Bonterra Oil & Gas Ltd. Announces Second Quarter 2009 Results
CALGARY, Aug. 13 /CNW/ - Bonterra Oil & Gas Ltd. ("Bonterra" or the
"Company") (www.bonterraenergy.com) (TSX: BNE) is pleased to announce its
financial and operational results for the three months and six months ended
June 30, 2009.Highlights
Three months ended Six Months Ended
-------------------------------------------------------------------------
($ 000 except $ per June 30, June 30, June 30, June 30,
share/unit) 2009 2008 2009 2008
-------------------------------------------------------------------------
FINANCIAL
Revenue - realized oil
and gas sales 20,501 34,398 39,801 64,891
Cash flow from operations 9,238 20,530 15,870 36,742
Per share/unit - basic 0.52 1.21 0.91 2.16
Per share/unit - diluted 0.52 1.19 0.91 2.15
Payout ratio(1) 77% 69% 83% 71%
Funds flow(3) 9,780 21,352 18,156 39,410
Per share/unit - basic 0.55 1.25 1.04 2.32
Per share/unit - diluted 0.55 1.24 1.04 2.31
Payout ratio(1) 73% 67% 73% 67%
Cash dividends per
share/unit(1) 0.40 0.84 0.76 1.54
Net earnings 4,544 12,912 10,637 23,716
Per share/unit - basic 0.26 0.76 0.61 1.40
Per share/unit - diluted 0.26 0.75 0.61 1.39
Capital expenditures and
acquisitions 2,255 2,543 4,956 8,964
Total assets 258,393 153,247
Working capital deficiency 13,989 57,148
Long-term debt 71,573 -
Shareholders'/unitholders'
equity 72,332 46,612
-------------------------------------------------------------------------
OPERATIONS
Oil and NGLs
- barrels per day 3,029 3,024 3,148 3,088
- average price
($ per barrel) 59.77 101.69 52.56 94.31
Natural gas - MCF per day 11,912 7,272 12,067 7,206
- average price
($ per MCF) 3.64 9.61 4.42 8.97
Total barrels of oil
equivalent per day (BOE)(2) 5,014 4,236 5,159 4,289
-------------------------------------------------------------------------
(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The 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 and as such may be misleading if
used in isolation.
(3) Funds flow is not a recognized measure under GAAP. For these
purposes, the Company defines funds flow as funds provided by
operations before changes in non-cash operating working capital items
excluding gain on sale of property and asset retirement expenditures.
The TSX does not accept responsibility for the accuracy of this release.REPORT TO SHAREHOLDERS
Bonterra Oil & Gas Ltd. (Bonterra or the Company) is pleased to report
the operating and financial results for the three months and six months ended
June 30, 2009.
The second quarter is generally a difficult period from a production
volume perspective due to road bans making it difficult to repair or complete
wells and gas plant maintenance and repairs are generally done in May and June
which results in wells having to be shut in. The low commodity price
environment, most notably in natural gas prices, has also continued to
negatively impact financial results during the first half of 2009 compared
with the same period in 2008.
Despite these difficult economic times, Bonterra has been able to make
positive advances in many areas. It has been able to substantially reduce its
bank debt, increase its inventory of non-producing properties and most
importantly, has increased its confidence in the potential for economic
success in drilling horizontal wells in the Cardium zone in the Pembina field.
In addition, Bonterra is proud to report that it is one of a small number of
trusts or companies that has increased its monthly payment to
shareholders/unitholders (by 17 percent) in 2009 and this quarter represents
the 44th consecutive quarter dating back to 1998 in which positive net
earnings were achieved.
Operations
Bonterra's production averaged 5,014 BOE per day in the second quarter of
2009, an increase of 18.4 percent over the second quarter of 2008. The
increase is due mainly to additional production from the Company's first
Pembina Cardium horizontal well, the fourth quarter 2008 drilling program and
the Silverwing Energy Inc. acquisition, including the subsequent optimization
of the Silverwing existing wells. The company continues to project a 20
percent increase in 2009 average daily production rates over the previous
year.
Bonterra's capital expenditures during the quarter totaled approximately
$2.3 million and for the first half of the year totaled approximately $5.0
million. This included the start of the 2009 drilling program in June which
included the drilling of our second Cardium horizontal well, participating in
several smaller interest gas wells, completion and tie-in costs related to the
Q408 drilling program, the purchase of additional land rights in the Pembina
area of Alberta and various project and facility upgrades to enhance existing
production.
The majority of the $20 million 2009 capital development drilling program
will be spent in the latter half of the year with a strong focus on the
Pembina Cardium horizontal program. Bonterra has a significant land position
in the Pembina field with a large amount of undeveloped land with similar
reservoir characteristics to the Company's first successful horizontal well.
Bonterra also has a $10,000,000 capital budget in 2009 for acquisitions of
Cobalt Energy Ltd. and additional producing and non-producing lands.
The first horizontal well produced at an average rate of approximately
250 barrels of oil per day in February 2009, its first month of production.
The well is currently producing in excess of 100 barrels of oil per day and
approximately 40 MCF per day of solution gas. The second horizontal well was
drilled in June, completed and tested in July and commenced production in
August, 2009.
The horizontal program provides Bonterra with the opportunity to continue
unlocking further value from the Pembina field, Canada's largest
original-oil-in-place field. The Company has identified an additional 80
horizontal locations and is planning to drill three to four additional
horizontal Cardium wells in 2009 (working interests range from 68 to 100
percent) to further evaluate the play.
Improved Financial Strength
During the second quarter of 2009, the Company took several steps towards
improving its financial position. Bonterra entered into a new syndicated
banking facility effective April 29, 2009 consisting of a $100 million
syndicated revolving credit facility and a $20 million non-syndicated
revolving credit facility. In addition, the Company issued 1,068,000 common
shares at a price of $16.85 per share for net proceeds of $16,985,000 with the
funds used to retire debt and for general working capital.
Bonterra is continuing to seek additional ways to improve the financial
position through project reviews, cost reduction programs and operational
efficiencies. The improved financial position provides increased flexibility
for the Company to fund its 2009 capital development program and to pursue
additional acquisition opportunities that may become available.
Subsequent to quarter end, Bonterra was able to successfully close the
strategic acquisition of Cobalt Energy Ltd. (Cobalt), a junior oil and gas
exploration company. The acquisition is expected to result in an additional
production of approximately 40 BOE per day during the second half of 2009 and
also includes increased working interests in approximately 11 sections of land
which has prospective horizontal drilling opportunities.
Commodity Prices
Oil prices have continued to recover during the second quarter of the
year and into the third quarter. The Company's average realized price for
crude oil and natural gas liquids was $59.77 in the second quarter of 2009
versus $45.80 recorded during the first quarter of the year. Higher crude oil
prices were partially offset by the continued decline in natural gas prices
from $5.19 per MCF in Q109 to $3.64 per MCF in Q209. However, Bonterra
recorded a 17 percent increase in funds flow from operations and a 23 percent
increase in cash netbacks quarter over quarter.
As a result of the improved oil price environment and strong production
levels, Bonterra was able to increase the dividend to shareholders to $0.14
per share beginning with the June 30, 2009 dividend payment (May 2009
production month) from $0.12 per share previously. Cash payments to
shareholders during the second quarter of 2009 totaled $0.40 per share with a
payout ratio of 73 percent of fund flow. The Board of directors and management
will continue to monitor dividend levels, payout ratios and capital
expenditures on a monthly basis and will adjust the amount if necessary.
Natural gas prices have continued to collapse. Prices declined
significantly to $3.64 per MCF during the second quarter of 2009 and the
Company's average realized price decreased approximately 30 percent quarter
over quarter and over 62 percent compared with the same period in 2008.
It is difficult to predict when natural gas prices might recover. The low
price environment negatively impacts funds flow, but may provide opportunities
for the Company to further grow its asset base through acquisitions. Bonterra
has historically made acquisitions counter-cyclically and this strategic
approach remains significant in today's marketplace. The Company's strong
balance sheet provides the ability to move quickly and the junior sector
continues to operate within a difficult business environment. As a result,
there has been an increase in assets for sale and Bonterra will endeavor to
take advantage of any opportunities to add additional value to its portfolio.
Summary
As the Company moves into the second half of 2009, it will continue to
execute its long-term strategy to maximize shareholder returns through prudent
financial management while conservatively growing the Company with a targeted
exploitation and development program.(signed) (signed)
George F. Fink Randy M. Jarock
Chief Executive Officer and President and Chief Operating
Director OfficerA Discussion of Financial and operational Results
The following press release is a review of the operations and current
financial position for Bonterra Oil & Gas Ltd. ("Bonterra" or the "Company")
and should be read in conjunction with the unaudited financial statements for
the six months ended June 30, 2009, including the notes related thereto, and
the audited financial statements for the fiscal year ended December 31, 2008,
together with the notes related thereto.
