The following discussion highlights the principal factors that have affected our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described. This discussion contains
forward-looking statements. Please see "Forward-Looking Statements" above for a
discussion of the uncertainties, risks and assumptions associated with these
forward-looking statements. The following discussion and analysis of our
financial condition and results of operations is based on our consolidated
financial statements, which have been prepared on the accrual basis of
accounting, whereby revenues are recognized when earned, and expenses are
recognized when incurred. You should read this management's discussion and
analysis of our financial condition and results of operations in conjunction
with our historical financial statements included elsewhere in this Annual
Report. Our future results could differ materially from our historical results
due to a variety of factors, many of which are out of our control.
20
Overview
GulfSlope Energy, Inc. is an independent crude oil and natural gas exploration
and production company whose interests are concentrated in the United States
Gulf of Mexico federal waters. We are a technically driven company and we use
our licensed 2.2 million acres of advanced three-dimensional ("3-D") seismic
data to identify, evaluate, and acquire assets with attractive economic
profiles. GulfSlope Energy commenced commercial operations in March 2013.
GulfSlope Energy was originally organized as a Utah corporation in 2004 and
became a Delaware corporation in 2012.
We have focused our operations in the United States Gulf of Mexico because we
believe this area provides us with favorable geologic and economic conditions,
including multiple reservoir formations, comprehensive geologic databases,
extensive infrastructure, relatively favorable royalty regime, and an attractive
acquisition market and because our management and technical teams have
significant experience and technical expertise in this geologic province.
Additionally, we licensed 2.2 million acres of advanced 3-D seismic data, a
significant portion of which has been enhanced by new, state-of-the-art
reprocessing and noise attenuation techniques including reverse time migration
depth imaging. We have used our broad regional seismic database and our
reprocessing efforts to generate and high-grade oil and natural gas prospects.
The use of our extensive seismic database, coupled with our ability, knowledge,
and expertise to effectively reprocess this seismic data, allows us to further
optimize our drilling operations and to effectively evaluate acquisition and
joint venture opportunities. We consistently assess our prospect inventory in
order to deploy capital as efficiently as possible. We have given preference to
areas with water depths of 450 feet or less where production infrastructure
already exists, which will allow for any discoveries to be developed rapidly and
cost effectively with the goal to reduce economic risk while increasing returns.
Technical Strategy
We believe that a major obstacle to identifying potential hydrocarbon
accumulations globally has been the inability of seismic technology to
accurately image deeper geologic formations because of overlying massive,
extensive, and complex salt bodies. Large and thick laterally extensive
subsurface salt layers highly distort the seismic ray paths traveling through
them, which often has led to misinterpretation of the underlying geology and the
potential major accumulations of oil and gas. We believe the opportunity exists
for a technology-driven company to extensively apply advanced seismic
acquisition and processing technologies, with the goal of achieving attractive
commercial discovery rates for exploratory wells, and their subsequent appraisal
and development, potentially having a very positive impact on returns on
invested capital. These tools and techniques have been proven to be effective in
deep water exploration and production worldwide, and we are using them to
identify and drill targets below the salt bodies in an area of the shallower
waters of the Gulf of Mexico where industry activity has largely been absent for
over 20 years. In fact, GulfSlope management led the early industry teams in
their successful efforts to discover and develop five new fields below the
extensive salt bodies in our core area during the 1990's, which have produced
over 125 million barrels of oil equivalent.
Our technical approach to exploration and development is to deploy a team of
highly experienced geo-scientists who have current and extensive understanding
of the geology and geophysics of the petroleum system within our core area,
thereby decreasing the traditional timing and execution risks of advancing up a
learning curve. For data licensing, re-processing and interpretation, our
technical staff has prioritized specific geographic areas within our 2.2 million
acres of seismic coverage, with the goal to optimize capital outlays.
