Attached files

file filename
EX-10.2 - TURNKEY DRILLING CONTRACT - BAYOU CITY EXPLORATION, INC.bayou_10q-ex1002.htm
EX-31.2 - CERTIFICATION - BAYOU CITY EXPLORATION, INC.bayou_10q-ex3102.htm
EX-10.1 - LIMITED PARTNERSHIP AGREEMENT - BAYOU CITY EXPLORATION, INC.bayou_10q-ex1001.htm
EX-10.4 - LIMITED PARTNERSHIP AGREEMENT - BAYOU CITY EXPLORATION, INC.bayou_10q-ex1004.htm
EX-32.1 - CERTIFICATION - BAYOU CITY EXPLORATION, INC.bayou_10q-ex3201.htm
EX-10.5 - TURNKEY DRILLING CONTRACT - BAYOU CITY EXPLORATION, INC.bayou_10q-ex1005.htm
EX-31.1 - CERTIFICATION - BAYOU CITY EXPLORATION, INC.bayou_10q-ex3101.htm
EX-32.2 - CERTIFICATION - BAYOU CITY EXPLORATION, INC.bayou_10q-ex3202.htm
EXCEL - IDEA: XBRL DOCUMENT - BAYOU CITY EXPLORATION, INC.Financial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q
(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012
or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  ______________________________ to ______________________________

Commission File Number:                                                      0-27443

BAYOU CITY EXPLORATION, INC.
(Exact name of registrant as specified in its charter)

NEVADA
61-1306702
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

632 Adams Street, Suite-700, Bowling Green, Kentucky 
 42101
(Address of principal executive offices) 
 (Zip Code)

(800) 798-3389
(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) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  þYes oNo

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.)  þYes ¨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 definition of “larger accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
  
Large accelerated filer ¨ Accelerated filer ¨
   
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company þ
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  oYes þNo

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  oYes ¨No

APPLICABLE ONLY TO CORPORATE ISSUERS:
Shares outstanding for each class of stock as of the latest practicable date:

Title or Class
Shares Outstanding on April 30, 2012
Common Stock, $0.005 par value
99,003,633


 
 
 
 
  
 
PART I
FINANCIAL INFORMATION
 
     
ITEM 1.
FINANCIAL STATEMENTS
1
 
BALANCE SHEETS AS OF MARCH 31, 2012 (UNAUDITED) AND DECEMBER 31, 2011 (AUDITED)
1
 
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
2
 
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
3
 
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
4
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
7
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
12
ITEM 4.
CONTROLS AND PROCEDURES
12
     
 
PART II
OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
13
ITEM 1A.
RISK FACTORS
13
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
13
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
13
ITEM 4.
MINE SAFETY DISCLOSURES.
13
ITEM 5.
OTHER INFORMATION
13
ITEM 6.
EXHIBITS
14
 
 
 
 
 

 
BAYOU CITY EXPLORATION, INC.
BALANCE SHEETS
  
   
March 31,
2012
   
December 31,
2011
 
   
(Unaudited)
   
(Audited)
 
ASSETS:
 
             
CURRENT ASSETS:
           
Cash
 
$
1,991,717
   
$
1,259,934
 
Accounts receivable:
               
Trade and other
   
50,940
     
13,778
 
Prepaid expenses and other
   
5,520
     
5,520
 
                 
TOTAL CURRENT ASSETS
   
2,048,177
     
1,279,232
 
                 
OIL AND GAS PROPERTIES, NET
   
516,731
     
415,149
 
OTHER FIXED ASSETS
   
25,047
     
25,047
 
                 
TOTAL ASSETS
 
$
2,589,955
   
$
1,719,428
 
   
LIABILITIES AND STOCKHOLDERS' EQUITY:
 
             
CURRENT LIABILITIES:
           
Accounts payable and accrued expenses
 
$
73,527
   
$
154,705
 
Accounts payable – related party
   
84,906
     
84,906
 
Net turnkey partnership obligation
   
693,471
     
743,601
 
Notes payable - minority shareholders
   
100,000
     
100,000
 
                 
TOTAL CURRENT LIABILITIES
   
951,904
     
1,083,212
 
                 
TOTAL LIABILITIES
   
951,904
     
1,083,212
 
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized;
     0 shares issued and outstanding as of March 31, 2012 and December 31, 2011
   
-
     
-
 
Common stock, $0.005 par value; 150,000,000 shares authorized; 99,003,633 and
     29,003,633 shares issued and outstanding at March 31, 2012 and at December 31, 2011, respectively
   
495,018
     
145,018
 
Additional paid in capital
   
13,414,747
     
13, 414,747
 
Accumulated deficit
   
(12,271,714
)
   
(12,923,519
)
                 
TOTAL STOCKHOLDERS' EQUITY
   
1,638,051
     
636,246
 
                 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
2,589,955
   
$
1,719,458
 
  
The accompanying notes are an integral part of these financial statements
   
 
1

 
 
