CALGARY, Aug. 10 /CNW/ - Verenex Energy Inc. ("Verenex" or the "Company")
(TSX - VNX) is pleased to report its unaudited interim operating and financial
results for the three and six months ended June 30, 2009.
Verenex is a Canada-based international exploration and production
company with a world-class discovered resource base and exploration portfolio
in the Ghadames Basin in Libya.
Second Quarter 2009 Highlights
- Continued to seek consent from Libyan authorities for the sale of
Verenex. Representatives of Verenex and the Libyan authorities are
actively engaged in discussions to reach an amicable solution to the
current impasse.
- Extended the outside date under the acquisition agreement (the "CNPCI
Agreement") with CNPC International Ltd. to August 24, 2009 in light
of the continuing efforts to seek NOC consent.
- Drafted potential arbitration claim should pursuit of this legal
remedy available under the Exploration and Production Sharing
Agreement for Area 47 prove necessary in the event that Libyan
authorities fail to approve a sale of Verenex under acceptable terms.
- Drilled and cased the N1-47/02 new field wildcat exploration well
(well No.21) in the northern part of Block 2 to a depth of 10,775
feet. Formation evaluation results indicated the presence of
hydrocarbons in the Lower Acacus and Memouniat Formations.
- Suspended drilling in Area 47 as at the end of June 2009. Drilling is
targeted to resume in late 2009 contingent on the resolution of the
commerciality application for the A1-47/02 field and the Verenex sale
process.
Financial
- Net loss in the second quarter of 2009 from continuing operations was
($1.4 million) compared to net loss of ($2.6 million) in the second
quarter of 2008.
- Funds flow from continuing operations in the second quarter of 2009
was ($0.7 million) compared to ($0.5 million) for the second quarter
of 2008.
- Working capital surplus at June 30, 2009 was $13.4 million compared
to $29.8 million as at December 31, 2008, including cash amounting to
$21.8 million (December 31, 2008 - $55.5 million) net of restricted
cash amounting to $nil million (December 31, 2008 - $4.1 million).
The decrease in working capital is due to the ongoing investments in
the Company's Libya operations.
Highlights
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
(unaudited) 2009 2008 2009 2008
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Financial (thousands of Cdn $, except share and per share amounts)
Funds flow from continuing
operations(1) (713) (530) (2,606) (1,653)
Net (loss) from continuing
operations (1,404) (2,578) (5,306) (587)
Capital expenditures 6,777 20,944 20,410 36,605
Working capital surplus 13,393 61,452 13,393 61,452
Common shares outstanding
Basic 44,393,491 44,267,891 44,393,491 44,267,891
Diluted 49,851,391 50,063,924 49,851,391 50,063,924
Weighted average common
shares outstanding
Basic 44,303,711 44,267,891 44,286,797 44,267,891
Diluted 44,303,711 47,454,427 47,314,900 47,530,075
Share trading
High 9.25 10.96 9.70 11.24
Low 6.00 8.06 6.00 7.25
Close 6.00 8.14 6.00 8.14
Discontinued Operations
Petroleum and natural
gas revenues (net) - 287 (8) 527
Production
Crude oil (bbls/d) - - - -
Natural gas liquids
(bbls/d) - 11 - 12
Natural gas (mcf/d) - 228 - 246
Boe/d (6:1)(x) - 49 - 53
Average reference price
WTI (US$ per bbl) - 123.98 - 110.94
Brent (US$ per bbl) - 121.38 - 109.14
AECO (Cdn$ per mcf) - 10.21 - 9.06
Average selling price
Crude oil
(Cdn$ per bbl) - - - -
Natural gas liquids
(Cdn$ per bbl) - 74.91 - 72.86
Natural gas
(Cdn$ per mcf) - 10.17 - 8.23
Average Operating Netback
(Cdn$ per BOE @ 6:1) - 64.06 - 54.71
(1) The above table includes non-GAAP measures, which may not be
comparable to other companies. See MD&A for further discussion.
Capital Expenditures (Cdn $)
During the second quarter of 2009, the Company invested approximately
$6.8 million. Libya accounted for all of the investment activity level with
approximately $5.3 million in drilling, $0.1 million in facilities and $1.4
million in capitalized General and Administration ("G&A") and office costs.
