Basic Earth Science Systems, Inc. (Basic or the Company) is an independent oil and gas exploration company focusing on the fundamentals of company growth and profitability in an effort to enhance shareholder wealth. Basic is engaged in the exploration, acquisition, development, operation, production and sale of crude oil and natural gas. The Company has an established production base that generates positive cash flow and profits. The Company is comprised of seasoned industry professionals who have been associated with Basic for nearly two decades. These professionals have a management track record in both good times and bad. Capitalizing on their knowledge, the Company’s activities are focused in the North Dakota and Montana portions of the Williston basin, the Denver-Julesburg basin of Colorado, the southern portions of Texas, and along the onshore portions of the Gulf Coast.
Strategy
Basic intends to enhance shareholder wealth by focusing on the fundamental value of the Company, i.e. reserve growth and profitability.
The three components of its growth strategy are:
| • | 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. |
While Basic has a three-pronged strategy to grow its pool of oil and gas reserves, its primary emphasis is exploration and development drilling. This emphasis, adopted in the fiscal year ended March 31, 2002, follows a decade of pursuing a property acquisition strategy. Basic’s primary exploration focus is in the Montana and North Dakota portions of the Williston basin. Second only to south Texas in terms of time frame, the Company has been involved in the Williston basin since the early 1980’s. As such, the Company has significant understanding of and exposure to both geology and operations in the area. However, both the Williston basin and the Company’s south Texas waterfloods are primarily oil productive. Sensitive to the need to increase its natural gas output and balance its product base, Basic’s efforts in other areas, notably Colorado and on-shore portions of the Gulf Coast, are simply to increase the Company’s exposure to natural gas projects.
In the past, the Company’s strategy focused on the acquisition of producing properties with subsequent enhancement and exploitation. With oil prices in the $50-$65 per barrel range, Basic believes that the price risk associated with property acquisitions is substantial. Thus, Basic has significantly curtailed its acquisition efforts relative to previous years. Despite this, the Company expects to monitor the acquisition market and, if economically feasible, attempt to procure properties that may augment existing operations or ownership.
Areas of Focus
Williston Basin
The Company had three major areas of focus within the Williston basin during the year ended March 31, 2006 (fiscal 2006) and expects that focus to continue in the coming months. These areas are the horizontal Bakken play in Richland County, Montana, the Company’s efforts in the Indian Hill Field in McKenzie County, North Dakota and the Company’s Banks prospect in McKenzie County, North Dakota.
Horizontal Bakken — Richland County, Montana . By virtue of its acquisitions in the mid- and late-1990’s, the Company has interests in the heart of the horizontal Bakken play in Richland County, Montana. With interests in five different sections, Basic was originally exposed to several significant drilling opportunities. Two of these have now been developed; the very successful Halvorsen wells and the Johnson 3-21H (see discussion below). With better understanding of the Bakken in this area, the attractiveness of two other sections has been downgraded due to the quantity of oil already produced by vertical Bakken wells on this acreage. Thus, one remaining section could be developed where Basic has an interest. Basic’s actual working interest in such a development would be dependent upon the size of the approved well spacing unit and could range from a 12.5% to 25% working interest in one or two wells. At these levels, Basic’s financial commitment would vary from $450,000 to $900,000 per well.
Indian Hill Field — McKenzie County, North Dakota . In the year ended March 31, 2005 (fiscal 2005), Basic acquired an 18% interest in a 2,000 acre block within the Indian Hill Field. In fiscal 2005 and 2006 the Company participated in drilling three wells on this block and established production in both the Nisku and Duperow formations (see discussion below). Basic believes that, in addition, both the lower Mission Canyon and Rival formations may be productive not only in these wellbores but also on the surrounding undeveloped acreage. Basic and its partners expect to evaluate this potential in the current fiscal year.
Banks Prospect — McKenzie County, North Dakota . During the June 2005 quarter, the Company acquired a 20% interest in 13,000 acres in its Banks prospect in McKenzie County, North Dakota. Originally planned to position the Company in the developing, though unproven, extension of the Bakken horizontal play into North Dakota, the prospect is now headed in a different direction. When indications on its first horizontal Bakken well, the State 16-1H, were not encouraging, the Company and its partners elected to pursue development of the Rival formation. Including the State 16-1H, Basic drilled three wells on this prospect in fiscal 2006: a vertical Rival producer, a horizontal Rival producer (both of which remain unstimulated) and a temporarily abandoned well which is still being evaluated for further development (see discussion below). Basic and its partners expect to evaluate alternative stimulation protocols in an effort to enhance production from not only these existing wellbores, but also those that Basic drills on this acreage in the future. While the primary focus in this area is now the Rival formation, Basic still owns rights to the underlying Bakken formation and has one wellbore, the State 16-1H, that has a horizontal Bakken section that could be exploited. However, until such time as either offset Bakken production is demonstrated or a breakthrough in stimulation technology or application is made, Basic and its partners have little interest in pursuing Bakken development in this immediate area.
