CORRESP 14 filename14.txt TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP THE CHRYSLER BUILDING 405 LEXINGTON AVENUE NEW YORK, NEW YORK 10174 www.troutmansanders.com TELEPHONE: 212-704-6000 FACSIMILE: 212-704-6288 Timothy I. Kahler Direct Dial: 212-704-6169 timothy.kahler@troutmansanders.com Fax: 212-704-5948 August 23, 2005 Via Edgar Correspondence United States Securities and Exchange Commission Division of Corporate Finance 450 Fifth Street, N.W. Washington, D.C. 20549-0405 Attn: H. Roger Schwall Assistant Director Re: Cadence Resources Corporation - Amendment No. 1 to Registration Statement on Form S-4; File No. 333-124904 Dear Mr. Schwall: Our client Cadence Resources Corporation is enclosing herewith amendment No. 1 (the "Amendment") to its registration statement on Form S-4, File No. 333-124904, which was initially filed May 13, 2005. Cadence has asked that we describe in this letter its responses to the comments contained in your letters of June 10, 2005 and June 15, 2005 with respect to the initial May 13, 2005 filing of the registration statement. The comment numbers below in this letter correspond to the comment numbers set forth in the two comment letters. To facilitate the staff's review, the text of each comment is set forth below and, where appropriate, the descriptions of the responses are keyed to the page numbers of the Amendment. For the staff's convenience, we will also be delivering to the Commission paper copies of the Amendment marked to show changes from the initial May 13, 2005 filing of the registration statement. ATLANTA o HONG KONG o LONDON o NEW YORK o NORFOLK o RALEIGH RICHMOND o TYSONS CORNER o VIRGINIA BEACH o WASHINGTON, D.C. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 2 Accounting Comments Contained in Comment Letter Dated June 10, 2005 Comment No. 1: Please include updated interim financial statements in your next amended filing pursuant to Rule 3-10 of Regulation S-B. Response to Comment No. 1: The Amendment includes updated interim financial statements pursuant to Rule 3-10 of Regulation S-B. These consist of Cadence's interim financial statements for its third fiscal quarter ended June 30, 2005, and Aurora's interim financial statements for its second fiscal quarter ended June 30, 2005. (See pages F-36 and F-77.) Comment No. 2: Please remove the statements referencing the letter sent to the Chief Accounting Office in your next amended filing. Response to Comment No. 2: Cadence has removed the statements referencing the letter sent to the Chief Accounting Office (see page 96). Comment No. 3: We note that oil and gas exploration and intangible drilling expenses of Cadence under the successful efforts method have not been adjusted to give pro forma effect to conform to the treatment of such costs under the full cost method. We also note that the asset value remains the same under both successful efforts and full cost methods due to certain impairment provisions made by Cadence, which are attributable to the write-down of De Soto Parish gas well and a downward adjustment in total gas reserves. Please tell us why you wrote down the carrying value of gas wells and why there was a downward adjustment in total gas reserves. Supplementally provide to us a detail calculation supporting your position that a conforming pro forma adjustment is not required. Response to Comment No. 3: Write-down of Carrying Value of Cadence Gas Wells. During the fiscal year ended September 30, 2004, four of Cadence's developed oil and gas wells in Louisiana were impaired to varying degrees ranging from a 30% impairment on one well to a 100% impairment on another. In conjunction with Cadence's reserve report and assessments made by management as to well performance, it was determined that these wells were not producing results that would fully return the capital invested in them. These impairments amounted to approximately $1,200,000. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 3 Downward Adjustment of Total Gas Reserves. Cadence's reserve report as of October 1, 2004 showed 585.7 MMcf of gas attributable to developed producing reserves and no reserves to proved undeveloped reserves. This resulted in a downward adjustment of total gas reserves. Detail Calculation. Attached as "Exhibit A" to this letter are spreadsheets related to the detailed calculation of the conversion of the Cadence oil and gas properties from the successful efforts method of accounting to the full cost method. In its original pro forma compilation, Cadence made an assessment that, given the write down under FAS 121 (described above), an equivalent write-down to fair market value would occur under Rule 4-10(c) of Regulation S-X ceiling test rules applicable under the full cost method, and the asset value would remain the same under both methods. However, when Cadence performed a further detailed calculation adding back certain applicable costs for full cost