CALGARY, March 12 /CNW/ - Sabretooth Energy Ltd. (TSX:SAB) ("Sabretooth"
or "the Company") is pleased to announce financial and operational results for
2008 and an operational update on current activity.
2008 Highlights
- Increased average production in 2008 to 2,349 boe/d, a 26% increase
over 2007.
- Divested 545 boe/d of non-core assets in West Central Alberta,
Saskatchewan and Fireweed, British Columbia, for proceeds of
$22.45 MM.
- Increased reserve life index (RLI) by 46% on a Proved + Probable
(P+P) basis to 9.5 years and 34% on a proved basis to 6.9 years
primarily by shifting focus to Montney and Jean Marie drilling.
- Replaced reserves by 279% on a P+P basis as calculated by reserve
additions divided by 2008 production. 2.4 MMboe of reserves were
added in 2008 (1.66 MMboe net of revisions) through the drill bit.
- Achieved Sabretooth stand-alone 2008 F&D costs of $10.60/boe P+P
(consolidated $12.42/boe) and $13.19/boe P+P (consolidated
$15.73/boe) with full development. Sabretooth stand-alone F&D costs
net of revisions were $15.22/boe P+P (consolidated $17.84/boe) and
$18.95/boe P+P (consolidated $22.59/boe) with full development.
- Drilled 18 gross (11 net) wells in 2008 resulting in an overall
success rate of 89% (net 93%).
- Successfully drilled and completed the Company's first unconventional
Montney horizontal well at Gordondale, Alberta.
- Made an unconventional Montney new pool discovery at Red Creek,
British Columbia.
- Made an oil discovery at Blueberry and natural gas discoveries at
Gordondale and Earring on the Alberta side of the Peace River Arch.
- Made a significant light oil discovery in the Mica area of North East
British Columbia (NE B.C.).
- Continued development of the Jean Marie formation at Gunnell in
NE B.C. with 5 (1.25 net) successful gas wells. Additional wells are
planned for 2009.
- Successfully closed a $15.2 MM flow-through share issue on Dec. 24,
2008 through a subsidiary (HFG Holdings Inc., "HFG") whereby
Sabretooth contributed its Montney assets at NAV for 71% of the
shares in HFG. This created a pure Montney public company, operated
by Sabretooth.
- Grew the Company's Montney land position successfully in NE B.C. and
Alberta to approximately 60 net sections, of which 59 net sections
were transferred to HFG in December 2008.
- Increased the Company undeveloped land position to approximately
121,000 net acres in 2008, and which were independently valued at
$14.4 MM.
2009 Operational Update
Production
Production for the last week of February 2009 was approximately 1,687
boe/d. Production was negatively impacted by approximately 200 boe/d by plant
outages on third-party facilities which process Sabretooth volumes. The down
production was due to high Nova line pressure curtailing Spectra capacity at
Pouce Coupe which impacted Sabretooth's Mica production. Mica is currently
back on production and Spectra has indicated that a long term solution to the
curtailments will be completed in the next week.
Drilling and Completions
Sabretooth, in conjunction with HFG, completed and tested gas from its
Red Creek, British Columbia horizontal well in February 2009. A re-entry well
was drilled at Sinclair, Alberta for Lower Doig and Montney targets in March
that is currently awaiting completion. This well enabled Sabretooth to
continue three sections of expiring land valued at approximately $2.0 million
and to earn an interest in two additional sections in the Sinclair area which
we estimate are worth approximately $1.5 million (based on the independent
land evaluation of December 31, 2008). Further Montney exploration wells in
Sinclair and Mica are planned following spring breakup.
Corporate Governance
Due to the formation of HFG and in accordance with good corporate
governance, Hank Swartout, an independent director, has been appointed
Chairman of the Board. Marshall Abbott remains as Director and CEO.
Short Term Investments - Resolution of ABCP
The Pan-Canadian Investors Committee for Third-Party Structured Asset
Backed Commercial Paper announced on January 16, 2009 that the restructuring
of the Asset Backed Commercial Paper ("ABCP") market was finalized. Sabretooth
has now received the first of two interest payments for back-dated ABCP
interest. The second payment is expected before the end of Q1. Sabretooth
holds asset backed commercial paper investments with a face value of $24.2
million.
As a result of the completed restructuring, the bank has extended a loan
to Sabretooth for $18.1 million for a period of up to seven years, which
reflects the life of the ABCP. The loan interest (Prime Rate less 100 points)
and the interest earned on the ABCP (Bankers Acceptance less 50 points)
currently offset each other so that the carrying cost of this loan is zero.
At December 31, 2008, Sabretooth had a consolidated working capital
deficit of approximately $30.3 million. Sabretooth's consolidated credit
facilities with the National Bank are $63 million. The Company expects that
cash flow and available bank lines will allow it to remain active in 2009 and
into 2010.
Hedging Strategy
The Company has put in place three hedges that will protect cash flow
from low commodity prices. The three hedges will allow Sabretooth to sell
9,000 GJ/d of natural gas production for approximately $7.06/GJ for the first
three months of 2009 and sell 6,000 GJ/d of natural gas production for
$7.85/GJ for the remainder of the year and into March 2010. The mark to market
value of these hedges was approximately $3 million at December 2008. At the
time of this press release the value of such hedges was estimated at more than
double that amount.
Reserves
Sabretooth's reserves were evaluated at December 31, 2008 by GLJ
Petroleum Consultants ("GLJ"), an independent engineering firm. GLJ's
evaluation was conducted in accordance with standards set out in the Canadian
Oil and Gas Evaluation Handbook and is compliant with National Instrument
51-101 ("NI 51-101"). All reserve numbers are Company gross(x) before royalties.
The following estimates of Sabretooth's reserves and future net revenues are
disclosed on a consolidated basis with HFG as required by NI 51-101 and for
Sabretooth on a stand-alone basis. The estimates of reserves as future net
revenue for individual properties may not reflect the same confidence level as
estimates of reserves and future net revenue for all properties, due to the
effects of aggregation. SAB owns approximately 71% of HFG.
Light and
Sabretooth and HFG Consolidated Medium
2008 Reserves (before Gas Oil NGLs Total
royalties) (forecast prices) mmcf mbbls mbbls mboe
-------------------------------------------------------------------------
December 31, 2008
Proved producing 14,068 345 135 2,825
Proved developed non-producing 4,922 72 67 960
Proved undeveloped 5,407 32 48 981
-------------------------------------------------------------------------
Total Proved 24,397 449 251 4,766
Probable 13,955 195 168 2,689
-------------------------------------------------------------------------
Total Proved plus Probable 38,353 643 419 7,455
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Light and
Sabretooth Only Medium
2008 Reserves (before Gas Oil NGLs Total
royalties) (forecast prices) mmcf mbbls mbbls mboe
-------------------------------------------------------------------------
December 31, 2008
Proved producing 14,028 345 134 2,817
Proved developed non-producing 4,601 72 59 898
Proved undeveloped 4,601 16 35 818
-------------------------------------------------------------------------
Total Proved 23,230 433 228 4,533
Probable 13,314 187 155 2,561
-------------------------------------------------------------------------
Total Proved plus Probable 36,545 620 383 7,094
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: Columns may not add due to rounding
(x) "Gross" reserves means the Company's working interest (operating and
non-operating) share before deduction of royalties payable to others
and without including any royalty interest of the Company.
