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| DOIG.OB > SEC Filings for DOIG.OB > Form 10-Q on 18-Aug-2009 | All Recent SEC Filings |
18-Aug-2009
Quarterly Report
This Quarterly Report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Quarterly Report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.
Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. We caution the reader that numerous important factors, including those factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which are incorporated herein by reference, could affect our actual results and could cause our actual consolidated results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, Delta Oil. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We file reports with the Securities and Exchange Commission (the "SEC" or "Commission"). We make available on our website under "Investors/SEC Filings," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.deltaoilandgas.com. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this Quarterly Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
As used in this Quarterly Report, the terms "we," "us," "our," and "Delta Oil" mean Delta Oil & Gas, Inc. and our subsidiaries unless otherwise indicated.
Business of Delta Oil
We are an exploration company focused on developing North American oil and natural gas reserves. Our current focus is on the exploration of our land portfolio comprised of working interests in acreage in King City, California; Southern Saskatchewan, Canada; the Southern Alberta Foothills area in Canada; and South Central, Oklahoma. As a result of our acquisition of a controlling interest in The Stallion Group, a Nevada corporation, which is discussed below, we expanded our property interests to include acreage in the North Sacramento Valley, California.
Acquisition of Controlling Interest in The Stallion Group
On October 7, 2008, we announced the commencement of our offer to purchase (the "Offer") all of the outstanding common shares of The Stallion Group, a Nevada corporation ("Stallion"), in exchange for 0.333333 shares of our common stock and $0.0008 in cash per share of Stallion, upon the terms and subject to the conditions set forth in the prospectus accompanying the Offer.
The Offer expired on March 26, 2009 and thereafter we notified the depository to take and pay for all of the shares of Stallion that were validly tendered in connection with our previously-announced Offer. The depository advised us that, as of the expiration of the Offer, 58,635,139 shares of Stallion common stock had been validly tendered, representing 80.31% of the issued and outstanding common shares of Stallion.
All validly tendered common shares of Stallion were accepted for payment in accordance with the terms of the Offer, pursuant to which each validly tendered common share of Stallion was exchanged for 0.333333 of a share of our common stock and $0.0008 in cash.
Based on the number of common shares validly tendered in the Offer and the exchange ratio set forth above, we issued 19,545,026 shares of our common stock and paid $46,908 in cash pursuant to the Offer.
Hillspring Prospect
On November 26, 2004, through our wholly-owned Canadian subsidiary, Delta Oil & Gas (Canada), Inc., we entered into an agreement (the "Agreement") with Win Energy Corporation, ("Win Energy"), an Alberta based oil & gas exploration company, in order to acquire an interest in leases owned by Win Energy. On or about January 25, 2005, we paid Win Energy $414,766 in exchange for a 10% working interest in one section of land (640 acres) in Hillspring located approximately 90 miles south of Calgary, Alberta in the Southern Alberta Foothills belt. During the three months ended March 31, 2009, management reassessed its participation in this project and determined to abandon this project due to concerns regarding its profitability. We did not incur any costs in connection with our abandonment of this project and do not anticipate incurring any future costs.
Strachan Prospect
On September 23, 2005, we entered into the Farmout Agreement with Odin Capital Inc. ("Odin Capital"), a Calgary, Alberta corporation. A former member of our board of directors, Mr. Philipchuk, maintains a 50% ownership interest in Odin Capital. Odin Capital had the right to acquire an oil and gas leasehold interests in certain lands located in Section 9, Township 38, Range 9, West of the 5th Meridian, Alberta, Canada ("Section 9") upon incurring expenditures for drilling and testing on the property.
In exchange for us paying 4.0% of all costs associated with drilling, testing, and completing the test well on the property which we refer to as the Leduc formation test well, we will have earned:
1. in the Spacing Unit for the Earning Well:
(a) a 2.0% interest in the petroleum and natural gas
below the base of the Mannville, excluding natural
gas in the Leduc formation; and
(b) a 4.0% interest in the natural gas in the Leduc
formation before payout, subject to payment of the
Overriding Royalty which is convertible upon
payout at royalty owners option to 50% of our
Interest;
2. a 1.6% interest in the rights below the base of the Shunda formation in
Section 10, Township 38, Range 9W5M; and
3. a 1.289% interest in the rights below the base of the Shunda formation in
Section 15 and 16, Township 38, Range 9W5M, down to the base of the deepest
formation penetrated.
