Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _______________ to _______________
Commission file number: 333-99455
SKY PETROLEUM, INC.
(Exact name of registrant as specified in its charter)
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Nevada
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32-0027992
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(State of other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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401 Congress Avenue, Suite 1540
Austin, Texas
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78701
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(Address of principal executive offices)
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(Zip Code)
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(512) 687-3427
(Registrant’s Telephone Number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company x |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes x No
Number of Shares outstanding at May 14, 2010: 58,793,709
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INDEX
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Page No.(s)
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PART I - FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009
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1
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Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited)
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2
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Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)
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3
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Notes to Consolidated Financial Statements
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4
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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9
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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15
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Item 4T.
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Controls and Procedures
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15
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PART II - OTHER INFORMATION
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Item 1.
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Legal Proceedings
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15
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Item 1A.
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Risk Factors
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15
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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15
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Item 3.
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Defaults Upon Senior Securities
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15
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Item 4.
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[RESERVED]
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16
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Item 5.
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Other Information
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16
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Item 6.
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Exhibits
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16
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SIGNATURES
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17
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Item 1 - Financial Statements
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NOTE: These consolidated financial statements reflect the Company’s Consolidated Balance Sheets at March 31, 2010 (unaudited) and December 31, 2009, the unaudited Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, and unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009.
Sky Petroleum, Inc.
Consolidated Balance Sheets
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March 31,
2010
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December 31,
2009
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Unaudited
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 5,195,760 | $ | 5,024,899 | ||||
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Accounts receivable
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- | 504,774 | ||||||
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Prepaids and other current assets
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33,416 | 30,752 | ||||||
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Total Current Assets
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5,229,176 | 5,560,425 | ||||||
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Fixed assets, net
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2,160 | 2,472 | ||||||
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Deposits and other assets
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8,315 | 8,315 | ||||||
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Total Other Assets
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10,475 | 10,787 | ||||||
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Total Assets
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$ | 5,239,651 | $ | 5,571,212 | ||||
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Liabilities and Stockholders’ Equity
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Current liabilities:
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Accounts payable and accrued liabilities
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$ | 135,950 | $ | 198,598 | ||||
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Commitments and contingencies
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Stockholders’ equity:
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Series A Preferred stock, $0.001 par value, 10,000,000 shares authorized, none outstanding
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- | - | ||||||
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Common stock, $0.001 par value, 150,000,000 shares authorized,
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58,793,709 shares issued and outstanding
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58,794 | 58,794 | ||||||
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Additional paid-in capital
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40,348,746 | 40,348,746 | ||||||
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Accumulated deficit
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(35,303,839 | ) | (35,034,926 | ) | ||||
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Total Stockholders’ Equity
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5,103,701 | 5,372,614 | ||||||
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Total Liabilities and Stockholders’ Equity
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$ | 5,239,651 | $ | 5,571,212 | ||||
The accompanying Notes are an integral part of these consolidated financial statements.
1
Sky Petroleum, Inc.
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Oil revenues
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$ | - | $ | 218,748 | ||||
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Expenses:
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Lease operating expenses
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- | 22,774 | ||||||
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Depletion and depreciation
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312 | 227,795 | ||||||
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Consulting services
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107,600 | 116,732 | ||||||
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Other general and administrative
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161,104 | 139,160 | ||||||
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Total expenses
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269,016 | 506,461 | ||||||
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Net operating loss
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(269,016 | ) | (287,713 | ) | ||||
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Interest income
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103 | 578 | ||||||
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Net loss
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$ | (268,913 | ) | $ | (287,135 | ) | ||
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Net loss per share - basic and diluted
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$ | 0.00 | $ | 0.00 | ||||
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Weighted average number of common shares outstanding - basic and diluted
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58,793,709 | 58,793,709 | ||||||
The accompanying Notes are an integral part of these consolidated financial statements.