Non-GAAP Measures
Throughout the press release we use the terms "payout ratio" and "cash
netback" to analyze operating performance. Payout ratio is calculated by
dividing cash distributions/dividends to unitholders/shareholders by cash flow
from operating activities both of which are measures prescribed by GAAP which
appear on our consolidated statements of cash flows. Cash netback is
calculated by dividing various operation and deficit statement items as
determined by GAAP by total production on a barrel of oil equivalent basis.
The above terms do not have standardized meaning or definition as prescribed
by GAAP and therefore may not be comparable with the calculation of similar
measures by other entities.
Forward-looking Information
Certain statements contained in this press release include statements
which contain words such as "anticipate", "could", "should", "expect", "seek",
"may", "intend", "likely", "will", "believe" and similar expressions, relating
to matters that are not historical facts, and such statements of our beliefs,
intentions and expectations about development, results and events which will
or may occur in the future, constitute "forward-looking information" within
the meaning of applicable Canadian securities legislation and are based on
certain assumptions and analysis made by us derived from our experience and
perceptions. Forward-looking information in this press release includes, but
is not limited to: expected cash provided by continuing operations; cash
dividends; future capital expenditures, including the amount and nature
thereof; oil and natural gas prices and demand; expansion and other
development trends of the oil and gas industry; business strategy and outlook;
expansion and growth of our business and operations; and maintenance of
existing customer, supplier and partner relationships; supply channels;
accounting policies; credit risks; and other such matters.
All such forward-looking information is based on certain assumptions and
analyses made by us in light of our experience and perception of historical
trends, current conditions and expected future developments, as well as other
factors we believe are appropriate in the circumstances. The risks,
uncertainties, and assumptions are difficult to predict and may affect
operations, and may include, without limitation: foreign exchange
fluctuations; equipment and labour shortages and inflationary costs; general
economic conditions; industry conditions; changes in applicable environmental,
taxation and other laws and regulations as well as how such laws and
regulations are interpreted and enforced; the ability of oil and natural gas
companies to raise capital; the effect of weather conditions on operations and
facilities; the existence of operating risks; volatility of oil and natural
gas prices; oil and gas product supply and demand; risks inherent in the
ability to generate sufficient cash flow from operations to meet current and
future obligations; increased competition; stock market volatility;
opportunities available to or pursued by us; and other factors, many of which
are beyond our control.
Actual results, performance or achievements could differ materially from
those expressed in, or implied by, this forward-looking information and,
accordingly, no assurance can be given that any of the events anticipated by
the forward-looking information will transpire or occur, or if any of them do,
what benefits will be derived there from. Except as required by law, Bonterra
disclaims any intention or obligation to update or revise any forward-looking
information, whether as a result of new information, future events or
otherwise.
The forward-looking information contained herein is expressly qualified
by this cautionary statement.Quarterly Comparisons
2009
-------------------------------------------------
Financial ($ 000 except
$ per share) Q2 Q1
-------------------------------------------------
Revenue - realized oil and
gas sales 20,501 19,300
Cash flow from operations 9,238 6,632
Per share - basic 0.52 0.38
Per share - fully diluted 0.52 0.38
Cash payments per share(1) 0.40 0.36
Payout Ratio(1) 77% 94%
Net earnings 4,544 6,093
Per share - basic 0.26 0.35
Per share - fully diluted 0.26 0.35
Capital expenditures
and acquisitions 2,255 2,696
Total assets 258,393 260,732
Working capital deficiency 13,989 14,909
Long-term debt 71,573 89,383
Shareholders' equity 72,332 56,377
-------------------------------------------------
Operations
Oil and NGLs (barrels
per day) 3,029 3,268
Natural gas (MCF per day) 11,912 12,223
Total BOE per day(2) 5,014 5,305
-------------------------------------------------
2008
-------------------------------------------------------------------------
Financial ($ 000 except
$ per share/unit) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 22,613 34,226 34,398 30,493
Cash flow from operations 10,336 22,492 20,530 16,212
Per share/unit - basic 0.59 1.31 1.21 0.96
Per share/unit -
fully diluted 0.59 1.30 1.20 0.96
Cash payments per
share/unit(1) 0.62 0.96 0.84 0.70
Payout Ratio(1) 105% 73% 69% 73%
Net earnings 10,585 21,125 12,912 10,804
Per share/unit - basic 0.62 1.23 0.76 0.64
Per share/unit -
fully diluted 0.62 1.22 0.75 0.64
Capital expenditures
and acquisitions 30,405 6,038 2,543 6,421
Total assets 265,301 150,120 153,247 150,169
Working capital deficiency 23,878 47,499 57,148 57,810
Long-term debt 79,910 - - -
Shareholders'/unitholders'
equity 56,777 57,623 46,612 48,136
-------------------------------------------------------------------------
Operations
Oil and NGLs
(barrels per day) 3,105 3,013 3,024 3,153
Natural gas (MCF per day) 8,892 7,233 7,272 7,139
Total BOE per day(2) 4,587 4,219 4,236 4,343
-------------------------------------------------------------------------
2007
-------------------------------------------------------------------------
Financial ($ 000 except
$ per unit) Q4 Q3 Q2 Q1
-------------------------------------------------------------------------
Revenue - realized oil
and gas sales 26,573 23,794 23,462 22,602
Cash flow from operations 13,369 11,886 13,413 12,765
Per unit - basic 0.79 0.70 0.79 0.76
Per unit - fully diluted 0.79 0.70 0.79 0.76
Cash distributions(1) 0.66 0.66 0.66 0.66
Payout Ratio(1) 84% 94% 84% 87%
Net earnings 8,372 8,945 5,371 7,662
Per unit - basic 0.49 0.53 0.32 0.45
Per unit - fully diluted 0.49 0.53 0.32 0.45
Capital expenditures
and acquisitions 7,213 2,763 1,699 7,625
Total assets 143,239 138,140 139,432 140,926
Working capital deficiency 58,766 50,041 49,595 49,288
Long-term debt - - - -
Unitholders' equity 44,218 50,820 51,920 57,646
-------------------------------------------------------------------------
Operations
Oil and NGLs
(barrels per day) 3,098 3,054 3,074 3,227
Natural gas (MCF per day) 7,176 6,196 6,663 6,470
Total BOE per day(2) 4,295 4,086 4,184 4,305
-------------------------------------------------------------------------
(1) Cash payments per share/unit are based on payments made in respect of
production months within the quarter.
(2) BOE is calculated using a conversion ratio of 6 MCF to 1 barrel of
oil. The 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 and as such may be misleading if
used in isolation.
Production
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Crude oil and
NGLs (barrels
per day) 3,029 3,268 3,024 3,148 3,088
Natural gas
(MCF per day) 11,912 12,223 7,272 12,067 7,206
-------------------------------------------------------------------------
Average BOE
per day 5,014 5,305 4,236 5,159 4,289
-------------------------------------------------------------------------Barrels of oil equivalent (BOE) are calculated using a conversion ratio
of 6 MCF to 1 barrel of oil. The 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 and as such may be misleading if
used in isolation.
Production volumes for the first half of 2009 were up 20.3 percent over
the corresponding 2008 period. Added production related to the Silverwing
Energy Inc. (Silverwing) acquisition, Bonterra's Q4 2008 drilling program
including the start of production from the Company's first Pembina Cardium
horizontal well, new gas wells drilled, and optimization of existing wells.
These additions more than offset Bonterra's average corporate production
decline of approximately two percent per quarter.
Q209 production was down 291 BOE per day from Q109 due to spring break up
as well as planned gas plant scheduled maintenance shutdowns at several of the
Company's main gas plants. Also flush production from the Company's first
horizontal well and new gas well on the former Silvering property resulted in
higher Q109 volumes.
The Company commenced its 2009 drilling program in June with the drilling
of the Company's second horizontal well (0.68 net). The well commenced
production in August, 2009.Revenue
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue - oil
and gas sales
(000's) 20,501 19,300 34,398 39,801 64,891
Average Realized
Prices:
Crude oil and
NGLs (per
barrel) 59.77 45.80 101.69 52.56 94.31
Natural gas
(per MCF) 3.64 5.19 9.61 4.42 8.97
-------------------------------------------------------------------------
Revenue from petroleum and natural gas sales decreased $25,090,000 in the
first half of 2009 from the corresponding period in 2008 primarily due to a 44
percent drop in crude oil prices and a 51 percent drop in natural gas prices.
The drop in commodity prices were partially offset with the above mentioned
production increases. Quarter over quarter saw an increase in revenues of
$1,201,000 due to improved crude oil prices.