On October 6, 2005, drilling commenced on the Leduc formation test well. Under the terms of the Farmout Agreement, we advanced 110% of the anticipated costs prior to drilling. The total costs advanced by us prior to drilling were $347,431. The well was drilled to the targeted depth of 13,650 feet. During the three month period ended September 30, 2007, we paid additional drilling costs of $41,231 and have since incurred no additional drilling costs.
Based on results indicating the presence of a potential gas well, the operator inserted casing into the total depth of the well in July 2006 and we committed to perform a full testing program. During the three months ended March 31, 2008, testing showed that no economic hydrocarbons were present, the well was abandoned and the costs of $388,662 was transferred to the proven cost pool for depletion.
Palmetto Point Prospect - 12 Wells Phase - I
On February 21, 2006, we entered into an agreement with 0743608 B.C. Ltd., ("Assignor"), a British Columbia based oil and gas exploration company, in order to accept an assignment of the Assignor's 10% gross working and revenue interest in a ten-well drilling program (the "Drilling Program") to be undertaken by Griffin & Griffin Exploration L.L.C. ("Griffin Exploration"), a Mississippi based exploration company. Under the terms of the agreement, we paid the Assignor $425,000 as payment for the assignment of the Assignor's 10% gross working and revenue interest in the Drilling Program. We also entered into a Joint Operating Agreement directly with Griffin Exploration on February 24, 2006.
The initial Drilling Program on ten wells on the acquired property interest was completed by Griffin Exploration. On August 4, 2006, we paid $70,000 to Griffin Exploration in exchange for our participation in an additional two well program, which has also been completed. The prospect area owned or controlled by Griffin Exploration on which the wells were drilled is comprised of approximately 1,273 acres in Palmetto Point, Mississippi. Twelve wells had been drilled resulting in seven producing wells. We anticipated that three additional wells would be producing subsequent to being tied into the pipeline and two wells were not commercially viable and were plugged and abandoned. We refer to this drilling program as Palmetto Point Phase I.
In October 2007, as part of Palmetto Point Phase I, we drilled a well (the "PP F-12") on the prospect. Subsequent testing revealed that the PP F-12 well contained oil reserves suitable for commercial production. The PP F-12 well began producing on October 2, 2007. This well is situated in what is known as the Belmont Lake Oil Field. Based on the positive results from the PP F-12 well, the operator suggested drilling an additional two development wells in the immediate vicinity in which we would participate. In November 2007, we participated in the drilling of a step-out well from the PP F-12 (the "PP F-12 #2"). This well was drilled to total depth, logged, tested and cased. The PP F-12 #2 encountered approximately three feet of hydrocarbon showings and as such the operator recommended re-entering the well and directionally drilling on an angle toward the PP F-12. Upon completion and testing of this re-entry (the "PP F-12 #2-3"), the operator encountered approximately 32 feet of hydrocarbon pay and the well was connected to a nearby pipeline to commence oil production.
During the reporting period, we disposed of our interests in the Palmetto Point Prospect - 12 Wells Phase - I project described above. These interests were disposed of together with the interests in the Palmetto Point Prospect - 50 Wells Phase II project described below. Although our disposition of these interests occurred during the reporting period, we did not report any revenue or expenses attributable to these interests in the Palmetto Point Prospect - 12 Wells Phase - I project during the three months ended March 31, 2009 because this disposition was determined by the parties to be effective as of February 1, 2009.
