Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in
conjunction with our Unaudited Financial Statements and Notes thereto included
herein and our Financial Statements and Notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2013 (the Form 10-K),
along with
Managements Discussion and Analysis of Financial Condition and
Results of Operations
contained in the Form 10-K. Any terms used but not
defined herein have the same meaning given to them in the Form 10-K. Our
discussion and analysis includes forward-looking information that involves risks
and uncertainties and should be read in conjunction with
Risk Factors
under Item 1A of Part II of this report, along with
Forward-Looking
Information
at the end of this section for information on the risks and
uncertainties that could cause our actual results to be materially different
than our forward-looking statements.
Throughout this Quarterly Report on Form 10-Q, the terms "Park
Place" "we" "us," "the Company", "our" and "our company" refer to Park Place
Energy Corp. and its subsidiaries.
Our website can be found at www.parkplaceenergy.com. 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 U.S.
Securities and Exchange Commission ("SEC"), pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934 ("Exchange Act"), can be accessed free of
charge by linking directly from our website under the "Investor Relations - SEC
Filings" caption to the SEC's Edgar Database.
Executive overview
Park Place Energy Corp. is an energy company engaged in
exploration for oil and natural gas in Bulgaria.
Today, the operations of our Company and its subsidiary
concentrate on natural gas exploration in the Dobrich region of northeast
Bulgaria. Our goal is to become a producer of natural gas in Bulgaria.
Our head offices are located in Texas and we established a
registered office in Bulgaria and satellite offices in British Columbia, Canada.
Our primary oil and gas exploration permit is located in the
Dobrudja Basin, northeast Bulgaria, which was awarded to the Company in October
2010. The award of the exploration permit was in dispute until mid-2013, due to
litigation regarding the tender process that was resolved in our favor. The term
of the initial period of the exploration permit is five years. This five-year
period will commence once the Bulgarian regulatory authorities approve the Park
Place work programs for the permit area. The specific proposed work programs are
presently under review by the Bulgairan authorities. The initial term of the
exploration permit may be extended up to an additional 5 years so long as we
satisfy our minimum work commitments. Upon declaration of a commercial
discovery, a portion of the exploration permit may be converted into an
exploitation concession, which may have a duration of up to 35 years so long as
we satisfy our minimum work commitments.
In 2010, we revamped our business strategy to focus on
obtaining gas properties in Europe. We were attracted to the high price of
natural gas and shortage of supply on the European continent. We also saw the
possibility of prolonged depressed natural gas prices in North America.
In October of 2010, we were awarded our first exploration block
in Europe, the Vranino 1-11 Block located in Dobrudja Basin, Bulgaria covering
an area of 98,205 acres (397.42 square kilometers) by the Bulgarian Counsel of
Ministers. Thereafter, on April 1, 2014, the Company entered into a license
agreement titled Agreement for Crude Oil and Natural Gas Prospecting and
Exploration in Block 1-11 Vranino, situated in Dobrich District with the
Ministry of Economy and Energy of Bulgaria (the License Agreement).
Notwithstanding the execution of the License Agreement, under
Bulgarian law, the exploration license granted therein will not become effective
until all of the following conditions have been satisfied (the License
Conditions Precedent): (i) the approval of the Companys work programs by the
Ministry of Environment as well as by the Ministry of Energy (the Ministry
Approvals); (ii) the posting of a bond by the Company, the amount of which must
be approved by the Ministry of Energy; (iii) plus the payment of a signature
bonus by the Company in the amount of 100,007 Euros, within thirty days after
the Ministry Approvals.
The initial term of the License Agreement is five (5) years.
This five-year period will commence after the License Conditions Precedent have
been satisfied, which is expected to occur mid-2014. The License Agreement (or
applicable legislation) provides for possible extension periods
for up to 5 additional years during the exploration phase, as well as the
conversion of the License Agreement to an exploitation concession, which can
last up to 35 years. Such extensions and conversion are at the Companys
election, subject to the Companys satisfaction of minimum work commitments and
Government approval.
15
Under the License Agreement, the Company will submit a yearly
work program that is subject to approval of the Bulgarian regulatory
authorities. The Companys commitment is to perform geological and geophysical
exploration activities in the first 3 years of the initial term, followed by
drilling activities in years 4 and 5 of the initial term. The Company is
expected to drill approximately 32,800 feet (10,000 meters) of new wellbore (may
be vertical, horizontal or diagonal) and conduct other exploration activities at
certain intervals during the initial term. The Company has flexibility to adjust
the yearly work program based on negotiations with the Bulgarian regulatory
authorities.
