UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2006
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from ________ to ________
Commission file number: 000-51488
PETROSEARCH ENERGY CORPORATION
(Exact name of small business issuer as specified in its charter)
NEVADA 20-2033200
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
675 BERING DRIVE, SUITE 200
HOUSTON, TX 77057
(Address of principal executive offices)
(713) 961-9337
(Issuer's telephone number)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Check whether the issuer: (i) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (ii) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: 31,104,570 Shares of $0.001 par
value Common Stock outstanding as of November 10, 2006
Transitional Small Business Disclosure Format (check one): Yes [ ] NO [X]
PETROSEARCH ENERGY CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2006
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
ITEM 3. CONTROLS AND PROCEDURES
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 6. EXHIBITS
SIGNATURES
ITEM 1. FINANCIAL STATEMENTS
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
SEPTEMBER 30, DECEMBER 31,
2006 2005
ASSETS (UNAUDITED) (SEE NOTE)
- ------ --------------- ---------------
Current assets:
Cash 1,591,227 $ 4,052,844
Accounts receivable:
Joint owners, net of allowance of $83,073 - Excluding Kallina well 514,870 1,344,344
AR Kallina well 5,237,204 -
Oil and gas production sales 65,487 9,345
Note receivable 466,972 -
Prepaid expenses 714,051 517,482
--------------------------------
Total current assets 8,589,811 5,924,015
--------------------------------
Property and equipment:
Oil and gas properties, full cost method of accounting:
Properties subject to amortization 17,438,801 11,849,520
Properties not subject to amortization 8,877,244 3,513,597
Other property and equipment 149,348 147,047
--------------------------------
Total property and equipment 26,465,393 15,510,164
Less accumulated depreciation, depletion and amortization (2,180,242) (1,966,000)
--------------------------------
Property and equipment, net 24,285,151 13,544,164
Prepaid oil and gas costs 56,757 81,603
Other assets 39,072 66,462
--------------------------------
Total assets $ 32,970,791 $ 19,616,244
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,094,631 $ 908,168
Accounts payable - Excluding Kallina well 1,875,160 561,546
Accounts Payable - Kallina well 4,925,289 -
Accrued liabilities for Barnett property interest 4,636,584 -
Other accrued liabilities 442,962 750,036
--------------------------------
Total current liabilities 13,974,626 2,219,750
--------------------------------
Long-term debt, net of current portion 2,589,811 2,537,251
Other long-term obligations 659,438 670,456
--------------------------------
Total liabilities 17,223,875 5,427,457
Stockholders' equity:
Preferred stock, par value $1.00 per share, 20,000,000 shares
authorized:
Series A 8% convertible preferred stock, 1,000,000 shares authorized; 483,416
shares issued and outstanding at September 30, 2006 and December 31, 2005 483,416 483,416
Series B convertible preferred stock, 100,000 shares authorized; 43,000 shares
issued and outstanding at September 30, 2006 and December 31, 2005 43,000 43,000
Common stock, par value $0.001 per share, 100,000,000 shares 31,104 28,497
Authorized; 31,104,570 and 28,497,761 shares issued and outstanding at
September 30, 2006 and December 31, 2005, respectively
Additional paid-in capital 21,347,515 18,089,828
Unissued common stock 23,075 545,000
Accumulated deficit (6,181,194) (5,000,954)
--------------------------------
Total stockholders' equity 15,746,916 14,188,787
--------------------------------
Total liabilities and stockholders' equity $ 32,970,791 $ 19,616,244
=============== ===============
Note: The balance sheet at December 31, 2005 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to unaudited condensed consolidated financial statements
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
------------ ------------ ------------ ------------
Oil and gas production revenues $ 335,711 $ 240,005 $ 827,311 $ 1,617,520
------------------------------------------------------
Operating costs and expenses:
Lease operating and production taxes 240,977 140,030 658,859 467,091
Depreciation, depletion and amortization 79,614 54,738 214,242 540,684
General and administrative 550,075 784,005 1,845,396 2,159,950
------------------------------------------------------
Total costs and expenses 870,666 978,773 2,718,497 3,167,725
------------------------------------------------------
Operating loss (534,955) (738,768) (1,891,186) (1,550,205)
------------------------------------------------------
Other income (expense):
Interest income 18,775 18,995 51,858 19,410
Interest expense (137,034) (42,333) (340,912) (154,286)
Gain on sale of investment - - 1,000,000 -
------------------------------------------------------
Total other income (expense) (118,259) (23,338) 710,946 (134,876)
Net Income (Loss) $ (653,214) $ (762,106) $(1,180,240) $(1,685,081)
============= =========== ============ ============
Basic and diluted net income (loss) per
common share $ (0.02) $ (0.03) $ (0.04) $ (0.07)
============= =========== ============ ============
Basic and diluted weighted average shares
outstanding 31,115,168 27,967,327 30,527,998 24,364,902
============= =========== ============ ============
See accompanying notes to unaudited condensed consolidated financial statements
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
SERIES A SERIES B
COMMON PREFERRED PREFERRED ADDITIONAL UNISSUED TOTAL STOCK-
STOCK STOCK STOCK PAID-IN COMMON ACCUMULATED HOLDERS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT EQUITY
---------- ------- ------- -------- ------ ------- ----------- ---------- ------------ ------------
Balance at
December 28,497,761 $28,497 483,416 $483,416 43,000 $43,000 $18,089,828 $ 545,000 $(5,000,954) $14,188,787
31, 2005
Common stock
issued for cash 1,928,576 1,929 2,538,696 2,540,625
Common stock
issued for oil and 500,000 500 544,500 (545,000) -0-
gas properties
Common stock
committed for
professional 23,075 23,075
services
Common stock
issued - exercise 178,233 178 174,491 174,669
of warrants
Net loss (1,180,240) (1,180,240)
------------------------------------------------------------------------------------------------------------
Balance at
September 31,104,570 $31,104 483,416 $483,416 43,000 $43,000 $21,347,515 $ 23,075 $(6,181,194) $15,746,916
30, 2006 ========== ======= ======= ======== ====== ======= =========== ========== ============ ============
See accompanying notes to unaudited condensed consolidated financial statements
PETROSEARCH ENERGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(1,180,240) $(1,685,081)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING
ACTIVITIES:
Gain on sale of equity securities (1,000,000) -
Depletion, depreciation and amortization expense 214,242 540,684
Amortization of other costs 81,707 39,969
Common stock and warrants issued or committed for services 1,923 45,000
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable 461,417 339,787
Trade note receivable (466,972) -
Prepaid expenses and other assets (184,174) (142,992)
Accounts payable and accrued liabilities 915,955 (1,361,071)
--------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,156,142) (2,223,704)
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including purchases and development of properties (6,233,269) (4,362,659)
Prepayments for oil and gas properties, net - (324,331)
Proceeds from sale of oil and gas property - 2,072,002
Proceeds from sale of equity securities 1,000,000 -
--------------------------
NET CASH USED IN INVESTING ACTIVITIES (5,233,269) (2,614,988)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 2,540,625 10,609,719
Proceeds from exercise of warrants 174,669 -
Proceeds from notes payable 1,800,000 3,950,000
Repayment of notes payable (587,500) (3,315,000)
--------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,927,794 11,244,719
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,461,617) 6,406,027
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,052,844 1,100,568
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,591,227 $ 7,506,595
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 361,774 $ 150,754
============ ============
Income taxes paid $ - $ -
============ ============
See accompanying notes to unaudited condensed consolidated financial statements
PETROSEARCH ENERGY CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL STATEMENTS
------------------------------
The accompanying unaudited interim financial statements have been
prepared without audit pursuant to the rules and regulations of the U.S.
