Verenex Energy Inc. - Third Quarter 2009 Operating and Financial Results
Verenex is a Canada-based international exploration and production company with a world-class discovered resource base and exploration portfolio in the Ghadames Basin in
Third Quarter 2009 Highlights
- On November 5, the Company announced it had entered into a definitive
arrangement agreement with the Libyan Investment Authority (the
"LIA") pursuant to which the LIA, through a subsidiary, has agreed to
acquire all of the Verenex shares issued and outstanding upon
completion of the transaction at a price per share in cash equal to
$7.09 plus an additional amount per share (the "Working Capital
Amount"). Based on preliminary estimates agreed to by the LIA,
Verenex expects the Working Capital Amount to be a nominal amount of
approximately $0.15 per share, assuming completion of the transaction
in mid-December.
Financial
- Net loss in the third quarter of 2009 from continuing operations was
($3.5 million) compared to net income of $0.2 million in the third
quarter of 2008.
- Funds flow from continuing operations in the third quarter of 2009
was ($1.5 million) compared to ($1.1 million) for the third quarter
of 2008.
- Working capital surplus at September 30, 2009 was $8.9 million
compared to $29.8 million as at December 31, 2008, including cash
amounting to $11.9 million (December 31, 2008 - $55.5 million) net of
restricted cash amounting to $nil million (December 31, 2008 -
$4.1 million). The decrease in working capital is due to the ongoing
investments in the Company's Libya operations.
Highlights
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
(unaudited) 30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Financial (thousands of Cdn $, except share and per share amounts)
Funds flow from
continuing
operations(1) (1,539) (1,122) (4,145) (2,775)
Net Income/(loss) from
continuing operations (3,513) 191 (8,819) (397)
Capital expenditures 3,255 16,486 23,665 53,100
Working capital surplus 8,897 46,362 8,897 46,362
Common shares
outstanding
Basic 44,677,291 44,267,891 44,677,291 44,267,891
Diluted 49,851,391 50,090,407 49,851,391 50,090,407
Weighted average common
shares outstanding
Basic 44,605,169 44,267,891 44,394,087 44,267,891
Diluted 44,605,169 47,326,910 47,172,681 47,454,810
Share trading
High 7.73 9.94 9.70 11.24
Low 5.87 6.81 5.87 6.81
Close 6.40 8.10 6.40 8.10
Discontinued Operations
Petroleum and natural
gas revenues (net) - 267 (8) 794
Production
Crude oil (bbls/d) - - - -
Natural gas liquids
(bbls/d) - 10 - 11
Natural gas (mcf/d) - 216 - 234
Boe/d (6:1)* - 46 - 51
Average reference price
WTI (US$ per bbl) - 117.98 - 113.29
Brent (US$ per bbl) - 114.78 - 111.02
AECO (Cdn$ per mcf) - 7.74 - 8.62
Average selling price
Crude oil (Cdn$ per
bbl) - - - -
Natural gas liquids
(Cdn$ per bbl) - 90.36 - 78.18
Natural gas (Cdn$ per
mcf) - 9.19 - 8.53
Average Operating
Netback (Cdn$
per BOE @ 6:1) - 63.08 - 57.27
(1) The above table includes non-GAAP measures, which may not be
comparable to other companies. See MD&A for further discussion.
Capital Expenditures (Cdn $)
During the third quarter of 2009, the Company invested approximately
Outlook
On
An irrevocable letter of credit in the amount of
The transaction will be completed by way of plan of arrangement (the "Arrangement"), to be submitted to the holders of Verenex securities (Verenex shares, options and performance warrants) for approval at a meeting scheduled for
All of the members of the Verenex Board, its executive officers and its major shareholder, Vermilion Resources Ltd. (representing in aggregate approximately 45.2% of the common shares on a fully diluted basis), have entered into voting support agreements pursuant to which they have agreed to vote their securities in favour of the Arrangement.
This press release contains forward-looking financial and operational information, including but not limited to proposed budgets, earnings, funds flow, cash reserves and capital investment projections. These projections are based on current expectations and are subject to a number of risks and uncertainties that could materially affect the results. These risks include, but are not limited to, risks associated with obtaining regulatory approvals; the uncertainty associated with negotiating with governments; risks associated with the oil and gas industry (e.g. financing; operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections in relation to production, costs and expenses; health, safety and environmental risks; and, the uncertainty of resource estimates), the ability to attract and retain key personnel, the risk of commodity price and foreign exchange rate fluctuations and the risk associated with international activity. Due to the risks, uncertainties and assumptions inherent in forward-looking statements, prospective investors in the company's securities should not place undue reliance on these forward-looking statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (MD&A), dated
Additional information relating to the Company is available on SEDAR at www.sedar.com.
PROPOSED TRANSACTION
On
An irrevocable letter of credit in the amount of
The transaction will be completed by way of plan of arrangement (the "Arrangement"), to be submitted to the holders of Verenex securities (Verenex shares, options and performance warrants) for approval at a meeting scheduled for
All of the members of the Verenex Board, its executive officers and its major shareholder, Vermilion Resources Ltd. (representing in aggregate approximately 45.2% of the common shares on a fully diluted basis), have entered into voting support agreements pursuant to which they have agreed to vote their securities in favour of the Arrangement.
