PETROLIFERA PETROLEUM LIMITEDDetailed Chart...PETROLIFERA PETROLEUM LIMITEDDetailed Chart...Petrolifera Petroleum strengthens balance sheet during third quarter 2009 (Q3 2009) with $58.5 million equity raise; Focus in fourth quarter 2009 is on testing La Pinta discovery in Colombia; Concluding Peru farmouts high on the agenda; Recent Argentinean drilling raises production 20% over Q3 2009 levels; Conference call scheduled for 9:00 AM MST November 9, 2009
Petrolifera's priority in the short run is to reenter and test the La Pinta No.1 exploratory discovery in
Our second priority is to continue farmout negotiations on exploratory lands in With the decision to retain our Argentinean properties, we again include those results in our continuing operations. As a consequence, after provision for normal year-to-date depletion, which could not be provided for when our Argentinean operations were classified as discontinued, we experienced our first quarterly loss as a company in over four years. We hope to reverse this situation as we again expand our Argentinean production base and normalize our reporting. Recent infill drilling at Puesto Morales Norte has resulted in a 20% increase in production after only two wells of what could be a nine-well program.
We will hold a conference call to discuss our Q3 and year-to-date 2009 ("YTD 2009") results on
Highlights for the period were as follows:
- Raised $58.5 million of gross proceeds to fund a portion of our
exploration capital expenditure, primarily in Colombia during the
balance of 2009 and into 2010, to reduce our reserve-backed credit
facility and augment our working capital
- Tested light gravity crude oil from the La Pinta No.1 exploratory
well in Colombia; remedial work to start shortly
- Retained Argentinean properties for continuing source of cash flow;
recent drilling increases production 20% over Q3 2009 levels
- Reduced indebtedness and initiated discussions to refinance remaining
reserve-backed term debt
Summary Results
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Three months ended Sept. 30 Nine months ended Sept. 30
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% %
2009 2008 Change 2009 2008 Change
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FINANCIAL ($000, except
per share amounts)
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Total revenue $17,229 $32,126 (46) $65,891 $92,915 (29)
Cash flow from
operations before
non-cash working
capital(1) 5,503 15,726 (65) 26,540 41,113 (35)
Per share, basic 0.07 0.29 (76) 0.41 0.79 (48)
Per share, diluted 0.07 0.28 (75) 0.40 0.78 (49)
Net earnings (loss) (11,359) 3,564 (419) (6,744) 8,892 (176)
Per share, basic (0.14) 0.06 (333) (0.11) 0.17 (165)
Per share, diluted (0.14) 0.06 (333) (0.11) 0.17 (165)
Capital expenditures 13,389 21,046 (36) 59,478 81,212 (27)
Cash 55,953 14,865 276 55,953 14,865 276
Working capital 724 8,148 (91) 724 8,148 (91)
Long-term debt 27,464 45,576 (40) 27,464 45,576 (40)
Shareholders' equity 238,475 178,069 34 238,475 178,069 34
Total assets $368,288 $279,174 32 $368,288 $279,174 32
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OPERATING
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Daily sales volumes
Crude oil and
natural gas liquids
- bbl/d 3,653 6,850 (47) 4,511 6,896 (35)
Natural gas - mcf/d 4,252 5,363 (21) 5,633 6,106 (8)
Barrels of oil
equivalent - boe/d(2) 4,362 7,744 (44) 5,450 7,913 (31)
Average selling prices
Crude oil and natural
gas liquids - $/bbl $48.07 $48.93 (2) $49.87 $47.01 6
Natural gas - $/mcf $2.74 $2.58 6 $2.89 $2.37 22
Barrels of oil
equivalent - $/boe $42.93 $45.07 (5) $44.26 $42.80 3
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COMMON SHARES
OUTSTANDING (000s)
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Weighted average
Basic 82,418 54,884 50 64,205 51,876 24
Diluted(3) 82,539 55,897 48 65,619 53,054 24
End of period 121,759 54,948 122 121,759 54,948 122
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(1) Cash flow from operations before non-cash working capital changes
("cash flow") and cash flow per share do not have standardized
meanings prescribed by Canadian generally accepted accounting
principles ("GAAP") and therefore may not be comparable to similar
measures used by other companies. Cash flow includes all cash flow
from operating activities and is calculated before changes in non-
cash working capital. The most comparable measure calculated in
accordance with GAAP would be net earnings (loss). Cash flow is
reconciled with net earnings in the accompanying Management's
Discussion & Analysis ("MD&A"). Management uses these non-GAAP
measurements for its own performance measures and to provide its
shareholders and investors with a measurement of the company's
efficiency and its ability to fund a portion of its future growth
expenditures.
(2) All references to barrels of oil equivalent (boe) are calculated on
the basis of 6 mcf : 1 bbl. Boes may be misleading, particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
(3) As the company has net losses during the three months and nine months
ended September 30, 2009, the dilutive effect of stock options and
stock purchase warrants became anti-dilutive causing the basic
weighted average common shares outstanding to be used as the
denominator in the dilutive per share net loss calculation.
We successfully advanced our balance sheet reconstruction during the third quarter of 2009. This was accomplished through a marketed, underwritten offering of units comprised of one common share and one-half common share purchase warrant. A full warrant entitles the holder to acquire one additional common share in exchange for one full warrant at
Proceeds were used to reduce bank indebtedness and to replenish working capital. At
Petrolifera's focus during Q3 2009 was on its balance sheet reconstruction, in light of the decision to retain its Argentinean assets and given the amount of cash used for its extensive capital expenditure programs in both
We were successful in raising total gross proceeds of
With our new funding, we are in a better position to continue our high potential exploration activity in
As has been previously reported, the La Pinta No.1 exploratory well on the Sierra Nevada License in the Lower Magdalena Basin was drilled and cased earlier this year. The well was expensive due to very difficult drilling conditions largely related to overpressured conditions, which not only affected drilling but also logging, casing and testing operations. Unfortunately, during testing of the upper portion of the Cienaga de Oro ("CDO") formation, which was indicated to be hydrocarbon bearing based on logs and shows while drilling and after having recovered light gravity 45 degrees API crude oil at an instantaneous rate of approximately 700 bbl/d, a casing split apparently occurred. This required operations to be suspended. The rig used to drill the well was released temporarily to a third party for one or possibly two wells to reduce continuing costs and we are continuing to examine the preferred method of remediation, having regard for related costs. In this regard, we are conducting an independent third party evaluation of the well and suggested remediation procedures to examine contingencies and identify available options. We continue to believe the La Pinta prospect is significant with considerable reserve and resource potential, despite the challenges encountered to date. As soon as it is practicable and as warranted by our ongoing study, we intend to reenter the well, retrieve the tubing string and down hole assembly and test the CDO, if possible, in this wellbore. This would be feasible if the casing breach is below the upper perforated zone in the CDO formation. If so, then we might be able to install a permanent bridge plug above the uppermost portion of the split in the casing, clean out and retrieve the tubing, rerun the tubing, log and test the well. If this is not feasible, we would intend to move uphole in the well and test shallower formations, primarily the Porquero, to evaluate indicated hydrocarbon bearing zones. This would mean a replacement well would be necessary to reassess the CDO. In these circumstances, we envisage attracting an industry partner due to the inherent risk and cost experience at La Pinta. As the evaluation continues, we are moving ahead with our plans to drill the Brillante natural gas/gas liquids prospect on the Sierra Nevada license and we have two drill-ready prospects (La Pinta No.2 and La Pinta No.3) one of which could be drilled to evaluate shallower zones above the CDO if our testing program at La Pinta No.1 proves successful and we complete the well as a crude oil producer from the deeper zone. Immediately subsequent to the reporting period, we were awarded the Magdalena License by Agencia Nacional De Hidrocarburos, the Colombian state agency, over approximately 595,000 acres immediately adjacent to our Sierra Nevada License. The Block requires a work commitment of 150 km(2) of 3D seismic within fifteen months of award, so drilling should commence on this block in late 2010 or early 2011. It is primarily prospective for large natural gas and natural gas liquids accumulations. We envisage attracting industry partners for some or all of our continuing work obligations and planned activity on both the Sierra Nevada License and the Magdalena License during the remainder of this year and into 2010. We have engaged in discussions with a number of qualified and financially strong parties. As these are projects requiring considerable associated capital, farmouts will take time to complete but with the quality of opportunity, we anticipate acceptable terms and conclusions can be reached. We note, however, that completion of suitable arrangements may have to await until 2010 as companies finalize their budgets to include these types of opportunities. The farmout of our Turpial License in the Middle Magdalena Basin is nearing completion. Terms have been agreed and we are in the final stages of documentation. A US-based company has elected to join us in this project and will reimburse Petrolifera a portion of its sunk costs and carry the company through a portion of the next stage of evaluation, with drilling possible in 2010 on this property which is offset by large producing heavy oil fields.
We continue to hold three licenses in
We had hoped to be drilling in
With the decision to retain our Argentinean assets, following a market test of sale alternatives, we have reactivated our technical assessment and have already initiated a four-well infill program at Puesto Morales Norte to enhance overall production levels. Our production had fallen off in recent months due to the absence of sustaining capital investment. We anticipate our modest planned capital program prior to year end will result in production increases and improved revenue, cash flow and lower unit operating costs. We will attempt to farmout the balance of our Argentinean properties later this year and next year to reduce capital outlays, at least until there is evidence of improved crude oil pricing, more attuned to world market conditions. Outlook
Petrolifera's outlook has improved with the successful completion of our
We intend to husband our resources and continue our commitment to attracting third party funding of higher risk activity, which we can pursue because of the vast potential associated with our projects in both Our share price has been brutalized of late, as we restored adequate liquidity to our balance sheet and in the aftermath of uncertain results at La Pinta. Our number one priority, which we believe will be the catalyst to recovery, is to resolve the proper procedure to determine the full potential of the La Pinta discovery. We remain confident we have made what appears to be a significant find and we are also very enthused about our other exploration opportunities in the vicinity of the La Pinta prospect.
Our plans for next year are discussed in greater detail in the attached Management Discussion and Analysis ("MD&A"). We will conduct an exciting yet prudent capital program, supplemented by third party funding through farmouts. With healthy cash balances, a satisfactory level of cash generation from We thank our new shareholders for the commitment to the company and also appreciate the continuing loyalty and support of our broad shareholder base, including that of Connacher Oil and Gas Limited, our largest shareholder.
