CALGARY, March 20 /CNW/ - Petrolifera Petroleum Limited (PDP - TSX) had a wonderful year in 2006. In its first full year of operations as a public company and its second full year as a company, achievements and accomplishments were considerable.
Highlights are as follows:
- Revenue increased 36 times to $106 million, compared to $3 million in
2005
- Cash flow from operations before working capital changes(1) increased
120 times to $52 million after deduction current income taxes of
$24 million, compared to cash flow of only $400,000 in 2005, after a
current tax provision of $330,000 last year
- Cash flow per share(1) increased 67 times to $1.34 per share in 2006
compared to only $0.02 per share in 2005; there were 39 million
(basic weighted average) shares outstanding in 2006, compared to
21 million shares in 2005. Fully diluted, there were 50 million
outstanding in 2006 compared to 32 million in 2005. At December 31,
2006 there were 44 million common shares outstanding (53 million
fully diluted)
- Earnings were $40 million ($1.02 per share, basic) compared to a loss
in 2005 of $400 thousand ($0.02 per share, basic)
- Year end working capital was $43 million with $51 million of cash
- Petrolifera has no debt
- Eight successful new wells were drilled in 2006 with no dry holes
- Daily average sales in 2006 was 17 times that of 2005, reaching
6,171 boe/d, including 5,973 bbl/d of crude oil, all derived from the
company's drilling program
- Fourth quarter 2006 production averaged 10,900 boe/d, including
10,716 bbl/d of crude oil
- Proved reserves increased 99 percent over 2005 levels
The following table summarizes these highlights and provides other
information with comparisons to results in 2005.
HIGHLIGHTS
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2006 2005 % Change
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FINANCIAL ($000 except per share amounts)
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Total revenue $105,583 $2,864 3,587
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Cash flow from operations before working
capital changes(1) 52,366 434 11,966
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Per share, basic(1) 1.34 0.02 6,600
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Per share, diluted(1) 1.05 0.01 10,500
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Net earnings (loss) 39,894 (415) 9,713
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Per share, basic 1.02 (0.02) 5,200
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Per share, diluted 0.80 (0.02) 4,000
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Capital expenditures 36,400 6,662 446
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Cash on hand 51,008 19,744 158
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Working capital 43,038 17,886 141
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Indebtedness - - -
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Shareholders' equity 80,656 27,060 198
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Total assets 118,517 31,581 275
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OPERATING
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Daily production/sales volumes
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Crude oil - bbl/d 5,973 145 4,019
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Natural gas - mcf/d 1,192 1,287 (7)
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Barrels of oil equivalent - boe/d(2) 6,171 360 1,614
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Reserves (mboe)(3)
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Proved 12,898 6,477 99
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Probable 11,436 16,717 (32)
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Proved plus probable(4) 24,334 23,194 5
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Prices
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Oil - $/bbl 47.71 43.73 9
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Natural gas - $/mcf 1.36 0.93 46
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Barrels of oil equivalent - $/boe 46.43 20.93 122
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Common shares outstanding (000s)
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Weighted average - Basic 39,132 20,721 89
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Weighted average - Diluted 49,956 31,803 57
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End of period - Issued 43,613 34,404 27
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End of period - Fully diluted 52,704 51,118 3
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1) Cash flow from operations before working capital changes and cash flow
per share do not have standardized meanings prescribed by Canadian
generally accepted accounting principles ("GAAP") and therefore may
not be comparable to similar measures used by other companies. Cash
flow from operations before working capital changes includes all cash
flow from operating activities and is calculated before changes in
non-cash working capital. The most comparable measure calculated in
accordance with GAAP would be net earnings. Cash flow from operations
before working capital changes is reconciled with net earnings on the
Consolidated Statement of Cash Flows and in the accompanying
Management's Discussion & Analysis. Management uses these non-GAAP
measurements for its own performance measures and to provide its
shareholders and investors with a measurement of the company's
efficiency and its ability to fund a portion of its future growth
expenditures.
(2) All references to barrels of oil equivalent (boe) are calculated on
the basis of 6 mcf: 1/bbl. Boes may be misleading, particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
(3) The reserve estimates for 2006 and 2005 were prepared by an
independent professional petroleum engineering firm in accordance
with National Instrument 51-101 (NI 51-101). Under NI 51-101, proved
reserve assignments are based on a 90 percent certainty that total
quantities received will equal or exceed proved reserve estimates.
Proved plus probable reserves are the most likely case and are based
on a 50 percent certainty that they will equal or exceed estimates.
Proved plus probable plus possible reserves have a 10 percent
probability that they will equal or exceed estimates.
(4) After production of 2.3 million boe in 2006.
(5) No dividends have been declared by the company since its
incorporation.
Summary fourth quarter 2006 results are contained in the enclosed MD&A.
Petrolifera is able to report considerable progress and accomplishments were achieved during 2006. The company is now well established with consequential reserves, production and sales in Argentina. In addition to a very successful drilling program during the year, field facilities and an oil pipeline were constructed at its Puesto Morales operation in the Neuquen Basin, Argentina. This program is continuing and will be expanded during 2007 to include enhanced recovery through installation of a waterflood for pressure maintenance purposes. Also, a high pressure natural gas pipeline will be installed to enable additional volumes of natural gas to be delivered to market during 2007.
Rig availability limited Petrolifera to the drilling of eight wells during 2006. All of these wells encountered hydrocarbons and were completed as either oil wells (some multi-zone) or as natural gas wells. This brought to fourteen the number of successive discoveries drilled by Petrolifera at Puesto Morales. A fifteenth successful well was drilled in March 2007.
As a consequence, production and sales grew rapidly and successively throughout the year. Fourth quarter 2006 sales were 47 percent higher than levels achieved in the prior quarter and at 10,900 boe/d were over five times first quarter levels of only 2,062 boe/d. Peak sales of 13,400 bbl/d for crude oil and 13,700 boe/d on an equivalent basis were achieved during December 2006. Subsequently, the company has reduced production levels primarily for natural gas conservation purposes until facilities are available to handle additional natural gas sales volumes. Most of the increase was as a result of new oil wells being placed onstream. Included in the new oil wells were two wells in particular, namely 1012 and 1013. These offset the original new 2005 discovery at 1002 encountered excellent reservoir while drilling and are to be prolific flowing oil wells, with almost no measurable water, since being placed onstream in the third quarter. Overall water production remained extremely low throughout the year.
While its facilities were being sized and then constructed, Petrolifera was fortunate to be able to access third party treatment plants and accordingly trucked its produced oil to these sites. While adding minor additional operating costs in the $1.00 -$1.50 per barrel range, operating costs remained low at only $4.49 per boe for the year. Furthermore, these arrangements permitted the company to achieve higher sales volumes than would otherwise have been achievable. As increased volumes of production are treated on site and then delivered to markets through our own 25 kilometer, six inch pipeline which connects to the regional carrier, reductions in operating costs are contemplated. Petrolifera expects to continue being a low cost operator.
Revenue for the year was healthy at $106 million. This was achieved despite the impact of Argentina's export tax on the pricing of crude oil in the domestic market, where Petrolifera's crude oil production is sold. During 2006, the average price received of $47.71 per barrel of crude oil was only nine percent above the 2005 price of $43.73 per barrel. Natural gas prices improved considerably to $1.36 per mcf, a 46 percent improvement. On an equivalent basis, the selling price in 2006 was $46.43 per boe, more than double that recorded in 2005. This improvement reflects the higher percentage of crude oil in the company's production mix as well as the continuing improvement in natural gas prices, even with price controls.
As a result of improved pricing and effective control of operating costs, Petrolifera's corporate field netback improved 165 percent to $35.81 per boe, compared to only $13.41 in 2005. At 77 percent of selling price, field netbacks are attractive, even with the impact of price controls. This improvement was achieved despite a significant increase in royalties payable due to higher prices and due to a 21 percent reduction in unit operating costs during the year. Field netbacks are calculated by dividing related revenue and costs by total production on an equivalent basis, resulting in an overall field netback. Netbacks do not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. For details regarding the calculation of field netback, product netbacks and a reconciliation of field netback to net income, see "Management's Discussion and Analysis - Operating Expenses and Netbacks.
General and administrative expenses were $3.7 million in 2007 ($1.66 per boe of sales) reflecting an expansion of operations during the year.
Cash flow from operations before working capital changes amounted to $52 million ($1.34 per share) in 2006, compared to only $434 thousand ($0.02 per share) in 2005. This was achieved after provision for $24 million of current taxes during the year. Petrolifera was self-sufficient during the year as capital expenditures totaled $36 million, mostly in Argentina. In addition to drilling and facilities construction in Argentina, Petrolifera also shot a 263 square kilometer seismic program over most of the previously unshot 95,000 acres which comprise the Puesto Morales/Rinconada Concession. Argentinean capital spending totaled $34 million. The balance was spent in Peru and in investigating new opportunities in Colombia. A variety of field programs and considerable data reprocessing and interpretation was conducted in Peru during 2006; a much more active program is envisaged for our two large licenses in 2007.
Earnings were a robust $40 million ($1.02 per share) compared to a modest loss of only $400 thousand last year. This represented an approximate 50 percent return on year end 2006 shareholders' equity and a 75 percent return on average recorded equity during 2006. Return on equity is a non-GAAP measurement and with respect to return on year end equity has been calculated herein by dividing net earnings by year end shareholders' equity as shown on the company's balance sheet and then converting it to a percentage. The calculation of return on average equity is done in the same manner except shareholders' equity is the average of year end 2005 and year end 2006 amounts. Return on equity is used as a measurement of operating and financial efficiency in capital markets.
During the year, nine million common shares were issued upon the exercise of outstanding warrants and options issued pursuant to the company's Stock Option Plan. Proceeds were $8.4 million and when combined with the surplus of funds from operations in excess of capital expenditures, resulted in year end working capital for Petrolifera of $43 million, including $51 million of cash. The company has no debt.
As previously reported, Petrolifera's proved reserves ("1P") of crude oil and natural gas increased 99 percent during 2006 to reach 13 million boe at December 31, 2006. Proved and probable reserves ("2P") improved modestly to 24.3 million boe after production of approximately 2.3 million boe during the year. Reserve volumes were estimated by GLJ Petroleum Consultants Ltd. ("GLJ"), independent engineering consultants of Calgary, Alberta.
Since it embarked on its modern exploration program in late 2005, Petrolifera has added 14.7 million boes of proved ("1P") reserves and 25.7 million boe of new proved and probable ("2P") reserves from corporate capital budgets for those two years as reported in the company's financial statements of $43 million. After provision for future capital requirements and abandonment liabilities as forecast by GLJ in their year end 2006 reserve report ("GLJ Report") totaling $47 million and treating Petrolifera's Puesto Morales program as a project for 2005 and 2006, Petrolifera's finding, development and onstream ("FD&A") costs are calculated to be $6.11 per boe for 1P reserve additions and $3.50 per boe for 2P reserve additions.
