BELLATRIX EXPLORATION LTD. ANNOUNCES THIRD QUARTER 2010 FINANCIAL RESULTS
TSX: BXE
CALGARY, Nov. 4 /CNW/ - (TSX: BXE) Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") announces its financial and operating results for the three and nine months ended September 30, 2010.
Forward-Looking Statements
This press release contains forward-looking statements. Please refer to our disclaimer on forward-looking statements set forth at the beginning of the management's discussion and analysis attached to this press release.
HIGHLIGHTS
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Three months ended Nine months ended
September 30, September 30,
2010 2009 2010 2009
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FINANCIAL (unaudited)
(CDN$000s except share
and per share amounts)
Revenue (before royalties
and risk management(1)) 27,344 23,860 79,847 85,010
Funds flow from
operations(2) 16,342 11,090 37,150 28,344
Per basic share $0.17 $0.14 $0.39 $0.36
Per diluted share(5) $0.17 $0.14 $0.39 $0.36
Cash flow from operating
activities 13,466 12,150 32,987 27,928
Per basic share $0.14 $0.15 $0.35 $0.36
Per diluted share $0.14 $0.15 $0.35 $0.36
Net loss (8,555) (9,633) (19,360) (118,404)
Per basic share $(0.09) $(0.12) $(0.21) $(1.51)
Per diluted share(5) $(0.09) $(0.12) $(0.21) $(1.51)
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Exploration and development 30,096 2,682 63,503 6,238
Corporate and property
acquisitions 327 28 3,549 379
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Capital expenditures - cash 30,423 2,710 67,052 6,617
Property dispositions -
cash (7) (84,696) (587) (92,977)
Other - non-cash 458 178 2,122 (1,043)
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Total capital expenditures
- net 30,874 (81,808) 68,587 (87,403)
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Long-term debt 28,522 26,485 28,522 26,485
Convertible debentures(3) 47,246 82,549 47,246 82,549
Working capital (excess)
deficiency(3) 1,369 (4,701) 1,369 (4,701)
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Total net debt(3) 77,137 104,333 77,137 104,333
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Total assets 469,288 443,115 469,288 443,115
Shareholders' equity 330,288 286,841 330,288 286,841
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Three months ended Nine months ended
September 30, September 30,
OPERATING 2010 2009 2010 2009
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Daily sales volumes
Crude oil, condensate
and NGLs (bbls/d) 2,377 2,253 2,122 3,292
Natural gas (mcf/d) 40,452 31,075 35,386 34,547
Total oil equivalent
(boe/d) 9,119 7,432 8,020 9,050
Average prices
Crude oil, condensate
and NGLs ($/bbl) 58.32 57.77 63.20 48.07
Crude oil, condensate
and NGLs (including
risk management(1))
($/bbl) 60.98 57.77 64.55 48.07
Natural gas ($/mcf) 3.81 3.89 4.33 4.26
Natural gas (including
risk management(1))
($/mcf) 5.95 5.84 5.81 5.74
Total oil equivalent
($/boe) 32.11 33.79 35.81 33.74
Total oil equivalent
(including risk
management(1)) ($/boe) 42.28 41.94 42.72 39.40
Statistics
Operating netback(4)
($/boe) 13.22 16.24 15.05 12.56
Operating netback(4)
(including risk
management(1)) ($/boe) 23.39 24.39 21.96 18.23
Transportation ($/boe) 1.13 0.50 1.20 1.28
Production expenses
($/boe) 11.63 13.29 12.59 14.15
General & administrative
($/boe) 2.86 4.75 3.49 3.51
Royalties as a % of
sales after
transportation 20% 11% 20% 18%
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COMMON SHARES(6)
Common shares
outstanding 97,201,866 78,496,581 97,201,866 78,496,581
Share options
outstanding 6,155,872 4,039,229 6,155,872 4,039,229
Trust units issuable
for exchangeable shares - 312,467 - 312,467
Shares issuable for
convertible debentures(7) 9,821,429 5,390,625 9,821,429 5,390,625
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Diluted common shares
outstanding 113,179,167 88,238,902 113,179,167 88,238,902
Diluted weighted average
shares(5) 94,999,409 78,496,581 94,727,115 78,496,581
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SHARE TRADING STATISTICS(6)
(CDN$, except volumes) based on intra-day trading
High 4.00 1.13 4.60 1.56
Low 2.90 0.67 2.53 0.48
Close 3.90 1.07 3.90 1.07
Average daily volume 369,802 203,568 606,619 166,148
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(1) The Company has entered into various commodity price risk management
contracts which are considered to be economic hedges. Per unit
metrics after risk management includes only the realized portion of
gains or losses on commodity contracts.
The Company does not apply hedge accounting to these contracts. As
such, these contracts are revalued to fair value at the end of each
reporting date. This results in recognition of unrealized gains or
losses over the term of these contracts which is reflected each
reporting period until these contracts are settled, at which time
realized gains or losses are recorded. These unrealized gains or
losses on commodity contracts are not included for purposes of per
share metrics calculations disclosed.
(2) The highlights section contains the term "funds flow from operations"
which should not be considered an alternative to, or more meaningful
than cash flow from operating activities as determined in accordance
with Canadian generally accepted accounting principles ("GAAP") as an
indicator of the Company's performance. Therefore reference to
diluted funds flow from operations or funds flow from operations per
share may not be comparable with the calculation of similar measures
for other entities. Management uses funds flow from operations to
analyze operating performance and leverage and considers funds flow
from operations to be a key measure as it demonstrates the Company's
ability to generate the cash necessary to fund future capital
investments and to repay debt. The reconciliation between cash flow
from operating activities and funds flow from operations can be found
in the Management Discussion and Analysis ("MD&A"). Funds flow from
operations per share is calculated using the weighted average number
of common shares for the period.
(3) Net debt and total net debt are considered non-GAAP terms. The
Company's calculation of net debt includes the net working capital
deficiency (excess) before short-term commodity contract assets and
liabilities and short-term future income tax assets and liabilities.
Total net debt also includes the liability component of convertible
debentures and excludes asset retirement obligations and the future
income tax assets and liabilities. A reconciliation between total
liabilities under GAAP and total net debt as calculated by the
Company is found in the MD&A.
(4) Operating netbacks are calculated by subtracting royalties,
transportation, and operating costs from revenues before other
income.
(5) In computing weighted average diluted earnings per share and weighted
average diluted funds flow from operations for the three and nine
month period ended September 30, 2010, a total of 6,155,872 (2009:
4,039,229) share options, nil (2009: 312,467) exchangeable shares and
9,821,428 (2009: 5,390,625) common shares issuable on conversion of
convertible debentures were excluded from the calculation as they
were not dilutive.
(6) Reference to "common shares" or "shares" includes "trust units" or
"units" of True Energy Trust and a reference to "share options"
includes a reference to "incentive rights" prior to the
reorganization of True Energy Trust into the Corporation effective
November 1, 2009, unless the context otherwise requires.
(7) Shares issuable for convertible debentures are calculated as the
$55.0 million principal amount of the convertible debentures divided
by the conversion price of $5.60 per share.
REPORT TO SHAREHOLDERS
The combination of a stunted recovery from the recent global recession and the current North American gas bubble has created a very difficult economic climate for Canadian producers in 2010. In spite of weak commodity pricing in conjunction with one of the wettest drilling seasons recorded in Alberta, Bellatrix continues to forge ahead with accelerated growth in production, reserves and cash flow while reducing our cost base predominately in the early stage development of our two resources plays; the Cardium and Notikewin formations in West Central Alberta.
Sales Volumes- boe/d
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Quarter boe/d % Liquids % Gas
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Q4 2009 6,572 25 75
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Q1 2010 7,248 26 74
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Q2 2010 7,671 27 73
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Q3 2010 9,119 26 74
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Current (est) 10,500 34 66
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The first nine months of this fiscal year was punctuated by the following achievements:
- 97% drilling success realized on 34 gross wells, including 9 gross
(6.23 net) wells in Q3 2010.
- Sales volumes increased 39% from Q4 2009 (6,572 boe/d) to Q3 2010
(9,119 boe/d)
- Full cycle exploitation expertise driving the drill bit has resulted
in achieving our exit guidance of 10,000 boe/d in October, 3 months
early.
- Increased land holdings on the Cardium and Notikewin play trends by
16 gross (8.24 net) sections.
- Drilling inventory in the Cardium increased to 312 net locations and
94 net locations in the Notikewin.
- Per unit production expenses have decreased throughout 2010 to
$11.63/boe for Q3 2010, which compares to $13.29/boe for Q3 2009.
- Total net debt of $77.1 million at the end of Q3 compared to 2009
year end debt of $107.7 million.
- Financings -
- closed a $45 million equity offering ($3.30 per share) on
January 28, 2010
- closed a $55 million debenture offering on April 20, 2010
- closed a bought deal flow through share financing for $20 million
($4.25 per share) on August 12, 2010.
- Realized natural gas prices after including risk management contracts
for the three and nine months periods ending September 30, 2010 were
$5.95/mcf and $5.81/mcf respectively.
- Installed 29.4km of pipeline, building 3 oil batteries and built 2
gas compression facilities.
In the first nine months of 2010, the Company drilled a total of 34 gross (20.97 net) wells resulting in 25 gross (14.18 net) oil wells and 8 gross (5.79 net) gas wells with 1 gross and net dry hole establishing a 97 percent drill bit success rate. Despite the extremely wet weather experienced during the third quarter of 2010, Bellatrix drilled and/or participated in 9 gross (6.23 net) wells resulting in 6 gross (4.23 net) Cardium light wells including 2 in West Pembina, 3 in Lodgepole and 1 in the Willesden Green area, 1 gross (0.50 net) Frog Lake McLaren heavy oil well, and 2 gross (1.50 net) Notikewin horizontal gas wells in Brazeau and Willesden Green. As at November 1, 2010 all of these wells have been completed and the last 2 wells are in the process of being tied in.
In addition to the drilling activity, the Company upgraded the Brazeau compressor station and gathering system, installed additional compression in the Brazeau and Willesden Green areas, is in the process of building three new oil batteries in Pembina and installed 29.4km of pipelines to gather and process our production.
The Company continues its pragmatic approach to optimize the drilling and completion techniques on our horizontal wells in an effort to maximize productivity and ultimate resource recovery. Initial horizontal wells in both the Cardium and Notikewin were drilled with approximately 1,000 m horizontal legs and stimulated with 6 fracture treatments. The horizontal wells drilled in Q2 and Q3 are being extended to optimal length encountering up to 1,400 m horizontal legs where ownership and reservoir configuration allow and are being fracture stimulated with up to 20 stages. Early results are demonstrating superior IP's with lower initial decline rates in the optimized wells. That said, there will still be a normal distribution to the well results because of inherent reservoir heterogeneity.
Production results on the first 16 wells drilled in the Cardium play, after recovery of all load fluids, shows an IP7 (average of first 7 days production rate) of 291 boe/d, and IP15 of 253 boe/d and an IP30 of 192 boe/d. The third quarter Cardium wells (7 wells total), as a result of the aforementioned ongoing optimization, are producing at higher rates with an IP7 of 504 boe/d, an IP15 of 359 boe/d and an IP30 of 228 boe/d. The best well drilled to date was in Willesden Green in Q3 resulting in an IP7 of 891 boe/d and an IP15 of 721 boe/d.
During the quarter ending September 30, 2010 the Company also drilled 2 gross (1.5 net) Notikewin wells which have been placed on production at 3 mmcf/d with 35 bbl liquids per mmcf of gas. In Frog Lake the Company drilled 1 gross (0.5 net) McLaren heavy oil well which is producing 35 bbls/d.
The Company is on track to fulfill its drilling goals for the remainder of 2010. Bellatrix expects to drill 8 gross wells (4.80 net) Cardium horizontal wells and 1 gross (.50 net) horizontal wells in the Notikewin formation in the fourth quarter of 2010.
Bellatrix has added to its presence in the prolific liquids rich gas focus area at Ferrier. The Company has added additional, complementary land holdings of approximately 6 gross (3.6 net) sections of Mannville rights and 3 gross (1.2 net) sections of Cardium rights under a farm-in arrangement. Bellatrix expects to spud the first commitment well under this arrangement in Q4/2010. The Company has also increased its interest in a strategic pipeline along with its participation in an Upper Mannville test drilled in Q3 2010.
At the end of the third quarter, Bellatrix has 228,585 net acres of undeveloped land and has expanded its inventory of low risk development locations to 675 providing in excess of 10 years of drilling inventory.
For the three and nine month periods ended September 30, 2010, Bellatrix spent $30.7 million and $70.2 million, respectively on capital projects, before drilling royalty credits, of its total 2010 $95 million capital expenditures budget. The 2010 capital program is expected to be funded as to $85 million from the net proceeds from common share and flow through financings, cash flows and credit facilities and $10 million provided from joint venture partners.
Third quarter 2010 sales volumes averaged 9,119 boe/d compared to 7,432 boe/d in the same period of 2009. Sales volumes for the nine months ended September 30, 2010 averaged 8,020 boe/d compared to 9,050 boe/d for the same period in 2009. The reduction in average sales volume is due to natural production declines and the impact of dispositions totaling approximately 3,600 boe/d for the third and fourth quarter of 2009, offset by the additional production achieved through drilling success in the fourth quarter of 2009 and through to the third quarter of 2010. For comparison, second quarter 2010 sales volumes averaged 7,671 boe/d.
Third quarter 2010 production was impacted by delays in bringing new wells on production due to generally wet field conditions and unplanned third party plant turnarounds.
For the three months ended September 30, 2010, natural gas revenues contributed approximately 53% of total petroleum and natural gas sales; the remaining 47% was from crude oil and NGL sales.
FINANCIAL
Bellatrix's total net debt including the liability component of the convertible debentures, excluding unrealized commodity contract assets and liabilities, future income tax assets and liabilities and asset retirement obligations, as at September 30, 2010 was $77.1 million.
On August 12, 2010, Bellatrix closed its previously announced flow through financing of 4.71 million common shares on a flow through basis ("Flow Through Shares") at a price of $4.25 per Flow Through Share for aggregate gross proceeds of $20,017,500. The offering was completed on a bought deal, private placement basis through an underwriting syndicate. Proceeds of the offering will be used to accelerate the Company's Cardium light oil exploration program by incurring expenditures eligible for Canadian exploration expenses that will be renounced to subscribers of the Flow Through Shares effective on or before December 31, 2010.
As at September 30, 2010, Bellatrix had approximately $28.5 million drawn on its extendible, revolving bank credit facility leaving approximately $56.5 million available. As previously reported, on March 31, 2010, the borrowing base level was confirmed at $85 million through to the next borrowing base determination on November 30, 2010.
Bellatrix has recently applied a portion of the value of its natural gas commodity gas contracts to its balance sheet through the early crystallization of forward fixed price natural gas contracts. Three of Bellatrix's September 1 to December 31, 2010 natural gas contracts were monetized for proceeds of $4.9 million in the third quarter of 2010. As of September 30, 2010, Bellatrix has realized hedging positions of $15.1 million in 2010 through the settlement and crystallization of forward positions.
Funds flow from operations for the 2010 third quarter was $16.3 million on gross sales of $27.3 million compared to funds flow from operations for the 2009 third quarter of $12.2 million on gross sales of $23.9 million. Funds flow from operations for nine months ended September 30, 2010 was $37.1 million on gross sales of $79.8 million compared to funds flow from operations for the same period in 2009 of $28.3 million on gross sales of $85.0 million. In comparison, funds flow from operations for the second quarter of 2010 was $10.6 million on gross sales of $25.6 million. The increase in funds flow from operations from Q2 2010 to Q3 2010 was the result of $4.9 million realized gain on commodity price risk management contracts attributable to early crystallization of certain forward fixed price natural gas contracts in the quarter as discussed above. The higher sales volumes in Q3 2010 compared to Q3 2009 alleviated the impact of overall lower realized commodity prices on the Company's funds flows from operations.
The net loss for the 2010 third quarter was $8.6 million compared to a net loss of $9.6 million in the 2009 third quarter. In comparison, the net loss for the second quarter of 2010 was $10.8 million.
