AI
Wednesday, August 14, 2013 6:30:12 PM
Form 10-Q for ARMADA OIL, INC.
14-Aug-2013
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words "believe," "expects," "anticipates," "intends," "estimates," "projects," "target," "goal," "plans," "objective," "should" or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, government regulations, lack of diversification, volatility in the price of oil and/or natural gas, increased competition, results of arbitration and litigation, stock volatility and illiquidity, our failure to implement our business plans or strategies and general economic conditions. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned "Risk Factors" in our 2012 Annual Report on Form 10-K.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
History
Armada Oil, Inc. (the "Company", "Armada", or "we") was incorporated under the laws of the State of Nevada on November 6, 1998, under the name "e.Deal.net, Inc." On June 20, 2005, the Company amended its Articles of Incorporation to effect a change of name to International Energy, Inc. On June 27, 2011, the Company amended its Articles of Incorporation to change its name to NDB Energy, Inc. On May 7, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name to Armada Oil, Inc.
On March 28, 2013 Armada formed a business combination with Mesa Energy Holdings, Inc. ("Mesa"), pursuant to which Armada acquired from Mesa substantially all of the assets of Mesa consisting of all of the issued and outstanding shares of Mesa Energy, Inc. ("MEI"), whose predecessor entity, Mesa Energy, LLC, was formed in April 2003 as an exploration and production company in the oil and gas industry. Although Armada was the legal acquirer, Mesa was the accounting acquirer.
Armada has a farmout agreement with Anadarko Petroleum on approximately 8,750 net mineral acres in Carbon County, Wyoming ("Project Acreage"). The Project Acreage is generally 40 miles west of Laramie, Wyoming and lies in the emerging fairway of the Niobrara Shale play which is currently very active in northern Colorado and eastern Wyoming.
MEI's oil and gas operations are conducted through itself and its wholly owned subsidiaries. MEI acquired Tchefuncte Natural Resources, LLC ("TNR") in July 2011. TNR owns interests in 80 wells and related surface production equipment in five fields located in Plaquemines and Lafourche Parishes, Louisiana. Mesa Gulf Coast Operating, LLC ("MGC") became the operator of all operated properties in Louisiana in October 2011. Mesa Midcontinent, LLC is a qualified operator in the state of Oklahoma and operates our properties in Garfield and Major Counties, Oklahoma. MEI is a qualified operator in the State of New York and operates the Java Field.
The Company's operating entities have historically employed, and will continue in the future to employ, on an as-needed basis, the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers, geologists and land men as required in connection with future drilling and production operations.
Overview
We are an oil and gas exploration and production ("E & P") company engaged primarily in the acquisition, drilling, development, production and rehabilitation of oil and gas properties.
Table of Contents
Our business plan is to build a strong, balanced and diversified portfolio of oil and gas reserves and production revenue through the acquisition of properties with solid, long-term existing production with enhancement potential and the development of highly diversified, multi-well developmental drilling opportunities.
We continuously evaluate opportunities in the United States' most productive basins, and we currently have interests in the following:
? Lake Hermitage Field, a producing oil and natural gas field in Plaquemines Parish, Louisiana;
? Valentine Field, a producing oil and natural gas field in Lafourche Parish, Louisiana;
? Larose Field, a producing oil and natural gas field in Lafourche Parish, Louisiana;
? Bay Batiste Field, a producing natural gas field in Plaquemines Parish, Louisiana;
? Manila Village Field, a currently shut-in field in Plaquemines Parish, Louisiana;
? Turkey Creek Field, an area of interest in which we hold undeveloped leasehold interests and a farm-out in Garfield and Major Counties, Oklahoma;
? Carbon County, Wyoming, an area of interest in which we hold a farm-out agreement with Anadarko Petroleum Company; and
? Java Field, a natural gas development project in Wyoming County in western New York.
The following discussion highlights the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information which management believes is relevant for an assessment and understanding of the statements of financial position, results of operations and cash flows presented herein. This discussion should be read in conjunction with our unaudited financial statements, related notes and the other financial information included elsewhere in this report.
Louisiana Operating Area
On July 22, 2011, the Company's wholly owned subsidiary, Mesa Energy, Inc. ("MEI"), completed the acquisition of Tchefuncte Natural Resources, LLC ("TNR"), a Louisiana operator. Immediately prior to MEI's closing of the TNR acquisition, TNR completed the acquisition of properties in five fields in South Louisiana from Samson Contour Energy E & P, LLC. TNR, now a wholly owned subsidiary of MEI, owns 100% working interests in the Lake Hermitage Field in Plaquemines Parish, Louisiana along with various working interests in producing properties in four additional fields in Plaquemines and Lafourche Parishes, Louisiana.
