CALGARY, Aug. 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 six month period ending June 30,
2006.
Solana is a resource exploration and production company headquartered in
Calgary, Alberta, Canada. The Company is engaged in the exploration for and
the acquisition, development and production of oil and natural gas. The
Company's exploration and development properties are located in Colombia,
South America through its wholly owned subsidiary, Solana Petroleum
Exploration Colombia Limited ("Solana Colombia").
<<
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE SIX-MONTH PERIOD
ENDED JUNE 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 six-month periods ended June 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 Resources Limited. ("Solana") is a resource exploration and
production company headquartered in Calgary, Alberta, Canada. Solana is
engaged in the exploration for and the acquisition, development and production
of oil and natural gas. The company's exploration and development properties
are located in Colombia, South America through its wholly owned subsidiary,
Solana Petroleum Exploration (Colombia) Limited ("Solana Colombia").
<<
HIGHLIGHTS
- 14 exploration/production blocks currently held with firm drilling
commitments on seven blocks. Six blocks were acquired in 2005 and
early 2006.
- Drilling in early 2006 resulted in a discovery at Guariquies 1. This
discovery has led to two near-term appraisal/development locations.
The first of these, Guariquies 2, has been drilled and tested to yield
low, non commercial gas rates and a small volume of oil. The second
appraisal well, Guariquies 3 is scheduled for late 2006/early 2007.
Guariquies 1 was put in production in early August and is being tested
at various natural flow rates to determine important reservoir
characteristics. Flow rates reflect those previously reported on DST.
After the relevant reservoir information has been gathered, the well
will be put on pump to verify the maximum sustainable production rate.
- Three wells have been drilled in early 2006 on Llanos Basin acreage.
Yalea 1 is currently on a production test. The well initially produced
at rates over 500 bopd however achieving sustainable flow rates has
been complicated by sand production. It appears that the well may have
encountered a sand channel and that sustainable rates may be of the
order of 200 bopd. The Bonaire 1 well which has recovered
approximately 140 barrels of 39 degree API high paraffin oil in
various swab tests is being prepared for fracturing to attempt to
improve productivity. The Gaviotas 1 well was tested. The upper
Mirador formation that had been interpreted as being oil bearing in
the nearby Cuerdas 1 well and in the Gaviotas 1 well tested fresh
water. A lower zone that produced oil and water from a single drill
stem test over three sand intervals is being studied for a future
re-entry to isolate and test potential oil bearing zones.
- Seven 2D seismic programs were initiated in 2005 and completed during
the first quarter of 2006 on Company held acreage. Five of these were
on Solana acreage in the Llanos basin and two additional seismic
programs were completed on Company held blocks in the Catatumbo basin.
- Equity financing, proceeds net to the Company amounting to
$39.3 million which closed on April 18, 2006, will be substantially
used to fund exploration activities in Colombia.
>>
TRENDS
The significantly increased level of activity world wide and specifically
in Colombia accompanying the recent high oil prices has dramatically reduced
the availability of drilling rigs and the associated services. Solana has been
able to meet contractual deadlines but the costs have exceeded original
budgets as rig day rates and service costs have increased significantly.
Unfortunately, although the drilling and service companies have ordered
additional equipment, delivery to Colombia will be delayed so the time and
cost pressures can be expected to continue into the foreseeable future. On top
of this, there is a severe shortage of trained personnel. The upstream
industry is affected in terms of the limited supply of engineers, geologists
and geophysicists however there is also a shortage of the trained personnel
required to operate the drilling rigs and associated equipment safely.
The security situation in the country, which has long hampered
exploration, has improved significantly and is expected to continue to
improve. In certain parts of the country where Solana has interests,
additional support is required to ensure that operations can continue
unimpeded. The government has cooperated and continues to cooperate to ensure
that the oil and gas sector, seen as vital to the national interest, is able
to operate as efficiently as possible.
SOLANA'S PROJECTS
ECOPETROL/RAMSHORN/SOLANA SHARED RISK CONTRACT (SRC) PROJECTS
PUMA PROSPECT, EL PITAL AREA, PUTUMAYO BASIN
The Puma well was drilled in the Putumayo Basin of southwestern Colombia
to a final total depth of 12,225 feet in September 2005 and logged. The Puma
well was the second well drilled under the terms of the SRC between Ecopetrol
and Ramshorn. Under the terms of this contract Solana is entitled to a 75%
interest in Ramshorn's share of any production derived from a discovery and
since Ramshorn has a 30% working interest in the Puma prospect, Solana's net
share of any production ultimately obtained from this prospect, if any, will
be 18.75%. The well was suspended pending the development of the testing
program. Actual testing has been delayed as a result of the availability of
service rigs in the Putumayo basin. A rig has now been contracted for these
operations and testing is expected to begin near the end of the third quarter
of 2006.
