CALGARY, May 13 /CNW/ - Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX: BNE) is pleased to announce its financial and operational results for the three months ended March 31, 2009.
Highlights
For the three months ended March December March
($ 000 except $ per unit) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
FINANCIAL
Revenue - realized oil and gas sales 19,300 22,613 30,493
Cash flow from operations 6,632 10,336 16,212
Per share/unit - basic 0.38 0.59 0.96
Per share/unit - diluted 0.38 0.59 0.96
Payout ratio(1) 94% 105% 73%
Funds flow(3) 8,376 9,880 18,058
Per share/unit - basic 0.49 0.57 1.07
Per share/unit - diluted 0.49 0.57 1.06
Payout ratio(1) 74% 109% 66%
Cash dividends per share/unit(1) 0.36 0.62 0.70
Net earnings 6,093 10,585 10,804
Per share/unit - basic 0.35 0.62 0.64
Per share/unit - diluted 0.35 0.62 0.64
Capital expenditures and acquisitions 2,696 30,405 6,421
Total assets 260,732 265,301 150,169
Working capital deficiency 14,909 23,878 57,810
Long-term debt 89,383 79,910 -
Shareholders'/unitholders' equity 56,377 56,777 48,136
-------------------------------------------------------------------------
OPERATIONS
Oil and NGLs - barrels per day 3,268 3,105 3,153
- average price
($ per barrel) 45.80 58.91 87.20
Natural gas - MCF per day 12,223 8,892 7,139
- average price
($ per MCF) 5.19 7.00 8.32
Total barrels of oil equivalent
per day (BOE)(2) 5,305 4,587 4,343
-------------------------------------------------------------------------
(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The conversion is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead and as such may be misleading if
used in isolation.
(3) Funds flow is not a recognized measure under GAAP. For these
purposes, the Company defines funds flow as funds provided by
operations before changes in non-cash operating working capital items
excluding gain on sale of property and asset retirement expenditures.
Report to Shareholders
Bonterra Oil & Gas Ltd. ("Bonterra" or "the Company") is pleased to report the operating and financial results for the three months ended March 31, 2009. Despite continued weakness in the commodity and credit markets, the Company was able to continue its long-term approach to both operating its business and creating additional value for shareholders. As a result of this approach, Bonterra was able to grow its production through its capital development program which included a successful operated horizontal well in the Pembina Cardium field, low cost field optimization and sustainable operating cost reductions. Subsequent to quarter-end, the Company also strengthened its financial position by increasing its bank line and raising funds through a private placement and expanded its asset base through a strategic corporate acquisition.
Operations
Bonterra achieved record production volumes of 5,305 barrels of oil equivalent (BOE) per day during the first quarter of 2009. This represents an increase of 16 percent over the previous quarter and 22 percent over the first quarter of 2008. This increase is due to the Company's successful capital development program and the acquisition and subsequent optimization of the Silverwing Energy Inc. (Silverwing) properties in the Company's new core area of Northeast British Columbia. The Silverwing corporate acquisition closed in November, 2008.
The Company has been successful in reducing operating costs by over nine percent in the first quarter of 2009 compared to the previous quarter as a result of a focused review of its operating costs and increased production volumes. Operating costs are projected to remain lower than in previous years because of further field optimization and reduced costs of services.
As part of the capital development program, Bonterra successfully drilled and placed on production its first operated Cardium horizontal well in the Pembina area of west central Alberta (25 percent working interest). The well's first month production (February, 2009) averaged approximately 250 barrels of oil per day. It is currently producing approximately 145 barrels of oil per day and 85 MCF per day of solution gas which is being conserved.
Bonterra has a very large land position in the Pembina field with a significant amount of undeveloped land with similar reservoir characteristics to the above horizontal well. Working interests range from 25 to 100 percent and with the recent Crown royalty credit announcement by the Alberta government, the Company plans on drilling additional horizontal Pembina Cardium oil wells to further evaluate the play as well as continuing with its selective vertical Pembina Cardium wells.
Bonterra's 2009 capital program is currently expected to total $20 million. This has been increased from $15 million due to the Alberta government's recent royalty and incentive programs, the Company's strengthened financial position, improving commodity prices and encouraging drilling results. Drilling is anticipated to commence late in the second quarter with the majority of the drilling expenditures expected to be incurred during the third and fourth quarters of 2009.
Maintaining Financial Strength
Subsequent to the quarter-end, Bonterra entered into a new syndicated banking facility effective April 29, 2009. The maximum borrowing amount of the new facility has been increased to $120 million from $100 million and consists of a $100 million syndicated revolving credit facility and a $20 million non-syndicated revolving credit facility. The terms of the new facility provides that the loan is revolving until April 28, 2011 and is subject to an annual review and has no fixed payment requirements.
Also subsequent to the quarter-end, the Company entered into a bought-deal private placement financing where it will issue 890,000 common shares at a price of $16.85 per share for gross proceeds of $15,000,000. The underwriters also have an option exercisable prior to the closing date to increase the size of the offering up to an additional 178,000 common shares at a price of $16.85 for further proceeds of up to $2,999,300 which would increase the offering to $17,999,300. This transaction is expected to close prior to May 31, 2009.
This further strengthens Bonterra's financial position and provides increased flexibility for the Company to fund its 2009 capital development program and continue to pursue additional acquisition opportunities as they become available. In addition, Bonterra will continue to seek new ways to strengthen its financial position through cost reduction initiatives, low-cost production optimization, project reviews and exploring and implementing operational efficiencies across its business.
Strategic Acquisition
Bonterra continues to diligently assess additional opportunities to grow its reserves and production through strategic acquisitions. Subsequent to the quarter-end, the Company entered into a letter of intent to proceed with a proposed plan of arrangement to acquire all of the issued and outstanding shares of Cobalt Energy Ltd. (Cobalt).
Cobalt is a junior oil and gas exploration and production company operating in western Canada with production of approximately 85 BOE per day. Cobalt's main assets consist of a 43.18 percent working interest in the Company's above-mentioned horizontal well and additional lands with Cardium horizontal well potential in Pembina with working interests ranging between 25 and 43.18 percent. These lands are operated by Bonterra.
The board of directors of Cobalt has unanimously approved the proposed transaction and, subject to receipt of an independent fairness opinion, intends to recommend that the shareholders vote in favour of the proposed transaction. Cobalt has agreed to pay a non-completion fee not to exceed $400,000 to Bonterra under certain circumstances. Shareholders of Cobalt will be asked to approve the Plan of Arrangement at a special meeting of shareholders expected to be scheduled in late June, 2009. The plan will, amongst other closing conditions, require the approval of 66 2/3 percent of the votes cast by the shareholders and the approval of the Court of Queen's Bench of Alberta. The transaction may also be subject to TSX Venture Exchange and other regulatory approvals.
Commodity Prices
During the first quarter of 2009, the continued and significant weakness in commodity prices impacted the Company's financial performance. Average realized prices for crude oil declined 22 percent quarter over quarter and 47 percent from the first quarter of 2008 while average realized prices for natural gas declined 26 percent quarter over quarter and 38 percent from the same period in 2008. This resulted in significant declines in revenue, net earnings and cash flow from operations.
