CALGARY, May 8 /CNW/ - Petrolifera Petroleum Limited (TSX: PDP) reports continued progress during the first quarter of 2007. Significant growth was recorded for sales, revenue, cash flow and earnings compared to last year. Satisfactory growth was achieved over fourth quarter 2006 results, limited by a delay in the arrival of the first of a minimum of three drilling rigs to be used by the company in Argentina during the balance of 2007 and into 2008. The company's balance sheet remains strong with over $59 million of cash and working capital is buoyant at $58.8 million. The company has no debt.
Highlights of the first quarter 2007 are as follows:
- Triple digit growth continues
- Financial strength maintained
- Production growth achieved
- New concessions secured - expansion underway
Summary results
Three months ended March 31
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2007 2006 % Change
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FINANCIAL ($000 except per
share amounts)
Total revenue 47,122 8,452 458
Cash flow from operations before
working capital changes(1) 24,615 3,435 617
Per share, basic(1) 0.56 0.10 460
Per share, diluted(1) 0.49 0.07 600
Net earnings for the period 15,069 1,543 877
Per share, basic 0.34 0.04 750
Per share, diluted 0.30 0.03 900
Capital expenditures 7,514 2,321 224
Cash on hand 59,155 21,999 169
Working capital 58,811 21,959 168
Shareholders' equity 98,124 32,991 197
Total assets 137,840 38,989 254
OPERATING
Daily sales volumes
Crude oil - bbl/d 11,333 1,855 511
Natural gas - mcf/d 1,858 1,243 49
Barrels of oil equivalent -
boe/d(2) 11,643 2,062 465
Average selling prices
Oil - $/bbl 45.43 48.90 (7)
Natural gas - $/mcf 1.53 1.17 31
Barrels of oil equivalent - $/boe(2) 44.47 44.70 (1)
COMMON SHARES OUTSTANDING (000s)
Weighted average
Basic 43,800 36,036 22
Diluted 50,635 47,500 7
End of period
Issued 44,029 37,100 19
Fully diluted 53,280 52,172 2
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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 Statements 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 : 1bbl. 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.
LETTER TO SHAREHOLDERS
Petrolifera continued its record of progress in the first quarter of 2007. Sales of crude oil have now increased for seven successive quarters. During the first quarter of 2007 crude oil sales averaged 11,333 barrels per day. This represents an increase of 511 percent compared to last year and six percent over the levels of the fourth quarter of 2006, when some deliverability testing impacted favorably on results.
Natural gas sales and prices continued to escalate. Natural gas sales were 1.9 mmcf/d and surpassed 2 mmcf/d in two of the three months during the quarter. These were up 68 percent over the fourth quarter 2006 levels. Prices improved 31 percent over those received in the same period last year.
Sales on a boe basis have also improved for seven successive quarters. First quarter 2007 sales were 11,643 boe/d, 465 percent above last year and seven percent above the fourth quarter 2006 levels.
Revenues have risen every quarter since the first quarter of 2005 and have grown dramatically since Petrolifera became a public company in late 2005. Revenue in the first quarter 2007 was $47.1 million. Last year it was only $8.5 million.
Cash flow at $24.6 million has now risen for six successive quarters and cash flow per weighted average share at $0.56 has also consistently risen during this period. A year ago cash flow per share for the first quarter was only $0.10. Cash flow per weighted average share has now totaled $1.80 for the past four quarters and first quarter 2007 annualized cash flow is $2.24 per share.
Earnings were strong at $15.1 million ($0.34 per share on a weighted average basis). This represents an increase of 877 percent year over year. Earnings per weighted average share outstanding have totaled $1.32 in the past four quarters, and first quarter 2007 annualized earnings are $1.36 per share. Importantly, these are after-tax earnings, including a significant provision for cash taxes.
The company remains in a solid financial condition with significant cash balances and strong working capital after a provision for approximately $30 million of cash taxes payable to Argentinean authorities. This tax burden reflects the early and considerable success achieved by Petrolifera. Unlike many companies who pride themselves on not being cash taxpayers, Petrolifera does not have a legacy of failure or dry hole costs to shelter current income from drilling success. This is an enviable position to be in as a company and not one experienced by many junior oil companies.
Argentina - Puesto Morales/Rinconada
These accomplishments by Petrolifera at Puesto Morales occurred despite the fact that the drilling rigs under contract to the company for its anticipated drilling in Argentina during 2007 did not arrive as originally scheduled. As a result of various circumstances, only one rig was operating at the end of the reporting period and it did not arrive on location until into February 2007. As a consequence, planned drilling was pushed back and only two wells were drilled prior to the end of the reporting period. Both the 1016 and 1021 wells were tested and completed as oil wells. The 1016 well originally flowed oil during testing but subsequently stopped flowing and has now been placed on pump and is being evaluated for an optimum pumping rate. The 1021 well flowed light gravity crude oil on test at rates of approximately 1,460 bbl/d. The stabilized production rate for this well is being established, and there can be no assurance that the test rates will be sustainable, but it appears to be a good well.
Since measured crude oil production reached over 13,000 bbl/d on test in December 2006, Petrolifera has experienced some production declines due to reservoir pressure decline as well as from the application of sound reservoir management policies designed to preserve reservoir energy until a planned pressure maintenance program can be introduced at Puesto Morales. Work is progressing favorably in this regard and the company has targeted the fall of 2007 for full introduction of the planned waterflood. It will take some time for this project to impact on overall production. As indicated, despite the impact of periodic pressure testing on production and sales levels during the period, progress was still recorded. As is customary, certain wells which cease to flow will also be placed on pump as soon as practical. Had drilling rigs arrived on a timelier basis, more wells might have been drilled to further augment the achieved results.
