SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004.
Commission File Number 0-30472
PIONEER OIL AND GAS
(Name of small business issuer as specified in its charter)
Utah 87-0365907
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1206 West South Jordan Parkway, Unit B
South Jordan, Utah 84095-5512
(Address of principal executive offices)
(801) 566-3000
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Par Value $.001 Per Share)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No __ Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation SB contained in this form, and no disclosures
will be contained, to the best of registrant's knowledge, in any definitive
proxy or information statement incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10 KSB [ ]
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No __
The issuer's revenues for its most recent fiscal year were $1,918,272.
The aggregate market value on September 30th, 2004, of common shares held by
non-affiliates was approximately $4,128,783 based on the average of the closing
bid and asked prices of the registrant's common shares on such date, as quoted
by the National Quotation Bureau.
As of December 18, 2004 the issuer had 7,912,819 shares of its $0.001 par value
common stock issued and outstanding.
Transitional Small Business Issuer Disclosure Format Yes ____ No X
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this 10KSB are forward-looking statements which involve risks and uncertainties,
including but not limited to economic, competitive, political, regulatory and
governmental factors affecting the company's revenues, operations, markets and
prices, properties and other factors discussed in the Company's various filings
with the Securities and Exchange Commission.
PART I
ITEM 1 - BUSINESS
HISTORY AND OVERVIEW
Pioneer Oil and Gas (the "Company") was organized on October 16, 1980 under the
laws of the State of Utah. The Company's principal place of business is located
at 1206 West South Jordan Parkway, Unit B, South Jordan, Utah 84095-5512. The
Company's telephone number is (801) 566-3000 and the Company's fax number is
(801) 446-5500. The Company has primarily been engaged in the acquisition and
exploration of oil and gas properties in Utah, Wyoming, Colorado and Nevada.
RECENT DEVELOPMENTS:
During the last three years, the Company has been focusing on obtaining
prospects for the exploration of oil and gas and continuing the operations of
its current producing oil and gas properties. During the last fiscal year ended
September 30th, 2004, the Company has sold drilling ventures for its Emigrant
Gap Prospect in Natrona County, Wyoming; Yankee Mine West Prospect in White Pine
County, Nevada and its Abel Springs Prospect in Nye County, Nevada. The Company
has also entered into an agreement to sell the remaining acreage in its Uinta
Basin Overpressured Gas Prospect in Utah and has accepted a deposit of $50,000
with the closing anticipated to occur on or before January 18, 2005. The Company
is currently marketing its trend acreage in central Utah that is near the
overthrust discovery of Wolverine Gas and Oil. The Company owns a 37.5%
undivided interest in approximately 60,000 acres on this overthrust trend. It is
also selling a large lease in the northwest portion of the Uinta Basin that is
about 12 miles north of it Uinta Basin Overpressured Gas Prospect mentioned
above
The Yankee Mine West Prospect in White Pine County Nevada commenced drilling
operations in December of 2004 with a projected drill depth of 4500 feet.
Drilling on the Emigrant Prospect and Abel Springs Prospect is not anticipated
to begin prior to spring of 2005 and most likely will be delayed to the summer
of 2005.
During the last year the Company has increased the amount of undeveloped oil and
gas leases it holds from 59,018 gross acres on 9/30/03 to 109,933 gross acres on
9/30/04 primarily due to the purchase of acreage in Central Utah. (See "Wells
and Acreage").
The Company has also been involved in a 3D seismic project in Texas that will
continue to cause the Company to expend funds during the current year on
prospective prospects identified on 3D seismic. The Company owns a 1.65% working
interest in the 3D seismic venture in Texas and has already drilled four wells
on the 3D seismic venture. One of the wells has been deemed a producer and the
others dry holes. The fifth well is currently being drilled and has not yet
reached the objective pay zone. The producer is anticipated to begin sales the
last part of December 2004.
The Company operates in a highly competitive industry wherein many companies are
competing for the same finite resources as the Company.
THE BUSINESS
The Company has focused its efforts over the years in acquiring oil and gas
properties from other companies, selling producing wells and acquiring new oil
and gas leases for the purpose of exploring for oil and gas. Leases have also
been acquired over the years for the purpose of reselling them at a profit to
other oil and gas companies.
Most of the Company's present production from oil and gas properties was
acquired from large oil companies selling properties they considered to be
marginal producers. The Company has found that it can operate these properties
at a profit. Presently, the Company operates 9 producing oil and gas wells in
Utah and Wyoming.
The Company also owns an interest in several non-operated oil and gas wells and
overriding royalty interests in oil and gas wells located in Utah, Colorado and
Wyoming. Primary among these overriding royalty interests is the Hunter Mesa
Unit and Grass Mesa Unit in Garfield County, Colorado. The Company's overriding
royalty interest although less than a half of a percent in both the Hunter Mesa
Unit and the Grass Mesa Unit accounts for the majority of the Company's royalty
income since the Units contain several hundred wells. An overriding royalty
interest is an interest in a well that receives a percentage of the production
from a well without paying any operation expenses.
The Company over the last few years has focused most of its exploration efforts
in the Rocky Mountain area, and in acquiring leasehold positions in trend areas
of existing production. Prior to leasing an area a geological review of the
prospective area is made by the Company's staff to determine the potential for
oil and gas. If an area is determined to have promise the Company will attempt
to acquire oil and gas leases over the prospective area. The Company will then
acquire geophysical data (generally seismic and gravity data) to further
evaluate the area. After the evaluation of the geophysical data, if the area
appears to contain significant accumulations of oil and gas in the Company's
opinion for the area, the Company will market a drilling program to outside
investors covering the Company's leases or sell the leases with the Company
retaining an overriding royalty interest. Significant accumulations cannot be
quantified because it depends on many factors such as how much it costs to drill
and complete wells in a certain area, how close the wells are to pipelines, what
the price of oil or gas is, how accessible the area is, whether the project is a
developmental or wildcat project, what the cost of oil and gas leases are in an
area, the type of return investors are seeking at that time in the different
exploration areas, and many other geological, geophysical and
other considerations.
When the Company markets a drilling program it sells a portion of its oil and
gas leases over the prospect area along with obtaining a drilling commitment
from the parties purchasing the leases to drill a well on the prospect area. A
drilling program will generally allow the Company to recoup its investment in
the area with the Company also retaining an ongoing interest in new wells to be
drilled in the area.
The Company markets its drilling programs to other industry partners. Drilling
programs have been marketed by placing ads in industry journals, attending trade
shows and by traveling to the office of prospective partners. In the past, the
Company has sold drilling programs to major oil companies and large independents
and occasionally to individuals.
COMPETITION
The oil and gas business is highly competitive. The Company competes against
numerous other companies, both major and independents, many with greater
financial resources and larger staffs than those available to the Company. In
the area that the Company competes there are over 100 competitors with no one
competitor dominating the area. The Company believes it can successfully compete
against other companies by focusing its efforts in the Rocky Mountain area and
by pursuing oil and gas prospects that it develops internally with its own
staff. The Company has also been able to successfully compete in the past for
leases in areas that it has accumulated geological and geophysical data.
MARKETABILITY
The products sold by the Company, natural gas and crude oil, are commodities
desired by many companies and the Company is frequently contacted regarding the
sale of its products. The Company sells all of its oil on 30-day contracts to
companies willing to pay the highest price. Although, at anytime the Company may
be selling 10% or more of its crude oil to one purchaser, such a purchaser is
not material to the Company since if that purchaser fails to purchase the
Company's oil for any reason the Company can readily sell the oil to another
party at a price close to what was paid by the former purchaser.
Presently, the marketability of the Company's crude oil has not posed a problem
for the Company. Crude oil can be easily sold wherever it is produced in the
states that the Company operates subject to the transportation cost. The crude
oil produced by the Company is transported either by trucking or pipeline. On
the other hand, natural gas can be more difficult to sell since transportation
requires a pipeline. In the areas that the Company is presently pursuing new
drilling activity for natural gas, other companies have been delayed up to a
year because of the unavailability of a pipeline. No assurance can be given that
natural gas wells drilled by the Company will be placed on line within a year
after the well is drilled and completed.
BUSINESS RISKS
Oil and gas exploration and drilling involves a high degree of risk. Oil and gas
prices are subject to fluctuations and, as a consequence, no assurance can be
given that oil and gas prices will decrease, increase or remain stable. There is
no assurance that wells drilled on behalf of the Company will obtain production
or that even if production is obtained, such production will allow the recovery
of all or any part of the investment made by the Company in a well.
There are other risks inherent in the oil and gas industry that are encountered
in drilling, completing, and producing oil and gas wells. These risks include
unusual or unexpected formations, pressures or other conditions, blowouts and
environmental pollution. The Company may incur losses due to environmental
hazards against which it cannot insure or which it elects not to insure against
because of high premium costs or other reasons. Consequently, substantial
uninsured liabilities to third parties may arise, the payment of which could
result in significant losses to the Company.
The Company carries comprehensive general liability in the amount of $6,000,000
with a financially sound and reputable insurance company and covers such risks
that are usually carried by companies engaged in the same or a similar business
and similarly situated. However, the Company usually does not insure against
environmental hazards such as blowouts of wells or environmental problems in a
prior chain of title. The cost of such insurance in many cases is prohibitive.
