Filed
Pursuant to Rule 424(b)(2)
Registration
No. 333-130769
DATED
MARCH 26, 2008.
Common
Stock
All
of
the shares to which this prospectus relates are being registered for resale
by
certain selling security holders as described more fully beginning on page
21.
We will not sell any of these shares nor will we receive any proceeds from
the
sale of the shares.
Our
common stock is traded on the American Stock Exchange under the symbol “AOG.” On
December 17, 2007, the last sales price of our common stock as reported on
the
American Stock Exchange was $1.47 per share.
Investing
in our common stock involves risks. See “Risk Factors”
beginning
on
page 7.
Neither
the Securities and Exchange Commission nor any state securities
commission
has
approved or disapproved of these securities or passed upon the adequacy
or
accuracy
of this prospectus. Any representation to the contrary is a
criminal
offense.
The
date
of this prospectus is March 26, 2008.
TABLE
OF CONTENTS
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PROSPECTUS
SUMMARY
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1
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RISK
FACTORS
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9
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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22
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USE
OF PROCEEDS
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22
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PRICE
RANGE OF COMMON STOCK
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22
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SELLING
SECURITY HOLDERS
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24
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PLAN
OF DISTRIBUTION
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26
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DESCRIPTION
OF SECURITIES
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28
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LEGAL
MATTERS
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29
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EXPERTS
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29
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CHANGE
IN INDEPENDENT AUDITORS
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30
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WHERE
YOU CAN FIND MORE INFORMATION
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30
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INFORMATION
INCORPORATED BY REFERENCE
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31
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DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
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33
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APPENDIX
A — GLOSSARY OF OIL AND NATURAL GAS TERMS
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A1–A3
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You
should rely only on the information contained in this prospectus or to which
we
have
referred you. We have not authorized anyone to provide you with information
that
is
different. This document may only be used where it is legal to sell
these
securities.
The information in this document may only be accurate on the date of
this
prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
shares.
Except
as
otherwise indicated or required by the context, references in this prospectus
to
“we”, “us,” “our” or the “Company” refer to Aurora Oil & Gas
Corporation and its subsidiaries. The term “you” refers to a prospective
investor.
PROSPECTUS
SUMMARY
This
summary contains basic information about us and the offering. Because it is
a
summary,
it does not contain all the information that you should consider
before
investing
in our common stock. You should read and carefully consider this
entire
prospectus
before making an investment decision, especially the information
presented
under
the heading “Risk Factors” and our consolidated financial statements and
the
accompanying
notes incorporated by reference into this prospectus, as well as the
other
documents
to which we refer you. We have provided definitions for some of the oil
and
natural
gas industry terms used in this prospectus in the “Glossary of Oil
and
Natural
Gas Terms” in Appendix A. Natural gas equivalents are determined
using
the
ratio of six mcf of natural gas to one bbl of crude oil, condensate or
natural
gas
liquids.
AURORA
OIL & GAS CORPORATION
Overview
We
are a
growing independent energy company focused on the exploration, exploitation,
and
development of unconventional natural gas reserves. Our unconventional natural
gas projects target shale plays where large acreage blocks can be easily
evaluated with a series of low cost test wells. Shale plays tend to be
characterized by high drilling success and relatively low drilling costs when
compared to conventional exploration and development plays. Our project areas
are focused in the Antrim shale of Michigan, the New Albany shale of Southern
Indiana and Western Kentucky, and the Woodford shale in Oklahoma.
We
commenced operations in 1969 to explore and mine natural resources under the
name Royal Resources, Inc. In July 2001, we reorganized our business to pursue
oil and natural gas exploration and development opportunities and changed our
name to Cadence Resources Corporation. We acquired Aurora Energy, Ltd.
("Aurora") on October 31, 2005 through the merger of our wholly-owned subsidiary
with and into Aurora. The acquisition of Aurora was accounted for as a reverse
merger, with Aurora being the acquiring party for accounting purposes. The
Aurora executive management team also assumed management control at the time
the
merger closed, and we moved our corporate offices to Traverse City,
Michigan.
Our
strategy is to maximize shareholder value by leveraging our significant acreage
position and the experience of our management and technical teams in finding
and
developing natural gas reserves to profitably grow our reserves and production.
Over the last several years we have focused primarily on the acquisition of
properties in the Antrim and New Albany shale. We have recently begun to acquire
properties in the Woodford shale. As an early stage developer of properties,
we
anticipate reserve growth will be our initial focus followed by a more
traditional balance between reserve and production growth.
Our
Strategy
The
principal elements of our strategy to maximize shareholder value
are:
Generate
growth through drilling
.
We
expect to generate long-term reserve and production growth predominantly through
our drilling activities. We believe the experience and expertise of our
management and technical teams enables us to identify, evaluate and develop
natural gas projects. We anticipate the substantial majority of our future
capital expenditures will be directed toward the drilling of wells, although
we
expect to continue to acquire additional leasehold interests. Initially, we
anticipate reserve growth will be our primary focus with a more balanced reserve
and production growth profile as we continue to execute our growth
strategy.
Focus
on lower risk shale development projects, with selective expenditures outside
our focus areas
.
Most of
our acreage in the Antrim and New Albany shale contains lower risk
unconventional natural gas development plays, including 598,685 net leasehold
acres on which we have identified approximately 2,478 net potential drilling
locations. In the Antrim shale play there have been over 9,000 successful gas
wells drilled and are currently in production. The New Albany shale play is
an
emerging play without the history of the Antrim shale play, but we believe
it
will have similar success characteristics to the Antrim shale play. We believe
that by focusing our drilling budget on development oriented activities in
our
shale areas in the short run, we can maintain high drilling success rates
yielding attractive rates of return. We anticipate committing a small portion
of
our drilling budget to locations outside of our shale project areas to
continually evaluate and test new areas for exploration and development
potential.
Employ
leading edge technologies to grow reserves and production and enhance
returns
.
We
employ several leading edge technologies in the drilling, completion and
development of our natural gas reserves. For example, our employees have
developed and implemented a low pressure natural gas production system to
increase the estimated recoverable reserves and improve production rates of
shale-sourced natural gas. We have installed several low pressure, small modular
style compression facilities in our Antrim shale play. We believe this system
has reduced development costs, increased production rates, extended the
commercial life of existing wells and increased the total amount of reserves
ultimately recoverable from each well bore when compared to the high pressure,
large compression facilities that are typically used in the Antrim shale play.
We believe this innovative system gives us a competitive advantage compared
to
other operators in the area.
Manage
costs by maximizing operational control
.
We seek
to exert control over our exploration, exploitation and development activities.
As the operator of our projects, we have greater control over the amount and
timing of the expenditures associated with those activities. As we manage our
growth, we are focused on reducing lease operating expenses, general and
administrative costs and finding and development costs on a per mcfe basis.
As
of September 30, 2007, we operated 33% of our completed wells.
Pursue
complementary leasehold interest and property
acquisitions
.
We
intend to use our experience and regional expertise to supplement our drilling
strategy with complementary leasehold interest and property
acquisitions.
Our
Strengths
We
believe that our strengths will help us successfully execute our strategy.
These
strengths include:
Inventory
of growth opportunities
.
We have
established an asset base of approximately 598,685 net leasehold acres in our
shale areas, of which approximately 92% were undeveloped as of September 30,
2007. As of that date, we had approximately 2,478 net potential drilling
locations on this acreage. At our current planned drilling rate, this would
accommodate approximately fifteen plus years of drilling activity.
Experienced
management and technical teams
.
Our
four senior executive officers average 26 years of experience in the natural
gas
industry. In addition, we employ one staff geologist, one senior oil and gas
petroleum engineer, and three senior land professionals with an average over
22
years of oil and gas experience.
Operational
control
.
As of
September 30, 2007, we operated approximately 33% of the wells in which we
have
an interest, and we expect our 65% average working interest in leases to allow
us to increase the number of wells we will operate in the future. This will
afford us a significant degree of control over costs and other operational
matters.
Our
Challenges
Investing
in our common stock involves risks. You should read carefully the section of
this prospectus entitled “Risk Factors” beginning on page 7 and “Cautionary Note
Regarding Forward-Looking Statements” on page 18 for an explanation of these
risks before investing in our common stock. In particular, the following
considerations may offset our competitive strengths or have a negative effect
on
our strategy as well as activities on our properties, which could cause a
decrease in the price of our common stock and a loss of all or part of your
investment.
Price
volatility
.
Market
prices for natural gas may fluctuate widely for reasons that are outside of
our
control.
Risks
relating to the development of natural gas reserves
.
Our
natural gas reserves and future production and, therefore, our future cash
flow
and income are highly dependent on our ability to successfully execute our
drilling program, which will require substantially greater amounts of capital
than we currently have available to us.
Risks
relating to natural gas reserve estimates
.
Reserve
estimates are based on many assumptions and our properties may not produce
the
reserves we originally forecast. Our reserves will decline unless we are
successful in finding or acquiring new reserves.
Access
to equipment and personnel
.
Shortages of drilling rigs, equipment, supplies or personnel could delay,
restrict or increase the cost of our exploration, exploitation and development
operations, which in turn could impair our financial condition and results
of
operations.
Operating
Areas
Antrim
Shale
.
Our
Antrim shale properties are located in Michigan and represent our primary area
of development over the near term. Nearly all of our development operations
in
this play/trend are focused on unconventional shale plays. Shale development
typically results in higher drilling success and lower drilling costs when
compared to conventional exploration and development activity.
Antrim
shale underlies the entire Michigan basin. The shale is very thick (140 to
over
200 feet) and has a high percentage of organic content (up to 20%). Due to
the
makeup of the natural fractures in the Antrim shale, production will vary from
well to well.
The
productive, fractured trend for the Antrim shale runs across the northern
portion of the Michigan basin from Lake Huron to Lake Michigan (160 miles).
Gas
wells have been drilled and produced in the Antrim shale from depths of 250
feet
down to 1,500 feet below the surface. A high percentage of the wells drilled
in
the Antrim shale have been put into production and levels of production vary
from well to well. Over 9,000 wells are currently producing in the Antrim shale.
In recent years, 200 to 400 wells have been drilled annually by all operators
in
the Antrim shale.
The
gas
produced from the Antrim shale is primarily a biogenic gas due to the presence
of microbes in the low to medium saline waters. The low-density pay zones in
the
Antrim shale are over 100 feet thick. Methane gas is continuously being
generated by anaerobic bacteria that feed on C02 organic material, and the
heavier oil and gases stored in the shale.
