CALGARY, AB and LONDON, UK, Oct. 31 /CNW/ - Solana Resources Limited (TSX-V: SOR; AIM: SORL), the Colombia focussed independent oil and gas exploration and production company, today announces restated results for the six month period ended June 30, 2007. After consultation with its auditors in connection with the bought deal financing announced on October 25, 2007, the Company is restating its financial report for the six month period ended June 30, 2007 reflecting a decrease in depletion expense and a corresponding decrease in the Company's net loss of US$800,000 for three months and US 1,600,000 for six months ended June 30, 2007. This favourable restatement reduces Solana's three and six month loss per share to ($0.03) and ($0.06) from ($0.05) and ($0.08) respectively, resulting from the application of reserve additions pursuant to a mid year engineering report announced on August 27, 2007.
The restated financial report for the six month period ended June 30, 2007 reflecting this restatement is attached.
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.
Please note that the commentary accompanying the restated figures has not otherwise been updated for events subsequently announced following publication of Solana's original Financial Report on 27 August 2007.
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 or the Sedar website at www.sedar.com.
NO REGULATORY AUTHORITY HAS APPROVED OR DISAPPROVED THE CONTENT OF
THIS RELEASE. THE TSX VENTURE EXCHANGE DOES NOT ACCEPT RESPONSIBILITY FOR
THE ADEQUACY OR ACCURACY OF THIS RELEASE
HIGHLIGHTS
- On May 29, 2007, Solana announced that the Juanambu-1 wildcat
exploration well, located in the Guayuyaco Block, Putumayo Basin,
southern Colombia, was a new field discovery. Juanambu-1 tested a
combined 139 m(3)/day (876 bopd) from 26.8 m (88 ft) of perforations
over four separate zones. Solana holds a non-operated 50% working
interest in this field that will be reduced to 35% should Ecopetrol,
the Colombian State oil company, exercise its back-in rights.
- On June 25, 2007 Solana acquired the 439 km(2) Colonia, and
the 423 km(2) San Pablo, exploration blocks in the Llanos Basin.
These blocks border Solana's Guachiria, Guachiria Norte and Guachiria
Sur blocks and together form a five block contiguous land package
encompassing 1,735 km(2). This area is considered to be highly
prospective.
- On July 9, 2007, the Company announced that the Costayaco-1 wildcat
exploration well, located in the Chaza Block, Putumayo Basin,
southern Colombia, was a new field discovery. Costayaco-1 tested a
combined 939 m3/day (5,906 bopd) maximum flow rate from 47.2 m
(155 ft) of perforations over four formations. Solana holds a non-
operated 50% working interest in the Chaza Block.
- 100 km(2) 3-D seismic data were acquired over portions of the Garibay
block in the Llanos Basin. Interpretation is underway.
- In comparison to December 31, 2006, mid-year 2007 total proved oil
reserves increased by 180% to 2.0 MMbbls and proved plus producing
oil reserves increased by 390% to 4.5 MMbbls (forecast prices case).
- In comparison to December 31, 2006, mid-year 2007 total proved plus
probable oil reserves NPV 10% (before tax) increased by 500% to
$127 million (forecast prices case).
- At June 30, 2007 the Company had a net cash balance of $19.2 million.
- June 30, 2007 the production was 529 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 km(2) (77,000 square miles) and holds Colombia's largest number of oil fields and proved oil reserves.
Solana has working interests in seven blocks in the Llanos Basin, covering an area of 2,542 km(2) (981 square miles). These blocks are: Guachiria Norte, Guachiria, Guachiria Sur, Colonia, San Pablo, Gaviotas and Garibay.
GUACHIRIA NORTE BLOCK
Solana is the Operator of the 412 km(2) (159 square miles) Guachiria Norte Block with a working interest of 70%. 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 m(3)/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 km(2) (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.
Solana is currently incorporating the results of the Calcedonia-1 well, drilled and abandoned in March 2007, with the Onyx 3-D seismic survey, to optimize the location of the next well, a Carbonera C5 channel target. The Company plans to drill this well prior to the March 21, 2009 deadline.
GUACHIRIA BLOCK
Solana is the Operator of the 75 km(2) (29 square miles) Guachiria Block with a working interest of 70%. The block adjoins the Guachiria Norte Block immediately to the South. This block was acquired from Empresa Colombiana de Petroleos SA (Ecopetrol, the State owned oil Company), and is subject to a standard ANH contract plus an additional 13% royalty payable to Ecopetrol.
During Phase 1 (October 9, 2003 to October 9, 2004) the Malabares-1 well was drilled and following an inconclusive test the well was suspended, 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 m(3)/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 15 m(3)/day (72 bopd, 41 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 km(2) (39 square mile) 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 for this survey are now complete 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 km(2) (141 square miles) Guachiria Sur Block with a working interest of 70%. 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 km (2) (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 and processing are now complete 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.
GAVIOTAS BLOCK
Solana is the Operator of the 377 km(2) (146 square miles) Gaviotas Block with a 70% 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 Empresa Colombiana de Petroleos SA (Ecopetrol, the State owned oil Company). 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.
The well commitment for Phase 3 (May 18, 2006 to May 18, 2007) was met by drilling Bevea-1. This well reached a Total Depth of 3802 m (12,475 ft) on June 19, 2007 and was subsequently abandoned. While there were minor oil and gas shows during drilling, subsequent well log analysis determined the presence of hydrocarbons in sub-commercial quantities. Solana and its partners have agreed to relinquish this block.
