The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. For the purpose of this discussion, unless the context indicates another meaning, the terms: "Deep Well," "Company," "we," "us," and "our" refer toDeep Well Oil & Gas, Inc. and its subsidiaries. This discussion includes forward-looking statements that reflect our current views with respect to future events and financial performance that involve risks and uncertainties. Our actual results, performance or achievements could differ materially from those anticipated in the forward-looking statements as a result of certain factors including risks discussed in "Cautionary Note Regarding - Forward-Looking Statements" below and elsewhere in this report, and under the heading "Risk Factors" and "Environmental Laws and Regulations" disclosed in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 , filed with theU.S. Securities and Exchange Commission ("SEC") and theAlberta Securities Commission ("ASC") on SEDAR onJanuary 13, 2020 . Our Annual Report on Form 10-K can be downloaded from our website at www.deepwelloil.com. Our consolidated financial statements and the supplemental information thereto are reported inUnited States dollars and are prepared based uponUnited States generally accepted accounting principles ("US GAAP"). References in this quarterly report on Form 10-Q to "$" are toUnited States ("US") dollars and references to "Cdn$" are to Canadian dollars. The following table sets forth the rates of exchange for the Cdn$, expressed in US dollars, in effect at the end of the following periods and the average rates of exchange during such periods, based on the rates of exchange for such periods as reported by the Bank of
Canada . Period Ending March 31 2020 2019 Rate at end of period$ 0.7049 $ 0.7483
Average rate for the three month period
General OverviewDeep Well Oil & Gas, Inc. , through its subsidiaries conducts business, as an independent junior oil sands exploration and development company. Its subsidiaries are headquartered inEdmonton, Alberta, Canada . Our immediate corporate focus is to develop the existing oil sands land base where our subsidiaries have working interests ranging from 25% to 100% in thePeace River oil sands area ofAlberta, Canada .Deep Well Oil & Gas, Inc. is aNevada corporation and trades on theOTC Marketplace under the symbol DWOG. We maintain a website at www.deepwelloil.com. Our financial statements are available for download on our website or you may download our financial statements from theSEC's website at www.sec.gov. The contents of our website are not part of this quarterly report on Form 10-Q. Operations Since the inception of our current business plan, our operations have consisted of various exploration and start-up activities relating to our properties, including the acquisition of lease holdings, raising capital, locating joint venture partners, acquiring and analyzing seismic data, complying with environmental regulations, drilling, testing and analyzing of wells to define our oil sands reservoir, and development planning of our Alberta Energy Regulatory ("AER") approved thermal recovery projects, which includes our jointSteam Assisted Gravity Drainage Demonstration Project (the "SAGD Project ") where we have a 25% working interest. Our main objective is to develop our oil sands lease holdings located in thePeace River oil sands area of North Central Alberta, Canada (also known as ourSawn Lake oil sands properties) using thermal recovery technologies. We have received approval from the AER for two thermal recovery projects located on
ourSawn Lake properties. 14
ASAGD Project on ourSawn Lake properties commenced in 2013 where we have a 25% working interest.The SAGD Project consists of one SAGD well pair drilled to a depth of 650 meters and a horizontal length of 780 meters and the SAGD facility for steam generation, water handling, and bitumen treating. Steam injection commenced inMay 2014 and production started in September of 2014.The SAGD Project reached a steady state production level in February of 2016 of 620 bopd, on a 100% basis (155 bopd net to us) from one SAGD well pair and achieved an instantaneous Steam oil Ratio ("ISOR") efficiency of 2.1, demonstrating the productive capability of ourSawn Lake reservoir. The lower the ISOR the lower the production costs and emissions per barrel of oil produced. A majority of our Company's Joint Venture partners voted to temporarily suspend operations for theSAGD Project at the end ofFebruary 2016 . As 2021 and 2022 proceed, the operator of theSAGD Project should be consulting with its joint venture partners regarding development potential and alternatives for theSAGD Project .The SAGD Project has:
? confirmed that the SAGD process works in the
? established characteristics of ramp up through stabilization of SAGD performance; ? indicated the productive capability and ISOR of the reservoir; and
? provided critical information required for well and facility design associated
