Forward-looking Statements
The following discussion and analysis should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements and the notes
to those financial statements included in Item 1 of this Quarterly Report on
Form 10-Q. The following discussion contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 (the "Exchange Act"). These forward-looking statements involve risks,
uncertainties and assumptions. If the risks or uncertainties materialize or the
assumptions prove incorrect, our results may differ materially from those
expressed or implied by such forward-looking statements and assumptions. All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, such as those statements that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future. These statements are based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions, expected future developments and other factors we
believe are appropriate in the circumstances. Known material risks that may
affect our financial condition and results of operations are discussed in Item
1A, Risk Factors of our Annual Report on Form 10-K for the year ended September
30, 2020, and this Quarterly Report on Form 10-Q, Part II, Item 1A, Risk
Factors, and may be discussed or updated from time to time in subsequent reports
filed with the Securities and Exchange Commission. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date hereof. We assume no obligation, nor do we intend to update these
forward-looking statements. Unless the context requires otherwise, references in
this Quarterly Report on Form 10-Q to "GulfSlope" "we," "us," "our" and the
"Company" refer to GulfSlope Energy, Inc.
Overview
GulfSlope Energy, Inc. is an independent crude oil and natural gas exploration
and production company whose interests are concentrated in the United States
Gulf of Mexico federal waters. We are a technically driven company, and we use
our licensed 2.2 million acres of advanced three-dimensional ("3-D") seismic
data to identify, evaluate, and acquire assets with attractive economic
profiles. GulfSlope Energy commenced commercial operations in March 2013.
GulfSlope Energy was originally organized as a Utah corporation in 2004 and
became a Delaware corporation in 2012. We have focused our operations on the
United States Gulf of Mexico because we believe this area provides us with
favorable geologic and economic conditions, including multiple reservoir
formations, comprehensive geologic databases, extensive infrastructure,
relatively favorable royalty regime, and an attractive acquisition market and
because our management and technical teams have significant experience and
technical expertise in this geologic province. Additionally, we licensed 2.2
million acres of advanced 3-D seismic data, a significant portion of which has
been enhanced by new, state-of-the-art reprocessing and noise attenuation
techniques including reverse time migration depth imaging. We have used our
broad regional seismic database and our reprocessing efforts to generate and
high-grade oil and natural gas prospects. The use of our extensive seismic
database, coupled with our ability, knowledge, and expertise to effectively
reprocess this seismic data, allows us to further optimize our drilling
operations and to effectively evaluate acquisition and joint venture
opportunities. We consistently assess our prospect inventory in order to deploy
capital as efficiently as possible. We have given preference to areas with water
depths of 450 feet or less where production infrastructure already exists, which
will allow for any discoveries to be developed rapidly and cost effectively with
the goal to reduce economic risk while increasing returns.
We have historically operated our business with working capital deficits and
these deficits have been funded by equity and debt investments and loans from
management. As of June 30, 2021, we had $1.8 million of cash on hand. The
Company estimates that it will need to raise a minimum of $10.0 million to meet
its obligations and planned expenditures through August 2022. The Company plans
to finance operations and planned expenditures through equity and/or debt
financings, farm-out agreements, and/or other transactions. There are no
assurances that financing will be available with acceptable terms, if at all.
Competitive Advantages
Experienced management. Our management team has a track record of finding,
developing and producing oil and natural gas in various hydrocarbon producing
basins including the U. S. Gulf of Mexico. Our team has significant experience
in acquiring and operating oil and natural gas producing assets worldwide with
particular emphasis on conventional reservoirs. We deployed a technical team
with over 150 years of combined industry experience finding and developing oil
and natural gas in the development and execution of our technical strategy. We
believe the application of advanced geophysical techniques on a specific
geographic area with unique geologic features such as conventional reservoirs
whose trapping configurations have been obscured by overlying salt layers
provides us with a competitive advantage.
