CALGARY and LONDON, 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, 2008. These results should be read in conjunction with the Company's audited consolidated financial statements for the years ended December 31, 2007 and 2006. 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 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 and the SEDAR website at www.sedar.com.
HIGHLIGHTS
- Costayaco-2, a 560 metre crestal step out from Costayaco-1, was
drilled and tested in excess of 6,600 bopd (gross) combined from the
two primary horizons, the Caballos and the Villeta T.
- Costayaco-3, a 960 down dip step out from Costayaco-1, was drilled
and tested a maximum combined 2,543 bopd from the two primary
horizons, the Caballos and the Villeta-T.
- Primavera-1, testing a structure in the Guachiria block in the Llanos
block was drilled and cased. Subsequent to the end of the first
quarter Solana tested this well at a pump constrained rate of
650 bopd (gross) from the Carbonera C7 formation.
- Palmitas-2, testing a structure in the Guachiria Sur block in the
Llanos basin, was drilled and cased as a potential oil discovery.
- First quarter 2008 cash flow from operating activities of
$10.7 million ($0.08/share) and after tax net income of $6.5 million
($0.05/share).
- First quarter 2008 capital expenditures of $13.2 million.
- Cash balance of $62.4 million as at March 31, 2008.
OPERATIONAL UPDATE
LOWER MAGDALENA BASIN
The Lower Magdalena basin is located in northwest Colombia. It covers an area of approximately 87,000 km(2) 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 a 58% working interest, and Technopetrol, a Colombian company, with a 4.2% working interest.
Solana operates the Guepaje gas field on the 84 km(2) Magangue block, which borders the Pacific Rubiales La Creciente block where there was a significant gas discovery, in the same productive formation as the Guepaje gas field, in 2006. This field came on production in January 2008, greatly increasing local line pressure and effectively backing out Guepaje gas production. Guepaje will remain shut in until a new compressor is sourced and installed.
CATATUMBO BASIN
The Catatumbo Basin is a 7,350 km(2) sub-basin, forming the southwest flank of Venezuela's prolific Maracaibo Basin. Solana has one block in the Catatumbo sub-basin.
CATGUAS BLOCK
Solana is the operator of the 1,591 km(2) Catguas block with a 100% working interest. In the southern 70% of the block, Trayectoria Oil and Gas, Sucursal Colombia, has a 15% beneficial interest, and a 50% beneficial interest in the remainder. The block is held under an ANH contract.
Phase 1 (November 17, 2005 to May 17, 2007) commitments were fulfilled by drilling the relatively shallow Tres Curvas-1 and Cocodrilo-1 wells.
Tres Curvas-1 tested a combined maximum 180 bopd from two Catatumbo formation zones and was completed as a new oilfield discovery. The well is currently awaiting permission from the Ministry of Mines and Minerals for a Long Term Test with a progressive cavity pump.
Cocodrilo-1 was abandoned after failing to identify oil in commercial quantities. An extension to the phase 1 deadline, to accomplish the required activities, was requested and granted.
During phase 2 (May 17, 2007 to November 17, 2008) Solana must drill one exploration well and re-enter one existing well. In the absence of a suitable re-entry candidate the requirement is to drill a second exploration well. Accordingly, two wells, testing deeper targets, are scheduled to be drilled during Q4, 2008. At the end of this phase a certain portion of this block must be relinquished. In view of the prospectivity of the block and to reduce the relinquishment area to 15%, the Company will also acquire 132 line-km of 2-D and 50 km(2) of 3-D seismic data in Q3, 2008. The 3-D seismic is designed to delineate the shallower Tres Curvas channel discovery and the 2-D to assist in selection of the second well to be drilled from the five prospects identified on a large anticlinal feature. The Natubay prospect on this anticline has already been identified as a drilling location.
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 km(2) and holds Colombia's largest number of oil fields and proved oil reserves.
Solana has working interests in six blocks in the Llanos Basin, covering an area of 2,015 km(2). These blocks are from North to South: Guachiria Norte, Colonia, San Pablo, Guachiria, Guachiria Sur and Garibay. These blocks are in the part of the Llanos Basin where drilling and seismic activity is generally restricted to a four-month weather window from December to March.
GUACHIRIA NORTE BLOCK
Solana is the Operator of the 412 km(2) Guachiria Norte block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. The block is located approximately 250 km northeast of Bogota and is subject to an ANH contract.
During Phases 3 and 4 (March 21, 2007 to March 21, 2009) Solana is required to drill two exploration wells and acquire 25 km(2) of 3-D seismic data.
