Attached files
| file | filename |
|---|---|
| 8-K - Triangle Petroleum Corp | v176908_8-k.htm |
| EX-3.1 - Triangle Petroleum Corp | v176908_ex3-1.htm |
| EX-99.1 - Triangle Petroleum Corp | v176908_ex99-1.htm |
| EX-10.1 - Triangle Petroleum Corp | v176908_ex10-1.htm |
| EX-99.3 - Triangle Petroleum Corp | v176908_ex99-3.htm |
Exhibit
99.2
EXCERPTS
FROM CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM:
THE
CORPORATION
We are an
oil and gas exploration company focused on emerging shale oil reserves. We have
recently undertaken a new strategic investment strategy in the Bakken Shale play
with our entry into a joint participation agreement (the “Slawson Agreement”), effective
January 15, 2010, with Slawson Exploration Company, Inc. (“Slawson”) involving 4,000 net
acres in McKenzie and Williams Counties of North Dakota. The Bakken Shale
formation in the Williston Basin underlies much of North Dakota and eastern
Montana. In addition, we have interests in the Maritimes Basin in the Province
of Nova Scotia.
Williston
Basin
The
Bakken Shale play in the Williston Basin is our core area of operations in the
United States. Having identified what we believe is the prime Bakken Shale
fairway, we are continuing to explore further opportunities in the region. We
are constantly reviewing potential transactions and are actively pursuing the
acquisition of additional leases and acreage in North Dakota in furtherance of
our new strategic direction, with an ongoing acreage acquisition program
targeting 1,000 acres per month.
We have
entered into the Slawson Agreement to acquire and develop acreage in known areas
of production from the Middle Bakken Shale and Three Forks formations. Our
acreage is located in the Rough Rider area of the play, primarily McKenzie and
Williams Counties, North Dakota and consists of several drill ready locations.
Under the terms of the Slawson Agreement, we have agreed to participate with a
30% working interest in the exploration and development of certain oil and gas
leasehold interests acquired by Slawson (the “Project”).
As part
of the Slawson Agreement, we have agreed to pay our participation interest share
of all costs incurred in the Project, plus (i) an additional amount equal to 20%
to 60% of our costs directly attributable to lease acquisitions, which amount
depends on the bonus cost of a lease per net acre, (ii) an additional amount
equal to 50% of our share of brokerage costs and other leasehold costs except
those direct lease costs set out above and except those included in an
applicable authorization for expenditure, and (iii) an additional 10% of our
share in costs proposed in the applicable authorizations for expenditure for
wells drilled under the Slawson Agreement.
The
Slawson Agreement also provides that Slawson will generally be responsible for
initiating well proposals, provided that we may recommend the drilling of a well
upon land which we own an interest in the leases. If a party to the Slawson
Agreement elects not to participate in a proposed well, then, subject to certain
condition, it forfeits all rights within the spacing unit boundaries for such
well, plus all contiguous sections. The Slawson Agreement also sets out a form
of joint operating agreement, pursuant to which all wells initiated under the
Slawson Agreement are to be operated.
Through
the signing of the Slawson Agreement, awards at a recent North Dakota state
lease sale, and the on-going success of our joint leasing program, we have
acquired approximately 13,000 gross (4,000 net) acres at a total cost to us of
$2.9 million. We are currently budgeting an additional minimum $7.0 million to
acquire additional leases in the Bakken Shale play in the Williston Basin over
the remainder of 2010. Under the terms of the Slawson Agreement, we have the
ability to limit our participation to no more than $25 million in any 12-month
period for total gross acreage acquisition capital, of which we are 30%.
However, this limitation may be exceeded at our option.
We plan
to participate in a well proposed by XTO Energy Inc. on a 1,280 acre unit in
Williams County, North Dakota on the Nesson Anticline. Our leasehold in the unit
provides us with a 1.6% working interest, with the well expected to commence in
March, 2010.
Eastern
Canadian Shale Gas Project (Windsor Block)
We have
an 87% working interest in 474,625 gross acres (412,924 net acres) in the
Windsor Sub-Basin of the Maritimes Basin located in the Province of Nova Scotia,
Canada (the “Windsor
Block”) and serve as operator of the Windsor Block. Until April 15, 2009,
the land was governed by an exploration agreement between us and the Province of
Nova Scotia. On April 15, 2009, the Windsor Block exploration agreement was
transferred to a 10-year production lease. We acquired an additional 30% working
interest in the Windsor Block in June 2009 from Contact Exploration Inc. in
exchange for a 5.75% non-convertible gross overriding royalty interest, a cash
payment of Cdn $270,000 and our assumption of the liabilities related to
the former working interest of Contact Exploration Inc. This acquisition
increased our working interest to its current 87% level.
In
October 2009, we acquired 30 kilometers of 2D seismic on the Windsor Block and
completed processing and interpreting the data in the fiscal quarter ending
January 31, 2010. We believe that this seismic program, combined with the three
completion operations on previously drilled vertical exploration wells, should
satisfy the first-year requirements of our 10-year production
lease.
