/NOT FOR DISTRIBUTION TO US NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE
UNITED STATES/
CALGARY, Nov. 7 /CNW/ - Petro Andina Resources Inc. (the Company) is
pleased to report continued production growth and increased development
activity on its Argentine concessions for the third quarter of 2007.
Production for the last week of the quarter averaged 7,480 barrels of oil per
day net (14,960 gross).
------------------------------------------------------------------------DETAILThe Company announces its operating and financial results for the nine
months ended September 30, 2007. Copies of the 2007 third quarter financial
statements and related Management's Discussion and Analysis (MD&A) for the
nine months ended September 30, 2007 will be made available under the
Company's profile at www.sedar.com and on the Company's website at
www.petroandina.com.
Conference Call & Webcast
Petro Andina will host a conference call and live webcast to discuss
these results on Wednesday, November 7, 2007 beginning at 10:00 am Mountain
Standard Time (12:00 pm Eastern Standard Time). Media, analysts or any other
interested parties wishing to participate in the call can access it by calling
403-537-9608 or 1-800-952-4972 (toll free in North America). No access codes
are required.
The live audio webcast of the conference call will be available through
Windows Media Player by following the link posted under the Investor
Relations, Events section of the Company's website at www.petroandina.com.
Following the conclusion of the call, a link to a replay of the webcast will
also be posted on the Company's website.Highlights of the Third Quarter
- Increased average production to 6,627 barrels of oil per day net, an
18 percent increase over the second quarter of 2007 and a 385 percent
increase over the same period in 2006;
- Drilled 19 net (38 gross) development, appraisal and delineation
wells with an overall success rate of 90 percent and four net (six
gross) exploration wells with a 50 percent success rate;
- Commissioned the El Corcobo Norte (ECN) oil treatment facility, with
an initial design capacity of 15,000 barrels per day gross, (7,500
net), 15 months after initial decision to construct;
- Assumed operatorship of the CNQ-7 Concession and accelerated activity
by contracting a three dimensional (3D) seismic survey to commence in
November 2007;
- Successfully tested two wells on the CNQ-7 acreage offsetting Jaguel
Casa de Piedra (JCP);
- Completed acquisition of 300 square kilometres of 3D seismic on the
newly acquired Gobernador Ayala III (GA III) Concession, bringing
total seismic coverage to 81 percent of the Company's lands; and
- Commenced construction of the 80-kilometre sales pipeline on
September 10, 2007. To date 25 percent of the right-of-way has been
ditched and 30 percent of the pipe has been welded.
2008 Capital Budget
During its regularly scheduled meeting on November 6, 2007, the Board of
Directors of Petro Andina approved the 2008 capital budget for the Company
which includes:
- Development and appraisal drilling expenditures of $70 million,
- Exploration drilling and seismic expenditures of $10 million,
- Facilities and infrastructure expenditures of $35 million, and
- Business Development and other expenditures of $12 million.
The proposed capital budget also includes a carry forward of capital of
$13 million for the sales pipeline bringing Petro Andina's total net capital
budget for 2008 to $140 million.
The Company has contracted a fifth rig to assist in carrying out the 2008
drilling program which includes up to 200 development and injection wells. The
number of injectors will be dependent upon a review of performance of the five
waterflood pilot patterns at ECN. Petro Andina previously released initial
data from its waterflood program at JCP and is evaluating early stage response
at its first waterflood pilot at ECN. Injection began into an additional four
patterns at ECN in the third quarter and preliminary response is expected
during the second quarter of 2008. Following a review of the data, the
appropriate spacing and injector pattern for the development drilling program
will be selected. Twenty-three exploration wells are also proposed in the
budget for 2008, the final number of exploration wells being dependent upon
partner approval.
Petro Andina will now recommend the 2008 capital budget to its partners.
Subject to partner approval, Petro Andina will proceed with implementation of
the approved program.
The Company previously indicated that its target net exit rate for
year-end 2007 was 7,200 barrels of oil per day. Average production for the
final week of September was 7,480 barrels of oil per day. Petro Andina now
projects that the Company's 2007 exit rate will exceed 8,000 barrels of oil
per day net. Given its proposed capital budget, the Company estimates that it
will exit 2008 at a production rate of between 14,000 and 15,500 barrels of
oil per day. As well as normal uncertainties related to exploration and
production activities, performance within the range will be dependent upon the
following:
- Timing of waterflood response and performance, including the eventual
producer to injector ratio;
- Timing and commissioning of the sales pipeline; and
- Steamflood response and performance anticipated in the second quarter
of 2008.Management's Discussion and Analysis
The following Management's Discussion and Analysis (MD&A) of Petro Andina
Resources Inc. (Petro Andina or the Company) is dated as of November 5, 2007
and should be read in conjunction with the unaudited consolidated financial
statements for the nine months ended September 30, 2007 and the MD&A and
audited financial statements for the year ended December 31, 2006. The
consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles (GAAP). All amounts are in
Canadian dollars unless otherwise specified. This discussion is intended to
facilitate the understanding of trends and significant changes in the
financial condition and operational results of Petro Andina for the nine
months ended September 30, 2007.
Additional information relating to Petro Andina is contained in the
Company's long-form prospectus dated May 10, 2007. This document is available
on the Canadian Securities Administrators' website at www.sedar.com.
Forward-Looking Statements
This document contains forward-looking information that involves known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking information. For this purpose, any statements that are
contained herein that are not statements of historical fact may be deemed to
be forward-looking information, including Management's discussion of the
Company's plans and future operations. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "intends," "will," "should,"
"expects," "projects," and similar expressions are intended to identify
forward-looking information. The associated risks include, but are not limited
to, those associated with competition, the ability to generate revenue and
exploit operating margins, capital resources, the use of certain technologies
and materials, annual impairment tests, labour relations, insurance, damage
from weather and other disasters, operating and maintenance risks and
environmental risks, new information regarding reserves, changes in demand for
and volatility of commodity prices of crude oil and natural gas, legislative,
regulatory and political changes along with other factors discussed in this
presentation. The risks outlined should not be construed as exhaustive.
Accordingly, no assurance can be given that any events anticipated by the
forward-looking statements will transpire or, if they do, what their impact on
the Company might be. Investors are cautioned not to place undue reliance on
any forward-looking information. The forward-looking statements are made as of
the date hereof, and the Company undertakes no obligation to update or revise
any forward-looking information to reflect new events or circumstances except
as required by law. The Company assumes no responsibility or liability of any
nature whatsoever for the forward-looking statements contained herein.
Non-GAAP Terms
Funds flow from operations and netback per barrel are used in this
document, but do not have any standardized meaning under GAAP and are unlikely
to be comparable to similarly defined measures presented by other companies.
Funds flow from operations includes all cash from operating activities and is
calculated before changes in non-cash working capital. Funds flow from
operations is reconciled with net earnings in the Consolidated Statement of
Cash Flows. Funds flow per share is calculated by dividing funds flow from
operations by the weighted average shares outstanding. Netback per barrel
equals sales revenue, less royalties and production expenses, divided by total
equivalent sales volumes. 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.
Oil and Natural Gas Conversions
In this MD&A, natural gas volumes have been converted to barrels of oil
equivalent (boe) on the basis of six thousand cubic feet (mcf) to one barrel
(bbl) of oil. This conversion factor is based on an energy equivalency
conversion method primarily applicable at the burner tip and is not intended
to represent a value equivalency at the wellhead. Boe may be misleading,
particularly if used in isolation.