Modern 3-D seismic datasets with acquisition parameters that are optimal for
improved imaging at multiple depths are readily available in many of these
sub-basins across our core area, and they can be licensed on commercially
reasonable terms. The application of state-of-the-art seismic imaging technology
is necessary to optimize delineation of prospective structures and to detect the
presence of hydrocarbon-charged reservoirs below many complex salt bodies. An
example of such a seismic technology is reverse time migration, which we believe
to be the most accurate, fastest, and yet affordable, seismic imaging technology
for critical depth imaging available today.
Lease and Acquisition Strategy
Our prospect identification and analytical strategy is based on a thorough
understanding of the geologic trends within our core area. Exploration efforts
have been focused in areas where lease acquisition opportunities are readily
available. We entered into two master 3-D license agreements, together covering
approximately 2.2 million acres and we have completed advanced processing on
select areas within this licensed seismic area exceeding one million acres. We
can expand this coverage and perform further advanced processing, both with
currently licensed seismic data and seismic data to be acquired. We have sought
to acquire and reprocess the highest resolution data available in the potential
prospect's direct vicinity. This includes advanced imaging information to
further our understanding of a particular reservoir's characteristics, including
both trapping mechanics and fluid migration patterns. Reprocessing is
accomplished through a series of model building steps that incorporate the
geometry of the geology to optimize the final image. Our integration of existing
geologic understanding and enhanced seismic processing and interpretation
provides us with unique insights and perspectives on existing producing areas
and especially underexplored formations below and adjacent to salt bodies that
are highly prospective for hydrocarbon production.
We currently hold three leases and we are evaluating the acquisition of
additional leases in our core area. Our original leases have a five-year primary
term, expiring in 2022, 2023 and 2025. BOEM's regulatory framework provides
multiple options for leaseholders to apply to receive extensions of lease terms
under specified conditions. GulfSlope is exploring all options contained in
BOEM's regulatory framework to extend the terms of the leases. Additional
prospective acreage can be obtained through lease sales, farm-in, or purchase.
As is consistent with a prudent and successful exploration approach, we believe
that additional seismic licensing, acquisition, processing, and/or
interpretation may become highly advantageous, in order to more precisely define
the most optimal drillable location(s), particularly for development of
discoveries.
21
We continue to evaluate potential producing property acquisitions in the
offshore Gulf of Mexico, taking advantage of our highly specialized subsurface
and engineering capabilities, knowledge, and expertise to identify attractive
opportunities. Any merger or acquisition is likely to be financed through the
issuance of debt and/or equity securities.
Drilling and other Exploratory and Development Strategies
Our plan has been to partner with other entities which could include oil and gas
companies and/or financial investors. Our goal is to diversify risk and minimize
capital exposure to exploration drilling costs. We expect a portion of our
exploration costs to be paid by our partners through these transactions, in
return for our previous investment in prospect generation and delivery of an
identified prospect on acreage we control. Such arrangements are a commonly
accepted industry method of proportionately recouping pre-drill cost outlays for
seismic, land, and associated interpretation expenses. We cannot assure you,
however, that we will be able to enter into any such arrangements on
satisfactory terms. In any drilling, we expect that our retained working
interest will be adjusted based upon factors such as geologic risk and well
cost. Early monetization of a discovered asset or a portion of a discovered
asset is an option for the Company as a means to fund development or additional
exploration projects as an alternative to potential equity or debt offerings.
However, if a reasonable value were not received from the market at the
discovery stage, then we may elect to retain (subject to lease terms) the
discovery asset undeveloped, until a reasonable offer is received in line with
our perceived market value, or we may elect to seek development partners on a
promoted basis in order to substantially reduce capital development
requirements.
Recent Developments
The Company has been conducting pre-drill operations for the Tau prospect which
is anticipated to be re-drilled to a total depth of approximately 21,000 feet.
The Exploration Plan has been filed with and approved by BOEM and the
Application for Permit to Drill ("APD") has been filed with BSEE and is pending
approval.
