ProspEx Announces 2009 Third Quarter Results
(All amounts are in Canadian dollars, unless stated otherwise)
"The third quarter marked the transition of ProspEx to a resource play focus", said John Rossall, President and Chief Executive Officer. "The results from our 2-33-63-4W6M East Kakwa horizontal well validated the concept of development using horizontal wells with multi-stage fracturing. The Company also established a new operating area in West Central Alberta that we believe offers repeatable opportunity similar to East Kakwa."
HIGHLIGHTS
- The third quarter was highlighted by the successful drilling and
completion of ProspEx's first horizontal well at East Kakwa in the
Deep Basin (2-33-63-4W6M or the "2-33 well"). This well was tested
at flow rates up to 11 million cubic feet ("mmcf") per day, and is
expected to be on stream by mid November. ProspEx is the operator
and has a 60% working interest in this well.
- ProspEx has established a new operating area in West Central
Alberta. In 2009 to date, the Company has assembled a 12,000 net
acre land position through the acquisition of oil and gas rights at
Alberta Crown land sales at a cost of approximately $4.3 million.
- Production for the third quarter decreased to 1,978 barrels of oil
equivalent ("boe") per day, compared to 3,089 boe per day in the
second quarter of 2009. This decrease in production was due to the
disposition of approximately 750 boe per day of non-core production
effective June 1, 2009, and the temporary curtailment of production
during the third quarter due to the low natural gas price
environment, both as previously announced by ProspEx, and natural
declines of the Company's production base. Substantially all of the
curtailed production was brought back on line in late October.
- Cash flow before changes in non-cash working capital items for the
quarter was $2.0 million, a decrease of 81% compared to the third
quarter of the prior year due to a 49% decrease in production and a
50% decrease in realized commodity prices.
- ProspEx remains in strong financial condition. Net debt at
September 30, 2009 was $27.8 million, equivalent to 70% of the limit
on the Company's credit facility. The Company has entered into
various hedging arrangements to protect cash flow through to the end
of the first quarter of 2010.
MESSAGE TO SHAREHOLDERS
Over the course of 2009, ProspEx has focused on building an inventory of repeatable opportunities on assets where horizontal drilling using multi-stage fracturing technology has the potential to generate superior results. The third quarter saw these efforts come to fruition. As previously announced, the Company drilled and completed the 2-33 well, a successful horizontal well at East Kakwa in the Deep Basin, during the third quarter. This well was drilled to test the technical and commercial viability of horizontal drilling at East Kakwa. Given the success of this well, ProspEx is planning two additional horizontal wells for the upcoming winter drilling season that are intended to extend the application of horizontal drilling over the length of the Company's East Kakwa land base. This winter's drilling program is designed to set the stage for a full scale development using horizontal wells at East Kakwa, which ProspEx currently sees as including 20 (10 net) additional horizontal wells.
ProspEx has also established a new operating area in West Central Alberta, with the majority of the 12,000 net acre land position held in two contiguous blocks. These lands were acquired by ProspEx because they showed potential in the same geological formations as the Company is exploiting in East Kakwa, allowing the Company to extend its horizontal drilling program over a larger land base. Drilling activity in West Central Alberta over the coming winter will be focused on drilling an initial horizontal well on each of two contiguous land blocks acquired in the area.
The success of the 2-33 horizontal well and the addition of the new lands in West Central Alberta reinforces ProspEx's commitment to a resource play focus featuring a repeatable prospect inventory utilizing horizontal drilling. The 2-33 well demonstrates the viability of horizontal drilling in East Kakwa, and the acquisition of new lands provides the Company with a substantially larger prospect inventory upon which to apply this technology.
In addition to transforming the Company's asset base, ProspEx's other priority in 2009 is to maintain financial flexibility during the current downturn in natural gas prices. The Company disposed of certain non-core assets in the second quarter to strengthen its balance sheet, and has entered into various hedging arrangements to protect cash flow through to the end of the first quarter of 2010.
ProspEx's activities in 2009 were intended to position the Company to emerge from the current downturn with an improved asset base and the financial flexibility to realize value from these assets. ProspEx believes that it is successfully executing this strategy, and looks forward to the coming winter drilling program.
OPERATIONAL REVIEW
Capital Program
Capital expenditures for exploration and development (before acquisitions and dispositions) were
At East Kakwa, the 2-33 well was successfully drilled and completed during the third quarter. Following the completion, the well flowed up 4 1/2" casing on clean up test with a final rate of 10.9 mmcf per day at a flowing wellhead pressure of 2,380 pounds per square inch ("psi"). A 66 hour extended flow test was then performed, with the well flowing up 2 3/8" tubing at a restricted rate to minimize operational risks associated with the flow back of frac sand. During the extended test the well produced at a stable flowing pressure of approximately 2,300 psi, with the flow rate increasing from 6.0 mmcf per day to 6.6 mmcf per day at the end of the test.
The estimated gross cost to drill and complete the 2-33 well was
The Company believes that this well result confirms the technical and commercial viability of developing its East Kakwa properties using horizontal wells with multi-stage fracturing techniques. Based on this well result, existing vertical well control and 3D seismic coverage, ProspEx has identified 20 (10 net) additional horizontal drilling locations on its existing East Kakwa acreage, assuming a drilling density of two horizontal wells per section. The Company has regulatory approval to drill to a density of four wells per section on the majority of its East Kakwa lands.
ProspEx invested
Using data from existing wells and two dimensional seismic, ProspEx has mapped a number of trends across these lands that the Company considers to be similar to the East Kakwa assets. The trends identified on the new lands exist in the same geological formations that ProspEx has been exploiting in East Kakwa, and ProspEx believes that the potential opportunity should be similar to that at East Kakwa. Industry activity on trend with the newly acquired lands has demonstrated the potential for a successful development using horizontal wells.
Production
Production (boe/d) Q3 2009 Q2 2009 Q1 2009 Q4 2008 Q3 2008
-------------------------------------------------------------------------
West Central Alberta 1,289 1,635 2,099 1,914 1,847
Deep Basin 675 944 985 924 1,150
Southern Alberta 7 503 713 743 847
Other 7 7 10 6 6
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Total 1,978 3,089 3,807 3,587 3,850
The third quarter production averaged 1,978 boe per day, compared to second quarter of 2009 production of 3,089 boe per day. This decrease in production was due to the disposition of approximately 750 boe per day of non- core production effective
FINANCIAL
The Company remains in strong financial condition despite the relatively low natural gas pricing environment of the past quarter. Net debt at
The Company has entered into the following financial derivative sales contracts in order to partially mitigate commodity price risk over the fall and winter of 2009.