Light and
Medium
2007 Reserves (before Gas Oil NGLs Total
royalties) (forecast prices) mmcf mbbls mbbls mboe
-------------------------------------------------------------------------
December 31, 2007
Proved producing 18,112 545 167 3,731
Proved developed non-producing 6,923 0 84 1,237
Proved undeveloped 2,705 0 16 467
-------------------------------------------------------------------------
Total Proved 27,740 545 267 5,435
Probable 14,816 229 149 2,848
-------------------------------------------------------------------------
Total Proved plus Probable 42,556 775 416 8,283
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: Columns may not add due to rounding
Reserve Reconciliation
The following tables provide a reconciliation of the Company's gross
reserves of oil, natural gas and natural gas liquids for the year ended
December 31, 2008 versus the year ending December 31, 2007 (rows and columns
may not add due to rounding).
Sabretooth and HFG Consolidated
Total Proved Probable
-------------------------------------------------------------------------
Light Light
and and
Medium Medium
Gas Oil NGLs Total Gas Oil NGLs Total
mmcf mbbls mbbls mboe mmcf mbbls mbbls mboe
-------------------------------------------------------------------------
Opening -
12/31/07 27,740 546 267 5,435 14,816 229 149 2,848
-------------------------------------------------------------------------
Discoveries(x) 7,318 264 84 1,568 3,815 131 65 832
-------------------------------------------------------------------------
Revisions(xx) (2,047) 33 13 (294) (2,210) (65) (1) (435)
-------------------------------------------------------------------------
Dispositions (4,232) (319) (71) (1,095) (2,466) (101) (45) (556)
Production (4,381) (75) (43) (848) (-) (-) (-) (-)
-------------------------------------------------------------------------
Closing -
12/31/08 24,398 449 251 4,766 13,955 194 168 2,689
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Proved plus Probable
-------------------------------------------
Light
and
Medium
Gas Oil NGLs Total
mmcf mbbls mbbls mboe
-------------------------------------------
Opening -
12/31/07 42,556 775 416 8,283
-------------------------------------------
Discov-
eries(x) 11,132 395 149 2,400
-------------------------------------------
Revisions(xx) (4,257) (32) 12 (729)
-------------------------------------------
Dispositions (6,697) (420) (116) (1,651)
Production (4,381) (75) (43) (848)
-------------------------------------------
Closing -
12/31/08 38,353 643 419 7,455
-------------------------------------------
-------------------------------------------
Sabretooth Only
Total Proved Probable
-------------------------------------------------------------------------
Light Light
and and
Medium Medium
Gas Oil NGLs Total Gas Oil NGLs Total
mmcf mbbls mbbls mboe mmcf mbbls mbbls mboe
-------------------------------------------------------------------------
Opening -
12/31/07 27,740 546 267 5,435 14,816 229 149 2,848
-------------------------------------------------------------------------
Discoveries(x) 7,318 264 84 1,568 3,815 131 65 832
-------------------------------------------------------------------------
Revisions(xx) (2,047) 33 13 (294) (2,210) (65) (1) (435)
-------------------------------------------------------------------------
Dispositions (5,399) (334) (94) (1,328) (3,107) (109) (58) (684)
Production (4,381) (75) (43) (848) (-) (-) (-) (-)
-------------------------------------------------------------------------
Closing -
12/31/08 23,230 433 228 4,533 13,314 187 155 2,561
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Proved plus Probable
-------------------------------------------
Light
and
Medium
Gas Oil NGLs Total
mmcf mbbls mbbls mboe
-------------------------------------------
Opening -
12/31/07 42,556 775 416 8,283
-------------------------------------------
Discov-
eries(x) 11,132 395 149 2,400
-------------------------------------------
Revisions(xx) (4,257) (32) 12 (729)
-------------------------------------------
Dispositions (8,508) (443) (151) (2,012)
Production (4,381) (75) (43) (848)
-------------------------------------------
Closing -
12/31/08 36,545 620 383 7,094
-------------------------------------------
-------------------------------------------
Note: Columns may not add due to rounding
(x) Discoveries, Extensions and Infill Drilling
(xx) Improved Recovery, Technical Revisions and Economic Factors
Net Present Value of Future Net Revenue 2008 (forecast prices)
Sabretooth and HFG Consolidated
It should not be assumed that the undiscounted and discounted future net
revenues estimated by GLJ which we set forth below represents fair market
value.
Net Present Value
Before Income taxes ($000's)
As at December 31, 2008 at 0% At 8% at 10% at 12%
-------------------------------------------------------------------------
Proved producing 88,491 60,236 56,024 52,448
Proved developed non-producing 29,063 17,508 15,807 14,370
Proved Undeveloped 19,675 7,949 6,541 5,414
-------------------------------------------------------------------------
Total Proved 137,229 85,693 78,371 72,231
Probable 96,167 44,733 39,160 34,747
-------------------------------------------------------------------------
Total Proved plus Probable 233,396 130,426 117,532 106,980
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: Columns may not add due to rounding
Sabretooth Only
Net Present Value
Before Income taxes ($000's)
As at December 31, 2008 at 0% At 8% at 10% at 12%
-------------------------------------------------------------------------
Proved producing 88,331 60,089 55,880 52,307
Proved developed non-producing 25,728 16,756 15,272 13,986
Proved Undeveloped 14,734 4,991 3,896 3,037
-------------------------------------------------------------------------
Total Proved 128,792 81,836 75,048 69,329
Probable 88,283 43,071 37,790 33,565
-------------------------------------------------------------------------
Total Proved plus Probable 217,075 124,907 112,839 102,895
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: Columns may not add due to rounding
Net Present Value of Future Net Revenue 2007 (forecast prices)
Net Present Value
Before Income taxes ($000's)
As at December 31, 2007 at 0% At 8% at 10% at 12%
-------------------------------------------------------------------------
Proved producing 101,666 72,102 67,979 64,484
Proved developed non-producing 28,249 18,468 17,069 15,876
Proved Undeveloped 6,799 1,310 798 407
-------------------------------------------------------------------------
Total Proved 136,714 91,880 85,846 80,767
Probable 80,720 41,702 37,577 34,242
-------------------------------------------------------------------------
Total Proved plus Probable 217,434 133,582 123,423 115,010
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note: Columns may not add due to rounding
GLJ's reserves evaluation is based upon the following price forecast
(effective January 1, 2009):
Natural Gas Condensate Crude Oil
--------------------- ---------------------- --------------------
AECO Spot Edmonton Pentanes Plus Edmonton Par
Benchmark Company Benchmark Company Benchmark Company
($/mmbtu) ($/mcf) ($/bbl) ($/bbl) ($/bbl) ($/bbl)
2009 7.58 7.60 69.98 63.28 68.61 62.71
2010 7.5 7.95 80.52 74.51 78.94 72.39
2011 8.10 8.33 85.21 79.37 83.54 77.09
2012 8.85 8.69 92.74 86.89 90.92 84.63
2013 9.30 8.99 97.82 91.41 95.91 89.81
2014 9.48 9.29 99.80 92.64 97.84 91.91
2015 9.67 9.47 101.81 94.73 99.82 94.03
2016 9.86 9.66 103.87 96.88 101.83 96.17
2017 10.06 9.85 105.97 99.03 103.89 98.30
2018 10.26 10.06 108.10 101.57 105.99 100.75
Escalation rate of 2.0% per year thereafter
SAB+HFG SAB
Reserve Life Index Consolidated Only
Proved Production (boe)(1) 695,325 661,745
Proved reserves (boe) 4,766,000 4,533,000
Proved reserve life index (years) 6.85 6.85
Proved + Probable Production (boe)(1) 786,940 750,805
Proved plus probable reserves (boe) 7,455,000 7,094,000
Proved plus probable reserve life index (years) 9.47 9.45
(1) Production from GLJ reserve report for 2009
Reserve Life Index is calculated by taking proven and proven plus probable
reserves from the GLJ report divided by the 2009 production from proved
reserves and proved plus probable reserves respectively.
