Tekoil & Gas Corporation (“TKGN,” “we” or the “Company”) was incorporated in Delaware on January 2, 2002, under the name “Trailridge Holdings, Inc.” On April 6, 2004, the Company changed its name to “Glow Bench Systems International, Inc.”; and on December 14, 2004, it changed its name to “Pexcon, Inc.”
On May 25, 2005, Pexcon, Inc., entered into an Acquisition Agreement with Tekoil & Gas Corporation, a Florida corporation (“Tekoil-FL”), the shareholders of Tekoil-FL and Gerald M. Dunne, in which the shareholders of Tekoil-FL received 694,980,000 shares of the common stock, $0.00000001 par value, of Pexcon, Inc., in exchange for the outstanding shares of common stock of Tekoil-FL held by them. Immediately following the closing of the Acquisition Agreement on June 27, 2005, Pexcon, Inc., had a total of 772,200,000 shares of common stock outstanding. In connection with the Acquisition Agreement, Pexcon, Inc., acquired the assets and assumed the liabilities of Tekoil-FL, which became a wholly-owned subsidiary of Pexcon, Inc. For accounting purposes only, the share exchange transaction was treated as a recapitalization of Tekoil-FL as the acquirer. In connection with the transaction, the Board of Directors of Pexcon, Inc., resigned, the Board of Directors of Tekoil-FL became the Board of Directors of the Company, and the Company’s name was formally changed from Pexcon, Inc., to Tekoil & Gas Corporation.
On October 14, 2005, the Company effected a 1 for 100 reverse split of its common stock. As of that date and as a result of the reverse stock split, 7,722,000 shares of common stock were outstanding. In connection with the reverse stock split, the Company changed the par value of the common stock from $0.00000001 per share to $0.000001 per share, and it reduced the number of authorized shares of common stock from 800,000,000 shares to 200,000,000 shares.
The Company currently operates its business directly, and not through its Tekoil-FL subsidiary, which continues to exist but has no assets or operations. For the purpose of pursuing its business strategy in the Province of Newfoundland, Canada, as described in greater detail below, on March 29, 2006, the Company formed a wholly-owned subsidiary, Tekoil Rig and Development Corporation, a Newfoundland corporation, and on April 19, 2006, the Company qualified to do business in Newfoundland. On January 17, 2007, the Company formed another wholly-owned subsidiary, Masters Acquisition Co., LLC, a Delaware limited liability company, and changed its name to Tekoil and Gas Gulf Coast, LLC, on January 26, 2007.
The Company is authorized to issue up to 20,000,000 shares of preferred stock, par value $0.00000001 per share. The Company has designated 3,000,000 of those authorized shares of preferred stock as Series A Convertible Preferred Stock, the terms of which are set forth in the Certificate of the Powers, Designations, Preferences and Rights of the Series A Convertible Preferred Stock, filed with the Secretary of State of Delaware on August 2, 2005, as amended on February 22, 2006 and June 12, 2006.
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As of March 15, 2007, the Company had outstanding 23,694,175 shares of common stock, par value $0.000001 per share (the “Common Stock”), and 2,692,000 shares of Series A Convertible Preferred Stock, par value $0.00000001 per share (the “Series A Preferred Stock”).
Business of Issuer
The Company is an exploration stage oil and gas enterprise focused on the acquisition, stimulation, rehabilitation and asset improvement of small to medium sized manageable oil and gas fields throughout North America.
Business Strategy
Our overall goal is to maximize our value through profitable growth by acquiring oil and gas reserves and production, with a firm philosophy of utilizing the latest, state of the art oil and gas technology in our drilling operations. Our current and ongoing strategy is to (a) acquire producing oil and gas properties with significant upside potential at favorable prices, (b) focus on exploration and development activities to maximize production and ultimate reserve recovery on existing properties, (c) explore undeveloped properties, (d) maintain a low cost structure, and (e) maintain financial flexibility. Key elements of our strategy include the following:
Acquisitions of Producing Properties . We have an experienced management and technical team, some of whom are consultants, which makes us more financially flexible. We focus on the acquisition of owner-operated producing properties that meet our selection criteria, which include (a) significant potential for increasing reserves and production through development and further exploration, (b) favorable purchase price, and (c) opportunities for improved operating efficiency. We are continually identifying and evaluating acquisition opportunities. To date, we have not been successful in this regard and there can be no assurance that any such acquisitions will be successfully consummated in the future.
Development . We have researched several projects that did not meet our criteria and/or did not pass our due diligence process. We continue to use our network of contacts in the industry to explore such opportunities, and with the use of the internet we conduct much of our due diligence before doing in situ evaluations.
