CALGARY, Nov. 28 /CNW/ - Solana Resources Limited (TSX-V:SOR; AIM:SORL),
the Colombia focused independent oil and gas exploration and production
company, today announces its results for the nine month period ending
September 30, 2006.
Solana (www.solanaresources.com) is an international resource company
engaged in the acquisition, exploration, development and production of oil and
natural gas. The Company's properties are located in Colombia, South America
and are primarily held through its wholly owned subsidiary, Solana Petroleum
Exploration (Colombia) Limited. The Company is headquartered in Calgary,
Alberta, Canada.
<<
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 2006
>>
The discussion and analysis that follows is intended to provide a summary
of Solana Resources Limited's ("Solana" or "the Company") activities and
results over the nine month periods ended September 30, 2006 and 2005 as well
as its financial position and future prospects. It should be read in
conjunction with the Company's audited consolidated financial statements for
the years ended December 31, 2005 and 2004. All numbers in this discussion and
analysis are expressed in Canadian dollars unless otherwise indicated.
Additional information (which does not form part of this announcement) is
available on the Company's website at www.solanaresources.com or on Sedar's
website at www.sedar.com.
Solana is an international resource company engaged in the acquisition,
exploration, development and production of oil and natural gas. The Company's
properties are located in Colombia, South America and are primarily held
through its wholly owned subsidiary, Solana Petroleum Exploration (Colombia)
Limited ("Solana Colombia"). The Company is headquartered in Calgary, Alberta,
Canada.
SIGNIFICANT ISSUES
Subsequent to the end of this nine month reporting period, on October 4,
2006, Solana underwent a significant corporate restructuring facilitated
through its acquisition of Breakaway Energy Inc. Through this transaction,
Mr. Scott Price and Mr. Glenn Van Doorne, principals of Breakaway Energy,
became the President and CEO and the Chief Operating Officer of Solana
respectively. Mr. Stephen Newton continues with Solana as the President and
director of Solana Colombia while Mr. Menno Wiebe, the Vice President of
Exploration of Solana Colombia, resigned to pursue other interests.
Continued high oil prices have sustained increased oil and gas activity
on a world wide basis. This activity level has resulted in a global shortage
of skilled personnel, drilling rigs, casing, line pipe etc. and is reflected
in Colombia by ever increasing mobilization costs and rig rates and
difficulties accessing equipment and trained people. As a result, the
estimated value of Solana's work commitments for the next year exceeds
$46 million. As such, while all contractual deadlines have been met to date,
costs have exceeded original budgets. Taking into account its cash balance,
Solana is prioritizing its current commitments. This high cost, scarce
equipment and personnel environment is expected to continue for the
foreseeable future.
Solana plans to drill one well on each of its Guauchiria Norte, Gaviotas,
Guayuyaci and Chaza blocks during Q1 2007.
President Alvaro Uribe was re-elected in May 2006 with an increased
popular mandate and will remain in power until 2010. With a majority in
Congress and provided the alliance of pro-Uribe parties remains cohesive,
"governability" is likely to improve. The Economist Intelligence Unit expects
President Uribe to maintain a prudent fiscal policy and are forecasting solid
(4.1% per year) if somewhat slowing GDP growth for 2007-2008.
Despite improvements in security from the weakening of the guerrillas and
the demobilization of around 30,000 paramilitaries, public security will
remain poor particularly in some rural areas in which Solana operates (mainly
the Catatumbo). In parts of this area Solana will require additional support
to ensure operations can continue unimpeded. A negotiated end to the conflict
with the FARC remains unlikely.
SOLANA'S PROJECTS
COLOMBIA
LLANOS BASIN
The Llanos basin is located northeast of Bogota, the capital of Colombia,
on the east side of the Andes mountains. It covers an area of approximately
200,000 km2 (77,000 square miles). The Basin is bounded to the West by the
foothills of the Cordillera Oriental, the easternmost of the three distinct
ranges of the Andes, traversing Colombia in a north-south direction; to the
North by the Apure Basin and the Cordillera de Merida in Venezuela; to the
East by the Guyana Pre-Cambrian cratonic shield and to the South by the Amazon
Basin from which it is separated by the Serrania de la Macarena Mountains.
Solana has working interests in five blocks in the Llanos Basin, covering
an area of 1,680 km2 (649 square miles). These blocks are from North to South:
Guachiria Norte, Guachiria, Guachiria Sur, Gaviotas and Garibay.
GUACHIRIA NORTE BLOCK
Solana is the Operator of the 412 km2 (159 square miles) Guachiria Norte
Block with a working interest of 100%. Petroleum Exploration International
S.A. (Pexin) has the right to a 30% working interest upon the completion of
certain work obligations. Pexin has agreed to fund 60% of the first 5 wells in
Solana's Llanos blocks to earn 30%. To date Pexin has participated in 3 wells.
The block is located approximately 250 km (155 miles) northeast of Bogota and
is subject to an Agencia Nacional de Hidrocarburos (ANH), the Government
regulatory body, contract.
During Phase 1 (December 21, 2004 to December 21, 2005) the Bonaire-1
well was drilled. The well tested 7 m3/day (44 bopd) of waxy crude and is
currently shut in pending a technical review. The composition of this
paraffinic oil will be analyzed in order to optimize the method of production.
During Phase 2 (December 21, 2005 to December 21, 2006) 56 line-km
(35 miles) of seismic were acquired and interpreted. As a result of the
re-interpretation of a 157 km2 (61 square miles) 3-D seismic survey (acquired
in 2001 and reprocessed in 2005) a very prospective channel system was
identified in the Carbonera depositional package. This channel could have
recoverable oil reserves of approximately 1,250,000 m3 (8 million bbls). In
this part of the Llanos Basin, drilling activity is restricted to a four month
weather window from December to March and as such Solana has submitted an
application to the ANH to extend the Phase 2 period to March 2007. Assuming
ANH approval, Calcedonia-1 will be drilled within this weather window as soon
as a suitable rig can be obtained.
During Phase 3 (December 21, 2006 to December 21, 2007) Solana is
required to drill one well.
GUACHIRIA BLOCK
Solana is the Operator of the 75 km2 (29 square miles) Guachiria Block
with a working interest of 100%. However, Pexin has the right to earn a 30%
working interest upon the completion of certain work obligations. The block
adjoins the Guachiria Norte Block immediately to the South. This block was
acquired from Empresa Colombiana de Petroleos SA (Ecopetrol, the State owned
oil Company), and is subject to a standard ANH contract plus an additional 13%
royalty payable to Ecopetrol.
