Item 1. Business
ITEM 1. BUSINESS
We are an early-stage development oil and gas company seeking to become an independent energy company focused on the acquisition and subsequent exploitation and development of crude oil in the Gulf States Drill Region, including acquisition of hydrocarbon revenues and underlying oil and gas exploration and production rights. We believe that we can establish a profitable niche in crude oil production due to the quality of the light sweet crude oil produced from the Gulf States Region, which is cheaper to refine than crude oil from other regions of the U.S. and Canada.
The Company was incorporated in the Commonwealth of Virginia on November 13, 2017, and started its operations on November 17, 2020, upon an acquisition (the “Barrister Acquisition”) of all outstanding capital of Barrister, including all of Barrister’s crude oil and natural gas exploration and production leases and rights owned or controlled by Barrister. In consideration for the Barrister Acquisition, the Company issued 3,650,000 shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”) to the members of Barrister and the assumption of Barrister’s debt obligations to Central Operating, LLC (“COP”) in principal amount of $2,700,000 (the “Assumed Debt”) under the Purchase and Sale Agreement and the related secured promissory note (the “Note”), each dated as of June 1, 2019. On November 16, 2021, the Company and COP entered into a debt exchange agreement (the “Debt Exchange Agreement”), pursuant to which, COP fully discharged the Company from the obligation to repay the Assumed Debt in exchange for the issuance of 1,350,000 shares of Common Stock to COP. Currently we are producing very limited crude oil production from limited oil drilling operations as a result of the Barrister Acquisition. It is insufficient to cover our operating expenses or to fund establishing new oil drilling rigs or increased drilling.
Recent Developments
On September 27, 2022, the Company dismissed Haynie & Company PC (“Haynie”) as the independent registered public accounting firm engaged to audit the Company’s financial statements. Haynie had served as the Company’s independent auditor since January 2019. Haynie’s dismissal was approved by the Company’s board of directors as of such date. Effective as of September 30, 2022, the Company engaged Sadler, Gibb & Associates, LLC (“Sadler Gibb”), as the Company’s independent registered public accounting firm, to audit the Company’s financial statements for the fiscal year ending December 31, 2022, in accordance with the U.S. federal securities laws and the applicable SEC rules and regulations and the Public Company Accounting Oversight Board (“PCAOB”).
On November 8, 2022, the Company, through Barrister, its wholly-owned subsidiary, acquired from Taxodium Energy, LLC, a Mississippi limited liability company (“Taxodium”), 100% ownership, right, title and interest in certain properties located in Mississippi and Alabama, including all oil and gas leases, interests, royalties, overriding royalties, subleases, fee estates, net profits interest, and carried interests (collectively “NONOP Assets”) pursuant to the Assignment, Bill of Sale and Conveyance, dated October 31, 2022, executed by Taxodium (the “NONOP Assignment”). In consideration of the acquisition of NONOP Assets, the Company issued 1,600,000 shares of the Company’s Common Stock to all members of Taxodium in proportion to their interest in Taxodium. This transaction became effective on October 1, 2022, for accounting purposes, based on when the Company obtained control of the acquired assets. A copy of the NONOP Assignment is attached to this Annual Report as Exhibit 10.2.
On December 2, 2022, the Company, through Barrister, acquired from Taxodium a 100% ownership, right, title and interests in additional properties located in Mississippi, including certain wells, facilities, the oil gas and mineral leases, together with all surface and subsurface and all operating rights, working interest, and net revenue interest arising out such leases and rights (collectively “Buckley Assets”) pursuant to the to the Assignment, Bill of Sale and Conveyance, dated December 2, 2022, executed by Taxodium and Barrister (the “Buckley Assignment”). In consideration of the acquisition of Buckley Assets, the Company issued to members of Taxodium an aggregate of 1,500,000 shares of its Common Stock, valued at $2.00 per share, in proportion of their ownership interest in Taxodium. The Buckley Assignment became effective on October 15, 2022, for accounting purposes, based on when
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the Company obtained control of the acquired assets. A copy of the Buckley Assignment is attached to this Annual Report as Exhibit 10.3.
While the Company acquired these new properties, including drilling wells, currently, these wells have very limited productions, not sufficient to for the Company to become profitable.