Palmetto Point Prospect - 50 wells - Phase II
During the fiscal quarter ended September 30, 2006, we entered into a joint venture agreement to acquire an interest in a drilling program comprised of up to fifty natural gas and/or oil wells. The area in which the wells are being drilled is approximately 300,000 gross acres located between Southwest Mississippi and Northeastern Louisiana. Drilling commenced in September 2006. The site of the first twenty wells is located within range to tie into existing pipeline infrastructure should the wells be suitable for commercial production. The drilling program was conducted by Griffin Exploration in its capacity as operator. We agreed to pay 10% of all prospect fees, mineral leases, surface leases, and drilling and completion costs to earn a net 8.0% share of all production zones to the base of a geological formation referred to as the Frio formation and 7.5% of all production to the base of a geological formation referred to as the Wilcox formation. The cost during the quarter ending September 30, 2006 amounted to $100,000. During the fourth quarter of fiscal 2006, we made additional payments of $300,000 that was employed in the further development of prospects on lands in Mississippi and Louisiana in accordance with the terms of the operating agreement.
We acquired through our acquisition of a controlling interest of The Stallion Group ('Stallion") an additional interest in this same drilling program. Pursuant to the agreement entered into by Stallion on August 2, 2006, Stallion agreed to pay 30% of all prospect fees, mineral leases, surface leases, and drilling and completion costs to earn a net 19.2% share of all production zones to the base of a geological formation referred to as the Frio formation and 17.25% of all production to the base of a geological formation referred to as the Wilcox formation. Stallion's cost during the quarter ending September 30, 2006 amounted to $300,000. During the fourth quarter of fiscal 2006, Stallion made additional payments of $600,000 that was employed in the further development of prospects on lands in Mississippi and Louisiana in accordance with the terms of the operating agreement. As a result of our acquisition of a controlling interest of Stallion in 2009 pursuant to our tender offer, we became obligated to pay 40% of all prospect fees, mineral leases, surface leases, and drilling and completion costs to earn a net 27.2% share of all production zones to the base of a geological formation referred to as the Frio formation and 24.75% of all production to the base of a geological formation referred to as the Wilcox formation
Neither we nor Stallion incurred any additional payments other than drilling costs for these prospects in 2008 or 2007.
During the reporting period, we disposed of our interests in the Palmetto Point Prospect - 50 Wells Phase - II project described above. These interests were disposed of together with the interests in the Palmetto Point Prospect - 12 Wells Phase I for consideration of $200,367. Although our disposition of these interests occurred during the reporting period, we did not report any revenue or expenses attributable to these interests in the Palmetto Point Prospect - 50 Wells Phase - II project during the three months ended June 30, 2009 because this disposition was determined by the parties to be effective as of February 1, 2009.
Wordsworth Prospect
On April 10, 2006, we entered into a farmout, option and participation letter agreement ("FOP Agreement") where we acquired a 15% working interest in certain leasehold interests located in southeast Saskatchewan, Canada referred to as the Wordsworth area for the purchase price of $152,724. We are responsible for our proportionate share of the costs associated with drilling, testing, and completing the first test well on the property. In exchange for us paying our proportionate share of the costs associated with drilling, testing, and completing the first test well on the property, we earned a 15% working interest before payout and a 7.5% working interest after payout on the Wordsworth prospect. Payout refers to the return of our initial investment in the property. In addition, we also acquired an option to participate and acquire a working interest in a vertical test well drilled to 1200 meters to test the Mississippian (Alida) formation in LSD 13 of section 24, township 7, range 3 W2. Our total costs as at December 31, 2007 was $222,649.
During June 2006, the first well was drilled to a horizontal depth of 2033 meters in the Wordsworth prospect. The initial drilling of this well and subsequent testing revealed that this well contained oil reserves suitable for commercial production. In June 2006, this initial well began producing as an oil well. In December 2008, a second well was drilled and completed which started production in January 2009.
The revenue received from these wells for the three months ended June 30, 2009 was $37,301, as compared to $26,085 for the three months ended June 30, 2008. The revenue received from these wells for the six months ended June 30, 2009 was $77,116, as compared to $55,515 for the six months ended June 30, 2008. The increase in revenue was attributable the production of a second well on this prospect beginning in January 2009, but we generated less revenue than we anticipated as a result of a decline in oil prices during the reporting period ended June 30, 2009.
The second horizontal well was drilled in May 2007 at a cost of $198,152. Initial logs indicated hydrocarbon showings in an oil-bearing zone estimated to be approximately 770 feet in the horizontal section. However, due to the high water content in fluid removed from this well, the operator determined that it was not commercially productive and it was plugged and abandoned.