Advanced seismic image processing. Commercial improvements in 3-D seismic data
imaging and the development of advanced processing algorithms, including
pre-stack depth, beam, and reverse time migration have allowed the industry to
better distinguish hydrocarbon traps and identify previously unknown prospects.
Specifically, advanced processing techniques improve the definition of the
seismic data from a scale of time to a scale of depth, thus locating the images
in three dimensions. The Company has invested significant technical person hours
in the reprocessing and interpretation of seismic data. We believe the
proprietary reprocessing and interpretation and the contiguous nature of our
licensed 3-D seismic data gives us an advantage over other exploration and
production companies operating in our core area.
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Industry leading position in our core area. We have licensed 2.2 million acres
of 3-D seismic data which covers over 440 Outer Continental Shelf ("OCS")
Federal lease blocks on the highly prolific Louisiana outer shelf, offshore Gulf
of Mexico. We believe the proprietary and state-of-the-art reprocessing of our
licensed 3-D seismic data, along with our proprietary and leading-edge geologic
depositional and petroleum trapping models, gives us an advantage in identifying
and high grading drilling and acquisition opportunities in our core area.
Technical Strategy
We believe that a major obstacle to identifying potential hydrocarbon
accumulations globally has been the inability of seismic technology to
accurately image deeper geologic formations because of overlying massive,
extensive, and complex salt bodies. Large and thick laterally extensive
subsurface salt layers highly distort the seismic ray paths traveling through
them, which often has led to misinterpretation of the underlying geology and the
potential major accumulations of oil and gas. We believe the opportunity exists
for a technology-driven company to extensively apply advanced seismic
acquisition and processing technologies, with the goal of achieving attractive
commercial discovery rates for exploratory wells, and their subsequent appraisal
and development, potentially having a very positive impact on returns on
invested capital. These tools and techniques have been proven to be effective in
deep water exploration and production worldwide, and we are using them to
identify and drill targets below the salt bodies in an area of the shallower
waters of the Gulf of Mexico where industry activity has largely been absent for
over 20 years. GulfSlope management led the early industry teams in their
successful efforts to discover and develop five new fields below the extensive
salt bodies in our core area during the 1990's, which have produced over 125
million barrels of oil equivalent.
Our technical approach to exploration and development is to deploy a team of
highly experienced geo-scientists who have current and extensive understanding
of the geology and geophysics of the petroleum system within our core area,
thereby decreasing the traditional timing and execution risks of advancing up a
learning curve. For data licensing, re-processing and interpretation, our
technical staff has prioritized specific geographic areas within our 2.2 million
acres of seismic coverage, with the goal to optimize capital outlays.
Modern 3-D seismic datasets with acquisition parameters that are optimal for
improved imaging at multiple depths are readily available in many of these
sub-basins across our core area and can be licensed on commercially reasonable
terms. The application of state-of-the-art seismic imaging technology is
necessary to optimize delineation of prospective structures and to detect the
presence of hydrocarbon-charged reservoirs below many complex salt bodies. An
example of such a seismic technology is reverse time migration, which we believe
to be the most accurate, fastest, and yet affordable, seismic imaging technology
for critical depth imaging available today.
Lease and Acquisition Strategy
Our prospect identification and analytical strategy is based on a thorough
understanding of the geologic trends within our core area. Exploration efforts
have been focused in areas where lease acquisition opportunities have been
readily available. We entered into two master 3-D license agreements, together
covering approximately 2.2 million acres and we have completed advanced
processing on select areas within this licensed seismic area exceeding one
million acres. We can expand this coverage and perform further advanced
processing, both with currently licensed seismic data and seismic data to be
acquired. We have sought to acquire and reprocess the highest resolution data
available in the potential prospect's direct vicinity. This includes advanced
imaging information to further our understanding of a particular reservoir's
characteristics, including both trapping mechanics and fluid migration patterns.
