North Peace Energy Updates Operational Progress and Provides Q3 Financial
Results
About North Peace Energy
North Peace has an early stage in-situ oil sands play in northern Alberta with an estimated 2 to 3.1 billion barrels of Discovered Petroleum Initially-In-Place. The Company has a 100% working interest in 86,400 acres of Crown oil sands leases at Red Earth in the Peace River area. The lands have the benefit of over 300 legacy logs and are surrounded by accessible oil and gas production infrastructure. The target Bluesky zone is a regional sand, deposited in a near shore marine environment at approximately 400 metres in depth. The initial focus area has approximately 22 sections (86,400 acres) with oil bearing thickness ranging for 10 to 16 metres, expected to be technically sufficient to advance a 30,000 bbl/d commercial project. North Peace is currently advancing the development of its resource using a robust and proven in-situ thermal recovery process, Cyclic Steam Stimulation ("CSS"). A pilot project consisting initially of two horizontal CSS wells has been built and the facility has been producing since
Financial Update
-----------------
- Working capital of $13.2 million and no debt as at September 30, 2009
- Capital expenditures of $699,780 in the third quarter
- Planned capital expenditures of $7.5 million in the fourth quarter of
2009
Corporate Update
-----------------
- Front-end engineering has been completed on a 3,000 bbl/d pilot
expansion. This is the first step of a potential 30,000 bbl/d
commercial development
- Investigating potential joint venture partners on the Red Earth asset
to secure additional capital
Delineation Update
------------------
- The delineation program focused in Block B South is now underway;
drilling commenced in November
- Eight vertical delineation wells are planned with additional
contingent locations indentified
- This round of delineation combined with existing delineation is
expected to be sufficient to advance a commercial project
CSS Pilot Project Results
--------------------------
North Peace's CSS pilot is the first thermal recovery project in the Red Earth area and has now been producing bitumen continuously for seven months. At this early stage of operations, the piloting efforts have not yet demonstrated the production rates and Steam to Oil Ratios ("SOR") required to advance full commercial development. Although initial results are encouraging, as expected several cycles will be required to demonstrate commerciality. In order to maximize production rates and reduce SORs, the Company is currently optimizing steaming strategies and is also investigating the use of alternate well types and configurations.
The L1 well has completed its first cycle
- Total cycle length of nine months: steam injection of three months
and production of six months
- Cumulative oil production of 9,500 bbls
- Peak oil production of 200 bbl/d, with average oil rates of
35 bbl/d over the cycle
- Average oil cuts of 38%
- End of cycle SOR of 8.0 with an average 69% quality steam injected
- Adjusted for heat content, this equates to an SOR of 6.8 in
Steam Assisted Gravity Drainage ("SAGD") projects where 100%
quality steam is required
- Oil production at temperatures as low as approximately 20 degrees C
- Average bitumen sales price of $49.16/bbl, total sales of $467,020
- Gas purchases of 25,200 mcf at an average price of $5.32/mcf
for a total gas cost of $134,064
- Indications are that minimal fracturing has occurred at the regulated
injection pressure limitation
- Temperature logs show steam injected into the reservoir was
concentrated at the toe of the well
The L1 well is now in its second cycle
- Steam injection commenced in October and was completed in mid
November
- This steam slug size was smaller than the first cycle's steam slug in
an attempt to minimize SOR's by keeping the injected heat closer to
the well
- This cycle focused steam at the heel of the well in an effort to more
evenly distribute the steam over the horizontal length of the well
- Production is expected to commence in December 2009
Production update on the L2 well
- The well has been producing for three months
- Peak oil production of 150 bbl/d was reached early in the cycle and
has gradually declined to the current rate of 20 bbl/d
- Oil cuts have remained in the 5% - 15% range
- Similar to the L1 well, produced oil quality is as expected and no
discernable sand production
- At this stage of production it is too early to determine full cycle
SORs and production rates
- This information will be provided at the end of the cycle
Operations Strategy Update
--------------------------
Data collected from the pilot is being used to optimize the commercial
strategy. To accomplish this, the pilot needs to be operated for multiple
cycles.
Operational information learned to date
- Steam injection rates are lower than anticipated
- As a result, increased injection pressure limits may be
required or modified steaming strategies will need to be
developed
- First cycle production rates were lower than expected, resulting in
higher SORs
- As a result, we need to optimize steaming and production
strategies and may need to consider additional pilot strategies
- Oil is nearly mobile at reservoir conditions
- L1 well produced at temperatures significantly lower than
expected
- Bitumen produced is of high quality as predicted
- 10 degrees API and 90,000 - 200,000 centipoises and 16 degrees C
- Water separation from the produced emulsion is easier than
expected, which may be beneficial in commercial operations
- No discernable sand production
- The current sand control strategy is sufficient
Future plans to further define operating strategy and maximize existing
facility utilization
- Optimization Strategies
- Target the steam injection at different areas along the
horizontal well to achieve more uniform heat distribution in
the reservoir
- Vary steam injection rates, volumes and pressures to reduce
SORs
- Gather fracture orientation information on a vertical
delineation well to help determine the orientation of
commercial horizontal wells
- Additional Pilot Strategies under consideration (if optimization
strategies do not meet expectations)
- Convert L1 to a continuous injection and production process by
converting its two vertical observation wells to steam
injectors
- Perform a CSS test on a vertical well
- Enhance injectivity in wells with the use of radial drilling
technology
- Drill an additional horizontal well and perform a multi-stage
fracture stimulation prior to steaming
- Drill two additional horizontal wells to bound one of the
existing horizontals in order to simulate a commercial well pad
layout
- Test the potential for high pressure SAGD recovery by
converting an existing horizontal well to a well pair
Once we have optimized our strategy for commercial operations the detailed design of the commercial project will be finalized and the commercial application will be submitted.
