Overview
Norris Industries, Inc. (the "Company", "we", or "us") (formerly International
Western Petroleum, Inc.) was incorporated on February 19, 2014, under the laws
of the state of Nevada. We are an oil and natural gas company that focuses on
the acquisition, development, and exploration of crude oil and natural gas
properties in Texas. As of March 1, 2020, the SEC Non-Escalated Analysis of
Estimated Proved Reserve of our various leases in Jack County and Palo-Pinto
County, the Ratliff leases, the Marshall-Walden, and the Bend Arch Lion 1A and
Bend Arch Lion 1B leaseholds, is a total of 29 Mbbl in oil net reserves, plus
150 MMcf in natural gas net reserves being out of total of BOE equivalent of 54
Mbbl in gross reserves, which is down from prior year by 322 Mbbl due to
reduction of expected production as result of well workover issues.
The reserves associated with the report from Bryant M. Mook, PE have been
classified in accordance with the definitions of the Securities and Exchange
Commission as found in Part 210 - Form and Content of and Requirements for
Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934,
Public Utility Holding Company Act of 1935, Investment Company Act of 1940,
Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975,
under Rules of General Application § 210.4-10 Financial accounting and reporting
for oil and gas producing activities pursuant to the Federal securities laws and
the Energy Policy and Conservation Act of 1975.
The Company's longer term main objective is to actively focus on improving its
existing fields and to look for additional reserve oil and gas concessions and
production opportunities, aiming to participate with capital partners for a
transaction related to buyouts and joint ventures. The Company will continue to
conserve capital to be able to focus on smaller oil and natural gas properties
in West, Central West, East and South Texas, aiming to increase its revenues via
an acquisition. It also will try to improve the existing production revenues of
the Bend Arch Lion 1A, Bend Arch Lion 1B, Marshall Walden joint venture
property, which includes the purchase of the leases in Jack County and Palo
Pinto County, plus the Ratliff property via new entries, re-entries and EOR
methods as mentioned in the Operational Plan section above.
The Company ultimately plans to tap into the high potential leases of the West
Texas region of the United States, aiming to obtain reserves for future
development, so as to increase its overall oil and gas assets in the Permian
Basin. The Permian Basin is a sedimentary basin largely contained in the western
part of the U.S. state of Texas and the southeastern part of the U.S. state of
New Mexico. It reaches from just south of Lubbock, TX, to just south of Midland
and Odessa, TX, extending westward into the southeastern part of New Mexico. It
is so named because it has one of the world's thickest deposits of rocks from
the Permiangeologic period. The greater Permian Basin comprises several
component basins: of these, Midland Basin is the largest, Delaware Basin is the
second largest, and Marfa Basin is the smallest. The Permian Basin extends
beneath an area approximately 250 miles (400 km) wide and 300 miles (480 km)
long.
To achieve the Company's production objectives, our senior management team has
explored the opportunity to utilize new and existing technologies and plans to
start with 4 counties (Coleman, Gregg, Russ and Reeves) for the EOR business in
Texas. The Company plans to optimize its acquisition model by adding this
technology to increase existing mature productions without additional drilling
or fracking.
18
Results of Operations
Revenues
The Company generated revenues of $573,016 from oil and gas production sales
during the year ended February 29, 2020, compared to $499,074 during the year
ended February 28, 2019. The increase in oil and gas production sales was
primarily due to the acquisition of the Marshall Walden accounting for 100% WI
ownership in June 2019.
Because of the disruption to the oil and gas industry caused by the COVID-19
pandemic and measures taken to control the spread of disease, the Company
expects that there will be a reduction in revenues for fiscal year 2021.
Lease Operating Expenses
Lease operating expenses for the years ended February 29, 2020 and February 28,
2019, were $731,760 and $279,815, respectively. We incurred more lease operating
expenses in 2020 primarily because of additional lease expenses incurred for
workovers, well repair, and maintenance in the Marshall-Walden property, and
other workover, well service repair, and maintenance costs in the Jack and Palo
Pinto Country properties that have not be as successful as Company had initially
expected them to be.
Operating Expenses
Operating expenses for the years ended February 29, 2020 and February 28, 2019,
were $577,066 and $878,051, respectively. The decrease was primarily due to
management implementing cost controls to lower the general and administrative
expenses incurred by the Company.
Depletion and Accretion Expenses
For the years ended February 29, 2020 and February 28, 2019, the Company
recorded depletion and accretion expense of $771,837 and 210,625, respectively,
related to depletion of oil and gas properties and amortization of asset
retirement obligations.
Impairment Expense
For the years ended February 29, 2020 and February 28, 2019, the Company
recorded impairment of $1,319,444 and $-0-, respectively, related to ceiling
test write-down of its oil and gas properties.
Other Income (Expense)
For the years ended February 29, 2020 and February 28, 2019, the Company
recorded interest expense of $73,295 and $52,268, respectively. Higher interest
expense was incurred in 2020 due to additional debt issuances to related parties
in the current year. In addition, the Company sold a piece of equipment in 2020
and recognized a gain of $2,254 on the sale. No similar sale occurred during
2019.