Comparative Figures
Certain comparative figures have been reclassified to conform to the
current period's presentation.Highlights (Unaudited)
Three months Nine months
ended September 30, ended September 30,
2007 2006 2007 2006
---------------------------- ----------- ---------- ---------- ----------
Production
Oil (bbls/d) 6,627 1,365 5,338 1,030
Natural gas (mcf/d) 98 - 124 -
Total (boe/d) 6,643 1,365 5,359 1,030
Financial (thousands of
Canadian dollars except
per share amounts)
Oil and natural gas
revenue 26,079 5,496 61,102 11,959
Net loss 2,142 386 6,961 3,175
Per share - basic(1) $ 0.05 $ 0.02 $ 0.20 $ 0.13
Per share - diluted(1) $ 0.05 $ 0.02 $ 0.20 $ 0.13
Funds flow from operations 13,846 1,932 30,425 2,328
Per share - basic(1) $ 0.35 $ 0.08 $ 0.85 $ 0.09
Per share - diluted(1) $ 0.34 $ 0.07 $ 0.82 $ 0.09
Total assets (end of
period) 152,150 55,149 152,150 55,149
Working capital (end of
period) 32,203 (414) 32,203 (414)
Long-term debt (end of
period) - - - -
Weighted average shares
outstanding (000s)(1)
Basic 39,513 25,185 35,741 24,940
Diluted 42,046 26,913 38,611 26,426
Outstanding shares (end of
period) (000s)(1)
Basic 39,573 25,185 39,573 25,185
Diluted 42,185 27,855 42,185 27,855
Notes:
(1) Restated to reflect two-for-one stock split in September 2006.
During the nine months ended September 30, 2007, Petro Andina continued
development drilling and facilities construction in the El Corcobo Norte (ECN)
field, as well as proceeding with delineation drilling at the Cerro Huanul Sur
(CoHS) and Puesto Pinto (PP) fields which were discovered in late 2006. All of
these areas are located in the CNQ-7/A Concession operated by the Company, in
which Petro Andina has a 50 percent working interest.
The Company was awarded the Gobernador Ayala III Concession (GA III) on
May 29, 2007. Petro Andina has a 70 percent working interest in GA III. Also,
in July 2007 the Company assumed operatorship of the CNQ-7 Concession in which
it holds a 47.48 percent working interest. Drilling on both the GA III and
CNQ-7 concessions commenced in the third quarter of 2007, although there was
no significant production as of quarter-end.
Selected Quarterly Information (Unaudited)
Three months ended
Sept. 30 June 30, Mar. 31, Dec. 31,
2007 2007 2007 2006
---------------------------- ----------- ---------- ---------- ----------
Production
Oil (bbls/d) 6,627 5,604 3,752 2,853
Natural gas (mcf/d) 98 128 146 -
Total (boe/d) 6,643 5,625 3,776 2,853
Financial (thousands of
Canadian dollars except per
share amounts)
Oil and natural gas revenue 26,079 20,867 14,156 11,519
Net loss 2,142 3,448 1,371 168
Per share - basic(1) $ 0.05 $ 0.08 $ 0.04 $ 0.00
Per share - diluted(1) $ 0.05 $ 0.08 $ 0.04 $ 0.00
Funds flow from operations 13,846 10,221 6,358 5,677
Per share - basic(1) $ 0.35 $ 0.29 $ 0.20 $ 0.18
Per share - diluted(1) $ 0.34 $ 0.28 $ 0.19 $ 0.17
Total assets (end of
period) 152,150 145,251 102,288 101,722
Working capital (end of
period) 32,203 58,742 16,226 29,006
Long-term debt (end of
period) - - - -
Sept. 30 June 30, Mar. 31, Dec. 31,
2006 2006 2006 2005
---------------------------- ----------- ---------- ---------- ----------
Production(2)
Oil (bbls/d) 1,365 980 737 513
Natural gas (mcf/d) - - - -
Total (boe/d) 1,365 980 737 513
Financial (thousands of
Canadian dollars except per
share amounts)
Oil and natural gas revenue 5,496 3,799 2,664 2,004
Net income (loss) (386) (1,641) (1,148) 1,996
Per share - basic(1) $ (0.02) $ (0.07) $ (0.05) $ 0.09
Per share - diluted(1) $ (0.02) $ (0.07) $ (0.05) $ 0.08
Funds flow from operations 1,932 566 (170) (109)
Per share - basic(1) $ 0.08 $ 0.02 $ (0.01) $ (0.01)
Per share - diluted(1) $ 0.07 $ 0.02 $ (0.01) $ (0.01)
Total assets (end of
period) 55,149 43,762 42,481 41,834
Working capital (end of
period) (414) 8,531 15,131 19,931
Long-term debt (end of
period) - - - -
Notes:
(1) Restated to reflect two-for-one stock split in September 2006.
(2) Until September 30, 2005, the Company's operations were considered by
Management to be in the pre-production stage. Accordingly, net
revenues after royalties and operating expenses were capitalized. The
financial results for 2005 include only volumes and net revenues
earned in the fourth quarter.
Financial and Operating Review
Production and Netback
Three months ended September 30,
2007 2006
-------------------------------------------------------------------------
(thousands of Canadian
dollars, unless otherwise
stated) Total Per boe Total Per boe
-------------------------------------------------------------------------
Average daily production
(boe/d)
Argentina 6,624 1,365
Canada 19 -
-------------------------------------------------------------------------
Total 6,643 1,365
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oil and natural gas revenue $ 26,079 $ 42.67 $ 5,496 $ 43.77
Royalties and turnover taxes (4,083) (6.68) (726) (5.78)
-------------------------------------------------------------------------
Net revenue 21,996 35.99 4,770 37.99
Production expenses 5,698 9.32 1,623 12.92
-------------------------------------------------------------------------
Netback $ 16,298 $ 26.67 $ 3,147 $ 25.07
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30,
2007 2006
-------------------------------------------------------------------------
(thousands of Canadian
dollars, unless otherwise
stated) Total Per boe Total Per boe
-------------------------------------------------------------------------
Average daily production (boe/d)
Argentina 5,335 1,030
Canada 24 -
-------------------------------------------------------------------------
Total 5,359 1,030
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oil and natural gas revenue $ 61,102 $ 41.77 $ 11,959 $ 42.54
Royalties and turnover taxes (9,831) (6.72) (1,757) (6.25)
-------------------------------------------------------------------------
Net revenue 51,271 35.05 10,202 36.29
Production expenses 13,561 9.27 3,670 13.05
-------------------------------------------------------------------------
Netback $ 37,710 $ 25.78 $ 6,532 $ 23.24
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Oil and Natural Gas Revenue
In the three months ended September 30, 2007 (which will also be referred
to below as the third quarter), Petro Andina's oil and natural gas revenue
increased by 375 percent to $26,079,000 from $5,496,000 in the third quarter
of 2006. Third quarter sales volumes in 2007 increased by 387 percent over the
same period of 2006. Oil and natural gas revenue for the nine months ended
September 30, 2007 increased by 411 percent to $61,102,000 from $11,959,000 in
the first nine months of 2006. The increase was due to a 420 percent increase
in sales volumes in the first nine months of 2007 over 2006, while realized
pricing remained virtually unchanged.
As of September 30, 2007, essentially all of the Company's Argentine
production is from the operated CNQ-7/A Concession in which it holds a 50
percent working interest. In September 2007, there were 129 wells producing in
CNQ-7/A compared to 34 in September 2006. This is a result of the successful
development activity undertaken by Petro Andina over the past year. The
average production by area was as follows:
Three months Nine months
ended September 30, ended September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Average daily oil production
(bbls/d)
El Corcobo Norte (ECN) 4,774 726 3,828 430
Cerro Huanul Sur (CoHS) 464 9 317 3
Puesto Pinto (PP) 520 - 392 -
Jaguel Casa de Piedra (JCP) 807 630 779 569
Other 59 - 19 28
-------------------------------------------------------------------------
6,624 1,365 5,335 1,030
-------------------------------------------------------------------------
-------------------------------------------------------------------------Petro Andina acquired its Canadian non-operated oil and natural gas
properties on December 29, 2006. Therefore, there are no comparatives for the
previous year.
