Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles.
Unless otherwise specified in this annual report, all dollar amounts are expressed in United States dollars and all references to “common shares” refer to shares of our common stock.
As used in this annual report, the terms “we”, “us”, “our”, “our Company” and “California Oil & Gas” mean our company, California Oil & Gas Corporation, unless otherwise indicated.
Corporate History
We were incorporated under the laws of the State of Nevada on June 21, 2002 under the name Ucluelet Exploration Corp. Following our incorporation, we engaged in the business of exploring mineral resource properties, with claims on properties located on Vancouver Island in British Columbia, Canada.
In January, 2003 David Heel, a former President and ex-director of our company, acquired sixteen mineral claims known as the Kennedy Lake property. This property covered approximately 1,000 acres of land located on Vancouver Island, British Columbia, approximately 82 miles west of the city of Nanaimo and approximately 10 miles north of the town of Ucluelet. This property was without known reserves and our initial program was preliminary in nature. We intended to conduct an exploration program to determine the presence of minerals, if any, on the property. Our preliminary evaluation of this property did not look promising. Due in part to the results of our preliminary evaluation of this property and in part to our lack of sufficient funding to initiate a meaningful exploration program, we permitted all sixteen of these Kennedy Lake mineral claims to lapse in February 2005.
In January, 2004 we purchased an option to acquire up to a 100% interest in a mineral property known as the Hit Property for $7,400, subject to a 2% net smelter royalty in favour of the Optionor. This property was located in Aspen Grove, British Columbia and consisted of 23 mineral claims over a total of approximately 1,543 acres. These claims were without known reserves. Although we lacked the funds required to pay the first option payment due in January, 2005, the grantor of the option gave us an extension until July 29, 2005. We were unable to raise funds to make the option payment on July 29, 2005 and, on October 1, 2005, the grantor of the option terminated the option because of our failure to make the option payment.
Due primarily to our inability to attract the capital necessary to explore our mineral resource properties, we began to consider other business opportunities during the months of September and October of 2005. In late October, 2005 we concluded that we could not continue to pursue the mineral resource exploration business as we had been, and we began to focus on opportunities that might be available to our company in the oil and gas industry. On November 3, 2005, we appointed John McLeod to our board of directors in an effort to benefit from, among other things, his extensive experience in the oil and gas industry. On January 13, 2006, David Heel resigned from his positions with our company (including his offices as President, Secretary and Treasurer) and we appointed John McLeod to serve in these capacities from and after that date.
On January 31, 2006, we changed our name to California Oil & Gas Corporation. We effected this name change by merging our newly created and wholly-owned Nevada subsidiary, named California Oil & Gas Corporation, into our company pursuant to an agreement and plan of merger dated January 26, 2006. This newly created subsidiary had been incorporated for that single purpose. Our company, now called California Oil & Gas Corporation, was the surviving company in the merger, which was effected with the State of Nevada on January 31, 2006.
Our Current Business
We are an exploration stage company engaged in the identification, acquisition and exploration of oil and natural gas properties. Since transitioning our focus from mineral resource properties to oil and natural gas properties in January of 2006, we have entered into several letters of intent, all of which are discussed below in greater detail, whereby we hope to earn an interest in one or more oil and gas properties located in California, Louisiana and Chile.
To date, our partners in the East Slopes project have leased over 18,000 acres of mineral property in four prospect areas. During the next six months, these partners intend to acquire 3-D seismic data covering three of these four areas.
