SPLM Sentry Petroleum Ltd (CE)

1.        Nature of Operations and Continuance of Business

Sentry Petroleum Ltd. (the “Company”) is an Exploration Stage Company as defined by Statement of Financial Accounting Standard (“SFAS”) No. 7 “Accounting and Reporting By Development Stage Enterprises” incorporated under the laws of the State of Nevada on February 23, 2006 as Summit Exploration Inc. On December 3, 2007 the Company changed its name from Summit Exploration Inc. to Sentry Petroleum Ltd. The Company is engaged in the acquisition, exploration, and development of oil and gas properties.

The Company has no revenues and has not generated any cash flows from operations to fund its acquisition, exploration and development activities. The Company intends to rely upon the issuance of equity securities to finance its oil and gas property acquisitions and exploration and development on acquired properties, however there can be no assurance it will be successful in raising the funds necessary, or that a self-supporting level of operations will ever be achieved. The likely outcome of these future events is indeterminable. As at August 31, 2011, the Company has accumulated losses since inception of $3,270,096. These factors raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustment to reflect the possible future effect on the recoverability and classification of the assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

On April 15, 2008, the Company incorporated a subsidiary company, Sentry Petroleum (Australia) Pty. Ltd. in order to facilitate exploration activities in Australia.

2.        Summary of Significant Accounting Policies

a.              Basis of Presentation

These financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company’s fiscal year-end is February 28. While the information presented in the accompanying interim financial statements is unaudited, it includes all adjustments which are in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim period presented in accordance with accounting principles generally accepted in the United States of America. All adjustments are of a normal recurring nature.

Although these interim financial statements follow the same accounting policies and methods of their application as the Company’s February 28, 2011 annual financial statements, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. Accordingly, it is suggested that these interim financial statements be read in conjunction with the Company’s February 28, 2011 annual financial statements.

b.              Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company regularly evaluates estimates and assumptions related to donated services and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

Sentry Petroleum Ltd.
(An Exploration Stage Company)

Notes to the Interim Consolidated Financial Statements

August 31, 2011

2. Summary of Significant Accounting Policies (continued)

c.         Comprehensive Loss

 

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Code (“ASC”) topic 220 “ Comprehensive Income” (formerly FAS 130), comprehensive income consists of net income and other gains and losses affecting stockholder's equity that are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. For the period ending August 31, 2011, the Company’s other comprehensive income represented foreign currency translation adjustments.

d.        Cash and Cash Equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As at August 31, 2011, the Company has $ Nil ($Nil in 2010) in cash equivalents. As at August 31, 2011, $14,123 was deposited in accounts that were federally insured ($49,904 in February 28, 2011).

e.         Oil and Gas Property

The Company follows the full cost method of accounting for oil and gas operations whereby all costs associated with the acquisition, exploration and development of oil and gas properties will be capitalized in cost centers on a country-by-country basis.  These capitalized amounts include the costs of unproved properties, internal costs directly related to acquisitions, development and exploration activities, asset retirement costs and capitalized interest. They include geological and geophysical studies, and costs of drilling both productive and non-productive wells.  

Amortization will be calculated for producing properties by using the unit-of-production method based on proved reserves before royalties, as determined by management of the Company or independent consultants.  Unproved reserves are exempt from amortization and are subject to annual assessment as noted below. Sales of oil and gas properties will be accounted for as adjustments of capitalized costs, without any gain or loss recognized, unless such adjustments significantly alter the relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center.  Costs of abandoned oil and gas properties will be accounted for as adjustments of capitalized cost and written off to expense.

A ceiling test will be applied to each cost center by comparing the net capitalized costs to the present value of the estimated future net revenue from production of proved reserves, based on commodity prices in effect as at the Company’s year-end and based on current operating costs, discounted by 10%, less the effects of future costs to develop and produce the proved reserves, plus the lower of costs or estimated fair value of unproved properties net of impairment, and less the effects of income taxes.  Any excess capitalized costs are written off to operations.

