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EX-31.2 - EX-31.2 - Erin Energy Corp.cak-ex312_201409307.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 01-34525

 

CAMAC ENERGY INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

30-0349798

(State or Other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

1330 Post Oak Blvd.,
Suite 2250, Houston, Texas

 

77056

(Address of principal executive offices)

 

(Zip Code)

(713) 797-2940

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At October 31, 2014, there were 1,261,763,853 shares of common stock, par value $0.001 per share, outstanding.

 

 

 

 

 

 


 

PART I

FINANCIAL INFORMATION

  

 

 

 

 

 

Item 1.

Financial Statements:

  

3

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited)

  

3

 

 

 

 

 

Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

  

4

 

 

 

 

 

Consolidated Statements of Equity for the nine months ended September 30, 2014 (unaudited)

  

5

 

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

  

6

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

  

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

15

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

  

21

 

 

 

 

Item 4.

Controls and Procedures

  

22

 

 

 

 

PART II

OTHER INFORMATION

  

 

 

 

 

 

Item 1.

Legal Proceedings

  

23

 

 

 

 

Item 1A.

Risk Factors

  

23

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

 

Item 6.

Exhibits

  

24

 

 

 

Signatures

  

25

 

 

 

Exhibits

  

 

 

 

 

Page 2 of 25


 

PART I. – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CAMAC ENERGY INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except for share and per share amounts)

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

54,264

 

 

$

163

 

Accounts receivable

 

1,122

 

 

 

1,112

 

Crude oil inventory

 

1,952

 

 

 

16,254

 

Prepaids and other current assets

 

8,492

 

 

 

856

 

Total current assets

 

65,830

 

 

 

18,385

 

 

 

 

 

 

 

 

 

Property, plant and equipment:

 

 

 

 

 

 

 

Oil and gas properties (successful efforts method of accounting), net

 

521,306

 

 

 

435,035

 

Other property, plant and equipment, net

 

1,059

 

 

 

752

 

Total property, plant and equipment, net

 

522,365

 

 

 

435,787

 

 

 

 

 

 

 

 

 

Other non-current assets

 

1,988

 

 

 

52

 

 

 

 

 

 

 

 

 

Total assets

$

590,183

 

 

$

454,224

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

$

48,182

 

 

$

31,668

 

Accrued liabilities

 

34,076

 

 

 

7,446

 

Asset retirement obligations

 

23,086

 

 

 

12,479

 

Promissory note - related party

 

11,185

 

 

 

6,496

 

Total current liabilities

 

116,529

 

 

 

58,089

 

 

 

 

 

 

 

 

 

Convertible subordinated note - related party

 

50,000

 

 

 

-

 

Term loan facility

 

50,000

 

 

 

-

 

Asset retirement obligations

 

13,914

 

 

 

8,122

 

Other long-term liabilities

 

81

 

 

 

67

 

 

 

 

 

 

 

 

 

Total liabilities

 

230,524

 

 

 

66,278

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Preferred stock $0.001 par value - 50,000,000 shares

   authorized; none issued and outstanding at September 30,

   2014 and December 31, 2013

 

-

 

 

 

-

 

Common stock $0.001 par value - 2,500,000,000 shares

   authorized; 1,261,763,853 and 382,362,236 shares

   outstanding as of September 30, 2014 and December 31, 2013

 

1,262

 

 

 

382

 

Paid-in capital

 

776,300

 

 

 

736,456

 

Accumulated deficit

 

(417,903

)

 

 

(348,892

)

Total equity

 

359,659

 

 

 

387,946

 

 

 

 

 

 

 

 

 

Total liabilities and equity

$

590,183

 

 

$

454,224

 

See accompanying notes to unaudited consolidated financial statements.

 

 

Page 3 of 25


 

CAMAC ENERGY INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and gas revenue

$

19,010

 

 

$

21,723

 

 

$

53,844

 

 

$

63,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production costs

 

34,261

 

 

 

22,155

 

 

 

72,617

 

 

 

65,757

 

Exploratory expenses

 

1,148

 

 

 

967

 

 

 

3,851

 

 

 

4,064

 

Depreciation, depletion and amortization

 

21,720

 

 

 

5,607

 

 

 

32,676

 

 

 

16,216

 

General and administrative expenses

 

3,427

 

 

 

3,395

 

 

 

12,200

 

 

 

10,508

 

Total operating costs and expenses

 

60,556

 

 

 

32,124

 

 

 

121,344

 

 

 

96,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(41,546

)

 

 

(10,401

)

 

 

(67,500

)

 

 

(32,809

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(771

)

 

 

(16

)

 

 

(1,637

)

 

 

(26

)

Other, net

 

94

 

 

 

-

 

 

 

126

 

 

 

-

 

Total other income (expense)

 

(677

)

 

 

(16

)

 

 

(1,511

)

 

 

(26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(42,223

)

 

 

(10,417

)

 

 

(69,011

)

 

 

(32,835

)

Income tax expense

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(42,223

)

 

$

(10,417

)

 

$

(69,011

)

 

$

(32,835

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(0.03

)

 

$

(0.03

)

 

$

(0.07

)

 

$

(0.09

)

Diluted

$

(0.03

)

 

$

(0.03

)

 

$

(0.07

)

 

$

(0.09

)

