Bellatrix Exploration Ltd. announces year end 2009 financial results
TSX: BXE
CALGARY, March 11 /CNW/ - (TSX: BXE) Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") announces its financial and operating results for the year ended December 31, 2009. Effective November 1, 2009 Bellatrix Exploration Ltd. became the successor to True Energy Trust ("True" or the "Trust") as a result of a Plan of Arrangement (the "Arrangement") approved by the Trust's securityholders at a special meeting held on October 28, 2009. As a result of the Arrangement, the Trust was dissolved, and the Company assumed all of the liabilities and acquired all of the assets of the Trust. Information herein with respect to Bellatrix includes information in respect of the Trust prior to completion of the Reorganization to the extent applicable unless the context otherwise requires. In addition, references to "common shares" and "shares", "Share Option Plan", and "options" should be read as references to "Units", "Unit Rights Incentive Plan", and "rights" respectively, for periods prior to November 1, 2009.
Forward-Looking Statements
This press release contains forward-looking statements. Please refer to our disclaimer on forward-looking statements set forth at the beginning of the management's discussion and analysis attached to this press release.
HIGHLIGHTS ------------------------------------------------------------------------- Years ended December 31, 2009 2008 ------------------------------------------------------------------------- FINANCIAL (unaudited) (CDN$000s except share and per share amounts) Revenue (before royalties and risk management(1)) 109,014 265,385 Cash flow from operating activities 30,671 78,784 Per basic share $0.39 $1.00 Per diluted share $0.39 $0.99 Funds flow from operations(2) 36,025 77,893 Per basic share $0.46 $0.99 Per diluted share(5) $0.46 $0.98 Net loss (126,620) (19,590) Per basic share $(1.61) $(0.25) Per diluted share(5) $(1.61) $(0.25) ------------------------------------------------------------------------- Exploration and development 15,844 36,699 Corporate and property acquisitions 643 6,303 ------------------------------------------------------------------------- Capital expenditures - cash 16,487 43,002 Property dispositions - cash (92,921) (44,340) Other - non-cash (492) 3,710 ------------------------------------------------------------------------- Total capital expenditures - net (76,926) 2,372 ------------------------------------------------------------------------- Long-term debt 27,902 132,388 Convertible debentures(3) 81,684 81,124 Working capital (excess) deficiency (2,317) 1,492 ------------------------------------------------------------------------- Total net debt(3) 107,269 215,004 ------------------------------------------------------------------------- Pro-forma total net debt subsequent to equity financing(6) 64,578 N/A ------------------------------------------------------------------------- Total assets 440,970 736,117 Shareholders' equity 281,351 404,461 ------------------------------------------------------------------------- OPERATING Years ended December 31, 2009 2008 ------------------------------------------------------------------------- Daily sales volumes Crude oil, condensate and NGLs (bbls/d) 2,877 4,333 Natural gas (mcf/d) 33,295 45,202 Total oil equivalent (boe/d) 8,426 11,867 Average prices Crude oil, condensate and NGLs ($/bbl) 49.65 76.75 Crude oil, condensate and NGLs (including risk management(1)) ($/bbl) 49.62 64.24 Natural gas ($/mcf) 4.50 8.50 Natural gas (including risk management (1)) ($/mcf) 5.96 8.00 Total oil equivalent ($/boe) 34.72 60.42 Total oil equivalent (including risk management(1)) ($/boe) 40.49 53.92 Statistics Operating netback(4) ($/boe) 13.11 30.91 Operating netback(4) (including risk management(1)) ($/boe) 18.88 24.41 Transportation ($/boe) 1.26 1.62 Production expenses ($/boe) 14.64 15.33 General & administrative ($/boe) 3.33 3.61 Royalties as a % of sales after transportation 17% 21% ------------------------------------------------------------------------- COMMON SHARES Common shares outstanding 78,809,039 78,496,581 Share options outstanding 4,213,733 2,700,500 Trust units issuable for exchangeable shares - 300,433 Shares issuable for convertible debentures(7) 5,305,250 5,390,625 ------------------------------------------------------------------------- Diluted common shares outstanding 88,328,022 86,888,139 Diluted weighted average shares(5) 78,548,800 78,985,481 ------------------------------------------------------------------------- SHARE TRADING STATISTICS (CDN$, except volumes) based on intra-day trading High 2.75 4.69 Low 0.48 1.17 Close 2.65 1.20 Average daily volume 235,339 270,458 ------------------------------------------------------------------------- (1) The Company has entered into various commodity price risk management contracts which are considered to be economic hedges. Per unit metrics after risk management includes only the realized portion of gains or losses on commodity contracts. The Company does not apply hedge accounting to these contracts. As such, these contracts are revalued to fair value at the end of each reporting date. This results in recognition of unrealized gains or losses over the term of these contracts which is reflected each reporting period until these contracts are settled, at which time realized gains or losses are recorded. These unrealized gains or losses on commodity contracts are not included for purposes of per share metrics calculations disclosed. (2) The highlights section contains the term "funds flow from operations" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian generally accepted accounting principles ("GAAP") as an indicator of the Company's performance. Therefore reference to diluted funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from operations can be found in the Management Discussion and Analysis ("MD&A"). Funds flow from operations per share is calculated using the weighted average number of common shares for the period. (3) Net debt and total net debt are considered non-GAAP terms. The Company's calculation of net debt includes the net working capital deficiency (excess) before short-term commodity contract assets and liabilities and short-term future income tax assets and liabilities. Total net debt also includes the liability component of convertible debentures and excludes asset retirement obligations and the future income tax assets and liabilities. A reconciliation between total liabilities under GAAP and total net debt as calculated by the Company is found in the MD&A. (4) Operating netbacks are calculated by subtracting royalties, transportation, and operating costs from revenues. (5) In computing weighted average diluted earnings per share for the year ended December 31, 2009 a total of 4,213,733 (2008: 2,700,500) share options, nil (2008: 300,433) exchangeable shares and 5,305,250 (2008: 5,390,625) common shares issuable on conversion of convertible debentures were excluded from the calculation for the years ended December 31, 2009 and 2008 as they were not dilutive. To calculate weighted average diluted funds flow from operations for the year ended December 31, 2009, a total of nil (2008: 300,433) exchangeable shares were added to the denominator. Under this calculation, a total of 4,213,733 (2008: 2,700,500) share options and 5,305,250 (2008: 5,390,625) shares issuable on conversion of convertible debentures were excluded from the calculation for the years ended December 31, 2009 and 2008 as they were not dilutive. (6) Pro-forma total net debt subsequent to equity issuance is calculated as total net debt as at December 31, 2009 less net proceeds of $42.7 million, after underwriter fees and before other closing costs (7) Shares issuable for convertible debentures are calculated as the $84.88 million principal amount of the convertible debentures divided by the conversion price of $16.00 per share. REPORT TO SHAREHOLDERS
Bellatrix's corporate thrust in 2009 was to improve the Company's balance sheet by reducing total outstanding debt and streamlining its operating cost structure. The Company reorganized its senior management, bringing in successful full cycle exploration and production optimization specialists, to provide significant experience and expertise to Bellatrix.
During 2009, the Company maintained a controlled capital budget program of approximately $16.5 million, from $43.0 million in 2008. Bellatrix implemented optimization and maintenance programs in order to arrest production declines with minimal capital spending, and achieved 100% success rate in its 2009 drilling program. The Company focused on increasing financial flexibility by strategically disposing of petroleum and natural gas properties for net proceeds of $92.9 million. The proceeds from the dispositions were used to pay down indebtedness. Bellatrix decreased G&A to $10.2 million in 2009 from $15.7 million established in 2008 a 35% reduction. Operating costs were reduced to $45.0 million in 2009 from $66.5 million in 2008 representing a decrease of 32%. 2009 Operating costs were negatively impacted by costs relating to prior periods of $2.6 million or $0.85/boe. Bellatrix continues to tighten its cost structure in the current economically challenging climate with forecasted reductions of approximately 22% to total operating expenses in 2010.
Following securityholder and regulatory approval, on November 1, 2009, the Company was converted (the "Reorganization") from an open-ended, unincorporated investment trust into a growth oriented, public exploration and production company. Strategically, the Reorganization re-positioned the Company, allowing Bellatrix to move forward with a corporate organic growth model and a flexible balance sheet.
On January 28, 2010 Bellatrix completed an equity issuance of 13.64 million common shares on a bought deal basis at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.7 million after underwriter fees and before other closing costs). The net proceeds from this financing were used to temporarily reduce outstanding indebtedness, thereby freeing up borrowing capacity that may be redrawn to fund Bellatrix's ongoing capital expenditure program and for general purposes.
MARKET AND SHARE TRADING STATS
Bellatrix's share price has increased significantly from $1.30 on January 2, 2009 to a closing price of $4.15 on February 22, 2010, representing a 219% increase. In comparison, the S&P/TSX producers index, AECO spot price and WTI spot price increased (decreased) by 28%, (23%), and 73%, respectively.
RESERVES AND PRODUCTION
Highlights from Bellatrix's December 31, 2009 reserves include: - Total proved plus probable company interest reserves, including all royalties receivable but before deducting royalty burdens, as evaluated by GLJ Petroleum Consultants Ltd. ("GLJ") at December 31, 2009 were 25,872 mboe (gas converted 6:1). - Omitting properties subject to disposition in 2009, proved and probable company interest reserve additions in 2009 replaced 99% of production. - Bellatrix's net asset value, based on GLJ reserve report evaluation (before income taxes) at a 10% discount rate, equates to $3.76 per share as at December 31, 2009. Bellatrix's net asset value excludes $400 million in available tax pools that would add an additional value of $0.25 per share. - Bellatrix's reserves life index has extended to 6.5 years for proved reserves and 9.6 years for proved plus probable. - Bellatrix established a recycle ratio, after commodity price risk management and excluding future development costs, of 3.14 on a proved basis and 2.71 on a proved and probable basis. - The Company recorded all-in annual Finding, Development and Acquisition ("FD&A") cost of $6.97 per barrel of oil equivalent ("boe") in 2009 including future development capital ("FDC") for the proved and probable reserves category. This is a 81% reduction from the $36.06 per boe FD&A cost realized in 2008. - The Company recorded all-in annual FD&A cost of $6.01 per boe in 2009 before consideration FDC for proved reserves category. This is a 67% reduction from the $18.24 per boe FD&A cost realized in 2008. Including FDC, the FD&A cost was $9.50 per boe. The three year average FD&A cost is $16.07 per boe for the proved category before FDC; including FDC, the three year average FD&A cost is $17.06 per boe. - Based on the reserves information and other data as at December 31, 2009, the Company has performed ceiling test calculations in accordance with the requirements of CICA AcG 16 "Oil and Gas Accounting - Full Cost." No ceiling test impairment of oil and gas properties was identified for accounting purposes as at December 31, 2009.
For additional information please refer to the reserves news release dated February 22, 2010 (posted on wwww.sedar.com).
The Company has experienced several years of positive revisions to the reserve base as its assets continue to mature and expects this trend to continue. Additionally, reserves expected from the Company's developing Cardium and Notikewin resource plays remain largely unassigned due to the nascent development of the play and the horizontal drilling and completion technologies involved. Specifically, the reserve evaluation includes only one (net) undeveloped Notikewin horizontal gas location at Ferrier and two (net) undeveloped Cardium horizontal oil locations at Pembina. Focusing on the Cardium oil play, the Company is in the process of developing and proving reserves across 133 gross (81 net) sections of land, at an average 61% working interest. The Company is also in the process of developing and proving reserves across 142 gross (74 net) sections of land in the Notikewin natural gas play, at an average 52% working interest.
At December 31, 2009 the Company's proved and probable company interest reserves, using forecast prices and costs, were 25,872 mboe, a decrease of 34% compared to 39,488 mboe at December 31, 2008. Property dispositions accounted for 12,858 mboe or 94 % of the decrease. By commodity type, natural gas makes up 72%, light oil and natural gas liquids 21% and heavy oil 7% of total reserves. At December 31, 2009, the Company's total proved company interest reserves were 16,573 mboe, a decrease of 29% compared to 23,453 mboe at December 31, 2008; property dispositions accounted for 6,464 mboe or 94% of the decrease.
2009 sales volumes averaged 8,426 boe/d compared to 10,750 boe/d that was sold in the fourth quarter of 2008. The reduction in average sales volume is due to natural production declines, minimal capital spending in 2009 and the impact of dispositions totaling approximately 3,600 boe/d for the third and fourth quarter of 2009. Fourth quarter 2009 sales volumes averaged 6,572 boe/d.
As stated in the press release dated January 29, 2010 Bellatrix has announced a $75 million capital expenditures budget for 2010. Based on the timing of proposed expenditures, downtime for anticipated plant turnarounds and normal production declines, execution of the 2010 budget is anticipated to provide 2010 average daily production of approximately 8,500 boe/d and an exit rate of approximately 10,000 boe/d. The 2010 capital budget is expected to be directed primarily towards horizontal drilling and completions activities in the Cardium and Notikewin resource plays.
As part of the 2010 capital expenditures budget the Corporation anticipates drilling 44 gross wells (31.6 net wells) primarily in the Pembina and Ferrier areas of Alberta, for an approximate cost of $57.0 million. In addition, the Corporation anticipates spending approximately $4.0 million on land and seismic acquisitions, $6.25 million on well site equipping and field facilities, $0.75 million on geological and geophysical expenditures, $3.0 million on optimization and recompletions and $4.0 million on non-operated joint venture billings.
DRILLING
The Company maintained a controlled capital program in 2009, focusing on maintaining its production base through optimization and maintenance programs in the first half of the year and drilling in the second half of 2009. Exploration and development capital expenditures after drilling incentive credits but excluding acquisitions and dispositions were $15.8 million in 2009. During the fourth quarter of 2009, Bellatrix spent $9.6 million on capital projects, excluding corporate and asset acquisitions and dispositions, compared to $11.0 million in 2008. In 2009, Bellatrix drilled or participated in 18 (11.68 net) wells including 12 gross (7.62 net) natural gas wells, and 4 gross (3.5 net) oil wells and 2 gross (0.56 net) awaiting completion.
FINANCIAL - Total net proceeds from property dispositions completed in 2009 were $92.9 million which was used to pay down debt. - Bellatrix's total net debt including the liability component of its convertible debentures, excluding unrealized commodity contract assets and liabilities, future income tax assets and liabilities and asset retirement obligations, as at December 31, 2009 was $107.3 million. The convertible debentures have a maturity date of June 2011. - As at December 31, 2009, Bellatrix had approximately $27.9 million drawn on its extendible, revolving bank credit facility leaving approximately $57.1 million available. - Bellatrix has approximately $400 million in tax pools available for deduction against future income. - Funds flow from operations for the 2009 year was $36.0 million on gross sales of $109.0 million compared to funds flow from operations for the 2008 year of $77.9 million on gross sales of $265.4 million. - Funds flow from operations for the 2009 fourth quarter was $7.7 million on gross sales of $24.0 million compared to funds flow from operations for the 2008 fourth quarter of $5.9 million on gross sales of $41.1 million. - The net loss for the 2009 year was $126.6 compared to a net loss of $19.6 million in the 2008 year. The increase in the net loss from 2008 to 2009 is primarily due to a $114.2 million non-cash accounting loss recorded in the second quarter of 2009 on the sale of the majority of the Company's Saskatchewan petroleum and natural gas properties. Lower overall commodity prices in conjunction with decreased production also contributed to a higher net loss. - The net loss for the 2009 fourth quarter was $8.2 million compared to a net loss of $9.5 million in the 2008 fourth quarter. The net loss from 2008 fourth quarter compared to the 2009 fourth quarter is primarily reflective of non-cash amounts including lower charges for depletion, depreciation and accretion, offset by lower unrealized gains on commodity risk management contracts and future income tax recoveries for the 2009 period. LIQUIDITY In an effort to cope with the global financial crisis experienced in 2009, the Company took the following steps in order to increase liquidity: - Operated within cash flow by targeting reductions in G&A, operating costs and staffing levels in early 2009. - Maintained a controlled capital program; 2009 capital expenditures totaled $16.5 million, net of drilling and royalty credits. - Successfully disposed of petroleum and natural gas properties in Penhold, the majority of the Company's properties in Saskatchewan and royalty interests for total net proceeds of approximately $92.9 million.
The above measures have allowed Bellatrix to reduce total net debt by approximately $107.7 million since fiscal 2008. Bellatrix's total net debt includes the liability portion of the convertible debentures and excludes unrealized commodity contract assets and liabilities, future income tax assets and liabilities and asset retirement obligations.
As an added layer of protection of its cash flows, the Company's 2010 commodity price risk management contracts provide price protection on approximately 54% of its estimated natural gas production for 2010 that is forward sold for an average of CDN$5.972/GJ ($6.56/mcf). In addition, the Company has a price ceiling in place for 2010 on 5,000 GJ/d or 14% of its estimated natural gas production for 2010 at an average price of CDN$8.05/GJ ($8.85/mcf). These percentages of price protection and the conversion from $/GJ to $/mcf are based upon on an estimated 2010 average corporate natural gas production of 32 MMcf/d and 39 MJ/m3 average heat content, respectively. In addition, 500 bbl/d of oil for 2010 is protected by way of a costless collar of CDN$75.00 x CDN$101.15. Bellatrix maintains an active commodity price risk management program focused on maintaining sufficient cash flow to fund its operations.
2010 OUTLOOK
Bellatrix is now well positioned with approximately 258,500 net acres of undeveloped land, with in excess of 475 exploitation drilling opportunities identified representing over 6 years of drilling inventory coupled with a dramatically improved balance sheet. The Company possesses 200 drilling locations in the exciting Cardium oil horizontal play and 50 Notikewin horizontal drilling locations in West Central Alberta. Execution is now the action phrase at Bellatrix which will translate into sustainable growth utilizing the drill bit.
To date in the first quarter of 2010 the Company has drilled or is drilling a total of 13 gross (7.86 net) wells.
On the Cardium play in West Central Alberta the Company drilled 7 gross (5.46 net) wells. Two wells have been completed and placed on production in mid February, the first 100% well demonstrated an initial production rate of 375 boe/d, the second 100% well has encountered fluid compatibility problems reducing outflow to 100 boe/d initially. A workover program to resolve the fluid issues is being drafted. Another 100% WI well was completed and is currently recovering load fluid. Three Cardium (1.46 net) wells are scheduled for fracture stimulations this week. The Company is currently drilling the seventh and final 100% WI well at West Pembina which is currently scheduled for completion prior to month end.
The Company has drilled a 100% WI Notikewin horizontal in Ferrier and placed the well on production February 26, 2010 at 3.5 mmcfd with approximately 35 bbls of liquids per mmcf. A second 85% WI Notikewin horizontal is currently drilling in the Ferrier Area. The completion timing will be dependant on road restrictions as spring approaches.
In addition to this activity, Bellatrix participated in drilling 4 gross (0.55net) non-operated McLaren oil wells in the Lindberg area.
Production for the week ending March 5, 2010 averaged 8,000 boe/d. The Company had experienced some delays in the first quarter of 2010 as a result of equipment constraints on the completion side of our business. As a result of the timing delays, the Company averaged 7,000 boe/d in January; production from Bellatrix's new drilling operations was brought on later in February.
The new management team and staff of Bellatrix are experienced in providing stakeholders with growth created by organically generated full cycle exploration. Post January 2010 financing, Bellatrix is undrawn on its bank line and when combined with the commodity price protection already in place for 2010 the Company is well positioned to maintain an aggressive capital program even if weaker product pricing prevails in the shoulder months this year. 2010 should be a very exciting year.
A conference call to discuss Bellatrix's annual financial and reserves results will be held on March 11, 2010 at 2:30 pm MDT/4:30 pm EDT. To participate, please call toll-free 1-888-231-8191 or 647-427-7450. The conference call will also be recorded and available by calling 1-800-642-1687 or 416-849-0833 and entering passcode 57037282 followed by the pound sign.
Bellatrix's annual general meeting is scheduled for 2:00 pm on May 26, 2010 in the Tivoli/Strand Meeting Room at the Metropolitan Conference Centre in Calgary.
Bellatrix is a company dedicated to "the pursuit of sustainable growth" for its stakeholders.
Raymond G. Smith, P. Eng. President and CEO March 11, 2010 MANAGEMENT'S DISCUSSION AND ANALYSIS
March 11, 2010 - The following Management's Discussion and Analysis of financial results as provided by the management of Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") should be read in conjunction with the audited consolidated financial statements of the Company for the years ended December 31, 2009 and 2008. This commentary is based on information available to, and is dated as of, March 11, 2010. The financial data presented is in accordance with Canadian generally accepted accounting principles ("GAAP") in Canadian dollars, except where indicated otherwise.
CONVERSION: The term barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil equivalent (6 mcf/bbl) is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. All boe conversions in this report are derived from converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil.
NON-GAAP MEASURES: This Management's Discussion and Analysis contains the term "funds flow from operations" which should not be considered an alternative to, or more meaningful than "cash flow from operating activities" as determined in accordance with Canadian GAAP as an indicator of the Company's performance. Therefore reference to funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from operations can be found in the Management's Discussion and Analysis. Funds flow from operations per share is calculated using the weighted average number of shares for the period.
This Management's Discussion and Analysis also contains other terms such as total net debt and operating netbacks, which are not recognized measures under Canadian GAAP. Total net debt is calculated as long-term debt plus the liability component of the convertible debentures and the net working capital deficiency (excess) before short-term commodity contract assets and liabilities and short-term future income tax assets and liabilities. Operating netbacks are calculated by subtracting royalties, transportation, and operating expenses from revenues. Management believes these measures are useful supplemental measures of firstly, the total amount of current and long-term debt and secondly, the amount of revenues received after transportation, royalties and operating expenses. Readers are cautioned, however, that these measures should not be construed as an alternative to other terms such as current and long-term debt or net income determined in accordance with GAAP as measures of performance. Bellatrix's method of calculating these measures may differ from other entities, and accordingly, may not be comparable to measures used by other trusts or companies.
Additional information relating to the Company, including the Bellatrix's Annual Information Form, is available on SEDAR at www.sedar.com.
