The Division of Oil and Gas will provide the applicant a letter certifying that the conditions for the tax credit have been met, and that letter can be submitted with other needed documentation to the Severance Tax Section of the Department of Revenue.
There is no assurance that these tax credits will continue.
Company Operations
The Company is engaged in the business of oil and gas exploration and the production of oil and gas. The Company is focusing its efforts on re-entering existing oil and gas wells that previously produced oil and gas or are producing oil and gas at a fractional output compared to when the oil and gas wells first came into production and perform a workover program on the well. Workover activities include one or more of a variety of remedial operations on a producing well or inactive well to try to increase production. A workover program varies from well to well and can cost from a few thousand dollars to as much as fifty thousand dollars.
The implementation of our business plan will require significant capital. We do not have this capital and as a result, we will require additional financing to develop our leasehold obligations. We may use debt or equity to fund our ongoing operations. There can be no assurance that any financing will be available, and if available, will be on terms and conditions acceptable to the Company. If we rely on equity financing, our shareholders will experience significant dilution. If we rely on debt financing, we may not be able to satisfy our debt obligations.
Identification of leasehold interests.
The Company has chosen to focus its operations in the state of Kentucky. At this time, we do not believe that we have sufficient resources to expand our operations beyond the state of Kentucky. Rather our focus will be on developing the leaseholds acquired to date. We may however acquire additional leaseholds either within or outside of the state of Kentucky. However, it is unlikely that we will be able to exploit these leaseholds without a significant capital infusion.
Drilling opportunities in Kentucky.
Kentucky has over 13,000 abandoned oil and gas wells with an estimated 18,000 producing oil wells and 13,000 producing gas wells. The majority of those producing wells are in the "stripper" category, having daily production rates of 60 million Btu or less (10 barrels of oil or 60,000 cubic feet of gas). Many wells are reported with initial daily production rates in excess of 580 million Btu (100 barrels of oil or 580,000 cubic feet of gas). This gives the Company a market of over 44,000 oil and gas wells to select targets for its workover model.
A workover program varies from well to well and Company can incur costs from a few thousand dollars to as much as fifty thousand dollars.
Workover programs could entail any one or more of the following workover activities, depending upon the workover required to stimulate or enhance the well to produce oil or gas:
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·
drill out the plugs,
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·
drill the well deeper to a new producing formation,
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·
acid stimulation to open up the producing formation,
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·
replace or install down hole pump, rod and tubing,
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replace or install well casing
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·
fracture the producing formation,
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replace or install pump jack, collection tank, and surface equipment
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·
drill an offset well, or
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surface work such as drill or well head pad and access roads, fences, etc.
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Not all wells that have workover programs completed will be successful and the Company may incur costs in an attempt to stimulate or produce production of oil or gas. Should a workover program be unsuccessful, the Company will incur costs to abandon the well, which include plugging, and filling the well as well as surface reclamation of the landowners property back to original condition. The cost of abandoning a well ranges from five hundred to five thousand dollars.
The State of Kentucky requires a bond to be posted for each well should the Company fail to perform with the proper plugging and abandonment of any well. Bond deposits vary by the well depth and are as follows:
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Well Depth
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Amount of Bond
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0 to 500 feet
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$500
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501 feet to 1,000 feet
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$1,000
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1,001 feet to 1,500 feet
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$1,500
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1,501 feet to 2,000 feet
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$2,000
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2,001 feet to 2,500 feet
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$2,500
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2,501 feet to 3,000 feet
|
$3,000
|
3,001 feet to 3,500 feet
|
$3,500
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3,501 feet to 4,000 feet
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$4,000
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4,001 feet and deeper
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$4,500
|
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The State of Kentucky allows any qualified well operator, in lieu of the individual bond, to file with the department a blanket bond according to the following tiered structure:
1.
One (1) to twenty-five (25) wells require a ten thousand dollar ($10,000) bond;
2.
Twenty-six (26) to one hundred (100) wells require a twenty-five thousand dollar ($25,000) bond;
3.
One hundred one (101) to five hundred (500) wells require a fifty thousand dollar ($50,000) bond; and
4.
Five hundred one (501) or more wells require a one hundred thousand dollar ($100,000) bond.
The Company will look to identify Oil and Gas Leases that had or have oil and gas wells drilled on the owners property whereby the oil and gas wells have been shut-in due to poor performance or at the time of shut-in, it was uneconomical to complete the oil or gas well for production. The target Oil and Gas Leases selected for acquisition should have the potential to be worked over or stimulated to produce oil or gas at costs, after the cost of the workover below the sales price of the oil or gas.
Subject to sufficient financing, the Companys objective will be to identify and acquire oil and gas properties that have the potential for natural gas production. Due to the low sales price of natural gas, many landowners and natural gas producers are selling their gas leases at discounted prices to entice oil operators to drill for oil or workover abandoned or poor oil producing wells to take advantage the current high selling price of oil.
Once the property has been identified, the Companys current Landman (Michael Grubb), or an independent consultant approaches the owner of the property to secure an Oil and Gas Lease with the landowner or approaches the current Operator of the Oil and Gas Lease to negotiate an agreement to allow the Company to perform a workover program.
If there is no current Operator on the property, the Company will enter into an Oil and Gas Lease agreement with the landowner. In consideration of the rights granted to the Company, the landowner generally receives e a standard rate royalty of 1/8 or 12.5% of the sales proceeds of such, less 1/8 (12.5%) of applicable production and transportation costs and taxes, including, without limitation, mineral severance taxes, based on the field price received by the Company for oil or gas sold to a purchaser. There may be some instances where the Company may negotiate a non-standard royalty, which may be less or higher than the standard royalty rate of 1/8.
If there is an existing Operator for the Oil and Gas Lease, the Companys Landman approaches the Operator of the Property to solicit a workover program with the Operator. In the case that the Operator accepts the Companys solicitation for a rework program, the Company will either enter into a Farmin workover program with the Operator or the Operator will assign the Oil and Peter Matousek is an internationally seasoned consultant and entrepreneur with a European background. Formal education includes attendance at University of Maryland University College and Warner Pacific College, where he earned degrees in Associates of Arts and Bachelors of Business Administration.
He has been a proud member of the United States Navy and is a Veteran of Foreign War having recently served in Operation Iraqi Freedom. The Army Achievement Medal, Navy Achievement Medal and Honorable Discharge are among his many awards and recognition.
Professionally, Matousek has demonstrated both passion and ability, working extensively with the public markets for companies throughout the United States and Canada. During this time, he has cultivated relationships with shareholders, private investors, venture capital firms and investment advisors, in addition to a wealth of business professionals and strategic partners worldwide.
With over 20 years of experience in the financial industry, Matousek has utilized his in-depth knowledge and skills to foster unparalleled success in the public arena. He has held directorships, key officer positions, and has represented numerous companies in the capacity of Investor & Public Relations. His ability to communicate in a number of languages and to understand other cultures and traditions has enabled Peter to establish lasting relationships and effective synergies.
He has also has been a frequent contributor to charitable organizations, such as Ministries to Mexico and recently contributed to the erection of a War Heroes Memorial.
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Gas Lease to the Company in consideration for an Overriding Royalty and in some cases, plus a cash consideration. Typical Overriding Royaltys range from 2.5% to as much as 25% depending upon the current production on the Oil and Gas Lease and the potential for Oil and Gas production.