with future commercial development. The production results of theSAGD Project successfully confirmed the capability of theBluesky reservoir to produce using thermal recovery technology. The following graph sets out the production levels that theSAGD Project achieved. These production numbers compare favorably to analogous reservoirs in thermal recovery projects that we are monitoring and using as a basis of comparison. [[Image Removed]] 15
An amended application was submitted to the AER for a commercial expansion of the existingSAGD Project facility site and received regulatory approval inDecember 2017 . This expansion application sought approval to expand the currentSAGD Project facility site to produce up to 3,200 bopd (100% basis). It is anticipated that only five SAGD well pairs will need to be operating to achieve this production level.The SAGD Project development plan will be done in stages to reduce initial financial costs. The first stage anticipates the reactivation of the existing SAGD facility and existing SAGD well pair, along with the drilling of one additional SAGD well pair, initially producing from two SAGD well pairs. The second stage anticipates drilling an additional three SAGD well pairs to produce up to 3,200 bopd and the expansion of the existing SAGD facility to generate the additional steam required. The lead time to acquiring the necessary equipment and commencing operations is estimated to be about 18 months and another 6 months is required for the start of bitumen production (after development of the steam chamber). We anticipate our near- and or long-term funding of our operations to be financed through the existing Farmout Agreement, future earn-in agreements, and cash flow from the reactivation of the existingSAGD Project . We also intend to negotiate in the future with thePetroleum and Natural Gas holders in the area of our leases, to enter into further downhole contribution agreements to acquire additional logs and cores of theBluesky formation, in order to expand the boundaries of the oil sands reservoir we have already defined and save on drilling costs and reduce our environmental footprint. ASawn Lake full field development plan using SAGD batteries has been defined for theSAGD Project . Under Full Cost accounting we assess our unproved properties for impairment annually. Management takes a longer-term approach to the commodity price because of the long life of the Company's oil sands assets, that being 30, 40, or even over, 50 years. The significant decline in oil prices may have an impact on the Company's annual impairment assessment of its unprovenSawn Lake properties, whereby we may have to impair some or all of our unproven properties on our balance sheet when we preform our yearly assessment of our unproved properties for impairment. However, management feels that any impairment decision must take in to account the relatively long-term life of the Company's assets. We previously received approval from the AER for a horizontal cyclic steam stimulation project ("HCSS Project ") application. It is anticipated that we will develop a thermal demonstration project on our properties followed by a commercial expansion project on one half section of land located on section 10-92-13W5 of ourSawn Lake oil sands properties where we currently have at least a 90% working interest. The final performance results and revised reservoir modeling studies from ourSAGD Project will be used to fine-tune ourHCSS Project facility design before we initiate start-up operations on the half of a section of land where we plan to drill two horizontal wells to test the use of HCSS technology. We previously performed an environmental field study and surveyed the proposed location of our plannedHCSS Project site and received AER approval for the surface wellsite and access road for thisHCSS Project . Our Company to date has, but not limited to, drilled or participated in 13 wells over ourSawn Lake leases to expand the boundaries of theBluesky oil sands reservoir; commissioned various independent reservoir simulation studies of our properties; successfully produced bitumen from theSAGD Project , which outperformed independent reservoir production type curves; acquired AER approval for two thermal recovery projects, which includes our jointSAGD Project facility expansion to produce up to 3,200 bopd; successfully entered into Farmout Agreements; and we have successfully applied and received approval from the AER to continue the best sections of our oil sands properties past their initial lease expiry dates, where resources were identified. Currently, our Company'sSawn Lake oil sands properties under lease covers 17,712 gross acres (11,734 net acres) of land under six oil sands leases. The lease expiration dates of our Company's oil sands leases are as follows:
1. Five oil sands leases covering 14,549 gross acres (8,571 net acres) were
continued under the Alberta Oil Sands Tenure division and are now held by our
Company into perpetuity and are subject to yearly escalating rental payments
until they are deemed to be producing leases.
