CALGARY, Nov. 11 /CNW/ - Petrolifera Petroleum Limited (PDP - TSX) reports that it achieved solid financial and operating results during the third quarter and first nine months of 2008. The company has now had 16 successive quarters of positive cash flow and 11 successive quarters of meaningful earnings since its formation in late 2004. All of the company's growth has been organic. We ended the period with healthy cash balances, unutilized credit capacity and sustainable cash flow to finance our anticipated capital programs in the remainder of 2008 and throughout 2009. Shortly, we anticipate commencement of our high impact drilling program on our Sierra Nevada License in the Lower Magdalena Basin in Colombia. We are also in the planning stages for drilling on our Ucayali Block 107 in Peru next year.
Highlights are as follows:
- Solid, stable crude oil and natural gas sales were achieved;
waterflood progress continues at Puesto Morales
- Fourth successive quarter of cash flow growth, with Q3 2008 cash flow
up 17 percent over Q2 2008 and cash flow per basic weighted average
common share outstanding ("common share" or "share") of $0.29
- YTD 2008 cash flow of $41 million ($0.79 per share)
- Rig for Colombian drilling in country, undergoing final retrofitting
for anticipated December startup of drilling at La Pinta prospect on
the Sierra Nevada License
- Financial discipline established for balance of 2008 and for 2009
These third quarter 2008 and year to date results will be the subject of a Conference Call at 9:00 a.m. MST on November 12, 2008. To listen to or participate in the live conference call please dial either (416) 644.3418 or (800) 732.0232. A replay of the event will be available from Wednesday, November 12, 2008 at 11:00 a.m. MST until 23:59 (11:59 p.m.) MST on Wednesday, November 19, 2008. To listen to the replay please dial either (416) 640-1917 or Toll Free at (877) 289-8525 and enter the passcode 21284984 followed by the number sign.
SUMMARY RESULTS
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Three months ended Nine months ended
September 30 September 30
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2008 2007 % Change 2008 2007 % Change
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FINANCIAL ($000
except per share
amounts)
Total revenue 32,126 31,730 1 92,915 106,956 (13)
Cash flow from
operations before
non-cash working
capital changes(1) 15,726 18,619 (16) 41,113 57,738 (29)
Per share,
basic(1) 0.29 0.37 (22) 0.79 1.22 (35)
Per share,
diluted(1) 0.28 0.36 (22) 0.78 1.13 (31)
Net earnings 3,564 4,919 (28) 8,892 24,438 (64)
Per share, basic 0.06 0.10 (40) 0.17 0.52 (41)
Per share,
diluted 0.06 0.10 (40) 0.17 0.48 (65)
Capital
expenditures 21,046 26,061 (19) 81,212 53,417 52
Cash and cash
equivalents 14,865 11,368 31
Working capital 8,148 22,742 (64)
Long-term debt 45,576 - -
Shareholders' equity 178,069 121,727 46
Total assets 279,174 144,016 94
OPERATING
Daily sales volumes
Crude oil and
natural gas
liquids - bbl/d 6,850 7,195 (5) 6,896 8,376 (18)
Natural gas - mcf/d 5,363 2,169 147 6,106 1,919 218
Barrels of oil
equivalent -
boe/d(2) 7,744 7,557 2 7,913 8,696 (9)
Average selling
prices
Crude oil and
natural gas
liquids - $/bbl 48.93 46.99 4 47.01 45.82 3
Natural gas -
$/mcf 2.58 1.41 83 2.37 1.45 63
Barrels of oil
equivalent -
$/boe(2) 45.07 45.15 (0) 42.80 44.45 (4)
Common shares
outstanding (000s)
Weighted average
Basic 54,884 50,107 10 51,876 47,285 10
Diluted 55,897 51,800 8 53,054 51,309 3
End of period
Issued 54,948 50,119 10
Fully diluted 58,675 51,400 14
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(1) Cash flow from operations before non-cash 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 non-cash 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
Troublesome capital market conditions dominated the third quarter of 2008. Stock markets and all equities suffered as a result of the lingering and expanding credit market turmoil. Fears of a deep and prolonged recession arising therefrom triggered a selloff in commodity prices, including crude oil. As a result, investors sought refuge from markets and sold equities indiscriminately during the latter part of the reporting period. Petrolifera was no exception. Along with other international junior oil companies, we saw our share price devastated by selling pressure. In our opinion, this has resulted in a huge disconnect between stock market prices and reasonable valuations by any normal standard. Despite the precipitous drop in world crude oil prices, our operating and financial results were not adversely affected due to the regulated commodity pricing regime which has been in place in Argentina for 2008. Accordingly, as our relative performance is anticipated to be superior to many of our peers, it seems illogical that our share price would be as adversely affected as it has been.
Petrolifera continues to conduct its business in Argentina, Colombia and Peru in South America. Our entire production base is currently in Argentina, where price controls have limited the appropriate impact of the company's success on the market price for its common shares in recent times. Also, recent policy initiatives and a weak economic framework have dampened investor attitudes towards business activity in Argentina.
We have decided to react to the overall malaise in capital markets worldwide by adopting a very conservative approach to our originally anticipated capital programs in South America over the ensuing five quarters, until we can determine with greater confidence a sense of direction for worldwide stock markets, credit markets and crude oil markets. Accordingly, in early October 2008 we issued a press release detailing our financial integrity as a company while cautioning shareholders and investors that we would curtail, defer or sell down, through joint venture or farmout activity, our participation in various higher risk projects. This was adopted in recognition of the limitations on being able to access new capital for a considerable period of time, until markets exhibit discernible and restored equilibrium.
These types of decisions are never easy for management, the Board of Directors or for shareholders who have invested in the company because of its exposure to the excellent high potential prospects, plays and properties we have accumulated since the company was formed in late 2004. Nevertheless, fiscal and financial prudence is in order in these tumultuous times. Fortunately, we own or control 100 percent of most of our assets and can manage the timing and pace of drilling programs, while meeting our contractual obligations and focusing on production maintenance and the integrity of our assets until stability and the prospect of being able to finance growth reemerge.
Q3 2008 and YTD 2008 Results and Activity
During Q3 2008, we generated $32.1 million of revenue, $15.7 million of cash flow and earnings of $3.6 million. Cash flow in the period was $0.29 per share. Our crude oil sales averaged 6,850 bbl/d as our waterflood program largely offset normal production declines. With only one drilling rig operating and with one service rig under contract, we were unable to accelerate our production base. Our equivalent sales for the quarter were 7,744 boe/d, including 5.4 mmcf/d of natural gas sales. The average price received for our sales was $45.07 per boe, including a crude oil selling price of $48.93 per barrel, aided by a weaker Canadian dollar.
YTD 2008, our revenue reached $92.9 million, resulting in cash flow of $41.1 million and earnings of $8.9 million. Crude oil sales have averaged 6,896 bbl/d this year, while equivalent sales have averaged 7,913 boe/d this year with considerable consistency. Cash flow YTD 2008 has totaled $0.79 per share, while earnings were $0.17 per share. There were more shares outstanding in Q3 2008 and YTD 2008 due to the successful completion of a $40 million capital raise through the sale of shares from treasury at the end of June 2008. This financing allowed us to further strengthen our balance sheet.
At September 30, 2008 we had $14.9 million of cash and over $8 million of working capital, net of $16 million of debt incurred in relation to the company's holdings of asset backed commercial paper ("ABCP"). It is anticipated this indebtedness will be reclassified as long-term debt once the ABCP court-approved restructuring is completed. This is now anticipated for later this year, when it is also anticipated the credit capacity of the company's long-term ABCP holdings will be expanded. The company also had approximately $28.6 million of unused credit capacity related to its reserve-backed credit facility at the end of the reporting period, so has the cash, cash flow and available credit to meet all its anticipated financial and operating obligations without further recourse to capital markets. As mentioned, efforts continue to further reduce the company's financial exposure to new higher cost drilling activity in Colombia and Peru through farmouts or joint ventures. In this way, financial risk will be reduced while retaining meaningful participation in new identified prospects to the potential benefit of shareholders upon success, at limited cost.
In the meantime, we have been busy on our lower impact drilling program in Argentina, while increasing injectivity at Puesto Morales to restore pressure to the reservoir and expand the production base from this asset. Injectivity rates as high as 26,000 bbl/d of water have been achieved as we replace the voidage caused by our significant production of crude oil during the past four years. Operating metrics in the field have remained stable despite increasing inflationary pressures in Argentina. Our field netback per boe sold in Q3 2008 was $29.29/boe, representing a solid 65 percent of the company's average selling price. Our YTD 2008 netback at $28.29 represents 66 percent of our sales price for the year. Operating costs at $8.61 per boe are acceptable for the complexity of the operation at Puesto Morales.
In Q3 2008 we drilled six wells in Argentina, with one well drilling at the end of the period. YTD 2008 we have participated in a total of 32 wells, resulting in 21 crude oil wells, two natural gas wells, one drilling well and one well awaiting completion at September 30, 2008. Most of these wells were of an infill nature designed to offset production declines until the full impact of the waterflood is experienced, anticipated sometime toward the middle of 2009.
Capital spending in the third quarter 2008 aggregated $21.0 million and was financed from cash flow and cash balances. Short term indebtedness declined from levels at June 30, 2008 with the application of proceeds from the June 2008 equity financing. Overall indebtedness declined in the reporting period.
Expenditures in Argentina continued to dominate our capital program, including outlays for geophysical programs and seismic processing for our exploratory blocks at Vaca Mahuida and Puesto Guevara. Costs for drilling site preparations at La Pinta in Colombia and continued outlays for geophysical programs and activity in Peru were also incurred in Q3 2008. YTD 2008 our total capital outlays have aggregated $81.2 million, including $59.8 million in Argentina (drilling, seismic, field facilities, waterflood), $2.5 million in Colombia (preparation for drilling the La Pinta well) and $18.8 million for seismic in Peru.
We were finally able to secure a suitable drilling rig for our Colombian drilling program and prospectively for our Peruvian drilling program during the reporting period. The rig has been transported from the Ecuadorean jungle to Colombia, is being retrofitted and is expected to be on location at La Pinta on our Sierra Nevada license in December 2008. A second well, Brillante, on the same license is anticipated for 2009. Thereafter, it is anticipated the rig will be available for development drilling until it is required for drilling on Ucayali Block 107 in Peru. It is a helicopter-transportable unit so should meet Petrolifera's requirements for jungle drilling after the company receives its drilling Environmental Impact Assessment ("EIA") approval, which is currently anticipated around mid-year 2009.
We were awarded a license over our Turpial Block earlier this year and continue to await the formal award of a license covering our Magdalena Block in Colombia.
