(All amounts are in Canadian dollars, unless stated otherwise)
CALGARY, July 31 /CNW/ - ProspEx Resources Ltd. ("ProspEx" or the
"Company") is pleased to provide its financial and operating results for the
three and six month period ended June 30, 2008.
"ProspEx achieved significant production growth during the second quarter
as a result of a successful winter drilling program" said John Rossall,
President and Chief Executive Officer. "Our summer drilling program is now
underway in West Central Alberta, with drilling operations in the Deep Basin
scheduled to start within the next week."HIGHLIGHTS
- Production for the second quarter of 2008 was 4,285 barrels of
oil equivalent ("boe") per day, a 13% increase over the prior
quarter.
- In the first quarter, ProspEx drilled two wells in the Kakwa area
that have now been on production for over three months. Current
production from these two wells totals about 600 (360 net) boe
per day. The Company believes that these two wells have defined a
significant new opportunity that could require either four vertical
wells per section or horizontal drilling with multi-stage fracturing
to fully develop.
- The Company expanded its three dimensional ("3D") seismic coverage in
Edson, Kakwa and Ricinus with the acquisition of approximately
320 square kilometers of new data. This data will allow ProspEx to
select drilling locations to follow up on successful winter drilling.
- ProspEx's summer drilling program started in late June, and
two (1.5 net) wells have been drilled and cased to date in the
third quarter in Harmattan and Willesden Green in West Central
Alberta. An additional well is currently being drilled at Harmattan.
- Cash flow before changes in operating non-cash working capital items
for the quarter was $14.9 million, an increase of 33% compared to the
prior year due to higher commodity prices. Cash flow increased from
the prior quarter due to growth in volumes and higher commodity
prices.
- The Company showed earnings of $2.3 million in the second quarter,
despite a $2.8 million unrealized mark to market loss on financial
instruments, as natural gas prices at quarter end had increased
significantly compared to the pricing of financial instruments put in
place earlier this year.
- Net debt excluding after tax unrealized financial instrument losses
was $43.2 million at June 30, 2008 compared to $55.8 million at the
end of the prior quarter, reflecting the increased cash flow over the
quarter and reduced capital spending due to the spring break-up
period and the proceeds from the previously announced disposition of
Granum area assets.OPERATIONAL REVIEW
Capital Program
Capital expenditures for exploration and development before acquisitions
and dispositions were $8.6 million during the second quarter of 2008.
Approximately half of this total was spent on land and seismic, with the
Company expanding its 3D seismic coverage in Edson, Kakwa and Ricinus. In
Edson, approximately 200 square kilometers of seismic was acquired to extend
ProspEx's coverage along the prospective play fairway. At Kakwa, an additional
60 square kilometers of seismic data was acquired offsetting successful wells
drilled in the first quarter, and to provide "template" data over recent
industry drilling in the area. This additional data provides the Company with
3D seismic coverage over essentially all of its lands in Kakwa. At Ricinus, 60
square kilometers of 3D seismic was obtained to evaluate potential exploration
opportunities on recently consolidated lands.
Drilling and completions expenditures were modest in the second quarter
due to the annual spring break-up period. No wells were rig released in the
second quarter. ProspEx's summer drilling program began in late June with two
(1.5 net) wells drilled in West Central Alberta since the end of the second
quarter. This drilling includes a successful trend extension well at Harmattan
(100% working interest) and a successful development well (50% working
interest) at Willesden Green. An infill well (50% working interest) at
Harmattan is currently being drilled. Following this Harmattan well, drilling
activity will shift to the Ricinus area, where three (2.3 net) wells are
planned.
Drilling operations are scheduled to begin at Wapiti in the Deep Basin in
the next week. After this initial Wapiti well, drilling activity will resume
later in the third quarter at Kakwa, where ProspEx enjoyed significant success
during the first quarter of 2008. Two of the first quarter Kakwa wells have
been on production since late March and are now producing at stable gross
rates of 1.5 and 2.0 million cubic feet ("mmcf") per day. Three dimensional
seismic has been used to define the prospective fairway tested by these two
wells and based on the Company's interpretation of the seismic data, ProspEx
estimates that the pool may be three to seven sections in areal extent.
Internal estimates as of the date of this release indicate that gross gas in
place volumes may range from 20 to 55 billion cubic feet ("bcf"), depending on
the average net pay thickness, porosity and productive area of the pool. At
this time ProspEx is not able to further define the resources described above
due to the early state of development of the pool. ProspEx has an average
working interest of 55% in this pool.
Please note that the foregoing estimate does not represent recoverable
natural gas and there is no certainty that any additional portion of the
resources will be discovered. If discovered, there is no certainty that it
will be commercially viable to produce any portion of the resources.
Given the large resource estimate relative to productivity, the Company
believes that this trend may require up to four vertical wells per section to
fully develop, or may be a good candidate for horizontal drilling with
multi-stage fracturing technology. The first wells in the Kakwa program will
be vertical wells to delineate the prospective fairway, followed by vertical
or horizontal development wells contingent on delineation drilling and further
technical analysis.
ProspEx has also identified an additional analogous exploration
opportunity using 3D seismic on its Kakwa lands which will be tested as part
of the upcoming drilling program. ProspEx has six to eight wells planned in
its fall and winter drilling program in the Kakwa area. The Company has an
inventory of 12 (6.4 net) locations on undrilled sections within the two Kakwa
play fairways.
At Edson, the 8-13-54-19W5 well (ProspEx 35% working interest) was
successfully drilled and production tested in the Devonian Wabamun formation
during the first quarter. The pipeline tie-in for this well has been licensed
and longer delivery equipment has been ordered, with production now expected
to commence late in 2008. The operator of the Edson lands is advancing four
additional locations through the regulatory process: two follow-ups to the
8-13 well, and two exploratory locations. ProspEx has developed an inventory
of 10 (3.5 net) additional drilling locations on Company land utilizing 3D
seismic.
At Salter, a horizontal well was drilled and completed in the first
quarter in the Mississippian Rundle Group in a Foothills structure.
Relicensing of the existing pipeline to this well site is in progress to
accommodate production from the horizontal well, and is expected to be on
stream at the end of the third quarter, at a facilities restricted rate of 2
mmcf per day. ProspEx has a 40% working interest in the production from this
well.
In Southern Alberta, surface acquisition is underway for a ten well
program at Medallion that is expected to commence late in the third quarter.
The previously announced disposition of properties in the Granum area
effective April 1, 2008 was closed during the second quarter. The
consideration received was $5.6 million, prior to closing adjustments. These
properties include approximately 110 boe per day of net production and
2,660 net acres of undeveloped land.
Subsequent to quarter end, ProspEx closed an acquisition of partner
interests in the Ricinus area for consideration of $3.35 million, subject to
normal closing adjustments, effective July 1, 2008. These properties include
approximately 60 boe per day of net production and 400 net acres of
undeveloped land. This acquisition is a follow up to the previous acquisition
that closed in January, 2008, further consolidating the Company's Ricinus
lands.
Also subsequent to quarter end, the Company disposed of its lands in the
Shaw area (2,500 net undeveloped acres), which were due to expire in August of
this year, for consideration of $1.0 million.Production
Production (boe/d) Q2 2008 Q1 2008 Q4 2007 Q3 2007 Q2 2007
-------------------------------------------------------------------------
Southern Alberta 1,009 1,109 1,134 1,190 1,122
West Central Alberta 1,904 1,236 1,305 1,466 1,397
Deep Basin 1,362 1,425 1,472 1,589 1,713
Other 10 11 11 9 9
-------------------------------------------------------------------------
Total 4,285 3,781 3,922 4,254 4,241Production for the second quarter of 2008 was 4,285 boe per day, 13%
greater than the prior quarter. New production was brought on stream at Kakwa
in the Deep Basin, as discussed above, and at Harmattan in West Central
Alberta, where three (3.0 net) wells were tied into the local midstream plant.
Subsequent to the quarter end, the three Harmattan wells were offline for
approximately five days due to a fire at a third party gas processing
facility, but have since resumed production.
Second quarter 2008 production of 4,285 boe per day is only 1% greater
than the same quarter in 2007. This was expected as the Company elected to
pursue a measured pace of capital spending in the second half of 2007 due to
low natural gas prices, resulting in full year 2007 capital spending of only
$48.6 million. Consequently, new production additions have only just offset
production declines. With a 2008 capital budget of $65.0 million, the Company
is positioned to grow its production through 2009.2008 Guidance Summary
Annual production 4,200 to 4,500 boe per day
Capital expenditures $65 million
Operating costs $8.50 per boe
General and administration ("G&A") costs $2.15 per boe
Royalties 20%Guidance for 2008 is summarized in the table above. Guidance regarding
capital expenditures, operating costs, G&A costs and royalties may constitute
"financial outlooks" as contemplated by National Instrument 51-102 of the
Canadian Securities Administrators entitled Disclosure Obligations. The
purpose of such financial outlooks is to forecast the anticipated operating
results of the Company in 2008. Please be advised that the information may not
be appropriate for other purposes.