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
  
   
Three Months Ended March 31,
 
   
2012
   
2011
 
OPERATING REVENUES:
           
Oil and gas sales
  $ 59,567     $ 38,155  
Net turnkey drilling contract revenue
    856,285       -  
                 
TOTAL OPERATING REVENUES
    915,852       38,155  
                 
OPERATING COSTS AND EXPENSES:
               
Lease operating expenses and production taxes
    19,116       12,301  
Abandonment and dry hole costs
    -       90  
Depreciation, depletion and amortization
    27,989       30,435  
Marketing Costs
    68,621       33,134  
General and administrative costs
    148,291       160,627  
                 
TOTAL OPERATING COSTS
    264,017       236,587  
OPERATING INCOME (LOSS)
    651,835       (198,432 )
                 
OTHER INCOME:
               
Miscellaneous income
    -       200  
                 
NET INCOME (LOSS) BEFORE INCOME TAX
    651,835       (198,232 )
                 
Income Tax Provision
    -       -  
                 
NET INCOME (LOSS)
  $ 651,835       (198,232 )
                 
NET INCOME (LOSS) PER COMMON SHARE – BASIC
  $ 0.01     $ (0.01 )
                 
NET INCOME (LOSS) PER COMMON SHARE – DILUTED
  $ 0.01       (0.01 )
Weighted average common shares outstanding -
               
Basic
    46,503,633       29,003,633  
                 
Diluted
    47,109,694       29,003,633  
  
The accompanying notes are an integral part of these financial statements
   
 
2

 
 
BAYOU CITY EXPLORATION, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
  
   
Three Months Ended March 31,
 
   
2012
 
 2011
 
CASH FLOW FROM OPERATING ACTIVITIES:
           
             
Net (loss) income
  $ 651,835     $ (198,232 )
Adjustments to reconcile net (loss) income to net cash flows used in operating activities:
               
Depreciation, depletion, and amortization
    27,989       30,435  
Abandonment of oil and gas properties
    495       -  
Common stock issued for services
    22,500       -  
Change in operating assets and liabilities:
               
Accounts receivable - trade
    (37,162 )     (54,966 )
Accounts payable and accrued liabilities
    (81,178 )     189,843  
Net turnkey partnership obligation
    (50,130 )     -  
                 
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    534,349       (32,920 )
                 
CASH FLOW FROM INVESTING ACTIVITIES:
               
Purchase of oil and gas properties
    (130,066 )     (92,508 )
Proceeds from sale of oil and gas property
    -       372,284  
                 
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    (130,066 )     279,776  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuing stock
    327,500       -  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    327,500       -  
                 
NET INCREASE IN CASH
    731,783       246,856  
                 
CASH AT BEGINNING OF PERIOD
    1,259,934       491,708  
                 
CASH AT END OF PERIOD
  $ 1,991,717     $ 738,564  
   
The accompanying notes are an integral part of these financial statements
   
 
3

 
   
BAYOU CITY EXPLORATION, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1.    BASIS OF PRESENTATION

The financial statements of Bayou City Exploration, Inc. (the “Company”) included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Although certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been omitted, the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Form 10-K of the Company for its fiscal year ended December 31, 2011 and subsequent filings with the SEC.

The financial statements included herein reflect all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary to present a fair statement of the results for the interim periods. The results for interim periods are not necessarily indicative of trends or of results to be expected for a full year.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Under the sales method, oil and gas revenue is recognized when produced and sold. Management fees are recognized under the accrual method and recorded when earned. Prospect fees charged under joint participation agreements are recorded after execution.

Accounts Receivable

Accounts receivable are from oil and gas sales produced and sold during the reporting period but awaiting cash payment, from expenditures paid on behalf of the limited partnerships, from expenditures on behalf of non-operators, including related parties and on oil and gas properties operated by the Company. Based upon a review of trade receivables as of March 31, 2012, a total of $0 was considered potentially uncollectible.

Managed Limited Partnerships

The Company sponsors limited partnerships for which it serves as the Managing General Partner. The Company normally participates for 10% of the limited partnerships as the Managing General Partner and accounts for the investment under the equity method. Revenues received and changes in the partnership investments are recorded as oil and gas revenues and net assets, respectively.

Oil and Gas Properties

The Company follows the successful efforts method of accounting for oil and gas producing activities. Under the successful efforts method of accounting, costs which relate directly to the discovery of oil and gas reserves are capitalized. These capitalized costs include:

 
(1) 
the costs of acquiring mineral interest in properties,

 
(2) 
costs to drill and equip exploratory wells that find proved reserves,

 
(3) 
costs to drill and equip development wells, and

 
(4) 
costs for support equipment and facilities used in oil and gas producing activities.