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

1,261,646

 

 

 

380,321

 

 

 

1,045,483

 

 

 

380,883

 

Diluted

 

1,261,646

 

 

 

380,321

 

 

 

1,045,483

 

 

 

380,883

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements

 

 

 

Page 4 of 25


 

CAMAC ENERGY INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(In thousands)

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

Common

 

 

Paid-in

 

 

Accumulated

 

 

Total

 

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Equity

 

 

Balance at January 1, 2014

$

382

 

 

$

736,456

 

 

$

(348,892

)

 

$

387,946

 

 

Common stock issued

 

880

 

 

 

269,535

 

 

 

-

 

 

 

270,415

 

 

Stock based compensation

 

-

 

 

 

2,749

 

 

 

-

 

 

 

2,749

 

 

Net loss

 

-

 

 

 

-

 

 

 

(69,011

)

 

 

(69,011

)

 

Allied acquisition

 

-

 

 

 

(220,000

)

 

 

-

 

 

 

(220,000

)

 

Allied transaction adjustment

 

-

 

 

 

(12,440

)

 

 

-

 

 

 

(12,440

)

 

Balance at September 30, 2014

$

1,262

 

 

$

776,300

 

 

$

(417,903

)

 

$

359,659

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

Page 5 of 25


 

CAMAC ENERGY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net loss

$

(69,011

)

 

$

(32,835

)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

31,327

 

 

 

14,558

 

Asset retirement obligation accretion

 

1,349

 

 

 

1,658

 

Share based compensation

 

2,216

 

 

 

1,468

 

Related party liability offset

 

(32,880

)

 

 

-

 

Other

 

21

 

 

 

3

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

(Increase) decrease in accounts receivable

 

(10

)

 

 

(2,612

)

Decrease (increase) in inventories

 

13,715

 

 

 

1,483

 

(Increase) decrease in other current assets

 

(7,103

)

 

 

114

 

Increase (decrease) in accounts payable and accrued liabilities

 

27,277

 

 

 

3,205

 

Net cash used in operating activities

 

(33,099

)

 

 

(12,958

)

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(59,481

)

 

 

(590

)

Allied transaction

 

(170,000

)

 

 

-

 

Net cash used in investing activities

 

(229,481

)

 

 

(590

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Proceeds from the issuance of common stock

 

270,000

 

 

 

-

 

Proceeds from exercise of stock option

 

415

 

 

 

-

 

Proceeds from term loan facility

 

50,000

 

 

 

-

 

Proceeds from  promissory note - related party, net

 

10,649

 

 

 

1,500

 

Debt costs

 

(1,943

)

 

 

-

 

Allied transaction adjustments

 

(12,440

)

 

 

8,677

 

Net cash provided by financing activities

 

316,681

 

 

 

10,177

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

54,101

 

 

 

(3,371

)

Cash and cash equivalents at beginning of period

 

163

 

 

 

3,806

 

Cash and cash equivalents at end of period

$

54,264

 

 

$

435

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest, net

$

8

 

 

$

26

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Related party liability offset

$

32,880

 

 

$

-

 

Related party accounts payable settled with note payable - related party

$

-

 

 

$

9,311

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

 

 

Page 6 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Company Description

CAMAC Energy, Inc. (NYSE MKT: CAK, JSE: CME) is an independent oil and gas exploration and production company focused on energy resources in Africa. The Company’s asset portfolio consists of nine licenses across four countries covering an area of approximately 43,000 square kilometers (approximately 10 million acres) including current production and other prospects offshore Nigeria, as well as exploration licenses offshore Ghana and The Gambia, and both offshore and onshore Kenya.

CAMAC Energy Inc. is headquartered in Houston, Texas, and has additional offices in Lagos, Nigeria; Nairobi, Kenya; and Banjul, The Gambia.

The Company’s operating subsidiaries include CAMAC Energy Ltd., CAMAC Petroleum Limited (“CPL”), CAMAC Energy International Ltd., CAMAC Energy Ghana Limited, CAMAC Energy Kenya Limited, CAMAC Energy Gambia A2 Ltd. and CAMAC Energy Gambia A5 Ltd. The terms “we,” “us,” “our,” “the Company,” and “our Company” refer to CAMAC Energy Inc. and its subsidiaries and affiliates.

The Company conducts certain business transactions with its majority shareholder, CAMAC Energy Holdings Limited (“CEHL”), and its affiliates, which include Allied Energy Plc (“Allied”).  See “Note 12 – Related Party Transactions” for details of these transactions.

 

2. Basis of Presentation and Recently Issued Accounting Standards

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned direct and indirect subsidiaries and have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position and results of operations for the indicated periods. All such adjustments are of a normal recurring nature. This Form 10-Q should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

In February 2014, the Company completed the acquisition of the remaining economic interests that it did not already own in the Production Sharing Contract (“PSC”) covering Oil Mining Leases 120 and 121 (“OMLs 120 and 121”) offshore Nigeria, which include the currently producing Oyo Field (the “Allied Assets”), from Allied (the “Allied Transaction”). Allied is a subsidiary of CEHL, the Company’s majority shareholder, and deemed to be under common control (transactions between subsidiaries of the same parent). Accordingly, the net assets acquired from Allied were recorded at their respective carrying values as of the acquisition date. The financial statements presented for all periods included herein are presented as though the transfer of the Allied assets had occurred at the beginning of the first period presented.