Alternatively, using NI 51-101 parameters and guidelines for calculation of the company's finding and development costs, for 2005 the company's finding and development costs were $3.69 per boe for 1P reserve additions and $1.74 for 2P reserve additions. For 2006, the company's finding and development costs were calculated to be $7.23 per boe for 1P reserve additions and $14.76 for 2P reserve additions. The average two-year finding and development costs based on NI 51-101 parameters is accordingly calculated to be $5.46 per boe for 1P reserve additions and $8.25 for 2P reserve additions.
The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future developments costs generally will not reflect total finding and development costs related to reserves additions for that year.
The company's recycle ratio is calculated by dividing corporate netbacks per boe by finding and development costs per boe. While not a GAAP measurement, it provides an indication of a company's reinvestment capability and its ability to replace production. The higher the recycle ratio, the more likely a company is judged to be able to replace production through exploration and development and to grow its reserves. Petrolifera's recycle ratio using 1P finding and development costs for 2006 is calculated to be five (5) times. Using the two year average finding and development cost calculated in accordance with NI 51-101 yields a recycle ratio based on 2006 netbacks of 6.6 times for 1P reserves and 4.3 times for 2P reserves. Using the project approach results in a recycle ratio for 2P reserves of ten (10) times.
Outlook
Since year end, Petrolifera has reactivated its drilling program in Argentina. The company expects to operate with three rigs under long-term renewable contracts during 2007, with two additional rigs anticipated to be available for use by Petrolifera before mid-year 2007. In addition to drilling numerous development, stepout and exploratory wells for additional crude oil and associated natural gas reserves and productivity on the Puesto Morales Block, the company also anticipates it will develop additional non-associated Loma Montosa natural gas reserves for tie-in during the year. Also, drilling will be initiated on several new prospects developed from our 2006 3D seismic program over the Rinconada Block, which is prospective for shallow Sierras Blancas oil. Petrolifera anticipates it could drill up to 50 wells in 2007, contingent upon timely availability of the two new rigs to be provided to it during the next several months by the company's drilling contractor and the results of its capital program.
Recently, Petrolifera was able to successfully complete a satisfactory resolution of the contractual matters related to the 1.1 million acre Salinas Grande I concession situated northeast of its main holdings at Puesto Morales. The company will secure an initial 50 percent working interest in the concession on ground floor terms and will proceed with an exploration program on the block during 2007. Petrolifera also has been advised it will be awarded the Gobernador Ayala II block in La Pampa Province, Argentina. This block is contiguous with the Salinas Grande I acreage and is immediately east of and on trend with new oil discoveries made by another Canadian company active in the region. Petrolfiera will be the operator of and own 100 percent of this block.
Petrolifera is also bidding on and attempting to otherwise expand its acreage and opportunity inventory in its key areas of interest in Rio Negro and La Pampa provinces in Argentina.
In Peru, Petrolifera will accelerate its activities in 2007 with plans to conduct new 2D seismic programs on both Blocks 106 and 107 in the Maranon and Ucayali Basins. These will follow completion of a densely-gridded high resolution areomag/gravity program over Block 107. Detailed Environmental Impact Assessments ("EIA") will be completed and submitted for approval for both blocks and it is anticipated that commencing in the near term 600-800 kilometers of new 2D seismic will be shot on each license. Plans are being formulated for drilling in 2008.
In Colombia, Petrolfiera has been advised by Agencia Nacional de Hidrocarburos ("ANH") that is will be awarded the Sierra Nevada License and a Technical Evaluation Agreement ("AREA "C" TEA") over approximately 1.1 million acres in the Lower Magdalena Basin. These lands offset two large natural gas fields and are prospective for both crude oil and natural gas. Separate work programs, including a 13,000 foot well commitment within 18 months for the license, are envisaged for the two concession agreements.
Also, Petrolifera has been advised by ANH that it will be awarded the Turpial TEA over approximately 113,000 acres of prospective lands in the Middle Magdalena Basin. These lands were formerly fee simple acreage owned by a major oil company and are prospective for crude oil and offset the established Velasquez and Cocorna oil fields. Petrolfiera may apply for a license over this block in the future, and retains a first right to match any other license proposal for the region during the 18 month primary term of the TEA.
This successful entry into Colombia gives Petrolfiera a desirable diversity within its portfolio of properties and prospects, ranging from lower risk opportunities in Argentina to higher risk but higher reward projects in Peru, with Colombia judged to be in the middle of this spectrum. Petrolifera believes the concession terms in all three countries are comparable and attractive and intends to focus on these regions for the foreseeable future.
In 2007 Petrolifera's capital budget, including anticipated expenditures on new awards, has now been set at approximately $153 million. The company's guidance suggests this can be financed from cash flow and working capital without any equity financing. To ensure its financial strength and flexibility, the company is in the process of finalizing a US$100 million reserve-backed revolving credit facility with a large international bank. Initial draws of up to US $60 million are being discussed.
Petrolifera's full year guidance as advanced to shareholders in October 2006 will be reevaluated after the conclusion of an assessment of first quarter 2007 results. Changes will be made and communicated to public markets, if required, once the exact timing of the arrival of the two additional rigs is crystallized. Currently, we anticipate full year cash flow will range between $140-$150 million (approximately $3.00 per share), with full year oil production targeted to average approximately 16,000 bbl/d and full-year equivalent production (boe) targeted to average 18,000 boe/d. Year end 2007 working capital is anticipated to be approximately $50 million due to the impact of anticipated additional cash in the treasury from the exercise of outstanding $3.00 share purchase warrants (PDP.WT-TSX) which expire on May 8, 2007. Petrolifera expects to again be profitable in 2007 and in the absence of acquisitions or the identification of other opportunities, anticipates remaining debt-free with a US$60 million credit facility in place.
Petrolifera's annual meeting of shareholders will be held at the Calgary Petroleum Club in Calgary, Alberta at 3:00 PM local time on May 8, 2007.
Petrolifera Petroleum Limited is a public Canadian crude oil and natural gas exploration and production company engaged in drilling production and sales activity in Argentina, Colombia and Peru in South America. The company's current reserve, production and sales derive from its Puesto Morales/Rinconada Concession in the Neuquen Basin, Argentina. Two large licenses comprising 5.2 million acres onshore Peru are also held. The company recently entered Colombia and holds one license and two technical evaluation agreements in the Lower and Middle Magdalena Basin. Active drilling, facility construction and exploration programs are planned in all three jurisdictions during 2007 with an internally-financed capital budget exceeding $150 million.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements, including but not limited to estimated reserves and future net revenues, future exploration and development plans, anticipated capital expenditures and sources of funding in respect thereof, forecast cash flow, production and year end working capital and the expected awarding of certain technical evaluation assessments in Colombia and certain exploration blocks in Argentina. These statements are based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.
The reserves and future net revenue in this press release represent estimates only. The reserves and future net revenue from the company's properties have been independently evaluated by GLJ with effective date of December 31, 2006. This evaluation includes a number of assumptions relating to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital expenditures, marketability of production, future prices of crude oil and natural gas, operating costs, abandonment and salvage values, royalties and other government levies that may be imposed during the producing life of the reserves. These assumptions were based on price forecasts in use at December 31, 2006 and many of these assumptions are subject to change and are beyond the control of the company. Actual production, sales and cash flows derived therefrom will vary from the evaluation and such variations could be material. The present value of estimated future net cash flows referred to herein should not be construed as the current market value of estimated crude oil and natural gas reserves attributable to the company's properties.
Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the particular wells to be drilled and has been risked. Forecast cash flow has been estimated based on anticipated revenue (which is dependent upon forecast production, commodity prices and exchange rates), anticipated royalty rates (which is based upon the continuation of existing legislation and contractual obligations) and forecast operating costs and general and administrative expenses (which are based on assumptions including, without limitation, the costs of services and equipment and foreign exchange rates).
Due to the risks, uncertainties and assumptions inherent in forward-looking statements, prospective investors in the company's securities should not place undue reliance on these forward-looking statements. Forward looking statements contained in this press release are made as of the date hereof and are subject to change. The company assumes no obligation to revise or update forward looking statements to reflect new circumstances, except as required by law.
A barrel of oil equivalent (boe), derived by converting gas to oil in the ratio of six thousand cubic feet of gas to oil, may be misleading, particularly if used in isolation. A boe conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars. This MD&A provides management's view of the financial condition of the company and the results of its operations for the reporting periods. Information in this report contains forward-looking information based on current expectations, estimates and projections of future production, capital expenditures and available sources of financing. It should be noted forward-looking information involves a number of risks and uncertainties and actual results may vary materially from those anticipated by the company. These risks and uncertainties include, but are not limited to, political and economic conditions in the countries in which the company operates, changes in market conditions, law or governing policy, operating conditions and costs, operating performance, demand for crude oil and natural gas, foreign currency exchange rate fluctuations, currency controls, commercial negotiations and technical and economic factors. Throughout the MD&A, per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boes and may be misleading, particularly if used in isolation.
SELECTED FINANCIAL INFORMATION ------------------------------------------------------------------------- As at and for the Year Ended December 31 2006 2005 2004 ------------------------------------------------------------------------- ($000, except per share amounts) ------------------------------------------------------------------------- Total revenue $105,583 $2,864 $123 ------------------------------------------------------------------------- Net earnings (loss) 39,894 (415) (26) ------------------------------------------------------------------------- Per share, basic 1.02 (0.02) - ------------------------------------------------------------------------- Per share, diluted 0.80 (0.02) - ------------------------------------------------------------------------- Total assets 118,517 31,581 3,884 ------------------------------------------------------------------------- Long-term obligations for asset retirement 2,347 467 3,172 -------------------------------------------------------------------------
Since incorporation, Petrolifera's management has concentrated on building a financially strong company.
To this end, the company completed three equity financings, two by way of private placement and one by way of initial public offering pursuant to a prospectus dated October 17, 2005. The company's common shares and the warrants offered in conjunction with the initial public offering were listed for trading on the Toronto Stock Exchange on November 8, 2005 under the symbols PDP and PDP.WT, respectively.
During 2006 Petrolifera completed a $36.4 million capital program which included drilling eight oil wells and the construction of an oil pipeline and related facilities.
The company's recent drilling program in Argentina was very successful and including 2005 and 2006 drilling, resulted in 14 oil wells. Petrolifera now owns 29 oil wells, of which 23 are currently producing. As arrangements to treat produced crude oil were completed with third parties, production growth was considerable in 2006. In late 2006 a 25 kilometer six-inch pipeline to connect to market was placed in operation, thereby reducing the amount of the light gravity crude oil to be trucked and treated by third party operators prior to sale.
Petrolifera's financial condition was strengthened considerably during 2006 and its asset base and financial results were strong.