California
On July 9, 2007 we, together with the other participants in the East Slopes project, entered into a seismic option farm-in agreement dated for reference June 21, 2007 with Chevron U.S.A. Inc. granting to Chevron an option to farm-in to a 50% interest in the East Slopes project if Chevron funds a High Definition 3-D Exploration Seismic Survey over a project area in the San Joaquin area of Southern California consisting of approximately 19,000 acres. The project area is comprised of 16,000 gross acres of mineral leaseholds to be contributed by our current partners and approximately 3,000 gross acres of mineral leaseholds to be contributed by Chevron, all of which has been subdivided into three prospect areas. Under the terms of the agreement, Chevron has the right, but is not obligated, to fund the high definition 3-D exploration seismic survey over the project area. The agreement provides that if Chevron chose to fund the survey, our company would act as the operator. The agreement also provides that if the survey is shot and the data is acquired, processed and delivered to the other parties to the agreement, Chevron will have earned its 50% interest in the 16,000 gross acres of mineral leaseholds contributed by our partners. If this occurs, our current partners will have the option to farm-in to a 50% interest in the 3,000 gross acre area contributed to the project by Chevron by drilling three initial test wells, one in each of the three prospect areas into which the overall project has been subdivided. If this occurs, then our current partners as a group and Chevron will then each hold a 50% interest in the lands and wells. The agreement provides that our company would also be the operator for the purposes of drilling each of these three test wells. If after we have drilled these three test wells the parties decide to continue exploration in any of the prospect areas, Chevron will have the right, at its option, to become the operator in place of our company. Beginning in mid-September, 2007, we began preliminary work on the 3-D seismic project data acquisition began October 15, 2007.
Our company does not currently own any interest in this Eastern Slopes project. We have previously entered into a farm-in agreement with our current partners pertaining to our ability to earn an interest. Under this agreement, and following interpretation of any seismic data derived from the High Definition 3-D Exploration Seismic Survey, we will have the option to earn a 12.5% interest (after recovery of 200% of costs) in the seismic area leases and wells by paying 25% of the cost of three wells in each of the three prospect areas covered by the seismic survey.
Under the farm-in agreement with Chevron, Chevron has a ‘call' right to purchase any oil, gas or other hydrocarbons produced under the terms of the agreement at posted, competitive pricing.
We anticipate that we will spend approximately $1 million on this project over the next 12 months.
In the North project, basic exploration techniques have identified an area that could be prospective for shallow oil production. Over the next 12 months we plan to continue our geologic analysis of the area, the acquisition of oil and gas leases in areas considered prospective, and acquisition of 2-D and 3-D seismic data in anticipation of beginning exploratory drilling. We anticipate that we will spend approximately $1,500,000 on this project over the next 12 months.
Louisiana
At the South Krotz Springs project located in St. Landry Parish, the operator has completed drilling the Haas-Hirsch No. 1 Well (formerly known as the Haas-Hirsch Unit Well No. 60). The well encountered, based on mud log and electric log analyses, 2 commercial zones which could be productive for natural gas and condensate. The lower of the 2 zones, the Second Cockfield sand, was perforated and tested at rates of about 900 mcfd at 600 psi wellhead pressure. After a 17 hour flow period through a production test unit, the well was tied into a pre-existing flowline on location and gas sales commenced May 16, 2007. The well is currently producing and we are receiving revenues from sales of natural gas. The operator is considering a workover to complete the First Cockfield Sand and the potential for commingled production with the currently producing Second Cockfield sand. We currently estimate that the remainder of the drilling, completion and tie-in for this well should cost our company approximately $600,000 over the next 12 months.
We believe that further activity in Krotz Springs should involve the purchase and reinterpretation of existing seismic data. The reinterpretation of this data could result in the selection of other drilling locations in the 4,500 acre Krotz Springs Unit, and if so, an election to drill an additional well could be made during the next few months with drilling to follow. We estimate that our share of the costs of this additional well and activity over the next 12 months could be approximately $1,500,000.
Our "E" project in Louisiana involves the potential exploration of a subterranean structure. Current operations involve leasing of acreage over the structure that our partners believe may be prospective for oil, gas and/or condensate. After leasing is completed, we expect that our partners will consider acquisition of 3-D seismic data. If interpretation of the seismic data identifies prospective locations, exploration wells would be planned and drilled. We believe that it is unlikely that a well will be drilled during the 12 month period ending September 30, 2008. We anticipate that we will spend approximately $2,000,000 for our share of any leasing and seismic data acquisition and drilling planning during this 12 month period.