Our Growth Strategy
The Company is seeking underexploited oil leases and rights in the Gulf States Drilling Region with reserve reports and one or more drilling rigs, even if exploratory or not deep drilling rigs, which taken together indicate that the oil leases and rights have potential, substantial oil production capability – substantial for a small independent oil production company. Our long-term goal is to create shareholder value by identifying and assembling a portfolio of low-risk assets with attractive economic profiles. Our ability to implement our business plan is subject, in part, on our ability to timely raise adequate and affordable funding from investors or lenders for establishing deep drilling rigs. Our first acquisition was Barrister, followed by the acquisition of NONOP Assets and Buckley Assets in the fourth quarter of 2022. Now we need to raise sufficient working capital to establish deep drilling rigs in these acquired oil and gas leases and rights.
Generally, the oil fields in the southern part of the Gulf States Drilling Region are less expensive to drill due to the nature of rock strata and the depth of the oil reserves. The Company will seek acquisitions that can be obtained for stock or other securities or under an earn-out arrangement and prefers acquiring companies that hold oil leases and rights rather than acquiring individual oil leases and rights, preferable the targets with several oil leases and rights as opposed to acquiring individual oil leases and rights. The acquisition of a company has the perceived advantages of acquiring several oil leases and rights and existing drilling operations with in-place management in a single transaction along with possibly reduced due diligence costs and more expeditious closing of the transaction.
Our teaming approach is also designed to facilitate rapid growth by bringing necessary expertise into operations from available contractors. Our ability to realize profitability from oil production also depends on the success of deep drill wells, engaging necessary operations expertise, and market price for crude oil remaining at attractive per-barrel levels, which we believe is $60 or more per barrel. If we have adequate funding and/or sufficient cash flow, then we may seek to drill for oil in other assignee or leasehold interests or, alternatively, in oil and gas assignee or leasehold interests or properties owned by our potential affiliates or teaming partners. Through established networks of contacts, the Company markets its crude oil production, whether current or future, on a month-to-month basis.
If the production of oil increases from the properties in which the Company obtain its oil rights, the Company will have to expand the marketing efforts by engaging a person or firm to seek out new customers for the oil production in case the current customer base is unable or unwilling to purchase increased oil production. The cost means and extent of any enhanced future marketing effort will depend on the amount of increased oil production, the then-current market for oil, and the potential customer base for the oil production. If the existing customer base will not purchase increased oil production, then the engagement of a dedicated marketing person who engages in direct marketing, by telephone and internet, of potential customers for oil production may be required for the sale of any future increase of oil production.
Competitive Strengths
Use of Contractors
The Company utilizes experienced contractors, including former members of Barrister, with significant prior experience in oil and gas production in the Gulf States Drilling Region in the initial phases of implementing the business plan. The Company believes that the use of these contractors is the most efficient and cost-effective means of operations for a small independent oil and gas production company and is designed to allow the Company to use
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experienced oil drilling and production personnel without the high overhead costs of hiring personnel as employees of the Company. Currently, we engage COP and Taxodium as our contractors to operate the limited oil and gas production drilling and storage operations for the Company Oil Rights and to manage the Company’s drilling operations. They have extensive experience with operations and administration in an independent oil and gas production company and rely on contract operators to provide experienced personnel to handle all essential crude oil production on a day-to-day basis for the Company. With adequate funding, the Company intends to employ this teaming model strategy to help attract and retain experienced oil industry engineering and production personnel to identify drill sites and then efficiently operate those wells to produce oil at an above-average industry rate of efficiency in the Gulf States region.
Competition
The Company competes with many large, medium, and small-sized competitors in the Gulf States Drilling Region (including off-shore drilling in the Gulf of Mexico) and adjacent areas which have extensive operational histories, experienced oil and gas industry management, established market share, profitable operations, and extensive potential oil and gas fields or leases to exploit and the cash or funding resources to explore new oil and gas fields as well as acquire mature fields . [There is also an established oil and gas production industry in northern Alaska and in North Dakota and western Canada (where fracking has made available significant oil and gas reserves in shale formations).
The Company has a very limited history of its business operation and is not able to match the resources, whether financial, technical, manpower, size of proven crude oil reserves, and distribution channels, of its competition in the Gulf States Drilling Region or elsewhere. The Company’s current oil production is not sufficient to concern or attract the attention of competitors, which allows Barrister to operate as a small provider of oil without competitive pressures. If we significantly increase oil production, we will face increasing competition from other small independent oil producers selling limited amounts of oil. Any increase in competitive pressures will require investment in a full-time marketing effort by the Company.