FINANCIAL AND OPERATING REVIEW PRODUCTION, PRICING AND REVENUE ------------------------------------------------------------------------- Year Ended December 31 2006 2005 ------------------------------------------------------------------------- Daily sales volumes ------------------------------------------------------------------------- Oil - bbl/d $5,973 $145 ------------------------------------------------------------------------- Natural gas - mcf/d 1,192 1,287 ------------------------------------------------------------------------- Total - boe/d 6,171 360 ------------------------------------------------------------------------- Product pricing ($) ------------------------------------------------------------------------- Oil - per bbl 47.71 43.73 ------------------------------------------------------------------------- Natural gas - per mcf 1.36 0.93 ------------------------------------------------------------------------- Revenue per boe 46.43 20.93 ------------------------------------------------------------------------- Petroleum and natural gas sales ($000) 104,595 2,750 ------------------------------------------------------------------------- Interest and other income ($000) 988 114 ------------------------------------------------------------------------- Total ($000) $105,583 $2,864 -------------------------------------------------------------------------
Petroleum and natural gas revenues for 2006 were $104.6 million (2005 - $2.8 million) on sales of 5,973 bbl/d (2005 - 145 bbl/day) of crude oil and 1,192 mcf/d (2005 - 1,287 mcf/d) of natural gas. The substantial increases in revenue resulted from higher oil production volumes arising from the successful 2006 and 2005 drilling program, which resulted in ten new producing wells coming onstream in Argentina during the year. Also, higher prices for oil and natural gas were realized. All production was from the company's Argentinean properties.
Crude oil production increased substantially during 2006. New discoveries resulted in production rising to 5,973 bbl/d. This has significantly altered the company's product mix. In 2006 sales of crude oil represented 97 percent of the company's sales volumes; in 2005 natural gas sales represented 60 percent of the sales volumes. Crude oil prices increased nine percent to average $47.71 per barrel throughout the year. Natural gas prices increased 46 percent to average $1.36 per mcf in 2006, reflecting some relaxation of regulated Argentinean natural gas prices, which are still substantially below prices prevailing in North American markets. Argentinean crude oil selling prices reflect world prices for the respective quality of oil, adjusted for the impact of Argentinean export taxes on domestic sales prices. All of Petrolifera's production is sold in domestic markets. Natural gas prices have been improving and are expected to continue improving in the future due to market conditions and new policy initiatives aimed at market deregulation.
Interest and other income of $988,000 in 2006 and $114,000 for 2005 related to interest earned on short-term cash deposits.
ROYALTIES
Royalties represent charges against production or revenue by governments and landowners. Included in royalties are revenue taxes levied by provincial jurisdictions. Royalties in 2006 were $14.8 million ($6.57 per boe), or 14.1 percent of oil and gas revenue.
In the 2005 reporting period, royalties were $353,000 ($2.68 per boe) or 13 percent of oil and gas revenues.
OPERATING EXPENSES AND NETBACKS
Company Netbacks(1)
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Year ended December 31 2006 2005
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Total Per boe Total Per boe
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($000, except per unit amounts)
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Average daily sales (boe/d) 6,171 360
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Petroleum and natural gas sales $104,595 $46.43 $2,750 $20.93
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Interest and other income 988 0.44 114 0.86
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Royalties (14,796) (6.57) (353) (2.68)
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Net revenue 90,787 40.30 2,511 19.11
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Operating costs (10,111) (4.49) (749) (5.70)
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Corporate netback $80,676 $35.81 $1,762 $13.41
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(1) Calculated by dividing related revenue and costs by total boe sold,
resulting in an overall company netback. Netbacks do not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to similar measures used by other companies. Nevertheless,
Petrolifera's management uses netbacks as a performance measurement
of operating efficiency and the prevailing royalty regime. A high
ratio of netback to selling price is a positive indicator.
Petrolifera's netbacks improved 167 percent over those recorded in the 2005 reporting period. This primarily reflects increased sales of crude oil, a 46 percent increase in the boe selling price, higher interest income from cash balances and lower operating costs, offset by higher royalties due to the improved product prices for both crude oil and natural gas. Petrolifera's calculated netback at $35.81 per boe is a healthy 77 percent of selling price.
Operating Netbacks by Product for the years ended December 31, 2005 and
2006
Per unit netbacks are calculated by dividing netbacks by sales volumes.
Operating netbacks by product type are indicated below.
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Crude oil Natural gas
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2006 Total Per bbl Total Per mcf
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($000, except per unit figures)
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Average daily production 5,973 bbl/d 1,192 mcf/d
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Petroleum and natural gas sales $104,005 $47.71 $590 $1.36
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Royalties (14,737) (6.67) (59) (0.14)
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Operating costs (10,052) (4.61) (59) (0.14)
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Field operating netback $79,216 $36.43 $472 $1.08
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Crude oil Natural gas
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2005 Total Per bbl Total Per mcf
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($000, except per unit figures)
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Average daily production 145 bbl/d 1,287 mcf/d
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Petroleum and natural gas sales $2,315 $43.73 $435 $0.93
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Royalties (297) (5.61) (56) (0.12)
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Operating costs (630) (11.91) (119) (0.25)
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Field operating netback $1,388 $26.21 $260 $0.56
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On a per unit basis, royalties were higher in 2006 due to higher product selling prices.
Operating costs in 2006 declined on a per unit basis from 2005 reflecting the impact of higher sales volumes, and strong new well productivity, offset by trucking and third party treatment charges. Petrolifera anticipates these offsets will be reduced once our new facilities on-site are fully functional. Crude oil production in 2005 was from mature wells for most of the year and operating costs reflected this until the fourth quarter when new flowing oil wells were placed onstream.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $3.7 million in 2006, reflecting costs incurred in Canada, Argentina and Peru. These costs primarily consist of management and advisory fees, insurance, the cost of independent reserve reports, travel and other administrative expenses. The increase from 2005 is attributable to increased staffing and much expanded activity levels. G&A of $716,000 was capitalized in 2006 (2005 - $164,000) and non-cash stock-based compensation costs of $3.6 million were recorded in the year (2005 - $124,000), reflecting a substantial increase in the company's share price and its consequent effect on the determination of the fair value of all stock options granted and vested in the year.
FOREIGN EXCHANGE
The impact of fluctuations in the Argentinean peso and the US dollar relative to the Canadian dollar arising from settling foreign-denominated transactions and from translating foreign denominated financial statements and operating results of its integrated foreign operations resulted in a foreign exchange loss of $439,000 in 2006 (2005 - $131,000 gain). The company's main exposure to foreign currency risk relates to the pricing of crude oil sales, costs and capital expenditures which are denominated in US dollars and Argentinean pesos.
DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")
DD&A is calculated using the unit-of-production method based on total estimated proved reserves. DD&A in 2006 was $9.6 million (2005 - $826,000) or $4.27 per boe (2005 - $6.29 per boe). This includes a charge of $27,000 (2005 - $25,000) to accrete the company's estimated asset retirement obligation. These charges will continue to be necessary in future to accrete the currently booked discounted liability of $2.3 million to the estimated total undiscounted liability of $6.3 million over the estimated remaining economic life of the company's oil and gas properties. Capital costs of $6.4 million related to unevaluated properties in Argentina and for major development projects, and other assets in the pre-production stage principally related to Peruvian assets, have been excluded from depletable costs. No proved reserves have yet been assigned to this project. Additionally, future development costs of $41.2 million for proved undeveloped reserves were included in the depletion calculation.
CEILING TEST
Oil and gas companies are required to compare the recoverable value of their oil and gas assets to their recorded carrying value at the end of each reporting period. Excess carrying values over fair value are to be written off against earnings. No write-down was required in 2006 or in 2005.
TAXES
The current income tax provision of $23.8 million for 2006 (2005 - $330,000), primarily relates to income taxes in Argentina. Additionally, a future tax recovery of $1.2 million for the year was recorded to recognize the benefit of changes in tax pool balances. Taxes other than income taxes of $655,000 represent taxes charged at a rate of 0.6% on all banking transactions in Argentina.
NET EARNINGS AND SHARES OUTSTANDING
-------------------------------------------------------------------------
Year ended Year ended
December 31, 2006 December 31, 2005
-------------------------------------------------------------------------
Total Per boe Total Per boe
-------------------------------------------------------------------------
($000, except per unit amounts)
-------------------------------------------------------------------------
Netback $80,676 $35.81 $1,762 $13.41
-------------------------------------------------------------------------
General & administrative (3,744) (1.66) (921) (7.01)
-------------------------------------------------------------------------
Stock-based compensation (3,628) (1.61) (124) (0.95)
-------------------------------------------------------------------------
Finance charges (88) (0.04) (77) (0.59)
-------------------------------------------------------------------------
Foreign exchange (loss) gain (439) (0.19) 131 1.00
-------------------------------------------------------------------------
Taxes other than income taxes (655) (0.29) - -
-------------------------------------------------------------------------
Depletion, depreciation
and accretion (9,614) (4.27) (826) (6.29)
-------------------------------------------------------------------------
Income tax recovery (provision) (22,614) (10.04) (360) (2.73)
-------------------------------------------------------------------------
Net earnings (loss)
for the period $39,894 $17.71 $(415) $(3.16)
-------------------------------------------------------------------------
In 2006 the company reported earnings of $39.9 million (2005 - loss of $415,000), which equates to $1.02 (2005 - $0.02 loss) per basic and $0.80 (2005 - $0.02 loss) per weighted average diluted share outstanding.
For 2006, the weighted average number of common shares outstanding was 39,132,413 (2005 - 20,721,430). In 2006, 10,823,848 additional shares were included in the diluted earnings per share calculations related to the potentially dilutive effect of options and warrants. In 2005, as a result of the loss incurred in the year no incremental shares were included for the diluted per share calculations because the effect would be anti-dilutive.
As at March 19, 2007, the company had the following securities issued and outstanding:
- 43,898,103 common shares; - 6,191,072 warrants; and - 2,614,667 stock options
Details of the exercise rights and terms of the warrants and options are noted in the Consolidated Financial Statements, included in this Annual Report.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations before working capital changes ("cash flow"), cash flow per share and cash flow per boe do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings. Cash flow is reconciled with net earnings on the Consolidated Statement of Cash Flows and below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding; cash flow per boe is calculated by dividing cash flow by the quantum of crude oil and natural gas (expressed in boe) sold in the period. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures.
Reconciliation of net earnings (loss) to cash flow from operations before working capital changes:
------------------------------------------------------------------------- Year ended December 31 2006 2005 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Net earnings (loss) for the period $39,894 $(415) ------------------------------------------------------------------------- Add (deduct) ------------------------------------------------------------------------- Stock-based compensation 3,628 124 ------------------------------------------------------------------------- Depletion, depreciation, and accretion 9,614 826 ------------------------------------------------------------------------- Future income tax provision (recovery) (1,209) 30 ------------------------------------------------------------------------- Foreign exchange loss (gain) 439 (131) ------------------------------------------------------------------------- Cash flow from operations before working capital changes $52,366 $434 -------------------------------------------------------------------------
Cash flow from operations in 2006 was $52.4 million (2005 - $434,000) ($1.34 per basic share and $1.05 per diluted share) (2005 - $0.02 per basic share and $0.01 per weighted average diluted share).