The Company's total 2008 capital budget, including acquisition
expenditures and disposition proceeds, is unchanged at $65.0 million. Guidance
with respect to annual average production guidance, operating costs, royalties
and G&A expenses is also unchanged.
Reader's Advisory
ProspEx is a Calgary based junior oil and gas company focused on
exploration for natural gas in the Western Canadian Sedimentary Basin.
Certain information contained in this press release constitutes
forward-looking information or statements including, without limitation,
information and statements respecting: anticipated cash flow, capital
expenditures, production forecasts, production additions and deletions,
reserves and resources additions and deletions, additions to and deletions
from the Company's historical and future capital programs, acquisitions or
dispositions, operating expenses, G&A, royalties, expected timing of the
tie-in of wells, expected timing of the receipt of regulatory approvals and
expected timing of the completion of facilities projects.
Statements relating to "reserves" and "resources" are forward-looking
information as they involve the implied assessment, based on certain estimates
and assumptions that, among others, the reserves and resources described exist
in the quantities predicted or estimated.
Forward-looking information and statements are often, but not always,
identified by the use of words such as "anticipate", "seek", "believe",
"expect", "hope", "plan", "intend", "forecast", "target", "project",
"guidance", "may", "might", "will", "should", "could", "estimate", "predict"
or similar words or expressions suggesting future outcomes or language
suggesting an outlook. By their very nature, forward-looking information and
statements involve inherent risks and uncertainties, both general and
specific, and risks that predictions, forecasts, projections and other
forward-looking information and statements will not be achieved. We caution
readers not to place undue reliance on these statements as a number of
important factors could cause the actual results to vary materially from the
forward-looking information or statements. These factors include, but are not
limited to: the volatility of oil and gas prices; production and development
costs and capital expenditures; the imprecision of reserve and resource
estimates and estimates of recoverable quantities of oil, natural gas and
liquids; the Company's ability to replace and expand oil and gas reserves;
environmental claims and liabilities; incorrect assessments of value when
making acquisitions or dispositions; increases in debt service charges; the
loss of key personnel; the marketability of production; defaults by third
party operators; unforeseen title defects; fluctuations in foreign currency
and exchange rates; inadequate insurance coverage; compliance with
environmental laws and regulations; changes in tax and royalty laws; the
Company's ability to access external sources of debt and equity capital; and
the Company's ability to obtain equipment in a timely manner to carry out
development activities. Further information regarding these factors may be
found under the headings "Risk Factors" and "Industry Conditions" in the
Company's most recent Annual Information Form, under the heading "Business
Risks" in the Company's Management's Discussion and Analysis for the year
ended December 31, 2007, and in the Company's most recent consolidated
financial statements, management information circular, quarterly reports,
material change reports and news releases available under the Company's
profile on SEDAR (www.sedar.com). Readers are cautioned that the foregoing
list of factors that may affect future results is not exhaustive. When relying
on our forward-looking statements to make decisions with respect to the
Company, investors and others should also carefully consider information set
forth in the section "Forward-Looking Information" of the Company's most
recent Annual Information Form respecting the assumptions upon which the
Company bases certain forward-looking information and the uncertainties
inherent in such assumptions.
The Company does not assume responsibility for the accuracy and
completeness of the forward-looking information or statements and such
information and statements should not be taken as guarantees of future
outcomes. Subject to applicable securities laws, the Company does not
undertake any obligation to revise these forward-looking information or
statements to reflect subsequent events or circumstances. Furthermore, the
forward-looking information contained in this press release are made as of the
date of this document and the Company does not undertake any obligation to
update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by applicable law. The forward-looking information and statements
contained in this press release are expressly qualified by this cautionary
statement.
The term boe may be misleading, particularly if used in isolation. A boe
conversion ratio of six thousand cubic feet to one barrel is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead. The aggregate of
the exploration and development costs incurred in the most recent financial
year and the change during that year in estimated future development costs
generally will not reflect total finding and development costs related to
reserves additions for that year.ProspEx Resources Ltd.
Consolidated Highlights
For the period ended
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
(unaudited) 2008 2007 2008 2007
-------------------------------------------------------------------------
FINANCIAL ($000's)
Oil and gas revenue 24,567 17,554 41,945 31,625
Net earnings 2,261 2,235 151 441
Cash flow(1) 14,926 11,189 24,108 18,722
Total assets 192,681 171,361 192,681 171,361
Total net debt(2) 43,224 39,336 43,224 39,336
Net earnings per share
($ per share)
Basic 0.04 0.04 0.00 0.01
Diluted 0.04 0.04 0.00 0.01
Cash flow per share
($ per share)(1)
Basic 0.26 0.21 0.42 0.35
Diluted 0.25 0.20 0.41 0.33
Weighted average
common shares (000's)
Basic 57,082 53,912 56,814 53,859
Diluted 58,709 56,560 58,400 56,429
PRODUCTION VOLUMES
Natural gas (mcf/d) 19,957 21,108 19,510 18,945
Natural gas liquids
(bbls/d) 851 513 694 402
Oil (bbls/d) 108 210 88 147
--- --- --- ---
Total (boe/d) 4,285 4,241 4,033 3,707
SALES PRICES
Natural gas ($/mcf) 9.47 7.31 8.74 7.70
Natural gas liquids
($/bbl) 79.09 48.47 71.88 48.48
Oil ($/bbl) 126.37 65.22 114.49 63.66
------ ----- ------ -----
Total ($/boe) 63.00 45.48 57.14 47.14
NETBACKS ($/boe)
Price 63.00 45.48 57.14 47.14
Unrealized financial
instrument (loss)
gain (7.13) 3.96 (9.94) (2.53)
Royalties (11.97) (3.97) (10.38) (6.47)
Operating costs (8.39) (7.86) (9.23) (7.66)
Transportation (1.00) (1.01) (0.98) (1.02)
General and
administrative (2.02) (2.13) (2.25) (2.18)
------ ------ ------ ------
Total 32.49 34.47 24.36 27.28
CAPITAL ($000's)
Drilling and
completions 2,094 1,552 12,145 10,869
Facilities 1,908 3,801 6,620 9,732
Land and lease 1,354 1,369 2,913 3,557
Seismic 2,562 311 2,826 1,015
Capitalized general
and administrative 697 718 1,494 1,234
Net property
acquisitions
(dispositions) (5,448) - 6,050 -
Other capital assets 99 34 159 108
-- -- --- ---
Total 3,266 7,785 32,207 26,515
(1) Cash flow is defined as cash flow from operations before changes in
operating non-cash working capital.
(2) Total net debt is defined as long term debt less working capital
(or plus working capital deficiency) excluding unrealized financial
instrument gain (loss) and associated future tax assets
(liabilities).Cash flow and total net debt do not have standardized measures prescribed
by Canadian generally accepted accounting principles and therefore may not be
comparable with calculation measures for other issuers.
MANAGEMENT DISCUSSION & ANALYSIS
Management's Discussion and Analysis ("MD&A") is management's assessment
of the financial and operating results of ProspEx Resources Ltd. ("ProspEx" or
the "Company") as well as a prospective view of the Company's activities. The
MD&A is for the three and six months ended June 30, 2008, and was prepared as
at July 31, 2008. The MD&A should be read in conjunction with the audited
consolidated financial statements and MD&A for the year ended December 31,
2007 together with the notes related thereto. The reader should be aware that
historical results are not necessarily indicative of future performance.
RESULTS OF OPERATIONS
The second quarter of 2008 was highlighted by continued strengthening of
the commodity price environment along with record production levels. Natural
gas prices strengthened 30% to $9.47 per million cubic feet ("mcf") from $7.31
per mcf in the same quarter last year. Operationally, the Company saw a 13%
increase in production from the first quarter of 2008 to 4,285 barrels of oil
equivalent ("boe") per day. Increases in production levels reflect the
successful completion of a winter drilling program in the Company's growth
areas.
Net Earnings and Cash Flow
Cash flow for the second quarter of 2008 was $14.9 million, an increase
of 33% from the same period of 2007. This was driven by a 39% increase in
average realized prices.
