Kodiak Energy, Inc. (KDKN)

[Mr B]

KDKN.OB > SEC Filings for KDKN.OB > Form 10-Q on 18-May-2010 All Recent SEC Filings
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Form 10-Q for KODIAK ENERGY, INC.


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18-May-2010

Quarterly Report



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION UPDATE
FORWARD LOOKING STATEMENTS

From time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by us with the Securities and Exchange Commission. Words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project or projected", or similar expressions are intended to identify "forward-looking statements". Such statements are qualified in their entirety by reference to and are accompanied by the above discussion of certain important factors that could cause actual results to differ materially from such forward-looking statements.

Management is currently unaware of any trends or conditions other than those mentioned elsewhere in this management's discussion and analysis that could have a material adverse effect on the Company's consolidated financial position, future results of operations, or liquidity. However, investors should also be aware of factors that could have a negative impact on the Company's prospects and the consistency of progress in the areas of revenue generation, liquidity, and generation of capital resources. These include: (i) variations in revenue,
(ii) possible inability to attract investors for its equity securities or otherwise raise adequate funds from any source should the Company seek to do so,
(iii) increased governmental regulation, (iv) increased competition, (v) unfavorable outcomes to litigation involving the Company or to which the Company may become a party in the future and, (vi) a very competitive and rapidly changing operating environment. The risks identified here are not all inclusive. New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results.

The financial information set forth in the following discussion should be read in conjunction with the consolidated financial statements of Kodiak Energy, Inc. included elsewhere herein.



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PLAN OF OPERATION
Oil and Gas Leases and Development Rights

As of March 31, 2010, we had approximately 130 80 leases covering approximately 285256,949 gross acres. The typical oil and gas lease provides for the payment of royalties to the mineral owner for all oil or gas produced from any well drilled on the lease premises. This amount typically ranges from 12% to 30% resulting in a 70% to 88% net revenue interest to us.

Because the acquisition of oil and gas leases is a very competitive process, and involves certain geological and business risks to identify productive areas, prospective leases are sometimes held by other oil and gas operators. In order to gain the right to drill these leases, we may purchase leases from other oil and gas operators. In some cases, the assignor of such leases will reserve an overriding royalty interest, ranging from 5% to 15%, which further reduces the net revenue interest available to us to between 55% and 73%.

In Q1, 2010, the Corporation elected to allow approximately 29,000 acres of mineral rights to expire. These mineral rights were leased from the State of New Mexico and had more than a year left on their initial lease term. After reviewing the New Mexico project results to date the Corporation reviewed all of the New Mexico properties and determined this specific acreage was situated too far from the regional carbon dioxide pipeline and it would be unlikely to be developed prior to expiry resulting in additional rental fees and administration costs. The Corporation remains confident that the remaining mineral leases are the most strategically valuable to successfully develop the Sofia carbon dioxide resources.

As of December 31, 2009, approximately 4% of our oil and gas leases were held by production, which means that for as long as our wells continue to produce oil or gas, we will continue to own those respective leases.

In the Trout Area, Alberta as of December 31, 2009, we held oil and gas leases on approximately 7,680 gross acres, of which approximately 320 gross acres (4%) are not currently held by production. The approximate 320 acres had an expiry date in Q4 2009 and an application has been submitted to the regulatory agency to extend the expiry of these leases.

In the Alexander Area, Alberta as of December 31, 2009, we held oil and gas leases on approximately 160 gross acres, of which 0 gross acres (0%) are not currently held by production. There are no expiry issues for this lease.

In the Crossfield Area, Alberta as of December 31, 2009, we held oil and gas leases on approximately 160 gross acres, of which 0 gross acres (0%) are not currently held by production. There are no expiry issues for this lease.

In the Granlea Area, Alberta as of December 31, 2009, we held oil and gas leases on approximately 1,265 gross acres, of which approximately 1,265 gross acres (100%) are not currently held by production. The Granlea oil and gas leases will expire in Q3 2010.

In Lucy, British Columbia as of December 31, 2009, we held oil and gas leases on approximately 1,975 gross acres, of which approximately 1,975 gross acres (100%) are not currently held by production. The Lucy mineral lease was extended as part of an approved Experimental Scheme application to the regulatory agency. The Lucy lease is currently extended indefinitely.