Capital expenditures in 2006 totaled $36.4 million (2005 - $6.7 million), primarily for seismic expenditures and costs to drill oil wells, completing an oil pipeline and constructing a battery and other facilities in Argentina, and for new projects in Peru.
Petrolifera was in a strong financial position at year end 2006 with bouyant cash flow, $51 million of cash, $43 million of working capital and no debt. The company anticipates it can internally finance a much-expanded capital program of $153 million in 2007 from cash flow and working capital without incurring debt during the year. Additional proceeds from the exercise of outstanding warrants, which are significantly in the money, would bring additional cash of approximately $18 million to Petrolifera's treasury.
The company's 2007 capital program includes expenditures to satisfy work commitments related to the Peruvian license blocks. The company is well ahead of schedule to meet these requirements and in 2007 expects to complete the geophysical work, prior to drilling wells on each block. The company has sufficient cash balances and cash flow is being generated in Argentina to fund these capital expenditures and funds are being moved among Argentina, Barbados and Peru as required.
Sufficient cash is also on hand to satisfy the Argentina tax liabilities, due to be paid in the second quarter of 2007.
The company is also well-advanced in discussions and has executed a mandate letter with a recognized international bank for a reserve-based US $100 million revolving credit facility. This would further enhance Petrolifera's liquidity and financial capacity.
FINANCING ACTIVITIES
In March 2005, the company completed a $7 million private placement financing consisting of seven million common shares and 3.5 million common share purchase warrants. Proceeds of the financing were used as follows:
-------------------------------------------------------------------------
As
As stated at the actually
time of the financing applied
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Gross proceeds $7,000 $7,000
-------------------------------------------------------------------------
Agent commissions and issue costs (779) (747)
-------------------------------------------------------------------------
Applied to reduce promissory note
payable to Connacher (2,000) (2,000)
-------------------------------------------------------------------------
Used in the capital program $4,221 $4,253
-------------------------------------------------------------------------
In November 2005 the company completed a $21.3 million public offering, by
way of prospectus, consisting of 12,193,894 units each comprised of one common
share and one-half share purchase warrant, with one warrant and $3.00
entitling the holder to acquire one additional common share from treasury
until May 8, 2007. Proceeds of the financing were applied as follows:
-------------------------------------------------------------------------
As stated in the As
Prospectus at time actually
of Financing applied
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Gross proceeds (up to) $30,000 $21,339
-------------------------------------------------------------------------
Agent commissions and issue costs (up to) (2,360) (1,797)
-------------------------------------------------------------------------
PowerOne success fee (up to) (550) (327)
-------------------------------------------------------------------------
Repayment of promissory note and accrued
interest (818) (818)
-------------------------------------------------------------------------
Used in capital program or working capital $26,272 $18,397
-------------------------------------------------------------------------
The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable and income taxes payable; it maintains no off-balance sheet financial instruments.
RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS
Under the terms of a Management Services Agreement with Connacher Oil and Gas Limited ("Connacher"), which expires in May 2007, Connacher provides all management, operational, accounting and general and administrative services necessary or appropriate to manage and administer the company. The fee for this service is $15,000 per month. From time to time Connacher also pays bills on behalf of Petrolifera, for which it is reimbursed.
In consideration for the assistance provided to Petrolifera in securing two crude oil and natural gas exploration licenses in Peru and for the provision of financial guarantees respecting Petrolifera's annual work commitments in the licensed blocks in 2005, Connacher was granted an option to acquire 200,000 common shares at $0.50 per share and was granted a 10 percent carried working interest ("CWI") through the drilling of the first well on each block. Petrolifera has the right of first purchase of this interest should Connacher elect to sell it at some future date. The CWI is convertible at the holder's election into a two percent gross overriding royalty on each license after the drilling of the first well on each license. These interests became effective upon the issuance of the licenses. The guarantees are limited to amounts specified over the terms of the licenses. Over the next 12 months, the guarantee is limited to US $200,000. Connacher was subsequently indemnified by Petrolifera for this guarantee.
In consideration for his expertise and role in assisting the company in securing the two licenses in Peru, an officer of the company received options to purchase 300,000 Common Shares at a price of $0.50 per share, exercisable until February 1, 2010, a single payment of $100,000 and pursuant to an overriding royalty agreement with the company, was granted a three percent gross overriding royalty ("GORR") on each of the two Peruvian blocks. The GORR will vest over three years; one-third vested immediately upon the issuance of the licenses, one-third will vest one year thereafter and the remaining one-third will vest two years after the issuance of the licenses. The company has the right of first purchase of the GORR at fair value should the officer elect to sell it at some future date.
In consideration for his expertise and role in assisting the company in securing the two licenses in Peru, another officer of the company received vested options to purchase 300,000 Common Shares at a price of $0.50 per share, exercisable until February 1, 2010 and a success fee of $20,000 upon the closing of the March 2005 private placement financing and a success fee of $40,000 in November 2005 upon the company completing its initial public offering ("IPO") financing.
To assist in marketing the March 2005 private placement financing, the company retained PowerOne Capital Markets Limited ("PowerOne") as one of the selling agents. Prior to the March 2005 private placement financing, PowerOne was considered a connected issuer of Petrolifera because, together with its officers, directors and shareholders and associates of such persons, it owned 18 percent of the outstanding shares of the company. PowerOne received a commission for its services.
In March 2005, a Consulting Agreement with PowerOne was extended to November 2006 with a fee of $6,000 per month. The agreement has expired.
An additional success fee ("PowerOne Success Fee") in the amount of $327,000 was paid to PowerOne upon the company completing its IPO in November 2005.
In March 2005 the company granted Connacher the right, without obligation, to participate in future financings to maintain its 40 percent equity interest in Petrolifera.
The company has entered into an executive employment agreement with Gary D. Wine with an effective date of March 11, 2005. Under the terms of this agreement, Mr. Wine is entitled to a base salary as determined by the Human Resources Committee of the Board of Directors, an annual bonus which is based upon the achievement of certain targets relating to corporate performance and stock options as granted by the Board of Directors from time to time. The term of the agreement is indefinite. The agreement may be terminated by the company without notice or cause upon the payment of 18 months annual base salary plus one and a half times the average amount of the bonus payments paid to Mr. Wine for the two calendar years prior to the date of termination, plus the sum of $15,000, less applicable withholdings and deductions, representing compensation for the loss of benefits and perquisites (the "Termination Payment"). In the event of a "change of control", as defined in the agreement, Mr. Wine will also be entitled to the Termination Payment. The executive employment agreement also contains standard confidentiality and non-disclosure provisions.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING
ESTIMATES
The significant accounting policies used by the company are described below. Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these judgments and estimates may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included in the MD&A to aid the reader in assessing the significant accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews it estimates regularly. The emergence of new information and changed circumstances may result in changes to estimates which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.
The following assessment of significant accounting polices is not meant to be exhaustive.
Oil and Gas Reserves
Under Canadian Securities Regulators' "National Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10 percent probability that the quantities actually recovered will exceed the sum of proved plus probable plus possible reserves.
The company's oil and gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities".
Full Cost Accounting for Oil and Gas Activities
The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit-of-production method based on estimated proved oil and gas reserves.
Major Development Projects and Unproved Properties
Certain costs related to major development projects and unproved properties are excluded from net capitalized costs subject to depletion until proved reserves have been determined, the project becomes commercial, or their value is impaired. These costs are reviewed quarterly and any impairment is transferred to the costs being depleted or, if the properties are located in a cost centre where there is no reserve base, the impairment is charged directly to income.
Full Cost Accounting Ceiling Test
The company is required to review the carrying value of all property, plant and equipment, including the carrying value of oil and gas assets, for potential impairment. Impairment is indicated if the carrying value of the long-lived asset or oil and gas cost centre is not recoverable by the future undiscounted cash flows. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings.
The ceiling test is based on estimates of reserves, production rate, petroleum and natural gas prices, future costs and other relevant assumptions. By their nature these estimates are subject to measurement uncertainty and the impact on the consolidated financial statements could be material.
Asset Retirement Obligations
The company is required to provide for future removal and site restoration costs by estimating these costs in accordance with existing laws, contracts or other policies. These estimated costs are charged to earnings and the appropriate liability account over the expected service life of the asset. When the future removal and site restoration costs cannot be reasonably determined, a contingent liability may exist. Contingent liabilities are charged to earnings only when management is able to determine the amount and the likelihood of the future obligation. The company estimates future retirement costs based on current estimates adjusted for inflation and credit risk. These estimates are subject to measurement uncertainty.
Income Taxes
The company follows the liability method of accounting for income taxes. Under this method tax assets are recognized when it is more than likely realization will occur. Tax liabilities are recognized for temporary differences between recorded book values and underlying tax values. Rates used to determine income tax asset and liability amounts are enacted rates expected to be used in future periods when the timing differences change. The period in which a timing difference reverses are impacted by future income and capital expenditures. Rates are also affected by legislation changes.
Stock-Based Compensation
The company uses the fair value method to account for stock options. The determination of the amounts for stock-based compensation is based on assumptions of stock volatility, interest rates and the term of the option. These assumptions by their nature are subject to measurement uncertainty.
Legal, Environment Remediation and Other Contingent Matters
In respect of these matters, the company is required to determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine if such a loss can be estimated. When any such loss is determined, it is charged to earnings. Management continually monitors known and potential contingent matters and makes appropriate provisions by charges to earnings when warranted by circumstance.
NEW SIGNIFICANT ACCOUNTING POLICIES
Foreign currency translation
Business conducted in Peru is considered to be an "integrated foreign operation" for accounting purposes and, therefore, its financial statements are translated into Canadian dollars using the temporal method. Under the temporal method, the company translates foreign denominated monetary assets and liabilities at the exchange rate prevailing at year end; non-monetary assets, liabilities and related depletion and depreciation are translated at historic rates; revenues and expenses are translated at the average rate of exchange for the period; and any resulting foreign exchange gains or losses are included in operations.
Due to the significant increase in cash flow generated in Argentina in the second quarter of 2006, the company determined its Argentinean activities comprise a self-sustaining operation. This necessitated a change in the way the Argentinean operations were translated into Canadian dollars for reporting purposes.
Previously the Argentinean operations were considered to be integrated with the Canadian operations and were translated using the temporal method described above. As a self-sustaining foreign operation, the Argentinean financial statements are translated into Canadian dollars using the current rate method, whereby assets and liabilities are translated now at the rate of exchange in effect at the balance sheet date; revenues and expenses are translated at the average monthly rates of exchange during the period; and gains or losses on translation are included in a cumulative translation adjustment account in shareholders' equity.
This change in accounting practice was adopted prospectively on June 1, 2006 and resulted in a decrease to property, plant and equipment of $597,000 and a decrease to asset retirement obligation of $46,000, which resulted in a net operating foreign currency translation adjustment of $551,000. In the second quarter of 2006, the translation loss was $548,000 which was then recorded to the cumulative translation adjustment account ("CTA"). Since adoption of this change, the impact on CTA for the year ended December 31, 2006 was a gain of $2,218,000.
IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
The company has assessed new and revised accounting pronouncements that have been issued but that are not yet effective and has determined that the following may have a significant impact on the company.
Beginning with the year ending December 31, 2007 the company will be required to adopt, if applicable, the Canadian Institute of Chartered Accountants ("CICA") Section 1530, 3251, 3855 and 3865 on "Comprehensive Income", "Equity", "Financial Instruments - Recognition and Measurement", and "Hedges" respectively, all of which were issued in January 2005. Under the new standards additional financial statement disclosure, namely Consolidated Statement of Other Comprehensive Income, has been introduced that will identify certain gains and losses, including the foreign currency translation adjustments and other amounts arising from changes in fair value, to be temporarily recorded outside the income statement. In addition, all financial instruments, including derivatives, are to be included in the company's Consolidated Balance Sheet and measured, in most cases, at fair values. Requirements for hedge accounting have been further clarified. Although Petrolifera is in the process of evaluating the impact of these standards, the company does not expect these new standards to have a material impact on its Consolidated Financial Statements.
Over the next five years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Stands ("IFRS") over the next five years. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS.
COMMITMENTS, CONTINGENCIES, GUARANTEES, CONTRACTUAL OBLIGATIONS AND OFF
BALANCE SHEET ARRANGEMENTS
In 2005 Petrolifera acquired two significant oil and gas exploration licenses in Peru. The licenses have a total US$41.8 million financial commitment to complete negotiated work programs on the two licenses over seven years. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first license term will end in 2007 and the company has already met its commitment to invest US$1 million. In the second license term, the company is committed to invest a total of US$4.6 million between 2007 and 2009. These expenditures are budgeted to be fully discharged in 2007. The company issued letters of credit in the amount of US$200,000 to secure the capital expenditure requirements associated with the two exploration licenses.
Additionally, the company has various guarantees and indemnifications in place in the ordinary course of business, none of which are expected to have a significant impact on the company's financial statements or operations.
The company's annual commitments under contracts for drilling services, leases for office premises and operating costs, software license agreements and other equipment are as follows:
-------------------------------------------------------------------------
Sub-
2008- 2011- sequent
Contractual Obligations 2007 2010 2012 to 2012 Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Asset retirement
obligations - - - 2,347 2,347
Service contracts 12,505 11,703 - - 24,208
-------------------------------------------------------------------------
Total 12,505 11,703 - 2,347 26,555
-------------------------------------------------------------------------
The company has no off balance sheet financing arrangements
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman and Interim Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. Management assessed the design of the company's internal controls over financial reporting as of December 31, 2006 and based on that assessment, determined that the company's internal controls over financial reporting were adequately designed.
It should be noted that while the company's Executive Chairman and Interim Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
BUSINESS RISKS
Petrolifera is exposed to certain risks and uncertainties inherent in the oil and gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations.
The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and safety concerns.
The success of the company's capital programs as embodied in its productivity and reserve base could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important criterion in determining company growth, success and access to new capital sources.
To date, the company has utilized equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of domestic and international oil and gas exploration, development and production activities. The company is currently negotiating with an international bank for a credit facility that would provide the company with additional financial flexibility to fund its future growth.
From time to time, the company may have to access capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors.
Periodic fluctuations in energy prices may also affect lending policies of the company's banker, for new borrowings. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results.
While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques.
The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable.
OUTLOOK
The company's business plan contemplates continued aggressive growth. To accomplish this, the company expects an active capital program of oil and gas exploration and development drilling in 2007.
Forecast operating cash flow from growing production and available cash should be sufficient to finance Petrolifera's expected 2007 capital spending program, which has been established at $153 million. All capital program expenditures are discretionary, except for a total of $US4.6 million for which the company is obligated between the years 2007 and 2009, pursuant to the terms of the Peruvian exploration licenses. A summary of the company's original 2007 financial plan and budget is contained in an investor presentation dated October 2006 as posted on its website under Investor Info/Presentations at www.petrolifera.ca. The company reserves the right to alter or amend its guidance throughout the year and will communicate such amendments, if material, by way of press release to the public.
All estimates and statements which may have been issued are forward-looking statements. This involves inherent risks and uncertainties where actual results will differ and such differences could be material. There can be no assurance that Petrolifera will achieve the drilling results and levels of production it might assume in developing its internal capital budget and financial plan. In addition, oil and gas prices are subject to fluctuation and there can be no assurance that the prices assumed for the company's internal plan, or any variation thereof, will be attained.
QUARTERLY RESULTS
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Three months ended
-------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
-------------------------------------------------------------------------
Financial results
($000 except per share
amounts) - unaudited
-------------------------------------------------------------------------
Total revenue 385 477 517 1,485
-------------------------------------------------------------------------
Cash flow from operations before
working capital changes(1) 73 77 56 228
-------------------------------------------------------------------------
Basic, per share(1) - 0.01 - 0.01
-------------------------------------------------------------------------
Diluted, per share(1) - 0.01 - 0.01
-------------------------------------------------------------------------
Earnings (loss) for the period (75) (161) 5 (184)
-------------------------------------------------------------------------
Basic, per share - (0.01) - (0.01)
-------------------------------------------------------------------------
Diluted, per share - (0.01) - (0.01)
-------------------------------------------------------------------------
Capital expenditures 1,295 245 650 4,472
-------------------------------------------------------------------------
Cash on hand 3,420 3,237 2,315 19,744
-------------------------------------------------------------------------
Working capital surplus 3,112 2,222 44 17,887
-------------------------------------------------------------------------
Indebtedness 750 750 750 -
-------------------------------------------------------------------------
Shareholders' equity 6,881 6,738 6,766 27,060
-------------------------------------------------------------------------
Total assets 8,688 8,530 9,251 31,581
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Production / sales volumes
-------------------------------------------------------------------------
Crude oil - bbl/d 85 86 84 324
-------------------------------------------------------------------------
Natural gas - mcf/d 1,209 1,381 1,273 1,285
-------------------------------------------------------------------------
Equivalent - boe/d(2) 287 316 296 538
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 39.83 44.84 48.01 43.08
-------------------------------------------------------------------------
Natural gas - $/mcf 0.72 0.86 1.12 0.99
-------------------------------------------------------------------------
Selected highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average selling
price per boe 14.91 15.97 18.46 28.31
-------------------------------------------------------------------------
Interest and other income - 0.61 0.51 1.67
-------------------------------------------------------------------------
Royalties 1.70 2.00 2.22 3.85
-------------------------------------------------------------------------
Operating costs 3.43 5.40 6.20 6.78
-------------------------------------------------------------------------
Netback(3) 9.78 9.18 10.57 17.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share information (000s)
-------------------------------------------------------------------------
Shares outstanding at end
of period 20,000 20,000 20,000 34,404
-------------------------------------------------------------------------
Fully diluted 30,140 30,140 31,080 51,118
-------------------------------------------------------------------------
Weighted average shares
outstanding for the period
-------------------------------------------------------------------------
Basic 14,633 20,000 20,000 20,721
-------------------------------------------------------------------------
Diluted 18,309 23,676 23,676 31,803
-------------------------------------------------------------------------
Volume traded during quarter (000)
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High
-------------------------------------------------------------------------
Low
-------------------------------------------------------------------------
Close (end of period)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006
-------------------------------------------------------------------------
Three months ended
-------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31
-------------------------------------------------------------------------
Financial results
($000 except per share
amounts) - unaudited
-------------------------------------------------------------------------
Total revenue 8,452 18,821 33,157 45,153
-------------------------------------------------------------------------
Cash flow from operations before
working capital changes(1) 3,435 9,470 18,384 21,077
-------------------------------------------------------------------------
Basic, per share(1) 0.10 0.25 0.46 0.53
-------------------------------------------------------------------------
Diluted, per share(1) 0.07 0.19 0.38 0.49
-------------------------------------------------------------------------
Earnings (loss) for the period 1,543 7,685 15,683 14,983
-------------------------------------------------------------------------
Basic, per share 0.04 0.21 0.39 0.38
-------------------------------------------------------------------------
Diluted, per share 0.03 0.16 0.32 0.29
-------------------------------------------------------------------------
Capital expenditures 2,321 2,310 9,738 22,031
-------------------------------------------------------------------------
Cash on hand 21,999 25,941 36,206 51,008
-------------------------------------------------------------------------
Working capital surplus 21,959 28,913 41,361 43,038
-------------------------------------------------------------------------
Indebtedness - - - -
-------------------------------------------------------------------------
Shareholders' equity 32,991 40,844 61,440 80,656
-------------------------------------------------------------------------
Total assets 38,989 52,760 81,226 118,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Production / sales volumes
-------------------------------------------------------------------------
Crude oil - bbl/d 1,855 4,006 7,202 10,716
-------------------------------------------------------------------------
Natural gas - mcf/d 1,243 1,181 1,259 1,101
-------------------------------------------------------------------------
Equivalent - boe/d(2) 2,062 4,203 7,412 10,900
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 48.90 50.71 49.49 45.20
-------------------------------------------------------------------------
Natural gas - $/mcf 1.17 1.33 1.44 1.50
-------------------------------------------------------------------------
Selected highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average selling
price per boe 44.70 48.71 48.33 44.59
-------------------------------------------------------------------------
Interest and other income 0.84 0.50 0.30 0.44
-------------------------------------------------------------------------
Royalties 5.74 7.20 6.73 6.37
-------------------------------------------------------------------------
Operating costs 4.52 4.42 5.21 4.02
-------------------------------------------------------------------------
Netback(3) 35.28 37.59 36.69 34.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share information (000s)
-------------------------------------------------------------------------
Shares outstanding at end
of period 37,100 37,855 42,817 43,612
-------------------------------------------------------------------------
Fully diluted 52,172 52,172 52,671 52,704
-------------------------------------------------------------------------
Weighted average shares
outstanding for the period
-------------------------------------------------------------------------
Basic 36,036 37,399 40,442 43,418
-------------------------------------------------------------------------
Diluted 47,500 48,777 48,594 51,002
-------------------------------------------------------------------------
Volume traded during quarter (000) 26,745 8,697 16,732 18,086
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 13.75 12.60 21.95 25.24
-------------------------------------------------------------------------
Low 6.55 8.15 10.92 14.71
-------------------------------------------------------------------------
Close (end of period) 12.25 11.00 20.90 17.65
-------------------------------------------------------------------------
(1) Cash flow from operations before working capital changes ("cash
flow") and cash flow per share do not have standardized meanings
prescribed by Canadian generally accepted accounting principles
("GAAP") and therefore may not be comparable to similar measures used
by other companies. Cash flow from operations before working capital
changes includes all cash flow from operating activities and is
calculated before changes in non-cash working capital. The most
comparable measure calculated in accordance with GAAP would be net
earnings. Cash flow from operations before working capital changes is
reconciled with net earnings on the Consolidated Statement of Cash
Flows and in the accompanying Management's Discussion & Analysis.
