CALGARY, May 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 three month period ended March 31, 2007. These results should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2006 and 2005. All numbers in this report are expressed in US dollars unless otherwise indicated.
Solana (www.solanaresources.com) is an international resource company engaged in the acquisition, exploration, development and production of oil and natural gas. The Company's properties are located in Colombia, South America and are primarily held through its wholly owned subsidiary, Solana Petroleum Exploration (Colombia) Limited. The Company is headquartered in Calgary, Alberta, Canada.
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.
HIGHLIGHTS
- The Juanambu-1 wildcat exploration well located in the Guayuyaco
Block, Putumayo Basin, southern Colombia was drilled, logged and
cased as a potential new field discovery. Juanambu-1 reached a total
measured depth of 2,790 meters (9,154 feet) on March 10, 2007 and
encountered reservoir quality sandstones with hydrocarbon shows in
four zones. Solana holds a non-operated 50% working interest that
will be reduced to 35% should Ecopetrol, the Colombian State oil
company, exercise its back-in rights.
- On May 9, 2007, subsequent to the 2007 first quarter, Solana
announced that the first two, of a planned five, drill stem tests
obtained final natural oil flow rates of 12 m3/day (77 bopd) and
56 m3/day (354 bopd) from the Lower and Middle Caballos formations
respectively in the Juanambu-1 well. It is anticipated that pumping
will substantially increase these flow rates.
- Effective April 9, 2007, subsequent to year end, Mr. Don Jones, a
seasoned oil and gas executive with in excess of 30 years
international experience, joined Solana as the Colombia Country
Manager based in Bogota.
- On May 14, 2007, subsequent to the 2007 first quarter, the Company
announced that the Costayaco-1 wildcat exploration well located in
the Chaza Block, Putumayo Basin, southern Colombia had been
successfully drilled, logged and cased as a potential new field
discovery. Costayaco-1 reached a total measured depth of 2,612 meters
(8,570 feet) on May 10, 2007. Solana holds a non-operated 50% working
interest in the Chaza Block.
- 220 km2 of 3-D seismic was successfully acquired over the Guachiria
block and portions of the Guachiría Sur block in the Llanos basin.
Processing and interpretation is underway.
- A 100 km2 3-D seismic acquisition program was initiated over portions
of the Garibay block in the Llanos basin.
- At March 31, 2007 the Company had a cash balance of $28 million.
- Current production is 387 boepd, net to Solana.
OPERATIONAL UPDATE
LLANOS BASIN
The Llanos basin is located northeast of Bogota, the capital of Colombia, on the east side of the Andes Mountains. This basin covers an area of approximately 200,000 km2 (77,000 square miles) and holds Colombia's largest number of oil fields and proved oil reserves.
Solana has working interests in five blocks in the Llanos Basin, covering an area of 1,680 km2 (649 square miles). These blocks are from North to South: Guachiría Norte, Guachiría, Guachiría Sur, Gaviotas and Garibay.
Lewis Energy Colombia has the right to a 30% working interest in Solana's Llanos Blocks, with the exception of Garibay, upon the completion of certain work obligations. These work obligations involve funding 60% of five wells on Solana's Guachiria Norte, Guachiria, Guachiria Sur and Gaviotas Blocks. As at March 31, 2007 four wells of this five well commitment had been drilled. Upon completion of this five well commitment Solana's interest will drop to 70% on these blocks.
GUACHIRÍA NORTE BLOCK
Solana is the Operator of the 412 km2 (159 square miles) Guachiria Norte Block with a working interest of 100%. The block is located approximately 250 km (155 miles) northeast of Bogota and is subject to an Agencia Nacional de Hidrocarburos (ANH) contract.
Phase 1 (December 21, 2004 to December 21, 2005) commitments were met with the drilling of the Bonaire-1 well. Although the well tested 7 m3/day (44 bopd) of waxy crude, a complete technical review, including petrophysical and reservoir parameter analysis, indicated that Bonaire-1 is not commercially viable. Solana and its partners have agreed to abandon the well.
During Phase 2 (December 21, 2005 to December 21, 2006, extended to March 21, 2007) 56 line-km (35 miles) of seismic were acquired and interpreted. Also in Phase 2, a 157 km2 (61 square miles) 3-D seismic survey, that was acquired in 2001 and reprocessed in 2005, was re-interpreted. This re-interpretation resulted in the identification of a very prospective channel system in the Carbonera depositional package.
In this part of the Llanos Basin, drilling activity is generally restricted to a four month weather window from December to March and as such Solana submitted an application to the ANH to extend the Phase 2 period to March 2007. The ANH approved this extension on the condition that Phases 3 and 4 are combined into one. During Phases 3 and 4 (March 21, 2007 to March 21, 2009) Solana is required to drill two exploration wells.
During March 2007 Solana drilled the Calcedonia-1 well. This well reached a total depth of 2,480 meters (8,138 feet) and penetrated a thick Carbonera C7 structure that had oil shows and excellent reservoir parameters. Subsequent extensive testing proved the structure was water bearing and the well was temporarily abandoned. In the immediate vicinity there remains a significant Carbonera C5 channel target which the Company intends to test in the future subject to technical review, equipment availability, surface access and capital availability.