These costs are depreciated, depleted or amortized on the unit of production method, based on estimates of recoverable proved developed oil and gas reserves. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs, and costs of carrying and retaining unproved properties are expensed.

The costs of acquiring unproved properties are capitalized as incurred and carried until the property is reclassified as a producing oil and gas property, or considered impaired as discussed below. The Company annually assesses its unproved properties to determine whether they have been impaired. If the results of this assessment indicate impairment, a loss is recognized by providing a valuation allowance. When an unproved property is surrendered, the costs related thereto are first charged to the valuation allowance, with any additional balance expensed to operations.
  
 
4

 
   
The costs of drilling exploratory wells are capitalized as wells in progress pending determination of whether the well has proved reserves. Once a determination is made, the capitalized costs are charged to expense if no reserves are found or, otherwise reclassified as part of the costs of the Company’s wells and related equipment. In the absence of a determination as to whether the reserves that have been found can be classified as proved, the costs of drilling such an exploratory well are not carried as an asset for more than one year following completion of drilling. If, after a year has passed, the Company is unable to determine that proved reserves have been found, the well is assumed to be impaired and its costs are charged to expense. At March 31, 2012 and December 31, 2011 the Company had $0 in capitalized costs pending determination.

Other Dispositions

Upon disposition or retirement of property and equipment other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is credited or charged to expense. The Company recognizes the gain or loss on the sale of either a part of a proved oil and gas property or of an entire proved oil and gas property constituting a part of a field upon the sale or other disposition of such. The unamortized cost of the property or group of properties, a part of which was sold or otherwise disposed of, is apportioned to the interest sold and interest retained on the basis of the fair value of those interests.

Impairment of Long-Lived Assets

The Company follows the provisions of ASC Subtopic 360-35, “Property, Plant and Equipment – Subsequent Measurement.” Consequently, the Company reviews its long-lived assets to be held and used, including oil and gas properties accounted for under the successful efforts method of accounting. Whenever events or circumstances indicate the carrying value of those assets may not be recoverable, an impairment loss for proved properties and capitalized exploration and development costs is recognized. The Company assesses impairment of capitalized costs, or carrying amount, of proved oil and gas properties by comparing net capitalized costs to undiscounted future net cash flows on a field-by-field basis using known expected prices, based on set agreements. If impairment is indicated based on undiscounted expected future cash flows, then impairment is recognizable to the extent that net capitalized costs exceed the estimated fair value of the property. Fair value of the property is estimated by the Company using the present value of future cash flows discounted at 10%, in accordance with ASC 932-235, “Disclosures about Oil and Gas Producing Activities,”
  
Stock Options

Effective January 1, 2006, the Company accounts for stock options in accordance with revised Statement of Financial Accounting Standards (SFAS) No. 123, Share-Based Payment (SFAS 123(R) (ASC 718 and 505). Accordingly, stock compensation expense has been recognized in the statement of operations based on the grant date fair value of the options for the period ended December 31, 2006 and thereafter.

Under SFAS 123(R) (ASC 718 and 505), the fair value of options is estimated at the date of grant using a Black-Scholes-Merton (“Black-Scholes”) option-pricing model, which requires the input of highly subjective assumptions including the expected stock price volatility. Volatility is determined using historical stock prices over a period consistent with the expected term of the option. The Company utilizes the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period.

The Company has used this method in determining the expected term of all options. The Company has several awards that provide for graded vesting. The Company recognizes compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits

The Company maintains its cash balances in one financial institution located in Bowling Green, Kentucky. The account the cash balance reflects is insured by the Federal Deposit Insurance Corporation (“FDIC”) for an unlimited amount since it meets the FDIC’s requirements as a noninterest-bearing account. At March 31, 2012 the cash balances were at $1,991,717.
   
 
5

 
  
Offering Related Expenses

The Company expenses marketing-related offering expenses as these are incurred.  Marketing expenses totaled $68,621 and $33,134 in the three month periods ended March 31, 2012 and 2011, respectively.

Fair Value of Financial Instruments

The carrying cash value and cash equivalents, receivables, prepaids, accounts payable, notes payable and advances payable approximate their fair value. Management is of the opinion that the Company is not exposed to significant interest or credit risk arising from these financial instruments.

Recently Issued Accounting Pronouncements

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.

3.    CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Sale of Common Stock to Related Parties

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 70,000,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private offering (the “Offering”) at a price of $0.005 per share, for total consideration to the Company valued at $350,000.  The Investors included Charles T. Bukowski, Jr., the Company’s President and Chief Executive Officer, as well as a member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s Chief Financial Officer and a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder and G2 International, Inc., a consultant to the Company. Of the $350,000, $327,500 was collected in cash and $22,500 was exchanged for consulting services.
  
As of March 31, 2012, there are 99,003,633 shares of common stock issued and outstanding.   Stephen C. Larkin, Director and Chief Financial Officer of the Company, owns 27.06% as a result of his purchase in the Offering.