In June 2014, the Company’s management concluded that the Company’s unaudited consolidated financial statements included in its quarterly report on Form 10-Q for the first quarter of 2014 contained errors. These errors were identified in the course of preparing recast historical financial information of the Company to account for the February 2014 acquisition of economic interests in OMLs 120 and 121 from Allied as a combination of businesses under common control. In July 2014, the Company restated its previously filed interim financial statements for the first quarter of 2014. The revised financial statements for the quarter ended March 31, 2014 included adjustments to reflect (i) an increase in crude oil inventory as of December 31, 2013 and a corresponding increase in production costs for the first quarter of 2014, (ii) an increase in operating costs due to the receipt of additional third-party vendor cost information from Allied and (iii) a reclassification of the adjustments to the net assets of Allied on the unaudited consolidated statement of cash flows. For further information about the restatement, see our Quarterly Report on Form 10-Q/A for the period ended March 31, 2014, filed with the SEC on July 18, 2014.

Recently Issued Accounting Standards

In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance that changes the criteria for reporting discontinued operations including enhanced disclosure requirements. Under the updated guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization´s operations and financial results. The standards update is effective for fiscal years beginning after December 15, 2014. We will adopt this standards update, as required, beginning with the first quarter of 2015. The adoption of this standards update affects presentation only and, as such, is not expected to have a material impact on our consolidated financial statements.

Page 7 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers. The objective of this guidance is to establish principles for reporting information about the nature, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers, including qualitative and quantitative disclosures around contracts with customers, significant judgments and change in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standards update is effective for interim and annual periods beginning after December 15, 2016. We will adopt this standards update, as required, beginning with the first quarter of 2017. The Company is in the process of evaluating the impact, if any, of this guidance on its consolidated financial statements.

In June 2014, the FASB issued updated guidance around share-based compensation. The guidance was issued to clarify the accounting treatment for performance-based stock awards. The update states that companies should not record compensation expense related to an award for which transfer to the employee is contingent on the company’s satisfaction of a performance target until it becomes probable that the performance target will be met. The update does not contain any new disclosure requirements and is effective for interim and annual periods beginning after December 15, 2015. We will adopt this standards update, as required, beginning with the first quarter of 2016. The adoption of this standards update is not expected to have a material impact on our consolidated financial statements.

In August 2014, the FASB issued updated guidance on determining when and how reporting entities must disclose going concern uncertainties in its financial statements. The objective of the update is to define management’s responsibility to evaluate, each annual and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures. The standards update is effective for annual periods ending after December 15, 2016, and interim period thereafter. We will adopt this standards update, as required, beginning with the first quarter of 2017. The Company is in the process of evaluating the impact this guidance will have on its footnote disclosures.

 

3. Acquisitions

In February 2014, the Company completed the Allied Transaction, thereby acquiring the Allied Assets. Pursuant to the terms of the Transfer Agreement among the Company, Allied and the other parties thereto, (the “Transfer Agreement”), the Company, as partial consideration for the Allied Assets, paid $85.0 million in cash, issued 497,454,857 shares of the Company’s common stock and delivered a $50.0 million Convertible Subordinated Note (the “Convertible Subordinated Note”) of which $25.0 million was deemed advanced, with interest accruing per the terms of the Convertible Subordinated Note.

To fund the cash portion of the Allied Transaction and a portion of the anticipated capital expenditures for development of the Oyo Field, the Company also entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the Public Investment Corporation (SOC) Limited, a state-owned company incorporated in the Republic of South Africa (“PIC”), for an aggregate cash investment of $270.0 million through a private placement of 376,884,422 shares of common stock (the “Private Placement”). The Share Purchase Agreement provided that the Private Placement would be completed in two installments. The first installment of $135.0 million (the “First Closing”) in exchange for 188,442,211 shares of the Company’s common stock was completed at the closing of the Allied Transaction. The second installment (the “Second Closing”) of $135.0 million in exchange for 188,442,211 shares of the Company’s common stock was completed in May 2014.

Following the Second Closing with the PIC, the Company paid to Allied the additional $85.0 million in cash due under the Transfer Agreement, and the remaining $25.0 million Convertible Subordinated Note was deemed advanced with interest accruing per the terms of the Convertible Subordinated Note.

Page 8 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

The contractual purchase consideration paid and the assets acquired and liabilities assumed are as follows (In thousands):

 

Cash consideration paid upon First Closing

 

$

85,000

 

Cash consideration paid upon Second Closing

 

 

85,000

 

CAMAC Energy Inc. common stock

 

 

-

 

Long-term convertible subordinated note payable - related party

 

 

50,000

 

 

 

 

 

 

Total purchase price

 

$

220,000

 

 

 

 

 

 

Assets acquired and liabilities assumed:

 

 

 

 

Property, plant and equipment, net

 

$

248,736

 

Accounts payable

 

 

(25,429

)

Asset retirement obligations

 

 

(20,890

)

Net assets acquired

 

 

202,417

 

 

 

 

 

 

Consideration in excess of carrying value acquired

 

$

17,583

 

 

The Allied Transaction is being accounted for as a transfer of entities under common control, whereby the net assets acquired are combined with the Company’s assets at their historical amounts. Since the cash and debt consideration exceeds the carrying cost of the assets acquired, no value was assigned to the shares issued.