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted, pursuant to such rules
and regulations. These unaudited consolidated condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto of Petrosearch Energy Corporation (the
"Company") for the year ended December 31, 2005. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of financial position, results
of operations and cash flows for the interim periods presented have been
included. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the respective full
year.
2. INCOME TAXES
-------------
The Company uses the liability method in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based
on differences between financial reporting and income tax carrying amounts
of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against deferred tax assets,
based upon management's assessment as to their realization.
The difference between the 35% federal statutory income tax rate and
amounts shown in the accompanying interim financial statements is primarily
attributable to the utilization of net operating loss carry-forwards and a
valuation allowance recorded against net deferred tax assets.
3. INTERESTS IN OIL AND GAS PROPERTIES
----------------------------------------
BARNETT SHALE PROJECT, 5 COUNTIES, TEXAS
On August 29, 2006, the Company entered into a Second Amended and
Restated Program Agreement with Harding (the "Second Amendment") under
which it received a fixed 14% working interest in the existing Project
leases. The assignment by Harding to the Company shall be subject only to
applicable royalty and overriding royalty burdens described in the Amended
Program Agreement. The interest acquired relative to the Second Amendment
is an un-promoted interest which eliminates the Company's previous
obligations to advance a significant amount of costs on behalf of Harding.
The Company's cost bearing interest in all future acquisition, drilling,
completion and operating costs shall also remain fixed at an un-promoted
14%.
Pursuant to the terms of the Second Amendment, in October 2006 the
Company paid accrued drilling and operating obligations for the months of
May and June 2006 in the amount of $875,605 and have committed to pay
$1,635,725 related to lease acquisition costs for May and June paid for by
ExxonMobil and lease-banked. The Company anticipates the $1,635,725 to be
due in December 2006. As of September 30, 2006, the Company's share of
total property costs associated with its 14% fixed interest is $7,461,560,
$4,636,584 of which was unpaid and included as a current liability in the
accompanying balance sheet as of September 30, 2006.
The Company continues to work directly with Exxon Mobil Corporation
and Harding Company to form the integrated venture for the project for both
upstream and gathering system assets under the previously announced
non-binding "Heads of Agreement". Subsequent to the third quarter of 2006,
the Company assigned its interests in the Barnett Shale leases to a wholly
owned subsidiary, Barnett Petrosearch, LLC which will hold the Company's
interest in the integrated venture when and if it is formed.
SOUTHWEST GARWOOD PROJECT, COLORADO COUNTY, TEXAS
- -------------------------------------------------
With regard to the SW Garwood Project, on September 21, 2006, the
Company entered into a Second Amendment to the Petrosearch-Rock Agreement
and an Option Agreement with all other working interest owners in the
Project to resolve certain disputes. Under the collective terms of the
Second Amendment and the Option Agreement, Rock Energy Partners Operating,
L.P ("Rock"), the defaulting working interest owner, was granted a two-week
time period to settle its outstanding obligation on the Kallina 46 #1 well
totaling approximately $7.5 million. The funds were not received from Rock
in the allotted two week time period, which gave the Company an option
period under which it was able to acquire the interest from Rock the
Kallina lease.
On November 1, 2006, the Company exercised the option under the Option
Agreement with Rock, upon which exercise, it acquired a 100% working
interest (68% after payout working interest) from Rock in the Anthony
Kallina, et al lease covering 438.16 acres together with the existing
Kallina 46 #1 well in the Southwest Garwood Field of Colorado County,
Texas. As part of this transaction, the Company gave up a 20% working
interest in 240 acres and a 21.5% after payout working interest in 445
acres. In connection with the exercise of the option and acquisition of
these interests into the newly formed subsidiary, Garwood Petrosearch, Inc.
("Garwood"), Garwood executed a Securities Purchase Agreement and Secured
Term Note with Laurus Master Fund, Ltd. ("Laurus") for Laurus to provide
financing for payment of Rock's accrued and unpaid vendor obligations
related to the drilling of the Kallina 46 #1 well and payment of the future
completion costs for the Kallina 46 #1 well which is in process of being
completed. Garwood was formed to hold the Kallina Lease and the Kallina 46
#1 well acquired from Rock.
As a part of the financing arrangement, Garwood issued Laurus a
Warrant to acquire, upon payout of the Note indebtedness, 45% of Garwood's
outstanding common stock such that upon exercise of the Warrant, Garwood
would be owned 55% by us and 45% by Laurus and the sole asset is the
Kallina lease acquired from Rock. Advances under the Note shall bear
interest at Wall Street Journal Prime plus 2% with a minimum interest rate
of 8% and a maximum interest rate of 15%. Payments under the Note will be
paid from 90% of net production revenues beginning on the earlier to occur
of (i) receipt of actual proceeds from production from the Kallina 46 #1
well and (ii) a date which is 120 days after the closing date of the
transaction and requires a minimum monthly payment of $100,000 of which we
are now obligated for $87,500 as a result of the sale of 12.5% of the
interest as described immediately below. Upon any event of default, Laurus
would be entitled to receive 100% of the net production revenues relating
to oil and gas properties of Garwood. There were no Company warrants issued
related to this transaction. The Note is collateralized solely by the
recently acquired interest in the Kallina 46 #1 well and the related
Section 46 acreage, and has no other recourse to the Company.
On November 13, 2006, Garwood farmed out a 12.5% working interest in
the Kallina lease and the Kallina 46 #1 well to an industry partner on a
heads up basis. Garwood retains an 87.5% working interest in the Kallina
lease and the Kallina 46 #1 well before payout and a 59.5% working interest
after payout.
In the SW Garwood project, as a result of the exercise of this option
and the sale of the interest in the entire SW Garwood Project, Petrosearch
entities now own a 16% working interest in 640 acres; a 16% after payout
working interest in 640 acres; and an 87.5% before payout and 75.5% after
payout working interest in 438 acres.
