CALGARY, March 11 /CNW/ - Bonterra Energy Corp. ("Bonterra" or the "Company") (www.bonterraenergy.com) (TSX: BNE) is pleased to announce its financial and operational results for the three months and fiscal year ended December 31, 2009.
Annual Highlights
2009 2008 2007
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Financial ($000, except $ per share/unit)
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Revenue - realized oil and gas 85,712 121,730 96,431
Cash flow from operations 38,893 69,570 51,433
Per Share/Unit Basic 2.16 4.07 3.04
Per Share/Unit Diluted 2.15 4.06 3.04
Payout Ratio(1) 79% 77% 87%
Funds Flow(2) 66,504 70,448 53,815
Per Share/Unit Basic 3.69 4.13 3.18
Per Share/Unit Diluted 3.67 4.12 3.18
Payout Ratio(1) 46% 76% 83%
Cash payments per share/unit(1) 1.70 3.12 2.64
Net Earnings 68,563 55,426 30,350
Per Share/Unit Basic 3.81 3.25 1.79
Per Share/Unit Diluted 3.78 3.23 1.79
Capital Expenditures and Acquisitions
(net of disposals) 5,640 45,407 19,300
Total assets 293,987 265,301 142,326
Working Capital Deficiency 10,162 23,878 58,766
Long-term Debt 59,823 79,910 -
Shareholders'/Unitholders' Equity 118,874 56,777 44,376
Shares/Units Outstanding 18,620 17,258 16,928
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Operations
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Oil and Liquids (barrels per day) 3,141 3,073 3,113
Average Price ($ per barrel) 59.82 87.54 70.31
Natural Gas (MCF per day) 11,120 7,637 6,627
Average Price ($ per MCF) 4.15 8.21 6.75
Total BOE per day(3) 4,994 4,346 4,218
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Reserves
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Oil and Liquids (barrels in 000s)
Proved Developed Prducing (Gross)(4) 15,519 15,534 14,468
Proved (Gross) 19,220 17,991 17,472
Proved plus Probable (Gross) 27,568 22,867 21,910
Natural Gas (MCF in 000s)
Proved Developed Prducing (Gross) 32,103 32,108 19,863
Proved (Gross) 36,642 36,571 24,125
Proved plus Probable (Gross) 49,539 50,245 32,465
Reserve Life Index(5) (oil, liquids
and natural gas at 6:1) (years)
Proved Developed Prducing (Gross) 11.7 12.5 11.3
Proved (Gross) 14.2 14.4 13.7
Proved plus Probable (Gross) 20.1 18.7 17.4
Reserves per Weighted Average Outstanding
Share/Unit (BOE)
Proved Developed Prducing (Gross) 1.16 1.22 1.05
Proved (Gross) 1.41 1.41 1.27
Proved plus Probable (Gross) 1.99 1.83 1.62
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Quarterly Highlights
2009 4th 3rd 2nd 1st
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Financial ($ 000s, except $ per share)
Revenue - realized oil and gas sales 24,946 20,965 20,501 19,300
Cash flow from operations 13,673 9,350 9,238 6,632
Per Share Basic 0.76 0.50 0.52 0.38
Per Share Diluted 0.75 0.50 0.52 0.38
Payout Ratio(1) 66% 87% 77% 94%
Funds Flow(2) 37,595 10,753 9,780 8,376
Per Share Basic 2.07 0.58 0.55 0.49
Per Share Diluted 2.06 0.57 0.55 0.49
Payout Ratio(1) 24% 76% 73% 74%
Cash payments per share(1) 0.50 0.44 0.40 0.36
Net Earnings 52,136 5,790 4,544 6,093
Per Share Basic 2.88 0.32 0.26 0.35
Per Share Fully Diluted 2.85 0.32 0.26 0.35
Capital Expenditures and
Acquisitions (16,976) 17,660 2,255 2,701
Total Assets 293,987 273,543 258,393 260,732
Working Capital Deficiency 10,162 14,455 13,989 14,909
Long-term debt 59,823 81,136 71,573 89,383
Shareholders' Equity 118,874 74,025 72,332 56,377
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Operations
Oil and Liquids (barrels per day) 3,182 3,084 3,029 3,268
Natural Gas (MCF per day) 10,193 10,881 11,551 11,877
Total BOE per day 4,881 4,898 4,954 5,245
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(1) Cash dividend/disbursement payments per share/unit are based on
payments made in respect of production months as opposed to the month
paid.
(2) 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
but including gain on sale of property and investment tax credit
receivable adjustments and excluding restricted cash and asset
retirement obligations settled.
(3) 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 convervsion 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.
(4) Gross reserves relate to the Company's ownership of reserves
deducting any royalties.
(5) The reserve life index is calculated by dividing the reserves (BOE)
by the annualized fourth quarter average production rate
(2009 - 4,881; 2008 - 4,587 BOE per day; 2007 - 4,295 BOE per day).
Financial Highlights
- Revenue and funds flow from operations in 2009 decreased 30 percent
and 6 percent, respectively when compared to the prior year primarily
due to a 32 percent decrease in the Company's crude oil average
realized price and a 50 percent decrease in the Company's natural gas
average realized price partially offset by production increases and a
gain on asset sale of $24.2 million in Q4 2009. Commodity prices
showed improvement during the latter half of the year, mainly in
crude oil, and the fourth quarter numbers reflected a positive impact
with a 250 percent increase in funds flow from operations in the
fourth quarter of 2009 compared with the third quarter of 2009;
- In 2009, Bonterra paid cash dividends to shareholders of $1.70 per
share, a substantial decrease from the 2008 level of $3.12 per share.
Bonterra had reduced its dividend in early 2009 to maintain its
balance sheet strength and the financial flexibility necessary to
continue developing the Pembina Cardium horizontal play. As pricing
improved, Bonterra was able to increase the dividend twice during the
year. Subsequent to year-end, Bonterra was able to once again
increase the dividend to its current level of $0.18 per share which
began with the dividend paid out in January, 2010;
- The payout ratio was 46 percent of funds flow (72 percent without the
gain on asset sale of $24.2 million and within the Company's annual
target of 70 to 80 percent);
- During the year, Bonterra took several steps towards improving its
financial position. The Company 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, Bonterra completed an equity
offering in May, 2009. The Company issued 1,068,000 common shares at
a price of $16.85 per share for net proceeds of approximately $17
million. Funds were used for the Company's capital program and for
general working capital purposes.
Operational Highlights
- In 2009, Bonterra spent approximately $35.2 million on its capital
development program of which $22.9 million was spent on its drilling
and completions program with the remainder spend on land and
corporate acquisitions in the Pembina area.
- Production increased to an all time high of 4,994 barrels of oil
equivalent (BOE) per day as a result of its internal development
program and acquisitions during the year. Fourth quarter production
totaled 4,881 BOE per day, an increase of eight percent over the same
period last year;
- Reserves increased to 25.3 million BOE and 35.8 million BOE on a
proved and a proved plus probable basis, respectively. This
represents an increase of 5.2 percent to the Company's proved
reserves and a 14.7 percent increase to proved plus probable
reserves;
- Reserves per share on a P+P basis increased 8.7 percent to 1.99 BOE
per share compared to 1.83 BOE per share in 2008 ;
- Bonterra's finding, development and acquisition (FD&A) costs in 2009
continue to be among the lowest in the Canadian oil and gas industry
at $13.25 per BOE on a total proved basis and $8.93 per BOE on a
proved plus probable basis.
- With an average cash netback of $23.42 per BOE, Bonterra's 2009
proved plus probable recycle ratio is 2.6 times.
- Bonterra completed asset sales in 2009 and in the first quarter of
2010, obtaining $35.8 million in dispositions from non-core assets in
Saskatchewan. This included the divestment of approximately 270 BOE
per day of producing oil and gas properties and an associated 1.4
million BOE of proved plus probable reserves. The proceeds from these
sales will assist in accelerating the development of the Cardium
assets.
A Discussion of Financial and Operational Results
This press release is a review of the operations, current financial position, and outlook for Bonterra Energy Corp. ("Bonterra" or the "Company") and should be read in conjunction with the audited financial statements for the year ended December 31, 2009, together with the notes related thereto.
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, statements 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; 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. The foregoing factors are not exhaustive and are further discussed herein under the heading Business Prospects, Risks and Outlooks as well as in the Company's Annual Information Form filed on SEDAR at www.sedar.com.
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 so, what benefits will be derived therefrom. Except as required by law, the Company 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.
Production
Three months ended Twelve months ended
December September December December December
31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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Crude oil and NGLs
(barrels per day) 3,182 3,084 3,055 3,141 3,073
Natural gas
(MCF per day) 10,193 10,881 8,817 11,120 7,637
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Average BOE per day 4,881 4,898 4,525 4,994 4,346
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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.
Bonterra's 2009 average production increased 14.9 percent on a per BOE basis over 2008 despite the sale of the Shaunavon property of 210 BOE per day. Crude oil production increased by 2.2 percent while gas production increased by 45.6 percent. The natural gas increase was due primarily to the acquisition of Silverwing Energy Inc. (Silverwing) on November 12, 2008 which resulted in approximately 3,600 MCF per day being added to production.
On November 6, 2009, the Company disposed of a portion of its Shaunavon property for gross proceeds of $30,191,000. The production from this property was averaging approximately 210 BOE per day consisting entirely of medium grade crude oil.
In 2009, Bonterra drilled seven Pembina Cardium horizontal wells (5.5 net), eight vertical Pembina Cardium wells (6.9 net) and participated in drilling two natural gas wells (0.4 net). Bonterra recorded a 100 percent success rate with its 2009 drilling program. The Company's first horizontal well was drilled in 2008 and was placed on production in Q1 2009. Bonterra has completed and tied in three (2.1 net) horizontal Cardium oil wells and six (4.9 net) vertical oil wells in 2009. The additional four (3.4 net) horizontal Cardium oil wells and two (2.0 net) vertical wells were placed on production in the first week in Q1 2010.