Unproved properties will be assessed for impairment on an annual basis by applying factors that rely on historical experience. In general, the Company may write-off any unproved property under one or more of the following conditions:

i) there are no firm plans for further drilling on the unproved property;

ii) negative results were obtained from studies of unproved property;

ii) negative results were obtained from studies conducted in the vicinity of the unproved property; or

iv) the remaining term of the unproved property does not allow sufficient time for further studies or drilling.

f.         Asset Retirement Obligations

The Company will recognize a liability for future asset retirement obligations associated with oil and gas properties.  The estimated fair value of the asset retirement obligation will be based on current cost escalated at an inflation rate and discounted at a credit adjusted risk-free rate.  This liability will be capitalized as part of the cost of the related asset and amortized over its useful life.  The liability will accrete until the Company settles the obligation.  As of August 31, 2011, the Company did not have any asset retirement obligations.

 

Sentry Petroleum Ltd.
(An Exploration Stage Company)

Notes to the Interim Consolidated Financial Statements

August 31, 2011

 

 

 

Sentry Petroleum Ltd.
(An Exploration Stage Company)

Notes to the Interim Consolidated Financial Statements

August 31, 2011

3. Unproved properties – (continued)

During the year ended February 28, 2009, the Company acquired 100% working interest in the following tenures in Queensland Australia for cash consideration revealed below: ATP 862, ATP 864, ATP 865, ATP 866, and EPC 1758. A 7% gross overriding royalty was given to the original tenure holder.

Period Ended August 31, 2011				Year Ended February 28, 2011
	Acquisition	Exploration	Total		Acquisition	Exploration	Total
	Costs	Costs	Costs		Costs	Costs	Costs
	$	$	$		$	$	$
ATP 862	10,568	1,196,750	1,207,318		10,626	129,452	140,078
ATP 864	10,568	94,401	104,969		10,626	34,652	45,278
ATP 865	7,713	172,808	180,521		7,713	153,494	161,207
ATP 866	10,568	37,203	47,771		10,626	25,724	36,350
EPC 1758	60,569	(60,569)	-		52,595	-	52,595
	99,986	1,440,593	1,540,579		92,186	343,321	435,508

 

EPC 1758 was surrendered during the period ending May 31, 2011 and all capitalized costs were written off.

4.        Equipment

	Period ended August 31, 2011				Year ended February 28, 2011
		Accumulated	Net  Book			Accumulated	Net  Book
	Cost	Amortization	Value		Cost	Amortization	Value
	$	$	$		$	$	$
Computer  equipment	12,691	(10,081)	2,610		9,923	(9,306)	617
Furniture  and fixtures	1,246	(1,065)	181		1,246	(940)	306
Seismic software	15,150	(15,150)	-		15,150	(15,150)	-
Total	29,087	(26,238)	2,791		26,319	(25,396)	923

 

5. Common stock

On February 23, 2006, the Company issued 2 common shares to the President of the Company for cash proceeds of $1.

On March 8, 2006, the Company issued 10,000,000 common shares at $.01 per common share to the President of the Company for cash proceeds of $100,000. In addition, the Company cancelled the 2 common shares issued to the President of the Company.

On November 17, 2006, the Company issued 6,325,600 common shares at $.05 per common share for cash proceeds of $316,280.

On November 2, 2007, the Company issued 30,000,000 common shares at $.025 per common share for cash proceeds of $750,000

Sentry Petroleum Ltd.
(An Exploration Stage Company)

Notes to the Interim Consolidated Financial Statements

August 31, 2011

5. Common stock (Continued)

Effective November 26, 2007, the Company authorized a 2 for 1 share split. These financial statements give retroactive application to this event.

On December 3, 2007, the Company increased its authorized share capital to 100,000,000, common shares of $.0001 par value.

On February 5, 2010, the Company increased its authorized share capital to 200,000,000, common shares of $.0001 par value.

On November 4, 2010 the Company issued 416,667 units consisting of one common share and one common share purchase warrant pursuant to a Private Placement for total consideration of $500,000. The warrants are exercisable for a period of 24 months at a price of $1.50 during the first 12 months and $1.75 thereafter.

On December 16, 2010 the Company Issued 83,334 shares of common stock at $1.20 per share for cash proceeds of $100,000

On April 14, 2011 the Company issued 227,273 shares of common stock at $2.20 per share for cash proceeds of $500,000.

On April 20, 2011 a shareholder exercised 333,333 warrants at a price of $1.50 per share and the Company issued 333,333 common shares for proceeds of $500,000.

On June 7, 2011 the Company issued 60,000 shares to a consultant for investor relations services. The compensation was booked at the fair value of the shares and was determined to be $180,600, which represents the market value of the shares which approximates the value of the services performed. The compensation is reflected in General and Administrative expenses on the Income Statement.

