As
filed with the Securities and Exchange Commission on September 13,
2017
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________
FORM
S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
__________
Yuma Energy, Inc.
(Exact name of Registrant as specified in its
charter)
Delaware
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1311
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94-0787340
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(State or other jurisdiction of incorporation or
organization)
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(Primary Standard Industrial Classification Code
Number)
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(I.R.S. Employer Identification Number)
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1177
West Loop South, Suite 1825
Houston,
Texas 77027
(713)
968-7000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive
offices)
__________
Sam
L. Banks
Chief
Executive Officer
1177
West Loop South, Suite 1825
Houston,
Texas 77027
(713)
968-7000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
The
Commission is requested to send copies of all communications
to:
Reid
A. Godbolt, Esq.
Jones
& Keller, P.C.
1999
Broadway, Suite 3150
Denver,
Colorado 80202
Telephone:
(303) 573-1600
Facsimile:
(303) 573-8133
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Jonathan
R. Zimmerman, Esq.
Faegre Baker
Daniels LLP
2200
Wells Fargo Center
90
S. Seventh Street
Minneapolis,
MN 55402-3901
Telephone:
(612) 766-7000
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___________
Approximate date of commencement of proposed sale to the
public:
As
soon as practical after the effective date of this registration
statement.
If
any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended, or the Securities Act,
check the following box. ☐
If
this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
If
this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
☐ Accelerated
filer ☐
Non-accelerated
filer ☐ (Do not check if a smaller reporting
company)
Smaller reporting company ☒
Emerging growth
company ☐
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided to
Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
Title of each
class of securitiesto be registered
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Amount to be
registered
(1)
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Proposed maximum
aggregate offering price per share
(2)
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Proposed maximum
aggregate offering price
(1)(2)
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Amount of
registration fee
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Common Stock,
$0.001 par value per share
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9,200,000
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$
1.21
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$
11,132,000
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$
1,291
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(1)
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Includes an
aggregate of 1,200,000 shares issuable upon exercise of a 30-day
option granted to the underwriters to cover over-allotments, if
any.
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(2)
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Estimated solely
for the purpose of calculating the registration fee and based upon
the average of the high and low prices of the Registrant’s
common stock as reported on the NYSE American on September 11,
2017, in accordance with Rule 457(c) under the Securities Act
of 1933, as amended.
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The
Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall thereafter become effective
in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 2017
PRELIMINARY
PROSPECTUS
Yuma Energy, Inc.
8,000,000
Shares of Common Stock
We are offering
8,000,000
shares of our
common stock, par value $0.001 per share. Our common stock is
traded on the NYSE American under the symbol “YUMA.” On
September 12, 2017, the last reported sales price of our common
stock on the NYSE American was $1.40 per share.
Certain
members of our senior management, and certain of our directors, or
entities affiliated with our directors, have indicated an interest
in purchasing up to an aggregate of $
million in shares of our common stock in this offering
at the public offering price. However, because indications of
interest are not binding agreements or commitments to purchase, the
underwriters may determine to sell more, less or no shares in this
offering to these persons, or these persons may determine to
purchase more, less or none of the shares in this
offering.
Investing
in our common stock involves a high degree of risk. You should
carefully consider the matters set forth in “Risk
Factors” on page 5 of this prospectus and in the documents
incorporated by reference into this prospectus.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
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Public offering
price
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$
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$
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Underwriting
discounts and
commissions
(1)
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$
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$
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Proceeds to us,
before expenses
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$
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$
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(1) We
have also agreed to reimburse the underwriters for certain of their
expenses. See “Underwriting” for more information about
these arrangements.
We have granted an
over-allotment option to the underwriters. Under this option, the
underwriters may elect to purchase up to a maximum of 1,200,000
additional shares of common stock from us at the public offering
price, less discounts and commissions, within 30 days following the
date of this prospectus to cover over-allotments, if any. If the
underwriters exercise the option in full, the total underwriting
discount will be $
, and the total proceeds to us,
before expenses, will be $
.
We expect that
delivery of the common stock will be made through the facilities of
the Depository Trust Company on or about
, 2017, subject to customary closing
conditions.
————————
Northland
Capital Markets
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Euro
Pacific Capital
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The date of this
prospectus is
,
2017.
TABLE
OF CONTENTS
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Page
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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5
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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23
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USE
OF PROCEEDS
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24
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MARKET
PRICE OF OUR COMMON STOCK
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25
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DIVIDEND
POLICY
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25
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CAPITALIZATION
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26
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BUSINESS
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27
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DESCRIPTION
OF CAPITAL STOCK
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43
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UNDERWRITING
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49
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LEGAL
MATTERS
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53
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EXPERTS
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53
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WHERE
YOU CAN FIND MORE INFORMATION
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53
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INCORPORATION
BY REFERENCE
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54
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GLOSSARY OF SELECTED OIL AND NATURAL GAS TERMS
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55
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_____________
This
prospectus contains forward-looking statements that are subject to
a number of risks and uncertainties, many of which are beyond our
control. Please see “Risk Factors” and
“Cautionary Statement Regarding Forward-Looking
Statements.”
INDUSTRY
AND MARKET DATA
The
market data and certain other statistical information used
throughout this prospectus are based on independent industry
publications, government publications and other published
independent sources. Although we believe these third-party sources
are reliable as of their respective dates, we have not
independently verified the accuracy or completeness of this
information. The industry in which we operate is subject to a high
degree of uncertainty and risk due to a variety of factors,
including those described or incorporated by reference in the
section entitled “Risk Factors.” These and other
factors could cause results to differ materially from those
expressed in these publications.
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PROSPECTUS
SUMMARY
This summary highlights selected information contained elsewhere in
this prospectus. This summary is not complete and does not contain
all of the information that you should consider before deciding to
invest in our common stock. You should read this entire prospectus
carefully, especially the “Risk Factors” and our
financial statements and notes thereto incorporated by reference in
this prospectus, before making an investment decision. Unless the
context otherwise requires, all references in this prospectus to
the “Company,” “Yuma,” “our,”
“us,” and “we” refer to Yuma Energy, Inc.,
a Delaware corporation, and its subsidiaries, as a common entity,
and “Yuma California” prior to our reincorporation from
California to Delaware. Unless otherwise noted, all information in
this prospectus relating to oil, natural gas and natural gas
liquids reserves and the estimated future net cash flows
attributable to those reserves are based on estimates prepared by
independent reserve engineers and are net to our
interest.
Overview
We are
an independent Houston-based exploration and production company
focused on acquiring, developing and exploring for conventional and
unconventional oil and natural gas resources. Historically, our
operations have focused on onshore properties located in central
and southern Louisiana and southeastern Texas where we have a long
history of drilling, developing and producing both oil and natural
gas assets. More recently, we have begun acquiring acreage in
Yoakum County, Texas, with plans to explore and develop oil and
natural gas assets in the Permian Basin. Finally, we have operated
positions in Kern County, California, and non-operated positions in
the East Texas Woodbine and the Bakken Shale in North Dakota. Our
common stock is listed on the NYSE American under the trading
symbol “YUMA.”
Our
average production for the year ended December 31, 2016 was 1,820
Boe/d and we estimate our production for the year ending December
31, 2017 to be approximately 2,400 to 2,800 Boe/d.
Recent
Developments
Entry into the Permian Basin
We
recently entered into the Permian Basin through a joint venture
with two privately held energy companies and have established an
Area of Mutual Interest, or AMI, covering approximately 33,280
acres in Yoakum County, Texas, located in the Northwest Shelf, or
NWS, of the Permian Basin. The primary target within the AMI will
be the San Andres formation, which has been one of the largest
producing formations in Texas to date. We currently hold an 87.5%
working interest in approximately 2,841 gross acres (2,486 net
acres) within the AMI and intend to apply horizontal drilling
technology to the San Andres formation which we believe will result
in increased reserves and production on a per well basis. This
activity is commonly referred to as the Horizontal San Andres Play,
and in certain areas, referred to as a Residual Oil Zone, or ROZ,
Play due to the presence of residual oil zone fairways with
substantial recoverable hydrocarbon resources in place. We are the
operator of the joint venture and intend on acquiring additional
leases offsetting existing acreage. We intend to spud a joint
venture well in the fourth quarter of 2017, as well as acquire
additional acreage within the AMI using some of the proceeds of
this offering.
Reincorporation Merger and Davis Merger
On
October 26, 2016, Yuma Energy, Inc., a California corporation, or
Yuma California, merged with and into our company resulting in our
reincorporation from California to Delaware, which we refer to as
the Reincorporation Merger. In connection with the Reincorporation
Merger, Yuma California converted each outstanding share of its
9.25% Series A cumulative redeemable preferred stock, or Yuma
California Series A Preferred Stock, into 35 shares of its common
stock, or the Yuma California Common Stock, and then each share of
Yuma California Common Stock was exchanged for one-twentieth of one
share of our common stock. Immediately after the
Reincorporation Merger on October 26, 2016, a wholly owned
subsidiary of our company merged, which we refer to as the Davis
Merger, with and into Davis Petroleum Acquisition Corp., a Delaware
corporation, or Davis, in exchange for approximately 7,455,000
shares of common stock and 1,754,179 shares of Series D convertible
preferred stock, or the Series D preferred stock. As a result of
the Davis Merger, the former holders of Davis common stock received
approximately 61.1% of our then outstanding common stock and thus
acquired voting control of the Company. Although we were the legal
acquirer, for financial reporting purposes, the Davis Merger was
accounted for as a reverse acquisition of the Company by
Davis.
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Preferred Stock
As of
September 12, 2017, we had 1,838,927 shares of our Series D
preferred stock outstanding with an aggregate liquidation
preference of approximately $20.4 million and a conversion rate of
$11.0741176 per share. The Series D preferred stock is paid
dividends in the form of additional shares of Series D preferred
stock at a rate of 7% per annum. After this offering and assuming a
public offering price of $
per share of common stock, we
estimate that the conversion price of the Series D preferred stock
will be adjusted to $
, resulting in the issuance of
approximately
shares of common stock if all of
the outstanding shares of Series D preferred stock were to be
converted.
Senior Credit Agreement
Also on
October 26, 2016, we and three of our subsidiaries, as the
co-borrowers, entered into a credit agreement providing for a $75.0
million three-year senior secured revolving credit facility, or the
credit agreement, with Société Générale, or
SocGen, as administrative agent, SG Americas Securities, LLC, or SG
Americas, as lead arranger and bookrunner, and the lenders
signatory thereto, or collectively with SocGen, the
Lender.
The
borrowing base of the credit facility was reaffirmed on September
8, 2017 at $40.5 million with our next redetermination scheduled
for April 1, 2018. The borrowing base is generally subject to
redetermination on April 1st and October 1st of each year, as well
as special redeterminations described in the credit agreement. The
amounts borrowed under the credit agreement bear annual interest
rates at either (a) the London Interbank Offered Rate plus 3.00% to
4.00% or (b) the prime lending rate of SocGen plus 2.00% to 3.00%,
depending on the amount borrowed under the credit facility and
whether the loan is drawn in U.S. dollars or Euro dollars.
Principal amounts outstanding under the credit facility are due and
payable in full at maturity on October 26, 2019. All of the
obligations under the credit agreement, and the guarantees of those
obligations, are secured by substantially all of our
assets.
The
credit agreement contains a number of covenants that, among other
things, restrict, subject to certain exceptions, our ability to
incur additional indebtedness, create liens on assets, make
investments, enter into sale and leaseback transactions, pay
dividends and distributions or repurchase our capital stock, engage
in mergers or consolidations, sell certain assets, sell or discount
any notes receivable or accounts receivable, and engage in certain
transactions with affiliates.
Oil
and Natural Gas Reserves Information
All
of our oil and natural gas reserves are located in the United
States. The reserve estimates have been prepared by Netherland,
Sewell & Associates, Inc., or NSAI, an independent petroleum
engineering firm.
Estimated Proved Reserves
The
table below summarizes our estimated proved reserves at December
31, 2016 based on reports prepared by NSAI. In preparing these
reports, NSAI evaluated 100% of our properties at December 31,
2016. The information in the following table does not give any
effect to or reflect our commodity derivatives.
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Natural Gas Liquids (MBbls)
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Present Value Discounted at 10% ($ in
thousands)
(2)
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Proved
developed
(3)
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Lac Blanc Field
(4)
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266
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600
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10,341
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2,589
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$
21,802
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Bayou Hebert Field
(4)
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171
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306
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7,965
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1,805
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19,888
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Other
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1,766
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155
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3,613
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2,523
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25,627
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Total
proved developed
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2,203
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1,061
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21,919
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6,917
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$
67,317
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Proved
undeveloped
(3)
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Lac Blanc Field
(4)
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-
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-
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-
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-
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-
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Bayou Hebert Field
(4)
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-
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-
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-
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-
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-
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Other
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773
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287
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2,060
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1,404
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6,283
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Total
proved undeveloped
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773
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287
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2,060
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1,404
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6,283
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Total
proved
(3)
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2,976
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1,348
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23,979
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8,321
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$
73,600
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(1)
Barrels of oil equivalent have been calculated on the basis of six
thousand cubic feet (Mcf) of natural gas equal to one barrel of oil
equivalent (Boe).
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(2)
Present Value Discounted at 10%, or PV10, is a Non-GAAP measure
that differs from the GAAP measure “standardized measure of
discounted future net cash flows” in that PV10 is calculated
without regard to future income taxes. PV10 does not necessarily
represent the fair market value of oil and natural gas
properties.
(3)
Proved reserves were calculated using prices equal to the
twelve-month unweighted arithmetic average of the
first-day-of-the-month prices for each of the preceding twelve
months, which were $42.75 per Bbl (WTI) and $2.48 per MMBtu (HH),
for the year ended December 31, 2016. Adjustments were made
for location and grade.
(4)
Our Lac Blanc Field and Bayou Hebert Field were our only fields
that each contained 15% or more of our estimated proved reserves as
of December 31, 2016.
Non-GAAP
Reconciliation
($ in
thousands)
The
table below provides a reconciliation of PV10 to the standardized
measure of discounted future net cash flows as of December 31,
2016:
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Present
value of estimated future net revenues (PV10)
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$
73,600
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Future
income taxes discounted at 10%
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-
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Standardized
measure of discounted future net cash flows
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$
73,600
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Risk
Factors
An
investment in our common stock involves a number of risks that
include the speculative nature of oil and natural gas exploration,
volatile commodity prices, competition and other material factors.
Importantly, due to an abundance of supply in the global crude oil
market and the domestic natural gas market, oil and natural gas
prices have decreased significantly. While we continue to believe
our inventory of drilling opportunities is repeatable and
relatively low-risk, should oil and natural gas prices decrease
even further, we may reevaluate our development drilling program.
Any postponement or elimination of our development drilling program
could result in a reduction of proved reserve volumes and the
standardized measure of our oil and gas reserves. You should
carefully consider, in addition to the other information contained
in this prospectus, the risks described or incorporated by
reference in “Risk Factors” before investing in our
common stock. These risks could materially affect our business,
financial condition and results of operations and cause the trading
price of our common stock to decline. You could lose part or all of
your investment.
Corporate
Information
Our
principal executive offices are located at 1177 West Loop South,
Suite 1825, Houston, Texas 77027. Our telephone number is (713)
768-7000. You can find more information about us at our website
located at www.yumaenergyinc.com. The information contained on our
website is not a part of, and should not be construed as being
incorporated by reference into, this prospectus.
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The
Offering
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Common
stock offered by us
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8,000,000
shares
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Underwriters’
over-allotment option
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We
have granted an over-allotment option to the underwriters. Under
this option, the underwriters may elect to purchase up to a maximum
of 1,200,000 additional shares of common stock from us at the
public offering price, less discounts and commissions, within 30
days following the date of this prospectus to cover
over-allotments, if any.
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Common
stock to be outstanding immediately after the offering
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shares (or
shares if the underwriters
exercise their over-allotment option in full).
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Use
of Proceeds
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We
estimate that our net proceeds from the sale of the common stock we
are offering will be approximately $
million, or approximately
$
million if the underwriters exercise
their over-allotment option in full,
after deducting
estimated offering expenses payable by us. We intend to use the net
proceeds from this offering to expand our Horizontal San Andres
Play located in Yoakum County, Texas. Specifically, these funds
will provide for additional leasehold acquisitions in the Permian
Basin, the drilling of a San Andres horizontal well and a Devonian
salt water disposal well, and other field infrastructure, and for
general working capital purposes.
See “Use of
Proceeds.”
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Risk
Factors
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Investing in our
common stock involves a high degree of risk. See “Risk
Factors” for a discussion of factors to consider carefully
before investing in our common stock.
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NYSE
American Symbol
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“YUMA”
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Unless
we indicate otherwise, all information in this prospectus is based
on 12,559,608 shares of our common stock issued and outstanding as
of September 12, 2017, and excludes as of such date:
●
84,248 shares of
our common stock issuable upon exercise of outstanding stock
appreciation rights under our 2014 Long-Term Incentive Plan, or the
2014 Plan, at a weighted-average exercise price of $12.10 per
share;
●
893,617 shares of
our common stock issuable upon exercise of outstanding stock
options under our 2014 Plan, at a weighted-average exercise price
of $2.56 per share;
●
5,000 shares of our
common stock issuable upon exercise of outstanding stock options
under our 2006 Equity Incentive Plan, or the 2006 Plan, at a
weighted-average exercise price of $103.20 per share;
●
942,816 shares of
our common stock reserved for issuance under equity awards that may
be granted under our 2014 Plan in the future; and
●
shares
of our common stock issuable upon conversion of the currently
outstanding shares of Series D preferred stock assuming that the
conversion price of the Series D preferred stock is adjusted to
$
per share as a result of this
offering.
Unless
otherwise indicated, all information in this prospectus assumes no
exercise by the underwriters of their over-allotment
option.
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RISK
FACTORS
Investing in our common stock involves a high degree of risk.
Before deciding whether to purchase shares of our common stock, you
should also consider the risks, uncertainties and assumptions
discussed under the heading “Risk Factors” included in
our most recent annual report on Form 10-K, as amended, as
revised or supplemented by our most recent quarterly report
on Form 10-Q, each of which are on file with the Securities
and Exchange Commission, or SEC, and are incorporated herein
by reference, and which may be amended, supplemented or superseded
from time to time by other reports we file with the SEC in the
future. If any of these risks actually occur, our business,
financial condition and results of operations could be materially
and adversely affected and we may not be able to achieve our goals,
the value of our securities could decline and you could lose some
or all of your investment. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also
impair our business operations and the market price for our common
stock.
Risks Relating to Our Company
If we are not able to continue to access additional capital in
significant amounts, we may not be able to continue to develop our
current prospects and properties, or we may forfeit our interest in
certain prospects and we may not be able to continue to operate our
business.
We
need significant capital to continue to operate our properties and
continue operations. In the near term, we intend to finance our
capital expenditures with cash flow from operations, borrowings
under our revolving credit facility, and future issuance of debt
and/or equity securities. Our cash flow from operations and access
to capital is subject to a number of variables, including, among
others:
●
our
estimated proved oil and natural gas reserves;
●
the
amount of oil and natural gas we produce from existing
wells;
●
the
prices at which we sell our production;
●
the
costs of developing and producing our oil and natural gas
reserves;
●
our
ability to acquire, locate and produce new reserves;
●
our
borrowing base and willingness of banks to lend to us;
and
●
our
ability to access the equity and debt capital markets.
Our
operations and other capital resources may not provide cash in
sufficient amounts to maintain planned or future levels of capital
expenditures. Further, our actual capital expenditures in 2017
could exceed our capital expenditure budget. In the event our
capital expenditure requirements at any time are greater than the
amount of capital we have available, we could be required to seek
additional sources of capital, which may include refinancing
existing debt, joint venture partnerships, production payment
financings, sales of non-core property assets, or offerings of debt
or equity securities. We may not be able to obtain any form of
financing on terms favorable, or at all.
If
we are unable to fund our capital requirements, we may be required
to curtail our operations relating to the exploration and
development of our prospects, which in turn could lead to a
possible loss of properties and a decline in our oil and natural
gas reserves, or we may be otherwise unable to implement our
development plan, complete acquisitions or otherwise take advantage
of business opportunities or respond to competitive pressures, any
of which could have a material adverse effect on our production,
revenues and results of operations. In addition, a delay in or the
failure to complete proposed or future infrastructure projects
could delay or eliminate potential efficiencies and related cost
savings. The occurrence of such events may prevent us from
continuing to operate our business and our common stock and
preferred stock may not have any value.
Our short-term liquidity is significantly constrained, and could
severely impact our cash flow and our development of our
properties.
Currently, our
principal sources of liquidity are cash flow from our operations
and borrowing under our credit facility. During the year ended
December 31, 2016, we borrowed $39.5 million under our credit
facility to fund a portion of our capital expenditures. As of
September 8, 2017, our total borrowing base was $40.5 million with
$8.5 million available. Since significant amounts of capital are
required for companies to participate in the business of
exploration for and development of oil and natural gas resources,
we are dependent on improving our cash flow and revenue, as well as
receipt of additional working capital, to fund continued
development and implementation of our business plan. Adverse
developments in our business or general economic conditions may
require us to raise additional financing at prices or on terms that
are disadvantageous to existing stockholders. We may not be able to
obtain additional capital at all and may be forced to curtail or
cease our operations. We will continue to rely on equity or debt
financing and the sale of working interests to finance operations
until such time, if ever, that we generate sustained positive cash
flow. The inability to obtain necessary financing will likely
adversely impact our ability to develop our properties and to
expand our business operations.
Our level of indebtedness could adversely affect our ability to
raise additional capital to fund our operations, limit our ability
to react to changes in the economy or our industry and prevent us
from meeting our obligations under our indebtedness.
On
October 26, 2016, we and three of our subsidiaries, as the
co-borrowers, entered into a credit agreement providing for a $75.0
million three-year senior secured revolving credit agreement, or
the credit agreement, with Société Générale, as
administrative agent, SG Americas Securities, LLC, as lead arranger
and bookrunner, and the lenders signatory thereto. Our degree of
leverage could have important consequences, including the
following:
●
it
may limit our ability to obtain additional debt or equity financing
for working capital, capital expenditures, further exploration,
debt service requirements, acquisitions and general corporate or
other purposes;
●
a
substantial portion of our cash flows from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes,
including our operations, capital expenditures and future business
opportunities;
●
the
debt service requirements of other indebtedness in the future could
make it more difficult for us to satisfy our financial
obligations;
●
we
could be vulnerable to any downturn in general economic conditions
and in our business, and we could be unable to carry out capital
spending and exploration activities that are currently planned;
and
●
we
may from time to time be out of compliance with covenants under our
debt agreements, which will require us to seek waivers from our
lenders, which may be difficult to obtain.
We
may incur additional debt, including secured indebtedness, or issue
preferred stock in order to maintain adequate liquidity and develop
and acquire properties to the extent desired. A higher level of
indebtedness and/or preferred stock increases the risk that we may
default on our obligations. Our ability to meet our debt
obligations and to reduce our level of indebtedness depends on our
future performance. General economic conditions, natural gas and
oil prices and financial, business and other factors affect our
operations and our future performance. Many of these factors are
beyond our control. Factors that will affect our ability to raise
cash through an offering of our capital stock or a refinancing of
our debt include financial market conditions, the value of our
assets, the number of shares of capital stock we have authorized,
unissued and unreserved and our performance at the time we need
capital.
Our credit agreement has substantial restrictions and financial
covenants and our ability to comply with those restrictions and
financial covenants is uncertain. Our inability to comply with the
restrictions and covenants in our credit agreement could result in
an acceleration of payment of funds that we have borrowed and would
impact our ability to make principal and interest payments on our
indebtedness and satisfy our other obligations.
The terms of our credit agreement require us to comply with certain
restrictions and financial covenants. Our ability to comply with
these restrictions and financial covenants in the future is
uncertain and will be affected by the levels of cash flows from
operations and events or circumstances beyond our control. Our
failure to comply with any of the restrictions or financial
covenants under the credit agreement could result in a default
under our credit agreement, which may cause all of our existing
indebtedness to be immediately due and payable.
Any
default under the agreements governing our indebtedness, including
a default under our
credit
agreement
that is not waived by the required lenders, and
the remedies sought by the holders of any such indebtedness, could
make us unable to pay principal and interest on our indebtedness
and satisfy our other obligations. If we are unable to generate
sufficient cash flows and are otherwise unable to obtain the funds
necessary to meet required payments of principal and interest on
our indebtedness, or if we otherwise fail to comply with the
various covenants, including financial and operating covenants, in
the instruments governing our indebtedness, we could be in default
under the terms of the agreements governing such indebtedness. In
the event of such default, the holders of such indebtedness could
elect to declare all the funds borrowed thereunder to be due and
payable, together with accrued and unpaid interest, the lenders
under our credit agreement could elect to terminate their
commitments, cease making further loans and institute foreclosure
proceedings against our assets, and we could be forced into
bankruptcy or liquidation. If our operating performance declines,
we may in the future need to seek to obtain waivers from the
required lenders under our credit agreement to avoid being in
default and we may not be able to obtain such a waiver. We cannot
assure you that we will be granted waivers or amendments to our
debt agreements if for any reason we are unable to comply with
these agreements, or that we will be able to refinance our debt on
terms acceptable to us, or at all.