In the three months ended September 30, 2007, the Company's average oil
sales price was $42.67 per barrel, compared to $43.77 per barrel in the same
quarter of 2006. For the nine months ended September 30, the average oil sales
price was $41.77 per barrel in 2007 compared to $42.54 in 2006. The price
received is based on the local benchmark Medanito crude and reflects a quality
adjustment for the Company's 19 degree API production. Argentine oil sales are
subject to an export tax with statutory rates ranging from 25 percent to 45
percent depending on the West Texas Intermediate (WTI) benchmark price. The
export tax becomes effective when WTI prices exceed US$32.00 per barrel. An
amount equal to the export tax is also applied to domestic sales. This has the
effect of limiting the realized sales price for the Company's Argentine
production.
Royalties and Turnover Taxes
Total royalties and turnover taxes were $4,083,000 in the third quarter
of 2007, compared to $726,000 in the same period of 2006. The average royalty
rate for the third quarter of 2007 was 16 percent, compared to 13 percent in
the comparable period of 2006. For the nine months ended September 30,
royalties and turnover taxes increased from $1,757,000 (15 percent of revenue)
in 2006 to $9,831,000 (16 percent of revenue) in 2007. In the first months of
2006, the CNQ-7/A Concession was still considered an exploration concession
and production was subject to a 15 percent royalty rate. In March 2006, Petro
Andina applied to the Federal Secretary of Energy to convert 303.5 square
kilometres of the CNQ-7/A Concession around the ECN and JCP fields into an
exploitation concession. The Company has been advised that legal precedent in
Argentina provides the federal regulator with a period of 60 days to object to
the filing. If no objection is made, then the operator is permitted to reduce
the amount of royalties paid to the 12 percent applicable to an exploitation
concession. Since no objection was received, in mid-May 2006, 60 days after
this application was made, the rate used in computing the royalty was reduced
to 12 percent. However, the responsibility for the granting of exploitation
concessions has now been transferred to provincial control. In March 2007, the
Company received notice from the Province of Mendoza claiming royalty
adjustments to increase the royalty to 15 percent retroactive to May 2006. The
claim has been made by a provincial government department which is separate
from the government department responsible for the granting of exploitation
concessions. While Petro Andina has received assurance from expert advisors
and regulators that the same precedent will apply, the change in
administrative jurisdiction introduces an element of uncertainty concerning
the timing of the royalty rate reduction. To address this uncertainty, as of
June 30, 2007 the Company decided to accrue an additional royalty amount for
the period commencing May 2006 equal to one-half of the difference between the
exploration and exploitation royalty rates or 1.5 percent. This accrual is
planned to continue until the bureaucratic process related to the granting of
the exploitation concession is complete and the matter is resolved.
The Company's Argentine sales are also subject to turnover taxes imposed
by the provinces. These taxes are accounted for as royalty expense.
Production Expenses
In the third quarter of 2007 production expenses increased by 251 percent
to $5,698,000 from $1,623,000 in the same period of 2006. On a unit of
production basis, production expenses averaged $9.32 per barrel in the third
quarter of 2007 compared to $12.92 in the same period of 2006. Total
production expenses for the first nine months of the year were $13,561,000
($9.27 per barrel) in 2007 compared to $3,670,000 ($13.05 per barrel) in 2006.
The Company's average costs per unit in Argentina are decreasing as volumes
increase and operating efficiencies are realized. Trucking costs accounted for
$2.86 per barrel or 31 percent of Argentine production expenses for the first
nine months of 2007, compared to $4.88 per barrel or 37 percent in the same
period of 2006. Trucking is required to transport emulsion from single well
batteries to infield processing facilities, as well as to deliver clean oil
from the field to market. In the first nine months of 2007, the Company's
field staff were successful in reducing trucking costs by increasing trucking
efficiency and making road improvements. The new oil processing facility at
ECN was commissioned in August 2007. Field satellite and flowline systems are
also currently under construction in ECN and PP. Petro Andina and its partner
in the CNQ-7/A Concession, Repsol-YPF S.A., have commenced construction of an
80-kilometre, 12-inch diameter sales pipeline from the CNQ-7/A area to the
Puesto Hernandez pipeline terminal. From that location, the Company will be
able to deliver oil volumes to the Atlantic coast via the Oldelval pipeline
system, or north to the Lujan de Cuyo refinery at Mendoza. Construction of the
pipeline commenced in the third quarter of 2007. The pipeline is scheduled to
be commissioned in the first quarter of 2008. All of these activities are
expected to reduce trucking costs on a unit of production basis over time.
On October 17, 2007, the Secretary of Energy announced an increase in
mineral lease rates, also known as the canon in Argentina. The new rates will
apply to the Company's CNQ-7/A and CNQ-7 concessions. It is estimated that the
new rates will increase production expenses by less than $1,000,000 in 2008.
Interest Income
For the three months ended September 30, 2007, interest income was
$433,000 compared to $29,000 in the same period of 2006. Interest income for
the nine months ended September 30, 2007 was $1,068,000 compared to $229,000
in the first nine months of 2006. Average cash balances were significantly
higher in the first nine months of 2007 than in the same period of 2006 due to
the net $39 million raised in the Company's private equity placement in
October 2006, as well as the net $56 million raised in May 2007 from the
Company's initial public offering.
General and Administrative Expenses (G&A)
For the three months ended September 30, 2007, G&A was $3,317,000
compared to $1,167,000 in the same period of 2006. Total G&A for the first
nine months of 2007 was $8,109,000 compared to $4,415,000 in the same period
of 2006. The increase relates to the expansion of staff and to incremental
overhead burdens associated with becoming a publicly-traded company. Expenses
include bonuses and non-executive directors' fees of $845,000 in the first
nine months of 2007 compared to $12,000 in the first nine months of 2006.
Stock-based compensation for the nine months ended September 30, 2007
increased by $775,000 over the first nine months of 2006 largely due to
including volatility in the calculation as a result of becoming a public
company. Total year-to-date 2007 costs have also increased by $132,000 for
corporate governance-related activities, including the independent reserve
evaluation and travel for management and directors to Argentina. For the nine
months ended September 30, 2007, G&A costs in Argentina increased by a total
of $2,086,000 over the comparable period of 2006, which was partially offset
by an increase of $851,000 in overhead recoveries from operatorship of the
CNQ-7/A joint venture. These higher costs are directly related to increased
activity levels which have led to higher staffing costs, as well as higher
bank taxes.
Interest Expense
Interest expense was $1,252,000 in the first nine months of 2007, all of
which was incurred prior to the third quarter. In 2006, interest expense was
$236,000 for the first nine months, all of which was incurred in the third
quarter. Interest expense is attributable to the non-convertible $11 million
debenture that was issued in August 2006 at a 12 percent interest rate. The
debenture was repaid in full on May 23, 2007 from the proceeds of Petro
Andina's initial public offering.
Depletion, Depreciation and Accretion Expense (DD&A)
DD&A is calculated using the unit-of-production method based on total
estimated proved reserves. DD&A during the third quarter of 2007 was
$12,854,000 compared to $2,320,000 in the same period of 2006. For the nine
months ended September 30, 2007, DD&A expense was $30,992,000 compared to
$5,429,000 in the first nine months of 2006. Most of the increase was a result
of increased production levels. On a unit of production basis, DD&A expense in
the first nine months of 2007 was $21.18 per barrel compared to $19.31 per
barrel in the first nine months of 2006. The DD&A rate has increased because
the Company is spending significant amounts of capital on facilities to handle
anticipated future production volumes that have not yet been classified as
proved by the Company's external reserves evaluators. Petro Andina expects
that additional proved reserves will be recognized by the end of the year.
Foreign Exchange Loss
The Company's main exposure to foreign currency risk relates to the
pricing of Argentine oil sales, operating costs and capital costs which are
largely denominated in US dollars. The Company also holds Canadian dollars in
cash and short-term deposits with Canadian financial institutions and from
time to time converts those funds into US dollars prior to their transmittal
to Argentina. This exchange of currencies can give rise to gains and losses.