6.        Stock options and warrants

Since 2009, the following management options have been awarded to our Board of Directors and management team.

			Weighted
			Average
	Number of		Exercise
	Options		Price
Outstanding at February 28, 2009	925,000	$	1.04
Granted	1,325,000		0.25
Cancelled	(100,000)		1.04
Outstanding at February 28, 2010	2,150,000	$	0.55
Granted	400,000		1.30
Granted	1,100,000		3.01
Outstanding at February 28, 2011	3,650,000	$	1.38
Outstanding at August 31, 2011	3,650,000	$	1.38

 

 

The stock options outstanding February 28, 2009 vested over 3 years, with one-third vesting each year. For the stock options granted in 2010 and 2011, two-thirds vest after 2 years and one-third vest after 3 years or when the Company books initial 3P reserves

 

Sentry Petroleum Ltd.
(An Exploration Stage Company)

Notes to the Interim Consolidated Financial Statements

August 31, 2011

 

6. Stock options and warrants (Continued)

A recap of the terms of the stock options as at August 31, 2011 is as follows:

Year awarded	Number	Exercise price	Currently Exercisable	Fair   Value	Expiry Date
2009	825,000	$1.04	550,000	$653,407	February 2014
2010	1,325,000	$0.25	-	$255,107	February 2015
2010	400,000	$1.30	-	$461,871	November 2015
2011	1,100,000	$3.01	-	$2,528,999	February 2016

 

The fair value for stock options was estimated using the Black-Scholes option pricing model assuming no expected dividends and the following weighted average assumptions:

2010 Options			2011 Options
Expected volatility	112.86%		Expected volatility	111.21%
Risk-free interest rate	2.30%		Risk-free interest rate	2.39%
Expected life of options	3 years		Expected life of options	4.5 years
Fair value	$0.188 - $0.201		Fair value	$2.247. - $2.404

 

During the six month period ended August 31, 2011, the Company recognized $821,070 in stock-based compensation expense ($164,184 in 2010).

As at August 31, 2011, there were $2,042,898 of unrecognized compensation costs related to non-vested stock options.

7. Commitments

Under the oil and gas tenures described in Note 3 and in the assignment agreements with the original grantor, the Company is committed to the following work programs in order to maintain its interest in those tenures.

Tenure		Commitment		Commitment
		in US $		Period
				Remaining
ATP 862		5,544,000		1 years
ATP 864		5,275,000		1 years
ATP 865		3,958,000		1 years
ATP 866		4,721,000		1 years

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Forward-Looking Statements

This Form 10-Q includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements in this Form 10-Q, other than statements of historical facts, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future, including operating costs, future capital expenditures (including the amount and nature thereof), and other such matters are forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control.  Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs.  There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

Important factors that may cause the actual results to differ materially from the forward-looking statements, projections or other expectations include, but are not limited to, the following:

·          ability to secure adequate financing on a timely basis;

·          ability to complete our planned work program, which is a condition of maintaining our permits in good standing;

·          if we do not complete our planned work program on a timely basis, we may be required to relinquish our permits;

·          changes in our business strategy;

·          the timing of exploration expenditures;

·          access and availability of materials, equipment, supplies, labor and supervision, power and water;

·          results of current and future exploration activities;

·          accidents and labor disputes;

·          disappointing results from our exploration or development efforts;

·          decline in demand for our common stock;

·          changes in general market conditions;

·          investor perception of our industry or our prospects;

·          technological changes in the oil and gas exploration industry, including technological innovations by competitors or in competing technologies;

·          the proximity of natural gas production to natural gas pipelines;

·          the availability of pipeline capacity;

·          the demand for oil and natural gas by utilities and other end users;

·          the availability of alternate fuel sources;

·          the effect of inclement weather;

·          changes in oil and gas exploration, processing and overhead costs;

·          unexpected changes in business and economic conditions;

·          changes in interest rates and currency exchange rates;

·          commodity price fluctuations, including changes in the worldwide price for oil and gas;

·          government regulation of oil and natural gas marketing;

·          government regulation of natural gas sold or transported in interstate commerce;

·          acquisition opportunities or lack of opportunities;

·          changes in laws or regulations;

·          risk factors listed from time to time in our reports filed with the Securities and Exchange Commission and

·          local and community impacts and issues.