SAB+HFG SAB
Reserve Replacement Consolidated Only
Production (boe) 2008 859,780 859,780
Proven reserves additions (boe) 1,568,000 1,568,000
Proven reserve replacement (per cent) 182% 182%
Proven plus probable reserves additions (boe) 2,400,000 2,400,000
Proven plus probable reserve replacement
(per cent) 279% 279%
Reserve replacement is calculated by taking the proven and proven plus
probable reserve additions (before revisions) in 2008 from the GLJ report and
dividing them by the 2008 actual production.
Finding and Development Costs
During 2008, Sabretooth spent approximately $37.4 million. $2.2 million
was spent on West Central and Fireweed properties which were sold in July 2008
and an additional $5.7 million was spent on land acquisitions. During 2008,
Sabretooth alone spent approximately $25.4 million on exploration and
development with $0.6 million on land. Sabretooth and HFG consolidated spent
approximately $29.8 million on exploration and development with $5.7 million
on land.
SAB SAB SAB SAB SAB
ONLY +HFG +HFG +HFG +HFG
($/boe) ($/boe) ($/boe) ($/boe) ($/boe)
-------------------------------------------------------------------------
FD&A Costs Excluding Future
Development Capital 2008 2008 2007 2006 3 Year
-------------------------------------------------------------------------
F&D - Proved and Probable
excluding revisions 10.60 12.42 13.43 21.58 14.64
F&D - Proved and Probable
inclusive of revisions 15.22 17.84 19.37 31.62 21.15
-------------------------------------------------------------------------
F&D - Total Proved excluding
revisions 16.22 19.01 19.57 25.89 20.85
F&D - Total Proved inclusive
of revisions 19.97 23.40 26.73 25.89 25.30
-------------------------------------------------------------------------
FD&A - Total Proved 19.97 23.40 16.91 25.89 19.48
-------------------------------------------------------------------------
FD&A - Total Proved and
Probable 15.22 17.84 12.31 31.62 15.24
-------------------------------------------------------------------------
FD&A Costs Including Future
Development Capital
-------------------------------------------------------------------------
F&D - Proved and Probable
excluding revisions 13.19 15.73 $17.24 $19.90 16.84
F&D - Proved and Probable
inclusive of revisions 18.95 22.59 $29.16 $29.16 24.33
-------------------------------------------------------------------------
F&D - Total Proved excluding
revisions 19.32 23.20 $23.95 $26.19 23.73
F&D - Total Proved inclusive
of revisions 23.78 28.56 $31.11 $26.19 28.80
-------------------------------------------------------------------------
FD&A - Total - Proved 23.78 28.56 $18.98 $26.19 21.87
-------------------------------------------------------------------------
FD&A - Total - Proved and
Probable 18.95 22.59 $14.47 $29.16 17.45
-------------------------------------------------------------------------
Finding and development costs: with respect to disclosure of finding and
development costs disclosed above:
(a) The amounts of 2008 finding and development and/or acquisition costs
contained in the table set forth above are calculated by dividing the
total of the particular costs noted in each line incurred during 2008
by the amounts of additions to proved reserves and proved and
probable reserves during 2008 that resulted from the expenditures of
such costs during 2008 which are based upon the GLJ Evaluation.
(b) In calculating the amounts of finding and development and/or
acquisition costs, the change during the year in estimated future
development costs is based upon the evaluation of Sabretooth's
reserves prepared by GLJ Petroleum Consultants effective December 31,
2007 and 2008.
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.
About Sabretooth Energy
Sabretooth Energy Ltd. is a public oil and gas exploration and
development company, located in Calgary, Alberta and carrying out operations
in Western Canada. Sabretooth trades on the Toronto Stock Exchange (TSX) under
the symbol "SAB".
Our mandate is to grow through a balanced approach of drill bit
additions, accretive acquisitions and aggressive exploitation of upside.
This news release contains forward-looking statements relating to the
Company's plans and other aspects of the Company's anticipated future
operations, strategies, financial and operating results and business
opportunities. Forward-looking statements typically use words such as
"anticipate", "believe", "project", "expect", "plan", "intend" or similar
words suggesting future outcomes, statements that actions, events or
conditions "may", "would", "could" or "will" be taken or occur in the future,
or statements regarding the outlook for petroleum prices, estimated amounts
and timing of capital expenditures, anticipated results of construction
projects, estimates of future production, the ability to realize on
investments in asset backed commercial paper, operating costs or other
expectations, beliefs, plans, objectives, assumptions or statements about
future events or performance. Statements regarding reserves are also
forward-looking statements, as they reflect estimates as to the expectation
that the deposits can be economically exploited in the future.
These statements are based on certain factors and assumptions regarding
expected growth, results of operations, performance, business prospects and
opportunities and the ability of the Company to realize on its investments in
asset backed commercial paper. While we consider these assumptions to be
reasonable based on information currently available to us, they may prove to
be incorrect.
By their nature, forward-looking statements involve numerous risks and
uncertainties and other factors that contribute to the possibility that the
predicted outcome will not occur, including, without limitation, risks
associated with oil and gas exploration, development, exploitation,
production, marketing and transportation, loss of markets, volatility of
commodity prices, currency fluctuations, imprecision of reserve estimates,
environmental risks, competition from other producers, inability to retain
drilling rigs and other services, incorrect assessment of the value of
acquisitions, failure to realize the anticipated benefits of acquisitions,
delays resulting from or inability to obtain required regulatory approvals and
ability to access sufficient capital from internal and external sources.
Readers are cautioned that the foregoing list of factors is not exhaustive.
Although Sabretooth believes that the expectations represented in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to be correct. As a consequence, actual results may
differ materially from those anticipated in the forward-looking statements and
you should not unduly rely on forward-looking statements. The forward-looking
statements contained in this news release are made as of the date of this news
release and the Company does not undertake any obligation to update publicly
or to revise any of the included forward-looking statements, whether as a
result of new information, future events or otherwise, except as may be
required by applicable securities laws.
The term barrels of oil equivalent may be misleading, particularly if
used in isolation. A conversion ratio for gas of 6 mcf : 1 boe is based on an
energy equivalency conversion method primarily applicable at the burner tip
and does not represent a value equivalency at the wellhead.
