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CAMAC - quarterly report
CAMAC Energy Incorporated
(Incorporated and registered in Delaware,
United States of America)
Share code on the NYSE MKT: CAK
Share code on the JSE: CME
ISIN: US1317451011
USA ISIN: US1317451011
(“CAMAC” or “the company”)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 01-34525
CAMAC ENERGY INC.
(Exact name of registrant as specified in its charter)
Delaware 30-0349798
(State or Other jurisdiction of I.R.S. Employer incorporation or organization) Identification No.)
1330 Post Oak Blvd.,
Suite 2250, Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
(713) 797-2940
Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes ? No ?
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer X
Non-accelerated filer X (Do not check if a smaller reporting company) Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
At October 31, 2014, there were 1,261,763,853 shares of common stock, par value $0.001 per share, outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements: 3
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (unaudited) 3
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013
(unaudited) 4
Consolidated Statements of Equity for the nine months ended September 30, 2014 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited) .... 5
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 1A.Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 6. Exhibits 20
Signatures 20
Exhibits
PART I. – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAMAC ENERGY INC.
CONSOLIDATED BALANCE SHEETS
Unaudited)
(In thousands, except for share and per share amounts)
September 30, December 31,
2014 2013
ASSETS
Current Assets:
Cash and cash equivalents $ 54,264 $ 163
Accounts receivable 1,122 1,112
Crude oil inventory 1,952 16,254
Prepaids and other current assets 8,492 856
Total current assets 65,830 18,385
Property, plant and equipment:
Oil and gas properties (successful efforts method of accounting), net 521,306 435,035
Other property, plant and equipment, net 1,059 752
Total property, plant and equipment, net 522,365 435,787
Other non-current assets 1,988 52
Total assets $ 590,183 $ 454,224
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable $ 48,182 $ 31,668
Accrued liabilities 34,076 7,446
Asset retirement obligations 23,086 12,479
Promissory note - related party 11,185 6,496
Total current liabilities 116,529 58,089
Convertible subordinated note - related party 50,000 -
Term loan facility 50,000 -
Asset retirement obligations 13,914 8,122
Other long-term liabilities 81 67
Total liabilities 230,524 66,278
Commitments and contingencies
Equity:
Preferred stock $0.001 par value - 50,000,000 shares
authorized; none issued and outstanding at September 30,
2014 and December 31, 2013 - -
Common stock $0.001 par value - 2,500,000,000 shares
authorized; 1,261,763,853 and 382,362,236 shares
outstanding as of September 30, 2014 and December 31, 2013 1,262 382
Paid-in capital 776,300 736,456
Accumulated deficit (417,903 ) (348,892 )
Total equity 359,659 387,946
Total liabilities and equity $ 590,183 $ 454,224
See accompanying notes to unaudited consolidated financial statements.
CAMAC ENERGY INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Revenues:
Oil and gas revenue $ 19,010 $ 21,723 $ 53,844 $ 63,736
Operating costs and expenses:
Production costs 34,261 22,155 72,617 65,757
Exploratory expenses 1,148 967 3,851 4,064
Depreciation, depletion and amortization 21,720 5,607 32,676 16,216
General and administrative expenses 3,427 3,395 12,200 10,508
Total operating costs and expenses 60,556 32,124 121,344 96,545
Operating loss (41,546) (10,401) (67,500) (32,809)
Other income (expense):
Interest expense (771) (16) (1,637) (26)
Other, net 94 - 126 -
Total other income (expense) (677) (16) (1,511) (26)
Loss before income taxes (42,223) (10,417) (69,011) (32,835)
Income tax expense - - - -
Net loss $ (42,223) $ (10,417) $ (69,011) $ (32,835)
Net loss per common share:
Basic $ (0.03) $ (0.03) $ (0.07) $ (0.09)
Diluted $ (0.03) $ (0.03) $ (0.07) $ (0.09)
Weighted average common shares outstanding:
Basic 1,261,646 380,321 1,045,483 380,883
Diluted 1,261,646 380,321 1,045,483 380,883
See accompanying notes to unaudited consolidated financial statements
CAMAC ENERGY INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(In thousands)
Additional
Common Paid-in Accumulated Total
Stock Capital Deficit Equity
Balance at January 1, 2014 $ 382 $ 736,456 $ (348,892 ) $ 387,946
Common stock issued 880 269,535 - 270,415
Stock based compensation - 2,749 - 2,749
Net loss - - (69,011 ) (69,011 )
Allied acquisition - (220,000 ) - (220,000 )
Allied transaction adjustment - (12,440 ) - (12,440 )
Balance at September 30, 2014 $ 1,262 $ 776,300 $ (417,903 ) $ 359,659
See accompanying notes to unaudited consolidated financial statements.
CAMAC ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended September 30,
2014 2013
Cash flows from operating activities
Net loss $ (69,011 ) $ (32,835 )
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation, depletion and amortization 31,327 14,558
Asset retirement obligation accretion 1,349 1,658
Share based compensation 2,216 1,468
Related party liability offset (32,880 ) -
Other 21 3
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (10 ) (2,612 )
Decrease (increase) in inventories 13,715 1,483
(Increase) decrease in other current assets (7,103 ) 114
Increase (decrease) in accounts payable and accrued liabilities 27,277 3,205
Net cash used in operating activities (33,099 ) (12,958 )
Cash flows from investing activities
Capital expenditures (59,481 ) (590 )
Allied transaction (170,000 ) -
Net cash used in investing activities (229,481 ) (590 )
Cash Flows from Financing Activities
Proceeds from the issuance of common stock 270,000 -
Proceeds from exercise of stock option 415 -
Proceeds from term loan facility 50,000 -
Proceeds from promissory note - related party, net 10,649 1,500
Debt costs (1,943 ) -
Allied transaction adjustments (12,440 ) 8,677
Net cash provided by financing activities 316,681 10,177
Net increase (decrease) in cash and cash equivalents 54,101 (3,371 )
Cash and cash equivalents at beginning of period 163 3,806
Cash and cash equivalents at end of period $ 54,264 $ 435
Supplemental disclosure of cash flow information
Cash paid for:
Interest, net $ 8 $ 26
Supplemental disclosure of non-cash investing and financing activities:
Related party liability offset $ 32,880 $ -
Related party accounts payable settled with note payable - related party $ - $ 9,311
See accompanying notes to unaudited consolidated financial statements.
CAMAC ENERGY INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Company Description
CAMAC Energy, Inc. (NYSE MKT: CAK, JSE: CME) is an independent oil and gas exploration and production company focused on
energy resources in Africa. The Company’s asset portfolio consists of nine licenses across four countries covering an area of
approximately 43,000 square kilometers (approximately 10 million acres) including current production and other prospects offshore
Nigeria, as well as exploration licenses offshore Ghana and The Gambia, and both offshore and onshore Kenya.
CAMAC Energy Inc. is headquartered in Houston, Texas, and has additional offices in Lagos, Nigeria; Nairobi, Kenya; and Banjul,
The Gambia.
The Company’s operating subsidiaries include CAMAC Energy Ltd., CAMAC Petroleum Limited (“CPL”), CAMAC Energy
International Ltd., CAMAC Energy Ghana Limited, CAMAC Energy Kenya Limited, CAMAC Energy Gambia A2 Ltd. and CAMAC
Energy Gambia A5 Ltd. The terms “we,” “us,” “our,” “the Company,” and “our Company” refer to CAMAC Energy Inc. and its
subsidiaries and affiliates.
