MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
Management’s Discussion and Analysis of Financial Condition and Results of Operations
and other
parts of this quarterly report contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements can also be identified by words such as “anticipates,” “expects,” “believes,”
“plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the forward-
looking statements. Factors that might cause such differences include but are not limited to those
discussed in the subsection entitled
Forward-Looking Statements and Factors That May Affect Future
Results and Financial Condition
below. The following discussion should be read in conjunction with our
financial statements and notes thereto included in this report. Our fiscal year end is December 31. All
information presented herein is based on the three and six month periods ended June 30, 2016 and June
30, 2015.
Allied is an independent oil and natural gas producer involved in the exploration, development,
production and sale of oil and gas derived from properties located in Calhoun and Ritchie Counties, West
Virginia, and Goliad, Edwards and Jackson Counties, Texas.
Discussion and Analysis
General
Allied intends to utilize available cash to acquire additional oil and gas producing properties and to
implement improved production practices on existing wells to increase production and expand reserves
where practicable. Allied believes that it can achieve production growth while expanding reserves through
improved exploitation of its existing inventory of wells by disposing of non-productive wells and
enhancing producing wells. An evaluation for this objective of our existing portfolio of oil and gas
properties is constantly under consideration. Allied also intends to continue to expand non-operated and
explore opportunities for operated acquisitions of additional oil or gas producing properties.
Recovery from producing wells is consistently evaluated to consider cost-efficient work-over methods
designed to improve the performance of the wells. When considering the drilling of new wells, we
conduct a geological review of the prospective area, in cooperation with our independent operator, to
determine the potential for oil and gas. Our own consultants then review available geophysical data
(generally seismic and gravity data) opine as to the prospect for success. In the event that our evaluation
of available geophysical data indicates that the target has significant accumulations of oil and gas, we
then consider the economic feasibility of drilling. The presence of oil and gas for any specific target
cannot guarantee economic recovery. Production depends on many factors including drilling and
completion costs, the distance to pipelines and pipeline pressure, current energy prices, accessibility to the
site, and whether the project is developmental or solely a wildcat prospect.
Allied’s business development strategy is prone to significant risks and uncertainties certain of which can
have an immediate impact on its efforts to realize positive net cash flow and deter future prospects of
production growth. Historically, Allied has not been able to generate sufficient cash flow from operations
to sustain operations and fund exploration or development costs. Therefore, there can be no assurance that
the wells currently producing revenue will provide sufficient cash flows to sustain operations. Should
Allied be unable to generate sufficient cash flow from existing properties, it may have to sell certain
properties or interests in such properties or seek financing through alternative sources such as the sale of
its common stock.
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Allied’s financial condition, results of operations and the carrying value of its oil and natural gas
properties depends primarily upon the prices it receives for oil and natural gas production and the quantity
of that production. Oil and natural gas prices historically have been volatile and in the last six months of
2014 through the first six months of 2016 the price paid for oil and natural gas has plummeted. The
reasons for the drastic fall in energy prices have been attributed to a combination of oversupply as a direct
result of the revolution in shale recoveries, worldwide economic malaise and geopolitical reasons. The
price crash has eliminated positive cash flow from operations which in turn has impacted the amount of
cash available for future capital expenditures. A continued drop in oil and natural gas prices could also
incur a write down of the carrying value of our properties as can further decreases in production. Since
production leads to the depletion of oil and gas reserves, Allied’s ability to develop or acquire additional
economically recoverable oil and gas reserves is vital to its future success.
West Virginia Well Information
Allied owns varying interests in a total of 145 wells in West Virginia on several leases held by an
independent operator. Some leases contain multiple wells. All the wells in which we have an interest are
situated on developed acreage spread over 3,400 acres in Ritchie and Calhoun Counties. Depth of the
producing intervals varies from 1,730 ft to 5,472 ft. Many of our wells are situated on the same leases and
as such share production equipment in order to minimize lease operating costs.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 18.75% to 75%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 15.00% to 65.625%.
