Nov. 6, 2009 (Canada NewsWire Group) --
CALGARY, Nov. 6 /CNW/ -- Petrolifera Petroleum Limited substantially strengthened its financial condition and balance sheet during Q3 2009 with a successful $58.5 million equity raise comprised of a $57.5 million publicly-marketed, underwritten transaction and a $1 million private placement with management and directors on identical terms to the public offering. These new funds were used to strengthen working capital for future capital programs and to pay down a portion of the company's reserve-backed indebtedness. The company anticipates renegotiating its reserve-backed loan later this year; in the interim, we have classified this indebtedness as current, pending completion of the replacement facility with an extended term. There can be no assurance that a new facility can be secured on terms acceptable to the corporation.
Petrolifera's priority in the short run is to reenter and test the La Pinta No.1 exploratory discovery in Colombia. We are carefully considering our alternatives before initiating this program, in order to maximize benefits at lowest attendant cost. We anticipate resolving our plan in the near future with the priority objective to test the oil-bearing Cienaga de Oro ("CDO") Formation, if possible. If not, we would move uphole and test upper zones indicated to be hydrocarbon bearing based on log indications and drilling results and determine the best method to evaluate the lower CDO reservoir, which flowed light gravity crude oil on test before a casing split required suspension of operations.
Our second priority is to continue farmout negotiations on exploratory lands in Peru, Colombia and Argentina to maximize the benefit to our shareholders from our strong ownership positions in these prospective lands. The 2008-2009 commodity price and capital market collapse has forestalled this process to some extent. It is now a reality that large farm-out transactions take more time to complete than during the heady days prior to the market collapse. However, strong crude oil prices are stimulating renewed interest and new players and we remain optimistic about our ability to attract third party capital to finance exploration on our lands and identified prospects. As we approach the new 2010 budget year, many companies with surplus funds but which are prospect poor will surface and we anticipate successful transactions will be accomplished near term. The administrative requirements such as we experienced in Peru, delaying us by over a year in securing an EIA, are now behind us and we will proceed resolutely to increase activity levels on our high potential blocks.
With the decision to retain our Argentinean properties, we again include those results in our continuing operations. As a consequence, after provision for normal year-to-date depletion, which could not be provided for when our Argentinean operations were classified as discontinued, we experienced our first quarterly loss as a company in over four years. We hope to reverse this situation as we again expand our Argentinean production base and normalize our reporting. Recent infill drilling at Puesto Morales Norte has resulted in a 20% increase in production after only two wells of what could be a nine-well program.
We will hold a conference call to discuss our Q3 and year-to-date 2009 ("YTD 2009") results on November 9, 2009 at 9:00 AM MST. To listen to or participate in the live conference call, please dial either 1-416-644-3421 or 1-877-974-0447. A replay of the event will be available from November 9, 2009 at 1:00 PM MST until November 16, 2009 at 9:50 PM MST. To listen to the replay please dial either 1-416-640-1917 or 1-877-289-8525 and enter the passcode 4178419 followed by the pound sign (No.). You can also listen to the conference call online, through the following webcast link: http://www.newswire.ca/en/webcast/viewEvent.cgi?eventID=2865720
Highlights for the period were as follows:
- Raised $58.5 million of gross proceeds to fund a portion of our
exploration capital expenditure, primarily in Colombia during the
balance of 2009 and into 2010, to reduce our reserve-backed credit
facility and augment our working capital
- Tested light gravity crude oil from the La Pinta No.1 exploratory
well in Colombia; remedial work to start shortly
- Retained Argentinean properties for continuing source of cash flow;
recent drilling increases production 20% over Q3 2009 levels
- Reduced indebtedness and initiated discussions to refinance remaining
reserve-backed term debt
Summary Results
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Three months ended Sept. 30 Nine months ended Sept. 30
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% %
2009 2008 Change 2009 2008 Change
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FINANCIAL ($000, except
per share amounts)
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Total revenue $17,229 $32,126 (46) $65,891 $92,915 (29)
Cash flow from
operations before
non-cash working
capital(1) 5,503 15,726 (65) 26,540 41,113 (35)
Per share, basic 0.07 0.29 (76) 0.41 0.79 (48)
Per share, diluted 0.07 0.28 (75) 0.40 0.78 (49)
Net earnings (loss) (11,359) 3,564 (419) (6,744) 8,892 (176)
Per share, basic (0.14) 0.06 (333) (0.11) 0.17 (165)
Per share, diluted (0.14) 0.06 (333) (0.11) 0.17 (165)
Capital expenditures 13,389 21,046 (36) 59,478 81,212 (27)
Cash 55,953 14,865 276 55,953 14,865 276
Working capital 724 8,148 (91) 724 8,148 (91)
Long-term debt 27,464 45,576 (40) 27,464 45,576 (40)
Shareholders' equity 238,475 178,069 34 238,475 178,069 34
Total assets $368,288 $279,174 32 $368,288 $279,174 32
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OPERATING
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Daily sales volumes
Crude oil and
natural gas liquids
- bbl/d 3,653 6,850 (47) 4,511 6,896 (35)
Natural gas - mcf/d 4,252 5,363 (21) 5,633 6,106 (8)
Barrels of oil
equivalent - boe/d(2) 4,362 7,744 (44) 5,450 7,913 (31)
Average selling prices
Crude oil and natural
gas liquids - $/bbl $48.07 $48.93 (2) $49.87 $47.01 6
Natural gas - $/mcf $2.74 $2.58 6 $2.89 $2.37 22
Barrels of oil
equivalent - $/boe $42.93 $45.07 (5) $44.26 $42.80 3
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COMMON SHARES
OUTSTANDING (000s)
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Weighted average
Basic 82,418 54,884 50 64,205 51,876 24
Diluted(3) 82,539 55,897 48 65,619 53,054 24
End of period 121,759 54,948 122 121,759 54,948 122
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(1) Cash flow from operations before non-cash working capital changes
("cash flow") and cash flow per share do not have standardized
meanings prescribed by Canadian generally accepted accounting
principles ("GAAP") and therefore may not be comparable to similar
measures used by other companies. Cash flow includes all cash flow
from operating activities and is calculated before changes in non-
cash working capital. The most comparable measure calculated in
accordance with GAAP would be net earnings (loss). Cash flow is
reconciled with net earnings in the accompanying Management's
Discussion & Analysis ("MD&A"). Management uses these non-GAAP
measurements for its own performance measures and to provide its
shareholders and investors with a measurement of the company's
efficiency and its ability to fund a portion of its future growth
expenditures.