Reprocessing is accomplished through a series of model building steps that
incorporate the geometry of the geology to optimize the final image. Our
integration of existing geologic understanding and enhanced seismic processing
and interpretation provides us with unique insights and perspectives on existing
producing areas and especially underexplored formations below and adjacent to
salt bodies that are highly prospective for hydrocarbon production.
We currently hold three leases, and we are evaluating the acquisition of
additional leases in our core area. Our original leases have a five-year primary
term, expiring in 2022, 2023 and 2025. Drilling the Tau No. 2 well will extend
the terms of the lease that is set to expire in 2022. BOEM's regulatory
framework provides multiple options for leaseholders to apply to receive
extensions of lease terms under specified conditions. GulfSlope is exploring all
options contained in BOEM's regulatory framework to extend the terms of the
leases. Additional prospective acreage can be obtained through lease sales,
farm-in, or purchase. As is consistent with a prudent and successful exploration
approach, we believe that additional seismic licensing, acquisition, processing,
and/or interpretation may become highly advantageous, in order to more precisely
define the most optimal drillable location(s), particularly for development of
discoveries.
We continue to evaluate potential producing property acquisitions in the
offshore Gulf of Mexico, taking advantage of our highly specialized subsurface
and engineering capabilities, knowledge, and expertise to identify attractive
opportunities. Any merger or acquisition is likely to be financed through the
issuance of debt and/or equity securities.
Drilling and other Exploratory and Development Strategies
Our plan has been to partner with other entities which could include oil and gas
companies and/or financial investors. Our goal is to diversify risk and minimize
capital exposure to exploration drilling costs. We expect a portion of our
exploration costs to be paid by our partners through these transactions, in
return for our previous investment in prospect generation and delivery of an
identified prospect on acreage we control. Such arrangements are a commonly
accepted industry method of proportionately recouping pre-drill cost outlays for
seismic, land, and associated interpretation expenses. We cannot assure you,
however, that we will be able to enter into any such arrangements on
satisfactory terms. In any drilling, we expect that our retained working
interest will be adjusted based upon factors such as geologic risk and well
cost. Early monetization of a discovered asset or a portion of a discovered
asset is an option for the Company as a means to fund development of additional
exploration projects, as an alternative to potential equity or debt offerings.
However, if a reasonable value were not received from the market at the
discovery stage, then we may elect to retain (subject to lease terms) the
discovery asset undeveloped, until a reasonable offer is received in line with
our perceived market value, or we may elect to seek development partners on a
promoted basis in order to substantially reduce capital development
requirements.
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Outlook
In the first quarter of 2020, the COVID-19 outbreak spread quickly across the
globe. Federal, state and local governments mobilized to implement containment
mechanisms and minimize impacts to their populations and economies. Various
containment measures, such as stay-at-home orders, closures of restaurants and
banning of group gatherings have resulted in a severe drop in general economic
activity, as well as a corresponding decrease in global energy demand.
Additionally, the risks associated with COVID-19 have impacted our workforce and
the way we meet our business objectives. Due to concerns over health and safety,
we have asked most of our corporate workforce to work remotely as we begin to
plan a process to phase employees to return to the office. Working remotely has
not significantly impacted our ability to maintain our operations or caused us
to incur significant additional expenses; however, we are unable to predict the
duration or ultimate impact of these measures.
In addition, actions by the Organization of Petroleum Exporting Countries and
other high oil exporting countries like Russia ("OPEC+") negatively impacted
crude oil prices in 2020. These rapid and unprecedented events pushed crude oil
storage near capacity and drove prices down significantly. These events have
been the primary cause of the significant supply-and-demand imbalance for oil,
significantly lowering oil pricing in 2020. Despite a strong recovery of prices
in 2021, oil and gas operators have reduced exploration budgets and activity.