FORWARD-LOOKING INFORMATION
This MD&A contains forward-looking financial and operational information, including but not limited to proposed budgets, earnings, funds flow, cash reserves and capital investment projections. These projections are based on current expectations and are subject to a number of risks and uncertainties that could materially affect the results. These risks include, but are not limited to, risks associated with obtaining regulatory approvals; the uncertainty associated with negotiating with governments; risks associated with the oil and gas industry (e.g. financing; operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of estimates and projections in relation to production, costs and expenses; health, safety and environmental risks; and, the uncertainty of resource estimates), the ability to attract and retain key personnel, the risk of commodity price and foreign exchange rate fluctuations and the risk associated with international activity. Due to the risks, uncertainties and assumptions inherent in forward-looking statements, prospective investors in the company's securities should not place undue reliance on these forward-looking statements.
NON-GAAP MEASURES
Included in this report are references to terms commonly used in the oil and gas industry, such as funds flow and funds flow per share which is expressed before changes in non-cash working capital and are used by the Company to analyze operating performance, leverage and liquidity. These terms are not defined by GAAP. Consequently, these are referred to as non-GAAP measures.
OPERATING RESULTS
Asset Valuation
The Company performs a review for asset impairment as required by the Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent upon an independent reservoir engineer's assessment of the deliverability and resources associated with certain wells and the outlook for world prices for oil and natural gas.
Revenues
On
Interest of
The foreign exchange loss for the third quarter of 2009 was
Stock Compensation
For the three and nine months ended
The Company received approval from the Shareholders at its
General and Administration ("G&A")
The Company capitalized
Effects of Exchange Rate Fluctuations
The Company's operations are conducted primarily in jurisdictions where the
Depletion and Depreciation
Depletion and depreciation of
RELATED PARTY TRANSACTIONS
On
Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion Energy Trust ("VET"), which is a significant shareholder in Verenex. VREP, as contract operator in
Verenex entered into a Technical and Administrative Services Agreement with Vermilion on
LIQUIDITY AND CAPITAL RESOURCES
The Company has completed a review of its 2009 operating and investment programs and, in consultation with its
The Company issued two letters of credit ("LC's") relating to the signing of two long-term drilling contracts that back-stop early termination provisions, both of which have now expired. The first LC to ODE required cash collateral of US
The Company had a working capital surplus of
All accounts receivable have been assessed for credit risk and no allowance for doubtful accounts is necessary at this time.
Accounts payable and accrued liabilities have decreased since
Verenex is listed on the
CRITICAL ACCOUNTING ESTIMATES
Depletion and Depreciation
The amounts recorded for depletion and depreciation of property, plant and equipment are based on estimates. By their nature, these estimates are subject to measurement uncertainty and the effect on the consolidated financial statements from changes in such estimates in future years could be significant.
The Company performs a review for asset impairment as required by the Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent upon an independent reservoir engineer's assessment of the deliverability and resources associated with certain wells and the outlook for world prices for oil and natural gas.
Stock-Based Compensation
The Company accounts for all employee stock-based compensation pursuant to the amended recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. The stock-based compensation recorded by the Company is a critical accounting estimate because of the value of compensation recorded and assumptions required to calculate the compensation expense.
NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING STANDARDS FOR 2008 AND 2009
On
- Section 3862 - "Financial Instruments - Disclosures", describes the
required disclosure for the assessment of the significance of
financial instruments for an entity's financial position and
performance and of the nature and extent of risks arising from
financial instruments to which the entity is exposed and how the
entity manages those risks. This section and Section 3863, "Financial
Instruments - Presentation" replaced Section 3861, "Financial
Instruments - Disclosure and Presentation".
- Section 3863 - "Financial Instruments - Presentation", establishes
standards for presentation of financial instruments and non-financial
derivatives.
- Section 1535 - "Capital Disclosures", establishes standards for
disclosing information about an entity's capital and how it is
managed. It describes the disclosure requirements of the entity's
objectives, policies and processes for managing capital, the
quantitative data relating to what the entity regards as capital,
whether the entity has complied with capital requirements, and, if it
has not complied, the consequences of such non-compliance.
- The CICA has amended Section 1400, "General Standards of Financial
Statement Presentation", to include requirements to assess and
disclose the Company's ability to continue as a going concern. The
adoption of this new section did not have an impact on the
consolidated financial statements.
Goodwill and Intangible Assets
In
DISCLOSURE CONTROLS AND PROCEDURES OVER FINANCIAL REPORTING
The Company evaluated the effectiveness and design of its disclosure controls and procedures for the three months ended
The Company's financial reporting procedures and practices have enabled the certification of Verenex Energy Inc.'s annual filings in compliance with National Instrument 52-109 "Certification of Disclosure in Issuer's Annual and Interim Filings". Management has designed such internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements and other annual filings in accordance with Canadian Generally Accepted Accounting Principles.
There have been no significant changes in the third quarter of 2009 to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
The Company's management, including the CEO and CFO, conducted an evaluation of the effectiveness of its internal controls over financial reporting as of
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
On
The Company commenced its IFRS conversion project in 2008, which consists of three phases - scoping, evaluation and design, implementation and review. The Company has commenced its first phase of the project, which includes project initiation and awareness, identification of high-level differences between Canadian GAAP and IFRS and project planning and resourcing. A high level scoping exercise has been completed which has identified priority areas and a high-level plan has been prepared.