Exploration . Our exploration activities for 2005 and 2006 have been restricted geographically to North America and Canada. The main thrust of this initiative, however, was predominantly in Eastern Canada. We have identified a potentially exciting opportunity in an area where exploration and risk capital of in excess of $100 million has been previously expended from the 1990’s to 2005. However, another company holds the lease to this area, so we have no rights to pursue this opportunity unless the current lease is terminated. Our independent consulting engineers, Fekete Associates and Dick Boyce of dB, LLC, have advised us that this area was a failure due to previous operators’ not understanding the complexity of the structures, and the unavailability of modern-day 3D seismic technology. Over the life of the one drilled well in this area, when operating by various operators, the well produced an average of 2,500 barrels of oil per day. We have access to all the previous data and history of these prospects, including mapping information, 2D seismic interpretation, minimal 3D seismic interpretation and extensive drilling information.
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Low Cost Structure . We have only six employees, and we hire subcontractors to provide technical engineering, accounting and legal expertise. We intend to maintain a low cost structure by keeping a small workforce. We have the capabilities of being an efficient operator and can capitalize on our low cost structure in evaluating acquisition opportunities. Our goal is to achieve substantial reductions in labor and other field-level costs from those expended by the previous operators. Our lower cost structure could substantially improve cash flows of targeted companies.
Financial Flexibility . We are committed to maintaining financial flexibility, which we believe is important for the successful execution of our acquisition, exploration and development strategy. Since October of 2005, we have completed private placements of our Common Stock and Series A Preferred Stock, which have provided us with aggregate net proceeds of approximately $4,022,000.
Western Newfoundland Prospect Development
Progress from November 2005 to December 2006 . After assembling the technical team in August 2005 and confirming the significant hydrocarbon potential that exists in the area of the Port au Port Peninsula of Western Newfoundland, we had the following objectives for the November 2005 to December 2006 time period:
| · | Prepare a technically sound exploration and development plan. |
| · | Lease the mineral rights over the prospective acreage at reasonable terms for the Company. |
| · | Establish our presence in Newfoundland by forming a Newfoundland subsidiary, qualifying to do business in Newfoundland and opening an office there; familiarize ourselves with the applicable regulatory regime(s) for oil and gas activity in the province; and establish good working relations with the regulators, government officials and the local communities in which we will be operating. |
| · | Obtain the approvals required to conduct an intense 3D seismic survey over the area’s onshore prospects. The necessity of conducting the seismic survey prior to conducting further drilling had been identified early in the technical evaluations. |
In establishing these objectives, we recognized that they would not all be completely achieved by December 2006. Nonetheless, we have achieved the following objectives:
| · | The exploration and development plan is complete. |
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| · | We have developed a significant network of contacts in Newfoundland and have established a Newfoundland subsidiary and an office in St. John’s, Newfoundland, staffed by two employees, one of whom previously worked for the Newfoundland Department of Natural Resources for eight years. |
| · | We have met with relevant government agencies, such as the Department of Natural Resources, the Canada-Newfoundland and Labrador Offshore Petroleum Board, the Department of Environment and Conservation, Environment Canada, the Department of Fisheries and Oceans, as well as the Fish, Food and Allied Workers Union. |
| · | We have made significant progress towards obtaining environmental approvals for an exploration license to conduct the 3D seismic survey over the onshore prospects. On May 2, 2006, the Department of Environment and Conservation issued a letter regarding our Port au Port Peninsula 3D seismic survey, along with a summary of comments received from various reviewing agencies during the review period. The letter released our proposed 3D seismic survey from further environmental assessment by the Department, subject to the approval of an Environmental Protection Plan prior to the commencement of the survey. |
Onshore Rig Construction
Background . High market demand has made it very difficult to contract drill rigs from oil producing centers to undertake drilling in frontier areas. Larger oil companies are executing long-term exclusive-use contracts in established areas, making rigs unavailable on a well-by-well basis. High demand has simultaneously created 12-18 month wait times to purchase a new rig. Rigs in the 600 to 1000 HP and 1500 to 2000 HP range are particularly in short supply. Industry analysts, such as Rigzone.com (August 24, 2006) and WorldOil.com (October 2005), report that high market demand for rigs is expected to continue for the next few years, and other industry publications, such as Drilling Contractor , appear to concur in that expectation. However, there can be no assurance that market demand will continue to be high.
To ensure access to a 2000 HP drilling rig for our Newfoundland exploration activities, we have investigated purchasing one or more, older, unused units, and refurbishing them to present-day standards. The option is technically viable because the structural components of the rig have a service life in the order of 60 years. Refurbishment involves complete rebuilding/replacement of the mechanical, electrical and instrumentation systems.
