CALGARY, May 12 /CNW/ - Compton Petroleum Corporation ("Compton" or the "Company") is pleased to announce its financial and operating results for the quarter ended March 31, 2008.
HIGHLIGHTS - FIRST QUARTER 2008
- Drilled 99 wells with a 96% success rate.
- Natural gas production of 170 mmcf/d, up 15% from first quarter 2007.
- Total first quarter 2008 production averaged 33,274 boe/d.
- Revenue of $162 million, up 15% from first quarter 2007.
- Realized prices of $53.64/boe, up 14% from first quarter 2007.
- Adjusted cash flow from operations of $69 million.
- Capital expenditures of $101 million, before acquisitions and
divestitures.
FINANCIAL SUMMARY
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Three Months Ended March 31
($000s, except per share amounts) 2008 2007 Change
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Gross revenue $162,433 $140,877 15%
Adjusted cash flow from operations(1) $ 69,322 $ 68,783 1%
Per share - basic(1) $ 0.54 $ 0.53 2%
- diluted(1) $ 0.52 $ 0.52 0%
Adjusted net earnings from operations(1) $ 17,404 $ 17,933 -3%
Per share - basic(1) $ 0.13 $ 0.14 -7%
- diluted(1) $ 0.13 $ 0.14 -7%
Net earnings $ 1,619 $ 13,719 -88%
Per share - basic $ 0.01 $ 0.11 -91%
- diluted $ 0.01 $ 0.10 -90%
Capital expenditures
(before acquisitions & divestitures) $100,948 $106,059 -5%
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(1) See cautionary statements at the beginning of Management's Discussion
and Analysis.
OPERATING SUMMARY
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Three Months Ended March 31 2008 2007 Change
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Average production
Natural gas (mmcf/d) 170 148 15%
Liquids (bbls/d) 5,009 8,729 -43%
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Total (boe/d) 33,274 33,316 0%
Realized prices
Natural gas ($/mcf) $ 7.48 $ 7.24 3%
Liquids ($/bbl) 94.97 54.20 62%
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Total ($/boe) $ 53.64 $ 46.98 14%
Field netback ($/boe) $ 41.06 $ 30.84 33%
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OPERATIONS REVIEW
Drilling Summary
Compton experienced an active first quarter in 2008. We drilled 99 wells
with a 96% success rate. Of the 99 wells drilled during the quarter, 97 were
classified as development wells and 2 as exploratory wells. The following
table summarizes drilling results to March 31, 2008.
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Gas Oil D&A Total Net Success
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Southern Alberta 50 1 3 54 51 94%
Central Alberta 37 3 1 41 18 98%
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Standing, cased wells 4 4
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Total 87 4 4 99 73 96%
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DEEP BASIN GAS
Compton has two Deep Basin deep gas plays: the Basal Quartz sands at Hooker and the Gething/Rock Creek sands at Niton and Caroline in central Alberta.
Southern Alberta: Hooker
In the first three months of 2008, we drilled one well targeting the Basal Quartz at our Hooker natural gas resource play. The well at 9-17-17-29W4 was drilled with a 700 metre horizontal leg and was placed on production March 10, 2008. Initial production was approximately 5 mmcf/d, and the well is currently producing approximately 2.2 mmcf/d. Of significance is the fact that two offset vertical wells have shown minimal pressure interference from the new horizontal well. Both of the offset wells are within 800 meters of 9-17 and one has been on production since 2000 and has produced 4.7 bcf. This supports our reservoir models and the requirement for additional wells to recover the reserves from the Basal Quartz. The 9-17 well also supports the premise that horizontal well technology can be effectively used to access productivity from tighter rock on the periphery of the play.
Subsequent to quarter end, Compton has rig-released a second horizontal well at 15-30-16-29W4 and completed a multi stage frac on the well on April 25, 2008. The well is currently flowing back to the gas plant on cleanup at 2.5 mmcf/d. We are optimistic that the horizontal drill and completion technique is an important technical step forward in the development of the large known gas reserves existing on the periphery of this play. Two additional horizontal wells have been licensed and will spud once spring break-up road conditions permit.
The existing Basal Quartz play, as currently delineated, extends over four townships where Compton has an average working interest of approximately 85%. Infrastructure necessary to accommodate the accelerated production growth and development of this play is largely in place. Assuming continued horizontal drilling success at Hooker, Compton estimates there are in excess of 100 potential horizontal locations on Compton lands.
Central Alberta: Niton and Caroline
At our Niton and Caroline resource plays we drilled 15 wells in the first quarter of 2008, five of which were horizontal wells. All wells were successful and immediate follow-up locations are now being acquired.
The horizontal well at 4-27-52-17W5 at Niton in central Alberta, referred to in our news release of March 6, 2008, was placed on continuous production on March 28th. The well came on production at 9 mmcf/d and is expected to exhibit a typical tight gas well production profile. Including the 4-27 well, Compton has five horizontal wells in township 52-17W5 with a sixth well currently drilling. Production from these wells is facility constrained with only 4-27 currently producing. Pipeline and compression facilities are being installed and are expected to be operational by mid to late May. These facilities will accommodate all wells in the 11 well program planned for township 52-17W5.
During the previous week Compton rig released three horizontal wells in the Niton area. The rigs were drilling in three separate townships targeting the Rock Creek formation following-up on the successes in townships 53-15W5 and 52-17W5. Compton has 272 gross sections of land in the Niton area and, based upon results to date, the Company has the potential for over 300 Ellerslie and Rock Creek horizontal drilling locations on Compton lands in the area.
With the success that Compton has experienced drilling horizontal wells into the Basal Quartz at our southern Alberta Hooker resource play, we will be drilling horizontal wells in the geologically similar Gething Sands at Niton, spudding our first well in the second half of this year.
At Bigoray, the 00/04-30-051-09W5/2 well watered out in the Spirit River zone. The uphole completion was previously a high rate gas zone that proved to be limited. The original well bore event continues to produce successfully from the Ellerslie.
Foothills
In the foothills at Cowley, we will drill two horizontal multi stage frac wells during the second quarter of 2008. We have identified and are moving to license three more wells in this area.
Our exploration program at Callum is designed to minimize our environmental footprint in this environmentally sensitive area. Compton continues to work with all stakeholders to design a mutually acceptable development program for this high impact resource play.
SHALLOW GAS
The Plains Belly River and overlying Edmonton Horseshoe Canyon shallow gas zones cover more than 1,200 sections of Compton held land in southern Alberta. The entire 900 metre gas-charged section is comprised of multiple Belly River sands, silts, and shales, overlain by the Edmonton/Horseshoe Canyon coals that similarly include sands, silts, and shales. Going forward, we will focus on downspacing, development drilling, and recompletions in order to establish a resource manufacturing and processing model designed to maximize production and capital efficiency.
Plains Belly River and Edmonton Coal Bed Methane
We drilled 55 Belly River wells in the first quarter, two of which were horizontal. Pending the outcome of our horizontal wells drilled in this area, we delayed drilling an additional 20 wells initially planned for the quarter. We are currently testing the horizontal wells and believe it will take 10 additional Belly River horizontal wells to fully determine the effectiveness of this drilling technique on this play type. We are in the process of acquiring surface locations for these wells.
As we move into the second quarter of 2008, we have continued to be active in southern Alberta despite the occurrence of spring break-up in most areas. In April, we drilled six Belly River wells, all of which were successful.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Management's Discussion and Analysis ("MD&A") is intended to provide both a historical and prospective view of our activities. The MD&A was prepared as at May 9, 2008 and should be read in conjunction with the interim unaudited consolidated financial statements for the three months ended March 31, 2008 and the audited consolidated financial statements for the year ended December 31, 2007, available in printed form on request and posted on the Company's website.
FORWARD LOOKING STATEMENTS
Certain information regarding the Company contained herein constitutes forward-looking information and statements and financial outlooks (collectively, "forward-looking statements") under the meaning of applicable securities laws, including Canadian Securities Administrators' National Instrument 51-102 Continuous Disclosure Obligations and the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements include estimates, plans, expectations, opinions, forecasts, projections, guidance, or other statements that are not statements of fact, including statements regarding (i) cash flow and capital and operating expenditures, (ii) exploration, drilling, completion, and production matters, (iii) results of operations, (iv) financial position, and (v) other risks and uncertainties described from time to time in the reports and filings made by Compton with securities regulatory authorities. Although Compton believes that the assumptions underlying, and expectations reflected in, such forward-looking statements are reasonable, it can give no assurance that such assumptions and expectations will prove to have been correct. There are many factors that could cause forward-looking statements not to be correct, including risks and uncertainties inherent in the Company's business. These risks include, but are not limited to: crude oil and natural gas price volatility, exchange rate fluctuations, availability of services and supplies, operating hazards, access difficulties and mechanical failures, weather related issues, uncertainties in the estimates of reserves and in projection of future rates of production and timing of development expenditures, general economic conditions, and the actions or inactions of third-party operators, and other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by Compton. Statements relating to "reserves" and "resources" are deemed to be forward-looking statements, as they involve the implied assessment, based on estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated, and can be profitably produced in the future.
The forward-looking statements contained herein are made as of the date of this MD&A solely for the purpose of generally disclosing Compton's views of its prospective activities. Compton may, as considered necessary in the circumstances, update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise, but Compton does not undertake to update this information at any particular time, except as required by law. Compton cautions readers that the forward-looking statements may not be appropriate for purposes other than their intended purposes and that undue reliance should not be placed on any forward-looking statement. The Company's forward-looking statements are expressly qualified in their entirety by this cautionary statement.
Non-GAAP Financial Measures
Included in the MD&A and elsewhere in this report are references to terms used in the oil and gas industry such as adjusted cash flow from operations, cash flow per share, adjusted net earnings from operations, adjusted EBITDA, and enterprise value. These terms are not defined by GAAP in Canada and consequently are referred to as non-GAAP measures. Non-GAAP measures do not have any standardized meaning and therefore reported amounts may not be comparable to similarly titled measures reported by other companies.
Adjusted cash flow from operations should not be considered an alternative to, or more meaningful than, cash provided by operating, investing and financing activities or net earnings as determined in accordance with Canadian GAAP, as an indicator of the Company's performance or liquidity. Adjusted cash flow from operations is used by Compton to evaluate operating results and the Company's ability to generate cash to fund capital expenditures and repay debt.
Adjusted net earnings from operations represents net earnings excluding certain items that are largely non-operational in nature and should not be considered an alternative to, or more meaningful than, net earnings as determined in accordance with Canadian GAAP. Adjusted net earnings from operations is used by the Company to facilitate comparability of earnings between periods.
Use of BOE Equivalents
The oil and natural gas industry commonly expresses production volumes and reserves on a barrel of oil equivalent ("boe") basis whereby natural gas volumes are converted at the ratio of six thousand cubic feet to one barrel of oil. The intention is to sum oil and natural gas measurement units into one basis for improved measurement of results and comparisons with other industry participants. Compton has used the 6:1 boe measure which is the approximate energy equivalency of the two commodities at the burner tip. However, boe does not represent a value equivalency at the plant gate where Compton sells its production volumes and therefore may be a misleading measure if used in isolation.
EXECUTIVE SUMMARY
- First quarter 2008 natural gas production of 170 mmcf/d, a 15% year
over year increase.
- Total first quarter 2008 production averaged 33,274 boe/d. While
consistent with a year ago, the 2008 period reflects the major oil
property disposition in September 2007.
- Adjusted cash flow from operations of $69 million.
- Adjusted net earnings from operations of $17.4, comparable to the
first quarter of 2007 and an increase of $20.4 million over the last
quarter of 2007 as a result of higher overall commodity prices.
RESULTS OF OPERATIONS
Adjusted cash flow from operations is a non-GAAP term that represents net
earnings adjusted for non-cash items. We consider adjusted cash flow from
operations to be a key financial measure as it demonstrates our ability to
generate the cash flow necessary to fund future growth through capital
investment. Adjusted cash flow from operations may not be comparable to
similar measures presented by other companies.
Adjusted cash flow from operations and Net Earnings
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Three Months Ended March 31
($000s, except per share amounts) 2008 2007 Change
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Adjusted cash flow from operations $ 69,322 $ 68,783 1%
Per share - basic $ 0.54 $ 0.53 2%
- diluted $ 0.52 $ 0.52 0%
Net earnings $ 1,619 $ 13,719 -88%
Per share - basic $ 0.01 $ 0.11 -91%
- diluted $ 0.01 $ 0.10 -90%
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The following table reconciles net earnings to adjusted cash flow from
operations:
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Three months ended March 31, 2008 2007
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Operating activities
Net earnings $ 1,619 $ 13,719
Amortization and other (107) 511
Depletion and depreciation 41,807 38,794
Accretion of asset retirement obligations 812 651
Unrealized foreign exchange (gain) loss 17,910 (5,580)
Future income taxes 3,286 610
Unrealized risk management (gain) loss 773 17,324
Stock-based compensation 2,249 2,267
Asset retirement expenditures (940) (1,201)
Non-controlling interest 1,913 1,688
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Adjusted cash flow from operations $ 69,322 $ 68,783
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ADJUSTED NET EARNINGS FROM OPERATIONS
Adjusted net earnings from operations is a non-GAAP measure that adjusts net earnings by non-operating items that we believe reduce the comparability of our underlying financial performance between periods. The following reconciliation of adjusted net earnings from operations has been prepared to provide investors with information that is more comparable between periods.
Summary of Adjusted net earnings from operations(1)
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Three Months Ended March 31
($000s, except per share amounts) 2008 2007
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Net earnings, as reported $ 1,619 $ 13,719
Non-operational items, after tax
Unrealized foreign exchange (gain) loss 15,268 (4,683)
Unrealized risk management (gain) loss 543 11,759
Stock-based compensation(2) 1,586 1,539
Effect of tax rate changes on future income
tax liabilities (1,612) (4,401)
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Adjusted net earnings from operations $ 17,404 $ 17,933
Per share - basic $ 0.13 $ 0.14
- diluted $ 0.13 $ 0.14
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(1) Adjusted net earnings from operations was referred to as Operating
Earnings in prior years.
(2) Excludes compensation costs related to the Restricted Share Unit
Plan.
REVENUE
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Three Months Ended March 31 2008 2007 Change
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Average production
Natural gas (mmcf/d) 170 148 15%
Liquids (light oil & ngls) (bbls/d) 5,009 8,729 -43%
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Total (boe/d) 33,274 33,316 0%
Benchmark prices
Natural Gas
AECO ($/GJ)
Monthly index $ 6.75 $ 7.07 -5%
Daily index $ 7.49 $ 7.00 7%
Crude Oil
WTI (U.S.$/bbl) $ 97.85 $ 58.12 68%
Edmonton sweet light ($/bbl) $ 97.44 $ 67.13 45%
Realized prices
Natural gas ($/mcf) $ 7.48 $ 7.24 3%
Liquids ($/bbl) 94.97 54.20 62%
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Total ($/boe) $ 53.64 $ 46.98 14%
Revenue ($000s)
Natural gas $115,439 $ 96,079 20%
Crude oil and ngls 46,994 44,798 5%
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Total $162,433 $140,877 15%
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Natural gas production rose by 15% on a year over year basis, while liquids volumes decreased by 43% over the same period due primarily to the sale of oil producing assets at the end of the third quarter of 2007. Revenue attributable to natural gas volumes grew by 20% over the first quarter of 2007 due to slightly higher realized natural gas prices and significantly increased natural gas production.
We market our natural gas using both 30 day AECO indexed and daily AECO indexed contracts. Approximately 49% of our gas was sold on monthly evergreen contracts, and approximately 42% on indexed daily contracts. The remaining 9% of Compton's natural gas production remains committed to aggregator contracts, which received a price during the current quarter that was, on average, $0.80/mcf less than prices received on non-aggregator volumes.
ROYALTIES ------------------------------------------------------------------------- Three Months Ended March 31 2008 2007 ------------------------------------------------------------------------- Royalties ($000s) $ 33,487 $ 28,646 Percentage of revenues 20.6% 20.3% ------------------------------------------------------------------------- The Alberta royalty structure is based upon commodity prices and well productivity, with higher prices and well productivity attracting higher royalty rates. As a percentage of total revenue, our royalties remained consistent with the comparable period in 2007. OPERATING EXPENSES ------------------------------------------------------------------------- Three Months Ended March 31 2008 2007 ------------------------------------------------------------------------- Operating expenses ($000s) $ 28,842 $ 26,032 Operating expenses per boe ($/boe) $ 9.53 $ 8.68 ------------------------------------------------------------------------- Operating expenses for the first quarter of 2008 increased 11% over the first quarter of 2007 as a result of costs associated with accelerated activity throughout the oil and gas industry. Additionally, the first quarter of 2008 experienced significantly colder weather than the first quarter of 2007, resulting in increased operating costs associated with difficult operating conditions. For a similar reason first quarter 2008 operating costs increased 5% over the fourth quarter of 2007. TRANSPORTATION ------------------------------------------------------------------------- Three Months Ended March 31 2008 2007 ------------------------------------------------------------------------- Transportation costs ($000s) $ 2,254 $ 2,482 Transportation costs per boe ($/boe) $ 0.74 $ 0.83 ------------------------------------------------------------------------- Transportation expenses for the first quarter of 2008 fell by 9% over the first quarter of 2007 as a result of reduced trucking requirements associated with lower oil volumes. GENERAL AND ADMINISTRATIVE EXPENSES ------------------------------------------------------------------------- Three Months Ended March 31 ($000s, except where noted) 2008 2007 ------------------------------------------------------------------------- General and administrative expenses $ 12,054 $ 9,338 Capitalized general and administrative expenses (2,458) (2,165) Operator recoveries (674) (764) ------------------------------------------------------------------------- Total general and administrative expenses $ 8,922 $ 6,409 General and administrative per boe ($/boe) $ 2.95 $ 2.14 ------------------------------------------------------------------------- General and administrative expenses increased by 39% year over year primarily as a result of increased personnel costs, higher rent associated with additional office space, and other escalating overhead expenses such as insurance and consulting fees. STRATEGIC REVIEW EXPENSES ------------------------------------------------------------------------- Three Months Ended March 31 2008 2007 ------------------------------------------------------------------------- Strategic review costs ($000s) $ 2,568 - Strategic review costs per boe ($/boe) $ 0.85 - ------------------------------------------------------------------------- In the first quarter of 2008, we incurred approximately $2.6 million in expenses associated with the strategic review process. Compton has estimated direct costs associated with and resulting from the review process could total approximately $22 million. These costs include among others, consulting and advisory fees, legal fees, and costs relating to employee retention. INTEREST EXPENSE ------------------------------------------------------------------------- Three Months Ended March 31 ($000s, except where noted) 2008 2007 ------------------------------------------------------------------------- Interest on bank debt, net $ 6,458 $ 5,209 Interest on Senior Notes 8,980 10,445 ------------------------------------------------------------------------- Interest charges $ 15,438 $ 15,654 Finance charges 413 (110) ------------------------------------------------------------------------- Total interest and finance charges $ 15,851 $ 15,544 Total interest and finance charges per boe ($/boe) $ 5.23 $ 5.18 ------------------------------------------------------------------------- Weighted average debt ------------------------------------------------------------------------- Three months ended March 31 ($000s, except where noted) 2008 2007 ------------------------------------------------------------------------- Bank debt $433,664 $327,444 Effective interest rate 5.96% 6.35% Senior unsecured notes (US$450,000) $451,610 $437,932 Effective interest rate 8.00% 8.15% -------------------------------------------------------------------------
Interest expenses relating to bank debt for the first three months of 2008 increased from the comparative prior year period as a result of increased borrowings incurred to fund our 2007 and 2008 drilling programs. Interest charges payable in US dollars on our Senior Notes have decreased by 14% due to the strengthening of the Canadian dollar relative to the US dollar over this time period.
Interest on our senior unsecured notes is payable in US dollars at a fixed annual rate of 7.625%. This equates to interest costs of US$34.3 million per year relating to the notes. During the last quarter of 2007, we entered into foreign exchange contracts that fixed the exchange rate of the interest payments and, as a result, we will incur Canadian dollar interest costs of $34.2 million per year through to December 1, 2010 on the notes. This will result in an overall reduction of $4.2 million in 2008 interest costs relating to the senior notes as compared to 2007. At the time of issuance of the notes, we received Canadian dollar proceeds of $510 million. Based upon the proceeds received, the effective fixed rate of interest on the notes is 6.7% per year through to December 1, 2010.
DEPLETION AND DEPRECIATION ------------------------------------------------------------------------- Three Months Ended March 31 2008 2007 ------------------------------------------------------------------------- Depletion and depreciation ($000s) $ 41,807 $ 38,794 Depletion and depreciation per boe ($/boe) $ 13.81 $ 12.94 -------------------------------------------------------------------------
Strong commodity prices have accelerated capital programs and competition throughout the oil and gas industry, raising the demand for and costs of goods and services. This increase in costs is reflected in increased finding, development, and on-stream costs which in turn have resulted in an increase in depletion and depreciation rates in the current quarter in comparison to the prior comparative period.
INCOME TAXES
Income taxes are recorded using the liability method of accounting. Future income taxes are calculated based on the difference between the accounting and income tax basis of an asset or liability. Note 12 in the financial statements details the calculation of the provision and the effective tax rate for the period. The classification of future income taxes between current and non-current is based upon the classification of the liabilities and assets to which the future income tax amounts relate. The classification of a future income tax amount as current does not imply a cash settlement of the amount within the following twelve month period.
RISK MANAGEMENT
Our financial results are impacted by external market risks associated with fluctuations in commodity prices, interest rates, and the Canadian/U.S. currency exchange rate. We use various financial instruments for non-trading purposes to manage and partially mitigate our exposure to these risks.
Financial instruments used to manage risk are subject to periodic settlements throughout the term of the instruments. Such settlements may result in a gain or loss which is recognized as a risk management gain or loss at the time of settlement. The mark-to-market value of an instrument outstanding at the end of a reporting period reflects the value of the instrument based upon market conditions existing as of that date. Any change in value from that determined at the end of the prior period is recognized as an unrealized risk management gain or loss.
Risk management gains and losses recognized in the quarter are summarized in the following table.
Risk Management Gains and Losses
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Three Months Ended March 31 ($000s) 2008 2007
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Commodity contracts
Realized (gain) loss $ (611) $ (8,753)
Unrealized (gain) loss 27,097 16,486
Foreign currency contracts
Realized (gain) loss - 838
Unrealized (gain) loss (26,324) -
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Total risk management (gain) loss $ 162 $ 8,571
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Realized (gain) loss $ (611) $ (8,753)
Unrealized (gain) loss 773 17,324
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Total risk management (gain) loss $ 162 $ 8,571
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Unrealized risk management gains and losses may or may not be realized
based upon the underlying market conditions at the time of settlement.
RISK MANAGEMENT - OUTSTANDING CONTRACTS
Commodity hedge contracts in place as at May 9, 2008 are:
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Commodity Term Amount Average Price Index
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Natural gas
Collars April 2008 - Oct. 2008 66,667 mcf/d $7.50 - $8.93 AECO
Fixed April 2008 - Oct. 2008 19,048 mcf/d $7.86 AECO
Collars Nov. 2008 - March 2009 28,571 mcf/d $8.40 - $10.00 AECO
Fixed Nov. 2008 - March 2009 9,524 mcf/d $8.51 AECO
Crude oil
Fixed March 2008 - Dec. 2008 1,000 bbls/d U.S.$93.00/bbl WTI
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FOREIGN EXCHANGE CONTRACTS
On March 31, 2008, Compton had the following foreign exchange contracts in
place:
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Mark to
Contract Amount USD Rate Amount CDN Term Market
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Matures on
Currency December 1,
Swap $450,000,000 96.9750 $436,387,500 2010 $ 33,822
Equal payments
on May 30 and
Currency Nov. 30
Swap $78,435,000 99.5500 $78,082,043 until 2010 3,338
Cross
Currency Equal payments
Interest on May 15 and
Rate BA plus Nov. 15
Swap $24,502,500 4.845% $35,801,232 until 2009 (6,885)
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Total unrealized foreign exchange gain $ 30,275
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CAPITAL EXPENDITURES
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Three Months Ended March 31 ($000s) 2008 % 2007 %
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Land and seismic $ 6,104 6% $ 13,258 12%
Drilling and completions 65,776 65% 64,468 61%
Production facilities and equipment 29,068 29% 28,333 27%
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Sub-total $100,948 100% $106,059 100%
Property acquisitions (divestitures)
net 10,518 (45,261)
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Sub-total $111,466 60,798
MPP 61 569
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Total capital expenditures $111,527 $ 61,367
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Capital spending, before acquisitions and divestments, during the first quarter of 2008 remained relatively consistent with that of the comparable period in 2007, although an additional 10 net wells were drilled during the first quarter of 2008 as compared to the prior year. A total of 53 Belly River natural gas wells were drilled during the first quarter of 2008 as compared to 34 Belly River wells during the same time period in 2007. The sale of the Worsley property during 2007 resulted in no oil wells being drilled in the Peace River Arch area in 2008 as compared to the 10 wells drilled in the area during 2007. The shallow Belly River wells are significantly less costly to drill and complete than were the Worsley oil wells resulting in year over year expenditures being relatively consistent, despite the year over year increased number of wells drilled.
LIQUIDITY AND CAPITAL RESOURCES
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As at March 31, As at Dec. 31,
($000s, except where noted) 2008 2007
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Senior term notes $462,555 $444,645
Associated unrealized exchange (gain) (33,822) (14,146)
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$428,733 $430,499
Bank debt 435,000 400,000
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Long term debt $863,733 $830,499
Working capital deficiency 47,323 39,216
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Total indebtedness $911,056 $869,715
Shareholders' equity $875,017 $869,956
Debt to adjusted EBITDA(1)(2) 3.5x 3.6x
Debt to total capitalization(1) 51% 50%
Debt to enterprise value(1) 39% 41%
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(1) Excludes risk management items net of related future income taxes.
(2) Based on trailing 12 month adjusted EBITDA.
Our senior term notes are payable in US dollars and are translated into Canadian Dollars at the period end at the then prevailing exchange rate. Any change from the prior period is recognized as an unrealized exchange gain or loss and decreases or increases the carrying value of the notes. At March 31, 2008 the carrying value of the notes increased by $17.9 million from December 31, 2007 as a result of the unrealized loss on translation at March 31, 2008. In 2007, we entered into foreign exchange contracts relating to the senior notes that effectively fixes their liability in Canadian dollars through to December 1, 2010. The unrealized mark-to-market gain on these contracts is recognized as a reduction to the notes in determining total debt and capitalization as determined above.
Note 5 to the financial statements discusses our capital structure and certain non-GAAP measure and targets utilized in managing our capital structure. We have targeted a total debt to capitalization ratio of between 40% and 50% and a total debt to adjusted EBITDA ratio of between 2.5 to 1 and 3.0 to 1. As at March 31, 2008 our debt to capitalization ratio of 52% and our debt to adjusted EBITDA of 3.5 to 1 exceeded our targeted ranges. The Company is in the process of divesting of certain non-core assets. Proceeds from these divestments are expected to be such that, subsequent to closing, the Company will be within the range of its stated capital structure targets. Agents have been appointed to manage the property sales and preliminary bids are due on May 27, 2008. The divestments are expected to close on or about June 30, 2008.
Our corporate debt is structured to provide us with financial flexibility and coincide with the nature of our asset base. As of December 31, 2007 the reserve life index of our proved reserves was approximately 12 years. Of our existing debt, 48% consists of long term senior unsecured notes that are not due until 2013. This structure provides us the ability to draw on our senior secured credit facilities to assist in funding our planned capital programs.
The borrowing base on which our syndicated credit facility is based is determined in relation to our year end reserves. The credit facility is currently under annual review and with the increase in our 2007 reserves we do not anticipate any reduction to the borrowing base. Initially, the proceeds from the property sales referred to above will be applied to reduce our outstanding bank debt and our borrowing base may be reduced to reflect the reduction in reserves associated with these dispositions. Any such change is expected to be minimal and largely offset by the increase in reserves and stronger commodity prices. Currently we have authorized senior secured credit facilities of $500 million, of which $65 million remains available.
We believe internally generated cash flow from operations and the proceeds from planned property dispositions will be more than sufficient to fund our planned capital program.
STRATEGIC DIRECTION FOR 2008
2008 Plan Update
During the later part of 2007 and during the first quarter of 2008 we have achieved considerable success using multi stage frac technology combined with horizontal wells drilled into tight natural gas formations. At Niton in central Alberta we have drilled a total of 16 horizontal wells targeting the Rock Creek formation and most recently, we have applied this technology to the Basal Quartz formation at Hooker in southern Alberta with very positive results. We are currently assessing the application of this technology to the Belly River play in southern Alberta where we are testing two horizontal wells drilled in 2008.
Although wells drilled and completed using this technology are approximately twice the cost of vertical wells, results to date indicate their potential to increase capital efficiencies and enhance the present values of reserves in developing our natural gas resource plays.
Our initial 2008 drilling program and capital budget only minimally reflected the use of this technology. Additionally, our budget was based upon what now appears to be overly conservative commodity prices for the year. In view of these positive developments, we are in the process of revisiting our drilling program and capital budget for the remainder of 2008 to incorporate increased horizontal drilling and multi stage frac completions and stronger commodity prices. We expect this revised budget to be completed in late May.
Strategic Review
As previously announced, the Board of Directors, in response to concerns raised by Centennial Energy Partners LLC, has implemented a formal review of Compton's business plans and various strategic alternatives available to the Company. The review is being conducted by a Special Committee of the Board, assisted by Tristone Capital Inc. and UBS Securities Canada Inc., who have been engaged as financial advisors and independent counsel.
The initial phase of this review is ongoing and consists of a comprehensive analysis by the advisors, working independently, of Compton's business plans and various strategic alternatives available to the Company, including asset divestments, equity alternatives, strategic alliances, joint venture opportunities mergers or a corporate transaction. The advisors are scheduled to report to the Special Committee near the end of May and provide their recommendations for consideration by the Special Committee.
Guidance
The update to our 2008 budget plans and the outcome of the strategic review process, as discussed above, both have the potential to materially impact Compton's future direction and activities. Updated guidance will be provided once these issues have been addressed.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes during the quarter ended March 31, 2008 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ADDITIONAL DISCLOSURES
On January 1, 2008, Compton adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 3031, "Inventories", Handbook Section 1400, "General Standards of Financial Statement Presentation", Handbook Section 3862, "Financial Instruments - Disclosures", Handbook Section 3863, "Financial Instruments - Presentation", and Handbook Section 1535, "Capital Disclosures".
The adoption of these standards has had no significant impact on our consolidated financial statements. The effects of the implementation of the new standards are discussed below.
Inventories
The new standard replaces the previous standard and requires the consistent grouping of like assets and the application of the first-in-first-out or weighted average cost formula methodology. Spare parts inventory are tangible assets with a useful life that extends beyond one year and are held for re-deployment rather than re-sale. As such, they have been included in property and equipment and are depreciated on a per unit of production basis.
General standards of financial statement presentation
The new standard requires assessing an entity's ability to continue as a going concern and disclosing such if any uncertainty exists.
Financial instruments disclosure and presentation
These new standards require increased disclosure of financial instruments with particular emphasis on the risks associated with recognized and unrecognized financial instruments and how those risks are managed by Compton as disclosed in Note 13 of the financial statements.
Capital Disclosures
The new standard requires disclosure about Compton's objectives, policies and process for managing its capital structure as disclosed in Note 6 of the financial statements.
QUARTERLY INFORMATION
The following table sets forth certain quarterly financial information of the Company for the eight most recent quarters.
-------------------------------------------------------------------------
2008 2007
Q1 Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Total revenue (millions) $ 162 $ 126 $ 108 $ 126 $ 141
Adjusted cash flow from
operations (millions) $ 69 $ 46 $ 33 $ 49 $ 69
Per share - basic $ 0.54 $ 0.35 $ 0.26 $ 0.38 $ 0.53
- diluted $ 0.52 $ 0.35 $ 0.25 $ 0.36 $ 0.52
Net earnings (millions) $ 2 $ 50 $ 20 $ 45 $ 14
Per share - basic $ 0.01 $ 0.39 $ 0.15 $ 0.35 $ 0.11
- diluted $ 0.01 $ 0.38 $ 0.15 $ 0.34 $ 0.10
Adjusted net earnings from
operations (millions) $ 17 $ (2) $ (2) $ 7 $ 18
Production
Natural gas (mmcf/d) 170 167 135 130 148
Liquids (bbls/d) 5,009 4,818 7,954 7,199 8,729
-------------------------------------------------------------------------
Total (boe/d) 33,274 32,646 30,440 28,918 33,316
Average price
Natural gas ($/mcf) $ 7.48 $ 6.00 $ 5.23 $ 6.92 $ 7.24
Liquids ($/bbl) 94.97 77.60 61.91 60.49 54.20
-------------------------------------------------------------------------
Total ($/boe) $ 53.64 $ 41.94 $ 38.56 $ 47.94 $ 46.98
-------------------------------------------------------------------------
-------------------------------------------------------
2006
Q4 Q3 Q2
-------------------------------------------------------
Total revenue (millions) $ 130 $ 127 $ 135
Adjusted cash flow from
operations (millions) $ 55 $ 60 $ 67
Per share - basic $ 0.43 $ 0.47 $ 0.53
- diluted $ 0.42 $ 0.45 $ 0.50
Net earnings (millions) $ (10) $ 31 $ 69
Per share - basic $ (0.08) $ 0.24 $ 0.54
- diluted $ (0.08) $ 0.23 $ 0.51
Adjusted net earnings from
operations (millions) $ 12 $ 13 $ 18
Production
Natural gas (mmcf/d) 148 142 137
Liquids (bbls/d) 8,600 9,249 9,821
-------------------------------------------------------
Total (boe/d) 33,245 32,843 32,645
Average price
Natural gas ($/mcf) $ 6.48 $ 5.38 $ 5.86
Liquids ($/bbl) 48.44 57.53 59.41
-------------------------------------------------------
Total ($/boe) $ 42.60 $ 42.03 $ 45.37
-------------------------------------------------------
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Balance Sheets
(thousands of dollars)
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
------------ ------------
(unaudited)
Assets
Current
Cash $ 16,614 $ 8,665
Accounts receivable 99,097 83,144
Risk management gain (Note 13b) 1,341 1,835
Other current assets 25,434 19,772
Future income taxes 8,825 2,606
------------ ------------
151,311 116,022
Property and equipment 2,187,374 2,116,834
Goodwill 9,933 9,933
Other assets 332 291
Risk management gain (Note 13b) 36,319 14,320
------------ ------------
$ 2,385,269 $ 2,257,400
------------ ------------
------------ ------------
Liabilities
Current
Accounts payable $ 188,468 $ 150,796
Risk management loss (Note 13b) 30,427 8,832
Future income taxes 389 542
------------ ------------
219,284 160,170
Long term debt (Note 3) 885,274 832,188
Asset retirement obligations (Note 7) 38,329 36,696
Risk management loss (Note 13b) 2,265 1,585
Future income taxes 302,170 293,494
Non-controlling interest (Note 8) 62,930 63,311
------------ ------------
1,510,252 1,387,444
------------ ------------
Shareholders' equity
Capital stock (Note 4) 238,305 235,871
Contributed surplus (Note 9a) 25,838 24,233
Retained earnings 610,874 609,852
------------ ------------
875,017 869,956
------------ ------------
$ 2,385,269 $ 2,257,400
------------ ------------
------------ ------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Statements of Earnings and Other Comprehensive Income
(unaudited) (thousands of dollars, except per share amounts)
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Revenue
Oil and natural gas revenues $ 162,433 $ 140,877
Royalties (33,487) (28,646)
------------ ------------
128,946 112,231
------------ ------------
Expenses
Operating 28,842 26,032
Transportation 2,254 2,482
General and administrative 8,922 6,409
Stock-based compensation 2,996 3,266
Strategic review (Note 16) 2,568 -
Interest and finance charges (Note 10) 15,851 15,544
Foreign exchange (gain) loss (Note 14) 17,906 (5,522)
Risk management (gain) loss (Note 13c) 162 8,571
Depletion and depreciation 41,807 38,794
Accretion of asset retirement obligations 812 651
------------ ------------
122,120 96,227
------------ ------------
Earnings before taxes and non-controlling
interest 6,826 16,004
------------ ------------
Income taxes (Note 12)
Current 8 (13)
Future 3,286 610
------------ ------------
3,294 597
------------ ------------
Earnings before non-controlling interest 3,532 15,407
Non-controlling interest 1,913 1,688
------------ ------------
Net earnings 1,619 13,719
------------ ------------
------------ ------------
Other comprehensive income - -
------------ ------------
Comprehensive income $ 1,619 $ 13,719
------------ ------------
------------ ------------
Net earnings per share (Note 11)
Basic $ 0.01 $ 0.11
------------ ------------
------------ ------------
Diluted $ 0.01 $ 0.10
------------ ------------
------------ ------------
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Statements of Retained Earnings
(unaudited) (thousands of dollars)
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Retained earnings, as previously reported $ 609,852 $ 485,158
Accounting policy adjustments - (1,320)
------------ ------------
Retained earnings, as adjusted 609,852 483,838
Net earnings 1,619 13,719
Premium on redemption of shares (Note 4) (597) (787)
------------ ------------
Retained earnings, end of period $ 610,874 $ 496,770
------------ ------------
------------ ------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Statements of Cash Flow
(unaudited) (thousands of dollars)
-------------------------------------------------------------------------
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Operating activities
Net earnings $ 1,619 $ 13,719
Amortization and other (107) 511
Depletion and depreciation 41,807 38,794
Accretion of asset retirement obligations 812 651
Unrealized foreign exchange (gain) loss 17,910 (5,580)
Future income taxes 3,286 610
Unrealized risk management (gain) loss 773 17,324
Stock-based compensation 2,249 2,267
Asset retirement expenditures (940) (1,201)
Non-controlling interest 1,913 1,688
------------ ------------
69,322 68,783
Change in non-cash working capital 326 4,253
------------ ------------
69,648 73,036
------------ ------------
Financing activities
Issuance (repayment) of bank debt 35,238 (15,000)
Proceeds from share issuances (net) 1,918 1,877
Distributions to partner (2,292) (2,293)
Redemption of common shares (724) (946)
------------ ------------
34,140 (16,362)
------------ ------------
Investing activities
Property and equipment additions (101,050) (105,428)
Property acquisitions (10,998) -
Property dispositions 480 45,261
Change in non-cash working capital 15,729 2,591
------------ ------------
(95,839) (57,576)
------------ ------------
Change in cash 7,949 (902)
Cash, beginning of period 8,665 11,876
------------ ------------
Cash, end of period $ 16,614 $ 10,974
------------ ------------
------------ ------------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
Compton Petroleum Corporation
Notes to the Consolidated Financial Statements
(unaudited)
(Tabular amounts in thousands of dollars, unless otherwise stated)
March 31, 2008
-------------------------------------------------------------------------
1. Basis of presentation
Compton Petroleum Corporation (the "Company" or "Compton") explores for
and produces petroleum and natural gas reserves in the Western Canadian
Sedimentary Basin.
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The consolidated financial
statements also include the accounts of Mazeppa Processing Partnership
(the "Partnership" or "MPP") in accordance with Accounting Guideline 15
("AcG-15"), Consolidation of Variable Interest Entities, as outlined in
Note 8.
These consolidated interim financial statements have been prepared by
Management in accordance with accounting principles generally accepted in
Canada. Certain information and disclosure normally required to be
included in notes to annual consolidated financial statements have been
condensed or omitted. The consolidated interim financial statements
should be read in conjunction with the audited consolidated financial
statements and the notes thereto in the Company's annual report for the
year ended December 31, 2007. The consolidated interim financial
statements have been prepared following the same accounting policies and
methods of computation as the audited consolidated financial statements
for the year ended December 31, 2007 except as disclosed in Note 2 below.
All amounts are presented in Canadian dollars unless otherwise stated.
2. Changes in accounting policies and procedures
On January 1, 2008, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") Handbook Section 3031, "Inventories",
Handbook Section 1400, "General Standards of Financial Statement
Presentation", Handbook Section 3862, "Financial Instruments -
Disclosures", Handbook Section 3863, "Financial Instruments -
Presentation", and Handbook Section 1535, "Capital Disclosures".
The adoption of these standards has had no significant impact on the
Company's consolidated financial statements. The effects of the
implementation of the new standards are discussed below.
a) Inventories
The new standard replaces the previous standard and requires the
consistent grouping of like assets and the application of the first-
in-first-out or weighted average cost formula methodology. Spare
parts inventory are tangible assets with a useful life that extends
beyond one year and are held for re-deployment rather than re-sale.
As such, they have been included in property and equipment and are
depreciated on a per unit of production basis.
b) General standards of financial statement presentation
The new standard requires assessing an entity's ability to continue
as a going concern and disclosing such if any uncertainty exists.
c) Financial instruments disclosure and presentation
The new standards require increased disclosure of financial
instruments with particular emphasis on the risks associated with
recognized and unrecognized financial instruments and how those risks
are managed by the Company as disclosed in Note 13.
d) Capital disclosures
The new standard requires disclosure about the Company's objectives,
policies and process for managing its capital structure as disclosed
in Note 5.
3. Long term debt
March 31, December 31,
2008 2007
------------ ------------
Syndicated bank debt
Prime rate $ 85,000 $ 50,000
Bankers' acceptance 350,000 350,000
Discount to maturity (1,336) (1,574)
------------ ------------
433,664 398,426
------------ ------------
Senior term notes
U.S. $450 million senior term notes 462,555 444,645
Unamortized transaction costs (10,945) (10,883)
------------ ------------
451,610 433,762
------------ ------------
Total long term debt 885,274 832,188
------------ ------------
------------ ------------
The bank credit facilities are currently under review by the Company's
banking syndicate and are expected to be renewed under similar terms and
conditions.
4. Capital stock
Issued and outstanding
March 31, 2008 December 31, 2007
----------------------- -----------------------
Number Number
of shares Amount of shares Amount
----------- ----------- ----------- -----------
(000s) (000s)
Common shares outstanding,
beginning of period 129,098 $ 235,871 128,503 $ 231,992
Shares issued for services 50 490 - -
Shares issued under stock
option plan 260 2,071 993 4,603
Shares repurchased (69) (127) (398) (724)
----------- ----------- ----------- -----------
Common shares outstanding,
end of period 129,339 $ 238,305 129,098 $ 235,871
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The Company maintains a normal course issuer bid program on an annual
basis. Under the current program, the Company may purchase for
cancellation up to 6,000,000 of its common shares, representing
approximately 5.0% of the issued and outstanding common shares at the
time the bid received regulatory approval. During the three months ended
March 31, 2008 the Company purchased for cancellation 69,300 common
shares at an average price of $10.44 per share (December 31, 2007 -
398,300 shares at an average price of $9.98 per share) pursuant to the
normal course issuer bid. The excess of the purchase price over book
value has been charged to retained earnings.
5. Capital structure
The Company's capital structure is comprised of shareholders equity plus
long-term debt. The Company's objectives when managing its capital
structure are to:
a) ensure the Company can meet its financial obligations,
b) retain an appropriate level of leverage relative to the risk of
Compton's underlying assets, and
c) finance internally generated growth and potential acquisitions.
Compton manages its capital structure based on changes in economic
conditions and the Company's planned capital requirements. Compton has
the ability to adjust its capital structure by making modifications to
its capital expenditure program, divesting of assets and by issuing new
debt or equity.
The Company monitors its capital structure and financing requirements
using non-GAAP measures consisting of Total Debt to Capitalization and
Total Debt to Adjusted Earnings Before Interest, Taxes, Depreciation and
Amortization ("adjusted EBITDA").
Compton targets a net debt to capitalization ratio of between 40% and 50%
calculated as follows:
March 31, December 31,
As at period ended 2008 2007
------------ ------------
Senior term notes $ 462,555 $ 444,645
Associated unrealized risk management
(gain) (33,822) (14,146)
------------ ------------
428,733 430,499
Bank debt 435,000 400,000
------------ ------------
Long-term debt 863,733 830,499
Working capital deficiency(x) 47,323 39,216
------------ ------------
Total net debt 911,056 869,715
Total shareholder's equity 875,017 869,955
------------ ------------
Total capitalization $ 1,786,073 $ 1,739,671
------------ ------------
------------ ------------
Net debt to capitalization ratio 51% 50%
------------ ------------
------------ ------------
(x)excludes risk management items, net of related future income taxes
Compton's senior term notes, denominated in US dollars, are translated
into Canadian dollars at period end at the then prevailing exchange rate.
Any change from the prior period is recognized as an unrealized foreign
exchange gain or loss and decreases or increases the carrying value of
the notes. At March 31, 2008 the carrying value increased by
$17.9 million from December 31, 2007 as a result of the unrealized loss
on translation. In 2007, the Company entered into foreign exchange
contracts relating to the senior notes that effectively fixes their
liability in Canadian dollars through to December 1, 2010. The unrealized
risk management gain on these contracts is recognized as a reduction to
the notes in determining total net debt and capitalization as calculated
above.
The Company's net debt to capitalization increased to 51% at March 31,
2008 from 50% at December 31, 2007 as a result of increased borrowings
relating to first quarter activities.
Compton targets a total net debt to adjusted EBITDA of 2.5 to 3.0 times.
At March 31, 2008 net debt to adjusted EBITDA was 3.5x (December 31, 2007
- 3.6x) calculated on a trailing 12 month basis as follows:
March 31, December 31,
As at period ended 2008 2007
------------ ------------
Total net debt $ 911,056 $ 869,715
------------ ------------
------------ ------------
March 31, December 31,
12 months ended 2008 2007
------------ ------------
Net earnings $ 117,166 $ 129,267
Add (deduct)
Interest and finance charges 63,800 63,493
Income taxes (23,738) (26,435)
Depletion, depreciation and
amortization 154,424 151,411
Accretion of asset retirement
obligations 2,879 2,718
Foreign exchange (gain) loss (55,289) (78,717)
------------ ------------
Adjusted EBITDA $ 259,241 $ 241,736
------------ ------------
------------ ------------
Net debt to adjusted EBITDA 3.5x 3.6x
------------ ------------
------------ ------------
The Company is in the process of divesting of certain non-core assets.
Proceeds from these divestments are expected to be such that, subsequent
to closing, the Company will be within the range of its stated capital
structure targets. The divestments are expected to close on or about
June 30, 2008.
Compton is subject to certain financial covenants relating to its credit
facility and senior notes and at March 31, 2008 is in compliance with all
such financial covenants.
6. Business combination
On December 21, 2007 the Company acquired all of the issued and
outstanding shares of WIN Energy Corporation. The transaction was
accounted for using the purchase method and during the period ended
March 31, 2008 the purchase price allocation was finalized. The result
was a decrease to petroleum and natural gas properties of $1.0 million
and an increase to the future income tax asset of $1.0 million over that
reported at December 31, 2007.
7. Asset retirement obligations
The following table presents a reconciliation of the beginning and ending
aggregate carrying amount of the obligations associated with the
retirement of oil and gas assets:
March 31, December 31,
2008 2007
------------ ------------
Asset retirement obligations, beginning
of period $ 36,696 $ 29,791
Liabilities incurred 1,031 8,719
Liabilities settled and disposed (210) (4,532)
Accretion expense 812 2,718
------------ ------------
Asset retirement obligations, end
of period $ 38,329 $ 36,696
------------ ------------
------------ ------------
8. Non-controlling interest
Pursuant to AcG-15, these consolidated financial statements include the
assets, liabilities and operations of the Partnership. Equity in the
Partnership, attributable to the partners of MPP, is recorded on consolidation
as a non-controlling interest and is comprised of the following:
March 31, December 31,
2008 2007
------------ ------------
Non-controlling interest, beginning
of period $ 63,311 $ 66,350
Earnings attributable to non-
controlling interest 1,912 6,132
Distributions to limited partner (2,293) (9,171)
------------ ------------
Non-controlling interest, end of period $ 62,930 $ 63,311
------------ ------------
------------ ------------
MPP has guaranteed payment of certain obligations of its limited partner
under a credit agreement between the limited partner and a syndicate of
lenders. The maximum liability pursuant to the guarantee at March 31,
2008 is $10.0 million. The Company has determined that its exposure to
loss under these arrangements is minimal, if any.
9. Stock-based compensation plans
a) Stock option plan
The Company has a stock option plan for employees, including
Directors and Officers. The exercise price of each option
approximated the market price for the common shares on the date the
option was granted. Options granted under the plan before June 1,
2003 are generally fully exercisable after four years and expire ten
years after the grant date. Options granted under the plan after
June 1, 2003 are generally fully exercisable after four years and
expire five years after the grant date.
The following tables summarize the information relating to stock
options:
March 31, 2008 December 31, 2007
----------------------- -----------------------
Weighted Weighted
average average
Stock exercise Stock exercise
Options price options price
----------- ----------- ----------- -----------
(000s) (000s)
Outstanding, beginning
of period 12,084 $8.49 11,611 $7.79
Granted 429 $9.41 2,074 $11.02
Exercised (260) $5.49 (993) $3.47
Cancelled (155) $12.52 (608) $11.97
----------- ----------- ----------- -----------
Outstanding, end of
period 12,098 $8.53 12,084 $8.49
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Exercisable, end of
period 8,043 $7.02 7,240 $6.20
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The range of exercise prices of stock options outstanding and
exercisable at March 31, 2008 was as follows:
Outstanding Options Exercisable Options
---------------------------------- ------------------------
Weighted
average Weighted Weighted
Range of Number of remaining average Number of average
exercise options contractual exercise options exercise
prices outstanding life (years) price outstanding price
------------------------ ----------- ----------- ----------- ------------
(000s) (000s)
$1.45 -
$3.99 2,614 2.4 $2.71 2,614 $2.71
$4.00 -
$6.99 1,852 2.4 $4.91 1,852 $4.91
$7.00 -
$9.99 1,835 2.6 $8.15 962 $7.69
$10.00 -
$11.99 2,772 3.2 $11.19 981 $11.10
$12.00 -
$13.99 1,638 2.4 $12.63 937 $12.56
$14.00 -
$18.39 1,387 2.9 $14.69 697 $14.68
----------- ----------- ----------- ----------- ------------
12,098 2.7 $8.53 8,043 $7.02
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
The Company has recorded stock-based compensation expense in the
consolidated statement of earnings and other comprehensive income for
stock options granted to employees, Directors and Officers after
January 1, 2003 using the fair value method.
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option pricing model with weighted
average assumptions for grants as follows:
Three months ended March 31, 2008 2007
----------------------------------------- ------------ ------------
Weighted average fair value of options
granted $3.84 $4.25
Risk-free interest rate 3.5% 4.0%
Expected life (years) 5.0 5.0
Expected volatility 38.4% 39.3%
The following table presents the reconciliation of contributed
surplus with respect to stock-based compensation:
March 31, December 31,
2008 2007
------------ ------------
Contributed surplus, beginning of period $ 24,233 $ 16,974
Stock-based compensation expense 2,250 8,416
Stock options exercised (645) (1,157)
------------ ------------
Contributed surplus, end of period $ 25,838 $ 24,233
------------ ------------
------------ ------------
b) Restricted share unit plan
On March 1, 2008, the Company implemented a Restricted Share Unit
Plan ("RSU") for employees, officers and directors. The purpose of
the Plan is to attract and retain personnel necessary to the
successful operation of the Company and promote greater alignment of
their interests to that of Compton's shareholders. Under the Plan and
at the direction of the Board of Directors, RSUs may be granted to
persons eligible under the Plan. Generally RSUs so granted vest over
three years commencing with the first anniversary date of grant and
entitle the holder to receive a cash payment equal to the fair market
value of one common share of Compton per vested RSU. On March 10,
2008, 899,400 RSUs were granted under the Plan.
In accordance with CICA Handbook section 3870 the Company recognizes,
as compensation costs, the change in the intrinsic value of the RSUs
over the vesting period. During the period ending March 31, 2008 the
Company recognized, within stock based compensation, $746,000
(March 31, 2007 - nil) of compensation costs related to outstanding
RSUs. The corresponding liability is included in accounts payable as
at March 31, 2008. All outstanding RSUs expire in 2011.
c) Share appreciation rights plan
CICA Handbook section 3870 requires recognition of compensation costs
with respect to changes in the intrinsic value for the variable
component of fixed share appreciation rights ("SARs"). During the
periods ended March 31, 2008 and 2007, there were no significant
compensation costs related to the outstanding variable component of
these SARs. The liability related to the variable component of these
SARs amounts to $1.0 million, which is included in accounts payable
as at March 31, 2008 (December 31, 2007 - $1.0 million). All
outstanding SARs having a variable component expire at various times
through 2011.
d) Employee retention program
In recognition of the demand for qualified personnel that existed
within the industry, the Company implemented an Employee Retention
program in July 2006 for its existing employees, at the time
excluding Officers and Directors. Under the program, the Company
incurred additional compensation costs of $4.0 million, $2.6 million
of which was recognized in 2007 and the balance in 2006. Amounts paid
under the program were determined in relation to the market value of
the Company's capital stock and accordingly have been included in
stock-based compensation expense. No further obligation exists
pursuant to this program.
10. Interest and finance charges
Amounts charged to interest expense during the period were:
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Interest on bank debt, net $ 6,458 $ 5,209
Interest on senior term notes 8,980 10,445
Other finance charges 413 (110)
------------ ------------
$ 15,851 $ 15,544
------------ ------------
------------ ------------
Other finance charges include lease financing, bank service charges and
fees as well as other miscellaneous interest revenue and expense.
11. Per share amounts
The following table summarizes the common shares used in calculating net
earnings per common share:
Three months ended March 31, 2008 2007
----------------------------------------- ------------ ------------
(000s) (000s)
Weighted average common shares
outstanding - basic 129,182 128,570
Effect of stock options 3,387 4,074
------------ ------------
Weighted average common shares
outstanding - diluted 132,569 132,644
------------ ------------
------------ ------------
12. Income taxes
The following table reconciles income taxes calculated at the Canadian
statutory rates with actual income taxes:
Three months ended March 31, 2008 2007
----------------------------------------- ------------ ------------
Earnings before taxes and non-controlling
interest $ 6,826 $ 16,004
------------ ------------
Canadian statutory rates 29.5% 32.1%
Expected income taxes $ 2,014 $ 5,137
Effect on taxes resulting from:
Non-deductible stock-based compensation 664 728
Effect of tax rate changes (1,612) (4,401)
Non-taxable portion of foreign exchange
(gain) loss 2,386 (896)
Other (158) 29
------------ ------------
Provision for income taxes $ 3,294 $ 597
------------ ------------
Current $ 8 $ (13)
Future 3,286 610
------------ ------------
$ 3,294 $ 597
------------ ------------
------------ ------------
Effective tax rate 48.3% 3.7%
------------ ------------
------------ ------------
13. Financial instruments and risk management
At March 31, 2008, the Company's financial assets and liabilities consist
of cash, accounts receivable, other current assets, accounts payable,
bank debt, senior term notes and risk management assets and liabilities
relating to the use of derivative financial instruments.
The following summarizes a) fair values of financial assets and
liabilities, b) risk management assets and liabilities, c) risk
management gains and losses and d) risks associated with financial assets
and liabilities.
a) Fair value of financial assets and liabilities
The fair value of financial assets and liabilities were as follows:
March 31, 2008 December 31, 2007
Carrying Carrying
Amount Fair Value Amount Fair Value
Financial assets
Held-for-trading
Cash $ 16,614 $ 16,614 $ 8,665 $ 8,665
Other current
assets 25,434 25,434 19,772 19,772
Risk management
assets(x) 37,660 37,660 16,155 16,155
Loans and receivables
Accounts receivable 99,097 99,097 83,144 83,144
Financial liabilities
Held-for-trading
Risk management
liabilities(x) $ 32,692 $ 32,692 $ 10,417 $ 10,417
Other financial
liabilities
Accounts payable 188,468 188,468 150,796 150,796
Bank debt 433,664 433,664 398,426 398,426
Senior term notes 451,610 444,053 433,762 415,743
(x) Includes current and non-current
The carrying value of cash, accounts receivable, other current
assets, accounts payable, and bank debt approximate fair value due to
the short term nature of these instruments and variable rates of
interest. The senior term notes trade in the US and the estimated
fair value was determined using quoted market prices. Risk management
assets and liabilities are recorded at their estimated fair value
based on the mark to market method of accounting, using quoted market
prices, third-party market indications and forecasts.
b) Risk management assets and liabilities
i) Net risk management positions
Risk management assets and liabilities relate to unrealized gains and
losses associated with commodity price risk management and foreign
currency risk management and are classified on the balance sheet as
follows:
Total Total
Commodity Foreign March 31, December
Contracts Currency 2008 31, 2007
----------- ----------- ----------- -----------
Unrealized gain
Current asset $ 501 840 1,341 $ 1,835
Non-current asset - 36,319 36,319 14,320
Unrealized loss
Current liability (25,808) (4,619) (30,427) (8,832)
Non-current
liability - (2,265) (2,265) (1,585)
----------- ----------- ----------- -----------
Total unrealized
gain (loss) $ (25,307) 30,275 4,968 $ 5,738
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
ii) Net fair value of commodity positions
On March 31, 2008, the Company had the following commodity contracts
in place:
Daily
Notional Mark-to-
Commodity Term Volume Average Price Market
--------- ---- ------ ------------- ------
gain
(loss)
Natural gas
Summer $7.33 -
collar Apr./08 - Oct./08 52,381 mcf $8.48/mcf (11,782)
Summer
fixed Apr./08 - Oct./08 19,048 mcf $7.86/mcf (5,843)
Winter $8.40 -
collar Nov./08 - Mar./09 28,571 mcf $10.00/mcf (2,326)
Winter
fixed Nov./08 - Mar./09 9,524 mcf $8.51/mcf (3,629)
Oil fixed
price Mar./08 - Dec./08 1,000 bbl US $93.00/bbl (2,228)
Electricity Jan./07 - Dec./08 2.5 MW $55.00/MWh 501
---------
Total
unrealized
commodity
loss (25,307)
---------
iii) Net fair value of foreign currency positions
On March 31, 2008, the Company had the following foreign exchange
contracts in place:
Mark to
Contract Amount USD Rate Amount CDN Term Market
-------- ---------- ---- ---------- ---- ------
gain
(loss)
Matures on
Currency December 1,
Swap $450,000,000 96.9750 $436,387,500 2010 $ 33,822
Equal payments
on May 30 and
Currency Nov. 30
Swap $78,435,000 99.5500 $78,082,043 until 2010 3,338
Cross Equal payments
Currency on May 15 and
Interest BA plus Nov. 15
Rate Swap $24,502,500 4.845% $35,801,232 until 2009 (6,885)
---------
Total
unrealized
foreign
exchange
gain $ 30,275
---------
---------
c) Risk management gains and losses
Risk management gains and losses recognized in the consolidated
statements of earnings and other comprehensive income during the
periods relating to commodity prices and foreign currency
transactions are summarized below:
Commodity Foreign
Period ended March 31, 2008 Contracts Currency Total
----------- ----------- -----------
Unrealized change in fair value $ 27,097 $ (26,324) $ 773
Realized cash settlements (611) - (611)
----------- ----------- -----------
Total (gain) loss $ 26,486 $ (26,324) $ 162
----------- ----------- -----------
----------- ----------- -----------
Commodity Foreign
Period ended March 31, 2007 Contracts Currency Total
----------- ----------- -----------
Unrealized change in fair value $ 16,486 $ 838 $ 17,324
Realized cash settlements (8,753) - (8,753)
----------- ----------- -----------
Total (gain) loss $ 7,733 $ 838 $ 8,571
----------- ----------- -----------
----------- ----------- -----------
The gains and losses realized during the year on the electricity
contract are included in operating expenses.
d) Risks associated with financial assets and liabilities
The Company is exposed to financial risks arising from its financial
assets and liabilities. The financial risks include market risk
relating to commodity prices, foreign exchange rates, interest rates,
credit risk, and liquidity risk.
i) Market risk
Market risk is the risk that the fair value or future cash flows from
financial assets or liabilities will fluctuate due to movements in
market prices and is comprised of the following:
- Commodity price risk
The Company is exposed to commodity price movements as part of
its normal oil and gas operations. Under guidelines established
and approved by the Board of Directors, Compton enters into
economic hedge transactions relating to crude oil and natural gas
prices to mitigate volatility in commodity prices and the
resulting impact on cash flow. The contracts entered into are
forward transactions providing the Company with a range of prices
on the commodities sold. Prices are marked to industry benchmarks
specifically to AECO monthly prices for gas contracts, WTI NYMEX
prices for oil contracts and power pool spot prices for
electricity contracts. Prices are valued in Canadian dollars
unless otherwise disclosed. The Company does not use derivative
contracts for speculative purposes.
At March 31, 2008, with respect to commodity contracts in place
on that date, an increase of $0.25/mcf in the price of natural
gas, holding all other variables constant, would have reduced the
fair value of the derivative financial instrument and negatively
impacted before tax earnings by approximately $5.1 million. A
similar decline in commodity prices would have had the opposite
impact.
- Foreign exchange rate risk
Compton is exposed to fluctuations in the exchange rate between
the Canadian dollar and the US dollar. Crude oil and to a certain
extent natural gas prices are based upon reference prices
denominated in US dollars, while the majority of the Company's
expenses are denominated in Canadian dollars. To mitigate the
exposure to the fluctuating Canada/US exchange rate the Company
maintains a mix of US and Canadian dollar denominated debt. In
addition Compton enters into agreements to fix the exchange rate
of Canadian dollars to US dollars in order to manage the risk.
With Board of Director approval, during 2007, the Company entered
into a series of foreign exchange contracts relating to the
US$450 million senior notes due December 1, 2013, effectively
fixing the liability in Canadian dollars through to December 1,
2010, being the second call date of the senior notes.
Additionally, the Company entered into a series of foreign
exchange contracts relating to the semi-annual interest
settlement obligations until November 30, 2010.
At March 31, 2008, a $0.01 increase in the value of the Canadian
dollar, when measured against the US dollar, would have reduced
the fair value of the foreign exchange contracts and negatively
impacted before tax earnings by approximately $4.9 million. A
similar decrease of $0.01 would have had the opposite impact.
- Interest rate risk
The Company is exposed to interest rate risk principally
associated with borrowings. Floating rates, associated with bank
debt, expose the Company to short-term movements in interest
rates. Fixed rates, associated with the senior term notes,
introduce risk at the time of maturity if replacement bonds are
issued.
The Company partially mitigates its exposure to interest rate
changes by maintaining a mix of both fixed and floating rate
debt. Entering into interest rate swap transactions, when deemed
appropriate, is another means of managing the fixed/floating rate
debt portfolio mix.
At March 31, 2008, a 100 basis point increase in floating
interest rates, associated with the cross currency interest rate
swap would negatively impact before tax earnings by approximately
$2.5 million. A similar decrease in floating rates would have the
opposite impact.
ii) Credit risk
The Company is exposed to credit risk, which is the risk that a
counterparty will fail to perform an obligation or settle a
liability, resulting in a financial loss to the Company.
A significant portion of Compton's accounts receivable and other
current asset balances are with entities in the oil and gas industry
and subject to normal industry credit risks. The allowance for
doubtful accounts is less than 1% of total balances and relates to
receivables acquired through corporate acquisitions and disputes with
partners. Substantially all of the receivable balances at March 31,
2008 were current.
In the money derivative financial instrument contracts are with
investment grade Canadian and US financial institutions that are also
members of the Company's banking syndicate. At March 31, 2008,
Compton had two financial institutions whose net settlement position
individually accounted for more than 10% of the fair value of the
outstanding in-the-money net financial instrument contracts.
The Company regularly assesses the financial strength of its
marketing customers and limits the total exposure to individual
counterparties based on management determined criteria. As well, a
number of contracts contain provisions that allow Compton to demand
the posting of collateral in the event of a downgrade to a non-
investment grade credit rating.
The maximum credit risk exposure associated with the Company's
financial assets is the carrying amount.
iii) Liquidity risk
Compton is exposed to liquidity risk which is the risk that the
Company will be unable to generate or obtain sufficient cash to meet
its commitments as they come due. Mitigation of this risk is achieved
through the active management of cash and debt. In managing liquidity
risk, in addition to cash flow generated from operating activities,
the Company has access to sources of funding at competitive rates
through public debt markets, capital markets, property dispositions
and banks as disclosed in Note 5. Compton believes it has sufficient
funding through the use of these facilities to meet any foreseeable
cash requirements.
The timing of cash outflows relating to financial liabilities are
outlined below:
1 year 2-3 years 4-5 years + 5 years Total
---------- ---------- ---------- ---------- -----------
Accounts payable $ 188,468 $ - $ - $ - $ 188,468
Risk management
liabilities 30,427 2,265 - - 32,692
Bank debt - 435,000 - - 435,000
Senior term notes - - - 462,555 462,555
---------- ---------- ---------- ---------- -----------
$ 218,895 $ 437,265 $ - $ 462,555 $1,118,715
---------- ---------- ---------- ---------- -----------
---------- ---------- ---------- ---------- -----------
14. Foreign exchange (gain) loss
Amounts charged to foreign exchange (gain) loss during the period ended
are as follows:
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Foreign exchange on translation of US$ debt $ 17,910 $ (5,580)
Other foreign exchange (4) 58
------------ ------------
Total (gain) loss $ 17,906 $ (5,522)
------------ ------------
------------ ------------
15. Supplemental cash flow information
Amounts actually paid during the period relating to interest expense and
capital taxes are as follows:
Three months ended March 31, 2008 2007
--------------------------------------------- ------------ ------------
Interest paid $ 5,296 $ 4,181
Taxes paid - -
------------ ------------
$ 5,296 $ 4,181
------------ ------------
------------ ------------
16. Strategic review
In response to certain concerns raised by Centennial Energy Partners LLC,
a major shareholder of Compton, the Board of Directors of the Company
announced, in a news release dated February 28, 2008, that it would
undertake a formal review of the Company's business plans and
alternatives for enhancing shareholder value. The review is being
conducted under the direction of a Special Committee of the Board
comprised of Compton's independent directors and the Special Committee
has appointed independent advisors and legal counsel to assist in the
conduct of the review.
The Company has estimated direct costs associated with, and resulting
from the review process could total approximately $22 million. These
costs include among others, consulting and advisory fees, legal fees, and
costs relating to employee retention. Costs are recognized as incurred
and, as at March 31, 2008, the Company has recorded $2.6 million of
Strategic Review related expenses.
17. Reclassification
Certain amounts disclosed for prior periods have been reclassified to
conform with current period presentation.
Conference Call
Compton will be conducting a conference call and audio webcast May 12, 2008 at 9:30 a.m. (MST) or 11:30 a.m. (EST) to discuss the Company's 2008 first quarter financial and operating results. To participate in the conference call, please contact the Conference Operator at 9:20 a.m. (MST), ten minutes prior to the call.
Conference Operator Dial-in Number: 416-644-3419 or toll-free
1-800-731-6941.
The audio replay will be available two hours after the conclusion of the conference call and will be accessible until May 19, 2008. Callers may dial toll-free 1-877-289-8525 and enter access code 2127014 (followed by the pound key).
Audio webcast link:
http://phx.corporate-ir.net/phoenix.zhtml?p(equal sign)irol-eventDetails&c(equal sign)69018&eve ntID(equal sign)1813794
Compton Petroleum Corporation is a Calgary-based public company actively engaged in the exploration, development, and production of natural gas, natural gas liquids, and crude oil in the Western Canada Sedimentary Basin. Compton's shares are listed on the Toronto Stock Exchange under the symbol CMT and on the New York Stock Exchange under the symbol CMZ.
%SEDAR: 00003803E %CIK: 0001043572