During Phase 1 (October 9, 2003 to October 9, 2004) the Malabares-1 well
was drilled and following an inconclusive test the well was suspended.
During Phase 2 (October 9, 2004 to October 9, 2005, extended to June 1,
2006) the Bucaro-1 well was re-entered. The well tested 123 m3/day (774 bopd)
waxy crude but is currently shut in due to a high water cut. Further analysis
to potentially optimize production is required. In May 2006 the Yalea-1 well
was drilled. The well tested oil and is currently producing approximately
30 m3/day (189 bopd, 123 net to Solana).
For Phase 3 (June 1, 2006 to June 1, 2007), Ecopetrol has agreed that
Solana may substitute its well commitment for a 100 km2 (39 square mile) 3-D
seismic survey, covering the block, and overlapping the southern part of the
adjacent Guachiria Norte 3-D seismic survey. This survey is planned to start
in December 2006 and will be processed and interpreted during 2007. In this
part of the Llanos Basin, drilling and seismic activity is restricted to a
four month weather window from December to March.
GUACHIRIA SUR BLOCK
Solana is the Operator of the 366 km2 (141 square miles) Guachiria Sur
Block with a working interest of 100%. However, Pexin has the right to earn a
30% working interest upon the completion of certain work obligations. The
block is to the west and the south of the Guachiria Block and to the south of
the Guachiria Norte Block. This block is subject to an ANH contract.
During Phase 1 (October 25, 2005 to October 25, 2006) 155 line-km
(96 miles) of seismic data were acquired and 300 line-km (186 miles) of
seismic data were reprocessed.
The commitment to drill a well during Phase 2 (October 25, 2006 to
October 25, 2007) has been renegotiated with the ANH to be replaced by a
155 km2 (60 square mile) 3-D seismic survey and a commitment to drill one well
during Phase 3 (October 25, 2007 to October 25, 2008). The survey will start
in December 2006 and cover the northern part of the block, adjacent to the
Guachiria Block and the northern area of the block, immediately south of the
Guachiria Block.
GAVIOTAS BLOCK
Solana is the Operator of the 377 km2 (146 square miles) Gaviotas Block
with an 80% working interest. However, Pexin has the right to 37.5% of
Solana's working interest, a net 30% working interest, upon the completion of
certain work obligations. A Colombian investment group owns the remaining 20%
working interest. The block is located approximately 170 km (105 miles) east
of Bogota. This block was acquired from Empresa Colombiana de Petroleos SA
(Ecopetrol, the State owned oil Company), and is subject to a standard ANH
contract plus an additional 13% royalty payable to Ecopetrol.
During Phase 1 (December 18, 2003 to February 18, 2005) 50 line-km
(31 miles) of seismic data were acquired.
During Phase 2 (February 18, 2005 to February 18, 2006, extended to
May 18, 2006) the Gaviotas-1 well was drilled and 85 line-km (53 miles) of
seismic were acquired and 650 line-km (404 miles) reprocessed. Although
wireline logs of the Gaviotas-1 well indicated hydrocarbon bearing zones,
tests were inconclusive. Further evaluation of the logs and subsequent testing
well is required.
There is a one well commitment for Phase 3 (May 18, 2006 to May 18, 2007)
and Solana is planning to drill the Belgica prospect (Belgica-1) as soon as a
suitable rig is available and weather permits.
GARIBAY BLOCK
Solana is the Operator of the 450 km2 (174 square miles) Garibay Block
with a working interest of 100%. The block is located approximately 170 km
(105 miles) east of Bogota and 15 km (9 miles) south of the Gaviotas Block.
This block is subject to an ANH contract.
During Phase 1 (October 25, 2005 to October 25, 2006) 136 line-km
(85 miles) of seismic data were acquired and 300 line-km (186 miles)
reprocessed.
During Phase 2 (October 25, 2006 to October 25, 2007) Solana is required
to drill one well. The ANH has approved the replacement of this programme with
the acquisition of 100 km2 (39 square miles) of 3-D seismic, subject to
relinquishment of 30% of the block area.
PUTUMAYO BASIN
The Putumayo basin is located in southwest Colombia and extends into
Ecuador, where it is called the Oriente (Ecuador)-Maranon (Peru) Basin. It
covers an area of approximately 320,000 km2 (124,000 square miles). It is
bounded to the west by the Central and Western Cordillera, to the north by the
Macarena uplift, which separates it from the Llanos Basin, and to the east by
the Guyana Shield. The south boundary is formed by the Ucayali and Acre basins
in Brazil and Peru.
Solana holds interests in the Guayuyaco Block and the Chaza Block
totalling 536 km2 (207 square miles).
GUAYUYACO BLOCK
Solana holds a 35% non-operated net working interest in the 212 km2
(82 square mile) Guayuyaco Block, located approximately 290 km (180 miles)
southwest of Bogota. Gran Tierra Energy Inc. is the Operator with 35% working
interest. Ecopetrol has a 30% working interest in the Guayuyaco field which is
currently producing 160 m3/day (1,000 bopd, 350 bopd net to Solana). All
commitments are fulfilled and the block is being further developed under an
Association Contract.
The Operator is currently mobilizing a rig from Venezuela to drill the
Juanambu-1 exploration well. Solana will finance two thirds of this well to
finalize the earning of a 50% interest in this block (35% post Ecopetrol
back-in on any commercial discovery). The spud date is expected to be early
January 2007. This field could have gross recoverable reserves of 1.5 million
m3 (10 million bbls).
CHAZA BLOCK
Solana has a 50% working interest of the 325 km2 (125 square mile) Chaza
Block, immediately west of the Guayuyaco Block. Gran Tierra, the operator,
holds the other 50% in the block. All first Phase commitments have been
fulfilled and a well has to be drilled in the second Phase. The block is held
under an ANH contract.
During Phase 1 (June 27, 2005 to June 26, 2006) Solana participated in
the acquisition of 27 line-km of 2-D and 13.5 km2 of 3-D of seismic data and
the reprocessing of 250 line-km of 2-D data.
During Phase 2 (June 27, 2006 to June 26, 2007) the partners are required
to drill one well. The Naboyaco-1 well (previously named Cafelina-1) will be
drilled immediately after the Juanambu-1 well with the same rig. Naboyaco is a
2.4 million m3 (15 million bbls) target.