Forward Looking Information This press release contains forward-looking information including, but not limited to the company's plans to renegotiate its existing reserve-backed credit facility and the timing associated therewith, anticipated remediation and further testing of the La Pinta No.1 well in Forward looking information is not based on historical facts but rather on Management's expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities and expectations with respect to general economic conditions. Such forward looking information reflects Management's current beliefs and assumptions and is based on information currently available to Management. Forward looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward looking information, including but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production, delays or changes to plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environment risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and third parties located in foreign jurisdictions and the risk associated with international activity. There can be no assurance that planned remediation efforts and subsequent testing of the La Pinta No.1 well drilled on the Sierra Nevada I License will yield commercial results. The company's ability to complete its capital program and repay outstanding indebtedness is dependent upon completion of planned farm-out arrangements and recovery of sunk costs, restoration of production in MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following is dated as of
Information in the MD&A contains forward-looking information including but not limited to the company's plan to renegotiate its existing reserve-backed credit facility, anticipated remediation and further testing of the La Pinta No.1 well in PETROLIFERA TO RETAIN ARGENTINEAN OPERATIONS
Petrolifera announced on
The Argentinean operations are presented within the unaudited consolidated financial statements and MD&A for the three months and nine months ended
FINANCIAL AND OPERATING REVIEW
SALES VOLUMES, PRICING AND REVENUE
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Three months ended Sept. 30 Nine months ended Sept. 30
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2009 2008 % 2009 2008 %
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Daily sales volumes:
Crude oil and natural
gas liquids - bbl/d 3,653 6,850 (47) 4,511 6,896 (35)
Natural gas - mcf/d 4,252 5,363 (21) 5,633 6,106 (8)
Equivalent - boe/d 4,362 7,744 (44) 5,450 7,913 (31)
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Average selling prices:
Crude oil and natural
gas liquids - $/bbl $48.07 $48.93 (2) $49.87 $47.01 6
Natural gas - $/mcf $2.74 $2.58 6 $2.89 $2.37 22
Weighted average
selling price - $/boe $42.93 $45.07 (5) $44.26 $42.80 3
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Petroleum and natural
gas sales ($000) $17,229 $32,110 (46) $65,854 $92,793 (29)
Interest income ($000) - 16 (100) 37 122 (70)
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Total revenue ($000) $17,229 $32,126 (46) $65,891 $92,915 (29)
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Petroleum and natural gas revenues for the nine months ended
The reduction in sales revenues during the three months and nine months ended
The company's realized crude oil price rose six percent to average
Relative to the second quarter of 2009, when petroleum and natural gas revenues were
In the three months and nine months ended
Royalties, Operating Expenses and Corporate Netbacks
Corporate Netbacks (1)
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Three months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Average daily sales (boe/d) 4,362 7,744
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Petroleum and natural gas sales $17,229 $42.93 $32,110 $45.07
Interest income - - 16 0.02
Royalties (2,445) (6.09) (4,842) (6.80)
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Net revenue 14,784 36.84 27,284 38.29
Operating costs (5,763) (14.36) (6,410) (9.00)
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Corporate netback $9,021 $22.48 $20,874 $29.29
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Nine months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Average daily sales (boe/d) 5,450 7,913
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Petroleum and natural gas sales $65,854 $44.26 $92,793 $42.80
Interest income 37 0.02 122 0.05
Royalties (9,362) (6.29) (12,892) (5.95)
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Net revenue 56,529 37.99 80,023 36.90
Operating costs (17,362) (11.67) (18,675) (8.61)
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Corporate netback $39,167 $26.32 $61,348 $28.29
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(1) Calculated by dividing related revenue and costs by total boe sold,
resulting in a corporate netback. Netback does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to
be comparable to similar measures used by other companies. The most
comparable measure calculated in accordance with GAAP would be net
earnings (loss). Nevertheless, Petrolifera's management uses netbacks
as a performance measurement of operating efficiency and the
prevailing royalty regime. A high ratio of netback to selling price
is a positive indicator. A reconciliation of corporate netback to net
income (loss) can be found in the Net Earnings (Loss) table.
Petrolifera's corporate netback of
Relative to the corporate netback of Operating costs
Total operating costs during the three months and nine months ended Royalties
Royalties represent charges levied by governments and landowners against production or revenue. Included in royalties are revenue taxes imposed by provincial jurisdictions. Royalties in the nine months ended NET EARNINGS AND SHARES OUTSTANDING
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Three months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Corporate netback $9,021 $22.48 $20,874 $29.29
General and administrative (2,278) (5.68) (2,240) (3.15)
Stock-based compensation (1,561) (3.89) (1,123) (1.57)
Finance charges (1,132) (2.82) (1,361) (1.91)
Foreign exchange gain (loss) 1,102 2.75 239 0.34
Fair value impairment (2,104) (5.24) (1,885) 2.65
Depletion, depreciation and
accretion (17,568) (43.78) (6,599) (9.26)
Income tax recovery (provision) 3,428 8.54 (3,855) (5.41)
Taxes other than income taxes (267) (0.67) (486) (0.68)
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Net earnings (loss) $(11,359) $(28.31) $3,564 $5.00
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Nine months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Corporate netback $39,167 $26.32 $61,348 $28.29
General and administrative (6,370) (4.28) (6,326) (2.92)
Stock-based compensation (3,999) (2.69) (4,252) (1.96)
Finance charges (4,057) (2.73) (3,584) (1.65)
Foreign exchange gain (loss) 110 0.07 (969) (0.45)
Fair value impairment (2,104) (1.41) (5,377) (2.48)
Depletion, depreciation and
accretion (24,610) (16.54) (17,656) (8.14)
Income tax recovery (provision) (3,250) (2.18) (12,484) (5.76)
Taxes other than income taxes (1,631) (1.10) (1,808) (0.83)
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Net earnings (loss) $(6,744) $(4.53) $8,892 $4.10
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For the nine months ended
A net loss resulted for the nine months ended 2009 compared to net earnings during the same period in 2008, mainly due to lower crude oil and natural gas liquids sales volumes, higher finance costs and higher depletion, depreciation and accretion expense. A net loss was recognized during the third quarter of 2009, relative to the net earnings in the same quarter in 2008, mainly due to lower crude oil and natural gas liquids volumes and realized prices, higher stock-based compensation and higher depletion, depreciation and accretion expense. The depletion, depreciation and accretion expense for the quarter ended
For the three months and nine months ended
During the three months and nine months ended
As at the close of business on
- 121,758,510 common shares; and
- 7,636,067 stock options; and
- 33,240,250 warrants.
General & Administrative and Stock-based Compensation
General and administrative ("G&A") expenses were
On a per boe basis, G&A was
During the nine months ended Finance Charges
Included in the finance charges of Foreign Exchange
The effect during 2009 of the weakening US dollar relative to the Canadian dollar, on a portion of the company's debt which is US dollar denominated, was mostly offset by the effect of the weakening of the Argentinean peso, relative to the US dollar, on the Argentinean working capital. This resulted in a net foreign exchange gain of Depletion, Depreciation & Accretion ("DD&A")
DD&A is calculated using the unit-of-production method based on total estimated proved reserves. In accordance with Canadian GAAP, depletion and depreciation was not recognized on the company's Argentinean interests that were previously held as discontinued operations during the time these interests were for sale. As a result of management's decision to no longer pursue a sale, the company's Argentinean interests were again classified as "held for use", resulting in the recognition of depletion and depreciation expense from the date that management had initially ceased recognition, which was
DD&A in the nine months ended
Accretion expense, which is included in DD&A expense, was Taxes
The current income tax provision of CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY
During 2008, the company adopted a conservative approach to its anticipated 2009 capital expenditure programs in Cash Flow Cash flow and cash flow per share do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings (loss). Cash flow is reconciled with net earnings (loss) below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures.
Reconciliation of net earnings to cash flow:
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Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
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($000) 2009 2008 2009 2008
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Net earnings (loss) $ (11,359) $ 3,564 $ (6,744) $ 8,892
Add non-cash charges:
Depletion, depreciation and
accretion 17,568 6,599 24,610 17,656
Fair value impairment 2,104 1,885 2,104 5,377
Future income tax provision
(recovery) (3,944) 2,573 344 3,360
Stock-based compensation 1,561 1,123 3,999 4,252
Amortization of deferred
finance charges 213 221 656 607
Unrealized foreign exchange
loss (gain) (640) (239) 1,571 969
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Cash flow $ 5,503 $ 15,726 $ 26,540 $ 41,113
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Per share, basic 0.07 0.29 0.41 0.79
Per share, diluted 0.07 0.28 0.40 0.78
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Cash flow in the first nine months of 2009 was Equity Financing & Private Placement
In
In
There were 33.2 million Warrants issued pursuant to the Public Offering and Private Placement. Each Warrant entitles the holder thereof to purchase one Common Share (each a "Warrant Share") at an exercise price of
The net proceeds of the Public Offering and Private Placement will be used to fund a portion of the company's exploration capital expenditure program, primarily in
Proceeds of the Public Offering and Over-Allotment Option are summarized
as follows:
($000)
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Gross Proceeds of Public Offering and Over-Allotment Option: $57,502
Underwriter's commissions and issue costs (3,155)
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Net funds available to reduce indebtedness, capital
expenditures and working capital $54,347
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The proposed use of net proceeds per the Public Offering and Over-
Allotment Option relative to actual use of net proceeds as at September
30, 2009, are as follows:
Use of Net Use of Net
Proceeds Per Proceeds as
Public at Sept. 30,
($000) Offering 2009
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Capital expenditure program, primarily in Colombia $31,647 $1,970
Reduction of reserve-backed credit facility up to 16,000 5,409
Working capital 6,700 4,359
Cash to be deployed - 42,609
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$54,347 $54,347
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Capital Expenditures
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Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
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($000) 2009 2008 2009 2008
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Argentina $ 4,863 $ 14,628 $ 19,989 $ 59,831
Peru 309 4,623 6,977 18,838
Colombia 8,203 1,765 32,478 2,512
Corporate 14 31 34 31
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Capital expenditures $ 13,389 $ 21,046 $ 59,478 $ 81,212
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Capital expenditures for the nine months ended
Expenditures were incurred on Block 107 in
On Block 106, in the Maranon Basin,
In Readers are cautioned that instantaneous rates are not reflective of sustainable production rates and if the La Pinta No.1 well is remediated such that commercial production is established, these production rates may differ materially from the recorded instantaneous flow rate reflected above.
