we used approximately $5.9 million for the repayment of secured debt, approximately $2.1 million for the payment of accounts payable and used the balance primarily for exploration and development of our Bayou Couba oil and gas leases within the ExxonMobil Joint Development Agreement in St. Charles Parish, Louisiana. In addition, we paid out of the proceeds a $1.7 million production payment owing to TransAtlantic. TransAtlantic retained a 10% participation right in our AMI with ExxonMobil which we granted in March 2003 as partial consideration for the $2.0 million financing entered into at that time. On both October 21 and 31, 2003, the dates the transaction was completed, the closing sale prices for our shares were $0.70 on the TSX Venture Exchange

     Purchasers of the Debentures included TransAtlantic $3.0 million principal amount, and Quest Capital Corp., $500,000 principal amount. Mr. Brian Bayley, who has been a Director of our company since June 2001, is also President and Chief Executive Officer of Quest Capital Corp. and a Director of TransAtlantic. Quest Capital Corp. is engaged in merchant banking activities in Canada and elsewhere which includes providing financial services to small and mid-cap companies operating primarily in North America. Quest Investment Corporation is a predecessor company of Quest Capital Corp.

     In connection with the Debenture financing and under the terms of the transaction, two persons were designated to serve as Directors of our company. At present, both of such Director positions are vacant and the holders of the Debentures have not designated any persons to fill the vacancies.

     In August 2004, we completed the sale, pursuant to the issuance of stock purchase rights to all our stockholders, of 6,941,414 shares of our common stock for gross proceeds of $1,665,939. After deducting the expenses of the offering, $1,433,287 of the net proceeds was applied to our oil and natural gas well drilling activities.

     During the third quarter of 2005, we completed a private sale of 12,193,333 shares of our common stock for gross proceeds of $1,463,000 ($1,428,000 net). Additionally, 2,170,000 shares were issued as payment for professional services in the amount of $250,000 relating to

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restructuring of our Debentures. The net proceeds were used for working capital and the drilling of three wells.

          On October 19, 2005 we executed the definitive Exploration and Development Agreement (the “Agreement”) with Dune Energy, providing for the creation of an area of mutual interest covering an area of approximately 31,367 acres. Pursuant to the terms of the Agreement, Dune Energy agreed to pay us in installments a prospect fee in the amount of $1.0 million, all of which has been paid. Under the original Agreement, in the event we and Dune Energy elect to complete the first two exploratory wells drilled pursuant to the Agreement, upon the receipt by Dune Energy of a log from either of those two wells, Dune Energy would pay to us an additional prospect fee of $500,000. However, as a result of Dune Energy paying 100% of the costs for our participation in the 3D seismic survey being conducted by SEI and described above, the terms of the Agreement between us and Dune Energy were amended to waive any additional prospect fees that may be due from Dune Energy. On June 26, 2007, Dune Energy increased its participation to 75% of our interest under these agreements, excluding the area under the Bayou Couba lease itself where it retains a participation of 50% of our interest, with the payment of $3 million. On September 1, 2007 Dune Energy was elected successor operator under the joint development agreement and Dune Energy paid us an additional $500,000. We used the proceeds from these payments to reduce outstanding obligations.

     During the year ended December 31, 2005, we converted an aggregate of approximately $1.74 million of accounts payable and other current obligations into notes payable. During the year 2006, we converted an aggregate of approximately $340,000 of accounts payable into notes payable. At September 30, 2008, $75,000 principal amount of such notes was outstanding and past due.

Future Capital Requirements and Resources

     At September 30, 2008, we do not have any available borrowing capacity under existing credit facilities and our current assets are $312,000 compared with current liabilities of $19.6 million. Our current liabilities include approximately $10.8 million of secured indebtedness, which was due September 2006 and is currently in default and accounts payable, revenues payable, notes payable (a portion of which is past due), and other current obligations aggregating to approximately $8.8 million. We have substantial needs for funds to pay our outstanding payables and debt due during 2008. In addition, we have substantial need for capital to develop our oil and gas prospects and opportunities identified in our ExxonMobil AMI. At September 30, 2008, we have no commitments for additional capital to fund drilling activities in 2008.

     Since 2001, we have funded our capital expenditures and operating activities through a series of debt and equity capital-raising transactions, drilling participations and, during the last two quarters of 2004 and all of 2005 and 2006, through an increase in vendor payables and notes payable. Any capital expenditures for drilling purposes during 2008, we expect will be funded from the sale of drilling participations and equity capital. It is our intention to raise additional capital through the sale of interests in our drilling activities or other strategic transaction;

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however, we currently have no firm commitment from any potential investors and such additional capital may not be available to us in the future.

     Our business strategy requires us to obtain additional financing and our failure to do so can be expected to adversely affect our ability to further the development of our ExxonMobil AMI, grow our revenues, oil and gas reserves and achieve and maintain a significant level of revenues and profitability. There can be no assurance we will obtain this additional funding. Such funding may be obtained through the sale of drilling participations, joint ventures, equity securities or by incurring additional indebtedness. Without such funding, our revenues will continue to be limited and it can be expected that our operations will not be profitable. In addition, any additional equity funding that we obtain may result in material dilution to the current holders of our common stock.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

     With the exception of historical matters, the matters we discussed below and elsewhere in this Report are “forward-looking statements” as defined under the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. The forward-looking statements appear in various places including under the headings Item 1. Financial Information and Item 2. Management’s Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to

• our ability to repay or extend the maturity of our Debentures which were due in September 2006 and as of November 12, 2008 are in default,

• our ability to raise capital and fund our oil and gas well drilling and development plans,

• our ability to fund the repayment of our current liabilities,

• our ability to negotiate and enter into any agreement relating to a merger or sale of all or substantially all our assets or enter into a restructuring or refinancing transaction relating to our outstanding debentures and the terms of such a transaction and the price we are able to realize in such a transaction, and

• the likelihood that the Trustee under our outstanding Debentures or the requisite holders of principal amount of Debentures will demand immediate payment of the Debentures and seek to foreclose on our assets as a consequence of our existing default in the payment of interest and redemption of the Debentures which were due on September 30, 2006 and remain in default as of November 12, 2008.