PUMA WELL
Solana participated for 96% of the cost of Ramshorn International
Limited's 30% working interest in the Puma well to earn 75% of Ramshorn's 25%
revenue interest (net 18.75% to Solana). The Puma well was drilled in
September 2005 under a Shared Risk Contract, but was not tested. Ecopetrol,
the Operator, has opted out of the testing and Solana and Ramshorn are
currently testing the well on a sole risk basis. Solana is paying 75% of the
cost of the well testing to earn 75% of the production until 200% of the
incurred costs are recovered. Thereafter, Solana's interest will drop to 48%.
CATATUMBO BASIN
The Catatumbo Basin is a subbasin, forming the southwest flank of
Venezuela's prolific Maracaibo Basin. It is bounded to the west by the
Santander Massif and the Sierra de Perija and in the south and southeast by
the Merida Andes. The eastern boundary is defined by the Venezuelan border
with Colombia.
Solana has two blocks in the Catatumbo subbasin, namely Catguas and Cerro
Gordo, covering a total area of 1878 km2 (726 square miles).
CATGUAS BLOCK
Solana is the operator of the 1,620 km2 (625 square miles) Catguas Block
with 85% working interest in the southernmost two-thirds of the Block. In the
northern third, Solana has a 50% working interest. Solana's partner in this
block is Well Logging Ltda, a Colombian company.
The block is held under an ANH contract. The commitments for the first
Phase (November 17, 2005 to May 17, 2007) were partially fulfilled by the
acquisition of 200 line-km (124 miles) of seismic data and 10 line-km
(six miles) of high resolution seismic. Remaining commitments are the drilling
of two wells.
Seismic interpretation has identified several drillable prospects. Two
smaller structures, each with gross recoverable oil reserves expected to be
around 160,000 m3 (1 million bbls) will be drilled as soon as a suitable rig
has been identified.
CERRO GORDO BLOCK
Solana is the Operator with a 50% working interest in the 260 km2
(100 square mile) Cerro Gordo Block. Its partner is Well Logging Ltda. The
block has a commitment to re-enter or drill one well before April 28, 2007.
The Block contains a gas discovery but due to lack of infrastructure,
market remoteness and high carbon dioxide levels within the gas, Solana is
planning to relinquish its interest back to Well Logging Ltda.
ALAMO WELL
Alamo-1 was drilled during September 2006 with Solana contributing 96% of
Ramshorn International Limited's 40% cost share of the well (net 38.4%) to
earn 75% of Ramshorn International Limited's 35% working interest (net
26.25%). Although several hydrocarbon bearing zones were identified on logs,
the well failed to test oil in commercial quantities and was abandoned.
LOWER MAGDALENA BASIN
The Lower Magdalena basin is located in northwest Colombia. It covers an
area of approximately 87,000 km2 (33,500 square miles). The Basin is bounded
to the South by the Bucaramanga thrust fault, which separates it from the
Middle Magdalena basin and the northernmost part of the Andean region; to the
east by the Santa Marta fault; to the west by the Sautata-Taumarado arch and
to the north it continues offshore to the marine platform of the Caribbean.
MAGANGUE BLOCK
The MaganguDe Block is held pursuant to the MaganguDe Association Contract.
Solana is the operator of the block with a 37.8% working interest and has
partners, Ecopetrol with 58%, and Technopetrol, a Colombian company, with
4.2%.
Solana operates the GuepajDe gas field on the 169 km2 (65 square mile)
MaganguDe Block, which is currently producing 104,000 m3/day (3.7 mmcfd,
1.4 mmcfd net to Solana) and sold into the local market at USD2.42/mmbtu. The
well is slowly depleting and Solana is currently re-evaluating the available
seismic and geological information, to identify other possible targets.
MIDDLE MAGDALENA BASIN
The Middle Magdalena Basin is an intermontane basin located in central
Colombia, between the crystalline rocks of the Central Cordillera to the west
and to the east by the Garzon Massif of the Eastern Cordillera.
Solana has interests in the Guariquies field and the Zeus prospect in
this area.
GUARIQUIES FIELD
Solana has a 37.5% working interest to earn a 33.75% revenue share
interest in the Guariquies field. The Guariquies-1 well underwent a long term
production test utilizing a jet pump and is currently shut in for a pressure
buildup. The Guariquies-2 well is suspended after testing subcommercial gas
rates. A decision to build a flow line to connect to the nearby Ecopetrol
facilities is also pending the completion of additional studies. The AFE for
the Guariquies-3 well has been approved and the well is expected to spud
during Q4 2006.
ZEUS PROSPECT
Solana is paying for 96% of Ramshorn International Limited's 50% cost
share of the first Zeus well (net 48%) to earn 75% of Ramshorn International
Limited's 45% revenue share (net 33.75%).
The spud date for the Zeus well is expected to be during Q1 2007.
Glenn Van Doorne, Chief Operating Officer of Solana, a Petroleum
Geologist, with 30 years of experience and a member of the AAPG and the SPE,
is the qualified person that has reviewed the technical reserve, resource, and
drilling update information contained in these results.
OPERATING RESULTS
Selected Quarterly Information
The following table summarizes selected financial data for Solana for
each of the two most recently completed financial nine-month periods ended
September 30, 2006 and 2005. Unless otherwise noted, all currency amounts are
stated in Canadian dollars.
<<
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September 30, 2006 September 30, 2005
-------------------------------------------------------------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
-------------------------------------------------------------------------
$ $ $ $
-------------------------------------------------------------------------
Revenue
Production Revenue, net
of royalties 3,709,469 8,917,603 2,242,770 4,711,746
Operating costs 635,712 1,762,376 1,394,519 2,235,827
-------------------------------------------------------------------------
3,073,757 7,155,227 848,251 2,475,919
-------------------------------------------------------------------------
Expenses
General and administrative 474,960 2,838,030 711,020 2,264,979
Depletion, depreciation
and accretion 994,435 3,352,236 390,288 1,020,883
Foreign exchange (income)
loss (3,839,157) (2,576,049) 236,457 97,465
Stock-based compensation 235,299 828,013 434,000 1,404,622
-------------------------------------------------------------------------
(2,134,463) 4,442,230 1,771,765 4,787,949
-------------------------------------------------------------------------
Other income (expenses)
Interest 385,617 1,216,528 170,171 581,670
Income taxes (292) (51,919) - (50,000)
-------------------------------------------------------------------------
385,325 1,164,609 170,171 531,670
-------------------------------------------------------------------------
Net income (loss) 5,593,545 3,877,606 (753,343) (1,780,360)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income (loss) per
share 0.08 0.05 (0.01) (0.03)
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September 30, December 31,
2006 2005
-------------------------------------------------------------------------
$ $
Share capital 150,296,534 110,910,147
Working capital 52,673,753 28,457,255
Petroleum and natural gas properties 92,778,267 73,618,637
Total assets 155,610,936 111,807,270
Total long-term liabilities 6,769,811 6,725,565
Shareholders' equity 142,238,792 98,146,787
Cash dividends per share NIL NIL
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Results of operations for the three and nine month periods ending
September 30, 2006 and 2005
The net income from production was obtained mainly from Guayuyaco l & 2
(86%) in the third quarter and the Company's net results are as follows:
-------------------------------------------------------------------------
Nine months Nine months
ended ended
September 30, September 30,
Figures expressed in 2006 2005
US dollars except Bopd (Average) (Average)
Bopd 410 851
Net revenue, net of royalties per Barrel $57.47 $30.25
Net operating costs per Barrel $12.16 $14.35
-------------------------------------------------------------------------
Average production for the nine months ended September 2005 was derived
from long term test production at Bucaro-1 and the two Guayuyaco wells (50%
during the pre-commerciality period). The average production for the nine
month period ended September 2006 is substantially lower than for the same
2005 period as Bucaro-1 was suspended due to high water production, and in
addition to natural decline, Solana was only receiving 35% of Guayuyaco
production post Ecopetrol back-in (instead of the original 50% pre Ecopetrol
back-in).