Company Oil Rights
Description of Barrister Oil Properties and Oil Production Operations . The Company’s current oil and gas assets consist primarily of non-operated interest. However, production from these assets has significantly improved the Company’s operating ability.
As shown in the tables below, production has significantly improved due to the asset acquisitions in Q4. However, the Company will not be able to increase production until sufficient financial resources are obtained through potential debt and equity financing. Additionally, the Company may need to impair some of these assets if production cannot be restored.
The Smackover Trend . The Smackover trend is a belt of carbonate, evaporite, and clastic rocks of the Late Jurassic age that rims the Gulf Coast of the United States from Texas, up to Arkansas, throughout Louisiana, Mississippi, Southwest Alabama, and all the way to the Florida panhandle. Stratigraphic and geochemical data indicate that the oil and gas were generated from algae-rich lime mudstones. It was named after the Smackover oil field, which was discovered in Union County, Arkansas, in 1937.
Current Barrister Energy Properties . We own interests in 32 wells as of the end of 2022. In Q4 2022, we acquired interest in 29 of those wells.
The annual net production of wells for the fiscal years 2020, 2021, and 2022 are summarized in the table below, with the 29 acquisition wells shown only in the 2022 total.
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CONSOLIDATED PRODUCTION
Year
Total Oil Produced (bbl)
Total Gas Produced (mcf)
2020
183
-
2021
127
-
2022
4,132
4,106
TOTAL
4,442
4,106
Oil and Gas Production, Production Prices, and Production Costs
Oil and Gas Production
The table below summarizes production by final product sold and by geographic area for the last four years.
2022
2021
2020
2019
(Net barrels of oil produced at year-end)
Crude oil and natural gas liquids production
Crude Oil
NGL
Crude Oil
NGL
Crude Oil
NGL
Crude Oil
NGL
Consolidated Subsidiaries
United States
4,132
-
127
-
183
-
1,397
-
Total Consolidated Subsidiaries
4,132
-
127
-
183
-
1,397
-
Total crude oil & natural gas liquids production
Bitumen production
Consolidated Subsidiaries
United States
-
-
-
-
-
-
-
-
Synthetic oil production
Consolidated Subsidiaries
United States
-
-
-
-
-
-
-
-
Total liquids production
-
-
-
-
-
-
-
-
Natural gas production available for sale
Consolidated Subsidiaries
United States
4,106
-
-
-
-
-
-
-
Total Consolidated Subsidiaries
4,106
-
-
-
-
-
-
Total natural gas production available for sale
4,106
-
-
-
-
-
-
-
(thousands of oil-equivalent barrels at year-end)
Oil-equivalent production
-
-
-
-
-
-
-
-
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Production Prices and Production Costs. The table below summarizes average production prices and average production costs by geographic area and by product type for the last three years.
United States
Total
During 2022
Consolidated Subsidiaries
Average production prices
Crude oil, per barrel
88.85
88.85
NGL, per barrel
-
-
Natural gas, per thousand cubic feet
7.60
7.60
Bitumen, per barrel
-
-
Synthetic oil, per barrel
-
-
Average production costs, per oil-equivalent barrel – total
4.77
4.77
Average production costs, per barrel – bitumen
-
-
Average production costs, per barrel - synthetic oil
-
-
During 2021
Consolidated Subsidiaries
Average production prices
Crude oil, per barrel
64.25
64.25
NGL, per barrel
-
-
Natural gas, per thousand cubic feet
-
-
Bitumen, per barrel
-
-
Synthetic oil, per barrel
-
-
Average production costs, per oil-equivalent barrel – total
251.32
251.32
Average production costs, per barrel – bitumen
-
-
Average production costs, per barrel - synthetic oil
-
-
During 2020
Consolidated Subsidiaries
Average production prices
Crude oil, per barrel
58.88
58.88
NGL, per barrel
-
-
Natural gas, per thousand cubic feet
-
-
Bitumen, per barrel
-
-
Synthetic oil, per barrel
-
-
Average production costs, per oil-equivalent barrel – total
32.13
32.13
Average production costs, per barrel – bitumen
-
-
Average production costs, per barrel - synthetic oil
-
-
Average production prices have been calculated by using sales quantities from Barrister’s production as the divisor. Average production costs have been computed by using net production quantities for the
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divisor. The volumes of crude oil and natural gas liquids (“NGL”) production used for this computation are shown in the oil and gas production table. The volumes of natural gas used in the calculation are the production volumes of natural gas available for sale and are also shown. Gas is converted to an oil-equivalent basis at six million cubic feet per one thousand barrels .