These types of risks are extraordinary events and are not generally covered
under a normal liability insurance policy for an oil and gas company.
Governmental regulation is a significant business risk of an oil and gas company
because the industry becomes more regulated with time. The Company is subject to
federal, state and local laws, regulations and ordinances relating to the
production and sale of oil and gas. Some of the laws that the Company is subject
to include the Clean Air Act, the Clean Water Act, and Endangered Species Act.
For example, coal bed methane wells are being highly regulated for disposing
produced fresh water on the surface. The EPA is requiring that the fresh water
meet more stringent standards than before, which ultimately may require the
water be injected underground. Reinjecting the water will increase the cost of
production and in some cases make the drilling of wells uneconomical.
Environmental regulations and taxes imposed by state governments in a
jurisdiction wherein producing oil and gas properties are located impose a
significant burden on the cost of production. Severance and ad valorem taxes in
Wyoming can amount to approximately 14% of the Company's gross production and if
the property is located on a Reservation the total tax burden by governmental
entities can amount to as much as 22% of the gross production. Governmental
regulation may also delay drilling in areas that have endangered species. Delays
in drilling in the past have not imposed a significant cost to the Company,
however, no assurance can be given that in future the delays will not be more
expensive.
In the oil and gas industry there is always a possibility that there will be a
shortage of drilling rigs, casing pipe or other material not being available,
when needed for drilling, completing or operating wells. To date, the Company
has not encountered any significant difficulties in the areas it has operated or
intends to operate in the future, however, no assurance can be given that this
condition will remain unchanged.
OBLIGATIONS AND CONTINGENCIES
The Company is liable for future restoration and abandonment costs associated
with its oil and gas properties. These costs include future site restoration and
plugging costs of wells. The cost of future abandonment of producing wells has
been estimated and is listed under the classification of asset retirement
obligation under the Statement of Operations in the Company's Financial
Statements.
OTHER
The Company had a total of four full-time employees as of September 30, 2004.
All of the company's revenues during the last fiscal year were derived from
domestic sources.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company owns an interest in 9 currently producing oil and gas wells located
in Utah and Wyoming.
The Company attempts to maintain all of its operating wells in good working
condition. Contract pumpers familiar with the oil and gas business in the area
that the well is located generally oversee wells operated by the Company.
The operated wells are secured by the Company's line of credit. Other than the
line of credit by Zions Bank the operated oil and gas wells of the Company have
no other liens or encumbrances.
The Company owns a small interest in more than 500 other oil and gas wells that
it does not operate. The Company owns its interest in these properties either as
a working interest owner or as an overriding royalty interest owner. These
interests vary from the Company owning an interest of less than a half of a
percent to as high as eight and a third percent. The non-operating properties
are located primarily in Colorado and Wyoming. The primary non-operated
properties of the Company are its interests in the Hunter Mesa and Grass Mesa
Units in Garfield County, Colorado. Although the Company owns less then a half
of a percent overriding royalty interest in these properties, the revenue is
significant to the Company since the Company's override in these properties is
in more than 500 wells. The non-operating properties of the Company account for
a little less than 50% of the Company's total oil and gas revenues. The Company
also owns various non-producing oil and gas leases that it is either attempting
to sell to industry partners or develop itself.
EXPLORATION AND PRODUCTION
During the fiscal years ending September 30, 2004, and September 30, 2003 the
Company participated as a working interest owner in the drilling of wells only
in the Texas 3D seismic venture referenced above. However, the Company plans to
participate as operator, working interest owner in the drilling of its Emigrant
Gas Prospect and two Nevada ventures during the next 12 months. The Company also
will be drilling additional wells in the Texas 3D seismic venture during the
coming fiscal year along with participating in some of the overpressured acreage
for which it retained an interest, when and if a well is drilled on that
acreage.
PROVED RESERVES
The following table sets forth the estimated proved developed oil and gas
reserves, net to Company's interest, of oil and gas properties as of September
30, 2004. The reserve information is based on the independent appraisal prepared
by Fall Line Energy Inc. of Littleton, Colorado, and was calculated in
accordance with the rules and regulations of the Securities and Exchange
Commission. The product pricing used was based on actual spot prices available
on September 30, 2004. Where necessary, prices were estimated based on
historical differentials between the different properties or with quoted indexes
such as the WTI Cushing prices, obtained from the US Government - Energy
Information Agency (EIA). The volume weighted average wellhead price was
determined to $43.46/Bbl and $4.55/MCF. The wellhead prices are net of BTU and
gravity adjustments, transportation deductions and differentials between Rocky
Mountain gas and most other markets. For comparison purposes, the average NYMEX
Henry Hub price for the same time period was $6.43/MMBTU, the average price for
the Questar Rocky Mountain Index was $4.53/MMBTU, and the average WTI Cushing
price was $49.51/Bbl. All product pricing was held flat for the life of the
project.
Present Value of Estimated Future Net Revenues
Estimated Proved Reserves Oil Gas Discounted
at
10% (1)
(MBbl) (MMCF) (M$)
Proved Developed
Operated
Canyon State 2-36 11.442 24.639 $ 219.193
-------------------------------------------------------------------------------
Climax 7-2 52.533 0.000 699.452
-------------------------------------------------------------------------------
Pilot A-1 and Delta 1 0.360 98.984 64.501
-------------------------------------------------------------------------------
Sheldon Tribal Lease (includes
-------------------------------------
31-1, 21-1, 42-1 wells) 12.589 0.000 153.190
-------------------------------------------------------------------------------
South Pine Ridge 7-6 0.127 44.370 104.290
-------------------------------------------------------------------------------
Willow Creek 29-13 8.340 21.174 208.047
-------------------------------------------------------------------------------
Non-Operated
Mamm Creek 0.057 39.525 99.727
-------------------------------------------------------------------------------
Climax Minnelusa Unit 2.600 0.000 31.186
-------------------------------------------------------------------------------
Hunter Mesa Unit 1.917 990.555 3,279.095
-------------------------------------------------------------------------------
Grassy Mesa Unit 0.548 161.964 516.330
-------------------------------------------------------------------------------
Murdock 41-10 3.143 0.000 30.519
-------------------------------------------------------------------------------
Totals 93.656 1,381.211 $5,405.530
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(1) The oil reserves assigned to the properties in the evaluation were
determined by analyzing current test data, extrapolating historical
production data, and comparing field data with the production history of
similar wells in the area. The current volatility of oil prices provides an
element of uncertainty to any estimates. If prices should vary
significantly from those projected in the appraisal, the resulting values
would change substantially.
The reserve estimates contained in the engineering report are based on accepted
engineering and evaluation principles. The present value of estimated future net
revenues, discounted at 10%, does not necessarily represent an estimate of a
fair market value for the evaluated properties.
The reserve estimates contained herein are the same required to be filed with
any governmental agency.
There are numerous uncertainties inherent in estimating quantities of proved oil
reserves. The estimates in the appraisal are based on various assumptions
relating to rates of future production, timing and amount of development
expenditures, oil prices, and the results of planned development work. Actual
future production rates and volumes, revenues, taxes, operating expenses,
development expenditures, and quantities of recoverable oil reserves may vary
substantially from those assumed in the estimates. Any significant change in
these assumptions, including changes that result from variances between
projected and actual results, could materially and adversely affect future
reserve estimates. In addition, such reserves may be subject to downward or
upward revision based upon production history, results of future development,
prevailing oil prices, and other factors.
The actual amount of the Company's proved reserves is dependent on the
prevailing price for oil, which is beyond the Company's control or influence.
World oil prices declined significantly during 1997 and 1998 from previous years
and increased significantly during 1999 and 2000. In 2003 and 2004 prices again
have been extremely volatile with oil prices increasing significantly during
fiscal year ending September 30th, 2004. There can be no assurance that oil
and/or natural gas prices will decline or increase in the future. Oil and gas
prices have been and are likely to continue to be volatile and subject to wide
fluctuations in response to any of the following factors: relatively minor
changes in the supply of and demand for oil and gas; market uncertainty;
political conditions in international oil producing regions; the extent of
domestic production and importation of oil; the level of consumer demand;
weather conditions; the competitive position of oil as a source of energy as
compared with natural gas, coal, nuclear energy, hydroelectric power, and other
energy sources; the refining capacity of prospective oil purchasers; the effect
of federal and state regulation on the production, transportation and sale of
oil; and other factors, all of which are beyond the control or influence of the
Company.
WELLS AND ACREAGE
In the oil and gas industry and as used herein, the word "gross" well or acre is
a well or acre in which a working interest is owned; the number of gross wells
is the total number of wells in which a working interest is owned. A "net" well
or acre is deemed to exist when the sum of fractional ownership working
interests in gross wells or acres equals one. The number of net wells or acres
is the sum of the fractional working interests owned in gross wells or acres.
As of September 30, 2004, the Company owned 5.89 net productive wells and 14
gross productive wells.
Set forth below is information respecting the developed and undeveloped acreage
owned by the Company in Utah, Colorado, Nevada and Wyoming as of September 30,
2004.