Texas Well Information
Allied owns varying interests in a total of 10 wells in Texas on four leases held by independent operators.
All the wells in which we have an interest are situated on developed acreage spread over 2,510 acres in
Goliad, Edwards and Jackson Counties. Depth of the producing intervals varies from 7,600 ft to 9,600 ft.
Our working interest is defined as interest in oil and gas that includes responsibility for all drilling,
developing, and operating costs varying from 3.73% to 21%. Our net revenue interest is defined as that
portion of oil and gas production revenue after deduction of royalties, varying from 3.9388% to 12.75%.
Exploration, Development and Operations
The dramatic decline in oil prices over the last twenty four months has had a significant negative effect on
Allied’s business. Even though production has increased revenues over the last two years have
plummeted. Revenue will decrease unless prices increase. During the second quarter of 2016 prices for oil
and natural gas appear to be trending towards a gradual recovery. However, the strength of any sustained
recovery has been challenged since the end of the second quarter as the prices paid for oil have been in
retreat.
Allied will continue to identify non-operated oil and gas producing properties for purchase, oil and gas
leases that it could operate and implement improved production efficiencies on existing wells. Our criteria
for purchasing oil and gas producing properties is defined by short term returns on investment, long term
growth in revenue, and development potential, while our criteria for acquiring oil and gas leases is
predicated on a proven record of historical production and our own capacity to operate any given field.
The decrease in prices for oil and the continuation of low natural gas prices has increased the
opportunities available to us though we are limited by our limited cash position and the expectation that
prices for oil will increase to average around $50.00 per NYMEX WTI Crude barrel and natural gas will
increase to average around $3.72 per mcf within the next 12 months.
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We are further considering future prospects for the development of the Marcellus and Utica shale
formations that underlie Allied’s oil and gas interests in West Virginia. The Marcellus and Utica shale
structures that underlay much of Pennsylvania, Ohio, New York, West Virginia and adjacent states are
major reservoirs for hydrocarbon recovery. Drilling by third party operators in Ritchie County, West
Virginia has indicated successful rates of recovery and our own open hole well logs indicate the presence
of potentially productive Marcellus shale at a depth of 6,000 feet that varies in thickness from 50 – 60
feet. We were approached by an active operator in the area that sought the right to develop this resource
though no agreement was reached. Nevertheless, no oil or natural gas reserves underlying our interests in
West Virginia have been proven although we have obtained a probable reserve calculation. The
calculation places a value on probable reserves underlying certain of our leases in Ritchie County based
on our portion of an estimated royalty payment that would issue if a third party operator recovered
commercial quantities of oil and natural gas from our leases. Any future plans to develop these shale
formations continue to be tempered by the high risk/reward ratio of exploratory drilling in the near term
based on anticipated pricing for oil and natural gas over the next five years.
Results of Operations
During the period from January 1, 2016 through June 30, 2016, Allied was engaged in evaluating
development opportunities, examining the operating efficiencies of existing wells, and overseeing the
operation of its oil and gas assets by independent operators. The operation and maintenance of Allied’s oil
and gas operations is wholly dependent on the services provided by five different independent operators.
While the services provided by these operators have proven adequate, the fact that Allied is dependent on
the operations of third parties to maintain its operations and produce revenue does impact its own ability
to realize a net profit. For the six months ended June 30, 2016, Allied realized a net loss due primarily to
the decline in energy prices over the comparable six month period despite a significant increase in
production. Allied believes that the key to its ability to return to profitability is energy prices. Unless oil
and natural gas prices rise, Allied will continue to realize net losses in future periods.
