GULFSLOPE ENERGY, INC Forward-looking Statements
The following discussion and analysis should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements and the notes
to those financial statements included in Item 1 of this Quarterly Report on
Form 10-Q. The following discussion contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). These forward-looking statements involve risks,
uncertainties and assumptions. If the risks or uncertainties materialize or the
assumptions prove incorrect, our results may differ materially from those
expressed or implied by such forward-looking statements and assumptions. All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, such as those statements that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future. These statements are based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate in the circumstances. Known material risks that may
affect our financial condition and results of operations are discussed in Item
1A, Risk Factors of our Annual Report on Form 10-K for the year ended
Overview
We have focused our operations in the
We have historically operated our business with working capital deficits and
these deficits have been funded by equity and debt investments and loans from
management. As of
Competitive Advantages
Experienced management. Our management team has a track record of finding,
developing and producing oil and natural gas in various hydrocarbon producing
basins including the US
Advanced seismic image processing. Commercial improvements in 3-D seismic data imaging and the development of advanced processing algorithms, including pre-stack depth, beam, and reverse time migration have allowed the industry to better distinguish hydrocarbon traps and identify previously unknown prospects. Specifically, advanced processing techniques improve the definition of the seismic data from a scale of time to a scale of depth, thus locating the images in three dimensions. The Company has invested significant technical person hours in the reprocessing and interpretation of seismic data. We believe the proprietary reprocessing and interpretation and the contiguous nature of our licensed 3-D seismic data gives us an advantage over other exploration and production companies operating in our core area.
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Industry leading position in our core area. We have licensed 2.2 million acres
of 3-D seismic data which covers over 440 Outer Continental Shelf ("OCS")
Federal lease blocks on the highly prolific
Technical Strategy
We believe that a major obstacle to identifying potential hydrocarbon
accumulations globally has been the inability of seismic technology to
accurately image deeper geologic formations because of overlying massive,
extensive, and complex salt bodies. Large and thick laterally extensive
subsurface salt layers highly distort the seismic ray paths traveling through
them, which often has led to misinterpretation of the underlying geology and the
potential major accumulations of oil and gas. We believe the opportunity exists
for a technology-driven company to extensively apply advanced seismic
acquisition and processing technologies, with the goal of achieving attractive
commercial discovery rates for exploratory wells, and their subsequent appraisal
and development, potentially having a very positive impact on returns on
invested capital. These tools and techniques have been proven to be effective in
deep water exploration and production worldwide, and we are using them to
identify and drill targets below the salt bodies in an area of the shallower
waters of the
Our technical approach to exploration and development is to deploy a team of highly experienced geo-scientists who have current and extensive understanding of the geology and geophysics of the petroleum system within our core area, thereby decreasing the traditional timing and execution risks of advancing up a learning curve. For data licensing, re-processing and interpretation, our technical staff has prioritized specific geographic areas within our 2.2 million acres of seismic coverage, with the goal to optimize capital outlays.
Modern 3-D seismic datasets with acquisition parameters that are optimal for improved imaging at multiple depths are readily available in many of these sub-basins across our core area and can be licensed on commercially reasonable terms. The application of state-of-the-art seismic imaging technology is necessary to optimize delineation of prospective structures and to detect the presence of hydrocarbon-charged reservoirs below many complex salt bodies. An example of such a seismic technology is reverse time migration, which we believe to be the most accurate, fastest, and yet affordable, seismic imaging technology for critical depth imaging available today.
Lease and Partner Strategy
Our prospect identification and analytical strategy is based on a thorough understanding of the geologic trends within our core area. Exploration efforts have been focused in areas where lease acquisition opportunities are readily available. We entered into two master 3-D license agreements, together covering approximately 2.2 million acres and we have completed advanced processing on select areas within this licensed seismic area exceeding one million acres. We can expand this coverage and perform further advanced processing, both with currently licensed seismic data and seismic data to be acquired. We have sought to acquire and reprocess the highest resolution data available in the potential prospect's direct vicinity. This includes advanced imaging information to further our understanding of a particular reservoir's characteristics, including both trapping mechanics and fluid migration patterns. Reprocessing is accomplished through a series of model building steps that incorporate the geometry of the geology to optimize the final image. Our integration of existing geologic understanding and enhanced seismic processing and interpretation provides us with unique insights and perspectives on existing producing areas and especially underexplored formations below and adjacent to salt bodies that are highly prospective for hydrocarbon production.
