Form 10QSB for STAR ENERGY CORP
14-Nov-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with our financial statements and notes thereto included in this report.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in this "Management's Discussion and Analysis", with the exception of historical facts, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which reflect our current expectations and beliefs regarding our future results of operations, performance, and achievements. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. These statements are subject to risks and uncertainties and are based upon assumptions and beliefs that may or may not materialize. These forward looking statements include, but are not limited to, statements concerning:
o the sufficiency of existing capital resources;
o our ability to raise additional capital to fund cash requirements for future operations;
o our ability to maintain sufficient energy reserves to fund and maintain operations;
o uncertainties related to Star's future business prospects with possible future acquisitions;
o the volatility of the stock market; and
o general economic conditions.
We wish to caution readers that Star's operating results are subject to various risks and uncertainties that could cause our actual results to differ materially from those discussed or anticipated in this report. We also wish to advise readers not to place any undue reliance on the forward looking statements contained in this report, which reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update or revise these forward looking statements to reflect new events or circumstances or any changes in our beliefs or expectations, other than as required by law.
Our Business
Until October 6, 2006, Star was an independent oil and natural gas producer involved in the exploration, development, production and sale of gas derived from properties located in Webb County, West Texas. We realized production from a total of five oil and gas wells known as the Galvan Ranch Gas Wells, which were located in Webb County, Texas, each with a 15% working interest and a 12% net revenue interest. The wells were on five separate parcels of land spread over 425 acres of the Galvan Ranch. Depth of the producing intervals varied from 5,800 to 6,800 ft within the Olmos sand reservoir. The producing interval within the Olmos sand reservoir where Star's wells were located had an average thickness ranging from 75 to 100 feet with an average porosity ranging from 10 to 14%.
On March 24, 2006, Star had executed a letter of intent to acquire Terrabyte, LLC, an oil and gas exploration company headquartered in Allegan, Michigan. Subsequent to the three month period ended June 30, 2006, Star announced that the parties had not been able to reach a mutually acceptable definitive agreement and had ended all further negotiations.
On October 6, 2006, an Assignment and Bill of Sale was entered into between Star and Ruairidh Campbell, a former officer and director of Star. Pursuant to such assignment, Star agreed to assign to Mr. Campbell all of Star's interests in a 15% working interest (12% net revenue interest) in and to the five oil and gas wells known as the Galvan Ranch Gas Wells, which are located in Webb County, Texas. In consideration therefor, Mr. Campbell transferred to Star his 3,250,000 shares of Star's common stock held by him for cancellation and return to Star's authorized but unissued common shares.
On October 6, 2006, Star acquired Volga-Neft Limited Company, a corporation formed under the laws of the Russian Federation, Samara Region, Privolzhsky ("Volga"). On such date, Start purchased all of the issued and outstanding shares of Volga from Volga's two shareholders, Dzhalovyan Artiir Andreasovich and Dubrovskaya Olga AmUofyevna. In consideration therefor, Star issued to Dzhalovyan Artiir Andreasovich and Dubrovskaya Olga AmUofyevna an aggregate of 10,000,000 shares of Star's common stock. Such issuance represented 25.6% of the issued and outstanding shares of Star. As a result of the closing, Volga has became a wholly owned subsidiary of Star.
Volga is engaged in the exploration, development and production of oil and gas resources in the Russian Federation. Volga owns a parcel of land in Chapaevsk, Russia, measuring approximately 30 000 square meters, on which Volga intends to build an oil refinery. In addition, Volga owns sixty nine vehicles used for the transportation of oil and inflammable loads. Volga employs approximately 185 persons.
Star's financial condition, results of operations and the carrying value of its natural gas properties depends primarily upon the prices it receives for natural gas production and the quantity of that production. Natural gas prices historically have been volatile and are likely to continue to be volatile in the future. This price volatility can immediately affect Star's available cash flow which can in turn impact the availability of net cash flow for operations and future capital expenditures. A drop in oil and natural gas prices could also incur a write down of the carrying value of our properties as can a decrease in production. Star's future success will depend on the level of gas prices and the quantity of its production. Since production leads to the depletion of gas reserves, Star's ability to develop or acquire additional economically recoverable gas reserves is vital to its future success. Unless Star can obtain such additional reserves, its current production will continue to decline which will lead to a significant reduction in revenue.
Further, estimates of reserves and of future net revenue may vary substantially depending, in part, on the assumptions made and may be subject to adjustment either up or down in the future. Actual amounts of production, revenue, taxes, development expenditures, operating expenses, and quantities of recoverable oil and gas reserves to be encountered may vary substantially from the engineer's estimates. Oil and gas reserve estimates are necessarily inexact and involve matters of subjective and engineering judgment. If these estimates of quantities, prices and costs prove inaccurate, and Star is unsuccessful in increasing its producing gas wells, and/or declines in and instability of gas prices occurs, then write downs in the capitalized costs associated with its gas assets may be required. While Star believes that the estimated proved gas reserves and estimated future net revenues are reasonable, there is no assurance that certain revisions will not be made in the future.
Results of Operations
During the nine month period ended September 30, 2006, Star was engaged in evaluating the operating efficiencies of its wells, overseeing the operation of its gas assets, and involved in negotiating and drafting the letter of intent and an agreement pertaining to Star's former intention to acquire Terrabyte, LLC.