Subsequent to the reporting period, Petrolifera has drilled a third new well, 1023, offsetting the original PMNX-1 well on the southern lobe. Based on drilling and log results, the well has been cased and will be completed as a producing oil well. Also, the 1056 well east of the 1004 location has been logged and is being cased for testing and completion as an indicated multizone crude oil and natural gas well. Since it began drilling in late 2005, Petrolifera has not drilled a dry well.
Petrolifera has been functioning with one drilling rig and one service or workover rig. The conversion of a new service rig imported into the country for Petrolifera's exclusive use has been completed and it has now become available for use. This rig is designed to drill wells shallower than those drilled at Puesto Morales on the Rinconada Blockand on other Argentinean acreage secured by Petrolifera. Numerous new leads and prospects have been identified on the Rinconada Block from the interpretation of new 3D seismic shot during the last quarter of 2006. Many of these will be evaluated by drilling throughout the balance of 2007. Drilling on the Rinconada Block commenced at the Ra-1001 location on May 8, 2007.
Several new prospects have also been identified on the Puesto Morales Block from continuing interpretation of old and new 3D seismic owned by the company. Drilling to evaluate these new structures is anticipated during the balance of the year. A third drilling rig has been contracted and Petrolifera is awaiting its delivery to have its full complement available for the ensuing year or more. Negotiations are also proceeding in an attempt to secure a fourth rig.
During the quarter, Petrolifera negotiated an agreement with Gas Medanito, whereby initial volumes of 16 mmcf/d of natural gas with associated liquids will be delivered through a Petrolifera-owned pipeline presently being constructed to a nearby Gas Medanito plant. There, Petrolifera's natural gas will be processed with extracted liquids split between the two parties in Petrolifera's favour. This will compensate Gas Medanito for operating Petrolifera's pipeline and extracting the liquids. Under certain circumstances initial volumes may be increased to 21 mmcf/d. Dry gas will likely be marketed by Petrolifera in higher-priced industrial markets with more favourable pricing, anticipated to exceed US$2.00 per mcf. Petrolifera's investment in this project is budgeted at approximately $10 million with a targeted startup by the fourth quarter 2007. At the same time, this arrangement enables Petrolifera to conserve about US$8 million which would have been used for a new gas plant.
Argentina - Other
Petrolifera has negotiated a ground floor 50 percent participation in the Salinas Grande I concession awarded to a third party by the La Pampa government after Petrolifera, despite being the top bidder in a public tender, was disqualified as the recipient by an independent review tribunal. This compromise serves to secure Petrolifera added exposure to new exploration opportunities under this 1.1 million acre exploratory block situated northeast of Rinconada. Also, Petrolifera has been awarded the Gobernador Ayala II Block (43,000 acres), which is contiguous with the northeastern portion of the Salinas Grande Block.
The company has also submitted a work program and royalty bid on the Vaca Mahuida Block (253,000 acres) offered for tender by the Rio Negro government. Petrolifera was qualified as an acceptable bidder and has been pre-awarded the block based on public pronouncement by the Rio Negro government. On final award, Petrolifera will have expanded its formidable core exposure in this area to approximately one million acres. With successful drilling, this should provide the basis for continued expansion of the company's reserves, production and sales.
Peru
Work continues on both Blocks 106 and 107 in the Maranon and Ucayali Basins, respectively. In particular, considerable progress has been made on our airborne high resolution gravity and magnetic survey over the Ucayali Block. A contract to conduct 2D seismic over this block was also awarded to a geophysical company. Work continues to complete the related EIA for the planned seismic survey. Following completion of a second EIA for the proposed locations, drilling is expected to commence in early 2008.
Geochemical surveys over a portion of Block 106 in the Maranon Basin have been encouraging, suggesting the possibility of lighter hydrocarbons at depth. This work continues, along with planning of a 2D seismic program later this year and for drilling in early 2008.
Colombia
Recently, Petrolifera executed the Turpial TEA and the Sierra Nevada License covering both crude oil and natural gas prospects in the Magdalena Basin onshore Colombia. These concessions have now been executed by ANH, the government agency, and requisite financial guarantees put in place. A third block is also under negotiation for a TEA covering a large area contiguous with the Sierra Nevada License.
These new concessions provide medium risk and potential relative to the lower risk activity being conducted in Argentina and the higher risk, higher potential activity in Peru.
A small startup office has been established in Bogota and work will be initiated on these concessions shortly.
Petrolifera is pleased to enter Colombia with its well-established energy industry and the opportunities identified are considered attractive with solid potential.
Outlook
The delay in the timely arrival of drilling rigs will preclude the company from achieving its guidance, as provided to shareholders in our October 2006 presentation as posted on our website at www.petrolifera.ca. While satisfactory results were achieved during the first quarter of 2007, these are below our previous budgeted targets by about 20 percent for anticipated crude oil sales. The company's operating results have also been affected by the slower than expected pace of completion of all required facilities, compounded by changes in plans to incorporate a pressure maintenance scheme and adequate water disposal capability and a termination of our relationship with the prior field operator as the company assumed direct control of operations.
As a result, and because of the difficulties in forecasting with limited production history and lingering uncertainties about the precise timing of rig availability, Petrolifera has reduced its forecast crude oil production for the full year to approximately 12,400 bbl/d with a December exit rate targeted to reach 18,400 bbl/d. Including anticipated natural gas volumes of 16 mmcf/d by year-end (and averaging 5.8 mmcf/d on a full year basis), revised boe targets are now 13.3 mboe/d for full year 2007 with a December 2007 exit rate in excess of 21,000 boe/d. Accordingly, with no other changes to previously forecast pricing, anticipated after-tax cash flow is still anticipated to exceed $100 million for the year. As a consequence, forecast year end working capital is forecast to be approximately $25 million as the company plans to proceed with revised 2007 capital program of $144 million, approximately $9 million below earlier guidance. In the absence of any acquisitions which might arise later in the year, Petrolifera anticipates remaining debt free even though it is making considerable progress in finalizing a US$100 million revolving credit facility, with an initial anticipated draw capacity of US$60 million.
