Erin Energy Corporation (ERINQ)
OTHER OTC:ERINQ
Risk Overview Q3, 2017
Risk Distribution
46% Finance & Corporate
26% Production
13% Legal & Regulatory
9% Macro & Political
4% Tech & Innovation
2% Ability to Sell
Finance & Corporate - Financial and accounting risks. Risks related to the execution of corporate activity and strategy
This chart displays the stock's most recent risk distribution according to category. TipRanks has identified 6 major categories: Finance & corporate, legal & regulatory, macro & political, production, tech & innovation, and ability to sell.
Risk Change Over Time
S&P500 Average
Sector Average
Risks removed
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Risks changed
Erin Energy Risk Factors
New Risk (0)
Risk Changed (0)
Risk Removed (0)
No changes from previous report
The chart shows the number of risks a company has disclosed. You can compare this to the sector average or S&P 500 average.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
The quarters shown in the chart are according to the calendar year (January to December). Businesses set their own financial calendar, known as a fiscal year. For example, Walmart ends their financial year at the end of January to accommodate the holiday season.
Risk Highlights Q3, 2017
Main Risk Category
Finance & Corporate
With 21 Risks
Finance & Corporate
With 21 Risks
Number of Disclosed Risks
46
No changes from last report
S&P 500 Average: 31
46
No changes from last report
S&P 500 Average: 31
Recent Changes
0Risks added
0Risks removed
2Risks changed
Since Sep 2017
0Risks added
0Risks removed
2Risks changed
Since Sep 2017
Number of Risk Changed
2
No changes from last report
S&P 500 Average: 3
2
No changes from last report
S&P 500 Average: 3
See the risk highlights of Erin Energy in the last period.
Risk Word Cloud
The most common phrases about risk factors from the most recent report. Larger texts indicate more widely used phrases.
Risk Factors Full Breakdown - Total Risks 46
Finance & Corporate
Total Risks: 21/46 (46%)Above Sector Average
Share Price & Shareholder Rights11 | 23.9%
Share Price & Shareholder Rights - Risk 1
Our business partner, CEHL, is a related party, and our former executive chairman and CEO is a principal owner and one of the directors of CEHL, which may result in real or perceived conflicts of interest.Share Price & Shareholder Rights - Risk 2
If CEHL, our majority shareholder, loses its status as an indigenous Nigerian oil and gas operator, we would no longer be eligible for preferential treatment in the acquisition of oil and gas assets and oil and gas licensing rounds in Nigeria.The Company by virtue of our majority stockholder, CEHL, which has indigenous status in Nigeria, is eligible for preferential treatment under the Nigerian Content Development Act with respect to the acquisition of oil and gas assets and in oil and gas licensing rounds in Nigeria. If CEHL were to lose its status as an indigenous Nigerian oil and gas company due to its affiliation with our U.S.-based company or otherwise, or if CEHL's majority interest in us were to be diluted or reduced due to additional issuances of equity by the Company, or if CEHL were to sell or transfer its interest in the Company or otherwise, we may lose our status as an indigenous Nigerian oil and gas operator. As a result, we would lose one of our key advantages in the Nigerian oil and gas market, and our results of operations could materially suffer.
Share Price & Shareholder Rights - Risk 3
CAMAC Energy Holdings Limited is our majority stockholder, and it may take actions that conflict with the interests of other stockholders.Following the Allied Transaction, CEHL beneficially owned approximately 56.7% of our outstanding shares of our common stock and continues to own a majority interest. CEHL controls the power to elect our directors, to appoint members of management and to approve all actions requiring the approval of the holders of our common stock, including adopting amendments to our Certificate of Incorporation and approving mergers, acquisitions or sales of all or substantially all of our assets, subject to certain restrictive covenants. The interests of CEHL as our controlling stockholder could conflict with your interests as a holder of Company common stock. For example, CEHL as our controlling stockholder may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investment even though such transactions might involve risks to you, as minority holders of the Company.
Share Price & Shareholder Rights - Risk 4
The Company's stockholders may not be able to enforce United States civil liabilities claims.Many of the Company's assets are and are expected to continue to be located outside the United States and held through one or more subsidiaries incorporated under the laws of foreign jurisdictions. Substantially all of the Company's operations are and are expected to continue to be conducted in Africa. In addition, some of the Company's directors and officers, including directors and officers of its subsidiaries, may be residents of countries other than the United States. All or a substantial portion of the assets of these persons may be located outside the United States. As a result, it may be difficult for shareholders to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the foreign courts would recognize or enforce judgments of United States courts obtained against the Company or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof or be competent to hear original actions brought in these countries against the Company or such persons predicated upon the securities laws of the United States or any state thereof.
Share Price & Shareholder Rights - Risk 5
The market price of the Company's common stock may be adversely affected by a number of factors related to the Company's performance, the performance of other energy-related companies and the stock market in general.The market prices of securities of energy companies are extremely volatile and sometimes reach unsustainable levels that bear no relationship to the past or present operating performance of such companies.
Factors that may contribute to the volatility of the trading price of the Company's common stock include, among others:
- financial predictions and recommendations by stock analysts concerning energy companies and companies competing in the Company's market in general, and concerning the Company in particular;- the Company's quarterly results of operations or variances between the Company's actual quarterly results of operations and predictions by stock analysts;- public announcements of regulatory changes or new ventures relating to the Company's business or its competitors, or acquisitions, joint ventures or strategic alliances by the Company or its competitors;- investor perception of the Company's business prospects or those of the oil and gas industry in general;- the timing of commencement of production of new wells;- the operating and stock price performance of other companies that investors or stock analysts may deem comparable to the Company;- large purchases or sales of the Company's common stock; and - general economic and financial conditions.
