American Natural Energy (ANR) 10-Q 2011 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2011;

or

[  ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from ______to ______.

Commission File Number000-18596

American Natural Energy Corporation
(Exact name of small business issuer as specified in its charter)

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

One Warren Place, 6100 South Yale, Suite 300, Tulsa, Oklahoma74136

(Address of principal executive offices) (zip code)

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

Indicate by check mark 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.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [  ]  No [X]

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.

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [ ]	Smaller Reporting Company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No :

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 15, 2011, 13,431,954 shares of the Registrant's Common Stock, $0.001 par value, were outstanding.

AMERICAN NATURAL ENERGY CORPORATION

QUARTERLY REPORT ON FORM 10-Q

INDEX

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets – June 30, 2011 and December 31, 2010	3
	Condensed Consolidated Statements of Operations Three Months and Six Months Ended June 30, 2011 and June 30, 2010	4
	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and June 30, 2010	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 4.	Controls and Procedures	17
PART II – OTHER INFORMATION
Item 6.	Exhibits	19

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Balance Sheets (Unaudited)

	June 30, 2011		December 31, 2010
	$		$
ASSETS
Current assets:
Cash and cash equivalents	14,896		8,658
Accounts receivable – joint interest billing	97,578		77,816
Accounts receivable – oil and gas sales	188,499		153,745
Prepaid expenses and other	51,510		108,064
Oil inventory	24,416		20,779
Total current assets	376,899		369,062
Proved oil and natural gas properties, full cost method of accounting, net of accumulated depletion, depreciation, amortization and impairment of $21,439,273 and $21,241,298	16,038,941		15,994,561
Unproved oil and natural gas properties	427,154		352,554
Equipment and other fixed assets, net of accumulated depreciation of $1,117,260 and $1,103,461	60,971		74,770
Deferred costs	77,500		15,000
Total assets	16,981,465		16,805,947
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities	1,939,492		2,089,119
Revenue payable	3,398,095		3,288,180
Accrued interest	40,393		18,072
Insurance note payable	-		68,028
Notes payable – related parties	706,527		161,062
Note payable (Note 4)	1,030,062		1,248,247
Taxes due on dissolution of subsidiary	55,252		65,252
Total current liabilities	7,169,821		6,937,960
Asset retirement obligation	2,122,230		2,023,780
Total liabilities	9,292,051		8,961,740
Commitments and contingencies
Stockholders' equity :
Common stock (Note 6) Authorized – 250,000,000 shares with par value of $0.001 – 13,431,954 and 13,430,608 shares issued and outstanding respectively	13,432		13,431
Additional paid-in capital	23,299,608		23,112,711
Accumulated deficit, since January 1, 2002 (in conjunction with the quasi- Reorganization stated capital was reduced by an accumulated deficit of $2,015,495)	(19,965,309	)	(19,322,589	)
Accumulated other comprehensive income	4,341,683		4,040,654
Total stockholders' equity	7,689,414		7,844,207
Total liabilities and stockholders' equity	16,981,465		16,805,947

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

3

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
For the thee-month and six-month periods ended June 30, 2011 and 2010

	Three months ended June 30,				Six months ended June 30,
	2011		2010		2011		2010
	$		$		$		$
Revenues:
Oil and gas sales	642,028		711,825		1,291,580		1,603,009
Operations income	11,923		13,878		26,042		27,286
	653,951		725,703		1,317,622		1,630,295
Expenses:
Lease operating expense	162,671		219,856		370,814		506,976
Production taxes	23,587		30,001		36,179		66,243
General and administrative	350,949		351,484		826,897		661,783
Foreign exchange (gain) loss	(56,396	)	(342,511	)	301,029		10,652
Interest and financing costs	39,133		130,250		77,606		369,212
Related party interest	17,018		3,786		37,639		14,128
Depletion, depreciation and amortization – oil and gas properties	90,629		156,967		197,929		396,834
Accretion of asset retirement obligation	41,532		77,005		98,450		144,100
Depreciation and amortization – other assets	6,899		6,900		13,799		13,800
Total expenses	676,022		633,738		1,960,342		2,183,728
Net income (loss)	(22,071	)	91,965		(642,720	)	(553,433	)
Other comprehensive income– net of tax:
Foreign exchange translation	(56,396	)	(342,511	)	301,029		10,652
Other comprehensive income (loss)	(56,396	)	(342,511	)	301,029		10,652
Comprehensive loss	(78,467	)	(250,546	)	(341,691	)	(542,781	)
Basic and diluted loss per share	( 0.00	)	0.01		(0.05	)	(0.04	)
Weighted average number of shares outstanding
Basic	13,431,954		13,430,608		13,431,954		13,429,890
Diluted	13,431,954		13,430,608		13,431,954		13,429,890