These factors and others have contributed to the volatility of oil and gas
prices and may continue to impact prices in future periods. The Company has
evaluated the effect of these factors on its business and the Company has
determined that these factors could cause a delay in the Company's 2021 drilling
program. The Company continues to monitor the economic environment and evaluate
its continuing impact on the business.
President Biden entered office in January 2021 and has made tackling climate
change, including the restriction or elimination of future greenhouse gases
("GHGs"), a priority in his administration. The Biden Administration has already
adopted several executive orders and is expected to pursue additional orders,
legislation, regulations or other regulatory initiatives in support of this
agenda. Notably, the Acting Secretary of the U.S. Department of the Interior
issued an order on January 20, 2021, effective immediately, that suspends new
oil and gas leases and drilling permits on federal lands and offshore waters,
including the OCS for a period of 60 days. Building on this suspension,
President Biden issued an executive order on January 27, 2021 that suspends new
leasing activities for oil and gas exploration and production on federal lands
and offshore waters pending review and reconsideration of federal oil and gas
permitting and leasing practices. Subsequent to the issuance of the order issued
by the Acting Secretary of Interior, thirteen states brought suit to end the
suspension of new oil and gas leases on federal lands and water and to
reschedule canceled sales of leases in the Gulf of Mexico, Alaska waters and
western states and on June 13, 2021, a federal judge in Louisiana issued a
ruling blocking the temporary ban. In response, U.S. Interior Secretary Deb
Haaland insisted that Interior is evaluating its options and moving forward on
releasing an interim report to guide future leasing decisions. The report is
expected to recommend increasing royalty rates among other changes. While these
January 20, 2021 and January 27, 2021 orders do not apply to existing leases,
the January 27, 2021 order further directs applicable agencies to take measures
to eliminate provision of subsidies to the fossil fuel industry, although the
term "subsidies" is not defined by the administration. We continue to conduct
our operations on our existing leases in the OCS; however, uncertainty on future
Biden Administration actions with regards to offshore oil and gas activities on
the OCS together with the issuance of any future executive orders or adoption
and implementation of laws, rules or initiatives that further restrict, delay or
result in cancellation of existing oil and gas activities on the OCS could have
a material adverse effect on our business and operations.
Recent Developments
The Company has been conducting pre-drill operations for the Tau prospect which
is anticipated to be re-drilled to a total depth of approximately 21,000 feet.
The Exploration Plan has been filed with and approved by BOEM and the
Application for Permit to Drill ("APD") has been filed with BSEE and is pending
approval. The Company plans to sign a rig contract, and arrange for bonding and
insurance in conjunction with the approval of the APD. The Company continues to
be active in the evaluation of potential mergers and producing property
acquisitions that it deems to be attractive opportunities. Any such merger or
acquisition is likely to be financed through a combination of debt and equity.
Significant Accounting Policies
The Company uses the full cost method of accounting for its oil and gas
exploration and development activities. Under the full cost method of
accounting, all costs associated with successful and unsuccessful exploration
and development activities are capitalized on a country-by-country basis into a
single cost center ("full cost pool"). Such costs include property acquisition
costs, geological and geophysical ("G&G") costs, carrying charges on
non-producing properties, costs of drilling both productive and non-productive
wells. Overhead costs, which includes employee compensation and benefits
including stock-based compensation, incurred that are directly related to
acquisition, exploration and development activities are capitalized. Interest
expense is capitalized related to unevaluated properties and wells in process
during the period in which the Company is incurring costs and expending
resources to get the properties ready for their intended purpose. For
significant investments in unproved properties and major development projects
that are not being currently depreciated, depleted, or amortized and on which
exploration or development activities are in progress, interest costs are
capitalized. Proceeds from property sales will generally be credited to the full
cost pool, with no gain or loss recognized, unless such a sale would
significantly alter the relationship between capitalized costs and the proved
reserves attributable to these costs. A significant alteration would typically
involve a sale of 25% or more of the proved reserves related to a single full
cost pool.