purposes less the depreciation recomputed using the adjusted basis and an impairment recognized under the ceiling test provisions, there resulted an upward adjustment of $430,131 to the asset value under the full cost method. This adjustment has been incorporated in the June 30, 2005 pro forma financial statements included in the Amendment. (See page 97.) Engineering Comments Contained in Comment Letter Dated June 15, 2005 Comment No. 1: You state that you and Aurora entered into the Agreement and Plan of Merger based, in part, on an assessment of recoverable reserves. However, we are unable to find any discussion under "Approval of the Merger." Either delete this disclosure or expand the discussion under "Approval of the Merger" to address the consideration given by Cadence to "recoverable reserves" and explain what you mean by that term which is not defined under Rule 4-10 of Regulation S-X. Response to Comment No. 1: The word "recoverable" as a modifier of "reserves" appeared twice in the original filing of the registration statement, in both cases within the risk factor on page 5. The word "recoverable" in this context has been deleted in both places, as shown on pages 6 and 7 of the Amendment. As a result, Cadence believes that no additional discussion is needed to elaborate on the term "recoverable." In addition, Cadence examined each use of the term "reserves" in the registration statement and considered whether the appropriate modifier (e.g., "proved," "proved developed producing," etc.) accompanied such use. And, where the term "reserves" was used in the registration statement without any modifier, Cadence considered whether such term should be accompanied by an appropriate modifier. As a result of this review, Cadence deleted the term "reserves" from certain text within the registration statement (see pages 6, 7 and 50) and added an appropriate modifier to certain other text (see page 79). TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 4 Comment No. 2: Under Rule 4-10(a) of Regulation S-X only proved reserves may be disclosed in a SEC filing. Therefore, please remove the following reserves disclosure: o the gas-in-place of 11 BCFG per square mile in New Albany Shale on page 70; o 1.2 BCF of gas or more per square mile in the Crossroads Projects on page 74; o the referenced oil reserves in Beregsai Reef field on page 75. Response to Comment 2: Cadence has deleted all of these reserves disclosures as requested. (See pages 71, 75 and 76, respectively.) Comment No. 3: Please disclose that over 86% of Aurora's proved reserves are classified either as proved developed non-producing or proved developed. This should also be placed prominently in front of the document, such as the risk factors section, to inform investors of the nature of Aurora's proved reserves. Response to Comment No. 3: The Aurora business description (see page 78) now includes disclosure that over 86% of Aurora's proved reserves are classified either as proved developed non-producing or proved underdeveloped. In addition, there has been added a risk factor (see page 7) to similar effect. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 5 Comment No. 4: In 2004 Aurora produced an average of 414 MCF per day of gas from 40.5 net gas wells for an average of 10 MCFD per well. Explain to us how the development of reserves is economic at these rates of production. Response to Comment No. 4: To derive a per-well production for Aurora during 2004 based on the disclosures in the registration statement, the calculation would use as its denominator the number of gas wells shown in the table under the caption "Aurora Productive Oil and Gas Wells" (i.e., 40.49 net wells). However, this net number of wells includes (i) 25 non-producing wells, and (ii) five wells that produced for only a short period during 2004 and were in the early testing and dewatering phase during which production yields are limited. Cadence believes that the inclusion of these wells in the registration statement disclosures is in accordance with Securities Act Industry Guide 2, "Disclosure of Oil and Gas Operations," which states that productive wells are "producing wells and wells capable of production." The 25 non-producing wells were drilled, capable of production but awaiting the completion of infrastructure to transport the gas. The five new wells were producing wells, although their production rates had not yet reached a representative volume. If these 30 wells are excluded from the per-well production calculation, the ten remaining wells would yield approximately 41 MCF per day, which Cadence believes is economic in today's gas market. (See page 80.) Comment No. 5: Tell us how Aurora's monthly net gas production rate has been in each month in 2005 and how many wells. Response to Comment No. 5: Aurora's total gas production during the first six months of 2005 was 164,206 MCF, which was derived from an aggregate of 23 net producing wells. Of that amount, 51,607 MCF was produced by wells in existence at December 31, 2004, and 112,599 MCF (representing approximately 69% of Aurora's total production during such period) was produced by wells added during 2005. For the first six months of 2005, Aurora's monthly net gas production from new wells, and the cumulative number of new wells, are shown in the table below. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 6 Month Net Gas Production Cumulative Number of New Wells ----- ------------------ ------------------------------ January 10,164 7 February 11,222 8 March 12,887 10 April 16,979 14 May 29,333 15 June 32,014 16 Total 112,599 Comment No. 6: We note that during the last two years you had no revisions of previous reserve estimates. Tell us the reason for this. Response to Comment No. 6: The table on page F-74 of the Amendment has been revised to correct the information contained in the table as filed with the original registration statement on May 13, 2005. Aurora had not received its first independent reserve report until after December 31, 2002. Thus, as of January 1, 2003 there were no "proved reserves." The amount of 16,874 MMscf is properly shown as an addition during 2003 because that is the amount shown in Aurora's first reserve report which was received during 2003. What was originally shown in the table as an addition of 18,440 MMscf during 2004 actually was a net number resulting from the reserve report received during 2004 showing new holdings, net of a downward adjustment of 4,025 MMscf attributable to existing holdings. The downward adjustment is now separately stated in the table as a "revision" during 2004. Comment No. 7: Tell us how you arrived at the future production costs that you utilized in your Standardized Measure calculation given your historical production costs. Response to Comment No. 7: Cadence believes that, in order to be more meaningful for the reader, the disclosures required by SFAS #69 should be adapted in the case of an entity such as Aurora which is in the very early stages of development and which has limited cost data to use in preparing a standardized measure. Accordingly, in establishing the estimated future production costs to be used in preparing the standardized measure, Cadence and Aurora considered three factors expected to be material to its future production costs. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 7 First, due to inadequate available capital during periods prior to 2005, Aurora had been unable to achieve a desirable density of wells in its productive fields. Costs per volume of gas pumped from the wells will decrease as a higher, more desirable density is achieved, because: (a) a higher density of wells allows more water to be removed from the shale, which in turn allows the natural gas to release from the organic materials, resulting in a higher volume of gas production from each well for the same pumping expense; and (b) higher production volumes typically decrease the per-volume costs of both transportation and CO2 removal. With the investment of additional capital into Aurora during January 2005, Aurora was able to begin a drilling program designed to achieve significantly higher well density. Cadence believes this drilling program should result in production costs that are more closely aligned with industry averages. Second, one of the producing fields included in Aurora's historical information and its reserve report is the Paxton Quarry field. Aurora acquired this field from another operator, and due to some structural issues, its operating costs are higher compared with a majority of the existing Antrim Shale fields. Although this field will remain in production, its impact on average costs will be reduced as Aurora adds significantly more wells in the Antrim Shale. (See page 80 for additional discussion.) Third, the standardized measure included in the footnotes to Aurora's year-end December 31, 2004 financial statements reflects production values only from wells and fields that were included in the reserve report. Properties in which Aurora owns a minor non-operated interest or for which there is uncertainty about continued production, are not included in the reserve report, and neither their projected revenues nor their associated production costs are used in calculating the standardized measure. Revenues and costs from those wells are, however, reflected on the historical production charts in response to Guide 2 on page 80 of the Amendment. TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 8 Because of the foregoing, in selecting the year-end costs to be used in calculating the standardized measure, Cadence and Aurora looked to two sources of information. Aurora's drilling activity in the third and fourth quarters of 2004 was focused on the Hudson 34 field. As of December 31, 2004, there were seven wells in production in this field. Although this