UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30009
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PETROL OIL AND GAS, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 90-0066187
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11020 King Street
Suite 370
Overland Park, Kansas 66210
-------------------------------------- --------
(Address of principal executive offices) (Zip Code)
(913) 323-4925
--------------------------------------------------
(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 last 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 is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of Common Stock, $0.001 par value, outstanding on September
30, 2007 was 29,090,926.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
Petrol Oil and Gas, Inc.
Condensed Consolidated Balance Sheet
September 30, December 31,
2007 2006
----------- -----------
(Unaudited) Audited
Assets
Current assets:
Cash $ 1,210,467 $ 5,917,958
Accounts receivable 842,099 624,731
Prepaid expenses 107,615 38,085
----------- -----------
Total current assets 2,160,181 6,580,774
----------- -----------
Fixed assets:
Pipeline 1,522,423 5,331,028
Equipment and vehicles 375,865 341,310
----------- -----------
1,898,288 5,672,338
Less accumulated depreciation 446,628 471,600
----------- -----------
Fixed assets, net 1,451,660 5,200,738
----------- -----------
Other assets:
Other assets 25,068 1,932
Oil and gas properties using full cost accounting:
Properties not subject to amortization 321,464 1,210,174
Properties subject to amortization 15,282,967 21,856,363
Capitalized loan costs, net 324,694 662,511
Derivative asset 175,756 974,752
----------- -----------
Total other assets 16,129,949 24,705,732
----------- -----------
$19,741,790 $36,487,244
=========== ===========
September 30, December 31,
2007 2006
------------ ------------
(Unaudited) (Audited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 118,149 $ 462,188
Accrued liabilities 394,454 430,190
Current portion of long term debt 12,785,885 14,193,588
------------ ------------
Total current liabilities 13,298,488 15,085,966
------------ ------------
Long-term liabilities:
Asset retirement obligation 438,680 907,797
Long-term derivative liability -- 58,133
Long-term debt, less current portion 13,510,583 13,169,895
------------ ------------
Total long-term liabilities 13,949,263 14,135,825
------------ ------------
Commitments and contingencies:
Stockholders' Equity:
Preferred stock, $0.001 par value, 10,000,000
shares authorized, no shares issued and
outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 29,090,926 and 29,084,597 issued and
outstanding 29,090 29,084
at September 30, 2007 and December 31, 2006
respectively
Stock for services not issued, 6,329 shares at December 31, 2006 -- 6
Unamortized cost of stock, warrants & options issued for services -- (1,461,747)
Prepaid share-based compensation -- (47,600)
Additional paid-in capital 27,220,866 28,555,484
Other comprehensive income 175,756 916,619
Accumulated (deficit) (34,931,673) (20,726,393)
------------ ------------
(7,505,961) 7,265,453
------------ ------------
$ 19,741,790 $ 36,487,244
============ ============
See notes to condensed consolidated financial statements.
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Operations
(Unaudited)
For the Nine Months Ended For the Three Months Ended
September 30, September 30,
---------------------------- ----------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Revenue $ 4,249,576 $ 4,988,661 $ 1,301,347 $ 1,947,729
------------ ------------ ------------ ------------
Expenses:
Direct costs 1,687,861 1,711,719 187,794 556,365
Pipeline costs 758,363 651,731 206,644 267,809
General and administrative 1,384,179 1,769,788 421,226 398,373
Impairment of oil & gas properties
and pipelines 9,076,165 -- 264,138 --
Professional and consulting fees 707,233 1,480,137 195,726 207,251
Depreciation, depletion and
amortization 1,714,278 1,939,619 468,824 1,005,939
------------ ------------ ------------ ------------
Total expenses 15,328,079 7,552,994 1,744,352 2,435,737
------------ ------------ ------------ ------------
Net operating (loss) (11,078,513) (2,564,333) (443,005) (488,008)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (3,126,777) (2,861,886) (971,089) (1,003,794)
------------ ------------ ------------ ------------
Net (loss) $(14,205,280) $ (5,426,219) $ (1,414,094) $ (1,491,802)
============ ============ ============ ============
Weighted average number of
common shares outstanding - basic
and fully diluted 29,090,926 28,665,768 29,090,926 29,010,350
============ ============ ============ ============
Net (loss) per share -
basic and fully diluted $ (0.4) $ (0.19) $ (0.05) $ (0.05)
============ ============ ============ ============
See notes to condensed consolidated financial statements.
