Petrolifera Petroleum reports Q1 2008 results and schedules conference call May 9, 2008, 9:00 A.M. MT
15:19 EDT Thursday, May 08, 2008
CALGARY, May 8 /CNW/ - Petrolifera Petroleum Limited (TSX: PDP) reports steady growth during the first quarter of 2008 with sales up 12 percent and cash flow per share up 14 percent over the fourth quarter of 2007. During the period Petrolifera drilled 16 new wells in Argentina, substantially completed its Puesto Morales Norte production facilities and activated its pressure maintenance program. Since year end, a significant followup well at Rinconada has been drilled, resulting in a Sierras Blancas discovery which, after a frac treatment, flowed light gravity crude oil at approximately 800 bbl/d and is presently producing at a rate of approximately 460 bbl/d through a 10 millimetre choke. Also, the company will shortly be testing several indicated hydrocarbon-bearing zones in its PME x-1002 well. The first well on this block is a Loma Montosa natural gas discovery.
The company anticipates commencing drilling in Colombia during the third quarter 2008. Subsequent thereto and over the ensuing 18 month period, the company plans a continuous program comprised of drilling high impact wells in both Colombia and Peru.
Against a backdrop of regulated energy prices in Argentina and regulatory delays anticipated in Peru to secure approval of the company's drilling Environmental Impact Assessment ("EIA"), Petrolfiera has decided to reduce its capital budget for 2008 to $102 million compared to a previously-announced level of $140 million. This primarily reflects the probable deferral of the startup of drilling in Peru until 2009.
These Q1 2008 results will be subject to a Conference Call event at 9:00 A.M MT, May 9, 2008. To listen to or participate in the live conference call please dial either (416) 644-3424 or (800) 587-1893. A replay of the event will be available from May 9, 2008 at 11:00 a.m. MT until May 16, 2008 at 11:59 p.m. MT. To listen to the replay please dial either (416) 640-1917 or 877-289-8525 and enter the passcode 21270831 followed by the pound sign.
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HIGHLIGHTS
- Sales and cash flow growth restored
- Profitability retained despite provision for ABCP impairment
- ABCP headed towards resolution
- Facilities completed, operational at Puesto Morales Norte, Argentina
- Focus moving to plans for Colombian and Peruvian drilling
- High impact Colombian and Peruvian wells anticipated throughout
second half of 2008, all of 2009
Summary Results
Three months ended
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March 31, December 31, March 31,
2008 2007 2007
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FINANCIAL ($000 except per
share amounts)
Total revenue 27,167 27,266 47,122
Cash flow from operations before
working capital changes(1) 11,902 10,707 24,615
Per share, basic(1) 0.24 0.21 0.56
Per share, diluted(1) 0.23 0.21 0.49
Net earnings for the period 1,738 4,863 15,069
Per share, basic 0.04 0.10 0.34
Per share, diluted 0.03 0.09 0.30
Capital expenditures 31,056 57,608 7,514
Working capital including bank debt (51,546) (31,779) 58,811
Bank debt 53,039 29,612 -
Shareholders' equity 127,225 120,303 98,124
Total assets 231,278 204,227 137,840
OPERATING
Daily sales volumes
Crude oil - bbl/d 6,726 6,565 11,333
Natural gas - mcf/d 7,044 2,860 1,858
Barrels of oil equivalent -
boe/d(2) 7,900 7,042 11,643
Average selling prices
Oil - $/bbl 41.99 44.36 45.43
Natural gas - $/mcf 2.20 1.76 1.53
Barrels of oil equivalent - $/boe(2) 37.72 42.07 44.47
COMMON SHARES OUTSTANDING (000s)
Weighted average
Basic 50,212 50,123 43,800
Diluted 51,562 51,689 50,635
End of period
Issued 50,353 50,127 44,029
Fully diluted 51,572 51,670 53,280
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(1) Cash flow from operations before working capital changes ("cash
flow") and cash flow per share do not have standardized meanings
prescribed by Canadian generally accepted accounting principles
("GAAP") and therefore may not be comparable to similar measures used
by other companies. Cash flow includes all cash flow from operating
activities and is calculated before changes in non-cash working
capital. The most comparable measure calculated in accordance with
GAAP would be net earnings. Cash flow is reconciled with net earnings
on the Consolidated Statements of Cash Flows and in the accompanying
Management's Discussion & Analysis. Management uses these non-GAAP
measurements for its own performance measures and to provide its
shareholders and investors with a measurement of the company's
efficiency and its ability to fund a portion of its future growth
expenditures.
(2) All references to barrels of oil equivalent (boe) are calculated on
the basis of 6 mcf : 1bbl. Boes may be misleading, particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.
>>
LETTER TO SHAREHOLDERS
Your company achieved its objective of steady growth during the first quarter of 2008. Our sales of both crude oil and natural gas increased over the fourth quarter of 2007. On an equivalent basis, sales rose 12 percent to reach 7,900 boe/d, with much of the increase deriving from increased natural gas sales with the completion of the company's high pressure gas line from Puesto Morales Norte to Medanito. Significantly, natural gas prices rose 25 percent to accompany the 146 percent improvement in natural gas sales volumes, on a successive or quarter over quarter basis. This improvement in crude oil and natural gas sales is almost entirely attributable to new drilling, which more than offset normal declines. This occurred while we completed most of our permanent facilities at Puesto Morales Norte. We were unable to achieve the record results of a year ago, when we experienced flush production from our new discovery wells at Puesto Morales Norte and registered the company's record set of quarterly results.
During the quarter, our water supply, treatment and waterflood facilities were substantially completed and we expect to see some measurable impact of the waterflood later in 2008 as it ramps up towards full effectiveness in mid-2009, after more injectors are drilled and injection rates are escalated. This should provide a more stable, manageable and predictable production profile for Puesto Morales Norte in upcoming years.
Our progress at Puesto Morales was achieved despite serious dislocations in the Argentinean economy during the latter half of 2007 and into 2008. These dislocations included shortages of natural gas and equipment, along with emerging inflationary pressures, especially from labor. Also, the industry continues to be adversely affected by Argentina's regulated pricing policy, which is limiting cash flow from current production, traditionally the source of reinvestment capital. Price regulation is prevalent for both crude oil and natural gas and, as a consequence, there is growing evidence of a slowdown of new investment throughout the Argentinean oil and natural gas industry. Our experience is that capital will always move to opportunities in jurisdictions which afford a more attractive market-driven return on investment. This activity slowdown is unfortunately already evident in Argentina and is likely to continue unless changes are made near-term.
Against this backdrop, Petrolifera has maintained a respectable reinvestment rate, with capital expenditures continuing to be made at levels considerably in excess of cash flow, in order to maintain its asset base in Argentina while meeting all commitments. This dislocation clearly cannot persist. We believe an indicated near term response from the policy makers in respect of fairer and more appropriate energy pricing is now overdue; further delays will only exacerbate existing and looming issues of energy supply shortfalls and lead to a further reduction in investment, which would only accelerate the deterioration.
During the first quarter 2008, Petrolifera's capital expenditures totaled $31.1 million. These investments were made in Argentina, Peru and Colombia. In Argentina, outlays of $23 million were invested in the drilling of 16 wells (which resulted in eight oil wells, one natural gas well (undergoing a long-term test), one abandoned well, two water injector wells and four wells awaiting completion or drilling at the end of the period) and to complete our Puesto Morales Norte facilities. Initial drilling on Puesto Morales Este yielded dissapointing but commercial results and the PME x-1002 well has been cased for testing after drilling and logging; testing is warranted but expectations for the well are guarded. Drilling of these wells completes our negotiated commitment on this block. The balance of the capital program was largely incurred in Peru for the company's 2D seismic program on Ucayali Block 107.
This level of total capital expenditure again exceeded cash flow. In Argentina, our investments were more than double our corporate cash flow. As a result, the company's indebtedness increased by about $23 million to approximately $53 million, which while higher than we would prefer is clearly at a level well within the company's financial capacity, especially when evaluated in relation to its anticipated annualized cash flow and credit capacity. Nevertheless, this rising indebtedness has been forced upon the company as it carries out its chosen level of capital expenditures while we await the resolution of the status of our investment in Asset Backed Commercial Paper ("ABCP"). Our ABCP investments, which total approximately $38 million, have regrettably been frozen since August of last year. We have participated to the extent possible in the process of trying to resolve and unwind this impasse, which has effectively sterilized these investments. You may recall they were sold to us by our banker as cash-equivalent, highly-rated and liquid paper. Your company made a provision for impairment of the value of this investment in each of the last two quarters and charged this against its earnings. A similar non-cash charge has been provided for in this quarter, which again reduced net income for the first quarter 2008.
On April 25, 2008 a vote to determine if the Plan of Arrangement proposed by the Pan-Canadian Investors Committee for third-Party Structured ABCP ("the Committee") was accepted by the majority of investors holding ABCP. A fairness hearing will now be held and thereafter the full impact of the resolution may be more appropriately measurable, although liquidity and the timing thereof remains uncertain. Resolution of this difficult and unfortunate situation has been protracted, seemingly insensitive to the interests of corporate holders of ABCP, such as Petrolifera and the situation is unprecedented in the annals of the Canadian money market.
Despite the lack of current liquidity afforded by our ABCP holdings, we continue to have access to considerable unutilized credit to supplement our internally generated funds so we can continue to conduct our desired programs, but we are monitoring our financial condition constantly with balance sheet strength foremost in our minds and with our insistence to only financing development activity with debt. We are hopeful some resolution will permit us to significantly reduce our current level of indebtedness and restore our balance sheet to its rightful strength.
During the remainder of 2008, we expect a developmental multi-well drilling program will continue in Argentina on our Puesto Morales Norte, Este and Rinconada blocks. We also anticipate exploratory drilling will be initiated on each of our Vaca Mahuida and Gobernador Ayala II blocks, following the completion, processing and interpretation of our ongoing 3D seismic programs.
In Colombia, we have identified three drillable prospects with interesting and meaningful potential on our Sierra Nevada I Block and with rig availability to be finalized, anticipate commencement of drilling in the late summer of 2008.