In addition to the foregoing factors, the trading prices for equity securities in the stock market in general, and of energy-related companies in particular, have been subject to wide fluctuations that may be unrelated to the operating performance of the particular company affected by such fluctuations. Consequently, broad market fluctuations may have an adverse effect on the trading price of our common stock regardless of the Company's results of operations.
Share Price & Shareholder Rights - Risk 6
The limited market for the Company's common stock may adversely affect trading prices or the ability of a shareholder to sell the Company's shares in the public market at or near ask prices or at all if a shareholder needs to liquidate its shares.The market price for shares of the Company's common stock has been, and is expected to continue to be, volatile. Numerous factors beyond the Company's control may have a significant effect on the market price for shares of the Company's common stock, including the fact that the Company is a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volumes. There may be periods of several days or more when trading activity in the Company's shares is minimal as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Due to these conditions, investors may not be able to sell their shares at or near ask prices or at all if investors desire to liquidate their shares.
Share Price & Shareholder Rights - Risk 7
Our common stock is listed on the Johannesburg Stock Exchange ("JSE"). However, a trading market may not successfully develop on the JSE.There is a limited trading market for our common stock on the JSE. An active trading market may not successfully develop on the JSE, or if it does, it may not be sustained. In addition, we cannot assure what effect our listing on the JSE will have on our trading market on the NYSE MKT. In 2014, we issued an aggregate of 62.8 million shares of our common stock to the Public Investment Corporation (SOC) Limited ("PIC") of South Africa in a private placement. If PIC chooses to sell those shares on the JSE, sales of a large number of shares could have a negative effect on the market price of our shares on the JSE, which could have a negative effect on the market price of our shares on the NYSE MKT.
Share Price & Shareholder Rights - Risk 8
Substantial sales of the Company's common stock could cause the Company's stock price to fall.The potential for substantial amounts of our common stock to be sold in the public market may adversely affect prevailing market prices for our common stock and could impair the Company's ability to raise capital through the sale of its equity securities. Additionally, we may issue and register a greater number of shares of common stock in order to meet our obligations to pay up to $50.0 million in oil and gas milestone payments under the Transfer Agreement or upon conversion of the 2014 Convertible Subordinated Note or the 2015 Convertible Note. All of such shares would be eligible for registration under a registration rights agreement.
Share Price & Shareholder Rights - Risk 9
Conversion of the 2014 Convertible Subordinated Note or the 2015 Convertible Note, in the event of a default thereunder, may dilute the ownership interest of existing stockholders.The conversion of some or all of the 2014 Convertible Subordinated Note or the 2015 Convertible Note, in the event of a default thereunder, may dilute the ownership interests of existing stockholders. The 2014 Convertible Subordinated Note is convertible into 13.4 million shares of our common stock, which represents approximately 6.28% of our currently outstanding shares. The 2014 Convertible Subordinated Note is subject to anti-dilution adjustment provisions, including provisions that make it convertible into the same percentage of our outstanding shares if we issue shares of common stock or any convertible security at a price per share less than the conversion price. The 2015 Convertible Note is convertible into shares of the Company's common stock upon the occurrence and continuation of an event of default thereunder, at the sole option of the holder. The number of shares issuable upon conversion is equal to the sum of the principal amount and the accrued and unpaid interest divided by the conversion price, defined as the volume weighted average of the closing sales prices on the NYSE MKT for a share of common stock for the five complete trading days immediately preceding the conversion date. Any sales in the public market of the shares of our common stock issuable upon such conversions could adversely affect prevailing market prices of our common stock. In addition, the anticipated conversion of the 2014 Convertible Subordinated Note or the 2015 Convertible Note into shares of our common stock could depress the price of our common stock.
Share Price & Shareholder Rights - Risk 10
The Company's issuance of preferred stock could adversely affect the value of the Company's common stock.The Company's Amended and Restated Certificate of Incorporation authorizes the issuance of up to 50.0 million shares of preferred stock, which shares constitute what is commonly referred to as "blank check" preferred stock. This preferred stock may be issued by the Board of Directors from time to time on any number of occasions, without stockholder approval, as one or more separate series of shares comprised of any number of the authorized but unissued shares of preferred stock, designated by resolution of the Board of Directors, stating the name and number of shares of each series and setting forth separately for such series the relative rights, privileges and preferences thereof, including, if any, the: (i) rate of dividends payable thereon; (ii) price, terms and conditions of redemption; (iii) voluntary and involuntary liquidation preferences; (iv) provisions of a sinking fund for redemption or repurchase; (v) terms of conversion to common stock, including conversion price; and (vi) voting rights. The designation of such shares could be dilutive of the interest of the holders of our common stock. The ability to issue such preferred stock could also give the Company's Board of Directors the ability to hinder or discourage any attempt to gain control of the Company by a merger, tender offer at a control premium price, proxy contest or otherwise.
Share Price & Shareholder Rights - Risk 11
The Company's executive officers, directors and major stockholders, including CEHL and PIC, hold a controlling interest in the Company's common stock and may be able to prevent other stockholders from influencing significant corporate decisions.The executive officers, directors and holders of 5% or more of the outstanding common stock, if acting together, would be able to control all matters requiring approval by stockholders, including the election of Directors and the approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying, deterring or preventing a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders.