In Peru, we are continuing to interpret the 2D seismic shot over our Ucayali Block 107 and we received our EIA for seismic on Maranon Block 106. The seismic crew has been relocated from Block 107 to Block 106 and seismic data acquisition is anticipated to be underway in the near future. A license on Block 133 offsetting our Ucayali Block 107 to the west is anticipated to be awarded sometime prior to year end, although we do not control this timetable. We remain one of the largest landholders in Peru and among the largest acreage owners of all independent companies operating in South America.
We recently announced the hiring of Dr. Robert ("Bob") Erlich as our new Vice President, Exploration and New Ventures. Dr. Erlich brings an impressive academic and business record to our company and will establish a representative office for the company in Houston, Texas. This will facilitate ease of access to South America and other regions of interest to the company, including Central America.
Outlook for 2009
We are cautiously optimistic about our outlook for 2009, assuming some equilibrium is restored to capital and credit markets. We remain concerned about the direction of Argentinean policy and in particular the continuing limitation on the sales prices available for domestic sales of crude oil and natural gas. Nevertheless, we will monitor and manage our principal asset with care during this period of turmoil.
Our Board of Directors has now approved a 2009 capital budget of $30 million, set at a reduced level compared to 2008 to address current uncertain economic conditions. High impact drilling in Colombia will dominate our proposed 2009 program. We also anticipate commencement of drilling activity in Peru on Block 107 during 2009, provided a suitable farmout arrangement can be achieved in a timely manner. Our Argentinean program will focus on production maintenance and the anticipated impact of our continuing water injection at Puesto Morales Norte. With our expanded technical capability, new ventures will continue to be evaluated for future acquisition once more amenable capital market conditions evolve.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following is dated as of November 11, 2008 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three and nine months ended September 30, 2008 as contained in this interim report and the MD&A and audited financial statements for the years ended December 31, 2007 and 2006 as contained in the company's 2007 Annual Report. Additional information relating to Petrolifera, including its Annual Information Form for the year ended December 31, 2007 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, including the letter to shareholders, contains forward-looking information including but not limited to future exploration and development plans, strategies for reducing the company's financial exposure to high cost exploration and drilling activities, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the company's waterflood program, and potential recovery of investments in ABCP. See "Outlook" for a discussion of the forward-looking information contained in this MD&A. Throughout this 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 may be misleading, particularly if used in isolation.
FINANCIAL AND OPERATING REVIEW
SALES VOLUMES, PRICING AND REVENUE
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Three months ended Nine months ended
Sept. 30 Sept. 30
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2008 2007 2008 2007
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Daily sales volumes
Crude oil and NGL - bbl/d 6,850 7,195 6,896 8,376
Natural gas - mcf/d 5,363 2,169 6,106 1,919
Total - boe/d 7,744 7,557 7,913 8,696
Average selling prices
Crude oil and NGL
- $ per bbl $48.93 $46.99 $47.01 $45.82
Natural gas - $ per mcf 2.58 1.41 2.37 1.45
Revenue per boe $45.07 $45.15 $42.80 $44.45
Petroleum and natural
gas sales ($000) $32,110 $31,387 $92,793 $105,522
Interest and other
income ($000) 16 343 122 1,435
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Total revenue ($000) $32,126 $31,730 $92,915 $106,957
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Petroleum and natural gas revenues for the third quarter of 2008 were $32.1 million on sales volumes of 7,744 boe/d, an increase of two percent on both sales revenue and sales volumes, compared to the third quarter 2007 revenues of $31.4 million and sales volumes of 7,557 boe/d. The modest increase in revenue, compared to the third quarter of 2007, resulted from higher natural gas production and increased pricing for Petrolifera's sales. All of Petrolifera's sales were from its Puesto Morales/Rinconada Block in Argentina and all of its production is sold to the domestic market in Argentina.
Petroleum and natural gas revenues for the nine months ended September 30, 2008 were $92.8 million (nine months ended September 30, 2007 - $105.5 million) on sales volumes of 7,913 boe/d (nine months ended September 30, 2007 - 8,696 boe/d), a year-over-year decrease of twelve percent for revenue and nine percent for sales volumes. In January 2008 the company activated a waterflood program to re-pressurize the reservoir, increase production volumes and optimize the ultimate recovery of reserves from the Puesto Morales Field. The waterflood program is in its early phases and has only partially re-pressurized the reservoir but an encouraging production response has been recorded in portions of the Field. This production response from the recently implemented pressure maintenance program when combined with the new drilling on the Puesto Morales/Rinconada Concession contributed to production levels above year-end 2007 exit rates.
Petroleum and natural gas revenues in the third quarter 2008 were down four percent from the second quarter of 2008, largely due to lower crude oil and natural gas liquids production and therefore sales volumes. There were some minor crude oil production declines in September 2008 due to optimization programs and adjustments being made to the pumping systems in Puesto Morales Norte Field. It should also be noted that as the Canadian dollar weakened relative to the US dollar and Argentinean peso during the third quarter of 2008, Petrolifera's realized price, as expressed in Canadian dollars, has improved.
For the nine months ended September 30, 2008, sales of crude oil and natural gas liquids represented 87 percent of the company's sales volumes compared to 96 percent for the nine months ended September 30, 2007. The company's realized crude oil price was up three percent to average $47.01 per barrel for the nine months ended September 30, 2008 (nine months ended September 30, 2007 - $45.82 per barrel). Third quarter average realized crude oil and natural gas liquids prices were up four percent compared to the third quarter of 2007. 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, which have effectively capped the current realized crude oil price at US$47.00 per barrel. Petrolifera's realized crude oil price has been insulated from the adverse impact of the significant decline in world crude oil markets.
Natural gas prices increased 63 percent to average $2.37 per mcf for the first nine months of 2008, reflecting some relaxation of regulated Argentinean natural gas prices. These are still substantially below prices prevailing in North American markets. The company successfully negotiated an increase to US$2.40 per mmbtu for winter sales volumes sold to a local gas marketing company. Third quarter natural gas prices increased 83 percent to $2.58 per mcf compared to $1.41 per mcf in the third quarter of 2007. Natural gas prices have been improving throughout 2008 and are expected to continue improving in the longer term due to market conditions and new policy initiatives aimed at market deregulation for industrial sales. Despite improved average selling prices for crude oil and natural gas for the three months and nine months ended September 30, 2008, the increase in natural gas sales volumes, which are priced considerably lower than the equivalent heating value of crude oil, resulted in an overall reduction in Petrolifera's revenue per boe due to the increased volumes of gas sold at a boe price well below the price for crude oil sales.
Interest and other income was $0.1 million in the nine months ended September 30, 2008 (nine months ended September 30, 2007 - $1.4 million) and $0.02 million for the three months ended September 30, 2008 (three months ended September 30, 2007 - $0.3 million) 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 nine months of 2008 were $12.9 million ($5.95 per boe) or 14 percent of oil and natural gas revenue, compared to $13.8 million ($5.80 per boe) or 13 percent in the first nine months of 2007. Royalties for the third quarter of 2008 were $4.8 million ($6.80 per boe) or 15 percent of oil and natural gas revenue compared to $4.7 million (6.33 per boe) or 14 percent in the second quarter of 2008 and $4.0 million ($5.77 per boe) or 13 percent in the third quarter of 2007.
OPERATING EXPENSES AND NETBACKS
Company Netbacks(1)
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Three months ended September 30
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($000 except per
boe amounts) 2008 2007
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Total Per boe Total Per boe
-------------------------------------------------------------------------
Average daily production
(boe/d) 7,744 7,557
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Petroleum and natural
gas sales $32,110 $45.07 $31,387 $45.15
Interest and other income 16 0.02 343 0.49
Royalties (4,842) (6.80) (4,010) (5.77)
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Net revenue 27,284 38.29 27,720 39.87
Operating costs (6,410) (9.00) (4,836) (6.96)
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Corporate netback $20,874 $29.29 $22,884 $32.91
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Nine months ended September 30
-------------------------------------------------------------------------
($000 except per
boe amounts) 2008 2007
-------------------------------------------------------------------------
Total Per boe Total Per boe
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Average daily production
(boe/d) 7,913 8,696
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Petroleum and natural
gas sales $92,793 $42.80 $105,522 $44.45
Interest and other income 122 0.05 1,435 0.60
Royalties (12,892) (5.95) (13,771) (5.80)
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Net revenue 80,023 36.90 93,186 39.25
Operating costs (18,675) (8.61) (12,955) (5.46)
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Corporate netback $61,348 $28.29 $80,231 $33.79
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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 is unlikely to
be comparable to similar measures used by other companies. The most
comparable measure calculated in accordance with GAAP would be net
earnings. 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. A reconciliation of netback to net income can be
found in the Net Earnings table.
Petrolifera's corporate netbacks per boe were respectively down 11 and 16 percent over those recorded in the three months and nine months ended September 30, 2007. The year over year change primarily reflects a decreased realized sales price, higher operating expenses and lower interest income. The change between third quarter 2008 over third quarter 2007 primarily reflects higher operating expenses, lower interest income and higher royalties. Petrolifera's third quarter 2008 corporate netback was down five percent over that recorded in the second quarter of 2008. The second quarter's realized pricing included a retroactive receipt for previously sold crude oil. Petrolifera's calculated unit netback for the third quarter and the first nine months of 2008 was respectively a healthy 65 and 66 percent of selling price per boe.
Operating costs in the first nine months of 2008 increased 44 percent in total and 58 percent on a per boe basis from 2007 levels. Operating costs in the third quarter of 2008 increased 33 percent in total and 29 percent on a per boe basis from 2007 levels. The increases are mainly attributable to a significant increase in the number of wells being operated, the number of wells on pump or that require servicing on a more frequent basis in addition to the effect of inflationary pressures and start-up costs related to new field facilities. Operating costs in the third quarter of 2008 were consistent in total but increased five percent on a per boe basis compared to the second quarter of 2008.
GENERAL & ADMINISTRATIVE AND STOCK BASED COMPENSATION EXPENSES
General & administrative ("G&A") expenses were $6.3 million in the first nine months of 2008 compared to $4.7 million for the first nine months of 2007. G&A was $2.2 million in the third quarter of 2008 compared to $1.5 million for the third quarter of 2007. These costs primarily consist of management and administrative salaries, legal and professional fees, insurance, travel and other administrative expenses. The increase from 2007 for both the three and nine month periods is primarily attributable to increased staffing levels to handle the expanded nature of the company's operations and increased legal costs associated with a dispute that was subject to an arbitration proceeding. The dispute was resolved during the current reporting period.
On a per boe basis, G&A was $2.92 per boe of sales for the first nine months of 2008 compared to $1.99 per boe for the first nine months of 2007. The increase in G&A per boe for the year, relative to 2007, was for the reasons previously mentioned, combined with modestly lower sales volumes. The increase in G&A per boe for the third quarter, relative to the second quarter of 2008, was primarily due to lower sales volumes. G&A of $1.7 million was capitalized in the first nine months of 2008 (first nine months of 2007 - $1.8 million). Non-cash stock-based compensation costs of $4.3 million were recorded in the first nine months of 2008 (first nine months of 2007 - $5.4 million), reflecting the amortization over the vesting period of the fair value of stock options granted during this or a previous reporting period, less the recognized fair value of options, during this or a previous reporting period, that were forfeited during the nine months ended September 30, 2008. The company generally grants stock options on an annual basis to existing employees and to new hires when employed.
