PART I. FINANCIAL INFORMATION
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 ("2013 Annual Report"), our unaudited consolidated financial statements and related notes included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, the risk factors contained herein and in our 2013 Annual Report, and all of the other information contained elsewhere in this
report. The terms "we," "us," "our," “the Company” and "our company" refer to Far East Energy Corporation and its subsidiaries, unless the context suggests otherwise. The term "FEEB" refers to Far East Energy (Bermuda), Ltd., our wholly-owned subsidiary, which conducts substantially all of our operations in China.
Overview.
We are a party to the Shouyang PSC with CUCBM, which provides for an operating interest in approximately 288,569 acres (1,167.8 square kilometers) in the Shanxi Province, which includes approximately 15,988 acres, or approximately 64.7 square kilometers (Area A), in the 1H Pilot Area for which the CBM resources have been certified by the MLR to support the request for a long-term development license and in which we hold a 100% participation interest. As of December 31, 2013, we had estimated net proved gas reserves of 67.5 billion cubic feet (“Bcf”) with an associated standardized measure of our future net cash flows of proved reserves, discounted at 10 percent per annum of $151.8 million. This represents an increase of 32% over the net proved gas reserves of 51.3 Bcf as of December 31, 2012. As of December 31, 2013, total net probable reserves were estimated to be 372.4 Bcf.
The proved reserves are attributable to approximately 13,732 gross acres (approximately 55.6 square kilometers). The probable and possible reserves are attributable to approximately 85,428 gross acres (approximately 345.7 square kilometers), which includes the Shouyang Block proved reserve locations. This combined acreage with proved, probable and possible reserves represents only approximately 29% and 41%, respectively, of our total gross and net acreage of the Shouyang Block.
During the first six months of 2014, we continued our efforts to explore and develop CBM pursuant to our Shouyang PSC. Currently, we have 95 wells connected to the gathering lines in the 1H Pilot Area, 70 of which are currently producing gas. Gas sales volume, net to the Company, was 244 million cubic feet (“MMcf”) during the six months ended June 30, 2014. Sales volumes increased 136 MMcf, or 126%, compared to the six months ended June 30, 2013 due to increased production resulting from the 2013 drilling program. Sales revenues increased 209% compared to the six months ended June 30, 2013 due to the increased 2014 gas contract price (up 42% from the 2013 gas contract price), as well as the increase in production.
We continued to employ numerous safety precautions to ensure the safety of our employees and independent contractors. We also seek to conduct our operations in accordance with various laws and regulations concerning the environment, occupational safety and health.
We believe that good environmental, social, health and safety performance is an integral part of our business success. We conduct our business with respect and care for our employees, contractors, communities, and the environments in which we operate. Our vision is zero harm to people and the environment while creating value for our shareholders as well as for China, including the regions and communities within which we operate. Our commitment to these principles is demonstrated by the fact that we have had no lost-time accidents in over nine years and no major environmental incidents. We have a commitment to being good corporate citizens of China, striving to emphasize and utilize very high levels of Chinese content in personnel, services, and equipment; and we have achieved very high percentages of
Chinese content in each category.
On November 28, 2011, FEEB and the Company entered into a facility agreement with SCB (the “Facility Agreement”). The Facility Agreement provided for a $25 million credit facility to be used for project costs with respect to the Shouyang Block, finance costs and other general corporate purposes approved by SCB. The Facility Agreement had an initial 9-month term and was subsequently extended. At June 30, 2014, the total amount drawn under the Facility Agreement was $21.0 million. In addition, the related accrued interest as of June 30, 2014 was $0.1 million.
On January 14, 2013, the Company sold senior secured notes of FEEB (the “Notes”) and warrants to purchase common stock of FEEC (the “Warrants”) to certain institutional investors for $60.0 million of gross proceeds in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Section 4(a)(2) thereof and Regulation S thereunder (the “Private Placement”). The Private Placement closed on January 15, 2013.
On January 15, 2013, the Company entered into the Fifth Amendment to the Facility Agreement (the “Fifth Amendment”), to provide for the extension of the maturity date thereof until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which included $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million.
On July 1, 2013, the Company issued $3,987,501 aggregate principal amount of senior notes for the paid in kind interest that was due on June 30, 2013. On December 30, 2013, the Company issued $4,639,095 aggregate principal amount of senior notes for the paid in kind interest that was due on December 30, 2013.
On December 31, 2013, the Company entered into the Sixth Amendment to the Facility Agreement (the "Sixth Amendment"), to, among other things, extend the maturity date of the Facility Agreement from January 15, 2014 to April 15, 2014. The Sixth Amendment also requires the Company to pay interest under the Facility Agreement on a monthly basis rather than a quarterly basis.
On March 31, 2014, the Company entered into the Extension Agreement to the Facility Agreement (the “Extension Agreement”) to, among other things, extend the maturity date of the Facility Agreement from April 15, 2014 to July 15, 2014. The Extension Agreement contained certain customary representations, warranties, releases and confirmations.
On July 9, 2014, the Company entered into the Second Extension Agreement to the Facility Agreement (the “Second Extension Agreement”) to, among other things, extend the maturity date of the Facility Agreement from July 15, 2014 to September 15, 2014. The Extension Agreement contained certain customary representations, warranties, releases and confirmations.
To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based, project or equity-related financing. In
addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no guarantee of future capital acquisition, fundraising or exploration success.
Although we believe the results of our exploration activities in Shanxi Province to date have been favorable, we will need to complete more wells to achieve commercial viability in this province, which will require additional capital expenditures. Our current and future work programs for our PSCs will depend on our ability to raise additional capital to fund our exploration activities. Our current work programs are described below.
Shouyang Block, Shanxi Province.
We are a party to the Shouyang PSC with CUCBM, which provides for an operating interest in approximately 288,569 acres (1,167.8 square kilometers) in the Shanxi Province, which includes approximately 15,988 acres, or approximately 64.7 square kilometers (Area A), in the 1H Pilot Area for which the CBM resources have been certified by the MLR to support the request for a long-term development license and in which we hold a 100% participation interest.