In Peru, our seismic program on Block 107 has been progressing favorably and we recently decided to shoot an expanded program to follow up leads developed by our primary activity in the region. We continue to plan for drilling in Peru for as early a date as will be facilitated by the government's approval of our drilling Environmental Impact Assessment ("EIA") and selection of a suitable rig for an adequate period to facilitate the prospect of a multi-well program, especially if early success is achieved. We also await approval of our seismic EIA for Maranon Block 106, where drilling will not occur until 2009.
Your company is confident of its future. We have already experienced higher productivity and sales since the end of the reporting period, with daily sales levels approaching 10,000 boe/d on occasion. Once our waterflood begins to impact on adjacent well productivity, further gains can be anticipated without the level of pressure decline on overall well productivity through the production process. This will be reinforced with the drilling of additional injector wells during the year, accompanied by a higher injection rate to replace voidage which has occurred during production.
Later in the year, shareholders will be exposed to high potential drilling in Colombia and subsequently in Peru. In the process of preparing for very high cost drilling in new countries, we have strengthened our staff and assigned new responsibilities to our senior managers in Argentina, as expertise is accessed for our Colombian project. Even with our healthy level of cash generation and the level of unused credit available to the company, we may also give consideration to the introduction of some form of risk management through farmout or other form of joint venture activity, or capital strengthening alternatives, as a result of the unfortunate and unnecessary effect which the status of our ABCP investment has placed on what previously had been a debt free balance sheet. Against this backdrop, we have decided to scale back our planned 2008 capital program to $102 million from a previously announced level of $140 million. While this may have a modest impact on anticipated production levels in Argentina during the balance of the year, the reduction primarily reflects deferral of Peruvian drilling until early 2009. We believe this is prudent awaiting resolution of the ABCP situation and in light of prevailing regulatory limitations on realizations in Argentina in a credit-conscious environment.
We appreciate the continued support of all our shareholders. Now that our Argentinean facilities construction program is virtually complete, we can again focus on new exploration opportunities and continued growth, at a measured pace and with a more controllable cost structure than that which usually results from reliance on and access to third party facilities.
FORWARD-LOOKING INFORMATION:
This press release contains forward-looking information, including but not limited to future exploration and development plans, future drilling plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, and potential recovery of investments in ABCP. Forward-looking information is not based on historical facts but rather on Management expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities. Such forward-looking information reflects Management's current beliefs and assumptions and is based on information currently available to Management. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking information including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.
Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions and availability. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the company's waterflood program. Indicated flow rates from production testing are not necessarily indicative of sustainable production rates for such wells.
Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts, the restoration of liquidity in this market and approval of the proposed restructuring proposal. There can be no assurance as to the timing or extent of recovery of this investment.
Due to the risks, uncertainties and assumptions inherent in forward-looking information, prospective investors in the company's securities should not place undue reliance on this forward-looking information. Forward-looking information contained in this press release is made as of the date hereof and is subject to change. The company assumes no obligation to revise or update forward-looking information to reflect new circumstances, except as required by law.
For further information
Richard A Gusella
Executive Chairman
Petrolifera Petroleum Limited
Phone: (403) 538-6201, Fax: (403) 538-6225
inquiries@petrolifera.ca, www.petrolifera.ca
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following is dated as of May 8, 2008 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three months ended March 31, 2008 as contained in this interim report and the MD&A and audited financial statements for the years ended December 31, 2007 and 2006 as contained in the company's 2007 Annual Report. Additional information relating to Petrolifera, including its Annual Information Form for the year ended December 31, 2007, is on SEDAR at www.sedar.com. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars. This MD&A provides management's view of the financial condition of the company and the results of its operations for the reporting periods indicated.
This interim report, including the MD&A and letter to shareholders, contains forward-looking information, including but not limited to future exploration and development plans and the anticipated timing associated therewith, anticipated capital expenditures and sources of funding in respect thereof, anticipated production growth from planned capital programs, current production and the recently activated waterflood, anticipated reductions in operating costs and potential recovery of investments in asset backed commercial paper ("ABCP"). This information is based on current expectations that involve a number of risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. Additional risks and uncertainties are described in the company's Annual Information Form which is filed on SEDAR at www.sedar.com.
Forecast capital expenditures are based on Petrolifera's current budgets and development plans which are subject to change based on commodity prices, market conditions, drilling success and potential timing delays. Petrolifera's capital budget has been prepared based upon anticipated costs for equipment and services which are subject to fluctuation based upon market conditions, availability and potential changes or delays in capital expenditures. Additionally, forecast capital expenditures do not include capital required to pursue future acquisitions. Anticipated production growth has been estimated based on (i) the proposed drilling program with a success rate based upon historical drilling success and an evaluation of the particular wells to be drilled and has been risked, (ii) current production and anticipated decline rates and (iii) the projected impact of the company's waterflood program. Recovery of the company's investment in ABCP is dependent on the value of the underlying assets held by the applicable trusts and the restoration of liquidity in this market. There can be no assurance as to the timing or extent of recovery of this investment. Due to the risks, uncertainties and assumptions inherent in forward-looking information, prospective investors in the company's securities should not place undue reliance on this forward-looking information. Readers should review the risk factors set forth in the company's Annual Information Form, available at www.sedar.com, for a detailed description of the risks and uncertainties facing the company. Forward-looking information contained in this interim report is made as of May 8, 2008 and is subject to change. The company assumes no obligation to revise or update forward-looking information to reflect new circumstances, except as required by law. Throughout the MD&A, per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boes and may be misleading, particularly if used in isolation.
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FINANCIAL AND OPERATING REVIEW
SALES VOLUMES, PRICING AND REVENUE
-------------------------------------------------------------------------
March 31, December 31, March 31,
Three months ended 2008 2007 2007
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Daily sales volumes
Oil - bbl/d 6,726 6,565 11,333
Natural gas - mcf/d 7,044 2,860 1,858
Total - boe/d 7,900 7,042 11,643
Average selling prices
Crude oil - per bbl $41.99 $44.36 $45.43
Natural gas - per mcf 2.20 1.76 1.53
Revenue per boe $37.72 $42.07 $44.47
Petroleum and natural gas sales ($000) $27,114 $27,257 $46,598
Interest and other income ($000) 53 9 524
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Total revenue ($000s) $27,167 $27,266 $47,122
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Petroleum and natural gas sales for the three months ended March 31, 2008 were $27.1 million (three months ended March 31, 2007 - $46.6 million) on sales of 6,726 bbl/d (2007 - 11,333 bbl/day) of crude oil and 7.0 mmcf/d (2007 - 1.9 mmcf/d) of natural gas. The decrease in revenue resulted from lower crude oil pricing and lower crude oil production and sales volumes. These short-falls arose due to delays in the implementation of the company's reservoir pressure maintainance program (water flood), natural production declines and the incursion of water at one of the company's key wells, PMN-1013, offset by improved natural gas sales and prices. All production was from the company's Argentinean properties.
Crude oil sales decreased 41 percent from the first quarter of 2007. In the three months ended March 31, 2008 sales of crude oil represented 85 percent of the company's sales volumes; in the three months ended March 31, 2007 crude oil sales represented 97 percent of the sales volumes. Argentinean crude oil selling prices reflect world prices for the respective quality of oil, adjusted for the impact of Argentinean export taxes on domestic sales prices. The company does not receive world crude oil pricing for its crude oil produced in Argentina, due to export taxes that establish a limit on the realized crude oil price that a company can receive at approximately US$42.00 per barrel. Compared to last year, the realized crude oil price decreased eight percent to average $41.99 per barrel in the three months ended March 31, 2008, mainly due to the implementation of the resultant limit on oil prices that can be received. Natural gas prices increased 44 percent to average $2.20 per mcf in 2008, reflecting the company's new natural gas sales contract and some relaxation of regulated Argentinean natural gas prices, which are still substantially below prices prevailing in North American markets. All of Petrolifera's production is sold in domestic Argentinean markets. Natural gas prices have been improving and are expected to continue improving in the future due to market conditions and new policy initiatives aimed at market deregulation. Petroleum and natural gas revenues for the three months ended March 31, 2008 were essentially flat compared to the fourth quarter of 2007. Crude oil sales were up two percent, natural gas sales were up 146 percent and sales on a boe basis were up 12 percent compared to the fourth quarter of 2007.
Interest and other income of $0.1 million in the three months ended March 31, 2008 and $0.5 million for three months ended March 31, 2007 related to interest earned on short-term cash deposits. The company has an investment of $37.7 million face value in non-bank asset backed commercial paper ("ABCP") on which no interest income has been accrued since August 2007, due to the lack of liquidity for these investments. There are also fair value concerns for these investments and they have been classified as a long term investment on the balance sheet. See "Long-Term Investments" for additional details including estimates of valuation.
ROYALTIES
Royalties represent charges against production or revenue by governments and landowners. Included in royalties are revenue taxes levied by provincial jurisdictions. Royalties in the first three months of 2008 were $3.4 million ($4.71 per boe), or 13 percent of oil and gas revenue compared to $5.9 million ($5.59 per boe) or 13 percent in the first quarter of 2007.
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OPERATING COSTS AND NETBACKS
Company Netbacks(1)
-------------------------------------------------------------------------
Three months
ended March 31, 2008 December 31, 2007 March 31, 2007
-------------------------------------------------------------------------
Total Per boe Total Per boe Total Per boe
-------------------------------------------------------------------------
($000, except
per unit
amounts)
-------------------------------------------------------------------------
Average daily
sales (boe/d) 7,900 7,042 11,643
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Petroleum and
natural gas
sales $27,114 $37.72 $27,257 $42.07 $46,598 $44.47
Interest and
other income 53 0.07 9 0.01 524 0.50
Royalties (3,384) (4.71) (3,730) (5.76) (5,855) (5.59)
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Net revenue 23,783 33.08 23,536 36.32 41,267 39.38
Operating
costs (5,925) (8.24) (5,312) (8.20) (4,612) (4.40)
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Corporate
netback $17,858 $24.84 $18,224 $28.12 $36,655 $34.98
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(1) Calculated by dividing related revenue and costs by total boe sold,
resulting in an overall company netback. Netbacks do not have a
standardized meaning prescribed by GAAP and therefore may not be
comparable to similar measures used by other companies. Nevertheless,
Petrolifera's management uses netbacks as a performance measurement
of operating efficiency and the prevailing royalty regime. A high
ratio of netback to selling price is a positive indicator.