(2) All references to barrels of oil equivalent (boe) are calculated on
the basis of 6 mcf : 1 bbl. Boes may be misleading, particularly if
used in isolation. This conversion is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.
(3) As the company has net losses during the three months and nine months
ended September 30, 2009, the dilutive effect of stock options and
stock purchase warrants became anti-dilutive causing the basic
weighted average common shares outstanding to be used as the
denominator in the dilutive per share net loss calculation.
We successfully advanced our balance sheet reconstruction during the third quarter of 2009. This was accomplished through a marketed, underwritten offering of units comprised of one common share and one-half common share purchase warrant. A full warrant entitles the holder to acquire one additional common share in exchange for one full warrant at $1.20 per common share for approximately a two year period. This financing raised approximately $57.5 million of gross proceeds. Subsequently, a modest private placement was also completed with management and directors on the same terms as the public offering, adding over another $1.0 million to our treasury. This reaffirmed the commitment of management and directors to the future of the corporation.
Proceeds were used to reduce bank indebtedness and to replenish working capital. At September 30, 2009 we had cash balances in excess of $55 million.
Petrolifera's focus during Q3 2009 was on its balance sheet reconstruction, in light of the decision to retain its Argentinean assets and given the amount of cash used for its extensive capital expenditure programs in both Peru and Colombia during the past year or so. This need was advanced by the adverse commodity and capital market conditions, which emerged in late 2008 and continued through much of the first half of 2009. This limited the company's ability to complete farmouts of some of its properties, as prospective partners recalibrated their own financial conditions and commitment levels at a time when preserving liquidity was paramount for all players in the oil and gas industry.
We were successful in raising total gross proceeds of $58.5 million from a successful marketed, underwritten financing (which raised $57.5 million) and a subsequent private placement with management and directors (which raised a further $1.0 million). Total proceeds, then, of $58.5 million were used to pay related commissions and costs of the public offering and to reduce the company's reserve-backed indebtedness, with the balance added to working capital and to fund future capital expenditures, primarily in Colombia. We attracted a new body of committed shareholders and existing shareholders also supported the company's future prospects at a time when strong liquidity was of paramount importance.
With our new funding, we are in a better position to continue our high potential exploration activity in Colombia and Peru and can negotiate more favorable farmout terms for higher cost opportunities. As we do this, we are continuing our discussions with our lead lender to extend the term and refinance our existing reserve-backed indebtedness beyond its expiry of September 5, 2010, while we arrange a repayment schedule to reduce this debt over the next year or longer. Discussions in this regard are proceeding favorably, although a final term sheet and commitment letter are still forthcoming. In the meantime, we will record this debt as a current maturity on our balance sheet, which impacts our reported working capital. Nevertheless, we have steady cash flow from Argentina and strong cash balances exceeding $55.0 million at September 30, 2009, to ensure continued exploration and drilling activity while fulfilling our financial obligations. There can be no assurance, however, that our reserve-backed loan can be renegotiated beyond its current expiry or on satisfactory terms, so we will be exercising considerable caution in our spending programs, until this process can be favorably concluded.
Colombia
As has been previously reported, the La Pinta No.1 exploratory well on the Sierra Nevada License in the Lower Magdalena Basin was drilled and cased earlier this year. The well was expensive due to very difficult drilling conditions largely related to overpressured conditions, which not only affected drilling but also logging, casing and testing operations. Unfortunately, during testing of the upper portion of the Cienaga de Oro ("CDO") formation, which was indicated to be hydrocarbon bearing based on logs and shows while drilling and after having recovered light gravity 45 degrees API crude oil at an instantaneous rate of approximately 700 bbl/d, a casing split apparently occurred. This required operations to be suspended. The rig used to drill the well was released temporarily to a third party for one or possibly two wells to reduce continuing costs and we are continuing to examine the preferred method of remediation, having regard for related costs. In this regard, we are conducting an independent third party evaluation of the well and suggested remediation procedures to examine contingencies and identify available options. We continue to believe the La Pinta prospect is significant with considerable reserve and resource potential, despite the challenges encountered to date. As soon as it is practicable and as warranted by our ongoing study, we intend to reenter the well, retrieve the tubing string and down hole assembly and test the CDO, if possible, in this wellbore. This would be feasible if the casing breach is below the upper perforated zone in the CDO formation. If so, then we might be able to install a permanent bridge plug above the uppermost portion of the split in the casing, clean out and retrieve the tubing, rerun the tubing, log and test the well. If this is not feasible, we would intend to move uphole in the well and test shallower formations, primarily the Porquero, to evaluate indicated hydrocarbon bearing zones. This would mean a replacement well would be necessary to reassess the CDO.
In these circumstances, we envisage attracting an industry partner due to the inherent risk and cost experience at La Pinta. As the evaluation continues, we are moving ahead with our plans to drill the Brillante natural gas/gas liquids prospect on the Sierra Nevada license and we have two drill-ready prospects (La Pinta No.2 and La Pinta No.3) one of which could be drilled to evaluate shallower zones above the CDO if our testing program at La Pinta No.1 proves successful and we complete the well as a crude oil producer from the deeper zone.