Crude oil prices have been improving in the second quarter while natural gas prices have continued their decline. Bonterra currently anticipates that crude oil and natural gas prices will not change significantly from the current levels for the remainder of 2009. As a result, commodity prices are expected to continue to significantly and negatively impact results compared to 2008. The price declines should be partially offset by increases in production volumes and a reduction in operating costs and royalties.
Cash dividends paid to shareholders totaled $0.36 per share in the first quarter of 2009. This represents a monthly dividend of $0.12 per share with a payout ratio of 74 percent of funds flow during the quarter. The Board of Directors and management will continue to monitor dividend levels, payout ratios and capital expenditures on a monthly basis and adjust the amount if necessary. However, the monthly dividend level has been set at an amount deemed appropriate to both balance capital development requirements while providing investors with a maximized and stable cash payment. If current commodity prices are sustained or increase, Bonterra should be in a position to increase dividends.
Summary
In conclusion, Bonterra remains well-positioned to both continue its strong dividend policy and ensure the long-term sustainability of its business. The Company's focus is on maximizing its high-quality asset base, finding additional operational efficiencies and taking advantage of continued opportunities due to the low price environment, including lower land costs, lower project costs and acquisition opportunities. Bonterra's improved financial strength well-positions the Company to capitalize on these objectives and the Company will strive to add further value on behalf of investors.
(signed) (signed) George F. Fink Randy M. Jarock Chief Executive Officer and President and Chief Operating Director Officer
A Discussion of Financial and Operational Results
This press release is a review of the operations and current financial position for Bonterra Oil & Gas Ltd. (Bonterra or the Company) and should be read in conjunction with the unaudited financial statements for the three months ended March 31, 2009, including the notes related thereto, and the audited financial statements for the fiscal year ended December 31, 2008, together with the notes related thereto.
Forward-looking Information
Certain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; cash dividends; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.
All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control.
Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived there from. Except as required by law, Bonterra disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information contained herein is expressly qualified by this cautionary statement.
Quarterly Comparisons
2009 2008
-------------------------------------------------------------------------
Financial ($ 000
except $ per unit) Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 19,300 22,613 34,226 34,398 30,493
Cash flow from
operations 6,632 10,336 22,492 20,530 16,212
Per share/unit
- basic 0.38 0.59 1.31 1.21 0.96
Per share/unit
- fully diluted 0.38 0.59 1.30 1.20 0.96
Cash payments per
share/unit(1) 0.36 0.62 0.96 0.84 0.70
Payout Ratio(1) 94% 105% 73% 69% 73%
Net earnings 6,093 10,585 21,125 12,912 10,804
Per share/unit
- basic 0.35 0.62 1.23 0.76 0.64
Per share/unit
- fully diluted 0.35 0.62 1.22 0.75 0.64
Capital expenditures
and acquisitions 2,696 30,405 6,038 2,543 6,421
Total assets 260,732 265,301 150,120 153,247 150,169
Working capital
deficiency 14,909 23,878 47,499 57,148 57,810
Long-term debt 89,303 79,910 - - -
Shareholders'/
unitholders' equity 56,377 56,777 57,623 46,612 48,136
-------------------------------------------------------------------------
Operations
Oil and NGLs
(barrels per day) 3,268 3,105 3,013 3,024 3,153
Natural gas
(MCF per day) 12,223 8,892 7,233 7,272 7,139
Total BOE per day(2) 5,305 4,587 4,219 4,236 4,343
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
Financial ($ 000
except $ per unit) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 26,573 23,794 23,462 22,602
Cash flow from operations 13,369 11,886 13,413 12,765
Per unit - basic 0.79 0.70 0.79 0.76
Per unit - fully diluted 0.79 0.70 0.79 0.76
Cash distributions(1) 0.66 0.66 0.66 0.66
Payout Ratio(1) 84% 94% 84% 87%
Net earnings 8,372 8,945 5,371 7,662
Per unit - basic 0.49 0.53 0.32 0.45
Per unit - fully diluted 0.49 0.53 0.32 0.45
Capital expenditures and
acquisitions 7,213 2,763 1,699 7,625
Total assets 143,239 138,140 139,432 140,926
Working capital deficiency 58,766 50,041 49,595 49,288
Long-term debt - - - -
Unitholders' equity 44,218 50,820 51,920 57,646
-------------------------------------------------------------------------
Operations
Oil and NGLs (barrels per day) 3,098 3,054 3,074 3,227
Natural gas (MCF per day) 7,176 6,196 6,663 6,470
Total BOE per day(2) 4,295 4,086 4,184 4,305
-------------------------------------------------------------------------
(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The conversion is based on an energy equivalency conversion
method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead and as such may be misleading if
used in isolation.
Production
Three months ended
March December March
31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Crude oil and NGLs (barrels per day) 3,268 3,105 3,153
Natural gas (MCF per day) 12,223 8,892 7,139
-------------------------------------------------------------------------
Average BOE per day 5,305 4,587 4,343
-------------------------------------------------------------------------
Barrels of oil equivalent (BOE) are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.
Production volumes for the first quarter of 2009 were a record for the Company. Added production related to the Silverwing Energy Inc. (Silverwing) acquisition (approximately 650 BOE per day), Bonterra's Q4 2008 drilling program including the start of production from the Company's first Pembina Cardium horizontal well and new gas wells drilled and optimization of existing wells on former Silverwing properties (totaling approximately 250 BOE per day). These additions more than offset Bonterra's average corporate production decline of approximately two percent per quarter.
The Company did not drill any wells during the first quarter of 2009. It did participate in several small interest wells resulting in approximately one net gas well. As of March 31, 2009, all of the Company's operated drilled oil and natural gas wells (excluding 3 (2.5 net) coalbed methane wells) were on production.
Revenue
Three months ended
March December March
($) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Revenue - oil and gas sales (000's) 19,300 22,613 30,493
Average Realized Prices:
Crude oil and NGLs (per barrel) 45.80 58.91 87.20
Natural gas (per MCF) 5.19 7.00 8.32
-------------------------------------------------------------------------
Revenue from petroleum and natural gas sales decreased $11,193,000 from the corresponding 2008 quarter primarily due to a 47 percent drop in crude oil prices and a 38 percent drop in natural gas prices. Quarter over quarter saw a decline in revenues of $3,313,000 again due to declining commodity prices (approximately 25 percent). Crude oil prices increased modestly in the month of March however natural gas prices continued to fall throughout the first quarter.
Royalties
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Crown royalties 1,364 2,337 3,613
Freehold royalties, gross overriding
royalties and net carried interests 501 558 731
-------------------------------------------------------------------------
Total royalty expense 1,865 2,895 4,344
-------------------------------------------------------------------------
Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. Most of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate is approximately 7.1 percent (2008 - 11.3 percent) and approximately 2.6 percent (2008 - 2.3 percent) for other royalties.
