Oil and Gas Properties

12 Months Ended

Dec. 31, 2016

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NOTE 4 - OIL AND GAS PROPERTIES

The Company has held and explored oil and gas leases in Texas. The oil and gas leases were classified as unproved properties at December 31, 2016 and 2015 due to the absence of sustained commercial levels of oil and gas production from the properties.

Dawson-Conway & Powers-Sanders Leases

In July 2013, the Company purchased an 85% working interest and 75% net revenue interest in the Dawson-Conway leases located in Shackelford County, Texas, for a purchase price of $400,000. The Company initially issued a promissory note in the amount of $400,000 to finance the purchase, that amount was initially reduced to $340,000 during March of 2014 and subsequently reduced to zero as the result of litigation filed by the Company in 2015 (see Note 7 for additional details). The Company has reflected these actions as adjustments (reductions) to the cost basis of the leases (Oil and gas properties). On March 11, 2014 the Company purchased the remaining 15% working interest in Dawson Conway Leases property for a cash payment of $30,000. On June 30, 2015 the Company announced that it had settled the dispute with Concho Oilfield Services (“Concho”) over services provided by Concho. As a part of the settlement Concho agreed to re-enter the #5B well on the Dawson-Conway 195B lease to repair damage to the wellbore and production string and to return the well to production. In July 2015 Concho did return to the #5B well and commenced jarring and fishing operations in an attempt to repair the well. These operations did not result in success and the well remains shut-in at this time. In June 2015 the Company filed suit in the District Court for Shackelford County against HLA Interests, LLC and SEDCO (a former operator of the Dawson-Conway leases) alleging misrepresentation and fraud concerning title to the leases and non-compliance regarding regulations and permitting requirements of the Texas Railroad Commission (the department tasked with administering and regulating oil and gas development in the State of Texas).

On March 5, 2014, the Company acquired a 100% working interest (80% net revenue interest) in the Powers-Sanders lease located in Shackelford County, Texas for $600,000. The property consists of 385 acres and 5 producing oil wells. The property has been shut-in since August of 2015 due to mechanical downhole issues. In December 2015, the Company assessed the potential development options for the Powers-Sanders lease and decided to suspend operations at the Powers-Sanders leases pending the eventual sale of the property.

In December of 2015 the Company employed the services of Bullet Development, a respected oil and gas development firm headquartered in Abilene, Texas, to assess the value and potential development options for its remaining oil and gas properties in north-central Texas, namely the Company-operated Powers-Sanders and Dawson-Conway leases and our non-operating working interest in the Fortune Prospect. Based on the results of the study and the recommendations from Bullet Development we determined that the best course of action would be to sell our interests in the leases to interested local parties. Accordingly, the Company held discussions with multiple parties interested in acquiring the properties; however, no agreements were reached. The talks stalled and, to relieve the Company of remediation responsibilities, the Powers-Sanders and Dawson-Conway leases were transferred to an operator in good standing with the Railroad Commission of Texas in August 2017 (see Note 14).

Stroebel-Broyles Leases

On March 6, 2014, the Company acquired a 100% working interest in the Stroebel-Broyles leases located in Eastland County, Texas for $75,000. We held a 76.0% net revenue interest in the Broyles lease and a 78.0% net revenue interest in the Stroebel lease. The property consisted of 235 acres and 32 wells. The Company disposed of its working interests in the Stroebel-Broyles leases during the first quarter of 2015. The Company assigned its interests in the leases to two local companies in exchange for the assumption of the plugging and abandonment liability associated with the thirty-two wells located on the properties. The disposition was in keeping with the Company’s decision to focus its drilling and development activities in other areas of north-central Texas.

Bradford Leases

On June 16, 2014, we acquired a 93.75% working interest in the Bradford “A” and Bradford “B” leases (“Bradford Leases”) located in Shackelford County, Texas for $225,000 pursuant to the terms of Purchase & Sale and Farmout agreements. At the time of the acquisition the property consisted of 320 acres with 7 producing wells. Under the terms of the Farmout Agreement our wholly-owned subsidiary, CEGX of Texas, LLC, was obligated to spud the initial “Earning Well” by September 15, 2014. The initial well was part of a “continuous drilling program” which afforded the Company the opportunity to earn additional 2-acre producing units on the Bradford leases by drilling and completing injection and production wells. The property, which heretofore had never been water flooded, had two tank batteries. On September 2, 2014 the Company sold its interests in the Bradford “A” and Bradford “B” leases to the Bradford Joint Venture Partnership (“Bradford JV”) for $325,000. At the time of the sale neither the parent company nor CEGX of Texas, LLC held any ownership in Bradford JV, however, the Company’s wholly-owned subsidiary, CEGX of Texas, LLC, was engaged by Bradford JV as an operator under a Contract Operating Agreement to provide turn-key drilling and production services.

In late December 2014, the Company purchased 20 participation interests (“Equity Units”) in Bradford JV on the same terms as offered to the public and initial investors, valued at $25,000 per Equity Unit, for a total of $500,000.

On June 12, 2015, the Company entered into a Participation Interest Purchase Agreement with Keystone Energy, LLC (“Keystone”). In June 2015, the Company received $250,000 for the Company’s ten (10) Equity Units providing for Keystone’s right to beneficial enjoyment which is not subject to forfeiture by the Company under any circumstances. For financial reporting purposes the Company recognized this amount as a component of related party operating revenues during the year ended December 31, 2015. The Company also transferred ten (10) Equity Units for a 5% equity interest in Keystone.