FINANCIAL RESULTS AND HIGHLIGHTS
-------------------------------------------------------------------------
Three Months Three Months
Ended Year Ended Ended Year Ended
December 31, December 31, December 31, December 31,
2008 2008 2007 2007
-------------------------------------------------------------------------
Financial
Production revenue $7,422,000 $48,674,000 $13,535,000 $30,121,000
Realized gain
(loss) on hedge $657,000 $(1,721,000) $834,000 $2,700,000
Unrealized gain
(loss) on hedge $2,482,000 $2,191,000 $(1,481,000) $(1,563,000)
Net income (loss) $(987,000) $(8,179,000) $217,000 $3,775,000
Funds flow from
operations $2,496,000 $21,807,000 $5,985,000 $14,524,000
-------------------------------------------------------------------------
Production volumes
Natural gas (mcf/d) 9,480 12,139 17,303 9,664
Crude oil (bbls/d) 186 210 325 181
Natural gas liquids
(bbls/d) 122 115 171 73
Total (boe/d) 1,887 2,349 3,380 1,865
Sales prices
Natural gas ($/mcf) $7.34 $8.06 $6.84 $7.45
Natural gas, not
including hedges
($/mcf) $6.59 $8.44 $6.32 $6.69
Crude oil ($/bbl) $53.55 $93.64 $76.55 $72.16
Natural gas liquids
($/bbl) $67.98 $93.57 $75.81 $66.31
Total ($/boe) $46.52 $54.61 $46.21 $48.22
Netbacks, not
including unrealized
hedges ($/boe)
Price $46.52 $54.61 $46.21 $48.22
Royalties (5.15) (6.69) $(7.22) $(7.74)
Transportation (1.97) (1.55) $(1.68) $(1.58)
Operating costs (16.30) (14.85) $(11.73) $(11.41)
-------------------------------------------------------------------------
Total $23.10 $31.52 $25.58 $27.49
-------------------------------------------------------------------------
Total Capital
expenditures
(excluding Bear
Ridge acquisition) $6,095,000 $37,429,000 $12,013,000 $36,223,000
-------------------------------------------------------------------------
Land (net acres)
Developed 23,494 49,605
Undeveloped 148,822 154,843
-------------------------------------------------------------------------
Total Land 172,316 204,448
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reserves (boe)
-------------------------------------------------------------------------
Proved 4,766,000 5,435,000
-------------------------------------------------------------------------
Proved plus probable 7,455,000 8,283,000
-------------------------------------------------------------------------
Management's Discussion and Analysis
-------------------------------------------------------------------------
This Management's Discussion and Analysis ("MD & A") of the financial and
operating results for Sabretooth Energy Ltd. ("Sabretooth" or the "Company")
should be read in conjunction with the Company's audited consolidated
financial statements (the "Annual Financial Statements") and related notes for
the years ended December 31, 2008 and 2007.
Additional information relating to the Company, including its quarterly
MD & A for the year is available on SEDAR at www.sedar.com.
This MD & A is dated March 12, 2009.
Sabretooth Strategy in the Current Economic Environment
The current economic environment is challenging and uncertain amidst a
global recession, low commodity prices, volatile financial markets and limited
access to capital markets. In this environment, Sabretooth is highly focused
on the key business objectives of maintaining financial strength, generating
significant free cash flow, further optimizing capital investments. This
measured investment approach is underpinned by a strong balance sheet and a
market risk mitigation strategy where Sabretooth has hedged about two thirds
of its expected gas production from January through March 2010 at an average
NYMEX equivalent price of about $7.69 per Mcf, along with other actions within
its risk management program that are more fully described in the Risk
Management section of this MD & A.
Sabretooth has a strong balance sheet and continues to employ a
conservative capital structure. As at December 31, 2008, Sabretooth had
available unused committed bank credit facilities in the amount of $15
million. The Company also has $15 million cash in its subsidiary HFG.
Sabretooth targets a Net Debt to Adjusted Funds Flow ratio no greater than
3.0: 1.0; at December 31, 2008, the Company's Net Debt to Adjusted Funds Flow
ratio was 1.53: 1.0. In addition, Sabretooth will continue to monitor expenses
and capital programs. In light of the current market situation, Sabretooth has
planned a measured, flexible approach to 2009 investment and has designed a
2009 capital program with the flexibility to adjust investment up or down
depending upon how economic circumstances unfold during the year.
Basis of Presentation
The financial data presented below has been prepared in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and
the measurement currency is the Canadian dollar. For the purpose of
calculating unit costs, natural gas is converted to a barrel equivalent
("boe") using six thousand cubic feet of natural gas equal to one barrel of
oil unless otherwise stated. The term barrels of oil equivalents (BOE) may be
misleading, particularly if used in isolation. A BOE conversion ratio for gas
of 6 mcf:1 boe is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead.
Non-GAAP Measurements
Within the MD & A references are made to terms commonly used in the oil
and gas industry. Netback is not defined by GAAP in Canada and is referred to
as a non-GAAP measure. Netbacks equal total revenue less royalties, operating
costs and transportation costs calculated on a boe basis. Management utilizes
this measure to analyze operating performance. Total boes are calculated by
multiplying the average daily production by the number of days in the period.
Funds flow from operations is a non-GAAP term that represents net income
(loss) adjusted for non-cash items including depletion, depreciation,
accretion, future income taxes, stock-based compensation, unrealized hedge
gains (losses), asset write-downs and gains (losses) on sale of assets and
non-controlling interest and before adjustments for changes in working
capital, asset retirement expenditures and interest accrued on ABCP. The
Company evaluates its performance based on earnings and funds flow from
operations. The Company considers funds flow from operations a key measure as
it demonstrates the Company's ability to generate the cash flow necessary to
fund future growth through capital investment and to repay debt. The Company's
calculation of funds flow from operations may not be comparable to that
reported by other companies. Funds flow from operations per share is
calculated using the same weighted average number of shares outstanding used
in the calculation of income (loss) per share.
Forward-looking Statements
Certain statements contained within this MD & A constitute
forward-looking statements. These statements related to future events or our
future performance. All statements other than statements of historical fact
may be forward-looking statements. Forward-looking statements are often, but
not always, identified by the use of words such as "seek", "anticipate",
"budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will",
"project", "predict", "potential", "targeting", "intend", "could", "might",
"should", "believe", and similar expressions. Forward-looking statements in
this MD & A include, but are not limited to, statements with respect to: the
potential impact of implementation of the Alberta Royalty Framework on
Sabretooth's condition and projected 2008 capital investments; the Company's
ability to realize its investments in Asset Backed Commercial Paper ("ABCP");
projections with respect to growth of natural gas production; the projected
impact of land access and regulatory issues; projections relating to the
volatility of crude oil prices in 2009 and beyond and reasons therefor; the
Company's projected capital investment levels for 2009 and the source of
funding therefor; the effect of the Company's risk management program,
including the impact of derivative financial instruments; the Company's
defence of lawsuits; the impact of the climate change initiatives on operating
costs; the impact of Western Canada pipeline constraints; projections that the
Company will fully recover from its ABCP. Readers are cautioned not to place
undue reliance on forward-looking statements, as there can be no assurance
that the plans, intentions or expectations upon which they are based will
occur.
By their nature, forward-looking statements involve numerous assumptions,
known and unknown risks and uncertainties, both general and specific, that
contribute to the possibility that the predictions, forecast, projects and
other forward-looking statements will not occur, which may cause the Company's
actual performance and financial results in future periods to differ
materially from any estimates or projects of future performance or results
expressed or implied by such forward-looking statements. These assumptions,
risks and uncertainties include, among other things: volatility of and
assumptions regarding oil and gas prices; assumptions based upon Sabretooth's
current guidance; fluctuations in currency and interest rates; the Company's
ability to realize its investment in ABCP; product supply and demand; market
competition; risk inherent in the Company's marketing operations, including
credit risks; imprecision of reserves estimates and estimates of recoverable
quantities of oil, natural gas and liquids from resource plays and other
sources not currently classified as proved; the Company's ability to replace
and expand oil and gas reserves; the Company's ability to generate sufficient
cash flow from operations to meet its current and future obligations; the
Company's ability to access external sources of debt and equity capital; the
timing and cost of well and pipeline constructions; the Company's ability to
secure adequate product transportation; changes in royalty, tax, environmental
and other laws or regulations or the interpretations of such laws or
regulations; risks associated with existing and potential future lawsuits and
regulatory actions made against the Company; and other risks and uncertainties
described from time to time in the reports and filings made with securities
regulatory authorities by Sabretooth. Statements relating to "reserves" are
deemed to be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions that the resources and
reserves described can be profitably produced in the future.