Onshore Gulf Coast
During fiscal 2006, the Company participated in three wells in this area: an 11,000 foot vertical Yegua formation drilling test in Wharton County, Texas, a 13,000 foot lower Frio formation recompletion in Matagorda County, Texas and a 14,000 foot Discorbis formation re-entry in St. Mary Parish, Louisiana. As noted above, the Company’s involvement in these efforts was pursued strictly to enhance Basic’s exposure to natural gas
projects. Despite some setbacks (see discussion below), Basic is still interested in Yequa “3-D Bright Spot” prospects and intends to look at and evaluate other ventures in this area for possible future participation. However, the Company’s future involvement in this area will depend on the quality of prospects it reviews, the operational record of designated operators and the risk associated with specific ventures.
Other Areas
The following areas are primarily gas productive and again provide Basic exposure to natural gas projects.
Denver-Julesberg Basin — Weld County, Colorado. On its Antenna Federal property the Company owns a 60% working interest in 7 wells producing from the J-Sand formation and an overriding royalty interest in 9 wells producing from the Codell-Niobrara formation in the D-J basin. For several years, Basic and its partner have been deepening the Codell wells to the J-Sand formation. Basic has a 3% to 5% overriding royalty interest in these Codell wells and earns a 60% working interest in the J-Sand production once a well is deepened to that formation. In addition, once a well is completed in the J-Sand, Basic takes over as operator of that well.
Christmas Meadows Prospect – Summit County, Utah. In the March 2006 quarter, Basic consummated its involvement in the Christmas Meadows prospect operated by Double Eagle Petroleum Company (Double Eagle). One of the more exciting, true wildcat projects in the Rocky Mountain region, Christmas Meadows is a “high risk – high reward” venture located in Summit County, Utah in the southwest corner of the prolific Green River Basin and along the Wyoming Overthrust Belt. Containing 41,000 gross acres, the Christmas Meadows prospect has a long history. Originally identified as a structural dome by Gulf Oil Company in the 1970s, the project has been pursued by numerous major oil companies; all to no avail due to federal permitting issues. With 22 years since its first fledgling involvement, Double Eagle (and its partners) now control the prospect and have been successful in resolving these federal permitting issues. The first well, the Table Top Unit #1, is expected to commence drilling operations in August 2006. Viewed by the Company as a “swing for the fences” opportunity, if successful, Basic’s 2% interest in the Christmas Meadows prospect could have a considerable impact on a company the size of Basic.
Company Developments
The following points summarize the Company’s capital investment activity during fiscal 2006:
U.S. Operations
Williston Basin, Horizontal Bakken Area
| • | Completion operations were finalized on the Halvorsen #31X-1 dual-lateral, horizontal well in Richland County, Montana. This well, which was drilled in the prior fiscal year, is currently producing approximately 200 barrels of oil, 40 barrels of water and 100 Mcf of gas per day. Basic has a 25.77% working interest in this well which is operated by Headington Oil, L.P. | ||
| • | Basic drilled the Johnson #3-21H single-lateral, horizontal well in Richland County, Montana in the September 2005 quarter. The well is operated by Nance Petroleum Corporation, a subsidiary of St. Mary Land & Exploration. Initially producing 282 barrels of oil, 144 barrels of load water and 104 Mcf of gas per day, by December 2005 production had declined severely. In February 2006, downhole diagnostic pressure tests were performed to determine the cause of this abnormally steep production decline. The well is now back on production at rates lower than 50 barrels of oil per day while the results of the diagnostic tests are analyzed. However, based on preliminary results it appears unlikely |
| that a second well will be drilled on this drilling unit. Basic has a 12.5% working interest in this well. |
| • | In November 2005 the Company commenced drilling the Halvorsen #21X-36, a single-lateral, horizontal well in Richland County, Montana. The well was completed near the end of December and began producing in early-January 2006 at rates in excess of 300 barrels of oil per day. However, early flow rates were impeded by sand accumulations in the wellbore to the point that the well ceased to flow. Workover operations conducted in mid-March 2006 rectified this problem and the well is currently flowing an average of 235 barrels of oil per day. Basic has a 25.77% working interest in this well which is operated by Headington Oil, L.P. |
Williston Basin, Banks Prospect
| • | In the June 2005 quarter, Basic acquired a 20% interest in 13,000 acres in its Banks prospect in McKenzie County, North Dakota. The majority of these leasehold rights are in the developing, though unproven, extension of the Bakken horizontal play into North Dakota. | ||