Royalties
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Crown royalties 674 1,364 4,263 2,038 7,876
Freehold royalties,
gross overriding
royalties and net
carried interests 587 501 1,056 1,088 1,787
-------------------------------------------------------------------------
Total royalty
expense 1,261 1,865 5,319 3,126 9,663
-------------------------------------------------------------------------
% of total revenue 6.2 9.7 15.5 7.9 14.9
-------------------------------------------------------------------------Royalties paid by the Company consist primarily of Crown royalties paid
to the Provinces of Alberta, Saskatchewan and British Columbia. Most of the
Company's wells are low productivity wells and therefore have low Crown
royalty rates. The Company's average Crown royalty rate is approximately 5.2
percent (2008 - 11.2 percent) and approximately 2.7 percent (2008 - 2.5
percent) for other royalties.
The recently announced new Alberta Crown royalty rates vary by prices as
well as productivity levels. With recent declines in commodity prices and the
Silvering acquisition (mostly BC production with lower Crown royalty rates)
the Company has experienced a significant reduction in Crown royalties in the
first half of 2009. In addition, the majority of the Company's Crown royalty
payments are in respect to natural gas production. With the significant
reduction in natural gas prices experienced during the second quarter coupled
with its low productivity wells, Crown royalty payments have dropped by
$690,000 quarter over quarter.
The government of the province of Alberta has recently announced drilling
incentives and royalty reductions in respect of wells drilled after April 1,
2009 and prior to March 31, 2011. The Company is currently examining its
capital requirements (see Liquidity and Capital Resources) and the impact on
its crown royalty for newly drilled wells in that period. The Company is
planning to maximize the crown royalty credits available under the new
drilling incentive program which should result in lower crown royalty payments
for the balance of 2009 and 2010.Production Costs
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Production costs 7,355 7,038 6,089 14,393 12,406
$ per BOE 16.12 14.74 15.79 15.41 15.89
-------------------------------------------------------------------------Total production costs in the first half of 2009 have increased by
$1,987,000 over the first half of 2008. The increase is due to increased
production volumes (see Production). On a per BOE basis, production costs have
declined in the first half of 2009 compared to the same period in 2008 mainly
due to a general decline in service and material costs resulting from
decreased industry demand and field optimization.
During the second quarter, the Company incurred costs related to the
annual scheduled maintenance shutdowns on several of its Pembina gas plants as
well as clean-up costs related to a minor pipeline break at one of the
Company's Saskatchewan properties. These costs resulted in a slight increase
in total operating costs compared to the first quarter of 2009. The Company
continues to anticipate operating costs will remain in the $14 to $15 per BOE
range for 2009.
The Company's production comes primarily from low productivity wells.
These wells generally result in higher production costs on a per
unit-of-production basis as costs such as municipal taxes, surface leases,
power and personnel costs are not variable with production volumes. The high
production costs for the Company are substantially offset by current low
royalty rates of approximately 7.9 percent, which is much lower than industry
average for conventional production and results in high cash netbacks on a
combined basis despite higher than industry average production costs.General and Administrative (G&A) Expense
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
G&A Expense 1,108 939 855 2,047 1,732
$ per BOE 2.43 1.97 2.22 2.19 2.22
-------------------------------------------------------------------------The increase in G&A expense in the first half of 2009 compared to the
first half of 2008 was due to increased accounting contract personnel costs
($123,000) related to temporary staffing needs; professional service costs
($168,000) related to IFRS, internal control reviews and various legal and
accounting services related to annual filing requirements; computer services
fees ($191,000) related to new monthly geological software licensing fees,
service costs related to a new production accounting software, and the
contracting of a new IT manager position; bad debt expense ($53,000) due to
the receivership of one of the Company's joint venture partners and numerous
accounts with small oil and gas organizations which have become delinquent;
bank charges ($262,000) related to cancelling the old banking facility and
setting up the new banking facility, offset partially by reduced employee
compensation ($613,000).
Quarter over quarter saw an increase of $169,000 related primarily to the
write off of costs associated with the establishment of the old banking
facility $132,000 as well as additional professional fees and computer
services costs as discussed above.
G&A costs are anticipated to remain at approximately $1,000,000 per
quarter ($2 per BOE) as costs associated with contract personnel and
production accounting will be reduced, but will be offset with additional bank
charges related to the new banking facility (approximately $100,000 per
quarter).Interest Expense
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Interest Expense 915 826 650 1,741 1,449
-------------------------------------------------------------------------Interest charges increased in the first half of 2009 as average
outstanding debt balance (included related party balances) increased by
approximately $40,000,000 over the first half of 2008. The acquisition of
Silverwing as well as the reorganization into a corporation resulted in an
approximate additional $44.5 million of debt. This was partially offset by net
proceeds of $16,985,000 from a 2009 second quarter private equity issue.
Offsetting the increased debt balances was an average reduction of one percent
(4.5 percent in 2008 to 3.5 percent in 2009) in interest rates paid on the
outstanding debt balances.
Effective April 29, 2009, the Company entered into a new bank facility
with new terms and conditions. The new facility consists of a $100,000,000
syndicated revolving credit facility and a $20,000,000 non-syndicated
revolving credit facility.
The interest rate on the new credit facility is calculated as follows:-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
(2) Numbers in table represent basis points.Consolidated total funded debt to consolidated cash flow ratio shall be
adjusted effective as of the first day of the next fiscal quarter following
the end of each fiscal quarter, with each such adjustment to be effective
until the next such adjustment.
The above rate schedule combined with current bank prime and interest
rates on the related party debt is expected to result in average borrowing
costs of approximately three and a half percent for the balance of the fiscal
year.
Stock-Based Compensation
Stock-based compensation is a statistically calculated value representing
the estimated expense of issuing employee stock options. The Company records a
compensation expense over the vesting period based on the fair value of
options granted to employees, directors and consultants. Based on currently
outstanding options, the Company anticipates that an expense of approximately
$450,000 will be recorded for the balance of 2009, $425,000 in 2010 and
$160,000 in 2011.
Depletion, Depreciation, Accretion and Dry Hole Costs
Provision for depletion, depreciation and accretion was $9,523,000 and
$7,010,000, respectively for the six month periods ending June 30, 2009 and
June 30, 2008. The increase in the depletion amount was due primarily to
increased production volumes and an increase in the average cost of reserves
resulting from the Silverwing acquisition. The Company has capital costs of
approximately $6.60 (June 30, 2008 - $6.10) per proved BOE of reserves based
on the December 31, 2008 independent engineering report.
Taxes
On November 12, 2008, the Company converted from a trust to a
corporation. Due to the conversion and the acquisition of Silverwing, the
Company increased its usable tax pools to approximately $468,000,000. As a
result of the reorganization, the Company has recorded a future income tax
asset and a corresponding deferred tax credit. These amounts will be amortized
into future tax expense as the associated tax pools are consumed.
The current tax provision relates to a resource surcharge of $129,000
payable to the Province of Saskatchewan as well as a capital tax amount of
$269,000 payable to the Province of Quebec. The resource surcharge is
calculated as a flat percent of revenues generated from the sale of petroleum
products produced in Saskatchewan. The resource surcharge rate is three
percent in 2009. The capital tax payable to the Province of Quebec is a
one-time charge that resulted from the Company's conversion to a corporation.Net Earnings
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Earnings 4,544 6,093 12,912 10,637 23,716
-------------------------------------------------------------------------Net earnings decreased in the first six months of 2009 by $13,079,000
from the corresponding 2008 period. Reduced revenues resulting from decreased
commodity prices were the main reason for the reduction. This reduction was
partially offset by production volume gains. The Company continues to return
in excess of 25 percent of its gross realized revenues in net earnings. The
Company's low capital costs combined with the Company's low production decline
rates should allow for continued positive earnings even in the current lower
commodity price environment.
The three months ended June 30, 2009 saw a decline of $1,549,000 in net
earnings from the first three months of 2009. The decrease was primarily due
to reduced future income tax recovery. Income before taxes was higher quarter
over quarter by $853,000 due primarily to increased crude oil prices.
Comprehensive Income
Other comprehensive income for 2009 consists of an unrealized gain on
investment in a related party of $818,000 (2008 - ($164,000)) due to an
increase in the related company's fair value.Cash Flow from Operations
Three months ended Six months ended
June 30, March 31, June 30, June 30, June 30,
($ 000) 2009 2009 2008 2009 2008
-------------------------------------------------------------------------
Cash flow from
operations 9,238 6,632 20,530 15,870 36,742
-------------------------------------------------------------------------First half 2009 cash flow from operations decreased 57 percent compared
to first half 2008 due to decreased commodity prices received during the first
six months of 2009. Q2 cash flow increased by $2,606,000 from Q1 due primarily
to recovering crude oil pricing.