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 charge of $1.0 million in the first nine months of 2008 (first nine months of 2007 - $6.3 million charge) and a gain of $0.2 million for the third quarter of 2008 (second quarter 2007 - $2.3 million charge). The company's main exposure to foreign currency risk relates to the pricing of crude oil sales, operating costs and capital expenditures which are mainly denominated in US dollars and Argentinean pesos.
FAIR VALUE IMPAIRMENT - ABCP
In recognition of the loss of liquidity in the company's ABCP investment, provision has been made in the financial statements for a non-cash fair value impairment charge of $5.4 million for the first nine months of 2008. The cumulative effect of the current year and 2007 impairments represents approximately 31 percent of the face value of the investment at the time of the loss of liquidity in the Canadian commercial paper market. The basis for this charge is explained under "Long-Term Investments." It is not known when or whether these amounts can or will be recovered.
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 nine months of 2008 was $17.7 million (first nine months of 2007 - $12.4 million) or $8.14 per boe (first nine months of 2007 - $5.23 per boe). DD&A was $6.6 million or $9.26 per boe for the third quarter of 2008 (third quarter 2007 - $3.6 million or $5.16 per boe). Accretion expense for the first nine months of 2008, which is included in DD&A expense, was $0.3 million (2007 - $0.1 million) to accrete the company's estimated asset retirement obligation. These charges will continue at appropriate levels in the future to accrete the currently booked discounted liability of $6.8 million over the estimated remaining economic life of the company's oil and gas properties. Capital costs of $37.3 million related to unevaluated properties and properties in the pre-production stage in Argentina, Colombia and Peru have been excluded from depletable costs (2007 - $10.1 million). The increase in DD&A in both the three and nine month comparison periods was mainly due to the estimated higher cost of production additions and the cost of infrastructure related to the Argentina production.
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 the first nine months of 2008 or for 2007.
TAXES
The current income tax provision of $9.1 million for the first nine months of 2008 (first nine months of 2007 - $16.4 million) primarily related to income taxes payable in Argentina. Additionally, a future income tax provision of $3.4 million for the nine month period (2007 - provision of $6.4 million) was recorded to recognize changes in tax pool balances. The increase in the effective tax rate to 58 percent for the first nine months of 2008 compared to 48 percent for the first nine months of 2007 was primarily due to the tax effect in Canada of the impairment recorded on the company's investment in ABCP. Taxes other than income taxes of $1.8 million (2007 - $1.3 million) represent taxes charged on all banking transactions in Argentina for the nine month period.
Current income tax provision for the third quarter of 2008 was $1.3 million (third quarter of 2007 - $2.4 million) and a future income tax expense of $2.6 million (third quarter of 2007 - provision of $3.8 million) for a total income tax provision in the third quarter of $3.9 million (third quarter of 2007 - $6.2 million). Taxes other than income taxes were $0.5 million (2007 - $0.4 million) for the third quarter of 2008.
NET EARNINGS AND SHARES OUTSTANDING
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Three months ended Sept. 30
-------------------------------------------------------------------------
($000 except per boe) 2008 2007
-------------------------------------------------------------------------
Total Per boe Total Per boe
-------------------------------------------------------------------------
Netback $20,874 $29.29 $22,884 $32.91
General & administrative (2,240) (3.15) (1,489) (2.14)
Stock-based compensation (1,123) (1.57) (1,260) (1.81)
Finance charges (1,361) (1.91) (11) (0.02)
Foreign exchange gain (loss) 239 0.34 (2,267) (3.26)
Fair value adjustments -
ABCP (1,885) (2.65) (2,787) (4.01)
Taxes other than income
taxes (486) (0.68) (360) (0.52)
Depletion, depreciation
and accretion (6,599) (9.26) (3,586) (5.16)
Income tax provision (3,855) (5.41) (6,205) (8.93)
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Net earnings for the period $3,564 $5.00 $4,919 $7.06
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-------------------------------------------------------------------------
Nine months ended Sept. 30
-------------------------------------------------------------------------
($000 except per boe) 2008 2007
-------------------------------------------------------------------------
Total Per boe Total Per boe
-------------------------------------------------------------------------
Netback $61,348 $28.29 $80,232 $33.79
General & administrative (6,326) (2.92) (4,721) (1.99)
Stock-based compensation (4,252) (1.96) (5,420) (2.28)
Finance charges (3,584) (1.65) (40) (0.02)
Foreign exchange gain (loss) (969) (0.45) (6,287) (2.65)
Fair value adjustments -
ABCP (5,377) (2.48) (2,787) (1.17)
Taxes other than income
taxes (1,808) (0.83) (1,306) (0.55)
Depletion, depreciation
and accretion (17,656) (8.14) (12,420) (5.23)
Income tax provision (12,484) (5.76) (22,813) (9.61)
-------------------------------------------------------------------------
Net earnings for the period $8,892 $4.10 $24,438 $10.29
-------------------------------------------------------------------------
In the first nine months of 2008 the company reported net earnings of $8.9 million (first nine months of 2007 - $24.4 million), which equates to $0.17 per weighted average basic and diluted share compared to $0.52 per weighted average basic and $0.48 per weighted average diluted share for the first nine months of 2007. Net earnings for the third quarter were $3.6 million (third quarter 2007 - $4.9 million), which equates to $0.06 per weighted average basic and diluted share (third quarter 2007 - $0.10 per weighted average basic and diluted share). Net earnings for the nine months ended September 30, 2008 were lower than the nine month period in 2007 mainly due to lower sales volumes, reduced pricing on a boe basis, cost inflation, fair value adjustments to ABCP and increased financing costs.
In the first nine months of 2008, the weighted average number of common shares outstanding was 51.9 million (first nine months of 2007 - 47.3 million). In the first nine months of 2008, 1.2 million additional shares were included in the diluted earnings per share calculations related to the potentially dilutive effect of outstanding options and warrants. The weighted average number of common shares outstanding was 54.9 million (2007 - 50.1 million) for the third quarter of 2008 and an additional 1.0 million shares were included for the diluted per share calculations related to the potentially dilutive effect of outstanding options and warrants.
As at the close of business on November 10, 2008, the company had the following securities issued and outstanding:
- 54,948,010 common shares; and - 3,941,867 stock options
Details of the exercise rights and terms of the options are noted in the Consolidated Financial Statements, included in this Interim Report.
CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY
Cash flow from operations before non-cash 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 Statements 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, natural gas liquids 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 Nine months ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings for the period $3,564 $4,919 $8,892 $24,438
Add (deduct)
Stock-based compensation 1,123 1,260 4,252 5,419
Depletion, depreciation,
and accretion 6,599 3,586 17,656 12,420
Future income tax provision 2,573 3,800 3,360 6,387
Amortization of deferred
finance charges 221 - 607 -
Foreign exchange (gain) loss (239) 2,267 969 6,287
Fair value adjustments -
ABCP 1,885 2,787 5,377 2,787
-------------------------------------------------------------------------
Cash flow from operations
before non-cash working
capital changes $15,726 $18,619 $41,113 $57,738
-------------------------------------------------------------------------
Cash flow in the first nine months of 2008 was $41.1 million (first nine months of 2007 - $57.7 million) or $0.79 per weighted average basic and $0.78 per weighted average diluted share, (2007 - $1.22 per weighted average basic and $1.13 per weighted average diluted share). Cash flow in the third quarter was $15.7 million (second quarter of 2007 - $18.6 million) which equates to $0.29 per weighted average basic and $0.28 per weighted average fully diluted share (2007 - $0.37 per weighted average basic and $0.36 per weighted average fully diluted share).
Equity Financing
On June 11, 2008 the company announced that it entered into a financing agreement with a syndicate of underwriters to issue 4,445,000 common shares ("Common Shares") at $9.00 per Common Share, on a "bought deal" basis, for gross proceeds of approximately $40.0 million. The underwriters were granted an over-allotment option to purchase up to an additional 666,750 Common Shares on the same terms and conditions, exercisable in whole or in part up to 30 days following closing. This financing was closed on June 27, 2008 and the over-allotment option was not exercised.
For the three months ended September 30, 2008, the net proceeds of the financing have been partially used to fund a portion of Petrolifera's 2008 capital expenditure programs in Argentina, Colombia and Peru as described under "Capital Expenditures". Until such time that Petrolifera applies all of the net proceeds of the financing to its remaining 2008 capital expenditure programs, a portion of the net proceeds were used to repay $11.5 million of indebtedness incurred outside of Argentina pursuant to the reserve-based credit facility. This reserve-based credit facility was previously utilized to fund a portion of the capital expenditures and general working capital given the loss of liquidity experienced in connection with the investment in ABCP (see "Long-Term Investments").
Proceeds of the financing are summarized as follows:
-------------------------------------------------------------------------
($000s)
-------------------------------------------------------------------------
Gross proceeds $40,005
Underwriter's commissions and issue costs 2,240
-------------------------------------------------------------------------
Net funds available for capital expenditure program $37,765
-------------------------------------------------------------------------
Capital Expenditures
-------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Argentina $14,628 $22,721 $59,831 $47,388
Colombia 1,765 150 2,512 353
Peru 4,623 3,190 18,838 5,641
Corporate 31 - 31 35
-------------------------------------------------------------------------
Total capital expenditures $21,046 $26,061 $81,212 $53,417
-------------------------------------------------------------------------
Capital spending exceeded cash flow resulting in an increase in bank debt compared to December 31, 2007. Nevertheless, Petrolifera was in a strong financial position at September 30, 2008 with significant cash flow, $14.9 million of cash and established and available borrowing capacity of $30.6 million. Petrolifera is striving to reduce future cash outlays to be more aligned with cash flow to maintain its balance sheet strength and financial flexibility as it prepares for increased activity in Colombia and Peru. Some commitments may also be reduced through anticipated farmouts and joint ventures.
Capital expenditures for the nine months ended September 30, 2008 totaled $81.2 million (nine months ended September 30, 2007 - $53.4 million). In Argentina the company drilled 32 wells (including two wells started in 2007 and completed in 2008) in the first nine months of the year with six of these wells drilled in the third quarter. The drilling program resulted in 21 oil wells, two natural gas wells, four injectors, four wells abandoned and one well awaiting completion as at September 30, 2008. In Peru on Block 107 the company completed the seismic data acquisition and continued to interpret and evaluate the results and was preparing for the seismic acquisition program on Block 106 following receipt of approval of the Environmental Impact Assessment. The anticipated award of Block 133, offsetting Block 107, is awaiting Peruvian Presidential decree. In Colombia, the company continued preparations for the planned La Pinta exploration well that is scheduled to commence drilling this year on the Sierra Nevada I License in the Lower Magdalena Basin.
