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4. OIL AND GAS PROPERTIES

6 Months Ended

Jun. 30, 2013

Extractive Industries [Abstract]

OIL AND GAS PROPERTIES

The following tables summarize the Company’s oil and gas activities by classification for the six months ended June 30, 2013:

		December 31, 2012				Additions				Disposals				Transfers				June 30, 2013
Unproved properties		$	1,105,645			$	5,081,135			$	-			$	-			$	6,186,780
Proved properties			2,479,535				1,000,352												3,479,887
Asset retirement costs			16,552				(1,444)				-				-				15,108
Accumulated depreciation depletion and impairment			(255,662	)			(305,778	)			-				-				(561,440	)
Total oil and gas assets		$	3,346,070			$	5,774,265			$	-			$	-			$	9,120,335

The above amounts include the effect of owners who choose not to participate in the costs of the development of the properties (non-consenting owners) which has increased our interest in the properties’ operations during the six months ended June 30, 2013.

The depletion recorded for production on proved properties for the three and six months ended June 30, 2013 amounted to $94,132 and $217,275, respectively. The Company recorded impairment expense for expired leasehold costs in the amount of $53,862 and $88,503 for the three and six months ended June 30, 2013, respectively. During the year ended December 31, 2012, the Company began drilling operations on its FFT2H, Logan 2H and Waves 1H wells. The Company completed the FFT2H well in July 2012. For the six months ended June 30, 2013, the Company has incurred $548,832 and $451,520 in drilling costs related to the Logan 2H and Waves 1H wells, respectively, in addition to amounts previously incurred. These wells were both completed in February 2013.

On February 22, 2013, Pacific Energy Development MSL, LLC (“PEDCO MSL”), a wholly-owned subsidiary of the Company, entered into an Agreement for Purchase of Term Assignment (the “Purchase Agreement”) with Berexco LLC (“Berexco”) for the acquisition of unproved oil and gas interests in the Mississippian Lime covering approximately 6,763 net acres located in Comanche, Harper, Barber and Kiowa Counties, Kansas (the “Mississippian Asset”) and approximately 10.5 square miles of related 3-D seismic data, for an aggregate purchase price of $4,207,117. Pursuant to the Purchase Agreement, Berexco applied $864,866 as the initial deposit due from PEDCO MSL to Berexco, which funds were held in escrow by Berexco on Condor’s behalf in connection with a previously contemplated transaction between Condor and Berexco. The Company remains obligated to Condor to refund the amount of $432,433, which was the portion of the initial deposit previously paid into escrow by MIE Jurassic Holding Corporation (“MIEJ”) in connection with the previously contemplated transaction between Condor and Berexco. The remaining $3,774,684 was paid in cash by the Company to Berexco in March 2013. The Company also capitalized $245,135 for legal fees and title work, $72,726 for additional costs (including $67,341 for acquiring an additional 122 acres), and $507,221 payable to South Texas Reservoir Alliance LLC (“STXRA”) for acquisition costs for total capitalized costs of approximately $5,032,000.

On March 25, 2013, PEDCO MSL completed the acquisition of the Mississippian asset, acquiring an average 98% working interest in the Mississippian Lime properties. PEDCO MSL serves as the operator of the asset.

The Mississippian acquisition is structured as a primary term assignment by the seller to PEDCO MSL of the leasehold interests which expires on December 29, 2014. If PEDCO MSL drills at least three (3) horizontal wells on these leasehold interests during this primary term, then PEDCO MSL has the option, in its sole discretion, to extend the primary term with respect to some or all of the leases subject to the assignment for an additional one (1) year period upon payment to the seller of an additional $200 per net acre covered by the leases upon which the option is exercised. If PEDCO MSL completes a commercially producing well during the primary or extended terms, then the seller shall assign such leases to PEDCO MSL for as long as the wells produce in paying quantities, with each horizontal well of at least 4,000 feet in length holding 320 acres covered by the leases, each short horizontal well with a length of between less than 4,000 feet and at least 2,000 feet in length holding 160 acres, and each vertical well holding 10 acres. The seller shall retain an overriding royalty interest equal to the positive difference, if any, obtained by subtracting existing leasehold burdens from 22.5% before payout and 25% after payout (reduced to the extent the seller assigns less than a 100% working interest to PEDCO MSL). For purposes of the Mississippian agreement, “payout” is defined as such time, on a well by well basis, when a well has sold the following specified barrels of oil equivalent (“BOE”), (utilizing a conversion factor for gas sales of 8 thousand cubic feet (Mcf) per 1 barrel of oil (bbl)): for a vertical well, ten thousand (10,000) BOE; for a short horizontal well: twenty-five thousand (25,000) BOE; and for a horizontal well: fifty thousand (50,000) BOE.

In addition, PEDCO MSL and Berexco entered into an option agreement, dated February 22, 2013, for a nonrefundable option fee of $300,000 payable in equal $100,000 installments on each of March 25, 2013, April 25, 2013, and May 25, 2013, whereby Berexco granted to PEDCO MSL an exclusive option (“Option”), expiring on May 30, 2013, to purchase a term assignment with respect to certain interests in the Mississippian Lime covering an additional approximately 7,043 net acres located in Comanche, Harper, Barber and Kiowa Counties, Kansas, and Woods County, Oklahoma and approximately 9.0 square miles of related 3-D seismic data, for an aggregate purchase price upon exercise of the Option of $4,216,544. The Company paid $200,000 for the first two installments of the option fee. The Company has allowed this option to expire through non-payment to Berexco of the third and final $100,000 option consideration payment due on May 25, 2013 and recorded a loss on the option of $200,000. If the Company wishes to pursue acquisition of this additional acreage at a later date, there can be no assurances that the Company will be able to acquire this acreage on terms acceptable to us.

In connection with the closing of the Company’s acquisition of the Mississippian Asset, pursuant to a letter agreement with STXRA dated March 25, 2013, as amended, the Company is obligated to pay STXRA a completion fee of $507,221 (equal to $75.00 per net oil and gas acre acquired in the Mississippian Asset (the “Completion Fee”)), based on the 6,763 net acres acquired, which is payable 80% in cash and 20% in the Company’s common stock, or $405,777 in cash and $101,444 in common stock (the “Equity Consideration”). Such cash compensation is due and payable to STXRA thirty (30) days following the closing of the Company’s next underwritten public offering, and as Equity Consideration the Company issued to STXRA 33,815 shares of common stock on July 11, 2013. The Company recorded an account payable and common stock payable obligation and a corresponding asset to oil and gas properties, not subject to amortization on March 25, 2013 in the accompanying balance sheet for $507,221. STXRA originally identified the Mississippian asset acquisition opportunity for the Company, and provided substantial acquisition and due-diligence related consulting services to the Company, with their sole compensation being the Completion Fee.