Petrolifera has also completed 2D and 3D seismic programs over its Turpial License in the Middle Magdalena Basin, onshore
On
In
Argentinean crude oil production was down, reflecting the minimal investment undertaken in the period leading up to and during the CREDIT FACILITIES
During
As at
As at
The company is subject to external restrictions on its reserve-backed revolving credit facility. Under this facility, bank debt and long-term bank debt cannot exceed two times the 12 month trailing EBITDA. EBITDA is a non-GAAP measure and is defined by the credit facility agreement as net earnings (loss) prior to deduction of finance charges, income taxes, depletion, depreciation and accretion expense, stock-based compensation and unrealized foreign exchange losses. As at
Reconciliation of net earnings to EBITDA is as follows:
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12 Months
Three Months Ended Ended
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Dec. 31, Mar. 31, June 30, Sept. 30, Sept. 30,
($000) 2008 2009 2009 2009 2009
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Net earnings
(loss) $ 2,662 $ 1,188 $ 3,427 $ (11,359) $ (4,082)
Add Interest, income
taxes, depletion,
depreciation and
accretion expense
and other non-cash
expenses:
Depletion,
depreciation, and
accretion 11,328 6,904 138 17,568 35,938
Finance Charges 1,833 1,577 1,348 1,132 5,890
Fair value impairment 3,505 - - 2,104 5,609
Stock-based
compensation 1,595 1,592 846 1,561 5,594
Income tax provision
(recovery) 1,947 1,044 5,634 (3,428) 5,197
Unrealized foreign
exchange loss (gain) (789) 815 1,396 (640) 782
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EBITDA $ 22,081 $ 13,120 $ 12,789 $ 6,938 $ 54,928
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RESTRICTED CASH AND LONG-TERM INVESTMENTS
As at In January, 2009, the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper announced that the Superior Court of Ontario granted the Plan Implementation Order and that, accordingly, the plan for restructuring ABCP had been fully implemented. In exchange for the shorter-term ABCP, the company has now received the longer term notes with maturities that generally approximate those of the assets previously contained in the underlying conduits. Assuming these replacement notes become liquid and could be sold for cash, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts.
During the third quarter of 2009, the company was advised that its investment in the ineligible asset tracking note Class 2 ("IA - Class 2") had total pledged collateral of
For the nine months ended
As no active market for the longer term notes has developed, management has estimated the fair value of the company's investment in the longer term notes at
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Risk- Risk-
adjusted adjusted Capital Interest
Face Value Capital Interest Weighted Weighted Risk-free
Class of Notes Recovery Recovery Average Average Term Discount
of Note ($000s) Range Range Recovery Recovery (years) Rate
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A-1 $13,978 0 - 80% 0 - 60% 75% 54% 4 - 8 3%
A-2 13,543 0 - 70% 0 - 30% 64% 27% 8 3%
B 2,459 0 - 30% 0% 27% 0% 8 3%
C 928 0% 0% 0% 0% 8 3%
IA Tracking 3,674 0% 0% 0% 0% 8 3%
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Total $34,582
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Based on the above approach the fair value of the investment in the longer term notes was
The theoretical fair value of the company's longer-term notes could range from Related Party Transactions
Connacher Oil and Gas Limited ("Connacher") purchased 13,556,000 Units for gross proceeds of
Under the terms of an Administrative Agreement with Connacher, in effect from
Directors and officers of the company purchased 1,137,500 Units for gross proceeds of
During 2009 the company paid professional legal fees and common share issue costs for the three months and nine months ended IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
During August, 2009, the CICA issued amendments to Section 3855, Financial Instruments - Recognition and Measurement. The amendments included the definitions of a financial asset or financial liability held for trading and loans and receivables, provided guidance concerning the assessment of embedded derivatives upon reclassification of a financial asset out of the held-for-trading category and requires that Section 3025, Impaired Loans, be applied to assess whether held-to-maturity investments are impaired and to account for any such impairment. The amendment concerning the embedded derivates was adopted for any reclassification made on or after
During June, 2009, the CICA issued amendments to Section 3855, Financial Instruments - Recognition and Measurement, and Section 3862, Financial Instruments - Disclosures. The amendment to Section 3855 clarifies when an embedded prepayment option is separated from its host debt instrument for accounting purposes. The company prospectively adopted the CICA amendment to Section 3855 which did not have an impact on the company's financial statements. The amendments to Section 3862 enhance financial instrument disclosure requirements about liquidity risk and provide new disclosure requirements for fair value measurements. The amendments to Section 3862 apply to the company's annual financial statements ended
Effective
In
In
In INTERNATIONAL FINANCIAL REPORTING STANDARDS
In Management has commenced its IFRS conversion project which consists of several phases commencing with a review of the company's significant accounting policies relative to current and proposed IFRS. During this preliminary phase, management determined that the differences most likely to have the greatest impact on the company's consolidated financial statements are the accounting for exploration and development activities, assessment of impairment of property and equipment, calculation of asset retirement obligations and the foreign currency translation method of the company's foreign operations. At the present time, the financial impacts of these preliminarily identified accounting policy differences on the company's current financial position and results of operations have yet to be quantified. The impact on the company's disclosure controls, internal controls over financial reporting, contracts and lending agreements will also be determined but have not yet been quantified.
In COMMITMENTS, GUARANTEES and CONTRACTUAL OBLIGATIONS Work Commitments
In 2005, Petrolifera acquired two significant oil and gas exploration licenses onshore The Peruvian licenses have negotiated work programs through 2016, unless extended. Each work program has a specified minimum financial commitment that must be met for the company to maintain its rights to these licenses. Specifically, the immediate work commitments for Block 133 are primarily comprised of geological field studies and as such are not capital intensive. The company has met, or surpassed, all of its current work commitments for Blocks 106 and 107 in a timely manner. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first well is required to be drilled per the work programs and as approved by the local Peruvian authorities by mid-2014, which positions the company to defer the more significant of its work programs while still maintaining these properties in good standing. In 2007, the company was granted three Colombian concessions comprised of one license and two TEAs. Petrolifera has converted the Turpial and Sierra Nevada II TEAs into exploration licenses, the latter was renamed Magdalena. Petrolifera drilled the La Pinta No.1 well on the Sierra Nevada I License, which completed this license's first phase of work commitments and the company is now in the second phase of the work program, which requires the drilling of one exploratory well and acquiring seismic by June, 2010. On the company's Turpial License, the company has completed its seismic acquisition, processing and interpretation program and entered into the second phase of the exploration contract. The second phase of the work program for the Turpial License requires the drilling of one exploratory well prior to September, 2010. The company is in the first phase of its Magdalena License which requires 3D seismic acquisition, processing and interpretation of 150 km2 of the seismic data to be completed prior to December, 2010.
In Contractual Obligations
The company's contractual obligations for drilling, leases for office premises and other equipment and an administrative services agreement for the three months ended
-------------------------------------------------------------------------
Subsequent
2009 2010 2011 to 2011 Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Drilling service
contracts and other
leases $5,685 $16,266 $429 $322 $22,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Guarantees
The company has issued letters of credit in the total amount of US$1.6 million to secure the capital expenditure requirements associated with two exploration licenses in
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL
REPORTING
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. Based on their evaluation as of the end of the nine months covered by this MD&A, the company's Executive Chairman, President and Chief Operating Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures as of the end of such period are designed to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure. Management of the company is also responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the company's systems of internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting. BUSINESS RISKS Petrolifera is exposed to certain risks and uncertainties inherent in the oil and gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations. The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and health and safety concerns. Farm-out (and joint venture) efforts continue with respect to much of the company's prospect inventory. Current capital market conditions may make this process more challenging and time consuming than under more buoyant economic conditions, resulting in the company having to bring participants into its acreage holdings and planned activities on less attractive terms than might otherwise have been negotiated. There can be no assurances as to the timing or completion of possible farm-out (and/or joint venture) arrangements. The success of the company's capital programs as embodied in its productivity and reserve base, could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important long-term criterion in determining company growth, success and access to new capital sources.