The Company conducts certain business transactions with its majority shareholder, CAMAC Energy Holdings Limited (“CEHL”), and
its affiliates, which include Allied Energy Plc (“Allied”). See “Note 12 – Related Party Transactions” for details of these transactions.
2. Basis of Presentation and Recently Issued Accounting Standards
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned and
majority-owned direct and indirect subsidiaries and have been prepared in accordance with generally accepted accounting principles in
the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).
All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited consolidated financial
statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the consolidated
financial position and results of operations for the indicated periods. All such adjustments are of a normal recurring nature. This Form
10-Q should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K
for the year ended December 31, 2013.
In February 2014, the Company completed the acquisition of the remaining economic interests that it did not already own in the
Production Sharing Contract (“PSC”) covering Oil Mining Leases 120 and 121 (“OMLs 120 and 121”) offshore Nigeria, which
include the currently producing Oyo Field (the “Allied Assets”), from Allied (the “Allied Transaction”). Allied is a subsidiary of
CEHL, the Company’s majority shareholder, and deemed to be under common control (transactions between subsidiaries of the same
parent). Accordingly, the net assets acquired from Allied were recorded at their respective carrying values as of the acquisition date.
The financial statements presented for all periods included herein are presented as though the transfer of the Allied assets had occurred
at the beginning of the first period presented.
In June 2014, the Company’s management concluded that the Company’s unaudited consolidated financial statements included in its
quarterly report on Form 10-Q for the first quarter of 2014 contained errors. These errors were identified in the course of preparing
recast historical financial information of the Company to account for the February 2014 acquisition of economic interests in OMLs
120 and 121 from Allied as a combination of businesses under common control. In July 2014, the Company restated its previously
filed interim financial statements for the first quarter of 2014. The revised financial statements for the quarter ended March 31, 2014
included adjustments to reflect (i) an increase in crude oil inventory as of December 31, 2013 and a corresponding increase in
production costs for the first quarter of 2014, (ii) an increase in operating costs due to the receipt of additional third-party vendor cost
information from Allied and (iii) a reclassification of the adjustments to the net assets of Allied on the unaudited consolidated
statement of cash flows. For further information about the restatement, see our Quarterly Report on Form 10-Q/A for the period ended
March 31, 2014, filed with the SEC on July 18, 2014.
Recently Issued Accounting Standards
In April 2014, the Financial Accounting Standards Board (“FASB”) issued updated guidance that changes the criteria for reporting
discontinued operations including enhanced disclosure requirements. Under the updated guidance, only disposals representing a
strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the
organization´s operations and financial results. The standards update is effective for fiscal years beginning after December 15, 2014.
We will adopt this standards update, as required, beginning with the first quarter of 2015. The adoption of this standards update affects
presentation only and, as such, is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers. The objective of this
guidance is to establish principles for reporting information about the nature, timing, and uncertainty of revenue and cash flows arising
from an entity’s contracts with customers, including qualitative and quantitative disclosures around contracts with customers,
significant judgments and change in judgments, and assets recognized from the costs to obtain or fulfill a contract. The standards
update is effective for interim and annual periods beginning after December 15, 2016. We will adopt this standards update, as
required, beginning with the first quarter of 2017. The Company is in the process of evaluating the impact, if any, of this guidance on
its consolidated financial statements.
In June 2014, the FASB issued updated guidance around share-based compensation. The guidance was issued to clarify the accounting
treatment for performance-based stock awards. The update states that companies should not record compensation expense related to an
award for which transfer to the employee is contingent on the company’s satisfaction of a performance target until it becomes
probable that the performance target will be met. The update does not contain any new disclosure requirements and is effective for
interim and annual periods beginning after December 15, 2015. We will adopt this standards update, as required, beginning with the
first quarter of 2016. The adoption of this standards update is not expected to have a material impact on our consolidated financial
statements.
In August 2014, the FASB issued updated guidance on determining when and how reporting entities must disclose going concern
uncertainties in its financial statements. The objective of the update is to define management’s responsibility to evaluate, each annual
and interim reporting period, whether there are conditions or events that raise substantial doubt about an entity’s ability to continue as
a going concern within one year after the date the financial statements are issued and to provide related footnote disclosures. The
standards update is effective for annual periods ending after December 15, 2016, and interim period thereafter. We will adopt this
standards update, as required, beginning with the first quarter of 2017. The Company is in the process of evaluating the impact this
guidance will have on its footnote disclosures.
3. Acquisitions
In February 2014, the Company completed the Allied Transaction, thereby acquiring the Allied Assets. Pursuant to the terms of the
Transfer Agreement among the Company, Allied and the other parties thereto, (the “Transfer Agreement”), the Company, as partial
consideration for the Allied Assets, paid $85.0 million in cash, issued 497,454,857 shares of the Company’s common stock and
delivered a $50.0 million Convertible Subordinated Note (the “Convertible Subordinated Note”) of which $25.0 million was deemed
advanced, with interest accruing per the terms of the Convertible Subordinated Note.
To fund the cash portion of the Allied Transaction and a portion of the anticipated capital expenditures for development of the Oyo
Field, the Company also entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the Public Investment
Corporation (SOC) Limited, a state-owned company incorporated in the Republic of South Africa (“PIC”), for an aggregate cash
investment of $270.0 million through a private placement of 376,884,422 shares of common stock (the “Private Placement”). The
Share Purchase Agreement provided that the Private Placement would be completed in two installments. The first installment of
$135.0 million (the “First Closing”) in exchange for 188,442,211 shares of the Company’s common stock was completed at the
closing of the Allied Transaction. The second installment (the “Second Closing”) of $135.0 million in exchange for 188,442,211
shares of the Company’s common stock was completed in May 2014.
Following the Second Closing with the PIC, the Company paid to Allied the additional $85.0 million in cash due under the Transfer
Agreement, and the remaining $25.0 million Convertible Subordinated Note was deemed advanced with interest accruing per the
terms of the Convertible Subordinated Note.
The contractual purchase consideration paid and the assets acquired and liabilities assumed are as follows (In thousands):
Cash consideration paid upon First Closing $ 85,000
Cash consideration paid upon Second Closing 85,000
CAMAC Energy Inc. common stock -
Long-term convertible subordinated note payable - related party 50,000
Total purchase price $ 220,000
Assets acquired and liabilities assumed:
Property, plant and equipment, net $ 248,736
Accounts payable (25,429)
Asset retirement obligations (20,890)
Net assets acquired 202,417
Consideration in excess of carrying value acquired $ 17,583
The Allied Transaction is being accounted for as a transfer of entities under common control, whereby the net assets acquired are
combined with the Company’s assets at their historical amounts. Since the cash and debt consideration exceeds the carrying cost of the
assets acquired, no value was assigned to the shares issued.