Payables and Notes Payable to Related Parties

As of March 31, 2012 and December 31, 2011, the Company had the following debts and obligations to related parties:

   
March 31, 2012
   
December 31, 2011
 
             
Note Payable to a minority shareholder
  $ 100,000     $ 100,000  
                 
Total Note Payable to a minority shareholder
  $ 100,000     $ 100,000  

During the fourth quarter 2007, Peter Chen, a minority shareholder loaned the Company $100,000 to finance the Company’s operations. The Company executed a written promissory note on October 4, 2007 which is due on demand and bears an interest rate of 0%.

4.    OIL AND GAS PROPERTIES
 
Oil and Gas properties, stated at cost, consisted of the following:

   
March 31, 2012
   
December 31, 2011
 
Proved oil and gas properties
  $ 393,866     $ 434,289  
Investment in partnerships
    334,018       207,280  
Investment in undeveloped leases in Illinois Basin
    190,000       190,000  
                 
Total oil and gas properties
    917,884       831,569  
                 
Less accumulated depletion and amortization
    (401,153 )     (416,420 )
Less impairment
    -       -  
 Net oil and gas properties
  $ 516,731     $ 415,149  
  
 
6

 
  

5.    COMMITMENTS AND CONTINGENCIES

Commitments

As of March 31, 2012, neither the Company nor any of its properties is subject to any material pending legal proceedings.

Contingencies

As the managing general partner of the Company’s investment partnerships, the Company’s operations are subject to environmental protection regulations established by federal, state, and local agencies that may necessitate significant capital outlays that, in turn, would materially affect the financial position and business operations of the Company. These regulations, enacted to protect against waste, conserve natural resources and prevent pollution, could necessitate spending funds on environmental protection measures, rather than on drilling operations.  Because these laws and regulations change frequently and are becoming increasingly more stringent, the costs to the Company of compliance with existing and future environmental regulations and the overall impact on the Company’s operations or financial condition cannot be predicted, but are likely to increase. Furthermore, if any penalties or prohibitions were imposed on the Company for violating such regulations, the Company’s operations could be adversely affected.

6.    STOCKHOLDERS’ EQUITY

Authorization to Issue Shares — Preferred and Common

The Company is authorized to issue two classes of stock that are designated as common and preferred stock. As of March 31, 2012, the Company was authorized to issue 155,000,000 shares of stock, 150,000,000 being designated as common stock of which 99,003,633 were outstanding, and 5,000,000 shares designated as preferred stock, of which 0 shares were outstanding.

Issuance of Equity Securities

As described in Note 3 above, on March 8, 2012, the Company conducted an Offering pursuant to which the Company sold 70,000,000 shares of the Company’s Common Stock for total consideration to the Company valued at $350,000.   The consideration for the Common Stock was paid primarily in cash, however, the shares issued to one Investor were issued in exchange for settlement of outstanding invoices for consulting services rendered.

Stock Options

During the three months ended March 31, 2012, the Company did not issue any options to purchase shares of the Company’s common stock, and no outstanding options were exercised during this period.

7.    SUBSEQUENT EVENTS
  
The Company has evaluated events and transactions since the balance sheet date of March 31, 2012 through the date the financial statements were available to be issued.
  
On April 9, 2012, the Company formed the 2012 Bayou City Squeeze Box Offset Program, L.P.  The partnership was formed to obtain a 5% working interest in the Squeeze Box Shallow Well in Cameron Parish, LA.  The Company will pay for and hold a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.
   
 
7

 
   
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We urge you to read the following discussion in conjunction with management’s discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011 as well as with our condensed consolidated financial statements and the notes thereto included elsewhere herein.

Caution Regarding Forward-Looking Statements

Our prospects are subject to uncertainties and risks. In this Quarterly Report on Form 10-Q, we make forward-looking statements in this Item 2 and elsewhere that also involve substantial uncertainties and risks. These forward-looking statements are based upon our current expectations, estimates and projections about our business and our industry, and reflect our beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “if,” “may,” “might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance and our anticipated growth, descriptions of our strategies, and other objectives, expectations and intentions, the trends we anticipate in our business and the markets in which we operate, and the competitive nature and anticipated growth of those markets.

We caution readers that forward-looking statements are predictions based on our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed in our other filings with the SEC or changes in costs associated with our operations. We undertake no obligation to revise or update any forward-looking statement for any reason.

Overview

Bayou City Exploration, Inc., (the “Company”), a Nevada corporation, was organized in November 1994, as Gem Source, Incorporated, and subsequently changed the name to Blue Ridge Energy, Inc. in May 1996. In September 2005, the Company changed its name to Bayou City Exploration, Inc. The Company’s corporate headquarters are located at 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101.