We believe that, as a result of our ongoing program of recompleting, sidetracking, or otherwise returning shut-in wells to production, improving operational efficiencies and continued optimization of the gas lift systems, significant increases in production can continue to be achieved in these fields. We expect to continue our recompletion program and to accomplish a number of additional enhancements and upgrades to processing facilities and flow lines in the second half of 2013, all of which to be funded out of cash flow or acceleration financing if available at reasonable terms. These efforts should significantly increase production and PDP reserves. Extensive geological and engineering evaluations of the Lake Hermitage and Valentine Fields have revealed multiple opportunities and we are prioritizing and planning for those opportunities on an ongoing basis. In addition, our technical team is in the process of refining a number of additional drilling locations and we expect to sidetrack existing wells into deeper zones and drill the first of several developmental wells later this year. We are reviewing a number of deep targets with potential for farm out or joint venture with other operators and are actively pursuing additional acquisition opportunities in South Louisiana.
The Louisiana Operating Area is located in Lafourche and Plaquemines Parishes in Louisiana and includes:
Producing Fields - Plaquemines and Lafourche Parishes, Louisiana
Lake Hermitage Field - Plaquemines Parish, Louisiana
The Lake Hermitage Field is located in Plaquemines Parish, Louisiana, approximately 25 miles south-southeast of New Orleans, Louisiana. The field is a salt dome structure discovered in 1928 and has produced significant quantities of oil and gas from multiple sandstone reservoirs between 3,100 and 14,200 feet deep. It is situated in a shallow, marshy environment on the west side of the Mississippi River.
Table of Contents
The Company owns a 100% working interest and 75% net revenue interest in each of the eighteen wells in the Lake Hermitage Field. A total of 3,589 mineral acres is held by production in the field. Ten wells are currently shut-in pending evaluation for workover and/or future recompletion in uphole zones or sidetrack into deeper zones, and an additional well is being evaluated for conversion to a salt water disposal well, which would reduce expenses and allow for increased daily handling of fluid. There are three processing facilities and tank batteries in the field. The high gravity crude oil produced at Lake Hermitage is transported out of the field by barge. In the first quarter of 2013, we successfully replaced the tubing string in the LLDSB #10 well which resulted in a return to stable daily production of over 100 barrels per day. In addition, the LLDSB #3 was successfully recompleted into the UL-4 sand which not only resulted in more production out of the UL-4 in that location but may allow us to re-enter and deepen the LLDSB #4 as a part of our developmental drilling efforts later this year. On May 1, 2013, we initiated a new round of workovers and recompletions in the field and expect those efforts to have a positive impact on production in the third quarter of 2013.
Valentine Field - Lafourche Parish, Louisiana
The Valentine Field is located in the Mississippi Delta area in Lafourche Parish, Louisiana, approximately 35 miles southwest of New Orleans, Louisiana. This gas and oil field was discovered in 1933 on the east flank of the Valentine Salt Dome as a result of torsion-balance and reflection-seismic surveying.
The company owns approximately 3,082 net mineral acres that are held by production in the field and holds operated working interests averaging in excess of 94% with net revenue interests averaging approximately 80%.
Twenty-five of the forty wells operated by MGC are currently shut-in pending evaluation for future workover or recompletion to uphole zones. There are three salt water disposal wells in the field. An extensive geological and engineering evaluation review of the Valentine Field is ongoing and we have identified a number of recompletion opportunities as well as a couple of potential drilling locations.
The processing facilities and tank batteries are strategically located throughout the field and have plenty of excess capacity. A field operations center is centrally located in the field. Access to pipelines and crude oil markets is excellent.
Larose Field - Lafourche Parish, Louisiana
The Larose Field, discovered in 1953 is located in Lafourche Parish, Louisiana, and is approximately 25 miles southwest of New Orleans, Louisiana. The field is on a southwesterly plunging anticlinal ridge that trends in a NE-SW direction and is approximately five miles along the NE-SW axis and is two and one-half miles wide. There are three major faults, striking east to west and dipping to the south that cross the ridge and separate the field into three main producing segments.
The company operates one well in the field and owns various non-operated working interests that range from 10.4% to 57.6% and net revenue interests from 8.7% to 41.2% covering approximately 350 net mineral acres. The processing facilities and tank batteries are well located and have plenty of excess capacity, and the access to pipelines and crude oil markets is excellent.
MGC has a production handling agreement ("PHA") in place with an outside operator which takes advantage of the excess capacity and generates additional revenue. Also, the PHA provides the additional advantage of access to artificial lift gas on an as needed basis.
Bay Batiste Field - Plaquemines Parish, Louisiana
The Bay Batiste Field, discovered in 1983, is located in Plaquemines Parish, Louisiana approximately 35 miles east-southeast of New Orleans, Louisiana. It is situated in a shallow water environment on the west side of the Mississippi River.
The Company owns and operates an average 59.43% working interest and 41.89% net revenue interest in seven wells in the Bay Batiste Field. One well is currently producing and the other four wells are currently shut-in pending evaluation for future workover or recompletion in uphole zones. Approximately 74 net mineral acres are held by production by the producing well. The salt water disposal well and two production facilities have plenty of excess capacity to handle production from recompleted wells or from third party operators nearby. Access to markets is excellent.
Table of Contents
SE Manila Village Field - Plaquemines Parish, Louisiana
The SE Manila Village Field is located in Plaquemines Parish, Louisiana approximately 45 miles southeast of New Orleans, Louisiana. The field was discovered in 1985 and is situated in a shallow open-water environment on the west side of the Mississippi River.