If the Company is successful in its exploration efforts during
the exploration phase, the Company would file to establish a geological
discovery. The Company is permitted to commence limited production during the
exploration phase. After additional exploration work is completed on the area
covered by the License Agreement and upon declaration of a commercial discovery,
the Company may, subject to Government approval, convert a portion of the
License Agreement to an exploitation concession. The duration of the
exploitation concession may last for up to 35 years so long as minimum work
commitments are satisfied.
The costs of the exploration plan will vary depending on a
variety of factors, including, inter alia, the market price and availability of
services in the area, taxes, and transportation costs relating to delivering
equipment to the area.
During the quarter, we continued to engage in the collection of
historical data regarding the Bulgarian license block. We have accumulated a
solid body of data that will assist us in making the exploration project
successful. We have submitted our overall five year work program and our first
year work program and budget to the government authorities for their approval.
Patents and Trademarks
We do not own, either legally or beneficially, any patent or
trademark.
Research and Development Expenditures
We have not incurred any research or development expenditures
since our incorporation.
Government Regulation
Our current or future operations, including exploration and
development activities on our properties, require permits from various
governmental authorities, and such operations are and will be governed by laws
and regulations of the jurisdiction in which we are conducting business, which
at the present time is Bulgaria. These laws and regulations concern exploration,
development, production, exports, taxes, labor laws and standards, occupational
health, waste disposal, toxic substances, land use, environmental protection and
other matters. Compliance with these requirements may prove to be difficult and
expensive. Due to our international operations, we are subject to the following
issues and uncertainties that can affect our operations adversely:
-
the risk of expropriation, nationalization, war, revolution, political
instability, border disputes, renegotiation or modification of existing
contracts, and import, export and transportation regulations and tariffs;
-
laws of foreign governments affecting our ability to fracture stimulate oil
or natural gas wells, such as the legislation enacted in Bulgaria in January
2012, discussed in greater detail below;
-
the risk of not being able to procure residency and work permits for our
expatriate personnel;
-
taxation policies, including royalty and tax increases and retroactive tax
claims;
-
exchange controls, currency fluctuations and other uncertainties arising
out of foreign government sovereignty over international operations;
16
-
laws and policies of the United States affecting foreign trade, taxation
and investment;
-
the possibility of being subjected to the exclusive jurisdiction of foreign
courts in connection with legal disputes and the possible inability to subject
foreign persons to the jurisdiction of courts in the United States; and
-
the possibility of restrictions on repatriation of earnings or capital from
foreign countries.
Permits and Licenses
In order to carry out exploration and development of oil and
natural gas interests or to place these into commercial production, we may
require certain licenses and permits from various governmental authorities.
There can be no guarantee that we will be able to obtain all necessary licenses
and permits that may be required. In addition, such licenses and permits are
subject to change and there can be no assurances that any application to renew
any existing licenses or permits will be approved.
Repatriation of Earnings
Currently, there are no restrictions on the repatriation of
earnings or capital to foreign entities from Bulgaria. However, there can be no
assurance that any such restrictions on repatriation of earnings or capital from
the aforementioned countries or any other country where we may invest will not
be imposed in the future.
Environmental
The oil and natural gas industry is subject to extensive
environmental regulations in Bulgaria. Environmental regulations establish
standards respecting health, safety and environmental matters and place
restrictions and prohibitions on emissions of various substances produced
concurrently with oil and natural gas. The regulatory requirements cover the
handling and disposal of drilling and production waste products and waste
created by water and air pollution control procedures. These regulations may
have an impact on the selection of drilling locations and facilities,
potentially resulting in increased capital expenditures. In addition,
environmental legislation may require those wells and production facilities to
be abandoned and sites reclaimed to the satisfaction of local authorities. Such
regulation has increased the cost of planning, designing, drilling, operating
and, in some instances, abandoning wells. We are committed to complying with
environmental and operation legislation wherever we operate.