GUARIQUIES PROSPECT, DE MARES AREA, UPPER MAGDALENA BASIN
The Guariquies 1 well was drilled under the terms of the SRC. Solana
Colombia paid 96% of Ramshorn's share of the initial cost to casing point to
earn 75% of Ramshorn's 45% working interest. In subsequent wells, including
the first appraisal well already drilled, Solana Colombia will participate
directly in the SRC as it pertains to the Guariquies prospect and will pay
37.5% of the costs and receive 33.75% of the production after royalties.
The Guariquies 1 well encountered thick oil bearing pay in the Mugrosa
formation at a depth of between 5500 ft and 6500 ft. This formation is
productive in fields near the Guariquies well location and had produced with
low decline rates at those locations for more than 30 years. However these
sands are known to be of fairly low permeability and flow rates per individual
well are low. This was confirmed in Guariquies 1 where the sustained DST flow
rate from the Mugrosa formation was approximately 220 barrels of oil per day
on natural flow and the well produced approximately 1,000 barrels of 28 deg
API oil over a period of several days.
Surface production facilities were installed during the month of
June/July, 2006, and production from Guariquies 1 was reinitiated at the
beginning of August. The well is being tested at various flow rates on natural
flow to determine important reservoir characteristics. Flow rates observed to
date reflect those previously reported on DST. After the relevant reservoir
information has been gathered, the well is expected to be put on pump to
verify the maximum sustainable production rate. This is anticipated to be
before the end of September, 2006.
In addition to the Mugrosa formation the Guariquies 1 well encountered
more than 100 feet of oil pay in the La Paz formation at a depth of
approximately 10,000 ft. This interval initially recovered 400 barrels of 39
deg. API oil on test and then ceased to flow. Subsequent studies have shown
that this formation, although oil bearing, has low natural permeability and a
study will be completed within three months to determine whether fracturing
can increase reservoir productivity to the extent that the development of this
La Paz reservoir is economically viable.
The first Guariquies appraisal well, Guariquies 2 well was drilled from
the same surface location as Guariquies 1 and was deviated approximately 1500
feet to the west to encounter the Mugrosa formation updip. The Mugrosa was in
fact penetrated 700 feet updip of the Guariquies 1 discovery and was found to
be at least 700 feet thicker. Testing of this well however recovered only gas
and is interpreted that this well may have encountered a gas cap updip of the
Guariquies 1 well. The area of this gas cap is thought to be fairly limited
and the potential of the Guariquies discovery, which is located primarily
downdip of the discovery well remains to be confirmed.
The next well in the Guariquies program, Guariquies 3 is expected to be
drilled at a location 4.5 km. north of the discovery well in late 2006 or
early 2007, subject to rig availability.
ALAMO PROSPECT, ALAMO AREA, CATATUMBO BASIN
The Alamo surface location has been built and all environmental approvals
required to drill this well have been received. The rig which will drill the
Alamo prospect has been mobilized to the drilling location and drilling is
expected to begin in September 2006.
ZEUS PROSPECT, RIO HORTA AREA, MIDDLE MAGDALENA BASIN
The timing of the drilling of the Zeus well is dependent upon the
availability of a large 3,000 horsepower rig to drill this deep well. As there
are only two of these available in Colombia and both are under contract to
other operators, the actual commencement date of the Zeus well cannot be
confirmed at this time. Based on best estimates this well could be spudded
between November, 2006 and March 2007.
CATATUMBO BASIN PROJECTS
CATGUAS BLOCK
Solana has also acquired seismic over a large structure which contains a
well which, on the basis of two independent third party studies, is
interpreted to contain a substantial column of oil pay in a fractured
reservoir similar to that which produces in other fields in the region. Solana
has staked a location on this prospect and is currently acquiring the
environmental approvals required to drill this feature. A well is planned on
this prospect in late 2006.
The previously mentioned seismic program also inferred the existence of
apparently thicker sand packages associated with an old discovery that tested
oil. The second well of the two well commitments is expected to be drilled to
test this play. The environmental license is being finalized.