A detailed assessment of the impact of adopting IFRS on the Company's consolidated financial statements, accounting policies, information technology and data systems, internal controls over financial reporting, disclosure controls and procedures has not been completed. The impact of such elements will depend on the particular circumstances prevailing at the adoption date and the IFRS accounting policy choices the Company makes. The Company has not completed its quantification of the effects of adopting IFRS.
The financial performance and financial position as disclosed in our Canadian GAAP financial statements may be significantly different when presented in accordance with IFRS.
Verenex Energy Inc.
Consolidated Balance Sheets
(thousands of Cdn $)
unaudited
September 30, December 31,
2009 2008
-------------------------------------------------------------------------
Assets
Current assets
Cash $ 11,889 $ 55,522
Accounts receivable 262 402
Prepaid expenses and others 297 753
------------------------
12,448 56,677
Restricted cash (Note 11) - 4,144
Capital assets (Note 4) 176,716 156,980
------------------------
$ 189,164 $ 217,801
------------------------
------------------------
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 2,687 $ 23,950
Joint venture payable 864 2,916
Due to related party (Note 5) - 37
------------------------
3,551 26,903
Joint venture payables related to
restricted cash (Note 11) - 2,072
Stock compensation liability (Note 7) 3,168 1,835
------------------------
6,719 30,810
------------------------
Shareholders' equity
Share capital (Note 6) 205,432 203,431
Contributed surplus (Note 6) 10,634 9,646
Deficit (33,621) (26,086)
------------------------
182,445 186,991
------------------------
$ 189,164 $ 217,801
------------------------
------------------------
See accompanying notes to the Consolidated Financial Statements
Verenex Energy Inc.
Consolidated Statements of Loss/Income and Comprehensive
Loss/Income and Deficit
(thousands of Cdn $, except share and per share amounts)
unaudited
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Restated Restated
(Note 12) (Note 12)
------------------------------------------------
Revenue
Interest income $ 10 $ 301 $ 112 $ 1,481
------------------------------------------------
$ 10 $ 301 $ 112 $ 1,481
------------------------------------------------
Expenses
General and
administration $ 1,326 $ 1,340 $ 3,607 $ 2,675
Stock based
compensation (Note 7) 1,403 644 3,620 2,354
Depletion and
depreciation (Note 4) 74 96 246 283
Foreign exchange
loss/(gain) 720 (1,983) 1,410 (3,448)
------------------------------------------------
$ 3,523 $ 97 $ 8,883 $ 1,864
------------------------------------------------
(Loss)/income before
taxes and discontinued
operations (3,513) 204 (8,771) (383)
Taxes - 13 48 14
------------------------------------------------
Net (loss)/income from
continuing operations (3,513) 191 (8,819) (397)
Net income from
discontinued operations
(Note 12) - 124 1,284 461
------------------------------------------------
Net (loss)/Income and
comprehensive (loss)/
Income (3,513) 315 (7,535) 64
Deficit, beginning
of period (30,108) (28,380) (26,086) (28,129)
------------------------------------------------
Deficit, end of period $ (33,621) $ (28,065) $ (33,621) $ (28,065)
------------------------------------------------
------------------------------------------------
Per share amounts
(Note 8)
Net (loss)/income from
continuing operations
Basic $ (0.08) $ 0.01 $ (0.20) $ (0.01)
Diluted $ (0.08) $ 0.01 $ (0.20) $ (0.01)
Net income from
discontinued operations
Basic and Diluted $ - $ - $ 0.03 $ 0.01
Net (loss)/income
per share
Basic and Diluted $ (0.08) $ 0.01 $ (0.17) $ -
Weighted average number
of shares outstanding
(Note 8):
Basic 44,605,169 44,267,891 44,394,087 44,267,891
------------------------------------------------
------------------------------------------------
Diluted 44,605,169 47,326,910 47,172,681 47,454,810
------------------------------------------------
------------------------------------------------
See accompanying notes to the Consolidated Financial Statements
Verenex Energy Inc.