In November, the Company engaged the services of a second drilling rig and in March a third drilling rig was added and will continue its Pembina Cardium horizontal well drilling program with all rigs until road bans are imposed in March 2010. The acquisition of Cobalt Energy Ltd. (Cobalt) effective July 1, 2009 resulted in only a modest increase in production but provided the Company with additional ownership in potential Pembina Cardium horizontal drilling opportunities.
Even with the above mentioned disposition, the company was able to increase its Q4 crude oil production through its 2009 Pembina Cardium horizontal and vertical drill programs. The Company's fourth quarter production in 2009 saw increases in crude oil of 98 barrels per day and a decline in natural gas of 688 MCF per day production over Q309. Exit production for the four (2.73 net) producing Pembina Cardium horizontal wells was approximately 456 (311 net) BOE per day. The Q4 natural gas decline is mainly due to shut in and restricting production of some of the Company's gas wells as well as natural production declines.
Bonterra expects 2010 production to average between 5,700 and 6,000 BOE per day.
Revenue
Three months ended Twelve months ended
December September December December December
(Cdn $) 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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Revenue - oil and gas
sales (000s) 24,946 20,965 22,613 85,712 121,730
Average Realized
Prices:
Crude oil and NGLs
(per barrel) 68.40 65.38 58.91 59.82 87.54
Natural gas (per MCF) 4.76 3.13 7.00 4.15 8.21
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Revenue from petroleum and natural gas sales decreased 29.6 percent in 2009 compared to 2008 primarily due to a 31.7 percent drop in crude oil prices and a 49.5 percent drop in natural gas prices. The drop in commodity prices was partially offset with the above mentioned production increases. During 2009 the Company did not enter into any risk management contracts.
Quarter over quarter the Company saw an increase in revenues of $3,981,000 due to improved crude oil and natural gas prices in the fourth quarter of 2009.
Royalties
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per BOE 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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Crown royalties 1,451 1,248 2,337 4,737 13,736
Freehold royalties,
gross overriding
royalties and net
carried interests 892 697 558 2,677 3,479
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Total royalty expense 2,343 1,945 2,895 7,414 17,215
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Percentage of Revenue 9.4 9.3 12.8 8.6 14.1
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$ per BOE 5.22 4.32 6.86 4.07 10.82
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Royalties paid by the Company consist primarily of Crown royalties paid to the Provinces of Alberta, Saskatchewan and British Columbia. The majority of the Company's wells are low productivity wells and therefore have lower Crown royalty rates. The Company's average Crown royalty rate was approximately 5.5 percent (2008 - 10.6 percent) and approximately 3.1 percent (2008 - 2.7 percent) for other royalties. The increase in other royalty rates is due to the new horizontal oil wells being drilled on freehold mineral rights land.
The recently announced new Alberta Crown royalty rates vary by prices as well as productivity levels. With lower commodity prices in 2009 compared to 2008 and the Silvering acquisition (mostly BC production with lower Crown royalty rates), the Company has experienced a significant reduction in Crown royalties in 2009.
The fourth quarter royalties have increased $398,000 over third quarter due primarily to higher crude oil and natural gas pricing and an increased proportion of the Company's production coming from the new horizontal oil wells which are subject to freehold royalties at approximately 17 percent compared to a 5 percent royalty rate on Crown wells.
Investment Tax Credit Recovery
As part of the Company's conversion from a trust to a corporation in 2008, Bonterra assumed approximately $27,670,000 of investment tax credits (ITC's) from SRX Post holdings Inc. Due to the depressed commodity prices as of December 31, 2008, the Company was not able to justify the ability to claim these ITC's prior to their expiration. The continued recovery in the price of crude oil as well as the Company's success in its horizontal crude oil development has resulted in significantly higher future anticipated cash flow from Bonterra's oil and gas operations and in the justification that the ITC's are likely to be claimed.
Gain on Sale of Property
On November 6, 2009, the Company closed the sale of a portion of its Shaunavon oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX). The proceeds of disposition consisted of $23,729,000 cash and 30,769,200 common shares in Eagle Rock (representing approximately 4.2 percent of the outstanding common shares of that company at the time). The closing price of the Eagle Rock common shares on November 6 was $0.21 placing total consideration for the property at $30,191,000. The book value (net of asset retirement provision) of the property to the Company was approximately $5,993,000 resulting in a gain on sale of $24,198,000.
Eagle Rock has since changed its name to Wild Stream Exploration Inc. (Wild Stream) (TSXV: WSX) and consolidated its common shares on a 30:1 basis resulting in Bonterra holding 1,025,640 common shares of Wild Stream.
Production Costs
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per BOE 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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Production costs 6,870 6,585 6,859 27,848 25,413
$ per BOE 15.30 15.79 16.25 15.28 15.98
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Total production costs in 2009 have increased by $2,435,000 over 2008. The increase is due to increased production volumes (see Production). On a per BOE basis, production costs have declined in 2009 compared to 2008 mainly due to field optimization and a general decline in service and material costs resulting from decreased industry demand.
Total operating costs increased slightly in the fourth quarter of 2009 compared to the prior quarter due primarily to the billing of prior year gas processing charge adjustments in 2009 of approximately $200,000 by the operator of several of the Company's non-operated gas plants. On a per-unit-of- production basis, the 2009 rates were $0.49 lower than in 2008.
As discussed above, Bonterra's production comes primarily from low productivity wells. These wells generally result in higher operating costs on a per-unit-of-production basis as costs such as municipal taxes, surface leases, power and personnel costs are not variable with production volumes. The Company is continually examining ways to reduce operating costs.
General and Administrative Expense
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per BOE 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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G&A Expense 1,623 788 824 4,458 3,401
$ per BOE 3.61 1.75 1.95 2.45 2.14
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General and administrative (G&A) expenses increased 31 percent in 2009 compared to 2008. The Company provides administrative services to Comaplex Minerals Corp. (Comaplex) (TSX: CMF) and Pine Cliff Energy Ltd. (Pine Cliff) (TSXV: PNE), companies that share common directors and management. Please refer to discussion under Related Party Transactions for details.
The Company's significant general and administrative costs are employee compensation; professional services such as legal, engineering and accounting; computer services and bank charges. Employee compensation expense decreased by approximately 7 percent ($279,000) in 2009 from 2008 due to a smaller bonus accrual. The Company's bonus plan consists of cash payments equal to three percent of before tax net earnings (excluding the investment tax credit recovery) to be paid to employees and key consultants based on performance throughout the year. Costs associated with professional services increased by approximately $115,000 due to additional accounting (new production accounting software) and engineering services (horizontal well evaluations).
Computer services increased by $367,000 due to significant increases in the cost of new licensing agreements for the Company's engineering and accounting software and the contracting of an external manager of IT. The largest increase to G&A was bank charges of $678,000 relating to the cost of establishing a new bank facility as well as increased standby fees on the unused portion of the Company's credit facility.
The quarter over quarter increase of $835,000 was primarily due to a special bonus accrual of approximately $532,000 on the gain on sale of the Shaunavon property, legal and accounting costs increase of approximately $80,000 associated with the amalgamation of the various Bonterra entities in December of 2009 and $55,000 of engineering costs associated with various horizontal well evaluations.
During the year the Company capitalized $359,000 (2008 - $426,000) of general and administrative costs.
Interest Expense
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per BOE 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
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Interest Expense 738 815 746 3,294 2,740
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$ per BOE 1.64 1.81 1.77 1.81 1.72
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Bank debt at December 31, 2009 was $59,823,000 (December 31, 2008 - $93,235,000). The Company's banking arrangements allow it to use Bankers Acceptances (BA's) as part of its loan facility. Interest charges on BA's are generally one half percent lower than that charged on the general loan account.
The Company has also borrowed $23,500,000 from two related parties. Please see Related Party Transactions section for further details.
Interest charges increased in 2009 as the average outstanding debt balance (including related party balances) increased by approximately $22 million over 2008. The acquisitions of Silverwing and Cobalt as well as the reorganization costs to change Bonterra into a corporation resulted in approximately $47 million of additional debt. In addition the Company has incurred approximately $28 million in capital expenditures during this period. These increases were partially offset by net proceeds of approximately $17,000,000 from a 2009 second quarter private equity issue and approximately $24 million cash on the sale of the Shaunavon property in November. Offsetting the increased debt balance was an average reduction of 0.3 percent (4.3 percent in 2008 to 4.0 percent in 2009) in interest rates paid on the outstanding debt balances.
Quarter over quarter saw a decrease in interest charges due to reduced debt balances resulting from proceeds of the Shaunavon sale being applied to the bank debt.
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 credit facility is calculated as follows:
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Level I Level II Level III Level IV Level V
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Consolidated
Total Funded
Debt(1) to Over Over Over
Consolidated Under 1.0:1 to 1.5:1 to 2.0:1 to Over
Cash flow Ratio 1.0:1 1:5:1 2.0:1 2.5:1 2.5:1
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Canadian Prime
Rate Plus(2) 125 150 175 200 250
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Bankers'
Acceptances Rate
Plus(2) 275 300 325 350 400
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(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.
As of December 31, 2009 the Company will qualify for the Level I interest rates. The revised rates will apply commencing April 1, 2010 resulting in a reduction of 50 basis points in the cost of the Company's bank borrowings.
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. The Company issued only 33,000 stock options during 2009 resulting in a reduction of stock-based compensation by $296,000.