Our lenders can unilaterally reduce our borrowing availability
based on anticipated commodity prices.
Our
credit agreement limits the amounts we can borrow to a borrowing
base amount, determined by the lenders in their sole discretion
based upon projected revenues from the properties securing their
loan. For example, our lenders have set our borrowing base at $40.5
million. Prices of crude oil below $40.00 per Bbl are likely to
have an adverse effect on our borrowing base. The lenders can
unilaterally adjust the borrowing base and the borrowings permitted
to be outstanding under the credit agreement. Outstanding
borrowings in excess of the borrowing base must be repaid
immediately, or we must pledge other crude oil and natural gas
properties as additional collateral. We do not currently have any
substantial unpledged properties, and we may not have the financial
resources in the future to make any mandatory principal prepayments
required under the credit agreement. Any inability to borrow
additional funds under our credit agreement could adversely affect
our operations and our financial results.
Our variable rate indebtedness subjects us to interest rate risk,
which could cause our debt service obligations to increase
significantly.
Borrowings under
our credit agreement bear interest at variable rates and expose us
to interest rate risk. If interest rates increase, our debt service
obligations on the variable rate indebtedness would increase
although the amount borrowed remained the same, and our net income
and cash available for servicing our indebtedness and for other
purposes would decrease.
We have historically incurred losses and may not achieve
profitability in the future.
We have
incurred losses from operations during our history in the oil and
natural gas business. We had an accumulated deficit of
approximately $10.6 million as of June 30, 2017. Our ability to be
profitable in the future will depend on successfully addressing our
near-term capital needs and implementing our acquisition,
development and production activities, all of which are subject to
many risks beyond our control. Even if we become profitable on an
annual basis, our profitability may not be sustainable or increase
on a periodic basis.
Failure to maintain an effective system of internal control over
financial reporting may have an adverse effect on our stock
price.
Pursuant to Section
404 of the Sarbanes-Oxley Act of 2002, and the rules and
regulations promulgated by the SEC to implement Section 404, our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of our financial statements for external purposes in
accordance with generally accepted accounting principles, or GAAP.
Under the supervision of, and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer, we are required to conduct an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework and criteria established in Internal
Control-Integrated Framework, (2013 Version) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
Because of its inherent limitations, internal controls over
financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
Through June 30, 2017, management had
concluded that its internal control over financial reporting was
effective.
Our oil, natural gas and natural gas liquids are sold to a limited
number of geographic markets so an oversupply in any of those areas
could have a material negative effect on the price we
receive.
Our
oil, natural gas and natural gas liquids are sold to a limited
number of geographic markets which each have a fixed amount of
storage and processing capacity. As a result, if such markets
become oversupplied with oil, natural gas and/or natural gas
liquids, it could have a material negative effect on the prices we
receive for our products and therefore an adverse effect on our
financial condition. There is a risk that refining capacity in the
U.S. Gulf Coast may be insufficient to refine all of the light
sweet crude oil being produced in the United States or that
capacities could be significantly reduced, temporarily or otherwise
by events such as Hurricane Harvey. Moreover, if light sweet crude
oil production remains at current levels or continues to increase,
demand for our light crude oil production could result in widening
price discounts to the world crude prices and potential shut-in of
production due to a lack of sufficient markets despite the lift on
prior restrictions on the exporting of oil and natural
gas.
We may not be able to drill wells on a substantial portion of our
acreage.
We may
not be able to drill on a substantial portion of our acreage for
various reasons. We may not generate or be able to raise sufficient
capital to do so. Further deterioration in commodities prices may
also make drilling certain acreage uneconomic. Our actual drilling
activities and future drilling budget will depend on drilling
results, oil and natural gas prices, the availability and cost of
capital, drilling and production costs, availability of drilling
services and equipment, lease expirations, gathering system and
pipeline transportation constraints, regulatory approvals and other
factors. In addition, any drilling activities we are able to
conduct may not be successful or add additional proved reserves to
our overall proved reserves, which could have a material adverse
effect on our future business, financial condition and results of
operations.
A significant portion of our net leasehold acreage is undeveloped,
and that acreage may not ultimately be developed or become
commercially productive, which could cause us to lose rights under
our leases as well as have a material adverse effect on our oil and
natural gas reserves and future production and, therefore, our
future cash flow and income.
A
significant portion of our net leasehold acreage (approximately
46%) is undeveloped, or acreage on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and natural gas regardless of whether
such acreage contains proved reserves. In addition, many of our oil
and natural gas leases require us to drill wells that are
commercially productive, and if we are unsuccessful in drilling
such wells, we could lose our rights under such leases. Our future
oil and natural gas reserves and production and, therefore, our
future cash flow and income, are dependent on successfully
developing our undeveloped leasehold acreage.
Our ability to sell our production and/or receive market prices for
our production may be adversely affected by transportation capacity
constraints and interruptions.
If the
amount of natural gas, natural gas liquids or oil being produced by
us and others exceeds the capacity of the various transportation
pipelines and gathering systems available in our operating areas,
it will be necessary for new transportation pipelines and gathering
systems to be built. Or, in the case of oil and natural gas
liquids, it will be necessary for us to rely more heavily on trucks
to transport our production, which is more expensive and less
efficient than transportation via pipeline. The construction of new
pipelines and gathering systems is capital intensive and
construction may be postponed, interrupted or cancelled in response
to changing economic conditions and the availability and cost of
capital. In addition, capital constraints could limit our ability
to build gathering systems to transport our production to
transportation pipelines. In such event, costs to transport our
production may increase materially or we might have to shut in our
wells awaiting a pipeline connection or capacity and/or sell our
production at much lower prices than market or than we currently
project, which would adversely affect our results of
operations.
A
portion of our production may also be interrupted, or shut in, from
time to time for numerous other reasons, including as a result of
operational issues, mechanical breakdowns, weather conditions,
accidents, loss of pipeline or gathering system access, field labor
issues or strikes, or we might voluntarily curtail production in
response to market conditions. If a substantial amount of our
production is interrupted at the same time, it would likely
adversely affect our cash flow.
Unless we replace our reserves, our reserves and production will
decline, which would adversely affect our financial condition,
results of operations and cash flows.
Producing oil and
natural gas reservoirs generally are characterized by declining
production rates that vary depending upon reservoir characteristics
and other factors. Decline rates are typically greatest early in
the productive life of a well. Estimates of the decline rate of an
oil or natural gas well are inherently imprecise, and are less
precise with respect to new or emerging oil and natural gas
formations with limited production histories than for more
developed formations with established production histories. Our
production levels and the reserves that we currently expect to
recover from our wells will change if production from our existing
wells declines in a different manner than we have estimated and can
change under other circumstances. Thus, our future oil and natural
gas reserves and production and, therefore, our cash flow and
results of operations are highly dependent upon our success in
efficiently developing and exploiting our current properties and
economically finding or acquiring additional recoverable reserves.
We may not be able to develop, find or acquire additional reserves
to replace our current and future production at acceptable costs.
If we are unable to replace our current and future production, our
cash flow and the value of our reserves may decrease, adversely
affecting our business, financial condition, results of operations,
and potentially the borrowing capacity under our credit
facility.
Estimates of proved oil and natural gas reserves involve
assumptions and any material inaccuracies in these assumptions will
materially affect the quantities and the net present value of our
reserves.
This
prospectus contains estimates of our proved oil and natural gas
reserves. These estimates are based upon various assumptions,
including assumptions required by the SEC relating to oil and
natural gas prices, drilling and operating expenses, capital
expenditures, taxes and availability of funds. The process of
estimating oil and natural gas reserves is complex. This process
requires significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data
for each reservoir. Therefore, these estimates are inherently
imprecise.
Actual
future production, oil and natural gas prices, revenues, taxes,
development expenditures, operating expenses and quantities of
recoverable oil and natural gas reserves will vary from those
estimated. Any significant variance could materially affect the
estimated quantities and the net present value of our reserves. For
instance, the SEC mandated prices used in estimating our proved
reserves as of December 31, 2016 are $42.75 per Bbl of oil and
$2.48 per MMBtu of natural gas, which may be significantly higher
than future spot market prices. Our properties may also be
susceptible to hydrocarbon drainage from production by other
operators on adjacent properties. In addition, we may adjust
estimates of proved reserves to reflect production history, results
of exploration and development, prevailing oil and natural gas
prices and other factors, many of which are beyond our
control.
At
December 31, 2016, approximately 17% of our estimated reserves were
classified as proved undeveloped. Recovery of proved undeveloped
reserves requires significant capital expenditures and successful
drilling operations. The reserve data assumes that we will make
significant capital expenditures to develop our reserves. The
estimates of these oil and natural gas reserves and the costs
associated with development of these reserves have been prepared in
accordance with SEC regulations; however, actual capital
expenditures will likely vary from estimated capital expenditures,
development may not occur as scheduled and actual results may not
be as estimated.
We depend on the skill, ability and decisions of third-party
operators of the oil and natural gas properties in which we have a
non-operated working interest.
The
success of the drilling, development and production of the oil and
natural gas properties in which we have or expect to have a
non-operating working interest is substantially dependent upon the
decisions of such third-party operators and their diligence to
comply with various laws, rules and regulations affecting such
properties. The success and timing of our drilling, development and
production activities on such properties operated by third-parties
therefore depends upon a number of factors, including:
●
timing and amount
of capital expenditures;
●
the
operator’s expertise and financial
resources;
●
the rate of
production of reserves, if any;
●
approval
of other participants in drilling wells; and
●
selection
of technology.
The
failure of third-party operators to make decisions, perform their
services, discharge their obligations, deal with regulatory
agencies, and comply with laws, rules and regulations, including
environmental laws and regulations in a proper manner with respect
to properties in which we have an interest could result in material
adverse consequences to our interest in such properties, including
substantial penalties and compliance costs. Such adverse
consequences could result in substantial liabilities to us or
reduce the value of our properties, which could materially affect
our results of operations.
As a
result, our ability to exercise influence over the operations of
some of our current or future properties is and may be
limited.
The standardized measure of discounted future net cash flows from
our proved reserves will not be the same as the current market
value of our estimated oil and natural gas reserves.
You
should not assume that the standardized measure of discounted
future net cash flows from our proved reserves is the current
market value of our estimated oil and natural gas reserves. In
accordance with SEC requirements, we based the discounted future
net cash flows from our proved reserves on the 12-month
first-day-of-the-month oil and natural gas average prices without
giving effect to derivative transactions. Actual future net cash
flows from our oil and natural gas properties will be affected by
factors such as:
●
actual prices we
receive for oil and natural gas;
●
actual cost of
development and production expenditures;
●
the amount and
timing of actual production; and
●
changes in
governmental regulations or taxation.
The
timing of both our production and our incurrence of expenses in
connection with the development and production of oil and natural
gas properties will affect the timing and amount of actual future
net revenues from proved reserves, and thus their actual present
value. In addition, the 10% discount factor we use when calculating
standardized measure may not be the most appropriate discount
factor based on interest rates in effect from time to time and
risks associated with us or the oil and natural gas industry in
general. As a corporation, we are treated as a taxable entity for
federal income tax purposes and our future income taxes will be
dependent on our future taxable income. Actual future prices and
costs may differ materially from those used in the present value
estimates included in this prospectus which could have a material
effect on the value of our reserves.
A component of our growth may come through acquisitions, and our
failure to identify or complete future acquisitions successfully
could reduce our earnings and slow our growth.
We
may be unable to identify properties for acquisition or to make
acquisitions on terms that we consider economically acceptable.
There is intense competition for acquisition opportunities in our
industry. Competition for acquisitions may increase the cost of, or
cause us to refrain from, completing acquisitions. The completion
and pursuit of acquisitions may be dependent upon, among other
things, our ability to obtain debt and equity financing and, in
some cases, regulatory approvals. Our ability to grow through
acquisitions will require us to continue to invest in operations
and financial and management information systems and to attract,
retain, motivate and effectively manage our employees.
In
addition, we may be unable to successfully integrate any potential
acquisitions into our existing operations. The inability to manage
the integration of acquisitions, including our merger with Davis,
effectively could reduce our focus on subsequent acquisitions and
current operations, and could negatively impact our results of
operations and growth potential. Members of our management team may
be required to devote considerable amounts of time to the
integration process, including with respect to the merger of Davis,
which will decrease the time they will have to manage our
business.
Furthermore,
our decision to acquire properties that are substantially different
in operating or geologic characteristics or geographic locations
from areas with which our staff is familiar may impact our
productivity in such areas. Our financial condition, results of
operations and cash flows may fluctuate significantly from period
to period as a result of the completion of significant acquisitions
during particular periods.
We
may engage in bidding and negotiation to complete successful
acquisitions. We may be required to alter or increase substantially
our capitalization to finance these acquisitions through the use of
cash on hand, the issuance of debt or equity securities, the sale
of production payments, the sale of non-strategic assets, the
borrowing of funds or otherwise. Our credit agreement includes
covenants limiting our ability to incur additional debt. If we were
to proceed with one or more acquisitions involving the issuance of
our common stock, our stockholders would suffer dilution of their
interests.
Seismic studies do not guarantee that hydrocarbons are present or,
if present, will produce in economic quantities.
We
design and generate in-house 3-D seismic survey programs on many of
our projects. We may use seismic studies to assist with assessing
prospective drilling opportunities on current properties, as well
as on properties that we may acquire. Such seismic studies are
merely an interpretive tool and do not necessarily guarantee that
hydrocarbons are present or if present will produce in economic
quantities.
We depend on computer and telecommunications systems and failures
in our systems or cyber security attacks could significantly
disrupt our business operations.
We have
entered into agreements with third parties for hardware, software,
telecommunications and other information technology services in
connection with our business. It is possible we could incur
interruptions from cyber security attacks, computer viruses or
malware. We believe that we have positive relations with our
related vendors and maintain adequate anti-virus and malware
software and controls; however, any interruptions to our
arrangements with third parties to our computing and communications
infrastructure or our information systems could significantly
disrupt our business operations.
We depend substantially on our key personnel for critical
management decisions and industry contacts.
Our
success depends upon the continued contributions of our executive
officers and key employees, particularly with respect to providing
the critical management decisions and contacts necessary to manage
and maintain our company within a highly competitive industry.
Competition for qualified personnel can be intense, particularly in
the oil and natural gas industry, and there are a limited number of
people with the requisite knowledge and experience. Under these
conditions, we could be unable to attract and retain these
personnel. The loss of the services of any of our executive
officers or other key employees for any reason could have a
material adverse effect on our business, operating results,
financial condition and cash flows.
Competition in the oil and natural gas industry is intense and many
of our competitors have resources that are substantially greater
than ours.
The oil
and natural gas industry is highly competitive in many respects,
including identification of attractive oil and natural gas
properties for acquisition, drilling and development, securing
financing for such activities and obtaining the necessary equipment
and personnel to conduct such operations and activities. In seeking
suitable opportunities, we compete with a number of other
companies, including large oil and natural gas companies and other
independent operators with greater financial resources, larger
numbers of personnel and facilities, and, in some cases, with more
expertise. Larger competitors may also be able to absorb the burden
of present and future federal, state, local and other laws and
regulations more easily than we can, which could adversely affect
our competitive position. There can be no assurance that we will be
able to compete effectively with these entities. These factors
could adversely affect the success of our operations and our
profitability.
Risks Relating to the Energy Production and/or Distribution
Industry
Oil and natural gas prices are volatile. A substantial or extended
decline in commodity prices will likely adversely affect our
business, financial condition and results of operations and our
ability to meet our debt commitments, or capital expenditure
obligations and other financial commitments.
Prices
for oil, natural gas, and natural gas liquids can fluctuate widely.
For example, the NYMEX WTI oil prices have been volatile and ranged
from a high of $107.26 per barrel in June 2014 to a low
of $26.21 per barrel in February 2016. Also, NYMEX HH natural
gas prices have been volatile and ranged from a high of
$6.15 per MMBtu in February 2014 to a low of
$1.64 per MMBtu in December 2015. Our revenues, profitability
and our future growth and the carrying value of our properties
depend substantially on prevailing oil and natural gas prices.
Prices also affect the amount of cash flow available for capital
expenditures and our ability to borrow and raise additional
capital. The amount we will be able to borrow under our credit
agreement is subject to periodic redetermination based in part on
current oil and natural gas prices and on changing expectations of
future prices. Lower prices may also reduce the amount of oil and
natural gas that we can economically produce and have an adverse
effect on the value of our properties.
Historically, the
markets for oil and natural gas have been volatile, and they are
likely to continue to be volatile in the future. Among the factors
that can cause volatility are:
●
the domestic and
foreign supply of, and demand for, oil and natural
gas;
●
volatility and
trading patterns in the commodity-futures markets;
●
the ability of
members of the Organization of the Petroleum Exporting Countries,
or OPEC, and other producing countries to agree upon and determine
oil prices and production levels;
●
social unrest and
political instability, particularly in major oil and natural gas
producing regions outside the United States, such as Africa and the
Middle East, and armed conflict or terrorist attacks, whether or
not in oil or natural gas producing regions;
●
the level of
overall product demand;
●
the growth of
consumer product demand in emerging markets, such as
China;
●
labor unrest in oil
and natural gas producing regions;
●
weather conditions,
including hurricanes and other natural occurrences that affect the
supply and/or demand of oil and natural gas;
●
the price and
availability of alternative fuels;
●
the price of
foreign imports;
●
worldwide economic
conditions; and
●
the availability of
liquid natural gas imports.
These
external factors and the volatile nature of the energy markets make
it difficult to estimate future prices of oil and natural
gas.
The
long-term effect of these and other factors on the prices of oil
and natural gas is uncertain. Prolonged or further declines in
these commodity prices may have the following effects on our
business:
●
adversely affecting
our financial condition, liquidity, ability to finance planned
capital expenditures, and results of operations;
●
reducing the amount
of oil and natural gas that we can produce
economically;
●
causing us to delay
or postpone a significant portion of our capital
projects;
●
materially reducing
our revenues, operating income, or cash flows;
●
reducing the
amounts of our estimated proved oil and natural gas
reserves;
●
reducing the
carrying value of our oil and natural gas properties due to
recognizing additional impairments of proved properties, unproved
properties and exploration assets;
●
reducing the
standardized measure of discounted future net cash flows relating
to oil and natural gas reserves; and
●
limiting our access
to, or increasing the cost of, sources of capital such as equity
and long-term debt.
Due to low current commodity prices, we may be required to take
write-downs of the carrying values of our properties in
2017.
Accounting rules
require that we periodically review the carrying value of our
properties for possible impairment. Based on specific market
factors and circumstances at the time of prospective impairment
reviews, and the continuing evaluation of development plans,
production data, economics and other factors, we may be required to
write down the carrying value of our properties. A write-down
constitutes a non-cash charge to earnings. Based upon commodity
prices, we did not incur an impairment charge in the second quarter
of 2017, but we may incur impairments in future
periods.
Drilling for oil and natural gas is a speculative activity and
involves numerous risks and substantial and uncertain costs that
could adversely affect us.
Our
operations are subject to many risks and hazards incident to
exploring and drilling for, producing, transporting, marketing and
selling oil and natural gas. Although we may take precautionary
measures, many of these risks and hazards are beyond our control
and unavoidable under the circumstances. Many of these risks or
hazards could materially and adversely affect our revenues and
expenses, the ability of certain of our wells to produce oil and
natural gas in commercial and economic quantities, the rate of
production and the economics of the development of, and our
investment in the prospects in which we have or will acquire an
interest. Any of these risks and hazards could materially and
adversely affect our financial condition, results of operations and
cash flows. Such risks and hazards include:
●
human error,
accidents, labor force and other factors beyond our control that
may cause personal injuries or death to persons and destruction or
damage to equipment and facilities;
●
blowouts, fires,
hurricanes, pollution and equipment failures that may result in
damage to or destruction of wells, producing formations, production
facilities and equipment and increased drilling and production
costs;
●
unavailability of
materials and equipment;
●
engineering and
construction delays;
●
unanticipated
transportation costs and delays;
●
unfavorable weather
conditions;
●
hazards resulting
from unusual or unexpected geological or environmental
conditions;
●
environmental
regulations and requirements;
●
accidental leakage
of toxic or hazardous materials, such as petroleum liquids,
drilling fluids or salt water, into the environment;
●
hazards resulting
from the presence of hydrogen sulfide or other contaminants in
natural gas we produce;
●
changes in laws and
regulations, including laws and regulations applicable to oil and
natural gas activities or markets for the oil and natural gas
produced;
●
fluctuations in
supply and demand for oil and natural gas causing variations of the
prices we receive for our oil and natural gas production;
and
●
the availability of
alternative fuels and the price at which they become
available.
Our
success will depend on the success of our drilling program. There
is no way to predict in advance of drilling and testing whether any
particular prospect will yield oil or natural gas in sufficient
quantities to recover drilling or completion costs or to be
economically viable. The use of seismic data and other technologies
and the study of producing fields in the same area will not enable
us to know conclusively prior to drilling whether oil or natural
gas will be present or, if present, whether oil or natural gas will
be present in commercial quantities. Analogies drawn from
available data from other wells, more fully explored prospects or
producing fields may not be applicable to current drilling
prospects.
The
budgeted costs of planning, drilling, completing and operating
wells are often exceeded and such costs can increase significantly
due to various complications that may arise during the drilling and
operating processes. Before a well is spud, we may incur
significant geological and geophysical (seismic) costs, which are
incurred whether a well eventually produces commercial quantities
of hydrocarbons, or is drilled at all. Exploration wells endure a
much greater risk of loss than development wells. If actual
drilling and development costs are significantly more than the
current estimated costs, we may not be able to continue operations
as proposed and could be forced to modify drilling plans
accordingly. Drilling for oil and natural gas involves numerous
risks, including the risk that no commercially productive natural
gas or oil reservoirs will be discovered.
If we
decide to drill a certain location, there is a risk that (i) no
commercially productive oil or natural gas reservoirs will be found
or produced, or (ii) we may drill or participate in new wells that
are not productive or drill wells that are productive, but that do
not produce sufficient net revenues to return a profit after
drilling, operating and other costs. A productive well may become
uneconomical if water or other deleterious substances are
encountered which impair or prevent the production of oil and/or
natural gas from the well.
Our
overall drilling success rate or drilling success rate for activity
within a particular project area may decline. Unsuccessful drilling
activities could result in a significant decline in production and
revenues and materially harm operations and financial condition by
reducing available cash and resources. Even if sufficient amounts
of oil or natural gas exist, we may damage the potentially
productive hydrocarbon-bearing formation or experience mechanical
difficulties while drilling or completing the well, resulting in a
reduction in production and reserves from the well or abandonment
of the well.
Our exploration and development drilling efforts and the operation
of our wells may not be profitable or achieve our targeted
returns.
We
require significant amounts of undeveloped leasehold acreage to
further our development efforts. Exploration, development, drilling
and production activities are subject to many risks, including the
risk that commercially productive reservoirs will not be
discovered. We invest in property, including undeveloped leasehold
acreage that we believe will result in projects that will add value
over time. However, we cannot guarantee that our leasehold acreage
will be profitably developed, that new wells drilled by us will be
productive or that we will recover all or any portion of our
investment in such leasehold acreage or wells. 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 reserves to return a profit after deducting
operating and other costs. In addition, wells that are profitable
may not achieve our targeted rate of return. Our ability to achieve
our target results is dependent upon the current and future market
prices for oil and natural gas, costs associated with producing oil
and natural gas and our ability to add reserves at an acceptable
cost.
In
addition, we may not be successful in controlling our drilling and
production costs to improve our overall return. The cost of
drilling, completing and operating a well is often uncertain and
cost factors can adversely affect the economics of a project. We
cannot predict the cost of drilling and completing a well, and we
may be forced to limit, delay or cancel drilling operations as a
result of a variety of factors, including:
●
unexpected drilling
conditions;
●
downhole and well
completion difficulties;
●
pressure or
irregularities in formations;
●
equipment failures
or breakdowns, or accidents and shortages or delays in the
availability of drilling and completion equipment and
services;
●
fires, explosions,
blowouts and surface cratering;
●
adverse weather
conditions, including hurricanes; and
●
compliance with
governmental requirements.
We are subject to complex federal, state, local and other laws and
regulations that from time to time are amended to impose more
stringent requirements that could adversely affect the cost, manner
or feasibility of doing business.
