Item 1. Description of Business
GENERAL
Spindletop Oil & Gas Co. is an independent oil and gas company
engaged in the exploration, development, production and acquisition of oil and natural gas; the rental of oilfield equipment; and
through one of its subsidiaries, the gathering and marketing of natural gas. The terms the "Company", "We",
"Us" or “Spindletop” are used interchangeably herein to refer to Spindletop Oil & Gas Co. (“Spindletop”,
“SOG”) and its wholly owned subsidiaries, Spindletop Drilling Company ("SDC"), and Prairie Pipeline Co. (“PPC”).
The Company has focused its oil and gas operations principally in
Texas, although we operate properties in six states including: Texas, Oklahoma, New Mexico, Louisiana, Alabama and Arkansas. We
operate a majority of our projects through the drilling and production phases. Our staff has a great deal of experience in the
operations arena. We have traditionally leveraged the risks associated with drilling by obtaining industry partners to share in
the costs.
In addition, the Company, through PPC, owns several miles of pipelines
associated with Company operated oil and natural gas properties in Texas and other states, which are used for the gathering of
natural gas. These gathering lines are located primarily in the Fort Worth Basin and are being utilized to transport the Company's
natural gas as well as natural gas produced by third parties.
Website Access to Our Reports
We make available free of charge through our website, www.spindletopoil.com,
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports
as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Information
on our website is not a part of this report.
Operating Approach
We believe that a major attribute of the Company is its long history
with, and extensive knowledge of, the Fort Worth Basin of Texas. Our technical staff has an average of over 26 years oil and gas
experience, most of it in the Fort Worth Basin.
One of our strengths has been the ability of the Company to look
at cost effective ways to grow our production. We have traditionally increased our reserve base in one of two ways. Initially,
in the 1970s and 1980s, the Company obtained its production through an exploration and development drilling program focused principally
in the Fort Worth Basin of North Texas. Today, the Company has retained many of these wells as producing properties and holds a
large amount of acreage by production in that Basin.
From the 1990s through 2003, the Company took advantage of the lower
product prices by cost effectively adding to its reserve base through value-priced acquisitions. We found that through selective
purchases we could make producing property acquisitions that were more cost effective than drilling.
During this time period, the Company acquired a large number of operated
and non-operated oil and gas properties in various states.
From 2003 through the fourth quarter of 2008, we returned our focus
to a strategy of development drilling with an emphasis on our Barnett Shale acreage. Since 2009, our focus has evolved to seek
value-priced acquisitions combined with the development of economically feasible drilling prospects. Currently we are continuing
our efforts to acquire producing properties and develop our leasehold acreage. We are pursuing controlled growth primarily through
acquisitions of good quality producing properties. With current oil and natural gas prices and high costs to produce, we believe
that it is prudent to carefully evaluate all our options and make sure that each transaction can be supported in today’s
price environment.
Strategic Business Plans
One of our key strategies is to attempt to maintain shareholder value
through implementation of plans for selective drilling and value priced acquisitions to the extent the economics of such projects
work in this low energy price
3
environment and development of assets. The Company's long-term focus is to grow its oil and natural
gas production through a strategic combination of selected property acquisitions, divestitures, and a development program primarily
based on developing its leasehold acreage. Additionally, the Company plans to continue to rework existing wells to increase production
and reserves when feasible.
The Company's primary area of operation has been in the State of
Texas with an emphasis in the geological province known as the Fort Worth Basin. We plan to continue to focus on operations in
Texas, and we want to capitalize on our strengths which include an extensive knowledge of the various reservoirs in Texas, experience
in operations in this geographic area, development of lease holdings, and utilization of existing infrastructure to minimize costs.
The Company will continue to generate and evaluate prospects using
its own technical staff. The Company intends to fund operations primarily from cash flow generated by its operations.
Project Significant Areas
The Company owns various interests in wells located in 14 states
and the Company’s operations are currently located in 6 of those states which include Alabama, Arkansas, Louisiana, Oklahoma,
New Mexico and Texas.
The Company holds approximately 84,248 gross acres under lease in
14 states. The majority of the leases are held by production. A breakout of the Company’s leasehold acreage by geographic
area is as follows:
|
|
Operated
|
|
Non-Operated
|
|
|
|
|
|
Percent
|
|
|
Properties
|
|
Properties
|
|
Total
|
|
of Total
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
Geographic Area
|
|
Acres
|
|
Acres
|
|
Acres
|
|
Acres
|
|
Acres
|
|
Acres
|
|
Acres
|
|
Acres
|
North Texas (1)
|
|
|
7,993
|
|
|
|
7,510
|
|
|
|
6,759
|
|
|
|
334
|
|
|
|
14,752
|
|
|
|
7,844
|
|
|
|
17.52
|
%
|
|
|
38.81
|
%
|
East Texas
|
|
|
3,200
|
|
|
|
2,780
|
|
|
|
9,011
|
|
|
|
1,050
|
|
|
|
12,211
|
|
|
|
3,830
|
|
|
|
14.49
|
%
|
|
|
18.95
|
%
|
Gulf Coast Texas
|
|
|
40
|
|
|
|
35
|
|
|
|
2,250
|
|
|
|
65
|
|
|
|
2,290
|
|
|
|
100
|
|
|
|
2.72
|
%
|
|
|
0.49
|
%
|
South Texas
|
|
|
—
|
|
|
|
—
|
|
|
|
540
|
|
|
|
52
|
|
|
|
540
|
|
|
|
52
|
|
|
|
0.64
|
%
|
|
|
0.26
|
%
|
West Texas
|
|
|
1,115
|
|
|
|
988
|
|
|
|
2,390
|
|
|
|
163
|
|
|
|
3,505
|
|
|
|
1,151
|
|
|
|
4.16
|
%
|
|
|
5.69
|
%
|
Texas Panhandle
|
|
|
1,760
|
|
|
|
1,195
|
|
|
|
1,520
|
|
|
|
104
|
|
|
|
3,280
|
|
|
|
1,299
|
|
|
|
3.89
|
%
|
|
|
6.43
|
%
|
Alabama
|
|
|
1,160
|
|
|
|
634
|
|
|
|
2,498
|
|
|
|
169
|
|
|
|
3,658
|
|
|
|
803
|
|
|
|
4.34
|
%
|
|
|
3.97
|
%
|
Arkansas
|
|
|
1,286
|
|
|
|
1,141
|
|
|
|
2,957
|
|
|
|
109
|
|
|
|
4,243
|
|
|
|
1,250
|
|
|
|
5.04
|
%
|
|
|
6.18
|
%
|
Louisiana
|
|
|
195
|
|
|
|
144
|
|
|
|
3,058
|
|
|
|
213
|
|
|
|
3,253
|
|
|
|
357
|
|
|
|
3.86
|
%
|
|
|
1.77
|
%
|
New Mexico
|
|
|
2,600
|
|
|
|
1,835
|
|
|
|
796
|
|
|
|
29
|
|
|
|
3,396
|
|
|
|
1,864
|
|
|
|
4.03
|
%
|
|
|
9.22
|
%
|
Oklahoma
|
|
|
317
|
|
|
|
185
|
|
|
|
26,071
|
|
|
|
536
|
|
|
|
26,388
|
|
|
|
721
|
|
|
|
31.32
|
%
|
|
|
3.57
|
%
|
Colorado
|
|
|
—
|
|
|
|
—
|
|
|
|
240
|
|
|
|
—
|
|
|
|
240
|
|
|
|
—
|
|
|
|
0.28
|
%
|
|
|
0.00
|
%
|
Kansas
|
|
|
—
|
|
|
|
—
|
|
|
|
640
|
|
|
|
184
|
|
|
|
640
|
|
|
|
184
|
|
|
|
0.76
|
%
|
|
|
0.91
|
%
|
Michigan
|
|
|
—
|
|
|
|
—
|
|
|
|
240
|
|
|
|
6
|
|
|
|
240
|
|
|
|
6
|
|
|
|
0.28
|
%
|
|
|
0.03
|
%
|
Mississippi
|
|
|
—
|
|
|
|
—
|
|
|
|
140
|
|
|
|
6
|
|
|
|
140
|
|
|
|
6
|
|
|
|
0.17
|
%
|
|
|
0.03
|
%
|
Montana
|
|
|
—
|
|
|
|
—
|
|
|
|
10
|
|
|
|
2
|
|
|
|
10
|
|
|
|
2
|
|
|
|
0.01
|
%
|
|
|
0.01
|
%
|
North Dakota
|
|
|
—
|
|
|
|
—
|
|
|
|
1,142
|
|
|
|
138
|
|
|
|
1,142
|
|
|
|
138
|
|
|
|
1.36
|
%
|
|
|
0.68
|
%
|
Utah
|
|
|
—
|
|
|
|
—
|
|
|
|
2,520
|
|
|
|
471
|
|
|
|
2,520
|
|
|
|
471
|
|
|
|
2.99
|
%
|
|
|
2.34
|
%
|
Wyoming
|
|
|
—
|
|
|
|
—
|
|
|
|
1,800
|
|
|
|
134
|
|
|
|
1,800
|
|
|
|
134
|
|
|
|
2.14
|
%
|
|
|
0.66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,666
|
|
|
|
16,447
|
|
|
|
64,582
|
|
|
|
3,765
|
|
|
|
84,248
|
|
|
|
20,212
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) North Texas includes the Fort Worth Basin & Bend Arch
|
The majority of the Company’s net acres (70.63%)
are located in Texas.