The 33,000 common share options were issued with an exercise price of $14.90 per share and a fair value of $1.58 per option. The fair value of the options granted has been estimated using the Black-Scholes option pricing model, assuming a weighted risk free interest rate of 1.4 percent (2008 - 2.2 percent), expected weighted average volatility of 33 percent (2008 - 31 percent), expected weighted average life of 3.0 years (2008 - 3.5 years) and an annual dividend/distribution rate based on the dividends paid to the shareholders during the year.
Depletion, Depreciation, Accretion and Dry Hole Costs
The Company follows the successful efforts method of accounting for petroleum and natural gas exploration and development costs. Under this method, the costs associated with dry holes are charged to operations. For intangible capital costs that result in the addition of reserves, the Company depletes its oil and natural gas intangible assets using the unit-of-production basis by field.
For tangible assets such as well equipment, a life span of ten years is estimated and the related tangible costs are depreciated at one tenth of original cost per year. The use of a ten year life span instead of calculating depreciation over the life of reserves was determined to be more representative of actual costs of tangible property. Given the Company's long production life of its wells, the wells generally require replacement of tangible assets more than once during their life time. Most of the Company's wells have been producing since the 1960's and are expected to continue to produce for at least another twenty years.
Provisions are made for asset retirement obligations through the recognition of the fair value of obligations associated with the retirement of tangible long-life assets being recorded in the period the asset is put into use, with a corresponding increase to the carrying amount of the related asset. The obligations recognized are statutory, contractual or legal obligations. The liability is adjusted over time for changes in the value of the liability through accretion charges which are included in depletion, depreciation and accretion expense. The costs capitalized to the related assets are amortized to earnings in a manner consistent with the depletion and depreciation of the underlying asset.
At December 31, 2009, the estimated total undiscounted amount required to settle the asset retirement obligations was $64,482,000 (2008 - $58,903,000). Of the $5,579,000 increase, the majority is due to increases in anticipated costs of abandoning the Company's producing and non producing wells.
These obligations will be settled based on the useful lives of the underlying assets, which extend up to 50 years into the future. This amount has been discounted using a credit-adjusted risk-free interest rate of five percent. The discount rate is reviewed annually and adjusted if considered necessary. A change in the rate would have a significant impact on the amount recorded for asset retirement obligations. Based on the current provision, a one percent increase in the risk adjusted rate would decrease the asset retirement obligation by $2,870,000. While a one percent decrease in the risk adjusted rate would increase the asset retirement obligation by $3,949,000.
The above calculation requires an estimation of the amount of the Company's petroleum reserves by field. This figure is calculated annually by an independent engineering firm and is used to calculate depletion. This calculation is to a large extent subjective. Reserve adjustments are affected by economic assumptions as well as estimates of petroleum products in place and methods of recovering those reserves. To the extent reserves are increased or decreased, depletion costs will vary.
For the fiscal year ending December 31, 2009, the Company expensed $19,277,000 (2008 - $14,749,000) for the above-described items. The increase is predominately due to increased production volumes resulting from the Silverwing acquisition and higher per BOE depletion charges on the Company's horizontal Cardium oil wells compared to Bonterra's other production. The higher BOE depletion charges on the horizontal wells are primarily due to lack of production history on these wells resulting in lower proved reserve being assigned but with substantial probable reserves being assigned. The Company's policy is to deplete the cost of the wells based on proved reserves. It is anticipated that as there is more production history on the horizontal wells there will be a conversion of the probable reserves to proven reserves resulting in a reduction of depletion charges per BOE in future years.
The Company continues to have relatively low finding and development costs (see discussion under Finding and Development Costs). Based on year end reserves, the Company's average cost of proved reserves is $6.62 (2008 - $6.40) per BOE.
The Company currently has an estimated reserve life for its proved developed producing reserves of 11.7 (2008 - 12.5) years calculated using the Company's gross reserves (prior to allowance for royalties) based on the third party engineering report dated December 31, 2009 and using fourth quarter 2009 average production rates of 4,879 BOE per day (2008 - 4,587 BOE per day). Based on total proved reserves the Company has a 14.2 (2008 - 14.4) year reserve life and on a proved and probable basis the reserve life increases to 20.1 (2008 - 18.7) years. These figures are some of the longest reserve life indexes (excluding oil sands) in the Canadian oil and gas industry.
Income Taxes
On November 12, 2008, Bonterra Energy Income Trust converted to a corporation. 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 of $551,000 consists of a resource surcharge of $282,000 payable to the Province of Saskatchewan and a tax amount of $269,000 payable to the Province of Quebec. The resource surcharge is calculated as a flat percent of revenues generated from the sale of petroleum products produced in Saskatchewan. The resource surcharge rate was three percent in 2009. The tax payable to the Province of Quebec is a one-time charge that resulted from the Company's conversion to a corporation.
The Company and its subsidiaries have the following tax pools, which may be used to reduce taxable income in future years, limited to the applicable rates of utilization:
Rate of
Utilization
($ 000s) % Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 $ 21,671
Eligible capital expenditures 7 7,363
Share issue costs 20 2,973
Canadian oil and gas property expenditures 10 26,282
Canadian development expenditures 30 59,141
Canadian exploration expenditures 100 11,174
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 223,629
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$ 432,590
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(1) Federal income tax losses carried forward expire in the following
years; 2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000, 2026
- $46,670,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 -
$13,096,000.
The Company has $27,670,000 (2008 - $27,670,000) remaining of investment tax credits that expire in the following years; 2019 - $3,469,000, 2020 - $3,059,000, 2021 - $4,667,000, 2022 - $3,909,000, 2023 - $3,155,000, 2024 - $1,995,000, 2025 - $2,257,000, 2026 - $2,405,000, 2027 - $2,009,000, 2028 - $745,000.
The Company also has $143,061,000 of capital loss carry forwards which can only be claimed against taxable capital gains.
Net Earnings
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per share 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Net Earnings 52,136 5,790 10,585 68,563 55,426
-------------------------------------------------------------------------
$ per share - Basic 2.88 0.32 0.62 3.81 3.25
-------------------------------------------------------------------------
$ per share - Fully
Diluted 2.85 0.32 0.62 3.78 3.23
-------------------------------------------------------------------------
Bonterra's net earnings for the year ended December 31, 2009 represents a 23.7 percent increase over the Company's 2008 net earnings. The Company recorded net earnings per share in 2009 of $3.81 compared to $3.25 in the 2008 year. This represents a return on Shareholders' equity of approximately 57.7 percent (2008 - 97.6 percent) based on year end Shareholders' equity.
Two significant factors contributing to net earnings were the Company's recordings of the investment tax credit recovery of $27,670,000 and the sale of a portion of the Company's Shaunavon production for a gain of $24,198,000 all of which occurred in the fourth quarter of 2009. Excluding these items (net of 29.15 percent tax effect), 2009 net earnings decreased by $23,611,000 from $55,426,000 in 2008 to an adjusted net earnings of $31,815,000 in 2009. 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 oil and gas revenues in net earnings. The Company's low capital costs per BOE of reserves combined with the Company's low production decline rates should allow for continued positive earnings.
Comprehensive Income
Other comprehensive income for 2009 consists of an unrealized gain on investments (including investments in a related party) of $600,000 (2008 loss of $1,611,000) including a fourth quarter loss of $478,000 relating to a reduction in the investments fair value. Other comprehensive income varies from net earnings by changes in the fair value of Bonterra's holdings of investments including the investment in Comaplex.
Cash Flow from Operations
Three months ended Twelve months ended
($ 000s) except December September December December December
$ per share 31, 2009 30, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Cash flow from
operations 13,673 9,350 10,336 38,893 69,570
-------------------------------------------------------------------------
$ per share - basic 0.76 0.50 0.59 2.16 4.07
-------------------------------------------------------------------------
$ per share - fully
diluted 0.75 0.50 0.59 2.15 4.06
-------------------------------------------------------------------------
Cash flow from operations decreased 44 percent year over year, mainly due to decreased commodity prices received in 2009. Fourth quarter cash flow increased by $4,325,000 over Q3 due to recovering commodity prices. The Company has not entered into any risk management agreements and as such is fully exposed to changes in commodity prices and exchange rates.
Cash Netbacks
The following table illustrates the Company's cash netback:
$ per Barrel of Oil Equivalent (BOE) 2009 2008
-------------------------------------------------------------------------
Production volumes (BOE) 1,822,628 1,590,666
-------------------------------------------------------------------------
Gross production revenue $ 47.04 $ 81.15
Realized gain (loss) on risk management
contracts - (4.62)
Royalties (4.07) (10.82)
Production costs (15.28) (15.98)
-------------------------------------------------------------------------
Field netback 27.69 49.73
General and administrative(1) (2.16) (2.14)
Interest and taxes (2.11) (2.00)
-------------------------------------------------------------------------
Cash netback $ 23.42 $ 45.59
-------------------------------------------------------------------------
The following table illustrates the Company's cash netback for the three
months ended:
December September
$ per Barrel of Oil Equivalent (BOE) 31, 2009 30, 2009
-------------------------------------------------------------------------
Production volumes (BOE) 448,892 450,616
-------------------------------------------------------------------------
Gross production revenue $ 55.50 $ 47.81
Royalties (5.22) (4.32)
Production costs (15.30) (15.79)
-------------------------------------------------------------------------
Field netback 34.98 27.70
General and administrative(1) (2.43) (1.75)
Interest and taxes (1.80) (1.99)
-------------------------------------------------------------------------
Cash netback $ 30.75 $ 23.96
-------------------------------------------------------------------------
(1) General and administrative costs have been reduced by $532,000
relating to the bonus payment on the gain on sale of property as the
benefit has not been included in the above cash net back calculation.
