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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following discussion and analysis is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and should be read in conjunction with our financial statements and related notes. We incorporate by reference into this Report our audited consolidated financial statements for the years ended December 31, 2012 and 2011. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. In addition, the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, including, but not limited to, those discussed in “Forward Looking Statements,” and elsewhere in this Report.
The following management’s discussion and analysis is intended to assist in understanding the principal factors affecting our results of operations, liquidity, capital resources and contractual cash obligations. This discussion should be read in conjunction with our consolidated financial statements which are incorporated by reference herein, information about our business practices, significant accounting policies, risk factors, and the transactions that underlie our financial results, which are included in various parts of this filing.
For ease of presentation in the following discussions of “Comparison of Results” and “Liquidity and Capital Resources”, we round dollar amounts to the nearest thousand dollars (other than average prices per barrel and per share amounts).
We are an oil and gas exploration, development and production company. Our oil and gas property interests are located in Western Canada (in Berwyn, Medicine River, Boundary Lake, and Wildmere in Alberta, and Clarke Lake and Inga in British Columbia) and in the United States (in the Piqua region of the State of Kansas).
Our business focus is to acquire producing and non-producing oil and gas right interests and develop oil and gas properties that we own or in which we have a leasehold interest. We also anticipate pursuing the acquisition of leaseholds and sites within other geographic areas that meet our general investment guidelines and targets. The majority of our operational duties are outsourced to consultants and independent contractors, including for drilling, maintaining and operating our wells, and we maintain a limited in-house employee base.
On October 20, 2011, our wholly-owned subsidiary, Legend Canada completed the acquisition of the majority of the petroleum and natural gas leases, lands and facilities held by Wi2Wi, formerly International Sovereign. The assets acquired consisted of substantially all of Wi2W’s assets, including interests in producing oil and gas leasehold properties in Western Canada that have been maintained through the drilling of internally generated low to medium risk exploration and development sites. The principal natural gas leasehold properties are located in Medicine River and Berwyn in Alberta, and Clarke Lake in British Columbia. The assets also include an interest in a light oil property in Inga in British Columbia.
Our Company was incorporated under the laws of the State of Colorado on November 27, 2000 under the name “SIN Holdings, Inc.” On November 29, 2010, we changed our name to Legend Oil and Gas, Ltd. Our only subsidiary is Legend Canada, which was formed in Alberta, Canada on July 28, 2011 to acquire the Wi2Wi assets. Neither we nor Legend Canada are reporting issuers in any province of Canada.
Results of Operations
The following is a discussion of our consolidated results of operations, financial condition and capital resources. You should read this discussion in conjunction with our Consolidated Financial Statements and the Notes thereto contained elsewhere in this Form 10-Q. Comparative results of operations for the periods indicated are discussed below.
The following table sets forth certain of our oil and gas operating information for the three months ended March 31, 2013, and March 31, 2012, respectively.
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Three Months Ended March 31,
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2013
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2012
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Change
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% Change
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Production Data :
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|
|
|
|
|
|
|
|
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Oil production (bbl)
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5,226
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|
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5,827
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|
|
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(601
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)
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|
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(10.3
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)
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Average daily oil production (bbl/d)
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57
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|
|
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64
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|
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(7
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)
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(10.9
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)
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Natural gas production (mcf)
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56,561
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92,438
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(35,877
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)
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|
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(38.8
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)
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Average daily natural gas production (mcf/d)
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622
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1,016
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(394
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)
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(38.0
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)
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Natural gas liquids production (bbl)
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540
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421
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119
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28.3
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Average daily natural gas liquids production (bbl/d)
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6
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5
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1
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20.0
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Total BOE
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15,193
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21,655
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(6,462
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)
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(29.8
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)
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Total BOE/d
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167
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238
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(71
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)
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(29.8
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)
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Revenue Data :
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Oil revenue ($)
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336,000
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508,000
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(172,000
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)
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(33.9
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)
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Average realized oil sales price ($/bbl)
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64.34
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86.67
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(22.33
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)
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(25.8
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)
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Gas revenue ($)
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165,000
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162,000
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3,000
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1.9
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Average realized gas sales price ($/mcf)
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2.91
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1.75
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1.16
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66.3
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Natural gas liquids revenue ($)
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22,000
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28,000
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(6,000
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)
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(21.4
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)
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Average realized natural gas liquids price ($/bbl)
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39.58
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67.48
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(27.90
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)
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(41.3
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)
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Operating expenses :
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Production expenses
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351,000
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428,000
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(77,000
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)
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(18.0
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)
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Average production expenses ($/boe)