4. Property, Plant and Equipment
Property, plant and equipment is comprised of the following (In thousands):
September 30, December 31,
2014 2013
Wells and production facilities $ 43,924 $ 28,874
Proved properties 386,196 386,196
Work in progress and other 188,288 86,634
Oilfield assets 618,408 501,704
Accumulated depletion (105,342) (74,909)
Oilfield assets, net 513,066 426,795
Unevaluated leaseholds 8,240 8,240
Oil and gas properties, net 521,306 435,035
Other property and equipment 2,204 1,590
Accumulated depreciation (1,145) (838)
Other property and equipment, net 1,059 752
Total property, plant and equipment, net $ 522,365 $ 435,787
5. Suspended Exploratory Well Costs
In November 2013, the Company achieved both its primary and secondary drilling objectives for the Oyo-7 well. The primary drilling
objective was to establish production from the existing Pliocene reservoir. The secondary drilling objective was to confirm the
presence of hydrocarbons in the deeper Miocene formation. Hydrocarbons were encountered in three intervals totaling approximately
65 feet, as interpreted by logging-while-drilling (“LWD”) data. Management is making plans to further explore the Miocene formation
in future wells. Suspended exploratory well costs were $26.5 million at both September 30, 2014 and December 31, 2013, for the costs
related to the Miocene exploratory drilling activities.
In August 2014, the Oyo-8 well was drilled to a total vertical depth of approximately 6,059 feet (approximately 1,847 meters) and
successfully encountered four new oil and gas reservoirs in the eastern fault block, with total gross hydrocarbon thickness of 112 feet,
based on results from the LWD data, reservoir pressure measurement, and reservoir fluid sampling. Management has commenced a
detailed evaluation of the results and plans to further explore the Pliocene formation in the eastern fault block and establish the size of
the incremental additions. Suspended exploratory well costs were $6.5 million at September 30, 2014 for the costs related to the
Pliocene exploration drilling activities in the eastern fault block.
The Company is currently working on its 2015 exploration program for the OMLs 120 and 121, which may include further analysis of
the commercial potential for both the Miocene formation and the Pliocene formation in the eastern fault block.
6. Asset Retirement Obligations
The Company’s asset retirement obligations primarily represent the estimated fair value of the amounts that will be incurred to plug,
abandon and remediate our producing properties at the end of their productive lives. Significant inputs used in determining such
obligations include, but are not limited to, estimates of plugging and abandonment costs, estimated future inflation rates and changes
in property lives. The inputs are calculated based on historical data as well as current estimated costs.
On a quarterly basis, the Company reviews the assumptions used to estimate the expected cash flows required to settle the asset
retirement obligations, including changes in estimated probabilities, amounts and timing of the settlement of the asset retirement
obligations, as well as changes in the legal obligation for each of its properties. Changes in any one or more of these assumptions may
cause revisions in the estimated liabilities for the corresponding assets.
In September 2014, the Company determined that, based on the current operating plan and the equipment to be utilized, its estimated
costs to plug and abandon certain wells should be revised upwards by a net amount of $15.1 million.
The following summarizes changes in the Company’s asset retirement obligations during the period (In thousands):
2014
Asset retirement obligations at January 1 $ 20,601
Accretion expense 1,349
Revisions in estimated liabilities 15,050
Asset retirement obligations at September 30 $ 37,000
The table below shows the current and long-term portions of the Company's asset retirement obligations
during the period (In thousands):
2014
Asset retirement obligations, current portion $ 23,086
Asset retirement obligations, long-term portion 13,914
$ 37,000
Accretion expense is recognized as a component of depreciation, depletion and amortization expense in the accompanying statements
of operations.
7. Debt
Promissory Note – Short-Term
The Company has a $25.0 million borrowing facility under a Promissory Note (the “Promissory Note”) with Allied. Interest accrues
on the outstanding principal under the Promissory Note at a rate of the 30-day London Interbank Offered Rate (“LIBOR”) plus 2% per
annum, payable quarterly. The obligations under the Promissory Note have been guaranteed by the Company. In August 2014, the
Promissory Note was amended to extend the maturity date by one year to July 2015, and to allow for the entire $25.0 million facility
amount to be utilized for general corporate purposes. As of September 30, 2014, the Company owed $11.2 million under the
Promissory Note.
Convertible Subordinated Note – Long-Term
As partial consideration in connection with the February 2014 closing of the Allied Transaction, the Company issued a $50.0 million
Convertible Subordinated Note in favor of Allied. The principal of the Convertible Subordinated Note was deemed advanced in two
equal $25.0 million tranches at each of the First Closing and the Second Closing of the Private Placement. Interest on the Convertible
Subordinated Note accrues at a rate per annum of one-month LIBOR plus 5%, payable quarterly in cash until the maturity of the
Convertible Subordinated Note five years from the closing of the Allied Transaction. At the election of the holder, the Convertible
Subordinated Note is convertible into shares of the Company’s common stock at an initial conversion price of $0.7164 per share,
subject to customary anti-dilution adjustments. The Convertible Subordinated Note is subordinated to the Company’s existing and
future senior indebtedness and is subject to acceleration upon an Event of Default (as defined in the Convertible Subordinated Note).
The Company may, at its option, prepay the note in whole or in part, at any time, without premium or penalty. The note is subject to
mandatory prepayment upon (i) the Company’s issuance of capital stock or incurrence of indebtedness, the proceeds of which the
Company does not apply to repayment of senior indebtedness or (ii) any capital markets debt issuance to the extent the net proceeds of
such issuance exceed $250.0 million. Allied may assign all or any part of its rights and obligations under the Convertible Subordinated
Note to any person upon written notice to the Company. As of September 30, 2014, the Company owed $50.0 million under the
Convertible Subordinated Note.
Term Loan Facility
In September 2014, the Company, through its wholly owned subsidiary CPL, entered into a credit facility with a Nigerian bank for a
five-year senior secured term loan providing initial borrowing capacity of up to $100.0 million (the “Term Loan Facility”). U.S. dollar
borrowings under the Term Loan Facility bear interest at the rate of LIBOR plus 7.5%, subject to a floor of 9.5%. The obligations
under the Term Loan Facility include a legal charge over OMLs 120 and 121 and an assignment of proceeds from oil sales. The
obligations of CPL have been guaranteed by the Company and rank in priority with all its other obligations. Proceeds from the Term
Loan Facility will be used for the further expansion and development of OMLs 120 and 121 offshore Nigeria, including the Oyo field.
Under the Term Loan Facility, the following events, among others, constitute events of default: CPL failing to pay any amounts due
within thirty days of the due date; bankruptcy, insolvency, liquidation or dissolution of CPL; a material breach of the Loan Agreement
by CPL that remains unremedied within thirty days of written notice by CPL; or a representation or warranty of CPL proves to have
been incorrect or materially inaccurate when made. Upon any event of default, all outstanding principal and interest under any loans
will become immediately due and payable.
The Term Loan Facility contains normal and customary covenants including the delivery of the Company’s annual audited financial
information each year, and a provision of priority of interest, in which the Company is to procure that its obligations under the Term
Loan Facility do and will rank in priority with all its other current and future unsecured and unsubordinated obligations. The
Company is also to provide a production and lifting schedule each month displaying the daily production totals and quantities lifted
respectively from OMLs 120 and 121. The Company was in compliance with all loan covenants as of September 30, 2014.
Upon executing the Term Loan Facility, the Company paid a commitment fee of $1.9 million, which was capitalized and will be
amortized over the life of the Term Loan Facility. As of September 30, 2014, the Company owed $50.0 million under the Term Loan
Facility.
8. Share-Based Compensation
During the nine months ended September 30, 2014, the Company issued 1,707,908 shares of common stock as a result of the exercise
of options.
During the nine months ended September 30, 2014, the Company granted employees a total of 3,914,215 shares of restricted stock,
and options to purchase a total of 2,267,394 shares of common stock, with vesting periods from 24 months to 36 months.