In exchange for CUCBM’s election to forego its participation rights to the approximately 15,988 acres, or approximately 64.7 square kilometers comprising Area A, that have received MLR certification, in April 2012 we elected to forgo our rights to approximately 8,673 acres (35.1 square kilometers) of the original Shouyang PSC, which had also been certified by the MLR, allowing CUCBM to proceed independently at its sole risk to develop this area. We believe that this is an advantageous arrangement for us because it provides us with a 100% participating interest (subject to a net 3.5% revenue interest held by
Phillips China, Inc., a subsidiary of ConocoPhillips ("Phillips")
in the approximately 15,988 acre (approximately 64.7 square kilometer) area, which contains all of the wells in the 1H Pilot Area (the area of our current CBM sales) and the planned expansion thereof.
Also we relinquished 121,255 acres (approximately 490.7 square kilometers) in June 2013. With respect to the remaining approximately 272,581 acres (1,103.1 square kilometers), CUCBM maintains the right to elect up to a 30% participating interest upon completion of certain milestones, and we retain the remaining participating interest in the contract area, subject to the 3.5% revenue interest held by Phillips.
The P8 well was a well drilled on a portion of the Shouyang Block which we relinquished in April 2008. Under the terms of the April 26, 2012 Fifth Modification Agreement, this well will be replaced by CUCBM pursuant to an agreement whereby CUCBM has agreed to drill an appraisal well which shall include the expenses associated with coring, fracturing and other testing on our behalf in Area B in a location as determined by FEEB, nearby the P8 well and to the same coal seam as the P8 well.
During the exploration period, FEEB, as operator, must complete at least the minimum work program and seek commercial deposits of CBM that can be developed in commercially paying quantities. Under the Shouyang PSC, as modified to date, we are required to conduct pilot testing to obtain information necessary to prepare an application for an overall development plan to submit as part of the application for a long-term development license for a particular CBM field or area within the Shouyang Block.
The preparation of an Overall Development Plan (“ODP”) to be submitted jointly with CUCBM as part of the application for a long-term development license requires adequate CBM resources certified to the applicable standard by the MLR, as well as technical, commercial, environmental, health and safety plans demonstrating how the CBM field will be developed for the exploitation of CBM resources located therein.
The key certification required to be granted by the MLR is certification that the identified development area contains verifiable/recoverable CBM resources that can be extracted in a commercially economic manner to the standards and guidelines set forth in the Specifications for Coalbed Methane Resources/Reserves (DZ/T0216-2010) (the “CBM Specifications”) promulgated by the MLR.
We obtained this certification from the MLR in June 2012, with respect to an area 99.8 square kilometers in the Nanyanzhu area of the northern Shouyang Block. This 99.8 square kilometers is comprised of the approximately 64.7 square kilometers comprising Area A, and the approximately 35.1 square kilometers of the original Shouyang PSC, in which we had elected to forgo our rights in favor of CUCBM to allow CUCBM to proceed independently at its sole risk to develop.
The first step in the certification process was to engage a Chinese company licensed by the MLR to compile reports as to CBM resources in accordance with MLR requirements. The licensed Chinese vendor estimated CBM resources subject to certain conditions and assumptions specified in the CBM Specifications with respect to well spacing, the types of wells emphasized in the estimation of resources, the level of output of individual wells and the method of determining such output. Such an estimation of CBM resources at the necessary level is conducted only on blocks containing wells achieving a minimum standard of production for the CBM resources claimed for a time period of at least three months.
Upon completion of a preliminary draft of the report, a group of independent CBM experts reviewed the report and provided comments to the licensed Chinese vendor. Our Chinese partner company then submitted the report to the Petroleum Reserve Office of the MLR. The report was approved by the Petroleum Reserve Office of the MLR and submitted to the Reserve Review and Exam Office of the MLR for further review and certification. After review and resolution of questions or comments, the CBM resources were then certified by the Reserve Review and Exam Office of the MLR to the requisite levels under the CBM Specifications, at which point work commenced on the application process for a long-term development license for the identified development area (an ODP).
After several revisions, the final draft of the Nanyanzhu ODP was finished and an internal review was completed. An external expert review was held on March 27, 2014, and the ODP passed review of the required external experts, and the expert group recommended that the relevant parties approve the ODP report. This draft ODP report was submitted to the NEA on June 16, 2014 to receive a “Road Pass.” The Road Pass is anticipated to be awarded in the fourth quarter of 2014, allowing FEEB to apply for permits and approvals from local government bureaus in land use, grid power supply, environment protection, land reclamation, and safety. Vendors of six third parties have been engaged to compile supplementary reports needed to obtain various permits from local government bureaus that are required by the ODP process. All of these permits and approvals, as well as the ODP report, will be submitted to NDRC again approximately by the first quarter of 2015. The Company expects to receive formal ODP approval by the end of June 2015.
The development period as to any CBM field covered by the Shouyang PSC will begin after the approval of the overall development plan for any such CBM field. As discussed above, CUCBM has agreed to waive its right to any participating interest share in approximately 15,988 acres (approximately 64.7 square kilometers) of the Shouyang Block. Thus, Far East will be entitled to a 100% participating interest share in the entirety of its 1H Pilot Area (subject to Phillips 3.5% revenue interest). Also, CUCBM has not currently elected to exercise its option to receive a 30% participating interest in any other CBM field that is developed in the Shouyang Block.
Effective January 1, 2014, the price received from SPG for CBM under the Gas Sales Agreement is 1.7 RMB per cubic meter (or $7.84 per Mcf, inclusive of $0.90 for VAT and $0.11 for provincial taxes, based on the June 30, 2014 exchange rate, before any applicable subsidies). The VAT portion of the sales price is refundable to the Company. The Gas Sales Agreement also provides for price adjustments in accordance with changes to the published Chinese national natural gas price and annual price adjustments based on the parties’ mutual agreement. If the parties do not agree on a new price, the then-current price shall continue in effect and either party may seek to resolve any pricing dispute pursuant to arbitration.