With the continuing depressed crude oil and natural gas prices, cash flow
for the remainder of 2009 is expected to be significantly negatively affected
compared to 2008 figures. The price declines should be partially offset by
increases in production volumes of approximately 20 percent in 2009 over 2008
levels and a reduction in royalties.
Cash Netback
The following table illustrates the Company's cash netback from
operations for the six month periods ended June 30:$ per Barrel of Oil Equivalent (BOE) 2009 2008
-------------------------------------------------------------------------
Production volumes (BOE) 933,781 780,644
Gross production revenue $ 42.62 $ 90.02
Realized gain (loss) on risk management contracts - (6.90)
Royalties (3.35) (12.38)
Field operating costs (15.41) (15.89)
-------------------------------------------------------------------------
Field netback 23.86 54.85
General and administrative (2.19) (2.22)
Interest and taxes (2.29) (2.18)
-------------------------------------------------------------------------
Cash netback $ 19.38 $ 50.45
-------------------------------------------------------------------------
The following table illustrates the Company's cash netback from operations
for the three month periods ended:
June 30, March 31,
$ per Barrel of Oil Equivalent (BOE) 2009 2009
-------------------------------------------------------------------------
Production volumes (BOE) 456,286 477,495
Gross production revenue $ 44.93 $ 40.42
Royalties (2.76) (3.91)
Field operating costs (16.12) (14.74)
-------------------------------------------------------------------------
Field netback 26.05 21.77
General and administrative (2.43) (1.97)
Interest and taxes (2.17) (2.40)
-------------------------------------------------------------------------
Cash netback $ 21.45 $ 17.40
-------------------------------------------------------------------------Related Party Transactions
The Company owns 689,682 (December 31, 2008 - 689,682) common shares in
Comaplex Minerals Corp. ("Comaplex") which have a fair market value as of June
30, 2009 of $3,083,000 (December 31, 2008 - $2,131,000). Comaplex is a
publicly traded mineral company on the Toronto Stock Exchange. The Company's
ownership in Comaplex represents approximately 1.3 percent of the issued and
outstanding common shares of Comaplex. The Company has common directors and
management with Comaplex.
Comaplex paid a management fee to the Company of $165,000 (2008 -
$165,000). Comaplex also shares office rental costs and reimburses the Company
for costs related to employee benefits and office materials. In addition,
Comaplex owns 204,633 (December 31, 2008 - 204,633) common shares in the
Company. Services provided by the Company include executive services (chief
executive officer, president and vice president, finance duties), accounting
services, oil and gas administration and office administration. All services
performed are charged at estimated fair value. At June 30, 2009, Comaplex owed
the Company $75,000 (December 31, 2008 - $56,000).
As of June 30, 2009, Comaplex has loaned the Company $12,000,000
(December 31, 2008 - Nil). The loan is unsecured, bears interest at Canadian
chartered bank prime plus one quarter of a percent and has no set repayment
terms. Effective July 1, 2009, the interest rate was reduced to Canadian
chartered bank prime less .25 percent. The reduction in rate was due to the
lowering of the Company's bank interest rate caused by the improving debt to
cash flow ratio (see Interest Expense and Liquidity and Capital Resources
sections).
The loan can only be repaid should the Company have sufficient available
borrowing limits under the Company's credit facility. Interest paid on this
loan during the first six months of 2009 was $79,000. This results in being a
substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex
by Bonterra is substantially lower than bank interest and for Comaplex the
interest earned is substantially higher than Comaplex would receive by
investing in bank instruments such as BA's or GIC's.
The Company also has a management agreement with Pine Cliff Energy Ltd.
(Pine Cliff). Pine Cliff has common directors and management with the Company.
Pine Cliff trades on the TSX Venture Exchange. Pine Cliff paid a management
fee to the Company of $60,000 (2008 - $118,800). Services provided by the
Company include executive services (CEO, president and vice president, finance
duties), accounting services, oil and gas administration and office
administration. All services performed are charged at estimated fair value.
The Company has no share ownership in Pine Cliff. As at June 30, 2009, the
Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008
- $1,000).
As of June 30, 2009, the Company's CEO and major shareholder has loaned
the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is
unsecured, bears interest at Canadian chartered bank prime and has no set
repayment terms. Effective July 1, 2009 the interest rate was decreased to
Canadian chartered bank prime less .25 percent. The loan can only be repaid
should the Company have sufficient available borrowing limits under the
Company's credit facility. Interest paid on this loan during the first six
months of 2009 was $101,000. This loan results in being a substantial benefit
to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is
substantially lower than bank interest and for the CEO the interest earned is
substantially higher than the CEO would receive by investing in bank
instruments such as BA's or GIC's.
Liquidity and Capital Resources
During the first six months of 2009, the Company incurred capital costs
of $4,956,000 (2008 - $8,964,000). In the second quarter of 2009, the Company
drilled one horizontal well (0.68 net) and acquired approximately $600,000 of
land rights in the Pembina area of Alberta. During the first half of 2009,
Bonterra also participated in a number of smaller interest natural gas wells
for total costs of approximately $1,000,000 and spent approximately $1,300,000
on completion and tie in costs in respect to wells drilled in Q4 2008. The
balance of the capital expenditures related to various capital projects
ranging from pipeline tie-ins to maximizing natural gas production to various
battery upgrades to enhance overall production from existing wells.
On July 2, 2009, Bonterra completed its acquisition of Cobalt Energy Ltd.
(Cobalt). The Company issued 201,738 common shares and assumed $2,818,000 of
negative working capital. Total costs to complete the acquisition were
approximately $170,000. This acquisition resulted in acquiring an additional
40 BOE per day of production as well as increasing the Company's land position
in approximately 11 sections of land with potential horizontal locations in
the Pembina area of Alberta.
The Company currently has plans to spend an estimated $20,000,000 in 2009
(approximately $16,000,000 in the third and fourth quarters) on development of
its oil and gas properties. Land acquisitions and property or corporate
acquisitions estimated to be $10,000,000 (including the Cobalt acquisition)
will bring the total to approximately $30,000,000. With the recent Crown
royalty credit announcement by the Alberta government, the Company plans on
drilling additional horizontal Pembina Cardium oil wells as well as vertical
Pembina Cardium wells. The exact number of each will depend on drilling
success and commodity prices. The 2009 drilling program commenced in the
second quarter with the majority of the drilling expenditures expected to be
incurred during the third and fourth quarters.
Bonterra anticipates funding the 2009 capital program out of cash flow
and the Company's line of credit. Effective April 29, 2009, the Company
entered into a new bank facility. The new facility consists of a $100,000,000
syndicated revolving credit facility and a $20,000,000 non-syndicated
revolving credit facility. At June 30, 2009, the Company's bank loan was
$71,573,000 (December 31, 2008 - $93,235,000). The terms of the new facility
provides that the loan is revolving until April 28, 2011, is subject to annual
review and has no fixed payment requirements.The following is a list of the material covenants:
1) The Company is required to not exceed $120,000,000 in consolidated
debt (includes negative working capital but excludes debt to related
parties). As of June 30, 2009 the Company had consolidated debt of
$63,562,000.
2) Dividends paid in any quarter shall not exceed 80 percent of the
average of the previous four quarters' cash flow as defined under
GAAP. During the quarter Bonterra paid $6,708,000 in dividends. This
compares to $11,998,000 that was allowed under the bank covenant.Additional information relating to the Company may be found on
www.sedar.com or visit our website at www.bonterraenergy.com.