The economics of purchasing an older unit and then refurbishing it in Newfoundland are attractive. Order of magnitude costs to secure a 2000 HP unit are as follows:
| · | Two-year, long-term contract - $32 million, with an expected mobilization/demobilization charge of $10 million, according to an estimate by Nabors International. Factors affecting the estimate were limited land market in Newfoundland, higher labor costs in Canada, the fact that there is no rig in the area and the necessity of winterization. |
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| · | Purchase new - $27 million, with 12 to 18 month delivery, according to an estimate from National Oilwell Varco. Prices for new rigs have been steadily increasing in response to demand. |
| · | Refurbish older unit - $10 million with 6 months delivery through our own turnkey operation, as outlined below. |
According to our consultant, given current market conditions and the expectation that high market demand will continue, the resale value of a refurbished unit one year from now would likely be in the range of $18 million to $25 million. That would provide an $8 million to $15 million margin. Because of this significant margin, we could have an opportunity to generate healthy profits from ongoing rig refurbishments, through development of an extended work experience program with a Newfoundland technical college. A typical capital cost profile for a refurbished 2000+ HP rig is as follows:
| ITEM DESCRIPTION | ESTIMATED PURCHASE PRICE | **ESTIMATED COST TO REFURBISH | TRANSPORT. COSTS | TOTAL | |||||||||
| $US | $US | $US | $US | ||||||||||
| Substructure 25' clear working height | |||||||||||||
| Mast 152' x 1,300,000 lbs capacity | |||||||||||||
| National 1320 UE Drawwork c/w electric brake | |||||||||||||
| National P275 rotary table | |||||||||||||
| Oilwell P500 swivel | |||||||||||||
| Traveling block / hook B660GA500 | |||||||||||||
| Items above to be purchased as part of the original four rig package. | 1,500,000.00 | 600,000.00 | 200,000.00 | 2,300,000.00 | |||||||||
| Engines / generators - Caterpillar or Detroit (3) | 600,000.00 | 100,000.00 | 60,000.00 | 760,000.00 | |||||||||
| SCR system and building | 650,000.00 | 30,000.00 | 680,000.00 | ||||||||||
| * 3 tank mud system 1800 bbls total volume | 750,000.00 | 20,000.00 | 770,000.00 | ||||||||||
| 1600 hp mud pumps (two pumps) | 650,000.00 | 100,000.00 | 40,000.00 | 790,000.00 | |||||||||
| * Water tank and pumping system | 150,000.00 | 7,000.00 | 157,000.00 | ||||||||||
| * Dog house and windwall on off drillers side | 150,000.00 | 5,000.00 | 155,000.00 | ||||||||||
| Blow out preventer 13 5/8" x 5000 | 200,000.00 | 15,000 | 215,000.00 | ||||||||||
| 6 station closing unit | 80,000.00 | 10,000.00 | 90,000.00 | ||||||||||
| Choke manifold and poorboy degasser | 120,000.00 | 10,000.00 | 130,000.00 | ||||||||||
| Hydraulic catwalk | 530,000.00 | 25,000.00 | 555,000.00 | ||||||||||
| * Pipe tubs( 7units ) | 150,000.00 | 5,000.00 | 155,000.00 | ||||||||||
| Handling tools (tongs, slips, elevators) Pipe spinner to suit tubulars | 200,000.00 | 5,000.00 | 205,000.00 | ||||||||||
| Tuggers, air winch and wire line unit | 60,000.00 | 10,000.00 | 5,000.00 | 75,000.00 | |||||||||
| Cold start and air compressors | 110,000.00 | 15,000.00 | 5,000.00 | 130,000.00 | |||||||||
| Instrumentation | 75,000.00 | 15,000.00 | 1,000.00 | 91,000.00 | |||||||||
| Wire rope & bridle line | 55,000.00 | 5,000.00 | 60,000.00 | ||||||||||
| * Suitcases & grasshopper/rig stairs | 70,000.00 | 5,000.00 | 75,000.00 |
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| 15,000' of 5" Grade S-135 (19.5 lbs/ft.) | 960,000.00 | 100,000.00 | 1,060,000.00 | ||||||||||
| Drill collars 30 ea x 6 ½", 6 ea. X 8"; 3 ea. 9 1/2" drill collars | 230,000.00 | 40,000.00 | 270,000.00 | ||||||||||
| HWDP 5" x 50 joints | 235,000.00 | 30,000.00 | 265,000.00 | ||||||||||
| * Double walled fuel tank c/w pump | 75,000.00 | 1,000.00 | 76,000.00 | ||||||||||
| EZ-Torque hydraulic system | 30,000.00 | 2,000.00 | 1,000.00 | 33,000.00 | |||||||||
| Rig hydraulic pump, tank and hook up | 85,000.00 | 20,000.00 | 2,000.00 | 107,000.00 | |||||||||
| * Sandblasting & paint | 78,000.00 | 1,000.00 | 79,000.00 | ||||||||||
| Kelly hose, shock hoses & fire proof hoses | 62,000.00 | 5,000.00 | 67,000.00 | ||||||||||
| Miscellaneous equipment | 100,000.00 | 5,000.00 | 105,000.00 | ||||||||||
| * Complete electrical | 225,000.00 | 225,000.00 | |||||||||||
| Rig and mechanic tools | 15,000.00 | 15,000.00 | |||||||||||
| Rig up costs (cranes, trucks) | 150,000.00 | 150,000.00 | |||||||||||
| * Labor | 630,000.00 | 630,000.00 | |||||||||||
| Total | 8,975,000.00 | ** 862,000.00 | 638,000.00 | 10,475,000.00 | |||||||||
| Optional Equipment | Cost plus 15 | % | |||||||||||
| a 650 Ton Top Drive | Cost plus 15 | % | |||||||||||
| b Rig Matting | Cost plus 15 | % | |||||||||||
| c Convert rig to AC power | Cost plus 15 | % | |||||||||||
| d Purchase 125 hp boiler and winterize rig | Cost plus 15 | % |
* 35% of total is for materials and 65% is for labor. Materials - $629,300.00; Labor - $1,168,700.00.