2. One oil sands lease covering 3,163 gross acres (3,163 net acres) are set to
expire on
into perpetuity. 16
The development progress of ourSawn Lake oil sands properties is governed by several factors such as federal and provincial governmental regulations. Long lead times in getting regulatory approval for thermal recovery projects are commonplace in our industry. Road bans, winter access only roads and environmental regulations can, and often, do delay development of similar projects and our projects. Because of these and other factors, our oil sands projects can take significantly longer to complete than regular conventional drilling programs for lighter oil. Results of Operations Our Company's independent auditor has not performed a review of our quarterly condensed consolidated financial statements for the period endingMarch 31, 2020 , in accordance with standards established by thePublic Company Accounting Oversight Board (United States ) ("PCAOB") for a review of quarterly financial statements by an entity's auditor. The accompanying unreviewed quarterly condensed consolidated financial statements of our Company for the period endingMarch 31, 2020 have been prepared by our inhouse Company accounting and other staff but are the responsibility of our Company's management.
The following table sets forth summarized financial information:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, 2020 2019 2020 2019 (Auditor (Auditor (Unreviewed) Reviewed) (Unreviewed) Reviewed) Revenue $ - $ - $ - $ - Royalty refunds (expenses) - - - - Revenue, net of royalty - - - - Expenses Operating expenses 11,197 3,820 38,935 43,480 Operating expense covered by Farmout (11,197 ) (3,820 ) (38,935 ) (43,480 ) General and administrative 40,324 39,566 70,645 93,421 Depreciation, accretion and depletion 10,760 11,411 21,603 22,853 Net loss from operations (51,084 ) (50,977 ) (92,248 ) (116,274 ) Other income and expenses Rental and other income 38 20 (2,009 ) 2,066 Interest income 1,960 1,923 3,954 3,733 Net loss$ (49,086 ) $ (49,034 ) $ (90,303 ) $ (110,475 )
There was no production volumes or revenues for the years endingMarch 31, 2020 and 2019, due to a majority of our Company's Joint Venture partners voting to temporarily suspend operations of theSAGD Project at the end ofFebruary 2016 . In accordance with the Farmout Agreement we entered into onJuly 31, 2013 , the Farmee has agreed to provide up to$40,000,000 in funding for our portion of the costs for theSAGD Project in return for a net 25% working interest in two oil sands leases where we had a working interest of 50% before the execution of the Farmout Agreement. Under the terms of the Farmout Agreement the Farmee is required to provide funding to cover the monthly administrative expenses of our Company provided that such funding shall not exceed$30,000 per month. Under the terms of the Farmout Agreement, the Farmee is to continue to cover our Company's administrative costs up to$30,000 per month until completion in all substantial respects of theSAGD Project agreement entered into between the Company and the operator of theSAGD Project . Since March of 2020, the Farmee has been delinquent in making its monthly payments in full to us. Currently the Farmee has only been paying about half of the$30,000 per month payments to us. To date the Farmee owes us approximately$345,000 in reimbursement of administrative costs as required by the Farmout Agreement. Our net operating margin after operating expenses is zero, under the Farmout Agreement, any negative operating cash flows are reimbursed to us to fund our share of theSAGD Project . Therefore, the total share of the capital costs and operating expenses of our Company's jointSAGD Project has been funded in accordance with the Farmout Agreement, at a net cost to our Company of $Nil. As required by the Farmout Agreement, as ofMarch 31, 2020 , the Farmee has reimbursed our Company and/or paid the operator up to a total of approximatelyCdn$27.4 million , which depending upon the exchange rates used over time could presently be approximately$19.3 million USD , for the Farmee's share and our share of the capital costs and operating expenses of theSAGD Project . These costs included the drilling and completion of one SAGD well pair; the purchase and transportation of equipment of which included the once through steam generator, production tanks, water treatment plant, and power generators; installation and construction of the steam plant facility; testing and commissioning; the purchase of the water source and disposal wells; construction of pipelines and expenditures to connect and tie-in the source and disposal water wells to the steam plant facility along with a fuel source tie-in pipeline; equipment for processing and treating the bitumen production at the SAGD facility site; replacement of the electrical submersible pump; front end costs for the expansion; the operating expenses associated with the steaming and production of the one SAGD well pair when the facility was producing; and the expenses associated the monthly shut-in operations of theSAGD Project facility. 