Solana is currently reprocessing the existing 157 km(2) Onyx 3-D seismic survey to optimize the location of the next wells. Within this area is a significant Carbonera C5 channel target which the Company intends to test. The Company plans to drill the commitment wells prior to the March 21, 2009 deadline.
COLONIA BLOCK
On June 25, 2007, Solana acquired the 439 km(2) Colonia block, situated immediately to the west of the Guachiria Norte block. Solana is required to acquire 55 km(2) of 3-D seismic data and to reprocess the existing 2-D seismic data during the first phase (June 25, 2007 until June 25, 2008), and to drill one exploration well in each of the subsequent five annual phases. This block is subject to an ANH contract.
The acquisition of the 3-D seismic data was completed and the data is being processed.
SAN PABLO BLOCK
On June 25, 2007, Solana acquired the 423 km(2) San Pablo block, situated immediately to the west of the Guachiria Sur block and to the south of the Colonia block. Solana must acquire 50 km(2) of 3-D seismic data during the first phase (June 25, 2007 until June 25, 2008) and drill one exploration well in each of the subsequent five annual phases. This block is subject to an ANH contract.
50 km(2) of 3-D seismic data was acquired in December 2007 and has been processed. This seismic clearly indicates the extension of the significant Carbonera C-5 channel prospect, identified on Guachiria Norte and Guachiria Sur, into this block.
GUACHIRIA BLOCK
Solana is the Operator of the 68 km(2) Guachiria block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. The block adjoins the Guachiria Norte block immediately to the South. This block was acquired from Empresa Colombiana de Petroleos SA (Ecopetrol), and is subject to a standard ANH contract plus an additional 13% royalty payable to Ecopetrol.
For Phase 3 (June 1, 2006 to June 1, 2007), Ecopetrol agreed that Solana may substitute its well commitment for a 100 km(2) 3-D seismic survey, covering the block, and overlapping the southern part of the adjacent Guachiria Norte 3-D seismic survey. Data acquisition and processing were completed on time.
The commitment for Phase 4 (June 1, 2007 to June 1, 2008) is to drill an exploration well. The Company drilled the Primavera-1 well during February, 2008. In May, this well was successfully tested at a pump constrained rate over a continuous 24 hour period, of 650 barrels of 40 degree API oil per day, gross, 365 bopd net of royalty to Solana, from eight feet of perforations, 6,682 to 6,690 ft, in the Carbonera C-7 formation. The well produced with a water cut of approximately 58% during this flow period.
Solana's Yalea-1 well was shut-in for repairs.
GUACHIRIA SUR BLOCK
Solana is the Operator of the 366 km(2) Guachiria Sur block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. 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.
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 km(2) 3-D seismic survey and a commitment to drill one well during Phase 3 (October 25, 2007 to October 25, 2008). This survey was completed and covers the northern part of the block, immediately west and south of the Guachiria block.
The Company drilled the Palmitas-2 well during March, 2008 resulting in a potential Carbonera structural play discovery. The well will be tested shortly after Primavera-1.
GARIBAY BLOCK
Solana is the Operator of the 307 km(2) Garibay block and holds a 100% working interest. The block is located approximately 170 km east of Bogota. This block is subject to an ANH contract.
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 km(2) (39 square miles) of 3-D seismic, subject to relinquishment of 30% of the block area. This survey was completed in April 2007.
During Phase 3 (October 25, 2007 to October 25, 2008), the Company is required to drill one exploration well. On November 17, 2007, Solana farmed out a 50% working interest and operatorship to Cepsa Colombia SA. Pursuant to this agreement, Solana is fully carried on the phase 3 commitment well, Topocho-1, which is currently drilling.
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 km(2) and Solana holds interests in the Guayuyaco block and the Chaza block totalling 536 km(2) in this basin.
GUAYUYACO BLOCK
Solana holds a 35% non-operated net working interest in the 212 km(2) Guayuyaco block, located approximately 290 km 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 was producing 492 bopd (gross), 158 bopd net of royalty to Solana, on March 31, 2008. All commitments have been fulfilled and the block is being developed further under an Association Contract.
During the first quarter of 2007 Solana participated in drilling the Juanambu-1 discovery well which was productive in the Caballos, Villeta T and Rumiyaco Kg formations. The well has been completed with a jet pump and the tubing string configured to allow for production from selected zones. Pursuant to regulatory requirements, the well was intermittently tested until Ecopetrol granted "commerciality" to the Juanambu field on November 7, 2007, at which time the well was placed on continuous production. Juanambu-1 was producing 965 bopd (gross), 311 bopd net of royalty to Solana, on March 31, 2008.