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In the Little Chicago Area, N.W.T. as of December 31, 2009, we held oil and gas leases on approximately 199,000 gross acres, of which approximately 199,000 gross acres (100%) are not currently held by production. The Little Chicago oil and gas leases will expire in Q3 2010.

In the Sofia and Speardraw Areas, northeast New Mexico as of December 31, 2009, we held CO2 and oil and gas leases on approximately 47,805 gross acres, of which approximately 47,805 gross acres (100%) are not currently held by production. There are no lease expiries in 2010.

In the Hill County Area, northwest Montana as of December 31, 2009, we held oil and gas leases on approximately 879 gross acres, of which approximately 879 gross acres (100%) are not currently held by production. The Montana leases will expire in Q3 2010.

In the Bison Lake area, northern Alberta as of December 31, 2009, we hold oil and gas leases and development rights, by virtue of farm-out agreements or similar mechanisms, on approximately 17,712 gross acres that are still within their original lease or agreement term and are not earned or are not held by production. The farm-in agreement specifies that we are entitled to earn 100% of whatever leases we can extend as a result of drilling and completion operations. The farm-in leases expire in Q3 2010.

As our projects in Kodiak - EL 413 and Sofia New Mexico - were long term projects and subject to external influences such a commodity prices, pipeline status, overall investment climate and etc, it has been difficult to raise equity financing for such purposes in the last 18 to 24 months. During this time we reduced internal costs to a minimum and continue to hold Kodiak's costs at that level.
Based on advice from the investment community on how to finance going forward and the stage of the projects that Kodiak was at, it was decided to place the CREEnergy project into a subsidiary and finance that project in conjunction with Lucy, as a Canadian conventional Oil and Gas operations based subsidiary. In that way specific financing could be raised with equity initially for this project and then as it matured into non conventional debt and finally into conventional debt instruments.Thus Cougar Energy was born.
To have arranged the private placements into Kodiak at the time of the world recession would have been at such a discount to the already depressed market as to have been very dilutive to the Kodiak shareholders. We tried very hard for many months to arrange financing during those difficult times - in Canada, Europe and various institutions in the USA.
Some of the term sheets offered by the various investment banks would have resulted in a material change of control of the company due to the discount to the share price and the size of the required placement, or the ownership of the actual projects would have changed or both and thus potentially lost opportunities to the existing shareholders. Ultimately we succeeded through hard work and persistence and are succeeding with the plan by making small steps toward the final goal.



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We financed the CREEnergy project and Cougar operations, with small private placements with accredited small investors in Canada and Europe as per the regulations, for the first 10 months. Then as the acquisitions presented opportunities, we found a bridge loan and a vendor take back to close the acquisition. Please read the management discussion posted on the Cougar web site.
Subsequently we reached an agreement with OreMore ( Cougar Oil and Gas Canada, Inc) who had previously bought the bridge loan (which had been guaranteed by both Cougar and Kodiak) - to merge Cougar Energy into OreMore in exchange for issuing shares of Oremore to Kodiak and cancelling the bridge loan debt. Thus we retained the project through ownership of shares of and positions on the Board of Directors of Oremore.
The result was Cougar Oil and Gas Canada - who has a strong future and Kodiak retains a 64.52% of the outstanding shares at this time.
Kodiak in the agreements has the rights to retain a majority interest in Cougar Oil and Gas Canada going forward by participating in any financing and as Cougar shows success expected both short and long term, we believe that Kodiak will start to see that reflected in the Kodiak share price.

Canada

Through Kodiak's majority interest in Cougar Oil and Gas Canada, the Company's focus has developed into the definitive projects of:

1. Cougar Trout Properties, Alberta (Core Area) - farm-in and acquired lands in the Trout, Kidney and Equisetum fields;

2. CREEnergy Project, Alberta - mineral leases, exploration and development opportunities within the CREEnergy Agreement and several current and proposed Northern Alberta Treaty Land Entitlement Claims;

3. Lucy, British Columbia - Horn River Basin Muskwa shale gas project; and

4. Other Alberta properties.



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The Company expects to finance its future capital expenditure programs and acquisitions with combinations of revenue from current operations, debt instruments, farm-outs, equity financings and divestitures, depending upon what vehicle is appropriate to the capital program/acquisition and the overall market economy. A 6 to 12 month payback will be used to benchmark all such capital programs for financing purposes. A brief description of the Company's properties and activities is described below. For a more detail description of the properties to better understand the planned operations.