NORTH TEXAS/PANHANDLE WATER FLOOD PROJECT
- ---------------------------------------------
In November 2005, the Company acquired a 100% working interest in
1,755 acres in the Quinduno Field in Roberts County, Texas, in the Anadarko
Basin. The Company's working interest reduces to 90% at payout, which
includes the cost of acquisition. Proved reserves net to the Company's
interest are estimated by Ryder Scott to be 2.0 MMbo and 1.1 Bcf of gas
with an SEC PV-10 value of $33.7 million (at December 31, 2005). The
purchase price (in November 2005) equated to $3.37 per proved barrel of oil
equivalent (boe) based on a conversion factor of 6 Mcf/bo. As operator, the
Company intends to extract the reserves through conventional water flood
technology. The first phase of the project began in March 2006 with the
drilling of a new well, the Maddox #42, for production, to a depth of 4,495
feet. The well was completed April 13, 2006 in a small, previously unseen,
zone below the water flood target; initial production was encouraging but
subsequently
declined to a less than commercial rate. The Company plans to recomplete
the well in the water flood zone at a depth of 4100 feet. The Company has
an ongoing program to enter each of the 20 wells that have not been
plugged. So far, the Company has entered 7 of these older wells to
determine their mechanical status and produce whatever oil or gas we can
while working on the water flood design. Two of these wells have been
equipped and are now producing. The Company is presently preparing a
detailed study and development plan for the field and have filed
application for a permit to use the Ogallala freshwater aquifer as a source
for the injection program. As of this filing, the Company has reached
agreement in principle with a landowner to allow the Company to drill for
and extract water from a water well to be drilled on a 560 acre parcel in
the field and has been notified by the staff of the local water district
that they will recommend that the district Board approve the Company's
permit application. We are in final discussion with a potential industry
partner to participate in the development of the field.
4. STOCK WARRANTS
---------------
In the past, the Company has periodically issued incentive stock
warrants to officers, executives, directors, and consultants to provide
additional incentives to promote the success of the Company's business and
to enhance the ability to attract and retain the services of qualified
persons. The issuance of such warrants has been approved by the Board of
Directors. The exercise price of a warrant granted is determined by the
fair market value of the stock on the date of grant.
In December 2004, the FASB issued SFAS 123(R), which is a revision of
SFAS 123. SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock warrants, to be recognized as
stock-based compensation expense in the Company's Consolidated Statements
of Operations based on their fair values. Proforma disclosure is no longer
an alternative, as was permitted by SFAS 123. Until the adoption of the
provisions of SFAS 123(R) on January 1, 2006, the Company elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations in accounting for its
employee stock options and warrants because the alternative fair value
accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation", required use of option valuation models that
were not developed for use in valuing employee stock options or warrants.
Under APB 25, if the exercise price of the Company's employee stock
warrants is greater than or equal to the market price of the underlying
stock on the date of grant, no compensation expense was recognized.
The adoption of SFAS 123(R) has not resulted in any compensation
charges in 2006 related to warrants outstanding at December 31, 2005,
because all employee stock warrants were vested as of December 31, 2005.
There was no compensation expense related to warrants during the three
month periods ended September 30, 2006 and 2005.
Although it is no longer required, due to the adoption of SFAS 123(R),
proforma information regarding net income and earnings per share was
required by Statement 123 and 148 (included for purposes of 2005 proforma
comparison), and has been determined as if the Company had accounted for
its employee stock warrants under the fair value method of these
Statements. For warrants granted to employees or directors during the three
months ended September 30, 2006 and 2005, the fair value of such warrants
was estimated at the date of grant using a Black-Scholes option-pricing
model with the following assumptions:
SEPTEMBER 30, SEPTEMBER 30,
2006 2005
-------------- --------------
Dividend yield - 0 - - 0 -
Expected volatility 98% 180 %
Risk free interest 3.00% 2.25% - 2.50%
Expected lives 2 - 4 years 2 - 4 years
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options or warrants that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
warrants have characteristics significantly different from those of traded
warrants, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock warrants.
For purposes of proforma disclosures, the estimated fair value of the
warrants is included in expense over the vesting period or expected life of
the warrant.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------- ------------- -------------
2006 2005 2006 2005
-------------- -------------- ------------- -------------
Net loss, as reported $ (653,214) $ (762,106) $ (1,180,240) $ (1,685,081)
Less stock-based
compensation calculated in
accordance with SFAS 123 - (25,160) - (855,335)
-------------- -------------- ------------- -------------
Proforma net loss $ (653,214) $ (787,266) $ (1,180,240) $ (2,540,416)
============== ============== ============= =============
Basic and fully diluted net
loss per common share, as
reported $ (0.02) $ (0.03) $ (0.04) $ (0.07)
============== ============== ============= =============
Basic and fully diluted
proforma net loss per
common share $ (0.02) $ (0.03) $ (0.04) $ (0.10)
============== ============== ============= =============
A summary of the Company's warrant activity and related information for the
nine months ended September 30, 2006 follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES UNDER EXERCISE EXERCISE
WARRANT PRICE PRICE
------------- ------------- ---------
Balance outstanding at
December 31, 2005 8,495,058 $ 0.98-$9.75 $ 3.57
Issued 1,060,714 $ 2.00 $ 2.00
Exercised (178,233) $ 0.98 $ 0.98
Expired (1,067,927) $0.98 - $1.63 $ 1.35
-------------
Balance outstanding at
September 30, 2006 8,309,612 $ 0.98-$9.75 $ 3.71
=============
A summary of outstanding stock warrants at September 30, 2006 is as
follows:
WEIGHTED
NUMBER OF REMAINING AVERAGE
COMMON STOCK CONTRACTED EXERCISE EXERCISE
EQUIVALENTS EXPIRATION DATE LIFE (YEARS) PRICE PRICE
------------ --------------- ------------ ----------- ---------
1,076,922 November 2006 .17 $ 9.75 $ 9.75
211,541 February 2007 1.42 $ 9.75 $ 9.75
30,770 March 2007 .50 $ 9.75 $ 9.75
300,004 April 2007 .59 $ 9.75 $ 9.75
161,538 May 2007 .67 $6.50-$9.75 $ 7.27
76,923 July 2007 .75 $5.20-$6.50 $ 6.24
269,231 September 2007 .92 $4.88-$5.20 $ 5.15
100,000 November 2007 1.17 $ 2.00 $ 2.00
150,000 March 2008 1.50 $ 1.95 $ 1.95
20,000 August 2008 1.87 $ 1.95 $ 1.95
4,851,969 November 2008 2.17 $ .98-$1.95 $ 1.93
1,060,714 February 2009 2.41 $ 2.00 $ 2.00
------------
8,309,612
============
5. RELATED PARTY TRANSACTIONS
----------------------------
During the three months ended September 30, 2006 there were no related
party transactions.
6. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
During the nine months ended September 30, 2006 and 2005, the Company
engaged in non-cash financing and investing activities as follows:
2006 2005
---------- -------
Transfer of vehicle for reduction of liability $ - $15,346
========== =======
Reduction of prepaid drilling for development of oil and gas
properties $ 24,846 $ 6,557
========== =======
Increase in accounts payable for property costs $ 560,530 $93,794
========== =======
Increase in accrued liabilities for Barnett Shale property costs $4,636,584 $ -
========== =======
Transfer of overriding royalty interest for debt issuance costs $ - $89,609
========== =======
Issuance of warrants with debt financing $ - $88,422
========== =======
Cancellation of warrants for reduction of note receivable $ - $88,392
========== =======
Issuance of common stock for deferred board compensation $ - $15,000
========== =======
Increase in accounts payable for JIB receivable - Kallina $4,925,289 $ -
========== =======
7. EARNINGS PER SHARE
--------------------
The Company has adopted SFAS No. 128, which provides for calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share
includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average common shares outstanding for
the period. Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity similar to fully
diluted earnings per share. Following is a reconciliation of the numerators
and denominators of the basic and diluted EPS computations for the three
and nine months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
2006 2005 2006 2005
------------------------------------------------------
Basic EPS:
Net income (loss) $ (653,214) $ (762,106) $(1,180,240) $(1,685,081)
Less: Preferred stock
dividends (9,668) (9,668) (29,005) (29,005)
------------------------------------------------------
Net income (loss) available
to common stockholders $ (662,882) $ (771,774) $(1,209,245) $(1,714,086)
======================================================
Weighted average shares
of common stock 31,115,168 27,967,327 30,527,998 24,364,002
======================================================
Basic net income (loss)
per share $ (0.02) $ (0.03) $ (0.04) $ (0.07)
======================================================
Diluted EPS:
Income (loss) available to
common stockholders $ (662,882) $ (771,774) $(1,209,245) $(1,714,086)
Plus assumed conversions - - - -
------------------------------------------------------
Net income (loss) used for
diluted EPS $ (662,882) $ (771,774) $(1,209,245) $(1,714,086)
======================================================
Weighted average shares
of common stock 31,115,168 27,967,327 30,527,998 24,364,902
Plus effect of dilutive
securities:
Warrants - - - -
Convertible preferred stock - - - -
------------------------------------------------------
Weighted average shares
used for Diluted EPS 31,115,168 27,967,327 30,527,998 24,364,902
======================================================
Diluted net income (loss)
per share $ (0.02) $ (0.03) $ (0.04) $ (0.07)
======================================================
For the nine month period ended September 30, 2006, potential dilutive
securities had an anti-dilutive effect and were not included in the
calculation of diluted net loss per common share. These securities included
in-the-money warrants for the purchase of 84,280 common shares and
preferred stock convertible into 94,465 common shares. For the three months
ended September 30, 2006, these securities included preferred stock
convertible into 94,218 common shares. For the nine months ended September
30, 2005, these securities included in-the-money warrants for the purchase
of 868,376 common shares and preferred stock convertible into 94,218 common
shares. For the three months ended September 30, 2005, these securities
included in-the-money warrants for the purchase of 851,282 common shares
and preferred stock convertible into 94,218 common shares.
8. OTHER INCOME
-------------
On May 5, 2006 the Company sold its 1,500,000 shares of Texcom Stock
for a total of $1,000,000. The Company acquired the shares in November 2003
pursuant to a merger and a sale of a subsidiary.
9. SUBSEQUENT EVENTS
------------------
Please see Footnote number 3. INTERESTS IN OIL AND GAS PROPERTIES for
------------------------------------
several subsequent events related the Southwest Garwood Project, Colorado
County, Texas.
On October 16, 2006, the Company entered into a Letter Agreement to
amend its existing revolving credit facility with Fortuna Energy, LP
("Fortuna"). The principal available under the revolving borrowing base
remains $10,000,000. Under the terms of the transaction, Fortuna advanced
the Company $780,000 for the purpose of paying amounts due for the Barnett
Shale Project. As part of the financing, the Company pledged additional
interests in its oil and gas properties as collateral.
In addition, the Company agreed to issue to Fortuna 475,000 five year
warrants with a strike price of $0.92 per share (the "Warrants"). The
Warrants will contain a "put" provision which will allow Fortuna to "put"
the warrants to the Company at a price of $0.65 per share for two (2)
years, which "put" period shall commence 180 days after the issuance of the
Letter Agreement. The Warrants have piggyback registration rights.
Additionally, as part of the transaction, the Company agreed to issue
100,000 new warrants, which expire five (5) years from the date of issue,
at a price of $0.92 per share (the "Replacement Warrants") to replace
100,000 warrants previously issued to Fortuna at a price of $2.00 per
share, which were previously set to expire on November 1, 2007. The
Replacement Warrants also have piggyback registration rights.
The Company signed a commitment letter for a short term bridge debt
facility on September 26, 2006 with Macquarie Bank Limited ("Macquarie)
which commitment letter has since expired on October 16, 2006. The Company
continues to negotiate with Macquarie regarding the loan facility in an
effort to evaluate how, and if, the short term facility will meet the
Company's capital needs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD LOOKING STATEMENTS
Statements contained herein and the information incorporated by reference herein
may be forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements
can be identified by the use of forward-looking terminology such as, but not
limited to, "may," "will," "expect," "anticipate," "estimate," "would be,"
"believe," or "continue" or the negative or other variations of comparable
terminology. We intend such forward-looking statements to be covered by the
safe harbor provisions applicable to forward-looking statements contained in
Section 21E of the Exchange Act. Such statements (none of which is intended as a
guarantee of performance) are subject to certain assumptions, risks and
uncertainties, which could cause our actual future results, achievements or
transactions to differ materially from those projected or anticipated. Such
risks and uncertainties are set forth herein.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events, or performance and underlying assumptions and
other statements, which are other than statements of historical facts. These
statements are subject to uncertainties and risks including, but not limited to,
product and service demands and acceptance, changes in technology, economic
conditions, the impact of competition and pricing, and government regulation and
approvals. Petrosearch cautions that assumptions, expectations, projections,
intentions, or beliefs about future events may, and often do, vary from actual
results and the differences can be material. Some of the key factors which could
cause actual results to vary from those Petrosearch expects include changes in
natural gas and oil prices, the timing of planned capital expenditures,
availability of acquisitions, uncertainties in estimating proved reserves and
forecasting production results, operational factors affecting the commencement
or maintenance of producing wells, the condition of the capital markets
generally, as well as our ability to access them, and uncertainties regarding
environmental regulations or litigation and other legal or regulatory
developments affecting our business.
Our expectations, beliefs and projections are expressed in good faith and are
believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We
undertake no duty to update these forward-looking statements.
OVERVIEW - CORPORATE STRATEGY
We are a resource based energy company with operations focused in three core
areas of the lower 48 states of the United States. Our strategic goal is to
build intrinsic shareholder value through; 1) focused operations in our three
core property areas, and 2) maintaining a low cost structure at every level of
our Company.