During the second quarter of 2008, the Company reported net earnings of
$2.3 million which is a 1% increase over the same period in 2007 and an
improvement of $4.4 million from 2008's first quarter net loss. The increase
in earnings was due to stronger prices and production growth during the second
quarter of 2008. For the six months ending June 30, 2008, net earnings were
$0.2 million compared to $0.4 million from the same period of 2007.Revenue
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
----------------------------------------------------
Natural gas $ 18,605 $ 14,004 $ 32,344 $ 25,634
Realized gain (loss)
on financial
instruments (1,407) 39 (1,307) 768
----------------------------------------------------
Total natural gas 17,198 14,043 31,037 26,402
Oil 1,245 1,245 1,832 1,692
Natural gas liquids 6,124 2,266 9,076 3,531
----------------------------------------------------
Oil and gas revenue 24,567 17,554 41,945 31,625
Unrealized financial
instrument (loss)
gain (2,781) 1,529 (7,300) (1,701)
----------------------------------------------------
Total revenue $ 21,786 $ 19,083 $ 34,645 $ 29,924
----------------------------------------------------Second quarter oil and gas revenue increased by $7.0 million or 40% to
$24.6 million in 2008 from the second quarter of 2007, as a result of a slight
volume increase and a 39% increase in average prices. The Company experienced
significant increases in natural gas liquids ("NGL") revenues as a result of
new liquid rich production in both the Ricinus and Harmattan areas. Second
quarter 2008 total revenue increased by $2.7 million or 14% from the same
period in 2007 for the reasons mentioned above, partially offset by an
increase in the unrealized financial instrument loss of $4.3 million.
For the six months ending June 30, 2008 oil and gas revenue increased by
$10.3 million or 33% due to a 9% increase in production as well as a 21%
increase in average prices.Production
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
Area (boe/d)
------------
Deep Basin 1,362 1,713 1,393 1,270
West Central Alberta 1,904 1,397 1,570 1,283
Southern Alberta 1,009 1,122 1,059 1,142
Other Areas 10 9 11 12
----- ----- ----- -----
4,285 4,241 4,033 3,707
----------------------------------------------------
Product
-------
Natural gas (mcf/d) 19,957 21,108 19,510 18,945
Natural gas liquids
(bbls/d) 851 513 694 402
Oil (bbls/d) 108 210 88 147
----- ----- ----- -----
Total (boe/d) 4,285 4,241 4,033 3,707
----------------------------------------------------Production for the second quarter of the year averaged 4,285 boe per day,
an increase of 13% over the first quarter and 1% over the same period of 2007.
Production growth was mainly attributable to the West Central Alberta area due
to a property acquisition in the Ricinus area and drilling success in both
Harmattan and Ricinus. Production in the Deep Basin was lower in the quarter
due to natural declines and facility downtime in the Wapiti area partially
offset by new production in Kakwa.
ProspEx's overall production mix for the second quarter of 2008 was 78%
natural gas with the remaining 22% being NGLs and oil. On a year to date
basis, production was 81% natural gas and 19% NGLs and oil. NGLs and oil
volumes have increased in the current year due to the liquid rich production
brought on in the Harmattan and Ricinus areas.Commodity Pricing
ProspEx Three months Three months Six months Six months
Average Prices ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
Natural gas ($/mcf)
Sales price $ 10.25 $ 7.29 $ 9.11 $ 7.48
Realized (loss)
gain on financial
instrument (0.78) 0.02 (0.37) 0.22
----------------------------------------------------
Average realized
natural gas price 9.47 7.31 8.74 7.70
Oil ($/bbl) 126.37 65.22 114.49 63.66
NGL ($/bbl) 79.09 48.47 71.88 48.48
----------------------------------------------------
Average realized
price ($/boe) 63.00 45.48 57.14 47.14
Unrealized financial
instrument (loss)
gain ($/boe) (7.13) 3.96 (9.94) (2.53)
----------------------------------------------------
Total average price
($/boe) $ 55.87 $ 49.44 $ 47.20 $ 44.61
----------------------------------------------------
Benchmark pricing Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
AECO C Spot ($/mcf) $ 10.22 $ 7.07 $ 9.06 $ 7.24
Edmonton Par -
light oil ($/bbl) $ 126.07 $ 71.93 $ 111.79 $ 69.51
----------------------------------------------------Average natural gas sales prices increased 41% to $10.25 per mcf in the
second quarter of 2008, compared to $7.29 per mcf in the second quarter of
2007. During the second quarter of 2008, AECO C daily spot prices for natural
gas increased by 45% compared to the second quarter of 2007 and the AECO
monthly index for the same period increased 27%.
Realized natural gas prices for the second quarter of 2008 averaged $9.47
per mcf, an increase of 30% from $7.31 per mcf realized in the second quarter
of 2007. For the six months ending June 30, 2008 the realized natural gas
price increased 14% to $8.74 per mcf compared to $7.70 per mcf for the same
period of 2007. Overall 2008 realized natural gas prices have increased
reflecting the improvements in the commodity markets for 2008.
Oil prices received for the second quarter of 2008 were $126.37 per
barrel ("bbl"). This is a 94% increase from the $65.22 per bbl received in the
second quarter of 2007. For the six months ending June 30, 2008, the oil price
received was $114.49 per bbl, an increase of 80% from the same period of 2007.
The price realized for NGLs in the second quarter of 2008 was $79.09 per
bbl, an increase of 63% from $48.47 per bbl in the second quarter of 2007. On
a year to date basis, the NGL price as of June 30, 2008 was $71.88 per bbl
which is an increase of 48% over June 30, 2007. NGL prices did not reflect the
same percentage increases as seen with the oil benchmark pricing due to an
increase in the proportion of ethane in the Company's overall NGL mix. Ethane
prices tend to track natural gas pricing as opposed to oil prices.
Financial Instruments
In an effort to mitigate the effects of volatile commodity prices and
ensure cash flow to fund its exploration and development programs, ProspEx
enters into financial instruments such as forwards, futures, swaps and
costless collars. For the quarter ended June 30, 2008, the Company's risk
management program resulted in a net realized loss of $1.4 million and a loss
of $1.3 million for the first half of 2008, compared to a $0.1 million gain
and a $0.8 million gain for the same periods in 2007.
The fair values of unsettled financial instruments are recorded as a
current asset or liability with the change in the fair value recorded as an
unrealized gain or loss in the statements of earnings. As a result, changes in
the fair value of financial instruments due to fluctuating forward natural gas
prices and the purchase or expiration of financial contracts can lead to
volatility in net earnings for the period. The financial instruments open as
of June 30, 2008 are described in detail in the financial instruments, risk
management and capital management strategy note to the consolidated financial
statements (note 5). The fair value of open financial instruments at June 30,
2008 was a liability of $7.1 million compared to an asset of $1.4 million at
June 30, 2007. The impact of the changes in the fair values of open financial
instruments was a loss of $2.8 million for the quarter ended June 30, 2008 and
a loss of $7.3 million for the first six months of the year. This compares to
a gain of $1.5 million for the second quarter of 2007 and a loss of $1.7
million for the first six months of 2007.Royalty Expenses
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
----------------------------------------------------
Crown $ 2,862 $ 768 $ 5,528 $ 3,114
Freehold and
gross overriding 1,806 765 2,090 1,226
-------- -------- -------- --------
Total Royalties $ 4,668 $ 1,533 $ 7,618 $ 4,340
----------------------------------------------------
$ per boe $ 11.97 $ 3.97 $ 10.38 $ 6.47
As a percentage
of oil and gas
revenue 19% 9% 18% 14%
----------------------------------------------------In the second quarter of 2008, royalties totaled $4.7 million or 19% of
revenue compared to last year's $1.5 million or 9% of revenue. During the
first six months of 2008 royalties totaled $7.6 million or 18% of revenue
compared to $4.3 million or 14% of revenue for the same period of 2007. The
rate in 2007 was low due to a $1.2 million capital cost deduction adjustment
that was not duplicated in 2008. The Company's 2008 royalty rate is expected
to be higher than 2007 as a result of the shift in the production profile from
the lower royalty rate wells in Medallion to higher royalty rate wells in West
Central Alberta and the Deep Basin.
ProspEx is required to pay the Province of Alberta and other royalty
owners for the right to produce minerals owned by them. Such royalty payments
are subject to change and any changes may have an adverse impact on the
profitability of a project.
On October 25, 2007, the Government of Alberta unveiled a new framework
to calculate the royalties payable to it for conventional oil, natural gas and
bitumen that are based on, among other things, price, production and depth of
wells. This framework has a proposed effective date of January 1, 2009,
however many material details of the revised royalty structure have yet to be
finalized.
On April 10, 2008, the Government of Alberta introduced two new five year
deep resource programs to address concerns over the development of deep oil &
gas reserves commencing January 1, 2009. These programs consist of a sliding
scale of royalty credits according to depth.Operating Costs
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
Operating costs
($000's) $ 3,274 $ 3,034 $ 6,774 $ 5,137
Operating costs
($/boe) $ 8.39 $ 7.86 $ 9.23 $ 7.66
----------------------------------------------------Operating costs for the second quarter were $3.3 million or $8.39 per
boe. In comparison to the prior year operating costs have risen from $3.0
million or $7.86 per boe, but in comparison to the first quarter of 2008 are
lower than the $3.5 million or $10.17 per boe. Overall operating costs are
trending upwards as the Company's growing production profile is shifting
towards producing areas that attract higher operating costs which include
processing fees. Operating costs for the second quarter were lower than the
first quarter of 2008 as a result of higher than usual operating costs
incurred in the first quarter of the year as the Company incurred additional
spending required to integrate newly acquired properties that it purchased in
the quarter, the cost to address operational issues at Medallion, increased
costs at Salter and costs incurred to accommodate production growth.