The Company also grants shares of restricted stock to non-employee Directors and, on occasion, will issue warrants to third parties for
services. During the nine months ended September 30, 2014, the Company granted 1,000,002 shares of restricted stock to non-
employee Directors, which vest after a one year period, and issued 1,800,000 fully vested warrants for services, which expire after five
years.
9. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed by dividing net income (loss) available to common stockholders by the
weighted-average number of common shares outstanding during the period. The weighted average number of common shares
outstanding for computing basic and diluted earnings (loss) per common share for the three and nine months ended September 30,
2014 and 2013 were as follows (In thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Basic 1,261,646 380,321 1,045,483 380,883
Diluted 1,261,646 380,321 1,045,483 380,883
The weighted average number of stock options, restricted stock awards and warrants that were excluded from dilutive shares
outstanding as these potentially dilutive securities are anti-dilutive because the Company was in a loss position for the three and nine
months ended September 30, 2014 and 2013 were as follows (In thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2014 2013 2014 2013
Stock options 6,410 - 7,010 -
Nonvested restricted stock awards 6,140 1,972 5,960 1,359
Warrants 12 - 6 -
12,562 1,972 12,976 1,359
10. Financial Instruments and Fair Value Measurements
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, trade receivables, inventory,
accounts payable, accrued expenses, other long-term liabilities and debt at floating interest rates approximate their fair values at
September 30, 2014, principally due to the short-term nature, maturities or nature of interest rates of the above listed items.
11. Commitments and Contingencies
Commitments
In January 2014, a long-term drilling contract was signed for the drillship Energy Searcher. The rig arrived at the Oyo Field offshore
Nigeria in June 2014 and has commenced the Oyo Field development campaign. The agreement covers an initial term of one year,
with an option to extend the contract for an additional one year. As of September 30, 2014, the remaining minimum commitment
pursuant to the initial term of the agreement is approximately $64.0 million.
In February 2014, a long-term contract was signed for the floating, production, storage, and offloading vessel (“FPSO”) Armada
Perdana, which is the vessel currently connected to the Company’s producing wells Oyo-5 and Oyo-6 in OML 120. The contract
provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an additional term of two years
unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid per day, with a storage
capacity of approximately one million barrels. The annual minimum commitment per the terms of the agreement is approximately
$35.0 million in the first year and approximately $48.0 million thereafter.
The Company also has commitments related to four production sharing contracts with the Government of the Republic of Kenya (the
“Kenya PSCs”) and two Petroleum Exploration, Development & Production Licenses with the Republic of The Gambia (the “Gambia
Licenses”), in each case entered into by the Company through a wholly owned subsidiary. To maintain compliance and ownership, the
Company is required to fulfill minimum work obligations and to make certain payments as stated in each of the Kenya PSCs and The
Gambia Licenses.
Legal Proceedings
From time to time we may be involved in various legal proceedings and claims in the ordinary course of our business. As of
September 30, 2014, and through the filing date of this report, we believe the ultimate resolution of such actions or potential actions of
which we are currently aware will not have a material effect on our consolidated financial position or our results of operations.
12. Related Party Transactions
The Company has transactions in the normal course of business with its shareholders, CEHL and their affiliates. The following table
summarizes related party transactions for the respective periods (In thousands):
September 30, December 31,
2014 2013
Accounts receivable $ - $ 1,026
Other current assets $ 624 $ 624
Accounts payable and accrued expenses $ 8,897 $ 25,721
Promissory Note $ 11,185 $ 6,496
Convertible Subordinated Note $ 50,000 $ -
The Company was owed $1.0 million as of December 31, 2013, for billings under the Technical Services Agreement (“TSA”) signed
with Allied in January 2013. Under the TSA, the Company agreed to provide certain services related to the Oyo Field within OML
120, in exchange for payments from Allied of $150,000 per month with effect from September 2012. The TSA was terminated as of
the closing of the Allied Acquisition in February 2014 pursuant to the Transfer Agreement and subsequently settled as part of an offset
of certain liabilities owed to Allied.
The Company was owed $0.6 million as of both September 30, 2014 and December 31, 2013, as a result of an estimated overpayment
made for royalty and petroleum profit taxes in Nigeria under the PSC.
As of September 30, 2014 the Company owed $8.9 million to affiliates of CEHL for expenses incurred during the period to support
the operations in the normal course of business. As of December 31, 2013, the Company owed $25.7 million to Allied primarily as
reimbursement for costs incurred related to the drilling of development wells in the Oyo Field.
As of September 30, 2014 and December 31, 2013, the Company had total outstanding notes payable balances of $61.2 million and
$6.5 million, respectively, owed to Allied. See “Note 7 – Debt”, for details relating to the notes payable transactions.
An affiliate of CEHL, the Company’s majority shareholder, provides procurement and logistical support services to the Company’s
Nigerian operations. In connection therewith, the Company incurred $9.9 million and $15.4 million worth of costs with the affiliate,
which includes $1.5 million and $2.9 million over and above the actual cost of goods and/or services acquired as compensation to the
affiliate during the three and nine months ended September 30, 2014, respectively.
13. Segment Information
The Company’s current operations are based in Nigeria, Kenya and The Gambia. Management reviews and evaluates the operations of
each geographic segment separately. Operations include exploration for and production of hydrocarbons where commercial reserves
have been found and developed. Revenues and expenditures are recognized at the relevant geographical location. The Company
evaluates each segment based on operating income (loss).
Segment activity for the three and nine months ended September 30, 2014 and 2013 are as follows (In thousands):
Corporate and
Nigeria Kenya The Gambia Other Total
Three months ended September 30,
2014
Revenues $ 19,010 $ - $ - $ - $ 19,010
Operating loss $ (37,039) $ (614) $ (341) $ (3,552) $ (41,546)
2013
Revenues $ 21,723 $ - $ - $ - $ 21,723
Operating loss $ (6,182) $ (426) $ (217) $ (3,576) $ (10,401)
Nine months ended September 30,
2014
Revenues $ 53,844 $ - $ - $ - $ 53,844
Operating loss $ (51,349) $ (2,689) $ (983) $ (12,479) $ (67,500)
2013
Revenues $ 63,736 $ - $ - $ - $ 63,736
Operating loss $ (18,406) $ (2,091) $ (653) $ (11,659) $ (32,809)
Total assets by segment are as follows (In thousands):
Corporate and
Nigeria Kenya The Gambia Other Total
Total Assets
As of September 30, 2014 $ 582,104 $ 1,467 $ 2,223 $ 4,389 $ 590,183
As of December 31, 2013 $ 449,856 $ 1,484 $ 2,025 $ 859 $ 454,224
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our Business
CAMAC Energy Inc. is an independent oil and gas exploration and production company focused on energy resources in Africa. Our
strategy is to acquire and develop high-potential exploration and production assets in Africa through strategic partnerships with
national oil companies, indigenous local partners and other independent oil companies. Our shares are traded on the New York Stock
Exchange under the symbol “CAK” and on the Johannesburg Stock Exchange (“JSE”) under the symbol “CME”. The terms “we,”
“us,” “our,” “Company,” and “our Company” refer to CAMAC Energy Inc. and its subsidiaries and affiliates.
The Company’s asset portfolio consists of nine licenses across four countries covering an area of approximately 43,000 square
kilometers (approximately 10 million acres), including current production and other projects offshore Nigeria, as well as exploration
licenses offshore Ghana and The Gambia, and both offshore and onshore Kenya.
