CALGARY, March 24 /CNW/ - Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX: BNE.UN) is pleased to announce its financial and operational results for the three months and fiscal year ended December 31, 2008.
Reorganization Highlights
Bonterra successfully converted to a corporation in November, 2008. The conversion provides investors with enhanced certainty in regard to Bonterra's ability to remain a high-income generating investment while negating the overhang associated with the Canadian federal government's legislation to tax trusts beginning in 2011. Select benefits of the new corporate structure include:
- The ability to continue to provide income oriented investors with a
substantial cash yield. Bonterra intends to continue with a cash
dividend policy similar to that followed by the Trust;
- Substantial tax pools of approximately $465 million which will
currently allow Bonterra to extend its taxable horizon beyond 2018,
subject to commodity prices;
- Higher after-tax earnings for investors as dividends are taxed at
lower rates than distributions;
- Removal of the growth limitation which currently exists under the
"normal growth" guidelines; and
- The flexibility to increase capital investment over the next several
years with a view to providing enhanced returns to investors.
Financial Highlights
- Net earnings increased substantially to $55.4 million or $3.25 per
share as compared to $30.4 million or $1.79 per unit in 2007;
- Cash flow from operations totaled $69.6 million ($4.07 per share) in
2008, an increase of 35 percent year over year;
- Cash payment per share/unit to investors totaled $3.12, a substantial
increase from the 2007 level of $2.64;
- The payout ratio was 77 percent of cash flow, within the Company's
annual target of 75 to 80 percent and a decrease from the 2007 level
of 87 percent.
Operational Highlights
- Production increased to an all time high of 4,346 barrels of oil
equivalent (BOE) per day as a result of its internal development
program and an acquisition during the year. Fourth quarter production
totaled 4,587 BOE per day, an increase of nine percent over the same
period last year and the 2009 exit rate was 4,950 BOE per day;
- Reserves increased to 24.1 million BOE and 31.2 million BOE on a
proved and a proved plus probable basis, respectively. This
represents an increase of 12.1 percent to the Company's proved
reserves and a 14.4 percent increase to proved plus probable
reserves;
- Reserves per share on a P+P basis increased 13.0 percent to 1.83 boe
per share;
- Bonterra's finding and development costs (F&D costs) including
acquisitions in 2008 continue to be among the lowest in the Canadian
oil and gas industry. F&D average costs for the past three years were
$8.67 per boe on a proved basis and $7.47 per BOE on a proved plus
probable (P+P) basis compared with the previous three year average
(2005-2007) of $14.37 per boe on a proved basis and $11.07 per boe on
a P+P basis.
Annual Highlights
2008 2007 2006
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Financial ($000, except $ per share/unit)
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Revenue - realized oil and gas 121,730 96,431 88,734
Cash payments per share/unit(1) 3.12 2.64 2.82
Cash flow from operations 69,570 51,433 51,944
Per Share/Unit Basic 4.07 3.04 3.10
Per Share/Unit Fully Diluted 4.06 3.04 3.08
Payout Ratio(1) 77% 87% 91%
Net Earnings 55,426 30,350 37,250
Per Share/Unit Basic 3.25 1.79 2.23
Per Share/Unit Fully Diluted 3.23 1.79 2.21
Capital Expenditures and Acquisitions 45,407 19,300 38,348
Working Capital Deficiency 23,878 58,766 50,187
Long-term Debt 79,910 - -
Shareholders'/Unitholders' Equity 56,777 44,376 53,359
Shares/Units Outstanding 17,258 16,928 16,875
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Operations
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Oil and Liquids (barrels per day) 3,073 3,113 3,040
Average Price ($ per barrel) 87.54 70.31 64.69
Natural Gas (MCF per day) 7,637 6,627 6,014
Average Price ($ per MCF) 8.21 6.75 7.55
Total BOE per day (2) 4,346 4,218 4,042
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Reserves
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Oil and Liquids (barrels in 000s)
Proved Developed Producing (Gross)(3) 15,534 14,468 13,688
Proved (Gross) 17,991 17,472 16,758
Proved plus Probable (Gross) 22,867 21,910 21,526
Natural Gas (MCF in 000s)
Proved Developed Producing (Gross) 32,108 19,863 17,011
Proved (Gross) 36,571 24,125 22,562
Proved plus Probable (Gross) 50,245 32,465 29,700
Reserve Life Index(4) (oil, liquids and
natural gas at 6:1) (years)
Proved Developed Producing (Gross) 12.5 11.3 11.0
Proved (Gross) 14.4 13.7 13.6
Proved plus Probable (Gross) 18.7 17.4 17.6
Reserves per Weighted Average Outstanding
Share/Unit (BOE)
Proved Developed Producing (Gross) 1.22 1.05 0.98
Proved (Gross) 1.41 1.27 1.22
Proved plus Probable (Gross) 1.83 1.62 1.57
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Quarterly Highlights
2008 4th 3rd 2nd 1st
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Financial ($000, except $ per
share/unit)
Revenue - realized oil and gas sales 22,613 34,226 34,398 30,493
Cash flow from operations 10,336 22,492 20,530 16,212
Per Share/Unit Basic 0.59 1.31 1.21 0.96
Per Share/Unit Fully Diluted 0.59 1.30 1.20 0.96
Cash payments per share/unit(1) 0.62 0.96 0.84 0.70
Payout Ratio(1) 105% 73% 69% 73%
Net Earnings 10,585 21,125 12,912 10,804
Per Share/Unit Basic 0.62 1.23 0.76 0.64
Per Share/Unit Fully Diluted 0.62 1.22 0.75 0.64
Capital Expenditures and
Acquisitions 30,405 6,038 2,543 6,421
Total Assets 265,301 150,120 153,247 150,169
Working Capital Deficiency 23,878 47,499 57,148 57,810
Long-term debt 79,910 - - -
Shareholders'/Unitholders' Equity 56,777 57,623 46,612 48,136
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Operations
Oil and Liquids (barrels per day) 3,105 3,013 3,024 3,153
Natural Gas (MCF per day) 8,892 7,233 7,272 7,139
Total BOE per day 4,587 4,219 4,236 4,343
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(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) 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 convervsion 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) Gross reserves relate to the Company's ownership of reserves
deducting any royalties.
(4) The reserve life index is calculated by dividing the reserves (BOE)
by the annualized fourth quarter average production rate (2008 -
4,587 BOE per day; 2007 - 4,295 BOE per day; 2006 - 4,119).
A Discussion of Financial and Operational Results
This press release is a review of the operations, current financial position, and outlook for Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company") and should be read in conjunction with the audited financial statements for the year ended December 31, 2008, together with the notes related thereto.
Forward-looking Information
Certain statements contained in this report include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, statements 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 report includes, but is not limited to: expected cash provided by continuing operations; 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. The foregoing factors are not exhaustive and are further discussed herein under the heading Business Prospects, Risks and Outlooks as well as in the Company's Annual Information Form filed on SEDAR at www.sedar.com.
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 so, what benefits will be derived therefrom. Except as required by law, the Company 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.
Production
Three months ended Twelve months ended
December September December December December
31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Crude oil and NGLs
(barrels per day) 3,105 3,013 3,098 3,073 3,113
Natural gas (MCF per day) 8,892 7,233 7,176 7,637 6,627
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Average BOE per day 4,587 4,219 4,295 4,346 4,218
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Bonterra's 2008 average production increased three percent on a per BOE basis. Crude oil production decreased by approximately 1.3 percent while gas production increased by approximately 15.2 percent. The decreased crude oil production was due to the timing of Bonterra's 2008 development program in which production came on late in the year and therefore contributed little to 2008 and the 2007 property swap where the Company exchanged its predominantly Saskatchewan oil property for additional production in the Pembina area which had higher natural gas production. The natural gas increase was due to a combination of the successful 2008 development program, the acquisition of Silverwing on November 12, 2008 and the above mentioned property swap.
The Company's fourth quarter production in 2008 saw increases in crude oil (92 barrels per day) and natural gas (1,659 MCF per day) production over Q308 production due to the commencement of production from new wells drilled as well as the completion of the Silverwing acquisition. The Silverwing acquisition, which closed on November 12, 2008, added approximately 650 BOE per day, mainly natural gas. The Company's average production volume for December was approximately 4,950 BOE per day.
