CALGARY, May 30 /CNW/ - Solana Resources Limited (TSX-V:SOR; AIM:SORL),
the Colombia-focused independent oil and gas exploration and production
company, today announces its first quarter results for the three month period
ending March 31, 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").
30 May 2006
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 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 three month periods ended March 31, 2006 and 2005 as well as
its financial position and future prospects. It should be read in conjunction
with 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.
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.
Additional information is available on the Company's website at
www.solanaresources.com or on the SEDAR website at www.sedar.com.
HIGHLIGHTS
- 14 exploration/production blocks currently held with firm drilling
commitments on seven blocks. Six blocks were acquired in 2005 and
early 2006.
- A commercial oil discovery made at Guayuyaco in early 2005 which
is producing at approximately 1200 bopd gross (425 bopd net to
Solana) from two wells.
- Drilling in early 2006 resulted in a commercial 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 testing results are being interpreted.
- Four blocks held for production including; Guayuyaco, MaganguDe,
Guariquies, and Guachiria.
- Three blocks held under an option within an agreement between
Ecopetrol, Ramshorn, and Solana may lead to future drilling on
large prospects
- Drilling is currently underway at an additional three locations on
Solana's Llanos Basin acreage and the currently envisaged drilling
program will continue for 12 to 18 months
- Six 2D seismic programs were initiated in 2005 and completed
during the first quarter of 2006 on Company held acreage
- 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
OUTLOOK
In January of 2004, the Colombian authorities implemented new regulatory
and fiscal policies intended to encourage oil industry investment in the
country. Solana responded quickly and decisively to these incentives and is
currently focused on Colombia, is fully operational and well funded. The
company is active in all major hydrocarbon basins in the country and proposes
to apply modern exploration technology to its projects. A number of
historical, economic and technical factors support the Solana decision to
concentrate on Colombia including:
- The hydrocarbon potential of the country is significant in terms
of the overall economy and much of it remains untapped due to a
lack of investment in the last 20 years.
- Widespread under-utilized infrastructure exists in most Colombian
basins and specifically near all current Solana prospects.
- The fiscal terms were revised as of January 2003, making Colombia
an attractive country in which to invest in the oil and gas
industry. These fiscal incentives increased the share of revenue
which the investor could obtain from 27% to up to 50%.
- The most modern exploration technology, especially as regards
seismic, drilling and reservoir management, has only been applied
in a limited manner during the past 20 years. Solana is now
applying such technology in its operated exploration blocks.
- Colombia has a stable economy, with low inflation and consistent
economic growth and, due to the fact that it has never defaulted
on a debt payment or breached a contract with foreign investors,
is a favored location for direct foreign investment.
- The Colombian authorities provide essentially unlimited access to
all technical information on oil and gas blocks.
- The security situation in the country, which has long hampered
exploration, has improved significantly and is expected to
continue to improve.
SOLANA'S PROJECTS
ECOPETROL/RAMSHORN/SOLANA PROJECT
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. Negotiations for a rig that is currently
in the area are ongoing and it is hoped that the rig will be made available in
early July.
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 future wells, 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.
Civil works recently completed at the Guariquies 1 well location will
allow Guariquies 1 well to be put on a long term test with the oil being
trucked to nearby production facilities. An appraisal well, Guariquies 2, has
been drilled from the Guariquies 1 well location and is currently being tested
and interpreted. It is currently expected that an additional appraisal well
will be drilled in late 2006 at a location approximately 4.5 kilometres north
of the discovery well.
ALAMO PROSPECT, ALAMO AREA, CATATUMBO BASIN
The Alamo prospect is located in the Catatumbo basin in the east central
part Colombia. The Catatumbo basin, unlike the basin to the west, belongs, in
a geological sense, to the Maracaibo basin system of Venezuela. The Maracaibo
basin has produced an estimated 37 billion barrels of oil to date, with
20 billion barrels estimated to remain to be produced.
The well proposed to test this prospect is expected to penetrate to
4,800 feet. The well will be drilled under the terms of the SRC. Solana
Colombia will pay 96% of Ramshorn's share of the initial cost to casing point
to earn 75% of Ramshorn's working interest. Solana will bear 38.4% of the cost
of the initial well and 30% of the cost of subsequent wells and will earn a
26.25% interest in production subject to a sliding scale royalty. The Company
expects the well to be spudded in Q3 of 2006. The Alamo well, which will be a
helirig operation to take into account sensitivities to the local environment,
is expected to cost an estimated US$15 million. Solana's share of the drilling
costs is estimated at US$5.8 million on a dry hole basis and Solana's share of
any production ultimately obtained from this prospect will be 26.25%.