Developed Acreage Undeveloped Acreage
----------------- -------------------
Gross Net Gross Net
------ ------- ------- --------
2,600 1,600 107,333 66,415
Annual rentals on all undeveloped leases for the fiscal year ending September
30, 2004 are expected to be approximately $75,000.
PRODUCTION AND SALE OF OIL AND GAS
The following table summarizes certain information relating to the Company's net
oil and gas produced and from the Company's properties, after royalties, during
the periods indicated.
Year Ended September 30,
-----------------------
2003 2004
----- -----
Average net daily production of oil (Bbl) 44 37
Average net daily production of gas (MCF) 449 494
Average sales price of oil ($ per Bbl) $26.43 $32.31
Average sales price of gas ($ per MCF) $4.08 $4.97
Average lifting cost per bbl oil equiv. $8.42 $7.54
DELIVERY COMMITMENTS
The Company sells its oil to the company willing to pay the highest price for
its crude oil. In the area that the Company sells its oil there are several
different companies offering to purchase the Company's oil. The Company sells
all of its crude oil on 30-day contracts that can be terminated at anytime upon
30-day notice by either party. The Company has also entered into contracts to
sell its natural gas on monthly spot prices. The contracts do not require the
Company to produce or sell any quantity of gas. The contracts only provide that
the price will be paid up to a certain amount of gas produced from the wells,
which is more than the wells are currently producing. Therefore, the Company has
no commitments that obligate the Company to produce any set amount of oil or
gas.
The Company does not own the office space in which its business is located. The
Company is located in an office condominium owned by the Company's Board of
Directors. The Company pays less for rent than it did at its former location. To
provide more operating capital for the Company the Company has chosen to lease
the office space from the Company's Board of Directors who have purchased the
office condominium themselves. The office space is leased on terms reasonable
for the same kind of office space in the area that it is located. The office
space is 1,950 square feet with an unfinished basement of approximately 975
square feet. The Company's address is 1206 West South Jordan Parkway, Unit B,
South Jordan, Utah 84095-5512. The Company's telephone number is (801) 566-3000
and the fax number is (801) 446-5500.
ITEM 3 - LEGAL PROCEEDINGS
The Company may become or is subject to investigations, claims, or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, commercial transactions etc. The Company is
currently not aware of any such items, which it believes could have a material
adverse affect on its financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 28, 2004, the Company held its Annual Meeting of Shareholders (the
"Meeting"). The following matters were voted upon at the Meeting:
1. The election of the Board of Directors of the Company until the next
shareholder meeting.
The table below sets forth the name of each nominee for Director along with
the number of shares voting for each nominee:
For the Election
of the Board Against Abstained
Don J. Colton 6,951,212 42,860 300
Gregg B. Colton 6,951,212 42,860 300
John O. Anderson 6,951,212 42,860 300
2. To ratify the appointment of Jones Simkins as independent auditors for
Pioneer Oil and Gas for the next fiscal year ending September 30, 2004.
For appointment
of Jones Simkins Against Abstained
Number of Shares 6,961,307 30,980 2,103
All matters that were brought before the shareholders at the annual meeting
were approved.
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE AND DIVIDENDS OF COMPANY
The Company is listed on the over-the-counter market on the NASDAQ OTC Bulletin
Board. The range of high and low bid information for the shares of the Company's
stock for the last two complete fiscal years, as reported by the OTC Bulletin
Board National Quotation Bureau, is set forth below. Such quotations represent
prices between dealers, do not include retail markup, markdown or commission,
and do not represent actual transactions.
Year Ended September 30, 2004 High Low
First Quarter $.46 $.30
Second Quarter .70 .32
Third Quarter .90 .61
Fourth Quarter 3.00 .55
Year Ended September 30, 2003 High Low
First Quarter $.36 $.27
Second Quarter .45 .21
Third Quarter .43 .25
Fourth Quarter .47 .16
As of September 30, 2003 the Company had issued and outstanding 7,912,819 common
shares held by approximately 1,016 holders of record.
There have been no cash dividends declared by the Company since its inception.
Further, there are no restrictions that would limit the Company's ability to pay
dividends on its common equity or that would be likely to do so in the future.
The Company has no plans to register any of its securities under the Securities
Act for sale by security holders. There is no public offering of equity and
there is no proposed public offering of equity.
RECENT SALES OF UNREGISTERED SECURITIES
In June of 1998, the Company effected a reverse stock split of 10 common shares
of the Company for one share. After the reverse stock split the Company had
issued and outstanding 4,289,431 common shares. The Company issued an additional
3,845,587 common shares after the reverse stock split for purposes of paying the
Company's obligation under the Company's Employee Stock Ownership Plan, for
providing working capital and paying the creditors and expenses under the
Company's plan of reorganization in bankruptcy.
The Company has an Employee Stock Ownership Plan, in which the Company invested
prior to September 30, 2002, 10% of the compensation for full-time employees for
salary and bonuses in common stock of the Company. After September 30, 2002, the
Company has adopted the policy of investing 15% of the compensation for
full-time employees for salary and bonuses in common stock of the Company. All
full-time employees of the Company participate in the Employee Stock Ownership
Plan on the same terms and conditions as management. Shares in the Company's
Employee Stock Ownership Plan ("ESOP") before November 1999 were issued from the
Company to the Plan every six months to cover the Company's obligation to the
ESOP. From January 1997 to September 1998, the Company issued to the ESOP
248,244 common shares calculated on a post reverse stock split basis.
In November of 1998, the ESOP in conjunction with the offer made to shareholders
of the Company purchased 1,500,000 common shares of the Company's common stock
at a price of $.20 per share in the form of a stock subscription receivable. The
stock subscription receivable owed by the ESOP to the Company is reduced every
six months by the amount of the obligation owed by the Company towards the ESOP
for that period. The stock subscription receivable bears interest at a rate of
six percent per annum.
For the Company to emerge from its Chapter 11 bankruptcy in 1997 it required
enough capital to pay its creditors under the reorganization plan and needed
sufficient capital to operate. From July 1998 to February of 1999, the Company
issued 2,246,426 common shares to shareholders of the Company for a total
consideration of $415,308. From the $415,308 raised by the Company,
approximately $300,000 was used for paying bankruptcy expenses and for paying
the creditors of the Company. The remaining $115,308 of the $415,308 raised was
used for operating capital of the Company.
Sales of the Company's securities to the shareholders under the Bankruptcy Plan
and to the ESOP plan were exempt from registration under the Securities Act of
1933 pursuant to Section 4(2) of the Act.
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS -2004 Compared to 2003
Total revenue for fiscal year 2004 was $1,918,272 as compared to total revenue
for fiscal year 2003 of $1,929,279. Total oil and gas sales (including royalty
revenue) increased 33 percent from $1,360,985 to $1,805,077. This increase in
oil and gas revenue was primarily due to higher product prices and increased
production from our Hunter Mesa and Grassy Mesa units. Average gas prices
increased 22% from $4.08 MCF (2003) to $4.97 MCF (2004). Average oil prices
increased 22 percent from $26.43 per barrel in 2003 to $32.31 per barrel in
2004.
Project and lease sales income decreased from $566,365 in 2003 to $113,195 in
2004. The Company sold two-thirds of its overpressured gas project and a 3500
acre coalbed methane lease block in 2003. Sales of leases near Vernal Utah
accounted for most of the project and lease sales in 2004. Total revenue for the
company declined slightly due to lower project and lease sales income even
though oil and gas revenues increased significantly.
Costs of operations increased from $632,264 to $679,132. This item includes all
well operating expenses and any amounts paid to employees and other interest
owners for their interest in producing properties. Increased disbursements to
interest owners due to higher product prices accounted for most of the increase.
General and administrative costs increased from $316,259 in fiscal 2003 to
$346,970 in fiscal 2004 primarly due to higher payroll costs.
In fiscal 2004 loss on assets sold or abandoned decreased from $355,459 to $0.
The write-off of some of the Company's producing assets in Wyoming during fiscal
2003 accounted for the difference.
The Company's total stockholders' equity increased from $1,034,808 to
$1,533,335. Net income increased from $177,413 in 2003 to $492,344 in 2004.
Earnings per share increased from $.02 in fiscal 2003 to $.06 in fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company has funded operations primarily from earnings and bank
borrowing. As of September 30, 2004 the Company had working capital of
$1,151,486 and an unused line of credit with Zions Bank for $750,000. This line
of credit is collateralized by all of the companies operated oil and gas
properties. The line of credit bears interest at prime rate plus 1.0%. The line
of credit with Zions Bank matured on December 31, 2003, and was renewed for a
two year period ending December 31, 2005. As of September 30, 2003 and as of
September 30, 2004, the amount on the credit line was $0 and $0 respectively.
During fiscal 2004 cash provided by operating activities was $274,903 while cash
used for investing activities was for $133,255. There was a net increase in cash
of $119,563, as cash increased from $371,527 to $491,090. The increase in cash
for operating activities was primarily the result of a drilling advance for our
Yankee Mine Well in Nevada.