FORWARD LOOKING STATEMENTS: Certain information contained herein may contain forward looking statements including management's assessment of future plans and operations, drilling plans and the timing thereof, commodity price risk management strategies, expected 2010 average production and exit rate, updating of ceiling test calculations, expectation that the Company will not pay dividends, use of proceeds from equity financing, plans and timing related to the adoption of IFRS and the effects thereof, elections anticipated to be made under IFRS, anticipated liquidity of the Company and various matters that may impact such liquidity, expected operating expenses and general and administrative expenses, expected levels of revenues in 2010 compared to 2009, 2010 capital expenditures and the nature of capital expenditures and the timing and method of financing thereof and use of proceeds from recent financing, may constitute forward-looking statements under applicable securities laws and necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources. The recovery and reserve estimates of Bellatrix's reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Events or circumstances may cause actual results to differ materially from those predicted, as a result of the risk factors set out and other known and unknown risks, uncertainties, and other factors, many of which are beyond the control of Bellatrix. In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information but which may prove to be incorrect. In addition, forward-looking statements or information are based on a number of factors and assumptions which have been used to develop such statements and information in order to provide shareholders with a more complete perspective on Bellatrix's future operations. Such information may prove to be incorrect and readers are cautioned that the information may not be appropriate for other purposes. Although the Company believes that the expectations reflected in such forward-looking statements or information are reasonable, undue reliance should not be placed on forward-looking statements because the Company can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may be identified herein, assumptions have been made regarding, among other things: the impact of increasing competition; the general stability of the economic and political environment in which the Company operates; the timely receipt of any required regulatory approvals; the ability of the Company to obtain qualified staff, equipment and services in a timely and cost efficient manner; drilling results; the ability of the operator of the projects which the Company has an interest in to operate the field in a safe, efficient and effective manner; the ability of the Company to obtain financing on acceptable terms; field production rates and decline rates; the ability to replace and expand oil and natural gas reserves through acquisition, development of exploration; the timing and costs of pipeline, storage and facility construction and expansion and the ability of the Company to secure adequate product transportation; future commodity gas prices; currency, exchange and interest rates; the regulatory framework regarding royalties, taxes and environmental matters in the jurisdictions in which the Company operates; and the ability of the Company to successfully market its oil and natural gas products. Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which have been used. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements. Additional information on these and other factors that could effect Bellatrix's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com), at Bellatrix's website (www.bellatrixexploration.com). Furthermore, the forward-looking statements contained herein are made as at the date hereof and Bellatrix 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 may be required by applicable securities laws.
The reader is further cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes.
Overview and Description of the Business
Bellatrix is a Western Canadian based growth oriented oil and gas company engaged in the exploration for, and the acquisition, development and production of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan. The Company resulted from a reorganization (the "Reorganization") effective November 1, 2009 pursuant to a plan of arrangement (the "Arrangement") involving, among others, True Energy Trust (the "Trust" or "True"), Bellatrix Exploration Ltd. ("Bellatrix" or the "Company") and securityholders of the Trust.
Pursuant to the Reorganization, the Trust was restructured from an open-ended, unincorporated investment trust to Bellatrix Exploration Ltd., a publicly traded corporation. Unitholders of the Trust received an equal number of common shares of Bellatrix which holds the assets and liabilities previously held, directly or indirectly, by the Trust. Exchangeable shares of the Trust were exchanged for common shares of Bellatrix at the current exchange ratio in effect on the effective date. The outstanding convertible debentures of the Trust were assumed by Bellatrix as a result of the Arrangement and are now convertible into common shares of the Company, rather than trust units of the Trust, at a conversion price of $16.00 per share. All outstanding incentive unit rights to acquire Trust units of True became share options to acquire an equal number of common shares of Bellatrix on the same terms and conditions including as to exercise price, vesting and expiry dates. Strategically, the Arrangement re-positioned the company, allowing Bellatrix to move forward with a corporate organic growth model and strong balance sheet.
Pursuant to the Arrangement, the Unitholders' Capital of the Trust Units as of the effective date of November 1, 2009 was reduced by the amount of the deficit of the Trust on October 31, 2009 of $666.8 million.
The Reorganization has been accounted for on a continuity of interest basis and accordingly, the consolidated financial statements for periods prior to the effective date of the Reorganization will reflect the financial position, results of operations and cash flows as if the Company had always carried on the business formerly carried on by the Trust. Information herein with respect to Bellatrix includes information in respect of the Trust prior to completion of the Reorganization to the extent applicable unless the context otherwise requires. In addition, references to "common shares" and "shares", "Share Option Plan", and "options" should be read as references to "Units", "Unit Rights Incentive Plan", and "rights" respectively, for periods prior to November 1, 2009.
Bellatrix's common shares and convertible debentures are listed on the Toronto Stock Exchange under the symbols BXE and BXE.DB, respectively.
Fourth Quarter 2009 HIGHLIGHTS ------------------------------------------------------------------------- Three months ended (CDN$000s except share and December 31, per share amounts) 2009 2008 ------------------------------------------------------------------------- FINANCIAL (unaudited) Revenue (before royalties and risk management(3)) 24,004 41,053 Cash flow from operating activities 2,743 11,643 Per basic share $0.03 $0.15 Per diluted share $0.03 $0.15 Funds flow from operations(1) 7,681 5,865 Per basic share $0.10 $0.07 Per diluted share(2) $0.10 $0.07 Net loss (8,216) (9,534) Per basic share $(0.10) $(0.12) Per diluted share(2) $(0.10) $(0.12) ------------------------------------------------------------------------- Exploration and development 9,606 11,009 Corporate and property acquisitions 264 5,454 ------------------------------------------------------------------------- Capital expenditures - cash 9,870 16,463 Property dispositions - cash 56 10 Other - non-cash 551 6,567 ------------------------------------------------------------------------- Total capital expenditures - net 10,477 23,040 ------------------------------------------------------------------------- OPERATING ------------------------------------------------------------------------- Daily sales volumes Crude oil, condensate and NGLs (bbls/d) 1,642 4,347 Natural gas (mcf/d) 29,580 38,418 Total oil equivalent (boe/d) 6,572 10,750 Average prices Crude oil, condensate and NGLs ($/bbl) 59.05 38.97 Crude oil, condensate and NGLs (including risk management(3)) ($/bbl) 58.85 37.33 Natural gas ($/mcf) 5.33 6.98 Natural gas (including risk management(3)) ($/mcf) 6.72 7.27 Total oil equivalent ($/boe) 44.93 41.07 Total oil equivalent (including risk management(3)) ($/boe) 42.22 48.55 Statistics Operating netback(4) ($/boe) 15.36 12.31 Operating netback(4) (including risk management(3)) ($/boe) 21.57 12.68 Transportation ($/boe) 1.17 1.21 Production expenses ($/boe) 16.65 18.11 General & administrative ($/boe) 3.43 4.13 Royalties as a % of sales after transportation 15% 23% ------------------------------------------------------------------------- (1) The highlights section contains the term "funds flow from operations" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of the Company's performance. Therefore reference to diluted funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from operations can be found as below. Funds flow from operations per share is calculated using the weighted average number of common shares for the period. (2) In computing weighted average diluted earnings per share for the three months ended December 31, 2009 a total of 4,213,733 (2008: 2,700,500) share options, nil (2008: 300,433) exchangeable shares and 5,305,250 (2008: 5,390,625) common shares issuable on conversion of convertible debentures were excluded from the calculation for the three months ended December 31, 2009 and 2008 as they were not dilutive. To calculate weighted average diluted funds flow from operations for the year ended December 31, 2009, a total of nil (2008:300,433) exchangeable shares were added to the denominator. Under this calculation, a total of 4,213,733 (2008: 2,700,500) share options and 5,305,250 (2008: 5,390,625) shares issuable on conversion of convertible debentures were excluded from the calculation for the three months ended December 31, 2009 and 2008 as they were not dilutive. (3) The Company has entered into various commodity price risk management contracts which are considered to be economic hedges. Per unit metrics after risk management includes only the realized portion of gains or losses on commodity contracts. The Company does not apply hedge accounting to these contracts. As such, these contracts are revalued to fair value at the end of each reporting date. This results in recognition of unrealized gains or losses over the term of these contracts which is reflected each reporting period until these contracts are settled, at which time realized gains or losses are recorded. These unrealized gains or losses on commodity contracts are not included for purposes of per share metrics calculations disclosed. (4) Operating netbacks are calculated by subtracting royalties, transportation, and operating costs from revenues.
As detailed previously in this Management's Discussion and Analysis, funds flow from operations is a term that does not have any standardized meaning under GAAP. Funds flow from operations is calculated as cash flow from operating activities before asset retirement costs incurred and changes in non-cash working capital incurred.
Reconciliation of Cash Flow from Operating Activities to Funds Flow from Operations ------------------------------------------------------------------------- Three months ended December 31, ($000s, except per unit amounts) 2009 2008 ------------------------------------------------------------------------- Cash flow from operating activities 2,743 11,643 Asset retirement costs incurred 241 998 Change in non-cash working capital 4,697 (6,776) ------------------------------------------------------------------------- Funds flow from operations 7,681 5,865 -------------------------------------------------------------------------
Funds flow from operations during the fourth quarter of 2009 was $7.7 million, an increase of 31% compared to $5.9 million for the fourth quarter of 2008 despite the lower sales volumes in 2009. This was reflective of higher operating netbacks as a result of reduced royalty and production expenses, lower general and administration costs and a decline in interest expense due to the significant reduction in long term debt. Cash flow from operating activities during the fourth quarter of 2009 was $2.7 million, compared to $11.6 million for the fourth quarter of 2009. This decrease was further reflective of a net use of cash for changes in working capital in the 2009 period compared to a corresponding increase in cash from changes in working capital in the 2008 period. Overall commodity prices for the fourth quarter of 2009 increased significantly from that seen throughout the first half of 2009. By comparison, in the last quarter of 2009, Bellatrix had a net loss of $8.2 million compared to a net loss of $9.5 million in the fourth quarter of 2008. The net loss from 2008 fourth quarter compared to the 2009 fourth quarter is primarily reflective of non-cash amounts including lower charges for depletion, depreciation and accretion, offset by lower unrealized gains on commodity risk management contracts and future income tax recoveries for the 2009 period.
Sales volumes for the three months ended December 31, 2009 averaged 6,572 boe/d, down 39% from the 10,750 boe/d sold in the fourth quarter of 2008. Fourth quarter 2009 sales volumes were lower than the same period in 2008 primarily due to property dispositions totaling approximately 3,600 boe/d for the third and fourth quarter, natural production declines, and minimal capital spending throughout the first three quarters of the year.
Natural gas sales averaged 29.6 Mmcf/d during the last quarter of 2009, compared to 38.4 Mmcf/d in the fourth quarter of 2008. The Company's natural gas sales reduction was attributed to dispositions closed in the year and natural production declines. The weighting toward natural gas averaged 75% in the fourth quarter, compared to 60% in the corresponding period of 2008 as the majority of the properties disposed of in 2009 primarily produced oil. Crude oil, condensate and NGL sales volumes averaged 1,642 bbls/d in the fourth quarter of 2009 compared to 4,347 bbls/d during the same period of 2008.
During the fourth quarter of 2009, Bellatrix experienced an overall decrease of 5% in commodity prices, based on a decrease in natural gas prices, offset by increases in crude oil, condensate and NGL pricing, as compared to the same period in 2008. The average daily and monthly AECO indices for natural gas during this quarter were 33% and 38%, respectively, lower than in the same period in 2008. For the three months ending December 31, 2009, Bellatrix received an average natural gas price, before transportation and commodity price risk management contracts, of $5.33/Mcf, 24% lower than $6.98/Mcf in the same period in 2008 and 37% higher than $3.89/Mcf in the third quarter of 2009. For heavy crude oil, Bellatrix received an average price before transportation of $62.79/bbl during the fourth quarter of 2009, 72% higher than $36.52/bbl in the same period in 2008 and 7% higher than $58.89/bbl in the third quarter of 2009. In comparison, the average reference price for Hardisty Heavy crude in the fourth quarter of 2009 was 58% higher than the average 2008 price in the same period. For light oil, condensate and NGLs, Bellatrix received an average price of $57.33/bbl before transportation and commodity price risk management contracts during the last quarter of 2009, 25% higher than the average price of $45.96/bbl received in the same period of 2008, compared to a 20% increase in the Edmonton par reference price. The average price for light oil, condensate and NGLs for Bellatrix was 2% higher than the $56.23/bbl for the third quarter of 2009. During the fourth quarter of 2009, revenue before other income and commodity price risk management contracts of $23.4 million was 42% lower than the corresponding 2008 period.
In the fourth quarter of 2009, average sales volumes decreased 12% from the third quarter 2009 average volumes of 7,432 boe/d. Bellatrix's production and operations were impacted by the disposition of the majority of the Company's Saskatchewan properties which closed in the third quarter of 2009.
During the fourth quarter of 2009, Bellatrix spent $9.6 million on capital projects, excluding corporate and asset acquisitions and dispositions, compared to $11.0 million in 2008. In the fourth quarter of 2009, Bellatrix drilled or participated in 12 (9.50 net) wells including 5.75 net natural gas wells, and 3.5 net oil wells and 0.25 awaiting completion. Fourth quarter drilling was focused on the Notikewin and Cardium resource plays.
In the fourth quarter of 2009, the Company paid $3.4 million in royalties, compared to $9.0 million in the same period in 2008. As a percentage of pre-commodity price risk management sales (after transportation costs), royalties were 15% in the fourth quarter of 2009 compared to 23% in the same period in 2008. In this same period of 2009, operating costs totaled $10.1 million, compared to $17.9 million recorded in the same period of 2008. During the fourth quarter of 2009, operating costs averaged $16.65/boe, down from the $18.11/boe incurred during the fourth quarter of 2008. The decrease was due to the disposition of properties with higher production costs and the Company's efforts to streamline production activities. This decrease was partially offset by $2.1 million ($3.47/boe) of costs recorded in the 2009 fourth quarter but related to prior periods. Fuel gas costs associated with steam generation at the Kerrobert facility contributed $1.57/boe in the fourth quarter of 2008, whereas these costs were absent in the fourth quarter of 2009 as the property was part of the Saskatchewan disposition that closed in the third quarter. In comparison, operating costs for the third quarter of 2009 averaged $13.29/boe. During the fourth quarter of 2009, company field operating netbacks increased by 25% to $15.36/boe compared to 2008, driven primarily by decreased operating and royalty charges. In comparison, the company field operating netback for the third quarter of 2009 was $16.24/boe. Field operating netbacks for natural gas before commodity price risk management contracts during the fourth quarter of 2009 of $2.35/Mcf were the same as 2008 netbacks, however, were reflective of lower royalties and production costs, offset by lower commodity prices and higher transportation costs. In comparison, the field operating netback for natural gas for the third quarter of 2009 was $1.68/Mcf. Field operating netbacks before commodity price risk management contracts for crude oil, condensate and NGLs during the fourth quarter of 2009 averaged $19.08/bbl, up from $9.68/bbl during the fourth quarter of 2008, primarily as a result of a significant increase in the overall commodity price received, offset by higher royalty and production expenses. In comparison, the field operating netback for crude oil, condensate and NGLs for the third quarter of 2009 was $30.38/bbl.
In the fourth quarter of 2009, general and administrative expenses, net of capitalized G&A and recoveries, were $2.1 million, compared to $4.1 million in the comparable 2008 period reflecting a reduction of the number of salaried personnel on staff and other efforts to reduce costs.
Depletion, depreciation and accretion expense for the fourth quarter of 2009 was $16.4 million, compared to $29.4 million in 2008, which reflects reduced carrying costs in 2009, combined with lower production volumes in fourth quarter 2009 versus 2008.
2009 Annual Financial and Operational Results
Dispositions
The Company's focus in 2009 has been on the restructuring and strengthening of its balance sheet. The Company had two minor dispositions in the second quarter and successfully completed the divestiture of the majority of its petroleum and natural gas properties in Saskatchewan in the third quarter. Total net proceeds from all dispositions during 2009 were $92.9 million (2008: $44.3 million). Net proceeds from the dispositions were used to reduce the Company's bank indebtedness; these strategic accomplishments have allowed the Company to progress forward with substantially improved financial flexibility.
On June 30, 2009, Bellatrix sold 145 boe/d, including 0.63 mmcf/d of natural gas, in the Penhold Area of Central Alberta for $4.7 million, after purchase adjustments and closing costs. In addition, in June 2009, Bellatrix completed a disposition of certain royalty interests for approximately $3.7 million, after purchase adjustments and closing costs. The proceeds from these two dispositions were used to reduce Bellatrix's bank indebtedness.
On July 30, 2009, the Company successfully completed the divestiture of a majority of its oil and natural gas assets in Saskatchewan for net proceeds of $85 million (the "Saskatchewan Divestiture"). The Saskatchewan Divestiture excludes the Saskatchewan properties of Mantario and Cypress. Bellatrix's interests to the base Belly River in three sections in the Ferrier area of West Central Alberta were also included in the divestiture package. The disposition was accounted for under the guidance of Accounting Guideline 16 - "Oil and Gas Accounting - Full Cost". Under full cost accounting, if crediting the proceeds from disposition to costs results in a change of 20 percent or more to the DD&A rate then a gain or loss should be recognized. When a gain or loss is to be recognized the total net book value of capitalized costs should be allocated between the properties sold and the properties retained. The assets sold were an allocation of the Company's historical full cost pool based on a pro-rata ratio of future cash flows of proved reserves associated with the assets sold, discounted at 10%, as compared to all oil and gas assets as of June 30, 2009. In the second quarter of 2009, the Company recorded a $114.2 million non-cash loss on the assets sold being the excess of the allocated net book value to these assets, compared to the total estimated net proceeds, after purchase adjustments and estimated closing costs.
The 2009 dispositions reduced sales volumes by approximately 3,600 boe/d for the third and fourth quarters.
Sales Volumes
Sales volumes for the year ended December 31, 2009 averaged 8,426 boe/d compared to 11,867 boe/d for the same period in 2008, representing a 29% decrease.
In addition to natural production decline and reduced 2009 capital spending, year over year production volumes were impacted by dispositions totalling approximately 3,600 boe/d for the third and fourth quarter of 2009 as a result of dispositions closed during the year.
Sales Volumes ------------------------------------------------------------------------- Years ended December 31, 2009 2008 ------------------------------------------------------------------------- Natural gas (mcf/d) 33,295 45,202 ------------------------------------------------------------------------- Heavy oil (bbls/d) 1,770 2,897 Light oil and condensate (bbls/d) 753 999 NGLs (bbls/d) 354 437 ------------------------------------------------------------------------- Total crude oil and NGLs (bbls/d) 2,877 4,333 ------------------------------------------------------------------------- Total boe/d (6:1) 8,426 11,867 ------------------------------------------------------------------------- -------------------------------------------------------------------------
During the 2009 year, Bellatrix had a 100% success rate in its drilling program that consisted of 18 wells (11.68 net) in the Pembina, Willesden Green, Mantario and Irvine areas. The program resulted in 7.62 net gas wells, 3.5 net oil wells and 0.56 wells awaiting completion. Of the above 18 wells, 5 gross wells in the Willesden Green area were farmed out with Bellatrix retaining a 24% average working interest with no payout account.
By comparison, the Company drilled or participated in 38 (17.1 net) working interest wells in 2008. 4.2 net wells were dry and abandoned.
For the year ended December 31, 2009, the weighting towards natural gas sales averaged 66% compared to 63% for the 2008 year. Heavy oil sales made up 21% of total production for the 2009 year compared to 24% in 2008.
Sales of natural gas averaged 33.3 Mmcf/d for 2009, compared to 45.2 Mmcf/d in 2008, a decrease of 26%. Crude oil and NGL sales for 2009 decreased 34% averaging 2,877 bbls/d compared to 2008 average sales of 4,333 bbls/d.
2010 production volumes are anticipated to average approximately 8,500 boe/d and an exit rate of approximately 10,000 boe/d. The forecast of 2010 production volumes is based upon a number of assumptions, including downtime for anticipated plant turnarounds and normal production declines and the execution of the current planned capital budget of $75.0 million.
Commodity Prices Average Commodity Prices ------------------------------------------------------------------------- Years ended December 31, 2009 2008 % Change ------------------------------------------------------------------------- Exchange rate (US$/Cdn$) 0.8757 0.9372 (7) Natural gas: NYMEX (US$/mmbtu) 4.16 8.89 (52) AECO daily index (CDN$/Mcf) 3.95 8.13 (51) AECO monthly index (CDN$/Mcf) 4.14 8.12 (49) Bellatrix's average price ($/mcf) 4.50 8.50 (47) Bellatrix's average price (including risk management(1)) ($/mcf) 5.96 8.00 (25) Crude oil: WTI (US$/bbl) 62.09 99.73 (38) Edmonton par - light oil ($/bbl) 66.20 102.85 (36) Bow River - medium/heavy oil ($/bbl) 59.71 83.85 (29) Hardisty Heavy - heavy oil ($/bbl) 55.59 76.32 (27) Bellatrix's average prices ($/bbl) Light crude oil, condensate, and NGLs 50.53 88.42 (43) Heavy crude oil 49.10 70.96 (31) Total crude oil and NGLs 49.65 76.75 (35) Total crude oil and NGLs (including risk management(1)) 49.62 64.24 (23) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Per unit metrics including risk management include realized gains or losses on commodity contracts and exclude unrealized gains or losses on commodity contracts.
Bellatrix's natural gas sales are priced with reference to the daily or monthly AECO indices. During 2009, the AECO daily and monthly reference price decreased by 51% and 49%, respectively, compared to the same period in 2008. Similarly, Bellatrix's average sales price before commodity price risk management contracts for 2009 decreased by 47% compared to the same period in 2008. Bellatrix's natural gas price after including commodity price risk management contracts for 2009 was $5.96/mcf compared to $8.00/mcf for 2008.
WTI crude oil prices varied greatly throughout 2008, increasing significantly to a high of US$147/bbl in July and dramatically falling during the fourth quarter of 2008 with December 2008 prices of under US$40/bbl. WTI crude oil prices have averaged over US$ 60/bbl through 2009.
For light oil, condensate and NGLs, Bellatrix recorded an average $50.53/bbl before commodity price risk management contracts during 2009, 43% lower than the average price received in the 2008 year. In comparison, the Edmonton par price decreased by 36% over the same period. The average WTI crude oil US dollar based price decreased 38% from 2008 to 2009. Bellatrix's realized price after including commodity price risk management contracts was $50.45/bbl for 2009 compared to $50.69/bbl for the same period in 2008. The average US$/Cdn$ foreign exchange rate was 0.8757 for the full year of 2009 compared to 0.9372 in 2008. The negative correlation between the Canadian dollar and U.S. dollar denominated WTI oil prices have softened the impact on the Company of lower US$ WTI prices.
For heavy crude oil, Bellatrix received an average price before transportation of $49.10/bbl for 2009, a decrease of 31% over prices in the 2008 year. The Bow River reference price decreased by 29% and the Hardisty Heavy reference price decreased by 27% over the same period. The majority of Bellatrix's heavy crude oil density ranges between 11 and 16 degrees API consistent with the Hardisty Heavy reference price, although all of Bellatrix's heavy oil production is sold at Saskatchewan delivery points.
Revenue
Revenue before other income and commodity price risk management contracts for the year ended December 31, 2009 was $106.8 million, 59% lower than the $262.4 million in the same period in 2008. The lower revenue for the 2009 period was the result of significantly lower commodity prices and lower sales volumes.
------------------------------------------------------------------------- Years ended December 31, ($000s) 2009 2008 ------------------------------------------------------------------------- Light crude oil, condensate and NGLs 20,400 46,485 Heavy oil 31,726 75,241 ------------------------------------------------------------------------- Crude oil and NGLs 52,126 121,726 Natural gas 54,652 140,701 ------------------------------------------------------------------------- Total revenue before other 106,778 262,427 Other(1) 2,236 2,958 ------------------------------------------------------------------------- Total revenue before royalties and risk management 109,014 265,385 ------------------------------------------------------------------------- (1) Other revenue primarily consists of processing and other third party income.