Price
Type Amount (GJ/day) Term ($/GJ at AECO)
---- --------------- ---- --------------
Fixed 2,500 Oct. 1 - Oct. 31, 2009 $ 4.21
Costless
collar 1,500 Oct. 1 - Oct. 31, 2009 $ 4.00 - $ 5.23
Costless
collar 2,000 Nov. 1 - Mar. 31, 2010 $ 4.25 - $ 5.67
Fixed 2,000 Nov. 1 - Dec. 31, 2009 $ 4.66
Fixed 2,000 Nov. 1 - Dec. 31, 2009 $ 4.735
Put 3,000 Jan. 1 - Mar. 31, 2010 $ 5.00
These hedges protect the price to be received for approximately half of the Company's forecasted natural gas production for the period
GUIDANCE
ProspEx has obtained the necessary licenses to drill the next horizontal well in the East Kakwa program, and expects to have this well drilled prior to the end of 2009. One additional East Kakwa horizontal well is planned for the first quarter of 2010. In West Central Alberta, two horizontal wells are planned for the first quarter of 2010, one on each of the two contiguous land blocks recently acquired by the Company. The Company anticipates that the capital spending program planned for this upcoming winter program will be financed by forecasted funds from operations and existing credit facilities.
ProspEx reaffirms its previously issued production guidance as the Company expects annual average production in 2010 to range between 3,100 and 3,300 boe per day after forecasting risked production and on stream timing of the projected capital program, and estimated decline rates on new and existing production.
Reader's Advisory
ProspEx is a
Certain information contained in this press release constitutes forward-looking information or statements including, without limitation, information and statements respecting: anticipated cash flow, capital expenditures, production forecasts, production additions and deletions, reserves and resources additions and deletions, additions to and deletions from the Company's historical and future capital programs, acquisitions or dispositions, operating expenses, G&A, royalties, expected timing of the tie- in of wells, expected timing of the receipt of regulatory approvals and expected timing of the completion of facilities projects.
Statements relating to "reserves" and "resources" are forward-looking information as they involve the implied assessment, based on certain estimates and assumptions that, among others, the reserves and resources described exist in the quantities predicted or estimated.
Forward-looking information and statements are often, but not always, identified by the use of words such as "anticipate", "seek", "believe", "expect", "hope", "plan", "intend", "forecast", "target", "project", "guidance", "may", "might", "will", "should", "could", "estimate", "predict" or similar words or expressions suggesting future outcomes or language suggesting an outlook. By their very nature, forward-looking information and statements involve inherent risks and uncertainties, both general and specific, and risks that predictions, forecasts, projections and other forward-looking information and statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause the actual results to vary materially from the forward-looking information or statements. These factors include, but are not limited to: the volatility of oil and gas prices; production and development costs and capital expenditures; the imprecision of reserve and resource estimates and estimates of recoverable quantities of oil, natural gas and liquids; the Company's ability to replace and expand oil and gas reserves; environmental claims and liabilities; incorrect assessments of value when making acquisitions or dispositions; increases in debt service charges; the loss of key personnel; the marketability of production; defaults by third party operators; unforeseen title defects; fluctuations in foreign currency and exchange rates; adequacy of insurance coverage; compliance with environmental laws and regulations; changes in tax and royalty laws; the Company's ability to access external sources of debt and equity capital; and the Company's ability to obtain equipment in a timely manner to carry out development activities. Further information regarding these factors may be found under the headings "Risk Factors" and "Industry Conditions" in the Company's most recent Annual Information Form, under the heading "Business Risks" in the Company's Management's Discussion and Analysis for the year ended
The Company does not assume responsibility for the accuracy and completeness of the forward-looking information or statements and such information and statements should not be taken as guarantees of future outcomes. Subject to applicable securities laws, the Company does not undertake any obligation to revise these forward-looking information or statements to reflect subsequent events or circumstances. Furthermore, the forward-looking information contained in this press release are made as of the date of this document and the Company 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 required by applicable law. The forward-looking information and statements contained in this press release are expressly qualified by this cautionary statement.
For the purposes of this press release, boes have been calculated on the basis of six thousand cubic feet of gas to one barrel of oil. The term boe may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Netbacks are calculated by subtracting transportation costs, royalties payable and operating costs from the average price received during the period.
ProspEx Resources Ltd.
Consolidated Highlights
For the period ended
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
(unaudited) 30, 2009 30, 2008 30, 2009 30, 2008
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FINANCIAL ($000's)
Oil and gas revenue 5,023 19,714 25,158 61,659
Net (loss) earnings (3,082) 6,923 (9,206) 7,074
Cash flow(1) 1,969 10,626 10,165 34,734
Total assets 160,129 198,395 160,129 198,395
Total net debt(2) 27,841 48,191 27,841 48,191
Net (loss) earnings per
share ($ per share)
Basic (0.05) 0.12 (0.16) 0.12
Diluted (0.05) 0.12 (0.16) 0.12
Cash flow per share
($ per share)(1)
Basic 0.03 0.19 0.18 0.61
Diluted 0.03 0.18 0.18 0.60
Weighted average
common shares (000's)
Basic 57,385 57,200 57,385 56,943
Diluted 57,385 58,215 57,385 58,339
PRODUCTION VOLUMES
Natural gas (mcf/d) 8,906 18,379 13,585 19,131
Natural gas liquids
(bbls/d) 456 722 637 703
Oil (bbls/d) 37 65 51 80
--- --- --- ---
Total (boe/d) 1,978 3,850 2,951 3,972
SALES PRICES
Natural gas ($/mcf) 3.70 8.14 4.83 8.55
Natural gas liquids
($/bbl) 41.60 78.24 36.75 74.08
Oil ($/bbl) 72.24 125.88 61.39 117.58
------ ------- ------ -------
Total ($/boe) 27.61 55.65 31.23 56.65
OPERATING NETBACKS ($/boe)
Price 27.61 55.65 31.23 56.65
Royalties (1.21) (12.98) (3.83) (11.22)
Operating costs (8.37) (7.76) (8.18) (8.75)
Transportation (1.12) (0.91) (1.02) (0.96)
------ ------ ------ ------
Total 16.91 34.00 18.20 35.72
CAPITAL ($000's)
Drilling and completion 1,952 8,761 5,642 20,905
Facilities (152) 564 (179) 7,184
Land and lease 3,661 2,600 5,551 5,513
Seismic 196 19 343 2,846
Capitalized general and
administrative 781 749 2,342 2,243
---- ---- ------ ------
Total exploration &
development 6,438 12,693 13,699 38,691
Net property acquisition
(disposition) 194 3,156 (27,267) 9,206
Other capital assets 3 1 10 159
-- -- --- ----
Total 6,635 15,850 (13,558) 48,056
(1) Cash flow is defined as cash flow from operations before changes in
operating non-cash working capital.
(2) Total net debt is defined as long term debt plus accounts payable &
accrued liabilities less accounts receivable and prepaid expenses.
Cash flow and total net debt do not have standardized measures prescribed by Canadian generally accepted accounting principles and therefore may not be comparable with calculation measures for other issuers.