To date, the company has utilized debt and equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of international oil and gas exploration, development and production activities. The company may be required to raise additional capital to fund its activities in light of overall industry conditions, the high cost of the La Pinta well, the termination of the Access to financing has been impacted by sub-prime mortgage defaults, the liquidity crisis affecting the ABCP and collateralized debt obligation markets and a deterioration in the global economy. Banks have been adversely affected by the worldwide economic crisis and have severely curtailed existing liquidity lines, increased pricing and introduced new and tighter borrowing restrictions to corporate borrowers, with extremely limited access to new facilities or for new borrowers. These factors may impact Petrolifera's ability to obtain equity, debt or bank financing on terms that are commercially reasonable, or at all, and could negatively impact its ability to access liquidity needed for its operations in the longer term. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors. Periodic fluctuations in energy prices may also affect lending policies of the company's banker for new borrowings in addition to the semi-annual review of existing availability of indebtedness. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results. While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques. The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable. OUTLOOK
Petrolifera's outlook has improved with the successful completion of our
We intend to husband our resources and continue our commitment to attracting third party funding of higher risk activity which we can pursue because of the vast potential associated with our projects in both
We will conduct an exciting yet prudent capital program in 2010, supplemented by third party funding through farmouts. With healthy cash balances, a satisfactory level of cash generation from
For 2010, a gross capital budget of approximately Forward Looking Information
This Interim Report, including the Letter to Shareholders, contains forward-looking information including, but not limited to the company's plans to renegotiate its existing reserve-backed credit facility, anticipated remediation and further testing of the La Pinta No.1 well in
QUARTERLY RESULTS (4)
-------------------------------------------------------------------------
2007 2008
-------------------------------------------------------------------------
For the Three
Months Ended Dec 31 Mar 31 June 30 Sept 30 Dec 31
-------------------------------------------------------------------------
FINANCIAL RESULTS ($000, EXCEPT PER SHARE AMOUNTS) - UNAUDITED
-------------------------------------------------------------------------
Total revenue 27,266 27,167 33,622 32,126 37,411
Cash flow(1) 10,707 11,902 13,485 15,726 21,689
Basic, per share(1) 0.21 0.24 0.27 0.29 0.39
Diluted, per share(1) 0.21 0.23 0.26 0.28 0.39
Net earnings (loss) 4,863 1,738 3,590 3,564 2,662
Basic, per share 0.10 0.04 0.07 0.06 0.05
Diluted, per share(5) 0.09 0.03 0.07 0.06 0.05
Capital expenditures 57,608 31,056 29,110 21,046 35,539
Cash or cash equivalents 13,052 11 41,039 14,865 30,701
Working capital (31,779) (51,546) 13,295 8,148 19,956
Long-term bank debt - - 43,800 45,576 77,150
Shareholders' equity 120,303 127,225 168,735 178,069 202,347
Total assets 204,227 231,278 292,882 279,174 355,658
-------------------------------------------------------------------------
OPERATING RESULTS
-------------------------------------------------------------------------
Sales volumes:
Crude oil and natural
gas liquids - bbl/d 6,565 6,726 7,111 6,850 6,877
Natural gas - mcf/d 2,860 7,044 5,922 5,363 5,451
Equivalent - boe/d(2) 7,042 7,900 8,098 7,744 7,786
Pricing:
Crude oil and natural
gas liquids - $/bbl 44.36 41.99 49.90 48.93 56.76
Natural gas - $/mcf 1.76 2.20 2.38 2.58 2.88
Selected highlights -
$/boe(2):
Weighted average
selling price -
$/boe 42.07 37.72 45.56 45.07 52.15
Interest and other
income 0.01 0.07 0.07 0.02 0.08
Royalties 5.76 4.71 6.33 6.80 7.66
Operating costs 8.20 8.24 8.60 9.00 10.28
Corporate netback(3) 28.12 24.84 30.69 29.29 34.29
-------------------------------------------------------------------------
COMMON SHARE INFORMATION (000, EXCEPT SHARE PRICE)
-------------------------------------------------------------------------
Shares outstanding at
end of period 50,127 50,353 54,798 54,948 54,948
Weighted average
shares outstanding
for the period:
Basic 50,123 50,212 50,500 54,884 54,948
Diluted(5) 51,689 51,562 51,735 55,897 55,043
Volume traded during
quarter 12,223 7,721 4,590 7,884 8,826
Common share price ($):
High 17.10 11.96 11.25 8.72 3.99
Low 9.14 6.61 8.25 3.16 0.75
Close (end of period) 9.87 9.10 8.69 3.37 1.05
-------------------------------------------------------------------------
-----------------------------------------------------
2009
-----------------------------------------------------
For the Three
Months Ended Mar 31 June 30 Sept 30
-----------------------------------------------------
FINANCIAL RESULTS ($000, EXCEPT PER SHARE AMOUNTS)
- UNAUDITED
-----------------------------------------------------
Total revenue 26,407 22,255 17,229
Cash flow(1) 10,804 10,233 5,503
Basic, per share(1) 0.20 0.19 0.07
Diluted, per share(1) 0.20 0.18 0.07
Net earnings (loss) 1,188 3,427 (11,359)
Basic, per share 0.02 0.06 (0.14)
Diluted, per share(5) 0.02 0.06 (0.14)
Capital expenditures 25,612 20,477 13,389
Cash or cash equivalents 30,994 14,803 55,953
Working capital 33,768 22,895 724
Long-term bank debt 104,649 102,104 27,464
Shareholders' equity 209,240 201,749 238,475
Total assets 371,054 353,424 368,288
-----------------------------------------------------
OPERATING RESULTS
-----------------------------------------------------
Sales volumes:
Crude oil and natural
gas liquids - bbl/d 5,245 4,625 3,653
Natural gas - mcf/d 6,500 6,232 4,252
Equivalent - boe/d(2) 6,328 5,691 4,362
Pricing:
Crude oil and natural
gas liquids - $/bbl 52.17 48.72 48.07
Natural gas - $/mcf 2.98 2.87 2.74
Selected highlights -
$/boe(2):
Weighted average
selling price -
$/boe 46.30 42.97 42.93
Interest and other
income 0.06 - -
Royalties 6.02 6.74 6.09
Operating costs 10.33 11.04 14.36
Corporate netback(3) 30.01 25.20 22.48
-----------------------------------------------------
COMMON SHARE INFORMATION (000, EXCEPT SHARE PRICE)
-----------------------------------------------------
Shares outstanding at
end of period 54,948 54,948 121,759
Weighted average
shares outstanding
for the period:
Basic 54,948 94,948 82,418
Diluted (5) 55,195 55,600 82,539
Volume traded during
quarter 10,053 13,268 55,032
Common share price ($):
High 1.60 3.47 2.85
Low 0.80 1.49 0.76
Close (end of period) 1.60 2.85 1.08
-----------------------------------------------------
(1) Cash flow from operations before non-cash working capital changes
("cash flow") and cash flow per share do not have standardized
meanings prescribed by Canadian generally accepted accounting
principles ("GAAP") and therefore may not be comparable to similar
measures used by other companies. Cash flow includes all cash flow
from operating activities and is calculated before changes in non-
cash working capital. The most comparable measure calculated in
accordance with GAAP would be net earnings (loss). Cash flow is
reconciled with net earnings (loss) in this Management's Discussion &
Analysis ("MD&A"). Management uses these non-GAAP measurements for
its own performance measures and to provide its shareholders and
investors with a measurement of the company's efficiency and its
ability to fund a portion of its future growth expenditures.
(2) All references to barrels of oil equivalent (boe) are calculated on
the basis of 6 Mcf :1 bbl. Boe may be misleading particularly if used
in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
(3) Corporate netback is a non-GAAP measure used by management as a
measure of operating efficiency and profitability. It is calculated
as petroleum and natural gas revenue and other income less royalties
and operating costs. For a reconciliation of netbacks to net earnings
(loss) see "MD&A".
(4) Fluctuations in results over the previous quarters are due
principally to variations in oil and gas prices and production
volumes. In addition, the net loss for the quarter ended
September 30, 2009 was adversely affected by the inclusion of
depletion and depreciation from March 2, 2009 to June 30, 2009.
Depletion and depreciation was initially not recognized after
March 2, 2009 due to the decision, at that time, to sell the
company's Argentinean interests. Attributing to fluctuations in
working capital is the classification of debt as either current or
long-term.
(5) As the company has net losses during the three months ended
September 30, 2009, the dilutive effect of stock options and stock
purchase warrants became anti-dilutive causing the basic weighted
average common shares outstanding to be used as the denominator in
the dilutive per share net loss calculation.
CONSOLIDATED BALANCE SHEETS
Petrolifera Petroleum Limited (Unaudited)
-------------------------------------------------------------------------
As at Sept. 30, Dec. 31,
2009 2008
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
ASSETS
Current
Cash $ 55,953 $ 30,701
Accounts receivable 18,067 37,331
Restricted cash (Note 4) 2,513 -
Income taxes receivable 4,720 4,736
Inventory (Note 5) 632 658
Prepaid expenses 308 535
Deferred financing costs (Note 6) 924 -
-------------------------------------------------------------------------
83,117 73,961
-------------------------------------------------------------------------
Long-term investments (Note 4) 19,873 25,428
Property and equipment 265,298 254,644
Deferred financing costs (Note 6) - 1,625
-------------------------------------------------------------------------
$ 368,288 $ 355,658
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $ 17,203 $ 35,882
Income taxes payable 810 1,444
Bank debt (Note 6) 64,332 16,637
Due to a related company (Note 7) 48 42
-------------------------------------------------------------------------
82,393 54,005
Long-term bank debt (Note 6) 27,464 77,150
Asset retirement obligations (Note 8) 9,534 10,106
Future income taxes 10,422 12,050
-------------------------------------------------------------------------
129,813 153,311
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital, warrants and contributed
surplus (Note 9(a)) 167,950 108,254
Accumulated other comprehensive income (loss) (718) 16,106
Retained earnings 71,243 77,987
-------------------------------------------------------------------------
238,475 202,347
-------------------------------------------------------------------------
$ 368,288 $ 355,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and guarantees (Note 13)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Petrolifera Petroleum Limited (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
$000 (except per share amounts) 2009 2008 2009 2008
-------------------------------------------------------------------------
REVENUE
Petroleum and natural
gas sales $ 17,229 $ 32,110 $ 65,854 $ 92,793
Interest income - 16 37 122
-------------------------------------------------------------------------
17,229 32,126 65,891 92,915
Royalties (2,445) (4,842) (9,362) (12,892)
-------------------------------------------------------------------------
14,784 27,284 56,529 80,023
-------------------------------------------------------------------------
EXPENSES
Operating 5,763 6,410 17,362 18,675
General and administrative 2,278 2,240 6,370 6,326
Finance charges (Note 6) 1,132 1,361 4,057 3,584
Taxes other than income taxes 267 486 1,631 1,808
Foreign exchange loss (gain) (1,102) (239) (110) 969
Depletion, depreciation and
accretion 17,568 6,599 24,610 17,656
Stock-based compensation
(Note 9(e)) 1,561 1,123 3,999 4,252
Fair value impairment (Note 4) 2,104 1,885 2,104 5,377
-------------------------------------------------------------------------
29,571 19,865 60,023 58,647
-------------------------------------------------------------------------
Earnings (loss) before
income taxes (14,787) 7,419 (3,494) 21,376
Current income tax provision 516 1,282 2,906 9,124
Future income tax provision
(recovery) (3,944) 2,573 344 3,360
-------------------------------------------------------------------------
(3,428) 3,855 3,250 12,484
-------------------------------------------------------------------------
NET EARNINGS (LOSS) (11,359) 3,564 (6,744) 8,892
RETAINED EARNINGS, BEGINNING
OF PERIOD 82,602 71,761 77,987 66,433
-------------------------------------------------------------------------
RETAINED EARNINGS, END
OF PERIOD $ 71,243 $ 75,325 $ 71,243 $ 75,325
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS (LOSS)
PER SHARE (Note 12(a))
Basic $ (0.14) $ 0.06 $ (0.11) $ 0.17
Diluted $ (0.14) $ 0.06 $ (0.11) $ 0.17
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Petrolifera Petroleum Limited (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
$000 2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) $ (11,359) $ 3,564 $ (6,744) $ 8,892
Foreign currency translation
adjustment (9,173) 4,574 (16,824) 6,632
-------------------------------------------------------------------------
Comprehensive income (loss) $ (20,532) $ 8,138 $ (23,568) $ 15,524
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Petrolifera Petroleum Limited (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
$000 2009 2008 2009 2008
-------------------------------------------------------------------------
Balance, beginning of period $ 8,455 $ (8,616) $ 16,106 $ (10,674)
Foreign currency translation
adjustment (9,173) 4,574 (16,824) 6,632
-------------------------------------------------------------------------
Balance, end of period $ (718) $ (4,042) $ (718) $ (4,042)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Petrolifera Petroleum Limited (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
Sept. 30 Sept. 30
-------------------------------------------------------------------------
$000 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by (used in)
the following activities:
OPERATING
Net earnings (loss) $ (11,359) $ 3,564 $ (6,744) $ 8,892
Items not involving cash:
Depletion, depreciation
and accretion 17,568 6,599 24,610 17,656
Stock-based compensation
(Note 9(e)) 1,561 1,123 3,999 4,252
Fair value impairment
(Note 4) 2,104 1,885 2,104 5,377
Unrealized foreign exchange
loss (gain) (640) (239) 1,571 969
Amortization of deferred
charges 213 221 656 607
Future income tax provision
(recovery) (3,944) 2,573 344 3,360
-------------------------------------------------------------------------
Cash flow from operations
before non-cash working
capital changes 5,503 15,726 26,540 41,113
Changes in non-cash
working capital (Note 12(b)) 2,859 (505) 14,414 (8,677)
-------------------------------------------------------------------------
8,362 15,221 40,954 32,436
-------------------------------------------------------------------------
FINANCING
Proceeds of bank debt or
long-term bank debt 924 - 19,896 44,214
Repayment of bank debt or
long-term bank debt (4,973) (15,825) (11,394) (15,825)
Issue of common shares and
common share purchase
wattants (Note 9(a)) 58,768 73 58,768 40,230
Share issue costs (Note 9(a)) (3,155) - (3,155) (2,240)
Deferred financing costs
and other (218) (153) - (153)
-------------------------------------------------------------------------
51,346 (15,905) 64,115 66,226
-------------------------------------------------------------------------
INVESTING
Development of oil and
gas properties (13,389) (21,046) (59,478) (81,212)
Receipt of interest on long-
term investment (Note 4) 97 - 1,623 -
Investment in restricted cash (1,482) - (1,188) -
Changes in non-cash working
capital (Note 12(b)) (2,577) (5,441) (14,839) (15,825)
-------------------------------------------------------------------------
(17,351) (26,487) (73,882) (97,037)
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 42,357 (27,171) 31,187 1,625
Impact of foreign exchange on
foreign currency denominated
cash balances (1,207) 997 (5,935) 188
CASH, BEGINNING OF PERIOD 14,803 41,039 30,701 13,052
-------------------------------------------------------------------------
CASH, END OF PERIOD $ 55,953 $ 14,865 $ 55,953 $ 14,865
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary cash flow information (Note 12(c))
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Petrolifera Petroleum Limited (Unaudited)
Period Ended September 30, 2009
1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES
The interim Consolidated Financial Statements include the accounts of
Petrolifera Petroleum Limited and its wholly-owned subsidiaries and
foreign branches (collectively, "Petrolifera" or the "company") and are
presented in Canadian dollars and in accordance with Canadian generally
accepted accounting principles. Petrolifera is engaged in petroleum and
natural gas exploration, development and production activities in South
America.