The company's remaining 2008 capital program includes exploratory and development drilling in Argentina, exploratory drilling and seismic in Colombia and seismic acquisition and interpretation in Peru. Reductions in the company's financial exposure to new higher cost drilling planned for the remainder of 2008 in Colombia and 2009 in Colombia and Peru are being pursued through farmouts or joint ventures while retaining meaningful participation in these new prospects.
The company anticipates it has sufficient cash balances, cash flow and available credit to fund these planned capital expenditures. Required funds are being moved among Argentina, Barbados, Canada, Colombia and Peru as needed. The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable, income taxes payable, bank debt and long-term bank debt. It maintains no off-balance sheet financial instruments.
CREDIT FACILITIES
In 2007 the company entered into a US$100 million reserve-based revolving credit facility with an initial availability of US$60 million. The initial facility term was for three years, bore interest at LIBOR plus a margin, was secured by the pledge of the shares of Petrolifera's subsidiaries and had a provision for a borrowing base adjustment every six months. During the second quarter of 2008, the availability of the reserve-based credit facility was increased to US$70 million based on reserves as at December 31, 2007. The next adjustment is to be calculated based on information as at January 1, 2009. Remaining deferred financing costs of $1.8 million related to this facility are being amortized over the remaining term of the facility.
Any drawings made under this reserve-based credit facility related to operations outside of Argentina would be classified as current bank debt as the facility agreement allows for repayment of such drawings and it would be the intention of the company to repay any of these drawings within twelve months.
In late 2007, the company established an $18 million line of credit with a Canadian chartered bank. The line of credit bears interest at a floating rate and is secured by the ABCP investments. The company is in final negotiations for the line of credit secured by its ABCP investments to be increased to an approximately $28.3 million long-term credit facility, with an initial term of two to three years with four to five one-year renewals.
As at September 30, 2008 the reserve-based credit facility had $45.6 million (US$43.0 million) outstanding, all classified as long-term bank debt. The line of credit facility had $16 million outstanding classified as current bank debt. Interest expense on the facilities for the nine months ended September 30, 2008 was $3.0 million (nine months ended September 30, 2007 - Nil) and was $1.1 million for the third quarter of 2008 (third quarter 2007 - Nil). Unused credit facilities as at September 30, 2008 were $30.6 million.
The company is in final negotiations for the line of credit to be converted to a long-term facility and increased to approximately $28.3 million, and with an initial term of two to three years with four to five one-year renewals secured by the ABCP investments.
LONG-TERM INVESTMENTS
Due to the early success of the Argentinean drilling program since December 2005, after the company completed its initial public offering, significant cash balances were retained in Petrolifera's bank accounts. These funds were largely kept in Canada for capital preservation and security. In mid-2006 the company commenced a program to invest its surplus funds in high quality, highly rated, liquid commercial paper with a primary emphasis on security of capital. Investments were made in R-1 High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by the money market facilities of a Canadian chartered bank with whom we held bank accounts. These investments were made in more than one issuing entity, were made for various time periods and were acquired to earn a reasonable return in relation to prevailing market conditions. On maturity, proceeds including earned interest were generally reinvested on a regular basis. In August 2007 the Canadian third-party ABCP market experienced severe liquidity problems. This has caused the conduits that issued the notes to default on the redemption of the notes. As a result, holders could not receive their cash plus interest at maturity. On September 6, 2007 a panel of banks, asset providers, and major investors formed the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to oversee a proposed restructuring process. The proposed restructuring called for the ABCP to be converted into longer term floating rate notes which more closely match the maturities of the underlying assets. On March 17, 2008 the Pan-Canadian Committee made the restructuring proposal by filing a CCAA restructuring proposal whereby the company's notes will be exchanged for several classes of notes with maturities that better match the maturities of the underlying assets. On April 25, 2008, the noteholders voted in favour of the Pan-Canadian Committee restructuring proposal and on June 5, 2008 the court sanctioned the restructuring plan. In late June 2008, the Court of Appeal of Ontario heard motions from various noteholders seeking leave to appeal and an appeal of the sanctioning of the proposed restructuring. In August 2008, the lower courts original decision was upheld by the Court of Appeal of Ontario. In September 2008, the Supreme Court of Canada declined to hear any further noteholders appeal. It has been recently announced by the Pan-Canadian Committee chairman that it is anticipated that the plan of arrangement will be implemented by the end of 2008.
Quoted market values of the ABCP are not available due to the market disruption that has frozen the ABCP market. Management has therefore estimated the fair value of the owned ABCP, which were issued by Apsley Trust and MMAI-I Trust, based on a probabilistic recovery of principal and interest, taking into account all available information. Under this valuation method, several different outcomes of the recovery of the principal and interest are estimated considering the information available as at September 30, 2008. A weighted average recovery is then calculated. This weighted average recovery is used to determine the discounted cash flows that are expected from these investments. The discount rate used to discount the expected cash flows from the ABCP is an approximation of the risk-free rate for the expected life of the ABCP notes to be received. As the rate used for discounting is an approximation of the risk-free rate, all other risks have been incorporated in the estimated probability adjusted expected outcomes. This methodology applies all risking information into the various scenarios and discounts the fully risked cash flow stream only for the time value of money. The recovery factors used were as follows:
-------------------------------------------------------------------------
Face
Value Capital Interest
Class of Notes Capital Interest Weighted Weighted
of Expected Recovery Recovery Average Average Term Discount
Note ($000s) Range Range Recovery Recovery (years) Rate
-------------------------------------------------------------------------
A-1 $14,603 0 - 93% 0 - 73% 88% 68% 5 - 8 3.50%
-------------------------------------------------------------------------
A-2 13,246 0 - 87% 0 - 67% 79% 54% 8 3.50%
-------------------------------------------------------------------------
B 2,281 0 - 45% 0 - 20% 42% 19% 8 3.50%
-------------------------------------------------------------------------
C 932 0 - 20% 0 - 20% 18% 13% 8 3.50%
-------------------------------------------------------------------------
IA
Tracking 6,638 0 - 73% 0 - 48% 58% 3% 8 3.50%
-------------------------------------------------------------------------
Total $37,700
-------------------------------------------------------------------------
Based on the above approach the fair value of the investment in ABCP is estimated to be $26.0 million which is an impairment of $5.4 million for the nine months ended September 30, 2008. For the quarter ended September 30, 2008 the impairment recorded is $1.9 million or approximately 5 percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 31 percent of the original cost of the investment.
As at September 30, 2008, included in long-term investments were ABCP with a face value of $37.7 million and a carrying value of $26.0 million. These investments are classified as held for trading and are carried at fair value, which is assessed each reporting date. The theoretical fair value of the company's ABCP could range from $18.5 million to $32.8 million using the valuation methodology described above, with alternative reasonably possible assumptions. The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the replacement notes for the ABCP become liquid, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. The outcome of the actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings.
RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS
Under the terms of an Administrative Agreement with Connacher Oil and Gas Limited ("Connacher"), in effect from January 1, 2008, Connacher provided certain administrative services necessary or appropriate upon the direction of the company. The fee for this service is $15,000 per month. From time to time Connacher also paid bills on behalf of Petrolifera, for which it is reimbursed. Connacher also provided certain support and services to Petrolifera in its pursuit of exploration opportunities in Colombia, for which it will be indemnified and reimbursed without further economic interest in the secured opportunities. The Executive Chairman of the company is the President and Chief Executive Officer of Connacher.
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, 2008, the company adopted CICA Handbook sections 1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories, Financial Instruments - Disclosures and Financial Instruments - Presentation, respectively. Under section 1535, the company is required to disclose its objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. Note 5 contains further disclosures with respect to this standard.
Under section 3031, the measurement of cost and cost formulas for inventories have been revised, along with additional disclosure requirements. The adoption of this section has had no impact on the company's consolidated financial statements, as inventories were already being measured in a manner permitted under the new standard.
Under section 3862, the company is required to disclose the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. Note 5 contains further disclosures with respect to this standard.
Under section 3863, further guidance is provided on the classification of financial instruments as liabilities vs. equity, and when netting of financial assets and financial liabilities is appropriate. The adoption of this section had no impact on the company's consolidated financial statements as the company does not have any financial instruments that contains both a liability and an equity element and was already offsetting a financial asset and financial liability when it had a legally enforceable right to set off the recognized amounts and intended to settle simultaneously.
As of January 1, 2009, the company will be required to adopt CICA Handbook section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets and section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new standard establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous section 3062. The company is currently evaluating the impact of the adoption of this new section.
Over the next three 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 Standards ("IFRS"), with an expected effective date of January 1, 2011. 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$51.9 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 for Block 106 ended in 2007 and the company has met its commitment and is currently in the second license term with a commitment to invest a minimum of US$1.6 million in this term. These expenditures are budgeted to be fully discharged in 2008. In Block 107, the company is in the first term of the license and expects to complete all the required work commitments for the term during 2008. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru.
In 2007 the Company was granted three concessions comprised of one license and two technical evaluation agreements (TEA) in Colombia with a total work commitment of US$5.7 million over a two year period. These work commitments are budgeted to be completed during 2008. Petrolifera has converted the Turpial TEA into a licence and has requested that the remaining TEA, Sierra Nevada II, be also converted to a licence. The company has issued letters of credit in the total amount of US$0.6 million in support of these work commitments as well as depositing US$2.6 million in a trust account in Colombia to meet certain of the work obligations.
In Argentina the company has total gross work commitments estimated at US$12.0 million over the next three years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayalla II Blocks. A portion of the Argentinean work commitments related to the Vaca Mahuida block has been farmed out to a third party.
The company signed a letter of intent with Petrex S.A. ("Petrex") whereby Petrex has agreed to provide a helicopter-transportable drilling rig for up to two years from commencement of the Colombian drilling program with an option for an additional year where the company anticipates having mobilized the rig for its prospective Peruvian drilling program. The rig is currently in Colombia and is undergoing retrofitting for anticipated fourth quarter drilling at the La Pinta prospect on the Sierra Nevada Licence.
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 service contracts for drilling, leases for office premises, various operating costs, software license agreements and other equipment are as follows:
------------------------------------------------------------------------- ($000) 2008 2009-2011 2012-2013 Total ------------------------------------------------------------------------- Total service contracts and other $2,542 $41,323 $150 $44,015 -------------------------------------------------------------------------
Reductions in the company's net work commitments are currently being pursued through farmout and/or joint ventures while retaining meaningful participation in these prospects.
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, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman, President and Chief Operating Officer and 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, President and Chief Operating Officer and 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 judgment 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 health 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 debt and equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of international oil and gas exploration, development and production activities. 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
We will attempt to reduce risk by reducing our participation in higher risk, higher cost activity through farmouts and joint ventures with industry and financial partners in a period of volatility and uncertainty expected to persist throughout the balance of 2008 and in 2009.