Solana is negotiating the contract for a new rig that will be available
in Colombia to spud the first of these two wells in late 2006.
CARBONERA BLOCK
In January 2006, Solana entered into an agreement with a private company
pursuant to which Solana will receive a 50% interest in the Carbonera Block in
the Catatumbo basin. This block lies immediately adjacent to the southeast of
the Catguas Block described above. The Carbonera Block contains an existing
gas discovery of unknown size and includes three wells which tested gas and
condensate and one dry appraisal well.
The initial phase of the contractual commitment of this block required
seismic reprocessing and the acquisition of 38 kms of 2D seismic. These
commitments have been fulfilled and the remaining first phase commitment
requires the re-entry of an existing well to determine whether commercial gas
production rates can be achieved in this discovery.
It is currently anticipated that the re-entry or the drilling of a new
well will be accomplished after the drilling of the Catguas commitment wells.
The environmental license process has been initiated.
SOLANA/ARGOSY PROJECTS
GUAYUYACO 1 AND 2
Currently Guayuyaco 1 is producing 400 bopd with 70% water cut and
Guayuyaco 2 is producing 900 bopd with 27% water cut for a total net
production to Solana Colombia of 425 bopd.
Based upon a report by DeGolyer and MacNaughton, independent Petroleum
Consultants, that was commissioned by Solana the remaining net recoverable
proven and probable reserves attributable to Solana's share of this field net
of royalties amount to 865,000 barrels at June 30, 2006.
The Juanambu prospect, located adjacent the Toroyacu field, is ready to
drill with the environmental permit granted and the location and road
construction accomplished. Timing is dependent on rig availability, however
early 2007 is the best current estimate.
CHAZA BLOCK
A well location, Cafelina, has been selected and the required
environmental approvals for drilling have been obtained. The timing of the
drilling of the first well, Cafelina 1, on this block is dependent upon rig
availability; however the best current estimate for the spudding of this well
is early 2007, after the Juanambu well has been drilled.
LLANOS BASIN PROJECT
Solana drilled three wells in the Llanos basin in 2006, Yalea 1 on the
Guachiria Block, Bonaire 1 on the Guachiria Norte Block and Gaviotas 1 on the
Gaviotas Block. Solana holds majority interests in two other blocks; Guachiria
South and Garibay in the Llanos basin and has fulfilled its initial stage
commitments on both of these blocks.
GAVIOTAS 1 PROSPECT, GAVIOTAS BLOCK
The Gaviotas 1 Prospect is located on the Gaviotas Block, in the Llanos
Basin. Solana farmed out a 50% interest in this block and retains a 50%
interest in production achieved from the well. Two private companies paid
approximately 90% of the cost of the Gaviotas well and will be entitled to a
50% share of the production while Solana remains the operator.
The primary target of the Gaviotas 1 well was found to be water bearing
based on two drill stem tests conducted over this interval. A secondary target
found at a depth of 12,650 ft. exhibited oil shows and three sands were
perforated and tested as part of a single drill tem test. This test recovered
mainly water (88%) with a small (12%) but persistent oil cut. Log analysis
suggests that at least one of these sands is entirely water bearing while the
other two appear to contain oil or oil and water. A study has been initiated
to determine whether one or two of the three sands may be capable of producing
oil in the future and to provide information on the economic viability of
conducting a re-entry to attempt to establish oil production.
BONAIRE 1 PROSPECT, GUACHIRIA NORTE BLOCK
The Bonaire 1 Prospect is located on the Guachiria Block, in the Llanos
Basin, and is close to the Yalea and Bonaire discoveries discussed below. The
Bonaire 1 well was drilled to a total depth of 7,800 feet. Solana bore 40% of
the cost of the Bonaire well while retaining a 70% working interest with a
Colombian partner bearing 60% of the costs and earning 30% of the production.
Solana remains the operator.
Two drill stem tests were conducted in the Bonaire well. The lower test
recovered only water while the upper test recovered 20 barrels of 39 degree
API oil with no water. A total of 140 barrels of oil has since been recovered
during swabbing operations. The oil recovered contains a high percentage (38%)
of paraffin and accordingly paraffin treatment will be required for production
operations. In addition the oil bearing reservoir, although having good
porosity, appears to be of fairly low permeability. For that reason a well
stimulation study is under way to determine whether this well can be fractured
to attempt to achieve commercial flow rates. The well was completed and is in
a condition to allow such a fracturing application without the requirement to
mobilize a rig to the location.