Cougar Trout Properties, Alberta (Core Area)
The following is a summary of the various properties plan of developments:

Farmin (June 2009) . A 100% working interest in 28 sections of land in the area of the CREEnergy Project, northwest of Red Earth Creek, Alberta - pay 100% to earn 100% with a 3% gross overriding royalty (GOR) upon earning to the vendor.

A drilling program has been prepared for one initial well and two subsequent wells. Contingent upon financing, this program will be evaluated and funds allocated to the best net back between this gas project and the other oil developments. A minimum 18 month payback criteria will be used prior to assigning capital to this project.

Private Company Production and Property Acquisitions (2009) . The existing infrastructure and initial production on the acquired properties enables the Company to realize higher netbacks and focus on deploying capital to the drill bit and development work. Additional details include:
? The existing area field personnel agreed to transfer to Cougar with their many years of hands-on field expertise thereby greatly reducing the risk of downtime due to lack of qualified field personnel.

? The existing pipeline systems provides direct access to sales of oil products, which results in the access to sales being in the Company's control and not third party pipeline operator dependent.

? There are 2 batteries for the handling and treating of oil and the disposal of the produced water. The batteries are capable of handling an estimated 2,500 bbl/d with nominal refit costs.

? Many of the wells are piped into the batteries to reduce the need for trucking, which is important for the higher water cut wells. These pipelines can be expanded to further lower operating costs.

? There are 37 wells, which 13 were producing as of December 31, 2009. The 20 suspended wells are workover or recompletion candidates.

? The produced water can be used for future water floods, which regularly have been shown to add substantial incremental production in the area.



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Metrics for review of progress

As of December 31, 2009, the average production was 125 bbl/d net of light sweet crude oil at an average operating cost of CAD$20.00 to CAD$25.00/bbl.

As of March 31, our average net production was approximately 150bbl/d. Our overall acquisition costs have dropped from $74K per flowing barrel to approximately $25K per flowing barrel as a result of the reactivation and maintenance work performed on the properties. Continued low risk development work is adding additional production at a cost of approximately $10K to $15K per flowing barrel. Production has increase 17% over previous quarter, Revenue has increased 27% over previous quarter, Operating costs have lowered 37% over previous quarter and operating net backs have increased 120% over previous quarter.

Subsequent Maintenance and Development Programs

Prior to the production and property acquisitions, the Company conducted a detailed review of the properties in public domain petroleum records over last 5 to 7 years and with a comparison to other operators in the area. The Company's operations and geological teams have determined a strong potential to increase production through normal maintenance activities. These activities include utilizing existing technologies that have proven success in similar maintenance and optimization programs in the area. Some of these normal maintenance activities include and are not limited to:
? Acid wash of perforations

? Use of enhanced chemical treatment programs to improve inflow

? Setting of bridge plugs to seal off water

? Cleanouts

? Re perforating

? Drill out plugs and open up previously unproduced zones

? Repairs to wells with separated rods

? Plug off water sources with no resulting loss of production

? Pump and well site equipment optimization

? Waterflood programs - future

? Horizontal drilling - future

Continued Development of the Trout Area Through Systematic Operational Controls

As we develop our maintenance program through the Trout Area lands in north central Alberta, we will continue to utilize our economical model to drive efficiency and minimize costs. We will focus our maintenance program on industry best practices and continued technological enhancements to maximize our return on assets and capital deployed.



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Consolidate the Trout Area

To further enhance our economies of scale, we intend to be aware of other acquisition opportunities in the area. Consistent with our strategy to improve our financial flexibility, we intend to make acquisitions utilizing either equity and/ or debt instruments. See subsequent notes re post March 31 developments

Develop Trout Area Assets

We intend to prudently develop this acreage position by redeploying cash flow generated from area operations. We are currently evaluating a series of developmental drilling locations in addition to several step out drilling locations on land we currently hold, with the goal of adding incremental reserves and cash flow. As we are focused on locations in areas with existing infrastructure, we expect our development plan to have a near-term material impact on our proved reserves and production. We believe investing in this area is the most expedient way for us to improve our financial flexibility and return on capital.