Outlook
The Company is continuing to seek the consent of the Libyan authorities
for the sale of Verenex. Representatives of Verenex are in discussions with
Libyan authorities to seek an amicable solution to the current impasse on
securing sale approvals. Investors are cautioned that there can be no
assurance that consent to the CNPCI Agreement will be received soon from
Libyan authorities, or that a sale transaction will be concluded on the terms
contemplated in the CNPCI Agreement or at all.
Coincident with the cessation of drilling at the end of June 2009, the
Ensign Drilling Rig 28 has been placed under a low cost suspension mode to the
end of the drilling contract term in September 2009.
The Company has received written feedback from the NOC on the final
appraisal report and associated commerciality application for the A1-47/02
field. The NOC did not make a final decision on commerciality at this time and
requested further clarification on a number of technical matters. The Company
is preparing a comprehensive response to the NOC feedback. The Company is also
completing Final Appraisal Reports on the B1, C1, D1 and F1-47/02 fields with
the benefit of the feedback from the NOC on the Final Appraisal Report for the
A1-47/02 field. It is expected that these reports will be presented to the NOC
in the third quarter of 2009 together with the Company's response to the NOC
recommendations on the A1-47/02 field report.
The Company has sufficient cash reserves to fund its ongoing
expenditures.
This press release contains forward-looking financial and operational
information, including but not limited to drilling operations, proposed
budgets, earnings, funds flow, cash reserves, production and capital
investment projections. These projections are based on current expectations
and are subject to a number of risks and uncertainties that could materially
affect the results. These risks include, but are not limited to, risks
associated with obtaining regulatory approvals; the uncertainty associated
with negotiating with governments; the risks and uncertainties associated with
Verenex seeking legal remedies available under the EPSA contract such as
arbitration; risks associated with the oil and gas industry (e.g. financing;
operational risks in development, exploration and production; delays or
changes in plans with respect to exploration or development projects or
capital expenditures; the uncertainty of estimates and projections in relation
to production, costs and expenses; health, safety and environmental risks;
and, the uncertainty of resource estimates), drilling equipment availability
and efficiency, the ability to attract and retain key personnel, the risk of
commodity price and foreign exchange rate fluctuations and the risk associated
with international activity. Due to the risks, uncertainties and assumptions
inherent in forward-looking statements, prospective investors in the company's
securities should not place undue reliance on these forward-looking
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (MD&A), dated
August 10, 2009, of the operating and financial results of Verenex Energy Inc.
("Verenex" or the "Company") for the three and six months ended June 30, 2009.
The financial data has been prepared in Canadian dollars in accordance with
Canadian Generally Accepted Accounting Principles ("GAAP") applied
consistently with prior periods. This discussion should be read in conjunction
with the Company's unaudited consolidated financial statements for the three
and six months ended June 30, 2009 and the audited consolidated financial
statements for the year ended December 31, 2008, together with the
accompanying notes as contained in the Company's 2008 annual filings.
Additional information relating to the Company is available on SEDAR at
www.sedar.com.
PROPOSED TRANSACTION
On February 26, 2009, the Company announced it had entered into an
acquisition agreement whereby a wholly-owned subsidiary of CNPC International
Ltd. ("CNPCI") had agreed to make an offer to acquire all the outstanding
common shares of the Company by way of a take-over bid for $10.00 per share in
cash. Mailing of the offer to the Company's shareholders is subject to,
amongst other conditions, receipt from the Libyan National Oil Corporation
(the "NOC") of written consent to the acquisition of Verenex by CNPCI and
certain related matters. NOC consent to a change of control of Verenex is
required under the terms of the EPSA contract in Libya; however, under the
terms of the EPSA, such consent cannot be unreasonably withheld.
In discussions prior to the execution of the CNPCI acquisition agreement,
the NOC had indicated to Verenex that an approval bonus would be required to
be paid to the NOC to obtain its consent to any sale transaction. Based on
indications from the NOC, Verenex estimated this amount to be approximately
Cdn$46.7 million, and the CNPCI acquisition agreement was negotiated on this
basis. The NOC had also indicated that, in consideration of the payment of
such an approval bonus, it would expedite its approval process so as to occur
within a three to four week period from the time its formal consent was
requested.