The rig has been sourced and mobilization is expected to commence around
mid June with drilling to commence in early August.
ZEUS PROSPECT, RIO HORTA AREA, MIDDLE MAGDALENA BASIN
The Zeus prospect is one of the largest undrilled prospects in Colombia
and represents an attractive exploration target with a considerable amount of
well control. It is a deep prospect (18,000 ft.) and is expected to take
135 days to drill, with a further 40 days for testing, with an anticipated dry
hole cost of USD $10 million net to Solana. The well proposed to test the Zeus
prospect is the deepest, largest target and most expensive well planned to be
drilled among the Ecopetrol/Ramshorn/Solana Prospects.
The Zeus well will be drilled under the terms of the SRC. Solana will pay
96% of Ramshorn's share of the initial costs to casing point to earn 75% of
Ramshorn's working interest. Solana will bear 48% of the cost of the first
well on this prospect and 37.5% of the costs of subsequent wells and will earn
a 33.75% interest in the production subject to a sliding scale royalty.
CATATUMBO BASIN PROJECTS
CATGUAS BLOCK
The Catguas Block located in the Catatumbo basin in northeastern Colombia
encompasses approximately 393,000 acres and was granted to Solana by the ANH
on October 14, 2005.
This basin is the western extension, into Colombia, of the Maracaibo
basin of Venezuela. The Maracaibo basin has produced an estimated 37 billion
barrels of oil to date with 20 billion barrels estimated remaining to be
produced. In Colombia, immediately adjacent to the Catguas Block, are fields
such as the Tibu field (found in 1940 and with 260 million bbls produced to
date), the Petrolea field (discovered in 1934 with 38 million bbls produced to
date) and the Rio Zulia field (dating from 1962 and with 137 million bbls
recovered to date). Two existing oil pipelines cross the Catguas Block. As
these are now underutilized, they provide important infrastructure for access
to markets.
Although little exploration has taken place in the Catatumbo Basin within
the past 25 years, the Catguas Block contains two wells, drilled in the late
1950s, which produced oil at rates which were then deemed by the previous
operator as sub commercial due to low oil prices, poor fiscal terms and lack
of infrastructure existing at the time of drilling. Solana has acquired
seismic over these prospects to determine whether follow up drilling is
warranted. In addition 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. A gas discovery, Esperanza, exists
on the Catguas Block.
In addition to the prospects noted above a number of large exploration
targets are believed by management of the Corporation to exist on the Catguas
Block based on studies by previous operators and the Solana operated seismic
program now underway. These are expected to provide follow-up drilling
locations to any success encountered in the first drilling program to be
conducted in 2006 and 2007.
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
one dry appraisal well.
Acquisition of the 38 kilometres 2D seismic program will commence in June
and should be completed by July 2006.
SOLANA/ARGOSY PROJECT
GUAYUYACO 1 AND 2
Guayuyaco 1 and 2, located in the Putumayo basin of southern Colombia are
wells which discovered and appraised the Guayuyaco structure between March and
June 2005. Solana paid 66.7% of the cost of the discovery well and 50% of the
cost of the Guayuyaco 2 well and holds a 35% interest in the production.
Currently Guayuyaco 1 is producing 400 bopd with 70% water cut and
Guayuyaco 2 is producing 800 bopd with 27% water cut for a total net
production to Solana Colombia of 425 bopd.
CHAZA BLOCK
The Chaza Block covers an area of 80,200 acres and is located in the
Putumayo basin to the west and north of the contiguous Guayuyaco Block. Argosy
is the operator of the Chaza Block and the ANH has approved Argosy's
assignment to Solana of a 50% interest in this acreage. Management believes
that several drillable prospects exist on the Chaza Block based on work by
previous operators and a recently completed Argosy 2D seismic program. The
seismic program cost US$0.551million net to Solana, and completes phase 1 of
the Chaza Block commitment. A second seismic program is planned for 2006
intended to convert known existing leads into drillable prospects.
LLANOS BASIN PROJECT
The Llanos Basin provides moderately sized, relatively low risk projects.