Trucking operations have been replaced with a six kilometre six inch flowline that went into operation on February 29, 2008. The line connects Juanambu-1 into the nearby Toroyaco facility and from there into existing infrastructure.
CHAZA BLOCK
Solana has a 50% working interest in the 325 km(2) 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 2 (June 27, 2006 to June 26, 2007) the partners drilled the Costayaco-1 discovery well which tested at a combined maximum rate of 5,906 bopd from four separate formations; the Caballos, Villeta T, Villeta U and the Rumiyaco Kg. This well is currently on a long term test. Costayaco-1 was producing 3,089 bopd (gross), 1,421 bopd net of royalty to Solana, on March 31, 2008. Production is trucked to facilities at Uchupayaco that were constructed in the second half of 2007. A ten kilometre, eight inch pipeline, tying into existing infrastructure at Uchupayaco, is being built to replace trucking operations. This line is scheduled to be in operation by mid 2008.
To assist with future development drilling location selection, a 70 km(2) 3-D seismic programme was acquired in December 2007.
During December 2007 and January 2008, Costayaco-2 was drilled on a crestal location approximately 560 metres north of Costayaco-1 and was subsequently completed as an oil well. This well tested over 6,600 bopd (gross) from the Caballos and Villeta T sands. The secondary zone, the Villeta U sand was not tested as it showed very similar characteristics to Costayaco-1. A long term test is planned in the next four months. Costayaco-2 was producing 1,446 bopd (gross), 665 bopd net of royalty to Solana, on March 31, 2008.
In February 2008, Costayaco-3 was drilled on a down dip location approximately 960 metres west south west of Costayaco-1 in an effort to find oil-water contacts (OWC). This well encountered the same reservoir sequences with similar good oil and gas shows as the other Costayaco wells. Initial log interpretations indicate hydrocarbon pay across the Rumiyaco Kg, the Villeta U, the Villeta T and the Caballos formations. A drill-stem test (DST) and flow-test (FT) program was implemented on March 19, 2008, to evaluate the Caballos Formation and the Villeta T. The Upper Caballos and the Villeta T flowed at a maximum rate combined of 2,543 bopd with only traces of water. At the end of the 36 hour test, the flow rate was still increasing.
Importantly this testing program identified an OWC below 8,486 feet in the lower Caballos Formation, which is the first definitive identification of an OWC in the Costayaco field. Equally importantly, there was no evidence of an OWC in the other primary formation, the Villeta T.
Costayaco-4D, a directional well drilled from Costayaco-2 with a crestal location some 540 metres north of Costayaco-2, spudded on March 17, 2008. Cores are planned for the Villeta T and Caballos sandstones with drilling expected to take until the end of May with completion and testing to follow.
At least 3 more wells are planned in the field during 2008.
Costayaco-1 continues to produce on long term test and at March 31, 2008 was producing 3,089 bopd (gross), 1,421 bopd net of royalty to Solana. Production is currently trucked to an offloading facility at Uchupayaco and into existing infrastructure. Trucking constraints are expected to be eliminated by mid 2008 when it is anticipated that the 10 kilometre eight inch line from Costayaco-1 to Uchupayaco will be in service. Work is underway to reduce existing infrastructure production constraints beyond Uchupayaco. It is currently anticipated that 6,000 - 9,000 bopd gross could be accommodated during the second half of 2008. A second stage of infrastructure expansion, to accommodate the anticipated increase in production from the continuing Costayaco drilling program, is currently being evaluated.
OPERATING RESULTS
Selected Quarterly Information
The following table summarizes selected financial data for Solana for the three month periods ended March 31, 2008, and 2007. Unless otherwise noted, all currency amounts are stated in US dollars.