Chile
On May 15, 2007, we received a cash call from March Resources Corp. as contemplated in our Letter of Understanding with March Resources dated September 11, 2006. We did not remit the cash requested and, on June 26, 2007, March Resources sent us notice that we had failed to comply with our obligations under that Letter of Understanding and, as a result, that they were terminating the Letter of Understanding and retaining our $250,000 deposit.
Other Activity
We expect to continue to investigate other opportunities within the oil and gas sector, both domestic and international, over the next 12 months. We anticipate that our costs for the investigation and analysis of opportunities over the next 12 months should be approximately $200,000. Unless we are successful in identifying a project or projects that are, in our opinion, worth pursuing, it is unlikely that we will incur significant project costs in the coming 12 month period.
Cash Requirements
We estimate that we will spend approximately $400,000 on general and administrative expenses over the next 12 months and working capital of approximately $7,000,000. Working capital requirements may increase if we identify, assess and acquire one or more new oil and gas exploration or development properties during the year. The amount of the increase will depend, to a large extent, on the nature of the properties identified, if any.
Based on our current plan of operations, we do not have sufficient funds for the next 12 months. We believe that we will require additional funds to continue our exploration operations. If we are unable to raise additional financing in the next 12 months, and we fail to otherwise generate any cash flow through operations, we will be required to modify our operations plan accordingly or even to cease operations altogether. These funds may be raised through equity financing, debt financing or other sources, and may result in substantial dilution of the equity ownership of our shares. There can be no assurance that we will be able to raise the funds required or maintain operations at a level sufficient for an investor to obtain a return on his investment in our common stock. Further, we may continue to be unprofitable.
Financial Condition, Liquidity and Capital Resources
From the date of inception on June 21, 2002, to the date we abandoned our mineral exploration business, we were engaged in the acquisition and exploration of mineral properties. Our principal capital resources have been acquired through the issuance of common stock.
At August 31, 2007, we had a working capital deficiency of $680,424.
At August 31, 2007, our total assets of $3,132,683 consisted of current assets of $149,329 and oil and gas properties and other long term assets of $2,983,354. This compares with our assets at August 31, 2006 of $795,091 which consisted of cash and a deposit.
At August 31, 2007, our total liabilities were $829,753, compared to our liabilities of $18,658 as at August 31, 2006. The increase in these liabilities consisted primarily of trade payables.
On August 7, 2007, we closed a private placement of 363,636 units for gross proceeds of $200,000. Each unit consisted of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase one additional common share of our company at a price of $0.55 per warrant share until the warrants expire on August 7, 2008.
The continuation of our business is dependent upon obtaining financing, a successful program of acquisition and exploration, and, finally, achieving a profitable level of operations. The issuance of additional equity securities by us could result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.
There are no assurances that we will be able to obtain funds required for our continued operations. As noted herein, we are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
We have no long-term debt and do not regard long-term borrowing as a good, prospective source of financing at this stage in the development of our company and its business.
Results of Operations.
