Nov. 9, 2009 (Canada NewsWire Group) --
CALGARY, Nov. 9 /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 nine months ended September 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.
Third Quarter 2009 Highlights
- On November 5, the Company announced it had entered into a definitive
arrangement agreement with the Libyan Investment Authority (the
"LIA") pursuant to which the LIA, through a subsidiary, has agreed to
acquire all of the Verenex shares issued and outstanding upon
completion of the transaction at a price per share in cash equal to
$7.09 plus an additional amount per share (the "Working Capital
Amount"). Based on preliminary estimates agreed to by the LIA,
Verenex expects the Working Capital Amount to be a nominal amount of
approximately $0.15 per share, assuming completion of the transaction
in mid-December.
Financial
- Net loss in the third quarter of 2009 from continuing operations was
($3.5 million) compared to net income of $0.2 million in the third
quarter of 2008.
- Funds flow from continuing operations in the third quarter of 2009
was ($1.5 million) compared to ($1.1 million) for the third quarter
of 2008.
- Working capital surplus at September 30, 2009 was $8.9 million
compared to $29.8 million as at December 31, 2008, including cash
amounting to $11.9 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 Nine Nine
Months Months Months Months
Ended Ended Ended Ended
September September September September
(unaudited) 30, 2009 30, 2008 30, 2009 30, 2008
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Financial (thousands of Cdn $, except share and per share amounts)
Funds flow from
continuing
operations(1) (1,539) (1,122) (4,145) (2,775)
Net Income/(loss) from
continuing operations (3,513) 191 (8,819) (397)
Capital expenditures 3,255 16,486 23,665 53,100
Working capital surplus 8,897 46,362 8,897 46,362
Common shares
outstanding
Basic 44,677,291 44,267,891 44,677,291 44,267,891
Diluted 49,851,391 50,090,407 49,851,391 50,090,407
Weighted average common
shares outstanding
Basic 44,605,169 44,267,891 44,394,087 44,267,891
Diluted 44,605,169 47,326,910 47,172,681 47,454,810
Share trading
High 7.73 9.94 9.70 11.24
Low 5.87 6.81 5.87 6.81
Close 6.40 8.10 6.40 8.10
Discontinued Operations
Petroleum and natural
gas revenues (net) - 267 (8) 794
Production
Crude oil (bbls/d) - - - -
Natural gas liquids
(bbls/d) - 10 - 11
Natural gas (mcf/d) - 216 - 234
Boe/d (6:1)* - 46 - 51
Average reference price
WTI (US$ per bbl) - 117.98 - 113.29
Brent (US$ per bbl) - 114.78 - 111.02
AECO (Cdn$ per mcf) - 7.74 - 8.62
Average selling price
Crude oil (Cdn$ per
bbl) - - - -
Natural gas liquids
(Cdn$ per bbl) - 90.36 - 78.18
Natural gas (Cdn$ per
mcf) - 9.19 - 8.53
Average Operating
Netback (Cdn$
per BOE @ 6:1) - 63.08 - 57.27
(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 third quarter of 2009, the Company invested approximately $3.3 million. Libya accounted for all of the investment activity level with approximately $1.7 million in drilling, $0.1 million in facilities, $0.1 in completions, $0.1 in G&G and $1.3 million in capitalized General and Administration ("G&A") and office costs.
Outlook
On November 5, the Company announced it had entered into a definitive arrangement agreement with the Libyan Investment Authority (the "LIA") pursuant to which the LIA, through a subsidiary, has agreed to acquire all of the Verenex shares issued and outstanding upon completion of the transaction at a price per share in cash equal to $7.09 plus an additional amount per share (the "Working Capital Amount" and, together with the $7.09 offer price, the "Cash Purchase Consideration") to be determined by the Board of Directors of Verenex and the LIA at the time of completion of the transaction based on the aggregate amount, if any, of positive net working capital in Verenex at such time (determined on a pro-forma basis in accordance with the provisions of the Agreement). It is a condition to the completion of the transaction that such pro-forma closing working capital amount not be negative. Based on preliminary estimates agreed to by the LIA, Verenex expects the Working Capital Amount to be a nominal amount of approximately $0.15 per share, assuming completion of the transaction in mid-December. The final determination of the Working Capital Amount is subject to a number of factors, primarily the period of time for completion of the transaction, the rate of ongoing expenditures (primarily general and administrative expenses) and closing costs.
An irrevocable letter of credit in the amount of $350 million, the aggregate purchase consideration payable by the LIA to acquire Verenex, has been deposited in escrow on behalf of the LIA as security for the availability of the aggregate purchase funds upon satisfaction or waiver of the conditions set out in the Agreement.
The transaction will be completed by way of plan of arrangement (the "Arrangement"), to be submitted to the holders of Verenex securities (Verenex shares, options and performance warrants) for approval at a meeting scheduled for December 11, 2009. In addition to the working capital condition mentioned above, the Arrangement is conditional upon, among other things, securityholder approval of 75% of the votes cast at the meeting, court and regulatory approvals and certain other customary conditions for an agreement of this nature. The parties have provided for a higher than normal voting approval threshold in lieu of granting dissent rights to shareholders. The LIA has represented in the Agreement that the Arrangement has received all necessary Libyan government approvals. The Agreement has been filed on SEDAR at www.sedar.com.