The Company would hope to achieve reasonable cash flow from any successful
wells due to the fact that wells in this area are known to produce at high
rates (700 to 2000 bopd) and because underutilized infrastructure exists in
the region.
Solana entered into a drilling services agreement in December 2005 with a
private company pursuant to which it has secured the rights to drilling
services during the two year period ending November 2007. Under this
agreement, Solana has prepaid US$1.5 million for drilling services. Solana
anticipates that this agreement will facilitate Solana complying with all of
its drilling obligations for 2006 and 2007. This drilling rig is currently
drilling the Gaviotas 1 well described below.
Solana is drilling or expects to drill an exploration well on three of
the four Blocks described below within the next six months. The well on the
Guachiria Sur Block is expected to be drilled within twelve months.
GAVIOTAS 1 PROSPECT, GAVIOTAS BLOCK
The Gaviotas 1 Prospect is located on the Gaviotas Block, in the Llanos
Basin. The Gaviotas 1 well was spudded in April 2006. This well is expected to
be drilled to a final total depth of approximately 13,000 feet. Solana has
farmed out a 50% interest in this block and retains a 50% interest in
production. Two private companies are paying 100% of the cost of the Gaviotas
well and will be entitled to a 50% share of the production. Solana remains the
operator.
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 discoveries and facilities previously mentioned.
The Bonaire 1 well was spudded in March 2006 and drilled to a total depth of
7,800 feet. Based on shows seen in the samples and log analysis, Solana's
management believes that the well warrants testing. Accordingly casing has
been run to 7,783 feet and cemented. The well has been suspended, the drilling
rig released and a workover rig mobilized to test the well. Solana bears 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.
YALEA PROSPECT, GUACHIRIA SUR BLOCK
The Yalea Prospect is located on the Guachiria Sur Block, in the Llanos
Basin, and is close to the Bucaro well which is currently producing at low
rates and which has underutilized oil handling facilities. A Solana completed
2D seismic program has been interpreted and on that basis it is believed that
the Yalea feature has a structural culmination somewhat higher than that at
the Bucaro well.
The well has been drilled and cased. The drilling rig has been
demobilized and testing is pending the release of the workover rig currently
finalizing the testing of the Bonaire 1 well.
SEISMIC PROGRAMS, LLANOS BASIN
Solana entered into a contract in December 2005 to have 300 kilometres 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 kilometres 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.
OPERATING RESULTS
Selected Quarterly Information
The following table summarizes selected financial data for Solana for
each of the two most recently completed financial three month periods ended
March 31, 2006, 2005 and 2004. Unless otherwise noted, all currency amounts
are stated in Canadian dollars.
<<
2006 2005 2004
-------------------------------------------------------------------------
$ $ $
Production Revenue, net
of royalties 2,498,124 294,700 -
Operating costs 302,203 78,481 -
-------------------------------------------------------------------------
2,195,921 216,219 -
-------------------------------------------------------------------------
Expenses
General and administrative 1,084,988 710,131 117,135
Depletion, depreciation
and accretion 1,218,568 133,883 -
Foreign exchange loss (gain) 286,259 (547,492) -
Stock-based compensation 336,165 604,530 45,900
-------------------------------------------------------------------------
(2,925,980) (901,052) (163,035)
-------------------------------------------------------------------------
Other income/expenses
Interest and other 401,750 204,003 15,419
Income taxes - (50,000) -
-------------------------------------------------------------------------
401,750 154,003 15,419
-------------------------------------------------------------------------
Net loss (328,309) (530,830) (147,616)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net loss per share (0.01) (0.01) (0.01)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
March 31, December 31,
2006 2005
-------------------------------------------------------------------------
$ $
Share capital 110,924,147 110,910,147
Working capital 19,918,857 28,457,255
Petroleum and natural gas properties 80,015,267 73,618,637
Total assets 115,042,783 111,807,270
Total long-term liabilities 6,740,314 6,725,565
Shareholders' equity 98,168,644 98,146,787
Cash dividends per share NIL NIL
Results of Operations for the Three Months Ending March 31, 2006
Production, net of royalties and operating costs
This consolidated financial information includes the revenue and expenses
of Solana Colombia for the three month periods ended March 31, 2006 and 2005.