Additionally, the Chinese government and Shanxi provincial authorities enacted subsidies equal to 0.20 RMB and 0.05 RMB per cubic meter, respectively, for a total of 0.25 RMB per cubic meter. Effective January 1, 2014, the price received by CUCBM and FEEB, including subsidies for gas sales, is 1.95 RMB per cubic meter. The total price received is approximately $8.85 per Mcf after taxes, based on the June 30, 2014 exchange rate.
Work programs are being carried out to achieve three primary goals: (i) to expand the producing area in the 1H Pilot Area to increase gas production, (ii) to determine the optimal development approach in order to minimize costs and maximize CBM recovery and (iii) to add appraisal wells, spaced at intervals of several kilometers across the entire Shouyang Block to help delineate the geographic extent of the high permeability and high gas content coal located in the area. We refer to an “appraisal well” as a CBM well drilled outside of the 1H Pilot Area to determine the physical extent of commercially attractive parameters of the coal (such as high gas content, high permeability and good coal thickness), as well as to contribute to the identification of reserves.
We believe that the addition of production wells in the 1H Pilot Area will increase production and the addition of appraisal wells throughout the Shouyang Block could add substantially to proved and probable reserves. The following discussion regarding our drilling activity involves the drilling of wells that constitute “exploratory wells,” as such term is defined in Rule 4-10(a)(13) of Regulation S-X.
During the first half of 2014, no wells were spudded or fracture stimulated. Additionally, from inception of the Shouyang PSC through July 31, 2014, one well has been abandoned in the Shouyang Block.
In conjunction with the review of the results of the 2013 drilling program, 41 wells were shut in during the second quarter of 2014. They were comprised of 12 wells in Area B, the Company’s appraisal/exploration area, and 29 wells in Area A, the Company’s production/gas sales area. The 12 wells in Area B had already provided sufficient test data and did not yet contribute to gas sales due to their location, as they were not yet connected to the gas gathering system. The 29 wells in Area A can be divided into two subsets. The first subset included those which lay outside the main pattern of dewatering activity and have demonstrated significant dewatering capability. However, due to their location, they did not contribute meaningfully to dewatering the main pattern, would not produce gas for quite some time and were not tied in to the sales line. The Company plans to return these wells to gas production as the pattern expands in their nearby vicinity. After the expanded development, the gathering and sales system will be extended to accept sales gas from these wells. The second subset included the poorer performing wells from the 2011 drilling and fracing campaign. These wells were part of a gel-based fracing campaign which had subsequently proved to be ineffective in our particular coal seam. These wells are scheduled for remedial work involving re-fracturing using different and appropriate formulations of proppant, fluid and rates.
FEEC operates the Shouyang drilling program using the most efficient and environmentally responsible methods available in China. In its execution, the Company has elected to pursue pad drilling operations placing as many as 5 wells on one location, thus creating a small footprint. This saves important agricultural lands, reduces infrastructure loads, lowers manpower requirements and lightens our impact on the environment. While this approach places additional burdens on the orchestration of drilling, fracturing and completion operations and could introduce minor delays, these factors are mitigated by our ability to batch wells for the fracturing operations. Through careful cooperation between our fracturing service company, logistics department, and local suppliers, the Company is able to maintain a fracture treatment program of up to one well per day for extended periods.
The gross and net number of productive wells in the Shouyang Block as of July 31, 2014, after giving effect to CUCBM’s right to make participating elections in the Shouyang Block as if made on such date, was 91 and 88.6, respectively. Of these 91 wells, 82 are wells drilled in the initial 1H Pilot Area to expand the field to the west and 9 are appraisal wells. In addition to these wells, there are wells in various stages of drilling and fracing operations as noted above.
A number of appraisal wells have been drilled to the west, south and east of the 1H Pilot Area, which is adjacent to the northern boundary of the Shouyang Block, with the goal of providing data to support the full extent of the northern portion of the Shouyang Block that contains high gas content as well as good permeability characteristics.
Through the drilling of the appraisal wells we seek to determine what portion of the Shouyang Block shares the same rare combination of high permeability and high gas content as discovered in the 1H Pilot Area. The wells drilled to the west, east and south of the 1H Pilot Area have revealed both high gas content and high permeability. The drilling and subsequent production testing of a number of these wells demonstrate that permeability and the potential for significant gas production extend into these portions of the block. Most significantly, the SYS05 well in the southeastern portion of the block and approximately 35 kilometers southeast of the 1H Pilot Area was successfully production tested at a rate exceeding MLR certification requirements.
Provided we remain in compliance with the requirements under the Shouyang PSC, the Shouyang PSC allows production to continue on a CBM field until the earlier of the end of the useful life of the field or June 30, 2032, unless such term is extended or otherwise amended.
The following table reflects the range of permeability determined in the Shouyang Block:
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Permeability Range
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Number of Wells
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Well Area
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(Millidarcies - mD)
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In this Range
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1H Pilot Area
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80-100
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1H Pilot Area Wells
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Appraisal/ Exploration Wells
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200-300
|
|
1
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Appraisal/ Exploration Wells
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100-199
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|
3
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Appraisal/ Exploration Wells
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50-99
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|
4
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Appraisal/ Exploration Wells
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10-49
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|
14
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With permeabilities ranging from 10 millidarcies to 300 millidarcies, we believe that the No. 15 coal seam in the expanded areas tested appears to contain areas of high permeability coupled with high gas content.
Qinnan Block, Shanxi Province.