The Company owns a non-operated 21.09% working interest and 14.48% net revenue interest in two outside operated wells in the Manila Village Field. 16.88 net mineral acres are held by production in the field. The wells are scheduled to be plugged and abandoned.
Oklahoma Operating Area
During 2012, the Company began a leasing and acreage acquisition program in Major and Garfield Counties, Oklahoma, and has acquired, through a combination of grass roots leasing and farmouts, approximately 3,200 net mineral acres. We are continuing to actively pursue agreements with operators to acquire additional acreage that is held by production. We refer to our acreage position in Major and Garfield Counties, OK, as the Turkey Creek Field.
We believe that Oklahoma is a great place to develop a drilling program. It is relatively close to Dallas, is a very oil friendly state and has good availability of services and a moderate climate. The Mississippian Limestone in Oklahoma is a proven zone that has been drilled vertically in that area for many years so there is a lot of well control available with no need for seismic. The emerging horizontal play is sufficiently mature to have big company names and good results, yet acreage can still be acquired at moderate prices. This is an opportunity to establish a repeatable drilling program in an area with a high drilling success rate.
The Mississippian Limestone in the area of interest is at a vertical depth of approximately 7,000 feet and is 300 feet to 500 feet thick. The Woodford Shale is immediately below the Mississippian and is about 80 feet thick. Early reports indicate that the Woodford is oil bearing and quite productive in the area of interest. Potential reserves in the Mississippian on a per well basis have been reported to be 200,000 to 400,000 barrels per well. The Woodford would increase the potential reserves recoverable. A multi-stage frac is required using acid, fresh water and a simple sand proppant. The Mississippian produces some water, so disposal wells will likely be required. The oil is light, sweet crude with a gravity of 40 to 45 dg.
In December of 2012, the Company commenced the drilling of its first horizontal well in the play. A pilot hole was drilled to a depth of 7,946 feet. A sophisticated set of logs was run in the pilot hole along with pressure testing and the retrieval of cores for evaluation. That set of information revealed not only solid potential and a good porosity streak in the Mississippian Limestone, but also excellent potential in the Woodford Shale. Unfortunately, the well-bore was ultimately lost due to the back to back mechanical failure of two horizontal drilling motors and the resulting negative affect on the tangent of the curve. These incidents combined with a difficult shale section just above the Mississippian Limestone precipitated a series of issues that ultimately could not be overcome. As a result, we had to plug and abandon the well-bore. Accordingly, we view the exercise as a geological success and a mechanical failure and expect to move over and re-drill the well from the same surface location when resources allow.
Since that time, other operators have drilled additional wells in the area, both in the Mississippian and in the Woodford, in many cases drilling multiple wells in both formations from the same drilling pad. The Company believes the Woodford has as much oil production potential in the area as the Mississippian, and the Woodford is rapidly becoming an exciting and emerging play in its own right.
Wyoming Operating Area
The Company holds has a farmout agreement with Anadarko (Anadarko Contract) on approximately 8,750 net mineral acres in Carbon County, Wyoming ("Project Acreage"). The Project Acreage is generally 40 miles west of Laramie, Wyoming and lies in the emerging fairway of the Niobrara Shale play which is currently very active in northern Colorado and eastern Wyoming. In addition, there are a number of conventional zones, both above and below the Niobrara, which are highly productive in the area. 3-D seismic was recently shot and processed over the acreage position and is currently being evaluated. Initial feedback is very good. The Company expects to pick a location and to drill its first well in the Project Acreage later this year.
The Company has well logs from nearby wells showing the presence of all three Niobrara "benches", and well control and core data indicates that the Niobrara in this area meets or exceeds the positive attributes of the DJ Basin and Wattenberg Fields in northern Colorado, both of which are being actively drilled by Anadarko, Noble and other major independents.
Initial indications from those fields indicate drilling and completion costs for the Niobrara of under $5,000,000, potential reserves per well of 300,000 to 600,000 barrels and liquids ratios of 60% to 80%.
Table of Contents
On the conventional side, three nearby fields in conventional zones have produced in excess of 65,000,000 barrels of oil and 23 BCF of gas. A number of potential conventional drilling locations are also being evaluated as a result of the recently completed 3-D seismic shoot.
Based on a recent article in the Oil & Gas Investor, companies drilling the Niobrara in the DJ Basin to the south are horizontally drilling all three Niobrara benches separately plus the deeper Codell formation, resulting in as many as 16 horizontal wells per section. That drilling plan could theoretically result in over 200 wells on the existing Anadarko farmout acreage. Anadarko owns the minerals underlying the contracted acreage as well as a substantial amount of additional acreage in the area.
