ProspEx Announces 2008 Third Quarter Results
(All amounts are in Canadian dollars, unless stated otherwise)
CALGARY, Nov. 6 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or "the
Company") announces its financial and operating results for the three and nine
month periods ended September 30, 2008 and provides comments on capital
markets.
"The ongoing global financial crisis has depressed the share price of all
Canadian oil and gas companies," said John Rossall, President and Chief
Executive Officer. "However, ProspEx continues to enjoy drilling success and
is in a strong financial condition to execute its winter drilling program."
HIGHLIGHTS
- The Company participated in 10 (5.2 net) wells in its three core
areas in the third quarter, with a 100% success rate.
- The Company's fourth quarter drilling program is currently underway
at Kakwa in the Deep Basin. The first well, an offset to ProspEx's
first quarter discovery, has been drilled and encountered reservoir
similar to the initial discovery wells. Three additional Kakwa wells
are planned prior to year end.
- In Ricinus, ProspEx closed its second asset acquisition of 2008,
increasing the Company's average working interest in the area to
approximately 90%. Two successful wells were drilled on the newly
acquired lands and tested at a combined rate of 600 net barrels of
oil equivalent ("boe") per day.
- Production for the third quarter averaged 3,850 boe per day.
Production for the third quarter decreased by 10% from the second
quarter as no material new production was brought onstream. The tie
in of wells at Salter and Edson has been delayed and production from
the Harmattan property has shown steeper declines than anticipated.
As a result, the Company is adjusting its annual average production
guidance from 4,200 to 4,500 boe per day to 4,000 boe per day.
- Cash flow before changes in operating non-cash working capital items
for the quarter was $10.6 million, an increase of 34% compared to the
prior year due to higher commodity prices.
- The Company showed earnings of $6.9 million in the third quarter,
driven by a $8.3 million unrealized mark to market gain on financial
instruments, as natural gas prices at quarter end had decreased
significantly compared to the pricing at the end of the second
quarter.
- Net debt excluding after tax unrealized financial instrument gains or
losses was $48.2 million at September 30, 2008. The Company's credit
facility limit remains at $65 million.
BUSINESS ENVIRONMENT
Recent months have shown a substantial deterioration in equity and credit
markets, as well as a significant decline in commodity prices. ProspEx's
philosophy is to maintain a strong balance sheet and preserve financial
flexibility in these uncertain times, while balancing the need to develop its
assets and capture new opportunities.
Given the current conditions in equity and credit markets, ProspEx
anticipates that access to capital will be restricted or unavailable to oil
and gas companies in the near term. The Company is therefore planning a
capital budget approximately equivalent to cash flow until market conditions
improve. Although the Company has not finalized a 2009 business plan, ProspEx
expects that a capital budget in 2009 equivalent to the Company's forecasted
cash flow at current forward prices should offset current production declines
and allow the Company to maintain current production levels through 2009. This
capital program is expected to be oriented towards developing higher growth
properties at Kakwa in the Deep Basin, and Ricinus in West Central Alberta, as
well as securing new opportunities.
ProspEx expects that capital and commodity markets will demonstrate
considerable volatility for the foreseeable future, and will continue to
monitor the markets carefully. Although there is uncertainty in the capital
markets, we remain confident that we have the right people, assets and the
financial flexibility to successfully execute on our upcoming winter drilling
program.
OPERATIONAL REVIEW
Capital Program
Capital expenditures for exploration and development (before acquisitions
and dispositions) were $12.7 million during the third quarter of 2008. ProspEx
participated in 10 (5.2 net) wells in the third quarter with a 100% success
rate. In addition to exploration and development spending, ProspEx closed an
acquisition of partner interests in the Ricinus area for consideration of
$3.4 million, effective July 1, 2008. These properties included approximately
60 boe per day of net production and 400 net acres of undeveloped land. This
acquisition is a follow up to the previous acquisition that closed in January,
2008, further consolidating the Company's Ricinus lands. ProspEx's average
Ricinus working interest is now approximately 90%, compared to 20% prior to
these two acquisitions.
During the third quarter, the Company enjoyed success in drilling on the
newly acquired Ricinus lands, with two 100% working interest wells
successfully drilled. Prior to the acquisition of partner interests, ProspEx's
average working interest in these two wells was only 5%. The first of these
wells is now on stream and producing at a rate of 400 net boe per day, the
second well tested at a rate of 200 net boe per day and is currently being
tied in to the Company's gathering system in the area. The Company believes
that these drilling results have validated upside not included in the
acquisition metrics. ProspEx has also acquired an additional 8 sections (5,120
acres) of mineral rights in the Ricinus area at recent Crown land sales,
further enhancing the Company's drilling inventory in the area.
Elsewhere in West Central Alberta, two (1.5 net) wells were drilled in
Harmattan and one (0.5 net) well was drilled in Willesden Green. The Willesden
Green well has been tied in and is producing at a rate of 130 (65 net) boe per
day. Tie-ins of the Harmattan wells are expected to be complete by year end.
In the Deep Basin, one (0.6 net) well was drilled in the third quarter
and is anticipated to be on production in mid-November. The Company's fourth
quarter drilling program is currently underway at Kakwa in the Deep Basin. The
first well (0.6 net) of the fourth quarter program, a trend extension well
approximately 2.5 kilometres from ProspEx's first quarter discovery, has been
drilled and encountered reservoir similar to the initial discovery wells.
Three additional Kakwa wells are planned prior to year end: one well on the
trend delineated by this first well, and two wells on new trends in the area.
At Edson, construction of a multi-well facility and pipeline tie-in at
the 8-13-54-19W5 well (ProspEx 35% working interest) should commence shortly.
At Medallion in Southern Alberta, four (0.6 net) successful partner
operated wells were drilled in the third quarter.
In July, the Company disposed of its lands in the Shaw area (2,500 net
undeveloped acres), which were due to expire in August of this year, for
consideration of $1.0 million.
Production
Production (boe/d) Q3 2008 Q2 2008 Q1 2008 Q4 2007 Q3 2007
-------------------------------------------------------------------------
Southern Alberta 847 1,009 1,109 1,134 1,190
West Central Alberta 1,847 1,904 1,237 1,305 1,466
Deep Basin 1,150 1,362 1,425 1,472 1,589
Other 6 10 10 11 9
-------------------------------------------------------------------------
Total 3,850 4,285 3,781 3,922 4,254
The third quarter production of 3,850 boe per day was a decrease of 10%
compared to the second quarter of this year. As no material new production was
brought onstream during the quarter, this decrease reflects natural decline of
the Company's production base. The tie-in of the Salter and Edson wells has
been delayed and production declines at the Harmattan Cardium pool have been
greater than anticipated in the Company's forecast. As a result of these
factors ProspEx's annual average production guidance for 2008 has been revised
downwards to 4,000 boe per day from our previously announced guidance of 4,200
to 4,500 boe per day.
The Company is currently producing at approximately 3,800 boe per day and
estimates that it has approximately 600 net boe per day of completed
production awaiting tie-in. "Exit" production at year end is expected to be
approximately 4,000 to 4,200 boe per day, depending on the exact timing of
production additions.
2008 Guidance Summary and Outlook
Revised Previous
4,200 to
Annual production 4,000 boe per day 4,500 boe per day
Capital expenditures $65 million $65 million
Operating costs $8.50 per boe $8.50 per boe
General and administration
("G&A") costs $2.15 per boe $2.15 per boe
Royalties 20% 20%
Guidance for 2008 is summarized in the table above. Guidance regarding
production, capital expenditures, operating costs, G&A costs and royalties may
constitute "financial outlooks" as contemplated by National Instrument 51-102
of the Canadian Securities Administrators entitled Disclosure Obligations. The
purpose of such financial outlooks is to forecast the anticipated operating
results of the Company in 2008 and 2009. Please be advised that the
information may not be appropriate for other purposes.
The Company is revising its guidance with respect to annual average
production as discussed above.
The Company's total 2008 capital budget, including acquisition
expenditures and disposition proceeds, is unchanged at $65.0 million. Guidance
with respect to operating costs, royalties and G&A expenses is also unchanged.
Reader's Advisory
ProspEx is a Calgary based junior oil and gas company focused on
exploration for natural gas in the Western Canadian Sedimentary Basin.
Certain information contained in this press release constitutes
forward-looking information or statements including, without limitation,
information and statements respecting: anticipated cash flow, capital
expenditures, production forecasts, production additions and deletions,
reserves and resources additions and deletions, additions to and deletions
from the Company's historical and future capital programs, acquisitions or
dispositions, operating expenses, G&A, royalties, expected timing of the
tie-in of wells, expected timing of the receipt of regulatory approvals and
expected timing of the completion of facilities projects.