Financial outlook information contained in this MD & A about prospective
results of operations, financial position or cash flows is based on
assumptions about future events, including economic conditions and proposed
courses of action, based on management's assessment of the relevant
information currently available. Readers are cautioned that such financial
outlook information contained in this MD & A should not be used for purposes
other than for which it is disclosed herein.
Although Sabretooth believes that the expectations represented by such
forward-looking statements are reasonable, there can be no assurance that such
expectation will prove to be correct. Readers are cautioned that the foregoing
list of important factors is not exhaustive. Furthermore, the forward-looking
statements contained in this MD & A are made as of the date of this MD & A,
and except as required by law Sabretooth does not undertake any obligation to
update publicly or to revise any of the included forward-looking statements,
whether as a result of new information, future events or otherwise. The
forward-looking statements contained in this MD & A are expressly qualified by
this cautionary statement.
Selected Annual Information
Year ended Year ended Year ended
December 31, December 31, December 31,
$(000's) 2008 2007 2006
-------------------------------------------------------------------------
Total Production Revenue $48,674 $30,121 $27,613
Net Income (Loss) $(8,179) $3,775 $2,312
Per share - basic (0.21) 0.14 0.12
Per share - diluted (0.21) 0.14 0.12
Total Assets $163,950 $169,610 $68,065
-------------------------------------------------------------------------
Sale of Assets to HFG
On December 24, 2008, pursuant to an Agreement of Purchase and Sale
whereby Sabretooth Energy Ltd. sold 59 net sections of Montney petroleum
rights located in Northeastern British Columbia and Northwestern Alberta and a
$1.0 million tie-in commitment at Red Creek in addition to certain Montney
wells and seismic access (the "Assets") in exchange for 156,546,590 common
shares of HFG Holdings Inc. ("HFG") with a market value of $31,309,318. In
addition, Sabretooth Energy Ltd. subscribed for 5,000,000 common shares of HFG
at $0.20 per share, for an aggregate subscription price of $1,000,000.
On December 24, 2008, HFG also raised approximately $15,221,000 by
issuing 60,886,000 common shares on a flow-through basis at a price of $0.25
per share to external parties. Sabretooth's interest in HFG was reduced
through the issuance of these additional shares by HFG to third parties.
As a result of the transactions described above, Sabretooth Energy Ltd.
holds approximately 71% of the outstanding common shares of HFG and
effectively disposed of 29% of the Assets to non-controlling interest
shareholders. Accordingly, the sale of Assets and the corresponding sale of
shares by HFG is, in substance, a sale of oil and gas properties. No gain or
loss has been recorded as crediting the sale proceeds to the full cost pool
did not result in a change of 20% or more in the depletion rate of the
Company.
Prior to the transactions described above, HFG was classified as a
Capital Pool Company as defined in Policy 2.4 of the TSX Venture Exchange (the
"Exchange") and had no operations or business activities and had approximately
$14,437,000 in cash. As a result, HFG does not meet the definition of a
business and, therefore, the acquisition of HFG has not been accounted for as
a business combination, but rather as an asset acquisition. The results of HFG
are recorded by the Company from December 24, 2008 forwards.
Financial Results and Highlights
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Revenue, net of royalties $6,528 $11,289 $42,921 $24,849
Funds flow from operations(1) $2,496 $5,985 $21,807 $14,524
Net income (loss) $(987) $217 $(8,179) $3,775
-------------------------------------------------------------------------
(1) Funds flow from operations is a non-GAAP term that represents net
earnings adjusted for non-cash items including depletion and
depreciation, accretion, future income taxes, stock-based
compensation, unrealized hedge gains (losses), asset write-downs and
gains (losses) on sale of assets and non-controlling interest and
before adjustments for changes in working capital, asset retirement
expenditures and interest accrued on ABCP. The Company evaluates its
performance based on earnings and funds flow from operations. The
Company considers funds flow from operations a key measure as it
demonstrates the Company's ability to generate the cash flow
necessary to fund future growth through capital investment and to
repay debt.
Summary of Funds Flow from Operations
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Cash From Operating Activities $3,771 $(2,777) $22,146 $12,089
Add back (deduct):
Net change in non-cash
working capital (2,708) 8,762 (2,373) 2,435
Asset retirement
expenditures 215 - 816 -
Interest accrued on ABCP 1,218 - 1,218 -
-------------------------------------------------------------------------
Funds flow from operations $2,496 $5,985 $21,807 $14,524
-------------------------------------------------------------------------
Revenue
Gas revenue not including the realized loss on derivatives increased 59%
from $23,582,000 for the year ended December 31, 2007 to $37,511,000 for the
same period in 2008. The increase in gas sales relates primarily to the 26%
increase in production resulting from the successful drilling program, as well
as a full year of production from the BER acquisition offset by the West
Central sale and a slight increase of Sabretooth's natural gas price.
Oil sales increased by approximately 51% for the year ended December 31,
2008 compared to the same time period in 2007 primarily due to the
strengthening of Sabretooth's oil price by approximately 30%. The increase in
the oil price was the result of the increase in the US$ WTI.
The overall increase in revenue for the year ended December 31, 2008
compared to the same period in 2007 was due to a 26% increase in production
and a 13% increase in average selling price.
For the three months ended December 31, 2008, over all revenues were
decreased by 44% compared to the same time period in 2007. This is
attributable to lower prices and the sale of the West Central properties.
The following table summarizes the changes in sales revenue:
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's)(1) 2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas $5,747 $10,056 $37,511 $23,582
Realized gain (loss)
on hedge contracts 657 834 (1,721) 2,700
-------------------------------------------------------------------------
Total Natural gas $6,404 $10,890 $35,790 $26,282
Oil 915 2,290 7,208 4,780
Natural gas liquids 760 1,189 3,955 1,759
-------------------------------------------------------------------------
Total Revenue $8,079 $14,369 $46,953 $32,821
-------------------------------------------------------------------------
(1) Revenue is reported before transportation charges.
Pricing
Natural gas and oil prices have suffered a significant decrease in the
quarter. For the year ended December 31, 2008 prices at AECO daily index
prices fluctuated from a low of $5.85/Mcf for the month of September to a high
of $10.60/Mcf for the month of June. Sabretooth realized an average natural
gas price of $7.34/Mcf during the three months ended December 31, 2008, an
increase of 15% for the same period in 2007. Sabretoooths's average selling
price outperformed the AECO daily index for the same time period, as it only
saw an increase of 5%.
For the year ended December 31, 2008, Sabretooth's average natural gas
selling price was $8.06/mcf comparing to $7.45/mcf for the year ended December
31, 2007. The increase is attributable to a stronger AECO daily index price,
offset by a $4,421,000 decrease in realized gains for 2008 compared to 2007.
The selling price for oil for the three months ended December 31, 2008
decreased from $76.55/bbl to $53.55/bbl, a decrease of 30%, due to the
decrease in the US$ WTI benchmark price, and offset by the softening Canadian
dollar.
