South Texas Oil Company
P.O. Box 340504
Austin, TX 78734
Tel : (210) 568-9760
Fax : (210) 568-9761
February 8, 2007
To:
Mr. Kevin Stertzel
Securities Exchange Commission
Division of Corporate Finance
100 F Street N.E., Stop 7010
Washington, D.C. 20549
Tel: (202) 551-3723
Fax: (202) 772-9368
RE: SOUTH TEXAS OIL COMPANY
FORM 10-KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2005
FILED MARCH 31, 2006
FILE NO. 0-50732
Dear Mr. Stertzel,
Here follows our response to your comment letter dated September 14, 2006.
Form 10-KSB for the Fiscal Year Ended December 31, 2005
Financial Statements
Note 2 - Summary of Significant Accounting Policies
Fixed Assets, page F-8
1. We note your proposed revised disclosure provided in response to our
prior comment number five. Please further expand this disclosure to
address your accounting for development costs.
We have updated the notes to the financials to indicate our accounting
policies related to Development Costs.
2. We note your response to our prior comment number seven and are unable to
agree with your conclusion. Please note that paragraph 35 of SFAS 19
specifically requires the use of the units of production method. Please
modify your financial statements accordingly. You may contact us if you
wish to discuss this matter further.
After discussions with the Commission, our auditor, we have determined
that in 2004 and 2005, the Company over depreciated some assets by virtue
of using the straight line depreciation method, rather than units of
production. For 2004, the company took depreciation related to leasehold
improvements of $16,524, whereas the actual amount, using units of
production, should have been $13,517. For 2005, the company took
depreciation related to leasehold improvements of $38,405, whereas the
actual amount, using units of production, should have been $17,732.
The aggregate of these two differences is $23,679 of over depreciation.
The company has reviewed Staff Accounting Bulletin 1M "Materiality"
(added by SAB 99) and determined it is not necessary to restate the prior
financial statements, but to make a cumulative adjustment in the 2005
year end numbers when the company files it's 10KSB for 12/31/06 in the
coming weeks. The 2005 and 2006 year end income statement and balance
sheet will be presented at that time, and the 2005 numbers (earliest
period presented) will be adjusted. The notes to the financial
statements will additionally contain an explanation of the (1) reason for
the change, (2) the effect on net income (loss), and (3) the effect on
earnings per share - basic and diluted.
In coming to this conclusion, the company determined that the above
adjustment would not have changed the mind of a potential user of the
financial statements. The adjustment, as a percentage of total assets,
was less than 1% in both years. The adjustment, as a percentage of total
loss, was 1.64% and 2.27%, respectively. Restating the prior filings and
financials to increase the earnings of the company (i.e. decrease the
loss) by such a small percentage, would not prove to be beneficial to the
shareholders, the company or any other users to the financial statements.
The company reviewed the SAB to determine if the qualitative factors
outweighed the quantitative issues as well. Again, the company
determined that the error was not intentional, nor was the over
depreciation a significant enough adjustment to change the readers mind
or impression of the integrity of management.
Below is the company's analysis of the effect on the depreciation taken
vs. units of production method.
UNITS OF PRODUCTION 2004 2005
- ------------------- --------- --------
Total Cost 668,189 809,136
Salvage Value 10% 66,819 80,914
Total Est'd Units Avail 221,196 215,938
Depletion Cost Per Unit $ 2.72 $ 3.37
Total production for year 4,972 5,258
Revisions (2,337) -
Total Depletion amount $ 13,517 $ 17,732
Net carrying value 654,671 791,404
Total depreciation taken 16,524 38,405
Total depletion - corrected $ 13,517 $ 17,732
difference (less) more $ 3,007 $ 20,673
(less) means that too little was taken,
more means that to amend would
provide income to the company
Total Assets 1,565,014 3,738,196
0.19% 0.55%
Total Sales 195,786 292,143
1.54% 7.08%
Total Loss (183,196) (911,457)
-1.64% -2.27%
As stated above, the company will make a cumulative adjustment to the
financial statements on the year end 12/31/06 10KSB which will reflect
these adjustments in our 2005 presented financial statements.