Revenues for 2010 are currently expected to be higher than 2009 due to higher overall commodity prices and average estimated 2010 production of approximately 8,500 boe/d.
Commodity Price Risk Management
The Company has a formal commodity price risk management policy which permits management to use specified price risk management strategies including fixed price contracts, collars and the purchase of floor price options and other derivative financial instruments and physical delivery sales contracts to reduce the impact of price volatility and ensure minimum prices for a maximum of eighteen months beyond the current date. The program is designed to provide price protection on a portion of the Company's future production in the event of adverse commodity price movement, while retaining significant exposure to upside price movements. By doing this, the Company seeks to provide a measure of stability to funds flow from operations, as well as, to ensure Bellatrix realizes positive economic returns from its capital developments and acquisition activities. The Company plans to continue its commodity price risk management strategies focusing on maintaining sufficient cash flow to fund Bellatrix's operations. Any remaining production is realized at market prices.
A summary of the financial commodity price risk management volumes and average prices by quarter currently outstanding as of March 11, 2010 is shown in the following tables:
Natural gas Average Volumes (GJ/d) ------------------------------------------------------------------------- Q1 2010 Q2 2010 Q3 2010 Q4 2010 ------------------------------------------------------------------------- Fixed 16,556 20,000 20,000 20,000 Call option (ceiling price) 5,000 5,000 5,000 5,000 ------------------------------------------------------------------------- Total GJ/d 21,556 25,000 25,000 25,000 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average Price ($/GJ AECO C) ------------------------------------------------------------------------- Q1 2010 Q2 2010 Q3 2010 Q4 2010 ------------------------------------------------------------------------- Fixed 6.73 5.80 5.60 5.90 Call option (ceiling price) 8.05 8.05 8.05 8.05 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Crude oil and liquids Average Volumes (bbls/d) ------------------------------------------------------------------------- Q1 2010 Q2 2010 Q3 2010 Q4 2010 ------------------------------------------------------------------------- Costless collars 500 500 500 500 ------------------------------------------------------------------------- Total bbls/d 500 500 500 500 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Average Price (CDN$/bbl WTI) ------------------------------------------------------------------------- Q1 2010 Q2 2010 Q3 2010 Q4 2010 ------------------------------------------------------------------------- Collar ceiling price 101.15 101.15 101.15 101.15 Collar floor price 75.00 75.00 75.00 75.00 ------------------------------------------------------------------------- -------------------------------------------------------------------------
As of December 31, 2009, the fair value of Bellatrix's outstanding commodity contracts is an unrealized asset of $3.4 million as reflected in the financial statements. The fair value or mark-to-market value of these contracts is based on the estimated amount that would have been received or paid to settle the contracts as at December 31, 2009 and may be different from what will eventually be realized. Changes in the fair value of the commodity contracts are recognized in the Consolidated Statements of Loss within the financial statements.
Lower commodity prices throughout most of 2009 had a significant impact on the Company's revenue; however, these weaker prices resulted in realized cash gains $17.8 million for the Company's natural gas commodity price risk management contracts.
The following is a summary of the gain (loss) on commodity contracts for the years ended December 31, 2009 and 2008 as reflected in the Consolidated Statements of Loss in the financial statements:
Commodity contracts ------------------------------------------------------------------------- Crude Oil Natural ($000s) & Liquids Gas 2009 Total ------------------------------------------------------------------------- Realized cash gain (loss) on contracts (31) 17,777 17,746 Unrealized gain (loss) on contracts(1) 53 (405) (352) ------------------------------------------------------------------------- Total gain on commodity contracts 22 17,372 17,394 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Crude Oil Natural ($000s) & Liquids Gas 2008 Total ------------------------------------------------------------------------- Realized cash loss on contracts (19,835) (8,387) (28,222) Unrealized gain on contracts(1) 11,404 2,664 14,068 ------------------------------------------------------------------------- Total loss on commodity contracts (8,431) (5,723) (14,154) ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Unrealized gain (loss) commodity contracts represent non-cash adjustments for changes in the fair value of these contracts during the period.
Royalties
For the year ended December 31, 2009, total royalties were $17.6 million, compared to $54.6 million incurred in 2008. Overall royalties as a percentage of revenue (after transportation costs) in 2009 were 17%, compared with 21% in 2008. The reduction in royalty percentages experienced for the year was primarily due to lower natural gas royalties in Alberta due to the impact of lower natural gas pricing under the new Alberta Government Royalty Program.
------------------------------------------------------------------------- Royalties by Commodity Type Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Light crude oil, condensate and NGLs 5,758 11,211 $/bbl 14.26 21.33 Average light crude oil, condensate and NGLs royalty rate (%) 28 25 Heavy Oil 5,975 14,060 $/bbl 9.25 13.26 Average heavy oil royalty rate (%) 20 20 Natural Gas 5,821 29,291 $/mcf 0.48 1.77 Average natural gas royalty rate (%) 11 21 ------------------------------------------------------------------------- Total 17,554 54,562 ------------------------------------------------------------------------- $/boe 5.71 12.56 ------------------------------------------------------------------------- Average total royalty rate (%) 17 21 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Royalties, by Type ------------------------------------------------------------------------- Years ended December 31, ($000s) 2009 2008 ------------------------------------------------------------------------- Crown royalties 7,710 30,354 Indian Oil and Gas Canada royalties 3,198 6,479 Freehold & GORR 5,968 17,729 Saskatchewan resource surcharge 678 - ------------------------------------------------------------------------- Total 17,554 54,562 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Expenses ------------------------------------------------------------------------- Years ended December 31, ($000s) 2009 2008 ------------------------------------------------------------------------- Production 45,015 66,573 Transportation 3,880 7,047 General and administrative 10,239 15,658 Interest and financing charges 13,657 14,822 Share-based compensation (recovery) (159) 1,395 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Expenses per boe ------------------------------------------------------------------------- Years ended December 31, ($ per boe) 2009 2008 ------------------------------------------------------------------------- Production 14.64 15.33 Transportation 1.26 1.62 General and administrative 3.33 3.67 Interest and financing charges 4.44 3.41 Share-based compensation (recovery) (0.05) 0.32 -------------------------------------------------------------------------
Production Expenses
For the year ended December 31, 2009, production expenses totaled $45.0 million ($14.64/boe), compared to $66.6 million ($15.33/boe) recorded in 2008. The decrease in production expenses in 2009 on a boe basis is due to planned cost reductions initiated in the first quarter of 2009 and continuation of field optimization projects throughout the year.
Included within the $45.0 million (2008: $66.6 million) of production expenses for the 2009 year were $2.6 million (2008: $3.2 million) of costs related to prior periods, which were primarily from non-operated properties for plant equalizations and other costs. Excluding these prior period costs, production expenses for the 2009 year would have been $42.4 million or $13.79/boe (2008: $63.4 million or $14.59/boe).
Bellatrix is targeting operating costs of approximately $33.3 million ($10.75/boe) in 2010. This is based upon assumptions of estimated 2010 average production of approximately 8,500 boe/d, continued field optimization work and planned capital expenditures in producing areas which are anticipated to have lower operating costs.
Production Expenses, by Commodity Type ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Light crude oil, condensate and NGLs 8,730 10,155 $/bbl 21.62 19.32 Heavy oil 11,180 22,672 $/bbl 17.30 21.38 Natural gas 25,105 33,746 $/mcf 2.07 2.04 ------------------------------------------------------------------------- Total 45,015 66,573 ------------------------------------------------------------------------- $/boe 14.64 15.33 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Total 45,015 66,573 ------------------------------------------------------------------------- Processing and other third party income(1) (2,237) (2,958) ------------------------------------------------------------------------- Total after deducting processing and other third party income 42,778 63,615 ------------------------------------------------------------------------- $/boe 13.91 14.65 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Processing and other third party income is included within petroleum and natural gas sales on the Consolidated Statements of Loss.
Transportation
Transportation expenses for the year ended December 31, 2009 were $3.9 million ($1.26/boe) compared to $7.0 million ($1.62/boe) in the same 2008 period. The reduction in transportation expenses is due to significantly less heavy oil hauling costs following sale of Saskatchewan properties in July 2009.
Operating Netback Field Operating Netback - Corporate (before risk management) ------------------------------------------------------------------------- For the years ended December 31, ($/boe) 2009 2008 ------------------------------------------------------------------------- Sales 34.72 60.42 Transportation (1.26) (1.62) Royalties (5.71) (12.56) Production expense (14.64) (15.33) ------------------------------------------------------------------------- Field operating netback 13.11 30.91 ------------------------------------------------------------------------- -------------------------------------------------------------------------
For the 2009 year, corporate field operating netback (before commodity price risk management contracts) was $13.11/boe compared to $30.91/boe in fiscal 2008. This was primarily the result of a significant decrease in commodity prices offset by a reduction in transportation, royalties and production expenses. After including commodity price risk management contracts, the corporate field operating netback for 2009 was $18.88/boe compared to $24.41/boe in 2008.
Field Operating Netback - Natural Gas (before risk management) ------------------------------------------------------------------------- Years ended December 31, ($/mcf) 2009 2008 ------------------------------------------------------------------------- Sales 4.50 8.50 Transportation (0.20) (0.17) Royalties (0.48) (1.77) Production expense (2.07) (2.04) ------------------------------------------------------------------------- Field operating netback 1.75 4.52 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Field operating netback for natural gas in 2009 decreased 61% to $1.75/mcf, compared to $4.52/mcf in 2008, reflecting weaker natural gas prices experienced, along with slightly higher transportation and production expenses, the effects of which were partially offset by lower royalties. After including commodity price risk management contracts, field operating netback for natural gas for fiscal 2009 was $3.21/mcf compared to $4.02/mcf in the same period in 2008.
Field Operating Netback - Crude Oil, Condensate and NGLs (before risk management) ------------------------------------------------------------------------- Years ended December 31, ($/bbl) 2009 2008 ------------------------------------------------------------------------- Sales 49.65 76.75 Transportation (1.34) (2.66) Royalties (11.18) (15.93) Production expense (18.96) (20.70) ------------------------------------------------------------------------- Field operating netback 18.17 37.46 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Field operating netback for crude oil, condensate and NGLs averaged $18.17/bbl for 2009, down 51% compared to $37.46/bbl for 2008. This compares to a 35% decrease in the crude oil, condensate and NGLs sales price. After including commodity price risk management contracts, field operating netback for crude oil and NGLs for 2009 was $18.14/boe compared to $24.96/boe in 2008.
General and Administrative
General and administrative ("G&A") expenses (after capitalized G&A and recoveries) for 2009 were $10.2 million ($3.33/boe) compared to $15.7 million ($3.61/boe) for 2008. The decrease in the G&A expense for the year ended December 31, 2009 from the same period in 2008 reflects targeted G&A reductions completed early in 2009 as well as a reduction in staff due to the disposition completed in July 2009. G&A costs for the 2008 year included $1.0 million of charges associated with severance costs in the fourth quarter of 2008. The reduction in amounts of capitalized G&A for 2009 is consistent with a lower capital program.
For 2010, the Company is anticipating G&A costs after capitalization to be approximately $10.0 million ($3.22/boe) based on continued efficiencies and estimated 2010 average production volumes of approximately 8,500 boe/d.
General and Administrative Expenses ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Gross expenses 12,371 19,897 Capitalized (648) (2,419) Recoveries (1,484) (1,820) ------------------------------------------------------------------------- G&A expenses 10,239 15,658 ------------------------------------------------------------------------- G&A expenses, per unit ($/boe) 3.33 3.61 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Interest and Financing Charges
Bellatrix recorded $13.7 million of interest and financing charges for the year ended December 31, 2009 compared to $14.8 million in 2008. Bellatrix's total net debt at December 31, 2009 of $107.3 million includes the $81.7 million liability portion of convertible debentures, $27.9 million of bank debt and the net balance of working capital. The convertible debentures have a maturity date of June 30, 2011.
Interest and Financing Charges ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Interest and financing charges 13,657 14,822 Interest and financing charges ($/boe) 4.44 3.41 Debt to funds flow from operations(1) ratio annualized(3)(4) Funds flow from operations(1) (annualized) 30,724 23,460 Total net debt(2) at year end 107,269 215,004 Total net debt to periods funds flow from operations ratio annualized(3) 3.5x 9.2x Net debt(2) (excluding convertible debentures) at year end 25,585 133,880 Net debt to periods funds flow from operations ratio annualized(3) 0.8x 5.7x Debt to funds flow from operations(1) ratio(4) Funds flow from operations(1) for the year 36,025 77,893 Total net debt(2) to funds flow from operations for the year 3.0x 2.8x Net debt(2) (excluding convertible debentures) to funds flow from operations for the year 0.7x 1.7x ------------------------------------------------------------------------- (1) As detailed previously in this Management's Discussion and Analysis, funds flow from operations is a term that does not have any standardized meaning under GAAP. Funds flow from operations is calculated as cash flow from operating activities before asset retirement costs incurred and changes in non-cash working capital incurred. (2) Net debt includes the net working capital deficiency (excess) before short-term commodity contract assets and liabilities and short-term future tax assets and liabilities. Total net debt also includes the liability component of convertible debentures and excludes asset retirement obligations and the future income tax assets and liabilities. Total net debt is a non-GAAP measure; refer to the following reconciliation of total liabilities to total net debt. (3) Total net debt and net debt to periods funds flow from operations ratio (annualized) is calculated based upon fourth quarter funds flow from operations annualized. (4) Pro-forma total net debt and net debt (excluding convertible debentures) at December 31, 2009, adjusted for the net proceeds of the January 2010 equity financing of $42.7 million (note 17) are $64.6 million and nil, respectively. As a result, pro-forma total net debt to periods funds flow from operations ratio annualized and pro- forma net debt to periods funds flow from operations ratio annualized for 2009 are reduced to 2.1 times and nil, respectively. In addition, pro-forma total net debt to funds flow from operations for the year and pro-forma net debt to funds flow from operations for the year, for 2009, were reduced to 1.8 times and nil, respectively. Reconciliation of Total Liabilities to Total Net Debt ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Total liabilities per financial statements 159,619 326,769 Current liabilities included within working capital calculation (24,305) (36,798) Asset retirement obligations (25,728) (33,682) Future income taxes - long-term - (42,777) Working Capital Current assets (29,036) (37,934) Current liabilities 24,305 36,798 Net commodity contract asset 3,374 3,726 Net future income taxes - current (960) (1,100) ------------------------------------------------------------------------- (2,317) 1,490 ------------------------------------------------------------------------- Total net debt 107,269 215,002 -------------------------------------------------------------------------
Share-Based Compensation
Non-cash share-based compensation expense for the year ended December 31, 2009 was a recovery of $0.2 million compared to an expense of $1.4 million in 2008. The 2009 recovery reflects a reversal of $0.8 million (2008: $0.5 million) of prior year share compensation expense for 2009 cancellation of unvested share options, $0.2 million (2008: $0.4 million) of share-based compensation expense capitalized, offset by $0.8 million (2008: $2.3 million) share-based compensation expense. The reduction in the share-based compensation expense reflects a reduction in the estimated weighted average fair value for more recent share options granted. During 2009, 3,295,800 options were issued with an average exercise price of $1.44. The 2008 year expense includes $0.5 million of additional compensation expense for the incentive units voluntarily surrendered and cancelled in the year.
In connection with the Reorganization, a new option plan under Bellatrix was approved. As a result, the existing 4,067,733 incentive unit rights as at November 1, 2009 were exchanged for an equal number of common share options of Bellatrix with the same terms and conditions, including as to exercise price, vesting and expiry dates.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expense for 2009 was $90.8 million ($29.51/boe), compared to the $128.9 million ($29.68/boe) in 2008, which reflects lower production volumes combined with reduced carrying costs in the 2009 period as compared to 2008.
For the year ended December 31, 2009, Bellatrix has included $57.2 million (2008: $62.8 million) for future development costs in the depletion calculation and excluded from the depletion calculation $20.5 million (2008: $31.3 million) for undeveloped land and $27.8 million (2008: $42.5 million) for estimated salvage.
Depletion, Depreciation and Accretion Costs ------------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 ------------------------------------------------------------------------- Depletion and Depreciation 88,441 126,773 Accretion 2,319 2,159 ------------------------------------------------------------------------- Total 90,760 128,932 ------------------------------------------------------------------------- Per unit ($/boe) 29.51 29.68 ------------------------------------------------------------------------- -------------------------------------------------------------------------
Reorganization Costs
The Company incurred $0.9 million in costs for legal, financial advisory, accounting, printing, mailing and other expenses that are included as reorganization costs within the Consolidated Statements of Loss for the year ended December 31, 2009 associated with the Reorganization resulting in the conversion from an open-ended, unincorporated investment trust to Bellatrix Exploration Ltd., a publicly traded exploration and development corporation.
Income Taxes
For the year ended December 31, 2009, the Company has recorded no capital tax expense compared to $2.0 million expensed in 2008. Prior to January 1, 2009, capital taxes were based on a combination of debt and equity levels of the Company at the end of the year in addition to a resource surcharge component of Saskatchewan provincial taxes calculated as a percentage of revenues. Effective for Bellatrix's 2009 taxation year, this Saskatchewan tax has been changed such that it is calculated solely as a percentage of revenues. Accordingly, this Saskatchewan tax is grouped with royalties on a prospective basis.
Future income taxes arise from differences between the accounting and tax bases of the Company's assets and liabilities. For the year ended December 31, 2009, the Company recognized a future income tax recovery of $44.4 million compared to a recovery of $20.4 million in 2008.
As at December 31, 2009, the Company had a total net future income tax asset balance of $0.4 million. Canadian GAAP requires that a future income tax asset be recorded when the tax pools exceeds the book value of assets, to the extent the amount is more than likely than not to be realized.
At December 31, 2009, Bellatrix had approximately $399.9 million in tax pools available for deduction against future income as follows:
------------------------------------------------------------------------- ($000s) Rate % 2009 2008 ------------------------------------------------------------------------- Intangible resource pools: Canadian exploration expenses 100 43,200 43,300 Canadian development expenses 30 210,500 214,100 Canadian oil and gas property expenses 10 15,100 63,300 Foreign resource expenses 10 1,100 700 Attributed Canadian Royalty Income 100 (Alberta) 16,100 16,100 Undepreciated capital cost 6 - 55(1) 100,600 128,300 Non-capital losses (expire through 2027) 100 13,100 39,800 Financing costs 20 straight line 200 5,400 ------------------------------------------------------------------------- 399,900 511,000 ------------------------------------------------------------------------- (1) Approximately $94.3 million of undepreciated capital cost pools are class 41, which is claimed at a 25% rate.
The reduction in tax pools from 2008 to 2009 is primarily due to the dispositions that closed during the year.
As a result of the Reorganization from the Trust to the Company, approximately $1.7 million of tax pools related to financing costs were eliminated.
Cash Flow From Operating Activities, Funds Flow from Operations and Net Loss
Reconciliation of Cash Flow from Operating Activities and Funds Flow from Operations ------------------------------------------------------------------------- Years ended December 31, ($000s, except per unit amounts) 2009 2008 ------------------------------------------------------------------------- Cash flow from operating activities 30,671 78,784 Asset retirement costs incurred 1,510 2,603 Change in non-cash working capital 3,844 (3,494) ------------------------------------------------------------------------- Funds flow from operations 36,025 77,893 -------------------------------------------------------------------------
Bellatrix's cash flow from operating activities of $30.7 million ($0.39 per diluted share) for the year ended December 31, 2009 decreased approximately 61% from the $78.8 million ($0.99 per diluted share) generated in 2008. Bellatrix generated funds flow from operations of $36.0 million ($0.46 per diluted share) for the year ended December 31, 2009, down 54% from $77.9 million ($0.98 per diluted share) for 2008. The decrease in cash flow from operating activities and funds flow from operations for 2009 compared to 2008 was primarily the result of a significant decrease in commodity prices, in combination with lower sales volumes, offset slightly by a reduction in expenses.
Bellatrix maintains a commodity price risk management program to provide a measure of stability to funds flow from operations. Unrealized mark-to-market gains or losses are non-cash adjustments to the current fair market value of the contract over its entire term and are included in the calculation of net loss.
The net loss for the 2009 year was $126.6 million ($1.61 per diluted share) compared to a net loss of $19.6 million ($0.25 per diluted share) in 2008. The increase in the net loss from 2008 to 2009 was primarily due to a $114.2 million non-cash loss recorded on the disposition of the majority of the Company's petroleum and natural gas properties in Saskatchewan, lower commodity prices in conjunction with reduced sales volumes, offset by reduced non-cash charges for depletion, depreciation and accretion, higher realized gains on commodity contracts, and reduced production, transportation and general and administrative charges.
Cash Flow from Operating Activities, Funds Flow from Operations and Net Loss ------------------------------------------------------------------------- Years Ended December 31, ($000s, except per unit amounts) 2009 2008 ------------------------------------------------------------------------- Cash flow from operating activities 30,671 78,784 Basic ($/share) 0.39 1.00 Diluted ($/share) 0.39 0.99 Funds flow from operations 36,025 77,893 Basic ($/share) 0.46 0.99 Diluted ($/share) 0.46 0.98 Net loss (126,620) (19,590) Basic ($/share) (1.61) (0.25) Diluted ($/share) (1.61) (0.25) ------------------------------------------------------------------------- -------------------------------------------------------------------------
Capital Expenditures
Bellatrix invested $18.0 million on exploration and development activities during 2009, before $2.2 million of drilling incentive credits, compared to $36.7 million in 2008. The reduction in these expenditures was consistent with a reduced capital budget for 2009 in an effort to maintain production and to increase financial flexibility to fund operations in light of the uncertain economic environment.
During the 2009 year, Bellatrix achieved a 100% success rate in its 2009 drilling program that consisted of 18 (11.68 net) wells in the Pembina, Willesden Green, Mantario and Irvine areas. The program resulted in 7.62 net gas wells, 3.5 net oil wells and 0.56 wells awaiting completion. Of the above 18 wells, 5 gross wells in the Willesden Green area were farmed out with Bellatrix retaining a 24% average working interest with no payout account.
Bellatrix has approximately 258,500 net acres of undeveloped mineral leases in Alberta, British Columbia and Saskatchewan as of December 31, 2009.
Capital Expenditures ------------------------------------------------------------------------- Years ended December 31, ($000s) 2009 2008 ------------------------------------------------------------------------- Lease acquisitions and retention 649 1,244 Geological and geophysical 31 318 Drilling and completion costs 13,715 19,008 Facilities and equipment 3,616 16,129 ------------------------------------------------------------------------- 18,011 36,699 Drilling incentive credits (2,168) - ------------------------------------------------------------------------- Exploration and development(1) 15,843 36,699 Corporate(2) 644 589 Property acquisitions - 5,714 ------------------------------------------------------------------------- Total capital expenditures - cash 16,487 43,002 Property dispositions - cash (92,921) (44,340) ------------------------------------------------------------------------- Total net capital expenditures - cash (76,434) (1,338) ------------------------------------------------------------------------- Other - non-cash(3) (492) 3,710 ------------------------------------------------------------------------- Total net capital expenditures (76,926) 2,372 ------------------------------------------------------------------------- (1) Excludes capitalized costs related to asset retirement obligation expenditures incurred during the year. (2) Corporate costs include office furniture, fixtures and equipment and other costs. (3) Other includes non-cash adjustments for current period's asset retirement obligations and unit based compensation capitalized.