** 60% of total is for materials and 40% is for labor. Materials - $517,200.00; Labor - $344,800.00.
Total cost for labor - $2,143,500.00
Contract Drilling . The cost and difficulty of procuring a rig is a common problem for all oil companies operating in Atlantic Canada. With a rig in the area, we could contract to drill on non-competitive lands at a cost effective rate relative to drilling contractors located in Western Canada, the US or international locations. In addition to our own use, we are already aware of at least two potential uses for a rig in Atlantic Canada: (i) drilling stratigraphic test holes for the province of Newfoundland, and (ii) drilling two commercial wells, preferably commencing the summer of 2007, for Petroworth Resources Inc., onshore Prince Edward Island to a depth of approximately 3,500 meters. Elsewhere, demand for rigs of this size is growing, and we have already established a number of leads.
An existing port with direct access to/from the college fabrication facilities enables freighter transport of rigs. Ready transportation access to/from Newfoundland to oil producing regions around the globe could, in combination with the aforementioned labor cost advantages, enable development of an ongoing commercial operation that supports government development initiatives for the region.
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Status of Rig Refurbishing Plans . The initial assessment of a rig purchase encouraged further investigation through February and March, 2006. During this time period, the purchase concept has evolved and expanded to one of purchasing old, inactive rig(s) and refurbishing them in Stephenville, Newfoundland, as a stand-alone business because market demand has taken up all available manufacturing capability and is creating excessive queue times for new rigs. Given current market conditions, our best option to secure a rig for our internal 2008 drilling program is to rebuild one. However, an ongoing rig refurbishing business could generate cash flow in 2007 and could be used to collateralize and finance our current and future exploration efforts. A refurbishing business is technically viable because the service life on structural components is on the order of 60 years.
The capital cost estimate to acquire and refurbish an older rig is approximately $10.5 million. To control material and shipping costs, we have contracted with Jim Howdle of Full Circle International Oilfield Products Inc., who has over 25 years experience in refurbishing rigs. The contractor has confirmed the tight market situation, the suitability of Port Harmon for freighter transport and the capability of the industrial trades in the Stephenville, Newfoundland, area to refurbish rigs. Mr. Howdle has also located inactive drilling rigs for potential purchase, including four rigs offered by Sun Machinery Corp. at a price of $1.9 million each.
We are currently pursuing the rig refurbishing business opportunity on several levels as follows:
| · | Scouting for suitable rigs and rig components to ship to Newfoundland. Refinement of material lists and cost estimates to procure, ship and refurbish selected rigs. |
| · | Negotiation with interested oil companies for the pre-purchase of the initial batch of rigs. |
| · | Establishment of a wholly-owned subsidiary in Newfoundland, to handle the refurbishment business. |
| · | Securing key personnel under long-term contracts. |
| · | A site tour to inventory the college facilities and identify any additional equipment that will need to be purchased. |
| · | Ongoing negotiations with the technical college to better define the training program and the business relationship with the college. |
Recent Developments
On November 13, 2006, we executed a Purchase and Sale Agreement with Masters Resources, LLC, and Masters Oil and Gas, LLC, to acquire four properties, consisting of interests in Trinity Bay, Redfish Reef, Fishers Reef, and North Point Bolivar Fields, located in Galveston and Chambers Counties in the Galveston Bay, Texas. Total consideration payable by Tekoil will exceed $50 million and may be as much as $80 million under the terms of the Purchase and Sale Agreement. The Purchase and Sale Agreement required the Company to pay a non-refundable sum of $1 million to Masters Resources and Masters Oil and Gas within five business days of executing the Purchase and Sale Agreement. The agreement further provided for a closing to occur in January 2007, which was subject to a number of conditions, including completion of due diligence and arrangement of financing by the Company. On November 22, 2006, the Company paid the $1 million deposit required by the Purchase and Sale Agreement.