GARIBAY BLOCK
Solana is the Operator of the 450 km(2) (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 km(2) (39 square miles) of 3-D seismic, subject to relinquishment of 30% of the block area. This survey started in March 2007. Acquisition and processing are now complete and interpretation is underway.
COLONIA BLOCK
On June 25, 2007, Solana acquired the 439 km(2) (169 square mile) Colonia Block, situated immediately to the west of the Guachiria Norte Block. Solana's commitments are to acquire 55 km(2) (21 square miles) 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.
SAN PABLO BLOCK
On June 25, 2007, Solana acquired the 423 km(2) (163 square mile) San Pablo Block, situated immediately to the west of the Guachiria Sur Block. Solana's commitments are to acquire 50 km(2) (19 square miles) of 3-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.
PUTUMAYO BASIN
The Putumayo Basin is located in southwest Colombia and extends into Ecuador and Peru, where it is called the Oriente (Ecuador)-Maranon (Peru) Basin. It covers an area of approximately 320,000 km(2) (124,000 square miles) and Solana holds interests in the Guayuyaco Block and the Chaza Block totaling 536 km(2) (207 square miles) in this Basin.
GUAYUYACO BLOCK
Solana holds a 35% non-operated net working interest in the 212 km(2) (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 107 m(3)/day (670 bopd, 234 bopd net to Solana). Guayuyaco production volumes have recovered from the first quarter, All commitments have been 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) is a new field discovery.
Six different reservoir intervals, the Lower Caballos, Middle Caballos, Villeta T sand, Villeta U sand, Villeta A limestone and the Rumiyaco Kg sand, were tested through separate DSTs. Viable test rates were obtained from four of the six zones, with the Villeta U sand and Villeta A limestone being non-commercial. Juanambu-1 tested a combined 139 m(3)/day (876 bopd) from 26.8 m (88 ft) of perforations over the four viable zones.
The Caballos flowed naturally at a rate of 71 m(3)/day (448 bopd), and still increasing, from 10.4 m (34 ft) of perforations. The Villeta T sand flowed 34 m(3)/day (214 bopd), and still increasing, from 11.9 m (39 ft) of perforations. The Kg sand flowed 34 m(3)/day (214 bopd) on pump from 4.6 m (15 ft) of perforations.
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 has been intermittently tested since April 26, 2007 and as of June 30, 2007 has produced a total of 819 m(3) (5,152 bbls) gross. This well will be placed on continuous production as soon as regulatory approval is obtained. This approval is anticipated in the third quarter of 2007.
Solana paid for two thirds of this well to earn a 50% interest (35% if Ecopetrol elects to back-in).
CHAZA BLOCK
Solana has a 50% working interest in the 325 km(2) (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 were required to drill one well. This commitment was fulfilled with the Costayaco-1 wildcat exploration well which reached a total measured depth of 2,612 meters (8,570 feet) on May 10, 2007, and is a new field discovery.
Six zones over four formations were tested through cased hole and yielded an exceptional 939 m(3)/day (5,906 bopd) combined maximum flow rate from 47.2 m (155 ft) of perforations.
The Caballos flowed naturally at a rate of 422 m(3)/day (2,655 bopd) from 29.0 m (95 ft) of perforations. The Villeta T sand flowed 352 m(3)/day (2,212 bopd) from 12.2 m (40 ft) of perforations. The Villeta U sand flowed 67 m(3)/d (420 bopd), on pump, from 3.0 m (10ft) of perforations and the Kg sand flowed 98 m(3)/day (619 bopd) on pump from 3.0 m (10 ft) of perforations.
The Pride-17 drilling rig, used to drill Costayaco-1, is expected to be available for additional drilling as of November. Current plans include drilling two additional wells as soon as Pride-17 is available. The two well locations are based on the existing 2D seismic data and will be step outs from Costayaco-1. One well is situated to penetrate the crest of the structure. To optimize further drilling locations, and to gain a more complete picture of the size and shape of the Costayaco structure, a 3-D seismic infill program is currently being planned.
Although Costayaco-1 is proximal to infrastructure, which will allow for early monetization of a portion of its production, the magnitude of this discovery will require additional facilities, including a dedicated pipeline, and infrastructure, to exploit this field. These phased plans are currently being fast tracked, but will take some time to implement. The Chaza block is subject to a fiscally attractive ANH contract, with no additional state participation.
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, namely Catguas.
CATGUAS BLOCK
Solana is the operator of the 1,620 km(2) (625 square miles) Catguas Block with an 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 Trayectoria Oil and Gas, Sucursal Colombia, 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. The acquisition of 200 line-km (124 miles) of seismic data and 10 line-km (six miles) of high resolution seismic has been completed.
Seismic interpretation and geochemical mapping identified several drillable prospects and two shallower Barco structures, Tres Curvas and Cocodrilo, were selected. Tres Curvas-1 is currently drilling and Cocodrilo-1 will follow immediately afterwards. Solana has received an extension to the phase 1 deadline.
LOWER MAGDALENA BASIN
The Lower Magdalena Basin is located in northwest Colombia. It covers an area of approximately 87,000 km(2) (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 km(2) (65 square mile) Magangue Block, which is currently producing 94,000 m(3)/day (3.3 mmcfd, 0.9 mmcfd net to Solana) and sold into the local market at $2.16/mmbtu. Solana is currently re-evaluating the available seismic and geological information to identify possible workover opportunities and other possible targets.