17 For the three months endedMarch 31, 2020 , our general and administrative expenses increased by$758 compared to the three months endedMarch 31, 2019 . We also accrued$90,000 during this quarter from the Farmee in accordance with a Farmout Agreement to offset our monthly expenses. After adjusting out the non-cash item foreign exchange and the funds we accrued from the Farmee, our general and administrative expenses were$132,558 for the three months endedMarch 31, 2020 compared to$124,751 for the three months endedMarch 31, 2019 . For the six months endedMarch 31, 2020 , our general and administrative expenses decreased by$22,776 compared to the six months endedMarch 31, 2019 , which was primarily due to decreases in office rent and other general and administrative expenses. We also accrued$180,000 during the last six months from the Farmee in accordance with the Farmout Agreement, to offset our monthly expenses. After adjusting out the non-cash items for foreign exchange and the funds we received from the Farmee, our general and administrative expenses were$252,201 for the six months endedMarch 31, 2020 compared to$271,483 for the six months endedMarch 31, 2019 .
For the three months endedMarch 31, 2020 , our depreciation, depletion, and accretion expense decreased by$651 compared to the three months endedMarch 31, 2019 , which was primarily due to the depreciating value of our assets. Depreciation expense is computed using the declining balance method over the estimated useful life of the asset. In compliance with our accounting policy, only half of the depreciation is taken in the year of acquisition. No significant asset purchases were made in the quarter endedMarch 31, 2020 . For the six months endedMarch 31, 2020 , our depreciation and accretion expense decreased by$1,250 compared to the six months endedMarch 31, 2019 , which was primarily due to the depreciating value of our assets. Depreciation expense is computed using the declining balance method over the estimated useful life of the asset. In compliance with our accounting policy, only half of the depreciation is taken in the year of acquisition. No significant depreciable asset purchases were made in the quarter endedMarch 31, 2020 .
For the three months ended
For the six months ended
For the three months endedMarch 31, 2020 , there were no significant increases or decreases for interest income compared to the three months endedMarch 31, 2019 .
For the six months ended
As a result of the above transactions, there was no significant increase or
decrease in our net loss and loss from operations for the three months ended
As a result of the above transactions, we recorded a decrease of$20,172 in our net loss and loss from operations for the six months endedMarch 31, 2020 compared to the six months endedMarch 31, 2019 . As discussed above, this decrease was primarily due to decreases in office rent and other general and administrative expenses. 18
Liquidity and Capital Resources
As ofMarch 31, 2020 , our total assets were$22,611,906 compared to$22,677,977 as ofSeptember 30, 2019 . There was a decrease of$66,071 in our total assets from theSeptember 30, 2019 year end, which was primarily due to a decrease
of$38,599 in cash. Our total liabilities as ofMarch 31, 2020 were$595,616 compared to$571,384 as ofSeptember 30, 2019 . There was a$24,232 increase in our total liabilities from theSeptember 30, 2019 year end, which was primarily due to an increase in accounts payable. Our working capital (current liabilities subtracted from current assets) is as follows: Six months Ended Year Ended March 31, September 30, 2020 2019 Current Assets $ 124,004 167,379 Current Liabilities 119,755 70,992 Working Capital $ 4,249 96,387 As ofMarch 31, 2020 , we had working capital of$4,249 compared to a working capital of$96,387 as ofSeptember 30, 2019 . This decrease of$92,138 in working capital is primarily due to cash used for general and administrative expenses and an increase of$48,763 in current liabilities. As reported on our condensed Consolidated Statement of Cash Flows under "Operating Activities", for the six months endedMarch 31, 2020 , our net cash used in operating activities was$15,161 compared to$150,711 for the six months endedMarch 31, 2019 . This decrease of$135,550 in our operating activities was due to a decrease of$18,922 for general and administrative expenses and a decrease of$116,628 from changes in non-cash working capital. As reported on our condensed Consolidated Statement of Cash Flows under "Investing Activities", we had a decrease of$34,322 on investment in our oil and gas properties for the six months endedMarch 31, 2020 , compared to the six months endedMarch 31, 2019 . As reported on our condensed Consolidated Statement of Cash Flows under "Financing Activities", for the six months endedMarch 31, 2020 andMarch 31, 2019 . There were no financing activities for the six months endedMarch 31 ,
2020 period.