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On December 29, 2006, the Company and Masters Resources and Masters Oil and Gas agreed to a First Amendment to Purchase and Sale Agreement (the “First Amendment”), which amended the Purchase and Sale Agreement. The First Amendment extended the date for a closing to February 9, 2007, and set the purchase price for the transaction at $47,500,000 plus 500,000 shares of the Company’s Common Stock and the preservation by Masters Resources and Masters Oil and Gas of a specified overriding royalty interest as detailed in the Amendment. On February 8, 2007, the Company assigned the Purchase and Sale Agreement to its wholly owned subsidiary, Tekoil and Gas Gulf Coast, LLC. On February 14, 2007, a Second Amendment to the Purchase and Sales Agreement extended the closing to March 2, 2007. A Third Amendment dated March 1, 2007, extended the closing until March 16, 2007; and a Fourth Amendment dated March 22, 2007, extended the closing until April 12, 2007.
On December 29, 2006, the Company authorized a leading New York-based financial institution, on a 60-day exclusive basis, to proceed with an accelerated due diligence investigation and to seek internal lender credit approval for a contemplated $50,000,000 multiple advance, senior secured four year credit facility, with initial availability of $25,000,000 in support of the Masters acquisition. The Company also announced that the terms for the credit facility, while based upon existing market conditions and subject to change, were anticipated to include among other terms, conditions and other provisions, the Company’s agreement to issue at Closing warrants to purchase 900,000 shares of Common Stock at a price of $0.50 per share exercisable for 5 years. The authorization required the Company to advance $50,000 against Lender’s expenses and certain other customary terms. The Term Sheet also contemplates that the credit facility will be conditioned upon the Company completing a minimum $20,000,000 equity financing, with standard covenants and conditions, including satisfactory due diligence reviews and regulatory approval, and other conditions, which the potential Lender may deem appropriate.
On November 21, 2006, the Company announced that its application for a geographic expansion of its original 3D seismic survey program around the Port au Port Peninsula and Port au Port Bay in western Newfoundland, had been increased from approximately 240 sq km to approximately 500 sq km and released from further environmental assessment by the Newfoundland and Labrador Department of Environment and Conservation. The Company is in the final stages with the Canada-Newfoundland and Labrador Offshore Petroleum Board to complete its approvals for the offshore component of the program, and it is focused on its Galveston, Texas, acquisition and on establishing its rig fabrication center in Stephenville, Newfoundland, with the anticipation of work beginning as early as the second quarter of 2007.
On January 3, 2007, the Company and Ptarmigan Resources Limited, a company based in Newfoundland & Labrador, Canada, executed a Farmout Agreement with respect to Ptarmigan’s offshore exploration license EL-1069. The License covers approximately 140,000 hectares, or 346,500 acres, of offshore surface area, in the shallow waters of the Gulf of St. Lawrence north of the Port au Port peninsula in western Newfoundland.
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Pursuant to the Farmout Agreement, the Company, as the Farmee, has paid $214,000 ($250,000 Canadian) to Ptarmigan, which was used as a drilling deposit to secure a one-year extension of the License from the Canada - Newfoundland and Labrador Offshore Petroleum Board. The Company is required to drill an onshore-to-offshore test well during 2007, which will test an offshore structure and, as the validation well, will extend the lease until January 2011 (Phase 1). The Company will earn a one-third interest (33.3%) in the License for the completion of Phase 1. The Company may then conduct an offshore 3D seismic program by late 2008, to map in more detail four offshore features already identified by Ptarmigan using 2D seismic data, which will earn the Company a further 26.7% of the License, for a total ownership of 60% (Phase 2).
The Farmout Agreement further provides that the Company and Ptarmigan will then drill an offshore exploration well and will share the drilling costs; 60% by the Company and 40% by Ptarmigan. Should the Company carry 100% of the cost of drilling, it will earn an additional 20% interest in the License, for a total of up to 80%, subject to government royalties (Phase 3). The Company estimates the total cost of Phases 1, 2, and 3 to be approximately $6,000,000 in 2007, $10,000,000 in 2008 and $25,000,000 in 2009.
Research and Development Expenses
We do not presently budget or isolate all of our research and development costs. These costs are generally included in overhead, as they are attributed principally to salary and other expenses associated with maintaining personnel who spend varying amounts of time dedicated to both research and development and to ongoing studies on our current projects.
Costs and Effects of Compliance with Environmental Laws
We do not currently budget or isolate all of our compliance costs relating to the environment. These costs are included in our consultant engineer fees.