We are
continuing to evaluate the anticipated performance and viability of our working
interest in the Windsor Block. In moving forward with such property, we intend
to consider a range of options pursuant to our existing production
lease.
New
Triangle Board and Management
In
November 2009, Palo Alto Investors, Inc. (“Palo Alto”), our largest
shareholder, initiated discussions with us regarding the potential for several
proactive measures, including changes to our board of directors (the “Board”) and management and
other strategic alternatives. On November 30, 2009, we entered into a memorandum
of understanding with a fund managed by Palo Alto, providing for the
restructuring of the Board and management, as well as our intention to consider
changes in our strategic direction and certain related matters.
As part
of this memorandum of understanding, on November 30, 2009, we restructured the
Board and senior management team. Three new directors were appointed on November
30, 2009, including Gardner Parker, who was appointed Chairman of the Board, Dr.
Peter Hill and Jonathan Samuels. Two former directors also resigned from the
Board. The Board is currently comprised of five directors, each of whom, other
than Dr. Hill and Mr. Samuels, is independent under Canadian securities
laws.
The Board
also immediately restructured our senior management team. As part of the
memorandum of understanding with Palo Alto, Dr. Hill was appointed our new Chief
Executive Officer and Mr. Samuels was appointed our new Chief Financial
Officer.
The Board
and our senior management team have extensive knowledge of the oil and natural
gas industry, and have broad experience in acquiring early stage oil and natural
gas projects and exploring and developing oil and natural gas projects. Our
officers and directors also have extensive experience in raising capital through
the public equity markets and project finance.
Board
of Directors
F. Gardner Parker
(Chairman of the Board and Director)
Mr.
Parker began his career with Ernst & Young in 1970 and spent the last seven
of his 14 years there as a partner. He has been a Trust Manager for Camden
Property Trust since 1993 and Lead Trust Manager until 2006. He has also served
as a director of Carrizo Oil & Gas since 2000. Mr. Parker also serves on the
boards of Hercules Offshore, Pinnacle Oil & Gas, and Sharpes Medical
Compliance. He is a graduate of the University of Texas and is a CPA in
Texas.
Dr. Peter Hill (Chief
Executive Officer and Director)
Dr. Hill
has over 37 years experience in the international oil and gas industry. He
commenced his career in 1972 and spent 22 years in senior positions at British
Petroleum including Chief Geologist, Chief of Staff for BP Exploration,
President of BP Venezuela and Regional Director for Central and South America.
Dr. Hill then worked as Vice President Exploration at Ranger Oil in England
(1994-95), Managing Director Exploration and Production at Deminex in Germany
(1995-97), Technical Director/Chief Operating Officer at Hardy Oil & Gas
(1998-2000), President & CEO at Harvest Natural Resources (2000-2005),
Director/Chairman at Austral Pacific Energy (2006-2008), an independent advisor
to Palo Alto Investors, LLC (2008-2009) and Non Executive Chairman at Toreador
Resources Corporation (2009 to present). Dr. Hill has a BSc Honors in Geology
and a PhD in Geology.
Jonathan Samuels, CFA
(Chief Financial Officer, Corporate Secretary and Director)
Before
joining us, Mr. Samuels spent 5 years in principal investing, primarily in the
energy sector: Palo Alto Investors, LLC, a California based, $1.3 billion
investment fund that owns approximately 21% of the Common Shares; Alpine
Investors, a private equity firm; and Orient Global, a Singapore based
privately-held investment firm. Mr. Samuels holds a bachelor’s degree from the
University of California, San Diego and an MBA from the Wharton School at the
University of Pennsylvania. He is a CFA Charterholder.
-2-
Stephen A. Holditch
(Director)
Mr.
Holditch has been one of our directors since February 2006. Since 1976, Mr.
Holditch has been a faculty member at Texas A&M University, as an Assistant
Professor, Associate Professor, Professor and Professor Emeritus and since
January 2004, head of the department of Petroleum Engineering. From its founding
in 1977 until 1997, when it was acquired by Schlumberger Technology Corporation,
Mr. Holditch was the President of S.A. Holditch & Associates, Inc., a
petroleum technology consulting firm providing analysis of low permeability gas
reservoirs and designing hydraulic fracture treatments. Mr. Holditch previously
worked for Shell Oil Company and Pan American Petroleum Corporation. Mr.
Holditch is a registered Professional Engineer in Texas, has received numerous
honors, awards and recognitions and has authored or co-authored over 100
publications on the oil and gas industry. Mr. Holditch received his B.S., M.S.
and Ph.D. in Petroleum Engineering from Texas A&M University in 1969, 1970
and 1976, respectively.
Randal Matkaluk
(Director)
Mr.
Matkaluk has been one of our directors since August 2007. Mr. Matkaluk has been
the Chief Financial Officer
and Corporate Secretary of Vigilant Exploration Inc., a private oil and gas
exploration company, since November 2008. From March 2006 to October
2008, Mr. Matkaluk was an independent businessman. Mr. Matkaluk has been a
Director and Officer of Virtutone Networks Inc. (formerly Sawhill
Capital Ltd.) since October 2005. Between January 2003 and February 2006, Mr.