Our near term goal is to bring additional production and revenues from our
existing resource base. We see tangible progress in achieving our goal.
Specifically:
- In October 2006, we undertook certain remedial work on our Gruman
property in North Dakota. As a result of this work, our production on
this property has an average rate of 60 barrels of oil and oil
equivalent per day ("boepd") during the third quarter of 2006, which
has increased over the 45 day period after the end of the quarter. We
are currently assessing the sustainability of the production increase.
We now own an 85% working interest in this well. Once we receive
permit approval for water injection on this property and pressure
maintenance is initiated, we expect further production increases. We
expect approval by year end.
- During the month of December 2006 we expect to complete our
Kallina 46 #1 well. Petrosearch entities now own an 87.5% working
interest in this well before payout and 75.5% after payout. As
we announced previously, this well has encountered in excess of 250
feet of potentially net productive pay in multiple sands in the Upper,
Middle and Lower Wilcox.
- In January of 2007 we anticipate initiating production from the
five wells we have drilled to date, the one currently drilling and
possibly another well to be drilled prior to year end in the Barnett
Shale project. A multi-rig continuous drilling program is planned for
2007 and 2008.
Over the past two years we have assembled an inventory of high quality drilling
opportunities in our focus areas. We now have seven development locations on our
Wilcox properties and 38 locations for development on our Quinduno waterflood.
In the Barnett Shale project we have accumulated an important leasehold position
inside our 5 county Area of Mutual Interest with numerous locations. A multi-rig
program is planned for the area over the next several years. We are now
embarking on an aggressive program to exploit this inventory for the benefit of
our shareholders. Accordingly, a majority of effort over the next 18 months will
be focused on growth through the drill bit in our three core areas:
- The Barnett Shale project with ExxonMobil;
- The Texas Panhandle water flood that we operate; and
- Development of the Garwood field in the Wilcox trend of
South Texas that we operate.
We are also maintaining a low cost structure. Our finding and development costs
for the year ended 12/31/05 were $3.60 per barrel of oil equivalent ("boe").
During that same period our total proved reserves expanded 3.9 times and we
finished the year with 2.5 Million boe. Added to this base of proved reserves is
another 7.1 million boe of probable and possible reserves. We have not included
any of the reserves that we expect to realize from wells drilled to date in the
Barnett Shale project or the Kallina 46 #1 well in the aforementioned figures.
We also maintain tight control on our corporate overheads and have low relative
lease operating costs in our core property areas.
LIQUIDITY AND CAPITAL RESOURCES
The significant decrease in our working capital from $3,704,265 at December 31,
2005 to $(5,384,815) at September 30, 2006 is the result of 1) accrued
liabilities of $4.6 million for our interest in the Barnett Shale properties of
which $875,000 has been paid subsequent to the end of the third quarter with the
balance expected to be paid in full and on time through financings that are in
late stage negotiations with institutional investors; 2) an increase in the
current portion of our long term debt; and 3) decreased cash that was used for
capital expenditures, and general working capital.
We have primarily financed our operating and investing cash flow needs through
private offerings of equity securities, sales of crude oil and natural gas, and
the use of debt instruments such as revolving credit facilities. We believe
that given our increased production (See Gruman Prospect, Stark County, North
Dakota below), existing debt facilities and capital raising efforts currently
underway we will have the ability to provide the capital needed to develop our
Projects.
Our financing strategy is to use various debt related financings that recognize
specific property risks and their economic attributes. We are executing on this
strategy. We recently closed an $8.3 million financing with Laurus Master Fund
for the purchase of a 100% working interest before payout in the Kallina 46 #1
well, and the associated 438 acre lease, in the Garwood field (and subsequently
farmed out a 12.5% working interest and reduced the borrowing by approximately
$1 million). Recourse under this facility is only to the Kallina well and the
leases which it holds. We did not issue any common stock or warrants in our
Company in conjunction with this financing. We are working towards a joint
venture for the development of our Quinduno water flood property. We do not
anticipate having to issue any common stock or warrants in our Company in
association with this possible transaction. We are also working on various
financing strategies for our Barnett Shale project.
PRIVATE PLACEMENTS
In February 2006, we completed sales of $2.7 million of our common stock in a
private offering. We received net proceeds of approximately $2.54 million which
were for general corporate purposes, including the drilling of projects in our
prospect inventory.
SPECIFIC PROJECT FINANCING - SW GARWOOD PROJECT
With regard to the SW Garwood Project, on September 21, 2006, we entered into a
Second Amendment to the Petrosearch-Rock Agreement and an Option Agreement with
all other working interest owners in the Project to resolve certain disputes.
Under the collective terms of the Second Amendment and the Option Agreement,
Rock Energy Partners Operating, L.P ("Rock"), the defaulting working interest
owner, was granted a two-week time period to settle its outstanding obligation
on the Kallina 46 #1 well totaling approximately $7.5 million. The funds were
not received from Rock in the allotted two week time period, which gave us an
option period under which we were able to acquire the Kallina lease from Rock.
On November 1, 2006, we exercised the option under the Option Agreement with
Rock, upon which exercise, we acquired a 100% working interest (68% after payout
working interest) from Rock in the Anthony Kallina, et al lease covering 438.16
acres together with the existing Kallina 46 #1 well in the Southwest Garwood
Field of Colorado County, Texas. As part of this transaction, we gave up a 20%
working interest in 240 acres and a 21.5% after payout working interest in 445
acres. In connection with the exercise of the option and acquisition of these
interests into our newly formed subsidiary, Garwood Petrosearch, Inc.
("Garwood"), Garwood executed a Securities Purchase Agreement and Secured Term
Note with Laurus Master Fund, Ltd. ("Laurus") for Laurus to provide financing
for payment of Rock's accrued and unpaid vendor obligations related to the
drilling of the Kallina 46 #1 well and payment of the future completion costs
for the Kallina 46 #1 well which is in process of being completed. Garwood
was formed to hold the Kallina Lease and the Kallina 46 #1 well acquired from
Rock.
As a part of the financing arrangement, Garwood issued Laurus a Warrant to
acquire, upon payout of the Note indebtedness, 45% of Garwood's outstanding
common stock such that upon exercise of the Warrant, Garwood would be owned 55%
by us and 45% by Laurus and the sole asset is the Kallina lease acquired from
Rock. Advances under the Note shall bear interest at Wall Street Journal Prime
plus 2% with a minimum interest rate of 8% and a maximum interest rate of 15%.