Bonterra's overall annual decline rate for 2008 was approximately 8.5 percent. The Company was able to more than offset this decline with its 2008 drill program. Bonterra, along with its partners, drilled 33 gross (22.9 net) Cardium oil wells. This includes 26 gross and 21.9 net Cardium wells drilled directly by the Company. Also the Company drilled 7 gross (5 net) shallow gas wells in 2008 in the Pembina field and 3 gross (2.9 net) Shaunavon oil wells. The Company also participated in one (0.1 net) Cardium natural gas well drilled by one of its partners. Bonterra recorded a 100 percent success rate with its 2008 drilling program. The majority of the wells were drilled in the fourth quarter; 14 (10.2 net) Cardium oil wells, seven gross (five net) shallow Pembina gas wells and all three (2.9 net) of the Shaunavon oil wells. The closing date for the Silverwing acquisition was November 12, 2008 and therefore contributed little to production rates for the full year.
As at December 31, 2008, Bonterra had only one gross (0.25 net) Cardium oil well, no natural gas wells, three gross (2.5 net) coalbed methane (CBM) wells with assigned reserves and three gross (2.9 net) Shaunavon oil wells drilled but not on production. Subsequent to December 31, 2008 and up to the date of this report, the Company has put all of its oil wells on production. The timing for the tie-in of the CBM wells has not yet been determined.
Revenue
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Revenue - oil and gas
sales (000's) - cash 22,613 34,226 26,573 121,730 96,431
Average Realized Prices:
Crude oil and NGLs (per
barrel) 58.91 103.36 77.60 87.54 70.31
Natural gas (per MCF) 7.00 8.20 6.70 8.21 6.75
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Revenue from petroleum and natural gas sales increased 26 percent in 2008 compared to 2007 due to increased production volumes and an increase in the average price received for crude oil, natural gas liquids and natural gas. The fourth quarter of 2008 saw a substantial decrease in realized revenues over the third quarter of 2008 due to the significant decrease in commodity prices.
Included in revenue is a risk management loss of $7,353,000 (2007 - gain of $621,000) due to lower prices received as a result of commodity risk management agreements. The Company may continue to hedge future production to assist in managing its cash flow. As at December 31, 2008, the Company had no outstanding risk management agreements. The value of the outstanding commodity hedging contracts as of December 31, 2007 was a net liability of $3,085,000.
Royalties
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Crown royalties 2,337 3,523 2,634 13,736 9,209
Freehold royalties, gross
overriding royalties and
net carried interests 558 1,134 682 3,479 3,235
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Total royalty expense 2,895 4,657 3,316 17,215 12,444
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Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The majority of the Company's wells are low productivity wells and therefore have low Crown royalty rates. The Company's average Crown royalty rate was approximately 10.6 percent (2007 - 10 percent) and approximately 2.7 percent (2007 - 3 percent) for other royalties before hedging adjustments.
During 2007, the Company was advised by the owner of a gross overriding royalty that a production limit was attained that resulted in an additional gross overriding royalty in respect of certain of its Cardium oil wells. The production limit was triggered by a calculation on a multitude of Cardium wells including many that were not owned by the Company. In addition the exact wells that the production limit was applicable to was not readily known by the Company nor easily determined. In discussions with the payee it was determined that the production limit was reached in late 2005. The royalty was calculated based on this agreed date and the affected wells for the Company and other operators in the area were identified. The approximate amount of the adjustment, net to the Company was $570,000 for periods prior to January 1, 2007. This amount has been included in the 2007 royalty numbers.
Also in 2007 the Company was informed by the operator of its former Dodsland property that it had not been charged a net profit royalty for the years 2004, 2005 and 2006. In reviewing the agreements it was confirmed the claim was accurate and an amount of approximately $150,000 was paid by the Company in 2007 for the net profit royalty. This was also expensed in 2007.
New Alberta Crown Royalty Framework (NRF)
Royalty rates in the fourth quarter averaged approximately 13.4 percent; slightly higher than preceding quarters. The NRF rates vary by prices as well as productivity levels. With the current low prices the new royalty rates should result in a significant reduction in the amount the Company will pay to the Province of Alberta. This combined with the Silvering acquisition (mostly BC production with lower Crown royalty rates) should result in a lower average Crown royalty rate for the Company in 2009.
Production Costs
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Production costs 6,859 6,148 5,535 25,413 24,073
$ per BOE 16.25 15.84 14.01 15.98 15.64
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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. Operating costs on the Company's newly acquired British Columbia (BC) properties as well as on the newly drilled wells are lower on a BOE basis than on its older low productivity wells and this may result in lower operating costs per BOE in the future.
Operating costs increased slightly in the fourth quarter of 2008 compared to the prior quarter due primarily to the acquisition of Silverwing and from new wells put on production in the fourth quarter of 2008 and large industry wide increases for oilfield services especially for oil producing properties. Average production costs per BOE increased marginally in Q408 compared with the previous quarter due mainly to winterization programs performed on the Company's wells and facilities.
With the acquisition of Silverwing and the Company's recent drilling success and expected declines in oilfield service costs, the Company anticipates operating costs in the $14 to $15 per BOE range for 2009. The higher operating costs for the Company are substantially offset by lower royalty rates and results in higher cash net backs on a combined basis despite higher than average operating costs.
General and Administrative Expense
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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G&A Expense 824 845 739 3,401 2,603
$ per BOE 1.95 2.18 1.69 2.14 1.69
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General and administrative (G&A) expenses increased 31 percent in 2008 compared to 2007. The Company provides administrative services to Comaplex Minerals Corp. (Comaplex) and Pine Cliff Energy Ltd. (Pine Cliff), companies that share common directors and management. Please refer to discussion under Related Party Transactions for details.
The Company's only significant general and administrative costs are employee compensation and professional services such as legal, engineering and accounting. Employee compensation expense increased by approximately 29 percent ($856,000). The increase is due primarily to the Company's bonus plan which resulted in additional employee compensation of $610,000 (20.7 percent) with the remainder due to increased staffing levels (3.8 percent) and 2008 salary increases (4.5 percent). The Company's bonus plan consists of cash payments equal to three percent of before tax net earnings to be paid to employees and key consultants based on performance throughout the year.
Costs associated with professional services increased by approximately $90,000. Increases in other general and administrative areas have been offset by increased administration recovery charges to capital programs.
The quarter over quarter decrease was primarily due to a lower bonus accrual but was almost fully offset by increased professional fees related to the internal control review and costs related to managing the integration of the Silverwing acquisition and reorganization.
Interest Expense
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Interest Expense 746 545 878 2,740 3,028
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The decrease in interest expense in 2008 as compared to 2007 was due to much lower borrowing costs, offset partially by increased loan balances resulting from the Company's acquisition of Silverwing and its reorganization. Interest rates during the year on the outstanding debt averaged approximately 4.5 percent (2007 - 5.9 percent). The Company maintained an average outstanding debt balance of approximately $60,600,000 (2007 - $51,600,000). Total debt (including negative working capital) as of December 31, 2008 represents approximately 17.9 months of 2008 annual cash flow from operations or 30.1 months based on annualized 2008 fourth quarter cash flow from operations. The ratio of bank debt only as of December 31, 2008 based on the annualized 2008 Q4 base was 27.1 months. Also in the fourth quarter of 2008 the Company had one time reorganization costs of approximately $1,369,000 reducing cash flow to $10,336,000 from approximately $11,700,000. This one item has significant implications on the ratio of bank debt to cash flow and would reduce the Q4 numbers of 30.1 to 26.6 and 27.1 to 23.9 months.
During the year the Company acquired Silverwing a public oil and gas producer for cash consideration including negative working capital of $28,995,000. In addition, the Trust underwent a reorganization resulting in a cash outlay of $11,257,000 plus reorganization costs of $2,121,000. The Company also experienced a decrease in cash flow due to the rather significant drop in commodity prices during the final four months of 2008.
The Company ended 2008 with a debt to cash flow ratio that is higher than usual even though it is in a range that is normal with its peers at the present time. The main reason for the higher debt level is that early in the third quarter of 2008, when the Company announced its reorganization and Silverwing acquisition, it had various options outstanding that were well in the money for approximately $35 million. At closing of the reorganization on November 12, 2008, the world economy had changed substantially resulting in large reductions in share prices, including Bonterra's and the majority of the outstanding options not being exercised. The debt level is still very manageable for Bonterra but plans for 2009 are to reduce the debt to cash flow ratio that presently exceeds 2 to 1.