Bellatrix recently added another crude oil fixed price swap for 500 bbl/d at CDN$89.00/bbl for calendar 2011. As at November 4, 2010, Bellatrix has entered into commodity price risk management arrangements as follows:
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Price Price
Type Period Volume Floor Ceiling Index
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Natural Gas Jan. 1, 2010 to
call option Dec. 31, 2010 5,000 GJ/day $ - $8.05 CDN AECO
Crude Oil Jan. 1, 2010 to
collar Dec. 31, 2010 500 bbl/d $75.00 CDN $101.15 CDN WTI
Crude Oil June 1, 2010 to
fixed Dec. 31, 2010 500 bbl/d $91.76 CDN $91.76 CDN WTI
Crude Oil Jan. 1, 2011 to
fixed Dec. 31, 2011 1,000 bbl/d $88.18 CDN $88.18 CDN WTI
Crude Oil Jan. 1, 2011 to
fixed Dec. 31, 2011 500 bbl/d $89.00 CDN $89.00 CDN WTI
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2011 OUTLOOK
In 2011, Bellatrix will continue to be active in drilling its two core resource plays, the Cardium and Notikewin, utilizing horizontal drilling multi fracturing technology. In West Central Alberta, the Company has developed an inventory of 312 net horizontal drilling locations targeting the Cardium Interval and 94 net horizontal drilling locations to access the Notikewin sequence of channel sands. An initial capital budget of $85 million has been set for fiscal 2011. Based on the timing of the 2011 capital program, downtime for anticipated plant turnarounds and normal production declines, execution of the 2011 budget is anticipated to provide 2011 average daily production of approximately 11,500 to 12,000 boe/d and an exit rate of approximately 12,000 to 12,500 boe/d.
Bellatrix is a company dedicated to "the pursuit of sustainable growth" for its stakeholders.
Raymond G. Smith, P. Eng.
President and CEO
November 4, 2010
MANAGEMENT'S DISCUSSION AND ANALYSIS
November 4, 2010 - The following Management's Discussion and Analysis of financial results as provided by the management of Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") should be read in conjunction with the unaudited interim consolidated financial statements and selected notes for the three and nine months ended September 30, 2010 and the audited consolidated financial statements of the Company for the years ended December 31, 2009 and 2008 and the related Management's Discussion and Analysis of financial results. This commentary is based on information available to, and is dated as of, November 4, 2010. The financial data presented is in accordance with Canadian generally accepted accounting principles ("GAAP") in Canadian dollars, except where indicated otherwise.
CONVERSION: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 mcf/bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived from converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.
NON-GAAP MEASURES: This Management's Discussion and Analysis contains the term "funds flow from operations" which should not be considered an alternative to, or more meaningful than "cash flow from operating activities" as determined in accordance with Canadian GAAP as an indicator of the Company's performance. Therefore reference to funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from operations can be found in the Management's Discussion and Analysis. Funds flow from operations per share is calculated using the weighted average number of shares for the period.
This Management's Discussion and Analysis also contains other terms such as total net debt and operating netbacks, which are not recognized measures under Canadian GAAP. Total net debt is calculated as long-term debt plus the liability component of the convertible debentures and the net working capital deficiency (excess) before short-term commodity contract assets and liabilities and short-term future income tax assets and liabilities. Operating netbacks are calculated by subtracting royalties, transportation, and operating expenses from revenues before other income. Management believes these measures are useful supplemental measures of firstly, the total amount of current and long-term debt and secondly, the amount of revenues received after transportation, royalties and operating expenses. Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as current and long-term debt or net income determined in accordance with GAAP as measures of performance. Bellatrix's method of calculating these measures may differ from other entities, and accordingly, may not be comparable to measures used by other trusts or companies.
Additional information relating to the Company, including the Bellatrix's Annual Information Form, is available on SEDAR at www.sedar.com.
FORWARD LOOKING STATEMENTS: Certain information contained herein may contain forward looking statements including management's assessment of future plans and operations, drilling plans and the timing thereof, commodity price risk management strategies, expected 2010 and 2011 average production and exit rate, updating of ceiling test calculations, expected production increase in the balance of 2010 over 2009, plans to increase interest in certain facilities, use of proceeds from equity financings, plans and timing related to the adoption of IFRS and the effects thereof, elections anticipated to be made under IFRS and the impact on financial statements, anticipated liquidity of the Company and various matters that may impact such liquidity, expected operating expenses and general and administrative expenses, expected levels of revenues in 2010 compared to 2009, 2010 capital expenditures and the nature of capital expenditures and the timing and method of financing thereof and 2011 capital expenditure budget, may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Bellatrix. In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. Such information may prove to be incorrect and readers are cautioned that the information may not be appropriate for other purposes. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward- looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; completion of the Flow-Through Financing; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future commodity gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors that could effect Bellatrix's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), at Bellatrix's website (www.bellatrixexploration.com). Furthermore, the forward-looking statements contained herein are made as at the date hereof and Bellatrix does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.
Overview and Description of the Business
Bellatrix is a Western Canadian based growth oriented oil and gas company engaged in the exploration for, and the acquisition, development and production, of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan.
Bellatrix is the continuing corporation resulting from the reorganization (the "Reorganization") effective November 1, 2009 pursuant to a plan of arrangement involving, among others, True Energy Trust (the "Trust" or "True"), Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") and securityholders of the Trust.
The Reorganization has been accounted for on a continuity of interest basis and accordingly, the consolidated financial statements for periods prior to the effective date of the Reorganization will reflect the financial position, results of operations and cash flows as if the Company had always carried on the business formerly carried on by the Trust. Information herein with respect to Bellatrix includes information in respect of the Trust prior to completion of the Reorganization to the extent applicable unless the context otherwise requires. In addition, references to "common shares" and "shares", "Share Option Plan", and "options" should be read as references to "Units", "Unit Rights Incentive Plan", and "rights" respectively, for periods prior to November 1, 2009.
Bellatrix's common shares and convertible debentures are listed on the Toronto Stock Exchange under the symbols BXE and BXE.DB.A, respectively.
Financings in 2010
Part of Bellatrix's focus in 2010 has been directed towards improving the Company's financial flexibility and building a stronger balance sheet. In January 2010, Bellatrix issued 13.64 million common shares at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.4 million after transaction costs). The net proceeds from this financing were used to temporarily reduce outstanding bank indebtedness, thereby freeing up borrowing capacity that could be redrawn to fund Bellatrix's ongoing capital expenditure program and for general corporate purposes.
On April 20, 2010, Bellatrix issued $55 million of convertible unsecured subordinated debentures (the "4.75% Debentures") on a bought deal basis. The 4.75% Debentures have a face value of $1,000, bear interest at the rate of 4.75% per annum payable semi-annually in arrears on the last day of April and October of each year commencing on October 31, 2010 and mature on April 30, 2015 (the "Maturity Date"). The 4.75% Debentures are convertible at the holder's option and at any time prior to the close of business on the earlier of the close of business on the business day immediately preceding the Maturity Date and the date specified by the Corporation for redemption of the 4.75% Debentures into common shares of the Corporation at a conversion price of $5.60 per common share (the "Conversion Price"), subject to adjustment in certain events. The 4.75% Debentures are not redeemable by the Corporation before April 30, 2013. On and after April 13, 2013 and prior to April 30, 2014, the 4.75% Debentures are redeemable at the Corporation's option, in whole or in part, at par plus accrued and unpaid interest if the weighted average trading price of the common shares for the specified period is not less than 125% of the Conversion Price. On and after April 30, 2014, the 4.75% Debentures are redeemable at the Corporation's option, in whole or in part, at any time at par plus accrued and unpaid interest. Proceeds from the issuance of the 4.75% Debentures have been used by Bellatrix to partially fund the redemption of the convertible unsecured subordinated debentures due June 30, 2011 (the "7.5% Debentures") and the balance of the redemption amount has been funded through bank indebtedness.
On April 20, 2010, Bellatrix deposited with Computershare Trust Company of Canada, the trustee (the "Trustee") for Bellatrix's 7.5% Debentures, sufficient funds to satisfy the principal amount and interest owing on the 7.5% Debentures and on May 3, 2010 the trustee provided notice to the registered holders of the 7.5% Debentures of its intention to redeem the 7.5% Debentures on July 2, 2010. The 7.5% Debentures were redeemed on July 2, 2010 for an amount of $1,025 for each $1,000 principal amount of the 7.5% Debentures plus accrued and unpaid interest, or a total of $88.0 million. The funds deposited with the Trustee on April 20, 2010 and acknowledgment by the Trustee thereof discharged and extinguished the financial liability for the 7.5% Debentures as of that date.
As the 7.5% Debentures were convertible into common shares, the Company carried a liability and equity portion on its balance sheet in relation to the debentures. Canadian GAAP provides specific guidelines on the accounting for redemption of convertible debt. Under these guidelines, an amount is determined, using fair value techniques, for the liability and equity portion of the redeemed debentures, resulting in a gain/loss and an adjustment to retained earnings. The net impact on the deficit for Bellatrix as a result of the redemption of the 7.5% Debentures recorded in the second quarter and reflected as at September 30, 2010 is as follows:
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(000's)
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Non-cash loss on the redemption of 7.5% Debentures, recorded
on the Consolidated Statements of Loss $ 3,514
Adjustment for the redemption of 7.5% Debentures, recorded
against the deficit (2,915)
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Net increase to deficit $ 599
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The $88.0 million cost of redemption of the 7.5% Debentures was reflected
in the Statement of Cash Flows for the second quarter of 2010 as follows:
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(000's)
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Cash flows from Operating Activities:
Realization of imputed interest cost on 7.5% Debentures $ (5,050)
Cash flows from Financing Activities:
Redemption of 7.5% Debentures (88,009)
Realization of imputed interest cost on 7.5% Debentures
allocated to operating activities 5,050
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Total $ (88,009)
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On August 12, 2010, Bellatrix issued 4,170,000 common shares on a flow- through basis ("Flow-Through Shares") at $4.25 a share for gross proceeds of $20.0 million. Proceeds from the issuance of the Flow-Through Shares will be used to accelerate the Company's Cardium light oil exploration program by incurring expenditures eligible for Canadian exploration expenses that will be renounced to subscribers of the Flow-Through Shares effective on or before December 31, 2010.
Third Quarter 2010 Financial and Operational Results
Sales Volumes
Sales volumes for the three months ended September 30, 2010 averaged 9,119 boe/d compared to 7,432 boe/d for the same period in 2009, representing a 23% increase. In comparison, sales volumes for the second quarter of 2010 averaged 7,671 boe/d.
The increase in average sales volumes from the third quarter 2009 to 2010 is due to additional production achieved through drilling success in the fourth quarter of 2009 and the first nine months of 2010. Third quarter 2010 production was impacted by delays in bringing new wells on production due to generally wet field conditions and unplanned third party plant turnarounds.
Sales Volumes
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2010 2009 2010 2009
-------------------------------------------------------------------------
Natural gas (mcf/d) 40,452 31,075 35,386 34,547
-------------------------------------------------------------------------
Heavy oil (bbls/d) 451 1,300 389 2,191
Light oil and condensate
(bbls/d) 1,273 662 1,178 766
NGLs (bbls/d) 653 291 555 335
-------------------------------------------------------------------------
Total crude oil and NGLs
(bbls/d) 2,377 2,253 2,122 3,292
-------------------------------------------------------------------------
Total boe/d (6:1) 9,119 7,432 8,020 9,050
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the nine months of 2010 the Company drilled a total of 34 gross (20.97 net) wells resulting in 25 gross (14.18 net) oil wells and 8 gross (5.79 net) gas wells with 1 gross (1 net) dry hole establishing a 97 percent drill bit success rate.
Despite the extremely wet weather experienced during the third quarter of 2010, Bellatrix drilled and/or participated in 9 gross (6.23 net) wells resulting in 6 gross (4.23 net) Cardium light wells including 2 in West Pembina, 3 in Lodgepole and 1 in the Willesden Green area, 1 gross (0.50 net) Frog Lake McLaren heavy oil well, and 2 gross (1.50 net) Notikewin horizontal gas wells in Brazeau and Willesden Green. As at November 1, 2010, all of these wells have been completed and the last 2 wells are in the process of being tied in.
By comparison, the Company did not participate directly in any drilling in the first half of 2009. In the first quarter of 2009, the Company farmed out the drilling of 5 gross wells retaining a 24% average working interest with no payout account. During the third quarter of 2009, Bellatrix drilled, completed and placed on production its first 100% working interest well at Willesden Green.
For the three months ended September 30, 2010, the weighting towards natural gas sales volumes averaged 74% compared to 70% in the same period in 2009. Similarly, for the nine month period ended September 30, 2010, the weighting towards natural gas sales volumes averaged 74% compared to 64% for the same period in 2009. Heavy oil sales volumes made up 5% of total production for the 2010 third quarter compared to 17% in the 2009 third quarter. Heavy oil sales are down in the third quarter of 2010 compared to the same period in 2009 as a result of the sale of predominantly heavy oil properties on July 30, 2009. In comparison, heavy oil sales made up 5% of total production for the 2010 second quarter.
Sales volumes of natural gas averaged 40.5 mmcf/d for the third quarter of 2010, compared to 31.1 mmcf/d in the same 2009 period, an increase of 30%. Crude oil and NGL sales volumes for the 2010 third quarter increased 6% averaging 2,377 bbls/d compared to 2009 average sales volumes of 2,253 bbls/d.
The increase in natural gas and crude oil and NGL sales volumes from Q3 2009 to Q3 2010 is predominantly due to the drilling success achieved in the Notikewin natural gas and Cardium light oil plays, respectively.
Sales volumes for the remainder of 2010 are expected to be higher than the corresponding period in 2009, consistent with average 2010 production of approximately 8,500 boe/d. The impact to revenues for the remainder of 2010 is more uncertain due to volatile commodity prices. While sales volumes and crude oil and liquid prices for Q4 2010 are expected to be higher compared to 2009, natural gas prices remain relatively weak.
2010 production volumes are anticipated to average approximately 8,500 boe/d and an exit rate of approximately 10,000 boe/d. The forecast of 2010 production volumes is based upon a number of assumptions, including downtime for anticipated plant turnarounds and normal production declines and expected results from the execution of the current planned capital budget of $95.0 million.
Commodity Prices
Average Commodity Prices
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
% %
2010 2009 Change 2010 2009 Change
-------------------------------------------------------------------------
Exchange rate (US$/Cdn$) 0.9623 0.9108 6 0.9656 0.8839 9
Natural gas:
NYMEX (US$/mmbtu) 4.25 3.44 24 4.52 3.62 25
AECO daily index
(CDN$/Mcf) 3.54 2.94 21 4.13 3.19 29
AECO monthly index
(CDN$/Mcf) 4.15 3.02 37 4.51 3.34 35
Bellatrix's average price
($/mcf) 3.81 3.89 (2) 4.33 4.26 2
Bellatrix's average price
(including risk
management(1)) ($/mcf) 5.95 5.84 2 5.81 5.74 1
Crude oil:
WTI (US$/bbl) 76.14 68.22 12 77.70 64.17 21
Edmonton par - light oil
($/bbl) 74.44 71.71 4 76.73 62.68 22
Bow River - medium/heavy
oil ($/bbl) 64.09 64.97 (1) 67.98 56.81 20
Hardisty Heavy - heavy
oil ($/bbl) 57.99 61.11 (5) 62.16 52.85 18
Bellatrix's average
prices ($/bbl)
Light crude oil,
condensate, and NGLs 58.43 56.23 4 63.56 48.19 32
Heavy crude oil 57.89 58.89 (2) 61.60 48.01 28
Total crude oil and
NGLs 58.32 57.77 1 63.20 48.07 31
Total crude oil and
NGLs (including risk
management (1)) 60.98 57.77 6 64.55 48.07 34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Per unit metrics including risk management include realized gains or
losses on commodity contracts and exclude unrealized gains or losses
on commodity contracts.
Bellatrix's natural gas sales are priced with reference to the daily or monthly AECO indices. During the 2010 third quarter, the AECO daily reference price increased by 21% and the monthly reference price increased by 37% compared to the same period in 2009. Bellatrix's average sales price before commodity price risk management contracts for the 2010 third quarter decreased by 2% compared to the same period in 2009. The Company had a natural gas physical sales contract to deliver 5,279 GJ/day at a fixed price of $7.29/GJ in the third quarter of 2009 which contributed to higher pricing experienced relative to the AECO indices. Bellatrix's natural gas price after including commodity price risk management contracts for the third quarter of 2010 was $5.95/mcf compared to $5.84/mcf for the same period in 2009.
For light oil, condensate and NGLs, Bellatrix recorded an average price of $58.43/bbl before commodity price risk management contracts in the 2010 third quarter, 4% higher than the average price received in the same period in 2009. In comparison, the Edmonton par price increased by 12% over the same period. The average WTI crude oil US dollar based price increased 12% from the third quarter of 2009 to that in 2010.