GUACHIRIA BLOCK
Solana is the Operator of the 75 km2 (29 square miles) Guachiria Block with a working interest of 100%. The block adjoins the Guachiría Norte Block immediately to the South. This block was acquired from Empresa Colombiana de Petroleos SA (Ecopetrol, the State owned oil Company), and is subject to a standard ANH contract plus an additional 13% royalty payable to Ecopetrol.
During Phase 1 (October 9, 2003 to October 9, 2004) the Malabares-1 well was drilled and following an inconclusive test the well was suspended, pending further evaluation.
During Phase 2 (October 9, 2004 to October 9, 2005, extended to June 1, 2006) the Bucaro-1 well was re-entered. The well tested 123 m3/day (774 bopd) waxy crude but is currently shut in due to a high water cut. In May 2006 the Yalea-1 well was drilled. The well tested oil and is currently producing approximately 20 m3/day (123 bopd, 70 net to Solana).
For Phase 3 (June 1, 2006 to June 1, 2007), Ecopetrol agreed that Solana may substitute its well commitment for a 100 km2 (39 square mile) 3-D seismic survey, covering the block, and overlapping the southern part of the adjacent Guachiría Norte 3-D seismic survey. This survey started in December 2006, data acquisition is now complete and processing and interpretation is underway. In this part of the Llanos Basin, drilling and seismic activity is generally restricted to a four month weather window from December to March.
GUACHIRIA SUR BLOCK
Solana is the Operator of the 366 km2 (141 square miles) Guachiria Sur Block with a working interest of 100%. The block is to the west and the south of the Guachiria Block and to the south of the Guachiria Norte Block. This block is subject to an ANH contract.
During Phase 1 (October 25, 2005 to October 25, 2006) 155 line-km (96 miles) of seismic data was acquired and 300 line-km (186 miles) of seismic data were reprocessed.
The commitment to drill a well during Phase 2 (October 25, 2006 to October 25, 2007) was renegotiated with the ANH and was replaced by a 120 km2 (74 square mile) 3-D seismic survey and a commitment to drill one well during Phase 3 (October 25, 2007 to October 25, 2008). This survey started in December 2006 and covers the northern part of the block, immediately west and south of the Guachiria Block. Acquisition is now complete and processing and interpretation underway.
GAVIOTAS BLOCK
Solana is the Operator of the 377 km2 (146 square miles) Gaviotas Block with a 100% working interest. In addition to Lewis Energy's 30% earning rights, a Colombian investment fund has a 20% participation right on individual Gaviotas wells. The Fund evaluates and elects its participation on a well by well basis. The block is located approximately 170 km (105 miles) east of Bogota and was acquired from Ecopetrol. It is subject to a standard ANH contract plus an additional 13% royalty payable to Ecopetrol.
During Phase 1 (December 18, 2003 to February 18, 2005) 50 line-km (31 miles) of seismic data was acquired.
During Phase 2 (February 18, 2005 to February 18, 2006, extended to May 18, 2006) the Gaviotas-1 well was drilled and 85 line-km (53 miles) of seismic were acquired and 650 line-km (404 miles) reprocessed. Although wire line logs of the Gaviotas-1 well indicated hydrocarbon bearing zones, tests were inconclusive. Further petrophysical evaluation of the logs indicated that Gaviotas-1 is not commercially viable. Solana and its partners have agreed to abandon the well.
There is a one well commitment for Phase 3 (May 18, 2006 to May 18, 2007) which will be met by drilling Bevea-1 (rig currently moving to location).
GARIBAY BLOCK
Solana is the Operator of the 450 km2 (174 square miles) Garibay Block with a working interest of 100%. The block is located approximately 170 km (105 miles) east of Bogota and 15 km (9 miles) south of the Gaviotas Block. This block is subject to an ANH contract.
During Phase 1 (October 25, 2005 to October 25, 2006) 136 line-km (85 miles) of seismic data was acquired and 300 line-km (186 miles) reprocessed.
During Phase 2 (October 25, 2006 to October 25, 2007) Solana is required to drill one well. The ANH has approved the replacement of this program with the acquisition of 100 km2 (39 square miles) of 3-D seismic, subject to relinquishment of 30% of the block area. This survey started in March 2007. Acquisition is now complete and processing and interpretation underway.
PUTUMAYO BASIN
The Putumayo basin is located in southwest Colombia and extends into Ecuador, where it is called the Oriente (Ecuador)-Maranon (Peru) Basin. It covers an area of approximately 320,000 km2 (124,000 square miles) and Solana holds interests in the Guayuyaco Block and the Chaza Block totaling 536 km2 (207 square miles) in this basin.
GUAYUYACO BLOCK
Solana holds a 35% non-operated net working interest in the 212 km2 (82 square mile) Guayuyaco Block, located approximately 290 km (180 miles) southwest of Bogota. Gran Tierra Energy Inc. is the Operator with a 35% working interest. Ecopetrol has a 30% working interest in the Guayuyaco field which is currently producing 64 m3/day (404 bopd, 130 bopd net to Solana). Volume is lower due to increased water production resulting from an unsuccessful workover on Guayuyaco-2. All commitments are fulfilled and the block is being further developed under an Association Contract.