Since the execution of the CNPCI acquisition agreement on February 24,
2009, Verenex has actively sought the NOC's consent to the transaction.
However, to date, the NOC has continually failed or refused to provide such
consent. The Chairman of the NOC has publicly stated on several occasions that
the NOC intends to exercise a pre-emptive right to buy all of the outstanding
shares of Verenex at $10 per share. In light of the continuing efforts by
Verenex to actively seek the NOC's consent to the CNPCI offer, Verenex has
sent a letter to CNPCI extending the outside date under the CNPCI Agreement to
August 24, 2009.
Signing of the acquisition agreement with CNPCI was the culmination of a
process that began in early September 2008 when the Company advised the NOC
and the public that it had initiated a process to review strategic
alternatives including a potential sale of the Company. Guidelines for such a
sale process under the terms of the EPSA were communicated to the Company by
the NOC in early October 2008. Physical data rooms were opened in the offices
of Standard Chartered Bank in London in mid-November for a five-week period
and the data set was reviewed by the NOC. All of the companies that entered
the data room were pre-qualified by the NOC and each signed a confidentiality
agreement that was also endorsed by the NOC. Bids were submitted in late
January 2009 and based on its superior offer an acquisition agreement was
signed with CNPCI on February 24, 2009.
On behalf of Verenex, the Government of Canada has expressed its concerns
to the Government of Libya respecting the actions, and lack of action, by the
NOC.
On June 22, 2009, the Company provided an update as to the status of its
discussions with representatives of the NOC and the General People's Committee
(the "GPC") of Libya in relation to obtaining NOC consent to a change of
control of Verenex. The Company indicated that it had received letters from
the General Manager of the NOC on June 11 and June 16, 2009. Collectively, the
two letters advised that legal authorities in Libya are investigating
allegations that Verenex was improperly pre-qualified to bid in the EPSA IV
first bid round in January 2005, under which Verenex acquired its rights to
Area 47 in Libya. The letters further state that the ongoing investigation
does not affect the rights and obligations of Verenex, and likewise does not
affect the plans of the NOC related thereto, and the GPC has not provided its
final decision on the NOC's intention to exercise a pre-emptive right.
Verenex considers these allegations to be without merit and vigorously
denies them. No specific improprieties or details of the allegations have been
provided to Verenex.
Verenex is continuing to engage in discussions in good faith with Libyan
authorities to seek an amicable solution to the current impasse on securing
sale approvals. In contrast to the publicly stated position of the NOC, it is
now clear that the GPC is seeking either a reduced purchase price or an
increased approval bonus. At the same time, Verenex is considering and
evaluating all of its options in light of these recent events, including legal
remedies available under the EPSA contract such as arbitration. An arbitration
claim has been drafted in this regard.
Investors are cautioned that there can be no assurance that consent to
the CNPCI acquisition agreement will be received soon from Libyan authorities,
or that a sale transaction will be concluded on the terms contemplated in the
CNPCI acquisition agreement or at all.
FORWARD-LOOKING INFORMATION
This MD&A contains forward-looking financial and operational information,
including but not limited to drilling operations, proposed budgets, earnings,
funds flow, cash reserves, production and capital investment projections.
These projections are based on current expectations and are subject to a
number of risks and uncertainties that could materially affect the results.
These risks include, but are not limited to, risks associated with obtaining
regulatory approvals; the uncertainty associated with negotiating with
governments; the risks and uncertainties associated with Verenex seeking legal
remedies available under the EPSA contract such as arbitration; risks
associated with the oil and gas industry (e.g. financing; operational risks in
development, exploration and production; delays or changes in plans with
respect to exploration or development projects or capital expenditures; the
uncertainty of estimates and projections in relation to production, costs and
expenses; health, safety and environmental risks; and, the uncertainty of
resource estimates), drilling equipment availability and efficiency, the
ability to attract and retain key personnel, the risk of commodity price and
foreign exchange rate fluctuations and the risk associated with international
activity. Due to the risks, uncertainties and assumptions inherent in
forward-looking statements, prospective investors in the company's securities
should not place undue reliance on these forward-looking statements.