MANAGEMENT DISCUSSION & ANALYSIS
Management's Discussion and Analysis ("MD&A") is management's assessment of the financial and operating results of ProspEx Resources Ltd. ("ProspEx" or the "Company") as well as a prospective view of the Company's activities. The MD&A is for the three and nine months ended
THIRD QUARTER HIGHLIGHTS
The third quarter of 2009 saw the achievement of key milestones in the Company's transition to a strategy focusing on building an inventory of repeatable opportunities utilizing horizontal drilling. During the quarter ProspEx successfully drilled its first horizontal well in East Kakwa, validating the concept of horizontal drilling of these lands. In addition, the Company established a new core operating area within West Central Alberta with the purchase of 12,000 net acres of land that ProspEx considers similar to the East Kakwa assets.
Natural gas prices continued on a downward trend, as concerns of oversupply reduced the overall price received in the quarter to
The Company continues to monitor current net debt levels given the current weakness in natural gas prices. Net debt at
Revenue
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
($000's) 30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
Natural gas $ 2,654 $ 15,214 $ 16,231 $ 47,557
Realized gain (loss) on
financial instruments 376 (1,451) 1,692 (2,758)
---------------------------------------------------
Total natural gas 3,030 13,763 17,923 44,799
Oil 247 750 849 2,583
Natural gas liquids 1,746 5,201 6,386 14,277
---------------------------------------------------
Oil and gas revenue 5,023 19,714 25,158 61,659
Unrealized (loss) gain
on financial instruments (401) 8,277 (919) 977
---------------------------------------------------
Total revenue $ 4,622 $ 27,991 $ 24,239 $ 62,636
---------------------------------------------------
Third quarter oil and gas revenue decreased
Production
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
----------------------------------------------------
Area (boe/d)
------------
Deep Basin 675 1,150 867 1,312
West Central Alberta 1,289 1,847 1,671 1,663
Southern Alberta 7 847 405 988
Other 7 6 8 9
----------------------------------------------------
1,978 3,850 2,951 3,972
Product
-------
Natural gas (mcf/d) 8,906 18,379 13,585 19,131
Natural gas liquids
(bbls/d) 456 722 637 703
Oil (bbls/d) 37 65 51 80
----------------------------------------------------
Total (boe/d) 1,978 3,850 2,951 3,972
Third quarter production averaged 1,978 boe per day, compared to second quarter production of 3,089 boe per day and prior year's production of 3,850 boe per day. This decrease in production reflects the disposition of approximately 750 boe per day of non-core production effective
Commodity Pricing
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
ProspEx Average Prices 30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
Natural gas ($/mcf)
Sales price $ 3.24 $ 9.00 $ 4.37 $ 9.08
Realized gain (loss)
on financial
instruments 0.46 (0.86) 0.46 (0.53)
---------------------------------------------------
3.70 8.14 4.83 8.55
Oil ($/bbl) 72.24 125.88 61.39 117.58
NGL ($/bbl) 41.60 78.24 36.75 74.08
---------------------------------------------------
Average realized price
($/boe) 27.61 55.65 31.23 56.65
Unrealized gain (loss)
on financial
instruments ($/boe) (2.21) 23.36 (1.14) 0.90
---------------------------------------------------
Total average price
($/boe) $ 25.40 $ 79.01 $ 30.09 $ 57.55
---------------------------------------------------
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
Benchmark pricing 30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
AECO C Spot ($/mcf) $ 2.94 $ 7.75 $ 3.77 $ 8.62
Edmonton Par - light
oil ($/bbl) $ 71.53 $ 121.74 $ 62.38 $ 115.11
---------------------------------------------------
Average natural gas sales prices decreased 64% to
Oil prices received for the third quarter of 2009 were
Financial Instruments
The impact of the changes in the fair values of open financial instruments during the quarter ended
The financial instruments open as of
Amount
Type (GJ/day) Term Price ($/GJ at AECO) Type
---- -------- ---- -------------------- ----
Fixed 2,500 Oct.1-Oct.31, 2009 $ 4.21 Physical
Costless
collar 1,500 Oct.1-Oct.31, 2009 $ 4.00 - $ 5.23 Financial
Costless
collar 2,000 Nov.1-Mar.31, 2010 $ 4.25 - $ 5.67 Financial
Fixed 2,000 Nov.1-Dec.31, 2009 $ 4.66 Physical
Subsequent to the quarter the Company entered into the following financial instruments:
Amount
Type (GJ/day) Term Price ($/GJ at AECO) Type
---- -------- ---- -------------------- ----
Fixed 2,000 Nov.1-Dec.31, 2009 $ 4.735 Financial
Put 3,000 Jan.1-Mar.31, 2010 $ 5.00 Financial
The Company's strategy is to selectively enter into financial instruments such as forwards, futures, swaps and costless collars in an effort to mitigate the effects of volatile commodity prices and protect cash flow to enable funding of its exploration and development programs. These financial instruments allow the Company to better forecast operating cash flow, in turn providing greater confidence in funding for its operations.
Royalty Expenses
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
($000's) 30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
Crown $ 20 $ 3,152 $ 1,994 $ 8,679
Freehold and gross
overriding 200 1,445 1,093 3,536
---------------------------------------------------
Total Royalties $ 220 $ 4,597 $ 3,087 12,215
---------------------------------------------------
$ per boe $ 1.21 $ 12.98 $ 3.83 $ 11.22
As a percentage of
oil and gas revenue 4% 23% 12% 20%
---------------------------------------------------
In the third quarter of 2009, royalties totaled
On
Operating Costs
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
Operating costs
($000's) $ 1,524 $ 2,750 $ 6,589 $ 9,524
Operating costs
($/boe) $ 8.37 $ 7.76 $ 8.18 $ 8.75
Quarterly operating costs of
On a year to date basis, operating costs of
Transportation Expenses
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------
Transportation
expenses ($000's) $ 203 $ 322 $ 823 $ 1,042
Transportation
expenses ($/boe) $ 1.12 $ 0.91 $ 1.02 $ 0.96
Transportation expense per boe for the three and nine months ended
General and Administrative Expenses
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
--------------------------------------------------
Gross general and
administrative $ 1,878 $ 1,870 $ 5,596 $ 5,490
Recoveries (197) (217) (598) (688)
Capitalized expenses (781) (749) (2,341) (2,242)
----------- ----------- ---------- ----------
Net general and
administrative
expenses $ 900 $ 904 $ 2,657 $ 2,560
Net general and
administrative
expenses ($/boe) $ 4.95 $ 2.55 $ 3.30 $ 2.35
Gross general and administrative costs in 2009 are approximately in line with costs in 2008, as increases in office rents have been offset by reductions in personnel and other costs. However, unit costs have increased due to decreases in production levels.