Accounting & Financial Operations3 | 6.5%
Accounting & Financial Operations - Risk 1
We may be unable to continue as a going concern.Accounting & Financial Operations - Risk 2
The Company may continue to incur losses for a significant period of time and may not be able to achieve profitability.In addition to our interests in the OMLs, including the Oyo field, we have signed production sharing contracts in Kenya, two exploration licenses in The Gambia and a petroleum agreement in Ghana. As we are still in the early stages of exploration and have yet to drill on our Kenyan, Gambian, and Ghanaian blocks, we expect to continue to incur significant expenses relating to our identification of drilling prospects and investment costs relating to exploration. Additionally, fixed commitments, including salaries and fees for employees and consultants, rent and other contractual commitments may be substantial and are likely to increase as exploration drilling is scheduled and personnel are retained. Drilling projects generally require a significant period of time before they produce resources and generate profits. Our production in the Oyo field may or may not result in net earnings in excess of our losses on other ventures under development or in the start-up phase. We may not achieve or sustain profitability on a quarterly or annual basis, or at all.
Accounting & Financial Operations - Risk 3
Our proved reserves are based on many assumptions that may turn out to be inaccurate. Any significant inaccuracies in these reserve estimates or underlying assumptions could materially affect the quantities and present value of our reserves. Of our total estimated proved reserves at December 31, 2016, 6.0 million Bbls were proved undeveloped reserves, which ultimately may be less than currently estimated.The process of estimating oil and natural gas reserves is complex. It requires interpretations of available technical data and many assumptions, including assumptions relating to current and future economic conditions and commodity prices. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities. In the case of production sharing contracts, the quantities allocable to a part-interest owner's share are affected by the assumptions of that owner's future participation in funding of operating and capital costs. Actual future production, prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas reserves will vary from estimates. Any significant variance could materially affect the estimated quantities and present value of reserves disclosed. In addition, estimates of proved reserves reflect production history, results of exploration and development, prevailing prices and other factors, many of which are beyond our control. Due to the limited production history, the estimates of future production associated with such properties may be subject to greater variance to actual production than would be the case with properties having a longer production history.
Debt & Financing7 | 15.2%
Debt & Financing - Risk 1
We may not be able to generate or obtain sufficient cash to service all of our indebtedness or trade payables, and we may be forced to take other actions to satisfy our obligations under our indebtedness and trade payables, which may not be successful.Debt & Financing - Risk 2
Our business requires substantial additional capital. If we are unable to raise additional capital on acceptable terms in the future, our ability to execute our business plan may be impaired.The Company's business activities require substantial capital from outside sources as well as from internally-generated sources. Although our majority shareholder has historically provided the Company with additional funding in the past, there can be no assurances that our majority shareholder will provide any funds in the future or, if the funds are provided, that the terms under which the funds are provided will be acceptable to us. The Company's ability to finance a portion of its working capital and capital expenditure requirements with cash flow from operations will be subject to a number of variables, such as:
- level of production from existing and new wells;- prices of oil and natural gas;- success and timing of development of proved undeveloped reserves;- remedial work to improve a well's producing capability;- direct costs and general and administrative expenses of operations;- reserves, including a reserve for the estimated costs of eventually plugging and abandoning the wells;- indemnification obligations of the Company for losses or liabilities incurred in connection with the Company's activities;- general economic, financial, competitive, legislative, regulatory and other factors beyond the Company's control; and - ability to farm-out portions of the Company's rights under its various petroleum licenses.
The significant decline in oil and natural gas prices as well as our substantial indebtedness and general lack of liquidity may make it more difficult for us to obtain additional financing. The Company might not generate or sustain cash flows at sufficient levels to finance its business activities. When and if the Company generates significant revenues, if such revenues were to decrease due to lower oil prices, decreased production or other factors, and if the Company were unable to obtain capital through reasonable financing arrangements, its ability to execute its business plan would be limited, and it could be required to discontinue operations.
Debt & Financing - Risk 3
We have substantial indebtedness and may incur substantially more debt. Higher levels of indebtedness make us more vulnerable to economic downturns and adverse developments in our business.Changed
As of September 30, 2017, we had approximately $24.9 million of outstanding principal under the 2011 Promissory Note, $50.0 million of outstanding principal under the 2014 Convertible Subordinated Note, $48.5 million of outstanding principal under the 2015 Convertible Note, $84.0 million outstanding principal under the Term Loan Facility, $6.4 million of outstanding principal under the 2016 Promissory Note and $63.2 million of outstanding principal under the MCB Finance Facility, and we may incur additional indebtedness in the future. Our level of indebtedness has, or could have, important consequences to our business because:
- a substantial portion of our cash flows from operations will be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions, general corporate or other purposes;- it may impair our ability to obtain additional financing in the future for acquisitions, capital expenditures or general corporate purposes;- it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and - we may be substantially more leveraged than some of our competitors, which may place us at a relative competitive disadvantage and make us more vulnerable to downturns in our business, our industry or the economy in general.
In addition, the terms of the Term Loan Facility and the MCB Finance Facility restrict, and the terms of any future indebtedness including any future credit facility may restrict, our ability to incur additional indebtedness and grant liens because of debt or financial covenants we are, or may be, required to meet and compliance with certain negative covenants restricting the incurrence of addition indebtedness. Thus, we may not be able to obtain sufficient capital to grow our business or implement our business strategy and may lose opportunities to acquire interests in oil properties or related businesses because of our inability to fund such growth.
Our ability to comply with restrictions and covenants, including those in the Term Loan Facility, the MCB Finance Facility or in any future credit facility, is uncertain and will be affected by the levels of cash flow from our operations and events or circumstances beyond our control. Our failure to comply with any of the restrictions and covenants in the Term Loan Facility and the MCB Facility could result in a default, which could permit the lenders to accelerate repayments and foreclose on the collateral securing such indebtedness.