The following tables compare our average selling prices for the three
months and year ended December 31, 2008 and 2007 and also compares the
benchmark indices for the same periods:
Three months ended Year ended
December 31, December 31,
------------------------------------------
Average Selling Price(1) 2008 2007 2008 2007
-------------------------------------------------------------------------
Natural gas (per mcf) $7.34 $6.84 $8.06 $7.45
Crude oil (per bbl) $53.55 $76.55 $93.64 $72.16
Natural gas liquids (per bbl) $67.98 $75.81 $93.57 $66.31
-------------------------------------------------------------------------
Per boe $46.52 $46.21 $54.61 $48.22
-------------------------------------------------------------------------
(1) The average selling prices reported are after realized derivative
gains/(losses) and before transportation costs.
Three months ended Year ended
December 31, December 31,
------------------------------------------
Benchmark Pricing 2008 2007 2008 2007
-------------------------------------------------------------------------
AECO natural gas -
monthly index (CDN$/Mcf) $6.43 $5.67 $7.70 $6.26
AECO natural gas - daily
index (CDN$/Mcf) $6.35 $6.01 $6.25 $6.15
WTI crude oil (US$/bbl) $58.33 $90.63 $99.59 $72.27
Edmonton par price (CDN$/bbl) $71.21 $89.23 $105.69 $79.59
US$/CDN$ exchange rate $0.83 $1.02 $0.943 $0.935
Production
Annual production for 2008 averaged 2,349 boe/d, an increase of 26%
compared to 2007. Increased production was attributable to a successful 2008
drilling program and, a full year of production from the BER acquisition.
Sabretooth had eight new wells come on production during 2008, primarily in
B.C.
Production volumes for the three months ended December 31, 2008 were
173,646 and averaged 1,887 boe/d, a decrease of 11% or 236 boe/d from the
third quarter. Sabretooth's production was reduced due to Gunnell wells being
shut-in for build up and the shutdown of the Fourth Creek compressor and the
Spectra plant in the Mica area. Lost production was offset by the Company's
first Montney well in Gordondale that came on production the last week of
November. Sabretooth drilled 2 exploration wells (0.9 net) in the fourth
quarter of 2008.
Average production volumes for the three months and year ended December
31, 2008 and 2007 are outlined below:
Three months ended Three months ended
December 31, 2008 December 31, 2007
---------------------------------------------------------
Total Per day Total Per day
-------------------------------------------------------------------------
Natural Gas 872,201mcf 9,480 mcf/d 1,591,960 mcf 17,303 mcf/d
Crude Oil 17,090 bbls 186 bbls/d 29,911 bbls 325 bbls/d
NGLs 11,180 bbls 122 bbls/d 15,687 bbls 171 bbls/d
-------------------------------------------------------------------------
Total 173,646 boe 1,887 boe/d 310,927 boe 3,380 boe/d
-------------------------------------------------------------------------
Year ended Year ended
December 31, 2008 December 31, 2007
---------------------------------------------------------
Total Per day Total Per day
-------------------------------------------------------------------------
Natural Gas 4,443,003 mcf 12,139 mcf/d 3,527,253 mcf 9,664 mcf/d
Crude Oil 76,970 bbls 210 bbls/d 66,242 bbls 181 bbls/d
NGLs 42,262 bbls 115 bbls/d 26,520 bbls 73 bbls/d
-------------------------------------------------------------------------
Total 859,780 boe 2,349 boe/d 680,637 boe 1,865 boe/d
-------------------------------------------------------------------------
Royalty Expense
Royalty expense for the full year 2008 was $5,753,000 or 12% of revenue
compared to $5,272,000 or 18% of revenue for 2007. The decrease in royalty
percentages for the year ended December 31, 2008 is primarily due to an
additional $800,000 of capital cost recovery credits compared to the same time
period in 2007, as well as summer drilling credits of $93,000 in B.C. received
in the third quarter in 2008.
Royalty expense in the fourth quarter of 2008 was $894,000 or 11 % of
revenue compared to $2,246,000 or 17% of revenue in the same quarter of 2007.
The decrease in royalty rate is attributable to the gas cost allowance being
received in relation to the royalties.
Royalty rates are based on government market reference prices and not our
average realized prices. As a result, the gains from our realized prices
included in revenue result in a lower royalty rate as a percentage of revenue.
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Royalties $894 $2,246 $5,753 $5,272
-------------------------------------------------------------------------
As a % of revenue 13% 17% 12% 18%
Per Unit of Production ($/boe) $5.15 $7.22 $6.69 $7.74
-------------------------------------------------------------------------
Transportation
For the year ended December 31, 2008 transportation costs were $1,336,000
or $1.55/boe compared to same period in 2007 where transportation was
$1,078,000 or $1.58/boe.
Transportation costs for the fourth quarter of 2008 were $342,000 or
$1.97/boe. The increase in transportation costs per boe is primarily
attributed to retaining assets in B.C. where transportation costs are
relatively higher.
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Transportation $342 $521 $1,336 $1,078
Per Unit of Production ($/boe) $1.97 $1.68 $1.55 $1.58
-------------------------------------------------------------------------
Operating Costs
Operating costs for the year ended December 31, 2008 and 2007 were
$12,771,000 or $14.85/boe and $7,770,000 or $11.41/boe respectively. For the
year ended December 31, 2008, operating costs increased by 64% while
production increased by 26% compared to the same period in 2007. The increases
in per unit costs were attributable to increased labor, third-party processing
adjustments on the Bear Ridge properties, and fuel costs.
For the three months ended December 31, 2008, operating costs were
$2,831,000 or $16.30/boe. The increase is attributable to production being
down for the quarter while fixed operating costs remain constant. Third party
processing equalizations and compression charges that pertain to the Bear
Ridge properties prior to the acquisition date are also impacting increased
operating costs $0.75/boe and $0.32/boe respectively.
Sabretooth's operating costs for the year were in-line with the third
quarter guidance of $15/boe.
Operating costs for the three months and year ended December 31, 2008 and
2007 are outlined below:
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Operating Costs $2,831 $3,647 $12,771 $7,770
Per Unit of Production ($/boe) $16.30 $11.73 $14.85 $11.41
-------------------------------------------------------------------------
Netbacks
For the year ended December 31, 2008 netbacks were $31.52/boe compared to
$27.49/boe in 2007. The increase in the netback for the year ended December
31, 2008 is primarily due to the higher average selling prices attributable to
higher market prices, along with lower royalty rates. Offsetting these
increases in the netback were higher operating costs.
Sabretooth's netback after realized derivative gains for the fourth
quarter of 2008 was at $23.10/boe compared to $25.58/boe for 2007.
The following table summarizes the changes in the netbacks:
Three months ended Year ended
December 31, December 31,
------------------------------------------
2008 2007 2008 2007
-------------------------------------------------------------------------
Average selling price,
including realized derivatives $46.52 $46.21 $54.61 $48.22
Royalty expense (5.15) (7.22) (6.69) (7.74)
Transportation (1.97) (1.68) (1.55) (1.58)
Operating Costs (16.30) (11.73) (14.85) (11.41)
-------------------------------------------------------------------------
Netback, ($/boe) $23.10 $25.58 $31.52 $27.49
-------------------------------------------------------------------------
General and Administrative Expenses
General and administrative ("G & A") expenses for the year ended December
31, 2008 were $3,962,000 or $4.61/boe compared to $2,970,000 or $4.36/boe in
2007, an increase of 5% per/boe. The increase is due to the first full year of
additional staff and consultants retained as a result of the Bear Ridge
acquisition.
For the fourth quarter of 2008, G & A expenses, net of capitalized
amounts and recoveries, was $1,135,000 or $6.54/boe, up 14% from $997,000 or
$3.21/boe for the fourth quarter of 2007. For the three and twelve months
ended December 31, 2008, Sabretooth capitalized approximately $301,000 and
$1,874,000 of G & A expenses respectively related to exploration and
development.