The
Antrim shale gas adsorbs to organic material in a manner similar to gas in
coal
seams. Water in the natural fractures of the shale provides a trapping mechanism
to hold the gas in place. As the water is produced, lowering the fluid and
pressure in the reservoir, gases are released from the organic material and
are
produced to the surface. At depths of less than 1,500 feet, the gas-in-place
is
typically 90% methane or greater, with the balance being C02 and some heavier
gases.
The
oldest Antrim shale gas field was drilled in the 1940s, and it is still in
production today. The production curve for the shale typically contains a peak
rate of gas occurring after the first two years of production when the shale
reservoir has been thoroughly dewatered. Peak rate production usually continues
for some time. After the water is taken from the formation and the gas is able
to fully release from the shale into the well bore, the rate of production
will
typically begin to decline 2% to 7% per year.
We
have
identified the Michigan Antrim shale as an area with natural fractures using
a
variety of diagnostic tests, including a review of production trends, fracture
imaging logs and geological mapping. In management's opinion, based upon
performance information from over 9,000 wells with comparable geologic
characteristics, areas with natural fractures in shale have compelling
production potential.
At
September 30, 2007, we owned working interests in 638 (316 net) Antrim wells.
For the nine months ended September 30, 2007, we drilled or participated in
50
(31 net) wells with a 96% success rate. In 2006, we drilled 173 (98 net) Antrim
wells and successfully completed 164 gross wells for a success rate of 95%.
On
average, our Antrim wells are drilled to depths ranging from 250 to 1,500 feet
targeting reserves of 0.513 bcfe per well based upon our December 31, 2006,
Schlumberger reserve report.
New
Albany shale
.
Our New
Albany shale properties are located in Southern Indiana and Western Kentucky
and
represent a relatively new area of activity for us. Most of our exploratory
and
developmental operations in the Illinois geological basin are focused on
unconventional shale plays. The New Albany shale play, much of which is located
in Indiana, is an emerging play with similar characteristics to the Antrim
shale
play. It is also very thick (100 to over 200 feet) and covers approximately
6,000,000 gross acres, with proven producing pay zones throughout. The shale
is
capped by the Borden shale, a very thick, dense, gray-green shale.
In
the
New Albany shale, a well commonly produces water along with the gas. In the
early 1900's, it was learned that a simple open-hole completion in the very
top
of the shale would yield commercial gas wells that would last for many years,
even while producing some water. Vertical fractures in the shale feed the gas
flow at the top of the shale. The potential of these wells was seldom realized
in the early to mid-twentieth century, as the production systems for handling
the associated water were limited. However, with current technology, the water
can be dealt with cost effectively and allow for better rates of gas
production.
Significant
research and study has been conducted to evaluate the producibility of the
New
Albany shale. In cooperation with the Gas Research Institute, we combined
resources and data with 11 other industry partners in a shale gas producibility
consortium lasting almost two years (concluded in 1999). The consortium
identified critical differences and similarities of the New Albany shale play
to
other shale plays. The consortium study observed that the New Albany shale
reservoir contained high-angled (vertical or nearly so) natural fractures that
are open to unimpeded flow. The predominant fracture system is oriented
east-west with spacing between joints estimated to average five feet based
on
outcrop studies and production simulations. Based on this information, it was
concluded that increases in performance could be achieved with a horizontally
drilled well compared to a vertically drilled well in the same
reservoir.
Reserve
studies were conducted on behalf of the consortium by Schlumberger Holditch
& Associates for both vertical producing wells and horizontal wells. Since
then, we have participated in approximately 30 pilot horizontal well drilling
projects across multiple counties which support the conclusions of the
consortium. With the data from these pilot wells, we have established a
development concept for the New Albany shale, which we began to implement in
2006.
Our
New
Albany shale projects are characterized by declining natural gas and water
production with peak natural gas and water flow rates occurring in the first
60
days. Our New Albany shale wells are drilled to depths ranging from 500 to
3,000
feet and based on our December 31, 2006, Schlumberger reserve report could
yield
an average reserve of 1.2 bcfe per well. At September 30, 2007, we owned working
interests in 59 (16.74 net) New Albany shale wells. For the nine months ended
September 30, 2007, we drilled or participated in 25 (9.17 net) wells with
a
100% success rate. In 2006, we drilled 26 (7.49 net) New Albany shale wells
and
successfully completed 25 of these wells for a success rate of 96%.
Recent
Developments
Refinancing
.
On
August 20, 2007, we entered into a second lien term loan agreement (the “Term
Loan”) with BNP Paribas (“BNP”), as the arranger and administrative agent, and
several other lenders forming a syndication. The initial term loan is $50
million for a 5-year term which may increase up to $70 million under certain
conditions over the life of the loan facility. The proceeds of the loan were
used to pay off our existing mezzanine financing with Trust Company of the
West
(‘”TCW”) and for general corporate purposes.
In
connection with the Term Loan, we also agreed to the amendment and restatement
of our senior secured credit facility with BNP and other lenders, pursuant
to
which the borrowing base under the senior secured credit facility was increased
from the existing authorized borrowing base of $50 million to $70
million.
In
both
the Term Loan and senior secured credit facility, we agreed to an affirmative
covenant regarding production exit rates with the first net production target
being 9.5 MMcfe per day as of June 30, 2007, which we achieved. The second
target production exit target is 10.5 MMcfe per day as of September 30, 2007
(which we have achieved), and the third production exit target is 12.0 MMcfe
per
day as December 31, 2007. In addition, we were required to execute financial
hedges at prices and aggregate notional volumes satisfactory to BNP, as
administrative agent. This requirement has been satisfied.
Upon
execution of the Term Loan, we also entered into a 3-year interest rate swap
transaction with BNP to hedge our exposure to the floating interest rate on
the
Term Loan debt. This hedge transaction on $50 million will yield an effective
interest rate of 11.86% for the period from August 23, 2007 through August
23,
2010.
Effective
August 20, 2007, our subsidiary Aurora Antrim North, L.L.C. (“North”) terminated
its Amended Note Purchase Agreement with TCW which provided $50 million in
mezzanine financing. As of the effective date, North had outstanding borrowing
of $40 million. TCW had limited the borrowing base and the agreement contained
a
commitment expiration date of August 12, 2007. Under the termination provisions,
we were required to pay certain fees and prepayment charges associated with
early termination. The following represents the expenditures paid to TCW: (i)
$40 million payment of principal; (ii) $0.7 million payment of interest expense
from June 27, 2007 through August 20, 2007; (iii) $0.35 million payment of
interest make-whole provision from August 21, 2007 through September 27, 2007;
(iv) $1.25 million payment of prepayment premium; and (v) $0.2 million payment
for a make-whole provision on principal greater than $30 million.
As
part
of the mezzanine financing with TCW, North provided an affiliate of TCW an
overriding royalty interest of 4% in certain leases to be drilled or developed
in the Counties of Alcona, Alpena, Charlevoix, Cheboygan, Montmorency, and
Otsego in the State of Michigan. The overriding royalty interest will also
continue on leases, including extensions or renewals, held by us at August
20,
2007 that may be developed through September 29, 2009.
Woodford
Shale Play
.
We have
established an acreage position of over 30,000 net acres in the Woodford Shale
natural gas play of Oklahoma. In early 2006, in conjunction with a private
operator based in Oklahoma, we had identified a Woodford Shale target area.
Together, the companies initiated the requisite administrative and leasing
efforts required to assemble an acreage block of sufficient scale to offer
competitive advantages and support exploration activities. The identified target
area is focused in central Oklahoma, which is experiencing a significant
increase in leasing and drilling activity. It is positioned among geological
provinces with active Woodford Shale development, with average depths over
5,000
feet and organic shale thickness up to 300 feet.
We
have
expended approximately $6.5 million for an 89% working interest in over 35,000
gross acres in the play. The early leasing activities have allowed us to
establish this competitive position in the targeted play area. Leasing
activities are continuing. We have targeted 2008 for a pilot program of 5 test
wells in its project area. Since our current capital expenditure budget has
been
dedicated to further development of the Antrim and New Albany Shales, we have
been in discussions with potential financing and joint venture partners to
facilitate aggressive development of this acreage. No financing for this
development has been procured as of the date of this prospectus.
Strategic
Alternatives
.
On
September 19, 2007, we announced that we have retained Johnson Rice &
Company, L.L.C. to assist the Board of Directors with investigating strategic
alternatives for us. These alternatives, among other things, may include
revisions to our strategic plan, asset divestitures, operating partnerships,
identifying additional capital sources, or a sale, merger, or other business
combination. We intend to disclose developments regarding the exploration of
alternatives only if and when the Board of Directors has approved a specific
course of action. There is no assurance that this process will result in any
changes to our current strategic direction. There is no specific timeframe
to
complete the review and there are no constraints on options to be explored.
Johnson Rice & Company, L.L.C. will assist our Board of Directors in
reviewing the strategic alternatives, while management continues to focus on
executing our current strategic plan.
Our
Offices
Our
principal executive offices are located at 4110 Copper Ridge Drive,
Suite 100, Traverse City, Michigan 49684, and our telephone number is
231-941-0073. Our website is
www.auroraogc.com
.
Information contained on our website does not constitute a part of this
prospectus.
The
Offering
|
Common
stock offered by us
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Use
of proceeds
|
We
will not receive any of the proceeds from the sale of the shares
by the
selling security holders. We may receive proceeds in connection with
the
exercise of warrants, the underlying shares of which may be sold
by the
selling security holders under this Prospectus. See “Use of
Proceeds.”
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Dividend
policy
|
We
currently anticipate that we will retain all future earnings, if
any, to
finance the growth and development of our business. We do not intend
to
pay cash dividends in the foreseeable future.
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AMEX
market symbol
|
“AOG”
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Risk
factors
|
Investing
in our common stock involves certain risks. You should carefully
consider
the risk factors discussed under the heading “Risk Factors” beginning on
page 7 of this prospectus and other information contained in this
prospectus before deciding to invest in our common
stock.
|
Except
as
otherwise indicated, all information contained in this prospectus:
|
·
|
excludes
5,257,500 shares of common stock reserved for issuance under our 2006
Stock Incentive Plan;
|
|
·
|
excludes
4,523,110 shares of our common stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.24 per
share; and
|
|
·
|
excludes
1,952,000 shares of our common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of
$1.74 per share.
|
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You
should
carefully
consider the following risks and all of the other information contained
in
this
prospectus before deciding to invest in our common stock. The risks
described
below
are not the only ones facing our company. Additional risks not presently
known
to
us
or which we currently consider immaterial also may adversely affect
our
company.