Interest and Bank Charges
With the disposition of the Medallion assets and decreased capital activity, overall debt levels were less than the prior year. This resulted in interest and bank charges of
Depletion, Depreciation and Accretion
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
--------------------------------------------------
Depletion, depreciation
and accretion ($000's) $ 5,457 $ 9,006 $ 22,446 $ 25,066
Depletion, depreciation
and accretion ($/boe) $ 29.99 $ 25.43 $ 27.86 $ 23.03
Depletion, depreciation and accretion expense per boe in the third quarter of 2009 was
Ceiling Test
The Company performed a ceiling test at
Stock-Based Compensation
Stock-based compensation expenses were down slightly for the three and nine months ended
Income Taxes
In the third quarter of 2009, the Company had a future income tax reduction of
Estimated tax pools as at September 30:
($000's) 2009 2008
-------------------------------------------------------------------------
Canadian development expense $ 38,856 $ 34,120
Canadian exploration expense 33,067 29,961
Canadian oil & gas property expense 21,686 39,012
Undepreciated capital cost 32,852 43,859
Other 4,352 5,003
-------------------------------------------------------------------------
$ 130,813 $ 151,955
-------------------------------------------------------------------------
Net (Loss) Earnings
Overall the Company reported a net loss of
Capital Expenditures
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
($000's) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Drilling and
completions $ 1,952 $ 8,761 $ 5,642 $ 20,905
Facilities (152) 564 (179) 7,184
Land and lease 3,661 2,600 5,551 5,513
Seismic 196 19 343 2,846
Capitalized G&A 781 749 2,342 2,243
--------------------------------------------------
Total exploration &
development 6,438 12,693 13,699 38,691
Net property
acquisitions
(dispositions) 194 3,156 (27,267) 9,206
Other capital
assets 3 1 10 159
-------------------------------------------------------------------------
Total net capital
expenditures $ 6,635 $ 15,850 $ (13,558) $ 48,056
-------------------------------------------------------------------------
During the third quarter of 2009, the Company invested
ProspEx also invested
Liquidity & Capital Resources
At
($000's)
-------------------------------------------------------------------------
Working capital deficiency, excluding financial
instrument gains/losses and related tax and other
current liabilities $ (2,694)
Long-term debt (25,147)
Bank facilities available 40,000
-------------------------------------------------------------------------
Total capital resources available $ 12,159
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProspEx expects that it will be able to fund its 2009 capital program from operating cash flow and the capital resources noted above.
As at
Bank Debt
At
The facility is secured by a general security agreement conveying a first floating charge over all real and personal property and after-acquired assets. The Company is required to meet certain financial based covenants under the terms of this facility. As at
The effective interest rate on the outstanding debt for the third quarter of 2009 is approximately 2.90% annualized.
Share Capital
As at
As at
Contractual Obligations
The Company has committed to certain payments as follows:
Payments due There-
($000's) 2009 2010 2011 2012 2013 after
-------------------------------------------------------------------------
Long-term debt $ - 25,147 - - - $ -
Building lease 232 934 1,050 1,356 1,433 358
Process fees 95 379 63 - - -
Transportation 37 40 - - - -
Other 4 7 - - - -
-------------------------------------------------------------------------
Total $ 368 26,507 1,113 1,356 1,433 $ 358
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Off-Balance Sheet Arrangements
The Company has not entered into any off-Balance Sheet transactions.
Summary of Quarterly Results
The following table summarizes the quarterly operating statistics of the Company.
2009 2008 2007
Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial ($000's,
except per
share amounts)
Oil and gas
revenue 5,023 7,370 12,765 15,046 19,714 24,567 17,378 15,906
Net (loss)
earnings (3,082)(3,899) (2,225) 487 6,923 2,261 (2,110) (180)
Per share
- basic (0.05) (0.07) (0.04) 0.01 0.12 0.04 (0.04) 0.00
- diluted (0.05) (0.07) (0.04) 0.01 0.12 0.04 (0.04) 0.00
Average Daily
Production
Oil (bbls/d) 37 47 69 57 65 108 68 125
NGL (bbls/d) 456 645 811 719 722 851 536 515
Natural Gas
(mcf/d) 8,906 14,382 17,561 16,868 18,379 19,957 19,064 19,690
----- ------ ------- ------ ------ ------ ------ ------
Total
(boe/d) 1,978 3,089 3,807 3,587 3,850 4,285 3,781 3,922
Operating
Netbacks
($/boe)
Price(1) 27.61 26.22 37.25 45.59 55.65 63.00 50.50 44.09
Royalties (1.21) (1.21) (7.37) (8.18) (12.98) (11.97) (8.57) (5.41)
Transpor-
tation (1.12) (0.93) (1.04) (1.00) (0.91) (1.00) (0.96) (0.86)
Operating
Cost (8.37) (9.30) (7.16) (4.58) (7.76) (8.39) (10.17) (8.06)
------ ------ ------ ------ ------ ------ ------- ------
Operating
Netback 16.91 14.78 21.68 31.83 34.00 41.64 30.80 29.76
-------------------------------------------------------------------------
(1) Price excludes unrealized financial instrument gain or loss.
Quarter to quarter results are influenced by many factors. The three main drivers are capital spending, production and commodity prices.
Capital spending is typically more heavily weighted to the winter drilling months, and therefore the fourth and first quarters of the year usually represent approximately 60% of the exploration and development budgets. The second quarter of each year usually has minimal capital spending, reflecting surface access restrictions due to spring break up conditions. Production additions typically lag capital spending by one or two quarters, resulting in production peaks in the second quarter of each year.
As previously mentioned, production is a key driver of overall quarterly results. Production is not only influenced by additions as a result of capital programs and dispositions, but also by natural declines as production from existing wells diminishes over time. With respect to the Company's overall quarterly production profile, production tends to peak in the second quarter of each year, reflecting new additions from the winter drilling programs, and the subsequent quarters reflect declining production as natural decline rates come into play.
World-wide commodity price environments have a significant influence on the overall Company's quarterly results. The Company is an overall price-taker in the oil & gas industry and as a result, world prices drive overall Company revenues. Natural gas prices are currently low, driven by high natural gas storage inventories, strong domestic production levels in the
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted and Recent Pronouncements
Convergence with International Reporting Standards - On
DISCLOSURE CONTROLS AND POLICIES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Company is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure. The Company's CEO and CFO have concluded, based on their evaluation as of
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and CFO of the Company are able to certify the design of the Company's internal controls over financial reporting as required under Multilateral Instrument 52-109 of the Canadian Securities Administration with no significant weaknesses in design of these internal controls that require commenting on in the MD&A.