We currently hold one lease, and we are evaluating the acquisition of additional
leases in our core area. Our lease has a five-year primary term, plus a three
year extension and the lease expires on
Our plan has been to partner with other entities which could include oil and gas companies and/or financial investors. Our goal is to diversify risk and minimize capital exposure to drilling costs. We expect a portion of our drilling costs to be paid by our partners through these transactions, in return for our previous investment in prospect generation and delivery of an identified prospect on acreage we control. Such arrangements are a commonly accepted industry method of proportionately recouping pre-drill cost outlays for seismic, lease costs, and associated interpretation expenses. We cannot assure you, however, that we will be able to enter into any such arrangements on satisfactory terms.
Merger and Acquisition Strategy
We believe there is an opportunity to consolidate oil and gas assets located in
the offshore
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Recent Developments
During the past fiscal year, the Company has conducted engineering, geotechnical
and economic evaluations on a total of 10 producing property acquisitions, all
located in the
Significant Accounting Policies
The Company uses the full cost method of accounting for its oil and gas exploration and development activities. Under the full cost method of accounting, all costs associated with successful and unsuccessful exploration and development activities are capitalized on a country-by-country basis into a single cost center ("full cost pool"). Such costs include property acquisition costs, geological and geophysical ("G&G") costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells. Overhead costs, which includes employee compensation and benefits including stock-based compensation, incurred that are directly related to acquisition, exploration and development activities are capitalized. Interest expense is capitalized related to unevaluated properties and wells in process during the period in which the Company is incurring costs and expending resources to get the properties ready for their intended purpose. For significant investments in unproved properties and major development projects that are not being currently depreciated, depleted, or amortized and on which exploration or development activities are in progress, interest costs are capitalized. Proceeds from property sales will generally be credited to the full cost pool, with no gain or loss recognized, unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool.
Proved properties are amortized on a country-by-country basis using the units of production method ("UOP"), whereby capitalized costs are amortized over total proved reserves. The amortization base in the UOP calculation includes the sum of proved property, net of accumulated depreciation, depletion and amortization ("DD&A"), estimated future development costs (future costs to access and develop proved reserves), and asset retirement costs, less related salvage value.
The costs of unproved properties and related capitalized costs (such as G&G costs) are withheld from the amortization calculation until such time as they are either developed or abandoned. Unproved properties and properties under development are reviewed for impairment at least quarterly and are determined through an evaluation by management and third-party consultants considering, among other factors, seismic data, requirements to relinquish acreage, drilling results, remaining time in the commitment period, remaining capital plan, and political, economic, and market conditions. In countries where proved reserves exist, exploratory drilling costs associated with dry holes are transferred to proved properties immediately upon determination that a well is dry and amortized accordingly. In countries where a reserve base has not yet been established, impairments are charged to earnings.
Companies that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for the preceding twelve-month period. The cost center ceiling is defined as the sum of (a) estimated future net revenues, discounted at 10% per annum, from proved reserves, (b) the cost of properties not being amortized, if any, and (c) the lower of cost or market value of unproved properties included in the cost being amortized. If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in a lower depreciation, depletion and amortization rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.
The Company capitalizes exploratory well costs into oil and gas properties until a determination is made that the well has either found proved reserves or is impaired. If proved reserves are found, the capitalized exploratory well costs are reclassified to proved properties. The well costs are charged to expense if the exploratory well is determined to be impaired.
As of
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Property and equipment are carried at cost. We assess the carrying value of our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
There has been no change to our critical accounting policies as included in our
annual report on Form 10-K as of
Three Months Ended
There was no revenue during the three months ended
Liquidity and Capital Resources
The Company has incurred accumulated losses for the period from inception to
For the three months ended
The Company will need to raise additional funds to cover planned expenditures, as well as any additional, unexpected expenditures that we may encounter. Future equity financings may be dilutive to our stockholders. Alternative forms of future financings may include preferences or rights superior to our common stock. Debt financings may involve a pledge of assets and will rank senior to our common stock. We have historically financed our operations through private equity and debt financings. We do not have any credit or equity facilities available with financial institutions, stockholders or third-party investors, and will continue to rely on best efforts financings. The failure to raise sufficient capital could cause us to cease operations, or the Company would need to sell assets or consider alternative plans up to and including restructuring.
Off-Balance Sheet Arrangements
None.
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