| • | In the December 2005 quarter, Basic began drilling the State #16-1H, a horizontal Bakken well in McKenzie County, North Dakota. During completion operations in January, upon testing the un-stimulated Bakken formation, Basic, along with its partners, were not sufficiently encouraged by initial indicators to incur the cost of hydraulically stimulating the Bakken formation and deferred further evaluation by sealing off the formation behind a removable plug. Instead, Basic completed the State #16-1H in the Rival formation flowing at the rate of approximately 80 barrels of oil and 10 barrels of water per day. While to date the well remains un-stimulated, Basic expects to stimulate this zone in the near future in efforts to enhance production. Basic has a 20% working interest in this well which is operated by Missouri Basin Well Service, Inc. | ||
| • | In the March 2006 quarter, the Company drilled and completed the LM #1, a 10,200 foot, vertical Rival test in McKenzie County, North Dakota. Initial swab rates were disappointing. However, at March 31 2006, the well remained unstimulated. Basic has nearly a 20% working interest in the well which is operated by Missouri Basin Well Service. | ||
| • | Following the conclusion of drilling the LM #1, Basic, along with its partners, commenced drilling the LM #2, originally planned as a 10,200 foot, vertical Rival test. Upon reaching its planned depth, the lower portion of the well was cemented off and the well was drilled horizontally into the Rival formation. At March 31, 2006 the LM #2 was still drilling. The well is operated by Missouri Basin Well Service and Basic has nearly a 20% working interest. |
Williston Basin, Indian Hill Field
| • | In December 2005 the Company began drilling the Lynn #3H in McKenzie County, North Dakota. This well, operated by Missouri Basin Well Service, targeted the Nisku formation with a single horizontal wellbore. Following completion in the March 2006 quarter, the well is averaging 15 barrels of oil and 130 barrels of water per day. Basic has a 17.13% working interest. Although producing, Basic considers this well unsuccessful and expects to recomplete this well into the Rival formation in the current fiscal year. |
Williston Basin, Other Areas
| • | Kerr-McGee Rocky Mountain Corporation began drilling a horizontal well in the TR-Madison Unit in Billings County, North Dakota. Basic has a 1.07% working interest in the entire TR-Madison Unit. |
On-Shore Gulf Coast
| • | The Company drilled the Homer Lowe #1, a second “3-D Bright Spot” well in Wharton County, Texas. After encountering significant pressures and hydrocarbon inflows at 11,300 feet, cementing off the lower portion of the well, and incurring an additional $98,000 in costs, Basic elected to terminate its participation in the venture due to significant cost overruns. The Company had a 5% working interest in this well. The venture eventually resulted in a producing well after the expenditure of over $11,000,000 by the remaining partners. | ||
| • | Following an unsuccessful attempt to restore production at 14,000 feet in its high-pressure, deep-gas PIDCO #2 well in Matagorda County, Texas, the Company successfully re-completed the well into a new producing horizon at 13,100 feet. The well was tested at a rate of 1.5 million cubic feet (MMcf) of natural gas and 210 barrels of condensate per day. However, the well encountered numerous surface equipment failures and/or was unable to treat impurities out of the natural gas at these high rates. Following numerous days of lost production, various pieces of production equipment were alternatively repaired or restored to original specifications. In addition, the well was down throughout February 2006 to replace the downhole tubing, but was successfully returned to production on March 1, 2006. As a result of these surface equipment repairs, the well did not incur any downtime during March 2006 and produced a total of 1,853 barrels of oil and 18.8 MMcf gas. Basic is the operator of the well and has a 12.77% working interest (9.09% net revenue interest). | ||
| • | During fiscal 2006, the Turf Grass #1, a successful Yequa “3-D Bright Spot” well in Wharton County, Texas drilled in fiscal 2005 continued to decline. In the September 2005 quarter, efforts to install gas lift equipment to maintain production on the well were only marginally successful due to increasing water production. And by December 2005, water production increased to a point that the well ceased to flow. In the March 2006 quarter production was restored by using the gas from an offset well to power the Turf Grass’s gas lift system The well is currently on production and has stabilized at a rate of 90 Mcf and 20 barrels of oil per day. Basic has a 5% working interest in the well which is operated by PetroReal, Inc. | ||
| • | The Company participated in the re-entry of a temporarily abandoned, 14,000 foot Discorbis formation well in St. Mary Parish, Louisiana. Initial re-entry efforts were hampered by equipment that was abandoned in the well by prior owners. However, during the March 2006 quarter, sufficient progress and preliminary testing indicated rates that justified the installation of production equipment, in addition to gas metering and sales facilities. At year-end, the well was shut-in while this installation occurred. Basic has a 10% working interest in this well that is operated by MTBB Acquisition Company, LLC. |