The recently announced new Alberta Crown royalty rates vary by prices as well as productivity levels. With recent declines in commodity prices and the Silvering acquisition (mostly BC production with lower Crown royalty rates) the Company has experienced a significant reduction in Crown royalties in Q1 2009.
The government of the province of Alberta has recently announced drilling incentives and royalty reductions in respect of wells drilled after April 1, 2009 and prior to March 31, 2010. The Company is currently examining its capital requirements (see Liquidity and Capital Resources) and the impact on its crown royalty for newly drilled wells in that period. The Company is planning on maximizing the crown royalty credits available under the new drilling incentive program which should result in lower crown royalty payments in the third and fourth quarters of 2009 and first quarter of 2010.
Production Costs
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Production costs 7,038 6,859 6,317
$ per BOE 14.74 16.25 15.98
-------------------------------------------------------------------------
Total production costs in Q1 2009 have increased by $721,000 over Q1 2008. The increase is due to increased production volumes (see Production). On a BOE basis production costs have declined mainly due a general decline in service and material costs resulting from decreased industry demand and field optimization.
The Company's production comes primarily from low productivity wells. These wells generally result in higher production costs on a per unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The high production costs for the Company are substantially offset by current low royalty rates of approximately 9.7 percent, which is much lower than industry average for conventional production and results in high cash netbacks on a combined basis despite higher than industry average production costs.
With the acquisition of Silverwing and the Company's recent drilling success and expected continued declines in oilfield service costs, the Company anticipates operating costs will remain in the $14 to $15 per BOE range for 2009.
General and Administrative (G&A) Expense
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
G&A Expense 939 824 877
$ per BOE 1.97 1.95 2.22
-------------------------------------------------------------------------
The increase in G&A expense year over year was due to increased contract personal costs ($123,000) related to temporary staffing needs, professional service costs ($30,000) related to IFRS and internal control reviews, computer services fees ($99,000) related to new monthly geological software licensing fees and service costs related to a new production accounting software, bad debt expense ($28,000) due to the receivership of one of the Company's joint venture partners, bank charges ($25,000) related to the old banking facility, offset partially by reduced employee compensation ($283,000).
G&A costs are anticipated to remain at approximately $1,000,000 per quarter ($2 per BOE) as costs associated with contract personnel and production accounting will be reduced, but will be offset with additional bank charges related to the new banking facility (approximately $100,000 per quarter).
Interest Expense
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Interest Expense 826 746 799
-------------------------------------------------------------------------
Interest charges increased as the Q1 2009 average outstanding debt balance (included related party balances) increased by $43,500,000 over Q1 2008. The acquisition of Silverwing as well as the reorganization into a corporation resulted in an approximate additional $44.5 million of debt. Offsetting the increased debt balances was an average reduction of 2.25 percent in interest rates paid on the outstanding debt balances.
Effective April 29, 2009, the Company entered into a new bank facility under similar terms and conditions. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility.
The interest rate on the new credit facility is calculated as follows:
-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
(2) Numbers in table represent basis points.
Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the next fiscal quarter following the end of each fiscal quarter, with each such adjustment to be effective until the next such adjustment.
The above rate schedule combined with current bank prime and interest rates on the related party debt is expected to result in average borrowing costs of approximately four percent for the balance of the fiscal year.
Stock-Based Compensation
Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee unit options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Based on currently outstanding options, the Company anticipates that an expense of approximately $700,000 will be recorded for the balance of 2009, $350,000 in 2010 and $160,000 in 2011.
Depletion, Depreciation, Accretion and Dry Hole Costs
Provision for depletion, depreciation and accretion was $4,614,000 and $3,494,000, respectively for the three month periods ending March 31, 2009 and March 31, 2008. The increase in the depletion amount was due primarily to increased production volumes and an increase in the average cost of reserves resulting from the Silverwing acquisition. The Company has capital costs of approximately $6.60 (March 31, 2008 - $6.10) per proved BOE of reserves based on the December 31, 2008 independent engineering report.
Taxes
On November 12, 2008, the Company converted from a trust to a corporation. Due to the conversion and the acquisition of Silverwing, the Company increased its usable tax pools to approximately $468,000,000. As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.
The current tax provision relates to resource surcharge of $53,000 payable by the Company to the Province of Saskatchewan as well as a capital tax amount of $269,000 payable to the Province of Quebec. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate is 3 percent in 2009. The capital tax payable to the Province of Quebec is a one-time charge.
Net Earnings
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Net Earnings 6,093 10,585 10,804
-------------------------------------------------------------------------
Net earnings decreased in the first three months of 2009 by $4,711,000 from the corresponding 2008 period and $4,492,000 from Q4 2008. Reduced revenues resulted from decreased commodity prices that more than offset production volume gains. The Company continues to return in excess of 30 percent of its gross realized revenues in net earnings. The Company's low capital costs combined with the Company's low production decline rates should allow for continued positive earnings even in the current low commodity price environment.
Comprehensive Income
Other comprehensive income for 2009 consists of an unrealized gain on investment in a related party of $181,000 (2008 - $171,000) due to an increase in the related company's fair value.
Cash Flow from Operations
Three months ended
March December March
($ 000) 31, 2009 31, 2008 31, 2008
-------------------------------------------------------------------------
Cash flow from operations 6,632 10,336 16,212
-------------------------------------------------------------------------
First quarter 2009 cash flow from operations decreased 59 percent compared to Q1 2008 due to decreased commodity prices received during the first three months of 2009.
Due to accounting software upgrades, financial regulatory requirements and integration of the Silverwing acquisition, the normal month end cheque run for the month of December was not processed until January 2009. This resulted in approximately $1.5 million of operating accounts payable being paid in Q1 2009 which would normally have been paid in Q4 of 2008. The impact on cash flow from operations was a decrease of $1.5 million in Q1 2009 and an increase to Q4 2008 of an equivalent amount. After adjusting for the timing of these payables, Q1 2009 cash flow from operations would have been only slightly below that of Q4 2008.
With the continuing depressed crude oil and natural gas prices, cash flow for the remainder of 2009 is expected to be significantly negatively affected compared to 2008 figures. The price declines should be partially offset by increases in production volumes to approximately 5,250 BOE per day for 2009 and a reduction in royalties.
Cash Netback
The following table illustrates the Company's cash netback from operations (excludes reorganization costs) for the three month periods ended:
March December March $ per Barrel of Oil Equivalent (BOE) 31, 2009 31, 2008 31, 2008 ------------------------------------------------------------------------- Production volumes (BOE) 477,495 422,008 395,176 Gross production revenue $ 40.42 $ 51.27 $ 80.62 Realized gain (loss) on risk management contracts - 2.31 (3.46) Royalties (3.91) (6.86) (10.99) Field operating costs (14.74) (16.25) (15.98) ------------------------------------------------------------------------- Field netback 21.77 30.47 50.19 General and administrative (1.97) (1.95) (2.22) Interest and taxes (2.40) (1.90) (2.30) ------------------------------------------------------------------------- Cash netback $ 17.40 $ 26.62 $ 45.67 -------------------------------------------------------------------------
Related Party Transactions
The Company holds 689,682 (December 31, 2008 - 689,682) common shares in Comaplex Minerals Corp. which have a fair market value as of March 31, 2009 of $2,338,000 (December 31, 2008 - $2,131,000). Comaplex is a publically traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents approximately 1.3 percent of the issued and outstanding common shares of Comaplex. The Company has common directors and management with Comaplex.