Debt & Financing - Risk 4
Due to our lack of liquidity, we may not be able to make the required principal and interest payments under the Term Loan Facility, the MCB Facility and other indebtedness or to satisfy our obligations under our trade payables.Changed
As a result of the current low commodity prices and a prior history of low oil production volumes due to the shut-in of well Oyo-8 from September 2015 to May 2016 and the currently shut-in well Oyo 7, the Company has not been able to generate sufficient cash from operations to satisfy certain obligations as they become due. The Company has been relying on drawdowns under the MCB Facility and short-term promissory notes, such as the 2016 Promissory Note, with an entity related to the Company's majority shareholder which notes have been foreclosed on and transferred to an unrelated party to supplement the Company's liquidity needs, but we may not be able to continue to borrow funds under the MCB Facility in the future or the related party may not continue to provide such short-term loans in the future.
Pursuant to the Term Loan Facility, Zenith has the right to review the terms and conditions of the Term Loan Facility.
The Company did not pay the installment due and payable on September 30, 2017 and obtained a waiver from MCB to waive any event of default arising from the non-payment until December 31, 2017. The Company is currently in discussions with MCB on a revised principal repayment schedule. Our failure to make the required payments under the MCB Facility or the Term Loan Facility, or to comply with its applicable debt covenants could result in a default under the applicable facility and a cross-default under the other facility and the Related Party Notes (defined and described above under "Note 7 - Debt - Long-Term Debt - Related Party", from the notes to the unaudited consolidated financial statements set forth above under "Part I Financial Information" - "Item 1 - Financial Statements"), which could result in the acceleration of the payment of such indebtedness, termination of commitments to make further loans to us, prevention of our development drilling on the Oyo field and other operations, loss of our ownership interests in the secured properties or otherwise materially adversely affect our business, financial condition and results of operations. Also, if we are unable to service our debt obligations or obligations under our trade payables generally, Company may be unable to continue in its current state or continue to operate as a going concern.
Debt & Financing - Risk 5
Events of default may occur under the Allied related party notes, subject to waivers entered into by the Company and Allied in March 2016 and as subsequently amended. If events of default occur or Allied accelerates the repayment obligations, as to matters not covered or no longer covered by the waivers, cross-defaults will exist under the Allied related party notes, and we will not be able to repay the obligations that become immediately due.Allied, a related party, is the holder of the 2014 Convertible Subordinated Note, the 2015 Convertible Note, and the 2011 Promissory Note (collectively the "Allied Notes"). Each of the Allied Notes contains certain default and cross-default provisions, including failure to pay interest and principal amounts when due and default under other indebtedness. As of December 31, 2016, the Company was not in compliance with the default provisions of each of the Allied Notes with respect to the payment of quarterly interest. Further, the risk of cross-default exists for each of the Allied Notes if the holder of the Term Loan Facility exercises its right to terminate the Term Loan Facility and accelerate its maturity. Allied agreed to waive its rights under all default provisions of each of the Allied Notes through April 2018. For additional information regarding defaults, cross-defaults and potential cross-defaults, please see the discussion regarding each debt instrument in Note 9 - Debt to the Notes to Consolidated Financial Statements included herein. If any of our debt obligations are accelerated due to the events of default or future cross-defaults, we may not be able to repay the obligations that become immediately due and will have severe liquidity restraints.
Debt & Financing - Risk 6
Hedging transactions may limit the Company's potential gains and increase the Company's potential losses.To date, the Company has not entered into any hedging transactions but may do so in the future. In the event that the Company chooses not to hedge its exposure to reductions in oil and gas prices, it could be subject to significant reduction in prices which could have a material adverse impact on its profitability. Alternatively, the Company may elect to enter into hedging transactions with respect to a portion of its production to achieve more predictable cash flow and to reduce its exposure to price fluctuations. The use of hedging transactions could limit future revenues from price increases and could expose the Company to adverse changes in basis risk, the relationship between the price of the specific oil or gas being hedged and the price of the commodity underlying the futures contracts or other instruments used in the hedging transaction. Hedging transactions also involve the risk that the counterparty does not satisfy its obligations.
Debt & Financing - Risk 7
The Company may be required to take non-cash asset write-downs.Under applicable accounting rules, during 2016 and 2015, the Company recorded an impairment charge of $0.6 million and $261.2 million, respectively. The 2016 write-off is related to the carrying value of its offshore leases in Kenya because the Company no longer intends to renew or extend its leases on these offshore blocks. The 2015 write off is mainly due to the carrying value of oil and natural gas properties in excess of the estimated fair value of the underlying oil and gas revenues. The Company may record additional impairment charges in future periods if oil and natural gas prices do not recover or if there are substantial downward adjustments to its estimated proved reserves, increases in its estimates of development costs or deterioration in its exploration results. Accounting standards require the Company to review its long-lived assets for possible impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable over time. In such cases, if the asset's estimated undiscounted future net cash flows are less than its carrying amount, impairment exists. Any impairment write-down, which would equal the excess of the carrying amount of the assets being written down over their estimated fair value, would have a negative impact on the Company's earnings, which could be material.