Our cash and cash equivalents as of
Our currentSAGD Project capital and operating costs are covered under the terms of the Farmout Agreement. In addition, as described above the Farmee shall continue to cover our administrative costs up to$30,000 per month, under the Farmout Agreement, until completion in all substantial respects of theSAGD Demonstration Project agreement entered into between us and the operator of theSAGD Project . For our long-term operations, we anticipate that, among other alternatives, we may raise funds during the next twenty-four months through sales of our equity securities, debt, or entering into another form of joint venture. We also note that if we issue more shares of our common stock, our shareholders will experience dilution in the percentage of their ownership of common stock. We may not be able to raise sufficient funding from stock sales for long-term operations and if so, we may be forced to delay our business plans until adequate funding is obtained.
Off-Balance Sheet Arrangements
There is no transaction, arrangement, or other relationship between our Company or any of our subsidiaries and an unconsolidated or affiliated entity that is not reflected on our Company's Financial Statements that is required to be disclosed by our Company in ourSEC filings and is not already disclosed. 19
Cautionary Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q, including all referenced Exhibits, contains "forward-looking statements" within the meaning ofthe United States federal securities laws. All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words "may," "believe," "intend," "will," "anticipate," "expect," "estimate," "project," "future," "plan," "strategy," "probable," "possible," or "continue," and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters, often identify forward-looking statements. For these statements, Deep Well claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this quarterly report include, among others, statements with respect to: ? our current business strategy; ? our future financial position and projected costs; ? our projected sources and uses of cash;
? our plan for future development and operations, including the building of
all-weather roads; ? our drilling and testing plans;
? our proposed plans for further thermal in-situ development or demonstration
project or projects; ? the sufficiency of our capital in order to execute our business plan; ? our reserves and resources estimates; ? the timing and sources of our future funding; ? the quantity and value of our reserves; ? the intent to issue a distribution to our shareholders;
? our or our operator's objectives and plans for our current
? our plans for development of ourSawn Lake properties; ? production levels from our currentSAGD Project ; ? costs of our currentSAGD Project ;
? funding from the Farmee to pay our costs for the current
connection with the Farmout Agreement; ? additional sources of funding from the Farmout Agreement; ? funding from the Farmee to cover our monthly administrative operating expenses; ? our access and availability to third-party infrastructure; ? present and future production of our properties;
? our ability to extend our remaining lease; past its primary expiration date;
and
? expectations regarding the ability of our Company and its subsidiaries to
raise capital and to continually add to reserves through acquisitions and
development. 20
These forward-looking statements are based on the beliefs and expectations of our management and are subject to significant risks and uncertainties. If underlying assumptions prove inaccurate or unknown risks or uncertainties materialize, actual results may differ materially from current expectations and projections. Factors that could cause actual results to differ materially from those set forward in the forward-looking statements include, but are not limited to: ? changes in general business or economic conditions;
? changes in governmental legislation or regulation that affect our business;
? our ability to obtain necessary regulatory approvals and permits for the
development of our properties, including obtaining the required water licenses
from Alberta Environment to withdraw water for our thermal operations;
? changes to the greenhouse gas reduction program and other environmental and
climate change regulations which are adopted by provincial or federal
governments of
cap and trade regimes, carbon taxes, increased efficiency standards, each of
which could increase compliance costs and impose significant penalties for
non-compliance;
? increase in taxes and changes to existing legislation affecting governmental