General and administrative expenses for the three- and nine-month periods
ended September 30, 2006 amounted to $474,960 and $2,838,030 respectively, in
comparison to the three and nine-month periods ended September 30, 2005, which
amounted to $711,020 and $2,264,979 respectively.
The substantial components of general and administrative expenses are as
follows:
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September 30, 2006 September 30, 2005
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
$ $ $ $
General office 212,225 1,511,936 191,294 754,959
Professional fees 58,939 412,377 146,615 544,176
Public company costs 170,663 448,316 9,807 120,868
Consulting fees 19,353 121,125 162,157 264,945
Salaries & Benefits 393,936 815,567 201,147 580,031
Billing to partners (380,156) (471,291) - -
-----------------------------------------------
474,960 2,838,030 711,020 2,264,979
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Most of the components of general and administrative expenses increased
due to the current period's activities. Public company costs increased mainly
due to the costs associated with the issuance of shares and fees paid to meet
listing requirements. Salary and benefits increased as a consequence of staff
changes.
Depletion, depreciation and accretion amounted to $994,435 and $3,352,236
for the three and nine month periods ended September 30, 2006, compared to the
same periods a year ago, which were $390,288 and $1,020,883 respectively. The
depletion expense is calculated based on the decline in proved reserves, and
amounts to $949,985 and $3,212,532 for the three and nine month periods ended
September 30, 2006, compared to the same periods a year ago, which were
$264,437 and $895,032, respectively. Increase of depletion charges are
directly affected by additions made to the depletable base.
Depreciation amounts to $29,701 and $95,457 for the three and nine month
periods ended September 30, 2006, compared to the same periods a year ago,
which were $49,934 and $108,450 respectively, and relates to the Company's
other assets, primarily office equipment and leasehold improvements.
Accretion expense amounting to $14,749 and $44,247 for the three- and
nine-month periods ended September 30, 2006 compared to $17,401 for the nine-
month period ended September 30, 2005 represents the costs to plug and abandon
its petroleum and natural gas wells at the end of their useful lives.
The foreign exchange profits amounting to $3,839,157 and $2,576,049 for
the three- and nine-month periods ended September 30, 2006, compared to the
same periods a year ago, which were losses of $236,457 and $97,465
respectively, is due to the translation adjustment of the Inter-company
balances and the exchange income realized from term deposits in US dollars.
Stock-based compensation amounting to $235,299 and $828,013 for the three-
and nine-month periods ended September 30, 2006, compared to the same periods
a year ago, which were $434,000 and $1,404,622 respectively. The decrease in
stock-based compensation reflects a reduction in amortization for options
granted in 2004 and options expired.
Other income mainly relates to interest income amounting to $385,617 and $
1,216,528 for the three and nine month periods ended September 30, 2006,
compared to the same periods a year ago, which were $170,171 and $581,670
respectively. The increase is due to interest from term deposits held in CDN
dollars.
The income tax expenses amounting to $292 and $51,919 for the three- and
nine-month periods ended September 30, 2006, correspond to adjustments to the
income tax payable on a presumptive basis.
The resulting net profit (loss) amounting to $5,593,545 and $3,877,606 for
the three and nine month periods ended September 30, 2006, compared to the
same periods a year ago, which were $(753,343) and $(1,780,360) respectively
is related to an increase in revenue from the Company's Colombian operations
and a non cash inter-company foreign exchange adjustment.
The Company's share capital increased $39,386,386 at September 30, 2006
from $110,910,147 at December 31, 2005 due to the issue of 21,000,000 common
shares at $2.00 per share, less cost of the issuance of $2,627,614 and the
exercise of 140,000 options at $0.10 each.
Selected Quarterly Financial Information
The following table sets out selected unaudited quarterly financial
information of Solana and is derived by unaudited quarterly financial
statements prepared by management. Solana's interim financial statements are
prepared in accordance with Canadian generally accepted accounting principles
and are expressed in Canadian dollars.
-------------------------------------------------------------------------
Sep 30, Jun 30, Mar 31, Dec 31,
2006 2006 2006 2005
$ $ $ $
Additions to Petroleum
and Natural Gas
properties 4,936,169 9,960,499 7,548,553 12,055,993
Total revenues 4,095,086 3,139,171 2,899,874 3,690,011
General and administrative
expenses 474,960 1,343,467 1,084,988 1,126,933
Depletion, depreciation
and accretion 994,435 1,073,847 1,218,568 4,665,478
Foreign exchange income
(loss) 3,839,157 (976,849) (286,259) 331,567
Stock-based compensation 235,299 256,549 336,165 766,478
Income (loss) after taxes 5,593,837 (1,387,630) (328,309) (2,289,806)
Income (loss) per share 0.08 (0.02) (0.01) (0.04)
-------------------------------------------------------------------------
Sep 30, Jun 30, Mar 31, Dec 31,
2005 2005 2005 2004
$ $ $ $
Additions to Petroleum
and Natural gas
properties 7,045,475 6,350,471 8,234,026 13,125,680
Total revenues 2,412,941 2,381,774 498,703 557,233
General and administrative
expenses 711,020 893,827 710,131 707,660
Depletion, depreciation
and accretion 390,288 496,713 133,883 359,952
Impairment - - - 1,102,826
Foreign exchange income
(loss) (236,457) (408,500) 547,492 (522,317)
Stock-based compensation 434,000 366,122 604,530 1,102,826
Income (loss) after taxes (753,343) (546,216) (530,830) (3,963,435)
Income (loss) per share (0.01) (0.02) (0.01) (0.14)
-------------------------------------------------------------------------
LIQUIDITY
Solana's working capital increased from $28,457,255 at December 31, 2005,
to $52,673,753 at September 30, 2006, largely due to the issue of additional
common shares.
