Mail Stop 3561 November 3, 2005
David Nunn, President
Fortune Oil & Gas, Inc.
305-1657 Martin Drive White Rock, British Columbia
Canada V4A-6E7
Re: Fortune Oil & Gas, Inc.
Amendment No. 1 to Form 10-SB
Filed October 18, 2005
File No. 0-51484
Dear Mr. Nunn:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
Please feel free to call us at the telephone numbers listed at the
end of this letter.
Glossary, page 12
1. Your definitions of proved reserves paraphrase those in Rule 4-
10(a) of Regulation S-X. Please amend your document to include at
least one reference to Rule 4-10(a)(2)(3)(4) as the only
applicable
definitions of proved oil and gas reserves. This is available at
our
website, http://www.sec.gov/divisions/corpfin/
forms/regsx.htm#gas.
Item 2. Management`s Discussion of Analysis or Plan of Operation,
page 13
Liquidity and Capital Resources, page 19
2. We note your disclosure that cash used in operating activities
of
$564,897 for the six months ended June 30, 2004 does not agree
with
the net cash used in operating activities of $444,912 as disclosed
on
the face of your statements of cash flows for the same period.
Please revise or advise.
3. We note that your negative working capital deficit decreased by
$12,324,580 for the six months ended June 30, 2005 rather than the
$12,504,580 disclosed in your discussion of liquidity and capital
resources. Please revise or advise.
4. Your discussion of cash used by financing activities for the
six
months ended June 30, 2005 indicates that, among other things,
financing activities were impacted by the issuance of common
shares
in payment of director fees which had a book value of $1,754,178.
Please clarify for us how this transaction impacted your cash
flows
from financing activities. Further, please note that the cash
payment of interest is more appropriately discussed as an
operating
activity rather than a financing activity. Please revise or
advise.
5. We note your response to comment 18 in our letter dated
September
2, 2005. You have indicated that you expect to have sufficient
liquidity to meet your planned operating needs for the next 12
months
and that you expect to be cash flow positive from operations
within
six months after securing a vessel for off-loading. Please
clarify
such statements to specify whether your operating needs include
your
substantial short-term obligations that exist as of June 30, 2005.
In this regard, please disclose your strategy for the pay-down of
such existing short-term obligations and the status of any
continued
negotiations with your creditors.
Note 3. Summary of Significant Accounting Policies, page F-8
6. We note your response to comment 22 in our letter dated
September
2, 2005. Please disclose the total valuation allowance recognized
for deferred tax assets for all applicable periods. Refer to
paragraph 43(c) of SFAS 109.
Note 7. Taxes Payable, page F-15
7. Please tell us how you determined that the right of offset
exists
with respect to your VAT receivable, VAT payable, and related
accrued
interest as of June 30, 2005. In doing so, please tell us how you
will account for such amounts subsequent to the date when CRC pays
the VAT payable due to the Indonesian government on your behalf
but
prior to the date when you repay CRC for such amounts. Please
provide the appropriate accounting literature on which you relied
for
your existing treatment.
Note 8. Sale of Oil Rights, page F-16
8. We note your response to comment 23 in our letter dated
September
2, 2005. Please tell us and disclose the amount of the unused $4.5
million in the trade debt settlement account as of June 30, 2005
and
indicate where such funds are classified on your consolidated
balance
sheet. In this regard, we would expect such funds to be
classified
as restricted cash. Further, please confirm that the $9.862
million
of your payables that require settlement pursuant to the asset
purchase and sale agreement were included in the $11.855 million
of
your trade payables as of December 31, 2004 and disclose the
status
of such payables as of June 30, 2005. In doing so, include an
analysis that reflects the amount of such debt that was forgiven,
paid, and status of ongoing negotiations with related creditors.
Finally, please tell us what rights, if any, that the creditors
have
with respect to the 70% interest in the Camar Oil field that you
sold
to CRC. Absent compelling evidence to the contrary, it appears
that
since the PSC interest sold is encumbered by the trade debts
outstanding, the gain you recorded should have been deferred until
the associated encumbrances are settled. Please revise your
financial statements accordingly or tell us why a revision is
unnecessary.
Costs Incurred, page F-29
9. Your response to comment 26 in our letter dated September 2,
2005
indicates you disclosed your asset book value in lieu of
development,
acquisition and exploration costs incurred. Please amend your
document to comply with Financial Accounting Standard 69,
paragraphs
18-23.
Oil and Natural Gas Reserves, page F-29
10. Your proved reserves do not appear to have been estimated with
the economic interest method. This is addressed at our website,
http://www.sec.gov/divisions/ corpfin/cfcrq032001.htm, under
"Determination of Reserves Under Production Sharing Agreements."
Please amend your estimate to comply with this method.
Standardized Measure..., page F-30
11. You state that your standardized measure is reduced by the 70%
of
rights sold to CRC. It is our understanding that this divestment
was
not completed until January 14, 2005. If true, your December 31,
2004 standardized measure and proved reserves should reflect your
ownership on that date. Please amend your document if it is
appropriate.
12. Please tell us the estimated annual production cost component
you
have included for a storage tanker.
***
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
letter with your amendment that keys your responses to our
comments
and provides any requested information. Detailed letters greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your amendment and responses to our
comments.
You may contact John Cannarella, Staff Accountant, at 202-
551-
3337 or William Choi, Accounting Branch Chief, at (202) 551-3716
if
you have questions regarding comments on the financial statements
and
related matters. Please contact Anita Karu, Attorney-Advisor, at
202-551-3240, David Mittelman, Legal Branch Chief, at (202) 551-
3214,
or me at 202-551-3725 with any other questions.
Sincerely,
H. Christopher Owings
Assistant Director
Cc: Jennifer A. Post, Esq.
Richardson & Patel LLP
Fax: (310) 208-1154
David Nunn, President
Fortune Oil & Gas, Inc.
November 3, 2005
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