MID YEAR RESERVES UPDATE
Following Solana's participation in the Costayaco and Juanambu new field discoveries during the first half of 2007, a mid year reserves update was performed. This evaluation has an effective date of June 30, 2007 and was completed by DeGolyer and MacNaughton, Solana's independent reserves engineers. The reserves provided below are based on forecast prices and costs and reflect Solana's interest net of all royalties. Degolyer and MacNaughton's reserve report evaluates Solana's Guepaje, Yalea, Guayuyaco, Juanambu and Costayaco properties but does not include any resources associated with the exploration properties in Solana's 11 Colombian blocks.
Company Net Reserves - June 30, 2007
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Oil (mbbls) Gas (mcf)
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Reserve Category Yalea Guayuyaco Juanambu Costayaco TOTAL Guepaje
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Proved
- Producing 58 145 - - 203 1,938
- Non Producing - 319 231 811 1,361 -
- Undeveloped - 107 - 348 455 -
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Total Proved 58 571 231 1,159 2,019 1,938
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Probable 8 156 331 2,007 2,502 253
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Total Proved +
Probable 66 727 562 3,166 4,521 2,191
Possible - - 512 3,544 4,056 -
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Total Proved +
Probable + Possible 66 727 1,074 6,710 8,577 2,191
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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 new field discoveries; Juanambu-1 on the Guayuyaco Block and Costayaco-1 on the Chaza Block. Conversely, two operated wells in the Llanos Basin, Calcedonia-1 on the Guachiria Norte Block and Bevea-1 on the Gaviotas Block, have been drilled and abandoned. Solana looks forward to drilling results in the third quarter on the two operated shallower wells, Tres Curvas-1 and Cocodrilo-1, on the Catguas Block in the Catatumbo Basin.
By year end, Solana should have one Costayaco step out well drilled. The acquisition and processing phases of the Costayaco 3D seismic program should also be completed by year end.
Regulatory approval to start Juanambu-1 production should be obtained in the third quarter with production commencing at that time. Costayaco-1 production should also be initiated in the third quarter by trucking. Costayaco-1 production will be limited by trucking constraints.
Solana is currently interpreting the 320 km(2) 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.
In addition to development activity on Costayaco, Juanambu and possibly Tres Curvas and Cocodrilo, Solana looks forward to drilling five to six exploration wells in 2008.
Glenn Van Doorne, Chief Operating Officer of Solana, a Petroleum Geologist, with 30 years of experience and a member of the AAPG and the SPE, is the qualified person that has reviewed the technical reserve, resource, and drilling update information contained in these results.
OPERATING RESULTS
Selected Quarterly Information
The following table summarizes selected financial data for Solana for each of the two most recently completed financial three and six month periods ended June 30, 2007 and 2006.
Unless otherwise noted, all currency amounts are stated in US dollars.
June 2007 June 2006
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Three Six Three Six
Months Months Months Months
ended ended ended ended
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$ $ $ $
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Revenue
Production Revenue,
net of
Royalties 1,387,542 2,801,468 2,415,196 4,579,105
Operating costs 817,675 1,474,253 734,771 996,544
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569,867 1,327,215 1,680,425 3,582,561
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Expenses
General and
administrative 1,319,363 2,380,667 1,197,315 2,137,147
Depletion,
depreciation 945,635 2,212,543 957,026 2,012,567
Amortization 1,148,058 2,296,116 - -
Foreign exchange
Loss(gain) 199,233 224,888 870,582 1,118,541
Stock-based
compensation 59,823 528,958 228,640 519,830
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3,672,112 7,643,172 3,253,563 5,788,085
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Other income/(expenses)
Interest and other 339,285 470,399 382,474 730,475
Income taxes (39,257) (89,257) (46,010) (46,010)
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300,028 381,142 336,464 684,465
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Net income (loss) (2,802,217) (5,934,815) (1,236,674) (1,521,060)
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Net income (loss)
per share (0.03) (0.06) (0.01) (0.02)
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June 30, December 31,
2007 2006
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$ $
Share capital 130,998,659 130,998,659
Working capital 18,039,839 37,106,929
Petroleum and natural gas properties 70,078,418 54,313,189
Total assets 103,635,387 106,651,944
Total current liabilities 5,632,373 3,404,607
Shareholders' equity 96,284,658 101,690,514
Cash dividends per share NIL NIL
Results of operations for the three and six month periods ending
June 30, 2007
This consolidated financial information includes the revenue and expenses of the Company for the six month periods ended June 30, 2007 and 2006. During the six month period ended June 30, 2007, revenue from operations amounted to $2,801,468. In this same period, operating costs were $1,474,253 resulting in an operating profit of $1,327,215. During the six month period ended June 30, 2006, the Company generated revenue of $4,579,105. In this same period operating costs were $996,544 resulting in an operating profit of $3,582,561. This lower operating profit in the period ending June 30, 2007 is mainly a consequence of lower international oil prices this period in comparison with the previous one.
The Company produced on average 468 boepd for the six months ended June 30, 2007 and 684 boepd for the six months ended June 30, 2006.