Matkaluk was the Chief Financial Officer of Relentless
Energy Corporation, a private oil and gas exploration company which he also
co-founded. Between June 2001 and December 2002, Mr. Matkaluk was the Chief Financial
Officer of Antrim Energy Inc., a public international oil and gas exploration
company listed on the Toronto Stock Exchange. Mr. Matkaluk has also
worked for Gopher Oil and Gas Company and Cube Energy Corp. Mr. Matkaluk has
been a Chartered Accountant since 1983. Mr. Matkaluk received
his Bachelors Degree in Commerce in 1980 from the University of
Calgary.
Other
Senior Management
P. Jeffrey McKenna
(Vice President, Corporate Development)
Mr.
McKenna is a senior landman with over 28 years of oil and gas experience in both
public and private companies. Over the last eight years he was the founder of
two private oil and gas exploration and production companies, Revolve Energy
Inc. and Revolution Energy Ltd. Mr. McKenna has experience early in his career
working frontier areas at Husky Oil Ltd. and Conoco Canada Limited and as Land
Manager at Startech Energy Inc. He gained senior management experience as Vice
President, Land at Volterra Energy Inc. and OGY Petroleums Ltd. Mr. McKenna is a
native of Halifax, and received his Bachelor of Commerce at Saint Mary’s
University.
FORWARD-LOOKING
STATEMENTS
This
Memorandum includes a number of forward-looking statements that reflect the current views of our
management with respect to future events and financial performance. You can
identify these statements by forward-looking words such as “may,” “will,”
“expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words.
Those statements include statements regarding our and members of our management
team’s intent, belief or current expectations as well as the assumptions on
which such statements are based. Prospective investors are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve risk and uncertainties, and that actual results may differ materially
from those contemplated by such forward-looking statements.
Readers
are urged to carefully review and consider the various disclosures made by us in
this Memorandum and in our other reports we filed with the U.S. Securities and
Exchange Commission (the “SEC”). The following
Memorandum should be read in conjunction with the sections entitled
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” “Consolidated Financial Statements” and notes related thereto in
the Triangle 10-K and the Triangle 10-Q. See “Additional Information.” Important
factors currently known to our management could cause actual results to differ
materially from those in forward-looking statements. We undertake no obligation
to update or revise forward-looking statements to reflect changed assumptions,
the occurrence of unanticipated events or changes in the future operating
results over time. We believe that these assumptions are based upon reasonable
data derived from and known about our business and operations. No assurances are
made that actual results of operations or the results of our future activities
will not differ materially from these assumptions. Factors that could cause
differences include, but are not limited to, our ability to find oil and gas
reserves that are economically recoverable, the volatility of oil and gas
prices, the uncertain economic conditions in the United States and globally, our
ability to develop reserves and sustain production, our estimate of the
sufficiency of our existing capital sources, our ability to raise additional
capital to fund cash requirements for future operations, in prospect development
and property acquisitions or dispositions and in projecting future rates of
production or future reserves, the timing of development expenditures and
drilling of wells, and the operating hazards attendant to the oil and gas
business.
-3-
Furthermore,
the forward-looking statements contained in this Memorandum are made as of the
date hereof, and we undertake no obligation, except as required by applicable
securities legislation, to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise. The forward-looking statements contained herein are
expressly qualified by this cautionary statement.
RISK
FACTORS
Investing
in the Common Shares is highly speculative and involves a high degree of risk.
The risks and uncertainties below are not the only ones we face. Additional
risks and uncertainties not presently known to us or that we currently consider
immaterial may also impair our business and operations and cause the price of
our Common Shares to decline. If any of the risks described in the Triangle 10-K
or the Triangle 10-Q, including those related to our ability to continue as a
going concern, or if any of the following risks actually occur, our business may
be harmed and the financial condition and results of operation may suffer
significantly. In that event, the trading price of the Common Shares could
decline and you may lose your entire investment. Prospective investors should
review the risks with their legal and financial advisors, in addition to the
matters set forth elsewhere in or incorporated by reference into this
Memorandum.
Risks
Relating to Our Business
Natural
gas and oil drilling is a speculative activity and involves numerous risks and
substantial and uncertain costs that could adversely affect us.
An
investment in us should be considered speculative due to the nature of our
involvement in the exploration for, and the acquisition, development and
production of, oil and natural gas in North America. Oil and gas operations
involve many risks, which even a combination of experience and knowledge and
careful evaluation may not be able to overcome. There is no assurance that
commercial quantities of oil and natural gas will be discovered or acquired by
us.
We depend on successful exploration,
development and acquisitions to maintain reserves and revenue in the
future.