royalties or other governmental initiatives; ? future marketing and transportation of our produced bitumen; ? proximity and capacity of oil and natural gas pipelines and other transportation facilities;
? our ability to receive approvals from the AER for additional tests to further
evaluate the wells on our lands; ? our Farmout Agreement and joint operating agreements; ? opposition to our regulatory requests by various third parties; ? actions of aboriginals, environmental activists and other industrial disturbances; ? the costs of environmental reclamation of our lands; ? availability of labor or materials or increases in their costs;
? the availability of sufficient capital to finance our business or development
plans on terms satisfactory to us;
? adverse weather conditions and natural disasters affecting access to our
properties and well sites;
? risks associated with increased insurance costs or unavailability of adequate
coverage;
? volatility in market prices for oil, bitumen, natural gas, diluent and natural
gas liquids. A decline in oil prices could result in a downward revision of
our future reserves and a ceiling test write-down of the carrying value of our
oil sands properties, which could be substantial and could negatively impact
our future net income and shareholders' equity; ? competition; ? changes in labor, equipment and capital costs; ? future acquisitions or strategic partnerships; ? the risks and costs inherent in litigation; 21
? imprecision in estimates of reserves, resources and recoverable quantities of
oil, bitumen and natural gas; ? product supply and demand;
? changes and amendments in the Canadian Oil and Gas Evaluation Handbook and or
the Petroleum Resources Management System to general disclosure of reserves
and resources standards and specific annual reserves and resources disclosure
requirements for reporting issuers with oil and gas activities;
? future appraisal of potential bitumen, oil and gas properties may involve
unprofitable efforts;
? the ability to obtain approval from the AER to continue our remaining oil
sands lease beyond its expiry date;
? the ability to pay future escalating oil sands lease rents on our continued
leases;
? our ability to meet the minimum level of production requirements on our oil
sands leases as set out by the AER in order to eliminate future escalating oil
sands lease rents on our continued leases; ? changes in general business or economic conditions;
? risks associated with the finding, determination, evaluation, assessment and
measurement of bitumen, oil and gas deposits or reserves; ? geological, technical, drilling and processing problems; ? third party performance of obligations under contractual arrangements; ? failure to obtain industry partner and other third-party consents and approvals, when required; ? treatment under governmental regulatory regimes and tax laws; ? royalties payable in respect of bitumen, oil and gas production;
? unanticipated operating events which can reduce production or cause production
to be shut-in or delayed; ? incorrect assessments of the value of acquisitions, and exploration and development programs;
? stock market volatility and market valuation of the common shares of our
Company;
? changes or amendments to the
impact on the over-the-counter ("OTC") market where our common shares are
publicly traded, of which changes or amendments such as Rule 15c2-11 which may
affect whether or not our common shares will continue to be publicly traded on
the OTC Market or downgraded to the Grey Market; ? fluctuations in currency and interest rates; ? the potential negative impact of public health epidemics and outbreaks, including COVID-19, on our Company, our operations, our employees, our
contractors, our suppliers, our joint venture partners and the global economy;
and
? the additional risks and uncertainties, many of which are beyond our control,
referred to elsewhere in this quarterly report and in our other
The preceding bullets outline some of the risks and uncertainties that may affect our forward-looking statements. For a full description of risks and uncertainties, see the sections entitled "Risk Factors" and "Environmental Laws and Regulations" of our annual report on Form 10-K for the fiscal year endedSeptember 30, 2019 filed with theSEC and the ASC on SEDAR onJanuary 13, 2020 . Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Any forward-looking statement speaks only as of the date on which it was made and, except as required by law, we disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q, 8-K and any otherSEC filing or amendments thereto should be consulted. 22
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