2
Sky Petroleum, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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Three Months Ended
March 31,
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2010
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2009
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Cash flows from operating activities:
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Net loss
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$ | (268,913 | ) | $ | (287,135 | ) | ||
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Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
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Depletion and depreciation
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312 | 227,795 | ||||||
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Changes in operating assets and liabilities:
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Accounts receivable
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504,774 | - | ||||||
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Inventory
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- | (2,180 | ) | |||||
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Prepaids and other current assets
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(2,664 | ) | (7,500 | ) | ||||
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Accounts payable and accrued liabilities
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(62,648 | ) | (2,391 | ) | ||||
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Net cash provided by (used in) operating activities
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170,861 | (71,411 | ) | |||||
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Net increase (decrease) in cash and cash equivalents
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170,861 | (71,411 | ) | |||||
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Cash and cash equivalents at the beginning of period
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5,024,899 | 5,242,260 | ||||||
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Cash and cash equivalents at the end of period
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$ | 5,195,760 | $ | 5,170,849 | ||||
The accompanying Notes are an integral part of these consolidated financial statements.
3
Sky Petroleum, Inc.
Notes to Consolidated Financial Statements
Note 1- Description of Business - Nature of Operations and Basis of Presentation
The Company was organized on August 22, 2002 under the laws of the State of Nevada, as The Flower Valet. On December 20, 2004, the Company amended its articles of incorporation to change its name to Seaside Explorations, Inc. Subsequently, on March 28, 2005 the Company changed its name to Sky Petroleum, Inc.
The Company is engaged in the exploration and development of oil and natural gas properties of others under arrangements in which we finance the costs in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners farming out to us.
In order to manage its international oil and gas operations, the Company established two corporations in Cyprus. Bekata Limited (“Bekata”), a wholly-owned subsidiary of Sky Petroleum, Inc. owns a 100% interest in Sastaro Limited, (“Sastaro”).
Sastaro entered into a Participation Agreement for the financing of a drilling program in the Mubarek field, an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf, with Buttes Gas and Oil Co. International Inc., (“Buttes”) a wholly-owned subsidiary of Crescent Petroleum Company International Limited (“Crescent”). Under the terms of the Participation Agreement, Sastaro has the right to participate in a share of the future production revenue due to its funding $25 million in drilling costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. The Participation Agreement does not grant Sastaro any interest in the concession area. Sastaro’s rights are limited to receiving a share of future production revenue, if any.
On December 31, 2009, Sastaro received written notice from Buttes that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated December 29, 1969, between His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes states that it has handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary corporations, after elimination of all intercompany accounts, transactions and profits.
Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in this Form 10-Q Quarterly Report pursuant to certain rules and regulations of the Securities and Exchange Commission (“SEC”). These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2009.
In the opinion of management, the interim unaudited consolidated financial statements include all normal recurring adjustments necessary to present fairly the financial position and results of operations for each interim period shown in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of cash and cash equivalents, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.
Unless otherwise indicated or unless the context otherwise requires, all references to “Sky”, the “Company”, “we”, “us”, and “our” are to Sky Petroleum, Inc. and its consolidated subsidiaries, Sastaro and Bekata.
Note 2- Investment in Oil and Gas Properties
On December 31, 2009, Sastaro received written notice from Buttes that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated December 29, 1969, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes states that it has handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009.
As a result of these events, the Company incurred an impairment charge of $230,825, after recording depletion of $831,747 for the year ended December 31, 2009. As the investment in the wells was impaired to zero, the Company did not obtain estimated petroleum reserves as of December 31, 2009.
As of March 31, 2010 and December 31, 2009, the Company's investment in oil and gas properties was zero.
Note 3 - Stock Options
On July 26, 2005, the Company adopted the Sky Petroleum, Inc. Non-U.S. Stock Option Plan (the "Non-U.S. Plan"), effective as of April 1, 2005. The Non-U.S. Plan authorizes the issuance of stock options to acquire up to 10% of the Company's issued and outstanding shares of common stock.