Finding and Development Costs (F&D Costs)
The Company has been active in its capital development program over the past three years. Over this time period Bonterra has incurred the following F&D and FD&A(3) Costs:
-------------------------------------------------------------------------
2009 F&D 2008 F&D 2007 F&D 2009 Three 2008 Three
Costs per Costs per Costs per Year Year
BOE(1)(2) BOE(1)(2) BOE(1)(2) Average Average
-------------------------------------------------------------------------
Proved Reserve
Additions $16.23 $7.00 $2.15 $8.46 $11.55
-------------------------------------------------------------------------
Proved plus
Probable Reserve
Additions $11.01 $6.82 $2.02 $6.62 $9.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2009 2008 2007
FD&A FD&A FD&A 2009 Three 2008 Three
Costs per Costs per Costs per Year Year
BOE BOE BOE Average Average
(1)(2)(3) (1)(2)(3) (1)(2)(3)
-------------------------------------------------------------------------
Proved Reserve
Net Additions $13.25 $8.67 $2.74 $8.22 $12.30
-------------------------------------------------------------------------
Proved plus
Probable Reserve
Net Additions $8.93 $7.47 $2.68 $6.36 $9.45
-------------------------------------------------------------------------
The above figures have been calculated in accordance with National Instrument 51-101 (NI 51-101) where the 2009 F&D Costs equate to the total exploration and development costs incurred by the Company of $28,726,000 (includes $5,814,000 for undeveloped land) as calculated according to GAAP plus or minus the yearly change in estimated future development costs as calculated by Sproule Associates Limited ($34,960,000 for proved and $51,538,000 for proved and probable). FD&A costs include acquisition costs of $7,105,000 as well as proceeds of disposition of $30,191,000. The following precautionary notes have been provided as required by NI 51-101.
(1) Barrels of Oil Equivalent may be misleading, particularly if used in
isolation. A BOE conversion ratio of 6MCF:1bbl is based on an energy
equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.
(2) The aggregate of the exploration and development costs incurred in
the most recent financial year and the change during that year in
estimated future development costs generally will not reflect total
finding and development costs related to reserve additions for that
year.
(3) FD&A costs are net of proceeds of disposal and the FD&A costs per BOE
are based on reserves acquired net of reserves disposed of.
Results from the Company's Cardium oil drilling program continue to be better than anticipated resulting in an increase in the third party engineering reports estimated recoverable reserves from existing wells but also from future development. Continued low decline rates have also resulted in increased reserves due to technical revisions. Both these factors contributed to an overall F&D cost in 2009 of $11.01 per BOE on a proved plus probable basis.
Related Party Transactions
The Company holds 689,682 (2008 - 689,682) common shares in Comaplex which have a fair market value as of December 31, 2009 of $4,827,000 (2008 - $2,131,000). Comaplex is a publically traded mineral company on the Toronto Stock Exchange. The Company's ownership in Comaplex represents less than one 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 $330,000 (2008 - $330,000). 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 (president and vice president, finance duties), accounting services, oil and gas administration and office administration. In addition, Bonterra allocated $102,000 of drilling tax credits to Comaplex for $51,000. All services performed are charged at estimated fair value. At December 31, 2009, Comaplex owed the Company $105,000 (December 31, 2008 - $56,000).
As of December 31, 2009, Comaplex has loaned the Company $12,000,000 (December 31, 2008 - Nil). The loan is unsecured and it has no set repayment terms. Until June 30, 2009 the Company paid interest at Canadian chartered bank prime plus one quarter of a percent. Effective July 1, 2009, the interest rate was reduced to Canadian chartered bank prime less 0.25 percent. The reduction in rate was due to the lowering of the Company's bank interest rate with its banking syndicate resulting from an improved debt to cash flow ratio (see Interest Expense and Liquidity and Capital Resources sections) and since the benefits of this loan are shared with Comaplex, the interest rate was reduced accordingly.
In 2008, in order to facilitate the acquisition of Silverwing, the Company borrowed on a short-term basis $20,000,000 from Comaplex to allow time to finalize documentation for its new bank line of credit. The funds were repaid on November 21, 2008.
Interest paid on these loans during 2009 and 2008 was $194,000 and $21,000, respectively. The loans result in a substantial benefit to Bonterra and to Comaplex. The interest paid to Comaplex by Bonterra is substantially lower than bank interest and the amount drawn on the bank line of credit is lower reducing the bank interest rate. 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. 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 $120,000 (2008 - $238,000). Services provided by the Company include executive services (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 December 31, 2009 the Company had an account receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).
As of December 31, 2009, the Company's CEO and major shareholder has loaned the Company $11,500,000 (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. Interest paid on this loan in 2009 was $209,000 (2008 - $7,000). This loan results in being a substantial benefit to Bonterra and to the CEO. The interest paid to the CEO by Bonterra is substantially lower than bank interest and for the CEO the interest earned is substantially higher than the CEO would receive by investing in bank instruments such as BA's or GIC's.
Commitments
The Company has no contractual obligations that last more than a year other than its office lease agreements which are as follows:
($ 000s)
-------------------------
Lease Obligations
-------------------------
Year 1 $ 944
Year 2 932
Year 3 829
Year 4 496
-------------------------
Total $3,201
-------------------------
Liquidity and Capital Resources
During 2009, Bonterra participated in drilling 17 gross wells (12.8 net) at a total cost of $22,912,000. Included in the above figure is approximately $1,300,000 of costs associated with the completion and tie-in of wells the Company drilled in 2008. The above capital cost is net of $3,836,000 in drilling tax credits. In addition, Bonterra acquired and paid $5,814,000 for mineral rights in the greater Pembina area of Alberta.
On July 2, 2009, Bonterra completed its acquisition of Cobalt. The Company issued 201,438 common shares and assumed $2,856,000 of negative working capital and incurred approximately $170,000 in acquisition costs for a total calculated accounting cost of $7,105,000. This acquisition resulted in acquiring an additional 40 BOE per day of production as well as increasing the Company's working interest in approximately 11 gross sections of land with potential Cardium horizontal locations in the Pembina area of Alberta.
As previously discussed, the Company closed a purchase and sale agreement to divest of a portion of its Shaunavon oil production to Eagle Rock. The proceeds of disposition included cash of $23,729,000 and 30,769,200 common shares. These funds were used to retire debt and therefore provide additional room in Bonterra's line of credit for additional 2010 drilling. In addition, the common shares received for the Shaunavon properties will provide further funds upon their ultimate sale.
Subsequent to December 31, 2009, the Company entered into a purchase and sale agreement to divest its Southeast Saskatchewan Pinto property. Production from this property was approximately 60 BOE per day consisting primarily of light sweet crude oil. The proceeds of disposition consist of approximately $5,600,000 cash. The disposition closed in February, 2010. The proceeds were applied to the Company's debt.
The government of Alberta announced drilling incentives and royalty reductions in respect of wells drilled after April 1, 2009 and prior to March 31, 2011. The Company is planning to maximize the crown royalty credits available under the new drilling incentive program which will result in a substantial reduction of capital costs on a per well basis. The Company currently has plans to spend between $40,000,000 and $50,000,000 (net of drilling incentives) in 2010 on development of its oil and gas properties. Any land, property or corporate acquisitions will be in addition to this amount.
Bonterra anticipates funding the 2010 capital program from cash flow, the Company's existing line of credit, sale of investments, proceeds from the above mentioned Pinto sale as well as proceeds received on the exercise of employee stock options.
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 December 31, 2009, the Company's bank loan was $59,823,000 (December 31, 2008 - $93,235,000). The terms of the new facility provides that the loan is revolving until April 28, 2011, is subject to annual review and has no fixed payment requirements.
The following consolidated financial statements and notes to the consolidated financial statements have been provided for further details.
Bonterra Oil & Gas Ltd.
Consolidated Balance Sheets
As at December 31
($ 000s) 2009 2008
-------------------------------------------------------------------------
Assets
Current
Restricted term deposit - 20
Accounts receivable (Notes 4 & 15) 14,713 11,753
Crude oil inventory 431 845
Prepaid expenses (Note 4) 3,247 4,222
Future income tax asset (Note 11) 11,889 2,669
Investments (Note 8) 4,462 -
Investment in related party (Note 6) 4,827 2,131
-------------------------------------------------------------------------
39,569 21,640
-------------------------------------------------------------------------
Restricted cash (Note 7) 812 1,252
Investment tax credit receivable (Note 11) 27,670 -
Future income tax asset (Note 11) 58,265 85,416
Property and Equipment (Note 8)
Petroleum and natural gas properties
and related equipment 255,840 232,685
Accumulated depletion and depreciation (88,169) (75,692)
-------------------------------------------------------------------------
Net Property and Equipment $ 167,671 $ 156,993
-------------------------------------------------------------------------
$ 293,987 $ 265,301
-------------------------------------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities (Note 4) 18,868 23,888
Due to related parties (Note 9) 23,500 6,000
Deferred credit (Note 11) 7,363 2,305
Short-term bank debt (Note 10) - 13,325
-------------------------------------------------------------------------
49,731 45,518
Long-term bank debt (Note 10) 59,823 79,910
Deferred credit (Note 11) 47,769 64,758
Asset retirement obligations (Note 12) 17,790 18,338
-------------------------------------------------------------------------
175,113 208,524
-------------------------------------------------------------------------
Commitments, Contingencies and
Guarantees (Note 17)
Shareholders' Equity (Note 13)
Share capital 121,955 99,530
Contributed surplus 3,350 2,542
-------------------------------------------------------------------------
125,305 102,072
-------------------------------------------------------------------------
Deficit (8,451) (46,715)
Accumulated other comprehensive
income (Note 14) 2,020 1,420
-------------------------------------------------------------------------
(6,431) (45,295)
-------------------------------------------------------------------------
Total Shareholders' Equity 118,874 56,777
-------------------------------------------------------------------------
293,987 265,301
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements
Bonterra Oil & Gas Ltd.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31
($ 000s) 2009 2008
-------------------------------------------------------------------------
Unitholders' equity, beginning of year - 44,218
Shareholders' equity, beginning of year 56,777 -
Comprehensive income for the year 69,163 53,815
Net capital contributions (Note 13) 22,322 8,135
Stock-based compensation 911 1,207
Conversion of the Trust to a Corporation (Note 4) - (64,715)
Distributions declared - (42,660)
-------------------------------------------------------------------------
Unitholders' Equity, End of Year - -
Conversion of the Trust to a Corporation (Note 4) - 64,715
Dividends declared (30,299) (7,938)
-------------------------------------------------------------------------
Shareholders' Equity, End of Year 118,874 56,777
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Bonterra Oil & Gas Ltd.