The Tau Prospect is located approximately six miles northeast of the Mahogany
Field, discovered in 1993. The Mahogany Field is recognized as the first
commercial discovery below allocthonous salt in the Gulf of Mexico. The Tau
Prospect is defined by mapping of 3D seismic reprocessed by RTM methods.
Drilling operations on the Tau subsalt prospect commenced in September 2018. The
wellbore was designed to test multiple Miocene horizons trapped against a
well-defined salt flank, including equivalent reservoir sands discovered and
developed at the nearby Mahogany Field. The surface location for Tau was located
in 305 feet of water. In January 2019, the Tau well experienced an underground
control of well event and as a result, an insurance claim was filed with the
insurance Underwriters for a net amount of approximately $10.8 million for 100%
working interest. The insurance claim was subsequently approved. On May 13,
2019, GulfSlope announced the Tau No. 1 well was drilled to a measured depth of
15,254 feet, as compared to the originally permitted 29,857 foot measured depth.
Producible hydrocarbon zones were not established to that depth, but hydrocarbon
shows were encountered. Complex geomechanical conditions required two by-pass
wellbores, one sidetrack wellbore, and eight casing strings to reach the depth
of 15,254 feet. Equipment limitations prevented further drilling at that time.
In addition, the drilling rig had contractual obligations related to another
operator. Due to these factors, the Company elected to plug the well in a manner
that would allow for re-entry at a later time.
Outlook
In the first quarter of 2020, the COVID-19 outbreak spread quickly across the
globe. Federal, state and local governments mobilized to implement containment
mechanisms and minimize impacts to their populations and economies. Various
containment measures, such as stay-at-home orders, closures of restaurants and
banning of group gatherings have resulted in a severe drop in general economic
activity, as well as a corresponding decrease in global energy demand.
Additionally, the risks associated with COVID-19 have impacted our workforce and
the way we meet our business objectives. Due to concerns over health and safety,
we have asked the vast majority of our corporate workforce to work remotely as
we begin to plan a process to phase employees to return to the office. Working
remotely has not significantly impacted our ability to maintain operations or
caused us to incur significant additional expenses; however, we are unable to
predict the duration or ultimate impact of these measures. In addition, actions
by the Organization of Petroleum Exporting Countries and other high oil
exporting countries like Russia ("OPEC+") have negatively impacted crude oil
prices. These rapid and unprecedented events have pushed crude oil storage near
capacity and driven prices down significantly. These events have been the
primary cause of the significant supply-and-demand imbalance for oil,
significantly lowering oil pricing. These conditions may continue to exist in
future periods. The Company has evaluated the effect of these factors on its
business and the Company has determined that these factors will most likely
cause a delay in the Company's 2021 drilling program. The Company continues to
monitor the economic environment and evaluate its continuing impact on the
business.
Factors Affecting Comparability of Future Results
Success in Acquiring Oil and Gas Leases or Prospects. As a result of our 3-D
seismic imaging and reprocessing, we currently hold three lease blocks in the
U.S. Gulf of Mexico, which we believe may potentially contain economically
recoverable reserves.
We have No Proved Reserves. We have identified prospects based on available
seismic and geological information that indicate the potential presence of oil
or gas, and we own the drilling and production rights for these prospects. Some
of our current prospects may require additional seismic data reprocessing and
interpretation. Even when properly used and interpreted, seismic data and
visualization techniques are only tools used to assist geoscientists in
identifying structures and hydrocarbon indicators and do not enable the
interpreter to have certainty as to whether hydrocarbons are, in fact, present
in those structures. We do not know if any prospect will contain oil or gas in
sufficient quantities or quality to recover drilling and completion costs or to
be economically viable.
22
Success in the Discovery and Development of Reserves. Because we have no
operating history in the production of oil and gas, our future results of
operations and financial condition will be directly affected by our ability to
discover and develop reserves through our drilling activities.