 

4. Property, Plant and Equipment

Property, plant and equipment is comprised of the following (In thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

Wells and production facilities

$

43,924

 

 

$

28,874

 

Proved properties

 

386,196

 

 

 

386,196

 

Work in progress and other

 

188,288

 

 

 

86,634

 

Oilfield assets

 

618,408

 

 

 

501,704

 

Accumulated depletion

 

(105,342

)

 

 

(74,909

)

Oilfield assets, net

 

513,066

 

 

 

426,795

 

Unevaluated leaseholds

 

8,240

 

 

 

8,240

 

Oil and gas properties, net

 

521,306

 

 

 

435,035

 

 

 

 

 

 

 

 

 

Other property and equipment

 

2,204

 

 

 

1,590

 

Accumulated depreciation

 

(1,145

)

 

 

(838

)

Other property and equipment, net

 

1,059

 

 

 

752

 

 

 

 

 

 

 

 

 

Total property, plant and equipment, net

$

522,365

 

 

$

435,787

 

 

5. Suspended Exploratory Well Costs

In November 2013, the Company achieved both its primary and secondary drilling objectives for the Oyo-7 well. The primary drilling objective was to establish production from the existing Pliocene reservoir. The secondary drilling objective was to confirm the presence of hydrocarbons in the deeper Miocene formation. Hydrocarbons were encountered in three intervals totaling approximately 65 feet, as interpreted by logging-while-drilling (“LWD”) data. Management is making plans to further explore the Miocene formation in future wells. Suspended exploratory well costs were $26.5 million at both September 30, 2014 and December 31, 2013, for the costs related to the Miocene exploratory drilling activities.

Page 9 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

In August 2014, the Oyo-8 well was drilled to a total vertical depth of approximately 6,059 feet (approximately 1,847 meters) and successfully encountered four new oil and gas reservoirs in the eastern fault block, with total gross hydrocarbon thickness of 112 feet, based on results from the LWD data, reservoir pressure measurement, and reservoir fluid sampling. Management has commenced a detailed evaluation of the results and plans to further explore the Pliocene formation in the eastern fault block and establish the size of the incremental additions. Suspended exploratory well costs were $6.5 million at September 30, 2014 for the costs related to the Pliocene exploration drilling activities in the eastern fault block.

The Company is currently working on its 2015 exploration program for the OMLs 120 and 121, which may include further analysis of the commercial potential for both the Miocene formation and the Pliocene formation in the eastern fault block.

 

6. Asset Retirement Obligations

The Company’s asset retirement obligations primarily represent the estimated fair value of the amounts that will be incurred to plug, abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such obligations include, but are not limited to, estimates of plugging and abandonment costs, estimated future inflation rates and changes in property lives. The inputs are calculated based on historical data as well as current estimated costs.

On a quarterly basis, the Company reviews the assumptions used to estimate the expected cash flows required to settle the asset retirement obligations, including changes in estimated probabilities, amounts and timing of the settlement of the asset retirement obligations, as well as changes in the legal obligation for each of its properties. Changes in any one or more of these assumptions may cause revisions in the estimated liabilities for the corresponding assets.

In September 2014, the Company determined that, based on the current operating plan and the equipment to be utilized, its estimated costs to plug and abandon certain wells should be revised upwards by a net amount of $15.1 million.  

The following summarizes changes in the Company’s asset retirement obligations during the period (In thousands):

 

 

2014

 

Asset retirement obligations at January 1

$

20,601

 

Accretion expense

 

1,349

 

Revisions in estimated liabilities

 

15,050

 

Asset retirement obligations at September 30

$

37,000

 

 

 

 

 

 

The table below shows the current and long-term portions of the Company's asset retirement obligations

during the period (In thousands):

 

 

2014

 

Asset retirement obligations, current portion

$

23,086

 

Asset retirement obligations, long-term portion

 

13,914

 

 

$

37,000

 

 

 

 

 

Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying statements of operations.

 

7. Debt

Promissory Note – Short-Term

The Company has a $25.0 million borrowing facility under a Promissory Note (the “Promissory Note”) with Allied. Interest accrues on the outstanding principal under the Promissory Note at a rate of the 30-day London Interbank Offered Rate (“LIBOR”) plus 2% per annum, payable quarterly. The obligations under the Promissory Note have been guaranteed by the Company. In August 2014, the Promissory Note was amended to extend the maturity date by one year to July 2015, and to allow for the entire $25.0 million facility amount to be utilized for general corporate purposes. As of September 30, 2014, the Company owed $11.2 million under the Promissory Note.