A breakout
of the Company's most significant oil and gas reserves by geographic area is as follows:
4
|
|
BOE
|
|
% Total
|
North Texas including the Fort Worth Basin & Bend Arch
|
|
|
656,182
|
|
|
|
66.82
|
%
|
East Texas
|
|
|
174,352
|
|
|
|
17.75
|
%
|
Panhandle Texas
|
|
|
23,475
|
|
|
|
2.39
|
%
|
West Texas
|
|
|
13,788
|
|
|
|
1.40
|
%
|
Gulf Coast Texas
|
|
|
3,210
|
|
|
|
0.33
|
%
|
Total Texas
|
|
|
871,007
|
|
|
|
88.69
|
%
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
|
54,931
|
|
|
|
5.59
|
%
|
Oklahoma
|
|
|
16,039
|
|
|
|
1.63
|
%
|
Kansas
|
|
|
1,448
|
|
|
|
0.15
|
%
|
New Mexico
|
|
|
5,450
|
|
|
|
0.55
|
%
|
Louisiana
|
|
|
29,563
|
|
|
|
3.01
|
%
|
Mississippi
|
|
|
220
|
|
|
|
0.02
|
%
|
Montana
|
|
|
3,369
|
|
|
|
0.34
|
%
|
Total Other States
|
|
|
111,020
|
|
|
|
11.31
|
%
|
Total
|
|
|
982,027
|
|
|
|
100.00
|
%
|
North Texas - Fort Worth Basin & Bend Arch
The Fort Worth Basin-Bend Arch Province has been a focal point of
the Company since its inception. Our technical personnel have an average of over 26 years of exploration, drilling, completing,
and production experience extracting natural gas and oil from both conventional and unconventional hydrocarbon deposits found across
the basin. Furthermore, the Company maintains comprehensive and extensive dossiers of geologic and engineering data gathered from
the province.
The Fort Worth Basin-Bend Arch Province is a major United States
onshore natural gas-prone expanse containing multiple pay zones that range in depth from one thousand to nine thousand (1,000-9,000)
feet. Improved technical advances in fracturing and stimulation technologies have helped unlock natural gas and oil reserves from
the hydrocarbon bearing Barnett Shale Formation; and thus, continue to bolster vigorous exploration and development activities
that target these conventional and unconventional reservoir reserves throughout the province.
The Barnett Shale is a thick natural gas and oil bearing stratigraphic
zone found throughout the Fort Worth Basin-Bend Arch Province. The natural gas reserves in place are significant; however, as a
consequence of the extreme low permeability character of the shales, it has been technically challenging to produce these reserves.
According to the United States Geological Survey assessment, an estimated 26.7 trillion cubic feet (TCF) of undiscovered natural
gas, 98.5 MMBO of undiscovered oil, as well as a mean of 1.1 BBNGL of undiscovered natural gas liquids reserves remain within the
54,000 square mile Fort Worth Basin-Bend Arch Province. More than 98 percent or approximately 26.2 TCF of the undiscovered natural
gas is contained in the organic-rich Mississippian Barnett Shale. Combined, recent advances in hydraulic fracturing, completion
procedures, and improvements in pump technology, as well as refined horizontal well drilling technologies, continue to enable the
economic recovery of natural gas and oil reserves from tight low-permeability reservoirs found throughout the Fort Worth Basin-Bend
Arch Province. Undiscovered conventional reservoir natural gas reserves are estimated to be 467 billion cubic feet of gas (BCFG),
the majority of which is dissolved in conventional oil accumulations (source: United States Geological Survey Energy Resource Program).
5
The Company has 14,752
gross acres under lease across the prolific Fort Worth Basin-Bend Arch Province, the majority of which is held by production from
the more shallow producing zones. The Company uses recent and emerging technologies, as well as proven industry practices, to develop
and produce oil and natural gas from its properties. Additionally, the Company has a dedicated and well-trained team of employees
and professional staff that continually seek out low-risk profitable drilling and acquisition opportunities throughout the Fort
Worth Basin-Bend Arch Province.
North Texas
Subsequent to year end, effective January 1, 2020, the Company acquired
additional working interests of 2.00% with net revenue interests of 1.50% in seven of its operated Olex wells located in the Newark
East Barnett Block of Denton County, Texas. The Company’s working interests range from 58.75% to 60.00% with net revenue
interests ranging from 43.75% to 45.00%, after the addition of these interests.
Subsequent to year end, effective January 1, 2020, the Company sold
eleven of its operated wells. Seven of the wells were located in Palo Pinto County, Texas with working interests ranging from 100%
to 89%. Three of the wells were located in Jones County, Texas with working interests ranging from 100% to 77%. One of the wells
was located in Comanche County, Texas with a working interest of 78.42%.
East Texas
Effective April 1, 2019, the Company sold its interest in the J.
M. Watts Gas Unit #1 and associated leases.
West Texas
Effective August 1, 2019, the Company acquired a 0.28% royalty interest
in two wells located in Howard County, Texas. In addition, the Company acquired a 0.17% royalty interest in two other wells also
located in Howard County, Texas.
The Company sold its interest in approximately 16.77 net leasehold
acres located in Loving County, Texas.
Oklahoma
Subsequent to year end, effective January 1, 2020, the Company acquired
additional working interests of 7.5% with net revenue interests of 5.93% in its operated Cook 1-17 well located in Harper County,
Oklahoma. The acquisition brings the Company’s total working interest in the well to 68.40% with a net revenue interest of
54.01%.
New Mexico
Effective June 19, 2019, the Company sold its interest in approximately
182 net leasehold acres located in Eddy County, New Mexico.
Oil and Natural Gas Reserves
The Company’s net proved oil and natural gas reserves have
been estimated by Company personnel. (See footnote 17 to the financial statements). No separate independent reserve report analysis
has been prepared by an independent third party.
6
The net proved crude oil and natural gas reserves of the Company
as of December 31, 2019 were 228,747 barrels of oil and condensate and 4.520
BCF of natural gas. Based on SEC guidelines, the reserves were classified as follows:
|
|
Barrels
of Oil
|
|
BCF
Gas
|
Proved Developed Producing
|
|
|
228,747
|
|
|
|
4.520
|
|
Proved Developed Non-Producing
|
|
|
—
|
|
|
|
—
|
|
Proved Undeveloped
|
|
|
—
|
|
|
|
—
|
|
Total Proved Reserves
|
|
|
228,747
|
|
|
|
4.520
|
|
Only reserves that fell within the Proved classification were considered.
Other categories such as Probable or Possible Reserves were not considered. No value was given to the potential future development
of behind pipe reserves, untested fault blocks, or the potential for deeper reservoirs underlying the Company's properties. Shut-in
uneconomic wells and insignificant non-operated interests were excluded.
On a BOE (barrel of oil equivalent) basis (6 MCF/BOE), the net reserves
are:
|
|
Barrels of Oil
Equivalent
(BOE)
|
|
|
|
|
|
|
|
Natural Gas Reserves
|
|
|
753,280
|
|
|
|
77
|
%
|
Oil Reserves
|
|
|
228,747
|
|
|
|
23
|
%
|
Total Reserves
|
|
|
982,027
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Proved Developed Producing
|
|
|
982,027
|
|
|
|
100
|
%
|
Proved Developed Non-Producing
|
|
|
—
|
|
|
|
0
|
%
|
Proved Undeveloped
|
|
|
—
|
|
|
|
0
|
%
|
Total Proved Reserves
|
|
|
982,027
|
|
|
|
100
|
%
|
The Company has operational control over the majority of these reserves
and can therefore to a large extent control the timing of development and production.
|
|
Barrels of Oil
Equivalent
(BOE)
|
|
|
|
|
|
|
|
Operated Wells
|
|
|
740,470
|
|
|
|
75
|
%
|
Non-Operated Wells
|
|
|
241,557
|
|
|
|
25
|
%
|
Total
|
|
|
982,027
|
|
|
|
100
|
%
|
Financial Information Relating to Industry Segments
The Company has three identifiable business segments: (1) exploration,
acquisition, development and production of oil and natural gas, (2) natural gas gathering, and (3) commercial real estate investment.