Petrol Oil and Gas, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30, 2007
----------------------------
2007 2006
------------ ------------
Cash flows from operating activities
Net (loss) $(14,205,280) $ (5,426,219)
Depreciation, depletion and amortization 1,376,468 1,939,619
Warrant accretion 752,110 938,294
Shares issued for interest -- 203,299
Accretion of asset retirement obligation 49,582 52,779
Impairment of oil & gas properties and pipelines 9,076,165 --
Warrants, options and shares issued for services 174,728 1,024,047
Adjustments to reconcile net (loss) to cash
used in operating activities:
Accounts receivable (217,368) (395,794)
Prepaid and other assets (69,530) (29,972)
Accounts payable (344,039) (1,102,719)
Accrued liabilities (35,737) 280,253
------------ ------------
Net cash used in operating activities (3,442,901) (2,516,413)
------------ ------------
Cash flows from investing activities
Additions to other assets (23,136) --
Purchase of other property and equipment (35,650) (1,932,542)
Additions to oil and gas properties not subject to amortization -- (326,209)
Sales of oil and gas properties 744,000 --
Additions to oil and gas properties subject to amortization (468,490) (9,599,771)
------------ ------------
Net cash used in investing activities 216,724 (11,858,522)
------------ ------------
Cash flows from financing activities
Proceeds from loans payable 23,452 15,000,000
Amortized loan fees 337,817 --
Payments on notes payable (1,842,583) (1,211,994)
Proceeds from the exercise of warrants -- 241,875
------------ ------------
Net cash provided from (used in) financing activities (1,481,314) 14,029,881
------------ ------------
Net decrease in cash (4,707,491) (345,054)
Cash - beginning 5,917,958 8,435,203
------------ ------------
Cash - ending $ 1,210,467 $ 8,090,149
============ ============
For the Nine Months Ended
September 30, 2007
-----------------------
2007 2006
---------- ----------
Supplemental disclosures:
$2,445,513
Interest paid -- $1,624,754
========== ==========
Income taxes paid
========== ==========
Non-cash transactions
Shares issued for oil & gas properties $ -- $ 615,998
========== ==========
Shares issued for debt conversion -- 963,301
========== ==========
Shares warrants and options issued for services -- 1,092,047
========== ==========
See notes to condensed consolidated financial statements.
Petrol Oil and Gas, Inc.
Notes to Condensed Financial Statements
Note 1 - Basis of Presentation
The unaudited condensed financial statements have been prepared in accordance
with United States generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The results
of operations for the interim period are not necessarily indicative of the
results to be expected for a full year. Certain amounts in the prior year
statements have been reclassified to conform to the current year presentations.
These statements should be read in conjunction with the financial statements and
footnotes thereto included in the Form 10-K for the year ended December 31,
2006.
Note 2 - Going Concern
The accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. Our ability to continue as a
going concern is dependent upon attaining profitable operations based on the
development of products that can be sold. We intend to use borrowings and
security sales to mitigate the affects of our cash position, however, no
assurance can be given that debt or equity financing, if and when required, will
be available. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and classification
of liabilities that might be necessary should we be unable to continue in
existence.
Note 3 - Stock Transactions and Consulting Agreements
During the three months ended March 31, 2007, we issued 6,329 shares of our
common stock as previously authorized for public relations services.
A summary of stock options and warrants is as follows:
Options Warrants
------- --------
Outstanding 01/01/07 2,810,000 $1.70 14,936,666 $1.87
Granted -- -- -- --
Cancelled (2,050,000) 1.55 (6,703,333) 1.36
Exercised -- -- -- --
----------- -----------
Outstanding 9/30/07 760,000 $2.12 8,233,333 $2.28
=========== ===========
Note 4 - Asset Retirement Obligation
Our asset retirement obligations relate to the abandonment of oil and gas wells.
The amounts recognized are based on numerous estimates and assumptions,
including future retirement costs, inflation rates and credit adjusted risk-free
interest rates. The following shows the changes in asset retirement obligations
for the financial statements presented. See Note 8 for sale of oil & gas
properties and release of asset retirement obligation.
September 30, 2007
------------------
Asset retirement obligation, beginning of year $ 907,797
Liabilities incurred during the year --
Liabilities settled during the year (518,699)
Accretion of expense 49,582
---------
Asset retirement obligations, end of year $ 438,680
=========
Note 5 - Long-Term Debt
Long-term debt consists of the following:
September 30, 2007
------------
Total notes payable $ 26,650,898
Less unamortized cost of warrants (354,430)
------------
26,296,468
Less current portion (12,785,885)
------------
Total long-term debt $ 13,510,583
============
During the quarter and nine months ended September 30, 2007, the accretion of
the warrants that was included in interest expense totaled $207,941 and
$752,110, respectively.
Note 6 - Fixed Price Sales Contracts
We have entered into various agreements with our customers to sell gas at a
fixed price. At September 30, 2007 we had contracts covering approximately
45,600 mmbtu per month for the period of October 2007 through February 2008 at
an average price of $7.23 per mmbtu and basis agreements covering approximately
15,200 mmbtu per month for the same period.
Note 7 - Impairment of oil & gas properties and pipeline
We have impaired our oil & gas properties by $264,138 and $9,076,165 in the
three and nine month period ended September 30, 2007 respectively based on our
reserve study of the present value of future cash flows discounted by 10%. The
impairment is primarily attributable to decline in reserves. We also impaired
the Burlington and Waverly pipelines by $0 and $3,537,377 in the three and nine
month period ended September 30, 2007 respectively to the fair market value of
zero as we have determined these facilities will not be used and are not
saleable.