The Company is engaged in the oil and gas business, and primarily operates in the gulf coast of Texas, East Texas, South Texas, and Louisiana.  During 2010, the Company changed its core business strategy.  The Company’s primary focus is now the management of partnerships that are created to explore and develop oil and gas reserves.  Pursuant to this new business plan, the Company manages partnerships that purchase interests in exploratory wells as well as interests in producing oil and gas properties with undrilled reserves.  This growth strategy is based on selling partnership interests to third party investors who will essentially assume the costs associated with the drilling of wells in exchange for interests in a partnership that holds working interest in the wells they finance.  The Company acts as the Managing General Partner for these partnerships and maintains a partnership interest or a working interest position outside of the partnership in each program for which we pay our proportionate share of the actual cost of drilling, testing, and completing the project well(s) and subsequent operating expenses to the extent that we retain a portion of the working interest.  The Company believes this strategy will reduce of financial risk for the Company in drilling new wells, while still receiving income from present production in addition to income from any new successful new drilling.

When the Company undertakes a drilling project, a calculation is made to estimate the costs associated with drilling the well(s).  The Company then forms and sells units in a partnership that will acquire working interest in the well(s) and undertake drilling operations. The Company typically enters into turnkey contracts with the partnerships it manages, pursuant to which we agree to undertake the drilling and completion of the partnerships’ well(s), for a fixed price, to a specific formation or depth.  As such, each partnership essentially prepays a fixed amount for the drilling and completion of a specified number of wells that the Company records as revenue.

As of March 31, 2012, the Company had total assets of $2,589,955, total liabilities of $951,904 and stockholders’ equity of $1,638,051. The Company had a net income of $651,835 for the three months ended March 31, 2012 compared to a net loss of $198,232 during the three months ended March 31, 2011. The net income per common share was $0.01 per share during the three months ended March 31, 2012 as compared to net loss per common share of ($0.01) during the same period in 2011. All per share data in this report has been adjusted to give effect to applicable stock issues and conversions.
   
 
8

 
  
All of the Company’s periodic report filings with the SEC pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended, are available through the SEC web site located at www.sec.gov, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports. The Company will also make available to any stockholder, without charge, copies of its Annual Report on Form 10-K as filed with the SEC and a copy of its Code of Ethics. For copies of this, or any other filings, please contact: Stephen C. Larkin at Bayou City Exploration, Inc., 632 Adams Street — Suite 700, Bowling Green, Kentucky 42101 or call (800) 798-3389.

Formation of Investment Partnerships

During the three months ended March 31, 2012, the Company sponsored eight limited partnerships formed for the purpose of oil and gas exploration and drilling.  The Company serves as the managing general partner of each of the partnerships for which it receives turnkey fees for drilling each partnership’s wells and, if applicable, completing the wells (the “Turnkey Fees”).

The 2011 Bayou City Two Well Drilling Program, L.P, (the “2011 Drilling Program”) was formed  in Kentucky on January 10, 2011 and planned to acquire up to a 2.125% working interest in two oil and gas wells known as the Miller Prospect Well and the Squeeze Box Prospect Well in Colorado County, Texas.  The Company has acquired a 1.78% working interest in the wells. The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $327,750 in Turnkey Fees associated with the 2011 Drilling Program.  The Company realized a profit of $197,253 from the Turnkey Fees received as of March 31, 2012.

The 2011-B Bayou City Two Well Drilling Program, L.P, (the “2011-B Drilling Program”) was formed in Kentucky on March 4, 2011 to acquire a 5% working interest in two oil wells, the Friesian Prospect, located in Colorado County, Texas and the Little Chenier Well, located in Cameron Parish, Louisiana.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $818,289 in Turnkey Fees associated with the 2011-B Drilling Program.  The Company realized a profit of $457,758 from the Turnkey Fees received as of March 31, 2012.

The 2011 Bayou City Drilling & Production Program, L.P., (the “Drilling and Production Program”) was formed on March 18, 2011 to acquire a 2.875% working interest in the same two wells as the 2011 and 2011-B Drilling Programs.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $529,000 in Turnkey Fees associated with the Drilling and Production Program.  The Company realized a profit of $343,677 from the Turnkey Fees received as of March 31, 2012.

The 2011-C Bayou City Offset Drilling Program, L.P., (the “2011-C Drilling Program”) was formed in Kentucky on April 12, 2011 to acquire a 5% working interest in the Glasscock Ranch Prospect Well, or Kleimann #1 Well, located in Colorado County, Texas.  The Company only acquired a 2.625% working interest in the Kleimann #1 Well.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership well.  At March 31, 2012, the Company had received $234,938 in Turnkey Fees associated with the 2011-C Drilling Program.  The Company realized a profit of $137,865 from the Turnkey Fees received as of March 31, 2012.