The interim Consolidated Financial Statements have been prepared
following the same accounting policies and methods of computation as the
annual audited Consolidated Financial Statements for the year ended
December 31, 2008 except as provided in Note 2. The disclosures provided
below do not conform in all respects to those included with the annual
audited Consolidated Financial Statements. The interim Consolidated
Financial Statements should be read in conjunction with the annual
audited Consolidated Financial Statements and the notes thereto.
2. NEW ACCOUNTING PRONOUNCEMENTS AND STANDARDS
During August, 2009, the CICA issued amendments to Section 3855,
Financial Instruments - Recognition and Measurement. The amendments
included the definitions of a financial asset or financial liability held
for trading and loans and receivables, provided guidance concerning the
assessment of embedded derivatives upon reclassification of a financial
asset out of the held-for-trading category and requires that Section
3025, Impaired Loans, be applied to assess whether held-to-maturity
investments are impaired and to account for any such impairment. The
amendment concerning the embedded derivates was adopted for any
reclassification made on or after July 1, 2009 and did not have any
impact on the company's financial statements. The remaining amendments to
Section 3855 apply to the company's annual financial statements ended
December 31, 2009. The adoption of the amendments to Section 3855 is not
anticipated to have an impact on the company's financial statements.
During June, 2009, the CICA issued amendments to Section 3855, Financial
Instruments - Recognition and Measurement, and Section 3862, Financial
Instruments - Disclosures. The amendment to Section 3855 clarifies when
an embedded prepayment option is separated from its host debt instrument
for accounting purposes. The company prospectively adopted the CICA
amendment to Section 3855 which did not have an impact on the company's
financial statements. The amendments to Section 3862 enhance financial
instrument disclosure requirements about liquidity risk and provide new
disclosure requirements for fair value measurements. The amendments to
Section 3862 apply to the company's annual financial statements ended
December 31, 2009. Upon adoption of the Section 3862 amendments, the
company need not provide comparative information for the disclosures
required by the amendments. The adoption of the amendments to Section
3862 is not anticipated to have an impact on the company's financial
statements.
Effective January 1, 2009 the company adopted CICA Handbook section 3064,
Goodwill and Intangible Assets, which replaced section 3062, Goodwill and
Other Intangible Assets and section 3450, Research and Development Costs.
Various changes have been made to other sections of the CICA Handbook for
consistency purposes. Section 3064 establishes new standards for the
recognition, measurement, presentation and disclosure of goodwill
subsequent to its initial recognition and of intangible assets by profit-
oriented enterprises. Standards concerning goodwill are unchanged from
the standards included in the previous section 3062. As the company does
not carry goodwill or intangible assets, as defined by section 3064, this
new standard had no impact on the presentation and disclosures of the
company.
In January 2009, the CICA issued EIC-173, Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities. The abstract provides
guidance on how to take into account credit risk of an entity and
counterparty when determining the fair value of financial assets and
financial liabilities, including derivative instruments. This abstract is
effective for the company's interim and annual Consolidated Financial
Statements for periods ending on or after March 31, 2009 with
retrospective application without reinstatement of prior periods. The
application of this abstract did not have a material effect on the
company's Consolidated Financial Statements.
In December 2008, the CICA issued Section 1582, Business Combinations,
which will replace CICA Section 1581 of the same name. Section 1582
establishes principles and requirements of the acquisition method for
business combinations and related disclosures. This statement applies
prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning
on or after January 2011 with earlier application permitted. The company
is currently evaluating the impact of this changeover on its Consolidated
Financial Statements.
In December 2008, the CICA issued Sections 1601, Consolidated Financial
Statements, and 1602, Non-Controlling Interests, which replaces existing
Section 1600. Section 1601 establishes standards for the preparation of
consolidated financial statements. Section 1602 provides guidance on
accounting for a non-controlling interest in a subsidiary in consolidated
financial statements subsequent to a business combination. These
standards are effective on or after the beginning of the first annual
reporting period beginning on or after January 2011 with earlier
application permitted. Section 1602 currently does not impact the
company as it has full controlling interest of all of its subsidiaries.
The company is currently evaluatin the impact of Section 1601 on its
Consolidated Financial Statements.
3. ARGENTINEAN OPERATIONS
The company announced on March 2, 2009 that its Board of Directors had
authorized the company to initiate a process to dispose of its
Argentinean interests. During early July, 2009, several bids for the
company's Argentinean interests were received from third parties and,
after careful consideration, on July 15, 2009 the company announced that
the process to dispose of its interests did not result in any acceptable
bids. Accordingly, the company's Argentinean interests are reported
within the unaudited consolidated financial statements from the beginning
of each period for the three months and nine months ended September 30,
2009 as though the operations were part of continuing operations,
resulting in the recognition of depletion and depreciation expense from
the date that management had initially ceased recognition, which was
March 2, 2009. This resulted in the company's depletion and depreciation
expense for the period from March 2, 2009 through to June 30, 2009, being
included in depletion and depreciation expense recognized for the three
months ended September 30, 2009.
4. RESTRICTED CASH AND LONG-TERM INVESTMENTS
As at September 30, 2009, long-term investments included notes received
in exchange for Asset Backed Commercial Paper ("ABCP") with a face value
of $34.6 million and a carrying value of $18.8 million and collateral to
support issued letters of credit of $1.1 million, while restricted cash
included collateral to support issued letters of credit of $2.5 million,
with terms to maturity of less than one year. As at December 31, 2008,
ABCP with a face value of $37.7 million and a carrying value of $22.5
million and collateral to support issued letters of credit of $2.9
million were included in long-term investments. The decrease in the face
and carrying values of the investments formerly known as ABCP is
explained herein. These investments were classified as held for trading
and were carried at fair value, which is assessed each reporting date.
In January, 2009, the Pan-Canadian Investors Committee for Third-Party
Structured Asset-Backed Commercial Paper announced that the Superior
Court of Ontario granted the Plan Implementation Order and that,
accordingly, the plan for restructuring ABCP had been fully implemented.
In exchange for the shorter-term ABCP, the company has now received the
longer term notes with maturities that generally approximate those of the
assets previously contained in the underlying conduits. Assuming these
replacement notes become liquid and could be sold for cash, the company
would be able to substantially reduce its net indebtedness incurred from
lack of access to these amounts.
During the third quarter of 2009, the company was advised that its
investment in the ineligible asset tracking note Class 2 ("IA - Class 2")
had total pledged collateral of $400.0 million. Several credit events
have occurred in the IA - Class 2 portfolio resulting in losses greater
than the pledged collateral, thereby reducing the outstanding principal
amount of this investment to nil (the company had an original face value
of $2.9 million in the IA - Class 2 notes). Further, the company's
investment in the ineligible asset tracking note Class 1 ("IA - Class 1")
has total pledged collateral of $500.0 million and a third party
portfolio investment manager expects no principal returns given the
likelihood of multiple credit events (the company has an investment with
a face value of $3.7 million in the IA - Class 1 notes). On August 11,
2009 a third party credit rating agency downgraded the Class A-2 notes to
"BBB" from "A" and maintained the rating under review with negative
implications due to a series of credit events.
For the nine months ended September 30, 2009, the company received $1.5
million in payments, representing interest that had accrued on the
previous holdings of ABCP during the period from mid-August 2007 until
January 21, 2009, net of its pro-rata portion of expenses, including
legal costs associated with the resolution agreed and approved under the
Canada Business Corporations Act and the Companies Creditors' Arrangement
Act. It is expected that substantially all of the restructuring costs and
reserves were deducted from these payments and are not expected to have
any further impact on future payments to the company, although there may
be other deductions related to alternative banking, legal or
administrative fees. For the three months and nine months ended September
30, 2009, the company received $0.1 million of interest and return of
capital payments that had accrued on the investments formerly known as
ABCP during the period from January 21, 2009 until September 30, 2009.