Page 10 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Convertible Subordinated Note – Long-Term

As partial consideration in connection with the February 2014 closing of the Allied Transaction, the Company issued a $50.0 million Convertible Subordinated Note in favor of Allied. The principal of the Convertible Subordinated Note was deemed advanced in two equal $25.0 million tranches at each of the First Closing and the Second Closing of the Private Placement. Interest on the Convertible Subordinated Note accrues at a rate per annum of one-month LIBOR plus 5%, payable quarterly in cash until the maturity of the Convertible Subordinated Note five years from the closing of the Allied Transaction. At the election of the holder, the Convertible Subordinated Note is convertible into shares of the Company’s common stock at an initial conversion price of $0.7164 per share, subject to customary anti-dilution adjustments. The Convertible Subordinated Note is subordinated to the Company’s existing and future senior indebtedness and is subject to acceleration upon an Event of Default (as defined in the Convertible Subordinated Note). The Company may, at its option, prepay the note in whole or in part, at any time, without premium or penalty. The note is subject to mandatory prepayment upon (i) the Company’s issuance of capital stock or incurrence of indebtedness, the proceeds of which the Company does not apply to repayment of senior indebtedness or (ii) any capital markets debt issuance to the extent the net proceeds of such issuance exceed $250.0 million. Allied may assign all or any part of its rights and obligations under the Convertible Subordinated Note to any person upon written notice to the Company. As of September 30, 2014, the Company owed $50.0 million under the Convertible Subordinated Note.

Term Loan Facility

In September 2014, the Company, through its wholly owned subsidiary CPL, entered into a credit facility with a Nigerian bank for a five-year senior secured term loan providing initial borrowing capacity of up to $100.0 million (the “Term Loan Facility”). U.S. dollar borrowings under the Term Loan Facility bear interest at the rate of LIBOR plus 7.5%, subject to a floor of 9.5%. The obligations under the Term Loan Facility include a legal charge over OMLs 120 and 121 and an assignment of proceeds from oil sales. The obligations of CPL have been guaranteed by the Company and rank in priority with all its other obligations.  Proceeds from the Term Loan Facility will be used for the further expansion and development of OMLs 120 and 121 offshore Nigeria, including the Oyo field.  

Under the Term Loan Facility, the following events, among others, constitute events of default: CPL failing to pay any amounts due within thirty days of the due date; bankruptcy, insolvency, liquidation or dissolution of CPL; a material breach of the Loan Agreement by CPL that remains unremedied within thirty days of written notice by CPL; or a representation or warranty of CPL proves to have been incorrect or materially inaccurate when made. Upon any event of default, all outstanding principal and interest under any loans will become immediately due and payable.

The Term Loan Facility contains normal and customary covenants including the delivery of the Company’s annual audited financial information each year, and a provision of priority of interest, in which the Company is to procure that its obligations under the Term Loan Facility do and will rank in priority with all its other current and future unsecured and unsubordinated obligations.  The Company is also to provide a production and lifting schedule each month displaying the daily production totals and quantities lifted respectively from OMLs 120 and 121.  The Company was in compliance with all loan covenants as of September 30, 2014.

Upon executing the Term Loan Facility, the Company paid a commitment fee of $1.9 million, which was capitalized and will be amortized over the life of the Term Loan Facility. As of September 30, 2014, the Company owed $50.0 million under the Term Loan Facility.  

 

8. Share-Based Compensation

During the nine months ended September 30, 2014, the Company issued 1,707,908 shares of common stock as a result of the exercise of options.

During the nine months ended September 30, 2014, the Company granted employees a total of 3,914,215 shares of restricted stock, and options to purchase a total of 2,267,394 shares of common stock, with vesting periods from 24 months to 36 months.

The Company also grants shares of restricted stock to non-employee Directors and, on occasion, will issue warrants to third parties for services. During the nine months ended September 30, 2014, the Company granted 1,000,002 shares of restricted stock to non-employee Directors, which vest after a one year period, and issued 1,800,000 fully vested warrants for services, which expire after five years.

 

Page 11 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

9. Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. The weighted average number of common shares outstanding for computing basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2014 and 2013 were as follows (In thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Basic

 

 

1,261,646

 

 

 

380,321

 

 

 

1,045,483

 

 

 

380,883

 

Diluted

 

 

1,261,646

 

 

 

380,321

 

 

 

1,045,483

 

 

 

380,883

 

 

The weighted average number of stock options, restricted stock awards and warrants that were excluded from dilutive shares outstanding as these potentially dilutive securities are anti-dilutive because the Company was in a loss position for the three and nine months ended September 30, 2014 and 2013 were as follows (In thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

Stock options

 

 

6,410

 

 

 

-

 

 

 

7,010

 

 

 

-

 

Nonvested restricted stock awards

 

 

6,140

 

 

 

1,972

 

 

 

5,960

 

 

 

1,359

 

Warrants

 

 

12

 

 

 

-

 

 

 

6

 

 

 

-

 

 

 

 

12,562

 

 

 

1,972

 

 

 

12,976

 

 

 

1,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. Financial Instruments and Fair Value Measurements

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, trade receivables, inventory, accounts payable, accrued expenses, other long-term liabilities and debt at floating interest rates approximate their fair values at September 30, 2014, principally due to the short-term nature, maturities or nature of interest rates of the above listed items.

 

11. Commitments and Contingencies

Commitments

In January 2014, a long-term drilling contract was signed for the drillship Energy Searcher. The rig arrived at the Oyo Field offshore Nigeria in June 2014 and has commenced the Oyo Field development campaign. The agreement covers an initial term of one year, with an option to extend the contract for an additional one year. As of September 30, 2014, the remaining minimum commitment pursuant to the initial term of the agreement is approximately $64.0 million.