Comaplex paid a management fee to the Company of $82,500 (2008 - $82,500). Comaplex also shares office rental costs and reimburses the Company for costs related to employee benefits and office materials. In addition, Comaplex owns 204,633 (December 31, 2008 - 204,633) common shares in the Company. Services provided by the Company include executive services (chief executive officer, president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. At March 31, 2009, Comaplex owed the Company $60,000 (December 31, 2008 - $56,000).
As of March 31, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured, bears interest at Canadian chartered bank prime plus one quarter of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility. Interest paid on this loan during the first quarter of 2009 was $3,000. This loan results in Comaplex receiving increased interest income and providing Bonterra with a lower cost of capital.
The Company also has a management agreement with Pine Cliff Energy Ltd. (Pine Cliff). Pine Cliff has common directors and management with the Company. Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management fee to the Company of $30,000 (2008 - $59,400). Services provided by the Company include executive services (president and vice president, finance duties), accounting services, oil and gas administration and office administration. All services performed are charged at estimated fair value. The Company has no share ownership in Pine Cliff. As at March 31, 2009 the Company had an account receivable from Pine Cliff of $Nil (December 31, 2008 - $1,000).
As of March 31, 2009, the Company's CEO and major shareholder has loaned the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is unsecured, bears interest at Canadian chartered bank prime less one half of a percent and has no set repayment terms. The loan can only be repaid should the Company have sufficient available borrowing limits under the Company's credit facility. Effective May 1, 2009 the interest rate was increased to Canadian chartered bank prime. Interest paid on this loan during the first quarter of 2009 was $48,000 (Last quarter 2008 - $7,000). This loan results in the major shareholder receiving increased interest income and providing Bonterra with a lower cost of capital.
Liquidity and Capital Resources
During the first three months of 2009, the Company incurred capital costs of $2,696,000 (2008 - $6,421,000). The Company did not directly drill any wells during the first quarter but did participate in a number of smaller interest natural gas wells (approximately one net) for total costs of $686,000. Bonterra did spend approximately $1,300,000 on completion and tie in costs in respect to wells drilled in Q4 2008. The balance of the capital expenditures of approximately $710,000 related to various capital projects ranging from pipeline tie-ins to maximizing natural gas production to various battery upgrades to enhance overall production from existing wells.
The Company currently has plans to spend an estimated $20,000,000 on capital projects (recently increased from $15,000,000). With the recent Crown royalty credit announcement by the Alberta government, the Company plans on drilling additional horizontal Pembina Cardium oil wells as well as selective vertical Pembina Cardium wells. The exact number of each will depend on drilling success and commodity prices. Drilling is anticipated to commence in the second quarter with the majority of the drilling expenditures expected to be incurred during the third and fourth quarters.
Bonterra anticipates funding the 2009 capital program out of cash flow and the Company's line of credit. Effective April 29, 2009, the Company entered into a new bank facility under similar terms and conditions. The new facility consists of a $100,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated revolving credit facility. At March 31, 2009 the Company's bank loan was $89,383,000 (December 31, 2008 - $79,910,000). The terms of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.
Bonterra, subsequent to the end of the quarter, entered into an agreement to issue up to 1,068,000 common shares at a price of $16.85 per share. The financing is expected to close on May 27, 2009. The funds from the equity placement will be used to retire debt and for general working capital.
Additional information relating to the Company may be found on www.sedar.com or visit our website at www.bonterraenergy.com.
The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.
Consolidated Balance Sheets
As at March 31, 2009 and December 31, 2008
(unaudited)
($ 000) 2009 2008
-------------------------------------------------------------------------
Assets
Current
Restricted term deposit - 20
Accounts receivable (Note 11) 10,657 11,753
Crude oil inventory 543 845
Prepaid expenses 3,654 4,222
Future income tax asset (Note 8) 6,841 2,669
Investments in related party (Note 3) 2,338 2,131
-------------------------------------------------------------------------
24,033 21,640
-------------------------------------------------------------------------
Restricted cash (Note 4) 1,257 1,252
Future income tax asset (Note 8) 80,157 85,416
Property and Equipment (Note 5)
Petroleum and natural gas properties
and related equipment 235,306 232,685
Accumulated depletion and depreciation (80,021) (75,692)
-------------------------------------------------------------------------
Net Property and Equipment 155,285 156,993
-------------------------------------------------------------------------
260,732 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 11,034 23,888
Due to related parties (Note 6) 22,000 6,000
Deferred credit (Note 8) 5,908 2,305
Short-term debt (Note 7) - 13,325
-------------------------------------------------------------------------
38,942 45,518
Long-term bank debt (Note 7) 89,383 79,910
Deferred credit (Note 8) 57,533 64,758
Asset retirement obligations 18,497 18,338
-------------------------------------------------------------------------
204,355 208,524
-------------------------------------------------------------------------
Shareholders' Equity (Note 9)
Share capital 99,530 99,530
Contributed surplus 2,771 2,542
-------------------------------------------------------------------------
102,301 102,072
-------------------------------------------------------------------------
Deficit (47,525) (46,715)
Accumulated other comprehensive income (Note 10) 1,601 1,420
-------------------------------------------------------------------------
(45,924) (45,295)
-------------------------------------------------------------------------
Total Shareholders' Equity 56,377 56,777
-------------------------------------------------------------------------
260,732 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
For the Three Months Ended March 31 (unaudited)
($ 000) 2009 2008
-------------------------------------------------------------------------
Unitholders' equity, beginning of period - 44,218
Shareholders' equity, beginning of period 56,777 -
Comprehensive income for the period 6,274 10,975
Net capital contributions - 280
Stock-based compensation 229 283
Distributions declared - (7,620)
-------------------------------------------------------------------------
Unitholders' Equity, End of Period 63,280 48,136
Conversion of the trust to a corporation (Note 1) - -
Dividends declared (6,903) -
-------------------------------------------------------------------------
Shareholders' Equity, End of Period 56,377 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Operations and Deficit
For the Three Months Ended March 31 (unaudited)
($000, except $ per Share) 2009 2008
-------------------------------------------------------------------------
Revenue
Oil and gas sales 19,300 31,860
Gain (loss) on risk management contracts
- cash - (1,367)
Gain (loss) on risk management contracts
- non-cash - (2,389)
Royalties (1,865) (4,344)
Interest and other 66 13
-------------------------------------------------------------------------
17,501 23,773
-------------------------------------------------------------------------
Expenses
Production costs 7,038 6,317
General and administrative 939 877
Interest on debt 826 799
Stock based compensation 229 283
Depletion, depreciation and accretion 4,614 3,494
-------------------------------------------------------------------------
13,646 11,770
-------------------------------------------------------------------------
Earnings Before Taxes 3,855 12,003
-------------------------------------------------------------------------
Taxes (Recovery)
Current 322 111
Future (2,560) 1,088