The Company's revenue, realized after royalties, operating costs and net backs for the three month period June 30, 2007 and 2006 are as follows:
June 30, 2007 June 30, 2006
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Three Six Three Six
Months Months Months Months
ended ended ended ended
Oil
Bopd - Average 242 296 422 410
Revenue, net of
royalties per barrel 52.65 44.51 51.77 54.95
Net operating costs
per barrel 21.15 19.09 19.35 11.81
Gas
Mscf per day - Average 1,019 1,034 1,297 1,233
Revenue, net of royalties
per Mscf 2.165 2.228 2.371 2.246
Net operating costs
per Mscf 0.877 0.890 0.580 0.538
General and administrative expenses for the three and six month periods
ended June 30, 2007 amounted to $1,319,363 and $2,380,667, respectively, in
comparison to the three and six month period ended June 30, 2006, which were
to $1,197,315 and $2,137,147, respectively.
The substantial components of general and administrative expenses are as
follows:
June 30, 2007 June 30, 2006
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Three Six Three Six
Months Months Months Months
ended ended ended ended
$ $ $ $
General office 158,482 217,076 482,437 708,015
Salaries & Benefits 707,559 1,506,934 465,598 752,263
Professional fees 135,429 212,503 115,506 319,647
Public company cost 156,548 202,160 129,813 265,179
Consulting fees 161,345 242,241 3,961 92,043
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1,319,363 2,380,667 1,197,315 2,137,147
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General office expenses decreased in 2007 mainly due to the recovery of overhead from partners and office cost optimization initiatives. Salaries & Benefits significantly increased due to labor contract termination costs resulting from the Company's restructuring process. Professional fees and public company costs are mainly related with finance and legal expenses, which were higher in the previous year due to the issuance of capital in April. Consulting fees are related to more external technical support and increased in accordance with Company activity levels.
Depletion, depreciation and accretion amounted to $945,635 and $2,212,543 for the three and six month periods ended June 30, 2007, compared to the same periods in 2006, which were $957,026 and $2,012,567 respectively. The variance is due mainly to a substantial increase in the depletable base partially compensated by the impact of the booking of additional reserves.
The foreign exchange loss amounted to $199,233 and $224,888 for the three and six month periods ended June 30, 2007, reflecting variations of the Canadian dollar against the U.S. dollar during the three and the six month periods ended June 30, 2007, compared to $870,581 and $1,118,542 for same periods ended June 30, 2006. The main reason for this variance is related to the adoption of the US dollar as reporting currency from October 1, 2006 and the implementation of a foreign exchange protection strategy in 2007.
Stock-based compensation amounted to $59,823 and $528,958 for the three and six month period ended June 30 2007, respectively, as compared to $228,640 and $519,830 for same periods ended June 30, 2006. The decrease in the first half of 2007, in comparison with the first half of 2006 is due to both lower market value and less outstanding options resulting from the termination and expiry of options associated with the labor contracts terminated in 2007.
Other income and expenses relate to interest income amounting to $339,285 and $470,399 for the three and six month periods ended June 30, 2007, respectively, compared to $382,474 and $730,475 for the same periods ended June 30, 2006. The decrease is due to the lower cash balances held throughout the current period.
The resulting net losses, amounting to $2,802,217 and $5,934,815 for the three and six month periods ended June 30, 2007, respectively, compared with $1,236,674 and $1,521,060 for the same periods ended June 30, 2006, are representative of the higher operations activity level of operations in Colombia and are affected mainly by significantly higher depletion charges and the amortization of intangible assets, as a consequence of the Breakaway acquisition in October last year.
Selected Quarterly Financial Information
The following table sets out selected unaudited quarterly financial information of Solana and is derived from unaudited quarterly financial statements prepared by management. Solana's interim financial statements prepared in accordance with Canadian generally accepted accounting principles and are expressed in US dollars.
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June 30, Mar 31, Dec 31, Sep 30,
2007 2007 2006 2006
Additions to Petroleum
and Natural Gas
properties 10,486,480 7,420,560 7,902,112 4,402,811
Total revenues 1,726,827 1,545,040 2,049,754 3,652,608
General and
administrative
expenses 1,319,363 1,061,304 2,042,166 423,640
Depletion,
depreciation
and accretion 945,635 1,266,908 3,958,215 886,985
Impairment - - 29,822,544 -
Foreign exchange
(gain) loss 199,233 25,655 160,105 (3,424,333)
Stock-based
compensation 59,823 469,135 783,233 209,875
Loss after
income tax (2,802,217) (3,132,598) (31,076,705) (4,989,157)
Loss per share
(basic and diluted) (0.03) (0.03) (0.34) (0.09)
Jun 30, Mar 31, Dec 31, Sep 30,
2006 2006 2005 2005
Additions to
Petroleum and
Natural Gas
properties 8,876,927 6,406,280 10,275,878 5,864,257
Total revenues 2,797,670 2,511,910 3,145,166 2,008,396
General and
administrative
expenses 1,197,315 939,831 960,537 591,813
Depletion,
depreciation
and accretion 957,026 1,055,540 3,976,602 324,854
Foreign exchange
(gain) loss 870,581 247,961 (282,610) 196,813
Stock-based
compensation 228,640 291,191 653,304 361,237
Loss after income tax (1,236,674) (284,386) (1,951,707) (627,040)
Loss per share
(basic and diluted) (0.01) (0.01) (0.05) (0.01)
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LIQUIDITY
Solana's working capital decreased from $29,587,287 at March 31, 2007, to $18,039,839 June 30, 2007, largely due to expenditure on the Company's petroleum and natural gas properties.
The Company's cash balances at June 30, 2007 amounting to $18,158,274 and $1,026,937 in restricted cash are committed to the Company's planned capital expenditure program in Colombia. The Company may require additional financing in order to fund its ongoing exploration, appraisal and development programs. Management intends to cover the exploration shortfall through strategic farm-outs or other means, and the costs of the ongoing appraisal and development program through debt or by other means.