Updated Corporate Presentation
------------------------------
Available on the Company's website at:
http://www.northpec.com/investor/event_presentations.html
Conference Call
---------------
North Peace has scheduled a conference call to discuss the pilot project operations and recent corporate developments. The call is set for
Management's Discussion and Analysis of
Financial Results
This Management's Discussion and Analysis (MD&A) for North Peace Energy Corp. ("North Peace" or the "Company") provides analysis of the Company's financial results for the three and nine month periods ended
Additional information about North Peace filed with Canadian securities commissions is available on-line at www.sedar.com.
Date of Report November 25, 2009
--------------
Overview
--------
North Peace has an early stage in-situ oil sands play in northern Alberta with an estimated 2 to 3.1 billion barrels of Discovered Petroleum Initially-In-Place. The Company has a 100% working interest in 86,400 acres of Crown oil sands leases at Red Earth in the Peace River area. The lands have the benefit of over 300 legacy logs and are surrounded by accessible oil and gas production infrastructure. The target Bluesky zone is a regional sand, deposited in a near shore marine environment at approximately 400 metres in depth. The initial focus area has approximately 22 sections (86,400 acres) with oil bearing thickness ranging for 10 to 16 metres, expected to be technically sufficient to advance a 30,000 bbl/d commercial project. North Peace is currently advancing the development of its resource using a robust and proven in-situ thermal recovery process, Cyclic Steam Stimulation ("CSS"). A pilot project consisting initially of two horizontal CSS wells has been built and the facility has been producing since
North Peace continues to advance its Red Earth asset to commercial production. The pilot CSS plant has been operational since the start of 2009 with the principal objective of demonstrating the feasibility of producing economic quantities of bitumen from the Company's resource and validating economic and technical parameters to optimize the design of future commercial development.
Company and Project Overview
----------------------------
During the three months ended September 30, 2009 North Peace has completed
the following significant milestones:
- Capital expenditures of $699,780 million during the quarter
- Oil Sales of $332,649 for the three months ended September 30, 2009
Subsequent to September 30, 2009 the Company has completed the following:
- As at November 25, 2009, $2 million has been spent towards the flow
through commitment of $6 million
- The delineation program of approximately $2.5 - $3.0 million is
now underway on our own lands
- The remaining $1.0 - $1.5 million of flow through expenditures
is being spent on other exploration locations prior to
December 31, 2009
Financial Results
-----------------
Quarterly Financial Information
2009 2009 2009 2008 2008
Q3($) Q2($) Q1($) Q4($) Q3($)
-------------------------------------------------------------------------
Revenues 8,191 4,099 26,752 150,963 120,028
Net Loss and
Comprehensive loss 640,129 695,369 658,380 30,100 571,983
Basic and diluted
Net Loss Per share 0.008 0.012 0.012 0.001 0.012
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2008 2008 2007
Q2($) Q1($) Q4($)
---------------------------------------------------
Revenues 39,045 87,905 117,197
Net Loss and
Comprehensive loss 486,924 399,290 448,481
Basic and diluted
Net Loss Per share 0.013 0.010 0.012
---------------------------------------------------
---------------------------------------------------
Results of Operations
---------------------
Interest Income
Nine months
2009 2008 ended September 30,
-------------------------------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
Interest Income 8,191 4,099 120,028 39,042 246,978
-------------------------------------------------------------------------
Interest income for the three months ended
Stock-based Compensation
Nine months
2009 2008 ended September 30,
-------------------------------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
Stock-based
Compensation 291,644 294,031 217,161 890,545 534,188
-------------------------------------------------------------------------
Stock-based compensation was
The average fair value of the options granted during the nine month ended
Administrative Expenses
Nine months ended
2009 2008 September 30,
-------------------------------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
G&A expense
Salaries, Benefits
and Consulting
Fees 222,365 217,369 277,432 641,329 634,792
Legal, Accounting
and Audit Fees 7,000 57,367 47,232 36,435 89,980
Office rent 64,891 64,282 27,578 194,064 82,174
Other G&A 163,283 165,667 112,017 413,831 333,314
-------------------------------------------------------------------------
Administrative
Expenses 457,539 504,685 464,259 1,285,659 1,140,260
-------------------------------------------------------------------------
Salaries, Benefits and Consulting Fees
Salaries, benefits and consulting fees for the three months ended
Legal, Accounting and Audit Fees
Legal, accounting and audit fees for the three months ended
Office Rent
Office rent has increased from the three month period and nine month period in the previous year because the Company relocated to larger office space on
Depreciation and Accretion
Nine months ended
2009 2008 September 30,
-------------------------------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
Depletion,
Depreciation and
Accretion 18,110 17,780 10,591 53,632 30,727
-------------------------------------------------------------------------
The increase in depletion, depreciation and accretion increased from the three month period and nine month period in the previous year is due to the construction of the pilot project with its subsequent depreciation, from additional depreciation expense on other assets and increased accretion expense from new asset retirement obligations on the horizontal wells and the pilot project.