YALEA PROSPECT, GUACHIRIA BLOCK
Yalea 1 was drilled in the Guachiria Block that also contains the Bucaro
1 well which has until recently produced at a high water cut. The block also
contains the late 1980's Guahibos 1 and Guacamayo 1 wells which tested at
rates of up to 2,000 bopd and which produced 350,000 and 650,000 barrels of
oil respectively over their economic lives. Bucaro 1, located less than 2
kilometers north of the Yalea 1 well, has underutilized oil handling
facilities and is connected to the main oil sales point in the Llanos basin by
a recently built all weather road which allows oil trucking operations to be
carried out during the extensive Llanos wet season.
The Yalea 1 well was spudded on April 28, 2006 and drilled to a total
depth of 7,500 feet. Testing operations have since been carried out with a
work-over rig. Initial production rates of over 500 bopd declined
substantially; apparently a result of sand production which affected the
efficiency of the surface pumping equipment, causing the well to be shut in
frequently. After each shut in to repair the surface equipment, the production
rate recovered only to decline again to the range of 150 to 250 bopd. While
analysis of the available data continues, it is currently thought that the
well may be located in a narrow channel resulting in relatively low
sustainable production rates. The oil has been trucked to a receiving facility
some 100 km. to the west. Oil is currently being sold to this facility under a
short term contract which has a price of 90% of WTI minus approximately
$13/bbl trucking and handling costs.
SEISMIC PROGRAMS, LLANOS BASIN
Solana entered into a contract in December 2005 to have 300 kilometers of
2D seismic shot in the Llanos Basin, where the Gaviotas, Guachiria Norte,
Guachiria Sur and Garibay Blocks are located. This group of seismic programs
was subsequently increased to approximately 400 kilometers to cover additional
leads, to provide an extensive inventory of prospects for future drilling and
to take advantage of lower seismic acquisition rates prevailing at the time
the contract was signed compared to current costs. These programs have been
completed, processed and interpreted. The total cost of this group of programs
was US$2.8 million.
Menno Wiebe, Vice President Exploration of Solana, a Petroleum Geologist,
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 six-month periods ended June 30,
2006 and 2005. Unless otherwise noted, all currency amounts are stated in
Canadian dollars.
June 30, 2006 June 30, 2005
-------------------------------------------------------------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
-------------------------------------------------------------------------
$ $ $ $
-------------------------------------------------------------------------
Revenue
Production
Revenue, net of
royalties 2,710,010 5,208,134 2,174,277 2,468,976
Operating costs 824,461 1,126,665 762,828 841,308
-------------------------------------------------------------------------
1,885,549 4,081,469 1,411,449 1,627,668
-------------------------------------------------------------------------
Expenses
General and
administrative 1,278 ,082 2,363,070 893,827 1,603,959
Depletion,
depreciation
and accretion 1,139,233 2,357,801 496,713 630,595
Foreign exchange
loss(gain) 976,849 1,263,108 408,500 (138,992)
Stock-based
compensation 256,549 592,714 366,122 970,652
-------------------------------------------------------------------------
3,650,713 6,576,693 2,165,162 3,066,214
-------------------------------------------------------------------------
Other income/
(expenses)
Interest and
other 429,161 830,910 207,497 411,500
Income taxes (51,627) (51,627) - (50,000)
-------------------------------------------------------------------------
377,534 779,283 207,497 361,500
-------------------------------------------------------------------------
Net gain (loss) (1,387,630) (1,715,939) (546,216) (1,077,046)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net gain (loss)
per share (0.02) (0.03) (0.02) (0.02)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
June 30, December 31,
2006 2005
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Share capital 150,296,533 110,910,147
Working capital 49,968,638 28,457,255
Petroleum and natural gas properties 88,836,533 73,618,637
Total assets 155,566,053 111,807,270
Total long-term liabilities 6,719,357 6,725,565
Shareholders' equity 136,409,949 98,146,787
Cash dividends per share NIL NIL
Results of operations for the three- and six-month periods ending
June 30, 2006
The net income from production was achieved substantially from Guayuyaco
1 in the second quarter and the Company's net results are as follows:
June 30, 2006 June 30, 2005
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
Bopd 422 410 488 488
Net revenue, net
of royalties
per bopd $62.99 $58.86 $42.30 $42.30
Net operating costs
per bopd $19.47 $15.27 $13.33 $13.33
General and administrative expenses for the three and six-month periods
ended June 30, 2006 amounted to $1,278,082 and $2,363,070, respectively, in
comparison to the three- and six-month period ended June 30, 2005, which
amounted to $893,827 and $1,603,959, respectively.