During the first quarter of 2007 Solana participated in drilling the Juanambu-1 exploration well with a rig mobilized from Venezuela. This well reached a total depth of 2,790 meters (9,154 feet) and was cased as a potential new field discovery. Testing and completion operations are underway. Juanambu-1 is proximal to infrastructure allowing for early production. Solana paid for two thirds of this well to earn a 50% interest (35% if Ecopetrol elects to back-in).(See Highlights).
CHAZA BLOCK
Solana has a 50% working interest in the 325 km2 (125 square mile) Chaza Block, immediately west of the Guayuyaco Block. Gran Tierra, the operator, holds the other 50% in the block. The block is held under an ANH contract.
During Phase 1 (June 27, 2005 to June 26, 2006) Solana participated in the acquisition of 27 line-km of 2-D and the reprocessing of 250 line-km of 2-D data.
During Phase 2 (June 27, 2006 to June 26, 2007) the partners are required to drill one well. The Costayaco-1 wildcat exploration well reached a total measured depth of 2,612 meters (8,570 feet) on May 10, 2007. The well has been cased as a potential new field discovery and will be tested immediately following completion of testing on Juanambu-1. A near term seismic infill program is being considered in order to optimize potential new drilling locations.
CATATUMBO BASIN
The Catatumbo Basin is a 7,350 km2 sub-basin, forming the southwest flank of Venezuela's prolific Maracaibo Basin. Solana has two blocks in the Catatumbo sub-basin, namely Catguas and Carbonera, covering a total area of 1,878 km2 (726 square miles).
CATGUAS BLOCK
Solana is the operator of the 1,620 km2 (625 square miles) Catguas Block with 85% working interest in the southernmost two-thirds of the Block. In the northern third, Solana has a 50% working interest. Solana's partner in this block is Well Logging Ltda, a Colombian company.
The block is held under an ANH contract. Fulfillment of first Phase (November 17, 2005 to May 17, 2007) commitments is underway with the acquisition of 200 line-km (124 miles) of seismic data and 10 line-km (six miles) of high resolution seismic, and the drilling of two wells.
Seismic interpretation and geochemical mapping have identified several drillable prospects. Two shallower structures, Tres Curvas-1 and Cocodrilo-1, have been selected and will be drilled on a back to back basis. Drilling operations are expected to commence late June.
CARBONERA BLOCK
Effective April 20, 2007, Solana relinquished 100% of its rights and obligations in the Carbonera block.
LOWER MAGDALENA BASIN
The Lower Magdalena basin is located in northwest Colombia. It covers an area of approximately 87,000 km2 (33,500 square miles) and contains Solana's Magangue Block.
MAGANGUE BLOCK
The Magangue Block is held pursuant to the Magangue Association Contract. Solana is the operator of the block with a 37.8% working interest and has partners, Ecopetrol with 58%, and Technopetrol, a Colombian company, with 4.2%.
Solana operates the Guepaje gas field on the 169 km2 (65 square mile) Magangue Block, which is currently producing 98,000 m3/day (3.5 mmcfd, 1.0 mmcfd net to Solana) and sold into the local market at $2.42/mmbtu. Solana is currently re-evaluating the available seismic and geological information to identify possible workover opportunities and other possible targets.
OUTLOOK
Over the next three months, Solana looks to finish its six exploration well drilling program. To date two non-operated wells in the Putamayo basin have been drilled and both are potential new field discoveries; Juanambu-1 on the Guayuyaco Block and Costayaco-1 on the Chaza Block. One operated well in the Llanos basin, Calcedonia-1 on the Guachiria Norte Block, was drilled and temporarily abandoned, and another operated Llanos well, Bevea-1 on the Gaviotas block, is scheduled to spud by the end of May. Solana will also drill two operated shallower wells on the Catguas Block in the Catatumbo basin on a back to back basis commencing late June.
Solana is currently processing 320 km2 of 3D seismic acquired during the first quarter of 2007 in the Llanos Basin over the entire Guachiria Block and portions of the Guachiria Sur Block and the Garibay Block. This seismic will be used to high-grade prospects and select drilling locations for the next Llanos dry season drilling campaign.
Building on Solana's view of the prospectivity of the stratagraphic channels in the Llanos basin, and in an effort to build a core area, Solana is looking to complete the acquisition of two new blocks contiguous to its three Guachiria blocks.
Glenn Van Doorne, Chief Operating Officer of Solana, a Petroleum Geologist, with 30 years of experience and a member of the AAPG and the SPE, is the qualified person that has reviewed the technical reserve, resource, and drilling update information contained in these results.
OPERATING RESULTS
Selected Quarterly Information
The following table summarizes selected financial data for Solana for the three month periods ended March 31, 2007, and 2006. Unless otherwise noted, all currency amounts are stated in US dollars.