Immediately subsequent to the reporting period, we were awarded the Magdalena License by Agencia Nacional De Hidrocarburos, the Colombian state agency, over approximately 595,000 acres immediately adjacent to our Sierra Nevada License. The Block requires a work commitment of 150 km(2) of 3D seismic within fifteen months of award, so drilling should commence on this block in late 2010 or early 2011. It is primarily prospective for large natural gas and natural gas liquids accumulations.
We envisage attracting industry partners for some or all of our continuing work obligations and planned activity on both the Sierra Nevada License and the Magdalena License during the remainder of this year and into 2010. We have engaged in discussions with a number of qualified and financially strong parties. As these are projects requiring considerable associated capital, farmouts will take time to complete but with the quality of opportunity, we anticipate acceptable terms and conclusions can be reached. We note, however, that completion of suitable arrangements may have to await until 2010 as companies finalize their budgets to include these types of opportunities.
The farmout of our Turpial License in the Middle Magdalena Basin is nearing completion. Terms have been agreed and we are in the final stages of documentation. A US-based company has elected to join us in this project and will reimburse Petrolifera a portion of its sunk costs and carry the company through a portion of the next stage of evaluation, with drilling possible in 2010 on this property which is offset by large producing heavy oil fields.
Peru
We continue to hold three licenses in Peru with a 100 percent working interest. We have held extensive discussions with numerous large international oil companies about our Ucayali (Blocks 107/103) and Maranon Basin (Block 106) Blocks, which are all prospective for crude oil and in the case of Blocks 107/133, also for natural gas and associated liquids. The huge downturn in capital markets and commodity prices in late 2008 and throughout the first half of 2009 has hindered our ability to complete a successful farmout to date. Based on our discussions, we believe, however, that this is more attributable to the financial concerns of large companies over new commitments and their own liquidity than the quality of opportunities associated with our lands. We continue to engage in serious discussions with two large international companies about a farmin on our Ucayali acreage and recently a third large international exploration company has approached us. We did reject one proposal from a large company already involved in the region and another large company was interested but had no remaining 2009 budget available for new ventures.
We had hoped to be drilling in Peru during 2009. However, we were delayed for over one year by the process of securing approval of our Environmental Impact Assessment due to regulatory lag and understaffing at the related government agencies. When combined with the impact of the slowdown on decision making by companies over large capital commitments, we are behind where we had hoped to be at this time. However, this does not diminish the caliber of our prospects or the potential of our acreage, nor our conviction that the right farmout transaction will occur soon, especially with the resurgence in crude oil prices which is motivating the renewed search for the type of prospects we have identified with our geological and geophysical work.
Argentina
With the decision to retain our Argentinean assets, following a market test of sale alternatives, we have reactivated our technical assessment and have already initiated a four-well infill program at Puesto Morales Norte to enhance overall production levels. Our production had fallen off in recent months due to the absence of sustaining capital investment. We anticipate our modest planned capital program prior to year end will result in production increases and improved revenue, cash flow and lower unit operating costs. We will attempt to farmout the balance of our Argentinean properties later this year and next year to reduce capital outlays, at least until there is evidence of improved crude oil pricing, more attuned to world market conditions.
Outlook
Petrolifera's outlook has improved with the successful completion of our $58.5 million equity financing in August 2009. Our strengthened financial condition will allow us the ability to continue our high potential exploration program in Colombia, to enhance production in Argentina and to pay down our reserve-backed debt, while we renegotiate terms of our borrowings and extend the term, as intended. We will also be better positioned in our negotiations of farmout terms in both Colombia and Peru.
We intend to husband our resources and continue our commitment to attracting third party funding of higher risk activity, which we can pursue because of the vast potential associated with our projects in both Colombia and Peru. We will also aggressively pursue farmouts in Argentina to eliminate residual work commitments incurred during more buoyant market conditions and before the harsh imposition of price controls on crude oil sales.
Our share price has been brutalized of late, as we restored adequate liquidity to our balance sheet and in the aftermath of uncertain results at La Pinta. Our number one priority, which we believe will be the catalyst to recovery, is to resolve the proper procedure to determine the full potential of the La Pinta discovery. We remain confident we have made what appears to be a significant find and we are also very enthused about our other exploration opportunities in the vicinity of the La Pinta prospect.
Our plans for next year are discussed in greater detail in the attached Management Discussion and Analysis ("MD&A"). We will conduct an exciting yet prudent capital program, supplemented by third party funding through farmouts. With healthy cash balances, a satisfactory level of cash generation from Argentina and the successful conclusion of the renegotiation of the terms of an extended loan facility, we will have sufficient financial wherewithal to conduct a meaningful value added program for our shareholders during 2010.
We thank our new shareholders for the commitment to the company and also appreciate the continuing loyalty and support of our broad shareholder base, including that of Connacher Oil and Gas Limited, our largest shareholder.
Forward Looking Information This press release contains forward-looking information including, but not limited to the company's plans to renegotiate its existing reserve-backed credit facility and the timing associated therewith, anticipated remediation and further testing of the La Pinta No.1 well in Colombia, future exploration and development opportunities in Argentina, Colombia and Peru, anticipated results from the La Pinta No.1 well in Colombia, future drilling plans in Argentina, Colombia and Peru, and the anticipated timing associated therewith, anticipated expansion of Petrolifera's Argentinean production base, planned capital expenditures (including sources of funding and timing thereof), strategies for reducing the company's financial exposure high cost exploration and drilling activities in Colombia and Peru and eliminate residual commitments in Argentina including, planned farm-out and/or joint ventures arrangements and reimbursement of sunk costs, payments to be made against the company's reserve-backed credit facility and the timing thereof and the company's ability to continue to comply with financial covenants imposed pursuant to its reserve-backed credit facility. Additional forward looking information is contained in the Management's Discussion and Analysis ("MD&A") attached to this press release. See "Forward Looking Information" in the MD&A.