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23.10
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16.37
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6.73
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41.1
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Operating Margin ($/boe)
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11.32
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12.46
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(1.14
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)
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(9.1
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)
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Depreciation, depletion, and amortization
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185,000
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421,000
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(236,000
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)
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(56.1
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)
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* Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe
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Production and Revenue
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Three Months Ended March 31,
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2013
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2012
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Change
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Percent Change
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Product revenues:
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Crude oil sales
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$
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336,000
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$
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508,000
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$
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(172,000
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)
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(33.9
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)%
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Natural gas sales
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165,000
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|
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162,000
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3,000
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1.9
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%
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Natural gas liquids sales
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22,000
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|
|
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28,000
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|
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(6,000
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)
|
|
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(21.4
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)%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Product revenues
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$
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523,000
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|
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$
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698,000
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|
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$
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(175,000
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)
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|
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(25.1
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)%
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The decrease in the price of oil received in Canada was the main driver for the lower oil revenues, in combination with slightly lower volumes due to the asset sales in Canada that occurred during the third quarter of 2012. Gas revenues were relatively flat, with the lower production volumes in Canada being offset by considerably higher pricing in 2013. Liquids revenues were also flat from 2012, with higher volumes being offset by lower pricing in the liquids markets.
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Three Months Ended March 31,
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2013
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2012
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Change
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Percent Change
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Sales Volume :
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|
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|
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Crude Oil(bbl)
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5,226
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|
|
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5,827
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|
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(601
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)
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|
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(10.3
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)%
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Natural Gas(mcf)
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56,561
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92,438
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(35,877
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)
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(38.8
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)%
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Natural Gas Liquids(bbl)
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540
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|
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421
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|
|
119
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28.3
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Total BOE
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15,193
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21,655
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(6,462
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)
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(29.8
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)%
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* Oil and natural gas were combined by converting natural gas to oil equivalent on the basis of 6 mcf of gas = 1 boe
.
The decrease in oil volumes is largely due to the asset sales in Canada in third quarter of 2012. Natural gas volume decreases were due to asset sales, as well lower production in key areas in Canada such as Berwyn. The increase in liquids is reflective of higher production from the liquid rich production in Canada.
Commodity Prices Realized
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Three Months Ended March 31,
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2013
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2012
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Change
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Percent Change
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Sales Price :
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Crude Oil($/bbl)
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64.34
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86.67
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(22.33
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)
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(25.8
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)%
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Natural Gas($/mcf)
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2.91
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1.75
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1.16
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66.3
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%
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Natural Gas Liquids($/bbl)
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39.58
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67.48
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(27.9
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)
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(41.3
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)%
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The average price per barrel during the first quarter of 2013 was $64.34, down from $86.67 in the first quarter of 2012, respectively, which mirrors the Canadian oil pricing environment and lowering differentials. The natural gas prices reflect the considerably stronger gas price environment in 2013 in Canada. Liquids pricing is linked to the oil pricing environment, which leads to the decrease in liquids prices. The prices we receive for our oil and natural gas production are determined by the market and heavily influence our revenue, profitability, access to capital and future rate of growth.
Lease Operating Expenses
Operating expenses decreased on an absolute basis to $351,000 in the first quarter of 2013 from $428,000 in the first quarter of 2012, linked to the lower production base. However, on a per barrel basis, the operating expense increased from $16.37/boe in the first quarter of 2012 to $23.10/boe in the corresponding period of 2013, due to the fixed expenses being distributed over the lower production base. Lease operating expenses consist of day-to-day operational expenses for production of oil and maintenance and repair expenses for the wells and property.
General and Administrative Expenses
General and administrative expenses include: professional fees; management fees; travel expenses; office and administrative expenses; and marketing and SEC filing expenses. General and administrative expenses increased to $1,547,000 for the first quarter of 2013, as compared to $1,012,000 for the same period in 2012, a $535,000 increase. The period-to-period increase is largely due to the non-cash stock based compensation expense due to the cancellation of the stock options in Q1 of 2013. The stock based expense had no impact on total consolidated stockholders’ equity. This increased stock based compensation is offset by lower professional fees, salaries and office expenses due to an increased focus on reducing costs and streamlining operations.