RISKS
RELATED TO OUR BUSINESS
Natural
gas prices are volatile. A substantial decrease in natural gas prices
would
significantly
affect our business and impede our growth.
Our
revenues, profitability and future growth depend upon prevailing natural gas
prices. Prices also affect the amount of cash flow available for capital
expenditures and our ability to borrow and raise additional capital. Lower
prices may also reduce the amount of natural gas that we can economically
produce. It is possible that prices will be low at the time periods in which
the
wells are most productive, thereby reducing overall returns. It is possible
that
prices will drop so low that production will become uneconomical. Ongoing
production costs that will continue include equipment maintenance, compression
and pumping costs. If production becomes uneconomical, we may decide to
discontinue production until prices improve.
Prices
for natural gas fluctuate widely. For example, from January 1, 2006, through
September 30, 2007, natural gas prices quoted for the near month NYMEX contract
have ranged from a low of $4.40 per mmbtu to a high of $11.00 per mmbtu. The
prices for natural gas are subject to a variety of factors beyond our control,
including:
·
the
level of consumer product demand;
·
weather
conditions;
·
domestic
and foreign governmental regulations;
·
the
price and availability of alternative fuels;
·
political conditions in oil and natural gas producing regions;
·
the
domestic and foreign supply of oil and natural gas;
·
speculative trading and other market uncertainty; and
·
worldwide economic conditions.
The
failure to develop reserves could adversely affect our production and cash
flows.
Our
success depends upon our ability to find, develop or acquire natural gas
reserves that are economically recoverable. We will need to conduct successful
exploration or development activities or acquire properties containing proved
reserves, or both. The business of exploring for, developing or acquiring
reserves is capital intensive. We may not be able to make the necessary capital
investment to expand our natural gas reserves from cash flows, and external
sources of capital may be limited or unavailable. Our drilling activities may
not result in significant reserves, and we may not have continuing success
drilling productive wells. Exploratory drilling involves more risk than
development drilling because exploratory drilling is designed to test formations
in which proved reserves have not been discovered. Additionally, while our
revenues may increase if prevailing gas prices increase significantly, our
finding costs for reserves also could increase, and we may not be able to
finance additional exploration or development activities.
We
may have difficulty financing our planned growth.
We
have
incurred and expect to continue to incur substantial capital expenditures and
working capital needs, particularly as a result of our property acquisition
and
development drilling activities. We will require substantial additional
financing to fund our planned growth. Additional financing may not be available
to us on acceptable terms or at all. If additional capital resources are
unavailable, we may be forced to curtail our acquisition, development drilling
and other activities or to sell some of our assets on an untimely or unfavorable
basis. We are in the process of evaluating strategic alternatives as of the
date
of this prospectus.
Most
of our current development activity and producing properties are located
in
Michigan
and Indiana, making us vulnerable to risks associated with operating in
this
region.
Our
current development activity is concentrated in Michigan and Indiana, and our
currently producing properties are located primarily in a six-county area in
Michigan. As a result, we may be disproportionately exposed to the impact of
drilling and other delays or disruptions of production from these regions caused
by weather conditions, governmental regulation, lack of field infrastructure,
or
other events which impact these areas. In addition, a majority of our leaseholds
held for development is located in the more untested New Albany shale
play/trend.
Our
potential drilling locations comprise an estimation of part of our
future
drilling
plans over several years, making them susceptible to uncertainties
that
could
materially alter the occurrence or timing of their
drilling.
As
of
September 30, 2007, we had approximately 4,000 net potential drilling
locations to be included in our future multi-year drilling activities on our
existing acreage. These drilling locations represent a significant part of
our
growth strategy. Our ability to drill and develop these locations depends on
a
number of uncertainties, including the availability of capital, construction
of
infrastructure, seasonal conditions, regulatory approvals, natural gas prices,
costs and drilling results. Because of these uncertainties, we do not know
if
our numerous potential drilling locations will ever be drilled or if we will
be
able to produce natural gas from these or any other potential drilling
locations, which could materially affect our business.
We
may continue to incur losses.
We
reported a net loss for the years ended December 31, 2006, and 2005, and
the nine months ended September 30, 2007. We expect to report a net loss for
the
year ended December 31, 2007, and also expect to show a net reduction in working
capital and shareholder equity for the year ended December 31, 2007. There
is no
assurance that we will be able to achieve and maintain
profitability.
We
do not operate a substantial amount of our
properties.
We
conduct much of our oil and natural gas exploration, development and production
activities in joint ventures with others. In some cases, we act as operator
and
retain significant management control. In other cases, we have reserved only
an
overriding royalty interest and have surrendered all management rights. In
still
other cases, we have reserved the right to participate in management decisions,
but do not have ultimate decision-making authority. As of September 30, 2007,
we
operated 33% of our wells. As a result of these varying levels of management
control, for those properties that we do not operate, we have no control
over:
·
the
number of wells to be drilled;
·
the
location of wells to be drilled;
·
the
timing of drilling and re-completing of wells;
·
the
field company hired to drill and maintain the wells;
·
the
timing and amounts of production;
·
the
approval of other participants in drilling wells;
·
development and operating costs;
·
capital
calls on working interest owners; and
·
pipeline
nominations.
These
and
other aspects of the operation of our properties and the success of our drilling
and development activities will in many cases be dependent on the expertise
and
financial resources of our joint venture partners and third-party
operators.
We
may be unable to make acquisitions of producing properties or prospects
or
successfully
integrate them into our operations.
Acquisitions
of producing properties and undeveloped oil and natural gas leases have been
an
essential part of our long-term growth strategy. As of September 30, 2007,
we
had acquired approximately 1,277,364 (709,613 net) acres with 153,450 mmcfe
in
net proved reserves. We may not be able to identify suitable acquisitions in
the
future or to finance these acquisitions on favorable terms or at all. In
addition, we compete against other companies for acquisitions, many of whom
have
substantially greater managerial and financial resources than we have. The
successful acquisition of producing properties and undeveloped natural gas
leases requires an assessment of the properties’ potential natural gas reserves,
future natural gas prices, development costs, operating costs, potential
environmental and other liabilities and other factors beyond our control. These
assessments are necessarily inexact and their accuracy inherently uncertain.
Such a review may not reveal all existing or potential problems, nor will it
necessarily permit us to become sufficiently familiar with the properties to
fully assess their merits and deficiencies. Significant acquisitions can change
the nature of our operations and business depending upon the character of the
acquired properties, which may be substantially different in operating and
geological characteristics or geographic location than existing properties.
Our
acquisitions may not be integrated successfully into our operations and may
not
achieve desired profitability objectives.
We
may lose key management personnel.
Our
current management team has substantial experience in the oil and natural gas
business. We only have an employment agreement with one member of our management
team. The loss of any of these individuals could adversely affect our business.
If one or more members of our management team dies, becomes disabled or
voluntarily terminates employment with us, there is no assurance that a suitable
or comparable replacement will be found.
Much
of our proved reserves are not yet generating production
revenues.
Of
our
proved natural gas reserves as of December 31, 2006, approximately 54% are
classified as proved developed producing, 15% are classified as proved developed
non-producing, and 31% are classified as proved undeveloped.
You
should be aware that our ability to convert proved reserves into revenues is
subject to certain limitations, including the following:
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Reserves
characterized as proved developed producing reserves may be producing
predominantly water and generate little or no production
revenue;
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Production
revenues from estimated proved developed non-producing reserves will
not
be realized until some time in the future, after we have installed
supporting infrastructure or taken other necessary steps. It will
be
necessary to incur additional capital expenditures to install this
required infrastructure;
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Production
revenues from estimated proved undeveloped reserves will not be realized
until after such time, if ever, as we make significant capital
expenditures with respect to the development of such reserves, including
expenditures to fund the cost of drilling wells, dewatering the wells,
and
building the supporting
infrastructure; and
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The
reserve data assumes that we will make significant capital expenditures
to
develop our reserves. Although we have prepared estimates of the
costs
associated with developing these reserves in accordance with industry
standards, no assurance can be given that our estimates of capital
expenditures will prove accurate, that our financing sources will
be
sufficient to fully fund our planned development activities, or that
development activities will be either successful or in accordance
with our
schedule. We cannot control the performance of our joint venture
partners
on whom we depend for development of a substantial number of properties
in
which we have an economic interest and which are included in our
reserves.
Further, any significant decrease in oil and natural gas prices or
any
significant increase in the cost of development could result in a
significant reduction in the number of wells drilled. No assurance
can be
given that any wells will yield commercially viable
quantities.
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Our
oil and natural gas reserve data are estimates based
on
assumptions
that may be inaccurate and existing economic and operating
conditions
that
may differ from future economic and operating
conditions.
Reservoir
engineering is a subjective and inexact process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner
and is based upon assumptions that may change from year to year and vary
considerably from actual results. Accordingly, reserve estimates may be subject
to downward or upward adjustment. Actual production, revenue and expenditures
with respect to our reserves will likely vary from estimates, and such variances
may be material. Information regarding discounted future net cash flows should
not be considered as the current market value of the estimated oil and natural
gas reserves that will be attributable to our properties. Examples of items
that
may cause our estimates to be inaccurate include, but are not limited to, the
following:
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The
estimated discounted future net cash flows from proved reserves are
based
on prices and costs as of the date of the estimate, while actual
future
prices and costs may be materially higher or
lower;
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Because
we have limited operating cost data to draw upon, the estimated operating
costs used to calculate our reserve values may be
inaccurate;
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Actual
future net cash flows also will be affected by factors such as the
amount
and timing of actual production, supply and demand for oil and natural
gas, increases or decreases in consumption, and changes in governmental
regulations or taxation;
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The
reserve report for our Michigan Antrim properties assumes that production
will be generated from each well for a period of 50 years. Because
production is expected for such an extended period of time, the
probability is enhanced that conditions at the time of production
will
vary materially from the current conditions used to calculate future
net
cash flows; and
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The
10% discount factor, which is required by the Financial Accounting
Standards Board in Statement of Financial Accounting Standards No. 69
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor
based on
interest rates in effect from time to time and risks that will be
associated with our operations or the oil and natural gas industry
in
general.