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
G & A Expense $1,135 $997 $3,962 $2,970
Per Unit of Production ($/boe) $6.54 $3.21 $4.61 $4.36
-------------------------------------------------------------------------
Interest Expense
For the year ended December 31, 2008 interest expense was $2,543,000
compared to $1,410,000 in 2007. The increase in interest expense was a result
of increased bank debt in 2008 due to the Bear Ridge acquisition.
Interest expense for the fourth quarter was $465,000 compared to $973,000
in 2007. The decrease in the fourth quarter is attributable to the decrease in
the interest rates as well as the decrease in debt from the West Central and
Fireweed sales in July 2008.
Three months ended Year ended
December 31, December 31,
------------------------------------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Interest Expense $465 $973 $2,543 $1,410
Per Unit of Production ($/boe) $2.68 $3.13 $2.96 $2.07
-------------------------------------------------------------------------
Depletion, Deprecation and Accretion ("DD&A")
DD&A expense for the three months ended December 31, 2008 was $4,494,000.
DD&A expense for the year ended December 31, 2008 was $20,285,000. On a unit
of production basis, depletion expense was $25.88 and $23.59 per boe for the
three months and year respectively.
DD&A expense for the three months ended December 31, 2007 was $6,309,000.
DD&A expense for the year ended December 31, 2007 was $16,500,000. On a unit
of production basis, depletion expense was $20.29 and $24.24 per boe for the
three months and year respectively.
The DD&A per boe decrease for the year ended 2008 compared to 2007 is
mainly due to significant investment in acquisitions and capital projects that
has increased proven reserves.
The depletion rate is impacted by the costs to acquire, explore and
develop reserves of crude oil and natural gas, known as finding, development
and acquisition costs. In the early stages of exploration, capital costs may
be recognized before proven reserves are fully booked leading to higher
initial depletion rates. In addition higher depletion rates also result as new
production often receives lower reserves assignments under NI 51-101 due to
the naturally unpredictable nature of newer production.
Asset Retirement Obligations
The Company developed two new assets subject to asset retirement
obligations during the fourth quarter of 2008, and eighteen new assets for the
year ended December 31, 2008. $39,000 was recognized as an accretion expense
for the fourth quarter of 2008, and $212,000 for the year ended December 31,
2008. For the year ended December 31, 2007, the Company acquired 299 new
assets subject to asset retirement obligations. The Company recognized
accretion expense of $110,000 for the fourth quarter of 2007 and $184,000 for
the year ended December 31, 2007. Total asset retirement obligations
recognized at December 31, 2008 were $2,515,000. At December 2007 total asset
retirement obligations recognized were $4,560,000. The decrease is mainly due
to the properties sold during the third quarter of 2008.
Stock Based Compensation
The Company recognizes stock based compensation expense for all stock
options granted. For the three and twelve months ended December 31, 2008,
Sabretooth recorded $157,000 and $918,000 respectively in stock based
compensation expense, with a corresponding increase to contributed surplus,
for stock options issued.
For the three and twelve months ended December 31, 2007, Sabretooth
recorded $20,000 and $242,000 respectively in stock based compensation
expense, with a corresponding increase to contributed surplus, for stock and
performance options issued.
Common Shares Outstanding
In the first quarter of 2008 the Company granted 195,000 stock options
exercisable for voting common shares of the Company. These options vest 25%
the first, second, third and fourth anniversaries of grant and have a weighted
average exercise price of $2.66 per share.
In the first quarter of 2008, 229,000 vested options were repurchased for
approximately $104,000. The amount paid to repurchase the options was charged
to contributed surplus.
In the second quarter of 2008 the Company granted 500,000 stock options
exercisable into voting common shares of the Company. These options vest 25%
the first, second, third and fourth anniversaries of grant and have a weighted
average exercise price of $2.28 per share.
In the second quarter of 2008, 48,000 vested options were exercised for
approximately $100,000. The amount paid to exercise the options was credited
to share capital. $15,000 was charged to contributed surplus related to the
stock based compensation recognized for the above options in previous periods;
the same amount was credited to share capital.
On October 28, 2008, the Company repurchased 453,000 common shares of the
Company under its normal course issuer bid ("NCIB") for $184,000 or $0.42 per
share. The stated value of the shares was debited to share capital, with the
excess of stated value over the cost of the re-acquisition of $2,077,000
credited to contributed surplus.
No additional options were granted during the third and fourth quarter of
2008.
At December 31, 2008, there are 38,661,000 Common Shares outstanding.
Subsequent to December 31, 2008, the Company purchased 200,000 shares of
the Sabretooth Energy Ltd. in a block transaction for $84,000 or $0.42 per
share under the NCIB. These shares are expected to be cancelled by treasury in
the first quarter of 2008.
Income Taxes
The Company has non-capital loss carry-forwards, investment tax credit
carry-forwards, and Scientific Research and Development expenses available to
reduce future years' income for tax purposes. The Scientific Research and
Development expenses of approximately $22,704,000 available for carry-forward
do not expire. The non-capital loss and investment tax credit carry-forwards
expire as follows:
Year of expiry Non-capital losses Investment tax credits
$(000's) $(000's)
-------------------------------------------------------------------------
2010 $ - $ 930
2011 - 1,280
2012 - 672
2013 - 761
2014 - 338
2025 10,752 -
---------------------------------------------------
$ 10,752 $ 3,981
---------------------------------------------------
In addition, the Company has UCC pools of approximately $30,000,000,
COGPE pools of approximately $14,000,000, CEE pools of approximately
$26,000,000, CDE pools of approximately $16,000,000, and share issuance costs
of approximately $4,000,000 which can be used to reduce taxable income in the
future.
As at December 31, 2008, $6,129,000 has been recognized as a future
income tax asset as the Company believes, based on estimated cash flows from
existing reserves, that it is more likely than not to realize these assets.
Capital Expenditures
Three months ended Year ended
------------------ ----------------
December 31, December 31,
------------ ------------
$(000's) 2008 2007 2008 2007
-------------------------------------------------------------------------
Land acquisition costs $13 $190 $5,944 $2,058
Geological & geophysical 106 66 490 1,812
Drilling, completions & workovers 4,729 8,639 24,306 23,176
Tangible equipment 946 2,708 4,668 7,935
Capitalized overhead 301 363 2,026 1,049
Office furniture & equipment - 47 (5) 193
-------------------------------------------------------------------------
Total capital expenditures $6,095 $12,013 $37,429 $36,223
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Company sold properties during the year for net proceeds of
$21,262,000 ($22,450,000 before transaction costs) (after effective/closing
date adjustments).