Our Board of Directors has now approved a 2009 capital budget of $30 million, set at a reduced level compared to 2008 to address uncertain economic conditions. High impact drilling in Colombia will dominate our proposed 2009 program. We also anticipate commencement of drilling activity in Peru on Block 107, provided a suitable farmout arrangement can be achieved in a timely manner. Our Argentinean program will focus on production maintenance and the anticipated impact of our continuing water injection at Puesto Morales Norte. With our expanded technical capability, new ventures will continue to be evaluated for future acquisition once more amenable capital market conditions emerge.
Forward-Looking Statements
This MD&A contains forward-looking information, including but not limited to future exploration and development plans, strategies for reducing the company's financial exposure to high cost exploration and drilling activities, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the company's waterflood program, and potential recovery of investments in ABCP. Forward-looking information is not based on historical facts but rather on management expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities. Such forward-looking information reflects management's current beliefs and assumptions, including but not limited to the continued existence and operation of existing pipelines, future prices for crude oil, natural gas and natural gas liquids, future currency and exchange rates, the regulatory framework representing royalties, taxes and environmental matters in the countries in which Petrolifera conducts its business and Petrolifera's ability to obtain qualified staff and equipment in a timely and cost efficient manner to meet Petrolifera's demand and is based on information currently available to management. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but 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 are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success, potential timing delays and possible third party joint ventures and farmout arrangements. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions and availability. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the company's waterflood program.
Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts and the restoration of liquidity in this market. There can be no assurance as to the timing or extent of recovery of this investment.
Due to the risks, uncertainties and assumptions inherent in forward-looking information, prospective investors in the company's securities should not place undue reliance on this forward-looking information. Forward-looking information contained in this press release is made as of the date hereof and is subject to change. The company assumes no obligation to revise or update forward-looking information to reflect new circumstances, except as required by law.
QUARTERLY RESULTS(4)
-------------------------------------------------------------------------
For the three months ended
-------------------------------------------------------------------------
2006 2007
-------------------------------------------------------------------------
Dec 31 Mar 31 Jun 30 Sept 30 Dec 31
-------------------------------------------------------------------------
Financial results ($000
except per share
amounts) - unaudited
-------------------------------------------------------------------------
Total revenue 45,15 47,122 28,105 31,730 27,266
-------------------------------------------------------------------------
Cash flow from
operations before
non-cash working
capital changes(1) 18,495 24,615 14,504 18,619 10,707
-------------------------------------------------------------------------
Basic, per share(1) 0.42 0.56 0.30 0.37 0.21
-------------------------------------------------------------------------
Diluted, per share(1) 0.35 0.49 0.28 0.36 0.21
-------------------------------------------------------------------------
Net earnings 12,401 15,069 4,450 4,919 4,863
-------------------------------------------------------------------------
Basic, per share 0.28 0.34 0.09 0.10 0.10
-------------------------------------------------------------------------
Diluted, per share 0.24 0.30 0.09 0.10 0.09
-------------------------------------------------------------------------
Capital expenditures 22,031 7,514 19,842 26,061 57,608
-------------------------------------------------------------------------
Cash on hand 51,008 59,155 66,535 11,368 13,052
-------------------------------------------------------------------------
Working capital 43,038 58,811 69,690 22,742 (31,779)
-------------------------------------------------------------------------
Long-term bank debt - - - - -
-------------------------------------------------------------------------
Shareholders' equity 80,656 98,124 120,236 121,727 120,303
-------------------------------------------------------------------------
Total assets 118,517 137,840 139,054 144,016 204,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Sales volumes
-------------------------------------------------------------------------
Crude oil and natural
gas liquids - bbl/d 10,716 11,333 6,644 7,195 6,565
-------------------------------------------------------------------------
Natural gas - mcf/d 1,101 1,858 1,726 2,169 2,860
-------------------------------------------------------------------------
Equivalent - boe/d(2) 10,900 11,643 6,932 7,557 7,042
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil and natural
gas liquids - $/bbl 45.20 45.43 45.17 46.99 44.36
-------------------------------------------------------------------------
Natural gas - $/mcf 1.50 1.53 1.42 1.41 1.76
-------------------------------------------------------------------------
Selected highlights -
$/boe(2)
-------------------------------------------------------------------------
Weighted average selling
price per boe 44.59 44.47 43.65 45.65 42.07
-------------------------------------------------------------------------
Interest and other income 0.44 0.50 0.90 0.49 0.01
-------------------------------------------------------------------------
Royalties 6.37 5.59 6.19 5.77 5.76
-------------------------------------------------------------------------
Operating costs 4.02 4.40 5.56 6.96 8.20
-------------------------------------------------------------------------
Corporate netback(3) 34.64 34.98 32.80 32.91 28.12
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share information
(000, except share price)
-------------------------------------------------------------------------
Shares outstanding at
end of period 43,612 44,029 50,084 50,119 50,127
-------------------------------------------------------------------------
Fully diluted 52,704 53,280 53,382 51,803 51,670
-------------------------------------------------------------------------
Weighted average
shares outstanding
for the period
-------------------------------------------------------------------------
Basic 43,418 43,800 47,816 50,107 50,123
-------------------------------------------------------------------------
Diluted 51,002 50,635 51,303 51,800 51,689
-------------------------------------------------------------------------
Volume traded during
quarter 18,086 7,202 6,211 10,921 12,223
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 25.24 20.20 19.29 22.35 17.10
-------------------------------------------------------------------------
Low 14.71 16.05 16.60 13.18 9.14
-------------------------------------------------------------------------
Close (end of period) 17.65 19.14 17.04 15.20 9.87
-------------------------------------------------------------------------
-----------------------------------------------------
For the three months ended
-----------------------------------------------------
2008
-----------------------------------------------------
Mar 31 Jun 30 Sept 30
-----------------------------------------------------
Financial results ($000
except per share
amounts) - unaudited
-----------------------------------------------------
Total revenue 27,167 33,622 32,126
-----------------------------------------------------
Cash flow from
operations before
non-cash working
capital changes(1) 11,902 13,485 15,726
-----------------------------------------------------
Basic, per share(1) 0.24 0.27 0.29
-----------------------------------------------------
Diluted, per share(1) 0.23 0.26 0.28
-----------------------------------------------------
Net earnings 1,738 3,590 3,564
-----------------------------------------------------
Basic, per share 0.04 0.07 0.06
-----------------------------------------------------
Diluted, per share 0.03 0.07 0.06
-----------------------------------------------------
Capital expenditures 31,056 29,110 21,046
-----------------------------------------------------
Cash on hand 11 41,039 14,865
-----------------------------------------------------
Working capital (51,546) 13,295 8,148
-----------------------------------------------------
Long-term bank debt - 43,800 45,576
-----------------------------------------------------
Shareholders' equity 127,225 168,735 178,069
-----------------------------------------------------
Total assets 231,278 292,882 279,174
-----------------------------------------------------
-----------------------------------------------------
Operating results
-----------------------------------------------------
Sales volumes
-----------------------------------------------------
Crude oil and natural
gas liquids - bbl/d 6,726 7,111 6,850
-----------------------------------------------------
Natural gas - mcf/d 7,044 5,922 5,363
-----------------------------------------------------
Equivalent - boe/d(2) 7,900 8,098 7,744
-----------------------------------------------------
Pricing
-----------------------------------------------------
Crude oil and natural
gas liquids - $/bbl 41.99 49.90 48.93
-----------------------------------------------------
Natural gas - $/mcf 2.20 2.38 2.58
-----------------------------------------------------
Selected highlights -
$/boe(2)
-----------------------------------------------------
Weighted average selling
price per boe 37.72 45.56 45.07
-----------------------------------------------------
Interest and other income 0.07 0.07 0.02
-----------------------------------------------------
Royalties 4.71 6.33 6.80
-----------------------------------------------------
Operating costs 8.24 8.60 9.00
-----------------------------------------------------
Corporate netback(3) 24.84 30.69 29.29
-----------------------------------------------------
-----------------------------------------------------
Common share information
(000, except share price)
-----------------------------------------------------
Shares outstanding at
end of period 50,353 54,798 54,948
-----------------------------------------------------
Fully diluted 54,105 58,590 58,675
-----------------------------------------------------
Weighted average
shares outstanding
for the period
-----------------------------------------------------
Basic 50,212 50,273 54,884
-----------------------------------------------------
Diluted 51,562 51,508 55,897
-----------------------------------------------------
Volume traded during
quarter 7,721 4,590 7,884
-----------------------------------------------------
Common share price ($)
-----------------------------------------------------
High 11.96 11.25 8.72
-----------------------------------------------------
Low 6.61 8.25 3.16
-----------------------------------------------------
Close (end of period) 9.10 8.69 3.37
-----------------------------------------------------
(1) Cash flow from operations before non-cash 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 are unlikely to 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 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 internally 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. 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) Corporate 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. For a reconciliation of netbacks to net
earnings, see "MD&A".
(4) Fluctuations in results over the previous eight quarters are due
principally to variations in oil and gas prices and production
volumes.