Consolidated Statements of Cash Flows
(thousands of Cdn $)
unaudited
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
-------------------------------------------------------------------------
Cash (used in) provided by:
Operating activities:
Net (loss)/income from
continuing operations $ (3,513) $ 191 $ (8,819) $ (397)
Items not affecting cash:
Stock based
compensation 1,403 644 3,620 2,354
Depletion and
depreciation 74 96 246 283
Unrealized foreign
exchange gain(loss) 458 (1,542) 861 (4,779)
------------------------------------------------
(1,578) (611) (4,092) (2,539)
Cash Settlement
- RSU/PSU (162) - (649) -
Changes in non-cash
operating working
capital (Note 10) 201 (511) 596 (236)
------------------------------------------------
Cash used in continuing
operations (1,539) (1,122) (4,145) (2,775)
------------------------------------------------
Cash provided/(used)
by discontinued
operations - 248 (32) 747
------------------------------------------------
Cash used in operations (1,539) (874) (4,177) (2,028)
------------------------------------------------
Investing activities:
Acquisition and
expenditures on
petroleum and natural
gas properties (3,255) (16,486) (23,665) (53,100)
Changes in non-cash
investing working
capital (Note 10) (5,629) (4,429) (23,315) (16,655)
Restricted cash - 1,037 4,144 2,928
Joint venture payables
related to restricted cash - (371) (2,072) (1,227)
Discontinued
operations (Note 12) - (154) 5,000 (145)
------------------------------------------------
(8,884) (20,403) (39,908) (68,199)
------------------------------------------------
Financing activities:
Issue of common shares
for cash 958 - 1,352 -
Changes in non-cash
financing working
capital (Note 10) - (361) (37) (1,046)
------------------------------------------------
958 (361) 1,315 (1,046)
------------------------------------------------
Foreign exchange gain/
(loss) on cash held in a
foreign currency (458) 1,248 (863) 4,309
------------------------------------------------
Net decrease in cash (9,923) (20,390) (43,633) (66,964)
Cash, beginning of period 21,812 75,928 55,522 122,502
------------------------------------------------
Cash, end of period $ 11,889 $ 55,538 $ 11,889 $ 55,538
------------------------------------------------
------------------------------------------------
Cash taxes paid $ - $ 3 $ 8 $ 14
------------------------------------------------
------------------------------------------------
Cash interest received $ 10 $ 301 $ 112 $ 1,481
------------------------------------------------
------------------------------------------------
See accompanying notes to the Consolidated Financial Statements
Verenex Energy Inc.
Notes to the Consolidated Financial Statements
For the Three and Nine Months ended September 30, 2009
(thousands of Cdn $, except as noted)
unaudited
1. Summary of Significant Accounting Policies and Basis of Presentation
Verenex Energy Inc. (the "Company" or "Verenex") was established on
June 29, 2004, by way of a "reverse takeover" pursuant to an
amalgamation agreement dated May 27, 2004. Verenex is a public
company listed on the Toronto Stock Exchange on April 19, 2005.
The interim consolidated financial statements have been prepared by
management in accordance with Canadian Generally Accepted Accounting
Principles on a consistent basis with the audited consolidated
financial statements for the year ended December 31, 2008. Certain
disclosures in the interim financial statements may not conform in
all respects to the requirements of generally accepted accounting
principles for annual financial statements. The interim consolidated
financial statements should be read in conjunction with the
consolidated financial statements as at and for the year ended
December 31, 2008.
2. Changes in Accounting Policies
Goodwill and Intangible Assets
In February 2008, the CICA issued Section 3064, Goodwill and
intangible assets, replacing Section 3062, Goodwill and other
intangible assets and Section 3450, Research and development costs.
Various changes have been made to other sections of the CICA Handbook
for consistency purposes. The new Section will be applicable to
financial statements relating to fiscal years beginning on or after
October 1, 2008. Accordingly, the Company adopted the new standard
for its fiscal year beginning January 1, 2009. It establishes
standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards
concerning goodwill are unchanged from the standards included in the
previous Section 3062. The adoption of this new Section has no
material impact on the Company's consolidated financial statements at
this time.
3. Financial Risk and Capital Management
Financial Risk
The Company is exposed to financial risk on its financial instruments
including cash, restricted cash, accounts receivable, joint venture
receivable/payable, deposits, accounts payable and due to/from
related party. The Company manages its exposure to financial risks by
operating in a manner that minimizes its exposure to the extent
practical. The main financial risks affecting the Company are
discussed below:
Credit Risk
Credit risk arises when a failure by counter parties to discharge
their obligations could reduce the amount of future cash inflows from
financial assets on hand at the balance sheet date. The Company has
policies in place to ensure that transactions are made to parties
with an appropriate credit history and monitors on a continuous basis
the aging profile of its receivables.
Accounts receivables are presented in the balance sheet net of any
allowances for doubtful receivables. In addition, when joint
operations are conducted on behalf of a joint venture partner
relating to capital expenditures, the costs of such operations are
paid for in advance to the Company by way of a cash call by the
partner of the operations being conducted.
The majority of the Company's financial assets are cash. The credit
risk on cash is considered by management to be limited because the
counterparties are financial institutions with high credit ratings
assigned by international credit rating agencies.
The maximum exposure to credit risk is represented by the carrying
amount of each financial asset in the balance sheet. On a quarterly
basis, the Company assesses whether there should be any impairment of
the financial assets. There are no material financial assets that the
Company considers past due and there is no impairment of any
financial assets as at September 30, 2009.
Market Risk
Foreign Exchange Risk
Currency risk is the risk that the value of financial instruments
will fluctuate due to changes in foreign exchange rates. Currency
risk arises when future commercial transactions and recognized assets
and liabilities are denominated in a currency that is not the
Company's measurement currency. The Company is exposed to foreign
exchange risk arising from various currency exposures primarily the
US dollar in relation to the Canadian dollar. The Company's
management monitors the exchange rate fluctuations on a regular
basis.
The Company operated in three geographic areas and is exposed to
foreign currency risk due to changes in foreign currency exchange
rates, primarily as measured against the US dollar. The Company does
not use currency derivative instruments to manage the Company's
exposure to foreign currency fluctuations.