A typical Oil and Gas Lease grants the Company the exclusive right to explore the land (Property) covered by the Oil and Gas Lease by geophysical and other methods, and to operate same for and produce there from all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced therewith ("Oil and Gas"); and the exclusive right to inject gas, water, brine and other fluids into subsurface strata; and rights of way and easements for laying pipelines, telephone, telegraph and power lines, and the right to erect or install power stations, compressor stations, roadways, storage tanks or other storage facilities, separators and any fixtures and other structures thereon for producing, treating, processing, maintaining, storing and caring for the oil and gas; and oil and gas from other properties and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas, and the injecting of gas, water, brine and other fluids into subsurface strata.
The Company may, at any time and from time-to-time pool all or part of the Property with other properties to create one or more drilling units. The production of Oil or Gas from such a pooled unit is generally treated as though the production occurred from a well on the Property, except the Lessor shall be entitled to royalty only on its pro-rata share of such production.
It is intended that the Oil and Gas Lease also include all lands and interests therein of Lessor, which are contiguous to or in the vicinity of the Property
Usually the Oil and Gas Lease will remain in force for a term of one year from the date executed and for as long thereafter as Oil and/or Gas is produced from the Property, or as long as operations for drilling are continued or as long as operations are continued for injection of gas, water, brine and other fluids into subsurface strata. In the case of our four Oil and Gas Leases, three of the Oil and Gas Leases (Tillet, Gross and Neely) have a 6 month term to commence a workover program or lose the lease due to forfeiture. The Nelson Lease has a one year term to commence a workover program.
When a well is worked over, drilled, an access road is constructed to the well site or upgraded. This results in surface damages that the surface owner is compensated for the loss of property. Timber may also be cut down during construction, the Company may cut and stack the timber at a location convenient for the surface owner to sell or a value may be assessed on the timber and the surface owner compensated.
Under Kentucky law, the state Division of Oil and Gas can force a "pooling" of the oil and gas interests of a landowner with the interests of other landowners where the size or condition of lands does not allow the neighbor to find a drill site while respecting distance limits from property lines. A mineral owner has five options in the context of forced pooling. They can:
1.
Lease their mineral interest.
2.
Sell their mineral interest.
3.
Participate materially in the development of the gas field.
4.
Be a non-consenting owner.
5.
Protest forced pooling.
A rework well or producing well requires maintenance by a company representative sometimes referred to as a pumper to insure the well(s) produce at their capacity and to monitor production. As per the terms of the lease, a gate may be installed by the well Operator to prohibit access to the Property by unauthorized personnel. The gate is typically locked and a key may be provided to the landowner. The well may require periodic maintenance by a service rig during the life of the well. Surface equipment includes a wellhead, gas meter, storage tank (for oil wells), separator, and pipeline. Lease is held-by-production during the life of the well(s).
When the well is no longer considered productive, the Company is required to plug the well under the direction of the Division of Oil and Gas inspector for the State. This involves placing cement plugs at various depths to isolate producing intervals, protect fresh water aquifers and coal seams. The site is reclaimed and vegetation is established to prevent erosion from the well site. After all wells on a lease are plugged, the lease is terminated and returned to the mineral owner.
After completion and testing of a workover program, the well is put into production. As in the case of oil, the oil is pumped into a 100 BBL or 200 BBL tank(s). The pumper inspects the well on a daily or regular routine basis and monitors the production of oil. As the tank(s) nears capacity, the pumper will make arrangements for pickup of the oil for delivery to the Purchaser. Broker/truckers like Barrett, Coomer, Regal, and Kentucky Oil Gathering gather the oil and deliver the oil to either a gathering station or refinery, such as the Somerset Energy Refinery in Somerset, Kentucky or the Mobil Refinery in Ashland, Kentucky. The cost of hauling the oil to the refinery varies by distance from the well to the refinery and can range from $4 to $6 per BBL. The cost of the freight charge is borne by the Company. Oil collected or shipped during the month is paid by the Purchaser in the following month. The price paid for the produced oil is based on the average monthly market price.
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Conflicts of Interest
Management is not required to commit their full time to our affairs and, accordingly, such persons may have conflicts of interest in allocating management time among various business activities. Our affiliates, officers, and directors may engage in other business activities similar and dissimilar to those we are engaged in. To the extent that management engages in such other activities, they will have possible conflicts of interest in diverting opportunities to other companies, entities, or persons with which they are or may be associated or have an interest, rather than diverting such opportunities to us. As no policy has been established for the resolution of such a conflict, we could be adversely affected should management choose to place their other business interests before ours. No assurance can be given that such potential conflicts of interest will not cause us to lose potential opportunities. Management may become aware of investment and business opportunities, which may be appropriate for presentation to us as well as the other entities with which they are affiliated. Management may have conflicts of interest in determining which entity a particular business opportunity should be presented. Accordingly, as a result of multiple business affiliations, management may have similar legal obligations relating to presenting certain business opportunities to multiple entities. In addition, conflicts of interest may arise in connection with evaluations of a particular business opportunity by the board of directors with respect to the foregoing criteria. There can be no assurances that any of the foregoing conflicts will be resolved in our favor. We may consider Business Combinations with entities owned or controlled by persons other than those persons described above. There can be no assurances that any of the foregoing conflicts will be resolved in our favor.
Investment Company Act and Other Regulation
We may participate in a Business Combination by purchasing, trading, or selling the securities of such Target Business. We do not, however, intend to engage primarily in such activities. Specifically, we intend to conduct our activities so as to avoid being classified as an "investment company" under the Investment Company Act of 1940 (the "Investment Act"), and therefore to avoid application of the costly and restrictive registration and other provisions of the Investment Act, and the regulations promulgated thereunder.
Employees
Other than our officers and directors, we have no employees. We outsource all of our business operations as follows:
Executive, Financial and Operations:
Mr. Jerry G. Mikolajczyk was a key consultant who identified the opportunities available to us in Kentucky and helped negotiate our contracts and assisted the Company with its financial reporting over the last year. Mr. Mikolajczyk consulted to the Company, through an agency, Comtax Services, Inc., from April 2010 to May 31, 2011. On May 31, 2011, Mr. Mikolajczyk was appointed as our President, Chief Executive Officer (CEO) and our Chief Financial Officer (CF0). Mr. Mikolajczyk was also appointed a director of the Company on May 31, 2011. Mr. Mikolajczyk resigned as an officer of Comtax Services, Inc. on May 31, 2011.
Mr. Mikolajczyk (age 58) has had an extensive career in the oil and gas, construction, and mining industries. He has worked for Fortune 500 companies such as BP Resources (British Petroleum), SCI Group of Companies, Husky Oil, Syncrude, Bechtel, Guy F. Atkinson and INCO. He has worked as a heavy equipment operator on surface and open pit mining operations. After completing his Business Administration diploma, he went on to obtain his professional designation as a Certified General Accountant (CGA) and Certified Internal Auditor (CIA). As a professional accountant and auditor, he has been involved with planning, designing, and testing operations to ensure that the operations are efficient and effective. Recently he was awarded CFO of the Year for the application of his knowledge and expertise in a turnaround assignment for the Santa Clara Valley Transportation Authority (VTA), a $3.3 Billion asset transportation authority in Silicon Valley (San Jose, California). Jerry has an aggregate of 40 years of experience, which include:
·
Twenty-two (22) years of C-Level experience.