Payments under the Note will be paid from 90% of net production revenues
beginning on the earlier to occur of (i) receipt of actual proceeds from
production from the Kallina 46 #1 well and (ii) a date which is 120 days after
the closing date of the transaction and requires a minimum monthly payment of
$100,000 of which we are now obligated for $87,500 as a result of the sale of
12.5% of the interest as described immediately below. Upon any event of default,
Laurus would be entitled to receive 100% of the net production revenues relating
to oil and gas properties of Garwood. There were no Company warrants issued
related to this transaction. The Note is collateralized solely by the recently
acquired interest in the Kallina 46 #1 well and the related Section 46 acreage,
and has no other recourse to the Company.
On November 13, 2006, Garwood farmed out a 12.5% working interest in the Kallina
lease and the Kallina 46 #1 well to an industry partner on a heads up basis.
Garwood retains an 87.5% working interest in the Kallina lease and the Kallina
46 #1 well before payout and a 59.5% interest after payout.
As a result of the exercise of this option and the sale of the interest in the
entire SW Garwood Project, Petrosearch entities now own a 16% working interest
in 640 acres; a 16% after payout working interest in 640 acres; and an 87.5%
before payout and 74.5% after payout working interest in 438 acres.
CREDIT FACILITIES
On October 16, 2006, we entered into a Letter Agreement to amend our existing
revolving credit facility with Fortuna Energy, LP. The principal available under
the revolving borrowing base remains $10,000,000, with a current outstanding
balance of $5,222,500. Under the terms of the transaction, Fortuna advanced us
$780,000 for the purpose of paying amounts due for the Barnett Shale Project.
As part of the financing, we provided Fortuna additional collateral. In
addition, we agreed to issue to Fortuna 475,000 five year warrants with a strike
price of $0.92 per share. The Warrants contain a "put" provision which will
allow Fortuna to "put" the warrants to the Company at a price of $0.65 per share
for two years, which "put" period shall commence 180 days after the issuance of
the Letter Agreement. The Warrants
have piggyback registration rights.
Although we signed a commitment letter on September 26, 2006 with Macquarie Bank
Limited ("Macquarie) which commitment letter has since expired, we continue to
negotiate with Macquarie to provide a loan facility that is in the best
interests of the Company's capital needs.
OTHER FINANCING OPPORTUNITIES
We are currently in discussions with several investment groups which could
result in additional sources of capital which will enable us to develop the high
quality projects in our inventory and fund our working capital needs. We are
also in the process of developing industry relationships to participate in both
our core and exploration prospects and projects. Management believes this
reduces our capital risk and increase the diversity of the projects in which we
use our own capital. We intend to establish these industry relationships with
terms that are standard in the oil and gas industry.
CURRENT PROJECTS AND CAPITAL REQUIREMENTS
CORE PROPERTIES
- ---------------
BARNETT SHALE PROJECT -
The Barnett Shale Project is located in the Fort Worth basin of Texas and is
arguably one of the most exciting plays to emerge in the lower 48 in the past
decade. Our position consists of a substantial leasehold position inside a five
county Area of Mutual Interest with Exxon Mobil Corporation and Harding Company,
a privately held Fort Worth based oil and gas company. Initial production is
estimated to commence in early 2007. An active drilling and leasing program is
planned for 2007 and 2008 and beyond.
On August 29, 2006, we entered into a Second Amended and Restated Program
Agreement with Harding (the "Second Amendment") under which we received a
fixed 14% working interest in the existing Project leases. The assignment by
Harding to us shall be subject only to applicable royalty and overriding royalty
burdens described in the Amended Program Agreement. The interest we acquired
relative to the Second Amendment is an un-promoted interest which eliminates our
previous obligations to advance a significant amount of costs on behalf of
Harding. Our cost bearing interest in all future acquisition, drilling,
completion and operating costs shall also remain fixed at an un-promoted
14%. Pursuant to the terms of the Second Amendment, in October we paid our
accrued drilling and operating obligations for the months of May and June 2006
in the amount of $875,605 and have committed to pay $1,635,725 related to lease
acquisition costs for May and June paid for by ExxonMobil and lease-banked. We
anticipate the $1,635,725 to be due in December 2006.
We continue to work directly with Exxon Mobil Corporation and Harding Company to
form the integrated venture for the project for both upstream and gathering
system assets under the previously announced non-binding "Heads of Agreement".
Subsequent to the third quarter of 2006 we assigned our interests in the Barnett
Shale leases to a wholly owned subsidiary, Barnett Petrosearch, LLC which will
hold our interest in the integrated venture when and if it is formed.
NORTH TEXAS/PANHANDLE WATER FLOOD PROJECT - In November 2005, we acquired a 100%
working interest in 1,755 acres in the Quinduno Field in Roberts County, Texas,
in the Anadarko Basin. The project is focused on infill drilling and the
implementation of a water flood on the property. Quinduno has a large
established resource base of original oil in place. Since its discovery in
1953, only five million barrels have been produced using primary production.
One infill well has been drilled to date. We have an ongoing program to enter
each of the 20 wells that have not been plugged. So far, we have entered seven
of these older wells to determine their mechanical status and establish
potential productivity. Two of these wells have been equipped and are now
producing. We have prepared a detailed study and development plan for the field.
Our independent engineers, Ryder Scott, have estimated proved reserves
extractable by water flood at 2.1 million barrels, with probable and possible
reserves adding a further 6.7 million barrels. Slightly deeper than the water
flood zone, the Moore County Limestone formation has undrilled exploration
potential that may be tested
in a future well. We are in final stages of negotiation with an industry partner
to jointly develop this important asset.
SW GARWOOD, COLORADO COUNTY, TEXAS - The Wilcox Trend Garwood field has had
three wells drilled with one of these in the process of being completed. Seven
additional proved, probable and possible locations are on current leases. The
initial well on this prospect, the Pintail #1, completed in the Upper Wilcox in
December 2004, paid out in April of this year. As of payout, we began
participating in the production from the well with a 16% working interest. The
well is currently producing approximately 260 Mcfd and 3 bopd.We have recently
proposed additional perforations and installed a gas compressor to increase
production.
The second well, the Pintail Flats #1, was completed and fracture stimulated in
May, 2005 from 15,950 feet to 16,010 feet in the Lower Wilcox. Completion
problems resulting from the fracture treatment resulted in the well
under-performing (at about 210 Mcfd) compared to expectations from the zone. We
have recompleted and fracture stimulated an uphole zone at 15,100 feet. The well
flowed back frac fluids with a 2000 Mcfpd gas rate into the sales line as of
August 3, 2006. The well is currently flowing 750 Mcfd and we are analyzing
potential additional perforations. We have a 16% working interest in the well
after payout. The well has 2 additional potentially productive zones in the
Lower Wilcox and 3 additional potentially productive zones in the Upper Wilcox.
A third well, the Kallina 46 #1, reached its targeted depth of 16,230 feet on
August 6, 2006. Data available while drilling indicates several potentially
productive Wilcox sands from 10,400 feet to 16,100 feet. Gross prospective
interval is believed to exceed 250 feet of pay. As discussed in our Footnote #3,
we now have a 87.5% before payout (75.5% after payout) working interest in the
Kallina 46 #1 and the associated 438 acre lease. Completion operations on this
well commenced on November 6, 2006. Production from the well is expected prior
to year end.