There has been a recent surge in interest among the media,
government regulators and private citizens concerning the possible negative
environmental and geological effects of fracture stimulation. Some have alleged
that fracture stimulation results in the contamination of aquifers and may even
contribute to seismic activity. In January 2012, the government of Bulgaria
enacted legislation that banned the fracture stimulation of oil and natural gas
wells in the Republic of Bulgaria and imposed large monetary penalties on
companies that violate that ban. Such legislation or regulations could impact
our ability to drill and complete wells, and could increase the cost of
planning, designing, drilling, completing and operating wells. We are committed
to complying with legislation and regulations involving fracture stimulation
wherever we operate.
Such laws and regulations not only expose us to liability for
our own negligence, but may also expose us to liability for the conduct of
others or for our actions that were in compliance with all applicable laws at
the time those actions were taken. We may incur significant costs as a result of
environmental accidents, such as oil spills, natural gas leaks, ruptures, or
discharges of hazardous materials into the environment, including clean-up costs
and fines or penalties. Additionally, we may incur significant costs in order to
comply with environmental laws and regulations and may be forced to pay fines or
penalties if we do not comply.
Competition
We operate in Bulgaria, where currently one Russian company
supplies Bulgaria with virtually all gas being marketed and consumed in Bulgaria
through a pipeline that runs through Ukraine from Russia. On a regional level,
we compete with other oil and gas exploration companies and independent
producers for license blocks and capital, which are actively seeking oil and gas
properties throughout the world.
The principal area of competition is encountered in the
financial ability of our Company to acquire acreage positions and drill wells to
explore for oil and gas, then, if warranted, install production equipment.
Competition for the acquisition of oil and gas license areas is high in
Europe.
17
Therefore, we may or may not be successful in acquiring
additional blocks in the face of this competition. Presently, we are not seeking
additional license blocks.
From a general standpoint, we operate in the highly competitive
areas of oil and natural gas exploration, development, production and
acquisition with a substantial number of other companies, including U.S.-based
and international companies doing business in each of the countries in which we
operate. We face intense competition from independent, technology-driven
companies as well as from both major and other independent oil and natural gas
companies in each of the following areas:
-
seeking oil and natural gas exploration licenses and production licenses
and leases;
-
acquiring desirable producing properties or new leases for future
exploration;
-
marketing oil and natural gas production;
-
integrating new technologies; and
-
contracting for drilling services and equipment and securing the expertise
necessary to develop and operate properties.
Many of our competitors have substantially greater financial,
managerial, technological and other resources than we do. To the extent
competitors are able to pay more for properties than we are paying, we will be
at a competitive disadvantage. Further, many of our competitors enjoy
technological advantages over us and may be able to implement new technologies
more rapidly than we can. Our ability to explore for and produce oil and natural
gas prospects and to acquire additional properties in the future will depend
upon our ability to successfully conduct operations, implement advanced
technologies, evaluate and select suitable properties and consummate
transactions in this highly competitive environment.
Employees and Directors
As of June 30, 2014, the Company had one full time employee,
the Companys chief financial officer, while all of the other executive officers
of Company work on a consulting contract basis. As of June 30, 2014, our
business is generally conducted through our officers and directors and also
through consultants of the company. A description of our officers and
directors professional experience is contained on our website.
Working Capital
Based on our current plan of operations as set forth above, we
estimate that we will require approximately $2,300,000 to pursue our plan of
operations over the next 12 months. As at June 30, 2014, we had cash of
$1,917,090 and working capital of $1,549,882.
The Company requires additional funds over the next twelve
months to fully implement its business plan and cover its operating expenses.
Management will evaluate various alternatives to obtain additional funding,
which include, without limitation, financing through the sale of equity,
borrowings from private lenders, or farm-outs or similar arrangements under
which third parties would pay all or a portion of the costs to implement the
Companys business plan in exchange for an interest in assets of the Company. In
connection with a possible financing through the sale of equity, the Company
will consider a listing on a domestic or foreign stock exchange. There can be no
certainty that these sources will provide the additional funds required for the
next twelve months. If we do not continue to obtain additional financing or less
than anticipated going forward, we will re-evaluate our plans.
Results of Operations
The following summary of our results of operations should be
read in conjunction with our unaudited consolidated financial statements for the
quarter ended June 30, 2014 which are included herein.
18
Revenue
We are a pre-revenue stage company, and our future revenues
depend upon successful extraction of oil and gas deposits for sale.
Expenses
Our total operating expenses for the six months ending June 30,
2014 was $376,554 compared to $121,258 for the same period in 2013.