Note 8 - Sale of oil and gas properties
On September 14, 2007, we entered into an agreement with Enerjex Resources, Inc.
for the sale of approximately 200 oil wells and a 100% working interest in 1,100
gross acres of leaseholds located in eastern Kansas for a cash purchase price of
$800,000. There was a fee owed to a consultant who assisted us in the
transaction of $56,000. In connection with the sale of the wells we reduced our
asset retirement obligation relating to the plugging liabilities related to
these wells by $518,699. The net proceeds we received and the liability
reduction totaled $1,262,699 and this was recorded as a reduction of the oil and
gas properties subject to amortization account.
FORWARD-LOOKING STATEMENTS
This document contains "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. All statements other
than statements of historical fact are "forward-looking statements" for purposes
of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the
plans, strategies and objections of management for future operations; any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words "may," "could," "will
be," "estimate," "intend," "plan," "continue," "believe," "expect,"
"anticipate," "goal" or "forecast" or other similar words. These forward-looking
statements present our estimates and assumptions only as of the date of this
report. Except as otherwise required by applicable securities laws, we do not
intend, and undertake no obligation, to update any forward-looking statement.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Our future financial condition and results of operations, as well as
any forward-looking statements, are subject to change and inherent risks and
uncertainties. The factors impacting these risks and uncertainties include, but
are not limited to:
o attainment of profitable operations based on the development of oil
and gas products that can be sold, and the continued availability of
debt or equity financing. The Company's ability to continue to operate
is contingent on refinancing or restructuring indebtedness. See
"Liquidity and Capital Resources".
o increased competitive pressures from existing competitors and new
entrants;
o increases in interest rates or our cost of borrowing or a default
under any material debt agreements;
o deterioration in general or regional economic conditions;
o adverse state or federal legislation or regulation that increases the
costs of compliance, or adverse findings by a regulator with respect
to existing operations;
o hedging risks;
o ability to attract and retain key personnel;
o inability to achieve future sales levels or other operating results;
o fluctuations of oil and gas prices; o the unavailability of funds for
capital expenditures; and
o operational inefficiencies in distribution or other systems.
For a detailed description of these and other factors that could cause
actual results to differ materially from those expressed in any forward-looking
statement, please see the "Risk Factors" section of our Annual Report on Form
10-K for the year ended December 31, 2006, and to the extent applicable, our
Quarterly Reports on Form 10-Q.
References to "Petrol", "the Company", "we," "us," and "our" refer to
Petrol Oil and Gas, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW AND OUTLOOK
We are an oil and gas exploration, development and production company.
Our properties are located in the Cherokee and Forrest Basins along the Kansas
and Missouri border. Our corporate strategy has been to build value through the
development and acquisition of gas and oil assets that exhibit consistent,
predictable, and long-lived production, with a focus on Coal Bed Methane ("CBM")
reservoirs in the central U.S. In prior periods, we have described five separate
projects of the Company. Two of those projects, the Pomona Project and the
Missouri Project have been abandoned and the leases covering those projects have
expired. We have segregated our current operations into three separate projects,
which include:
Petrol-Neodesha Project
-----------------------
Our gas producing leases known as Petrol-Neodesha, in the
Neosho and Wilson counties, account for approximately 10,000 of the
Company's total of approximately 56,000 gross leased acres. However,
this project produces substantially all of the Company's gas
production.
The Petrol-Neodesha Project includes over 100 CBM production
wells, 8 saltwater disposal wells ("SWD Wells") wells and a fully
contained and integrated gas gathering pipeline and gas processing
system. At this time, we have suspended our development plan for the
Petrol-Neodesha Project and have discontinued lease acquisitions in
the area due a shortage of funds. The Petrol-Neodesha properties have
provided us with the bulk of our revenue stream and value in proven
producing reserves and therefore represent the most valuable group of
assets of the Company. However, if we do not resume development of
these properties, we expect to see revenues decline as existing wells
mature and experience production declines.
Coal Creek Project
------------------
The Coal Creek Project, centered in Coffey County, Kansas,
includes leases covering about 46,000 gross acres. Leases for the Coal
Creek Project covering approximately 46,000 gross acres have recently
expired. The Company has invested approximately $15 million in the
Coal Creek Project for the construction of a gathering system and the
drilling and completion of over 50 CBM wells. Of these wells, only
four wells are producing natural gas, and only one of these is
producing CBM. Total production from these wells is minimal. Due to a
number of technical issues with the wells and the geology, it is
doubtful that significant production will ever be obtained from these
properties. The Company does not currently plan to drill any
additional CBM wells in the Coal Creek Project. The Company doubts
that the Coal Creek Project will at any time in the future contribute
to the Company's revenues to any significant extent. The Company is
currently evaluating whether there are exploration and development
opportunities for oil or conventional natural gas from the leases
acquired for the Coal Creek Project.
Oil Field Project
-----------------
Petrol holds a 100% working interest in several oil
producing properties in eastern Kansas that produced approximately
22,249 barrels of oil (bbl) during 2006 (17,954 bbl net to Petrol).