For the three months ended September 30, 2007, the total foreign exchange loss
was $2,033,000 compared to a gain of $22,000 in the third quarter of 2006. On
a year-to-date basis, the foreign exchange loss was $4,085,000 in the first
nine months of 2007 compared to a loss of $803,000 in the same period of 2006.
Currently, the Company does not hedge against fluctuations in the US dollar
exchange rate.
Future Tax Expense (Recovery)
The Company recorded a future tax expense of $669,000 for the three
months ended September 30, 2007. In the same period of 2006, there was a
future tax recovery of $139,000. For the nine months ended September 30, 2007,
future tax expense was $1,301,000 compared to a recovery of $947,000 in the
first nine months of 2006. The Company's operations in Argentina are now
producing taxable income due to successful development activity. The nominal
income tax rate in Argentina is 35 percent. The Company does not recognize any
benefit for its Canadian tax losses.Capital Expenditures
Three months Nine months
ended September 30, ended September 30,
(thousands of Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Geological and geophysical $ 3,447 $ 1,596 $ 3,541 $ 3,261
Property acquisition 3 11 14 11
Drilling and completion 14,140 3,883 33,245 9,630
Well equipment and facilities 17,807 3,156 35,784 7,196
Other 279 67 1,022 381
-------------------------------------------------------------------------
$ 35,676 $ 8,713 $ 73,606 $ 20,479
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Argentina $ 35,670 $ 8,719 $ 73,593 $ 20,438
Canada 6 (6) 13 41
-------------------------------------------------------------------------
$ 35,676 $ 8,713 $ 73,606 $ 20,479
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company had three drilling rigs in continuous operation throughout the
first six months of 2007, which was increased to four rigs in July 2007. Two
drilling rigs were in operations in the first nine months of 2006. In the
first nine months of each year, the Company drilled wells as follows:
2007 2006
Gross Net Gross Net
-------------------------------------------------------------------------
CNQ-7/A
El Corcobo Norte (ECN) 68 34.0 21 10.5
Cerro Huanul Sur (CoHS) 13 6.5 7 3.5
Puesto Pinto (PP) 15 7.5 1 0.5
Jaguel Casa de Piedra (JCP) 3 1.5 1 0.5
Other 6 3.0 1 0.5
-------------------------------------------------------------------------
105 52.5 31 15.5
GA III 5 3.5 - -
CNQ-7 3 1.4 1 0.5
CN-VI A/B - - 1 1.0
-------------------------------------------------------------------------
113 57.4 33 17.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------During the first nine months of 2007, the Company also spent $16,162,000
on construction of the ECN oil handling facilities and field pipeline system.
The ECN facility was commissioned in August 2007. Construction of the oil
sales pipeline from CNQ-7/A to the Puesto Hernandez pipeline terminal
commenced in July 2007. As of September 30, 2007 a total of $7,735,000 had
been spent on engineering, surveying, pre-acquisition of related materials and
initial ditching and setting.
Liquidity and Capital Resources
At September 30, 2007, Petro Andina had $34 million of cash on hand,
compared to $37 million at December 31, 2006. The cash balances are comprised
of current chequing accounts and bank term deposits. Including cash, Petro
Andina had working capital of $32 million at September 30, 2007, compared to
$29 million at year-end 2006.
On May 23, 2007, Petro Andina closed an initial public offering of
6.7 million common shares at $9.00 per share for total gross proceeds of
$60 million ($56 million net after agents' fees and other expenses). The
Company is using the net proceeds of the initial public offering to fund
continued exploration activity, appraisal and development drilling and
facilities development in Argentina. A portion of the funds was also used to
repay the Company's outstanding debenture of $11 million on May 23, 2007.
In September 2007 the Company, through its subsidiary Petro Andina
Resources Ltd., entered into a US$100 million senior first lien secured credit
facility, to be provided by Macquarie Bank Limited (Macquarie). The first
advances under the credit facility were made in October 2007. Initial
availability under the facility is US$28 million. The borrowing base will be
updated based on semi-annual re-determinations by Macquarie that the Company's
oil and gas reserves will support additional lending amounts. The first update
will be completed in the fourth quarter of 2007 and the Company expects that
the borrowing base will be increased before year-end 2007. The loan facility
bears interest at variable rates which, at the Company's option, will be based
on either LIBOR or US prime. The loan is secured by a pledge of Petro Andina
Resources Ltd. common shares and by an assignment of the Company's collection
rights under all agreements related to its Argentine properties, including
leases, exploration and development concessions, joint venture agreements,
operating agreements and sales agreements. The loan is not convertible into
equity.
Outstanding Share Data
Petro Andina is authorized to issue an unlimited number of class A common
shares. As at September 30, 2007, the Company had 39.6 million outstanding
common shares compared to 31.8 million outstanding shares at December 31,
2006. Directors, employees and consultants have been granted options to
purchase 2.6 million common shares under the Company's stock option plan, as
disclosed in note 9 to the consolidated financial statements. All outstanding
Liquidity Entitlement Certificates expired on May 23, 2007 when the Company's
shares commenced trading on the Toronto Stock Exchange.
Business Environment and Risks
The Company's operations are subject to the risks normally inherent in
the operation and development of oil and natural gas properties. There is no
assurance of finding and developing economic oil and natural gas reserves in
commercial quantities. Operational risks include reservoir and facility
performance uncertainties, competition, access to markets for the Company's
products, potential transportation interruptions, a complex regulatory regime
and environmental and safety concerns. Financial and liquidity risks include
commodity price fluctuations, currency exchange rates, interest rates, and the
costs of goods and services. Due to the nature of Petro Andina's international
operations and related assets, the Company is also exposed to economic and
political risk, including currency fluctuations, price controls and varying
forms of fiscal regimes or changes thereto. Petro Andina uses a variety of
means to help minimize its business risks.
For a more detailed discussion of risk factors, please see the Company's
long-form prospectus dated May 10, 2007, which is available on the Canadian
Securities Administrators' website, www.sedar.com.
Contractual Obligations
Petro Andina has assumed various contractual obligations and commitments
in the normal course of its operations. These commitments are disclosed in the
Company's long-form prospectus and MD&A for the year ended December 31, 2006.
In 2007, the Company entered into work commitments related to a fourth
drilling rig which was mobilized in July, and a fifth rig which is expected to
be mobilized in the fourth quarter of 2007. Under the terms of the contract
for the fourth drilling rig, the Company must pay a demobilization fee of
US$80,000 at the end of the two-year term. The contract for the fifth drilling
rig requires the Company to pay a mobilization fee of US$250,000 when the rig
is mobilized in 2007, as well as a demobilization fee of US$175,000 if the
contract is terminated at the end of the second year. If the contract is
extended for a third year, the demobilization fee will be waived.
On May 29, 2007, the Company signed a final agreement with the Province
of La Pampa with respect to the award of the Gobernador Ayala III Exploration
Concession (GA III Concession). The Company had been awarded the GA III
Concession on a provisional basis on April 30, 2007. This exploration
concession comprises 335 square kilometres (82,800 acres) and is located
adjacent to the southern boundary of the Company's operated CNQ-7/A acreage.
Petro Andina subsequently entered into a joint venture agreement with ENARSA,
Argentina's state oil company, and with another Argentine company with respect
to the GA III Concession. Under terms of the joint venture agreement, Petro
Andina will operate the GA III Concession with a 70 percent working interest,
while the other parties will share the remaining 30 percent. The two-year work
commitment with respect to the Concession includes drilling a total of 25
wells and acquiring 250 square kilometres of three dimensional (3D) seismic
data. As of September 30, 2007, five wells had been drilled and the seismic
acquisition had been completed, with data processing to commence in the fourth
quarter of 2007.