The following consolidated financial statements and notes to the
consolidated financial statements have been provided for further details.CONSOLIDATED BALANCE SHEETS
As at June 30, 2009 and December 31, 2008
(unaudited)
($ 000) 2009 2008
-------------------------------------------------------------------------
Assets
Current
Restricted term deposit - 20
Accounts receivable (Note 11) 10,553 11,753
Crude oil inventory 538 845
Prepaid expenses 4,468 4,222
Future income tax asset (Note 8) 8,591 2,669
Investments in related party (Note 3) 3,083 2,131
-------------------------------------------------------------------------
27,233 21,640
-------------------------------------------------------------------------
Restricted cash (Note 4) 1,257 1,252
Future income tax asset (Note 8) 77,021 85,416
Property and Equipment (Note 5)
Petroleum and natural gas properties and
related equipment 237,585 232,685
Accumulated depletion and depreciation (84,703) (75,692)
-------------------------------------------------------------------------
Net Property and Equipment 152,882 156,993
-------------------------------------------------------------------------
258,393 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued liabilities 11,827 23,888
Due to related parties (Note 6) 22,000 6,000
Deferred credit (Note 8) 7,395 2,305
Short-term debt (Note 7) - 13,325
-------------------------------------------------------------------------
41,222 45,518
Long-term bank debt (Note 7) 71,573 79,910
Deferred credit (Note 8) 54,598 64,758
Asset retirement obligations 18,668 18,338
-------------------------------------------------------------------------
186,061 208,524
-------------------------------------------------------------------------
Shareholders' Equity (Note 9)
Share capital 116,773 99,530
Contributed surplus 3,010 2,542
-------------------------------------------------------------------------
119,783 102,072
-------------------------------------------------------------------------
Deficit (49,689) (46,715)
Accumulated other comprehensive income (Note 10) 2,238 1,420
-------------------------------------------------------------------------
(47,451) (45,295)
-------------------------------------------------------------------------
Total Shareholders' Equity 72,332 56,777
-------------------------------------------------------------------------
258,393 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the periods ended
June 30 (unaudited) Three Months Six Months
($ 000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Unitholders' equity,
beginning of period
(Note 1) - 48,136 - 44,218
Shareholders' equity,
beginning of period
(Note 1) 56,377 - 56,777 -
Comprehensive income
for the period 5,181 12,577 11,455 23,552
Net capital contributions 17,243 4,210 17,243 4,490
Stock-based compensation 239 279 468 562
Dividends declared (6,708) - (13,611) -
Distributions declared - (18,590) - (26,210)
-------------------------------------------------------------------------
Unitholders' Equity,
End of Period - 46,612 - 46,612
-------------------------------------------------------------------------
Shareholders' Equity,
End of Period 72,332 - 72,332 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
For the periods ended
June 30 (unaudited) Three Months Six Months
($000, except $ per Share) 2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Oil and gas sales 20,501 38,412 39,801 70,272
Loss on risk management
contracts - cash - (4,014) - (5,381)
Loss on risk management
contracts - non-cash - (4,636) - (7,025)
Royalties (1,261) (5,319) (3,126) (9,663)
Interest and other (6) 9 60 22
-------------------------------------------------------------------------
19,234 24,452 36,735 48,225
-------------------------------------------------------------------------
Expenses
Production costs 7,355 6,089 14,393 12,406
General and administrative 1,108 855 2,047 1,732
Interest on debt 915 650 1,741 1,449
Stock-based compensation 239 279 468 562
Depletion, depreciation
and accretion 4,909 3,516 9,523 7,010
-------------------------------------------------------------------------
14,526 11,389 28,172 23,159
-------------------------------------------------------------------------
Earnings Before Taxes 4,708 13,063 8,563 25,066
-------------------------------------------------------------------------
Taxes (Recovery)
Current 76 142 398 253
Future 88 9 (2,472) 1,097
-------------------------------------------------------------------------
164 151 (2,074) 1,350
-------------------------------------------------------------------------
Net Earnings for the Period 4,544 12,912 10,637 23,716
Deficit, beginning
of period (47,525) (48,359) (46,715) (51,543)
Dividends declared (6,708) - (13,611) -
Distributions declared - (13,116) - (20,736)
-------------------------------------------------------------------------
Deficit, End of Period (49,689) (48,563) (49,689) (48,563)
-------------------------------------------------------------------------
Net Earnings Per Share
- Basic (Note 9) 0.26 0.76 0.61 1.40
-------------------------------------------------------------------------
Net Earnings Per Share
- Diluted (Note 9) 0.26 0.75 0.61 1.39
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Periods Ended June 30
(unaudited) Three Months Six Months
($ 000, except $ per Share) 2009 2008 2009 2008
-------------------------------------------------------------------------
Net Earnings for the Period 4,544 12,912 10,637 23,716
Unrealized gains and losses
on investments (net of
Income taxes; Three months
ended 2009 - 108, 2008 -
(112); Six months ended 2009
- 134, 2008 - (55)) 637 (355) 818 (164)
-------------------------------------------------------------------------
Other Comprehensive Income
(Loss) 637 (355) 818 (164)
-------------------------------------------------------------------------
Comprehensive Income 5,181 12,577 11,455 23,552
-------------------------------------------------------------------------
Comprehensive Income
Per Share - Basic (Note 9) 0.29 0.74 0.66 1.39
-------------------------------------------------------------------------
Comprehensive Income
Per Share - Diluted (Note 9) 0.29 0.73 0.66 1.38
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the periods ended
June 30 (unaudited) Three Months Six Months
($000) 2009 2008 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net earnings for the period 4,544 12,912 10,637 23,716
Items not affecting cash
Loss on risk management
contracts - non-cash - 4,636 - 7,025
Stock-based compensation 239 279 468 562
Depletion, depreciation
and accretion 4,909 3,516 9,523 7,010
Future income taxes 88 9 (2,472) 1,097
-------------------------------------------------------------------------
9,780 21,352 18,156 39,410
-------------------------------------------------------------------------
Change in non-cash
working capital
Accounts receivable 104 (1,636) 1,200 (4,837)
Crude oil inventory (17) (55) 299 87
Prepaid expenses (814) (1,116) (246) (1,047)
Accounts payable and
accrued liabilities 243 2,171 (3,410) 5,042
Asset retirement
obligations settled (58) (186) (129) (1,913)
-------------------------------------------------------------------------
(542) (822) (2,286) (2,668)
-------------------------------------------------------------------------
Cash Provided by
Operating Activities 9,238 20,530 15,870 36,742
-------------------------------------------------------------------------
Financing Activities
Increase (decrease)
in debt (17,810) (5,933) (21,662) (4,442)
Due to related parties - - 16,000 -
Issue of shares pursuant
to private placement 17,996 - 17,996 -
Share issue costs (1,011) - (1,011) -
Stock option proceeds - 4,210 - 4,490
Dividends (6,708) - (13,611) -
Unit distributions - (13,116) - (24,460)
-------------------------------------------------------------------------
Cash Used in Financing
Activities (7,533) (14,839) (2,288) (24,412)
-------------------------------------------------------------------------
Investing Activities
Property and equipment
expenditures (2,255) (2,543) (4,956) (8,964)
Restricted term deposit - - 20 -
Restricted cash - - 5 -
Change in non-cash
working capital Accounts
payable and accrued
liabilities 550 (3,148) (8,651) (3,366)
-------------------------------------------------------------------------
Cash Used in Investing
Activities (1,705) (5,691) (13,582) (12,330)
-------------------------------------------------------------------------
Net Cash Inflow - - - -
Cash, beginning of period - - - -
-------------------------------------------------------------------------
Cash, End of Period - - - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid 861 650 1,687 1,449
Cash Taxes Paid 31 90 192 368
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Periods Ended June 30, 2009 and 2008 (unaudited)
1. CHANGE OF ORGANIZATION
On November 12, 2008, Bonterra Energy Income Trust (the "Trust")
converted to Bonterra Oil & Gas Ltd. (the "Company" or the "Trust")
through a reverse takeover by the Trust of SRX Post Holdings Inc. (SRX).
In conjunction with the reorganization, the Trust acquired all of the
issued and outstanding shares of Silverwing Energy Inc. (Silverwing).
Concurrently, all of the Company's subsidiaries, including Silverwing
were amalgamated into Bonterra Energy Corp., a wholly owned subsidiary of
the Company.
Prior to the Arrangement on November 12, 2008, the consolidated financial
statements included the accounts of the Trust and its subsidiaries. After
giving effect to the Arrangement, the consolidated financial statements
have been prepared on a continuity of interests basis, which recognizes
Bonterra Oil & Gas Ltd. as the successor entity to the Trust. The
continuity of interest basis requires that the 2008 comparative
consolidated financial statement figures presented prior to the
reorganization are those previously presented by the Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies and methods of application followed in the
preparation of the interim consolidated financial statements are the same
as those followed in the preparation of Bonterra's 2008 annual
consolidated financial statements except as described below. These
interim consolidated financial statements do not include all disclosures
required for annual consolidated financial statements. The interim
consolidated financial statements as presented should be read in
conjunction with the 2008 annual consolidated financial statements.
In February 2008, the Canadian Institute of Chartered Accountants (CICA)
issued 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. The new Section is
applicable to financial statements relating to fiscal years beginning on
or after October 1, 2008. Accordingly, the Company adopted the new
standards for its fiscal year beginning January 1, 2009. It establishes
standards for the recognition, measurement, presentation and disclosure
of goodwill subsequent to its initial recognition and of intangible
assets by profit-orientated enterprises. Standards concerning goodwill
are unchanged from the standards included in the previous Section 3062.
The adoption of this Standard did not have an impact on the Consolidated
Financial Statements.
In January 2009, the CICA issued EIC-173, "Credit Risk and the Fair Value
of Financial Assets and Financial Liabilities". The EIC provides guidance
on how to take into account credit risk of an entity and counterparty
when determining the fair value of financial assets and financial
liabilities, including derivative instruments. This standard is effective
for the Company's fiscal periods ending on or after January 20, 2009 with
retrospective application. The application of this EIC did not have a
material effect on the Company's Consolidated Financial Statements.