The oil producing wells on these properties and in the surrounding
areas are generally defined as stripper wells and usually produce
under the influence of a water flood. A part of the leases that
comprise this project were sold in September 2007. See Note 8 to the
Company's Condensed Financial Statements included herein.
At September 30, 2007, the Company had long term debt (including the
current portion of long term debt) of approximately $26.7 million. Approximately
$15 million of this debt was utilized to develop the Coal Creek Project, which
has contributed no significant revenue to the Company. As a result, the
Company's cash position has seriously declined. On October 28, 2007, the Company
was required to make a principal payment of approximately $1.1 million on a
portion of its long term debt. The Company did not have adequate cash to make
such principal payment and is currently in default under the terms of the note
for this long term debt. There can be no assurance that the Company will be able
to cure this default or to obtain adequate cash to service its other debt as it
comes due.
Results of Operations for the Three Months Ended September 30, 2007 and 2006.
The following table summarizes selected items from the statement of
operations for the three months ended September 30, 2007 compared to the three
months ended September 30, 2006.
Three Months Ended
September 30 Increase Percentage
2007 2006 (Decrease) Change
----------- ----------- ----------- -----------
Revenue $ 1,301,347 $ 1,947,729 (646,382) (33.2%)
Expenses:
Direct costs 187,794 556,365 (368,571) (66.2%)
Pipeline costs 206,644 267,809 (61,165) (22.8%)
General and administrative 421,226 398,373 22,853 5.7%
Impairment of oil and gas properties
And pipelines 264,138 -- 264,138 NA
Professional and consulting fees 195,726 207,251 (11,525) (5.6%)
Depreciation, depletion and amortization 468,824 1,005,939 (537,115) (53.4%)
----------- ----------- ----------- -----------
Total expenses 1,744,352 2,435,737 (691,385) (26.4%)
----------- ----------- ----------- -----------
Net operating (loss)
(443,005) (488,008) (45,003) (9.2%
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (971,089) (1,003,794) (32,705) (3.3%)
----------- ----------- ----------- -----------
Net income (loss) $(1,414,094) $(1,491,802) $ (77,708) (5.2%)
=========== =========== =========== ===========
Revenues. Revenues for the three months ended September 30, 2007 were
$1,301,347 compared to revenues of $1,947,729 in the three months ended
September 30, 2006. This resulted in a decrease of $646,382 or 33.2%, from the
same period one year ago. The decrease in revenues is primarily the result of
decreased production, together with decreased pricing (after impact of the
Company's hedging activities).
Direct Costs. Direct costs are the costs associated with operating
producing wells, and transporting the oil and natural gas to the market for
sale. Direct costs for the three months ended September 30, 2007 were $187,794,
a decrease of $368,571 or 66.2%, from $556,365 for the three months ended
September 30, 2006. For the most part, this decrease reflects expenses related
to the Company's failed efforts to dewater and obtain commercial production from
wells drilled beginning during the last half of 2006 with respect to its
Burlington and Waverly properties in the Coal Creek Project. The Company ceased
dewatering efforts in Coal Creek near the end of the Company's second quarter
2007.
Pipeline Costs. Pipeline costs for the three months ended September
30, 2007 were $206,644, a decrease of $61,165, or 22.8%, from $267,809 for the
three months ended September 30, 2006. This decrease is primarily the result of
reduced expenses related to the operation of the Company's pipeline system
supporting its Burlington and Waverly properties in the Coal Creek Project,
which operations were discontinued in the second quarter of 2006.
General and Administrative Expenses. General and administrative
expenses for the three months ended September 30, 2007 were $421,226, an
increase of $22,853, or 5.7%, from $398,373 for the three months ended September
30, 2006. The small increase in general and administrative expenses is
attributable to additional costs relating to the moving of corporate operations.
Impairment of Oil and Gas Properties. We have impaired our oil and gas
properties by $264,138 in the three months ended September 30, 2007 based on our
reserve study of the present value of future cash flows discounted by 10%. The
impairment is primarily attributable to decline in reserves
Professional and Consulting Fees. Professional and consulting fees for
the three months ended September 30, 2007 was $195,726, a decrease of $11,525,
or 5.6%, from $207,251 for the three months ended September 30, 2006. The
decrease in professional and consulting fees in the current period was a result
of decreased investor relations fees and a lessened reliance on outside
consultants.
Depreciation, Depletion, and Amortization Expense. Depreciation,
depletion, and amortization expense for the three months ended September 30,
2007 was $468,824, an decrease of $537,115, or 53.4%, from $1,005,939 for the
three months ended September 30, 2006. The decrease in depreciation, depletion
and amortization expense was a result of lower depreciation due to the
impairment of the pipeline in the second quarter.
Net Operating Loss. The net operating loss for the three months ended
September 30, 2007 was $443,005 , versus a net operating loss of $488,008 for
the three months ended September 30, 2006.