During the three month period ended March 31, 2006, revenue from operations
amounting to $2,498,124 less the operating costs of $302,203 yielded operating
profit of $2,195,921. During the three month period ended March 31, 2005 the
Company generated revenue of $294,700, less operating costs of $78,481, which
yielded an operating profit of $216,219. Higher production from Solana's
properties accounted for the difference.
The Company produced on average 425 bopd for the three months ended
March 31, 2006 and for the three months ended March 31, 2005 the Company
produced on average 30 bopd. The Company's revenue, realized after royalties,
operating costs and net backs for the three month period ended March 31, 2006
and 2005 are as follows:
2006 2005
$/Bbl $/Bbl
---------------------
Revenue, net of royalties 49.18 31.96
Operating cost 11.97 8.32
---------------------
Net 37.21 23.65
---------------------
Additionally during the current period ended March 31, 2006, the Company
had production of gas of 195 boepd (2005 - 280 boepd)(converted on a basis of
6 to 1), and the revenues net of royalties, operating costs and net backs are
as follow:
2006 2005
$/boepd $/boepd
---------------------
Revenue, net of royalties 2.12 1.41
Operating cost 0.90 0.62
---------------------
Net 1.22 0.79
---------------------
General and administrative expenses
General and administrative expenses for the three month period ended
March 31, 2006 amounted to $1,084,988 in comparison to $710,131 for the same
period ended March 31, 2005, an increase of 52.7% due to increased activity.
The major components of general and administrative expenses are as
follows:
2006 2005
$ $
------------------------------
General office 193,786 204,320
Salaries and benefits 334,775 199,787
Professional fees 230,897 142,084
Public company costs 154,643 19,896
Consulting fees 97,546 106,612
Travel 73,341 37,432
The significant increases to a portion of the sub-categories of general
and administrative expense are due to the Company's focus on exploration and
continued growth of infrastructure in Colombia.
Depletion, depreciation and accretion
Depletion, depreciation and accretion amounted to $1,218,568, compared to
the same period a year ago, which was $133,883. The depletion expense is
calculated based on the decline in proved reserves, and amounts to $1,151,921
(2005 - $92,514). Depreciation amounts to $51,898 (2005 - $23,968) on the
Company's other capital assets. Accretion expense amounting to $14,749 (2005 -
$17,401) represents the future estimated costs to plug and abandon its
petroleum and natural gas wells at the end of their useful lives.
Stock-based compensation expense
Stock-based compensation decreased to $336,165 from $604,530 in the prior
period primarily from the amortization of costs associated with the vesting of
options granted in the fourth quarter of 2004 and the first quarter of 2005.
Foreign exchange
The foreign exchange loss of $286,259 in the three month period ended
March 31, 2006 and the gain of $547,492 in the three month period ended
March 31, 2005 reflect relative currency fluctuations between the Canadian
dollar, the U.S, dollar and the Colombian peso, all of which are held by the
Company from time to time.
Other income and expenses
Other income and expenses relate to interest income in the current three
month period ended amounting to $401,750 compared to $154,003 which is
representative of larger cash balances held throughout the current period.
The capital tax expense amounting to $Nil (2005 - $50,000) which is the
Canadian Large Corporations Tax.
Net loss
The resulting net loss amounting to $328,309 for the quarter ended
March 31, 2006 relative to the net loss amounting to $530,830 for the prior
period reflects the increased activity of the Company in its efforts to find
hydrocarbons, and the increased average oil production throughout the current
three month period.
Share capital
The Company's share capital increased to $110,924,147 at March 31, 2006
from $110,910,147 at December 31, 2005 due to the exercise of 140,000 stock
options amounting to $14,000 in proceeds.
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.