The forgoing list is not an exhaustive list of the factors that may affect any of our forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  You should not place undue reliance on these forward-looking statements, which speak only as of the date of this report.  Except as required by law, we do not undertake to update or revise any of the forward-looking statements to conform these statements to actual results, whether as a result of new information, future events or otherwise.

As used in this report, “Sentry Petroleum,” the “Company,” “we,” “us,” or “our” refer to Sentry Petroleum Ltd., unless otherwise indicated.

Overview

We were incorporated in Nevada on February 23, 2006 and are a Denver, Colorado-based oil and gas exploration stage company. We are considered an exploration stage company because we are involved in the examination and investigation of land that we believe may contain hydrocarbon reserves .

Our current focus is on the exploration of properties for which we acquired four exploration permits (Authority to Prospect 862, 864, 865, and 866) to exclusively engage in exploration for oil and gas in central Queensland, Australia. ATP 862, 864, 865, and 866 each have a maximum term of 12 years, but can be terminated earlier for failure to carry out exploration work programs on the properties underlying these permits within certain time constraints. Our obligations on the four ATPs include obtaining additional seismic data and drilling of wells on each of the permits prior to February 2012. The total estimated cost to complete our obligations by February 28, 2012 is approximately $13 million (see Footnotes to financial statements for further detail on our exploration obligations). We currently have insufficient funding to complete the required obligations to maintain our permits.

We have commenced our exploration program on ATP 862, 864, 865, and 866. We hold a 100% working interest in ATP 862, 864, 865, and 866, subject to a 7% gross overriding royalty payable to the original tenure holder. In the aggregate, our permits encompass approximately 6.9 million net acres.

On March 14, 2011, we awarded an option to Sino American Oil Company (“Sino”) for consideration of $25,000, which gave Sino the right to earn a 70% interest in ATP 865 and 866 by drilling one conventional well to a depth of 1,660 meters and to shoot 100 line Km of seismic. On June 27, 2011, we reached a mutual agreement with Sino American Oil Company to terminate this option agreement. The termination relieves both parties from any further rights or obligations awarded in the option and Sino is entitled to return of the $25,000 consideration Sino paid to us upon execution of the option agreement in March 2011.

The properties underlying our permits are without known reserves and the proposed plan of exploration detailed below is exploratory in nature. There is no assurance that we will discover commercial quantities of hydrocarbons. In addition, even if hydrocarbons are discovered, the costs of development may render any hydrocarbons found to be not commercially viable. If we do not find hydrocarbon reserves or are unable to develop reserves, either because we do not have sufficient capital or the costs of extraction are uneconomical, we will have to cease operations.

As part of our regular business activities, we routinely review and assess interests in exploration or production properties in Australia and Austral Asia for our possible acquisition. We seek additional properties or permits that we believe have the potential to add shareholder value. There can be no assurance that we will be successful in acquiring additional property interests or permits. In order to acquire any additional exploration or production properties, we will need to secure additional financing.

We require significant additional funding to complete the work program we committed to when acquiring our current exploration properties. We anticipate raising additional financing through the sale of equity securities to finance these exploration obligations, although there can be no assurance that such funding will be available. In the absence of sufficient financing to finance our exploration activity required to carry out our proposed exploration programs, we will not be able to pursue our exploration program or to maintain our permits in good standing.  If we do not execute on our proposed exploration programs, we may be required to relinquish our interests in our permits and will be forced to cease operations. 

Additionally, there can be no assurance that if we are successful in securing funding that we will be successful in discovering commercial quantities of hydrocarbons, or that we will have access to funds to develop a successful discovery without significant dilution or cost to our stockholders.

Our business plan is limited in its scope and we intend to derive all of our revenue from a discovery of commercial quantities of hydrocarbons. Specifically, discovering sufficient quantities of hydrocarbons to warrant their profitable development. We have no other business plans and if we are unsuccessful in discovering commercial quantities of hydrocarbons our business will fail.