Companies that
explore for and develop, produce, sell and transport oil and
natural gas in the United States are subject to extensive federal,
state and local laws and regulations, including complex tax and
environmental, health and safety laws and the corresponding
regulations, and are required to obtain various permits and
approvals from federal, state and local agencies. If these permits
are not issued or unfavorable restrictions or conditions are
imposed on our drilling activities, we may not be able to conduct
our operations as planned. We may be required to make large
expenditures to comply with governmental regulations. Matters
subject to regulation include:
●
water discharge and
disposal permits for drilling operations;
●
reports concerning
operations;
●
air quality, air
emissions, noise levels and related permits;
●
rights-of-way and
easements;
●
unitization and
pooling of properties;
●
gathering,
transportation and marketing of oil and natural gas;
●
waste and water
transport and disposal permits and requirements.
Failure
to comply with applicable laws may result in the suspension or
termination of operations and subject us to liabilities, including
administrative, civil and criminal penalties. Compliance costs can
be significant. Moreover, the laws governing our operations or the
enforcement thereof could change in ways that substantially
increase the costs of doing business. Any such liabilities,
penalties, suspensions, terminations or regulatory changes could
materially and adversely affect our business, financial condition
and results of operations. Under environmental, health and safety
laws and regulations, we also could be held liable for personal
injuries, property damage (including site clean-up and restoration
costs) and other damages including the assessment of natural
resource damages. Such laws may impose strict as well as joint and
several liability for environmental contamination, which could
subject us to liability for the conduct of others or for our own
actions that were in compliance with all applicable laws at the
time such actions were taken. Environmental and other governmental
laws and regulations also increase the costs to plan, design,
drill, install, operate and abandon oil and natural gas wells.
Moreover, public interest in environmental protection has increased
in recent years, and environmental organizations have opposed, with
some success, certain drilling projects. Part of the regulatory
environment in which we operate includes, in some cases, federal
requirements for performing or preparing environmental assessments,
environmental impact studies and/or plans of development before
commencing exploration and production activities. In addition, our
activities are subject to regulation by oil and natural
gas-producing states relating to conservation practices and
protection of correlative rights. These regulations affect our
operations and limit the quantity of oil and natural gas we may
produce and sell. Delays in obtaining regulatory approvals or
necessary permits, the failure to obtain a permit or the receipt of
a permit with excessive conditions or costs could have a material
adverse effect on our ability to explore on, develop or produce our
properties. Additionally, the oil and natural gas regulatory
environment could change in ways that might substantially increase
the financial and managerial costs to comply with the requirements
of these laws and regulations and, consequently, adversely affect
our profitability.
Federal, state and local legislation and regulatory initiatives
relating to hydraulic fracturing could result in increased costs
and additional operating restrictions or delays.
We
engage third parties to provide hydraulic fracturing or other well
stimulation services to us in connection with many of the wells for
which we are the operator. Federal, state and local governments
have been adopting or considering restrictions on or prohibitions
of fracturing in areas where we currently conduct operations, or in
the future plan to conduct operations. Consequently, we could be
subject to additional levels of regulation, operational delays or
increased operating costs and could have additional regulatory
burdens imposed upon us that could make it more difficult to
perform hydraulic fracturing and increase our costs of compliance
and doing business.
From
time to time, for example, legislation has been proposed in
Congress to amend the federal Safe Drinking Water Act, or the
SDWA
,
to require federal
permitting of hydraulic fracturing and the disclosure of chemicals
used in the hydraulic fracturing process. Further, the EPA
completed a study finding that hydraulic fracturing could
potentially harm drinking water resources under adverse
circumstances such as injection directly into groundwater or into
production wells lacking mechanical integrity. Other governmental
reviews have also been recently conducted or are under way that
focus on environmental aspects of hydraulic fracturing. For
example, a federal Bureau of Land Management, or BLM
,
rulemaking for hydraulic fracturing
practices on federal and Indian lands resulted in a 2015 final rule
that requires public disclosure of chemicals used in hydraulic
fracturing, confirmation that the wells used in fracturing
operations meet proper construction standards and development of
plans for managing related flowback water. These activities could
result in additional regulatory scrutiny that could make it
difficult to perform hydraulic fracturing and increase our costs of
compliance and doing business.
Certain
states, including North Dakota, where we have interests in numerous
non-operated wells, have adopted, and other states are considering
or have adopted more stringent requirements for various aspects of
hydraulic fracturing operations, such as permitting, disclosure,
air emissions, well construction, seismic monitoring, waste
disposal and water use. In addition to state laws, local land use
restrictions, such as city ordinances, may restrict or prohibit
drilling in general or hydraulic fracturing in particular. Such
efforts have extended to bans on hydraulic fracturing.
The
proliferation of regulations may limit our ability to operate. If
the use of hydraulic fracturing is limited, prohibited or subjected
to further regulation, these requirements could delay or
effectively prevent the extraction of oil and natural gas from
formations which would not be economically viable without the use
of hydraulic fracturing. This could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
Climate change legislation or regulations restricting emissions of
“greenhouse gases” could result in increased operating
costs and reduced demand for the oil, natural gas and natural gas
liquids we produce.
Studies
over recent years have indicated that emissions of certain gases
may be contributing to warming of the Earth
’
s atmosphere. In response,
governments have increasingly been adopting domestic and
international climate change regulations that require reporting and
reductions of the emission of such greenhouse gases. Methane, a
primary component of natural gas, and carbon dioxide, a byproduct
of burning oil, natural gas and refined petroleum products, are
considered greenhouse gases. Internationally, the United Nations
Framework Convention on Climate Change, the Kyoto Protocol and the
Paris Agreement address greenhouse gas emissions, and international
negotiations over climate change and greenhouse gases are
continuing. Meanwhile, several countries, including those
comprising the European Union, have established greenhouse gas
regulatory systems.
In the
United States, many states, either individually or through
multi-state regional initiatives, have begun implementing legal
measures to reduce emissions of greenhouse gases, primarily through
emission inventories, emission targets, greenhouse gas cap and
trade programs or incentives for renewable energy generation, while
others have considered adopting such greenhouse gas
programs.
At the
federal level, the Obama Administration pledged for the Paris
Agreement to meet an economy-wide target in 2025 of reducing
greenhouse gas emissions by 26-28% below the 2005 level. To help
achieve these reductions, federal agencies have been addressing
climate change through a variety of administrative actions. The
U.S. Environmental Protection Agency, or the EPA, thus issued
greenhouse gas monitoring and reporting regulations that cover oil
and natural gas facilities, among other industries. Beyond
measuring and reporting, the EPA issued an
“
Endangerment Finding
”
under Section 202(a) of the federal
Clean Air Act, concluding certain greenhouse gas pollution
threatens the public health and welfare of current and future
generations. The finding served as the first step to issuing
regulations that require permits for and reductions in greenhouse
gas emissions for certain facilities. In March 2014, moreover, then
President Obama released a Strategy to Reduce Methane Emissions
that included consideration of both voluntary programs and targeted
regulations for the oil and natural gas sector. Consistent with
that strategy, the EPA issued final rules in 2016 for new and
modified oil and natural gas production sources (including
hydraulically fractured oil wells, natural gas well sites, natural
gas processing plants, natural gas gathering and boosting stations
and natural gas transmission sources) to reduce emissions of
methane as well as volatile organic compounds and toxic pollutants.
In addition, the BLM has promulgated standards for reducing venting
and flaring on public lands. The EPA and BLM actions are part of a
series of steps by the Obama Administration that were intended to
result by 2025 in a 40-45% decrease in methane emissions from the
oil and gas industry as compared to 2012 levels.
In the
courts, several decisions have been issued that may increase the
risk of claims being filed by governments and private parties
against companies that have significant greenhouse gas emissions.
Such cases may seek to challenge air emissions permits that
greenhouse gas emitters apply for and seek to force emitters to
reduce their emissions or seek damages for alleged climate change
impacts to the environment, people, and property.
The
direction of future U.S. climate change regulation is difficult to
predict given the current uncertainties surrounding the policies of
the Trump Administration. The EPA may or may not continue
developing regulations to reduce greenhouse gas emissions from the
oil and natural gas industry. Even if federal efforts in this area
slow, states may continue pursuing climate regulations. Any laws or
regulations that may be adopted to restrict or reduce emissions of
greenhouse gases could require us to incur additional operating
costs, such as costs to purchase and operate emissions controls to
obtain emission allowances or to pay emission taxes, and reduce
demand for our products.
Derivatives reform legislation and related regulations could have
an adverse effect on our ability to hedge risks associated with our
business.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act, or the
Dodd-Frank Act
,
provides for
federal oversight of the over-the-counter derivatives market and
entities that participate in that market and mandates that the
Commodity Futures Trading Commission, or the CFTC, the SEC, and
federal regulators of financial institutions adopt rules or
regulations implementing the Dodd-Frank Act and providing
definitions of terms used in the Dodd-Frank Act.
The
CFTC has finalized other regulations implementing the Dodd-Frank
Act
’
s provisions
regarding trade reporting, margin, clearing and trade execution;
however, some regulations remain to be finalized and it is not
possible at this time to predict when the CFTC will adopt final
rules. For example, the CFTC has re-proposed regulations setting
position limits for certain futures and option contracts in the
major energy markets and for swaps that are their economic
equivalents. Certain bona fide hedging transactions are expected to
be made exempt from these limits. Also, it is possible that under
recently adopted margin rules, some registered swap dealers may
require us to post initial and variation margins in connection with
certain swaps not subject to central clearing.
The
Dodd-Frank Act and any additional implementing regulations could
significantly increase the cost of some commodity derivative
contracts (including through requirements to post collateral, which
could adversely affect our available liquidity), materially alter
the terms of some commodity derivative contracts, limit our ability
to trade some derivatives to hedge risks, reduce the availability
of some derivatives to protect against risks we encounter, and
reduce our ability to monetize or restructure our existing
commodity derivative contracts. If we reduce our use of derivatives
as a consequence, our results of operations may become more
volatile and our cash flows may be less predictable, which could
adversely affect our ability to plan for and fund capital
expenditures. Increased volatility may make us less attractive to
certain types of investors. Finally, the Dodd-Frank Act was
intended, in part, to reduce the volatility of oil and natural gas
prices, which some legislators attributed to speculative trading in
derivatives and commodity instruments related to oil and natural
gas. If the implementing regulations result in lower commodity
prices, our revenues could be adversely affected. Any of these
consequences could adversely affect our business, financial
condition and results of operations.
We may incur more taxes and certain of our projects may become
uneconomic if certain federal income tax deductions currently
available with respect to oil and natural gas exploration and
development are eliminated as a result of future
legislation.
In past
years, legislation has been proposed that would, if enacted into
law, make significant changes to U.S. tax laws, including to
certain key U.S. federal income tax provisions currently available
to oil and natural gas exploration and production companies. Such
legislative changes have included, but not limited to,
(i)
the repeal of the
percentage depletion allowance for oil and natural gas properties,
(ii)
the elimination of
current deductions for intangible drilling and development costs,
(iii)
the elimination of
the deduction for certain domestic production activities, and
(iv)
an extension of the
amortization period for certain geological and geophysical
expenditures. Congress could consider, and could include, some or
all of these proposals as part of tax reform legislation, to
accompany lower federal income tax rates. Moreover, other more
general features of tax reform legislation, including changes to
cost recovery rules and to the deductibility of interest expense,
may be developed that also would change the taxation of oil and
natural gas companies. It is unclear whether these or similar
changes will be enacted and, if enacted, how soon any such changes
could take effect. The passage of any legislation as a result of
these proposals or any similar changes in U.S. federal income tax
laws could eliminate or postpone certain tax deductions that
currently are available with respect to oil and natural gas
development, or increase costs, and any such changes could have an
adverse effect on our financial position, results of operations and
cash flows.
Our operations are substantially dependent on the availability, use
and disposal of water. New legislation and regulatory initiatives
or restrictions relating to water disposal wells could have a
material adverse effect on our future business, financial
condition, operating results and prospects.
Water
is an essential component of our drilling and hydraulic fracturing
processes. If we are unable to obtain water to use in our
operations from local sources, we may be unable to economically
produce oil, natural gas liquids and natural gas, which could have
an adverse effect on our business, financial condition and results
of operations. Wastewaters from our operations typically are
disposed of via underground injection. Some studies have linked
earthquakes in certain areas to underground injection, which is
leading to greater public scrutiny of disposal wells. Any new
environmental initiatives or regulations that restrict injection of
fluids, including, but not limited to, produced water, drilling
fluids and other wastes associated with the exploration,
development or production of oil and gas, or that limit the
withdrawal, storage or use of surface water or ground water
necessary for hydraulic fracturing of our wells, could increase our
operating costs and cause delays, interruptions or cessation of our
operations, the extent of which cannot be predicted, and all of
which would have an adverse effect on our business, financial
condition, results of operations and cash flows.
We participate in oil and natural gas leases with third parties who
may not be able to fulfill their commitments to our
projects.
We
frequently own less than 100% of the working interest in the oil
and natural gas leases on which we conduct operations, and other
parties own the remaining portion of the working interest.
Financial risks are inherent in any operation where the cost of
drilling, equipping, completing and operating wells is shared by
more than one person. We could be held liable for joint activity
obligations of other working interest owners, such as nonpayment of
costs and liabilities arising from the actions of other working
interest owners. In addition, declines in oil and natural gas
prices may increase the likelihood that some of these working
interest owners, particularly those that are smaller and less
established, are not able to fulfill their joint activity
obligations. A partner may be unable or unwilling to pay its share
of project costs, and, in some cases, a partner may declare
bankruptcy. In the event any of our project partners do not pay
their share of such costs, we would likely have to pay those costs,
and we may be unsuccessful in any efforts to recover these costs
from our partners, which could materially adversely affect our
financial position.
We cannot be certain that the insurance coverage maintained by us
will be adequate to cover all losses that may be sustained in
connection with all oil and natural gas activities.
We
maintain general and excess liability policies, which we consider
to be reasonable and consistent with industry standards. These
policies generally cover personal injury, bodily injury, third
party property damage, medical expenses, legal defense costs,
pollution in some cases, well blowouts in some cases, and workers
compensation.
As is
common in the oil and natural gas industry, we will not insure
fully against all risks associated with our business either because
such insurance is not available or because we believe the premium
costs are prohibitive. A loss not fully covered by insurance could
have a material effect on our financial position, results of
operations and cash flows. There can be no assurance that the
insurance coverage that we maintain will be sufficient to cover
claims made against us in the future.
Title to the properties in which we have an interest may be
impaired by title defects.
We
generally obtain title opinions on significant properties that we
drill or acquire. However, there is no assurance that we will not
suffer a monetary loss from title defects or title failure.
Additionally, undeveloped acreage has greater risk of title defects
than developed acreage. Generally, under the terms of the operating
agreements affecting our properties, any monetary loss is to be
borne by all parties to any such agreement in proportion to their
interests in such property. If there are any title defects or
defects in assignment of leasehold rights in properties in which we
hold an interest, we will suffer a financial loss.
The unavailability or high cost of drilling rigs, pressure pumping
equipment and crews, other equipment, supplies, water, personnel
and oil field services could adversely affect our ability to
execute our exploration and development plans on a timely basis and
within our budget.
The oil
and natural gas industry is cyclical and, from time to time, there
have been shortages of drilling rigs, equipment, supplies, water or
qualified personnel. During these periods, the costs and delivery
times of rigs, equipment and supplies are substantially greater. In
addition, the demand for, and wage rates of, qualified drilling rig
crews rise as the number of active rigs in service increases.
Increasing levels of exploration and production may increase the
demand for oilfield services and equipment, and the costs of these
services and equipment may increase, while the quality of these
services and equipment may suffer. The unavailability or high cost
of drilling rigs, pressure pumping equipment, supplies or qualified
personnel can materially and adversely affect our operations and
profitability.
We may not be able to keep pace with technological developments in
the industry.
The oil and natural gas industry is characterized by rapid and
significant technological advancements and introductions of new
products and services using new technologies. As others use or
develop new technologies, we may be placed at a competitive
disadvantage or competitive pressures may force us to implement
those new technologies at substantial costs. In addition, other oil
and natural gas companies may have greater financial, technical,
and personnel resources that allow them to enjoy technological
advantages and may in the future allow them to implement new
technologies before we are in a position to do so. We may not be
able to respond to these competitive pressures and implement new
technologies on a timely basis or at an acceptable cost. If one or
more of the technologies used now or in the future were to become
obsolete or if we are unable to use the most advanced commercially
available technology, the business, financial condition, and
results of operations could be materially adversely
affected.
Terrorist attacks aimed at energy operations could adversely affect
our business.
The continued threat of terrorism and the impact of military and
other government action have led and may lead to further increased
volatility in prices for oil and natural gas and could affect these
commodity markets or the financial markets used by us. In addition,
the U.S. government has issued warnings that energy assets may be a
future target of terrorist organizations. These developments have
subjected oil and natural gas operations to increased risks. Any
future terrorist attack on our facilities, customer facilities, the
infrastructure depended upon for transportation of products, and,
in some cases, those of other energy companies, could have a
material adverse effect on our business.
Hedging transactions may limit our potential gains and increase our
potential losses.
In
order to manage our exposure to price risks in the marketing of our
oil, natural gas, and natural gas liquids production, we have
entered into oil, natural gas, and natural gas liquids price
hedging arrangements with respect to a portion of our anticipated
production and we may enter into additional hedging transactions in
the future. While intended to reduce the effects of volatile
commodity prices, such transactions may limit our potential gains
and increase our potential losses if commodity prices were to rise
substantially over the price established by the hedge. In addition,
such transactions may expose us to the risk of loss in certain
circumstances, including instances in which our production is less
than expected, there is a widening of price differentials between
delivery points for our production, or the counterparties to our
hedging agreements fail to perform under the
contracts.
Risks Related to the Ownership of our Common Stock
Our common stock price has been and is likely to continue to be
highly volatile.
The
trading price of our common stock is subject to wide fluctuations
in response to a variety of factors, including quarterly variations
in operating results, announcements of drilling and rig activity,
economic conditions in the natural gas and oil industry, general
economic conditions or other events or factors that are beyond our
control.
In
addition, the stock market in general and the market for oil and
natural gas exploration companies, in particular, have experienced
large price and volume fluctuations that have often been unrelated
or disproportionate to the operating results or asset values of
those companies. These broad market and industry factors may
seriously impact the market price and trading volume of our common
stock regardless of our actual operating performance. In the past,
following periods of volatility in the overall market and in the
market price of a company
’
s securities, securities class
action litigation has been instituted against certain oil and
natural gas exploration companies. If this type of litigation were
instituted against us following a period of volatility in our
common stock trading price, it could result in substantial costs
and a diversion of our management
’
s attention and resources, which
could have a material adverse effect on our financial condition,
future cash flows and the results of operations.
The low trading volume of our common stock may adversely affect the
price of our shares and their liquidity.
Although our common
stock is listed on the NYSE American, our common stock has
experienced low trading volume. Limited trading volume may subject
our common stock to greater price volatility and may make it
difficult for investors to sell shares at a price that is
attractive to them.
If our common stock were delisted and determined to be a
“penny stock,” a broker-dealer may find it more
difficult to trade our common stock, and an investor may find it
more difficult to acquire or dispose of our common stock in the
secondary market.
If our
common stock were removed from listing with the NYSE American, it
may be subject to the so-called
“
penny stock
”
rules. The SEC has adopted
regulations that define a penny stock to be any equity security
that has a market price per share of less than $5.00, subject to
certain exceptions, such as any securities listed on a national
securities exchange. For any transaction involving a penny stock,
unless exempt, the rules impose additional sales practice
requirements on broker-dealers, subject to certain exceptions. If
our common stock were delisted and determined to be a penny stock,
a broker-dealer may find it more difficult to trade our common
stock, and an investor may find it more difficult to acquire or
dispose of our common stock on the secondary market.
Our failure to fulfill all of our registration requirements may
cause us to suffer liquidated damages, which may be very
costly.
Pursuant to the
terms of the
Registration
Rights
Agreement
that we entered into with certain of
our stockholders, we filed a registration statement with respect to
securities issued and are required to maintain the effectiveness of
such registration statement. There can be no assurance that we will
be able to maintain the effectiveness of any registration
statement, and therefore there can be no assurance that we will not
incur damages with respect to such agreement.
Red Mountain Capital Partners LLC and its affiliates, or Red
Mountain, hold 30.8% of the voting power of our outstanding shares
which gives Red Mountain a significant interest in the
Company.
Red
Mountain holds approximately 30.8% of our outstanding shares of
common stock on an as-converted basis and after adjusting the
conversion price of our Series D preferred stock as a result of
this offering, we anticipate that Red Mountain will hold
approximately
% of the voting power of our
outstanding shares following this offering. Accordingly, Red
Mountain has the ability to exert a significant degree of influence
over our management and affairs and, as a practical matter, will
significantly influence corporate actions requiring stockholder
approval, irrespective of how our other stockholders may vote,
including the election of directors, amendments to our certificate
of incorporation and bylaws, and the approval of mergers and other
significant corporate transactions, including a sale of
substantially all of our assets, and Red Mountain may vote its
shares in a manner that is adverse to the interests of our minority
stockholders. For example, Red Mountain may be able to prevent a
merger or similar transaction, including a transaction in which
stockholders will receive a premium for their shares, even if our
other stockholders are in favor of such transaction. Further, Red
Mountain
’
s position might
adversely affect the market price of our common stock to the extent
investors perceive disadvantages in owning shares of a company with
a controlling stockholder.
We are able to issue shares of preferred stock with greater rights
than our common stock.
Our
Amended and Restated Certificate of Incorporation authorizes our
board of directors to issue one or more series of preferred shares
and set the terms of the preferred shares without seeking any
further approval from our stockholders. The preferred shares that
we have issued rank ahead of our common stock in terms of dividends
and liquidation rights. We may issue additional preferred shares
that rank ahead of our common stock in terms of dividends,
liquidation rights or voting rights. If we issue additional
preferred shares in the future, it may adversely affect the market
price of our common stock. We have issued in the past, and may in
the future continue to issue, in the open market at prevailing
prices or in capital markets offerings series of perpetual
preferred stock with dividend and liquidation preferences that rank
ahead of our common stock.
Because we have no plans to pay dividends on our common stock,
stockholders must look solely to appreciation of our common stock
to realize a gain on their investment.
We do
not anticipate paying any dividends on our common stock in the
foreseeable future. We currently intend to retain any future
earnings to finance the expansion of our business. In addition, our
credit agreement contains covenants that prohibit us from paying
cash dividends on our common stock as long as such debt remains
outstanding. The payment of future dividends, if any, will be
determined by our board of directors in light of conditions then
existing, including our earnings, financial condition, capital
requirements, restrictions in financing agreements, business
conditions and other factors. Accordingly, stockholders must look
solely to appreciation of our common stock to realize a gain on
their investment, which may not occur.
Our Series D preferred stock has rights, preferences and privileges
that are not held by, and are preferential to, the rights of our
common stockholders. Such preferential rights could adversely
affect our liquidity and financial condition and may result in the
interests of the holders of our Series D preferred stock differing
from those of our common stockholders.
In the
event of any liquidation, dissolution or winding up of our company,
whether voluntary or involuntary, or any other transaction deemed a
liquidation event pursuant to the Certificate of Designation,
including a sale of our company, or a Liquidation, each holder of
outstanding shares of our Series D preferred stock will be entitled
to be paid out of our assets available for distribution to
stockholders, before any payment may be made to the holders of our
common stock, an amount per share equal to the original issue
price, plus accrued and unpaid dividends thereon. If, upon such
Liquidation, the amount that the holders of Series D preferred
stock would have received if all outstanding shares of Series D
preferred stock had been converted into shares of our common stock
immediately prior to such Liquidation would exceed than the amount
they would receive pursuant to the preceding sentence, the holders
of Series D preferred stock will receive such greater
amount.
Dividends on the
Series D preferred stock are cumulative and accrue quarterly,
whether or not declared by our Board of Directors, at the rate of
7.0% per annum on the sum of the original issue price plus all
unpaid accrued and unpaid dividends thereon, and payable in
additional shares of Series D preferred stock. In addition to the
dividends accruing on shares of Series D preferred stock described
above, if we declare certain dividends on our common stock, we will
be required to declare and pay a dividend on the outstanding shares
of our Series D preferred stock on a pro rata basis with the common
stock, determined on an as-converted basis. Our obligations to the
holders of Series D preferred stock could also limit our ability to
obtain additional financing or increase our borrowing costs, which
could have an adverse effect on our financial
condition.
There may be future dilution of our common stock.
We have
a significant number of dilutive securities outstanding, which upon
conversion, would result in substantial dilution. For example,
prior to adjusting the conversion price for this offering, the
conversion of outstanding shares of Series D preferred stock in
full could result in the issuance of 1,838,927 shares of common
stock. After this offering, we estimate that the conversion price
of the Series D preferred stock will be adjusted to $
, resulting in the issuance of
approximately
shares of common stock if all of
the outstanding shares of Series D preferred stock were converted.