Bank debt at December 31, 2008 was $93,235,000 (December 31, 2007 - $57,422,000). The Company's banking arrangements allow it to use Bankers Acceptances (BA's) as part of its loan facility. Interest charges on BA's are generally one half percent lower than that charged on the general loan account. The interest rate on the credit facilities is calculated as follows:
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Consolidated Level I Level II Level III Level IV Level V Level VI
Total Funded ----------------------------------------------------------
Debt(1) to Over Over Over Over
Consolidated Below 0.5:1 to 1.0:1 to 1.5:1 to 2.0:1 to Over
Cash flow Ratio 0.50:1 1:0:1 1.5:1 2.0:1 2.5:1 2.5:1
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Canadian Prime
Rate Plus 50 75 85 100 125 150
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Bankers'
Acceptances
Rate Plus 150 175 185 200 225 250
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(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
Consolidated total funded debt to consolidated cash flow ratio shall be adjusted effective as of the first day of the third month following the end of each fiscal quarter, except for the end of a fiscal year in respect of which the adjustment shall be made effective as of the first day of the fifth month following the end of such fiscal year, with each such adjustment to be effective until the next such adjustment.
Reorganization Costs
Based on current accounting rules, costs associated with the Trust's reorganization into Bonterra Oil and Gas Ltd. must be expensed. The costs consist of a $1,000,000 finders fee paid to a company that facilitated the reorganization, $931,000 of professional fees, $150,000 stock exchange fees and $40,000 of costs associated with the distribution of the reorganization document. These costs are all one time costs and no further costs are anticipated by the Company in direct relation to the reorganization. Of these total costs of $2,121,000, the Company expensed $1,369,000 in the fourth quarter of 2008 and $752,000 was expensed in the third quarter of 2008.
Stock-Based Compensation
Stock-based compensation is a statistically calculated value representing the estimated expense of issuing employee stock options. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants. Due to the reorganization, all existing employee unit options vested and were either exercised or were cancelled. This resulted in approximately an additional $195,000 of stock-based compensation being recorded in the fourth quarter on the automatic vesting of outstanding options. Also the Company issued 1,390,500 stock options during 2008 resulting in a further expense of $97,000.
The 1,390,500 common share options were issued at the end of November 2008 with an exercise price of $20.50 per share and a fair value of $1.11 per option. The fair value of the options granted has been estimated using the Black-Scholes option pricing model, assuming a weighted risk free interest rate of 2.2 percent (2007 - 4.7 percent), expected weighted average volatility of 31 percent (2007 - 27 percent), expected weighted average life of 3.5 years (2007 - 2.3 years) and an annual dividend/distribution rate based on the dividends paid to the Shareholders/Unitholders during the year. The future stock-based compensation impact of these options is approximately $225,000 per quarter over the next four quarters.
Depletion, Depreciation, Accretion and Dry Hole Costs
The Company follows the successful efforts method of accounting for petroleum and natural gas exploration and development costs. Under this method, the costs associated with dry holes are charged to operations. For intangible capital costs that result in the addition of reserves, the Company depletes its oil and natural gas intangible assets using the unit-of- production basis by field.
For tangible assets such as well equipment, a life span of ten years is estimated and the related tangible costs are depreciated at one tenth of original cost per year. The use of a ten year life span instead of calculating depreciation over the life of reserves was determined to be more representative of actual costs of tangible property. Given the Company's long production life, wells generally require replacement of tangible assets more than once during their life time. Most of the Company's wells have been producing since the 1960's and are expected to continue to produce for at least another twenty years.
Provisions are made for asset retirement obligations through the recognition of the fair value of obligations associated with the retirement of tangible long-life assets being recorded in the period the asset is put into use, with a corresponding increase to the carrying amount of the related asset. The obligations recognized are statutory, contractual or legal obligations. The liability is adjusted over time for changes in the value of the liability through accretion charges which are included in depletion, depreciation and accretion expense. The costs capitalized to the related assets are amortized to earnings in a manner consistent with the depletion and depreciation of the underlying asset.
At December 31, 2008, the estimated total undiscounted amount required to settle the asset retirement obligations was $58,903,000 (2007 - $54,622,000). Of the $4,281,000 increase, the majority is due to the Silverwing acquisition.
These obligations will be settled based on the useful lives of the underlying assets, which extend up to 50 years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of five percent. The discount rate is reviewed annually and adjusted if considered necessary. A change in the rate would have a significant impact on the amount recorded for asset retirement obligations. Based on the current provision, a one percent increase in the risk adjusted rate would decrease the asset retirement obligation by $2,706,000. While a one percent decrease in the risk adjusted rate would increase the asset retirement obligation by $3,639,000.
For the fiscal year ending December 31, 2008, the Company expensed $14,749,000 (2007 - $16,675,000) for the above-described items including $Nil (2007 - $3,078,000) for dry hole costs. During 2007 the Company wrote off all costs related to eight wells which no reserves were attributed by the independent third party engineers.
Income Taxes
On November 12, 2008, Bonterra Energy Income Trust converted to a corporation. Due to the conversion and the acquisition of Silverwing, the Company increased its usable tax pools to approximately $468,000,000 (see below). As a result of the reorganization, the Company has recorded a future income tax asset and a corresponding deferred tax credit. These amounts will be amortized into future tax expense as the associated tax pools are consumed.
The current tax provision relates to resource surcharge payable by the Company to the Province of Saskatchewan. The surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The provincial government of Saskatchewan reduced the resource surcharge rate from 3.1 percent to 3.0 percent on July 1, 2008.
The Company has the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:
Rate of
Utilization
($ 000) % Amount
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Undepreciated capital costs 20-100 $ 23,696
Eligible capital expenditures 7 1,870
Share issue costs 20 4,581
Canadian oil and gas property expenditures 10 25,072
Canadian development expenditures 30 50,743
Canadian exploration expenditures 100 10,530
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 271,029
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$ 467,878
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(1) Income tax losses carried forward expire in the following years;
2014 - $1,069,000, 2025 - $3,179,000, 2026 - $109,244,000,
2027 - $116,787,000, 2028 - $40,750,000.
Prior to becoming a corporation, the Trust paid nine distributions for the
2008 tax year. The Canadian tax breakdown of those distributions is as
follows:
Percentage
-----------
Taxable Income (Other Income) 85.16
Return of Capital 14.84
------------
100.00
------------
With respect to cash distributions paid during the year to U.S. individual unitholders, 17.71 percent should be reported as a return of capital (to the extent of the Unitholder's U.S. tax basis in their respective units) and 82.29 percent should be reported as qualified dividends.
Net Earnings
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Net Earnings 10,585 21,125 8,372 55,426 30,350
Bonterra's net earnings for the year ended December 31, 2008 represents an 82 percent increase over the Company's 2007 net earnings. The Company recorded net earnings per share on a fully diluted basis in 2008 of $3.23 verses $1.79 in the 2007 year. This represents a return on Shareholders' equity of approximately 97.6 percent (2007 - 68.6 percent) based on year end Shareholders' equity.
Strong crude oil and natural gas prices for most of 2008 along with a three percent increase in production volumes were driving factors behind the increased profit. However, during the fourth quarter and continuing into the first quarter and likely beyond, commodity prices have plunged to under $40 U.S. ($50 Cdn). This along with natural gas prices in the $4 to $5 dollar range will significantly reduce the Company's net earnings. The Company's low capital costs combined with the Company's low production decline rates should allow for continued positive earnings even in the above mentioned price environment.
Cash Flow from Operations
Three months ended Twelve months ended
December September December December December
($ 000) 31, 2008 30, 2008 31, 2007 31, 2008 31, 2007
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Cash flow from operations 10,336 22,492 13,369 69,570 51,433
Cash flow from operations increased 35 percent year over year, mainly due to increased commodity prices received during the first nine months of 2008. The fourth quarter of 2008 saw significant price declines in all commodity categories. Although the Company was able to increase production in the fourth quarter of 2008 by almost nine percent over the previous quarter, cash flow from operations decreased approximately 54 percent. One time costs of $1,369,000 incurred in Q4 (Q3 - $752,000) related to the reorganization also contributed to the decline.
With the continuing depressed crude oil and natural gas prices, cash flow for 2009 is expected to be significantly negatively affected. The price declines are expected to be partially offset by anticipated production volumes in excess of 5,000 BOE per day for 2009, and anticipated decreases in G&A costs (lower employee compensation) and in corporate resource surcharge (tax on revenues). Also, Bonterra does not expect any further costs associated with the acquisition of Silverwing or the reorganization.