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Proved properties are amortized on a country-by-country basis using the units of
production method ("UOP"), whereby capitalized costs are amortized over total
proved reserves. The amortization base in the UOP calculation includes the sum
of proved property, net of accumulated depreciation, depletion, and amortization
("DD&A"), estimated future development costs (future costs to access and develop
proved reserves), and asset retirement costs, less related salvage value.
The costs of unproved properties and related capitalized costs (such as G&G
costs) are withheld from the amortization calculation until such time as they
are either developed or abandoned. Unproved properties and properties under
development are reviewed for impairment at least quarterly and are determined
through an evaluation considering, among other factors, seismic data,
requirements to relinquish acreage, drilling results, remaining time in the
commitment period, remaining capital plan, and political, economic, and market
conditions. In countries where proved reserves exist, exploratory drilling costs
associated with dry holes are transferred to proved properties immediately upon
determination that a well is dry and amortized accordingly. In countries where a
reserve base has not yet been established, impairments are charged to earnings.
Companies that use the full cost method of accounting for oil and natural gas
exploration and development activities are required to perform a ceiling test
calculation each quarter. The full cost ceiling test is an impairment test
prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed
quarterly, on a country-by-country basis, utilizing the average of prices in
effect on the first day of the month for the preceding twelve-month period. The
cost center ceiling is defined as the sum of (a) estimated future net revenues,
discounted at 10% per annum, from proved reserves, (b) the cost of properties
not being amortized, if any, and (c) the lower of cost or market value of
unproved properties included in the cost being amortized. If such capitalized
costs exceed the ceiling, the Company will record a write-down to the extent of
such excess as a non-cash charge to earnings. Any such write-down will reduce
earnings in the period of occurrence and results in a lower depreciation,
depletion and amortization rate in future periods. A write-down may not be
reversed in future periods even though higher oil and natural gas prices may
subsequently increase the ceiling.
The Company capitalizes exploratory well costs into oil and gas properties until
a determination is made that the well has either found proved reserves or is
impaired. If proved reserves are found, the capitalized exploratory well costs
are reclassified to proved properties. The well costs are charged to expense if
the exploratory well is determined to be impaired. Capitalized exploratory well
costs remain pending the outcome of exploration activities involving the
drilling of the Tau No. 2 well (twin well). Accordingly, these costs are
included as suspended well costs as of June 30, 2021, and it is expected that a
final analysis will be completed in the next twelve months at which time the
costs will be transferred to the full cost pool upon final evaluation.
As of June 30, 2021, the Company's oil and gas properties consisted of wells in
process, capitalized exploration and acquisition costs for unproved properties
and no proved reserves.
Property and equipment are carried at cost. We assess the carrying value of our
property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
There has been no change to our critical accounting policies as included in our
annual report on Form 10-K as of September 30, 2020, which was filed with the
Securities and Exchange Commission on December 29, 2020.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
There was no revenue during the three months ended June 30, 2021 and 2020. We
incurred no impairment of oil and natural gas properties for the three months
ended June 30, 2021 and approximately $2.1 million impairment of oil and natural
gas properties for the three months ended June 30, 2020. General and
administrative expenses were approximately $0.4 million for the three months
ended June 30, 2021, compared to approximately $0.3 million for the three months
ended June 30, 2020. Net interest expense was approximately $131,000 for the
three months ended June 30, 2021, with none capitalized to unevaluated oil and
natural gas properties, compared to net interest expense of approximately $1,100
with interest expense of approximately $1.2 million capitalized to unevaluated
oil and natural gas properties for the three months ended June 30, 2020, net of
approximately $1,000 of interest income. Loss on debt extinguishment was nil for
the three months ended June 30, 2021 and approximately $0.02 million for the
three months ended June 30, 2020. Gain on derivative financial instruments was
approximately $0.1 million for the three months ended June 30, 2021, and for the
three months ended June 30, 2020, there was a loss of approximately $0.2
million, respectively.
Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020
There was no revenue during the nine months ended June 30, 2021 and 2020. We
incurred no impairment of oil and natural gas properties for the nine months
ended June 30, 2021, and $2.1 million for the nine months ended June 30, 2020.
This is due to the expiration of oil and gas leases for the nine months ended
June 30, 2020. General and administrative expenses were approximately $1.1
million for the nine months ended June 30, 2021, compared to approximately $1.2
million for the nine months ended June 30, 2020. This decrease is primarily due
to a decrease in professional fees and stock compensation for the nine months
ended June 30, 2021. Interest expense was approximately $416,000 for the nine
months ended June 30, 2021, with none capitalized to unevaluated oil and natural
gas properties and approximately $16,000 for the nine months ended June 30,
2020, with approximately $2.4 million net of interest income of approximately
$22,000 capitalized to unevaluated oil and natural gas properties. Gain on debt
extinguishment was approximately $0.1 million for the nine months ended June 30,
2021, compared to a loss on debt extinguishment of approximately $1.6 million
for the nine months ended June 30, 2020. Loss on derivative financial instrument
was approximately $0.3 million for the nine months ended June 30, 2021, compared
to gain on derivative financial instrument of approximately $1.5 million for the
nine months ended June 30, 2020.
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Liquidity and Capital Resources
The Company has incurred accumulated losses for the period from inception to
June 30, 2021, of approximately $59.7 million, and has a negative working
capital of $12.0 million. For the nine months ended June 30, 2021, the Company
has generated losses of approximately $1.7 million and net cash used in
operations of approximately $1.2 million. As of June 30, 2021, there was $1.8
million of cash on hand. The Company estimates that it will need to raise a
minimum of $10 million to meet its obligations and planned expenditures through
August 2022. The $10 million is comprised primarily of capital project
expenditures as well as general and administrative expenses. It does not include
any amounts due under outstanding debt obligations and accrued interest, which
amounted to approximately $11.9 million as of June 30, 2021. The Company plans
to finance operations and planned expenditures through the issuance of equity
securities, debt financings, farm-out agreements, mergers or other transactions.
Our policy has been to periodically raise funds through the sale of equity on a
limited basis, to avoid undue dilution while at the early stages of execution of
our business plan. Short term needs have been historically funded through loans
from executive management. There are no assurances that financing will be
available with acceptable terms, if at all. If the Company is not successful in
obtaining financing, operations would need to be curtailed or ceased. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
For the nine months ended June 30, 2021, the Company used approximately $1.2
million of net cash in operating activities, compared with approximately $0.1
million of net cash used by operating activities for the nine months ended June
30, 2020. For the nine months ended June 30, 2021, approximately $0.2 million of
cash was provided by investing activities compared with approximately $0.4
million of cash used in investing activities for the nine months ended June 30,
2020. For the nine months ended June 30, 2021, the Company used approximately
$0.3 million of cash in financing activities in payment of notes payable,
compared with approximately $0.4 million provided by financing activities for
the nine months ended June 30, 2020, these amounts are from net loan proceeds of
approximately $0.4 million provided by the issuance of Convertible Notes Payable
during the nine months ended June 30, 2020.
The Company will need to raise additional funds to cover planned expenditures,
as well as any additional, unexpected expenditures that we may encounter. Future
equity financings may be dilutive to our stockholders. Alternative forms of
future financings may include preferences or rights superior to our common
stock. Debt financings may involve a pledge of assets and will rank senior to
our common stock. We have historically financed our operations through private
equity and debt financings. We do not have any credit or equity facilities
available with financial institutions, stockholders or third-party investors,
and will continue to rely on best efforts financings. The failure to raise
sufficient capital could cause us to cease operations, or the Company would need
to sell assets or consider alternative plans up to and including restructuring.
Off-Balance Sheet Arrangements
None.
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