Forward looking information is not based on historical facts but rather on Management's expectations regarding the company's future growth, results of operations, production, future capital and other expenditures (including the amount, nature and sources of finding thereof), competitive advantages, plans for and results of drilling activity, environmental matters, business prospects and opportunities and expectations with respect to general economic conditions. Such forward looking information reflects Management's current beliefs and assumptions and is based on information currently available to Management. Forward looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from the results discussed in the forward looking information, including but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development, exploration and production, delays or changes to plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections in relation to production, costs and expenses and health, safety and environment risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and third parties located in foreign jurisdictions and the risk associated with international activity. There can be no assurance that planned remediation efforts and subsequent testing of the La Pinta No.1 well drilled on the Sierra Nevada I License will yield commercial results. The company's ability to complete its capital program and repay outstanding indebtedness is dependent upon completion of planned farm-out arrangements and recovery of sunk costs, restoration of production in Argentina and stabilized or improved commodity prices. In addition, the current financial crisis has resulted in severe economic uncertainty and resulting illiquidity and volatility in credit and capital markets which increases the risk that actual results will vary from forward looking expectations in this press release and these variations may be material. Petrolifera may have to bring participants into its acreage holdings and planned evaluation activities on less attractive terms than might otherwise have been the case due to the combination of tighter economic conditions and the influence of contractual commitments and deadlines on the terms of trade. There can be no assurance that the company will be successful in its efforts to secure planned farm-outs and/or joint venture arrangements. Additionally, the company's discussions regarding the renegotiation of its reserve-backed credit facility are at a preliminary stage and there can be no assurance that these discussions will result in terms acceptable to Petrolifera or at all. Additional risks and uncertainties associated with Petrolifera's future plans are described elsewhere in this press release, in the MD&A attached hereto and in Petrolifera's Annual Information Form for the year ended December 31, 2008. Although the forward looking information contained herein is based upon assumptions which Management believes to be reasonable, the company cannot assure investors that actual results will be consistent with this forward looking information. This forward looking information is made as of the date hereof and the company assumes no obligation to update or revise this information to reflect new events or circumstances, except as required by law. Because of the risks, uncertainties and assumptions inherent in forward looking information, prospective investors in the company's securities should not place undue reliance on this forward looking information.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
The following is dated as of November 6, 2009 and should be read in conjunction with the unaudited consolidated financial statements of Petrolifera Petroleum Limited ("Petrolifera" or the "company") for the three months and nine months ended September 30, 2009, as contained in this interim report and the audited financial statements for the years ended December 31, 2008 and 2007, as contained in the company's 2008 Annual Report. Additional information relating to Petrolifera, including its Annual Information Form for the year ended December 31, 2008, is on SEDAR at www.sedar.com. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in Canadian dollars. This MD&A provides management's view of the financial condition of the company and the results of its operations for the reporting periods indicated.
Information in the MD&A contains forward-looking information including but not limited to the company's plan to renegotiate its existing reserve-backed credit facility, anticipated remediation and further testing of the La Pinta No.1 well in Colombia, future exploration and development opportunities in Argentina, Colombia and Peru, anticipated results from the La Pinta No.1 well in Colombia, future drilling plans in Argentina, Colombia and Peru, and the anticipated timing associated therewith, planned capital expenditures (including sources of funding and timing thereof), strategies for reducing the company's financial exposure to high cost exploration and drilling activities and eliminate residual work commitments in Argentina including, planned farm-out and/or joint ventures arrangements, recovery of the company's investment in asset-backed commercial paper ("ABCP"), the anticipated impact of the proposed conversion to International Financial Reporting Standards ("IFRS") on the company's consolidated financial statements, payments to be made against the company's reserve-backed credit facility and the timing thereof and the company's ability to continue to comply with financial covenants imposed pursuant to its reserve-backed credit facility. See "Forward - Looking Information" for a discussion of the forward-looking information contained in this MD&A and the risks and uncertainties associated therewith. Additional risks and uncertainties relating to Petrolifera and its business and affairs are also described in detail in its Annual Information Form for the year ended December 31, 2008. Throughout this MD&A, per barrel of oil equivalent ("boe") amounts have been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of crude oil (6:1). The conversion is based on an energy equivalency conversion method primarily applicable to the burner tip and does not represent a value equivalency at the wellhead. Boe may be misleading, particularly if used in isolation.
PETROLIFERA TO RETAIN ARGENTINEAN OPERATIONS
Petrolifera announced on March 2, 2009 that its Board of Directors had authorized the company to initiate a process to dispose of its Argentinean interests. Petrolifera's Argentinean interests represented all of its current production, related revenues and substantially all of its reserves. During early July, 2009, several bids for the company's Argentinean interests were received from third parties. After careful consideration, on July 15, 2009 the company announced that the process to dispose of its interests did not result in any acceptable bids. Accordingly, management decided to retain the company's Argentinean interests and the company is currently in the process of drilling four in-fill development wells in Puesto Morales Norte ("PMN") and increasing the water treatment capacity of its facilities to enhance production.
The Argentinean operations are presented within the unaudited consolidated financial statements and MD&A for the three months and nine months ended September 30, 2009 (combined together as the "Interim Report) as "held for use", given the decision made on July 15, 2009 to retain these operations. As required by Canadian GAAP, because of the decision to retain the Argentinean operations, these operations must be presented as though they were "held for use" despite the 2009 first and second quarter's Interim Reports classification as discontinued operations. For the three months ended September 30, 2009 the classification of the Argentinean operations as "held for use" has resulted in the recognition of depletion and depreciation related to the period from March 2 through to June 30, 2009 in addition to depletion and depreciation expense for the third quarter of 2009. The recognition of depletion and depreciation related to previous periods has partially contributed to the company's reported net loss for the three months ended September 30, 2009. Because of the additional depletion during the quarter, depletion, depreciation and accretion expense and the resulting net loss recognized for the three months ended September 30, 2009 may not be comparable to prior periods.
