SOUTHERN STAR ENERGY INC. company history: the story so far

History

Southern Star Energy left software for Louisiana gas drilling in 2006, funded it with convertible debt and a Macquarie loan, and by February 2010 faced a default demand.

2006-2007: From software to oil and gas

The company, then called Surge Enterprises, set out in November 2006 to drop its software and website business and move into oil and gas. Under a restructuring agreement signed on November 6, 2006, it would take an interest in the D Duck Prospect in Bossier and Caddo Parishes, Louisiana. The filing said closing was not assured. It also issued a 10% US$600,000 convertible debenture to Sovereign Services Limited. A 7.5-for-1 forward split on November 13 lifted shares from 7,555,000 to 56,662,500, and at closing the plan was to cut that to 21,037,500, with Eric Boehnke holding 6,000,000 shares and sitting as sole director.

Drilling of the first well, Atkins-Lincoln 18-1, began in December 2006, aiming for about 9,950 feet. In January 2007 the subsidiary, Southern Star Operating, bought a 20% interest in the prospect for $290,962.27 and became operator. An amendment showed Big Sky Management had held only 20%, not 40%, so the subsidiary ended up with a 40% working interest.

2007-2008: Paying for the wells

The company leaned on convertible funding. By July 2007 Venture Capital Asset Management AG held 48.6 units worth US$2,430,000, giving it about 60% of net proceeds from the Atkins Lincoln 18-1 and 8-1 wells. The units could convert into 4,860,000 shares at US$0.50, or 13.6% of 30,806,251 shares then outstanding. In September 2007 a 10% US$1,300,000 convertible debenture went to Gobbet Management Inc., convertible at US$0.50. The company's address was by then Houston, Texas.

In May 2008 it signed a secured loan of up to $2,000,000 with Macquarie Bank Limited, with a warrant for 750,000 shares. In July 2008 this was replaced by a revolving facility of up to $25 million due July 2011, with a $5 million borrowing base, and further warrants were issued, adding dilution risk. In September and October 2008 the company changed auditors; the dismissed firm's report on the year to May 31, 2008 had raised going-concern doubt, citing no revenues, a history of losses and need for more funds.

2008-2009: Production, then pressure

In October 2008 the company said its first five Cotton Valley wells were producing an average 2.3 MMcf/d (millions of cubic feet of gas a day) and announced a Haynesville discovery at Atkins-Lincoln 17-2. It spudded (began drilling) the Burt 20-1 as a second Haynesville test. Borrowing had reached $3.5 million. These were company statements, and later results were not seen in filings.

By January 2009 the full $5.0 million borrowing base was drawn. On May 29, 2009 Macquarie waived three financial ratio tests only until June 30, 2009. In return the company had to send 100% of net operating cash flow to the loan and get written consent for any capital spending.

2009-2010: A failed merger and default

In November 2009 the company announced a non-binding letter of intent to combine with Lion Energy Corp. and Gold Star Resources Corp., with Lion issuing about 40 million shares, roughly 26 million to Southern Star holders. The letter expired on December 31, 2009 and the board chose not to extend it, saying Lion's exploration commitments did not suit the combined business.

On February 3, 2010 Macquarie declared the loan in default, demanded immediate repayment of the $5,000,000 plus interest, and ended further lending. As of February 9, 2010, the company said it lacked enough current assets to repay, and Macquarie could foreclose on its oil and gas properties.

Written from the 14 story beats below (2006 to 9 Feb 2010), which come from the company's own announcements and filings.

Beat by beat

The events that changed the company's story, in plain English, each written against everything known about the company at the time. The dot shows whether it was good, bad or neutral for shareholders.

2010

9 Feb
On February 3, 2010 Macquarie declared the loan in default after the limited waiver expired and demanded immediate repayment of the $5,000,000 principal plus interest, and ended any further lending under the $25 million facility. The company says it lacks enough current assets to repay, and Macquarie may foreclose on its oil and gas properties, so investors may lose all or part of their investment. This follows the May 2009 waiver and puts the company's assets at risk.
debt financing
14 Jan
The company announced it ended the proposed combination with Lion Energy and Gold Star; the letter of intent expired December 31, 2009 and the board chose not to extend it. The board said Lion's existing exploration commitments were not compatible with the combined business's strategic objectives, so the share exchange announced in November 2009 will not happen.
business combination

2009

6 Nov
The company announced a non-binding letter of intent for a combination with Lion Energy Corp. and Gold Star Resources Corp. (both Canadian). Lion would issue about 40 million shares, roughly 26 million to Southern Star shareholders and 14 million to Gold Star shareholders, in exchange for all shares of both. The deal still needs due diligence, final documents, regulatory and court approval, and shareholder votes of all three companies.
business combination
4 June
The company had drawn the full $5.0 million of the Macquarie borrowing base by January 2009 (up from $3.5 million in October 2008). On May 29, 2009 Macquarie waived compliance with three financial ratio tests only until June 30, 2009. In return the company must pay Macquarie 100% of net operating cash flow toward the loan, get Macquarie's written consent for any capital spending, and release Macquarie from prior claims.
material agreement