The Company's cash balances at September 30, 2006 are comprised of
$38,978,887 in cash and term deposits and $5,338,811 held in trust. These
funds are committed to the Company's planned capital expenditure program in
Colombia. The Company will require additional financing to fund its ongoing
exploration, development and appraisal programs. Management plans to meet this
need through strategic farm-outs, asset dispositions, debt financing or by
other means.
The Company's long-term liabilities are $6,769,811 (2005 - $6,725,565) and
the most significant component is the $6,100,000 future tax liability.
Solana's shareholders' equity increased from $98,146,787 at December 31,
2005, to $142,238,792 at September 30, 2006.
SHARE CAPITAL
Share Capital
Authorized share capital consists of an unlimited number of common shares.
-----------------------------------------------------------------
Common Shares Shares Amount
$
-----------------------------------------------------------------
Balance, December 31, 2005 64,736,792 110,910,147
Share options exercised 140,000 14,000
Private placement,
net of issuance costs 21,000,000 39,372,387
-----------------------------------------------------------------
Balance, September 30, 2006 85,876,792 150,296,534
-----------------------------------------------------------------
-----------------------------------------------------------------
Stock options Options Weighted Average
Exercise Price
$
-----------------------------------------------------------------
Balance, December 31, 2005 4,015,000 1.94
Granted 180,000 3.85
Expired (430,000) 2.87
Exercised (140,000) 0.10
-----------------------------------------------------------------
Balance, September 30,2006 3,625,000 1.99
-----------------------------------------------------------------
>>
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The Company generated cash inflows from operations amounting to
$6,823,279 and $8,057,855 for the three-and nine-month periods ended
September 30, 2006, compared to the same periods in 2005 which had cash
outflows amounting to $617,538 and $373,754. This difference is substantially
due to a combination of higher oil prices, significantly higher per barrel
depletion costs and foreign exchange gains.
Solana's net cash inflow from financing activities amounted to
$39,386,386 for the nine-month period ended September 30, 2006, compared to
$1,415,000 for the period ended September 30, 2005 due to the private
placement of common shares.
The Company incurred cash outflows from its investing activities of
$4,118,163 and $23,227,743 for the three- and nine-month periods ended
September 30, 2006 as compared to $12,102,643 and $23,699,292 for the three-
and nine-month periods ended September 30, 2005. The most significant cash
outflow component was $4,936,169 and $22,511,866 of expenditures for petroleum
and natural gas properties for the three- and nine-month period ended
September 30, 2006 compared with $7,045,475 and $22,083,559 expended for the
three- and nine-month period ended September 30, 2005.
RELATED PARTY TRANSACTIONS
The Company paid $45,000 in management fees in the current nine-month
period ended September 30, 2006 (2005 - $72,000) to a company controlled by a
director of the Company, which expenses are included in general and
administrative expense.
These transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
SUBSEQUENT EVENTS
On October 4, 2006, Solana underwent a significant corporate
restructuring facilitated through its acquisition of Breakaway Energy Inc
("Breakaway"), an internationally focused resource company. Through this
transaction, Mr. Scott Price and Mr. Glenn Van Doorne, principals of
Breakaway, became the President and CEO and the Chief Operating Officer of
Solana, respectively.
Pursuant to a share purchase agreement dated October 2, 2006, Solana
purchased all of the issued and outstanding shares of Breakaway, in exchange
for the issuance of 10 million shares of Solana and 10 million performance
warrants. Of the 10 million Solana shares, 2/3 were to be issued subject to a
voluntary escrow agreement with Solana and will be released as to one-half of
the escrowed shares on each of October 2, 2007 and 2008, respectively.
The performance warrants have a term of 42 months, an exercise price of
$2.00 per share, and are exercisable only if Solana's share price trades above
$2.75 per share for a period of more than 45 consecutive trading days. The
10 million performance warrants are also subject to a voluntary escrow
agreement with Solana and will be released as to one-half of the performance
warrants on each of October 2, 2007 and 2008 respectively.
Both the escrowed shares and performance warrants issued to Mr. Price and
Mr. Van Doorne are subject to certain vesting provisions over the 24 month
period following completion of the acquisition, including immediate vesting in
the event of a change of control or in the event that Solana's share price
trades above $2.75 per share for a period of more than 45 consecutive days.
BUSINESS RISK AND UNCERTAINTIES
The Company's business is subject to risks inherent in oil and gas
exploration and development operations. In addition, there are risks
associated with the Company's development stage of operations and the foreign
jurisdiction in which it operates. The Company has identified certain risks
pertinent to its business, including: exploration and reserve risks, drilling
and operating risks, costs and availability of materials and services, capital
markets and the requirement for additional capital, loss of or changes to
production sharing, joint venture or related agreements, economic and
sovereign risks, possibly of less developed legal systems, reliance on
strategic relationships, market risk, volatility of future oil and gas prices
and foreign currency risk.
Solana attempts to monitor, assess and mitigate certain of these risks by
retaining an experienced team of professionals and using modern technology.
Further, the Company has focused its activities in a known hydrocarbon basin
in a jurisdiction that has previously established long-term oil and gas
ventures with foreign oil and gas companies, existing infrastructure of
services and oil and gas transportation facilities, and reasonable proximity
to markets. The Company also retains consultants resident in Colombia to
monitor economic and political developments and to assist with operating,
administrative and legal matters. There are certain risks, however, over which
the Company has little or no control.
OUTLOOK
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Petroleum and Natural Gas Operations
Solana uses the full cost method to account for its petroleum and natural
gas operations, whereby all costs of exploring for and developing petroleum
and natural gas reserves are capitalized and accumulated in country-by-country
cost centres. These capitalized costs will be depleted using the unit-of-
production method based on estimates of proved reserves. The costs in cost
centres from which there has been no commercial production are not subject to
depletion until commercial production commences. These capitalized costs are
assessed to determine whether it is likely such costs will be recovered in the
future. Costs which are not likely to be recovered in the future are written
off.
Petroleum and natural gas reserves form the basis for a number of
accounting estimates and support for the carrying amount of petroleum and
natural gas properties. The estimation of reserves is a subjective process.
Forecasts are based on engineering data, projected future rates of production,
estimated commodity price forecasts and the timing of future expenditures, all
of which are subject to numerous uncertainties and various interpretations.