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

4

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six-month periods ended June 30, 2011 and 2010

	Six months ended June 30,
	2011		2010
	$		$
Cash flows from operating activities:
Net loss	(642,720	)	(553,433	)
Non cash items:
Depreciation, depletion and amortization	211,728		410,634
Accretion of asset retirement obligation	98,450		144,100
Foreign exchange loss	301,029		10,652
Noncash compensation expense	186,898		75,081
Amortization of debt discount	-		299,452
Changes in working capital items:
Accounts receivable	(59,440	)	93,099
Oil inventory	(3,637	)	(6,908	)
Prepaid expenses and other current assets	(1,022	)	95,766
Accounts payable, accrued liabilities and interest	(48,011	)	(113,312	)
Net cash provided by operating activities	43,275		455,131
Cash flows from investing activities:
Purchase and development of oil and gas properties	(90,107	)	(296,538	)
Net cash used in investing activities	(90,107	)	(296,538	)
Cash flows from financing activities:
Payment of notes payable	(337,958	)	(223,680	)
Payment of notes payable-related party	(160,447	)	(362,184	)
Proceeds from issuance of notes payable	51,475		-
Proceeds from issuance of notes payable- related party	500,000		330,620
Net cash provided by (used in) financing activities	53,070		(255,244	)
Increase (decrease) in cash and cash equivalents	6,238		(96,651	)
Cash beginning of period	8,658		142,488
Cash end of period	14,896		45,837

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

5

AMERICAN NATURAL ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
For the six-month periods ended June 30, 2011 and 2010

	Six months ended June 30,
	2011	2010
	$	$
Supplemental disclosures:
Interest paid, net of capitalized interest	75,087	45,922
Taxes paid	10,000	40,000
Non cash investing and financing activities:
Purchase of working interest through issuance of a note payable (Note 4)	226,847	-
Discount on notes payable	-	108,141
Asset retirement obligation revision	-	91,312
Exchange of oil and gas leasehold interests	-	107,288
Stock issued as partial payment for purchase of third party working interest	-	22,125

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

6

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011 and 2010

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-K. The unaudited condensed consolidated financial statements for the six-month periods ended June 30, 2011 and 2010 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 consolidated 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 six-month period ended June 30, 2011 are not indicative of the results that may be expected for the full year ending December 31, 2011.
	Reclassification of Prior Period Statements
	Certain reclassifications of prior period consolidated financial statements balances have been made to conform to current reporting practices.
	Stock-based compensation
	As discussed below in Note 7, the Company has a stock-based compensation plan, and effective January 1, 2006, accounts for stock options granted to employees under this plan in accordance with the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718,Share-Based Payment("ASC 718").Under the provisions of ASC 718, share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the grantee’s requisite service period (generally the vesting period of the equity grant).

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 diluted earnings (loss) per share is determined using the treasury method of shares outstanding as of June 30, 2011. This includes the net of new shares potentially created by unexercised in-the-money options. The method assumes that the proceeds that a company receives from in-the-money options exercised are used to repurchase common shares in the market. The Company had 1,490,000 vested and

7

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011 and 2010

	unexercised employee stock options outstanding as of June 30, 2011, with the outstanding employee stock options excluded from the calculation of diluted earnings per share as they were anti-dilutive.
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 has no current borrowing capacity with any lender. The Company incurred a net loss of $642,720 for the six months ended June 30, 2011 and a net loss of $2,062,145 for the year ended December 31, 2010. The Company has a working capital deficit of $6,792,922 and an accumulated deficit of $19,965,309 at June 30, 2011 which leads to substantial doubt 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 consolidated 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. It is management’s intention to raise additional debt or equity financing 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, 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
	Notes payable and long-term debt as of June 30, 2011 and December 31, 2010 consisted of the following:

8

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011 and 2010

	June 30, 2011		December 31, 2010
	$		$
Accounts payable refinanced as notes payable	-		19,930
Note payable – Citizens Bank of Oklahoma	500,000		448,255
Note payable – Bank of Oklahoma	-		250,000
Note payable – Dune Energy (Note 5)	157,017		157,017
Note payable – Leede Financial	373,045		373,045
Total third-party notes payable and long-term debt	1,030,062		1,248,247
Note payable – TPC Energy	184,799		139,334
Note payable – Mike Paulk	500,000		-
Note payable - Other	21,728		21,728
Total related party notes payable and long-term debt	706,527		161,062
Total notes payable and long-term debt	1,736,589		1,409,309
Less: Current portion	(1,736,589	)	(1,409,309	)
Total notes payable and long-term debt, net of current portion	-		-

On August 31, 2010, the Company entered into an $112,000 unsecured short-term note with Imperial Credit Corporation with an annual interest rate of 5.44% and ten monthly payments of $11,518. This note was paid in full on June 20, 2011.

On September 2, 2009, the Company entered into a $250,000 unsecured short-term note with a variable interest rate with Bank of Oklahoma. The note was paid in full on February 17, 2011.

In 2009 and 2010, the Company and TPC Energy entered into financing agreements whereas TPC Energy advanced funds required for the recompletion of behind pipe zones in several existing wells. The terms of the financing required the Company to repay the funds advanced out of specified cash flow from the subject wells. Principal and interest at 10% per annum and is payable monthly. Upon payout of the cost of recompleting the wells, the Company assigned a pro-rata 25% working interest in the wells to TPC Energy. Based on the relative fair value of the wells, a discount on the note was recorded with the discount being amortized over the life of the loan using the effective interest rate method. These discounts were fully amortized as of December 31, 2010. During the six months ended June 30, 2011, cash payments totaling $133,535 were also applied to the note which paid the note in full. In June 2010, the Company borrowed $100,000 from TPC Energy with an interest rate of 10% per annum. The principal and interest was repaid during the first quarter of 2011. On March 31, 2011, with an effective date of January 1, 2011, the Company purchased the working interests from TPC Energy for $300,000 through the issuance of a note payable in the same amount. Principal payments of $12,500 and interest at the rate of 10% per annum are due monthly. During the effective date through the closing date of March 31, 2011, revenues of $95,662 and lease operating expenses of $22,509 were recorded as a net purchase price adjustment that lowered the note payable balance and during the six months ended June 30, 2011, cash payments totaling $19,540 were also applied to the note which left a remaining balance due of $184,799.

9

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011 and 2010

On December 23, 2009, the Company entered into a $373,045 unsecured short-term note with Leede Financial with an interest rate of 12% per annum. During the three months ended June 30, 2011, the maturity date of the note was extended to September 30, 2011. The Company evaluated the application of ASC 470-50 and ASC 470-60 and concluded that the revised terms constituted a debt modification, rather than a debt extinguishment or a troubled debt restructuring.

On February 17, 2011, the Company entered into a $500,000 note payable with Mike Paulk, a director of the Company, with an annual interest rate of 10%. Monthly payments may be made; however, all unpaid principal and interest is due and payable on February 15, 2012.

5

Convertible Debentures

On August 4, 2009 the Company re-purchased and retired $7.895 million, plus $2.1 million accrued and unpaid interest, of its 8% Secured Debentures held by Dune (including release of collateral rights), acquired Dune’s interest in producing wells and certain leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba field, and settled outstanding issues between the companies, which net to $2.1 million payable to Dune. In exchange, the Company assigned a portion of certain deep rights held by the Company valued at $93,000 and paid Dune $1 million at the closing and issued a note payable of $300,000 payable in six consecutive quarterly payments of $50,000 each, with the first installment due and payable 90 days after resuming operations of the field. The first installment has been paid at the time of the Form 10-Q filing. The second installment has not been paid yet at the time of this Form 10-Q filing. As of June 30, 2011 the balance of the note payable to Dune was approximately $157,000.