The substantial components of general and administrative expenses are as
follows:
June 30, 2006 June 30, 2005
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
$ $ $ $
General office 514,981 782,861 283,238 604,878
Salaries &
Benefits 497,006 831,787 197,822 378,884
Professional fees 123,298 353,438 244,057 397,561
Public company
costs 138,570 293,212 100,165 120,061
Consulting fees 4,226 101,772 68,334 102,786
-------------------------------------------------------
1,278,082 2,363,070 893,827 1,603,959
-------------------------------------------------------
-------------------------------------------------------
All the components of general and administrative expenses increased due to
the current period's activities of adding the appropriate infrastructure for
the Company's endeavors in Colombia and sustaining two offices, one in Bogota,
Colombia and one in Calgary, Alberta, Canada.
Depletion, depreciation and accretion amounted to $1,139,233 and
$2,357,801 for the three and six-month periods ended June 30, 2006, compared
to the same periods in 2005, which were $496,713 and $630,595 respectively.
The foreign exchange loss amounted to $976,849 and $1,263,108 for the
three- and six-month periods ended June 30, 2006 reflects substantial
variations of the Canadian dollar against the U.S. dollar during the three and
the six month periods ended June 30, 2006, compared to $408,500 and ($138,992)
for same periods ended June 30, 2005.
Stock-based compensation amounted to $256,549 and $592,714 for the three-
and six-month period ended June 30, 2006, respectively, as compared to
$366,122 and $970,652 for same periods ended June 30, 2005.
Other income and expenses relate to interest income amounting to $429,161
and $830,911 for the three and six-month periods ended June 30, 2006,
respectively, compared to $207,497 and $411,500 for the same periods ended
June 30, 2005. The increase is due to the larger balances held throughout the
current period.
The resulting net loss amounting to $1,387,630 and $1,715,939 for the
three and six-month periods ended June 30, 2006, respectively, compared to
$546,216 and $1,077,046 for the same periods ended June 30, 2005 and is
representative of the Company's efforts to expand operations in Colombia.
The Company's share capital increased to $150,296,533 at June 30, 2006
from $110,910,147 at December 31, 2005 due to the private placement of
21,000,000 common shares in April 2006.
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.
-------------------------------------------------------------------------
Jun 30, Mar 31, Dec 31, Sep 30,
2006 2006 2005 2005
$ $ $ $
Additions to
Petroleum and
Natural Gas
properties 9,960,499 7,548,553 12,055,993 7,045,475
Total revenues 3,139,171 2,899,874 3,690,011 2,412,941
General and
administrative
expenses 1,343,467 1,084,988 1,126,933 711,020
Depletion,
depreciation and
accretion 1,073,847 1,218,568 4,665,478 390,288
Foreign exchange
(gain) loss 976,849 286,259 (331,567) 236,457
Stock-based
compensation 256,549 336,165 766,478 434,000
Loss before and
after extraordinary
items and taxes 1,387,630 328,309 2,289,806 753,343
Loss per share
(basic and diluted) 0.02 0.01 0.04 0.01
Jun 30, Mar 31, Dec 31, Sep 30,
2005 2005 2004 2004
$ $ $ $
Additions to
Petroleum and
Natural gas
properties 6,350,471 8,234,026 13,125,680 529,124
Total revenues 2,381,774 498,703 557,233 9,123
General and
administrative
expenses 893,827 710,131 707,660 337,832
Depletion,
depreciation
and accretion 496,713 133,883 359,952 -
Impairment - - 1,102,826 -
Foreign exchange
(gain) loss 408,500 (547,492) 522,317 -
Stock-based
compensation 366,122 604,530 1,102,826 -
Write-off of
mineral properties - - - -
Loss before and after
extraordinary items
and taxes 546,216 530,830 3,963,435 328,709
Loss per share
(basic and diluted) 0.02 0.01 0.14 0.01
-------------------------------------------------------------------------
>>
LIQUIDITY
Solana's working capital increased from $19,968,638 at March 31, 2006, to
$48,968,638 at June 30, 2006, largely due to the cash inflow related to the
Company's private placement completed in April 2006.
The Company's cash balances at June 30, 2006 amounting to $41,896,158 and
$5,121,510 in restricted cash are committed to the Company's planned capital
expenditure program in Colombia. The Company requires additional financing in
order to fund its ongoing exploration and appraisal programs. Management
intends to cover the exploration shortfall through strategic farm-outs and the
costs of the ongoing appraisal program through debt or by other means.