Management uses these non-GAAP measurements for its own performance
measures and to provide its shareholders and investors with a
measurement of the company's efficiency and its ability to fund a
portion of its future growth expenditures.
(2) All references to barrels of oil equivalence (boe) are calculated on
the basis of 6 mcf : 1 bbl. Boe may be misleading particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalent at the wellhead.
(3) Netback is a non-GAAP measure used by management as a measure of
operating efficiency and profitability. It is calculated as petroleum
and natural gas revenue and other income less royalties and operating
costs.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
Petrolifera Petroleum Limited
December 31
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
$000
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
Current
-------------------------------------------------------------------------
Cash and cash equivalents $51,008 $19,744
-------------------------------------------------------------------------
Accounts receivable 26,868 2,060
-------------------------------------------------------------------------
Prepaid expenses 302 136
-------------------------------------------------------------------------
Inventories (Note 4) 374 -
-------------------------------------------------------------------------
78,552 21,940
-------------------------------------------------------------------------
Future income tax asset (Note 5) 2,150 941
-------------------------------------------------------------------------
Property and equipment (Note 6) 37,815 8,700
-------------------------------------------------------------------------
$118,517 $31,581
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------
Current
-------------------------------------------------------------------------
Accounts payable and accrued liabilities $14,066 $3,559
-------------------------------------------------------------------------
Income taxes payable 21,416 274
-------------------------------------------------------------------------
Due to a related company (Note 9) 32 221
-------------------------------------------------------------------------
35,514 4,054
-------------------------------------------------------------------------
Asset retirement obligations (Note 7) 2,347 467
-------------------------------------------------------------------------
37,861 4,521
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Share capital, warrants and contributed
surplus (Note 8) 39,275 27,240
-------------------------------------------------------------------------
Cumulative translation adjustment 1,667 -
-------------------------------------------------------------------------
Retained earnings (deficit) 39,714 (180)
-------------------------------------------------------------------------
80,656 27,060
-------------------------------------------------------------------------
$118,517 $31,581
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments, contingencies and guarantees (Note 12)
Approved by the board
Signed, Signed,
"C.J. Smith" "D.D. Barkwell"
Director Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND
RETAINED EARNINGS (DEFICIT)
Petrolifera Petroleum Limited
Years Ended December 31
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
$000
-------------------------------------------------------------------------
Revenue
-------------------------------------------------------------------------
Petroleum and natural gas sales $104,595 $2,750
-------------------------------------------------------------------------
Interest and other income 988 114
-------------------------------------------------------------------------
105,583 2,864
-------------------------------------------------------------------------
Royalties (14,796) (353)
-------------------------------------------------------------------------
90,787 2,511
-------------------------------------------------------------------------
Expenses
-------------------------------------------------------------------------
Operating 10,111 749
-------------------------------------------------------------------------
General and administrative 3,744 921
-------------------------------------------------------------------------
Stock-based compensation 3,628 124
-------------------------------------------------------------------------
Finance charges 88 77
-------------------------------------------------------------------------
Foreign exchange (gain) loss 439 (131)
-------------------------------------------------------------------------
Taxes other than income taxes 655 -
-------------------------------------------------------------------------
Depletion, depreciation and accretion 9,614 826
-------------------------------------------------------------------------
28,279 2,566
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) before income taxes 62,508 (55)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current income tax provision (Note 5) 23,823 330
-------------------------------------------------------------------------
Future income tax provision (recovery) (Note 5) (1,209) 30
-------------------------------------------------------------------------
22,614 360
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS (LOSS) 39,894 (415)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
DEFICIT, BEGINNING OF YEAR (180) (1,019)
-------------------------------------------------------------------------
Elimination of deficit (Note (8(f)) - 1,254
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT), END OF YEAR $39,714 $(180)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS (LOSS) PER SHARE (Note 11)
-------------------------------------------------------------------------
Basic $1.02 $(0.02)
-------------------------------------------------------------------------
Diluted $0.80 $(0.02)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Petrolifera Petroleum Limited
Years Ended December 31
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
$000
-------------------------------------------------------------------------
Cash provided by (used in) the following activities:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating
-------------------------------------------------------------------------
Net earnings (loss) $39,894 $(415)
-------------------------------------------------------------------------
Items not involving cash:
-------------------------------------------------------------------------
Depletion, depreciation and accretion 9,614 826
-------------------------------------------------------------------------
Stock-based compensation 3,628 124
-------------------------------------------------------------------------
Foreign exchange (gain) loss 439 (131)
-------------------------------------------------------------------------
Future income tax provision (1,209) 30
-------------------------------------------------------------------------
Cash flow from operations before working
capital changes 52,366 434
-------------------------------------------------------------------------
Changes in non-cash working capital (Note 11) 1,317 (704)
-------------------------------------------------------------------------
53,683 (270)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing
-------------------------------------------------------------------------
Issue of common shares, net of share issue costs 8,407 26,642
-------------------------------------------------------------------------
Repayment of promissory note - (2,750)
-------------------------------------------------------------------------
8,407 23,892
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing
-------------------------------------------------------------------------
Development of oil and gas properties (36,400) (6,662)
-------------------------------------------------------------------------
Changes in non-cash working capital (Note 11) 4,796 2,625
-------------------------------------------------------------------------
(31,604) (4,037)
-------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 30,486 19,585
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 19,744 159
-------------------------------------------------------------------------
Impact of foreign exchange on foreign currency
denominated cash balances 778 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $51,008 $19,744
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS IS COMPOSED OF:
-------------------------------------------------------------------------
Cash in banks $18,345 $1,036
-------------------------------------------------------------------------
Term deposits 32,663 18,708
-------------------------------------------------------------------------
$51,008 $19,744
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information - Note 11
-------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Petrolifera Petroleum Limited
Years ended December 31, 2006 and December 31, 2005
1. INCORPORATION
Petrolifera Petroleum Limited ("Petrolifera" or the "company") was
incorporated on November 9, 2004. Through subsidiaries and foreign
branches, it is engaged in petroleum and natural gas exploration,
development and production activities in South America.
2. FINANCIAL STATEMENT PRESENTATION
The financial statements include the accounts of the company and its
subsidiaries and are presented in Canadian dollars and in accordance with
Canadian generally accepted accounting principles.
3. SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents
Cash and cash equivalents include short-term deposits with initial
maturities of three months or less when purchased.
Inventory
Crude oil inventory is measured at the lower of cost on a weighted
average cost basis and net realizable value.
Income taxes
The company follows the liability method of accounting for income taxes.
Under this method, income tax liabilities and assets are recognized for
the estimated tax consequences attributed to differences between the
amounts reported in the financial statements and their respective tax
bases, using substantively enacted income tax rates. The effect of a
change in income tax rates on future income tax liabilities and assets is
recognized in income in the period that the change occurs. Future tax
assets are assessed by management at each balance sheet date and
recognized when realization is probable.
Petroleum and natural gas operations
The company follows the full cost method of accounting whereby all costs
relating to the exploration for and development of crude oil and natural
gas reserves are capitalized on a country by country cost centre basis.
Capitalized costs of petroleum and natural gas properties and related
equipment within a cost centre are depleted and depreciated using the
unit-of-production method based on estimated proved crude oil and natural
gas reserves as determined by independent consulting engineers. For the
purpose of this calculation, production and reserves of natural gas are
converted to equivalent units of crude oil based on relative energy
content (6:1).
The company applies a "ceiling test" to the net book value of petroleum
and natural gas properties for each cost centre to ensure that such
carrying value does not exceed the estimated fair value of the
properties. The carrying value is assessed to be recoverable when the sum
of the undiscounted cash flows expected from the production of proved
reserves and the lower of cost, less impairment, of unproved properties
exceeds the carrying value. If the carrying value is assessed to not be
recoverable, the calculation compares the carrying value to the sum of
the discounted cash flows expected from the production of proved and
probable reserves and the lower of cost, less impairment, of unproved
properties. Should the carrying value exceed this sum, an impairment loss
is recognized. The cash flows are estimated using projected future
product prices and costs and are discounted using the credit adjusted
risk-free interest rate.
Costs of acquiring and evaluating unproved properties and major
development projects are excluded from costs subject to depletion and
depreciation until it is determined whether or not proved reserves are
attributable to the properties, the project becomes commercial, or
impairment occurs. These costs are reviewed quarterly and any impairment
is transferred to the costs being depleted or, if the properties are
located in a cost centre where there is no reserve base, the impairment
is charged directly to income.
Gains or losses on sales of properties are recognized only when crediting
the proceeds to cost would result in a change of 20 percent or more in
the depletion and depreciation rate.
Asset retirement obligations
The company provides for the costs of retirement obligations associated
with long-lived assets, including the abandonment of oil and natural gas
wells, related facilities, compressors and gas plants, removal of
equipment from leased acreage and returning such land to its original
condition. The estimated fair value of each asset retirement obligation
is recorded in the period a well or related asset is drilled, constructed
or acquired. Fair value is estimated using the present value of the
estimated future cash outflows to abandon the asset using the company's
credit adjusted risk-free interest rate and expected inflation rate. The
obligation is reviewed regularly by management based upon current
regulations, costs, technologies and industry standards. The discounted
obligation is initially capitalized as part of the carrying amount of the
related oil and natural gas properties and a corresponding liability is
recognized. The liability is accreted against income until it is settled
or the property is sold and is included as a component of depletion and
depreciation expense. The increase in oil and natural gas properties is
depleted and depreciated on the same basis as the remainder of the oil
and natural gas properties. Actual restoration expenditures are charged
to the accumulated obligation as incurred.
Foreign operations
The company is exposed to foreign currency fluctuations, political risks,
price controls and varying forms of fiscal regimes or changes thereto
which may impair its ability to conduct profitable operations as it
operates internationally and holds foreign denominated cash and other
assets.
Revenue recognition
Petroleum and natural gas sales are recognized as revenue at the time the
respective commodities are delivered to purchasers at the point of sale.
Stock-based compensation
The company uses the fair value method for valuing stock option grants.
Compensation costs attributed to share options granted are measured at
fair value at the grant date and expensed over the vesting period with a
corresponding increase to contributed surplus. Upon exercise of the stock
options, consideration paid by the option holder together with the amount
previously recognized in contributed surplus is recorded as an increase
to share capital.
Financial instruments
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable, and amount due to a related company. All
carrying values of financial instruments approximate fair values due to
their short-term maturities.
Credit risk
The majority of the accounts receivable is in respect of sales of
petroleum and natural gas. The company generally extends unsecured credit
to customers and therefore, the collection of accounts receivable may be
affected by changes in economic or other conditions. Management believes
the risk is mitigated by the size and reputation of the companies to
which credit has been extended.
Commodity risk
The company is exposed to fluctuations in commodity prices and has no
contracts in place to mitigate these exposures.
Measurement uncertainty
The timely preparation of the financial statements in conformity with
Canadian generally accepted accounting principles requires that
management make estimates and assumptions and use judgment regarding the
reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the period. Such estimates primarily relate to
unsettled transactions and events as of the date of the consolidated
financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.
