OKMN Okmin Resources Inc (QB)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Special Note Regarding Forward-Looking Information

The following discussion and analysis of the results of operations and financial condition of Okmin Resources, Inc., and its subsidiaries (“Okmin” or the “Company”) as of March 31, 2023 should be read in conjunction with our unaudited financial statements and the notes to those unaudited financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to Okmin. This Quarterly Report contains forward-looking statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained in this Quarterly Report may not occur. Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,” “will,” “expect,” “believe,” “anticipate,” “project,” “plan,” “intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence the accuracy of the statements and the projections upon which the statements are based.

Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements. Except as required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.

U.S. Dollars are denoted herein by “USD,” “$” and “dollars”.

Overview

Okmin Resources, Inc. was organized near the end of 2020 to engage in the business of the acquisition, exploration and development of mineral rights and natural resource assets.

As a development stage company, Okmin has been focused on the acquisition and development of domestic oil and gas fields, investing in lower profile rework and recompletion opportunities with lower entry costs. The company's initial projects are located in Oklahoma and Kansas. 

The Company has two wholly owned subsidiaries that conduct oil and gas activities, Okmin Operations, LLC incorporated on May 25, 2021 in the State of Kansas and Okmin Energy LLC, incorporated on November 21, 2021 in the State of Oklahoma.

The Company has an interest in four separate projects:

The Company has not conducted any reserve evaluations or calculations, and there are currently no proven reserves on any of the Company’s properties.

Blackrock Joint Venture

Okmin entered into a Joint Venture Agreement and Operating Agreement in February 2021, committing $100,000 in the initial phase to acquire working interests in ten oil and gas leases located in Okmulgee and Muskogee Counties in Oklahoma. Under the Operating Agreement, Okmin has a 50% Working Interest in 710 acres and a 25% interest in 80 acres. The Company’s Joint Venture partner, Company added an additional five oil and gas leases across 739 acres to its joint venture with Blackrock, thereby expanding the overall project to fifteen leases covering over 1,500 acres.

Recent focus was directed to the Shanks lease, one of the newly acquired leases. Initially the operator was able to activate one of the four wells on the lease (Well 13C) and ran a 24 hour gas test on the well. The test results showed 198.5 MCFD potential. Upon being put on production, the 13C well flowed 140 MCFD through the meter for a short time from the lower Dutcher zone at 1683 to 1687 feet. However, due to blockages downhole, the flow rate subsequently dropped. Blockages and corrosion are typical since the well has been shut in for a number of years. The well was subsequently pulled and the operator attempted to recomplete the well utilizing a stimulation technique, though encountered continued issues with the well and was unable to resume immediate production. In April 2023, the lower zone was acidized to clean up the gypsum blockages, and an additional zone was perforated in the middle Dutcher at a depth of around 1672 feet which shows oil potential. The well resumed production at between 62 to 104 MCFD gas, which subsequently dropped to approximately 30 MCFD. It is also showing a small amount of oil. We are considering installing a small gas compressor on this well in an attempt to stabilize and increase gas production which may be fluctuating due to pipeline differential pressure changes. The compressor could also help enhance oil production by reducing back pressure in the wellbore.

On the Shanks 12B well, we perforated a new Dutcher zone at a depth of 1608' to 1614' for natural gas production. Due to service delays and wet weather conditions, we have been unable to acidize this new zone but intend to complete this work as soon as practicable.

Two additional wells at Shanks, the Shanks 12A and Shanks Watson 3, initially produced a small amount of oil, but eventually changed to all water. Three different log analysts have examined the well logs and have concluded that the Shanks 12A has one possible methane coal bed gas zone at a depth of around 700 feet that could be pursued when natural gas prices improve. The Watson 3 well shows one very shallow methane coal bed gas zone at a depth of around 400 feet, but the potential of this zone may be too marginal to justify additional expenditures. 