·
Ten (10) years in the Oil and Gas Industry evaluating and analyzing systems and operations to improve effectiveness, increase profits, and streamline operations without compromising controls.
·
Eighteen (18) years in the Mining Industry with operational experience in tar sands, copper, gold, limestone and precious stones. Mines were both open pit and deep rock (shaft) as well as alluvial and placer mining operations.
·
Twenty Seven (27) years of experience in the Construction Industry ranging in Oil and Gas, Mining, Transportation and Housing sectors. Specialty is Project Control and Reporting.
16
Mr. Mikolajczyk, through consulting agencies, has provided various consulting services to clients, which included, but not limited to:
·
Global Power and Water Industries, Inc.
·
VTA (Santa Clara Valley Transportation Authority)
·
MineCore International, Inc.
·
Platinum Works, Inc.
·
Blue Green Corp
·
J.M.E.L. International, Inc.
·
Nova Petrochemicals
·
BP Resources
In addition to providing financial and operations consulting services to the Company, Mr. Mikolajczyk is also consulting to Shirelle Holdings, Inc. developing the Carter Creek Iron Ore project.
Field Operations:
Mr. Michael Grubb is our Manager of Field Operations in Kentucky. Michael was instrumental in negotiating the four Oil and Gas Leases and completing our first workover, well number XUN001, for the Company. Michael has over 11 years of oil and gas industry experience. He has been involved in various aspects of the oil and gas industry including duties as landman, oil and gas well completions, reclamation of properties, oil and gas well drilling, surveying, geological map reading, evaluating geological formations, well reading (well logs) and interpretation, to being a heavy equipment operator. He has managed field workers and oil and gas contractors from drilling contractors through to well completions and well workovers. Michael recently consulted to Americas Energy Company, Sequachee Oil and Gas LLC, KYTX OIL and Gas and Consolidated Oil and Gas/ Sand Hill Energy. Michael managed Grubb Industrial and Trucking, a family owned and operated business until the company was sold recently.
Finance:
Mr. Wayne St. Cyr is our Executive Vice President, Marketing, and Strategic Development. Waynes duties include the planning and implementation of the financing for the workover program. Wayne comes to us leaving a distinguished 10 year career with RBS Group (Royal Bank of Scotland) which includes a six time recipient of the President's Award for exceeding company objectives. During his tenure at RBS/Citizens Financial Group, he was responsible for developing the key alliances with Citizens Bank. Waynes education includes an Associates degree in Business Administration and a Bachelor of Science degree in Marketing.
In addition to providing marketing and strategic development consulting services to the Company, Wayne is also consulting to Shirelle Holdings, Inc. developing the Carter Creek Iron Ore project.
Availability of SEC Filings:
You may read and copy any materials we file with the U.S. Securities and Exchange Commission (the SEC) at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. You can obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.
Website/Available Information
Our website can be found at www.xunenergy.com. As of the date of filing this Annual Report on Form 10-K, our website is under construction and being updated. Once completed, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed with or furnished to the SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) can be accessed free of charge on our web site at www.xunenergy.com under the Shareholder/Financial section of our web site within the SEC Filings subsection as soon as is reasonably practicable after we electronically file such material with, or otherwise furnish it to, the SEC.
Information contained on or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report or any other filing that we make with the SEC.
17
Item 1a. Risk Factors
The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business could be materially adversely affected. In such case, the Company may not be able to proceed with its planned operations and your investment may be lost entirely.
RISK FACTORS
Risks Related to Our Business
We have extremely limited assets and ceased generating revenue.
We have little assets and have had limited revenues since inception. We will not receive revenues until we complete funding through debt, equity, or Joint Venture financing.
We will, in all likelihood, sustain operating expenses without corresponding revenues, at least until the consummation of a debt, equity, or Joint Venture financing or consummate a business combination with a profitable business. This may result in our incurring a net operating loss that will increase unless we consummate a business combination with a profitable business. We cannot assure you that we can identify a suitable business opportunity and consummate a business combination, or that any such business will be profitable at the time of its acquisition by the Company or ever.
We will need to raise additional capital.
We will require additional financing. Any debt or equity financing may be dilutive to shareholders, and debt financing, if available, would increase expenses, and may involve restrictive covenants. We may be required to raise additional capital, at times and in amounts, which are uncertain, especially under the current capital market conditions. Under these circumstances, if we are unable to acquire additional capital or are required to raise it on terms that are less satisfactory than desired, it may have a material adverse effect on our financial condition.
Risks related to our business operations:
Environmental and Occupational Regulations will impact our operations
.
We are subject to various federal, state, provincial, and local international laws and regulations concerning occupational safety and health as well as the discharge of materials into, and the protection of, the environment. Environmental laws and regulations relate to, among other things:
|
·
assessing the environmental impact of drilling, workover or construction activities;
|
·
the generation, storage, transportation and disposal of waste materials;
|
·
the emission of certain gases into the atmosphere;
|
·
the monitoring, abandonment, reclamation and remediation of well and other sites, including sites of former operations; and
|
·
the development of emergency response and spill contingency plans.
|
The costs of environmental protection and safety and health compliance are significant. Compliance with environmental, safety and health initiatives can be costly. There is no assurance that we will be able to comply with these regulations. If we cannot comply with these regulations, we will be forced to cease all operations in which case you will lose your entire investment. We cannot predict with any reasonable degree of certainty our future exposure concerning such matters.
18
We are subject to exploration and production regulation
Our oil and gas operations are subject to various federal, state, provincial, tribal, and local laws and regulations. These laws and regulations relate to matters that include, but are not limited to:
|
·
acquisition of seismic data;
|
·
location of wells;
|
·
drilling and casing of wells;
|
·
hydraulic fracturing;
|
·
well production;
|
·
spill prevention plans;
|
·
emissions and discharge permitting;
|
·
use, transportation, storage and disposal of fluids and materials incidental to oil and gas operations;
|
·
surface usage and the restoration of properties upon which wells have been drilled;
|
·
calculation and disbursement of royalty payments and production taxes;
|
·
plugging and abandoning of wells; and
|
·
transportation of production.
|
Our operations also are subject to conservation regulations, including the regulation of the size of drilling and spacing units or proration units; the number of wells that may be drilled on the Oil and Gas Lease and the unitization or pooling of oil and gas properties. In the United States, some states allow the forced pooling or integration of tracts to facilitate exploration, while other states rely on voluntary pooling of lands and leases, which may make it more difficult to develop oil and gas properties. In addition, state conservation laws generally limit the venting or flaring of natural gas and impose certain requirements regarding the ratable purchase of production. The effect of these regulations is to limit the amounts of oil and gas we can produce from our wells and to limit the number of wells or the locations at which we can drill.