FINANCIAL AND OPERATING REVIEW
SALES VOLUMES, PRICING AND REVENUE
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Three months ended Sept. 30 Nine months ended Sept. 30
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2009 2008 % 2009 2008 %
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Daily sales volumes:
Crude oil and natural
gas liquids - bbl/d 3,653 6,850 (47) 4,511 6,896 (35)
Natural gas - mcf/d 4,252 5,363 (21) 5,633 6,106 (8)
Equivalent - boe/d 4,362 7,744 (44) 5,450 7,913 (31)
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Average selling prices:
Crude oil and natural
gas liquids - $/bbl $48.07 $48.93 (2) $49.87 $47.01 6
Natural gas - $/mcf $2.74 $2.58 6 $2.89 $2.37 22
Weighted average
selling price - $/boe $42.93 $45.07 (5) $44.26 $42.80 3
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Petroleum and natural
gas sales ($000) $17,229 $32,110 (46) $65,854 $92,793 (29)
Interest income ($000) - 16 (100) 37 122 (70)
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Total revenue ($000) $17,229 $32,126 (46) $65,891 $92,915 (29)
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Petroleum and natural gas revenues for the nine months ended September 30, 2009 were $65.9 million on average sales volumes of 5,450 boe/d, compared to $92.8 million on sales of 7,913 boe/d during the same period in 2008, a decrease of 29 percent for revenue and 31 percent for sales volumes. Petroleum and natural gas revenues for the third quarter of 2009 were $17.2 million on sales volumes of 4,362 boe/d, compared to $32.1 million on sales of 7,744 boe/d during the third quarter of 2008, a decrease of 46 percent for revenue and 44 percent for sales volumes. For the three months and nine months ended September 30, 2009, sales of crude oil and natural gas liquids represented 84 and 83 percent of the company's sales volumes, respectively, which was lower than the 88 and 87 percent for the comparable periods, respectively. The reduction of sales represented by crude oil and natural gas liquids for the third quarter of 2009 relative to the same period in 2008 was mainly the result of operational challenges as detailed herein. All of Petrolifera's sales during the three months and nine months ended September 30, 2009 were from its Puesto Morales/Rinconada, Puesto Morales Este ("PME") and, to a lesser extent, Gobernador Ayala II Concessions in Argentina and all of its crude oil sales were made to the Argentinean operation of a large multinational company.
The reduction in sales revenues during the three months and nine months ended September 30, 2009, compared to the same periods in 2008 reflects minimal investment undertaken during the period leading up to and during the sale process related to the company's Argentinean interests and operational challenges, which included labour strikes and downtime at several wells in addition to natural production declines. Operational challenges during the three months and nine months ended September 30, 2009, relative to the comparable period in 2008, included several labour strikes resulting in the shut-in of production for periods ranging from 24 to 48 hours (estimated average decrease of 125 boe/d for the three months ended September 30, 2009), a scheduled workover of a key producing well, PMN x- 1002 and shut-ins caused by equipment failures at PMN - 1113 and, to a lesser extent, PMN a-1013 and 1021 (estimated average decrease of 300 boe/d for the three months ended September 30, 2009). Also, the company experienced certain challenges with the PMN waterflood program initiated during 2008, including rising water cuts. Remedial measures are being evaluated through a tracer sampling program and improvements in the water treatment capacity of the company's facilities.
The company's realized crude oil price rose six percent to average $49.87/bbl for the nine months ended September 30, 2009, compared to $47.01/bbl realized in the same period in 2008, mainly due to a weakening of the Canadian dollar compared to the US dollar, resulting in a higher reported price as expressed in Canadian dollars. The company's realized crude oil price fell two percent to average $48.07/bbl for the third quarter of 2009, compared to $48.93/bbl realized in the third quarter of 2008, mainly from lower realized US dollar pricing of US$44.70/bbl during the third quarter of 2009 relative to the US$47.00/bbl during the third quarter in 2008. During 2009, Petrolifera negotiated a new crude oil sales agreement with a well-established multinational purchaser and secured a crude oil price with some exposure to world crude oil price ("WTI") improvements. During the three months and nine months ended September 30, 2009, the crude oil price realized by Petrolifera averaged approximately 66 and 76 percent of the WTI average of US$67.26/bbl and US$56.59/bbl, respectively.
Relative to the second quarter of 2009, when petroleum and natural gas revenues were $22.3 million on sales volumes of 5,691 boe/d, lower revenues and sales volumes (both down 23 percent) were experienced during the third quarter of 2009. The reduction of crude oil and natural gas liquids production during the third quarter of 2009 relative to the second quarter of 2009 reflects the minimal investment undertaken during the period of the sales process of the company's Argentinean interests, combined with operational changes, which included several labour strikes and downtime at several wells. A one percent decrease occurred in realized crude oil and natural gas liquids prices during the third quarter of 2009, relative to the $48.72/bbl realized during the second quarter of 2009. The modest fall in the realized crude oil and natural gas liquids prices compared to the second quarter of 2009 is mainly attributable to a six percent strengthening of the Canadian dollar relative to the US dollar, resulting in the reduction in Petrolifera's realized prices as expressed in Canadian dollars.
In the three months and nine months ended September 30, 2009, natural gas prices respectively increased six percent and 22 percent over the level realized during the same periods in 2008 to average $2.74/mcf and $2.89/mcf, respectively. This reflected some relaxation of regulated Argentinean natural gas prices in industrial markets. The company successfully negotiated a price increase for Argentinean 2008/2009 winter sales volumes to US$2.40/mcf. This was a 10 percent improvement relative to the US$2.19/mcf realized during the 2007/2008 winter sales volumes of 2008. Natural gas prices are believed to have the potential of further improvement in the longer term, due to market conditions and new Argentinean policy initiatives aimed at further eventual market deregulation for industrial sales, including for power generation.