Canadian Operations
| • | Legent Resources Corporation, Basic’s wholly-owned Canadian subsidiary, wrote off its remaining Canadian full cost pool assets and disclosed that it has no plans to lease additional acreage or to conduct any further Canadian operations. |
Subsequent Events
Williston Basin, Banks Prospect
| • | In early May 2006, the LM #1 in McKenzie County, North Dakota was shut-in following a hydraulic stimulation that was commercially unsuccessful. The Company has a number of options with this well and the spacing unit it occupies, and intends to analyze the results of the LM #2 prior to undertaking further efforts on the LM #1. As of this date this situation remains unchanged. Basic has a 20% working interest in this well. | ||
| • | The LM #2 in McKenzie County, North Dakota was initially flowing rates of 147 barrels of oil and 107 barrels of water a day from an un-stimulated Rival formation. On June 13, 2006, following the decline to less then 90 barrels of oil a day, the Company installed a pumping unit. Rates of approximately 120 barrels of oil and 140 barrels of water per day have been recorded. However, the Company cautions that these unstimulated pumping rates are very preliminary and may be influenced either positively or negatively by various factors including future stimulation efforts, downhole pump efficiencies, wellbore inflow rates, unknown wellbore obstructions and/or other factors not currently known. Confirming this observation, diagnostic tests conducted one week later, indicate that the existing artifical lift equipment is not removing all of the available fluids from the wellbore suggesting that the well could produce at higher rates. | ||
| • | The State #16-1H in McKenzie County, North Dakota continues to flow at approximately 55 barrels of oil per day. The well currently remains un-stimulated in the Rival formation. |
On-Shore Gulf Coast
| • | In Louisiana, following a successful re-entry, the Discorbis B1 RB SUB: Martin 1-D was placed on production in mid-April. The well is currently flowing at a rate of 1.6 MMcf of gas and 6 barrels of condensate per day. |
Contemplated Activities
In addition to the discussion in Areas Of Focus and Subsequent Events described above, the Company anticipates pursuing the following activities in fiscal 2007 (year ending March 31, 2007).
Other Areas
On its Antenna Federal property in Weld County, Colorado, Basic has previously disclosed the receipt of proposals from its partner to deepen three additional Codell formation wells to the J-Sand formation. These efforts have never been undertaken due to various issues concerning Basic’s partner on the property and Bureau of Land Management permitting requirements, both of which are beyond the control of the Company. It is Basic’s understanding that one of these three wells has now been approved. As a result, the Company expects to deepen at least one of these wells in the current fiscal year. Basic estimates the cost to deepen one well to be $150,000.
Basic has received notification from its partner, Double Eagle Petroleum Co., that it has a drilling rig under contract and expects to commence drilling operations on the Table Top Unit #1, the initial Christmas Meadows prospect well, in early-August 2006. Basic has a 2% working interest in this well and has spent $17,000 to-date on land costs and $52,000 on road and location costs. Basic anticipates spending an additional $200,000 in drilling costs.
Basic is continually evaluating other drilling and acquisition opportunities for possible participation. Typically, at
any one time, several opportunities are in various stages of due diligence. The Company’s 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. Basic cautions that the absence of news and/or press releases should not be interpreted as a lack of development or activity.
The Company 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 the Company is not able to anticipate.
Segment Information and Major Customers
Industry segment. The Company is engaged only in the upstream segment of the oil and gas industry, which comprises exploration, production, operations and development. The Company has no gathering, transportation, refining or marketing functions.
Markets. The Company’s oil and natural gas is sold to various purchasers in the geographic area of its properties. Basic is a small company and, as such, has no impact on the market for its 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 the control of Basic.
During fiscal 2006, Basic sold 57% of its oil and gas production to three purchasers: Murphy Oil USA, Inc. (25%), Valero Marketing & Supply Co. (17%), and Plains Marketing LP (15%). Sales to no other customer of Basic (or group of customers under common control) were equal to 10 percent or more of oil and gas sales. Since there is strong competition among purchasers, management does not believe it is dependent on any one purchaser or group of purchasers. See also Note 8 to the Consolidated Financial Statements.