SIX MONTHS ENDED JUNE 30
2016
2015
CHANGE # CHANGE %
AVERAGE DAILY PRODUCTION
Oil (bbls/day)
21
11
10
91%
Natural gas (mcf/day)
268
232
36
16%
Barrels of oil equivalent (boe/day)
66
50
16
32%
PROFITABILITY
Petroleum and natural gas revenue
$
165,335
$
164,291
1,044
1%
Net Revenue
165,335
164,291
1,044
1%
Production and operating costs
158,477
156,200
2,277
1%
Field netback
6,858
8,091
(1.233)
-15%
G&A
106,976
122,143
(15,167)
-12%
Net cash flow from operations
(100,118)
(114,052)
13,934
12%
Depletion, depreciation and other charges
29,798
22,486
7,312
33%
Future income taxes
-
-
-
0%
Net loss from operations
$
(129,916)
$
(136,538)
(6,622)
5%
PROFITABILITY PER BOE
Oil and gas revenue (average selling price)
13.76
18.15
(4.39)
-24%
Production and operating costs
13.19
17.26
(4.07)
-24%
Field netback ($/boe)
0.57
0.89
(0.32)
-36%
Cash flow from operations ($/boe)
(8.33)
(12.60)
4.27
34%
Net loss ($/boe)
(10.82)
(15.09)
4.27
28%
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Revenue
Revenue for the three month period ended June 30, 2016, increased to $85,344 from $53,190 for the
comparable period ended June 30, 2015, an increase of 60%. Revenue for the six month period ended
June 30, 2016, increased to $165,335 from $164,291 for the comparable period ended June 30, 2015, an
increase of 1%. The increase in revenue over the comparable three month periods can be attributed to the
increase in production and a slight increase in energy prices in the current three month period over that
production and energy prices realized in the prior three month period. The increase in revenue over the
comparative six month periods can be attributed to the increase in production offset by lower energy
prices paid in the current six month period over energy prices realized in the prior six month period.
Allied believes that revenue can only increase in future periods based on current assets if energy prices
increase and production of oil and natural gas remains relatively consistent.
Net Losses
Net losses for the three month period ended June 30, 2016, decreased to $77,539 as compared to net
losses of $111,626 for the three month period ended June 30, 2015, a decrease of 31%. Net losses for the
six month period ended June 30, 2016, decreased to $128,045 from $134,561 for the comparable period
ended June 30, 2015, a decrease of 5%. The decrease in net losses over the comparable three month
periods can be attributed to the increase in production and revenue over the comparable three month
periods. The decrease in net losses over the comparable six month period can be attributed to the increase
in production and a decrease in general and administrative costs.
Allied does not expect to return to net income in future periods based on current energy prices which
expectation will not change unless revenues increase and current productivity remains consistent.
Operating Expenses
General and administrative expenses for the three month period ended June 30, 2016, decreased to
$72,319 as compared to general and administrative expenses of $87,601 for the three month period ended
June 30, 2015, a decrease of 17%. General and administrative expenses for the six month period ended
June 30, 2016, decreased to $106,976 as compared to general and administrative expenses of $122,143, a
decrease of 12%. The decrease in general and administrative expenses over the comparable three and six
month periods can be attributed to lower professional fees paid in the current periods over the prior
periods.
Allied expects that general and administrative expenses will continue to decline in future periods.
Depletion expenses for the six month periods ended June 30, 2016, and June 30, 2015, were $29,798 and
$22,486 respectively, an increase of 33%.
Depletion expenses are expected to remain relatively consistent in relation to the value attributed to aging
oil and gas assets.
Production costs for the three month periods ended June 30, 2016, and June 30, 2015, were $76,208 and
$66,802 respectively, an increase of 14%. Production costs for the six month periods ended June 30,
2016, and June 30, 2015, were $158,477 and $156,200 respectively, an increase of 1%, The increase in
production costs over the three and six month comparable periods can be attributed to an increase in work
over costs, well down time and adverse weather conditions.
Allied expects that production costs will increase over future periods as existing wells age and require
more vigorous maintenance.
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Income Tax Expense
As of December 31, 2015, Allied has net operating loss (NOL) carry forwards of approximately
$2,354,000. Should substantial changes in our ownership occur there would be an annual limitation of the
amount of NOL carry forward which could be utilized. The ultimate realization of these carry forwards is
due, in part, on the tax law in effect at the time and future events, which cannot be determined. During the
year ended December 31, 2015, a valuation allowance was recorded against this net operating loss carried
forward.