Interest Expense. Interest expense for the three months ended
September 30, 2007 was $971,089, a decrease of $32,705 , or 3.3% , from
$1,003,794 for the three months ended September 30, 2006. The decrease in
interest expense is primarily the result of reduced principal balances due to
repayment of long term debt in accordance with its terms.
Results of Operations for the Nine months Ended September 30, 2007 and 2006.
The following table summarizes selected items from the statement of
operations for the nine months ended September 30, 2007 compared to the nine
months ended September 30, 2006.
Nine Months Ended September 30,
---------------------------- Increase Percentage
2007 2006 (Decrease) Change
------------ ------------ ------------ ------------
Revenue $ 4,249,576 $ 4,988,661 $ (739,085) 14.8%
Expenses:
Direct costs 1,687,861 1,711,719 (23,858) (1.4%)
Pipeline costs 758,363 651,731 106,632 16.4%
General and administrative 1,384,179 1,769,788 (385,609) (21.8%)
Impairment of oil and gas properties
and pipelines 9,076,165 -- 9,076,165 N/A
Professional and consulting fees 707,233 1,480,137 (772,904) (52.2%)
Depreciation, depletion and
amortization 1,714,278 1,939,619 (225,341) (11.6%)
------------ ------------ ------------ ------------
Total expenses 15,328,079 7,552,994 7,775,085 102.9%
------------ ------------ ------------ ------------
Net operating (loss) (11,078,513) (2,564,333) (8,514,180) (332.0%)
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (3,126,777) (2,861,886) 264,891 9.3%
------------ ------------ ------------ ------------
Net income (loss) $(14,205,280) $ (5,426,219) $ (8,779,061) (161.8%)
============ ============ ============ ============
Revenues. Revenues for the nine months ended September 30, 2007 were
$4,249,576 compared to revenues of $4,988,661 in the nine months ended September
30, 2006. This resulted in a decrease of $739,085 or 14.8%, from the same period
one year ago. The decrease in revenues is primarily the result of decreased
production, together with decreased pricing (after impact of the Company's
hedging activities).
Direct Costs. Direct costs for the nine months ended September 30,
2007 were $1,687,861, a decrease of $23,858 or 1.4%, from $1,711,719 for the
nine months ended September 30, 2006. For the most part, this decrease reflects
expenses incurred in 2007 related to the Company's failed efforts to dewater and
obtain commercial production from wells drilled beginning during the last half
of 2006 with respect to its Burlington and Waverly properties in the Coal Creek
Project. The Company ceased dewatering efforts in Coal Creek near the end of the
Company's second quarter 2007.
Pipeline Costs. Pipeline costs for the nine months ended September 30,
2007 were $758,363, an increase of $106,632, or 16.4%, from $651,731 for the
nine months ended September 30, 2006. This increase is primarily the result of
increased expenses related to the operation of the Company's pipeline system
supporting its Burlington and Waverly properties in the Coal Creek Project,
which construction began during the last half of 2006. During the nine months
ended September 30, 2007, we impaired the Burlington and Waverly pipelines by
$3,537,377 to the fair market value of zero, as we have determined these
facilities will not be used and are not saleable.
General and Administrative Expenses. General and administrative
expenses for the nine months ended September 30, 2007 were $1,384,179, a
decrease of $385,609, or 21.8%, from $1,769,788 for the nine months ended
September 30, 2006. The decrease in general and administrative expenses is
attributable to the streamlining and reduction of expenses.
Impairment of Oil and Gas Properties. We have impaired our oil and gas
properties by $5,538,788 based on our reserve study of the present value of
future cash flows discounted by 10%. The impairment is primarily attributable to
decline in reserves. We also impaired the Burlington and Waverly pipelines by
$3,537,377 to the fair market value of zero as we have determined these
facilities will not be used and are not saleable.
Professional and Consulting Fees. Professional and consulting fees for
the nine months ended September 30, 2007 was $707,233, a decrease of $772,904,
or 52.2%, from $1,408,137 for the nine months ended September 30, 2006. The
decrease in professional and consulting fees in the current period was a result
of decreased investor relations fees and a lessened reliance on outside
consultants.
Depreciation, Depletion, and Amortization Expense. Depreciation,
depletion, and amortization expense for the nine months ended September 30, 2007
was $1,714,278, a decrease of $225,341, or 11.6%, from $1,939,619 for the nine
months ended September 30, 2006. The decrease in depreciation, depletion and
amortization expense was a result of an $8,812,027 writeoff of impaired oil and
gas properties in the second quarter of 2007.
Net Operating Loss. The net operating loss for the nine months ended
September 30, 2007 was $11,078,513, versus a net operating loss of $2,564,333
for the nine months ended September 30, 2006. This increase is primarily the
result of the impairment of oil and gas properties and pipeline.
Interest Expense. Interest expense for the nine months ended September
30, 2007 was $3,126,777) , an increase of $264,891 from $2,861,886 for the nine
months ended September 30, 2006.