For the third quarter of 2009 there were no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
ADVISORIES
Within the MD&A references are made to terms commonly used in the oil and gas industry. "Cash flow" is not defined by GAAP in
The following table provides a reconciliation between cash flow from operations and cash flow for the periods below:
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
($000s) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Cash flow from
operating activities 2,457 12,419 6,185 36,224
Change in non-cash
working capital (488) (1,793) 3,980 (1,490)
----- ------- ----- -------
Cash flow 1,969 10,626 10,165 34,734
-------------------------------------------------------------------------
The following table provides a reconciliation of net debt for the periods below:
($000's) As at September As at December
30, 2009 31, 2008
-------------------------------------------------------------------------
Accounts receivable (5,823) (10,770)
Prepaid expenses (319) (693)
Accounts payable and accrued
liabilities 8,836 22,078
Long term debt 25,147 40,807
-------------------------------------------------------------------------
Net debt 27,841 51,422
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Boe amounts have been calculated using a conversion rate of six mcf of gas to one barrel of oil. The term boe may be misleading if used in isolation. A boe conversion ratio of one barrel of oil to six mcf of gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well head.
"Netbacks" are calculated by subtracting transportation costs, royalties payable, and operating costs from the average price received during the period.
Forward-looking Information
Certain information regarding ProspEx including, without limitation, management's assessment of future plans and operations, constitutes forward- looking information or statements under applicable securities law and necessarily involve assumptions regarding factors and risks that could cause actual results to vary materially, including, without limitation, assumptions and risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, royalty rates, imprecision of reserve estimates, environmental risks, competition, incorrect assessment of the value of acquisitions or dispositions, failure to realize the anticipated benefits of acquisitions and ability to access sufficient capital from internal and external sources.
The reader is cautioned that these factors and risks are difficult to predict and that the assumptions used in the preparation of such information, although considered reasonable by ProspEx at the time of preparation, may prove to be incorrect. Accordingly, readers are cautioned that the actual results achieved will vary from the information provided herein and the variations may be material. Readers are also cautioned that the foregoing list of assumptions, factors and risks is not exhaustive. Additional information on the foregoing assumptions, risks and other factors that could affect ProspEx's operations or financial results are included in ProspEx's public disclosure documents on file with Canadian securities regulatory authorities. In particular see the Risk Factors and Industry Conditions sections of ProspEx's most recent Annual Information Form. ProspEx's reports may be accessed through the SEDAR website (www.sedar.com), at ProspEx's website (www.psx.ca) or by contacting the Company directly. Consequently, there is no representation by ProspEx that actual results achieved will be the same in whole or in part as those set out in the forward-looking information.
Furthermore, the forward-looking information and statements contained in this MD&A are made as of the date of this MD&A, and ProspEx 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 required by law. The forward-looking information and statements contained herein are expressly qualified by this cautionary statement.
ProspEx Resources Ltd.
Consolidated Balance Sheets
(unaudited)
September December
(Stated in thousands of dollars) 30, 2009 31, 2008
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 5,823 10,770
Prepaid expenses 319 693
Future income tax asset (note 2) 26 -
Unrealized financial instrument gain (note 6) - 828
-----------------------
6,168 12,291
Property, plant and equipment, net 153,961 190,693
-----------------------
$ 160,129 202,984
-----------------------
-----------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 8,836 22,078
Current portion of future income tax
liability (note 2) - 240
Current portion of other liabilities (note 3) 221 -
Unrealized financial instrument loss (note 6) 91 -
-----------------------
9,148 22,318
Long-term debt (note 1) 25,147 40,807
Other liabilities (note 3) 250 -
Asset retirement obligation (note 4) 4,397 6,462
Future income tax liability (note 2) 5,452 9,119
-----------------------
Total liabilities 44,394 78,706
-----------------------
Shareholders' Equity
Common shares (note 5) 90,800 90,802
Common share performance warrants (note 5) 1,233 1,233
Contributed surplus (note 5) 7,423 6,758
Retained earnings 16,279 25,485
-----------------------
Total shareholders' equity 115,735 124,278
-----------------------
$ 160,129 202,984
-----------------------
-----------------------
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of (Loss) Earnings, Comprehensive (Loss) Earnings
and Retained Earnings
For the period ended
(unaudited)
Three Three Nine Nine
months months months months
(Stated in thousands ended ended ended ended
of dollars, except per September September September September
share amounts) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Revenue
Oil and gas $ 5,023 19,714 25,158 61,659
Unrealized financial
instrument (loss)
gain (note 6) (401) 8,277 (919) 977
Royalties (220) (4,597) (3,087) (12,215)
----------------------------------------------
4,402 23,394 21,152 50,421
----------------------------------------------
Expenses
Depletion, depreciation
and accretion 5,457 9,006 22,446 25,066
Operating 1,524 2,750 6,589 9,524
Transportation 203 322 823 1,042
General and administrative 900 904 2,657 2,560
Interest and bank charges 276 449 1,030 1,473
Stock-based compensation 124 236 332 667
Loss on subleasing (note 3) - - 524 -
----------------------------------------------
8,484 13,667 34,401 40,332
----------------------------------------------
(Loss) earnings before
income taxes (4,082) 9,727 (13,249) 10,089
Income taxes (note 2)
Future (reduction) (1,000) 2,804 (4,043) 3,015
----------------------------------------------
Net (loss) earnings and
comprehensive (loss)
earnings for the period (3,082) 6,923 (9,206) 7,074
Retained earnings,
beginning of period 19,361 18,076 25,485 17,925
----------------------------------------------
Retained earnings,
end of period $ 16,279 24,999 16,279 24,999
----------------------------------------------
----------------------------------------------
Net (loss) earnings
per share
Basic $ (0.05) 0.12 (0.16) 0.12
----------------------------------------------
----------------------------------------------
Diluted $ (0.05) 0.12 (0.16) 0.12
----------------------------------------------
----------------------------------------------
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of Cash Flows
For the periods ended,
(unaudited)
Three Three Nine Nine
months months months months
ended ended ended ended
(Stated in thousands September September September September
of dollars) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------
Operations
Net (loss) earnings
for the period $ (3,082) 6,923 (9,206) 7,074
Items not involving cash
Depletion, depreciation
and accretion 5,457 9,006 22,446 25,066
Stock-based compensation 124 236 332 667
Future income taxes
(reduction) (1,000) 2,804 (4,043) 3,015
Sublease loss - - 524 -
Rent inducement 161 - 161 -
Unrealized financial
instrument (gain) loss 401 (8,277) 919 (977)
Amortization of
sublease loss (62) - (62) -
Amortization of rent
inducement (21) - (21) -
Asset retirement
expenditures (9) (66) (885) (111)
-------------------------------------------------
1,969 10,626 10,165 34,734
Changes in non-cash
working capital 488 1,793 (3,980) 1,490
-------------------------------------------------
2,457 12,419 6,185 36,224
-------------------------------------------------
Financing
(Decrease) increase
in long-term debt 4,197 1,595 (15,660) 9,264
Issuance of common
shares (2) 257 (2) 1,675
-------------------------------------------------
4,195 1,852 (15,662) 10,939
-------------------------------------------------
Investments
Exploration and
development
expenditures (6,438) (12,693) (13,699) (38,691)
Proceeds on property
disposal - - 28,964 -
Property acquisition (194) (3,156) (1,697) (9,206)
Deposit on property
acquisition - - - 1,175
Other capital
expenditures (3) (1) (10) (159)
-------------------------------------------------
(6,635) (15,850) 13,558 (46,881)
Changes in non-cash
working capital (17) 1,579 (4,081) (282)
-------------------------------------------------
(6,652) (14,271) 9,477 (47,163)
-------------------------------------------------
Change in cash - - - -
Cash, beginning of
period - - - -
-------------------------------------------------
Cash, end of period $ - - - -
-------------------------------------------------
-------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2009 and 2008
(unaudited)
The interim unaudited consolidated financial statements of ProspEx
Resources Ltd. (the "Company" and/or "ProspEx") have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). The Company is engaged in the acquisition, exploration,
development and production of oil and natural gas in Canada.