2007 2006
-------------------------------------------------------------------------
$ $
Production revenue, net of royalties 1,413,926 2,163,909
Operating costs 656,578 261,772
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757,348 1,902,137
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Expenses
General and administrative 1,061,304 939,831
Depletion, depreciation and accretion 2,066,908 1,055,540
Amortization of Intangible assets 1,148,058 -
Foreign exchange loss (gain) 25,655 247,961
Stock-based compensation 469,135 291,191
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4,771,060 2,534,523
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Other income/expenses
Interest and other (131,114) (348,001)
Income taxes 50,000 -
-------------------------------------------------------------------------
(81,114) (348,001)
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Net loss 3,932,598 284,386
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Net loss per share 0.04 0.01
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Mar 31, Dec 31,
2007 2006
------------ ------------
$ $
Share capital 130,998,659 130,998,659
Working capital 29,587,287 37,106,929
Petroleum and natural gas properties 59,663,362 54,313,18
Total assets 108,702,627 106,651,944
Total current liabilities 8,414,785 3,404,607
Shareholders' equity 98,227,050 101,690,514
Cash dividends per share Nil Nil
Results of Operations for the Three Months Ending March 31, 2007
Production, net of royalties and operating costs
This consolidated financial information includes the revenue and expenses of the Company for the three month periods ended March 31, 2007 and 2006. During the three month period ended March 31, 2007, revenue from operations amounted to $1,413,926. In this same period operating costs were $656,578 resulting in an operating profit of $757,348. During the three month period ended March 31, 2006, the Company generated revenue of $2,163,909. In this same period operating costs were $261,772 resulting in an operating profit of $1,902,137. This lower operating profit is a result of lower production due to the Guayuyaco-2 workover in 2007 and increased operating costs associated with the Yalea-1 well testing.
The Company produced on average 453 boepd for the three months ended March 31, 2007 and 620 bopd for the three months ended March 31, 2006. The Company's revenue, realized after royalties, operating costs and net backs for the three month period ended March 31, 2007 and 2006 are as follows:
2007 2006
$/Boe $/Boe
------------------------
Revenue, net of royalties 34.62 38.78
Operating cost 11.47 4.69
------------------------
Net 23.15 34.09
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General and administrative expenses
General and administrative expenses for the three month period ended March 31, 2007 amounted to $1,061,304 in comparison to $939,831 for the same period in 2006. This increase of $121,473 is mainly due to increased activity and associated head office support and use of consultants. The major components of general and administrative expenses are as follows:
2007 2006
$ $
------------------------
General office 107,000 167,860
Salaries and benefits 523,552 289,987
Professional fees 14,722 200,006
Public company costs 98,282 133,954
Consulting fees 200,287 84,496
Travel 117,461 63,528
Depletion, depreciation and accretion
First quarter 2007 depletion, depreciation and accretion amounted to $2,066,908, compared to the same period a year ago, which was $1,055,540. The depletion expense is calculated based on the decline in proved reserves, and amounts to $1,993,072 (2006 - $997,810). Depreciation amounts to $19,867 (2006 - $44,954) on the Company's other capital assets. Accretion expense amounting to $53,969 (2006 - $12,776) represents the increase in future estimated costs to plug and abandon its petroleum and natural gas wells at the end of their useful lives.
Stock-based compensation expense
First quarter 2007 stock-based compensation increased to $469,135 from $291,191 in the first quarter of 2006 primarily from the amortization of costs associated with the vesting of options granted in the fourth quarter of 2006.
Foreign exchange
The foreign exchange loss of $25,655 in the three month period ended March 31, 2007 in comparison with the loss of $247,960 in the three month period ended March 31, 2006 reflects 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 and amount to $131,114 compared to $348,001 for the same period in 2006. This difference is due to the larger cash balances held throughout the 2006 first quarter.
The income tax expense amounting to $50,000 (2006 - $Nil) is the minimum Colombian income tax obligation. It is based on presumptive income calculated as a percentage of Colombian equity levels and can be recovered against future income taxes for up to five years.
Net loss
The resulting net loss amounting to $3,932,598 for the quarter ended March 31, 2007 relative to the net loss amounting to $284,385 for the similar 2006 period is mainly attributable to higher depletion charges resulting from a higher proved properties cost pool. Additionally, the quarter ended March 31, 2007 includes the amortization of intangible assets recognized as a result of the Breakaway acquisition in October 2006.
Selected Quarterly Financial Information
The following table sets out selected unaudited quarterly financial information of Solana and is derived from the 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 US dollars.
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SUMMARY OF QUARTERLY RESULTS
QUARTERS ENDED
Mar 31, Dec 31, Sep 30, Jun 30,
2007 2006 2006 2006
$ $ $ $
Additions to
Petroleum and
Natural Gas
properties 7,274,457 7,902,112 4,402,811 8,876,927
Total revenues 1,545,040 2,049,754 3,652,608 2,797,670
General and
administrative
expenses 1,061,304 2,042,166 423,640 1,197,315
Depletion,
depreciation and
accretion 3,214,966 3,958,215 886,985 957,026
Impairment - 29,822,544 - -
Foreign exchange
(income) loss 25,655 160,105 (3,424,333) 870,581
Stock-based
compensation 469,135 783,233 209,875 228,640
Income (loss) after
taxes (3,939,403) (31,076,705) 4,989,157 (1,236,674)
Income (loss) per
share (0.04) (0.34) 0.09 (0.02)
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Mar 31, Dec 31, Sep 30, Jun 30,
2006 2005 2005 2005
$ $ $ $
Additions to Petroleum
and Natural gas
properties 6,406,280 10,275,878 5,864,257 5,105,152
Total revenues 2,511,910 3,145,166 2,008,396 1,914,711
General and
administrative
expenses 939,831 960,537 591,813 718,549
Depletion, depreciation
and accretion 1,055,540 3,976,602 324,854 399,308
Foreign exchange
(income) loss 247,961 (282,610) 196,813 328,394
Stock-based
compensation 291,191 653,304 361,237 294,326
Income (loss) after
taxes (284,386) (1,951,707) (627,040) (439,104)
Income (loss) per share (0.01) (0.05) (0.01) (0.02)
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LIQUIDITY
Solana's working capital decreased from $37,106,929 at December 31, 2006, to $29,587,287 at March 31, 2007, largely due to the cash outflow related to the Company's investing activities in the three month period ended March 31, 2007.