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Our
drilling activities may be unsuccessful.
We
cannot
predict prior to drilling and testing a well whether the well will be productive
or whether we will recover all or any portion of our investment in the well.
Our
drilling for natural gas may involve unprofitable efforts, not only from dry
holes but from wells that are productive but do not produce sufficient
quantities to cover drilling and completion costs and are not economically
viable. Our efforts to identify commercially productive reservoirs, such as
studying seismic data, the geology of the area and production history of
adjoining fields, do not conclusively establish that natural gas is present
in
commercial quantities. If our drilling efforts are unsuccessful, our
profitability will be adversely affected. For the 21-month period ending
September 30, 2007, approximately 7% of the gross wells we drilled were
unsuccessful.
Production
levels cannot be predicted with certainty.
Until
a
well is drilled and has been in production for a number of months, we will
not
know what volume of production we can expect to achieve from the well. Even
after a well has achieved its full production capacity, we cannot be certain
how
long the well will continue to produce or the production decline that will
occur
over the life of the well. Estimates as to production volumes and production
life are based on studies of similar wells (of which there are relatively few
in
the New Albany play) and, therefore, are speculative and not fully reliable.
As
a result, our revenue budgets for producing wells may prove to be
inaccurate.
Drilling
and production delays may occur.
In
order
to generate revenues from the sale of oil and natural gas production from new
wells, we must complete significant development activity. Delay in receiving
governmental permits, adverse weather, a shortage of labor or parts, and/or
dewatering time frames may cause delays, as discussed below. These delays will
result in delays in achieving revenues from these new wells.
Oil
and
natural gas producers often compete for experienced and competent drilling,
completion and facilities installation vendors and production laborers. The
unavailability of experienced and competent vendors and laborers may cause
development and production delays.
From
time
to time, vendors of equipment needed for oil and natural gas drilling and
production become backlogged, forcing delays in development until suitable
equipment can be obtained.
For
each
new well, before drilling can commence, we will have to obtain a drilling permit
from the state in which the well is located. We will also have to obtain a
permit for each salt water disposal well. It is possible that for reasons
outside of our control, the issuance of the required permits will be delayed,
thereby delaying the time at which production is achieved. We have previously
experienced a delay in receiving permits from the State of Michigan, Department
of Environmental Quality ("DEQ"), for drilling horizontal wells, while the
DEQ
further reviews this drilling methodology. As a result of these delays, we
have
had to defer the drilling of certain wells in the Antrim shale until the review
by the DEQ was completed and permits were issued. The DEQ has also forced
producers to discontinue operations in certain areas of the Michigan Antrim
so
that the DEQ can inspect the salt water disposal wells operated in those areas.
We have no control over this type of regulatory delay.
The
DEQ
has also recently instituted a water sampling and monitoring requirement for
wells north of a line that includes three of our Antrim projects. The drilling
permits for these wells require produced water monitoring and reporting of
gas
and water volume and water quality. If the water produced by a well has levels
of dissolved solid concentration below specified levels, we may be required
to
shut-in the well. If the well cannot be remediated so that fresh water is no
longer produced, we may be required to plug the well.
Adverse
weather may foreclose any drilling or development activity, forcing delays
until
more favorable weather conditions develop. This is more likely to occur during
the winter and spring months, but can occur at other times of the
year.
Different
natural gas reservoirs contain different amounts of water. The actual amount
of
time required for dewatering with respect to each well cannot be predicted
with
accuracy. The period of time when the volume of gas that is produced is limited
by the dewatering process may be extended, thereby delaying revenue
production.
Pipeline
capacity may be inadequate.
Because
of the nature of natural gas development, there may be periods of time when
pipeline capacity is inadequate to meet our gas transportation needs. It is
often the case that as new development comes online, pipelines are close to
or
at capacity before new pipelines are built. During periods when pipeline
capacity is inadequate, we may be forced to reduce production or incur
additional expense as existing production requires additional compression to
enter existing pipelines.
Our
reliance on third parties for gathering and distribution could curtail
future
exploration
and production activities.
The
marketability of our production will depend on the proximity of our reserves
to,
and the capacity of, third party facilities and services, including oil and
natural gas gathering systems, pipelines, trucking or terminal facilities,
and
processing facilities. The unavailability or insufficient capacity of these
facilities and services could force us to shut-in producing wells, delay the
commencement of production, or discontinue development plans for some of our
properties, which would adversely affect our financial condition and
performance. During 2006, production was hampered by curtailments in a
third-party processing facility. We have since completed construction of our
own
processing facility and built an alternative pipeline route in response to
this
curtailment.
There
is a potential for increased costs.
The
oil
and natural gas industry has historically experienced periods of rapidly
increasing drilling and production costs, frequently during times of increased
drilling activities. If significant cost increases occur with respect to our
development activity, we may have to reduce the number of wells we drill, which
may adversely affect our financial performance.
We
may incur compression difficulties and expense.
As
production of natural gas increases, more compression is generally required
to
compress the production into the pipeline. As more compression is required,
production costs increase, primarily because more fuel is required in the
compression process. Furthermore, because compression is a mechanical process,
a
breakdown may occur that will cause us to be unable to deliver natural gas
until
repairs are made.
We
may not have good and marketable title to our
properties.
It
is
customary in the oil and natural gas industry that upon acquiring an interest
in
a non-producing property, only a preliminary title investigation is done at
that
time and that a drilling title opinion is done prior to the initiation of
drilling, neither of which can substitute for a complete title investigation.
We
have followed this custom to date and intend to continue to follow this custom
in the future. Furthermore, title insurance is not available for mineral leases,
and we will not obtain title insurance or other guaranty or warranty of good
title. If the title to our prospects should prove to be defective, we could
lose
the costs that we have incurred in their acquisition or incur substantial costs
for curative title work.
Competition
in our industry is intense, and we are smaller and have a more
limited
operating
history than most of our competitors.
We
compete with major and independent oil and natural gas companies for property
acquisitions and for the equipment and labor required to develop and operate
these properties. Most of our competitors have substantially greater financial
and other resources than we do. In addition, larger competitors may be able
to
absorb the burden of any changes in federal, state and local laws and
regulations more easily than we can, which would adversely affect our
competitive position. These competitors may be able to pay more for exploratory
prospects and productive oil and natural gas properties and may be able to
define, evaluate, bid for and purchase a greater number of properties and
prospects than we can. Our ability to explore for oil and natural gas prospects
and to acquire additional properties in the future will depend on our ability
to
conduct operations, to evaluate and select suitable properties and to complete
transactions in this highly competitive environment.
Oil
and natural gas operations involve various operating
risks.
The
oil
and natural gas business involves operating hazards such as well blowouts,
craterings, explosions, uncontrollable flows of crude oil, natural gas or well
fluids, fires, formations with abnormal pressures, pipeline ruptures or spills,
pollution, releases of toxic gas and other environmental hazards and risks.
Personal injuries, damage to property and equipment, reservoir damage, or loss
of reserves may occur if such a catastrophe occurs, any one of which could
cause
us to experience substantial losses. In addition, we may be liable for
environmental damage caused by previous owners of properties purchased or leased
by us.
Federal
and state regulation of oil and natural gas production and transportation,
tax
and energy policies, changes in supply and demand and general economic
conditions all could adversely affect our ability to produce and market our
natural gas and crude oil. Production from natural gas wells in many geographic
areas of the United States has been curtailed or shut-in for considerable
periods of time due to a lack of market demand, and such curtailments may
continue for a considerable period of time in the future. There may be an excess
supply of natural gas in areas where our operations will be conducted. If so,
it
is possible that there will be no market or a very limited market for our
production.
As
a
result of operating hazards, regulatory risks and other uninsured risks, we
could incur substantial liabilities to third parties or governmental entities,
the payment of which could reduce or eliminate funds available for exploration,
development or acquisitions.
We
may lack insurance that could lower risks to our
investors.
We
have
procured insurance policies for general liability, property/pollution, well
control and director and officer liability in amounts considered by management
to be adequate, as well as a $20 million excess liability umbrella policy.
Nonetheless, the policy limits may be inadequate in the case of a catastrophic
loss, and there are some risks that are not insurable. We have limited business
interruption insurance. An uninsured loss could adversely affect our financial
performance.
Our
credit facilities have operating restrictions and financial covenants that
limit
our
flexibility and may limit our borrowing capacity; needed increases in
borrowing
capacity
may not be available.
As
of
September 30, 2007, our outstanding debt includes a senior credit facility
with
a current approved borrowing base of $70 million, $46 million of which is
currently drawn, and a five-year second lien term loan facility with a current
approved borrowing base of $50 million, of which $50 million is
currently drawn, and a $5 million revolving line of credit, which expired
on October 15, 2007. All of our credit facilities, other than our office
mortgage loan, have operational restrictions and credit ratio compliance
requirements that limit our flexibility. If the ratio requirements are not
satisfied, curative action may be required, such as repaying a part of the
outstanding principal, and we will be unable to draw more funds to use in
development. We may not have sufficient funds available to make any required
repayment, which could cause us to be in default of our credit
facilities.
The
value
of the assets pledged as collateral under our senior credit facility and second
lien term loan facility will depend on the then current commodity prices for
natural gas. If prices drop significantly, we may have trouble satisfying the
ratio covenants of these credit facilities. As noted above, oil and natural
gas
prices are volatile.
In
order
to execute our current development plan we will need to increase our credit
availability as we add proved reserves. If we are unable to convert our assets
to proved reserves at our planned pace, or if the value of our proved reserves
drops as described above, we may be unable to increase our available credit
as
needed. Furthermore, any increases to our available credit will be entirely
within the discretion of our lenders and may not be available to us even if
we
are successful in increasing the value of our proved reserves.
If
we are
unable to make use of our credit facilities, it may be difficult to find
replacement sources of financing to use for working capital, capital
expenditures, drilling, technology purchases or other purposes. Even if
replacement financing is available, it may be on less advantageous terms than
the current credit facilities. If we are unable to obtain increases in our
borrowing capacity as needed, we may be unable to execute our development
plan.
Our
debt level and the covenants in our credit facility agreements could negatively
impact our financial condition, results of operations and business
prospects.