The Company's long-term liabilities are $6,719,357 (2005 - $6,725,565)
and the most significant component is the $6,100,000 future tax liability.
Solana's shareholders' equity increased from $98,168,644 at March 31,
2006, to $136,409,949 at June 30, 2006.
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The Company incurred cash outflows from operations amounting to
$5,077,028 and $2,469,133 for the three- and six-month periods ended June 30,
2006, compared to the same periods in 2005 which incurred cash outflows
amounting to $857,784 and $795,464. This is substantially due to the
contribution of joint venture partners in Company projects.
Solana's net cash inflow from financing activities amounted to
$39,372,386 for the six-month period ended June 30, 2006, compared to
$1,415,000 for the six-month period ended June 30, 2005, due to the private
placement completed in April 2006.
The Company incurred cash outflows from its investing activities of
$9,330,755 and $19,109,579 for the three- and six-month periods ended June 30,
2006 as compared to $10,886,875 and $10,861,664 for the three- and six-month
periods ended June 30, 2005. The most significant cash outflow component was
$17,575,697 of expenditures for petroleum and natural gas properties for the
six-month period ended June 30, 2006.
RELATED PARTY TRANSACTIONS
The Company paid $30,000 in management fees in the current six-month
period ended June 30, 2006 to a company controlled by a director of the
Company and are included in general and administrative expense.
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 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
The Company expects to drill 10 additional wells in the next 18 months.
Targets range from 2 MMbo to 400 MMbo recoverable. The Company is actively
looking for new exploration projects and continually conducts strategic asset
reviews to rebalance its portfolio through farm-ins and farm-outs.
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.
<<
August 25, 2006
SOLANA RESOURCES LIMITED
CONSOLIDATED BALANCE SHEET
(Unaudited)
June 30, December 31,
2006 2005
$ $
------------- -------------
ASSETS
Current:
Cash and cash equivalents 41,896,158 24,088,484
Cash in trust (Note 2) 5,121,510 457,848
Accounts receivable - trade 3,319,831 5,900,323
- cash calls 11,659,613 2,267,631
Prepaid expenses 408,273 2,677,887
------------- -------------
62,405,385 35,392,173
Other receivable 160,508 -
Deposits (Note 3) 3,234,748 2,149,224
Petroleum and natural gas properties 88,836,533 73,618,637
Other capital assets 777,721 644,624
Investment (Note 4) 151,158 2,612
------------- -------------
155,566,053 111,807,270
------------- -------------
------------- -------------
LIABILITIES
Current:
Accounts payable and accrued liabilities
- trade 10,955,103 4,899,514
- cash calls 1,481,644 2,035,404
------------- -------------
12,436,747 6,934,918
Asset retirement obligations (Note 5) 619,357 625,565
Future income taxes (Note 6) 6,100,000 6,100,000
------------- -------------
19,156,104 13,660,483
------------- -------------
SHAREHOLDERS' EQUITY
Share capital (Note 7) 150,296,533 110,910,147
Contributed surplus 4,900,826 4,308,111
Deficit (18,787,410) (17,071,471)
------------- -------------
136,409,949 98,146,787
------------- -------------
155,566,053 111,807,270
------------- -------------
------------- -------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
(Unaudited)
June 30, 2006 June 30, 2005
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
$ $ $ $
Revenue
Oil and gas
revenues, net
of royalties 2,710,010 5,208,134 2,174,277 2,468,976
Interest 429,161 830,911 207,497 411,500
------------- ------------- ------------- -------------
3,139,171 6,039,045 2,381,774 2,880,476
------------- ------------- ------------- -------------
Expenses
Operating 824,461 1,126,664 762,828 841,308
General and
administrative 1,278,082 2,363,070 893,827 1,603,959
Depletion,
depreciation and
accretion 1,139,233 2,357,801 496,713 630,595
Foreign exchange
loss (gain) 976,849 1,263,108 408,500 (138,992)
Stock-based
compensation
(Note 7) 256,549 592,714 366,122 970,652
------------- ------------- ------------- -------------
4,475,174 7,703,357 2,927,990 3,907,522
------------- ------------- ------------- -------------
Loss before taxes (1,336,003) (1,664,312) (546,216) (1,027,046)
Taxes (51,627) (51,627) - (50,000)
------------- ------------- ------------- -------------
Net loss (1,387,630) (1,715,939) (546,216) (1,077,046)
Deficit, beginning
of period (17,399,780) (17,071,471) (13,482,106) (12,951,276)
------------- ------------- ------------- -------------
Deficit, end
of period (18,787,410) (18,787,410) (14,028,322) (14,028,322)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Loss per share (0.02) (0.03) (0.02) (0.02)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF CASH FLOW