The interim unaudited consolidated financial statements have been
prepared by management following the same accounting policies and methods
of computation as the audited consolidated financial statements for the
period ended December 31, 2008 except as described below. Preparation of
financial statements in conformity with Canadian GAAP requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual
results may differ from these estimates. In the opinion of management,
these interim consolidated financial statements contain all adjustments
of a normal and recurring nature to present fairly the Company's
financial position as at September 30, 2009 and the results of its
operations and cash flows for the three and nine months ended September
30, 2009. The disclosures included below are incremental to those
included with the annual consolidated financial statements except as
disclosed below. The interim consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto in the Company's annual report for the year ended
December 31, 2008.
1. LONG TERM DEBT
At September 30, 2009, the Company had a $40.0 million revolving
operating credit facility agreement. The facility revolves for 364-day
periods, at which time the Company can request approval from the lender
for an extension for an additional 364 day period or convert the
outstanding bank indebtedness to a one-year term loan. The facility is
subject to an annual review on May 31, 2010. The amount of the facility
is subject to a borrowing base test performed on a periodic basis by the
lenders, based primarily on reserves and using commodity prices estimated
by the lenders, as well as other factors. A decrease in the borrowing
base could result in a reduction of the credit facility which may require
a repayment to the lenders within sixty days of receiving notice of the
new borrowing base. The credit facility provides that advances may be
made by way of prime rate loans, guaranteed notes (bankers' acceptances)
and letters of credit. The credit facility is tested quarterly, in
arrears, and bears interest based on a sliding scale. The interest rate
varies depending on the Company's debt to cash flow ratio determined
quarterly on a grid system, with the grid ranging from debt to cash flow
ranges of lower than 1.0:1.0 to greater than 3.0: 1.0.
The facility is secured by a general security agreement conveying a first
floating charge over all real and personal property and after-acquired
assets. The Company is required to meet certain financial based covenants
under the terms of this facility. As at September 30, 2009, the Company
is in compliance with all covenants in accordance with the terms of the
credit facility.
The effective interest rate on the outstanding debt for the third quarter
of 2009 is approximately 2.90% annualized.
2. FUTURE INCOME TAXES
The provision for future income taxes differs from the amount computed by
applying the combined expected Canadian Federal and Provincial tax rates
to earnings before income taxes. The reasons for these differences are as
follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
(Loss) Earnings before
taxes $ (4,082) $ 9,727 $ (13,249) $ 10,089
Rate (%) 29.00% 29.50% 29.00% 29.50%
-------------------------------------------------------------------------
Computed expected
reduction for future
income taxes (1,184) 2,869 (3,842) 2,976
Increase (decrease) in
taxes resulting from:
Stock-based
compensation expensed 36 70 96 197
Effect of change in
tax rate 135 (135) (355) (304)
Other 13 - 58 146
-------------------------------------------------------------------------
Income tax reduction $ (1,000) $ 2,804 $ (4,043) $ 3,015
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The current future income tax asset at September 30, 2009 of $0.03
million (December 31, 2008 - $0.2 million liability) results from the
future tax impact of the unrealized financial instrument gain.
The components of the long term future income tax liability are as
follows:
September December
($000's) 30, 2009 31, 2008
-------------------------------------------------------------------------
Property, plant and equipment $ (6,365) $ (10,697)
Asset retirement obligation 1,099 1,773
Other liabilities 137 -
Share issue costs 177 305
-------------------------------------------------------------------------
(4,952) (8,619)
Valuation allowance (500) (500)
-------------------------------------------------------------------------
Future income tax liability $ (5,452) $ (9,119)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2009, the Company had estimated tax pools available to
reduce future taxable income of $130.8 million (December 31, 2008 -
$154.6 million).
Capitalized stock based compensation resulted in an increase to future
tax liabilities of $0.1 million during the nine month period (2008 -
$0.2 million).
3. OTHER LIABILITIES
September December
($000's) 30, 2009 31, 2008
-------------------------------------------------------------------------
Loss on sublease $ 524 $ -
Accretion expense
Expenses paid 9 -
(62) -
-------------------------------------------------------------------------
Total liability 471 -
Less current portion (221) -
-------------------------------------------------------------------------
Other liabilities $ 250 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The loss on sublease relates to the subleasing of a portion of the
Company's head office space. This provision represents the present value
at a 7.0% discount rate of the difference between the original head lease
rate and the estimated amounts recoverable under the sublease terms.
4. ASSET RETIREMENT OBLIGATION
The Company has estimated the net present value of its total asset
retirement obligation at September 30, 2009 to be $4.4 million (2008 -
$6.3 million) based on a total future liability of $10.6 million (2008 -
$22.0 million). The total future liability was estimated based on the
Company's net ownership interest in all wells and facilities, estimated
costs to reclaim and abandon the wells and facilities and the estimated
timing of when the costs will be incurred. These payments are expected to
be made over the next 33 years with the majority of costs incurred
between 2029 and 2038. A 7% interest rate and 2% inflation rate were used
to calculate the present value of the asset retirement obligation.