Our
level
of indebtedness, and the covenants contained in our credit facility agreements,
could have important consequences for our operations, including:
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increasing
our vulnerability to general adverse economic and industry conditions
and
detracting from our ability to withstand successfully a downturn
in our
business or the economy generally;
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requiring
us to dedicate a substantial portion of our cash flow from operations
to
required payments on debt, thereby reducing the availability of cash
flow
for working capital, capital expenditures and other general business
activities;
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limiting
our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions and general corporate
and
other activities;
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limiting
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we operate;
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placing
us at a competitive disadvantage relative to other less leveraged
competitors; and
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making
us vulnerable to increases in interest rates, because borrowings
under our
credit facility may be at rates prevailing at the time of each
borrowing.
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We
may incur non-cash charges to our operations as a result of current and future
financing transactions
.
Under
current accounting rules and requirements, we may incur additional non-cash
charges to future operations beyond the stated contractual interest payments
required under our current and potential future credit facilities. While such
charges are generally non-cash, they would impact our results of operations
and
earnings per share and could be material.
We
have hedged and may continue to hedge a portion of our production, which
may
result
in our making cash payments or prevent us from receiving the full benefit
of
increases
in prices for oil and natural gas.
In
order
to reduce our exposure to short-term fluctuations in the price of oil and
natural gas, and in some cases as required by our lenders, we periodically
enter
into hedging arrangements. Our hedging arrangements apply to only a portion
of
our production and provide only partial price protection against declines in
oil
and natural gas prices. Such hedging arrangements may expose us to risk of
financial loss in certain circumstances, including instances where production
is
less than expected, our customers fail to purchase contracted quantities of
oil
or natural gas or a sudden, unexpected event materially impacts oil or natural
gas prices. In addition, our hedging arrangements may limit the benefit to
us of
increases in the price of oil and natural gas.
We
will be subject to the requirements of Section 404 of the Sarbanes-Oxley
Act.
If
we are unable to timely comply with Section 404 or if the costs related
to
compliance
are significant, our profitability, stock price and results of
operations
and
financial condition could be materially adversely
affected.
We
will
be required to comply with the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002 as of December 31, 2007. Section 404
requires that we document and test our internal controls over financial
reporting and issue management’s assessment of our internal controls over
financial reporting. This section also requires that our independent registered
public accounting firm opine on those internal controls and management’s
assessment of those controls. We will be required to evaluate our existing
controls against the criteria established in "Internal Control — Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO. During the course of our ongoing evaluation and integration
of the internal control over financial reporting, we may identify areas
requiring improvement, and we may have to design enhanced processes and controls
to address issues identified through this review.
We
believe that the out-of-pocket costs, the diversion of management’s attention
from running the day-to-day operations and operational changes caused by the
need to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act could be significant. If the time and costs associated with such compliance
significantly exceed our current expectations, our results of operations could
be materially affected.
We
cannot
be certain at this time that we will be able to successfully complete the
procedures, certification and attestation requirements of Section 404 or
that we or our auditors will not identify material weaknesses in internal
control over financial reporting. If we fail to comply with the requirements
of
Section 404 or if we or our auditors identify and report such material
weakness, the accuracy and timeliness of the filing of our annual and quarterly
reports may be materially adversely affected and could cause investors to lose
confidence in our reported financial information, which could have a negative
effect on the trading price of our common stock. In addition, a material
weakness in the effectiveness of our internal controls over financial reporting
could result in an increased chance of fraud and the loss of customers, reduce
our ability to obtain financing and require additional expenditures to comply
with these requirements, each of which could have a material adverse effect
on
our business, results of operations and financial condition.
We
are subject to complex federal, state and local laws and regulations that
could
adversely
affect our business.
Oil
and
natural gas operations are subject to various federal, state and local
government laws and regulations, which may be changed from time to time in
response to economic or political conditions. Matters that are typically
regulated include:
·
discharge
permits for drilling operations;
·
drilling
bonds;
·
reports
concerning operations;
·
spacing
of wells;
·
unitization and pooling of properties;
·
environmental protection; and
·
taxation.
From
time
to time, regulatory agencies have imposed price controls and limitations on
production by restricting the rate of flow of oil and natural gas wells below
actual production capacity to conserve supplies of natural gas and crude oil.
We
also are subject to changing and extensive tax laws, the effects of which we
cannot predict.
The
development, production, handling, storage, transportation and disposal of
natural gas and crude oil, by-products and other substances and materials
produced or used in connection with oil and natural gas operations are subject
to laws and regulations primarily relating to protection of human health and
the
environment. The discharge of natural gas, crude oil or pollutants into the
air,
soil or water may give rise to significant liabilities on our part to the
government and third parties and may result in the assessment of civil or
criminal penalties or require us to incur substantial costs of
remediation.
Legal
and
tax requirements frequently are changed and subject to interpretation, and
we
are unable to predict the ultimate cost of compliance with these requirements
or
their effect on our operations. Existing laws or regulations, as currently
interpreted or reinterpreted in the future, could harm our business, results
of
operations and financial condition.
RISKS
RELATED TO THE OWNERSHIP OF OUR STOCK
We
may experience volatility in our stock price.
For
the
21-month period ending September 30, 2007, our stock traded as high as $7.44
per
share and as low as $1.30 per share. The market price of our common stock may
fluctuate significantly in response to a number of factors, some of which are
beyond our control, including:
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changes
in natural gas prices;
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changes
in the natural gas industry and the overall economic
environment;
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quarterly
variations in operating results;
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changes
in financial estimates by securities analysts;
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changes
in market valuations of other similar companies;
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announcements
by us or our competitors of new discoveries or of significant technical
innovations, contracts, acquisitions, strategic partnerships or joint
ventures;
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additions
or departures of key personnel;
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any
deviations in net sales or in losses from levels expected by securities
analysts; and
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future
sales of our common stock.
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In
addition, the stock market from time to time experiences extreme volatility
that
has often been unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to fall regardless of our
performance.
A
small number of existing shareholders control us and we do not have
cumulative
voting.
In
connection with the closing of the merger of Cadence Resources Corporation
and
Aurora Energy, Ltd. certain of our shareholders, including certain former Aurora
shareholders who became shareholders of us in connection with the merger,
executed and delivered voting agreements pursuant to which they agreed, until
October 31, 2008, to vote their shares of our common stock in favor of
(i) five directors designated by William W. Deneau, who were initially
William W. Deneau, Earl V. Young, Gary J. Myles, Richard Deneau, and Ronald
E.
Huff; and (ii) two directors designated by William W. Deneau from among our
board of directors immediately before the closing of the merger, who were
initially Howard Crosby and Kevin Stulp. Howard Crosby has since resigned from
our board of directors. In addition, these shareholders agreed to vote all
of
their shares of common stock to ensure that the size of our board of directors
will be set and remain at seven directors. After recent amendments to the voting
agreements, an aggregate of 11,702,580 shares, approximately 11.5% of our
outstanding shares, are subject to these voting agreements.
Also
in
connection with the closing of the merger, certain of our shareholders executed
and delivered irrevocable proxies naming William W. Deneau and Lorraine King
as
proxies to vote their shares through October 31, 2008, in the manner
determined by such proxies. An aggregate of approximately 10.7 million
shares of our common stock held by such shareholders was subject to these
proxies at September 30, 2007. These provisions will limit our other
shareholders’ ability to influence the outcome of shareholder votes through
October 31, 2008, including votes concerning the election of directors, the
adoption or amendment of provisions in our articles of incorporation or bylaws
and the approval of mergers and other significant corporate
transactions.
Our
shareholders do not have the right to cumulative voting in the election of
our
directors. Cumulative voting, in some cases, could allow a minority group to
elect at least one director to our board. Because there is no provision for
cumulative voting, a minority group will not be able to elect any directors.
Accordingly, the holders of a majority of the shares of common stock, present
in
person or by proxy, will be able to elect all of the members of our board of
directors.
Our
articles of incorporation contain provisions that discourage a change of
control.
Our
articles of incorporation contain provisions that could discourage an
acquisition or change of control without our board of directors’ approval. Our
articles of incorporation authorize our board of directors to issue preferred
stock without shareholder approval. If our board of directors elects to issue
preferred stock, it could be more difficult for a third party to acquire control
of us, even if that change of control might be beneficial to our
shareholders.
You
may experience dilution of your ownership interests due to the future issuance
of
shares
of our common stock, which could have an adverse effect on our stock
price.
We
may,
in the future, issue our previously authorized and unissued securities,
resulting in the dilution of the ownership interests of our present
shareholders. Our authorized capital stock consists of 250,000,000 shares
of common stock and 20,000,000 shares of preferred stock with such
designations, preferences and rights as may be determined by our board of
directors. On September 30, 2007, we had 101,679,456 shares of common stock
outstanding.
At
September 30, 2007, we had warrants and options outstanding that were
exercisable for 6,475,110 shares of our common stock. We have an additional
5,257,500 shares available for award as either option or stock grants under
our
existing incentive plans. The potential issuance of such additional shares
of
common stock may create downward pressure on the trading price of our common
stock. We may also issue additional shares of our common stock or other
securities that are convertible into or exercisable for common stock in
connection with the hiring of personnel, future acquisitions, private placements
of our securities for capital raising purposes, or for other business purposes.
In the future, we may engage in public offerings of our stock. Future sales
of
substantial amounts of our common stock, or the perception that sales could
occur, could have a material adverse effect on the price of our common
stock.
The
market price of our common stock could be adversely affected by sales
of
substantial
amounts of our common stock in the public markets.
We
have
two shelf registration statements that are currently effective, which together
have registered almost 20.6 million shares of common stock for resale. The
sale of a large number of shares of our common stock pursuant to the resale
registration statements, the perception that any such sale might occur, or
the
issuance of a large number of shares of our common stock in connection with
future acquisitions, equity financings or otherwise, could cause the market
price of our common stock to decline significantly. As of September 30, 2007,
we
had approximately 101.7 million shares of common stock issued and outstanding,
including approximately 10.5 million shares of our common stock held or
controlled by our executive officers and directors. Of those 10.5 million
shares, 8.6 million are subject to lock-up agreements through October 31, 2008,
0.5 million are eligible for resale on two S-8 registration statements, and
the
balance are eligible for sale under Rule 144 ("Rule 144") under the Securities
Act of 1933, as amended (the "Securities Act"). We have two currently effective
S-8 registration statements that, combined, include 469,996 shares owned or
controlled by our executive officers and directors that are registered for
resale.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements within the meaning of Section 27A
of
the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All
statements other than statements of historical facts are forward-looking
statements. You can find many of these statements by looking for words such
as
"believes," "expects," "anticipates," "estimates", "intends", or similar
expressions used in this prospectus.