Under the farmout agreement with Anadarko, the Company is obligated to commence drilling of the initial test well on or before December 31, 2013. If the Company fails to drill said well in a timely manner, the Company shall be deemed to have relinquished its right to acquire any interest in Anadarko's acreage under the Anadarko Contract. If the Company drills an initial test well capable of production in paying quantities to the initial contract depth (approximately 9,500 feet), completes it as a producer and otherwise complies with and performs all other terms, covenants, and conditions of the Anadarko Contract, the Company will earn and be entitled to receive from Anadarko a lease, effective 30 days from the date of the release of the rig from the test well location, covering all of Anadarko's oil and gas estate in the respective drill site section limited to the earned depth. The lease to be so earned by Armada will (i) be for a primary term of three (3) years; and (ii) provide for a lessor's royalty of twenty percent (20%), proportionately reduced as appropriate and subject to any gas sales, purchase, transportation or gathering contracts affecting the leased lands on the date of the Anadarko Contract. The Company will then have the right to continue to drill additional wells on the contracted acreage, subject to a drilling schedule, and earn additional drill site sections as described above. The contracted acreage covers approximately 8,750 net mineral acres.
The Company is evaluating the acreage and expects to select a location for the initial test well in the third quarter of 2013.
Armada intends to develop and produce reserves at a low cost and take an aggressive approach to exploiting the Anadarko acreage position. The implementation of its drilling strategy using new shale drilling and completion technology should enable the Company to identify and develop significant oil and gas reserves in the Niobrara Shale.
New York Operating Area
The New York Operating Area is located in Wyoming County in western New York.
Java Field - Wyoming County, New York
In 2009, Mesa Energy, Inc. acquired the Java Field, which was discovered in 1978. The Medina Sandstone is the productive natural gas interval for the 19 producing natural gas wells in the field. The total depth range of these vertical wells is approximately 2,850' - 3,500'. A development project targeting the Marcellus Shale, as is present in a large area of the Appalachian Basin in the northeastern United States, is the primary goal.
The acquisition included 19 producing natural gas wells, their associated leases, units and all equipment; two surface tracts of land totaling approximately 36 acres; and two pipeline systems; a 12.4 mile pipeline and gathering system that serves the existing field, as well as a separate 2.5 mile system located northeast of the field. The company owns approximately 78% net revenue interest in leases covering 2,851.50 gross and net acres, more or less.
Production is nominal from the wells but serves to hold the acreage for future development. In early 2010, we recompleted and fracked the Reisdorf Unit #1 and the Ludwig #1 in the Marcellus Shale. The initial round of testing and analysis provided a solid foundation of data that strongly supports further development of the Marcellus Shale in western New York. Formation pressures and flow-back rates were much higher than expected providing a clear indication of the potential of the resource.
We believe that horizontal drilling, successfully done at this depth in other basins, is ultimately what is needed to maximize the resource.
The State of New York placed a moratorium on horizontal drilling and high volume fracture stimulation in late 2008 in order to develop new permitting rules. Environmental activism has resulted in continued delays of this process and there can be no assurance when such permitting rules will be issued or what restrictions such permits might impose on producers. Accordingly, we have been unable to continue with our development plans in New York for the time being. Unless the moratorium is removed and new permitting rules provide for the economic development of these properties, production on these properties will remain marginally economic.
Table of Contents
Texas Operating Area
In June of 2013, Armada formally took over operatorship of two leases in which it previously held as a nonoperated working interest in Young County, Texas totaling approximately 120 acres of land and fourteen stripper wells and is making efforts to re-establish production as well as to sell the property.
Adjusted EBITDA as a Non-GAAP Performance Measure
In evaluating our business, management believes earnings before interest, taxes, depreciation, depletion, amortization and accretion, unrealized gains and losses on financial instruments, gains and losses on sales of assets and stock-based compensation expense ("Adjusted EBITDA") is a key indicator of financial operating performance and is a measure of our ability to generate cash for operational activities and future capital expenditures. Adjusted EBITDA is not a GAAP measure of performance. We use this non-GAAP measure primarily to compare our performance with other companies in our industry and as a measure of our current liquidity. We believe that this measure may also be useful to investors for the same purposes and as an indication of our ability to generate cash flow at a level that can sustain or support our operations and capital investment program. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under GAAP, or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures that may be disclosed by other companies.
The following is a reconciliation of our net income in accordance with GAAP to our Adjusted EBITDA for the six-month periods ending June 30, 2013 and 2012:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2013 2012 2013 2012
Net income (loss) $ (490,517 ) $ 1,187,324 $ (1,546,086 ) $ 521,562
Adjustments:
Interest (income) expense, net 198,123 94,048 392,762 268,340
Income tax (benefit) expense (411,658 ) 821,862 (1,287,929 ) 468,014
Dry hole expense 24,804 - 2,609,866 -
Depreciation, depletion, accretion
and impairment 271,361 435,094 1,031,129 855,434
Gain on settlement of asset
retirement obligation - - (1,328 ) -
Bargain purchase gain - - (1,455,879 ) -
Unrealized (gain) loss on change in
commodity derivative instruments (586,527 ) (766,981 ) (51,828 ) 76,300
Loss on modification of offering
terms 65,749 - 65,749 -
(Gain) loss on change in
convertible debt derivative - (246,305 ) - 518,708
. . .