6	Common Stock
	During the first quarter of 2011, outstanding shares of our common stock increased by 1,346 due to the issuance of shares to shareholders who held fractions of a share as a result of our reverse stock split on October 26, 2010.

7

Stock-based compensation

On January 1, 2006, the Company adopted ASC 718 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 ASC 718 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-K for the year ended December 31, 2010. All options expire five years from the date of grant. Generally, stock options granted to employees and directors vest 25% upon approval of the

10

American Natural Energy Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 30, 2011 and 2010

grant by the TSX Venture Exchange and 12.5% per quarter thereafter. The Company recognizes stock-based compensation expense over the vesting period of the individual grants.

For the six months ended June 30, 2011, the Company recognized compensation costs of approximately $187,000 related to stock options issued September 8, 2009 and November 30, 2010. At June 30, 2011, there was $319,000 of total unrecognized compensation costs related to non-vested stock options granted on November 30, 2010.

The fair value of stock options granted was estimated on the date of the grant using a Black-Scholes valuation model that uses the following weighted average assumptions:

Options Granted in 2010
Expected term, in years 4.25
Risk-Free interest rate 1.47%
Expected volatility 238.81%
Expected Dividend Rate None

Options Granted in 2009
Expected term, in years 3.25
Risk-Free interest rate 2.38%
Expected volatility 352.71%
Expected Dividend Rate None

The Company utilizes authorized but unissued shares when a stock option is exercised.

At June 30, 2011 there were 2,515,000 options outstanding and 1,490,000 options were exercisable with a weighted average exercise price of $0.41 and $0.49, respectively. The weighted average remaining contractual term for these outstanding and exercisable options at June 30, 2011 was 4.25 and 4 years, respectively. The exercisable options had no intrinsic value at June 30, 2011.

8	Asset Retirement Obligation
	The Company’s asset retirement obligations relate to plugging and abandonment of oil and gas properties. The components of the change in the Company’s asset retirement obligations for the six months ended June 30, 2011 is shown below:

	For the six months ended
	June 30, 2011
Asset retirement obligations, January 1, 2011	2,023,780
Additions and revisions	-
Settlement and disposals	-
Accretion Expense	98,450
Asset retirement obligation, June 30, 2011	2,122,230

11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

We currently are experiencing a severe shortage of working capital and funds to pay our liabilities. We have no current borrowing capacity with any lender. We incurred a net loss of $643,000 for the six months ended June 30, 2011 and a net loss of $2,062,000 for the year ended December 31, 2010. We have a working capital deficiency and an accumulated deficit at June 30, 2011 which leads to substantial doubt 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 consolidated 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 consolidated financial statements as of and for the year ended December 31, 2010 includes an explanatory paragraph which states that we have sustained a substantial loss in 2010 and have a working capital deficiency and an accumulated deficit at December 31, 2010 that raise substantial doubt about our ability to continue as a going concern. These matters 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 developouroil and gas reserves and pay our obligations.

A Comparison of Operating Results For The Three Months Ended June 30, 2011 and June 30, 2010

We recorded a loss of $22,000 during the three months ended June 30, 2011 compared to net income of $92,000 for the three months ended June 30, 2010. During the three months ended June 30, 2011, our revenues were comprised of oil and gas sales totaling $642,000 compared with oil and gas sales of $712,000 during the same period of 2010. Our oil and gas sales for the three months ended June 30, 2011 were lower as a result of a decrease in production which was offset by an increase in oil and gas prices. Our net average daily production for the three month period ended June 30, 2011 decreased by 36% over the same period of the prior year, from 97 net barrels of oil equivalent per day to 62 net barrels of oil equivalent per day. Oil and gas prices increased by 43% for the three month period ended June 30, 2011 over the same period of the prior year. The weighted average price increased from $81.06 per barrel of oil equivalent to $115.76 per barrel of oil equivalent. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

12

We had expenses of $676,000 for the three months ended June 30, 2011 compared to expenses of $634,000 for the three months ended June 30, 2010. Our general and administrative expenses were consistent at $351,000 for the three months ended June 30, 2011 and 2010.