In December 2008, the CICA issued Section 1582, "Business Combinations",
which will replace former guidance on business combinations. Section 1582
establishes principles and requirements of the acquisition method for
business combinations and related disclosures. This statement applies
prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning
on or after January 1, 2011 with earlier adoption permitted. The Company
is currently evaluating the impact of this change on its Consolidated
Financial Statements.
In December 2008, the CICA issued Sections 1601, "Consolidated Financial
Statements", and 1602, "Non-controlling Interests", which replaces
existing Section 1600. Section 1601 establishes standards for the
preparation of consolidated financial statements. Section 1602 provides
guidance on accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business combination.
These standards are effective on or after the beginning of the first
annual reporting period beginning on or after January 2011 with earlier
adoption permitted. These standards currently do not impact the Company
as it has full controlling interest of all of its subsidiaries.
Recent Accounting Pronouncements
The Accounting Standards Board has confirmed that the convergence of
Canadian GAAP with International Financial Reporting Standards (IFRS)
will be effective January 1, 2011. The Company has performed an initial
scoping process in order to ensure successful implementation within the
required timeframe. The impact on the Company's consolidated financial
statements is not reasonably determinable at this time. Key information
will be disclosed as it becomes available during the transition period.
In June 2009, the CICA issued amendments to CICA Handbook Section 3862,
"Financial Instruments - Disclosures". The amendments include enhanced
disclosures related to the fair value of financial instruments and the
liquidity risk associated with financial instruments. The amendments will
be effective for annual financial statements for fiscal years ending
after September 30, 2009. The amendments are consistent with recent
amendments to financial instrument disclosure standards in IFRS. The
Company will include these additional disclosures in its annual
consolidated financial statements for the year ending December 31, 2009.
3. INVESTMENT IN RELATED PARTY
The investment consists of 689,682 (December 31, 2008 - 689,682) common
shares in Comaplex Minerals Corp. (Comaplex), a company with common
directors and management with the Company and its subsidiaries. The
investment is recorded at fair market value. The common shares trade on
the Toronto Stock Exchange under the symbol CMF. The investment
represents less than one and a half percent ownership in the outstanding
shares of Comaplex.
4. RESTRICTED CASH
An escrow account was held by Silverwing prior to its acquisition by the
Company. The escrow account was created to support eligible expenditures
related to a farm-in agreement. The Company may access the funds upon
completion and tie-in or abandonment and reclamation of 22 wells. The
funds are administered by the farmors' legal counsel. The funds in the
escrow account are invested in interest bearing term deposits.
5. PROPERTY AND EQUIPMENT
June 30, 2009 December 31, 2008
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion Depletion
and and
($ 000) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land 2,580 - 2,295 -
Petroleum and natural
gas properties and
related equipment 233,574 83,768 229,136 74,844
Furniture, equipment
and other 1,431 935 1,254 848
-------------------------------------------------------------------------
237,585 84,703 232,685 75,692
-------------------------------------------------------------------------
6. DUE TO RELATED PARTIES
As of June 30, 2009, the Company's CEO and major shareholder has loaned
the Company $10,000,000 (December 31, 2008 - $6,000,000). The loan is
unsecured, bears interest at Canadian chartered bank prime and has no set
repayment terms but is payable on demand. However, the loan can only be
repaid should the Company have sufficient available borrowing limits
under the Company's credit facility. Effective July 1, 2009 the interest
rate was decreased to Canadian chartered bank prime less .25 percent. The
interest rate was decreased to keep the loan rate at approximately two
percent below the Company's bank financing rate. Interest paid on this
loan during the first half of 2009 was $101,000.
As of June 30, 2009, Comaplex has loaned the Company $12,000,000
(December 31, 2008 - Nil). The loan is unsecured, bears interest at
Canadian chartered bank prime plus one quarter of a percent and has no
set repayment terms but is payable on demand. Effective July 1, 2009 the
interest rate was decreased to Canadian chartered bank prime less .25
percent. The interest rate was decreased to keep the loan rate at
approximately two percent below the Company's bank financing rate. The
loan can only be repaid should the Company have sufficient available
borrowing limits under the Company's credit facility. Interest paid on
this loan during the first half of 2009 was $79,000.
Please refer to note 11 for additional related party transactions.
7. BANK DEBT
As of June 30, 2009, the Company has a bank facility consisting of a
$100,000,000 syndicated and $20,000,000 non-syndicated revolving credit
facility (December 31, 2008 - $80,000,000 syndicated and $20,000,000 non-
syndicated demand credit facility). This new facility became effective
April 29, 2009, when the Company agreed to new terms and conditions.
Amounts drawn under the facility at June 30, 2009 was $71,573,000
(December 31, 2008 - $93,235,000). The interest rate on the outstanding
debt as of June 30, 2009 was 4.25 percent on the Company's Canadian prime
rate loan. The term of the new facility provides that the loan is
revolving until April 28, 2011, is subject to annual review and has no
fixed payment requirements.
The amount available for borrowing under the credit facilities is reduced
by outstanding letters of credit. Letters of credit totaling $285,000
were issued at June 30, 2009 (December 31, 2008 - $525,000). Security for
the credit facilities consists of various fixed and floating demand
debentures totaling $200,000,000 over all of the Company's assets, and a
general security agreement with first ranking over all personal and real
property.
The interest rate on the new credit facility is calculated as follows:
-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) to Over Over Over
Consolidated Cash Under 1.0:1 to 1.5:1 to 2.0:1 to Over
flow Ratio 1.0:1 1.5:1 2.0:1 2.5:1 2.5:1
-------------------------------------------------------------------------
Canadian Prime Rate
Plus(2) 125 150 175 200 250
-------------------------------------------------------------------------
Bankers' Acceptances
Rate Plus(2) 275 300 325 350 400
-------------------------------------------------------------------------
(1) Consolidated total funded debt excludes related party amounts but
includes working capital.
(2) Numbers in table represent basis points.
The consolidated total funded debt to consolidated cash flow ratio shall
be adjusted effective as of the first day of the next fiscal quarter
following the end of each fiscal quarter, with each such adjustment to be
effective until the next such adjustment.
The following is a list of the material covenants:
- The Company is required to not exceed $120,000,000 in consolidated
debt (includes negative working capital but excludes debt to related
parties).
- Dividends paid in any quarter shall not exceed 80 percent of the
average of the previous four quarters' cash flow as defined under
GAAP.
8. TAXES
The Company has recorded a future income tax asset related to assets and
liabilities and related tax amounts:
June 30 December 31
($ 000) 2009 2008
-------------------------------------------------------------------------
Future tax liability related to investments: (331) (212)
Future tax liability related to property
and equipment: (6,334) (7,097)
Future tax asset related to asset retirement
obligations: 4,697 4,593
Futures tax asset related to finance costs: 1,143 1,134
Future tax asset related to corporate tax losses
and SR&ED claims: 77,846 86,998
-------------------------------------------------------------------------
Future Tax Asset - Long-term 77,021 85,416
-------------------------------------------------------------------------
Current portion of future income tax asset
related to corporate Tax losses and SR&ED claims: 8,591 2,669
-------------------------------------------------------------------------
Future Tax Asset - Current 8,591 2,669
-------------------------------------------------------------------------
As a result of the reorganization, the Company recorded a deferred credit
relating to the difference between the future income tax asset generated
on the reorganization and the amount of the cash payment made to SRX
immediately before the reorganization. This credit is being amortized on
the same basis as the related future income tax asset.
A reconciliation of the deferred credit is as follows:
($ 000)
-------------------------------------------------------------------------
Amount recorded on reorganization 71,303
Amortized in 2008 (4,240)
-------------------------------------------------------------------------
Balance as of December 31, 2008 67,063
Amortized in first half of 2009 (5,070)
-------------------------------------------------------------------------
Balance as of June 30, 2009 61,993
-------------------------------------------------------------------------
Current portion 7,395
Long-term portion 54,598
-------------------------------------------------------------------------
61,993
-------------------------------------------------------------------------
The Company and its subsidiaries have the following tax pools, which may
be used to reduce taxable income in future years, limited to the
applicable rates of utilization:
($ 000) Rate of Utilization (%) Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 21,844
Eligible capital expenditures 7 7,640
Share issue costs 20 4,553
Canadian oil and gas property expenditures 10 25,023
Canadian development expenditures 30 51,595
Canadian exploration expenditures 100 11,255
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 252,536
-------------------------------------------------------------------------
454,803
-------------------------------------------------------------------------
(1) Income tax losses carried forward expire in the following years; 2013
- $1,069,000, 2024 - $3,229,000, 2025 - $6,810,000, 2026 -
$79,852,000, 2027 - $116,680,000, 2028 - $34,702,000, 2029 -
$10,194,000.