For heavy crude oil, Bellatrix received an average price before transportation of $57.89/bbl in the 2010 third quarter, a decrease of 2% over prices in the same 2009 period. The Bow River reference price decreased by 1% and the Hardisty Heavy reference price decreased by 5% over the same period in 2009. The majority of Bellatrix's heavy crude oil density ranges between 11 and 16 degrees API consistent with the Hardisty Heavy reference price, although all of Bellatrix's heavy oil production is sold at Saskatchewan delivery points.
Revenue
Revenue before other income and commodity price risk management contracts for the three month period ended September 30, 2010 was $26.9 million, 17% higher than the $23.1 million in the same period in 2009. Natural gas revenues contributed approximately 53% of the total revenue before other income and price risk management contracts for the three month period ended September 30, 2010, compared to 48% in the same period in 2009. Crude oil and NGLs revenue contributed approximately 47% of the total revenue before other income and price risk management contracts for the three month period ended September 30, 2010, compared to 52% in the same period in 2009.
The increase in revenue for the 2010 period is primarily due to the increase in sales volumes as overall commodity prices received remained comparable to 2009 prices.
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
Light crude oil, condensate
and NGLs 10,349 4,930 30,064 14,478
Heavy oil 2,407 7,040 6,550 28,729
-------------------------------------------------------------------------
Crude oil and NGLs 12,756 11,970 36,614 43,207
Natural gas 14,183 11,133 41,783 40,159
-------------------------------------------------------------------------
Total revenue before other 26,939 23,103 78,397 83,366
Other(1) 405 757 1,450 1,644
-------------------------------------------------------------------------
Total revenue before
royalties and risk
management 27,344 23,860 79,847 85,010
-------------------------------------------------------------------------
(1) Other revenue primarily consists of processing and other third party
income.
Revenues for the remainder of 2010 are uncertain due to volatile commodity prices. While sales volumes and crude oil and liquid prices for Q4 2010 are expected to be higher compared to 2009, natural gas prices remain relatively weak.
Commodity Price Risk Management
The Company has a formal commodity price risk management policy which permits management to use specified price risk management strategies including fixed price contracts, collars and the purchase of floor price options and other derivative financial instruments and physical delivery sales contracts to reduce the impact of price volatility for a maximum of eighteen months beyond the current date. The program is designed to provide price protection on a portion of the Company's future production in the event of adverse commodity price movement, while retaining significant exposure to upside price movements. By doing this, the Company seeks to provide a measure of stability to funds flow from operations, as well as, to ensure Bellatrix realizes positive economic returns from its capital development and acquisition activities. The Company plans to continue its commodity price risk management strategies focusing on maintaining sufficient cash flow to fund Bellatrix's operations. Any remaining production is realized at market prices.
A summary of the financial commodity price risk management volumes and average prices by quarter currently outstanding as of November 4, 2010 is shown in the following tables:
Natural gas
Average Volumes (GJ/d)
-------------------------------------------------------------------------
Q4 2010
-------------------------------------------------------------------------
Call option 5,000
-------------------------------------------------------------------------
Total GJ/d 5,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Price ($/GJ AECO C)
-------------------------------------------------------------------------
Q4 2010
-------------------------------------------------------------------------
Call option (ceiling price) 8.05
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude oil and liquids
Average Volumes (bbls/d)
-------------------------------------------------------------------------
Q4 2010
-------------------------------------------------------------------------
Costless collars 500
Fixed 500
-------------------------------------------------------------------------
Total bbls/d 1,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Volumes (bbls/d)
-------------------------------------------------------------------------
Q1 2011 Q2 2011 Q3 2011 Q4 2011
-------------------------------------------------------------------------
Fixed 1,500 1,500 1,500 1,500
-------------------------------------------------------------------------
Total bbls/d 1,500 1,500 1,500 1,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Price (CDN$/bbl WTI)
-------------------------------------------------------------------------
Q4 2010
-------------------------------------------------------------------------
Collar ceiling price 101.15
Collar floor price 75.00
Fixed price 91.76
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Price (CDN$/bbl WTI)
-------------------------------------------------------------------------
Q1 2011 Q2 2011 Q3 2011 Q4 2011
-------------------------------------------------------------------------
Fixed price 88.45 88.45 88.45 88.45
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As of September 30, 2010, the fair value of Bellatrix's outstanding commodity contracts is an unrealized asset of $0.7 million as reflected in the financial statements. The fair value or mark-to-market value of these contracts is based on the estimated amount that would have been received or paid to settle the contracts as at September 30, 2010 and may be different from what will eventually be realized. Changes in the fair value of the commodity contracts are recognized in the Consolidated Statements of Loss within the financial statements.
The following is a summary of the gain (loss) on commodity contracts for the three months ended September 30, 2010 and 2009 as reflected in the Consolidated Statements of Loss in the financial statements:
Commodity contracts
-------------------------------------------------------------------------
Crude Oil Natural Q3 2010 Q3 2009
($000s) & Liquids Gas Total Total
-------------------------------------------------------------------------
Realized cash gain on
contracts 580 7,954 8,534 5,572
Unrealized loss on
contracts(1) (616) (6,191) (6,807) (3,851)
-------------------------------------------------------------------------
Total gain (loss) on
commodity contracts (36) 1,763 1,727 1,721
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude Oil Natural YTD 2010 YTD 2009
($000s) & Liquids Gas Total Total
-------------------------------------------------------------------------
Realized cash gain on
contracts 783 14,352 15,135 13,992
Unrealized gain (loss) on
contracts(1) 636 (3,321) (2,685) 1,289
-------------------------------------------------------------------------
Total gain on commodity
contracts 1,419 11,031 12,450 15,281
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Unrealized gain commodity contracts represent non-cash adjustments
for changes in the fair value of these contracts during the period.
During the 2010 third quarter, Bellatrix applied a portion of the value of its natural gas commodity gas contracts to its balance sheet through the early crystallization of forward fixed price natural gas contracts. Three of Bellatrix's September 1 to December 31, 2010 natural gas contracts were monetized for proceeds of $4.9 million. As of September 30, 2010, Bellatrix has realized hedging positions of $15.1 million in 2010 through the settlement and crystallization of forward positions.
Royalties
For the three months ended September 30, 2010, total royalties were $5.1 million, compared to $2.6 million incurred in the same 2009 period. Overall royalties as a percentage of revenue (after transportation costs) in the third quarter of 2010 were 20%, compared with 11% in the same 2009 period.
Royalties for the third quarter of 2010 were impacted by Saskatchewan crown amendments of approximately $0.7 million relating primarily to natural gas properties sold in 2008 and 2009. Excluding these Saskatchewan crown amendments, the average royalty rate percentage for the third quarter of 2010 would be 17%. Included in the overall royalties for Q3 2010 is approximately 3% due to additional gross overriding royalties for recent wells drilled which were funded by certain joint venture partners. In the third quarter of 2009, royalties were also lower due to the impact of approximately $0.8 million over accrued in the first six months of 2009; excluding these adjustments, the average royalty percentage for Q3 2009 would have been approximately 14%.
-------------------------------------------------------------------------
Royalties by Commodity Type Three months ended Nine months ended
September 30, September 30,
($000s, except where noted) 2010 2009 2010 2009
-------------------------------------------------------------------------
Light crude oil, condensate
and NGLs 2,567 1,369 7,688 3,952
$/bbl 14.49 15.62 16.25 13.16
Average light crude oil,
condensate and NGLs
royalty rate (%) 25 27 26 27
Heavy Oil 350 689 1,296 5,183
$/bbl 8.42 5.77 12.18 8.66
Average heavy oil royalty
rate (%) 15 10 20 19
Natural Gas 2,225 512 6,285 5,067
$/mcf 0.60 0.18 0.65 0.54
Average natural gas
royalty rate (%) 17 5 16 13
-------------------------------------------------------------------------
Total 5,142 2,570 15,269 14,202
-------------------------------------------------------------------------
$/boe 6.13 3.76 6.97 5.75
-------------------------------------------------------------------------
Average total royalty
rate (%) 20 11 20 18
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Royalties, by Type
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
Crown royalties 2,115 (250) 5,101 3,016
Indian Oil and Gas Canada
royalties 1,462 515 2,670 2,488
Freehold & GORR 1,538 2,173 7,399 8,076
Saskatchewan resource
surcharge 27 132 99 622
-------------------------------------------------------------------------
Total 5,142 2,570 15,269 14,202
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
Production 9,761 9,089 27,557 34,951
Transportation 950 340 2,635 3,170
General and administrative 2,400 2,744 7,651 8,167
Interest and financing
charges 1,373 3,573 5,766 11,093
Share-based compensation
(recovery) 667 (3) 1,388 (363)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses per boe
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($ per boe) 2010 2009 2010 2009
-------------------------------------------------------------------------
Production 11.63 13.29 12.59 14.15
Transportation 1.13 0.50 1.20 1.28
General and administrative 2.86 4.75 3.49 3.51
Interest and financing
charges 1.64 5.22 2.63 4.49
Share-based compensation
(recovery) 0.80 (0.01) 0.63 (0.15)
-------------------------------------------------------------------------
Production Expenses
For the three months ended September 30, 2010, production expenses totaled $9.8 million ($11.63/boe), compared to $9.1 million ($13.29/boe) recorded in the same 2009 period. The decrease in production expenses per boe from the third quarter of 2009 to 2010 is primarily due to increased production from recent drilling in areas with lower production expenses and the Company's continued efforts to streamline operations and field optimization projects. In comparison, production expenses were $9.1 million ($13.00/boe) for the second quarter of 2010.
Bellatrix is targeting operating costs of approximately $36.0 million ($11.60/boe) in 2010. This is based upon assumptions of estimated 2010 average production of approximately 8,500 boe/d, continued field optimization work benefits and planned capital expenditures in producing areas which are anticipated to have lower operating costs.
Production Expenses, by Commodity Type
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s, except where noted) 2010 2009 2010 2009
-------------------------------------------------------------------------
Light crude oil, condensate
and NGLs 2,517 2,074 7,917 6,701
$/bbl 14.21 23.65 16.74 22.30
Heavy oil 1,022 1,780 1,972 9,928
$/bbl 24.60 14.89 18.55 16.59
Natural gas 6,222 5,235 17,668 18,322
$/mcf 1.67 1.83 1.83 1.94
-------------------------------------------------------------------------
Total 9,761 9,089 27,557 34,951
-------------------------------------------------------------------------
$/boe 11.63 13.29 12.59 14.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total 9,761 9,089 27,557 34,951
-------------------------------------------------------------------------
Processing and other third
party income(1) (405) (757) (1,450) (1,644)
-------------------------------------------------------------------------
Total after deducting
processing and other third
party income 9,356 8,332 26,107 33,307
-------------------------------------------------------------------------
$/boe 11.15 12.19 11.92 13.48
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Processing and other third party income is included within petroleum
and natural gas sales on the Consolidated Statements of Loss.
Transportation
Transportation expenses for the three months ended September 30, 2010 were $1.0 million ($1.13/boe) compared to $0.3 million ($0.50/boe) in the same 2009 period. In comparison, transportation expenses for the second quarter of 2010 were $0.9 million ($1.26/boe).
Operating Netback
Field Operating Netback - Corporate (before risk management)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($/boe) 2010 2009 2010 2009
-------------------------------------------------------------------------
Sales 32.11 33.79 35.81 33.74
Transportation (1.13) (0.50) (1.20) (1.28)
Royalties (6.13) (3.76) (6.97) (5.75)
Production expense (11.63) (13.29) (12.59) (14.15)
-------------------------------------------------------------------------
Field operating netback 13.22 16.24 15.05 12.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the third quarter of 2010, corporate field operating netback (before commodity price risk management contracts) was $13.22/boe compared to $16.24/boe in the same 2009 period. The decrease in the operating netback is a result of overall lower commodity prices, higher transportation and royalty costs, offset by a reduction in operating expenses. After including commodity price risk management contracts, the corporate field operating netback for the third quarter of 2010 was $23.39/boe compared to $24.39/boe in the same 2009 period. In comparison, second quarter 2010, corporate field operating netback (before commodity price risk management contracts) was $14.67/boe.
Field Operating Netback - Natural Gas (before risk management)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($/mcf) 2010 2009 2010 2009
-------------------------------------------------------------------------
Sales 3.81 3.89 4.33 4.26
Transportation (0.22) (0.20) (0.22) (0.20)
Royalties (0.60) (0.18) (0.65) (0.54)
Production expense (1.67) (1.83) (1.83) (1.94)
-------------------------------------------------------------------------
Field operating netback 1.32 1.68 1.63 1.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Field operating netback for natural gas in the third quarter of 2010 decreased 21% to $1.32/mcf, compared to $1.68/mcf in the same period in 2009, reflecting weaker natural gas prices experienced, along with higher royalty expenses, offset by lower production costs. After including commodity price risk management contracts, field operating netback for natural gas for the three month period ended September 30, 2010 was $3.46/mcf compared to $3.63/mcf in the same period in 2009.
Field Operating Netback - Crude Oil, Condensate and NGLs (before risk
management)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($/bbl) 2010 2009 2010 2009
-------------------------------------------------------------------------
Sales 58.32 57.77 63.20 48.07
Transportation (0.65) 1.15 (0.87) (1.39)
Royalties (13.33) (9.94) (15.51) (10.16)
Production expense (16.18) (18.60) (17.07) (18.50)
-------------------------------------------------------------------------
Field operating netback 28.16 30.38 29.75 18.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Field operating netback for crude oil, condensate and NGLs averaged $28.16/bbl for the three month period ended September 30, 2010, down 7% compared to $30.38/bbl for the same period in 2009. The decrease is primarily due to higher transportation and royalty costs, offset by higher prices received and lower production expenses. After including commodity price risk management contracts, field operating netback for crude oil and NGLs for the third quarter in 2010 was $30.81/boe compared to $30.38/boe in the same period in 2009.
General and Administrative
General and administrative ("G&A") expenses (after capitalized G&A and recoveries) for the three month period ended September 30, 2010 were $2.4 million ($2.86/boe) compared to $2.7 million ($4.75/boe) for the same period in 2009. The decrease in G&A expenses from the third quarter of 2009 to that in 2010 was due to an increase in amounts of capitalized G&A and recoveries, which is consistent with Bellatrix's increased 2010 capital program, offset slightly by higher compensation and base costs.
For 2010, the Company is currently anticipating G&A costs after capitalization and recoveries to be approximately $11.0 million ($3.54/boe) based on continued efficiencies and estimated 2010 average production volumes of approximately 8,500 boe/d.
General and Administrative Expenses
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s, except where noted) 2010 2009 2010 2009
-------------------------------------------------------------------------
Gross expenses 3,522 3,118 10,338 9,682
Capitalized (517) (106) (1,465) (318)
Recoveries (605) (268) (1,222) (1,197)
-------------------------------------------------------------------------
G&A expenses 2,400 2,744 7,651 8,167
-------------------------------------------------------------------------
G&A expenses, per unit ($/boe) 2.86 4.75 3.49 3.51
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest and Financing Charges
Bellatrix recorded $1.4 million of interest and financing charges for the three months ended September 30, 2010 compared to $3.6 million in the same 2009 period. For the nine months ended September 30, 2010, the Company recorded $5.8 million of interest and financing charges compared to $11.1 million for the same period in 2009. Bellatrix's total net debt at September 30, 2010 of $77.1 million includes the $47.2 million liability portion of the 4.75% Debentures, $28.5 million of bank debt and the net balance of working capital deficiency.
Interest and Financing Charges
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s, except where noted) 2010 2009 2010 2009
-------------------------------------------------------------------------
Interest and financing
charges 1,373 3,573 5,766 11,093
Interest and financing
charges ($/boe) 1.63 5.22 2.63 4.49
Debt to funds flow from
operations(1) ratio
annualized(3)
Funds flow from
operations(1) (annualized) 65,368 44,360 49,533 37,792
Total net debt(2) at
period end 77,137 104,333 77,137 104,333
Total net debt to periods
funds flow from operations
ratio annualized(3) 1.2x 2.4x 1.6x 2.8x
Net debt(2) (excluding
convertible debentures) at
period end 29,891 21,784 29,891 21,784
Net debt to periods funds
flow from operations ratio
annualized(3) 0.5x 0.5x 0.6x 0.6x
Debt to funds flow from
operations(1) ratio
(trailing)(4)
Funds flow from operations(1)
ratio trailing 44,831 51,953 44,831 51,593
Total net debt (2) to funds
flow from operations ratio
trailing 1.7x 2.0x 1.7x 2.0x
Net debt (2) (excluding
convertible debentures) to
funds flow from operations
for the period 0.7x 0.4x 0.7x 0.4x
-------------------------------------------------------------------------
(1) Funds flow from operations is a term that does not have any
standardized meaning under GAAP. Funds flow from operations is
calculated as cash flow from operating activities before realization
of imputed interest costs on 7.5% Debentures, asset retirement costs
incurred and changes in non- cash working capital incurred.