OIL AND GAS PROPERTIES
The Company, as of the date of this filing, is the owner of several oil and gas
properties located throughout the Rocky Mountain Region. The Company operates
four properties in Utah, three in Wyoming and one in Colorado. The standardized
measure of discounted future net cash flows (before income taxes) of all the
Company's properties as of September 30, 2004 was $5,405,530.
INCOME TAXES
As of September 30, 2004, the Company had net operating loss carry forwards of
approximately $1,164,000. The present net operating loss carry-forward of the
Company will begin to expire in the year 2012. If substantial changes in the
Company's ownership should occur there would be an annual limitation of the
amount of NOL carry forward which could be utilized. Also, the ultimate
realization of these carry forwards is due, in part, on the tax law in effect at
the time and future events that cannot be determined.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report on Form 10-KSB includes "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 included in this report, including, without limitation, statements under
"Description of Business", "Description of Property' and "Management's
Discussion and Analysis or Plan of Operation" regarding the Company's financial
position, reserve quantities and net present values, business strategy, plans
and objectives of management of the Company for future operations and capital
expenditures, are forward-looking statements and the assumptions upon which such
forward- looking statements are based are believed to be reasonable. The Company
can give no assurance that such expectations and assumptions will prove to be
correct. Reserve estimates of oil and gas properties are generally different
from the quantities of oil and natural gas that are ultimately recovered or
found. This is particularly true for estimates applied to exploratory prospects.
Additionally, any statements contained in this report regarding forward-looking
statements are subject to various known and unknown risks, uncertainties and
contingencies, many of which are beyond the control of the Company. Such things
may cause actual results, performance, achievements or expectations to differ
materially from the anticipated results, performance, achievements or
expectations. Factors that may affect such forward-looking statements include,
but are not limited to: the Company's ability to generate additional capital to
complete any planned drilling and exploration activities; risks inherent in oil
and gas acquisitions, exploration, drilling, development and production; price
volatility of oil and gas; competition; shortages of equipment, services and
supplies; government regulation; environmental matters; financial condition of
the other companies participating in the exploration, development and production
of oil and gas programs; and other matters beyond the Company's control. All
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf subsequent to the date of this report are expressly
qualified in their entirety by this disclosure.
ITEM 7 - FINANCIAL STATEMENTS
PIONEER OIL AND GAS
FINANCIAL STATEMENTS
September 30, 2004 and 2003
PIONEER OIL AND GAS
FINANCIAL STATEMENTS
September 30, 2004 and 2003
INDEX
Page
Independent Auditors' Report F-2
Statements of Operations F-3
Balance Sheets F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
Supplementary Schedules on Oil and Gas Operations F-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Pioneer Oil and Gas
We have audited the accompanying balance sheets of Pioneer Oil and Gas as of
September 30, 2004 and 2003, and the related statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing standards
as established by the Auditing Standards Board (United States) and in accordance
with the auditing standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pioneer Oil and Gas as of
September 30, 2004 and 2003, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
JONES SIMKINS, P.C.
Logan, Utah
November 18, 2004
F-2
PIONEER OIL AND GAS
STATEMENTS OF OPERATIONS
Years Ended September 30, 2004 and 2003
2004 2003
----------------- -----------------
Revenue:
Oil and gas sales $ 954,970 963,244
Royalty revenue 850,107 397,741
Operational reimbursements - 1,929
Project and lease sales income 113,195 566,365
----------------- -----------------
1,918,272 1,929,279
----------------- -----------------
Costs and expenses:
Cost of operations 679,132 632,264
General and administrative expenses 346,970 316,259
Exploration costs 208,309 248,753
Lease rentals 54,083 57,395
Depreciation, depletion and amortization 87,770 141,019
----------------- -----------------
1,376,264 1,395,690
----------------- -----------------
Income from operations 542,008 533,589
----------------- -----------------
Other income (expense):
Loss on assets sold or abandoned - (355,459)
Interest income 15,287 15,518
Interest expense (3,059) (23,476)
Other 19,629 7,241
----------------- -----------------
31,857 (356,176)
----------------- -----------------
Income before provision for income taxes 573,865 177,413
Provision for income taxes - -
----------------- -----------------
Net income before cumulative effect of a change in
accounting principle 573,865 177,413
Cumulative effect of a change in accounting principle - asset
retirement obligation (81,521) -
----------------- -----------------
Net income $ 492,344 177,413
================= =================
Net income per common share - basic and diluted:
Income before cumulative effect of accounting change $ .07 .02
Loss from cumulative effect of change in accounting principle (.01) -
----------------- -----------------
$ .06 .02
================= =================
Weighted average common shares - basic and diluted 7,931,000 7,962,000
================= =================
See accompamying notes to financial statements
F-3
PIONEER OIL AND GAS
BALANCE SHEETS
September 30, 2004 and 2003
2004 2003
------------------- -------------------
Assets
Current assets:
Cash $ 491,090 371,527
Accounts receivable 301,450 149,793
Resale leases, at lower of cost or market 1,052,292 219,677
------------------- -------------------
Total current assets 1,844,832 740,997
Property and equipment, net 537,969 438,881
Other assets 2,230 2,230
------------------- -------------------
$ 2,385,031 1,182,108
=================== ===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 108,208 122,093
Accrued expenses 28,565 25,207
Advances on drilling costs 556,573 -
------------------- -------------------
Total current liabilities 693,346 147,300
------------------- -------------------
Asset retirement obligation 158,350 -
------------------- -------------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.001 per share,
50,000,000 shares authorized; 7,912,819 and
7,961,618 shares issued and outstanding, respectively 7,912 7,961
Additional paid-in capital 2,473,256 2,495,292
Stock subscription receivable (203,659) (231,927)
Accumulated deficit (744,174) (1,236,518)
------------------- -------------------
Total stockholders' equity 1,533,335 1,034,808
------------------- -------------------
$ 2,385,031 1,182,108
=================== ===================
See accompamying notes to financial statements
F-4
Common Stock Additional Stock
-------------------- Paid-in Subscription Accumulated
Shares Amount Capital Receivable Deficit Total
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at October 1, 2002 7,961,618 $ 7,961 $ 2,495,292 $ (258,219) $ (1,413,931) $ 831,103
Payments on stock subscription
receivable - - - 26,292 - 26,292
Net income - - - - 177,413 177,413
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at September 30, 2003 7,961,618 7,961 2,495,292 (231,927) (1,236,518) 1,034,808
Payments on stock subscription
receivable - - - 28,268 - 28,268
Purchase and retirement of common
stock (48,799) (49) (22,036) - - (22,085)
Net income - - - - 492,344 492,344
--------- ------- ------------ ------------ ------------- ------------
--------- ------- ------------ ------------ ------------- ------------
Balance at September 30, 2004 7,912,819 $ 7,912 $ 2,473,256 $ (203,659) $ (744,174) $ 1,533,335
========= ======= ============ ============ ============= ============
========= ======= ============ ============ ============= ============
See accompamying notes to financial statements
F-5
PIONEER OIL AND GAS
STATEMENTS OF CASH FLOWS
Years Ended September 30, 2004 and 2003
2004 2003
----------------- -----------------
Cash flows from operating activities:
Net income $ 492,344 177,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on assets sold, abandoned, and dry hole costs 19,984 355,459
Depreciation, depletion and amortization 87,770 141,019
Accretion expense 4,609
Cumulative effect of change in accounting principle 81,521 -
Employee benefit plan expense 41,772 41,396
Interest income (13,504) (15,104)
(Increase) decrease in:
Accounts receivable (151,657) (28,620)
Resale leases (833,982) 308,131
Other assets - (230)
Increase (decrease) in:
Accounts payable (13,885) (6,334)
Accrued expenses 3,358 (5,745)
Advances on drilling costs 556,573 -
----------------- -----------------
----------------- -----------------
Net cash provided by operating activities 274,903 967,385
----------------- -----------------
----------------- -----------------
Cash flows from investing activities:
Acquisition of property and equipment (133,255) (32,158)
----------------- -----------------
----------------- -----------------
Net cash used in investing activities (133,255) (32,158)
----------------- -----------------
----------------- -----------------
Cash flow from financing activities:
Decrease in note payable - (654,158)
Purchase of common stock (22,085) -
----------------- -----------------
----------------- -----------------
Net cash used in financing activities (22,085) (654,158)
----------------- -----------------
----------------- -----------------
Net increase in cash 119,563 281,069
Cash, beginning of year 371,527 90,458
----------------- -----------------
----------------- -----------------
Cash, end of year $ 491,090 371,527
================= =================
================= =================
See accompamying notes to financial statements
F-6
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
The Company is incorporated under the laws of the state of Utah and is primarily
engaged in the business of acquiring, developing, producing and selling oil and
gas properties to companies located in the continental United States.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.
Concentration of Credit Risk
The Company maintains its cash in bank deposit accounts, which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant credit
risk on cash and cash equivalents.
Resale Leases
The Company capitalizes the costs of acquiring oil and gas leaseholds held for
resale, including lease bonuses and any advance rentals required at the time of
assignment of the lease to the Company. Advance rentals paid after assignment
are charged to expense as carrying costs in the period incurred. Costs of oil
and gas leases held for resale are valued at lower of cost or net realizable
value and included in current assets since they could be sold within one year,
although the holding period of individual leases may be in excess of one year.