Red Earth CSS Pilot
-------------------
The Red Earth CSS pilot commenced production at the beginning of
Nine months ended
2009 2008 September 30,
-------------------------------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
Production (bbls/day) 91 62 - 51 -
Average sales price
(CDN$/bbl) 47.13 53.33 - 49.16 -
Revenue 332,649 218,499 - 531,148 -
Operating Costs &
Royalties (634,119) (838,490) - (1,811,133) -
-------------------------------------------------------------------------
Net operating
revenues (301,470) (619,991) - (1,279,985) -
-------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
As at
On
The 2009 capital budget includes
Commitments
-----------
As at September 30, 2009, the payments due under the office lease are as
follows:
(Cdn $)
-------------------------------------------------------------------------
2009 48,216
2010 192,864
2011 192,864
Thereafter Nil
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The office lease expires
The Company has a flow through share commitment of
Capital Expenditures
Nine months ended
2009 2008 September 30,
----------------------------------------------------
Q3 Q2 Q3 2009 2008
-------------------------------------------------------------------------
Land & Lease Rentals 96,764 8,512 56,356 180,260 196,961
Drilling and
Completion 232,061 230,466 2,253,696 688,707 5,834,649
Geological Costs 35,031 41,845 13,301 91,502 69,601
Pilot Facilities
Construction,
equipment and
engineering - 691,392 4,123,684 3,923,060 7,208,080
Capitalized plant
overhead and
operations 301,470 548,295 - 1,259,986 -
Other 34,454 181,314 97,204 406,800 189,246
-------------------------------------------------------------------------
Total 699,780 1,701,824 6,544,231 6,550,315 13,498,537
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company is a development stage enterprise and therefore capitalizes net revenue and depreciation until the Company commences its planned commercial operations. The Company has capitalized
Capitalized stock-based compensation and asset retirement obligation additions are not included in the above table.
Additional Disclosure for Venture Issuers without Significant Revenues
----------------------------------------------------------------------
As at
Share Capitalization
--------------------
The following table shows the common shares, stock options, purchase
warrants and performance warrants issued and outstanding at September 30,
2009:
September 30, 2009
-------------------------------------------------------------------------
Common shares outstanding 76,179,800
Weighted average number of shares outstanding during
the period 62,725,712
Stock options outstanding 6,065,000
Performance warrants outstanding 6,300,000
$0.75 Warrants outstanding 10,554,500
$2.00 Warrants outstanding 6,666,650
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at November 24, 2009, there were no changes to the amounts in the above
table.
Off Balance Sheet Arrangements
------------------------------
There were no off balance sheet arrangements, other than the office lease
commitment.
Transactions with Related Parties
---------------------------------
As at September 30, 2009, the Company accrued legal costs of $70,000
payable to a firm in which a director is a partner. These costs were for
general legal services and legal work for the equity financing in June 2009.
Critical Accounting Estimates
-----------------------------
The preparation of financial statements requires the Company to make judgements, assumptions and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Company. Actual results could differ from those estimates.
Impairment of Property and Equipment
Property costs are reviewed at least annually to consider whether there are conditions that may indicate impairment. The carrying values of petroleum and natural gas properties are compared to their net recoverable amount as estimated by quantifiable evidence of the market value of similar assets or geological resources. If the carrying value is found to exceed the estimated net recoverable amount a write down will be recorded.
Asset Retirement Obligations
The Company is required to provide for future removal and restoration costs. The Company must estimate these costs in accordance with existing laws, contracts or other policies. The fair value of the liability for the Company's asset retirement obligations is recorded in the period in which it is expected to be incurred, discounted to its present value using the Company's risk-adjusted interest rate and expected inflation rate. The offset to the liability is recorded in the carrying amount of property and equipment. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.
Income Tax Accounting
The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time.
Stock-Based Compensation
The Company uses the fair value method for valuing stock option grants. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. This model requires the Company's management to make estimates and assumptions for the following: dividend yield; expected volatility and risk-free rate. A zero dividend yield is used as the Company does not pay dividends; the volatility is a calculation based on a peer company comparison because of our lack of trading history and the risk-free rate is obtained from the Bank of
Changes in Accounting Policies (including initial adoption)
-----------------------------------------------------------
In
Financial Instruments and Other Instruments
-------------------------------------------
The Company's carrying value of cash and cash equivalents, accounts
receivable and accounts payable and accruals approximates its fair value due
to the immediate or short-term maturity of these instruments.
Risks and Uncertainties
-----------------------
North Peace is exposed to operational and regulatory risks and uncertainties in the normal course of business that can influence its future financial performance. A summary of certain of these risks is set out below under "Forward-Looking Statements". Readers are cautioned that these descriptions are not exhaustive. Certain additional risks and uncertainties are discussed below.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company's reputation.