At September 30, 2009, the carrying amount of the Company's foreign
currency denominated monetary assets was approximately $4.5 million
and monetary liabilities were $2.3 million. Assuming all other
variables remain constant, a fluctuation of one cent in the exchange
rate of the US dollar to the Canadian dollar would result in an
increase or decrease on profit or loss of approximately $0.1 million.
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial
instrument or cash flows associated with the instrument will
fluctuate due to changes in market interest rates. The Company is
exposed to interest rate risk as it maintains significant cash
balances in interest bearing bank accounts. The Company monitors
these risks on a regular basis. The Company currently does not use
interest rate hedges or fixed interest rate contracts to manage the
Company's exposure to interest rate fluctuations.
Assuming all other variables remain constant, a fluctuation of 1% in
the interest rates would result in an annual increase or decrease on
profit or loss of approximately $0.1 million.
Liquidity Risk
Liquidity risk includes the risk that, as a result of the Company's
operational liquidity requirements:
- The Company will not have sufficient funds to settle a transaction
on the due date;
- The Company will be forced to sell financial assets at a value
which is less than what they are worth; or
- The Company may be unable to settle or recover a financial asset
at all.
The ultimate responsibility for liquidity risk rests with the Board
of Directors, which has built a liquidity risk management framework
for the management of the Company's short, medium and long-term
funding and liquidity management requirements.
The Company's cash requirements and balances are projected based on
forecasted operations and capital expenditures. The Company plans to
meet these requirements through the mix of available funds, equity
financing on a required basis, project debt financing and cash, which
may be provided by the exercise of warrants and share options in the
future. The Company also mitigates liquidity risk by maintaining an
insurance program to minimize exposure to insurable losses.
Financial liabilities are comprised of accounts payable, accrued
liabilities, joint venture payable, due to related party and stock
compensation liability. Accounts payable, accrued liabilities, joint
venture payable and due to related party are expected to mature in
less than one year. The stock compensation liability is expected to
be settled over the periods consistent with the Stock Appreciation
Rights, Performance Share Unit and Restricted Share Unit vesting
periods. The Stock Appreciation Rights, Performance Share Unit and
Restricted Share Unit are valued at the end of each period based on
the closing share price.
While Verenex manages its operations in order to minimize exposure to
these risks, the Company has not entered into any derivatives or
contracts to hedge or otherwise mitigate these fluctuations.
Capital Management
The Company manages its capital to ensure that the Company and its
subsidiaries will be able to continue as a going concern and to
provide a return to shareholders through exploring, appraising and
developing its assets. As the Company is in the early stages of these
activities, it will meet its capital requirements though the sale of
common shares and issuance of debt.
The Company defines capital as total equity plus debt, which totals
$182.4 million as at September 30, 2009. Total equity is comprised of
share capital, contributed surplus and deficit. The Company currently
has no debt. The Company is not subject to any externally imposed
capital requirements.
4. Capital Assets
September 30, 2009
-------------------------------------------------------------------------
Accumulated
Depletion,
Depreciation & Net
Cost Amortization Book Value
--------------------------------------------
Petroleum and natural gas
properties and equipment $ 175,650 $ - $ 175,650
Furniture and equipment 2,300 1,234 1,066
--------------------------------------------
$ 177,950 $ 1,234 $ 176,716
--------------------------------------------
--------------------------------------------
December 31, 2008
-------------------------------------------------------------------------
Accumulated
Depletion,
Depreciation & Net
Cost Amortization Book Value
--------------------------------------------
Petroleum and natural gas
properties and equipment $ 168,065 $ 12,393 $ 155,672
Furniture and equipment 2,296 988 1,308
--------------------------------------------
$ 170,361 $ 13,381 $ 156,980
--------------------------------------------
--------------------------------------------
The Company capitalized $1.3 million and $4.3 million of general and
administrative costs directly related to exploration and development
activities for the three and nine months ended September 30, 2009
(2008 - $1.3 million and $3.1 million).
On January 28, 2009, the Company entered into an arrangement with
Vermilion and its wholly owned France and Denmark subsidiaries to
sell the Bottrel GORR and the Verenex Danish and French subsidiaries
for $5.0 million. The transaction closed on February 27, 2009. (See
Note 12)
Depletion and depreciation of $0.1 million and $0.2 million for the
three and nine months ended September 30, 2009 (2008 - $0.2 million
and $0.6 million) relate to the depreciation of the Canadian and
Libyan furniture and equipment. The 2008 expense includes depletion
on the Bottrel GORR. At September 30, 2009, approximately $175.7
million of undeveloped properties in Libya (December 31, 2008 - $152
million) were excluded from the depletion calculation.
5. Related Party Transactions
On January 28, 2009, the Company entered into an arrangement with
Vermilion and its wholly owned France and Denmark subsidiaries to
sell the Bottrel GORR and the Verenex Danish and French subsidiaries
for $5.0 million. The transaction closed on February 27, 2009. All
oil and gas revenues for 2009 relate to differences between accruals
for the Bottrel GORR at December 31, 2008 and the actuals reported in
2009. (See Note 12)
Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion
Energy Trust ("VET"), which is a significant shareholder in Verenex.