Consolidated Statements of Operations and Deficit
For the Years Ended December 31
($ 000s except $ per share) 2009 2008
-------------------------------------------------------------------------
Revenue and Other Income
Oil and gas sales 85,712 129,083
Loss on risk management contracts - cash - (7,353)
Gain on risk management contracts - non-cash - 3,085
Royalties (7,414) (17,215)
Investment tax credit recovery (Note 11) 27,670 -
Gain on sale of property (Note 8) 24,198 -
Interest and other 158 45
-------------------------------------------------------------------------
130,324 107,645
-------------------------------------------------------------------------
Expenses
Production costs 27,848 25,413
General and administrative (Note 8 and 15) 4,458 3,401
Interest on debt (Notes 9 and 10) 3,294 2,740
Reorganization costs (Note 4) - 2,121
Stock-based compensation 911 1,207
Depletion, depreciation and accretion 19,277 14,749
-------------------------------------------------------------------------
55,788 49,631
-------------------------------------------------------------------------
Earnings Before Taxes 74,536 58,014
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Taxes (Note 11)
Current 551 437
Future 5,422 2,151
-------------------------------------------------------------------------
5,973 2,588
-------------------------------------------------------------------------
Net Earnings for the Year 68,563 55,426
Deficit, beginning of year (46,715) (51,543)
Distributions declared - (42,660)
Dividends declared and paid (30,299) (7,938)
-------------------------------------------------------------------------
Deficit, end of year (8,451) (46,715)
-------------------------------------------------------------------------
Net Earnings Per Share - Basic (Note 13) 3.81 3.25
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net Earnings Per Share - Diluted (Note 13) 3.78 3.23
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements
Bonterra Oil & Gas Ltd.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31
($ 000s except $ per share) 2009 2008
-------------------------------------------------------------------------
Net Earnings for the Year 68,563 55,426
Other comprehensive income, net of income tax
Unrealized (loss) gain on investments
(net of income taxes of (97), (2008 - (272)) 600 (1,611)
-------------------------------------------------------------------------
Other Comprehensive Income (Loss) 600 (1,611)
-------------------------------------------------------------------------
Comprehensive Income 69,163 53,815
-------------------------------------------------------------------------
Comprehensive Income Per Share - Basic (Note 13) 3.84 3.15
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Comprehensive Income Per Share - Diluted (Note 13) 3.81 3.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements
Bonterra Oil & Gas Ltd.
Consolidated Statements of Cash Flow
For the Years Ended December 31
($ 000s) 2009 2008
-------------------------------------------------------------------------
Operating Activities
Net earnings for the year 68,563 55,426
Items not affecting cash
Gain on risk management contracts - non-cash - (3,085)
Stock-based compensation 911 1,207
Depletion, depreciation and accretion 19,277 14,749
Gain on sale of property (24,198) -
Future income taxes 5,422 2,151
-------------------------------------------------------------------------
69,975 70,448
-------------------------------------------------------------------------
Change in non-cash working capital
Accounts receivable (47) 2,642
Crude oil inventory 365 (40)
Prepaid expenses 1,057 (360)
Accounts payable and accrued liabilities (4,654) (57)
Restricted cash 440 -
Investment tax credit receivable (27,670) -
Asset retirement obligations settled (Note 12) (573) (3,063)
-------------------------------------------------------------------------
(31,082) (878)
-------------------------------------------------------------------------
Cash Provided by Operating Activities 38,893 69,570
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Financing Activities
Increase (decrease) in debt (35,613) 20,698
Due to related parties 17,500 6,000
Issue of shares pursuant to private placement 17,996 -
Share issue costs (1,046) -
Stock option proceeds 1,898 7,935
Unit distributions - (46,384)
Dividends (30,299) (7,938)
-------------------------------------------------------------------------
Cash Used in Financing Activities (29,564) (19,689)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investing Activities
Property and equipment expenditures (28,726) (30,060)
Acquisition (Note 5) - (13,816)
Disposition of property and equipment (Note 5) 23,729 -
Reorganization (Note 4) - (11,257)
Restricted term deposit 20 (20)
Change in non-cash working capital
Accounts receivable (3,613) -
Accounts payable and accrued liabilities (739) 5,272
-------------------------------------------------------------------------
Cash Used in Investing Activities (9,329) (49,881)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net cash inflow - -
Cash, beginning of year - -
-------------------------------------------------------------------------
Cash, End of Year - -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash Interest Paid 3,294 2,740
Cash Taxes Paid 616 582
-------------------------------------------------------------------------
See the accompanying notes to the consolidated financial statements
Bonterra Oil & Gas Ltd.
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2009 and 2008
1. CHANGE OF ORGANIZATION
On November 12, 2008, Bonterra Energy Income Trust (the "Trust") was
acquired by Bonterra Oil & Gas Ltd. (the "Company") through a reverse
takeover by the Trust of SRX Post Holdings Inc. (SRX). In conjunction
with the reorganization, the Trust acquired all 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 subsidiary of Bonterra Energy Income
Trust).
Prior to the reorganization on November 12, 2008, the consolidated
financial statements included the accounts of the Trust and its
subsidiaries. After giving effect to the reorganization, 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.
Effective January 1, 2010, the Trust was wound up into Bonterra Oil & Gas
Ltd. and Bonterra Oil & Gas Ltd. was amalgamated with Bonterra Energy
Corp. The continuing entity officially changed its name to Bonterra
Energy Corp. subsequent to finalizing the reorganization.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared by management in
accordance with Canadian generally accepted accounting principles (GAAP)
as described below.
Consolidation
These consolidated financial statements include the accounts of the
Company, the Trust (wholly owned by the Company as of December 31, 2009)
and its wholly owned subsidiary Bonterra Energy Corp. (Bonterra). Inter-
company transactions and balances are eliminated upon consolidation.
Measurement Uncertainty
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as at the date of the balance sheets as well as the reported
amounts of revenues, expenses, and cash flows during the periods
presented. Such estimates relate primarily to unsettled transactions and
events as of the date of the financial statements. Actual results could
differ materially from estimated amounts.
Amounts recorded for depletion, depreciation, accretion and amounts used
for impairment calculations are based on estimates of crude oil and
natural gas reserves and future costs required to develop those reserves.
Stock-based compensation is based upon expected volatility and option
life estimates. Asset retirement obligations are based on estimates of
abandonment costs, timing of abandonment, inflation and interest rates.
The provision for income taxes is based on judgements in applying income
tax law and estimates on the timing, likelihood and reversal of temporary
differences between the accounting and tax basis of assets and
liabilities. These estimates are subject to measurement uncertainty and
changes in these estimates could materially impact the financial
statements of future periods.
Revenue Recognition
Revenues associated with sales of petroleum and natural gas are recorded
when title passes to the customer.
Joint Interest Operations
Significant portions of the Company's oil and gas operations are
conducted jointly with other parties and accordingly the financial
statements reflect only the Company's proportionate interest in such
activities.
Inventories
Inventories consist of crude oil. Crude oil stored in the Company's tanks
are valued on a first in first out basis at the lower of cost or net
realizable value. Inventory cost for crude oil is determined based on
combined average per barrel operating costs, royalties and depletion and
depreciation for the year and net realizable value is determined based on
estimated sales price less transportation costs.
Investments
Investments are carried at fair value. Fair value is determined by
multiplying the year end trading price of the investments by the number
of common shares held as at period end.
Property and Equipment
Petroleum and Natural Gas Properties and Related Equipment
The Company follows the successful efforts method of accounting for
petroleum and natural gas properties and related equipment. Costs of
exploratory wells are initially capitalized pending determination of
proved reserves. Costs of wells which are assigned proved reserves remain
capitalized, while costs of unsuccessful wells are charged to earnings.
All other exploration costs including geological and geophysical costs
are charged to earnings as incurred. Development costs, including the
cost of all wells, are capitalized.
Producing properties are assessed annually or more frequently as economic
events dictate, for potential impairment. Impairment is assessed by
comparing the estimated net undiscounted future cash flows to the
carrying value of the asset. If required, the impairment recorded is the
amount by which the carrying value of the asset exceeds its fair value.
Costs related to undeveloped properties are excluded from the depletion
base until it is determined whether or not proved reserves exist or if
impairment of such costs has occurred. These properties are assessed at
least annually to determine whether impairment has occurred.
Depreciation and depletion of capitalized costs of oil and gas producing
properties are calculated using the per-unit-of-production method.
Development and exploration drilling and equipment costs are depleted
over the remaining proved developed reserves. Depreciation of other plant
and equipment is provided on the straight line method. Straight line
depreciation is based on the estimated service lives of the related
assets which is estimated to be ten years.
Furniture, Fixtures and Office Equipment
These assets are recorded at cost and depreciated over a three to ten
year period representing their estimated useful lives.
Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, the Company records a future income tax asset or liability
to reflect any difference between the accounting and tax basis of assets
and liabilities, using substantively enacted income tax rates. The effect
on future tax assets and liabilities of a change in tax rates is
recognized in net earnings in the period in which the change occurs.
Future income tax assets are only recognized to the extent it is more
likely than not that sufficient future taxable income will be available
to allow the future income tax asset to be realized.