The cost of oil and gas leases sold is determined on a specific identification
basis.
Oil and Gas Producing Activities
The Company utilizes the successful efforts method of accounting for its oil and
gas producing activities. Under this method, all costs associated with
productive exploratory wells and productive or nonproductive development wells
are capitalized while the costs of nonproductive exploratory wells are expensed.
F-7
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Oil and Gas Producing Activities (continued)
If an exploratory well finds oil and gas reserves, but a determination that such
reserves can be classified as proved is not made after one year following
completion of drilling, the costs of drilling are charged to operations.
Indirect exploratory expenditures, including geophysical costs and annual lease
rentals are expensed as incurred. Unproved oil and gas properties that are
individually significant are periodically assessed for impairment of value and a
loss is recognized at the time of impairment by providing an impairment
experience of successful drillings and average holding period. Capitalized costs
of producing oil and gas properties after considering estimated dismantlement
and abandonment costs and estimated salvage values, are depreciated and depleted
by the units-of-production method. Support equipment and other property and
equipment are depreciated over their estimated useful lives.
On the sale or retirement of a complete unit of a proved property, the cost and
related accumulated depreciation, depletion and amortization are eliminated from
the property accounts, and the resultant gain or loss is recognized. On the
retirement or sale of a partial unit of proved property, the cost is charged to
accumulated depreciation, depletion and amortization with a resulting gain or
loss recognized in income.
On the sale of an entire interest in an unproved property for cash or cash
equivalent, gain or loss on the sale is recognized, taking into consideration
the amount of any recorded impairment if the property has been assessed
individually. If a partial interest in an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized. When assets are sold,
retired or otherwise disposed of the applicable costs and accumulated
depreciation, depletion and amortization are removed from the accounts, and the
resulting gain or loss is reflected in operations.
F-8
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred income taxes arise from temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending on
the classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or non-current depending on the periods in
which the temporary differences are expected to reverse. Temporary differences
result primarily from net operating loss carryforwards, intangible drilling
costs and depletion.
Earnings Per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.
Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized in the financial statements, as all options granted
under those plans had an exercise price equal to or greater than the market
value of the underlying common stock on the date of grant. Had the Company's
options been determined based on the fair value method, the results of
operations would have remained unchanged as all options were vested in prior
years.
Revenue Recognition
Revenue is recognized from oil sales at such time as the oil is delivered to the
buyer. Revenue is recognized from gas sales when the gas passes through the
pipeline at the well head. Revenue from overriding royalty interests is
recognized when earned.
The Company does not have any gas balancing arrangements.
F-9
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
primarily related to oil and gas property reserves and prices, 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.
Note 2 - Property and Equipment
Property and equipment consists of the following:
September 30,
2004 2003
Oil and gas properties (successful efforts method) $ 1,987,099 1,914,635
Capitalized asset retirement cost 116,376 -
Office furniture and equipment 139,360 133,321
2,242,835 2,047,956
Less accumulated depreciation, depletion and
amortization (1,704,866) (1,609,075)
$ 537,969 438,881
F-10
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 3 - Asset Retirement Obligation
The Company has an obligation to plug and abandon certain oil and gas wells it
owns. Accordingly, a liability has been established equal to the obligation.
Following is a reconciliation of the aggregate retirement liability associated
with the Company's obligation to plug and abandon its oil and gas properties:
2004
Balance at beginning of year $ -
Initial amount recorded for ARO 116,376
Cumulative effect of accounting change 37,365
Additional obligations incurred -
Revisions of estimate -
Accretion expense 4,609
Balance at end of year $ 158,350
Note 4 - Cumulative Effect of Change In Accounting Principle
The Company has adopted the provisions of SFAS 143 "Accounting for Asset
Retirement Obligations" which requires entities to record the fair value of a
legal liability for an asset retirement obligation in the period in which it is
incurred. The Company has recognized a liability based on the present value of
the estimated costs related to its obligation to plug and abandon the oil and
gas wells it owns. The Company has also capitalized the costs of the liability
through increasing the carrying amount of its oil and gas properties. The
liability is accreted to its estimated present value each period, and the
capitalized cost is amortizated over the useful life of the related asset. Upon
settlement of the liability, the Company will settle the obligation for its
recorded amount or incur a gain or loss upon settlement.
The effect of adopting SFAS 143 is recorded as the cumulative effect of a change
in accounting principle as follows:
Amortization $ 44,156
Accretion of asset retirement obligation 37,365
Cumulative effect of change $ 81,521
F-11
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 5 - Note Payable
The Company has a bank revolving line-of-credit agreement, which allows the
Company to borrow a maximum amount of $750,000. This agreement bears interest at
the bank's prime rate plus 1 percent and is secured by accounts receivable and
producing properties. The line-of-credit matures on December 31, 2005 and had no
outstanding balance at September 30, 2004 and 2003. Also, as of September 30,
2004, $20,000 of the $750,000 was reserved for an outstanding letter of credit.
Note 6 - Stock Subscription Receivable
The stock subscription receivable consists of a six percent receivable due from
the Company's ESOP. The receivable is reduced every six months by the amount of
the obligation owed by the Company to the ESOP, less interest (see Note 12).
During the years ended September 30, 2004 and 2003, the Company recognized
$13,504 and $15,104 of interest income related to this note.
Note 7 - Income Taxes
The provision for income taxes differs from the amount computed at federal
statutory rates as follows:
Years Ended
September 30,
2004 2003
Income tax provision at statutory rate $ 160,000 45,000
Change in valuation allowance (160,000) (45,000)
-------- --------
$ - -
======== ========
F-12
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 7 - Income Taxes (continued)
Deferred tax assets (liabilities) are comprised of the following:
September 30,
2004 2003
------- ------
Intangible drilling costs and depletion $ 129,000 15,000
Net operating loss carryforwards 396,000 696,000
Asset Retirement Obligation 31,000 -
AMT credit carryforward - 5,000
------- -------
556,000 716,000
------- -------
Valuation allowance (556,000) (716,000)
$ - -
======== ========
A valuation allowance has been recorded for the full amount of the deferred tax
asset because it is more likely than not that the deferred tax asset will not be
realized.
As of September 30, 2004, the Company had net operating loss carryforwards of
approximately $1,164,000. These carryforwards begin to expire in 2012. If
substantial changes in the Company's ownership should occur there would be an
annual limitation of the amount of NOL carryforward which could be utilized.
Also, the ultimate realization of these carryforwards is due, in part, on the
tax law in effect at the time and future events that cannot be determined.
Note 8 - Sales to Major Customers
The Company had sales to major customers during the years ended September 30,
2004 and 2003, which exceeded ten percent of total sales as follows:
September 30,
2004 2003
------- -------
Company A $ 788,000 115,000
Company B 434,000 420,000
Company C 207,000 414,000
Company D - 134,000
F-13
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 9 - Related Party Transactions
The Company acts as the operator for several oil and gas properties in which
employees, officers and other related and unrelated parties have a working or
royalty interest. At September 30, 2004 and 2003 there was $14,016 and $17,917,
respectively, included in accounts payable due to officers as a result of these
activities. Also at September 30, 2004 and 2003 there was $26,673 and $0,
respectively, included in accounts receivable due from officers as a result of
these activities. The Company also is the general manager in certain limited
partnerships and the operator for certain joint ventures formed for the purpose
of oil and gas exploration and development.
The Company leases its office space from certain officers of the Company. The
lease requires monthly rental payments of $2,500 plus all expenses pertaining to
the office space and expires in September 2005. Future minimum lease payments
for the next year are $30,000. Rent expense for the years ended September 30,
2004 and 2003 was approximately $30,000 each year.
The Company has a stock subscription receivable from the ESOP (see Note 6).
Note 10 - Supplemental Disclosures of Cash Flow Information
During the year ended September 30, 2004:
o The Company recorded an asset retirement obligation and increased oil and gas
properties in the amount of $116,376.
o The Company transferred property from Leases for Resale to Developing
Properties in the amount of $1,367.
Operations reflect actual amounts paid for interest and income taxes
approximately as follows:
September 30,
2004 2003
------ -------
Interest $ 3,000 23,000
Income taxes - -
Note 11 - Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, payables and a
note payable. The carrying amount of cash, receivables and payables approximates
fair value because of the short-term nature of these items. The carrying amount
of the note payable approximates fair value as the note bears interest at
floating market interest rates.
F-14
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 12 - Stock Options
The Company has granted stock options to the members of the Board of Directors
and the officers and employees of the Company to purchase shares of the
Company's common stock. The exercise price of the options is equal to or in
excess of the fair market value of the stock on the date of grant. All options
were granted and vested prior to 2003.
Information related to these options at September 30, 2004 is as follows:
Outstanding Exercisable
------------------------------------------------- --------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
$.20 420,000 6.9 $.20 420,000 $.20
==== ======= === ==== ======= ====
Employee Stock Ownership Plan
The Company has adopted a noncontributory employee stock ownership plan (ESOP)
covering all full-time employees who have met certain service requirements. It
provides for discretionary contributions by the Company as determined annually
by the Board of Directors, up to the maximum amount permitted under the Internal
Revenue Code. The plan has received IRS approval under Section 401(A) and 501(A)
of the Internal Revenue Code. Pension expense charged to operations for the
years ended September 30, 2004 and 2003 was $41,772 and $41,396 respectively.