(2) Net debt includes the net working capital deficiency (excess) before
short-term commodity contract assets and liabilities and short-term
future tax assets and liabilities. Total net debt also includes the
liability component of convertible debentures and excludes asset
retirement obligations and the future income tax assets and
liabilities. Total net debt is a non-GAAP measure; refer to the
following reconciliation of total liabilities to total net debt.
(3) Total net debt and net debt to periods funds flow from operations
ratio (annualized) is calculated based upon annualizing funds flow
from operations for the three and nine month periods ended
September 30, respectively.
(4) Trailing periods funds flow from operations ratio annualized is based
on the twelve-months period ended September 30, 2010 and
September 30, 2009.
Reconciliation of Total Liabilities to Total Net Debt
-------------------------------------------------------------------------
As at September 30,
($000s) 2010 2009
-------------------------------------------------------------------------
Total liabilities per financial statements 139,000 153,861
Current liabilities included within working
capital calculation (34,705) (19,084)
Asset retirement obligations (28,527) (24,776)
Future income taxes - (967)
Working Capital
Current assets (33,830) (27,327)
Current liabilities 34,705 19,084
Net commodity contract asset 689 5,015
Net future income taxes - current (195) (1,473)
-------------------------------------------------------------------------
1,369 (4,701)
-------------------------------------------------------------------------
Total net debt 77,137 196,717
-------------------------------------------------------------------------
Share-Based Compensation
Non-cash share-based compensation expense for the three months ended September 30, 2010 was an expense of $0.7 million compared to a $0.3 thousand recovery in the same period in 2009. The increase in expense from the third quarter of 2009 compared to 2010 is primarily due to the issuance of 2,054,500 options during the second quarter of 2010 which have weighted average fair value of $2.07 per option, as determined by the Black-Scholes fair value model. Also, in the nine months ended September 30, 2009, the Company reversed $0.8 million of expense related to cancelled unvested options compared to $0.02 thousand in the same period in 2010.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expense for the three months ended September 30, 2010 was $19.9 million ($23.77/boe), compared to the $19.7 million ($28.79/boe) in the same period in 2009, which reflects Bellatrix's increased cost base due to capital additions in 2010, offset by the additional reserves achieved through the Company's drilling success.
For the three months ended September 30, 2010, Bellatrix has included $47.8 million (2009: $39.4 million) for future development costs in the depletion calculation and excluded from the depletion calculation $19.8 million (2009: $22.6 million) for undeveloped land and $27.9 million (2009: $27.8 million) for estimated salvage.
Depletion, Depreciation and Accretion Costs
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s, except where noted) 2010 2009 2010 2009
-------------------------------------------------------------------------
Depletion and Depreciation 19,375 19,193 51,653 72,500
Accretion 564 490 1,611 1,812
-------------------------------------------------------------------------
Total 19,939 19,683 53,264 74,312
-------------------------------------------------------------------------
Per unit ($/boe) 23.77 28.79 24.33 30.08
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income Taxes
Future income taxes arise from differences between the accounting and tax bases of the Company's assets and liabilities. For the nine months ended September 30, 2010, the Company recognized a future income tax recovery of $5.6 million compared to a recovery of $41.5 million in the same period in 2009, which is consistent with pre-tax losses of $25.0 million and $160.4 million for the respective periods.
As at September 30, 2010, the Company had a total net future income tax asset balance of $6.8 million. Canadian GAAP requires that a future income tax asset be recorded when the tax pools exceeds the book value of assets, to the extent the amount is more than likely than not to be realized.
At September 30, 2010, Bellatrix had approximately $439 million in tax pools available for deduction against future income as follows:
-------------------------------------------------------------------------
($000s) Rate %
-------------------------------------------------------------------------
Intangible resource pools:
Canadian exploration expenses 100 44,000
Canadian development expenses 30 264,000
Canadian oil and gas property expenses 10 16,000
Foreign resource expenses 10 1,000
Attributed Canadian Royalty Income 100 (Alberta) 16,000
Undepreciated capital cost(1) 6 - 55 95,000
Non-capital losses 100 -
Financing costs 20 straight line 3,000
-------------------------------------------------------------------------
439,000
-------------------------------------------------------------------------
(1) Approximately $89 million of undepreciated capital cost pools are
class 41, which is claimed at a 25% rate.
As a result of the issuance of the Flow-Through Shares on August 12, 2010, Bellatrix is committed to incur approximately $20.0 million in qualifying Canadian Exploration Expenses ("CEE") prior to December 31, 2011.
Cash Flow from Operating Activities, Funds Flow from Operations and Net Loss
As detailed previously in this Management's Discussion and Analysis, funds flow from operations is a term that does not have any standardized meaning under GAAP. Funds flow from operations is calculated as cash flow from operating activities before realization of imputed interest costs on 7.5% Debentures, asset retirement costs incurred and changes in non-cash working capital incurred.
Reconciliation of Cash Flow from Operating Activities and Funds Flow from
Operations
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Three months ended Nine months ended
($000s, except per share September 30, September 30,
amounts) 2010 2009 2010 2009
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Cash flow from operating
activities 13,466 12,150 32,987 27,928
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Realization of imputed
interest costs on 7.5%
Debentures - - 5,050 -
Asset retirement costs
incurred 304 218 907 1,269
Change in non-cash working
capital 2,572 (1,278) (1,794) (853)
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Funds flow from operations 16,342 11,090 37,150 28,344
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Bellatrix generated funds flow from operations of $16.3 million ($0.17 per diluted share) for the three months ended September 30, 2010, up 47% from $11.1 million ($0.14 per diluted share) for the same period in 2009. Bellatrix's cash flow from operating activities for the three months ended September 30, 2010 was $13.5 million ($0.14 per diluted share) compared to $12.2 million ($0.15 per diluted share) in the same 2009 period. The increase in cash flows and funds flow from the 2009 third quarter to that in 2010 was primarily due to the early crystallization of three of Bellatrix's forward fixed price natural gas contracts for $4.9 million.
Bellatrix maintains a commodity price risk management program to provide a measure of stability to funds flow from operations. Unrealized mark-to- market gains or losses are non-cash adjustments to the current fair market value of the contract over its entire term and are included in the calculation of net income.
The net loss for the three month period ended September 30, 2010 was $8.6 million ($0.09 per diluted share) compared to a net loss of $9.6 million ($0.12 per diluted share) for the same period in 2009. The decrease in net loss from the third quarter of 2009 to that in 2010 was primarily due to a reduction in general and administrative expenses and interest on debt.
In comparison, Bellatrix recorded a loss of 10.8 million for the three months ended June 30, 2010. The loss recorded in the third quarter of 2010 compared to the loss in the second quarter of 2010 is impacted by a $3.7 million non-cash difference between a $3.1 million unrealized loss on commodity price risk management contracts in Q2 2010 compared to a $6.8 million unrealized loss on commodity price risk management contracts recorded in Q3 2010.
The net loss for the nine month period ended September 30, 2010 was $19.4 million ($0.21 per diluted share) compared to a net loss of $108.9 million ($1.51 per diluted share) for the same period in 2009. The decrease in net loss from the nine month period ended September 30, 2009 to that in 2010 was primarily due to the non-cash $114.2 million loss recognized in Q2 2009 on the sale of petroleum and natural gas properties.
Cash Flow from Operating Activities, Funds Flow from Operations and Net
Loss
-------------------------------------------------------------------------
Three months ended Nine months ended
($000s, except per share September 30, September 30,
amounts) 2010 2009 2010 2009
-------------------------------------------------------------------------
Funds flow from operations 16,342 11,090 37,150 28,344
Basic ($/share) 0.17 0.14 0.39 0.36
Diluted ($/share) 0.17 0.14 0.39 0.36
Cash flow from operating
activities 13,466 12,150 32,987 27,928
Basic ($/share) 0.14 0.15 0.35 0.36
Diluted ($/share) 0.14 0.15 0.35 0.36
Net loss (8,555) (9,633) (19,360) (108,878)
Basic ($/share) (0.09) (0.12) (0.21) (1.51)
Diluted ($/share) (0.09) (0.12) (0.21) (1.51)
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Capital Expenditures
Bellatrix invested $30.4 million on exploration and development activities during the third quarter of 2010, before $0.3 million of drilling incentive credits, compared to $2.7 million invested in the same period in 2009. The increase in these expenditures during the period is consistent with the higher capital budget for 2010.
Capital Expenditures
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
Lease acquisitions and
retention 85 170 337 478
Geological and geophysical 24 80 696 131
Drilling and completion
costs 28,736 1,570 59,122 3,017
Facilities and equipment 1,566 862 6,476 2,612
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30,411 2,682 66,631 6,238
Drilling incentive credits (315) - (3,128) -
-------------------------------------------------------------------------
Exploration and
development(1) 30,096 2,682 63,503 6,238
Corporate(2) 327 28 362 378
Property acquisitions - - 3,187 1
-------------------------------------------------------------------------
Total capital expenditures
- cash 30,423 2,710 67,052 6,617
Property dispositions - cash (7) (84,696) (587) (92,977)
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Total net capital
expenditures - cash 30,416 (81,986) 66,465 (86,360)
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Other - non-cash(3) 458 178 2,122 (1,043)
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Total net capital
expenditures 30,874 (81,808) 68,587 (87,403)
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(1) Excludes capitalized costs related to asset retirement obligation
expenditures incurred during the year.
(2) Corporate costs include office furniture, fixtures and equipment and
other costs.
(3) Other includes non-cash adjustments for current period's asset
retirement obligations and unit based compensation capitalized.
The $30.7 million capital program, before drilling incentive credits, for the three months ended September 30, 2010 was financed with funds flow from operations, bank indebtedness, proceeds from equity financings and joint venture partners.
Despite the extremely wet weather experienced during the third quarter of 2010, Bellatrix drilled and/or participated in 9 gross (6.23 net) wells resulting in 6 gross (4.23 net) Cardium light wells including 2 in West Pembina, 3 in Lodgepole and 1 in the Willesden Green area, 1 gross (0.50 net) Frog Lake McLaren heavy oil well, and 2 gross (1.50 net) Notikewin horizontal gas wells in Brazeau and Willesden Green.
Based on the current economic conditions and Bellatrix's operating forecast for 2010, the Company budgets a 2010 capital program of $95 million funded by $85 million from the Company's cash flows, debt facilities, and equity financings and $10 million funded by joint venture partners.
Ceiling Test
The Company calculates a ceiling test quarterly and annually to place a limit on the aggregate carrying value of its capitalized costs, which may be amortized against revenues of future periods. The ceiling test is performed in accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA") AcG-16 "Oil and Gas Accounting - Full Cost", a two step process.
The Company performed a ceiling test calculation at September 30, 2010 resulting in undiscounted cash flows from proved reserves and the undeveloped properties exceeding the carrying value of oil and gas assets. Consequently, no impairment in oil and gas assets was identified as at September 30, 2010.
The ceiling test calculation is updated in 2010 on a quarterly and annual basis based upon the latest available data, including but not limited to an updated annual external reserve engineering report which incorporates a full evaluation of reserves or internal reserve updates at quarterly periods, and the latest commodity pricing deck. Estimating reserves is very complex, requiring many judgments based on available geological, geophysical, engineering and economic data. Changes in these judgments could have a material impact on the estimated reserves. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available and as the economic environment changes.
Asset Retirement Obligations
As at September 30, 2010, Bellatrix has recorded an Asset Retirement Obligation ("ARO") of $28.5 million, compared to $25.7 million at December 31, 2009, for future abandonment and reclamation of the Company's properties. For the nine month period ended September 30, 2010, the ARO increased by $2.8 million total as a result of $1.6 million of accretion expense, $1.5 million incurred on changes in estimates and liabilities, $1.1 million incurred through property acquisitions and operations, offset by $1.0 million for liabilities settled during the period and $0.4 million reversed on dispositions.
Liquidity and Capital Resources
As an oil and gas business, Bellatrix has a declining asset base and therefore relies on ongoing development and acquisitions to replace production and add additional reserves. Future oil and natural gas production and reserves are highly dependent on the success of exploiting the Company's existing asset base and in acquiring additional reserves. To the extent Bellatrix is successful or unsuccessful in these activities, cash flow could be increased or reduced.
Bellatrix plans to focus on growing oil and natural gas production from its diversified portfolio of existing and emerging resource plays in Western Canada. Bellatrix remains highly focused on key business objectives of maintaining financial strength, optimizing capital investments - attained through a disciplined approach to capital spending, a flexible investment program and financial stewardship. Natural gas prices are primarily driven by North American supply and demand, with weather being the key factor in the short term. Bellatrix believes that natural gas represents an abundant, secure, long-term supply of energy to meet North American needs. Bellatrix's results are affected by external market and risk factors, such as fluctuations in the prices of crude oil and natural gas, movements in foreign currency exchange rates and inflationary pressures on service costs.
Bellatrix continues to be subject to liquidity and credit risk as more fully described in the Company's Management, Discussion and Analysis for the year ended December 31, 2009.
Bellatrix generally relies on operating cash flows and its credit facilities to fund capital requirements and provide liquidity. Future liquidity depends primarily on cash flow generated from operations, existing credit facilities and the ability to access debt and equity markets. From time to time, the Company accesses capital markets to meet its additional financing needs and to maintain flexibility in funding its capital programs. While Bellatrix completed a January 2010 equity offering, issued the 4.75% Debentures in April 2010 and completed a Flow-Through Share offering in August 2010, there can be no assurance that future debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to Bellatrix.
A substantial portion of Bellatrix's accounts receivable are with customers and joint interest partners in the petroleum and natural gas industry and are subject to normal industry credit risks. Bellatrix sells substantially all of its production to five primary purchasers under standard industry sale and payment terms. Purchasers of Bellatrix's natural gas, crude oil and natural gas liquids are subject to a periodic internal credit review to minimize the risk of non-payment. Bellatrix has continued to closely monitor and reassess the creditworthiness of its counterparties, including financial institutions. This has resulted in Bellatrix reducing or mitigating its exposures to certain counterparties where it is deemed warranted and permitted under contractual terms.
Bellatrix may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to Bellatrix, such failures may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner's willingness to participate in Bellatrix's ongoing capital program, potentially delaying the program and the results of such program until Bellatrix finds a suitable alternative partner.
During 2010, Bellatrix has concentrated on executing its considerable drilling program and improving its balance sheet. Bellatrix has taken advantage of several financial opportunities that have improved the Company's financial flexibility. In January 2010, Bellatrix closed an equity issuance of 13.64 million common shares at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.4 million after transaction costs). The net proceeds from this financing were used to temporarily reduce outstanding indebtedness. On April 20, 2010, the Company issued $55 million of 4.75% Debentures, in order to facilitate the repayment of its 7.5% Debentures. The balance of the repayment of the 7.5% Debentures was funded through bank indebtedness.
On August 12, 2010, Bellatrix issued 4.2 million Flow-Through Shares at $4.25 each for gross proceeds of $20.0 million. Proceeds of the Flow-Through Shares will be used to accelerate the Company's Cardium light oil exploration program by incurring expenditures eligible for Canadian exploration expenses which will be renounced to subscribers of the Flow-Through Shares effective on or before December 31, 2010. The Company is committed to incur the $20.0 million CEE expenditures on or before December 31, 2011.
Total net debt levels at September 30, 2010 have decreased $30.2 million from $107.3 million at December 31, 2009, primarily as a consequence of the January 2010 equity issuance and the Flow-Through Share financing. Total net debt includes the liability component of the convertible debentures and excludes unrealized commodity contract assets and liabilities, future income taxes and asset retirement obligations.
Funds flow from operations represents 54% and 59% of the funding requirements for Bellatrix's capital expenditures for the three and nine months ended September 30, 2010, respectively. The remainder has been funded through bank indebtedness, equity financings and funds available through joint venture partners.