To the extent outstanding stock appreciation rights or stock
options under our long-term incentive plan are exercised or
additional shares of restricted stock are issued to our employees,
holders of our common stock will experience dilution. Furthermore,
if we sell additional equity or convertible debt securities, such
sales could result in further dilution to our existing stockholders
and cause the price of our outstanding securities to
decline.
If securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business, our
stock price and trading volume could decline.
The
trading market for our common stock will depend in part upon the
research and reports that securities or industry analysts publish
about us and our business. We do not currently have and may never
obtain research coverage by securities and industry analysts. If no
analysts commence coverage of our company, the trading price of our
common stock might be negatively impacted. If we obtain securities
or industry analyst coverage and if one or more of the analysts who
covers us downgrades our stock or publishes inaccurate or
unfavorable research about our business, our stock price would
likely decline. If one or more of these analysts ceases coverage or
fails to report about us on a regular basis, demand for our stock
could decrease, which could cause our stock price and trading
volume to decline.
Risks Related to This Offering
The market price and trading volume of our common stock may be
volatile and our stock price could decline because of significant
market overhang.
We have
registered the resale of approximately 10.9 million shares of our
common stock that were previously acquired by certain of our
stockholders and their affiliates. In addition, we have agreed to
register the resale of shares of our common stock that may be
acquired by certain of our stockholders and their affiliates. The
influx of a substantial number of shares into the public market
through sales by these stockholders or their affiliates or the
possibility that a substantial number of shares could be introduced
into the market by these persons could have a significant negative
effect on the trading market and price of our common
stock.
We have broad discretion in the use of the net proceeds from this
offering and may not use them effectively.
We will
have broad discretion in the application of the net proceeds from
this offering and could spend the proceeds in ways that do not
improve our results of operations or enhance the value of our
common stock. We intend to use the net proceeds from this offering
for continuation of our development and acquisition program,
repayment of debt and other capital and operating expenses. We may
also use a portion of our net proceeds to acquire oil and natural
gas assets; however, we currently have no agreements or commitments
to complete any such transaction. We might not be able to yield a
significant return, if any, on any investment of these net
proceeds. You will not have the opportunity to influence our
management’s decisions on how to use the net proceeds from
this offering, and our failure to apply these funds effectively
could have a material adverse effect on our business, delay the
development of our product candidates and cause the price of our
common stock to decline.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain
information contained in this prospectus may contain
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. All statements other than
statements of historical facts contained in this prospectus are
forward-looking statements. These forward-looking statements can
generally be identified by the use of words such as
“may,” “will,” “could,”
“should,” “project,” “intends,”
“plans,” “pursue,” “target,”
“continue,” “believes,”
“anticipates,” “expects,”
“estimates,” “predicts,” or
“potential,” the negative of such terms or variations
thereon, or other comparable terminology. Statements that describe
our future plans, strategies, intentions, expectations, objectives,
goals or prospects are also forward-looking statements. Actual
results could differ materially from those anticipated in these
forward-looking statements. Readers should consider carefully the
risks described under or incorporated by reference in the
“Risk Factors” section contained herein and other
sections of this prospectus which describe factors that could cause
our actual results to differ from those anticipated in
forward-looking statements, including, but not limited to, the
following factors:
●
high volatility and
weakness in commodity prices for oil and natural gas and the effect
of prices set or influenced by actions of OPEC and other oil and
natural gas producing countries;
●
near term and long
term dislocations in the development, production, transportation
and refining of oil and natural gas and related products resulting
from extreme weather conditions and events, such as Hurricane
Harvey;
●
our ability to
repay outstanding debt when due;
●
our limited
liquidity and ability to finance our exploration, acquisition and
development strategies;
●
reductions in the
borrowing base under our credit facility;
●
impacts to our
financial statements as a result of oil and natural gas property
impairment write-downs;
●
our ability to
successfully integrate acquired oil and natural gas businesses and
operations;
●
the possible
adverse impact or depressive effect on the market price our common
stock because of significant market overhang;
●
our ability to
successfully develop our inventory of undeveloped acreage in our
resource plays;
●
our oil and natural
gas assets are concentrated in a relatively small number of
properties;
●
our access to
adequate gathering systems, processing facilities, transportation
take-away capacity to move our production to market and marketing
outlets to sell our production at market prices;
●
our ability to
generate sufficient cash flow from operations, borrowings or other
sources to enable us to fund our operations, satisfy our
obligations and seek to develop our undeveloped acreage
positions;
●
our ability to
replace our oil and natural gas reserves;
●
the presence or
recoverability of estimated oil and natural gas reserves and actual
future production rates and associated costs;
●
the potential for
production decline rates for our wells to be greater than we
expect;
●
our ability to
retain key members of senior management and key technical
employees;
●
environmental,
drilling, operating, and exploration and development
risks;
●
the possibility
that our industry may be subject to future regulatory or
legislative actions (including additional taxes and changes in
environmental regulations);
●
general economic
conditions, whether internationally, nationally or in the regional
and local market areas in which we do business, may be less
favorable than we expect, including the possibility that economic
conditions in the United States could worsen and that capital
markets could be disrupted, which could adversely affect demand for
oil and natural gas and make it difficult to access
capital;
●
social unrest,
political instability or armed conflict in major oil and natural
gas producing regions outside the United States, such as Africa,
the Middle East, and armed conflict or acts of terrorism or
sabotage;
●
the insurance
coverage maintained by us may not adequately cover all losses that
may be sustained in connection with our business
activities;
●
title to the
properties in which we have an interest may be impaired by title
defects;
●
the cost and
availability of goods and services, such as drilling rigs;
and
●
our dependency on
the skill, ability and decisions of third party operators of the
oil and natural gas properties in which we have a non-operated
working interest.
All
forward-looking statements are expressly qualified in their
entirety by the cautionary statements in this section and elsewhere
in this document. Other than as required under applicable
securities laws, we do not assume a duty to update these
forward-looking statements, whether as a result of new information,
subsequent events or circumstances, changes in expectations or
otherwise. You should not place undue reliance on these
forward-looking statements. All forward-looking statements speak
only as of the date of this prospectus or, if earlier, as of the
date they were made.
USE
OF PROCEEDS
We estimate that the net proceeds
from this offering, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, will be
$
million, or approximately
$
million if the underwriters
exercise their over-allotment option in full.
We intend to
use the net proceeds from this offering to expand our Horizontal
San Andres Play located in Yoakum County, Texas. Specifically,
these funds will provide for additional leasehold acquisitions in
the Permian Basin, the drilling of a San Andres horizontal well and
a Devonian salt water disposal well, and other field
infrastructure, and for general working capital
purposes.
The
foregoing represents our current intentions based upon our current
plans and business condition. We have not, however, made a
definitive determination as to how to allocate these proceeds among
these and other possible general working capital purposes and we do
not anticipate doing so prior to the completion of this offering.
Our management will have broad discretion in the application of our
net proceeds from this offering, and the occurrence of unforeseen
events or changes in business conditions could result in the
application of our net proceeds from this offering in a manner
other than as described in this prospectus.
MARKET
PRICE OF OUR COMMON STOCK
Market
Information
Our
common stock is listed for trading on the NYSE American under the
symbol “YUMA.” The following table sets forth, for the
periods indicated, the high and low sales prices per share of our
common stock on the NYSE American, adjusted to reflect the 1-for-20
reverse stock split that was completed on October 26, 2016 as part
of the closing of the Davis Merger and our reincorporation from
California to Delaware.
|
|
|
Quarter
Ended
|
|
|
2015
|
|
|
March 31
|
$
42.20
|
$
20.20
|
June
30
|
$
23.40
|
$
9.80
|
September
30
|
$
16.60
|
$
6.00
|
December
31
|
$
12.00
|
$
2.60
|
2016
|
|
|
March 31
|
$
6.60
|
$
3.00
|
June
30
|
$
7.40
|
$
3.80
|
September
30
|
$
6.20
|
$
3.98
|
December
31
|
$
5.40
|
$
1.94
|
2017
|
|
|
March 31
.
|
$
3.91
|
$
2.06
|
June 30 gh
|
$
3.17
|
$
0.81
|
September 30
(through September 12, 2017) .
|
$
3.10
|
$
0.77
|
Holders
of our Common Stock
As of
September 12, 2017, there were 108 stockholders of record of our
common stock. On September 12, 2017, the last sale price of our
common stock as reported on the NYSE American was $1.40 per
share.
The
comparisons contained herein may not provide meaningful information
to you in determining whether to purchase our common stock. You are
urged to obtain current sale prices of our common stock and to
carefully review the other information contained in this prospectus
and the documents incorporated by reference herein. See
“Where You Can Find More Information” and
“Incorporation By Reference” of this
prospectus.
DIVIDEND
POLICY
We have
not paid cash dividends on our common stock in the past two fiscal
years to date, and we do not anticipate that we will declare or pay
dividends on our common stock in the foreseeable future. Payment of
dividends, if any, is within the sole discretion of our Board of
Directors and will depend, among other factors, upon our earnings,
capital requirements and our operating and financial
condition.
In
addition, our credit facility does not permit us to pay dividends
on our common stock without the consent of our lenders. Further,
our Board of Directors may not declare, pay or set aside any
dividends on any class of our capital stock (other than the payment
of dividends in-kind on our Series D preferred stock), without
the approval of at least a majority of the outstanding shares of
our Series D preferred stock.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and our
capitalization as of June 30, 2017:
●
on an actual basis;
and
●
on an as-adjusted
basis, giving effect to the sale of shares of our common stock in
this offering at a public offering price of $
per share, and after deducting
the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The
as-adjusted information below is illustrative only, and our
capitalization following the closing of this offering may differ
from that shown below based on the public offering price and other
terms of this offering determined at pricing. You should read the
following table in conjunction with the sections entitled
“Use of Proceeds,” “Selected Historical
Consolidated Financial and Operating Data” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”
included elsewhere or incorporated by
reference in this prospectus and our financial statements and
related notes thereto, which are incorporated by reference in this
prospectus.
|
|
|
|
|
|
(Unaudited)
(in
thousands, except share amounts)
|
Cash
and cash equivalents
|
$
543
|
$
|
Long-term
debt
|
32,000
|
32,000
|
Stockholders’
equity:
|
|
|
Series
D convertible preferred stock, $0.001 par value:
|
|
|
7,000,000
shares authorized, 1,838,927 shares issued and outstanding, actual;
and 1,838,927 shares issued or outstanding, as
adjusted
|
2
|
2
|
Common
stock, $0.001 par value:
|
|
|
100,000,000 shares authorized,
12,558,891
shares issued and outstanding, actual;
and
shares issued and outstanding, as
adjusted
|
13
|
|
Additional
paid-in capital
|
44,958
|
|
Treasury
stock (11,900 shares as of June 30, 2017)
|
(23
)
|
|
Accumulated
deficit
|
(10,637
)
|
|
Total
stockholders’ equity
|
34,313
|
|
|
|
|
Total
capitalization
|
$
66,313
|
$
|
The
number of shares of common stock shown above is based on 12,558,891
shares issued and outstanding as of June 30, 2017, and excludes as
of such date:
●
84,248 shares of
our common stock issuable upon exercise of outstanding stock
appreciation rights under our 2014 Plan, at a weighted-average
exercise price of $12.10 per share;
●
893,617 shares of
our common stock issuable upon exercise of outstanding stock
options under our 2014 Plan at a weighted-average exercise price of
$2.56 per share;
●
5,000 shares of our
common stock issuable upon exercise of outstanding stock options
under our 2006 Plan at a weighted-average exercise price of $103.20
per share;
●
942,816 shares of
our common stock reserved for issuance under equity awards that may
be granted under our 2014 Plan in the future; and
●
shares of our common stock
issuable upon conversion of the currently outstanding shares of
Series D preferred stock assuming that the conversion price is
adjusted to $
per share as a result of this
offering.
BUSINESS
Overview
We are
an independent Houston-based exploration and production company
focused on acquiring, developing and exploring for conventional and
unconventional oil and natural gas resources. Historically, our
operations have focused on onshore properties located in central
and southern Louisiana and southeastern Texas where we have a long
history of drilling, developing and producing both oil and natural
gas assets. More recently, we have begun acquiring acreage in
Yoakum County, Texas, with plans to explore and develop oil and
natural gas assets in the Permian Basin. Finally, we have operated
positions in Kern County, California, and non-operated positions in
the East Texas Woodbine and the Bakken Shale in North Dakota. Our
common stock is listed on the NYSE American under the trading
symbol “YUMA.”
Our
average production for the year ended December 31, 2016 was 1,820
Boe/d and we estimate our production for the year ending December
31, 2017 to be approximately 2,400 to 2,800 Boe/d.
Recent Developments
Entry into the Permian Basin
We
recently entered into the Permian Basin through a joint venture
with two privately held energy companies and have established an
Area of Mutual Interest, or AMI, covering approximately 33,280
acres in Yoakum County, Texas, located in the Northwest Shelf, or
NWS, of the Permian Basin. The primary target within the AMI will
be the San Andres formation, which has been one of the largest
producing formations in Texas to date. We currently hold an 87.5%
working interest in approximately 2,841 gross acres (2,486 net
acres) within the AMI and intend to apply horizontal drilling
technology to the San Andres formation which we believe will result
in increased reserves and production on a per well basis. This
activity is commonly referred to as the Horizontal San Andres Play,
and in certain areas, referred to as a Residual Oil Zone, or ROZ,
Play due to the presence of residual oil zone fairways with
substantial recoverable hydrocarbon resources in place. We are the
operator of the joint venture and intend on acquiring additional
leases offsetting existing acreage. We intend to spud a joint
venture well in the fourth quarter of 2017, as well as acquire
additional acreage within the AMI using some of the proceeds of
this offering.
Horizontal San Andres
Overview
. The Horizontal San
Andres Play relies on the identification of residual oil zone
fairways usually offsetting legacy conventional oil fields in the
Permian Basin that have historically produced prodigious amounts of
oil and natural gas, and applying today’s horizontal drilling
and multi-frac completion technologies. Today, operators are using
the latest horizontal drilling and completion technologies to
economically access more of the reservoir, improve the ability of
the wells to produce higher volumes of liquids, and recover
hydrocarbons that were not economical to produce with vertical
wells. Due to higher water saturations in these ROZ reservoirs
– large volumes of produced water must be produced before oil
can be recovered, therefore field level infrastructure is critical
to the operation, including an integrated network of saltwater
disposal systems, tank batteries, water lines and
pipelines.
We
have identified as many as 30 gross horizontal drilling locations
that could be potentially drilled within our existing acreage,
consisting of primarily one-mile lateral wells (5,500 feet true
vertical depth or TVD). Depending on the success of our current
lease acquisition efforts, some of those wells may be drilled as
1.5 mile lateral wells (5,500 feet TVD). We estimate that the costs
to drill, complete and equip each of these wells is currently
between $3.0 to $5.0 million. Based on the most recent data from
surrounding analogous wells in the area, we expect a highest 30-Day
average initial production rate (30-Day IP) of 300
Boe/d.
“Drilling
locations” represent the number of locations that we
currently estimate could potentially be drilled in this particular
area estimated by well spacing assumptions applicable to that area.
The actual number of locations drilled and quantities of oil and
gas that may be ultimately recovered from our interests will likely
differ substantially from our estimates. Challenges to our ability
to fund the drilling of these potential locations are discussed
under “Risk Factors.”
Sale of Certain Non-Core Oil and Gas Properties
On
May 17, 2017 and effective as of January 1, 2017, we sold certain
oil and natural gas properties for $5.5 million located in Brazos
County, Texas known as the El Halcón property. Our El
Halcón property consisted of an average working interest of
approximately 8.5% (1,557 net acres) producing approximately 140
Boe/d net from 50 Eagle Ford wells and one Austin Chalk
well.
Reincorporation Merger and Davis Merger
On
October 26, 2016, Yuma Energy, Inc., a California corporation, or
Yuma California, merged with and into our company resulting in the
reincorporation from California to Delaware, or the Reincorporation
Merger. In connection with the Reincorporation Merger, Yuma
California converted each outstanding share of its 9.25% Series A
Cumulative Redeemable Preferred Stock, no par value per share, or
the Yuma California Series A Preferred Stock, into 35 shares of its
common stock, no par value per share, or the Yuma California Common
Stock, and then each share of Yuma California Common Stock was
exchanged for one-twentieth of one share of common stock, $0.001
par value per share, of the Company, or the common
stock.
Immediately after
the Reincorporation Merger on October 26, 2016, a wholly owned
subsidiary of our company merged, or the Davis Merger, with and
into Davis Petroleum Acquisition Corp., a Delaware corporation, or
Davis, in exchange for approximately 7,455,000 shares of common
stock and 1,754,179 shares of Series D Convertible preferred stock,
$0.001 par value per share, or the Series D preferred stock. The
Series D preferred stock had an aggregate liquidation preference of
approximately $19.4 million and a conversion rate of $11.0741176
per share at the closing of the Davis Merger, and will be paid
dividends in the form of additional shares of Series D preferred
stock at a rate of 7% per annum. As a result of the Davis Merger,
the former holders of Davis common stock received approximately
61.1% of the then outstanding common stock of the Company and thus
acquired voting control. Although the Company was the legal
acquirer, for financial reporting purposes the Davis Merger was
accounted for as a reverse acquisition of the Company by
Davis.
As part
of the closing of the Davis Merger, we entered into a registration
rights agreement, or the Registration Rights Agreement
,
with Sam L. Banks, RMCP PIV DPC, LP, RMCP
PIV DPC II, LP, Davis Petroleum Investment, LLC, Sankaty Davis,
LLC, Paul-ECP2 Holdings, LP, HarbourVest Partners VIII
–
Buyout Fund L.P., Dover Street VII
L.P., Michael S. Reddin, Thomas E. Hardisty, Susan J. Davis,
Gregory P. Schneider, and Steven Enger, or the Stockholders,
pursuant to which we agreed to register, at our cost, with the SEC
the resale of the common stock issued to such holders of common
stock and the common stock issued upon conversion of the Series D
preferred stock. We filed a shelf registration statement, or the
Shelf Registration Statement, with the SEC on June 7, 2017 and
which was declared effective by the SEC on June 23, 2017. The
Stockholders may request registration no more than three times
during any twelve (12) consecutive months, of shares having an
estimated offering price of greater than $5.0 million. No request
may be made after the fourth anniversary of the effectiveness of
the Shelf Registration Statement. In addition, if we file a
registration statement within four years of the effectiveness of
the Shelf Registration Statement, we must offer to the Stockholders
the opportunity to include the resale of their shares in the
registration statement, subject to customary qualifications and
limitations.
Subsequent to the
Davis Merger, Ben T. Morris resigned from our Board of Directors
and Stuart E. Davies, Neeraj Mital and J. Christopher Teets were
appointed to our Board of Directors and Richard K. Stoneburner
became the Non-Executive Chairman of our Board of Directors. Sam L.
Banks continues to serve as Director, President and Chief Executive
Officer, and James W. Christmas and Frank A. Lodzinski also
continue to serve as directors. Subsequent to the Davis Merger, on
December 20, 2016, Mr. Davies resigned from our Board of
Directors.
Preferred Stock
As of
September 12, 2017, we had 1,838,927 shares of our Series D
preferred stock outstanding with an aggregate liquidation
preference of approximately $20.4 million and a conversion rate of
$11.0741176 per share. The Series D preferred stock is paid
dividends in the form of additional shares of Series D preferred
stock at a rate of 7% per annum. After this offering and assuming a
public offering price of $
per share of common stock, we
estimate that the conversion price of the Series D preferred stock
will be adjusted to $
, resulting in the issuance of
approximately
shares of common stock if all of
the outstanding shares of Series D preferred stock were
converted.
Senior Credit Agreement
On
October 26, 2016, we and three of our subsidiaries, as the
co-borrowers, entered into a credit agreement providing for a $75.0
million three-year senior secured revolving credit facility, or the
credit agreement, with Société Générale, or
SocGen, as administrative agent, SG Americas Securities, LLC, or SG
Americas, as lead arranger and bookrunner, and the lenders
signatory thereto, or collectively with SocGen, the
Lender.
The borrowing base of
the credit facility was reaffirmed on September 8, 2017 at $40.5
million with our next redetermination scheduled for April 1, 2018.
The borrowing base is generally subject to redetermination on April
1st and October 1st of each year, as well as special
redeterminations described in the credit agreement. The amounts
borrowed under the credit agreement bear annual interest rates at
either (a) the London Interbank Offered Rate plus 3.00% to 4.00% or
(b) the prime lending rate of SocGen plus 2.00% to 3.00%, depending
on the amount borrowed under the credit facility and whether the
loan is drawn in U.S. dollars or Euro dollars. Principal amounts
outstanding under the credit facility are due and payable in full
at maturity on October 26, 2019. All of the obligations under the
credit agreement, and the guarantees of those obligations, are
secured by substantially all of our assets. Additional payments due
under the credit agreement include paying a commitment fee to the
Lender in respect of the unutilized commitments thereunder. The
commitment rate is 0.50% per year of the unutilized portion of the
borrowing base in effect from time to time. We are also required to
pay customary letter of credit fees.
The
credit agreement contains a number of covenants that, among other
things, restrict, subject to certain exceptions, our ability to
incur additional indebtedness, create liens on assets, make
investments, enter into sale and leaseback transactions, pay
dividends and distributions or repurchase our capital stock, engage
in mergers or consolidations, sell certain assets, sell or discount
any notes receivable or accounts receivable, and engage in certain
transactions with affiliates.
Operating Outlook
Since
2014, the oil and natural gas industry has experienced significant
decreases in commodity prices driven by supply and demand
imbalances for oil internationally and for natural gas in the
United States. The decline in commodity prices and global economic
conditions have continued into 2017, and low commodity prices may
exist for an extended period of time.
It is
too early to fully assess the short and long-term effects of
Hurricane Harvey. We believe our properties should be largely
unaffected by the hurricane except for transportation and refining
facilities in the eastern gulf coast of Texas.
We plan
to continue our disciplined approach in 2017 by emphasizing
liquidity and value, enhancing operational efficiencies, and
managing capital expenses. We will continue to evaluate the oil and
natural gas price environments and may adjust our capital spending
plans, capital raising activities, and strategic alternatives
(including possible asset sales) to maintain appropriate liquidity
and financial flexibility.
Business Strategy
Due to
the continued low commodity price environment and our belief that
uncertainty remains with respect to commodity prices in 2017, we
have adjusted our capital spending plans in our historical
properties to be limited to within our cash flow, which is expected
to increase in 2017 as a result of the Davis Merger and a decrease
in general and administrative costs on a per barrel basis. We will
be focused on lower risk and lower cost opportunities that are
expected to have higher returns to maintain our production and cash
flow. However, with our entry into the Permian Basin, we expect to
spend excess funds on leasehold acquisition and the initial
drilling of our production and disposal wells. Based upon our
initial results we may re-allocate our internally generated cash
flow to further develop these properties, and continue to expand
our acreage position within the Permian Basin, pursuing similar
Horizontal San Andres or ROZ opportunities.
The key
elements of our business strategy are:
●
seek operating
scale, through merger, acquisition, and joint venture opportunities
to increase our liquidity, as well as reduce our general and
administrative on a per Boe basis;
●
transition existing
inventory of non-producing and undeveloped reserves into oil and
natural gas production;
●
add selectively to
project inventory through ongoing prospect generation, exploration
and strategic acquisitions; and
●
retain a greater
percentage working interest in, and operatorship of, our projects
going forward.
Our
core competencies include oil and natural gas operating activities
and expertise in generating and developing:
●
unconventional oil
and natural gas resource plays;
●
onshore
liquids-rich prospects through the use of 3-D seismic surveys;
and
●
identification of
high impact deep onshore prospects located beneath known producing
trends through the use of 3-D seismic surveys.
Our Key Strengths and
Competitive Advantages
We
believe the following are our key strengths and competitive
advantages:
●
Extensive technical knowledge
and history of operations in the Gulf Coast region
. We
believe our extensive understanding of the geology and experience
in interpreting well control, core and 3-D seismic data in this
area provides us with a competitive advantage in exploring and
developing projects in the Gulf Coast region. We have cultivated
amicable and mutually beneficial relationships with acreage owners
in this region and adjacent oil and natural gas operators, which
generally provides for effective leasing and development
activities.
●
In-house technical expertise
in 3-D seismic programs
. We design and generate in-house 3-D
seismic survey programs on many of our projects. By controlling the
3-D seismic program from field acquisition through seismic
processing and interpretation, we gain a competitive advantage
through proprietary knowledge of the project.
●
Liquids-rich, quality assets
with attractive economics
. Our assets and potential future
drilling locations are primarily in oil plays with associated
liquids-rich natural gas.
●
Diversified portfolio of
producing and non-producing assets
. Our current portfolio of
producing and non-producing assets covers a large area within the
Gulf Coast, south and east Texas, the Bakken/Three Forks shale in
North Dakota, along with shallow oil fields in central and southern
California.