Footnote 14 to the Consolidated Financial Statements filed herein sets forth the relevant information regarding revenues, income
from operations, and identifiable assets for these segments.
Narrative Description of Business
The Company is engaged in the exploration, development, acquisition
and production of oil and natural gas, and the gathering and marketing of natural gas. The Company is also engaged in commercial
real estate leasing through leasing office space to non-related third party tenants in the Company’s corporate headquarters
office building.
7
Principal Products, Distribution and Availability
The principal products marketed by the Company are crude oil and
natural gas which are sold to major oil and gas companies, brokers, pipelines and distributors, and oil and natural gas properties
which are acquired and sold to oil and natural gas development entities. Reserves of oil and natural gas are depleted upon extraction,
and the Company is in competition with other entities for the discovery of new prospects.
The Company is also engaged in the gathering and marketing of natural
gas through its subsidiary PPC, which owns several miles of pipelines in various states. Natural gas is gathered for a fee. Substantially
all of the natural gas gathered by the Company is produced from wells that the Company operates and in which it owns a working
interest.
The Company owns land and a two story commercial office building
in Dallas, Texas, which it uses as its principal headquarters office. The Company leases the remainder of the building to non-related
third party commercial tenants at prevailing market rates.
Patents, Licenses and Franchises
Oil and natural gas leases of the Company are obtained from the owner
of the mineral estate. The leases are generally for a primary term of one or more years, and often have extension options for an
equivalent period as the original primary term for payment of additional bonus consideration. The leases customarily provide for
extension beyond their primary term for as long as oil and natural gas are produced in commercial quantities or other operations
are conducted on such leases as provided by the terms of the leases.
The Company currently holds interests in producing and non-producing
oil and natural gas leases. The existence of the oil and natural gas leases and the terms of the oil and natural gas leases are
important to the business of the Company because future additions to reserves will come from oil and natural gas leases currently
owned by the Company, and others that may be acquired, when they are proven to be productive. The Company is continuing to purchase
oil and natural gas leases in areas where it currently has production, and also in other areas.
8
Dependence on Customers
The following is a summary of a partial list of purchasers / operators
(listed by percent of total oil and natural gas sales) from oil and natural gas produced by the Company for the three-year period
ended December 31, 2019.
Purchaser / Operator
|
|
2019
|
|
2018
|
|
2017
|
Sunoco Partners Marketing
|
|
|
21
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Targa Midstream Services, LLC
|
|
|
8
|
%
|
|
|
9
|
%
|
|
|
13
|
%
|
Bedrock Production LLC
|
|
|
8
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Enlink Gas Marketing, LTD.
|
|
|
8
|
%
|
|
|
10
|
%
|
|
|
13
|
%
|
ETX Energy, LLC formerly New Gulf Resources
|
|
|
6
|
%
|
|
|
5
|
%
|
|
|
7
|
%
|
Eastex Crude Company
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
7
|
%
|
Barnett Gathering, LP
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
1
|
%
|
ACE Gathering, Inc.
|
|
|
4
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
Peveler Pipeline, LP
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Shell Trading (US) Company
|
|
|
3
|
%
|
|
|
4
|
%
|
|
|
4
|
%
|
Pruet Production Co.
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
Phillips 66
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Hunt Crude Oil Supply
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
ETC Texas Pipeline, Ltd
|
|
|
2
|
%
|
|
|
4
|
%
|
|
|
2
|
%
|
Midcoast Energy Partners LP
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
4
|
%
|
Land and Natural Resource Development
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
0
|
%
|
Enlink Crude Purchasing, LLC
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
FDL Operating LLC
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Valero Energy Corporation
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
Empire Pipeline Corp.
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
DCP Midstream, LP
|
|
|
1
|
%
|
|
|
4
|
%
|
|
|
3
|
%
|
XTO Energy, Inc.
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
OXY USA, Inc.
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Range Resources Corporation
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Sandridge Energy, Inc.
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
White Knight Production, LLC
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Webb Energy Resources, Inc.
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
Enervest Operating, LLC
|
|
|
0
|
%
|
|
|
10
|
%
|
|
|
3
|
%
|
Courson Oil & Gas, Inc.
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
LPC Crude Oil Marketing LLC
|
|
|
0
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
Lucid Energy Group II (Formerly Agave Energy Co.)
|
0
|
%
|
|
|
1
|
%
|
|
|
2
|
%
|
Enterprise Crude Oil, LLC
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
Ward Petroleum Corporation
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
1
|
%
|
Oil and natural gas is sold to approximately
106 different purchasers under market sensitive, short-term contracts computed on a month to month basis.
Except as set forth above, there are no other customers of the Company
that individually accounted for more than one percent (1%) of the Company's oil and natural gas revenues during the three years
ended
December 31, 2019.
The Company currently has no hedged contracts.
9
Prospective Drilling Activities
The Company's primary oil and natural gas prospect generation and
acquisition efforts have been in known producing areas in the United States with emphasis devoted to Texas.
The Company intends to use a portion of its available funds to participate
in drilling activities. The Company does not own any drilling rigs. Independent drilling contractors perform all drilling activity.
The Company does not refine or otherwise process its oil and natural gas production.
Exploration for oil and natural gas is normally conducted with the
Company acquiring undeveloped oil and natural gas leases under prospects, and carrying out exploratory drilling on the prospective
leasehold with the Company retaining a majority interest in the prospect. Interests in the property are sometimes sold to key employees
and associated companies at cost. Also, interests may be sold to third parties with the Company retaining an overriding royalty
interest, carried working interest, or a reversionary interest.
A prospect is a geographical area designated by the Company for the
purpose of searching for oil and natural gas reserves and reasonably expected by it to contain at least one oil or natural gas
reservoir. The Company utilizes its own funds along with the issuance of common stock and options to purchase common stock in some
limited cases, to acquire oil and gas leases covering the lands comprising the prospects. These leases are selected by the Company
and are obtained directly from the landowners, as well as from land men, geologists, other oil companies, some of whom may be affiliated
with the Company, and by direct purchase, farm-in, or option agreements. After an initial test well is drilled on a property, any
subsequent development drilling of such prospect will normally require the Company to fund the development activities.
Employees
As of December 31, 2019, the Company employed or contracted for the
services of a total of approximately 47 people. Of this total, 20 are full-time employees,
and the remainder are part-time employees or independent contractors. We believe that our relationships with our employees
are good.
In order to effectively utilize our resources, we employ the services
of independent consultants and contractors to perform a variety of professional, technical, and field services, including in the
areas of lease acquisition, land related documentation and contracts, drilling and completion work, pumping, inspection, testing,
maintenance and specialized services. We believe that it can be more cost effective to utilize the services of consultants and
independent contractors for some of these services.
We depend to a large extent on the services of certain key management
personnel and officers, and the loss of any these individuals could have a material adverse effect on our operations. The Company
does not maintain key-man life insurance policies on its employees.
Financial information about foreign and domestic operations and
export sales
All of the Company's business is conducted domestically, with no
export sales.
Compliance with Environmental Regulations
Our oil and natural gas operations are subject to numerous United
States federal, state, and local laws and regulations relating to the protection of the environment, including those governing
the discharge of materials into the water and air, the generation, management and disposal of hazardous substances and wastes,
and clean-up of contaminated sites. We could incur material costs, including clean-up costs, fines, civil and criminal sanctions,
and third party claims for property damage and personal injury as a result of violations of, or liabilities under, environmental
laws and regulations. Such laws and regulations not only expose us to liability for our own activities, but may also expose us
to liability for the conduct of others or for actions by us that were in compliance with all applicable laws at the time those
actions were taken. In addition, we could incur substantial expenditures complying with environmental laws and regulations, including
future environmental laws and regulations which may be more stringent.
10
Glossary of Oil and Gas Terms
The following are abbreviations and definitions of terms commonly
used in the oil and gas industry that are used in this Report. The terms defined herein may be found in this report in both upper
and lower case or a combination of both.
"BBL" means a barrel of 42 U.S. gallons.
“BBNGL” means billion barrels of natural gas liquids.
“BCF” or “BCFG” means billion cubic feet.