Production
Total Risks: 12/46 (26%)Above Sector Average
Manufacturing6 | 13.0%
Manufacturing - Risk 1
The Company may not be successful in finding, acquiring, or developing sufficient petroleum reserves, and a failure to do so could materially adversely affect our financial position, liquidity and ability to continue operations.Manufacturing - Risk 2
Our offshore production and exploration activities will involve special risks that could adversely affect operations.Offshore operations are subject to a variety of operating risks specific to the marine environment, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can cause substantial damage to facilities and interrupt our operations. As a result, we could incur substantial expenses that could reduce or eliminate the funds available for exploration, development or leasehold acquisitions, or result in loss of equipment and properties.
Deepwater exploration and production generally involves greater operational and financial risks than on the shelf. Deepwater drilling generally requires more time and more advanced drilling technologies, involving a higher risk of technological failure and usually higher drilling costs. Such risks are particularly applicable to our deepwater operations in the Oyo field. In addition, there may be production risks of which we are currently unaware. Whether we use existing pipeline infrastructure, participate in the development of new subsea infrastructure or use floating production systems to transport oil from producing wells, if any, these operations may require substantial time for installation, or encounter mechanical difficulties and equipment failures that could result in significant cost overruns and delays. Furthermore, operations in frontier areas generally lack the physical and oilfield service infrastructure present in more mature basins. As a result, a significant amount of time may elapse between a discovery and the marketing of the associated hydrocarbons, increasing both the financial and operational risk involved with these operations. Because of the lack and high cost of this infrastructure, oil and gas discoveries we make in the deepwater, if any, may never be economically producible.
In addition, in the event of a well control incident, containment and, potentially, cleanup activities for offshore drilling are costly. The resulting regulatory costs or penalties, and the results of third party lawsuits, as well as associated legal and support expenses, including costs to address negative publicity, could well exceed the actual costs of containment and cleanup. As a result, a well control incident could result in substantial liabilities for us, and have a significant negative impact on our earnings, cash flows, liquidity, financial position, and stock price.
Manufacturing - Risk 3
Drilling wells is speculative, often involving significant costs that may be more than our estimates and may not result in any discoveries or additions to our future production or reserves. Any material inaccuracies in drilling costs, estimates or underlying assumptions will materially affect our business.Exploring for and developing oil reserves involves a high degree of operational and financial risk, which precludes definitive statements as to the time required and costs involved in reaching certain objectives. The budgeted costs of drilling, completing and operating exploration, appraisal and development wells are often exceeded and can increase significantly when drilling costs rise due to a tightening in the supply of various types of oilfield equipment and related services. Drilling may be unsuccessful for many reasons, including geological conditions, weather, cost overruns, equipment shortages and mechanical difficulties. Exploration wells bear a much greater risk of financial loss than development wells. In the past, we have experienced unsuccessful drilling efforts. Moreover, the successful drilling of an oil well does not necessarily result in a profit on investment. A variety of factors, both geological and market-related, can cause a well or an entire development project to become uneconomic or only marginally economic. Our initial drilling sites, and any potential additional sites that may be developed, require significant additional exploration and appraisal, regulatory approval and commitments of resources prior to commercial development. We face additional risks due to i) a general lack of infrastructure in areas in which we operate, ii) underdeveloped oil and gas industries in areas in which we operate, and iii) increased transportation expenses due to geographic remoteness. Thus, this may require either a single well to be exceptionally productive, or the existence of multiple successful wells, to allow for the development of a commercially viable field. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our business operations as proposed and would be forced to modify our plan of operation.
We contract with third parties to conduct drilling and related services on our development and exploration prospects for us. Such third parties may not perform the services they provide us on schedule or within budget. The decline in oil and gas prices may have an adverse impact on certain third parties from which we contract drilling, development and related oilfield services, which in turn could affect such companies' ability to perform such services for us and result in delays to our exploration, appraisal and development activities. Furthermore, the drilling equipment, facilities and infrastructure owned and operated by the third parties we contract with is highly complex and subject to malfunction and breakdown. Any malfunctions or breakdowns may be outside our control and result in delays, which could be substantial. Any delays in our drilling campaign caused by equipment, facility or equipment malfunction or breakdown could materially increase our costs of drilling and cause an adverse effect on our business, financial position and results of operations.
Manufacturing - Risk 4
Our exploration projects remain subject to varying degrees of additional evaluation, analysis and partner and regulatory approvals prior to official project sanction and production.A discovery made by the initial exploration well on a prospect does not ensure that we will ultimately develop or produce hydrocarbons from such prospect or that a development project will be economically viable or successful. Following a discovery by an initial exploration well, substantial additional evaluation, analysis, expenditure of capital and partner and regulatory approvals will need to be performed and obtained prior to official project sanction and development, which may include (i) the drilling of appraisal wells, (ii) the evaluation and analysis of well logs, reservoir core samples, fluid samples and the results of production tests from both exploration and appraisal wells, and (iii) the preparation of a development plan which includes economic assumptions on future oil and gas prices, the costs of drilling development wells, and the construction or leasing of offshore production facilities and transportation infrastructure. Regulatory approvals are also required to proceed with certain development plans.
Any of the foregoing steps of evaluation and analysis may render a particular development project uneconomic, and we may ultimately decide to abandon the project, despite the fact that the initial exploration well, or subsequent appraisal or development wells, discovered hydrocarbons. We may also decide to abandon a project based on forecasted oil and gas prices or the inability to obtain sufficient financing. We may not be successful in obtaining partner or regulatory approvals to develop a particular discovery, which could prevent us from proceeding with development and ultimately producing hydrocarbons from such discovery, even if we believe a development would be economically successful.