●
Company operated
assets
. In order to maintain better control over our assets,
we have established a leasehold position comprised primarily of
assets where we are the operator. By controlling operations, we are
able to dictate the pace of development and better manage the cost,
type, and timing of exploration and development
activities.
●
Experienced management
team
. We have a highly qualified management team with many
years of industry experience, including extensive experience in the
Louisiana and Texas Gulf Coast, south and east Texas, and most of
the other oil and natural gas producing regions of the United
States. Our exploration team has substantial expertise in the
design, acquisition, processing and interpretation of 3-D seismic
surveys, our experienced operations team allows for efficient
turnaround from project identification, to drilling, to production,
and our engineering and geoscience teams have considerable
experience evaluating both conventional and unconventional
opportunities in existing and prospective trends.
●
Experienced board of
directors
. Our directors have substantial experience
managing successful public companies and realizing value for
investors through the development, acquisition and monetization of
both conventional and unconventional oil and natural gas
assets.
Description
of Major Properties
We are
the operator of properties containing approximately 60% of our
proved oil and natural gas reserves as of December 31, 2016. As
operator, we are able to directly influence exploration,
development and production operations. Our producing properties
have reasonably predictable production profiles and cash flows,
subject to commodity price fluctuations, and have provided a
foundation for our technical staff to pursue the development of our
undeveloped acreage, further develop our existing properties and
also generate new projects that we believe have the potential to
increase shareholder value.
As is
common in the industry, we participate in non-operated properties
and investments on a selective basis; our non-operating
participation decisions are dependent on the technical and economic
nature of the projects and the operating expertise and financial
standing of the operators. The following is a description of our
significant oil and natural gas properties.
South Louisiana
We have
operated and non-operated assets in many of the prolific oil and
natural gas producing parishes of south Louisiana including
Cameron, Jefferson Davis, LaFourche, Livingston, St. Helena, St.
Bernard, and Vermilion parishes. As of December 31, 2016, we had
working interests in fifteen fields in south Louisiana of which we
operate nine with an average operated working interest of 59.1%.
The acreage associated with these leasehold positions is comprised
of 28,158 gross acres and 10,969 net acres. The associated assets
produce from a variety of conventional formations with oil, natural
gas, and natural gas liquids from depths of approximately 5,500
feet to almost 19,000 feet. The formations include the Lower
Miocene, CibCarst, Dibert, Wilcox, Marg Tex, Het 1A, Tuscaloosa,
Miocene Siphonina, and Lower Planulina Cris R sands. This
diversified mix of assets results in predictable and
well-diversified production profiles. The collective production
from this area averaged approximately 56.2 MMcf/d of natural gas
and 2,046 Bbl/d of oil gross (10.0 MMcf/d and 520 Bbl/d net) during
the month of June 2017. Our inventory of future development
opportunities includes proved, probable and possible reserves and
prospective resources consisting of behind pipe recompletions,
artificial lift installations, workovers, sidetracks of existing
wells and new well drilling opportunities.
Our two
largest fields in south Louisiana, based on estimated proved
reserve value, are described below.
Lac Blanc Field, Vermilion Parish,
Louisiana
– We are the operator of the Lac Blanc Field
which is comprised of 1,744 gross acres and 1,090 net acres and
where two wells, the SL 18090 #1 (62.5% working interest) and the
SL 18090 #2 (100% working interest), are producing from the Miocene
Siphonina D-1 sand (18,700 feet sand). The field averaged
approximately 8.8 MMcf/d of natural gas and 140 Bbl/d of oil gross
(4.5 MMcf/d and 71 Bbl/d net) during the month of June
2017.
Bayou Hebert Field, Vermilion Parish,
Louisiana
– We have a 12.5% non-operated working
interest in the Bayou Hebert Field, which is comprised of
approximately 1,600 gross acres and 200 net acres with three wells
completed in the Lower Planulina Cris R sands. In
mid-December 2016, the operator recompleted the lowest well on the
structure, the Thibodeaux No. 1 well, from the Cris R
“C” zone up hole to the Cris R “B” zone.
The field averaged approximately 44.6 MMcf/d of natural gas and 837
Bbl/d of oil gross (4.0 MMcf/d and 75 Bbl/d net) during the month
of June 2017. Future development opportunities include behind pipe
recompletions and sidetracking an existing wellbore for proved and
non-proved reserves.
Southeast Texas
We have
operated and non-operated assets in southeast Texas containing both
conventional and unconventional properties located in Jefferson and
Madison counties. As of December 31, 2016, we had working interests
in two fields, one of which we operated with an average working
interest of 47.4%, and on the non-operated field, we have a working
interest of 23.4%. The acreage associated with these leasehold
positions consist of 29,220 gross acres and 1,554 net acres, which
excludes 1,557 net acres known as the El Halcón property that
we sold in May 2017 and as discussed above. The unconventional
assets are developed primarily with horizontal wells in the tight
Woodbine sands producing oil, natural gas, and natural gas liquids
from depths of approximately 8,000 feet to 9,000 feet. Typical
development wells are drilled horizontally with lateral sections
ranging from approximately 4,500 feet to 7,500 feet in length where
multi-stage fracturing technology is employed. Collective
production from this area averaged approximately 4.0 MMcf/d of
natural gas and 219 Bbl/d of oil gross (750 Mcf/d and 42 Bbl/d net)
during the month of June 2017. Future development opportunities
include the drilling of proved and non-proved reserves, the
development of which will be influenced largely by future oil and
natural gas commodities prices.
California
We have
legacy assets in Kern County, California. As of June 30, 2017, we
had a 100% working interest in seven conventional fields with a
leasehold position comprised of 1,192 gross acres inclusive of 263
fee or minerals only acres. These properties produce oil from a
variety of conventional formations including the Pliocene, Miocene,
Oligocene, and Eocene from depths ranging from approximately 800
feet to 6,300 feet and are characterized by long-life shallow
decline production profiles. For the month ended June 30, 2017,
production from our California assets averaged approximately 110
Bbls of oil per day gross (88 Bbl/d net). Future development
opportunities include behind pipe recompletions, artificial lift
installations, and new well drilling opportunities of proved and
non-proved reserves.
North Dakota
We have
non-operated working interests in the Bakken Play in McKenzie
County, North Dakota. As of December 31, 2016, we had an
approximate 5.2% average working interest in two fields that
together include 18,553 gross acres (706 net acres). Oil, natural
gas, and natural gas liquids are produced from depths of
approximately 8,000 feet from wells drilled horizontally with
lateral lengths ranging from approximately 5,000 feet to 10,000
feet and completed with multi-stage fracturing technology. For the
month ended June 30, 2017, gross production from these assets
averaged 318 Bbl/d of oil gross and 286 Mcf/d of natural gas (13
Bbl/d net and 12 Mcf/d). Future development opportunities include
the drilling of non-proved reserves, the development of which will
be influenced largely by future oil and natural gas commodities
prices.
Oil
and Natural Gas Reserves
All of
our oil and natural gas reserves are located in the United States.
The reserve estimates have been prepared by Netherland, Sewell
& Associates, Inc., or NSAI, an independent petroleum
engineering firm. We have no long-term supply or similar agreements
with foreign governments or authorities. We did not provide any
reserve information to any federal agencies in 2016 other than to
the SEC.
Estimated Proved Reserves
The
table below summarizes our estimated proved reserves at December
31, 2016 based on reports prepared by NSAI. In preparing these
reports, NSAI evaluated 100% of our properties at December 31,
2016. For more information regarding our independent reserve
engineers, please see Independent Reserve Engineers below. The
information in the following table does not give any effect to or
reflect our commodity derivatives.
|
|
Natural Gas Liquids (MBbls)
|
|
|
Present Value Discounted at 10% ($ in
thousands)
(2)
|
Proved developed
(3)
|
|
|
|
|
|
Lac Blanc Field
(4)
|
266
|
600
|
10,341
|
2,589
|
21,802
|
Bayou Hebert Field
(4)
|
171
|
306
|
7,965
|
1,805
|
19,888
|
Other
|
1,766
|
155
|
3,613
|
2,523
|
25,627
|
Total
proved developed
|
2,203
|
1,061
|
21,919
|
6,917
|
67,317
|
Proved
undeveloped
(3)
|
|
|
|
|
|
Lac Blanc Field
(4)
|
-
|
-
|
-
|
-
|
-
|
Bayou Hebert Field
(4)
|
-
|
-
|
-
|
-
|
-
|
Other
|
773
|
287
|
2,060
|
1,404
|
6,283
|
Total
proved undeveloped
|
773
|
287
|
2,060
|
1,404
|
6,283
|
Total proved
(3)
|
2,976
|
1,348
|
23,979
|
8,321
|
73,600
|
(1)
Barrels of oil
equivalent have been calculated on the basis of six thousand cubic
feet (Mcf) of natural gas equal to one barrel of oil equivalent
(Boe).
(2)
Present Value
Discounted at 10%, or PV10, is a Non-GAAP measure that differs from
the GAAP measure “standardized measure of discounted future
net cash flows” in that PV10 is calculated without regard to
future income taxes. Management believes that the presentation of
the PV10 value is relevant and useful to investors because it
presents the estimated discounted future net cash flows
attributable to our estimated proved reserves independent of our
income tax attributes, thereby isolating the intrinsic value of the
estimated future cash flows attributable to our reserves. Because
many factors that are unique to each individual company impact the
amount of future income taxes to be paid, we believe the use of a
pre-tax measure provides greater comparability of assets when
evaluating companies. For these reasons, management uses, and
believes the industry generally uses, the PV10 measure in
evaluating and comparing acquisition candidates and assessing the
potential return on investment related to investments in oil and
natural gas properties. PV10 includes estimated abandonment costs
less salvage. PV10 does not necessarily represent the fair market
value of oil and natural gas properties.
PV10 is
not a measure of financial or operational performance under GAAP,
nor should it be considered in isolation or as a substitute for the
standardized measure of discounted future net cash flows as defined
under GAAP. The table below titled “Non-GAAP
Reconciliation” provides a reconciliation of PV10 to the
standardized measure of discounted future net cash
flows.
Non-GAAP
Reconciliation
($ in thousands)
The
following table reconciles our direct interest in oil, natural gas
and natural gas liquids reserves as of December 31,
2016:
Present
value of estimated future net revenues (PV10)
|
73,600
|
Future
income taxes discounted at 10%
|
-
|
Standardized
measure of discounted future net cash flows
|
73,600
|
(3)
Proved reserves
were calculated using prices equal to the twelve-month unweighted
arithmetic average of the first-day-of-the-month prices for each of
the preceding twelve months, which were $42.75 per Bbl (WTI) and
$2.48 per MMBtu (HH), for the year ended December 31, 2016.
Adjustments were made for location and grade.
(4)
Our Lac Blanc Field
and Bayou Hebert Field were our only fields that each contained 15%
or more of our estimated proved reserves as of December 31,
2016.
Proved Undeveloped Reserves
At
December 31, 2016, our estimated proved undeveloped
(“PUD”) reserves were approximately 1,404 MBoe. The
following table details the changes in PUD reserves for the year
ended December 31, 2016 (in MBoe):
Beginning
proved undeveloped reserves at January 1, 2016
|
1,731
|
Undeveloped
reserves transferred to developed
|
(325
)
|
Purchases
of minerals-in-place
|
6,379
|
Extensions
and discoveries
|
83
|
Production
|
-
|
Revisions
|
(6,464
)
|
Proved
undeveloped reserves at December 31, 2016
|
1,404
|
From
January 1, 2016 to December 31, 2016, our PUD reserves decreased
327 MBoe, or 19%, from 1,731 MBoe to 1,404 MBoe. Reserves of 325
MBoe were moved from the PUD reserve category to the proved
developed producing category through the drilling of the EE
Broussard 1 Het 1 well in the Cameron Canal field. We incurred
approximately $6.3 million in capital expenditures during the year
ended December 31, 2016 in converting this well to the proved
developed reserve category. We acquired 6,379 MBoe through
purchases of minerals-in-place as a result of the Davis Merger, and
added 83 MBoe through extensions of existing discoveries in our
Kern County, California assets. The remaining change to our
year-end 2016 PUDs of 6,464 MBoe was a result of downward revisions
due to price of 70 MBoe, and downward revisions due to removing
6,394 MBoe of primarily Masters Creek Field undeveloped reserves.
We elected not to extend our Masters Creek acreage associated with
these reserves because of the depressed price environment and our
inability to attract a joint venture partner. As of December 31,
2016, we plan to drill all of our PUD drilling locations within
five years from the date they were initially recorded
.
Uncertainties are
inherent in estimating quantities of proved reserves, including
many risk factors beyond our control. Reserve engineering is a
subjective process of estimating subsurface accumulations of oil
and natural gas that cannot be measured in an exact manner, and the
accuracy of any reserve estimate is a function of the quality of
available data and the interpretation thereof. As a result,
estimates by different engineers often vary, sometimes
significantly. In addition, physical factors such as the results of
drilling, testing and production subsequent to the date of the
estimates, as well as economic factors such as change in product
prices, may require revision of such estimates. Accordingly, oil
and natural gas quantities ultimately recovered will vary from
reserve estimates.
Technology Used to Establish Reserves
Under
SEC rules, proved reserves are those quantities of oil and natural
gas that by analysis of geoscience and engineering data can be
estimated with reasonable certainty to be economically producible
from a given date forward from known reservoirs, under existing
economic conditions, operating methods and government regulations.
The term “reasonable certainty” implies a high degree
of confidence that the quantities of oil and natural gas actually
recovered will equal or exceed the estimate. Reasonable certainty
can be established using techniques that have been proven effective
by actual production from projects in the same reservoir or an
analogous reservoir or by other evidence using reliable technology
that establishes reasonable certainty. Reliable technology is a
grouping of one or more technologies (including computational
methods) that has been field tested and has been demonstrated to
provide reasonably certain results with consistency and
repeatability in the formation being evaluated or in an analogous
formation.
To
establish reasonable certainty with respect to our estimated proved
reserves, NSAI employed technologies that have been demonstrated to
yield results with consistency and repeatability. The technologies
and economic data used in the estimation of our reserves include,
but are not limited to, electrical logs, radioactivity logs, core
analyses, geologic maps and available downhole and production data,
seismic data and well test data. Reserves attributable to producing
wells with sufficient production history were estimated using
appropriate decline curves or other performance relationships.
Reserves attributable to producing wells with limited production
history and for undeveloped locations were estimated using both
volumetric estimates and performance from analogous wells in the
surrounding area. These wells were considered to be analogous based
on production performance from the same formation and completion
using similar techniques.
Independent Reserve Engineers
We
engaged NSAI to prepare our annual reserve estimates and have
relied on NSAI’s expertise to ensure that our reserve
estimates are prepared in compliance with SEC guidelines. NSAI was
founded in 1961 and performs consulting petroleum engineering
services under Texas Board of Professional Engineers Registration
No. F-2699. Within NSAI, the technical persons primarily
responsible for preparing the estimates set forth in the NSAI
reserves report incorporated herein are G. Lance Binder and Philip
R. Hodgson. Mr. Binder has been practicing consulting petroleum
engineering at NSAI since 1983. Mr. Binder is a Registered
Professional Engineer in the State of Texas (No. 61794) and has
over 30 years of practical experience in petroleum engineering,
with over 30 years of experience in the estimation and evaluation
of reserves. He graduated from Purdue University in 1978 with a
Bachelor of Science degree in Chemical Engineering. Mr. Hodgson has
been practicing consulting petroleum geology at NSAI since 1998.
Mr. Hodgson is a Licensed Professional Geoscientist in the State of
Texas, Geology (No. 1314) and has over 30 years of practical
experience in petroleum geosciences. He graduated from University
of Illinois in 1982 with a Bachelor of Science Degree in Geology
and from Purdue University in 1984 with a Master of Science Degree
in Geophysics. Both technical principals meet or exceed the
education, training, and experience requirements set forth in the
Standards Pertaining to the Estimating and Auditing of Oil and Gas
Reserves Information promulgated by the Society of Petroleum
Engineers; both are proficient in judiciously applying industry
standard practices to engineering and geoscience evaluations as
well as applying SEC and other industry reserves definitions and
guidelines.
Our
President and Chief Operating Officer is the person primarily
responsible for overseeing the preparation of our internal reserve
estimates and for overseeing the independent petroleum engineering
firm during the preparation of our reserve report. He has a
Bachelor of Science degree in Petroleum Engineering and over 30
years of industry experience, with 20 years or more of experience
working as a reservoir engineer, reservoir engineering manager, or
reservoir engineering executive. His professional qualifications
meet or exceed the qualifications of reserve estimators and
auditors set forth in the “Standards Pertaining to Estimation
and Auditing of Oil and Gas Reserves Information” promulgated
by the Society of Petroleum Engineers. The President and Chief
Operating Officer reports directly to our Chief Executive
Officer.
Internal Control over Preparation of Reserve Estimates
We
maintain adequate and effective internal controls over our reserve
estimation process as well as the underlying data upon which
reserve estimates are based. The primary inputs to the reserve
estimation process are technical information, financial data,
ownership interest, and production data. The relevant field and
reservoir technical information, which is updated annually, is
assessed for validity when our independent petroleum engineering
firm has technical meetings with our engineers, geologists, and
operations and land personnel. Current revenue and expense
information is obtained from our accounting records, which are
subject to external quarterly reviews, annual audits and our own
set of internal controls over financial reporting. All current
financial data such as commodity prices, lease operating expenses,
production taxes and field-level commodity price differentials are
updated in the reserve database and then analyzed to ensure that
they have been entered accurately and that all updates are
complete. Our current ownership in mineral interests and well
production data are also subject to our internal controls over
financial reporting, and they are incorporated in our reserve
database as well and verified internally by us to ensure their
accuracy and completeness. Once the reserve database has been
updated with current information, and the relevant technical
support material has been assembled, our independent engineering
firm meets with our technical personnel to review field performance
and future development plans in order to further verify the
validity of estimates. Following these reviews, the reserve
database is furnished to NSAI so that it can prepare its
independent reserve estimates and final report. The reserve
estimates prepared by NSAI are reviewed and compared to our
internal estimates by our Chief Operating Officer and our reservoir
engineering staff. Material reserve estimation differences are
reviewed between NSAI’s reserve estimates and our internally
prepared reserves on a case-by-case basis. An iterative process is
performed between NSAI and us, and additional data is provided to
address any differences. If the supporting documentation will not
justify additional changes, the NSAI reserves are accepted. In the
event that additional data supports a reserve estimation
adjustment, NSAI will analyze the additional data, and may make
changes it deems necessary. Additional data is usually comprised of
updated production information on new wells. Once the review is
completed and all material differences are reconciled, the reserve
report is finalized and our reserve database is updated with the
final estimates provided by NSAI. Access to our reserve database is
restricted to specific members of our reservoir engineering
department and management.
Production, Average Price and Average Production Cost
The net
quantities of oil, natural gas and natural gas liquids produced and
sold by us for each of the years ended December 31, 2016 and 2015,
the average sales price per unit sold and the average production
cost per unit are presented below.
|
|
|
|
|
Production
volumes:
|
|
|
Crude
oil and condensate (Bbls)
|
172,003
|
209,545
|
Natural
gas (Mcf)
|
2,326,400
|
2,547,300
|
Natural
gas liquids (Bbls)
|
104,689
|
129,670
|
Total (Boe)
(1)
|
664,425
|
763,765
|
Average
prices realized:
|
|
|
Crude oil and condensate (per Bbl)
|
$
42.21
|
$
46.92
|
Natural gas (per Mcf)
|
$
2.45
|
$
2.63
|
Natural gas liquids (per Bbl)
|
$
17.33
|
$
17.01
|
Production cost per Boe
(2)
|
$
5.98
|
$
8.10
|
(1)
Barrels of oil
equivalent have been calculated on the basis of six thousand cubic
feet (Mcf) of natural gas equal to one barrel of oil equivalent
(Boe).
(2)
Excludes ad valorem
taxes (which are included in lease operating expenses on our
Consolidated Statements of Operations in the Consolidated Financial
Statements incorporated herein by reference) and severance taxes,
totaling $1,588,798 and $1,452,738 in fiscal years 2016, and 2015,
respectively.
Our
interests in Lac Blanc Field and Bayou Hebert Field represented
31.1% and 21.7%, respectively, of our total proved reserves as of
December 31, 2016. Our interests in Lac Blanc Field represented
46.0% of our total proved reserves as of December 31, 2015. No
other single field accounted for 15% or more of our proved reserves
as of December 31, 2016 and 2015.
The net
quantities of oil, natural gas and natural gas liquids produced and
sold by us for the years ended December 31, 2016 and 2015, the
average sales price per unit sold and the average production cost
per unit for our Lac Blanc field are presented below.
|
|
Lac Blanc Field
|
|
|
Production
volumes:
|
|
|
Crude
oil and condensate (Bbls)
|
22,111
|
37,278
|
Natural
gas (Mcf)
|
1,069,325
|
1,703,825
|
Natural
gas liquids (Bbls)
|
56,005
|
41,336
|
Total (Boe)
(1)
|
256,337
|
362,585
|
Average
prices realized:
|
|
|
Crude
oil and condensate (per Bbl)
|
$
41.46
|
$
50.27
|
Natural
gas (per Mcf)
|
$
2.43
|
$
2.72
|
Natural
gas liquids (per Bbl)
|
$
18.75
|
$
28.14
|
Production cost per Boe
(2)
|
$
6.37
|
$
4.53
|
(1)
Barrels of oil
equivalent have been calculated on the basis of six thousand cubic
feet (Mcf) of natural gas equal to one barrel of oil equivalent
(Boe).
(2)
Excludes ad valorem
taxes (which are included in lease operating expenses on our
Consolidated Statements of Operations in the Consolidated Financial
Statements incorporated herein by reference) and severance taxes,
totaling $412,372 and $681,437 in fiscal years 2016 and 2015,
respectively.
The net
quantities of oil, natural gas and natural gas liquids produced and
sold by us for the year ended December 31, 2016, the average
sales price per unit sold and the average production cost per unit
for our Bayou Hebert field are presented below.
|
|
Bayou Hebert Field
|
|
Production
volumes:
|
|
Crude
oil and condensate (Bbls)
|
4,401
|
Natural
gas (Mcf)
|
177,756
|
Natural
gas liquids (Bbls)
|
5,553
|
Total (Boe)
(1)
|
39,580
|
Average
prices realized:
|
|
Crude
oil and condensate (per Bbl)
|
$
47.41
|
Natural
gas (per Mcf)
|
$
3.01
|
Natural
gas liquids (per Bbl)
|
$
22.72
|
Production cost per Boe
(2)
|
$
6.48
|
(1)
Barrels of oil
equivalent have been calculated on the basis of six thousand cubic
feet (Mcf) of natural gas equal to one barrel of oil equivalent
(Boe).
(2)
Excludes severance
taxes and ad valorem taxes in lease operating expenses, totaling
$308,338 in 2016.
Gross and Net Productive Wells
As of
December 31, 2016, our total gross and net productive wells
were as follows:
(1)
A gross well is a
well in which a working interest is owned. The number of net wells
represents the sum of fractions of working interests we own in
gross wells. Productive wells are producing wells plus shut-in
wells we deem capable of production. Horizontal re-entries of
existing wells do not increase a well total above one gross well.
We have working interests in 10 gross wells with completions into
more than one productive zone; in the table above, these wells with
multiple completions are only counted as one gross
well.
Gross and Net Developed and Undeveloped Acres
As of
December 31, 2016, we had total gross and net developed and
undeveloped leasehold acres as set forth below. The developed
acreage is stated on the basis of spacing units designated or
permitted by state regulatory authorities.
Gross acres are those acres in which
a working interest is owned. The number of net acres represents the
sum of fractional working interests we own in gross
acres.
|
|
Undeveloped
|
|
State
|
|
|
|
|
|
|
Louisiana
|
20,023
|
3,833
|
8,135
|
7,136
|
28,158
|
10,969
|
North
Dakota
|
18,553
|
706
|
-
|
-
|
18,553
|
706
|
Texas
|
43,710
|
2,756
|
3,017
|
355
|
46,727
|
3,111
|
Oklahoma
|
2,000
|
79
|
-
|
-
|
2,000
|
79
|
California
|
1,342
|
1,342
|
-
|
-
|
1,342
|
1,342
|
Wyoming
|
7,360
|
3
|
-
|
-
|
7,360
|
3
|
Total
|
92,988
|
8,719
|
11,152
|
7,491
|
104,140
|
16,210
|
As of
December 31, 2016, we had leases representing 7,436 net acres (none
of which were in the Lac Blanc or Bayou Herbert Fields) expiring in
2017; 55 net acres (none of which were in the Lac Blanc or Bayou
Herbert Fields) expiring in 2018; and -0- net acres expiring in
2019 and beyond. We believe that our current and future drilling
plans, along with selected lease extensions, can address the
majority of the leases expiring in 2017 and beyond.