14-Aug-2013
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This report contains forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation, statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial position, estimated working capital, business strategy, the plans and objectives of our management for future operations and those statements preceded by, followed by or that otherwise include the words "believe," "expects," "anticipates," "intends," "estimates," "projects," "target," "goal," "plans," "objective," "should" or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that the assumptions upon which the forward-looking statements are based will prove to be correct. Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements, including, but not limited to, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, government regulations, lack of diversification, volatility in the price of oil and/or natural gas, increased competition, results of arbitration and litigation, stock volatility and illiquidity, our failure to implement our business plans or strategies and general economic conditions. A description of some of the risks and uncertainties that could cause our actual results to differ materially from those described by the forward-looking statements in this Quarterly Report on Form 10-Q appears in the section captioned "Risk Factors" in our 2012 Annual Report on Form 10-K.
Except as otherwise required by the federal securities laws, we disclaim any obligations or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
History
Armada Oil, Inc. (the "Company", "Armada", or "we") was incorporated under the laws of the State of Nevada on November 6, 1998, under the name "e.Deal.net, Inc." On June 20, 2005, the Company amended its Articles of Incorporation to effect a change of name to International Energy, Inc. On June 27, 2011, the Company amended its Articles of Incorporation to change its name to NDB Energy, Inc. On May 7, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation to change its name to Armada Oil, Inc.
On March 28, 2013 Armada formed a business combination with Mesa Energy Holdings, Inc. ("Mesa"), pursuant to which Armada acquired from Mesa substantially all of the assets of Mesa consisting of all of the issued and outstanding shares of Mesa Energy, Inc. ("MEI"), whose predecessor entity, Mesa Energy, LLC, was formed in April 2003 as an exploration and production company in the oil and gas industry. Although Armada was the legal acquirer, Mesa was the accounting acquirer.
Armada has a farmout agreement with Anadarko Petroleum on approximately 8,750 net mineral acres in Carbon County, Wyoming ("Project Acreage"). The Project Acreage is generally 40 miles west of Laramie, Wyoming and lies in the emerging fairway of the Niobrara Shale play which is currently very active in northern Colorado and eastern Wyoming.
MEI's oil and gas operations are conducted through itself and its wholly owned subsidiaries. MEI acquired Tchefuncte Natural Resources, LLC ("TNR") in July 2011. TNR owns interests in 80 wells and related surface production equipment in five fields located in Plaquemines and Lafourche Parishes, Louisiana. Mesa Gulf Coast Operating, LLC ("MGC") became the operator of all operated properties in Louisiana in October 2011. Mesa Midcontinent, LLC is a qualified operator in the state of Oklahoma and operates our properties in Garfield and Major Counties, Oklahoma. MEI is a qualified operator in the State of New York and operates the Java Field.
The Company's operating entities have historically employed, and will continue in the future to employ, on an as-needed basis, the services of drilling contractors, other drilling related vendors, field service companies and professional petroleum engineers, geologists and land men as required in connection with future drilling and production operations.
Overview
We are an oil and gas exploration and production ("E & P") company engaged primarily in the acquisition, drilling, development, production and rehabilitation of oil and gas properties.
Table of Contents
Our business plan is to build a strong, balanced and diversified portfolio of oil and gas reserves and production revenue through the acquisition of properties with solid, long-term existing production with enhancement potential and the development of highly diversified, multi-well developmental drilling opportunities.
We continuously evaluate opportunities in the United States' most productive basins, and we currently have interests in the following:
? Lake Hermitage Field, a producing oil and natural gas field in Plaquemines Parish, Louisiana;
? Valentine Field, a producing oil and natural gas field in Lafourche Parish, Louisiana;
? Larose Field, a producing oil and natural gas field in Lafourche Parish, Louisiana;
? Bay Batiste Field, a producing natural gas field in Plaquemines Parish, Louisiana;
? Manila Village Field, a currently shut-in field in Plaquemines Parish, Louisiana;
? Turkey Creek Field, an area of interest in which we hold undeveloped leasehold interests and a farm-out in Garfield and Major Counties, Oklahoma;
? Carbon County, Wyoming, an area of interest in which we hold a farm-out agreement with Anadarko Petroleum Company; and
? Java Field, a natural gas development project in Wyoming County in western New York.
The following discussion highlights the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information which management believes is relevant for an assessment and understanding of the statements of financial position, results of operations and cash flows presented herein. This discussion should be read in conjunction with our unaudited financial statements, related notes and the other financial information included elsewhere in this report.
Louisiana Operating Area
On July 22, 2011, the Company's wholly owned subsidiary, Mesa Energy, Inc. ("MEI"), completed the acquisition of Tchefuncte Natural Resources, LLC ("TNR"), a Louisiana operator. Immediately prior to MEI's closing of the TNR acquisition, TNR completed the acquisition of properties in five fields in South Louisiana from Samson Contour Energy E & P, LLC. TNR, now a wholly owned subsidiary of MEI, owns 100% working interests in the Lake Hermitage Field in Plaquemines Parish, Louisiana along with various working interests in producing properties in four additional fields in Plaquemines and Lafourche Parishes, Louisiana.