We also plan to acquire addition lands through the defined provincial posting process - as we do geological studies, additional targets within the overall seismic which we purchased covered areas is showing some opportunities - although higher risk, but higher rewards are possible and potentially to add production via the drill bit at an estimated find and development cost of $5 to $7 per barrel..


CREEnergy Project
Current Status

Cougar continues to actively work with CREEnergy as they assist their First Nations communities to achieve the goal of independence though the Treaty Land Entitlement (TLE) claim with the Federal Government of Canada and the Province of Alberta. Although delayed several times due to regulatory processes, this process is nearing completion.

We endeavor to engage with CREEnergy on a weekly basis through conference calls, status email and other written communication, monthly in person status meetings, and a continual dialogue to foster open communication.

At this time Cougar Energy is under negotiations to vend part of their mineral leases located within the TLE claim to CREEnergy for fair market value, to provide direct ownership and participation to the communities in the Oil and Gas mineral rights and associated operations. These discussions are reaching a mature level and legal is formalizing the documentation.

This proposed transaction will continue to provide positive growth for the relationship going forward and will provide cash flow opportunities for CREEnergy and thus the communities.



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Due to delays in the land claim process, and in order to move Cougar Energy forward in the interim, Cougar looked to other opportunities in the Red Earth area. .


Lucy, Northern British Columbia
Cougar Energy, Inc is the operator and 80% working interest owner of a 1,920 acre lease located in Northeastern British Columbia. The Company believes the lease is situated on the southeast edge of the Horn River Basin and the Muskwa Shale gas prospect. Industry continues to show increased interest in this shale gas play with several comparisons of the Muskwa Shale gas potential as an analogue of the Barnett Shale gas potential.

The prospect is still in the early stages of delineation and no assurance can be given that its exploitation will be successful. Further appraisal work is required before these estimates can be finalized and commerciality assessed.

Depending upon commodity prices - the severe turn down in gas prices over the past year have made natural gas projects difficult to show returns on investment
- especially high capital cost project such as the Horn River Basin - despite the very large reserves and recovery rates attributed to the Muskqua shales. The current $4-$5 gas prices limit the return this project in the short term and thus the financing availability.

The current intention is to perform the previously planned work programs for the license (as new information and financing becomes available, the plans may be revised). In lieu of obtaining our own financing, we are actively enlisting JV partners to move the project forward by way of divesting part of our interest.


Cougar Central Alberta Producing Properties
Private Company Production and Property Acquisition (completed October 1, 2009)

1. 2 producing oil properties in the Crossfield and Alexander fields in Central Alberta.

2. 100% working interest in the Crossfield property - 1 producing well with single well battery with approximately 5 barrels per day (bbl/d) net production - production continues to be stable with no capital commitment required.

3. 55% working interest in the Alexander property - 1 shut in oil well with a single well battery, 1 suspended well. Expected production of approximately 10 bbl/d net production upon restarting shut in oil well after spring break up.

In Summary

The Company plans to aggressively develop and explore its newly acquired Cougar assets. A maintenance and development program was planned for the winter work season of 2009/2010 which was implemented and which attained the expected goals on a well by well basis, however we are now limited in some cases by pump sizes and after break up will start moving pumpjacks and downhole equipment to better take advantage of the workover programs performed in February and March. Addition maintenance programs will be initiated in post break up through into the following winter. Drilling programs will be planned for the fourth quarter of 2010 where the seismic data supports the effort and expense and further drilling will be based on the results of the initial wells.



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Little Chicago - Northwest Territories

The Company is the operator and largest working interest owner of the 201,160 acre Exploration License 413 ("EL 413") in the Mackenzie River Valley centered along the planned Mackenzie Valley Pipeline.