Under the terms of the GA III joint venture agreement, Petro Andina will
initially pay 100 percent of the capital costs and associated value added tax
related to the two year work commitment on the Concession. If commercial
hydrocarbon reserves are discovered, 30 percent of the work commitment costs
and associated value added tax will then be recovered from the joint venture
partners out of their share of revenues less royalties and production expenses
("net revenues") earned from GA III production. The joint venture partners
will be entitled to 30 percent of net revenues from production. Half of these
net revenues will be paid to them as earned and half will be applied to repay
capital costs advanced by Petro Andina on their behalf. The amounts due to
Petro Andina will be secured by an assignment of the joint venture partners'
interests in GA III. Interest is payable by the joint venture partners on the
unpaid capital costs, but this interest is also only recoverable from their
share of net revenues.
The Company will only recognize a receivable for recovery of work
commitment costs and interest when commercial reserves have been established.
The amount of the receivable to be recognized will be limited to the joint
venture partners' share of estimated reserves, up to a maximum of 30 percent
of the work commitment costs plus accrued interest. As of September 30, 2007,
the Company had not yet applied to convert any portion of the GA III
concession into an exploitation concession with commercial reserves.
Accordingly, 100 percent of GA III work commitment costs incurred have been
recorded as capital expenditures by the Company.
On July 23, 2007, Petro Andina participated in a bid round for land in
the province of Mendoza. The Company's work program bids for the two
concessions of interest to Petro Andina were lower than the bids submitted by
other parties. However, the amount of the work program is not the sole
criterion for award of the acreage. The bids are currently under review by the
provincial government.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet transactions in
the first nine months of 2007.
Related-Party Transactions
The Company has not entered into any related-party transactions in the
first nine months of 2007.
Critical Accounting Estimates
The preparation of consolidated financial statements in accordance with
Canadian GAAP requires Management to make judgments, assumptions and estimates
that affect the financial results of the Company. Management reviews its
estimates regularly but new information and changed circumstances may result
in actual results or changes to estimated amounts that differ materially from
current estimates. For a discussion of the Company's critical accounting
estimates and policies, please refer to the MD&A for the year ended December
31, 2006 that is included in the Company's long-form prospectus, which is
available on the Canadian Securities Administrators' website, www.sedar.com.
Changes in Accounting Policy
Effective January 1, 2007, Petro Andina adopted the new accounting
standards set out in the Canadian Institute of Chartered Accountants' (CICA)
Handbook section 3855 "Financial Instruments - Recognition and Measurement",
section 3865 "Hedges" and section 1530 "Comprehensive Income". These standards
have been adopted prospectively. See note 3 to the consolidated financial
statements.
Impact of New Accounting Pronouncements
The CICA has issued the following accounting standards which will be
effective for the Company on January 1, 2008: Handbook section 3862 "Financial
Instruments - Disclosures", section 3863 "Financial Instruments -
Presentation" and section 1535 "Capital Disclosures".
These new accounting standards will require the Company to provide
additional disclosures relating to its financial instruments and capital. It
is not anticipated that the adoption of these new accounting standards will
impact the amounts reported in the Company's financial statements as they
relate primarily to disclosure.Petro Andina Resources Inc.
Consolidated Balance Sheets (Unaudited)
As at September December
(thousands of Canadian dollars) 30, 2007 31, 2006
-------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 34,217 $ 37,214
Accounts receivable 19,663 15,764
Prepaids and other current assets 1,434 389
-------------------------------------------------------------------------
55,314 53,367
Long-term receivables (note 5) 13,035 5,886
Future income tax 1,565 2,866
Property, plant and equipment (note 6) 82,236 38,864
Deferred financing costs - 739
-------------------------------------------------------------------------
$ 152,150 $ 101,722
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 23,111 $ 13,361
Debenture payable (note 7) - 11,000
-------------------------------------------------------------------------
23,111 24,361
Asset retirement obligation (note 8) 1,302 544
-------------------------------------------------------------------------
24,413 24,905
Shareholders' equity
Share capital (note 9) 143,398 86,405
Contributed surplus (note 10) 1,486 598
Deficit (17,147) (10,186)
-------------------------------------------------------------------------
127,737 76,817
-------------------------------------------------------------------------
$ 152,150 $ 101,722
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and Contingency (notes 14 and 15)
See accompanying Notes to the Consolidated Financial Statements
Petro Andina Resources Inc.
Consolidated Statements of Loss, Comprehensive Loss and Deficit
(Unaudited)
(thousands of Canadian Three months Nine months
dollars, except per share ended September 30, ended September 30,
amounts) 2007 2006 2007 2006
-------------------------------------------------------------------------
Revenue
Oil and natural gas revenue $ 26,079 $ 5,496 $ 61,102 $ 11,959
Royalties and turnover
taxes (4,083) (726) (9,831) (1,757)
-------------------------------------------------------------------------
21,996 4,770 51,271 10,202
Interest income 433 29 1,068 229
-------------------------------------------------------------------------
22,429 4,799 52,339 10,431
Expenses
Production 5,698 1,623 13,561 3,670
General and administrative 3,317 1,167 8,109 4,415
Interest - 236 1,252 236
Depletion, depreciation
and accretion 12,854 2,320 30,992 5,429
Foreign exchange loss (gain) 2,033 (22) 4,085 803
-------------------------------------------------------------------------
23,902 5,324 57,999 14,553
Loss before taxes (1,473) (525) (5,660) (4,122)
Future tax expense (recovery)
(note 11) 669 (139) 1,301 (947)
-------------------------------------------------------------------------
Net loss and comprehensive
loss for period (2,142) (386) (6,961) (3,175)
Deficit, beginning of period (15,005) (9,632) (10,186) (6,843)
-------------------------------------------------------------------------
Deficit, end of period $ (17,147) $ (10,018) $ (17,147) $ (10,018)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net loss
per common share $ (0.05) $ (0.02) $ (0.20) $ (0.13)
See accompanying Notes to the Consolidated Financial Statements
Petro Andina Resources Inc.
Consolidated Statements of Cash Flows (Unaudited)
Three months Nine months
ended September 30, ended September 30,
(thousands of Canadian dollars) 2007 2006 2007 2006
-------------------------------------------------------------------------
Operating activities
Net loss $ (2,142) $ (386) $ (6,961) $ (3,175)
Add (deduct) non-cash items
Depletion, depreciation
and accretion 12,854 2,320 30,992 5,429
Non-cash component of
interest expense - 102 739 102
Future tax expense
(recovery) 669 (139) 1,301 (947)
Stock-based compensation 482 70 985 210
Expenses paid by issue of
common shares - - 61 -
Unrealized foreign exchange
loss (gain) 1,983 (35) 3,308 709
-------------------------------------------------------------------------
Funds from operations 13,846 1,932 30,425 2,328
Net change in non-cash
working capital (56) (1,398) 4,239 (1,017)
-------------------------------------------------------------------------
13,790 534 34,664 1,311
-------------------------------------------------------------------------
Investing activities
Acquisition of capital
assets (35,676) (8,713) (73,606) (20,479)
Loan receivable 24 - 74 -
Net change in non-cash
working capital (379) (2,594) (8,584) (2,669)
-------------------------------------------------------------------------
(36,031) (11,307) (82,116) (23,148)
-------------------------------------------------------------------------
Financing activities
Issue (repayment) of
debenture - 11,000 (11,000) 11,000
Issue of common shares 215 - 61,410 1,376
Share issue costs - - (4,575) -
Financing costs - (1,086) - (1,086)
Net change in non-cash
working capital (354) - (12) -
-------------------------------------------------------------------------
(139) 9,914 45,823 11,290
-------------------------------------------------------------------------
Decrease in cash and cash
equivalents for period (22,380) (859) (1,629) (10,547)
Impact of foreign exchange
on foreign currency
denominated cash balances (823) 4 (1,368) (249)
Cash and cash equivalents,
beginning of period 57,420 9,692 37,214 19,633
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 34,217 $ 8,837 $ 34,217 $ 8,837
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary Disclosure of Cash Flow Information (note 12)
See accompanying Notes to the Consolidated Financial Statements
Petro Andina Resources Inc.