On August 25, 2005, the Company adopted the Sky Petroleum, Inc. 2005 U.S. Stock Incentive Plan (the "U.S. Plan"). The U.S. Plan authorizes the issuance of stock options and other awards to acquire up to a maximum of 3,321,600 shares of the Company's common stock (less the number of shares issuable upon exercise of options granted by the Company under all other stock incentive plans on the date of any grant under the U.S. Plan). The U.S. Plan provides for the grant of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended), options that are not incentive stock options, stock appreciation rights and various other stock-based grants.
On July 31, 2009 the Company issued 150,000 stock options to a newly appointed director. The options are exercisable at $0.50 per share and vest over the next three years.
There were no options granted during the three months ended March 31, 2010 or 2009 and as such there is no compensation expense during the periods respectively. No options were exercised during the three months ended March 31, 2010 or 2009, therefore, the intrinsic value of options exercised during 2010 and 2009 is zero. Compensation expense is based upon straight-line amortization of the grant-date fair value over the vesting period of the underlying stock option. In accordance with Accounting Standards Codification Topic No. 718 and 505, the fair value of each stock option grant was estimated on the date of the grant, using the Black-Scholes option-pricing model. As of March 31, 2010, there was no unrecognized compensation expense related to non-vested stock option agreements.
Information regarding stock options outstanding as of March 31, 2010 is summarized below:
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Shares Underlying Options Outstanding
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Shares Underlying Options Exercisable
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Range of
Exercise Prices
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Shares
Underlying
Options
Outstanding
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Weighted
Average
Remaining
Contractual
Life (Years)
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Weighted
Average
Exercise
Price
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Shares
Underlying
Options
Exercisable
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Weighted
Average
Exercise
Price
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| $ | 0.50 | 150,000 | 6.34 | $ | 0.50 | - | $ | - | ||||||||||||||
| $ | 1.00 | 400,000 | 2.63 | $ | 1.00 | 400,000 | $ | 1.00 | ||||||||||||||
| $ | 1.29 - $1.88 | 800,000 | 4.78 | $ | 1.44 | 800,000 | $ | 1.44 | ||||||||||||||
The aggregate intrinsic value of exercisable options as of March 31, 2010 is $0.
The following is a summary of stock option activity for the three months ended March 31, 2010 and for the year ended December 31, 2009:
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Number
Of Shares
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Weighted
Average
Exercise Price
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Weighted Average
Remaining Contract Life (Years)
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Balance, December 31, 2008
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1,699,999 | $ | 1.19 | |||||||||
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Options cancelled
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(499,999 | ) | .93 | |||||||||
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Options granted
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150,000 | .50 | ||||||||||
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Options exercised
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- | - | ||||||||||
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Balance, December 31, 2009
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1,350,000 | 1.19 | ||||||||||
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Options cancelled
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- | - | ||||||||||
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Options granted
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- | - | ||||||||||
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Options exercised
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- | - | ||||||||||
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Balance, March 31, 2010
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1,350,000 | $ | 1.20 | 4.32 | ||||||||
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Exercisable, March 30, 2009
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1,200,000 | $ | 1.29 | 4.06 | ||||||||
Note 4 - Income Taxes
For the three months ended March 31, 2010 and 2009, the Company had net losses of $268,913 and $287,135, respectively. No benefit or provision for income taxes has been recorded due to the uncertainty of the realization of any tax assets. At March 31, 2010, the Company has accumulated net operating losses totaling approximately $35.3 million. The net operating loss carry forwards will begin to expire in 2019 if not utilized. The Company has recorded net operating loss carry forwards in each year since its inception and through March 31, 2010. Based upon all available objective evidence, including the Company’s loss history, management believes it is more likely than not that the net deferred assets will not be fully realized. Therefore, the Company has provided a valuation allowance against its deferred tax assets.
All of the Company’s oil and gas activities were located offshore from the coast of Dubai, UAE and there are no income taxes due as there were no earnings or dividends distributed or repatriated.