(Unaudited)
June 30, 2006 June 30, 2005
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
$ $ $ $
Summary of
activities
Operating
activities
Net loss (1,387,630) (1,715,939) (546,216) (1,077,046)
Items not
involving
cash:
Unrealized
foreign
exchange
loss 394,157 (68,826)
Depletion,
depreciation
and accretion 1,139,233 2,357,801 496,713 630,595
Stock-based
compensation 256,549 592,714 366,122 970,652
------------- ------------- ------------- -------------
8,152 1,234,576 710,776 455,375
Changes in
non-cash
working capital (5,085,180) (3,703,709) (1,568,560) (1,250,839)
------------- ------------- ------------- -------------
(5,077,028) (2,469,133) (857,784) (795,464)
------------- ------------- ------------- -------------
Financing
activities
Proceeds from
the exercise
of options - 14,000 - 60,000
Proceeds from
the exercise
of warrants - - - 1,355,000
Proceeds from
the issuance
of common
shares 42,000,000 42,000,000
Cost of issuance (2,627,614) (2,627,614)
------------- ------------- ------------- -------------
39,372,386 39,386,386 - 1,415,000
------------- ------------- ------------- -------------
Investing
activities
Additions to
petroleum
and natural
gas properties (9,960,499) (17,575,697) (6,350,471) (14,584,496)
Changes in
non-cash
working
capital
- Long Term 586,243 (315,262) (15,615) 2,778,021
Additions to
capital assets (106,615) (133,096) - -
Deposits 150,116 (1,085,524)
------------- ------------- ------------- -------------
(9,330,755) (19,109,579) (10,886,875) (10,861,664)
------------- ------------- ------------- -------------
Net increase
(decrease)
in cash 24,964,603 17,807,674 (1,255,102) (1,355,043)
Cash and cash
equivalents,
beginning of
period 16,931,555 24,088,484 3,725,224 3,825,165
------------- ------------- ------------- -------------
Cash and cash
equivalents,
end of period $ 41,896,158 41,896,158 2,470,122 2,470,122
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
>>
-------------------------------------------------------------------------
Note 1. Basis of Presentation
The interim consolidated financial statements of Solana Resources Limited
("Solana" or the "Company") for the three and six month periods ended
June 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 and appraisal programs. Management intends to cover the
exploration shortfall through strategic farm-outs and the costs of the
ongoing appraisal program through debt or by other means.
Note 2. Cash in trust
The cash in trust in the amount of $5,121,510 (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 $3,234,748 (December 31,
2005 - $2,149,224) with the Colombian Agency of National Hydrocarbons
("ANH") with respect to recently acquired exploration acreage awarded to
it. These funds are required to be returned to the Company by the ANH on
completion of Phase 1 work commitments on the Guachiria Norte, Catguas,
Guachiria Sur, Carbonera and Garibay Blocks.
Note 4. Investment
The Company has invested in aggregate $151,158 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 (6,208)
-------------------------------------------------------------------------
Asset retirement obligations, June 30, 2006 $619,357
-------------------------------------------------------------------------
At June 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.
Continuity of common shares Shares Amount
No. $
-------------------------------------------------------------------------
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 39,372,386
-------------------------------------------------------------------------
Balance, June 30, 2006 85,876,792 150,296,533
-------------------------------------------------------------------------
Continuity of stock options Options Weighted Average
No. Exercise Price
$
-------------------------------------------------------------------------
Balance, December 31, 2005 4,015,000 1.94
Granted 180,000 3.85
Expired (30,000) 2.75
Exercised (140,000) 0.10
-------------------------------------------------------------------------
Balance, June 30, 2006 4,025,000 1.95
-------------------------------------------------------------------------
Stock-based compensation
Compensation expense of $256,549 for the three-month period and $592,714
for the six-month period ended June 30, 2006 has been recorded in the
Consolidated Statements of Loss and Deficit (2005 - $366,122 and $970,652
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
second quarter of 2006 and the assumptions used in their determination
are as noted below:
Six months ended
June 30, 2006
Risk-free interest rate (percent) 2.51%
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 six months ended June 30, 2006 was 67,414,292
(2005 - 51,352,300).