Throughout 2015 and into the second quarter of 2016 the Company worked with representatives of the purchaser to design and install a pilot water flood program on the Bradford “A” and Bradford “B” leases. Due to delays in receiving funding from Keystone, work was sporadic and finally ground to a halt in the second half of 2016. On June 12, 2016 the Company re-acquired its 20 Equity Units in the Bradford JV for $100 following the expiration of the 365-day “Escrow Period” per the terms of the Participation Interest Purchase Agreement between Bradford JV participation interests and Keystone Energy, LLC and CEGX of Texas, LLC. Additionally, during the third quarter of 2016, the balance of $123,924 in related party receivables (representing un-reimbursed drilling, development and production costs incurred by the Company on behalf of the Bradford JV) was extinguished in exchange for 27 Equity Units in the Bradford JV, representing the remaining un-sold interests of the Bradford JV. (See Note 1).

In February of 2017 the lessor of the Bradford Leases filed a lawsuit to have the leases returned for lack of production greater than 90 days. As a result of a judgment the lessor was able to subdivide the Bradford Leases and thirteen were leased to another operator. The Bradford JV remained responsible for seven Bradford Leases, which were not transferred until they were reassigned to another operator in April 2018 (see Note 14).

Fortune Prospect

On September 2, 2014, we acquired a 43.75% working interest (32.375% net revenue interest) in the Fortune prospect located in Shackelford County, Texas for a cash payment of $80,000. P.I.D. Drilling, Inc. (“PID”) served as the operator for the property. The prospect consists of leasehold interests in five tracts of land aggregating just over 310 acres. During the fourth quarter of 2014 a plugged well on the Fortune Prospect was re-drilled and completed in the Caddo limestone formation. Additionally, two new wells were drilled in the Cooke sandstone formation. The remote location of the lease caused delays in getting electricity to the location, obtaining approval for hook-up to a natural gas pipeline and the delivery and installation of tank batteries and associated production equipment. The lease came on production in January 2015 and production peaked at just under 25 barrels of oil equivalent (“BOE”) per day. Production from the three wells has steadily declined from its peak to approximately 3 BOE per day during the third quarter of 2015.

Following the initial completion of the three producers, the Company asked for a full accounting of the drilling costs and requested a refund for excess charges billed by the operator. In March 2015 the Company received refunds totaling $40,000 from the operator. The refunds were treated as a reduction in our cost basis of the property. In June 2015 the Company filed suit against PID in the District Court for Shackelford County seeking recovery of damages, however, a final judgment was awarded to PID on November 8, 2017 and, on December 19, 2017, the Judge signed an Amended Order of Sale to satisfy the Judgment, which resulted in the Company having to give up its working interest and rights to the Fortune prospect to settle amounts owed (see Note 13 and 14).

Bradford West Lease

On December 31, 2014 the Company acquired a 100% working interest (77% net revenue interest) in the Bradford West lease for a cash payment of $20,000. The prospect comprising 200 acres is located adjacent to and just to the west of the existing Bradford “A” and “B” leases. During the second quarter of 2015, the Company drilled the initial well (Bradford West #1). The results from this well were disappointing and the Company elected not to continue the drilling program. The well was suspended and the lease and well were subsequently transferred to the previous owners during the fourth quarter of 2015.

Impairment

The Company considered the fall in crude oil prices over time and the relatively small production volumes, if any, from the Company’s leases and based on management’s review of the carrying value of oil and gas properties, management determined that there was sufficient evidence that the cost of their acquired oil and gas properties would not be fully recovered as of December 31, 2016 and 2015. Accordingly, the Company determined that an adjustment to the carrying value of these properties was required and recognized an impairment expense of $250,000 and $2,654,824 during the years ended December 31, 2016 and 2015, respectively. The impairment expense equals the difference between the carrying values of the oil and gas properties and their estimated recoverable fair values.

ARO Asset

In accordance with ASC 410, Asset Retirement and Environmental Obligations, the Company capitalizes an asset retirement cost (“ARO Asset”) by increasing their oil and gas asset by the same amount as their asset retirement obligation (“ARO”) upon the initial recognition of the ARO. The ARO asset is allocated to expense ratably over its estimated useful life. During the years ended December 31, 2016 and 2015 the Company allocated $11,248 and $3,093 to expense.

The Company regularly evaluates the retirement activities that are required to be performed to reclaim their oil and gas properties. Management concluded, as of December 31, 2016, that no such requirements existed, therefore they reduced their ARO Asset and ARO liability (see Note 11) to zero and recognized a loss of $48,978 in the Gain (Loss) on Retirement of Assets in their Statement of Operations related to the ARO Asset.

Summary

Activity for the Company’s oil and gas assets during the year ending December 31, 2016 can be summarized as follows:

	Unproven Properties			ARO Asset			Total Oil and Gas Properties
Balance December 31, 2015	$	250,000		$	60,226		$	310,226
Depreciation		-			(11,248	)		(11,248	)
Impairment		(250,000	)		-			(250,000	)
Loss on derecognition		-			(48,978	)		(48,978	)
Balance December 31, 2016	$	-		$	-		$	-

Cardinal Energy Group, Inc. 10-K