Amounts recorded for depreciation, depletion and accretion, amounts used
for ceiling test and impairment calculations and amounts used in the
determination of the future tax asset are based on estimates of natural
gas and crude oil reserves and future costs required to develop those
reserves. By their nature, these estimates of reserves, including the
estimates of future prices and costs, and the related future cash flows
are subject to measurement uncertainty.
Per share amounts
Basic per share amounts are calculated using the weighted average number
of common shares outstanding for the period. The company follows the
treasury stock method to calculate diluted per share amounts. The
treasury stock method assumes that any proceeds from the exercise of
in-the-money stock purchase warrants and other dilutive instruments, in
addition to stock-based compensation not yet recognized, would be used to
purchase common shares at the average market price during the period.
Foreign currency translation
Business conducted in Peru is considered to be an "integrated foreign
operation" for accounting purposes and, therefore, its financial
statements are translated into Canadian dollars using the temporal
method. Under the temporal method, the company translates foreign
denominated monetary assets and liabilities at the exchange rate
prevailing at year end; non-monetary assets, liabilities and related
depletion and depreciation are translated at historic rates; revenues and
expenses are translated at the average rate of exchange for the period;
and any resulting foreign exchange gains or losses are included in
operations.
Due to the significant increase in cash flow generated in Argentina in
the second quarter of 2006, the company determined its Argentinean
activities comprise a self-sustaining operation. This necessitated a
change in the way the Argentinean operations were translated into
Canadian dollars for reporting purposes.
Previously the Argentinean operations were considered to be integrated
with the Canadian operations and were translated using the temporal
method described above. As a self-sustaining foreign operation, the
Argentinean financial statements are translated into Canadian dollars
using the current rate method, whereby assets and liabilities are
translated now at the rate of exchange in effect at the balance sheet
date; revenues and expenses are translated at the average monthly rates
of exchange during the period; and gains or losses on translation are
included in a cumulative translation adjustment account in shareholders'
equity.
This change in accounting practice was adopted prospectively on June 1,
2006 and resulted in a decrease to property, plant and equipment of
$597,000 and a decrease to asset retirement obligation of $46,000, which
resulted in a net operating foreign currency translation adjustment of
$551,000. Since adoption of this change, the impact on the cumulative
translation adjustment account ("CTA") for the year ended December 31,
2006 was a gain of $2,218,000.
4. INVENTORIES
The company maintains inventory as a consequence of the sales process for
its products, whereby crude oil which has been produced is not delivered
to customers for periods of up to several days, during which time it must
be stored.
-------------------------------------------------------------------------
Years ended December 31 2006 2005
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Crude oil $374 $ -
-------------------------------------------------------------------------
At December 31, 2006 inventory is composed of crude oil held in storage
at the company's facilities and in transportation pipelines.
5. INCOME TAXES
The following table reconciles income taxes calculated at the Canadian
statutory rate with recorded income taxes:
-------------------------------------------------------------------------
Years ended December 31 2006 2005
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Earnings (loss) before income taxes $62,508 $(55)
-------------------------------------------------------------------------
Statutory income tax rate 32.2% 37.9%
-------------------------------------------------------------------------
Expected income tax (recovery) $20,128 $(21)
-------------------------------------------------------------------------
Non deductible expenditures and foreign taxes 1,686 366
-------------------------------------------------------------------------
Stock compensation 1,167 47
-------------------------------------------------------------------------
Rate adjustment and other (367) (32)
-------------------------------------------------------------------------
Tax expense $22,614 $360
-------------------------------------------------------------------------
Future tax assets relate to the following temporary timing differences:
-------------------------------------------------------------------------
Years ended December 31 2006 2005
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Property and equipment $(717) $597
Operating losses 645 180
Share issue costs 524 1,210
Future foreign tax credit 1,127 -
Asset retirement obligation 644 -
Valuation allowance (73) (1,046)
-------------------------------------------------------------------------
Future tax asset $2,150 $941
-------------------------------------------------------------------------
6. PROPERTY AND EQUIPMENT
-------------------------------------------------------------------------
Accumulated
Depletion
and
Deprec- Net Book
Cost iation Value
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
As at December 31, 2006
Petroleum and natural gas properties
and equipment $47,803 $10,445 $37,358
Furniture, equipment and leaseholds 523 66 457
-------------------------------------------------------------------------
$48,326 $10,511 $37,815
-------------------------------------------------------------------------
As at December 31, 2005
Petroleum and natural gas properties
and equipment $9,489 $835 $8,655
Furniture, equipment and leaseholds 67 22 45
-------------------------------------------------------------------------
$9,556 $857 $8,700
-------------------------------------------------------------------------
Included in property and equipment are estimated future asset retirement
costs of $2.3 million (2005 - $427,000). In 2006, the company capitalized
$716,000 (2005 - $164,000) of general and administrative expenses related
to exploration and development activities.
Capital costs of $6.4 million (2005 - $780,000) incurred for unevaluated
properties in Argentina and for major development projects and other
assets in a pre-production stage located mainly in Peru, have been
excluded from depletable costs. No proved reserves have been assigned to
those projects.
Depletion, depreciation and accretion expense includes a charge of
$27,000 (2005 - $25,000) to accrete the company's estimated asset
retirement obligations (Note 7).
The ceiling test as at December 31, 2006 excludes $6.4 million (2005 -
$780,000) for major development projects which have been separately
evaluated by management for impairment. Based on the ceiling test and
other assessments, no impairment has been recorded at December 31, 2006
or 2005.
Petrolifera's petroleum and natural gas reserves were evaluated by
independent reservoir engineers as at December 31, 2006 in a report dated
March 6, 2007. The evaluation was conducted in accordance with Canadian
Securities Administrators' National Instrument 51-101, using the
following price assumptions:
-------------------------------------------------------------------------
Crude Oil Price Natural Gas Price
($CDN/bbl) ($CDN/mcf)
-------------------------------------------------------------------------
2007 46.64 2.39
2008 45.94 2.44
2009 45.24 2.49
2010 44.89 2.54
2011 44.89 2.59
-------------------------------------------------------------------------
+ approximately 1% + approximately 2%
thereafter thereafter
-------------------------------------------------------------------------
7. ASSET RETIREMENT OBLIGATIONS
At December 31, 2006 the estimated total undiscounted amount required to
settle the asset retirement obligations was $6.3 million (2005 -
$751,000). These obligations are expected to be settled over the useful
lives of the underlying assets, which currently extend up to 20 years
into the future. This amount has been discounted using a credit-adjusted
risk-free interest rate of six percent and an annual inflation rate of
two percent. Changes to asset retirement obligations were as follows:
-------------------------------------------------------------------------
Years ended December 31 2006 2005
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Asset retirement obligations, beginning of year $467 $422
Liabilities incurred 1,853 51
Changes in estimates - (31)
Accretion expense 27 25
-------------------------------------------------------------------------
Asset retirement obligations, end of year $2,347 $467
-------------------------------------------------------------------------
8. SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS
Authorized
The authorized share capital is comprised of an unlimited number of
common shares.
Issued:
-------------------------------------------------------------------------
Number Amount
of Shares ($000)
-------------------------------------------------------------------------
Share capital and warrants:
-------------------------------------------------------------------------
Balance, January 1, 2005 13,000,001 $1,421
Issued for cash by private placement (a) 7,000,000 7,000
Issued upon exercise of rights (b) 700,000 -
Issued for cash by initial public offering (c) 12,193,894 19,630
Warrants issued for cash by initial
public offering 1,710
Issued upon exercise of warrants (d) 1,510,000 1,365
Assigned value of broker compensation
warrants exercised 6
Share issue costs (3,084)
Tax effect of share issue costs 295
Elimination of deficit (f) (1,254)
-------------------------------------------------------------------------
Balance share capital and warrants,
December 31, 2005 34,403,895 27,089
Issued upon exercise of warrants in 2006 (d) 8,677,275 7,908
Issued upon exercise of options in 2006 (e) 531,333 654
Assigned value of broker compensation
warrants exercised 27
Share issue costs (16)
-------------------------------------------------------------------------
Balance, share capital and warrants,
December 31, 2006 43,612,503 $35,662
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus:
Balance, January 1, 2005 $12
Assigned value of broker compensation
warrants exercised 21
Exercise of warrants in 2005 (6)
Assigned fair value of stock options
granted in 2005 124
-------------------------------------------------------------------------
Balance, contributed surplus, December 31, 2005 151
Assigned value of broker compensation
warrants exercised (27)
Fair value of options exercised (139)
Assigned fair value of stock options granted 3,628
-------------------------------------------------------------------------
Balance, contributed surplus, December 31, 2006 $3,613
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total share capital, warrants and contributed surplus
December 31, 2005 $27,240
December 31, 2006 $39,275
-------------------------------------------------------------------------
(a) Private Placement - 2005
In March 2005 the company issued 7 million Units for gross proceeds of
$7 million. Each Unit comprised one common share, one-half of one Common
Share Purchase Warrant and one Right. Each Common Share Purchase Warrant
issued was exercisable anytime before October 17, 2006 at $1.50 to
acquire a total of 3,500,000 common shares. All warrants were exercised
prior to their expiry.
As partial compensation for distributing the Units, selling agents were
issued 490,000 Broker Compensation Warrants. Each Broker Compensation
Warrant was exercisable anytime before October 17, 2006 at $1.00 to
acquire a maximum of 490,000 Broker Units. Each Broker Unit comprised one
common share and one-half of one Common Share Purchase Warrant. Each of
these Common Share Purchase Warrants issuable was exercisable at $1.50 to
acquire a total of 245,000 common shares anytime before October 17, 2006.
All Broker Compensation Warrants and all Broker Units were exercised in
2006.
For accounting purposes, the common share Purchase Warrants issued were
determined to have no assignable fair value using the Black-Scholes
option-pricing model. The Broker Compensation Warrants issued had an
assignable fair value of $21,400, as calculated using the Black-Scholes
option-pricing model.
(b) Rights - 2005
Each Right issued to investors in the March 2005 Private Placement
financing entitled the holder to receive, without any further action or
consideration, an additional 0.1 of a Unit, excluding a Right, for each
Unit held in the event that the company had not, before October 11, 2005,
either received a receipt for a final prospectus relating to an initial
public offering of securities by a securities commission in at least one
of the provinces of British Columbia, Alberta, Saskatchewan, Manitoba,
Ontario, or Nova Scotia; or completed a share exchange, amalgamation or
other business combination resulting in shareholders of the company
becoming holders of securities of an entity that was a reporting issuer
in at least one of the provinces of British Columbia, Alberta,
Saskatchewan, Manitoba, Ontario, or Nova Scotia. Rights were not attached
to the Broker Units issuable to the selling agents exercising their
Broker Compensation Warrants.
For accounting purposes, the Rights were determined to have no assignable
fair value using the Black-Scholes option-pricing model. Rights were not
attached to the Broker Units issuable to the selling agents exercising
their Broker Compensation Warrants.