Net Loss
Our operations resulted in a net loss in the amount of $2,898,132 for the year
ended February 29, 2020, compared to a net loss of $921,685 for the year ended
February 28, 2019. The increase was primarily related to lower returns, and
higher expenses incurred from leases in Jack County and Palo Pinto County, and
in the Marshall-Walden property acquired, which also resulted in impairment of
our oil and gas properties.
19
Liquidity and Capital Resources
On February 29, 2020, the Company had cash of $158,081.
Net cash used in operating activities during the year ended February 29, 2020,
was $551,515, compared to cash used in operating activities of $419,242 for the
same period in 2019. The increase was primarily related to an increase in
expenses related to the maintenance and repair of the Company's legacy oil and
gas properties incurred in purchase of Marshall-Walden that did not generate
near the returns expected in the near term, coupled with declining energy
prices.
Net cash used in investing activities during year ended February 29, 2020, was
$273,359 primarily from the Company's investment in the Marshall-Walden purchase
and purchase of pumps and related oil field equipment, compared to $0 cash used
in investing activities for the same period in 2019.
Net cash provided by financing activities during the year ended February 29,
2020, was $857,200, related to proceeds of $600,000 from the Company's line of
credit with JBB, proceeds from a $250,000 term loan from JBB for the
Marshall-Walden purchase, and proceeds of $7,200 from the exercise of stock
options. During the year ended February 28, 2019, cash provided by financing
activities was $300,000 related to proceeds from the Company's line of credit
with JBB.
The Company will require additional financing to support its operations and to
pursue its acquisition program. As of February 29, 2020, the Company had
availability of $600,000 on its existing credit line with JBB. If the Company
requires additional financing beyond what is available under its existing credit
line, it does not have any committed sources of financing at this time. If it is
unable to obtain financing, it will have to reduce or curtail its operations and
acquisition program. There is no assurance that it will be able to obtain
financing in the future, and even if financing is available, it may not be on
terms acceptable to the Company.
To date, the funding during the past two fiscal years to support operations and
facilitate some acquisitions has been provided by the largest shareholder of the
Company. This individual does not have any legal obligation to continue to
provide funding to the Company. Yet the majority owner has indicated a
willingness, and provided some assurances, to selectively review and determine
added funding for certain low risk initiatives on those oil and gas wells in
which the Company has either a 100% or a majority working interest in order to
increase its existing production. Our majority shareholder expects, but is not
legally obligated, to provide funding for the Company's capital expenditure
program for fiscal year 2021. Such funding may be provided in the form of loans,
issuance of equity or other means.
The financial statements of the Company have been prepared on a going concern
basis. The Company will either have to increase its operating revenues to a
point to be able to cover its operating expenses or obtain funding from other
investors or lenders. There is no assurance that the Company will be able to
increase its revenues or obtain funding. The Company believes that it will
experience revenue disruption and declines as a result of the COVID-19 pandemic
and the government response thereto. If it is not able to do so, it will have to
curtail operations or cease operations. There is no assurance that the Company
will be able to continue its operations. In such instances, investors will
suffer a loss in the value of their investment in the Company.
Off-Balance Sheet Arrangements
As of February 29, 2020, we did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities
Act of 1934.
Critical Accounting Policies
Oil and Gas Properties, Full Cost Method
The Company follows the full cost method of accounting for its oil gas
properties, whereby all costs incurred in connection with the acquisition,
exploration for and development of petroleum and natural gas reserves are
capitalized. Such costs include lease acquisition, geological and geophysical
activities, rentals on non-producing leases, drilling, completing and equipping
of oil wells and administrative costs directly attributable to those activities
and asset retirement costs. Disposition of oil properties are accounted for as a
reduction of capitalized costs, with no gain or loss recognized unless such
adjustment would significantly alter the relationship between capital costs and
proved reserves of oil and gas, in which case the gain or loss is recognized in
the statement of operations.
Depletion and depreciation of proved oil properties will be calculated on the
units-of-production method based upon estimates of proved reserves. Such
calculations include the estimated future costs to develop proved reserves.
Costs of unproved properties are not included in the costs subject to depletion.
These costs are assessed periodically for impairment.
At the end of each quarter, the unamortized cost of oil and gas properties, net
of related deferred income taxes, is limited to the sum of the estimated future
after-tax net revenues from proved properties, after giving effect to cash flow
hedge positions, discounted at 10%, and the lower of cost or fair value of
unproved properties, adjusted for related income tax effects. Costs in excess of
the present value of estimated future net revenues are charged to impairment
expense. This limitation is known as the "ceiling test," and is based on SEC
rules for the full cost oil and gas accounting method.
The Company capitalizes pre-acquisition costs directly identifiable with
specific properties when the acquisition of such properties is probable.
Capitalized pre-acquisition costs are presented in the balance sheet.
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