------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS
QUARTERS ENDED
March 31, December 31, September 30, June 30,
2006 2005 2005 2005
$ $ $ $
Additions to
Petroleum and
Natural Gas
properties 7,548,553 12,055,993 7,045,475 6,350,471
Total
revenues 2,899,874 3,690,011 2,412,941 2,381,774
General and
administrative
expenses 1,084,988 1,126,933 711,020 893,827
Depletion,
depreciation
and accretion 1,218,568 4,665,478 390,288 496,713
Foreign exchange
loss (gain) 286,259 (331,567) 236,457 408,500
Stock-based
compensation 336,165 766,478 434,000 366,122
Loss before and
after extra-
ordinary
items and taxes 328,309 2,289,806 753,343 546,216
Loss per share
(basic and
diluted) 0.01 0.04 0.01 0.02
March 31, December 31, September 30, June 30,
2005 2004 2004 2004
$ $ $ $
Additions to
Petroleum and
Natural Gas
properties 8,234,026 13,125,680 529,124 117,789
Total revenues 498,703 557,233 9,123 18,812
General and
administrative
expenses 710,131 707,660 337,832 89,547
Depletion,
depreciation
and accretion 133,883 359,952 - -
Impairment - 1,160,000 - -
Foreign exchange
loss (gain) (547,492) 522,317 - -
Stock-based
compensation 604,530 1,102,826 - -
Loss before and
after extra-
ordinary
items and taxes 530,830 3,963,435 328,709 70,735
Loss per share
(basic and
diluted) 0.01 0.14 0.01 0.01
-------------------------------------------------------------------------
LIQUIDITY
Solana's working capital decreased from $28,457,255 at December 31, 2005,
to $19,918,857 at March 31, 2006, largely due to the cash outflow related to
the Company's investing activities in the three month period ended March 31,
2006.
The Company's cash balances at March 31, 2005 amounting to $16,931,555 is
committed to the Company's planned capital expenditure program in Colombia,
which is expected to result in eight additional exploration wells and one
development well to be drilled in the calendar years of 2006 and 2007.
Management believes that the Company currently has sufficient working capital
to meet these commitments when considered in conjunction with the financing
the Company completed in April 2006, amounting to $39,230,000 in net proceeds.
Long-term liabilities amount to $6,740,314 (2005 - $6,725,565) and the
most significant component is the $6,100,000 future tax liability which arose
on the acquisition of Solana Colombia. The future tax liability represents the
potential future tax on the disposition of the assets of Solana Colombia by
Solana that may not be shielded by any tax basis on those assets.
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The Company incurred a cash inflow from operations amounting to
$1,845,875 for the three months ended March 31, 2006, compared to the same
period in 2005 in which a cash outflow amounting to $339,909 primarily as a
result of increased oil production in the current period.
Solana's net cash inflow from financing activities amounted to $14,000
for the three month period ended March 31, 2006, compared to $1,415,000 for
the three month period ended March 31, 2005, from the exercise of stock
options in the current period.
The Company incurred cash outflows from its investing activities of
$8,258,936 for the three month period ended March 31, 2006 as compared to
$5,752,673 for the three month period ended March 31, 2005. The most
significant cash outflow component was $7,548,553 (2005 - $8,234,026) of
expenditures for petroleum and natural gas properties.
RELATED PARTY TRANSACTIONS
The Company paid $15,000 in management fees in the current period ended
March 31, 2006 (2005 - $24,000) as part of directors' compensation 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 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.
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 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 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.
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2006 2005
-------------- --------------
$ $
Assets
Current:
Cash and cash equivalents 16,931,555 24,088,484
Cash in trust 3,600,952 3,754,937
Accounts receivable - trade 4,148,504 2,448,334
- cash calls 2,852,372 2,422,531
Prepaid expenses 2,519,297 2,677,887
-------------- --------------
30,052,682 35,392,173
Other receivable (Note 2) 773,250 -
Deposits (Note 3) 3,384,864 2,149,224
Petroleum and natural gas properties 80,015,267 73,618,637
Other capital assets 671,106 644,624
Investment (Note 4) 145,616 2,612
-------------- --------------
115,042,783 111,807,270
-------------- --------------
-------------- --------------
Liabilities
Current:
Accounts payable and accrued liabilities
- trade 8,071,137 2,378,094
- cash calls 2,062,688 4,556,824
-------------- --------------
10,133,825 6,934,918
Asset retirement obligations (Note 5) 640,314 625,565
Future income taxes (Note 6) 6,100,000 6,100,000
-------------- --------------
16,874,139 13,660,483
-------------- --------------
Shareholders' equity
Share capital (Note 7) 110,924,147 110,910,147
Contributed surplus 4,644,277 4,308,111
Deficit (17,399,780) (17,071,471)
-------------- --------------
98,168,644 98,146,787
-------------- --------------
115,042,783 111,807,270
-------------- --------------
-------------- --------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT
(Unaudited)
Three months ended March 31,
2006 2005
$ $
Revenue:
Oil and gas revenues, net of royalties 2,498,124 294,700
Interest 401,750 204,003
-------------- --------------
2,899,874 498,703
-------------- --------------
Expenses:
Operating 302,203 78,481
General and administrative 1,084,988 710,131
Depletion, depreciation and accretion 1,218,568 133,883
Foreign exchange loss (gain) 286,259 (547,492)
Stock compensation expense 336,165 604,530
-------------- --------------
3,228,183 979,533
-------------- --------------
Loss before taxes (328,309) (480,830)
Taxes - 50,000
-------------- --------------
Net loss (328,309) (530,830)
Deficit, beginning of period (17,071,471) (12,951,276)