Interest and financing costs decreased for the three months ended June 30, 2011 compared to the same period in 2010 at $56,000 and $134,000 respectively. Interest and financing costs were higher in the second quarter of 2010 due to the amortization of note discounts.

Lease operating expenses of $163,000, production taxes of $24,000 and depletion, depreciation and amortization of $139,000 during the three months ended June 30, 2011 changed from $220,000, $30,000, and $241,000, respectively, during the three months ended June 30, 2010. Lease operating expenses and production taxes were lower for the three months ended June 30, 2011 compared to the same period in 2010 as a result of decreased production. The decrease in depletion, depreciation and amortization charges were also due to decreased production for the three months ended June 30, 2011.

During the three months ended June 30, 2011, we had a foreign exchange gain of $56,000, compared to a $343,000 foreign exchange gain for the three months ended June 30, 2010. 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 three months ended June 30, 2011 was caused by the strengthening of the US dollar against the Canadian dollar.

A Comparison of Operating Results For The Six Months Ended June 30, 2011 and June 30, 2010

We recorded a loss of $643,000 during the six months ended June 30, 2011 compared to a loss of $553,000 for the six months ended June 30, 2010. During the six months ended June 30, 2011, our revenues were comprised of oil and gas sales totaling $1,292,000 compared with oil and gas sales of $1,603,000 during the same period of 2010. Our oil and gas sales for the six months ended June 30, 2011 were lower as a result of a decrease in production which was offset by an increase in oil and gas prices. Our net average daily production for the six month period ended June 30, 2011 decreased by 43% over the same period of the prior year, from 118 net barrels of oil equivalent per day to 67 net barrels of oil equivalent per day. Oil and gas prices increased by 41% for the six month period ended June 30, 2011 over the same period of the prior year. The weighted average price increased from $75.17 per barrel of oil equivalent to $105.81 per barrel of oil equivalent. Production from our existing wells is subject to fluctuation based upon which zones of wells are in production.

We had expenses of $1,960,000 for the six months ended June 30, 2011 compared to expenses of $2,184,000 for the six months ended June 30, 2010. Our general and administrative expenses were $827,000 for the six months ended June 30, 2011 compared to expenses of $662,000 for the same period in 2010. The increase in expense of $165,000 was due to higher stock option expense related to the options that were granted in the fourth quarter of 2010 and an increase in professional fees.

13

Interest and financing costs decreased for the six months ended June 30, 2011 compared to the same period in 2010 at $115,000 and $383,000 respectively. Interest and financing costs were higher during the first six months of 2010 due to the amortization of note discounts.

Lease operating expenses of $371,000, production taxes of $36,000 and depletion, depreciation and amortization of $310,000 during the six months ended June 30, 2011 changed from $507,000, $66,000, and $555,000, respectively, during the six months ended June 30, 2010. Lease operating expenses and production taxes were lower for the six months ended June 30, 2011 compared to the same period in 2010 as a result of decreased production. The decrease in depletion, depreciation and amortization charges were also due to decreased production for the six months ended June 30, 2011.

During the six months ended June 30, 2011, we had a foreign exchange loss of $301,000, compared to an $11,000 foreign exchange loss for the six months ended June 30, 2010. 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 loss for the six months ended June 30, 2011 was caused by the weakening of the US dollar against the Canadian dollar.

Liquidity and Capital Resources

General

To date, our production has not been sufficient to fund our operations and drilling program. At June 30, 2011, we do not have any available borrowing capacity and have negative working capital of approximately $6.8 million.

We have substantial need for capital to develop our oil and gas prospects. 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 Six Months Ended June 30, 2011 and June 30, 2010

Our net cash provided by operating activities was $43,000 for the six months ended June 30, 2011 as compared to net cash provided by operating activities of $455,000 for the six months ended June 30, 2010, a decrease of $412,000. The decrease in net cash provided by operating activities for the six months ended June 30, 2011 was primarily due to a decrease in non-cash items and an increase in accounts receivable. Changes in working capital items had the effect of decreasing cash flows from operating activities by $112,000 during the six months ended June 30, 2011 mainly due to an increase in accounts receivable of $59,000 and a decrease in accounts payable and accrued liabilities of $48,000. Changes in working capital items had the effect of increasing cash flows from operating activities by $69,000 during the six months ended June 30, 2010 due to a decrease in accounts receivable and prepaid expenses of $189,000, partially offset by a decrease in accounts payable and accrued liabilities of $113,000.