Royalties, Operating Expenses and Corporate Netbacks
Corporate Netbacks (1)
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Three months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Average daily sales (boe/d) 4,362 7,744
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Petroleum and natural gas sales $17,229 $42.93 $32,110 $45.07
Interest income - - 16 0.02
Royalties (2,445) (6.09) (4,842) (6.80)
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Net revenue 14,784 36.84 27,284 38.29
Operating costs (5,763) (14.36) (6,410) (9.00)
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Corporate netback $9,021 $22.48 $20,874 $29.29
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Nine months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Average daily sales (boe/d) 5,450 7,913
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Petroleum and natural gas sales $65,854 $44.26 $92,793 $42.80
Interest income 37 0.02 122 0.05
Royalties (9,362) (6.29) (12,892) (5.95)
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Net revenue 56,529 37.99 80,023 36.90
Operating costs (17,362) (11.67) (18,675) (8.61)
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Corporate netback $39,167 $26.32 $61,348 $28.29
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(1) Calculated by dividing related revenue and costs by total boe sold,
resulting in a corporate netback. Netback does not have a
standardized meaning prescribed by GAAP and therefore is unlikely to
be comparable to similar measures used by other companies. The most
comparable measure calculated in accordance with GAAP would be net
earnings (loss). Nevertheless, Petrolifera's management uses netbacks
as a performance measurement of operating efficiency and the
prevailing royalty regime. A high ratio of netback to selling price
is a positive indicator. A reconciliation of corporate netback to net
income (loss) can be found in the Net Earnings (Loss) table.
Petrolifera's corporate netback of $26.32 per boe decreased seven percent during the nine months ended September 30, 2009, compared to that recorded in the same period in 2008. Higher realized commodity pricing during the nine months ended September 30, 2009, compared to the same period in 2008, was more than offset by higher operating costs per boe. The corporate netback per boe decreased 23 percent during the third quarter of 2009 relative to the third quarter in 2008. Lower realized commodity pricing and higher operating costs per boe contributed to the reduction in the third quarter's 2009 corporate netback relative to the third quarter of 2008. Petrolifera's calculated unit netbacks of $22.48/boe and $26.32/boe remained a respectable 52 and 59 percent of the selling price per boe during the three months and nine months ended September 30, 2009, both respectively reductions from the 65 and 66 percent corporate netbacks relative to the selling prices per boe during the same periods in 2008.
Relative to the corporate netback of $25.20/boe for the second quarter of 2009, the corporate netback was 11 percent lower during the third quarter of 2009. Higher operating costs per boe during the three months ended September 30, 2009, compared to the prior period in 2009 contributed to the reduction in the corporate netback per boe.
Operating costs
Total operating costs during the three months and nine months ended September 30, 2009, respectively, decreased by approximately 10 percent and seven percent compared to the same periods in 2008, largely due to lower production volumes. On a per boe basis, operating costs increased 60 percent and 36 percent for the three months and nine months ended September 30, 2009, respectively, compared to the same periods for 2008. Lower crude oil and natural gas liquids production volumes, well servicing costs, transportation costs and one-time labour costs during the three months and nine months ended September 30, 2009 resulted in the increases on a per boe basis. Also contributing to higher operating costs per boe during the three months and nine months ended September 30, 2009, compared to the same periods in 2008, were the additional number of wells being operated resulting from the active 2008 drilling program, the number of wells on pump or that require servicing on a more frequent basis and inflationary pressures. The challenges related to the company's waterflood program caused an increase in total fluid throughput, with a lower percentage of crude oil combined with the additional fluid handling costs resulting in an increase in the operating costs per boe for the nine months ended September 30, 2009 relative to the same period in 2008.
Royalties
Royalties represent charges levied by governments and landowners against production or revenue. Included in royalties are revenue taxes imposed by provincial jurisdictions. Royalties in the nine months ended September 30, 2009 were $9.4 million ($6.29 per boe) or 14 percent of petroleum and natural gas revenue, compared to $12.9 million ($5.95 per boe), or 14 percent of petroleum and natural gas revenue in the same period in 2008. The increase on a boe basis is primarily attributable to the higher realized commodity pricing during the first nine months of 2009 compared to the same period of 2008. Royalties in the third quarter of 2009 were $2.4 million ($6.09 per boe) or 14 percent of petroleum and natural gas revenue, as compared to $4.8 million ($6.80 per boe) or 15 percent of petroleum and natural gas revenue in the same period in 2008 and to $3.5 million ($6.74 per boe) or 15 percent of petroleum and natural gas revenue in the second quarter of 2009.
NET EARNINGS AND SHARES OUTSTANDING
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Three months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Corporate netback $9,021 $22.48 $20,874 $29.29
General and administrative (2,278) (5.68) (2,240) (3.15)
Stock-based compensation (1,561) (3.89) (1,123) (1.57)
Finance charges (1,132) (2.82) (1,361) (1.91)
Foreign exchange gain (loss) 1,102 2.75 239 0.34
Fair value impairment (2,104) (5.24) (1,885) 2.65
Depletion, depreciation and
accretion (17,568) (43.78) (6,599) (9.26)
Income tax recovery (provision) 3,428 8.54 (3,855) (5.41)
Taxes other than income taxes (267) (0.67) (486) (0.68)
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Net earnings (loss) $(11,359) $(28.31) $3,564 $5.00
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Nine months ended Sept. 30
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($000, except per unit amounts) 2009 2008
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Total Per boe Total Per boe
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Corporate netback $39,167 $26.32 $61,348 $28.29
General and administrative (6,370) (4.28) (6,326) (2.92)
Stock-based compensation (3,999) (2.69) (4,252) (1.96)
Finance charges (4,057) (2.73) (3,584) (1.65)
Foreign exchange gain (loss) 110 0.07 (969) (0.45)
Fair value impairment (2,104) (1.41) (5,377) (2.48)
Depletion, depreciation and
accretion (24,610) (16.54) (17,656) (8.14)
Income tax recovery (provision) (3,250) (2.18) (12,484) (5.76)
Taxes other than income taxes (1,631) (1.10) (1,808) (0.83)
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Net earnings (loss) $(6,744) $(4.53) $8,892 $4.10
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For the nine months ended September 30, 2009, the company reported a net loss of $6.7 million, which equated to a net loss of $0.11 per weighted average basic and diluted share, compared to net earnings of $8.9 million, which equated to $0.17 per weighted average basic and diluted share for the same period in 2008. For the third quarter of 2009, the company reported a net loss of $11.4 million, which equated to a net loss of $0.14 per weighted average basic and diluted share, compared to net earnings of $3.6 million, which equated to $0.06 per weighted average basic and diluted share for the same period in 2008.