($000's)
-------------------------------------------------------------------------
Balance, at January 1, 2009 $ 6,462
Liabilities incurred 157
Liabilities settled (884)
Change in timing of estimated cash flows 917
Assets sold (2,570)
Accretion expense 315
-------------------------------------------------------------------------
Balance, at September 30, 2009 $ 4,397
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. SHAREHOLDERS' EQUITY
(a) Common Shares & Common Share Performance Warrants Issued
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Number of Number of
Shares/ Shares/
Warrants Amount Warrants Amount
(000's) ($000's) (000's) ($000's)
-------------------------------------------------------------------------
Common shares
Balance at the beginning
of the year 57,385 $ 90,802 56,453 $ 90,543
Flow-through shares tax
adjustment - - - (2,218)
Issued on exercise of
stock options - - 232 746
Shares issued on
exercise of warrants - - 698 1,404
Issue costs, net of
future tax reduction - (2) - (34)
Adjustment to contributed
surplus for options
exercised - - - 357
-------------------------------------------------------------------------
Balance at the end of
the period 57,385 $ 90,800 57,383 $ 90,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share performance
warrants
Balance at the beginning
of the period 2,016 $ 1,233 2,716 $ 1,661
Exercised - - (698) (427)
-------------------------------------------------------------------------
Balance at the end of
the period 2,016 $ 1,233 2,018 $ 1,234
-------------------------------------------------------------------------
Share Capital at the end
of the period $ 92,033 $ 92,032
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All outstanding performance warrants entitle the holder to acquire a
common share at a price of $1.40 and subsequently expired on October 1,
2009.
(b) Contributed Surplus
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Balance at the beginning
of the period $ 7,175 $ 6,119 $ 6,758 $ 5,614
Stock-based compensation 248 472 665 1,334
Exercise of stock
options - - - (357)
-------------------------------------------------------------------------
Balance at the end of
the period $ 7,423 $ 6,591 $ 7,423 $ 6,591
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Stock Options
Changes in outstanding stock options are summarized below:
September 30, 2009 September 30, 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
(000's) Price (000's) Price
-------------------------------------------------------------------------
Outstanding at beginning
of year 5,160 $ 3.44 4,656 $ 3.62
Granted 1,112 0.66 612 3.32
Exercised - - (232) 3.22
Forfeited (741) 3.51 (169) 4.30
-------------------------------------------------------------------------
Outstanding at end of
period 5,531 $ 2.88 4,867 $ 3.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable
at September 30, 2009:
Options outstanding Options exercisable
-------------------------------------------------------------------------
Number Weighted
outstanding average Number
at remaining Weighted exercisable Weighted
Range of period contractual average at period average
exercise end life exercise end exercise
price (000's) (years) price (000's) price
-------------------------------------------------------------------------
$ 0.61 -
$ 1.90 1,370 4.6 $ 0.77 - -
$ 1.91 -
$ 3.22 1,518 0.5 $ 3.19 1,351 $ 3.21
$ 3.23 -
$ 4.46 2,643 2.2 $ 3.79 1,894 $ 3.81
-------------------------------------------------------------------------
5,531 2.4 $ 2.88 3,245 $ 3.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
495,000 options were granted during the third quarter of 2009. The fair
value of options granted during the third quarter of 2009 was
$0.2 million. The fair value is determined using the Black-Scholes option
pricing model, with weighted average assumptions for grants as follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Risk free interest rate 1.93% n/a 1.88% 3%
Expected life 5 years n/a 5 years 5 years
Expected volatility 102% n/a 101% 47%
Expected dividend yield Nil n/a Nil Nil
Forfeiture rate 10% n/a 10% 10%
-------------------------------------------------------------------------
The estimated fair values of the options are being amortized against
earnings and capitalized to property, plant and equipment over the
vesting period. During the three months ended September 30, 2009, a total
of $0.1 million (2008 - $0.2 million) of stock-based compensation was
recorded against income and $0.1 million (2008 - $0.2 million) was
capitalized. During the nine months ended September 30, 2009, a total of
$0.3 million (2008 - $0.7 million) of stock-based compensation was
recorded against income and $0.3 million (2008 - $0.7 million) was
capitalized.
(d) Per Share Amounts
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Weighted average common
shares basic 57,385,162 57,200,496 57,385,162 56,943,470
Dilutive securities:
Stock options - - - 133,884
Performance warrants - 1,014,149 - 1,261,976
-------------------------------------------------------------------------
Diluted 57,385,162 58,214,645 57,385,162 58,339,330
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended September 30, 2009, all options and warrants
outstanding (2008 - 4,867,000) were excluded from the diluted
calculations as they were anti-dilutive. For the nine month year to date
all options were excluded due to their anti-dilutive impact (2008 -
3,761,400).
6. FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CAPITAL MANAGEMENT
STRATEGY
Overview
The Company has exposure to a number of risks from its use of financial
instruments including:
- Credit risk
- Liquidity risk
- Market risk
This note presents information about the Company's exposure to each of
the above risks and the Company's objectives, policies and processes for
measuring and managing risk, and the Company's management of capital.
Further quantitative disclosures are included throughout these financial
statements.
The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management framework. The Board has
implemented and monitors compliance with risk management policies.
The Company's risk management policies are established to identify and
analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to market conditions and
the Company's activities.
Credit Risk
Credit risk relates to the Company's receivables from joint venture
partners and petroleum and natural gas marketers and the risk of
financial loss if a customer, partner or counterparty to a financial
instrument fails to meet its contractual obligations. A substantial
portion of the Company's accounts receivable are with customers in the
energy industry and are subject to normal industry credit risk. The
Company generally grants unsecured credit but routinely assesses the
financial strength of its partners and marketers.
Receivables from petroleum and natural gas marketers are normally
collected on the 25th day of the month following production. The Company
sells the majority of its production to two petroleum and natural gas
marketers and therefore is subject to concentration risk. To date the
Company has not experienced any collection issues with its petroleum and
natural gas marketers. Joint venture receivables are typically collected
within one to three months of the joint venture bill being issued to the
partner. The Company attempts to mitigate the risk from joint venture
receivables by obtaining joint venturer approval of significant capital
expenditures prior to expenditure. The Company does not typically obtain
collateral from petroleum and natural gas marketers or joint venturers;
however in certain circumstances, it may elect to cash call a joint
venturer in advance of the work.
As at September 30, 2009 the Company's receivables consisted of
$2.8 million (December 31, 2008 - $4.3 million) from joint ventures,
$1.2 million (December 31, 2008 - $4.2 million) of receivables from
petroleum and natural gas marketers and $1.8 million (December 31, 2008 -
$2.3 million) of other receivables. Of the $5.8 million in total accounts
receivable, $0.3 million is aged over 90 days.
The carrying amount of accounts receivable and cash and cash equivalents
represents the maximum credit exposure. The Company does not have an
allowance for doubtful accounts as at September 30, 2009 and did not
provide for any doubtful accounts nor was it required to write-off any
receivables during the quarter ended September 30, 2009.
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 Company prepares annual 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. To
facilitate the capital expenditure program, the Company has a revolving
reserve based credit facility, as outlined in note 1. The Company also
attempts to match its payment cycle with collection of petroleum and
natural gas revenues on the 25th day of each month.
The following are the contractual maturities of financial liabilities and
associated interest payments due as at September 30, 2009:
-------------------------------------------------------------------------
Financial less than
Liability ($000's) 1 year 1 - 2 years 2 - 5 years Thereafter
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 8,836 - - -
Long-term debt - 25,147 - -
-------------------------------------------------------------------------
Total $ 8,836 25,147 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Market risk
Market risk is the risk that changes in market prices, such as foreign
exchange rates, commodity prices, and interest rates will affect the
Company's net earnings or the value of financial instruments. The
objective of market risk management is to manage and control market risk
exposures within acceptable limits, while maximizing returns.