Notes to the Consolidated Financial Statements (Unaudited)
For the Nine Months ended September 30, 2007
(thousands of Canadian dollars, unless otherwise stated)
1. Nature of Operations
Petro Andina Resources Inc. (Petro Andina or the Company) is a Calgary-
based oil and natural gas exploration and production company whose
activities are conducted primarily in South America. The Company was
incorporated on July 10, 2003 under the laws of the province of Alberta.
2. Basis of Presentation
The unaudited interim consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Petro Andina
Resources Ltd., and have been prepared in accordance with Canadian
generally accepted accounting principles.
The unaudited interim consolidated financial statements have been
prepared following the same accounting policies as the audited
consolidated financial statements for the year ended December 31, 2006,
except as discussed in note 3. The disclosures provided below are
incremental to those included in the annual audited financial statements.
These unaudited interim consolidated financial statements and the notes
thereto should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2006.
Certain comparative figures have been reclassified to conform to the
current period's presentation.
3. Changes in Accounting Policy
Effective January 1, 2007, the Company adopted new accounting standards
set out by the Canadian Institute of Chartered Accountants (CICA) in
Handbook section 3855 "Financial Instruments - Recognition and
Measurement", section 3865 "Hedging" and section 1530 "Other
Comprehensive Income".
Under the new standards, financial instruments designated as held for
trading and available for sale are carried at their fair values. Other
financial instruments such as loans and receivables, financial
liabilities and those designated as held to maturity are initially
recorded at fair value, and subsequently carried at their amortized cost.
All derivatives are carried in the consolidated balance sheet at their
fair value, including derivatives designated as hedges. The effective
portion of unrealized gains and losses on cash flow hedges is carried in
Other Comprehensive Income, a component of Shareholders' Equity on the
consolidated balance sheet, with any ineffective portions of gains and
losses on hedges taken into income immediately. Changes in the fair value
of hedges and the related changes in the carrying value of the hedged
items are taken into income immediately.
The Company has no derivative financial instruments or hedges. The
Company has classified its non-derivative financial instruments as loans
and receivables and financial liabilities. These are accounted for at
amortized cost. Debt and related transaction costs are measured at fair
value at inception and subsequently measured at amortized cost.
Transaction costs are included as a component of the amortized cost of
the Company's debt balance.
These standards have been adopted on a prospective basis. As a result of
the change in accounting policy, debenture issue costs of $739,000
previously shown as Deferred Financing Costs at December 31, 2006 were
reclassified as a component of the amortized cost of the debenture
balance in 2007. As of September 30, 2007, there are no amounts reflected
in the financial statements as the debenture has been repaid. These costs
have been amortized using the effective interest rate method, compared to
being amortized on a straight-line basis over the period to maturity.
This change had no material impact on net loss of prior years or the
current period.
4. Impact of New Accounting Pronouncements
The CICA has issued the following accounting standards which will be
effective for the Company on January 1, 2008: section 3862 "Financial
Instruments - Disclosures", section 3863 "Financial Instruments -
Presentation" and section 1535 "Capital Disclosures".
These new accounting standards will require the Company to provide
additional disclosures relating to its financial instruments and capital.
It is not anticipated that the adoption of these new accounting standards
will impact the amounts reported in the Company's financial statements as
they relate primarily to disclosure.
5. Long-Term Receivables
September December
30, 2007 31, 2006
-------------------------------------------------------------------------
Argentina value added taxes $ 12,947 $ 5,723
Loan receivable 88 163
-------------------------------------------------------------------------
$ 13,035 $ 5,886
Long-term receivables are comprised primarily of net credits for value
added tax (VAT). Under current Argentine legislation, VAT credits on
purchases can only be applied to offset liabilities for VAT payable on
sales. The balance of the receivable will be drawn down when the
Company's taxable sales exceed its taxable purchases. Given the Company's
current capital investment plans, this is not anticipated to occur in the
next 12 months. VAT credits are not subject to expiry.
A loan has been made to a company in Argentina which provides services to
the Company. The loan is secured by equipment purchased with the proceeds
of the loan, is repayable in 36 monthly installments commencing February
2007 and bears interest at 6 percent.
6. Property, Plant and Equipment
Accumulated
depletion,
depreciation Net book
September 30, 2007 Cost & amortization value
-------------------------------------------------------------------------
Oil and natural gas properties $ 120,336 $ 39,995 $ 80,341
Service rig 726 588 138
Office furniture and equipment 3,397 1,640 1,757
-------------------------------------------------------------------------
$ 124,459 $ 42,223 $ 82,236
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Accumulated
depletion,
depreciation Net book
December 31, 2006 Cost & amortization value
-------------------------------------------------------------------------
Oil and natural gas properties $ 46,875 $ 9,763 $ 37,112
Service rig 726 403 323
Office furniture and equipment 2,559 1,130 1,429
-------------------------------------------------------------------------
$ 50,160 $ 11,296 $ 38,864
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in oil and natural gas properties are $7,735,000 (2006 - nil) of
major development costs that are not subject to depletion.
7. Debenture Payable
The debenture was issued in August 2006 with an interest rate of 12
percent and was not convertible into equity. The debenture was repaid on
May 23, 2007 after the Company's initial public offering. The debt was
secured by a promissory note, a general security agreement granting a
first priority interest over all of the Company's present and after-
acquired property, as well as a pledge of the Company's shares in its
subsidiary.
8. Asset Retirement Obligation
Nine months ended Year ended
September 30, 2007 December 31, 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 544 $ 301
Liabilities incurred during period 693 334
Accretion expense 65 24
Change in estimate of future cash flows - (115)
-------------------------------------------------------------------------
Balance, end of period $ 1,302 $ 544
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Share Capital
On September 29, 2006, the Company undertook a two-for-one split of its
common shares. All common share numbers and per common share amounts have
been restated to reflect the share split.
a) Issued and outstanding common shares
Number of shares Amount
Balance, December 31, 2005 23,350,000 $ 44,856
Issued for cash - private placements 6,383,846 41,495
Issued for cash - exercise of warrants 1,835,000 1,376
Issued for cash - exercise of options 38,000 96
Allocation of contributed surplus - exercise
of options - 9
Issued for purchase of oil and natural gas
properties 157,692 1,025
Issued to directors in lieu of compensation 16,800 110
Share issue costs - (2,562)
-------------------------------------------------------------------------
Balance, December 31, 2006 31,781,338 86,405
Issued for cash - private placements 29,385 191
Issued for cash - initial public offering 6,700,000 60,300
Issued for cash - exercise of options 1,053,666 919
Allocation of contributed surplus - exercise
of options - 97
Issued to directors in lieu of compensation 9,100 61
Share issue costs - (4,575)
-------------------------------------------------------------------------
Balance, September 30, 2007 39,573,489 $ 143,398
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On May 10, 2007, the Company filed a prospectus to qualify the
distribution to the public of 6,700,000 common shares at a price of $9.00
per share (the "Offering") for total gross proceeds of $60,300,000. The
Company's shares commenced trading on the Toronto Stock Exchange on
May 23, 2007.
b) Stock options
The Company has a stock option plan that provides for the issuance of
options to its directors, officers, employees and consultants to acquire
common shares. The maximum number of options outstanding is equal to 10
percent of the number of common shares outstanding. The options typically
vest over a three-year period and expire five years from the date of
grant.