A net loss resulted for the nine months ended 2009 compared to net earnings during the same period in 2008, mainly due to lower crude oil and natural gas liquids sales volumes, higher finance costs and higher depletion, depreciation and accretion expense. A net loss was recognized during the third quarter of 2009, relative to the net earnings in the same quarter in 2008, mainly due to lower crude oil and natural gas liquids volumes and realized prices, higher stock-based compensation and higher depletion, depreciation and accretion expense. The depletion, depreciation and accretion expense for the quarter ended September 30, 2009 is not comparable to the third quarter of 2008 due to the previous classification of the company's Argentinean interest as discontinued operations. See "Depletion, Depreciation and Accretion-Discontinued Operations".
For the three months and nine months ended September 30, 2009, the company's comprehensive loss was $20.5 million and $23.6 million as compared to the comprehensive income in the corresponding 2008 periods of $8.1 million and $15.5 million, respectively. The comprehensive loss during the three months and nine months ended September 30, 2009, was due to the aforementioned net loss in each of the current periods and a weakening of the US dollar, relative to the Canadian dollar, of eight percent and 14 percent, respectively, which reduced the reported net assets of the company's Argentinean operations as denominated in US dollars. As the company's Argentinean operation is considered self-sustaining, changes in this operation's reported net assets, as expressed in Canadian dollars, resulting from foreign exchange differences between the US dollar and Canadian dollar is recognized as comprehensive income (loss).
During the three months and nine months ended September 30, 2009 the weighted average number of common shares outstanding was 82.4 million and 64.2 million, respectively, compared to 54.9 million and 51.9 million during the same periods in 2008. The increase in the weighted average number of common shares for the three months ended September 30, 2009, relative to the same period in 2008, reflected the August 2009 equity financing for gross proceeds of $57.5 million, which resulted in the issuance of 65.3 million common shares; the September 2009 private placement for gross proceeds of $1.0 million, which resulted in the issuance of 1.1 million common shares and the exercise of 0.2 million warrants and 0.3 million options which were respectively exercised during the third quarter of 2008 and 2009, resulting in the issuance of a like number of common shares in the period. The increase in the weighted average number of common shares for the nine months ended September 30, 2009 relative to the same period in 2008 includes the same issuances as explained for the third quarter of 2009 relative to the third quarter of 2008, in addition to the June 2008 equity financing for gross proceeds of $40.0 million, which resulted in the issuance of 4.4 million common shares at $9.00 per share. As the company had net losses during the three months and nine months ended September 30, 2009, the effect of "in-the-money" stock options and stock purchase warrants became anti-dilutive, resulting in the exclusion of the effect of these convertible equity instruments on the diluted net loss per common share calculation, whereas in the same periods in 2008, 1.0 million and 1.2 million additional common shares were respectively included in the diluted net earnings per share calculation.
As at the close of business on November 5, 2009, the company had the following securities issued and outstanding:
- 121,758,510 common shares; and
- 7,636,067 stock options; and
- 33,240,250 warrants.
General & Administrative and Stock-based Compensation
General and administrative ("G&A") expenses were $6.4 million and $6.3 million for the nine months ended September 30, 2009 and September 30, 2008, respectively. These costs primarily consist of management and administrative salaries, legal and professional fees, insurance, travel and other administrative expenses. G&A expenses of $3.6 million and $3.8 million were also capitalized in the nine months ended September 30, 2009 and 2008, respectively, primarily related to further exploration and evaluation of the prospects in Colombia, Peru and Argentina.
On a per boe basis, G&A was $4.28 per boe of sales for the first nine months of 2009 compared to $2.92 per boe for the first nine months of 2008. The increase in G&A per boe for the year, relative to 2009, was primarily due to lower sales volumes.
During the nine months ended September 30, 2009, a non-cash expense of $2.9 million (2008 - $4.3 million) was recorded as stock-based compensation, reflecting the amortization of the fair value of stock options over the vesting period. The decrease in stock-based compensation was mainly attributable to a lower fair value of options granted during the first nine months of 2009 compared to the fair value of options granted during the same period in 2008. For the three months ended September 30, 2009, relative to the same period in 2008, the stock-based compensation increase is attributable to the amortization of the fair value of 4.3 million options granted during the third quarter of 2009 with a weighted average grant price of $1.00 per stock option. Additionally, during 2009 certain employees, officers and non-managerial directors of the company voluntarily surrendered 1.8 million options with a weighted average exercise price of $13.79 per option. In accordance with Canadian GAAP, any unvested options that were voluntarily surrendered were deemed to have become vested, resulting in the recognition of an additional non-cash stock-based compensation expense of $1.1 million.
Finance Charges
Included in the finance charges of $4.1 million and $3.6 million for the nine months ended September 30, 2009 and September 30, 2008, respectively, were interest paid and accrued on the company's outstanding current and long-term bank debt and deferred financing charges that are being allocated over the life of the reserve-backed credit facility. The effective interest rate on the company's facilities was 3.0 and 4.4 percent for the three months and nine months ended September 30, 2009, compared to 3.6 and 6.0 percent for the same periods during 2008, respectively. The increase in finance charges during the nine months ended September 30, 2009, compared to the same period in 2008, reflected higher loan amounts outstanding on the facilities. The decrease in finance charges during the three months ended September 30, 2009, compared to the same period in 2008, reflected lower interest rates on the operating line-of-credit facility.