The $16.5 million capital program for the year ended December 31, 2009, was financed entirely with funds flow from operations.
Based on the current economic conditions and Bellatrix's operating forecast for 2010, the Company budgets a capital program of $75 million.
Ceiling Test
The Company calculates a ceiling test quarterly and annually to place a limit on the aggregate carrying value of its capitalized costs, which may be amortized against revenues of future periods. The ceiling test is performed in accordance with the requirements of the Canadian Institute of Chartered Accountants ("CICA") AcG-16 "Oil and Gas Accounting - Full Cost", a two step process.
The Company performed a ceiling test calculation at December 31, 2009 resulting in undiscounted cash flows from proved reserves and the undeveloped properties exceeding the carrying value of oil and gas assets. Consequently, no impairment in oil and gas assets was identified as at December 31, 2009.
The ceiling test calculation will be updated in 2010 on a quarterly and annual basis based upon the latest available data, including but not limited to an updated annual external reserve engineering report which incorporates a full evaluation of reserves or internal reserve updates at quarterly periods, and the latest commodity pricing deck. Estimating reserves is very complex, requiring many judgments based on available geological, geophysical, engineering and economic data. Changes in these judgments could have a material impact on the estimated reserves. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available and as the economic environment changes.
Asset Retirement Obligations
As at December 31, 2009, Bellatrix has recorded an Asset Retirement Obligation ("ARO") of $25.7 million, compared to $33.7 million at December 31, 2008, for future abandonment and reclamation of the Company's properties. For the year ended December 31, 2009, the ARO decreased by $8.0 million total as a result of $11.0 million of liabilities released on dispositions, $1.5 million of liabilities settled during the year, offset by accretion expense of $2.3 million, and $2.2 million net changes in estimates and liabilities incurred on development activities.
Dividends and Distributions
Dividend History
Bellatrix has not paid any dividends on the outstanding Common Shares. The Board of Directors of Bellatrix has determined not to pay any dividends on the Common Shares at the present time. Bellatrix's credit facility does not permit payment of dividends on the outstanding Common Shares.
Distribution History(1)
Prior to completion of the 2009 Reorganization, cash distributions were paid by the Trust to holders of trust units.
While a Trust, unitholders who held their trust units in January 2009 received distributions of $0.02 per unit for a total of $1.6 million.
Distributions may comprise a taxable portion and a return of capital portion (tax deferred). The return of capital component reduces the cost basis of the trust units held, as described below. For additional information, please see our website at www.bellatrixexploration.com.
------------------------------------------------------------------------- Distributions Taxable Return of Calendar Year per unit Portion Capital ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cumulative to December 31, 2008 $ 4.540 $ 3.909 $ 0.631 ------------------------------------------------------------------------- 2009 year to date (one month)(2) $ 0.020 $ 0.020 - ------------------------------------------------------------------------- Cumulative to December 31, 2009 $ 4.560 $ 3.929 $ 0.631 ------------------------------------------------------------------------- (1) Applies to unitholders who are residents of Canada and hold their trust units as capital property. (2) For Canadian tax purposes, the January 2009 distribution was determined to be 100% taxable. In consultation with its U.S. tax advisors, Bellatrix believes that True's Trust units should be "qualified dividends" for U.S. federal purposes. As such, the portion of distributions made during 2009 that are considered dividends for U.S. federal purposes should qualify for the reduced rate of tax applicable to long-term capital gains. Unitholders should consult their own legal or tax advisors as to their particular income tax consequences of holding Trust units. For additional information, please refer to our website at www.bellatrixexploration.com. Monthly Distributions Actual distributions paid and declared per Trust unit along with relevant payment dates for 2009 to date are as follows: ------------------------------------------------------------------------- Distribution Ex-distribution Date Record Date Payment Date per unit ------------------------------------------------------------------------- December 29, 2008 December 31, 2008 January 15, 2009 0.02 January 28, 2009 January 30, 2009 February 17, 2009 0.02 -------------------------------------------------------------------------
During 2009, funding requirements for distributions declared was 4% of funds flow from operations.
Liquidity and Capital Resources
As an oil and gas business, Bellatrix has a declining asset base and therefore relies on ongoing development and acquisitions to replace production and add additional reserves. Future oil and natural gas production and reserves are highly dependent on the success of exploiting the Company's existing asset base and in acquiring additional reserves. To the extent Bellatrix is successful or unsuccessful in these activities; cash flow could be increased or reduced.
Although conditions improved towards the latter portion of 2009, the economic crisis continues to put a strain on credit and equity markets as characterized by a decline in liquidity and higher borrowing costs. Access to capital markets has become constrained and significantly more expensive for the Company along with other oil and gas entities. The current global economic environment has continued to create volatility in commodity prices, tempered somewhat by the growing Canadian to US dollar exchange rate. Given the uncertain economic conditions experienced, Bellatrix maintained a modest 2009 capital program and the Trust suspended distributions. Bellatrix continues to monitor forecasted debt levels to manage its operations within forecasted cash flow. In addition, Bellatrix will continue to monitor developments within the global economic environment to consider the impacts on current or future lending arrangements. Bellatrix does not pay dividends to its common shareholders.
Liquidity risk is the risk that Bellatrix will not be able to meet its financial obligations as they fall due. Bellatrix actively manages its liquidity through daily and longer-term cash, debt and equity management strategies. Such strategies encompass, among other factors: having adequate sources of financing available through its bank credit facilities, estimating future cash generated from operations based on reasonable production and pricing assumptions, analysis of economic risk management opportunities, and maintaining sufficient cash flows for compliance with debt covenants. Bellatrix is fully compliant with all of its debt covenants.
Bellatrix generally relies on operating cash flows and its credit facilities to fund capital requirements and provide liquidity. Future liquidity depends primarily on cash flow generated from operations, existing credit facilities and the ability to access debt and equity markets. From time to time, the Company accesses capital markets to meet its additional financing needs and to maintain flexibility in funding its capital programs. While Bellatrix recently completed a January 2010 equity offering, there can be no assurance that future debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to Bellatrix.
Credit risk is the risk of financial loss to Bellatrix if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from Bellatrix's trade receivables from joint venture partners, petroleum and natural gas marketers, and financial derivative counterparties.
A substantial portion of Bellatrix's accounts receivable are with customers and joint interest partners in the petroleum and natural gas industry and are subject to normal industry credit risks. Bellatrix sells substantially all of its production to five primary purchasers under standard industry sale and payment terms. Purchasers of Bellatrix's natural gas, crude oil and natural gas liquids are subject to a periodic internal credit review to minimize the risk of non-payment. Bellatrix has continued to closely monitor and reassess the creditworthiness of its counterparties, including financial institutions. This has resulted in Bellatrix reducing or mitigating its exposures to certain counterparties where it is deemed warranted and permitted under contractual terms.
Bellatrix may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to Bellatrix, such failures may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner's willingness to participate in Bellatrix's ongoing capital program, potentially delaying the program and the results of such program until Bellatrix finds a suitable alternative partner.
During 2009, the Company executed several strategies for dealing with the uncertain economic times.
On July 30, 2009, the Company successfully completed the divestiture of the majority of its Saskatchewan assets for net proceeds, after purchase adjustments of approximately $86 million. The proceeds were used to reduce the Company's bank indebtedness. Including other dispositions completed, total net proceeds from dispositions were $92.9 million for the year ended December 31, 2009.
Bellatrix's corporate thrust in 2009 was to continue to improve Bellatrix's balance sheet by reducing total outstanding debt and streamlining its operating cost structure. In 2009, Bellatrix limited its capital program to $19 million in an effort to maintain production and increase financial flexibility to fund operations. This compares to the $43 million capital program employed in 2008. As a consequence of a reduced capital program in 2009 and strategic divestitures completed in 2009, total net debt levels decreased by $107.7 million from $215.0 million at December 31, 2008 to $107.3 million at December 31, 2009. Total net debt includes the liability component of the convertible debentures and excludes unrealized commodity contract assets and liabilities, future income taxes and asset retirement obligations.
On November 1, 2009, as part of the reorganization, the Company renewed its credit facility which consists of a $10 million demand operating facility provided by a Canadian bank and a $75 million extendible revolving term credit facility provided by a Canadian bank and a Canadian financial institution. Amounts borrowed under the credit facilities bear interest at a floating rate based on the applicable Canadian prime rate, U.S. base rate or LIBOR rate, plus between 1.50% and 4.50%, depending on the type of borrowing and the Company's debt to cash flow ratio. The credit facilities are secured by a $400 million debenture containing a first ranking charge and security interest. Bellatrix has provided a negative pledge and undertaking to provide fixed charges over major petroleum and natural gas reserves in certain circumstances. A standby fee is charged of between 0.60% and 1.12% on the undrawn portion of the credit facilities, depending on the Company's debt to cash flow ratio.
The revolving period for the revolving term credit facility will end on June 29, 2010, unless extended for a further 364-day period. Should the facility not be extended it will convert to a non-revolving term facility with the full amount outstanding due 366 days after the last day of the revolving period of June 29, 2010. The borrowing base will be subject to re-determination on March 31, 2010. Thereafter, a semi-annual re-determination of the borrowing base will occur, with the first such re-determination occurring on November 30, 2010 and each subsequent re-determination on May 30 and November 30 in each year prior to the maturity date.
Pursuant to Bellatrix's credit facilities, the Company is permitted to pay the semi-annual interest payments on the Debentures, and payments by the Company to debenture holders in relation to the redemption of Debentures and in relation to debenture normal course issuer bids approved by the TSX, provided that the aggregate of all such normal course issuer bids and redemptions do not exceed $10.0 million in any fiscal year.
The strategic dispositions accomplished in the year allow the Company to progress forward with substantially improved financial flexibility.
Combined funding requirements for the January distribution declared and Bellatrix's capital expenditures represented 50% of funds flow from operations for the year ended December 31, 2009.
As an added layer of protection of its cash flow forecast, the Company's 2010 commodity price risk management contracts provide price protection on approximately 54% of its estimated natural gas production for 2010 that is forward sold for an average of CDN$5.972/GJ ($6.56/mcf). In addition, the Company has a price ceiling in place for 2010 on 5,000 GJ/d or 14% of its estimated natural gas production for 2010 at an average price of CDN$8.05/GJ ($8.85/mcf). These percentages of price protection and the conversion from $/GJ to $/mcf are based upon an estimated 2010 average corporate natural gas production of 32 MMcf/d and 39 MJ/m3 average heat content, respectively. In addition, 500 bbl/d of oil for 2010 is protected by way of a costless collar of CDN$75.00 x CDN$101.15. Bellatrix maintains an active commodity price risk management program focused on maintaining sufficient cash flow to fund its operations.
There are currently no commitments, other than those associated with the Bellatrix's credit facilities outlined above, its 2010 capital program of $75 million for 2010, and the commitments outlined under the "Commitments" section. Bellatrix continually monitors its capital spending program in light of the recent volatility with respect to commodity prices and Canadian dollar exchange rates with the aim of ensuring the Company will be able to meet future anticipated obligations incurred from normal ongoing operations with funds flow from operations and draws on Bellatrix's credit facility, as necessary. Bellatrix has the ability to fund its 2010 capital program of $75 million by utilizing the net proceeds from the January 2010 equity issuance, undrawn amounts on its credit facility and ongoing cash flows.
On June 15, 2006 the Trust completed a bought deal public offering of 86,250 7.5% convertible unsecured subordinated debentures at a price of $1,000 per debenture for aggregate gross proceeds of $86,250,000. The debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2011. The debentures bear interest at an annual rate of 7.50% payable semi-annually on June 30 and December 31 in each year commencing December 31, 2006. Pursuant to the Reorganization, the debentures were assumed by Bellatrix and are now convertible at anytime at the option of the holders into common shares of Bellatrix at a conversion price of $16.00 per share, subject to adjustment in certain events. Bellatrix has the right to redeem all or a portion of the debentures at a price of $1,050 per debenture after June 30, 2009 and on or before June 30, 2010 and at a price of $1,025 per debenture after June 30, 2010 and before the maturity date. Upon maturity or redemption of the debentures, Bellatrix may, subject to notice and regulatory approval, pay the outstanding principal and premium (if any) on the debentures in cash or through the issue of additional common shares at 95% of the 20 day weighted average trading price for the common shares for the period ending the fifth trading day preceding the redemption date.
In November 2009, Bellatrix received Toronto Stock Exchange approval for its normal course issuer bid program ("NCIB") to repurchase up to 10% of the issued and outstanding 7.5% convertible unsecured subordinated debentures of the Company from December 1, 2009 to November 30, 2010, following the prior NCIB expiring on November 30, 2009. During 2009, the Company completed repurchases under the NCIB at a total cost of $1.3 million. Copies of the notice filed with the Toronto Stock Exchange for the NCIB are available upon request from the Company, at no charge.
On January 28, 2010, Bellatrix closed an equity issuance of 13.64 million common shares on a bought deal basis at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.7 million after underwriter fees and before other closing costs). The net proceeds from this financing will be used to temporarily reduce outstanding indebtedness, thereby freeing up borrowing capacity that may be redrawn to fund Bellatrix's ongoing capital expenditure program and for general purposes.
As at February 28, 2010, Bellatrix had outstanding a total of 4,170,733 options exercisable at an average exercise price of $2.01 per share, $84.9 million principal amount of debentures convertible into common shares (at a conversion price of $16.00 per share) and 92,449,039 common shares.
Related Party Transactions
The Company received legal services from a law firm in which a director and corporate secretary is a partner. The fees charged are based on standard rates and time spent on matters pertaining to the Company. The services provided were in the normal course of operations and have been recorded at the exchange amount. For the year ended December 31, 2009, legal fees invoiced by the related party totaled $1.1 million (2008: $0.6 million).
Commitments
As at December 31, 2009, the Company had committed to drill a total of 4 wells pursuant to various farm-in agreements with oil and gas companies. Bellatrix expects to satisfy these various drilling commitments at an estimated cost of approximately $8.2 million.
The following are the contractual maturities of financial liabilities as at December 31, 2009:
------------------------------------------------------------------------- (less than) Financial liability ($000s) 1 Year 1-2 Years 2-5 Years Thereafter ------------------------------------------------------------------------- Accounts payable and accrued liabilities 23,345 - - - Bank debt - principal(1) - 27,902 - - Convertible debentures - principal(2) - 84,884 - - Convertible debentures - interest(3) 6,368 3,158 - - ------------------------------------------------------------------------- Total 29,713 115,944 - - ------------------------------------------------------------------------- (1) Bank debt is based on a revolving term which is reviewed annually and converts to a 366 day non-revolving facility if not renewed. (2) The principal amount of the convertible debentures includes the cancellation of the $28,000 principal amount of debentures that were purchased by the Company under its NCIB during the year ended December 31, 2009 but not cancelled until January 8, 2010. (3) Convertible debentures outstanding at December 31, 2009 bear interest at a coupon rate of 7.5%, which currently requires total annual interest payments of $6.4 million.
Interest due on the bank credit facility is calculated based on floating rates.
Off-Balance Sheet Arrangements
The Company has certain fixed term lease agreements, including primarily office space leases, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in operating expenses or G&A expenses depending on the nature of the lease. The lease agreements do not currently provide for early termination. No asset or liability value has been assigned to these leases in the balance sheet as of December 31, 2009.
The Company is committed to payments under operating leases for office space as follows:
------------------------------------------------------------------------- ($000s) Expected Year Gross Amount Recoveries Net amount ------------------------------------------------------------------------- 2010 2,153 1,084 1,069 2011 2,207 970 1,237 2012 2,218 1,005 1,213 2013 2,218 1,035 1,183 2014 1,479 703 776 -------------------------------------------------------------------------
Business Prospects and 2010 Year Outlook
The Company continues to develop its core assets and conducts exploration programs utilizing its large inventory of geological prospects. The Company has approximately 259,000 net acres of undeveloped land with in excess of 400 exploitation drilling opportunities identified, representing over 6 years of drilling inventory.
Bellatrix plans to operate within funds flow from operations and the proceeds from the recently completed equity financing. The Company intends to continue to maintain reductions in G&A and operating expenses and field optimization and maintenance programs to maintain production base in addition to its developmental focus in the Notikewin and Cardium resource plays.
Bellatrix has approved its 2010 capital expenditures budget of $75 million. The Company currently anticipates to drill approximately 44 gross wells (31.6 net), primarily in the Pembina and Ferrier areas of Alberta.
On January 28, 2010, Bellatrix closed an equity issuance to sell 13.64 million common shares on a bought deal basis at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.7 million after underwriter fees and before other closing costs). The net proceeds from this financing will be used to temporarily reduce outstanding indebtedness, thereby freeing up borrowing capacity that may be redrawn to fund Bellatrix's ongoing capital expenditure program and for general purposes.
As an added layer of protection of its cash flows, the Company's 2010 commodity price risk management contracts provide price protection on approximately 54% of its estimated natural gas production for 2010 that is forward sold for an average of CDN$5.972/GJ ($6.56/mcf). In addition, the Company has a price ceiling in place for 2010 on 5,000 GJ/d or 14% of its estimated natural gas production for 2010 at an average price of CDN$8.05/GJ ($8.85/mcf). These percentages of price protection and the conversion from $/GJ to $/mcf are based upon an estimated 2010 average corporate natural gas production of 32 MMcf/d and 39 MJ/m3 average heat content, respectively. In addition, 500 bbl/d of oil for 2010 is protected by way of a costless collar of CDN$75.00 x CDN$101.15.
Based on the timing of proposed expenditures, downtime for anticipated plant turnarounds and normal production declines, execution of the 2010 budget is anticipated to provide 2010 average daily production of approximately 8,500 boe/d and an exit rate of approximately 10,000 boe/d.
Financial Reporting Update
The following accounting standards were adopted in 2009:
Goodwill and Intangible Assets
The Company adopted the Canadian Institute of Chartered Accountants ("CICA") new accounting standard, Section 3064 - "Goodwill and Intangible Assets", replacing Section 3062 - "Goodwill and Other Intangible Assets", and Section 3450 - "Research and Development Costs". The new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. Application of the new section did not have any impact on the Company's financial statements.
Financial Instruments - Disclosures
The CICA issued amendments to Section 3862 - "Financial Instruments - Disclosures" to include enhanced disclosures related to the fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The amendments are effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with recent amendments to financial instrument disclosures standards in International Financial Reporting Standards ("IFRS"). The Company has classified its financial instruments that are carried at fair value on the balance sheet at a level 2 of the fair value hierarchy.
Financial Instruments - Recognition and Measurement
Effective July 2009, the CICA amended Section 3855 - "Financial Instruments - Recognition and Measurement", to prohibit the reclassification of a financial asset out of the held-for-trading category when the fair value of the embedded derivative in a combined contract cannot be reasonably measured. Amendments to this section also include a revised definition of "loans and receivables" and, provided that certain conditions have been met, permits reclassification of financial assets from the held-for-trading and available-for-sale categories into the loans and receivables category. The amendments also provide one method of assessing impairment for all financial assets regardless of classification. The adoption of the amendments to this standard did not have any impact on the Company's financial statements.
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
Effective January 1, 2009, the Company adopted CICA Emerging Issues Committee ("EIC") Abstract No. 173 - "Credit Risk and Fair Value of Financial Assets and Financial Liabilities". The EIC provides guidance on the implications of credit risk in determining the fair value of an entity's financial assets and financial liabilities. The guidance clarifies that an entity's own credit risk and the credit risk of counterparties should be taken into account in determining the fair value of financial assets and liabilities, including derivative instruments, for presentation and disclosure purposes. Adoption of this statement did not have an impact on the Company's financial statements.
Future Accounting Pronouncements
International Financial Reporting Standards ("IFRS")
On February 13, 2008 the CICA Accounting Standards Board announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards ("IFRS"), which will replace Canadian generally accepted accounting principles ("GAAP") for years beginning on or after January 1, 2011. The transition date of January 1, 2011 will require restatement for comparative purposes, of the Company's opening balance sheet as at January 1, 2010, all interim quarterly periods in 2010 and for its year ended December 31, 2010. The objective is to improve financial reporting by having one single set of accounting standards that are comparable with other entities on an international basis.
An internal project team was set up to manage this transition and to ensure successful implementation within the required time frame. Current economic conditions may require re-allocation of resources available for the IFRS conversion project. Members of the internal project team and key finance personnel have attended industry specific seminars. Bellatrix is anticipating on providing staff training to key operational staff in the later part of 2010. Members of the Board and Audit Committee possess financial expertise and are provided with quarterly updates, including accounting policy choices among IFRSs and recommendations to date.
The Company has completed a high level analysis to determine the areas impacted by the conversion and is assessing the financial reporting impacts on the adoption of IFRS. The assessment provided insight as to the most significant areas of GAAP differences applicable to Bellatrix and include treatment of exploration and evaluation costs, depreciation and depletion of property, plant and equipment, and impairment of assets, as well as more extensive presentation and disclosure requirements under IFRS. The analysis has been reviewed by the Company's external auditors for consistency in the interpretation of the standards.
During the year ended December 31, 2009, IFRS in-depth reviews have been concentrated on cash generating units, options available under IFRS for modified full cost accounting, decommissioning liabilities, share-based compensation and a preliminary analysis of the impact on our data gathering and reporting systems. As we are still assessing the impact of IFRS and have not yet selected or finalized all of our accounting policy choices and IFRS 1 exemptions, we are unable to quantify the impact of IFRS on the Company's future financial position and results of operations.
IFRS 1 - "First-time Adoption of International Financial Reporting Standards" is the standard that governs mandatory exceptions and optional exemptions that an entity may elect for its transition to IFRS in order to assist the entity with the transition process. This standard is only applicable to the opening balance sheet of the entity on the transition date of January 1, 2010.
The following are IFRS 1 exemptions that Bellatrix will elect on transition date:
Property, Plant and Equipment ("PP&E")
The adopter has the option to elect fair value at the date of transition as the deemed cost for its PP&E or to use a revalued amount according to its previous GAAP if the revaluation, at the date of revaluation, is comparable to fair value or depreciated cost in accordance with IFRS. On July 23, 2009 the IASB published amendments to IFRS 1 which will allow an election to measure oil and gas assets at the date of transition to IFRS at the amount determined under Canadian GAAP. The Company plans to make this election under IFRS 1 for its opening balance sheet at January 1, 2010. The standard allows the adopter to allocate its PP&E asset base to the Company's cash generating units based on reserve volumes or values. At this time, Bellatrix has not determined the method of allocation that it will use on the transition date. Once the Company's petroleum and natural gas assets are allocated to their respective cash generating units, it is required to perform an impairment test. If an impairment is identified on the opening balance, it is recorded against retained earnings as a transitional adjustment.