Exploratory Wells and Development Wells
Set
forth below for the years ended December 31, 2016 and 2015 is
information concerning our drilling activity during the years
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
-
|
-
|
1.0
|
-
|
1.0
|
2015
|
0.3
|
-
|
0.2
|
-
|
0.5
|
Present Activities
At
September 12, 2017, we had -0- gross (-0- net) wells in the process
of drilling or completing.
Supply Contracts or Agreements
Crude
oil and condensate are sold through month-to-month evergreen
contracts. The price is tied to an index or a weighted monthly
average of posted prices with certain adjustments for gravity,
Basic Sediment and Water, or BS&W, and transportation.
Generally, the index or posting is based on WTI and adjusted to LLS
or HLS. Pricing for our California properties is based on an
average of specified posted prices, adjusted for gravity,
transportation, and for one field, a market
differential.
Our
natural gas is sold under multi-year contracts with pricing tied to
either first of the month index or a monthly weighted average of
purchaser prices received. Natural gas liquids are also sold under
multi-year contacts usually tied to the related natural gas
contract. Pricing is based on published prices for each product or
a monthly weighted average of purchaser prices
received.
Competition
The
domestic oil and natural gas business is intensely competitive in
the exploration for and acquisition of leasehold interests,
reserves and in the producing and marketing of oil and natural gas
production. Our competitors include national oil companies, major
oil and natural gas companies, independent oil and natural gas
companies, drilling partnership programs, individual producers,
natural gas marketers, and major pipeline companies, as well as
participants in other industries supplying energy and fuel to
consumers. Many of our competitors are large, well-established
companies. They likely are able to pay more for seismic information
and lease rights on oil and natural 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 be dependent upon our
ability to evaluate and select suitable properties and to
consummate oil and gas related transactions in a highly competitive
environment.
Other
Business Matters
Major Customers
During
the years ended December 31, 2016 and 2015, sales to five customers
accounted for approximately 78% and sales to four customers
accounted for approximately 84%, respectively, of our total
revenues.
We
believe there are adequate alternate purchasers of our production
such that the loss of one or more of the above purchasers would not
have a material adverse effect on our results of operations or cash
flows.
Seasonality of Business
Weather
conditions affect the demand for, and prices of, natural gas and
can also delay oil and natural gas drilling activities, disrupting
our overall business plans. Demand for natural gas is typically
higher during the winter, resulting in higher natural gas prices
for our natural gas production during our first and fourth fiscal
quarters. Due to these seasonal fluctuations, our results of
operations for individual quarterly periods may not be indicative
of the results that we may realize on an annual basis.
Operational Risks
Oil and
natural gas exploration and development involves a high degree of
risk, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. There is no assurance that
we will discover or acquire additional oil and natural gas in
commercial quantities. Oil and natural gas operations also involve
the risk that well fires, blowouts, equipment failure, human error
and other events may cause accidental leakage or spills of toxic or
hazardous materials, such as petroleum liquids or drilling fluids
into the environment, or cause significant injury to persons or
property. In such event, substantial liabilities to third parties
or governmental entities may be incurred, the satisfaction of which
could substantially reduce our available cash and possibly result
in loss of oil and natural gas properties. Such hazards may also
cause damage to or destruction of wells, producing formations,
production facilities and pipeline or other processing
facilities.
As is
common in the oil and natural gas industry, we do not insure fully
against all risks associated with our business either because such
insurance is not available or because we believe the premium costs
are prohibitive. A loss not fully covered by insurance could have a
material effect on our operating results, financial position and
cash flows. For further discussion of these risks see “Risk
Factors.”
Title
to Properties
We
believe that the title to our oil and natural gas properties is
good and defensible in accordance with standards generally accepted
in the oil and natural gas industry, subject to such exceptions
which, in our belief, are not so material as to detract
substantially from the use or value of such properties. Our
properties are typically subject to, in one degree or another, one
or more of the following:
●
royalties and other
burdens and obligations, express or implied, under oil and natural
gas leases;
●
overriding
royalties and other burdens created by us or our predecessors in
title;
●
a variety of
contractual obligations (including, in some cases, development
obligations) arising under operating agreements, farmout
agreements, production sales contracts and other agreements that
may affect the properties or their titles;
●
back-ins and
reversionary interests existing under purchase agreements and
leasehold assignments;
●
liens that arise in
the normal course of operations, such as those for unpaid taxes,
statutory liens securing obligations to unpaid suppliers and
contractors and contractual liens under operating agreements, as
well as pooling, unitization and communitization agreements,
declarations and orders; and
●
easements,
restrictions, rights-of-way and other matters that commonly affect
property.
To the
extent that such burdens and obligations affect our rights to
production revenues, they have been taken into account in
calculating our net revenue interests and in estimating the size
and value of our reserves. We believe that the burdens and
obligations affecting our properties are conventional in the
industry for properties of the kind that we own.
Regulations
All of
the jurisdictions in which we own or operate producing oil and
natural gas properties have statutory provisions regulating the
exploration for and production of oil and natural gas, including
provisions related to permits for the drilling of wells, bonding
requirements to drill or operate wells, the location of wells, the
method of drilling and casing wells, the surface use and
restoration of properties upon which wells are drilled, sourcing
and disposal of water used in the drilling and completion process,
and the plugging and abandonment of wells. Our operations are also
subject to various conservation laws and regulations. These include
the regulation of the size of drilling and spacing units or
proration units, the number of wells which may be drilled in an
area, and the unitization or pooling of oil and natural gas
properties, as well as regulations that generally prohibit the
venting or flaring of natural gas, and impose certain requirements
regarding the establishment of maximum allowable rates of
production from fields and individual wells. Our operations are
also subject to various conservation laws and regulations. These
laws and regulations govern the size of drilling and spacing units,
the density of wells that may be drilled in oil and natural gas
properties and the unitization or pooling of oil and natural gas
properties. In this regard, some states allow the forced pooling or
integration of land and leases to facilitate exploration while
other states rely primarily or exclusively on voluntary pooling of
land and leases. In areas where pooling is primarily or exclusively
voluntary, it may be difficult to form spacing units and therefore
difficult to develop a project if the operator owns less than 100%
of the leasehold. In addition, state conservation laws establish
maximum rates of production from oil and natural gas wells,
generally prohibit the venting or flaring of natural gas, and
impose specified requirements regarding the ratability of
production. On some occasions, local authorities have imposed
moratoria or other restrictions on exploration and production
activities pending investigations and studies addressing potential
local impacts of these activities before allowing oil and natural
gas exploration and production to proceed.
The
effect of these regulations is to limit the amount of oil and
natural gas that we can produce from our wells and to limit the
number of wells or the locations at which we can drill, although we
can apply for exceptions to such regulations or to have reductions
in well spacing. Failure to comply with applicable laws and
regulations can result in substantial penalties. The regulatory
burden on the industry increases the cost of doing business and
affects profitability. Moreover, each state generally imposes a
production or severance tax with respect to the production and sale
of oil, natural gas and natural gas liquids within its
jurisdiction.
Environmental
Regulations
Our
operations are subject to stringent federal, state and local laws
regulating the discharge of materials into the environment or
otherwise relating to health and safety or the protection of the
environment. Numerous governmental agencies, such as the United
States Environmental Protection Agency, commonly referred to as the
EPA, issue regulations to implement and enforce these laws, which
often require difficult and costly compliance measures. Among other
things, environmental regulatory programs typically govern the
permitting, construction and operation of a well or production
related facility. Many factors, including public perception, can
materially impact the ability to secure an environmental
construction or operation permit. Failure to comply with
environmental laws and regulations may result in the assessment of
substantial administrative, civil and criminal penalties, as well
as the issuance of injunctions limiting or prohibiting our
activities. In addition, some laws and regulations relating to
protection of the environment may, in certain circumstances, impose
strict liability for environmental contamination, which could
result in liability for environmental damages and cleanup costs
without regard to negligence or fault on our part.
Beyond
existing requirements, new programs and changes in existing
programs, may address various aspects of our business including oil
and natural gas exploration and production, air emissions, waste
management, and underground injection of waste material.
Environmental laws and regulations have been subject to frequent
changes over the years, and the imposition of more stringent
requirements could have a material adverse effect on our financial
condition and results of operations. The following is a summary of
the more significant existing environmental, health and safety laws
and regulations to which our business operations are subject and
for which compliance in the future may have a material adverse
impact on our capital expenditures, earnings and competitive
position.
Hazardous Substances and Wastes
The
federal Comprehensive Environmental Response, Compensation and
Liability Act, referred to as CERCLA or the Superfund law, and
comparable state laws impose liability, without regard to fault, on
certain classes of persons that are considered to be responsible
for the release of a hazardous substance into the environment.
These persons may include the current or former owner or operator
of the disposal site or sites where the release occurred and
companies that disposed or arranged for the disposal of hazardous
substances that have been released at the site. Under CERCLA, these
persons may be subject to joint and several liability for the costs
of investigating and cleaning up hazardous substances that have
been released into the environment, for damages to natural
resources and for the costs of some health studies. In addition, it
is not uncommon for neighboring landowners and other third parties
to file claims for personal injury and property damage allegedly
caused by hazardous substances or other pollutants released into
the environment.
Under
the federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976, referred to as RCRA, most
wastes generated by the exploration and production of oil and
natural gas are not regulated as hazardous waste. Periodically,
however, there are proposals to lift the existing exemption for oil
and natural gas wastes and reclassify them as hazardous wastes or
subject them to enhanced solid waste regulation. If such proposals
were to be enacted, they could have a significant impact on our
operating costs and on those of all the industry in general. In the
ordinary course of our operations moreover, some wastes generated
in connection with our exploration and production activities may be
regulated as solid waste under RCRA, as hazardous waste under
existing RCRA regulations or as hazardous substances under CERCLA.
From time to time, releases of materials or wastes have occurred at
locations we own or at which we have operations. These properties
and the materials or wastes released thereon may be subject to
CERCLA, RCRA and analogous state laws. Under these laws, we have
been and may be required to remove or remediate such materials or
wastes.
Water Discharges
Our
operations are also subject to the federal Clean Water Act and
analogous state laws. Under the Clean Water Act, the EPA has
adopted regulations concerning discharges of storm water runoff.
This program requires covered facilities to obtain individual
permits, or seek coverage under a general permit. Some of our
properties may require permits for discharges of storm water
runoff. We believe that we will be able to obtain, or be included
under, these permits, where necessary, and make minor modifications
to existing facilities and operations that would not have a
material effect on us. The Clean Water Act and similar state acts
regulate other discharges of wastewater, oil, and other pollutants
to surface water bodies, such as lakes, rivers, wetlands, and
streams. Failure to obtain permits for such discharges could result
in civil and criminal penalties, orders to cease such discharges,
and costs to remediate and pay natural resources damages. These
laws also require the preparation and implementation of Spill
Prevention, Control, and Countermeasure Plans in connection with
on-site storage of significant quantities of oil. In the event of a
discharge of oil into U.S. waters, we could be liable under the Oil
Pollution Act for clean-up costs, damages and economic
losses.
Our oil
and natural gas production also generates salt water, which we
dispose of by underground injection. The federal Safe Drinking
Water Act, or the SDWA, the Underground Injection Control, or the
UIC, regulations promulgated under the SDWA and related state
programs regulate the drilling and operation of salt water disposal
wells. The EPA directly administers the UIC program in some states,
and in others it is delegated to the state for administering.
Permits must be obtained before drilling salt water disposal wells,
and casing integrity monitoring must be conducted periodically to
ensure the casing is not leaking salt water to groundwater.
Contamination of groundwater by oil and natural gas drilling,
production, and related operations may result in fines, penalties,
and remediation costs, among other sanctions and liabilities under
the SDWA and state laws. In addition, third party claims may be
filed by landowners and other parties claiming damages for
alternative water supplies, property damages, and bodily
injury.
Hydraulic Fracturing
Our
completion operations are subject to regulation, which may increase
in the short- or long-term. In particular, the well completion
technique known as hydraulic fracturing, which is used to stimulate
production of natural gas and oil, has come under increased
scrutiny by the environmental community and many local, state and
federal regulators. Hydraulic fracturing involves the injection of
water, sand and additives under pressure, usually down casing that
is cemented in the wellbore, into prospective rock formations at
depth to stimulate oil and natural gas production. We engage third
parties to provide hydraulic fracturing or other well stimulation
services to us in connection with substantially all of the wells
for which we are the operator.
Under
the direction of Congress, the EPA completed a study finding that
hydraulic fracturing could potentially harm drinking water
resources under adverse circumstances such as injection directly
into groundwater or into production wells lacking mechanical
integrity. The EPA has also finalized pre-treatment standards under
the Clean Water Act for wastewater discharges from shale hydraulic
fracturing operations to municipal sewage treatment plants. Beyond
that, several environmental groups have petitioned the EPA to
extend toxic release reporting requirements under the Emergency
Planning and Community Right-to-Know Act to the oil and natural gas
extraction industry and to require disclosure under the Toxic
Substances Control Act of chemicals used in fracturing. Congress
might likewise consider legislation to amend the federal SDWA to
require the disclosure of chemicals used by the oil and natural gas
industry in the hydraulic fracturing process. Certain states,
including Colorado, Utah and Wyoming, already have issued similar
disclosure rules.
In
addition, the Department of the Interior has promulgated
regulations concerning the use of hydraulic fracturing on lands
under its jurisdiction, which includes lands on which we conduct or
plan to conduct operations. States similarly have been imposing new
restrictions or bans on hydraulic fracturing. Even local
jurisdictions have adopted, or tried to adopt, regulations
restricting hydraulic fracturing. Additional hydraulic fracturing
requirements at the federal, state or local level may limit our
ability to operate or increase our operating costs.
Air Emissions
The
federal Clean Air Act and comparable state laws regulate emissions
of various air pollutants through permitting programs and the
imposition of other requirements. In addition, the EPA has
developed and continues to develop stringent regulations governing
emissions of toxic air pollutants at specified sources, including
oil and natural gas production. Federal and state regulatory
agencies can impose administrative, civil and criminal penalties
for non-compliance with air permits or other requirements of the
federal Clean Air Act and associated state laws and regulations.
Our operations, or the operations of service companies engaged by
us, may in certain circumstances and locations be subject to
permits and restrictions under these statutes for emissions of air
pollutants.
In 2012
and 2016, the EPA issued air regulations for the oil and natural
gas industry that address emissions from certain new sources of
volatile organic compounds, or VOCs, sulfur dioxide, air toxics and
methane. The rules include the first federal air standards for oil
and natural gas wells that are hydraulically fractured, or
refractured, as well as requirements for other processes and
equipment, including storage tanks. Compliance with these
regulations has imposed additional requirements and costs on our
operations.
In
October 2015, the EPA announced that it was lowering the primary
national ambient air quality standards, or NAAQS, for ozone from 75
parts per billion to 70 parts per billion. Implementation will take
place over several years; however, the new standard could result in
a significant expansion of ozone nonattainment areas across the
United States, including areas in which we operate. Oil and natural
gas operations in ozone nonattainment areas would likely be subject
to increased regulatory burdens in the form of more stringent
emission controls, emission offset requirements, and increased
permitting delays and costs.
Climate Change
Studies
over recent years have indicated that emissions of certain gases
may be contributing to warming of the Earth’s atmosphere. In
response to these studies, governments have been adopting domestic
and international climate change regulations that require reporting
and reductions of the emission of such greenhouse gases. Methane, a
primary component of natural gas, and carbon dioxide, a byproduct
of burning oil, natural gas and refined petroleum products, are
considered greenhouse gases. Internationally, the United Nations
Framework Convention on Climate Change, the Kyoto Protocol and the
Paris Agreement address greenhouse gas emissions, and several
countries, including those comprising the European Union, have
established greenhouse gas regulatory systems. In the United
States, at the state level, many states, either individually or
through multi-state regional initiatives, have been implementing
legal measures to reduce emissions of greenhouse gases, primarily
through emission inventories, emissions targets, greenhouse gas cap
and trade programs or incentives for renewable energy generation,
while others have considered adopting such greenhouse gas
programs.
At the
federal level, the EPA has issued regulations requiring us and
other companies to annually report certain greenhouse gas emissions
from our oil and natural gas facilities. Beyond its measuring and
reporting rules, the EPA has issued an “Endangerment
Finding” under Section 202(a) of the Clean Air Act,
concluding greenhouse gas pollution threatens the public health and
welfare of current and future generations. The finding served as
the first step to issuing regulations that require permits for and
reductions in greenhouse gas emissions for certain
facilities.
In
addition, the Obama Administration developed a Strategy to Reduce
Methane Emissions that was intended to result by 2025 in a 40-45%
decrease in methane emissions from the oil and gas industry as
compared to 2012 levels. Consistent with that strategy, the EPA
issued its air rules for oil and natural gas production sources,
and the federal Bureau of Land Management, or BLM, promulgated
standards for reducing venting and flaring on public
lands.
Any
laws or regulations that may be adopted to restrict or reduce
emissions of greenhouse gases could require us to incur additional
operating costs, such as costs to purchase and operate emissions
control systems or other compliance costs, and reduce demand for
our products.
The National Environmental Policy Act
Oil and
natural gas exploration and production activities may be subject to
the National Environmental Policy Act, or NEPA. NEPA requires
federal agencies, including the Department of the Interior, to
evaluate major agency actions that have the potential to
significantly impact the environment. In the course of such
evaluations, an agency will prepare an Environmental Assessment
that assesses the potential direct, indirect and cumulative impacts
of a proposed project and, if necessary, will prepare a more
detailed Environmental Impact Statement that may be made available
for public review and comment. This process has the potential to
delay the development of future oil and natural gas
projects.
Threatened and endangered species, migratory birds and natural
resources
Various
state and federal statutes prohibit certain actions that adversely
affect endangered or threatened species and their habitat,
migratory birds, wetlands, and natural resources. These statutes
include the Endangered Species Act, the Migratory Bird Treaty Act
and the Clean Water Act. The United States Fish and Wildlife
Service may designate critical habitat areas that it believes are
necessary for survival of threatened or endangered species. A
critical habitat designation could result in further material
restrictions on federal land use or on private land use and could
delay or prohibit land access or development. Where takings of or
harm to species or damages to wetlands, habitat, or natural
resources occur or may occur, government entities or at times
private parties may act to prevent or restrict oil and natural gas
exploration activities or seek damages for any injury, whether
resulting from drilling or construction or releases of oil, wastes,
hazardous substances or other regulated materials, and in some
cases, criminal penalties may result. Moreover, as a result of a
settlement approved by the U.S. District Court for the District of
Columbia in September 2011, the U.S. Fish and Wildlife Service is
required to make a determination on listing of more than 250
species as endangered or threatened under the ESA by no later than
completion of the agency’s 2017 fiscal year. Similar
protections are offered to migratory birds under the Migratory Bird
Treaty Act. The federal government in the past has issued
indictments under the Migratory Bird Treaty Act to several oil and
natural gas companies after dead migratory birds were found near
reserve pits associated with drilling activities. The
identification or designation of previously unprotected species as
threatened or endangered in areas where underlying property
operations are conducted could cause us to incur increased costs
arising from species protection measures or could result in
limitations on our development activities that could have an
adverse impact on our ability to develop and produce reserves. If
we were to have a portion of our leases designated as critical or
suitable habitat, it could adversely impact the value of our
leases.
Hazard communications and community right to know
We are
subject to federal and state hazard communication and community
right-to-know statutes and regulations. These regulations govern
record keeping and reporting of the use and release of hazardous
substances, including, but not limited to, the federal Emergency
Planning and Community Right-to-Know Act and may require that
information be provided to state and local government authorities
and the public.
Occupational Safety and Health Act
We are
subject to the requirements of the federal Occupational Safety and
Health Act and comparable state statutes that regulate the
protection of the health and safety of workers. In addition, the
Occupational Safety and Health Administration’s hazard
communication standard requires that information be maintained
about hazardous materials used or produced in operations and that
this information be provided to employees.
Employees
and Principal Office
As of
September 12, 2017, we had 30 full-time employees and three
part-time employees. We hire independent contractors on an
as-needed basis. We have no collective bargaining agreements with
our employees. We believe that our employee relationships are
satisfactory.
Our
principal executive office is located at 1177 West Loop South,
Suite 1825, Houston, Texas 77027, where we occupy approximately
15,180 square feet of office space. Our Bakersfield office,
consisting of approximately 4,200 square feet, is located at 2008
Twenty-First Street, Bakersfield, California 93301.
DESCRIPTION
OF CAPITAL STOCK
General
The
following description summarizes certain important terms of our
capital stock. Because it is only a summary, it does not contain
all the information that may be important to you. For a complete
description of the matters set forth in this section entitled
“Description of Capital Stock,” you should refer our
amended and restated certificate of incorporation, which we refer
to as the Certificate of Incorporation, and our amended and
restated bylaws, which we refer to as the Bylaws, and to the
applicable provisions of Delaware law. Our authorized capital stock
consists of 120,000,000 shares of capital stock, $0.001 par value
per share, of which:
●
100,000,000 shares
are designated as common stock; and
●
20,000,000 shares
are designated as preferred stock.
As of
September 12, 2017, there were 12,559,608 shares of common stock
outstanding and 1,838,927 shares of Series D preferred stock
outstanding. Our Board of Directors is authorized, without
stockholder approval except as required by the listing standards of
the NYSE American, to issue additional shares of capital
stock.
Common
Stock
Dividend Rights
Subject
to preferences that may apply to any shares of preferred stock
outstanding at the time, the holders of common stock are entitled
to receive dividends out of funds legally available if our Board of
Directors, in its discretion, determines to issue dividends and
then only at the times and in the amounts that our Board of
Directors may determine.
Voting Rights
Holders
of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. However, each holder
of preferred stock will be entitled to vote equally with the
holders of the common stock on an as-converted basis (initially
each share of preferred stock is convertible into one share of
common stock).We have not provided for cumulative voting for the
election of directors in the Certificate of Incorporation. The
Certificate of Incorporation establishes a classified Board of
Directors that is divided into three classes with staggered
three-year terms. Only the directors in one class will be subject
to election by a majority of the votes cast at each annual meeting
of stockholders, with the directors in the other classes continuing
for the remainder of their respective three-year terms. In the
event that the number of nominees for director exceeds the number
of directors to be elected, directors shall be elected by a
plurality of the votes cast.
No Preemptive or Similar Rights
Common
stock is not entitled to preemptive rights, and is not subject to
conversion, redemption or sinking fund provisions.
Right to Receive Liquidation Distributions
If we
become subject to a liquidation, dissolution or winding-up, the
assets legally available for distribution to our stockholders would
be distributable ratably among the holders of common stock and any
participating preferred stock outstanding at that time, subject to
prior satisfaction of all outstanding debt and liabilities and the
preferential rights of and the payment of liquidation preferences,
if any, on any outstanding shares of preferred stock.
Fully Paid and Non-Assessable
All of
the outstanding shares of common stock are fully paid and
non-assessable and the shares offered hereby will be, upon
issuance, fully paid and non-assessable.
Preferred
Stock
We have
created a series of preferred stock, the Series D Convertible
Preferred Stock, or Series D preferred stock, with the terms set
forth in the Certificate of Designation of Series D Convertible
Preferred Stock, or the Certificate of Designation.
Our
Board of Directors is authorized, subject to limitations prescribed
by Delaware law, to issue preferred stock in one or more series, to
establish from time to time the number of shares to be included in
each series and to fix the designation, powers, preferences and
rights of the shares of each series and any of its qualifications,
limitations or restrictions, in each case without further vote or
action by our stockholders. Our Board of Directors can also
increase or decrease the number of shares of any series of
preferred stock, but not below the number of shares of that series
then outstanding, without any further vote or action by our
stockholders. Our Board of Directors may authorize the issuance of
preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of
delaying, deferring or preventing a change in control of us and
might adversely affect the market price of common stock and the
voting and other rights of the holders of common stock. We have no
current plan to issue any shares of preferred stock.
General
Pursuant to our
Certificate of Incorporation, we are currently authorized to
designate and issue up to 20,000,000 shares of preferred stock,
$0.001 par value per share, in one or more classes or series and,
subject to the limitations prescribed by our Certificate of
Incorporation and Delaware law, with such rights, preferences,
privileges and restrictions of each class or series of preferred
stock, including dividend rights, conversion rights, voting rights,
terms of redemption, liquidation preferences and the number of
shares constituting any class or series as our Board of Directors
may determine, without any vote or action by our stockholders. Our
Board of Directors has designated a series of preferred stock with
the rights described herein consisting of up to 7,000,000
authorized shares, designated as Series D preferred stock.
Following the designation of the Series D preferred stock by our
Board of Directors, we have available 13,000,000 shares of
undesignated preferred stock authorized under the terms of our
Certificate of Incorporation. Our Board of Directors may, without
the approval of holders of the preferred stock or its common stock,
designate additional series of authorized preferred stock ranking
junior to or on parity with the Series D preferred stock or
designate additional shares of the Series D preferred stock and
authorize the issuance of such shares.