All outstanding shares held by the ESOP are included in the calculation of
earnings per share.
Note 13 - Commitments and Contingencies
Limited Partnerships
The Company has an immaterial interest in a limited partnership drilling program
and acts as the general partner. As the general partner, the Company is
contingently liable for any obligations of the partnership and may be
contingently liable for claims generally incidental to the conduct of its
business as general partner. As of September 30, 2004, the Company was unaware
of any such obligations or claims arising from this partnership.
F-15
PIONEER OIL AND GAS
NOTES TO FINANCIAL STATEMENTS
September 30, 2004 and 2003
Note 13 - Commitments and Contingencies (continued)
Employment Agreements
The Company has entered into severance pay agreements with employees and
officers of the Company who also serve as board members. Under the terms of the
agreements, a board member who is terminated shall receive severance pay equal
to the amount such board member received in salary and bonus for the two years
prior to termination.
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to
environmental safety and health, commercial transactions, etc. The Company is
currently not aware of any such item, which it believes could have a material
adverse affect on its financial position.
Letter of Credit
The Company has a $20,000 letter-of-credit related to its oil and gas
operations. The letter-of-credit was issued in connection with the Company's
line-of-credit (see Note 5).
F-16
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
The information on the Company's oil and gas operations as shown in this
schedule is based on the successful efforts method of accounting and is
presented in conformity with the disclosure requirements of the Statement of
Financial Accounting Standards No. 69 "Disclosures about Oil and Gas Producing
Activities."
Capitalized Costs Relating to Oil and Gas Producing Activities
September 30,
2004 2003
Proved oil and gas properties and related equipment $ 1,763,802 1,763,802
Unproved oil and gas properties 223,298 150,833
Subtotal 1,987,099 1,914,635
Accumulated depreciation, depletion and amortization
and valuation allowances (1,553,389) (1,483,991)
$ 433,710 430,644
Costs Incurred in Oil and Gas Acquisition, Exploration and Development
Activities
September 30,
2004 2003
Acquisition of properties:
Proved $ - -
Unproved $ - -
Exploration costs $ - -
Development costs $ 91,081 96,272
F-17
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Results of Operations for Producing Activities
Years Ended
September 30,
2004 2003
Oil and gas - sales $ 1,805,077 1,360,985
Production costs net of reimbursements (733,215) (687,730)
Exploration costs (208,309) (248,753)
Depreciation, depletion and amortization
and valuation provisions (69,397) (136,726)
Net income before income taxes 794,156 287,776
Income tax provision (270,000) (98,000)
Results of operations from producing activities
(excluding corporate overhead and interest costs) $ 524,156 189,776
F-18
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Reserve Quantity Information (Unaudited)
---------------------------------------
The estimated quantities of proved oil and gas reserves disclosed in the table
below are based upon on appraisal of the proved developed properties by Fall
Line Energy, Inc. Such estimates are inherently imprecise and may be subject to
substantial revisions.
All quantities shown in the table are proved developed reserves and are located
within the United States.
Years Ended September 30,
2004 2003
Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf)
Proved developed and undeveloped reserves:
Beginning of year 116,486 879,320 118,572 774,733
Revision in previous estimates (9,212) 682,220 13,841 53,677
Discoveries and extensions - - - 214,708
Purchase in place - - - -
Production (13,618) (180,329) (15,927) (163,798)
Sales in place - - - -
End of year 93,656 1,381,211 116,486 879,320
Proved developed reserves:
Beginning of year 116,486 879,320 118,572 774,733
End of year 93,656 1,381,211 116,486 879,320
F-19
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
Relating to Proved Oil and Gas Reserves (Unaudited)
Years Ended
September 30,
2004 2003
Future cash inflows $ 10,409,000 7,340,000
Future production and development costs (2,586,000) (1,905,000)
Future income tax expenses (2,660,000) (1,848,000)
5,163,000 3,587,000
10% annual discount for estimated timing of cash flows (1,953,000) (1,415,000)
Standardized measure of discounted future net cash flows $ 3,210,000 2,172,000
The preceding table sets forth the estimated future net cash flows and related
present value, discounted at a 10% annual rate, from the Company's proved
reserves of oil, condense and gas. The estimated future net revenue is computed
by applying the year end prices of oil and gas (including price changes that are
fixed and determinable) and current costs of development production to estimated
future production assuming continuation of existing economic conditions. The
values expressed are estimates only, without actual long-term production to base
the production flows, and may not reflect realizable values or fair market
values of the oil and gas ultimately extracted and recovered. The ultimate year
of realization is also subject to accessibility of petroleum reserves and the
ability of the Company to market the products.
F-20
PIONEER OIL AND GAS
SCHEDULE OF SUPPLEMENTARY INFORMATION
ON OIL AND GAS OPERATIONS
September 30, 2004 and 2003
Changes in the Standardized Measure of
Discounted Future Cash Flows (Unaudited)
Years Ended
September 30,
2004 2003
Balance, beginning of year $ 2,172,000 877,000
Sales of oil and gas produced net of production costs (839,000) (539,000)
Net changes in prices and production costs 1,424,000 (1,186,000)
Extensions and discoveries, less related costs - 876,000
Purchase and sales of minerals in place - -
Revisions of estimated development costs - -
Revisions of previous quantity estimate 771,000 351,000
Accretion of discount 217,000 88,000
Net changes in income taxes (535,000) (667,000)
Balance, end of year $ 3,210,000 2,172,000
F-21
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANACIAL DISCLOSURE
The Company has had no changes in and/or disagreements with its Accountants
during the last two fiscal years.
ITEM 8A-CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" (defined in Rule 13a-15(e)) refers
to the controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Securities and Exchange Act of 1934 (the "Exchange Act") is recorded,
processed, summarized and reported within required time periods. The Company's
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures as of a date
within 90 days before the filing of this annual report, and he concluded that,
as of such date, the Company's controls and procedures were effective.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors, executive officers and significant employees of the company are
as follows:
POSITION
NAME AGE WITH COMPANY
---- --- ------------
Don J. Colton 58 President/Treasurer & Director
Gregg B. Colton 51 Vice President/Secretary & Director
John O. Anderson 62 Office Manager/Director
Michael L. Pinnell 60 Exploration Manager
Lynn Woodbury 41 Director
Note: Don J. Colton and Gregg B. Colton are brothers and John O. Anderson is
their uncle.
Don J. Colton serves as the Company's President, Treasurer and Chairman of its
Board of Directors. Since the Company's inception in October 1980 Mr. Colton has
served as the Company's President and has been involved in all aspects of the
business including exploration, acquisition and development of producing
properties. From 1979 to 1981, Mr. Colton was Chief Financial Officer and a
member of the Board of Directors of Drilling Research Laboratory in Salt Lake
City, Utah. The Drilling Research Laboratory is a subsidiary of Terra Tech, Inc.
and prior to his involvement with the Drilling Research Laboratory, Mr. Colton
was Manager of Special Projects for Terra Tech. Mr. Colton received a BS in
Physics from Brigham Young University in 1970 and a Master of Business
Administration from the University of Utah in 1974.
Gregg B. Colton serves as the Company's Vice President, Secretary, General
Counsel and a member of the Board of Directors. Mr. Colton has been employed
with the Company since it actually commenced business in 1981. Mr. Colton is
involved in handling the contracts, sales of oil and gas products and legal
problems of the Company along with the day to day decision making for the
Company with the Company's President. From 1981 to 1984, Mr. Colton was also a
partner in the law firm of Cannon, Hansen & Wilkinson. Mr. Colton is a member of
the Utah State Bar and a real estate broker. He is also a member of the
Corporate Counsel section for the Utah State Bar. Mr. Colton earned his BA from
the University of Utah in 1976 and a Juris Doctor and a Master of Business
Administration from Brigham Young University in 1981.
John O. Anderson serves as the Company's Office Manager along with being a
member of the Board of Directors. Mr. Anderson as Office Manager handles the day
to day accounting for the Company along with handling the procurement of office
supplies. The Company has employed Mr. Anderson since 1981 and prior to joining
the Company he worked in land investments. Mr. Anderson received his BS in
Zoology in 1968 from the University of California.
Michael L. Pinnell serves as the Company's Exploration Manager and has been
employed by the Company from 1989 to the present. Mr. Pinnell is in charge of
performing and supervising the geological and geophysical interpretation for the
Company's drilling prospects. Mr. Pinnell worked as a consultant for various
companies from 1985 to 1989 and performed geological and geophysical services.
From 1981 to 1985 Mr. Pinnell was the Exploration Manager for Fortune Oil
Company. Mr. Pinnell received a BS in Geology in 1970 and an MS in Geology from
Brigham Young University in 1972.
Lynn Woodbury became a member of the Board of Directors of the Company in July
of 2004 and is the sole member of the Company's audit committee. Ms. Woodbury
works full-time for International Petroleum LLC as their Controller and
supervises all phases of accounting for International Petroleum LLC. She has
been employed by International Petroleum LLC from 1999 to the present. Prior to
joining International Petroleum LLC, Ms. Woodbury from 1996 to 1999 was
self-employed and provided tax planning and compliance services for clients.