Acquisitions
of crude oil and natural gas issuers and crude oil and natural gas assets are
typically based on engineering and economic assessments made by independent
engineers and our own assessments. These assessments both will include a series
of assumptions regarding such factors as recoverability and marketability of
crude oil and natural gas, future prices of crude oil and natural gas and
operating costs, future capital expenditures and royalties and other government
levies which will be imposed over the producing life of the reserves. Many of
these factors are subject to change and are beyond our control. In particular,
the prices of and markets for oil and natural gas products may change from those
anticipated at the time of making such assessment. In addition, all such
assessments involve a measure of geologic and engineering uncertainty that could
result in lower production and reserves than anticipated. Initial assessments of
acquisitions may be based on reports by a firm of independent engineers that are
not the same as the firm that we use for our year-end reserve evaluations.
Because each of these firms may have different evaluation methods and
approaches, these initial assessments may differ significantly from the
assessments of the firm used by us.
In
addition, our review of records and properties of potential acquisitions may not
necessarily reveal existing or potential problems, nor will we necessarily
become sufficiently familiar with the properties before we acquire them to
assess fully their deficiencies and potential. Environmental problems, such as
soil or ground water contamination, are not necessarily observable even when an
inspection on a well is undertaken and even when problems are identified, we may
often assume certain environmental and other risks and liabilities in connection
with acquired properties.
As
most of our properties are in the exploration stage, there can be no assurance
that we will establish commercial discoveries on our properties.
Exploration
for economic reserves of oil and gas is subject to a number of risk factors. Few
properties that are explored are ultimately developed into producing oil and/or
gas wells. Most of our properties are in the exploration stage only and we have
only limited revenues from operations. While we do have a limited amount of
proven reserves of gas, we may not establish commercial discoveries on any of
our properties. Failure to do so would have a material adverse effect on our
financial condition and results of operations.
-4-
We
cannot control the activities on properties we do not operate and are unable to
ensure their proper operation and profitability.
We do not
operate the properties in which we have an interest. As a result, we have
limited ability to exercise influence over, and control the risks associated
with, operations of these properties. The failure of an operator of our wells to
adequately perform operations, an operator’s breach of the applicable agreements
or an operator’s failure to act in ways that are in our best interests could
reduce our production and revenues. The success and timing of our drilling and
development activities on properties operated by others therefore depend upon a
number of factors outside of our control, including the operator’s timing and
amount of capital expenditures, expertise and financial resources, inclusion of
other participants in drilling wells and use of technology.
We
have substantial capital requirements that, if not met, may hinder our
operations.
We
anticipate that we will make substantial capital expenditures for the
acquisition, exploration, development and production of oil and natural gas
reserves in the future and for future drilling programs, including our
obligations to Slawson under the Slawson Agreement. If we has insufficient
revenues, we may have limited ability to expend the capital necessary to
undertake or complete future drilling programs. There can be no assurance that
debt or equity financing, or cash generated by operations will be available or
sufficient to meet these requirements or for other corporate purposes, or if
debt or equity financing is available, that it will be on terms acceptable to
us. Moreover, future activities may require us to alter our capitalization
significantly. Our inability to access sufficient capital for our operations
could have a material adverse effect on our financial condition, results of
operations or prospects.
Because
we are small and have limited access to additional capital, we may have to limit
our exploration activity, which may result in a loss of investment.
We have a
small asset base and limited access to additional capital. Accordingly, we must
limit our exploration activity. As such, we may not be able to complete an
exploration program that is as thorough as our management would like. In that
event, existing reserves may go undiscovered. Without finding reserves, we
cannot generate revenues and investors may lose their investment.
Although
our estimated natural gas and oil reserve data has been prepared by an
independent third party, the estimates may still prove to be
inaccurate.
There are
numerous uncertainties inherent in estimating quantities of oil and natural gas
reserves and the future cash flows attributed to such reserves. In general,
estimates of economically recoverable oil and natural gas reserves and the
future net cash flows therefrom are based upon a number of variable factors and
assumptions, such as historical production from the properties, production
rates, ultimate reserve recovery, timing and amount of capital expenditure,
marketability of oil and gas, royalty rates, the assumed effects of regulation
by governmental agencies and future operating costs, all of which may vary
materially from actual results. For those reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classification of such reserves based on risk of recovery and
estimates of future net revenues associated with reserves prepared by different
engineers, or by the same engineers at different times, may vary. Our actual
production, revenues, taxes and development and operating expenditures with
respect to our reserves will vary from estimates thereof and such variations
could be material.
We
face strong competition from other oil and gas companies.
We
encounter competition from other oil and gas companies in all areas of our
operations, including the acquisition of exploratory prospects and proven
properties. Our competitors include major oil and gas companies and numerous
independent oil and gas companies, individuals and drilling and income programs.
Many of our competitors have been engaged in the oil and gas business much
longer than we have and possess substantially larger operating staffs and
greater capital resources than us. These companies may be able to pay more for
exploratory projects and productive oil and gas properties and may be able to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. In addition, these
companies may be able to expend greater resources on the existing and changing
technologies that we believe are and will be increasingly important to attaining
success in the industry. Such competitors may also be in a better position to
secure oilfield services and equipment on a timely basis or on favorable terms.
We may not be able to conduct our operations, evaluate and select suitable
properties and consummate transactions successfully in this highly competitive
environment.
-5-
Current
global financial conditions have been characterized by increased volatility
which could have a material adverse effect on our business, prospects, liquidity
and financial condition.