Competition
The oil and gas industry is a highly competitive and speculative business. The Company encounters strong competition from major and independent oil companies in all phases of its operations. In this arena, Basic must compete with many companies having financial resources and technical staffs significantly larger than its own. Furthermore, having pursued an acquisition strategy for the last decade, Basic has not developed an in-house geologic or geophysical infrastructure, as have many of its competitors. Rather than incur the time and expense to develop an in-house capability, for the time being, Basic has chosen to enter joint ventures with other companies to accelerate its efforts.
With respect to acquisitions, competition is intense for the purchase of large producing properties. Because of the limited capital resources available to the Company, management has historically focused on smaller and/or marginal properties with behind-pipe potential in its acquisition efforts.
Regulations
General. The operations of the Company 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. The Company is further affected by changes in such laws and by constantly changing administrative regulations. To the best of its knowledge, the Company is in compliance with all such
regulations and is not aware of any claims that could have a material impact upon the Company’s financial condition, results of operations, or cash flows.
Environmental matters. The Company is subject to various federal, state, regional and local laws and regulations relating 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 Basic utilizes are owned and operated by third parties whose disposal practices are outside of the Company’s control. With respect to the three disposal wells that Basic owns and operates, it currently uses 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 Basic any differently than other companies in this industry who operate in a given geographic area. The Company is not aware of any environmental claims which could have a material impact upon the Company’s 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, Basic has not had to hire any new employees to comply with these regulations. The Company will continue to make expenditures in its efforts to comply with these requirements, which are unavoidable business costs in the oil and gas industry.
Although the Company is not fully insured against all environmental and other risks, it maintains insurance coverage that it believes is customary in the industry.
Risk Factors
Volatility of oil and gas prices. The Company’s revenues, operating results, profitability, future rate of growth and the carrying value of its 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 the control of the Company 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 the Company’s financial condition and results of operations. Such decline would reduce the Company’s cash flow and borrowing capacity and both the value and the amount of the Company’s existing oil and gas reserves.
The Company believes that substantially all of its domestic oil that is produced can be readily sold at prevailing market prices. In prior years the oil prices Basic received were typically $2.25 to $2.50 lower than the benchmark U.S. crude spot price because of adjustments for location and grade. In January 2006 this price differential began to widen to $6 to $7 per barrel for production from the northern portion of the Williston basin. Differentials for both Wyoming production and production from the southern portion of the Williston basin increased to as much as $30 per barrel for March 2006 production. There are several factors leading to this
increased price differential. Due to more and more successful drilling projects in the Williston basin there has been an increase in production in the area as well as a surge in the amount of Canadian barrels coming across the border. This has led to an overload for the pipelines in the area and the situation is further compounded by limited refinery capacity and reduced refinery intake during times of equipment repair and facility upgrades.
The Company had only five marginal and low volume wells that were exposed to the highest differentials. For May 2006 the northern Williston differential was in the $9 per barrel range while the Wyoming and south Williston spread had contracted to the $15 range.
Substantially all of Basic’s gas production is sold at prevailing wellhead gas prices, subject to additional charges customary to an area. Basic does not own or operate any gas gathering or processing plant facilities nor does it possess sufficient volume on any pipeline to market its 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 the Company’s control. The reserve information set forth in this Form 10-KSB (see Note 13 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 the Company’s reserves will likely vary from estimates, and such variances may be material.
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 the Company’s 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. The future success of Basic is highly dependent on the Company’s ability to find, develop and/or acquire additional oil and gas reserves that are economically recoverable. Without continued
successful exploitation, exploration or acquisition projects, the Company’s 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 to the Company. In addition, the Company may be liable for environmental damage caused by previous owners of properties purchased or leased by the Company. 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 Basic is not fully insured against all environmental and other risks, it maintains insurance coverage which it believes 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 the Company’s properties in Montana and North Dakota, severe weather conditions, especially in the winter months, could have a material adverse effect on Basic’s operations and cash flow.
At March 31, 2006 the Company had eight full-time employees: four 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, Basic at times hires up to five contract technical/professional personnel in its 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 the Company’s financial position and liquidity, the amount of and its ability to make debt service payments should it utilize some or all of its available borrowing capacity, its strategies, either existing or anticipated, financial instruments, and other matters, are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations are disclosed in this Form 10-KSB in conjunction with the forward-looking statements included in this Form 10-KSB.
The Company’s intentions and expectations described in this Form 10-KSB with respect to possible exploration and development activities concerning properties in which it holds interests may be deemed to be forward-looking statements. These statements are made based on management’s 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 the Company’s relative interest in the property and its estimate of its 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 management’s expectations and intentions and, thus, the Company may alter its plans regarding these exploration and development activities. Furthermore, circumstances beyond the Company’s control may cause such prospects to be eliminated from further consideration as exploration and/or development prospects.