CONSOLIDATED BALANCE SHEETS
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
Sept. 30, 2008 Dec. 31, 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents $14,865 $13,052
Accounts receivable 31,199 27,512
Prepaid expenses 595 468
Inventories (Note 3) 1,552 854
-------------------------------------------------------------------------
48,211 41,886
Deferred financing costs 1,779 2,089
Long-term investments (Note 4) 28,488 33,378
Property and equipment 200,696 126,874
-------------------------------------------------------------------------
$279,174 $204,227
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $22,574 $37,963
Income taxes payable 1,469 6,090
Bank debt (Note 6) 16,000 29,612
Due to a related company 20 -
-------------------------------------------------------------------------
40,063 73,665
Asset retirement obligations (Note 7) 6,810 5,639
Long-term bank debt (Note 6) 45,576 -
Future income taxes 8,656 4,620
-------------------------------------------------------------------------
101,105 83,924
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital, warrants and contributed
surplus (Note 8) 106,786 64,544
Accumulated other comprehensive loss (4,042) (10,674)
Retained earnings 75,325 66,433
-------------------------------------------------------------------------
178,069 120,303
-------------------------------------------------------------------------
$279,174 $204,227
-------------------------------------------------------------------------
Commitments, contingencies and guarantees (Note 11)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30,
-------------------------------------------------------------------------
($000, except per
share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue
Petroleum and natural gas
sales $32,110 $31,387 $92,793 $105,522
Interest and other income 16 343 122 1,435
-------------------------------------------------------------------------
32,126 31,730 92,915 106,957
Royalties 4,842 4,010 12,892 13,771
-------------------------------------------------------------------------
27,284 27,720 80,023 93,186
-------------------------------------------------------------------------
Expenses
Operating 6,410 4,836 18,675 12,955
General & administrative 2,240 1,489 6,326 4,721
Stock-based compensation 1,123 1,260 4,252 5,419
Finance charges 1,361 11 3,584 40
Foreign exchange loss (gain) (239) 2,267 969 6,287
Fair value impairment -
ABCP (Note 4) 1,885 2,787 5,377 2,787
Taxes other than income taxes 486 360 1,808 1,306
Depletion, depreciation and
accretion 6,599 3,586 17,656 12,420
-------------------------------------------------------------------------
19,865 16,596 58,647 45,935
-------------------------------------------------------------------------
Earnings before income taxes 7,419 11,124 21,376 47,251
Current income tax provision 1,282 2,405 9,124 16,426
Future income tax provision 2,573 3,800 3,360 6,387
-------------------------------------------------------------------------
3,855 6,205 12,484 22,813
-------------------------------------------------------------------------
Net earnings 3,564 4,919 8,892 24,438
Retained earnings, beginning
of period 71,761 59,233 66,433 39,714
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Retained earnings, end of
period $75,325 $64,152 $75,325 $64,152
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per share
(Note 10(a))
Basic $0.06 $0.10 $0.17 $0.52
Diluted $0.06 $0.10 $0.17 $0.48
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30,
-------------------------------------------------------------------------
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Net earnings $3,564 $4,919 $8,892 $24,438
Foreign currency translation
adjustment 4,574 (4,790) 6,632 (7,196)
-------------------------------------------------------------------------
Comprehensive income $8,138 $129 $15,524 $17,242
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30,
-------------------------------------------------------------------------
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance, beginning of period $(8,616) $(739) $(10,674) $1,667
Foreign currency translation
adjustment 4,574 (4,790) 6,632 (7,196)
-------------------------------------------------------------------------
Balance, end of period $(4,042) $(5,529) $(4,042) $(5,529)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
Three months ended Nine months ended
Sept. 30, Sept. 30,
-------------------------------------------------------------------------
($000) 2008 2007 2008 2007
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash provided by (used in)
the following activities:
Operating
Net earnings $3,564 $4,919 $8,892 $24,438
Items not involving cash:
Depletion, depreciation and
accretion 6,599 3,586 17,656 12,420
Stock-based compensation 1,123 1,260 4,252 5,419
Amortization of deferred
charges 221 - 607 -
Foreign exchange loss (gain) (239) 2,267 969 6,287
Fair value impairment -
ABCP (Note 4) 1,885 2,787 5,377 2,787
Future income tax provision 2,573 3,800 3,360 6,387
-------------------------------------------------------------------------
Cash flow from operations
before non-cash working
capital changes 15,726 18,619 41,113 57,738
Changes in non-cash working
capital (Note 10(b)) (505) (8,874) (8,677) (24,351)
-------------------------------------------------------------------------
15,221 9,745 32,436 33,387
-------------------------------------------------------------------------
Financing
Proceeds from bank debt or
long-term bank debt - - 44,214 -
Repayment of bank debt or
long-term bank debt (15,825) - (15,825) -
Issue of common shares, net
of share issue costs 73 102 37,990 18,410
Deferred financing costs (153) - (153) -
-------------------------------------------------------------------------
(15,905) 102 66,226 18,410
-------------------------------------------------------------------------
Investing
Development of oil and gas
properties (21,046) (26,061) (81,212) (53,417)
Reclassification to
long-term investments - (37,661) - (37,661)
Changes in non-cash working
capital (Note 10(b)) (5,441) 655 (15,825) 5,007
-------------------------------------------------------------------------
(26,487) (63,067) (97,037) (86,071)
-------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (27,171) (53,220) 1,625 (34,274)
-------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 41,039 66,535 13,052 51,008
-------------------------------------------------------------------------
Impact of foreign exchange
on foreign currency
denominated cash balances 997 (1,947) 188 (5,366)
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $14,865 11,368 $14,865 11,368
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents
comprises:
Cash in banks $14,865 $10,302 $14,865 $10,302
Term deposits - 1,066 - 1,066
-------------------------------------------------------------------------
Cash and cash equivalents $14,865 $11,368 $14,865 $11,368
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary cash flow information - (Note 10(c))
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Petrolifera Petroleum Limited
Period ended September 30, 2008
(Unaudited)
1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES
The interim Consolidated Financial Statements include the accounts of
Petrolifera Petroleum Limited 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 year ended
December 31, 2007 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.
Financial instruments
Financial instruments are recognized initially at fair value on the
balance sheet, and include cash and cash equivalents, accounts
receivable, long-term investments, accounts payable and accrued
liabilities, due from a related company, bank debt and long-term bank
debt. The company has classified all of its financial instruments as held
for trading, with the exception of the bank debt and long-term bank debt,
which are classified as other liabilities. Held for trading instruments
are measured at fair value, while other liabilities are measured at
amortized cost.
The company has not entered into any financial derivative contracts, does
not enter into these contracts for speculative purposes, and has not
recorded any assets or liabilities as a result of embedded derivatives.
The carrying value of held for trading instruments approximates their
fair value due to the short term nature of these instruments, except for
long term investments, which is discussed in Note 4. The fair value of
the bank debt and long-term bank debt approximates the carrying value as
the debt has a floating market rate of interest.
2. NEW ACCOUNTING STANDARDS
Effective January 1, 2008, the company adopted CICA Handbook sections
1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories,
Financial Instruments - Disclosures and Financial Instruments -
Presentation, respectively. Under section 1535, the company is required
to disclose its objectives, policies and processes for managing capital,
and in addition, whether the entity has complied with any externally
imposed capital requirements. Note 5 contains further disclosures with
respect to this standard.
Under section 3031, the measurement of cost and cost formulas for
inventories have been revised, along with additional disclosure
requirements. The adoption of this section has had no impact on the
company's Consolidated Financial Statements, as inventories were already
being measured in a manner permitted under the new standard.
Under section 3862, the company is required to disclose the significance
of financial instruments to an entity's financial statements, the risks
associated with the financial instruments, and how those risks are
managed. Note 5 contains further disclosures with respect to this
standard.
Under section 3863, further guidance is provided on the classification of
financial instruments as liabilities vs. equity, and when netting of
financial assets and financial liabilities is appropriate. The adoption
of this section had no impact on the company's consolidated financial
statements as the company does not have any financial instruments that
contains both a liability and an equity element and was already
offsetting a financial asset and financial liability when it had a
legally enforceable right to set off the recognized amounts and intended
to settle simultaneously.
As of January 1, 2009, the company will be required to adopt CICA
Handbook section 3064, Goodwill and Intangible Assets, replacing section
3062, Goodwill and Other Intangible Assets and section 3450, Research and
Development Costs. Various changes have been made to other sections of
the CICA Handbook for consistency purposes. The new standard establishes
standards for the recognition, measurement, presentation and disclosure
of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill are
unchanged from the standards included in the previous section 3062. The
company is currently evaluating the impact of the adoption of this new
section.
Over the next three 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 Standards ("IFRS"),
with an effective date of January 1, 2011. The company continues to
monitor and assess the impact of the convergence of Canadian GAAP with
IFRS.
3. INVENTORIES
The company maintains inventories as a consequence of the sales process
for its products, whereby crude oil and natural gas liquids which has
been produced is not delivered to customers for periods of up to several
days, during which time it must be stored.
-------------------------------------------------------------------------
Sept. 30, Dec. 31,
2008 2007
-------------------------------------------------------------------------
($000)
Crude oil and natural gas liquids $1,552 $854
-------------------------------------------------------------------------
At September 30, 2008 and December 31, 2007, inventory is composed of
crude oil and natural gas liquids held in storage at the company's
facilities and in transportation pipelines. Crude oil and natural gas
liquids are carried at the lower of cost and net realizable value.
4. LONG-TERM INVESTMENTS
Due to the early success of the Argentinean drilling program since
December 2005, after the company completed its initial public offering,
significant cash balances were retained in Petrolifera's bank accounts.
These funds were largely kept in Canada for capital preservation and
security. In mid-2006 the company commenced a program to invest its
surplus funds in high quality, highly rated, liquid commercial paper with
a primary emphasis on security of capital. Investments were made in R-1
High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by
a Canadian chartered bank with whom we held bank accounts. These
investments were made in more than one issuing entity, were made for
various time periods and were acquired to earn a reasonable return in
relation to prevailing market conditions. On maturity, proceeds including
earned interest were generally reinvested on a regular basis. In August
2007 the Canadian third-party ABCP market experienced severe liquidity
problems. This has caused the conduits that issued the notes to default
on the redemption of the notes. As a result, holders could not receive
their cash plus interest at maturity.
On September 6, 2007 a panel of banks, asset providers, and major
investors formed the Pan-Canadian Investors Committee for Third-Party
Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to
oversee a proposed restructuring process. The proposed restructuring
called for the ABCP to be converted into longer term floating rate notes
which more closely match the maturities of the underlying assets. On
March 17, 2008 the Pan-Canadian Committee made the restructuring proposal
by filing a CCAA restructuring proposal whereby the company's notes will
be exchanged for several classes of notes with maturities that better
match the maturities of the underlying assets. On April 25, 2008, the
noteholders voted in favour of the Pan-Canadian Committee restructuring
proposal and on June 5, 2008 the court sanctioned the restructuring plan.
In late June 2008, the Court of Appeal of Ontario heard motions from
various noteholders seeking leave to appeal and an appeal of the
sanctioning of the proposed restructuring. In August 2008, the lower
courts original decision was upheld by the Court of Appeal of Ontario.
The final court involvement came in September 2008, whereby the Supreme
Court of Canada declined to hear any further noteholders appeal.
Quoted market values of the ABCP are not available due to the market
disruption that is currently paralyzing the ABCP market. Management has
therefore estimated the fair value of the owned ABCP, which were issued
by Apsley Trust and MMAI-I Trust, based on a probabilistic recovery of
principal and interest taking into account all available information.
Under this valuation method, several different outcomes of the recovery
of the principal and interest are estimated considering the information
available as at September 30, 2008. A weighted average recovery is then
calculated. This weighted average recovery is used to determine the
discounted cash flows that are expected from these investments. The
discount rate used to discount the expected cash flows from the ABCP is
an approximation of the risk-free rate for the expected life of the ABCP
notes to be received. As the rate used for discounting is an
approximation of the risk-free rate, all other risks have been
incorporated in the estimated probability adjusted expected outcomes.