Asset Retirement Obligations
The Company recognizes an Asset Retirement Obligation (ARO) in the period
in which it is incurred when a reasonable estimate of the fair value can
be made. On a periodic basis, management will review these estimates and
changes, if any, will be applied prospectively. The fair value of the
estimated ARO is recorded as a long-term liability, with a corresponding
increase in the carrying amount of the related asset. The capitalized
amount is depleted on a unit-of-production basis over the life of the
reserves. The liability amount is increased each reporting period due to
the passage of time and the amount of accretion is charged to earnings in
the period. Revisions to the estimated timing of cash flows or to the
original estimated undiscounted cost would also result in an increase or
decrease to the ARO. Actual costs incurred upon settlement of the
obligations are charged against the ARO to the extent of the liability
recorded.
Stock-Based Compensation
The Company accounts for stock based compensation using the fair-value
method of accounting for stock options granted to directors, officers,
employees and other service providers using the Black-Scholes option
pricing model. Stock-based compensation expense is recorded over the
vesting period with a corresponding amount reflected in contributed
surplus. Stock-based compensation expense is calculated as the estimated
fair value of the options at the time of grant, amortized over their
vesting period. When stock options are exercised, the associated amounts
previously recorded as contributed surplus are reclassified to common
share capital. The Company has not incorporated an estimated forfeiture
rate for stock options that will not vest, rather, the Company accounts
for actual forfeitures as they occur.
Financial Instruments
Financial instruments are measured at fair value on initial recognition
of the instrument and are classified into one of the following five
categories: held-for trading, loans and receivables, held-to-maturity
investments, available-for-sale financial assets or other financial
liabilities.
Subsequent measurement of financial instruments is based on their initial
classification. Held-for-trading financial instruments are measured at
fair value and changes in fair value are recognized in net earnings.
Available-for-sale financial instruments are measured at fair value with
changes in fair value recorded in other comprehensive income until the
instrument is derecognized or impaired. The remaining categories of
financial instruments are recognized at amortized cost using the
effective interest rate method.
All risk management contracts are recorded in the balance sheet at fair
value unless they qualify for the normal sale and normal purchase
exemption. All changes in their fair value are recorded in net earnings
unless cash flow hedge accounting is used, in which case changes in fair
value are recorded in other comprehensive income until the underlying
hedged transaction is recognized in net earnings. Any hedge
ineffectiveness is immediately recognized in net earnings. The Company
has elected not to use cash flow hedge accounting on its risk management
contracts with financial counterparties resulting in all changes in fair
value being recorded in net earnings.
Cash and restricted cash are classified as held-for-trading and are
measured at fair value which equals the carrying value and any gains or
losses are recognized in earnings in the period they occur. Accounts
receivable are classified as loans and receivables which are measured at
amortized cost. Investments are classified as available-for-sale which
are measured at fair value and any gains or losses are recognized in
other comprehensive income in the period they occur. Accounts payable and
accrued liabilities, bank debt and amounts due to related parties are
classified as other financial liabilities, which are measured at
amortized cost.
Risk Management Contracts
The Company is exposed to market risks resulting from fluctuations in
commodity prices, foreign currency exchange rates and interest rates in
the normal course of its business. The Company may use a variety of
instruments to manage these exposures. For transactions where hedge
accounting is not applied, the Company accounts for such instruments
using the fair value method by initially recording an asset or liability,
and recognizing changes in the fair value of the instruments in earnings
as unrealized gains or losses on risk management contracts. Fair values
of financial instruments are based on third party quotes or valuations
provided by independent third parties. Any realized gains or losses on
risk management contracts are recognized in earnings in the period they
occur.
The Company may elect to use hedge accounting when there is a high degree
of correlation between the price movements in the financial instruments
and the items designated as being hedged and the Company has documented
the relationship between the instruments and the hedged item as well as
its risk management objective and strategy for undertaking hedge
transactions. During the years ended December 31, 2009 and December 31,
2008, the Company did not designate any of its financial instruments as
hedges. There are no risk management contracts outstanding as at
December 31, 2009 and December 31, 2008.
Basic and Diluted per Share Calculations
Basic earnings per share are computed by dividing earnings by the
weighted average number of shares outstanding during the year. Diluted
per share amounts reflect the potential dilution that could occur if
options to purchase shares were exercised. The treasury stock method is
used to determine the dilutive effect of common share options, whereby
proceeds from the exercise of common share options or other dilutive
instruments are assumed to be used to purchase common shares at the
average market price during the period.
3. CHANGES IN ACCOUNTING POLICIES
On January 1, 2009, the Company adopted the Canadian Institute of
Chartered Accountants (CICA) Handbook Section 3064, "Goodwill and
Intangible Assets". The new section replaces the previous goodwill and
intangible asset standard and revises the requirement for recognition,
measurement, presentation and disclosure of intangible assets. The
adoption of this standard had no impact on the Company's consolidated
financial statements.
On January 20, 2009, the Company adopted the CICA's Emerging Issues
Committee (EIC) EIC-173, "Credit Risk and the Fair Value of Financial
Assets and Financial Liabilities". EIC-173 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. The adoption of EIC-173 did not have a
material impact on the Company's consolidated financial statements.
In 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. Section 3862 now
requires that all financial instruments measured at fair value be
categorized into one of three hierarchy levels. 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 has
included these additional disclosures in Note 16.
Recent Accounting Pronouncements
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.
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 1, 2011 with
earlier adoption permitted. Section 1602 currently does not impact the
Company as it has full controlling interest of all of its subsidiaries.
The Canadian Accounting Standards Board has confirmed that IFRS will
replace Canadian GAAP effective January 1, 2011, including comparatives
for 2010, for Canadian publicly accountable enterprises.
4. REORGANIZATION
As part of the 2008 reorganization of the Trust, SRX acquired all the
issued and outstanding trust units of Bonterra Energy Income Trust on a
basis of one Trust Unit for one Common Share of SRX. Immediately
preceding the reorganization, SRX was under the protection of Companies'
Creditors Arrangement Act (CCAA). Prior to the conversion, the Trust
advanced $11,257,000 to SRX for settlement of claims pursuant to the CCAA
proceedings. Upon completion of the CCAA procedures, SRX was owed
$2,224,000 in outstanding tax and legal claims that have been used by the
CCAA Monitor to settle secured creditor claims. This amount was recorded
as an outstanding account receivable by the Company. As of December 31,
2009 the entire amount has been received.
In addition, SRX paid an advance of $1,800,000 to the CCAA Monitor for
costs and payment of the unsecured creditors. This amount was recorded as
a prepaid expense in the accounts of the Company. As of December 31,
2009, $791,000 remains unpaid to the unsecured creditors.
Included in accounts payable is $791,000 (December 31, 2008 - $4,024,000)
to account for the amount due to the secured and unsecured creditors.
5. BUSINESS COMBINATIONS
On July 2, 2009, the Company acquired all of the issued common shares of
Cobalt Energy Ltd. (Cobalt) for consideration of 201,438 common shares at
a value of $15.92 per common share plus the assumption of $2,856,000 of
negative working capital for total consideration of $6,063,000. Results
of Cobalt's operations have been included in the consolidated financial
statements commencing from that date.
The acquisition was accounted for using the purchase method and the
purchase price was allocated to the fair value of the assets acquired and
the liabilities assumed as follows:
($ 000s)
-------------------------------------------
Cost of acquisition
-------------------------------------------
Value of common stock 3,207
Acquisition costs 170
-------------------------------------------
3,377
-------------------------------------------
Allocation of purchase price:
Property and equipment 7,105
Future income tax liability (748)
Working capital deficiency (2,856)
Asset retirement obligations (124)
-------------------------------------------
3,377
-------------------------------------------
On November 12, 2008, the Company acquired all the common shares of
Silverwing for cash consideration of $13,816,000 (including acquisition
costs of $334,000) plus the issuance of 7,745 common shares at a value of
$25.85 per common share plus the assumption of $14,979,000 of negative
working capital. The results of Silverwing's operations have been
included in the consolidated financial statements since that date. The
acquisition was funded through the Company's bank facility (see Note 10).
The acquisition was accounted for using the purchase method and the
purchase price was allocated to the fair value of the assets acquired and
the liabilities assumed as follows:
($ 000s)
-------------------------------------------
Cost of acquisition
-------------------------------------------
Cash paid 13,482
Value of common stock 200
Acquisition costs 34
-------------------------------------------
14,016
-------------------------------------------
Allocation of purchase price:
Restricted cash 1,252
Future income tax benefit 18,325
Property and equipment 15,347
Working capital deficiency (14,979)
Asset retirement obligations (5,929)
-------------------------------------------
14,016
-------------------------------------------
6. 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 a one percent ownership in the outstanding shares of
Comaplex.
7. 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 11 (December 31,
2008 - 21) wells. The funds are administered by the farmors' legal
counsel. The funds in the escrow account are invested in interest bearing
term deposits.
8. PROPERTY AND EQUIPMENT
2009 2008
-------------------------------------------------------------------------
Accumulated Accumulated
Depletion Depletion
and and
($ 000s) Cost Depreciation Cost Depreciation
-------------------------------------------------------------------------
Undeveloped land 7,992 - 2,295 -
Petroleum and natural
gas properties and
related equipment 246,387 87,153 229,136 74,844
Furniture, equipment
and other 1,461 1,016 1,254 848
-------------------------------------------------------------------------
255,840 88,169 232,685 75,692
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On November 6, 2009, the Company divested of a portion of its Shaunavon
oil production to Eagle Rock Exploration Ltd. (Eagle Rock) (TSXV: ERX).
The proceeds of disposition consist of $23,729,000 cash and 30,769,200
common shares in Eagle Rock (representing approximately 4.2 percent of
the outstanding common shares of that company). The Eagle Rock common
shares were trading for $0.21 cents per share on November 6, 2009. The
Company had a net book value (after effects of asset retirement
obligations) of $5,993,000 attributable to the assets disposed of
resulting in a gain on sale of the property of $24,198,000.