The Company does not have any long term debt.
SUMMARY OF CASH INFLOWS AND OUTFLOWS
The company incurred cash outflows from operations amounting to $696,437 and $804,160 for the three and six month periods ended June 30, 2007, compared to the same periods in 2006 which incurred cash inflows amounting to $7,265 and $1,606,186. This is substantially due to the impact of lower international oil prices these periods in comparison with the previous ones.
Solana's net cash inflow from financing activities amounted to $23,711 for the six month period ended June 30, 2007, compared to $34,440,170 for the six month period ended June 30, 2006, due to the private placement completed in April 2006.
The Company incurred cash outflows from its investing activities of $10,108,756 and $14,056,375 for the three and six month periods ended June 30, 2007 as compared to $8,315,692 and $16,139,492 for the three and six month periods ended June 30, 2006. The most significant cash outflow component for the six month period ended June 30, 2007 was $17,907,040 of expenditures for petroleum and natural gas properties.
RELATED PARTY TRANSACTIONS
The Company paid $28,158 in management fees in the current six month period ended June 30, 2007 to a company controlled by a director of the Company. These fees are included in general and administrative expense.
CAPITALIZATION
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, June 30, 2007 95,876,792 130,998,659
-------------------------------------------------------------------------
Continuity of stock options Number
-------------------------------------------------------------------------
Balance, December 31, 2006 4,350,000
Issued 200,000
Exercised -
Expired 1,065,000
-------------------------------------------------------------------------
Balance, June 30, 2007 3,485,000
-------------------------------------------------------------------------
Continuity of warrants Number
-------------------------------------------------------------------------
Balance, December 31, 2006 10,000,000
Issued -
Exercised -
Expired -
-------------------------------------------------------------------------
Balance, June 30, 2007 10,000,000
-------------------------------------------------------------------------
DISCLOSURE CONTROLS AND PROCEDURES
Management has evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 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 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 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 and oil an 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 operation, 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 Operation
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 facilities, 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 cost are not impaired and do not exceed the fair value of the properties. The cost 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 impaired 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 products 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
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six-Month Periods Ended
June 30, 2007 and 2006
(Unaudited)
Restated
The attached interim consolidated financial statements have been restated
to reduce depletion, depreciation and accretion expense by $800,000 for
the three month period ended June 30, 2007, which results in a decrease
in the net loss for the same period by $800,000, from $3,602,217 to
$2,802,217; and by $1,600,000 for the six month period ended June 30,
2007, which results in a decrease in the net loss for the same period by
$1,600,000 from $7,534,815 to $5,934,815.
SOLANA RESOURCES LIMITED
CONSOLIDATED BALANCE SHEET
(Unaudited)
Expressed in US Dollars
June 30 December 31
2007 2006
$ $
--------------------------
ASSETS
Current:
Cash and cash equivalents 18,158,274 29,909,168
Cash in trust 1,026,937 3,274,262
Accounts receivable - trade 2,726,014 1,472,209
- cash calls 1,260,222 4,825,589
Prepaid expenses 500,765 1,030,308
------------- ------------
23,672,212 40,511,536
Deposits (Note 3) 3,046,750 3,041,509
Petroleum and natural gas properties 70,078,418 54,313,189
Intangible assets 5,750,626 8,036,403
Other capital assets 789,360 543,080
Investment (Note 4) 298,021 206,227
------------- ------------
79,963,175 66,140,408
------------- ------------
103,635,387 106,651,944
LIABILITIES
Current:
Accounts payable and accrued liabilities
- trade 3,282,103 3,404,607
- cash calls 2,350,272 -
------------- ------------
5,632,375 3,404,607
Asset retirement obligations (Note 5) 1,668,356 1,556,823
Income tax liability 50,000 -
------------- ------------
7,350,731 4,961,430
SHAREHOLDERS' EQUITY
Share capital (Note 6) 130,998,659 130,998,659
Contributed surplus (Note 6) 5,564,033 5,035,075
Accumulated other comprehensive income
(Note 2) 5,791,923 5,791,923
Deficit (46,069,959) (40,135,143)
------------- ------------
96,284,656 101,690,514
------------- ------------
103,635,387 106,651,944
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
(Unaudited)
Expressed in US Dollars
June 30, 2007 June 30, 2006
Three months Six months Three months Six months
ended ended ended ended
$ $ $ $
------------ ------------ ------------ ------------
Revenue
Oil and gas
revenues, net
of royalties 1,387,542 2,801,468 2,415,196 4,579,105
Interest 339,285 470,399 382,474 730,475
------------ ------------ ------------ ------------
1,726,827 3,271,867 2,797,670 5,309,580
------------ ------------ ------------ ------------
Expenses
Operating 817,675 1,474,253 734,771 996,544
General and
administrative 1,319,363 2,380,667 1,197,315 2,137,147
Depletion,
depreciation and
accretion 945,635 2,212,543 957,026 2,012,567
Amortization of
intangible assets 1,148,058 2,296,116 - -
Foreign exchange
loss 199,233 224,888 870,582 1,118,542
Stock-based
compensation
(Note 6) 59,823 528,958 228,640 519,830
------------ ------------ ------------ ------------
4,489,787 9,117,425 3,988,334 6,784,630
------------ ------------ ------------ ------------
Loss before taxes (2,762,960) (5,845,558) (1,190,664) (1,475,050)