Although in certain cases capital markets have improved since the significant downturn experienced in 2008, capital market conditions may limit the Company's ability to raise the capital necessary to undertake or complete projected capital expenditures after 2010. In addition, if debt or equity financing is available, there is no assurance that it will be on terms acceptable to the Company.
The Company prepares periodic capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. The Company does not have a credit facility.
Capital Markets
Based on the current working capital balance, the Company's budget indicates that the Company currently has sufficient capital to fund corporate and operational expenses until the end of 2010. However, capital market conditions may limit the Company's ability to raise the capital necessary to undertake expanded operations after 2010 if the capital market conditions do not improve. The Company has flexibility in timing future capital expenditures related to further development and will investigate all options to obtain the required funds to grow the Company.
Oil & Gas Prices
World prices for crude oil and natural gas have been volatile. The Company's currently intends to operate its CSS pilot project notwithstanding the prevailing commodity price environment as the purpose of the pilot project is to validate the economic and technical parameters of the commercial project. Crude oil prices, while a significant factor, are only one of many factors in the Company's decision to advance a commercial project. The Company will monitor commodity prices as it is evaluating production performance data from the pilot project. The Company will utilize this data and then current and anticipated crude oil and natural gas prices in evaluating the feasibility of a commercial project.
New
The Province of Alberta implemented the new Royalty Framework ("NRF") on
Project and Company Outlook
---------------------------
During 2009, the Company has been focused on pilot operations. The data collected from the pilot will be used in evaluating the feasibility of future commercial operations and be used to design any future commercial development.
In the fourth quarter of 2009, the Company plans to spend
International Financial Reporting Standards ("IFRS")
----------------------------------------------------
In
The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.
The Company has not completed the development of its IFRS changeover plan, which will include project structure governance, resourcing and training, analysis of key GAAP differences and a phase plan to assess accounting policies under IFRS as well as potential IFRS 1 ("First Time Adoption of IFRS") exemptions. The Company will complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting and business activities, such as financing and compensation arrangements in the fourth quarter of 2009.
Discovered Petroleum Initially-In-Place
---------------------------------------
Discovered Petroleum Initially-In-Place (equivalent to Discovered Resources) is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of Discovered Petroleum Initially-In-Place includes production, reserves, and contingent resources. There is no certainty that the Discovered Petroleum Initially-In-Place will ever be produced.
Forward-Looking Statements
--------------------------
Certain statements contained in this MD&A constitute forward-looking statements that involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.
In particular, this MD&A contains forward-looking statements pertaining, directly or indirectly, to the following: business and operations strategies including the operations at North Peace's pilot project and potential commencement of a subsequent commercial project.
The forward-looking statements contained in this MD&A are based on a number of expectations and assumptions that may prove to be incorrect. In addition to other assumptions identified in this MD&A, assumptions have been made regarding, among other things: that North Peace will continue to conduct its operations in a manner consistent with past operations; the continuance of existing (and in certain circumstances, proposed) tax and royalty regimes; the general continuance of current industry conditions; the accuracy of the estimates of North Peace's resource volumes; the ability of North Peace to obtain equipment, services and supplies in a timely manner and within budget to carry out its activities; the timely receipt of required regulatory approvals; the ability of North Peace to obtain financing on acceptable terms; future oil and gas prices and future cost assumptions.
No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. Actual results could differ materially as a result of changes in North Peace's plans, changes in commodity prices, regulatory changes, general economic, market and business conditions as well as production, development and operating performance and other risks associated with oil and gas operations including anticipated success of resource prospects and the expected characteristics of resource prospects; anticipated capital requirements, project rates of return and estimated project life; estimates of original Discovered Petroleum Initially-In-Place; estimates of recovery factors; lack of diversification; and overall technical and economic feasibility of the Company's project. These statements speak only as of the date of this MD&A or as of the date specified in the documents accompanying this MD&A, as the case may be.
The Company undertakes no obligation to publicly update or revise any forward-looking statements except as expressly required by applicable securities laws.
North Peace Energy Corp.
(A Development Stage Company)
Balance Sheets, as at
(unaudited)
-------------------------------------------------------------------------
September 30, December 31,
2009 2008
(Cdn $)
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 4) $ 13,404,841 $ 18,119,752
Accounts receivable 288,974 922,537
Prepaid expenses 139,858 86,290
-------------------------------------------------------------------------
13,833,673 19,128,579
Oil and gas properties (note 5) 61,639,964 54,875,482
Other assets 40,029 48,097
Future income tax asset - 557,477
-------------------------------------------------------------------------
$ 75,513,666 $ 74,609,635
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accruals $ 641,880 $ 8,788,438
Asset retirement obligations (note 6) 530,077 442,303
Future income tax liability 452,197 -
-------------------------------------------------------------------------
1,624,154 9,230,741
-------------------------------------------------------------------------
Shareholders' equity
Equity Instruments (note 7) 76,654,413 67,158,445
Contributed surplus (note 8) 3,822,450 2,813,922
Deficit (6,587,351) (4,593,473)
-------------------------------------------------------------------------
73,889,512 65,378,894
-------------------------------------------------------------------------
$ 75,513,666 $ 74,609,635
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Future Operations (note 1)
Commitments (note 10)
Signed on behalf of the Board:
"Ian Robertson", Director
"Don Garner", Director
North Peace Energy Corp.
