2. LIQUIDITY AND GOING CONCERN

Our revenues, cash flow, profitability, oil and natural gas reserves value and future rate of growth are substantially dependent upon prevailing prices for oil and natural gas. Our ability to borrow funds and to obtain additional capital on attractive terms is also substantially dependent on oil and natural gas prices. Historically, world-wide oil and natural gas prices and markets have been volatile, and may continue to be volatile in the future. In particular, the prices of oil and natural gas declined dramatically in the second half of 2014 and have remained low, decreasing further in 2015. Average prices for our crude oil sales have decreased since the fall of 2014 from $103.23 per barrel in June 2014 to $33.56 per barrel in December 2015. As a result, revenues have decreased from $127.7 million for the year ended December 31, 2014 to $80.4 million for the year ended December 31, 2015.

The operation of the terms of our existing revolving credit loan agreement may also adversely impact our liquidity. As of December 31, 2015 (and as of March 16, 2016), we had outstanding borrowings of $15.0 million under our revolving credit facility. In March 2016, we announced that the borrowing base under our revolving credit facility had been reduced to $20.1 million at December 31, 2015. The International Finance Corporation (“IFC”), our lender under the revolving credit facility, has communicated to us that if we were to seek additional drawdowns before the next scheduled redetermination date as of June 30, 2016, the IFC could elect, under the terms of the loan agreement, to conduct an interim redetermination which it believes would result in a borrowing base of less than $20.1 million if commodity prices are lower than they were at December 31, 2015. Therefore, we currently have very limited, if any, borrowing capacity under our revolving credit facility. A continuation of prevailing low price levels for oil and natural gas may cause the IFC to make further reductions in the borrowing base under the credit facility.

If we fail to satisfy our obligations with respect to our indebtedness or trade payables, or fail to comply with the financial and other restrictive covenants contained in the loan agreement governing our revolving credit facility, an event of default could result, which would permit acceleration of such debt and which could result in an event of default under the facility and acceleration of other indebtedness, and could permit our secured lender to foreclose on any of our assets securing that debt. Any accelerated debt would become immediately due and payable.

As discussed further in Note 8, Sonangol P&P, our partner in Angola, has been in default since January 2015 for failure to pay amounts owed for their share of costs under the Joint Operating Agreement.  This had an adverse impact on our liquidity during 2015. On March 14, 2016, Sonangol P&P paid $19.0 million representing the amounts owed as of December 31, 2015, including default interest which we have not previously recognized in our financial results.

Continued depressed oil and natural gas prices or further declines in oil and natural gas prices for 2016 and thereafter would have a material adverse effect on our liquidity, financial condition, results of operations and on the carrying value of our proved reserves. Assets and liabilities could ultimately be settled for amount that differ from those currently reported in the consolidated balance sheet.

The environments in which we operate are often difficult and the ability to operate successfully depends on a number of factors including our ability to control the pace of development, our ability to apply “best practices” in drilling and development, and the fostering of productive and transparent relationships with local partners, the local community and governmental authorities. Financial risks include our ability to control costs and attract financing for our projects. In addition, often the legal systems of certain countries are not mature, and their reliability can be uncertain. This may affect our ability to enforce contracts and achieve certainty in our rights to develop and operate oil and natural gas projects, as well as our ability to obtain adequate compensation for any resulting losses. Our strategy depends on our ability to have significant influence over operations and financial control. 

If oil and natural gas prices continue to remain at current depressed levels, we expect that for 2016 we will not generate adequate revenue to cover our operating expenses, we will generate losses from operations, and our cash flows will not be sufficient to cover our operating expenses. To meet our capital needs, we are considering multiple alternatives, including, but not limited to, additional debt or equity financing, a sale or farm-downs of assets, delay of the discretionary portion of our capital spending to future periods or operating cost reductions. There can be no guarantee of future capital acquisition or fundraising success. Our current cash position and our ability to access additional capital may limit our available opportunities, or not provide sufficient cash available for our operations which raises substantial doubt about our ability to continue as a going concern.