The Company's cash balance at March 31, 2007 amounting to $29,235,341 is committed to the Company's planned capital expenditure program in Colombia, which is expected to include four additional exploration wells and 100 km2 of 3D seismic during the remainder of 2007. Management believes that the Company currently has sufficient working capital to meet these commitments.
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The Company incurred a cash outflow of $267,287 from operations for the three months ended March 31, 2007 compared to a cash inflow of $1,689,673 from operations for the same 2006 three month period. This drop in operating cashflow is attributable to lower production revenue (as a result of lower production), higher operating costs and increased general and administrative costs.
Solana's net cash inflow from financing activities was $Nil for the three month period ended March 31, 2007, compared to $12,127, derived from the exercise of stock options, for the three month period ended March 31, 2006.
The Company incurred investing activity cash outflows of $5,848,372 for the three month period ended March 31, 2007 as compared to $6,377,075 for the three month period ended March 31, 2006. The most significant cash outflow component was $7,274,457 (2006 - $6,406,280) related to petroleum and natural gas property expenditures.
RELATED PARTY TRANSACTIONS
The Company paid $12,802 (CDN $15,000) in management fees in the current period ended March 31, 2007 (2006 - $12,993 CDN $15,000) to a company controlled by a director of the Company and are included in general and administrative expense.
SUBSEQUENT EVENTS
Effective April 9, 2007, Mr. Don Jones, a seasoned oil and gas executive with in excess of 30 years international experience, joined Solana as the Colombia Country Manager based in Bogota.
As a consequence of a strategic asset review, initiated in Q4 2006, the Company relinquished its 50% operated interest in the Carbonera block to Well Logging Ltda. on April 20, 2007.
On May 9, 2007, Solana announced that the first two, of a planned five, drill stem tests obtained stabilized oil flows with a density of 0.869 (32 degrees API) with constant well-head flowing pressure and only traces of water from the Juanambu-1 well. After initial swabbing, sustained stable oil flows were attained in both tests without supplementary pumping, which is typically required in this region. Final natural oil flow rates of 12 m3/day (77 bopd) from 3.4 m (11 ft) of perforations and 56 m3/day (354 bopd) from 7.0 m (23 ft) of perforations were obtained from the Lower and Middle Caballos formations respectively. It is anticipated that pumping will substantially increase these flow rates.
On May 14, 2007, the Company announced that the Costayaco-1 wildcat exploration well had been successfully drilled, logged and cased as a potential new field discovery. Costayaco-1 is located in the Chaza Block, Putumayo Basin, southern Colombia and reached a total measured depth of 2,612 meters (8,570 feet) on May 10, 2007. Solana holds a 50% non-operated working interest in the Chaza Block.
DISCLOSURE CONTROLS AND PROCEDURES
Management has evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, 2007. Based on this evaluation, management has concluded that the Company's disclosure controls and procedures, as defined in Multilateral Instrument 52-109, are effective to ensure that the information required to be disclosed in reports that are filed or submitted under Canadian securities legislation are recorded, processed, summarized and reported within the time periods specified in those rules.
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
The Company follows the full cost method of accounting for petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized in country-by-country cost centres. Such costs include land acquisition costs, geological and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, interest costs on major development projects and overhead charges directly related to acquisition, exploration and development activities.
The costs (including exploratory dry holes) in cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. The capitalized costs are assessed to determine whether it is likely such costs will be recovered in the future. To the extent there are costs which are not likely to be recovered in the future, they are written-off.
The costs in cost centres from which there is production, together with the cost of production equipment, are depleted and depreciated on the unit-of-production method, based on the estimated proved reserves after royalties. Petroleum and natural gas reserves and production are converted into equivalent units, based upon estimated relative energy content. Costs of acquiring and evaluating significant unproved properties are excluded from the depletion calculations. These unproved properties are assessed to determine whether impairment has occurred. When proved reserves are assigned or the carrying value of the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion.
Petroleum and natural gas properties are subject to a ceiling test in each reporting period to determine that the costs are not impaired and do not exceed the fair value of the properties. The costs are assessed to be not impaired if the sum of the undiscounted cash flows expected from the production of proved reserves and the cost of unproved properties, net of impairment allowances of unproved properties exceed the carrying value of the petroleum and natural gas properties. If the carrying value of the petroleum and natural gas properties is determined to be impaired, an impairment loss is recognized to the extent that the carrying value exceeds an estimated fair value. The fair value estimate is normally based on the sum of the discounted cash flows expected from the production of proved and probable reserves plus the cost of unproved properties, net of impairment allowances. The cash flows are estimated using forecast product prices and costs and are discounted using a risk-free interest rate.
Proceeds from the sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the depletion rate by more than 20%.