During the three months ended May 31, 2011, we completed the final preparation for our drilling program. We completed contracts with the landowners, finalized the design and budgeting for each well and secured service contracts with the necessary drilling and testing companies. On June 15, 2011, we commended drilling on the initial well in ATP 862, the Talundilly_CSG1. We completed drilling of this initial well on June 24, 2011, after reaching target depth (TD) of 436 meters. A total of 15.26 meters of coal and carbonaceous shale cores were collected and forwarded for gas desorption testing. Net coal thickness collected was 12.7 meters. Due to certain anomalous data from what we believe could have been errors made during the testing process, we are not in a position based on the data received to determine the commerciality of the coal and carbonaceous shale deposit surrounding Talundilly_CSG1. An additional six to eight wells will need to be drilled to obtain more data in order to make any conclusive determination as to the results from the desorption analysis. [what is the anticipated cost and timing?] Drilling of an additional six to eight wells will require significant additional funding to complete.

During the three months ended August 31, 2011, we completed the drilling of the Albilbah_CSG1 well in permit ATP 862 in Queensland Australia. The well reached a total depth of 1,555 feet and 472 feet of core were cut. 35 feet of gaseous coal and carbonaceous rock were sealed in 20 canisters for desorption measurement. In addition, the lower Winton Sandstones were found to contain free gas and 20 feet of these cores were also placed in canisters to measure the gas emitted from the cores. Evidence of gas in the canisters prompted the re-evaluation of the original Albilbah-1 (drilled by a previous operator) well logs to investigate the possibility of gas being present in the pore space of the LWSS. Sentry’s log analysis concluded that gas is present in a net 115 feet of the 250 feet interval. Further drilling and testing is required in order to make any determination as to whether the amount of gas present can be economically produced and no assurance can be provided that the amount of gas found to exist will be capable of being economically produced.

With the completion of our current drilling campaign, we are currently finalizing the laboratory analysis and completion by end of October 2011. Our forward going strategy from that point will be based on our conclusions from this analysis. We will engage independent consultants to review and audit our findings. If our findings support certification of reserves, we will engage consultants to commence the certification process. We anticipate that the testing, analysis, and certification of our results will cost $100,000. We have sufficient funds to complete the laboratory analysis and independent review of our finding, however will require additional funding for any future exploration or appraisal work.

Plan of Operation

Our plan of operations for the next twelve months is to continue our work obligations on ATP 862, 864, 865, and 866 in the Adavale basin in Queensland Australia and to continue our assessment of various onshore exploration permits in Australia and Asia.

To further explore the delineated coal and carbonaceous shale deposit in ATP 862 and 864, we plan to drill eight to ten wells by March of 2012, assuming we are able to secure sufficient financing. This program will quantitatively measure original gas in place using canister desorption and core logging methods and we will commence flow testing of one or two of the wells. In addition to exploration of the coal and carbonaceous shale deposit we intend to drill two well to flow test the Winton Sandstone interval intercepted during drilling of Albilbah_CSG1 and we intend to acquire additional seismic data. We expect that in total these activities would cost $10 million. We do not have sufficient funds to complete such activities, however will require additional funding for any future exploration or appraisal work.

In ATP 865 and 866, we plan to undertake a seismic program to advance our prospects during the next 6 months assuming we are able to secure sufficient financing. We further plan to drill one conventional well, the Ravenscourt, to test the Etonvale Formation at a depth of approximately 1,700 meters (5,580 feet) downdip from the Rosebank-1 well and will be targeting a thicker carbonate section. We expect that such activities would cost $3.5 million . We do not have sufficient funds to complete such activities, however will require additional funding for any future exploration or appraisal work.

Our work program includes acquisition of seismic data and drilling of additional wells. The time to complete the acquisition of seismic data and drilling of wells depends on, among other things, the availability of personnel and equipment in Queensland. The associated costs will be determined by the depth of the wells and the amount of seismic data to be acquired.

In addition to our current permits, we are continuously investigating additional opportunities in Queensland and other parts of South-East Asia.

We do not have sufficient funds to carry out our plan of operations for the next twelve months. We rely principally on the issuance of common shares by private placements to raise funds to finance our business. There is no assurance that market conditions will continue to permit us to raise funds when required. If possible, we will issue more common shares at prices we determine, possibly resulting in dilution of the value of common shares.

With our ATP 862, 864, 865, and 866, we are obliged to complete proposed work programs to maintain our interests in good standing. As of August 31, 2011 our committed expenditures over the next year total $19.5 million. However, the completion of the work program is determined for each permit individually and there is no cumulative analysis on work completed.

