Item 7 – Financial Statements of this Annual Report on Form 10-KSB, for the effect of the restatements on fiscal years 2007 and 2006, and Note 13 – Quarterly Financial Data (Unaudited) in Notes to Consolidated Financial Statements in Item 7 – Financial Statements of this Annual Report on Form 10-KSB, for the effect of the restatements on the interim condensed financial information for the first three quarters of fiscal year 2008 and all four quarters of fiscal years 2007 and 2006.  We have not amended and do not intend to amend any of our previously filed Annual Reports on Form 10-KSB or Quarterly Reports on Form 10-QSB for the periods affected by these restatements.  

 

Deferred income taxes is a non-cash flow item, therefore this restatement had no effect on cash or cash flow from operations.

 

	•		Cost effective implementation of internally and externally generated exploration and development drilling projects.
	•		Identification and acquisition of strategic producing properties; strategic and significant in that they are either synergistic to our existing production or will provide a dramatic increase to the Company’s existing production base.
	•		Boosting cash flows from existing oil and gas production through a combination of cost control and the exploitation of behind-pipe potential.

 

Banks Prospect — McKenzie County, North Dakota.   In the June 2005 quarter, we acquired a 20% interest in 13,000 acres in our Banks prospect in McKenzie County, North Dakota primarily to position the Company in the developing, though unproven, extension of the Bakken horizontal play into North Dakota. Following discouraging results, we elected to pursue development of the Rival formation. In the intervening period, the success of new techniques by various companies has given new life to the horizontal Bakken play in North Dakota. As these ventures have expanded from their core discovery wells, they have neared the eastern boundary of our Banks prospect.  The success of these offset wells has dramatically enhanced the viability of the Bakken formation in our Banks Prospect.  As a result, we and our partners have been approached by several companies wishing to acquire part of our interest in exchange for cash and a carried working interest in several new horizontal wells that these companies would be required to drill.  Following the completion of “carried wells,” we would have 35% to 40% of our original working interest (or 7% to 8% working interest, proportionately reduced) in wells subsequently drilled on the acreage.   While attractive, details of such an agreement have not been acceptable and no agreement has been finalized.  Furthermore, there are no assurances that such an agreement will be finalized.  If an agreement can be reached, we expect drilling operations to commence within 30 to 60 days.

TR Madison Unit Prospect — Billings County, North Dakota. In May 2003 the North Dakota Industrial Commission created the TR Madison Unit for the purpose of enhancing the ultimate recovery from the Madison formation in the TR Field. Approximately nineteen existing wells were originally included in the Unit. By virtue of its interest in one of these wells we acquired a 1.075% working interest (0.833% net revenue interest) in the Unit. During the previous four years, six new horizontal wells have been drilled and four originally vertical wells have had horizontal laterals added. Three of these new horizontal wells were drilled in the year ended March 31, 2008.  Following the end of the fiscal year one additional well has been drilled but not yet completed.  While our interest in this effort is relatively small, this property has now become our 7th largest producer in terms of cash flow, up from 10th last year. More importantly these gains have been made with relatively low risk and low cost (relative to our cash position).

South Flat Lake Prospect — Sheridan County, Montana. We have acquired leases on approximately 4,200 gross acres (1,900 net) in northern Sheridan County near the Flat Lake Field. Developed by a geologist on retainer by us, South Flat Lake represents the first exploration prospect we have generated in more than a decade. To defray the cost of this effort, land, legal and geologic costs were funded equally by us and our 50% partner in this venture, an unrelated, non-public company. Our partner expects to sell a portion of this prospect to others to help defray their share of the cost of drilling. As an exploratory venture, this prospect is considered high risk and no assurance of its ultimate success can be offered. Presently, the Montana Oil & Gas Commission has granted a drilling permit and the surface location has been prepared for drilling operations.  We expect to commence drilling operations before the end of the calendar year.

Other Areas

The following areas are primarily gas productive and provide us exposure to natural gas projects.

Denver-Julesberg Basin — Weld County, Colorado.  We have previously disclosed our project to drill sixteen down-spaced wells on its Antenna federal property in Weld County, Colorado.  At March 31, 2008 all sixteen new wells had been drilled.  Of the now 32 total wells, eight of the new wells and eight of the original sixteen old wells were producing.  The eight remaining new wells and eight remaining original wells were not producing in that they were awaiting completion of newly designed and refurbished production facilities.  We were impacted in our fourth quarter and a portion of its third quarter because all of the original wells were shut-in to allow these new production facilities to be built.  We expect to have a 2% to 52.5% revenue interest in Codell/Niobrara production and a 13.125% to 52.5% revenue interest in J-Sand production (depending on actual well location).  However, initially, all new wells will produce from the Codell/Niobrara formation alone.  We expect to spend a total of $2.5 million for our share of the cost of drilling and completing these wells.  Kerr-McGee Oil & Gas Onshore, LP will be the Operator of the project.