The Company expects that its estimates of reserves will change to reflect
updated information. Reserve estimates can be revised upward or downward,
based on the results of future drilling, testing, production levels and
economics of recovery based on flow forecasts.
ADVISORY REGARDING FORWARD-LOOKING STATEMENTS
This discussion and analysis contains forward-looking statements.
Forward- looking statements are subject to numerous known and unknown risks
and uncertainties, some of which are beyond Solana's control, including the
impact of general economic conditions, industry conditions, volatility of
commodity prices, currency exchange rate fluctuations, reserve estimates,
environmental risks, and competition from other explorers, stock market
volatility and ability to access sufficient capital. Solana's actual costs
could differ materially from those anticipated in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements.
November 28, 2006
<<
SOLANA RESOURCES LIMITED
CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
September 30, 2006
Notice to Reader:
The accompanying unaudited interim consolidated financial statements of
Solana Resources Limited (the "Company" or the "Corporation") for the quarter
ended September 30, 2006 have been prepared by management and approved by the
Board of Directors of the Company. These statements have not been reviewed by
the auditors of the Corporation.
SOLANA RESOURCES LIMITED
CONSOLIDATED BALANCE SHEET (Unaudited)
September 30, December 31,
2006 2005
$ $
------------ ------------
ASSETS
Current assets
Cash and cash equivalents 38,978,887 24,088,484
Cash in trust (Note 2) 5,338,811 457,848
Accounts receivable
- trade 3,455,825 5,900,323
- cash calls 10,937,364 2,267,631
Prepaid expenses 565,199 2,677,887
------------ ------------
59,276,086 35,392,173
Other receivable 152,850 -
Deposits (Note 3) 2,400,820 2,149,224
Petroleum and natural gas properties 92,778,267 73,618,637
Other capital assets 789,632 644,624
Investment (Note 4) 213,281 2,612
------------ ------------
155,610,936 111,807,270
------------ ------------
------------ ------------
LIABILITIES
Current
Accounts payable and accrued liabilities
- Trade 4,396,774 4,899,514
- Cash calls 2,205,559 2,035,404
------------ ------------
6,602,333 6,934,918
Asset retirement obligations (Note 5) 669,811 625,565
Future income taxes (Note 6) 6,100,000 6,100,000
------------ ------------
13,372,144 13,660,483
------------ ------------
SHAREHOLDERS' EQUITY
Share capital (Note 7) 150,296,534 110,910,147
Contributed surplus 5,136,124 4,308,111
Deficit (13,193,866) (17,071,471)
------------ ------------
142,238,792 98,146,787
------------ ------------
155,610,936 111,807,270
------------ ------------
------------ ------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
(Unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September September September September
30, 2006 30, 2006 30, 2005 30, 2005
$ $ $ $
Revenue
Oil and gas
revenues, net
of royalties 3,709,469 8,917,603 2,242,770 4,711,746
Interest 385,617 1,216,528 170,171 581,670
------------ ------------ ------------ ------------
4,095,086 10,134,131 2,412,941 5,293,416
------------ ------------ ------------ ------------
Expenses
Operating 635,712 1,762,376 1,394,519 2,235,827
General and
administrative 474,960 2,838,030 711,020 2,264,979
Depletion,
depreciation
and accretion 994,435 3,352,236 390,288 1,020,883
Foreign exchange
(income) loss (3,839,157) (2,576,049) 236,457 97,465
Stock-based
compensation
(Note 7) 235,299 828,013 434,000 1,404,622
------------ ------------ ------------ ------------
(1,498,751) 6,204,606 3,166,284 7,023,776
------------ ------------ ------------ ------------
Net income (loss)
before taxes 5,593,837 3,929,525 (753,343) (1,730,360)
Taxes (292) (51,919) - (50,000)
------------ ------------ ------------ ------------
Net Income (loss)
for the period 5,593,545 3,877,606 (753,343) (1,780,360)
Deficit, beginning
of period (18,787,410) (17,071,471) (13,978,293) (12,951,276)
------------ ------------ ------------ ------------
Deficit, end of
period (13,193,865) (13,193,865) (14,731,636) (14,731,636)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Income (loss) per
share 0.08 0.05 (0.01) (0.03)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
Three months Nine months Three months Nine months
ended ended ended ended
September September September September
30, 2006 30, 2006 30, 2005 30, 2005
$ $ $ $
Cash flows related
to the following
activities:
Operating:
Net Income (loss) 5,593,545 3,877,606 (753,343) (1,780,360)
Adjustments for:
Unrealized foreign
exchange loss
(income) - - 546,593 (271,391)
Depletion,
depreciation
and accretion 994,435 3,352,236 390,288 1,020,883
Stock-based
compensation 235,299 828,013 434,000 1,404,622
------------ ------------ ------------ ------------
6,823,279 8,057,855 617,538 373,754
Changes in non-
cash working
capital (5,622,386) (9,326,095) 9,140,005 8,041,912
------------ ------------ ------------ ------------
1,200,893 (1,268,240) 9,757,543 8,415,666
------------ ------------ ------------ ------------
Financing:
Common shares
placement - 42,000,000 - -
Cost of the issuance - (2,627,614) - -
From the exercise
of warrants - - - 1,355,000
From the exercise
of options - 14,000 - 60,000
------------ ------------ ------------ ------------
- 39,386,386 - 1,415,000
------------ ------------ ------------ ------------
Investing:
Additions to PN&G
properties (4,936,169) (22,511,866) (7,045,475) (22,083,559)
Changes in non-cash
working capital (4,011) (319,273) (5,035,146) (1,257,124)
Deposits 833,928 (251,596) - -
Additions to other
capital assets (11,911) (145,008) (15,025) (351,612)
Investment - - (6,997) (6,997)
------------ ------------ ------------ ------------
(4,118,163) (23,227,743) (12,102,643) (23,699,292)
------------ ------------ ------------ ------------
Net Increase (decrease)
in cash (2,917,271) 14,890,403 (2,345,100) (13,868,626)
Cash, beginning
of period 41,896,158 24,088,484 44,380,745 55,904,271
------------ ------------ ------------ ------------
Cash, end of period 38,978,887 38,978,887 42,035,645 42,035,645
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SOLANA RESOURCES LIMITED
Notes to the Consolidated Financial Statements
September 30, 2006
(Unaudited)
Note 1. Basis of Presentation
The interim consolidated financial statements of Solana Resources Limited
("Solana" or the "Company") for the three and nine month periods ended
September 30, 2006 and 2005 have been prepared by management in
accordance with accounting principles generally accepted in Canada on the
same basis as the audited consolidated financial statements as at and for
the year ended December 31, 2005. These interim consolidated financial
statements, include Solana's wholly owned subsidiaries, Solana Petroleum
Exploration Colombia Limited ("Solana Colombia") and Bayford Investments
Limited, and should be read in conjunction with the consolidated
financial statements and the notes thereto in the Company's annual report
for the year ended December 31, 2005.