Note 9. Segmented information
Three month period ended June 30, 2006
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,710,010 2,710,010
Operating costs - 824,461 824,461
-----------------------------------------
- 1,885,549 1,885,549
-----------------------------------------
General and administrative
expenses 423,563 854,519 1,278,082
Depletion, depreciation, and
accretion 2,146 1,137,088 1,139,234
Foreign exchange loss 144,280 832,569 976,849
Stock-based compensation 256,549 - 256,549
Interest income (425,411) (3,750) (429,161)
-----------------------------------------
401,127 2,820,423 3,221,551
-----------------------------------------
(Loss)/income before taxes (401,127) (934,875) (1,336,003)
Income taxes - (51,627) (51,627)
-----------------------------------------
Net (loss) income (401,127) (986,502) (1,387,630)
-----------------------------------------
Identifiable assets 45,344,403 110,061,142 155,405,545
Capital expenditures - 10,027,144 10,027,144
-----------------------------------------
Six month period ended June 30, 2006
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 5,208,134 5,208,134
Operating costs - 1,126,665 1,126,665
-----------------------------------------
- 4,081,469 4,081,469
-----------------------------------------
General and administrative
expenses 909,035 1,454,035 2,363,070
Depletion, depreciation, and
accretion 4,292 2,353,509 2,357,801
Foreign exchange loss 1,968,161 (705,052) 1,263,108
Stock-based compensation 592,714 - 592,714
Interest income (799,807) (31,104) (830,911)
-----------------------------------------
2,674,395 3,071,387 5,745,782
-----------------------------------------
(Loss)/Income before taxes (2,674,395) 1,010,083 (1,664,312)
Income taxes - (51,627) (51,627)
-----------------------------------------
Net (loss) income (2,674,395) 958,456 1,715,939
-----------------------------------------
Identifiable assets 45,344,403 110,061,142 155,405,545
Capital expenditures - 17,575,697 17,575,697
-----------------------------------------
Three-month period ended June 30, 2005
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,174,277 2,174,277
Operating costs - 762,828 762,828
-----------------------------------------
- 1,411,449 1,411,449
-----------------------------------------
General and administrative
expenses 579,304 314,523 893,827
Depletion, depreciation, and
accretion 1,893 494,820 496,713
Foreign exchange loss 179,061 229,439 408,500
Stock-based compensation 366,122 - 366,122
Interest income (207,205) (292) (207,497)
-----------------------------------------
(919,715) 1,038,490 1,957,665
Capital taxes
-----------------------------------------
Net (loss) income (919,715) 372,959 (546,216)
-----------------------------------------
Identifiable assets 51,110,611 57,990,911 109,101,522
-----------------------------------------
Capital expenditures - 6,418,008 6,418,008
-----------------------------------------
Six-month period ended June 30, 2005
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,468,976 2,468,976
Operating costs - 841,308 841,308
-----------------------------------------
- 1,627,668 1,627,668
-----------------------------------------
General and administrative
expenses 834,595 769,364 1,603,959
Depletion, depreciation, and
accretion 3,786 626,809 630,595
Foreign exchange loss 85,783 (224,775) (138,992)
Stock-based compensation 970,652 - 970,652
Interest income (411,125) (375) (411,500)
-----------------------------------------
1,483,691 1,171,023 2,654,714
-----------------------------------------
(Loss) income before
income taxes (1,483,691) 456,645 (1,027,046)
Capital taxes (50,000) - 50,000
-----------------------------------------
Net (loss) income (1,533,691) 456,645 (1,077,046)
-----------------------------------------
Identifiable assets 51,110,611 57,990,911 109,101,522
-----------------------------------------
Capital expenditures 25,763 14,895,320 14,921,083
-----------------------------------------
Note 10. Supplemental cash flow information
June 30, 2006 June 30, 2005
$ $
-------------------------------------------------------------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
-------------------------------------------------------------------------
Cash interest
paid - - 2,857 5,312
-------------------------------------------------------
Cash taxes paid - - - -
-------------------------------------------------------
Note 11. Related party transactions
Management fees in the amount of $30,000 (2005 - $48,000) were paid to a
company controlled by a director of the Company and are included in
general and administrative expenses. 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:
-------------
$
-------------
2004 433,000
2005 318,000
2006 297,000
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
June 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 $50,762,600 over the next 12 months.
>>