Manufacturing - Risk 5
The Company's oil and gas operations are subject to various risks beyond the Company's control.The Company expects to produce, transport and market potentially toxic materials and purchase, handle and dispose of other potentially toxic materials in the course of its business. The Company's operations will produce byproducts, which may be considered pollutants. Any of these activities could result in liability, either as a result of an accidental, unlawful discharge or as a result of new findings on the effects of the Company's operations on human health or the environment. Additionally, the Company's oil and gas operations may also involve one or more of the following risks:
- fires and explosions;- blow-outs and oil spills;- pipe or cement failures and casing collapses;- uncontrollable flows of oil, gas, formation water, or drilling fluids;- embedded oilfield drilling and services tools;- abnormally pressured formations;- natural disaster;- vandalism and terrorism; and - environmental hazards.
In the event that any of the foregoing events occur, the Company could incur substantial losses that may not be covered by insurance or that may exceed our insurable limits as a result of (i) injury or loss of life; (ii) severe damage or destruction of property, natural resources or equipment; (iii) pollution and other environmental damage; (iv) investigatory and clean-up responsibilities; (v) regulatory investigation and penalties; (vi) suspension of its operations; or (vii) repairs to resume operations. If the Company experiences any of these problems, its ability to conduct operations could be adversely affected. Additionally, offshore operations are subject to a variety of risks, such as capsizing, collisions and damage or loss from typhoons or other adverse weather conditions. These conditions could cause substantial damage to facilities and interrupt production.
Manufacturing - Risk 6
Failure to effectively execute our exploration and development projects could result in significant delays and/or cost over-runs, including the delay of any future production, which could negatively impact our operating results, liquidity and financial position.We currently have a number of exploration projects, all of which are in the early stages of the project development life-cycle, in addition to our Oyo field development project. Our exploration projects will require substantial additional evaluation and analysis, including drilling and, in the event a commercial discovery occurs, the expenditure of substantial amounts of capital, prior to preparing a development plan and seeking formal project sanction. First production from these exploration projects, in the event a discovery is made, is not expected for several years. Our Oyo field development project and some of our exploration projects are located in challenging deepwater environments and may entail significant technical challenges, including subsea tiebacks to a floating, production, storage and offloading vessel or production platform, pressure maintenance systems, gas re-injection systems, and other specialized infrastructure.
This level of development activity and complexity requires significant effort from our management and technical personnel and places additional requirements on our financial resources and internal financial controls. In addition, we have increased dependency on third-party technology and service providers and other supply chain participants for these complex projects. We may not be able to fully execute these projects due to:
- inability to obtain sufficient and timely financing;- inability to attract and/or retain sufficient quantity of personnel with the skills required to bring these complex projects to production on schedule and on budget;- significant delays in the delivery of essential items or performance of services, cost overruns, supplier insolvency, or other critical supply failure could adversely affect project development;- lack of partner or government approval for projects;- civil disturbances, anti-development activities, legal challenges or other interruptions which could prevent access; and - drilling hazards or accidents or natural disasters.
We may not be able to compensate for, or fully mitigate, these risks.
Employment / Personnel1 | 2.2%
Employment / Personnel - Risk 1
The loss of key employees could adversely affect the Company's ability to operate.Supply Chain2 | 4.3%
Supply Chain - Risk 1
The Company is dependent on others for the storage and transportation of all of its oil and gas which could result in significant operational costs to the Company and depletion of capital.Supply Chain - Risk 2
An interruption in the supply of materials, resources or services, including storage and transportation of oil and gas, could limit the Company's operations and cause unprofitability.The Company obtains, and will need to obtain materials, resources and services, including, but not limited to, specialized chemicals, specialty muds, drilling fluids, pipe, drill-string and geological and geophysical mapping and interpretation services to carry out its operations. There may be only a limited number of manufacturers and suppliers of these materials, resources and services. Additionally, these manufacturers and suppliers may experience difficulty in supplying such materials, resources and services to the Company sufficient to meet its needs or may terminate or fail to renew contracts for supplying these materials, resources or services on terms the Company finds acceptable including, without limitation, acceptable pricing terms.
Costs3 | 6.5%
Costs - Risk 1
The Company does not presently carry business interruption insurance policies in Africa and will be at risk of incurring business interruption loss due to theft, accidents or natural disasters.Costs - Risk 2
Under the terms of our various petroleum agreements and leases, we are required to drill wells, declare any discoveries, conduct certain development activities and make certain payments in order to retain exploration and production rights, and failure to do so may result in substantial license renewal costs or penalties or loss of our interests in the undeveloped parts of our license areas.In order to protect our exploration and production rights in our license areas, we must meet various drilling, declaration and payment requirements. In general, unless we make and declare discoveries within certain time periods specified in our various petroleum agreements and leases, our interests in the undeveloped parts of our license areas may lapse and we may be subject to significant penalties or be required to make additional payments in order to maintain such licenses. We can make no assurances that we will receive an extension of the relevant exploration periods for any of our prospects or what the terms of the extensions might be. Additionally, these agreements require us to make certain payments, including royalty payments, training fee payments and other payments, to our counterparties. A failure to make such payments, even if subject to dispute, may result in significant penalties being imposed on us and the possible loss of exploration and production rights under the applicable agreement. Such penalties and losses of rights could have a material adverse effect on our business and results of operations.