Eagle Rock has since changed its name to Wild Stream Exploration Inc.
(Wild Stream) (TSXV: WSX) and consolidated its common shares on a 30:1
basis resulting in Bonterra holding 1,025,640 common shares of Wild
Stream at December 31, 2009 with a quoted market value of $4,462,000.
During the year the Company capitalized $359,000 (2008 - $426,000) of
general and administrative costs.
9. DUE TO RELATED PARTIES
As of December 31, 2009, the Company's CEO and major shareholder has
loaned the Company $11,500,000 (December 31, 2008 - $6,000,000). The loan
is unsecured, bore interest at Canadian chartered bank prime less one
half of a percent and has no set repayment terms but is payable on
demand. Effective July 1, 2009 the interest rate was adjusted to Canadian
chartered bank prime less .25 percent. The interest rate was adjusted to
keep the loan rate at approximately two percent below the Company's bank
financing rate. Interest paid on this loan during 2009 was $209,000
(2008 - $7,000).
As of December 31, 2009, Comaplex has loaned the Company $12,000,000
(December 31, 2008 - Nil). The loan is unsecured, bore 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 adjusted to Canadian chartered bank prime less 0.25
percent. The interest rate was adjusted to keep the loan rate at
approximately two percent below the Company's bank financing rate.
Interest paid on this loan during 2009 was $194,000.
The Company's bank agreement requires that the above loans can only be
repaid should the Company have sufficient available borrowing limits
under the Company's credit facility.
Please refer to Notes 6 and 15 for additional related party transactions.
10. BANK DEBT
As of December 31, 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 December 31, 2009 was $59,823,000
(December 31, 2008 - $93,235,000). The interest rate on the outstanding
debt during 2009 was approximately 4.0 percent. The Company at
December 31, 2009 was in level III (see below) in respect of its various
borrowing charges. 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 facility is reduced
by outstanding letters of credit. Letters of credit totaling $285,000
were issued at December 31, 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 credit facility is calculated as follows:
-------------------------------------------------------------------------
Level I Level II Level III Level IV Level V
-------------------------------------------------------------------------
Consolidated Total
Funded Debt(1) Over Over Over
to Consolidated Under 1.0:1 1.5:1 2.0:1 Over
Cash flow Ratio 1.0:1 to 1.5:1 to 2.0:1 to 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. During the third quarter the Company received a waiver of
this requirement for the fourth quarter and instead is restricted
to paying no more than the lesser of 80 percent of quarter four
cash flow or $10,000,000. In addition the Company received a
waiver of this requirement for the first quarter of 2010 and
instead is restricted to paying no more than the lesser of
80 percent of the first quarter 2010 cash flow or $12,500,000
At December 31, 2009, the Company is in compliance with all covenants.
11. INCOME TAXES
The Company has recorded a future income tax asset related to assets and
liabilities and related tax amounts:
($ 000s) 2009 2008
-------------------------------------------------------------------------
Future tax liability related to investments: (824) (212)
Future tax liability related to property
and equipment: (5,855) (7,097)
Future tax asset related to asset retirement
obligations: 4,474 4,593
Future tax asset related to finance costs: 802 1,134
Future tax asset related to corporate tax
losses and SR&ED claims 59,668 86,998
Future tax asset related to corporate
capital tax losses 17,883 17,883
Valuation adjustment (17,883) (17,883)
-------------------------------------------------------------------------
Future Tax Asset - Long-term 58,265 85,416
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current portion of future income tax asset
related to corporate tax losses and
SR&ED claims: 11,889 2,669
-------------------------------------------------------------------------
Future Tax Asset - Current 11,889 2,669
-------------------------------------------------------------------------
-------------------------------------------------------------------------
As a result of the reorganization as described in Note 1 the Company
recorded a deferred credit of $71,303,000 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 (2009 - $12,356,000, 2008 -
$4,240,000) on the same basis as the related future income tax asset
(2009 - $14,306,000, 2008 - $4,909,000).
A reconciliation of the deferred credit is as follows:
($ 000s)
-------------------------------------------
Amount recorded on reorganization 71,303
Amortized in 2008 (4,240)
Rate adjustment 425
Amortized in 2009 (12,356)
-------------------------------------------
Balance as of December 31, 2009 55,132
-------------------------------------------
Current portion 7,363
Long-term portion 47,769
-------------------------------------------
55,132
-------------------------------------------
Income tax expense varies from the amounts that would be computed by
applying Canadian federal and provincial income tax rates as follows:
($ 000s) 2009 2008
-------------------------------------------------------------------------
Earnings before income taxes 74,536 58,014
Combined federal and provincial income tax rates 29.15% 29.62%
-------------------------------------------------------------------------
Income tax provision calculated using
statutory tax rates 21,727 17,184
Increase (decrease) in taxes resulting from:
Saskatchewan resource surcharge 282 437
Quebec tax 269 -
Stock-based compensation 266 357
Deferred credit amortization (11,931) (4,240)
Change in effective tax rate (4,708) (499)
Trust income allocated to Unitholders
prior to conversion - (10,291)
Others 68 (360)
-------------------------------------------------------------------------
Income tax expense 5,973 2,588
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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:
Rate of
Utilization
($ 000s) % Amount
-------------------------------------------------------------------------
Undepreciated capital costs 20-100 21,671
Eligible capital expenditures 7 7,363
Share issue costs 20 2,973
Canadian oil and gas property expenditures 10 26,282
Canadian development expenditures 30 59,141
Canadian exploration expenditures 100 11,174
SR&ED expenditures 100 80,357
Income tax losses carried forward(1) 100 223,629
-------------------------------------------------------------------------
432,590
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Federal income tax losses carried forward expire in the following
years; 2013 - $1,069,000, 2024 - $3,347,000, 2025 - $7,532,000,
2026 - $46,670,000, 2027 - $117,189,000, 2028 - $34,726,000, 2029 -
$13,096,000.
The Company has $27,670,000 (2008 - $27,670,000) remaining of investment
tax credits that expire in the following years; 2019 - $3,469,000, 2020 -
$3,059,000, 2021 - $4,667,000, 2022 - $3,909,000, 2023 - $3,155,000,
2024 - $1,995,000, 2025 - $2,257,000, 2026 - $2,405,000, 2027 -
$2,009,000, 2028 - $745,000.
The Company also has $143,061,000 of capital loss carry forwards which
can only be claimed against taxable capital gains.
The amount and timing of reversals of temporary differences will also
depend on the Company's future operating results, acquisitions and
dispositions of assets and liabilities. A significant change in any of
these assumptions could materially affect the Company's estimate of the
future income tax asset.
12. ASSET RETIREMENT OBLIGATIONS
At December 31, 2009, the estimated total undiscounted amount required to
settle the asset retirement obligations was $64,482,000 (2008 -
$58,903,000). Costs for asset retirement have been calculated assuming a
two percent inflation rate. These obligations will be settled based on
the useful lives of the underlying assets, which extend up to 50 years
into the future. This amount has been discounted using a credit-adjusted
risk-free interest rate of five percent (2008 - five percent).
Changes to asset retirement obligations were as follows:
($ 000s) 2009 2008
-------------------------------------------------------------------------
Asset retirement obligations, January 1 18,338 14,904
Adjustment to asset retirement obligations (138) (217)
Adjustment related to asset additions
(net of disposals) (750) 5,929
Liabilities settled during the year (573) (3,063)
Accretion 913 785
-------------------------------------------------------------------------
Asset retirement obligations, December 31 17,790 18,338
-------------------------------------------------------------------------
13. SHAREHOLDERS' EQUITY
Authorized
The Company is authorized to issue an unlimited number of common shares
without nominal or par value. The Company is also 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.
Issued
2009 2008
-------------------------------------------------------------------------
Number Amount Number Amount
($ 000s) ($ 000s)
-------------------------------------------------------------------------
Common Shares
Balance, beginning
of year 17,257,603 99,530 - -
Issued pursuant to
private placement 1,068,000 17,996 - -
Issued on acquisition
of Cobalt (Note 5) 201,438 3,207 - -
Issued pursuant to
Company share
option plan 92,600 1,898 - -
Transfer of contributed
surplus to share capital - 103 - -
Issue costs for private
placement - (1,046) - -
Future tax effect of
share issue costs - 267 - -
Issued on reorganization
to a corporation - - 17,257,603 99,530
-------------------------------------------------------------------------
Balance, end of year 18,619,641 121,955 17,257,603 99,530
-------------------------------------------------------------------------
2008
-------------------------------------------------
Issued Number Amount
($ 000s)
-------------------------------------------------
Trust Units
Balance, beginning
of year 16,928,158 90,590
Transfer of contributed
surplus to unit capital - 805
Issued pursuant to Trust
unit option plan 321,700 7,935
Issued on acquisition
of Silverwing (Note 5) 7,745 200
Cancelled on conversion
to a corporation (17,257,603) (99,530)
-------------------------------------------------
Balance, end of 2008 - -
-------------------------------------------------
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 incurred issue costs of $1,046,000
in respect of the offering.
The number of common shares used to calculate diluted net earnings per
share for the year ended December 31, 2009 of 18,131,085 shares (2008 -
17,119,517) included the basic weighted average number of common shares
outstanding of 18,006,320 shares (2008 - 17,075,647) plus 124,765 shares
(2008 - 43,870) related to the dilutive effect of common share options.