Capital Expenditures
Allied made no capital expenditures on property or equipment for the three months ended June 30, 2016
or 2015.
Liquidity and Capital Resources
Allied had a working capital surplus of $1,185,363 as of June 30, 2016, and has funded its cash needs
since inception with revenues generated from operations, debt instruments and private equity placements.
Existing working capital and anticipated cash flow are expected to be sufficient to fund operations over
the next twelve months.
Total current assets as of June 30, 2016, were $1,234,832 which consisted of $1,205,851 in cash and
$28,981 in accounts receivable. Total assets were $2,467,990 which consisted of current assets, proven oil
and gas properties of $528,457 and deposits of $704,701.
Total current liabilities as of June 30, 2016, were $49,469 which consisted of accounts payable. Total
liabilities were $289,887 which consisted of current liabilities and an asset retirement obligation of
$240,418.
Stockholders’ equity as of June 30, 2016, was $2,178,103.
Net cash used in operating activities for the six month period ended June 30, 2016, was $59,275 as
compared to net cash used in operating activities of $57,077 for the six month period ended June 30,
2015. Net cash used in operating activities in the current period can be attributed primarily to a number of
items that are book expense items which do not affect the total amount relative to actual cash used
including depletion and amortization, and accretion expense. Balance sheet accounts that actually affect
cash, but are not income statement related items that are added or deducted to arrive at net cash used in
operating activities, include accounts receivable and accounts payable.
Allied expects to continue to rely on net cash flow used in operating activities until net losses decrease or
are eliminated as the result of any increase in energy prices.
Net cash flow used in investing activities for the six month periods ended June 30, 2016, and June 30,
2015, was nil.
Allied expects to use cash flow in investing activities over future periods as it continues to evaluate
existing wells, identify exploration opportunities and considers additional acquisitions which activities
will require investment.
Net cash flow from financing activities for the six month periods ended June 30, 2016, and June 30, 2015,
was nil.
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Allied does not expect to realize cash flow from financing activities in the near term.
Allied has adopted a stock option plan pursuant to which it can grant up to 750,000 options to purchase
shares of its common stock to employees, directors, officers, consultants or advisors on the terms and
conditions set forth therein. As of June 30, 2016, 600,000 options with an exercise price of $0.35 had
been granted, all of which have vested.
Allied has no lines of credit or other bank financing arrangements in place.
Allied had no commitments for future capital expenditures that were material at June 30, 2016.
Allied has no defined benefit plan or contractual commitment with any of its officers or directors except
each member’s participation in our stock option plan and an executive agreement with its chief executive
officer that provides for a monthly fee and participation in our stock option plan.
Allied has no current plans for the purchase or sale of any plant or equipment.
Allied has no current plans to make any changes in the number of employees.
Allied does not expect to pay cash dividends in the foreseeable future.
Off Balance Sheet Arrangements
As of June 30, 2016, Allied has no significant off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that are
material to stockholders.
Forward Looking Statements and Factors That May Affect Future Results and Financial Condition
The statements contained in the section titled
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
, with the exception of historical facts, are forward looking
statements within the meaning of Section 27A of the Securities Act. We are ineligible to rely on the safe-
harbor provision of the Private Litigation Reform Act of 1995 for forward looking statements made in
this current report. Forward looking statements reflect our current expectations and beliefs regarding our
future results of operations, performance, and achievements. These statements are subject to risks and
uncertainties and are based upon assumptions and beliefs that may or may not materialize. These
statements include, but are not limited to, statements concerning:
§
our anticipated financial performance and business plan;
§
uncertainties related to production volumes of oil and gas;
§
the sufficiency of existing capital resources;
§
uncertainties related to future oil and gas prices;
§
uncertainties related the quantity of our reserves of oil and gas;
§
the volatility of the stock market and;
§
general economic conditions.