Weighted
average
Number of exercise
options price
-------------------------------------------------------------------------
Balance,December 31, 2005 2,645,000 $2.04
Granted 239,000 $4.77
Exercised (38,000) $2.53
Forfeited (140,000) $1.00
-------------------------------------------------------------------------
Balance, December 31, 2006 2,706,000 $2.32
Granted 961,549 $8.58
Exercised (1,053,666) $0.87
Forfeited (2,300) $6.53
-------------------------------------------------------------------------
Balance, September 30, 2007 2,611,583 $5.21
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options outstanding at September 30, 2007 are as follows:
Weighted
average
Options Options remaining
Exercise price outstanding vested life (years)
---------------------------------------------------
$0.50 15,000 15,000 6.1
$0.75 55,667 55,667 1.6
$1.50 198,667 182,001 2.1
$3.00 694,000 537,666 2.5
$4.00 615,000 205,000 3.2
$6.50 72,000 - 4.1
$6.70 700,249 - 4.5
$11.80 95,000 - 4.7
$13.41 16,000 - 4.9
$14.80 150,000 - 5.0
---------------------------------------------------
2,611,583 995,334 3.4
---------------------------------------------------
---------------------------------------------------
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
2007 2006
-------------------------------------------------------------------------
Risk-free interest rate (%) 4.2 3.8
Expected life (years) 3.0 3.0
Expected volatility (%) 65 -
Expected dividends - -
c) Warrants
In conjunction with a private placement of shares in November 2003, the
Company issued 930,000 warrants to purchase additional common shares at a
price of $1.50 per share, on a pre-split basis. These warrants vested in
November 2005. All of the warrants were exercised by February 12, 2006.
d) Per share amounts
The weighted average number of common shares outstanding for the nine
months ended September 30, 2007 was 35,741,355 (for the year ended
December 31, 2006 - 26,429,225). The effect of including outstanding
stock options and warrants is anti-dilutive to the net loss per share
calculation.
10. Contributed Surplus
Nine months ended Year ended
September 30, 2007 December 31, 2006
-------------------------------------------------------------------------
Balance, beginning of period $ 598 $ 321
Stock-based compensation expense 985 286
Options exercised (97) (9)
-------------------------------------------------------------------------
Balance, end of period $ 1,486 $ 598
-------------------------------------------------------------------------
-------------------------------------------------------------------------
11. Income Tax
The provision for future income tax expense (recovery) for the nine
months ended September 30 is as follows:
2007 2006
-------------------------------------------------------------------------
Canada $ - $ -
Argentina 1,301 (947)
-------------------------------------------------------------------------
$ 1,301 $ (947)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The provision for income tax recovery is different from the amount
computed by applying the combined Canadian federal and provincial income
tax rates to loss before taxes. The reasons for the differences are as
follows:
2007 2006
-------------------------------------------------------------------------
Loss before taxes (5,660) (4,122)
Canadian statutory income tax rate 32.12% 34.12%
-------------------------------------------------------------------------
Income tax recovery at statutory rate $ (1,818) $ (1,406)
Effect on income taxes of:
Non-deductible stock-based compensation 317 72
Non-deductible directors' fees paid with shares 20 -
Non-deductible Argentine interest 1,008 -
Effect of Canadian tax rate changes - (68)
Increase in valuation allowance for Canadian
losses not recognized 4,610 746
Argentine tax rate differential 263 (17)
Foreign exchange translation difference (3,052) (280)
Other non-taxable items (47) 6
-------------------------------------------------------------------------
$ 1,301 $ (947)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At September 30, 2007, the Company had Canadian losses available to
reduce future taxable income in Canada, as well as other cumulative tax
deductions in excess of net book values. The income tax benefit of these
Canadian losses and deductions has not been recognized in the financial
statements since their recoverability is uncertain at this time.
12. Supplemental Disclosure of Cash Flow Information
Three months Nine months
ended September 30, ended September 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
Cash interest paid $ - $ - $ 513 $ 134
Cash income taxes paid $ - $ - $ - $ -
During the nine months ended September 30, 2007, approximately $689,000
(2006 - nil) of Argentine receivables for oil sales were settled by a
non- monetary exchange of services and supplies. The services and
supplies have been valued at standard industry rates.
13. Segmented Information
The Company has corporate offices in Calgary, Canada and in Buenos Aires,
Argentina. Prior to December 29, 2006 when the Company acquired interests
in various Canadian non-operated properties, all of its oil and natural
gas operations were conducted in Argentina.
Three months ended Three months ended
September 30, 2007 September 30, 2006
Canada Argentina Total Canada Argentina Total
-------------------------------------------------------------------------
Oil and
natural gas
revenue $ 67 $ 26,012 $ 26,079 $ - $ 5,496 $ 5,496
Royalties
and turnover
taxes (7) (4,076) (4,083) - (726) (726)
-------------------------------------------------------------------------
60 21,936 21,996 - 4,770 4,770
Interest
income 402 31 433 29 - 29
-------------------------------------------------------------------------
462 21,967 22,429 29 4,770 4,799
Expenses
Production 41 5,657 5,698 - 1,623 1,623
General and
admini-
strative 1,931 1,386 3,317 679 488 1,167
Interest - - - 236 - 236
Depletion,
depreciation
and accretion 108 12,746 12,854 60 2,260 2,320
Foreign
exchange
loss (gain) 6,719 (4,686) 2,033 (53) 31 (22)
-------------------------------------------------------------------------
8,799 15,103 23,902 922 4,402 5,324
Income (loss)
before taxes (8,337) 6,864 (1,473) (893) 368 (525)
Future tax
expense
(recovery) - 669 669 - (139) (139)
-------------------------------------------------------------------------
Net income
(loss) $ (8,337) $ 6,195 $ (2,142) $ (893) $ 507 $ (386)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property,
plant and
equipment $ 1,191 $ 81,045 $ 82,236 $ 685 $ 27,397 $ 28,082
Capital
expend-
itures $ 6 $ 35,670 $ 35,676 $ (6) $ 8,719 $ 8,713
Total assets $ 28,176 $ 123,974 $ 152,150 $ 8,129 $ 47,020 $ 55,149
Nine months ended Nine months ended
September 30, 2007 September 30, 2006
Canada Argentina Total Canada Argentina Total
-------------------------------------------------------------------------
Oil and
natural gas
revenue $ 293 $ 60,809 $ 61,102 $ - $ 11,959 $ 11,959
Royalties
and turnover
taxes (42) (9,789) (9,831) - (1,757) (1,757)
-------------------------------------------------------------------------
251 51,020 51,271 - 10,202 10,202
Interest
income 1,007 61 1,068 229 - 229
-------------------------------------------------------------------------
1,258 51,081 52,339 229 10,202 10,431
Expenses
Production 116 13,445 13,561 - 3,670 3,670
General and
admini-
strative 4,748 3,361 8,109 2,289 2,126 4,415
Interest 1,252 - 1,252 236 - 236
Depletion,
depreciation
and accretion 535 30,457 30,992 175 5,254 5,429
Foreign
exchange
loss (gain) 13,308 (9,223) 4,085 1,202 (399) 803
-------------------------------------------------------------------------
19,959 38,040 57,999 3,902 10,651 14,553
Income (loss)
before taxes (18,701) 13,041 (5,660) (3,673) (449) (4,122)
Future tax
expense
(recovery) - 1,301 1,301 - (947) (947)
-------------------------------------------------------------------------
Net income
(loss) $(18,701) $ 11,740 $ (6,961) $(3,673) $ 498 $ (3,175)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Property,
plant and
equipment $ 1,191 $ 81,045 $ 82,236 $ 685 $ 27,397 $ 28,082
Capital
expend-
itures $ 13 $ 73,593 $ 73,606 $ 41 $ 20,438 $ 20,479
Total assets $ 28,176 $ 123,974 $ 152,150 $ 8,129 $ 47,020 $ 55,149
14. Commitments
a) Exploration
On May 29, 2007, the Company signed a final agreement with the Province
of La Pampa with respect to the award of the Gobernador Ayala III
Exploration Concession (GA III Concession). Petro Andina subsequently
entered into a joint venture agreement under which Petro Andina will
operate the GA III Concession with a 70 percent working interest, while
the other parties will share the remaining 30 percent. The two-year work
commitment with respect to the Concession includes drilling a total of 25
wells and acquiring 250 square kilometres of three dimensional (3D)
seismic data. As of September 30, 2007, five wells had been drilled and
the seismic acquisition had been completed, with data processing to
commence in the fourth quarter of 2007.