Taxes 39,257 89,257 46,010 46,010
------------ ------------ ------------ ------------
Net loss (2,802,217) (5,934,815) (1,236,674) (1,521,060)
Deficit, beginning
of period (43,267,742) (40,135,144) (12,810,922) (12,526,536)
------------ ------------ ------------ ------------
Deficit, end
of period (46,069,959) (46,069,959) (14,047,596) (14,047,596)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share
(Note 7) (0.03) (0.06) (0.01) (0.02)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Expressed in US Dollars
June 30, 2007 June 30, 2006
Three months Six months Three months Six months
ended ended ended ended
$ $ $ $
------------ ------------ ------------ ------------
Net loss (2,802,217) (5,934,815) (1,236,674) (1,521,060)
Other comprehensive
loss - - - -
------------ ------------ ------------ ------------
Comprehensive income (2,802,217) (5,934,815) (1,236,674) (1,521,060)
---------------------------------------------------
SOLANA RESOURCES LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Expressed in US Dollars
June 30, 2007 June 30, 2006
Three months Six months Three months Six months
ended ended ended ended
$ $ $ $
------------ ------------ ------------ ------------
Operating activities
Net loss (2,802,217) (5,934,815) (1,236,674) (1,521,060)
Items not
involving cash:
Unrealized
foreign
exchange
loss (gain) (47,736) 93,038 58,273 594,849
Depletion,
depreciation
and accretion 945,635 2,212,543 957,026 2,012,567
Stock-based
compensation 59,823 528,958 228,640 519,830
Amortization of
intangibles 1,148,058 2,296,116 - -
------------ ------------ ------------ ------------
(696,437) (804,160) 7,265 1,606,186
Changes in non-cash
working capital (769,540) (680,556) (4,531,979) (4,286,240)
------------ ------------ ------------ ------------
(1,465,977) (1,484,716) (4,524,714) (2,680,054)
------------ ------------ ------------ ------------
Financing activities
Proceeds from the
exercise of options - - - 12,127
Proceeds from the
issuance of shares - - 36,725,684 36,725,684
Cost of issuance - - (2,297,641) (2,297,641)
Sale of capital
assets 23,711 23,711 - -
------------ ------------ ------------ ------------
23,711 23,711 34,428,043 34,440,170
------------ ------------ ------------ ------------
Investing activities
Additions to
petroleum and
natural gas
properties (10,486,480) (17,907,040) (8,876,927) (16,352,129)
Additions to
investments (91,794) (91,794) - -
Changes in non-
cash working
capital 2,266,859 5,749,428 522,467 523,344
Additions to
capital assets (349,834) (340,723) (95,017) (95,017)
Deposits (5,241) (5,241) 133,785 (215,690)
------------ ------------ ------------ ------------
(8,666,490) (12,595,370) (8,315,692) (16,139,492)
------------ ------------ ------------ ------------
Foreign exchange on
cash balances 58,626 58,156 - -
------------ ------------ ------------ ------------
Net increase
(decrease) in cash (10,050,130) (13,998,219) 21,587,637 15,620,624
Cash and cash
equivalents,
beginning of
period (Note 9) 29,235,341 33,183,430 15,946,996 21,914,009
------------ ------------ ------------ ------------
Cash and cash
equivalents,
end of period
(Note 9) 19,185,211 19,185,211 37,534,633 37,534,633
------------ ------------ ------------ ------------
SOLANA RESOURCES LIMITED
Notes to the Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 1. Basis of Presentation
The interim consolidated financial statements of Solana Resources Limited
("Solana" or the "Company") for the three and six-month periods ended
June 30, 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,
as the interim consolidated financial statements do not conform in all
respects to the note disclosure requirements of Generally Accepted
Accounting Principles for annual financial statements.
Note 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, except for the amount relating to the cumulative
translation adjustment as described below.
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.
Upon adoption of Section 3855, all financial instruments are classified
into one of the following five categories: held-for-trading, loans and
receivables, held-to-maturity investments, available-for-sale financial
assets or other financial liabilities. Subsequent measurement of the
financial instruments is based on their initial classification. Held-for-
trading financial assets are measured at fair value and changes in fair
value are recognized in net income. Available-for-sale financial
instruments are measured at fair value with changes in fair value
recorded in other comprehensive income until the instrument is
derecognized or impaired. All derivative instruments are recorded in the
balance sheet at fair value unless they qualify for the normal sale and
normal purchase exemption. All changes in their fair value are recorded
in net income. The other categories of financial instruments are
recognized at amortized cost using the effective interest rate method.
Upon adoption of these standards, the Company classified its cash and
cash equivalents as held-for-trading, which are measured at fair value
which equals the carrying value. Accounts receivable and deposits are
classified as loans and receivables, which are measured at amortized
cost. Investments has been classified as held-to-maturity investments.
Accounts payable are classified as other financial liabilities, which are
measured at amortized cost.
For financial assets and financial liabilities that are not classified as
held-for-trading, the transaction costs that are directly attributable to
the acquisition or issue of a financial asset or financial liability are
adjusted to the fair value initially recognized for that financial
instrument. These costs are expensed using the effective interest rate
method and are recorded within interest expense.
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 allows gains, losses, revenues and expenses from
the derivative and the item it hedges to be recorded in the statement of
loss 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.