In April 2008, the operator recommended re-entering the second horizontal well with a view to drilling horizontally in a different direction starting at the base of the vertical portion of that well. We elected to participate in this re-entry on the same terms and conditions as the previous wells. This well was drilled at a cost of $33,812. No economic hydrocarbons were found and this well was plugged and abandoned.
Effective June 1, 2009, we disposed of 2.5% of our interest in the Wordsworth prospect for total proceeds of CDN $250,000, which equates to approximately $214,961 USD. We will continue to hold a 5% working interest in our existing wells on the Wordsworth prospect and any future wells which we elect to participate.
Owl Creek Prospect
On June 1, 2006, we entered into an Assignment Agreement with Brinx Resources, Ltd., ("Brinx Resources"), a Nevada oil & gas exploration company, in order to acquire a working interest in lands and leases owned by Brinx Resources. The purchase price of $300,000 for the assignment and options to acquire future interests has been paid in full. We paid a further $68,987 for our proportion of costs associated with the completion of the first well. The lands are located in Garvin and McClain counties in Oklahoma and we refer to the lands as the "Owl Creek Prospect."
Pursuant to the terms of the Assignment Agreement, we acquired a 20% working interest in an oil well drilled at the Owl Creek Prospect (the "Powell #2"). The Powell #2 was drilled to total depth of 5,617 feet on May 18, 2006 and underwent testing. Based upon the positive result of the testing of the Powell #2, this well was completed and commercial production commenced in August 2006. Under the terms of the Assignment Agreement, we are responsible for our proportionate share of the costs of completion and tie-in for production of the Powell #2 which was $68,987. Initially, the Powell #2 began flowing oil and natural gas under its own pressure without the assistance of a pump. In July 2008, the Company disposed of its holdings in Powell #2 and the surrounding area for aggregate consideration of $760,438.
As part of the Assignment Agreement, we were granted an option to earn a 20% working interest in any future wells drilled on the 1,120 acres of land, which make up the Owl Creek Prospect. Lastly, we received an option to earn a 20% working interest in any future wells to be drilled on any land of mutual interest acquired by the Owl Creek participants in and around the same area. The working interest in future wells is earned by paying 20% of the costs of drilling and completing each additional well. Prior to drilling, we are provided an invoice for the anticipated costs of each proposed well and given the option to participate.
Based upon the positive results of the Powell #2, an additional well (the "Isbill #1-36") was drilled and reached targeted depth in September 2006. However, test results showed that the well was not commercially viable and it was plugged and abandoned in September 2006. Costs of $80,738 were transferred to proved reserves and subsequently depleted in accordance with our accounting policy.
In January 2007, we commenced drilling of another well (the "Isbill #2-36"). Our 20% working interest in the Isbill #2-36 cost $157,437 for both drilling and completion. The Isbill #2-36 was drilled to approximately 5,900 feet and encountered two potential pay zones and is a direct offset well to the Powell #2 which is currently producing. In July 2008, the Company disposed of its holdings in Isbill #2-36 and the surrounding area for aggregate consideration of $549,388.
In July, 2008, we sold both the Powell #2 and Isbill #2-36 wells and all interest in the Owl Creek Prospect for gross proceeds of $1,309,826. We realized a gain on sale of the property of $1,067,447. We decided to dispose of the property based on the declining rates of production experienced by the operator and the reasonable offer for both wells and the surrounding lands of 1,120 acres.
2006-3 Drilling Program
On April 17, 2007, we entered into an agreement with Ranken Energy Corporation ("Ranken Energy") to participate in a five well drilling program in Garvin and Murray counties in Oklahoma (the "2006-3 drilling Program"). The leases secured and/or lands to be pooled for this drilling program total approximately 820 net acres. We agreed to take a 10% working interest in this program. To date, we have paid Ranken the sum of $514,619.
Three wells drilled (the "Wolf #1-7", the "Loretta #1-22" and the "Ruggles #1-15") were deemed by the operator to not be commercially viable and as such, were plugged and abandoned. The proportionate costs associated with these abandoned wells amounted to $244,989, which were moved to the proved properties cost pool for depletion.