"BOE" means barrels of oil equivalent; converting volumes
of natural gas to oil equivalent volumes using a ratio of six Mcf of natural gas to one Bbl of oil.
“BOPD” means barrels of oil per day.
"BTU" means British Thermal Units. British Thermal Unit
means the quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
“BSWPD” means barrels of salt water per day.
"Completion" means the installation of permanent equipment
for the production of oil or natural gas.
"Development Well" means a well drilled within the proved
area of an oil or natural gas reservoir to the depth of a strata graphic horizon known to be productive.
"Dry Hole" or "Dry Well" means a well found to
be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production
expenses and taxes.
"Exploratory Well" means a well drilled to find and produce
oil or natural gas reserves not classified as proved, to find a new production reservoir in a field previously found to be productive
of oil or natural gas in another reservoir or to extend a known reservoir.
"Farm-Out" means an agreement pursuant to which the owner
of a working interest in an oil and natural gas lease assigns the working interest or a portion thereof to another party who desires
to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in
the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee
is a "farm-in" and the assignor issues a "farm-out."
"Farm-In" see "Farm-Out" above.
"Gas" means natural gas.
"Gross" when used with respect to acres or wells, refers
to the total acres or wells in which we have a working interest.
"Infill Drilling" means drilling of an additional well
or wells provided for by an existing spacing order to more adequately drain a reservoir.
"MCF" or “MCFG” means thousand cubic feet.
“MCFGPD” means thousand cubic feet of natural gas per
day.
11
"MCFE" means MCF of natural gas equivalent; converting
volumes of oil to natural gas equivalent volumes using a ratio of one BBL of oil to six MCF of natural gas.
“MD” means measured depth.
“MMBO” means million barrels of oil.
"MMBTU" means one million BTUs.
"Net" when used with respect to acres or wells, refers
to gross acres or wells multiplied, in each case, by the percentage working interest owned by the Company.
"Net Production" means production that is owned by the
Company less royalties and production due others.
"Non-Operated" or "Outside Operated" means wells
that are operated by a third party.
“Oil and Gas” means oil and natural gas.
"Operator" means the individual or company responsible
for the exploration, development, production and management of an oil or gas well or lease.
“Overriding Royalty” means a royalty interest which is
usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
"Present Value" ("PV") when used with respect
to oil and natural gas reserves, means the estimated future gross revenues to be generated from the production of proved reserves
calculated in accordance with the guidelines of the SEC, net of estimated production and future development costs as of the date
of estimation without future escalation, and discounted using an annual discount rate of 10%. Prices are not escalated and are
computed using a 12-month average price, calculated as the un-weighted arithmetic average of the first-day-of-the month price for
each month of the year (except to the extent a contract specifically provides otherwise). No effect is given to non-property related
expenses such as general and administrative expenses, debt service, future income tax expense and depreciation, depletion and amortization.
"Productive Wells" or "Producing Wells" consist
of producing wells and wells capable of production, including wells waiting on pipeline connections.
"Proved Developed Reserves" means reserves that can be
expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and natural gas expected
to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces
and mechanisms of primary recovery will be included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
"Proved Reserves" means the estimated quantities of crude
oil and natural gas which upon analysis of geological and engineering data appear with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the
estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not
on escalations based upon future conditions.
(i) Reservoirs are considered proved if either
actual production or conclusive formation
tests support economic producability. The area
of a reservoir considered proved
includes (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water
contacts, if any; and (B) the immediately adjoining
portions not yet drilled, but which
can be reasonably judged as economically productive
on the basis of available geological
and engineering data. In the absence of information
on fluid contacts, the lowest known
structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
12
(ii) Reserves which can be produced economically
through application of improved recovery
techniques (such as fluid injection) are included
in the "proved" classification when successful
testing by a pilot project, or the operation
of an installed program in the reservoir, provides
support for the engineering analysis on which
the project or program was based.
(iii) Estimates of proved reserves do not include
the following: (A) oil that may become
available from known reservoirs but is classified
separately as "indicated additional reserves";
(B) crude oil and natural gas, the recovery of
which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics
or economic factors; (C) crude oil and
natural gas that may occur in undrilled prospects;
and (D) crude oil and natural gas that may
be recovered from oil shales, coal, gilsonite
and other such resources.
"Proved Undeveloped Reserves" means reserves that are recovered
from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for completion. Reserves
on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there
is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated,
unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
"Recompletion" means the completion for production of an
existing well bore in another formation from that in which the well has been previously completed.
"Reserves" means proved reserves.
"Reservoir" means a porous and permeable underground formation
containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual
and separate from other reservoirs.
"Royalty" means an interest in an oil and natural gas lease
that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds
of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells
on the leased acreage. Royalties may be either landowner's royalties, which are reserved by the owner of the leased acreage at
the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with
a transfer to a subsequent owner.
“TCF” means trillion cubic feet.
“TD” means total depth.
“TVD” means true vertical depth,
"2-D Seismic" means an advanced technology method by which
a cross-section of the earth's subsurface is created through the interpretation of reflecting seismic data collected along a single
source profile.
"3-D Seismic" means an advanced technology method by which
a three dimensional image of the earth's subsurface is created through the interpretation of reflection seismic data collected
over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do conventional surveys
and contribute significantly to field appraisal, development and production.
"Working Interest" means an interest in an oil and natural
gas lease that gives the owner of the interest the right to drill for and produce oil and gas on the leased acreage and requires
the owner to pay a share of the costs of drilling and production operations. The share of production to which a working interest
owner is entitled will always be smaller than the share of costs that the working interest owner is required to bear, with the
balance of the production accruing to the owners of royalties.
"Workover" means operations on a producing well to restore
or increase production.
13
Item 1A. Risk Factors
Risks related directly to our Company
One should carefully consider the following risk factors, in addition
to the other information set forth in this Report, before investing in shares of our common stock. Each of these risk factors could
adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment
in our common stock. Some information in this Report may contain "forward-looking" statements that discuss future expectations
of our financial condition and results of operation. The risk factors noted in this section and other factors could cause our actual
results to differ materially from those contained in any forward-looking statements.
We are exposed to global health economic and market risks
that are beyond our control, which could adversely affect our financial results and capital requirements.
At the end of 2019, a novel strain of coronavirus
(“COVID-19”) was reported in China. Subsequent to year end and continuing currently, COVID-19 has spread to other countries
including the U.S. This pandemic has weakened the global demand for oil, putting pressure on the price of oil. In addition, the
failure of the Organization of Petroleum Exporting Countries and Russia to agree on production cuts, have caused oil prices to
drop dramatically around $20.00 per barrel which is approximately one-third of the oil price at the beginning of 2020.
During the first quarter of 2020, attempts at containment
of COVID-19 have resulted in decreased economic activity which has adversely affected the broader global economy. As the economy
slows, the demand for oil and natural gas softens. Many countries around the world as well as the majority of the states in the
United States have ordered their citizens to stay home in order to contain the spread of the virus. As part of the “shelter
in place” and “stay at home” orders, fewer businesses than normal are open and less people are going to work
which has reduced the demand for oil and natural gas. Airlines have dramatically cut back on flights as the number of passengers
has fallen off. Fewer cars on the road and planes in the sky means far less demand for oil. At this time, the full extent to which
COVID-19 will negatively impact the global economy and our business is uncertain, but pandemics or other significant public health
events will most likely have a material adverse effect on our business and results of operations.
Uncertainties regarding the global economic and financial environment
could lead to an extended national or global economic recession. A slowdown in economic activity caused by a recession would likely
reduce national and worldwide demand for oil and natural gas and result in lower commodity prices for long periods of time. Costs
of exploration, development and production have not yet adjusted to current economic conditions, or in proportion to the significant
reduction in product prices.
In the past several years, capital and credit markets have experienced
volatility and disruption. Given the levels of market volatility and disruption, the availability of funds from those markets may
diminish substantially. Further, arising from concerns about the stability of financial markets generally and the solvency of borrowers
specifically, the cost of accessing the credit markets has increased as many lenders have raised interest rates, enacted tighter
lending standards, or altogether ceased to provide funding to borrowers.
Due to these potential capital and credit market conditions, the
Company cannot be certain that funding will be available in amounts or on terms acceptable to the Company. The Company is evaluating
whether current cash balances and cash flow from operations alone would be sufficient to provide working capital to fully fund
the Company's operations. Accordingly, the Company is evaluating alternatives, such as joint ventures with third parties, or
sales of interests in one or more of its properties. Such transactions, if undertaken, could result in a reduction in the Company's
operating interests or require the Company to relinquish the right to operate the property. There can be no assurance that any
such transactions can be completed or that such transactions will satisfy the Company's operating capital requirements. If the
Company is not successful in obtaining sufficient funding or completing an alternative transaction on a timely basis on terms acceptable
to the Company, the Company would be required to curtail its expenditures or restructure its operations, and the Company would
be unable to continue its exploration, drilling, and recompletion program, any of which would have a material adverse effect on
its business, financial condition, and results of operations.