The following table details the capital expenditure required by February 28, 2012 for us to maintain good standing on our four permits:

			ATP 862	ATP 864	ATP 865	ATP 866
Deep Upholes			$305,000	$305,000	$-	$-
Seismic Reprocessing			406,000	137,000	142,000	142,000
Shooting of Seismic			2,035,000	2,035,000	1,017,000	1,017,000
Drilling of Petroleum wells			2,797,000	2,797,000	2,797,000	3,560,000
			$5,543,000	$5,274,000	$3,956,000	$4,719,000

 

We do not have sufficient capital to satisfy the required future exploration expenditures needed to maintain our four ATP permits in good standing and we will rely principally on the issuance of common stock to raise funds to finance the expenditures that we expect to incur. Failure to raise the required funds to complete our commitments will result in the failure to meet our obligations and the relinquishment of one or more of our permits. We have relied principally on the issuance of our common stock in private placements to raise funds to support our business, but there can be no assurance that we will be successful in raising additional funds through the issuance of additional equity. We have planned and budgeted for the required work and at the date of this report have sufficient time to complete most of the required work prior to February 28, 2012 provided that we are able to obtain sufficient financing on a timely basis.

We do not expect any significant purchases of plant and equipment or any increase in the number of employees in the near future.

We anticipate incurring expenses of approximately $19 million over the next 12 months for our exploration program. There can be no guarantee that we will be able to secure the necessary financing and equipment to undertake the work program within the anticipated time frame. If we are unsuccessful in securing sufficient financing and equipment we may be subject to relinquishment of any one or all of our existing permits.

Results of Operations for the Three and Six Months Ended August 31, 2011 and 2010

Revenues

We have not generated any revenues from operations since our inception.

Expenses

We reported total expenses in the amount of $770,781 for the three months ended August 31, 2011, compared to total expenses of $111,978 for the three months ended August 31, 2010.  Our total expenses were significantly higher for the three months ended August 31, 2011, as compared to the three months ended August 31, 2010. For the six month period ended August 31, 2011 we reported total expenses of $1,364,539 compared to $213,529 for same period last year. The substantial increase in costs for the six and three month periods are mostly related to increased cost of deferred compensation from additional options awarded, from increased shareholder communication expenditures, write down of exploration assets associated with our surrender of EPC 1758 and from increased travel related to financing activities. EPC 1758 was surrendered during the period ending May 31, 2011 and all capitalized costs were at that time written off.

We incurred general and administrative expenses of $721,094 for the three months ended August 31, 2011, compared to $105,052 for the three months ended August 31, 2010. For the six month period ended August 31, 2011, we reported 1,276,231 compared to $199,076 for the same period in 2010. The increase in our general and administrative expenses for both the three and six month periods are primarily attributable to the increased cost of deferred compensation from additional options awarded, increased investor communication expenses and travel related expenses. For the three months ended August 31, 2011, we incurred deferred compensation of $410,535, compared to $88,045 for the three months ended August 31, 2010. For the six month period ended August 31, 2011, we reported deferred compensation expenses of $821,070 compared to $164,183 for the six month period of 2010. During the three months ended August 31, 2011, we also incurred shareholder communication expenses of $246,217, compared to $859 for the same period in 2010. For the six month period ended August 31, 2011, we incurred shareholder communication expenses of $339,838 compared to $ 1,765 for the same period in 2010. The increase was caused by increased frequency of communication with a substantial greater number of shareholders and from issuing 60,000 shares to a consultant for investor relation services. For the three months ended August 31, 2011, we further incurred $37,762 related to travel and funding activities as compared $2,638 for the three months ended August 31, 2010. For the six months ended August 31, 2011, we incurred $64,492 for these activities compared to $2,638 for the six months ended August 31, 2010.  

Professional fees for the three months ended August 31, 2011 did not change significantly from the professional fees reported for the same period in the prior year. We incurred professional fees of $3,134 for the three months ended May 31, 2011, compared to $2,853 for the three months ended August 31, 2010. For the six month periods ended August 31, 2011 and 2010 we incurred professional fees of $27,389 and 13,514, respectively. The increase in professional fees for the six month period is attributable to an increase in our exploration activity and specifically to contract negotiations with land owners and with service providers for our drilling program. We anticipate that we will incur increased professional fees as we continue our work programs and exploration activity.