-------------------------------------------------------------------------
(2,238) 1,199
-------------------------------------------------------------------------
Net Earnings for the Period 6,093 10,804
Deficit, beginning of period (46,715) (51,543)
Dividends declared (6,903) -
Distributions declared - (7,620)
-------------------------------------------------------------------------
Deficit, End of Period (47,525) (48,359)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Per Share - Basic and Diluted (Note 9) 0.35 0.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31 (unaudited)
($ 000, except $ per Share) 2009 2008
-------------------------------------------------------------------------
Net Earnings for the Period 6,093 10,804
Other Comprehensive Income
Unrealized gains and losses on investments
(net of income taxes of 2009 - $26, 2008 - $47) 181 171
-------------------------------------------------------------------------
Other Comprehensive Income 181 171
-------------------------------------------------------------------------
Comprehensive Income 6,274 10,975
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive Income Per Share - Basic
and Diluted (Note 9) 0.36 0.65
Consolidated Statements of Cash Flows
For the Three Months Ended March 31 (unaudited)
($000) 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net earnings for the period 6,093 10,804
Items not affecting cash
(Gain) loss on risk management contracts
- non-cash - 2,389
Stock based compensation 229 283
Depletion, depreciation and accretion 4,614 3,494
Future income taxes (2,560) 1,088
-------------------------------------------------------------------------
8,376 18,058
-------------------------------------------------------------------------
Change in non-cash working capital
Accounts receivable 1,096 (3,201)
Crude oil inventory 316 142
Prepaid expenses 568 69
Accounts payable and accrued liabilities (3,653) 2,871
Asset retirement obligations settled (71) (1,727)
-------------------------------------------------------------------------
(1,744) (1,846)
-------------------------------------------------------------------------
Cash Provided by Operating Activities 6,632 16,212
-------------------------------------------------------------------------
Financing Activities
Increase (decrease) in debt (3,852) 1,491
Due to related parties 16,000 -
Stock option proceeds - 280
Dividends (6,903) -
Unit distributions - (11,344)
-------------------------------------------------------------------------
Cash Provided by (Used in) Financing Activities 5,245 (9,573)
-------------------------------------------------------------------------
Investing Activities
Property and equipment expenditures (2,696) (6,421)
Restricted term deposit 20 -
Change in non-cash working capital
Accounts payable and accrued liabilities (9,201) (218)
-------------------------------------------------------------------------
Cash Used in Investing Activities (11,877) (6,639)
-------------------------------------------------------------------------
Net Cash Inflow - -
Cash, beginning of period - -
-------------------------------------------------------------------------
Cash, End of Period - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid 826 799
Cash Taxes Paid 161 278
Notes to The Interim Consolidated Financial Statements
Periods Ended March 31, 2009 and 2008 (unaudited)
1. CHANGE OF ORGANIZATION
On November 12, 2008, Bonterra Energy Income Trust (the "Trust")
converted to Bonterra Oil & Gas Ltd. (the "Company") through a reverse
takeover by the Trust of SRX Post Holdings Inc. (SRX). In conjunction
with the reorganization, the Trust acquired all of the issued and
outstanding shares of Silverwing Energy Inc. (Silverwing). Concurrently,
all of the Company's subsidiaries, including Silverwing were amalgamated
into Bonterra Energy Corp.
Prior to the Arrangement on November 12, 2008, the consolidated financial
statements included the accounts of the Trust and its subsidiaries. After
giving effect to the Arrangement, the consolidated financial statements
have been prepared on a continuity of interests basis, which recognizes
Bonterra Oil & Gas Ltd. as the successor entity to the Trust. The
continuity of interest basis requires that the 2008 comparative
consolidated financial statement figures presented prior to the
reorganization are those previously presented by the Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and methods of application followed in the
preparation of the interim consolidated financial statements are the same
as those followed in the preparation of Bonterra Oil & Gas Ltd.'s (the
Company or Bonterra) 2008 annual consolidated financial statements except
as described below. These interim consolidated financial statements do
not include all disclosures required for annual consolidated financial
statements. The interim consolidated financial statements as presented
should be read in conjunction with the 2008 annual consolidated financial
statements.
In February 2008, the Canadian Institute of Chartered Accountants (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 is
applicable to financial statements relating to fiscal years beginning on
or after October 1, 2008. Accordingly, the Company adopted the new
standards 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-orientated enterprises. Standards concerning goodwill
are unchanged from the standards included in the previous Section 3062.
The adoption of this Standard did not have an impact on the Consolidated
Financial Statements.
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities". The EIC provides guidance
on how to take into account credit risk of an entity and counterparty
when determining the fair value of financial assets and financial
liabilities, including derivative instruments. This standard is effective
for the Company's fiscal periods ending on or after January 20, 2009 with
retrospective application. The application of this EIC did not have a
material effect on the Company's Consolidated Financial Statements.
In December 2008, the CICA issued Section 1582, "Business Combinations",
which will replace former guidance on business combinations. Section 1582
establishes principles and requirements of the acquisition method for
business combinations and related disclosures. This statement applies
prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning
on or after January 1, 2011 with earlier adoption permitted. The Company
is currently evaluating the impact of this change on its Consolidated
Financial Statements.
In December 2008, the CICA issued Sections 1601, "Consolidated Financial
Statements", and 1602, "Non-controlling Interests", which replaces
existing Section 1600. Section 1601 establishes standards for the
preparation of consolidated financial statements. Section 1602 provides
guidance on accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business combination.
These standards are effective on or after the beginning of the first
annual reporting period beginning on or after January 2011 with earlier
adoption permitted. These standards currently do not impact the Company
as it has full controlling interest of all of its subsidiaries.
Recent Accounting Pronouncements
The Accounting Standards Board has confirmed that the convergence of
Canadian GAAP with International Financial Reporting Standards (IFRS)
will be effective January 1, 2011. The Company has performed an initial
scoping process in order to ensure successful implementation within the
required timeframe. The impact on the Company's consolidated financial
statements is not reasonably determinable at this time. Key information
will be disclosed as it becomes available during the transition period.
3. INVESTMENT IN RELATED PARTY
The investment consists of 689,682 (December 31, 2008 - 689,682) common
shares in Comaplex Minerals Corp. (Comaplex), a company with common
directors and management with the Company and its subsidiaries. The
investment is recorded at fair market value. The common shares trade on
the Toronto Stock Exchange under the symbol CMF. The investment
represents less than one and a half percent ownership in the outstanding
shares of Comaplex.
4. RESTRICTED CASH
An escrow account was held by Silverwing prior to its acquisition by the
Company. The escrow account was created to support eligible expenditures
related to a farm-in agreement. The Company may access the funds upon
completion and tie-in or abandonment and reclamation of 22 wells. The
funds are administered by the farmors' legal counsel. The funds in the
escrow account are invested in interest bearing term deposits.