The Company’s operating subsidiaries include CAMAC Energy Ltd., CAMAC Petroleum Limited, CAMAC Energy International
Ltd., CAMAC Energy Ghana Limited, CAMAC Energy Kenya Limited, CAMAC Energy Gambia A2 Ltd. and CAMAC Energy
Gambia A5 Ltd. The Company also conducts certain business transactions with its majority shareholder, CAMAC Energy Holdings
Limited (“CEHL”), and its affiliates, which include Allied Energy Plc (“Allied”). See “Note 12 – Related Party Transactions” of the
Notes to the Unaudited Consolidated Financial Statements for details of these transactions.
In February 2014, the Company completed the acquisition of the remaining economic interests that it did not already own in the
Production Sharing Contract (“PSC”) covering Oil Mining Leases 120 and 121 (“OMLs 120 and 121”) offshore Nigeria, which
include the currently producing Oyo Field (the “Allied Assets”), from Allied (the “Allied Transaction”). Pursuant to the terms of the
Transfer Agreement, the Company, as partial consideration for the Allied Assets, paid $85.0 million in cash, issued 497,454,857
shares of the Company’s common stock and delivered a $50.0 million Convertible Subordinated Note (the “Convertible Subordinated
Note”), of which $25.0 million was deemed advanced, with interest accruing per the terms of the Convertible Subordinated Note.
To fund the cash portion of the Allied Transaction and a portion of the anticipated capital expenditures for development of the Oyo
Field, the Company also entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with the Public Investment
Corporation (SOC) Limited, a state-owned company incorporated in the Republic of South Africa (“PIC”), for an aggregate cash
investment of $270.0 million through a private placement of 376,884,422 shares of common stock (the “Private Placement”). The
Share Purchase Agreement provided that the Private Placement would be completed in two installments. The first installment of
$135.0 million (the “First Closing”) in exchange for 188,442,211 shares of the Company’s common stock was completed at the
closing of the Allied Transaction in February 2014. The second installment (the “Second Closing”) of $135.0 million in exchange for
188,442,211 shares of the Company’s common stock was completed in May 2014.
Following the Second Closing with the PIC, the Company paid to Allied the additional $85.0 million in cash due under the Transfer
Agreement, and the remaining $25.0 million Convertible Subordinated Note was deemed advanced, with interest accruing per the
terms of the Convertible Subordinated Note.
Nigeria
The Company currently owns 100% of the economic interests under the PSC and related assets, contracts and rights pertaining to
OMLs 120 and 121, including the currently producing Oyo Field, located in deepwater offshore Nigeria.
From September 2013 to November 2013, the first phase of drilling operations was conducted on the Oyo-7 well. Based on logging-
while-drilling (“LWD”) data, the well encountered gross oil pay of 133 feet (net oil pay of 115 feet) and gross gas pay of 103 feet (net
gas pay of 93 feet) in the gas cap from the currently producing Pliocene reservoir, with excellent reservoir quality. As a secondary
objective, the Oyo-7 well confirmed the presence of hydrocarbons in the deeper Miocene formation. This marked the first time a well
had been successfully drilled into the Miocene formation on OML 120. Hydrocarbons were encountered in three intervals totaling
approximately 65 feet, as interpreted from the LWD data.
In January 2014, a long-term drilling contract was signed for the drillship Energy Searcher. The rig arrived on location in the Oyo
Field on OML 120 in June 2014 and commenced drilling the Oyo-8 well. The drilling agreement is for an initial term of one year, with
an option to extend the contract for an additional one year. As of September 30, 2014, the remaining minimum commitment pursuant
to the initial term of the agreement is approximately $64.0 million.
In February 2014, a long-term contract was signed for the floating, production, storage, and offloading vessel (“FPSO”) Armada
Perdana. The contract provides for an initial term of seven years beginning January 1, 2014, with an automatic extension for an
additional term of two years unless terminated by the Company with prior notice. The FPSO can process up to 40,000 barrels of liquid
per day, with a storage capacity of approximately one million barrels. The annual minimum commitment per the terms of the
agreement is approximately $35.0 million in the first year and approximately $48.0 million thereafter.
In August 2014, the Oyo-8 well was drilled to a total vertical depth of approximately 6,059 feet (approximately 1,847 meters) and
successfully encountered four new oil and gas reservoirs with total gross hydrocarbon thickness of 112 feet in the eastern fault block,
based on results from the LWD data, reservoir pressure measurement, and reservoir fluid sampling. The well will be completed
horizontally as a producing well in the Pliocene formation of the Oyo Field.
In September 2014, the shut-in of Oyo-5 and Oyo-6 wells commenced. The removal of flow lines and other subsea equipment was
completed and successfully relocated to Oyo-7 and Oyo-8 wells as planned. The current plan is to bring the first of the two production
wells, Oyo-7 or Oyo-8, online by year end and the second approximately 45 days afterwards.
In addition to the development wells in the Oyo Field offshore Nigeria, the Company high-graded four of the prospects in OMLs 120
and 121. The Company currently plans to commence exploration well drilling in 2015.
Kenya
In May 2012, the Company, through a wholly owned subsidiary, entered into four production sharing contracts with the Government
of the Republic of Kenya (the “Kenya PSCs”), covering onshore exploration blocks L1B and L16, and new offshore exploration
blocks L27 and L28. For all blocks, the Company is the operator, with the Government having the right to participate up to 20%,
either directly or through an appointee, in any area subsequent to declaration of a commercial discovery. The Company also has the
right to apply for up to two additional two-year exploration periods, with specified additional minimum work obligations, including
the acquisition of seismic data and the drilling of one exploratory well on each block during each such additional period. The
Company is responsible for all exploration expenditures.
The Kenya PSCs for onshore blocks L1B and L16 each provide for an initial exploration period, now extended through June 2015,
with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company is required
to conduct, for each block, a gravity and magnetic survey and acquire, process and interpret 2D seismic data. The gravity and
magnetic survey was completed in April 2013. In December 2013, the Company initiated an Environmental and Social Impact
Assessment (“ESIA”) study which was successfully completed in March 2014. In October 2014, the Company signed agreements for
both blocks for the acquisition, processing and interpretation of 2D seismic data. The project is expected to be completed in the first
half of 2015.
The Kenya PSCs for offshore blocks L27 and L28 each provide for an initial exploration period of three years, through August 2015,
with specified minimum work obligations during that period. Prior to the end of the initial exploration period, the Company is required
to conduct, for each block, a regional geological and geophysical study, acquire 2D seismic data and acquire, process and interpret 3D
seismic data. The Company participated in a multi-client combined gravity / magnetic and 2D seismic survey covering blocks L27 and
L28. The survey was successfully completed in March 2014. The processed data is currently being interpreted internally. Further, in
March 2014 the Company started the regional geophysical study for these two blocks.
In addition to the minimum work obligations, each of the Kenya PSCs requires annual surface rental payments, training fund
payments and contributions to local community development projects.
The Gambia
In May 2012, the Company, through a wholly owned subsidiary, signed two Petroleum Exploration, Development & Production
Licenses with The Republic of The Gambia, for offshore exploration blocks A2 and A5. For both blocks, the Company is the operator,
with the Gambian National Petroleum Company (“GNPCo”) having the right to elect to participate up to a 15% interest, following
approval of a development and production plan. The Company is responsible for all expenditures prior to such approval even if the
GNPCo elects to participate.