Business Combinations
An exemption under IFRS 1 provides the entity with relief on the restatement of business combinations prior to the transition date. Under IFRS 3 - "Business Combinations," the determination of the fair value of share consideration differs than the determination under current Canadian accounting standards. Any difference in the fair value calculation would have a resulting impact on the carrying amount of net assets acquired, non-controlling interest and any goodwill. The Company plans to make the election under IFRS 1, allowing Bellatrix to be exempt from restating business combinations prior to the transition date to IFRS.
Share Based Payments
Differences in the accounting for the Company's share option plan have been identified. IFRS 2 - "Share-based Payments," requires the Company to estimate the number of options expected to vest when a grant of equity instruments do not vest immediately. An estimate of the option's life is also required for the estimation of the fair value of the instruments. IFRS 2 does not allow the recognition of the expense on a straight-line basis and requires each installment to be treated as a separate arrangement. Currently, the Company accounts for forfeitures as they occur and considers the estimated life of the options to be consistent with their expiry date. Share-based compensation expense is accounted for using the graded method which is required under IFRS. IFRS 1 provides an elective exemption which the Company plans to elect in order to account for remaining unvested options under IFRS 2 on a prospective basis commencing on the transition date.
Decommissioning Liabilities
IAS 37 - "Provisions, Contingent Liabilities and Contingent Assets," will govern how the Company accounts for its decommissioning liabilities (currently referred to as asset retirement obligations). The decommissioning liability should reflect risks specific to the liability and will be based on management's best assumptions and estimates versus the fair value of the obligation. The amount recognized should be the best estimate of the expenditure required to settle the present obligation at the end of the period. If there are uncertainties surrounding the amount to be recognized as a provision then the obligation is estimated by weighting all possible outcomes by their associated probabilities. The discount rate used for the decommissioning liability will be a risk free rate as the estimated provision is adjusted to reflect risks specific to the liability. Currently under Canadian GAAP, the Company uses a credit-adjusted risk free rate. Therefore, under IFRS, the decommissioning liabilities are expected to be higher due to lower discount rates. Under IFRS, the unwinding of the discount rate is charged as interest expense versus accretion expense under current Canadian standards. IFRS 1 provides an exemption that the Company plans to elect which will allow Bellatrix to measure decommissioning liabilities as at the date of transition to IFRS in accordance with IAS 37 and recognize directly in retained earnings any difference between that amount and the carrying amount of those liabilities at the date of transition to IFRS determined under Canadian GAAP.
Oil and Gas Expenditures
Petroleum and natural gas expenditures fall under IFRS 6 - "Exploration for and Evaluation of Mineral Resources," and IAS 16 - "Property, Plant and Equipment." Capital expenditures incurred will be segregated into three categories:
1) Pre-exploration expenditures
2) Exploration and evaluation expenditures
3) Development and production expenditures
Pre-exploration expenditures
These are costs incurred by the Company before acquiring the legal right to explore in a specific area. These expenditures do not meet the definition of an asset as defined by IAS 16 and therefore will be expensed by the Company as incurred. We do not anticipate these costs to be significant to the Company.
Exploration and evaluation expenditures
IFRS 6 provides flexibility on the accounting for exploration and evaluation ("E&E") expenditures, allowing the Company to choose what type of expenditures will be capitalized or expensed. The costs incurred in the E&E phase will be capitalized once the legal right to explore in a specific area has been obtained. The assets are separated between tangible and intangible and are classified as E&E assets until technical feasibility and commercial viability of extracting resources is proven.
The Company does not intend to amortize its E&E expenditures until technical feasibility and commercial viability has been established. The standard does not define technical feasibility and commercial feasibility. Bellatrix intends to classify E&E assets as technically feasible and commercially viable once the property has proved reserves. Once proved reserves are established, the respective E&E assets will be transferred into the development and production bucket. E&E assets will be assessed for impairment if such information becomes available or there has been a change in facts and circumstances that would lead management to believe that the assets may be impaired. The following is a list of examples of changes in facts and circumstances that indicate an impairment test is needed:
- Remaining land lease terms have expired or expire in the near future and is not expected to be renewed - Dry holes - Management decisions to continue or discontinue activities in an area - Budgeted or planned capital spending in an area - Other information that may come to management's attention indicating that the carrying amount of the E&E asset is unlikely to be recovered in full
A company has the option to test E&E assets for impairment using total proved reserves or total proved plus probable reserves, test at the cash generating unit level or an aggregated cash generating unit level (as long as it is not at a level higher than an operating segment) and can group E&E assets with developing and producing assets.
The Company intends on using total proved and probable reserves for its impairment test and plans on testing the E&E assets along with the respective developing and producing assets within the cash generating units. An impairment test is required before any E&E asset is transferred to the developing and producing phase.
Developing and production expenditures
Once technical feasibility and commercial viability has been established, the assets are classified as developing and producing ("D&P") assets and will be subject to depreciation and depletion.
Information technology and data systems
Bellatrix has performed a preliminary assessment of the implications of IFRS on its information technology and data systems. The Company's current data gathering and accounting system is capable of obtaining and recording data at a level of detail required for IFRS. The Company has identified transactions relating to its property, plant and equipment in relation to requirements under IFRS to have the most impact on its information technology and data systems. In order to comply with some of the requirements under IFRS, the Company will need to be able to record assets at the E&E and D&P categories, have the ability to transfer expenditures from the E&E phase to the D&P phase and record depletion, depreciation and accretion at the cash generating unit level or lower. A test environment has been set up and Bellatrix is anticipating on completing the required testing and any resulting systems modifications in the second quarter of 2010.
Business activities
Bellatrix is currently assessing the impact of IFRS on its commodity price risk management practices, debt covenants and compensation arrangements. Currently, Bellatrix's credit facility agreement provides for a 45 day notice at the end of the fiscal quarter in which there are any changes in financial calculations as a result of the adoption of IFRS or 90 day notice if the financial calculation is impacted in the fourth quarter or in respect of an entire fiscal year.
Internal control over financial reporting and disclosure controls and procedures
The implementation of IFRS may require changes to the Company's internal controls over financial reporting ("ICFR") and disclosure controls and procedures ("DC&P"). The Company plans to assess the changes required in its ICFR and DC&P as accounting policy choices are finalized and its implications on ICFR and DC&P are identified in 2010.
The Company anticipates quantifying the effects of IFRS on the opening balance sheet in the second quarter of 2010. We will continue to monitor standards development as issued by the International Accounting Standards Board and the AcSB, as well as regulatory developments as issued by the Canadian Securities Administrators (CSA), which may affect the timing, nature or disclosure of our adoption of IFRS.
Business Risks and Uncertainties
General
Bellatrix's production and exploration activities are concentrated in the Western Canadian Sedimentary Basin, where activity is highly competitive and includes a variety of different sized companies ranging from smaller junior producers to the much larger integrated petroleum companies.
Bellatrix is subject to the various types of business risks and uncertainties including:
- Finding and developing oil and natural gas reserves at economic costs; - Production of oil and natural gas in commercial quantities; and - Marketability of oil and natural gas produced.
In order to reduce exploration risk, the Company strives to employ highly qualified and motivated professional employees with a demonstrated ability to generate quality proprietary geological and geophysical prospects. To help maximize drilling success, Bellatrix combines exploration in areas that afford multi-zone prospect potential, targeting a range of low to moderate risk prospects with some exposure to select high-risk with high-reward opportunities. Bellatrix also explores in areas where the Company has significant drilling experience.
The Company mitigates its risk related to producing hydrocarbons through the utilization of the most appropriate technology and information systems managed by qualified personnel. In addition, Bellatrix seeks to maintain operational control of the majority of its prospects.
Oil and gas exploration and production can involve environmental risks such as pollution of the environment and destruction of natural habitat, as well as safety risks such as personal injury. In order to mitigate such risks, Bellatrix conducts its operations at high standards and follows safety procedures intended to reduce the potential for personal injury to employees, contractors and the public at large. The Company maintains current insurance coverage for general and comprehensive liability as well as limited pollution liability. The amount and terms of this insurance are reviewed on an ongoing basis and adjusted as necessary to reflect changing corporate requirements, as well as industry standards and government regulations. Bellatrix may periodically use financial or physical delivery contracts to reduce its exposure against the potential adverse impact of commodity price volatility, as governed by formal policies approved by senior management subject to controls established by the Board.
Royalties and Incentives
General
In addition to federal regulation, each province has legislation and regulations which govern royalties, production rates and other matters. The royalty regime in a given province is a significant factor in the profitability of crude oil, natural gas liquids, sulphur and natural gas production. Royalties payable on production from lands other than Crown lands are determined by negotiation between the mineral freehold owner and the lessee, although production from such lands is subject to certain provincial taxes and royalties. Royalties from production on Crown lands are determined by governmental regulation and are generally calculated as a percentage of the value of gross production. The rate of royalties payable generally depends in part on prescribed reference prices, well productivity, geographical location, field discovery date, method of recovery and the type or quality of the petroleum product produced. Other royalties and royalty like interests are, from time to time, carved out of the working interest owner's interest through non public transactions. These are often referred to as overriding royalties, gross overriding royalties, net profits interests, or net carried interests.
Occasionally the governments of the western Canadian provinces create incentive programs for exploration and development. Such programs often provide for royalty rate reductions, royalty holidays or royalty tax credits and are generally introduced when commodity prices are low to encourage exploration and development activity by improving earnings and cash flow within the industry.
Alberta
Producers of oil and natural gas from Crown lands in Alberta are required to pay annual rental payments, currently at a rate of $3.50 per hectare, and make monthly royalty payments in respect of oil and natural gas produced. On October 25, 2007, the Government of Alberta released a report entitled "The New Royalty Framework" ("NRF") containing the Government's proposals for Alberta's new royalty regime which were subsequently implemented by the Mines and Minerals (New Royalty Framework) Amendment Act, 2009. The NRF took effect on January 1, 2009.
With respect to conventional oil, the NRF eliminated the classification system used by the previous royalty structure which classified oil based on the date of discovery of the pool. Under the NRF, royalty rates for conventional oil are set by a single sliding rate formula which is applied monthly and incorporates separate variables to account for production rates and market prices. Royalty rates for conventional oil under the NRF range from 0-50%, an increase from the previous maximums of 30-35% depending on the vintage of the oil, and rate caps are set at $120 per barrel.
Royalty rates for natural gas under the NRF are similarly determined using a single sliding rate formula incorporating separate variables to account for production rates and market prices. Royalty rates for natural gas under the NRF range from 5-50%, an increase from the previous maximums of 5-35%, and rate caps are set at $17.75/GJ.
On April 10, 2008, the Government of Alberta introduced two new royalty programs to be implemented along with the NRF and intended to encourage the development of deeper, higher cost oil and gas reserves. A five-year program for conventional oil exploration wells over 2,000 m provides qualifying wells with up to a $1 million or 12 months of royalty relief, whichever comes first, and a five-year program for natural gas wells deeper than 2,500 m provides a sliding scale royalty credit based on depth of up to $3,750 per meter.
On November 19, 2008, in response to the drop in commodity prices experienced during the second half of 2008, the Government of Alberta announced the introduction of a five-year program of transitional royalty rates with the intent of promoting new drilling. The 5-year transition option is designed to provide lower royalties at certain price levels in the initial years of a well's life when production rates are expected to be the highest. Under this new program companies drilling new natural gas or conventional oil deep wells (between 1,000 and 3,500 m) are given a one-time option, on a well-by-well basis, to adopt either the new transitional royalty rates or those outlined in the NRF. In order to qualify for this program wells must be drilled during the period starting on November 19, 2008 and ending on December 31, 2013. Following this period all new wells drilled will automatically be subject to the NRF and wells that operated under the transitional royalty rates will revert to royalty rates determined by the NRF.
On March 3, 2009, the Government of Alberta announced a three-point incentive program in order to stimulate new and continued economic activity in Alberta. The program introduced a drilling royalty credit for new conventional oil and natural gas wells and a new well royalty incentive program, both applying to conventional oil or natural gas wells drilled between April 1, 2008 and March 31, 2010. The drilling royalty credit provides up to a $200 per meter royalty credit for new wells and is primarily expected to benefit smaller producers since the maximum credit available will be determined using the company's production level in 2008 and its drilling activity between April 1, 2009 and March 31, 2010, favouring smaller producers with lower activity levels. The new well incentive program will apply to wells that begin producing conventional oil or natural gas between April 1, 2009 and March 31, 2010 and provides for a maximum 5% royalty rate for the first 12 months of production, up to a maximum of 50,000 barrels of oil or 500 MMcf of natural gas. In June, 2009, the Government of Alberta announced the extension of these two incentive programs for one year to March 31, 2011.
In addition to the foregoing, Alberta currently maintains a royalty reduction program for low productivity oil and oil sands wells, a royalty adjustment program for deep marginal gas wells and a royalty exemption for re-entry wells, among others.
Land Tenure
Crude oil and natural gas located in the western provinces is owned predominantly by the respective provincial governments. Provincial governments grant rights to explore for and produce oil and natural gas pursuant to leases, licences, and permits for varying terms from two years, and on conditions set forth in provincial legislation including requirements to perform specific work or make payments. Oil and natural gas located in such provinces can also be privately owned and rights to explore for and produce such oil and natural gas are granted by lease on such terms and conditions as may be negotiated.
Each of the provinces of Alberta, British Columbia and Saskatchewan has implemented legislation providing for the reversion to the Crown of mineral rights to deep, non-productive geological formations at the conclusion of the primary term of a lease or license.
In Alberta, the NRF includes a policy of "shallow rights reversion" which provides, for the first time in western Canada, for the reversion to the Crown of mineral rights to shallow, non-productive geological formations for all leases and licenses. For leases and licenses issued subsequent to January 1, 2009, shallow rights reversion will be applied at the conclusion of the primary term of the lease or license. Holders of leases or licences that have been continued indefinitely prior to January 1, 2009 will receive a notice regarding the reversion of the shallow rights, which will be implemented three years from the date of the notice. The order in which these agreements will receive the reversion notice will depend on their vintage and location, with the older leases and licenses receiving reversion notices first beginning in January 2011. Leases and licences that were granted prior January 1, 2009 but continued after that date will not be subject to shallow rights reversion until they reach the end of their primary term and are continued (at which time deep rights reversion will be applied); thereafter, the holders of such agreements will be served with shallow rights reversion notices based on vintage and location similar to leases and licences that were already continued as of January 1, 2009.
Environmental Regulation
The oil and natural gas industry is currently subject to environmental regulations pursuant to a variety of provincial and federal legislation. Such legislation provides for restrictions and prohibitions on the release or emission of various substances produced in association with certain oil and gas industry operations, such as sulphur dioxide and nitrous oxide. In addition, such legislation requires that well and facility sites be abandoned and reclaimed to the satisfaction of provincial authorities. Compliance with such legislation can require significant expenditures and a breach of such requirements may result in suspension or revocation of necessary licenses and authorizations, civil liability for pollution damage, and the imposition of material fines and penalties. Implementation of strategies for reducing greenhouse gases could have a material impact on the nature of oil and the natural gas operations, including those of the Corporation. Given the evolving nature of the debate related to climate change and the control of greenhouse gases and resulting requirements, it is not possible to predict either the nature of those requirements or the impact on the Corporation and its operations and financial condition.
Global Financial Crisis
Recent market events and conditions, including disruptions in the international credit markets and other financial systems and the deterioration of global economic conditions, have caused significant volatility to commodity prices. These conditions worsened in 2008 and continued in 2009 and into 2010, causing a loss of confidence in the broader U.S. and global credit and financial markets and resulting in the collapse of, and government intervention in, major banks, financial institutions and insurers and creating a climate of greater volatility, less liquidity, widening of credit spreads, a lack of price transparency, increased credit losses and tighter credit conditions. Notwithstanding various actions by governments, concerns about the general condition of the capital markets, financial instruments, banks, investment banks, insurers and other financial institutions caused the broader credit markets to further deteriorate and stock markets to decline substantially. Although economic conditions improved towards the latter portion of 2009, these factors have negatively impacted company valuations and will impact the performance of the global economy going forward.
Petroleum prices are expected to remain volatile for the near future as a result of market uncertainties over the supply and demand of these commodities due to the current state of the world economies, OPEC actions and the ongoing global credit and liquidity concerns.
Substantial Capital Requirements
The Company anticipates making substantial capital expenditures for the acquisition, exploration, development and production of oil and natural gas reserves in the future. As the Company's revenues may decline as a result of decreased commodity pricing, it may be required to reduce capital expenditures. In addition, uncertain levels of near term industry activity coupled with the present global credit crisis exposes the Company to additional access to capital risk. There can be no assurance that debt or equity financing, or cash generated by operations will be available or sufficient to meet these requirements or for other corporate purposes or, if debt or equity financing is available, that it will be on terms acceptable to the Company. The inability of the Company to access sufficient capital for its operations could have a material adverse effect on the Company's business financial condition, results of operations and prospects.
Third Party Credit Risk
The Company may be exposed to third party credit risk through its contractual arrangements with its current or future joint venture partners, marketers of its petroleum and natural gas production and other parties. In the event such entities fail to meet their contractual obligations to the Company, such failures may have a material adverse effect on the Company's business, financial condition, results of operations and prospects. In addition, poor credit conditions in the industry and of joint venture partners may impact a joint venture partner's willingness to participate in the Company's ongoing capital program, potentially delaying the program and the results of such program until the Company finds a suitable alternative partner.
Critical Accounting Estimates
The reader is advised that the critical accounting estimates, policies, and practices as described in the Company's Management's Discussion and Analysis continue to be critical in determining Bellatrix's financial results.
The reader is cautioned that the preparation of financial statements in accordance with GAAP requires management to make certain judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses. The following discussion outlines accounting policies and practices that are critical to determining Bellatrix's financial results.
Reserves
The Company uses the full cost method of accounting for oil and gas properties. Generally, all costs of exploring and developing oil and natural gas reserves are capitalized and depleted against associated oil and natural gas production using the unit-of-production method based on the estimated proved reserves using forecast pricing. Estimating reserves is also critical to several accounting estimates and requires judgments and decisions based upon available geological, geophysical, engineering and economic data. Estimated reserves are also utilized by Bellatrix's bank in determining credit facilities. Reserves affect net income through depletion and the ceiling test calculation. Estimating reserves is very complex, requiring many judgments based on available geological, geophysical, engineering and economic data. Changes in these judgments could have a material impact on the estimated reserves. These estimates may change, having either a negative or positive effect on net earnings as further information becomes available, and as the economic environment changes. Changes in these judgments and estimates could have a material impact on the financial results and financial condition.
Asset retirement obligations
The discounted, expected future cost of statutory, contractual or legal obligations to retire long-lived assets are recorded as an Asset Retirement Obligation ("ARO") liability with a corresponding increase to the carrying amount of the related asset. The recorded ARO liability increases over time to its future amount through accretion charges to earnings. Revisions to the estimated amount or timing of the obligations are reflected as increases or decreases to the ARO liability. Amounts capitalized to the related assets are amortized to income consistent with the depletion or depreciation of the underlying asset.
Share based compensation
Options granted under the Share Option Plan to employees and the Board of Directors is accounted for in accordance with the fair-value based method of accounting. Accordingly, the stock based compensation expense is measured at the grant date based on the fair value, using the Black-Scholes model, and is expensed over the vesting period of the options using the graded vesting method. Determination of the fair value of options granted at the grant date requires judgment, including the expected share price volatility. The Company calculates volatility based on historical share price excluding specific time frames in which volatility was affected by specific transactions that are not considered to be indicative of the Company's normal share price volatility.
Fair value of derivatives
The fair value or mark-to-market value of commodity contracts is based on the estimated amount that would have been received or paid to settle the contracts as at December 31, 2009, and may be different from what will eventually be realized. Changes in the fair value of the commodity contracts are recognized in the Consolidated Statements of Loss within the financial statements. The actual gains and losses realized on eventual cash settlement can vary due to subsequent fluctuations in commodity prices.
Accounts receivable
The Company employs judgment to estimate the carrying value of accounts receivable. After making assessments of credit risk from customers and joint venture partners, the Company may provide for an allowance for doubtful accounts as required. Actual accounts receivable amounts collected in future periods may differ from these estimates.
Income taxes
In following the liability method of accounting for income taxes, related assets and liabilities are recognized for the estimated tax consequences between amounts included in the financial statements and their tax base using substantively enacted future income tax rates. Timing of future revenue streams and future capital spending changes can affect the timing of any temporary differences, and accordingly affect the amount of the future income tax liability calculated at a point in time. These differences could materially impact earnings.
Litigation outcomes
The Company is involved in various claims and litigation arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company's favor, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceeding related to these and other matters or any amount which it may be required to pay by reason thereof would have a material adverse impact on its financial position or results of operations.
With the above risks and uncertainties the reader is cautioned that future events and results may vary substantially from that which Bellatrix currently foresees.
Legal, Environmental Remediation and Other Contingent Matters
The Company reviews legal, environmental remediation and other contingent matters to both determine whether a loss is probable based on judgment and interpretation of laws and regulations and determine that the loss can reasonably be estimated. When the loss is determined, it is charged to earnings. The Company's management monitor known and potential contingent matters and make appropriate provisions by charges to earnings when warranted by the circumstances.
Controls and Procedures
Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide reasonable assurance that: (i) material information relating to the Company is made known to the Company's Chief Executive Officer and Chief Financial Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time period specified in securities legislation. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company's disclosure controls and procedures at the financial year end of the Company and have concluded that the Company's disclosure controls and procedures are effective at the financial year end of the Company for the foregoing purposes.
Internal Control over Financial Reporting
The Company's Chief Executive Officer and Chief Financial Officer have designed, or caused to be designed under their supervision, internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of financial statements for external purposes in accordance with the Canadian GAAP. Such officers have evaluated, or caused to be evaluated under their supervision, the effectiveness of the Company's internal control over financial reporting at the financial year end of the Company and concluded that the Company's internal control over financial reporting is effective, at the financial year end of the Company, for the foregoing purpose.
The Company is required to disclose herein any change in the Company's internal control over financial reporting that occurred during the period beginning on October 1, 2009 and ended on December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. No material changes in the Company's internal control over financial reporting were identified during such period, that has materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
It should be noted that a control system, including the Company's disclosure and internal controls and procedures, no matter how well conceived, can provide only reasonable, but not absolute, assurance that the objectives of the control system will be met and it should not be expected that the disclosure and internal controls and procedures will prevent all errors or fraud.