VREP, as contract operator in France, paid for various expenditures
on behalf of Verenex in 2008. These transactions were measured at the
exchange amount being the consideration established and agreed to by
the related parties. All transactions were undertaken under the same
terms and conditions as transactions with non-related parties.
Amounts due to related parties at September 30, 2009 are $nil
(December 31, 2008 - $0.1 million).
Verenex entered into a Technical and Administrative Services
Agreement with Vermilion Resources Limited ("Vermilion") on June 28,
2004, for the provision of certain financial and administrative
services by Vermilion. The Agreement was automatically renewed for
one-year periods, subject to termination or three months notice.
Effective April 1, 2008 the monthly charge was reduced to five
thousand dollars per month. During the nine months ended September
30, 2009 Verenex was billed ten thousand dollars (September 30, 2008
- sixty thousand dollars) for services provided under this Agreement.
The Agreement was terminated effective February 27, 2009.
6. Share Capital
Authorized
Unlimited number of common shares
Unlimited number of preferred shares
Issued Number of Shares Amount
---------------------------------------------------------------------
Opening balance as
at January 1, 2009 44,267,891 $ 203,431
Issued for cash on options exercised 409,400 1,352
Transferred from contributed surplus on
option exercise - 649
-----------------------------
Balance as at September 30, 2009 44,677,291 $ 205,432
-----------------------------
-----------------------------
September 30, December 31,
2009 2008
---------------------------------------------------------------------
Opening balance $ 9,646 $ 7,592
Stock compensation expense related to
options and warrants 1,637 2,678
Reversed on forfeiture of options - (624)
Transferred to share capital on
options exercised (649) -
-----------------------------
Ending balance $ 10,634 $ 9,646
-----------------------------
-----------------------------
7. Stock Compensation Plans
The Company has a stock option plan that allows the directors,
officers and employees of the Company to be granted rights to acquire
common shares of the Company. The Company has a "rolling" stock
option plan that reserves a maximum of 10% of the aggregate number of
issued and outstanding common shares. The term of option grants is up
to ten years.
Stock option exercise prices are equal to the market price for the
common shares on the date immediately prior to the date the stock
option is granted. Stock options currently granted vest over three
years and expire five years after the grant date.
There were no options granted during 2008 or 2009.
The following table summarizes information about the stock option
plan:
---------------------------------------------------------------------
Weighted
Average
Number of Stock Exercise
Options Price
-----------------------------
Opening balance, January 1, 2009 3,706,000 $ 4.57
Exercised (409,400) 3.30
-----------------------------
Closing balance, September 30, 2009 3,296,600 $ 4.73
-----------------------------
-----------------------------
The Company has also issued 1,877,500 performance warrants with a
weighted average exercise price of $2.55. All of the performance
warrants have vested and are exercisable. They expire on June 28,
2011.
The Company received approval from the Shareholders at its August 10,
2009 AGM to modify the terms of 896,200 options previously granted.
The life of these options was extended by 20 months to March 1, 2011.
The Company has completed a calculation of the incremental value of
this extension and recognized a $0.2 million stock compensation
expense during the third quarter ending September 30, 2009.
No performance warrants were issued in 2008 or 2009.
On January 29, 2008, the Company repriced the existing stock options
granted to non-officers and non-insiders to $8.90 from exercise
prices ranging from $12.75 to $14.45 to reflect the market condition
and pricing and to retain key employees. No changes were made to the
vesting dates of these options. 750,000 options were repriced to
$8.90.
For the three and nine months ended September 30, 2009, non-cash
stock compensation expense related to stock options and performance
warrants was $0.6 million and $1.6 million (2008 - $0.4 million and
$1.9 million).
The Company has a Stock Appreciation Rights ("SAR's") Plan for
directors, officers, employees and consultants adopted in 2005 with
first awards issued in December 2005. The Company issued 495,000
SAR's during the year ended December 31, 2008. Under the terms of the
SAR's Plan, the Company will pay a cash amount to any grantee of the
cash value of the market appreciation of such SAR's exercised,
measured as the difference between the SAR exercise price and the
average closing price of the common shares of the Company for the
five trading days preceding the date of exercise to a maximum defined
price under the SAR's agreement. Compensation expense on unexercised
rights is determined based on the market price at the end of each
reporting period and is deferred and recognized in income over the
vesting period of the rights. For the three and nine months ended
September 30, 2009, 5,000 and 115,000 SAR's were exercised. As at
September 30, 2009, there were 553,333 SAR's outstanding.
The Company has a Performance Share Unit Award Incentive Plan for
directors, officers, employees and consultants adopted in 2007 with
first awards issued in January 2008. The Company issued 71,000
Performance Share Units ("PSU's") during the year ended December 31,
2008. Under the terms of the PSU Plan, the Board may elect, in its
sole discretion, to pay to any grantee of a Unit Award in lieu of
delivering all or any part of the Common Shares that would be
otherwise delivered to the grantee on such vesting date (multiplied
by a performance factor which is reviewed on a quarterly basis), a
cash amount equal to the aggregate fair market value of such Common
Shares that would otherwise be issued on such vesting date in
consideration for surrender by the grantee to the Corporation of the
right to receive all or any part of the Common Shares under such Unit
Award. Compensation expense on unexercised rights is determined based
on the market price at the end of each reporting period and is
deferred and recognized in income over the vesting period of the
rights. For the three and nine months ended September 30, 2009, nil
and 35,500 were exercised. As at September 30, 2009, there were
35,500 PSU's outstanding.