Current
global financial conditions and recent market events have been characterized by
increased volatility and the resulting tightening of the credit and capital
markets has reduced the amount of available liquidity and overall economic
activity. There can be no assurance that debt or equity financing, the ability
to borrow funds or cash generated by operations will be available or sufficient
to meet or satisfy our initiatives, objectives or requirements. Our inability to
access sufficient amounts of capital on terms acceptable to us for our
operations could have a material adverse effect on our business, prospects,
liquidity and financial condition.
The
potential profitability of oil and gas properties depends upon factors beyond
our control.
The
potential profitability of oil and gas properties is dependent upon many factors
beyond our control. For instance, world prices and markets for oil and gas are
unpredictable, highly volatile, potentially subject to governmental fixing,
pegging, controls, or any combination of these and other factors, and respond to
changes in domestic, international, political, social, and economic
environments. Additionally, due to worldwide economic uncertainty, the
availability and cost of funds for production and other expenses have become
increasingly difficult, if not impossible, to project. These changes and events
may materially affect our financial performance. In addition, a productive well
may become uneconomic in the event that water or other deleterious substances
are encountered which impair or prevent the production of oil and/or gas from
the well. In addition, production from any well may be unmarketable if it is
impregnated with water or other deleterious substances. These factors cannot be
accurately predicted and the combination of these factors may result in us not
receiving an adequate return on invested capital.
Seasonal
weather conditions and other factors could adversely affect our ability to
conduct drilling activities.
Our
operations could be adversely affected by seasonal weather conditions and
wildlife restrictions on federal leases. In some areas, certain drilling and
other oil and gas activities can only be conducted during limited times of the
year, typically during the summer months. This would limit our ability to
operate in these areas and could intensify competition during those times for
drilling rigs, oil field equipment, services, supplies and qualified personnel,
which may lead to periodic shortages. These constraints and the resulting
shortages or high costs could delay our operations and materially increase our
operating and capital costs, which could have a material adverse effect upon us
and our results of operations.
If
we are unable to retain the services of Messrs. Hill and Samuels or if we are
unable to successfully recruit qualified managerial and field personnel having
experience in oil and gas exploration, we may not be able to continue our
operations.
Our
success depends to a significant extent upon the continued services of our
directors and officers and, in particular: Peter Hill, our Chief
Executive Officer and Jonathan Samuels, our Chief Financial Officer and
Corporate Secretary. Loss of the services of
Messrs. Hill and Samuels could have a material
adverse effect on our growth, revenues, and prospective business. We have not
and do not expect to obtain key man insurance on our management. In addition, in
order to successfully implement and manage our business plan, we will be
dependent upon, among other things, successfully recruiting qualified managerial
and field personnel having experience in the oil and gas exploration business.
Competition for qualified individuals is intense. There can be no assurance that
we will be able to find, attract and retain existing employees or that we will
be able to find, attract and retain qualified personnel on acceptable
terms.
We
have a limited operating history in the Bakken Shale play in North Dakota and if
we are not successful in continuing to grow our business, then we may have to
scale back or even cease our ongoing business operations.
We have a
limited operating history in the Bakken Shale play in North Dakota. Our success
is significantly dependent on a successful acquisition, drilling, completion and
production program. Our operations in the Bakken Shale play will be subject to
all the risks inherent in the establishment of a developing enterprise and the
uncertainties arising from the absence of a significant operating history. We
may be unable to locate recoverable reserves or operate on a profitable basis.
We are in the exploration stage and potential investors should be aware of the
difficulties normally encountered by enterprises in the exploration stage. If
our business plan is not successful, and we are not able to operate profitably,
investors may lose some or all of their investment.
Our
lack of diversification will increase the risk of an investment in us, and our
financial condition and results of operations may deteriorate if we fail to
diversify.
Our
current business focus is on the oil and gas industry in a limited number of
properties, initially in North Dakota. Larger companies have the ability to
manage their risk by diversification. However, we will lack diversification, in
terms of both the nature and geographic scope of our business. As a result, we
will likely be impacted more acutely by factors affecting our industry or the
regions in which we operate, such as the Bakken Shale play, than we would if our
business were more diversified, enhancing our risk profile.
-6-
The
marketability of natural resources will be affected by numerous factors beyond
our control.
The
markets and prices for oil and gas depend on numerous factors beyond our
control. These factors include demand for oil and gas, which fluctuate with
changes in market and economic conditions, and other factors,
including:
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worldwide
and domestic supplies of oil and
gas;
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actions
taken by foreign oil and gas producing
nations;
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political
conditions and events (including instability or armed conflict) in
oil-producing or gas-producing
regions;
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the
level of global and domestic oil and gas
inventories;
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the
price and level of foreign imports;
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the
level of consumer demand;
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the
price and availability of alternative
fuels;
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the
availability of pipeline or other takeaway
capacity;
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weather
conditions;
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domestic
and foreign governmental regulations and taxes;
and
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the
overall worldwide and domestic economic
environment.