Employees
As of March 15, 2007, we had six employees, of which five were full time employees. We have never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider our relations with our employees to be good. We believe that our future success will depend in part on our continued ability to attract, integrate, retain and motivate highly qualified technical and managerial personnel, and upon the continued service of our senior management and key technical personnel. Competition for qualified personnel in our industry and geographical location is intense, and there can be no assurance that we will be successful in attracting, integrating, retaining and motivating a sufficient number of qualified personnel to conduct our business in the future.
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Risk Factors
An investment in our Common Stock involves a high degree of risk. You should carefully consider the following risk factors and other information contained in or incorporated by reference into this report and any other Company reports and filings before deciding to purchase any shares of our Common Stock.
Tekoil's independent accountants have expressed substantial doubts about Tekoil's ability to continue as a going concern.
The report of Tekoil's independent accountants contains an explanatory paragraph expressing substantial doubts about Tekoil's ability to continue as a going concern due to the fact that Tekoil has incurred losses since inception. There can be no assurance that Tekoil will ever achieve significant revenues or profitable operations.
Tekoil is a development stage company and has no operating history on which to base an evaluation of its current business and future prospects.
Tekoil is a development stage company. As a result, it has no operating history upon which to base an evaluation of its current business and future prospects. We have not generated substantial revenues. Moreover, we do not currently have any contracts in place that will provide any significant revenue. Because of our lack of an operating history, management has limited insight into trends that may emerge and could materially adversely affect our business. Prospective investors should consider the risks and difficulties our Company may encounter, especially given our lack of operating history. These risks include our ability to:
| · | successfully execute our business strategy; |
| · | generate revenues; |
| · | compete favorably in a highly competitive market; |
| · | access sufficient capital to support growth; and |
| · | recruit and retain qualified employees. |
We have a history of operating losses and an accumulated deficit and we expect to continue to incur losses for the foreseeable future.
Since inception through December 31, 2006, we have incurred cumulative losses of $5,618,566 and have never generated enough funds through our operations to support our business. We expect to continue to incur substantial operating losses at least through March 31, 2007. Our losses to date have resulted principally from legal and accounting fees in connection with securities filings, engineering and consulting expenses related to the 3D seismic survey in western Newfoundland and salaries and related travel expenses. We expect to become profitable should the Masters acquisition be consummated early in the second quarter of 2007.
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We are currently unprofitable and may never become profitable. Since inception, we have funded our business activities primarily from private placements of equity and debt securities and short term loans from Mark S. Western, our President and Chief Executive Officer. As a result of our substantial expenditures and absence of revenues, we have incurred substantial net losses. There can be no assurance that Tekoil will ever achieve profitable operations.
The conversion of share of our Series A Convertible Preferred Stock may adversely affect the market price of the Company’s Common Stock.
As of March 15, 2007, the Company had outstanding 2,692,000 shares of Series A Convertible Preferred Stock. Each share of Series A Convertible Preferred Stock is convertible at the option of the holder, or automatically upon the occurrence of certain material corporate events, into three shares of Common Stock. The conversion of the Series A Convertible Preferred Stock and the sale in the public market of the shares of Common Stock received upon such conversion will be dilutive to existing stockholders and could adversely affect the market price of the Company’s Common Stock.
Our shareholders may suffer significant dilution as a result of contemplated capital raising activities and the failure to raise substantial additional capital to fund operations could force the Company to delay, reduce or eliminate its products and services.
In order to implement our business plan, we will require at least $60 million in additional capital financing and we will not be able to continue our operations without fresh injection of capital within the next nine months. There can be no assurance that the Company will be able to raise additional capital on terms acceptable to it or at all. Failure to obtain necessary financing could delay or force the Company to scale back or discontinue its products and services, which could have a material negative impact on its results of operations. To the extent Tekoil is able to raise additional funds by issuing equity securities, such issuance will be dilutive to existing stockholders and could adversely affect the market price of our Common Stock.
Exploration of oil and gas is highly speculative and involves a great deal of risk.
Companies engaged in oil and gas exploration are often required to perform expensive geological and/or seismic surveys with respect to their properties. Even if the results of such surveys are favorable, only subsequent drilling at substantial cost can determine whether the commercial development of properties is feasible. Oil and gas drilling is frequently marked by unprofitable efforts, not only from unproductive prospects, but also from productive prospects that do not produce sufficient amounts to return a profit on the investment. There can be no assurance that Tekoil will be able to discover, develop or produce sufficient reserves to recover the expenses incurred in connection with the exploration of its properties and achieve profitability.
We will have to expend significant amounts in connection with our evaluation of potential oil reserves and there can be no assurance that these efforts will result the identification of viable resources.