 

In February 2014, a long-term contract was signed for the floating, production, storage, and offloading vessel (“FPSO”) Armada Perdana, which is the vessel currently connected to the Company’s producing wells Oyo-5 and Oyo-6 in OML 120. The contract provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an additional term of two years unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid per day, with a storage capacity of approximately one million barrels. The annual minimum commitment per the terms of the agreement is approximately $35.0 million in the first year and approximately $48.0 million thereafter.

The Company also has commitments related to four production sharing contracts with the Government of the Republic of Kenya (the “Kenya PSCs”) and two Petroleum Exploration, Development & Production Licenses with the Republic of The Gambia (the “Gambia Licenses”), in each case entered into by the Company through a wholly owned subsidiary. To maintain compliance and ownership, the Company is required to fulfill minimum work obligations and to make certain payments as stated in each of the Kenya PSCs and The Gambia Licenses.

Legal Proceedings

From time to time we may be involved in various legal proceedings and claims in the ordinary course of our business. As of September 30, 2014, and through the filing date of this report, we believe the ultimate resolution of such actions or potential actions of which we are currently aware will not have a material effect on our consolidated financial position or our results of operations.

 

Page 12 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

12. Related Party Transactions

The Company has transactions in the normal course of business with its shareholders, CEHL and their affiliates. The following table summarizes related party transactions for the respective periods (In thousands):

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

 

 

 

Accounts receivable

$

-

 

 

$

1,026

 

Other current assets

$

624

 

 

$

624

 

Accounts payable and accrued expenses

$

8,897

 

 

$

25,721

 

Promissory Note

$

11,185

 

 

$

6,496

 

Convertible Subordinated Note

$

50,000

 

 

$

-

 

 

The Company was owed $1.0 million as of December 31, 2013, for billings under the Technical Services Agreement (“TSA”) signed with Allied in January 2013. Under the TSA, the Company agreed to provide certain services related to the Oyo Field within OML 120, in exchange for payments from Allied of $150,000 per month with effect from September 2012. The TSA was terminated as of the closing of the Allied Acquisition in February 2014 pursuant to the Transfer Agreement and subsequently settled as part of an offset of certain liabilities owed to Allied.

The Company was owed $0.6 million as of both September 30, 2014 and December 31, 2013, as a result of an estimated overpayment made for royalty and petroleum profit taxes in Nigeria under the PSC.

As of September 30, 2014 the Company owed $8.9 million to affiliates of CEHL for expenses incurred during the period to support the operations in the normal course of business.  As of December 31, 2013, the Company owed $25.7 million to Allied primarily as reimbursement for costs incurred related to the drilling of development wells in the Oyo Field.

As of September 30, 2014 and December 31, 2013, the Company had total outstanding notes payable balances of $61.2 million and $6.5 million, respectively, owed to Allied. See “Note 7 – Debt”, for details relating to the notes payable transactions.

An affiliate of CEHL, the Company’s majority shareholder, provides procurement and logistical support services to the Company’s Nigerian operations. In connection therewith, the Company incurred $9.9 million and $15.4 million worth of costs with the affiliate, which includes $1.5 million and $2.9 million over and above the actual cost of goods and/or services acquired as compensation to the affiliate during the three and nine months ended September 30, 2014, respectively.

 

13. Segment Information

The Company’s current operations are based in Nigeria, Kenya and The Gambia. Management reviews and evaluates the operations of each geographic segment separately. Operations include exploration for and production of hydrocarbons where commercial reserves have been found and developed. Revenues and expenditures are recognized at the relevant geographical location. The Company evaluates each segment based on operating income (loss).

Page 13 of 25


CAMAC ENERGY INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

Segment activity for the three and nine months ended September 30, 2014 and 2013 are as follows (In thousands):

 

 

 

Nigeria

 

 

Kenya

 

 

The Gambia

 

 

Corporate and Other

 

 

Total

 

Three months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

19,010

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

19,010

 

Operating loss

 

$

(37,039

)

 

$

(614

)

 

$

(341

)

 

$

(3,552

)

 

$

(41,546

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

21,723

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

21,723

 

Operating loss

 

$

(6,182

)

 

$

(426

)

 

$

(217

)

 

$

(3,576

)

 

$

(10,401

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

53,844

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

53,844

 

Operating loss

 

$

(51,349

)

 

$

(2,689

)

 

$

(983

)

 

$

(12,479

)

 

$

(67,500

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

63,736

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

63,736

 

Operating loss

 

$

(18,406

)

 

$

(2,091

)

 

$

(653

)

 

$

(11,659

)

 

$

(32,809

)

 

Total assets by segment are as follows (In thousands):

 

 

 

Nigeria

 

 

Kenya

 

 

The Gambia

 

 

Corporate and Other

 

 

Total

 

Total Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

$

582,104

 

 

$

1,467

 

 

$

2,223

 

 

$

4,389

 

 

$

590,183

 

As of December 31, 2013

 

$

449,856

 

 

$

1,484

 

 

$

2,025

 

 

$

859

 

 

$

454,224

 

 

 

 

 

 

 

 

Page 14 of 25


 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Business

CAMAC Energy Inc. is an independent oil and gas exploration and production company focused on energy resources in Africa. Our strategy is to acquire and develop high-potential exploration and production assets in Africa through strategic partnerships with national oil companies, indigenous local partners and other independent oil companies. Our shares are traded on the New York Stock Exchange under the symbol “CAK” and on the Johannesburg Stock Exchange (“JSE”) under the symbol “CME”. The terms “we,” “us,” “our,” “Company,” and “our Company” refer to CAMAC Energy Inc. and its subsidiaries and affiliates.