3. We note your response to our prior comment number eight. It appears you
have not recorded your asset retirement obligations. Please refer to
SFAS 143 and modify your financial statements accordingly. You may
contact us if you wish to discuss this matter further.
We have updated the notes to the financials to state:
"Pursuant to SFAS 143, the company is required to record any asset
retirement obligations when they become determined. The company has
evaluated the expected cost both current and in the future for its
potential plugging obligation and has determined that the salvage value
of the equipment and casing associated with those wells should more than
cover the costs to plug the wells. Given that, the company has not
recorded any potential plugging liability on the books."
Note 5 - Related Party Transactions, page F-12
4. We have reviewed your response to prior comment number 11. Please expand
your note disclosure to indicate the term of the loan agreements payable
to Mr. Conradie and Mr. Griffith rather than providing a cross reference
to a previously filed document.
We have updated the notes to the financials to detail out the specific
terms of the financing and repayment terms for the related party notes.
Note 10 - Warrants and Options, page F-14
5. It appears your adoption of SFAS 123(R) was effective on January 1, 2006.
Please expand your disclosure to indicate when you adopted SFAS 123(R)
and also to disclose your method of accounting for such instruments prior
to January 1, 2006. In addition, please expand your disclosures
regarding recently issued accounting pronouncements to indicate what
effect if any, your adoption of SFAS 123(R) is expected to have on your
financial statements.
We have updated Note 10 address both pre-1/1/06 accounting policy, as
well as the adoption of SFAS 123R.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves, page F-19
6. We note in your impairment analysis, that you are using a 3.5% discount
rate in your assumptions. Please tell us your basis for this rate.
We used the historical average inflation rate of 3.5% for our
calculation. The exact amount is 3.43% for 1913-2006 per
InflationData.com.
Engineering Comments
Financial Statements
Note 4 - Reserves Quantity Information
Proved Developed and Undeveloped Reserves, page F-19
7. In our prior comment 18, we asked that you revise your disclosure to
incorporate year-end 2005 assumptions, such as production costs, capital
expenditure, product prices etc., in your estimates of proved reserves
and standardized measure. Your draft amendment states "Our year end 2005
assumptions used in evaluating the reserves at December 31, 2005 were
based on the January 31, 2005 revised report. The company has not
completed an additional report, thus the $32.55 price is used along with
the future production costs of $960,682, future development costs of
$3,146,000 and future provision for income taxes of $184,436." Since you
have not utilized year-end 2005 prices and costs to estimate your proved
reserve and standardized measure figures, these disclosures do not comply
with paragraphs 10 and 30 of SFAS 69. Please amend your document to
comply with SFAS 69. Revise your proved undeveloped reserves so that the
dates of first production correspond to the revised drilling schedule you
referenced in your response prior comment number 19.
We have updated the standardized measure figures to account for the delay
in drilling and have amended the disclosures to reflect these changes.
8. In your response to prior comment 19, you state that you will commence
drilling in the fourth quarter of 2006. Please explain to us the status
of this drilling program. Affirm to us, if true, that this refers to
well locations for which you booked proved undeveloped reserves at year-
end 2005.
The company has not yet initiated its drilling program on the wells
indicated in the reserve report. This is not due to a lack of ability or
desire, but more of a shifting of resources to allow the best use of
funds. Additionally opportunities have presented them self which provide
a greater expected rate of return over the short term, thus the focus has
been on these areas. It is anticipated during the next 12 months for the
company to initiate the drilling program on the wells in the booked
proved undeveloped reserves areas. Management will continually assess
the value on the books to insure it is reasonably booked and does not
need an adjustment or impairment.
Best regards,
South Texas Oil Company
/s/ Murray N. Conradie
- ----------------------
Murray N. Conradie
President / CEO
210-568-9760 (voice)
210-568-9761 (fax)