Public policy, which includes laws, rules and regulations, can change
Our operations are generally subject to federal laws, rules and regulations. In addition, we are also subject to the laws and regulations of various states and local governments. Pursuant to public policy changes, numerous government departments and agencies have issued extensive rules and regulations binding on the oil and gas industry and its individual members, some of which carry substantial penalties for failure to comply. Changes in such public policy have affected, and at times in the future could affect, our operations. Political developments can restrict production levels, enact price controls, and change environmental protection requirements, and increase taxes, royalties and other amounts payable to governments or governmental agencies. Existing laws and regulations can also require us to incur substantial costs to maintain regulatory compliance. Our operating and other compliance costs could increase further if existing laws and regulations are revised or reinterpreted or if new laws and regulations become applicable to our operations. Although we are unable to predict changes to existing laws and regulations, such changes could significantly affect our profitability, financial condition, and liquidity, particularly changes related to hydraulic fracturing, income taxes and climate change as discussed below.
Hydraulic Fracturing
The U.S. Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and natural-gas industry in the hydraulic-fracturing process. Currently, regulation of hydraulic fracturing is primarily conducted at the state level through permitting and other compliance requirements. This legislation, if adopted, could establish an additional level of regulation and permitting at the federal level.
Environmental matters and costs can be significant
As an operator of oil and gas properties, we are subject to various federal, state, and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on us for the cost of pollution clean-up resulting from our operations in affected areas. Any future environmental costs of fulfilling our commitments to the environment are uncertain and will be governed by several factors, including future changes to regulatory requirements. There is no assurance that changes in or additions to public policy regarding the protection of the environment will not have a significant impact on our operations and profitability.
19
Insurance does not cover all risks
Exploration, development, production, and processing of oil and gas can be hazardous and involve unforeseen occurrence including, but not limited to blowouts, cratering, fires, and loss of well control. These occurrences can result in damage to or destruction of wells or production facilities, injury to persons, loss of life, or damage to property or the environment. We do not maintain insurance at this time against losses or liabilities in accordance with customary industry practices. However, insurance against all operational risks is not available to us.
We have generated limited revenues from operations. We have a history of losses and losses are likely to continue in the future.
We have generated limited revenues from operations. Cumulative losses as of May 31, 2011 totaled ($715,592). We have incurred significant losses in the past and we will likely continue to incur losses in the future unless our workover program proves successful. Even if our workover program produces oil and gas, there can be no assurance that we will be able to commercially exploit these resources, or generate sufficient revenues to operate profitably.
We will require additional financing to continue our workover operations.
We will require significant working capital to continue our current workover program. There can be no assurance that we will be able to secure additional funding to meet our objectives or if we are able to identify funding sources, that the funding will be available on terms acceptable to the Company. Should this occur, we will have to significantly reduce our workover programs, which will limit our ability to secure additional equity participation in acquisitions of oil and gas leases or in various joint ventures.
There are no confirmed proven reserves of oil and gas reservoirs on any properties from which we may derive any financial benefit.
Neither the Company nor any independent petroleum geologist has confirmed that our leasehold interests can be commercially developed. In order to carry out additional workover and/or exploration programs of any potential oil or gas deposits, we will require substantial additional funding.
We have no history as a company engaged in oil and gas development or exploration.
We have no history of earnings or cash flow from oil and gas operations. If we are able to proceed to production, commercial viability will be affected by factors that are beyond our control such as the particular attributes of the deposit, the fluctuation in the prices of oil and gas, the cost of construction and operating an oil or gas well, prices, and refining facilities, the availability of economic sources for energy, government regulations including regulations relating to prices, royalties, restrictions on production, quotas on exploration, as the costs of protection of the environment.
If our exploration costs are higher than anticipated, then our profitability will be adversely affected.
We are currently proceeding with workover and/or exploration of our leasehold interests on the basis of estimated workover/exploration costs. If our workover/exploration costs are greater than anticipated we may be forced to terminate our operations until such time as we generate additional revenues to fund our operations. Factors that could cause workover/exploration costs to increase are adverse weather conditions, difficult terrain, unknown or unexpected results when we re-enter a well, increased government regulation and shortages of qualified personnel.
We face many operating hazards.
The development and operation of an oil or gas well involves many risks, which even a combination of experience, knowledge and careful evaluation may not be able to overcome. These risks include, among other things, ground fall, flooding, environmental hazards, and the discharge of toxic chemicals, explosions and other accidents. Such occurrences may result in work stoppages, delays in production, increased production costs, damage to or destruction of mines and other producing facilities, injury or loss of life, damage to property, environmental damage, and possible legal liability for such damages.
We do not maintain liability insurance.
We do not maintain liability insurance. As such, if we are found liable for any action, whether intentional or unintentional, we will be required to satisfy the liability with our own funds. Currently we have nominal assets and any monetary award would likely result in the close of our operations. Even assuming a significant increase in our assets and we secure liability insurance, the amount of the coverage may be insufficient to cover to insure against any award. Since the Company may not be able, or may elect not to insure, this may result in a material adverse change in the Companys financial position. The nature of these risks is such that liabilities may exceed policy limits, in which event the Company would incur substantial uninsured losses.
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There may be insufficient oil and gas reserves to develop any of our properties and our estimates may be inaccurate.
There is no certainty that any expenditures made in the workover/exploration of any properties will result in discoveries of commercially recoverable quantities of oil or gas. Most workover/exploration projects do not result in the discovery of commercially extractable deposits of oil or gas and no assurance can be given that any particular level of recovery will in fact be realized or that any identified leasehold interest will ever qualify as a commercially developed. Estimates of reserves, deposits, and production costs can also be affected by such factors as environmental regulations and requirements, weather, unexpected or unknown results when we re-enter a well, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations, and work interruptions.
Short term factors relating to reserves, such as the need for orderly development of the wells may also have an adverse effect on our workover/exploration, drilling and on the results of operations. There can be no assurance the production of insignificant amounts of oil can be duplicated in a larger exploration program. Material changes in estimated reserves, workover/drilling costs may affect the economic viability of any project.
We have no proven reserves.
All of our leasehold interests are without known bodies (reserves) of commercial oil or gas. Development of these properties will follow only upon obtaining satisfactory workover/exploration results. The long-term profitability of the Companys operations will be in part directly related to the cost and success of its workover/exploration and development programs. Oil and gas workover/exploration and development are highly speculative businesses, involving a high degree of risk. Few properties, which are explored, are ultimately developed into producing oil and gas fields. There is no assurance that our workover/exploration and development activities will result in any discoveries of commercial quantities of oil and gas. There is also no assurance that, even if commercial quantities of oil or gas are discovered, a well can be brought into commercial production. Production/discovery of oil and gas is dependent upon a number of factors, not the least of which is the technical skill of the workover/exploration personnel involved. The commercial viability of a well is also dependent upon a number of factors, many of which are beyond the Companys control, such as worldwide economy, the price of oil and gas, government regulations, including regulations relating to royalties, allowable production, and environmental protection.
During our operations we may experience certain unanticipated conditions may arise or unexpected or unusual events may occur, including fires, floods, or earthquakes. It is not always possible to fully insure against such risks and we may decide not to take out insurance against such risks as a result of high premiums or for other reasons. Should such liabilities arise, they may reduce or eliminate any future profitability and may result in a decline in the value of the securities of the Company.
We face fluctuating oil and prices.
The price of oil and gas has experienced significant price movements over short periods of time and is affected by numerous factors beyond our control, including international economic and political trends, expectations of inflation, currency exchange fluctuations (including, the U.S. dollar relative to other currencies) interest rates, global or regional consumption patterns, speculative activities and increases in production due to improved exploration and d production methods. The supply of and demand for oil and gas are affected by various factors, including political events, economic conditions and production costs in major producing regions.