We recorded no gain or loss on foreign exchange for the three months ended August 31, 2011, compared to a loss of $4,073 for the same period in the prior year. For the six month period ended August 31, 2011, we reported a foreign exchange loss of $350 compared to $939 for the same period in 2010. The loss on foreign exchange was realized during the six months ended August 31, 2011 as a result of fluctuation in the US dollar as compared to the Australian dollars

During the three months ended August 31, 2011, we expensed $6,553 in write down of exploration assets due to our surrender of EPC 1758 during the reporting period. For the six month period ended August 31, 2011, we expensed $60,569. We did not incur any write down of exploration assets during the three or six months ended August 31, 2011.

Other Income

We reported other income of $11,253 for the three months ended August 31, 2011 and other income of $7 for the three months ended August 31, 2010. For the six month periods ending August 31, 2011 and August 31, 2010, we reported other income of $15,108 and $39, respectively. Other income was attributable to interest received on bank deposits and increased do to additional funds held in Australian Dollar at a higher interest rate than U.S. rates.

Net Loss

We had net loss of $719,582 for the three months ended August 31, 2011, as compared to net loss of $111,971 for the three months ended August 31, 2011. We had net loss of $1,349,431 for the six months ended August 31, 2011, as compared to net loss of $213,490 for the six months ended August 31, 2011. The increase in our net loss was attributable to increased expenses described above.

Basic and Diluted Loss per Share

As a result of the above, the basic and diluted loss per common share was $0.02 and $0.00 for the three months ended August 31, 2011 and 2010, respectively. Basic and diluted loss per common share was $0.03 and $0.00 for the six months ended August 31, 2011 and 2010, respectively.

Liquidity and Capital Resources

As of August 31, 2011, we had total current assets of $232,341 (February 2011: $689,015), which included cash of $121,447, prepaid expenses of $7,238, and sales taxes receivable of $103,686. As of August 31, 2011, we had total current liabilities in the amount of $49,232 (February 2011: $103,163). As a result, we had working capital of $183,109 as of August 31, 2011 (February 2011: $585,852).

We anticipate that we will not generate any revenue during the next twelve months. In 2008, the proposal to the local government for permits ATP 862, 864, 865 and 866 of an exploration program with a total estimated commitment of approximately $19.5 million to be completed by February 28, 2012 was approved. As of the date of this report, we have expended approximately $1,600,000 in exploration expenditures in executing on the proposal to the local government for permits ATP 862, 864, 865 and 866 and we are obligated to complete the $19.5 million in exploration expenditures by February 28, 2012 in order to maintain our permits in good standing. If we do not complete our work obligations, there is a risk that we will lose our rights to continue operations on our permits. In order for us to complete our work obligations we will have to raise additional funds. There can be no assurance that we will be able to raise sufficient funds to complete our obligations.

In addition to these expenditures anticipated to be incurred in connection with our proposed exploration programs, we anticipate spending approximately $60,000 in ongoing general and administrative expenses for the next twelve months.   The general and administrative expenses for the year will consist primarily of professional fees for the audit and legal work relating to our regulatory filings throughout the year, as well as general office expenses.

Our current cash on hand is insufficient to be able to make our planned exploration expenditures and to pay for our general administrative expenses over the next twelve months.  We must obtain additional financing in order to continue our plan of operations for the next twelve months. We do not have any lending arrangements in place with banking institutions and believe that debt financing will not be an alternative for funding our exploration programs as we have limited tangible assets to secure any debt financing. We anticipate that additional funding will be in the form of equity financing from the sale of our common stock.  We are currently seeking additional funding in the form of equity financing from the sale of our common stock, but cannot provide any assurance that we will be able to raise sufficient funding from the sale of our common stock to fund our proposed exploration programs that is a requirement in order to maintain our permits in good standing. During the six months ended August 31, 2011, we raised $1,000,000 through private equity offerings and entered into an agreement that provided for future financing through the issuance of 400,000 common shares for $1.0 million upon our ability to confirm average gas content of coal of not less than 2.5 cubic meters per ton dry ash free and; for Carbonaceous Shale - not less than average 0.5 cubic meters per ton for shale with total organic content greater than 8 weight percent.  This agreement also provides for the issuance of 535,714 shares for $1.5 million upon an initial 3P reserve certification.  There is no assurance that these conditions will be satisfied in order to enable us to closing on these financing commitments.