2008 2007
-------------------------------------------------------------------------
$ $
Production revenue, net of royalties 16,266,570 1,413,926
Operating costs 2,293,445 656,578
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13,973,125 757,348
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Expenses
General and administrative 1,490,599 1,061,304
Depletion, depreciation and accretion 3,504,208 1,266,908
Foreign exchange loss (gain) 510,421 25,655
Stock-based compensation 2,608,009 1,617,193
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8,113,237 3,971,060
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Other income/expenses
Interest and other 734,703 131,114
Income taxes (65,935) (50,000)
-------------------------------------------------------------------------
668,768 81,114
-------------------------------------------------------------------------
Net income (loss) 6,528,656 (3,132,598)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net loss (income) per share 0.05 (0.03)
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Mar 31,2008 Dec 31,2007
------------- -------------
$ $
Share capital 188,482,896 187,223,652
Working capital 72,305,604 70,974,442
Petroleum and natural gas properties 91,756,877 81,963,075
Total assets 175,672,064 166,641,302
Total current liabilities 9,147,319 9,307,557
Shareholders' equity 164,496,472 155,359,807
Cash dividends per share Nil Nil
Results of Operations for the Three Months Ending March 31, 2008
This consolidated financial information includes the revenue and expenses of the Company for the three month periods ended March 31, 2008 and 2007. During the three month period ended March 31, 2008, revenue from operations amounted to $16,266,570. In this same period operating costs were $2,293,445 resulting in an operating profit of $13,973,125. During the three month period ended March 31, 2007, the Company generated revenue of $1,413,926. In this same period operating costs were $656,578 resulting in an operating profit of $757,348. This significant increase in operating profit is mainly due to higher Costayaco and Juanambu field production and higher oil prices during the period. The Company produced an average 1,715 boepd for the three months ended March 31, 2008 against 453 bopd for the three months ended March 31, 2007. First quarter 2008 average production was impacted by the shut in of the Guepaje gas field in early January, while a new compressor was being sourced and installed, and downtime at Juanambu-1 associated with pressure build up tests. The Company's revenue, net of royalties, operating costs and net backs for the three month period ended March 31, 2008 and 2007 are:
2008 2007
$/Boe $/Boe
----------------------------
Revenue, net of royalties 88.84 34.62
Operating cost 14.83 11.47
----------------------------
Net 74.01 23.15
----------------------------
General and administrative expenses
General and administrative expenses for the three month period ended March 31, 2008 amounted to $1,490,599 in comparison to $1,061,304 for the same period in 2007. This $429,295 increase is mainly due to additional salary expense associated with increased activity in Colombia. The major components of general and administrative expenses are:
2008 2007
$ $
----------------------------
General office 69,149 107,000
Salaries and benefits 962,428 523,552
Professional fees 99,354 14,722
Public company costs 78,660 98,282
Consulting fees 179,017 200,287
Travel 101,991 117,461
Depletion, depreciation and accretion
First quarter 2008 depletion, depreciation and accretion amounted to $3,504,208, compared to $1,266,908 for the same period a year ago. The depletion expense amounts to $3,446,432 (2007 - $1,193,072). This increase is due to a combination of a higher depletable base and increased production but is somewhat offset by higher proved reserves highlighted in the Company's 2007 year end reserves report. Depreciation amounts to $42,764 (2007 - $19,867) on the Company's other capital assets. Accretion expense amounting to $15,012 (2007 - $53,969) represents the increase in future estimated costs to plug and abandon the Company's petroleum and natural gas wells at the end of their useful lives.
Stock-based compensation expense
First quarter 2008 stock-based compensation expense associated with options increased to $585,557 from $469,135 in the first quarter of 2007 primarily due to an increase in the amortization of costs associated with the vesting of options granted throughout 2007. Additionally, stock compensation expense of $1,259,244 (2007 - $1,148,058) relating to the Breakaway acquisition shares and $763,208 (2007- Nil) relating to the Breakaway performance warrants was recognized (see Note 3 to the financial statements for the years ended December 31, 2007 and 2006).
Foreign exchange
The foreign exchange loss of $510,421 in the three month period ended March 31, 2008 in comparison with the loss of $25,655 in the three month period ended March 31, 2007 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 $734,703 compared to $131,114 for the same period in 2007. This difference is due to the larger cash balances held throughout the first quarter of 2008.
The income tax expense amounting to $65,935 (2007 - $50,000) 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 income (loss)
The $6,528,656 net income for the quarter ended March 31, 2008 compares to a net loss of $3,132,598 for the same 2007 period. The increase is mainly attributable to higher production levels and higher oil prices.