Drilling operations are hazardous, raise environmental concerns and raise insu
r
ance risks.
Drilling operations are by their nature subject to a variety of risks, such as, flooding, environmental hazards, the discharge of toxic chemicals and other hazards. Such occurrences may delay development or production, increase production costs, or result in a liability. We may not be able to insure fully or at all against such risks, due to political or other reasons, or we may decide not to take out insurance against such risks as a result of high premiums or other reasons. We intend to conduct our business in a way that safeguards public health and the environment and in compliance with applicable laws and regulations. Environmental hazards may exist on properties in which we hold an interest which are unknown to us and may have been caused by prior owners. Changes to drilling laws and regulations could require additional capital expenditures and increase operating and/or reclamation costs. Although we are unable to predict what additional legislation, if any, might be proposed or enacted, additional regulatory requirements could render certain operations uneconomic.
Our estimates of resources are subject to uncertainty. The cost of employing this technology maybe cost prohibitive or the cost may exceed the benefit.
Under current SEC standards, proved reserves are those quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations. The term reasonable certainty implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field-tested and have demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
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In order to establish reasonable certainty with respect to our leases, we would have to employ technologies that have been demonstrated to yield results with consistency and repeatability. The technical data used in the estimation of proved reserves include, but are not limited to, electrical logs, radioactivity logs, core analyses, geologic maps and available downhole and production data, seismic data and well test data. Generally, oil and gas reserves are estimated using, as appropriate, one or more of these available methods: production decline curve analysis, analogy to similar reservoirs or volumetric calculations. Reserves attributable to producing wells with sufficient production history are estimated using appropriate decline curves or other performance relationships. Reserves attributable to producing wells with limited production history and for undeveloped locations are estimated using performance from analogous wells in the surrounding area and technical data to assess the reservoir continuity. In some instances, particularly in connection with exploratory discoveries, analogous performance data is not available, requiring us to rely primarily on volumetric calculations to determine reserve quantities. Volumetric calculations are primarily based on data derived from geologic-based seismic interpretation, open-hole logs, and completion flow data. When using production decline curve analysis or analogy to estimate proved reserves, they would be limited to estimates to the quantities of oil and gas derived through volumetric calculations.
The accuracy of any reserve estimate is a function of the quality of available geological, geophysical, engineering, and economic data, the precision of the engineering and geological interpretation and judgment. The estimates of reserves and future cash flows are based on various assumptions and are inherently imprecise. Even though these estimates may be reasonable and logical, actual future production, cash flows, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves may vary substantially from these estimates. Also, the use of a discount factor for reporting purposes may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the oil and natural gas industry in general are subject.
If we are unable to obtain all of our required governmental permits, our operations could be negatively impacted.
Our future operations, including exploration and development activities, required permits from various governmental authorities. Such operations are and will be governed by laws and regulations governing prospecting, development, production, exports, taxes, labor standards, occupational health, waste disposal, toxic substances, land use, environmental protection, mine safety and other matters. There can be no assurance that we will be able to acquire all required licenses or permits or to maintain continued operations at our properties.
We are subject to numerous environmental and other regulatory requirements.
All phases of drilling and workover/exploration operations are subject to governmental regulation including environmental regulation. Environmental legislation is becoming stricter, with increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and heightened responsibility for companies and their officers, directors and employees. There can be no assurance that possible future changes in environmental regulation will not adversely affect our operations. As well, environmental hazards may exist on a property in which we hold an interest that was caused by previous or existing owners or operators of the properties and of which the Company is not aware at present.
Government approvals and permits are required to be maintained in connection with our drilling and workover/exploration activities. We will require permits for our operations and there re is no assurance that delays will not occur in connection with obtaining all necessary renewals of such permits for the existing operations or additional permits for any possible future changes to the Companys operations, including any proposed capital improvement programs. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions there under, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. Parties engaged in drilling operations may be required to compensate those suffering loss or damage by reason of our activities and may be liable for civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permitting requirements, or more stringent application of existing laws, may have a material adverse impact on the Company resulting in increased capital expenditures or production costs, reduced levels of production at producing properties or abandonment or delays in development of properties.
There is no assurance that there will not be title or boundary disputes
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Although we have investigated the right to explore and exploit our properties and obtained records from government offices, this should not be construed as a guarantee of title. Other parties may dispute the title to any of our properties or that any property may be subject to prior unregistered agreements and transfers. The title may be affected by undetected encumbrances or defects or governmental actions.
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Local infrastructure may impact our workover/exploration activities and results of operations.
Our activities depend, to one degree or another, on adequate infrastructure. Reliable roads, bridges and power and water supplies are important determinants that affect capital and operating costs. Unusual or infrequent weather phenomena sabotage or government or other interference in the maintenance or provision of such infrastructure could adversely affect the activities and profitability of the Company.
There may be challenges to our title in our properties.
While we intend to conduct our own due diligence prior to committing significant funds to any project, oil and gas properties may be subject to prior unregistered agreements, transfers or claims and title may be affected by undetected defects. Should this occur, we face significant delays, costs and the possible loss of any investments or commitment of capital.
Because of the speculative nature of completing workover programs and drilling for oil and gas, there are significant risks that our business will fail.
Oil and gas workover/exploration is extremely risky. We cannot provide any assurances that our activities will result in commercially exploitable reserves of oil and gas. Workover/exploration for oil and gas is a speculative venture necessarily involving substantial risk. Any expenditure that we make may not result in the discovery of commercially exploitable reserves.
The market for oil and gas is volatile. This will have a direct impact on the Companys revenues (if any) and profits (if any) and will probably have an adverse affect on our ongoing operations.
The price of both oil and gas has fluctuated significantly over the past few years. This has contributed to the renewed interest in oil and gas exploration. However, in the event that the price of either oil or gas falls, the interest in exploratory ventures may decline and the value of the Companys business could be adversely affected.
Government regulation or changes in such regulation may adversely affect the Companys business.
The Company intends to engage experts to assist it with respect to its operations. The Company deals with various regulatory and governmental agencies and the rules and regulations of such agencies. No assurances can be given that it will be successful in its efforts or dealings with these agencies. Further, in order for the Company to operate and grow its business, it needs to continually conform to the laws, rules, and regulations of such jurisdiction. It is possible that the legal and regulatory environment pertaining to the workover/exploration and development of oil and gas properties will change. Uncertainty and new regulations and rules could increase the Companys cost of doing business or prevent it from conducting its business.
We are in competition with companies that are larger, more established and better capitalized than we are.
Many of our potential competitors have:
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greater financial and technical resources;
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longer operating histories and greater experience in oil and gas
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We may not be able to generate revenue sufficient to maintain operations
To date, we have generated limited revenue. We have incurred significant losses since inception and there can be no assurance that we will be able to reverse this trend. Even if we are able to successfully identify commercially exploitable oil and gas reserves, there is no assurance that we will have sufficient financing to exploit these reserves, generate revenues, or find a willing buyer for the properties.
We have no proven reserves, extremely limited operations and no operating revenues.