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Three months ended March 31,
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|
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2013
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|
2012
|
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$ Change
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% Change
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General and administrative expenses
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|
|
|
|
|
|
|
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Professional Fees
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$
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100,000
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$
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254,000
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$
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(154,000
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)
|
|
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(60.6
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)%
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Salaries and benefits
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|
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178,000
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235,000
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|
|
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(57,000
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)
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(24.3
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)%
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Office and administration
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79,000
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|
|
|
154,000
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|
|
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(75,000
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)
|
|
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(48.7
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)%
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Stock based compensation
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1,190,000
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|
|
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369,000
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|
|
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821,000
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|
|
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222.5
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Total
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$
|
1,547,000
|
|
|
$
|
1,012,000
|
|
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$
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535,000
|
|
|
|
52.9
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%
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Stock based compensation is a significant item in the general and administrative, and the amount in the first quarter of 2013 reflects the full amortization of the fair value of options granted in 2011and 2012. Disclosure of these stock based compensation transactions can be found in Note 5 to the Notes to Consolidated Financial Statements for the period ended March 31, 2013.
Depletion, depreciation, amortization and impairment
The
Company incurred $185,000 for depreciation, depletion, amortization for the three months ended March 31, 2013 ($421,000 in first quarter 2012), reflective of the lower production levels of the company. The Company also incurred $111,000 in non-cash impairment charges for the first quarter of 2013 ($0 in first quarter of 2012).
Accretion expense
For the three months ended March 31, 2013 the company had accretion expense of $15,000 ($13,000 in first quarter 2012) related to the Company’s asset retirement obligations.
Interest expense
Interest expense was $37,000 for the three months ended March 31, 2013($57,000 in first quarter 2012). The decrease in interest expenses is due to the reduction of the revolving bank line in Canada.
Net loss
The Company recorded a net loss of $1,723,000 in first three months of 2013, as compared to the net loss of $1,189,000 in the corresponding period in 2012. The increase in the loss is mainly due to the acceleration of stock based compensation, along with the impacts of lower production impact on revenues and expenses.
Liquidity and Capital Resources
Liquidity
We have incurred net operating losses and operating cash flow deficits over the last two years, continuing through the first quarter of 2013. We are in the early stages of acquisition and development of oil and gas leaseholds, and we have been funded primarily by a combination of equity issuances and bank debt, and to a lesser extent by operating cash flows, to execute on our business plan of acquiring working interests in oil and gas properties and for working capital for production. At March 31, 2013, we had cash and cash equivalents totaling approximately $10,000.
In October 2011, we established a revolving demand loan with National Bank of Canada (the “Bank”) through our wholly-owned subsidiary, Legend Canada. The credit facility currently has a maximum borrowing base of CA$3.5 million and is payable in full at any time upon demand.
The Company has a bridge demand loan with the Bank which is payable in monthly payments of CA$25,000 over 10 months, commencing December 24, 2012 with a final payment due September 24, 2013.
As of the date of this Report, we have an outstanding balance under the revolving demand loan with the Bank in the amount of approximately $3,445,050(CA$3,500,000) and approximately $123,035(CA$125,000) under the bridge demand loan. The Bank may demand repayment of all amounts owed by Legend Canada to it at any time. There is no assurance that any portion of this credit facility will be available to Legend Canada in the future.
We believe that the combination of revenue from our on-going operations, proceeds from potential future asset sales, and potential future equity or debt financing, provides us the ability to make our scheduled monthly bridge loan payments. However, in the event we are unable to meet a bridge loan scheduled payment or the repayment of the revolving demand loan at any time upon demand by the Bank, we will be in default of our obligations to the Bank. The Bank has a first priority security interest in all of our assets and can exercise its rights and remedies against us as a secured creditor. Any such default by us or action by the Bank will have a material adverse effect on us and our business. If we are unable to negotiate favorably with the Bank, or if we are unable to secure additional financing, whether from equity, debt, or alternative funding sources, this could have a material adverse effect on us and we may be required to sell some or all of our properties, sell or merge our business, or file a petition for bankruptcy.