Operating costs for the first half of the year were $6.8 million or $9.23
per boe compared to $5.1 million or $7.66 per boe for the first half of 2007,
reflecting the comments above.Transportation Expenses
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
Transportation
expenses ($000's) $ 389 $ 389 $ 721 $ 684
Transportation
expenses ($/boe) $ 1.00 $ 1.01 $ 0.98 $ 1.02
----------------------------------------------------Transportation expense per boe for the three and six months ended
June 30, 2008 is consistent with the comparable periods of 2007.General and Administrative Expenses
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
----------------------------------------------------
Gross general and
administrative $ 1,685 $ 1,732 $ 3,620 $ 3,242
Recoveries (202) (192) (470) (547)
Capitalized expenses (697) (718) (1,495) (1,234)
--------- --------- --------- ---------
Net general and
administrative
expenses $ 786 $ 822 $ 1,655 $ 1,461
--------- --------- --------- ---------
Net general and
administrative
expenses ($/boe) $ 2.02 $ 2.13 $ 2.25 $ 2.18
----------------------------------------------------Gross general and administrative costs remained relatively flat during
the second quarter of 2007 and 2008. For the first six months of 2008 gross
general and administrative costs increased by $0.4 million in the six months
ended June 30, 2008 compared to the same period in 2007, due to higher salary
expenses in the current year.
Interest and Bank Charges
Interest and bank charges of $0.5 million in the second quarter and $1.0
million year to date in 2008 were essentially unchanged from the prior year
amounts of $0.6 million and $1.0 million, as average debt levels have remained
consistent over the past year.Depletion, Depreciation and Accretion
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2008 2007 2008 2007
----------------------------------------------------
Depletion,
depreciation and
accretion ($000's) $ 8,685 $ 9,078 $ 16,060 $ 15,875
Depletion,
depreciation and
accretion ($/boe) $ 22.27 $ 23.52 $ 21.88 $ 23.66
----------------------------------------------------Depletion, depreciation and accretion expense per boe in the second
quarter and first half of 2008 was $22.27 per boe and $21.88 per boe
respectively, which is a decrease from the comparable period in 2007 of $23.52
per boe and $23.66 per boe respectively. The reductions over the comparable
periods in 2007 are as a result of the Company adding proven reserves at a
lower cost than the Company's historical average.
Stock-Based Compensation
Stock-based compensation expenses are down slightly for the three and six
months ended June 30, 2008 from $0.3 million and $0.5 million respectively in
2007, to $0.2 million and $0.4 million respectively in 2008. Costs are down as
the initial grant of stock options and special performance units in 2004 has
been fully recognized.
Income Taxes
In the second quarter of 2008, the Company's future income tax expense
was in line with the same period in 2007 at $1.0 million. For the six months
ending June 30, 2008 future income tax expense totaled $0.2 million, down from
$0.5 million in June of 2007.
During the first quarter of 2008, the renouncement of flow-through shares
resulted in an increase of future tax liability of $2.2 million (2007 - $4.5
million).Estimated tax pools as at June 30 are:
($000's) 2008 2007
-------------------------------------------------------------------------
Canadian development expense $ 33,042 $ 30,578
Canadian exploration expense 27,581 29,354
Canadian oil & gas property expense 34,606 30,156
Undepreciated capital cost 46,296 46,718
Other 5,169 4,799
-------------------------------------------------------------------------
$146,694 $141,605
-------------------------------------------------------------------------ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by the end of 2008. The Company estimates that $7.8 million of this
commitment has been expended to June 30, 2008.
Capital Expenditures
Capital expenditures excluding the property disposition of $5.4 million,
were $8.6 million during the second quarter of 2008, compared to expenditures
of $7.8 million in the second quarter of 2007. Details of these expenditures
for the period ended June 30, were as follows:Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Drilling and
completions $ 2,094 $ 1,552 $ 12,145 $ 10,869
Facilities 1,908 3,801 6,620 9,732
Land and lease 1,354 1,369 2,913 3,557
Seismic 2,562 311 2,826 1,015
Capitalized G&A 697 718 1,494 1,234
------ ------ ------ ------
Exploration &
development capital
expenditures 8,615 7,751 25,998 26,407
Net property
acquisitions
(dispositions) (5,448) - 6,050 -
Other capital assets 99 34 159 108
-------------------------------------------------------------------------
Total capital
expenditures $ 3,266 $ 7,785 $ 32,207 $ 26,515
-------------------------------------------------------------------------Of the $8.6 million invested in exploration and development capital
expenditures, $2.0 million was spent in the Deep Basin, $1.8 million in West
Central Alberta, $0.8 million in Southern Alberta, $2.3 million in other areas
and $1.7 million on corporate items.
In the first half of 2008, $12.1 million was spent to drill and complete
seven (3.8 net) wells with an 89% net success rate. No wells were rig released
in the second quarter of 2008 as the usual spring break-up conditions
prevented access to drilling locations for the quarter.
The Company has participated in $6.1 million of acquisition and
disposition activity during the first half of the year. During the first
quarter of 2008 the Company acquired certain properties in the Ricinus area of
Alberta for $11.5 million after closing adjustments. These properties consist
of 16 (11.9 net) wells with production at acquisition of approximately 360 boe
per day. In the second quarter of 2008 the Company sold certain non-operated
properties in the Granum area for net proceeds of $5.4 million after closing
adjustments. These properties consisted of 5 (1.0 net) producing wells with
net production at disposition of approximately 110 boe per day.
Liquidity & Capital Resources
At June 30, 2008, ProspEx had the following resources available to fund
its capital expenditure program.($000's)
-------------------------------------------------------------------------
Working capital deficiency, excluding financial instrument
gains/losses and related tax $ (6,709)
Long-term debt (36,515)
Bank facilities available 65,000
-------------------------------------------------------------------------
Total capital resources available $ 21,776
-------------------------------------------------------------------------
-------------------------------------------------------------------------ProspEx expects that it will be able to fund its remaining 2008 capital
program from operating cash flow and capital resources noted above.
On July 22, 2008 one of ProspEx's natural gas liquids purchasers
announced that it had filed for creditor protection. ProspEx has exposure of
approximately $25,000 with this counterparty.
Bank Debt
At June 30, 2008 the Company had a $65.0 million credit facility with a
Canadian chartered bank. The facility is available by way of Canadian prime
and US base rate loans, LIBOR advances, bankers' acceptances and letters of
credit. Canadian prime rate loans, US base rate loans, and LIBOR advances bear
interest at Canadian prime, US base rate or LIBOR, as applicable, plus a
margin dependant upon the Company's debt/cash flow ratio as calculated in the
previous quarter. Stamping fees for bankers' acceptances are based on a rate
adjusted over the term to maturity plus a margin as described above. The
credit facility is fully revolving until June 30, 2009 and may be extended at
the mutual agreement of ProspEx and its lender for an additional year. If the
credit facility is not extended, a balloon payment is required on July 1,
2010. This facility is secured by a $200 million demand debenture and a first
floating charge on all petroleum and natural gas assets of ProspEx.
Share Capital
As at June 30, 2008, ProspEx had 57,199,448 common shares (2007 -
53,955,551), 2,201,983 warrants (2007 - 2,792,218), and 5,035,553 options
(2007 - 4,520,917) issued and outstanding. Each warrant and option, upon
exercise, entitles the holder to one common share.
As at July 31, 2008, ProspEx had 57,199,448 common shares,
2,201,983 warrants, and 5,035,553 options issued and outstanding.
Subsequent event
On July 23, 2008, the Company acquired certain properties in the Ricinus
area of Alberta. These properties consist of 13 (1.2 net) producing wells,
with current net production of approximately 60 boe per day and 400 net acres
of undeveloped land. The consideration paid by the Company was $3.35 million
subject to normal closing adjustments.
Contractual Obligations
The Company has committed to certain payments over the next five years as
follows:Payments due There-
($000's) 2008 2009 2010 2011 2012 after
-------------------------------------------------------------------------
Long-term debt $ - - 36,515 - - $ -
Building lease 192 1,122 1,189 1,229 1,243 1,346
Drilling rig contract 2,929 161 - - - -
Process fees 252 400 300 47 - -
Transportation 491 579 78 - - -
Other 5 8 2 - - -
-------------------------------------------------------------------------
Total $ 3,869 2,270 38,084 1,276 1,243 $ 1,346
-------------------------------------------------------------------------
-------------------------------------------------------------------------ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by December 31, 2008. The Company estimates that $7.8 million of
this commitment has been expended to June 30, 2008.
Off-Balance Sheet Arrangements
The Company has not entered into any off-Balance Sheet transactions.