On October 11, 2005, 700,000 common shares and 350,000 Common Share
Purchase Warrants were issued pursuant to the Rights.
(c) Initial Public Offering ("IPO Financing") - 2005
On November 8, 2005 the company issued 12,193,894 Units for total gross
proceeds of $21,339,315. Each Unit comprised one common share and one-
half of one Common Share Purchase Warrant (the "IPO Warrants" - 6,096,947
in total), with each IPO Warrant entitling the holder to purchase one
common share from treasury at $3.00 any time before May 8, 2007. Pursuant
to this financing, the company listed its common shares and the IPO
Warrants for trading on the Toronto Stock Exchange.
For accounting purposes, the common share Purchase Warrants had an
assignable fair value of $1,709,608 as calculated using the Black-Scholes
option-pricing model.
(d) Common Share Purchase Warrants
Transactions in Common Share Purchase Warrants occurred during 2005 and
2006 as follows:
-------------------------------------------------------------------------
Opening balance, January 1, 2005 5,350,000
Issued in 2005 10,511,947
Exercised in 2005 (1,510,000)
-------------------------------------------------------------------------
Closing balance, December 31, 2005 14,351,947
Issued upon exercise of Broker Compensation Warrants
in 2006 520,000
Exercised in 2006 (8,677,275)
-------------------------------------------------------------------------
Closing balance, December 31, 2006 6,194,672
-------------------------------------------------------------------------
In 2006 the following warrants were exercised:
- 3,985,000 Common Share Purchase Warrants at $0.40 per share resulting
in the issuance of 3,985,000 common shares;
- 3,240,000 Common Share Purchase Warrants at $1.50 per share,
resulting in the issuance of 3,240,000 common shares;
- 167,275 IPO Warrants at $3.00 per share, resulting in the issuance of
167,275 common shares;
- The exercise of 350,000 Broker Compensation Warrants at $0.30 per
Broker Compensation Warrant resulted in the issuance of 350,000
common shares and the issuance of 350,000 additional Common Share
Purchase Warrants, which were all exercised to acquire an additional
350,000 common shares at $0.40 per common share; and
- The exercise of 340,000 Broker Compensation Warrants at $1.00 per
Broker Compensation Warrant resulted in the issuance of 340,000
common shares and the issuance of 170,000 additional Common Share
Purchase Warrants, which were all exercised, together with 75,000
Common Share Purchase Warrants in 2005 upon the exercise then of
150,000 Broker Compensation Warrants, to acquire an additional
245,000 common shares at $1.50 per common share.
As at December 31, 2006, the following Common Share Purchase Warrants
were outstanding:
(i) 5,929,672 IPO Warrants exercisable to acquire a total of 5,929,672
common shares at $3.00 per share anytime before May 8, 2007; and
(ii) 265,000 Common Share Purchase Warrants exercisable to acquire a
total of 265,000 common shares at $0.40 per share until October 17,
2008.
(e) Stock Options
As at December 31, the company had stock options outstanding to acquire
common shares, as follows:
-------------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
-------------------------------------------------------------------------
Outstanding, beginning
of year 2,437,000 $1.04 - $-
Granted 991,000 12.17 2,437,000 1.04
Exercised (531,333) 0.97 - -
-------------------------------------------------------------------------
Outstanding, end
of year 2,896,667 $4.86 2,437,000 $1.04
-------------------------------------------------------------------------
Exercisable, end
of year 1,057,666 $3.84 519,000 $1.30
-------------------------------------------------------------------------
All options have been granted for a period of five years. Options granted
under the plan are generally fully exercisable after three years and
expire five years after the date granted. The table below summarizes
unexercised stock options.
-------------------------------------------------------------------------
Weighted Average
Number Remaining Contractual
Range of Exercise Prices Outstanding Life at December 31, 2006
-------------------------------------------------------------------------
$0.50 - $2.00 1,906,667 3.5
$8.55 - $20.95 990,000 4.3
-------------------------------------------------------------------------
Total 2,896,667
-------------------------------------------------------------------------
Vested at December 31, 2006 1,057,666
-------------------------------------------------------------------------
In 2006 a compensatory non-cash expense of $3,628,000 (2005 - $124,000)
was recorded, reflecting the fair value of stock options amortized over
the vesting period.
The fair value of each option granted in 2006 is estimated on the date of
grant using the Black-Scholes option-pricing model with assumptions for
grants as follows:
-------------------------------------------------------------------------
Risk free
interest Expected Expected
rate life Volatility
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2006 4.1% 3 years 43% - 66%
2005 3% 4 years 72%
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The weighted average fair value at the date of grant of all options
granted in 2006 was $4.88 per option (2005 - $0.33 per option).
(f) Elimination of deficit
On October 4, 2005 the company's shareholders approved a reduction to the
stated capital account attributable to the common shares of the company
of $1,254,381.
9. RELATED PARTY TRANSACTIONS
Under the terms of a Management Services Agreement with Connacher Oil and
Gas Limited ("Connacher"), which expires in May 2007, Connacher provides
all management, operational, accounting and general and administrative
services necessary or appropriate to manage and administer the company.
The fee for this service is $15,000 per month. From time to time
Connacher also pays bills on behalf of Petrolifera, for which it is
reimbursed.
At December 31, 2006, the company owed Connacher $32,000 pursuant to the
Management Services Agreement, and for other amounts advanced (2005 -
$221,000).
In 2006 the company paid professional legal fees in the amount of
$613,000 (2005 - $509,000) to a law firm in which an officer of the
company is a related party. Transactions with the related party occurred
within the normal course of business and have been measured at the
exchange amount on normal business terms. The exchange amount is the
amount of consideration established and agreed to with the related
parties.
In consideration for the assistance provided to Petrolifera in securing
two crude oil and natural gas exploration licenses in Peru and for the
provision of financial guarantees respecting Petrolifera's annual work
commitments in the licensed blocks in 2005, Connacher was granted an
option to acquire 200,000 common shares at $0.50 per share and was
granted a 10 percent carried working interest ("CWI") through the
drilling of the first well on each block. Petrolifera has the right of
first purchase of this interest should Connacher elect to sell it at some
future date. The CWI is convertible at the holder's election into a two
percent gross overriding royalty on each license after the drilling of
the first well on each license. These interests were effective upon the
issuance of the licenses in 2005. The guarantees are limited to amounts
specified over the terms of the licenses and during the first 24 months,
the guarantee is limited to US $200,000. Connacher was subsequently
indemnified by Petrolifera for this guarantee.
In consideration for his expertise and role in assisting the company in
securing the two exploration licenses in Peru, an officer of the company
received vested options to purchase 300,000 Common Shares at a price of
$0.50 per share, exercisable until February 1, 2010, a single payment of
$100,000 and pursuant to an overriding royalty agreement with the
company, was granted a three percent gross overriding royalty ("GORR") on
each of the two Peruvian blocks. The company recorded the $100,000
payment as a capital expenditure. The GORR vests over three years with
one-third vesting immediately upon the issuance of the licenses in 2005,
one-third vested in 2006 and the remaining one-third will vest in 2007.
The company has the right of first purchase of the GORR at fair value
should the officer elect to sell it at some future date.
In consideration for his expertise and role in assisting the company in
securing the two licenses in Peru, another officer of the company
received vested options to purchase 300,000 Common Shares at a price of
$0.50 per share, exercisable until February 1, 2010, and a success fee of
$20,000 upon the closing of the March 2005 private placement financing
and a success fee of $40,000 in November 2005, when the company completed
its IPO financing.
To assist in marketing the March 2005 private placement financing, the
company retained PowerOne Capital Markets Limited ("PowerOne") as one of
the selling agents. Prior to the March 2005 private placement financing,
PowerOne was considered a connected issuer of Petrolifera because,
together with its officers, directors and shareholders and associates of
such persons, it then owned 18 percent of the outstanding shares of the
company. PowerOne received a commission for its services.
In March 2005 a Consulting Agreement with PowerOne was extended to
November 2006 with a monthly fee of $6,000.
An additional success fee ("PowerOne Success Fee") in the amount of
$327,000 was paid to PowerOne upon the company completing its IPO
financing in November 2005.
10. SEGMENTED INFORMATION
The Company has corporate offices in Canada and Barbados (combined to
comprise the corporate segment), petroleum and natural gas operations in
Argentina and exploration activities in Peru. Financial information
pertaining to these operating segments is presented below.
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Corporate Argentina Peru Total
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($000)
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2006
Revenue, gross $826 $104,757 $- $105,583
Net earnings (loss) (6,262) 46,316 (160) 39,894
Property and equipment 268 35,027 2,520 37,815
Capital expenditures 268 34,333 1,799 36,400
Total assets 29,118 86,486 2,913 118,517
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2005
Revenue, gross $114 $2,750 $- $2,864
Net earnings (loss) (361) 8 (62) (415)
Property and equipment 7,941 759 8,700
Capital expenditures 5,883 779 6,662
Total assets 20,442 10,199 940 31,581
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Crude oil sales totaling $104 million were made to two large
international oil companies during 2006 (2005 - $2.3 million to one large
international oil company).
11. SUPPLEMENTARY INFORMATION
(a) Per share amounts
The following table summarizes the common shares used in the per share
calculations.
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For the years ended December 31 2006 2005
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Weighted average common shares outstanding 39,132,413 20,721,430
Dilutive effect of all stock options and
all stock purchase warrants 10,823,848 11,081,933
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Weighted average common shares outstanding
- diluted 49,956,261 31,803,362
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(b) Net change in non-cash working capital
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For the years ended December 31 2006 2005
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($000)
-------------------------------------------------------------------------
Accounts receivable $(24,808) $(1,861)
Prepaid expenses (166) (105)
Accounts payable 10,234 3,773
Crude oil inventory (374) -
Income taxes payable 21,416 -
Due to a related company (189) 114
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Total $6,113 $1,921
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Operating $1,317 $(704)
Investing 4,796 2,625
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$6,113 $1,921
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(c) Supplementary cash flow information
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For the years ended December 31 2006 2005
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($000)
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Interest paid $- $92
Income taxes paid 552 -
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12. COMMITMENTS, CONTINGENCIES AND GUARANTEES
In 2005 Petrolifera acquired two significant oil and gas exploration
licenses in Peru. The licenses have a total US$41.8 million financial
commitment to complete negotiated work programs on the two licenses over
seven years. The company has the right to withdraw from the licenses at
the end of each interim period associated with the term of the licenses.
The company has issued letters of credit in the amount of US$200,000 to
secure the capital expenditure requirements associated with the two
exploration licenses.
The company's annual commitments under drilling contracts, management,
consulting and operating agreements are as follows:
2007 - $12,505,000; 2008 - $7,813,000; 2009 - $3,890,000; 2010 - Nil;
2011 - Nil
Additionally, the company has various guarantees and indemnifications in
place in the ordinary course of business, none of which are expected to
have a significant impact on the company's financial statements or
operations.
13. RECLASSIFICATION OF COMPARATIVE BALANCES
Certain comparative balances have been reclassified to conform with the
current year's presentation