Undistributed earnings of the Company’s foreign subsidiaries are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the foreign countries.
The Company’s wholly owned subsidiaries have not filed required foreign tax returns due for the years ended December 31, 2005, through December 31, 2009. No material tax liability is anticipated. Management has engaged qualified firms to identify and prepare delinquent foreign tax returns for filing. The Company believes amounts due, if any, would not be material.
Note 5 – Commitments and Contingencies
On December 31, 2009, Sastaro received written notice from Buttes that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Buttes also notified Sastaro that the Concession Agreement, dated December 29, 1969, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes states that it has handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009.
As a result of these events, the Company has notified Sastaro that the Participation Agreement between Sastaro and Buttes is terminated. Under the terms of the Participation Agreement, the Company, through Sastaro, contributed $25 million in drilling and completion costs related to two in-fill wells, H2 and K2-ST4, for the right for the Company to participate in a share of their future production revenue.
The Mubarek Field wells H2 and K2-ST4 produced commercial amounts of oil up to December 29, 2009, and the Company believes that there is significant residual value in H2 and K2-ST4. Consequently, the Company considers the Participation Agreement valid and in good standing.
Management is evaluating its rights under the Participation Agreement and will take any and all actions required to protect the interests of the Company, its shareholders and its investment in the Mubarek Field.
Forward-Looking Statements
This Report on Form 10-Q and the exhibits attached hereto contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements concern our anticipated results and developments in our operations in future periods, planned exploration and development of our properties, plans related to our business and matters that may occur in the future. These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and assumptions of management. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors which could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:
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risks related to our limited operating history;
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risks and uncertainty related to our legal rights under the participation agreement for the Mubarek Field;
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risks related to the historical losses and expected losses in the future;
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risks related to instability in production;
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risks related to our dependence on our executive officers;
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risks related to fluctuations in oil and natural gas prices;
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risks related to drilling for and producing oil and natural gas;
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risks related to liability claims from oil and gas operations;
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risks related to accessing the oil and natural gas markets;
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risks related to legal compliance costs;
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risks related to the unavailability of drilling equipment and supplies;
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risks related to competition in the oil and natural gas industry;
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risks related to period to period comparison of our financial results; and
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risks related to our securities.
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This list is not exhaustive of the factors that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking statements are described further under the sections titled “Risk Factors and Uncertainties”, “Description of the Business” and “Management’s Discussion and Analysis” of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. Our management has included projections and estimates in this Report, which are based primarily on management's experience in the industry, assessments of our results of operations, discussions and negotiations with third parties and a review of information filed by our competitors with the SEC or otherwise publicly available. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
Description of Property
Our principal corporate and executive offices are located at 401 Congress Avenue, Suite 1540, Austin, Texas 78701. Our telephone number is (512) 687-3427. We rent our office space. We do not currently maintain any investments in real estate, real estate mortgages or securities of persons primarily engaged in real estate activities, nor do we expect to do so in the foreseeable future.
Management’s Discussion and Analysis
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Forward-Looking Statements” above.
This discussion and analysis should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes. The discussion and analysis of the financial condition and results of operations are based upon the unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent liabilities at the financial statement date and reported amounts of revenue and expenses during the reporting period. On an on-going basis the Company reviews its estimates and assumptions. The estimates were based on historical experience and other assumptions that the Company believes to be reasonable under the circumstances. Actual results are likely to differ from those estimates under different assumptions or conditions, but the Company does not believe such differences will materially affect our consolidated financial position or results of operations. Critical accounting policies, the policies the Company believes are most important to the presentation of its consolidated financial statements and require the most difficult, subjective and complex judgments, are outlined below in “Critical Accounting Policies,” and have not changed significantly.
Overview
Our primary business is to identify opportunities to either make direct property acquisitions or to fund exploration or development of oil and natural gas properties of others under arrangements in which we will finance the costs in exchange for interests in the oil or natural gas revenue generated by the properties. Such arrangements are commonly referred to as farm-ins to us, or farm-outs by the property owners farming out to us. We may also make investments or acquire other energy related projects or businesses.