The Company’s asset portfolio consists of nine licenses across four countries covering an area of approximately 43,000 square kilometers (approximately 10 million acres), including current production and other projects offshore Nigeria, as well as exploration licenses offshore Ghana and The Gambia, and both offshore and onshore Kenya.

The Company’s operating subsidiaries include CAMAC Energy Ltd., CAMAC Petroleum Limited, CAMAC Energy International Ltd., CAMAC Energy Ghana Limited, CAMAC Energy Kenya Limited, CAMAC Energy Gambia A2 Ltd. and CAMAC Energy Gambia A5 Ltd. The Company also conducts certain business transactions with its majority shareholder, CAMAC Energy Holdings Limited (“CEHL”), and its affiliates, which include Allied Energy Plc (“Allied”).  See “Note 12 – Related Party Transactions” of the Notes to the Unaudited Consolidated Financial Statements for details of these transactions.

In February 2014, the Company completed the acquisition of the remaining economic interests that it did not already own in the Production Sharing Contract (“PSC”) covering Oil Mining Leases 120 and 121 (“OMLs 120 and 121”) offshore Nigeria, which include the currently producing Oyo Field (the “Allied Assets”), from Allied (the “Allied Transaction”). Pursuant to the terms of the Transfer Agreement, the Company, as partial consideration for the Allied Assets, paid $85.0 million in cash, issued 497,454,857 shares of the Company’s common stock and delivered a $50.0 million Convertible Subordinated Note (the “Convertible Subordinated Note”), of which $25.0 million was deemed advanced, with interest accruing per the terms of the Convertible Subordinated Note.

To fund the cash portion of the Allied Transaction and a portion of the anticipated capital expenditures for development of the Oyo Field, the Company also entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the Public Investment Corporation (SOC) Limited, a state-owned company incorporated in the Republic of South Africa (“PIC”), for an aggregate cash investment of $270.0 million through a private placement of 376,884,422 shares of common stock (the “Private Placement”). The Share Purchase Agreement provided that the Private Placement would be completed in two installments. The first installment of $135.0 million (the “First Closing”) in exchange for 188,442,211 shares of the Company’s common stock was completed at the closing of the Allied Transaction in February 2014. The second installment (the “Second Closing”) of $135.0 million in exchange for 188,442,211 shares of the Company’s common stock was completed in May 2014.

Following the Second Closing with the PIC, the Company paid to Allied the additional $85.0 million in cash due under the Transfer Agreement, and the remaining $25.0 million Convertible Subordinated Note was deemed advanced, with interest accruing per the terms of the Convertible Subordinated Note.

Nigeria

The Company currently owns 100% of the economic interests under the PSC and related assets, contracts and rights pertaining to OMLs 120 and 121, including the currently producing Oyo Field, located in deepwater offshore Nigeria.

From September 2013 to November 2013, the first phase of drilling operations was conducted on the Oyo-7 well. Based on logging-while-drilling (“LWD”) data, the well encountered gross oil pay of 133 feet (net oil pay of 115 feet) and gross gas pay of 103 feet (net gas pay of 93 feet) in the gas cap from the currently producing Pliocene reservoir, with excellent reservoir quality. As a secondary objective, the Oyo-7 well confirmed the presence of hydrocarbons in the deeper Miocene formation. This marked the first time a well had been successfully drilled into the Miocene formation on OML 120. Hydrocarbons were encountered in three intervals totaling approximately 65 feet, as interpreted from the LWD data.

In January 2014, a long-term drilling contract was signed for the drillship Energy Searcher. The rig arrived on location in the Oyo Field on OML 120 in June 2014 and commenced drilling the Oyo-8 well. The drilling agreement is for an initial term of one year, with an option to extend the contract for an additional one year. As of September 30, 2014, the remaining minimum commitment pursuant to the initial term of the agreement is approximately $64.0 million.

Page 15 of 25


 

In February 2014, a long-term contract was signed for the floating, production, storage, and offloading vessel (“FPSO”) Armada Perdana. The contract provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an additional term of two years unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid per day, with a storage capacity of approximately one million barrels. The annual minimum commitment per the terms of the agreement is approximately $35.0 million in the first year and approximately $48.0 million thereafter.

In August 2014, the Oyo-8 well was drilled to a total vertical depth of approximately 6,059 feet (approximately 1,847 meters) and successfully encountered four new oil and gas reservoirs with total gross hydrocarbon thickness of 112 feet in the eastern fault block, based on results from the LWD data, reservoir pressure measurement, and reservoir fluid sampling. The well will be completed horizontally as a producing well in the Pliocene formation of the Oyo Field.

In September 2014, the shut-in of Oyo-5 and Oyo-6 wells commenced. The removal of flow lines and other subsea equipment was completed and successfully relocated to Oyo-7 and Oyo-8 wells as planned. The current plan is to bring the first of the two production wells, Oyo-7 or Oyo-8, online by year end and the second approximately 45 days afterwards.