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, 2008 Dec 31, 2007 Sep 30, 2007 Jun 30, 2007
$ $ $ $
Additions to
Petroleum and Natural
Gas properties 13,255,246 8,336,394 7,191,743 10,486,480
Total revenues 17,001,273 12,768,179 3,345,664 1,726,827
General and
administrative
expenses 1,490,599 1,582,711 1,165,775 1,319,363
Depletion,
depreciation and
accretion 3,504,208 1,558,115 2,018,435 945,635
Foreign exchange
(income) loss 510,421 (385,373) 237,775 199,233
Stock-based
compensation 2,608,009 9,512,159 1,302,779 1,207,881
Income (loss) after
taxes 6,528,656 (999,906) (2,348,505) (2,802,217)
Income (loss) per
share 0.05 (0.01) (0.02) (0.05)
-------------------------------------------------------------------------
Mar 31, 2007 Dec 31, 2006 Sep 30, 2006 Jun 30, 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 1,266,908 2,441,325 886,985 957,026
Impairment - 29,822,544 - -
Foreign exchange
(income) loss 25,655 160,105 (3,424,333) 870,581
Stock-based
compensation 1,617,193 2,300,703 209,875 228,640
Income (loss) after
taxes (3,132,598) (31,076,705) 4,989,157 (1,236,674)
Income (loss) per
share (0.03) (0.34) 0.05 (0.01)
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LIQUIDITY
Solana's working capital increased from $70,974,442 at December 31, 2007, to $72,305,604 at March 31, 2008, largely due to the accounts receivable related to the Company's increased crude sales from production in the Costayaco and Juanambu fields in the first quarter of 2008.
The Company's $62,424,185 cash balance at March 31, 2008 is committed to its planned capital expenditure program in Colombia. Most of the balance is held in accounts and term deposits with Canadian chartered banks. The Company currently has sufficient working capital to meet its work obligations.
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The Company realized cash inflows of $12,641,364 from operations for the three months ended March 31, 2008 compared to cash outflows of $267,287 from operations for the same 2007 period. This significant increase in operating cashflow is attributable to higher production revenue (mainly from Costayaco and Juanambu production).
The Company incurred investing activity cash outflows of $19,831,462 for the three month period ended March 31, 2008 as compared to $5,848,372 for the same period in 2007. The most significant cash outflow component was $13,255,246 (2006 - $7,274,457) related to petroleum and natural gas property expenditures.
RELATED PARTY TRANSACTIONS
The Company paid $15,244 (Cdn$15,000) in management fees in the current period ended March 31, 2008 (2007 - $12,802 Cdn$15,000) to a company controlled by a director of the Company. These fees 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
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 report 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
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Three Month Periods Ended
March 31, 2008 and 2007
(Unaudited)
Notice to Reader:
The accompanying unaudited interim consolidated financial statements of
Solana Resources Limited (the "Company") for the period ended March 31, 2008,
have been prepared by management and approved by the Audit Committee and the
Board of Directors of the Company. These financial statements have not been
reviewed by the Company's external auditors.
DATED the 27th day of May, 2008
(signed) "J. Scott Price"
J. Scott Price,
President and Chief Executive Officer
SOLANA RESOURCES LIMITED
INTERIM CONSOLIDATED BALANCE SHEETS
(Unaudited)
Expressed in US dollars
March 31, December 31,
2008 2007
------------- -------------
$ $
Assets
Current
Cash and cash equivalents 62,424,185 71,537,827
Accounts receivable - trade 15,039,596 6,671,992
- cash calls 2,546,657 1,282,170
Prepaid expenses 1,442,485 790,010
------------- -------------
81,452,923 80,281,999
1,178,750 3,156,750
Deposits (Note 3) 91,756,877 81,963,075
Petroleum and natural gas properties 891,663 877,051
Other capital assets 391,851 362,427
------------- -------------
Investment (Note 4) 175,672,064 166,641,302
------------- -------------
------------- -------------
Liabilities
Current:
Accounts payable and accrued liabilities
- trade 9,032,640 8,185,187
- cash calls 114,679 1,122,370
------------- -------------
9,147,319 9,307,557
Asset retirement obligations (Note 5) 2,028,273 1,973,938
------------- -------------
11,175,592 11,281,495
------------- -------------
Shareholders'equity
Share capital (Note 6) 188,482,896 187,223,652
Contributed surplus 13,111,366 11,762,601
Cumulative other comprehensive income 5,791,923 5,791,923
Deficit (42,889,713) (49,418,369)
------------- -------------
(37,097,790) (43,626,446)
------------- -------------
164,496,472 155,359,807
------------- -------------
175,672,064 166,641,302
------------- -------------
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SOLANA RESOURCES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS),
COMPREHENSIVE INCOME (LOSS) AND DEFICIT
(Unaudited)
Expressed in US dollars
Three months ended March 31,
2008 2007
$ $
Revenue
Oil and gas revenues, net of royalties 16,266,570 1,413,926