In the most recent fiscal year ended June 30, 2022, our share of the overall joint venture recorded revenues of approximately $51,000 from oil and gas sales, predominantly oil. In the nine months ended March 31, 2023, our share of the joint venture recorded revenues of $33,924 from oil sales and $3,988 from the sale of natural gas.

Vitt

The Company through its wholly owned Kansas subsidiary, Okmin Operations, LLC, entered into an agreement in July 2021 to acquire a 72.5% Net Revenue Interest in the Vitt Lease located in Neosho County, Kansas. Okmin Operations, LLC acquired the lease with a cash payment of $25,000 together with a commitment to make additional capital and operating expenditures to rework the wells on the lease. The lease covers 160 acres and after initial reworking now includes nine oil wells, two idle wells and two active water injection wells, plus another two injection wells that require further assessment. At present, five of the nine oil wells are pumping. We are planning to pull some wells and perform additional work in an effort to improve the rate of production. In the nine months ended March 31, 2023, commitments and expenditures at the Vitt totaled $11,500 with revenue of $5,209 being derived during this period.

The Vitt lease has now become a small nominal producing lease, though not on a consistent basis as we continue to encounter various maintenance issues that have to be addressed. The Company continues to explore a number of possibilities for the lease, which may include involving a partner in its further development.

West Sheppard Pool

In November 2021, the Company entered into a definitive joint venture and operating agreement with Blackrock to acquire a 50% joint venture interest in the West Sheppard Pool Field, a series of leases totaling 1,930 acres located in Okmulgee County, Oklahoma with an upfront cost of $150,000 plus some ancillary costs and an anticipated initial rework budgeted at $100,000. As of the last fiscal year end on June 30, 2022, approximately $21,000 of additional expenditures had been made on equipment and field work. The 24 existing wells on the leases range from 850 feet to 1,950 feet in depth with gas production from several zones as their main objective. Following the acquisition of the leases, the operator began to assess the inventory of wells and equipment on site. Initial work focused on improving the flow lines, water congestion issues and electronic metering. After some minor repairs, there was gas flow between 25 to 50 MCFD, and additional work continued until gas sales were temporarily suspended, as the gas pipeline company had an equipment failure at its compressor station three miles away and in order to justify the investment in upgraded equipment, the gas pipeline company is requiring local operators to provide additional production throughput, sending more gas into the system.

Prior to the compressor outage, only 6 of the 24 wells on the property were selling into the pipeline. 4 additional wells were connected in late 2022, so in total the operator has now connected 10 of the 24 wells at West Sheppard Pool, which will be ready to sell gas upon the resumption of the necessary throughput via the pipeline. Additionally, further trenching work was conducted to lay flow lines with associated valve requirements.

The operator had previously negotiated an arrangement with the adjacent lease operator, which had yet to be implemented, to gather and sell the gas from three of their wells situated in close proximity to our leases in exchange for 20% of the gas revenue. Subsequent to the end of the period ended March 31, 2023, the operator has commenced new negotiations with the adjacent lease operator, pursuant to which the gas production from several of our West Sheppard wells will be transmitted into the adjacent lease’s gas gathering system without a customary 20% fee. In exchange, when gas sales are able to resume through our master meter, we will no longer charge the adjacent lease holder the previously negotiated 20% of gas revenue in connection with our processing of the gas production from their three wells included in the earlier arrangement.

Additionally, the plan would provide for the adjacent operator utilizing its knowledge and expertise of the area, to conduct further work at our West Sheppard Pool leases to reactivate additional wells that can eventually add additional gas production through our master meter as part of the current effort to  provide the requisite production throughput to justify the gas pipeline company’s upgrading of the compressor equipment which will restore service to the rest of the property.  Such an agreement is expected to enable us to resume generating some revenue from gas sales while the work required to reactivate the other wells at West Sheppard is being performed.

Beyond this, in terms of further developing the project, the operator believes that there is room to drill additional wells and additional behind-pipe opportunities within the existing 24 wells. In the nine months ended March 31, 2023, we had lease operating expenditures of $19,542 as we continued to conduct some additional work at the project. We recorded minimal revenues of $1,948 prior to the suspension at West Sheppard Pool, which continued through this quarter.