We posted a loss of $568,626 for the nine month period ended August 31, 2007, as compared to a loss of $216,411 for the nine month period ended August 31, 2006, and losses of $1,019,250 from inception to August 31, 2007. Oil and natural gas revenues, net of royalties, were $76,595 for the nine months ended August 31, 2007 (nil for the nine months ended August 31, 2006). The principal component of our losses from inception has been general and administrative expenses. The principal components of our loss for the nine month period ended August 31, 2007 were general and administrative expenses, stock based compensation ($58,771 during the nine month period ended August 31, 2007 as compared to $64,591 during the nine month period ended August 31, 2006), in addition to the write-off of $253,217 as the result of the termination of our agreement with March Resources in respect of the Chile project (as compared to nil in write-offs for resource properties for the nine months ended August 31, 2006). Legal costs were $53,714 for the nine month period ended August 31, 2007, compared to $24,443 for the nine month period ended August 31, 2006. Accounting and audit costs were $72,316 for the nine month period ended August 31, 2007, compared to $24,365 for the nine month period ended August 31, 2006. Consulting fees increased to $56,980 during the nine month period ended August 31, 2007 from $44,981 for the nine month period ended August 31, 2006. Office expense increased to $36,911 for the nine month period ended August 31, 2007 compared to $15,976 for the nine month period ended August 31, 2006. Corporate expenses, including transfer agent fees, news release costs and stock exchange filing fees were $39,110 for the nine month period ended August 31, 2007 compared to $18,705 for the nine months ended August 31, 2006. Travel expenses for the nine month period ended August 31, 2007 were $42,565 compared to $23,830 for the nine month period ended August 31, 2006. Depletion and depreciation expense was $18,139 for the nine month period ended August 31, 2007 compared to nil for the nine month period ended August 31, 2006. Operating expense was $13,643 for the nine month period ended August 31, 2007 compared to nil for the nine month period ended August 31, 2006. These increases, aggregating $428,475, are due primarily to the increase in activity commencing upon the abandonment of our mineral resource properties, the shift in our business from mineral resources to oil and gas, and the change in management that lead to this shift, all of which took place during the first few months of calendar year 2006.
Product Research and Development
Our business plan is focused on a strategy of acquiring and maximizing the long-term exploration and development of oil and gas opportunities. To date, execution of our business plan has largely focused on assessing prospective oil and gas interests and acquiring the interests that we have acquired in California and Louisiana, as well as those that we recently failed to farm-in on in Chile. As our plans for these properties continue to develop based on leasing progress, results of initial wells and other exploration and related events that will evolve over time, we hope to structure and implement an exploration and development plan. In addition, we continue to look for additional properties of interest.
Purchase of Significant Equipment
We do not intend to purchase any significant equipment (excluding oil and gas activities) over the next twelve months.
Employees
We do not currently have any employees (other than our directors and officers who, at present, have not signed an employment or consulting agreement with us). We do not expect any material changes in the number of employees over the next 12 month period (although we may enter into employment or consulting agreements with our officers or directors). We do and will continue to outsource contract employment as needed. We have an agreement with one consultant who performs general administrative and clerical functions for our company on an as-needed basis.
Going Concern
Due to the uncertainty of our ability to meet our current operating expenses and the capital expenses noted above, in their report on the annual financial statements for the year ended November 30, 2006, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that lead to this disclosure by our independent auditors.
There are no assurances that we will be able to obtain further funds required for our continued operations. As noted herein, we are pursuing various financing alternatives to meet our immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Management is currently evaluating the impact SFAS No. 157 will have on our financial position, results of operations, and cash flows.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB statement No. 115." This Statement permits all entities to choose, at specified election dates, to measure eligible items at fair value (the "fair value option"). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. If an entity elects the fair value option for a held-to-maturity or available-for-sale security in conjunction with the adoption of this Statement, that security shall be reported as a trading security under Statement 115, but the accounting for a transfer to the trading category under paragraph 15(b) of Statement 115 does not apply. Electing the fair value option for an existing held-to-maturity security will not call into question the intent of an entity to hold other debt securities to maturity in the future. This statement is effective as of the first fiscal year that begins after November 15, 2007. We are currently analyzing the effects of SFAS 159 but do not expect its implementation will have a significant impact on our financial condition or results of operations.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48 Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement, and disclosure of uncertain tax positions recognized in an enterprise's financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 will be applied to all positions upon the adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. Management is currently evaluating the impact of FIN 48 on the financial statements but does not believe that its adoption will have a material effect on our financial position, results of operations, or cash flows.