Summary of Quarterly Results
The following table summarizes the quarterly operating statistics of the
Company.2008 2007
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Financial ($000's,
except per share
amounts)
Oil and gas revenue 24,567 17,378 15,906 16,004
Net earnings (loss) 2,261 (2,110) (180) (1,352)
Per share - basic 0.04 (0.04) 0.00 (0.03)
- diluted 0.04 (0.04) 0.00 (0.03)
Average Daily
Production
Oil (bbls/d) 108 68 125 82
NGL (bbls/d) 851 536 515 548
Natural Gas (mcf/d) 19,957 19,064 19,690 21,743
-------- -------- -------- --------
Total (boe/d) 4,285 3,781 3,922 4,254
Operating Netbacks
($/boe)
Price(1) 63.00 50.50 44.09 40.89
Royalties (11.97) (8.57) (5.41) (7.79)
Transportation (1.00) (0.96) (0.86) (0.89)
Operating Cost (8.39) (10.17) (8.06) (8.42)
-------- -------- -------- --------
Operating Netback 41.64 30.80 29.76 23.79
---------------------------------------------------
2007 2006
-------------------------------------------------------------------------
Q2 Q1 Q4 Q3
-------------------------------------------------------------------------
Financial ($000's,
except per share
amounts)
Oil and gas revenue 17,554 14,071 13,536 14,071
Net earnings (loss) 2,235 (1,794) 2,143 440
Per share - basic 0.04 (0.03) 0.04 0.01
- diluted 0.04 (0.03) 0.04 0.01
Average Daily
Production
Oil (bbls/d) 210 83 184 67
NGL (bbls/d) 513 290 276 515
Natural Gas (mcf/d) 21,108 16,757 16,221 18,335
-------- -------- -------- --------
Total (boe/d) 4,241 3,166 3,164 3,639
Operating Netbacks
($/boe)
Price(1) 45.48 49.38 46.50 42.03
Royalties (3.97) (9.85) (7.16) (8.46)
Transportation (1.01) (1.03) (0.96) (0.98)
Operating Cost (7.86) (7.38) (7.39) (8.21)
-------- -------- -------- --------
Operating Netback 32.64 31.12 30.99 24.38
---------------------------------------------------
(1) Price does not include unrealized financial instrument gain or loss.Revenue and net earnings are affected by production volumes, operating
netback, taxation rates, the Company's risk management program and depletion
charges which are the result of the Company's success in adding new proven oil
and natural gas reserves.
Overall production volume trends are the result of exploration and
drilling success, however quarterly volatility is impacted by the seasonality
of the industry as well as facility or pipeline restrictions and/or
maintenance.
With respect to operating netbacks, the average price received has
increased as worldwide commodity prices have risen over the past two years.
Operating costs have increased due to the growth in the proportion of
production from higher cost areas such as the Deep Basin and West Central
Alberta.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted and Recent Pronouncements
Financial Instruments - Effective January 1, 2008 the Company adopted the
new accounting standards for disclosure required under CICA Handbook Section
3862 "Financial Instruments - Disclosures", which applies to both recognized
and unrecognized financial instruments. These disclosures, which include the
nature and extent of risks arising from financial instruments, are included in
note 5 of the unaudited financial statements of the Company for the second
quarter of 2008 (the "Second Quarter Financial Statements").
Capital Disclosures - Effective January 1, 2008, ProspEx adopted the new
requirements of the CICA for disclosure of the Company's objectives, policies
and processes for managing capital (Section 1535) as discussed in note 5 of
the Second Quarter Financial Statements.
Internal Control Reporting - On July 11, 2008, Canadian Securities
Administrators issued a staff notice relative to the replacement of the
current multilateral instrument 52-109, Certification of Disclosure in
Issuers' Annual and Interim Filings. The notice accepts the replacement
proposal, whereby CEO and CFO annual certification will be required to include
an evaluation of the effectiveness of internal controls over financial
reporting ("ICFR") as of the end of the financial year and disclosure
conclusions about the effectiveness of ICFR in the annual MD&A. This will
apply for the year ended December 31, 2008. The Company is continuing with its
evaluation of ICFR to ensure it meets the criteria for December 31, 2008
certification.
Convergence with International Reporting Standards - On February 13,
2008, the Canadian Accounting Standards Board confirmed that the effective
date for the convergence of Canadian Generally Accepted Accounting Standards
for publicly accountable entities to International Financial Reporting
Standards will be January 1, 2011. On April 8, 2008, an exposure draft was
released soliciting comment from the Canadian financial community on the
applicability and appropriateness in a Canadian context, of the proposed
standards, with a comment deadline of July 31, 2008. The Company has not yet
developed an IFRS changeover plan, therefore the impact on its financial
position or results of operations has not yet been determined.
DISCLOSURE CONTROLS AND POLICIES
Disclosure controls and procedures have been designed to ensure that
information required to be disclosed by the Company is accumulated and
communicated to the Company's management as appropriate to allow timely
decisions regarding required disclosure. The Company's CEO and CFO have
concluded, based on their evaluation as of June 30, 2008, that the Company's
disclosure controls and procedures as of the end of such period are effective
to provide reasonable assurance that material information related to the
Company, including its consolidated subsidiary, is made known to them by
others within those entities. It should be noted that while the Company's CEO
and CFO believe that the Company's disclosure controls and procedures provide
a reasonable level of assurance that they are effective, they do not expect
that the disclosure controls and procedures will prevent all errors and fraud.
A control system, no matter how well conceived or operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The CEO and CFO of the Company are able to certify the design of the
Company's internal controls over financial reporting as required under
Multilateral Instrument 52-109 of the Canadian Securities Administration with
no significant weaknesses in design of these internal controls that require
commenting on in the MD&A.
For the second quarter of 2008 there were no changes to the design of
internal controls over financial reporting.
ADVISORIES
Within the MD&A references are made to terms commonly used in the oil and
gas industry. "Cash flow" is not defined by GAAP in Canada and is referred to
as a non-GAAP measures. For the purposes thereof, "cash flow" is defined as
cash flow from operations before the change in operating non-cash working
capital. The MD&A contains the term "cash flow" which should not be considered
an alternative to, or more meaningful than "cash flow from operations" as
determined in accordance with GAAP. The Company considers cash flow to be a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund capital projects and to repay debt. Cash flow presented does
not have any standardized meaning prescribed by Canadian GAAP and therefore it
may not be comparable with the calculation of similar measures for other
entities. Cash flow per share is calculated using the same weighted average
number of common shares for the period as used in calculating the net earnings
per share calculation.
Boe amounts have been calculated using a conversion rate of six mcf of
gas to one barrel of oil. The term boe may be misleading if used in isolation.
A boe conversion ratio of one barrel of oil to six mcf of gas is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the well head.
"Operating netbacks" are calculated by subtracting transportation costs,
royalties payable, and operating costs from the average price received during
the period.
The aggregate of the exploration and development costs incurred in the
most recent financial year and the change during the year in estimated future
development costs generally will not reflect total finding and development
costs related to reserve additions for that year.
Forward-looking Information
Certain information regarding ProspEx including, without limitation,
management's assessment of future plans and operations, constitutes
forward-looking information or statements under applicable securities law and
necessarily involve assumptions regarding factors and risks that could cause
actual results to vary materially, including, without limitation, assumptions
and risks associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, royalty rates, imprecision of reserve
estimates, environmental risks, competition, incorrect assessment of the value
of acquisitions or dispositions, failure to realize the anticipated benefits
of acquisitions and ability to access sufficient capital from internal and
external sources.
The reader is cautioned that these factors and risks are difficult to
predict and that the assumptions used in the preparation of such information,
although considered reasonable by ProspEx at the time of preparation, may
prove to be incorrect. Accordingly, readers are cautioned that the actual
results achieved will vary from the information provided herein and the
variations may be material. Readers are also cautioned that the foregoing list
of assumptions, factors and risks is not exhaustive. Additional information on
the foregoing assumptions, risks and other factors that could affect ProspEx's
operations or financial results are included in ProspEx's public disclosure
documents on file with Canadian securities regulatory authorities. In
particular see the Risk Factors and Industry Conditions sections of ProspEx's
most recent Annual Information Form. ProspEx's reports may be accessed through
the SEDAR website (www.sedar.com), at ProspEx's website (www.psx.ca) or by
contacting the Company directly. Consequently, there is no representation by
ProspEx that actual results achieved will be the same in whole or in part as
those set out in the forward-looking information.
Furthermore, the forward-looking information and statements contained in
this MD&A are made as of the date of this MD&A, and ProspEx does not undertake
any obligation to update publicly or to revise any of the included
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law. The forward-looking
information and statements contained herein are expressly qualified by this
cautionary statement.ProspEx Resources Ltd.