Oil and Gas Properties, Wells, Operations, and Acreage
Gross and Net Productive Wells
Year-End 2022
Year-End 2021
Year-End 2020
Oil
Gas
Oil
Gas
Oil
Gas
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Gross and Net Productive Wells
Consolidated Subsidiaries
United States
32
7
-
-
3.0
1.8
-
-
3.0
1.8
-
-
Total Consolidated Subsidiaries
32
7
-
-
3.0
1.8
-
-
3.0
1.8
-
-
Total gross and net productive wells
32
7
-
-
3.0
1.8
-
-
3.0
1.8
-
-
There were 32 gross, and 7 net wells as of December 31, 2022.
Gross and Net Developed Acreage
Year-End 2022
Year-End 2021
Year-End 2020
Gross
Net
Gross
Net
Gross
Net
(acres)
Gross and Net Developed Acreage
Consolidated Subsidiaries
United States
6,208
901
370
352
370
352
Total Consolidated Subsidiaries
6,208
901
370
352
370
352
Total gross and net developed acreage
6,208
901
370
352
370
352
Separate acreage data for oil and gas are not maintained because, in many instances, both are produced from the same acreage.
Gross and Net Undeveloped Acreage
Year-End 2022
Year-End 2021
Year-End 2020
Gross
Net
Gross
Net
Gross
Net
(acres)
Gross and Net Undeveloped Acreage
Consolidated Subsidiaries
United States
2,600
26
700
700
2,992
2,244
Total Consolidated Subsidiaries
2,600
26
700
700
2,992
2,244
Total gross and net undeveloped acreage
2,600
26
700
700
2,992
2,244
Separate acreage data for oil and gas are not maintained because, in many instances, both are produced from the same acreage.
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Our investment in developed and undeveloped acreage is comprised of numerous leases. The List of Leases is included as Exhibit 99.2 to this Annual Report. The terms and conditions under which the Company maintains exploration and production rights to the acreage are property-specific, contractually defined, and vary significantly from property to property. Work programs are designed to ensure that the exploration potential of any property is thoroughly evaluated before expiration. In some instances, we may elect to relinquish acreage in advance of the contractual expiration date if the evaluation process is complete and there is not a business basis for the extension. In cases where additional time may be required to evaluate acreage fully, the Company has generally been successful in obtaining extensions. The scheduled expiration of leases and concessions for undeveloped acreage over the next three years is not expected to have a material adverse effect on the Company.
Government Regulation
Oil and natural gas operations such as ours are subject to various types of legislation, regulation, and other legal requirements enacted by governmental authorities. This legislation and regulation affecting the oil and natural gas industry are under constant review for amendment or expansion. Some of these requirements carry substantial penalties for failure to comply. The regulatory burden on the oil and natural gas industry increases our cost of doing business and, consequently, can affect our profitability.
Regulation of Drilling and Production
The production of oil and natural gas is subject to regulation under a wide range of local, state, and federal statutes, rules, orders, and regulations. Federal, state, and local statutes and regulations require permits for drilling operations, drilling bonds, and reports concerning operations. The trend in oil and natural gas regulation has been to increase regulatory restrictions and limitations on such activities. Any changes in, or more stringent enforcement of, these laws and regulations may result in delays or restrictions in permitting or development of projects or more stringent or costly construction, drilling, water management or completion activities or waste handling, storage, transport, remediation, or disposal emission or discharge requirements which could have a material adverse effect on the Company. For example, on January 20, 2021, the Biden Administration placed a 60-day moratorium on new oil and gas leasing and drilling permits on federal land, and on January 27, 2021, the Department of Interior, acting pursuant to a Presidential Executive Order suspended the federal oil and gas leasing program indefinitely. President Biden also announced that his administration would continue to pause all offshore and onshore leasing pending a full review of the federal leasing and permitting program. In response to a challenge filed by Louisiana and other states, a federal court in the Western District of Louisiana issued a preliminary injunction blocking the Biden administration’s leasing moratorium. The Biden administration appealed this decision but has continued to hold lease sales pending appeal. While we do not have a significant federal land acreage position at 240 net acres, these actions could have a material adverse effect on the Company and our industry.