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.
SOLANA RESOURCES LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2007
Notice to Reader:
The accompanying unaudited interim consolidated financial statements of
Solana Resources Limited (the "Corporation") for the period ended March 31,
2007 have been prepared by management and approved by the Audit Committee and
the Board of Directors of the Corporation. These statements have not been
reviewed by the Corporation's external auditors.
DATED the 28tn day of May, 2007
(signed) "J. Scott Price"
J. Scott Price,
President and Chief Executive Officer
SOLANA RESOURCES LIMITED
CONSOLIDATED BALANCE SHEET
(Unaudited)
Expressed in US dollars
March 31, December 31,
2007 2006
------------ ------------
Assets $ $
Current:
Cash and cash equivalents 28,141,628 29,909,168
Cash in trust 1,093,713 3,274,262
Accounts receivable - trade 962,922 1,472,209
- cash calls 7,208,731 4,825,589
Prepaid expenses 995,078 1,030,308
------------ ------------
38,402,072 40,511,536
Deposits (Note 3) 3,041,509 3,041,509
Petroleum and natural gas properties 59,663,362 54,313,189
Other capital assets 501,112 543,080
Intangible assets 6,888,345 8,036,403
Investment (Note 4) 206,227 206,227
------------ ------------
108,702,627 106,651,944
------------ ------------
------------ ------------
Liabilities
Current:
Accounts payable and accrued liabilities
- trade 8,814,785 3,404,607
- cash calls - -
------------ ------------
8,814,785 3,404,607
Asset retirement obligations (Note 5) 1,610,792 1,556,823
Income tax liability 50,000 -
------------ ------------
10,475,577 4,961,430
------------ ------------
Shareholders' equity
Share capital (Note 6) 130,998,659 130,998,659
Contributed surplus 5,504,210 5,035,075
Cumulative other comprehensive income 5,791,923 5,791,923
Deficit (44,067,742) (40,135,143)
------------ ------------
98,227,050 101,690,514
------------ ------------
108,702,627 106,651,944
------------ ------------
------------ ------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
(Unaudited)
Expressed in US dollars
Three months ended March 31,
2007 2006
$ $
Revenue:
Oil and gas revenues, net of royalties 1,413,926 2,163,909
Interest 131,114 348,001
------------ ------------
1,545,040 2,511,910
------------ ------------
Expenses:
Operating 656,578 261,772
General and administrative 1,061,304 939,831
Depletion, depreciation and accretion 2,066,908 1,055,540
Amortization of Intangible assets 1,148,058 -
Foreign exchange loss (gain) 25,655 247,960
Stock compensation expense 469,135 291,191
------------ ------------
5,427,638 2,796,296
------------ ------------
Loss before taxes 3,882,598 284,386
Taxes 50,000 0
------------ ------------
Net loss 3,932,598 284,386
Deficit, beginning of period 40,135,144 12,526,536
------------ ------------
Deficit, end of period 44,067,742 12,810,922
------------ ------------
------------ ------------
Net loss per share, basic and diluted 0.04 0.01
------------ ------------
------------ ------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Expressed in US dollars
Three months ended March 31,
2007 2006
Summary of activities $ $
Operating Activities:
Loss for the period (3,932,598) (284,386)
Items not involving cash:
Unrealized foreign exchange loss(gain) (18,790) 627,328
Stock-based compensation 469,135 291,191
Depletion, depreciation and accretion 2,066,908 1,055,540
Amortization of Intangible Assets 1,148,058 -
------------ ------------
(267,287) 1,689,673
Change in working capital - operating 2,167,570 (1,726,826)
------------ ------------
1,900,283 (37,153)
------------ ------------
Financing Activities:
Proceeds from exercise of options - 12,127
------------ ------------
- 12,127
------------ ------------
Investing activities:
Additions to petroleum and natural gas
properties (7,274,457) (6,406,280)
Change in working capital - Investing 1,403,983 3,780,542
Additions to other capital assets 22,102 (66,637)
Other receivables - (662,029)
Deposits - (2,898,000)
Investment - (124,671)
------------ ------------
(5,848,372) (6,377,075)
------------ ------------
Foreign exchange on cash balances - 100,000
------------ ------------
Net decrease in cash and cash equivalents (3,948,089) (6,302,101)
Cash and cash equivalents,
beginning of period 33,183,430 23,881,302
------------ ------------
Cash and cash equivalents, end of period 29,235,341 17,579,201
------------ ------------
------------ ------------
Supplemental cash Flow Information - (See Note 9)
SOLANA RESOURCES LIMITED
Notes to the Consolidated Financial Statements
March 31, 2007
(Unaudited)
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,
2007 and 2006 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, 2006 except for new standards adopted as described in
Note 2. 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, 2006.
2. Changes in Accounting Policies
Effective January 1, 2007, the Company adopted the new Canadian Institute
of Chartered Accountants ("CICA") standards related to Section 1530,
"Comprehensive Income," Section 3855, "Financial Instruments -
Recognition and Measurement," Section 3861, "Financial Instruments -
Disclosure and Presentation" and Section 3865, "Hedges." As required by
the standards the Company has adopted these standards prospectively.
Therefore, the comparative interim consolidated financial statements have
not been restated.