Pushmataha

In December 2021, the Company exercised its option and entered into a definitive joint venture and operating agreement with Blackrock to acquire 50% of Blackrock’s interest in the Pushmataha Gas Field, comprising 6 leases covering an area of 3,840 acres located in Pushmataha County, Oklahoma. Blackrock had previously entered into a separate option to acquire working interests ranging from 92%-100% in the existing wells and lease acreage from a third party. In connection with the initial acquisition, the Company expended approximately $253,000 in cash. Under the terms of the Joint Venture agreement, after deducting operating costs including a flat sum of $1,000 per month to Blackrock as operator, the Company shall receive all net income from revenues of the project until it has recouped $125,000, thereafter, the parties shall equally split the income.

The Company has a 50% ownership interest in the Joint Venture with Blackrock. The leases owned by the Joint Venture are subject to land owner royalties and other commitments resulting in net revenue interests to the joint venture of between 71% - 76%, with the exception of the Stephenson well, which has a net revenue interest of approximately 68%. 

Pushmataha has 7 existing gas wells ranging in depth from 10,000-12,300 feet. The wells were temporarily inactive since 2019 due to line leaks and lower gas prices, though in April 2021 some wells were put back online and have at various intervals produced between 100-300 MCFD. Through the fiscal year ended June 30, 2022, we recorded $28,110 in revenues from gas sales at the project. Earlier this fiscal year, the wells were shut in, as the operator awaited repairs to a gas leak by the pipeline owner to the pipeline gathering system. The operator developed its plan to resume and improve production on the leases and the Company committed to further expend an unspecified additional amount of capital toward reworking the field as it reasonably determines. In the nine months ended March 31, 2023 lease operating expenditures totaling $57,310 were largely offset with revenues of $53,397, though there was some additional capital expenditures of $21,256 on the project, including a hydrocarbon survey. The operator believes with additional reworking and recompletion efforts it can further optimize the production potential of this field. The application of newer technologies could also have an important impact on the economics for this asset. In July 2022, a hydrocarbon survey was conducted across these leases utilizing a third party patented remote sensing technology, which has provided the operator with valuable data in charting the potential for the future development of this project.

The existing seven wells show additional behind-pipe zones and the joint venture partners have assessed recompleting a new zone in one of the wells called the KDC. The operator had a rig out on site at KDC in late January and commenced some work on the well and were planning to conduct a recompletion, though weather conditions made it too dangerous to proceed. Plans were also underway for the operator to commence repairing or possibly replacing the plunger lift systems of some of the wells, with the goal of dewatering the wells to enable the gas to flow freely. The joint venture partners have temporarily deferred pursuing this active rework activity during the current downturn in natural gas pricing or until additional capital is available.

There is also space to drill new gas wells on the 3,840 acre leasehold, using the hydrocarbon mapping as a tool to locate the optimal drilling locations in these reservoirs. 

Subject to the Company being able to secure adequate additional financing, Okmin may also acquire the rights to and participate in drilling and/or other mining operations. The Company will evaluate exploration and mining opportunities and other strategic corporate opportunities as they become available from time to time.

The Company’s activities are subject to significant risks and uncertainties, including failing to secure additional funding to advance the Company’s current plan to rework and possibly develop its existing projects and to identify and acquire new projects.

Results of Operations

For the Three months ended March 31, 2023, as compared to the Three months ended March 31, 2022

Revenue

We generated $30,228 in revenue from oil and gas sales for the three months ended March 31, 2023, as compared to $29,497 in revenues generated in the three months ended March 31, 2022. Revenues in the corresponding quarters were fairly steady, though the current quarter was lower than anticipated due to the suspension of gas sales at West Sheppard Pool and generally lower natural gas prices worldwide, impacting Pushmataha in particular. We also received $1,123 in interest income from our cash balances for three months ended March 31, 2023.