We were incorporated in the state of Nevada in August, 2002 as The Flower Valet. In 2004, we began to reassess our business plan and to seek business opportunities in other industries, including the oil and gas industry. On December 20, 2004, at our annual meeting of stockholders, our stockholders approved an amendment to our Articles of Incorporation, changing our name from The Flower Valet to Seaside Exploration, Inc. Subsequently, on March 28, 2005, we changed our name from Seaside Exploration, Inc. to Sky Petroleum, Inc. and began actively identifying opportunities to make direct property acquisitions and to fund exploration and development of oil and natural gas properties.
As part of our business strategy, we, through our wholly-owned subsidiary, Sastaro, entered into a Participation Agreement for the financing of a drilling program in the Mubarek field, an offshore region in a concession area surrounding Abu Musa Island in the Arabian Gulf, with Buttes Gas and Oil Co. International Inc., (“Buttes”) a wholly-owned subsidiary of Crescent Petroleum Company International Limited (“Crescent”). Under the terms of the Participation Agreement, Sastaro has the right to participate in a share of the future production revenue by contributing $25 million in drilling costs related to two wells in an off-shore oil and gas project in the United Arab Emirates. Pursuant to the Participation Agreement, we had the right of first refusal to participate in an exploration program to be conducted by an affiliate of Buttes in a concession located in the offshore waters around Sir Abu Nu'Ayr Island. The island of Sir Abu Nu'Ayr, which sits in the center of the concession area, is part of the Emirate of Sharjah but is located in the offshore territory of Abu Dhabi. The right of first refusal expired on May 17, 2008. The Participation Agreement does not grant Sastaro any interest in the concession area. Sastaro’s rights are limited to receiving a share of future production revenue, if any.
On December 31, 2009, we received written notice from Crescent, the operator of the Mubarek Field, through its wholly owned subsidiary Buttes, that Buttes had unilaterally and solely determined that the Mubarek Field had reached the end of its economic life. Accordingly, the Concession Agreement, dated December 29, 1969, between the His Highness Sheikh Sultan bin Mohamed Al-Qassimi III, The Ruler of Sharjah, UAE and Buttes with respect to the Mubarek Field was terminated. Buttes stated that it had handed over the Mubarek Field operations and facilities to representatives of His Highness Sheikh Sultan bin Mohamed Al-Qassimi III on December 28, 2009.
As a result of these events, Buttes alleges that the Participation Agreement between Sastaro and Buttes is terminated. We strongly object with Crescent and Butte’s assessment of the economic viability of the Mubarek Field. The Mubarek Field continues to produce substantial amounts of oil and we believe that there is significant economic life left in the field. Consequently, we consider the Participation Agreement valid and in good standing. Management is exercising its rights under the Participation Agreement and is taking and will take any and all actions required to protect our interests, our shareholders and our investment in the Mubarek Field.
Mubarek H2 Well
Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of approximately 150,413 gross barrels through December 31, 2009. During the first quarter of 2010 there was no production from the Mubarek H2 due to events as described above. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.
Mubarek K2-ST4 Well
Since the Mubarek K2-ST4 well was completed in the second quarter of 2007, it has produced a total of approximately 149,471 gross barrels through December 31, 2009. During the first quarter of 2010 there was no production from the Mubarek K2-ST4 due to events as described above. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.
Other Projects
On October 14, 2009, we entered into a non-binding letter of intent to invest in and acquire Suntera Resources’ interests in two onshore oil & gas blocks in Nigeria. The letter of intent expired in April 2010.