The Company has a Restricted Share Unit Award Incentive Plan for
directors, officers, employees and consultants adopted in 2008 with
first awards issued in October 2008. The Company issued 513,000
Restricted Share Units ("RSU's") during the year ended December 31,
2008. Under the terms of the RSU Plan, the Company will pay a cash
amount to any grantee of a Unit Award equal to the aggregate fair
market value of an equivalent number of Common Shares on the vesting
date multiplied by a performance factor, which is reviewed on a
quarterly basis. Compensation expense on unexercised rights is
determined based on the market price at the end of each reporting
period and is deferred and recognized in income over the vesting
period of the rights. For the three and nine months ended September
30, 2009, 13,000 and 20,500 were exercised. As at September 30, 2009,
there were 492,500 RSU's outstanding.
For the three and nine months ended September 30, 2009, the stock
compensation expense related to SAR's, PSU's and RSU's was $0.8
million and $2.0 million (2008 - $0.2 million and $0.5 million).
8. Per Share Amounts
For the For the For the For the
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
number of common
shares outstanding 44,605,169 44,267,891 44,394,087 44,267,891
Shares issuable
pursuant to stock
options - 1,740,996 1,515,873 1,837,437
Shares issuable
pursuant to
performance
warrants - 1,318,023 1,262,721 1,349,482
------------------------------------------------
Weighted average
number of diluted
common shares
outstanding 44,605,169 47,326,910 47,172,681 47,454,810
------------------------------------------------
------------------------------------------------
The weighted average diluted shares outstanding include all stock
options in the money from the date of grant or the beginning of the
period. The weighted average diluted shares include the performance
warrants which are treated as contingently issuable shares and are
included from the beginning of the period that all of the conditions
for issue were satisfied.
The impact of options and performance warrants is not included in the
calculation of net loss from continuing operations and net loss per
share in 2009 as they would be anti-dilutive.
9. Segmented Information
The Company operated in three different geographical locations until
the sale of assets in the first quarter of 2009 (see Note 12) and
previously disclosed key financial data based on those jurisdictions.
With the sale of the assets resulting in there being discontinued
operations for the Canada and France/Barbados subsidiaries, the
historical segmented information has been restated to reflect the
Canadian corporate operations separate from the Libyan operations.
Where not specifically identified, income statement line items, such
as interest revenue, relate to Canada. Any allocations of costs
between segments are done at cost and based on time allocated to the
various projects.
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------------------------
Interest Income:
Canada $ 10 $ 264 $ 102 $ 1,244
Libya - 37 10 237
------------------------------------------------
$ 10 $ 301 $ 112 $ 1,481
------------------------------------------------
------------------------------------------------
Depletion &
depreciation:
Canada $ 4 $ 182 $ 103 $ 449
Libya 70 38 143 120
------------------------------------------------
$ 74 $ 220 $ 246 $ 569
------------------------------------------------
------------------------------------------------
For the For the For the For the
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
Foreign exchange
(gain)/loss:
Canada $ 635 $ (987) $ 638 $ (1,959)
Barbados (861) (304) (838) 16
Libya 946 (692) 1,610 (1,505)
------------------------------------------------
$ 720 (1,983) $ 1,410 $ (3,448)
------------------------------------------------
------------------------------------------------
Net income/(loss):
Canada $ (3,381) $ (741) $ (7,825) $ (1,889)
Barbados 854 233 720 (136)
Libya (986) 699 (1,714) 1,628
------------------------------------------------
$ (3,513) $ 191 $ (8,819) $ (397)
------------------------------------------------
------------------------------------------------
Cash flows
generated (used in)
from operations :
Canada $ (1,901) $ (1,353) $ (4,109) $ (2,199)
Barbados 860 218 736 (193)
Libya (498) 13 (772) (383)
------------------------------------------------
$ (1,539) $ (1,122) $ (4,145) $ (2,775)
------------------------------------------------
------------------------------------------------
Capital expenditures:
Canada $ - $ 154 $ - $ 145
Libya 3,255 16,486 23,665 53,100
------------------------------------------------
$ 3,255 $ 16,640 $ 23,665 $ 53,245
------------------------------------------------
------------------------------------------------
All costs related to production, transportation and impairment write-
downs relate to the France properties.