Our primary expense categories are described below:
General and Administrative Expenses
Our office and general expenses increased to $367,471 for the
six months ended June 30, 2014 from $118,819 for the six months ending June 30,
2013. Our overhead increased due to employing more consultants and increased
general activity of the Company over the last year.
Loss
Our net loss for the six months ending June 30, 2014 was
$376,554 compared to $124,784 for the six months ending June 30, 2013.
Liquidity and Capital Resources
Overview
For the six months ending June 30, 2014, we raised net proceeds
of $2,505,000 in cash from the issuance of common stock and share subscriptions
received (net of stock issuance costs) all which funds will be used for general
operation and to commence the exploration in Bulgaria.
We used net cash of $233,151 in operating activities for the
six months ended June 30, 2014 compared to $57,916 for the same period in
2013.
The following table summarizes our liquidity position as at
June 30, 2014:
|
|
As at
|
|
|
|
June 30, 2014
|
|
|
|
(Unaudited)
|
|
|
|
$
|
|
Cash
|
|
1,917,090
|
|
Working capital
|
|
1,549,882
|
|
Total assets
|
|
3,706,842
|
|
Total liabilities
|
|
387,118
|
|
Shareholders equity
|
|
3,319,724
|
|
We anticipate that we will require approximately $2,300,000 to
pursue our plan of operations over the next 12 months. As at June 30, 2014, we
had cash of $1,917,090 and working capital of $1,549,822. We anticipate raising
additional funds over the next twelve months to pay for our exploration
commitments in Bulgaria and general and administrative expenses.
Cash Flow Used In Operating Activities
Net cash used in operating activities was $233,151 for the six
months ended June 30, 2014 compared to $57,516 for the six months ended June 30,
2013.
19
Cash Flow from Investing Activities
Net cash used in investing activities for the six months ended
June 30, 2014 was $387,541 compared to net cash of $56,215 for the six months
ending June 30, 2013. This increase was due to increased expenditures on the
Bulgarian project compared to the prior period as the litigation regarding the
exploration claim was concluded in June 2013.
Cash Provided By Financing Activities
For the six months ended June 30, 2014, cash provided by
financing activities was $2,505,000 compared to $367,624 for the six months
ended June 30, 2013.
Off-Balance Sheet Arrangements
There are no off balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources, which individually or in
the aggregate is material to our investors.
Critical Accounting Policies
Our consolidated financial statements and accompanying notes
have been prepared in accordance with U.S. generally accepted accounting
principles applied on a consistent basis. The preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates
that we use to prepare our consolidated financial statements. In general,
managements estimates are based on historical experience, on information from
third party professionals, and on various other assumptions that are believed to
be reasonable under the facts and circumstances. Actual results could differ
from those estimates made by management.
We believe that our critical accounting policies and estimates
include the following:
Oil and gas properties
The Company follows the full
cost method of accounting for oil and natural gas operations, whereby all costs
of exploring for and developing oil and natural gas reserves are capitalized and
accumulated in cost centers on a country-by-country basis. Costs include land
acquisition costs, geological and geophysical charges, carrying charges on
non-productive properties and costs of drilling both productive and
non-productive wells. General and administrative costs are not capitalized other
than to the extent of the Companys working interest in operated capital
expenditure programs on which operators fees have been charged equivalent to
standard industry operating agreements.
The costs in each cost center, including the costs of well
equipment, are depleted and depreciated using the unit-of-production method
based on the estimated proved reserves before royalties. Natural gas reserves
and production are converted to equivalent barrels of crude oil based on
relative energy content. The costs of acquiring and evaluating significant
unproved properties are initially excluded from depletion calculations. These
unevaluated properties are assessed periodically to ascertain whether impairment
has occurred. When proved reserves are assigned or the property is considered to
be impaired, the cost of the property or the amount of the impairment is added
to costs subject to depletion.
The capitalized costs less accumulated depletion and
depreciation in each cost center are limited to an amount equal to the estimated
future net revenue from proved reserves (based on prices and costs at the
balance sheet date) plus the cost (net of impairments) of unproved properties.
The total capitalized costs less accumulated depletion and depreciation, site
restoration provision and future income taxes of all cost centers are further
limited to an amount equal to the future net revenue from proved reserves plus
the cost (net of impairments) of unproved properties of all cost centers less
estimated future site restoration costs, general and administrative expenses,
financing costs and income taxes.