Consolidated Balance Sheets
(unaudited)
June 30, December
(Stated in thousands of dollars) 2008 31, 2007
-------------------------------------------------------------------------
Assets
Current assets
Accounts receivable $ 11,653 12,900
Prepaid expenses 889 988
Future income tax asset (note 3) 2,090 -
Unrealized financial instrument gain - 214
-------------------
14,632 14,102
Property, plant and equipment, net 178,049 161,663
-------------------
$192,681 175,765
-------------------
-------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 19,251 22,761
Unrealized financial instrument loss 7,086 -
Future income tax liability (note 3) - 69
-------------------
26,337 22,830
Long term debt (note 2) 36,515 28,846
Asset retirement obligation 5,975 5,201
Future income tax liability (note 3) 7,884 3,145
-------------------
Total liabilities 76,711 60,022
-------------------
Shareholders' Equity
Share capital (note 4) 91,775 92,204
Contributed surplus (note 4) 6,119 5,614
Retained earnings 18,076 17,925
-------------------
Total shareholders' equity 115,970 115,743
-------------------
$192,681 175,765
-------------------
-------------------
Subsequent event (note 8)
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of Earnings, Comprehensive Earnings and Retained
Earnings
For the periods ended
(unaudited)
Three Three Six Six
months months months months
ended ended ended ended
(Stated in thousands of dollars, June 30, June 30, June 30, June 30,
except per share amounts) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue
Oil and gas $ 24,567 17,554 41,945 31,625
Unrealized financial instrument
gain (loss) (2,781) 1,529 (7,300) (1,701)
Royalties (4,668) (1,533) (7,618) (4,340)
---------------------------------------
17,118 17,550 27,027 25,584
---------------------------------------
Expenses
Depletion, depreciation and
accretion 8,685 9,078 16,060 15,875
Operating 3,274 3,034 6,774 5,137
Transportation 389 389 721 684
General and administrative 786 822 1,655 1,461
Interest and bank charges 515 559 1,024 956
Stock-based compensation 236 286 431 521
---------------------------------------
13,885 14,168 26,665 24,634
---------------------------------------
Earnings before taxes 3,233 3,382 362 950
---------------------------------------
Income Taxes (note 3)
Future 972 1,147 211 509
---------------------------------------
972 1,147 211 509
---------------------------------------
Net earnings and comprehensive
earnings for the period 2,261 2,235 151 441
Retained earnings, beginning of
period 15,815 17,222 17,925 19,016
---------------------------------------
Retained earnings, end of period $ 18,076 19,457 18,076 19,457
---------------------------------------
---------------------------------------
Net earnings per share
Basic $ 0.04 0.04 0.00 0.01
---------------------------------------
---------------------------------------
Diluted $ 0.04 0.04 0.00 0.01
---------------------------------------
---------------------------------------
See accompanying notes to consolidated financial statements
ProspEx Resources Ltd.
Consolidated Statements of Cash Flows
For the periods ended
(unaudited)
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
(Stated in thousands of dollars) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operations
Net earnings for the period $ 2,261 2,235 151 441
Items not involving cash
Depletion, depreciation and
accretion 8,685 9,078 16,060 15,875
Stock-based compensation 236 286 431 521
Future income taxes 972 1,147 211 509
Unrealized financial instrument
(gain) loss 2,781 (1,529) 7,300 1,701
Asset retirement expenditures (9) (28) (45) (325)
--------- -----------------------------
14,926 11,189 24,108 18,722
Changes in non-cash working
capital (2,227) (3,744) (302) (9,913)
--------- -----------------------------
12,699 7,445 23,806 8,809
--------- -----------------------------
Financing
Issuance of common shares 912 271 1,418 310
(Decrease) Increase in long-term
debt (2,910) 2,972 7,669 25,757
--------- -----------------------------
(1,998) 3,243 9,087 26,067
--------- -----------------------------
Investments
Exploration and development
expenditures (8,615) (7,751) (25,998) (26,407)
Property (acquisition)
disposition 5,448 - (6,050) -
Expenditures on asset held
for resale - 937 - 937
Deposit on property acquisition - - 1,175 -
Other capital expenditures (99) (34) (159) (108)
--------- -----------------------------
(3,266) (6,848) (31,032) (25,578)
Changes in non-cash working
capital (7,435) (3,840) (1,861) (9,298)
--------- -----------------------------
(10,701) (10,688) (32,893) (34,876)
--------- -----------------------------
Change in cash - - - -
Cash, beginning of period - - - -
--------- -----------------------------
Cash, end of period $ - - - -
--------- -----------------------------
--------- -----------------------------
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial Statements
For the three months and six months ended June 30, 2008
(unaudited)
The interim unaudited consolidated financial statements of ProspEx
Resources Ltd. (the "Company" and/or "ProspEx") have been prepared in
accordance with Canadian generally accepted accounting principles
("GAAP"). The Company is engaged in the acquisition, exploration,
development and production of oil and natural gas in Canada.
The interim unaudited consolidated financial statements have been
prepared by management following the same accounting policies and methods
of computation as the audited consolidated financial statements for the
period ended December 31, 2007 except as described below. Preparation of
financial statements in conformity with Canadian GAAP requires management
to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and disclosure of contingent
assets and liabilities at the date of the financial statements. Actual
results may differ from these estimates. The disclosures included below
are incremental to those included with the annual consolidated financial
statements except as disclosed below. The interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto in the Company's annual report for the
year ended December 31, 2007.
1. CHANGES IN ACCOUNTING POLICIES
(a) Financial Instruments
On January 1, 2008 the Company adopted the new accounting standard for
financial instruments - disclosures, which applies to both recognized and
unrecognized financial instruments. The standards require that disclosure
be made of the nature and extent of risks arising from financial
instruments. This adoption did not have any impact on the results of
operations or net financial position, as it is a disclosure related
standard.
A financial instrument is any contract that gives rise to a financial
asset of one entity and a financial liability or equity instrument to
another entity. Upon initial recognition all financial instruments,
including derivatives, are recognized on the balance sheet at fair value.
Subsequent measurement is then based on the financial instruments being
classified into one of five categories: held for trading, held to
maturity, loans and receivables, available for sale and other
liabilities. The Company has designated its financial instruments into
the following categories applying the indicated measurement methods:
Measurement
Financial Instrument Category Method
-------------------------------------------------------------------------
Accounts receivable Loans and Amortized cost
receivables
Accounts payable and accrued liabilities Other Amortized cost
liabilities
Long-term debt Other Amortized cost
liabilities
-------------------------------------------------------------------------
The Company enters into derivative financial instruments to manage its
exposure to volatility in commodity prices. These instruments are not
used for trading or other speculative purposes.
Commodity price financial instruments that do not qualify as hedges, or
have not been designated as such, are recorded at fair value on
inception. Realized gains or losses on these financial instruments are
reflected as adjustments to the related revenue when the gain or loss is
realized; unrealized gains and losses on these instruments are recognized
as adjustments to the related revenue at the end of each reporting
period. The estimated fair value of these instruments is based on quoted
market prices, or if quotes are not available, third-party market
indications and forecasts are used.
Derivative instruments that qualify as hedges, and have been designated
as hedges, are not recognized in the financial statements on inception.
Gains or losses on commodity price financial instruments designated as
hedges are reflected as adjustments to the related revenue when the gain
or loss is realized.
(b) Capital Disclosures
On January 1, 2008, the Company adopted the new accounting standard for
disclosure of the Company's objectives, policies and processes for
managing capital. This new adoption did not have any impact on the
results of operations or net financial position, as it is a disclosure
related standard.
2. LONG TERM DEBT
At June 30, 2008 the Company had a $65.0 million credit facility with a
Canadian chartered bank. The facility is available by way of Canadian
prime and US base rate loans, LIBOR advances, bankers' acceptances and
letters of credit. Canadian prime rate loans, US base rate loans, and
LIBOR advances bear interest at Canadian prime, US base rate or LIBOR, as
applicable, plus a margin dependant upon the Company's debt/cash flow
ratio as calculated in the previous quarter. Stamping fees for bankers'
acceptances are based on a rate adjusted over the term to maturity plus a
margin as described above. The credit facility is fully revolving until
June 30, 2009 and may be extended at the mutual agreement of ProspEx and
its lender for an additional year. If the credit facility is not
extended, a balloon payment is required on July 1, 2010. This facility is
secured by a $200 million demand debenture and a first floating charge on
all petroleum and natural gas assets of ProspEx.