General and Administrative Expense

General and administrative expenses decreased to $68,830 for the three months ended March 31, 2023 as compared to $92,991 for the three months ended March 31, 2022, including $12,500 in non-cash items, where stock was issued in lieu of cash for services. This decrease is attributable to the Company recording $30,000 non-cash fees in the previous corresponding quarter versus only $12,500 in the current quarter ended March 31, 2023. Additionally, legal fees were lower during the current quarter. Other expenses related to compensation, interest, rent, accounting and professional fees and other general and administrative expenses necessary for our operations.

Net Loss

The net loss for the three months ended March 31, 2023 was $138,718 compared to a net loss of $89,400 for the three months ended March 31, 2022. The Expenses during the three month period ended March 31, 2023, included: $100,019 in lease operating expenses (including taxes and royalties), $40,500 in compensation (of which only half is being paid out at the present time, with the remainder being accrued as a payable), $4,658 in interest expense, $12,500 in connection with our manager of land and resource development, $9,206 in professional fees and other general and administrative expenses necessary for our operations. These amounts included $12,500 of non-cash items with stock issued in lieu of services. Expenses during the comparative three month period ended March 31, 2022, including lease operating expenses, were lower as the Company had not fully established operations.

For the Nine months ended March 31, 2023, as compared to the Nine months ended March 31, 2022

Revenue

We generated $98,466 in revenue from oil and gas sales for the nine months ended March 31, 2023, as compared to $51,421 in revenues generated in the nine months ended March 31, 2022. The increase in revenue is attributable to ongoing rework operations over the past twelve months and the fact that some of the properties had only been acquired toward the end of our 2022 fiscal year, including West Sheppard Pool and Pushmataha, Therefore, revenues in fiscal 2023 included additional properties that were not included during all of the previous period. We also received $2,373 in interest income from our cash balances for nine months ended March 31, 2023.

General and Administrative Expense

General and administrative expenses increased to $306,068 for the nine months ended March 31, 2023 as compared to $173,672 for the nine months ended March 31, 2022. A portion of these expenses included $85,100 in non-cash items, where stock was issued in lieu of cash for services. This increase is attributable to the Company moving into the development stage, with operations at its oil and gas properties and greater expenses of the Company as it has transitioned to a more advanced operating Company for the full reporting period, therefore incurring increased expenses related to compensation, lease operating, interest, consultants, legal and professional fees. Additionally, this incorporates fees and expenses related to the efforts in becoming a publicly traded company.

Net Loss

The net loss for the nine months ended March 31, 2023 was $431,478 compared to a net loss of $149,732 for the nine months ended March 31, 2022.  The Expenses during the nine month period ended March 31, 2023, included: $223,517 in lease operating expenses (including taxes and royalties), $121,500 in compensation (of which only half is being paid out at the present time, with the remainder being accrued as a payable), $15,057 in interest expense, $61,721 in connection with corporate and investor relations consultants and $63,561 in legal and professional fees, $26,912 in listing related fees, and other general and administrative expenses necessary for our operations. These amounts included $85,100 of non-cash items with stock issued in lieu of services. The Expenses during the comparative nine month period ended March 31, 2022 were lower as the Company had still not fully established its operations. These included $67,500 in compensation, $31,250 in finance costs, $30,464 in legal and professional fees and other general and administrative expenses necessary for our operations.

Net cash used in investing activities

In the nine months ended March 31, 2023, net cash expended on investing activities was $30,285 versus $524,213 in the previous corresponding nine months ended March 31, 2022. The difference is attributable to the fact that a significant amount was invested into acquiring three of our oil and gas projects during the nine months ended March 31, 2022.