The Section 1530 of the CICA Handbook describes how to report and
disclose comprehensive income and its components. Comprehensive income is
the change in a company's net assets that results from transactions,
events and circumstances from sources other than the company's
shareholders. It includes items that would not normally be included in
net earnings. Upon adoption of Section 1530, amounts previously
recognized on the balance sheet as cumulative translation adjustment have
been reclassified as accumulated other comprehensive income.
The Section 3855 of the CICA Handbook describes the standards for
recognizing and measuring financial assets, financial liabilities and
non-financial derivatives. Upon adoption of Section 3855 all financial
instruments should be classified into one of the following categories:
held-for-trading (assets and liabilities), assets available-for-sale,
loans and receivables, assets held-to-maturity and other financial
liabilities. All financial instruments are measured at fair value on
initial recognition. Transaction costs are included in the initial
carrying amount of financial instruments except for held-for-trading
items in which case they are expensed as incurred. Measurement in
subsequent periods depends on the classification of the financial
instruments. Management does not believe that the adoption of this
section will have a material impact on the financial statements.
The Section 3865 of the CICA Handbook describes when and how hedge
accounting can be used. Hedging is an activity that may be used by a
company to change an exposure to one or more risks by creating an offset
between changes in the cash flows attributable to a hedge item or changes
resulting from a risks exposure relating to a hedge item and a hedging
item. Hedge accounting makes sure that all gains, losses, revenues and
expenses from the derivative and the item it hedges are recorded in the
statement of operations in the same period. The Company currently does
not utilize hedges or other derivative financial instruments in its
operations; as a result the adoption of Section 3865 currently has no
material impact on the consolidated financial statements of the Company.
3. Deposits
The Company has placed funds on deposit totaling $3,041,509 at the end of
March, 2007 with the Colombian Agency of National Hydrocarbons ("ANH")
with respect to acquired exploration acreage. These funds will be
returned to the Company by the ANH on completion of the work commitments
on the Guachiria Norte, Catguas, Guachiria Sur and Garibay Blocks.
4. Investment
The Company has invested $206,227 in the Colombian Hydrocarbon Investment
Fund ("Fund"), and expects to invest a maximum of US $500,000. The Fund
is managed by a U.S. based fund manager, who specializes South American
natural resources sector investments. The Fund is expected to have an
investment period of four years. After this period, the Fund will be
wound up, and any capital and 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, 2006 $1,556,823
Liabilities incurred during period -
Liabilities settled during period -
Accretion 53,969
-------------------------------------------------------------------------
Asset retirement obligations, March 31, 2007 $1,610,792
-------------------------------------------------------------------------
At March 31, 2007, the estimated total undiscounted amount required to
settle the asset retirement obligations was $1,840,000 (2006 -
$1,446,978). These obligations will be settled at the end of the useful
lives of the underlying assets, which currently extend up to 7 years into
the future. This amount has been discounted using a credit-adjusted risk-
free discount rate of 10% and an inflation rate of 2.5%.
6. Share Capital
Authorized share capital consists of an unlimited number of common
shares.
Continuity of common shares Shares Amount
No. $
-------------------------------------------------------------------------
Balance, December 31, 2006 95,876,792 130,998,659
Share options exercised - -
-------------------------------------------------------------------------
Balance, March 31, 2007 95,876,792 130,998,659
-------------------------------------------------------------------------
Continuity of contributed surplus Amount
$
-------------------------------------------------------------------------
Balance, December 31, 2006 5,035,075
Stock based compensation expense 469,135
-------------------------------------------------------------------------
Balance, March 31, 2007 5,504,210
-------------------------------------------------------------------------
Continuity of stock options Options Weighted
No. Average
Exercise
Price
$
-------------------------------------------------------------------------
Balance, December 31, 2006 4,350,000 1.64
Exercised - -
-------------------------------------------------------------------------
Balance, March 31, 2007 4,350,000 1.64
-------------------------------------------------------------------------
Stock-based compensation
For the first quarter of 2007, stock based compensation expense of
$469,135 has been recorded in the Consolidated Statement of Loss and
Deficit (2006 -$291,191). 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, 2007
Risk-free interest rate (percent) 4.25
Expected life (years) 5
Volatility (percent) 96.5
Expected annual dividend per share -
-------------------------------------------------------------------------
7. Per-share amounts
The weighted average number of common shares, basic and diluted,
outstanding during the three months ended March 31, 2007 was 95,876,792
(March 31, 2006 -64,748,465).