The exploration period of the Qinnan PSC in Shanxi Province expired on June 30, 2009, and we cannot continue our exploration activities in the Qinnan Block without an extension or a new PSC. We are continuing to pursue an extension of the exploration period of the Qinnan PSC, but we cannot be optimistic at this time. The Company believes the underlying exploration period should be extended due to events beyond its reasonable control, namely the lengthy transfer of rights taking place from CUCBM to CNPC. At our Chinese partner’s request, we have provided certain operational and financial information about our company to assist them in the decision-making process as to whether to recognize an extension of the exploration period in Qinnan. PetroChina, CNPC’s wholly-owned subsidiary, has completed an accounting audit pursuant to the Qinnan PSC of our expenditures for 2007 and 2008. We have also provided to PetroChina at their request our work plan for 2010 for Qinnan. In January 2011, we received a formal notice from CNPC that it has purportedly received all Chinese approvals with respect to the transfer of CUCBM’s interest to it, and subsequently to PetroChina. CNPC also requested we execute a modification agreement to confirm PetroChina as our Chinese partner company for the Qinnan PSC. In negotiations with CUCBM and PetroChina related to this request, we have endeavored to negotiate an assignment agreement that would reflect the transfer of interest to CNPC while CNPC and PetroChina would acknowledge delays that were incurred by virtue of FEEB not having, for an extended period of time, an official Chinese partner that had the capacity or authority under the Qinnan PSC to work with us.
Because of the inability to hold a formal JMC meeting or to have the effective involvement of our Chinese partner, we believe that our efforts to continue CBM operations in the Qinnan Block have been materially hindered. Technically, the exploration period under the Qinnan PSC expired on June 30, 2009; however, we have maintained the position that the doctrine of force majeure under the Qinnan PSC entitled us to an extension. We continue to discuss this situation with CUCBM and PetroChina, and as recently as January 2012 have submitted a notice of force majeure in accordance with the Qinnan PSC. There can be no assurance that we will be successful in extending the exploration period of the Qinnan PSC or that a new PSC will be granted. Additionally, in connection with obtaining this extension or a new PSC, we may be required to commit to certain expenditures or to modify the terms or respective ownership interests and/or acreage in the applicable PSC.
Laochang Area, Yunnan Province.
We were a party to the Yunnan PSC with CUCBM, which provided for an operating interest in approximately 119,327 acres (482.9 square kilometers) in the Laochang Area. CUCBM had the right to accept up to a 40% participating interest within thirty (30) days of receipt of notice of Chinese certifications of CBM resources in a particular CBM field. The exploration period expired on December 31, 2013 and was not amended or extended. Following expiration of the exploration period, we had the right to elect to continue the process of trying to convert portions of the Laochang Area into MLR certified areas in order to transition these areas into the process for a long-term development license and the development period for certain areas. Any acreage that was not at or past the stage of submittal of a technical report to CUCBM that reasonably met the criteria for MLR certification would be relinquished unless the parties otherwise agree. The Company and CUCBM have begun discussions that will likely result in the relinquishment of all of the Yunnan acreage covered by the PSC. The Company expects that any such relinquishment of the PSC will be formalized during the second half of 2014.
Our Ability To Continue as a Going Concern
Our independent registered public accounting firm has issued its report in connection with the audit of our financial statements for the years ended December 31, 2013 and 2012, which included an explanatory paragraph describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern. Our financial statements as of June 30, 2014 have been prepared under the assumption that we will continue as a going concern. If we are not able to continue as a going concern, it is possible that holders of our common stock could lose all of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Results of Operations
Three Months Ended June 30, 2014 vs. Three Months Ended June 30, 2013:
The following table sets forth the natural gas sales data for the three-month periods ended June 30, 2014 and 2013:
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Three Months Ended June 30,
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|
|
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2014
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|
|
2013
|
|
Natural Gas
|
|
|
|
|
|
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Sale Volumes, net (Mcf)
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|
|
128,499
|
|
|
|
40,991
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Per Day Volumes, net (Mcf per day)
|
|
|
1,412
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
Average Gas Sales Price, net of taxes (per Mcf)
|
|
$
|
6.80
|
|
|
$
|
4.76
|
|
PRC National and Provincial Subsidies (per Mcf)
|
|
|
1.15
|
|
|
|
1.14
|
|
VAT Refund (per Mcf)
|
|
|
0.90
|
|
|
|
0.63
|
|
Total Gas Sales and Other Revenues (per Mcf)
|
|
$
|
8.85
|
|
|
$
|
6.53
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue (in thousands)
|
|
$
|
1,137
|
|
|
$
|
268
|
|
Operating Revenue during the three months ended June 30, 2014 increased $0.9 million, or 324%, as compared to the same period a year ago due primarily to the
increase in the number of producing wells connected to the gathering system and the increased 2014 gas contract price (up 42% from the 2013 gas contract price).
The table below sets out major components of our expenditures (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Additions to Oil and Gas Properties (capitalized)
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
(1)
|
|
$
|
87
|
|
|
$
|
10,481
|
|
Exploration Expenditures (expensed)
|
|
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
|
|
|
1,148
|
|
|
|
1,216
|
|
- Qinnan Block, Shanxi Province
|
|
|
30
|
|
|
|
(95
|
)
|
- Laochang Block, Yunnan Province
|
|
|
97
|
|
|
|
220
|
|
- Total
|
|
|
1,275
|
|
|
|
1,341
|
|
Lease Operating Expenditures (expensed)
|
|
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
|
|
|
1,695
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
Total Capital and Operating Expenditures
|
|
$
|
3,057
|
|
|
$
|
12,925
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
$
|
2,527
|
|
|
$
|
2,333
|
|
(1)
|
Capitalized in the Consolidated Balance Sheets.
|
The table below sets out the operating expenses in the Consolidated Statements of Operations for the three-month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Lease operating expense
|
|
$
|
1,695
|
|
|
$
|
1,103
|
|
Exploration costs
|
|
|
1,275
|
|
|
|
1,341
|
|
General and administrative
|
|
|
2,527
|
|
|
|
2,333
|
|
Depreciation, depletion and amortization
|
|
|
898
|
|
|
|
416
|
|
Total
|
|
$
|
6,395
|
|
|
$
|
5,193
|
|
The table below sets out components of exploration costs for the three–month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Technical personnel compensation
|
|
$
|
63
|
|
|
$
|
47
|
|
PSC related payments
|
|
|
210
|
|
|
|
144
|
|
Geological and other indirect field costs
|
|
|
1,002
|
|
|
|
1,150
|
|
Total
|
|
$
|
1,275
|
|
|
$
|
1,341
|
|
Exploration costs for the three months ended June 30, 2014 are materially unchanged compared to the same period in 2013.