Oil and Gas Revenue. We have not yet commenced oil and gas production. If and
when we do commence production, we expect to generate revenue from such
production. No oil and gas revenue is reflected in our historical financial
statements.
General and Administrative Expenses. We expect that our general and
administrative expenses will increase in future periods when we commence
drilling operations.
Demand and Price. The demand for oil and gas is susceptible to volatility
related to, among other factors, the level of global economic activity and may
also fluctuate depending on the performance of specific industries. We expect
that a decrease in economic activity, in the United States and elsewhere, would
adversely affect demand for any oil and gas we may produce. Since we have not
generated revenues, these key factors will only affect us if and when we produce
and sell hydrocarbons.
Results of Operations for the Year Ended September 30, 2020 compared to
September 30, 2019
We had no sales during the year ended September 30, 2020 and September 30, 2019.
Impairment of oil and gas properties and capitalized exploration costs for the
year ended September 30, 2020 was $2.4 million compared to $6.0 million for the
year ended September 30, 2019. The impairment of approximately $2.4 million for
the year ended September 30, 2020 resulted from the expiration of leases and the
write-off of related capitalized costs. The impairment costs of approximately
$6.0 million for the year ended September 30, 2019 was primarily due to the
expiration of seven leases blocks, resulting in the write off of all the related
costs. General and administrative expenses were approximately $1.1 million for
the year ended September 30, 2020 compared to approximately $1.5 million for the
year ended September 30, 2019. This decrease in general and administrative
expenses of approximately $0.4 million was primarily due to a decrease in
consulting, accounting and legal fees. Interest expense was approximately
$38,000 for the year ended September 30, 2020 net of approximately $2.8 million
of interest expense capitalized to unevaluated oil and natural gas properties,
as compared to $1.8 million for the year ended September 30, 2019 net of
approximately $1.1 million of interest capitalized to unevaluated oil and
natural gas properties. Loss on extinguishment of debt was approximately $1.5
million for the year ended September 30, 2020 compared to $5.1 million for the
year ended September 30. 2019. Gain on derivative financial instrument was $2.6
million for the year ended September 30, 2020 compared to a gain of
approximately $0.6 million for the year ended September 30, 2019.
We had a net loss of approximately $2.4 million for the year ended September 30,
2020, compared to a net loss of $13.7 million for the year ended September 30,
2019. The decrease in net loss of approximately $11.6 million was primarily
attributable to the aforementioned $6.0 million impairment of oil and natural
gas properties and the approximately $5.1 million loss on extinguishment of
debt.
The basic loss per share for the year ended September 30, 2020 was $0.00,
compared to a net loss per share of $0.01 for the year ended September 30, 2019.
For the year ended September 30, 2020, cash used in operating activities totaled
$0.4 million compared to $6.4 million used in operating activities in fiscal
2019. The decrease in cash used in operating activities is primarily due to a
lower level of activity in 2020 compared to 2019.
For the year ended September 30, 2020, cash provided by investing activities was
$5.1 million compared to $10.6 used in investing activities in fiscal 2019.
Insurance proceeds received were approximately $7.5 million and spending for
exploration wells in process was approximately $2.6 million in fiscal 2020.
Insurance proceeds received were approximately $0.9 million and spending for
exploration wells in process was approximately $11.4 million in fiscal 2019.
For the year ended September 30, 2020, cash used in financing activities was
approximately $2.7 million compared to approximately $12.5 million cash provided
by financing activities for the year ended September 30, 2019. For fiscal 2020,
approximately $0.5 million of proceeds from promissory notes were received and
$3.2 million of promissory notes were paid. For fiscal 2019 approximately $13.3
million of proceeds from promissory notes was received and approximately $0.7
million was paid on notes payable and deferred loan costs.