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We expect 3D seismic surveys to cost approximately $20.5 million. We have expended $1.2 million in risk capital for the evaluation of these areas, including the costs for the studies for the projected costs of 3D seismic work and environmental impact studies. However, there can be no assurance that these surveys will successfully identify viable oil reserves or whether these reserves, if identified, can be successfully developed by the Company.
We do not currently own the leases to the Newfoundland properties in which we have an interest in exploring.
Canadian Imperial Venture Corp. was issued a lease for the area in which we are interested, and that lease was due to expire on August 13, 2006. A lease confers to the lessee the exclusive right to develop and produce a petroleum pool in the lease area. A lease has an initial term of 10 years, subject to five (5) year renewals for those areas still in production or necessary for production. On June 28, 2006, Canadian Imperial issued a press release announcing that the Government of Newfoundland and Labrador had extended the onshore lease for an additional year. We are not aware of the conditions placed upon the lease extension by the Government of Newfoundland and Labrador, but Canadian Imperial announced on August 15, 2006, that it had met certain financial commitments for the lease extension, specifically referencing work plans and work deposits submitted to the Department of Natural Resources.
Based upon our discussions with government officials, we believe that the Government of Newfoundland and Labrador is imposing stricter requirements on leaseholders regarding investment in leased areas and progress toward production, as suggested by the speech delivered at the Atlantic Canada Oil and Gas Summit on May 30, 2005, by Premier Danny Williams. However, we do not know whether or not Canadian Imperial will be able to continue to meet government requirements for its lease extension, so there is a substantial risk that we may not receive approval for application for an exploration license. It is possible that Canadian Imperial will meet all government requirements for continued extension of the lease, preventing us from having access to this specific area. In addition, even if Canadian Imperial’s lease were terminated, there is no guarantee that, if we receive approval of our exploration license for the 3D seismic survey, we will automatically be approved as the new holder/owner of the lease. Failure to obtain the licenses and/or leasehold interests discussed above could have a negative impact on our operations.
Our oil and gas activities are subject to various risks which are beyond our control.
Our operations are subject to many risks and hazards incident to exploring and drilling for, producing, transporting, marketing and selling oil and gas. Although we may take precautionary measures, many of these risks and hazards are beyond our control and unavoidable under the circumstances. Many of these risks or hazards could materially and adversely affect our revenues and expenses, the ability of certain of our wells to produce oil and gas in commercial quantities, the rate of production and the economics of the development of, and our investment in the prospects in which we have or will acquire an interest. Any of these risks and hazards could materially and adversely affect our financial condition, results of operations and cash flows. Such risks and hazards include:
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| · | human error, accidents, labor force and other factors beyond our control that may cause personal injuries or death to persons and destruction or damage to equipment and facilities; |
| · | blowouts, fires, hurricanes, pollution and equipment failures that may result in damage to or destruction of wells, producing formations, production facilities and equipment; |
| · | unavailability of materials and equipment; |
| · | engineering and construction delays; |
| · | unanticipated transportation costs and delays; |
| · | unfavorable weather conditions; |
| · | hazards resulting from unusual or unexpected geological or environmental conditions; |
| · | environmental regulations and requirements; |
| · | accidental leakage of toxic or hazardous materials, such as petroleum liquids or drilling fluids, into the environment; |
| · | changes in laws and regulations, including laws and regulations applicable to oil and gas activities or markets for the oil and gas produced; |
| · | fluctuations in supply and demand for oil and gas causing variations of the prices we receive for our oil and gas production; and |
| · | the internal and political decisions of OPEC and oil and natural gas producing nations and their impact upon oil and gas prices. |
The unavailability or high cost of drilling rigs, equipment, supplies, personnel and oil field services could adversely affect our ability to execute our exploration and development plans on a timely basis and within our budget.
Our industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies or qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. In addition, the demand for, and wage rates of, qualified drilling rig crews rise as the number of active rigs in service increases. As a result of increasing levels of exploration and production in response to strong prices of oil and natural gas, the demand for oilfield services has risen, and the costs of these services are increasing, while the quality of these services may suffer.
We could be adversely affected by fluctuations in oil and gas prices.
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Even if our drilling activities achieve commercial quantities of economically attractive reserves and production revenue, our revenue, profitability and future growth will depend substantially on prevailing oil and gas prices. Prices of oil, natural gas and natural gas liquids are subject to wide fluctuations in response to relatively minor changes in circumstances, and there can be no assurance that future prolonged decreases in such prices will not occur. There is no guarantee that price levels, which have recently decreased, will continue to be sustained, and there could be a further sharp drop in market prices from factors such as increased supply, reduced demand, new alternative energy sources, major new exploration successes, political instability, armed conflict or terrorist attacks, whether or not in oil and gas producing regions, labor unrest in oil and gas producing regions, weather conditions and world economic conditions. Any significant decline in oil and gas prices would have a material adverse effect on our liquidity, operations, financial condition and ability to raise additional necessary capital. Lower oil and gas prices may also reduce the amount of oil and gas, if any, that can be produced economically from the Company’s properties.