3. FUTURE INCOME TAXES
The provision for future income taxes differs from the amount computed by
applying the combined expected Canadian Federal and Provincial tax rates
to earnings before income taxes. The reasons for these differences are as
follows:
Three Three Six Six
months months months months
ended ended ended ended
June 30, June 30, June 30, June 30,
($000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Earnings before taxes $ 3,233 $ 3,382 $ 362 $ 950
Rate (%) 29.50% 32.12% 29.50% 32.12%
-------------------------------------------------------------------------
Computed expected provision for
future income taxes 954 1,086 107 305
Increase (decrease) in taxes
resulting from:
Stock-based compensation expensed 70 92 127 167
Effect of change in tax rate (195) (20) (168) (105)
Other 143 (11) 145 142
-------------------------------------------------------------------------
Income tax expense $ 972 $ 1,147 $ 211 $ 509
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The components of the current future income tax asset and liability are
as follows:
June 30, December
($000's) 2008 31, 2007
-------------------------------------------------------------------------
Financial instrument loss $ 2,090 $ -
Financial instrument gain - (69)
-------------------------------------------------------------------------
Future income tax asset (liability) $ 2,090 $ (69)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The components of the long term future income tax liability are as
follows:
June 30, December
($000's) 2008 31, 2007
-------------------------------------------------------------------------
Property, plant and equipment $ (8,329) $ (3,744)
Asset retirement obligation 519 509
Share issue costs 426 590
-------------------------------------------------------------------------
(7,384) (2,645)
Valuation allowance (500) (500)
-------------------------------------------------------------------------
Future income tax liability $ (7,884) $ (3,145)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At June 30, 2008, the Company had estimated tax pools available to reduce
future taxable income of $146.7 million (June 30, 2007 - $141.6 million).
ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by December 31, 2008. The Company estimates that $7.8 million
of this commitment has been expended to June 30, 2008.
Capitalized stock based compensation resulted in an increase to future
tax liabilities of $0.2 million during both the six months ended
June 30, 2008 and 2007 (three months ended June 30, 2008 and 2007 -
$0.1 million).
During the first quarter of 2008, the renouncement of flow-through shares
resulted in an increase of future tax liability of $2.2 million.
4. SHARE CAPITAL
(a) Common Shares & Common Share Performance Warrants Issued
June 30, 2008 June 30,2007
-------------------------------------------------------------------------
Number of Number of
Shares/ Shares/
Warrants Amount Warrants Amount
(000's) ($000's) (000's) ($000's)
-------------------------------------------------------------------------
Common shares
-------------------------------------------------------------------------
Balance at the beginning of
the year 56,453 $ 90,543 53,790 $ 85,681
Flow-through shares tax
adjustment - (2,218) - (4,461)
Issued on exercise of stock
options 232 746 72 243
Exercise of stock options - 357 - 114
Shares issued on exercise of
warrants 514 1,034 94 188
Issue costs, net of future tax
reduction of $14 (2007 - $20) - (34) - (44)
Warrants cancelled - - - 13
-------------------------------------------------------------------------
Balance at the end of the period 57,199 $ 90,428 53,956 $ 81,734
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share performance warrants
-------------------------------------------------------------------------
Balance at the beginning of the
period 2,716 $ 1,661 2,908 $ 1,778
Exercised (514) (314) (94) (58)
Cancelled - - (22) (13)
-------------------------------------------------------------------------
Balance at the end of the period 2,202 $ 1,347 2,792 $ 1,707
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Share Capital at the end of the
period $ 91,775 $ 83,441
-------------------------------------------------------------------------
-------------------------------------------------------------------------
All outstanding performance warrants entitle the holder to acquire a
common share at a price of $1.40 and expire on October 1, 2009.
(b) Contributed Surplus
Three months ended Six months ended
June 30, June 30,
(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Balance at the beginning of the
period $ 6,004 $ 4,818 $ 5,614 $ 4,348
Stock-based compensation 472 572 862 1,042
Exercise of stock options (357) (114) (357) (114)
-------------------------------------------------------------------------
Balance at the end of the period $ 6,119 $ 5,276 $ 6,119 $ 5,276
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Stock Options
Changes in outstanding stock options are summarized below:
June 30, 2008 June 30, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
(000s) Price (000s) Price
-------------------------------------------------------------------------
Outstanding at beginning of year 4,656 $ 3.62 3,354 $ 3.49
Granted 612 3.32 1,300 4.16
Exercised (232) 3.22 (72) 3.38
Cancelled - - (61) 3.60
-------------------------------------------------------------------------
Outstanding at the end of the
period 5,036 $ 3.60 4,521 $ 3.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes stock options outstanding and exercisable
at June 30, 2008:
Options outstanding Options exercisable
------------------------------------------------ ------------------------
Weighted
average Number
Number of remaining Weighted exercisable Weighted
Range of outstanding contractual average at average
exercise at period end life exercise period end exercise
price (000s) (years) price (000s) price
------------------------------------------------ ------------------------
$ 2.95 - $ 3.45 2,410 2.21 $ 3.22 1,751 $ 3.23
$ 3.48 - $ 3.95 1,721 3.22 $ 3.79 740 $ 3.84
$ 4.00 - $ 4.46 905 3.73 $ 4.27 302 $ 4.27
-------------------------------------------------------------------------
5,036 2.83 $ 3.60 2,793 $ 3.50
-------------------------------------------------------------------------
No options were granted during the second quarter of 2008. The fair value
of options granted during the second quarter of 2007 was $0.9 million,
during the first six months of 2008 was $0.8 million (2007 -
$2.2 million). The fair value is determined using the Black-Scholes
option pricing model with the following weighted average assumptions for
grants as follows:
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Risk free interest rate n/a 4.0% 3.2% 4.0%
Expected life n/a 5 years 5 years 5 years
Expected volatility n/a 48% 47% 48%
Expected dividend yield n/a Nil Nil Nil
-------------------------------------------------------------------------
The estimated fair values of the options and the special performance
units are being amortized to expense over the vesting period. During the
three months ended June 30, 2008, a total of $0.2 million (2007 -
$0.3 million) of stock based compensation was recorded against income and
$0.2 million (2007 - $0.3 million) was capitalized. During the six
months ended June 30, 2008 a total of $0.4 million (2007 - $0.5 million)
of stock based compensation was recorded against income and $0.4 million
(2007 - $0.5 million) was capitalized.
(d) Per Share Amounts
Three months ended Six months ended
June 30, June 30,
2008 2007 2008 2007
-------------------------------------------------------------------------
Weighted average common shares
basic 57,081,774 53,911,553 56,813,545 53,859,424
Dilutive securities:
Stock options 247,737 492,317 200,826 433,367
Performance warrants 1,379,670 1,888,528 1,385,890 1,880,767
Special performance units - 267,945 - 255,333
-------------------------------------------------------------------------
Diluted 58,709,181 56,560,343 58,400,261 56,428,891
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended June 30, 2008, a total of 3,133,000 (June 30,
2007 - 2,136,500) options were excluded from the diluted calculations as
they were anti-dilutive. The six month year to date equivalent number of
options excluded due to their anti-dilutive impact was 3,208,750 (2007 -
2,109,000)
5. FINANCIAL INSTRUMENTS, RISK MANAGEMENT AND CAPITAL MANAGEMENT
STRATEGY
Overview
The Company has exposure to a number of risks from its use of financial
instruments including:
- Credit risk
- Liquidity risk
- Market risk
This note presents information about the Company's exposure to each of
the above risks and the Company's objectives, policies and processes for
measuring and managing risk, and the Company's management of capital.
Further quantitative disclosures are included throughout these financial
statements.
The Board of Directors has overall responsibility for the establishment
and oversight of the Company's risk management framework. The Board has
implemented and monitors compliance with risk management policies.
The Company's risk management policies are established to identify and
analyze the risks faced by the Company, to set appropriate risk limits
and controls, and to monitor risks and adherence to market conditions and
the Company's activities.
Credit Risk
Credit risk relates to the Company's receivables from joint venture
partners and petroleum and natural gas marketers and the risk of
financial loss if a customer, partner or counterparty to a financial
instrument fails to meet its contractual obligations. A substantial
portion of the Company's accounts receivable are with customers in the
energy industry and are subject to normal industry credit risk. The
Company generally grants unsecured credit but routinely assesses the
financial strength of its partners and marketers.
Receivables from petroleum and natural gas marketers are normally
collected on the 25th day of the month following production. The Company
sells the majority of its production to two petroleum and natural gas
marketers therefore is subject to concentration risk. To date the Company
has not experienced any collection issues with its petroleum and natural
gas marketers. Joint venture receivables are typically collected within
one to three months of the joint venture bill being issued to the
partner. The Company attempts to mitigate the risk from joint venture
receivables by obtaining joint venturer approval of significant capital
expenditures prior to expenditure. The Company does not typically obtain
collateral from petroleum and natural gas marketers or joint venturers;
however in certain circumstances, it may elect to cash call a joint
venturer in advance of the work.
As at June 30, 2008 the Company's receivables consisted of $2.1 million
(December 31, 2007 - $5.3 million) from joint venturers, $7.8 million
(December 31, 2007 - $5.1 million) of receivables from petroleum and
natural gas marketers and $1.8 million (December 31, 2007 - $2.5 million)
of other receivables.
The carrying amount of accounts receivable and cash and cash equivalents
represents the maximum credit exposure. The Company does not have an
allowance for doubtful accounts as at June 30, 2008 and did not provide
for any doubtful accounts nor was it required to write-off any
receivables during the period ended June 30, 2008.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they are due. The Company's approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and
stressed conditions without incurring unacceptable losses or risking harm
to the Company's reputation.