-------------- --------------
Deficit, end of period (17,399,780) (13,482,106)
-------------- --------------
-------------- --------------
Net loss per share, basic and diluted (0.01) (0.01)
-------------- --------------
-------------- --------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
2006 2005
$ $
Summary of activities
Operating Activities:
Loss for the period (328,309) (530,830)
Items not involving cash:
Unrealized foreign exchange loss(gain) 619,451 (547,492)
Stock-based compensation 336,165 604,530
Depletion, depreciation and accretion 1,218,568 133,883
-------------- --------------
1,845,875 (339,909)
Change in non-cash working capital current 283,693 445,473
Change in non-cash working capital long term (773,250)
-------------- --------------
1,356,318 105,564
-------------- --------------
Financing Activities:
Proceeds from exercise of warrants - 1,355,000
Proceeds from exercise of options 14,000 60,000
-------------- --------------
14,000 1,415,000
-------------- --------------
Investing activities:
Additions to petroleum and natural
gas properties (7,548,553) (8,234,026)
Change in non-cash working capital 774,260 2,750,403
Additions to other capital assets (105,999) (269,050)
Deposits (1,235,640) -
Investment (143,004) -
-------------- --------------
(8,258,936) (5,752,673)
-------------- --------------
Foreign exchange on cash balances (268,311) -
-------------- --------------
Net decrease in cash and cash equivalents (7,156,929) (4,232,109)
Cash and cash equivalents, beginning of
period 24,088,484 55,904,271
-------------- --------------
Cash and cash equivalents, end of period 16,931,555 51,671,162
-------------- --------------
-------------- --------------
Supplemental cash Flow Information - (See Note 10)
-------------------------------------------------------------------------
1. Basis of Presentation
The interim consolidated financial statements of Solana Resources Limited
"Solana" or the "Company") for the three-month periods ended March 31,
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
should be read in conjunction with the consolidated financial statements
and the notes thereto in Solana's annual report for the year ended
December 31, 2005.
2. Other receivable
The other receivable in the amount of $773,250 (2005 - Nil) reflects the
net receivable owing from an operator in connection with a producing
field in which the Company participates. This amount is net of a related
liability amounting to $1,847,742, and relates to a dispute between the
operator and Ecopetrol, the Colombian state oil company, and whether
Ecopetrol's 30% back-in right, as it has claimed, applies to revenue
received before commerciality has been achieved in respect of the field.
The dispute is expected to be settled by arbitration and if the operator
is successful, it is expected that the full amount of the receivable will
be collected from the operator.
3. Deposits
The Company has placed funds on deposit totaling $3,384,864 (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.
4. Investment
The Company has invested in aggregate $145,616 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, 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.
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 14,749
-------------------------------------------------------------------------
Asset retirement obligations, March 31, 2005 $640,314
-------------------------------------------------------------------------
At March 31, 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%.
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 Colombia had
approximately US $ 3,000,000 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.
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
-------------------------------------------------------------------------
Balance, March 31, 2006 64,876,792 110,924,147
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Continuity of contributed surplus Amount
$
-------------------------------------------------------------------------
Balance, December 31, 2005 4,308,111
-------------------------------------------------------------------------
Stock based compensation expense 336,166
-------------------------------------------------------------------------
Balance, March 31, 2006 4,644,277
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Continuity of stock options Options Weighted Average
No. Exercise Price
$
-------------------------------------------------------------------------
Balance, December 31, 2005 4,015,000 1.94
-------------------------------------------------------------------------
Exercised (140,000) 0.10
-------------------------------------------------------------------------
Balance, March 31, 2006 3,875,000 1.90
-------------------------------------------------------------------------
Stock-based compensation
Compensation expense of $336,166 has been recorded in the Consolidated
Statements of Loss and Deficit (2005 - $604,500). The fair values of all
common share options granted are estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair market
value of options granted and the assumptions used in their determination
are as noted below:
Three months ended
March 31, 2006
-------------------------------------------------------------------------
Risk-free interest rate (percent) 3.81%
-------------------------------------------------------------------------
Expected life (years) 5.00
-------------------------------------------------------------------------
Volatility (percent) 104
-------------------------------------------------------------------------
Expected annual dividend per share -
-------------------------------------------------------------------------
8. Per-share amounts
The weighted average number of common shares, basic and diluted,
outstanding during the three months ended March 31, 2006 was 64,748,465
(March 31, 2005 - 64,071,766).