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Petrolifera's corporate netbacks decreased 29 percent over those recorded in the the first quarter of 2007. This primarily reflects the decreased price received for crude oil, a higher proportion of natural gas in the sales volumes which has a lower sales price and higher unit operating costs.
Operating costs in the first quarter of 2008 increased 28 percent in total and 87 percent on a per unit basis from 2007. The increases are mainly attributable to a significant increase in the number of wells, a significant increase in the number of wells on pump or that require servicing on a more frequent basis, inflationary pressures and start-up costs related to new field facilities. Petrolifera anticipates unit operating costs will be more stable after the new field facilities are optimally utilized which is expected to occur during the remainder of 2008 and throughout 2009.
Operating costs increased 12 percent in total and were essentially flat on a per unit basis compared to the fourth quarter of 2007.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses were $2.1 million ($2.87/boe) in the first three months of 2008 (first quarter 2007 - $1.4 million - $1.36/boe), reflecting costs incurred in Canada, Argentina, Colombia and Peru. These costs primarily consist of management and administrative salaries, legal and professional fees, insurance, travel and other administrative expenses. The increase from 2007 is attributable to increased staffing levels to handle the expanded nature of the company's operations and increased public company costs. Non-cash stock-based compensation costs of $2.4 million were recorded in the first three months of 2008 (2007 - $2.9 million), reflecting the calculated value of the stock options granted and vesting during the period and options previously granted that vested during the period.
FOREIGN EXCHANGE
The impact of fluctuations in the Argentinean peso and the US dollar relative to the Canadian dollar arising from settling foreign-denominated transactions and from translating foreign denominated financial statements and operating results of its integrated foreign operations resulted in a foreign exchange loss of $0.1 million in the first three months of 2008 (first quarter 2007 - $0.1 million loss). The company's main exposure to foreign currency risk relates to the pricing of crude oil sales, costs and capital expenditures which are denominated in US dollars and Argentinean pesos.
FAIR VALUE IMPAIRMENT - ABCP
In recognition of the loss of liquidity in the company's ABCP investment, provision has been made in the financial statements for a charge for a non-cash fair value impairment charge of $1.5 million. The cumulative effect of the current quarter and previous impairments represents approximately 20 percent of the face value of the investment at the time of the loss of liquidity in the Canadian commercial paper market. The basis for this charge is explained under "Long-Term Investments." It is not known when or whether these amounts can or will be recovered.
DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")
DD&A is calculated using the unit-of-production method based on total estimated proved reserves. DD&A in the first three months of 2008 was $4.7 million (first quarter 2007 - $5.4 million) or $6.49 per boe (first quarter 2007 - $5.15 per boe). DD&A is lower in total compared to the first quarter of 2007 due to the lower sales volume but is higher on a per unit basis because of the significant amount invested in 2007, especially on facilities. DD&A includes a charge of $0.1 million (2007 - $0.04 million) to accrete the company's estimated asset retirement obligation. These charges will continue to be necessary in future to accrete the currently booked discounted liability of $6.3 million over the estimated remaining economic life of the company's oil and gas properties. Capital costs of $8.6 million related to unevaluated properties in Argentina and for major development projects and other assets in the pre-production stage principally related to the Colombian and Peruvian assets, have been excluded from depletable costs (2007 - $6.4 million).
CEILING TEST
Oil and gas companies are required to compare the recoverable value of their oil and gas assets to their recorded carrying value at the end of each reporting period. Excess carrying values over fair value are to be written off against earnings. No write-down was required in 2008 or 2007.
TAXES
The current income tax provision of $2.7 million for the first three months of 2008 (first quarter 2007 - $10.2 million) primarily relates to income taxes in Argentina. Additionally, a future income tax provision of $1.3 million (2007 - $1.1 million) was recorded to recognize changes in tax pool balances. The increase in the effective tax rate to 70 percent in the first quarter of 2008 compared to 43 percent in 2007 is primarily due to the impairment recorded on ABCP. Taxes other than income taxes of $0.5 million (2007 - $0.4 million) represent taxes charged on all banking transactions in Argentina.
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NET EARNINGS AND SHARES OUTSTANDING
-------------------------------------------------------------------------
Three months
ended March 31, 2008 December 31, 2007 March 31, 2007
-------------------------------------------------------------------------
Total Per boe Total Per boe Total Per boe
-------------------------------------------------------------------------
($000, except
per unit
amounts)
-------------------------------------------------------------------------
Netback $17,858 $24.84 $18,224 $28.12 $36,655 $34.98
-------------------------------------------------------------------------
General &
adminis-
trative (2,062) (2,87) (1,647) (2.54) (1,421) (1.35)
-------------------------------------------------------------------------
Stock-based
compensation (2,398) (3.34) (1,414) (2.18) (2,921) (2.79)
-------------------------------------------------------------------------
Finance
charges (920) (1.28) (381) (0.59) (23) (0.02)
-------------------------------------------------------------------------
Foreign
exchange
(loss) gain (90) (0.13) 3,956 6.11 (133) (0.13)
-------------------------------------------------------------------------
Fair value
impairment
- ABCP (1,490) (2.07) (3,382) (5.22) - -
-------------------------------------------------------------------------
Taxes other
than income
taxes (506) (0.70) (832) (1.28) (438) (0.42)
-------------------------------------------------------------------------
Depletion,
depreciation
and accretion (4,669) (6.49) (4,471) (6.90) (5,396) (5.15)
-------------------------------------------------------------------------
Income tax
provision (3,985) (5.54) (5,191) (8.01) (11,254) (10.74)
-------------------------------------------------------------------------
Net earnings
for the
period $1,738 $2.42 $4,862 $7.51 $15,069 $14.38
-------------------------------------------------------------------------
>>
In the first quarter of 2008 the company reported earnings of $1.7 million (first quarter 2007 - $15.1 million), which equates to $0.04 (2007 - $0.34) per basic and $0.03 (2007 - $0.30) per weighted average diluted share outstanding.
In the first quarter of 2008, the weighted average number of common shares outstanding was 50.2 million (first quarter 2007 - 43.8 million). In the first quarter of 2008, 1.4 million additional shares (2007 - 6.8 million) were included in the diluted earnings per share calculations related to the potentially dilutive effect of options and warrants calculated under the treasury method.
As at the close of business on May 7, 2008, the company had the following securities issued and outstanding:
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- 50,353,010 common shares;
- 160,000 warrants; and
- 3,622,067 stock options
Details of the exercise rights and terms of the warrants and options are
noted in the Consolidated Financial Statements, included in this Interim
Report.
CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY
Cash flow from operations before working capital changes ("cash flow"),
cash flow per share and cash flow per boe do not have standardized meanings
prescribed by GAAP and therefore may not be comparable to similar measures
used by other companies. Cash flow includes all cash flow from operating
activities and is calculated before changes in non-cash working capital. The
most comparable measure calculated in accordance with GAAP would be net
earnings. Cash flow is reconciled with net earnings on the Consolidated
Statement of Cash Flows and below. Cash flow per share is calculated by
dividing cash flow by the weighted average shares outstanding; cash flow per
boe is calculated by dividing cash flow by the quantum of crude oil and
natural gas (expressed in boe) sold in the period. Management uses these
non-GAAP measurements for its own performance measures and to provide its
shareholders and investors with a measurement of the company's efficiency and
its ability to fund a portion of its future growth expenditures.
Reconciliation of net earnings to cash flow from operations before
working capital changes:
-------------------------------------------------------------------------
Three months ended March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Net earnings for the period $1,738 $4,862 $15,069
-------------------------------------------------------------------------
Add (deduct)
-------------------------------------------------------------------------
Stock-based compensation 2,398 1,414 2,921
-------------------------------------------------------------------------
Depletion, depreciation, and accretion 4,669 4,471 5,396
-------------------------------------------------------------------------
Future income tax provision 1,325 534 1,096
-------------------------------------------------------------------------
Amortization of deferred finance
charges 192 - -
-------------------------------------------------------------------------
Foreign exchange loss (gain) 90 (3,956) 133
-------------------------------------------------------------------------
Fair value impairment - ABCP 1,490 3,382 -
-------------------------------------------------------------------------
Cash flow from operations before
working capital changes $11,902 $10,707 $24,615
-------------------------------------------------------------------------
Cash flow from operations in the first quarter of 2008 was $11.9 million
(first quarter 2007 - $24.6 million) or $0.24 per basic share and $0.23 per
diluted share, (2007 - $0.56 per basic share and $0.49 per weighted average
diluted share).
Capital Expenditures
-------------------------------------------------------------------------
Three months ended March 31, December 31, March 31,
2008 2007 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Argentina $23,240 $50,077 $6,850
Colombia 225 241 -
Peru 7,591 7,290 630
Corporate - - 34
-------------------------------------------------------------------------
Total capital expenditures $31,056 $57,608 $7,514
-------------------------------------------------------------------------
>>
Capital expenditures in the first quarter of 2008 totaled $31.1 million (first quarter 2007 - $7.5 million). In Argentina the company drilled or initiated drilling of 16 wholly-owned wells at Puesto Morales/Rinconada, resulting in eight oil producers, two water injectors, one gas discovery, two wells waiting on completion, one well drilling, one preparing to drill on the company's Rinconada Block and one dry hole.
Capital spending exceeded cash flow, resulting in an increase in bank debt. Nevertheless, Petrolifera remained in a healthy financial position at March 31, 2008 with anticipated stable cash flow during the balance of 2008 and unused available credit.
The company's 2008 capital program includes expenditures to satisfy work commitments related to its landholdings. The company anticipates that it has sufficient cash flow and availability of credit to fund these planned capital expenditures and the current working capital deficit. Funds are being moved among Argentina, Barbados, Colombia and Peru as required.
The company's only financial instruments are cash and cash equivalents, accounts receivable, accounts payable, debt and income taxes payable; it maintains no off-balance sheet financial instruments.
CREDIT FACILITIES
On September 5th, 2007, the company entered into a US$100 million reserve-based revolving credit facility, with a borrowing base of US$60 million. The initial facility term is for three years, bears interest at LIBOR plus a margin, is secured by a pledge of the shares of Petrolifera's subsidiaries and has a provision for a borrowing base adjustment every six months, with the next adjustment being calculated as at June 30, 2008. Drawings under this facility are made for a term of less than one year and are therefore classified as current liabilities. Deferred financing costs of $2.0 million related to this facility are being amortized over the remaining term of the facility. The company is anticipating an increase to the borrowing base of this facility during the second quarter of 2008 based on the 2007 year-end reserve report submitted to the bank.