Statements relating to "reserves" and "resources" are forward-looking
information as they involve the implied assessment, based on certain estimates
and assumptions that, among others, the reserves and resources described exist
in the quantities predicted or estimated.
Forward-looking information and statements are often, but not always,
identified by the use of words such as "anticipate", "seek", "believe",
"expect", "hope", "plan", "intend", "forecast", "target", "project",
"guidance", "may", "might", "will", "should", "could", "estimate", "predict"
or similar words or expressions suggesting future outcomes or language
suggesting an outlook. By their very nature, forward-looking information and
statements involve inherent risks and uncertainties, both general and
specific, and risks that predictions, forecasts, projections and other
forward-looking information and statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number of
important factors could cause the actual results to vary materially from the
forward-looking information or statements. These factors include, but are not
limited to: the volatility of oil and gas prices; production and development
costs and capital expenditures; the imprecision of reserve and resource
estimates and estimates of recoverable quantities of oil, natural gas and
liquids; the Company's ability to replace and expand oil and gas reserves;
environmental claims and liabilities; incorrect assessments of value when
making acquisitions or dispositions; increases in debt service charges; the
loss of key personnel; the marketability of production; defaults by third
party operators; unforeseen title defects; fluctuations in foreign currency
and exchange rates; inadequate insurance coverage; compliance with
environmental laws and regulations; changes in tax and royalty laws; the
Company's ability to access external sources of debt and equity capital; and
the Company's ability to obtain equipment in a timely manner to carry out
development activities. Further information regarding these factors may be
found under the headings "Risk Factors" and "Industry Conditions" in the
Company's most recent Annual Information Form, under the heading "Business
Risks" in the Company's Management's Discussion and Analysis for the year
ended December 31, 2007, and in the Company's most recent consolidated
financial statements, management information circular, quarterly reports,
material change reports and news releases available under the Company's
profile on SEDAR (www.sedar.com). Readers are cautioned that the foregoing
list of factors that may affect future results is not exhaustive. When relying
on our forward-looking statements to make decisions with respect to the
Company, investors and others should also carefully consider information set
forth in the section "Forward-Looking Information" of the Company's most
recent Annual Information Form respecting the assumptions upon which the
Company bases certain forward-looking information and the uncertainties
inherent in such assumptions.
The Company does not assume responsibility for the accuracy and
completeness of the forward-looking information or statements and such
information and statements should not be taken as guarantees of future
outcomes. Subject to applicable securities laws, the Company does not
undertake any obligation to revise these forward-looking information or
statements to reflect subsequent events or circumstances. Furthermore, the
forward-looking information contained in this press release are made as of the
date of this document and the Company does not undertake any obligation to
update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by applicable law. The forward-looking information and statements
contained in this press release are expressly qualified by this cautionary
statement.
For the purposes of this press release, boes have been calculated on the
basis of six thousand cubic feet of gas to one barrel of oil. The term boe may
be misleading, particularly if used in isolation. A boe conversion ratio of
six thousand cubic feet to one barrel is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
Netbacks are calculated by subtracting transportation costs, royalties
payable and operating costs from the average price received during the period.
ProspEx Resources Ltd.
Consolidated Highlights
For the period ended
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
(unaudited) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
FINANCIAL ($000's)
Oil and gas revenue 19,714 16,004 61,659 47,628
Net earnings (loss) 6,923 (1,352) 7,074 (911)
Cash flow (1) 10,626 7,912 34,734 26,634
Total assets 198,395 169,923 198,395 169,923
Total net debt (2) 48,191 44,497 48,191 44,497
Net earnings (loss) per share
($ per share)
Basic 0.12 (0.03) 0.12 (0.02)
Diluted 0.12 (0.03) 0.12 (0.02)
Cash flow per share
($ per share) (1)
Basic 0.19 0.14 0.61 0.49
Diluted 0.18 0.14 0.60 0.47
Weighted average
common shares (000's)
Basic 57,200 53,966 56,943 53,895
Diluted 58,215 56,247 58,339 56,369
PRODUCTION VOLUMES
Natural gas (mcf/d) 18,379 21,743 19,131 19,888
Natural gas liquids (bbls/d) 722 548 703 451
Oil (bbls/d) 65 82 80 125
------ ------ ------ ------
Total (boe/d) 3,850 4,254 3,972 3,891
SALES PRICES
Natural gas ($/mcf) 8.14 6.33 8.55 7.20
Natural gas liquids ($/bbl) 78.24 51.22 74.08 49.60
Oil ($/bbl) 125.88 99.52 117.58 71.60
------ ------ ------ ------
Total ($/boe) 55.65 40.89 56.65 44.83
NETBACKS ($/boe)
Price 55.65 40.89 56.65 44.83
Unrealized financial
instrument gain (loss) 23.36 (0.45) 0.90 (1.77)
Royalties (12.98) (7.79) (11.22) (6.96)
Operating costs (7.76) (8.42) (8.75) (7.94)
Transportation (0.91) (0.89) (0.96) (0.97)
General and administrative (2.55) (2.00) (2.35) (2.11)
------ ------ ------ ------
Total 54.81 21.34 34.27 25.08
CAPITAL ($000's)
Drilling and completions 8,761 9,585 20,905 20,454
Facilities 564 1,383 7,184 11,115
Land and lease 2,600 300 5,513 3,857
Seismic 19 1,081 2,846 2,096
Capitalized general and
administrative 749 704 2,243 1,938
------ ------ ------ ------
Total exploration &
development 12,693 13,053 38,691 39,460
Net property acquisitions 3,156 - 9,206 -
Other capital assets 1 49 159 157
------ ------ ------ ------
Total 15,850 13,102 48,056 39,617
(1) Cash flow is defined as cash flow from operations before changes in
operating non-cash working capital.
(2) Total net debt is defined as long term debt less working capital (or
plus working capital deficiency) excluding unrealized financial
instrument gain (loss) and associated future tax assets
(liabilities).
Cash flow and total net debt do not have standardized measures prescribed
by Canadian generally accepted accounting principles and therefore may
not be comparable with calculation measures for other issuers.
MANAGEMENT DISCUSSION & ANALYSIS
Management's Discussion and Analysis ("MD&A") is management's assessment
of the financial and operating results of ProspEx Resources Ltd. ("ProspEx" or
the "Company") as well as a prospective view of the Company's activities. The
MD&A is for the three and nine months ended September 30, 2008, and was
prepared as at November 6, 2008. The MD&A should be read in conjunction with
the audited consolidated financial statements and MD&A for the year ended
December 31, 2007 including the notes related thereto and the consolidated
financial statements for the three and nine months ended September 30, 2008
together with the notes related thereto. The reader should be aware that
historical results are not necessarily indicative of future performance.
RESULTS OF OPERATIONS
The third quarter of 2008 was highlighted by positive drilling results in
a deteriorating commodity price environment. Realized natural gas prices of
$8.14 per million cubic feet ("mcf") were down 14% from the second quarter of
2008, although prices increased 29% from $6.33 per mcf in the same quarter
last year. The Company participated in drilling 10 (5.2 net) wells in the
third quarter with a 100% success rate. The drilling activity was mainly in
the West Central area with positive results in Ricinus, Harmattan and
Willesden Green. The new production associated with this drilling program is
expected to be on stream over the fourth quarter. The Company saw a 10%
decrease in production from the second quarter of 2008 to 3,850 barrels of oil
equivalent ("boe") per day. With no new wells coming on stream in the third
quarter, the decrease in production from the second quarter is a result of
natural declines on the Company's current production base.
Net Earnings and Cash Flow
Cash flow for the third quarter of 2008 was $10.6 million, an increase of
34% from the same period of 2007. This was driven by a 36% increase in average
realized prices and a 17% reduction in operating costs.
During the third quarter of 2008, the Company reported net earnings of
$6.9 million, an $8.3 million increase over the net loss of $1.4 million in
the same period of 2007. The increase in earnings was due to stronger
commodity prices, reduced operating costs and an unrealized gain on financial
instruments during the third quarter of 2008.
For the nine months ending September 30, 2008, net earnings increased
$8.0 million to $7.1 million compared to a net loss of $0.9 million in the
same period of 2007.