These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance
or
achievements expressed or implied by us in those statements include, among
others, the following:
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the
quality of our properties with regard to, among other things, the
existence of reserves in economic quantities;
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uncertainties
about the estimates of reserves;
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our
ability to increase our production and oil and natural gas income
through
exploration and development;
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the
number of well locations to be drilled and the time frame within
which
they will be drilled;
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the
timing and extent of changes in commodity prices for natural gas
and crude
oil;
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domestic
demand for oil and natural gas;
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drilling
and operating risks;
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the
availability of equipment, such as drilling rigs and transportation
pipelines;
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changes
in our drilling plans and related budgets;
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the
adequacy of our capital resources and liquidity including, but not
limited
to, access to additional borrowing capacity; and
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other
factors discussed above under the heading "Risks Related To Our
Business".
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Because
such statements are subject to risks and uncertainties, actual results may
differ materially from those expressed or implied by the forward-looking
statements. You are cautioned not to place undue reliance on such statements,
which speak only as of the date of this prospectus.
USE
OF PROCEEDS
We
will
not receive any of the proceeds from the sale of the shares owned by the selling
security holders. We may receive proceeds in connection with the exercise of
warrants, the underlying shares of which may in turn be sold by the selling
security holders. Although the amount and timing of our receipt of any such
proceeds are uncertain, such proceeds, if received, will be used for general
corporate purposes.
PRICE
RANGE OF COMMON STOCK
Our
common stock trades under the symbol AOG on the American Stock Exchange
(“AMEX”). Prior to May 2006, our common stock traded under the symbol CDNR.BB on
the Over-the-Counter Bulletin Board Electronic Quotation System maintained
by the National Association of Securities Dealers. The following chart shows
the
range of high and low bid prices/sales prices for our common stock for each
fiscal quarter in the last two calendar years plus the first three quarters
of
2007. The prices during the time in which our stock traded over-the-counter
are
bid prices, without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions. The prices during the time in which
our stock traded on AMEX are actual sales prices.
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Quarter Ended
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High Bid/
Sales Price
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Low Bid/
Sales Price
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March 31,
2005
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$
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2.95
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$
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1.05
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June 30,
2005
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$
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2.67
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$
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2.00
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September 30,
2005
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$
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3.47
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$
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1.86
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December 31,
2005
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$
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4.85
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$
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3.15
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March 31,
2006
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$
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7.44
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$
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4.45
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June 30,
2006
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$
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6.10
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$
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3.76
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September 30,
2006
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$
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4.74
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$
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2.94
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December
31, 2006
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$
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3.22
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$
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3.08
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March
31, 2007
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$
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3.30
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$
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2.06
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June
30, 2007
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$
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2.77
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$
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1.30
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September
30, 2007
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$
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2.35
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$
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1.37
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On
December 17, 2007, the last reported sale price of our common stock on AMEX
was $1.47 and there were 101,719,456 shares of our common stock outstanding
and
approximately 520 holders of record.
DIVIDEND
POLICY
There
have been no cash dividends declared on our common stock since we were formed.
We do not intend to pay cash dividends on our common stock for the foreseeable
future. Our current credit facilities prohibit our borrowing subsidiaries from
declaring dividends, which means that we will generally not have cash flow
available from which to pay cash dividends.
SELLING
SECURITY HOLDERS
We
issued
to certain of the selling security holders the common stock and the warrants
to
purchase common stock that are covered by this prospectus pursuant to our
merger
with Aurora, which was completed on October 31, 2005. The Aurora shares and
warrants that were converted in the merger, and pursuant to which we issued
the
common stock and warrants covered by this prospectus, were issued by Aurora
in
its private placement in January 2005. This prospectus relates to the resale
from time to time of up to 11,543,125 shares of our common stock that either
(i) have been acquired by the selling security holders identified in this
prospectus directly by exchange of their Aurora common shares in the merger
or
were purchased by certain of the selling security holders pursuant to the
exercise of warrants acquired from Aurora in the January private placement
(which warrants became exercisable for shares of our common stock automatically
as a result of the merger) or (ii) are purchasable by certain of the
selling security holders identified in this prospectus pursuant to the exercise
of warrants acquired from Aurora in the January private placement (which
warrants became exercisable for shares of our common stock automatically
as a
result of the merger). We also issued to certain of the selling security
holders
options to purchase common stock that are covered by this prospectus on
April 15, 2005, and September 30, 2005, pursuant to our 2004 Qualified
Stock Option Plan. This prospectus relates to the resale from time to time
of up
to 50,000 shares that are purchasable by a certain selling security holder
pursuant to the exercise of these options. We filed a registration statement,
of
which this prospectus constitutes a part, in order to permit the selling
security holders to resell to the public the shares of our common stock
described herein.
The
following table sets forth the names of the selling security holders, the number
of shares of common stock beneficially owned by the selling security holders,
the number of shares of common stock being offered by the selling security
holders, the number of shares of common stock each selling security holder
will
beneficially own if the security holder sells all of the shares being registered
and the selling security holder’s percentage ownership of our common stock if
all the shares in the offering are sold. The shares being offered hereby are
being registered to permit public secondary trading, and the selling security
holders may offer all or part of the shares for resale from time to time.
However, the selling security holders are under no obligation to sell all or
any
portion of such shares nor are the selling security holders obligated to sell
any shares immediately under this prospectus. To prevent dilution to the selling
security holders, the following numbers may change because of adjustments to
reflect stock splits, stock dividends, or similar events involving our common
stock.
The
following selling security holders listed below have or within the past three
years have had, material relationships with us or any of our predecessors
or
affiliates: (i) Kevin Stulp currently serves on our Board of Directors, a
position he has held since March 1997; (ii) John Ryan served on our Board
of Directors through October 2005 and served in various officer positions
through May 2006; (iii) Glenn DeHekker served on our Board of Directors
through October 2005; (iv) Jeffrey Christian served on our Board of
Directors through October 2005; and (v) Nathan A. Low, through his
controlled entity, Sunrise Securities Corporation, performed institutional
investor relations services for us and acted as a finder of investors in
various
private placements in which we have previously engaged. None of the other
selling security holders have, nor within the past three years have had,
any
position, office, or other material relationship with us or any of our
predecessors or affiliates, other than as a greater than 5%
shareholder.
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Selling Security Holders
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Shares of
Common Stock
Beneficially
Owned Prior to
Offering*
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Shares of
Common Stock
to be Sold*
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Beneficial
Ownership
After Offering
if all Shares are
Sold*
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Percent of
Class Owned
After Offering
if all Shares
are Sold**
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Rubicon
Master Fund(1)
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3,750,000
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3,750,000
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0
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0
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%
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Crestview
Capital Master, LLC(2)
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5,819,500
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4,320,000
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1,499,500
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1.5
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%
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Bear
Stearns, as Custodian for Nathan A. Low Roth IRA(3)
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8,586,409
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1,600,000
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6,986,409
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6.9
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%
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Electrum
Capital LLC(4)
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3,560,181
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1,600,000
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1,960,181
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1.9
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%
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Elena
Lefkowitz
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80,000
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80,000
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0
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0
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Jeffrey
Christian
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150,734
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64,734
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86,000
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***
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Glen
DeHekker
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111,500
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45,500
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66,000
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***
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John
Ryan(5)
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818,071
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32,891
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785,180
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0.8
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%
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Kevin
Stulp(6)
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527,500
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50,000
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477,500
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0.5
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%
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Totals
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23,403,895
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11,543,125
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11,860,770
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11.7
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%
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*
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This
information is provided as of November 1, 2005, except to the extent
that
we were able to update it based on a Schedule 13D or Schedule 13G
filing
made by the selling security holder after that date. We have, however,
revised our footnotes below to reflect exercises of warrants that
have
occurred since November 1, 2005. Since this registration statement
became
effective, many of the shares included in the registration statement
have
been sold. Except in cases where a Schedule 13D or Schedule 13G have
been
filed, we are not able to track exactly how many shares have been
sold to
date under the registration statement, or how many shares may have
subsequently been acquired by the selling security holders. We are
therefore presenting the information in the first three columns as
of the
time this registration statement became effective, except in the
cases
where a Schedule 13D or Schedule 13G filing reflect different
information.
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**
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The
percent of class information is based upon a total of 101,719,456
shares
of common stock outstanding. However, as reflected in the previous
footnote, the beneficial ownership used to calculate the percent
of class
is based upon the ownership at the time this registration statement
became
effective, except in those situations in which a Schedule 13D or
Schedule
13G have since been filed, in which case the calculation is based
on those
filings.
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(1)
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Based
on a Schedule 13G/A and Form 4 filed with the SEC on November 8,
2006,
pursuant to investment agreements, each of Rubicon Fund Management
Ltd., a
company organized under the laws of the Cayman Islands, which we
refer to
in this footnote as Rubicon Fund Management Ltd., and Rubicon Fund
Management LLP, a limited liability partnership organized under
the laws
of the United Kingdom, which we refer to in this footnote as Rubicon
Fund
Management LLP, Mr. Paul Anthony Brewer, Mr. Jeffrey Eugene Brummette,
Mr.
William Francis Callanan, Mr. Vilas Gadkari, and Mr. Horace Joseph
Leitch
III, share all investment and voting power with respect to the
securities
held by Rubicon Master Fund. Mr. Brewer, Mr. Brummette, Mr. Callanan,
Mr.
Gadkari, and Mr. Leitch control both Rubicon Fund Management Ltd.
and
Rubicon Fund Management LLP. Each of Rubicon Fund Management Ltd.,
Rubicon
Fund Management LLP, Mr. Brewer, Mr. Brummette, Mr. Callanan, Mr.
Gadkari,
and Mr. Leitch disclaim beneficial ownership of these
securities.
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(2)
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Based
on a Schedule 13G filed with the SEC on June 23, 2006, Crestview
Capital
Partners, LLC controls Crestview Capital Master, LLC, and the power
to
vote or dispose of our shares beneficially owned by Crestview Capital
Master, LLC is shared by Stewart Flink, Robert Hoyt and Daniel
Warsh, each
of whom disclaims beneficial ownership of our
shares.