5. PROPERTY AND EQUIPMENT
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion Depletion
and and
($ 000) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land 2,013 - 2,295 -
Petroleum and natural
gas properties and
related equipment 232,007 79,136 229,136 74,844
Furniture, equipment
and other 1,286 885 1,254 848
-------------------------------------------------------------------------
235,306 80,021 232,685 75,692
-------------------------------------------------------------------------
6. DUE TO RELATED PARTIES
As of March 31, 2009, the Company's CEO and major shareholder has loaned
the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is
unsecured, bears interest at Canadian chartered bank prime less one half
of a percent and has no set repayment terms but is payable on demand.
However, the loan can only be repaid should the Company have sufficient
available borrowing limits under the Company's credit facility. Effective
May 1, 2009 the interest rate was increased to Canadian chartered bank
prime. The interest rate was increased to keep the loan rate at
approximately two percent below the Company's bank financing rate.
Interest paid on this loan during the first quarter of 2009 was $48,000.
As of March 31, 2009, Comaplex has loaned the Company $12,000,000
(December 31, 2008 - Nil). The loan is unsecured, bears interest at
Canadian chartered bank prime plus one quarter of a percent and has no
set repayment terms but is payable on demand. However, the loan can only
be repaid should the Company have sufficient available borrowing limits
under the Company's credit facility. Interest paid on this loan during
the first quarter of 2009 was $3,000.
Please refer to note 11 for additional related party transactions.
7. BANK DEBT
As of March 31, 2009 and December 31, 2008, the Company has a bank
facility consisting of an $80,000,000 syndicated revolving credit
facility and a $20,000,000 non-syndicated demand credit facility. Amounts
drawn under these facilities at March 31, 2009 were $89,383,000
(December 31, 2008 - $93,235,000). The interest rates on the outstanding
debt as of March 31, 2009 were 3.35 percent and 2.50 percent on the
Company's Canadian prime rate loan (short-term debt) and Bankers'
Acceptances (long-term debt), respectively. The terms of the syndicated
revolving credit facility provided that the loan was revolving to May 30,
2010 and is subject to annual review. The revolving credit facility had
no fixed payment requirements. The terms of the non-syndicated demand
credit facility provided that the loan is due on demand and is subject to
annual review and has no fixed repayment terms.
Effective April 29, 2009, the Company entered into a new bank facility
under similar terms and conditions. The new facility consists of a
$100,000,000 syndicated revolving credit facility and a $20,000,000 non-
syndicated revolving credit facility. The terms of the new facility
provides that the loan is revolving until April 28, 2011, is subject to
annual review and has no fixed payment requirements.
The amount available for borrowing under the credit facilities is reduced
by outstanding letters of credit. Letters of credit totaling $85,000 were
issued at March 31, 2009 (December 31, 2008 - $525,000). Security for the
credit facilities consists of various fixed and floating demand
debentures totaling $200,000,000 over all of the Company's assets, and a
general security agreement with first ranking over all personal and real
property.
The interest rate on the new credit facility is calculated as follows:
-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
(2) Numbers in table represent basis points.
Consolidated total funded debt to consolidated cash flow ratio shall be
adjusted effective as of the first day of the next fiscal quarter
following the end of each fiscal quarter, with each such adjustment to be
effective until the next such adjustment.
The following is a list of the material covenants:
- The Company is required to not exceed $120,000,000 in consolidated
debt (includes negative working capital but excludes debt to related
parties).
- Dividends paid in any quarter shall not exceed 80 percent of the
average of the previous four quarters' cash flow as defined under
GAAP.
8. TAXES
The Company has recorded a future income tax asset related to assets and
liabilities and related tax amounts:
($ 000) 2009 2008
-------------------------------------------------------------------------
Future tax liability related to investments: (237) (212)
Future tax liability related to property
and equipment: (6,192) (7,097)
Future tax asset related to asset retirement
obligations: 4,653 4,593
Futures tax asset related to finance costs: 1,025 1,134
Future tax asset related to corporate tax
losses and SR&ED claims: 80,908 86,998
-------------------------------------------------------------------------
Future Tax Asset - Long-term 80,157 85,416
-------------------------------------------------------------------------
Current portion of future income tax asset related
to corporate tax losses and SR& ED claims: 6,841 2,669
-------------------------------------------------------------------------
Future Tax Asset - Current 6,841 2,669
-------------------------------------------------------------------------
As a result of the reorganization, the Company recorded a deferred credit
relating to the difference between the future income tax asset generated
on the reorganization and the amount of the cash payment made to SRX
immediately before the reorganization. This credit is being amortized on
the same basis as the related future income tax asset.
A reconciliation of the deferred credit is as follows:
($ 000)
-------------------------------------------------------------------------
Amount recorded on reorganization 71,303
Amortized in 2008 (4,240)
-------------------------------------------------------------------------
Balance as of December 31, 2008 67,063
Amortized in first quarter of 2009 (3,622)
-------------------------------------------------------------------------
Balance as of March 31, 2009 63,441
-------------------------------------------------------------------------
Current portion 5,908
Long-term portion 57,533
-------------------------------------------------------------------------
63,441
-------------------------------------------------------------------------
The Company and its subsidiaries have the following tax pools, which may
be used to reduce taxable income in future years, limited to the
applicable rates of utilization:
Rate of
($ 000) Utilization (%) Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 24,410
Eligible capital expenditures 7 1,837
Share issue costs 20 4,112
Canadian oil and gas property expenditures 10 24,749
Canadian development expenditures 30 51,858
Canadian exploration expenditures 100 11,279
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 263,482
-------------------------------------------------------------------------
462,084
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in the following years;
2014 - $1,069,000, 2025 - $3,179,000, 2026 - $92,857,000, 2027 -
$116,787,000, 2028 - $40,750,000, 2029 - $8,840,000.
The Company has $27,670,000 of investment tax credits (ITC) that expire
in the following years; 2009 - $3,469,000, 2010 - $3,059,000, 2011 -
$4,667,000, 2012 - $3,909,000, 2013 - $3,155,000, 2014 - $1,995,000,
2015 - $2,257,000, 2016 - $2,405,000, 2017 - $2,009,000, 2018 - $745,000.
The amount and timing of reversals of temporary differences will also
depend on the Company's future operating results, and acquisitions and
dispositions of assets and liabilities. A significant change in any of
the preceding assumptions could materially affect the Company's estimate
of the future income tax asset.
9. SHAREHOLDERS' EQUITY
Authorized
The Company is authorized to issue an unlimited number of common shares
without nominal or par value.
Amount
Issued Number ($ 000)
-------------------------------------------------------------------------
Common Shares
Balance, January 1, 2009 17,257,603 99,530
-------------------------------------------------------------------------
Balance, March 31, 2009 17,257,603 99,530
-------------------------------------------------------------------------
The Company is authorized to issue an unlimited number of Class "A"
redeemable Preferred Shares and an unlimited number of Class "B"
Preferred Shares. There are currently no outstanding Class "A" redeemable
preferred shares or Class "B" preferred shares.