The Company's credit facilities consists of a $10 million demand operating facility provided by a Canadian bank and a $75 million extendible revolving term credit facility provided by a Canadian bank and a Canadian financial institution. Amounts borrowed under the credit facilities bear interest at a floating rate based on the applicable Canadian prime rate, U.S. base rate or LIBOR rate, plus between 1.25% and 4.25%, depending on the type of borrowing and the Company's debt to cash flow ratio. Based on the current debt to cash flow ratio, interest is being charged at the lowest floating rate in the range. The credit facilities are secured by a $400 million debenture containing a first ranking charge and security interest. Bellatrix has provided a negative pledge and undertaking to provide fixed charges over major petroleum and natural gas reserves in certain circumstances. A standby fee is charged of between 0.55% and 1.02% on the undrawn portion of the credit facilities, depending on the Company's debt to cash flow ratio.
The revolving period for the revolving term credit facility will end on June 28, 2011, unless extended for a further 364-day period. Should the facility not be extended it will convert to a non-revolving term facility with the full amount outstanding due 366 days after the last day of the revolving period of June 28, 2011. The borrowing base will be subject to re- determination on November 30, 2010. Thereafter, a semi-annual re-determination of the borrowing base will occur on May 30 and November 30 in each year prior to the maturity date.
As an added layer of protection of its cash flows, Bellatrix has 500 bbl/d of oil for calendar 2010 protected by way of a costless collar of CDN$75.00 x CDN$101.15 and another 500 bbl/d of oil for the period of June 1 to December 31, 2010 is protected by way of a fixed price swap at CDN$91.76/bbl. For calendar 2011, Bellatrix has 1,000 bbl/d and 500 bbl/d of oil protected by fixed price swaps at CDN$88.18/bbl and CDN$89.00/bbl, respectively.
Bellatrix currently has commitments associated with its credit facilities outlined above and the commitments outlined under the "Commitments" section. Bellatrix continually monitors its capital spending program in light of the recent volatility with respect to commodity prices and Canadian dollar exchange rates with the aim of ensuring the Company will be able to meet future anticipated obligations incurred from normal ongoing operations with funds flow from operations and draws on Bellatrix's credit facility, as necessary. Bellatrix has the ability to fund its 2010 capital program of $95 million by utilizing undrawn amounts on its credit facility, funds available through joint venture partners, ongoing cash flows and proceeds from equity financings.
Pursuant to Bellatrix's credit facilities, the Company is permitted to pay the semi-annual interest payments on the 4.75% Debentures, and payments by the Company to debenture holders in relation to the redemption of the 4.75% Debentures and in relation to normal course issuer bids for the 4.75% Debentures approved by the TSX, provided that the aggregate of all such normal course issuer bids and redemptions do not exceed $10.0 million in any fiscal year.
As at October 29, 2010, Bellatrix had outstanding a total of 6,020,873 options exercisable at an average exercise price of $2.63 per share, $55.0 million principal amount of 4.75% Debentures convertible into common shares (at a conversion price of $5.60 per share) and 97,211,865 common shares.
Commitments
As at September 30, 2010, the Company had committed to drill 8 wells pursuant to farm-in agreements. Bellatrix expects to satisfy this drilling commitment at an estimated cost of approximately $8.8 million. As a result of the issuance of the Flow-Through Shares on August 12, 2010, Bellatrix is committed to incur approximately $20.0 million in qualifying Canadian Exploration Expenses on or before December 31, 2011.
The following are the contractual maturities of financial liabilities as at September 30, 2010:
-------------------------------------------------------------------------
Financial liability (less than)
($000s) 1 Year 1-2 Years 2-5 Years Thereafter
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities(1) $ 34,510 $ - $ - $ -
Long-term debt - 28,522 - -
4.75% Debentures -
principal - - 55,000 -
4.75% Debentures -
interest(2) 2,613 5,232 4,130 -
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Total $ 37,123 $ 33,754 $ 59,130 $ -
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(1) As at September 30, 2010, $1.2 million of accrued interest payable in
relation to the 4.75% Debentures is included in Accounts Payable and
Accrued Liabilities.
(2) The 4.75% Debentures outstanding at September 30, 2010 bear interest
at a rate of 4.75% per annum, which currently requires total annual
interest payments of $2.6 million.
Interest due on the bank credit facilities is calculated based on floating rates.
Off-Balance Sheet Arrangements
The Company has certain fixed term lease agreements, including primarily office space leases, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. The lease agreements do not currently provide for early termination. No asset or liability value has been assigned to these leases in the balance sheet as of September 30, 2010.
Business Prospects and 2010 and 2011 Year Outlook
The Company continues to develop its core assets and conducts exploration programs utilizing its large inventory of geological prospects. The Company has approximately 228,585 net acres of undeveloped land and has expanded its inventory of low risk development locations to 675, providing in excess of 10 years of drilling inventory. The Company possesses up to 312 drilling locations in the Cardium oil horizontal play and 94 Notikewin horizontal drilling locations in West Central Alberta.
Bellatrix's 2010 capital program of $95 million is funded by $85 million from the Company's cash flows, debt facilities, and equity financings and $10 million is funded by joint venture partners. Bellatrix will continue to take a balanced approach to the priority use of cash flow and its 2010 capital program.
Bellatrix plans to operate within funds flow from operations, the proceeds from the January 2010 equity financing and the Flow-Through Share financing. The Company intends to continue to maintain reductions in per boe G&A and operating expenses and field optimization and maintenance programs to maintain production base in addition to its developmental focus in the Notikewin and Cardium resource plays.
As an added layer of protection of its cash flows, Bellatrix has 500 bbl/d of oil for calendar 2010 protected by way of a costless collar of CDN$75.00 x CDN$101.15 and another 500 bbl/d of oil for the period of June 1 to December 31, 2010 is protected by way of a fixed price swap at CDN$91.76/bbl. For calendar 2011, Bellatrix has 1,000 bbl/d and 500 bbl/d of oil protected by fixed price swaps at CDN$88.18/bbl and CDN$89.00/bbl, respectively.
Based on the timing of proposed expenditures in the 2010 capital program, downtime for anticipated plant turnarounds and normal production declines, execution of the 2010 budget is anticipated to provide 2010 average daily production of approximately 8,500 boe/d and an exit rate of approximately 10,000 boe/d.
In 2011, Bellatrix will continue to be active in drilling its two core resource plays, the Cardium and Notikewin, utilizing horizontal drilling multi fracturing technology. An initial capital budget of $85 million has been set for fiscal 2011. Based on the timing of the 2011 capital program, downtime for anticipated plant turnarounds and normal production declines, execution of the 2011 budget is anticipated to provide 2011 average daily production of approximately 11,500 - 12,000 boe/d and an exit rate of approximately 12,000 - 12,500 boe/d.
Financial Reporting Update
Future Accounting Pronouncements
International Financial Reporting Standards ("IFRS")
On February 13, 2008 the CICA Accounting Standards Board announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards ("IFRS"), which will replace current Canadian GAAP for years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require restatement for comparative purposes, of the Company's opening balance sheet as at January 1, 2010, all interim quarterly periods in 2010 and for its year ended December 31, 2010. The objective is to improve financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis.
An internal project team was set up to manage this transition and to ensure successful implementation within the required time frame. Members of the internal project team and key finance personnel have attended industry specific seminars. Bellatrix is anticipating providing staff training to key operational staff in the later part of 2010. Members of the Board and Audit Committee possess financial expertise and are provided with quarterly updates, including accounting policy choices among IFRSs and recommendations to date.
The Company has completed a high level analysis to determine the areas impacted by the conversion and is assessing the financial reporting impacts on the adoption of IFRS. The assessment provided insight as to the most significant areas of GAAP differences applicable to Bellatrix and include treatment of exploration and evaluation costs, depreciation and depletion of property, plant and equipment, and impairment of assets, as well as more extensive presentation and disclosure requirements under IFRS. The analysis has been reviewed by the Company's external auditors for consistency in the interpretation of the standards.
IFRS in-depth reviews have been concentrated on cash generating units, options available under IFRS for modified full cost accounting, decommissioning liabilities, share-based compensation and a preliminary analysis of the impact on our data gathering and reporting systems. We are still assessing the impact of IFRS and have not yet selected or finalized all of our accounting policy choices and IFRS 1 exemptions. Throughout 2010 to date, efforts are underway to fully quantify the impact of IFRS on the Company's January 1, 2010 transition date balance sheet and the future financial position and results of operations.
IFRS 1 - "First-time Adoption of International Financial Reporting Standards" is the standard that governs mandatory exceptions and optional exemptions that an entity may elect for its transition to IFRS in order to assist the entity with the transition process. This standard is only applicable to the opening balance sheet of the entity on the transition date of January 1, 2010.
The following are IFRS 1 exemptions that Bellatrix currently anticipates electing on transition date. The quantification of certain of the effects of the adoption of IFRS discussed below are an estimate of the impact based on the policy elections currently proposed which may change prior to finalization. The following also is not exhaustive as to all actual or potential differences, which remain subject to determination and change.
Property, Plant and Equipment ("PP&E")
The adopter has the option to elect fair value at the date of transition as the deemed cost for its PP&E or to use a revalued amount according to its previous GAAP if the revaluation, at the date of revaluation, is comparable to fair value or depreciated cost in accordance with IFRS. On July 23, 2009 the International Accounting Standards Board ("IASB") published amendments to IFRS 1 which will allow an election to measure oil and gas assets at the date of transition to IFRS at the amount determined under Canadian GAAP. The Company plans to make this election under IFRS 1 for its opening balance sheet at January 1, 2010. The standard allows the adopter to allocate its PP&E asset base to the Company's cash generating units based on reserve volumes or values. Bellatrix anticipates the method of allocation that it will use on the transition date will be based upon proved plus probable company interest reserve cash flow values. In addition, the Company anticipates a total of 11 cash generating units. Once the Company's petroleum and natural gas assets are allocated to their respective cash generating units, it is required to perform an impairment test. The Company anticipates an impairment to its PP&E on transition to IFRS.
Business Combinations
An exemption under IFRS 1 provides the entity with relief on the restatement of business combinations prior to the transition date. Under IFRS 3 - "Business Combinations," the determination of the fair value of share consideration differs from the determination under current Canadian accounting standards. Any difference in the fair value calculation would have a resulting impact on the carrying amount of net assets acquired, non-controlling interest and any goodwill. The Company plans to make the election under IFRS 1, allowing Bellatrix to be exempt from restating business combinations prior to the transition date to IFRS.
Share Based Payments
Differences in the accounting for the Company's share option plan have been identified. IFRS 2 - "Share-based Payments," requires the Company to estimate the number of options expected to vest when a grant of equity instruments do not vest immediately. An estimate of the option's life is also required for the estimation of the fair value of the instruments. IFRS 2 does not allow the recognition of the expense on a straight-line basis and requires each installment to be treated as a separate arrangement. Currently, the Company accounts for forfeitures as they occur and considers the estimated life of the options to be consistent with their expiry date. Share-based compensation expense is accounted for using the graded method which is required under IFRS. IFRS 1 provides an elective exemption which the Company plans to elect which will allow Bellatrix to apply IFRS 2 to the 3,571,955 unvested options outstanding on the transition date of January 1, 2010. As a result of applying IFRS 2, the Company anticipates a decrease to contributed surplus of less than $0.5 million with an offsetting increase to the January 1, 2010 deficit. The adjustment is a result of applying an estimated forfeiture rate of 3%, 5% and 10% for options vesting in year 1, 2 and 3, respectively.
Decommissioning Liabilities
IAS 37 - "Provisions, Contingent Liabilities and Contingent Assets," will govern how the Company accounts for its decommissioning liabilities (currently referred to as asset retirement obligations). The decommissioning liability should reflect risks specific to the liability and will be based on management's best assumptions and estimates versus the fair value of the obligation. The amount recognized should be the best estimate of the expenditure required to settle the present obligation at the end of the period. If there are uncertainties surrounding the amount to be recognized as a provision then the obligation is estimated by weighting all possible outcomes by their associated probabilities. The discount rate used for the decommissioning liability will be a risk free rate as the estimated provision is adjusted to reflect risks specific to the liability. Currently under Canadian GAAP, the Company uses a credit-adjusted risk free rate. Therefore, under IFRS, the decommissioning liabilities are expected to be higher due to lower discount rates. Under IFRS, the unwinding of the discount rate is charged as interest expense versus accretion expense under current Canadian standards. IFRS 1 provides an exemption that the Company plans to elect which will allow Bellatrix to measure decommissioning liabilities as at the date of transition to IFRS in accordance with IAS 37 and recognize directly in retained earnings any difference between that amount and the carrying amount of those liabilities at the date of transition to IFRS determined under Canadian GAAP. The Company has calculated its decommissioning liabilities using risk free rates that coincide with the expected time frame of the abandonments which range from 1.45% to 4.1%. As a result of applying IAS 37, the Company anticipates its opening January 1, 2010 decommissioning liability to increase by approximately $10 million to $15 million, with an offsetting charge to the January 1, 2010 deficit.
Oil and Gas Expenditures
Petroleum and natural gas expenditures fall under IFRS 6 - "Exploration for and Evaluation of Mineral Resources," and IAS 16 - "Property, Plant and Equipment." Capital expenditures incurred will be segregated into three categories:
1) Pre-exploration expenditures
2) Exploration and evaluation expenditures
3) Development and production expenditures
Pre-exploration expenditures
These are costs incurred by the Company before acquiring the legal right to explore in a specific area. These expenditures do not meet the definition of an asset as defined by IAS 16 and therefore will be expensed by the Company as incurred. We do not anticipate these costs to be significant to the Company.
Exploration and evaluation expenditures
IFRS 6 provides flexibility on the accounting for exploration and evaluation ("E&E") expenditures, allowing the Company to choose what type of expenditures will be capitalized or expensed. The costs incurred in the E&E phase will be capitalized once the legal right to explore in a specific area has been obtained. The assets are separated between tangible and intangible and are classified as E&E assets until technical feasibility and commercial viability of extracting resources is proven.
The Company does not intend to amortize its E&E expenditures until technical feasibility and commercial viability has been established. The standard does not define technical feasibility and commercial feasibility. Bellatrix intends to classify E&E assets as technically feasible and commercially viable once the property has proved reserves. Once proved reserves are established, the respective E&E assets will be transferred into the development and production category. E&E assets will be assessed for impairment if such information becomes available or there has been a change in facts and circumstances that would lead management to believe that the assets may be impaired. The following is a list of examples of changes in facts and circumstances that indicate an impairment test is needed:
- Remaining land lease terms have expired or expire in the near future
and is not expected to be renewed
- Dry holes
- Management decisions to continue or discontinue activities in an area
- Budgeted or planned capital spending in an area is significantly
reduced or eliminated
- Other information that may come to management's attention indicating
that the carrying amount of the E&E asset is unlikely to be recovered
in full
A company has the option to test E&E assets for impairment using total proved reserves or total proved plus probable reserves, test at the cash generating unit level or an aggregated cash generating unit level (as long as it is not at a level higher than an operating segment) and can group E&E assets with developing and producing assets.
The Company intends on using total proved and probable reserves for its impairment test and plans on testing the E&E assets along with the respective developing and producing assets within the cash generating units. An impairment test is required before any E&E asset is transferred to the developing and producing phase.
Developing and production expenditures
Once technical feasibility and commercial viability has been established, the assets are classified as developing and producing ("D&P") assets and will be subject to depreciation and depletion.
Future Income Taxes
The transition to IFRS will require the Company to re-measure its future income taxes for its January 1, 2010 balance sheet. Adjustments to future income taxes will be made accordingly in conjunction with other transitionary IFRS adjustments discussed earlier, with an offsetting adjustment to the January 1, 2010 deficit.
Information technology and data systems
Bellatrix has performed a preliminary assessment of the implications of IFRS on its information technology and data systems. The Company's current data gathering and accounting system is capable of obtaining and recording data at a level of detail required for IFRS. The Company has identified transactions relating to its property, plant and equipment in relation to requirements under IFRS to have the most impact on its information technology and data systems. In order to comply with some of the requirements under IFRS, the Company will need to be able to record assets at the E&E and D&P categories, have the ability to transfer expenditures from the E&E phase to the D&P phase and record depletion, depreciation and accretion at the cash generating unit level or lower. A test environment has been set up and Bellatrix is still in the process of testing the requirements and amending system modifications. Based on the test environment set up, minor modifications are needed.
Business activities
Bellatrix has reviewed the impact of IFRS on its commodity price risk management practices, debt covenants and compensation arrangements. It is not expected that IFRS will result in any significant changes to the Company's business activities. Currently, Bellatrix's credit facility agreement provides for a notice which allows for consideration to be given to revise the method of calculating one or more of the financial calculations which are materially different as a result of the adoption of IFRS. The Company must provide notice within 45 days of the end of a quarter or 90 days at the end of the fourth quarter or in respect of an entire fiscal year.