Interest 734,703 131,114
------------- -------------
17,001,273 1,545,040
------------- -------------
Expenses
Operating 2,293,445 656,578
General and administrative 1,490,599 1,061,304
Depletion, depreciation and accretion 3,504,208 1,266,908
Foreign exchange loss (gain) 510,421 25,655
Stock compensation expense 2,608,009 1,617,193
------------- -------------
10,406,682 4,627,638
------------- -------------
Income (loss) before income taxes 6,594,591 (3,082,598)
Income tax expense 65,935 50,000
------------- -------------
Net income (loss) and comprehensive loss 6,528,656 (3,132,598)
Deficit, beginning of period 49,418,369 40,135,143
------------- -------------
Deficit, end of period 42,889,713 43,267,741
------------- -------------
------------- -------------
Net Income (loss) per share, basic and
diluted 0.05 (0.03)
------------- -------------
------------- -------------
SOLANA RESOURCES LIMITED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Expressed in US dollars
Three months ended March 31,
2008 2007
$ $
Summary of activities
Operating Activities 6,528,656 (3,132,598)
Income (loss) for the period
Items not involving
Unrealized foreign exchange loss (gain) 491 (18,790)
Stock-based compensation 2,608,009 1,617,193
Depletion, depreciation and accretion 3,504,208 1,266,908
12,641,364 (267,287)
Change in working capital - operating (1,923,053) 2,167,570
------------- -------------
10,718,311 1,900,283
------------- -------------
Financing Activities: - -
------------- -------------
- -
------------- -------------
Investing activities:
Additions to petroleum and natural gas
properties (13,255,246) (7,274,457)
Change in working capital - investing (8,467,416) 1,403,983
Additions to other capital assets (57,376) 22,102
Deposits 1,978,000 -
Investments (29,424) -
------------- -------------
(19,831,462) (5,848,372)
------------- -------------
Foreign exchange on cash balances (491) -
------------- -------------
Net decrease in cash and cash equivalents (9,113,642) (3,948,089)
Cash and cash equivalents, beginning of
period 71,537,827 33,183,430
------------- -------------
Cash and cash equivalents, end of period 62,424,185 29,235,341
------------- -------------
------------- -------------
Supplemental cash Flow Information - (See Note 9)
SOLANA RESOURCES LIMITED
Notes to the Interim Consolidated Financial Statements
For the Three Month Periods Ended March 31, 2008 and 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,
2008 and 2007 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, 2007 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 for the year ended December 31, 2007.
2. Changes in Accounting Policies
Effective January 1, 2008, the Company adopted the new Canadian Institute
of Chartered Accountants ("CICA") standards related to Section 3251,
"Equity" and Section 1506, "Accounting Changes." Section 3251 replaces
Section 3250, "Surplus," and describes standards for the presentation of
equity and changes in equity for reporting periods as a result of the
application of Section 1530, "Comprehensive Income." The only impact of
Section 1506, "Accounting Changes," is to provide disclosure of when an
entity has not applied a new source of GAAP that has been issued but is
not yet effective.
On January 1, 2008, the Company also adopted standards related to Section
3862, "Financial Instruments Disclosures", Section 3863, "Financial
Instruments Presentations" and Section 1535, "Capital Disclosures".
Sections 3862 and 3863 require additional disclosures regarding the
significance of financial instruments to the entity's financial position
and performance; and the nature, extent and management of risks arising
from financial instruments to which the entity is exposed. Section 1535
establishes standards for disclosing information about the Company's
capital and how it is managed. It requires disclosures of the Company's
objectives, policies and processes for managing capital, the quantitative
data about what the Company regards as capital, whether the Company has
complied with any capital requirements and if it has not complied, the
consequences of such non-compliance (see Note 13).
3. Deposits
The Company has funds on deposit totaling $1,178,750 as of the end of
March, 2008 and $3,156,750 as of the end of December 31, 2007, equal to
10% of work commitments on acquired Agencia Nacional de Hidrocarburos
("ANH") acreage. These funds will be returned to the Company upon
completion of the work commitments on the Guachiria Norte, Catguas,
Guachiria Sur, Garibay, Colonia and San Pablo blocks.
4. Investment
The Company has invested, as at the end of March 2008, $391,851 (March
2007 - $362,427) in the Colombian Hydrocarbon Investment Fund ("Fund"),
and expects to invest a maximum amount of $500,000. The Fund is managed
by a US based fund manager who specializes in South American natural
resources sector investments. The Fund is expected to have an investment
period of four years. After this period, it is expected that the Fund
will be wound up, and any remaining capital and any earned profits will
be distributed to the investors over a maximum period of seven years.