Costs - Risk 3
The decline in oil and natural gas prices may adversely affect our business, financial condition and results of operations.Oil and gas prices are in the midst of a severe and prolonged downturn although a limited recovery in prices has occurred since late 2016. The significant decline in oil and gas prices since mid-2014 has had, and will continue to have, a significant adverse effect on our business, results of operations, liquidity and market price of our common stock. The prices received for the Oyo field production will heavily influence our revenue, profitability, access to capital and future rate of growth. Oil is a commodity,and its price is subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the market for oil has been volatile. The oil market will likely continue to be volatile in the future. The prices received and the levels of production depend on numerous factors beyond our control. These factors include:
- global economic conditions;- changes in global supply of and demand for oil or natural gas;- actions of the Organization of Petroleum Exporting Countries with respect to production levels and pricing;- price and quantity of imports of foreign oil;- local and international political, economic and weather conditions;- political and military conflicts in oil producing regions or other geographical areas or acts of terrorism in the U.S. or elsewhere;- domestic and international relations, regulations and tax policies;- effects from the actions of other oil producing countries;- global oil exploration and production levels;- global oil inventory levels;- the development, exploitation, price and availability of alternative fuels;- reduction in energy consumption due to technological advances;- speculation by investors in oil and gas; and - proximity and capacity of transportation pipelines and facilities.
Significant and prolonged declines in crude oil and natural gas prices, such as the decline we are currently experiencing, may have the following effects on our business:
- limiting our financial condition, liquidity and/or ability to fund planned capital expenditures and operations;- reducing the amount of crude oil and natural gas that we can produce economically;- causing us to delay or postpone some of our capital projects;- reducing our revenues, operating income and cash flows;- limiting our access to sources of capital, such as equity and long-term debt;- reducing the carrying value of our crude oil and natural gas properties; and/or - reducing the market price of our common stock.
Legal & Regulatory
Total Risks: 6/46 (13%)Above Sector Average
Regulation2 | 4.3%
Regulation - Risk 1
The passage into law of the Nigerian Petroleum Industry Bill could create additional fiscal and regulatory burdens on the parties to the OMLs, which could have a material adverse effect on the profitability of the production.Regulation - Risk 2
The Company's failure to capitalize on existing petroleum agreements could result in an inability by the Company to generate sufficient revenues and continue operations.The Company has a 100% economic interest in, and operatorship of, the OMLs in Nigeria, including the Oyo field. The Company has also entered into definitive petroleum agreements with Kenya, The Gambia, and Ghana. The Company's business strategy includes spreading the risk of oil and natural gas exploration, development and drilling, and ownership of interests in oil and natural gas properties by participating in multiple projects and joint ventures. Failure by the Company to capitalize on its existing contracts could have a material adverse effect on the Company's business and results of operations.
Litigation & Legal Liabilities1 | 2.2%
Litigation & Legal Liabilities - Risk 1
We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, which could have a material adverse effect on our business, and the continued existence of official corruption and bribery in Africa, and the inability or unwillingness of authorities to combat such corruption, may negatively impact our ability to fairly and effectively compete.Taxation & Government Incentives1 | 2.2%
Taxation & Government Incentives - Risk 1
Applicable Nigerian income tax rates could adversely affect the value of the OMLs, including the Oyo field.Environmental / Social2 | 4.3%
Environmental / Social - Risk 1
We are subject to extensive environmental regulations.Environmental / Social - Risk 2
Compliance and enforcement of environmental laws and regulations, including those related to climate change, may affect operations and cause the Company to incur significant expenditures.Extensive national, regional and local environmental laws and regulations in Africa are expected to have a significant impact on the Company's operations. These laws and regulations set various standards regulating certain aspects of health and environmental quality, which provide for user fees, penalties and other liabilities for the violation of these standards. As new environmental laws and regulations are enacted and existing laws are repealed, interpretation, application and enforcement of the laws may become inconsistent. Compliance with applicable local laws in the future could require significant expenditures, which may adversely affect the Company's operations. The enactment of any such laws, rules or regulations in the future may have a negative impact on the Company's projected growth, which could decrease projected revenues or increase costs. In addition, non-governmental organizations concerned with the environment may take an interest in the Company's operations and attempt to disrupt or halt operations in areas deemed environmentally sensitive. The Company's response to these efforts could require unforeseen expenditures, cause delays in execution, and affect operations.
Macro & Political
Total Risks: 4/46 (9%)Above Sector Average
Economy & Political Environment1 | 2.2%
Economy & Political Environment - Risk 1
A deterioration of relations between the United States and Nigeria or other African governments could have a material adverse effect on the Company, the market price of the Company's common stock and the value of the Company's investments.International Operations1 | 2.2%
International Operations - Risk 1
The Company's international operations subject it to certain risks inherent in conducting business in Sub-Saharan Africa, including political instability and foreign government regulation, which could significantly impact the Company's ability to operate in such countries and impact the Company's results of operations.Natural and Human Disruptions2 | 4.3%
Natural and Human Disruptions - Risk 1
Maritime disasters and other operational risks may adversely impact our financial condition and results of operations.Natural and Human Disruptions - Risk 2
The geographic concentration of our properties offshore Nigeria, Kenya, The Gambia and Ghana subjects us to an increased risk of loss of revenue or curtailment of production from factors specifically affecting offshore Nigeria, Kenya, The Gambia and Ghana.Our properties are concentrated in four countries: Nigeria, Kenya, The Gambia and Ghana, and all of the value of our production and reserves is concentrated in a single oilfield offshore Nigeria. Any failure to sustain production, production problems or reduction in reserve estimates related to the Oyo field would adversely impact our business. In addition, some or all of these properties could be affected should such regions experience:
- severe weather or natural disasters;- moratoria on drilling or permitting delays;- delays in or the inability to obtain regulatory approvals;- delays or decreases in production;- delays or decreases in the availability of drilling rigs and related equipment, facilities, personnel or services;- delays or decreases in the availability of the capacity to transport, gather or process production; and/or - changes in the regulatory, political and fiscal environments.