In December 2007 the company established an $18 million line of credit with a Canadian chartered bank. This facility bears interest at a floating rate and is solely secured by the ABCP notes.
As of March 31, 2008, the reserve based facility had US$35.0 million outstanding and the line of credit facility had $17.1 million outstanding. Interest expense on the debt facilities for the three months ended March 31, 2008 was $0.7 million.
LONG-TERM INVESTMENTS
Due to the immediate success of the Argentinean drilling program in late 2005 and subsequent thereto, significant cash balances from its initial public offering were retained in Petrolifera's bank accounts. These funds were largely kept in Canada for capital preservation and security. In mid-2006 the company commenced a program to invest its surplus funds in high quality, highly rated, liquid commercial paper with a primary emphasis on security of capital. Investments were made in R-1 High rated ABCP, as rated by Dominion Bond Rating Service, sold to us by the money market facilities of a Canadian chartered bank with whom we held bank accounts. These investments were made in more than one issuing entity, were made for various time periods and were acquired to earn a reasonable return in relation to prevailing market conditions. On maturity, proceeds including earned interest were generally reinvested on a regular basis. In August 2007 the Canadian third-party ABCP market experienced severe liquidity problems. This has caused the conduits that issued the notes to default on the redemption of the notes. As a result, holders could not receive their cash plus interest at maturity.
On September 6, 2007 a panel of banks, asset providers, and major investors formed the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to oversee a proposed restructuring process. The proposed restructuring called for the ABCP to be converted into longer term floating rate notes which more closely match the maturities of the underlying assets. On March 17, 2008 the Pan-Canadian Committee made the restructuring proposal by filing a Companies' Creditors' Arrangement Act ("CCAA") restructuring proposal whereby the company's notes will be exchanged for several classes of notes with maturities that better match the maturities of the underlying assets. Subsequent to the quarter end the CCAA restructuring proposal was voted on and approved by note holders.
Quoted market values of the ABCP are not available due to the market disruption that is currently paralyzing the ABCP market. Management has therefore estimated the fair value of the owned ABCP based on a probabilistic recovery of principal and interest taking into account all available information. Under this valuation method, several different outcomes of the recovery of the principal and interest are estimated considering the information available as at March 31, 2008. A weighted average recovery is then calculated. This weighted average recovery is used to determine the discounted cash flows that are expected from these investments. The recovery factors used for were as follows:
<<
------------------------------------------------------------------------
Capital Interest Term
Capital Interest Weighted Weighted
Class Recovery Recovery Average Average
of Note Range Range Recovery Recovery
-------------------------------------------------------------------------
A-1 0-95% 0-90% 91% 84% 5-8 years
-------------------------------------------------------------------------
A-2 0-90% 0-90% 86% 81% 8 years
-------------------------------------------------------------------------
B 0-75% 0-75% 71% 70% 8 years
-------------------------------------------------------------------------
C 0-50% 0-50% 48% 48% 8 years
-------------------------------------------------------------------------
IA Tracking 0-75% 0-75% 62% 56% 8 years
-------------------------------------------------------------------------
>>
Based on the above approach the fair value of the investment in ABCP is estimated to be $29.9 million which implies an impairment of $1.5 million for the quarter ended March 31, 2008 or approximately four percent of the carrying value of the ABCP. This impairment brings the total impairment of the ABCP recorded to date to approximately 20 percent of the original cost of the ABCP. As at March 31, 2008, included in long-term investments were ABCP with a face value of $37.7 million. These investments are classified as Held for Trading and are carried at fair value which is assessed each reporting date. The theoretical fair value of the company's ABCP could range from $22.4 million to $34.3 million using the valuation methodology described above with alternative reasonably possible assumptions. The company anticipates that it presently has sufficient cash resources and available credit to satisfy obligations as they come due. Assuming the ABCP problems are restructured during 2008 and normal liquidation for cash occurs, the company would be able to substantially reduce its net indebtedness incurred from lack of access to these amounts. The outcome of the restructuring process, actual timing and amount ultimately recoverable from these notes may differ materially from this estimate which would impact the company's earnings.
LEGAL PROCEEDINGS
Petrolifera is a party to an arbitration proceeding initiated by the former contract operator of the Puesto Morales/ Rinconada block. The former operator is seeking financial compensation, including damages for wrongful dismissal. Petrolifera is of the opinion that the claim is without merit and has filed a counterclaim against the former operator. Potential damages, if any, against the company are not quantifiable at this time, but in any event are not anticipated to be material to the company.
RELATED PARTY TRANSACTIONS AND SIGNIFICANT TRANSACTIONS
Under the terms of a Management Services Agreement with Connacher Oil and Gas Limited ("Connacher") (extended on a month-to-month basis since its original term, which expired in May 2007), Connacher provides services to assist in the administration of the company. The fee for these services is $15,000 per month. From time to time Connacher also pays bills on behalf of Petrolifera, for which it is reimbursed at cost. Connacher is also guarantor for Petrolifera in Peru and operator of record on behalf of Petrolifera in Colombia for which Connacher is indemnified by Petrolifera. This extension is anticipated to be replaced by a new agreement on substantially the same terms.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING
ESTIMATES
Certain accounting policies require that management make appropriate decisions with respect to the formulation of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in these judgments and estimates may have a material impact on the company's financial results and condition. The following discusses such accounting policies and is included in the MD&A to aid the reader in assessing the significant accounting policies and practices of the company and the likelihood of materially different results being reported. Management reviews its estimates regularly. The emergence of new information and changed circumstances may result in changes to estimates which could be material and the company might realize different results from the application of new accounting standards promulgated, from time to time, by various rule-making bodies.
The following assessment of significant accounting polices is not meant to be exhaustive.
Oil and Gas Reserves
Under Canadian Securities Regulators' "National Instrument 51-101-Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable. In accordance with this definition, the level of certainty should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated reserves. In the case of probable reserves, which are less certain to be recovered than proved reserves, NI 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Possible reserves are those reserves less certain to be recovered than probable reserves. There is at least a 10 percent probability that the quantities actually recovered will exceed the sum of proved plus probable plus possible reserves.
The company's oil and gas reserve estimates are made by independent reservoir engineers using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the company's plans. The reserve estimates are also used in determining the company's borrowing base for its credit facilities and may impact the same upon revision or changes to the reserve estimates. The effect of changes in proved oil and gas reserves on the financial results and position of the company is described under the heading "Full Cost Accounting for Oil and Gas Activities".
Full Cost Accounting for Oil and Gas Activities
The company uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether successful or not. The aggregate of net capitalized costs and estimated future development costs is amortized using the unit-of-production method based on estimated proved oil and gas reserves.
IMPACT OF NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2008, the company adopted CICA Handbook sections 1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories, Financial Instruments - Disclosures and Financial Instruments - Presentation, respectively.
Under section 1535, the company is required to disclose its objectives, policies and processes for managing capital, and in addition, whether the entity has complied with any externally imposed capital requirements. Note 5 contains further disclosures with respect to this standard.
Under section 3031, the measurement of cost and cost formulas for inventories have been revised, along with additional disclosure requirements. The adoption of this section has had no impact on the company's consolidated financial statements, as inventories were already being measured in a manner permitted under the new standard.
Under section 3862, the company is required to disclose the significance of financial instruments to an entity's financial statements, the risks associated with the financial instruments, and how those risks are managed. Note 5 contains further disclosures with respect to this standard.
Under section 3863, further guidance is provided on the classification of financial instruments as liabilities vs. equity, and when netting of financial assets and financial liabilities is appropriate.
As of January 1, 2009, the company will be required to adopt CICA Handbook section 3064, Goodwill and Intangible Assets, replacing section 3062, Goodwill and Other Intangible Assets and section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous section 3062. The company is currently evaluating the impact of the adoption of this new section.
Over the next three years the CICA will adopt its new strategic plan for the direction of accounting standards in Canada, which was ratified in January 2006. As part of the plan, Canadian GAAP for public companies will converge with International Financial Reporting Standards ("IFRS"), with an expected effective date of January 1, 2011. The company continues to monitor and assess the impact of the convergence of Canadian GAAP with IFRS.
COMMITMENTS, CONTINGENCIES, GUARANTEES, CONTRACTUAL OBLIGATIONS
AND OFF BALANCE SHEET ARRANGEMENTS
In 2005 Petrolifera acquired two significant oil and gas exploration licenses in Peru. The licenses have a total US$41.8 million financial commitment to complete negotiated work programs on the two licenses over seven years. The company has the right to withdraw from the licenses at the end of each period associated with the term of the licenses. The first license term for Block 106 ended in 2007 and the company has met its commitment and is currently in the second license term with a commitment to invest a minimum of US$1.6 million in this term. These expenditures are budgeted to be fully discharged in 2008. In Block 107, the company is in the first term of the license and expects to complete all the required work commitments for the term during 2008. The company has issued letters of credit in the total amount of US$2.3 million to secure the capital expenditure requirements associated with the two exploration licenses in Peru.
In 2007 the Company was granted three concessions in Colombia with a total work commitment of US$5.7 million over a two year period. These work commitments are budgeted to be completed during 2008. The company has issued letters of credit in the total amount of US$0.6 million in support of these work commitments. In Argentina the company has total work commitments of US$54.0 million over the next three years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala II blocks.
Additionally, the company has various guarantees and indemnifications in place in the ordinary course of business, none of which are expected to have a significant impact on the company's financial statements or operations.