We wish to caution readers that our operating results are subject to various risks and uncertainties that
could cause our actual results to differ materially from those discussed or anticipated including the factors
set forth in the section entitled “Risk Factors” included elsewhere in this report. We also wish to advise
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readers not to place any undue reliance on the forward looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We assume no obligation to update
or revise these forward looking statements to reflect new events or circumstances or any changes in our
beliefs or expectations, other than is required by law.
Critical Accounting Policies and Estimates
Accounting for Oil and Gas Property Costs. Allied (i) follows the successful efforts method of accounting
for the costs of its oil and gas properties, (ii) amortizes such costs using the units of production method
and (iii) evaluates its proven properties for impairment whenever events or changes in circumstances
indicate that their net book value may not be recoverable. Adverse changes in conditions (primarily gas
price declines) could result in permanent write-downs in the carrying value of oil and gas properties as
well as non-cash charges to operations that would not affect cash flows.
Estimates of Proved Oil and Gas Reserves. An independent petroleum engineer annually estimates
Allied’s proven reserves. Reserve engineering is a subjective process that is dependent upon the quality of
available data and the interpretation thereof. In addition, subsequent physical and economic factors such
as the results of drilling, testing, production and product prices may justify revision of such estimates.
Therefore, actual quantities, production timing, and the value of reserves may differ substantially from
estimates. A reduction in proved reserves would result in an increase in depreciation, depletion and
amortization expense.
Estimates of Asset Retirement Obligations. In accordance with ASC 410, Allied makes estimates of
future costs and the timing thereof in connection with recording its future obligations to plug and abandon
wells. Estimated abandonment dates will be revised in the future based on changes to related economic
lives, which vary with product prices and production costs. Estimated plugging costs may also be adjusted
to reflect changing industry experience. Increases in operating costs and decreases in product prices
would increase the estimated amount of the obligation and increase depreciation, depletion and
amortization expense. Cash flows would not be affected until costs to plug and abandon were actually
incurred.
Critical Accounting Policies
In Note 1 to the audited financial statements for the years ended December 31, 2015 and 2014, included
in our Form 10-K, Allied discusses those accounting policies that are considered to be significant in
determining the results of operations and its financial position. Allied believes that the accounting
principles utilized by it conform to accounting principles generally accepted in the United States.
The preparation of financial statements requires Allied’s management to make significant estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature,
these judgments are subject to an inherent degree of uncertainty. On an on-going basis, Allied evaluates
estimates. Allied bases its estimates on historical experience and other facts and circumstances that are
believed to be reasonable, and the results form the basis for making judgments about the carrying value of
assets and liabilities. The actual results may differ from these estimates under different assumptions or
conditions.
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Recent Accounting Pronouncements
Allied’s management has evaluated the recently issued accounting pronouncements through the filing
date of these financial statements and has determined that the application of these pronouncements will
not have a material impact on Allied’s financial position and results of operations.
ITEM 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not required of smaller reporting companies.
ITEM 4.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In connection with the preparation of this report on Form 10-Q, an evaluation was carried out by Allied’s
management, with the participation of the chief executive officer and chief financial officer, of the
effectiveness of Allied’s disclosure controls and procedures (as defined in Rules 13a-15(e) of the
Securities Exchange Act of 1934 (“Exchange Act”)). Disclosure controls and procedures are designed to
ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is
recorded, processed, summarized, and reported within the time periods specified in the Commission’s
rules and forms and that such information is accumulated and communicated to management, including
the chief executive officer and chief financial officer, to allow timely decisions regarding required
disclosures.
Based on that evaluation, Allied’s management concluded, as of the end of the period covered by this
report, that Allied’s disclosure controls and procedures were effective in recording, processing,
summarizing, and reporting information required to be disclosed, within the time periods specified in the
Commission’s rules and forms, and that such information was accumulated and communicated to
management, including the chief executive officer and chief financial officer, to allow timely decisions
regarding required disclosures.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting (as defined in Rule 13a-15(f) of
the Exchange Act) during the quarter ended June 30, 2016, that materially affected, or are reasonably
likely to materially affect, Allied’s internal control over financial reporting.
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