This methodology applies all risking information into the various
scenarios and discounts the fully risked cash flow stream only for the
time value of money. The recovery factors used were as follows:
-------------------------------------------------------------------------
Face Value Capital Interest
of Notes Capital Interest Weighted Weighted
Class Expected Recovery Recovery Average Average Term Discount
of Note ($000s) Range Range Recovery Recovery (years) Rate
-------------------------------------------------------------------------
A-1 $14,603 0 - 93% 0 - 73% 88% 68% 5 - 8 3.50%
-------------------------------------------------------------------------
A-2 13,246 0 - 87% 0 - 67% 79% 54% 8 3.50%
-------------------------------------------------------------------------
B 2,281 0 - 45% 0 - 20% 42% 19% 8 3.50%
-------------------------------------------------------------------------
C 932 0 - 20% 0 - 20% 18% 13% 8 3.50%
-------------------------------------------------------------------------
IA Tracking 6,638 0 - 73% 0 - 48% 58% 3% 8 3.50%
-------------------------------------------------------------------------
Total $37,700
-------------------------------------------------------------------------
Based on the above approach the fair value of the investment in ABCP is
estimated to be $26.0 million which is an impairment of $5.4 million for
the nine months ended September 30, 2008. For the quarter ended September
30, 2008 the impairment recorded is $1.9 million or approximately
5 percent of the carrying value of the ABCP. This impairment brings the
total impairment of the ABCP recorded to date to approximately 31 percent
of the original cost of the investment.
As at September 30, 2008, included in long-term investments were ABCP
with a face value of $37.7 million and a carrying value of $26.0 million.
These investments are classified as held for trading and are carried at
fair value which is assessed each reporting date. The theoretical fair
value of the company's ABCP could range from $18.5 million to
$32.8 million using the valuation methodology described above with
alternative reasonably possible assumptions. The company anticipates that
it presently has sufficient cash resources and available credit to
satisfy obligations as they come due. Assuming the replacement notes for
the ABCP become liquid, the company would be able to substantially reduce
its net indebtedness incurred from lack of access to these amounts. The
outcome of the actual timing and amount ultimately recoverable from these
notes may differ materially from this estimate which would impact the
company's earnings.
5. FINANCIAL RISK MANAGEMENT
Summary
The company is exposed to various risks that arise from its business
environment and the financial instruments it holds. The Audit Committee
of the Board of Directors assists the Board in the discharge of its
responsibility for overseeing the process that management has in place to
identify, assess and manage business risks. The following outlines the
company's risk exposures, quantifies these risks, and explains how these
risks and its capital structure are managed.
Capital Management
The company's objective is to maintain a strong capital position in order
to execute its business plans and maximize value to shareholders. The
company defines its capital as shareholders' equity, bank debt and
long-term bank debt. Changes to the relative weighting of the capital
structure is driven by the company's business plans, changes in economic
conditions and risks inherent in the global oil and gas industry. There
have been no material changes to the company's processes and objectives
related to capital management compared to prior periods. Methods to
adjust the company's capital structure could include any or all of the
following activities:
- Repurchase shares pursuant to a normal course issuer bid;
- Issue new shares through a public offering or private placement; such
as occurred in the second quarter of 2008;
- Raise fixed or floating rate debt; and
- Refinance existing debt facilities to change amounts or terms.
The company periodically reviews certain quantitative measures of its
capital structure, in order to understand its position relative to
industry peers. These measures include calculations such as return on
equity, return on capital employed and the debt to equity ratio. The
company does not set certain limits or ranges with respect to these
quantitative measures.
The company is subject to external restrictions on its reserves-based
revolving credit facility. The facility has an overall limit of
US$100 million and the current available limit is US$70 million, which is
subject to semi-annual review. Bank debt and long-term bank debt
outstanding cannot exceed two times the 12 month trailing EBITDA. EBITDA
is defined as net earnings prior to deduction of interest, income taxes,
depletion, depreciation and accretion expense and other non-cash
expenses. As at September 30, 2008, bank debt and long-term bank debt
outstanding was $61.6 million and two times EBITDA was $138.0 million,
for a ratio of 0.3:1, which is well below the imposed limit.
Credit Risk
The Company is exposed to credit risk in relation to its cash and cash
equivalents, long-term investments and accounts receivable. Cash and cash
equivalents are held with highly rated international banks and therefore
the company considers these assets to have negligible credit risk. Refer
to Note 4 for further discussion regarding the credit risk of long-term
investments.
The company's accounts receivable are primarily with joint venture
partners, oil and gas marketers and local government agencies. The
company conducts a small minority of its business through joint ventures,
so its overall exposure to credit risk from joint venture partners is
considered to be low. The company's production base is entirely located
in Argentina, and is heavily weighted to oil. It sells its oil production
to a well-established, investment grade, state-owned oil company, and its
gas production to a reputable local gas marketing company. Receivables
with local governments pertain to input taxes paid on certain
expenditures. The company has not experienced any collection problems
with its counterparties and does not currently have any overdue amounts.
The carrying amounts of cash and cash equivalents and accounts receivable
represents the company's maximum credit exposure. The company does not
have an allowance for doubtful accounts, and did not write off any
receivables in the three or nine month periods ended September 30, 2008.
Liquidity Risk
The company manages its risk of not meeting its financial obligations
through management of its capital structure, annual budgeting of its
revenues, expenditures and cash flows, cash flow forecasting, and
maintaining unused credit facilities where practicable.
Accounts payable and income taxes payable, as disclosed on the
Consolidated Balance Sheet, fall due within the next reporting period.
The revolving debt facility has a current available limit of US$70
million, of which US$27 million is undrawn at September 30, 2008. This
facility expires on September 5, 2010. The company also holds an $18
million line of credit, of which $2 million is undrawn at September 30,
2008, that is secured solely by the company's long-term investments. This
line of credit is due on demand. The company believes it has adequate
cash flows and unused credit facilities to discharge its financial
obligations.
Market Risk
Changes in commodity prices, interest rates and foreign currency exchange
rates can expose the company to fluctuations in its net earnings and in
the fair value of its financial assets and liabilities.
Commodity Price Risk
Price fluctuations for both crude oil and natural gas are a risk to the
company over which the company has little influence. Due to pricing
controls present in Argentina, the company's selling price for oil is
limited to approximately US$47.00 per barrel when the world posted price
(WTI) for crude oil is in excess of US$60.90 per barrel. Natural gas
prices are controlled by the Argentine government and local demand with
historic prices at low levels compared to world prices.
Interest Rate Risk
Floating rate debt exposes the company to fluctuations in cash flows and
net earnings due to changes in market interest rates. Based on the
existing debt balance, a one percent increase (decrease) in the
underlying market interest rates would have decreased (increased) after
tax earnings by approximately $0.1 million for the quarter. The company
may enter into derivative interest rate swap contracts to manage this
risk, but has not done so to date.
Foreign Currency Exchange Rate Risk
Substantially all of the company's operations are conducted in foreign
jurisdictions, so the company is exposed to foreign currency exchange
rate risk on most of its activities as reported in Canadian Dollars
(CAD). Oil and natural gas sales contracts are denominated in US Dollars
(USD) and settled in Argentine Pesos (ARS). Operating and capital
expenditures are incurred in US Dollars and Argentine Pesos, and to a
lesser extent in Peruvian Nuevos Soles (PEN) and Colombian Pesos (COP).
The revolving credit facility is denominated in US Dollars, which
partially limits the company's exposure in terms of cash outflows
(interest expense) being inversely correlated to cash inflows (oil and
gas revenues). The company may enter into derivative forward exchange
rate contracts to manage this risk, but has not done so to date.
The table below shows the company's financial instruments exposure to
foreign currencies:
-------------------------------------------------------------------------
Per CAD USD ARS PEN COP
Balance ----------------------------------------------
($000) Sheet CAD $ equivalent amounts
-------------------------------------------------------------------------
Cash and
cash
equivalents $14,865 $553 $6,429 $2,857 $18 $5,008
Accounts
receivable 31,199 223 12,838 13,522 3,669 947
Accounts
payable and
accrued
liabilities (22,574) (270) (10,705) (10,787) (7) (805)
Income taxes
payable (1,469) (682) 160 (947) - -
Bank debt (16,000) (16,000) - - - -
Long term
bank debt (45,576) - (45,576) - - -
-------------------------------------------------------------------------
Net financial
assets
(liabili-
ties) $(39,555) $(16,176) $(36,854) $4,645 $3,680 $5,150
-------------------------------------------------------------------------
The company estimates a three percent change in the Canadian Dollar
against the above foreign currencies could be reasonably possible over a
three month period.
A three percent strengthening in the Canadian Dollar would result in a
change to earnings before taxes and other comprehensive income as follows
(an equal but opposite impact to earnings before taxes and other
comprehensive income would result if the Canadian Dollar weakened by
three percent):
-------------------------------------------------------------------------
USD ARS PEN COP
--------------------------------------
($000) CAD $ equivalent amounts
-------------------------------------------------------------------------
Decrease in earnings before taxes (67) - (107) (150)
-------------------------------------------------------------------------
Increase in other comprehensive
income 1,005 - - -
-------------------------------------------------------------------------
6. CREDIT FACILITIES
In 2007 the company entered into a US$100 million reserve-based revolving
credit facility with an initial availability of US$60 million. The
initial facility term was for three years, bears interest at LIBOR plus a
margin, is secured by the pledge of the shares of Petrolifera's
subsidiaries and has a provision for a borrowing base adjustment every
six months, with the next adjustment to be calculated based on
information as at January 1, 2009. Deferred financing costs of $1.8
million related to this facility are being amortized over the remaining
term of the facility. During the second quarter of 2008 the availability
of the reserve-based facility was increased to US$70 million based on
reserves as at December 31, 2007.
The company classifies drawings under this reserve-based facility that
relate to the Argentina operations as long-term debt as repayment is not
required within one year under the terms of the facility agreement.
Drawings made under this reserve-based facility related to operations
outside of Argentina are classified as current bank debt as the facility
agreement allows for repayment of such drawings and it would be the
intention of the company to repay any of these drawings within twelve
months.
In late 2007, the company established an $18 million line of credit with
a Canadian chartered bank. The line of credit bears interest at a
floating rate and is secured by the ABCP investments.
As at September 30, 2008 the reserve-based facility had $45.6 million
outstanding classified as long-term debt. The line of credit facility had
$16 million outstanding classified as current bank debt. Interest expense
on the facilities for the nine months ended September 30, 2008 was
$3.0 million (2007 - Nil) and was $1.1 million for the third quarter of
2008 (third quarter 2007 - Nil). The effective interest rate on the
company's interest bearing debt was 10.5 percent for the nine months
ended September 30, 2008 and 8.0 percent for the three months ended
September 30, 2008. Unused credit facilities as at September 30, 2008
were $30.6 million.