For the three months and nine months ended September 30, 2009, the
company has recognized a $2.1 million impairment in the carrying value of
its longer-term notes received in exchange for ABCP primarily due to the
loss in its IA - Class 1 and IA - Class 2 notes resulting from a series
of third party credit defaults or expected defaults, respectively, and a
lowered rating from a third party credit rating agency on the company's
A-2 class of investment notes.
As no active market for the longer term notes has developed, management
has estimated the fair value of the company's investment in the longer
term notes at September 30, 2009, based on a probabilistic recovery of
principal and interest, after taking into account all available
information. Under this valuation method, several different outcomes of
the recovery of the principal and interest are estimated, considering the
information available as at September 30, 2009. A weighted average
recovery is then calculated. This weighted average recovery is used to
determine the discounted cash flows that are expected from these
investments. The discount rate used to discount the expected cash flows
from the longer term notes was an approximation of the risk-free rate for
the expected life of the longer term notes to be received. As the rate
used for discounting was an approximation of the risk-free rate, all
other risks have been incorporated in the estimated probability-adjusted
expected outcomes. This methodology applied all risking information into
the various scenarios and discounted the fully-risked cash flow stream
only for the time value of money. The recovery factors used were as
follows:
-------------------------------------------------------------------------
Face Risk- Risk-
Value adjusted adjusted Capital Interest
Class of Capital Interest Weighted Weighted Risk-free
of Notes Recovery Recovery Average Average Term Discount
Note ($000s) Range Range Recovery Recovery (years) Rate
-------------------------------------------------------------------------
A-1 $ 13,978 0 - 80% 0 - 60% 75% 54% 4 - 8 3%
A-2 13,543 0 - 70% 0 - 30% 64% 27% 8 3%
B 2,459 0 - 30% 0% 27% 0% 8 3%
C 928 0% 0% 0% 0% 8 3%
IA
Track-
ing 3,674 0% 0% 0% 0% 8 3%
-------------------------------------------------------------------------
Total $34,582
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Based on the above approach the fair value of the investment in the
longer term notes was $18.8 million as at September 30, 2009 compared to
$22.5 million as at December 31, 2008. The reduction reflected the
receipt of interest and return of principal totaling $1.6 million in 2009
but incorporated in the determination of fair value as at December 31,
2008 and the recognition of impairment in the fair value of the
investments formerly known as ABCP for $2.1 million, as described herein.
To date, the total impairment is approximately 45 percent of the original
cost of the investment recognized on the longer term notes, including
impairments recognized on the ABCP, which is an increase compared to the
40 percent of impairment relative to the original cost of the ABCP
recognized at December 31, 2008.
The theoretical fair value of the company's longer-term notes could range
from $14.1 million to $25.2 million using the valuation methodology
described above with reasonably possible alternative assumptions. The
outcome of the actual timing and amount ultimately recoverable from these
notes may differ materially from this estimate, which would impact the
company's earnings.
5. INVENTORY
-------------------------------------------------------------------------
Sept. 30, Dec. 31,
As at 2009 2008
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Crude oil $632 $658
-------------------------------------------------------------------------
The company maintains inventory as a consequence of the sales process for
crude oil which has been produced and not delivered to customers for
periods of up to several days, during which time it must be stored. Crude
oil inventory was measured at September 30, 2009 and December 31, 2008
using a weighted average cost basis.
As at September 30, 2009 and December 31, 2008, inventory is composed of
crude oil held in storage at the company's facilities and in
transportation pipelines. Crude oil is carried at the lower of cost and
net realizable value.
6. BANK DEBT AND LONG-TERM BANK DEBT
In 2007 the company entered into a US$100.0 million reserve-backed
revolving credit facility with availability as at September 30, 2009 of
US$60.0 million. During July, 2009, the availability of the reserve-
backed facility was reduced from US$70.0 million to US$60.0 million based
on producing crude oil and natural gas reserves as at December 31, 2008.
This facility expires on September 5, 2010, bears interest at LIBOR plus
a margin, is secured by the pledge of the shares of Petrolifera's
subsidiaries and has a provision for a borrowing base adjustment every
six months, with the next adjustment to be calculated based on
information as at June 30, 2009. As at September 30, 2009 the outstanding
reserve-backed facility was $64.3 million (US$60.0 million) classified as
bank debt. As at December 31, 2008 the outstanding reserve-backed
facility was $77.2 million (US$63.0 million) classified as long-term
debt. Deferred financing costs of $0.9 million related to this facility
are being amortized up to September 5, 2010, the expiration of the
facility, and, accordingly, is classified as a current asset (2008 - $1.6
million was being amortized over the remaining term of this facility and,
accordingly, was classified as a long-term asset). For the three months
and nine months ended September 30, 2009, the company recognized
amortization of deferred charges of $0.2 and $0.7 million, respectively
(2008 - $0.2 and $0.6 million, respectively).
During April, 2009, the company negotiated an expansion of its line of
credit ("ABCP line-of-credit") to a maximum of $28.2 million with a
Canadian chartered bank. The ABCP line-of-credit was primarily secured by
the longer term notes exchanged for the ABCP. Any borrowings from the
expanded ABCP line-of-credit are categorized as long-term, as the
facility's initial term to maturity is April, 2011 and the company can
make up to five extension requests with each extension representing an
additional one-year period. As at December 31, 2008, the prevailing terms
of the line of credit were a maximum draw of $18.0 million and due on
demand, resulting in the company then categorizing its borrowings as
current. The ABCP line of credit bears interest at a floating rate. As at
September 30, 2009 the outstanding ABCP line-of-credit facility was $27.5
million whereas as at December 31, 2008, the outstanding prior facility
was $16.6 million.
Interest expense on the facilities for the three months and nine months
ended September 30, 2009 was $0.9 million and $3.4 million, respectively
(2008 - $1.1 million and $3.0 million, respectively), as disclosed on the
Consolidated Statement of Operations and Retained Earnings as finance
charges which also includes the amortization of deferred finance charges
(see Note 6). The effective interest rate on the company's facilities was
3.0 and 4.4 percent for the three months and nine months ended September
30, 2009, respectively (2008 - 3.6 and 6.0 percent, respectively). The
unused credit on the facilities were $0.7 million as at September 30,
2009 (2008 - $9.9 million).
7. RELATED PARTY TRANSACTIONS
Connacher Oil and Gas Limited ("Connacher") purchased 13,556,000 units
for gross proceeds of $11.9 million as offered pursuant to the equity
financing that resulted in the issuance of 56,820,000 units raising gross
proceeds of approximately $50.0 million (See Note 9(b)). Connacher did
not participate in the over-allotment option. The issuance of units to
Connacher pursuant to the equity financing was measured on the same terms
as the public offering closed on August 21, 2009.
Under the terms of an Administrative Agreement with Connacher, in effect
from January 1, 2008, Connacher provided certain administrative services
necessary or appropriate upon the direction of the company. The fee for
this services was $0.1 million for the nine months ended September 30,
2009 (2008 - $0.1 million). From time to time Connacher also paid bills
on behalf of the company, for which it is reimbursed. Connacher also
provided certain support and services to the company in its pursuit of
exploration opportunities in Colombia, for which it will be indemnified
and reimbursed without further economic interest in the secured
opportunities. Connacher is a significant shareholder of the company with
a 22 percent interest as at September 30, 2009 and the Executive Chairman
of the company is the President and Chief Executive Officer of Connacher.
Directors and officers of the company purchased 1,137,500 units for gross
proceeds of $1.0 million as offered pursuant to the private placement
(see Note 9(c)). The issuance of units to the directors and officers of
the company pursuant to the private placement was measured on the same
terms as the public offering closed on August 21, 2009.
During 2009 the company paid professional legal fees and common share
issue costs for the three months and nine months ended September 30, 2009
of $0.2 million and $0.4 million, respectively (2008 - $0.2 million, and
$0.8 million, respectively), to a law firm in which an officer of the
company is a related party. Transactions with the related party occurred
within the normal course of business and have been measured at the
exchange amount on normal business terms. The exchange amount is the
amount of consideration established and agreed with the related party.
8. ASSET RETIREMENT OBLIGATIONS
At September 30, 2009 the estimated total undiscounted amount required to
settle the asset retirement obligations was $17.4 million (December 31,
2008 - $19.2 million). These obligations are expected to be settled over
the useful lives of the underlying assets, which currently extend up to
19 years into the future. This amount has been discounted using a credit-
adjusted risk-free interest rate of six percent and an annual inflation
rate of two percent. Changes to asset retirement obligations were as
follows:
-------------------------------------------------------------------------
($000) 2009
-------------------------------------------------------------------------
Asset retirement obligations, December 31, 2008 $ 10,106
Liabilities incurred 296
Cumulative translation adjustment (1,300)
Accretion expense 432
-------------------------------------------------------------------------
Asset retirement obligations, September 30, 2009 $ 9,534
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS
(a) Authorized:
The authorized share capital is comprised of an unlimited number of
common shares.