We currently have no revenues from operations and no proven reserves. Reserves, by definition, contain mineral deposits in a quantity and in a form from which oil and gas may be economically and legally extracted or produced. We have not established that either oil or gas exists in any quantity in the property, which is the focus of our exploration efforts, and unless or until we do so, we will have nominal revenues.
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Workover/Exploration for economic deposits of oil and gas is speculative.
Our business is very speculative since there is generally no way to recover any of the funds expended on workover/exploration unless the existence of commercially exploitable reserves are established and the Company can exploit those reserves by either commencing drilling operations, selling or leasing its interest in the property, or entering into a joint venture with a larger e company that can further develop the property. Unless we can establish and exploit reserves before our funds are exhausted, we will have to discontinue operations, which could make our stock valueless.
Our operations are subject to environmental risks.
Our operations are subject to strict environmental rules and regulations. There can be no assurance that we will be able to comply with these rules. Environmental legislation is evolving in some jurisdictions in a manner, which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects, and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect our projects
The oil and gas industry is highly competitive and the success and future growth of our business depend upon our ability to remain competitive in identifying and developing properties with sufficient reserves for economic exploitation.
The oil and gas industry is highly competitive and fragmented with limited barriers to entry, especially at the exploratory stages. We compete in national, regional, and local markets with large multi-national corporations and against start-up operators hoping to identify an oil or gas property. Some of our competitors have significantly greater financial resources than we do. This puts us at a competitive disadvantage if we choose to further exploit workover opportunities.
The loss of key members of our senior management team could adversely affect the execution of our business strategy and our financial results.
We believe that the successful execution of our business strategy and our ability to move beyond the exploratory stages depends on the continued employment of key members of our senior management team. If any members of our senior management team become unable or unwilling to continue in their present positions, our financial results and our business could be materially adversely affected.
We operate in a regulated industry and changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our revenues.
Our organization is subject to extensive and complex, federal and state laws and regulations. If we fail to comply with the laws and regulations that are directly applicable to our business, we could suffer civil and/or criminal penalties or be subject to injunctions or cease and desist orders.
We will hire third party companies to undertake our workover programs.
We will have to hire employees or retain independent companies to oversee or perform our workover operations. We currently do not have sufficient funds for either. As such, even with exploitable deposits of oil or gas, we may not be able to develop our leasehold interests.
Risks Related to Our Stockholders and Shares of Common Stock
Our stock price may be volatile.
The market price of our common stock has been volatile. We believe investors should expect continued volatility in our stock price. Such volatility may make it difficult or impossible for you to obtain a favorable selling price for our shares.
We have a large number of authorized but unissued shares of our common stock.
We have a large number of authorized but unissued shares of common stock, which our management may issue without further stockholder approval, thereby causing dilution of your holdings of our common stock. Our management will continue to have broad discretion to issue shares of our common stock in a range of transactions, including capital-raising transactions, mergers, acquisitions and in other transactions, without obtaining stockholder approval, unless stockholder approval is required. If our management determines to issue shares of our common stock from the large pool of authorized but unissued shares for any purpose in the future, your ownership position would be diluted without your further ability to vote on that transaction.
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Shares of our common stock may continue to be subject to price volatility and illiquidity because our shares may continue to be thinly traded and may never become eligible for trading on a national securities exchange
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While we may at some point be able to meet the requirements necessary for our common stock to be listed on a national securities exchange, we cannot assure you that we will ever achieve a listing of our common stock on a national securities exchange. Our shares are currently only eligible for quotation on the Over-The-Counter Bulletin Board, which is not an exchange. Initial listing on a national securities exchange is subject to a variety of requirements, including minimum trading price and minimum public float requirements, and could also be affected by the general skepticism of such markets concerning companies that are the result of mergers with inactive publicly-held companies. There are also continuing eligibility requirements for companies listed on public trading markets. If we are unable to satisfy the initial or continuing eligibility requirements of any such market, then our stock may not be listed or could be delisted. This could result in a lower trading price for our common stock and may limit your ability to sell your shares, any of which could result in you losing some or all of your investments.
The market valuation of our business may fluctuate due to factors beyond our control and the value of your investment may fluctuate correspondingly.
The market valuation of emerging growth companies, such as us, frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. Our market valuation may fluctuate significantly in response to a number of factors, many of which are beyond our control, including:
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changes in securities analysts estimates of our financial performance, although there are currently no analysts covering our stock;
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fluctuations in stock market prices and volumes, particularly among securities of emerging growth companies;
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changes in market valuations of similar companies;
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announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
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variations in our quarterly operating results;
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fluctuations in related commodities prices; and
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additions or departures of key personnel.
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As a result, the value of your investment in us may fluctuate.
Investors should not look to dividends as a source of income.
In the interest of reinvesting initial profits back into our business, we do not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will initially be derived, if at all, from appreciation in the fair market value of our stock, and not as a result of dividend payments.
Our common stock may be subject to penny stock regulations, which may make it difficult for investors to sell their stock.
The Securities and Exchange Commission has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules; deliver a standardized risk disclosure document prepared by the Commission, which specifies information about penny stocks and the nature and significance of risks of the penny stock market. The broker-dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker-dealer and salesperson in the transaction, and monthly account statements indicating the market value of each penny stock held in the customer's account. In addition, the penny stock rules require that, prior to a transaction in a penny stock not otherwise exempt from those rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If our common stock becomes subject to the penny stock rules, holders of our shares may have difficulty selling those shares.
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We have never paid dividends on our common stock.
We have never paid cash dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of cash dividends will be re-invested into the Company to further our business strategy.
We expect to issue more shares in an equity financing, which will result in substantial dilution
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Our Articles of Incorporation authorize the Company to issue 5 billion shares of common stock. Any equity financing effected by the Company may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, our common stock issued in any equity financing transaction may be valued on an arbitrary or non-arms-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a business combination or otherwise, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially adversely affected.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties.
Executive Offices:
Our executive offices are currently located at 12518 NE Airport Way, Suite 148 No. 156 Portland Oregon 97230, an office leased by Peter Matousek, one of our executives. Mr. Matousek provides this office rent free. This office space is currently sufficient for our needs and we expect it to be sufficient for the foreseeable future or until such time as we acquire a target company.
Oil and Gas Leases
The Company has the following oil and gas leases in the State of Kentucky as of May 31, 2011:
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County
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Lease
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Permit
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Acres
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Historical Wells Drilled
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Historical
Confirmed Oil Wells
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Historical
Confirmed Gas Wells
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NRI
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Clay
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Gross
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Former 72582
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29.73
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1
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1
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1
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75.00%
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Jackson
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Neely
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107759
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239
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2
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1
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0
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75.00%
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Lincoln
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Tillet
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Various
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105
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12
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5
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0
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75.00%
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Adair
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Nelson
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Various
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12
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4
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2
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0
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87.50%
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Cumberland
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Cash
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Various
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70
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18
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5
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0
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87.50%
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Total
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455.73
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37
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1
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The Company has completed one workover well, XUN001 on one of the leases (Neely Lease) and began a workover program on a second oil well, XUN002 (Tillet Lease). Work on XUN002 was not completed
Gross Lease
The Gross Lease is for 29.73 acres and is situated in Clay County in the State of Kentucky, and is the same land (Property) conveyed to Josephine Gross, as Lessor, by a Deed dated 4/01/1980 and 3/15/2005 and recorded in Deed Book 276/166, page 701/122 in the Clay County Clerk's Office. The Oil and Gas Lease was purchased from Sequachee Oil and Gas LLC (Sequachee) whereby the lease is duly recorded on November 4, 2010 in Book 93 at Page 128 of the official records of the County of Clay, Kentucky.