We have acquired a minority stake in the development of an oilfield in the Komi Republic of the Russian Federation by acquiring a 3.9% interest, subject to dilution, in Pechora Energy through its UK parent company, Concorde Oil & Gas Plc. (which we refer to as “Concorde”). Concorde held its annual general meeting on December 29, 2009, with a notice to be reconvened on April 20, 2010. At the April 20, 2010 meeting the Concorde shareholders approved resolutions disposing its operating assets to Kuwait Energy Company (“KEC”), one of the majority shareholders. We are currently reviewing our investment in this project.
We continue to explore other business opportunities in the energy sector.
Plan of Operation
Our plan of operation and business strategy is to focus on producing or near-production oil and gas properties, and other energy related projects, in the Middle East, Africa, South East Asia, the Balkans and the Former Soviet Union (“FSU”), assuming adequate funding is available. We intend to seek niche opportunities through the contacts of our officers and directors in the region. We intend to limit our administrative and overhead expenses by seeking operating partners and participating in projects as non-operator. We intend to use contractors or consultants as much as and where possible. Assuming we have adequate funding, our goal during the next twelve months ending March 31, 2011 is to assess and obtain additional joint venture opportunities in new regions, although we have no agreements to do so at this time.
The strategic overview of Sky Petroleum is as follows:
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To identify opportunities to participate in oil and gas projects and other energy related projects in the Middle East, Africa, South East Asia, the Balkans and the FSU through strategic participation agreements, farm-ins or joint ventures.
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To focus initially on lower risk development or exploration projects in areas with known oil or natural gas reserves / production and infrastructure, and/or energy related opportunities, such as coal, infrastructure projects and other projects related to the energy industry.
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To participate as a non-operator on projects with working operators with experience in a specific region.
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To raise sufficient capital to fund our operations and to establish ongoing production revenue.
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Our plan of operation includes the following goals during the next twelve months:
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Evaluate new farm-in / joint venture opportunities in the Middle East, Africa, South East Asia, the Balkans and the FSU.
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As warranted, there can be no assurance that we will successfully implement our business strategy or meet our goals during the next twelve months, if ever.
Operations
Comparison of the three months ended March 31, 2010 with the three months ended March 31, 2009
For the three months ended March 31, 2010, we had a net loss of $268,913 as compared to a net loss of $287,135 for the three months ended March 31, 2009. There were no lifts for the first quarter of 2010 versus one lift for the comparable first quarter of 2009 with revenues of $218,748, compared to no revenue for the first quarter of 2010.
Operating expenses were lower in the first quarter of 2010 totaling $269,016, as compared with the first quarter of 2009 of $506,461 largely as a result of a decrease in depletion of approximately $228,000. There was no depletion recorded in 2010 due to the impairment of the wells.
Liquidity and Capital Resources
Since inception, we have financed our cash flow requirements through the issuance of equity. As we expand our activities, we may from time to time experience net negative cash flows from operations pending receipt of periodic receipt of sales proceeds. The Company may use excess cash investments, debt or equity financing to augment working capital.
As of March 31, 2010, we had current assets of $5,229,176 including cash and cash equivalents of $5,195,760 of which $4,260,321 was held in time deposits, as described below. We had current liabilities of $135,950. The Company had $5,093,226 of working capital at March 31, 2010 compared to $5,361,827 at December 31, 2009. Total Stockholder’s equity was $5,103,701 at March 31, 2010.
Net cash provided by operating activities during the three months ended March 31, 2010 was $170,861 as compared to net cash used of $71,411 for the comparable period in 2009. Total assets as of March 31, 2010 were $5,239,651 compared to total assets of $5,571,212 as of December 31, 2009. Stockholders’ equity as of March 31, 2010 was $5,103,701 compared to Stockholders’ equity of $5,372,614 as of December 31, 2009. The decrease in assets and stockholders’ equity is primarily due to collection of the December lift proceeds of approximately $505,000 in January 2010, less operating expenses of $269,016 for the three months ended March 31, 2010.
The Company follows the full-cost method of accounting for its oil and gas operations whereby exploration and development expenditures are capitalized. Such costs may include geological and geophysical, drilling, equipment and technical consulting directly related to exploration and development activities. Costs related to unproved properties and major development projects may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired.