Internal control over financial reporting and disclosure controls and procedures
The implementation of IFRS may require changes to the Company's internal controls over financial reporting ("ICFR") and disclosure controls and procedures ("DC&P"). The Company plans to assess the changes required in its ICFR and DC&P as accounting policy choices are finalized and its implications on ICFR and DC&P are identified in 2010.
Bellatrix continues to quantify the effects of choices available under IFRS which impact the opening balance sheet and the Company's external auditors have commenced their review process. The Company previously anticipated finalizing the opening balance sheet adjustments in the third quarter of 2010, but is still in the process of calculating all of the anticipated adjustments. Once the opening balance sheet adjustments are finalized, the Company will present the results to its Audit Committee and Board of Directors. Subsequently, the Company will commence roll-forward of the first to third quarter 2010 financial statements to IFRS.
During the third quarter of 2010, the Company completed a preliminary draft of the first quarter 2011 IFRS based financial statements presentation and disclosure. These draft financial statements have been presented to the Company's Audit Committee and Board of Directors.
We will continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators (CSA), which may affect the timing, nature or disclosure of our adoption of IFRS.
Business Risks and Uncertainties
The reader is advised that Bellatrix continues to be subject to various types of business risks and uncertainties as described in the Company's Management, Discussion and Analysis for the year ended December 31, 2009 and the Company's Annual Information Form for the year ended December 31, 2009.
Critical Accounting Estimates
The reader is advised that the critical accounting estimates, policies, and practices as described in the Company's Management's Discussion and Analysis for the year ended December 31, 2009 continue to be critical in determining Bellatrix's unaudited financial results as at September 30, 2010. There were no changes in accounting policies for the nine month period ended September 30, 2010.
Legal, Environmental Remediation and Other Contingent Matters
The Company reviews legal, environmental remediation and other contingent matters to both determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine that the loss can reasonably be estimated. When the loss is determined, it is charged to earnings. The Company's management monitor known and potential contingent matters and make appropriate provisions by charges to earnings when warranted by the circumstances.
Controls and Procedures
Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company's Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation.
Internal Control over Financial Reporting
The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with the Canadian GAAP.
The Company is required to disclose herein any change in the Company's internal control over financial reporting that occurred during the period beginning on July 1, 2010 and ended on September 30, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. No material changes in the Company's internal control over financial reporting were identified during such period, that has materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.
Sensitivity Analysis
The table below shows sensitivities to funds flow from operations as a result of product price, currency and interest rate changes. This is based on actual average prices received for the third quarter of 2010 and average production volumes of 9,119 boe/d during that period, as well as the same level of debt outstanding as at September 30, 2010. Diluted weighted average shares are based upon the third quarter of 2010. These sensitivities are approximations only, and not necessarily valid under other significantly different production levels or product mixes. Commodity price risk management activities can significantly affect these sensitivities. Changes in any of these parameters will affect funds flow as shown in the table below:
-------------------------------------------------------------------------
Funds Flow from Funds Flow from
Operations(1) Operations(1)
(annualized) Per Diluted Share
-------------------------------------------------------------------------
Sensitivity Analysis ($000s) ($)
-------------------------------------------------------------------------
Change of US $1/bbl WTI 700 0.00
Change of $0.10/ mcf 1,200 0.01
Change of US $0.01 Cdn/ US exchange rate 400 -
Change in prime of 1% 285 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The term "funds flow from operations" should not be considered an
alternative to, or more meaningful than cash flow from operating
activities as determined in accordance with Canadian GAAP as an
indicator of the Company's performance. Therefore reference to
diluted funds flow from operations or funds flow from operations per
share may not be comparable with the calculation of similar measures
for other entities. Management uses funds flow from operations to
analyze operating performance and leverage and considers funds flow
from operations to be a key measure as it demonstrates the Company's
ability to generate the cash necessary to fund future capital
investments and to repay debt. The reconciliation between cash flow
from operating activities and funds flow from operations can be found
in the Management's Discussion and Analysis. Funds flow from
operations per share is calculated using the weighted average number
of common shares for the period.
Selected Quarterly Consolidated Information
The following table sets forth selected consolidated financial information of the Company for the most recently completed quarters ending September 30, 2010.
-------------------------------------------------------------------------
2010 - Quarter ended
(unaudited)
($000s, except per share
amounts) March 31 June 30 Sept. 30
-------------------------------------------------------------------------
Revenues before royalties
and risk management 26,929 25,574 27,344
Funds flow from operations(1) 10,198 10,610 16,342
Funds flow from operations
per share(1)
Basic $0.12 $0.11 $0.17
Diluted $0.11 $0.11 $0.17
Cash flow from operating
activities 13,456 6,065 13,466
Cash flow from operating
activities per share
Basic and Diluted $0.15 $0.07 $0.14
Net income (loss) 7 (10,812) (8,555)
Net income (loss) per share
Basic and Diluted $0.00 $(0.12) $0.09
Net capital expenditures
(cash) 18,393 17,656 30,423
-------------------------------------------------------------------------
2009 - Quarter ended
(unaudited)
($000s, except per share
amounts) March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------
Revenues before royalties
and risk management 31,345 29,805 23,860 24,004
Funds flow from operations(1) 6,489 10,765 11,090 7,681
Funds flow from operations
per share(1)
Basic and Diluted $0.08 $0.14 $0.14 $0.10
Cash flow from operating
activities 9,311 6,467 12,150 2,743
Cash flow from operating
activities per share
Basic and Diluted $0.12 $0.08 $0.15 $0.03
Net loss (9,056) (99,715) (9,633) (8,216)
Net loss per share
Basic and Diluted $(0.12) $(1.27) $(0.12) $(0.10)
Net capital expenditures
(cash) 2,764 (7,138) (81,986) 9,926
Distributions declared 1,570 - - -
Distributions per share $0.02 - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 - Quarter ended
(unaudited)
($000s, except per share
amounts) March 31 June 30 Sept. 30 Dec. 31
-------------------------------------------------------------------------
Revenues before royalties
and risk management 70,033 82,074 72,225 41,053
Funds flow from operations(1) 24,233 26,304 21,491 5,865
Funds flow from operations
per share(1)
Basic and Diluted $0.31 $0.33 $0.27 $0.07
Cash flow from operating
activities 17,843 19,892 29,406 11,643
Cash flow from operating
activities per share
Basic and Diluted $0.23 $0.25 $0.37 $0.15
Net income (loss) (18,621) (21,374) 29,939 (9,534)
Net income (loss) per share
Basic and Diluted $(0.24) $(0.27) $0.38 $(0.12)
Net capital expenditures
(cash) 2,862 (34,450) 13,779 16,471
Distributions declared 9,507 9,505 9,474 7,848
Distributions per share $0.12 $0.12 $0.12 $0.10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
1) Refer to "Non-GAAP Measures" in respect of the term "funds flow from
operations" and "funds flow from operations per share".
BELLATRIX EXPLORATION LTD.
CONSOLIDATED BALANCE SHEETS
As at September 30 and December 31 (unaudited)
-------------------------------------------------------------------------
($000s) 2010 2009
-------------------------------------------------------------------------
ASSETS
Current assets
Accounts receivable $ 29,834 $ 20,722
Deposits and prepaid expenses 3,307 4,940
Commodity contract asset (note 13) 689 3,374
-----------------------
33,830 29,036
Property, plant and equipment (note 4) 428,422 410,566
Future income taxes (note 11) 7,036 1,368
-----------------------
Total assets $ 469,288 $ 440,970
-----------------------
-----------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 34,510 $ 23,345
Future income taxes (note 11) 195 960
-----------------------
34,705 24,305
Long-term debt (note 5) 28,522 27,902
Convertible debentures (note 6) 47,246 81,684
Asset retirement obligations (note 7) 28,527 25,728
-----------------------
Total liabilities 139,000 159,619
-----------------------
SHAREHOLDERS' EQUITY
Shareholders' capital (note 8) 315,068 252,592
Equity component of convertible debentures
(note 6) 5,881 5,037
Contributed surplus (note 9) 30,294 28,232
Deficit (20,955) (4,510)
-----------------------
Total shareholders' equity 330,288 281,351
-----------------------
Total liabilities and shareholders' equity $ 469,288 $ 440,970
-------------------------------------------------------------------------
-------------------------------------------------------------------------
COMMITMENTS (note 14)
See accompanying selected notes to the consolidated financial statements.
BELLATRIX EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the three and nine months ended September 30 (unaudited)
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
REVENUES
Petroleum and natural
gas sales $ 27,344 $ 23,860 $ 79,847 $ 85,010
Royalties (5,142) (2,570) (15,269) (14,202)
Gain on commodity
contracts (note 13) 1,727 1,721 12,450 15,281
-----------------------------------------------
23,929 23,011 77,028 86,089
EXPENSES
Production 9,761 9,089 27,557 34,951
Transportation 950 340 2,635 3,170
General and administrative 2,400 2,744 7,651 8,167
Interest and financing
charges 1,373 3,573 5,766 11,093
Provision for
uncollectible accounts
(note 13) 250 500 250 500
Share-based compensation
(recovery) (notes 8
and 9) 667 (3) 1,388 (363)
Depletion, depreciation
and accretion 19,939 19,683 53,264 74,312
Loss on redemption of
7.5% Debentures (note 6) - - 3,514 -
Loss on sale of
marketable securities - - - 501
Loss on petroleum and
natural gas properties
held for sale (note 4) - - - 114,182
-----------------------------------------------
35,340 35,926 102,025 246,513
LOSS BEFORE TAXES (11,411) (12,915) (24,997) (160,424)
TAXES
Future income tax
recovery (note 11) (2,856) (3,243) (5,637) (41,546)
-----------------------------------------------
NET LOSS BEFORE
NON-CONTROLLING INTEREST (8,555) (9,672) (19,360) (118,878)
Non-controlling interest - (39) - (474)
-----------------------------------------------
NET LOSS (8,555) (9,633) (19,360) (118,404)
-------------------------------------------------------------------------
Realized loss on
available for sale
marketable securities - - - 620
-------------------------------------------------------------------------
COMPREHENSIVE LOSS $ (8,555) $ (9,633) $ (19,360) $(117,784)
Net loss per share
Basic $ (0.09) $ (0.12) $ (0.21) $ (1.51)
Diluted $ (0.09) $ (0.12) $ (0.21) $ (1.51)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying selected notes to the consolidated financial statements.
BELLATRIX EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the three and nine months ended September 30 (unaudited)
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
SHAREHOLDERS' CAPITAL
Trust units of True Energy
Trust
Balance, beginning and
end of period $ - $ 917,012 $ - $ 917,012
-----------------------------------------------
Common shares of Bellatrix
Exploration Ltd.
Balance, beginning of
period 295,867 - 252,592 -
Issued for cash, net of
transaction costs 19,193 - 62,357 -
Issued on exercise of
share options 5 - 87 -
Contributed surplus
transferred on exercised
options 3 - 32 -
-----------------------------------------------
Balance, end of period 315,068 - 315,068 -
-----------------------------------------------
315,068 917,012 315,068 917,012
-----------------------------------------------
EQUITY COMPONENT OF
CONVERTIBLE DEBENTURES
Balance, beginning of
period 5,881 5,119 5,037 5,119
Conversion feature of
7.50% Debentures
redeemed (note 6) - - (5,037) -
Conversion feature on
4.75% Debentures issued
(note 6) - - 5,881 -
-----------------------------------------------
Balance, end of period 5,881 5,119 5,881 5,119
-----------------------------------------------
CONTRIBUTED SURPLUS
Balance, beginning of
period 29,289 27,943 28,232 28,240
Share-based compensation
expense (note 8 and 9) 1,008 174 2,115 564
Adjustment of prior
period share-based
compensation expense
for forfeitures of
unvested share options - (143) (21) (830)
Transferred to share
capital for exercised
options (3) - (32) -
-----------------------------------------------
Balance, end of period 30,294 27,974 30,294 27,974
-----------------------------------------------
DEFICIT
Balance, beginning of
period (12,400) (653,631) (4,510) (543,290)
Distributions declared - - - (1,570)
Adjustment for redemption
of 7.5% Debentures
(note 6) - - 2,915 -
Net loss (8,555) (9,633) (19,360) (118,404)
-----------------------------------------------
Balance, end of period (20,955) (663,264) (20,955) (663,264)
-----------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance, beginning of
period - - - (620)
Realized loss on sale of
marketable securities - - - 620
-----------------------------------------------
Balance, end of period - - - -
-----------------------------------------------
-------------------------------------------------------------------------
TOTAL SHAREHOLDERS'
EQUITY $ 330,288 $ 286,841 $ 330,288 $ 286,841
-------------------------------------------------------------------------
See accompanying selected notes to the consolidated financial statements.
BELLATRIX EXPLORATION LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three and nine months ended September 30 (unaudited)
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
-------------------------------------------------------------------------
Cash provided by (used in):
CASH FLOW FROM OPERATING
ACTIVITIES
Net loss $ (8,555) $ (9,633) $ (19,360) $(118,404)
Adjustments:
Non-controlling interest - (39) - (474)
Depletion, depreciation
and accretion 19,939 19,683 53,264 74,312
Share-based compensation
(recovery) (notes 8
and 9) 667 (3) 1,388 (363)
Unrealized loss (gain)
on commodity contracts
(note 13) 6,807 3,851 2,685 (1,289)
Accretion on convertible
debentures (note 6) 340 474 1,296 1,425
Loss on sale of
marketable securities - - - 501
Loss on petroleum and
natural gas properties
(note 4) - - - 114,182
Future income tax
recovery (note 11) (2,856) (3,243) (5,637) (41,546)
Loss on redemption of
7.5% Debentures (note 6) - - 3,514 -
Realization of imputed
interest costs on 7.5%
Debentures (note 6) - - (5,050) -
Asset retirement costs
incurred (note 7) (304) (218) (907) (1,269)
Change in non-cash
working capital
(note 10) (2,572) 1,278 1,794 853
-----------------------------------------------
13,466 12,150 32,987 27,928
CASH FLOW FROM (USED IN)
FINANCING ACTIVITIES
Increase (decrease) in
bank debt (5,879) (93,720) 620 (105,903)
Issuance of share
capital, net of share
issue costs (note 8) 18,872 - 61,318 -
Issuance of 4.75%
Debentures, net of
issue costs (note 6) - - 52,520 -
Redemption of 7.50%
Debentures (note 6) - - (88,009) -
Realization of imputed
interest costs on 7.5%
Debentures allocated to
operating activities
(note 6) - - 5,050 -
Proceeds from exercise
of options (note 8) 5 - 87 -
Distributions declared - - - (1,570)
-----------------------------------------------
12,998 (93,720) 31,586 (107,473)
Change in non-cash
working capital
(note 10) 577 861 1,170 52
-----------------------------------------------
13,575 (92,859) 32,756 (107,421)
CASH FLOW FROM (USED IN)
INVESTING ACTIVITIES
Additions to property,
plant and equipment (30,423) (2,710) (67,052) (6,617)
Proceeds on sale of
property, plant and
equipment 7 84,696 587 92,977
Proceeds on sale of
marketable securities - - - 349
-----------------------------------------------
(30,416) 81,986 (66,465) 86,709
Change in non-cash
working capital
(note 10) 3,375 (1,277) 722 (7,216)
-----------------------------------------------
(27,041) 80,709 (65,743) 79,493
Change in cash - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying selected notes to the consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
-------------------------------------------------------------------------
1. CORPORATE STRUCTURE AND THE ARRANGEMENT
Bellatrix Exploration Ltd. (the "Company" or "Bellatrix") is a growth
oriented, public exploration and production company. The Company
resulted from a reorganization (the "Reorganization") effective
November 1, 2009 pursuant to a plan of arrangement (the
"Arrangement") involving, among others, True Energy Trust (the
"Trust" or "True"), Bellatrix Exploration Ltd. and securityholders of
the Trust. The Arrangement involved the exchange, on a one-for-one
basis of trust units and exchangeable shares, after accounting for
the conversion factor applicable to the exchangeable shares, for
common shares of Bellatrix. All outstanding incentive unit rights to
acquire Trust units of True became share options to acquire an equal
number of common shares of Bellatrix Exploration Ltd. on the same
terms and conditions, including as to exercise price, vesting and
expiry dates.