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Significant
declines in oil and gas prices for an extended period may have the following
effects on our business:
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adversely
affect our financial condition, liquidity, ability to finance planned
capital expenditures and results of
operations;
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cause
us to delay or postpone some of our capital
projects;
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reduce
our revenues, operating income and cash flow;
and
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limit
our access to sources of capital.
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We
may have difficulty distributing our oil and gas production, which could harm
our financial condition.
In order
to sell the oil and gas that we are able to produce, we may have to make
arrangements for storage and distribution to the market. We will rely on local
infrastructure and the availability of transportation for storage and shipment
of our products, but infrastructure development and storage and transportation
facilities may be insufficient for our needs at commercially acceptable terms in
the localities in which we operate. This situation could be particularly
problematic to the extent that our operations are conducted in remote areas that
are difficult to access, such as areas that are distant from shipping and/or
pipeline facilities. These factors may affect our ability to explore and develop
properties and to store and transport our oil and gas production and may
increase our expenses.
Furthermore,
weather conditions or natural disasters, actions by companies doing business in
one or more of the areas in which we will operate, or labor disputes may impair
the distribution of oil and/or gas and in turn diminish our financial condition
or ability to maintain our operations.
Our
significant shareholders may have substantial influence over our business and
affairs.
As of
January 31, 2010, Palo Alto, Sprott Asset Management LP and Luxor Capital Group,
LP own approximately 21%, 14% and 8% of our Common Shares, respectively. As a
result, each these three investors individually will have substantial influence
over the outcome of certain matters requiring shareholder approval, including
the power to, among other things:
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amend
our articles of incorporation;
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elect
and remove our directors and control the appointment of our senior
management; and
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prevent
our ability to be acquired and complete other significant corporate
transactions.
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Oil
and gas operations are subject to comprehensive regulation which may cause
substantial delays or require capital outlays in excess of those anticipated,
causing an adverse effect on us.
Oil and
gas operations are subject to federal, state, provincial and local laws relating
to the protection of the environment, including laws regulating removal of
natural resources from the ground and the discharge of materials into the
environment. Oil and gas operations are also subject to federal, state,
provincial and local laws and regulations which seek to maintain health and
safety standards by regulating the design and use of drilling methods and
equipment. Various permits from government bodies are required for drilling
operations to be conducted; no assurance can be given that such permits will be
received. Further, hydraulic fracturing, the process used for
releasing natural gas from shale rock, has recently come under increased
scrutiny and could be the subject of further regulation that could impact the
timing and cost of development.
-7-
Exploration
activities are subject to certain environmental regulations which may prevent or
delay the commencement or continuance of our operations.
In
general, our exploration activities are subject to certain federal, state and
local laws and regulations relating to environmental quality and pollution
control. Such laws and regulations increase the costs of these activities and
may prevent or delay the commencement or continuance of a given operation.
Compliance with these laws and regulations has not had a material effect on our
operations or financial condition to date. Specifically, we are subject to
legislation regarding emissions into the environment, water discharges and
storage and disposition of hazardous wastes. In addition, legislation has been
enacted which requires well and facility sites to be abandoned and reclaimed to
the satisfaction of state authorities. However, such laws and regulations are
frequently changed and we are unable to predict the ultimate cost of compliance.
Generally, environmental requirements do not appear to affect us any differently
or to any greater or lesser extent than other companies in the
industry.
With the
introduction of the Kyoto Protocol, oil and gas producers may be required to
reduce greenhouse gas emissions. This could result in, among other things,
increased operating and capital expenditures for those producers. This could
also make certain production of crude oil or natural gas by those producers
uneconomic, resulting in reductions in such production. We are unable to predict
the effect on our future earnings of the ratification of the Kyoto Protocol by
the Canadian Federal Government. However, in order to mitigate this risk, we are
committed to maximizing shareholder value in an environmentally, socially
responsible and safe manner.
We
believe that our operations comply, in all material respects, with all
applicable environmental regulations. Our operating partners generally maintain
insurance coverage customary to the industry; however, we are not fully insured
against all possible environmental risks.
Exploratory
drilling involves many risks and we may become liable for pollution or other
liabilities which may have an adverse effect on our financial
position.
Drilling
operations generally involve a high degree of risk. Hazards such as unusual or
unexpected geological formations, power outages, labour disruptions, blow-outs,
sour gas leakage, fire, inability to obtain suitable or adequate machinery,
equipment or labour, and other risks are involved. We may become subject to
liability for pollution or hazards against which we cannot adequately insure or
for which we may elect not to insure. Incurring any such liability may have a
material adverse effect on our financial position and operations.
Any
change in government regulation and/or administrative practices may have a
negative impact on our ability to operate and on our profitability.
The laws,
regulations, policies or current administrative practices of any government
body, organization or regulatory agency in the U.S. or Canada or any other
jurisdiction may be changed, applied or interpreted in a manner which will
fundamentally alter our ability to carry on our business. The actions, policies
or regulations, or changes thereto, of any government body or regulatory agency,
or other special interest groups, may have a detrimental effect on us. Any or
all of these situations may have a negative impact on our ability to operate
and/or our profitability.