We could be adversely affected by increased costs of service providers that we utilize.
In accordance with customary industry practice, we rely on independent third-party service providers to provide most of the services necessary to drill new wells, including drilling rigs and related equipment and services, horizontal drilling equipment and services, trucking services, tubulars, fracing and completion services and production equipment. The industry has experienced significant price increases for these services during the last year, and this trend is expected to continue into the future. These cost increases could, in the future, significantly increase our development costs and decrease the return possible from drilling and development activities, and possibly render the development of certain proved undeveloped reserves uneconomical.
We have no experience in the rig building/refurbishment business and are relying on the expertise of third parties.
Since the Company has no experience in the rig building/refurbishment business, we are forced to rely on the expertise of third parties. There can be no guarantee that these third parties will continue to advise the Company with respect to this business and the failure to maintain these relationships could materially impair the Company’s ability to run, maintain and expand this line of business.
We could have difficulty locating candidate rigs for the rig building/refurbishment business or market conditions could change thus rendering our business model unprofitable.
While we have located some candidate rigs and we believe that such rigs will be available for our rig building/refurbishment business, there can be no assurance that we will be able to obtain used rigs on acceptable terms. In addition, market conditions could change, preventing us from acquiring suitable old, inactive rigs, or cheaper alternatives to refurbished rigs could become available thus rendering our product unattractive to potential consumers. The inability to build/refurbish rigs in a cost-effective manner could have a material adverse effect on our operations and a negative impact on the price of our stock.
We anticipate that we will utilize horizontal drilling techniques, which could result in greater mechanical risks and impair our ability to maximize production.
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Horizontal drilling will allow us to drill with an onshore rig into offshore bottom-hole locations much less expensively. The rig we plan to use is an onshore 2,000 horsepower triple, which has the ability to drill to a total depth of 20,000 feet with two miles of deviation. Horizontal drilling will also allow us to maximize production efficiency with less wells being drilled. Horizontal drilling activities involve a greater risk of mechanical problems than conventional vertical drilling methods and there can be no assurance that we will achieve expected results from the use of horizontal drilling, or that we will not experience more mechanical problems and other difficulties than we otherwise might experience. If we encounter mechanical risks as a result of our horizontal drilling strategy, this may impair our ability maximize production and could adversely affect our results of operations.
Our insurance policies may not adequately protect us against certain unforeseen risks.
There are currently many known hazards associated with the exploration, discovery and delivery of gas and oil. To protect against possible liability, Tekoil maintains liability insurance with coverage that it believes is consistent with industry practice and appropriate in light of the risks attendant to its business. However, if Tekoil is unable to maintain insurance in the future at acceptable cost or at all, or if its insurance does not fully cover it and a successful claim is made against Tekoil, Tekoil could be exposed to significant liability. Any claim made against Tekoil that is not fully covered by insurance could be costly to defend, result in substantial damage award against Tekoil and divert the attention of management from Tekoil’s operations, all of which could have a material adverse effect on the Company’s financial performance.
Our activities are subject to extensive governmental regulation.
The oil and gas industry is subject to extensive federal, state, provincial and local laws and regulations governing the production, transportation and sale of hydrocarbons as well as the taxation of income resulting there from. Such regulations may be changed from time to time in response to economic or political conditions. From time to time, regulatory agencies have imposed price controls and limitations on production in order to conserve supplies of oil and gas. Numerous federal, state and provincial departments and agencies have their own rules and regulations applicable to the oil and gas industry. In general, these rules and regulations regulate, among other things, the extent to which acreage may be acquired or relinquished, spacing of wells, measures required for preventing waste of oil and gas resources and, in some cases, rates of production. The heavy and increasing regulatory burdens on the oil and gas industry increase the costs of doing business and, consequently, affect profitability.
In addition, the production, handling, storage, transportation and disposal of oil and gas, by-products thereof and other substances and materials produced or used in connection with oil and gas operations are subject to regulation under federal, state, provincial and local laws and regulations primarily relating to protection of human health and the environment. To date, expenditures related to complying with these laws and for remediation of existing environmental contamination have not been significant in relation to the results of our operations. There can be no assurance that the trend of more expansive and stricter environmental legislation and regulations will not continue and that any such expansion will not materially increase our cost of doing business.
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We are subject to various environmental risks, and governmental regulation relating to environmental matters.
We are subject to a variety of federal, state, provincial and local governmental laws and regulations related environmental protection, particularly the storage, use, discharge and disposal of toxic, volatile or otherwise hazardous materials. These laws and regulations govern, amon