We believe these wells are in an excellent location in the trend. Significant
discoveries by others are nearby in the same sand sequences. These discoveries
are now being exploited by Petrohawk Energy Corp. and Cabot Oil & Gas less than
one half mile west of our westerly lease line. The initial reported test of
Petrohawk's Garrett #1 is 11,235 MMcfd after stimulation.
GRUMAN PROSPECT, STARK COUNTY, NORTH DAKOTA - On March 28, 2006, we spudded the
Gruman 18-3 well intended to be either an increased density well or a water
injection well up dip of the Gruman 18-1. The well reached total depth of 9,890
feet on April 14, 2006, and will be completed as an injection well. We have
established that the Gruman 18-3 is in pressure communication with the Gruman
18-1. Further testing or stimulation may be necessary to achieve the desired
future injection rates.
In October 2006, we undertook certain remedial work on the Gruman 18-1 which has
improved the production on the well. We are currently assessing the positive
impact on the long term production.
Once we receive permit approval for water injection on this property and
pressure maintenance is initiated, we expect further production increases. The
initial response from the water being injected into the well is expected to
begin within 60 to 90 days from the start of injection. We have applied to the
North Dakota Industrial Commission for a water flood unit and expect approval by
year end.
Proved developed reserves in the prospect to our share of the well as of
December 31, 2005, were 309 Mbo and 82 MMcf of natural gas, as estimated by a
third party engineering firm, McCartney Engineering, LLC.
EXPLORATION PROJECTS
- --------------------
AIRPORT PROSPECT, WOODWARD COUNTY - We farmed out this 640-acre prospect in
November 2005 and retained a 10% working interest. The initial well, the Corbett
N 13 #1 was spudded on March 7, 2006, and reached total depth of 8,323 feet in
the Morrow Sands on March 27, 2006. Three sands were perforated and tested gas.
This well was completed in June 2006 at an initial test rate of approximately
500 Mcfd. Initial sales were delayed while awaiting pipeline construction. The
well began commercial production on October 19, 2006 at an initial rate of 585
Mcfd.
RODNEY ISLAND, TENSAS PARISH, LOUISIANA - In October 2005, we took over
operations of the Harper Z-1 well on the Rodney Island prospect from the
previous operator after casing was set and cemented. As the current operator and
with the agreement of the other working interest owners, we initiated litigation
in February 2006 against the previous operator for non-payment of their share of
drilling and completion costs. Settlement discussions to resolve the dispute are
in progress.
Downhole mechanical difficulties hindered our attempt to complete the well,
which was directionally drilled to a measured depth of 11,701 feet (vertical
depth = 9,373 feet) and logged approximately 19 feet of oil sand in the
Tuscaloosa Massive Sand. Our program for sidetracking the well to improve
wellbore conditions has been finalized. Timing of the project completion is
indeterminate due to the ongoing litigation.
Ryder Scott estimates proved reserves net to our share as of December 31, 2005
to be 49.4 Mbo and 26 MMcf. We have a 25% working interest before payout in the
Harper Z-1 well and 18.75% working interest after payout. We have an 18.75%
working interest in all additional wells.
BURLESON COUNTY, TEXAS, PROJECTS - This is a multi-well natural gas project that
includes a total of 15 development and step-out locations in the Austin Chalk
and Georgetown formations at approximately 10,000 feet vertical depth on a
targeted leasehold position of approximately 11,000 acres, with 7,361 net acres
having been leased. Horizontal wells are planned with total measured length of
approximately 13,000 feet. The initial well is planned to be spudded in the
fourth quarter of 2006 with a second well planned in the first quarter of 2007.
We have a 37.5% non-operated working interest in the project, however; we have
agreed to sell our interest in the leases to the operator in exchange for the
reimbursement of 100% of our investment.
MISSISSIPPI TUSCALOOSA PROJECTS -- We have identified five Tuscaloosa oil
prospects in the Mississippi Inland Salt Basin, in Yazoo County, comprising a
maximum of 2,295 acres and up to 18 potential drilling locations. Eight
locations are planned to be drilled in 2007, ranging from 6,150 feet to 7,500
feet in depth. Approximately 55% of the required acreage has been leased.
Seismic data on the prospects has been reprocessed and confirmed our original
geological analysis. We own 100% of the prospects and will operate the project.
We are in initial discussions with a potential industry partner to co-develop
these prospects.
TAIT PROJECTS - COLORADO COUNTY, TEXAS - The initial well on this natural
prospect, the Sealy #1, was spudded April 25, 2006 and reached total depth in
the Upper Wilcox in May 2006. We determined all potential hydrocarbon zones in
the well bore to be non-commercial and did not consent to a completion attempt
by the operator in the shallower Frio sands. However, data from this well bore
did provide support for the geological interpretation of the shallower Yegua
sands between 2500 feet and 3100 feet in which we have 2 identified locations.
The first of these is scheduled to be drilled at the end of this year or the
beginning of 2007, pending equipment availability. We have a 10% non-operated
working interest in leases totaling 1,250 acres in this project.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
accompanying notes and the other financial information appearing elsewhere in
this filing.
The factors that most significantly affect our results of operations are: (i)
the sale prices of crude oil and natural gas; (ii) the amount of production
sales; and (iii) the amount of lease operating expenses. Sales of production and
level of borrowings are significantly impacted by our ability to maintain or
increase production and reserves from existing oil and gas properties through
exploration and development activities.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
REVENUES
Consolidated oil and gas production revenue for the quarter ended September 30,
2006 was $335,711 versus $240,005 for the quarter ended September 30, 2005. This
increase is due to the increase in production from our SW Garwood, Pintail Flats
#1 well which reached payout in the second quarter of 2006, as well as
significantly higher oil prices in 2006 as opposed to 2005.
In October 2006, we undertook certain remedial work on the Gruman 18-1 which has
improved the production on the well. We are currently assessing the positive
impact on the long term production.
LEASE OPERATING AND PRODUCTION TAX EXPENSE
Lease operating and production tax expense for the quarters ended September 30,
2006 and 2005 were $240,977 and $140,030, respectively. These expenses relate
to the costs that are incurred to operate and maintain our wells and related
production equipment, including the costs applicable to the operating costs of
support equipment and facilities. Fluctuation relates to 1) an increase in
production from 2005 to 2006, 2) the lease operating expenses increased because
in November 2005 we added approximately 30 existing wells associated with our
Quinduno Field Prospect, Roberts County, Texas that require lease operating
costs to be incurred even though the wells have minimal production. These
existing, but non-productive wells are vital to the success of the waterflood
project that will be needed to realize the reserves in the Quinduno Field.