Revenue
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Natural gas $ 15,214 $ 11,171 $ 47,557 $ 36,805
Realized (loss) gain on
financial instruments (1,451) 1,496 (2,758) 2,264
-------------------------------------------------------------------------
Total natural gas 13,763 12,667 44,799 39,069
Oil 750 753 2,583 2,444
Natural gas liquids 5,201 2,584 14,277 6,115
-------------------------------------------------------------------------
Oil and gas revenue 19,714 16,004 61,659 47,628
Unrealized financial
instrument gain (loss) 8,277 (175) 977 (1,876)
-------------------------------------------------------------------------
Total revenue $ 27,991 $ 15,829 $ 62,636 $ 45,752
------------------------------------------------------------------------
Third quarter oil and gas revenue increased $3.7 million or 23% to
$19.7 million in 2008 from $16.0 million in the third quarter of 2007 as a
result of a 36% increase in average realized prices offset by a 9% decrease in
production. The Company experienced significant increases in natural gas
liquids ("NGL") revenues as a result of new liquid rich production in both the
Ricinus and Harmattan areas. Third quarter 2008 total revenue of $28.0 million
was an increase of $12.2 million or 77% from $15.8 million in the same period
of 2007 for the reasons mentioned above, as well as an increase in the
unrealized financial instrument gain of $8.5 million, as natural gas prices
have decreased from the second quarter.
For the nine months ending September 30, 2008 total revenue was
$62.6 million representing an increase of $16.9 million or 37% increase over
the same period of 2007. This was due to a 26% increase in average prices as
well as a slight increase in production.
Production
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Area (boe/d)
------------
Deep Basin 1,150 1,589 1,312 1,378
West Central Alberta 1,847 1,466 1,663 1,344
Southern Alberta 847 1,190 988 1,158
Other Areas 6 9 9 11
------ ------ ------ ------
3,850 4,254 3,972 3,891
-------------------------------------------------------------------------
Product
-------
Natural gas (mcf/d) 18,379 21,743 19,131 19,888
Natural gas liquids (bbls/d) 722 548 703 451
Oil (bbls/d) 65 82 80 125
------ ------ ------ ------
Total (boe/d) 3,850 4,254 3,972 3,891
-------------------------------------------------------------------------
The third quarter production of 3,850 boe per day was a decrease of 10%
compared to the second quarter of this year. As no material new production was
brought on stream during the quarter, this decrease reflects natural decline
of the Company's production base. The tie-in of the Salter and Edson wells has
been delayed and production declines at the Harmattan Cardium pool have been
greater than anticipated in the Company's forecast. As a result of these
factors ProspEx's annual average production guidance for 2008 has been revised
downwards to 4,000 boe per day from our previously announced guidance of 4,200
to 4,500 boe per day.
At the date of this MD&A, the Company is currently producing at
approximately 3,800 boe per day and estimates that it has approximately
600 net boe per day of completed production awaiting tie-in. "Exit" production
at year end is expected to be approximately 4,000 to 4,200 boe per day,
depending on the exact timing of production additions.
ProspEx's overall production mix for the third quarter and nine months
ending September of 2008 was 80% natural gas, with the remaining 20% being
NGLs and oil. The production mix for both the third quarter and the nine
months ending September 2007 was 85% gas, 15% NGLs and oil. The changes seen
in 2008 are a reflection of the liquid rich production in the Harmattan and
Ricinus areas which increased the Company's NGL and oil volumes.
Commodity Pricing
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
ProspEx Average Prices 30, 2008 30, 2007 30, 2008 30, 2007
------------------------------------------
Natural gas ($/mcf)
Sales price $ 9.00 $ 5.58 $ 9.08 $ 6.78
Realized gain (loss)
on financial instrument (0.86) 0.75 (0.53) 0.42
------------------------------------------
Average realized natural
gas price 8.14 6.33 8.55 7.20
Oil ($/bbl) 125.88 99.52 117.58 71.60
NGL ($/bbl) 78.24 51.22 74.08 49.60
------------------------------------------
Average realized price ($/boe) 55.65 40.89 56.65 44.83
Unrealized financial
instrument gain (loss) ($/boe) 23.36 (0.45) 0.90 (1.77)
------------------------------------------
Total average price ($/boe) $ 79.01 $ 40.44 $ 57.55 $ 43.06
------------------------------------------
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
Benchmark pricing 30, 2008 30, 2007 30, 2008 30, 2007
------------------------------------------
AECO C Spot ($/mcf) $ 7.75 $ 5.18 $ 8.62 $ 6.55
Edmonton Par -
light oil ($/bbl) $ 121.74 $ 79.95 $ 115.11 $ 72.99
------------------------------------------
Average natural gas sales prices increased 61% to $9.00 per mcf in the
third quarter of 2008, compared to $5.58 per mcf in the third quarter of 2007.
During the third quarter of 2008, AECO C daily spot prices for natural gas
increased 50% per mcf compared to the third quarter of 2007 and the AECO
monthly index for the same period increased 65% per mcf.
Realized natural gas prices for the third quarter of 2008 averaged $8.14
per mcf, an increase of 29% from $6.33 per mcf realized in the third quarter
of 2007. For the nine months ending September 30, 2008 the realized natural
gas price increased 19% to $8.55 per mcf compared to $7.20 per mcf for the
same period of 2007. Overall 2008 realized natural gas prices have increased
reflecting the improvements in the commodity markets for 2008.
Oil prices received for the third quarter of 2008 were $125.88 per barrel
("bbl"). This is a 26% increase from the $99.52 per bbl received in the third
quarter of 2007, consistent with the increase in benchmark pricing. For the
nine months ending September 30, 2008, the oil price received was $117.58 per
bbl, an increase of 64% from the same period of 2007.
The price realized for NGLs in the third quarter of 2008 was $78.24 per
bbl, an increase of 53% from $51.22 per bbl in the third quarter of 2007. On a
year to date basis, the NGL price as of September 30, 2008 was $74.08 per bbl
which is an increase of 49% over the $49.60 per bbl received at September 30,
2007. The increases in NGL prices in the third quarter were due to the same
reasons mentioned above as NGL prices tend to follow the same trends as oil.
Financial Instruments
For the quarter and nine months ended September 30, 2008, the Company's
risk management program resulted in net realized losses of $1.5 million and
$2.8 million respectively, compared to a $1.5 million net realized gain and a
$2.3 million net realized gain for the same periods in 2007.
The financial instruments open as of September 30, 2008 are described in
detail in the financial instruments, risk management and capital management
strategy note to the consolidated financial statements (note 5). The impact of
the changes in the fair values of open financial instruments was an unrealized
gain of $8.3 million for the quarter ended September 30, 2008 and an
unrealized gain of $1.0 million for the first nine months of the year. This
compares to an unrealized loss of $0.2 million for the third quarter of 2007
and an unrealized loss of $1.9 million for the first nine months of 2007.
Decreases in forward prices have lead to the reversal of the losses seen in
the first half of the year on the Company's open financial instruments.
Royalty Expenses
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Crown $ 3,152 $ 1,802 $ 8,679 $ 4,917
Freehold and gross overriding 1,445 1,249 3,536 2,474
-------- -------- -------- --------
Total Royalties $ 4,597 $ 3,051 $ 12,215 $ 7,391
-------------------------------------------------------------------------
$ per boe $ 12.98 $ 7.79 $ 11.22 $ 6.96
As a percentage of oil and
gas revenue 23% 19% 20% 16%
-------------------------------------------------------------------------
In the third quarter of 2008, royalties totaled $4.6 million or 23% of
revenue compared to last year's $3.0 million or 19% of revenue. During the
first nine months of 2008 royalties totaled $12.2 million or 20% of revenue
compared to $7.4 million or 16% of revenue for the same period of 2007. The
Company's 2008 royalty rate is expected to be higher than 2007 as a result of
the shift in the production mix from the lower royalty rate wells in Medallion
to higher royalty rate wells in West Central Alberta and the Deep Basin.
ProspEx is required to pay the Province of Alberta and other royalty
owners for the right to produce minerals owned by them. Such royalty payments
are subject to change and any changes may have an adverse impact on the
profitability of a project.
Operating Costs
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Operating costs ($000's) $ 2,750 $ 3,298 $ 9,524 $ 8,435
Operating costs ($/boe) $ 7.76 $ 8.42 $ 8.75 $ 7.94
-------------------------------------------------------------------------
Operating costs for the third quarter were $2.8 million or $7.76 per boe,
compared to $3.3 million or $8.42 per boe in the third quarter of 2007.
Operating costs for the third quarter were lower than the second quarter of
2008 as a result of a reversal of previously accrued processing fees in the
Deep Basin area.
Operating costs for the first nine months of the year were $9.5 million
or $8.75 per boe compared to $8.4 million or $7.94 per boe for the first nine
months of 2007. Operating costs for the first quarter of 2008 were high as a
result of additional spending required to integrate newly acquired properties
and the cost to address operational issues in the Medallion area. Due to
higher costs early in the year, the nine months ending September 2008 remain
higher than the prior year despite lower costs in the current quarter.