was not at the ideal density of the total of 27 wells that Aurora has scheduled to drill in this field, for November and December 2004, production costs averaged $2.38 per MCF. Aurora's drilling plan over the next few years calls for drilling wells that are similar to the Hudson 34 wells in fields that are similar to the Hudson 34 field, and management felt that the Hudson 34 field data would be a reasonable choice of data to rely upon in preparing the standardized measure. Management also reviewed industry average data for the Michigan Antrim Shale play involving over 8,000 wells, and concluded that the production cost data used to prepare the standardized measure was consistent with industry averages. Data for the first six months of 2005 supports this approach. The Hudson 34 field producing for six months, the Hudson Southwest field producing for five months, and the Hudson Northeast field producing for three months, had a combined average production cost for June 2005 of $2.56 per MCF. None of these fields are yet at the ideal density, and management expects production costs to decline further. These three fields generated 70% of Aurora's gross revenues in the first six months of 2005. Attached as Exhibit B to this letter are charts showing production and cost information for these fields during 2005. (The production schedule is also included on page 71.) [The remainder of this page is intentionally blank.] TROUTMAN SANDERS LLP ATTORNEYS AT LAW A LIMITED LIABILITY PARTNERSHIP H. Roger Schwall August 23, 2005 Page 9 Thank you for your assistance in this matter. If you have any questions regarding this letter or the Amendment please do not hesitate to call me at (212) 704-6169. Very truly yours, /s/ Timothy I. Kahler --------------------- Timothy I. Kahler cc: Mr. Howard M. Crosby Henry I. Rothman, Esq. Exhibit A to Letter Dated August 23, 2005
==================================================================================================================================== Cadence Resources Corporation Comparison of SE to FC method of oil and gas accounting June 30, 2005 Successful Full Efforts Cost Difference ------- ---- ---------- Value of oil and gas property 8,321,020 10,561,745 2,240,725 Depletion, depreciation and amortization and impairment under respective methods (6,101,065) (7,911,659) (1,810,594) ----------- ----------- ----------- Net Value 2,219,955 2,650,086 430,131 =========== =========== ===========
Synopsis: Under the full cost method, Cadence would have on the books $2,650,086 for all oil and gas property and equipment.
==================================================================================================================================== Cadence Resources Corporation Calculation of SE to FC method of oil and gas accounting June 30, 2005 9 Months Ended Year Ended Year Ended Year Ended 6/30/2005 9/30/2004 9/30/2003 9/30/2002 --------- --------- --------- --------- Proved properties Acquisition costs 6/30/2005 8,321,020 7,549,316 1,341,569 398,353 Add: Exploration and drilling costs 6/30/2005 174,482 Exploration and drilling costs 9/30/2004 134,452 134,452 Exploration and drilling costs 9/30/2003 109,968 109,968 109,968 Exploration and drilling costs 9/30/2002 128,974 128,974 128,974 128,974 Oil and gas lease expense 6/30/2005 443,150 Oil and gas lease expense 9/30/2004 565,148 565,148 Oil and gas lease expense 9/30/2003 302,205 302,205 302,204 Oil and gas lease expense 9/30/2002 131,812 131,812 131,812 131,812 Oil and gas consulting engineer 6/30/2005 135,000 Oil and gas consulting engineer 9/30/2004 105,535 105,535 Oil and gas consulting engineer 9/30/2003 60,000 60,000 60,000 ------------------------------------------------------------------------------------------------------------------------------------ 10,611,746 9,087,410 2,074,527 659,139 Less: Gain on sale of production rights (50,000) (50,000) (50,000) -- ------------------------------------------------------------------------------------------------------------------------------------ Proved property total under full cost method 10,561,746 9,037,410 2,024,527 659,139 ==================================================================================================================================== ------------------------------------------------------------------------------------------------------------------------------------ Total Accumulated DDA and impairment under SE method (6,101,065) (3,911,939) (61,611) (4,312) Total Accumulated DDA and impairment under FC method (7,911,659) (5,164,162) (274,406) (24,388) Add'l Write Down - to ceiling amount-see separate calc (284,547) |-----------| |(5,448,709)| |-----------| ====================================================================================================================================
ATLANTA o HONG KONG o LONDON o NEW YORK o NORFOLK o RALEIGH RICHMOND o TYSONS CORNER o VIRGINIA BEACH o WASHINGTON, D.C.