5. Asset Retirement Obligations
The following table represents the reconciliation of the Company's
obligations associated with the retirement of oil and gas properties:
-------------------------------------------------------------------------
Asset retirement obligations, December 31, 2007 $1,973,938
Liabilities incurred during period 39,323
Liabilities settled during period -
Accretion 15,012
-------------------------------------------------------------------------
Asset retirement obligations, March 31, 2008 $2,028,273
-------------------------------------------------------------------------
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% per annum, and an inflation rate of 2.5% per annum.
6. Share Capital
Authorized share capital consists of an unlimited number of common
shares.
Number of Amount
Continuity of common shares Shares $
-------------------------------------------------------------------------
Balance, December 31, 2007 123,176,792 187,223,652
Shares in escrow earned in period - 1,259,244
-------------------------------------------------------------------------
Balance, March 31, 2008 123,176,792 188,482,896
-------------------------------------------------------------------------
Continuity of contributed surplus Amount
$
-------------------------------------------------------------------------
Balance, December 31, 2007 11,762,601
Stock based compensation expense 1,348,765
-------------------------------------------------------------------------
Balance, March 31, 2008 13,111,366
-------------------------------------------------------------------------
Continuity of stock options Number of Weighted
Options Average
Exercise
Price
$
-------------------------------------------------------------------------
Balance, December 31, 2007 4,625,000 1.75
0
50,000
-------------------------------------------------------------------------
4,575,000 1.75
-------------------------------------------------------------------------
Stock-based compensation
For the first quarter of 2008, stock based compensation expense of
$585,557 has been recorded in the Consolidated Statement of Income,
Comprehensive Income and Deficit (2007 - $469,135). The Company estimates
fair value of stock options and warrants granted using the Black-Scholes
option-pricing model with the following assumptions:
Three months ended
March 31, 2008
Risk-free interest rate (percent) 3.82
Expected life (years) 5
Volatility (percent) 102.54
Expected annual dividend per share -
Additional stock-based compensation expense of $1,259,244 (2007 -
$1,148,058) related with Breakaway acquisition shares and $763,208 (2007
- Nil) related to Breakaway performance warrants was recognized (see
Note 3 to the annual financial statements)
7. Per-share amounts
The weighted average number of common shares outstanding, basic and
diluted, during the three months ended March 31, 2008, was 123,919,008
(March 31, 2007 - 95,876,792).
8. Segmented information
March 31, 2008
Canada Colombia Total
$ $ $
-------------------------------------------------------------------------
Revenue - 16,266,570 16,266,570
Operating costs - 2,293,445 2,293,445
------------------------------------------
- 13,973,125 13,973,125
------------------------------------------
General and administrative
expenses 604,030 886,569 1,490,599
Depletion, depreciation, and
accretion 18,259 3,485,949 3,504,208
Foreign exchange loss (gain) (952) 511,373 510,421
Stock-based compensation 2,608,009 - 2,608,009
Interest (530,143) (204,560) (734,703)
------------------------------------------
2,699,203 4,679,331 7,378,534
------------------------------------------
Income (loss) before taxes (2,699,203) 9,293,794 6,594,591
Income taxes - 65,935 65,935
------------------------------------------
Next income (loss) (2,699,203) 9,227,859 6,528,656
------------------------------------------
------------------------------------------
Total assets 83,424,153 92,247,911 175,672,064
------------------------------------------
------------------------------------------
Capital expenditures - 13,255,246 13,255,246
------------------------------------------
------------------------------------------
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 1,260,693 1,266,908
Foreign exchange loss (gain) 11,928 13,727 25,655
Stock-based compensation 1,617,193 - 1,617,193
Interest (122,210) (8,904) (131,114)
------------------------------------------
2,079,489 1,760,457 3,839,946
------------------------------------------
Income (loss) before taxes (2,079,489) (1,003,109) (3,082,598)
Income taxes - 50,000 50,000
------------------------------------------
Net income (loss) (2,079,489) (1,053,109) (3,132,598)
------------------------------------------
------------------------------------------
Total assets 29,993,578 72,620,704 102,614,282
------------------------------------------
------------------------------------------
Capital expenditures - 7,274,457 7,274,457
------------------------------------------
------------------------------------------
9. Supplemental cash flow information
March 31, March 31,
2008 2007
$ $
Cash represented by:
Cash and cash equivalents 62,424,185 28,141,628
Demand loans - -
Restricted cash - 1,093,713
------------ ------------
62,424,185 29,235,341
------------ ------------
------------ ------------
$ $
Cash interest paid - -
------------ ------------
Cash taxes paid - -
------------ ------------
10. Related party transactions
For the first three months of 2008 management fees in the amount of
$15,244 (2007 - $12,802) 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 by taxation authorities, the Company has
approximately Cdn$10.2 million ($9.94 million) of Canadian non-capital
loss carry forwards which expire between 2008 and 2027 and Colombian tax
losses totaling Col$78 billion ($38.6 million) which are available to be
carried forward. 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 is based on presumptive income
calculated as a percentage of Colombian equity levels. These can be
recovered against future income taxes for up to five years.