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(3)
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Based
on information included in an amendment to Schedule 13D/A filed
with the
SEC on February 27, 2006, Nathan A. Low has the sole power to vote
or
direct the vote of, and the sole power to direct the disposition
of, the
shares held by the Nathan A. Low Roth IRAs and the shares held
by him
individually. Although Nathan A. Low has no direct voting or dispositive
power over the 828,643 shares of common stock held by the Nathan
A. Low
Family Trust or the 100,000 shares of common stock held in individual
trusts for the Neufeld children, he may be deemed to beneficially
own
those shares because his wife, Lisa Low, is the trustee of the
Nathan A.
Low Family Trust and custodian for the Neufeld children. Therefore,
Nathan
A. Low reports shared voting and dispositive power over 928,643
shares of
common stock. Nathan A. Low controls Sunrise Securities Corporation,
a
registered broker dealer. In this registration statement, he is
not acting
as an underwriter because he purchased the shares in the ordinary
course
of business and represented to us at the time of purchase that
he had no
agreements or understandings, directly or indirectly, with any
party to
distribute the securities.
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(4)
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We
have been advised by the selling security holder that its controlling
person is Thomas S. Kaplan. Based on Schedule 13G filed with the
SEC on
February 13, 2006, Thomas S. Kaplan has the sole voting and dispositive
power over 3,560,181 shares of our common stock as follows: 480,811
shares
owned by Electrum Resources, LLC; 2,129,370 shares and 800,000
shares
issuable upon the exercise of warrants owned by Electrum Capital,
LLC; and
150,000 shares owned by LCM Holdings, LLC.
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(5)
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Based
on a Form 5 filed on February 23, 2006, includes 358,625 shares
of common
stock owned by Nancy Martin-Ryan, 45,000 shares of common stock
owned by
John Ryan as custodian for Karen Ryan, 45,000 shares of common
stock owned
by John Ryan as custodian for Patrick Ryan, and 87,500 shares of
common
stock owned by Andover Capital Corporation.
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(6)
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Shares
of common stock beneficially owned and to be sold includes options to
purchase 50,000 shares of our common
stock.
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PLAN
OF DISTRIBUTION
The
selling security holders may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market, or trading facility on which
the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling security holders may use any one or more of
the
following methods when selling shares:
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·
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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·
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block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
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·
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purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
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·
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an
exchange distribution in accordance with the rules of the applicable
exchange
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·
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privately
negotiated transactions;
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·
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broker-dealers
may agree with the selling security holders to sell a specified number
of
such shares at a stipulated price per
share;
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·
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a
combination of any such methods of sale;
and
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·
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any
other method permitted pursuant to applicable
law.
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The
selling security holders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this
prospectus.
The
selling security holders may also engage in short sales against the box, puts
and calls, and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
However, selling security holders may not engage in short sales before this
registration statement becomes effective.
Broker-dealers
engaged by the selling security holders may arrange for other brokers-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling security holders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling security holders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions, and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling security holder.
The selling security holders may agree to indemnify any agent, dealer, or
broker-dealer that participates in transactions involving sales of the shares,
if liabilities are imposed on that person under the Securities Act.
The
selling security holders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if
they
default in the performance of their secured obligations, the pledges or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling security holders to include the pledge, transferee, or
other
successors in interest as selling security holders under this
prospectus.
The
selling security holders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledges, or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act of 1933 amendment the list
of
selling security holders to include the pledge, transferee, or other successors
in interest as selling security holders under this prospectus.
The
selling security holders and any broker-dealers or agents that are involved
in
selling the shares of common stock may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act. The selling
security holders have advised us that they have acquired their securities in
the
ordinary course of business, and they have not entered into any agreements,
understandings, or arrangements with any underwriters or broker-dealers
regarding the sale of their shares of common stock, nor is there an underwriter
or coordinating broker acting in connection with a proposed sale of shares
of
common stock by any selling security holder. If the selling security holders
use
this prospectus for any sale of the shares of common stock, they will be subject
to the prospectus delivery requirements of the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify the selling security holders
against certain losses, claims, damages, and liabilities, including liabilities
under the Securities Act.
The
anti-manipulation rules of Regulation M under the Securities Exchange Act of
1934 may apply to sales of our common stock and activities of the selling
security holders.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 250,000,000 shares of common stock,
par value $0.01 per share and 20,000,000 shares of preferred stock,
par value $0.01 per share. As of September 30, 2007, we had
101,679,456 shares of common stock issued and outstanding.
Common
Stock
The
holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. Accordingly, holders
of a majority of the shares of our common stock entitled to vote in any election
of directors may elect all of the directors standing for election. Holders
of
common stock are entitled to receive ratably such dividends as may be declared
by the board out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled
to
share ratably in the assets remaining after payment of liabilities. Holders
of
our common stock have no preemptive, conversion or redemption rights. All of
the
outstanding shares of common stock are fully paid and
non-assessable.
Holders
As
of
September 30, 2007, there were 527 holders of record for our common stock,
although we believe that there are additional beneficial owners of our common
stock who own their shares in “street name.”
Preferred
Stock
Our
board
of directors may, without shareholder approval, establish and issue shares
of
one or more classes or series of preferred stock having the designations, number
of shares, dividend rates, liquidation preferences, redemption provisions,
sinking fund provisions, conversion rights, voting rights and other rights,
preferences and limitations that our board may determine. Our board may
authorize the issuance of preferred stock with voting, conversion and economic
rights senior to the common stock so that the issuance of preferred stock could
adversely affect the market value of the common stock. The creation of one
or
more series of preferred stock may adversely affect the voting power or other
rights of the holders of common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things and under some circumstances,
have
the effect of delaying, deferring or preventing a change in control without
any
action by shareholders. Our board of directors previously authorized the
issuance of 2,500,000 shares of Class A Preferred Shares. As of
September 30, 2007, there were no remaining shares of our Class A
Preferred Shares outstanding.
No
other
classes or series of preferred stock are currently authorized or
outstanding.
Stock
Certificates
Our
bylaws permit each shareholder to elect whether to hold our stock as an
uncertificated security or in the form of a paper stock certificate.
Shareholders holding uncertificated securities will receive a written
information statement summarizing their holdings. We participate in the Direct
Registration System through our transfer agent.
Warrants
The
warrants being registered in connection with the January Private Placement
are
exercisable at $1.75 per share and expire on January 31, 2009. The warrants
may
be exercised in whole or in part, subject to the limitations provided in the
warrants. Any warrant holders who do not exercise their warrants prior to the
conclusion of the exercise period will forfeit the right to purchase the shares
of common stock underlying the warrants and any outstanding warrants will become
void and be of no further force or effect. If at any time while any of the
warrants are outstanding we issue common stock or securities convertible into
common stock to any person at a price per share of common stock less than the
exercise price of the warrants, the exercise price of the warrants will be
reduced pursuant to a formula as provided in the warrant. In addition, in the
event of a merger, consolidation, or sale of all or substantially all of our
assets, the holder of the warrant has the right to receive a warrant
substantially similar to the warrant or, at the option of the holder of the
warrant, an amount in cash equal to the value of the warrant. If a dividend
is
declared on our common stock, the exercise price of the warrant will be reduced
in accordance with the terms of the warrant and the number of shares of common
stock the warrant is exercisable for will be proportionately increased. If
we
were to offer any securities to its holders of common stock as a class, the
holder of the warrant would be entitled to purchase such number of securities
as
if the warrant holder were a holder of common stock.
Holders
of the warrants have no voting rights of a shareholder, no liquidation
preference, and no dividends will be declared on the warrants.
Transfer
Agent and Registrar
Our
transfer agent and registrar is Mellon Investor Services.
LEGAL
MATTERS
The
validity of the shares of common stock offered in this prospectus has been
passed upon for us by Fraser Trebilcock Davis & Dunlap, P.C.,
Lansing, Michigan.
EXPERTS
Our
consolidated financial statements for the years ended December 31, 2006 and
December 31, 2005 have been audited by Rachlin Cohen & Holtz LLP,
an independent registered public accounting firm, as indicated in their
accompanying report. These financial statements and accompanying report are
incorporated by reference in this prospectus in reliance on the authority of
Rachlin Cohen & Holtz LLP as an expert in auditing and
accounting.
The
reference to (and inclusion of) the reports of Data & Consulting
Services, Division of Schlumberger Technology Corporation, also referred to
as
Schlumberger Holditch in filings incorporated by reference, with respect to
estimates of proved reserves of oil and natural gas located in Michigan and
Indiana, and the reference to (and inclusion of) reports of acquired proved
reserves estimated by Netherland, Sewell & Associates, Inc. and Ralph
E. Davis Associates, Inc., is made in reliance upon the authority of these
firms
as experts with respect to such matters.
CHANGE
IN INDEPENDENT AUDITORS
On
March
23, 2007, after the completion of the audit of our financial statements for
the
years ended December 31, 2006 and 2005, we dismissed Rachlin Cohen &
Holtz LLP as our independent auditors. The report of Rachlin Cohen & Holtz
LLP on our financial statements for the years ended December 31, 2006 and 2005,
contained no adverse opinion or disclaimer of opinion and was not qualified
or
modified as to uncertainty, audit scope, or accounting principles. In connection
with its audit for the years ended December 31, 2006 and 2005, there have been
no disagreements with Rachlin Cohen & Holtz LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope
or
procedure, which disagreements, if not resolved to the satisfaction of Rachlin
Cohen & Holtz LLP, would have caused them to make reference thereto in their
report on the financial statements for such years except as described in the
following paragraph:
As
described under Item 3 of our Form 10-QSB/A for the quarter ended March 31,
2006
(as filed on October 31, 2006), Rachlin Cohen & Holtz LLP advised us and we
disclosed that we had a material weakness resulting from a deficiency in
internal controls relating to the lack of accounting recognition given to the
stock option grants authorized and approved by the Board of Directors in March
2006, which resulted in (a) the financial statements being modified to
account for all of the stock option grants in accordance with the applicable
provisions of Statement of Financial Accounting Standards No. 123(R) and
(b) remedial actions being taken by us. In addition, as described under
Item 3 of our Form 10-QSB/A for the quarter ended June 30, 2006 (as filed on
October 31, 2006), we validated the remedial actions taken to correct the
material weakness in connection with the reporting of stock option
compensation.
The
decision to change firms was approved by our Audit Committee of the Board of
Directors.