These interim consolidated financial statements do not include all
disclosures required in the annual financial statements and should be
read in conjunction with the December 31, 2005 consolidated financial
statements.
The Company requires additional financing in order to fund its ongoing
exploration, development and appraisal programs. Management plans to meet
this need through strategic farm-outs, asset dispositions, debt or by
other means.
Note 2. Cash in trust
The cash in trust in the amount of $5,338,811 (2005 - $ 457,848) reflects
mainly the funds in escrow required to satisfy the Company's share of the
appraisal costs related with the Guariquies discovery. This guarantee was
requested by Ecopetrol, the operator, once the Company became a party to
the Shared Risk Contract (SRC) which replaced the Exploration
Participation Agreement (EPA) with Ramshorn for this block.
Note 3. Deposits
The Company has placed funds on deposit totaling $2,400,820 (December 31,
2005 - $2,149,224) with the Colombian Agency of National Hydrocarbons
("ANH") with respect to acquired exploration acreage. These funds are
required to be returned to the Company by the ANH on completion of work
commitments on the Guachiria Norte, Catguas, Guachiria Sur, Carbonera and
Garibay Blocks.
Note 4. Investment
The Company has invested in aggregate $213,281 (US$190,821) in the
Colombian Hydrocarbon Investment Fund ("Fund"), and expects to invest a
maximum amount of US $500,000. The Fund is managed by a U.S.-based fund
manager, who specializes in investments in the natural resources sector
in South America. The Fund is expected to have an investment period of
four years. After this period, it is expected the fund will be wound up,
and any initial capital remaining and any earned profits will be returned
and distributed to the investors over a maximum period of seven years.
Note 5. Asset Retirement Obligations
The following table represents the reconciliation of the beginning and
ending obligations associated with the retirement of oil and gas
properties:
-------------------------------------------------------------------------
Asset retirement obligations, December 31, 2005 $ 625,565
Liabilities incurred during period -
Liabilities settled during period -
Accretion 44,247
-------------------------------------------------------------------------
Asset retirement obligations, September 30, 2006 669,811
-------------------------------------------------------------------------
At September 30, 2006, the estimated total undiscounted amount required
to settle the asset retirement obligations was $1,690,000 (2005 -
1,269,000). These obligations will be settled at the end of the useful
lives of the underlying assets, which currently extend up to 15 years
into the future. This amount has been discounted using a credit-adjusted
risk-free interest rate of 10% and an inflation rate of 2.5%.
Note 6. Future Income Taxes
At the time of the acquisition of Solana Colombia by the Company, in
December 2004 for 12,000,000 common shares at a deemed price of $ 2.00
per common share, it was determined that Solana had approximately
$ 3,000,000 US in tax deductions available, in Colombia, to shield any
potential future Colombian income tax liability that might arise in
Colombia. Accordingly, a future income tax liability amounting to
$ 6,100,000 was recorded.
Note 7. Share Capital
Authorized share capital consists of an unlimited number of common
shares.
-------------------------------------------------------------------------
Shares Amount
$
-------------------------------------------------------------------------
Balance, December 31, 2005 64,736,792 110,910,147
Share options exercised 140,000 14,000
Private placement of common shares,
net of issuance costs 21,000,000 39,372,387
-------------------------------------------------------------------------
Balance, September 30, 2006 85,876,792 150,296,534
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted
Average
Exercise
Options Price
$
-------------------------------------------------------------------------
Balance, December 31, 2005 4,015,000 1.94
Granted 180,000 3.85
Expired (430,000) 2.87
Exercised (140,000) 0.10
-------------------------------------------------------------------------
Balance, June 30, 2006 3,625,000 1.99
-------------------------------------------------------------------------
Stock-based compensation
Compensation expense of $235,299 for the three-month period and $828,013
for the nine-month period ended September 30, 2006 has been recorded in
the Consolidated Statements of Loss and Deficit (2005 - $434,000 and
$1,404,622 respectively). The fair value of all common share options
granted is estimated on the date of grant using the Black-Scholes option-
pricing model. The weighted average fair market value of options during
the third quarter of 2006 and the assumptions used in their determination
are as noted below:
-------------------------------------------------------------------------
Risk-free interest rate (percent) 4.25%
Expected life (years) 5.00
Volatility (percent) 100%
Expected annual dividend per share Nil
-------------------------------------------------------------------------
Note 8. Per-share amounts
The weighted average number of common shares, basic and diluted,
outstanding during the nine months ended September 30, 2006 was
75,341,792 (2005 - 64,436,067).