DEPLETION, DEPRECIATION AND AMORTIZATION
Costs for depletion, depreciation and amortization for the quarters ended
September 30, 2006, and 2005, were $79,614 and $54,738 respectively. This
increase is attributable to 1) an increase in proved reserves in the second
quarter of 2006, mainly due to the addition of our North Texas/Panhandle Water
Flood Project (described herein) compared with the third quarter of 2005; and 2)
an increase in the property costs subject to amortization from the quarter ended
September 30, 2006 versus the quarter ended September 30, 2005.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the quarters ended September 30, 2006
and 2005, were $550,075 and $784,005, respectively. This variance can primarily
be attributed to a decline in the number of employees which resulted in lower
payroll expense in the third quarter of 2006 as compared to the third quarter of
2005. The decrease can also be contributed to a decrease in management fees and
fees paid to third party technical consultants.
NET LOSS/INCOME FROM OPERATIONS
We generated a net operating loss of $(534,955) for the quarter ended September
30, 2006, compared to net operating loss of $(738,768) for the quarter ended
September 30, 2005. The $(203,813) variance is primarily due to increased
revenues and lower general and administrative expenses for the third quarter of
2006 versus the third quarter of 2005.
OTHER INCOME (EXPENSE)
The increase in interest expense from $42,333 in the quarter ended September 30,
2005 compared to $137,034 in the quarter ended September 30, 2006 is
attributable to a higher debt lever in 2006 and an increase in the interest rate
when the financing arrangement was amended in the fourth quarter of 2005.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2005
REVENUES
Consolidated oil and gas production revenue for the nine months ended September
30, 2006 was $827,311 versus $1,617,520 for the nine months ended September 30,
2005. This decrease is primarily the result of sale of our Blue Ridge Field
property in Fort Bend County, Texas, effective July 1, 2005, which accounted for
$552,998 of revenue during the nine months ended 2005, and lower production from
our North Dakota well in the nine months ended September 30, 2006 as compared to
the same period in 2005. Our North Dakota well was not producing from October,
2005 until March, 2006 as a result of the pump being down. In April, 2006, we
drilled a 9,900 foot well into the base of the productive reef of our North
Dakota prospect for the purpose of re-pressuring the reservoir and increasing
the production of the well. We are in the process of obtaining the necessary
permits to begin the water injection process which will begin in the fourth
quarter of 2006, or early 2007. Further testing or stimulation will be performed
as deemed necessary to achieve the desired future injection rates.
LEASE OPERATING AND PRODUCTION TAX EXPENSE
Lease operating and production tax expense for the nine months ended September
30, 2006 and 2005 were $658,859 and $467,091, respectively. These expenses
relate to the costs that are incurred to operate and maintain our wells and
related production equipment, including the costs applicable to the operating
costs of support equipment and facilities. Although there was a significant
decrease in production from 2005 to 2006, the lease operating expenses increased
because in November 2005 we added approximately 30 existing wells associated
with our Quinduno Field Prospect, Roberts County, Texas that require lease
operating costs to be incurred even though the wells have minimal production.
These existing, but non-productive wells are vital to the success of the
waterflood project that will be needed to realize the reserves in the Quinduno
Field.
DEPLETION, DEPRECIATION AND AMORTIZATION
Costs for depletion, depreciation and amortization for the nine months ended
September 30, 2006, and 2005, were $214,242 and $540,684, respectively. This
decrease is attributable to lower production in 2006 and the significant
increase in proved reserves in 2006 compared with the first nine months of 2005.
Production in the first nine months of 2005 was 34,639 boe as compared to 12,157
boe in the first nine months of 2006. The decrease caused by lower production
and higher reserves was partially offset by an increase in the property costs
subject to amortization. Given the fact that depletion is calculated by
multiplying the net amortizable costs times the units of production in the
related period relative to the total proved reserves, the depletion amount for
the first nine months of 2006 was significantly lower than the depletion for the
same period in 2005.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine months ended September 30, 2006
and 2005, were $1,845,396 and $2,159,950,respectively. This variance can
primarily be attributed to a decline in the number of employees which resulted
in lower payroll expense in the nine months ended September 30, 2006 as compared
to the same period in 2005. The decrease can also be contributed to a decrease
in management fees and fees paid to third party technical consultants in 2005.
NET LOSS/INCOME FROM OPERATIONS
We generated a net operating loss of $(1,891,186) for the nine months ended
September 30, 2006, compared to a net operating loss of $(1,550,205) for the
nine months ended September 30, 2005. The $(340,981) variance relates mainly to
the fact that revenues decreased a total of $790,209 from the same period in
2005 to 2006 offset by a decrease in total costs and expenses of $449,228 from
2005 to the same period in 2006.
OTHER INCOME (EXPENSE)
The increase in interest expense from $154,286 in the nine months ended
September 30, 2005 compared to $340,912 in the nine months ended September 30,
2006 is attributable to a higher debt level in 2006 and an increase in the
interest rate when the financing arrangement was amended in the fourth quarter
of 2005.
The $1,000,000 of other income during the nine months ended September 30, 2006,
is the result of the sale of common stock held in a company that had a basis of
zero.
OFF-BALANCE SHEET ARRANGEMENTS
We had no off-balance sheet arrangements during the fiscal quarter ended
September 30, 2006.
ITEM 3. CONTROLS AND PROCEDURES
Richard D. Dole, our Chief Executive Officer, and David J. Collins,
our Chief Financial Officer, have concluded that our disclosure controls
and procedures are appropriate and effective. They have evaluated these
controls and procedures as of September 30, 2006. There have been no
changes in our internal controls over financial reporting during the last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II--OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended September 30, 2006, we completed the
following transactions in reliance upon exemptions from registration under
the Securities Act of 1933, as amended (the "Act") as provided in Section
4(2) thereof. All certificates issued in connection with these transactions
were endorsed with a restrictive legend confirming that the securities
could not be resold without registration under the Act or an applicable
exemption from the registration requirements of the Act. We believe that
each person was a "qualified" investor within the meaning of the Act and
had knowledge and experience in financial and business matters, which
allowed them to evaluate the merits and risks of our securities. Each
person was knowledgeable about our operations and financial condition.
We committed to issue 32,500 shares of common stock to Piedmont Consulting
for investor relation services.
ITEM 6. EXHIBITS
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
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31.1 Rule 13a-14(a) Certification of Chief Executive Officer
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31.2 Rule 13a-14(a) Certification of Chief Financial Officer
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32.1 Section 1350 Certification of Chief Executive Officer
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32.2 Section 1350 Certification of Chief Financial Officer
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SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PETROSEARCH ENERGY CORPORATION
Date: NOVEMBER 14, 2006
By: /s/ Richard Dole
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RICHARD DOLE
CHIEF EXECUTIVE OFFICER, PRESIDENT AND CHAIRMAN