The company's annual commitments under service contracts for drilling, leases for office premises, various operating costs, software license agreements and other equipment are as follows:
<<
-------------------------------------------------------------------------
Contractual Remainder Subsequent
Obligations 2008 2009-2011 2012-2013 to 2013 Total
-------------------------------------------------------------------------
($000)
Service
contracts
and other $8,613 $11,601 $- $- $20,214
-------------------------------------------------------------------------
Total $8,613 $11,601 $- $- $20,214
-------------------------------------------------------------------------
>>
The company has no off balance sheet financing arrangements.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the company is accumulated, recorded, processed, summarized and reported to the company's management as appropriate to allow timely decisions regarding required disclosure. The company's Executive Chairman, President and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this MD&A, that the company's disclosure controls and procedures as of the end of such period are effective to provide reasonable assurance that material information related to the company, including its consolidated subsidiaries, is communicated to them as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the company is responsible for designing adequate internal controls over the company's financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. There have been no changes in the company's system of internal controls over financial reporting that would materially affect, or is reasonably likely to materially affect, the company's internal controls over financial reporting. It should be noted that while the company's Executive Chairman, President and Chief Financial Officer believe that the company's disclosure controls and procedures provide a reasonable level of assurance that they are effective and that the internal controls over financial reporting are adequately designed, they do not expect that the financial disclosure controls and procedures or internal control over financial reporting will prevent all errors and fraud. In reaching a reasonable level of assurance, management necessarily is required to apply its judgement in evaluating the cost-benefit relationship of possible controls and procedures. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
BUSINESS RISKS
Petrolifera is exposed to certain risks and uncertainties inherent in the oil and gas business. Furthermore, being a smaller independent company, it is exposed to financing and other risks which may impair its ability to realize on its assets or to capitalize on opportunities which might become available to it. Additionally, Petrolifera operates in various foreign jurisdictions and is exposed to other risks including currency fluctuations, political risk, price controls and varying forms of fiscal regimes or changes thereto which may impair Petrolifera's ability to conduct profitable operations.
The risks arising in the oil and gas industry include price fluctuations for both crude oil and natural gas over which the company has limited control; risks arising from exploration and development activities; production risks associated with the depletion of reservoirs and the ability to market production. Additional risks include environmental and safety concerns.
The success of the company's capital programs as embodied in its productivity and reserve base could also impact its prospective liquidity and pace of future activities. Control of finding, development, operating and overhead costs per boe is an important criterion in determining company growth, success and access to new capital sources.
To date, the company has utilized debt and equity financing and has had a bias towards conservatively financing its operations under normal industry conditions to offset the inherent risks of domestic and international oil and gas exploration, development and production activities. From time to time, the company may have to access capital markets for new equity to supplement internally generated cash flow and bank borrowings to finance its growth plans. Periodically, these markets may not be receptive to offerings of new equity from treasury, whether by way of private placement or public offerings. This may be further complicated by the limited market liquidity for shares of smaller companies, restricting access to some institutional investors.
Periodic fluctuations in energy prices may also affect lending policies of the company's banker for new borrowings. This in turn could limit growth prospects over the short run or may even require the company to dedicate cash flow, dispose of properties or raise new equity to reduce bank borrowings under circumstances of declining energy prices or disappointing drilling results.
While hedging activities may have opportunity costs when realized prices exceed hedged pricing, such transactions are not meant to be speculative and are considered within the broader framework of financial stability and flexibility. Management continuously reviews the need to utilize such financing techniques.
The company attempts to mitigate its business and operational risk exposures by maintaining comprehensive insurance coverage on its assets and operations, by employing or contracting competent technicians and professionals, by instituting and maintaining operational health, safety and environmental standards and procedures and by maintaining a prudent approach to exploration and development activities. The company also addresses and regularly reports on the impact of risks to its shareholders, writing down the carrying values of assets that may not be recoverable.
OUTLOOK
In light of late 2007 fiscal regime changes in Argentina which results in a relatively low selling price for crude oil, Petrolifera has adopted a measured approach for its anticipated capital expenditure program to more appropriately align available funds to the level of capital expenditures. Accordingly, this will have an impact on projected production and sales volumes. Capital spending in Argentina will continue to protect the significant asset base in the country at the same time the company is accelerating the Colombian capital expenditure program given the fiscal regime where participation in world prices and potentially significantly higher operating netbacks are available. Due to delays in approval time for drilling environmental impact assessments ("EIA") as a result of significantly increased activity levels in Peru, the first well on Block 107 will now be drilled in 2009. Nevertheless, in the next 18 months, shareholders will be exposed to the drilling of high-impact wells continuously.
Forecast operating cash flow from growing production and available credit is anticipated to be sufficient to finance Petrolifera's expected 2008 capital spending program, which has been reallocated and revised downwards from earlier estimates to $102 million. This is primarily due to a slower pace of development drilling in Argentina during 2008; a deferral of Peruvian drilling due to delays in securing a drilling EIA; and an allocation of more capital to Colombia drilling.
Petrolifera does not provide formal guidance although it discloses planned capital budgets. The company's revised reallocated budget now totals $102 million or $38 million less than the initial budget of $140 million. Petrolifera's capital program expenditures are largely discretionary, except for a total of approximately US$27 million for which the company is obligated between the years 2008 and 2010, pursuant to certain work obligations in Argentina, Peru and Colombia which may entail seismic reprocessing, seismic acquisition and drilling obligations. Some of these obligations will be discharged within the 2008 capital budget.
<<
QUARTERLY RESULTS
-----------------------------------------------------
2006
-----------------------------------------------------
Three months ended
-----------------------------------------------------
June 30 Sept 30 Dec 31
-----------------------------------------------------
Financial results
($000 except per share
amounts) - unaudited
-----------------------------------------------------
Total revenue 18,821 33,157 45,153
-----------------------------------------------------
Cash flow from
operations before
working capital
changes(1) 9,470 18,384 18,495
-----------------------------------------------------
Basic, per share(1) 0.25 0.46 0.42
-----------------------------------------------------
Diluted, per share(1) 0.19 0.38 0.35
-----------------------------------------------------
Earnings (loss) for the
period (7,685) 15,683 12,401
-----------------------------------------------------
Basic, per share (0.21) 0.39 0.28
-----------------------------------------------------
Diluted, per share (0.16) 0.32 0.24
-----------------------------------------------------
Capital expenditures 2,310 9,738 22,031
-----------------------------------------------------
Cash on hand 25,941 36,206 51,008
-----------------------------------------------------
Working capital surplus
(deficiency) 28,913 41,361 40,456
-----------------------------------------------------
Indebtedness - - -
-----------------------------------------------------
Shareholders' equity 40,844 61,440 78,074
-----------------------------------------------------
Total assets 52,760 81,226 118,517
-----------------------------------------------------
-----------------------------------------------------
Operating results
-----------------------------------------------------
Sales volumes
-----------------------------------------------------
Crude oil - bbl/d 4,006 7,202 10,716
-----------------------------------------------------
Natural gas - mcf/d 1,181 1,259 1,101
-----------------------------------------------------
Equivalent - boe/d(2) 4,203 7,412 10,900
-----------------------------------------------------
Pricing
-----------------------------------------------------
Crude oil - $/bbl 50.71 49.49 45.20
-----------------------------------------------------
Natural gas - $/mcf 1.33 1.44 1.50
-----------------------------------------------------
Selected highlights
- $/boe(2)
-----------------------------------------------------
Weighted average
selling price per boe 48.71 48.33 44.59
-----------------------------------------------------
Interest and other
income 0.50 0.30 0.44
-----------------------------------------------------
Royalties 7.20 6.73 6.37
-----------------------------------------------------
Operating costs 4.42 5.21 4.02
-----------------------------------------------------
Netback(3) 37.59 36.69 34.64
-----------------------------------------------------
-----------------------------------------------------
Common share
information (000)
-----------------------------------------------------
Shares outstanding at
end of period 37,855 42,817 43,612
-----------------------------------------------------
Fully diluted 52,172 52,671 52,704
-----------------------------------------------------
Weighted average shares
outstanding for the
period
-----------------------------------------------------
Basic 37,399 40,442 43,418
-----------------------------------------------------
Diluted 48,777 48,594 51,002
-----------------------------------------------------
Volume traded during
quarter (000) 8,697 16,732 18,086
-----------------------------------------------------
Common share price ($)
-----------------------------------------------------
High 12.60 21.95 25.24
-----------------------------------------------------
Low 8.15 10.92 14.71
-----------------------------------------------------
Close (end of period) 11.00 20.90 17.65
-----------------------------------------------------
-------------------------------------------------------------------------
2007 2008
Three months ended
-------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31
-------------------------------------------------------------------------
Financial results
($000 except per share
amounts) - unaudited
-------------------------------------------------------------------------
Total revenue 47,122 28,105 31,730 27,266 27,167
-------------------------------------------------------------------------
Cash flow from
operations before
working capital
changes(1) 24,615 14,504 18,619 10,707 11,902
-------------------------------------------------------------------------
Basic, per share(1) 0.56 0.3 0.37 0.21 0.24
-------------------------------------------------------------------------
Diluted, per share(1) 0.49 0.28 0.36 0.21 0.23
-------------------------------------------------------------------------
Earnings (loss) for the
period 15,069 4,450 4,919 4,863 1,738
-------------------------------------------------------------------------
Basic, per share 0.34 0.09 0.10 0.10 0.04
-------------------------------------------------------------------------
Diluted, per share 0.30 0.09 0.10 0.09 0.03
-------------------------------------------------------------------------
Capital expenditures 7,514 19,842 26,061 57,608 31,056
-------------------------------------------------------------------------
Cash on hand 59,155 66,535 11,368 13,052 11
-------------------------------------------------------------------------
Working capital surplus
(deficiency) 58,811 69,690 22,742 (31,779) (51,546)
-------------------------------------------------------------------------
Indebtedness - - - 29,612 53,039
-------------------------------------------------------------------------
Shareholders' equity 98,124 120,236 121,727 120,303 127,225
-------------------------------------------------------------------------
Total assets 137,840 139,054 144,016 204,227 231,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Operating results
-------------------------------------------------------------------------
Sales volumes
-------------------------------------------------------------------------
Crude oil - bbl/d 11,333 6,644 7,195 6,565 6,726
-------------------------------------------------------------------------
Natural gas - mcf/d 1,858 1,726 2,169 2,860 7,044
-------------------------------------------------------------------------
Equivalent - boe/d(2) 11,643 6,932 7,557 7,042 7,900
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 45.43 45.17 46.99 44.36 41.99
-------------------------------------------------------------------------
Natural gas - $/mcf 1.53 1.42 1.41 1.76 2.20
-------------------------------------------------------------------------
Selected highlights
- $/boe(2)
-------------------------------------------------------------------------
Weighted average
selling price per boe 44.47 43.65 45.65 42.07 37.72
-------------------------------------------------------------------------
Interest and other
income 0.50 0.90 0.49 0.01 0.07
-------------------------------------------------------------------------
Royalties 5.59 6.19 5.77 5.76 4.71
-------------------------------------------------------------------------
Operating costs 4.40 5.56 6.96 8.20 8.24
-------------------------------------------------------------------------
Netback(3) 34.98 32.80 32.91 28.12 24.84
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Common share
information (000)
-------------------------------------------------------------------------
Shares outstanding at
end of period 44,029 50,084 50,119 50,127 50,353
-------------------------------------------------------------------------
Fully diluted 53,280 53,382 51,803 51,670 54,105
-------------------------------------------------------------------------
Weighted average shares
outstanding for the
period
-------------------------------------------------------------------------
Basic 43,800 47,816 50,107 50,123 50,212
-------------------------------------------------------------------------
Diluted 50,635 51,303 51,800 51,689 51,562
-------------------------------------------------------------------------
Volume traded during
quarter (000) 7,202 6,211 10,921 12,223 7,721
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 20.20 19.29 22.35 17.10 11.96
-------------------------------------------------------------------------
Low 16.05 16.60 13.18 9.14 6.61
-------------------------------------------------------------------------
Close (end of period) 19.14 17.04 15.20 9.87 9.10
-------------------------------------------------------------------------
(1) Cash flow from operations before working capital changes ("cash
flow") and cash flow per share do not have standardized meanings
prescribed by Canadian generally accepted accounting principles
("GAAP") and therefore may not be comparable to similar measures used
by other companies. Cash flow from operations before working capital
changes includes all cash flow from operating activities and is
calculated before changes in non-cash working capital. The most
comparable measure calculated in accordance with GAAP would be net
earnings. Cash flow from operations before working capital changes is
reconciled with net earnings on the Consolidated Statement of Cash
Flows and in the accompanying Management's Discussion & Analysis.