NON-GAAP MEASURES
Included in this report are references to terms commonly used in the oil
and gas industry, such as funds flow and funds flow per share which is
expressed before changes in non-cash working capital and are used by the
Company to analyze operating performance, leverage and liquidity. These terms
are not defined by GAAP. Consequently, these are referred to as non-GAAP
measures.
OPERATING RESULTS
Asset Valuation
The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
resources associated with certain wells and the outlook for world prices for
oil and natural gas.
Revenues
On January 28, 2009 the Company entered into an arrangement with
Vermilion Resources Ltd. ("Vermilion") to sell the Canadian Bottrel GORR
effective December 31, 2008. All oil and gas revenues for 2009 relate to
differences between accruals for the Bottrel GORR at December 31, 2008 and the
actuals reported in 2009.
Interest of $21 thousand was earned in the second quarter of 2009 (2008 -
$0.4 million) compared to $81 thousand for the first quarter of 2009 on cash
balances invested in excess of expenditure requirements. The decrease versus
the second quarter of 2008 is due to the decreased cash position and lower
interest rates during the second quarter of 2009.
The foreign exchange loss for the second quarter of 2009 was $0.7 million
as compared to a loss of $0.9 million for the second quarter of 2008, and a
gain of $11 thousand in the first quarter of 2009. The decrease in the foreign
exchange loss in the second quarter of 2009 compared to the second quarter of
2008 is due to the decline in the US dollar denominated cash balances and the
strengthening of the Canadian dollar versus the US dollar during the period.
Stock Compensation
For the three and six months ended June 30, 2009, non-cash stock
compensation expense related to stock options and performance warrants was
$0.5 million and $1.0 million (2008 - $0.8 million and $1.6 million). Stock
compensation expense for the second quarter of 2009 was impacted by the
decline in the Company's closing stock price to $6.00 from $8.93 at the end of
the first quarter of 2009. This reduced the expense required to be recognized
associated with the Stock Appreciation Rights ("SAR's"), Performance Share
Units ("PSU's") and Restricted Share Units ("RSU's") that are directly tied to
stock price. For the three and six months ended June 30, 2009, the stock
compensation liability related to SAR's, PSU's and RSU's first issued in 2008,
was $(0.5) million and $1.2 million (2008 - $0.2 million and $0.1 million).
General and Administration ("G&A")
The Company capitalized $1.4 million and $3.0 million of general and
administrative costs relating to exploration and development activities for
the three and six months ended June 30, 2009 (2008 - $1.3 million and $3.1
million). The net G&A amounts that are expensed represent salaries, employee
benefits, office costs, legal and related party services not directly
attributable to ongoing exploration and development capital projects.
Effects of Exchange Rate Fluctuations
The Company's operations are conducted primarily in jurisdictions where
the United States dollar (US$) is the business currency. A large proportion of
the Company's costs, assets and liabilities during the quarter ended June 30,
2009 were denominated in US$. As the Canadian dollar fluctuates during the
period, foreign exchange gains and losses are reflected in both the earnings
and funds flow amounts.
Depletion and Depreciation
Depletion and depreciation of $0.1 million and $0.2 million for the three
and six months ended June 30, 2009 (2008 - $0.1 million and $0.2 million)
relate to the depreciation of the Canadian and Libyan leasehold improvements,
furniture and equipment.
RELATED PARTY TRANSACTIONS
On January 28, 2009, the Company entered into an arrangement with
Vermilion and its wholly owned France and Denmark subsidiaries to sell the
Canadian Bottrel GORR and the Verenex Danish and French subsidiaries for $5.0
million resulting in a gain on disposition of $1.3 million. The transaction
closed on February 27, 2009. All oil and gas revenues for 2009 relate to the
differences between accruals for the Bottrel GORR at December 31, 2008 and
actuals reported in 2009. (see note 12)
Vermilion REP SAS ("VREP") is a 100% owned subsidiary of Vermilion Energy
Trust ("VET"), which is a significant shareholder in Verenex. VREP, as
contract operator in France, paid for various expenditures on behalf of
Verenex. These transactions were measured at the exchange amount being the
consideration established and agreed to by the related parties. These
transactions were undertaken under the same terms and conditions as
transactions with non-related parties. Amounts due to related parties at June
30, 2009 are comprised of an amount due to VREP of $nil (December 31, 2008 -
$0.1 million).