(A Development Stage Company)
Statements of Loss, Comprehensive Loss and Deficit
(unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Interest Income $ 8,191 $ 120,028 $ 39,042 $ 246,978
-------------------------------------------------------------------------
8,191 120,028 39,042 246,978
-------------------------------------------------------------------------
Operating expenses
General and
administrative 457,539 464,259 1,400,659 1,140,260
Stock-based
compensation 291,644 217,161 890,545 534,188
Depletion,
depreciation
and accretion 18,110 10,591 53,632 30,727
-------------------------------------------------------------------------
767,293 692,011 2,344,836 1,705,175
-------------------------------------------------------------------------
Net Loss before
taxes $ 759,102 $ 571,983 $ 2,305,794 $ 1,458,197
Future Income Tax
reduction (118,973) - (311,916) -
-------------------------------------------------------------------------
Net Loss and
Comprehensive
Loss 640,129 571,983 1,993,878 1,458,197
Deficit at
beginning of
period 5,947,222 3,991,390 4,593,473 3,105,176
-------------------------------------------------------------------------
Deficit at end
of period $ 6,587,351 $ 4,563,373 $ 6,587,351 $ 4,563,373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Loss per share
(note 11)
Basic and
Diluted $ 0.008 $ 0.012 $ 0.032 $ 0.035
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North Peace Energy Corp.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating Activities
Net Loss $ (640,129) $ (571,983) $ (1,993,878) $ (1,458,197)
Non-cash charges
to earnings
Depletion,
depreciation
and accretion 18,110 10,591 53,632 30,727
Stock-based
compensation 291,644 217,161 890,545 534,188
Future income
tax reduction (118,973) - (311,916) -
-------------------------------------------------------------------------
(449,348) (344,231) (1,361,617) (893,282)
Net change in
non cash working
capital
Accounts
receivable 85,285 (186,679) 610,566 23,791
Prepaid
expenses (102,688) (57,346) (53,568) (58,589)
Accounts
payable and
accruals 47,703 47,065 (52,230) (29,569)
-------------------------------------------------------------------------
(419,048) (541,191) (856,849) (957,649)
-------------------------------------------------------------------------
Investing Activities
Additions to oil
and gas
properties (699,780) (6,544,231) (6,550,315) (13,498,538)
Other assets (2,729) (4,854) (14,646) (13,366)
Net change in non
cash working
capital
Accounts
receivable 56,921 - 22,997 (124,049)
Accounts
payable and
accruals (359,318) 3,835,383 (8,184,574) 5,841,694
-------------------------------------------------------------------------
(1,004,906) (2,713,702) (14,726,538) (7,794,259)
-------------------------------------------------------------------------
Financing
Activities
Proceeds on
issue of common
shares, net of
share issue
costs (2,940) 24,226,918 10,778,230 24,277,418
Net change in
non cash
working capital
Accounts
payable and
accruals 3,641 80,000 90,246 80,000
-------------------------------------------------------------------------
701 24,306,918 10,868,476 24,357,418
-------------------------------------------------------------------------
Increase (Decrease)
in cash and cash
equivalents (1,423,253) 21,052,025 (4,714,911) 15,605,510
Cash and cash
equivalents,
beginning of
period 14,828,094 4,517,878 18,119,752 9,964,393
-------------------------------------------------------------------------
Cash and cash
equivalents, end
of period $ 13,404,841 $ 25,569,903 $ 13,404,841 $ 25,569,903
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
disclosure:
Interest
received $ 44,104 $ 12,930 $ 194,777 $ 321,481
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North Peace Energy Corp.
(A Development Stage Company)
Notes to Financial Statements
As at and for the periods ended September 30, 2009 and 2008 (unaudited)
-------------------------------------------------------------------------
1. Nature of operation and future operations
North Peace Energy Corp. (the "Company" or "North Peace") resulted
from the amalgamation of Juno Capital Corp. and North Peace Energy
Inc. pursuant to the provisions of the Business Corporations Act
(Alberta) on February 6, 2007. The Company's principal business
activity is the exploration, exploitation and development and
production of petroleum and natural gas resources in the Province of
Alberta.
North Peace is a development stage enterprise whose principle focus
is the creation of shareholder value through the production of heavy
oil from its oil sands leases at its Red Earth project. Production
from its pilot project has commenced in the first half of 2009,
however production of commercial quantities is not expected for two
to three years.
The Company's Red Earth project contains a 100% working interest in
86,400 acres of Crown oil sands leases in the Peace River area. The
target geological zone is the Bluesky formation which is a regional
sand, deposited in a near shore marine environment at approximately
400 metres depth. North Peace is currently advancing the development
of its resource using Cyclic Steam Stimulation ("CSS"). A pilot
project consisting initially of two horizontal CSS wells has been
built and the facility is currently operating.