Issued:
-------------------------------------------------------------------------
Number of Amount
Securities ($000)
-------------------------------------------------------------------------
Share capital:
-------------------------------------------------------------------------
Balances, share capital, Dec. 31, 2008 54,948,010 $ 92,408
Issuance of common shares through public
offering (b) 65,343,000 52,928
Issuance of common shares through private
placement (c) 1,137,500 921
Issued common shares upon exercise of
options (e) 330,000 265
Assigned value of options exercised 67
Issue costs net of tax-effect (b) (3,071)
-------------------------------------------------------------------------
Balances, share capital, Sept. 30, 2009 121,758,510 $ 143,518
-------------------------------------------------------------------------
Warrants:
-------------------------------------------------------------------------
Balances, warrants, Dec. 31, 2008 - $ -
Issuance of warrants through public
offering (b) (d) 32,671,500 4,574
Issuance of warrants through private
placement (c) (d) 568,750 80
-------------------------------------------------------------------------
Balances, warrants, Sept. 30, 2009 33,240,250 $ 4,654
-------------------------------------------------------------------------
Contributed surplus:
-------------------------------------------------------------------------
Balance, contributed surplus, Dec. 31, 2008 15,846
Stock-based compensation (e) 3,999
Assigned value of options exercised (67)
-------------------------------------------------------------------------
Balance, contributed surplus, Sept. 30, 2009 $ 19,778
-------------------------------------------------------------------------
Share capital, warrants and contributed
surplus:
-------------------------------------------------------------------------
Balance, share capital, warrants and
contributed surplus, Dec. 31, 2008 $ 108,254
Balance, share capital, warrants and
contributed surplus, Sept. 30, 2009 $ 167,950
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Equity Financing:
On August 21, 2009, the company announced that it entered into a
financing agreement with a syndicate of underwriters to issue 56,820,000
units (each, a "Unit") at a price of $0.88 per Unit, with each Unit
consisting of one common share in the capital of the company (each, a
"Common Share") and one-half of one Common Share purchase warrant of the
company (each whole Common Share purchase warrant, a "Warrant"), on a
"marketed" basis, for gross proceeds of approximately $50.0 million. The
price of $0.88 per Unit is comprised of $0.81 per Common Share and $0.07
per one-half Warrant. The underwriters were granted an over-allotment
option (the "Over-Allotment Option"), which included the right to
purchase up to an additional 15 percent of the Units, exercisable in
whole or in part up to 30 days following closing on August 28, 2009. The
Over-Allotment Option was exercised in whole by the underwriters, closing
on September 4, 2009, and resulted in a total issuance of 65,343,000
Units raising gross proceeds of approximately $57.5 million. Issue costs
of $3.2 million were incurred with respect to the equity financing less a
tax-effect of $0.1 million.
(c) Private Placement:
On September 15, 2009 the company announced that it has closed a non-
brokered private placement of 1,137,500 Units at a price of $0.88 per
Unit, with each Unit consisting of a Common Share and one-half of one
Warrant, with directors and officers of the Corporation for gross
proceeds of approximately $1.0 million.
(d) Warrants:
Each Warrant, comprised of two one-half Common Share purchase warrants,
issued pursuant to the equity financing or private placement entitles the
holder thereof to purchase one Common Share (each a "Warrant Share") at
an exercise price of $1.20 per Warrant Share for two years from the date
of closing of the respective issuance. In the event that the 20-day
volume weighted average price of the Common Shares on the Toronto Stock
Exchange exceeds $2.50, the company may, within five business days after
such an event, provide notice to the holders of the Warrants
("Warrantholders") of early expiry and thereafter the Warrants can either
be exercised or they will expire on the date which is 30 days after the
date of the notice to the Warrantholders.
The fair value of each Warrant issued for the nine months ended September
30, 2009 was estimated on the date of issuance using the Black-Scholes
option-pricing model with assumptions for Warrants as follows:
-------------------------------------------------------------------------
Risk-free Expected
Dividend interest Expected vola-
yield rate life tility
-------------------------------------------------------------------------
2009 -% 1.5% 2 years 90%
-------------------------------------------------------------------------
The weighted average fair value of all Warrants issued for the three
months and nine months ended September 30, 2009 was $0.14 per Warrant.
(e) Stock Options:
As at September 30, 2009 and 2008, the company had stock options
outstanding to acquire common shares, as follows:
-------------------------------------------------------------------------
As at Sept. 30 2009 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding,
beginning of
period 4,576,327 $6.85 3,228,867 $8.71
Granted 5,280,900 1.31 830,000 9.24
Exercised (330,000) (0.80) (226,500) (0.73)
Forfeited (1,891,160) 13.14 (115,500) (13.89)
-------------------------------------------------------------------------
Outstanding, end
of period 7,636,067 1.72 3,716,867 9.27
-------------------------------------------------------------------------
Exercisable, end
of period 3,101,467 $1.86 2,698,184 $8.07
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options granted under the plan are generally fully exercisable after two
or three years and expire five years after the date granted. The table
below summarizes unexercised stock options and the weighted average
recurring contractual life, in years, by ranges of exercise prices as at
September 30, 2009 and 2008:
-------------------------------------------------------------------------
As at Sept. 30 2009 2008
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Remaining Remaining
Number Contractual Number Contractual
Outstanding Life (yrs) Outstanding Life (yrs)
-------------------------------------------------------------------------
$0.50 - $1.00 4,791,067 4.5 787,667 1.7
$1.09 - $1.75 381,500 1.3 419,000 2.1
$2.00 - $2.64 1,991,000 4.4 - -
$3.37 - $19.20 472,500 3.0 2,510,200 3.5
-------------------------------------------------------------------------
Total 7,636,067 4.2 3,716,867 2.9
-------------------------------------------------------------------------
During the three months and nine months ended September 30, 2009, a non-
cash expense of $1.6 million and $2.9 million, respectively, (2008 - $1.1
million and $4.3 million, respectively) was recorded as stock-based
compensation, reflecting the amortization of the fair value of stock
options over the vesting period. Additionally, during 2009 certain
employees, Officers and non-managerial Directors of the company
voluntarily surrendered 1,786,660 options with a weighted average
exercise price of $13.79 per option. In accordance with Canadian GAAP,
any unvested options that were voluntarily surrendered were deemed to
have become vested, resulting in the recognition of an additional non-
cash stock-based compensation expense of $1.1 million.
The fair value of each option granted for the nine months ended September
30, 2009 and 2008 is estimated on the date of grant using the Black-
Scholes option-pricing model with assumptions for grants as follows:
-------------------------------------------------------------------------
Risk-free
Dividend interest Expected Expected
yield rate life volatility
-------------------------------------------------------------------------
2009 -% 2.0% - 2.7% 4 years 89% - 90%
-------------------------------------------------------------------------
2008 -% 2.9% - 3.4% 4 years 89% - 94%
-------------------------------------------------------------------------
The weighted average fair value at the date of grant of all options
granted for the three months and nine months ended September 30, 2009 was
$0.65 and $0.84 per option, respectively (2008 - $3.64 and $5.93 per
option, respectively).
10. FINANCIAL INSTRUMENTS
Capital Management
The company is subject to external restrictions on its reserve-based
revolving credit facility. As at September 30, 2009, the facility had an
overall limit of US$100.0 million, with an availability of US$60.0
million (2008 - US$70.0 million), based on producing crude oil and
natural gas reserves as at December 31, 2008. This facility has a
provision for a borrowing base adjustment every six months, with the next
adjustment to be calculated based on information as at June 30, 2009.
Bank debt and long-term bank debt outstanding cannot exceed two times the
12 month trailing EBITDA. EBITDA is defined by the credit facility
agreement as net earnings (loss) prior to deduction of interest, income
taxes, depletion, depreciation and accretion expense and other non-cash
expenses and is reconciled to net earnings (loss) as follows:
-------------------------------------------------------------------------
12 Months
Three Months Ended Ended
-------------------------------------------------------------------------
($000) Dec. 31, Mar. 31, June 30, Sept. 30, Sept 30,
2008 2009 2009 2009 2009
-------------------------------------------------------------------------
Net earnings (loss) $2,662 $1,188 $3,427 $(11,359) $(4,082)
Add interest, income
taxes, depletion,
depreciation and
accretion expense
and other non-cash
expenses:
Depletion,
depreciation, and
accretion 11,328 6,904 138 17,568 35,938
Finance charges 1,833 1,577 1,348 1,132 5,890
Fair value
impairment 3,505 - - 2,104 5,609
Stock-based
compensation 1,595 1,592 846 1,561 5,594
Income tax
provision
(recovery) 1,947 1,044 5,634 (3,428) 5,197
Unrealized foreign
exchange loss (gain) (789) 815 1,396 (640) 782
-------------------------------------------------------------------------
EBITDA $22,081 $13,120 $12,789 $6,938 $54,928
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As at September 30, 2009, bank debt and long-term bank debt outstanding
was $91.8 million and two times EBITDA was $109.9 million, for a ratio of
0.84:1.00, which is below the imposed limit.
Credit Risk
The company is exposed to credit risk in relation to its cash, accounts
receivable, restricted cash and long-term investments:
Cash and restricted cash are held with highly rated international banks
and therefore the company considers these assets to have negligible
credit risk.
The company's accounts receivable are primarily with multinational
purchasers, oil and gas marketers and local government agencies. The
company conducts a small minority of its business through joint ventures,
so its overall exposure to credit risk from joint venture partners is
considered to be low. The company's production base is entirely located
in Argentina, and is heavily weighted to oil. The company has a
concentration of credit risk as it sold US$51.9 million of crude oil
production to one multinational purchaser for the nine months ended
September 30, 2009. Gas production is sold to a reputable local gas
marketing company. Receivables with local government agencies mainly
pertain to input taxes paid on certain expenditures. The company has not
experienced any collection problems with its counterparties and does not
currently have any overdue amounts.
Refer to Note 4 for further discussion regarding the credit risk of long-
term investments.
The carrying amounts of cash, accounts receivable, restricted cash and
long-term investments represent the company's maximum credit exposure.
The company does not have an allowance for doubtful accounts and did not
write off any receivables for the three months and nine months ended
September 30, 2009.
Liquidity Risk
The company manages the risk of not meeting its financial obligations
through management of its capital structure, annual budgeting of its
revenues, expenditures and cash flows, cash flow forecasting and
maintaining an unused credit facility where practicable.
Accounts payable, as disclosed on the Consolidated Balance Sheet, falls
due within the next year and is anticipated to be funded through the
company's cash, collections of accounts receivable and the unused credit
facility. The revolving reserve-backed debt facility has a current
available limit of US$60.0 million, of which $64.3 million is drawn at
September 30, 2009. Changes in the availability of the reserve-backed
credit facility are anticipated to occur, from time-to-time, through
significant reserve additions, disposals or revisions. This facility
expires on September 5, 2010. The company holds a $28.2 million ABCP
line-of-credit, of which $27.5 million is drawn at September 30, 2009,
that is primarily secured by the longer term notes received in exchange
for the ABCP. The line of credit bears interest at a floating rate.
Market Risk
Changes in commodity prices, interest rates and foreign currency exchange
rates can expose the company to fluctuations in its net earnings (loss)
and in the fair value of its financial assets and liabilities.
Commodity Price Risk
Price fluctuations for crude oil, natural gas liquids and natural gas are
a risk to the company over which the company has little influence. Due to
pricing controls present in Argentina and a domestic crude oil sales
agreement with a multinational purchaser, crude oil selling prices
reflect both current market conditions in Argentina and the movement of
crude oil prices in international markets. Natural gas prices are
impacted by the Argentine government and local demand with historic
prices at low levels compared to world prices.