2008

30 Oct
The company furnished a press release, which is company-stated and not independently verified. It says the Burt 20-1 well was spudded October 25, 2008 as a second Haynesville test in the Sentell Field, following an announced Haynesville discovery at Atkins-Lincoln 17-2 (completion techniques still being evaluated). The first five Cotton Valley wells are producing, averaging 2.3 MMcf/d from October 13 to 27 and sold at $7.67 per MMBtu in September; the Cash Pointe 30-1 awaits completion. The company has drawn $3.5 million of the $5.0 million Macquarie borrowing base and says the $25 million revolver remains available while it works with Macquarie on the borrowing base and drilling priorities. It also hired Deborah Null as land manager. This indicates production and a new discovery, though no Haynesville production rates are given.
drilling progress report
1 Oct
On September 25, 2008 the company dismissed its auditor Dale Matheson Carr-Hilton Labonte LLP and on October 1, 2008 engaged Weaver and Tidwell, L.L.P. of Houston. The dismissed auditor's report on the fiscal years ended May 31, 2008 and 2007 included a going-concern paragraph citing lack of revenues, history of losses and need for additional funds. The company reports no disagreements or reportable events with the former auditor.
auditor change
18 July
On July 16, 2008 the company drew $2.5 million under an amended and restated Macquarie credit agreement dated July 11, 2008. It replaces the May 2008 $2,000,000 short-term loan (due September 13, 2008) with a revolving facility of up to $25 million due July 11, 2011, with an initial borrowing base of $5 million, of which $2.5 million remains available. The draw included $526,838 for the working capital deficit. The loan is secured by a first-priority lien on all property, with oil and gas proceeds assigned to the lender. The company also issued warrants: 750,000 shares at $1.00 (replacing the earlier warrant) and a second warrant for 1,897,419 shares at $1.00, net of the first, both expiring July 11, 2013. This extends the debt deadline but adds dilution risk. The filing text provided is truncated, so further terms are not covered.
capital raising announcement
22 May
On May 16, 2008 the company signed a secured term loan with Macquarie Bank Limited for up to $2,000,000, all due September 13, 2008. Up to $1,079,050.32 goes to current accounts payable and the remaining $920,949.68 to general corporate purposes. Interest is the lesser of prime plus 2% and the highest lawful rate, all oil and gas sale proceeds are assigned to Macquarie, and it holds a first-priority lien on all the company's property. It also received a warrant for 750,000 shares at $1.00 expiring May 16, 2013, so shareholders face possible dilution.
capital raising announcement

2007

21 Nov
On September 18, 2007 the company issued a 10% US$1,300,000 convertible debenture to Gobbet Management Inc., due September 18, 2009 and convertible at US$0.50 per share, for general corporate use. Full conversion would mean 2,600,000 new shares (calculated from the filing's figures). The company's address is now Houston, Texas.
material agreement
18 July
The company amended a February 8, 2007 subscription with Venture Capital Asset Management AG, adding 11.6 units at US$50,000 each (US$580,000). Venture Capital now holds 48.6 units for US$2,430,000, entitling it to about 60% of net production proceeds from the Atkins Lincoln 18-1 and 8-1 wells. Units convert at US$0.50 per share; full conversion would give 4,860,000 shares, or 13.6% on 30,806,251 shares outstanding. For shareholders, this gives funding but a large share of those wells' proceeds and possible dilution.
material agreement
3 Jan
The company's subsidiary Southern Star Operating bought a 20% interest in the D Duck Prospect for $290,962.27 (agreement dated November 2, 2006) and became operator. A December 22, 2006 amendment corrected the restructuring agreement: Big Sky Management actually held and transferred only 20%, not 40%. Together the subsidiary now holds a 40% working interest. This corrects the November restructuring terms.
material agreement

2006

7 Dec
The company announced it had started drilling its first well, the Atkins-Lincoln 18-1 in Bossier Parish, Louisiana, planned to reach about 9,950 feet. A second well about a mile away is planned next under a Nabors Drilling USA contract, on a 5,300-acre block. This is the first drilling step after the move into oil and gas; no results are reported.
drilling progress report
21 Nov
The company, now named Southern Star Energy, told shareholders about the restructuring agreement and expected board change. A 7.5-for-1 forward split on November 13, 2006 raised shares from 7,555,000 to 56,662,500. At closing (anticipated November 22, 2006) Mutter and Hollmann would give up their shares (transfers to Boehnke plus cancellations) leaving 21,037,500 shares outstanding, with Boehnke holding 6,000,000 (28.5%) and as sole director. Closing is still subject to conditions. This continues the November 6 restructuring and gives the share and board details.
business combination
9 Nov
The company (then named Surge Enterprises) issued a 10% US$600,000 convertible debenture to Sovereign Services Limited, due November 1, 2008 and convertible at US$3.75 per share. It also signed a restructuring agreement on November 6, 2006 to drop its software and website business (Surge Marketing, to go to Troy Mutter) and move into oil and gas via an interest in the D Duck Prospect in Bossier and Caddo Parishes, Louisiana. Mutter and Frank Hollmann would give up 4,750,000 shares for cancellation and 800,000 shares to Eric Boehnke, who assigns the prospect interest through Big Sky Management. The filing says closing is not assured. A Meagher Oil & Gas assignment gave Southern Star 40% of certain leases. This follows the earlier officer filings and starts the oil and gas turn.
material agreement