September 30, December 31,
2009 2008
---------------------------------------------------------------------
Identifiable assets:
Canada $ 9,570 $ 28,856
France/Barbados - 1,512
Libya 179,594 187,433
------------------------
$ 189,164 $ 217,801
------------------------
------------------------
10. Statements of Cash Flow
Changes in non-cash working capital:
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
---------------------------------------------------------------------
Accounts receivable $ 1 $ (51) $ 140 $ 30
Prepaid expenses
and other 200 (460) 456 (266)
Joint venture
receivable/payable (2,916) (5,250) (2,052) (10,524)
Accounts payable and
accrued liabilities (2,713) 821 (21,263) (6,131)
Due to related party - (361) (37) (1,046)
------------------------------------------------
$ (5,428) $ (5,301) $ (22,756) $ (17,937)
------------------------------------------------
Changes in non-cash
working capital
relating to:
Operating
activities $ 201 $ (511) $ 596 $ (236)
Investing
activities (5,629) (4,429) (23,315) (16,655)
Financing
activities - (361) (37) (1,046)
------------------------------------------------
$ (5,428) $ (5,301) $ (22,756) $ (17,937)
------------------------------------------------
11. Restricted Cash
The Company issued two letters of credit ("LC's") relating to the
signing of two long-term drilling contracts that back-stop early
termination provisions, both of which have now expired. The first LC
to ODE required cash collateral of US $4.8 million (gross) be put in
place by September 30, 2006.The ODE LC expired on November 13, 2008.
The second LC to KCA DEUTAG Drilling GmbH required cash collateral of
US $7.2 million (gross) in place by June 30, 2006. The KCA LC expired
on April 30, 2009. The Company received funds from its partner, Medco
International Ventures Limited, for its 50% share of the cash
collateral and all cash provided as support for the LC's was
reflected as restricted cash on the balance sheet.
12. Discontinued Operations
On January 28, 2009, the Company entered into an arrangement with
Vermilion and its wholly owned France and Denmark subsidiaries to
sell the Bottrel GORR and the Verenex Danish and French subsidiaries
for $5.0 million. The transaction closed on February 27, 2009.
The following tables outline the final transaction details:
1) Canadian Bottrel GORR
---------------------
Proceeds on disposition $ 4,500
Net book value of assets disposed (3,657)
------------
------------
Gain on disposition of assets $ 843
------------
2) Danish and French Subsidiaries
------------------------------
Proceeds on disposition $ 500
Net book value of assets disposed (27)
------------
------------
Gain on disposition of assets $ 473
------------
Total Gain on disposition of assets $ 1,316
------------
------------
Income from discontinued operations
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
30, 2009 30, 2008 30, 2009 30, 2008
Revenue
Petroleum & natural
gas, net $ - $ 267 $ (8) $ 794
------------------------------------------------
$ - $ 267 $ (8) $ 794
Expenses
General and
administration $ - $ 19 $ 24 $ 47
Depletion and
depreciation
(Note 4) - 124 - 286
Disposal of fixed
assets gain - - (1,316) -
------------------------------------------------
$ - $ 143 $ (1,292) $ 334
------------------------------------------------
Income from
discontinued
operations $ - $ 124 $ 1,284 $ 461
------------------------------------------------
13. Proposed Transaction
On November 5, the Company announced it had entered into a definitive
arrangement agreement with the Libyan Investment Authority (the
"LIA") pursuant to which the LIA, through a subsidiary, has agreed to
acquire all of the Verenex shares issued and outstanding upon
completion of the transaction at a price per share in cash equal to
$7.09 plus an additional amount per share (the "Working Capital
Amount" and, together with the $7.09 offer price, the "Cash Purchase
Consideration") to be determined by the Board of Directors of Verenex
and the LIA at the time of completion of the transaction based on the
aggregate amount, if any, of positive net working capital in Verenex
at such time (determined on a pro-forma basis in accordance with the
provisions of the Agreement). It is a condition to the completion of
the transaction that such pro-forma closing working capital amount
not be negative. Based on preliminary estimates agreed to by the LIA,
Verenex expects the Working Capital Amount to be a nominal amount of
approximately $0.15 per share, assuming completion of the transaction
in mid-December. The final determination of the Working Capital
Amount is subject to a number of factors, primarily the period of
time for completion of the transaction, the rate of ongoing
expenditures (primarily general and administrative expenses) and
closing costs.
An irrevocable letter of credit in the amount of $350 million, the
aggregate purchase consideration payable by the LIA to acquire
Verenex, has been deposited in escrow on behalf of the LIA as
security for the availability of the aggregate purchase funds upon
satisfaction or waiver of the conditions set out in the Agreement.
The transaction will be completed by way of plan of arrangement (the
"Arrangement"), to be submitted to the holders of Verenex securities
(Verenex shares, options and performance warrants) for approval at a
meeting scheduled for December 11, 2009. In addition to the working
capital condition mentioned above, the Arrangement is conditional
upon, among other things, securityholder approval of 75% of the votes
cast at the meeting, court and regulatory approvals and certain other
customary conditions for an agreement of this nature. The parties
have provided for a higher than normal voting approval threshold in
lieu of granting dissent rights to shareholders. The LIA has
represented in the Agreement that the Arrangement has received all
necessary Libyan government approvals. The Agreement has been filed
on SEDAR at www.sedar.com.
All of the members of the Verenex Board, its executive officers and
its major shareholder, Vermilion Resources Ltd. (representing in
aggregate approximately 45.2% of the common shares on a fully diluted
basis), have entered into voting support agreements pursuant to which
they have agreed to vote their securities in favour of the
Arrangement.
For further information: Jim McFarland, President & CEO, Verenex Energy Inc., Telephone: (403) 536-8009; or Ken Hillier, Chief Financial Officer, Verenex Energy Inc., Telephone: (403) 536-8005; www.verenexenergy.com
Share this article