Note 9. Segmented Information
Three-month period ended September 30, 2006
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 3,709,469 3,709,469
Operating costs - 635,712 635,712
--------------------------------------
- 3,073,757 3,073,757
--------------------------------------
General and administrative expenses 330,589 144,371 474,960
Depletion, depreciation,
and accretion 2,146 992,289 994,435
Foreign exchange income (loss) 1,413,441 2,425,716 3,839,157
Stock-based compensation 235,299 - 235,299
Interest income (expenses) 354,827 30,790 385,617
--------------------------------------
1,200,234 1,319,846 2,520,080
--------------------------------------
Income (loss) before taxes 1,200,234 4,393,603 5,593,837
Capital taxes - (292) (292)
--------------------------------------
Net Income (loss) 1,200,234 4,393,311 5,593,545
--------------------------------------
--------------------------------------
Identifiable assets 63,410,799 92,200,137 155,610,936
--------------------------------------
--------------------------------------
Capital expenditure - 4,936,169 4,936,169
-------------------------------------------------------------------------
Segmented Information
Nine-month period ended September 30, 2006
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 8,917,603 8,917,603
Operating costs - 1,762,376 1,762,376
--------------------------------------
- 7,155,227 7,155,227
--------------------------------------
General and administrative expenses 1,239,624 1,598,406 2,838,030
Depletion, depreciation,
and accretion 6,438 3,345,798 3,352,236
Foreign exchange income (loss) (85,415) 2,661,464 2,576,049
Stock-based compensation 828,013 - 828,013
Interest income (expenses) 1,154,634 61,894 1,216,528
--------------------------------------
1,004,856 2,220,846 3,225,702
--------------------------------------
Income (loss) before taxes (1,004,856) 4,934,381 3,929,525
Capital taxes - (51,919) (51,919)
--------------------------------------
Net Income (loss) (1,004,856) 4,882,462 3,877,606
--------------------------------------
--------------------------------------
Identifiable assets 63,410,799 92,200,137 155,610,936
--------------------------------------
--------------------------------------
Capital expenditure - 22,511,866 22,511,866
-------------------------------------------------------------------------
Segmented Information
Three-month period ended September 30, 2005
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,242,770 2,242,770
Operating costs - 1,394,519 1,394,519
--------------------------------------
- 848,251 848,251
--------------------------------------
General and administrative expenses 409,984 301,036 711,020
Depletion, depreciation,
and accretion 2,146 388,142 390,288
Foreign exchange income (loss) (307,826) 71,369 (236,457)
Stock-based compensation 434,000 - 434,000
Interest income (expenses) 147,151 23,020 170,171
--------------------------------------
1,006,805 594,789 1,601,594
--------------------------------------
Income (loss) before taxes (1,006,805) 253,462 (753,343)
Capital taxes - - -
--------------------------------------
Net income (loss) (1,006,805) 253,462 (753,343)
--------------------------------------
--------------------------------------
Identifiable assets 35,410,988 76,994,145 112,405,133
--------------------------------------
--------------------------------------
Capital expenditure 4,049 7,056,451 7,060,500
-------------------------------------------------------------------------
Segmented Information
Nine-month period ended September 30, 2005
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 4,711,746 4,711,746
Operating costs - 2,235,827 2,235,827
--------------------------------------
- 2,475,919 2,475,919
--------------------------------------
General and administrative expenses 1,194,579 1,070,400 2,264,979
Depletion, depreciation,
and accretion 5,932 1,014,951 1,020,883
Foreign exchange income (loss) (393,609) 296,144 (97,465)
Stock-based compensation 1,404,622 - 1,404,622
Interest income (expenses) 558,358 23,312 581,670
--------------------------------------
2,440,384 1,765,895 4,206,279
--------------------------------------
Income (loss) before taxes (2,440,384) 710,024 (1,730,360)
Capital taxes (50,000) - (50,000)
--------------------------------------
Net income (loss) (2,490,384) 710,024 (1,780,360)
--------------------------------------
--------------------------------------
Identifiable assets 35,410,988 76,994,145 112,405,133
--------------------------------------
--------------------------------------
Capital expenditure 29,812 22,405,359 22,435,171
-------------------------------------------------------------------------
Note 10. Supplemental Cash Flow Information
-------------------------------------------------------------------------
September 30, 2006 September 30, 2005
$ $
-------------------------------------------------------------------------
Three Months Nine Months Three Months Nine Months
-------------------------------------------------------------------------
Cash interest paid 0 0 7,744 10,601
----------------------------------------------------
----------------------------------------------------
Cash taxes paid 0 0 45,136 45,136
-------------------------------------------------------------------------
Note 11. Related party transactions
The Company paid $45,000 in management fees in the current nine-month
period ended September 30, 2006 (2005 - $72,000) to a company controlled
by a director of the Company, which expenses are included in general and
administrative expense.
These transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
Note 12. Income Taxes
The Company has losses of approximately $3,575,000 carried forward for
tax purposes. The financial statements do not reflect the potential tax
benefit of these losses. These loss carry-forwards expire as follows:
--------------------------------
Year Expiry Amount
$
--------------------------------
2006 1,048,000
2007 304,000
2008 267,000
2009 140,000
2010 230,000
2011 1,586,000
--------------
3,575,000
--------------
--------------
--------------------------------
Note 13. Financial Instruments
a. Foreign Currency Exchange Risk
The Company is exposed to foreign currency fluctuations as it holds
United States Dollars and Colombian Pesos in cash and short-term
investments. There are no exchange rate contracts in place.
b. Fair Values of Financial Instruments
The fair values of the Company's financial instruments, including
cash and cash equivalents, cash in trust, accounts receivable and
accounts payable approximate their carrying values due to their short
terms to maturity. The fair value of the deposits is not
significantly different than its carrying value.
c. Credit Risk
The majority of the accounts receivable are in respect of oil and gas
operations. The Company generally extends unsecured credit to these
customers and therefore the collection of accounts receivable may be
affected by changes in economic or other conditions. Management
believes the risk is mitigated by the size and reputation of the
companies to which they extend credit. The Company has not
experienced any material credit loss in the collection of accounts
receivable to date.
d. Commodity Price Risk
Due to the volatility of commodity prices the Company is exposed to
adverse consequences of declining prices. The Company may enter into
oil and natural gas contracts in order to protect its cash flow on
future sales from the potential adverse impact of declining prices.
The contracts would reduce the fluctuation in sales revenue by
locking in prices with respect to future deliveries of oil and
natural gas. As at September 30, 2006 and December 31, 2005, the
Company had not entered into any of these contracts.
Note 14. Commitments
In addition to the funds held in trust, the Company has minimum
exploration commitments of US $ 46,472,295 over the next 12 months.
Note 15. Subsequent event
On October 4, 2006, Solana underwent a significant corporate
restructuring facilitated through its acquisition of Breakaway Energy Inc
("Breakaway"), an internationally focused resource company. Through this
transaction, Mr. Scott Price and Mr. Glenn Van Doorne, principals of
Breakaway, became the President and CEO and the Chief Operating Officer
of Solana, respectively.
Pursuant to a share purchase agreement dated October 2, 2006, Solana
purchased all of the issued and outstanding shares of Breakaway, in
exchange for the issuance of 10 million shares of Solana and 10 million
performance warrants. Of the 10 million Solana shares, 2/3 were issued
subject to a voluntary escrow agreement with Solana and will be released
as to one-half of the escrowed shares on each of October 2, 2007 and
2008, respectively.
The performance warrants have a term of 42 months, an exercise price of
$2.00 per share, and are exercisable only if Solana's share price trades
above $2.75 per share for a period of more than 45 consecutive trading
days. The 10 million performance warrants are also subject to a voluntary
escrow agreement with Solana and will be released as to one-half of the
performance warrants on each of October 2, 2007 and 2008 respectively.
Both the escrowed shares and performance warrants issued to Mr. Price and
Mr. Van Doorne are subject to certain vesting provisions over the 24
month period following completion of the acquisition, including immediate
vesting in the event of a change of control or in the event that Solana's
share price trades above $2.75 per share for a period of more than 45
consecutive days.
>>