Annual Meeting and Other
The company's Annual Meeting of Shareholders is scheduled for 3:00 PM local time, May 8, 2007 in Calgary, Alberta at the Calgary Petroleum Club.
On May 1, 2007, Petrolifera announced the appointment of Mr. Kristen Bibby, B.Comm., CA to the position of Vice President, Finance. Mr. Bibby will also become Chief Financial Officer on May 15, 2007, replacing Mr. Richard R. Kines, Connacher's CFO, who has served as Interim Chief Financial Officer of Petrolifera since its formation. We welcome Mr. Bibby and thank Mr. Kines for yeoman service during the company's formative period. This appointment reflects the increasing maturity and independence of Petrolifera's operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following is dated as of May 8, 2007 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three months ended March 31, 2007 as contained in this interim report and the MD&A and audited financial statements for the years ended December 31, 2006 and 2005 as contained in the company's 2006 Annual Report. Additional information relating to Petrolifera, including its Annual Information Form for the year ended December 31, 2006 is on SEDAR at www.sedar.com. 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 indicated.
Information in this report contains forward-looking information based on current expectations, estimates and projections of future production, capital expenditures, cash flow, working capital 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, technical and economic factors and access to services, equipment and facilities. Readers should review Petrolifera's Annual Information Form for the year ended December 31, 2006 for a description of the risk factors affecting Petrolifera. 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.
FINANCIAL AND OPERATING REVIEW
SALES VOLUMES, PRICING AND REVENUE
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Three months Three months
ended ended
March 31, March 31,
2007 2006
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Daily sales volumes
Oil - bbl/d 11,333 1,855
Natural gas - mcf/d 1,858 1,243
Total - boe/d 11,643 2,062
Average selling prices
Crude oil - per bbl $45.43 $48.90
Natural gas - per mcf $1.53 $1.17
Revenue per boe $44.47 $44.70
Petroleum and natural gas sales ($000) $46,598 $8,295
Interest and other income ($000) $524 $157
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Total revenue ($000s) $47,122 $8,452
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Petroleum and natural gas revenues for the three months ended March 31, 2007 were $46.6 million (three months ended March 31, 2007 - $8.3 million) on sales of 11,333 bbl/d (2006 - 1,855 bbl/day) of crude oil and 1,858 mcf/d (2006 - 1,243 mcf/d) of natural gas. The substantial increases in revenue resulted from higher oil production and sales volumes arising from last year's successful drilling program. All production was from the company's Argentinean properties.
Crude oil sales increased substantially from the first quarter of 2006. New discoveries resulted in sales rising to 11,333 bbl/d. In the three months ended March 31, 2007 sales of crude oil represented 97.3 percent of the company's sales volumes; in three months ended March 31, 2006 crude oil sales represented 90 percent of the sales volumes. In line with a reduction in world oil prices from the first quarter of 2006, the company's realized crude oil price decreased seven percent to average $45.43 per barrel in the three months ended March 31, 2006. Natural gas prices increased 31 percent to average $1.53 per mcf in 2007, 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 $524,000 in the three months ended March 31, 2007 and $157,000 for three months ended March 31, 2006 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 the first three months of 2007 were $5.9 million ($5.59 per boe), or 12.6 percent of oil and gas revenue.
In the same 2006 reporting period, royalties were $1 million ($5.74 per boe) or 13 percent of oil and gas revenues.
OPERATING EXPENSES AND NETBACKS
Company Netbacks(1)
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Three months ended
March 31 2007 2006
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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) 11,643 2,062
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Petroleum and natural
gas sales $46,598 $44.47 $8,295 $44.70
Interest and other
income 524 0.50 157 0.84
Royalties (5,855) (5.59) (1,065) (5.74)
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Net revenue 41,267 39.38 7,387 39.80
Operating costs (4,612) (4.40) (838) (4.52)
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Corporate netback $36,655 $34.98 $6,549 $35.28
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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 total netbacks improved 460 percent over those recorded in the 2006 comparative period. This primarily reflects increased sales of crude oil and higher interest income from cash balances and lower per unit operating costs. Petrolifera's calculated unit netback at $34.98 per boe was a healthy 79 percent of selling price in 2007.
Operating Netbacks by Product
For three months ended March 31, 2007 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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2007 Total Per bbl Total Per mcf
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($000, except per
unit figures)
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Average daily sales 11,333 bbl/d 1,858 mcf/d
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Petroleum and natural
gas sales $46,342 $45.43 $256 $1.53
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Royalties (5,833) (5.72) (22) (0.13)
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Operating costs (4,596) (4.51) (16) (0.10)
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Field operating netback $35,913 $35.20 $218 $1.30
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Crude oil Natural gas
-------------------------------------------------------------------------
2006 Total Per bbl Total Per mcf
-------------------------------------------------------------------------
($000, except per
unit figures)
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Average daily sales 1,855 bbl/d 1,243 mcf/d
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Petroleum and natural
gas sales $8,164 $48.90 $131 $1.17
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Royalties (1,048) (6.27) (17) (0.15)
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Operating costs (823) (4.93) (15) (0.14)
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Field operating netback $6,293 $37.70 $99 $0.88
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Operating costs in the year to date in 2007 declined on a per unit basis from 2006 reflecting a partial benefit from utilizing its new crude oil pipeline. Petrolifera anticipates further operating cost reductions when its new crude oil processing facilities are fully functional.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $1.4 million in the first three months of 2007, reflecting costs incurred in Canada, Argentina and Peru (first quarter 2006 - $1.1 million). These costs primarily consist of salaries, insurance, the cost of independent reserve reports, travel and other administrative expenses. The increase from 2006 is attributable to increased staffing related to expanded activity levels. On a boe basis, G&A was reduced by 78% to $1.35 per boe of sales. G&A of $174,000 was capitalized in 2007 (first quarter 2006 - $nil). Non-cash stock-based compensation costs of $2.9 million were recorded in the first three months of 2007 (2006 - $1.4 million), reflecting the company's increased share price and its consequent effect on the determination of the fair value of all stock options granted and vested in the periods.