Verenex entered into a Technical and Administrative Services Agreement
with Vermilion on June 28, 2004, for the provision of certain financial and
administrative services by Vermilion at a cost of twenty thousand dollars per
month and certain technical, marketing and other services at cost plus 5%, for
a period of eighteen months ending December 31, 2005. The Agreement was
automatically renewed for one-year periods, subject to termination on three
months notice. Effective January 1, 2006, the monthly charge was amended to
eliminate the services provided for the Canadian financial and administrative
services, reducing the monthly charge to ten thousand dollars per month in
support of the France operations. Effective April 1, 2008 the monthly charge
was reduced to five thousand dollars per month. The Agreement was terminated
effective February 27, 2009. During the six months ended June 30, 2009 Verenex
was billed ten thousand dollars (2008 - forty-five thousand dollars) for
services provided under this Agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company has completed a review of its 2009 operating and investment
programs and, in consultation with its Libya Area 47 partner, Medco
International Ventures Limited, reduced its go forward drilling activities and
suspended all drilling activities in Area 47 as at the end of June 2009
pending the resolution of the commerciality application for the A1-47/02 field
and the Verenex sale process. Verenex has sufficient cash reserves to fund its
short-term working capital requirements and capital obligations.
The Company issued two letters of credit ("LC's") relating to the signing
of two long-term drilling contracts that back-stop early termination
provisions, both of which have now expired. The first LC to ODE required cash
collateral of US $4.8 million (gross) be put in place by September 30,
2006.The ODE LC expired on November 13, 2008. The second LC to KCA DEUTAG
Drilling GmbH required cash collateral of US $7.2 million (gross) in place by
June 30, 2006. The KCA LC expired on April 30, 2009. The Company received
funds from its partner, Medco International Ventures Limited, for its 50%
share of the cash collateral and all cash provided as support for the LC's was
reflected as restricted cash on the balance sheet.
The Company had a working capital surplus of $13.4 million at June 30,
2009 compared to $29.8 million as at December 31, 2008, including cash
amounting to $21.8 million (December 31, 2008 - $55.5 million) net of
restricted cash amounting to $nil (December 31, 2008 - $4.1 million). The
decrease in working capital is due to the ongoing investments in the Company's
Libya operations.
All accounts receivables have been assessed for credit risk and no
allowance for doubtful accounts is necessary at this time.
Accounts payable and accrued liabilities have decreased since December
31, 2008 due to the timing of activity levels in Libya.
Verenex is listed on the Toronto Stock Exchange under the stock symbol
VNX.
CRITICAL ACCOUNTING ESTIMATES
Depletion and Depreciation
The amounts recorded for depletion and depreciation of property, plant
and equipment are based on estimates. By their nature, these estimates are
subject to measurement uncertainty and the effect on the consolidated
financial statements from changes in such estimates in future years could be
significant.
The Company performs a review for asset impairment as required by the
Full Cost Accounting Guideline, AcG-16. Any impairment in value is dependent
upon an independent reservoir engineer's assessment of the deliverability and
resources associated with certain wells and the outlook for world prices for
oil and natural gas.
Stock-Based Compensation
The Company accounts for all employee stock-based compensation pursuant
to the amended recommendations of the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section 3870, Stock-based Compensation and Other
Stock-based Payments. The stock-based compensation recorded by the Company is
a critical accounting estimate because of the value of compensation recorded
and assumptions required to calculate the compensation expense.
NEW ACCOUNTING STANDARDS AND CHANGES IN ACCOUNTING STANDARDS FOR 2008 AND
2009
On January 1, 2008, the Company adopted the following new Handbook
Sections, which were effective for interim periods beginning on or after
October 1, 2007 except for amendment on Canadian Institute of Chartered
Accountants ("CICA") 1400 which was effective for interim periods beginning on
or after January 1, 2008:
- Section 3862 - "Financial Instruments - Disclosures", describes the
required disclosure for the assessment of the significance of
financial instruments for an entity's financial position and
performance and of the nature and extent of risks arising from
financial instruments to which the entity is exposed and how the
entity manages those risks.