Management uses these non-GAAP measurements for its own performance
measures and to provide its shareholders and investors with a
measurement of the company's efficiency and its ability to fund a
portion of its future growth expenditures.
(2) All references to barrels of oil equivalence (boe) are calculated on
the basis of 6 mcf : 1 bbl. Boe may be misleading particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalent at the wellhead.
(3) Netback is a non-GAAP measure used by management as a measure of
operating efficiency and profitability. It is calculated as petroleum
and natural gas revenue and other income less royalties and operating
costs.
CONSOLIDATED BALANCE SHEETS
Petrolifera Petroleum Limited
(Unaudited)
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
($000)
ASSETS
Current
Cash and cash equivalents $11 $13,052
Accounts receivable 38,288 27,512
Prepaid expenses 544 468
Inventories (Note 3) 1,244 854
-------------------------------------------------------------------------
40,087 41,886
Long-term investments (Note 4) 31,967 33,378
Deferred financing costs (Note 6) 1,968 2,089
Property and equipment 157,256 126,874
-------------------------------------------------------------------------
$231,278 $204,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current
Accounts payable and accrued liabilities $32,770 $37,963
Income taxes payable 5,817 6,090
Bank debt (Note 6) 53,039 29,612
Due to a related company 7 -
-------------------------------------------------------------------------
91,633 73,665
Asset retirement obligations (Note 7) 6,252 5,639
Future income taxes 6,168 4,620
-------------------------------------------------------------------------
104,053 83,924
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital, warrants and contributed
surplus (Note 8) 67,108 64,544
Accumulated other comprehensive loss (8,054) (10,674)
Retained earnings 68,171 66,433
-------------------------------------------------------------------------
127,225 120,303
-------------------------------------------------------------------------
$231,278 $204,227
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments, contingencies and guarantees (Note 11)
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
($000)
Revenue
Petroleum and natural gas sales $27,114 $46,598
Interest and other income 53 524
-------------------------------------------------------------------------
27,167 47,122
Royalties (3,384) (5,855)
-------------------------------------------------------------------------
Net revenue 23,783 41,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Expenses
Operating 5,925 4,612
General and administrative 2,062 1,421
Stock-based compensation 2,398 2,921
Finance charges 920 23
Foreign exchange loss 90 133
Fair value impairment - ABCP (Note 4) 1,490 -
Taxes other than income taxes 506 438
Depletion, depreciation and accretion 4,669 5,396
-------------------------------------------------------------------------
18,060 14,944
-------------------------------------------------------------------------
Earnings before income taxes 5,723 26,323
Current income tax provision 2,660 10,158
Future income tax provision 1,325 1,096
-------------------------------------------------------------------------
3,985 11,254
-------------------------------------------------------------------------
NET EARNINGS 1,738 15,069
RETAINED EARNINGS, BEGINNING OF PERIOD 66,433 37,132
-------------------------------------------------------------------------
RETAINED EARNINGS, END OF PERIOD $68,171 $52,201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS PER SHARE (Note 10)
Basic $0.04 $0.34
Diluted $0.03 $0.30
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Net earnings $1,738 $15,069
Foreign currency translation adjustment 2,620 (956)
-------------------------------------------------------------------------
Comprehensive income $4,358 $14,113
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS)
Petrolifera Petroleum Limited
Three months ended March 31
(Unaudited)
-------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Balance, beginning of period $(10,674) $1,667
Foreign currency translation adjustment 2,620 (956)
-------------------------------------------------------------------------
Balance, end of period $(8,054) $711
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Petrolifera Petroleum Limited
Three months ended March 31
-------------------------------------------------------------------------
(Unaudited) 2008 2007
-------------------------------------------------------------------------
($000)
Cash provided by (used in) the following activities:
Operating
Net earnings $1,738 $15,069
Items not involving cash:
Depletion, depreciation and accretion 4,669 5,396
Stock-based compensation 2,398 2,921
Amortization of deferred charges 192 -
Fair value impairment - ABCP 1,490 -
Foreign exchange loss 90 133
Future income tax provision 1,325 1,096
-------------------------------------------------------------------------
Cash flow from operations before working
capital changes 11,902 24,615
Changes in non-cash working capital (Note 10(b)) (12,040) (9,928)
-------------------------------------------------------------------------
(138) 14,687
-------------------------------------------------------------------------
Financing
Proceeds from bank debt 23,427 -
Issue of common shares, net of share
issue costs (Note 8) 165 434
-------------------------------------------------------------------------
23,592 434
Investing
Development of oil and gas properties (31,056) (7,514)
Changes in non-cash working capital (Note 10(b)) (4,660) 2,302
-------------------------------------------------------------------------
(35,716) (5,212)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,262) 9,909
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,052 51,008
Impact of foreign exchange on foreign currency
denominated cash balances (779) (1,762)
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $11 $59,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS IS COMPOSED OF:
Cash in banks $11 $16,012
Term deposits - 43,143
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS $11 $59,155
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary information - Note 10
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Petrolifera Petroleum Limited
Period ended March 31, 2008
1. FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING POLICIES
The interim Consolidated Financial Statements include the accounts of
Petrolifera and its subsidiaries (collectively, "Petrolifera" or the
"company"), and are presented in accordance with Canadian generally
accepted accounting principles. Through subsidiaries and foreign
branches, Petrolifera is engaged in petroleum and natural gas
exploration, development and production activities in South America.
The interim Consolidated Financial Statements have been prepared
following the same accounting policies and methods of computation as the
annual audited Consolidated Financial Statements for the year ended
December 31, 2007 except as provided below. The disclosures provided
below do not conform in all respects to those included with the annual
audited Consolidated Financial Statements. The interim Consolidated
Financial Statements should be read in conjunction with the annual
audited Consolidated Financial Statements and the notes thereto.
Financial instruments
Financial instruments are recognized initially at fair value on the
balance sheet, and include cash and cash equivalents, accounts
receivable, long-term investments, accounts payable and accrued
liabilities, amount due to a related company and bank debt. The company
has classified all of its financial instruments as held for trading, with
the exception of the bank debt, which is classified as other liabilities.
Held for trading instruments are measured at fair value, while other
liabilities are measured at amortized cost. The company has not entered
into any financial derivative contracts, does not enter into these
contracts for speculative purposes, and has not recorded any assets or
liabilities as a result of embedded derivatives.
The carrying value of held for trading instruments is equal to their fair
value. The fair value of the bank debt approximates the carrying value as
the debt has a floating market interest rate.
2. NEW ACCOUNTING STANDARDS
Effective January 1, 2008, the company adopted CICA Handbook sections
1535, 3031, 3862 and 3863 relating to Capital Disclosures, Inventories,
Financial Instruments - Disclosures and Financial Instruments -
Presentation, respectively.
Under section 1535, the company is required to disclose its objectives,
policies and processes for managing capital, and in addition, whether the
entity has complied with any externally imposed capital requirements.
Note 5 contains further disclosures with respect to this standard.
Under section 3031, the measurement of cost and cost formulas for
inventories have been revised, along with additional disclosure
requirements. The adoption of this section has had no impact on the
company's consolidated financial statements, as inventories were already
being measured in a manner permitted under the new standard.
Under section 3862, the company is required to disclose the significance
of financial instruments to an entity's financial statements, the risks
associated with the financial instruments, and how those risks are
managed. Note 5 contains further disclosures with respect to this
standard.
Under section 3863, further guidance is provided on the classification of
financial instruments as liabilities or equity, and when netting of
financial assets and financial liabilities is appropriate.
As of January 1, 2009, the company will be required to adopt
CICA Handbook section 3064, Goodwill and Intangible Assets, replacing
section 3062, Goodwill and Other Intangible Assets and section 3450,
Research and Development Costs. Various changes have been made to other
sections of the CICA Handbook for consistency purposes. This section
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of
intangible assets by profit-oriented enterprises. Standards concerning
goodwill are unchanged from the standards included in the previous
section 3062. The company is currently evaluating the impact of the
adoption of this new section.
Over the next three years the CICA will adopt its new strategic plan for
the direction of accounting standards in Canada, which was ratified in
January 2006. As part of the plan, Canadian GAAP for public companies
will converge with International Financial Reporting Standards ("IFRS"),
with an expected effective date of January 1, 2011. The company continues
to monitor and assess the impact of the convergence of Canadian GAAP with
IFRS.
3. INVENTORIES
The company maintains inventory as a consequence of the sales process for
its products, whereby crude oil which has been produced is not delivered
to customers for periods of up to several days, during which time it must
be stored.