The number of common shares (2008 numbers based on units) used to
calculate diluted net earnings per share (2008 earnings per unit) for the
three month periods ended March 31 is as follows:
2009 2008
-------------------------------------------------------------------------
Basic shares/units outstanding 17,257,603 16,938,333
Dilutive effect of share/unit options - 19,153
-------------------------------------------------------------------------
Diluted shares/units outstanding 17,257,603 16,957,486
-------------------------------------------------------------------------
A summary of the changes of the Company's contributed surplus is
presented below:
Contributed surplus
($ 000) 2009 2008
-------------------------------------------------------------------------
Balance, beginning of period 2,542 2,140
Stock-based compensation expensed (non-cash) 229 283
Stock-based options exercised (non-cash) - (30)
-------------------------------------------------------------------------
Balance, end of period 2,771 2,393
-------------------------------------------------------------------------
The deficit balance is composed of the following items:
March 31, March 31,
($ 000) 2009 2008
-------------------------------------------------------------------------
Accumulated earnings 214,275 163,560
Accumulated cash dividends/distributions (261,800) (211,919)
-------------------------------------------------------------------------
Deficit (47,525) (48,359)
-------------------------------------------------------------------------
The Company provides an option plan for its directors, officers,
employees and consultants. Under the plan, the Company may grant options
for up to 1,725,760 (December 31, 2008 - 1,725,760) common shares. The
exercise price of each option granted equals the market price of the
common shares on the date of grant and the option's maximum term is five
years.
A summary of the status of the Company's stock option plan as of
March 31, 2009 and December 31, 2008, and changes during the three month
and twelve month periods ended on those dates is presented below:
March 31, 2009 December 31, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,390,500 $20.50 - $ -
Options granted - - 1,390,500 20.50
-------------------------------------------------------------------------
Outstanding at end
of period 1,390,500 $20.50 1,390,500 $20.50
-------------------------------------------------------------------------
Options exercisable at
end of period - $ - - $ -
-------------------------------------------------------------------------
The following table summarizes information about options outstanding at
March 31, 2009:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 3/31/09 Life Price at 3/31/09 Price
-------------------------------------------------------------------------
$20.50 1,390,500 3.6 years $20.50 - $ -
-------------------------------------------------------------------------
No stock options were granted in either the first quarter of 2009 or
2008.
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
Compre-
January 1, hensive March
($ 000) 2009 Income 31, 2009
-------------------------------------------------------------------------
Unrealized gains on available-for-
sale financial assets (net of tax) 1,420 181 1,601
-------------------------------------------------------------------------
Other
Compre-
hensive
January 1, Income December
($ 000) 2008 (Loss) 31, 2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
available-for-sale financial
assets (net of tax) 3,031 (1,611) 1,420
-------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Company received a management fee from Comaplex of $82,500 (2008 -
$82,500) for management services and office administration. This fee has
been included as a recovery in general and administrative expenses. As at
March 31, 2009, the Company had an account receivable from Comaplex of
$60,000 (December 31, 2008 - $56,000).
The Company received a management fee from Pine Cliff Energy Ltd. (Pine
Cliff) of $30,000 (2008 - $59,400) for management services and office
administration. This fee has been included as a recovery in general and
administrative expenses. As at March 31, 2009 the Company had an account
receivable from Pine Cliff of $Nil (December 31, 2008 - $1,000).
12. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
----------------------
The Company undertakes transactions in a range of financial instruments
including:
- Receivables
- Payables
- Common share investments
- Due to related parties
- Bank loans
- Derivatives
The Company's activities result in exposure to a number of financial
risks including market risk (commodity price risk, interest rate risk,
foreign exchange risk, credit risk, and liquidity risk).
The Company's overall risk management program seeks to mitigate these
risks and reduce the volatility on the Company's financial performance.
Financial risk management is carried out by senior management under the
direction of the Directors of the Company.
The Company enters into various risk management contracts in accordance
with Board approval to manage the Company's exposure to commodity price
fluctuations. Currently no risk management agreements are in place in
respect of interest rate risk. The Company does not speculatively trade
in risk management contracts. The Company's risk management contracts are
entered into to manage the risks relating to commodity prices from its
business activities.
Capital Risk Management
-----------------------
The Company's objectives when managing capital are to safeguard the
Company's ability to continue as a going concern, so that it can continue
to provide returns to its shareholders and benefits for other
stakeholders and to maintain an optimal capital structure to reduce the
cost of capital. In order to maintain or adjust the capital structure,
the Company may adjust the amount of dividends, the percentage of return
of capital or issue new shares.
The Company monitors capital on the basis of the ratio of debt to cash
flow. This ratio is calculated using each quarter end net debt (total
debt adjusted for working capital) and divided by the preceding twelve
months cash flow.
The combination of the Trust reorganization and the acquisition of
Silverwing Energy Inc. in 2008 resulted in the Company increasing its
debt, including negative working capital, to approximately $105,000,000
resulting in an increased debt to cash flow ratio. The Company believes
that a debt level of approximately one and a half year's cash flow is an
appropriate level to allow it to take advantage in the future of either
acquisition opportunities or to provide flexibility to develop its infill
oil, shallow gas and coalbed methane potential.
The following section (a) of this note provides a summary of the
Company's underlying economic positions as represented by the carrying
values, fair values and contractual face values of the Company's
financial assets and financial liabilities. The Company's debt to cash
flow is also provided.
The following section (b) addresses in more detail the key financial risk
factors that arise from the Company's activities including its policies
for managing these risks.
The following section (c) provides details of the Company's risk
management contracts that are used for financial risk management.
a) Financial assets, financial liabilities and debt ratio
The carrying amounts, fair value and face values of the Company's
financial assets and liabilities are shown in Table 1.
Table 1
As at March 31, 2009 As at December 31, 2008
---------------------------------------------------------------------
Carrying Fair Face Carrying Fair Face
($ 000) Value Value Value Value Value Value
---------------------------------------------------------------------
Financial
assets
Restricted term
deposit - - - 20 20 20
Accounts
receivable 10,657 10,657 10,774 11,753 11,753 11,838
Investments in
related party 2,338 2,338 N/A 2,131 2,131 N/A
Financial
liabilities
Accounts payable
and accrued
liabilities 11,034 11,034 11,034 23,888 23,888 23,888
Due to related
parties 22,000 22,000 22,000 6,000 6,000 6,000
Short-term debt - - - 13,325 13,325 13,325
Long-term debt 89,383 89,383 89,383 79,910 79,910 79,910
---------------------------------------------------------------------
The net debt and cash flow figures as of March 31, 2009 are presented
in Table 2.