Three other wells drilled (the "Elizabeth #1-25", the "Plaster #1-1" and the "Dale #1 re-entry") were deemed by the operator to be commercially viable and production casing was set in each. The Elizabeth #1-25 located in the Meridian Prospect cost $99,129, the Plaster #1-1 located in the Plaster Prospect cost $116,581, and re-entry into the Dale #1 located in the Dale Prospect cost $18,150. Subsequent to the completion of these wells, two remain economically viable at this time. The Plaster #1 encountered hydrocarbon showings and is producing natural gas with amounts of associated oil as of January, 2008. The Dale #1 re-entry has been producing in the range of 2 to 3 barrels of oil per day. The Elizabeth #1-25 has been plugged and abandoned.
Total revenue received from these wells for the three months ended June 30, 2009 was $2,066, as compared to $14,695 for the three months ended June 30, 2008. Total revenue received from these wells for the six months ended June 30, 2009 was $2,887, as compared to $45,792 for the six months ended June 30, 2008. The reduction in revenue was caused by a suspension of production in the Dale #1 and a decline in oil prices in the reporting period ended June 30, 2009 as compared to the reporting period ended June 30, 2008.
The operator, Ranken Energy, is reviewing the productivity levels from these wells and may propose the drilling of additional wells in the Dale Prospect and the Crazy Horse Prospect. We anticipate that we would participate in these wells to the same extent as in the original drilling program, which is a 10% working interest.
2007-1 Drilling Program - 3 Wells
On September 10, 2007, we entered into an agreement with Ranken Energy to participate in a three well drilling program in Garvin County, Oklahoma (the "2007-1 Drilling Program"). We purchased a 20% working interest in the 2007-1 Drilling Program for $77,100. Drilling of the first and second wells (the "Pollock #1-35" and the "Hulsey #1") has been completed in the N.E. Anitoch Prospect and the Washington Creek Prospect respectively. The Pollock #1-35 did not prove to be commercially viable, but the Hulsey #1 has been producing in the range of 50 to 60 barrels of oil per day with approximately 50 Mcf of natural gas per day.
Hulsey #1-8 started producing during the first quarter of 2008 and the total revenue received from the Hulsey #1-8 for the three months ended June 30, 2009 was $550, as compared to $51,577 for the three months ended June 30, 2008. The total revenue received from the Hulsey #1-8 for the six months ended June 30, 2009 was $1,244, as compared to $57,178 for the six months ended June 30, 2008. The significant decrease in revenue received from the Hulsey #1-8 is attributable to a decline in hydrocarbons recovered from the well and the reduction in natural gas and oil commodity prices.
Drilling of the third well in this drilling program (the "River #1") was completed during the three months ended September 30, 2008. The total revenue received from the River #1 for the three months ended June 30, 2009 was $8,897 and $21,305 for the six months ended June 30, 2009.
Hulsey #2-8 commenced production during the three months ended March 31, 2009 and produced $4,933 in oil revenues for the three months ended June 30, 2009 and $8,256 for the six months ended June 30, 2009.
2009-1 Drilling Program - 5 Wells
On July 27, 2009, we entered into an agreement with Ranken Energy to participate in a five well drilling program in Garvin County, Oklahoma (the "2009-1 Drilling Program"). We agreed to take a 5.0% working interest in the 2009-1 Drilling Program in exchange for our payment of a total of $13,125 in buy-in costs, which equates to $2,625 in buy-in costs for each well, plus our proportionate shares of the drilling and completion costs. The 2009-1 Drilling Program has already commenced and anticipate that we will have the results prior to the end of the fiscal year.
Willows Gas Field
On February 15, 2008, Stallion entered into a Farm Out Agreement with Production Specialties Company ("Production Specialties") for participation in a natural gas prospect area located in the North Sacramento Valley, California. Stallion has participated in the drilling of the first well on the prospect area and encountered a number of prospective pay zones. Testing has been completed and stabilized flow rates exceeded a combined 1.5 million cubic feet per day of sweet high quality gas, the well was connected to a nearby pipeline and begun producing natural gas in April 2008.
Stallion drilled its first prospect well paying 12.5% of the costs of the first well to earn a 6.5% Working Interest. Thereafter, Stallion will pay 6.5% of the . . .
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