On October 1, 2006, the Company changed its reporting currency from
Canadian dollars (Cdn$) to United States dollars ($). Financial
statements for prior periods presented have been translated from Canadian
dollars into United States dollars using the current rate method. Using
this method, all consolidated assets and liabilities have been translated
using the exchange rate at the balance sheet dates, while shareholders'
equity has been translated using the historical rates of exchange in
effect on the dates of the corresponding transactions. Consolidated
Statements of Loss and Deficit have been translated using the prevailing
average exchange rate for the period, except for equity transactions
which have been translated using the historical rates of exchange in
effect at the dates of the corresponding transactions.
All comparative financial information being presented has been restated
to reflect the Company's financial statements as if they had been
historically reported in United States dollars and this resulted in an
accumulated other comprehensive income of $5,791,923.
The adoption of these new standards had no impact on the Company's
retained earnings as at January 1, 2007.
The Company also adopted 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 period 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. This is
the case with Section 3862, "Financial Instruments Disclosures" and
Section 3863, "Financial Instruments Presentations" which are required to
be adopted for fiscal years beginning on or after October 1, 2007. The
Company will adopt these standards on January 1, 2008 and it is expected
the only effect on the Company will be additional disclosures regarding
the significance of financial instruments for 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, "Capital Disclosures" is effective for annual periods
beginning on or after October 1, 2007 and 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. The Company is currently evaluating the impact of the
adoption of this section on the consolidated financial statements.
Note 3. Deposits
The Company has funds on deposit totaling $3,046,750 at the end of
June 30, 2007 with the Colombian Agency of National Hydrocarbons ("ANH")
reflecting a percentage of the work commitments on certain ANH
exploration blocks. These funds will be returned to the Company by ANH on
completion of the work commitments on the Guachiria Norte, Catguas,
Guachiria Sur and Garibay Blocks.
Note 4. Investment
The Company has invested $298,021 in the Colombian Hydrocarbon Investment
Fund (the "Fund"), and expects to invest a maximum of US $500,000. The
Fund is managed by a U.S. 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, 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.
Note 5. Asset Retirement Obligations
The following table represents the reconciliation of the beginning and
ending obligations associated with the retirement of oil and gas
properties:
-------------------------------------------------------------------------
Asset retirement obligations December 31, 2006 $1,556,823
Liabilities incurred during period -
Liabilities settled during period -
Accretion 111,533
-------------------------------------------------------------------------
Asset retirement obligations, June 30,2007 $1,668,356
-------------------------------------------------------------------------
At June 30, 2007, the estimated total undiscounted amount required to
settle the asset retirement obligations was $2,100,000 (2006 -
$2,100,000). These obligations will be settled at the end of the useful
lives of the underlying assets, which currently extend up to seven 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%.
Note 6. Share Capital
Authorized share capital consists of an unlimited number of common
shares.
Continuity of common shares Number of Amount
shares $
-------------------------------------------------------------------------
Balance, December 31, 2006 and
June 30, 2007 95,876,792 130,998,659
-------------------------------------------------------------------------
Continuity of contributed surplus Amount
$
-------------------------------------------------------------------------
Balance, December 31, 2006 5,035,075
Stock based compensation expense 528,958
-------------------------------------------------------------------------
Balance, June 30, 2007 5,564,033
-------------------------------------------------------------------------
Continuity of stock options Number
-------------------------------------------------------------------------
Balance, December 31, 2006 4,350,000
Issued 200,000
Exercised -
Expired 1,065,000
-------------------------------------------------------------------------
Balance, June 30, 2007 3,485,000
-------------------------------------------------------------------------
Continuity of warrants Number
-------------------------------------------------------------------------
Balance, December 31, 2006 10,000,000
Issued -
Exercised -
Expired -
-------------------------------------------------------------------------
Balance, June 30, 2007 10,000,000
-------------------------------------------------------------------------
Warrant terms
-------------------------------------------------------------------------
Strike price CDN$2.00/share
Activation price Share price must exceed CDN$2.75 for 45 days
Expiry April 4, 2010
Stock-based compensation
For the first half of 2007, stock based compensation expense of $528,958
has been recorded in the Consolidated Statement of Loss and Deficit
(2006 - $519,830). The fair values of all common share options granted
are estimated on the date of grant using the Black-Scholes option-pricing
model. The fair value of options granted and the assumptions used in
their determination are as noted below:
Six months ended
June 30, 2007
-----------------
Risk-free interest rate (percent) 3.99
Expected life (years) 5
Volatility (percent) 96%
Expected annual dividend per share -
Fair value per option granted $0.91
Note 7. Per-Share Amounts
The weighted average number of common shares, basic and diluted,
outstanding during the six month period ended June 30, 2007 was
95,876,792 (June 30, 2006 - 68,547,423), and was 95,876,792
(2006 - 68,547,423) during the three month period ended June 30, 2007.