Table 2
($ 000) March 31, 2009
---------------------------------------------------------------------
Long-term debt 89,383
Accounts payable and accrued liabilities 11,034
Due to related parties 22,000
Current assets(1) (17,192)
---------------------------------------------------------------------
Net Debt 105,225
---------------------------------------------------------------------
Cash flow from operations(2) 59,990
---------------------------------------------------------------------
Net debt to cash flow from operations 1.75
---------------------------------------------------------------------
(1) Current assets include accounts receivable, crude oil inventory,
prepaid expenses and investment in related party.
(2) Cash flow from operations includes net earnings over the past
twelve months less adjustment for non-cash (gain) loss on risk
management contracts, stock-based compensation, depletion,
depreciation and accretion, future income taxes, changes in
non-cash working capital items and asset retirement obligations
settled.
b) Risks and mitigations
Market risk is the risk that the fair value or future cash flow of
the Company's financial instruments will fluctuate because of changes
in market prices. Components of market risk to which the Company is
exposed are discussed below.
Commodity price risk
--------------------
The Company's principal operation is the production and sale of crude
oil, natural gas and natural gas liquids. Fluctuations in prices of
these commodities directly impact the Company's performance and
ability to continue with its dividends.
The Company had used various risk management contracts to set price
parameters for a portion of its production. Management, in agreement
with the Board of Directors, decided that at least in the near term
it will discontinue the use of commodity price agreements. The
Company will assume full risk in respect of commodity prices.
Sensitivity Analysis
Commodity prices have fluctuated significantly over the recent past.
The following table updates the annual cash flow sensitivity for
movements in the commodity prices of $1 U.S. WTI for crude oil, $0.10
per MCF AECO for natural gas and $0.01 fluctuation in exchange rates.
Cash Flow
---------------------------------------------------------------------
U.S. $1.00 per barrel $ 870,000
Canadian $0.10 per MCF $ 289,000
Change of Canadian $0.01/U.S. $ exchange rate $ 593,000
---------------------------------------------------------------------
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. Interest rate risk
arises from interest bearing financial assets and liabilities that
the Company uses. The principal exposure of the Company is on its
bank borrowings and related party debts which have variable interest
rates which gives rise to a cash flow interest rate risk.
The Company's debt consists of a $120,000,000 revolving line and
$22,000,000 due to related parties. The borrowings under these
facilities are at bank prime plus or minus various percentages as
well as by means of bankers' acceptances (BA's). The Company manages
its exposure to interest rate risk through entering into various term
lengths on its BA's but in no circumstances do the terms exceed six
months.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate
markets and management's current assessment of the financial markets,
the Company believes that a one percent variation in the Canadian
prime interest rate is reasonably possible over a 12-month period. No
income tax effect has been calculated as the Company is expected to
be non-taxable until January 1, 2015.
A one percent change in the Canadian prime rate would increase or
decrease cash flow by $1,114,000.
Foreign exchange risk
---------------------
The Company has no foreign operations and currently sells all its
product sales in Canadian currency. The Company however is exposed to
currency risk in that crude oil is priced in U.S. currency then
converted to Canadian currency. The Company currently has no
outstanding risk management agreements. Management, in agreement with
the Board of Directors, recently decided that at least in the near
term it will discontinue the use of commodity price agreements. The
Company will assume full risk in respect of foreign exchange
fluctuations.
Credit risk
-----------
Credit risk is the risk that a contracting party will not complete
its obligations under a financial instrument and cause the Company to
incur a financial loss. The Company is exposed to credit risk on the
carrying value of all financial assets included on the balance sheet.
To help mitigate this risk:
- The Company only enters into material agreements with credit
worthy counterparties. These include major oil and gas companies
or major Canadian chartered banks;
- Agreements for product sales are primarily on 30 day renewal
terms; and
- Investments are generally only with companies that have common
management with the Company.
Of the accounts receivable balance at March 31, 2009 ($10,657,000)
and December 31, 2008 ($11,753,000), over 83 (2008 - 82) percent
relates to product sales with international oil and gas companies or
tax receivables from the Canadian Government.
The Company assesses quarterly if there has been any impairment of
the financial assets of the Company. During the quarter ended
March 31, 2009, there was no impairment provision required on any of
the financial assets of the Company due to historical success of
collecting receivables. The Company does have a credit risk exposure
as the majority of the Company's accounts receivable are with
counterparties having similar characteristics. However, payments from
the Company's largest accounts receivable counterparties have
consistently been received within 30 days and the sales agreements
with these parties are cancellable with 30 days notice if payments
are not received.
At March 31, 2009, approximately $225,000 or 2.1 percent of the
Company's total accounts receivable are aged over 120 days and
considered past due. The majority of these accounts are due from
various joint venture partners. The Company actively monitors past
due accounts and takes the necessary actions to expedite collection,
which can include withholding production or net paying when the
accounts are with joint venture partners. Should the Company
determine that the ultimate collection of a receivable is in doubt,
it will provide the necessary provision in its allowance for doubtful
accounts with a corresponding charge to earnings. If the Company
subsequently determines an account is uncollectable, the account is
written off with a corresponding charge to the allowance account. The
Company's allowance for doubtful accounts balance at March 31, 2009
is $117,000 (December 31, 2008 - $85,000). There were no accounts
written off during the period.
The carrying value of accounts receivable approximates their fair
value due to the relatively short periods to maturity on this
instrument. The maximum exposure to credit risk is represented by the
carrying amount on the balance sheet. There are no material financial
assets that the Company considers past due.
Liquidity risk
--------------
Liquidity risk includes the risk that, as a result of Company's
operational liquidity requirements:
- The Company will not have sufficient funds to settle a transaction
on the due date;
- The Company will not have sufficient funds to continue with its
dividends;
- The Company will be forced to sell assets at a value which is less
than what they are worth; or
- The Company may be unable to settle or recover a financial asset
at all.
To help reduce these risks the Company:
- Maintains a portfolio of high-quality, long reserve life oil and
gas assets.
The Company has the following maturity schedule for its financial
liabilities:
Payments Due by Period
---------------------------------------------------------------------
Recognized on Less
Financial than 1 2-3 4-5
($ 000) Statements year years years
---------------------------------------------------------------------
Accounts payable and Yes -
accrued liabilities Liability 11,034 - -
Due to related Yes -
parties Liability 22,000 - -
Long-term Yes -
bank debt Liability - 89,383 -
Office leases No 593 1,249 918
---------------------------------------------------------------------
Total 33,627 90,632 918
---------------------------------------------------------------------
c) Risk management contracts
The Company currently has no outstanding risk management contracts:
13. SUBSEQUENT EVENT - DIVIDENDS
Subsequent to March 31, 2009, the Company declared a dividend of $0.12
per common share payable on April 30, 2009 to shareholders of record on
April 15, 2009 and a dividend of $0.12 per common share payable on
May 29, 2009 to shareholders of record on May 15, 2009.
14. SUBSEQUENT EVENT - EQUITY PLACEMENT
The Company, subsequent to the end of the quarter, entered into an
agreement to issue up to 1,068,000 common shares at a price of $16.85 per
share. The financing is expected to close on May 27, 2009.
%SEDAR: 00003132E