The Gambia Licenses provide for an initial exploration period of four years with specified minimum work obligations during that
period. Prior to the end of the initial exploration period, the Company will conduct, on each block, a regional geological study,
acquire, process and interpret seismic data, drill one exploration well and evaluate drilling results, with the first two work obligations
(regional geological study and 3D seismic data acquisition and processing) due prior to the end of the second year. The Company has
the right to apply for up to two additional two-year exploration periods with specified additional minimum work obligations, including
the drilling of one exploration well during each additional period for each block. The company has completed a regional geology and
geophysical study of both the A2 and A5 blocks.
In addition to the minimum work obligations, The Gambia Licenses require annual surface rental payments, training and resources,
and community development fees.
Ghana
In April 2014, the Company signed a Petroleum Agreement relating to the Expanded Shallow Water Tano block in Ghana. The
Company has been named technical operator and will hold an indirect 30% participating interest in the block. The block contains three
discovered fields, and the work program requires the partners to determine, within nine months of the effective date, the economic
viability of developing the discovered fields. In collaboration with its joint venture partners, a Joint Operating Agreement is being
finalized. Preliminary work has also commenced on the evaluation on the discovered fields to determine economic viability.
Results of Operations
The following discussion pertains to the Company’s results of operations, financial condition, liquidity and capital resources and
should be read together with our unaudited consolidated financial statements and the notes thereto contained in this report, and our
audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended
December 31, 2013.
As stated above, the Company completed the Allied Transaction in February 2014. Allied is a subsidiary of CEHL, the Company’s
majority shareholder and deemed to be under common control (transactions between subsidiaries of the same parent). Accordingly,
the net assets acquired from Allied were recorded at their respective carrying values as of the acquisition date. The results of
operations presented for all periods included herein are reflected as though the transfer of the Allied assets had occurred at the
beginning of the first period presented.
Three months ended September 30, 2014, compared to the three months ended September 30, 2013
Revenues
Revenue is recognized when a lifting (sale) occurs. Crude oil revenues for the three months ended September 30, 2014 were $19.0
million, as compared to $21.7 million for the same period in 2013. For the three months ended September 30, 2014, the Company sold
approximately 189,000 net barrels of oil (Bbl) at an average price of $100.85/Bbl as compared to approximately 194,000 net barrels of
oil at an average price of $112.09/Bbl for the same period in 2013.
During the three months ended September 30, 2014, the average net daily production from the Oyo Field was approximately 800
barrels of oil per day (“BOPD”), as compared to approximately 2,000 BOPD for the same period in 2013. Both of the producing wells
were shut-in by mid-September 2014.
Operating Costs and Expenses
Production costs for the three months ended September 30, 2014 were $34.3 million, as compared to $22.2 million for the same period
in 2013. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil
inventory are capitalized, and are subsequently expensed when crude oil is sold. In the quarter ended September 30, 2014, the
Company incurred $9.6 million higher production expenditures associated with crude oil sales, as compared to the same period in the
previous year. In addition, in the three months ended September 30, 2014, the Company recorded a $1.7 million contingent liability
for a disputed transaction tax on marine transportation, following recent claims from a Nigerian tax authority.
During the three months ended September 30, 2014, the Company incurred $1.1 million of exploration expenses, including $0.2
million spent in Nigeria for exploration activities, $0.6 million in Kenya, and $0.3 million in The Gambia. During the three months
ended September 30, 2013, the Company incurred $1.0 million of exploration expenses, including $0.4 million spent at the corporate
level for exploration activities, $0.3 million related to Kenya, $0.2 million related to The Gambia, and $0.1 million related to Nigeria.
Depreciation, depletion and amortization (“DD&A”) expenses for the three months ended September 30, 2014 were $21.7 million, as
compared to $5.6 million for the same period in 2013. In September 2014, the Company determined that, based on the current
operating plan and the equipment to be utilized, its estimated cost to plug and abandon certain wells should be revised upwards; see
“Note 6 – Asset Retirement Obligations.” The higher asset retirement cost estimate caused an increase in the oil field asset cost basis,
which resulted in an increased average depletion rate. The average depletion rate for the three months ended September 30, 2014, was
$115.22/Bbl, as compared to $28.93/Bbl for the same period in 2013.
General and administrative expenses were $3.4 million for each of the three months ended September 30, 2014 and 2013. The
Company incurred non-cash stock-based compensation expenses of $0.8 million and $0.6 million for the three months ended
September 30, 2014 and 2013, respectively.
Other Income (Expense)
Other expense for the three months ended September 30, 2014 was $0.7 million, consisting primarily of $0.8 million interest expense
on the related party notes payable. Other expense for the three months ended September 30, 2013 was $16,000, consisting primarily of
interest expense on the Promissory Note with Allied.
Income Taxes
Income taxes were nil for each of the three months ended September 30, 2014 and 2013. The Company had negative earnings in both
periods, and thus was not subject to petroleum profit taxes in Nigeria.
Nine months ended September 30, 2014, compared to the Nine months ended September 30, 2013
Revenues
Revenue is recognized when a lifting (sale) occurs. Crude oil revenues for the nine months ended September 30, 2014 were $53.8
million, as compared to $63.7 million for the same period in 2013. For the nine months ended September 30, 2014, the Company sold
approximately 506,000 net barrels of oil at an average price of $106.38/Bbl as compared to approximately 591,000 net barrels of oil at
an average price of $107.86/Bbl for the same period in 2013.
During the nine months ended September 30, 2014, the average net daily production from the Oyo Field was approximately 1,300
BOPD, as compared to approximately 2,000 BOPD for the same period in 2013. Both of the producing wells were shut-in by mid-
September 2014.
Operating Costs and Expenses
Production costs for the nine months ended September 30, 2014 were $72.6 million, as compared to $65.8 million for the same period
in 2013. The Company matches production expenses with crude oil sales. Any production expenses associated with unsold crude oil
inventory are capitalized, and are subsequently expensed when crude oil is sold. In the nine months ended September 30, 2014, the
Company incurred $13.7 million higher production expenditures associated with crude oil sales, as compared to the same period in the
previous year, partially offset by $9.6 million lower FPSO costs as a result of a temporary price discount. In addition, in the nine
months ended September 30, 2014, the Company recorded a $1.7 million contingent liability for a disputed transaction tax on marine
transportation, following recent claims from a Nigerian tax authority.
During the nine months ended September 30, 2014, the Company incurred $3.9 million of exploration expenses, including $2.7
million spent in Kenya, $1.0 million in The Gambia, and $0.2 million in Nigeria. During the nine months ended September 30, 2013,
the Company incurred $4.1 million of exploration expenses, including $1.8 million spent at the corporate level for exploration
activities, $1.6 million related to Kenya, $0.5 million related to The Gambia, and $0.2 million related to Nigeria.
Depreciation, depletion and amortization (“DD&A”) expenses for the nine months ended September 30, 2014 were $32.7 million, as
compared to $16.2 million for the same period in 2013. In September 2014, the Company determined that, based on the current
operating plan and the equipment to be utilized, its estimated cost to plug and abandon certain wells should be revised upwards; see
“Note 6 – Asset Retirement Obligations.” The higher asset retirement cost estimate caused an increase in the oil field asset cost basis,
which resulted in an increased average depletion rate. The average depletion rate for the nine months ended September 30, 2014 was
$64.56/Bbl, as compared to $27.45/Bbl for the same period in 2013.