The Reorganization has been accounted for on a continuity of interest
basis and accordingly, the consolidated financial statements for
periods prior to the effective date of the Reorganization reflect the
financial position, results of operations and cash flows as if the
Company had always carried on the business formerly carried on by the
Trust. Information herein with respect to Bellatrix includes
information in respect of the Trust prior to completion of the
Reorganization to the extent applicable unless the context otherwise
requires. In addition, references to "common shares" and "shares",
"Share Option Plan", and "options" should be read as references to
"Units", "Unit Rights Incentive Plan", and "rights" respectively, for
periods prior to November 1, 2009.
2. SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of the Company have
been prepared by management in accordance with generally accepted
accounting policies in Canada. The unaudited interim consolidated
financial statements have been prepared following the same accounting
policies and methods of computation as the consolidated financial
statements for the fiscal year ended December 31, 2009. The interim
consolidated financial statement note disclosures do not include all
of those required by Canadian generally accepted accounting
principles ("GAAP") applicable for annual financial statements.
Accordingly, the interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and
the notes thereto as at and for the year ended December 31, 2009.
3. FUTURE ACCOUNTING PRONOUNCEMENTS
International Financial Reporting Standards ("IFRS")
On February 13, 2008 the CICA Accounting Standards Board announced
that Canadian public reporting issuers will be required to report
under International Financial Reporting Standards ("IFRS"), which
will replace Canadian generally accepted accounting principles for
years beginning on or after January 1, 2011. Currently, we are
assessing the effects of adoption and developing and executing a plan
accordingly. We will continue to monitor any changes in the adoption
of IFRS and will update plans as necessary.
4. PROPERTY, PLANT AND EQUIPMENT
($000s)
---------------------------------------------------------------------
Accumulated
depletion and Net book
September 30, 2010 Cost depreciation value
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 1,019,075 $ 592,459 $ 426,616
Office furniture and equipment 4,371 2,565 1,806
---------------------------------------------------------------------
$ 1,023,446 $ 595,024 $ 428,422
---------------------------------------------------------------------
December 31, 2009
---------------------------------------------------------------------
Petroleum and natural gas
properties $ 949,892 $ 541,075 $ 408,817
Office furniture and equipment 4,045 2,296 1,749
---------------------------------------------------------------------
$ 953,937 $ 543,371 $ 410,566
---------------------------------------------------------------------
Bellatrix has included $47.8 million (2009: $39.4 million) for future
development costs and excluded $19.8 million (2009: $22.6 million)
for undeveloped land and $27.9 million (2009: $27.8 million) for
estimated salvage from the depletion calculation during the nine
month period ended September 30, 2010.
For the nine month period ended September 30, 2010, the Company
capitalized $1.5 million (2009: $0.3 million) of general and
administrative expenses and $0.9 million (2009: $0.1 million),
including the future tax effect thereon of $0.2 million (2009: nil),
of share-based compensation expense directly related to exploration
and development activities.
Petroleum and Natural Gas Properties Sold
On July 30, 2009, the Company closed a divestiture for the majority
of its petroleum and natural gas properties in Saskatchewan (the
"Saskatchewan Divestiture") for net proceeds of approximately
$85 million, net of closing adjustments and closing costs. These
petroleum and natural gas properties were classified as held for sale
on June 30, 2009.
The disposition was accounted for in accordance with Accounting
Guideline 16 - "Oil and Gas Accounting - Full Cost". Under full cost
accounting, if crediting the proceeds from disposition to costs
results in a change of 20 percent or more to the depletion rate then
a gain or loss on disposition should be recognized. When a gain or
loss is to be recognized the total net book value of capitalized
costs should be allocated between the properties sold and the
properties retained. The carrying amount of the assets sold was an
allocation of the Company's historical full cost pool based on a pro-
rata ratio of future cash flows of proved reserves associated with
the assets sold, discounted at 10%, as compared to all oil and gas
assets on June 30, 2009. In the second quarter of 2009, the Company
recorded a $114.2 million loss on the assets sold for the excess of
the allocated net book value of the assets, compared to the total net
proceeds, after purchase adjustments and closing costs, of
approximately $85 million.
5. LONG-TERM DEBT
---------------------------------------------------------------------
September 30, December 31,
($000s) 2010 2009
---------------------------------------------------------------------
Operating facility $ 8,522 $ 2,656
Revolving term facility 20,000 25,246
---------------------------------------------------------------------
Balance, end of period $ 28,522 $ 27,902
---------------------------------------------------------------------
The Company's credit facilities consists of a $10 million demand
operating facility provided by a Canadian bank and a $75 million
extendible revolving term credit facility provided by a Canadian bank
and a Canadian financial institution. Amounts borrowed under the
credit facilities bear interest at a floating rate based on the
applicable Canadian prime rate, U.S. base rate or LIBOR rate, plus
between 1.25% and 4.25%, depending on the type of borrowing and the
Company's debt to cash flow ratio. The credit facilities are secured
by a $400 million debenture containing a first ranking charge and
security interest. Bellatrix has provided a negative pledge and
undertaking to provide fixed charges over major petroleum and natural
gas reserves in certain circumstances. A standby fee is charged of
between 0.55% and 1.02% on the undrawn portion of the credit
facilities, depending on the Company's debt to cash flow ratio.
The revolving period for the revolving term credit facility will end
on June 28, 2011, unless extended for a further 364-day period.
Should the facility not be extended it will convert to a non-
revolving term facility with the full amount outstanding due 366 days
after the last day of the revolving period of June 28, 2011. The
borrowing base will be subject to re-determination on November 30,
2010. Thereafter, a semi-annual re-determination of the borrowing
base will occur on May 30 and November 30 in each year prior to the
maturity date.
Pursuant to Bellatrix's credit facilities, the Company is permitted
to pay the semi-annual interest payments on the Debentures, and
payments by the Company to debenture holders in relation to the
redemption of Debentures and in relation to debenture normal course
issuer bids approved by the TSX, provided that the aggregate of all
such normal course issuer bids and redemptions do not exceed
$10.0 million in any fiscal year.
6. CONVERTIBLE DEBENTURES
The following table sets forth a reconciliation of the convertible
debentures:
Convertible debentures
---------------------------------------------------------------------
($000s except number
of debentures) 7.5% 4.75% Total
---------------------------------------------------------------------
Number of Debentures
Balance, December 31, 2009 84,884 - 84,884
Issued - 55,000 55,000
Redeemed (84,884) - (84,884)
---------------------------------------------------------------------
Balance, September 30, 2010 - 55,000 55,000
---------------------------------------------------------------------
Debt Component
Balance, December 31, 2009 $ 81,684 $ - $ 81,684
Issued - 48,841 48,841
Issue costs - (2,202) (2,202)
Accretion 689 607 1,296
Redeemed (82,373) - (82,373)
---------------------------------------------------------------------
Balance, September 30, 2010 $ - $ 47,246 $ 47,246
---------------------------------------------------------------------
Equity Component
Balance, December 31, 2009 $ 5,037 - $ 5,037
Issued - 6,159 6,159
Issue costs - (278) (278)
Redeemed (5,037) - (5,037)
---------------------------------------------------------------------
Balance, September 30, 2010 $ - $ 5,881 $ 5,881
---------------------------------------------------------------------
On April 20, 2010, Bellatrix issued $55 million of convertible
unsecured subordinated debentures (the "4.75% Debentures") on a
bought deal basis. The 4.75% Debentures have a face value of $1,000,
bear interest at the rate of 4.75% per annum payable semi-annually in
arrears on the last day of April and October of each year commencing
on October 31, 2010 and mature on April 30, 2015 (the "Maturity
Date"). The 4.75% Debentures are convertible at the holder's option
and at any time prior to the close of business on the earlier of the
close of business on the business day immediately preceding the
Maturity Date and the date specified by the Corporation for
redemption of the 4.75% Debentures into common shares of the
Corporation at a conversion price of $5.60 per common share (the
"Conversion Price"), subject to adjustment in certain events. The
4.75% Debentures are not redeemable by the Corporation before
April 30, 2013. On and after April 13, 2013 and prior to April 30,
2014, the 4.75% Debentures are redeemable at the Corporation's
option, in whole or in part, at par plus accrued and unpaid interest
if the weighted average trading price of the common shares for the
specified period is not less than 125% of the Conversion Price. On
and after April 30, 2014, the 4.75% Debentures are redeemable at the
Corporation's option, in whole or in part, at any time at par plus
accrued and unpaid interest. The 4.75% Debentures are listed and
posted for trading on the TSX under the symbol "BXE.DB.A".
As the 4.75% Debentures are convertible into common shares, the
liability and equity components are presented separately. The initial
carrying amount of the financial liability is determined by
discounting the stream of future payments of interest and principal
and has been determined to be $48.8 million. Using the residual
method, the carrying amount of the conversion feature is the
difference between the principal amount and the carrying value of the
financial liability. Within the Shareholder's Equity section of the
consolidated financial statements, $5.9 million has been recorded as
the carrying amount of the conversion feature of the debentures, net
of $0.3 million of issue costs. The 4.75% Debentures, net of the
equity component and issue costs, of $46.9 million, is accreted using
the effective interest rate method over the term of the 4.75%
Debentures such that the carrying amount of the financial liability
will equal the principal balance at maturity.
On April 20, 2010, Bellatrix deposited with Computershare Trust
Company of Canada, the trustee (the "Trustee") for Bellatrix's
previously outstanding series of debentures, being the 7.5%
convertible unsecured subordinated debentures due June 30, 2011 (the
"7.5% Debentures"), sufficient funds to satisfy the principal amount
and interest owing on the 7.5% Debentures and on May 3, 2010 the
trustee provided notice to the registered holders of the 7.5%
Debentures of its intention to redeem the 7.5% Debentures on July 2,
2010. The 7.5% Debentures were redeemed for an amount of $1,025 for
each $1,000 principal amount of the 7.5% Debentures plus accrued and
unpaid interest, or a total of $88.0 million. Proceeds from the
issuance of the 4.75% Debentures have been used by Bellatrix to
partially fund the redemption of the 7.5% Debentures and the balance
of the redemption amount has been funded through bank indebtedness.
The funds deposited with the Trustee on April 20, 2010 and
acknowledgment by the Trustee thereof discharged and extinguished the
Company's financial liability for the 7.5% Debentures as of that
date.
The Company recorded a $3.6 million loss and a reduction of the
deficit of $2.9 million in connection with the redemption of the 7.5%
Debentures.
7. ASSET RETIREMENT OBLIGATIONS
The Company's asset retirement obligations result from net ownership
interests in petroleum and natural gas assets including well sites,
gathering systems and processing facilities. The Company estimates
the total undiscounted amount of cash flows required to settle its
asset retirement obligations is approximately $64.9 million which
will be incurred between 2013 and 2054. A credit-adjusted risk-free
rate of 8 percent and an inflation rate of 2.4 percent were used to
calculate the fair value of the asset retirement obligation.
---------------------------------------------------------------------
September 30, December 31,
($000s) 2010 2009
---------------------------------------------------------------------
Balance, beginning of period $ 25,728 $ 33,682
Incurred on development activities 1,076 584
Changes in prior period estimates 1,475 1,652
Reversed on dispositions (456) (10,999)
Settled during the period (907) (1,510)
Accretion expense 1,611 2,319
---------------------------------------------------------------------
Balance, end of period $ 28,527 $ 25,728
---------------------------------------------------------------------
---------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY
a. Common Shares
Bellatrix is authorized to issue an unlimited number of common
shares.
------------------------------------------------------------------
September 30, 2010 December 31, 2009
Amount Amount
Number ($000s) Number ($000s)
------------------------------------------------------------------
Common shares,
opening
balance 78,809,039 $ 252,592 - $ -
Shares issued
for cash, net
of transaction
costs and tax
effect of
$1.1 million 18,350,000 62,357 - -
Shares issued
on exercise
of options 42,827 87 - -
Contributed
surplus trans-
ferred on ex-
ercised options - 32 - -
Issued pursuant
to Reorganization - - 78,496,581 250,194
Issued on
conversion of
exchangeable
shares pursuant
to Reorgani-
zation (note 1) - - 312,458 2,398
------------------------------------------------------------------
Balance, end of
period 97,201,866 $ 315,068 78,809,039 $ 252,592
------------------------------------------------------------------
------------------------------------------------------------------
On January 28, 2010, Bellatrix closed a bought deal equity
financing whereby 13,640,000 common shares were issued for gross
proceeds of $45.0 million (net proceeds of $42.4 million after
transaction costs and before tax effect). The net proceeds of the
issuance were used to temporarily reduce outstanding indebtedness.
On August 12, 2010, Bellatrix issued 4,170,000 common shares on a
flow-through basis ("Flow-Through Shares") at $4.25 each for gross
proceeds of $20.0 million (net proceeds of $18.9 after transaction
costs and before tax effect). The net proceeds from the issuance
of the Flow-Through Shares will be used to incur eligible Canadian
exploration expenses ("CEE") which will be renounced to
subscribers effective on or before December 31, 2010. Bellatrix is
committed to incur the $20.0 million CEE expenditures on or before
December 31, 2011.
In connection with the Reorganization on November 1, 2009, the
unitholders' capital was reduced by the deficit of the Trust as of
October 31, 2009 of $666.8 million and trust units and
exchangeable shares were exchanged for common shares of Bellatrix.
b. Share Option Plan
The following tables summarize information regarding Bellatrix's
Share Option Plan:
Share Options Continuity
------------------------------------------------------------------
Weighted Average
Exercise Price Number
------------------------------------------------------------------
Balance, December 31, 2009 $ 2.01 4,213,733
------------------------------------------------------------------
Granted $ 3.83 2,058,500
Exercised $ 2.05 (42,827)
Forfeited and cancelled $ 3.23 (73,534)
------------------------------------------------------------------
Balance, September 30, 2010 $ 2.61 6,155,872
------------------------------------------------------------------
As of September 30, 2010, a total of 9,720,186 share options were
reserved, leaving an additional 3,564,314 available for future
grants.
Share Options Outstanding, September 30, 2010
------------------------------------------------------------------
Outstanding Exercisable
Weighted
Weighted Average Weighted
At Average Remaining At Average
Exercise September Exercise Contractual September Exercise
Price 30, 2010 Price Life 30, 2010 Price
------------------------------------------------------------------
$ 0.65 -
$ 0.83 444,186 $ 0.69 3.5 139,468 $ 0.69
$ 1.07 -
$ 1.50 1,008,177 $ 1.35 3.6 276,914 $ 1.37
$ 1.64 -
$ 2.00 1,840,174 $ 1.88 3.6 491,355 $ 1.88
$ 2.47 -
$ 3.94 2,448,335 $ 3.64 4.2 264,992 $ 2.56
$ 3.98 -
$ 5.57 415,000 $ 4.93 1.7 400,500 $ 4.95
------------------------------------------------------------------
------------------------------------------------------------------
$ 0.65 -
$ 5.57 6,155,872 $ 2.61 3.7 1,573,229 $ 2.58
------------------------------------------------------------------
------------------------------------------------------------------
9. CONTRIBUTED SURPLUS
---------------------------------------------------------------------
September 30, December 31,
($000s) 2010 2009
---------------------------------------------------------------------
Balance, beginning of period $ 28,232 $ 28,240
Share-based compensation expense 2,115 812
Adjustment of prior period share-based
compensation expense for forfeitures
of unvested share options (21) (820)
Transferred to share capital for
exercised options (32) -
---------------------------------------------------------------------
Balance, end of period $ 30,294 $ 28,232
---------------------------------------------------------------------
---------------------------------------------------------------------
Share-based Compensation Expense
During the nine months ended September 30, 2010, the Company granted
2,058,500 share options to employees, consultants, directors and
officers. For the nine months ended September 30, 2010, the Company
recorded share-based compensation of $2.1 million, of which
$0.7 million was capitalized to property, plant and equipment.