We believe that, as a result of our ongoing program of recompleting, sidetracking, or otherwise returning shut-in wells to production, improving operational efficiencies and continued optimization of the gas lift systems, significant increases in production can continue to be achieved in these fields. We expect to continue our recompletion program and to accomplish a number of additional enhancements and upgrades to processing facilities and flow lines in the second half of 2013, all of which to be funded out of cash flow or acceleration financing if available at reasonable terms. These efforts should significantly increase production and PDP reserves. Extensive geological and engineering evaluations of the Lake Hermitage and Valentine Fields have revealed multiple opportunities and we are prioritizing and planning for those opportunities on an ongoing basis. In addition, our technical team is in the process of refining a number of additional drilling locations and we expect to sidetrack existing wells into deeper zones and drill the first of several developmental wells later this year. We are reviewing a number of deep targets with potential for farm out or joint venture with other operators and are actively pursuing additional acquisition opportunities in South Louisiana.
The Louisiana Operating Area is located in Lafourche and Plaquemines Parishes in Louisiana and includes:
Producing Fields - Plaquemines and Lafourche Parishes, Louisiana
Lake Hermitage Field - Plaquemines Parish, Louisiana
The Lake Hermitage Field is located in Plaquemines Parish, Louisiana, approximately 25 miles south-southeast of New Orleans, Louisiana. The field is a salt dome structure discovered in 1928 and has produced significant quantities of oil and gas from multiple sandstone reservoirs between 3,100 and 14,200 feet deep. It is situated in a shallow, marshy environment on the west side of the Mississippi River.
Table of Contents
The Company owns a 100% working interest and 75% net revenue interest in each of the eighteen wells in the Lake Hermitage Field. A total of 3,589 mineral acres is held by production in the field. Ten wells are currently shut-in pending evaluation for workover and/or future recompletion in uphole zones or sidetrack into deeper zones, and an additional well is being evaluated for conversion to a salt water disposal well, which would reduce expenses and allow for increased daily handling of fluid. There are three processing facilities and tank batteries in the field. The high gravity crude oil produced at Lake Hermitage is transported out of the field by barge. In the first quarter of 2013, we successfully replaced the tubing string in the LLDSB #10 well which resulted in a return to stable daily production of over 100 barrels per day. In addition, the LLDSB #3 was successfully recompleted into the UL-4 sand which not only resulted in more production out of the UL-4 in that location but may allow us to re-enter and deepen the LLDSB #4 as a part of our developmental drilling efforts later this year. On May 1, 2013, we initiated a new round of workovers and recompletions in the field and expect those efforts to have a positive impact on production in the third quarter of 2013.
Valentine Field - Lafourche Parish, Louisiana
The Valentine Field is located in the Mississippi Delta area in Lafourche Parish, Louisiana, approximately 35 miles southwest of New Orleans, Louisiana. This gas and oil field was discovered in 1933 on the east flank of the Valentine Salt Dome as a result of torsion-balance and reflection-seismic surveying.
The company owns approximately 3,082 net mineral acres that are held by production in the field and holds operated working interests averaging in excess of 94% with net revenue interests averaging approximately 80%.
Twenty-five of the forty wells operated by MGC are currently shut-in pending evaluation for future workover or recompletion to uphole zones. There are three salt water disposal wells in the field. An extensive geological and engineering evaluation review of the Valentine Field is ongoing and we have identified a number of recompletion opportunities as well as a couple of potential drilling locations.
The processing facilities and tank batteries are strategically located throughout the field and have plenty of excess capacity. A field operations center is centrally located in the field. Access to pipelines and crude oil markets is excellent.
Larose Field - Lafourche Parish, Louisiana
The Larose Field, discovered in 1953 is located in Lafourche Parish, Louisiana, and is approximately 25 miles southwest of New Orleans, Louisiana. The field is on a southwesterly plunging anticlinal ridge that trends in a NE-SW direction and is approximately five miles along the NE-SW axis and is two and one-half miles wide. There are three major faults, striking east to west and dipping to the south that cross the ridge and separate the field into three main producing segments.
The company operates one well in the field and owns various non-operated working interests that range from 10.4% to 57.6% and net revenue interests from 8.7% to 41.2% covering approximately 350 net mineral acres. The processing facilities and tank batteries are well located and have plenty of excess capacity, and the access to pipelines and crude oil markets is excellent.
MGC has a production handling agreement ("PHA") in place with an outside operator which takes advantage of the excess capacity and generates additional revenue. Also, the PHA provides the additional advantage of access to artificial lift gas on an as needed basis.
Bay Batiste Field - Plaquemines Parish, Louisiana
The Bay Batiste Field, discovered in 1983, is located in Plaquemines Parish, Louisiana approximately 35 miles east-southeast of New Orleans, Louisiana. It is situated in a shallow water environment on the west side of the Mississippi River.
The Company owns and operates an average 59.43% working interest and 41.89% net revenue interest in seven wells in the Bay Batiste Field. One well is currently producing and the other four wells are currently shut-in pending evaluation for future workover or recompletion in uphole zones. Approximately 74 net mineral acres are held by production by the producing well. The salt water disposal well and two production facilities have plenty of excess capacity to handle production from recompleted wells or from third party operators nearby. Access to markets is excellent.
Table of Contents
SE Manila Village Field - Plaquemines Parish, Louisiana
The SE Manila Village Field is located in Plaquemines Parish, Louisiana approximately 45 miles southeast of New Orleans, Louisiana. The field was discovered in 1985 and is situated in a shallow open-water environment on the west side of the Mississippi River.