General and administrative expenses for the nine months ended September 30, 2014 were $12.2 million, as compared to $10.5 million
for the nine months ended September 30, 2013. The increase is primarily due to increased corporate overhead costs to support the
development of the Oyo field offshore Nigeria and the Company’s expanding exploration activities. The Company incurred non-cash
stock-based compensation expenses of $2.2 million and $1.5 million for the nine months ended September 30, 2014 and 2013,
respectively.
Other Income (Expense)
Other expense for the nine months ended September 30, 2014 was $1.5 million, consisting primarily of $1.6 million interest expense
on the related party notes payable. Other expense for the nine months ended September 30, 2013 was $26,000, consisting primarily of
interest expense on the Promissory Note with Allied.
Income Taxes
Income taxes were nil for each of the nine months ended September 30, 2014 and 2013. The Company had negative earnings in both
periods, and thus was not subject to petroleum profit taxes in Nigeria.
Headline Earnings
In addition to the Company’s primary listing on the New York Stock Exchange, the Company’s common stock also began trading on
the JSE in February 2014. The Company is required to publish certain documents filed with the SEC with the JSE. The JSE requires
that we calculate Headline Earnings Per Share (“HEPS”) which, per the SEC, is considered a non-GAAP measurement.
As defined in the Circular 3/2009 of The South African Institute of Chartered Accountants, headline earnings is an additional earnings
number that excludes certain separately identifiable remeasurements, net of related tax, and related non-controlling interest.
The number of shares used to calculate basic and diluted HEPS is the same as basic and diluted EPS. In the three and nine months
ended September 30, 2014 and 2013, there were no separate identifiable remeasurements required and headline earnings was the same
as net loss per share as disclosed on the unaudited consolidated statements of operations. Therefore, HEPS for the three months ended
September 30, 2014 and 2013, were $(0.03) and $(0.03), respectively, and for the nine months ended September 30, 2014 and 2013
were $(0.07) and $(0.09), respectively.
Liquidity and Capital Resources
As of September 30, 2014, the Company had current asset and current liability balances of $65.8 million and $116.5 million,
respectively, resulting in a net negative working capital of $50.7 million.
During the nine months ended September 30, 2014, net cash used in operating activities was $33.1 million as compared to $13.0
million for the same period in 2013. The net increase in cash used in operating activities of $20.1 million was primarily due to $36.2
million higher net loss and negative $15.5 million non-cash adjustments to net income, partially offset by $31.6 million positive
variance in changes in operating assets and liabilities. The non-cash adjustments to net income were primarily due to $32.9 million
non-cash offset of crude oil sales proceeds against certain related party liabilities, partially offset by $16.8 million positive adjustments
for depletion expense. The positive variance in changes in operating assets and liabilities was primarily due to higher liabilities
incurred as a result of the Oyo expansion activities in Nigeria.
During the nine months ended September 30, 2014, net cash used in investing activities was $229.5 million, including $170.0 million
paid to Allied as partial consideration for the Allied Assets, and $59.5 million spent for additions to property, plant and equipment.
During the nine months ended September 30, 2013, net cash used in investing activities was $0.6 million, primarily for additions to
property, plant and equipment.
During the nine months ended September 30, 2014, net cash provided by financing activities was $316.7 million, consisting of the
$270.0 million investment from the PIC, $60.6 million of net borrowings and $0.4 million for the issuance of stock pursuant to
employee stock option exercises, partially offset by a $12.4 million adjustment to the net assets of Allied in connection with the Allied
Transaction and $1.9 million of costs paid to secure the Term Loan Facility. During the nine months ended September 30, 2013, cash
provided by financing was $10.2 million, primarily due to an adjustment to the net assets of Allied in connection with the Allied
Transaction and $1.5 million of borrowings.
The Company has a $25.0 million borrowing facility under a Promissory Note (the “Promissory Note”) with Allied. In August 2014,
the Promissory Note was amended to extend the maturity date by one year to July 2015 and to allow for the entire $25.0 million
facility amount to be utilized for general corporate purposes. As of September 30, 2014, the Company had the availability to borrow
$13.8 million under the Promissory Note.
In February 2014, the Company completed the Allied Transaction and the First Closing of the Private Placement with the PIC, in
accordance with the terms of the Transfer Agreement and the Share Purchase Agreement, respectively. In May 2014, the Company
completed the Second Closing of the Private Placement with the PIC. In aggregate, the Company received $270.0 million pursuant to
the Closing of both the First and Second Private Placements with the PIC. The Company paid Allied a total sum of $170.0 million in
cash, resulting in a net $100.0 million retained by the Company.
As partial consideration in connection with the February 2014 closing of the Allied Transaction, the Company issued the $50.0 million
Convertible Subordinated Note in favor of Allied. The principal of the Convertible Subordinated Note was deemed advanced in two
equal $25.0 million tranches at each of the First Closing and the Second Closing of the Private Placement. Interest on the Convertible
Subordinated Note accrues at a rate per annum of one-month LIBOR plus 5%, payable quarterly in cash until the maturity of the
Convertible Subordinated Note five years from the closing of the Allied Transaction. At the election of the holder, the Convertible
Subordinated Note will be converted into shares of the Company’s common stock at an initial conversion price of $0.7164 per share,
subject to customary anti-dilution adjustments. The Convertible Subordinated Note is subordinated to the Company’s existing and
future senior indebtedness and is subject to acceleration upon an Event of Default (as defined in the Convertible Subordinated Note).
The Company may, at its option, prepay the note, in whole or in part, at any time, without premium or penalty. The note is subject to
mandatory prepayment upon (i) the Company’s issuance of capital stock or incurrence of indebtedness, the proceeds of which the
Company does not apply to repayment of senior indebtedness or (ii) any capital markets debt issuance to the extent the net proceeds of
such issuance exceed $250.0 million. Allied may assign all or any part of its rights and obligations under the Convertible Subordinated
Note to any person upon written notice to the Company.
In September 2014, the Company, through its wholly owned subsidiary CPL, entered into a credit facility with a Nigerian bank for a
five-year senior secured term loan providing initial borrowing capacity of up to $100.0 million (the “Term Loan Facility”). U.S. dollar
borrowings under the Term Loan Facility bear interest at the rate of LIBOR plus 7.5%, subject to a floor of 9.5%. The security
package for the Term Loan Facility includes a legal charge over OMLs 120 and 121 and an assignment of proceeds from oil sales.
Proceeds from the Term Loan Facility will be used for the further expansion and development of OMLs 120 and 121 offshore Nigeria,
including the Oyo field.
Under the Loan Agreement, the following events, among others, constitute events of default: CPL failing to pay any amounts due
within thirty days of the due date; bankruptcy, insolvency, liquidation or dissolution of CPL; a material breach of the Loan Agreement
by CPL that remains unremedied within thirty days of written notice by CPL; or a representation or warranty of CPL proves to have
been incorrect or materially inaccurate when made. Upon any event of default, all outstanding principal and interest under any Loans
will become immediately due and payable. See “Note 7 – Debt” for details of the Term Loan Facility. As of September 30, 2014, the
Company owed $50.0 million under the Term Loan Facility and had the availability to draw the remaining $50.0 million available.
Although there are no assurances that the Company’s plans will be realized, management believes that the Company will have
sufficient capital resources to meet projected cash flow requirements for the next twelve months from the date of filing this report.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than normal operating leases and employee contracts, that have or are likely to have
a current or future material effect on our financial condition, changes in financial condition, revenues, expenses, results of operations,
liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this report, including without limitation the statements under
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” are, or may be deemed to be, forward-
looking statements. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking statements contained in this report.