As of March 31, 2010, the Company has capitalized drilling and completion costs incurred for the Mubarek H2 and Mubarek K2-ST4 wells of $13,457,501 and $13,173,901, respectively. Based upon the December 31, 2008 reserve report prepared by ESG, proved developed reserves net to the Company's interests were 30,301 barrels of oil. ESG was considered an affiliate of the Company at one time because a director of the Company, who has since resigned, had an ownership interest in ESG. During the three months ended March 31, 2010, there were no barrels of oil net to the Company’s interest due to the factors discussed above under “Overview”.
Since the Mubarek H2 well was completed in the second quarter of 2006, it has produced a total of approximately 150,413 gross barrels through December 31, 2009. During the first quarter of 2010 there was no production from the Mubarek H2 due to events as described above under “Overview”. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.
Since the Mubarek K2-ST4 well was completed in the second quarter of 2007, it has produced a total of approximately 149,471 gross barrels through December 31, 2009. During the first quarter of 2010 there was no production from the Mubarek K2-ST4 due to events as described above under “Overview”. Actual production may vary from our forecasts or estimates, and does not include any additional production from other Mubarek wells, planned or contemplated, if any.
We believe that we have sufficient working capital to meet our currently anticipated expenditure levels for the next 12 months. However, if we identify additional prospects for the implementation of the Company’s plan of operation, we will require additional financing to fund such operations.
There was a severe deterioration in global credit and equity markets in 2007 through 2009. This resulted in the need for government intervention in major banks, financial institutions and insurers and also resulted in greater volatility, increased credit losses and tighter credit conditions. These disruptions in the credit and financial
markets have had a significant material adverse impact on a number of financial institutions and have limited access to capital and credit for many companies. While market conditions have generally improved in the first quarter of 2010, access to capital and credit remains limited compared to capital markets before the deterioration in 2007. As our operating plan includes reliance on equity financings in order to fund future additional prospects, these current market conditions could make it difficult or impossible for us to raise necessary funds to meet our operating plan. If we are unable to obtain financing through equity investments, we will seek multiple solutions including, but not limited to, credit facilities or debenture issuances.
Currently, we have cash assets of $4,260,321 invested in 7-day term deposits with HSBC, a bank in the United Arab Emirates. We do not expect these deposits to be affected by the current financial conditions and we do not anticipate that the bank in which they are deposited will fail. Management continues to monitor the state of the financial markets and will make adjustments to the investment of cash assets based on the current and anticipated capital requirements of the Company, the stability of the markets, the rate of return on time deposits, money market accounts and bonds, and the levels of protection provided by such investments.
Our lack of operating history makes predictions of future operating results difficult to ascertain. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies searching for opportunities in the oil and gas industry. Such risks include, but are not limited to, our ability to secure a drilling rig, our ability to successfully drill for hydrocarbons, commodity price fluctuations, delays in drilling or bringing production, if any, on line, an evolving business model and unpredictable availability of qualified oil and gas exploration prospects and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and development plan, successfully identify future drilling locations, continue to rely on Buttes efforts, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have material adverse effect on our business prospects, financial condition and results of operations.
During the quarter ended March 31, 2010, we had no material transactions affecting our liquidity and capital resources.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
The price of oil has varied between $36 per barrel and $147 per barrel over the past 24 months which has had a significant impact on our oil revenues.
Critical Accounting Policies
Use of estimates
Preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The oil and natural gas reserve estimates, and the related future net cash flows derived from those reserves, are used in the determination of depletion expense and the full cost ceiling test and are inherently imprecise. Actual results could differ from those estimates.
Fair value of financial instruments
The Company calculates the fair value of its assets and liabilities which qualify as financial instruments and includes this additional information in the notes to consolidated financial statements when the fair value is different than the carrying value of these financial instruments. The estimated fair value of accounts receivable, accounts payable and accrued liabilities approximate their carrying amounts due to the relatively short maturity of these instruments. None of these instruments are held for trading purposes.