Transportation Expenses
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Transportation expenses
($000's) $ 322 $ 349 $ 1,042 $ 1,032
Transportation expenses
($/boe) $ 0.91 $ 0.89 $ 0.96 $ 0.97
-------------------------------------------------------------------------
Transportation expense per boe for the three and nine months ended
September 30, 2008 is consistent with the comparable periods of 2007.
General and Administrative Expenses
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Gross general and
administrative $ 1,870 $ 1,653 $ 5,490 $ 4,896
Recoveries (217) (166) (688) (714)
Capitalized expenses (749) (704) (2,242) (1,938)
-------- -------- -------- --------
Net general and
administrative expenses $ 904 $ 783 $ 2,560 $ 2,244
-------- -------- -------- --------
Net general and
administrative expenses
($/boe) $ 2.55 $ 2.00 $ 2.35 $ 2.11
-------------------------------------------------------------------------
Gross general and administrative costs increased by $0.6 million in the
nine months ended September 30, 2008 compared to the same period in 2007, due
to higher salary expenses in the current year. Reduced production volumes and
higher salary costs resulted in the $0.55 per boe difference in net general
and administrative expenses in the third quarter of 2007 compared to the same
quarter in 2008.
Interest and Bank Charges
Interest and bank charges of $0.4 million in the third quarter and
$1.5 million year to date in 2008 were slightly lower compared to the prior
year amounts of $0.6 million and $1.5 million, although average debt levels
have remained consistent over the past year, slight interest rate decreases in
the quarter have resulted in interest expense reductions.
Depletion, Depreciation and Accretion
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Depletion, depreciation
and accretion ($000's) $ 9,006 $ 9,270 $ 25,066 $ 25,145
Depletion, depreciation
and accretion ($/boe) $ 25.43 $ 23.69 $ 23.03 $ 23.67
-------------------------------------------------------------------------
Depletion, depreciation and accretion expense per boe in the third
quarter and first nine months of 2008 was $25.43 per boe and $23.03 per boe
respectively. This is an increase from the third quarter 2007 rate of $23.69
per boe and a decrease from the first nine months of 2007 rate of $23.67 per
boe.
Stock-Based Compensation
Stock-based compensation expenses were down slightly for the three and
nine months ended September 30, 2008 from $0.3 million and $0.8 million
respectively in 2007, to $0.2 million and $0.7 million respectively in 2008.
Costs are down as the initial grant of stock options and special performance
units in 2004 have been fully recognized, with no new options granted in the
third quarter of 2008.
Income Taxes
In the third quarter of 2008, the Company's future income tax expense was
greater than the same period in 2007 at $2.8 million compared to a reduction
of $0.5 million, as a result of the $8.3 million increase in the unrealized
financial instrument gain from June 30, 2008. For the nine months ending
September 30, 2008 future income tax expense totaled $3.0 million, down from
$0.1 million in September of 2007, for the same reason as noted above.
During the first quarter of 2008, the renouncement of flow-through shares
resulted in an increase of future tax liability of $2.2 million (2007 -
$4.5 million).
Estimated tax pools as at September 30:
($000's) 2008 2007
-------------------------------------------------------------------------
Canadian development expense $ 34,120 $ 32,020
Canadian exploration expense 29,961 34,951
Canadian oil & gas property expense 39,012 29,634
Undepreciated capital cost 43,859 45,569
Other 5,003 4,654
-------------------------------------------------------------------------
$ 151,955 $ 146,828
-------------------------------------------------------------------------
ProspEx has met its commitment to incur $8.0 million in qualifying
Canadian exploration expenditures related to the December 2007 flow-through
share financing.
Capital Expenditures
Capital expenditures were $15.9 million during the third quarter of 2008,
compared to expenditures of $13.1 million in the third quarter of 2007.
Details of these expenditures for the periods ended September 30 were as
follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Drilling and completions $ 8,761 $ 9,585 $ 20,905 $ 20,454
Facilities 564 1,383 7,184 11,115
Land and lease 2,600 300 5,513 3,857
Seismic 19 1,081 2,846 2,096
Capitalized G&A 749 704 2,243 1,938
-------- -------- -------- --------
Exploration & development
capital expenditures 12,693 13,053 38,691 39,460
Net property acquisitions 3,156 - 9,206 -
Other capital expenditures 1 49 159 157
-------------------------------------------------------------------------
Total capital expenditures $ 15,850 $ 13,102 $ 48,056 $ 39,617
-------------------------------------------------------------------------
Of the $12.7 million invested in exploration and development capital
expenditures, $2.3 million was spent in the Deep Basin, $8.9 million in West
Central Alberta, $0.4 million in Southern Alberta, and $1.1 million on
corporate items. The Company participated in drilling 10 (5.2 net) wells in
the third quarter with a 100% success rate. The drilling activity was mainly
in the West Central area with positive results in Ricinus, Harmattan and
Willesden Green. Capital spent in the third quarter on land acquisitions were
focused in the Company's Ricinus and Deep Basin areas. The property
acquisition was in the Ricinus area and is described in more detail below.
In the first nine months of 2008, $21.0 million was spent to drill and
complete 17 (9.0 net) wells with a 95% net success rate.
The Company has participated in $9.2 million of acquisition and
disposition activity during the first nine months of the year. During the
first quarter of 2008 the Company acquired certain properties in the Ricinus
area of Alberta for $11.5 million after closing adjustments. These properties
consist of 16 (11.9 net) wells with net production at acquisition of
approximately 360 boe per day. In the second quarter of 2008 the Company sold
certain non-operated properties in the Granum area for net proceeds of
$5.4 million after closing adjustments. These properties consisted of 5 (1.0
net) producing wells with net production at disposition of approximately 110
boe per day. In the third quarter of 2008 the Company acquired additional
properties in the Ricinus area of Alberta for $3.4 million. These properties
consist of 13 (1.2 net) producing wells, with net production of approximately
60 boe per day and 400 net acres of undeveloped land.
Business Environment
Recent months have shown a substantial deterioration in equity and credit
markets, as well as a significant decline in commodity prices. ProspEx's
philosophy is to maintain a strong balance sheet and preserve financial
flexibility in these uncertain times, while balancing the need to develop its
assets and capture new opportunities.
Given the current conditions in equity and credit markets, ProspEx
anticipates that access to capital will be restricted or unavailable to oil
and gas companies in the near term. The Company is therefore planning a
capital budget approximately equivalent to cash flow until market conditions
improve. Although the Company has not finalized a 2009 business plan, ProspEx
expects that a capital budget in 2009 equivalent to the Company's forecasted
cash flow at current forward prices should offset current production declines
and allow the Company to maintain current production levels through 2009. This
capital program is expected to be oriented towards developing higher growth
properties at Kakwa in the Deep Basin, and Ricinus in West Central Alberta, as
well as securing new opportunities. ProspEx expects that capital and commodity
markets will demonstrate considerable volatility for the foreseeable future,
and will continue to monitor the markets carefully.
Liquidity & Capital Resources
At September 30, 2008, ProspEx had the following financial resources
available to fund its capital expenditure program.
($000's)
-------------------------------------------------------------------------
Working capital deficiency, excluding financial instrument
gains/losses and related tax $ (10,081)
Long-term debt (38,110)
Bank facilities available 65,000
-------------------------------------------------------------------------
Total capital resources available $ 16,809
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProspEx expects that it will be able to fund its remaining 2008 capital
program from operating cash flow and capital resources noted above.
On July 22, 2008, one of ProspEx's natural gas liquids purchasers
announced that it had filed for creditor protection. At September 30, 2008,
ProspEx has exposure of approximately $15,000 with this counterparty.
Subsequent to the quarter end, the Company obtained a counterparty
guarantee of its natural gas and liquid purchases from its major purchaser for
$5.5 million. The Company believes that this guarantee is sufficient to ensure
prompt payment for all transactions with this counterparty.
Bank Debt
At September 30, 2008 the Company had a $65.0 million credit facility
with a Canadian chartered bank. The facility is available by way of Canadian
prime and US base rate loans, LIBOR advances, bankers' acceptances and letters
of credit. Canadian prime rate loans, US base rate loans, and LIBOR advances
bear interest at Canadian prime, US base rate or LIBOR, as applicable, plus a
margin dependant upon the Company's debt/cash flow ratio as calculated in the
previous quarter. Stamping fees for bankers' acceptances are based on a rate
adjusted over the term to maturity plus a margin as described above. The
credit facility is fully revolving until June 30, 2009 and may be extended at
the mutual agreement of ProspEx and its lender for an additional year. If the
credit facility is not extended, a balloon payment is required on July 1,
2010. This facility is secured by a $200 million demand debenture and a first
floating charge on all petroleum and natural gas assets of ProspEx.