These risks and uncertainties also relate to our ability to attain and maintain profitability and cash flow and continue as a going concern, our ability to increase our reserves of oil and gas

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through successful drilling activities and acquisitions, our ability to enhance and maintain production from existing wells and successfully develop additional producing wells, our access to debt and equity capital and the availability of joint venture development arrangements, our ability to remain in compliance with the terms of any agreements pursuant to which we borrow money and to repay the principal and interest when due, our estimates as to our needs for additional capital and the times at which additional capital will be required, our expectations as to our sources for this capital and funds, our ability to successfully implement our business strategy, our ability to maintain compliance with covenants of our loan documents and other agreements pursuant to which we issue securities or borrow funds and to obtain waivers and amendments when and as required, our ability to borrow funds or maintain levels of borrowing availability under our borrowing arrangements, our ability to meet our intended capital expenditures, our statements and estimates about quantities of production of oil and gas as it implies continuing production rates at those levels, proved reserves or borrowing availability based on proved reserves and our future net cash flows and their present value.

     Readers are cautioned that the risk factors described in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and other reports filed with the Commission, as well as those described elsewhere in this Report, in some cases have affected, and in the future could affect, our business plans and actual results of operations and could cause our actual consolidated results during 2008 and beyond, to differ materially from those expressed in any forward-looking statements made by or on our behalf.

     Our common shares have no trading market in the United States, and there can be no assurance as to the liquidity of any markets that may develop for our common shares, the ability of the holders of common shares to sell their common shares in the United States or the price at which holders would be able to sell their common shares. Any future trading prices of the common shares will depend on many factors, including, among others, our operating results and the market for similar securities.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report on Form 10-Q, our Chief Executive Officer and our Chief Financial Officer performed an evaluation of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, the Company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that as of the end of the period covered by this report on Form 10-Q that the Company’s disclosure controls and procedures are not effective to provide reasonable assurance that: (i) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s

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management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure by the Company; and (ii) information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In our evaluation of disclosure controls and procedures as of December 31, 2007, we concluded there were material weaknesses in our internal controls over financial reporting which we viewed as an integral part of our disclosure controls and procedures. The material weaknesses as noted below have not been remediated as of September 30, 2008.

Changes in Internal Control Over Financial Reporting

As of December 31, 2007 the Company identified material weaknesses in our internal controls over financial reporting. The material weaknesses relate to:

1. Deficiencies in segregation of duties due to:

a.	the CEO and CFO’s active involvement in the preparation of the financial statements resulting in an inability to provide an independent review and quality assurance function; and
b.	a limited number of qualified accounting personnel resulting in management and accounting personnel having wide-spread access to create and post accounting entries into the accounting system and an inability to independently review and approve accounting entries.

2. The failure to identify during the year end financial statement closing process all the journal entries required for certain complex and non-routine transactions. These entries were identified by our independent registered public accounting firm.

In order to mitigate these material weaknesses to the fullest extent possible, all financial reports are reviewed by the CEO and CFO. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, it is immediately implemented. As soon as our finances allow, we will hire sufficient staff and implement appropriate procedures to address the segregation of duties and improve the closing process.

There were no significant changes in our internal control over financial reporting identified in connection with the evaluation that occurred during the last fiscal quarter that have materially affected or that are reasonably likely to materially affect our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 3. Defaults Upon Senior Securities.

     We failed to meet the interest payments due quarterly since June 30, 2006 on our outstanding 8% Convertible Secured Debentures due September 30, 2006. In addition, we failed to repay or redeem the Debentures by the due date of September 30, 2006. Accordingly, pursuant to the Indenture governing the Debentures, an Event of Default pursuant to section 7.1(b) of the Trust Indenture has occurred and is continuing at the time. Under those circumstances, the Trustee may, and upon request in writing from the holders of not less than 25% of the principal amount of the Debentures then outstanding, shall declare the outstanding principal of and all interest on the Debentures and other moneys outstanding under the Indenture to be immediately due and payable. In addition, the Trustee will have the right to enforce its rights on behalf of the Debenture holders against the collateral for the Debentures. The Debentures are collateralized by substantially all of our assets. At September 30, 2008, the Debentures are outstanding in the principal amount of $10,825,000 and accrued and unpaid interest at that date amounts to $2,165,000. Subsequent to September 30, 2008, neither the Trustee nor the requisite holders of principal amount of Debentures have declared the Debentures to be immediately due and payable.

Item 6. Exhibits

31.1	Certification of President and Chief Executive Officer Pursuant to Rule 13a-14(a)(1)
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a- 14(a)(1)
32.1	Certification of President and Chief Executive Officer Pursuant to Section 1350 (furnished, not filed)(1)
32.2	Certification of Chief Financial Officer Pursuant to Section 1350 (furnished, not filed)(1)

⁽¹⁾ Filed or furnished herewith.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934 the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMERICAN NATURAL ENERGY CORPORATION
	(Registrant)
Date: November 12, 2008	/S/ Michael K. Paulk
	Michael K. Paulk
	President and Chief Executive Officer
	/S/ Steven P. Ensz
	Steven P. Ensz
	Principal Financial and Accounting Officer

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