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 $133,000 in the first three months of 2007 (2006 - $78,000 loss). 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 the first three months of 2007 was $5.4 million (2006 - $543,000) or $5.15 per boe (first quarter 2006 - $2.93 per boe). This includes a charge of $36,000 (first quarter 2006 - $7,000) 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 $2.4 million to the estimated total undiscounted liability of $6.8 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 (first quarter 2006 - $1.0 million). Additionally, future development costs of $36 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 2007 or in 2006.
TAXES
The current income tax provision of $10.2 million for the first three months of 2007 (2006 - $2 million), primarily relates to income taxes in Argentina. Additionally, a future income tax provision of $1.1 million for the period was recorded to recognize changes in tax pool balances. Taxes other than income taxes of $438,000 (first quarter 2006 - $nil) represent taxes charged on all banking transactions in Argentina.
NET EARNINGS AND SHARES OUTSTANDING
-------------------------------------------------------------------------
Three months ended Three months ended
March 31, 2007 March 31, 2006
-------------------------------------------------------------------------
Total Per boe Total Per boe
-------------------------------------------------------------------------
($000, except per
unit amounts)
-------------------------------------------------------------------------
Netback $36,655 $34.98 $6,549 $35.28
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General & administrative (1,421) (1.35) (1,125) (6.06)
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Stock-based compensation (2,921) (2.79) (1,352) (7.29)
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Finance charges (23) (0.02) (5) (0.03)
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Foreign exchange (loss)
gain (133) (0.13) (78) (0.42)
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Taxes other than income
taxes (438) (0.42) - -
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Depletion, depreciation
and accretion (5,396) (5.15) (543) (2.93)
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Income tax provision (11,254) (10.74) (1,903) (10.24)
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Net earnings (loss) for
the period $15,069 $14.38 $1,543 $8.31
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In the first quarter of 2007 the company reported earnings of $15.1
million (first quarter 2006 - $1.5 million), which equates to $0.34 (2006 -
$0.04) per basic and $0.30 (2006 - $0.03) per weighted average diluted share
outstanding.
In the first quarter of 2007, the weighted average number of common shares
outstanding was 43,800,217 (first quarter 2006 - 36,036,000). In the first
quarter of 2007, 6,834,948 additional shares were included in the diluted
earnings per share calculations related to the potentially dilutive effect of
options and warrants.
As at the close of business on May 7, 2007, the company had the following
securities issued and outstanding:
- 46,343,989 common shares;
- 3,875,186 warrants; and
- 3,150,667 stock options
Details of the exercise rights and terms of the warrants and options are noted in the Consolidated Financial Statements, included in this Interim 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 to cash flow from operations before working capital changes: ------------------------------------------------------------------------- Three months ended March 31 2007 2006 ------------------------------------------------------------------------- ($000) ------------------------------------------------------------------------- Net earnings for the period $15,069 $1,543 ------------------------------------------------------------------------- Add (deduct) ------------------------------------------------------------------------- Stock-based compensation 2,921 1,352 ------------------------------------------------------------------------- Depletion, depreciation, and accretion 5,396 543 ------------------------------------------------------------------------- Future income tax provision (recovery) 1,096 (81) ------------------------------------------------------------------------- Foreign exchange loss 133 78 ------------------------------------------------------------------------- Cash flow from operations before working capital changes $24,615 $3,435 -------------------------------------------------------------------------
Cash flow from operations in the first quarter of 2007 was $24.6 million (first quarter 2006 - $3.4 million) or $0.56 per basic share and $0.49 per diluted share, (2006 - $0.10 per basic share and $0.07 per weighted average diluted share).
Capital expenditures in the fist quarter of 2007 totaled $7.5 million (first quarter 2006 - $2.3 million), primarily for costs to drill oil wells, complete an oil pipeline and for constructing a crude oil treating facility in Argentina.
Petrolifera was in a strong financial position at March 31, 2007 with buoyant cash flow, $59 million of cash, $58.8 million of working capital and no debt. Subsequent to March 31, 2007 proceeds of $7.7 million were received as at May 7, 2007 upon the exercise of 2,579,886 publicly traded warrants expiring on May 8, 2007.
The company's 2007 capital program includes expenditures to satisfy work commitments related to the Peruvian license blocks. The company is ahead of schedule in meeting these requirements and in 2007 expects to complete 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 planned capital expenditures. 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 an international bank for a reserve-based US $100 million revolving credit facility with initial available draws of US$60 million. This would further enhance Petrolifera's liquidity and financial capacity to take advantage of new investment opportunities.
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. This agreement has recently been extended on a month-to-month basis and will be reassessed as Petrolifera achieves increasing independence and managerial capabilities.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING
ESTIMATES
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 its 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.
IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2007 the company adopted CICA Handbook sections 1530, 3251, 3855, and 3865 relating to Comprehensive Income, Equity, Financial Instruments - Recognition and Measurement, and Hedges, respectively. Under the new standards, additional financial statement disclosure, namely Consolidated Statements of Other Comprehensive Income, has been introduced. This statement identifies certain gains and losses, which in the company's case at this time, include only foreign currency translation adjustments arising from translation of the company's Argentinian business units which are considered to be self-sustaining, that are recorded outside the income statement. Additionally, a separate component of equity, Accumulated Other Comprehensive Income, has been introduced to disclose comprehensive income balances on a cumulative basis. Finally, all financial instruments, including derivatives, are recorded in the company's consolidated balance sheet and measured at their fair values.