Share Capital
As at September 30, 2008, ProspEx had 57,383,377 common shares (2007 -
53,975,551), 2,018,054 warrants (2007 - 2,772,218), and 4,866,887 options
(2007 - 4,595,917) issued and outstanding. Each warrant and option, upon
exercise, entitles the holder to one common share.
As at November 6, 2008, ProspEx had 57,385,162 common shares,
2,016,269 warrants, and 4,866,887 options issued and outstanding.
Contractual Obligations
The Company has committed to certain payments as follows:
There-
Payments due ($000's) 2008 2009 2010 2011 2012 after
-------------------------------------------------------------------------
Long-term debt $ - - 38,110 - - $ -
Building lease 134 973 1,212 1,230 1,235 1,544
Process fees 126 400 300 47 - -
Transportation 246 598 78 - - -
Other 4 15 7 - - -
-------------------------------------------------------------------------
Total $ 510 1,986 39,707 1,277 1,235 $ 1,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProspEx has met its commitment to incur $8.0 million in qualifying
Canadian exploration expenditures related to the December 2007 flow-through
share financing.
Off-Balance Sheet Arrangements
The Company has not entered into any off-Balance Sheet transactions.
Summary of Quarterly Results
The following table summarizes the quarterly operating statistics of the
Company.
2008 2007
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial ($000's, except per
share amounts)
Oil and gas revenue 19,714 24,567 17,378 15,906
Net earnings (loss) 6,923 2,261 (2,110) (180)
Per share
- basic 0.12 0.04 (0.04) 0.00
- diluted 0.12 0.04 (0.04) 0.00
Average Daily Production
Oil (bbls/d) 65 108 68 125
NGL (bbls/d) 722 851 536 515
Natural Gas (mcf/d) 18,379 19,957 19,064 19,690
------ ------ ------ ------
Total (boe/d) 3,850 4,285 3,781 3,922
Operating Netbacks ($/boe)
Price(1) 55.65 63.00 50.50 44.09
Royalties (12.98) (11.97) (8.57) (5.41)
Transportation (0.91) (1.00) (0.96) (0.86)
Operating Cost (7.76) (8.39) (10.17) (8.06)
------ ------ ------ ------
Operating Netback 34.00 41.64 30.80 29.76
-------------------------------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Q3 Q2 Q1 Q4
-------------------------------------------------------------------------
Financial ($000's, except per
share amounts)
Oil and gas revenue 16,004 17,554 14,071 13,536
Net earnings (loss) (1,352) 2,235 (1,794) 2,143
Per share
- basic (0.03) 0.04 (0.03) 0.04
- diluted (0.03) 0.04 (0.03) 0.04
Average Daily Production
Oil (bbls/d) 82 210 83 184
NGL (bbls/d) 548 513 290 276
Natural Gas (mcf/d) 21,743 21,108 16,757 16,221
------ ------ ------ ------
Total (boe/d) 4,254 4,241 3,166 3,164
Operating Netbacks ($/boe)
Price(1) 40.89 45.48 49.38 46.50
Royalties (7.79) (3.97) (9.85) (7.16)
Transportation (0.89) (1.01) (1.03) (0.96)
Operating Cost (8.42) (7.86) (7.38) (7.39)
------ ------ ------ ------
Operating Netback 23.79 32.64 31.12 30.99
-------------------------------------------------------------------------
(1) Price excludes unrealized financial instrument gain or loss.
Revenue and net earnings are affected by prices, production volumes,
operating netback, taxation rates, the Company's risk management program and
depletion charges which are the result of the Company's success in adding new
proven oil and natural gas reserves.
Overall production volume trends are the result of exploration and
drilling success based on our capital expenditure program, however quarterly
volatility is impacted by the seasonality of the industry as well as facility
or pipeline restrictions and/or facility maintenance.
Operating netbacks are driven by price, operating costs and royalties.
The average price received fluctuates with trends in worldwide commodity
prices. Operating costs have increased due to growth in the proportion of
production from higher cost areas such as the Deep Basin and West Central
Alberta. Royalties are driven by the mix of Crown and freehold mineral rights
in the Company's production stream, as well as by various Crown royalty
incentive programs, changes to Crown royalty programs over time, and the terms
of negotiated freehold royalty arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted and Recent Pronouncements
Financial Instruments - Effective January 1, 2008 the Company adopted the
new accounting standards for disclosure required under CICA Handbook Section
3862 "Financial Instruments - Disclosures", which applies to both recognized
and unrecognized financial instruments. These disclosures, which include the
nature and extent of risks arising from financial instruments, are included in
note 5 of the unaudited financial statements of the Company for the third
quarter of 2008 (the "Third Quarter Financial Statements").
Capital Disclosures - Effective January 1, 2008, ProspEx adopted the new
requirements of the CICA for disclosure of the Company's objectives, policies
and processes for managing capital (Section 1535) as discussed in note 5 of
the Third Quarter Financial Statements.
Internal Control Reporting - On July 11, 2008, Canadian Securities
Administrators issued a staff notice accepting a replacement of the current
multilateral instrument 52-109, Certification of Disclosure in Issuers' Annual
and Interim Filings. The notice requires annual certification by the CEO and
CFO of the effectiveness of internal controls over financial reporting
("ICFR") as of the end of the financial year and disclosure conclusions
regarding the effectiveness of ICFR in the annual MD&A. This notice will apply
for the Company's year ended December 31, 2008. The Company expects to meet
the December 31, 2008 certification requirements.
Convergence with International Reporting Standards - On February 13,
2008, the Canadian Accounting Standards Board confirmed that the effective
date for the convergence of Canadian Generally Accepted Accounting Standards
for publicly accountable entities to International Financial Reporting
Standards will be January 1, 2011. As ProspEx will be required to report under
these new standards, the Company has started a preliminary assessment of the
potential impacts of this changeover and will develop its conversion plan
accordingly.
DISCLOSURE CONTROLS AND POLICIES
Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's CEO and CFO have
concluded, based on their evaluation as of September 30, 2008, that the
Company's disclosure controls and procedures as of the end of such period are
effective to provide reasonable assurance that material information related to
the Company, including its consolidated subsidiary, is made known to them by
others within those entities. It should be noted that while the Company's CEO
and CFO believe that the Company's disclosure controls and procedures provide
a reasonable level of assurance that they are effective, they do not expect
that the disclosure controls and procedures will prevent all errors and fraud.
A control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls that require
commenting on in the MD&A.
For the third quarter of 2008 there were no changes to the design of
internal controls over financial reporting.
ADVISORIES
Within the MD&A references are made to terms commonly used in the oil and
gas industry. "Cash flow" is not defined by GAAP in Canada and is referred to
as a non-GAAP measure. For the purposes thereof, "cash flow" is defined as
cash flow from operations before the change in operating non-cash working
capital. The MD&A contains the term "cash flow" which should not be considered
an alternative to, or more meaningful than "cash flow from operations" as
determined in accordance with GAAP. The Company considers cash flow to be a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund capital projects and to repay debt. Cash flow presented does
not have any standardized meaning prescribed by Canadian GAAP and therefore it
may not be comparable with the calculation of similar measures for other
entities. Cash flow per share is calculated using the same weighted average
number of common shares for the period as used in calculating the net earnings
per share calculation.
Boe amounts have been calculated using a conversion rate of six mcf of
gas to one barrel of oil. The term boe may be misleading if used in isolation.
A boe conversion ratio of one barrel of oil to six mcf of gas is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the well head.
"Netbacks" are calculated by subtracting transportation costs, royalties
payable, and operating costs from the average price received during the
period.
Forward-looking Information
Certain information regarding ProspEx including, without limitation,
management's assessment of future plans and operations, constitutes
forward-looking information or statements under applicable securities law and
necessarily involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without limitation, assumptions
and risks associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, royalty rates, imprecision of reserve
estimates, environmental risks, competition, incorrect assessment of the value
of acquisitions or dispositions, failure to realize the anticipated benefits
of acquisitions and ability to access sufficient capital from internal and
external sources.
The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonable by ProspEx at the time of preparation, may
prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of assumptions, factors and risks is not exhaustive. Additional information on
the foregoing assumptions, risks and other factors that could affect ProspEx's
operations or financial results are included in ProspEx's public disclosure
documents on file with Canadian securities regulatory authorities. In
particular see the Risk Factors and Industry Conditions sections of ProspEx's
most recent Annual Information Form. ProspEx's reports may be accessed through
the SEDAR website (www.sedar.com), at ProspEx's website (www.psx.ca) or by
contacting the Company directly. Consequently, there is no representation by
ProspEx that actual results achieved will be the same in whole or in part as
those set out in the forward-looking information.