Aboriginal
claims could have an adverse effect on us and our operations.
Aboriginal
peoples have claimed aboriginal title and rights to portions of Canada. We are
not aware that any claims have been made in respect of our property and assets.
However, if a claim arose and was successful, it could have an adverse effect on
us and our operations.
No
assurance can be given that defects in our title to natural gas and oil
interests do not exist.
Title to
natural gas and oil interests is often not possible to determine without
incurring substantial expense. An independent title review was completed with
respect to certain of the more valuable natural gas and oil rights acquired by
us and the interests in natural gas and oil rights owned by us. Also, legal
opinions have been obtained with respect to the spacing units for the wells
which have been drilled to date and which have been operated by us. However, no
assurance can be given that title defects do not exist. If a title defect does
exist, it is possible that we may lose all or a portion of the properties to
which the title defect relates. Our actual interest in certain properties may
therefore vary from our records.
-8-
Risks
Relating to Investment in the Common Shares
An
investment in the Common Shares is highly speculative and there is no assurance
of a positive return on an investment in the Common Shares.
An
investment in the Common Shares is highly speculative and there is no assurance
of a positive, or any, return on an investment in the Common Shares. The
purchase of Common Shares involves a number of significant risks and is most
suitable only for an investor who is aware of the inherent risks in resource
exploration and development, who is able and willing to risk a total loss of
this investment and who has no immediate need for liquidity.
An
active and liquid market for the Common Shares may not be maintained and the
lack of liquidity could adversely affect the market price for the Common
Shares.
An active
and liquid market for the Common Shares may not be maintained following the
completion of the Offering. If an active public market is not
maintained, investors may have difficulty selling their Common Shares.
Furthermore, quotations for the Common Shares are published on the OTC Bulletin
Board. The OTC Bulletin Board is an unorganized, inter-dealer, over-the-counter
market that provides significantly less liquidity than other markets. Purchasers
of the Common Shares may, therefore, have difficulty selling their shares should
they desire to do so, and the lack of liquidity could adversely affect the
market price for the Common Shares.
The
Common Shares will be restricted and may not be transferable.
The
issuance of the Common Shares has not been and will not be registered under
applicable federal, state or provincial securities laws of the United States and
Canada, as applicable. The Common Shares will be issued in reliance on
exemptions from the registration requirements of such laws. The
certificates representing the Common Shares will contain a legend restricting
the transfer of the Common Shares. We will not be obligated to
register the resale of the Common Shares. Accordingly, the Common
Shares may not be sold, assigned, pledged or otherwise transferred except under
specified conditions, including the requirement that the Common Shares be
registered under the Securities Act and all applicable state securities laws or
that an opinion of counsel satisfactory to us be rendered to the effect that
such registrations are not required. Because of the restricted nature
of the Common Shares, the Common Shares may not be readily accepted as
collateral for a loan.
All
of the Common Shares may not be sold, and we may not receive the maximum amount
of proceeds.
The
Offering is being made on a “best efforts” basis with no minimum number of
Common Shares that must be sold. In addition, we reserve the right to terminate
the Offering at any time and accept subscriptions for only a portion of the
Common Shares offered. To the extent that fewer than all the Common
Shares being offered are sold, we may need to obtain other financing to pursue
our business objectives described under “Use of Proceeds.” We may be
unable to sell additional Common Shares or to obtain other financing on terms
and conditions acceptable to us. If an insufficient number of Common
Shares is sold and other financing is not available, we may be prevented from
pursuing our current business plan as in effect, and we may need to modify or
scale back that plan.
Our
management will have considerable discretion in the application of the net
proceeds of the Offering.
Our
management will have considerable discretion in the application of the net
proceeds, and you will not have the opportunity, as part of your investment
decision, to assess whether the proceeds are being used appropriately, or to
have any input over the application of such proceeds. The net proceeds may be
used for purposes that do not increase our operating results or market value.
Until the net proceeds are used, they may be placed in investments that either
do not produce income or lose value.
Investors
will experience immediate dilution in the net tangible book value per Common
Share from the price paid in the Offering.
Immediately
after this Offering, the public offering price of the Common Shares will be
substantially higher than the net tangible book value per Common Share. Net
tangible book value per Common Share represents the amount of total tangible
assets less total liabilities, divided by the number of shares outstanding. If
an investor purchases Common Shares in this Offering, it will incur
immediate dilution in the net tangible book value per Common Share from the
price paid for Common Shares in this Offering.
-9-
The
market price for the Common Shares may be highly volatile.
The
market price for the Common Shares may be highly volatile and could be subject
to wide fluctuations. Some of the factors that could negatively affect such
share price include:
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actual
or anticipated fluctuations in our quarterly results of
operations;
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liquidity;
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sales
of Common Shares by our
shareholders;
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changes
in oil and natural gas prices;
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changes
in our cash flows from operations or earnings
estimates;
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publication
of research reports about us or the exploration and production industry
generally;
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increases
in market interest rates which may increase our cost of
capital;
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changes
in applicable laws or regulations, court rulings and enforcement and legal
actions;
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changes
in market valuations of similar
companies;
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adverse
market reaction to any increased indebtedness we incur in the
future;
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additions
or departures of key management
personnel;
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actions
by our shareholders;
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commencement
of or involvement in litigation;
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news
reports relating to trends, concerns, technological or competitive
developments, regulatory changes and other related issues in our
industry;
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speculation
in the press or investment community regarding our
business;
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general
market and economic conditions; and
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domestic
and international economic, legal and regulatory factors unrelated to our
performance.