Note 8. Segmented Information
Three month period ended June 30, 2007
Canada Colombia Total
$ $ $
--------------------------------------
Revenue - 1,387,542 1,387,542
Operating costs - 817,675 817,675
--------------------------------------
- 569,867 569,867
--------------------------------------
General and administrative
expenses 259,262 1,060,101 1,319,363
Depletion, depreciation,
and accretion 3,359 942,276 945,635
Amortization of intangibles 1,148,058 - 1,148,058
Foreign exchange loss 3,101 196,132 199,233
Stock-based compensation 59,823 - 59,823
Interest income (328,744) (10,541) (339,285)
--------------------------------------
1,144,859 2,187,968 3,332,827
--------------------------------------
Loss before taxes (1,144,859) (1,618,101) (2,762,960)
Income taxes - 39,257 39,257
--------------------------------------
Net loss (1,144,859) (1,657,358) (2,802,217)
--------------------------------------
--------------------------------------
Identifiable assets 44,334,039 59,301,348 103,635,387
Capital expenditures - 10,486,480 10,486,480
--------------------------------------
--------------------------------------
Six month period ended June 30, 2007
Canada Colombia Total
$ $ $
--------------------------------------
Revenue - 2,801,468 2,801,468
Operating costs - 1,474,253 1,474,253
--------------------------------------
- 1,327,215 1,327,215
--------------------------------------
General and administrative
expenses 723,215 1,657,452 2,380,667
Depletion, depreciation,
and accretion 7,644 2,204,899 2,212,543
Amortization of intangibles 2,296,116 - 2,296,116
Foreign exchange loss 35,994 188,894 224,888
Stock-based compensation 528,958 - 528,958
Interest income (448,122) (22,277) (470,399)
--------------------------------------
3,143,805 4,028,968 7,172,773
--------------------------------------
Loss before taxes (3,143,805) (2,701,753) (5,845,558)
Income taxes - 89,257 89,257
--------------------------------------
Net loss (3,143,805) (2,791,010) (5,934,815)
--------------------------------------
--------------------------------------
Identifiable assets 44,334,039 59,301,348 103,635,387
Capital expenditures - 17,907,040 17,907,040
--------------------------------------
--------------------------------------
Three month period ended June 30, 2006
Canada Colombia Total
$ $ $
--------------------------------------
Revenue - 2,415,196 2,415,196
Operating costs - 734,771 734,771
--------------------------------------
- 1,680,425 1,680,425
--------------------------------------
General and administrative
expenses 377,485 819,830 1,197,315
Depletion, depreciation,
and accretion 1,912 955,114 957,026
Foreign exchange loss 128,585 741,996 870,581
Stock-based compensation 228,640 - 228,640
Interest income (379,132) (3,341) (382,473)
--------------------------------------
357,490 2,513,599 2,871,089
--------------------------------------
Loss before taxes (357,490) (833,174) (1,190,664)
Capital taxes - 46,010 46,010
--------------------------------------
Net loss (357,490) (879,184) (1,236,674)
--------------------------------------
--------------------------------------
Identifiable assets 40,316,100 99,055,028 139,371,128
--------------------------------------
--------------------------------------
Capital expenditures - 8,876,927 8,876,927
--------------------------------------
--------------------------------------
Six month period ended June 30, 2006
Canada Colombia Total
$ $ $
--------------------------------------
Revenue - 4,579,105 4,579,105
Operating costs - 996,544 996,544
--------------------------------------
- 3,582,561 3,582,561
--------------------------------------
General and administrative expenses 801,240 1,335,907 2,137,147
Depletion, depreciation,
and accretion 798 2,011,769 2,012,567
Foreign exchange loss 1,738,438 (619,897) 1,118,541
Stock-based compensation 519,830 - 519,830
Interest income (703,128) (27,347) (730,475)
--------------------------------------
2,357,178 2,700,432 5,057,610
--------------------------------------
Income (loss) before taxes (2,357,178) 882,129 (1,475,049)
Capital taxes - 46,011 46,011
--------------------------------------
Net (loss) income (2,357,178) 836,118 (1,521,060)
--------------------------------------
--------------------------------------
Identifiable assets 40,316,100 99,055,028 139,371,128
--------------------------------------
--------------------------------------
Capital expenditures - 16,352,129 16,352,129
--------------------------------------
--------------------------------------
Note 9. Supplemental cash flow information
At June 30, 2007, cash and cash equivalents includes $13,469,000
(December 31, 2006 - $23,213,000) in term deposits.
Cash interest paid - -
------------ ------------
Cash taxes paid - -
------------ ------------
Note 10. Related party transactions
Management fees in the amount of $28,158 (2006 - $26,877) 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.
Note 11. Income taxes
Subject to confirmation from taxation authorities, the Company has
approximately Cdn$9.9 million ($10 million) of Canadian non-capital loss
carry forwards which expire between 2007 and 2026. Additionally, the
Company had Colombian tax losses totaling Col 65 billion ($30 million)
which are available to be carried forward and used to offset future
Colombian taxable income up to a maximum of 25% per year. 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, to be recognized. 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.
Note 12. Commitments
The Company has remaining commitments to be met during 2007 of
$13.5 million.
Note 13. Financial instruments
The nature of crude oil and natural gas operations in Colombia expose the
Company to fluctuations in commodity prices and foreign currency exchange
rates. The Company does not manages these risks through the use of
derivative instruments.
Credit risk
A substantial portion of the Company's accounts receivable are with
customers in the oil 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, 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.
Fair value of financial instruments
The Company's financial instruments are classified as cash and cash
equivalents, cash in trust, accounts receivable and deposits and accounts
payable on the balance sheet. The carrying values and fair values of these
financial instruments at June 30, 2007 are not significantly different due to
the short term to maturity of these financial instruments.
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
(Colombia) Limited
Calgary, Alberta, T2R 1L5 Regatta Office Park, West Bay Road,
SMB P.O.Box 31106
Canada
Tel.: 403-770-1822 Gran Cayman, KYl-1205,
Fax.: 403-770-1826 Cayman Islands
Fax.: 345-945-7566 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: +571 629 1636
Fax: +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.