These financial statements are prepared on the assumption that the
Company will continue as a going concern and realize its assets and
discharge its liabilities in the normal course of business. If the
going concern assumption was not appropriate for these financial
statements, adjustments might be necessary to the carrying value of
assets and liabilities, the reported revenues and expenses and the
balance sheet classifications used.
The recoverability of the amounts shown for petroleum and natural gas
assets is dependent upon the discovery of economically recoverable
oil and gas resources and the ability of the Company to obtain
financing necessary to complete the exploration and development and
the success of future operations. Recent market events, including
disruption of credit markets and other financial systems and the
deterioration of global economic conditions have resulted in
significant declines in commodity prices and made completing
financings more difficult. As at September 30, 2009 the Company had
working capital of $13.2 million and no debt. The Company has a flow
through commitment of $6 million to be spent on Canadian Exploration
Expenditures ("CEE") prior to December 31, 2009. As at September 30,
2009 the Company had spent approximately $540,000 towards this
commitment. The Company has sufficient working capital to satisfy its
flow through commitment.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they are due. The Company's approach to
managing liquidity is to ensure, as far as possible, that it will
have sufficient liquidity to meet its liabilities when due, under
both normal and stressed conditions without incurring unacceptable
losses or risking harm to the Company's reputation.
The recent downturn in the capital markets may limit the Company's
ability to raise the capital necessary to undertake commercial
development capital expenditures after 2010 if the capital market
conditions do not improve. If debt or equity financing is available,
there is no assurance that it will be on terms acceptable to the
Company.
The Company prepares periodic capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the
Company utilizes authorizations for expenditures on both operated and
non-operated projects to further manage capital expenditures. The
Company does not have a credit facility.
2. Adoption of new accounting policies
The International Accounting Standards Board ("IASB") has issued an
amendment to IFRS 1"Additional Exemptions for First-time Adopters".
Included in the amendment issued in July 2009 by the IASB are
transition exemptions for oil and gas companies following full cost
accounting. The transition exemptions allow full cost companies to
allocate their existing full cost PP&E balances using reserve values
or volumes to IFRS compliant units of account without requiring
retroactive adjustment, subject to an initial impairment test. The
Company intends to adopt the transition exemptions.
In May 2009, the CICA amended Section 3862, "Financial Instruments -
Disclosures," to include additional disclosure requirements about
fair value measurement for financial instruments and liquidity risk
disclosures. These amendments require a three level hierarchy that
reflects the significance of the inputs used in making the fair value
measurements. Fair values of assets and liabilities included in Level
1 are determined by reference to quoted prices in active markets for
identical assets and liabilities. Assets and liabilities in Level 2
include valuations using inputs other than quoted prices for which
all significant outputs are observable, either directly or
indirectly. Level 3 valuations are based on inputs that are
unobservable and significant to the overall fair value measurement.
These amendments are effective for on December 31, 2009.
The Company is currently assessing which accounting policies will be
affected by the change to IFRS and the potential impact of these
changes on its financial position and results of operations.
3. Basis of presentation
These interim financial statements have been prepared following the
same accounting policies and methods used in the financial statements
for the year ended December 31, 2008 except as noted. These financial
statements should be read in conjunction with the audited year-end
financial statements for North Peace Energy Corp.
4. Cash and cash equivalents
Included in cash and cash equivalents is a redeemable term variable
rate deposit totaling $11 million which currently bears interest at
0.25 % and matures on June 23, 2010. The term deposits are fully
redeemable, without penalty, 30 days after the date of investment and
are therefore classified as cash and cash equivalents.
5. Oil and gas properties
September 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Oil and gas
interests $ 43,269,455 $ 42,442,785
Pilot Project
Equipment
and
construction 16,401,285 12,432,697
Startup costs 183,416 -
Capitalized
operations 1,785,807 -
---------------------------------------------------------------------
$ 61,639,963 $ 54,875,482
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company is advancing a Cyclic Steam Stimulation ("CSS") project
on its land holdings. A pilot project consisting initially of two
horizontal CSS wells has been built and is currently operating. At
September 30, 2009, the Company has no economic reserves or
commercial production. Accordingly, no provision for depletion
expense has been made.
Stock-based compensation recovery for consultants of $40,812 was
capitalized during the nine months ended September 30, 2009 (2008 -
$93,864 recovery).
Deposits with the Energy Resources and Conservation Board of $495,382
(2008 - $126,782) were included in oil and gas properties as at
September 30, 2009.
6. Asset retirement obligations
The following table represents the reconciliation of the carrying
amount of the obligation associated with the retirement of the
Company's petroleum and gas interests.
September 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Asset retirement obligations, beginning
of period $ 442,303 $ 215,820
Additions 64,506 212,296
Accretion 30,918 17,120
Change in estimates (7,650) (2,933)
---------------------------------------------------------------------
Asset retirement obligations, end of
period $ 530,077 $ 442,303
---------------------------------------------------------------------
---------------------------------------------------------------------
The total undiscounted amount of cash flows required to settle the
obligations as measured at September 30, 2009 is estimated to be
$1,273,466 (2008 - $1,121,365). These obligations will be settled
based on the useful lives of the underlying assets, which ranges from
one to ten years. The credit-adjusted risk free rate at which the
estimated cash flows were discounted was 8 - 10% (2008 - 8%) and the
estimated inflation rate used to project future costs was 2% (2008 -
2%).