The Company owns a non-operated 21.09% working interest and 14.48% net revenue interest in two outside operated wells in the Manila Village Field. 16.88 net mineral acres are held by production in the field. The wells are scheduled to be plugged and abandoned.
Oklahoma Operating Area
During 2012, the Company began a leasing and acreage acquisition program in Major and Garfield Counties, Oklahoma, and has acquired, through a combination of grass roots leasing and farmouts, approximately 3,200 net mineral acres. We are continuing to actively pursue agreements with operators to acquire additional acreage that is held by production. We refer to our acreage position in Major and Garfield Counties, OK, as the Turkey Creek Field.
We believe that Oklahoma is a great place to develop a drilling program. It is relatively close to Dallas, is a very oil friendly state and has good availability of services and a moderate climate. The Mississippian Limestone in Oklahoma is a proven zone that has been drilled vertically in that area for many years so there is a lot of well control available with no need for seismic. The emerging horizontal play is sufficiently mature to have big company names and good results, yet acreage can still be acquired at moderate prices. This is an opportunity to establish a repeatable drilling program in an area with a high drilling success rate.
The Mississippian Limestone in the area of interest is at a vertical depth of approximately 7,000 feet and is 300 feet to 500 feet thick. The Woodford Shale is immediately below the Mississippian and is about 80 feet thick. Early reports indicate that the Woodford is oil bearing and quite productive in the area of interest. Potential reserves in the Mississippian on a per well basis have been reported to be 200,000 to 400,000 barrels per well. The Woodford would increase the potential reserves recoverable. A multi-stage frac is required using acid, fresh water and a simple sand proppant. The Mississippian produces some water, so disposal wells will likely be required. The oil is light, sweet crude with a gravity of 40 to 45 dg.
In December of 2012, the Company commenced the drilling of its first horizontal well in the play. A pilot hole was drilled to a depth of 7,946 feet. A sophisticated set of logs was run in the pilot hole along with pressure testing and the retrieval of cores for evaluation. That set of information revealed not only solid potential and a good porosity streak in the Mississippian Limestone, but also excellent potential in the Woodford Shale. Unfortunately, the well-bore was ultimately lost due to the back to back mechanical failure of two horizontal drilling motors and the resulting negative affect on the tangent of the curve. These incidents combined with a difficult shale section just above the Mississippian Limestone precipitated a series of issues that ultimately could not be overcome. As a result, we had to plug and abandon the well-bore. Accordingly, we view the exercise as a geological success and a mechanical failure and expect to move over and re-drill the well from the same surface location when resources allow.
Since that time, other operators have drilled additional wells in the area, both in the Mississippian and in the Woodford, in many cases drilling multiple wells in both formations from the same drilling pad. The Company believes the Woodford has as much oil production potential in the area as the Mississippian, and the Woodford is rapidly becoming an exciting and emerging play in its own right.
Wyoming Operating Area
The Company holds has a farmout agreement with Anadarko (Anadarko Contract) on approximately 8,750 net mineral acres in Carbon County, Wyoming ("Project Acreage"). The Project Acreage is generally 40 miles west of Laramie, Wyoming and lies in the emerging fairway of the Niobrara Shale play which is currently very active in northern Colorado and eastern Wyoming. In addition, there are a number of conventional zones, both above and below the Niobrara, which are highly productive in the area. 3-D seismic was recently shot and processed over the acreage position and is currently being evaluated. Initial feedback is very good. The Company expects to pick a location and to drill its first well in the Project Acreage later this year.
The Company has well logs from nearby wells showing the presence of all three Niobrara "benches", and well control and core data indicates that the Niobrara in this area meets or exceeds the positive attributes of the DJ Basin and Wattenberg Fields in northern Colorado, both of which are being actively drilled by Anadarko, Noble and other major independents.
Initial indications from those fields indicate drilling and completion costs for the Niobrara of under $5,000,000, potential reserves per well of 300,000 to 600,000 barrels and liquids ratios of 60% to 80%.
Table of Contents
On the conventional side, three nearby fields in conventional zones have produced in excess of 65,000,000 barrels of oil and 23 BCF of gas. A number of potential conventional drilling locations are also being evaluated as a result of the recently completed 3-D seismic shoot.
Based on a recent article in the Oil & Gas Investor, companies drilling the Niobrara in the DJ Basin to the south are horizontally drilling all three Niobrara benches separately plus the deeper Codell formation, resulting in as many as 16 horizontal wells per section. That drilling plan could theoretically result in over 200 wells on the existing Anadarko farmout acreage. Anadarko owns the minerals underlying the contracted acreage as well as a substantial amount of additional acreage in the area.