A summary of the changes of the Company's contributed surplus is
presented below:
Contributed surplus
($ 000s) 2009 2008
-------------------------------------------------------------------------
Balance, beginning of year 2,542 2,140
Stock-based compensation expensed (non-cash) 911 1,207
Stock-based options exercised (non-cash) (103) (805)
-------------------------------------------------------------------------
Balance, end of year 3,350 2,542
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The deficit balance is composed of the following items:
($ 000s) 2009 2008
-------------------------------------------------------------------------
Accumulated earnings 276,745 208,182
Accumulated cash dividends and distributions (285,196) (254,897)
-------------------------------------------------------------------------
Deficit (8,451) (46,715)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company provides a stock option plan for its directors, officers,
employees and consultants. Under the plan, the Company may grant options
for up to 1,861,964 common shares (2008 - 1,725,760). 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
December 31, 2009 and 2008, and changes during the years ended on those
dates is presented below:
December 31, 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
Options exercised (92,600) 20.50 - -
-------------------------------------------------------------------------
Outstanding at end
of period 1,330,900 $ 20.36 1,390,500 $ 20.50
-------------------------------------------------------------------------
Options exercisable
at end of period 370,900 $ 20.50 - $ -
-------------------------------------------------------------------------
The following table summarizes information about options outstanding at
December 31, 2009:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Number Weighted-
Out- Average Weighted- Number Weighted-
Range of standing Remaining Average Exercisable Average
Exercise At Contractual Exercise at Exercise
Prices 12/31/09 Life Price 12/31/09 Price
-------------------------------------------------------------------------
$14.90 33,000 3.1 years $ 14.90 - $ -
20.50 1,297,900 2.9 years 20.50 370,900 20.50
-------------------------------------------------------------------------
$14.90-
20.50 1,330,900 2.9 years $ 20.36 - $ 20.50
-------------------------------------------------------------------------
The Company records compensation expense over the vesting period based on
the fair value of options granted to employees, directors and
consultants. In 2009, the Company granted 33,000 stock options with an
estimated fair value of $52,000 ($1.58 per option) using the Black-
Scholes option pricing model with the following key assumptions:
2009 2008
-------------------------------------------------------------------------
Weighted-average risk free interest rate (%) 1.4 2.2
Expected life (years) 3.0 3.5
Weighted-average volatility (%) 33.0 31.3
Dividend yield 2009 and 2008 based on the percentage of
dividends (2008 - dividends
or distributions) paid
during the period granted
-------------------------------------------------------------------------
14. ACCUMULATED OTHER COMPREHENSIVE INCOME
Other
January 1, Comprehensive December 31,
($ 000s) 2009 Income (Loss) 2009
-------------------------------------------------------------------------
Unrealized gains (losses) on
available for sale financial
assets 1,420 600 2,020
-------------------------------------------------------------------------
Other
January 1, Comprehensive December 31,
($ 000s) 2008 Income (Loss) 2008
-------------------------------------------------------------------------
Unrealized gains on available
for sale financial assets 3,031 (1,611) 1,420
-------------------------------------------------------------------------
15. RELATED PARTY TRANSACTIONS
The Company received a management fee from Comaplex of $330,000 (2008 -
$330,000) for management services and office administration. This fee has
been included as a recovery in general and administrative expenses and
represents the fair value of the services rendered. The Company also
allocated $102,000 of drilling royalty credits to Comaplex for $51,000.
As at December 31, 2009, the Company had an account receivable from
Comaplex of $105,000 (December 31, 2008 - $56,000).
The Company received a management fee from Pine Cliff Energy Ltd., a
company with common directors and management with the Company and its
subsidiaries, of $120,000 (2008 - $238,000) for management services and
office administration. This fee has been included in general and
administrative expenses as a recovery and represents the fair value of
the services rendered. As at December 31, 2009 the Company had an account
receivable from Pine Cliff of $1,000 (December 31, 2008 - $1,000).
These transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties.
16. FINANCIAL AND CAPITAL RISK MANAGEMENT
Financial Risk Factors
----------------------
The Company undertakes transactions in a range of financial instruments
including:
- Receivables
- Restricted cash
- Payables
- Common share investments
- Due to related parties
- Bank loans
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 may enter 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, which the Company defines
to include shareholders' equity, debt and working capital balances, 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, debt
facilities 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 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 undeveloped resources by horizontal or
vertical drill programs.
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 from operations 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 December 31, 2009
---------------------------------------------------------------------
Carrying Fair Face
($ 000s) Value Value Value
---------------------------------------------------------------------
Financial assets
Accounts receivable 14,713 14,713 14,873
Investments 4,462 4,462 N/A
Investment in related party 4,827 4,827 N/A
Restricted cash 812 812 812
Financial liabilities
Accounts payable and accrued
liabilities 18,868 18,868 18,868
Due to related parties 23,500 23,500 23,500
Long-term debt 59,823 59,823 59,823
---------------------------------------------------------------------
Financial instruments consisting of accounts receivable, accounts
payable and accrued liabilities, due to related parties and long-term
debt carried on the consolidated balance sheet are carried at
amortized cost. Restricted cash, investments, and investments in
related party are carried at fair value. All of the fair value items
are transacted in active markets. Bonterra classifies the fair value
of these transactions according to the following hierarchy based on
the amount of observable inputs used to value the instrument.
Level 1 - Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions occur in sufficient frequency and volume
to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active
markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date. Level 2 valuations
are based on inputs, including quoted forward prices for commodities,
time value and volatility factors, which can be substantially
observed or corroborated in the marketplace.
Level 3 - Valuations in this level are those with inputs for the
asset or liability that are not based on observable market data.
Bonterra's restricted cash, investments and investments in related
party have been assessed on the fair value hierarchy described above
and are all considered Level 1.
The net debt and cash flow from operations figures are presented in
Table 2.
Table 2
December 31
($ 000s) 2009
---------------------------------------------------------------------
Long-term debt 59,823
Due to related parties 23,500
Accounts payable and accrued liabilities 18,868
Current assets(1) (27,680)
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Net Debt 74,511
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Cash flow from operations(2) 38,893
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Net debt to cash flow from operations 1.92
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(1) Current assets include accounts receivable, crude oil inventory,
prepaid expenses, investments and investment in related party.
(2) Cash flow from operations includes annual net earnings less
adjustment for non-cash (gain) loss on risk management contracts,
stock-based compensation, depletion, depreciation and accretion,
gain on sale of property, future income taxes, changes in non-
cash working capital items, asset retirement obligations settled
and investment tax credit receivable.
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 has used various risk management contracts to set price
parameters for a portion of its production. 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 commodity prices.
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
borrowings which have a variable interest rate which gives rise to a
cash flow interest rate risk.
The Company's debt facilities consist of a $100,000,000 revolving
operating line, $20,000,000 demand operating line and $23,500,000 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) within the Company's credit facility. 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.
A one percent increase (decrease) in the Canadian prime rate would
decrease net earnings and comprehensive income by $591,000 (increase
by $591,000).
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, 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 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 of December 31, 2009 ($14,713,000)
and December 31, 2008 ($11,753,000) over 87 (2008 - 82) percent
relates to product sales with international oil and gas companies and
drilling credits receivable from the province of Alberta.
The Company assesses quarterly, if there has been any impairment of
the financial assets of the Company. During the year ended
December 31, 2009, there was no impairment provision required on any
of the financial assets of the Company due to historical success of
collecting receivables. 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 December 31, 2009, approximately $244,000 or 1.6 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 netting payables 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 December 31,
2009 is $160,000 (December 31, 2008 - $85,000) with the difference
being included in general and administrative expenses. There were no
accounts written off during the year.
The carrying value of accounts receivable approximates their fair
value due to the relatively short periods to maturity on this
instrument. The maximum exposure to credit risk is represented by the
carrying amount on the balance sheet. There are no material financial
assets that the Company considers past due.
Liquidity risk
--------------
Liquidity risk includes the risk that, as a result of the Company's
operational liquidity requirements:
- The Company will not have sufficient funds to settle a
transaction on the due date;
- The Company will not have sufficient funds to continue with its
dividends;
- The Company will be forced to sell assets at a value which is
less than what they are worth; or
- The Company may be unable to settle or recover a financial
asset at all.
To help reduce these risks the Company:
- Maintains a portfolio of high-quality, long reserve life oil
and gas assets.
The Company has the following maturity schedule for its financial
liabilities:
Payments Due By Period
Recognized on Less
Financial than 1-3 4-5
($ 000s) Statements 1 year years years
---------------------------------------------------------------------
Accounts payable and Yes -
accrued liabilities Liability 18,868 - -
Due to related Yes -
party Liability 23,500 - -
Long-term Yes -
bank debt Liability - 59,823 -
Office leases No 944 1,761 496
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Total 43,312 61,584 496
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c) Risk management contracts
The Company has no outstanding risk management contracts.
17. COMMITMENTS, CONTINGENCIES AND GUARANTEES
The Company has no contractual obligations that last more than a year
other than its office lease agreements which are as follows:
($ 000s)
Lease Obligations
-------------------------------------------
Year 1 944
Year 2 932
Year 3 829
Year 4 496
-------------------------------------------
Total 3,201
-------------------------------------------
18. SUBSEQUENT EVENTS - DIVIDENDS
Subsequent to December 31, 2009, the Company has declared the following
dividends:
Date declared Record date $ per share Date payable
-------------------------------------------------------------------------
January 5, 2010 January 15, 2010 $0.18 January 29, 2010
February 3, 2010 February 16, 2010 $0.18 February 26, 2010
March 3, 2010 March 15, 2010 $0.18 March 31, 2010
19. SUBSEQUENT EVENT - DISPOSITION
Subsequent to December 31, 2009, the Company entered into a purchase and
sale agreement to divest its Southeast Saskatchewan Pinto property. The
proceeds of disposition consist of approximately $5,600,000 cash and
resulted in a gain of approximately $5,800,000. The disposition closed on
February 23, 2010.
The TSX does not accept responsibility for the adequacy or accuracy of
this release.
%SEDAR: 00003132E