The 2011-D Bayou City Two Well Drilling Program, L.P., (the “2011-D Drilling Program) was formed in Kentucky on May 10, 2011 to acquire a 5% working interest in the Prairie Bell West Prospect Well and the Prairie Bell East Prospect Well located in Colorado County, Texas.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $949,924 in Turnkey Fees associated with the 2011-D Drilling Program.  The Company realized a profit of $524,958 from the Turnkey Fees received as of March 31, 2012.

The 2011 Bayou City Year End Drilling Program, L.P., (“2011 Year End Program”) was formed in Kentucky on September 13, 2011 to acquire a 6.48% working interest in the Loma Blanca Well located in Brooks County, Texas.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $1,801,500 in Turnkey Fees associated with the 2011 Year End Program.  The Company realized a profit of $956,462 from the Turnkey Fees received as of March 31, 2012.

The 2012-A Bayou City Year Drilling Program, L.P., (“2012-A Program”) was formed in Kentucky on December 13, 2011 to acquire a 8.33% working interest in the Altair Well located in Colorado County, Texas.  The Company paid for and holds a 10% interest in this partnership and receives management fees equal to the excess, if any, of the Turnkey Fees over the total cost to the Company of drilling and if applicable, completing the partnership wells.  At March 31, 2012, the Company had received $1,068,750 in Turnkey Fees associated with the 2012-A Year End Program.  The Company has not realized a profit as of March 31, 2012.
  
 
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Description of Properties

The following are the primary properties held by the Company as of March 31, 2012:

Developed Properties

Chapman No. 75-1:  The Company owns an 8% working interest in 1 well located in Nueces County, Texas, which began production in October 2009.  The well produces approximately 56 thousand cubic feet of gas (“Mcf”) per day as of the date of this report.

Garcitas #1:  The Company owns an 11.2% working interest in 1 well located in Jackson & Victoria County, Texas, which began production in March 2010.  The well produces approximately 11 barrels of oil (“Bbls”) per day as of the date of this report.

Rooke B-1:  The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in February 2010.  The well produces approximately 484 Mcf and 18 Bbls per day as of the date of this report.

Rooke #2:  The Company owns a 9.5% working interest in 1 well located in Refugio County, Texas, which began production in May 2010.  The well produces approximately 6 Bbls per day as of the date of this report.

Miller A-1: The Company owns a 0.81% working interest in the Miller A-1, a gas well is located in Colorado County, Texas, which began production in August 2011.  The well produces approximately 246 Mcf per day as of the date of this report.

Kleimann #1: The Company owns a 0.26% working interest in the Kleimann #1, a well located in Colorado County, Texas, which began production in March 2012.  The well is currently producing approximately 334 Mcf and 20 Bbls per day as of the date of this report.

Squeeze Box: The Company owns a 0.78% working interest in the Squeezebox well, a gas well located in Cameron Parish, Louisiana, which began production in November 2011. The well produces approximately 526 Mcf and 31 Bbls per day as of the date of this report.

Little Chenier: The Company owns a 0.50% working interest in the Little Chenier well, a gas well is located in Cameron Parish, Louisiana. Although it has not been hooked up to sales as of yet, it tested at over 1,200 Mcf per day.   The operator is waiting on a state permit to allow a 5,000’ pipeline that will get us to sales.

Prairie Bell East: The Company owns a 0.49% working interest in the Prairie Bell East well, a gas well is located in Colorado County, Texas, which began production in February 2012.  The well produces approximately 2,472 Mcf and 119 Bbls per day as of the date of this report.

Prairie Bell West: The Company owns a 0.49% working interest in the Prairie Bell West well, which is located in Colorado County, Texas.   A pipeline is currently being built to get the gas to sales, and production is expected to begin by the end of May 2012.

Loma Blanca: The Company owns a 0.59% working interest in the Loma Blanca well, which well is located in Brookes County, Texas.  Completion procedure for the well is currently being designed.

Key Undeveloped Properties

On August 29, 2011, the Company invested $190,000 and entered into the Next Energy Illinois Basin Oil & Gas Lease Development JV (“Next Energy JV”), a joint venture with Next Energy, LLC and other industry participants to evaluate, test and purchase mineral leases in the Illinois Basin.  The venture is targeting up to 300,000 net acres of oil and gas leases. The investment entitles the Company to 0.005% of the joint venture.  The Company does not own a direct interest in any of the acreage, but rather an interest in a joint venture that holds undeveloped acreage.
    
On December 13, 2011 the Company formed the 2012-A Bayou City Year Drilling Program, L.P. to acquire up to a 8.33% working interest in the Altair Well located in Colorado County, Texas.  The timetable for drilling and developing this well is currently unknown.

Critical Accounting Policies

Since the Company filed its Annual Report on Form 10-K f  or the fiscal year ended December 31, 2011, there have been no changes to the Company’s Critical Accounting Policies.
   