The Company has $27,670,000 of investment tax credits (ITC) that expire
in the following years; 2009 - $3,469,000, 2010 - $3,059,000, 2011 -
$4,667,000, 2012 - $3,909,000, 2013 - $3,155,000, 2014 - $1,995,000, 2015
- $2,257,000, 2016 - $2,405,000, 2017 - $2,009,000, 2018 - $745,000.
The amount and timing of reversals of temporary differences will also
depend on the Company's future operating results, and acquisitions and
dispositions of assets and liabilities. A significant change in any of
the preceding assumptions could materially affect the Company's estimate
of the future income tax asset.
9. SHAREHOLDERS' EQUITY
Authorized
The Company is authorized to issue an unlimited number of common shares
without nominal or par value.
Amount
Issued Number ($ 000)
-------------------------------------------------------------------------
Common Shares
Balance, January 1, 2009 17,257,603 99,530
Issued pursuant to private placement 1,068,000 17,996
Issue costs for private placement - (1,011)
Future tax effect of share issue costs - 258
-------------------------------------------------------------------------
Balance, June 30, 2009 18,325,603 116,773
-------------------------------------------------------------------------
The Company is authorized to issue an unlimited number of Class "A"
redeemable Preferred Shares and an unlimited number of Class "B"
Preferred Shares. There are currently no outstanding Class "A" redeemable
preferred shares or Class "B" preferred shares.
On May 27, 2009, the Company completed a private placement for 1,068,000
common shares at a price of $16.85 per common share for aggregate
proceeds of $17,996,000. The Company paid a commission of five percent of
the gross proceeds ($900,000) plus additional share issue costs of
$111,000.
The number of common shares (2008 numbers based on units) used to
calculate diluted net earnings per share (2008 earnings per unit) for the
three and six month periods ended June 30 is as follows:
Three Months Six Months
2009 2008 2009 2008
-------------------------------------------------------------------------
Basic shares/units
outstanding 17,668,372 17,025,803 17,464,122 16,982,068
Dilutive effect of
share/unit options 28,735 185,533 14,447 102,363
-------------------------------------------------------------------------
Diluted shares/units
outstanding 17,697,107 17,211,336 17,478,569 17,084,431
-------------------------------------------------------------------------
A summary of the changes during the first six months of the Company's
contributed surplus is presented below:
Contributed surplus
($ 000) 2009 2008
-------------------------------------------------------------------------
Balance, beginning of period 2,542 2,140
Stock-based compensation expensed (non-cash) 468 562
Stock-based options exercised (non-cash) - (448)
-------------------------------------------------------------------------
Balance, end of period 3,010 2,254
-------------------------------------------------------------------------
The deficit balance is composed of the following items:
June 30, June 30,
($ 000) 2009 2008
-------------------------------------------------------------------------
Accumulated earnings 218,819 176,472
Accumulated cash dividends/distributions (268,508) (230,509)
-------------------------------------------------------------------------
Deficit (49,689) (54,037)
-------------------------------------------------------------------------
The Company provides an option plan for its directors, officers,
employees and consultants. Under the plan, the Company may grant options
for up to 1,832,560 (December 31, 2008 - 1,725,760) common shares. The
exercise price of each option granted equals the market price of the
common shares on the date of grant and the option's maximum term is five
years.
A summary of the status of the Company's stock option plan as of June 30,
2009 and December 31, 2008, and changes during the six month and
twelve month periods ended on those dates is presented below:
June 30, 2009 December 31, 2008
-------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
-------------------------------------------------------------------------
Outstanding at beginning
of period 1,390,500 $ 20.50 - $ -
Options granted 33,000 14.90 1,390,500 20.50
-------------------------------------------------------------------------
Outstanding at end of
period 1,423,500 $ 20.37 1,390,500 $ 20.50
-------------------------------------------------------------------------
Options exercisable at
end of period - $ - - $ -
-------------------------------------------------------------------------
The following table summarizes information about options outstanding at
June 30, 2009:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices At 6/30/09 Life Price at 6/30/09 Price
-------------------------------------------------------------------------
$14.90 33,000 3.6 years $14.90 - $ -
20.50 1,390,500 3.3 years 20.50 - -
-------------------------------------------------------------------------
$14.90-20.50 1,423,500 3.3 years $20.37 - $ -
-------------------------------------------------------------------------
The Company records compensation expense over the vesting period based on
the fair value of options granted to employees, directors and
consultants. The Company granted 33,000 stock options with an estimated
fair value of $52,000 ($1.56 per option) using the Black-Scholes option
pricing model with the following key assumptions:
2009 2008
-------------------------------------------------------------------------
Weighted-average risk free interest rate (%) 1.4 2.2
Expected life (years) 3.0 3.5
Weighted-average volatility (%) 33.0 31.3
Dividend yield 2009 and 2008 based on the percentage of
dividends or distributions
paid during the period
granted
-------------------------------------------------------------------------
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
Compre-
January 1, hensive June 30,
($ 000) 2009 Income 2009
-------------------------------------------------------------------------
Unrealized gains on available-for-
sale financial assets (net of tax) 1,420 818 2,238
-------------------------------------------------------------------------
Other
Compre-
hensive
January 1, Income December
($ 000) 2008 (Loss) 31, 2008
-------------------------------------------------------------------------
Unrealized gains (losses) on
available-for-sale financial
assets (net of tax) 3,031 (1,611) 1,420
-------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Company received a management fee from Comaplex of $165,000 (2008 -
$165,000) for management services and office administration. This fee has
been included as a recovery in general and administrative expenses. As at
June 30, 2009, the Company had an account receivable from Comaplex of
$75,000 (December 31, 2008 - $56,000).
The Company received a management fee from Pine Cliff Energy Ltd. (Pine
Cliff) of $60,000 (2008 - $118,800) for management services and office
administration. This fee has been included as a recovery in general and
administrative expenses. As at June 30, 2009 the Company had an account
receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).
12. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
----------------------
The Company undertakes transactions in a range of financial instruments
including:
- Receivables
- Payables
- Common share investments
- Due to related parties
- Bank loans
- Derivatives
The Company's activities result in exposure to a number of financial
risks including market risk (commodity price risk, interest rate risk,
foreign exchange risk, credit risk, and liquidity risk).
The Company's overall risk management program seeks to mitigate these
risks and reduce the volatility on the Company's financial performance.
Financial risk management is carried out by senior management under the
direction of the Directors of the Company.
The Company enters into various risk management contracts in accordance
with Board approval to manage the Company's exposure to commodity price
fluctuations. Currently no risk management agreements are in place. The
Company does not speculatively trade in risk management contracts. The
Company's risk management contracts are entered into to manage the risks
relating to commodity prices from its business activities.
Capital Risk Management
-----------------------
The Company's objectives when managing capital are to safeguard the
Company's ability to continue as a going concern, so that it can continue
to provide returns to its shareholders and benefits for other
stakeholders and to maintain an optimal capital structure to reduce the
cost of capital. In order to maintain or adjust the capital structure,
the Company may adjust the amount of dividends, the percentage of return
of capital or issue new shares.
The Company monitors capital on the basis of the ratio of debt to cash
flow. This ratio is calculated using each quarter end net debt (total
debt adjusted for working capital) and divided by the preceding twelve
months cash flow.
The combination of the Trust reorganization and the acquisition of
Silverwing in 2008 resulted in the Company increasing its debt, including
negative working capital, to approximately $105,000,000 resulting in an
increased debt to cash flow ratio. During the second quarter, the Company
completed a private placement for net proceeds of $16,985,000 thereby
reducing its level of indebtedness. The Company believes that a debt
level of approximately one and a half year's cash flow is an appropriate
level to allow it to take advantage in the future of either acquisition
opportunities or to provide flexibility to develop its horizontal oil,
infill oil and shallow gas potential.
The following section (a) of this note provides a summary of the
Company's underlying economic positions as represented by the carrying
values, fair values and contractual face values of the Company's
financial assets and financial liabilities. The Company's debt to cash
flow is also provided.
The following section (b) addresses in more detail the key financial risk
factors that arise from the Company's activities including its policies
for managing these risks.
The following section (c) provides details of the Company's risk
management contracts that are used for financial risk management.
a) Financial assets, financial liabilities and debt ratio
The carrying amounts, fair value and face values of the Company's
financial assets and liabilities are shown in Table 1.
Table 1
As at June 30, 2009 As at December 31, 2008
---------------------------------------------------------------------
Carrying Fair Face Carrying Fair Face
($ 000) Value Value Value Value Value Value
---------------------------------------------------------------------
Financial assets
Restricted term
deposit - - - 20 20 20
Accounts
receivable 10,553 10,553 10,690 11,753 11,753 11,838
Investments in
related party 3,083 3,083 N/A 2,131 2,131 N/A
Financial
liabilities
Accounts payable
and accrued
liabilities 11,827 11,827 11,827 23,888 23,888 23,888
Due to related
parties 22,000 22,000 22,000 6,000 6,000 6,000
Short-term debt - - - 13,325 13,325 13,325
Long-term debt 71,573 71,573 71,573 79,910 79,910 79,910
---------------------------------------------------------------------
The net debt and cash flow figures as of June 30, 2009 are presented
in Table 2.