Under the terms of the GA III joint venture agreement, Petro Andina will
initially pay 100 percent of the capital costs and associated value added
tax related to the two-year work commitment on the Concession. If
commercial hydrocarbon reserves are discovered, 30 percent of the work
commitment costs and associated value added tax will then be recovered
from the joint venture partners out of their share of revenues less
royalties and production expenses ("net revenues") earned from GA III
production. The joint venture partners will be entitled to 30 percent of
net revenues from production. Half of these net revenues will be paid to
them as earned and half will be applied to repay capital costs advanced
by Petro Andina on their behalf. The amounts due to Petro Andina will be
secured by an assignment of the joint venture partners' interests in GA
III. Interest is payable by the joint venture partners on the unpaid
capital costs, but this interest is also only recoverable from their
share of net revenues.
The Company will only recognize a receivable for recovery of work
commitment costs and interest when commercial reserves have been
established. The amount of the receivable to be recognized will be
limited to the joint venture partners' share of estimated reserves, up to
a maximum of 30 percent of the work commitment costs plus accrued
interest. As of September 30, 2007, the Company had not yet applied to
convert any portion of the GA III concession into an exploitation
concession with commercial reserves. Accordingly, 100 percent of GA III
work commitment costs incurred have been recorded as capital expenditures
by the Company.
b) Credit facility
In September 2007 the Company, through its subsidiary Petro Andina
Resources Ltd., entered into a US$100 million senior first lien secured
credit facility, to be provided by Macquarie Bank Limited (Macquarie).
Initial availability under the facility is US$28 million, comprising a
US$18 million Tranche A component and a US$10 million Tranche B
component. The first advances under Tranche A of the credit facility were
made in October 2007.
The Tranche A availability will be updated based on semi-annual re-
determinations by Macquarie that the Company's oil and gas reserves will
support additional lending amounts. The first update will be completed in
the fourth quarter of 2007. The Tranche B borrowing base is available
until September 14, 2008.
The loan facility bears interest at variable rates which, at the
Company's option, will be based on either LIBOR or US prime (the
"contract rates"). The Company may select either contract rate to apply
to each advance for periods of 90 days at a time. The Tranche A facility
interest rates will be LIBOR plus 2.75 percent per annum or US prime plus
0.75 percent per annum. The Tranche B facility interest rates will be
LIBOR plus 5.25 percent per annum or US prime plus 3.25 percent per
annum. Interest is payable quarterly.
The loan is secured by a pledge of Petro Andina Resources Ltd. common
shares and an assignment of the Company's collection rights under all
agreements related to its Argentine properties, including leases,
exploration and development concessions, joint venture agreements,
operating agreements and sales agreements. The loan is not convertible
into equity.
The loan agreement provides for amortization of the initial Tranche A
advances of US$18 million in ten quarterly instalments of US$1,800,000
commencing on October 20, 2008. However, the amortization schedule may be
amended and deferred based on the results of the Company's development
plan and the Company anticipates that principal repayments will not be
scheduled while funds continue to be advanced. The loan facility matures
on September 14, 2011.
15. Contingency
In March 2006 Petro Andina applied to the Federal Secretary of Energy in
Argentina to convert 303.5 square kilometres of the CNQ-7/A Concession
around the Company's producing fields into an exploitation concession.
The Company has been advised that legal precedent in Argentina provides
the federal regulator with a period of 60 days to object to the filing.
If no objection is made, then the operator is permitted to reduce the
amount of royalties paid from 15 percent to the 12 percent applicable to
an exploitation concession. Since no objection was received, in mid-May
2006, 60 days after this application was made, the rate used in computing
the royalty was reduced to 12 percent. However, the responsibility for
the granting of exploitation concessions has now been transferred to
provincial control. In March 2007, the Company received notice from the
Province of Mendoza claiming royalty adjustments to increase the royalty
to 15 percent retroactive to May 2006. The claim has been made by a
provincial government department which is separate from the government
department responsible for the granting of exploitation concessions.
While Petro Andina has received assurance from expert advisors and
regulators that the same precedent will apply, the change in
administrative jurisdiction introduces an element of uncertainty
concerning the timing of the royalty rate reduction. To address this
uncertainty, the Company has decided to accrue an additional royalty
amount for the period commencing May 2006 equal to one-half of the
difference between the exploration and exploitation royalty rates or
1.5 percent. This amount of $1,096,000 has been accrued in the nine
months ended September 30, 2007. This accrual is planned to continue
until the bureaucratic process related to the granting of the
exploitation concession is complete and the matter is resolved.About Petro Andina Resources Inc.
Petro Andina is engaged in the exploration for and development and
production of oil and natural gas in Argentina. The Corporation is continuing
to develop its existing reserves and to conduct appraisal and exploration
drilling on its 457,000 acre (260,000 acre net) land position in the Neuquén
basin. Petro Andina is headquartered in Calgary, Canada.
This news release does not constitute an offer to sell securities, nor is
it a solicitation of an offer to buy securities, in any jurisdiction. All
sales will be made through registered securities dealers in jurisdictions
where the offering has been qualified for distribution. The securities offered
are not, and will not be, registered under the securities laws of the United
States of America, nor any state thereof and may not be sold in the United
States of America absent registration in the United States or the availability
of an exemption from such registration.
The Toronto Stock Exchange has not received and does not accept
responsibility for the adequacy or accuracy of this news release.
Forward-Looking Statements
This document contains forward-looking information that involves known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by the
forward-looking information. For this purpose, any statements that are
contained herein that are not statements of historical fact may be deemed to
be forward-looking information, including Management's assessment and
discussion of the Company's plans and future operations. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "intends," "will,"
"should," "expects," "projects," and similar expressions are intended to
identify forward-looking information. The associated risks and uncertainties
include, but are not limited to, the impact of general economic conditions in
Canada and in Argentina; industry conditions including changes in laws and
regulations including adoption of new environmental laws and regulations, and
changes in how they are interpreted and enforced, both in Canada and
Argentina; competition; the ability to generate revenue and exploit operating
margins; capital resources; the use of certain technologies and materials;,
annual impairment test;, labour relations; insurance; damage from weather and
other disasters; operating and maintenance risks and environmental risks; new
information regarding reserves; changes in demand for and volatility of
commodity prices of crude oil and natural gas; legislative, regulatory and
political changes; the production and growth potential of Petro Andina's
assets; fluctuations in foreign exchange or interest rates; the ability to
access sufficient capital from internal and external sources; and obtaining
required approvals of regulatory authorities, both in Canada and in Argentina,
along with other factors discussed in this presentation. The risks outlined
should not be construed as exhaustive. Many of these risk factors are
discussed in further detail in the Company's final Prospectus dated May 10,
2007 on file with Canadian securities commissions and Petro Andina's website.
Readers are also referred to the risk factors described in other documents
that Petro Andina files from time to time with securities regulatory
authorities.
Accordingly, no assurance can be given that any events anticipated by the
forward-looking statements will transpire or, if they do, what their impact on
the Company might be. Investors are cautioned not to place undue reliance on
any forward-looking information. The forward-looking statements are made as of
the date hereof, and the Company undertakes no obligation to publicly update
or revise any forward-looking information to reflect new events or
circumstances except as required by law. The Company assumes no responsibility
or liability of any nature whatsoever for the forward-looking statements
contained herein.
For further information: Melesia Kasha, Investor Relations, Petro Andina
Resources Inc., Phone: (403) 237-1700, Fax: (403) 265-8216; Bill Hogg, Chief
Financial Officer, Petro Andina Resources Inc., Phone: (403) 237-1701, Fax:
(403) 265-8216