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Financial
markets have recently experienced significant price and volume fluctuations that
have affected the market prices of equity securities of companies and that have,
in many cases, been unrelated to the operating performance, underlying asset
values or prospects of such companies. Accordingly, the market price
of the Common Shares may decline even if our operating results, underlying asset
values or prospects have not changed. Additionally, these factors, as well as
other related factors, may cause decreases in asset values that are deemed to be
other than temporary.
We do
not anticipate paying dividends on our Common Shares in the foreseeable
future.
We do not
expect to declare or pay any cash or other dividends in the foreseeable future
on our Common Shares, as we intend to use cash flow generated by operations to
develop our business.
The
Common Shares are subject to the “penny stock” rules of the SEC and the trading
market in our securities is limited, which makes transactions in the Common
Shares cumbersome and may reduce the value of an investment in the Common
Shares.
The SEC
has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for
the purposes relevant to us, as any equity security that (i) has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per
share, or (ii) is not registered on a national securities exchange or listed on
an automated quotation system sponsored by a national securities exchange. For
any transaction involving a penny stock, unless exempt, Rule 15g-9 of the
Exchange Act requires:
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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obtain
financial information and investment experience objectives of the person;
and
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make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the SEC relating to the penny stock market,
which, in highlight form:
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sets
forth the basis on which the broker or dealer made the suitability
determination; and
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attests
that the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading, and about the commissions payable to both
the broker-dealer and the registered representative. Current quotations for the
securities and the rights and remedies and to be available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of
the Common Shares and cause a decline in the market value of the Common
Shares.
-10-
Investors
may be unable to enforce Canadian statutory remedies against us.
Securities
legislation in certain of the Provinces and Territories of Canada provides
investors with various rights and remedies where a public disclosure contains a
misrepresentation. We are incorporated under the laws of the State of Nevada. It
may be difficult for investors to collect from us judgements obtained in courts
in Canada predicated on the civil liability provisions of Canadian securities
legislation.
Investors
may be unable to enforce judgments against us and certain of our directors and
officers.
Certain
of our directors and officers, as well as our independent auditors, reside
principally in Canada. Because a portion of our assets and all or substantially
all of the assets of these persons are located outside the U.S., it may not be
possible for you to effect service of process within the U.S. upon us or those
persons. Furthermore it may not be possible for you to enforce judgments
obtained in U.S. courts based upon the civil liability provisions of the U.S.
federal securities laws or other laws of the U.S. against us or those persons.
There is doubt as to the enforceability in original actions in Canadian courts
of liabilities based upon the U.S. federal securities laws, and as to the
enforceability in Canadian courts of judgments of U.S. courts obtained in
actions based upon the civil liability provisions of the U.S. federal securities
laws. Therefore, it may not be possible to enforce those actions against
us, certain of our directors and officers or anyone else named in this
Memorandum.
DESCRIPTION
OF SHARE CAPITAL
The
following is a summary of the rights, privileges, restrictions and conditions
attaching to the Common Shares and other outstanding securities.
Common
Shares
We are
authorized to issue up to 150,000,000 Common Shares, with a par value of
$0.00001. As of the date of this Memorandum, there are 69,926,043 Common Shares
outstanding. Holders of the Common Shares are entitled to one vote per share on
all matters to be voted upon by the shareholders. Holders of Common Shares are
entitled to receive rateably such dividends, if any, as may be declared by the
Board. Upon our liquidation, dissolution, or winding up, the holders of Common
Shares are entitled to share rateably in our assets which are legally available
for distribution after payment of all debts and other liabilities. Holders of
Common Shares have no pre-emptive, subscription, redemption or conversion
rights.
Warrants
and Equity Grants
In
connection with a private placement that closed on June 3, 2008, we issued
warrants to purchase 9,128,750 Common Shares. The warrants are exercisable until
June 3, 2010 at a purchase price of $2.25 per Common Share. All of the Common
Shares issuable upon conversion of the warrants may be sold without restriction
pursuant to the registration statement on Form S-1 declared effective by the SEC
on July 15, 2008. As of the date of this Memorandum, warrants to acquire
9,128,750 Common Shares remain outstanding. In addition, as of January 31, 2010,
we had issued and outstanding vested and unvested stock options exercisable for
an aggregate of 5,550,000 Common Shares.
On
February 2, 2010, we issued, subject to TSX-V approval, an aggregate of
2,050,000 deferred share units to certain members of senior management and the
Board. Such deferred share units will be automatically exchangeable, on a
one-for-one basis, for Common Shares on the first anniversary date of the
grant.
-11-