The table below sets out components of lease operating expense ("LOE") for the three-month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Three Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Pumping Related Costs
|
|
$
|
740
|
|
|
$
|
709
|
|
Compression
|
|
|
328
|
|
|
|
175
|
|
Workovers
|
|
|
151
|
|
|
|
150
|
|
Supervision
|
|
|
476
|
|
|
|
69
|
|
Total
|
|
$
|
1,695
|
|
|
$
|
1,103
|
|
LOE for the three months ended June 30, 2014 was comprised of costs pertaining to the production and dewatering efforts in the Shouyang Block in Shanxi Province. LOE for the three months ended June 30, 2014 increased $0.6 million compared to the same period in 2013 due primarily to increases in supervision of $0.4 million and compression of $0.2 million. The various components of LOE have increased due to the additional wells producing in 2014 that were drilled in 2013.
General and administrative ("G&A") expenses for the three months ended June 30, 2014 increased $0.2 million compared to the same period in 2013 primarily due to a $0.2 million increase in legal expense, a $0.2 million increase in professional services, and a $0.1 million increase in payroll expense partially offset by a $0.1 million decrease in share-based compensation and a $0.1 million decrease in investor relations expenses.
Six Months Ended June 30, 2014 vs. Six Months Ended June 30, 2013:
The following table sets forth the natural gas sales data for the six-month periods ended June 30, 2014 and 2013:
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Natural Gas
|
|
|
|
|
|
|
Sale Volumes, net (Mcf)
|
|
|
244,345
|
|
|
|
107,938
|
|
Per Day Volumes, net (Mcf per day)
|
|
|
1,350
|
|
|
|
596
|
|
|
|
|
|
|
|
|
|
|
Average Gas Sales Price, net of taxes (per Mcf)
|
|
$
|
6.82
|
|
|
$
|
4.73
|
|
PRC National and Provincial Subsidies (per Mcf)
|
|
|
1.15
|
|
|
|
1.13
|
|
VAT Refund (per Mcf)
|
|
|
0.90
|
|
|
|
0.63
|
|
Total Gas Sales and Other Revenues (per Mcf)
|
|
$
|
8.87
|
|
|
$
|
6.49
|
|
|
|
|
|
|
|
|
|
|
Operating Revenue (in thousands)
|
|
$
|
2,168
|
|
|
$
|
701
|
|
Operating Revenue during the six months ended June 30, 2014 increased $1.5 million, or 209%, as compared to the same period a year ago due primarily to the
increase in the number of producing wells connected to the gathering system and the increased 2014 gas contract price (up 42% from the 2013 gas contract price).
The table below sets out major components of our expenditures (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Additions to Oil and Gas Properties (capitalized)
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
(1)
|
|
$
|
204
|
|
|
$
|
11,183
|
|
Exploration Expenditures (expensed)
|
|
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
|
|
|
2,287
|
|
|
|
2,058
|
|
- Qinnan Block, Shanxi Province
|
|
|
36
|
|
|
|
21
|
|
- Laochang Block, Yunnan Province
|
|
|
241
|
|
|
|
473
|
|
- Total
|
|
|
2,564
|
|
|
|
2,552
|
|
Lease Operating Expenditures (expensed)
|
|
|
|
|
|
|
|
|
- Shouyang Block, Shanxi Province
|
|
|
4,103
|
|
|
|
2,342
|
|
|
|
|
|
|
|
|
|
|
Total Capital and Operating Expenditures
|
|
$
|
6,871
|
|
|
$
|
16,077
|
|
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
$
|
4,993
|
|
|
$
|
5,203
|
|
The table below sets out the operating expenses in the Consolidated Statements of Operations for the six-month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Lease operating expense
|
|
$
|
4,103
|
|
|
$
|
2,342
|
|
Exploration costs
|
|
|
2,564
|
|
|
|
2,552
|
|
General and administrative
|
|
|
4,993
|
|
|
|
5,203
|
|
Depreciation, depletion and amortization
|
|
|
1,725
|
|
|
|
959
|
|
Total
|
|
$
|
13,385
|
|
|
$
|
11,056
|
|
The table below sets out components of exploration costs for the six–month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Technical personnel compensation
|
|
$
|
124
|
|
|
$
|
153
|
|
PSC related payments
|
|
|
423
|
|
|
|
407
|
|
Geological and other indirect field costs
|
|
|
2,017
|
|
|
|
1,992
|
|
Total
|
|
$
|
2,564
|
|
|
$
|
2,552
|
|
Exploration costs for the six months ended June 30, 2014 are materially unchanged compared to the same period in 2013.
The table below sets out components of LOE for the six-month periods ended June 30, 2014 and 2013 (in thousands):
|
|
Six Months Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Pumping Related Costs
|
|
$
|
2,209
|
|
|
$
|
1,541
|
|
Compression
|
|
|
614
|
|
|
|
351
|
|
Workovers
|
|
|
334
|
|
|
|
262
|
|
Supervision
|
|
|
946
|
|
|
|
188
|
|
Total
|
|
$
|
4,103
|
|
|
$
|
2,342
|
|
LOE for the six months ended June 30, 2014 was comprised of costs pertaining to the production and dewatering efforts in the Shouyang Block in Shanxi Province. LOE for the six months ended June 30, 2014 increased $1.8 million compared to the same period in 2013 due primarily to increases in pumping related costs of $0.7 million, supervision costs of $0.8 million and compression costs of $0.3 million. The various components of LOE have increased due to the additional wells producing in 2014 that were drilled in 2013.
G&A expenses for the six months ended June 30, 2014 are materially unchanged compared to the same period in 2013.
Capital Resources and Liquidity.
Although gas sales under the Gas Sales Agreement commenced in the first quarter of 2011, our primary source of cash flow has been cash proceeds from public offerings and private placements of our common stock and warrants to purchase our common stock, the exercise of warrants and options to purchase our common stock, and proceeds received from the closing of the Facility Agreement and the issuance of the Notes.