Liquidity and Capital Resources
During the nine months ended September 30, 2007 our cash position
decreased by $4,707,491. During that period, our operating activities utilized
$3,442,901 of cash mainly from operating expenses we incurred, and we made
payments on notes payable of $1,842,583. The following table summarizes total
assets, accumulated deficit, stockholders' equity and working capital at
September 30, 2007 compared to December 31, 2006.
Increase / (Decrease)
September 30, December 31, ----------------------------
2007 2006 $ %
------------ ------------ ------------ ------------
Current assets $ 2,160,181 $ 6,580,774 $ (4,420,593) (67.2%)
============ ============ ============ ============
Current liabilities 13,028,487 15,085,966 (2,057,479) (13.6%)
============ ============ ============ ============
Working capital (deficit) $(10,868,306) $ (8,505,192) $ (2,363,114) (27.8%)
============ ============ ============ ============
Financing. On October 28, 2004, we entered into agreements with Laurus
Master Fund, Ltd., a Cayman Islands corporation. Under the terms of the Laurus
Funds agreements, we issued a Secured Convertible Term Note (the "Note") in the
aggregate principal amount of $8,000,000 and a five-year warrant (the "Warrant")
to purchase 3,520,000 shares of our common stock at $2.00 per share and
1,813,333 shares of our common stock at $3.00 per share. On June 2, 2006, Laurus
transferred the 5,333,333 warrants to Pallas Production Corp. ("Pallas"). The
Note is convertible into shares of our common stock at a fixed conversion price
of $1.50 per share. The Note has a three-year term and bears an interest rate
equivalent to the "prime rate" published by the Wall Street Journal from time to
time plus 3%, subject to a floor of 7.5% per annum.
On January 28, 2005, we amended the Laurus Note and the Registration
Rights Agreement. Laurus agreed to move five months of principal payments
(January through May of 2005) to be paid on the Maturity Date (October 28,
2007). Additionally, Laurus agreed to extend certain filing and effectiveness
dates under the registration rights agreement. In consideration for the
amendment, we issued an additional common stock purchase warrant to Laurus to
purchase up to 1,000,000 shares of our common stock at $2.50 per share for the
first 666,667 shares and $3.00 per share for the remaining 333,333 shares. On
June 20, 2006, Laurus transferred the 1,000,000 warrants to Pallas. Further,
pursuant to the amendment agreement executed on April 28, 2004, we have agreed
to file semi-annual registration statements to register shares of our common
stock issued to Laurus for the conversion of interest under the Note.
As of September 30, 2007, Laurus had converted $2,283,823 of principal
payments into 1,522,550 shares of our common stock and $779,352 of accrued
interest into 519,568 shares of our common stock (2,042,118 shares in total).
The conversion of principal and accrued interest allowed us additional cash to
use in our operations.
On October 31, 2005, we entered into another financing agreement with
Laurus, under which $10,000,000 was funded into an escrow account and was
disbursed to us in November 2005 after finalization of certain closing
requirements. We issued a three-year Secured Term Note in the aggregate
principal amount of $10,000,000 and a five-year warrant to purchase 1,000,000
shares of our common stock at $2.00 per share. On June 20, 2006, Laurus
transferred the 1,000,000 warrants to Pallas. The note bears an interest rate
equivalent to the "prime rate" published by the Wall Street Journal from time to
time plus 3.25%, subject to a floor of 10% and a ceiling of 14% per annum. In
addition, Laurus, in their sole discretion, was able to purchase additional
notes from us in an aggregate principal amount of up to $40,000,000 pursuant to
substantially similar terms of the initial note dated October 31, 2005.
On June 30, 2006, we entered into agreements with Laurus to draw down
an additional $5,000,000 under the credit facility provided by Laurus in October
2005. Under the terms of the Laurus agreements we issued a Secured Term Note in
the aggregate principal amount of $5,000,000 and a five-year warrant to purchase
200,000 shares of our common stock at $1.80 per share. On June 20, 2006, Laurus
transferred the 200,000 warrants to Pallas. The Note has a three-year term and
bears an interest rate equivalent to the "prime rate" published by the Wall
Street Journal from time to time plus 3.25%, subject to a floor of 10% and a
ceiling of 14% per annum. Concurrently with the agreements listed above, we
amended and restated our previous $10,000,000 Secured Term Note dated October
31, 2005 with Laurus.
On April 7, 2006, the funds were released from Escrow. Net proceeds to
Petrol from the financing, after payment of fees and expenses to Laurus and its
affiliates, were $4,806,688. The proceeds were primarily utilized by Petrol for
drilling activities on our Coal Creek Project.
On May 31, 2006, we entered into agreements with Laurus to draw down
an additional $10,000,000 under the credit facility provided by Laurus in
October 2005. Under the terms of the Laurus agreements we issued a Secured Term
Note in the aggregate principal amount of $10,000,000 and a five-year warrant to
purchase 400,000 shares of our common stock at $1.65 per share. On June 20,
2006, Laurus transferred the 400,000 warrants to Pallas. The Note has a
three-year term and bears an interest rate equivalent to the "prime rate"
published by the Wall Street Journal from time to time plus 3.25%, subject to a
floor of 10% and a ceiling of 14% per annum. Concurrently with the execution of
the new Laurus Funds agreements, Petrol amended and restated its previous
$10,000,000 Secured Term Note dated October 31, 2005 and the $5,000,000 Secured
Term Note dated September 30, 2006 with Laurus Funds.