As of September 30, 2020, the Company's cash balance was approximately $3.2
million compared to a cash balance of approximately $1.1 million as of September
30, 2019. The Company's fiscal 2020 cash increase of approximately $2.1 million
was primarily due to its net cash used in operating activities of approximately
$0.4 million, cash received in investing activities of approximately $5.1
million and cash used in financing activities of approximately $2.7 million.
23
Liquidity and Capital Resources
The Company has incurred accumulated losses for the period from inception to
September 30, 2020, of approximately $58.0 million, and has negative working
capital of approximately $10.3 million. For the year ended September 30, 2020,
the Company has generated losses of approximately $2.4 million and negative cash
flows from operations of approximately $0.4 million. As of September 30, 2020,
we had $3.2 million of cash on hand. The Company estimates that it will need to
raise a minimum of $10 million to meet its obligations and planned expenditures
through December 2021. The $10 million is comprised primarily of drilling
capital expenditures as well as general and administrative expenses. It does not
include any amounts due under outstanding debt obligations, which amounted to
$12.0 million of current principal and interest as of September 30, 2020. The
Company plans to finance its operations through equity and/or debt financings,
and strategic transactions to include farm-outs, asset sales or mergers. Our
policy has been to periodically raise funds through the sale of equity
securities on a limited basis, to avoid undue dilution while at the early stages
of execution of our business plan. Short term needs have been historically
funded through loans from executive management. There are no assurances that
financing will be available with acceptable terms, if at all. If the Company is
not successful in obtaining financing, operations would need to be curtailed or
ceased. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
For the year ended September 30, 2020, the Company used approximately $0.4
million of net cash in operating activities, compared with approximately $6.4
million of net cash used in operating activities for the year ended September
30, 2019. For the year ended September 30, 2020, cash provided by investing
activities was approximately $5.1 compared to approximately $10.6 million of
cash used in investing activities for the year ended September 30, 2019. For the
year ended September 30, 2020, we used approximately $2.7 million of net cash in
financing activities, compared with approximately $12.5 million received in
financing activities for year ended September 30, 2019.
We will need to raise additional funds to cover expenditures planned for 2021,
as well as any additional, unexpected expenditures that we may encounter. Future
equity financings may be dilutive to our stockholders. Alternative forms of
future financings may include preferences or rights superior to our common
stock. Debt financings may involve a pledge of assets and will rank senior to
our common stock. We have historically financed our operations through private
equity and debt financings. We do not have any credit or equity facilities
available with financial institutions, stockholders or third-party investors,
and will continue to rely on best efforts financings. The failure to raise
sufficient capital could cause us to cease operations, or the Company would need
to sell assets or consider alternative plans up to and including restructuring.
We are party to various contractual obligations such as our office lease
obligation that is disclosed in the financial statements. We do not have any
other material contractual obligations Other immaterial obligations may be
reflected in our accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2020.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The critical accounting estimates include impairment considerations
of long lived assets including oil and natural gas properties and assumptions
used in valuing our derivative financial instruments.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases," and in March 2019,
the FASB issued ASU No. 2019-01, "Leases: Codification Improvements", which
updated the accounting guidance related to leases to increase transparency and
comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing
arrangements. They also clarify implementation issues. These updates are
effective for public companies for annual periods beginning after December 15,
2018, including interim periods therein. Accordingly, the standard was adopted
by the Company on October 1, 2019. The standard was applied utilizing a modified
retrospective approach and is reflected in these financial statements. See Note
13.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation
(Topic 718), Improvements to Nonemployee Share-based Payments ("ASU 2018-07").
This ASU expands the scope of Topic 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. The amendments
in this ASU are effective for public companies for fiscal years beginning after
December 15, 2018, including interim periods within that fiscal year. The
Company adopted this new standard effective October 1, 2019 with no material
impact to stock compensation issued to non-employees during the year ended
September 30, 2020.
The Company has evaluated all other recent accounting pronouncements and
believes that none of them will have a significant effect on the Company's
financial statements.
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GULFSLOPE ENERGY, INC 