On January 14, 2013, the Company sold the Notes and the Warrants to certain institutional investors for $60.0 million of gross proceeds in the Private Placement, which was exempt from the Securities Act. The Private Placement closed on January 15, 2013.
On January 15, 2013, the Company entered into the Fifth Amendment to provide for the extension of the maturity date of the Facility Agreement until January 15, 2014. The Fifth Amendment was subject to the repayment of $4.125 million of the outstanding principal amount and the repayment of $0.7 million of capitalized interest under the Facility Agreement. The total amount of outstanding principal and capitalized interest under the Facility Agreement prior to the repayment of such amount was $25.8 million (which included $125,000 borrowed on January 11, 2013). In addition, accrued interest, amendment fees and certain transaction expenses were paid at closing out of the gross proceeds of the Private Placement. As of January 15, 2013, the amount remaining owed under the Facility Agreement was $21.0 million. After taking into account the amounts paid pursuant to the Fifth Amendment and transaction fees and expenses incurred in connection with the Fifth Amendment and the Private Placement, the net proceeds to the Company of the Private Placement were $52.0 million.
On December 31, 2013, the Company entered into the Sixth Amendment to, among other things, extend the maturity date of the Facility Agreement from January 15, 2014 to April 15, 2014. The Sixth Amendment also requires the Company to pay interest under the Facility Agreement on a monthly basis rather than a quarterly basis.
On March 31, 2014, the Company entered into the Extension Agreement to, among other things, extend the maturity date of the Facility Agreement from April 15, 2014 to July 15, 2014. The Extension Agreement contained certain customary representations, warranties, releases and confirmations.
On July 9, 2014, the Company entered into the Second Extension Agreement to, among other things, extend the maturity date of the Facility Agreement from July 15, 2014 to September 15, 2014. The Extension Agreement contained certain customary representations, warranties, releases and confirmations.
To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through additional debt, reserve based, project or equity-related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain, and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. There can be no assurance that the Chinese authorities will provide the approvals necessary for a transaction or transfer. There can be no
guarantee of future capital acquisition, fundraising or exploration success. See Note 4 to the Financial Statements for information regarding the Facility Agreement.
In addition to payment of the above amounts to SCB, FEEB and FEEC have used the net proceeds of the Private Placement for (i) drilling and development expenses for the Shouyang CBM project in the Shanxi Province in China, including drilling and completion expenses of appraisal wells, drilling and completion expenses of production wells, construction and installation of gathering and compression facilities and submission of an overall development plan for the project, (ii) general corporate purposes, including exploration costs for such project, operating costs on the Shouyang PSC and general and administrative expenses and (iii) transaction expenses. Under the securities purchase agreement for the Private Placement and the Indenture, FEEB and FEEC are obligated to apply the net proceeds according to the estimated amounts of each category set forth therein within an agreed range, provided that FEEC and FEEB shall apply not less than $21.6 million for the drilling and completion of production wells.
There can be no guarantee of future capital acquisition, fundraising or exploration success or that we will realize the value of our unproved exploratory well costs.
Summary of Material Terms of the Notes.
The Notes are senior secured obligations of FEEB and are fully and unconditionally guaranteed by FEEC. The Notes were sold at an issue price of 100% of par for an aggregate principal amount of $60.0 million. The Notes accrue cash interest at a rate of 13.0% per year, which is paid semi-annually in arrears on June 30 and December 30 of each year, commencing on June 30, 2013. FEEB may, at its option, elect to pay interest “in kind” at a rate of 14.5% per year by issuing additional Notes with the first interest payment required to be paid in kind. The Notes will mature on January 15, 2016.
The Notes and related guarantees rank equal in right of payment with the Facility Agreement. Except as specifically permitted by the Indenture, any new indebtedness of FEEC, FEEB or any restricted subsidiary of FEEC will require the consent of SCB and the “Required Noteholders,” which means holders of 75% of aggregate principal amount at maturity of the Notes. The Notes and related guarantees are secured by substantially all of the assets of FEEC and FEEB, other than assets located in the People’s Republic of China, assets the grant, creation or perfection of any lien on which would require the consent, authorization or approval of, or filing with, any governmental authority in the People’s Republic of China and certain other excluded assets. Such collateral continues to secure the Facility Agreement with the administration of such collateral subject to a collateral agency and intercreditor agreement between SCB and Wells Fargo Bank, National Association, as indenture trustee of the Notes and as collateral agent.
In certain circumstances specified in the Indenture and as summarized below, FEEB may or will be required to redeem or offer to repurchase the Notes at the relevant prices set forth below times the principal amount being redeemed or repurchased:
Closing Date to February 28, 2014
|
|
|
100
|
%
|
March 1, 2014 to December 31, 2014
|
|
|
104
|
%
|
January 1, 2015 and thereafter
|
|
|
108
|
%
|
plus accrued and unpaid interest thereof, if any, on the Notes to the applicable date of redemption or repurchase, as applicable.
FEEB has the option to redeem the Notes, in whole or in part, at any time after all obligations under the Facility Agreement have been repaid in full at the relevant redemption prices set forth above.
In the event that FEEC and FEEB obtain financing pursuant to a credit facility, agreement or indenture with one or more banks or other institutional lenders or a trustee or investors (a “Future Financing”), which in certain circumstances would require the consent of the Required Noteholders and SCB, or if FEEC sells capital stock at a time when the aggregate principal amount of the Notes outstanding exceeds $10.0 million, the net proceeds of such Future Financing and the net proceeds of such capital stock offering in excess of $5.0 million, as applicable, shall first be used to repay obligations under the Facility Agreement and thereafter to redeem the Notes at the redemption prices set forth above to the extent of such amounts.
In the event that (i) FEEC and FEEB generate “excess cash flow” as defined in the Indenture, (ii) FEEC or FEEB sell assets in circumstances described in the Indenture or (iii) a casualty loss of property or assets of FEEC or FEEB occurs and the insurance proceeds with respect to such loss exceed $30.0 million, then FEEB will be required to apply the “excess cash flow amount” (as defined in the Indenture), the net proceeds of such asset sale or such insurance proceeds, as applicable, to first repay obligations under the Facility Agreement and thereafter to offer to repurchase the Notes at the purchase prices set forth above. The “excess cash flow amount” means, with respect to any period, 50% of the excess cash flow for such period minus $5.0 million of cash and cash equivalents for such period minus the principal amount of the Facility Agreement repaid with such excess cash flow during such period.