We
engaged Weaver and Tidwell L.L.P. as our new independent auditors effective
March 23, 2007, and we have relied upon Weaver and Tidwell L.L.P. as an expert
in auditing and accounting from that date.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC a registration statement on Form S-3 under the
Securities Act covering the securities offered by this prospectus. This
prospectus, which constitutes a part of that registration statement, does not
contain all of the information that you can find in that registration statement
and its exhibits. Certain items are omitted from this prospectus in accordance
with the rules and regulations of the SEC. For further information about us
and
the common stock offered by this prospectus, reference is made to the
registration statement and the exhibits filed with the registration statement.
Statements contained in this prospectus and any prospectus supplement as to
the
contents of any contract or other document referred to are not necessarily
complete and in each instance such statement is qualified by reference to each
such contract or document filed as part of the registration statement. We are
subject to the information and reporting requirements of the Exchange Act,
and
are therefore required to file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read any materials we
file with the SEC free of charge at the SEC’s Public Reference Room at 100 F
Street, N.E., Washington, D.C. 20549. Copies of all or any part of these
documents may be obtained from such office upon the payment of the fees
prescribed by the SEC. The public may obtain information on the operation of
the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains
an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the SEC. The
address of the site is
www.sec.gov
.
The
registration statement, including all exhibits thereto and amendments thereof,
has been filed electronically with the SEC. We also post our SEC filings on
our
website:
www.auroraogc.com
.
INFORMATION
INCORPORATED BY REFERENCE
The
SEC
allows us to “incorporate by reference” into this prospectus the information we
provide in other documents filed by us with the SEC. The information
incorporated by reference is an important part of this prospectus and any
prospectus supplement. Any statement contained in a document that is
incorporated by reference in this prospectus is automatically updated and
superseded if information contained in this prospectus and any prospectus
supplement, or information that we later file with the SEC, modifies and
replaces this information. We incorporate by reference the following documents
that we have filed with the SEC:
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·
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Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2006,
filed
on March 15, 2007.
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·
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Annual
Proxy Statement on Schedule 14A filed on April 2,
2007.
|
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·
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Quarterly
Report on Form 10-Q for the three months ended March 31, 2007, filed
on
May 14, 2007.
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·
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Quarterly
Report on Form 10-Q for the three months ended June 30, 2007, filed
on
August 9, 2007.
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·
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Quarterly
Report on Form 10-Q for the three months ended September 30, 2007,
filed
on November 14, 2007.
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·
|
The
following Current Reports on Form 8-K filed by us with the SEC since
December 31, 2006:
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(1)
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Current
Report on Form 8-K filed on March 15, 2007;
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(2)
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Current
Report on Form 8-K filed on March 29, 2007;
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(3)
|
Current
Report on Form 8-K filed on May 24, 2007;
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(4)
|
Current
Report on Form 8-K filed on May 30, 2007;
|
|
|
(5)
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Current
Report on Form 8-K filed on June 27, 2007;
|
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|
(6)
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Current
Report on Form 8-K filed on August 22, 2007;
|
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(7)
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Current
Report on Form 8-K filed on September 24, 2007;
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(8)
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Current
Report on Form 8-K filed on October 26, 2007;
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(9)
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Current
Report on Form 8-K filed on October 29, 2007; and
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(10)
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Current
Report on Form 8-K filed on November 14,
2007.
|
We
also
incorporate by reference any documents that are subsequently filed with the
SEC
pursuant to Sections 13(a), 13(c) or 15(d) of the Securities Exchange Act of
1934, prior to the termination of this offer.
You
may
request a copy of these filings at no cost by writing or telephoning us at
the
following address or telephone number:
Aurora
Oil & Gas Corporation
4110
Copper Ridge Drive, Suite 100
Traverse
City, Michigan 49684
Attention:
Investor Relations
(231)
941-0073
DISCLOSURE
OF COMMISSION POSITION OF
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our
bylaws provide that our directors and officers will be indemnified to the
fullest extent permitted by the Utah Corporation Code. However, such
indemnification does not apply to acts of intentional misconduct, a knowing
violation of law, or any transaction where an officer or director personally
received a benefit in money, property, or services to which the director was
not
legally entitled.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers, and controlling persons of the company
pursuant to the foregoing provisions, we have been informed that, in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
APPENDIX A
GLOSSARY
OF OIL AND NATURAL GAS TERMS
The
following is a description of the meanings of some of the oil and natural gas
industry terms used in this prospectus.
bbl.
Stock
tank barrel, or 42 U.S. gallons liquid volume, used in this prospectus in
reference to crude oil or other liquid hydrocarbons.
bcfe.
Billion
cubic feet equivalent, determined using the ratio of six mcf of natural gas
to
one bbl of crude oil, condensate or natural gas liquids.
Biogenic
gas.
Gas
produced by methanogenic bacteria or microbes. Predominately methane gas with
<1% higher chain hydrocarbons.
Completion.
The
process of treating a drilled well followed by the installation of permanent
equipment for the production of natural gas or oil, or in the case of a dry
hole, the reporting of abandonment to the appropriate agency.
Compression.
Process
of taking a gas or compressible fluid from a low pressure to a higher
pressure.
Dewatering.
The
system whereby brine water is removed from the well in order to allow the
gas/oil to be released. Pumping mechanisms are usually used for this process.
New wells may have great amounts of water, which must first be removed. As
water
is removed, gas/oil production usually increases.
Drilling
locations.
Total
gross locations specifically quantified by management to be included in our
multi-year drilling activities on existing acreage. Our actual drilling
activities may change depending on the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices, costs, drilling
results and other factors.
Field.
An area
consisting of either a single reservoir or multiple reservoirs, all grouped
on
or related to the same individual geological structural feature and/or
stratigraphic condition.
Finding
and development costs.
Capital
costs incurred in the acquisition, exploitation and exploration of proved oil
and natural gas reserves divided by proved reserve additions and revisions
to
proved reserves.
Formation.
An
identifiable layer of rocks named after its geographical location and dominant
rock type.
Gross
acres, gross wells or gross reserves.
The
total acres, wells, or reserves as the case may be, in which a working interest
is owned.
Lease.
A legal
contract that specifies the terms of the business relationship between an energy
company and a landowner or mineral rights holder on a particular tract of
land.
Leasehold.
Mineral
rights leased in a certain area to form a project area.
mcf.
Thousand
cubic feet of natural gas.
mcfe.
Thousand
cubic feet equivalent, determined using the ratio of six mcf of natural gas
to
one bbl of crude oil, condensate or natural gas liquids.
mmbtu.
Million
British Thermal Units.
mmcfe.
Million
cubic feet equivalent, determined using the ratio of six mcf of natural gas
to
one bbl of crude oil, condensate or natural gas liquids.
Net
acres, net wells, or net reserves.
The sum
of the fractional working interest owned in gross acres, gross wells, or gross
reserves, as the case may be.
Overriding
royalty interest.
Is
similar to a basic royalty interest except that it is created out of the working
interest. For example, an operator possesses a standard lease providing for
a
basic royalty to the lessor or mineral rights owner of 1/8 of 8/8. This then
entitles the operator to retain 7/8 of the total oil and gas produced. The
7/8
in this case is the 100% working interest the operator owns. This operator
may
assign his working interest to another operator subject to a retained 1/8
overriding royalty. This would then result in a basic royalty of 1/8, an
overriding royalty of 1/8 and a working interest of 3/4. Overriding royalty
interest owners have no obligation or responsibility for developing and
operating the property. The only expenses borne by the overriding royalty owner
are a share of the production or severance taxes and sometimes costs incurred
to
make the oil or gas salable.
Pay
zone.
The
geologic formation where the gas/oil is located.
Play/Trend.
A set of
discovered or prospective oil and/or natural gas accumulations sharing similar
geologic, geographic and temporal properties, such as source rock, reservoir
structure, timing, trapping mechanism and hydrocarbon type.
Production.
Natural
resources, such as oil or gas, taken out of the ground.
Productive
well.
A well
that is found to be capable of producing either oil or gas in sufficient
quantities to justify completion as an oil or gas well.
Project.
A
targeted development area where it is probable that commercial gas can be
produced from new wells.
Prospect.
A
specific geographic area which, based on supporting geological, geophysical
or
other data and also preliminary economic analysis using reasonably anticipated
prices and costs, is deemed to have potential for the discovery of commercial
hydrocarbons.
Proved
developed non-producing reserves.
Proved
developed reserves that are shut-in or otherwise not producing.
Proved
developed producing reserves.
Reserves
that can be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved
reserves.
The
estimated quantities of oil, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable certainty to be
commercially recoverable from known reservoirs under current economic and
operating conditions, operating methods, and government
regulations.
Proved
undeveloped reserves.
Proved
reserves that are expected to be recovered from new wells on undrilled acreage
or from existing wells where a relatively major expenditure is required for
recompletion.
Recompletion.
The
process of re-entering an existing well bore that is either producing or not
producing and completing new reservoirs in an attempt to establish or increase
existing production.
Reserves.
Oil, gas
and gas liquids thought to be accumulated in known reservoirs.
Reservoir.
A porous
and permeable underground formation containing a natural accumulation of
producible nature gas and/or oil that is confined by impermeable rock or water
barriers and is separate from other reservoirs.
Salt
water disposal well.
A well
into which salt water and other liquid substances are pumped for disposal
purposes.
Schlumberger
Holditch.
Schlumberger Technology Corporation, formerly known as Schlumberger
Holditch & Associates.
Shale.
A
clastic (gr. Klastos, “broken”) rock composed of predominantly clay-sized
particles consisting of clay minerals, quartz and other minerals. Often found
as
thin layered organic rock rich in hydrocarbon deposits.
Shut-in.
A well
that has been capped (having the valves locked shut) for an undetermined amount
of time. This could be for additional testing, could be to wait for pipeline
or
processing facility, or a number of other reasons.
Successful.
A well
is determined to be successful if it is producing natural gas, dewatering,
or
awaiting hookup, but not abandoned or plugged.
Well
bore.
The hole
of the well starting at the surface of the earth and descending downward to
the
bottom of the hole.
Working
interest.
The
operating interest that gives the owner the right to drill, produce and conduct
operating activities on the property and receive a share of production and
requires the owner to pay a share of the costs of drilling and production
operations.
Common
Stock
PROSPECTUS
We
have
not authorized any dealer, salesperson, or any other person to give any
information or to represent anything not contained in this prospectus. You
must
not rely on any unauthorized information. This prospectus does not offer to
sell
or buy any shares in any jurisdiction where it is unlawful. The information
in
this prospectus is current as of December 21, 2007.
Aurora Oil & Gas Corp. (AMEX:AOG)
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