All of the members of the Verenex Board, its executive officers and its major shareholder, Vermilion Resources Ltd. (representing in aggregate approximately 45.2% of the common shares on a fully diluted basis), have entered into voting support agreements pursuant to which they have agreed to vote their securities in favour of the Arrangement.
This press release contains forward-looking financial and operational information, including but not limited to proposed budgets, earnings, funds flow, cash reserves 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; 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), 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 November 9, 2009, of the operating and financial results of Verenex Energy Inc. ("Verenex" or the "Company") for the three and nine months ended September 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 nine months ended September 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 November 5, the Company announced it had entered into a definitive arrangement agreement with the Libyan Investment Authority (the "LIA") pursuant to which the LIA, through a subsidiary, has agreed to acquire all of the Verenex shares issued and outstanding upon completion of the transaction at a price per share in cash equal to $7.09 plus an additional amount per share (the "Working Capital Amount" and, together with the $7.09 offer price, the "Cash Purchase Consideration") to be determined by the Board of Directors of Verenex and the LIA at the time of completion of the transaction based on the aggregate amount, if any, of positive net working capital in Verenex at such time (determined on a pro-forma basis in accordance with the provisions of the Agreement). It is a condition to the completion of the transaction that such pro-forma closing working capital amount not be negative. Based on preliminary estimates agreed to by the LIA, Verenex expects the Working Capital Amount to be a nominal amount of approximately $0.15 per share, assuming completion of the transaction in mid-December. The final determination of the Working Capital Amount is subject to a number of factors, primarily the period of time for completion of the transaction, the rate of ongoing expenditures (primarily general and administrative expenses) and closing costs.
An irrevocable letter of credit in the amount of $350 million, the aggregate purchase consideration payable by the LIA to acquire Verenex, has been deposited in escrow on behalf of the LIA as security for the availability of the aggregate purchase funds upon satisfaction or waiver of the conditions set out in the Agreement.
The transaction will be completed by way of plan of arrangement (the "Arrangement"), to be submitted to the holders of Verenex securities (Verenex shares, options and performance warrants) for approval at a meeting scheduled for December 11, 2009. In addition to the working capital condition mentioned above, the Arrangement is conditional upon, among other things, securityholder approval of 75% of the votes cast at the meeting, court and regulatory approvals and certain other customary conditions for an agreement of this nature. The parties have provided for a higher than normal voting approval threshold in lieu of granting dissent rights to shareholders. The LIA has represented in the Agreement that the Arrangement has received all necessary Libyan government approvals. The Agreement has been filed on SEDAR at www.sedar.com.
All of the members of the Verenex Board, its executive officers and its major shareholder, Vermilion Resources Ltd. (representing in aggregate approximately 45.2% of the common shares on a fully diluted basis), have entered into voting support agreements pursuant to which they have agreed to vote their securities in favour of the Arrangement.
FORWARD-LOOKING INFORMATION
This MD&A contains forward-looking financial and operational information, including but not limited to proposed budgets, earnings, funds flow, cash reserves 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; 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), 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 $10 thousand was earned in the third quarter of 2009 (2008 - $0.3 million) compared to $21 thousand for the second quarter of 2009 on cash balances invested in excess of expenditure requirements. The decrease versus the third quarter of 2008 is due to the decreased cash position and lower interest rates during the third quarter of 2009.
The foreign exchange loss for the third quarter of 2009 was $0.7 million as compared to a gain of $2.0 million for the third quarter of 2008, and a loss of $0.7 million in the second quarter of 2009. The foreign exchange loss in the third quarter of 2009 compared to the third 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 nine months ended September 30, 2009, non-cash stock compensation expense related to stock options and performance warrants was $0.6 million and $1.6 million (2008 - $0.4 million and $1.9 million). For the three and nine months ended September 30, 2009, the stock compensation liability related to SAR's, PSU's and RSU's first issued in 2008, was $0.8 million and $2.0 million (2008 - $0.2 million and $0.5 million).
The Company received approval from the Shareholders at its August 10, 2009 AGM to modify the terms of 896,200 options previously granted. The life of these options was extended by 20 months to March 1, 2011. The Company has completed a calculation of the incremental value of this extension and recognized a $0.2 million stock compensation expense during the third quarter ending September 30, 2009.
General and Administration ("G&A")
The Company capitalized $1.3 million and $4.3 million of general and administrative costs relating to exploration and development activities for the three and nine months ended September 30, 2009 (2008 - $1.1 million and $4.2 million). The net G&A amounts that are expensed represent salaries, employee benefits, office costs, legal and related party services not directly attributable to ongoing exploration and development capital projects.
Effects of Exchange Rate Fluctuations
The Company's operations are conducted primarily in jurisdictions where the United States dollar (US$) is the business currency. A large proportion of the Company's costs, assets and liabilities during the quarter ended September 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 nine months ended September 30, 2009 (2008 - $0.2 million and $0.6 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 in 2008. These transactions were measured at the exchange amount being the consideration established and agreed to by the related parties. All transactions were undertaken under the same terms and conditions as transactions with non-related parties. Amounts due to related parties at September 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. Effective April 1, 2008 the monthly charge was five thousand dollars per month. The Agreement was terminated effective February 27, 2009. During the nine months ended September 30, 2009 Verenex was billed ten thousand dollars (2008 - sixty 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 $8.9 million at September 30, 2009 compared to $29.8 million as at December 31, 2008, including cash amounting to $11.9 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 receivable 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.