In the event of a change of control of FEEC, FEEB will be required to repay all obligations outstanding under the Facility Agreement and to offer to repurchase the Notes at the purchase prices set forth above.
The Indenture contains covenants that, among other restrictions, limit FEEC’s and FEEB’s ability and the ability of certain of their subsidiaries to:
•
amend our constitutional documents;
•
incur or guarantee additional indebtedness other than up to $15.0 million of aggregate principal amount of additional Notes and additional warrants on terms identical to or more favorable to FEEC than the Warrants;
•
issue certain preferred stock;
•
create or incur liens other than liens permitted by the Indenture;
•
pay dividends, repurchase equity securities, redeem subordinated debt, repay certain intercompany indebtedness up to a specified amount or make investments or other restricted payments;
•
transfer or sell assets;
•
incur dividend or other payment restrictions;
•
enter into certain transactions with affiliates;
•
change FEEC’s or FEEB’s line of business;
•
form subsidiaries;
•
sell capital stock of restricted subsidiaries; and
•
merge, consolidate or transfer all or substantially all of FEEC’s and FEEB’s assets.
In addition, the Indenture contains covenants that, among other obligations, require FEEC and FEEB to:
•
be in compliance with all relevant laws and regulations;
•
provide specified financial reports to holders of Notes;
•
maintain customary insurance policies;
•
maintain FEEB’s foreign exchange registration certificate;
•
use the net proceeds of the Private Placement as set forth in the Indenture; and
•
use their commercially reasonable efforts to list the Notes on the Cayman Islands Stock Exchange within six months of the issue date and maintain such listing.
The Indenture contains customary events of default that could, subject to certain conditions, cause the Notes to become immediately due and payable, including but not limited to:
•
the failure to make principal (at maturity, upon redemption or otherwise) or interest payments when due;
•
the failure to make, and to accept and pay the purchase price for Notes tendered pursuant to, the offers to purchase required by the Indenture;
•
the failure to comply with certain covenants in the Indenture or any of the collateral documents;
•
the failure to comply with the reporting obligations in the Indenture for ten days after notice by the trustee or the holders of at least 25% of the aggregate principal amount of the Notes;
•
the default by FEEC or any of its restricted subsidiaries under any mortgage, indenture or other indebtedness in the aggregate of $1 million or more if caused by the failure to pay principal or interest when due or if such default entitles the creditor to declare such indebtedness due and payable prior to its stated maturity;
•
the failure to satisfy certain final, non-appealable judgments of any court of competent jurisdiction in excess of $1.0 million;
•
if any Note guarantee is held to be unenforceable or is repudiated by the guarantor thereof;
•
certain events of bankruptcy or insolvency;
•
the liens securing the Notes cease to be in full force in effect or cease to have priority over certain other lienholders with respect to collateral with a fair market value in excess of $1.0 million or are contested by FEEB or any guarantor in circumstances specified by the Indenture;
•
any representation or warranty made by FEEC or FEEB in the securities purchase agreement for the Private Placement proves to be incorrect in any material respect;
•
the validity of the Notes, the guarantees of the Notes or the Indenture is contested by FEEB or any guarantor;
•
the Shouyang project is abandoned in whole or in part, the Shouyang PSC is terminated, revoked or ceases to be in full force and effect or an event of loss occurs with respect to any of the property or assets of FEEC or FEEB in excess of $10 million net of any insurance proceeds; and
•
certain acts of governmental expropriation or nationalization or certain governmental restrictions on foreign currency exchange or that prevents FEEC or FEEB from paying its obligations in U.S. dollars.
Summary of Material Terms of the Warrants.
The Warrants provide the holders the right to purchase up to 56,086,439 shares of FEEC common stock at an exercise price of $0.085 per share, subject to adjustments described below. The Warrants are exercisable at any time after issuance and will expire at 5:00 p.m., New York City time, on December 31, 2017. The Warrants have anti-dilution provisions specified in the Warrant Agreement, dated January 15, 2013 (the “Warrant Agreement”), between FEEC and Continental Stock Transfer & Trust Company, as warrant agent, including, but not limited to, adjustments for (i) stock splits, reverse stock splits and stock dividends, (ii) the issuance of rights, options, warrants or convertible or exchangeable securities at a price per share less than the current market value of FEEC common stock at the record date therefore, (iii) certain distributions of cash, evidence of indebtedness or other property or assets to holders of any class of common stock, (iv) certain reclassifications, consolidations, mergers or sales of assets of FEEC and (v) certain issuances or sales, or deemed issuances or sales, of shares of common stock for an effective price below the then-effective exercise price of the Warrants or for an effective price greater than the then-effective exercise price but less than or equal to $0.425 per share, subject to adjustment, or for an effective price greater than $0.425, subject to adjustment, but less than the current market price per share at the time of such issuance or sale.
The holders of the Warrants are entitled to certain registration rights set forth in the Registration Rights Agreement, dated January 15, 2013 (the “Registration Rights Agreement”), between FEEC and the purchasers of the Warrants. Under the Registration Rights Agreement, FEEC will file a registration statement (the "Primary Registration Statement") on the appropriate form with the Securities and Exchange Commission (“SEC”) to register under the Securities Act the resale of the shares of common stock issuable upon exercise of the Warrants within 210 days after the closing date and will use its best efforts to cause the Primary Registration Statement to be declared effective by the SEC under the Securities Act within 360 days after the closing date (or within 390 days after the closing date if FEEC receives comments on the Primary Registration Statement from the SEC). In addition, the holders of common stock underlying the Warrants will have "piggyback" registration rights for the resale of such shares of common stock.