 
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Results of Operations

Comparison of Three Month Periods Ended March 31, 2012 and March 31, 2011

The Company had a net income of $651,835 for the three months ended March 31, 2012 compared to a net loss of $198,232 for the same period in 2011. The income per common share was $0.01 per share during the first quarter of 2012 compared to a loss per common share of ($0.01) per share during the first quarter of 2011.  The increase in net income in the first quarter of 2012 was primarily the result of net income from recognizing turnkey income from limited partnerships the Company manages, offset slightly by increases in operating costs and expenses. Expenses from the first quarter of 2011 to the first quarter of 2012 include a $35,487 increase in marketing costs, a $12,336 decrease in general and administrative costs, a $2,446 decrease in depreciation, depletion and amortization expense, and a $6,815 increase in lease operating expenses and production taxes.

Operating Revenues

The Company’s operating revenues increased $877,697 in the three months ended March 31, 2012 as compared to the same period in 2011.  This significant increase was primarily a result of $856,285 of net turnkey drilling contract revenue during the first quarter of 2012, whereas no such revenue was realized during the same period in 2011.  In addition, operating revenues also increased $21,412 from the first quarter of 2011 to the first quarter of 2012 as a result of oil and gas sales by the partnerships managed by the Company.  This increase was largely due to the fact that the Company received revenues from wells it managed during the first quarter of 2012 that it did not hold an interest in during the three months ended March 31, 2011.

Operating Costs and Expenses

The Company’s total operating costs increased $27,430 from three months ended March 31, 2011 compared to the three months ended March 31, 2012.  The rise in total costs was a result of increases in lease operating expenses and production taxes, resulting from an increase in the number of wells under the Company’s management from four during the first quarter 2011 to six during the first quarter of 2012, as well as an increase in marketing costs for the Company during the first quarter of 2012.

Direct operating costs are reflected as lease operating expenses and production taxes on the Company’s statement of operations and were $19,116 for the three months ended March 31, 2012 as compared to $12,301 during the three months ended March 31, 2011.  These costs increased $6,815 during the period because the Company owned interests in six oil and gas wells that were in full operation during the first quarter of 2012, whereas during the same period in 2011, the Company only held interest in four operating wells in which reserves are depleting.

The Company’s general and administrative expenses decreased to $148,291 for the first quarter 2012 as compared to $160,627 for the first quarter of 2011. Legal fees for the period went from $27,379 in 2011 to only $355 in 2012 and that decrease in expense is offset by an increase in office rent in the amount of $4,535 and auditing and consulting fees increased $5,264.  Depreciation, depletion and amortization costs also decreased by $2,446 during the three months ended March 31, 2012.  The increase of $35,487 in marketing expenses is attributable to fees associated with a conference attended by members of the Company.

Balance Sheet Review
 
Assets:  The Company’s total assets increased $870,527 from $1,719,428 for the year ended December 31, 2011 to $2,589,955 for the period ended March 31, 2012.  The primary reason for the increase in assets was due to the $731,783 increase in the Company’s cash during the first quarter, which was attributable to income from turnkey fees and the proceeds from the sale of its Common Stock.

Liabilities:  The Company’s total liabilities decreased $131,308 from $1,083,212 for the year ended December 31, 2011 to $951,904 for the quarter ended March 31, 2012.  The decrease in liabilities was primarily a result of a decrease in accounts payable and accrued expenses by $81,178 from $154,705 at year end to $73,527 at March 31, 2012, and a decrease of $50,130 in net turnkey partnership obligations owed by the Company at March 31, 2012 as compared to December 31, 2012.
  
 
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Liquidity and Capital Resources

The Company’s liquidity position has significantly improved as a result of the Company’s implementation of a new business plan over the past year, in which the Company sponsored and served as managing general partner of limited partnerships formed for the purpose of conducting oil and gas exploration and production operations.  As a result of its formation and sponsorship of such limited partnerships, the Company has received turnkey drilling contract revenue in addition to revenues from oil and gas production.  The Company intends to continue to sponsor such partnerships and receive revenues from similar turnkey arrangements in order to fund its operations.  The Company’s ability to continue and maintain profitable operations is contingent upon its continued ability to sponsor additional partnerships and earn turnkey fees.  In addition, the Company believes it will continue to earn revenue from its direct oil and gas holdings, including holdings from the oil and gas limited partnerships it manages.  The total production capability of the six currently producing wells and their cash flows is known, and diminishing.  Revenues from currently producing wells will not be sufficient to sustain the Company’s operations on a going forward basis.  Based on the Company’s projected expenses, we believe our current cash resources are sufficient to fund operations for at least the next twelve months.

As of March 31, 2012, the Company’s cash balance was $1,991,717 and its liabilities totaled $951,904, which include $693,471 in partnership obligations pursuant to its turnkey contracts with the partnerships it manages, as well as $73,527 in accounts payable and accrued expenses, $84,906 in related party accounts payable, and $100,000 in a note payable to a minority shareholder.    Cash on hand at March 31, 2012, was primarily from turnkey fees received from the partnerships the Company manages and cash provided by financing activities, offset by costs associated with the purchase of oil and gas properties.