Interest Rate Risk
Floating rate debt exposes the company to fluctuations in cash flows and
net earnings (loss) due to changes in market interest rates. Based on the
existing debt balance, a one percent increase (decrease) in the
underlying market interest rates would have decreased (increased) net
earnings by approximately $0.7 million on an annual basis.
Foreign Currency Exchange Rate Risk
Substantially all of the company's operations are conducted in foreign
jurisdictions, so the company is exposed to foreign currency exchange
rate risk on most of its activities as reported in Canadian Dollars
(CAD). Oil and natural gas sales contracts are denominated in US Dollars
(USD) and settled in Argentine Pesos (ARS). Operating and capital
expenditures are incurred in USD and ARS, and to a lesser extent in
Peruvian Nuevos Soles (PEN) and Colombian Pesos (COP). The revolving
credit facility is denominated in USD, which partially limits the
company's exposure in terms of cash outflows (interest expense) being
inversely correlated to cash inflows (oil and gas revenues). The table
below details the company's financial instruments exposure to foreign
currencies:
-------------------------------------------------------------------------
Per CAD USD ARS PEN COP
Balance ----------------------------------------------
($000) Sheet CAD $ equivalent amounts
-------------------------------------------------------------------------
Cash $55,953 $23,294 $22,186 $5,587 $86 $4,800
Accounts
receivable 18,067 135 3,627 8,487 1,207 4,611
Restricted
cash 2,513 - 2,513 - - -
Long-term
investments 19,873 18,854 1,019 - - -
Accounts payable
and accrued
liabilities (17,203) (1,023) (2,742) (8,120) (11) (5,307)
Bank debt (64,332) - (64,332) - - -
Long term
bank debt (27,464) (27,464) - - - -
-------------------------------------------------------------------------
Net financial
assets
(liabili-
ties) $(12,593) $13,796 $(37,729) $5,954 $1,282 $4,104
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The company estimates a 20 percent change in the Canadian Dollar against
the above listed foreign currencies could be reasonably possible over a
twelve month period. A 20 percent strengthening in the CAD would result
in a change to earnings (loss) before taxes and other comprehensive
income (loss) as follows (an equal but opposite impact to earnings (loss)
before taxes and other comprehensive income (loss) would result if the
CAD weakened by 20 percent):
-------------------------------------------------------------------------
USD ARS PEN COP
--------------------------------------
($000) CAD $ equivalent amounts
-------------------------------------------------------------------------
Decrease in earnings before taxes $(1,219) $ - $ (214) $ (684)
Increase in other comprehensive
income $ 6,515 $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. SEGMENTED INFORMATION
The company has corporate offices in Canada, the US and Barbados
(combined to comprise the corporate segment), petroleum and natural gas
operations in Argentina and exploration activities in Peru and Colombia.
Financial information pertaining to these operating segments is presented
below.
-------------------------------------------------------------------------
Corporate Argentina Peru Colombia Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Three Months Ended
Sept. 30, 2009
Revenue, gross $- $17,229 $- $- $17,229
Net loss (4,738) (6,488) (110) (23) (11,359)
Property and
equipment 302 164,521 55,655 44,820 265,298
Capital
expenditures 14 4,863 309 8,203 13,389
Total assets $63,227 $190,488 $60,314 $54,259 $368,288
-------------------------------------------------------------------------
Three Months Ended
Sept. 30, 2008
Revenue, gross $7 $32,119 $- $- $32,126
Net earnings (loss) (3,102) 6,534 (41) 173 3,564
Property and
equipment 335 161,810 34,245 4,306 200,696
Capital
expenditures 31 14,628 4,622 1,765 21,046
Total assets $36,544 $193,819 $38,161 $10,650 $279,174
-------------------------------------------------------------------------
Nine Months Ended
Sept. 30, 2009
Revenue, gross $9 $65,860 $22 $- $65,891
Net earnings
(loss) (10,564) 3,877 (13) (44) (6,744)
Property and
equipment 302 164,521 55,655 44,820 265,298
Capital
expenditures 34 19,989 6,977 32,478 59,478
Total assets $63,227 $190,488 $60,314 $54,259 $368,288
-------------------------------------------------------------------------
Nine Months Ended
Sept. 30, 2008
Revenue, gross $54 $92,861 $- $- $92,915
Net earnings
(loss) (12,923) 21,617 19 179 8,892
Property and
equipment 335 161,810 34,245 4,306 200,696
Capital
expenditures 31 59,831 18,838 2,512 81,212
Total assets $36,544 $193,819 $38,161 $10,650 $279,174
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Crude oil sales totaling US$14.6 million and US$51.9 million was made to
one large international oil company during the three months and nine
months ended September 30, 2009, respectively (2008 - US$29.3 million and
US$86.9 million, respectively).
12. SUPPLEMENTARY INFORMATION
(a) Per share amounts
The following table summarizes the calculation of basic and diluted
common shares:
-------------------------------------------------------------------------
Three months Nine months
ended Sept. 30 ended Sept. 30
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Weighted average common
shares outstanding 82,417,689 54,884,423 64,205,191 51,876,382
Dilutive effect of stock
options and stock
purchase warrants 121,139 1,013,443 1,414,008 1,178,292
-------------------------------------------------------------------------
Weighted average common
shares outstanding -
diluted 82,538,828 55,897,866 65,619,199 53,054,674
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As the company has net losses, the dilutive effect of stock options and
stock purchase warrants became anti-dilutive causing 82,417,689 and
64,205,191 weighted average dilutive common shares outstanding to be used
as the denominator in the diluted per share net loss calculation for the
three months and nine months ended September 30, 2009, respectively.
(b) Net change in non-cash working capital
-------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------------------------------------------------------
($000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Accounts receivable $5,259 $7,400 $17,588 $(3,687)
Income taxes receivable (332) - (640) -
Prepaid expenses 284 (218) 211 (127)
Inventory 10 (190) (13) (698)
Accounts payable and accrued
liabilities (5,184) (7,043) (17,112) (15,389)
Income taxes payable (272) (5,951) (465) (4,621)
Due to a related company (27) 56 6 20
-------------------------------------------------------------------------
$282 $(5,946) $(425) $(24,502)
-------------------------------------------------------------------------
Operating $2,859 $(505) $14,414 $(8,677)
Investing $(2,577) (5,411) $(14,839) (15,825)
-------------------------------------------------------------------------
$282 $(5,946) $(425) $(24,502)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Supplementary cash flow information
-------------------------------------------------------------------------
Three Months Nine Months
Ended Sept. 30 Ended Sept. 30
-------------------------------------------------------------------------
($000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Interest paid $886 $991 $3,341 $2,489
Income taxes paid $748 $6,592 $3,051 $9,704
-------------------------------------------------------------------------
-------------------------------------------------------------------------
13. COMMITMENTS AND GUARANTEES
Work Commitments
Each of the Peruvian licenses have negotiated work programs for a period
of seven years and the company has the right to withdraw from the
licenses at the end of each work program. In 2005 Petrolifera acquired
Blocks 106 and 107, two significant oil and gas exploration licenses in
Peru. In April, 2009 the company was awarded a third license with Block
133, a block that is contiguous with Block 107.
On Block 106, the company has recently completed the second phase work
program and anticipates making an application with the Peruvian authority
for completion of the third phase work program by December 31, 2009. The
fourth phase work program of Block 106 has a commitment to invest a
minimum of US$1.6 million in at least 60 km of 2D seismic prior to April,
2011. On Block 107, the company has completed the first two phases of
work programs and is in the process of applying for completion of the
third phase. Upon completion of an Environmental Impact Assessment, the
company will be able to proceed with the fourth phase of the work program
on Block 107 with a commitment to invest a minimum of US$10.0 million
through the drilling of one well prior to May, 2014. The company is in
the first phase of its Block 133 license which requires a minimum
investment of US$0.3 million through the acquisition of 20 km of seismic,
field geology and satellite mapping prior to February, 2011.
In 2007, the company was granted three concessions comprised of one
license and two technical evaluation agreements ("TEA") in Colombia.
Petrolifera has converted the Turpial and Sierra Nevada II TEAs into
exploration licenses where the latter was renamed Magdalena. Each of the
Colombian licenses have negotiated work programs for a period of six
years and the company has the right to withdraw from the licenses at the
end of each work program. Petrolifera has drilled the La Pinta No.1 well
on the Sierra Nevada I License which has completed the first phase work
program on this license. The second phase work program of the Sierra
Nevada License requires either the drilling of one exploratory well or
seismic acquisition and processing of 100 km prior to June, 2010. On the
company's Turpial License, the company has completed its 3D seismic
acquisition, processing and interpretation program. The second phase of
the work program for the Turpial License requires the drilling of one
exploratory well prior to September, 2010. The company is in the first
phase of its Magdalena license which requires 3D seismic acquisition,
processing and interpretation of 150 km(2) of seismic data to be
completed prior to December, 2010.
In Argentina the company has gross work commitments of US$4.0 million,
related to the Vaca Mahuida and Puesto Guevara blocks, that are to be
completed during 2010. During the nine months ended September 30, 2009,
the company completed its licensed work commitments related to the
Gobernador Ayala II block and is currently discussing the development
plans of this block with the province of La Pampa, Argentina. A portion
of the Argentinean work commitments related to the Vaca Mahuida block has
been farmed out to a third party.
Contractual Commitments
The company's contractual commitments under service contracts for
drilling, leases for office premises and other equipment and an
administrative services agreement for the three months ended December 31,
2009 and annually thereafter are as follows:
-------------------------------------------------------------------------
Subsequent
2009 2010 2011 to 2011 Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Drilling service
contracts and
other leases $5,685 $16,266 $429 $322 $22,702
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Guarantees
The company has issued letters of credit in the total amount of
US$1.6 million to secure the capital expenditure requirements associated
with two exploration licenses in Peru and US$1.7 million in support of
the Colombian work commitments, as well as depositing US$4.1 million in a
trust account in Colombia to meet certain of the work obligations as they
occur.
For further information: Petrolifera Petroleum Limited, R. A. Gusella, Executive Chairman, (403) 538-6201; Or Gary D. Wine, President and Chief Operating Officer, (403) 539-8450; Or Kristen J. Bibby, Vice President Finance and Chief Financial Officer, (403) 539-8450, Fax: (403) 538-6225, inquiries@petrolifera.ca, www.petrolifera.ca
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