Cash Netbacks
The following table illustrates the Company's cash netback:
$ per Barrel of Oil Equivalent (BOE) 2008 2007
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Production volumes (BOE) 1,590,666 1,539,461
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Gross production revenue $ 81.15 $ 62.24
Realized gain (loss) on risk management
contracts (4.62) 0.40
Royalties (10.82) (8.08)
Field operating (15.98) (15.64)
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Field netback 49.73 38.92
General and administrative (2.14) (1.69)
Interest and taxes (2.00) (2.30)
-------------------------------------------------------------------------
Cash netback $ 45.59 $ 34.93
-------------------------------------------------------------------------
The following table illustrates the Company's cash netback for the three
months ended:
December 31, September 30,
$ per Barrel of Oil Equivalent (BOE) 2008 2008
-------------------------------------------------------------------------
Production volumes (BOE) 422,008 395,962
-------------------------------------------------------------------------
Gross production revenue $ 51.27 $ 95.80
Realized gain (loss) on risk management
contracts 2.31 (7.60)
Royalties (6.86) (12.00)
Field operating (16.25) (15.84)
-------------------------------------------------------------------------
Field netback 30.47 60.36
General and administrative (1.95) (2.18)
Interest and taxes (1.90) (1.73)
-------------------------------------------------------------------------
Cash netback $ 26.62 $ 56.45
-------------------------------------------------------------------------
Finding and Development Costs (F&D Costs)
The Company has been active in its capital development program over the past three years. Over this time period Bonterra has incurred the following F&D Costs:
-------------------------------------------------------------------------
2008 F&D 2007 F&D 2006 F&D 2008 Three 2007 Three
Costs per Costs per Costs per Year Year
BOE(1)(2) BOE(1)(2) BOE(1)(2) Average Average
-------------------------------------------------------------------------
Proved Reserve
Additions $8.67 $2.74 $25.51 $12.30 $14.37
-------------------------------------------------------------------------
Proved plus Probable
Reserve Additions $7.47 $2.68 $18.21 $9.45 $11.07
-------------------------------------------------------------------------
The above figures have been calculated in accordance with National Instrument 51-101 (NI 51-101) where the F&D Costs equate to the total exploration and development costs incurred by the Company during the year plus the yearly change in estimated future development costs as calculated by Sproule Associates Limited. The following precautionary notes have been provided as required by NI 51-101.
(1) Barrels of Oil Equivalent may be misleading, particularly if used in
isolation. A BOE conversion ratio of 6 MCF:1 bbl is based on an
energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the
wellhead.
(2) The aggregate of the exploration and development costs incurred in
the most recent financial year and the change during that year in
estimated future development costs generally will not reflect total
finding and development costs related to reserve additions for that
year.
Results from the Company's Cardium oil drilling program continue to be better than anticipated resulting in an increase in the third party engineering reports estimated recoverable reserves from existing wells but also from future development. Continued low decline rates have also resulted in increased reserves due to technical revisions. Both these factors contributed to an overall F&D cost in 2008 of $7.47 per BOE on a proved plus probable basis.
Related Party Transactions
The Company holds 689,682 (2007 - 689,682) common shares in Comaplex which have a fair market value as of December 31, 2008 of $2,131,000 (2007 - $4,014,000). 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 $330,000 (2007 - $300,000). 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, 2007 - 204,633) common shares in the Company. 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. At December 31, 2008, Comaplex owed the Company $56,000 (December 31, 2007 - $63,000).
In order to facilitate the acquisition of Silverwing, the Company borrowed on a short-term basis $20,000,000 from Comaplex to allow time to finalize documentation for its new bank line of credit. The funds were repaid on November 21, 2008. Total interest paid on the loan was $21,000.
The Company also has a management agreement with 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 $238,000 (2007 - $216,000). 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 December 31, 2008 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2007 - $4,000).
As of December 31, 2008, the Company's CEO and major shareholder had loaned the Company $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 within its bank debt. Interest paid on this loan during 2008 was $7,000.
Liquidity and Capital Resources
During 2008, Bonterra participated in drilling 44 gross wells (30.9 net) at a total cost of $29,466,000. Included in the above figure is approximately $1,200,000 of costs associated with the completion and tie-in of wells the Company drilled in 2007 and prior years. As discussed in the Production section, only four gross oil wells (3.2 net) were not on production by December 31, 2008. These wells have subsequently been placed on production at a capital cost of less than $1,000,000 being spent in 2009.
The Company currently has plans to drill approximately 30 gross (18 net) oil and gas wells in 2009 at an estimated budget figure of $15,000,000. The current plan, if Alberta suitably adjusts its royalty structure, includes 18 gross (14 net) Cardium vertical oil wells and two gross (0.65 net) Cardium horizontal oil wells. The balance of the drilling is anticipated to consist of wells in BC and Saskatchewan. The majority of the drilling is anticipated to occur during the third and fourth quarters due in part to the Company's position that it is prudent to wait for the Alberta government to disclose its incentive programs and potential modifications to its high royalty rates so that Alberta will be competitive for certain types of wells.
Bonterra anticipates funding the 2009 capital program out of cash flow and if necessary an increase in the Company's line of credit. Should the need arise, the Company is prepared to raise sufficient equity to complete its planned capital expenditures. However, the current capital budget is predicated on commodity prices recovering to above $50 U.S. for crude oil and $6 per MCF for natural gas and an $0.82 dollar for the last six months of 2009.
Due to the corporate reorganization and acquisition of Silverwing, the Company amended its bank facility to consist of an $80,000,000 syndicated revolving credit facility and a $20,000,000 non-syndicated demand credit facility (December 31, 2007 - $69,900,000) (non-syndicated demand facility). The terms of the syndicated revolving credit facility provide that the loan is revolving to May 30, 2010 and is subject to annual review. The revolving credit facility has no fixed payment requirements. The terms of the non-syndicated demand credit facility provide that the loan is due on demand and is subject to annual review and has no fixed repayment terms.
At December 31, 2008 the Company had bank debt of $93,235,000 (2007 - $57,422,000). For the interest rates charged on the facilities please refer to the Interest Expense section of this report.
The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.
Bonterra Oil & Gas Ltd.
Consolidated Balance Sheets
As at December 31 2008 2007
($000)
Assets
Current
Restricted term deposit (Note 10) $ 20 $ -
Accounts receivable (Notes 4 & 15) 11,753 10,575
Crude oil inventory 845 792
Prepaid expenses (Note 4) 4,222 1,462
Future income tax asset (Note 11) 2,669 913
Investment in related party (Note 6) 2,131 4,014
-------------------------------------------------------------------------
21,640 17,756
-------------------------------------------------------------------------
Restricted cash (Note 7) 1,252 -
Future income tax asset (Note 11) 85,416 -
Property and Equipment (Note 8)
Petroleum and natural gas properties and
related equipment 232,685 187,288
Accumulated depletion and depreciation (75,692) (61,805)
-------------------------------------------------------------------------
156,993 125,483
-------------------------------------------------------------------------
$ 265,301 $ 143,239
-------------------------------------------------------------------------
Liabilities
Current
Distribution payable $ - $ 3,724
Accounts payable and accrued
liabilities (Note 4) 23,888 12,291
Derivative liability (Note 16) - 3,085
Due to related party (Note 9) 6,000 -
Deferred credit (Note 11) 2,305 -
Short-term bank debt (Note 10) 13,325 57,422
-------------------------------------------------------------------------
45,518 76,522
Long-term bank debt (Note 10) 79,910 -
Future income tax liability (Note 11) - 7,595
Deferred credit (Note 11) 64,758 -
Asset retirement obligations (Note 12) 18,338 14,904
-------------------------------------------------------------------------
208,524 99,021
-------------------------------------------------------------------------
Commitments, Contingencies and
Guarantees (Note 17)
Shareholders' Equity (Note 13)
Share capital 99,530 -
Unit capital - 90,590
Contributed surplus 2,542 2,140
-------------------------------------------------------------------------
102,072 92,730
-------------------------------------------------------------------------
Deficit (46,715) (51,543)
Accumulated other comprehensive
income (Note 14) 1,420 3,031
-------------------------------------------------------------------------
(45,295) (48,512)
-------------------------------------------------------------------------
Total Shareholders' Equity 56,777 44,218
-------------------------------------------------------------------------
$ 265,301 $ 143,239
-------------------------------------------------------------------------
Bonterra Oil & Gas Ltd.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31
($000) 2008 2007
Unitholders' equity, beginning of year $ 44,218 $ 53,359
Comprehensive income for the year 53,815 31,001
Adjustment of opening accumulated other
comprehensive income - 2,380
Net capital contributions (Note 13) 8,135 993
Stock-based compensation 1,207 1,133
Distributions declared (42,660) (44,648)
-------------------------------------------------------------------------
Unitholders' Equity 64,715 44,218
Conversion of the Trust to
a Corporation (Note 4) - (44,218)
Dividends declared (7,938) -
-------------------------------------------------------------------------
Shareholders' Equity, End of Year $ 56,777 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bonterra Oil & Gas Ltd.
Consolidated Statements of Operations and Deficit
For the Years Ended December 31
($000) 2008 2007
Revenue
Oil and gas sales $ 129,083 $ 95,810
Gain (loss) on risk management
contracts - cash (7,353) 621
Gain (loss) on risk management
contracts - non-cash 3,085 (3,085)
Royalties (17,215) (12,444)
Interest and other 45 44
-------------------------------------------------------------------------
107,645 80,946
-------------------------------------------------------------------------
Expenses
Production costs 25,413 24,073
General and administrative 3,401 2,603
Interest on debt 2,740 3,028
Reorganization costs (Note 4) 2,121 -
Stock-based compensation 1,207 1,133
Dry hole costs - 3,078
Depletion, depreciation and accretion 14,749 13,597
-------------------------------------------------------------------------
49,631 47,512
-------------------------------------------------------------------------
Earnings Before Taxes 58,014 33,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Taxes (Note 11)
Current 437 512
Future 2,151 2,572
-------------------------------------------------------------------------
2,588 3,084
-------------------------------------------------------------------------
Net Earnings for the Year 55,426 30,350
Deficit, beginning of year (51,543) (37,245)
Distributions declared (42,660) (44,648)
Dividends declared (7,938) -
-------------------------------------------------------------------------
Deficit, end of year ($46,715) ($51,543)
-------------------------------------------------------------------------
Net Earnings Per Share - Basic (Note 13) $ 3.25 $ 1.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Per Share - Diluted (Note 13) $ 3.23 $ 1.79
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bonterra Oil & Gas Ltd.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
($000) 2008 2007
Net Earnings for the Period $ 55,426 $ 30,350
-------------------------------------------------------------------------
Other comprehensive income, net of income tax
Unrealized (loss) gain on investments (net
of income taxes of $(272), (2007 - $252)) (1,611) 1,465
Gains and losses on derivatives designated
as cash flow hedges transferred to net
earnings (net of income taxes of ($334)) - (814)
-------------------------------------------------------------------------
Other Comprehensive Income (Loss) (1,611) 651
-------------------------------------------------------------------------
Comprehensive Income $ 53,815 $ 31,001
-------------------------------------------------------------------------
Comprehensive Income Per
Share - Basic (Note 13) $ 3.15 $ 1.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive Income Per
Share - Diluted (Note 13) $ 3.14 $ 1.83
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bonterra Oil & Gas Ltd.
Consolidated Statements of Cash Flow
For the Years Ended December 31
($000's) 2008 2007
Operating Activities
Net earnings for the year $ 55,426 $ 30,350
Items not affecting cash
(Gain) loss on risk management
contracts - non-cash (3,085) 3,085
Stock-based compensation 1,207 1,133
Dry hole costs - 3,078
Depletion, depreciation and accretion 14,749 13,597
Future income taxes 2,151 2,572
-------------------------------------------------------------------------
70,448 53,815
-------------------------------------------------------------------------
Change in non-cash working capital
Accounts receivable 2,642 (1,082)
Crude oil inventory (40) 51
Prepaid expenses (360) (262)
Accounts payable and accrued liabilities (57) (269)
Asset retirement obligations settled (3,063) (820)
-------------------------------------------------------------------------
(878) (2,382)
-------------------------------------------------------------------------
69,570 51,433
-------------------------------------------------------------------------
Financing Activities
Increase in debt 20,698 12,043
Due to related party 6,000 -
Stock option proceeds 7,935 993
Unit distributions (46,384) (44,974)
Dividends (7,938) -
-------------------------------------------------------------------------
(19,689) (31,938)
-------------------------------------------------------------------------
Investing Activities
Property and equipment expenditures (30,060) (19,300)
Acquisition (Note 5) (13,816) -
Reorganization (Note 4) (11,257) -
Restricted term deposit (20) -
Change in non-cash working capital
Accounts receivable - 993
Accounts payable and accrued liabilities 5,272 (1,188)
-------------------------------------------------------------------------
(49,881) (19,495)
-------------------------------------------------------------------------
Net cash inflow - -
Cash, beginning of year - -
-------------------------------------------------------------------------
Cash, End of Year $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid $ 2,740 $ 3,028
Cash Taxes Paid $ 582 $ 292
Bonterra Oil & Gas Ltd.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007
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 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 2007 comparative
consolidated financial statement figures are those previously presented
by the Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles (GAAP)
as described below.
Consolidation
These consolidated financial statements include the accounts of the
"Company", the Trust (wholly owned by the Company) and its wholly owned
subsidiary Bonterra Energy Corp. (Bonterra). Inter-company transactions
and balances are eliminated upon consolidation.
Measurement Uncertainty
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as at the date of the balance sheets as well as the reported
amounts of revenues, expenses, and cash flows during the periods
presented. Such estimates relate primarily to unsettled transactions and
events as of the date of the financial statements. Actual results could
differ materially from estimated amounts.
Amounts recorded for depletion, depreciation and accretion costs and
amounts used for ceiling test calculations are based on estimates of
crude oil and natural gas reserves and future costs required to develop
those reserves. Stock-based compensation is based upon expected
volatility and option life estimates. Asset retirement obligations are
based on estimates of abandonment costs, timing of abandonment, inflation
and interest rates. The provision for income taxes is based on judgements
in applying income tax law and estimates on the timing, likelihood and
reversal of temporary differences between the accounting and tax basis of
assets and liabilities. These estimates are subject to measurement
uncertainty and changes in these estimates could materially impact the
financial statements of future periods.
Revenue Recognition
Revenues associated with sales of petroleum and natural gas are recorded
when title passes to the customer.
Joint Interest Operations
Significant portions of the Company's oil and gas operations are
conducted jointly with other parties and accordingly the financial
statements reflect only the Company's proportionate interest in such
activities.
Inventories
Inventories consist of crude oil. Crude oil stored in the Company's tanks
are valued on a first in first out basis at the lower of cost or net
realizable value. Inventory cost for crude oil is determined based on
combined average per barrel operating costs, royalties and depletion and
depreciation for the year and net realizable value is determined based on
sales price in the month preceding year end.
Investments
Investments are carried at fair value. Fair value is determined by
multiplying the year end trading price of the investments by the number
of common shares held as at period end.
Property and Equipment
Petroleum and Natural Gas Properties and Related Equipment
The Company follows the successful efforts method of accounting for
petroleum and natural gas properties and related equipment. Costs of
exploratory wells are initially capitalized pending determination of
proved reserves. Costs of wells which are assigned proved reserves remain
capitalized, while costs of unsuccessful wells are charged to earnings.
All other exploration costs including geological and geophysical costs
are charged to earnings as incurred. Development costs, including the
cost of all wells, are capitalized.
Producing properties are assessed annually or more frequently as economic
events dictate, for potential impairment. Impairment is assessed by
comparing the estimated net undiscounted future cash flows to the
carrying value of the asset. If required, the impairment recorded is the
amount by which the carrying value of the asset exceeds its fair value.
Costs related to undeveloped properties are excluded from the depletion
base until it is determined whether or not proved reserves exist or if
impairment of such costs has occurred. These properties are assessed at
least annually to determine whether impairment has occurred.
Depreciation and depletion of capitalized costs of oil and gas producing
properties are calculated using the unit of production method.
Development and exploration drilling and equipment costs are depleted
over the remaining proved developed reserves. Depreciation of other plant
and equipment is provided on the straight line method. Straight line
depreciation is based on the estimated service lives of the related
assets which is estimated to be ten years.
Furniture, Fixtures and Office Equipment
These assets are recorded at cost and depreciated over a three to ten
year period representing their estimated useful lives.
Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, the Company records a future income tax asset or liability
to reflect any difference between the accounting and tax basis of assets
and liabilities, using substantively enacted income tax rates. The effect
on future tax assets and liabilities of a change in tax rates is
recognized in net earnings in the period in which the change occurs.
Future income tax assets are only recognized to the extent it is more
likely than not that sufficient future taxable income will be available
to allow the future income tax asset to be realized.
Asset Retirement Obligations
The Company recognizes an Asset Retirement Obligation (ARO) in the period
in which it is incurred when a reasonable estimate of the fair value can
be made. On a periodic basis, management will review these estimates and
changes, if any, will be applied prospectively. The fair value of the
estimated ARO is recorded as a long-term liability, with a corresponding
increase in the carrying amount of the related asset. The capitalized
amount is depleted on a unit-of-production basis over the life of the
reserves. The liability amount is increased each reporting period due to
the passage of time and the amount of accretion is charged to earnings in
the period. Revisions to the estimated timing of cash flows or to the
original estimated undiscounted cost would also result in an increase or
decrease to the ARO. Actual costs incurred upon settlement of the
obligations are charged against the ARO to the extent of the liability
recorded.
Stock-Based Compensation
The Company accounts for stock based compensation using the fair-value
method of accounting for stock options granted to directors, officers,
employees and other service providers using the Black-Scholes option
pricing model. Stock-based compensation expense is recorded over the
vesting period with a corresponding amount reflected in contributed
surplus. Stock-based compensation expense is calculated as the estimated
fair value of the options at the time of grant, amortized over their
vesting period. When stock options are exercised, the associated amounts
previously recorded as contributed surplus are reclassified to common
share capital. The Company has not incorporated an estimated forfeiture
rate for stock options that will not vest, rather, the Company accounts
for actual forfeitures as they occur.
Financial Instruments
Financial instruments are measured at fair value on initial recognition
of the instrument, into one of the following five categories: held-for
trading, loans and receivables, held-to-maturity investments, available-
for-sale financial assets or other financial liabilities.
Subsequent measurement of financial instruments is based on their initial
classification. Held-for-trading financial assets are measured at fair
value and changes in fair value are recognized in net earnings.
Available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income until the
instrument is derecognized or impaired. The remaining categories of
financial instruments are recognized at amortized cost using the
effective interest rate method.
All risk management contracts are recorded in the balance sheet at fair
value unless they qualify for the normal sale and normal purchase
exemption. All changes in their fair value are recorded in net earnings
unless cash flow hedge accounting is used, in which case changes in fair
value are recorded in other comprehensive income until the underlying
hedged transaction is recognized in net earnings. Any hedge
ineffectiveness is immediately recognized in net earnings. The Company
has elected not to use cash flow hedge accounting on its risk management
contracts with financial counterparties resulting in all changes in fair
value being recorded in net earnings.
Cash and restricted cash are classified as held-for-trading and are
measured at fair value which equals the carrying value and any gains or
losses are recognized in earnings in the period they occur. Accounts
receivable are classified as loans and receivables which are measured at
amortized costs. Investments in related party are classified as
available-for-sale which are measured at fair value and any gains or
losses are recognized in other comprehensive income in the period they
occur. Accounts payable and accrued liabilities and bank debt are
classified as other financial liabilities, which are measured at
amortized cost.
Risk Management Contracts
The Company is exposed to market risks resulting from fluctuations in
commodity prices, foreign currency exchange rates and interest rates in
the normal course of its business. The Company may use a variety of
instruments to manage these exposures. For transactions where hedge
accounting is not applied, the Company accounts for such instruments
using the fair value method by initially recording an asset or liability,
and recognizing changes in the fair value of the instruments in earnings
as unrealized gains or losses on risk management contracts. Fair values
of financial instruments are determined from third party quotes or
valuations provided by independent third parties. Any realized gains or
losses on risk management contracts are recognized in earnings in the
period they occur.
The Company may elect to use hedge accounting when there is a high degree
of correlation between the price movements in the financial instruments
and the items designated as being hedged and has documented the
relationship between the instruments and the hedged item as well as its
risk management objective and strategy for undertaking hedge
transactions. During the year ended December 31, 2008 the Company did not
designate any of its financial instruments as hedges. There are no risk
management contracts outstanding as at December 31, 2008.
Basic and Diluted per Share (formerly per Unit) Calculations
Basic earnings per share are computed by dividing earnings by the
weighted average number of shares outstanding during the year. Diluted
per share amounts reflect the potential dilution that could occur if
options to purchase shares were exercised. The treasury stock method is
used to determine the dilutive effect of common share options, whereby
proceeds from the exercise of common share options or other dilutive
instruments are assumed to be used to purchase common shares at the
average market price during the period.
3. NEW ACCOUNTING POLICIES
Capital Disclosures
Effective January 1, 2008, the Company prospectively adopted the Canadian
Institute of Chartered Accountants (CICA) Section 1535, "Capital
Disclosures" which establishes standards for disclosing information about
the Company's capital and how it is managed. It requires disclosures of
the Company's objectives, policies and processes for managing capital,
the quantitative data about what the Company regards as capital, whether
the Company has complied with any capital requirements and if it has not
complied, the consequences of such non-compliance. The only effect of
adopting this standard is disclosures about the Company's capital and how
it is managed (see Note 16).
Financial Instruments Disclosures and Presentation
Effective January 1, 2008, the Company prospectively adopted Section
3862, "Financial Instruments - Disclosures" and Section 3863, "Financial
Instruments - Presentation." These new accounting standards replaced
Section 3861, "Financial Instruments - Disclosure and Presentation."
Section 3862 requires additional information regarding the significance
of financial instruments for the entity's financial position and
performance, and the nature, extent and management of risks arising from
financial instruments to which the entity is exposed. The additional
disclosures required under these standards are included in Note 16.
Recent Accounting Pronouncements
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. The
Company adopted these standards for its fiscal year beginning January 1,
2009 with no impact on its consolidated financial statements.
In January 2009, the CICA issued Section 1582, "Business Combinations",
which replaces 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 2011 with earlier adoption permitted. The Company
plans to adopt this standard prospectively effective January 1, 2009 and
does not expect the adoption of this statement to have a material impact
on the Company's results of operations or financial position.
In January 2009, the CICA issued Sections 1601, "Consolidated Financial
Statements", and 1602, "Non-controlling Interests", which replaces
existing guidance. 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
application permitted. The Company plans to adopt these standards
effective January 1, 2009 and does not expect the adoption will have a
material impact on the results of operations or financial position.
The Accounting Standards Board has confirmed 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.
4. REORGANIZATION
As part of the reorganization of the Trust, SRX acquired all the issued
and outstanding trust units of Bonterra Energy Income Trust on a basis of
one Trust Unit for one Common Share of SRX. Immediately preceding the
reorganization, SRX was in receivership. Prior to the conversion, the
Trust advanced $11,257,000 to SRX for settlement of claims pursuant to
the CCAA proceedings. Upon completion of the CCAA procedures, SRX was
owed $2,224,000 in outstanding tax and legal claims that will be used by
the CCAA Monitor to settle secured creditor claims. This amount has been
recorded as an outstanding account receivable by the Company.
In addition, SRX paid an advance of $1,800,000 to the CCAA Monitor for
costs and payment of the unsecured creditors. This amount has been
recorded as a prepaid expense in the accounts of the Company.
Included in accounts payable is $4,024,000 to account for the amount due
to the secured and unsecured creditors.
Of the tax claims, $66,000 had been received and repaid to the Monitor by
December 31, 2008. In addition, $99,000 of expense claims had been paid
by the Monitor and deducted from the advance.
5. BUSINESS COMBINATION
On November 12, 2008, the Company acquired all the common shares of
Silverwing for cash consideration of $13,816,000 (including acquisition
costs of $334,000) plus the issuance of 7,745 common shares at a value of
$25.85 per common share plus the assumption of $14,979,000 of negative
working capital. The results of Silverwing's operations have been
included in the consolidated financial statements since that date. The
acquisition was funded through the Company's new bank facility (see
Note 10).
The acquisition was accounted for using the purchase method and the
purchase price was allocated to the fair value of the assets acquired and
the liabilities assumed as follows:
Cost of acquisition (000's)
Cash paid $ 13,482
Value of common stock 200
Acquisition costs 334
---------
$14,016
---------
---------
Allocation of purchase price:
Restricted cash $ 1,252
Future income tax benefit 18,325
Property and equipment 15,347
Working capital deficiency (14,979)
Asset retirement obligations (5,929)
---------
$ 14,016
---------
---------
6. INVESTMENT IN RELATED PARTY
The investment consists of 689,682 (December 31, 2007 - 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 a one and a half percent ownership in the
outstanding shares of Comaplex.
7. 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 20 wells. The
funds are administered by the farmors' legal counsel. The funds in the
escrow account are invested in interest bearing term deposits.
8. PROPERTY AND EQUIPMENT
2008 2007
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion Depletion
and and
($000) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land $ 2,295 $ - $ 316 $ -
Petroleum and
natural gas
properties
and related
equipment 229,136 74,844 185,947 61,105
Furniture,
equipment
and other 1,254 848 1,025 700
-------------------------------------------------------------------------
$ 232,685 $ 75,692 $ 187,288 $ 61,805
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. DUE TO RELATED PARTY
As of December 31, 2008, the Company's CEO and major shareholder has
loaned the Company $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.
Interest paid on this loan during 2008 was $7,000.
Please refer to note 15 for additional related party transactions.
10. BANK DEBT
Due to the corporate reorganization and acquisition of Silverwing, the
Company amended its bank facility to consist of an $80,000,000 syndicated
revolving credit facility and a $20,000,000 non-syndicated demand credit
facility (December 31, 2007 - $69,900,000 (non-syndicated demand
facility)). Amounts drawn under these facilities at December 31, 2008
were $93,235,000 (December 31, 2007 - $57,422,000). The interest rates on
the outstanding debt as of December 31, 2008 were 4.35 percent and
3.49 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 provide that the loan is revolving
to May 30, 2010 and is subject to annual review. The revolving credit
facility has no fixed payment requirements. The terms of the non-
syndicated demand credit facility provide that the loan is due on demand
and is subject to annual review and has no fixed repayment terms.
The amount available for borrowing under the credit facilities is reduced
by outstanding letters of credit. Letters of credit totaling $525,000
were issued at December 31, 2008 (December 31, 2007 - $355,000). Of the
letters of credit, $20,000 is secured by a restricted term deposit.
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 credit facilities is calculated as follows:
-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V Level VI
------------------------------------------------------
Consolidated Total Over Over Over Over
Funded Debt(1) 0.5:1 1.0:1 1.5:1 2.0:1
to Consolidated Below to to to to Over
Cash flow Ratio 0.50:1 1:0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 50 75 85 100 125 150
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 150 175 185 200 225 250
-------------------------------------------------------------------------
(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 third month following the
end of each fiscal quarter, except for the end of a fiscal year in
respect of which the adjustment shall be made effective as of the first
day of the fifth month following the end of such fiscal year, with each
such adjustment to be effective until the next such adjustment:
The following is a list of the material covenants:
- The Company as of December 31, 2008 is required to not exceed
$100,000,000 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 previous four quarters' cash flow as defined under GAAP.
11. INCOME TAXES
The Company has recorded a future income tax asset related to assets and
liabilities and related tax amounts:
($000) 2008 2007
-------------------------------------------------------------------------
Future tax liability related to investments: $ (212) $ (448)
Future tax liability related to property
and equipment: (7,097) (14,828)
Future tax asset related to asset retirement
obligations: 4,593 3,759
Future tax asset related to finance costs: 1,134 79
Future tax asset related to corporate tax
losses and SR&ED claims 86,998 3,843
-------------------------------------------------------------------------
Future Tax Asset (Liability) - Long-term $ 85,416 $ (7,595)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current portion of future income tax asset
related to corporate tax losses and SR&ED
claims: $ 2,669 $ -
Future income tax asset related to current
portion of derivative liability - 913
-------------------------------------------------------------------------
Future Tax Asset - Current $ 2,669 $ 913
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a result of the reorganization the Company recorded a deferred credit
of $71,303,000 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 (2008 - $4,240,000) on the same basis as the related future
income tax asset (2008 - $4,909,000).
A reconciliation of the deferred credit is as follows:
Amount recorded on reorganization $ 71,303,000
Amortized in current year (4,240,000)
-------------------------------------------------------------------------
Balance as of December 31, 2008 $ 67,063,000
-------------------------------------------------------------------------
Current portion $ 2,305,000
Long-term portion 64,758,000
-------------------------------------------------------------------------
$ 67,063,000
-------------------------------------------------------------------------
Income tax expense varies from the amounts that would be computed by
applying Canadian federal and provincial income tax rates as follows:
($000) 2008 2007
-------------------------------------------------------------------------
Earnings before income taxes $ 58,014 $ 33,434
Combined federal and provincial income tax
rates 29.62% 32.27%
-------------------------------------------------------------------------
Income tax provision calculated using
statutory tax rates 17,184 10,789
Increase (decrease) in taxes resulting from:
Saskatchewan resource surcharge 437 512
Stock-based compensation 357 366
Change in effective tax rate (4,739) 4,076
Trust income allocated to Unitholders
prior to conversion (10,291) (13,176)
Others (360) 517
-------------------------------------------------------------------------
Income tax expense $ 2,588 $ 3,084
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
Utilization
($000) % Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 $ 23,696
Eligible capital expenditures 7 1,870
Share issue costs 20 4,581
Canadian oil and gas property expenditures 10 25,072
Canadian development expenditures 30 50,743
Canadian exploration expenditures 100 10,530
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 271,029
-------------------------------------------------------------------------
$ 467,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in the following years;
2014 - $1,069,000, 2025 - $3,179,000, 2026 - $109,244,000,
2027 - $116,787,000, 2028 - $40,750,000.
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, acquisitions and
dispositions of assets and liabilities, and distribution policy. A
significant change in any of the preceding assumptions could materially
affect the Company's estimate of the future income tax asset.
12. ASSET RETIREMENT OBLIGATIONS
At December 31, 2008, the estimated total undiscounted amount required to
settle the asset retirement obligations was $58,903,000
(2007 - $54,622,000). Costs for asset retirement have been calculated
assuming a two percent inflation rate. These obligations will be settled
based on the useful lives of the underlying assets, which extend up to
50 years into the future. This amount has been discounted using a credit-
adjusted risk-free interest rate of five percent (2007 - five percent).
Changes to asset retirement obligations were as follows:
($000) 2008 2007
-------------------------------------------------------------------------
Asset retirement obligations, January 1 $ 14,904 $ 14,819
Adjustment to asset retirement obligations (217) (399)
Adjustment related to asset additions
(net of disposals) 5,929 563
Liabilities settled during the year (3,063) (820)
Accretion 785 741
-------------------------------------------------------------------------
Asset retirement obligations, December 31 $ 18,338 $ 14,904
-------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY
Authorized
The Company is authorized to issue an unlimited number of common shares
without nominal or par value.
($000) 2008 2007
-------------------------------------------------------------------------
Issued Number Amount Number Amount
-------------------------------------------------------------------------
Common Shares
Balance, beginning
of year - $ - - $ -
Issued on
reorganization to
a corporation 17,257,603 99,530 - -
-------------------------------------------------------------------------
Balance, end of
year 17,257,603 $ 99,530 - $ -
-------------------------------------------------------------------------
($000) 2008 2007
-------------------------------------------------------------------------
Issued Number Amount Number Amount
-------------------------------------------------------------------------
Trust Units
Balance, beginning
of year 16,928,158 $ 90,590 16,874,658 $ 89,488
Transfer of
contributed
surplus to
unit capital - 805 - 109
Issued pursuant to
Trust unit option
plan 321,700 7,935 53,500 993
Issued on
acquisition of
Silverwing 7,745 200 - -
Cancelled on
conversion
to a
corporation (17,257,603) (99,530) - -
-------------------------------------------------------------------------
Balance, end of
year - $ - 16,928,158 $ 90,590
-------------------------------------------------------------------------
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 (formerly trust units) used to calculate
diluted net earnings per share (formerly per unit) for the year ended
December 31, 2008 of 17,119,517 shares (2007 - 16,942,036 Units) included
the basic weighted average number of common shares outstanding of
17,075,647 shares (2007 - 16,908,266 Units) plus 43,870 shares
(2007 - 33,770 Units) related to the dilutive effect of common share
options.
A summary of the changes of the Company's contributed surplus is
presented below:
Contributed surplus
($000) 2008 2007
-------------------------------------------------------------------------
Balance, beginning of year $ 2,140 $ 1,116
Stock-based compensation expensed (non-cash) 1,207 1,133
Stock-based options exercised (non-cash) (805) (109)
-------------------------------------------------------------------------
Balance, end of year $ 2,542 $ 2,140
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The deficit balance is composed of the following items:
($000) 2008 2007
-------------------------------------------------------------------------
Accumulated earnings $ 208,182 $ 152,756
Accumulated cash dividends and distributions (254,897) (204,299)
-------------------------------------------------------------------------
Deficit $ (46,715) $ (51,543)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 common shares (2007 - 1,692,800 Trust Units). 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
December 31, 2008 and changes during the year is presented below:
2008
-------------------------------------------------------------------------
Weighted-
Average
Exercise
Options Price
-------------------------------------------------------------------------
Outstanding at beginning of year - $ -
Options granted 1,390,500 20.50
-------------------------------------------------------------------------
Outstanding at end of year 1,390,500 $20.50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable at end of year - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding at December 31, 2008:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Number Weighted-
Out- Average Weighted- Number Weighted-
Range of standing Remaining Average Exercisable Average
Exercise At Contractual Exercise At Exercise
Prices 12/31/08 Life Price 12/31/08 Price
-------------------------------------------------------------------------
$20.50 1,390,500 3.9 years $20.50 - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
A summary of the former unit option plan as of December 31, 2008 and
2007, and changes during the years is presented below:
2008 2007
-------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding at
beginning of year 1,177,000 $27.59 721,500 $26.55
Options granted 29,000 39.09 553,000 28.11
Options exercised (321,700) 24.66 (53,500) 18.56
Options cancelled (884,300) 29.03 (44,000) 27.92
-------------------------------------------------------------------------
Outstanding at end of
year - $ - 1,177,000 $27.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable at
end of year - $ - 530,000 $26.63
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company records compensation expense over the vesting period based on
the fair value of options granted to employees, directors and
consultants. The Company granted 1,390,500 stock options with an
estimated fair value of $1,548,000 ($1.11 per option) using the Black-
Scholes option pricing model with the following key assumptions:
2008 2007
Weighted-average risk free interest rate (%) 2.2 4.7
Expected life (years) 3.5 2.3
Weighted-average volatility (%) 31.3 27.2
Dividend yield 2008 and 2007 based on the percentage of
dividends or distributions
paid during the year
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
January 1, Comprehensive December 31,
($000) 2008 Income (Loss) 2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
available for sale
financial assets $3,031 ($1,611) $1,420
-------- -------- --------
-------- -------- --------
Other
January 1, Comprehensive December 31,
($000) 2007 Income (Loss) 2007
-------------------------------------------------------------------------
Unrealized gains on available
for sale financial assets $1,566 $1,465 $3,031
Unrealized gains and losses on
derivatives designated as
cash flow hedges 814 (814) -
-------- -------- --------
$2,380 $ 651 $3,031
-------- -------- --------
-------- -------- --------
15. RELATED PARTY TRANSACTIONS
The Company received a management fee from Comaplex of $330,000
(2007 - $300,000) for management services and office administration. This
fee has been included as a recovery in general and administrative
expenses and represents the fair value of the services rendered.
In order to facilitate the acquisition of Silverwing, the Company
borrowed on a short-term basis $20,000,000 from Comaplex to allow time to
finalize documentation for its new bank line of credit. The funds were
repaid on November 21, 2008. Total interest paid on the loan was $21,000.
As at December 31, 2008, the Company had an account receivable from
Comaplex of $56,000 (December 31, 2007 - $63,000).
The Company received a management fee from Pine Cliff Energy Ltd., a
company with common directors and management with the Company and its
subsidiaries, of $238,000 (2007 - $216,000) for management services and
office administration. This fee has been included in general and
administrative expenses as a recovery and represents the fair value of
the services rendered.
As at December 31, 2008 the Company had an account receivable from Pine
Cliff of $1,000 (December 31, 2007 - $4,000).
16. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
----------------------
The Company undertakes transactions in a range of financial instruments
including:
- Receivables
- Payables
- Common share investments
- 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 or issue new shares.
The Company monitors capital on the basis of the ratio of debt to cash
flow. During the year the Company acquired Silverwing, a public oil and
gas producer, for cash consideration including negative working capital
of $28,795,000. In addition, the Trust underwent a reorganization
resulting in a cash outlay of $11,257,000 plus reorganization costs of
$2,121,000. The Company has also experienced a decrease in cash flow due
to the rather significant drop in commodity prices during the final four
months of 2008.
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 from operations 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 December 31, 2008
---------------------------------------------------------------------
Carrying Fair Face
($000) Value Value Value
Financial assets
Restricted term deposit 20 20 20
Accounts receivable 11,753 11,753 11,838
Investment in related party 2,131 2,131 N/A
Financial liabilities
Accounts payable and accrued liabilities 23,888 23,888 23,888
Due to related party 6,000 6,000 6,000
Short-term debt 13,325 13,325 13,325
Long-term debt 79,910 79,910 79,910
The net debt and cash flow from operations figures are presented in
Table 2.
Table 2
December 31
($000) 2008
---------------------------------------------------------------------
Short-term debt 13,325
Long-term debt 79,910
Due to related party 6,000
Accounts payable and accrued liabilities 23,888
Current assets(1) (18,971)
---------------------------------------------------------------------
Net Debt 104,152
---------------------------------------------------------------------
Cash flow from operations(2) 69,570
---------------------------------------------------------------------
Net debt to cash flow from operations 1.50
---------------------------------------------------------------------
(1) Current assets include restricted term deposit, accounts
receivable, crude oil inventory, prepaid expenses and
investment in related party.
(2) Cash flow from operations includes annual net earnings 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 has used various risk management contracts to set price
parameters for a portion of its production. 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 commodity prices.
Sensitivity Analysis
Commodity prices have fluctuated significantly over the recent past.
The following table updates the cash flow sensitivity for movements
in the commodity prices of $1 U.S. WTI per barrel for crude oil,
$0.10 per MCF AECO for natural gas and $0.01 fluctuation in exchange
rates.
($000) 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 which have a variable interest rate which gives rise
to a cash flow interest rate risk.
The Company's debt consists of an $80,000,000 revolving operating
line, $20,000,000 demand operating line and $6,000,000 due to the
Company's CEO and major shareholder. The borrowings under these
facilities are at bank prime plus or minor 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 has sufficient
tax pools such that it will not be taxable in the near future.
A one percent increase (decrease) in the Canadian prime rate would
decrease cash flow by $992,000 (increase by $992,000).
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 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 of December 31, 2008 ($11,753,000)
and December 31, 2007 ($10,575,000) over 82 (2007 - 90) percent
relates to product sales with international oil and gas companies,
tax receivables from the Canadian Government or risk contract
payments from the Company's principal banker.
The Company assesses quarterly, if there has been any impairment of
the financial assets of the Company. During the year ended December
31, 2008, 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 December 31, 2008 approximately $99,000 or 0.8 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 December 31,
2008 is $85,000. There were no accounts written off during the year.
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:
Recognized on Payments Due By Period
Financial Less than
($000) Statements 1 year 1-3 years 4-5 years
---------------------------------------------------------------------
Accounts payable
and accrued
liabilities Yes - Liability 23,888 - -
Due to related
party Yes - Liability 6,000 - -
Short-term bank
debt Yes - Liability 13,325 - -
Long-term bank
debt Yes - Liability - 79,910 -
Office leases No 589 1,238 1,080
---------------------------------------------------------------------
Total 43,802 81,148 1,080
---------------------------------------------------------------------
---------------------------------------------------------------------
c) Risk management contracts
The Company currently has no outstanding risk management contracts:
As of December 31, 2007, the fair value of the outstanding commodity
risk management contracts was a net liability of $3,085,000.
17. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company has no contractual obligations that last more than a year
other than its office lease agreements which are as follows:
Contract Obligations Less
than 1 - 3 4 - 5
($000) Total 1 year years years
-------------------------------------------------------------------------
Office leases(1) $2,907 $589 $1,238 $1,080
(1) Includes Silverwing's former office space which is being sublet at a
rate that approximates the rates charged to the Company. The funds
received on the sublease have not been offset against the contractual
liability.
18. SUBSEQUENT EVENTS - DIVIDENDS
Subsequent to December 31, 2008, the Company has declared the following
dividends:
Date declared Record date $ per share Date payable
-------------------------------------------------------------------------
January 6, 2009 January 15, 2009 $0.16 January 30, 2009
February 9, 2009 February 18, 2009 $0.12 February 27, 2009
March 5, 2009 March 16, 2009 $0.12 March 31, 2009
The TSX does not accept responsibility for the adequacy or accuracy of
this release.
%SEDAR: 00003132E