From 1986 to 1996, Ms. Woodbury was a staff accountant for Kevin R. Huntington.
Ms. Woodbury obtained a BS in Accounting in 1985 from Brigham Young University
and has been a licensed certified public accountant since 1994. She is a member
of the American Institute of Certified Public Accountants and a member of the
Utah Association of Certified Pubic Accountants.
AUDIT COMMITTEE
The Company's Audit Committee has the responsibility of assisting with the
selection of the independent auditors, approving all audit and non-audit
services, reviewing with management and the independent auditors the Company's
financial statements, significant accounting and financial policies and
practices, audit scope and adequacy of internal audit and control systems. The
Audit Committee is comprised of Lynn Woodbury, presently the sole member of the
committee. Ms. Woodbury will meet each quarter to review the financial
statements of the Company prior to submission with the SEC. Ms. Woodbury, a CPA,
is considered an independent director in accordance with the National
Association of Securities Dealer's listing standards and serves as the Chairman
and designated financial expert for the audit committee. All members of the
Audit Committee are able to read and understand fundamental financial
statements.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of the
Company's Common Stock, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers, directors and
greater than ten percent stockholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
The following disclosure is based solely upon a review of the Forms 3 and any
amendments thereto furnished to the Company during the Company's fiscal year
ended September 30, 2004, and Forms 5 and amendments thereto furnished to the
Company with respect to such fiscal year, or written representations that no
Forms 5 were required to be filed by such persons. Based on this review there
were no reports or SEC forms required to be filed by directors of the Company
for the fiscal year ended September 30, 2004.
ITEM 10 - EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth all cash compensation paid,
distributed or accrued for services, including salary and bonus amounts rendered
in all capacities for the Company's CEO during the fiscal years ended, September
30, 2004, 2003, and 2002. All other tables required to be reported have been
omitted as there has been no compensation awarded to, earned by or paid to any
of the executives of the Company that is required to be reported other than what
is stated below:
SUMMARY COMPENSATION TABLE
Name and Amount of Fiscal
Principal Position Compensation Year Ended
Don J. Colton, CEO $91,129(1) 2004
Don J. Colton, CEO $90,504(1) 2003
Don J. Colton, CEO $90,504(1) 2002
(1) The amount of compensation included in the table above for each fiscal
year does not include amounts paid by the Company for the Company's
Employee Stock Ownership Plan. Under the Employee Stock Ownership Plan 10%
of the employees compensation for salary or bonuses is paid on behalf of
the employee for Company stock in the Company's Employee Stock Ownership
Plan before October 1, 2002 and after September 30, 2002, 15% is paid. All
full-time employees of the Company participate in the Employee Stock
Ownership Plan on the same terms and conditions as management. For fiscal
year 2002 shown above 10% and in 2003 and in 2004, 15% of the compensation
amount above was paid towards the Employee Stock Ownership Plan in the form
of Company stock.
The Company in its June 27, 2001, annual shareholders meeting approved an
incentive stock option plan for its employees, directors and officers. After the
approval of the incentive stock option plan, the Company canceled all of the
options presently existing at that time and replaced them with the same number
of incentive stock options in accordance with the plan approved by the
shareholders. Below are the options granted in the last three years that are
required to be disclosed under this filing:
OPTION GRANTS IN LAST TWO FISCAL
YEARS
% of Total
Number of Options
Securities Granted to
Underlying Employees in ExerciseExp.
Name Options Granted Fiscal Year Price ($/Sh) Date
Don J. Colton, CEO 120,000 0.0% $.20/Share (1)
(1) The 120,000 options granted above are due to expire on August 9, 2011.
No options were exercised during the year by any officer, director or
employee granted options under the Company's incentive option stock plan.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock by each person or group that is known by
the Company to be the beneficial owner of more than five percent of its
outstanding Common Stock, each director of the Company, each person named in the
Summary Compensation Table, and all directors and executive officers of the
Company as a group as of September 30, 2004. Unless otherwise indicated, the
Company believes that the persons named in the table below, based on information
furnished by such owners, have sole voting and investment power with respect to
the Common Stock beneficially owned by them, where applicable.
Title of Name and Address of Amount and Nature Percent
Class Beneficial Owner of Beneficial Owner of Class
Common Don J. Colton 880,625(1) 10.6%
2172 E Gambel Oak Drive
Sandy, Utah 84092
Common Gregg B. Colton 890,664(1) 10.7%
10026 Ridge Gate Circle
Sandy, Utah 84092
Common John O. Anderson 535,703(1) 6.4%
7462 S Parkridge Circle
Salt Lake City, Utah 84121
Common Lynn Woodbury
4834 South Highland Drive
Salt Lake City, Utah 84117
Common Pioneer Employee Stock 1,018,290(2) 12.22%
Ownership Plan
1206 W. South Jordan Parkway
Unit B
South Jordan, Utah 84095-5512
All Directors and Officers as a Group
(3 Persons) 2,306,992 27.69%
(1) Includes currently exercisable options to purchase common stock in
the Company as long as the person is serving as a director and
employee of the Company. Each of the persons listed under this
footnote has options to purchase 120,000 shares of the Company's
Common Stock.
(2) Persons listed above have their vested shares under the Pioneer
Employee Stock Ownership Plan included under their name. Don J. Colton
and Gregg B. Colton as Trustees of the Pioneer Employee Stock
Ownership Plan have the right to vote all the shares of the Plan at
any shareholder meeting of the Company.
The Company currently has no arrangements, which may result in a change of
control.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Board of Directors approved more than 10 years ago a resolution to allow
employees of the Company to purchase 25% of any oil and gas producing property
acquired by the Company at the same time as the Company acquires the property.
The resolution required that the employees pay for 25% of the cost of the oil
and gas properties at the same time the Company purchased the properties. In the
event the Company is unable to fund the total cost of any producing properties,
the employees of the Company may purchase the amount the Company is unable to
fund even if it exceeds 25%. The employees also have the right to acquire 25% of
any non-producing oil and gas leases acquired by the Company on similar terms as
those for producing properties. The Company also benefits its employees other
than by monetary compensation by assigning overriding royalty interests to
Company employees that have assisted the Company on the various oil and gas
projects.
The Company leases office space that is owned by the Board of Directors. The
office space is leased to the Company on terms reasonable for the same kind of
office space in the area that it is located. The new office space has 1,950
square feet with an unfinished basement of approximately 975 square feet.
The Board of Directors has also authorized the Company to repurchase up to
2,000,000 of its common shares as treasury stock, during the fiscal year 2004
the Company repurchased a total of 48,799 common shares through its purchase of
small shareholder stock. During fiscal year ending September 30, 2002, the
Company repurchased 25,000 common shares and none during fiscal year ending
September 30, 2003. The exact timing, price and terms for the purchase of the
stock shall be at the discretion of the officers of the Company.
PART IV
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
PART F/S FINANCIAL STATEMENTS
The financial statements of the Company as required by Item 310 of Regulation
S-B are included in Part II, Item 7 of this report.
PART III. INDEX TO EXHIBITS
The following Exhibits are filed herewith:
Exhibit No. Description
3(i) Articles of Incorporation (1) (with
amendments)
3(ii) Bylaws (1)
10 Line of Credit Agreement (1)
23 Fall Line Energy letters from Petroleum Engineer
31 Certification of the Chief Executive
Officer and Chief Financial Officer
pursuant to Rule 13a-14 of the
Securities and Exchange Act of 1934,
as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certification of the 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.
(1) Incorporated by reference from the Company's 2000 Form
10SB.
REPORTS ON FORM 8-K
The Company filed one form 8K during fiscal year ending
September 30, 2004, regarding the Company's buyback of common shares from
shareholders owning 1000 or less shares in the Company. Most of the common
shares acquired by the Company during fiscal year 2004 were purchased pursuant
to the small shareholder buyback plan.
ITEM 14-PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees: The Company's principal accountants billed fees of approximately
$14,000 and $13,570 for the fiscal years ended September 30, 2004 and 2003,
respectively, for the audit of the Company's annual financial statements and
review of quarterly financial statements reported on Form 10-QSB.
Tax Fees: The Company's principal accountants billed the Company for tax fees
during fiscal years 2004 and 2003 for assistance with filing the federal tax
return and state tax return in Utah in the amount of $1,681.76 and 1,581.76
respectively.
All Other Fees: The Company was not billed for any other fees by its principal
accountants during the fiscal years ended September 30, 2004, or 2003. The Audit
Committee commencing this year requires that all audit and non-audit services
performed by the Company's principal accountants are approved by the entire
Audit Committee.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/
By: ______________________
Don J. Colton
Director/President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/
_________________________ Director/President
Don J. Colton
/s/
_________________________ Director/Vice President/Secretary
Gregg B. Colton
/s/
_________________________ Director
John O. Anderson
/s/
_________________________ Director
Lynn Woodbury
Exhibit 23
Fall Line Energy, Inc.