We face significant competition, and many of our competitors
have resources in excess of our available resources.
The oil and natural gas industry is highly competitive. We encounter
competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties
and sale of crude oil and natural gas. Our competitors include major integrated oil and gas companies and numerous independent
oil and gas companies, individuals, and drilling agreater number of properties and
prospects than our financial or human resources permit.
14
Our ability to acquire additional properties and to discover reserves in
the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly
competitive environment income programs. Many of our competitors are large, well-established companies
with substantially larger operating staffs and greater capital resources than us. Such companies may be able to pay more for productive
oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in
the future will depend upon our ability to evaluate and select suitable properties and to consummate transactions in this highly
competitive environment.
Exploratory drilling is a speculative activity that may not
result in commercially productive reserves and may require expenditures in excess of budgeted amounts.
Drilling activities are subject to many risks, including the risk
that no commercially productive oil or natural gas reservoirs will be encountered. There can be no assurance that new wells drilled
by us will be productive or that we will recover all or any portion of our investment. Drilling for oil and natural gas may involve
unprofitable efforts, not only from dry wells, but also from wells that are productive but do not produce sufficient net revenues
to return a profit after drilling, operating and other costs. The cost of drilling, completing and operating wells is often uncertain.
Our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond our
control, including economic conditions, mechanical problems, pressure or irregularities in formations, title problems, weather
conditions, compliance with governmental requirements, and shortages in or delays in the delivery of equipment and services. In
today's environment, shortages make drilling rigs, labor and services difficult to obtain and could cause delays or inability to
proceed with our drilling and development plans. Such equipment shortages and delays sometimes involve drilling rigs where inclement
weather prohibits the movement of land rigs causing a high demand for rigs by a large number of companies during a relatively short
period of time. Our future drilling activities may not be successful. Lack of drilling success could have a material adverse effect
on our financial condition and results of operations.
Our operations are also subject to all the hazards and risks normally
incident to the development, exploitation, production and transportation of, and the exploration for, oil and natural gas, including
unusual or unexpected geologic formations, pressures, down hole fires, mechanical failures, blowouts, explosions, uncontrollable
flows of oil, natural gas or well fluids and pollution and other environmental risks. These hazards could result in substantial
losses to us due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental
damage and suspension of operations. We participate in insurance coverage maintained by the operator of its wells, although there
can be no assurances that such coverage will be sufficient to prevent a material adverse effect to us in such events.
The vast majority of our oil and natural gas reserves are classified
as proved reserves. Recovery of the Company's future proved undeveloped reserves will require significant capital expenditures.
Our management estimates that additional capital expenditures will be required to fully develop some of these reserves in the next
twelve month period. No assurance can be given that our estimates of capital expenditures will prove accurate, that our financing
sources will be sufficient to fully fund our planned development activities or that development activities will be either successful
or in accordance with our schedule. Additionally, any significant decrease in oil and natural gas prices or any significant increase
in the cost of development could result in a significant reduction in the number of wells drilled and/or reworked. No assurance
can be given that any wells will produce oil or natural gas in commercially profitable quantities.
We are subject to uncertainties in reserve estimates and future
net cash flows.
This annual report contains estimates of our oil and natural gas
reserves and the future net cash flows from those reserves. These estimates have been prepared by Company personnel for 2019, 2018
and 2017. There are numerous uncertainties inherent in estimating quantities of reserves of oil and natural gas and in projecting
future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve estimates
in this annual report are based on various assumptions, including decline curve analysis, constant oil and natural gas prices,
operating expenses, capital expenditures and the availability of funds, and therefore, are inherently imprecise indications of
future net cash flows. Actual future production, cash flows, taxes, operating expenses, development expenditures and quantities
of recoverable oil and gas reserves may vary substantially from those assumed in the estimates. Any significant variance in these
assumptions could materially affect the estimated quantity and value of reserves set forth in this annual report. Additionally,
our reserves may be subject to downward or upward revision based upon actual production performance, results of future development
and exploration, prevailing oil and natural gas prices and other factors, many of which are beyond our control.
15
The present value of future net reserves discounted at 10% (the "PV-10")
of proved reserves referred to in this annual report should not be construed as the current market value of the estimated proved
reserves of oil and gas attributable to our properties. In accordance with applicable requirements of the SEC, the estimated discounted
future net cash flows from proved reserves are generally based on prices using a 12-month average price, calculated as the un-weighted
arithmetic average of the first-day-of-the month price for each month of each year, and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual future net cash flows also will be affected by: (i) the
timing of both production and related expenses; (ii) changes in consumption levels; and (iii) governmental regulations or taxation.
In addition, the calculation of the present value of the future net cash flows using a 10% discount as required by the SEC is not
necessarily the most appropriate discount factor based on interest rates in effect from time to time and risks associated with
our reserves or the oil and gas industry in general. Furthermore, our reserves may be subject to downward or upward revision based
upon actual production, results of future development, supply and demand for oil and natural gas, prevailing oil and natural gas
prices and other factors. See "Properties - Oil and Gas Reserves."
Unless we replace our oil and natural gas reserves, our reserves
and production will decline, which would adversely affect our cash flows and income.
Unless we conduct successful development, exploitation and exploration
activities or acquire properties containing proved reserves, our proved reserves will decline as those reserves are produced. Producing
oil and natural gas reservoirs generally are characterized by declining production rates that vary depending upon reservoir characteristics
and other factors. Our future oil and natural gas reserves and production, and, therefore our cash flow and income, are highly
dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional
recoverable reserves. We may be unable to make such acquisitions because we are:
|
·
|
unable to identify attractive acquisition candidates or negotiate acceptable
purchase contracts with them;
|
|
·
|
unable to obtain financing for these acquisitions on economically acceptable
terms; or
|
If we are unable to develop, exploit, find or acquire additional
reserves to replace our current and future production, our cash flow and income will decline as production declines, until our
existing properties would be incapable of sustaining commercial production.
There are risks in acquiring producing oil and natural gas
properties, including difficulties in integrating acquired properties into our business, additional liabilities and expenses associated
with acquired properties, diversion of management attention, increasing the scope, geographic diversity and complexity of our operations.
One of our business strategies includes growing our reserve base
through acquisitions of oil and natural gas properties. Our failure to integrate acquired properties successfully into our existing
business, or the expense incurred in consummating future acquisitions, could result in unanticipated expenses and losses. In addition,
we may assume environmental cleanup or reclamation obligations or other unanticipated liabilities in connection with these acquisitions.
The scope and cost of these obligations may ultimately be materially greater than estimated at the time of the acquisition.
We are continually investigating opportunities for acquisitions.
In connection with future acquisitions, the process of integrating acquired operations into our existing operations may result
in unforeseen operating difficulties and may require significant management attention and financial resources that would otherwise
be available for the ongoing development or expansion of existing operations. Our ability to make future acquisitions may be constrained
by our ability to obtain additional financing.
Possible future acquisitions could result in our incurring debt,
contingent liabilities and expense, all of which could have a material effect on our financial condition and operating results.
16
Acquisitions may prove to be worth less than we paid because
of uncertainties in evaluating recoverable reserves and potential liabilities.
Successful acquisitions require an assessment of a number of factors,
including estimates of recoverable reserves, exploration potential, recovery applicability from water flood and Enhanced Oil Recovery
techniques (“EOR”), future oil and natural gas prices, operating costs and potential environmental and other liabilities.
Such assessments are inexact and their accuracy is inherently uncertain. In connection with our assessments, we perform a review
of the acquired properties which we believe is generally consistent with industry practices. However, such a review will not reveal
all existing or potential problems. In addition, our review may not permit us to become sufficiently familiar with the properties
to fully assess their deficiencies and capabilities. We do not inspect every well or property. Even when we inspect a well or property,
we do not always discover structural, subsurface and environmental problems that may exist or arise. We are generally not entitled
to contractual indemnification for pre-closing liabilities, including environmental liabilities. Normally, we acquire interests
in properties on an “as is” basis with limited remedies for breaches of representations and warranties. As a result
of these factors, we may not be able to acquire oil and natural gas properties that contain economically recoverable reserves or
be able to complete such acquisitions on acceptable terms.