Under section 3855, the company is required to classify its financial instruments into one of five categories. The company has classified all of its financial instruments as Held for Trading, which requires measurement on the balance sheet at fair value with any changes in fair value recorded in income. This classification has been chosen due to the nature of the company's financial instruments. Transaction costs related to financial instruments classified as held for trading are recorded in income in accordance with the new standards.
The adoption of section 3865, "Hedges", has had no effect on the company's consolidated financial statements as the company has no hedging transactions in place at this time.
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.
The CICA has issued new Canadian accounting recommendations for additional disclosures about financial instruments and capital which will require disclosure and presentation of financial instruments about the nature and extent of risks arising from financial instruments to which the Company is exposed. These recommendations are effective beginning January 1, 2008.
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, summarized 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. There have been no changes in the company's system of internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting.
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. In reaching a reasonable level of assurance, management necessarily is required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. 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 revised downwards from earlier estimates to $144 million. Petrolifera's capital program expenditures are largely discretionary, except for a total of US$4.6 million for which the company is obligated between the years 2007 and 2009, pursuant to the terms of the Peruvian exploration licenses and certain work obligations in both Argentina and Colombia which may entail seismic reprocessing, seismic acquisition and drilling obligations over periods of up to three years. Some of these obligations will be discharged within the 2007 capital budget. A summary of the company's original 2007 financial plan and budget was contained in an investor presentation dated October 2006 as posted on its website under Investor Info/Presentations at www.petrolifera.ca and such guidance should be read in the context of the updated information contained herein. The company reserves the right to alter or amend its guidance throughout the year and all amendments replace and supersede prior estimations and projections. As contained in the Letter to Shareholders, Petrolifera has reduced its forecast production, revenue, cash flow from operations and capital budget for 2007 due primarily to late arrival of drilling rigs. Revised guidance as contained in the Letter to Shareholders will be issued to the public in the press release for quarterly results, posted on our website and on www.sedar.com.
All estimates and statements which are not statements of historical facts are forward-looking statements. These statements involve 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, levels of production, sales, cash flow or working capital, 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. Estimated production, cash flow and working capital are dependant on access to required services and equipment on a timely basis.
QUARTERLY RESULTS
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Three months ended
-------------------------------------------------------------------------
June 30 Sept 30 Dec 31
-------------------------------------------------------------------------
Financial results ($000 except per share
amounts) - unaudited
-------------------------------------------------------------------------
Total revenue 477 517 1,485
-------------------------------------------------------------------------
Cash flow from operations before working
capital changes(1) 77 56 228
-------------------------------------------------------------------------
Basic, per share(1) 0.01 - 0.01
-------------------------------------------------------------------------
Diluted, per share(1) 0.01 - 0.01
-------------------------------------------------------------------------
Earnings (loss) for the period (161) 5 (184)
-------------------------------------------------------------------------
Basic, per share (0.01) - (0.01)
-------------------------------------------------------------------------
Diluted, per share (0.01) - (0.01)
-------------------------------------------------------------------------
Capital expenditures 245 650 4,472
-------------------------------------------------------------------------
Cash on hand 3,237 2,315 19,744
-------------------------------------------------------------------------
Working capital surplus 2,222 44 17,887
-------------------------------------------------------------------------
Indebtedness 750 750 -
-------------------------------------------------------------------------
Shareholders' equity 6,738 6,766 27,060
-------------------------------------------------------------------------
Total assets 8,530 9,251 31,581
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Sales volumes
-------------------------------------------------------------------------
Crude oil - bbl/d 86 84 324
-------------------------------------------------------------------------
Natural gas - mcf/d 1,381 1,273 1,285
-------------------------------------------------------------------------
Equivalent - boe/d(2) 316 296 538
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 44.84 48.01 43.08
-------------------------------------------------------------------------
Natural gas - $/mcf 0.86 1.12 0.99
-------------------------------------------------------------------------
Selected highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average selling price per boe 15.97 18.46 28.31
-------------------------------------------------------------------------
Interest and other income 0.61 0.51 1.67
-------------------------------------------------------------------------
Royalties 2.00 2.22 3.85
-------------------------------------------------------------------------
Operating costs 5.40 6.20 6.78
-------------------------------------------------------------------------
Netback(3) 9.18 10.57 17.78
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share information (000s)
-------------------------------------------------------------------------
Shares outstanding at end of period 20,000 20,000 34,404
-------------------------------------------------------------------------
Fully diluted 30,140 31,080 51,118
-------------------------------------------------------------------------
Weighted average shares outstanding for
the period
-------------------------------------------------------------------------
Basic 20,000 20,000 20,721
-------------------------------------------------------------------------
Diluted 23,676 23,676 31,803
-------------------------------------------------------------------------
Volume traded during quarter (000)
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High
-------------------------------------------------------------------------
Low
-------------------------------------------------------------------------
Close (end of period)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2006 2007
-------------------------------------------------------------------------
Three months ended
-------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31
-------------------------------------------------------------------------
Financial results ($000
except per share amounts)
- unaudited
-------------------------------------------------------------------------
Total revenue 8,452 18,821 33,157 45,153 47,122
-------------------------------------------------------------------------
Cash flow from operations
before working capital
changes(1) 3,435 9,470 18,384 21,077 24,615
-------------------------------------------------------------------------
Basic, per share(1) 0.10 0.25 0.46 0.53 0.56
-------------------------------------------------------------------------
Diluted, per share(1) 0.07 0.19 0.38 0.41 0.49
-------------------------------------------------------------------------
Earnings (loss) for the
period 1,543 7,685 15,683 14,983 15,069
-------------------------------------------------------------------------
Basic, per share 0.04 0.21 0.39 0.38 0.34
-------------------------------------------------------------------------
Diluted, per share 0.03 0.16 0.32 0.29 0.30
-------------------------------------------------------------------------
Capital expenditures 2,321 2,310 9,738 22,031 7,514
-------------------------------------------------------------------------
Cash on hand 21,999 25,941 36,206 51,008 59,155