In consideration for $1,800 and an overriding royalty equal to one-eighth (1/8 or 12.50%) of the value of all oil produced and removed under the lease and the net proceeds received by NUX from the sale of all gas and casing head gasoline produced and sold under the lease, NUX will have a 100% WI in the Gross Lease with a 75% NRI. The Oil and Gas Lease has one non-producing gas well, which, should NUX enter to produce gas from the well; the Lessor would receive a 20% NRI leaving NUX with a 67.5% NRI on this one gas well.
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NUX has the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within the Property and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas to Nux. If Nux does not commence operations or drill a well on the land covered by the lease by June 30, 2011, the Oil and Gas Lease will terminate, unless, on or before June 30, 2011, the parties renegotiate the terms of the Oil and Gas Lease assignment.
The Gross Lease is south of the Ellis Branch-Cool Springs Road between the Cane Branch road on the west and the Collins Fork-Ellis Branch Road on the east side. The Gross Lease can be accessed off Ellis Branch Road.
The Gross Lease had its first and only well drilled in 1986. The well produced 4,000 BBLs for 9 days and has tested natural gas at 900 MCF. The well was shut in by the Operator and has been inactive since August 1, 1986. The Company is assessing the potential of a workover program on the well drilled on the Gross Lease.
Subsequent Event: On June 30, 2011, the Company forfeited on the Gross Lease by failing to commence work on the oil and gas lease. The Company will incur a loss of $1,980 because of the forfeiture.
Neely Lease
The Neely Lease is for 239 acres and is situated in Jackson County in the State of Kentucky, and is the same land (Property) conveyed to Jerry, Carla and Joy Neely, as Lessor, by a Deed dated October 15, 1983and recorded in Deed Book 10952, page 498290 in the Jackson County Clerk's Office and recorded in. The Oil and Gas Lease was purchased from Sequachee Oil and Gas LLC (Sequachee) whereby the lease is duly recorded on November 4, 2010 in Book 40 at Page 191 of the official records of the County of Jackson, Kentucky.
In consideration for $900 and an overriding royalty equal to one-eighth (1/8 or 12.50%) of the value of all oil produced and removed under the lease and the net proceeds received by NUX from the sale of all gas and casing head gasoline produced and sold under the lease, NUX will have a 100% WI in the Neely Lease with a 87.5% NRI with a Royalty reserve of 10% to the Lessor for any oil wells that produce over 10 barrels per day.
NUX has the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within the Property and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas to Nux. If Nux does not commence operations or drill a well on the land covered by the lease by June 30, 2011, the Oil and Gas Lease will terminate, unless, on or before June 30, 2011, the parties renegotiate the terms of the Oil and Gas Lease assignment.
The Neely Lease is located south of Highway 577 with Swinding Gap Road to west and Robinson Creek Road to the east. The Neely Lease can be accessed on either side off Highway 577, west one mile off Highway 421.
The Neely Lease had it first well drilled in 1991 and since then has had two wells drilled on the Property. Both wells are recorded in the Kentucky Geological Survey, one as a producer of DG and the other well is recorded as LOC. The last well was permitted by Sequachee in 2010 with no work performed on the well. The Company is assessing the potential of a workover program on the Neely Lease and the potential for several offset wells.
Tillet Lease
The Tillet Lease is for 105 acres and is situated in Lincoln County in the State of Kentucky, and is the same land (Property) conveyed to Leroy and Margaret Tillett, as Lessor, by a Deed dated 01/07/61 and recorded in Deed Book 134, page 555 in the Lincoln County Clerk's Office. The Oil and Gas Lease was purchased from Sequachee Oil and Gas LLC (Sequachee) whereby the lease is duly recorded on October 16, 2010 in Book 393 at Pages 816-818 of the official records of the County of Lincoln, Kentucky.
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In consideration for $1,375 and an overriding royalty equal to one-eighth (1/8 or 12.50%) of the value of all oil produced and removed under the lease and the net proceeds received by NUX from the sale of all gas and casing head gasoline produced and sold under the lease, NUX will have a 100% WI in the Tillet Lease with a 75% NRI.
NUX has the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within the Property and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas to Nux. If Nux does not commence operations or drill a well on the land covered by the lease by June 30, 2011, the Oil and Gas Lease will terminate, unless, on or before June 30, 2011, the parties renegotiate the terms of the Oil and Gas Lease assignment.
The Tillet Lease is located between Highway 27, Somerset Road and State Highway 698, Mason Gap Road, bordered on the north by Miracle Gerkey Road and Morse Ridge Road on the south. Access to the Oil and Gas Lease is from Highway 27, Somerset Road (Highway 1247) and Greasy Ridge Road.
The Tillet Lease had it first well drilled in 1981 and since then has had twelve wells drilled on the Property. Five of the twelve wells are recorded in the Kentucky Geological Survey as producers of Oil, six have been recorded as D & A, and one well is recorded as LOC. The last well was drilled by Sequachee in 2010 and was drilled before a permit was issued by the State of Kentucky. The Company is assessing the potential of a workover program on several of the twelve wells drilled on the Tillet Lease.
Nelson Lease
The Nelson Lease is for 12 acres and is situated in Adair County in the state of Kentucky, and is the same land (Property) conveyed to Lessor by a Deed dated 7-2-2001, which is recorded in the Deed Book 254, Page 367 in the Adair County Clerk's Office. The term of the Nelson Lease is for one year.
NUX has the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within the Property and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas to Nux.
If Nux does not commence operations or drill a well on the land covered by the lease by March 31, 2012, the Oil and Gas Lease will terminate, unless, on or before March 31, 2012, the parties renegotiate the terms of the Lease. Nux will own 100% of the WI and 87.5% of the NRI in this lease. The cost of the Oil and Gas Lease is $1,000.
The Nelson Lease is located east of Highway 61, Burkssville Road, with Corbin Road (Jeff Road) to the north. The Nelson Lease can be accessed off Corbin Road, approximately 3.5 miles off Highway 61.
The Nelson Lease had it first well drilled in 1977 and since then has had three wells drilled on the Property. Two of the wells are recorded in the Kentucky Geological Survey as producers of Oil, with one well D & A, and the fourth wells permit expired or terminated before the well was completed. The Company is assessing the potential of a workover program on the Nelson Lease.
Cash Lease
The Cash Lease is for 70 acres and is situated in Cumberland County in the state of Kentucky, and is the same land (Property) conveyed to Lessor by a Deed dated 9-29-2003, which is recorded in the Deed Book 4958126, Page 527216668 in the Cumberland County Clerk's Office. The term of the Cash Lease is for one year.
NUX has the exclusive right to explore, operate, produce all naturally-occurring oil, gas, casing-head gas or gasoline, gas condensate and/or all other liquid or gaseous hydrocarbons and other marketable or non-marketable substances produced (Oil and Gas) from Oil and Gas deposits contained within the Property and any and all other rights and privileges necessary, incident to, or convenient for the economical operation of the Property and other lands for the production of Oil and Gas to Nux.