Under the farmout agreement with Anadarko, the Company is obligated to commence drilling of the initial test well on or before December 31, 2013. If the Company fails to drill said well in a timely manner, the Company shall be deemed to have relinquished its right to acquire any interest in Anadarko's acreage under the Anadarko Contract. If the Company drills an initial test well capable of production in paying quantities to the initial contract depth (approximately 9,500 feet), completes it as a producer and otherwise complies with and performs all other terms, covenants, and conditions of the Anadarko Contract, the Company will earn and be entitled to receive from Anadarko a lease, effective 30 days from the date of the release of the rig from the test well location, covering all of Anadarko's oil and gas estate in the respective drill site section limited to the earned depth. The lease to be so earned by Armada will (i) be for a primary term of three (3) years; and (ii) provide for a lessor's royalty of twenty percent (20%), proportionately reduced as appropriate and subject to any gas sales, purchase, transportation or gathering contracts affecting the leased lands on the date of the Anadarko Contract. The Company will then have the right to continue to drill additional wells on the contracted acreage, subject to a drilling schedule, and earn additional drill site sections as described above. The contracted acreage covers approximately 8,750 net mineral acres.
The Company is evaluating the acreage and expects to select a location for the initial test well in the third quarter of 2013.
Armada intends to develop and produce reserves at a low cost and take an aggressive approach to exploiting the Anadarko acreage position. The implementation of its drilling strategy using new shale drilling and completion technology should enable the Company to identify and develop significant oil and gas reserves in the Niobrara Shale.
New York Operating Area
The New York Operating Area is located in Wyoming County in western New York.
Java Field - Wyoming County, New York
In 2009, Mesa Energy, Inc. acquired the Java Field, which was discovered in 1978. The Medina Sandstone is the productive natural gas interval for the 19 producing natural gas wells in the field. The total depth range of these vertical wells is approximately 2,850' - 3,500'. A development project targeting the Marcellus Shale, as is present in a large area of the Appalachian Basin in the northeastern United States, is the primary goal.
The acquisition included 19 producing natural gas wells, their associated leases, units and all equipment; two surface tracts of land totaling approximately 36 acres; and two pipeline systems; a 12.4 mile pipeline and gathering system that serves the existing field, as well as a separate 2.5 mile system located northeast of the field. The company owns approximately 78% net revenue interest in leases covering 2,851.50 gross and net acres, more or less.
Production is nominal from the wells but serves to hold the acreage for future development. In early 2010, we recompleted and fracked the Reisdorf Unit #1 and the Ludwig #1 in the Marcellus Shale. The initial round of testing and analysis provided a solid foundation of data that strongly supports further development of the Marcellus Shale in western New York. Formation pressures and flow-back rates were much higher than expected providing a clear indication of the potential of the resource.
We believe that horizontal drilling, successfully done at this depth in other basins, is ultimately what is needed to maximize the resource.
The State of New York placed a moratorium on horizontal drilling and high volume fracture stimulation in late 2008 in order to develop new permitting rules. Environmental activism has resulted in continued delays of this process and there can be no assurance when such permitting rules will be issued or what restrictions such permits might impose on producers. Accordingly, we have been unable to continue with our development plans in New York for the time being. Unless the moratorium is removed and new permitting rules provide for the economic development of these properties, production on these properties will remain marginally economic.
Table of Contents
Texas Operating Area
In June of 2013, Armada formally took over operatorship of two leases in which it previously held as a nonoperated working interest in Young County, Texas totaling approximately 120 acres of land and fourteen stripper wells and is making efforts to re-establish production as well as to sell the property.
Adjusted EBITDA as a Non-GAAP Performance Measure
In evaluating our business, management believes earnings before interest, taxes, depreciation, depletion, amortization and accretion, unrealized gains and losses on financial instruments, gains and losses on sales of assets and stock-based compensation expense ("Adjusted EBITDA") is a key indicator of financial operating performance and is a measure of our ability to generate cash for operational activities and future capital expenditures. Adjusted EBITDA is not a GAAP measure of performance. We use this non-GAAP measure primarily to compare our performance with other companies in our industry and as a measure of our current liquidity. We believe that this measure may also be useful to investors for the same purposes and as an indication of our ability to generate cash flow at a level that can sustain or support our operations and capital investment program. Investors should not consider this measure in isolation or as a substitute for income from operations, or cash flow from operations determined under GAAP, or any other measure for determining operating performance that is calculated in accordance with GAAP. In addition, because Adjusted EBITDA is not a GAAP measure, it may not necessarily be comparable to similarly titled measures that may be disclosed by other companies.
The following is a reconciliation of our net income in accordance with GAAP to our Adjusted EBITDA for the six-month periods ending June 30, 2013 and 2012:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2013 2012 2013 2012
Net income (loss) $ (490,517 ) $ 1,187,324 $ (1,546,086 ) $ 521,562
Adjustments:
Interest (income) expense, net 198,123 94,048 392,762 268,340
Income tax (benefit) expense (411,658 ) 821,862 (1,287,929 ) 468,014
Dry hole expense 24,804 - 2,609,866 -
Depreciation, depletion, accretion
and impairment 271,361 435,094 1,031,129 855,434
Gain on settlement of asset
retirement obligation - - (1,328 ) -
Bargain purchase gain - - (1,455,879 ) -
Unrealized (gain) loss on change in
commodity derivative instruments (586,527 ) (766,981 ) (51,828 ) 76,300
Loss on modification of offering
terms 65,749 - 65,749 -
(Gain) loss on change in
convertible debt derivative - (246,305 ) - 518,708
. . .
Join the InvestorsHub Community
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