Net cash provided by operating activities during the three months ended March 31, 2012 was $534,349. A $651,835 net income from the first quarter of 2012 was primarily a result of the Company’s 2011 Year End Drilling Program turnkey fees being recognized as income.  The Company did not recognize income from turnkey fees during the comparable period of 2011.  In addition, accounts payable and accrued liabilities decreased by $81,178 during the period in comparison to the quarter ended March 31, 2011. Net cash used in investing activities was $130,066 during the three months ended March 31, 2012, which was a result of the purchase of oil and gas property.  In addition, the Company recognized $327,500 in cash proceeds from the issuance of 70,000,000 shares of its Common Stock to eight investors in a private transaction.  As a result of increases in cash from operating activities and financing activities, offset by cash used in investing activities, the Company saw a $731,783 increase in cash during the period ended March 31, 2012.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s principal executive officer and principal financial officer, conducted an evaluation with the participation of our management of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of March 31, 2012, pursuant to Exchange Act Rule 13a-15. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the appropriate management on a basis that permits timely decisions regarding disclosure. Based upon that evaluation, our principal executive officer, our principal financial officer and our management concluded that the Company's disclosure controls and procedures as of March 31, 2012 were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Exchange Act is accumulated and communicated to our management to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal controls over financial reporting during our first quarter ended March 31, 2012 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Limitations on the Effectiveness of Controls

Our disclosure controls and procedures provide our principal executive officer and principal financial officer with reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within our company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.
   
 
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PART II
OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

None.
  
ITEM 1A.  RISK FACTORS
  
The Company is a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and as such, is not required to provide the information required under this Item.
 
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 8, 2012, the Company entered into a Stock Purchase Agreement with eight investors (the “Investors”), pursuant to which the Company sold 70,000,000 shares of the Company’s common stock, $0.005 par value (the “Common Stock”) in a private offering (the “Offering”) at a price of $0.005 per share, for total consideration to the Company valued at $350,000.  The Investors included Charles T. Bukowski, Jr., the Company’s President and Chief Executive Officer, as well as a member of the Company’s Board of Directors (the “Board”), Travis N. Creed, a member of the Board, Stephen C. Larkin, the Company’s Chief Financial Officer and a member of the Board, Robert D. and Doris R. Burr, the Company’s former Chief Executive Officer and his spouse, Danny Looney, the Company’s tax accountant, Harry J. Peters, a consultant to the Company, Robert Shallow, a current stockholder and G2 International, Inc., a consultant to the Company. The consideration for the Common Stock was paid primarily in cash, however, the shares issued to G2 International, Inc. were issued in exchange for settlement of outstanding invoices for consulting services rendered.  The cash proceeds of the offering were used for general working capital purposes.

The securities issued in the Offering were issued without registration under the Securities Act in reliance upon the exemption provided in Section 4(2) of the Securities Act. Appropriate legends were affixed to the share certificates issued in the above transaction.  The Company believes that each Investor was an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in its common stock. Each Investor had adequate access, through his relationship with the Company, to information about the Company. The transaction described above did not involve general solicitation or advertising.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES.

Not Applicable..

ITEM 5.  OTHER INFORMATION

None.
  
 
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ITEM 6.  EXHIBITS

The following exhibits are filed with this Quarterly Report on Form 10-Q.

Exhibit
Description
10.1
Limited Partnership Agreement of 2012-A Bayou City Drilling Program, L.P.*
10.2
Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012-A Bayou City Drilling Program, L.P., dated January 2, 2012.*
10.3
Stock Purchase Agreement, dated March 8, 2012 by and among the Company and the investors named therein (incorporated by reference to Ex. 10.1 of the Company’s Current Report on Form 8-K filed with the Commission on March 9, 2012).
10.4
Limited Partnership Agreement of 2012 Bayou City Squeeze Box Offset Program, L.P.*
10.5
Turnkey Drilling Contract between Bayou City Exploration, Inc. and 2012 Bayou City Squeeze Box Offset Program, L.P., dated April 9, 2012.*
31.1
Certification of Principal Executive Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a).*
31.2
Certification of Principal Financial Officer of Periodic Report pursuant to Rule 13a-14a/Rule 14d-14(a).*
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.*
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*
101.1
Interactive data files pursuant to Rule 405 of Regulation S-T.*
*Filed herewith.
 
   
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
BAYOU CITY EXPLORATION, INC.
   
Date: May 15, 2012
/s/ Charles T. Bukowski
 
Charles T. Bukowski
 
Chief Executive Officer and President (Principal Executive Officer and Authorized Signatory)
   
Date: May 15, 2012
/s/ Stephen C. Larkin
 
Stephen C. Larkin
 
Chief Financial Officer (Principal Financial and Accounting Officer)


 
 
 
 
 
 
 
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