Sensitivity Analysis
The table below shows sensitivities to funds flow from operations as a result of product price and operational changes. This is based on actual average prices received for the fourth quarter of 2009 and average production volumes of 6,572 boe/d during that period, as well as the same level of debt outstanding at December 31, 2009. Diluted weighted average shares are based upon the fourth quarter of 2009. These sensitivities are approximations only, and not necessarily valid under other significantly different production levels or product mixes. Commodity price risk management activities can significantly affect these sensitivities. Changes in any of these parameters will affect funds flow as shown in the table below:
------------------------------------------------------------------------- Funds Flow Funds Flow from from Operations(1) Operations(1) Per Diluted (annualized) Share ------------------------------------------------------------------------- Sensitivity Analysis ($000s) ($) ------------------------------------------------------------------------- Change of US $1/bbl WTI 450 0.01 Change of $0.10/mcf 1,020 0.01 Change of US $0.01 Cdn/US exchange rate 260 - Change in prime of 1% 280 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) The highlights section contains the term "funds flow from operations" which should not be considered an alternative to, or more meaningful than cash flow from operating activities as determined in accordance with Canadian GAAP as an indicator of the Company's performance. Therefore reference to diluted funds flow from operations or funds flow from operations per share may not be comparable with the calculation of similar measures for other entities. Management uses funds flow from operations to analyze operating performance and leverage and considers funds flow from operations to be a key measure as it demonstrates the Company's ability to generate the cash necessary to fund future capital investments and to repay debt. The reconciliation between cash flow from operating activities and funds flow from operations can be found in the Management's Discussion and Analysis. Funds flow from operations per share is calculated using the weighted average number of common shares for the period.
Selected Quarterly Consolidated Information
The following table sets forth selected consolidated financial information of the Company for the eight most recently completed quarters at the end of 2009.
------------------------------------------------------------------------- 2009 - Quarter ended (unaudited) ($000s, except per unit amounts) March 31 June 30 Sept. 30 Dec. 31 ------------------------------------------------------------------------- Revenues before royalties and risk management 31,345 29,805 23,860 24,004 Cash flow from operating activities 9,311 6,467 12,150 2,743 Cash flow from operating activities per share Basic and Diluted $0.12 $0.08 $0.15 $0.03 Funds flow from operations(1) 6,489 10,765 11,090 7,681 Funds flow from operations per share(1) Basic and Diluted $0.08 $0.14 $0.14 $0.10 Net loss (9,056) (99,715) (9,363) (8,216) Net loss per share Basic and Diluted $(0.12) $(1.27) $(0.12) $(0.10) Net capital expenditures (cash) 2,764 (7,138) (81,986) 9,926 Distributions declared 1,570 - - - Distributions per share $0.02 - - - ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2008 - Quarter ended (unaudited) ($000s, except per share amounts) March 31 June 30 Sept. 30 Dec. 31 ------------------------------------------------------------------------- Revenues before royalties and risk management 70,033 82,074 72,225 41,053 Cash flow from operating activities 17,843 19,892 29,406 11,643 Cash flow from operating activities per share Basic and Diluted $0.23 $0.25 $0.37 $0.15 Funds flow from operations(1) 24,233 26,304 21,491 5,865 Funds flow from operations per share(1) Basic and Diluted $0.31 $0.33 $0.27 $0.07 Net income (loss) (18,621) (21,374) 29,939 (9,534) Net income (loss) per share Basic and Diluted $(0.24) $(0.27) $0.38 $(0.12) Net capital expenditures (cash) 2,862 (34,450) 13,779 16,471 Distributions declared 9,507 9,505 9,474 7,848 Distributions per share $0.12 $0.12 $0.12 $0.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to "Non-GAAP Measures" in respect of the term "funds flow from operations" and "funds flow from operations per unit".
The quarterly results for 2009 compared to 2008 were impacted by dispositions, fluctuating commodity prices, lower operating costs and reduced capital spending.
During the first half of 2008, Bellatrix was successful in completing the divestiture of its Dodsland-Stranraer property located in Saskatchewan and other non-core properties in Alberta for net proceeds of $44.3 million; the net proceeds from the dispositions were used to pay down debt. The dispositions reduced production volumes by approximately 1,000 boe/d. In the fourth quarter of 2008, Bellatrix closed the purchase of further working interests in the Mantario, Saskatchewan area for $4.3 million in cash after adjustments. The tuck-in acquisition added approximately 225 bbls/d of heavy oil production.
In the early part of 2009, the Company made an effort to reduce operating costs and general and administrative charges in light of the volatile economic environment. Capital spending was kept to a minimum and the Company concentrated on field optimization projects in order to arrest decline and maintain production. The Company was successful in the disposition of two minor properties in the second quarter and the majority of its Saskatchewan petroleum and natural gas properties in the third quarter. Total proceeds of approximately $92.9 million, after purchase adjustments and closing costs, were used to reduce the Company's indebtedness. The dispositions reduced production volumes by approximately 3,600 boe/d for third and fourth quarters. This compares to approximately 1,000 boe/d disposed of in the first half of 2008 for approximately $44.3 million.
Bellatrix invested approximately $36.7 million in exploration and development in 2008 compared to $15.8 million in 2009. Approximately 61% of the exploration and development expenditures occurred in the fourth quarter of 2009. Bellatrix was successful in adding 18 (11.68 net) gross wells in 2009 compared to Bellatrix's participation in 38 (17.1 net) gross wells in 2008. 4.2 net wells in 2008 were dry and abandoned.
Bellatrix's revenues, net loss, and funds flow from operations in 2008 and 2009 reflect its production base after considering the above noted dispositions, results of exploration and development expenditures, timing of plant turnarounds and other operational challenges, as well as significant fluctuations in commodity prices. WTI crude oil prices varied greatly throughout 2008, increasing significantly to a high of US$147/bbl in July and dramatically falling during the fourth quarter of 2008 with December 2008 prices of under US$40/bbl. WTI crude oil prices averaged over US$ 60/bbl through 2009.
The fluctuation in commodity prices, and production volumes over these periods resulted in a corresponding increase or decrease in the Company's petroleum and natural gas revenue, net income and funds flow from operations in the respective periods.
Selected Annual Information ------------------------------------------------------------------------- Years ended December 31, ($000s, except per unit amounts) (unaudited) 2009 2008 2007 ------------------------------------------------------------------------- Revenues before royalties and risk management 109,014 265,385 258,490 Cash flow from operating activities Cash flow from operating activities per share Funds flow from operations(1) 36,025 77,893 101,172 Funds flow from operations per share(1) Basic $0.46 $0.99 $1.33 Diluted $0.46 $0.98 $1.33 Net loss (126,620) (19,590) (24,267) Net loss per share Basic $(1.61) $(0.25) $(0.32) Diluted $(1.61) $(0.25) $(0.32) Net capital expenditures (cash) (76,434) (1,338) 57,094 Total assets 440,970 736,117 880,252 Total net debt(1)(2) 107,269 215,004 250,313 Long-term financial liabilities Future income taxes - 42,777 67,366 Asset retirement obligations 25,728 33,682 28,373 Exchangeable shares of subsidiary - 2,887 3,922 Production (boe/d) 8,426 11,867 16,139 Distributions declared 1,570 36,334 73,451 Distributions per share $0.02 $0.46 $0.96 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Refer to "Non-GAAP Measures" in respect of the term "funds flow from operations," "funds flow from operations per share," "net debt" and "total net debt.". (2) Net debt includes the net working capital deficiency before short- term commodity contract assets and liabilities and short-term future income tax assets and liabilities. Total net debt also includes the liability component of convertible debentures and excludes asset retirement obligations and the future income tax liability. BELLATRIX EXPLORATION LTD. CONSOLIDATED BALANCE SHEETS As at December 31 (unaudited) ------------------------------------------------------------------------- ($000s) 2009 2008 ------------------------------------------------------------------------- ASSETS Current assets Accounts receivable $ 20,722 $ 28,119 Marketable securities - 120 Deposits and prepaid expenses 4,940 5,969 Commodity contract asset (note 16) 3,374 3,726 ------------------------ 29,036 37,934 Property, plant and equipment (note 4) 410,566 698,183 Future income taxes (note 12) 1,368 - ------------------------ Total assets $ 440,970 $ 736,117 ------------------------ ------------------------ LIABILITIES Current liabilities Accounts payable and accrued liabilities $ 23,345 $ 34,128 Distributions payable - 1,570 Future income taxes (note 12) 960 1,100 ------------------------ 24,305 36,798 Long-term debt (note 5) 27,902 132,388 Convertible debentures (note 6) 81,684 81,124 Asset retirement obligations (note 7) 25,728 33,682 Future income taxes (note 12) - 42,777 ------------------------ Total liabilities 159,619 326,769 ------------------------ NON-CONTROLLING INTEREST Exchangeable shares of subsidiary (note 8) - 2,887 SHAREHOLDERS' EQUITY Shareholders' capital (note 1 and 9) 252,592 917,012 Equity component of convertible debentures (note 6) 5,037 5,119 Contributed surplus (note 10) 28,232 28,240 Accumulated other comprehensive income - (620) Deficit (note 9) (4,510) (543,290) ------------------------ (4,510) (543,910) ------------------------ ------------------------ Total shareholders' equity 281,351 406,461 ------------------------ Total liabilities and shareholders' equity $ 440,970 $ 736,117 ------------------------------------------------------------------------- ------------------------------------------------------------------------- COMMITMENTS (note 15) and SUBSEQUENT EVENT (note 17) See accompanying notes to the consolidated financial statements. BELLATRIX EXPLORATION LTD. CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS For the years ended December 31 (unaudited) ($000s) 2009 2008 ------------------------------------------------------------------------- REVENUES Petroleum and natural gas sales $ 109,014 $ 265,385 Royalties (17,554) (54,562) Gain (loss) on commodity contracts (note 16) 17,394 (14,154) ------------------------ 108,854 196,669 EXPENSES Production 45,015 66,573 Transportation 3,880 7,047 General and administrative 10,239 15,658 Interest and financing charges 13,657 14,822 Share-based compensation (notes 9 and 10) (159) 1,395 Depletion, depreciation and accretion 90,760 128,932 Provision for uncollectible accounts (note 16) 1,400 300 Loss on repurchase of convertible debentures (note 6) 51 - Loss on sale of marketable securities 501 - Loss on sale of petroleum and natural gas properties (note 4) 114,182 - Reorganization costs (note 1) 885 - ------------------------ 280,411 234,727 LOSS BEFORE TAXES (171,557) (38,058) TAXES Capital taxes - 2,025 Future income tax recovery (note 12) (44,448) (20,410) ------------------------ (44,448) (18,385) NET LOSS BEFORE NON-CONTROLLING INTEREST (127,109) (19,673) Non-controlling interest (489) (83) ------------------------ NET LOSS (126,620) (19,590) ------------------------ Unrealized loss on available for sale marketable securities (net of tax recovery of $0.1 million) - (620) ------------------------ COMPREHENSIVE LOSS $(126,620) $ (20,210) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss per share Basic $(1.61) $(0.25) Diluted $(1.61) $(0.25) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. BELLATRIX EXPLORATION LTD. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the years ended December 31 (unaudited) ($000s) 2009 2008 ------------------------------------------------------------------------- SHAREHOLDERS' CAPITAL Trust units of True Energy Trust Balance, beginning of year $ 917,012 $ 925,573 Repurchased under normal course issuer bid - (9,513) Exchangeable shares converted - 952 Reduction in capital for deficit (note 1) (666,818) - Exchanged for common shares of Bellatrix (note 1) (250,194) - ------------------------ Balance, end of year - 917,012 ------------------------ Common shares of Bellatrix Exploration Ltd. Balance, beginning of year - - Issued on corporate reorganization (note 1) 250,194 - Issued on conversion of exchangeable shares pursuant to reorganization (note 1) 2,398 - ------------------------ Balance, end of year 252,592 - ------------------------ 252,592 917,012 ------------------------ EQUITY COMPONENT OF CONVERTIBLE DEBENTURES Balance, beginning of year 5,119 5,119 Adjustment for repurchase of convertible debentures under normal course issuer bid (note 6) (82) - ------------------------ Balance, end of year 5,037 5,119 ------------------------ CONTRIBUTED SURPLUS Balance, beginning of year 28,240 19,454 Share-based compensation expense (note 9 and 10) 812 1,869 Share options voluntarily surrendered - 466 Adjustment of prior period share-based compensation expense for forfeitures of unvested share options (820) (526) Adjustment for repurchase of Trust units under normal course issuer bid - 6,977 ------------------------ Balance, end of year 28,232 28,240 ------------------------ DEFICIT Balance, beginning of year (543,290) (487,366) Distributions declared (1,570) (36,334) Reduction of deficit on Reorganization (note 1) 666,818 - Adjustment for repurchase of convertible debentures 152 - Net loss (126,620) (19,590) ------------------------ Balance, end of year (4,510) (543,290) ------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance, beginning of year (620) - Unrealized loss on available for sale marketable securities - (620) Realized loss on sale of marketable securities 620 - ------------------------ Balance, end of year - (620) ------------------------ ------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY $ 281,351 $ 406,461 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. BELLATRIX EXPLORATION LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31 (unaudited) ($000s) 2009 2008 ------------------------------------------------------------------------- Cash provided by (used in): CASH FLOW FROM OPERATING ACTIVITIES Net loss $(126,620) $ (19,590) Items not involving cash: Non-controlling interest (note 8) (489) (83) Depletion, depreciation and accretion 90,760 128,932 Share-based compensation (notes 9 and 10) (159) 1,395 Unrealized loss (gain) on commodity contracts (note 16) 352 (14,068) Accretion on convertible debentures (note 6) 1,895 1,717 Future income tax recovery (note 12) (44,448) (20,410) Loss on repurchase of convertible debentures (note 6) 51 - Loss on sale of marketable securities 501 - Loss on sale of petroleum and natural gas properties (note 4) 114,182 - Asset retirement costs incurred (note 7) (1,510) (2,603) Change in non-cash working capital (note 11) (3,844) 3,494 ------------------------ 30,671 78,784 CASH FLOW FROM (USED IN) FINANCING ACTIVITIES Decrease in bank debt (104,486) (36,087) Repurchase of trust units under normal course issuer bid - (2,536) Repurchase of convertible debentures under normal course issuer bid (1,315) - Distributions declared (1,570) (36,334) ------------------------ (107,371) (74,957) Change in non-cash working capital (note 11) (1,584) (4,873) ------------------------ (108,955) (79,830) CASH FLOW FROM (USED IN) INVESTING ACTIVITIES Additions to property, plant and equipment (16,487) (43,002) Proceeds on sale of property, plant and equipment 92,921 44,340 Proceeds on sale of marketable securities 349 - ------------------------ 76,783 1,338 Change in non-cash working capital (note 11) 1,501 (292) ------------------------ 78,284 1,046 Change in cash - - Cash, beginning of year - - ------------------------------------------------------------------------- Cash, end of year $ - $ - ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited) ------------------------------------------------------------------------- 1. CORPORATE STRUCTURE AND THE ARRANGEMENT Bellatrix Exploration Ltd. (the "Company" or "Bellatrix") is a growth oriented, public exploration and production company. The Company resulted from a reorganization (the "Reorganization) effective November 1, 2009 pursuant to a plan of arrangement (the "Arrangement") involving, among others, True Energy Trust (the "Trust" or "True"), Bellatrix Exploration Ltd. and securityholders of the Trust. Pursuant to the Reorganization, the Trust was restructured from an open-ended, unincorporated investment trust to Bellatrix Exploration Ltd., a publicly traded corporation. Unitholders of the Trust received an equal number of common shares of Bellatrix which holds the assets and liabilities previously held, directly or indirectly, by the Trust. Exchangeable shares of the Trust were exchanged for common shares of Bellatrix at the current exchange ratio in effect on the effective date. The outstanding convertible debentures of the Trust were assumed by Bellatrix as a result of the Arrangement and are now convertible into common shares of the Company, rather than trust units of the Trust, at a conversion price of $16.00 per share. All outstanding incentive unit rights to acquire Trust units of True became share options to acquire an equal number of common shares of Bellatrix Exploration Ltd. on the same terms and conditions, including as to exercise price, vesting and expiry dates. Pursuant to the Arrangement, the Unitholders' Capital of the Trust Units as of the effective date of November 1, 2009 was reduced by the amount of the deficit of the Trust on October 31, 2009 of $666.8 million. The cost of the Reorganization of $885,000 has been expensed during the year ended December 31, 2009. The Reorganization has been accounted for on a continuity of interest basis and accordingly, the consolidated financial statements for periods prior to the effective date of the Reorganization reflect the financial position, results of operations and cash flows as if the Company had always carried on the business formerly carried on by the Trust. Information herein with respect to Bellatrix includes information in respect of the Trust prior to completion of the Reorganization to the extent applicable unless the context otherwise requires. In addition, references to "common shares" and "shares", "Share Option Plan", and "options" should be read as references to "Units", "Unit Rights Incentive Plan", and "rights" respectively, for periods prior to November 1, 2009. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Company have been prepared by management in accordance with generally accepted accounting principles in Canada. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Amounts recorded for depreciation, depletion and amortization, asset retirement costs and obligations and amounts used for ceiling test and impairment calculations are based on estimates of natural gas, and crude oil reserves and future costs required to develop those reserves. Accounts receivable are recorded at the estimated recoverable amount which involves the estimates of uncollectable accounts. Share-based compensation involves the calculation of the option's fair value which includes the estimate of the Company's share price volatility. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be material. The consolidated financial statements have, in management's opinion, been properly prepared using careful judgment and reasonable limits of materiality and within the framework of the significant policies summarized below. a. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiary. Any reference to the "Company" throughout these consolidated financial statements refers to the Company and its subsidiary. All inter-entity transactions have been eliminated. b. Revenue Recognition Revenues from the sale of petroleum and natural gas are recorded when title to the products transfers to the purchasers based on volumes delivered and contracted delivery points and prices. c. Joint Interests A significant portion of the Company's exploration and development activities are conducted jointly with others and, accordingly, the financial statements reflect only the Company's proportionate interest in such activities. d. Petroleum and Natural Gas Properties The Company follows the full cost method of accounting for petroleum and natural gas operations whereby all costs related to the exploration and development of petroleum and natural gas reserves are capitalized. These costs include land acquisition costs, geological and geophysical expenses, the costs of drilling both productive and non-productive wells, directly related overhead and estimated abandonment costs. Proceeds from the disposal of properties are deducted from the full cost pool without recognition of a gain or loss unless such a sale would significantly alter the rate of depletion and depreciation. e. Depletion and Depreciation Depletion of petroleum and natural gas properties is provided using the unit-of-production method based on production volumes before royalties in relation to total estimated proved reserves as determined annually by independent engineers and determined in accordance with National Instrument 51-101. Natural gas reserves and production are converted at the energy equivalent of six thousand cubic feet to one barrel of oil. Calculations for depletion and depreciation of production equipment are based on total capitalized costs plus estimated future development costs of proved undeveloped reserves less the estimated net realizable value of production equipment and facilities after the proved reserves are fully produced. The costs of acquiring and evaluating unproved properties are excluded from depletion calculations. These properties are assessed periodically to ascertain whether impairment has occurred. When the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion. Depreciation of office furniture and equipment is provided for on a 20% declining balance basis. f. Ceiling Test The Company applies a two-stage ceiling test on the aggregate carrying value of its capitalized costs, which may be amortized against revenues of future periods. The first stage of this process is to ensure that such costs do not exceed the undiscounted future cash flows from production of proved reserves. Undiscounted future cash flows are calculated based on management's best estimate of forward indexed prices applied to estimated future production of proved reserves plus the carrying cost of undeveloped properties, less estimated future operating costs, royalties, future development costs and abandonment costs. When the carrying amount of a cost centre is not recoverable, the second stage of the process will determine the impairment whereby the cost centre would be written down to its fair value. The second stage requires the calculation of discounted future cash flows from proved plus probable reserves plus the carrying cost of undeveloped properties net of any impairment allowance. The fair value of proved and probable reserves is estimated using accepted present value techniques, which incorporate risks and other uncertainties when determining expected cash flows. The cost of undeveloped properties is excluded from the impairment test described above and subject to a separate impairment test. g. Asset Retirement Obligations The Company records a provision for the future retirement obligations associated with the Company's property, plant, and equipment. The fair value of the asset retirement obligation is recorded on a discounted basis. This amount is also capitalized as part of the cost of the related asset and amortized to expense over its useful life. The liability accretes until the Company settles the obligation. h. Environmental Liabilities The Company records liabilities on an undiscounted basis for environmental remediation efforts that are likely to occur and where the cost can be reasonably estimated. The estimates, including associated legal costs, are based on available information using existing technology and enacted laws and regulations. The estimates are subject to revision in future periods based on actual costs incurred or new circumstances. Any amounts expected to be recovered from other parties, including insurers, are recorded as an asset separate from the associated liability. i. Share-based Compensation Plan The Company accounts for Share Option Plan issued to employees and the Board of Directors using the fair value method. The fair value of each share option is estimated on the date of the grant using the Black-Scholes options pricing model and charged to earnings over the vesting period with a corresponding increase to contributed surplus. j. Income Taxes Income taxes are recorded using the liability method of tax allocation. Future income tax assets and liabilities are determined based on "temporary differences" and are measured using the current, or substantively enacted, tax rates and laws expected to apply when these differences reverse. A valuation allowance is recorded against any future income tax assets if it is more likely than not that the asset will not be realized. k. Exchangeable Shares of Subsidiary The exchangeable shares, which were issued by a subsidiary of the Trust, could have been traded privately, allowing holders of the exchangeable shares to dispose of them without having to exchange them for trust units; consequently they were classified as a non- controlling interest outside of the Trust's Unitholders' Equity. Upon conversion from the Trust to the Company (note 1) the exchangeable shares were fully exchanged for common shares of the Company. l. Financial Instruments All financial instruments, including all derivatives, are recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in income. Available- for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to income when derecognized or impaired. The Company has the following classifications: ------------------------------------------------------------------ Financial Assets and Liabilities Category ------------------------------------------------------------------ Accounts receivable Loans and receivables ------------------------------------------------------------------ Marketable securities Available-for-sale ------------------------------------------------------------------ Commodity risk management contracts Held-for-trading ------------------------------------------------------------------ Accounts payable and accrued liabilities Other liabilities ------------------------------------------------------------------ Distribution payable Other liabilities ------------------------------------------------------------------ Long-term debt Other liabilities ------------------------------------------------------------------ Convertible debentures Other liabilities ------------------------------------------------------------------ Transaction costs attributable to financial instruments classified as other than held-for-trading are included in the recognized amount of the related financial instrument and recognized over the life of the resulting financial instrument. The Company utilizes financial derivatives and non-financial derivatives, such as commodity sales contracts requiring physical delivery, to manage the price risk attributable to anticipated sale of petroleum and natural gas production and foreign exchange exposures. The Company does not enter into derivative financial instruments for trading or speculative purposes. The derivative financial instruments are initiated within the guidelines of the Company's commodity price risk management policy. This includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company accounts for its commodity sales and purchase contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts on an accrual basis rather than as derivatives. As such, physical sales and purchase contracts are not recorded at fair value on the balance sheet with changes in fair value included in earnings. Subsequent changes in fair value of derivatives that are not designated or do not qualify for hedge accounting or normal purchase, sale or usage contracts are recognized in net income as incurred. For derivatives that are designated and qualify for cash flow hedge accounting at inception or the date of adoption, the effective portion of the change in fair value is recognized in other comprehensive income as incurred with the remaining portion of the change in fair value recognized in net income as incurred in the same financial statement caption as the hedged transaction. Net derivative gains (losses) in accumulated other comprehensive income are reclassified to net income in the same financial statement caption and future periods as the hedged transactions affect net income. Financial instruments measured at fair value on the balance sheet require classification into one of the following levels of the fair value hierarchy: Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 - inputs for the asset or liability that are not based on observable market data. The fair value hierarchy level at which a fair value measurement is categorized is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. The Company has categorized its financial instruments that are fair valued on the balance sheet according to the fair value hierarchy (note 16). m. Capital Disclosures The Company considers its capital structure to include unitholders' equity, bank debt, convertible debentures and working capital. Handbook Section 1535, "Capital Disclosures" specify the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. n. Basic and Diluted per Share Calculations Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. The Company uses the treasury stock method to determine the dilutive effect of share options. Under the treasury stock method, only "in the money" dilutive instruments impact the diluted calculations in computing diluted per share amounts. The Company uses the "if- converted" method to determine the dilutive effect of convertible debentures. o. Cash and cash equivalents Cash and cash equivalents include cash and short-term investments with original maturities of three months or less. p. Financial Presentation and Disclosure Certain prior year comparative figures have been restated to conform to the current year's presentation. 