Additionally, significant acquisitions can change the nature of our
operations and business depending upon the character of the acquired properties, which may have substantially different operating
and geological characteristics or be in different geographic locations than our existing properties. It is our current intention
to continue focusing on acquiring properties with development and exploration potential located in onshore United States. To the
extent that we acquire properties substantially different from the properties in our primary operating regions or acquire properties
that require different technical expertise, we may not be able to realize the economic benefits of these acquisitions as efficiently
as in our prior acquisitions.
We cannot control activities on properties we do not operate.
Failure to fund capital expenditure requirements may result in reduction or forfeiture of our interests in some of our non-operated
projects.
We do not operate some of the properties in which we have an interest
and we have limited ability to exercise influence over operations for these properties or their associated costs. As of December
31, 2019, approximately 25% of our crude oil and natural gas proved reserves were operated by other companies. Our dependence on
other operators and other working interest owners for these projects and our limited ability to influence operations and associated
costs could materially adversely affect the realization of our targeted return on capital in drilling or acquisition activities
and our targeted production growth rate. The success and timing of drilling, development and exploitation activities on properties
operated by others depend on a number of factors that are beyond our control, including the operator’s expertise and financial
resources, approval of other participants for drilling wells and utilization of technology.
When we are not the majority owner or operator of a particular crude
oil or natural gas project, we may have no control over the timing or amount of capital expenditures associated with such project.
If we are not willing or able to fund our capital expenditures relating to such projects when required by the majority owner or
operator, our interests in these projects may be reduced or forfeited.
We are subject to risks associated with the current United
States Government Administration’s possible budget features.
Future legislation may set forth budget proposals which if passed,
would significantly curtail our ability to attract investors and raise capital. Future possible changes in the Federal income tax
laws which would eliminate or reduce the percentage depletion deduction and the deduction for intangible drilling and development
costs for small independent producers will likely significantly reduce the investment capital available to those in the industry
as well as our Company. Lengthening the time to expense seismic costs would likely also have an adverse effect on our ability to
explore and find new reserves.
17
We are subject to various operating and other casualty risks
that could result in liability exposure or the loss of production and revenues.
Our oil and gas business involves a variety of operating risks, including,
but not limited to, unexpected formations or pressures, uncontrollable flows of oil, natural gas, brine or well fluids into the
environment (including groundwater contamination), blowouts, fires, explosions, pollution and other risks, any of which could result
in personal injuries, loss of life, damage to properties and substantial losses. Although we carry insurance at levels that we
believe are reasonable, we are not fully insured against all risks. We do not carry business interruption insurance. Losses and
liabilities arising from uninsured or under-insured events could have a material adverse effect on our financial condition and
operations.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which we own an interest have been subject to production curtailments. The curtailments
range from production being partially restricted to wells being completely shut-in. The duration of curtailments varies from a
few days to several months. In most cases, we are provided only limited notice as to when production will be curtailed and the
duration of such curtailments. We are not currently experiencing any material curtailment of our production.
We intend to increase to some extent our development and, to a lesser
extent, exploration activities. Exploration drilling and, to a lesser extent, development drilling of oil and gas reserves involve
a high degree of risk that no commercial production will be obtained and/or that production will be insufficient to recover drilling
and completion costs. The cost of drilling, completing and operating wells is often uncertain. Our drilling operations may be curtailed,
delayed or canceled as a result of numerous factors, including title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment. Furthermore, completion of a well does not assure a profit on
the investment or a recovery of drilling, completion and operating costs.
We depend on our key management personnel and technical experts
and the loss of any of these individuals could adversely affect our business.
If we lose the services of our key management personnel, technical
experts or are unable to attract additional qualified personnel, our business, financial condition, results of operations, development
efforts and ability to grow could suffer. We have assembled a team of engineers and geologists who have considerable experience
in applying advanced drilling and completion techniques to explore for and to develop crude oil and natural gas. We depend upon
the knowledge, skill and experience of these experts to assist us in improving the performance and reducing the risks associated
with our participation in crude oil and natural gas exploration and development projects. In addition, the success of our business
depends, to a significant extent, upon the abilities and continued efforts of our management, particularly Chris Mazzini, our Chief
Executive Officer, President and Chairman of the Board. We do not have an employment agreement with or key-man life insurance on
Mr. Mazzini or any of our other employees.
The inability to continue to hire, train and retain operational,
technical and managerial personnel could adversely affect our results of operations.
The average age of the employee base of the Company has been increasing
for a number of years, with a number of employees becoming eligible to retire within the next five to ten years. If we were unable
to hire appropriate personnel to fill future needs, the Company could encounter operating challenges and increased costs, primarily
due to a loss of knowledge, errors due to inexperience or the lengthy time period typically required to adequately train replacement
personnel. In addition, higher costs could result from the increased use of contractors to replace retiring employees, loss of
productivity or increased safety compliance issues. The inability to hire, train and retain new operational, technical and managerial
personnel adequately and to transfer institutional knowledge and expertise could adversely affect our ability to manage and operate
our business. If we were unable to hire, train and retain appropriately qualified personnel, our results of operations could be
adversely affected.
18
The costs of providing health care benefits to our employees
may increase substantially.
We provide health care benefits to eligible full-time employees.
The costs of providing health care benefits to our employees could significantly increase over time due to rapidly increasing health
care inflation, and any future legislative changes related to the provision of health care benefits. The impact of additional costs
which are likely to be passed on to the Company are difficult to measure at this time. Further, our costs of providing such benefits
are also subject to a number of factors, including (i) changing demographics; and (ii) future government regulation.
Certain of our affiliates control a majority of our outstanding
common stock, which may affect your vote as a shareholder.
Our executive officers, directors and their affiliates as of December
31, 2019 hold approximately 86.65% of our outstanding shares of common stock. As a result, officers, directors and their affiliates
and such shareholders have the ability to exert significant influence over our business affairs, including the ability to control
the election of directors and results of voting on all matters requiring shareholder approval. This concentration of voting power
may delay or prevent a potential change in control.
Certain of our affiliates have engaged in business transactions
with the Company, which may result in conflicts of interest.
Certain officers, directors and related parties, including entities
controlled by Mr. Mazzini, the President and Chief Executive Officer, have engaged in business transactions with the Company which
were not the result of arm's length negotiations between independent parties. Our management believes that the terms of these transactions
were as favorable to us as those that could have been obtained from unaffiliated parties under similar circumstances. All future
transactions between us and our affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of our Board of Directors.
Our common stock is traded on the Over-the-Counter market and
is currently quoted on the OTC Market (Other), symbol "SPND".
The liquidity of our common stock may be adversely affected, and
purchasers of our common stock may have difficulty selling our common stock, if our common stock does not continue to trade in
that or another suitable trading market.
There is presently only a limited public market for our common stock,
and there is no assurance that a ready public market for our securities will develop. It is likely that any market that develops
for our common stock will be highly volatile and that the trading volume in such market will be limited. The trading price of our
common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, announcements
of our drilling results and other events or factors. In addition, the United States stock market has from time to time experienced
extreme price and volume fluctuations that have affected the market price for many companies and which often have been unrelated
to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our securities.
We do not intend to declare dividends in the foreseeable future.
Our Board of Directors presently intends to retain all of our earnings
for the expansion of our business. We therefore do not anticipate the distribution of cash dividends in the foreseeable future.
Any future decision of our Board of Directors to pay cash dividends will depend, among other factors, upon our earnings, financial
position and cash requirements.
19
We are subject to certain title risks.
Our company employees and contract land professionals have reviewed
title records or other title review materials relating to substantially all of our producing properties. The title investigation
performed by us prior to acquiring undeveloped properties is thorough, but less rigorous than that conducted prior to drilling,
consistent with industry standards. We believe we have satisfactory title to all our producing properties in accordance with standards
generally accepted in the oil and gas industry. Our properties are subject to customary royalty interests, liens incident to operating
agreements, liens for current taxes and other burdens, which we believe do not materially interfere with the use of or affect the
value of such properties. At December 31, 2019, our leaseholds for some of our net acreage were being kept in force by virtue of
production on that acreage in paying quantities. The remaining net acreage was held by lease rentals and similar provisions and
requires production in paying quantities prior to expiration of various time periods to avoid lease termination.