If Nux does not commence operations or drill a well on the land covered by the lease by May 12, 2012, the Oil and Gas Lease will terminate, unless, on or before May 12, 2012, the parties renegotiate the terms of the Lease. Nux will own 100% of the WI and 87.5% of the NRI in this lease. The cost of the Oil and Gas Lease is $10.
The Cash Lease is located within a mile north east of Burksville, Kentucky off Highway 61 with Scotts Ferry Road to the south and Thomas Lane to the west.
The Cash Lease had it first well drilled in 1960 and since then has had seventeen wells drilled on the Property. Five of the wells are recorded in the Kentucky Geological Survey as producers of Oil, with twelve wells D & A, and the six wells permit expired or terminated before the well was completed. The Company is assessing the potential of a workover program on the Cash Lease.
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Item 3. Legal Proceedings
On May 10, 2011, the Company accepted an Offer to Purchase from Lea Kennedy d/b/a LuxemBarings (Purchaser) to purchase $10 million of the Companys common stock based on the average of 5 consecutive trading days close prior to date of closing. The Offer to Purchase was scheduled to close on or before June 24, 2011. The Purchaser failed to complete the transaction, after mutually agreed extensions of the closing date. The Company has retained legal counsel to take legal action against the Purchaser for failing to complete the purchase transaction and for damages to the Company as a result of the failure to complete the transaction. The Company has not recognized any potential losses and damages in the financial statements for the year ended May 31, 2011.
Item 4. Submission of Matters to a Vote of the Security Holders.
On May 15, 2010, the Company obtained the written consent of the stockholders holding a majority of the outstanding voting rights of the Company (the Consent). The Consent authorized the following corporate actions:
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Amend our certificate of incorporation to change our name to Xun Energy, Inc.;
·
Increase the number of our authorized common shares from one hundred million shares, $0.0001 par value to 5 billion shares of common stock $0.0001 par value; and
·
Forward split our common stock on an 80:1 basis.
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
A.
Market Information
Our common stock trades on the Over-the-Counter-Bulletin Board under the symbol ("XNRG"). There is a very limited market for our common stock, with very limited trading activities. Until October 2009 there was no posted bid or ask price for our common stock.
The following table shows the high and low closing sales prices for our Common Stock for the two most recent fiscal years. The quotations reflect inter dealer prices, without retail mark
-
up, mark
-
down or commission and may not represent actual transactions. The information is derived from information received from online stock quotation services.
|
|
|
|
| |
|
Year ended May 31, 2011
|
|
Year ended May 31, 2010
|
|
HIGH
|
LOW
|
|
HIGH*
|
LOW*
|
First Quarter
|
$0.150
|
$0.028
|
|
No Quote/Trades
|
No Quote/Trades
|
Second Quarter
|
$0.080
|
$0.050
|
|
$0.013
|
$0.006
|
Third Quarter
|
$0.295
|
$0.075
|
|
$0.016
|
$0.013
|
Fourth Quarter
|
$0.170
|
$0.105
|
|
$0.014
|
$0.003
|
*The price of the common stock has been adjusted to reflect an 80:1forward split of our common stock in July 2010.
B.
Holders
As of May 31, 2011, the Company had 27 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.
C.
Transfer Agent
Our transfer agent is
Holladay Stock Transfer, Inc. whose address is 2939 N. 67
th
Place #C, Scottsdale, Arizona 85251 and their telephone number is (480)481-3940.
D.
Dividends
Holders of our common stock are entitled to receive such dividends as our Board may declare from time to time from any surplus that we may have. We have not paid dividends on our common stock since the date of our incorporation and we do not anticipate paying any common stock dividends in the foreseeable future. We anticipate that any earnings will be retained for development and expansion of our businesses and we do not anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon our earnings, financial condition, contractual restrictions and other factors considered relevant by our Board and will be subject to limitations imposed under Nevada law.
29
E.
Equity Compensation Plan
Executive and Board Compensation
The Company entered into a Management and Financial Service Agreement with Mr. Peter Matousek for a 12 month period ending August 31, 2011 whereby Mr. Matousek will be paid $30,000 in cash payments and 2,500 shares per month in stock of the Company. The stock will be valued based on the average of the 5 trading day close price prior to each month end. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000.
The Company entered into a Board Member Compensation Agreement with Mr. Peter Matousek and Mr. Donald Lynch for a 12 month period ending August 31, 2011 whereby Mr. Matousek and Mr. Lynch will be paid 5,000 shares per month in stock of the Company. The stock will be valued based on the average of the 5 trading day close price prior to each month end. The terms and conditions will be renegotiated upon the successful consummation of a Business Combination through the acquisition of, or merger or consolidation with, a company that has substantial additional capital and or operating revenues; or the Company is able to finance operating expenses with additional debt or through equity financing of not less than $5,000,000.
The table below represents the shares issued to the Executive and Board with the 5-Day Average Share Closing Price:
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|
|
|
| |
Month
|
Executive Shares
|
Board Shares
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Total Shares
|
5 Day Average Share Closing Price
|
Amount
|
June
|
0
|
0
|
0
|
$0.0000
|
$0.00
|
July
|
0
|
0
|
0
|
$0.0000
|
$0.00
|
August
|
0
|
0
|
0
|
$0.0000
|
$0.00
|
Quarter Total
|
0
|
0
|
0
|
$0.0000
|
$0.00
|
September
|
2,500
|
10,000
|
12,500
|
$0.1500
|
$1,875.00
|
October
|
2,500
|
10,000
|
12,500
|
$0.0600
|
$750.00
|
November
|
2,500
|
10,000
|
12,500
|
$0.0540
|
$675.00
|
Quarter Total
|
7,500
|
30,000
|
37,500
|
$0.0880
|
$3,300.00
|
December
|
2,500
|
10,000
|
12,500
|
$0.1440
|
$1,800.00
|
January
|
2,500
|
10,000
|
12,500
|
$0.2220
|
$2,775.00
|
February
|
2,500
|
10,000
|
12,500
|
$0.1100
|
$1,375.00
|
Quarter Total
|
7,500
|
30,000
|
37,500
|
$0.1587
|
$5,950.00
|
March[1]
|
2,500
|
10,000
|
12,500
|
$0.1260
|
$1,575.00
|
April[1]
|
2,500
|
10,000
|
12,500
|
$0.1320
|
$1,650.00
|
May[1]
|
2,500
|
10,000
|
12,500
|
$0.1388
|
$1,735.00
|
Quarter Total[1]
|
7,500
|
30,000
|
37,500
|
$0.1323
|
$4,960.00
|
June 1, 2010 to May 31, 2011
|
22,500
|
90,000
|
112,500
|
$0.1263
|
$14,210.00
|
|
|
|
|
|
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[1] Note *1 - Shares were issued by the Company on June 6, 2011
|
Field Operations Services Compensation
The Company entered into an Oil And Gas Field Operations Services agreement with Mr. Michael Grubb to provide his services exclusively as Manager of Field Operations for XUN OIL OF KENTUCKY, INC. and NUX HOLDINGS OF KENTUCKY, INC., wholly owned subsidiaries of the Company. The Company agreed to pay common shares of the Company in lieu of cash as bonuses for the following: