CALGARY, March 25 /CNW/ - Compton Petroleum Corporation (TSX - CMT, NYSE - CMZ) is pleased to report its financial and operating results for the year and quarter ended December 31, 2007.
2007 HIGHLIGHTS
- Reserve additions, proved plus probable 22 million boe (net of
production & divestments),
9% increase
- Reserve value, before tax $3.4 billion, 8% DCF
- FD&A costs, $/boe
Including change in future capital $12.86 proved plus probable
$23.36 proved
- 2007 Average production 31,326 boe/d
- Production replacement 1.9 times
- Adjusted cash flow from operations $196 million
Drilling Results
During 2007 Compton successfully completed a 322 well drilling program, with a 97% success rate. Of the 322 wells drilled in 2007, 91% were classified as development wells and nine percent were classified as exploratory wells, compared to 84% and 16% respectively in 2006. The higher percentage of development wells in the current year reflects the increasing success of our oil and gas plays.
Of particular note was our very successful horizontal drilling program targeting the Rock Creek formation in the Niton area of central Alberta. We completed a total of six horizontal natural gas wells utilizing multi-stage frac technology with excellent results. As announced in our recent news release of March 6, 2008 we are excited at the potential of applying this technology to other core areas including the Basal Quartz at Hooker and the Belly River in southern Alberta.
Dispositions and Acquisitions
We were also very active on the Acquisition and Divestment front during 2007. We pursued our strategy of divesting of non-focus assets and the redeployment of the proceeds into our focus area natural gas plays. We closed non-core property divestments, including our conventional light oil property at Worsley, for total net proceeds of $303.1 million. We also added to our core areas through a series of property acquisitions that totaled approximately $73.7 million and completed two corporate acquisitions, Stylus Energy Inc. and WIN Energy Corporation, that significantly expanded our presence in southern Alberta and the Foothills at a total cost of $131.4 million.
Reserve Growth
Our 2008 activities resulted in strong reserve growth. We replaced 192% of our 2007 production on a proved plus probable basis at very competitive Finding, Development, and Acquisition costs ("FD&A") of $12.86/boe, including change in future capital. We added 2.3 million boe of proved reserves and 22 million boe proved plus probable reserves, net of production and asset divestitures. Asset divestitures during the year included total reserves of 12.2 million boe, of which 11.9 million boe were classified as proved reserves.
Total proved plus probable reserves rose nine percent from the prior year to 271 million boe and were valued before tax at $3.4 billion, based on eight percent discounted cash flow. Total proved reserves at year end were 150 million boe. Proved producing reserves comprise 69% of total proved reserves. Total proved reserves account for 55% of the proved plus probable reserves.
2007 proved plus probable reserves of 271 million boe equate to 2.10 boe per common share outstanding, versus 1.93 boe per common share in 2006. During the past five years, we have grown our reserve base at a 21% compound annual growth rate.
Production, Revenue, and Adjusted Cash Flow From Operations
Overall average production, revenue, and adjusted cash flow from operations for 2007 declined from 2006 levels primarily as a result of an overall reduction in drilling, particularly during the first half of the year, and natural declines and property divestments. During the last half of 2007, activity increased appreciatively. We drilled a total of 238 wells during the third and fourth quarters of 2007 and fourth quarter production averaged 32,646 boe/d, an increase of 7% over the third quarter.
2007 Objectives
A primary goal during 2007 was that of positioning the Company to execute on its three year strategic plan to realize on the Company's large resource potential through expanding drill programs. To this end, much was achieved in 2007 including:
- The continued strengthening of our technical and professional teams
necessary to manage expanded drilling programs,
- The testing of the applicability of advanced drilling and completion
technologies to our resource plays,
- The continued divestment of non-core properties and redeployment of
capital to our focus areas, and
- Developing internal systems and procedures to efficiently and cost
effectively manage larger drilling programs.
We are largely pleased with the result of our efforts in these areas and
look forward to 2008.
The following sections of this news release discuss in significant detail
our 2007 operational and financial results together with our plans for 2008
and beyond.
FINANCIAL SUMMARY
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Three Months Ended Dec. 31 Year Ended Dec. 31
($000s, except
per share
amounts) 2007 2006 % Change 2007 2006 % Change
-------------------------------------------------------------------------
Gross revenue $125,959 $130,289 -3% $500,987 $540,837 -7%
Adjusted cash
flow from
operations(1) $ 45,696 $ 55,263 -17% $196,194 $256,305 -23%
Per share
- basic $ 0.35 $ 0.43 -19% $ 1.52 $ 2.01 -24%
- diluted $ 0.35 $ 0.42 -17% $ 1.48 $ 1.92 -23%
Net earnings $ 50,457 ($10,037) 603% $129,266 $127,426 1%
Per share
- basic $ 0.39 ($ 0.08) 588% $ 1.00 $ 1.00 0%
- diluted $ 0.38 ($ 0.08) 588% $ 0.98 $ 0.95 3%
Adjusted net
earnings from
operations(2) $ (2,017) $ 11,822 -117% $ 21,286 $ 65,168 -67%
Capital
expenditures $385,532 $491,511 -22%
Corporate debt, net $871,403 $875,548 0%
Shareholders'
equity $869,956 $734,124 19%
Weighted
averages
shares (000s)
- basic 128,993 127,820
- diluted 132,539 133,626
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(1) Adjusted cash flow from operations is a non-GAAP term that represents
net earnings adjusted for non-cash items. We consider adjusted cash
flow from operations to be a key financial measure as it demonstrates
our ability to generate the cash flow necessary to fund future growth
through capital investment. Adjusted cash flow from operations may
not be comparable to similar measures presented by other companies.
(2) Adjusted net earnings from operations was referred to as Operating
Earnings in prior years.
OPERATING SUMMARY
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Three Months Ended Dec. 31 Year Ended Dec. 31
(6:1 boe
conversion) 2007 2006 % Change 2007 2006 % Change
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Average daily
production
Natural gas
(MMcf/d) 167 148 13% 145 142 2%
Liquids (light
oil & ngls)
(bbls/d) 4,818 8,600 -44% 7,166 9,516 -25%
Total oil
equivalent
(boe/d) 32,646 33,245 -2% 31,326 33,187 -6%
Average realized
prices
Natural gas
($/Mcf) $ 6.00 $ 6.48 -7% $ 6.33 $ 6.32 0%
Liquids ($/bbl) 77.60 50.18 55% 62.28 59.09 5%
Total oil
equivalent
($/boe) $ 41.94 $ 42.60 -1% $ 43.82 $ 44.65 -2%
Field operating
netback ($/boe) $ 23.93 $ 27.03 -11% $ 26.54 $ 28.17 -6%
Cash flow
netback ($/boe) $ 16.91 $ 19.38 -13% $ 18.25 $ 21.53 -15%
Undeveloped land
Gross acres 1,121,130 980,179 14%
Net acres 893,462 798,192 12%
Average working
interest 80% 81%
Reserves (Mboe)
Proved oil
equivalent 149,564 147,218 2%
Proved plus
probable oil
equivalent 270,819 248,755 9%
Proved plus
probable gas
equivalent, Tcfe 1.625 1.492
Proved reserve
life index (years) 13 12
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OPERATIONS
1. PROPERTY REVIEW
Compton engages in oil and gas exploration and development in the Western Canada Sedimentary Basin of Alberta, Canada. Our focus is on the Deep Basin portion of the Basin, which extends from Northwest Alberta and British Columbia to the United States border. In this large geographical region, we pursue two types of resource plays. A shallow gas resource play, targeting the Plains Belly River and overlying Edmonton Horseshoe Canyon zones, and the three deep gas plays that include the Basal Quartz sands at Hooker, the Gething/Rock Creek sands at Niton and Caroline in central Alberta, and the Foothills stacked, thrusted Upper Cretaceous Belly River play at Callum in the south.
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, shales, and coals, overlain by the Edmonton/Horseshoe Canyon Coals that similarly include sands, silts, and shales. In 2007 we drilled a total of 226 wells through the Edmonton Horseshoe Canyon Group targeting the Belly River section. 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.
Plains Belly River and Edmonton Coal Bed Methane
At December 31, 2007, we were producing approximately 55 mmcf/d from 630 Belly River and Edmonton coal bed methane wells. With 1,200 sections of land, at four wells per section automatic downspacing, this translates to a significant multi-year, low risk drilling inventory on which to grow our company.
During 2007, we took full advantage of the four well per section reduced spacing initiative for our Belly River drilling program. Wherever possible, our shallow gas wells were drilled in batches in areas close to existing infrastructure. This initiative enabled us to significantly reduce our 2007 spud to rig release and rig release to on-stream times to 2.8 days and 99 days, respectively. Drilling results at our southern Alberta Belly River play were 100% successful in 2007, and we made particularly notable advances in the Brant, south Hooker, Ghost Pine, and Vulcan areas. Using our 1,200 km(2) of proprietary 3D seismic, coupled with detailed geological mapping, has allowed us to model the Belly River sands for consistent, repeatable success.
At Brant, our 3-5-17-27W4M compressor station became fully operational in November 2007, providing us the requisite horsepower needed to bring on eight new 100% owned Belly River wells. These wells were producing a combined four mmcf/d at year end. The average production rate of these wells is approximately double the 30 day initial production rate of a typical Belly River well. Our 2007 drilling targeted longer term producing wells such as Compton Brant 00/07-05-017-27W4M/0 and Compton Silver 00/13-32-016-28W4M/2. These two wells are producing 570 and 860 mcf/d, respectively. In 2008, we will aggressively follow up similar trends into south Hooker and south Brant.
In the Ghost Pine area, we expanded our 15-11-30-23W4M compressor station from eight to 12 mmcf/d in 2007. A total of 62 Belly River and Horseshoe Canyon coal wells are currently producing 12 mmcf/d at Ghost Pine. We have 14 standing gas wells that are scheduled to be tied-in in the first quarter 2008. We have recently reprocessed our 3D seismic in this area, and in 2008 we plan to use this seismic to replicate the Ghost Pine Belly River gas well 02/07-10-030-23W4M, which had an initial production rate of 1,300 mcf/d, and the 00/05-01-030-23W4/4 Coal Bed Methane gas well, which had an initial production rate of 74 mcf/d.
Finally, further south in the Vulcan area, we placed five Belly River gas wells drilled by Stylus Energy on production in late 2007. In aggregate, these wells were placed on production at 2.2 mmcf/d. These wells are the southernmost Belly River gas wells producing in Alberta.
Our total compression capacity for southern Alberta low pressure gas is 95 mmcf/d. Compton had 27,000 horsepower of installed compression dedicated to the play installed and running at year end 2007.
In 2008, we plan to drill 275 Belly River wells, focusing specifically on the top tier prospects identified by our technical teams. We have allocated approximately $180 million in our budget to this area, with $5 million ear-marked specifically to continue with identification of well locations and licensing such that as industry conditions improve, we can readily ramp-up activity. We estimate that roughly 40% of our 2008 Belly River wells drilled in the latter part of the year will not come on production until early 2009 and will, as a result, take full advantage of the lower shallow gas royalty rates effective for 2009.
Our 2008 southern Alberta plans also include an eight well per section pilot project. Additionally and following on our Deep Basin deeper target success, we will use extended reach drilling with multi-stage fracturing techniques.
DEEP BASIN
Compton has two Deep Basin gas plays: the Basal Quartz sands at Hooker and the Gething/Rock Creek sands at Niton and Caroline in central Alberta.
Southern Alberta: Hooker
Discovered by Compton in 1999, the Basal Quartz sandstone pool at Hooker is the southern Alberta extension of the Lower Cretaceous Deep Basin gas trend. Current production extends over five townships, and in 2007, we drilled 10 wells at Hooker.
In March 2008, Compton successfully completed the first horizontal well in southern Alberta at Niton targeting the Basal Quartz formation utilizing multi-stage fracturing technology. The well at 9-17-17-29W4 was drilled with a 700 metre horizontal leg that flow tested at six mmcf/d. It is scheduled to be tied-in during mid March. A second horizontal well is currently drilling at 15-30-16-29W4 and 15 follow-up locations have been identified.
While Compton has been employing horizontal drilling and multi-stage frac technology in the Niton area in central Alberta with good success, the 9-17 well at Hooker is of major significance in that it establishes that this technology is applicable to the development of the Hooker Basal Quartz play in southern Alberta. To date the Hooker play has been developed through drilling one to two vertical wells per section. Reservoir modeling indicates up to four vertical wells per section may be necessary to fully develop the play. A horizontal well could replace two to three vertical wells, eliminating the need for extensive down-spacing in the area
Central Alberta: Niton and Caroline
The Niton area in central Alberta, 150 miles west of Edmonton, is also in the Alberta Deep Basin fairway. Our main targets are the Jurassic Rock Creek and Cretaceous Gething, analogous to the Hooker pool in southern Alberta. Proprietary exploration, development, and operational knowledge gained in southern Alberta has resulted in accelerated growth of this core area. In 2007, we drilled 35 wells at Niton and Caroline.
We experienced significant drilling success with our Rock Creek horizontal gas well program at Niton in 2007. The average cost to drill and complete a Niton horizontal gas well is $4.5 million, or roughly two times the cost of a comparative vertical Rock Creek gas well. With a 30 day initial production average of 5.0 mmcfe/d per well, horizontal wells produce about four times that of a comparative vertical well. Compton's average horizontal gas well is 2,600 meters deep and has a 1,000 meter open-hole section. Multiple open-hole packers are set within the horizontal section and three to four staged hydraulic fractures are completed. At year end, we had eight Niton horizontal Rock Creek wells on production. Six of these wells were gas wells and two were oil wells, with the gas wells producing approximately 16.2 mmcfe/d in aggregate and the two oil wells were producing a combined 153 boe/d.
To date in 2008 we have drilled two additional horizontal wells at Niton and a third well is currently drilling. The first well tested 3.0 mmcf/d and most recently, the well at 4-27-52-17W5 completed at the end of February is currently flow testing at 11 mmcf/d. The third well is scheduled to be completed later this month. Production from these wells will be facility constrained pending the completion of additional compression and gathering lines. This work is currently underway and is scheduled for completion by the end of March barring any delay resulting from an early spring break-up. A total of 10 additional locations are planned for this area in 2008.
In 2008, Compton's Niton budget plans for 15 horizontal wells using this multi-stage frac technology. Last year's focus by a number of producers, including Compton, targeted the Compton discovered Edson Rock Creek P pool. Following the Niton Rock Creek successes, Compton posted and acquired a 100% interest in 12 sections of mineral rights on a second Rock Creek discovery. Late in 2007, Compton drilled Edson 00/01-31-052-16W5M/0 discovery well on this 100% block of land. This well was successful and is currently producing at 3.5 mmcfe/d.
All major compression equipment has been ordered for this play and we are currently drilling the third and fourth horizontal wells in this play. Pending break-up and drilling success, we plan to have eight 100% working interest horizontal wells on stream by the end of May 2008.
For 2008 we have allocated approximately $135 million or 33% of our total planned capital expenditures to our central Alberta resource play. We plan to drill 48 wells in this area, with 13 of these wells slated to be horizontal. The 2008 plan is to continue to aggressively drill similar Rock Creek plays and to transfer this multi-staged horizontal fracture technology to other Compton operated deep basin gas plays throughout Alberta.
FOOTHILLS
Our Callum/Cowley property consists of a series of over pressured, thrusted, low permeability Belly River sands in the foothills of southern Alberta. A total of 15 exploratory wells have been drilled over the life of the play. Based on our initial detailed geological, geophysical, and engineering analysis of seismic, cores, well logs, and test and production data, Callum appears to exhibit many similarities to the deep unconventional gas pools of the Rocky Mountain region of the United States.
In 2007, we drilled a horizontal well targeting a specific group of sands plus intersecting mapped fracture systems. The well came on production at approximately 6.5 mmcf/d, without stimulation. Further reservoir and completion work is planned on this well bore in 2008.
During the fourth quarter of 2007, we acquired WIN Energy Inc., a junior oil and gas company that was active on lands immediately adjacent to ours. This $30 million acquisition added 68,000 gross (53,600 net) acres of undeveloped land in the Cowley area in southern Alberta prospective for the thrusted Belly River trend. As at December 31, 2007, we held approximately 239 net sections of high impact exploration lands at Callum and Cowley.
With our acquisition of WIN Energy Inc., we also acquired 55 kilometres of 2D seismic and a new 36 square mile 3D seismic survey surrounding currently producing wells. Using this seismic data, we plan to replicate our recent horizontal well success at Callum in the Cowley area. In 2008, we plan to drill four extended reach horizontal wells. These wells will be oriented to intersect the maximum number of natural fractures in the foothills gas play. Each of these horizontal wells will use multi-stage fracturing techniques and they will be drilled from existing pads to minimize our environmental impact. We plan to drill a total of nine wells in the Callum and Cowley area in 2008.
Compton treats the southern Alberta Foothills region as a unique environmental eco- system. In conjunction with a number of southern Alberta ranching operations, we are completing a rangeland health assessment that addresses optimal ways to restore these systems to their natural state. This includes funding of studies on native rough fescue grasses by the University of Alberta, as well as working closely with both industry and landowner work groups. Surface impact on all proposed wells will be minimized by using existing drill pads or by selecting surface areas on sites previously disturbed by the agriculture industry.
OPERATING RESULTS
UNDEVELOPED LAND
In 2007, we continued to build and maintain a dominant land position in our core areas. The Company's total net land inventory increased 15% in 2007, with acquisitions occurring primarily in the southern and central Alberta core areas. Net undeveloped land increased 12% from the prior year.
Land Summary
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Undeveloped Acres Total Acres
Area Gross Net Gross Net
-------------------------------------------------------------------------
Southern Alberta 576,253 537,631 1,058,145 941,972
Central Alberta 311,835 225,437 692,453 399,042
Peace River Arch 60,660 35,969 128,980 67,195
Northern Alberta 143,840 87,345 226,210 122,876
Other 28,542 7,080 63,149 11,750
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December 31, 2007 total 1,121,130 893,462 2,168,937 1,542,835
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December 31, 2006 total 980,179 798,192 1,838,863 1,339,481
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During 2008, we plan to continue to invest in the future and expand in our core areas. Our 2008 budget includes $28 million directed towards land acquisitions and seismic surveys in our major operating areas.
DRILLING ACTIVITY
We drilled 322 gross (266 net) wells in 2007 with a 97% success rate, compared with 342 gross (274 net) wells in 2006.
Of the 322 wells drilled in 2007, 91% were classified as development wells and nine percent were classified as exploratory wells, compared to 84% and 16% respectively in 2006. The higher percentage of development wells in the current year reflects the increasing maturity of our oil and gas plays.
Drilling Summary
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Natural
Years ended December 31, Gas Oil D&A Total Net Success
-------------------------------------------------------------------------
Southern Alberta 236 - 1 237 208 100%
Central Alberta 37 8 6 51 36 88%
Peace River Arch 3 17 3 23 13 87%
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Standing, cased wells 11 9
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2007 Total 322 266 97%
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2006 Total 266 56 20 342 274
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RESERVES
Netherland, Sewell & Associates Inc. ("NSAI"), independent reserve evaluators, have completed an evaluation of 96% of Compton's petroleum and natural gas reserves in accordance with National Instrument 51-101. The remaining four percent of the Company's reserves have been evaluated internally.
As required by National Instrument 51-101 "Standards of Disclosure for Oil and Gas Activities" ("NI 51-101"), Compton filed Form 51-101 F1 as part of its Annual Information Form ("AIF"). The AIF is considered comprehensive. Certain information has been summarized below regarding the Company's operations. All such information is consistent with the Form NI 51-101 F1 filing. Compton's extended disclosure contained in the AIF is available on both the SEDAR website and Compton's website.
i) Summary of Estimated Reserve Volumes - Forecast Prices and Costs(1)
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Crude Oil Natural Gas NGLs
Gross Net Gross Net Gross Net
As at December 31, 2007 (Mbbl) (Mbbl) (Bcf) (Bcf) (Mbbl) (Mbbl)
-------------------------------------------------------------------------
Proved
Developed producing 9,015 8,501 502 411 9,182 6,498
Developed non-producing 222 197 55 45 1,079 749
Undeveloped 1,695 1,502 188 154 2,100 1,432
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Total proved 10,933 10,199 745 610 12,362 8,679
Probable 6,495 5,842 625 510 9,820 6,879
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Total proved plus
probable 17,427 16,042 1,369 1,120 22,182 15,558
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2006 total proved
plus probable 29,233 26,213 1,189 984 19,068 13,761
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Sulphur Total
Gross Net Gross Net
As at December 31, 2007 (Mlt) (Mlt) (Mboe) (Mboe)
----------------------------------------------------------
Proved
Developed producing 1,968 1,674 103,884 85,205
Developed non-producing 66 55 10,464 8,559
Undeveloped 149 124 35,216 28,710
----------------------------------------------------------
Total proved 2,183 1,853 149,564 122,474
Probable 839 711 121,255 98,391
----------------------------------------------------------
Total proved plus
probable 3,022 2,563 270,819 220,865
----------------------------------------------------------
----------------------------------------------------------
2006 total proved
plus probable 2,271 1,975 248,755 205,895
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(1) Numbers may not add due to rounding.
In 2007, we added 22 MMboe, after production, to our proved plus probable reserves primarily through the drill bit. Total proved plus probable reserves increased nine percent from the prior year to 271 MMboe. Year end 2007 reserves do not include any reserves associated with our light oil asset at Worsley, which was sold at the end of the third quarter of 2007.
Our total proved reserve base is comprised of 84% natural gas and 16% liquids. Proved producing reserves comprise 69% of total proved reserves, while total proved reserves account for 55% of the proved plus probable reserves. We have a 13 year proved and a 23 year proved plus probable reserve life index.
ii) Net Present Value of Reserves - Forecast Prices and Costs(1)
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Future net revenue before income
taxes(1) discounted at a rate of
----------------------------------
($millions) 0% 8% 10%
-------------------------------------------------------------------------
Proved
Producing $2,872 $1,453 $1,304
Non-producing 383 183 160
Undeveloped 1,020 416 345
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Total proved $4,275 $2,051 $1,809
Probable 3,800 1,356 1,109
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2007 Total proved plus probable $8,075 $3,406 $2,919
-------------------------------------------------------------------------
2006 proved plus probable $7,633 $3,312 $2,845
-------------------------------------------------------------------------
(1) Pricing assumptions are the average of four major Canadian oil and
gas evaluation firms. Numbers may not add due to rounding.
Future net revenues are calculated based upon estimated revenue less
royalties, operating costs, future development costs, and well abandonment
costs. Estimated income taxes have not been deducted. The net present value
should not be considered the current market value of our reserves or the costs
that would be incurred to obtain equivalent reserves.
iii) Reserve Reconciliation (before royalties) -- Forecast Prices and
Costs (1)
-------------------------------------------------------------------------
Crude oil, Ngls, &
Sulphur Natural Gas
-----------------------------------------
Proved Probable Proved Probable
(Mbbl) (Mbbl) (Bcf) (Bcf)
-------------------------------------------------------------------------
December 31, 2006 32,745 17,827 687 502
Extensions, improved recovery,
& discoveries 1,460 1,770 60 113
Technical Revisions 2,254 -3,377 14 -39
Acquisitions 1,386 948 49 50
Dispositions -9,753 -14 -13 -1
Production -2,616 0 -53 0
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December 31, 2007 25,477 17,154 745 625
-------------------------------------------------------------------------
-------------------------------------------------------------
Total
------------------------------
Proved
plus
Proved Probable Probable
(Mboe) (Mboe) (Mboe)
-------------------------------------------------------------
December 31, 2006 147,218 101,537 248,755
Extensions, improved recovery,
& discoveries 11,511 20,549 32,059
Technical Revisions 4,627 -9,848 -5,221
Acquisitions 9,583 9,269 18,851
Dispositions -11,940 -252 -12,192
Production -11,434 0 -11,434
-------------------------------------------------------------
December 31, 2007 149,564 121,255 270,819
-------------------------------------------------------------
(1) Numbers may not add due to rounding.
FINDING & DEVELOPMENT COSTS
-------------------------------------------------------------------------
3 Year
FD&A costs ($/boe) 2007 2006 2005 Average
-------------------------------------------------------------------------
Including future capital
Proved $23.36 $18.48 $15.42 $17.85
Proved plus probable $12.86 $13.57 $13.02 $13.17
Excluding future capital
Proved $24.18 $14.38 $12.84 $15.22
Proved plus probable $ 9.95 $ 8.85 $ 7.05 $ 8.27
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FINANCIAL REVIEW
ADVISORIES
Management's Discussion and Analysis ("MD&A") is intended to provide both an historical and prospective view of our activities. The MD&A was prepared as at March 24, 2008, and should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2007 and the advisories set out below. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). A reconciliation to U.S. GAAP is included in Note 21 to the consolidated financial statements.
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 financial measures commonly used in the oil and gas industry, including adjusted cash flow from operations and adjusted net earnings from operations. These financial measures are not defined by Canadian generally accepted accounting principles ("GAAP") and therefore are referred to as non-GAAP measures. The non-GAAP measures used by the Company may not be comparable to similar measures provided by other companies. We use these non-GAAP measures to evaluate our performance.
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 our performance or liquidity. Adjusted cash flow from operations is used by us to evaluate operating results and our ability to generate cash to fund future growth through capital investment.
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 us 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. We use the 6:1 boe measure which is the approximate energy equivalency of the two commodities at the burner tip. However, boes do not represent a value equivalency at the plant gate where we sell our production volumes and therefore may be a misleading measure if used in isolation.
RESULTS OF OPERATIONS
2007 SUMMARY
- Drilled 322 gross (266 net) wells with a 97% success rate.
- Achieved annual average production of 31,326 boe/d.
- Generated adjusted cash flow from operations of $196.2 million, or
$1.48 per diluted share.
- Adjusted net earnings from operations for the year were
$21.3 million.
- Net earnings for the year were $129.2 million.
ADJUSTED CASH FLOW FROM OPERATIONS AND NET EARNINGS
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Years ended December 31, 2007 2006 2005
-------------------------------------------------------------------------
Adjusted cash flow from
operations(1) ($000s) $ 196,194 $ 256,305 $ 278,112
Per share: basic $ 1.52 $ 2.01 $ 2.21
diluted $ 1.48 $ 1.92 $ 2.11
Net earnings ($000s) $ 129,266 $ 127,426 $ 81,326
Per share: basic $ 1.00 $ 1.00 $ 0.65
diluted $ 0.98 $ 0.95 $ 0.62
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(1) 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
-------------------------------------------------------------------------
Years ended December 31, ($000s) 2007 2006 2005
-------------------------------------------------------------------------
Net earnings $ 129,266 $ 127,426 $ 81,326
-------------------------------------------------------------------------
Amortization of deferred charges
and other 3,417 1,996 2,190
-------------------------------------------------------------------------
Tender costs - - 20,750
-------------------------------------------------------------------------
Depletion and depreciation 151,411 143,057 105,504
-------------------------------------------------------------------------
Accretion of asset retirement
obligations 2,718 2,257 1,975
-------------------------------------------------------------------------
Unrealized foreign exchange (gain) (79,740) (665) (7,808)
-------------------------------------------------------------------------
Future income taxes (26,452) (3,636) 52,317
-------------------------------------------------------------------------
Unrealized risk management
(gain) loss 5,467 (27,522) 10,171
-------------------------------------------------------------------------
Stock-based compensation 8,416 9,121 5,903
-------------------------------------------------------------------------
Asset retirement expenditures (4,441) (2,352) (749)
-------------------------------------------------------------------------
Non-controlling interest 6,132 6,623 6,533
-------------------------------------------------------------------------
Adjusted cash flow from operations $ 196,194 $ 256,305 $ 278,112
-------------------------------------------------------------------------
Adjusted cash flow from operations declined in 2007 from the prior year's level by approximately $60 million. The major causes of the decline were a $25 million reduction in realized risk management gains, a reduction of $19 million in revenue after royalties, and increases in general and administrative and interest expenses. Additionally, at the end of the third quarter of 2007, we closed the sale of our conventional light oil asset at Worsley, which reduced production, adjusted cash flow from operations, and net income accordingly for the last three months of the year as compared to the prior year.
Net earnings for the year increased by approximately $2 million over 2006 and benefited from a foreign exchange gain of $79 million and a $26 million future income tax recovery.
ADJUSTED NET EARNINGS FROM OPERATIONS
Adjusted net earnings from operations is a non-GAAP measure that represents net earnings adjusted for certain items of a non-operational and non-cash nature. We evaluate our performance on adjusted net earnings from operations which eliminates these non-operational items that can introduce a level of volatility to net earnings determined in accordance with GAAP.
The following reconciliation identifies the after-tax effects of certain items of non-operational nature that are included in our financial results. Adjusted net earnings from operations may not be comparable to similar measures presented by other companies.
SUMMARY OF ADJUSTED NET EARNINGS FROM OPERATIONS(1)
-------------------------------------------------------------------------
Years ended December 31,
($000s, except per share amounts) 2007 2006 2005
-------------------------------------------------------------------------
Net earnings, as reported $ 129,266 $ 127,426 $ 81,326
Non-operational items, after tax
Unrealized foreign exchange (gain) (66,934) (550) (6,339)
Unrealized risk management
(gain) loss 3,711 (18,027) 6,345
Stock-based compensation 5,713 5,974 3,682
Tender costs on repurchase
of 9.90% notes - - 14,414
Future income tax recovery due to
income tax rate reductions (50,470) (49,655) (5,764)
-------------------------------------------------------------------------
Adjusted net earnings from
operations $ 21,286 $ 65,168 $ 93,664
Per share: basic $ 0.17 $ 0.51 $ 0.75
diluted $ 0.16 $ 0.49 $ 0.71
-------------------------------------------------------------------------
(1) Adjusted net earnings from operations was referred to as Operating
Earnings in prior years.
Revenue
-------------------------------------------------------------------------
Years ended December 31, 2007 2006 2005
-------------------------------------------------------------------------
Average production
Natural gas (mmcf/d) 145 142 131
Liquids (bbls/d) 7,166 9,516 7,646
-------------------------------------------------------------------------
Total (boe/d) 31,326 33,187 29,424
Benchmark prices
NYMEX (U.S.$/mmbtu) $ 6.86 $ 7.26 $ 8.55
AECO ($/GJ)
Monthly index $ 6.27 $ 6.21 $ 8.04
Daily index $ 6.11 $ 6.19 $ 8.27
WTI (U.S.$/bbl) $ 72.37 $ 66.22 $ 56.56
Edmonton par ($/bbl) $ 76.23 $ 72.77 $ 68.72
Realized prices
Natural gas ($/mcf) $ 6.33 $ 6.32 $ 8.36
Liquids ($/bbl) 62.28 59.09 56.47
-------------------------------------------------------------------------
Total ($/boe) $ 43.82 $ 44.65 $ 52.54
Revenue ($000s)
Natural gas $ 334,920 $ 327,629 $ 398,543
Liquids 166,067 213,208 165,698
-------------------------------------------------------------------------
Total $ 500,987 $ 540,837 $ 564,241
-------------------------------------------------------------------------
SUMMARY OF REVENUE INCREASES FROM PRODUCTION AND PRICING
-------------------------------------------------------------------------
Natural Gas Liquids Total
($000s) Revenue Revenue Revenue
-------------------------------------------------------------------------
Reported 2006 revenue $ 327,629 $ 213,208 $ 540,837
Change in production volumes 7,291 (49,875) (42,584)
Change in prices - 2,734 2,734
-------------------------------------------------------------------------
Reported 2007 revenue $ 334,920 $ 166,067 $ 500,987
-------------------------------------------------------------------------
Overall production in 2007 fell 6% from the prior year. Natural gas volumes increased 2%, while liquids production decreased 25% from 2006 volumes. The significant reduction in our year over year liquids volumes is attributable to natural declines and the sale of our conventional light oil asset, Worsley. This transaction closed at the end of the third quarter of 2007.
We market the majority of our natural gas production through a combination of daily and monthly indexed contracts and aggregator contracts. During 2007, approximately 10% of our natural gas production remained committed to longer term aggregator contracts which realized a price that was, on average, $0.75/mcf less than that received on non-aggregator volumes.
Our crude oil sales are priced based upon Edmonton postings and are typically sold on 30 day evergreen arrangements. Natural gas liquids are bid out on an annual basis to obtain the most favourable pricing. We sell our crude oil and natural gas liquids primarily to refineries and marketers of crude oil and natural gas liquids.
Periodically we enter into financial instrument contracts to hedge against price volatility. This activity is fully disclosed in the Risk Management and Financial Instrument sections of this MD&A. Realized commodity prices, as reported in the MD&A, are before any hedging gains or losses.
ROYALTIES ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2007 2006 2005 ------------------------------------------------------------------------- Crown royalties $ 86,850 $ 100,230 $ 105,827 Other royalties 15,828 23,447 26,890 ------------------------------------------------------------------------- Net royalties $ 102,678 $ 123,677 $ 132,717 Percentage of revenues 20.5% 22.9% 23.5% -------------------------------------------------------------------------
Royalties are paid to various government entities and other land and mineral rights owners. Virtually all Crown royalties are paid to the province of Alberta which has a royalty structure based upon commodity prices and well productivity, with higher prices and well productivity attracting higher royalty rates. Our royalty rate in 2007, as a percentage of revenue, decreased from 2006 as a result of the increased contribution from lower productivity wells to total production.
We anticipate 2008 royalty rates will remain relatively consistent with prior years; however, significant changes to the Alberta royalty structure may occur in 2009 as a result of the recent Alberta royalty review, the final results of which are yet to be announced.
OPERATING EXPENSES ------------------------------------------------------------------------- Years ended December 31, 2007 2006 2005 ------------------------------------------------------------------------- Operating expenses ($000s) $ 101,478 $ 102,643 $ 73,164 Operating expenses per boe ($/boe) $ 8.88 $ 8.47 $ 6.81 -------------------------------------------------------------------------
Year over year operating costs remained constant. However, when measured on a $/boe basis, 2007 operating expenses increased by 5% when compared to 2006. Specific increases of note include salaries for field staff and contract operators and rising electricity prices. Additionally, fourth quarter 2007 operating costs included significant lease repair and maintenance costs associated with assets acquired during the last half of the year.
In prior years, operating costs were reported net of third party processing fees. Commencing in 2007, third party processing income is included in revenue and not netted against operating expenses. 2006 and 2005 operating expenses have been reclassified accordingly.
With the current reduced level of activity in the industry, we are now beginning to see indications that cost inflation is moderating. With an increased emphasis on cost controls, we anticipate 2008 operating costs, on a unit of production basis, will remain similar to those experienced in 2007.
TRANSPORTATION EXPENSES ------------------------------------------------------------------------- Years ended December 31, 2007 2006 2005 ------------------------------------------------------------------------- Transportation costs ($000s) $ 12,615 $ 12,564 $ 10,858 Transportation costs per boe ($/boe) $ 1.10 $ 1.04 $ 1.01 -------------------------------------------------------------------------
We incur charges for the transportation of our production from the wellhead to the point of sale. Pipeline tariffs and trucking rates for liquids are primarily dependent upon production location and distance from the sales point. Regulated pipelines transport natural gas within Alberta at tolls approved by the government.
2007 transportation expense remained relatively constant with that of 2006. However, with the closing of the sale of our conventional oil property, Worsley, at the end of the third quarter of 2007, our fourth quarter transportation expense fell to $0.55/boe, as our oil trucking requirements were reduced significantly.
GENERAL AND ADMINISTRATIVE EXPENSES ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2007 2006 2005 ------------------------------------------------------------------------- General and administrative expenses $ 41,633 $ 38,321 $ 34,638 Capitalized general and administrative expenses (7,470) (9,625) (11,158) Operator recoveries (2,835) (2,465) (2,257) ------------------------------------------------------------------------- Total general and administrative expenses $ 31,328 $ 26,231 $ 21,223 General and administrative per boe ($/boe) $ 2.74 $ 2.17 $ 1.98 -------------------------------------------------------------------------
Employee costs associated with increased personnel levels, together with a general increase in remuneration necessary to attract and retain qualified personnel in a very competitive industry, were the main contributors to the increase in general and administrative expenses in 2007. Other increases included insurance and costs associated with ongoing regulatory compliance requirements. Additionally, increased expenses associated with additional office space were incurred as a result of corporate acquisitions. During 2007, we incurred direct expenses totaling approximately $1.5 million relating to compliance requirements pursuant to the U.S. Sarbanes-Oxley Act of 2002 and Canadian Multilateral Instrument 52-109.
General and administrative expenses in 2008 will be impacted by costs associated with current shareholder activism activities. Such costs will include additional legal fees, advisory fees and expenses, and employee retention costs. Such costs are expected to be approximately $22 million, as discussed in the Outlook and Guidance section of this MD&A and Note 20 to the financial statements.
INTEREST AND FINANCE CHARGES ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2007 2006 2005 ------------------------------------------------------------------------- Interest on bank debt, net $ 22,476 $ 14,243 $ 11,520 Interest on Senior Notes 38,345 35,880 20,912 ------------------------------------------------------------------------- Interest expense $ 60,821 $ 50,123 $ 32,432 Finance charges 2,672 3,952 2,519 ------------------------------------------------------------------------- Total interest and finance charges $ 63,493 $ 54,075 $ 34,951 ------------------------------------------------------------------------- Total interest and finance charges per boe ($/boe) $ 5.55 $ 4.47 $ 3.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average annual debt ($000s, except where noted) 2007 2006 2005 ------------------------------------------------------------------------- Bank debt $ 348,216 $ 254,476 $ 228,381 Effective interest rate 6.46% 5.60% 4.23% Senior notes (US$) $ 450,000 $ 412,802 $ 179,583 Effective interest rate 7.63% 7.64% 9.50% ------------------------------------------------------------------------- Interest expenses relating to bank debt in 2007 increased from the prior year as a result of increased borrowings incurred to fund our 2007 capital program and overall floating interest rate increases. NETBACKS ------------------------------------------------------------------------- Years ended December 31, ($/boe) 2007 2006 2005 ------------------------------------------------------------------------- Realized price $ 43.82 $ 44.65 $ 52.54 Realized commodity hedge gain (loss) 1.68 3.24 (0.90) Royalties (8.98) (10.21) (12.36) Operating expenses (8.88) (8.47) (6.81) Transportation (1.10) (1.04) (1.01) ------------------------------------------------------------------------- Field operating netback $ 26.54 $ 28.17 $ 31.46 ------------------------------------------------------------------------- General and administrative (2.74) (2.17) (1.98) Interest (5.55) (4.47) (3.25) Current taxes - - (0.47) ------------------------------------------------------------------------- Cash flow netback $ 18.25 $ 21.53 $ 25.76 -------------------------------------------------------------------------
RISK MANAGEMENT
Our financial results are impacted by external market risks associated with fluctuations in commodity prices, interest rates, and the Canadian/U.S. dollar exchange rate. We utilize various financial instruments for non-trading purposes to manage and mitigate our exposure to these risks. Our financial instruments are not designated for hedge accounting, and accordingly are recorded at fair value on the consolidated balance sheets, with subsequent changes recognized in consolidated net earnings and other comprehensive income.
Financial instruments utilized 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 realized risk management gain or loss at the time of settlement.
The mark-to-market values of financial instruments outstanding at the end of a reporting period reflect the values of the instruments based upon market conditions existing as of that date. Any change in the fair values of the instruments from that determined at the end of the previous reporting period is recognized as an unrealized risk management gain or loss. Unrealized risk management gains or losses may or may not be realized in subsequent periods depending upon subsequent moves in commodity prices, interest rates, or exchange rates affecting the financial instruments.
Risk management gains and losses recognized in 2007 are outlined below.
------------------------------------------------------------------------- Year ended December 31, ($000s) 2007 2006 2005 ------------------------------------------------------------------------- Commodity contracts Realized (gain) loss $ (19,220) $ (39,217) $ 9,663 Unrealized (gain) loss 20,834 (25,775) 5,136 Foreign currency contracts Realized (gain) loss 7,739 3,018 (532) Unrealized (gain) loss (15,367) (1,747) 5,035 ------------------------------------------------------------------------- Total risk management (gain) loss $ (6,014) $ (63,721) $ 19,302 ------------------------------------------------------------------------- Realized (gain) loss $ (11,481) $ (36,199) $ 9,131 Unrealized (gain) loss 5,467 (27,522) 10,171 ------------------------------------------------------------------------- Total risk management (gain) loss $ (6,014) $ (63,721) $ 19,302 ------------------------------------------------------------------------- DEPLETION AND DEPRECIATION ------------------------------------------------------------------------- Years ended December 31, 2007 2006 2005 ------------------------------------------------------------------------- Total depletion and depreciation ($000s) $ 151,411 $ 143,057 $ 105,504 Depletion and depreciation per boe ($/boe) $ 13.24 $ 11.81 $ 9.82 -------------------------------------------------------------------------
Accelerated capital programs and competition throughout the oil and gas industry during the current and prior years increased the demand and costs of goods and services. This increase in costs is reflected in higher finding, development, and on-stream costs which in turn, have resulted in an increase in depletion and depreciation rates on a boe basis in the current year in comparison to prior periods.
FOREIGN EXCHANGE
The foreign exchange gain recognized on the consolidated statements of earnings results primarily from the translation of our U.S. dollar denominated Senior Notes into Canadian dollars. The Senior Notes are translated and recorded in the financial statements at the year end exchange rate, with any differences from prior measurements being recognized as an unrealized foreign exchange gain or loss.
In 2007, we entered into foreign currency exchange contracts related to our $450 million of U.S. dollar denominated Senior Notes. The notes were issued in 2005 and 2006 and are due in 2013. The strengthening of the Canadian dollar against that of the U.S. resulted in the Company recognizing the unrealized foreign exchange gain referred to in the preceding paragraph. On October 26 and 31, 2007 we entered into foreign exchange forward contracts to purchase U.S.$450 million for C$436 million, as at December 1, 2010 being the second call date on the notes. These contracts effectively crystallize a total foreign exchange gain of approximately $91.7 million.
On November 22, 2005, pursuant to a tender offer, we repurchased U.S.$158 million of the 9.90% Senior Notes issued in 2002. As a result of the repurchase, we crystallized $62 million of the accumulated unrealized foreign exchange gains in 2005 that had previously been recognized with the strengthening of the Canadian dollar subsequent to the note issuance.
STOCK-BASED COMPENSATION ------------------------------------------------------------------------- Years ended December 31, 2007 2006 2005 ------------------------------------------------------------------------- Options granted (000s) 2,074 2,228 2,930 Weighted average fair value of options granted ($/share) $ 4.23 $ 6.90 $ 5.45 Stock-based compensation expense recognized ($000s) $ 11,034 $ 10,488 $ 5,903 -------------------------------------------------------------------------
We have a stock option plan for employees, officers, and directors. The plan is designed to attract, motivate, and retain outstanding individuals and to align their success with that of our shareholders. The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model and the associated compensation expense is recognized over the vesting period.
During 2006, in recognition of the shortage of, and competition for, qualified personnel within the oil and gas industry in Western Canada, we implemented an Employee Retention Program in July 2006 for our existing employees, excluding officers and directors. Pursuant to the program, and based upon various conditions existing on July 1, 2007, including the market value of the Company's shares, we incurred additional compensation expense of $4.0 million. For the years ended December 31, 2006 and 2007, we recognized $1.4 million and $2.6 million respectively in stock-based compensation in relation to this program.
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. 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.
CURRENT INCOME TAXES
No current income taxes were incurred in 2007 and 2006 primarily as a result of the elimination of federal capital tax effective January 1, 2006. Current taxes of $5 million in 2005, in addition to capital taxes, included $3 million related to the resolution of a Notice of Objection with respect to a corporate acquisition in a prior tax period. As a result of the reassessment resulting from resolution of the Notice of Objection, $7 million of tax deductible exploration expenses denied to the acquired corporation were added to our income tax pools as a positive offset to incurring the current liability. The resolution of this matter did not impact our total future income tax expense for 2006.
FUTURE INCOME TAXES
Future income taxes in 2007 included a $50 million recovery as a result of reductions in the federal corporate tax rates, which were enacted in the second and fourth quarter of 2007. The federal tax rate is to be reduced by 1.0% in 2008, 1.0% in 2009, 1.0% in 2010, 2.0% in 2011, and 3.5% in 2012. Future taxes in 2006 also included a $50 million recovery as a result of reductions in the federal and Alberta corporate tax rates, which were enacted in the second quarter of 2006.
CORPORATE TAX RATES
-------------------------------------------------------------------------
Years ended December 31, 2007 2006 2005
-------------------------------------------------------------------------
Statutory rate 32.1% 34.5% 37.6%
Effective rate (24.3)% (2.8)% 39.5%
-------------------------------------------------------------------------
A reconciliation of our effective tax rate to the statutory rate may be
found in Note 16a to the consolidated financial statements.
TAX POOLS
The following table summarizes our estimated tax pool balances by
classification.
-------------------------------------------------------------------------
Available Maximum
Balance Annual
As at January 1, 2008 ($000s) Deduction
-------------------------------------------------------------------------
Canadian exploration expense
and non-capital losses $ 360,500 100%
Canadian development expense 367,241 30%
Canadian oil and natural gas property expense 74,070 10%
Undepreciated capital cost and financing costs 316,151 ~25%
-------------------------------------------------------------------------
Total $1,117,962
-------------------------------------------------------------------------
A significant portion of our taxable income is generated by a wholly owned partnership. Consolidated earnings before income taxes include $149 million (2006 - $259 million) of partnership earnings that will be included in the following year's income for income tax purposes. Future income taxes include $44 million (2006 - $83 million) as a result of this deferral of partnership earnings.
Based upon planned capital expenditure programs and current commodity price assumptions, it appears we will not incur current income taxes until at least 2010.
SUMMARY OF CAPITAL EXPENDITURES
-------------------------------------------------------------------------
Years ended December 31, 2007 2006 2005
-------------------------------------------------------------------------
($000s) % ($000s) % ($000s) %
-------------------------------------------------------------------------
Drilling and
completions $226,789 59 $294,197 60 $318,502 66
Land and seismic 47,528 12 59,905 12 55,469 11
Facilities 111,215 29 137,409 28 109,729 23
-------------------------------------------------------------------------
Sub-total $385,532 100 $491,511 100 $483,700 100
Corporate acquisitions 131,380 - -
Acquisitions and
divestments, net (229,391) 34,394 28,575
-------------------------------------------------------------------------
Sub-total $287,521 $525,905 $512,275
MPP 4,796 (31) 1,261
-------------------------------------------------------------------------
Total capital
expenditures $292,317 $525,874 $513,536
-------------------------------------------------------------------------
Capital spending in 2007 was directed towards the continued development of our core natural gas resource plays in southern and central Alberta. Overall, 2007 capital spending, before acquisitions and divestitures, decreased by 22% when compared to 2006. This reduction reflects the fewer number of wells drilled in 2007 versus the prior year as well as an overall reduction in certain service costs in 2007 as compared to 2006. We drilled 6% fewer wells in 2007 as compared to 2006, and drilling and completions expenditures declined by 23%, which implies an overall reduction in service costs of approximately 17%. Lower spending on land and seismic and facilities during 2007 also reflect the lower level of activity as compared to 2006.
During 2007, we pursued our strategy of divesting of non-focus assets and the redeployment of the proceeds into our focus area natural gas plays including strategic acquisitions. We closed non-core property divestments, including our conventional light oil property at Worsley, for total net proceeds of $303.1 million. We also added to our core areas through a series of property acquisitions that totaled approximately $73.7 million, resulting in $229.4 million property divestments net of acquisitions. Through two corporate acquisitions, Stylus Energy Inc. and WIN Energy Corporation, we significantly expanded our presence in southern Alberta and the Foothills in 2007 at a total cost of $131.4 million.
During the second quarter of 2007, we undertook a major two week maintenance turn around at the Mazeppa gas plant. This scheduled maintenance, which is necessary every three years, accounts for the increased capital spending at Mazeppa when compared to 2006 and 2005.
Capital expenditures, before acquisitions and divestitures, in 2006 increased only marginally from 2005; however, they reflect overall cost inflation experienced in the industry during the year. We drilled a total of 274 net wells in 2006 at an average cost, to drill and complete, of $1,074,000 per well. In contrast, we drilled 334 net wells during 2005 at an average cost of $954,000 per well. Although not an entirely comparable analysis, as the mix of shallow, deep, and oil wells affected this comparison, this represented a 12.6% increase in drilling and completion costs, on a per well basis, in 2006 as compared to 2005.
Spending on production facilities increased $27.7 million in 2006 over 2005 and comprised 28% of our total capital program, before acquisitions and divestments as compared to 23% in 2005. Although we deferred a portion of our initial 2006 drilling program in deference to lower commodity prices and the inflationary cost environment, we continued with the majority of our planned expenditures in 2006 relating to equipment and facilities.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------------------------------------------
As at December 31,
($000s, except where noted) 2007 2006 2005
-------------------------------------------------------------------------
Working capital deficiency(1) $ 39,215 $ 23,163 $ 62,116
Bank debt 398,426 328,000 177,900
Senior term notes 433,762 524,385 357,640
-------------------------------------------------------------------------
Total indebtedness $ 871,403 $ 875,548 $ 597,656
-------------------------------------------------------------------------
Shareholders' equity $ 869,956 $ 734,124 $ 596,336
Debt to adjusted cash flow
from operations(2) 4.2 3.4 2.2
Debt to book capitalization 49% 54% 50%
Debt to market capitalization 41% 39% 22%
-------------------------------------------------------------------------
1. Excludes unrealized risk management items net of related future
income taxes.
2. Based on trailing 12 month adjusted cash flow from operations.
Senior Term Notes
The Senior Notes are repayable in U.S. dollars for 2007 and are carried on the balance sheet at their Canadian dollar equivalent less related unamortized transaction costs. The 2005 and 2006 comparative amounts have not been adjusted to reflect new accounting treatment. The Canadian dollar equivalent is determined based upon the Canadian/U.S. dollar exchange rate at December 31.
During the fourth quarter of 2007, we entered into foreign currency exchange contracts to purchase US$450 million for C$436 million as at December 1, 2010, being the second call date on the Senior Notes. The Senior Notes are due on December 1, 2013. The foreign exchange contracts effectively fix the Canadian dollar repayment amount of the Senior Notes at $436 million through to December 1. 2010 and crystallized an unrealized foreign exchange gain of approximately $91.7 million.
The carrying value of the Senior Notes will continue to vary in relation to the Canadian/U.S. dollar exchange rate and any resulting unrealized foreign exchange gains or losses will be recognized. The variance in the carrying amount of the notes will largely be offset by the mark-to-market value of the foreign exchange contracts. Effectively, unrealized foreign exchange gains and losses resulting from translation of the notes will be offset by unrealized gains and losses on the foreign exchange contracts until December 2, 2010. At December 31, 2007 an accumulated gain of $14.1 million has been recorded on the foreign exchange contracts as outlined in Note 17(a)(iii) to the financial statements.
Bank Debt
Bank debt is comprised of a syndicated credit facility with a current authorized limit of $500 million. The facility is a borrowing based facility with the borrowing base being determined based upon year end reserves. The facility is subject to review annually prior to the renewal date of July 4, 2008. We do not anticipate any reduction to the borrowing base and authorized credit facility amount given the increase in 2007 reserves over 2006.
Our corporate debt is structured to provide us with financial flexibility. Of our existing debt, 50% consists of Senior Notes that are not due until 2013, giving us the ability to draw on our senior secured credit facilities to assist in funding our planned 2008 capital program.
We have identified a number of non-core properties for disposition during 2008. We anticipate the proceeds from the sale of these properties to be approximately $250 million. Initially, the proceeds so generated will be applied to reduce our outstanding bank debt. Additionally, the authorized limit of $500 million may be reduced to recognize the reduction in reserves related to these dispositions. Any such potential change is expected to be minimal due to 2007 reserve additions.
We believe internally generated adjusted cash flow from operations and proceeds from planned property dispositions will be more than sufficient to fund our planned 2008 capital program. Excess funds will be used to reduce bank indebtedness.
CONTRACTUAL OBLIGATIONS
As part of normal business, we have entered into arrangements and incurred obligations that will impact our future operations and liquidity, some of which are reflected as liabilities in the consolidated financial statements. The following table summarizes our contractual obligations as at December 31, 2007.
-------------------------------------------------------------------------
Payments Due by Period
Less than 1-3 4-5 After
($000s) 1 year years years 5 years Total
-------------------------------------------------------------------------
Bank debt - $400,000 - - $400,000
Senior term notes - - $436,388 - 436,388
Operating leases $ 3,811 3,830 - - 7,641
Office facilities 4,351 16,565 5,569 $ 33,414 59,899
MPP partnership
distributions 9,172 3,057 - 12,229
Asset retirement
obligations 2,818 3,910 7,203 232,631 246,562
-------------------------------------------------------------------------
Total $ 20,152 $427,362 $449,160 $266,045 $1,162,719
-------------------------------------------------------------------------
We have the ability and the intention to extend the term of our bank debt and therefore repayment of the facility, although included in the schedule of contractual obligations, is not expected to occur.
OUTLOOK AND GUIDANCE FOR 2008
The following section summarizes our plans and guidance for 2008 as announced in a news release dated January 23, 2008. We believe our budget to be achievable, however, certain events more fully described under "Recent Events", will impact our 2008 operations.
Summary of 2008 Guidance
-------------------------------------------------------------------------
2008 Budget Range
-------------------------------------------------------------------------
Capital expenditures ($millions) $410
Gross wells 350
Average production - total boe/d 36,000 - 37,000
Adjusted cash flow from operations ($millions) $245 - $255
-------------------------------------------------------------------------
Our 2008 projected adjusted cash flow from operations is based upon the
following pricing assumptions:
-------------------------------------------------------------------------
Benchmark Realized
-------------------------------------------------------------------------
Natural gas AECO Cdn $6.98/mcf Cdn $6.95/mcf
Crude oil ($/bbl) WTI U.S. $81.00/bbl Cdn $72.75bbl
-------------------------------------------------------------------------
The average Canadian/U.S. exchange rate is budgeted at $1.00 U.S. (equal sign) $1.00
Cdn.
Concurrent with strengthening commodity prices during the first part of
2008, we have systematically entered into a number of commodity hedge
contracts as summarized in the Risk Management section of this MD&A and Note
17(a) (ii) to the financial statements. The effect of these contracts is an
increase in projected 2008 cash flow of $10.8 million from the amount noted
above. It is our intent to hedge approximately 50% of our gross production
forward 12 to 18 months.
Cash Flow Sensitivities for 2008
-------------------------------------------------------------------------
($millions) Change in Cash Flow
-------------------------------------------------------------------------
Change of Cdn $0.25/mcf in the benchmark AECO
natural gas price $14.0
Change of U.S. $1.00/bbl in the benchmark WTI
oil price $0.4
-------------------------------------------------------------------------
In the event of significant changes in commodity prices, operating and exploration costs, or an overall change in general economic or industry conditions, we can readily amend our capital expenditure program as appropriate.
RECENT EVENTS
In response to concerns raised by a major shareholder of Compton, the Board of Directors of the Company, as announced in a news release dated February 27, 2008 will conduct a formal review of the Company's business plans and strategic alternatives. This will include exploring potential asset divestments, equity alternatives, strategic alliances, joint venture opportunities, mergers, or a corporate transaction. In the aforementioned news release, the Company cautioned shareholders that there is no assurance that the review will result in any specific transaction and no timetable had been set for its completion.
The Company has estimated that during 2008 direct costs and costs resulting from the process associated with shareholder activism will be approximately $22 million. Such costs will include additional legal fees, advisory fees and expenses, and employee retention costs. Such costs will be included in 2008 general and administrative expenses and will reduce cash flow from operations. Depending upon the outcome of the process the Company could incur additional cash outlays relating to change of control provisions applicable to the Company's Senior Notes, Mazeppa Processing Partnership arrangements, employee contracts, and additional advisory and legal fees.
At this stage, we are unable to predict the outcome of the review process and the direction that Compton may ultimately take. As events unfold, we will provide complete and timely updates.
ADDITIONAL DISCLOSURES
CONTROLS AND PROCEDURES
With respect to disclosure controls and procedures and internal control over financial reporting, we are required to comply with the U.S. Sarbanes-Oxley Act of 2002 and Canadian Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings. These regulations are substantially the same. However, the most significant difference is the U.S. requirement for the registered public accounting firm that audits our financial statements, included in our annual report, to issue an attestation report on our internal control over financial reporting. There is no corresponding Canadian attestation requirement.
There are certain procedural and wording differences between the U.S. and Canadian certifications. We have chosen to file the form of certification pursuant to Section 302 of the Sarbanes-Oxley Act with the U.S. Securities and Exchange Commission ("SEC") and Form 52-109 F1, Certification of Annual Filings, with the Canadian Securities Administrators ("CSA").
We have complied with both the U.S. and Canadian requirements in respect of disclosure controls and procedures and internal control over financial reporting and our report is below.
MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined, under Rule 13a-15(d) of the U.S. Exchange Act of 1934, as controls and other procedures that are designed to ensure both non-financial and financial information required to be disclosed by us in our periodic reports is recorded, processed, summarized, and reported within the time periods required, and this information is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosures. The definition of disclosure controls and procedures with respect to Canadian Multilateral Instrument 52-109 is substantially the same.
As indicated in our certifications filed with the SEC and CSA, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007, under the supervision and with the participation of our Management, including our President & CEO and VP Finance & CFO. Based upon our evaluation, we concluded our disclosure controls and procedures were effective.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management, including our President & CEO and VP Finance & CFO, is responsible for establishing and maintaining adequate internal control over financial reporting. The term "internal control over financial reporting" is defined, under both Rule 13a-15(f) of the U.S. Exchange Act of 1934 and Canadian Multilateral Instrument 52-109, as processes designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP. These controls would include policies and procedures that:
1. Pertain to the maintenance of our records, that accurately and fairly
reflect the transactions affecting, and dispositions of, our assets;
2. Provide reasonable assurance that transactions are recorded to be
able to prepare our financial statements in accordance with GAAP, and
that our receipts and expenditures are made only in accordance with
authorizations of our management and directors; and
3. Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of our assets, which
could have a material effect on our financial statements.
We completed an evaluation of the effectiveness of the design and operation of our internal control over financial reporting under the supervision, and with the participation, of our Management, including our President & CEO and VP Finance & CFO. We conducted our evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, also known as COSO. Based upon our evaluation, we have concluded, as of December 31, 2007, internal control over financial reporting was effective.
The effectiveness of internal control over financial reporting as of December 31, 2007 was audited by Grant Thornton LLP, Chartered Accountants, the independent registered public accounting firm, which also audits our financial statements. They have issued their Independent Auditors' Report which is included in this Annual Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended March 31, 2007, we made two material changes to internal control over financial reporting. On March 1, 2007 we converted our production accounting and royalty management information systems. These changes were implemented to improve both operational efficiencies and internal controls. These conversions were not due to any identified internal control weaknesses.
During the quarter ended December 31, 2007, we made one material change to internal control over financial reporting. On October 15, 2007, we implemented our substantially re-engineered capital expenditure approval and tracking business process. This included improved policies and procedures as well as new workflow software to support those policies and procedures. This change was implemented to improve operational effectiveness and efficiency as well as remediate internal control deficiencies.
These changes were subject to our change management procedures which are effective.
There were no other changes during the year ended December 31, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
CRITICAL ACCOUNTING ESTIMATES
Accounting estimates require us to make assumptions regarding matters that are uncertain at the time the estimate is made and may have a material impact on our financial condition. A comprehensive discussion of our significant accounting policies may be found in Note 1 to the consolidated financial statements.
OIL AND NATURAL GAS RESERVES
The independent petroleum engineering and geological consulting firm of Netherland, Sewell & Associates, Inc. evaluated and reported on 96% of our oil and natural gas reserves. The remainder was internally evaluated.
The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. We expect that our estimates of reserves will change with updated information from the results of future drilling, testing, or production levels. Such revisions could be upwards or downwards. Reserve estimates have a material impact on depletion and depreciation, asset retirement obligations, and impairment costs, all of which could possibly have a material impact on our consolidated net earnings.
DEPLETION
Capitalized costs and estimated future expenditures to develop proved reserves, including abandonment costs, are depleted based on the proportion of proved oil and natural gas reserves produced during the year compared to estimated total proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If it is determined that properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized.
In 2007, we incurred $151 million of depletion and depreciation. If our proved reserves were to increase by 5%, our depletion and depreciation expense would decrease by $1.8 million and consolidated net earnings after tax would increase by $1.4 million. If our proved reserves were to decrease by 5%, our depletion and depreciation expense would increase by $2.0 million and consolidated net earnings after tax would decrease by $1.5 million.
IMPAIRMENT
In applying the full cost method of accounting, we periodically calculate a ceiling or limitation on the amount that property and equipment may be carried for on the consolidated balance sheets. An impairment exists if the undiscounted future net cash flows from proved reserves at future commodity prices plus the cost of undeveloped properties is less than the carrying value of the capitalized costs. As at December 31, 2007, the ceiling amount calculated was $2.4 billion (2006 - $2.7 billion) in excess of the carrying value of the costs capitalized.
If an impairment is found to exist, the impaired properties are written down to their fair value. The fair value of the assets is calculated based on future net cash flows from proved plus probable reserves, discounted at a risk free interest rate using future commodity prices, plus the cost of undeveloped properties. An impairment may result in a material loss for a particular period; however, future depletion and depreciation expense would be reduced as a result.
Assumptions about reserves and future prices are required to calculate future net cash flows. The assumptions made to estimate reserves have been discussed above. There is significant uncertainty regarding forecasting future commodity prices due to economic and political uncertainties. Future prices are derived from a consensus of price forecasts among recognized reserve evaluators. Estimates of future cash flows assume a long term price forecast and current operating costs per boe plus an inflation factor.
It is difficult to determine and assess the impact of a decrease in proved reserves on impairment. The relationship between reserve estimates and the estimated undiscounted cash flows, and the nature of the property-by-property impairment test is complex. As a result, it is not possible to provide a reasonable sensitivity analysis of the impact that a reserve estimate decrease would have on impairment. No material downward revisions to our reserves are anticipated.
ASSET RETIREMENT OBLIGATION
We recognize the fair value of estimated asset retirement obligations on the consolidated balance sheet when a reasonable estimate of fair value can be made. Asset retirement obligations include those legal obligations where we will be required to retire tangible long term assets such as well sites, pipelines, and facilities. The asset retirement cost, equal to the initially estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long term assets. Increases in the asset retirement obligations resulting from the passage of time are recorded as accretion of asset retirement obligations in the consolidated statement of earnings. Amounts recorded for asset retirement obligations are subject to uncertainty associated with the method, timing, and extent of future retirement activities. Actual payments to settle the obligations may differ from estimated amounts.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2008, the Company will adopt the following CICA Handbook Sections:
a. Section 3031, "Inventories" which replaces the existing standard. The
requirements include the consistent grouping of like assets and the
application of the first-in-first-out or weighted average cost
formula methodologies.
b. Section 1400, "General Standards of Financial Statement
Presentation" which requires assessing and disclosing the Company's
ability to continue as a going concern.
c. Section 3862, "Financial Instruments - Disclosures" and Section 3863,
"Financial Instruments - Presentation". These new standards will
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.
d. Section 1535, "Capital Disclosures", requiring disclosure of
information about an entity's capital and the objectives, policies,
and processes for managing capital.
The adoption of these standards is not expected to have a material impact on the Company's consolidated financial statements.
On January 1, 2009 the Company will be required to adopt CICA Handbook Section 3064, "Intangible Assets". The new section established standards for the recognition, measurement, and disclosure of goodwill and intangible assets and replaces the existing Handbook Section 3062, "Goodwill and Other Intangible Assets" and Section 3450, "Research and Development Costs". Intangible assets associated with the exploration and development of oil and gas assets are specifically excluded under the new standard. The Company is evaluating the implications of this adoption, but expects no material impact on the consolidated financial statements.
On January 10, 2006, the CICA Accounting Standards Board ("AcSB") ratified a new strategic plan that would see the convergence of Canadian Generally Accepted Accounting Principles ("GAAP") with International Financial Reporting Standards ("IFRS") within 5 years. In March 2007, the AcSB released an "Implementation Plan for Incorporating IFRSs into Canadian GAAP", which assumed a convergence date of January 1, 2011. The AcSB confirmed this date in February 2008. The Company continues to monitor and assess the consequences of convergence on the consolidated financial statements as they could have a material impact.
RISK MANAGEMENT
Our operations are subject to risks inherent to the oil and natural gas industry. We are exposed to financial risks including fluctuations in commodity prices, currency exchange rates, interest rates, credit ratings, and changing expenditure costs due to shifts in market conditions. We take specific measures to manage these risks, particularly those impacting adjusted cash flow from operations.
A more detailed discussion of risk factors is presented in our most recent Annual Information Form, filed with securities regulatory authorities on or before March 31, 2008 on www.sedar.com.
COMMODITY PRICE RISK MANAGEMENT
We enter into commodity price contracts to actively manage risk associated with price volatility to protect adjusted cash flow from operations required to fund our capital program. We use fixed price and costless collar contracts as well as balancing physical and financial contracts in terms of volumes, timing of performance, and delivery obligations to manage risk. Net open positions may exist or may be established to take advantage of market conditions. Net earnings for the year ended December 31, 2007, include realized and unrealized loss of $1.6 million (2006 - $65.0 million gain) on these transactions.
The following table outlines commodity hedge transactions in place at December 31, 2007 together with transactions entered into subsequent to the year end:
------------------------------------------------------------------------- Commodity Term Amount Average Price Index ------------------------------------------------------------------------- Natural gas Collar Nov. 2007 - March 2008 9,524 mcf/d $8.27 - $10.50 AECO Collar April 2008 - Oct. 2008 52,381 mcf/d $7.33 - $8.48 AECO Fixed April 2008 - Oct. 2008 19,048 mcf/d $7.86 AECO Collar 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 -------------------------------------------------------------------------
FOREIGN CURRENCY EXCHANGE RATE RISK MANAGEMENT
Our 7.625% Senior Notes due December 1, 2013 and semi-annual interest obligations thereon are payable in U.S. dollars. Accordingly, we are exposed to fluctuations in the exchange rate between the Canadian and the U.S. dollar. To manage this risk we entered into a series of foreign exchange contracts relating to the principle amount of the Notes, effectively fixing the liability at $436 million Canadian through to December 1, 2010, being the second call date on the Notes. Additionally, we entered into a series of foreign exchange contracts relating to the interest obligations associated with the Notes through to December 1, 2010.
We are also exposed to fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar. Commodity prices are based on U.S. dollar benchmarks that result in our realized price being influenced by the Canadian/U.S. currency exchange rate. Should the Canadian dollar strengthen compared to the U.S. dollar we will experience a negative effect on net earnings. Conversely, should the Canadian dollar weaken compared to the U.S. dollar we will experience a positive effect on net earnings.
INTEREST RATE RISK MANAGEMENT
We are exposed to fluctuations in interest rates on corporate borrowings. To manage this risk we attempt to achieve a balance between fixed and floating interest rate debt instruments. Our Senior Notes bear a fixed interest charge of 7.625% and our borrowings under are syndicate credit facility incur floating rate interest charges. At year end approximately 52% of our total corporate debt incurred fixed rate interest charges and the balance incurred floating rate charges.
Concurrent with the closing of our 9.90% Senior Notes offering in May of 2002, we entered into a cross currency interest rate swap. The swap, which converted fixed rate U.S. dollar interest obligations into floating rate Canadian dollar interest obligations, was entered into to fix the exchange rate on interest payments and take advantage of lower floating interest rates. On repurchase of the majority of 9.90% Senior Notes in November 2005, we elected not to collapse the swap and incur the then associated costs of $12 million. The swap remains outstanding and at December 31, 2007, we valued the liability relating to future unrealized losses on the swap arrangement to be $10.4 million (2006 - $11 million) determined on a mark-to-market basis. The loss associated with the swap has resulted primarily from the strengthening of the Canadian dollar. Should the Canadian dollar continue to increase against the U.S. dollar, the loss could increase further; alternatively if the Canadian dollar were to weaken the loss would be reduced. Cash settlements of the swap positions are made semi-annually and losses realized will be recorded over the remaining term of the swap agreement which expires in May 2009.
SELECTED QUARTERLY INFORMATION
The following tables set out selected quarterly financial information for the last two fiscal years.
-------------------------------------------------------------------------
Three Months Ended Year
Ended
-------------------------------------------------------------------------
($000s, except March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
where noted) 2007 2007 2007 2007 2007
-------------------------------------------------------------------------
Average production
(boe/d) 33,316 28,918 30,440 32,646 31,326
Average pricing
($/boe) $ 46.98 $ 47.94 $ 38.56 $ 41.94 $ 43.82
Total revenue $140,877 $126,171 $107,980 $125,959 $500,987
Adjusted cash flow
from operations $ 68,783 $ 48,582 $ 33,133 $ 45,696 $196,194
Per share: basic $ 0.53 $ 0.38 $ 0.26 $ 0.35 $ 1.52
diluted $ 0.52 $ 0.36 $ 0.25 $ 0.35 $ 1.48
Adjusted net
earnings from
operations $ 17,933 $ 7,364 $ (1,994) $ (2,017) $ 21,286
Net earnings (loss) $ 13,719 $ 45,307 $ 19,782 $ 50,457 $129,266
Per share: basic $ 0.11 $ 0.35 $ 0.15 $ 0.39 $ 1.00
diluted $ 0.10 $ 0.34 $ 0.15 $ 0.38 $ 0.98
-------------------------------------------------------------------------
September and October of 2007 were our busiest drilling months on record since Company inception. These high activity levels generated production growth of 7% from the third quarter to the fourth quarter of 2007. Strengthening commodity prices together with increased production volumes resulted in a 17% increase in fourth quarter revenue and a 38% increase in adjusted cash flow from operations over the third quarter of 2007. Revenue and net earnings were lower during the third quarter of 2007 due primarily to lower realized prices.
-------------------------------------------------------------------------
Three Months Ended Year
Ended
-------------------------------------------------------------------------
($000s, except March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
where noted) 2006 2006 2006 2006 2006
-------------------------------------------------------------------------
Average production
(boe/d) 34,029 32,645 32,843 33,245 33,187
Average pricing
($/boe) $ 48.58 $ 45.37 $ 42.03 $ 42.60 $ 44.65
Total revenue $148,779 $134,778 $126,991 $130,289 $540,837
Adjusted cash flow
from operations $ 73,596 $ 67,326 $ 60,120 $ 55,263 $256,305
Per share: basic $ 0.58 $ 0.53 $ 0.47 $ 0.43 $ 2.01
diluted $ 0.55 $ 0.50 $ 0.45 $ 0.42 $ 1.92
Adjusted net
earnings from
operations $ 22,249 $ 17,947 $ 13,150 $ 11,822 $ 65,168
Net earnings (loss) $ 38,002 $ 68,744 $ 30,717 $(10,037) $127,426
Per share: basic $ 0.30 $ 0.54 $ 0.24 $ (0.08) $ 1.00
diluted $ 0.28 $ 0.51 $ 0.23 $ (0.08) $ 0.95
-------------------------------------------------------------------------
During the second half of 2006, lower realized commodity prices from those experienced during the first half of the year resulted in reduced revenue, cash flow, and adjusted net earnings from operations. Production increases in the third and fourth quarter were more than offset by the reduction in commodity prices. The negative effect of lower commodity prices on cash flow was reduced by realized gains of $36 million from risk management activities. Net earnings for the nine months ended September 30, 2006 benefited from an unrealized foreign exchange gain of $19.1 million, after tax, and an income tax recovery of $35 million. Net earnings in the fourth quarter were negative due to the reversal of unrealized foreign exchange gains recorded in prior quarters, as the result of the weakening of the Canadian dollar compared to the U.S. dollar.
Selected Annual Information
Years ended December 31, ($000s) 2007 2006 2005
-------------------------------------------------------------------------
Total revenue $ 500,987 $ 540,837 $ 564,241
Net earnings $ 129,266 $ 127,426 $ 81,326
Per share: basic $ 1.00 $ 1.00 $ 0.65
diluted $ 0.98 $ 0.95 $ 0.62
Total assets $2,254,587 $2,145,472 $1,758,098
Total long term financial
liabilities $ 832,188 $ 852,385 $ 535,540
-------------------------------------------------------------------------
Total revenue in 2007 was lower than 2006 due to lower oil prices and slightly lower production volumes arising from the disposition of our conventional oil asset Worsley.
Total revenue in 2006 was marginally lower than 2005 with increases in production being more than offset by reduced commodity prices. Net earnings in 2006 increased $46.1 million over 2005 primarily as a result of risk management gains that offset the reduction in revenue and increases in expenses. Long term financial obligation in 2006 increased over 2005 as a result of increased borrowings to fund the capital programs.
TRADING AND SHARE STATISTICS
As at March 10, 2008 there were 129,194,721 common shares outstanding and 12,314,907 stock options.
-------------------------------------------------------------------------
2007 2006 2005(1)
TSX NYSE TSX NYSE TSX NYSE
($Cdn) ($US) ($Cdn) ($US) ($Cdn) ($US)
-------------------------------------------------------------------------
Average daily
trading
volume (000s) 485,027 213,044 545,489 115,450 736,416 138,288
Share price
($/share)
High $ 13.19 US$12.16 $ 19.24 US$16.74 $ 18.66 US$16.11
Low $ 7.40 US$ 7.70 $ 10.20 US$ 9.04 $ 9.80 US$14.15
Close $ 9.14 US$ 9.20 $ 10.65 US$ 9.12 $ 17.10 US$14.65
Market
capitalization
at December 31
($000s) $1,179,958 $1,368,557 $2,176,197
Shares
outstanding
(000s) 129,098 128,503 127,263
-------------------------------------------------------------------------
(1) Trading on the New York Stock Exchange commenced December 5, 2005.
Compton Petroleum Corporation
Consolidated Financial Statements
December 31, 2007
(Unaudited)
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Balance Sheets
(thousands of dollars)
-------------------------------------------------------------------------
December 31, December 31,
2007 2006
------------ ------------
(unaudited)
Assets
Current
Cash $ 8,665 $ 11,876
Accounts receivable 80,331 83,535
Unrealized risk management gain
(Note 17a (i)) 1,835 22,625
Other current assets 19,772 22,869
Future income taxes(Note 16b) 2,606 1,479
------------ ------------
113,209 142,384
Property and equipment (Note 5) 2,116,834 1,977,062
Goodwill (Note 3) 9,933 7,914
Other assets (Note 9) 291 14,144
Unrealized risk management gain (Note 17a (i)) 14,320 -
Deferred risk management loss (Note 2b) - 3,968
------------ ------------
$2,254,587 $2,145,472
------------ ------------
------------ ------------
Liabilities
Current
Accounts payable $ 147,983 $ 141,443
Unrealized risk management loss
(Note 17a (i)) 8,832 4,604
Future income taxes (Note 16b) 542 7,269
------------ ------------
157,357 153,316
Bank debt (Note 6) 398,426 328,000
Senior term notes (Note 7) 433,762 524,385
Asset retirement obligations (Note 11) 36,696 29,791
Unrealized risk management loss (Note 17 a(i)) 1,585 6,816
Future income taxes (Note 16b) 293,494 302,690
Non-controlling interest (Note 4) 63,311 66,350
------------ ------------
1,384,631 1,411,348
------------ ------------
Shareholders' equity
Capital stock (Note 12b) 235,871 231,992
Contributed surplus (Note 13a) 24,233 16,974
Retained earnings 609,852 485,158
------------ ------------
869,956 734,124
------------ ------------
$2,254,587 $2,145,472
------------ ------------
------------ ------------
Commitments and contingent liabilities
(Note 19)
Subsequent events (Note 20)
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 Years ended
December 31, December 31,
-------------------- --------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Revenue
Oil and natural
gas revenues $ 125,959 $ 130,289 $ 500,987 $ 540,837
Royalties (26,617) (29,182) (102,678) (123,677)
--------- --------- --------- ---------
99,342 101,107 398,309 417,160
--------- --------- --------- ---------
Expenses
Operating 27,549 29,703 101,478 102,643
Transportation 1,654 3,214 12,615 12,564
General and administrative 6,594 7,422 31,328 26,231
Interest and finance charges
(Note 8) 14,494 15,926 63,493 54,075
Depletion and depreciation 44,379 37,036 151,411 143,057
Foreign exchange (gain) loss
(Note 10) (3,460) 22,708 (78,717) (891)
Accretion of asset retirement
obligations (Note 11) 769 632 2,718 2,257
Stock-based compensation
(Notes 13a and c) 1,636 3,616 11,034 10,488
Risk management gain
(Note 17b) (13,859) (6,028) (6,014) (63,721)
--------- --------- --------- ---------
79,756 114,229 289,346 286,703
--------- --------- --------- ---------
Earnings before taxes and
non-controlling interest 19,586 (13,122) 108,963 130,457
--------- --------- --------- ---------
Income taxes (Note 16a)
Current 9 21 17 44
Future (32,289) (5,530) (26,452) (3,636)
--------- --------- --------- ---------
(32,280) (5,509) (26,435) (3,592)
--------- --------- --------- ---------
Earnings before
non-controlling interest 51,866 (7,613) 135,398 134,049
Non-controlling interest
(Note 4) 1,409 2,424 6,132 6,623
--------- --------- --------- ---------
Net earnings 50,457 $ (10,037) 129,266 $ 127,426
--------- --------- --------- ---------
--------- --------- --------- ---------
Other comprehensive income - -
--------- ---------
Comprehensive income $ 50,457 $ 129,266
--------- ---------
--------- ---------
Net earnings per share
(Note 14)
Basic $ 0.39 $ (0.08) $ 1.00 $ 1.00
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted $ 0.38 $ (0.08) $ 0.98 $ 0.95
--------- --------- --------- ---------
--------- --------- --------- ---------
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Statements of Retained Earnings
(unaudited) (thousands of dollars)
-------------------------------------------------------------------------
Three months ended Years ended
December 31, December 31,
-------------------- --------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Retained earnings, beginning
of period
As previously reported $ 560,464 $ 495,727 $ 485,158 $ 360,719
Accounting policy adjustments
(Note 2) - - (1,320) -
--------- --------- --------- ---------
As adjusted 560,464 495,727 483,838 360,719
Net earnings 50,457 (10,037) 129,266 127,426
Premium on redemption of
shares (Note 12b) (1,069) (532) (3,252) (2,987)
--------- --------- --------- ---------
Retained earnings, end of
period $ 609,852 $ 485,158 $ 609,852 $ 485,158
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
Compton Petroleum Corporation
Consolidated Statements of Cash Flow
(unaudited) (thousands of dollars)
-------------------------------------------------------------------------
Three months ended Years ended
December 31, December 31,
2007 2006 2007 2006
--------- --------- --------- ---------
Operating activities
Net earnings $ 50,457 $ (10,037) $ 129,266 $ 127,426
Amortization and other 393 401 3,417 1,996
Depletion and depreciation 44,379 37,036 151,411 143,057
Accretion of asset
retirement obligations 769 632 2,718 2,257
Unrealized foreign exchange
(gain) loss (3,690) 22,500 (79,740) (665)
Future income taxes (32,289) (5,530) (26,452) (3,636)
Unrealized risk management
(gain) loss (16,789) 6,073 5,467 (27,522)
Stock-based compensation 1,636 2,249 8,416 9,121
Asset retirement
expenditures (578) (485) (4,441) (2,352)
Non-controlling interest 1,408 2,424 6,132 6,623
--------- --------- --------- ---------
45,696 55,263 196,194 256,305
Change in non-cash
working capital (Note 18) (9,201) 14,639 (23,366) 19,823
--------- --------- --------- ---------
36,495 69,902 172,828 276,128
--------- --------- --------- ---------
Financing activities
Issuance (repayment) of bank
debt 174,320 50,000 70,426 152,100
Proceeds from share
issuances, net 649 598 3,446 4,672
Distributions to partner (2,278) (2,293) (9,171) (9,171)
Redemption of common shares (1,373) (635) (3,976) (3,433)
Issue costs on senior notes - - - (3,408)
Issuance of senior notes - - - 174,930
Redemption of senior notes - - - (7,520)
--------- --------- --------- ---------
171,318 47,670 60,725 308,170
--------- --------- --------- ---------
Investing activities
Property and equipment
additions (121,221) (88,453) (391,070) (490,429)
Corporate acquisitions
(Note 3) (29,740) - (104,705) -
Property acquisitions (58,766) (3,603) (66,808) (34,444)
Property dispositions 1,931 - 307,527 1,350
Change in non-cash working
capital (Note 18) (1,356) (35,636) 18,292 (57,853)
--------- --------- --------- ---------
(209,152) (127,692) (236,764) (581,376)
--------- --------- --------- ---------
Change in cash (1,339) (10,120) (3,211) 2,922
Cash, beginning of period 10,004 21,996 11,876 8,954
--------- --------- --------- ---------
Cash, end of period $ 8,665 $ 11,876 $ 8,665 $ 11,876
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to the consolidated financial statements.
-------------------------------------------------------------------------
Compton Petroleum Corporation
Notes to the Consolidated Financial Statements
December 31, 2007
(Tabular amounts in thousands of dollars, unless otherwise stated)
-------------------------------------------------------------------------
1. Significant accounting policies
Compton Petroleum Corporation (the "Company" or "Compton") is in the
business of the exploration for and production of petroleum and
natural gas reserves in the Western Canada Sedimentary Basin.
a) Basis of presentation
The consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted
in Canada within the framework of the accounting policies summarized
below.
The 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 in accordance with Accounting Guideline 15 ("AcG-15")
"Consolidation of Variable Interest Entities", as outlined in Note 4.
All amounts are presented in Canadian dollars unless otherwise
stated.
b) Measurement uncertainty
The timely preparation of financial statements requires that
Management make estimates and assumptions and use judgment regarding
the measurement of assets, liabilities, revenues, and expenses. Such
estimates relate primarily to transactions and events that have not
settled as of the date of the financial statements. Accordingly,
actual results may materially differ from estimated amounts as future
confirming events occur.
Amounts recorded for depletion and depreciation, and amounts used in
impairment test calculations are based upon estimates of petroleum
and natural gas reserves and future costs to develop those reserves.
By their nature, these estimates of reserves, costs, and related
future cash flows are subject to uncertainty, and the impact on the
consolidated financial statements of future periods could be
material.
The calculation of asset retirement obligations include estimates of
the ultimate settlement amounts, inflation factors, credit adjusted
discount rates, and timing of settlement. The impact of future
revisions to these assumptions on the consolidated financial
statements of future periods could be material.
The amount of stock based compensation expense is subject to
uncertainty due to the Company's best estimate of whether or not
performance will be achieved and obligations incurred.
The values of pension assets and obligations and the amount of
pension costs charged to net earnings depend on certain actuarial and
economic assumptions which by their nature are subject to measurement
uncertainty.
c) Property and equipment
i) Capitalized costs
The Company follows the full cost method of accounting for its
petroleum and natural gas operations within one Canadian cost
centre. Under this method all costs related to the exploration
for and development of petroleum and natural gas reserves are
capitalized. Costs include lease acquisition costs, geological
and geophysical expenses, costs of drilling both producing and
non-producing wells, production facilities, future asset
retirement costs, and certain general and administrative
expenses directly related to exploration and development
activities.
Proceeds from the sale of properties are applied against
capitalized costs, without any gain or loss being realized,
unless such sale would significantly alter the rate of
depletion and depreciation.
Expenditures related to renewals or betterments that improve
the productive capacity or extend the life of an asset are
capitalized. Maintenance and repairs, other than major
turnaround costs, are expensed as incurred. Major turnaround
costs are included in property and equipment when incurred and
charged to depletion and depreciation in the consolidated
statements of earnings and other comprehensive income over the
estimated period of time to the next scheduled turnaround.
ii) Depletion and depreciation
Depletion and depreciation of property and equipment is
provided using the unit-of-production method based upon
estimated proved petroleum and natural gas reserves. The costs
of significant undeveloped properties are excluded from costs
subject to depletion until it is determined whether or not
proved reserves are attributable to the properties or
impairment has occurred. Estimated future costs to be incurred
in developing proved reserves are included in costs subject to
depletion and estimated salvage values are excluded from costs
subject to depletion. For depletion and depreciation purposes,
relative volumes of natural gas production and reserves are
converted at the energy equivalent conversion rate of six
thousand cubic feet of natural gas to one barrel of crude oil.
Depreciation of certain midstream facilities is provided for on
a straight line basis over 30 years and depreciation of office
equipment is provided for on a declining balance basis using
rates which range from 20% to 30% per year.
iii) Impairment test
At each reporting period the Company performs an impairment
test to determine the recoverability of capitalized costs
associated with reserves. An impairment loss is recognized when
the carrying amount of a cost centre is not recoverable. The
carrying amount of the cost centre is not recoverable if the
carrying amount exceeds the sum of the undiscounted cash flows
from proved reserves plus the costs of unproved properties. If
the sum of the cash flows is less than the carrying amount, the
impairment loss is limited to the amount by which the carrying
amount exceeds the sum of the fair value of discounted proved
and probable reserves and the costs of unproved properties that
have been subject to a separate impairment test and contain no
probable reserves.
vi) Asset retirement obligations
The Company recognizes the present value of estimated asset
retirement obligations on the consolidated balance sheet when a
reasonable estimate can be made. Asset retirement obligations
include those legal obligations where the Company will be
required to retire tangible long-lived assets such as well
sites, pipelines, and facilities. The asset retirement cost,
equal to the initial estimated present value of the asset
retirement obligation, is capitalized as part of the cost of
the related long-lived asset. Changes in the estimated
obligation resulting from revisions to estimated timing or
amount of undiscounted cash flows are recognized as a change in
the asset retirement obligation and the related asset
retirement cost.
Asset retirement costs are amortized using the unit-of-
production method and are included in depletion and
depreciation in the consolidated statements of earnings and
other comprehensive income. Increases in the asset retirement
obligations resulting from the passage of time are recorded as
accretion of asset retirement obligations in the consolidated
statements of earnings and other comprehensive income.
Actual expenditures incurred are charged against the
accumulated obligation.
v) Inventories
Physical inventory held for exploration, development, and
operating activities is included in property and equipment and
is valued at estimated realizable value.
d) Goodwill
Goodwill is recorded on a corporate acquisition when the purchase
price is in excess of the fair values assigned to assets acquired and
liabilities assumed. Goodwill is not amortized and an impairment test
is performed at least annually to evaluate the carrying value. To
assess impairment, the fair value of the consolidated entity,
excluding the Mazeppa Processing Partnership, is determined and
compared to the carrying value. If the fair value is less than the
carrying value then a second test is performed to determine the
amount of the impairment. Any loss recognized is equal to the
difference between the implied fair value and the carrying value of
the goodwill.
e) Financial instruments and derivatives
On January 1, 2007 the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") four new accounting standards:
Handbook Section 1530, "Comprehensive Income", Handbook Section 3855,
"Financial Instruments - Recognition and Measurement", Handbook
Section 3861, "Financial Instruments - Disclosure and Presentation"
and Handbook Section 3865, "Hedges". The adoption of these standards
resulted in accounting changes, the impact of which are disclosed in
Note 2 to these consolidated financial statements.
Financial instruments are any contract that gives rise to a financial
asset of one party and a financial liability or equity instrument of
another party. Financial instruments were identified by the Company
through a review of typical financial transactions and risk
management activities. The Company also reviewed non-financial
contracts, entered into subsequent to January 1, 2003, for potential
embedded derivatives. Once identified, the financial instruments were
classified and measured as disclosed below.
Financial instruments are measured at fair value on initial
recognition of the instrument except in specific circumstances.
Measurement in subsequent periods depends on whether the financial
instrument has been classified as "held for trading", "available for
sale", "held to maturity", "loans and receivables" or "other
financial liabilities" as defined by the standards.
Financial assets and financial liabilities "held for trading" are
measured at fair value with changes in those fair values recognized
in net earnings. Financial assets "available for sale" are measured
at fair value, with changes in those fair values recognized in other
comprehensive income. Financial instruments "held to maturity",
"loans and receivables" and "other financial liabilities" are
measured at amortized cost using the effective interest method.
Cash, and deposits included in other current assets, are classified
as "held for trading" and are measured at carrying value which
approximates fair value due to the short term nature of these
instruments. Investments included in other current assets are
designated as "held for trading", accounts receivable are classified
as "loans and receivables" and accounts payable, bank debt and senior
term notes are classified as "other financial liabilities".
Transaction costs, premiums and discounts associated with the
issuance of senior term notes are netted against the notes and
amortized to earnings using the effective interest method.
Derivative financial instruments are classified as "held for
trading" and are recorded at fair value based on quoted market prices
or third party market indications and forecasts. Fluctuations are
recorded in earnings as risk management gains and losses during each
reporting period. The Company uses derivative financial instruments
for non-trading purposes to manage fluctuations in commodity prices,
foreign currency exchange rates, and interest rates as outlined in
Note 17. The Company does not designate any of its current risk
management activities as accounting hedges.
f) Joint operations
Certain petroleum and natural gas activities are conducted jointly
with others. These consolidated financial statements reflect only the
Company's proportionate interest in such activities.
g) Earnings per share amounts
The Company uses the treasury stock method to determine the dilutive
effect of stock options. This method assumes that proceeds received
from the exercise of in-the-money stock options are used to
repurchase common shares at the average market price for the period.
Basic net earnings per common share are determined by dividing net
earnings by the weighted average number of common shares outstanding
during the period. Diluted earnings per share are computed by giving
effect to the potential dilution that would occur if stock options
were exercised.
h) 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, using
the substantively enacted income tax rates. Changes in income tax
rates are reflected in the period in which the rates are
substantively enacted.
i) Revenue recognition
Revenue associated with the production and sale of crude oil, natural
gas, and natural gas liquids owned by the Company is recognized when
title passes to the customer and delivery has taken place. Revenue as
reported, represents the Company's share and is presented before
royalty payments to governments and other mineral interest owners.
Other revenue is recognized in the period that the service is
provided to the customer.
j) Stock-based compensation plan
The Company records compensation expense in the consolidated
statements of earnings and other comprehensive income for stock
options granted to directors, officers, and employees using the fair-
value method. Compensation costs are recognized over the vesting
period and the fair values are determined using the Black-Scholes
option pricing model.
Contributions to the Company's stock savings plan are recorded as
compensation expense as incurred.
k) Deferred financing charges
On January 1, 2007 financing costs related to the issuance of senior
term notes were reclassified from other assets to senior term notes,
as disclosed in Note 2. The costs capitalized within long term debt
are amortized using the effective interest method.
l) Foreign currency translation
Monetary assets and liabilities of the Company that are denominated
in foreign currencies are translated into Canadian dollars at the
period-end exchange rate, with any resulting gain or loss recorded in
the consolidated statements of earnings and other comprehensive
income.
m) Dividend policy
The Company has neither declared nor paid any dividends on its common
shares. The Company intends to retain its earnings to finance growth
and expand its operations and does not anticipate paying any
dividends on its common shares in the foreseeable future.
n) Defined benefit pension plan
The Company accrues for obligations under a defined benefit pension
plan and the related costs, net of plan assets for employees of
Mazeppa Processing Partnership. The cost of the pension is
actuarially determined using the projected benefit method based on
length of service and reflects Management's best estimate of expected
plan investment performance, salary escalation, and retirement age of
employees.
o) Recent accounting pronouncements
On January 1, 2008, the Company will be required to adopt the
following CICA Handbook Sections:
a. Section 3031, "Inventories" which replaces the existing standard.
The requirements include the consistent grouping of like assets
and the application of the first-in-first-out or weighted average
cost formula methodologies.
b. Section 1400, "General Standards of Financial Statement
Presentation" which requires assessing and disclosing the
Company's ability to continue as a going concern.
c. Section 3862, "Financial Instruments - Disclosures" and
Section 3863, "Financial Instruments - Presentation". These new
standards will 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.
d. Section 1535, "Capital Disclosures", requiring disclosure of
information about an entity's capital and the objectives,
policies, and processes for managing capital.
The adoption of these standards is not expected to have a material
impact on the Company's consolidated financial statements.
On January 1, 2009 the Company will be required to adopt the CICA
Handbook Section 3064, "Intangible Assets". The new section
establishes standards for the recognition, measurement, and
disclosure of goodwill and intangible assets and replaces the
existing Handbook Section 3062, "Goodwill and Other Intangible
Assets" and Section 3450, "Research and Development Costs".
Intangible assets associated with the exploration and development of
oil and gas assets are specifically excluded under the new standard.
The Company is evaluating the implications but expects no material
impact on the consolidated financial statements.
On January 10, 2006, the CICA Accounting Standards Board ("AcSB")
ratified a new strategic plan that would see the convergence of
Canadian Generally Accepted Accounting Principles ("GAAP") with
International Financial Reporting Standards ("IFRS") within 5 years.
In March 2007, the AcSB released an "Implementation Plan for
Incorporating IFRSs into Canadian GAAP", which assumed a convergence
date of January 1, 2011. The AcSB confirmed this date in
February 2008. The Company continues to monitor and assess the
consequences of the convergence on the consolidated financial
statements as they could have a material impact.
p) Reclassification
Certain amounts disclosed for prior years have been reclassified to
conform with current year presentation.
2. Changes in significant accounting policies
On January 1, 2007, the Company adopted the CICA Handbook Section 1530,
"Comprehensive Income", Handbook Section 3855, "Financial Instruments -
Recognition and Measurement", Handbook Section 3861, "Financial
Instruments - Disclosure and Presentation", Handbook Section 3865,
"Hedges", and Handbook Section 1506, "Accounting Changes".
The adoption of these standards had no material impact on the Company's
consolidated financial statements. Any significant effects from the
implementation of the new standards are disclosed below.
a) Comprehensive income
The new standard introduced the statements of comprehensive income
and accumulated other comprehensive income to temporarily provide for
gains, losses and other amounts arising from changes in fair value
until realized and recorded in net earnings. The Company has
determined that it has no other comprehensive income nor accumulated
other comprehensive income for the year ended December 31, 2007.
b) Financial instruments
The financial instruments standard establishes recognition and
measurement criteria for financial assets, financial liabilities and
derivatives. The Company's policies on accounting for financial
instruments is disclosed in Note 1.
Transitional provisions were outlined in the financial instruments
standard and required retroactive adjustment without restatement of
prior periods. In addition, the provisions required that, upon
adoption at January 1, 2007, transitional adjustments, net of tax, be
recognized in the opening balance of retained earnings.
At January 1, 2007, the following transitional adjustments were
required.
- The reclassification of $14.0 million of deferred financing
charges as a reduction of senior term notes to reflect the adopted
policy of netting long term debt transaction costs within long
term debt. The costs capitalized will be amortized using the
effective interest method. Previously, the Company deferred these
costs and amortized them straight line over the life of the
related senior term notes. The adoption of this standard resulted
in a $0.3 million net increase to opening retained earnings.
- $3.97 million of deferred risk management loss, $2.7 million net
of tax, previously recognized at January 1, 2004 upon initial
adoption of CICA Accounting Guideline 13, "Hedging Relationships"
was reclassified as a reduction to opening retained earnings.
- The fair value measurement of investments resulted in a $1.1
million net increase to opening retained earnings.
The net effect on opening retained earnings as a result of the
transitional provisions is as follows:
Deferred financing charge adjustments $ 318
Deferred risk management loss (2,743)
Fair value of investments 1,105
------------
Total adjustment to opening retained earnings $ (1,320)
------------
------------
3. Business combinations
On August 15, 2007 and December 21, 2007, respectively, the Company
acquired all of the issued and outstanding shares of Stylus Energy Inc.
("Stylus") and WIN Energy Corporation ("WIN"). Both entities were
independent exploration and production companies with operations in the
Company's core areas. The business combinations have been accounted for
using the purchase method with results of operations included in the
consolidated financial statements from the date of acquisition. If the
purchase price is in excess of the fair value of net assets acquired,
goodwill is recorded.
The following table summarizes the estimated fair value of the assets
acquired and liabilities assumed at the date of acquisition. The Company
is in the process of finalizing the estimated fair value of the WIN
acquisition and therefore, the allocation of the purchase price is
subject to refinement.
Net assets acquired Stylus WIN Total
------------ ------------ ------------
Working capital $ (17,209) $ (2,010) $ (19,219)
Petroleum and natural gas
properties 106,916 24,465 131,381
------------ ------------ ------------
89,707 22,455 112,162
Future income taxes (12,288) 8,132 (4,156)
Asset retirement obligations (4,402) (919) (5,321)
Goodwill 2,020 - 2,020
------------ ------------ ------------
$ 75,037 $ 29,668 $ 104,705
------------ ------------ ------------
------------ ------------ ------------
Consideration
Cash $ 73,782 $ 29,414 $ 103,196
Transaction costs 1,255 254 1,509
------------ ------------ ------------
$ 75,037 $ 29,668 $ 104,705
------------ ------------ ------------
------------ ------------ ------------
During the year ended December 31, 2007, both companies were wound up
into Compton Petroleum Corporation.
4. Non-controlling interest
Mazeppa Processing Partnership ("MPP" or "the Partnership") is a limited
partnership organized under the laws of the province of Alberta and owns
certain midstream facilities, including gas plants and pipelines in
Southern Alberta. The Company processes a significant portion of its
production from the area through these facilities pursuant to a
processing agreement with MPP. The Company does not have an ownership
position in MPP, however, the Company, through a management agreement,
manages the activities of MPP and is considered to be the primary
beneficiary of MPP's operations. 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:
As at December 31, 2007 2006
------------ ------------
Non-controlling interest, beginning of year $ 66,350 $ 68,898
Earnings attributable to non-controlling
interest 6,132 6,623
Distributions to limited partner (9,171) (9,171)
------------ ------------
Non-controlling interest, end of year $ 63,311 $ 66,350
------------ ------------
------------ ------------
Commencing May 1, 2004, pursuant to the terms of a processing agreement
between Compton and MPP, Compton pays a monthly fee to MPP for the
transportation and processing of natural gas through the MPP owned
facilities. The fee is comprised of a fixed base fee of $764 thousand per
month plus MPP operating costs, net of third party revenues. These
amounts are eliminated from revenues and expenses on consolidation.
The processing agreement has a five year term ending April 1, 2009, at
which time Compton may renew the agreement under terms determined at that
time or purchase the Partnership units for the predetermined amount of
$55 million, deemed to be fair value. In the event that the Company does
not renew the processing agreement nor exercise the purchase option, the
limited partner may dispose of the Partnership units to an independent
third party.
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 of the Partnership under the guarantee is
limited to amounts due and payable to MPP by the Company pursuant to the
processing agreement. The maximum liability at December 31, 2007 was
$12.2 million (2006 - $21.4 million) payable over the remaining term of
the processing agreement. The Company has determined that its exposure to
loss under these arrangements is negligible.
5. Property and equipment
Accumulated
depletion
and
As at December 31, 2007 Cost depreciation Net
------------ ------------ ------------
Exploration and development costs $2,145,866 $ (603,867) $1,541,999
Production equipment and processing
facilities 651,999 (105,720) 546,279
Inventory 6,871 - 6,871
Future asset retirement costs 19,940 (5,396) 14,544
Office equipment 14,111 (6,970) 7,141
------------ ------------ ------------
$2,838,787 $ (721,953) $2,116,834
------------ ------------ ------------
------------ ------------ ------------
Accumulated
depletion
and
As at December 31, 2006 Cost depreciation Net
------------ ------------ ------------
Exploration and development costs $1,931,594 $ (482,524) $1,449,070
Production equipment and processing
facilities 582,705 (77,863) 504,842
Inventory 6,818 - 6,818
Future asset retirement costs 17,128 (4,906) 12,222
Office equipment 9,359 (5,249) 4,110
------------ ------------ ------------
$2,547,604 $ (570,542) $1,977,062
------------ ------------ ------------
------------ ------------ ------------
During the year, $9.6 million (2006 - $10.5 million) relating to employee
salaries, insurance costs, and overhead recoveries determined in
accordance with industry standards, were capitalized.
As at December 31, 2007, future capital expenditures of $318.3 million
(2006 - $329.7 million, 2005 - $192.9 million), as estimated by
independent reserve engineers, relating to the development of proved
reserves have been included in costs subject to depletion. The estimated
salvage value of production equipment and processing facilities at
December 31, 2007 was $130.1 million (2006 - $120.1 million, 2005 -
$108.6 million) and was excluded from costs subject to depletion.
Undeveloped properties with a cost at December 31, 2007 of $260.6 million
(2006 - $202.9 million, 2005 - $251.3 million) included in exploration
and development costs, have not been subject to depletion.
Prices used in the evaluation of the carrying value of the Company's
reserves for the purposes of the impairment test were:
Natural Crude Oil
Gas (Edmonton
As at December 31, 2007 (AECO C spot) par 40 API) NGL
------------ ------------ ------------
$ per MMbtu $ per bbl $ per bbl
2008 $6.74 $88.48 $91.04
2009 $7.48 $85.52 $88.03
2010 $7.69 $83.88 $86.41
2011 $7.80 $82.03 $84.54
2012 $7.84 $81.16 $83.66
Approximate % increase thereafter 2.0% 2.0% 2.0%
6. Credit facilities
As at December 31, 2007 2006
----------- -----------
Authorized
$ 500,000 $ 500,000
----------- -----------
----------- -----------
Prime rate $ 50,000 $ 35,000
Bankers' Acceptance 350,000 295,000
Discount to maturity (1,574) (2,000)
----------- -----------
Utilized $ 398,426 $ 328,000
----------- -----------
----------- -----------
As at December 31, 2007, the Company had arranged a $500 million
authorized senior credit facility with a syndicate of banks. Advances
under the facilities can be drawn and currently bear interest as follows:
Prime rate plus 0.95%
Bankers' Acceptance rate plus 1.95%
LIBOR rate plus 1.95%
At December 31, 2007 prime and 30 day bankers acceptance rates were 6.0%
and 4.6% respectively.
Margins are determined based on the ratio of total consolidated debt to
consolidated cash flow. The facilities reached term on July 4, 2007 and
were renewed under the same terms and conditions to July 2, 2008. If not
renewed in 2008 they will mature 366 days later on July 3, 2009.
The senior credit facilities are secured by a first fixed and floating
charge debenture in the amount of $1.0 billion covering all the Company's
assets and undertakings.
7. Senior term notes
As at December 31, 2007 2006
----------- -----------
Senior term notes
US$450 million, 7.625% due December 1, 2013 $ 444,645 $ 524,385
Unamortized transaction costs (10,883) -
----------- -----------
Carrying value $ 433,762 $ 524,385
----------- -----------
----------- -----------
On November 22, 2005, a wholly owned subsidiary of the Company issued US
$300 million senior term notes maturing December 1, 2013. On April 4,
2006, an additional US$150 million was issued under the same terms and
conditions as the original issue. The notes bear interest at 7.625%, are
unsecured and are subordinate to the Company's bank credit facilities.
The yield to maturity, using the effective interest method, was 8.840% as
at December 31, 2007.
Pursuant to the adoption of Handbook Section 3855, "Financial
Instruments - Recognition and Measurement", transaction costs relating to
the issue of the senior term notes reduce the carrying value of the notes
as disclosed in Note 2.
The notes are not redeemable by the Company prior to December 1, 2009,
except in limited circumstances. After that time, they can be redeemed
in whole or part, at the rates indicated below:
December 1, 2009 103.813%
December 1, 2010 101.906%
December 1, 2011 and thereafter 100.000%
During the year the Company entered into foreign exchange contracts as
outlined in Note 17a (iii) which fixed the repayment, in Canadian dollars
at December 1, 2010, being the second call date, as outlined in the
senior note agreement.
8. Interest and finance charges
Amounts charged to expense during the year ended are as follows:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Interest on bank debt, net $ 22,476 $ 14,243 $ 11,520
Interest on senior term notes 38,345 35,880 20,912
Other finance charges 2,672 3,952 2,519
------------ ------------ ------------
Total $ 63,493 $ 54,075 $ 34,951
------------ ------------ ------------
------------ ------------ ------------
Other finance charges include lease financing, bank service charges and
fees as well as other miscellaneous expenses.
The effective interest rate on bank debt at December 31, 2007 was 6.5%
(2006 - 5.6%).
9. Other assets
As at December 31, 2007 2006
----------- -----------
Deferred financing charges $ - $ 14,008
Defined benefit pension plan 277 125
Other 14 11
----------- -----------
Other assets $ 291 $ 14,144
----------- -----------
----------- -----------
On January 1, 2007 financing costs related to the issuance of senior term
notes were reclassified from other assets to senior term notes, as
disclosed in Note 2.
10. Foreign exchange (gain) loss
Amounts charged to foreign exchange (gain) loss during the year ended
were as follows:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Foreign exchange gain on
translation of US$ debt $ (79,740) $ (665) $ (7,808)
Other foreign exchange (gain) loss 1,023 (226) 455
------------ ------------ ------------
Total $ (78,717) $ (891) $ (7,353)
------------ ------------ ------------
------------ ------------ ------------
11. Asset retirement obligations
The following table presents the reconciliation of the beginning and
ending aggregate carrying amount of the obligations associated with the
retirement of oil and natural gas assets:
As at December 31, 2007 2006
----------- -----------
Asset retirement obligations, beginning of year $ 29,791 $ 20,770
Liabilities incurred 8,719 7,031
Liabilities settled and disposed (4,532) (267)
Accretion expense 2,718 2,257
----------- -----------
Asset retirement obligations, end of year $ 36,696 $ 29,791
----------- -----------
----------- -----------
The total undiscounted amount of estimated cash flows required to settle
the obligations was $246.6 million (2006 - $233.0 million), which has
been discounted using a credit-adjusted risk free rate of 10.8%
(2006 - 10.6%). Due to the Company's long reserve life, the majority of
these obligations are not expected to be settled until well into the
future. Settlements will be funded from general Company resources at the
time of retirement and removal.
12. Capital stock
a) Authorized
The Company is authorized to issue an unlimited number of common
shares and an unlimited number of preferred shares, issuable in
series.
b) Issued and outstanding
As at December 31, 2007 2006
--------------------- ---------------------
Number Number
of of
Shares Amount Shares Amount
---------- ---------- ---------- ----------
(000s) (000s)
Common shares outstanding,
beginning of year 128,503 $231,992 127,263 $226,444
---------- ---------- ---------- ----------
Shares issued under stock
option plan 993 4,603 1,489 5,993
Shares repurchased (398) (724) (249) (445)
---------- ---------- ---------- ----------
Common shares outstanding,
end of year 129,098 $235,871 128,503 $231,992
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The Company has, on an annual basis, instituted a normal course
issuer bid program. 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 year, the Company purchased for cancellation 398,300
common shares at an average price of $9.98 per share (2006 - 248,900
common shares at an average price of $13.79 per share) pursuant to
the normal course issuer bid. The excess of the purchase price over
book value has been charged to retained earnings.
c) Shareholder rights plan
The Company has a shareholder rights plan (the "Plan") to ensure all
shareholders are treated fairly in the event of a take-over offer or
other acquisition of control of the Company.
Pursuant to the Plan, the Board of Directors authorized and declared
the distribution of one Right in respect of each common share
outstanding. In the event that an acquisition of 20% or more of the
Company's shares is completed and the acquisition is not a permitted
bid, as defined by the Plan, each Right will permit the holder, other
than holders not in compliance with the plan, to acquire a common
share at a 50% discount to the market price at that time.
13. 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 fully exercisable and will 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:
As at December 31, 2007 2006
--------------------- ---------------------
Weighted Weighted
average average
Stock exercise Stock exercise
options price options price
---------- ---------- ---------- ----------
(000s) (000s)
Outstanding, beginning of
year 11,611 $7.79 11,446 $6.13
Granted 2,074 $11.02 2,228 $13.99
Exercised (993) $3.47 (1,489) $3.14
Forfeited (608) $11.97 (574) $10.92
---------- ---------- ---------- ----------
Outstanding, end of year 12,084 $8.49 11,611 $7.79
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Exercisable, end of year 7,240 $6.20 6,593 $4.82
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The range of exercise prices of stock options outstanding and
exercisable at December 31, 2007 is as follows:
Outstanding Options Exercisable Options
-------------------------------- ---------------------
Weighted
average
Number remaining Weighted Number Weighted
Range of of contractual average of average
exercise options life exercise options exercise
prices outstanding (years) price outstanding price
--------- ---------- ---------- ---------- ---------- ----------
(000s) (000s)
$1.45 - $3.99 2,665 2.6 $ 2.72 2,665 $ 2.72
$4.00 - $6.99 2,013 2.7 $ 4.94 1,995 $ 4.93
$7.00 - $9.99 1,533 2.2 $ 7.94 884 $ 7.63
$10.00 - $11.99 2,740 3.4 $ 11.19 633 $ 10.92
$12.00 - $13.99 1,713 2.7 $ 12.63 698 $ 12.61
$14.00 - $18.39 1,420 3.1 $ 14.69 365 $ 14.70
---------- ---------- ---------- ---------- ----------
12,084 2.9 $ 8.49 7,240 $ 6.20
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The Company has recorded stock-based compensation expense in the
consolidated statements 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:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Weighted average fair value of
options granted $4.23 $6.90 $5.45
Risk-free interest rate 4.1% 4.0% 3.6%
Expected life (years) 5.0 5.0 5.0
Expected volatility 39.0% 43.5% 43.9%
The following table presents the reconciliation of contributed
surplus with respect to stock-based compensation:
As at December 31, 2007 2006
----------- -----------
Contributed surplus, beginning of year $ 16,974 $ 9,173
Stock-based compensation expense 8,416 9,121
Stock options exercised (1,157) (1,320)
----------- -----------
Contributed surplus, end of year $ 24,233 $ 16,974
----------- -----------
----------- -----------
b) 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
years ended December 31, 2007, 2006 and 2005, 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 December 31, 2007 (2006 - $1.2 million). All
outstanding SARs having a variable component expire at various times
through 2011.
c) Employee retention program
In recognition of the shortage of 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, in July 2007,
$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. No further obligation exists
pursuant to this program.
14. Per share amounts
The following table summarizes the common shares used in calculating
net earnings per common share:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
(000s) (000s) (000s)
Weighted average common shares
outstanding - basic 128,993 127,820 125,627
Effect of stock options 3,546 5,806 6,040
------------ ------------ ------------
Weighted average common shares
outstanding - diluted 132,539 133,626 131,667
------------ ------------ ------------
------------ ------------ ------------
In calculating diluted earnings per common share for the year ended
December 31, 2007, the Company excluded 5,553,700 options (2006 -
1,537,100, 2005 - 331,800) as the exercise price was greater than the
average market price of its common shares in those years.
15. Defined benefit pension plan
There are 35 employees of MPP currently enrolled in a co-sponsored,
defined benefit pension plan. Information relating to the MPP retirement
plan is outlined below:
As at December 31, 2007 2006
----------- -----------
Accrued benefit obligation
Accrued benefit obligation - beginning of year $ 7,717 $ 7,562
Current service cost 401 368
Interest cost 403 387
Benefits paid (121) (392)
Actuarial (gain) loss (705) (208)
----------- -----------
Accrued benefit obligation - end of year $ 7,695 $ 7,717
----------- -----------
----------- -----------
Fair value of plan assets
Fair value of plan assets - beginning of year $ 6,635 $ 5,839
Employee contributions 87 82
Employer contributions 460 439
Benefits paid (121) (392)
Actual return on plan assets (164) 667
----------- -----------
Fair value of plan assets - end of year $ 6,897 $ 6,635
----------- -----------
----------- -----------
Accrued benefit asset
Funded status - plan assets less than benefit
obligation $ (798) $ (1,082)
Unamortized net actuarial loss 352 414
Unamortized past service costs 723 793
----------- -----------
Accrued benefit asset, included in other
assets (Note 9) $ 277 $ 125
----------- -----------
----------- -----------
Economic assumptions used to determine benefit obligation and periodic
expense were:
Years ended December 31, 2007 2006
----------- -----------
Discount rate 5.0% 5.0%
Expected rate of return on assets 7.0% 7.0%
Rate of compensation increase 3.5% 3.5%
Average remaining service period of covered
employees 16 years 16 years
Actuarial evaluations are required every three years, the next evaluation
being January 1, 2009.
Pension expense, included in MPP operating costs, is as follows:
Years ended December 31, 2007 2006
----------- -----------
Current service cost, net of employee
contributions $ 307 $ 292
Interest on accrued benefit obligation 403 387
Return on assets (479) (407)
Amortization of past service cost 69 69
Amortization of net actuarial loss - 9
----------- -----------
Pension expense, included in operating expense $ 300 $ 350
----------- -----------
----------- -----------
MPP expects to contribute $547 thousand to the plan in 2008.
16. Income taxes
a) The following table reconciles income taxes calculated at the
Canadian statutory rate with actual income taxes:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Earnings before taxes and
non-controlling interest $ 108,963 $ 130,457 $ 145,247
------------ ------------ ------------
Canadian statutory rate 32.1% 34.5% 37.6%
Expected income taxes $ 34,977 $ 45,008 $ 54,613
Effect on taxes resulting from:
Non-deductible Crown charges - 2,145 15,061
Resource allowance - (1,987) (11,980)
Non-deductible stock-based
compensation 2,704 3,147 2,221
Federal capital tax - - 1,896
Effect of tax rate changes (50,470) (49,655) (5,764)
Non-taxable capital (gains)
losses (11,651) (115) -
Other (1,995) (2,135) 1,341
------------ ------------ ------------
Provision for income taxes $ (26,435) $ (3,592) $ 57,388
------------ ------------ ------------
------------ ------------ ------------
Current
Income taxes $ 17 $ 44 $ 3,175
Federal capital taxes - - 1,896
Future (26,452) (3,636) 52,317
------------ ------------ ------------
$ (26,435) $ (3,592) $ 57,388
------------ ------------ ------------
------------ ------------ ------------
Effective tax rate (24.3)% (2.8)% 39.5%
------------ ------------ ------------
------------ ------------ ------------
A significant portion of the Company's taxable income is generated by
a partnership. Income taxes are incurred on the majority of the
partnership's taxable income in the year following its inclusion in
the Company's consolidated net earnings. Current income tax is
dependent upon the amount of capital expenditures incurred and the
method of deployment.
The Canadian federal government, during the fourth and second
quarters of 2007 and the second quarter of 2006, and the Alberta
government, during the second quarter of 2006 enacted income tax rate
changes.
b) Future income taxes are classified on the balance sheet as:
As at December 31, 2007 2006
----------- -----------
Current asset $ (2,606) $ (1,479)
Current liability 542 7,269
Non-current liability 293,494 302,690
----------- -----------
Net future income tax liability $ 291,430 $ 308,480
----------- -----------
----------- -----------
The net future income tax liability is comprised of:
As at December 31, 2007 2006
----------- -----------
Future income tax liabilities
Property and equipment in excess of tax
values $ 252,594 $ 229,936
Timing of partnership items 43,857 83,328
Foreign exchange gain on long-term debt 18,340 8,729
Other - 2,591
Future income tax assets
Non-capital losses carried forward (5,422) -
Attributed Canadian royalty income (7,810) (7,462)
Asset retirement obligations (9,177) (8,642)
Other (952) -
----------- -----------
Net future income tax liability $ 291,430 $ 308,480
----------- -----------
----------- -----------
The non-capital losses available for carry forward to reduce taxable
income in future years expire between 2011 and 2026.
17. Financial instruments
Derivative financial instruments and risk management activities
The Company is exposed to risks from fluctuations in commodity prices,
interest rates, and Canada/US currency exchange rates. The Company
utilizes various derivative financial instruments for non- trading
purposes to manage and mitigate its exposure to these risks. Effective
January 1, 2004, the Company elected to account for all derivative
financial instruments using the mark-to-market method.
On January 1, 2007 the Company adopted the new financial instrument
recognition, measurement, presentation and disclosure requirements of the
CICA as disclosed in Note 2 (b) to these consolidated financial
statements. Certain items have been reclassified as a reduction to
opening retained earnings, net of tax, as prescribed in the transitional
provisions.
Risk management activities during the year, utilizing derivative
instruments, relate to commodity price economic hedges, fixed price power
contracts, foreign currency contracts and cross currency interest rate
swap arrangements.
a) Unrealized risk management gains and losses as at December 31, 2007
i) Balance sheet classification
As at December 31, 2007, the Company had outstanding financial
instrument contracts for both commodity price risk management and
foreign currency risk management expiring at various periods to
December 2010. These contracts were valued on a mark-to-market
basis as at December 31, 2007 and the unrealized gains and losses
relating to these contracts are recorded on the consolidated
balance sheets as follows:
Commodity Foreign 2007 2006
As at December 31, 2007 Contracts Currency Total Total
---------- ---------- ---------- ----------
Unrealized gain
Current asset $ 1,790 $ 45 $ 1,835 $ 22,625
Non-current asset - 14,320 14,320 -
Unrealized loss
Current liability - (8,832) (8,832) (4,604)
Non current liability - (1,585) (1,585) (6,816)
---------- ---------- ---------- ----------
Total unrealized gains
(losses) $ 1,790 $ 3,948 $ 5,738 $ 11,205
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
The amounts relating to commodity price risk management and foreign
exchange risk management, respectively, are disclosed below:
ii) Commodity price risk management
The Company 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 AECO spot for gas contracts and WTI NYMEX for oil
contracts and are valued in Canadian dollars unless otherwise
disclosed. Outstanding economic hedge contracts at December 31, 2007
are:
Daily Mark-to-
Notional Average Market
Commodity Term Volume Price gain
--------- ---- -------- ------- ---------
Natural gas $8.27 -
Collar Nov./07 - Mar./08 9,524mcf $10.50/mcf $ 1,416
Electricity Jan./06 - Dec./08 2.5MW $55.00/MWh 374
---------
$ 1,790
---------
---------
The gains and losses realized during the year on the electricity
contract are included in operating expenses.
Subsequent to December 31, 2007, the Company entered into the
following commodity contracts:
Natural gas
Collar Apr./08 - Oct./08 52,381 mcf $7.33 -
$8.48/mcf
Fixed Apr./08 - Oct./08 19,048 mcf $7.86/mcf
Collar Nov./08 - Mar./09 28,571 mcf $8.40 -
$10.00/mcf
Fixed Nov./08 - Mar./09 9,524 mcf $8.51/mcf
Oil
Fixed Mar./08 - Dec./08 1,000 bbl US$93.00/bbl
iii) Foreign currency risk management
The Company 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. When appropriate, the Company enters
into agreements to fix the exchange rate of Canadian dollars to US
dollars in order to manage the risk.
Concurrent with the issuance of 9.90% Senior Notes in 2002, the
Company entered into cross currency interest rate swap arrangements
expiring May 2009 that convert fixed rate US dollar denominated
interest obligations into floating rate Canadian dollar denominated
interest obligations. On purchase of the majority of the 9.90% Senior
Notes in November 2005, the Company elected not to collapse the cross
currency interest rate swap and maintains it as a source of US funds
used to settle interest obligations on the 7.625% Senior Notes.
During the year 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 on
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.
On December 31, 2007, the Company had the following foreign exchange
contracts in place:
Amount Amount Mark to
Contract USD Rate CDN Term Market
--------- ------ ---- ------ ---- --------
Matures on
Currency December 1,
Swap $450,000,000 96.9750 $436,387,500 2010 $ 14,146
Equal Payments
on May 30 and
Currency Nov. 30 until
Swap $78,435,000 99.5500 $78,082,043 2010 219
Cross
Currency Equal payments
Interest on May 15 and
Rate BA plus Nov. 15 until
Swap $24,502,500 4.845% $34,627,785 2009 (10,417)
---------
Total unrealized foreign exchange gain $ 3,948
---------
---------
b) Risk management (gain) loss
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
Year ended December 31, 2007 Contracts Currency Total
------------ ------------ ------------
Unrealized
Change in fair value $ 20,834 $ (15,367) $ 5,467
------------ ------------ ------------
Realized cash settlements (19,220) 7,739 (11,481)
------------ ------------ ------------
Total (gain) loss $ 1,614 $ (7,628) $ (6,014)
------------ ------------ ------------
------------ ------------ ------------
Commodity Foreign
Year ended December 31, 2006 Contracts Currency Total
------------ ------------ ------------
Unrealized
Amortization of deferred loss $ - $ 1,642 $ 1,642
Change in fair value (25,775) (3,389) (29,164)
------------ ------------ ------------
(25,775) (1,747) (27,522)
Realized cash settlements (39,217) 3,018 (36,199)
------------ ------------ ------------
Total (gain) loss $ (64,992) $ 1,271 $ (63,721)
------------ ------------ ------------
------------ ------------ ------------
Commodity Foreign
Year ended December 31, 2005 Contracts Currency Total
------------ ------------ ------------
Unrealized
Amortization of deferred loss $ - $ 1,642 $ 1,642
Change in fair value 5,136 3,393 8,529
------------ ------------ ------------
5,136 5,035 10,171
Realized cash settlements 9,663 (532) 9,131
------------ ------------ ------------
Total loss $ 14,799 $ 4,503 $ 19,302
------------ ------------ ------------
------------ ------------ ------------
c) Credit risk management
Accounts receivable include amounts receivable for oil and natural
gas sales which are generally made to large credit worthy purchasers
and amounts receivable from joint venture partners which are
generally recoverable from production. Accordingly, the Company views
credit risks on these amounts as low.
The Company is exposed to losses in the event of non-performance by
counter-parties to financial instruments. The Company deals with
major financial institutions and believes these risks are minimal.
d) Fair value of financial assets and liabilities
Held for trading financial assets and liabilities are carried at fair
value. The carrying value of accounts receivable, 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.
As at December 31, 2007 2006
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Held-for-trading
Cash $ 8,665 $ 8,665 $ 11,876 $ 11,876
Other current assets 19,772 19,772 22,869 22,869
Loans and receivables
Accounts receivable $ 80,331 $ 80,331 $ 83,535 $ 83,535
Financial Liabilities
Other financial
liabilities
Accounts payable $147,983 $147,983 $141,443 $141,443
Bank debt 398,426 398,426 328,000 328,000
Senior term notes 433,762 415,743 524,385 503,410
The fair value of derivative financial instruments related to risk
management activities, classified as held-for-trading, are disclosed
elsewhere in this note.
18. Cash flow
Changes in non-cash working capital items increased (decreased) cash as
follows:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Accounts receivable and other
current assets $ (11,614) $ 24,395 $ (17,672)
Accounts payable 6,540 (62,425) 78,385
------------ ------------ ------------
$ (5,074) $ (38,030) $ 60,713
------------ ------------ ------------
------------ ------------ ------------
Net change in non-cash working
capital
Relating to:
Operating activities $ (23,366) $ 19,823 $ 6,612
Investing activities 18,292 (57,853) 54,101
------------ ------------ ------------
$ (5,074) $ (38,030) $ 60,713
------------ ------------ ------------
------------ ------------ ------------
Amounts paid during the year relating to interest expense and capital
taxes were as follows:
Years ended December 31, 2007 2006 2005
------------ ------------ ------------
Interest paid $ 60,976 $ 48,857 $ 31,444
------------ ------------ ------------
------------ ------------ ------------
Current income taxes paid $ 41 $ 14 $ 4,101
------------ ------------ ------------
------------ ------------ ------------
19. Commitments and contingent liabilities
a) Commitments
The Company has committed to certain payments over the next five
years, as follows:
2008 2009 2010 2011 2012
---------- ---------- ---------- ---------- ----------
Operating leases $ 3,811 $ 3,325 $ 505 $ - $ -
Office facilities 4,351 4,921 6,160 5,484 5,569
MPP partnership
distributions 9,172 3,057 - - -
---------- ---------- ---------- ---------- ----------
$ 17,334 $ 11,303 $ 6,665 $ 5,484 $ 5,569
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
The Company has entered into a lease agreement for new office facilities
commencing 2009. Annual commitments under the lease agreement are
approximately $5.6 million per year for the 10 year term. The commitment
remaining on the office facilities subsequent to 2012 is $33.6 million
and the total of all commitments, to expiry, is $80 million.
b) Legal proceedings
The Company is involved in various legal claims associated with
normal operations. These claims, although unresolved at the current
time, in management's opinion, are not significant and are not
expected to have a material impact on the financial position or
results of operations of the Company.
20. Subsequent events
On January 23, 2008, Compton announced its budget for 2008 and the
Company's longer term plans for 2009 and 2010. On January 29, 2008, the
Company received a letter from Centennial Energy Partners LLC, a major
shareholder of the Company, wherein they restated comments contained in a
letter to the Company dated December 14, 2007, that in their opinion, a
major discount had developed between the underlying value of the
Company's asset base and its share price. Additionally, they expressed
concerns that the Company's plans, as announced, would not eliminate the
discount and require Compton shareholders' to assume significant
execution risk, commodity price risk and stock market risk for minimal
per-share return and requested that the Company be put up for sale.
In response to Centennial's concerns, the Board of Directors, in a news
release dated February 28, 2008, announced that it would conduct a formal
review of the Company's business plans and alternatives for enhancing
shareholder value, and had appointed independent financial advisors to
assist the Company in the conduct of this review.
The Company has estimated that during 2008, Compton will incur direct
costs associated with, and costs resulting from, the process that could
total approximately $22 million. These expenses will be recognized
throughout the year as they occur.
In addition to the above, cash outlays associated with change of control
provisions relating to the Company's senior notes, Mazeppa Processing
Partnership arrangements, and employee contracts could result depending
upon the outcome of the review.
Further Information
Additional information, including our Annual Information Form, will be
available by month end on the Canadian Securities Administrators' System
for Electronic Document Analysis and Retrieval ("SEDAR") at
www.sedar.com.
CONFERENCE CALL
Compton will be conducting a conference call and audio webcast Wednesday, March 26, 2008 at 9:30 a.m. Mountain Standard Time (11:30 a.m. EST) to discuss the Company's 2007 fourth quarter and 2007 annual 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: Toll-Free 1-800-732-9307
Local Toronto: 1-416-644-3418
Webcast URL:
http://phx.corporate-ir.net/phoenix.zhtml?p(equal sign)irol-eventDetails&c(equal sign)69018&eve ntID(equal sign)1766299
The audio replay will be available two hours after the conclusion of the conference call and will be accessible until Tuesday, April 3, 2007. Callers may dial toll-free 1-877-289-8525 and enter access code 21263872 (followed by the pound key).
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