-------------------------------------------------------------------------
Working capital surplus 21,959 28,913 41,361 43,038 58,811
-------------------------------------------------------------------------
Indebtedness - - - - -
-------------------------------------------------------------------------
Shareholders' equity 32,991 40,844 61,440 80,656 98,124
-------------------------------------------------------------------------
Total assets 38,989 52,760 81,226 118,517 137,840
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Sales volumes
-------------------------------------------------------------------------
Crude oil - bbl/d 1,855 4,006 7,202 10,716 11,333
-------------------------------------------------------------------------
Natural gas - mcf/d 1,243 1,181 1,259 1,101 1,858
-------------------------------------------------------------------------
Equivalent - boe/d(2) 2,062 4,203 7,412 10,900 11,643
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 48.90 50.71 49.49 45.20 45.43
-------------------------------------------------------------------------
Natural gas - $/mcf 1.17 1.33 1.44 1.50 1.53
-------------------------------------------------------------------------
Selected highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average selling
price per boe 44.70 48.71 48.33 44.59 44.47
-------------------------------------------------------------------------
Interest and other income 0.84 0.50 0.30 0.44 0.50
-------------------------------------------------------------------------
Royalties 5.74 7.20 6.73 6.37 5.59
-------------------------------------------------------------------------
Operating costs 4.52 4.42 5.21 4.02 4.40
-------------------------------------------------------------------------
Netback(3) 35.28 37.59 36.69 34.64 34.98
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share information (000s)
-------------------------------------------------------------------------
Shares outstanding at end
of period 37,100 37,855 42,817 43,612 44,029
-------------------------------------------------------------------------
Fully diluted 52,172 52,172 52,671 52,704 53,280
-------------------------------------------------------------------------
Weighted average shares
outstanding for the period
-------------------------------------------------------------------------
Basic 36,036 37,399 40,442 43,418 43,800
-------------------------------------------------------------------------
Diluted 47,500 48,777 48,594 51,002 50,635
-------------------------------------------------------------------------
Volume traded during
quarter (000) 26,745 8,697 16,732 18,086 7,202
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 13.75 12.60 21.95 25.24 20.20
-------------------------------------------------------------------------
Low 6.55 8.15 10.92 14.71 16.05
-------------------------------------------------------------------------
Close (end of period) 12.25 11.00 20.90 17.65 19.14
-------------------------------------------------------------------------
(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 BALANCE SHEETS
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
March December
31, 2007 31, 2006
-------------------------------------------------------------------------
($000)
ASSETS
Current
Cash and cash equivalents $ 59,155 $ 51,008
Accounts receivable 36,206 26,868
Prepaid expenses 337 302
Inventories 341 374
Due from a related company 77 -
-------------------------------------------------------------------------
96,116 78,552
Future income tax asset 1,612 2,150
Property and equipment 40,112 37,815
-------------------------------------------------------------------------
$ 137,840 $ 118,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 6,387 $ 14,066
Income taxes payable 30,918 21,416
-------------------------------------------------------------------------
Due to a related company - 32
-------------------------------------------------------------------------
37,305 35,514
Asset retirement obligations (Note 3) 2,411 2,347
-------------------------------------------------------------------------
39,716 37,861
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital, warrants and contributed surplus
(Note 4) 42,630 39,275
Accumulated other comprehensive income (Note 2) 711 1,667
Retained earnings 54,783 39,714
-------------------------------------------------------------------------
98,124 80,656
-------------------------------------------------------------------------
$ 137,840 $ 118,517
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
($000)
Revenue
Petroleum and natural gas sales $ 46,598 $ 8,295
Interest and other income 524 157
-------------------------------------------------------------------------
47,122 8,452
Royalties 5,855 1,065
-------------------------------------------------------------------------
41,267 7,387
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses
Operating 4,612 838
General and administrative 1,421 1,125
Stock-based compensation 2,921 1,352
Finance charges 23 5
Foreign exchange loss 133 78
Taxes other than income taxes 438 -
Depletion, depreciation and accretion 5,396 543
-------------------------------------------------------------------------
14,944 3,941
-------------------------------------------------------------------------
Earnings before income taxes 26,323 3,446
Current income tax provision 10,158 1,984
Future income tax provision (recovery) 1,096 (81)
-------------------------------------------------------------------------
11,254 1,903
-------------------------------------------------------------------------
NET EARNINGS 15,069 1,543
RETAINED EARNINGS (DEFICIT), BEGINNING OF PERIOD 39,714 (180)
-------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $ 54,783 $ 1,363
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS PER SHARE (Note 6)
Basic $ 0.34 $ 0.04
Diluted $ 0.30 $ 0.03
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
For the period ended March 31 2007
-------------------------------------------------------------------------
($000)
Net earnings $ 15,069
Foreign currency translation adjustment (net of tax) (956)
-------------------------------------------------------------------------
Comprehensive income $ 14,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED
OTHER COMPREHENSIVE INCOME
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
For the period ended March 31 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Balance, beginning of period $ 1,667
Foreign currency translation adjustment (net of tax) (956)
-------------------------------------------------------------------------
Balance, end of period $ 711
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
2007 2006
-------------------------------------------------------------------------
($000)
Cash provided by (used in) the following
activities:
Operating
Net earnings $ 15,069 $ 1,543
Items not involving cash:
Depletion, depreciation and accretion 5,396 543
Stock-based compensation 2,921 1,352
Foreign exchange loss 133 78
Future income tax provision (recovery) 1,096 (81)
-------------------------------------------------------------------------
Cash flow from operations before working capital
changes 24,615 3,435
Changes in non-cash working capital (Note 6(b)) (9,928) (176)
-------------------------------------------------------------------------
14,687 3,259
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing
Issue of common shares, net of share issue costs 434 2,958
-------------------------------------------------------------------------
Investing
Development of oil and gas properties (7,514) (2,321)
Changes in non-cash working capital (Note 6(b)) 2,302 (1,641)
-------------------------------------------------------------------------
(5,212) (3,962)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 9,909 2,255
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 51,008 19,744
Impact of foreign exchange on foreign currency
denominated cash balances (1,762) -
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 59,155 $ 21,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS IS COMPOSED OF:
Cash in banks $ 16,012 $ 1,952
Term deposits 43,143 20,047
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS $ 59,155 $ 21,999
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information - Note 6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
Petrolifera Petroleum Limited
Period ended March 31, 2007
1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES
The interim Consolidated Financial Statements include the accounts of
Petrolifera and its wholly-owned subsidiaries (collectively,
"Petrolifera" or the "company"), and are presented in accordance with
Canadian generally accepted accounting principles. Through subsidiaries
and foreign branches, Petrolifera is engaged in petroleum and natural gas
exploration, development and production activities in South America.