Liquidity and Capital Resources
The Company has established three credit facilities with a Canadian
chartered bank. Credit Facility A is a $40,000,000 revolving operating demand
loan by way of prime rate based loans, Banker's Acceptances and letters of
credit/guarantee which bears interest at the bank prime rate plus 0.25% to
1.5% on a sliding scale, depending on the Company's debt to cash flow ratio
(ranging from being less than 1.0:1.0 to greater than or equal to 3:1). Credit
Facility B is a $5,000,000 non-revolving acquisition/development demand loan,
which bears interest at the bank prime rate plus 0.50%. Credit Facility C is a
Revolving Demand Credit Agreement in the face amount of $18,000,000 which
bears interest at the bank prime rate and will be required to be repaid in
full upon the liquidation or refinancing of the Company's ABCP holdings. All
credit facilities are subject to periodic review by the bank and are secured
by a general assignment of book debts and a $100,000,000 demand debenture with
a first floating charge over all assets of the Company as well a
hypothecation/pledge of ABCP. The Company is authorized to access the credit
facilities with prior approval of the Board of Directors of the Company (the
"Board"). The Company is required to meet certain financial based covenants
under the terms of this facility. The Company is also required to hedge no
more than 70% of its production under the lending agreement. As of December
31, 2008, the Company had hedged approximately 71% of its production, for
which it has obtained a waiver of the violation from the bank. As at December
31, 2008, the Company has drawn $29,970,000 on Facility A, $ Nil on Facility
B, and $18,000,000 on Facility C. The next scheduled review of the facilities
is on or before May 31, 2009. The effective interest rate for the year ended
December 31, 2008 was 4.05% (2007 - 5.85%).
As at December 31, 2008, the Company held Canadian third party ABCP with
an original cost of $24,147,000. At the dates the Company acquired these
investments, they were rated R1 (High) and backed by R1 (High) rated assets
and liquidity agreements. These investments matured during the third quarter
of 2007 but, as a result of the liquidity issues in the ABCP market, did not
settle on maturity. As a result the Company has classified its ABCP as long-
term investments. Such ABCP is valued at $13,968,000 at December 31, 2008.
On August 16, 2007 an announcement was made by a group representing
banks, asset providers and major investors that they had agreed in principle
to a long-term proposal and interim agreement to convert the ABCP's into long-
term floating rate notes maturing no earlier than the scheduled maturity of
the underlying assets. On September 6, 2007, a Pan-Canadian restructuring
committee consisting of major investors was formed. The committee was created
to propose a solution to the liquidity problem affecting the ABCP and has
retained legal and financial advisors to oversee the proposed restructuring
process. On March 17, 2008, a court order was obtained through which a
restructuring of the ABCP was expected to occur. A meeting of note holders
occurred on April 25, 2008 and the restructuring plan was approved. The
restructuring plan was then sanctioned by the Ontario Superior Court of
Justice on June 5, 2008.
On June 18, 2008 proceedings were taken by a number of corporate note
holders in the Ontario Court of Appeal seeking to challenge the Ontario
Superior Court of Justice decision that sanctioned the restructuring plan. In
a unanimous decision issued on August 18, 2008, the Ontario Court of Appeal
dismissed the appeal. On September 2, 2008, a number of the unsuccessful
appellants sought leave to appeal the Ontario Court of Appeal decision to the
Supreme Court of Canada. On September 19, 2008 the Supreme Court announced
that it would not grant leave to hear the appeal. On December 24, 2008 an
announcement was made by the Pan-Canadian Restructuring Committee that the
Alberta, Quebec and Canadian Federal governments has agreed to contribute a
margin facility for the ABCP and that the restructuring was expected to be
completed in January 2009.
On January 21, 2009, the Pan-Canadian Investors Committee announced that
the restructuring has been completed. As a result, the Company received new
notes of various classes issued by a trust referred to as Master Asset Vehicle
2 (MAV 2) , including senior notes (Class A1 and A2) which have been assigned
an investment grade rating of A by DBRS Limited ("DBRS") and subordinated
Class B and C notes, which have not been rated by DBRS. MAV 2 notes means that
the Company will not finance margin calls, but will receive a reduced coupon.
The following are the new notes received from the restructuring:
MAV 2 Class A1 $ 6,717,083
MAV 2 Class A2 $14,149,098
MAV 2 Class B $ 2,568,455
MAV 2 Class C $ 724,782
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$24,159,418
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The Class A1 and A2 notes will pay interest and Class B and C notes will
accrue interest with payments to be made only after the Class A1 and A2 notes
have been fully repaid. On January 23, 2009, the Company received an initial
net payment of approximately $858,000 as interest that has accrued on the ABCP
between August 2007 and August 31, 2008. The Company has accrued approximately
$360,000 representing interest earned in the ABCP conduits for the period
between September 1, 2008 and December 31, 2008 which is expected to be
received in the first quarter of 2009. The interest receivable is presented on
the consolidated balance sheet as short-term portion of ABCP. The amount
received subsequent to year end was not the interest that the Company would
normally be entitled to, since the amounts accumulated in the different ABCP
since August 13, 2007 were used to cover the restructuring charges and
constitute reserves for the newly issued notes. The new replacement notes will
be classified as held for trading financial assets and will be subject to
mark- to-market accounting in future periods. Changes in fair value will be
recorded in income as they arise. The estimated fair value of the new
replacement notes received on January 21, 2009 is unchanged from the December
31, 2008 estimated fair value.
The valuation technique used by the Company to estimate the fair value of
its investments in ABCP incorporates probability-weighted discounted cash
flows considering the best available public information regarding market
conditions and other factors that a market participant would consider for such
investments. Probability-weighted discount rates of approximately 8.4% and
14.4% were used at December 31, 2008 for the senior AA and subordinated notes
respectively for this estimate and an interest rate of 0.91% was used
(bankers' acceptance rate less 50 basis points). This evaluation resulted in a
reduction of $10,179,000 to the original cost of the ABCP at December 31,
2008. The assumptions used in determining the estimated fair value reflect the
public statements made by the Pan-Canadian restructuring committee and the
estimated new notes received, as described above, with maturities matching the
maturities of the underlying assets and bearing market interest rates
commensurate with the nature of the underlying assets and their associated
cash flows and the credit rating and risk associated with the long-term
floating rate notes. Discount rates have been estimated using Government of
Canada benchmark rates plus expected spreads. Assumptions have been made as to
the long-term interest rates to be received from the long-term floating rate
notes. The term of the notes is estimated to be approximately 7 years which
approximates the maturity of the assets backing the notes. Interest on Class
A- 1 notes is to be accrued and paid currently, with interest on all other
Classes to be accrued, but only paid after interest on higher ranking Classes
is paid. A total write-down of $8,052,000 from the estimated fair value at
December 31, 2007 was recognized during the year ended December 31, 2008. The
impairment charge recorded was reduced by the amount of the interest accrued
for of $1,218,000. The Company has maintained its 100% allowance against the
MAV 2 Class C notes in the amount of $725,000.
There are currently no market quotations available for the non-bank
sponsored ABCP or the new MAV 2 notes. Therefore continuing uncertainties
regarding the value of the assets which underlie the ABCP, the amount and
timing of cash flows, the evolution of the liquidity of the market for the new
notes issued following the restructuring and the evolution of the prevailing
financial crisis could give rise to a further change in the value of the
Company's investment in ABCP which would impact the Company's earnings. It is
reasonably possible, based on existing knowledge, that change in future
conditions in the near term could require a material change in the recognized
amount. The reduction from the face value could range from $11,900,000 to
$8,300,000 based on alternative reasonable assumptions, although given the
nature of the information available, the amount ultimately recovered could
vary outside these ranges.
Subsequent to year end, the Company's bank provided the Company with a
proposed additional credit facility to provide liquidity in respect to the
ABCP. The credit facility is structured as follows and all amounts drawn under
the Company's existing $18,000,000 credit facility C must be repaid to access
this new facility:
Tranche A: $10,871,700 revolving credit facility, which represents an
amount equal to approximately 45% of the face value of the restructuring
notes.
Tranche B: $7,247,800 revolving credit facility, which represents an
amount equal to approximately 30% of the face value of the restructuring
notes.
The borrowings under the credit facility will be first allocated to
Tranche A and the balance will be allocated to Tranche B.