Furthermore, the forward-looking information and statements contained in
this MD&A are made as of the date of this MD&A, and ProspEx does not undertake
any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. The forward-looking
information and statements contained herein are expressly qualified by this
cautionary statement.
ProspEx Resources Ltd.
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
(Stated in thousands of dollars) 2008 2007
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 10,727 12,900
Prepaid expenses 877 988
Unrealized financial instrument gain 1,191 214
--------------------------
12,795 14,102
Property, plant and equipment, net 185,600 161,663
--------------------------
$ 198,395 175,765
--------------------------
--------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 21,685 22,761
Future income tax liability (note 3) 351 69
--------------------------
22,036 22,830
Long term debt (note 2) 38,110 28,846
Asset retirement obligation 6,298 5,201
Future income tax liability (note 3) 8,329 3,145
--------------------------
Total liabilities 74,773 60,022
--------------------------
Shareholders' Equity
Share capital (note 4) 92,032 92,204
Contributed surplus (note 4) 6,591 5,614
Retained earnings 24,999 17,925
--------------------------
Total shareholders' equity 123,622 115,743
--------------------------
$ 198,395 175,765
--------------------------
--------------------------
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of Earnings (Loss), Comprehensive Earnings
and Retained Earnings
For the periods ended
(unaudited)
Three Three Nine Nine
months months months months
(Stated in thousands of ended ended ended ended
dollars, except per September September September September
share amounts) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Revenue
Oil and gas $ 19,714 16,004 61,659 47,628
Unrealized financial
instrument gain (loss) 8,277 (175) 977 (1,876)
Royalties (4,597) (3,051) (12,215) (7,391)
---------------------------------------------
23,394 12,778 50,421 38,361
---------------------------------------------
Expenses
Depletion, depreciation
and accretion 9,006 9,270 25,066 25,145
Operating 2,750 3,298 9,524 8,435
Transportation 322 349 1,042 1,032
General and administrative 904 783 2,560 2,244
Interest and bank charges 449 585 1,473 1,541
Stock-based compensation 236 307 667 828
---------------------------------------------
13,667 14,592 40,332 39,225
---------------------------------------------
Earnings (loss) before taxes 9,727 (1,814) 10,089 (864)
Income Taxes (note 3)
Future 2,804 (462) 3,015 47
---------------------------------------------
Net earnings (loss) and
comprehensive earnings
for the period 6,923 (1,352) 7,074 (911)
Retained earnings,
beginning of period 18,076 19,457 17,925 19,016
---------------------------------------------
Retained earnings,
end of period $ 24,999 18,105 24,999 18,105
---------------------------------------------
---------------------------------------------
Net earnings per share
Basic $ 0.12 (0.03) 0.12 (0.02)
---------------------------------------------
---------------------------------------------
Diluted $ 0.12 (0.03) 0.12 (0.02)
---------------------------------------------
---------------------------------------------
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of Cash Flows
For the periods ended
(unaudited)
Three Three Nine Nine
months months months months
ended ended ended ended
(Stated in thousands September September September September
of dollars) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Operations
Net earnings (loss)
for the period $ 6,923 (1,352) 7,074 (911)
Items not involving cash
Depletion, depreciation
and accretion 9,006 9,270 25,066 25,145
Stock-based compensation 236 307 667 828
Future income taxes 2,804 (462) 3,015 47
Unrealized financial
instrument (gain) loss (8,277) 175 (977) 1,876
Asset retirement
expenditures (66) (26) (111) (351)
---------------------------------------------
10,626 7,912 34,734 26,634
Changes in non-cash
working capital 1,793 9,737 1,490 (175)
---------------------------------------------
12,419 17,649 36,224 26,459
---------------------------------------------
Financing
Issuance of common shares 257 28 1,675 338
Increase (decrease) in
long-term debt 1,595 (10,057) 9,264 15,700
---------------------------------------------
1,852 (10,029) 10,939 16,038
---------------------------------------------
Investments
Exploration and
development expenditures (12,693) (13,053) (38,691) (39,460)
Property acquisition (3,156) - (9,206) -
Expenditures on asset
held for resale - - - 937
Deposit on property
acquisition - - 1,175 -
Other capital expenditures (1) (49) (159) (157)
---------------------------------------------
(15,850) (13,102) (46,881) (38,680)
Changes in non-cash
working capital 1,579 5,482 (282) (3,817)
---------------------------------------------
(14,271) (7,620) (47,163) (42,497)
---------------------------------------------
Change in cash - - - -
Cash, beginning of period - - - -
---------------------------------------------
Cash, end of period $ - - - -
---------------------------------------------
---------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
For the three and nine months ended September 30, 2008
(unaudited)
The interim unaudited consolidated financial statements of ProspEx
Resources Ltd. (the "Company" and/or "ProspEx") have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). The Company is engaged in the acquisition, exploration,
development and production of oil and natural gas in Canada.
The interim unaudited consolidated financial statements have been
prepared by management following the same accounting policies and methods
of computation as the audited consolidated financial statements for the
period ended December 31, 2007 except as described below. Preparation of
financial statements in conformity with Canadian GAAP requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual
results may differ from these estimates. The disclosures included below
are incremental to those included with the annual consolidated financial
statements except as disclosed below. The interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's annual report for the
year ended December 31, 2007.
1. CHANGES IN ACCOUNTING POLICIES
(a) Financial Instruments
On January 1, 2008 the Company adopted the new accounting standard
for financial instruments - disclosures, which applies to both
recognized and unrecognized financial instruments. The standards
require that disclosure be made of the nature and extent of risks
arising from financial instruments. This adoption did not have any
impact on the results of operations or net financial position, as it
is a disclosure related standard.
A financial instrument is any contract that gives rise to a financial
asset of one entity and a financial liability or equity instrument to
another entity. Upon initial recognition all financial instruments,
including derivatives, are recognized on the balance sheet at fair
value. Subsequent measurement is then based on the financial
instruments being classified into one of five categories: held for
trading, held to maturity, loans and receivables, available for sale
and other liabilities. The Company has designated its financial
instruments into the following categories applying the indicated
measurement methods:
Measurement
Financial Instrument Category Method
---------------------------------------------------------------------
Accounts receivable Loans and receivables Amortized cost
Accounts payable and
accrued liabilities Other liabilities Amortized cost
Long-term debt Other liabilities Amortized cost
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company enters into derivative financial instruments to manage
its exposure to volatility in commodity prices. These instruments are
not used for trading or other speculative purposes.
Commodity price financial instruments that do not qualify as hedges,
or have not been designated as such, are recorded at fair value on
inception. Realized gains or losses on these financial instruments
are reflected as adjustments to the related revenue when the gain or
loss is realized; unrealized gains and losses on these instruments
are recognized as adjustments to the related revenue at the end of
each reporting period. The estimated fair value of these instruments
is based on quoted market prices, or if quotes are not available,
third-party market indications and forecasts are used.
Derivative instruments that qualify as hedges, and have been
designated as hedges, are not recognized in the financial statements
on inception. Gains or losses on commodity price financial
instruments designated as hedges are reflected as adjustments to the
related revenue when the gain or loss is realized.
(b) Capital Disclosures
On January 1, 2008, the Company adopted the new accounting standard
for disclosure of the Company's objectives, policies and processes
for managing capital. This new adoption did not have any impact on
the results of operations or net financial position, as it is a
disclosure related standard.
2. LONG TERM DEBT
At September 30, 2008 the Company had a $65.0 million credit facility
with a Canadian chartered bank. The facility is available by way of
Canadian prime and US base rate loans, LIBOR advances, bankers'
acceptances and letters of credit. Canadian prime rate loans, US base
rate loans, and LIBOR advances bear interest at Canadian prime, US base
rate or LIBOR, as applicable, plus a margin dependant upon the Company's
debt/cash flow ratio as calculated in the previous quarter. Stamping fees
for bankers' acceptances are based on a rate adjusted over the term to
maturity plus a margin as described above. The credit facility is fully
revolving until June 30, 2009 and may be extended at the mutual agreement
of ProspEx and its lender for an additional year. If the credit facility
is not extended, a balloon payment is required on July 1, 2010. This
facility is secured by a $200 million demand debenture and a first
floating charge on all petroleum and natural gas assets of ProspEx.