We may from time to time make written or oral forward-looking statements with respect to our long-term objectives or expectations
which may be included in our filings with the SEC, reports to stockholders and information provided on our website.
The words or phrases “will likely,” “are expected to,” “is anticipated,” “is predicted,” “forecast,” “estimate,” “project,” “plans to
continue,” “believes,” or similar expressions identify “forward-looking statements.” Such forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently
anticipated or projected. We wish to caution you not to place undue reliance on any such forward-looking statements, which speak
only as of the date made. We are calling to your attention important factors that could affect our financial performance and could
cause actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in
any current statements.
The following list of important factors may not be all-inclusive, and we specifically decline to undertake an obligation to publicly
revise any forward-looking statements that have been made to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events. Among the factors that could have an impact on our ability to achieve
expected operating results and growth plan goals and/or affect the market price of our stock are:
- Limited operating history, operating revenue or earnings history.
- Ability to raise capital to fund our business plan, including developing the Oyo Field and other oil and gas licenses we
may participate in, on terms and conditions acceptable to the Company.
- Ability to develop oil and gas reserves.
- Dependence on key personnel, technical services and contractor support.
- Fluctuation in quarterly operating results.
- Possible significant influence over corporate affairs by significant stockholders.
- Ability to enter into definitive agreements to formalize foreign energy ventures and secure necessary exploitation rights.
- Ability to successfully integrate and operate acquired or newly formed entities and multiple foreign energy ventures and
subsidiaries.
- Competition from large petroleum and other energy interests.
- Changes in laws and regulations that affect our operations and the energy industry in general.
- Risks and uncertainties associated with exploration, development and production of oil and gas, and drilling and
production risks.
- Expropriation and other risks associated with foreign operations.
- Risks associated with anticipated and ongoing third party pipeline construction and transportation of oil and gas.
- The lack of availability of oil and gas field goods and services.
- Environmental risks and changing economic conditions.
- The material weakness in our internal controls over financial reporting as of September 30, 2014.
For a detailed description of these and other factors that could cause actual results to differ materially from those expressed in any
forward-looking statement, please see “Risk Factors” in Item 1A of Part II of this report and in our Annual Report on Form 10-K for
the year ended December 31, 2013.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company may be exposed to certain market risks related to changes in foreign currency exchange, interest rates, and commodity
prices.
Foreign Currency Exchange Risk
In addition to the U.S. dollar, the Company pays some of its expenses in Nigeria, The Gambia, and Kenya in Naira, Dalasi, and
Shillings respectively. Therefore we are subject to foreign currency exchange risk on non-U.S. dollar denominated transactions on
cash flows.
To date the Company has not engaged in hedging activities to hedge our foreign currency exposure in our foreign operations. In the
future, the Company may enter into hedging instruments to manage its foreign currency exchange risk or continue to be subject to
exchange rate risk.
Commodity Price Risk
As an independent oil producer, our revenue, other income and profitability, reserve values, access to capital and future rate of growth
are substantially dependent upon the prevailing prices of crude oil. Prevailing prices for such commodities are subject to wide
fluctuations in response to relatively minor changes in supply and demand and a variety of additional factors beyond our control.
Historically, prices received for oil production have been volatile and unpredictable, and such volatility is expected to continue.
Interest Rate Risk
We are exposed to changes in interest rates which affect the interest earned on our interest-bearing deposits and the interest paid on the
Promissory Note, the Convertible Subordinated Note and the Term Loan Facility. Currently, we do not use interest rate derivative
instruments to manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
Description of Material Weakness
As disclosed in our Quarterly Report on Form 10-Q/A for the period ended March 31, 2014, filed with the SEC on July 18, 2014, we
previously identified a material weakness in our internal controls over financial reporting with respect to complex, non-recurring
transactions. Management is actively engaged in developing a remediation plan to address this material weakness and will provide an
update as to the Company’s implementation of remediation measures in our subsequent Annual Report on Form 10-K.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the
Company’s reports under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management of the Company, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures as of September 30, 2014. As a result of the material weakness in
the Company’s internal control over financial reporting with respect to complex, non-recurring transactions for which remediation had
not been completed as of September 30, 2014, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were not effective as of September 30, 2014.
Changes in Internal Control Over Financial Reporting
Subject to the foregoing description of the material weakness in internal control over financial reporting and our efforts to remediate
such material weakness, there have not been any changes in our internal controls over financial reporting during the period covered by
this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The disclosures required in this Item 1 are included in “Note 11 - Commitments and Contingencies”, in the unaudited consolidated
financial statements included in Part I, Financial Information, Item 1, Financial Statements and incorporated herein by reference.
Item 1A. Risk Factors
The risk factor below is an addition to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K
filed with the SEC on March 14, 2014 for the fiscal year ended December 31, 2013.
A material weakness in our internal control over financial reporting with respect to complex, non-recurring transactions could, if not
remediated, result in a misstatement of the annual or interim financial statements.
We are required to maintain effective internal controls over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted
accounting principles. It has been determined that we had a material weakness as of March 31, 2014 relating to our internal controls
over complex, non-recurring transactions, and management is actively engaged in developing a remediation plan to address this
material weakness. Although we have implemented the steps to remediate this material weakness as of the filing date of this report, if
these steps are unsuccessful in remediating this material weakness, it could result in a misstatement of our future annual or interim
financial statements in the event of future complex transactions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In September 2014, the Company entered into a consulting agreement (the” Agreement”) with Liviakis Financial Communications
(“Liviakis”), pursuant to which Liviakis has agreed to represent the Company for a term of one-year in investors’ communications and
public relations with existing and prospective shareholders, brokers, dealers and other investment professionals with respect to the
Company’s current and proposed activities, and to consult with the Company’s management concerning such activities.
As partial consideration under the Agreement, the Company agreed to issue warrants to purchase an aggregate of 1,800,000 shares of
the Company’s common stock. The warrants have an exercise price of $0.56 per share, which was the closing price of our common
stock as of the date of the Agreement and the shares are considered fully vested.
The warrants discussed above have been issued in reliance on an exemption from registration of the shares provided by Section 4(a)(2)
of the Securities Act of 1933, as amended (the “Securities Act”), as a transaction by an issuer not involving any public offering.
Item 6. Exhibits
The following exhibits are filed with this report:
Exhibit
Number Description
3.1 Amended and Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the
Company’s Form 10-SB filed on August 16, 2007).
3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 13, 2010).
3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company (incorporated herein by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8 -K filed on February 19, 2014).
3.4 Amended and Restated Bylaws of the Company as of April 11, 2011 (incorporated by reference to Exhibit 3.1 of our
Quarterly Report on Form 10-Q filed on May 3, 2011).
31.1 Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
101. INS XBRL Instance Document.
101. SCH XBRL Schema Document.
101. CAL XBRL Calculation Linkbase Document.
101. DEF XBRL Taxonomy Extension Definition Linkbase Document
101. LAB XBRL Label Linkbase Document.
101. PRE XBRL Presentation Linkbase Document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CAMAC Energy Inc.
Date: November 10, 2014
/s/ Earl W. McNiel
Earl W. McNiel
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
12 November 2014
Sponsor
Sasfin Capital (a division of Sasfin Bank Limited)
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