PO Box 2935 o Centennial, Colorado 80161-2935 o (303) 795-9887
November 15, 2004
Mr. Don Colton
Pioneer Oil and Gas
1206 W. South Jordan Parkway, Unit B
South Jordan, UT 84095-4551
RE: Pioneer Oil and Gas
2004 Reserve Report
SEC Pricing
Dear Mr. Colton:
This report provides an appraisal of net oil and gas reserves and the associated
economic benefit to Pioneer Oil and Gas (POG) as of September 30, 2004. The only
reserves class evaluated was Proved Developed Producing. No credit was given to
behind pipe zones, potential enhanced oil recovery, infill drilling or wells not
currently producing due to operational problems.
Product Pricing
As requested, the economics were run using SEC pricing guidelines. The product
pricing used were based on actual spot prices available on September 30, 2004.
Where necessary, prices were estimated based on historical differentials between
the different properties or with quoted indexes such as the WTI Cushing prices,
obtained from the US Government - Energy Information Agency (EIA).
The volume weighted average wellhead price was determined to be $43.46/Bbl and
$4.55/MCF. This represents an increase of $17.61/Bbl and a decrease of $0.24/MCF
from last years report. The wellhead prices are net of BTU and gravity
adjustments, transportation deductions and differentials between Rocky Mountain
markets and most other markets. For comparison purposes, the NYMEX Henry Hub
price for September 30th, 2004 was $6.43/MMBTU, the price for the Questar Rocky
Mountain Index was $4.53/MMBTU, and the WTI Cushing price was $49.51/Bbl. All
product pricing was held flat for the life of the project.
Reserves Classification:
Only one class of reserves were evaluated, Proved Developed Producing (PDP). No
credit was given to behind pipe zones, potential enhanced oil recovery, infill
drilling or wells not currently producing due to operational problems. The
reserves were classified using the Society of Petroleum Evaluation Engineers
Reserve Definitions, a copy of which is attached to this report.
Estimates of oil, condensate, natural gas liquids, and gas reserves and future
net revenue should be regarded only as estimates that are likely to change as
actual production and pressure history becomes available. Not only are such
reserve and revenue estimates based on that information which is currently
available, but such estimates are also subject to the uncertainties inherent in
the application of judgmental factors in interpreting such information.
Sources of Information
The majority of the data used in the preparation of this report was obtained
from POG. This information consisted of revenue check details, division orders,
oil run statements, ownership interests, spreadsheets detailing operating costs
and miscellaneous pricing information. Additional information was obtained from
the individual property operators, industry contacts and other public sources.
Production information was obtained from the operator, IHS Energy Group (IHS),
the Utah Division or Oil, Gas & Mining, and the Wyoming Oil and Gas Conservation
Commission. No attempt was made to independently verify the accuracy of this
data. A field examination of the properties was not considered necessary for the
purposes of this evaluation.
Operating Costs
The operating costs used in the economics were based on actual historical costs.
The estimated operating expense includes field operating costs, pumper charges,
direct supervision and third party operator overhead charge. No allocated
overhead was included for POG operated properties. As with pricing, operating
expenses were held flat for the life of the project
Ownership:
The working interest and net revenue interest ownerships used in this appraisal
were provided by POG. No Farmouts or reversions were considered in the
economics. The ownership within the Hunter Mesa Unit and the Grassy Mesa Unit
are undergoing changes as the unit participating areas are revised. Several
revisions are currently waiting for the BLM to approve them. The ownerships
utilized in this report are based on the latest revisions, pending BLM approval.
Ownership in the Hunter Mesa Unit was based on the twentieth revision of the
Unit Participating Area (PA), effective December 1, 2003. Ownership in the Grass
Mesa Unit was based on the twenty-first revision of the Unit PA, effective June
1, 2003.
Methodology:
The estimates of Expected Ultimate Recovery (EUR) by well were prepared using
primarily decline curve analysis. Where appropriate, EUR estimates were made for
oil wells by extrapolating the Water-Oil-Ratio vs. Cumulative Oil Production
plot to a determined economic limit. These methodologies are commonly used by
the petroleum industry once detailed production data is available. Reserve
estimates for the Hunter Mesa and Grass Mesa Unit were obtained by extrapolating
the performance of average or normalized wells in the field to the total number
of wells currently in the unit as obtained from the operator, EnCana Oil and Gas
(USA) Inc.
Estimation of Plugging Liability:
In order to facilitate the financial planning needed to cover future obligations
for the Plugging and Abandonment (P&A) of wells in which POG owns a working
interest, a cursory review of the wells and the potential costs was performed
and is summarized in the table below.
POG # of Approximate * Est. P&A Net POG
Property Name WIO% Wells Depth-ft Cost/ Well Obligation
-------------------------------------------------------------------------------
Sheldon Tribal 20.0% 5 5,000 $ 40,000 $ 40,000
Pilot A-1 100.0% 2 4,000 $ 30,000 $ 60,000
Climax Unit 5.8% 3 8,000 $ 50,000 $ 8,640
Climax 7-2 80.5% 1 8,000 $ 70,000 $ 56,375
Canyon State 2-36 76.0% 1 5,000 $ 50,000 $ 38,000
S. Pine Ridge 37.5% 1 6,000 $ 40,000 $ 15,000
Murdock #41-10 8.3% 1 7,000 $ 50,000 $ 4,166
Willow Creek 76.1% 1 5,000 $ 40,000 $ 30,440
-------------------------------------------------------------------------------
15 $ 252,621
* Cost does not include any salvage value for surface facilities, equipment or
casing.
In the individual property cashflows attached to this report, no P&A obligation
was included. The assumption was made that the cost to plug and abandon the
wells would be offset by the salvage value of the equipment.
Evaluator Information:
Scott H Stinson is a consulting petroleum engineer with 24 years experience. His
primary emphasis has been on exploration, project economics and formation
evaluation. Mr. Stinson started Fall Line Energy, a small oil and gas company
and consulting firm in 1993. Prior to Fall Line, Mr. Stinson held positions with
Chevron, Terra Resources (Later Pacific Enterprises Oil Company) and Conley P.
Smith Operating Company.
Mr. Stinson is an active member of the Independent Petroleum Association of the
Mountain States (IPAMS). Previously, he held the position of Rocky Mountain
Vice-Chairman and Wyoming Reserves Coordinator for the American Gas Association
(AGA). In addition, he is an active member of the Society of Petroleum Engineers
(SPE) and was recently the Chairman of the Denver chapter of the Society of
Petroleum Evaluation Engineers (SPEE).
Mr. Stinson earned a Bachelor of Science degree in Petroleum Engineering from
the University of Wyoming in 1981 and a Masters in Business Administration
(Finance) from the University of Colorado-Denver in 1994. He is a registered
petroleum engineer in the states of Colorado and Wyoming.
Neither Fall Line Energy, nor Scott H Stinson, has any interest in the subject
properties and neither the employment to make this study nor the compensation is
contingent on the estimates of reserves and the future income from the subject
properties.
Thank you for the opportunity to perform this evaluation. If you have any
questions or require any additional information, please do not hesitate to call.
Sincerely,
Fall Line Energy, Inc.
/s/
____________________
Scott H Stinson, P.E.
President
Fall Line Energy, Inc.
PO Box 2935 o Centennial, Colorado 80161-2935 o (303) 795-9887
December 27, 2004
Mr. Don Colton
Pioneer Oil and Gas
1206 W. South Jordan Parkway, Unit B
South Jordan, UT 84095-4551
RE: Pioneer Oil and Gas
2004 Reserve Report
Dear Mr. Colton:
The 2004 Annual Reserve Report for Pioneer Oil and Gas (POG) has been prepared
for your use by Fall Line Energy Incorporated and covers the fiscal year ending
September 30, 2004. The original report was signed on November 15, 2004. The
report was prepared for inclusion in standard company filings and accurately
reflects the value to POG as of September 30, 2004. This report was prepared
using Security and Exchange Commission (SEC) and the Society of Petroleum
Evaluation Engineers (SPEE) guidelines. The only reserves class evaluated was
Proved Developed Producing.
The 2004 Annual Reserve Report was prepared by Scott H Stinson, P.E. Mr. Stinson
is a registered Professional Engineer in the States of Wyoming and Colorado. Mr.
Stinson's registration number in Wyoming is #5290, his registration number in
Colorado is #28624.
Neither Fall Line Energy, nor Scott H Stinson, has any interest in the subject
properties and neither the employment to make the study nor the compensation was
contingent on the estimates of reserves and the future income from the subject
properties.
If you have any questions or require any additional information, please do not
hesitate to call. Sincerely, Fall Line Energy, Inc.
/s/
____________________
Scott H Stinson, P.E.
President
Exhibit 31
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Don J. Colton,certify that:
1. I have reviewed this annual report on Form 10-KSB of Pioneer Oil and Gas.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on the most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of the most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
DATE: December 28, 2004
/s/ Don J. Colton
-----------------------
Don J. Colton, President
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the filing of the Annual Report of Pioneer Oil and Gas (the
"Company") on Form 10-KSB for the period ended September 30, 2004 (the
"Report"), I, Don J. Colton, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(i) The Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(ii) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Don J. Colton
-------------------------
Don J. Colton
Chief Executive Officer
December 28, 2004