Net cash from financing 

Net cash from financing activities in the nine months ended March 31, 2023 totaled $448,975, which was predominantly comprised of private placements of equity securities during the period. Net cash from financing activities in the corresponding nine months ended March 31, 2022 totaled $589,750, which was higher, attributable to an earlier private placement of equity securities and the addition of some debt financing via a convertible note during that period.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

The potential profitability of the Company’s operations is highly dependent upon the commodity prices of oil and natural gas. Natural gas prices tend to be seasonal and have declined substantially from the highs achieved in calendar 2022, although prices are expected to rebound somewhat later in the year as colder weather arrives in North America. In response to the current commodity prices, we have slowed our capital expenditures and are focusing our efforts on marginal improvements that can be conducted our projects which have the greatest potential returns on investment. These expenditures include the reworking of existing wells, and infrastructure investments on certain of our leases which are intended to increase production and cash flow without major capital expenditures.

As of March 31, 2023, we had total assets of $995,680, comprised primarily of cash and cash equivalents of $292,853, production revenue receivable of $14,889, oil and gas properties $686,362 and other assets of $1,576. As at March 31, 2023, we had total liabilities of $328,598, primarily comprised of convertible debt and related interest payable of $210,077, accounts payable of $1,271 and accrued liabilities of $117,250 in deferred compensation expense.

We have substantial capital resource requirements and have incurred significant losses since inception. The Company had a net loss of $431,478 for the nine months ended March 31, 2023 and an accumulated deficit of $737,768 as of March 31, 2023. The Company had working capital of $189,317 as at March 31, 2023 and management believes that the Company will have sufficient working capital for the remaining last quarter of the 2023 fiscal year. For the 2024 fiscal year starting in July, the Company anticipates cash needs of a minimum of $600,000, of which approximately $300,000 is for general corporate overhead and $300,000 for continued work on existing properties. The Company anticipates receiving limited revenue from oil and gas sales and intends to obtain the remaining capital through private sales of securities.

To date, we have funded our operations primarily through the issuance of equity and/or convertible securities for cash. We depend upon debt and/or equity financing and revenues to fund our ongoing operations and to execute our current business plan. In the upcoming 2024 fiscal year, such capital requirements will be in excess of what we have in available cash for planned ongoing activities. On October 4, 2022, the Company filed a Form D in connection with a private placement of securities in the Company, total gross proceeds of the private placement are an aggregate of $401,500 as of March 31, 2023. These securities were issued pursuant to an exemption from registration under Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) and Regulation D promulgated thereunder. Proceeds from the placement will be used for general corporate purposes. We will be required to obtain alternative or additional financing from financial institutions, investors or otherwise, in order to maintain and expand our existing operations. The failure by us to obtain such financing would have a material adverse effect upon our business, financial condition and results of operations, and adversely affecting our ability to complete ongoing activities.

Critical Accounting Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. Preparation of financial statements requires management to make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and the related disclosures of contingencies. Management bases its estimates on various assumptions and historical experience, which are believed to be reasonable; however, due to the inherent nature of estimates, actual results may differ significantly due to changed conditions or assumptions. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are fairly presented in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Recently Issued Accounting Pronouncements

Management does not believe any recently issued but not yet effective accounting pronouncements, if adopted, would have a material effect on the Company’s present or future financial statements.

Going Concern Qualification

The Company’s financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business.

As reflected in the accompanying condensed financial statements, the Company had a net loss of $431,478 for the nine months ended March 31, 2023 and an accumulated deficit of $737,768 as of March 31, 2023. These factors, among others, raise doubt about the Company’s ability to continue as a going concern.

The Company had working capital of $189,317 as at March 31, 2023 and management believes that the Company will have sufficient working capital for the remaining last quarter of the 2023 fiscal year. For the 2024 fiscal year starting in July, the Company anticipates cash needs of a minimum of $600,000, of which approximately $300,000 is for general corporate overhead and $300,000 for continued work on existing properties. The Company anticipates receiving limited revenue from oil and gas sales and intends to obtain the remaining capital through private sales of securities.

The Company’s future success is dependent upon its ability to achieve profitable operations, generate cash from operating activities and obtaining additional financing. If such additional financing is not available on terms acceptable to us or at all, then we may need to curtail our operations and/or take additional measures to conserve and manage our liquidity and capital resources, any of which would have a material adverse effect on our financial position, results of operations, and our ability to continue as a going concern. The condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.