The interim Consolidated Financial Statements have been prepared
following the same accounting policies and methods of computation as the
annual audited Consolidated Financial Statements for the years ended
December 31, 2006 and 2005 except as provided below. The disclosures
provided below do not conform in all respects to those included with the
annual audited Consolidated Financial Statements. The interim
Consolidated Financial Statements should be read in conjunction with the
annual audited Consolidated Financial Statements and the notes thereto.
2. NEW ACCOUNTING STANDARDS
Effective January 1, 2007 the company adopted CICA Handbook sections
1530, 3251, 3855 and 3865 relating to Comprehensive Income, Equity,
Financial Instruments - Recognition and Measurement, and Hedges,
respectively. Under the new standards, additional financial statement
disclosure, namely the Consolidated Statement of Comprehensive Income,
has been introduced. This statement identifies certain gains and losses,
which in the company's case at this time include only foreign currency
translation adjustments arising from translation of the company's
Argentinean business units which are considered to be self-sustaining
that are recorded outside the income statement. Additionally, a separate
component of equity, Accumulated Other Comprehensive Income ("AOCI"), has
been introduced in the consolidated balance sheet to record the
continuity of other comprehensive income balances on a cumulative basis.
The adoption of comprehensive income has been made in accordance with the
applicable transitional provisions. Accordingly, the December 31, 2006
year end accumulated foreign currency translation adjustment balance of
$1.7 million has been reclassified to AOCI (March 31, 2006 - nil). In
addition, the change in the accumulated foreign currency translation
adjustment balance for the three months ended March 31, 2007 of $956,000
is now included in the Statement of Comprehensive Income (three months
ended March 31, 2006 - nil) . Finally, all financial instruments,
including derivatives, are recorded in the company's consolidated balance
sheet and measured at their fair values.
Under section 3855, the company is required to classify its financial
instruments into one of five categories. The company has classified all
of its financial instruments as Held for Trading, which requires
measurement on the balance sheet at fair value with any changes in fair
value recorded in income. This classification has been chosen due to the
nature of the company's financial instruments, which are of a short-term
nature such that there are no material differences between the carrying
values and the fair values of these financial statement components.
Transaction costs related to financial instruments classified as held for
trading are recorded in income in accordance with the new standards.
The adoption of section 3865, "Hedges", has had no effect on the
company's consolidated financial statements as the company does not
account for its derivative financial instruments as hedges at this time.
The effects of adopting these new accounting standards on the company's
consolidated financial statements are as follows:
-------------------------------------------------------------------------
($000) Increase/(Decrease)
Other comprehensive income (956)
Accumulated other comprehensive income (956)
-------------------------------------------------------------------------
Effective January 1, 2007 the company adopted the revised recommendations
of CICA Handbook section 1506, Accounting Changes.
The new recommendations permit voluntary changes in accounting policy
only if they result in financial statements which provide more relevant
and reliable financial information. Accounting policy changes must be
applied retrospectively unless it is impractical to determine the period
or cumulative impact of the change in policy. Additionally, when an
entity has not applied a new primary source of GAAP that has been issued
but is not yet effective, the entity must disclose that fact along with
information relevant to assessing the possible impact that application of
the new primary source of GAAP will have on the entity's financial
statements in the period of initial application.
As of January 1, 2008, the company will be required to adopt two new CICA
handbook requirements, section 3862 "Financial Instruments - Disclosures"
and section 3863 "Financial Instruments - Presentation" which will
replace current section 3861. The new standards require disclosure of the
significance of financial instruments to an entity's financial
statements, the risks associated with the financial instruments, and how
those risks are managed. The new presentation standard essentially
carries forward the current presentation requirements. The company is
assessing the impact of these new standards in its consolidated financial
statements and anticipates that the main impact will be in terms of
additional disclosures required.
As of January 1, 2008 the company will be required to adopt CICA Handbook
section 1535, "Capital Disclosures", which requires entities to disclose
their objectives, policies and processes for managing capital, and in
addition, whether the entity has complied with any externally imposed
capital requirements. The company is assessing the impact of this new
standard on its consolidated financial statements and anticipates that
the main impact will be in terms of additional disclosures required.