The fair values of all incentive rights granted are estimated on the
date of grant using the Black-Scholes option-pricing model. The
weighted average fair market value of share options granted during
the nine month period ended September 30, 2010 and the assumptions
used in their determination are as noted below:
---------------------------------------------------------------------
2010
---------------------------------------------------------------------
Assumptions:
Risk free interest rate (%) 1.3-3
Expected life (years) 2-5
Expected volatility (%) 71-75
---------------------------------------------------------------------
Results:
Weighted average fair value of each option granted $ 2.07
---------------------------------------------------------------------
---------------------------------------------------------------------
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash Interest and Taxes Paid
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
---------------------------------------------------------------------
Cash paid:
Interest $ 214 $ 1,416 $ 2,851 $ 6,589
Taxes (net of
refunds) $ - $ 1 $ - $ (272)
---------------------------------------------------------------------
Change in Non-cash Working Capital
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
---------------------------------------------------------------------
Changes in non-
cash working
capital items:
Accounts
receivable $ (7,146) $ 6,112 $ (9,112) $ 11,444
Deposits and
prepaid expenses 638 (1,181) 1,633 443
Accounts payable
and accrued
liabilities 7,888 (4,069) 11,165 (16,628)
Distributions
payable - - - (1,570)
---------------------------------------------------------------------
$ 1,380 $ 862 $ 3,686 $ (6,311)
---------------------------------------------------------------------
Changes related
to:
Operating
activities $ (2,572) $ 1,278 $ 1,794 $ 853
Financing
activities 577 861 1,170 52
Investing
activities 3,375 (1,277) 722 (7,216)
---------------------------------------------------------------------
$ 1,380 $ 862 $ 3,686 $ (6,311)
---------------------------------------------------------------------
---------------------------------------------------------------------
11. INCOME TAXES
Bellatrix is a corporation as defined under the Income Tax Act
(Canada) and is subject to Canadian federal and provincial taxes.
Bellatrix is subject to provincial taxes in Alberta, British Columbia
and Saskatchewan as the Company operates in those jurisdictions.
Future income taxes reflect the tax effects of differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for tax purposes. As at
September 30, 2010, Bellatrix has approximately $439 million in tax
pools available for deduction against future income.
The provision for income taxes differs from the expected amount
calculated by applying the combined Federal and Provincial corporate
income tax rate of 28.06% (2009: 29.48%) to income before taxes. This
difference results from the following items:
---------------------------------------------------------------------
Nine months ended
September 30,
($000s) 2010 2009
---------------------------------------------------------------------
Expected income recovery $ (7,014) $ (47,594)
Distribution deducted for tax purposes - (219)
Share based compensation expense (recovery) 390 (106)
Change in tax rates 964 6,314
Other 23 59
---------------------------------------------------------------------
Future income tax recovery $ (5,637) $ (41,546)
---------------------------------------------------------------------
12. PER SHARE AMOUNTS
---------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2010 2009 2010 2009
---------------------------------------------------------------------
Basic common shares
outstanding 97,201,866 78,496,581 97,201,866 78,496,581
Dilutive effect of:
Share options
outstanding 6,155,872 4,039,229 6,155,872 4,039,229
Units issuable
for exchangeable
shares - 312,467 - 312,467
Shares issuable
for convertible
debentures 9,821,429 5,390,625 9,821,429 5,390,625
---------------------------------------------------------------------
Diluted common
shares
outstanding 113,179,167 88,238,902 113,179,167 88,238,902
---------------------------------------------------------------------
Weighted average
shares
outstanding 94,999,409 78,496,581 93,586,167 78,496,581
Dilutive effect
of exchangeable
shares, share
options and
convertible
debentures(1) - - - -
---------------------------------------------------------------------
Diluted weighted
average shares
outstanding 94,999,409 78,496,581 93,586,167 78,496,581
---------------------------------------------------------------------
(1) A total of 6,155,872 (2009: 4,039,229) share options, nil (2009:
312,467) exchangeable shares, 9,821,429 (2009: 5,390,625) common
shares issuable pursuant to the conversion of the convertible
debentures were excluded from the calculation for the three and
nine month period ended September 30, 2010 as they were not
dilutive.
13. FINANCIAL RISK MANAGEMENT
a. Credit risk
As at September 30, 2010, accounts receivable was comprised of and
estimated to be aged as follows:
------------------------------------------------------------------
Not past due Past due
(less than (90 days or
Aging ($000s) 90 days) more) Total
------------------------------------------------------------------
Joint venture and
other trade accounts
receivable $ 10,057 $ 2,017 $ 12,074
Amounts due from
government agencies 899 2,867 3,766
Revenue and other accruals 9,375 578 9,953
Cash call receivables 1,127 1,299 2,426
Plant revenue allocation
receivable - 2,855 2,855
Less: Allowance for
doubtful accounts - (1,240) (1,240)
------------------------------------------------------------------
Total accounts receivable 21,458 8,376 29,834
------------------------------------------------------------------
Less:
Accounts payable due to
same partners (1,101) (316) (1,417)
Subsequent receipts (12,569) (1,055) (13,624)
------------------------------------------------------------------
$ 7,788 $ 7,005 $ 14,793
------------------------------------------------------------------
Amounts due from government agencies include drilling royalty
credits, Alberta Royalty Tax Credit, GST and royalty and other
adjustments. During the three and nine month period ended
September 30, 2010, the Company has collected $2.0 million and
$2.6 million attributable to drilling credits, respectively. Plant
revenue allocation receivable includes amounts under dispute over
plant revenue allocations, net of expenses, from an operator. The
Company has commenced legal action for collection of these
amounts. Accounts payable due to same partners includes amounts
which may be available for offset against certain receivables.
The carrying amount of accounts receivable and derivative assets
represents the maximum credit exposure. The Company has an
allowance for doubtful accounts as at September 30, 2010 of
$1.2 million.
b. Liquidity risk
The following are the contractual maturities of financial
liabilities as at September 30, 2010:
------------------------------------------------------------------
Financial
liability (less than)
($000s) 1 Year 1-2 Years 2-5 Years Thereafter
------------------------------------------------------------------
Accounts
payable and
accrued
liabili-
ties(1) $ 34,510 $ - $ - $ -
Long-term debt - 28,522 - -
4.75% Debentures
- principal - - 55,000 -
4.75% Debentures
- interest(2) 2,613 5,232 4,130 -
------------------------------------------------------------------
Total $ 37,123 $ 33,754 $ 59,130 $ -
------------------------------------------------------------------
(1) As at September 30, 2010, $1.2 million of accrued coupon
interest payable in relation to the 4.75% Debentures is
included in Accounts Payable and Accrued Liabilities.
(2) The 4.75% Debentures outstanding at September 30, 2010 bear
interest at a coupon rate of 4.75%, which currently requires
total annual interest payments of $2.6 million.
Interest due on the bank credit facility is calculated based upon
floating rates.
c. Commodity price risk
Commodity price risk is the risk that the fair value or future
cash flows will fluctuate as a result of changes in commodity
prices. Commodity prices for petroleum and natural gas are
impacted by not only the relationship between the Canadian and
United States dollar, as outlined above, but also world economic
events that dictate the levels of supply and demand.
The Company utilizes both financial derivatives and physical
delivery sales contracts to manage commodity price risks. All such
transactions are conducted in accordance with the commodity price
risk management policy that has been approved by the Board of
Directors.
The Company's formal commodity price risk management policy
permits management to use specified price risk management
strategies including fixed price contracts, costless collars and
the purchase of floor price options, other derivative financial
instruments, and physical delivery sales contracts to reduce the
impact of price volatility for a maximum of eighteen months
beyond the current date. The program is designed to provide
price protection on a portion of the Company's
future production in the event of adverse commodity price
movement, while retaining significant exposure to upside price
movements. By doing this, the Company seeks to provide a measure
of stability to cash flows from operating activities, as well as,
to ensure Bellatrix realizes positive economic returns from its
capital developments and acquisition activities.
As at September 30, 2010, the Company had entered into commodity
price risk management arrangements as follows:
-------------------------------------------------------------------------
Price Price
Type Period Volume Floor Ceiling Index
-------------------------------------------------------------------------
Natural Gas Jan. 1, 2010 to
call option Dec. 31, 2010 5,000 GJ/day $ - $ 8.05 CDN AECO
Oil collar Jan. 1, 2010 to
Dec. 31, 2010 500 bbl/d $75.00 CDN $101.15 CDN WTI
Oil fixed June 1, 2010 to
Dec. 31, 2010 500 bbl/d $91.76 CDN $ 91.76 CDN WTI
Oil fixed January 1, 2011 to
Dec. 31, 2011 1,000 bbl/d $88.18 CDN $ 88.18 CDN WTI
Oil fixed January 1, 2011 to
Dec. 31, 2011 500 bbl/d $89.00 CDN $ 89.00 CDN WTI
-------------------------------------------------------------------------
For the three and nine months ended September 30, 2010 and 2009,
the gain (loss) on commodity contracts was comprised of the
following:
------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
($000s) 2010 2009 2010 2009
------------------------------------------------------------------
Gain (loss) on
commodity
contracts
Realized(1) $ 8,534 $ 5,572 $ 15,135 $ 13,992
Unrealized(2) (6,807) (3,851) (2,685) 1,289
------------------------------------------------------------------
$ 1,727 $ 1,721 $ 12,450 $ 15,281
------------------------------------------------------------------
(1) Realized gains and losses on commodity contracts represent
actual cash settlements and other amounts paid under these
contracts.
(2) Unrealized gains and losses on commodity contracts represent
non-cash adjustments for changes in the fair value of these
contracts during the period.
d. Interest rate risk
The Company had no interest rate swap or financial contracts in
place as at or during the three month period ended September 30,
2010.
e. Capital management
The Company's policy is to maintain a strong capital base so as to
maintain investor, creditor and market confidence and to sustain
the future development of the business. The Company manages its
capital structure and makes adjustments to it in the light of
changes in economic conditions and the risk characteristics of the
underlying petroleum and natural gas assets. The Company considers
its capital structure to include shareholders' equity, bank debt,
convertible debentures and working capital. In order to maintain
or adjust the capital structure, the Company may from time to time
issue common shares, issue convertible debentures, adjust its
capital spending, and/or dispose of certain assets to manage
current and projected debt levels
The Company monitors capital based on the ratio of total net debt
to annualized funds flow (the "ratio"). This ratio is calculated
as total net debt, defined as outstanding bank debt, plus the
liability component of convertible debentures, plus or minus
working capital (excluding commodity contract assets and
liabilities and future income tax assets or liabilities), divided
by funds flow from operations (cash flow from operating activities
before realization of imputed interest costs on 7.5% Debentures,
changes in non-cash working capital and deductions for asset
retirement costs) for the most recent calendar quarter, annualized
(multiplied by four). The total net debt to annualized funds flow
ratio may increase at certain times as a result of acquisitions,
fluctuations in commodity prices, timing of capital expenditures
and other factors. In order to facilitate the management of this
ratio, the Company prepares annual capital expenditure budgets
which are reviewed and updated as necessary depending on varying
factors including current and forecast prices, successful capital
deployment and general industry conditions. The annual and updated
budgets are approved by the Board of Directors. Bellatrix does not
pay dividends.
In January 2010 (note 8), the Company closed an equity issuance on
a bought deal basis to further Bellatrix's financial flexibility.
On April 20, 2010 (note 6), the Company closed an offering of
$55 million of 4.75% Debentures on a bought deal basis in order to
facilitate the redemption of the Company's 7.5% Debentures. On
August 12, 2010 (note 8), Bellatrix issued $20.0 million of Flow-
Through shares on a bought deal private placement basis. The
Company plans to continue to monitor forecasted debt levels to
manage its operations within forecasted funds flow. Bellatrix
expects the total net debt to annualized funds flow ratio to
reflect its strategic accomplishments in reducing the Company's
total net debt while funds flow are exposed to the current
volatile economic environment.
The Company's long-term strategy is to target a total net debt to
annualized funds flow ratio below 1.2 times. As at September 30,
2010, the Company's ratio of total net debt to annualized funds
flow based on third quarter results was 1.2 times. The total net
debt to annualized funds flow ratio as at September 30, 2010
decreased from that at September 30, 2009 of 2.4 times due to the
significant reduction in the Company's long term debt and higher
annualized funds flow. The total net debt to annualized funds flow
as at September 30, 2010 of 1.2 times decreased in comparison to
the ratio of 1.9 times as at June 30, 2010 as a result of
decreased total net debt levels and higher annualized funds flow.
Bellatrix continues to take a balanced approach to the priority
use of funds flows. The 4.75% Debentures have a maturity date of
April 30, 2015. Upon maturity, the Company may settle the
principal in cash or issuance of additional common shares.
Excluding Debentures, net debt to annualized funds flow based on
third quarter results was 0.5 times.
Bellatrix's capital structure and calculation of total net debt
and total net debt to funds flow ratios as defined by the Company
is as follows:
------------------------------------------------------------------
Three months ended Nine months ended
($000s, except September 30, September 30,
where noted) 2010 2009 2010 2009
------------------------------------------------------------------
Shareholders' equity 330,288 286,841 330,288 286,841
Long-term debt 28,522 26,485 28,522 26,485
Convertible debentures
(liability component) 47,246 82,549 47,246 82,549
Working capital
deficiency (surplus) 1,369 (4,701) 1,369 (4,701)
------------------------------------------------------------------
Total net debt(1) at
period end 77,137 104,333 77,137 104,333
Debt to funds flow from
operations ratio
(annualized)(2)
Funds flow from
operations (annualized) 65,368 44,360 49,533 37,792
Total net debt(1) to
periods funds flow
from operations ratio
(annualized) 1.2x 2.4x 1.6x 2.8x
Net debt(1) (excluding
convertible debentures)
at quarter end 29,891 21,784 29,891 21,784
Net debt to periods
funds flow from
operations ratio
(annualized) 0.5x 0.5x 0.6x 0.6x
Debt to funds flow from
operations ratio
(trailing)(3)
Funds flow from
operations ratio
trailing 44,831 51,953 44,831 51,953
Total net debt(1) to
periods funds flow
from operations
ratio (trailing) 1.7x 2.0x 1.7x 2.0x
Net debt(1) (excluding
convertible debentures)
to periods funds flow
from operations ratio
(trailing) 0.7x 0.4x 0.7x 0.4x
------------------------------------------------------------------
(1) Net debt includes the net working capital deficiency (excess)
before short-term commodity contract assets and liabilities
and short-term future income tax assets and liabilities. Total
net debt also includes the liability component of the
convertible debentures and excludes asset retirement
obligations and the future income tax liability.
(2) Debt to funds flow from operations ratio annualized is
calculated based upon third quarter and year to date funds
flow from operations annualized, respectively.
(3) Trailing periods funds flow from operations is based on the
twelve-months period ended September 30, 2010 and
September 30, 2009.
The Company's credit facility is based on petroleum and natural
gas reserves (see note 5). The credit facility outlines
limitations on percentages of forecasted production, from external
reserve engineer data, which may be hedged through financial
commodity price risk management contracts.
f. Fair value of financial instruments
The Company's financial instruments as at September 30, 2010
include accounts receivable, deposits, commodity contract asset,
accounts payable and accrued liabilities, long-term debt and
convertible debentures. The fair value of accounts receivable,
deposits, accounts payable and accrued liabilities approximate
their carrying amounts due to their short-terms to maturity.
The fair value of commodity contracts is determined by discounting
the difference between the contracted price and published forward
price curves as at the balance sheet date, using the remaining
contracted petroleum and natural gas volumes. The fair value of
commodity contracts as at September 30, 2010 was an asset of
$0.7 million (2009: $5.0 million). The commodity contracts are
classified as level 2 within the fair value hierarchy.
Long-term bank debt bears interest at a floating market rate and
the credit and market premiums therein are indicative of current
rates; accordingly the fair market value approximates the carrying
value.
The fair value of the 4.75% Debentures of $55.1 million is based
on exchange traded values. The 4.75% Debentures are classified as
level 1 within the fair value hierarchy.
14. COMMITMENTS
As at September 30, 2010, the Company had committed to drill 8 wells
pursuant to farm-in agreements. Bellatrix expects to satisfy this
drilling commitment at an estimated cost of approximately
$8.8 million.
As a result of the issuance of the Flow-Through shares on August 12,
2010, Bellatrix is committed to incur approximately $20.0 million in
qualifying Canadian Exploration Expenses on or before December 31,
2011.
An updated corporate presentation is available at www.bellatrixexploration.com.
Bellatrix Exploration Ltd. is a Western Canadian based growth oriented oil and gas company engaged in the exploration for, and the acquisition, development and production of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan. Common shares and convertible debentures of Bellatrix trade on the Toronto Stock Exchange ("TSX") under the symbols BXE and BXE.DB.A, respectively.
For further information: Raymond G. Smith, P.Eng., President and CEO, (403) 750-2420; or Edward J. Brown, CA, Vice President, Finance and CFO, (403) 750-2655; or Troy Winsor, Investor Relations, (800) 663-8072; Bellatrix Exploration Ltd., 2300, 530 - 8th Avenue SW, Calgary, Alberta, Canada, T2P 3S8, Phone: (403) 266-8670, Fax: (403) 264-8163, www.bellatrixexploration.com
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