We expect to make acquisitions of oil and gas properties from time
to time subject to available resources. In making an acquisition, we generally focus most of our title and valuation efforts on
the more significant properties. It is generally not feasible for us to review in-depth every property we purchase and all records
with respect to such properties. However, even an in-depth review of properties and records may not necessarily reveal existing
or potential problems, nor will it permit us to become familiar enough with the properties to assess fully their deficiencies and
capabilities. Evaluation of future recoverable reserves of oil and gas, which is an integral part of the property selection process,
is a process that depends upon evaluation of existing geological, engineering and production data, some or all of which may prove
to be unreliable or not indicative of future performance. To the extent the seller does not operate the properties, obtaining access
to properties and records may be more difficult. Even when problems are identified, the seller may not be willing or financially
able to give contractual protection against such problems, and we may decide to assume environmental and other liabilities in connection
with acquired properties.
Our business is highly capital-intensive, requiring continuous development
and acquisition of oil and gas reserves. In addition, capital is required to operate and expand our oil and natural gas field operations
and purchase equipment. At December 31, 2019, we had working capital of $13,292,000. We anticipate that we will be able to meet
our cash requirements for the next 12 months. However, if such plans or assumptions change or prove to be inaccurate, we could
be required to seek additional financing sooner than currently anticipated.
We have funded our operations, acquisitions and expansion costs primarily
through our internally generated cash flow. Our success in obtaining the necessary capital resources to fund future costs associated
with our operations and expansion plans is dependent upon our ability to: (i) increase revenues through acquisitions and recovery
of our proved producing and proved developed non-producing oil and gas reserves; and (ii) maintain effective cost controls at the
corporate administrative office and in field operations. However, even if we achieve some success with our plans, there can be
no assurance that we will be able to generate sufficient revenues to achieve significant profitable operations or fund our expansion
plans.
We have substantial capital requirements necessary for undeveloped
properties for which we may not be able to obtain adequate financing.
Development of our properties will require additional capital resources.
We have no commitments to obtain any additional debt or equity financing and there can be no assurance that additional financing
will be available, when required, on favorable terms to us. The inability to obtain additional financing could have a material
adverse effect on us, including requiring us to curtail significantly our oil and gas acquisition and development plans or farm-out
development of our properties. Any additional financing may involve substantial dilution to the interests of our shareholders at
that time.
20
Oil and natural gas prices fluctuate widely and low prices
could have a material adverse impact on our business and financial results.
Our revenues, profitability and the carrying value of our oil and
gas properties are substantially dependent upon prevailing prices of, and demand for, oil and natural gas and the costs of acquiring,
finding, developing and producing reserves. Our ability to obtain borrowing capacity, to repay future indebtedness, and to obtain
additional capital on favorable terms is also substantially dependent upon oil and natural gas prices. Historically, the markets
for oil and natural gas have been volatile and are likely to continue to be volatile in the future. Prices for oil and natural
gas are subject to wide fluctuations in response to: (i) relatively minor changes in the supply of, and demand for, oil and natural
gas; (ii) market uncertainty; and (iii) a variety of additional factors, all of which are beyond our control. These factors include
domestic and foreign political conditions, the price and availability of domestic and imported oil and natural gas, the level of
consumer and industrial demand, weather, domestic and foreign government relations, the price and availability of alternative fuels
and overall economic conditions. Furthermore, the marketability of our production depends in part upon the availability, proximity
and capacity of gathering systems, pipelines and processing facilities. Volatility in oil and natural gas prices could affect our
ability to market our production through such systems, pipelines or facilities. As of December 31, 2019, approximately 95% of our
oil and natural gas production is currently sold to 26 purchasing firms on a month-to-month basis at prevailing spot market prices.
Oil prices remained subject to unpredictable political and economic forces during 2019, 2018, and 2017, and experienced fluctuations
similar to those seen in natural gas prices for the year. We believe that oil prices will continue to fluctuate in response to
changes in the policies of the Organization of Petroleum Exporting Countries ("OPEC"), changes in demand from many Asian
countries, current events in the Middle East and Eastern Europe, security threats to the United States, and other factors associated
with the world political and economic environment. As a result of the many uncertainties associated with levels of production maintained
by OPEC and other oil producing countries, the availabilities of worldwide energy supplies and competitive relationships and consumer
perceptions of various energy sources, we are unable to predict what changes will occur in crude oil and natural gas prices.
At the end of 2019, a novel strain of coronavirus
(“COVID-19”) was reported in China. Subsequent to year end and continuing currently, COVID-19 has spread to other countries
including the U.S. This pandemic has weakened the global demand for oil, putting pressure on the price of oil. In addition, the
failure of the Organization of Petroleum Exporting Countries and Russia to agree on production cuts, have caused oil prices to
drop dramatically around $20.00 per barrel which is approximately one-third of the oil price at the beginning of 2020.
During the first quarter of 2020, attempts at containment
of COVID-19 have resulted in decreased economic activity which has adversely affected the broader global economy. As the economy
slows, the demand for oil and natural gas softens. Many countries around the world as well as the majority of the states in the
United States have ordered their citizens to stay home in order to contain the spread of the virus. As part of the “shelter
in place” and “stay at home” orders, fewer businesses than normal are open and less people are going to work
which has reduced the demand for oil and natural gas. Airlines have dramatically cut back on flights as the number of passengers
has fallen off. Fewer cars on the road and planes in the sky means far less demand for oil. At this time, the full extent to which
COVID-19 will negatively impact the global economy and our business is uncertain, but pandemics or other significant public health
events will most likely have a material adverse effect on our business and results of operations.
Gathering and transporting natural gas involve risks that may
result in accidents and additional operating costs.
Our natural gas pipeline business involves a number of hazards and
operating risks that cannot be completely avoided, such as leaks, accidents and operational problems, which could cause loss of
human life, as well as substantial financial losses resulting from property damage, damage to the environment and to our operations.
We maintain liability and property insurance coverage in place for many of these hazards and risks. However, because some of our
pipelines are near or are in populated areas, any loss of human life or adverse financial results resulting from such events could
be large. If these events were not fully covered by our general liability and property insurance, which policies are subject to
certain limits and deductibles, our operations or financial results could be adversely affected. Our pipelines are aging, and we
will be responsible for eventually replacing these lines. The costs of maintaining and replacing our aging pipeline infrastructure
may have a material adverse impact on our operating costs and financial results.
21
We will be responsible for additional costs in connection with
abandonment of properties.
We are responsible for payment of plugging and abandonment costs
on our oil and gas properties pro rata to our working interest. Based on our experience, we anticipate that in most cases, the
costs of abandoning such properties will range from $20,000 to $100,000 or more per well. In addition, abandonment costs and their
timing may change due to many factors, including actual production results, inflation rates and changes in environmental laws and
regulations.
Risks that Involve the Oil & Gas Industry in General.
We are subject to various governmental regulations which may
cause us to incur substantial costs.
Our operations are affected from time to time in varying degrees
by political developments and federal, state, and local laws and regulations. In particular, oil and natural gas production-related
operations are or have been subject to price controls, taxes and other laws and regulations relating to the oil and gas industry.
Failure to comply with such laws and regulations can result in substantial penalties. The regulatory burden on the oil and gas
industry increases our cost of doing business and affects our profitability. Although we believe we are in substantial compliance
with all applicable laws and regulations, because such laws and regulations are frequently amended or reinterpreted, we are unable
to predict the future cost or impact of complying with such laws and regulations.
Sales of natural gas by us are not regulated and are generally made
at market prices. However, the Federal Energy Regulatory Commission ("FERC") regulates interstate natural gas transportation
rates and service conditions, which affect the marketing of natural gas produced by us, as well as the revenues received by us
for sales of such production. Sales of our natural gas currently are made at uncontrolled market prices, subject to applicable
contract provisions and price fluctuations that normally attend sales of commodity products.
Since the mid-1980s, the FERC has issued a series of orders, culminating
in Order Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the marketing and transportation of
natural gas. Order 636 mandated a fundamental restructuring of interstate pipeline sales and transportation service, including
the unbundling by interstate pipelines of the sale, transportation, storage and other components of the city-gate sales services
such pipelines previously performed. One of the FERC's purposes in issuing the orders was to increase competition within all phases
of the natural gas industry. Order 636 and subsequent FERC orders issued in individual pipeline restructuring proceedings have
been the subject of appeals, and the courts have largely upheld Order 636. Because further review of certain of these orders is
still possible, and other appeals may be pending, it is difficult to exactly predict the ultimate impact of the orders on us and
our natural gas marketing efforts. Generally, Order 636 has eliminated or substantially reduced the interstate pipelines' traditional
role as wholesalers of natural gas, and has substantially increased competition and volatility in natural gas markets.
While significant regulatory uncertainty remains, Order 636 may ultimately
enhance our ability to market and transport our natural gas, although it may also subject us to greater competition, more restrictive
pipeline imbalance tolerances and greater associated penalties for violation of such tolerances.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order
636 and, more recently, the price which shippers can charge for their released capacity. In addition, in 1995, the FERC issued
a policy statement on how interstate natural gas pipelines can recover the costs of new pipeline facilities. In January 1997, the
FERC issued a policy statement and a request for comments concerning alternatives to its traditional cost-of-service rate making
methodology. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. While any
additional FERC action on these matters would affect us only indirectly, these policy statements and proposed rule changes are
intended to further enhance competition in natural gas markets. We cannot predict what the FERC will take on these matters, nor
can we predict whether the FERC's actions will achieve its stated goal of increasing competition in natural gas markets. However,
we do not believe that we will be treated materially differently than other natural gas producers and marketers with which we compete.
22
The price we receive from the sale of oil is affected by the cost
of transporting such products to market. Effective January 1, 1995, the FERC implemented regulations establishing an indexing system
for transportation rates for oil pipelines, which, generally, would index such rates to inflation, subject to certain conditions
and limitations. These regulations could increase the cost of transporting oil by interstate pipelines, although the most recent
adjustment generally decreased rates. These regulations have generally been approved on judicial review. We are not able to predict
with certainty the effect, if any, of these regulations on its operations. However, the regulations may increase transportation
costs or reduce wellhead prices for oil.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration for and
production of oil and natural gas. Such states also have statutes or regulations addressing conservation matters, including provisions
for the unitization or pooling of oil and gas properties, the establishment of maximum rates of production from wells and the regulation
of spacing, plugging and abandonment of such wells. The statutes and regulations of certain states limit the rate at which oil
and gas can be produced from our properties. However, we do not believe we will be affected materially differently by these statutes
and regulations than any other similarly situated oil and gas company.
We may not have enough insurance to cover all of the risks
we face, which could result in significant financial exposure.
We maintain insurance coverage against some, but not all, potential
losses in order to protect against the risks we face. We may elect not to carry insurance if our management believes that the cost
of insurance is excessive relative to the risks presented. If an event occurs that is not covered, or not fully covered, by insurance,
it could harm our financial condition, results of operations and cash flows. In addition, we cannot fully insure against pollution
and environmental risks.
Future new technologies could make the products we sell obsolete.
Future alternative technologies could dramatically impact the demand
for the natural gas and crude oil we sell thereby causing a material adverse impact on our operations and financial results. Such
alternative technologies could also cause a material adverse impact on the value of our oil and natural gas properties.
Cyber-attacks or acts of cyber-terrorism could disrupt our
business operations and information technology systems or result in the loss or exposure of confidential or sensitive customer,
employee or Company information.
Our business operations and information technology systems may be
vulnerable to an attack by individuals or organizations intending to disrupt our business operations and information technology
systems, even though the Company has implemented policies, procedures and controls to prevent and detect these activities. We use
our information technology systems to manage our oil and gas operations and other business processes. Disruption of those systems
could adversely impact our ability to safely operate our wells, operate our pipelines or otherwise run our business. Accordingly,
if such an attack or act of terrorism were to occur, our operations and financial results could be adversely affected. In addition,
we use our information technology systems to protect confidential or sensitive employee and Company information developed and maintained
in the normal course of our business. Any attack on such systems that would result in the unauthorized release of employee or other
confidential or sensitive data could have a material adverse effect on our business reputation, increase our costs and expose us
to additional material legal claims and liability. If such an attack or act of terrorism were to occur, our operations and financial
results would be adversely affected since we may not maintain insurance coverage to cover these risks.
23
Natural disasters, terrorist activities or other significant
events could adversely affect our operations or financial results.
Natural disasters are always a threat to our assets and operations.
In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of natural
gas that could affect our operations. Also, companies in our industry may face a heightened risk of exposure to actual acts of
terrorism, which could subject our operations to increased risks. As a result, the availability of insurance covering such risks
may become more limited, which could increase the risk that an event could adversely affect our operations or financial results.
The operations and financial results of the Company could be
adversely impacted as a result of climate changes or related additional legislation or regulation in the future.
To the extent climate changes occur, our businesses could be adversely
impacted, although we believe it is likely that any such resulting impacts would occur very gradually over a long period of time
and thus would be difficult to quantify with any degree of specificity. To the extent climate changes would result in warmer temperatures
in our areas of operations, financial results could be adversely affected through lower gas volumes and revenues. In addition,
there have been a number of federal and state legislative and regulatory initiatives proposed in recent years in an attempt to
control or limit the effects of global warming and overall climate change, including greenhouse gas emissions, such as carbon dioxide.
The adoption of this type of legislation by Congress or similar legislation by states or the adoption of related regulations by
federal or state governments mandating a substantial reduction in greenhouse gas emissions in the future could have far-reaching
and significant impacts on the energy industry. Such new legislation or regulations could result in increased compliance costs
for us or additional operating restrictions on our business, affect the demand for natural gas, or impact the prices we charge
to our customers. At this time, we cannot predict the potential impact of such laws or regulations that may be adopted on our future
business, financial condition or financial results.
We are subject to various environmental risks which may cause
us to incur substantial costs.
Our operations and properties are subject to extensive and changing
federal, state and local laws and regulations relating to environmental protection, including the generation, storage, handling
and transportation of oil and natural gas and the discharge of materials into the environment, and relating to safety and health.
The recent trend in environmental legislation and regulation generally is toward stricter standards, and this trend will likely
continue. These laws and regulations may require the acquisition of a permit or other authorization before construction or drilling
commences and for certain other activities; limit or prohibit construction, drilling and other activities on certain lands lying
within wilderness and other protected areas; and impose substantial liabilities for pollution resulting from our operations. The
permits required for our various operations are subject to revocation, modification and renewal by issuing authorities. Governmental
authorities have the power to enforce compliance with their regulations, and violations are subject to fines, penalties or injunctions.
In the opinion of management, we are in substantial compliance with current applicable environmental laws and regulations, and
we have no material commitments for capital expenditures to comply with existing environmental requirements. Nevertheless, changes
in existing environmental laws and regulations or in interpretations thereof could have a significant impact on us. The impact
of such changes, however, would not likely be any more burdensome to us than to any other similarly situated oil and gas company.
The Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA"), also known as the "Superfund" law, and similar state laws impose liability, without regard
to fault or the legality of the original conduct, on certain classes of persons that are considered to have contributed to the
release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal
site or sites where the release occurred and companies that disposed or arranged for the disposal of the hazardous substances found
at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and
several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment and for
damages to natural resources. Furthermore, neighboring landowners and other third parties may file claims for personal injury and
property damage allegedly caused by the hazardous substances released into the environment.
24
We generate typical oil and gas field wastes, including hazardous
wastes that are subject to the Federal Resources Conservation and Recovery Act and comparable state statutes. The United States
Environmental Protection Agency and various state agencies have limited the approved methods of disposal for certain hazardous
and non-hazardous wastes. Furthermore, certain wastes generated by our oil and gas operations that are currently exempt from regulation
as "hazardous wastes" may in the future be designated as "hazardous wastes", and therefore be subject to more
rigorous and costly operating and disposal requirements.
The Oil Pollution Act ("OPA") imposes a variety of requirements
on responsible parties for onshore and offshore oil and gas facilities and vessels related to the prevention of oil spills and
liability for damages resulting from such spills in waters of the United States. The "responsible party" includes the
owner or operator of an onshore facility or vessel or the lessee or permittee of, or the holder of a right of use and easement
for, the area where an onshore facility is located. OPA assigns liability to each responsible party for oil spill removal costs
and a variety of public and private damages from oil spills. Few defenses exist to the liability for oil spills imposed by OPA.
OPA also imposes financial responsibility requirements. Failure to comply with ongoing requirements or inadequate cooperation in
a spill event may subject a responsible party to civil or criminal enforcement actions.
We own or lease properties that for many years have produced oil
and natural gas. We also own natural gas gathering systems. It is not uncommon for such properties to be contaminated with hydrocarbons.
Although we or previous owners of these interests may have used operating and disposal practices that were standard in the industry
at the time, hydrocarbons or other wastes may have been disposed of or released on or under the properties or on or under other
locations where such wastes have been taken for disposal. These properties may be subject to federal or state requirements that
could require us to remove any such wastes or to remediate the resulting contamination. In addition to properties that we operate,
we have interests in many properties which are operated by third parties over whom we have limited control. Notwithstanding our
lack of control over properties operated by others, the failure of the previous owners or operators to comply with applicable environmental
regulations may, in certain circumstances, adversely impact us.