Maturity
The
Series D preferred stock has no stated maturity and will not be
subject to any sinking fund or mandatory redemption. Shares of the
Series D preferred stock will remain outstanding indefinitely
unless converted into common stock.
Ranking
The
Series D preferred stock will generally rank, with respect to
rights to the payment of dividends and the distribution of assets
upon our liquidation, dissolution or winding up senior to all
classes or series of our common stock and to all other equity
securities issued by us.
Dividends
The
holders of shares of Series D preferred stock are entitled to
receive, in preference to all of our common stock, a 7.0% per annum
dividend on the original issue price of each share of Series D
preferred stock held by such holder that is cumulative and payable
in kind per share in such number of shares of Series D preferred
stock determined using a price per share equal to approximately
$11.0741176 per share (adjusted appropriately for this offering,
stock splits, stock dividends, recapitalizations, consolidations,
mergers, reclassifications and the like with respect to the Series
D preferred stock), or the original issue price, and calculated on
actual number of days elapsed in a year of 365 days. In lieu of the
issuance of a fractional share of Series D preferred stock as a
dividend, we will issue a whole share of Series D preferred stock
(rounded to the nearest whole share), determined on the basis of
the total number of shares of Series D preferred stock held by the
holder with respect to which such dividends are being calculated.
Such dividends are cumulative and compound on a quarterly basis to
the extent not paid for any reason. Dividends accrue and are
cumulative from the date that the Series D preferred stock is
issued under the Certificate of Designation, whether or not we have
earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not such
dividends are declared or paid. Quarterly dividends will be paid on
the last business day of the fiscal quarter, or the payment date.
Dividends paid in an amount less than the total amount of such
accrued dividends at the time shall be allocated pro rata on a
share-by-share basis among all shares of Series D preferred stock
at the time outstanding. The record date for determination of the
holders of Series D preferred stock entitled to receive payment of
a dividend thereon shall be fifteen (15) days before the payment
date, or such other date that we establish no less than ten (10)
days and no more than thirty (30) days preceding the payment
date. In addition, if and when any dividend is declared
or paid by our Board of Directors with respect to the common stock,
our Board of Directors will also declare and pay the same dividend
on each share of the Series D preferred stock then outstanding on
an as-if-converted to common stock basis.
Liquidation Preference
In the
event of a triggering event, the holders of Series D preferred
stock shall be entitled to receive, prior and in preference to any
distribution of any of our assets to the holders of common stock by
reason of their ownership thereof, the preference amount payable
with respect to each outstanding share of Series D preferred stock
held by them. If, upon the occurrence of such triggering event, the
assets and funds thus distributed or the consideration paid to the
holders of our capital stock, as the case may be, among the holders
of Series D preferred stock shall be insufficient to permit the
payment to such holders of the full preference amounts, then the
entire assets and funds of our company legally available for
distribution or the consideration paid to the holders of our
capital stock, as the case may be, shall be distributed ratably
among the holders of Series D preferred stock in proportion to the
preference amounts each such holder is otherwise entitled to
receive.
The
term “triggering event” means a transaction or series
of related transactions that results in (i) the sale, conveyance,
transfer or other disposition of all or substantially all of the
property, assets or business of our company or its subsidiaries,
taken as a whole, (ii) the merger of our company with or into or
the consolidation of our company with any other corporation,
limited liability company or other entity (other than our
wholly-owned subsidiary), (iii) a third party or a group of related
third parties (other than pursuant to an offering registered under
the Securities Act) acquiring from our company, or from the holders
of our capital stock, shares representing 50% or more of our
outstanding voting power, or (iv) the liquidation, dissolution or
winding up of our company, either voluntary or involuntary;
provided that none of the following shall be considered a
triggering event: (A) a merger effected exclusively for the purpose
of changing the domicile of our company or (B) a transaction in
which our stockholders immediately prior to the transaction own 50%
or more of the voting power of the surviving corporation following
the transaction.
The
term “preference amount” means, with respect to each
outstanding share of Series D preferred stock, the greater of (x)
the original issue price for each outstanding share of Series D
preferred stock then held by them, plus accrued but unpaid
dividends and (y) the amount distributable or the consideration
payable with respect to common stock on the number of shares of
common stock into which such share of Series D preferred stock is
convertible in the event of a triggering event if all outstanding
shares of Series D preferred stock were deemed to have converted
into shares of common stock immediately prior to such triggering
event.
Redemption
The
Series D preferred stock is not redeemable.
Conversion Rights
Optional Conversion
. Each
share of Series D preferred stock (including any shares of Series D
preferred stock payable as dividends that have accrued but are
unpaid) is convertible, at the option of the holder thereof, at any
time after the date of issuance of such share, at our principal
corporate offices or any transfer agent for such stock, into such
number of fully paid and nonassessable shares of common stock as is
determined by dividing (i) the original issue price ($11.0741176,
subject to adjustment), by (ii) the conversion price, or the
conversion price, applicable to such share in effect on the date
the stock certificate is surrendered for conversion. The initial
conversion price per share of Series D preferred stock is
$11.0741176, subject to adjustment as set forth in Certificate of
Designation. After this offering, we anticipate that the conversion
price will be adjusted to $
per share.
Mandatory
Conversion
. Each share of Series D
preferred stock shall, at our election, automatically be converted
into shares of common stock at the conversion price then in effect
for such share immediately upon a mandatory conversion event. The
term “mandatory conversion event” means any of: (i) the
date specified, if any, by vote or written consent of the holders
of a majority of the outstanding shares of Series D preferred
stock; (ii) with respect to any holder, any time that less than 10%
of the original number of shares of Series D preferred stock issued
to such holder (as adjusted for stock splits, stock dividends,
reclassification and the like) are held by such holder together
with its affiliates on combined basis; or (iii) with respect to any
holder, when such holder, together with its affiliates on combined
basis, is no longer a holder of shares of common stock (or any
securities received in consideration for such common stock in the
event of merger, reorganization, reclassification or similar
transaction).
Voting Rights
General Voting Rights
. The
holders of the Series D preferred stock are entitled to notice of
all stockholder meetings at which holders of common stock are
entitled to vote and are entitled to vote equally with the holders
of the common stock as a single class on an as-converted basis on
any matter presented to our stockholders for their action or
consideration.
Special Voting Rights
. In
addition to any other vote required by law, the Certificate of
Incorporation or the Certificate of Designation, the holders of
shares of Series D preferred stock are entitled to vote as a
separate class on all matters specifically affecting the Series D
preferred stock. Without limiting the foregoing, we
shall not, either directly or indirectly, by amendment, merger,
consolidation or otherwise, do any of the following without first
obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the outstanding
shares of Series D preferred stock, and any such act or transaction
entered into without such approval shall be null and void ab
initio, and of no force or effect:
●
amend or repeal any
provision of, or add any provision to, the Certificate of
Incorporation or the Certificate of Designation if such action
would adversely alter or change the relative rights, preferences,
privileges or powers of the Series D preferred stock;
●
authorize or issue,
or obligate itself to issue, any other equity security, including
any security convertible into or exercisable for any equity
security, having a preference over, or being on a parity with, the
Series D preferred stock with respect to voting (other than the
pari passu voting rights of common stock), dividends, redemption,
conversion or upon liquidation;
●
redeem, purchase or
otherwise acquire (or pay into or set aside for a sinking fund for
such purpose) any share of common stock or any security (other than
Series D preferred stock) convertible into or exchangeable or
exercisable for shares of common stock; provided, however, that
this restriction shall not apply to the repurchase of shares of
common stock at fair market value from employees, officers,
directors, consultants or other persons performing services for us
or any subsidiary pursuant to agreements under which we have the
option to repurchase such shares under existing agreements and/or
upon the occurrence of certain events, such as the termination of
employment or service, or pursuant to a right of first refusal;
or
●
declare, pay or set
aside any dividends on any class of our capital stock (other than
the payment of dividends on the Series D preferred
stock).
Preemptive Rights
No
holders of the Series D preferred stock will, as holders of Series
D preferred stock, have any preemptive rights to purchase or
subscribe for common stock or any other security.
Anti-Takeover
Provisions
The
provisions of Delaware law, the Certificate of Incorporation and
the Bylaws, which are summarized below, may have the effect of
delaying, deferring or discouraging another person from acquiring
control of our company. They are also designed, in part, to
encourage persons seeking to acquire control of us to negotiate
first with our Board of Directors. We believe that the benefits of
increased protection of our potential ability to negotiate with an
unfriendly or unsolicited acquirer outweigh the disadvantages of
discouraging a proposal to acquire us because negotiation of these
proposals could result in an improvement of their
terms.
Amended
and Restated Certificate of Incorporation and Amended and Restated
Bylaws
The
Certificate of Incorporation and the Bylaws include a number of
provisions that could deter hostile takeovers or delay or prevent
changes in control of our Board of Directors or management team,
including the following:
Board of Directors Vacancies
. The
Certificate of Incorporation and the Bylaws authorize only our
Board of Directors to fill vacant directorships, including newly
created seats. In addition, the number of directors constituting
our Board of Directors will be permitted to be set only as provided
in, or in the manner provided by the Bylaws. The Bylaws provide
that the number of directors will be no fewer than two and no more
than seven, as determined by resolution of our Board of Directors
from time to time. These provisions would prevent a stockholder
from increasing the size of our Board of Directors and then gaining
control of our Board of Directors by filling the resulting
vacancies with its own nominees. This will make it more difficult
to change the composition of our Board of Directors and will
promote continuity of management.
Special Meeting of Stockholders
. The
Bylaws provide that special meetings of our stockholders may be
called only by our Board of Directors, the chairman of our Board of
Directors, our Chief Executive Officer, our President in absence of
a Chief Executive Officer, or by our Corporate Secretary upon
request to do so by holders of at least 10% of the voting power of
our outstanding shares.
Advance Notice Requirements for Stockholder
Proposals and Director Nominations.
The Bylaws provide
advance notice procedures for stockholders seeking to bring
business before our annual meeting of stockholders or to nominate
candidates for election as directors at our annual meeting of
stockholders. The Bylaws will also specify certain requirements
regarding the form and content of a stockholder’s notice.
These provisions might preclude our stockholders from bringing
matters before our annual meeting of stockholders or from making
nominations for directors at our annual meeting of stockholders if
the proper procedures are not followed. We expect that these
provisions may also discourage or deter a potential acquirer from
conducting a solicitation of proxies to elect the acquirer’s
own slate of directors or otherwise attempting to obtain control of
the Company.
No Cumulative Voting
. The Delaware
General Corporation Law, or the DGCL, provides that stockholders
are not entitled to cumulate votes in the election of directors
unless a corporation’s certificate of incorporation provides
otherwise. The Certificate of Incorporation does not provide for
cumulative voting.
Directors Removed Only for Cause
. The
Certificate of Incorporation provides that stockholders may remove
directors only for cause.
Amendment of Certificate of Incorporation
Provisions
. Any amendment of the above provisions in the
Certificate of Incorporation require approval by holders of at
least a majority of the voting power of our then outstanding
capital stock.
Issuance of Undesignated Preferred
Stock
. Our Board of Directors will have the authority,
without further action by our stockholders, to issue up to
13,000,000 shares of undesignated preferred stock with rights and
preferences, including voting rights, designated from time to time
by our Board of Directors. The existence of authorized but unissued
shares of preferred stock would enable our Board of Directors to
render more difficult or to discourage an attempt to obtain control
of our company by means of a merger, tender offer, proxy contest or
other means.
Forum Selection Provision
. The
Certificate of Incorporation provides that unless we consent to the
selection of an alternative forum, the Court of Chancery of the
State of Delaware shall be the sole and exclusive forum for any (i)
derivative action or proceeding brought on behalf, to the fullest
extent permitted by law, of our company, (ii) action asserting a
claim of breach of a fiduciary duty owed by any of our directors or
officers to us or our stockholders, creditors or other
constituents, (iii) action asserting a claim against us or any of
our directors or officers arising pursuant to any provision of the
DGCL or the Certificate of Incorporation or the Bylaws, or (iv)
action asserting a claim against us or any of our directors or
officers governed by the internal affairs doctrine, in each such
case subject to the Court of Chancery having personal jurisdiction
over the indispensable parties named as defendants therein. Any
person or entity purchasing or otherwise acquiring any interest in
shares of our capital stock shall be deemed to have notice of and
consented to the forum provisions in the Certificate of
Incorporation.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Computershare
Trust Company, N.A., 250 Royall Street, Canton, Massachusetts
02021. Its telephone number is (800) 962-4284.
Limitations
of Liability and Indemnification
The
Certificate of Incorporation contains provisions that limit the
liability of our directors for monetary damages to the fullest
extent permitted by Delaware law. Consequently, our directors are
not to be personally liable to us or our stockholders for monetary
damages for any breach of fiduciary duties as directors, except
liability for the following:
●
any breach of their
duty of loyalty to us or our stockholders;
●
any act or omission
not in good faith or that involves intentional misconduct or a
knowing violation of law;
●
unlawful payments
of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL; or
●
any transaction
from which they derived an improper personal benefit.
Any
amendment to, or repeal of, these provisions will not eliminate or
reduce the effect of these provisions in respect of any act,
omission or claim that occurred or arose prior to that amendment or
repeal. If the DGCL is amended to provide for further limitations
on the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to the
greatest extent permitted by the DGCL.
The
Bylaws provide that we will indemnify, to the fullest extent
permitted by law, any person who is or was a party or is threatened
to be made a party to any action, suit or proceeding by reason of
the fact that he or she is or was one of our directors or officers
or is or was serving at our request as a director or officer of
another corporation, partnership, joint venture, trust or other
enterprise. The Bylaws provide that we may indemnify to the fullest
extent permitted by law any person who is or was a party or is
threatened to be made a party to any action, suit or proceeding by
reason of the fact that he or she is or was one of our employees or
agents or is or was serving at its request as an employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise. The Bylaws also provide that we must advance expenses
incurred by or on behalf of a director or officer in advance of the
final disposition of any action or proceeding, subject to limited
exceptions.
Further, we have
entered into indemnification agreements with each of our directors
and executive officers that may be broader than the specific
indemnification provisions contained in the DGCL. These
indemnification agreements require us, among other things, to
indemnify our directors and executive officers against liabilities
that may arise by reason of their status or service. These
indemnification agreements also require us to advance all expenses
incurred by the directors and executive officers in investigating
or defending any such action, suit or proceeding. We believe that
these agreements are necessary to attract and retain qualified
individuals to serve as directors and executive
officers.
The
limitation of liability and indemnification provisions included in
the Certificate of Incorporation, the Bylaws and in indemnification
agreements that we have entered into or will enter into with our
directors and executive officers may discourage stockholders from
bringing a lawsuit against our directors and executive officers for
breach of their fiduciary duties. They may also reduce the
likelihood of derivative litigation against our directors and
executive officers, even though an action, if successful, might
benefit us and our stockholders. Further, a stockholder’s
investment may be adversely affected to the extent that we pay the
costs of settlement and damage awards against directors and
executive officers as required by these indemnification provisions.
At present, we are not aware of any pending litigation or
proceeding involving any person who is or was one of our directors,
officers, employees or other agents or is or was serving at our
request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
for which indemnification is sought, and we are not aware of any
threatened litigation that may result in claims for
indemnification.
We have
obtained or will obtain insurance policies under which, subject to
the limitations of the policies, coverage is provided to our
directors and executive officers against loss arising from claims
made by reason of breach of fiduciary duty or other wrongful acts
as a director or executive officer, including claims relating to
public securities matters, and to us with respect to payments that
may be made by us to these directors and executive officers
pursuant to its indemnification obligations or otherwise as a
matter of law.
Certain
of our non-employee directors may, through their relationships with
their employers, be insured and/or indemnified against certain
liabilities incurred in their capacity as members of our Board of
Directors.
Insofar
as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that,
in the opinion of the SEC, such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Listing
Our
common stock is listed on the NYSE American under the symbol
“YUMA.”
UNDERWRITING
Each of the underwriters named below have agreed
to buy, subject to the terms of the underwriting agreement, the
number of shares of common stock listed opposite its name below.
The underwriters are committed to purchase and pay for all of the
securities if any are purchased, other than those shares covered by
the over-allotment option described below. Northland Capital
Markets
a
nd Euro Pacific
Capital
are the managing
underwriters for the offering.
Underwriters
|
|
Northland
Securities, Inc.
|
|
Euro Pacific
Capital, Inc.
|
|
Total
|
|
The underwriters have advised us that they propose
to offer the shares of common stock to the public at the price of
$
per share. The underwriters propose to offer the
shares of common stock to certain dealers at the same price less a
concession not in excess of $
per share. After this offering, these
amounts may be changed by the underwriters.
The underwriters expect to deliver the securities
to purchasers against payment in immediately available funds on or
about
, 2017, subject to customary closing conditions.
The underwriters may reject all or part of any
order.
We
have granted to the underwriters a 30-day option to purchase up to
an additional 1,200,000 shares of common stock from us at the same
price to the public, and with the same underwriting discounts and
commissions, as set forth in the table below. The underwriters may
exercise this option any time during the 30-day period after the
date of this prospectus, but only to cover over-allotments, if any.
To the extent the underwriters exercise the option, the
underwriters will become obligated, subject to certain conditions,
to purchase the securities for which they exercise the
option.
The
underwriting discount is equal to the public offering price per
share of common stock, less the amount paid by the underwriters to
us per share. The following table shows the per share and total
underwriting discount and expenses to be paid by us to the
underwriters in this offering, assuming both no exercise and full
exercise of the over-allotment option.
|
|
Total with
no
Over-Allotment
|
Total
with
Over-Allotment
|
Underwriting
discounts and commissions to be paid by us
|
|
|
|
We
estimate expenses payable by us in connection with this offering,
other than the underwriting discounts referred to above, will be
approximately $400,000. This estimate includes $180,000 of fees and
expenses of the underwriters.
We
also have agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act,
or to contribute to payments that the underwriters may be required
to make in respect of those liabilities.
We
also have agreed that, at any time prior to or within 12 months of
the closing of this offering, if we undertake any public offering
or public placement of securities, we will offer Northland Capital
Markets and Euro Pacific Capital the right to serve, at a minimum,
as co-managers in such offering. If Northland Capital Markets
and/or Euro Pacific Capital agree to act in such capacity, we will
enter into an appropriate form of separate agreement with Northland
Capital Markets and/or Euro Pacific Capital containing customary
terms and conditions to be mutually agreed upon. This right to
serve is neither an expressed nor an implied commitment by
Northland Capital Markets and/or Euro Pacific Capital to act in any
capacity in any such transaction or to purchase any securities in
connection therewith, which commitment will only be set forth in a
separate agreement.
Except
as disclosed in this prospectus, the underwriters have not
received, and will not receive, from us any other item of
compensation or expense in connection with this offering considered
by FINRA to be underwriting compensation under its rule of fair
price. The underwriting discount was determined through an
arms’ length negotiation between us and the
underwriters.
No Sales of Similar Securities
We, and each of our directors and officers have
agreed or are otherwise contractually restricted for a period of
90
days after the date of this
prospectus, without the prior written consent of Northland Capital
Markets, not to directly or indirectly:
●
issue
(in the case of us), offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of any shares of our common stock or
other capital stock or any securities convertible into or
exercisable or exchangeable for our common stock or other capital
stock;
●
in
the case of us, file or cause the filing of any registration
statement under the Securities Act with respect to any shares of
our common stock or other capital stock or any securities
convertible into or exercisable or exchangeable for our common
stock or other capital stock, other than registration statements on
Form S-8 filed with the SEC after the closing date of this
offering; or
●
enter
into any swap or other agreement, arrangement, hedge or transaction
that transfers to another, in whole or in part, directly or
indirectly, any of the economic consequences of ownership of our
common stock or other capital stock or any securities convertible
into or exercisable or exchangeable for our common stock or other
capital stock,
whether
any transaction described in any of the foregoing bullet points is
to be settled by delivery of our common stock or other capital
stock, other securities, in cash or otherwise, or publicly announce
an intention to do any of the foregoing. The restrictions in
these agreements may be waived by the underwriters in their sole
discretion.
There
are no existing agreements between the underwriters and any person
who will execute a lock-up agreement in connection with this
offering providing consent to the sale of shares prior to the
expiration of the lock-up period. The lock up does not apply to the
issuance of shares upon the exercise of rights to acquire shares of
common stock pursuant to any existing stock option or stock
appreciation right, or the conversion of notes issued and
outstanding.
Price Stabilization, Short Positions and Penalty Bids
The
underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions, and penalty bids or
purchasers for the purpose of pegging, fixing or maintaining the
price of the common stock, in accordance with Regulation M under
the Exchange Act:
●
Over-allotment involves sales by the underwriters of securities in
excess of the number of securities the underwriters are obligated
to purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of securities
over-allotted by the underwriters are not greater than the number
of securities that they may purchase in the over-allotment option.
In a naked short position, the number of securities involved is
greater than the number of securities in the over-allotment option.
The underwriters may close out any short position by either
exercising their over-allotment option (which they anticipate will
occur if our prices on the exchange are greater than the price per
security in this offering) and/or purchasing securities in the open
market (which they anticipates will occur if our prices on the
exchange are less than the price per security in this
offering).
●
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified
maximum.
●
Syndicate covering transactions involve purchases of securities in
the open market after the distribution has been completed in order
to cover syndicate short positions. In determining the source of
securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for
purchase in the open market as compared to the price at which they
may purchase securities through the over-allotment option. If the
underwriters sell more securities than could be covered by the
over-allotment option, a naked short position, the position can
only be closed out by buying securities in the open market. A naked
short position is more likely to be created if the underwriters are
concerned that there could be downward pressure on the price of the
securities in the open market after pricing that could adversely
affect investors who purchase in the offering.
●
Penalty bids permit the underwriters to reclaim a selling
concession from a syndicate member when the securities originally
sold by the syndicate member is purchased in a stabilizing or
syndicate covering transaction to cover syndicate short
positions.
These
stabilizing transactions, syndicate covering transactions and
penalty bids may have the effect of raising or maintaining the
market price of our common stock, or preventing or retarding a
decline in the market price of those securities. As a result, the
price of the common stock may be higher than the price that might
otherwise exist in the open market. These transactions may be
effected on an exchange or in the over-the-counter market or
otherwise and, if commenced, may be discontinued at any
time.
Neither
we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In
addition, neither we nor the underwriters make any representation
that the underwriters will engage in these stabilizing transactions
or that any transaction, once commenced, will not be discontinued
without notice.
In
connection with this offering, the underwriters and selling group
members may also engage in passive market making transactions in
our securities. Passive market making consists of displaying bids
on a national securities exchange limited by the prices of
independent market makers and effecting purchases limited by those
prices in response to order flow. Rule 103 of Regulation M
promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of our
securities at a level above that which might otherwise prevail in
the open market and, if commenced, may be discontinued at any
time.
Electronic Offer, Sale and Distribution of Shares
The
underwriters may facilitate the marketing of this offering online
directly or through one of their affiliates. In those cases,
prospective investors may view offering terms and a prospectus
online and place orders online or through their financial advisors.
Such websites and the information contained on such websites, or
connected to such sites, are not incorporated into and are not a
part of this prospectus.
In
connection with this offering, the underwriters or syndicate
members may distribute prospectuses electronically.
Other Relationships
The
underwriters and their affiliates are full service financial
institutions engaged in various activities, which may include
securities trading, commercial and investment banking, financial
advisory, investment management, investment research, principal
investment, hedging, financing and brokerage activities. The
underwriters have in the past, and may in the future, engage in
investment banking and other commercial dealings in the ordinary
course of business with us or our affiliates. The underwriters have
in the past, and may in the future, receive customary fees and
commissions for these transactions.
In
the ordinary course of their various business activities, the
underwriters and their affiliates may make or hold a broad array of
investments and actively trade debt and equity securities (or
related derivative securities) and financial instruments (including
bank loans) for their own account and for the accounts of their
customers, and such investment and securities activities may
involve securities and/or instruments of the issuer. The
underwriters and their affiliates may also make investment
recommendations and/or publish or express independent research
views in respect of such securities or instruments and may at any
time hold, or recommend to clients that they acquire, long and/or
short positions in such securities and instruments.
Listing
Our
common stock is listed on the NYSE American under the symbol
“YUMA.”
Selling Restrictions
Canada.
The offering of the common stock in Canada
is being made on a private placement basis in reliance on
exemptions from the prospectus requirements under the securities
laws of each applicable Canadian province and territory where the
common stock may be offered and sold, and therein may only be made
with investors that are purchasing as principal and that qualify as
both an “accredited investor” as such term is defined
in National Instrument 45-106 - Prospectus Exemptions, and as a
“permitted client” as such term is defined in National
Instrument 31-103 - Registration Requirements, Exemptions and
Ongoing Registrant Obligations. Any offer and sale of the common
stock in any province or territory of Canada may only be made
through a dealer that is properly registered under the securities
legislation of the applicable province or territory wherein the
common stock is offered and/or sold or, alternatively, by a dealer
that qualifies under and is relying upon an exemption from the
registration requirements therein.