The Company utilizes both financial derivatives and physical delivery
sales contracts to manage market risks. All such transactions are
conducted in accordance with the risk management policy that has been
approved by the Board of Directors.
Foreign Currency Exchange Risk
Foreign currency exchange rate risk is the risk that the fair value of
financial instruments or future cash flows will fluctuate as a result of
changes in foreign exchange rates. Although substantially all of the
Company's petroleum and natural gas sales are denominated in Canadian
dollars, the underlying market prices in Canada for petroleum and natural
gas are impacted by changes in the exchange rate between the Canadian and
United States dollars. Given that changes in exchange rate have an
indirect influence, the impact of changing exchange rates cannot be
accurately quantified. The Company had no forward exchange rate contracts
in place as at or during the three and nine months ended September 30,
2009.
Commodity Price Risk
Commodity price risk is the risk that the fair value of financial
instruments or future cash flows will fluctuate as a result of changes in
commodity prices. Commodity prices for petroleum and natural gas are
impacted by world economic events that dictate the levels of supply and
demand. The Company attempts to mitigate commodity price risk through the
use of financial derivative sales contracts. The following contracts were
in place as of September 30, 2009:
Amount Price
Type (GJ/day) Term ($/GJ at AECO) Type
---- -------- ---- -------------- ----
Fixed 2,500 Oct. 1-Oct. 31, 2009 $ 4.21 Physical
Costless
collar 1,500 Oct. 1-Oct. 31, 2009 $ 4.00-$ 5.23 Financial
Costless
collar 2,000 Nov. 1-Mar. 31, 2010 $ 4.25-$ 5.67 Financial
Fixed 2,000 Nov. 1-Dec. 31, 2009 $ 4.66 Physical
Subsequent to the quarter the Company entered into the following
financial instruments:
Amount Price
Type (GJ/day) Term ($/GJ at AECO) Type
---- -------- ---- -------------- ----
Fixed 2,000 Nov. 1-Dec. 31, 2009 $ 4.735 Financial
Put 3,000 Jan. 1-Mar. 31, 2010 $ 5.00 Financial
The contracts in place during the three months ended September 30, 2009
resulted in an unrealized loss of $0.4 million (September 30, 2008 -
$8.3 million gain) and a realized gain of $0.4 million (September 30,
2008 - $1.5 million loss). During the nine months ended September 30,
2009 the contracts in place resulted an unrealized loss of $0.9 million
(2008 - $1.0 million gain) and a realized gain of $1.7 million (2008 -
$2.8 million loss)
With respect to commodity prices, during the three and nine month period
ended September 30, 2009, a one dollar increase in the price per GJ of
natural gas relevant only to the Company's production dedicated to
derivative financial instruments would have resulted in a net earnings
decrease of $0.1 million. A $1.00 decrease in the price per GJ of natural
gas on the same production would have increased net earnings for the
three and nine months ended September 30, 2009 by $0.1 million. This
excludes any impact relating to unrealized financial instrument
gains/losses.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a
result of changes in market interest rates. The Company is exposed to
interest rate fluctuations on its credit facility which bears a floating
rate of interest. The Company had no interest rate swaps or financial
contracts in place as at or during the three and nine months ended
September 30, 2009. For the three and nine months ended September 30,
2009, a difference in the interest rate of 1% would change net earnings
after tax by an estimated $0.1 million and $0.2 million (2008 -
$0.1 million and $0.2 million), assuming all other variables are
constant.
Capital Management Strategy
The Company's policy on capital management is to maintain a prudent
capital structure to allow the Company to fund future development. The
Company considers its capital structure to include shareholders' equity,
bank debt, and working capital.
September 30, December 31,
($000's) 2009 2008
-------------------------------------------------------------------------
Shareholders' equity $ 115,735 $ 124,278
Long-term debt 25,147 40,807
Working capital deficiency excluding unrealized
financial instrument gain or losses and
associated future tax assets (liabilities) and
other liabilities 2,694 10,615
-------------------------------------------------------------------------
The Company manages its capital programs in order to maintain a prudent
capital structure as changes in economic conditions occur. The Company
may and has from time to time issued shares and adjusted spending to
manage current or projected operating cash flows and debt levels.
The Company monitors its capital base using the ratio of net debt to
annualized operating cash flow. This ratio is calculated as net debt, as
defined as long term debt less working capital (or plus working capital
deficiency) excluding unrealized financial instrument gain (loss) and
associated future tax assets (liabilities) and other liabilities; divided
by annualized cash flow from operations before changes in non-cash
working capital (based on the most recent operating quarter). The
Company's guideline is to maintain a ratio of approximately 1.0 to 1.0,
not exceeding 2.0 to 1.0. This ratio will fluctuate depending on
fluctuations of the commodity and business cycles. The Company prepares
annual capital expenditure budgets which are updated periodically to
monitor this ratio. The annual budget is approved by the Board of
Directors with updates reviewed by the Board throughout the year.
As at September 30, 2009 the Company's ratio of net debt to annualized
operating cash flow was 3.5 to 1.0, and compares to the ratio of 1.2 to
1.0 for the year ended December 31, 2008.
The Company's share capital is not subject to any external restrictions.
The bank debt facility has no restrictions other than the limitation of
borrowing under the facility on an annual basis and an adjusted working
capital covenant ratio of 1.0 to 1.0. As at September 30, 2009, the
Company is in compliance with all flow-through share expenditure
requirements as well as all bank facility requirements.
There have been no changes to the Company's capital management strategy
during the quarter ended September 30, 2009.
7. ADDITIONAL DISCLOSURES
Interest and Taxes Paid
Net cash interest paid during the quarter was $0.2 million (2008 - $nil).
Cash taxes paid during the period was $nil (2008 - $nil). On a year to
date basis, net cash interest paid to September 30, 2009 was $0.7 million
(2008 - $1.1 million). Year to date cash taxes paid to September 30, 2009
was $nil (2008 - $nil).
8. COMMITMENTS
The Company has committed to certain future payments as follows:
Payments due There-
($000's) 2009 2010 2011 2012 2013 after
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Long-term debt $ - 25,147 - - - $ -
Building lease 232 934 1,050 1,356 1,433 358
Process fees 95 379 63 - - -
Transportation 37 40 - - - -
Other 4 7 - - - -
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Total $ 368 26,507 1,113 1,356 1,433 $ 358
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%SEDAR: 00021285E
For further information: John Rossall, President & CEO, [email protected], (403) 268-3940; or George Yee, Vice President Finance & Chief Financial Officer, [email protected], (403) 268-3940
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