Currently, all our properties and operations are in Alabama, which has regulations governing conservation matters, such as the unitization or pooling of oil and natural gas properties, the establishment of maximum allowable rates of production from oil and natural gas wells, the regulation of well spacing, and plugging and abandonment of wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce from our wells and to limit the number of wells or the locations at which we can drill, although we can apply for exceptions to such regulations or to have reductions in well spacing. Moreover, Alabama imposes a production or severance tax with respect to the production and
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sale of oil, natural gas, and natural gas liquids within their jurisdictions. Failure to comply with these rules and regulations can result in substantial penalties. Our competitors in the oil and natural gas industry are subject to the same regulatory requirements and restrictions that affect our operations.
Regulation of Transportation of Oil
Sales of crude oil, condensate, and natural gas liquids are not currently regulated and are made at negotiated prices; however, Congress could reenact price controls in the future.
Our sales of crude oil are affected by the availability, terms, and cost of transportation. The transportation of oil in common carrier pipelines is also subject to rate regulation. The Federal Energy Regulatory Commission, or the FERC, regulates interstate oil pipeline transportation rates under the Interstate Commerce Act. Intrastate oil pipeline transportation rates are subject to regulation by state regulatory commissions. The basis for intrastate oil pipeline regulation, and the degree of regulatory oversight and scrutiny given to intrastate oil pipeline rates, varies from state to state. Insofar as effective interstate and intrastate rates are equally applicable to all comparable shippers, we believe that the regulation of oil transportation rates will not affect our operations in any way that is of material difference from those of our competitors. Further, interstate and intrastate common carrier oil pipelines must provide service on a non-discriminatory basis. Under this open access standard, common carriers must offer service to all shippers requesting service on the same terms and under the same rates. When oil pipelines operate at full capacity, access is governed by pro-rationing provisions set forth in the pipelines’ published tariffs. Accordingly, we believe that access to oil pipeline transportation services generally will be available to us to the same extent as to our competitors.
Regulation of Transportation and Sale of Natural Gas
Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy Act of 1978, and regulations issued under those Acts by the FERC. In the past, the federal government has regulated the prices at which natural gas could be sold. While sales by producers of natural gas can currently be made at uncontrolled market prices, Congress could reenact price controls in the future.
Since 1985, the FERC has endeavored to make natural gas transportation more accessible to natural gas buyers and sellers on an open and non-discriminatory basis. The FERC has stated that open access policies are necessary to improve the competitive structure of the interstate natural gas pipeline industry and to create a regulatory framework that will put natural gas sellers into more direct contractual relations with natural gas buyers by, among other things, unbundling the sale of natural gas from the sale of transportation and storage services. Although the FERC’s orders do not directly regulate natural gas producers, they are intended to foster increased competition within all phases of the natural gas industry. We cannot accurately predict whether the FERC’s actions will achieve the goal of increasing competition in markets in which our natural gas is sold. Therefore, we cannot provide any assurance that the less stringent regulatory approach established by the FERC will continue. However, we do not believe that any action taken will affect us in a way that materially differs from the way it affects other natural gas producers.
Intrastate natural gas transportation is subject to regulation by state regulatory agencies. The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny
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given to intrastate natural gas pipeline rates and services varies from state to state. Insofar as such regulation within a particular state will generally affect all intrastate natural gas shippers within the state on a comparable basis, we believe that the regulation of similarly situated intrastate natural gas transportation in any states in which we operate and ship natural gas on an intrastate basis will not affect our operations in any way that is of material difference from those of our competitors.
Principal Executive Offices
Our principal executive office is located at 3033 Wilson Boulevard, Suite E-605, Arlington, Virginia 22201, in Arlington County outside of Washington, D.C., and our telephone number is (703) 479-8538. We rent our principal executive offices under a month-to-month lease for a monthly rental of $50. The Company website is www.cojaxoilandgas.com.
Employees
We have two full-time employees: Jeffrey J. Guzy, our Chief Executive Officer, and a director, and Wm. Barrett Wellman, our Chief Financial Officer. The officers devote the number of hours necessary to perform their duties, and each officer, in his sole discretion, determines the extent of the time commitment.
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