7. Share Capital
(a) Authorized
Unlimited number of common shares
Unlimited number of first preferred shares issuable in series
Unlimited number of second preferred shares issuable in series
(b) Issued
Number
of Shares Amount
---------------------------------------------------------------------
Common Shares
Balance December 31, 2007 38,050,640 $ 42,037,961
Tax effect on previously incurred share
issue costs - 364,971
Stock Options exercised 50,500 50,500
Equity financing (i) 16,969,660 22,999,951
Share issue costs (ii) - (1,774,667)
Tax effect of share issue costs - 479,736
---------------------------------------------------------------------
Balance December 31, 2008 55,070,800 $ 64,158,452
Equity financing (iii) 21,109,000 9,393,505
Share issue costs (iv) - (831,720)
Tax effect of share issue costs - 217,738
Tax effect of flow through shares - (1,500,000)
---------------------------------------------------------------------
Balance September 30, 2009 76,179,800 $ 71,437,975
Number
of Shares Amount
$0.75 Share Purchase Warrants
Balance December 31, 2008 - $ -
Equity financing (iii) 10,554,500 2,216,445
---------------------------------------------------------------------
Balance September 30, 2009 10,554,500 2,216,445
$2.00 Share Purchase Warrants
Balance December 31, 2007 - $ -
Equity financing (i) 6,666,650 2,999,993
---------------------------------------------------------------------
Balance December 31, 2008 and
September 30, 2009 6,666,650 $ 2,999,993
Total Equity Instruments $ 76,654,413
---------------------------------------------------------------------
---------------------------------------------------------------------
i. On August 7, 2008 the Company completed a private placement
equity offering, issuing a total of 13,333,300 units
("Units"), at a price of $1.50 per Unit and 3,636,360
flow-through common shares ("Flow-Through Shares"), at a
price of $1.65 per Flow-Through Share for gross proceeds of
approximately $26 million. Each Unit consists of one common
share and half of one common share purchase warrant. Each
full warrant entitles the holder to acquire one common share
at an exercise price of $2.00 per share until February 7,
2010.
The fair value of the warrants is $0.45 per warrant assuming
a volatility of 80% on the underlying shares, a risk-free
interest rate of 2.75%, an expected life of 1.5 years and an
expected dividend rate of nil.
ii. Share issue costs relate to the costs incurred for the
equity issuance on August 7, 2008.
iii. On June 23, 2009 the Company completed a private placement
equity offering, issuing a total of 21,109,000 units
("Units"), at a price of $0.55 per Unit for gross proceeds
of approximately $11.6 million. Each Unit consists of one
common share and half of one common share purchase warrant.
Each full warrant entitles the holder to acquire one common
share at an exercise price of $0.75 per share until December
23, 2010.
The fair value of the warrants is $0.21 per warrant assuming
a volatility of 80% on the underlying shares, a risk-free
interest rate of 2.23%, an expected life of 1.5 years and an
expected dividend rate of nil.
iv. Share issue costs relate to the costs incurred for the
equity issuance on June 23, 2009
(c) Stock options
Changes in the number of shares issuable under outstanding options
were as follows:
Weighted
Range of Average
Number Exercise Exercise
of options Prices Price
---------------------------------------------------------------------
Balance, December 31, 2007 2,280,500 $ 1.00 - 2.62 $ 1.43
Options exercised (50,500) 1.00 1.00
Options granted 1,830,000 1.18 - 1.50 1.46
---------------------------------------------------------------------
Balance, December 31, 2008 4,060,000 $ 1.00 - 2.62 $ 1.45
Options granted 2,455,000 0.28 - 0.55 0.54
Options forfeited (450,000) 1.00 - 1.50 1.17
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance, September 30, 2009 6,065,000 $ 0.28 - 2.62 $ 1.11
---------------------------------------------------------------------
---------------------------------------------------------------------
The average fair value of the options granted during 2009 was $0.33
per option (2008 - $0.82) assuming an average volatility of 80%
(2008 - 80%) on the underlying shares, a weighted average exercise
price of $0.54 (2008 - $1.46), a risk-free interest rate of
2.11% - 2.23% (2007 - 2.81% - 3.35%), an expected life of 4 years
(2008 - 4 years), and an expected dividend rate of nil (2008 - nil).
Stock options issued to employees vest 1/3 per year on the first,
second and third anniversary of the date of the grant. Options issued
to consultants vest at equal amounts at 6 months, 18 months and 30
months after the date of grant. All options expire 5 years after the
initial grant date.
The Company has recognized stock-based compensation expense of
$890,545 during the nine months ended September 30, 2009 and $117,983
was capitalized to oil and gas properties.
In 2008, the Company granted 1,830,000 stock options at a weighted
average exercise price of $1.46 per share to management, employees,
consultants and directors. 475,000 of the stock options granted to
management became exercisable when the Company's previously announced
cyclic steam pilot project demonstrated first oil production. These
options have the same vesting terms as existing options and vest 1/3
per year on the first, second and third anniversary of the date of
the grant.