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We used $90,000 of net cash in investing activities during the six months ended June 30, 2011 compared to net cash used of $297,000 in 2010. The cash used in investing in 2011 and 2010 was for the purchase and development of oil and gas properties.

Our net cash provided by financing activities was $53,000 for the six months ended June 30, 2011 compared to $255,000 of net cash used in financing activities for the same period in 2010. For the six months ended June 30, 2011, net cash inflows from financing activities were a result of the issuance of notes of $500,000 to related parties offset by payments against outstanding notes of $498,000 of which $160,000 was to related parties. During the six months ended June 30, 2010, net cash outflows from financing activities were a result of the issuance of notes payable of $331,000 to related parties offset by payments against outstanding notes of $586,000 of which $362,000 was to related parties.

We have no other commitments to expend additional funds for drilling activities for the rest of 2011.

How We Have Financed Our Activities

On July 29, 2009 we closed the final tranche of a Private Placement of 6.67 million shares of our common stock at $0.30 per share for total proceeds of $2.0 million. In conjunction with this placement, finders’ fees were paid to two firms in Vancouver, BC in the amount of $96,840 and finders’ warrants were issued for the purchase of 538,000 shares of common stock exercisable through July 29, 2010 at $0.50 per share. The net proceeds of the private placement were used to close the Dune Transaction and for working capital purposes.

On August 4, 2009 we re-purchased and retired $7.8 million, plus accrued and unpaid interest, of its 8% Secured Debentures held by Dune (including release of collateral rights), acquired Dune’s interest in producing wells and certain leasehold rights in the Bayou Couba field, resumed operations of the Bayou Couba field and settled outstanding issues between the companies. In exchange, we agreed to assign a portion of certain deep rights held by us and pay Dune a total of $1.3 million dollars with $1 million due at closing and an additional $300,000 due in quarterly payments commencing 90 days after resuming operations of the field. As of March 31, 2010 additional deep rights were assigned to Dune valued at $93,000 and were recorded as a reduction to the note payable. As of June 30, 2011 the balance of the note payable to Dune was $157,000.

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We re-purchased our remaining outstanding 8% Secured Debenture debt totaling $2.0 million and an additional $821,000 of accrued interest from various holders with the payment of $256,000 and the issuance of 1.17 million shares of our common stock at a deemed price of $0.30 per share. The issuance of the shares occurred during the third quarter of 2009.

Future Capital Requirements and Resources

At June 30, 2011, we do not have any available borrowing capacity under existing credit facilities and our current assets are $377,000 compared with current liabilities of $7.17 million. Our current liabilities include accounts payable, revenues payable, notes payable (a portion of which is past due), and other current obligations. We have substantial needs for funds to pay our outstanding payables and debt due during 2011. In addition, we have substantial need for capital to develop our oil and gas prospects. At June 30, 2011, we have no commitments for additional capital to fund drilling activities in 2011.

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. It is our intention 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. We expect that any capital expenditures for drilling purposes during 2011 will be funded from the sale of drilling participations and equity capital.

Our business strategy requires us to obtain additional financing and our failure to do so can be expected to adversely affect our ability to 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 Statements and Item 2. Management’s Discussion and Analysis or Plan of Operation. These risks and uncertainties relate to

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• 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, and

• our ability to negotiate and enter into any agreement relating to a merger or sale of all or substantially all our assets.

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 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-K for the year ended December 31, 2010 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 2011 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, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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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 our disclosure controls and procedures are not effective to provide reasonable assurance that: (i) information required to be disclosed by us in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure by us; and (ii) information required to be disclosed by us 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, 2010, 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 August 15, 2011.

Changes in Internal Control Over Financial Reporting

As of December 31, 2010 we 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 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: August 15, 2011	/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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