Foreign Exchange
The effect during 2009 of the weakening US dollar relative to the Canadian dollar, on a portion of the company's debt which is US dollar denominated, was mostly offset by the effect of the weakening of the Argentinean peso, relative to the US dollar, on the Argentinean working capital. This resulted in a net foreign exchange gain of $0.1 million for the nine months ended September 30, 2009. The company's main exposure to foreign currency risk in Argentina relates to the pricing of crude oil sales, operating costs and capital expenditures, which are mainly denominated in US dollars and Argentinean pesos, partially mitigated by draws on the reserve-backed credit facility, which is denominated in US dollars.
Depletion, Depreciation & Accretion ("DD&A")
DD&A is calculated using the unit-of-production method based on total estimated proved reserves. In accordance with Canadian GAAP, depletion and depreciation was not recognized on the company's Argentinean interests that were previously held as discontinued operations during the time these interests were for sale. As a result of management's decision to no longer pursue a sale, the company's Argentinean interests were again classified as "held for use", resulting in the recognition of depletion and depreciation expense from the date that management had initially ceased recognition, which was March 2, 2009. This resulted in the company's depletion and depreciation expense for the period from March 2, 2009 through to June 30, 2009, being included in DD&A for the three months ended September 30, 2009, in addition to the appropriate expense for the third quarter of 2009. As a result of this recognition of depletion and depreciation expense from previous periods in the financial results for the three months ended September 30, 2009, DD&A for the third quarter is not comparable to prior quarters. Had the company not recognized DD&A from prior periods, as included in the expense for the three months ended September 30, 2009, the normalized DD&A would have approximated $9.2 million, which would have resulted in a normalized net loss of approximately $3.8 million. The DD&A for the nine months ending September 30, 2009 was not affected by the classification of the company's Argentinean interests from discontinued operations to "held for use" as it is fully provided for during this reporting period.
DD&A in the nine months ended September 30, 2009 totaled $24.6 million or $16.54 per boe sold, compared to $17.7 million or $8.14 per boe in the same period in 2008. The increase in DD&A for the nine months ended September 30, 2009, relative to the same period in 2008, was mainly due to the higher estimated cost of production additions, the cost of infrastructure related to the Argentina production, a December 31, 2008 downward reserve adjustment and the inclusion of Gobernador Ayala II exploration costs subject to depletion, relative to an estimate of total proved reserves associated with this concession. Capital costs of $9.1 million (Dec. 31, 2008 - $14.5 million) incurred for unevaluated properties in Argentina have been excluded from the cost pool subject to depletion and depreciation.
Accretion expense, which is included in DD&A expense, was $0.1 million and $0.4 million for the three months and nine months ended September 30, 2009, compared to $0.1 million and $0.3 million during the same periods for 2008, respectively. Accretion expense will continue at appropriate levels in the future to accrete the discounted liability of $9.5 million (Dec. 31, 2008 - $10.1 million) over the estimated remaining economic life of the company's oil and gas properties.
Taxes
The current income tax provision of $2.9 million and $9.1 million for the nine months ended September 30, 2009 and September 30, 2008, respectively, related mostly to income taxes payable in Argentina. Additionally, a future income tax provision of $0.3 million and $3.4 million in the first nine months of 2009 and 2008, respectively, was recorded at the statutory rate to recognize the differences between the remaining tax pools and accounting carrying values. The implied effective tax rates of the Argentinean tax expense relative to the before tax net loss resulting from Argentinean net earnings, less general corporate deductions, is not indicative of the company's jurisdictional tax rates for the three months and nine months ended September 30, 2009. Taxes other than income taxes of $1.6 million and $1.8 million for the first nine months of 2009 and 2008, respectively, represent taxes charged on all banking transactions in Argentina.
CAPITAL RESOURCES, CAPITAL EXPENDITURES AND LIQUIDITY
During 2008, the company adopted a conservative approach to its anticipated 2009 capital expenditure programs in South America, until it could determine with greater confidence a sense of direction for worldwide stock, credit and crude oil markets. Accordingly, the company determined it would, if necessary, curtail, defer, or sell down, through joint venture or farm-out arrangements, its participation in various higher risk projects. Consistent with the company's strategy of achieving positive leverage for its shareholders and stakeholders from a high level of ownership in the significant value-added impact of its early stage geological and geophysical activity, management anticipates attempting to identify industry participants and negotiate transactions, whereby other enterprises join with Petrolifera to conduct joint venture activity. Current capital market conditions make this process more challenging and time consuming than under more buoyant economic circumstances, resulting in Petrolifera possibly having to bring participants into its acreage holdings and planned activities on less attractive terms than might otherwise have been negotiated. There can be no assurances as to the timing or completion of related terms of the possible farm-in or joint venture arrangements. Completion of one or more farm-ins or joint ventures arrangements are required to fund the company's long-term exploration activities in Colombia and Peru. See "Commitments, Guarantees and Contractual Obligations". Additionally, the company anticipates refinancing its existing reserve-backed indebtedness to extend the current term beyond the current expiry of September 5, 2010.
Cash Flow
Cash flow and cash flow per share do not have standardized meanings prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. Cash flow includes all cash flow from operating activities and is calculated before changes in non-cash working capital. The most comparable measure calculated in accordance with GAAP would be net earnings (loss). Cash flow is reconciled with net earnings (loss) below. Cash flow per share is calculated by dividing cash flow by the weighted average shares outstanding. Management uses these non-GAAP measurements for its own performance measures and to provide its shareholders and investors with a measurement of the company's efficiency and its ability to fund a portion of its future growth expenditures.
Reconciliation of net earnings to cash flow:
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Three Months Ended Nine Months Ended
Sept. 30 Sept.