==================================================================================================================================== Cadence Resources Corporation Calculation of Ceiling Test September 30, 2004 ------------------------------------------------------------------------------------------------------------------------------------ PV 10 - Proved Reserves 3,083,200 Unproved proerties 505,501 Total of above 3,588,701 Less: Tax basis of oil and gas properties at 9/30/04 (4,228,798) NOL Carryforwards N/A --------- Adjustment - --------- Full Cost Ceiling Amount 3,588,701 Total Oil and Gas Property Costs - proved 9,037,410 Accumulated D&A under full cost (5,164,162) ---------- 3,873,248 ---------- Cost Ceiling Cushion (Writedown) (284,547) ========== ====================================================================================================================================
Exhibit B to Letter Dated August 23, 2005
==================================================================================================================================== AURORA ENERGY, LTD SUMMARY OF 2005 PRODUCTION-NEW DRILLING GROSS PROJECT MCF'S ------------------------------------------------------------------------------------------------------------------------------------ Jan Wells Feb Wells Mar Wells April Wells May ------------------------------------------------------------------------------------------------------------------------------------ Well Name Hudson 34 25,475 17 24,875 17 25,343 17 24,081 17 22,265 Hudson SW -- 5,981 2 10,345 10 16,540 13 23,854 Hudson NE -- -- -- 6,794 8 29,796 ------------------------------------------------------------------------------------------------------------------------------------ NET COMPANY MCF'S ------------------------------------------------------------------------------------------------------------------------------------ Hudson 34 10,164 7 9,396 7 9,706 7 9,223 7 8,528 Hudson SW -- 1,826 1 3,181 3 5,085 4 9,004 Hudson NE -- -- -- 2,671 3 11,801 |------------------------------------------------------------------------------------------------------------ | 10,164 11,222 12,887 16,979 29,333 |------------------------------------------------------------------------------------------------------------ Net Company Totals: Ave MCF per day 328 401 416 566 946 ==================================================================================================================================== Ave Wells 7 8 10 14 15 ==================================================================================================================================== Ave MCF/well/day 48.34 52.66 41.26 40.02 62.04 ==================================================================================================================================== Wells June Wells Total to date ------------------------------------------------------------------ Well Name Hudson 34 18 24,965 21 147,004 Hudson SW 13 26,222 13 82,941 Hudson NE 11 36,336 11 72,926 ------------------------------------------------------------------ ------------------------------------------------------------------ Hudson 34 7 9,562 8 56,579 Hudson SW 4 8,062 4 27,158 Hudson NE 4 14,391 4 28,862 -----------------------------------------| 32,014 112,599 | -----------------------------------------| Net Company Totals: Ave MCF per day 1,067 ================================================================== Ave Wells 16 ================================================================== Ave MCF/well/day 65.08 ==================================================================
==================================================================================================================================== AURORA ENERGY, LTD SUMMARY OF 2005 PRODUCTION COST PER MCF NEW ANTRIM WELLS DRILLED IN 2005 ONLY ----------------------------------------------------------------------------------------------------------------- NET COMPANY PRODUCTION COST ----------------------------------------------------------------------------------------------------------------- Jan Feb Mar April May June Total to date --- --- --- ----- --- ---- ------------- Well Name Hudson 34 $ 34,748 $ 30,482 $ 28,818 $ 33,153 $ 32,567 $ 35,823 $195,591 Hudson SW -- $ 9,061 $ 17,110 $ 16,300 $ 18,718 $ 20,886 $ 82,075 Hudson NE -- -- -- 9,000 30,272 25,097 $ 64,369 |---------|-----------|------------|------------|------------|------------|------------| |$ 34,748 | $ 39,543| $ 45,928| $ 58,452| $ 81,556| $ 81,807| $342,035| |---------|-----------|------------|------------|------------|------------|------------| ----------------------------------------------------------------------------------------------------------------- NET COMPANY MCF/S ----------------------------------------------------------------------------------------------------------------- Hudson 34 10,164 9,396 9,706 9,223 8,528 9,562 $ 56,579 Hudson SW -- 1,826 3,181 5,085 9,004 8,062 $ 27,158 Hudson NE -- -- -- 2,671 11,801 14,391 $ 28,862 |---------|-----------|------------|------------|------------|------------|------------| | 10,164 | 11,222| 12,887| 16,979| 29,333| 32,014| $112,599| |---------|-----------|------------|------------|------------|------------|------------| ----------------------------------------------------------------------------------------------------------------- NET COMPANY PRODUCTION COST PER MCF ----------------------------------------------------------------------------------------------------------------- Hudson 34 $ 3.42 $ 3.24 $ 2.97 $ 3.59 $ 3.82 $ 3.75 Hudson SW -- $ 4.96 $ 5.38 $ 3.21 $ 2.08 $ 2.59 Hudson NE -- $ -- $ -- $ 3.37 $ 2.57 $ 1.74 |=========|===========|============|============|============|============|============| New Well Average $ 3.42 $ 3.52 $ 3.56 $ 3.44 $ 2.78 $ 2.56 |=========|===========|============|============|============|============|============| =================================================================================================================