The following table sets forth information about stock options
outstanding as at September 30, 2009.
Options
Outstanding Options Exercisable
Weighted Weighted
Range of Average Remaining Average
Exercise Number of Price Contractual Options Price
Price Options Per Share Life (yrs) Exercisable Per Share
---------------------------------------------------------------------
$0.28 -
$0.50 50,000 $0.28 4.39 16,667 $0.28
$0.51 -
$1.00 3,520,000 $0.70 2.17 790,000 $1.00
$1.01 -
$2.00 2,095,000 $1.53 3.67 836,666 $1.58
$2.00 -
$3.00 400,000 $2.62 2.67 266,667 $2.62
---------------------------------------------------------------------
6,065,000 $1.11 2.74 1,910,000 $1.47
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) Performance Warrants
Number of Exercise
Warrants Price
---------------------------------------------------------------------
Balance, December 31, 2007 6,300,000 $ 0.50
---------------------------------------------------------------------
Balance, December 31, 2008 and
September 30, 2009 6,300,000 $ 0.50
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable, September 30, 2009 - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
The performance warrants may be exercised the earlier of: (a)
immediately following a liquidity event whereby the Board of the
Company determines to liquidate all or substantially all of the
assets of the Company, (b) immediately following an offer to purchase
at least 66 2/3% of the outstanding common shares for cash or similar
consideration that is received and taken up and paid for by the
offeror, or (c) December 31, 2010, otherwise they expire.
The performance warrants vest immediately if (a) or (b) above occurs,
or after the shares are listed on a recognized stock exchange and all
of the following performance criteria are satisfied; (i) the Company
has a market capitalization of at least $30,000,000; (ii) at least
32,000,000 equity shares are outstanding; and (iii) the Company meets
or exceeds the minimum listing requirements of a Tier 1 Issuer as
defined in the policies of the TSX Venture Exchange (collectively the
"Performance Criteria"). If the Performance Criteria are met, the
warrants vest as follows: 2,700,000 performance warrants upon
achieving a share price of $1.00 per share, 1,800,000 performance
warrants upon achieving a share price of $1.50 per share and
1,800,000 performance warrants upon achieving a share price of $2.00
per share. Share prices are calculated based on the ten day weighted
average trading price per share of the Company.
As at September 30, 2009 all performance criteria related to the
Company have been satisfied except the minimum listing requirements
for a Tier 1 Issuer on the TSX Venture Exchange.
The fair value of the performance warrants was estimated at
$1,466,550 using the Black-Scholes option pricing model assuming
expected volatility of 90% and an expected life of between one and
three years with corresponding risk-free rates of 4.07% to 4.16%.
During 2006, all the substantive criteria were considered probable
and the $1,466,550 was expensed.
The remaining contractual life of the outstanding and exercisable
performance warrants is 1.25 years.
8. Contributed surplus
September 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 2,813,922 $ 2,131,653
Stock-based compensation
Expensed 852,547 794,233
Capitalized 99,731 183,983
Increase/(Decrease) in fair value of
non-employee options
Expensed 37,998 (18,100)
Capitalized 18,252 (277,847)
---------------------------------------------------------------------
Balance, end of period $ 3,822,450 $ 2,813,922
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Related party transactions
As at September 30, 2009, the Company accrued legal costs of $70,000
payable to a firm in which a director is a partner. These costs were
for general legal services and legal work for the equity financing in
June 2009. All related party transactions are in the normal course of
operations, related party transactions entered into by the Company
have been measured at the exchange amount established and agreed to
by the related parties.
10. Commitments
As at January 1, 2009, the Company was committed under a lease for
office premises, requiring future minimum rental payments of $192,864
per annum (2007 - $82,246), expiring December 31, 2011.
The Company has a flow through share commitment of $6 million which
is to be spent on Canadian Exploration Expenditures ("CEE") prior to
December 31, 2009. As at September 30, 2009 the Company had spent
approximately $540,000 of CEE towards this commitment.
11. Loss per Share
The following is a reconciliation of basic and diluted loss per
share.
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
2009 2008 2009 2008
---------------------------------------------------------------------
Net loss
(Cdn $) $ (640,129) $ (571,983) $ (1,993,878) $ (1,458,197)
Weighted
average
number of
shares
outstanding 76,179,800 49,414,247 62,725,712 41,844,120
Basic loss
per share $ 0.008 $ 0.012 $ 0.032 $ 0.035
Diluted loss
per share $ 0.008 $ 0.012 $ 0.032 $ 0.035
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company is in a loss position for the period, therefore all
dilutive instruments which include stock options and performance
warrants are anti-dilutive in nature.
For further information: Louis Dufresne, President & CEO; James Glessing, Vice President, Finance & CFO, North Peace Energy Corp., 630, 505 - 3rd Street SW, Calgary, Alberta, T2P 3E6, Telephone (403) 262-6024, Facsimile: (403) 262-6072, E-mail: [email protected], www.northpec.com; Or Stephanie K Mesher, Bryan Mills Iradesso, (403) 503-0144 ext. 216, [email protected]
Share this article