-------------------------------------------------------------------------
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Crude oil and natural gas liquids $1,244 $854
-------------------------------------------------------------------------
At March 31, 2008 and December 31, 2007, inventory is composed of crude
oil and natural gas liquids held in storage at the company's facilities
and in transportation pipelines. Crude oil and natural gas liquids are
carried at the lower of cost (on a weighted average cost basis) and net
realizable value.
4. LONG-TERM INVESTMENTS
Due to the immediate success of the Argentinean drilling program in late
2005 and subsequent thereto significant cash balances from its initial
public offering were retained in Petrolifera's bank accounts. These funds
were largely kept in Canada for capital preservation and security. In
mid-2006 the company commenced a program to invest its surplus funds in
high quality, highly rated, liquid commercial paper with a primary
emphasis on security of capital. Investments were made in R-1 High rated
ABCP, as rated by Dominion Bond Rating Service, sold to us by the money
market facilities of a Canadian chartered bank with whom we held bank
accounts. These investments were made in more than one issuing entity,
were made for various time periods and were acquired to earn a reasonable
return in relation to prevailing market conditions. On maturity, proceeds
including earned interest were generally reinvested on a regular basis.
In August 2007 the Canadian third-party ABCP market experienced severe
liquidity problems. This has caused the conduits that issued the notes to
default on the redemption of the notes. As a result, holders could not
receive their cash plus interest at maturity.
On September 6, 2007 a panel of banks, asset providers, and major
investors formed the Pan-Canadian Investors Committee for Third-Party
Structured Asset-Backed Commercial Paper ("Pan-Canadian Committee") to
oversee a proposed restructuring process. The proposed restructuring
called for the ABCP to be converted into longer term floating rate notes
which more closely match the maturities of the underlying assets. On
March 17, 2008 the Pan-Canadian Committee made the restructuring proposal
by filing a Companies' Creditors' Arrangement Act ("CCAA") restructuring
proposal whereby the company's notes will be exchanged for several
classes of notes with maturities that better match the maturities of the
underlying assets. Subsequent to the quarter end the CCAA restructuring
proposal was voted on and approved by note holders.
Quoted market values of the ABCP are not available due to the market
disruption that is currently paralyzing the ABCP market. Management has
therefore estimated the fair value of the owned ABCP based on a
probabilistic recovery of principal and interest taking into account all
available information. Under this valuation method, several different
outcomes of the recovery of the principal and interest are estimated
considering the information available as at March 31, 2008. A weighted
average recovery is then calculated. This weighted average recovery is
used to determine the discounted cash flows that are expected from these
investments. The recovery factors used for were as follows:
-------------------------------------------------------------------------
Capital Interest
Capital Interest Weighted Weighted
Recovery Recovery Average Average
Class of Note Range Range Recovery Recovery Term
-------------------------------------------------------------------------
A-1 0-95% 0-90% 91% 84% 5-8 years
-------------------------------------------------------------------------
A-2 0-90% 0-90% 86% 81% 8 years
-------------------------------------------------------------------------
B 0-75% 0-75% 71% 70% 8 years
-------------------------------------------------------------------------
C 0-50% 0-50% 48% 48% 8 years
-------------------------------------------------------------------------
IA Tracking 0-75% 0-75% 62% 56% 8 years
-------------------------------------------------------------------------
Based on the above approach the fair value of the investment in ABCP is
estimated to be $29.9 million which implies an impairment of $1.5 million
for the quarter ended March 31, 2008 or approximately four percent of the
carrying value of the ABCP. This impairment brings the total impairment
of the ABCP recorded to date to approximately 20 percent of the original
cost of the ABCP. As at March 31, 2008, included in long-term investments
were ABCP with a face value of $37.7 million. These investments are
classified as Held for Trading and are carried at fair value which is
assessed each reporting date. The theoretical fair value of the company's
ABCP could range from $22.4 million to $34.3 million using the valuation
methodology described above with alternative reasonably possible
assumptions. The company anticipates that it presently has sufficient
cash resources and available credit to satisfy obligations as they come
due. Assuming the ABCP problems are restructured during 2008 and normal
liquidation for cash occurs, the company would be able to substantially
reduce its net indebtedness incurred from lack of access to these
amounts. The outcome of the restructuring process, actual timing and
amount ultimately recoverable from these notes may differ materially from
this estimate which would impact the company's earnings in future
periods.
5. FINANCIAL RISK MANAGEMENT
Summary
The company is exposed to various risks that arise from its business
environment and the financial instruments it holds. The Audit Committee
of the Board of Directors reviews the adequacy of the risk management
framework in relation to these risks. The following outlines the
company's risk exposures, quantifies these risks, and explains how these
risks and its capital structure are managed.
Capital Management
The company's objective is to maintain a strong capital position in order
to execute on its business plans and maximize value to shareholders. The
company defines its capital as shareholders' equity and bank debt.
Changes to the relative weighting of the capital structure is driven by
our business plans, changes in economic conditions and risks inherent in
the global oil and gas industry. There have been no material changes to
the company's processes and objectives related to capital management
compared to prior periods. Methods to adjust our capital structure could
include any or all of the following activities:
- Repurchase shares pursuant to a normal course issuer bid;
- Issue new shares through a public offering or private placement;
- Raise fixed or floating rate debt;
- Refinance existing debt facilities to change amounts or terms
The company periodically reviews certain quantitative measures of its
capital structure, in order to understand its position relative to
industry peers. These measures include calculations such as return on
equity, return on capital employed and the debt to equity ratio. The
company does not set certain limits or ranges with respect to these
quantitative measures.
The company is subject to external restrictions on its reserves-based,
revolving debt facility. The facility has an overall limit of
US$100 million and the current available limit is US$60 million, which is
subject to semi-annual review. Debt outstanding cannot exceed two times
the 12 month trailing EBITDA. EBITDA is defined as net earnings prior to
deduction of interest, income taxes, depletion, depreciation and
accretion expense and other non-cash expenses. As at March 31, 2008,
total debt outstanding under this facility was $36 million and two times
EBITDA was $140.9 million, for a ratio of 0.3:1, which is well below the
imposed limit.
Credit Risk
The Company is exposed to credit risk in relation to its cash and cash
equivalents, long-term investments and accounts receivable. Cash and cash
equivalents are held with highly rated international banks and therefore
the company considers these assets to have negligible credit risk. Refer
to Note 4 for further discussion regarding the credit risk of long-term
investments.
The company's accounts receivable are primarily with joint venture
partners, oil and gas marketers and local government agencies. The
company conducts a small minority of its business through joint ventures,
so its overall exposure to credit risk from joint venture partners is
considered to be low. The company's production base is entirely located
in Argentina, and is heavily weighted to oil. It sells its oil production
to a well-established, investment grade, state-owned oil company, and its
gas production to a reputable local gas marketing company. Receivables
with local governments pertain to input taxes paid on certain
expenditures. The company has not experienced any collection problems
with its counterparties and does not currently have any overdue amounts.
The carrying amounts of cash and cash equivalents and accounts receivable
represents the company's maximum credit exposure. The company does not
have an allowance for doubtful accounts, and did not write off any
receivables in the quarter ended March 31, 2008.
Liquidity Risk
The company manages its risk of not meeting its financial obligations
through management of its capital structure, annual budgeting of its
revenues, expenditures and cash flows, cash flow forecasting, and
maintaining unused credit facilities where practicable.
Accounts payable and income taxes payable, as disclosed on the
Consolidated Balance Sheet, fall due within the next reporting period.
The revolving debt facility has a current available limit of
US$60 million.
This facility expires on September 5th, 2010. The company also holds an
$18 million line of credit, of which $1 million is undrawn at March 31,
2008, that is secured solely by the company's long-term investments.
This line of credit is due on demand. The company believes it has
adequate cash flows and unused credit facilities to discharge its
financial obligations.
Market Risk
Changes in commodity prices, interest rates and foreign currency exchange
rates can expose the company to fluctuations in its net earnings and in
the fair value of its financial assets and liabilities.
Commodity Price Risk
Price fluctuations for both crude oil and natural gas are a risk to the
company over which the company has little influence. Due to pricing
controls present in Argentina, the company's selling price for oil is
limited to approximately US$42.00 per barrel when the world posted price
(WTI) for crude oil is in excess of US$60.90 per barrel. Natural gas
prices are controlled by the Argentine government and local demand with
historic prices at low levels compared to world prices. Recent natural
gas prices have shown improvement due to increasing demand.
Interest Rate Risk
Floating rate bank debt exposes the company to fluctuations in cash flows
and net earnings due to changes in market interest rates. Based on the
current debt balance, a one percent increase (decrease) in the underlying
market rates would have decreased (increased) after tax earnings by
approximately $0.1 million for the quarter. The company may enter into
derivative interest swap contracts to manage this risk, but has not done
so to date.
Foreign Currency Exchange Rate Risk
Substantially all of the company's operations are conducted in foreign
jurisdictions, so the company is exposed to foreign currency exchange
rate risk on most of its activities. Oil and natural gas sales contracts
are denominated in US Dollars and paid in Argentine Pesos. Operating and
capital expenditures are incurred in US Dollars (USD) and Argentine Pesos
(ARS), and to a lesser extent in Peruvian Nuevos Soles (PEN) and
Colombian Pesos (COP). The revolving credit facility is denominated in US
Dollars, which partially limits the company's exposure in terms of cash
outflows (interest expense) being inversely correlated to cash inflows
(oil and gas revenues). The company may enter into derivative forward
exchange rate contracts to manage this risk, but has not done so to date.