In addition, Wi2Wi, formerly International Sovereign Energy Corp. and the holders of our convertible preferred stock had “put” rights to require us to repurchase their shares at a price of $2.00 per share. On March 30, 2012, we received signed waivers from the holders of our convertible preferred stock of their put rights; however, these waivers were contingent on Wi2Wi also agreeing to waive its rights. On May 1, 2013, Legend and Wi2Wi entered into a Settlement and Termination Agreement, of which a key component is the elimination of the put right. In return for cancellation of the put right, Legend has agreed to settlement of certain claims amounting to CA $60,000 and agreement to file a Form S-1 to register the restricted shares previously issued to Wi2Wi in VWAP settlements.
We anticipate needing additional financing to fund our drilling and development plans in 2013. We may seek financing from other sources, which may also include the sale of certain of our oil and gas properties. Our ability to obtain financing or to sell our properties on favorable terms may be impaired by many factors outside of our control, including the capital markets (both generally and in the crude oil and natural gas industry in particular), our limited operating history, the location of our crude oil and natural gas properties and prices of crude oil and natural gas on the commodities markets (which will impact the amount of asset-based financing available to us) and other factors. Further, if crude oil or natural gas prices on the commodities markets decline, our revenues will likely decrease and such decreased revenues may increase our requirements for capital.
Any new debt or equity financing arrangements may not be available to us, or may be available only on unfavorable terms. Additionally, these alternatives could be highly dilutive to our existing shareholders, and may not provide us with sufficient funds to meet our long-term capital requirements. We have and may continue to incur substantial costs in the future in connection with raising capital to fund our business, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, which may adversely impact our financial condition. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs (even to the extent that we reduce our operations), we will be required to reduce operating costs, which could jeopardize our future strategic initiatives and business plans, and we may be required to sell some or all of our properties (which could be on unfavorable terms), seek joint ventures with one or more strategic partners, strategic acquisitions and other strategic alternatives, cease our operations, sell or merge our business, or file a petition for bankruptcy.
The following table summarizes our cash flows for the year ended March 31, 2013 and March 31, 2012, respectively:
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For the Three Months Ended March 31,
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|
|
2013
|
|
|
2012
|
|
Net cash provided by (used) in operating activities
|
|
$
|
214,000
|
|
|
$
|
(81,000
|
)
|
Net cash used in investing activities
|
|
|
(150,000
|
)
|
|
|
(106,000
|
)
|
Net cash provided (used) by financing activities
|
|
|
(142,000
|
)
|
|
|
263,000
|
|
Net increase (decrease) in cash during period
|
|
$
|
(78,000
|
)
|
|
$
|
76,000
|
|
Cash from Operating Activities
Cash provided by operating activities was $214,000 for the three months ended March 31, 2013, as compared to cash used by operating activities of $81,000 in the three months ended March 31, 2012. The increase in cash provided is due to the lower operating and administrative costs of the Company.
Cash from Investing Activities
Cash used for investing activities for the three months ended March 31, 2013 was $150,000 as compared to $106,000 during the three months ended March 31, 2012. The increase is due to the Company spending much of the first quarter of 2012 integrating the Wi2Wi assets, whereas in the first quarter of 2013 the Company was doing some recompletion work in Canada that led to capital costs incurred.
Cash from Financing Activities
Total net cash provided by financing activities was $263,000 for the three months ended March 31, 2012, entirely drawn from the Company bank lines. Total net cash used by financing activities in the three months ended March 31, 2013 was 142,000 which was largely repayment of bank debt.
Credit Facility
At March 31, 2013, our revolving bank facility was CA$3,500,000. This revolving facility is payable on demand at anytime by the bank. We also have a bridge demand loan in place through Legend Canada that was fully drawn on March 31, 2013 for $147,645 (CA$150,000).
Our total credit facilities through National Bank were CA$3,650,000 and were drawn to CA$3,616,000 at March 31, 2013.
Planned Capital Expenditures
As funds allow, we plan to resume our drilling program on the Kansas properties. Based on the encouraging results from this 2011and 2012 drilling activity, we will execute a development program in the Kansas property.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.