Our board of directors has the authority, without further action by the stockholders but subject to restrictions in the Warrant Agreement and Indenture, to issue up to 500 million shares of preferred stock in one or more series and to designate the rights, preferences, privileges and restrictions of each series. We also have 500 million shares of Common Stock authorized under our charter documents, of which approximately 346.2 million shares were issued and outstanding as of June 30, 2014.
The issuance of preferred stock could have the effect of restricting dividends on the common stock or delaying or preventing our change in control without further action by the stockholders. While we have no present plans to issue any shares of preferred stock, we may need to do so in the future in connection with capital raising transactions. In addition, we may issue additional shares of common stock in connection with capital raising activities. The issuance of additional common stock would also have a dilutive impact on our stockholders' ownership interest in our company.
Work Program and Other Funding.
Our current work programs satisfied the minimum exploration expenditures for our Shouyang and Yunnan PSCs for 2013. With respect to the Qinnan PSC, we have halted
activities on the Qinnan Block pending regulatory approval or denial of our force majeure claims. To secure additional capital for future work programs and to repay the Facility Agreement on or before its maturity date, management must either explore potential strategic relationships or transactions involving one or more of our PSCs, such as a joint venture, farmout, merger, acquisition or sale of some or all of our assets or obtain additional debt, reserve based, project or equity-related financing. However, there can be no assurance that we will be successful in entering into any strategic relationship or transaction, securing capital or raising funds through debt, reserve based, project or equity- related financing. In addition, the terms and conditions of any potential strategic relationship or transaction or of any debt, reserve based, project or equity-related financing are uncertain and we cannot predict the timing, structure or other terms and conditions or the consideration that may be paid with respect to any transaction or offering of securities and whether the consideration will meet or exceed our offering price. Due to certain factors, an offering of our common stock is likely not a viable alternative at this time, but a non-convertible preferred stock offering might be possible under certain circumstances. Under certain circumstances, the structure of a strategic transaction may require the approval of the Chinese authorities, which could delay closing or make the consummation of a transaction more difficult. In particular, any transfer of our rights under the PSCs will require the approval of our Chinese partner company and the MofCom. However, on May 15, 2013, the State Council of PRC announced that such approval will no longer require the approval by MofCom. The Company is still analyzing the impact of the change and the affect it could have on its business and operations. There can be no assurance that the Chinese authorities will provide the approvals necessary for the consummation of a transaction or transfer. There can be no guarantee of future success in capital acquisition, fundraising or exploration success.
Our capital resources and planning can be impacted by fluctuations in the U.S. Dollar and RMB exchange rate as well as inflation in these countries. For further discussion of these risks, see Item 3. "Quantitative and Qualitative Disclosures About Market Risk."
Cash Flows.
As of June 30, 2014, our balance in cash and cash equivalents was $7.2 million, a decrease of $10.3 million from the balance of $17.6 million as of December 31, 2013. The decrease was due to $9.3 million used in operating activities and $1.0 million used in investing activities.
Cash used in operating activities for the six months ended June 30, 2014 was $9.3 million as compared to cash used in operating activities for the same period in 2013 of $13.1 million. The decrease was primarily due to $5.1 million favorable change in working capital, the decrease was offset by an increase of $1.7 million in LOE.
Cash used in investing activities for the six months ended June 30, 2014 was $1.0 million as compared to $8.4 million for the same period in 2013. The decrease was primarily due to a decrease in additions to oil and gas properties of $7.3 million.
Cash used by financing activities for the six months ended June 30, 2014 was $8,000 as a result of financing costs related to the Extension Agreement. Cash provided by financing activities for the six months ended June 30, 2013 was $52.0 million as a result of net proceeds from the Private Placement during the first quarter of 2013.
Forward-Looking Statements.
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. The words "believe," "may," "will," "plan," "estimate," "continue," "anticipate," "intend," "expect," "project," and
similar expressions, as they relate to us, are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Although we believe that the expectations reflected in these forward-looking statements are reasonable, there can be no assurance that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the expected effects on our business or operations. Actual results could differ materially from those projected in such forward-looking statements. Factors that could cause actual results to differ materially from those projected in such forward-looking statements include: the preliminary nature of well data, including permeability and gas content; there can be no assurance as to the volume of gas that is ultimately produced or sold from our wells; the fracture stimulation program may not be successful in increasing gas volumes; due to limitations under Chinese law, we may have only limited rights to enforce the Gas Sales Agreement, to which we are an express beneficiary; additional wells may not be drilled, or if drilled may not be timely; additional pipelines and gathering systems needed to transport our gas may not be constructed, or if constructed may not be timely, or their routes may differ from those anticipated; the pipeline and local distribution/compressed natural gas companies may decline to purchase or take our gas (although the Gas Sales Agreement with the pipeline is a “take or pay” contract), or we may not be able to enforce our rights under definitive agreements with pipelines; conflicts with coal mining operations or coordination of our exploration and production activities with mining activities could adversely impact or add significant costs to our operations; if required, the MofCom may not approve on a timely basis or at all, the extension of the Qinnan PSC or, if so, on commercially advantageous terms; our Chinese partner companies or the MofCom may require certain changes to the terms and conditions of the Shouyang or Yunnan PSCs in conjunction with their approval of any extension of the exploration period, including reductions in acreage or a reduction in the term of the extension for the exploration period; our lack of operating history; limited and potentially inadequate management of our cash resources; risk and uncertainties associated with exploration, development and production of CBM; our inability to extract or sell all or a substantial portion of our estimated CBM resources; we may not satisfy requirements for listing our securities on a securities exchange; expropriation and other risks associated with foreign operations; disruptions in capital markets affecting fundraising; matters affecting the energy industry generally; lack of availability of oil and gas field goods and services; environmental risks; drilling and production risks; changes in laws or regulations affecting our operations, as well as other risks described in our filings with the SEC.
When you consider these forward-looking statements, you should keep in mind these factors, the risk factors set forth in our 2013 Annual Report and this Quarterly Report on Form 10-Q under "Item 1A. Risk Factors" and in other filings with the SEC and the other cautionary statements in this Quarterly Report on Form 10-Q. Our forward-looking statements speak only as of the date made. All subsequent oral and written forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We assume no obligation to update any of these statements.