Any
resale of the common stock by an investor resident in Canada must
be made in accordance with applicable Canadian securities laws,
which may require resales to be made in accordance with prospectus
and registration requirements, statutory exemptions from the
prospectus and registration requirements or under a discretionary
exemption from the prospectus and registration requirements granted
by the applicable Canadian securities regulatory authority. These
resale restrictions may under certain circumstances apply to
resales of the common stock outside of Canada.
European Economic
Area.
In relation to each
Member State of the European Economic Area which has implemented
the Prospectus Directive, each, a Relevant Member State, no offer
to the public of any of our shares of common stock will be made,
other than under the following exemptions:
●
to
any legal entity that is a qualified investor as defined in the
Prospectus Directive;
●
to
fewer than 100 or, if the Relevant Member State has implemented the
relevant provision of the 2010 PD Amending Directive, 150, natural
or legal persons (other than qualified investors as defined in the
Prospectus Directive), as permitted under the Prospectus Directive,
subject to obtaining the prior consent of the issuer for any such
offer; or
●
in
any other circumstances falling within Article 3(2) of the
Prospectus Directive, provided that no such offer of shares of our
common stock will result in a requirement for the publication by us
or any underwriter of a prospectus pursuant to Article 3 of the
Prospectus Directive or any supplementary prospectus pursuant to
Article 16 of the Prospectus Directive.
For
the purposes of this provision, the expression an “offer to
the public” in relation to any shares of our common stock in
any Relevant Member State means the communication in any form and
by any means of sufficient information on the terms of the offer so
as to enable an investor to decide to purchase or subscribe for any
shares of common stock, as the same may be varied in that Member
State by any measure implementing the Prospectus Directive in that
Member State. The expression “Prospectus Directive”
means Directive 2003/71/EC (and amendments thereto, including the
2010 PD Amending Directive, to the extent implemented in the
Relevant Member State), and includes any relevant implementing
measure in the Relevant Member State, and the expression
“2010 PD Amending Directive” means Directive
2010/73/EU.
United
Kingdom.
This document is
not an approved prospectus for the purposes of section 85 of the UK
Financial Services and Markets Act 2000, as amended, or FSMA, and a
copy of it has not been, and will not be, delivered to or approved
by the UK Listing Authority or approved by any other authority
which could be a competent authority for the purposes of the
Prospectus Directive.
This
prospectus is only being distributed to, and is only directed at,
persons in the United Kingdom that are “qualified
investors” within the meaning of section 86(7) of FSMA that
are also (i) investment professionals falling within Article 19(5)
of the UK Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005, as amended, or the Order, and/or (ii) high
net worth companies, unincorporated associations or partnerships
and the trustees of high value trusts falling within Article
49(2)(a) to (d) of the Order and other persons to whom it may
lawfully be communicated (each such person being referred to as a
“relevant person”).
Any
person in the United Kingdom that is not a relevant person should
not act or rely on these documents or any of their contents. Any
investment, investment activity or controlled activity to which
this document relates is available in the United Kingdom only to
relevant persons and will be engaged in only with such persons.
Accordingly, this document has not been approved by an authorized
person, as would otherwise be required by Section 21 of
FSMA.
Any
purchaser of shares of common stock resident in the United Kingdom
will be deemed to have represented to us and the underwriter, and
acknowledge that each of us and the underwriter are relying on such
representation, that it, or the ultimate purchaser for which it is
acting as agent, is a relevant person.
LEGAL
MATTERS
The
validity of our common stock offered by this prospectus will be
passed upon for us by Jones & Keller, P.C., Denver,
Colorado.
Certain
matters will be passed on for the underwriters by Faegre Baker
Daniels LLP, Minneapolis, Minnesota.
EXPERTS
The
audited financial statements of Yuma Energy, Inc. as of
December 31, 2016 and for the year then ended, incorporated by
reference in this prospectus and elsewhere in this registration
statement, have been so incorporated by reference in reliance on
the report of Grant Thornton LLP, independent registered public
accountants, upon the authority of said firm as experts in auditing
and accounting.
The
financial statements for the year ended December 31, 2015
incorporated in this Prospectus by reference to the Annual Report
on Form 10-K for the year ended December 31, 2016 have been so
incorporated in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on the
authority of said firm as experts in auditing and
accounting.
Information about
the estimated oil and gas proved reserves and the future net cash
flows of Yuma Energy, Inc. as of December 31, 2016 and included in
this prospectus was prepared by Netherland, Sewell &
Associates, Inc., an independent petroleum engineering and
consulting firm, and is included herein in reliance upon their
authority as experts in petroleum engineering.
WHERE
YOU CAN FIND MORE INFORMATION
We are
required to file annual and quarterly reports and other information
with the SEC. You may read and copy any materials we file with the
SEC at the SEC’s Public Reference Room at 100 F Street,
N.E., Washington, D.C., 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC
maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC. The address of the site is
http://www.sec.gov.
We have
filed with the SEC a registration statement on Form S-1
(including the exhibits, schedules and amendments thereto) under
the Securities Act, with respect to the shares of our common stock
offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the
exhibits and schedules thereto. For further information with
respect to the common stock offered hereby, we refer you to the
registration statement and the exhibits and schedules filed
therewith. Statements contained in this prospectus as to the
contents of any contract, agreement or any other document are
summaries of the material terms of such contract, agreement or
other document and are not necessarily complete. With respect to
each of these contracts, agreements or other documents filed as an
exhibit to the registration statement, reference is made to the
exhibits for a more complete description of the matter
involved.
INCORPORATION
BY REFERENCE
We
incorporate by reference information from other documents that we
file with the SEC into this prospectus, which means that we
disclose important information to you by referring you to those
documents. The information incorporated by reference is deemed to
be part of this prospectus except for any information that is
superseded by information included directly in this prospectus, and
the information that we file later with the SEC will automatically
supersede this information. Any statement contained in this
prospectus or a document incorporated by reference in this
prospectus will be deemed to be modified or superseded for purposes
of this prospectus to the extent that a statement contained in this
prospectus or in any other subsequently filed document that is
incorporated by reference in this prospectus modifies or superseded
the statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part
of this prospectus. You should not assume that the information in
this prospectus is current as of the date other than the date on
the cover page of this prospectus.
The
following documents previously filed by us with the SEC are
incorporated by reference in this prospectus:
●
Our Annual Report
on Form 10-K for the year ended December 31, 2016 filed with the
SEC on April 12, 2017;
●
Our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017 filed with
the SEC on May 11, 2017;
●
Our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2017 filed with
the SEC on August 14, 2017;
●
Our Current Reports
on Form 8-K, as filed with the SEC on March 14, 2017, March 27,
2017, April 26, 2017, May 1, 2017, May 23, 2017, June 19, 2017,
July 11, 2017 and September 12, 2017, and on Form 8-K/A, as filed
with the SEC on January 9, 2017 and January 18, 2017;
and
●
The description of
our common stock contained in our Registration Statement on Form
8-A, as filed with the SEC on October 25, 2016, including any
amendment to that form that we may file in the future for the
purpose of updating the description of our common
stock.
We are
also incorporating by reference into this prospectus any additional
documents that we may file with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act on or after the effective
date of the registration statement and prior to the termination of
this offering.
We will
provide to each person, including any beneficial holder, to whom a
prospectus is delivered, at no cost, upon written or oral request,
a copy of any or all of the information that has been incorporated
by reference in the prospectus but not delivered with the
prospectus. You should direct any requests for documents to the
following address or telephone number:
Yuma
Energy, Inc.
Attention: James J.
Jacobs
1177
West Loop South, Suite 1825
Houston, Texas
77027
(713)
968-7000
You may
access the documents incorporated by reference on our website at
www.yumaenergyinc.com, although our website shall not be deemed to
be a part of this prospectus.
GLOSSARY OF SELECTED OIL AND
NATURAL GAS TERMS
The
following are abbreviations and definitions of terms commonly used
in the oil and natural gas industry and within this
prospectus:
“
3-D
”
means
three-dimensional.
“
Basin
”
means
a large depression on the
earth
’
s surface in which
sediments accumulate.
“
Bbl
”
or
“
Bbls
”
means barrel or barrels of oil or
natural gas liquids.
“
Bbl/d
”
means Bbl per day.
“
Boe
”
means barrel of oil equivalent,
determined by using the ratio of one barrel of oil or NGLs to six
Mcf of gas.
“
Boe/d
”
means Boe per day.
“
Btu
”
means a British thermal unit, a
measure of heating value.
“
Development well
”
means a well drilled within the
proved area of an oil or natural gas reservoir to the depth of a
stratigraphic horizon known to be productive.
“
Dry
hole
”
means a well
found to be incapable of producing hydrocarbons in sufficient
quantities such that proceeds from the sale of such production
would exceed production expenses and taxes.
“
Exploratory well
”
means a well drilled to find a new
field or to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir.
“
GAAP
” (generally accepted accounting principles)
is a collection of commonly-followed accounting rules and standards
for financial reporting.
“
Gross acres or gross wells
”
mean the total acres or wells, as
the case may be, in which we have working interest.
“
Horizontal drilling
”
means a drilling technique used in
certain formations where a well is drilled vertically to a certain
depth and then drilled at a right angle within a specified
interval.
“
HH
”
means Henry Hub natural gas spot
price.
“
HLS
”
means Heavy Louisiana Sweet crude
spot price.
“
LIBOR
”
means London Interbank Offered
Rate.
“
LLS
”
means Argus Light Louisiana Sweet
crude spot price.
“
LNG
”
means liquefied natural
gas.
“
MBbls
”
means thousand barrels of oil or
natural gas liquids.
“
MBoe
”
means thousand Boe.
“
Mcf
”
means thousand cubic feet of
natural gas.
“
Mcf/d
”
means Mcf per day.
“
MMBtu
”
means million Btu.
“
MMBtu/d
”
means MMBtu per day.
“
MMcf
”
means million cubic feet of natural
gas.
“
MMcf/d
”
means MMcf per day.
“
Net
acres or net wells
”
means gross acres or wells, as the
case may be, multiplied by our working interest ownership
percentage.
”
NGL
”
or
“
NGLs
”
means natural gas liquids, which
are expressed in barrels.
“
NYMEX
”
means New York Mercantile
Exchange.
“
Oil
”
includes crude oil and
condensate.
“
Productive well
”
means a well that produces
commercial quantities of hydrocarbons, exclusive of its capacity to
produce at a reasonable rate of return.
“
Proved area
”
means the part of a property to
which proved reserves have been specifically
attributed.
“
Proved developed reserves
”
means reserves that can be expected
to be recovered through existing wells with existing equipment and
operating methods.
“
Proved oil and natural gas
reserves
”
means
the estimated quantities of oil, natural gas and NGLs that
geological and engineering data demonstrate with reasonable
certainty to be commercially recoverable in future years from known
reservoirs under existing economic and operating
conditions.
“
Proved undeveloped reserves
”
means proved reserves that are
expected to be recovered from new wells on undrilled acreage or
from existing wells where a relatively major expenditure is
required for recompletion.
“
Realized price
”
means the cash market price less
all expected quality, transportation and demand
adjustments.
“
Recompletion
”
means the completion for production
of an existing wellbore in another formation from that which the
well has been previously completed.
“
Reserve
”
means that part of a mineral
deposit which could be economically and legally extracted or
produced at the time of the reserve determination.
“
Reservoir
”
means a porous and permeable
underground formation containing a natural accumulation of
producible oil and/or natural gas that is confined by impermeable
rock or water barriers and is individual and separate from other
reservoirs.
“
Resources
”
means quantities of oil and natural
gas estimated to exist in naturally occurring accumulations. A
portion of the resources may be estimated to be recoverable and
another portion may be considered unrecoverable. Resources include
both discovered and undiscovered accumulations.
“
Spacing
”
means the distance between wells
producing from the same reservoir. Spacing is often expressed in
terms of acres (e.g.,
75
acre well-spacing) and is often established by regulatory
agencies.
“
Standardized measure
”
means the present value of
estimated future after tax net revenue to be generated from the
production of proved reserves, determined in accordance with the
rules and regulations of the SEC (using prices and costs in effect
as of the date of estimation), less future development, production
and income tax expenses, and discounted at 10% per annum to reflect
the timing of future net revenue. Standardized measure does not
give effect to derivative transactions.
“
Trend
”
means a geographic area with
hydrocarbon potential.
“
Undeveloped acreage
”
means lease acreage on which wells
have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and natural gas
regardless of whether such acreage contains proved
reserves.
“
Unproved properties
”
means properties with no proved
reserves.
“
U.S.
”
means the United States of
America.
”
Wellbore
”
means the hole drilled by the bit
that is equipped for oil or natural gas production on a completed
well. Also called well or borehole.
“
Working interest
”
or “
WI
” 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 natural gas on the leased
acreage and requires the owner to pay a share of the costs of
drilling and production operations.
“
Workover
”
means operations on a producing
well to restore or increase production.
“
WTI
”
means the West Texas Intermediate
spot price.
YUMA
ENERGY, INC.
8,000,000
Shares of Common Stock
|
___________________
|
|
|
|
PROSPECTUS
|
|
|
____________________
|
|
Northland Capital
Markets
Euro Pacific Capital
|
|
, 2017
|
|
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
following table sets forth an itemized statement of the amounts of
all expenses (excluding underwriting discounts and commissions)
payable by us in connection with the registration of the common
stock offered hereby. With the exception of the SEC registration
fee and the FINRA filing fee, the amounts set forth below are
estimates.
SEC registration
fee
|
$
1,291
|
FINRA filing
fee
|
$
2,225
|
Accountants’
fees and expenses
|
$
125,000
|
Legal fees and
expenses
|
$
250,000
|
Transfer agent and
registrar fees and expenses
|
$
5,000
|
Reserve report
engineering fees
|
$
5,000
|
Printing and
engraving expenses
|
$
5,000
|
Miscellaneous
|
$
6,484
|
Total
|
$
400,000
|
Item
14. Indemnification of Directors and Officers.
Section
145 of the Delaware General Corporation Law, or the DGCL,
authorizes a corporation’s board of directors to grant, and
authorizes a court to award, indemnity to officers, directors and
other corporate agents.
Our
Certificate of Incorporation, as amended and restated, contains
provisions that limit the liability of its directors for monetary
damages to the fullest extent permitted by Delaware law.
Consequently, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary
duties as directors, except liability for the
following:
●
any breach of their
duty of loyalty to us or our stockholders;
●
any act or omission
not in good faith or that involves intentional misconduct or a
knowing violation of law;
●
unlawful payments
of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the DGCL; or
●
any transaction
from which they derived an improper personal benefit.
Any
amendment to, or repeal of, these provisions will not eliminate or
reduce the effect of these provisions in respect of any act,
omission or claim that occurred or arose prior to that amendment or
repeal. If the DGCL is amended to provide for further limitations
on the personal liability of directors of corporations, then the
personal liability of our directors will be further limited to the
greatest extent permitted by the DGCL.
In
addition, our Bylaws, as amended and restated, provide that we will
indemnify, to the fullest extent permitted by law, any person who
is or was a party or is threatened to be made a party to any
action, suit or proceeding by reason of the fact that he or she is
or was one of our directors or officers or is or was serving at our
request as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise. The Bylaws
provide that we may indemnify to the fullest extent permitted by
law any person who is or was a party or is threatened to be made a
party to any action, suit or proceeding by reason of the fact that
he or she is or was one of our employees or agents or is or was
serving at its request as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise.
The Bylaws also provide that we must advance expenses incurred by
or on behalf of a director or officer in advance of the final
disposition of any action or proceeding, subject to limited
exceptions.
Further, we have
entered into indemnification agreements with each of our directors
and executive officers that may be broader than the specific
indemnification provisions contained in the DGCL. These
indemnification agreements require us, among other things, to
indemnify our directors and executive officers against liabilities
that may arise by reason of their status or service. These
indemnification agreements also require us to advance all expenses
incurred by the directors and executive officers in investigating
or defending any such action, suit or proceeding. We believe that
these agreements are necessary to attract and retain qualified
individuals to serve as directors and executive
officers.
The
limitation of liability and indemnification provisions that are
expected to be included in our Certificate of Incorporation, our
Bylaws and in indemnification agreements that we have entered into
with our directors and executive officers may discourage
stockholders from bringing a lawsuit against our directors and
executive officers for breach of their fiduciary duties. They may
also reduce the likelihood of derivative litigation against our
directors and executive officers, even though an action, if
successful, might benefit us and other stockholders. Further, a
stockholder’s investment may be adversely affected to the
extent that we pay the costs of settlement and damage awards
against directors and executive officers as required by these
indemnification provisions. At present, we are not aware of any
pending litigation or proceeding involving any person who is or was
one of our directors, officers, employees or other agents or is or
was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or
other enterprise, for which indemnification is sought, and we are
not aware of any threatened litigation that may result in claims
for indemnification.
We have
obtained insurance policies under which, subject to the limitations
of the policies, coverage is provided to our directors and
executive officers against loss arising from claims made by reason
of breach of fiduciary duty or other wrongful acts as a director or
executive officer, including claims relating to public securities
matters, and to us with respect to payments that may be made by us
to these directors and executive officers pursuant to its
indemnification obligations or otherwise as a matter of
law.
Certain
of our non-employee directors may, through their relationships with
their employers, be insured and/or indemnified against certain
liabilities incurred in their capacity as members of our Board of
Directors.
Item 15.
Recent Sales of Unregistered Securities.
None.
Item 16.
Exhibits and Financial Statement Schedules.
See the
Exhibit Index immediately following the signature
page hereto, which is incorporated by reference as if fully
set forth herein.
Item 17.
Undertakings.
The
undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan’s
annual report pursuant to section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The
undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the
prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or
Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3
of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is
sent or given, the latest quarterly report that is specifically
incorporated by reference in the prospectus to provide such interim
financial information.
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication
of such issue.
The
undersigned Registrant hereby undertakes that it will:
(1) For
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(2) For
the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
SIGNATURES
Pursuant to the
requirements of the Securities Act of 1933, the registrant has duly
caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on September 13, 2017.
|
YUMA
ENERGY, INC.
|
|
|
|
|
|
|
By:
|
/s/
Sam L.
Banks
|
|
|
|
Sam L.
Banks
|
|
|
|
Director and Chief
Executive Officer
|
|
Each
person whose signature appears below appoints Sam L. Banks and
James J. Jacobs, and each of them, any of whom may act without the
joinder of the other, as his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to
file the same, with all exhibits thereto, and all other documents
in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and
purposes as he or she might or would do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of
them or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the
capacities indicated on September 13, 2017.
Signature
|
|
Title
|
|
|
|
/s/ Sam
L. Banks
|
|
Director and Chief
Executive Officer (Principal Executive Officer)
|
Sam L.
Banks
|
|
|
|
|
/s/
James J. Jacobs
|
|
Executive Vice
President, Chief Financial Officer, Treasurer and Corporate
Secretary (Principal Financial Officer and Principal Accounting
Officer)
|
James
J. Jacobs
|
|
|
|
|
/s/
James W. Christmas
|
|
Director
|
James
W. Christmas
|
|
|
|
|
/s/
Frank A. Lodzinski
|
|
Director
|
Frank
A. Lodzinski
|
|
|
|
|
/s/
Neeraj Mital
|
|
Director
|
Neeraj
Mital
|
|
|
|
|
/s/
Richard K. Stoneburner
|
|
Director
|
Richard
K. Stoneburner
|
|
|
|
|
/s/ J.
Christopher Teets
|
|
Director
|
J.
Christopher Teets
|
|
|
|
|
EXHIBIT
INDEX
|
|
|
|
Incorporated by
Reference
|
|
|
Exhibit
No.
|
|
Description
|
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Form
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SEC File
No.
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Exhibit
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Filing
Date
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Filed
Herewith
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1.1*
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Form of
Underwriting Agreement.
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Agreement and Plan
of Merger and Reorganization dated as of February 10, 2016, by and
among Yuma Energy, Inc., Yuma Delaware Merger Subsidiary, Inc.,
Yuma Merger Subsidiary, Inc. and Davis Petroleum Acquisition
Corp.
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8-K
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001-32989
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2.1
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February 16,
2016
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First Amendment to
the Agreement and Plan of Merger and Reorganization dated as of
September 2, 2016, by and among Yuma Energy, Inc., Yuma Delaware
Merger Subsidiary, Inc., Yuma Merger Subsidiary, Inc. and Davis
Petroleum Acquisition Corp.
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8-K
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001-32989
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2.1
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September 6,
2016
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Amended and
Restated Certificate of Incorporation dated October 26,
2016.
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8-K
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001-37932
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3.2
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November 1,
2016
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Certificate of
Designation of the Series D Convertible Preferred Stock of Yuma
Energy, Inc. dated October 26, 2016.
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8-K
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001-37932
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3.3
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November 1,
2016
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Amended and
Restated Bylaws dated October 26, 2016.
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8-K
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001-37932
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3.4
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November 1,
2016
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Specimen Stock
Certificate.
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X
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Opinion of Jones
& Keller, P.C. as to the legality of the securities being
registered.
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X
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Credit Agreement
dated as of October 26, 2016, among Yuma Energy, Inc., Yuma
Exploration and Production Company, Inc., Pyramid Oil LLC, Davis
Petroleum Corp., Société Générale, SG Americas
Securities, LLC and the lenders party thereto.
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8-K
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001-37932
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10.1
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November 1,
2016
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First Amendment to
Credit Agreement and Borrowing Base Redetermination dated May 19,
2017 among Yuma Energy, Inc., Yuma Exploration and Production
Company, Inc., Pyramid Oil LLC, Davis Petroleum Corp.,
Société Générale, as Administrative Agent, and
each of the lenders and guarantors party thereto.
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8-K
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001-37932
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10.1
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May 23,
2017
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Amended and
Restated Employment Agreement dated April 20, 2017, between Yuma
Energy, Inc. and Sam L. Banks.
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8-K
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001-37932
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10.1
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April 26,
2017
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Amended and
Restated Employment Agreement dated April 20, 2017, between Yuma
Energy, Inc. and Paul D. McKinney.
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8-K
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001-37932
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10.2
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April 26,
2017
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Amended and
Restated Employment Agreement dated April 20, 2017, between Yuma
Energy, Inc. and James J. Jacobs.
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8-K
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001-37932
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10.3
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April 26,
2017
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Form of
Indemnification Agreement.
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8-K
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001-37932
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10.2
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November 1,
2016
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Registration Rights
Agreement dated October 26, 2016.
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8-K
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001-37932
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10.3
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November 1,
2016
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Form of Lock-up
Agreement.
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8-K
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001-37932
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10.4
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November 1,
2016
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2006 Equity
Incentive Plan of Yuma Energy, Inc.
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S-8
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333-175706
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4.3
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July 21,
2011
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Yuma Energy, Inc.
2011 Stock Option Plan.
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8-K
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001-32989
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10.5
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September 16,
2014
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Yuma Energy, Inc.
2014 Long-Term Incentive Plan.
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8-K
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001-32989
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10.6
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September 16,
2014
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Amendment to the
Yuma Energy, Inc. 2014 Long-Term Incentive Plan.
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8-K
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001-37932
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10.8(a)
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November 1,
2016
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Form of Restricted
Stock Award Agreement (Employees).
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8-K
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001-37932
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10.1
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March 27,
2017
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Form of Restricted
Stock Award Agreement (Directors).
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8-K
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001-37932
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10.2
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March 27,
2017
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Form of Stock
Appreciation Right Agreement.
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8-K
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001-37932
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10.4
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April 26,
2017
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Form of Stock
Option Agreement.
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8-K
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001-37932
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10.5
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April 26,
2017
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Letter from
PricewaterhouseCoopers LLP dated November 3, 2016.
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8-K/A
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001-37932
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16.1
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November 3,
2016
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Letter from Grant
Thornton LLC dated July 10, 2017.
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8-K
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001-37932
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16.1
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July 11,
2017
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List of
Subsidiaries.
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10-K
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001-37932
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21.1
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April 12,
2017
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Consent of Grant
Thornton LLP.
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X
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Consent of
PricewaterhouseCoopers LLP.
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X
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Consent of
Netherland, Sewell & Associates, Inc.
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X
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23.4
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Consent of Jones
& Keller, P.C. (contained in Exhibit 5.1)
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X
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24.1
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Power of Attorney
(included on the signature page of this Registration
Statement)
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X
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Report of
Netherland, Sewell & Associates, Inc.
|
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10-K
|
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001-37932
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99.1
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April 12,
2017
|
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† Indicates management contract or compensatory plan or
arrangement.
*To be filed by amendment or pursuant to a report to be filed
pursuant to Section 13 or 15(d) of the Exchange Act, if applicable,
and incorporated herein by reference.
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