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Onshore Gulf Coast. During the past few years, we participated in five wells in this area; primarily pursuing “3-D Bright Spots.” We intend to look at and evaluate additional ventures in this area for possible future participation. However, our future involvement in this area will depend on the quality of prospects we review, the operational record of designated operators and the risk associated with specific ventures.

Christmas Meadows Prospect — Summit County, Utah. In fiscal 2007, we participated with Double Eagle Petroleum Company (“Double Eagle”) in one of the more exciting, true wildcat projects in the Rocky Mountain region, Christmas Meadows. Christmas Meadows is a structural dome in the southwest corner of the prolific Green River Basin, in Summit County, Utah. The dome is overlain by the Wyoming Overthrust Belt and the North Flank Thrust of the Uinta Mountains. During the first quarter of 2007, drilling at the Table Top Unit #1 well reached the originally planned depth of 15,760 feet. The drill cuttings did not reveal reservoir rocks (due to either insufficient hydraulics to bring those cuttings to surface undamaged and intact or because they did not exist).  Operations were suspended to assess alternative approaches to completing the project. The wellbore was sealed at 11,000 feet (the base of the intermediate casing) in order to prevent any abnormal pressure from migrating to surface.  The Table Top Unit, as originally formed, was dissolved, and, having met the governmental permitting obligation for the Unit test, the time-frame has been extended for drilling the newly formed Main Fork Unit until at least April 2009. We are in the process of evaluating potential alternatives, including drilling or farming out the drilling of the Table Top Unit #1 to drill deeper to the Nugget Sandstone at approximately 18,000 feet. Double Eagle has disclosed that it is in discussions with several larger or major companies to take over this venture and deepen this wellbore down to the deeper Nugget formation. While Double Eagle’s personnel have expressed excitement about this situation, given the recent premature and unexpected departure of Double Eagle’s long-time management, the possibility exists that little, or no, progress could occur.  If this does occur, this leasehold may expire of its own terms and we, Double Eagle, and our partners would be required to plug this well and reclaim the access road. We have a 1.5% interest in all future operations in this wellbore and in any future operations on the Christmas Meadows prospect.

Contemplated Activities

We are continually evaluating other drilling and acquisition opportunities for possible participation. Typically, at any one time, several opportunities are in various stages of due diligence. Our policy is to not disclose the specifics of a project or prospect, nor to speculate on such ventures, until such time as those various opportunities are finalized and undertaken. We caution that the absence of news and/or press releases should not be interpreted as a lack of development or activity.

We may alter or vary, all or part of, these contemplated activities based upon changes in circumstances, unforeseen opportunities, inability to negotiate favorable acquisition, farmout, joint venture or loan terms, lack of cash flow, lack of funding and/or other events which we are not able to anticipate.

Segment Information and Major Customers

Industry segment. We are engaged only in the upstream segment of the oil and gas industry, which comprises exploration, production, operations and development. We have no gathering, transportation, refining or marketing functions.

Markets. Our oil and natural gas is sold to various purchasers in the geographic area of its properties. We are a small company and, as such, have no impact on the market for our goods and little control over the price received. The market for, and the value of, oil and natural gas are dependent upon a number of factors including other sources of production, competitive fuels, and proximity and capacity of pipelines or other means of transportation, all of which are beyond our control. For more information see Note 1 - Major Customers and Concentration of Credit Risk in the Notes to Consolidated Financial Statements.

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Competition

The oil and gas industry is a highly competitive and speculative business. We encounter strong competition from major and independent oil companies in all phases of our operations. In this arena, we must compete with many companies having financial resources and technical staffs significantly larger than our own. Furthermore, having pursued an acquisition strategy for over a decade, we did not develop an in-house geologic or geophysical infrastructure, as have many of our competitors. Rather than incur the time and expense to develop in-house capability, we chose to enter joint ventures with other companies to accelerate our efforts.

With respect to acquisitions, competition is intense for the purchase of large producing properties. Because of the limited capital resources available to us, we have historically focused on smaller and/or marginal properties with behind-pipe potential in our acquisition efforts.

Regulations

General. Our operations are affected in varying degrees by federal, state, regional and local laws and regulations, including, but not limited to, laws governing well spacing, air emissions, water discharges, reporting requirements, endangered species, marketing, prices, taxes, allowable rates of production and the plugging and abandonment of wells and the subsequent rehabilitation of the wellsite locations. We are further affected by changes in such laws and by constantly changing administrative regulations. To the best of our knowledge, we are in compliance with all such regulations and are not aware of any claims that could have a material impact upon our financial condition, results of operations, or cash flows.