Upon review of the overall status of all projects in the area, current commodity prices being much below levels required to justify development on this and other projects, continued delay of the Mackenzie Valley Pipeline Project, the risk that any discovered gas reserves would be indefinitely stranded without such development, the Company continues to seek partnership in the development; however, the deteriorating economic factors make this difficult. We will still retain the confidential proprietary seismic data for future assessment of the "Little Chicago Prospect" and the Company will determine the best way to monetize that asset through either divestiture and/or possibly renominating the prospect when conditions are more appropriate.


Province/Granlea - Southeast Alberta
No budget is assigned to this prospect.

UNITED STATES


New Mexico
Through its acquisition of Thunder, the Company acquired a 100% interest in 55,000 acres of property located in northeast New Mexico. Additional land acquisitions have increased the Company's land position to approximately 79,000 acres. These lands have potential for natural gas and CO2 and oil and helium resources at shallow depths.

Due to lower commodity prices for Permian Basin oil (the primary market for CO2) and CO2 contract prices (deliverable into the Denver City Hub), aggressive development is not financeable at this time. Aside from ongoing maintenance of leases and wells, the Company is focusing its efforts on updating engineering models, and business opportunities so that when prices recover and investment markets improve, we will have the opportunity to move this project forward. The leases are 10 year leases and no expiries are imminent. A budget of $500,000 CAD has been assigned to this project in order to further define the reserves and the potential deliverability of those reserves in order to add definition to the engineering and economical prospect.

In Q1, 2010 the Company has made the strategic decision to allow some New Mexico properties to expire rather than continue to pay additional rental costs on lands which are not located in what has been identified as the most valuable project areas. These lands can be renominated for leases in the future if the Company determines they will be required.



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FINANCIAL INFORMATION

Operating Results

Kodiak continues production on its developed assets which began in the fourth quarter of 2009. As there are no comparisons for this quarter year over year the information set forth is for this present quarter only, three months ending March 31, 2010.

Net Loss for the three months ended March 31, 2010 totaled $4,612,285 (March 31, 2009 - $500,535). The increase loss is mainly due to the one time asset write down of a un developed US property in the amount of $4,144,000.

General and administrative for the three months ended March 31, 2010 was $652,530 (March 31, 2009 - $493,462). The increase is due to the increased costs associated with being an operating entity.

Interest expense for the three months ended March 31, 2010 was $76,260 (March 31, 2009 - $211). The increased is as result of the company using banking debt to help finance daily operations. Prior to this period the Company did not have the any operating lines of credit.

Depletion, depreciation and accretion including ceiling test impairment write-downs includes the cost of depletion and depreciation relating to production from producing properties in the quater, ceiling test impairment write-downs and the cost of depreciation relating to office furniture and equipment. Costs attributable to certain US cost center properties were determined to be unsupportable and, as a result, asset write-downs of $4,144,000(March 31,2009 - Nil were recorded and included in this expense.

Financial Condition and Changes in Financial Condition:

The Company's total assets have decreased to $29,017,258 as at March 31, 2010 from $31,943,001 as at December 31, 2009, and from $36,831,864 March 31, 2009. These decreases are sustainably due to write-downs of its unproved properties of $4,410,309. Total assets consist of cash and other current assets of $854,938 (December 31, 2009 - $296,153).

The Company has included in oil and gas properties evaluated and unevaluated properties. Evaluated properties net of accumulated depreciation, depletion and amortization was$5,239,357 (December 31, 2009 - $4,657,403l). Unevaluated properties decreased to $22,548,799 from $26,081,786 on December 31, 2009. The major difference write-down of undeveloped properties $4,410,309.
There was requirement for a ceiling test write down for the period ending March 31, 2010.

Other assets increase marginally to $306,458 as of March 31, 2010 (December 31, 2009 - $296,153 3). The increase is due to the increase in deposit held by regulatory bodies for operational and environmental deposits.



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Our total current liabilities increased $294,141 to $4,745,669 (December 31, 2008 - $4,451,528). The net increase is due to increases in accounts payable and current portions of long-term debt and a decrease in notes payable. Accounts payable and accrued liabilities increased to $3,046,835(December 31, 2009 - $2,548,661). The increase is due to increased work activity during the quarter and capital spending. Notes payable were paid out in the quarter and decreased . . .


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