On June 2, 2006, the funds were released from Escrow. Net proceeds to
Petrol from the financing, after payment of fees and expenses to Laurus Funds
and its affiliates, were $9,629,679. The proceeds were primarily utilized by
Petrol for drilling activities on Petrol's Coal Creek Project.
Cash Flows. Since inception, we have financed cash flow requirements
through debt financing, the issuance of common stock and revenues generated from
the sale of oil and gas. As we expand operational activities, we may experience
net negative cash flows from operations, pending receipt of sales or development
fees, and may be required to obtain additional financing to fund operations
through common stock offerings and debt borrowings to the extent necessary to
provide working capital.
Satisfaction of Our Cash Obligations for the Next 12 months. Due to
the poor results of our development efforts with the Coal Creek Project, we have
realized no significant increase in revenues, while simultaneously dramatically
increasing our debt levels. As a result, the Company's principal focus at this
time is to maximize cash flow to service our debt obligations. On October 28,
2007, the Company was required to make a principal payment of approximately $1.1
million on a portion of its long term debt. The Company did not have adequate
cash to make such principal payment and is currently in default under the terms
of the note for this long term debt. There can be no assurance that the Company
will be able to cure this default or to obtain adequate cash to service its
other debt as it comes due. In addition, we expect to continue incurring
operating losses over the next twelve months.
We are also required to make certain lease payments to maintain our
rights to develop and drill for oil and gas on our existing leases. These lease
payments are material obligations to us. There can be no assurance that the
Company will have adequate cash to make these lease payments, which could result
in the Company losing its rights under such leases. Due to the Company's
changing priorities, it may determine to forego selected lease payments and
allow the related leases to expire.
General Operations
Petrol's field development plans and strategies are employed
throughout its multiple project areas and incorporates several assessment
stages. Each new well is drilled through all possible CBM reservoirs and
individually evaluated. Upon a favorable evaluation of its overall production
capacity the well will be fully completed in as many gas producing intervals as
possible and then connected to our local gas gathering and water disposal
pipelines.
When a proposed drilling site is identified, as a licensed operator in
the State of Kansas, Petrol is engaged in all aspects of well site operations.
As a state licensed operator we are responsible for permitting the well, which
includes obtaining permission from the Kansas Oil and Gas Commission relative to
spacing requirements and any other county, state and federal environmental
regulatory issues required at the time that the permitting process commences.
Additionally, Petrol formulates and delivers to all interest owners an operating
agreement establishing each participant's rights and obligations in that
particular well based on the location of the well and the ownership. In addition
to the permitting process, we as the operator are responsible for hiring the
driller, geologist and land men to make final decisions relative to the zones to
be targeted, confirming that we have good title to each leased parcel covered by
the spacing permit and to actually drill the well to the target zones. Petrol is
responsible for completing each successful well and connecting it to the most
appropriate section of the gas gathering system.
As the operator, we are also the caretaker of the well once production
has commenced. We are responsible for paying bills related to the drilling and
development of the well, billing working interest owners for their proportionate
expenses in drilling and completing the well, and selling the production from
the well. Once the production is sold, we anticipate that the purchaser thereof
carries out its own research with respect to ownership of that production and
sends out a division order to confirm the nature and amount of each interest
owned by each interest owner. Once a division order has been established and
confirmed by the interest owners, the production purchaser issues the checks to
each interest owner in accordance with its appropriate interest. From that point
forward, we as operator are responsible for maintaining the well and the well
site during the entire term of the production or until such time as we have been
replaced or the site appropriately abandoned.
Along with the drilling and completion of our production wells, our
subsidiary pipeline companies formulate, design and install a gas gathering and
compression system to transport the gas from wellhead to the high pressure
interstate pipeline tap and sales market. We have identified several major
interstate distribution pipelines that operate within and pass through the
counties in which we have lease holdings. These include pipelines owned and
operated by Southern Star, CMS Energy, Enbridge and Kinder Morgan. We have
initiated contact with these companies to ascertain the specific locations of
their pipelines, their requirements to transport gas from us (including volume
of gas and quality of gas), and the costs to connect to their pipelines. We
currently have agreements with Southern Star in our Petrol-Neodesha Project and
Enbridge in our Coal Creek Project
The price obtained for produced oil and gas is dependent on numerous
factors beyond our control, including domestic and foreign production rates of
oil and gas, market demand and the effect of governmental regulations and
incentives. To reduce the impact of these extraneous factors, we often enter
into forward sales contracts for a portion of the gas and oil we produce.
However, we do not have any delivery commitments for gas or oil from wells not
currently drilled or producing. Because the U.S. government's has been
encouraging increases in domestic production of energy, coupled with the high
demand for natural gas, we do not anticipate any difficulties in selling any oil
and gas we produce, once it has been delivered to a distribution facility.