3. ASSET RETIREMENT OBLIGATIONS
At March 31, 2007 the estimated total undiscounted amount required to
settle the asset retirement obligations was $6.8 million (December 31,
2006 - $6.3 million). 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:
-------------------------------------------------------------------------
Three months Year ended
ended March December
31, 2007 31, 2006
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Asset retirement obligations, beginning of
period $ 2,347 $ 467
Liabilities incurred 28 1,853
Changes in estimates - -
Accretion expense 36 27
-------------------------------------------------------------------------
Asset retirement obligations, end of period $ 2,411 $ 2,347
-------------------------------------------------------------------------
4. 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, share capital and warrants,
December 31, 2006 43,612,503 $ 35,662
Issued upon exercise of warrants 4,600 14
Issued upon exercise of options 412,000 420
Assigned value of options exercised 134
-------------------------------------------------------------------------
Balance, share capital and warrants,
March 31, 2007 44,029,103 $ 36,230
-------------------------------------------------------------------------
Contributed surplus:
-------------------------------------------------------------------------
Balance, contributed surplus, December 31, 2006 $ 3,613
Assigned value of options exercised (134)
Stock-based compensation expensed 2,921
-------------------------------------------------------------------------
Balance, contributed surplus, March 31, 2007 $ 6,400
-------------------------------------------------------------------------
Total share capital, warrants and contributed
surplus:
December 31, 2006 $ 39,275
March 31, 2007 $ 42,630
-------------------------------------------------------------------------
(a) Common Share Purchase Warrants
As at March 31, 2006 and 2007 the company had warrants outstanding to
acquire common shares, as follows:
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Outstanding, beginning of period 6,194,672 14,351,947
Issued upon exercise of Broker Compensation
Warrants - 72,000
Exercised (4,600) (2,377,616)
-------------------------------------------------------------------------
Outstanding, end of period 6,190,072 12,046,331
-------------------------------------------------------------------------
As at March 31, 2007, the following Common Share Purchase Warrants were
outstanding:
(i) 5,925,072 Warrants exercisable to acquire a total of 5,925,072
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.
(b) Stock Options
As at March 31, 2006 and 2007 the company had stock options outstanding
to acquire common shares, as follows:
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding, beginning
of period 2,896,667 $ 4.86 2,437,000 $ 1.04
Granted 576,000 19.20 907,000 11.57
Exercised (412,000) 1.02 (318,750) (0.90)
-------------------------------------------------------------------------
Outstanding, end of
period 3,060,667 8.07 3,025,250 4.21
-------------------------------------------------------------------------
Exercisable, end of
period 1,411,666 $ 7.84 681,916 $ 4.53
-------------------------------------------------------------------------
All options have been granted for a period of five years. Options granted
under the plan are generally fully exercisable after two or 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 March 31, 2007
-------------------------------------------------------------------------
$0.50 - $2.00 1,498,667 3.3
$8.55 - $20.95 1,562,000 4.4
-------------------------------------------------------------------------
Total 3,060,667
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In the first three months of 2007 a compensatory non-cash expense of
$2.9 million (2006 - $1.3 million) was recorded, reflecting the
amortization of the fair value of stock options over the vesting period.
The fair value of each option granted in 2007 is estimated on the date of
grant using the Black-Scholes option-pricing model with assumptions for
grants as follows:
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Risk free Expected Expected
interest rate life Volatility
-------------------------------------------------------------------------
2007 4.5% 4 years 70%
2006 4.1% 3 years 43% - 66%
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The weighted average fair value at the date of grant of all options
granted in 2007 was $10.76 per option (2006 - $4.48 per option)
5. 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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Three months ended
March 31, 2007
Revenue, gross 281 46,841 - 47,122
Net earnings (loss) (3,931) 19,055 (55) 15,069
Property and equipment 301 36,661 3,150 40,112
Capital expenditures 34 6,850 630 7,514
Total assets 27,337 107,060 3,443 137,840
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Three months ended
March 31, 2006
Revenue, gross 156 8,295 - 8,452
Net earnings (loss) (2,144) 3,698 (12) 1,543
Property and equipment - 9,395 1,085 10,480
Capital expenditures - 1,996 325 2,321
Total assets 22,206 15,516 1,267 38,989
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6. 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 period ended March 31 2007 2006
-------------------------------------------------------------------------
Weighted average common shares outstanding 43,800,217 36,036,239
Dilutive effect of all stock options and
all stock purchase warrants 6,834,948 11,463,602
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Weighted average common shares outstanding -
diluted 50,635,165 47,499,841
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(b) Net change in non-cash working capital
-------------------------------------------------------------------------
For the period ended March 31 2007 2006
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Accounts receivable (9,338) (3,307)
Prepaid expenses (35) 15
Accounts payable and accrued liabilities (7,680) 1,306
Inventories 33 -
Income taxes payable 9,503 -
Due from (to) a related company (109) 169
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Total (7,626) (1,817)
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Operating (9,928) (176)
Investing 2,302 (1,641)
-------------------------------------------------------------------------
(7,626) (1,817)
-------------------------------------------------------------------------
(c) Supplementary cash flow information
-------------------------------------------------------------------------
For the period ended March 31 2007 2006
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Interest paid - 5
Income taxes paid 409 -
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7. SUBSEQUENT EVENT
Subsequent to March 31, 2007, as at the close of business on May 7, 2007
a total of 2,579,886 common share purchase warrants expiring May 8, 2007
were exercised for gross proceeds of $7.7 million.
Forward-Looking Statements
This press release contains forward-looking statements, including but not limited to future exploration and development plans, anticipated capital expenditures and sources of funding in respect thereof, forecast cash flow, production and year end working capital. All information regarding 2007 guidance constitutes forward-looking statements. 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.
Forecast capital expenditures ae 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.