3. CHANGES IN ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS During 2009, the Company adopted the following new accounting standards: a. Goodwill and Intangible Assets The Company adopted the Canadian Institute of Chartered Accountants ("CICA") new accounting standard, Section 3064 - "Goodwill and Intangible Assets", replacing Section 3062 - "Goodwill and Other Intangible Assets", and Section 3450 - "Research and Development Costs". The new section establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. Application of the new section did not have any impact on the Company's financial statements. b. Financial Instruments - Disclosures The CICA issued amendments to Section 3862 - "Financial Instruments - Disclosures" to include enhanced disclosures related to the fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. The amendments are effective for annual financial statements for fiscal years ending after September 30, 2009. The amendments are consistent with recent amendments to financial instrument disclosures standards in International Financial Reporting Standards ("IFRS"). The Company has included these additional disclosures in its annual Consolidated Financial Statements for the year ending December 31, 2009. c. Financial Instruments - Recognition and Measurement Effective July 2009, the CICA amended Section 3855 - "Financial Instruments - Recognition and Measurement", to prohibit the reclassification of a financial asset out of the held-for-trading category when the fair value of the embedded derivative in a combined contract cannot be reasonably measured. Amendments to this section also include a revised definition of "loans and receivables" and, provided that certain conditions have been met, permits reclassification of financial assets from the held-for- trading and available-for-sale categories into the loans and receivables category. The amendments also provide one method of assessing impairment for all financial assets regardless of classification. The adoption of the amendments to this standard did not have any impact on the Company's financial statements. d. Credit Risk and the Fair Value of Financial Assets and Financial Liabilities Effective January 1, 2009, the Company adopted CICA Emerging Issues Committee ("EIC") Abstract No. 173 - "Credit Risk and Fair Value of Financial Assets and Financial Liabilities". The EIC provides guidance on the implications of credit risk in determining the fair value of an entity's financial assets and financial liabilities. The guidance clarifies that an entity's own credit risk and the credit risk of counterparties should be taken into account in determining the fair value of financial assets and liabilities, including derivative instruments, for presentation and disclosure purposes. Adoption of this statement did not have an impact on the Company's financial statements. International Financial Reporting Standards ("IFRS") On February 13, 2008 the CICA Accounting Standards Board announced that Canadian public reporting issuers will be required to report under International Financial Reporting Standards ("IFRS"), which will replace Canadian generally accepted accounting principles for years beginning on or after January 1, 2011. Currently, we are assessing the effects of adoption and developing a plan accordingly. We will continue to monitor any changes in the adoption of IFRS and will update plans as necessary. 4. PROPERTY, PLANT AND EQUIPMENT ($000s) --------------------------------------------------------------------- Accumulated depletion and Net book December 31, 2009 Cost depreciation value --------------------------------------------------------------------- Petroleum and natural gas properties $ 949,892 $ 541,075 $ 408,817 Office furniture and equipment 4,045 2,296 1,749 --------------------------------------------------------------------- $ 953,937 $ 543,371 $ 410,566 --------------------------------------------------------------------- December 31, 2008 --------------------------------------------------------------------- Petroleum and natural gas properties $ 1,375,331 $ 679,196 $ 696,135 Office furniture and equipment 3,955 1,907 2,048 --------------------------------------------------------------------- $ 1,379,286 $ 681,103 $ 698,183 --------------------------------------------------------------------- --------------------------------------------------------------------- Petroleum and Natural Gas Properties Sold On July 30, 2009, the Company closed a divestiture for the majority of its petroleum and natural gas properties in Saskatchewan (the "Saskatchewan Divestiture") for net proceeds of approximately $85 million, net of closing adjustments and closing costs. The disposition was accounted for in accordance with Accounting Guideline 16 - "Oil and Gas Accounting - Full Cost". Under full cost accounting, if crediting the proceeds from disposition to costs results in a change of 20 percent or more to the depletion rate then a gain or loss on disposition should be recognized. When a gain or loss is to be recognized the total net book value of capitalized costs should be allocated between the properties sold and the properties retained. The carrying amount of the assets sold was an allocation of the Company's historical full cost pool based on a pro- rata ratio of future cash flows of proved reserves associated with the assets sold, discounted at 10%, as compared to all oil and gas assets on June 30, 2009. In the second quarter of 2009, the Company recorded a $114.2 million loss on the assets sold for the excess of the allocated net book value of the assets, compared to the total net proceeds, after purchase adjustments and closing costs, of approximately $85 million. Bellatrix has included $57.2 million (2008: $62.8 million) for future development costs and excluded $20.5 million (2008: $31.3 million) for undeveloped land and $27.8 million (2008: $42.5 million) for estimated salvage from the depletion calculation during the year ended December 31, 2009. For the year ended December 31, 2009, the Company capitalized $0.6 million (2008: $2.4 million) of general and administrative expenses and $0.2 million (2008: $0.6 million), including the future tax effect thereon of $0.1 million (2008: $0.1 million), of share- based compensation expense directly related to exploration and development activities. The Company performed a ceiling test calculation at December 31, 2009 resulting in undiscounted cash flows from proved reserves and the undeveloped properties exceeding the carrying value of oil and gas assets. No impairment in oil and gas assets was identified as at December 31, 2009 and 2008. The prices used in the ceiling test evaluation of the Company's crude oil and natural gas reserves at December 31, 2009 were based on the following benchmark price forecasts adjusted for quality and transportation differentials: --------------------------------------------------------------------- Hardisty Edmonton Heavy Light Sweet AECO Natural Year Crude Oil Crude Oil Gas ($/bbl) ($/bbl) ($/mmbtu) --------------------------------------------------------------------- 2010 67.67 83.57 5.79 2011 68.88 87.80 6.58 2012 69.14 91.06 6.83 2013 69.46 94.64 7.21 2014 71.07 97.74 7.61 2015 73.06 100.48 7.82 2016 74.55 102.51 8.05 2017 76.05 104.57 8.34 2018 77.57 106.66 8.64 2019 79.17 108.83 8.83 2020 80.72 111.00 9.00 Percentage increase each year after 2020 2% 2% 2% --------------------------------------------------------------------- --------------------------------------------------------------------- 5. LONG-TERM DEBT --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Operating facility $ 2,656 $ 7,388 Revolving term facility 25,246 125,000 --------------------------------------------------------------------- Balance, end of year $ 27,902 $ 132,388 --------------------------------------------------------------------- The credit facility was renewed as part of the corporate reorganization on November 1, 2009 and consists of a $10 million demand operating facility provided by a Canadian bank and a $75 million extendible revolving term credit facility provided by a Canadian bank and a Canadian financial institution. Amounts borrowed under the credit facilities bear interest at a floating rate based on the applicable Canadian prime rate, U.S. base rate or LIBOR rate, plus between 1.50% and 4.50%, depending on the type of borrowing and the Company's debt to cash flow ratio. The credit facilities are secured by a $400 million debenture containing a first ranking charge and security interest. Bellatrix has provided a negative pledge and undertaking to provide fixed charges over major petroleum and natural gas reserves in certain circumstances. A standby fee is charged of between 0.60% and 1.12% on the undrawn portion of the credit facilities, depending on the Company's debt to cash flow ratio. The revolving period for the revolving term credit facility will end on June 29, 2010, unless extended for a further 364-day period. Should the facility not be extended it will convert to a non- revolving term facility with the full amount outstanding due 366 days after the last day of the revolving period of June 29, 2010. The borrowing base will be subject to re-determination on March 31, 2010. Thereafter, a semi-annual re-determination of the borrowing base will occur, with the first such re-determination occurring on November 30, 2010 and each subsequent re-determination on May 30 and November 30 in each year prior to the maturity date. Payment will not be required under the revolving term facility for more than 365 days from December 31, 2009 and as there is sufficient availability under the revolving term credit facility to cover the operating facility, the entire amounts owing on the credit facilities have been classified as long-term. Pursuant to Bellatrix's credit facilities, the Company is permitted to pay the semi-annual interest payments on the Debentures, and payments by the Company to debenture holders in relation to the redemption of Debentures and in relation to debenture normal course issuer bids approved by the TSX, provided that the aggregate of all such normal course issuer bids and redemptions do not exceed $10.0 million in any fiscal year. As at December 31, 2009, approximately $57.1 million was not drawn under the existing facilities and Bellatrix was fully compliant with all of its debt covenants. 6. CONVERTIBLE DEBENTURES On June 15, 2006, the Trust completed a public offering of 86,250 7.5% convertible unsecured subordinated debentures at a price of $1,000 per debenture for aggregate gross proceeds of $86,250,000. Pursuant to the Reorganization, the convertible debentures have been assumed by Bellatrix. The convertible debentures have a face value of $1,000 per debenture and a maturity date of June 30, 2011. The convertible debentures bear interest at an annual rate of 7.50% payable semi-annually on June 30 and December 31 in each year. The debentures are convertible at anytime at the option of the holders into common shares of Bellatrix at a conversion price of $16.00 per common share. The Company has the right to redeem all or a portion of the debentures at a price of $1,050 per debenture after June 30, 2009 and on or before June 30, 2010 and at a price of $1,025 per debenture after June 30, 2010 and before the maturity date. Upon maturity or redemption of the debentures, the Company may, subject to notice and regulatory approval, pay the outstanding principal and premium (if any) on the debentures in cash or through the issue of additional common shares at 95% of the 20 day weighted average trading price for the common shares for the period ending the fifth trading day preceding the redemption date. As the debentures are convertible into common shares, they are considered to represent both debt and equity to the Company under generally accepted accounting standards. The debt component of the debentures was initially recorded at fair value of the obligation without the conversion feature. This fair value to make future payments of principal and interest was initially determined to be $81.1 million. The difference between the principal amount of $86.3 million and the fair value of the obligation was $5.1 million and has been recorded in shareholders' equity as the fair value of the conversion feature of the debentures. Issue costs of $4.0 million are recorded against the debt component of convertible debentures using the effective interest rate method. The debt component of the convertible debentures will accrete up to the principal balance at maturity. The accretion and the interest paid are expensed as interest and financing charges in the consolidated statement of operations. In November 2008, the Company received Toronto Stock Exchange approval for its normal course issuer bid program ("NCIB") to repurchase up to 10% of the issued and outstanding 7.50% convertible unsecured subordinated debentures of the Company from December 1, 2008 to November 30, 2009. In November 2009, the Company received Toronto Stock Exchange approval for its NCIB to repurchase up to 10% of the issued and outstanding 7.50% convertible unsecured subordinated debentures of the Company from December 1, 2009 to November 30, 2010. During the period of December 1, 2008 to November 23, 2009, True or Bellatrix acquired 986 debentures under the preceding NCIB and 380 debentures under the NCIB renewed on December 1, 2009. Associated with the 2009 NCIB repurchases at a cost of $1.3 million, the Company has recorded a loss on repurchase of debentures of $0.1 million and a reduction of the deficit of $0.2 million in connection with adjustments of debt and equity components of the convertible debentures, respectively. The following table sets forth a reconciliation of the convertible debentures: Convertible debentures --------------------------------------------------------------------- Debt Equity Number of Component Component Debentures ($000s) ($000s) --------------------------------------------------------------------- Balance, December 31, 2007 86,250 $ 79,407 $ 5,119 Accretion - 1,717 - --------------------------------------------------------------------- Balance, December 31, 2008 86,250 $ 81,124 $ 5,119 Accretion - 1,895 - Repurchased under normal course issuer bid(a) 1,366 (1,335) (82) --------------------------------------------------------------------- Balance, December 31, 2009 84,884 $ 81,684 $ 5,037 --------------------------------------------------------------------- --------------------------------------------------------------------- (a) As of December 31, 2009, of the 1,366 debentures repurchased, 28 debentures purchased pursuant to the NCIB had not yet been cancelled. These debentures were cancelled on January 8, 2010. 7. ASSET RETIREMENT OBLIGATIONS The Company's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $62.9 million which will be incurred between 2010 and 2054. A credit-adjusted risk-free rate of 8 percent and an inflation rate of 2.4 percent were used to calculate the fair value of the asset retirement obligation. --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Balance, beginning of year $ 33,682 $ 28,373 Incurred on development activities 584 784 Changes in prior period estimates 1,652 8,302 Reversed on dispositions (10,999) (3,333) Settled during the year (1,510) (2,603) Accretion expense 2,319 2,159 --------------------------------------------------------------------- Balance, end of year $ 25,728 $ 33,682 --------------------------------------------------------------------- --------------------------------------------------------------------- 8. EXCHANGEABLE SHARES OF SUBSIDIARY/NON-CONTROLLING INTEREST As a result of the 2005 conversion to a Trust, 843,304 exchangeable shares were issued by a subsidiary of the Trust. An unlimited number of exchangeable shares were authorized, issuable in series of which the first series in an unlimited number was designated for Series A exchangeable shares. The Series A exchangeable shares were non-voting (but holders were entitled to equivalent voting rights in the Trust) and could have been converted, at the option of the holder into trust units at any time. The number of trust units issued upon conversion was based on the exchange ratio in effect on the date of conversion. The exchange ratio was calculated monthly based on the five day weighted average trust unit trading price preceding the monthly effective date. The exchangeable shares were not eligible for cash distributions; however cash distributions increased the exchange ratio. Pursuant to the Reorganization, effective November 1, 2009, the issued and outstanding exchangeable shares were exchanged for common shares of Bellatrix based upon the exchange ratio in effect immediately prior to the effective time of the Arrangement. The following table summarizes the information regarding the exchangeable shares for the years ended December 31, 2009 and 2008: --------------------------------------------------------------------- December 31, 2009 December 31, 2008 Number Amount Number Amount ($000s) ($000s) --------------------------------------------------------------------- Balance, beginning of year 294,026 $ 2,887 390,276 $ 3,922 Non-controlling interest recovery - (489) - (83) Cancelled (8) - - - Converted pursuant to Reorganization (294,018) (2,398) (96,250) (952) --------------------------------------------------------------------- Balance, end of year - $ - 294,026 $ 2,887 --------------------------------------------------------------------- --------------------------------------------------------------------- 9. SHAREHOLDERS' EQUITY a. Trust Units The Trust Indenture provided for an unlimited number of trust units to be authorized and issued. Each trust unit was transferable, carried the right to one vote and represented an equal undivided beneficial interest in any distributions from the Trust and in the net assets of the Trust in the event of termination or winding-up of the Trust. All trust units were of the same class with equal rights and privileges. Trust units were redeemable at any time at the lesser of 90% of the market price (as determined in accordance with the Trust Indenture) and the closing price of the trust units on the date tendered for redemption to a maximum, unless waived, of $250,000 per calendar month in which case the redemption price was payable by distributing notes of the Trust's subsidiary or notes of the Trust. The Reorganization from the Trust to the Company, effective November 1, 2009, followed securityholder and regulatory approval pursuant to a Special Meeting. In connection with the Reorganization, the unitholders' capital was reduced by the deficit of the Trust as of October 31, 2009 of $666.8 million and trust units were exchanged for common shares of Bellatrix. ------------------------------------------------------------------ 2009 2008 Number Amount Number Amount ($000s) ($000s) ------------------------------------------------------------------ Balance, beginning of year 78,496,581 $ 917,012 79,216,046 $ 925,573 Repurchased under normal course issuer bid - - (814,300) (9,513) Exchangeable shares converted - - 94,835 952 Reduction in capital for deficit amount - 666,818) - - Exchanged for Bellatrix common shares (78,496,581) (250,194) - - ------------------------------------------------------------------ Balance, end of year - $ - 78,496,581 $ 917,012 ------------------------------------------------------------------ b. Common Shares Bellatrix is authorized to issue an unlimited number of common shares. ------------------------------------------------------------------ 2009 2008 Number Amount Number Amount ($000s) ($000s) ------------------------------------------------------------------ Balance, beginning of year - $ - - $ - Issued pursuant to Reorganization 78,496,581 250,194 - - Issued on conversion of exchangeable shares pursuant to Reorganization (note 1) 312,458 2,398 - - ------------------------------------------------------------------ Balance, end of year 78,809,039 $ 252,592 - $ - ------------------------------------------------------------------ Subsequent to December 31, 2009, Bellatrix issued 13,640,000 common shares as discussed in note 17. c. Share Option Plan In connection with the Arrangement, Bellatrix assumed all of the obligations of the Trust in respect of outstanding incentive rights. The Arrangement did not result in the acceleration of vesting of any outstanding incentive rights. Incentive rightsholders surrendered the incentive rights held by them in exchange for the same number of share options of Bellatrix, having the same terms as the incentive rights so held as to exercise price, vesting and expiry dates. Upon approval of the Arrangement effective November 1, 2009, Bellatrix has a Share Option Plan where the Company may grant share options to its directors, officers, employees and service providers. Under this plan, the exercise price of each share option is not less than the volume weighted average trading price of the Company's share price for the five trading days immediately preceding the date of grant. The maximum term of an option grant is five years. Option grants are non-transferable or assignable except in accordance with the Share Option Plan and the holding of share options shall not entitle a holder to any rights as a shareholder of Bellatrix. Share options, entitling the holder to purchase common shares of the Company, have been granted to directors, officers, employees and service providers of Bellatrix. One third of the initial grant of share options normally vests on each of the first, second, and third anniversary from the date of grant. Under the terms of the Trust's Incentive Plan, the exercise price of each True incentive right was initially equal to the per trust unit closing price on the trading day immediately preceding the date of grant, unless otherwise determined, and thereafter was reduced pursuant to a formula. The formula provided that the exercise price of each True incentive right was reduced by any decreases in the daily closing price on the Toronto Stock Exchange of the Trust Units, provided, however, that such decreases in the exercise price did not exceed the amount of Trust unit distributions. As of December 31, 2009, a total of 7,880,905 share options were reserved, leaving an additional 3,667,172 available for future grants. Following the closing of an equity offering in January 2010 (note 17), the Company has applied to the TSX for approval to increase the reserved share options to 9,244,903. The following tables summarize information regarding Bellatrix's Share Option Plan: Share Options Continuity(a) ------------------------------------------------------------------ Weighted Average Exercise Price(b) Number ------------------------------------------------------------------ Balance, December 31, 2007 $ 9.18 5,931,997 Granted $ 2.89 578,500 Forfeited and cancelled(c) $ 11.35 (3,809,997) ------------------------------------------------------------------ Balance, December 31, 2008 $ 3.97 2,700,500 Granted $ 1.44 3,295,800 Forfeited and cancelled $ 4.05 (1,782,567) ------------------------------------------------------------------ Balance, December 31, 2009 $ 2.01 4,213,733 (a) As a result of the Reorganization, the existing 4,067,733 incentive unit rights as of November 1, 2009, were exchanged for an equal number of common share options of Bellatrix with the same terms as to exercise price, vesting and expiry dates. (b) Exercise prices prior to the November 1, 2009 reorganization reflect grant prices less reduction in exercise prices for rights issued under the Trust unit incentive plan. (c) Total forfeited and cancelled in the year ended December 31, 2008 includes 2,191,250 incentive units which were voluntarily surrendered by existing employees, directors, and consultants of the Trust and were cancelled in July 2008. Share Options Outstanding, December 31, 2009 --------------------------------------------------------------------- Outstanding Exercisable Weighted Weighted Average At Average Remaining At Dec. 31, Exercise Contractual Dec. 31, Exercise Exercise Price 2009 Price Life 2009 Price --------------------------------------------------------------------- $ 0.65 - $ 0.83 459,641 $ 0.68 4.3 - - $ 1.07 - $ 1.50 1,015,631 $ 1.35 4.3 - - $ 1.64 - $ 2.00 1,847,628 $ 1.88 4.3 85,000 $ 1.70 $ 2.47 - $ 3.94 445,833 $ 2.55 3.0 274,823 $ 2.52 $ 3.98 - $ 5.57 445,000 $ 4.90 2.5 284,156 $ 4.93 --------------------------------------------------------------------- --------------------------------------------------------------------- $ 0.65 - $ 5.57 4,213,733 $ 2.01 4.0 643,979 $ 3.47 --------------------------------------------------------------------- --------------------------------------------------------------------- Unit Rights Outstanding, December 31, 2008 --------------------------------------------------------------------- Outstanding Exercisable Weighted Average Exercise Exercise Price Weighted Price Net of Average Net of Exercise Price At Price Remaining At Price Net of Dec. 31, Reduc- Contractual Dec. 31, Reduc- Reductions(a) 2008 tions(a) Life 2008 tions(a) --------------------------------------------------------------------- $ 1.66 - $ 2.49 1,018,000 $ 2.30 4.2 252,981 $ 2.49 $ 2.60 - $ 4.31 279,500 $ 3.54 4.5 - - $ 4.25 - $ 5.59 1,378,000 $ 5.06 3.4 459,316 $ 5.06 $16.97 - $16.97 25,000 $16.97 1.9 25,000 $16.97 --------------------------------------------------------------------- --------------------------------------------------------------------- $ 1.66 - $16.97 2,700,500 $ 3.97 3.8 737,297 $ 3.73 --------------------------------------------------------------------- --------------------------------------------------------------------- (a) Reductions in exercise prices were only applicable to True Unit Incentive Rights. Bellatrix's Share Option Plan does not provide for any reductions in exercise price. d. Employee Option Savings Plan Effective October 1, 2006, the Company introduced an employee unit savings plan for the benefit of all employees. Effective November 1, 2009, with the Reorganization, the employee unit savings plan continued as the employee option savings plan. Under the options savings plan, employees may elect to contribute up to 10 percent of their salary and contributions are used to fund the acquisition of common shares. The Company matches employee contributions at a rate of $1.00 for each $1.00 contributed. Shares are purchased in the open market by the plan administrator, an investment firm, on behalf of the participants in the plan. For the year ended December 31, 2009, the Company matched $0.1 million (2008 - $0.5 million) under the plan. In March 2009, the Company suspended matching contributions under the plan until further notice. 