Table 2
($ 000) June 30, 2009
---------------------------------------------------------------------
Long-term debt 71,573
Accounts payable and accrued liabilities 11,827
Due to related parties 22,000
Current assets(1) (18,642)
---------------------------------------------------------------------
Net Debt 86,758
---------------------------------------------------------------------
Cash flow from operations(2) 48,698
---------------------------------------------------------------------
Net debt to cash flow from operations 1.78
---------------------------------------------------------------------
(1) Current assets include accounts receivable, crude oil inventory,
prepaid expenses and investment in related party.
(2) Cash flow from operations includes net earnings over the past
twelve months less adjustment for non-cash (gain) loss on risk
management contracts, stock-based compensation, depletion,
depreciation and accretion, future income taxes, changes in non-
cash working capital items and asset retirement obligations
settled.
b) Risks and mitigations
Market risk is the risk that the fair value or future cash flow of
the Company's financial instruments will fluctuate because of changes
in market prices. Components of market risk to which the Company is
exposed are discussed below.
Commodity price risk
--------------------
The Company's principal operation is the production and sale of crude
oil, natural gas and natural gas liquids. Fluctuations in prices of
these commodities directly impact the Company's performance and
ability to continue with its dividends.
The Company had used various risk management contracts to set price
parameters for a portion of its production. Management, in agreement
with the Board of Directors, decided that at least in the near term
it will discontinue the use of commodity price agreements. The
Company will assume full risk in respect of commodity prices.
Sensitivity Analysis
Commodity prices have fluctuated significantly over the recent past.
The following table updates the annual cash flow sensitivity for
movements in the commodity prices of $1 U.S. WTI for crude oil,
$0.10 per MCF AECO for natural gas and $0.01 fluctuation in exchange
rates.
Cash Flow
---------------------------------------------------------------------
U.S. $1.00 per barrel $ 870,000
Canadian $0.10 per MCF $ 289,000
Change of Canadian $0.01/U.S. $ exchange rate $ 593,000
---------------------------------------------------------------------
Interest rate risk
------------------
Interest rate risk refers to the risk that the value of a financial
instrument or cash flows associated with the instrument will
fluctuate due to changes in market interest rates. Interest rate risk
arises from interest bearing financial assets and liabilities that
the Company uses. The principal exposure of the Company is on its
bank borrowings and related party debts which have variable interest
rates which gives rise to a cash flow interest rate risk.
The Company's debt consists of a $120,000,000 revolving line and
$22,000,000 due to related parties. The borrowings under these
facilities are at bank prime plus or minus various percentages as
well as by means of bankers' acceptances (BA's). The Company manages
its exposure to interest rate risk through entering into various term
lengths on its BA's but in no circumstances do the terms exceed six
months.
Sensitivity Analysis
Based on historic movements and volatilities in the interest rate
markets and management's current assessment of the financial markets,
the Company believes that a one percent variation in the Canadian
prime interest rate is reasonably possible over a 12-month period. No
income tax effect has been calculated as the Company is expected to
be non-taxable until January 1, 2018.
A one percent change in the Canadian prime rate would increase or
decrease cash flow by $936,000.
Foreign exchange risk
---------------------
The Company has no foreign operations and currently sells all its
product sales in Canadian currency. The Company however is exposed to
currency risk in that crude oil is priced in U.S. currency then
converted to Canadian currency. The Company currently has no
outstanding risk management agreements. Management, in agreement with
the Board of Directors, recently decided that at least in the near
term it will discontinue the use of commodity price agreements. The
Company will assume full risk in respect of foreign exchange
fluctuations.
Credit risk
-----------
Credit risk is the risk that a contracting party will not complete
its obligations under a financial instrument and cause the Company to
incur a financial loss. The Company is exposed to credit risk on the
carrying value of all financial assets included on the balance sheet.
To help mitigate this risk:
- The Company only enters into material agreements with credit
worthy counterparties. These include major oil and gas
companies or major Canadian chartered banks;
- Agreements for product sales are primarily on 30 day renewal
terms; and
- Investments are generally only with companies that have common
management with the Company.
Of the accounts receivable balance at June 30, 2009 ($10,553,000) and
December 31, 2008 ($11,753,000), over 77 (2008 - 82) percent relates
to product sales with international oil and gas companies or tax
receivables from the Canadian Government. In addition, the Company
was owed $950,000 from a company it acquired on July 2 (See Note 14)
which will be wound-up and eliminated on consolidation.
The Company assesses quarterly if there has been any impairment of
the financial assets of the Company. During the quarter ended
June 30, 2009, there was no impairment provision required on any of
the financial assets other than certain accounts receivable (see
below). The Company does have a credit risk exposure as the majority
of the Company's accounts receivable are with counterparties having
similar characteristics. However, payments from the Company's largest
accounts receivable counterparties have consistently been received
within 30 days and the sales agreements with these parties are
cancellable with 30 days notice if payments are not received.
At June 30, 2009, approximately $545,000 or 5.1 percent of the
Company's total accounts receivable are aged over 120 days and
considered past due. The majority of these accounts are due from
various joint venture partners. The Company actively monitors past
due accounts and takes the necessary actions to expedite collection,
which can include withholding production or net paying when the
accounts are with joint venture partners. Should the Company
determine that the ultimate collection of a receivable is in doubt,
it will provide the necessary provision in its allowance for doubtful
accounts with a corresponding charge to earnings. If the Company
subsequently determines an account is uncollectable, the account is
written off with a corresponding charge to the allowance account. The
Company's allowance for doubtful accounts balance at June 30, 2009 is
$137,000 (December 31, 2008 - $85,000). There were no accounts
written off during the period.
The carrying value of accounts receivable approximates their fair
value due to the relatively short periods to maturity on this
instrument. The maximum exposure to credit risk is represented by the
carrying amount on the balance sheet. There are no material financial
assets that the Company considers past due.
Liquidity risk
--------------
Liquidity risk includes the risk that, as a result of Company's
operational liquidity requirements:
- The Company will not have sufficient funds to settle a
transaction on the due date;
- The Company will not have sufficient funds to continue with its
dividends;
- The Company will be forced to sell assets at a value which is
less than what they are worth; or
- The Company may be unable to settle or recover a financial
asset at all.
To help reduce these risks the Company:
- Maintains a portfolio of high-quality, long reserve life oil
and gas assets.
The Company has the following maturity schedule for its financial
liabilities:
Payments Due by Period
---------------------------------------------------------------------
Recognized on Less
Financial than 1 2-3 4-5
($ 000) Statements year years years
---------------------------------------------------------------------
Accounts payable and Yes -
accrued liabilities Liability 11,827 - -
Due to related Yes -
parties Liability 22,000 - -
Long-term Yes -
bank debt Liability - 71,573 -
Office leases No 595 1,260 756
---------------------------------------------------------------------
Total 34,422 72,833 756
---------------------------------------------------------------------
c) Risk management contracts
The Company currently has no outstanding risk management contracts:
13. SUBSEQUENT EVENT - DIVIDENDS
Subsequent to June 30, 2009, the Company declared a dividend of $0.14
per common share payable on July 31, 2009 to shareholders of record
on July 15, 2009 and a dividend of $0.14 per common share payable on
August 31, 2009 to shareholders of record on August 14, 2009.
14. SUBSEQUENT EVENT - ACQUISITION
On July 2, 2009, the Company acquired all of the issued common shares
of Cobalt Energy Ltd. (Cobalt) for consideration of 201,738 common
shares at a value of $15.92 per common share plus the assumption of
$2,818,000 of negative working capital for total consideration of
$6,025,000. Results of Cobalt's operations will be included in the
consolidated financial statements commencing from that date.
The acquisition was accounted for using the purchase method and the
purchase price was allocated to the fair value of the assets acquired
and the liabilities assumed as follows:
Cost of acquisition (000's)
Value of common stock $3,207
Acquisition costs 170
------
$3,377
------
------
Allocation of purchase price:
Property and equipment $7,067
Future income tax liability (748)
Working capital deficiency (2,818)
Asset retirement obligations (124)
------
$3,377
------
------%SEDAR: 00003132E
For further information:
For further information: George F. Fink, CEO or Garth E. Schultz, Vice President, Finance and CFO or Kirsten Kulyk, Manager, Investor Relations, Telephone: (403) 262-5307, Fax: (403) 265-7488, Email: info@bonterraenergy.com, Website: www.bonterraenergy.com