Forward-looking Statements
The following discussion and analysis should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements and the notes
to those financial statements included in Item 1 of this Quarterly Report on
Form 10-Q. The following discussion contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). These forward-looking statements involve risks,
uncertainties and assumptions. If the risks or uncertainties materialize or the
assumptions prove incorrect, our results may differ materially from those
expressed or implied by such forward-looking statements and assumptions. All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, such as those statements that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future. These statements are based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate in the circumstances. Known material risks that may
affect our financial condition and results of operations are discussed in Item
1A, Risk Factors of our Annual Report on Form 10-K for the year ended
Overview
We have historically operated our business with working capital deficits and
these deficits have been funded by equity and debt investments and loans from
management. As of
Competitive Advantages
Experienced management. Our management team has a track record of finding,
developing and producing oil and natural gas in various hydrocarbon producing
basins including the U. S.
Advanced seismic image processing. Commercial improvements in
17
Industry leading position in our core area. We have licensed 2.2 million acres
of
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
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
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
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.
We continue to evaluate potential producing property acquisitions in the
offshore
18
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 of 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.
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 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 our 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
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 Company continues to be active in the evaluation of potential mergers and producing property acquisitions that it deems to be attractive opportunities. Any such merger or acquisition is likely to be financed through a combination of debt and equity.
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
Significant Accounting Policies
The Company uses the full cost method of accounting for its oil and gas exploration and development activities. Under the full cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities are capitalized on a country-by-country basis into a single cost center ("full cost pool"). Such costs include property acquisition costs, geological and geophysical ("G&G") costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells. Overhead costs, which includes employee compensation and benefits including stock-based compensation, incurred that are directly related to acquisition, exploration and development activities are capitalized. Interest expense is capitalized related to unevaluated properties and wells in process during the period in which the Company is incurring costs and expending resources to get the properties ready for their intended purpose. For significant investments in unproved properties and major development projects that are not being currently depreciated, depleted, or amortized and on which exploration or development activities are in progress, interest costs are capitalized. Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool.
19
Proved properties are amortized on a country-by-country basis using the units of production method ("UOP"), whereby capitalized costs are amortized over total proved reserves. The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization ("DD&A"), estimated future development costs (future costs to access and develop proved reserves), and asset retirement costs, less related salvage value.
The costs of unproved properties and related capitalized costs (such as G&G costs) are withheld from the amortization calculation until such time as they are either developed or abandoned. Unproved properties and properties under development are reviewed for impairment at least quarterly and are determined through an evaluation considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately upon determination that a well is dry and amortized accordingly. In countries where a reserve base has not yet been established, impairments are charged to earnings.
Companies that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for the preceding twelve month period. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized. If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in a lower depreciation, depletion and amortization rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
The Company capitalizes exploratory well costs into oil and gas properties until
a determination is made that the well has either found proved reserves or is
impaired. If proved reserves are found, the capitalized exploratory well costs
are reclassified to proved properties. The well costs are charged to expense if
the exploratory well is determined to be impaired. The Company is currently
evaluating one well for proved reserves and capitalized exploratory well costs
remain pending the outcome of exploration activities involving the drilling of
the Tau No. 2 well (twin well). Accordingly, these costs are included as
suspended well costs at
As of
Property and equipment are carried at cost. We assess the carrying value of our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
There has been no change to our critical accounting policies as included in our
annual report on Form 10-K as of
Three Months Ended
There was no revenue during the three months ended
20
Liquidity and Capital Resources
The Company has incurred accumulated losses for the period from inception to
For the three months ended
The Company will need to raise additional funds to cover planned expenditures, 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.
Off-Balance Sheet Arrangements
None.
© Edgar Online, source