Three and nine month periods ended September 30, 2006 and 2005
Gross Revenue
Gross revenue for the three month period ended September 30, 2006 was $8,410 as compared to $15,056 for the comparable period ended September 30, 2005, a decrease of $6,646. Gross revenue for the nine month period ended September 30, 2006 was $33431 as compared to $40,077 for the comparable period ended September 30, 2005. The decrease in gross revenue over the comparative three month periods can be attributed to a decrease in the prices realized for gas production over the respective periods. Star expects to maintain relatively consistent gross revenues over future periods due to gradual increases in gas prices which Star expects to offset decreases in production.
Net Income/Loss
Net loss for the three month period ended September 30, 2006 was $(3,161) as compared to $5,081 for the comparable period ended September 30, 2005, an increase of $8,242 of net losses. Net loss for the nine month period ended September 30, 2006 was $(56,138) as compared to net loss of $(4,123) for the comparable period ended September 30, 2005, an increase of $52,015. The increase of net loss over the comparative three and nine month periods can be primarily attributed to an increase in general and administrative expenses. Star expects to decrease net losses over future periods.
Expenses
General and administrative expenses for the three month period ended September 30, 2006 increased to $8,302 from $4,849 for the comparable period ended September 30, 2005, an increase of $3,453. General and administrative expenses for the nine month period ended September 30, 2006 increased to $73,109 from $20,390 for the comparable period ended September 30, 2005, an increase of $52,719. The increases in general administrative expenses over the three and nine month comparative periods were primarily attributed to costs associated with the intended acquisition of Terrabyte, LLC which included a $25,000 deposit paid to Terrabyte, LLC during the current period. Star anticipates that general and administrative expenses will decrease over future periods.
Production costs for the three month period ended September 30, 2006 decreased to $2,487 from $4,169 for the comparable period ended September 30, 2005, a decrease of 1,682. Production costs for the nine month period ended September 30, 2006 decreased to $13,849 from $20,870 for the comparable period ended September 30, 2005, a decrease of 7,021. Direct production expenses include the cost of maintaining the wells, access roads, miscellaneous expenses for soap, solvent, gasoline or electricity and expenses such as those incurred in swabbing, dozer work or rig time. The decrease in production costs over the three and nine month comparative periods can be attributed to a decrease in maintenance expenses incurred by Lewis. Star expects that productions costs will remain relatively consistent in future periods.
Depletion expenses for the three month periods ended September 30, 2006, and September 30, 2005 were $782 and $957, respectively. Depletion expenses for the nine month periods ended September 30, 2006 and September 30, 2005 were $2,611 and $2,940, respectively.
Income Tax Expense (Benefit)
Star has an income tax benefit resulting from operations that will offset any operating profit.
Impact of Inflation
Star believes that inflation has had a negligible effect on operations over the past three years. Star believes that it can offset inflationary increases in maintenance costs by increasing revenue and improving operating efficiencies.
Liquidity and Capital Resources
Cash flow used in operations for the nine month period ended September 30, 2006 was $(43,707) as compared to cash used in operations of $3,492 for the comparable period ended September 30, 2005. The increase in cash flow used in operations over the comparative nine month periods is primarily attributed to the increase in net loss due to an increase in general and administrative costs associated with the intended acquisition of Terrabyte, LLC. Star may continue to use cash flow in operations in future periods.
Cash flow used in investing activities for the nine month period ended September 30, 2006 was $0 as compared to $0 for the nine month period ended September 30, 2005.
Cash flow provided by a note payable upon demand was $30,000 for the nine month period ended September 30, 2006 as compared to cash flow provided by financing activities of $0 for the nine month period ended September 30, 2005. The cash flow provided by financing activities in the current period is attributed to a note payable.
Star does not have sufficient cash on hand to fund its operations. There can be no assurance that Star will generate sufficient cash flows to fund operations. Star had no lines of credit or other bank financing arrangements as of September 30, 2006. Since any earnings, if realized, are anticipated to be reinvested in operations, cash dividends are not expected to be paid in the foreseeable future. Commitments for future capital expenditures were not material at year-end.
Star has no defined benefit plan or contractual commitment with any of its officers or directors.
Star has no current plans for the purchase or sale of any plant or equipment.
Star has no current plans to make any changes in the number of employees.
Critical Accounting Policies and Estimates
Accounting for Oil and Gas Property Costs. As more fully discussed in Note 1 to the Financial Statements included with Star's Form 10-KSB for the year ended December 31, 2005, Star (i) follows the successful efforts method of accounting for the costs of its gas properties, (ii) amortizes such costs using the units of production method, and (iii) evaluates its proven properties for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. Adverse changes in conditions (primarily gas price declines) could result in permanent write-downs in the carrying value of gas properties as well as non-cash charges to operations that would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer annually estimates Star's proven reserves. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof. In addition, subsequent physical and economic factors such as the results of drilling, testing, production and product prices may justify revision of such estimates. Therefore, actual quantities, production timing, and the value of reserves may differ substantially from estimates. A reduction in proved reserves would result in an increase in depreciation, depletion and amortization expense.
Estimates of Asset Retirement Obligations. In accordance with SFAS No 143, Star makes estimates of future costs and the timing thereof in connection with recording its future obligations to plug and abandon wells. Estimated abandonment dates will be revised in the future based on changes to related economic lives, which vary with product prices and production costs. Estimated plugging costs may also be adjusted to reflect changing industry experience. Increases in operating costs and decreases in product prices would increase the estimated amount of the obligation and increase depreciation, depletion and amortization expense. Cash flows would not be affected until costs to plug and abandon were actually incurred.
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