Proceeds from the sale of oil and natural gas properties are
applied against capitalized costs, with no gain or loss recognized, unless such
a sale would significantly alter the rate of depletion and depreciation.
20
Stock-based compensation
The Company accounts for share-based compensation under the
provisions of ASC 718 Compensation Stock Compensation. ASC 718 requires that
all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the fair value of the award.
Recent Accounting Pronouncements
The Company has limited operations and is considered to be in
the development stage. In the period ended June 30, 2014, the Company has
elected to early adopt Accounting Standards Update No. 2014-10,
Development
Stage Entities (Topic 915): Elimination of Certain Financial Reporting
Requirements
. The adoption of this ASU allows the Company to remove the
inception to date information and all references to development stage.
The Company has implemented all new accounting pronouncements
that are in effect and that may impact its financial statements and does not
believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on its financial position or results of
operations
Forward-Looking Information
Certain statements in this Quarterly Report on Form 10-Q
constitute forward-looking statements within the meaning of applicable U.S.
securities legislation. Additionally, forward-looking statements may be made
orally or in press releases, conferences, reports, on our website or otherwise,
in the future, by us or on our behalf. Such statements are generally
identifiable by the terminology used such as plans, expects, estimates,
budgets, intends, anticipates, believes, projects, indicates,
targets, objective, could, should, may or other similar words.
By their very nature, forward-looking statements require us to
make assumptions that may not materialize or that may not be accurate.
Forward-looking statements are subject to known and unknown risks and
uncertainties and other factors that may cause actual results, levels of
activity and achievements to differ materially from those expressed or implied
by such statements, including the factors discussed under Item 1A. Risk Factors
in our 2013 Annual Report on Form 10-K. Such factors include, but are not
limited to, the following: fluctuations in and volatility of the market prices
for oil and natural gas products; the ability to produce and transport oil and
natural gas; the results of exploration and development drilling and related
activities; global economic conditions, particularly in the countries in which
we carry on business, especially economic slowdowns; actions by governmental
authorities including increases in taxes, legislative and regulatory initiatives
related to fracture stimulation activities, changes in environmental and other
regulations, and renegotiations of contracts; political uncertainty, including
actions by insurgent groups or other conflicts; the negotiation and closing of
material contracts; future capital requirements and the availability of
financing; estimates and economic assumptions used in connection with our
acquisitions; risks associated with drilling, operating and decommissioning
wells; actions of third-party co-owners of interests in properties in which we
also own an interest; our ability to effectively integrate companies and
properties that we acquire; our limited operating history; our history of
operating losses; our lack of insurance coverage; and the other factors
discussed in other documents that we file with or furnish to the U.S. Securities
and Exchange Commission. The impact of any one factor on a particular
forward-looking statement is not determinable with certainty as such factors are
interdependent upon other factors and our course of action would depend upon our
assessment of the future, considering all information then available. In that
regard, any statements as to: future oil or natural gas production levels;
capital expenditures; the allocation of capital expenditures to exploration and
development activities; sources of funding for our capital expenditure programs;
drilling of new wells; demand for oil and natural gas products; expenditures and
allowances relating to environmental matters; dates by which certain areas will
be developed or will come on-stream; expected finding and development costs;
future production rates; ultimate recoverability of reserves, including the
ability to convert probable and possible reserves to proved reserves; dates by
which transactions are expected to close; future cash flows, uses of cash flows,
collectability of receivables and availability of trade credit; expected
operating costs; changes in any of the foregoing and other statements using
forward-looking terminology are forward-looking statements, and there can be no
assurance that the expectations conveyed by such forward-looking statements
will, in fact, be realized.
Although we believe that the expectations conveyed by the
forward-looking statements are reasonable based on information available to us
on the date such forward-looking statements were made, no assurances can be
given as to future results, levels of activity, achievements or financial
condition.
Readers should not place undue reliance on any forward-looking
statement and should recognize that the statements are predictions of future
results, which may not occur as anticipated. Actual results could differ
materially from those anticipated in the forward-looking statements and from
historical results, due to the risks and uncertainties described above, as well
as others not now anticipated. The foregoing statements are not exclusive and
further information concerning us, including factors that potentially could
materially affect our financial results, may emerge from time to time. We do not
intend to update forward-looking statements to reflect actual results or changes
in factors or assumptions affecting such forward-looking statements.
21