9. Segmented information
March 31, 2006
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,498,124 2,498,124
-------------------------------------------------------------------------
Operating costs - 302,203 302,203
-------------------------------------------------------------------------
- 2,195,921 2,195,921
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General and administrative
expenses 485,472 599,515 1,084,988
-------------------------------------------------------------------------
Depletion, depreciation, and
accretion 2,146 1,216,422 1,218,568
-------------------------------------------------------------------------
Foreign exchange loss (gain) 1,294,737 (1,008,477) 286,260
-------------------------------------------------------------------------
Stock-based compensation 336,165 - 336,165
-------------------------------------------------------------------------
Interest (347,396) (27,355) (401,750)
-------------------------------------------------------------------------
1,744,125 780,105 2,524,230
-------------------------------------------------------------------------
(Loss) income before taxes (1,744,125) 1,415,816 (328,309)
-------------------------------------------------------------------------
Capital taxes - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (loss) income (1,744,125) 1,415,816 (328,309)
-------------------------------------------------------------------------
--------------------------------------------
Identifiable assets 21,143,869 95,746,657 116,890,526
-------------------------------------------------------------------------
--------------------------------------------
Capital expenditures - 7,654,552 7,654,552
-------------------------------------------------------------------------
--------------------------------------------
-------------------------------------------------------------------------
March 31, 2005
-------------------------------------------------------------------------
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 294,700 294,700
-------------------------------------------------------------------------
Operating costs - 78,481 78,481
-------------------------------------------------------------------------
- 216,219 216,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
General and administrative
expenses 255,291 454,840 710,131
-------------------------------------------------------------------------
Depletion, depreciation, and
accretion 1,893 131,990 133,883
-------------------------------------------------------------------------
Foreign exchange gain (93,278) (454,214) (547,492)
-------------------------------------------------------------------------
Stock-based compensation 604,530 - 604,530
-------------------------------------------------------------------------
Interest (203,920) (83) (204,003)
-------------------------------------------------------------------------
564,516 132,533 697,049
-------------------------------------------------------------------------
(Loss) income before taxes (564,516) 83,686 (480,830)
-------------------------------------------------------------------------
Capital taxes 50,000 - 50,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (loss) income (614,516) 83,686 (530,830)
-------------------------------------------------------------------------
--------------------------------------------
Identifiable assets 58,236,604 51,776,153 110,012,757
-------------------------------------------------------------------------
--------------------------------------------
Capital expenditures 25,763 8,477,313 8,503,076
-------------------------------------------------------------------------
--------------------------------------------
-------------------------------------------------------------------------
10. Supplemental cash flow information
March 31, 2006 March 31, 2005
$ $
Cash represented by:
Cash and cash equivalents 16,931,555 50,802,041
Demand loans - (29,879)
Restricted cash - 900,000
-------------- --------------
16,931,555 51,672,162
-------------- --------------
-------------- --------------
-------------------------------------------------------------------------
$ $
Cash interest paid - -
-------------------------------------------------------------------------
Cash taxes paid - -
-------------------------------------------------------------------------
11. Related party transactions
Management fees in the amount of $15,000 (2004 - $24,000) were paid as
part of directors' compensation 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.
12. Income Taxes
The Company has losses of approximately $4,743,000 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:
-----------
$
-----------
2006 297,000
2007 304,000
2008 267,000
2009 140,000
2010 230,000
2011 2,578,000
2012 927,000
-----------
4,743,000
-----------
-----------
13. Commitments
In addition to the funds held in trust, the Company has minimum
exploration commitments of $40,318,000 over the next 12 months.
14. 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 their 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
March 31, 2006 and December 31, 2005 the Company had not entered into any
of these contracts.
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