The table below shows the company's exposure to foreign currencies on the
balance sheet for its financial instruments:
-------------------------------------------------------------------------
($000) Per CAD USD ARS PEN COP
Balance $ -------------------------------------
Sheet CAD $ equivalent amounts
-------------------------------------------------------------------------
Cash and cash
equivalents 11 (29) 393 (461) 6 102
-------------------------------------------------------------------------
Accounts
receivable 38,288 176 17,105 17,569 3,395 43
-------------------------------------------------------------------------
Accounts
payable and
accrued
liabilities (32,770) (357) (8,296) (24,040) (7) (70)
-------------------------------------------------------------------------
Income taxes
payable (5,817) (308) 180 (5,689)
-------------------------------------------------------------------------
Bank debt (53,039) (17,063) (35,976)
-------------------------------------------------------------------------
Balance sheet
exposure (53,327) (17,581) (26,594) (12,621) 3,394 75
-------------------------------------------------------------------------
The company estimates a three percent change in the Canadian Dollar
against the above foreign currencies could be reasonably possible over a
three month period. A three percent strengthening in the Canadian Dollar
would result in a change to after tax net earnings and other
comprehensive income as follows (an equal but opposite impact to net
earnings and other comprehensive income would result if the Canadian
Dollar weakened by three percent):
-------------------------------------------------------------------------
($000) USD ARS PEN COP
--------------------------
CAD $ equivalent amounts
-------------------------------------------------------------------------
Increase (decrease) in after tax earnings 226 - (69) (2)
-------------------------------------------------------------------------
Increase (decrease) in other comprehensive
income 820 - - -
-------------------------------------------------------------------------
6. CREDIT FACILITIES
On September 5th, 2007, the company entered into a US$100 million
reserve-based revolving credit facility, with a borrowing base of
US$60 million. The initial facility term is for three years, bears
interest at LIBOR plus a margin, is secured by a pledge of the shares of
Petrolifera's subsidiaries and has a provision for a borrowing base
adjustment every six months, with the next adjustment being calculated as
at June 30, 2008. Drawings under this facility are made for a term of
less than one year and are therefore classified as current liabilities.
Deferred financing costs of $2.0 million related to this facility are
being amortized over the remaining term of the facility.
In December 2007 the company established an $18 million line of credit
with a Canadian chartered bank. This facility bears interest at a
floating rate and is solely secured by the ABCP notes.
As of March 31, 2008, the reserve based facility had US$35.0 million
outstanding and the line of credit facility had $17.1 million
outstanding. Interest expense on the facilities for the three months
ended March 31, 2008 was $0.7 million.
7. ASSET RETIREMENT OBLIGATIONS
At March 31, 2008 the estimated total undiscounted amount required to
settle the asset retirement obligations was $11.9 million
(December 31, 2007 - $11.3 million). These obligations are expected to be
settled over the useful lives of the underlying assets, which currently
extend up to 20 years into the future. This amount has been discounted
using a credit-adjusted risk-free interest rate of six percent and an
annual inflation rate of two percent. Changes to asset retirement
obligations were as follows:
------------------------------------------------------------------------
Three months ended Year ended
March 31, December 31,
2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Asset retirement obligations, beginning of period $5,639 $2,347
Liabilities incurred 527 2,678
Changes in estimates - 490
Accretion expense 86 124
-------------------------------------------------------------------------
Asset retirement obligations, end of period $6,252 $5,639
-------------------------------------------------------------------------
8. SHARE CAPITAL, WARRANTS AND CONTRIBUTED SURPLUS
Authorized
The authorized share capital is comprised of an unlimited number of
common shares.
Issued:
-------------------------------------------------------------------------
Number Amount
of Shares ($000)
-------------------------------------------------------------------------
Share capital and warrants:
Balance, share capital and warrants,
December 31, 2007 50,126,510 $54,356
Issued upon exercise of options 226,500 165
Assigned fair value of options exercised - 39
-------------------------------------------------------------------------
Balance, share capital and warrants,
March 31, 2008 50,353,010 $54,560
-------------------------------------------------------------------------
Contributed surplus:
-------------------------------------------------------------------------
Balance, contributed surplus, December 31, 2007 $10,188
Assigned fair value of options exercised (39)
Assigned fair value of stock options vesting 2,398
-------------------------------------------------------------------------
Balance, contributed surplus, March 31, 2008 $12,547
-------------------------------------------------------------------------
Total share capital, warrants and contributed
surplus:
December 31, 2007 $64,544
March 31, 2008 $67,108
-------------------------------------------------------------------------
(a) Common Share Purchase Warrants
As at March 31, 2008, there were 160,000 Common Share Purchase Warrants
outstanding to acquire 160,000 common shares at $0.40 per share until
October 17, 2008.
(b) Stock Options
For the three months ended March 31, 2008 and 2007 the company had stock
options outstanding to acquire common shares as follows:
------------------------------------------------------------------------
2008 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
-------------------------------------------------------------------------
Outstanding, beginning
of period 3,228,867 $8.71 2,896,667 $4.86
Granted 619,700 9.94 576,000 19.20
Exercised (226,500) 0.73 (412,000) 1.02
-------------------------------------------------------------------------
Outstanding, end of
period 3,622,067 9.42 3,060,667 8.07
-------------------------------------------------------------------------
Exercisable, end of
period 2,620,999 $7.90 1,411,666 $7.84
-------------------------------------------------------------------------
All options have been granted for a period of five years. Options granted
under the plan are generally fully exercisable after three years and
expire five years after the date granted. The table below summarizes
unexercised stock options:
-------------------------------------------------------------------------
Weighted
Average
Remaining
Contractual
Life at
Number March 31,
Range of Exercise Prices Outstanding 2008
-------------------------------------------------------------------------
$0.50 - $2.00 1,182,667 2.4
$8.55 - $20.95 2,439,400 3.8
-------------------------------------------------------------------------
Total 3,622,067 3.2
-------------------------------------------------------------------------
Vested at March 31, 2008 2,620,999
-------------------------------------------------------------------------
In the first three months of 2008 a compensatory non-cash expense of
$2.4 million (2007 - $2.9 million) was recorded, reflecting the fair
value of stock options amortized over the vesting period.
The fair value of each option granted in 2008 is estimated on the date of
grant using the Black-Scholes option-pricing model with assumptions for
grants as follows:
-------------------------------------------------------------------------
Risk free Expected Expected
interest rate life Volatility
-------------------------------------------------------------------------
2008 2.86% 4 years 88.8%
2007 4.14%-4.73% 4 years 70.3%-75.9%
-------------------------------------------------------------------------
The weighted average fair value at the date of grant of all options
granted in 2008 was $6.43 per option (2007 - $10.38 per option)
9. SEGMENTED INFORMATION
The Company has corporate offices in Canada and Barbados (combined to
comprise the corporate segment), petroleum and natural gas operations in
Argentina and exploration activities in Peru and Colombia. Financial
information pertaining to these operating segments is presented below.
Corporate Argentina Peru Colombia Total
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Three months
ended March
31, 2008
Revenue, gross $48 $27,119 $- $- $27,167
Net earnings
(loss) (5,457) 7,144 63 (12) 1,738
Property and
equipment 302 133,109 23,025 820 157,256
Capital
expenditures - 23,240 7,591 225 31,056
Total assets $34,310 $169,375 $26,595 $998 $231,278
-------------------------------------------------------------------------
Three months
ended March
31, 2007
Revenue, gross $281 $46,841 $- $- $47,122
Net earnings
(loss) (3,931) 19,055 (55) - 15,069
Property and
equipment 301 36,661 3,150 - 40,112
Capital
expenditures 34 6,850 630 - 7,514
Total assets $27,337 $107,060 $3,443 $- $137,840
-------------------------------------------------------------------------
10. SUPPLEMENTARY INFORMATION
(a) Per share amounts
The following table summarizes the common shares used in the per share
calculations:
-------------------------------------------------------------------------
Three months ended March 31 2008 2007
-------------------------------------------------------------------------
Weighted average common shares outstanding 50,212,120 43,800,217
Dilutive effect of all stock options and all
stock purchase warrants 1,349,398 6,834,948
-------------------------------------------------------------------------
Weighted average common shares outstanding
- diluted 51,561,518 50,635,165
-------------------------------------------------------------------------
(b) Net change in non-cash working capital
-------------------------------------------------------------------------
Three months ended March 31 2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Accounts receivable (10,775) (9,338)
Prepaid expenses (76) (35)
Accounts payable and accrued liabilities (5,193) (7,680)
Inventories (390) 33
Income taxes payable (273) 9,503
Due from (to) a related company 7 (109)
-------------------------------------------------------------------------
Total (16,700) (7,626)
-------------------------------------------------------------------------
Operating (12,040) (9,928)
Investing (4,660) 2,302
-------------------------------------------------------------------------
(16,700) (7,626)
-------------------------------------------------------------------------
(c) Supplementary cash flow information
-------------------------------------------------------------------------
Three months ended March 31 2008 2007
-------------------------------------------------------------------------
($000)
-------------------------------------------------------------------------
Interest paid 571 -
Income taxes paid 2,570 409
-------------------------------------------------------------------------
11. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Work Commitments
In 2005 Petrolifera acquired two significant oil and gas exploration
licenses in Peru. The licenses have a total US$41.8 million financial
commitment to complete negotiated work programs on the two licenses over
seven years. The company has the right to withdraw from the licenses at
the end of each period associated with the term of the licenses. The
first license term for Block 106 ended in 2007 and the company has met
its commitment and is currently in the second license term with a
commitment to invest a minimum of US$1.6 million in this next term. In
Block 107, the company is in the first term of the license and expects to
complete all the required work commitments for the term during 2008. The
company has issued letters of credit in the total amount of
US$2.3 million to secure the capital expenditure requirements associated
with the two exploration licenses in Peru.
In 2007 the Company was granted three concessions in Colombia with a
total work commitment of US$5.7 million over a two year period. The
company has issued letters of credit in the total amount of
US$0.6 million in support of these work commitments. In Argentina the
company has total work commitments of US$54.0 million over the next three
years related to the Vaca Mahuida, Puesto Guevara and Gobernador Ayala II
blocks.
Contractual Commitments
The company's annual commitments under service contracts for drilling,
leases for office premises, various operating costs, software license
agreements and other equipment are as follows:
-------------------------------------------------------------------------
Contractual Obligations 2008 2009-2011 Subsequent
to 2012 Total
-------------------------------------------------------------------------
Service contracts and other $8,613 $11,601 $- $20,214
-------------------------------------------------------------------------
Petrolifera is a party to an arbitration proceeding initiated by the
former contract operator of the Puesto Morales/Rinconada block. The
former operator is seeking financial compensation including damages for
wrongful dismissal. Petrolifera is of the opinion that the claim is
without merit and has filed a counterclaim against the former operator.
Potential damages, if any, against the company are not quantifiable at
this time, but in any event are not anticipated to be material to the
company.
Additionally, the company has various guarantees and indemnifications in
place in the ordinary course of business, none of which are expected to
have a significant impact on the company's financial statements or
operations.
>>
For further information: Richard A Gusella, Executive Chairman, Petrolifera Petroleum Limited, Phone: (403) 538-6201, Fax: (403) 538-6225, inquiries@petrolifera.ca, www.petrolifera.ca