We maintain insurance coverage for only a portion of these risks. There also may be certain risks covered by insurance where the policy does not reimburse us for all of the costs related to a loss. We do not carry business interruption insurance.
Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties.
Tech & Innovation
Total Risks: 2/46 (4%)Above Sector Average
Cyber Security2 | 4.3%
Cyber Security - Risk 1
Cyber incidents may adversely impact our operations.Cyber Security - Risk 2
The OMLs are located in an area where there are high security risks which could result in harm to the Oyo field operations and our interest in the Oyo field and the remainder of the OMLs.There are risks inherent to oil production in Nigeria. The Oyo field is located approximately 75 kilometers (46 miles) off the Nigerian coast in deep water. Despite undertaking various security measures and being situated 75 kilometers offshore the Nigerian coast, the FPSO vessel currently being used for storing petroleum production in the Oyo field may become subject to terrorist acts and other acts of hostility like piracy. Such actions could adversely impact our overall business, financial condition and operations. Our facilities are subject to these substantial security risks and our financial condition and results of operations may materially suffer as a result. Terrorist acts and regional hostilities around the world in recent years have led to increases in insurance premium rates and the implementation of special "war risk" premiums for certain areas. Such increases in insurance rates may adversely affect our profitability with respect to the Oyo field asset.
Ability to Sell
Total Risks: 1/46 (2%)Above Sector Average
Competition1 | 2.2%
Competition - Risk 1
The energy market in which the Company operates is highly competitive.See a full breakdown of risk according to category and subcategory. The list starts with the category with the most risk. Click on subcategories to read relevant extracts from the most recent report.
FAQ
What are “Risk Factors”?
Risk factors are any situations or occurrences that could make investing in a company risky.
The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose their most significant risk factors. This is so that potential investors can consider any risks before they make an investment.
They also offer companies protection, as a company can use risk factors as liability protection. This could happen if a company underperforms and investors take legal action as a result.
It is worth noting that smaller companies, that is those with a public float of under $75 million on the last business day, do not have to include risk factors in their 10-K and 10-Q forms, although some may choose to do so.
How do companies disclose their risk factors?
Publicly traded companies initially disclose their risk factors to the SEC through their S-1 filings as part of the IPO process.
Additionally, companies must provide a complete list of risk factors in their Annual Reports (Form 10-K) or (Form 20-F) for “foreign private issuers”.
Quarterly Reports also include a section on risk factors (Form 10-Q) where companies are only required to update any changes since the previous report.
According to the SEC, risk factors should be reported concisely, logically and in “plain English” so investors can understand them.
How can I use TipRanks risk factors in my stock research?
Use the Risk Factors tab to get data about the risk factors of any company in which you are considering investing.
You can easily see the most significant risks a company is facing. Additionally, you can find out which risk factors a company has added, removed or adjusted since its previous disclosure. You can also see how a company’s risk factors compare to others in its sector.
Without reading company reports or participating in conference calls, you would most likely not have access to this sort of information, which is usually not included in press releases or other public announcements.
A simplified analysis of risk factors is unique to TipRanks.
What are all the risk factor categories?
TipRanks has identified 6 major categories of risk factors and a number of subcategories for each. You can see how these categories are broken down in the list below.
1. Financial & Corporate
- Accounting & Financial Operations - risks related to accounting loss, value of intangible assets, financial statements, value of intangible assets, financial reporting, estimates, guidance, company profitability, dividends, fluctuating results.
- Share Price & Shareholder Rights – risks related to things that impact share prices and the rights of shareholders, including analyst ratings, major shareholder activity, trade volatility, liquidity of shares, anti-takeover provisions, international listing, dual listing.
- Debt & Financing – risks related to debt, funding, financing and interest rates, financial investments.
- Corporate Activity and Growth – risks related to restructuring, M&As, joint ventures, execution of corporate strategy, strategic alliances.
2. Legal & Regulatory
- Litigation and Legal Liabilities – risks related to litigation/ lawsuits against the company.
- Regulation – risks related to compliance, GDPR, and new legislation.
- Environmental / Social – risks related to environmental regulation and to data privacy.
- Taxation & Government Incentives – risks related to taxation and changes in government incentives.
3. Production
- Costs – risks related to costs of production including commodity prices, future contracts, inventory.
- Supply Chain – risks related to the company’s suppliers.
- Manufacturing – risks related to the company’s manufacturing process including product quality and product recalls.
- Human Capital – risks related to recruitment, training and retention of key employees, employee relationships & unions labor disputes, pension, and post retirement benefits, medical, health and welfare benefits, employee misconduct, employee litigation.
4. Technology & Innovation
- Innovation / R&D – risks related to innovation and new product development.
- Technology – risks related to the company’s reliance on technology.
- Cyber Security – risks related to securing the company’s digital assets and from cyber attacks.
- Trade Secrets & Patents – risks related to the company’s ability to protect its intellectual property and to infringement claims against the company as well as piracy and unlicensed copying.
5. Ability to Sell
- Demand – risks related to the demand of the company’s goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company’s competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
- Brand & Reputation – risks related to the company’s brand and reputation.
6. Macro & Political
- Economy & Political Environment – risks related to changes in economic and political conditions.
- Natural and Human Disruptions – risks related to catastrophes, floods, storms, terror, earthquakes, coronavirus pandemic/COVID-19.
- International Operations – risks related to the global nature of the company.
- Capital Markets – risks related to exchange rates and trade, cryptocurrency.