Environmental matters. We are subject to various federal, state, regional and local laws and regulations related to the discharge of materials into, and the protection of, the environment. These laws and regulations, among other things, may impose liability on the owner or the lessee for the cost of pollution cleanup resulting from operations, subject the owner or lessee to liability for pollution damages, require the suspension or cessation of operations in affected areas and impose restrictions on injection into subsurface formations in order to prevent the contamination of ground water. All but three of the disposal wells that we utilize are owned and operated by third parties whose disposal practices are outside of our control. With respect to the three disposal wells that we own and operates, we currently use these facilities only for the disposal of produced water from other Company-operated properties. Although environmental requirements do have a substantial impact upon the energy industry, these requirements do not appear to affect us any differently than other companies in this industry who operate in a given geographic area. We are not aware of any environmental claims which could have a material impact upon our financial condition, results of operations, or cash flows.

Such regulations have increased the resources required and costs associated with planning, designing, drilling, operating and both installing and abandoning oil and natural gas wells and facilities. As yet, we have not had to hire any new employees to comply with these regulations. We will continue to make expenditures in our efforts to comply with these requirements, which are unavoidable business costs in the oil and gas industry.

Although we are not fully insured against all environmental and other risks, we maintain insurance coverage that we believe is customary in the industry.

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Risk Factors

Volatility of oil and gas prices. Our revenues, operating results, profitability, future rate of growth and the carrying value of our oil and gas properties are highly dependent upon prevailing market prices for oil and gas. Historically, the markets for oil and gas have been volatile and in certain periods have been depressed by excess domestic and imported supplies. Such volatility can be expected to reoccur in the future. Various factors beyond our control will affect prices of oil and gas, including worldwide and domestic supplies of oil and gas, the ability of the members of the Organization of Petroleum Exporting Countries to agree to maintain oil price and production controls, political instability or armed conflict in oil and gas producing regions, the price and level of foreign imports, the level of consumer demand, the price, availability and acceptance of alternative fuels and weather conditions. In addition to market factors, actions of state and local agencies and the United States and foreign governments affect oil and gas prices. These external factors and the volatile nature of the energy markets make it difficult to estimate future prices of oil and gas. Any substantial or extended decline in the price of oil would have a material adverse effect on our financial condition and results of operations. Such decline would reduce our cash flow and borrowing capacity and both the value and the amount of our existing oil and gas reserves.

We believe that substantially all of our domestic oil produced can be readily sold at prevailing market prices. For March 2008 the price differential ranged from $2.50 to $14.00 below the U.S. crude spot price. There are several factors leading to this continuing price differential. The Williston basin has seen an increase in production due to a surge in new Bakken horizontal wells which has led to pipeline capacity shortages in the area. The situation is further compounded by limited refinery capacity and reduced refinery intake during times of equipment repair and facility upgrades.

Substantially all of our gas production is sold at prevailing wellhead gas prices, subject to additional charges customary to an area. We do not own or operate any gas gathering or processing plant facilities nor do we possess sufficient volume on any pipeline to market our product to end users.

Uncertainty of reserve information and future net revenue estimates. There are numerous uncertainties inherent in estimating quantities of proved and unproved oil and gas reserves and their values, including many factors beyond our control. The reserve information set forth in this Form 10-KSB (see Note 12 to the Consolidated Financial Statements) represents estimates only. Reserve estimates are imprecise and may materially change as additional information becomes available.

Estimates of oil and natural gas reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating the future recovery of underground accumulations of oil and natural gas that are difficult to measure. The accuracy of any estimate is a function of the quality of available data, engineering, and geological interpretation and judgment. Estimates of economically recoverable oil and gas reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as future operating costs, severance and excise taxes, development costs, workover costs, remedial costs and the assumed effects of regulations by governmental agencies, all of which may in fact vary considerably from actual results. Other variables, especially oil and gas prices, are fixed at the prices existing on March 31, the last day of the fiscal year, whether such prices are reasonable; and which may vary considerably from actual prices received over any given period of time in the past or in the future. For these reasons, estimates of the economically recoverable quantities of oil and gas attributable to any property or any group of properties, classifications of such reserves based upon risk of recovery, and estimates of the expected future net cash flows may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material.

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Reserves, as calculated according to SEC regulations and referred to in this Form 10-KSB, should not be construed as the current market value of the estimated oil and gas attributable to our properties. The timing of actual future net cash flows from proved reserves, and thus their actual present value, will be affected by the timing of both the production and incidence of expenses in connection with both extraction costs and development costs. In addition, the 10% discount factor, which is required to be used for reporting purposes, is not necessarily the most appropriate discount factor based on interest rates in effect at the time of calculation.

Reserve replacement. Our future success is highly dependent on our ability to find, develop and/or acquire additional oil and gas reserves that are economically recoverable. Without continued successful exploitation, exploration or acquisition projects, our current oil and gas reserves will decline as they are depleted by production.