3. FUTURE INCOME TAXES
The provision for future income taxes differs from the amount computed by
applying the combined expected Canadian Federal and Provincial tax rates
to earnings before income taxes. The reasons for these differences are as
follows:
Three Three Nine Nine
months months months months
ended ended ended ended
September September September September
($000's) 30, 2008 30, 2007 30, 2008 30, 2007
-------------------------------------------------------------------------
Earnings (loss)
before taxes $ 9,727 $ (1,814) $ 10,089 $ (864)
Rate (%) 29.50% 32.12% 29.50% 32.12%
-------------------------------------------------------------------------
Computed expected
provision (reduction)
for future income taxes 2,869 (583) 2,976 (278)
Increase (decrease) in
taxes resulting from:
Stock-based compensation
expensed 70 99 197 266
Effect of change in
tax rate (135) (116) (304) (79)
Other - 138 146 138
-------------------------------------------------------------------------
Income tax expense $ 2,804 $ (462) $ 3,015 $ 47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The current future income tax liability at September 30, 2008 of
$0.4 million (December 31, 2007 - $0.1 million) results from the future
tax impact of the unrealized financial instrument gain.
The components of the long term future income tax liability are as
follows:
September 30, December 31,
($000's) 2008 2007
-------------------------------------------------------------------------
Property, plant and equipment $ 9,910 $ 3,744
Asset retirement obligation (1,703) (509)
Share issue costs (378) (590)
-------------------------------------------------------------------------
7,829 2,645
Valuation allowance 500 500
-------------------------------------------------------------------------
Future income tax liability $ 8,329 $ 3,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2008, the Company had estimated tax pools available to
reduce future taxable income of $152.0 million (September 30, 2007 -
$146.8 million). ProspEx has met its commitment to incur $8.0 million in
qualifying Canadian exploration expenditures related to the December 2007
flow-through share financing.
Capitalized stock based compensation resulted in an increase to future
tax liabilities of $0.2 million during nine months ended September 30,
2008 (2007 - $0.4 million) and for each of the three month periods ended
September 30, 2008 and 2007, an increase to future tax liabilities of
$0.1 million.
During the first quarter of 2008, the renouncement of flow-through shares
resulted in an increase of future tax liability of $2.2 million (2007 -
$4.5 million).
4. SHARE CAPITAL
(a) Common Shares & Common Share Performance Warrants Issued
Three month Nine month
period ended period ended
September 30, 2008 September 30, 2008
-------------------------------------------------------------------------
Number of Number of
Shares/ Shares/
Warrants Amount Warrants Amount
(000's) ($000's) (000's) ($000's)
-------------------------------------------------------------------------
Common shares
-------------------------------------------------------------------------
Balance at the beginning
of the period 57,199 $ 90,428 56,453 $ 90,543
Flow-through shares
tax adjustment - - - (2,218)
Issued on exercise of
stock options - - 232 746
Shares issued on
exercise of warrants 184 370 698 1,404
Issue costs, net of
future tax reduction
of $14 - - - (34)
Adjustment to
contributed surplus
for options exercised 357
-------------------------------------------------------------------------
Balance at the end of
the period 57,383 $ 90,798 57,383 $ 90,798
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share performance
warrants
-------------------------------------------------------------------------
Balance at the beginning
of the period 2,202 $ 1,347 2,716 $ 1,661
Exercised (184) (113) (698) (427)
-------------------------------------------------------------------------
Balance at the end
of the period 2,018 $ 1,234 2,018 $ 1,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share capital at the
end of the period $ 92,032 $ 92,032
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All outstanding performance warrants entitle the holder to acquire a
common share at a price of $1.40 and expire no later than
October 1, 2009.
(b) Contributed Surplus
Three months ended Nine months ended
September 30, September 30,
(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance at the beginning
of the period $ 6,119 $ 5,276 $ 5,614 $ 4,348
Stock-based compensation 472 614 1,334 1,656
Exercise of stock options - - (357) (114)
-------------------------------------------------------------------------
Balance at the end
of the period $ 6,591 $ 5,890 $ 6,591 $ 5,890
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Stock Options
Changes in outstanding stock options are summarized below:
Three month period Nine month period
September 30, 2008 September 30, 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
(000s) Price (000s) Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 5,036 $ 3.60 4,656 $ 3.62
Granted - - 612 3.32
Exercised - - (232) 3.22
Cancelled (169) 4.30 (169) 4.30
-------------------------------------------------------------------------
Outstanding at the end
of the period 4,867 $ 3.58 4,867 $ 3.58
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes stock options outstanding and
exercisable at September 30, 2008:
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted
average Number
Number of remaining exerci-
outstanding contra- Weighted sable Weighted
at period ctual average at period average
Range of end life exercise end exercise
exercise price (000s) (years) price (000s) price
-------------------------------------------------------------------------
$ 2.95 - $ 3.45 2,398 1.94 $ 3.22 1,751 $ 3.23
$ 3.48 - $ 3.95 1,714 2.97 $ 3.79 894 $ 3.81
$ 4.00 - $ 4.46 755 3.44 $ 4.24 265 $ 4.23
-------------------------------------------------------------------------
4,867 2.54 $ 3.58 2,910 $ 3.50
-------------------------------------------------------------------------
-------------------------------------------------------------------------
No options were granted during the third quarter of 2008. The fair
value of options granted during the third quarter of 2007 was
$0.3 million, and during the first nine months of 2008 was
$0.8 million (2007 - $2.6 million). The fair value is determined
using the Black-Scholes option pricing model with the following
weighted average assumptions for grants as follows:
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Risk free interest rate n/a 4% 3% 4%
Expected life n/a 5 years 5 years 5 years
Expected volatility n/a 35% 47% 43%
Expected dividend yield n/a Nil Nil Nil
-------------------------------------------------------------------------
The estimated fair values of the options and the special performance
units are being amortized to expense over the vesting period. During
the three months ended September 30, 2008, a total of $0.2 million
(2007 - $0.3 million) of stock based compensation was recorded
against income and $0.2 million (2007 - $0.3 million) was
capitalized. During the nine months ended September 30, 2008 a total
of $0.7 million (2007 - $0.8 million) of stock based compensation was
recorded against income and $0.7 million (2007 - $0.8 million) was
capitalized.
(d) Per Share Amounts
Three months ended Nine months ended
September 30, September 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted average
common shares basic 57,200,496 53,965,986 56,943,470 53,895,335
Dilutive securities:
Stock options - 286,084 133,884 384,272
Performance warrants 1,014,149 1,753,733 1,261,976 1,838,422
Special performance
units - 241,632 - 250,767
-------------------------------------------------------------------------
Diluted 58,214,645 56,247,435 58,339,330 56,368,796
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended September 30, 2008, a total of 4,867,000
(September 30, 2007 - 2,600,000) options were excluded from the
diluted calculations as they were anti-dilutive. The nine month year
to date equivalent number of options excluded due to their anti-
dilutive impact was 3,761,400 (2007 - 2,300,000).
5. FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CAPITAL MANAGEMENT
STRATEGY
Overview
The Company has exposure to a number of risks from its use of financial
instruments including:
- Credit risk
- Liquidity risk
- Market risk
This note presents information about the Company's exposure to each of
the above risks and the Company's objectives, policies and processes for
measuring and managing risk, and the Company's management of capital.
Further quantitative disclosures are included throughout these financial
statements.
The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management framework. The Board has
implemented and monitors compliance with risk management policies.
The Company's risk management policies are established to identify and
analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to market conditions and
the Company's activities.
Credit Risk
Credit risk relates to the Company's receivables from joint venture
partners and petroleum and natural gas marketers and the risk of
financial loss if a customer, partner or counterparty to a financial
instrument fails to meet its contractual obligations. A substantial
portion of the Company's accounts receivable are with customers in the
energy industry and are subject to normal industry credit risk. The
Company generally grants unsecured credit but routinely assesses the
financial strength of its partners and marketers.
Receivables from petroleum and natural gas marketers are normally
collected on the 25th day of the month following production. The Company
sells the majority of its production to two petroleum and natural gas
marketers therefore is subject to concentration risk. To date the Company
has not experienced any collection issues with its petroleum and natural
gas marketers. Joint venture receivables are typically collected within
one to three months of the joint venture bill being issued to the
partner. The Company attempts to mitigate the risk from joint venture
receivables by obtaining joint venturer approval of significant capital
expenditures prior to expenditure. The Company does not typically obtain
collateral from petroleum and natural gas marketers or joint venturers;
however in certain circumstances, it may elect to cash call a joint
venturer in advance of the work.