We are considering entering into a joint venture arrangement to finance the exploration activity required to carry out our proposed exploration programs on the properties underlying our permits.  We are seeking to locate a joint venture participant, but can provide no assurance that we will be successful.  In the event that we enter into a joint venture arrangement, we would likely have to assign a percentage of our property interests to the joint venture participant.

If we are unable to raise additional capital in the immediate future, we will experience liquidity problems and management expects that we will need to curtail operations, liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures. In the absence of sufficient financing to finance our exploration activity required to carry out our proposed exploration programs, we will not be able to pursue our exploration program and maintain our permits in good standing.  If we do not execute on our proposed exploration programs, we may be required to relinquish our interests in our permits and will be forced to cease operations. 

Cash Used in Operating Activities

Cash flows used in operating activities for the six months ended August 31, 2011 were $449,202, as compared to cash flows used in operating activities of $71,760 for the six months ended August 31, 2010.  Our net loss of $1,349,431 for the six months ended August 31, 2011 was the primary reason for our negative operating cash flow, as compared to our net loss of $213,490 for the six months ended August 31, 2010. Our reporting negative operating cash flows for the six months ended August 31, 2011 was offset by stock-based compensation of $821,670, services paid for with stock of $180,000, and write off of exploration assets of $60,569 for the reporting period.

Cash Used in Investing Activities

For the six months ended August 31, 2011, we used $1,141,332 in investing activities, as compared to $26,086 for the six months ended August 31, 2010.  For the six months ended August 31, 2011, we invested $1,138,810 in unproven properties, as compared to the six months ended August 31, 2010, in which we invested of $26,086 in unproven properties.

Cash from Financing Activities

As we have had no revenues since inception, we have financed our operations primarily by using existing capital reserves and through private placements of our common stock.  For the six months ended August 31, 2011, we generated $1,000,000 from the issuance of common shares, as compared to no cash flows provided by financing activities for the six months ended August 31, 2010.

Off-balance sheet arrangements

We do not have any off-balance sheet arrangements.

Going Concern

We have incurred net losses for the period from inception on February 23, 2006 to August 31, 2011 of $3,270,096 and have no source of revenue.  The continuity of our future operations is dependent on our ability to obtain financing from issuance of equity securities.  These conditions raise substantial doubt about our ability to continue as a going concern.

Recent accounting pronouncements

There have been no recent accounting pronouncements since the filing of our Annual Report on Form 10-K, filed on August 31, 2011, that have a material impact on the Company's financial presentation and disclosure.

Critical Accounting Policies

Our condensed unaudited consolidated financial statements have been prepared in conformity with GAAP. For a full discussion of our accounting policies as required by GAAP, please refer to our Annual Report on Form 10-K for the year ended February 28, 2011. We consider certain accounting policies to be critical to an understanding of our condensed consolidated financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. The specific risks related to these critical accounting policies are unchanged at the date of this report and are described in detail in our Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and former Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of May 31, 2011 that the Company's disclosure controls and procedures are effective.

Limitations on the Effectiveness of Internal Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving our objectives and our Chief Executive Officer and former Chief Financial Officer concluded that our disclosure controls and procedures are effective at that reasonable assurance level. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended August 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II -OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

(Not Applicable).

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved).

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

See the Exhibit Index included as the last part of this report (following the signature page), which is incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SENTRY PETROLEUM LTD.

(Registrant)

Dated: October, 13 2011	By:	RAJ RAJESWARAN
		President and Chief Executive Officer
Dated: October 13 2011	By:	PAUL BOLDY
		Chief Financial Officer

 

 

SENTRY PETROLEUM LTD.

(the “Registrant”)

(Commission File No. 000-52794)

Exhibit Index

to Quarterly Report on Form 10-Q

for the Quarter Ended August 31, 2011

 

Exhibit Number	Description
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d- 14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101.INS *	XBRL Instance Document
101.SCH *	XBRL Taxonomy Extension Schema Document
101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document
1.01 LAB *	XBRL Extension Labels Linkbase Document
101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF *	XBRL Taxonomy Extension Definition Linkbase Document

 

* In accordance with SEC rules, this interactive data file is deemed “furnished” and not “filed” for purposes of Sections 11 or 12 of the Securities Act of 1933 and Section 18 of the Securities and Exchange Act of 1934, and otherwise is not subject to liability under those sections or acts.