Operating hazards. The oil and gas business involves certain operating hazards such as well blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or well fluids, fires, formations with abnormal pressures, pipeline ruptures or spills, pollution, releases of toxic gas and other environmental hazards and risks, any of which could result in substantial losses. In addition, we may be liable for environmental damage caused by previous owners of properties purchased or leased by us. As a result, substantial liabilities to third parties or governmental agencies may be incurred, the payment of which could reduce or eliminate the funds available for acquisitions, development, and exploration, or result in losses to the Company. Although we are not fully insured against all environmental and other risks, we maintain insurance coverage which we believe is customary in the industry.

Other

The oil and gas business is not generally seasonal in nature, although unusual weather extremes for extended periods may increase or decrease demand for oil and natural gas products temporarily.  Additionally, catastrophic events, such as hurricanes or other supply disruptions, may also temporarily increase the demand for oil and gas supplies. Such events and their impacts on oil and gas commodity prices may cause fluctuations in quarterly or even annual revenues and earnings. Also, because of the location of many of our properties in Montana and North Dakota, severe weather conditions, especially in the winter months, could have a material adverse effect on our operations and cash flow.

At March 31, 2008 we had eight full-time and two part-time employees: four full time and two part-time at its main office in Denver and four field laborers at a subsidiary’s field office in Bruni, Texas, located forty-five miles east, southeast of Laredo, Texas. In addition to eleven contract field workers on retainer, at times we hire up to five contract technical/professional personnel in our main office on a project-by-project basis.

Forward-Looking Statements

This Form 10-KSB includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-KSB including, without limitation, the statements under Item 1. “Description of Business” and Item 6. “Management’s Discussion and Analysis and Plan of Operation” and the statements located elsewhere herein regarding our financial position and liquidity, the amount of and our ability to make debt service payments should we utilize some or all of our available borrowing capacity, our strategies, either existing or anticipated, financial instruments, and other matters, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations are disclosed in this Form 10-KSB in conjunction with the forward-looking statements included in this Form 10-KSB.

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Our intentions and expectations described in this Form 10-KSB with respect to possible exploration and development activities concerning properties in which we hold interests may be deemed to be forward-looking statements. These statements are made based on our current assessment of the exploratory and development merits of the particular property in light of the geological information available at the time and based on our relative interest in the property and our estimate of our share of the exploration and development cost. Subsequently obtained information concerning the merits of any property, as well as changes in estimated exploration and development costs and ownership interest, may result in revisions to our expectations and intentions and, thus, we may alter our plans regarding these exploration and development activities. Furthermore, circumstances beyond our control may cause such prospects to be eliminated from further consideration as exploration and/or development prospects.

ITEM 2

DESCRIPTION OF PROPERTY

Producing Properties: Location and Impact

At March 31, 2008, we owned a working interest in 90 producing oil wells and 14 producing gas wells. We currently operate 54 of these wells in five states: North Dakota, Montana, Colorado, Texas and Wyoming. These operated wells contributed approximately 57% of both our total liquid hydrocarbon sales and total natural gas sales in fiscal 2008. A significant portion of our production is encumbered and used to secure bank debt.

Producing Property

		Gross Wells								Net Wells
		Oil				Gas				Oil				Gas
Colorado			—								—				5.40
Louisiana											0.01				0.10
Montana							—				9.51				—
North Dakota							—				9.28				—
Texas											20.66				0.11
Wyoming							—				0.47				—
Total											39.9				5.6

Production

Specific production data relative to our oil and gas producing properties can be found in the Selected Financial Information table in Item 6 “Management’s Discussion and Analysis and Plan of Operation.”

Reserves

At March 31, 2008, our estimated proved developed oil and gas reserves in barrels of oil equivalent (BOE) was 1,229,000, a 3.7% increase over the prior year’s estimated proved developed oil and gas reserves of 1,185,000 BOE. However, due to increases in oil and gas prices, our standardized measure of discounted future net cash flows was $24,960,000, a 70.7% increase from the prior year’s standardized measure of discounted future net cash flows of $14,624,000. Further discussion of our estimated oil and gas reserves can be found in Note 12 to the Consolidated Financial Statements.

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Geographically, our reserves are located in three primary areas: the Williston basin in North Dakota and Montana, the Denver-Julesburg (D-J) basin in Colorado and on-shore south Texas. The following table summarizes the estimated proved developed oil and gas reserves divided between operated and non-operated properties for these three areas as of March 31, 2008:

 

		Net Oil				Net Gas
		(Bbls)				(Mcf)				BOE				%
Williston Basin
Operated			323,000				40,000				329,667				26.2
Non-Operated			323,000				203,000				356,833				28.3
			646,000				243,000				686,500				54.5
South Texas/Onshore Gulf Coast
Operated			394,000				5,000				394,833				31.3
Non-Operated			—				188,000				31,359