The Company prepares annual capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the
Company utilizes authorizations for expenditures on both operated and
non-operated projects to further manage capital expenditures. To
facilitate the capital expenditure program, the Company has a revolving
reserve based credit facility, as outlined in note 2. The Company also
attempts to match its payment cycle with collection of petroleum and
natural gas revenues on the 25th of each month.
The following are the contractual maturities of financial liabilities and
associated interest payments as at June 30, 2008:
-------------------------------------------------------------------------
(less than) 1 - 2 2 - 5 There-
Financial Liability ($000's) 1 year years years after
-------------------------------------------------------------------------
Accounts payable and accrued
liabilities $ 19,251 - - -
Derivative contracts 7,086 - - -
Long term debt - 36,515 - -
-------------------------------------------------------------------------
Total $ 26,337 36,515 - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Market risk
Market risk is the risk that changes in market prices, such as foreign
exchange rates, commodity prices, and interest rates will affect the
Company's net earnings or the value of financial instruments. The
objective of market risk management is to manage and control market risk
exposures within acceptable limits, while maximizing returns.
The Company utilizes both financial derivatives and physical delivery
sales contracts to manage market risks. All such transactions are
conducted in accordance with the risk management policy that has been
approved by the Board of Directors.
Foreign Currency Exchange Risk
Foreign currency exchange rate risk is the risk that the fair value of
financial instruments or future cash flows will fluctuate as a result of
changes in foreign exchange rates. Although substantially all of the
Company's petroleum and natural gas sales are denominated in Canadian
dollars, the underlying market prices in Canada for petroleum and natural
gas are impacted by changes in the exchange rate between the Canadian and
United States dollars. Given that changes in exchange rate have an
indirect influence, the impact of changing exchange rates can not be
accurately quantified. The Company had no forward exchange rate contracts
in place as at or during the three months ended June 30, 2008.
Commodity Price Risk
Commodity price risk is the risk that the fair value of financial
instruments or future cash flows will fluctuate as a result of changes in
commodity prices. Commodity prices for petroleum and natural gas are
impacted by world economic events that dictate the levels of supply and
demand. The Company has attempted to mitigate commodity price risk
through the use of financial derivative sales contracts. The Company's
contracts in place as of June 30, 2008 are as follows:
Type Amount Term Price ($/GJ) Type
---- ------ ---- ------------ ----
(GJ/d) at AECO
------ -------
Collar 2,000 April 1, 2008 - October 31, 2008 $6.50 - $6.75 Physical
Collar 1,000 April 1, 2008 - October 31, 2008 $6.50 - $6.90 Physical
Collar 1,000 April 1, 2008 - October 31, 2008 $6.50 - $7.13 Financial
Collar 2,000 April 1, 2008 - October 31, 2008 $6.50 - $7.45 Financial
Collar 2,000 April 1, 2008 - October 31, 2008 $6.50 - $7.75 Financial
Collar 2,000 April 1, 2008 - October 31, 2008 $6.75 - $7.62 Financial
Collar 2,000 November 1, 2008 - March 31, 2009 $7.00 - $8.80 Financial
Collar 2,000 November 1, 2008 - March 31, 2009 $7.00 - $9.15 Financial
Put 2,000 November 1, 2008 - March 31, 2009 $10.00 Financial
The contracts in place during the three months ended June 30, 2008
resulted in an unrealized loss of $2.8 million (2007 - $1.5 million gain)
and a realized loss of $1.4 million (2007 - $0.1 million gain). During
the first half of the year ended June 30, 2008 the contracts in place
resulted in an unrealized loss of $7.3 million (2007 - $1.7 million) and
a realized loss of $1.3 million (2007 - $0.8 million gain).
With respect to commodity prices, during the three and six month period
ended June 30, 2008, a one dollar increase in the price per GJ of natural
gas relevant only to the Company's production dedicated to derivative
financial instruments would have resulted in a net earnings decrease of
$0.1 million and an increase of $0.1 million respectively. A $1.00
decrease in the price per GJ of natural gas on the same production would
have increased net earnings for the three and six months ended June 30,
2008 by $0.1 million. This excludes any impact relating to unrealized
financial instrument gains/losses.
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a
result of changes in market interest rates. The Company is exposed to
interest rate fluctuations on its credit facility which bears a floating
rate of interest. The Company had no interest rate swaps or financial
contracts in place as at or during the three months ended June 30, 2008.
For the three and six months ended June 30, 2008, a difference in the
interest rate of 1% would change net earnings in both periods by an
estimated $0.1 million, assuming all other variables are constant.
Capital Management Strategy
The Company's policy on capital management is to maintain a prudent
capital structure to allow the Company to fund future development. The
Company considers its capital structure to include shareholders' equity,
bank debt, and working capital.
June 30, December
($000's) 2008 31, 2007
-------------------------------------------------------------------------
Shareholders' equity $115,970 $115,743
Bank debt 36,515 28,846
Working capital deficiency excluding unrealized
financial instrument gain or losses and associated
future tax assets or liabilities 6,709 8,873
-------------------------------------------------------------------------
The Company manages its capital programs in order to maintain a prudent
capital structure as changes in economic conditions occur. The Company
may and has from time to time issued shares and adjusted spending to
manage current or projected operating cash flows and debt levels.
The Company monitors its capital base using the ratio of net debt to
annualized operating cash flow. This ratio is calculated as net debt, as
defined as long term debt less working capital (or plus working capital
deficiency) excluding unrealized financial instrument gain (loss) and
associated future tax assets (liabilities); divided by annualized cash
flow from operations before changes in non-cash working capital (based on
the most recent operating quarter). The Company's guideline is to
maintain a ratio of approximately 1.0 to 1.0, not exceeding 2.0 to 1.0.
This ratio will fluctuate depending on fluctuations of the commodity and
business cycles. The Company prepares annual capital expenditure budgets
which are updated periodically to monitor this ratio. The annual budget
is approved by the Board of Directors with updates reviewed by the Board
throughout the year.
As at June 30, 2008 the Company's ratio of net debt to annualized
operating cash flow was 0.7 to 1.0 (June 30, 2007 - 0.9 to 1.0), and
compares to the ratio of 1.0 to 1.0 for the year ended December 31, 2007.
The decrease during the second quarter is consistent with the reduction
of debt and improved cash flow in the second quarter.
The Company's share capital is not subject to any external restrictions.
The bank debt facility has no restrictions other than the limitation of
borrowing under the facility on an annual basis. As at June 30, 2008, the
Company is in compliance with all flow-through share expenditure
requirements as well as all bank facility requirements.
There have been no changes to the Company's capital management strategy
during the quarter ended June 30, 2008.
6. ADDITIONAL DISCLOSURES
(a) Interest and Taxes Paid
Net cash interest paid during the quarter was $0.7 million (2007 -
$0.9 million). Cash taxes paid during the period was $nil (2007 - $nil).
On a year to date basis, net cash interest paid to June 30, 2008 was
$1.1 million (2007 - $1.4 million). Year to date cash taxes paid to June
30, 2008 was $nil (2007 - $nil).
(b) Asset Retirement Obligation
For the six month period ended June 30, 2008, Asset Retirement Obligation
increased by $0.6 million for liabilities incurred (quarter ended June
30, 2008 - $0.5 million), with a corresponding increase to Property,
Plant and Equipment.
7. COMMITMENTS
The Company has committed to certain future payments as follows:
Payments due There-
($000's) 2008 2009 2010 2011 2012 after
-------------------------------------------------------------------------
Long-term
debt $ - - 36,515 - - $ -
Building lease 192 1,122 1,189 1,229 1,243 1,346
Drilling rig
contract 2,929 161 - - - -
Process fees 252 400 300 47 - -
Transportation 491 579 78 - - -
Other 5 8 2 - - -
-------------------------------------------------------------------------
Total $ 3,869 2,270 38,084 1,276 1,243 $ 1,346
-------------------------------------------------------------------------
-------------------------------------------------------------------------
ProspEx has committed to incur $8.0 million in qualifying Canadian
exploration expenditures related to the December 2007 flow-through share
financing by December 31, 2008. The Company estimates that $7.8 million
of this commitment has been expended to June 30, 2008.
8. SUBSEQUENT EVENT
On July 23, 2008, the Company acquired certain properties in the Ricinus
area of Alberta. These properties consist of 13 (1.2 net) producing
wells, with current net production of approximately 60 boe per day and
400 net acres of undeveloped land. The consideration paid by the Company
was $3.35 million subject to normal closing adjustments.
9. RECLASSIFICATION
Certain amounts disclosed for prior years have been reclassified to
conform to current period presentation.%SEDAR: 00021285E
For further information: John Rossall, President & CEO, jrossall@psx.ca,
(403) 268-3941; or George Yee, Vice President Finance & Chief Financial
Officer, gyee@psx.ca, (403) 268-3942