As at September 30, 2008 the Company's receivables consisted of
$3.2 million (December 31, 2007 - $5.3 million) from joint venturers,
$5.5 million (December 31, 2007 - $5.1 million) of receivables from
petroleum and natural gas marketers and $2.0 million (December 31, 2007 -
$2.5 million) of other receivables.
The carrying amount of accounts receivable and cash and cash equivalents
represents the maximum credit exposure. The Company does not have an
allowance for doubtful accounts as at September 30, 2008 and did not
provide for any doubtful accounts nor was it required to write-off any
receivables during the period ended September 30, 2008.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they are due. The Company's approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and
stressed conditions without incurring unacceptable losses or risking harm
to the Company's reputation.
The Company prepares annual capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the
Company utilizes authorizations for expenditures on both operated and
non-operated projects to further manage capital expenditures. To
facilitate the capital expenditure program, the Company has a revolving
reserve based credit facility, as outlined in note 2. The Company also
attempts to match its payment cycle with collection of petroleum and
natural gas revenues on the 25th of each month.
The following are the contractual maturities of financial liabilities and
associated interest payments due as at September 30, 2008:
-------------------------------------------------------------------------
Financial Liability less than 1 - 2 2 - 5
($000's) 1 year years years Thereafter
-------------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 21,685 - - -
Long term debt - 38,110 - -
-------------------------------------------------------------------------
Total $ 21,685 38,110 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Market risk
Market risk is the risk that changes in market prices, such as foreign
exchange rates, commodity prices, and interest rates will affect the
Company's net earnings or the value of financial instruments. The
objective of market risk management is to manage and control market risk
exposures within acceptable limits, while maximizing returns.
The Company utilizes both financial derivatives and physical delivery
sales contracts to manage market risks. All such transactions are
conducted in accordance with the risk management policy that has been
approved by the Board of Directors.
Foreign Currency Exchange Risk
Foreign currency exchange rate risk is the risk that the fair value of
financial instruments or future cash flows will fluctuate as a result of
changes in foreign exchange rates. Although substantially all of the
Company's petroleum and natural gas sales are denominated in Canadian
dollars, the underlying market prices in Canada for petroleum and natural
gas are impacted by changes in the exchange rate between the Canadian and
United States dollars. Given that changes in exchange rate have an
indirect influence, the impact of changing exchange rates can not be
accurately quantified. The Company had no forward exchange rate contracts
in place as at or during the three months ended September 30, 2008.
Commodity Price Risk
Commodity price risk is the risk that the fair value of financial
instruments or future cash flows will fluctuate as a result of changes in
commodity prices. Commodity prices for petroleum and natural gas are
impacted by world economic events that dictate the levels of supply and
demand. The Company has attempted to mitigate commodity price risk
through the use of financial derivative sales contracts. The Company's
contracts in place as of September 30, 2008 are as follows:
Type Amount (GJ/d) Term Price ($/GJ) at AECO Type
---- ------------- ---- -------------------- ----
April 1, 2008 -
Collar 2,000 October 31, 2008 $6.50 - $6.75 Physical
April 1, 2008 -
Collar 1,000 October 31, 2008 $6.50 - $6.90 Physical
April 1, 2008 -
Collar 1,000 October 31, 2008 $6.50 - $7.13 Financial
April 1, 2008 -
Collar 2,000 October 31, 2008 $6.50 - $7.45 Financial
April 1, 2008 -
Collar 2,000 October 31, 2008 $6.50 - $7.75 Financial
April 1, 2008 -
Collar 2,000 October 31, 2008 $6.75 - $7.62 Financial
November 1, 2008 -
Collar 2,000 March 31, 2009 $7.00 - $8.80 Financial
November 1, 2008 -
Collar 2,000 March 31, 2009 $7.00 - $9.15 Financial
November 1, 2008 -
Put 2,000 March 31, 2009 $10.00 Financial
The contracts in place during the three months ended September 30, 2008
resulted in an unrealized gain of $8.3 million (2007 - $0.2 million loss)
and a realized loss of $1.5 million (2007 - $1.5 million gain). During
the first nine months of the year ended September 30, 2008 the contracts
in place resulted in an unrealized gain of $1.0 million (2007 -
$1.9 million loss) and a realized loss of $2.8 million (2007 -
$2.3 million gain).
With respect to commodity prices, during the three and nine month period
ended September 30, 2008, a one dollar increase in the price per GJ of
natural gas relevant only to the Company's production dedicated to
derivative financial instruments would have resulted in a net earnings
decrease of $0.1 million. A $1.00 decrease in the price per GJ of natural
gas on the same production would have increased net earnings for the
three and nine months ended September 30, 2008 by $0.1 million. This
excludes any impact relating to unrealized financial instrument
gains/losses.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a
result of changes in market interest rates. The Company is exposed to
interest rate fluctuations on its credit facility which bears a floating
rate of interest. The Company had no interest rate swaps or financial
contracts in place as at or during the three months ended September 30,
2008. For the three months ended September 30, 2008, a difference in the
interest rate of 1% would change net earnings by an estimated
$0.1 million (nine months ended September 30, 2008 - $0.2 million),
assuming all other variables are constant.
Capital Management Strategy
The Company's policy on capital management is to maintain a prudent
capital structure to allow the Company to fund future development. The
Company considers its capital structure to include shareholders' equity,
bank debt, and working capital.
($000's) September 30, 2008 December 31, 2007
-------------------------------------------------------------------------
Shareholders' equity $ 123,622 $ 115,743
Bank debt 38,110 28,846
Working capital deficiency excluding
unrealized financial instrument gain
or losses and associated future
tax assets or liabilities 10,081 8,873
-------------------------------------------------------------------------
The Company manages its capital programs in order to maintain a prudent
capital structure as changes in economic conditions occur. The Company
may and has from time to time issued shares and adjusted spending to
manage current or projected operating cash flows and debt levels.
The Company monitors its capital base using the ratio of net debt to
annualized operating cash flow. This ratio is calculated as net debt, as
defined as long term debt less working capital (or plus working capital
deficiency) excluding unrealized financial instrument gain (loss) and
associated future tax assets (liabilities); divided by annualized cash
flow from operations before changes in non-cash working capital (based on
the most recent operating quarter). The Company's guideline is to
maintain a ratio of approximately 1.0 to 1.0, not exceeding 2.0 to 1.0.
This ratio will fluctuate depending on fluctuations of the commodity and
business cycles. The Company prepares annual capital expenditure budgets
which are updated periodically to monitor this ratio. The annual budget
is approved by the Board of Directors with updates reviewed by the Board
throughout the year.
As at September 30, 2008 the Company's ratio of net debt to annualized
operating cash flow was 1.1 to 1.0 (September 30, 2007 - 1.4 to 1.0), and
compares to the ratio of 1.0 to 1.0 for the year ended December 31, 2007.
The increase during the third quarter is consistent with the improved
cash flow in the third quarter.
The Company's share capital is not subject to any external restrictions.
The bank debt facility has no restrictions other than the limitation of
borrowing under the facility on an annual basis. As at September 30,
2008, the Company is in compliance with all flow-through share
expenditure requirements as well as all bank facility requirements.
There have been no changes to the Company's capital management strategy
during the quarter ended September 30, 2008.
6. ADDITIONAL DISCLOSURES
(a) Interest and Taxes Paid
Net cash interest paid during the quarter was $nil (2007 -
$0.2 million). Cash taxes paid during the period was $nil (2007 -
$nil). On a year to date basis, net cash interest paid to
September 30, 2008 was $1.1 million (2007 - $1.6 million). Year to
date cash taxes paid to September 30, 2008 was $nil (2007 - $nil).
(b) Asset Retirement Obligation
For the nine month period and quarter ended September 30, 2008, asset
retirement obligation increased by $0.9 million and $0.3 million
respectively (2007 nine months - $0.5 million, 2007 quarter end -
$0.2 million), with a corresponding increase to Property, Plant and
Equipment.
7. COMMITMENTS
The Company has committed to certain future payments as follows:
Payments due There-
($000's) 2008 2009 2010 2011 2012 after
-------------------------------------------------------------------------
Long-term debt $ - - 38,110 - - $ -
Building lease 134 973 1,212 1,230 1,235 1,544
Process fees 126 400 300 47 - -
Transportation 246 598 78 - - -
Other 4 15 7 - - -
-------------------------------------------------------------------------
Total $ 510 1,986 39,707 1,277 1,235 $ 1,544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProspEx has met its commitment to incur $8.0 million in qualifying
Canadian exploration expenditures related to the December 2007 flow-
through share financing.
%SEDAR: 00021285E
For further information: John Rossall, President & CEO, jrossall@psx.ca,
(403) 268-3941; or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3942
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