Investment in oil and gas properties
The Company uses the full cost method of accounting for its oil and natural gas producing activities. Accordingly, all costs associated with acquisition, exploration, and development of oil and natural gas reserves, including directly related overhead costs, are capitalized. Management and service fees received under contractual arrangements, if any, are treated as reimbursement of costs, offsetting the costs incurred to provide those services.
Depletion is provided using the units-of-production method based upon estimates of proved oil and natural gas reserves with oil and natural gas production being converted to a common unit of measure based upon their relative energy content. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the carrying value of the assets is reduced accordingly. Once the assessment of unproved properties is complete and when major development projects are evaluated, the costs previously excluded from amortization are transferred to the full cost pool and amortization begins.
Under the full cost method of accounting, the net book value of oil and natural gas properties, less related deferred income taxes, may not exceed a calculated “ceiling”. The ceiling limitation is the discounted estimated after-tax future net cash flows from proved oil and natural gas properties. In calculating future net cash flows, current prices and costs are generally held constant indefinitely. The net book value of oil and natural gas properties, less related deferred income taxes is compared to the ceiling on a quarterly and annual basis. Any excess of the net book value, less related deferred income taxes, is generally written off as an expense. Under rules and regulations of the SEC, all or a portion of the excess above the ceiling may not be written off if, subsequent to the end of the quarter or year but prior to the release of the financial results, prices have increased sufficiently that all or a portion of such excess above the ceiling would not have existed if the increased prices were used in the calculations. As of March 31, 2010 and December 31, 2009, the Company had accumulated impairment of $15,468,368 as a result of the full cost ceiling test for the years 2006 through 2009. As of March 31, 2010 and December 31, 2009, the net carrying value of the Company’s investment in oil and gas properties is zero.
Sales of proved and unproved properties are accounted for as an adjustment of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved oil and natural gas reserves, in which case the gain or loss is recognized.
Revenue is recognized in the period in which title to the petroleum or natural gas transfers to the purchaser and depletion is taken in the period based on production volumes.
Income taxes
The Company accounts for federal income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect on previously recorded deferred tax assets and liabilities resulting from a change in tax rates is recognized in operating results in the period in which the change is enacted.
Stock-Based Compensation
The Company measures all share-based payments, including grants of employee stock options, using a fair-value based method in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 505 and Topic No. 718 (formerly SFAS No. 123R)Share-Based Payments. The cost of services received in exchange for awards of equity instruments is recognized in the consolidated statement of operations based on the grant date fair value of those awards amortized over the requisite service period.
Contractual Obligations
The Company has had no material changes to its contractual obligations as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Item 4T - Disclosure Controls and Procedures
Disclosure Controls and Procedures
At the end of the period covered by the Annual Report an evaluation was carried out under the supervision of and with the participation of the Company's management, including the Interim Chief Executive Officer (“CEO”) and Interim Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of the Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) and Rule 15d - 15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on that evaluation the Interim CEO and Interim CFO have concluded that the Company's disclosure controls and procedures are adequately designed and effective in ensuring that: (i) information required to be disclosed by the Company in reports that it files or submits to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Interim CEO and Interim CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the above-referenced evaluation by management of the effectiveness of our internal control over financial reporting that occurred during the first quarter ended March 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 1A - Risk Factors
There have been no material changes from the risk factors as previously disclosed in our Form 10-K, which was filed with the SEC on March 31, 2010.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
None
Item 4 – [RESERVED]
Item 5 - Other Information
Item 6 – Exhibits
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
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32.1
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
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32.2
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Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SKY PETROLEUM, INC. | |
| By: /s/ Karim Jobanputra Karim Jobanputra Interim Chief Executive Officer (On behalf of the registrant and as Principal Executive Officer) |
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| By: /s/ Michael D. Noonan Michael D. Noonan Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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| Date: May 17, 2010 |