8. Segmented information
March 31, 2007
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 1,413,926 1,413,926
Operating costs - 656,578 656,578
--------------------------------------
- 757,348 757,348
--------------------------------------
General and administrative expenses 566,363 494,941 1,061,304
Depletion, depreciation,
and accretion 6,215 2,060,693 2,066,908
Amortization of Intangible assets 1,148,058 - 1,148,058
Foreign exchange loss (gain) 11,928 13,727 25,655
Stock-based compensation 469,135 - 469,135
Interest (122,210) (8,904) (131,114)
--------------------------------------
2,079,489 2,560,457 4,639,946
--------------------------------------
(Loss) income before taxes (2,079,489) (1,803,109) (3,882,598)
Income taxes - 50,000 50,000
--------------------------------------
Net (loss) income (2,079,489) (1,853,109) (3,932,598)
--------------------------------------
--------------------------------------
Total assets 29,993,578 78,709,049 108,702,627
--------------------------------------
--------------------------------------
Capital expenditures - 7,061,397 7,061,397
--------------------------------------
--------------------------------------
March 31, 2006
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 2,163,909 2,163,909
Operating costs - 261,772 261,772
--------------------------------------
- 1,902,137 1,902,137
--------------------------------------
General and administrative expenses 420,523 519,308 939,831
Depletion, depreciation,
and accretion 1,859 1,053,681 1,055,540
Foreign exchange loss (gain) 1,121,519 (873,558) 247,961
Stock-based compensation 291,191 - 291,191
Interest (322,598) (25,403) (348,001)
--------------------------------------
1,512,494 674,028 2,186,522
--------------------------------------
(Loss) income before taxes (1,512,494) 1,228,109 (284,345)
Income taxes - - -
--------------------------------------
Net (loss) income (1,512,494) 1,228,109 (284,345)
--------------------------------------
--------------------------------------
Total assets 17,816,479 80,679,054 98,495,533
--------------------------------------
--------------------------------------
Capital expenditures - 5,363,516 5,363,516
--------------------------------------
--------------------------------------
9. Supplemental cash flow information
March 31, March 31,
2007 2006
$ $
Cash represented by:
Cash and cash equivalents 28,141,628 14,496,194
Demand loans - -
Restricted cash 1,093,713 3,083,007
------------ ------------
29,235,341 17,579,201
------------ ------------
------------ ------------
$ $
-------------------------------------------------------------------------
Cash interest paid - -
--------------------------------------
Cash taxes paid - -
--------------------------------------
10. Related party transactions
Management fees in the amount of $12,802 (2006 - $12,993) were paid to a
company controlled by a director of the Company and are included in
general and administrative expenses. These fees are for services rendered
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.
11. Income Taxes
Subject to confirmation from taxation authorities, the Company has
approximately Cdn$9.9 million of Canadian non-capital loss carry forwards
which expire between 2007 and 2026. The consolidated financial statements
do not reflect the potential tax benefit of these losses, as they do not
meet the more likely than not criteria.
Provision for current income taxes are based on presumptive income
calculated as a percentage of Colombian equity levels and can be
recovered against future income taxes for up to five years.
12. Commitments
The Company has remaining minimum exploration commitments of $18,890,743
to be met during 2007.
13. Subsequent Events
On April 20 the Company relinquished 100% of its rights and obligations
in the Carbonera Block, Llanos Basin.
Corporate Information
Directors Nominated Adviser
Raymond P. Antony, Chair(1)(3)(4) Nabarro Wells & Co. Limited
Stan Grad, Director(2)(4)
Grant Howard, Director(1)(4) UK Broker
Roy H. Hudson, Director(3)(4) Tristone Capital Limited
Keith J. Jackson, Director(1)(4)
Joaquin Moreno Uribe, Director(2)(3)(4)
J. Scott Price, Director, President & CEO(2)(4)
(1) Audit Committee
(2) Reserves Committee
(3) Corporate Governance and Compensation Committee
(4) Health, Environment and Safety Committee
Management
J. Scott Price, President & CEO
Glenn Van Doorne, COO
Ricardo Montes, CFO
Trading Symbols
TSX-V: SOR
LSE (AIM): SORL
Transfer Agents
Valiant Trust Company
Auditor
Deloitte & Touche LLP
Legal Counsel
Davis LLP
Banker
Royal Bank of Canada
Offices
Head Office: Subsidiary:
Suite 640, 340 - 12th Avenue S.W Solana Petroleum Exploration
Calgary, Alberta, T2R1L5 (Colombia) Limited
Canada Regatta Office Park, West Bay Road,
Tel: 403-770-1822 P.O.Box 31106 SMB
Fax.: 403-770-1826 Gran Cayman, KY1-1205,
Cayman Islands
Tel: 345-949-3977
Fax.: 345-945-7566
Branch:
Solana Petroleum Exploration
Colombia Limited
CaUe 113 No. 7-21, Of 706
Torre A, Edificio Teleport
Bogota, D.C. Colombia
Tel: 011 571 629 1636
Fax: 011 571 629 1704
www.solanaresources.com
Abbreviations
CDN Canadian
U.S. United States
Col. Colombian Pesos
WTI West Texas Intermediate
Bbl barrel
Bopd barrels of oil per day
MBbls thousand barrels
MMBbls million barrels
Mcf thousand cubic feet
Mcfpd thousand cubic feet per day
MMcf million cubic feet
MMcfpd million cubic feet per day
Boe (x)barrel of oil equivalent
Boepd (x)barrel of oil equivalent per day
MBoe (x)thousand barrels of oil equivalent
NGL natural gas liquids
$MM million dollars
TSX-V TSX Venture Exchange
LSE London Stock Exchange
AIM Alternative Investment Market
Of the London Stock Exchange
MD&A Management's Discussion and Analysis
GAAP Generally Accepted Accounting Principles
G&A General and Administrative Expenses
(x) A Boe conversion ratio of 6 Mcf (equal sign) 1 Bbl has been used.
Boe's may be misleading, particularly if used in isolation. A Boe
conversion ratio of 6 Mcf to 1 Bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.