12. Commitments
The Company has remaining minimum exploration commitments of $35,174,667
to be met during 2008.
13. Financial and capital risk management
The Company undertakes transactions in a range of financial instruments
including the following categories:
March 31, December 31,
2008 2007
$ $
Held for trading (a):
Cash and cash equivalents 62,424,185 71,537,827
Loans & receivables (b):
Accounts receivables 17,586,253 7,954,162
Prepaid expenses 1,442,485 790,010
Available for sale (c):
Investments 391,851 362,427
Other financial liabilities (b):
Accounts payable 9,147,319 9,307,557
Asset retirement obligations 2,028,273 1,973,938
(a) Measured at fair value which equals the carrying value.
(b) Measured at amortized costs using the effective interest method
which is not significantly different to the carrying values due to
the short maturity term of these financial instruments.
(c) Measured at cost as the fair value is not readily available.
The Company's activities results in exposure to a number of financial
risks, including the following:
Market risk
The nature of crude oil and natural gas operations in Colombia expose the
Company to fluctuations in commodity prices. The Company does not manage
these risks through the use of derivative instruments.
Credit risk
A substantial portion of the Company's accounts receivable are with
customers in the petroleum industry and are subject to normal industry
credit risks. The carrying amount of accounts receivable reflects
management's assessment of the credit risk associated with these
customers. Crude oil production is sold, as determined by market based
prices adjusted for quality differentials, to the Colombian state oil
company, Ecopetrol. Revenues are denominated in United States dollars.
Typically, the Company's maximum credit exposure to customers is revenue
from two months' sales.
Foreign currency exchange risk
The Company is exposed to foreign currency fluctuations as certain
expenditures and expenses are denominated in Colombian pesos and Canadian
dollars.
Capital risk management
The Company's objectives when managing capital are to:
1. maintain financial flexibility in order to preserve the ability to
meet exploration and other commitments.
2. maintain a capital structure that allows multiple financing
options.
3. maintain an optimal capital structure to reduce the cost of
capital.
4. deploy capital to provide an appropriate investment return to
shareholders;
The Company defines its capital as follows:
1. cash, cash equivalents and short term investments
2. shareholders' equity
3. revolving secured credit facility.
The Company's financial strategy is designed and formulated to maintain a
flexible capital structure consistent with the objectives stated above
and to respond to changes in economic conditions and the risk
characteristics of underlying assets. The Company may issue new shares or
adjust its debt level to meet these objectives.
The Company monitors capital on the basis of its gearing ratio calculated
as net debt divided by total capital. Net debt is calculated as total
interest bearing financial assets and financial liabilities (including
derivatives financial instruments) less cash and cash equivalents. Total
capital is calculated as shown in the balance sheet plus net debt.
The Company is also subject to financial covenants pursuant to the credit facility secured through its wholly owned subsidiary, Solana Colombia. These covenants are measured on a quarterly basis. The Company is currently in compliance with all financial covenants.
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
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.
Corporate Information
Directors Nominated Adviser
Raymond P. Antony, Chair (1)(2)(3)(4) Nabarro Wells & Co. Limited
Grant Howard, Director (1)(3)(4)
Roy H. Hudson, Director (3)(4)
Keith J. Jackson, Director (1)(4) UK Broker
Luis Miguel Morelli, Director (4) Tristone Capital Limited
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 100, 522 - 11th Avenue S.W. Solana Petroleum Exploration
Calgary, Alberta, T2R OC8 (Colombia) Limited
Canada Regatta Office Park, West Bay Road,
Tel.: 403-770-1822 P.O.Box 1106
Gran Cayman, KYl-1205,
Cayman Islands Fax.: 403-770-1826
Tel.: 345-949-3977
Branch:
-------
Solana Petroleum Exploration
Colombia Limited
Calle 113 No. 7-21, Of 706
Torre A, Edificio Teleport
Bogota, D.C. Colombia
Tel: 011 571 629 1636
Fax: 011 571 629 1704