10. CONTRIBUTED SURPLUS --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Balance, beginning of year $ 28,240 $ 19,454 Share-based compensation expense 812 1,869 Share options voluntarily surrendered - 466 Adjustment of prior period share-based compensation expense for forfeitures of unvested incentive units (820) (526) Adjustment for repurchase of Trust units under NCIB - 6,977 --------------------------------------------------------------------- Balance, end of year $ 28,232 $ 28,240 --------------------------------------------------------------------- --------------------------------------------------------------------- Share-based Compensation Expense During the year ended December 31, 2009, Bellatrix granted 3,295,800 (2008: 578,500) share options. Of the outstanding share options granted during the year, 2,363,929 share options have an exercise price that is higher than the Company's share market price on the grant date. The share options for which the exercise price is higher than the Company's share market price on the grant date have a weighted average fair value of $0.2715 per option and an average exercise price of $1.70. The remaining share options have a weighted average fair value of $0.4684 per option. During the year ended December 31, 2009, the Company recorded share-based compensation of $0.8 million, of which $0.2 million was capitalized to property, plant and equipment. The fair values of all share options granted are estimated on the date of grant using the Black-Scholes option-pricing model. The weighted average fair market value of share options granted during the years ended December 31, 2009 and 2008 and the assumptions used in their determination are as noted below: --------------------------------------------------------------------- 2009 2008 --------------------------------------------------------------------- Assumptions: Risk free interest rate (%) 2-3 3 Expected life (years) 5 5 Expected volatility (%) 69-104 26-57 --------------------------------------------------------------------- Results: Weighted average fair value of each share option granted $ 0.31 $ 1.10 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. SUPPLEMENTAL CASH FLOW INFORMATION Cash Interest and Taxes Paid --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Cash paid: Interest $ 10,104 $ 14,041 Taxes (net of refunds) $ (272) $ 1,409 --------------------------------------------------------------------- Change in Non-cash Working Capital --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Changes in non-cash working capital items: Accounts receivable $ 7,397 $ 21,029 Deposits and prepaid expenses 1,029 127 Accounts payable and accrued liabilities (10,783) (18,060) Distributions payable (1,570) (4,767) --------------------------------------------------------------------- $ (3,927) $ (1,671) --------------------------------------------------------------------- Changes related to: Operating activities $ (3,844) $ 3,494 Financing activities (1,584) (4,873) Investing activities 1,501 (292) --------------------------------------------------------------------- --------------------------------------------------------------------- $ (3,927) $ (1,671) --------------------------------------------------------------------- --------------------------------------------------------------------- 12. INCOME TAXES True was a mutual fund trust as defined under the Income Tax Act (Canada). All taxable income earned by the Trust prior to the Reorganization was allocated to unitholders and such allocations were deducted for income tax purposes. Bellatrix is a corporation as defined under the Income Tax Act (Canada) and is subject to Canadian federal and provincial taxes. Bellatrix is subject to provincial taxes in Alberta, British Columbia and Saskatchewan as the Company operates in those jurisdictions. Future income taxes reflect the tax effects of differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for tax purposes. As at December 31, 2009, Bellatrix has approximately $400 million in tax pools available for deduction against future income. Included in this tax basis are estimated non-capital loss carry forwards of approximately $13 million that expire in years through 2027. As a result of the conversion from the Trust to the Company, approximately $1.7 million in tax pools related to trust unit issue costs were forfeited. The provision for income taxes differs from the expected amount calculated by applying the combined Federal and Provincial corporate income tax rate of 29.39% (2008: 30.10%) to loss before taxes. This difference results from the following items: --------------------------------------------------------------------- Years ended December 31 ($000s) 2009 2008 --------------------------------------------------------------------- Expected income tax recovery $ (50,421) $ (11,456) Distributions deducted for tax purposes (575) (11,276) Share based compensation expense (47) 420 Change in tax rates 6,746 3,133 Other (151) (1,231) --------------------------------------------------------------------- Future income tax recovery $ (44,448) $ (20,410) --------------------------------------------------------------------- The components of the net future income tax liability at December 31 are as follows: --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Future income tax liabilities: Petroleum and natural gas properties $ (10,306) $ (64,478) Commodity contract asset (958) (1,100) Other - (565) Future income tax assets: Future site restoration/asset retirement obligation 6,652 9,053 Share issue costs 58 656 Non-capital losses 3,728 11,331 Attributed Canadian Royalty Income 1,209 1,209 Other 25 17 --------------------------------------------------------------------- Net future income tax asset (liability) $ 408 $ (43,877) --------------------------------------------------------------------- --------------------------------------------------------------------- 13. PER SHARE AMOUNTS --------------------------------------------------------------------- 2009 2008 --------------------------------------------------------------------- Basic common shares outstanding, as at December 31 78,809,039 78,496,581 Dilutive effect of: Share options outstanding 4,213,733 2,700,500 Units issuable for exchangeable shares - 300,433 Shares issuable for convertible debentures 5,305,250 5,390,625 --------------------------------------------------------------------- Diluted common shares outstanding 88,328,022 86,888,139 --------------------------------------------------------------------- Weighted average shares outstanding 78,548,800 78,985,481 Dilutive effect of exchangeable shares, share options and convertible debentures(1) - - --------------------------------------------------------------------- Diluted weighted average shares outstanding 78,548,800 78,985,481 --------------------------------------------------------------------- (1) A total of 4,213,733 (2008: 2,700,500) share options, nil (2008: 300,433) exchangeable shares and 5,305,250 (2008: 5,390,625) common shares issuable pursuant to the conversion of convertible debentures were excluded from the calculation for the year ended December 31, 2009 as they were not dilutive. 14. RELATED PARTY TRANSACTIONS During the year ended December 31, 2009, the Company incurred fees of $1.1 million (2008: $0.6 million) for legal services provided by a firm in which a director and corporate secretary is a partner. The services provided were made in the normal course of operations, on commercial terms, and therefore were recorded at the exchange amount. As at December 31, 2009, an amount due to this firm of $0.1 million was included in accounts payable (2008: $0.1 million). 15. COMMITMENTS The Company is committed to payments under fixed term operating leases which do not currently provide for early termination. The Company's commitment for office space is as follows: --------------------------------------------------------------------- ($000s) Gross Expected Year Amount Recoveries Net amount --------------------------------------------------------------------- 2010 2,153 1,084 1,069 2011 2,207 970 1,237 2012 2,218 1,005 1,213 2013 2,218 1,035 1,183 2014 1,479 703 776 --------------------------------------------------------------------- 16. FINANCIAL RISK MANAGEMENT a. Overview The Company has exposure to the following risks from its use of financial instruments: - Credit risk - Liquidity risk - Market risk This note presents information about the Company's exposure to each of the above risks, 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. b. Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's trade receivables from joint venture partners, petroleum and natural gas marketers, and financial derivative counterparties. A substantial portion of the Company's accounts receivable are with customers and joint interest partners in the petroleum and natural gas industry and are subject to standard industry credit risks. The Company sells substantially all of its production to five primary purchasers under normal industry sale and payment terms. Purchasers of the Company's natural gas, crude oil and natural gas liquids are subject to an internal credit review to minimize the risk of non- payment. The Company has continued to closely monitor and reassess the creditworthiness of its counterparties, including financial institutions. This has resulted in the Company reducing or mitigating its exposures to certain counterparties where it is deemed warranted and permitted under contractual terms. Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. The Company's policy to mitigate credit risk associated with these balances is to establish marketing relationships with a range of medium to large purchasers and to conduct credit reviews of these parties on a regular basis. 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 partner approval of significant capital expenditures prior to expenditure. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling, in addition further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint venture partners; however, in certain instances the Company does have the ability to withhold production from joint venture partners in the event of non-payment. Bellatrix recorded a $1.4 million provision for uncollectible accounts for the year ended December 31, 2009 (2008: $0.3 million). As at December 31, 2009, accounts receivable was comprised of the following: --------------------------------------------------------------------- Not past due Past due (less than (90 days Aging ($000s) 90 days) or more) Total --------------------------------------------------------------------- Joint venture and other trade accounts receivable 2,446 2,988 5,434 Amounts due from government agencies 2,404 703 3,107 Revenue and other accruals 9,103 316 9,419 Cash call receivables 899 666 1,565 Plant revenue allocation receivable - 2,532 2,532 Less: Allowance for doubtful accounts - (1,335) (1,335) --------------------------------------------------------------------- Total accounts receivable 14,852 5,870 20,722 --------------------------------------------------------------------- Less: Accounts payable due to same partners (1,104) (457) (1,561) Subsequent receipts (11,639) (764) (12,403) --------------------------------------------------------------------- 2,109 4,649 6,758 --------------------------------------------------------------------- Amounts due from government agencies include drilling royalty credits, Alberta Royalty Tax Credit, GST and royalty and other adjustments. Plant revenue allocation receivable includes amounts under dispute over plant revenue allocations, net of expenses, from an operator. The Company has commenced legal action for collection of these amounts. Accounts payable due to same partners includes amounts which may be available for offset against certain receivables. The carrying amount of accounts receivable and derivative assets represents the maximum credit exposure. The Company has an allowance for doubtful accounts as at December 31, 2009 of $1.3 million. c. 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 make reasonable efforts to sustain 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 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 5, which is reviewed at least annually by the lender. The Company attempts to match its payment cycle with collection of petroleum and natural gas revenues on the 25th of each month. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. The following are the contractual maturities of financial liabilities as at December 31, 2009: --------------------------------------------------------------------- Financial liability (less than) ($000s) 1 Year 1-2 Years 2-5 Years Thereafter --------------------------------------------------------------------- Accounts payable and accrued liabilities 23,345 - - - Bank debt - principal(1) - 27,902 - - Convertible debentures - principal(2) - 84,884 - - Convertible debentures - interest(3) 6,368 3,158 - - --------------------------------------------------------------------- Total 29,713 115,944 - - --------------------------------------------------------------------- (1) Bank debt is based on a revolving term which is reviewed annually and converts to a 366 day non-revolving facility if not renewed. Subsequent to December 31, 2009, bank indebtedness was temporarily reduced as a result of an equity issuance as disclosed in note 17. (2) The principal amount of the convertible debentures includes the cancellation of the $28,000 principal amount of debentures that were purchased by the Company under its NCIB during the year ended December 31, 2009 but not cancelled until January 8, 2010. (3) Convertible debentures outstanding at December 31, 2009 bear interest at a coupon rate of 7.5%, which currently requires total annual interest payments of $6.4 million. Interest due on the bank credit facility is calculated based upon floating rates. d. 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. Foreign currency exchange rate risk Foreign currency exchange rate risk is the risk that the fair value of 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 dollar. As at December 31, 2009, if the Canadian/US dollar exchange rate had decreased by US$0.01 with all other variables held constant, after tax net earnings for the year ended December 31, 2009 would have been approximately $0.2 million lower. An equal and opposite impact would have occurred to net earnings had the Canadian/US dollar exchange rate increased by US$0.01. The Company had no forward exchange rate contracts in place as at or during the year ended December 31, 2009. Commodity price risk Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian and United States dollar, as outlined above, but also world economic events that dictate the levels of supply and demand. The Company utilizes both financial derivatives and physical delivery sales contracts to manage commodity price risks. All such transactions are conducted in accordance with the commodity price risk management policy that has been approved by the Board of Directors. The Company's formal commodity price risk management policy permits management to use specified price risk management strategies including fixed price contracts, costless collars and the purchase of floor price options, other derivative financial instruments, and physical delivery sales contracts to reduce the impact of price volatility and ensure minimum prices for a maximum of eighteen months beyond the current date. The program is designed to provide price protection on a portion of the Company's future production in the event of adverse commodity price movement, while retaining significant exposure to upside price movements. By doing this, the Company seeks to provide a measure of stability to cash flows from operating activities, as well as, to ensure Bellatrix realizes positive economic returns from its capital developments and acquisition activities. As at December 31, 2009, the Company had entered into commodity price risk management arrangements as follows: ------------------------------------------------------------------------- Price Price Type Period Volume Floor Ceiling Index ------------------------------------------------------------------------- Natural Gas Jan. 1, 2010 to 5,000 $ 8.00 CDN $ 8.00 CDN AECO fixed March 31, 2010 GJ/day Natural Gas Jan. 1, 2010 to 5,000 $ 7.16 CDN $ 7.16 CDN AECO fixed March 31, 2010 GJ/day Natural Gas April 1, 2010 to 5,000 $ 6.59 CDN $ 6.59 CDN AECO fixed June 30, 2010 GJ/day Natural Gas April 1, 2010 to 5,000 $ 5.53 CDN $ 5.53 CDN AECO fixed June 30, 2010 GJ/day Natural Gas July 1, 2010 to 10,000 $ 5.66 CDN $ 5.66 CDN AECO fixed Sept. 30, 2010 GJ/day Natural Gas Oct. 1, 2010 to 10,000 $ 6.245 CDN $ 6.245 CDN AECO fixed Dec. 31, 2010 GJ/day Natural Gas Jan. 1, 2010 to 5,000 $ - $ 8.05 CDN AECO call option Dec. 31, 2010 GJ/day Oil collar Jan. 1, 2010 to 500 $ 75.00 CDN $ 101.15 CDN WTI Dec. 31, 2010 bbl/d ------------------------------------------------------------------------- Subsequent to December 31, 2009, the Company entered into commodity price risk management arrangements as follows: ------------------------------------------------------------------------- Price Price Type Period Volume Floor Ceiling Index ------------------------------------------------------------------------- Natural Gas Feb. 1, 2010 to 5,000 $ 5.35 CDN $ 5.35 CDN AECO fixed March 31, 2010 GJ/day Natural Gas Feb. 1, 2010 to 5,000 $ 5.52 CDN $ 5.52 CDN AECO fixed Dec. 31, 2010 GJ/day Natural Gas April 1, 2010 to 5,000 $ 5.57 CDN $ 5.57 CDN AECO fixed Dec. 31, 2010 GJ/day ------------------------------------------------------------------------- For the years ended December 31, 2009 and 2008, the gain (loss) on commodity contracts was comprised of the following: --------------------------------------------------------------------- ($000s) 2009 2008 --------------------------------------------------------------------- Gain (loss) on commodity contracts Realized(1) $ 17,746 $ (28,222) Unrealized(2) (352) 14,068 --------------------------------------------------------------------- $ 17,394 $ (14,154) --------------------------------------------------------------------- (1) Realized gains and losses on commodity contracts represent actual cash settlements and other amounts paid under these contracts. (2) Unrealized gains and losses on commodity contracts represent non- cash adjustments for changes in the fair value of these contracts during the period. As at December 31, 2009, if oil and natural gas liquids prices had been US$1 per barrel and natural gas prices $0.10 per mcf lower, with all other variables held constant, after tax net earnings for the year ended December 31, 2009 would have been approximately $1.0 million lower. An equal and opposite impact would have occurred to net earnings had oil and natural gas liquids prices been US$1 per barrel and natural gas $0.10 per mcf higher. 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 bank debt which bears a floating rate of interest. As at December 31, 2009, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the year ended December 31, 2009 would have been approximately $0.2 million higher, due to lower interest expense. An equal and opposite impact would have occurred to net earnings had interest rates been 1% higher. The Company had no interest rate swap or financial contracts in place as at or during the year ended December 31, 2009. e. Capital management The Company's policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Company considers its capital structure to include shareholders' equity, bank debt, convertible debentures and working capital. In order to maintain or adjust the capital structure, the Company may from time to time issue common shares, adjust its capital spending, and/or dispose of certain assets to manage current and projected debt levels. The Company monitors capital based on the ratio of total net debt to annualized funds flow (the "ratio"). This ratio is calculated as total net debt, defined as outstanding bank debt, plus the liability component of convertible debentures, plus or minus working capital (excluding commodity contract assets and liabilities and future income tax assets or liabilities), divided by funds flow from operations (cash flow from operating activities before changes in non-cash working capital and deductions for asset retirement costs) for the most recent calendar quarter, annualized (multiplied by four). The total net debt to annualized funds flow ratio may increase at certain times as a result of acquisitions, fluctuations in commodity prices, timing of capital expenditures and other factors. In order to facilitate the management of this ratio, the Company prepares annual capital expenditure budgets which are reviewed and updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. Given the uncertain economic conditions experienced in 2009, the Company revised its 2009 capital spending, suspended distributions in February 2009 and successfully divested the majority of its Saskatchewan petroleum and natural gas properties in July 2009 in order to increase financial flexibility. Bellatrix does not pay dividends to its shareholders. Subsequent to December 31, 2009 (note 17), the Company closed an equity issuance on a bought deal basis to further the Company's financial flexibility. The Company plans to continue to monitor forecasted debt levels to manage its operations within forecasted funds flow. Bellatrix expects the total net debt to annualized funds flow ratio to reflect its strategic accomplishments in reducing the Company's total net debt while funds flow are exposed to the current volatile economic environment. The Company will continue to monitor developments within the global economic environment to consider the impacts on the current or future lending arrangements. The Company's long-term strategy, under a more stable economic environment, is to target a total net debt to annualized funds flow ratio of 2.0 times. As at December 31, 2009, the Company's ratio of total net debt to annualized funds flow based on fourth quarter results was 3.5 times. The total net debt to annualized funds flow ratio as at December 31, 2009 decreased from that at December 31, 2008 of 9.2 times due significant reduction in the Company's long term debt, offset slightly by lower annualized funds flow from operations. The Company expects this ratio to decrease through 2010 as total net debt levels are reduced as a result of the recent January 2010, equity issuance, forecasted funds flow and capital expenditures for 2010. Bellatrix continues to take a balanced approach to the priority use of funds flows. The Debentures have a maturity date of June 30, 2011. Upon maturity; the Company may settle the principal in cash or issuance of additional common shares. Excluding Debentures, net debt to annualized funds flow based on fourth quarter results was 0.8 times. Bellatrix's capital structure and calculation of total net debt and total net debt to funds flow ratios as defined by the Company is as follows: --------------------------------------------------------------------- Years ended December 31, ($000s, except where noted) 2009 2008 --------------------------------------------------------------------- Shareholders' equity 281,351 404,461 Long-term debt 27,902 132,388 Convertible debentures (liability component) 81,684 81,124 Working capital (surplus) deficiency (2,317) 1,490 --------------------------------------------------------------------- Total net debt(1) at year end 107,269 215,002 Debt to funds flow from operations ratio (annualized)(2) Funds flow from operations (annualized) 30,724 23,460 Total net debt(1) to periods funds flow from operations ratio (annualized) 3.5x 9.2x Net debt(1) (excluding convertible debentures) at quarter end 25,585 133,880 Net debt to periods funds flow from operations ratio (annualized) 0.8x 5.7x Debt to funds flow from operations ratio Funds flow from operations for the year 36,025 77,893 Total net debt(1) to funds flow from operations for the year 3.0x 2.8x Net debt(1) (excluding convertible debentures) to funds flow from operations for the year 0.7x 1.7x --------------------------------------------------------------------- (1) Net debt includes the net working capital deficiency (excess) before short-term commodity contract assets and liabilities and short-term future income tax assets and liabilities. Total net debt also includes the liability component of convertible debentures and excludes asset retirement obligations and the future income tax liability. (2) Debt to funds flow from operations ratio annualized is calculated based upon fourth quarter funds flow from operations annualized. The above ratios are expected to decrease in 2010 as a result of the receipt of $42.7 million net proceeds from the January 2010 equity issuance as disclosed in note 17. The Company's credit facility is based on petroleum and natural gas reserves (see note 5). The credit facility outlines limitations on percentages of forecasted production, from external reserve engineer data, which may be hedged through financial commodity price risk management contracts. The Company also has outstanding normal course issuer bids for its convertible debentures as detailed in note 6. f. Fair value of financial instruments The Company's financial instruments as at December 31, 2009 include accounts receivable, deposits, commodity contract asset, accounts payable and accrued liabilities, long-term debt and convertible debentures. The fair value of accounts receivable, deposits, accounts payable and accrued liabilities approximate their carrying amounts due to their short-terms to maturity. The fair value of commodity contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes. The fair value of commodity contracts as at December 31, 2009 was an asset of $3.4 million (2008: $3.7 million). The commodity contracts are classified as level 2 within the fair value hierarchy. Long-term bank debt bears interest at a floating market rate and the credit and market premiums therein are indicative of current rates; accordingly the fair market value approximates the carrying value. The fair value of the convertible debentures of $84.5 million is based on exchange traded values. The convertible debentures are classified as level 1 within the fair value hierarchy. 17. SUBSEQUENT EVENT On January 28, 2010, Bellatrix closed an equity issuance to sell 13.64 million common shares on a bought deal basis at a price of $3.30 per share for gross proceeds of $45.0 million (net proceeds of $42.7 million after underwriter fees and before other closing costs). The net proceeds from this financing were used to temporarily reduce outstanding indebtedness, thereby freeing up borrowing capacity that may be redrawn to fund Bellatrix's ongoing capital expenditure program and for general purposes. ADDITIONAL INFORMATION Oil and Gas Working Interest(1) Gross Reserves --------------------------------------------------------------------- Reconciliation of Proved Reserves(2) --------------------------------------------------------------------- Crude oil Coal bed Natural Equivalent & NGL methane gas units (mbbl) (mmcf) (mmcf) (mboe) --------------------------------------------------------------------- December 31, 2008 9,868 1,656 78,969 23,306 Revision of previous estimates 427 128 183 479 Discoveries, extensions, infill drilling and improved recovery 1,006 - 6,283 2,054 Dispositions, net of acquisitions (5,453) - (5,050) (6,296) Production (1,045) (266) (11,772) (3,051) --------------------------------------------------------------------- December 31, 2009 4,803 1,518 68,613 16,492 --------------------------------------------------------------------- Proved plus probable reserves December 31, 2009 7,096 1,950 109,976 25,750 December 31, 2008 17,781 2,090 126,892 39,278 --------------------------------------------------------------------- (1) "Working interest" refers to Bellatrix's working interest (operated or non-operated) share before deduction of royalties and without including any royalty interests of Bellatrix. Also referred to as Company Gross under NI 51-101. (2) Forecast prices before royalties.
Bellatrix Exploration Ltd. is a Western Canadian based growth oriented oil and gas company engaged in the exploration for, and the acquisition, development and production of oil and natural gas reserves in the provinces of Alberta, British Columbia and Saskatchewan. Common shares and convertible debentures of Bellatrix trade on the Toronto Stock Exchange ("TSX") under the symbols BXE and BXE.DB, respectively.
For further information: For further information: Raymond G. Smith, P.Eng., President and CEO, (403) 750-2420; or Edward J. Brown, CA, Vice President, Finance and CFO, (403) 750-2655; or Troy Winsor, Investor Relations, (800) 663-8072; Bellatrix Exploration Ltd., 2300, 530 - 8th Avenue SW, Calgary, Alberta, Canada, T2P 3S8, Phone: (403) 266-8670, Fax: (403) 264-8163, www.bellatrixexploration.com
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