The timing of most of our capital expenditures is discretionary.
Currently there are no material long-term commitments associated with any
capital expenditure plans or that are currently in the investigative planning
stage. Consequently, we have a significant degree of flexibility to adjust the
level of such expenditures as circumstances warrant. The level of our capital
expenditures will vary in future periods depending on energy market conditions
and other related economic factors. However, we expect to significantly reduce
our drilling activity due to our limited available cash.
Derivatives
To reduce our exposure to unfavorable changes in natural gas prices,
we have entered into an agreement to utilize energy swaps in order to have a
fixed-price contract. This contract allows us to be able to predict with greater
certainty the effective natural gas prices to be received for hedged production
and benefit operating cash flows and earnings when market prices are less than
the fixed prices provided under the contracts. However, we will not benefit from
market prices that are higher than the fixed prices in our contracts for hedged
production. If we are unable to provide the quantity that we have contracted for
we will have to go to the open market to purchase the required amounts that we
have contracted to provide.
We have entered into various agreements with our customers to sell gas
at a fixed price. At September 30, 2007 we had contracts covering approximately
45,600 mmbtu per month for the period of October 2007 to February 2008 at an
average price of $7.23 per mmbtu and basis agreements covering approximately
15,200 mmbtu per month for the same period.
Critical Accounting Policies and Estimates
Our accounting estimates include bad debts on our receivables, amount
of depletion of our oil and gas properties subject to amortization, the asset
retirement obligation and the value of the options and warrants that we issue.
Our trade receivables have been fully collectible since inception and we only
have sales to a small base of customers. We believe that all of our receivables
are collectible. The depletion of our oil and gas properties is based in part on
the evaluation of our reserves and an estimate of our reserves. We obtain an
evaluation of the proved reserves from a professional engineering company and on
a quarterly basis we review the estimates and determine if any adjustments are
needed. If the actual reserves are less than the estimated reserves, we would
not fully deplete our costs. The asset retirement obligation relates to the plug
and abandonment costs when our wells are no longer useful. We determine the
value of the liability by obtaining quotes for this service and estimate the
increase we will face in the future. We then discount the future value based on
an intrinsic interest rate that is appropriate for Petrol. If costs rise more
than what we have expected, there could be additional charges in the future
however we monitor the costs of the abandoned wells and we will adjust this
liability if necessary. The value we assign to the options and warrants that we
issue is based on the fair market value as calculated by the Black-Scholes
pricing model. To perform a calculation of the value of our options and
warrants, we determine the volatility of our stock. We believe our estimate of
volatility is reasonable and we review the assumptions used to determine this
whenever we have an equity instrument that needs a fair market value. Although
the offset to the valuation is in paid in capital, were we to have an incorrect
material volatility assumption, our expenses could be understated or overstated.
The preparation of our financial statements requires us to make assumptions and
estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, as well as the disclosure of contingent assets and liabilities. We
base our assumptions and estimates on historical experience and other sources
that we believe to be reasonable at the time. Actual results may vary from our
estimates due to changes in circumstances, weather, politics, global economics,
mechanical problems, general business conditions and other factors.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. As of the end of the period covered
by this report, Loren Moll, our Chief Executive Officer and Principal Financial
Officer evaluated the effectiveness of our disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based on the evaluation, which disclosed
no significant deficiencies or material weaknesses, Mr. Moll, concluded that our
disclosure controls and procedures are effective in timely alerting him to
material information required to be included in our periodic SEC filings.
It should be noted, however, that no matter how well designed and
operated, a control system can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. In addition, the design of
any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of
control systems (including faulty judgments in decision making or breakdowns
resulting from simple errors or mistakes), there can be no assurance that any
design will succeed in achieving its stated goals under all potential
conditions. Additionally, controls can be circumvented by individual acts,
collusion or by management override of the controls in place.
There were no changes in our internal control over financial reporting
that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II--OTHER INFORMATION
Item 1. Legal Proceedings.
Petrol is and may become involved in various routine legal proceedings
incidental to its business. However, to Petrol's knowledge as of the date of
this report, there are no material pending legal proceedings to which Petrol is
a party or to which any of its property is subject.
Item 1A. Risk Factors.
There have been no material changes from the risk factors disclosed in
the "Risk Factors" section of our Annual Report on Form 10-K for the year ended
December 31, 2006 and our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The information required by this Item 6 is set forth in the Index to
Exhibits accompanying this Quarterly Report on Form 10-Q.
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.
PETROL OIL AND GAS, INC.
By: /s/ Loren Moll
--------------------------------
Loren Moll,
Chief Executive Officer
(On behalf of the
registrant and as
principal accounting
officer)
Date: November 19, 2007
INDEX TO EXHIBITS
Exhibit
Number Exhibits
- ------------ -----------------------------------------------------------
31.1 Certification of the Company's Chief Executive Officer and
principal accounting officer Pursuant to Section 302 of
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 7241).
32.1 Certification of the Company's Chief Executive Officer and
principal accounting officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).