In addition to the development wells in the Oyo Field offshore Nigeria, the Company high-graded four of the prospects in OMLs 120 and 121. The Company currently plans to commence exploration well drilling in 2015.

Kenya

In May 2012, the Company, through a wholly owned subsidiary, entered into four production sharing contracts with the Government of the Republic of Kenya (the “Kenya PSCs”), covering onshore exploration blocks L1B and L16, and new offshore exploration blocks L27 and L28. For all blocks, the Company is the operator, with the Government having the right to participate up to 20%, either directly or through an appointee, in any area subsequent to declaration of a commercial discovery. The Company also has the right to apply for up to two additional two-year exploration periods, with specified additional minimum work obligations, including the acquisition of seismic data and the drilling of one exploratory well on each block during each such additional period. The Company is responsible for all exploration expenditures.

The Kenya PSCs for onshore blocks L1B and L16 each provide for an initial exploration period, now extended through June 2015, with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company is required to conduct, for each block, a gravity and magnetic survey and acquire, process and interpret 2D seismic data. The gravity and magnetic survey was completed in April 2013. In December 2013, the Company initiated an Environmental and Social Impact Assessment (“ESIA”) study which was successfully completed in March 2014. In October 2014, the Company signed agreements for both blocks for the acquisition, processing and interpretation of 2D seismic data. The project is expected to be completed in the first half of 2015.

The Kenya PSCs for offshore blocks L27 and L28 each provide for an initial exploration period of three years, through August 2015, with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company is required to conduct, for each block, a regional geological and geophysical study, acquire 2D seismic data and acquire, process and interpret 3D seismic data. The Company participated in a multi-client combined gravity / magnetic and 2D seismic survey covering blocks L27 and L28. The survey was successfully completed in March 2014. The processed data is currently being interpreted internally. Further, in March 2014 the Company started the regional geophysical study for these two blocks.

In addition to the minimum work obligations, each of the Kenya PSCs requires annual surface rental payments, training fund payments and contributions to local community development projects.

The Gambia

In May 2012, the Company, through a wholly owned subsidiary, signed two Petroleum Exploration, Development & Production Licenses with The Republic of The Gambia, for offshore exploration blocks A2 and A5. For both blocks, the Company is the operator, with the Gambian National Petroleum Company (“GNPCo”) having the right to elect to participate up to a 15% interest, following approval of a development and production plan. The Company is responsible for all expenditures prior to such approval even if the GNPCo elects to participate.

Page 16 of 25


 

The Gambia Licenses provide for an initial exploration period of four years with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company will conduct, on each block, a regional geological study, acquire, process and interpret seismic data, drill one exploration well and evaluate drilling results, with the first two work obligations (regional geological study and 3D seismic data acquisition and processing) due prior to the end of the second year. The Company has the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including the drilling of one exploration well during each additional period for each block. The company has completed a regional geology and geophysical study of both the A2 and A5 blocks.

In addition to the minimum work obligations, The Gambia Licenses require annual surface rental payments, training and resources, and community development fees.

Ghana

In April 2014, the Company signed a Petroleum Agreement relating to the Expanded Shallow Water Tano block in Ghana. The Company has been named technical operator and will hold an indirect 30% participating interest in the block. The block contains three discovered fields, and the work program requires the partners to determine, within nine months of the effective date, the economic viability of developing the discovered fields. In collaboration with its joint venture partners, a Joint Operating Agreement is being finalized. Preliminary work has also commenced on the evaluation on the discovered fields to determine economic viability.

Results of Operations

The following discussion pertains to the Company’s results of operations, financial condition, liquidity and capital resources and should be read together with our unaudited consolidated financial statements and the notes thereto contained in this report, and our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

As stated above, the Company completed the Allied Transaction in February 2014. Allied is a subsidiary of CEHL, the Company’s majority shareholder and deemed to be under common control (transactions between subsidiaries of the same parent). Accordingly, the net assets acquired from Allied were recorded at their respective carrying values as of the acquisition date. The results of operations presented for all periods included herein are reflected as though the transfer of the Allied assets had occurred at the beginning of the first period presented.

Three months ended September 30, 2014, compared to the three months ended September 30, 2013

Revenues

Revenue is recognized when a lifting (sale) occurs. Crude oil revenues for the three months ended September 30, 2014 were $19.0 million, as compared to $21.7 million for the same period in 2013. For the three months ended September 30, 2014, the Company sold approximately 189,000 net barrels of oil (Bbl) at an average price of $100.85/Bbl as compared to approximately 194,000 net barrels of oil at an average price of $112.09/Bbl for the same period in 2013.

During the three months ended September 30, 2014, the average net daily production from the Oyo Field was approximately 800 barrels of oil per day (“BOPD”), as compared to approximately 2,000 BOPD for the same period in 2013. Both of the producing wells were shut-in by mid-September 2014.

Operating Costs and Expenses

Production costs for the three months ended September 30, 2014 were $34.3 million, as compared to $22.2 million for the same period in 2013. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil inventory are capitalized, and are subsequently expensed when crude oil is sold. In the quarter ended September 30, 2014, the Company incurred $9.6 million higher production expenditures associated with crude oil sales, as compared to the same period in the previous year. In addition, in the three months ended September 30, 2014, the Company recorded a $1.7 million contingent liability for a disputed transaction tax on marine transportation, following recent claims from a Nigerian tax authority.