7. ASSET RETIREMENT OBLIGATIONS
At September 30, 2008 the estimated total undiscounted amount required to
settle the asset retirement obligations was $12.9 million
(December 31, 2007 - $11.3 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:
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Asset retirement obligations, December 31, 2008 $5,639
Liabilities incurred 464
Cumulative translation adjustment 433
Accretion expense 274
-------------------------------------------------------------------------
Asset retirement obligations, September 30, 2008 $6,810
-------------------------------------------------------------------------
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, share capital and warrants,
December 31, 2007 50,126,510 $54,356
Issued upon exercise of options or warrants 376,500 225
Assigned value of options exercised - 39
Issuance of common shares
(net of tax-effected issue costs)
(Note 8(b)) 4,445,000 37,765
-------------------------------------------------------------------------
Balance, share capital and warrants,
September 30, 2008 54,948,010 $92,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed surplus:
-------------------------------------------------------------------------
Balance, contributed surplus,
December 31, 2007 $10,188
Assigned value of options exercised (39)
Stock-based compensation expensed 4,252
-------------------------------------------------------------------------
Balance, contributed surplus,
September 30, 2008 $14,401
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total share capital, warrants and
contributed surplus:
December 31, 2007 $64,544
September 30, 2008 $106,786
-------------------------------------------------------------------------
(a) Common Share Purchase Warrants
As at September 30, 2008, there were 10,000 Common Share Purchase
Warrants ("warrants") outstanding to acquire 10,000 common shares at
$0.40 per share which were not subsequently exercised prior to expiring
on October 17, 2008. For the nine months ended September 30, 2008 there
were 150,000 warrants, exercised for proceeds of $0.1 million. For the
three and nine months ended September 30, 2007 there were 6,026,507
warrants exercised for proceeds of $17.8 million. No warrants were
exercised during the three months ended September 30, 2007.
(b) Equity Financing
On June 11, 2008 the company announced that it entered into a financing
agreement with a syndicate of underwriters to issue 4,445,000 common
shares ("Common Shares") at $9.00 per Common Share, on a "bought deal"
basis, for gross proceeds of approximately $40 million. The underwriters
had an over-allotment option to purchase up to an additional 666,750
Common Shares on the same terms and conditions, exercisable in whole or
in part up to 30 days following closing. This financing was closed on
June 27, 2008 and the over-allotment option was not exercised subsequent
to the closing.
For the three months ended September 30, 2008, the net proceeds of the
financing have been partially used to fund a portion of Petrolifera's
2008 capital expenditure programs in Argentina, Colombia and Peru as
described under "Capital Expenditures". Until such time that Petrolifera
applies all of the net proceeds of the financing to its remaining 2008
capital expenditure programs, a portion of the net proceeds were used to
repay $11.5 million of indebtedness incurred outside of Argentina
pursuant to the reserve-based credit facility. This reserve-based credit
facility was previously utilized to fund a portion of the capital
expenditures and general working capital given the loss of liquidity
experienced in connection with the investment in ABCP (see "Long-Term
Investments").
Proceeds of the financing were as follows:
-------------------------------------------------------------------------
($000s)
-------------------------------------------------------------------------
Gross proceeds $40,005
Underwriters' commissions and issue costs (net of tax-effect) 2,240
-------------------------------------------------------------------------
Net proceeds $37,765
-------------------------------------------------------------------------
(c) Stock Options
As at September 30, 2008 and 2007, the company had stock options
outstanding to acquire common shares, as follows:
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding,
beginning of period 3,228,867 $8.71 2,896,667 $4.86
Granted 830,000 9.24 701,700 18.89
Exercised (226,500) 0.73 (480,000) 1.23
Forfeited / cancelled (115,500) 13.89 (10,000) 13.23
-------------------------------------------------------------------------
Outstanding,
end of period 3,716,867 9.27 3,108,367 8.53
-------------------------------------------------------------------------
Exercisable,
end of period 2,698,184 $ 8.07 1,671,999 $ 8.49
-------------------------------------------------------------------------
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 as at September 30, 2008 and 2007:
-------------------------------------------------------------------------
Range of Exercise Prices 2008 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Remaining
Contractual Contractual
Number Life at Number Life at
Outstanding Sept. 30 Outstanding Sept. 30
-------------------------------------------------------------------------
$0.50 - $5.00 1,206,667 1.8 1,433,667 2.9
-------------------------------------------------------------------------
$5.01 - $10.00 848,700 4.3 100,000 3.3
-------------------------------------------------------------------------
$10.01 - $15.00 809,500 2.6 795,000 3.5
-------------------------------------------------------------------------
$15.01- $20.00 837,000 3.6 764,700 4.5
-------------------------------------------------------------------------
$20.01 - $20.95 15,000 2.4 15,000 3.4
-------------------------------------------------------------------------
Total 3,716,867 2.9 3,108,367 3.5
-------------------------------------------------------------------------
In the first nine months of 2008 a compensatory non-cash expense of
$4.3 million (2007 - $5.4 million) was recorded as stock-based
compensation, reflecting the amortization of the fair value of stock
options over the vesting period. The third quarter stock-based
compensation expense was $1.1 million (2007 - $1.3 million).
The fair value of each option granted in 2008 is estimated on the date of
grant using the Black-Scholes option-pricing model with assumptions for
grants as follows:
-------------------------------------------------------------------------
Risk free Expected
Dividend Yield interest rate Expected life volatility
-------------------------------------------------------------------------
2008 -% 2.9% - 3.4% 4 years 89% - 94%
2007 -% 4.1% - 4.7% 4 years 70% - 72%
-------------------------------------------------------------------------
The weighted average fair value at the date of grant of all options
granted in 2008 was $5.93 per option (2007 - $10.62 per option) and for
the three months ended September 30, 2008 was $3.64 per option (2007 -
$9.61 per option).
9. 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 and Colombia. Financial
information pertaining to these operating segments is presented below.
-------------------------------------------------------------------------
Corporate Argentina Peru Colombia Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Three months ended
September 30, 2008
Revenue, gross $7 $32,119 $- $- $32,126
Net earnings (loss) (3,102) 6,534 (41) 173 3,564
Property and
equipment 335 161,810 34,245 4,306 200,696
Capital expenditures 31 14,628 4,622 1,765 21,046
Total assets $36,544 $193,819 $38,161 $10,650 $279,176
-------------------------------------------------------------------------
Three months ended
September 30, 2007
Revenue, gross $188 $31,542 $- $- $31,730
Net earnings (loss) (4,268) 9,450 (263) - 4,919
Property and
equipment 302 61,441 7,348 353 69,444
Capital expenditures - 22,721 3,190 150 26,061
Total assets $38,744 $94,556 $10,323 $393 $144,016
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Corporate Argentina Peru Colombia Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Nine months ended
September 30, 2008
Revenue, gross $54 $92,861 $- $- $92,915
Net earnings (loss) (12,923) 21,617 19 179 8,892
Property and
equipment 335 161,810 34,245 4,306 200,696
Capital
expenditures 31 59,831 18,838 2,512 81,212
Total assets $36,544 $193,819 $38,161 $10,650 $279,174
-------------------------------------------------------------------------
Nine months ended
September 30, 2007
Revenue, gross $739 $106,218 $- $- $106,957
Net earnings (loss) (10,129) 35,200 (607) (26) 24,438
Property and
equipment 302 61,441 7,348 353 69,444
Capital
expenditures 35 47,388 5,641 353 53,417
Total assets $38,744 $94,556 $10,323 $393 $144,016
-------------------------------------------------------------------------
10. SUPPLEMENTARY INFORMATION
(a) Per share amounts
The following table summarizes the common shares used in the per share
calculations.
-------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
(000)
Weighted average common
shares outstanding 54,884 50,107 51,876 47,261
Dilutive effect of all
stock options and all
stock purchase warrants 1,013 1,693 1,178 4,048
-------------------------------------------------------------------------
Weighted average common
shares outstanding - diluted 55,897 51,800 53,054 51,309
-------------------------------------------------------------------------
(b) Net change in non-cash working capital
-------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
($000)
Accounts receivable $7,400 $(6,303) $(3,687) $2,007
Prepaid expenses (218) (2,320) (127) (2,244)
Accounts payable and
accrued liabilities (7,043) 3,297 (15,389) 543
Inventories (190) (271) (698) (493)
Income taxes payable (5,951) (2,607) (4,621) (19,069)
Due from (to) a
related company 56 (15) 20 (88)
-------------------------------------------------------------------------
Total $(5,946) $(8,219) $(24,502) $(19,344)
-------------------------------------------------------------------------
Operating $(505) $(8,874) $(8,677) $(24,351)
Investing (5,441) 655 (15,825) 5,007
-------------------------------------------------------------------------
$(5,946) $(8,219) $(24,502) (19,344)
-------------------------------------------------------------------------
(c) Supplementary cash flow information
-------------------------------------------------------------------------
Three months Six months
ended Sept. 30 ended Sept. 30
-------------------------------------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
($000)
Interest paid $991 $- $2,489 $-
Income taxes paid $6,592 $4,362 $9,704 $28,758
-------------------------------------------------------------------------
11. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Work Commitments
In 2005 Petrolifera acquired two significant oil and gas exploration
licenses in Peru. The licenses have a total US$51.9 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 for Block 106 ended in 2007 and the company has met
its commitment and is currently in the second license term with a
commitment to invest a minimum of US$1.6 million in this next term. In
Block 107, the company is in the first term of the license and expects to
complete all the required work commitments for the term during 2008. The
company has issued letters of credit in the total amount of
US$2.3 million to secure the capital expenditure requirements associated
with the two exploration licenses in Peru. The company has issued letters
of credit in the total amount of US$2.3 million to secure the capital
expenditure requirements associated with the two exploration licenses in
Peru.
In 2007 the Company was granted three concessions comprised of one
license and two technical evaluation agreements (TEA) in Colombia with a
total work commitment of US$5.7 million over a two year period. These
work commitments are budgeted to be completed during 2008. Petrolifera
has converted the Turpial TEA into a licence and has requested that the
remaining TEA, Sierra Nevada II, be converted to a licence as well. The
company has issued letters of credit in the total amount of
US$0.6 million in support of these work commitments as well as depositing
US$2.6 million in a trust account in Colombia to meet certain of the work
obligations.
In Argentina the company has total work commitments of gross US
$12.0 million over the next three years related to the Vaca Mahuida,
Puesto Guevara and Gobernador Ayalla II blocks. A portion of the
Argentinean work commitments related to the Vaca Mahuida block has been
farmed out to a third party.
Contractual Commitments
The company's annual commitments under service contracts for drilling,
leases for office premises, various operating costs, software license
agreements and other equipment are as follows:
-------------------------------------------------------------------------
Subsequent
2008 2009-2011 2012-2013 to 2013 Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Service contracts
and other $2,542 $41,323 $150 $- $44,015
-------------------------------------------------------------------------
Contingencies
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.
12. RELATED PARTY TRANSACTIONS
Under the terms of an Administrative Agreement with Connacher Oil and Gas
Limited ("Connacher"), in effect from January 1, 2008, Connacher will
provide certain administrative services necessary or appropriate upon the
direction of the company. The fee for this service is $15,000 per month.
From time to time Connacher also paid bills on behalf of Petrolifera, for
which it is reimbursed. Connacher also provided certain support and
services to Petrolifera in its pursuit of exploration opportunities in
Colombia, for which it will be indemnified and reimbursed without further
economic interest in the secured opportunities. The Executive Chairman of
the company is the President and Chief Executive Officer of Connacher.