Pine Cliff Energy Ltd. Announces Second Quarter Results
TSX - Toronto Stock Exchange
CALGARY, Aug. 29 /CNW/ -
Highlights
For the periods ended
Three Months Ended Six Months Ended June 30 June 30 2008 2007 2008 2007 Financial ($) Revenue - oil and gas 138,415 176,590 281,531 375,105 Funds Flow from Operations(1) (142,894) (252,435) (302,435) (418,321) Per Share Basic (0.00) (0.01) (0.01) (0.01) Per Share Diluted (0.00) (0.01) (0.01) (0.01) Loss (295,111) (346,274) (612,224) (616,383) Per Share Basic (0.01) (0.01) (0.01) (0.02) Per Share Diluted (0.01) (0.01) (0.01) (0.02) Capital Expenditures 2,516,214 233,648 2,797,602 2,430,124 Total Assets 12,043,617 3,946,888 Working Capital 5,278,074 182,319 Shareholders' Equity 11,799,266 3,749,025 OPERATIONS Oil and NGL's Barrels Per Day - 5 1 6 Average Price ($ per barrel) - 63.29 104.38 60.73 Natural Gas MCF Per Day 142 226 155 226 Average Price ($ per MCF) 10.84 7.22 9.40 7.63 Total Barrels of Oil Equivalent Per Day(2) 24 43 27 44
(1) Funds flow from operations is not a recognized measure under GAAP. Management believes that in addition to cash flow from operations, funds flow from operations is a useful supplemental measure as it demonstrates the Company's ability to generate the funds necessary to fund future growth through capital investment. Investors are cautioned, however, that this measure should not be construed as an indication of the Company's performance. The Company's method of calculating this measure may differ from other issuers and accordingly, it may not be comparable to that used by other issuers. For these purposes, the Company defines funds flow from operations as funds provided by operations before changes in non-cash operating working capital items excluding foreign exchange loss and asset retirement expenditures.
(2) BOEs are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation.
Report to Shareholders
The second quarter of 2008 was marked by difficult drilling conditions in Argentina and operating conditions in Canada.
Canadian Operations:
Pine Cliff's producing property is located in the Sundance area of West Central Alberta in which the Company has a 13.7 percent working interest in 5,280 acres (723 net) of Crown land. Production decreased 16 percent in the second quarter of 2008 compared to the first quarter of the year mainly due to a well that experienced significant production declines and was eventually shut-in during the second quarter.
Pine Cliff is participating in one multi-zone well in the Sundance area (15 percent working interest). The well is expected to be drilled by the end of this year. Pine Cliff will continue to assess appropriate business opportunities and potential acquisitions in the Western Canadian Sedimentary Basin to further supplement its production base.
Argentinean Operations:
Three wells were drilled in the Canadon Ramirez property in Argentina during the first quarter of the year. Testing and evaluating had commenced on the first well but had to be suspended due to an ongoing strike by oilfield workers and a national shortage of diesel fuel. In addition, severe weather disruptions including a winter snow storm, a volcano eruption and an earthquake prevented safe travel to the area for workers and further delayed Pine Cliff's progress.
Pine Cliff has continued to be in contact with the operator to assess when labour issues will be resolved and the diesel shortage situation rectified so that the testing and completing of all three wells may be resumed. At this time, we anticipate restarting activities in September of this year. Based on the results of the three-well program, Pine Cliff has identified several follow-up locations.
Pine Cliff has completed its 3D seismic program on the Laguna de Piedra concession in Argentina. During the second quarter, the data was processed and evaluation is now underway. Pine Cliff has a 25 percent participating interest in this property and anticipates drilling one well in the first quarter of 2009.
The Farmor for Pine Cliff's third potential farm-in (San Jorge Basin) has advised that the provincial government is withdrawing the concession and new terms need to be adopted for the concession. The Farmor and the provincial government continue with their negotiations to resolve this issue. Further details will be provided when additional information is received from the Farmor.
Despite the difficult operating and political conditions in Argentina, the Company remains optimistic in regard to its large land base and the potential for a large number of drill locations on anomalies that may be significant in size. In addition, a shortage of most commodities still exists in Argentina and the Company is of the view that the Argentinean Federal government will likely have to modify its energy policy to once again entice oil and natural gas companies to become more active.
Finance:
Pine Cliff continues to maintain a healthy financial position. At the end of the second quarter of 2008, the Company had positive working capital of $5,278,074 to fund future exploration and development of both the Canadian and international properties.
Outlook:
Although circumstances continue to be challenging, Pine Cliff is looking forward to entering a more active period once again. The Company's sound financial position and high-potential opportunities provide a solid platform from which to move forward.
George F. Fink President, CEO and Director August 26, 2008
FORWARD-LOOKING INFORMATION
Certain statements contained in this press release include statements which contain words such as "anticipate", "could", "should", "expect", "seek", "may", "intend", "likely", "will", "believe" and similar expressions, statements relating to matters that are not historical facts, and such statements of our beliefs, intentions and expectations about development, results and events which will or may occur in the future, constitute "forward-looking information" within the meaning of applicable Canadian securities legislation and are based on certain assumptions and analysis made by us derived from our experience and perceptions. Forward-looking information in this press release includes, but is not limited to: expected cash provided by continuing operations; future capital expenditures, including the amount and nature thereof; oil and natural gas prices and demand; expansion and other development trends of the oil and natural gas industry; business strategy and outlook; expansion and growth of our business and operations; and maintenance of existing customer, supplier and partner relationships; supply channels; accounting policies; credit risks; and other such matters.
All such forward-looking information is based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. The risks, uncertainties, and assumptions are difficult to predict and may affect operations, and may include, without limitation: the risks of foreign operations; foreign exchange fluctuations; equipment and labour shortages and inflationary costs; general economic conditions; industry conditions; changes in applicable environmental, taxation and other laws and regulations as well as how such laws and regulations are interpreted and enforced; the ability of oil and natural gas companies to raise capital; the effect of weather conditions on operations and facilities; the existence of operating risks; volatility of oil and natural gas prices; oil and gas product supply and demand; risks inherent in the ability to generate sufficient cash flow from operations to meet current and future obligations; increased competition; stock market volatility; opportunities available to or pursued by us; and other factors, many of which are beyond our control. The foregoing factors are not exhaustive.
Actual results, performance or achievements could differ materially from those expressed in, or implied by, this forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do, what benefits will be derived therefrom. Except as required by law, Pine Cliff disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise.
The forward-looking information contained herein is expressly qualified by this cautionary statement.
Production
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, 2008 2008 2007 2008 2007 Crude oil and NGLs (barrels per day) - 4 5 1 6 Natural gas (mcf per day) 142 168 226 155 226 Total BOE per day(1) 24 32 43 27 44 (1) BOEs are calculated using a conversion ratio of 6 MCF to 1 barrel of oil. The conversion is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and as such may be misleading if used in isolation
Production volumes for natural gas decreased 31 percent in the first half of 2008 compared to the first half of 2007 and 16 percent in Q2 2008 compared to the first quarter of 2008. During the third quarter of 2007, one of the Company's commingled gas wells with various production zones started to produce sand and production declined significantly. The operator of the well performed an unsuccessful workover in December of 2007 to attempt to optimize production from all zones. Production continued to decline and the well was eventually shut-in in June.
Revenue
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, (Cdn $) 2008 2008 2007 2008 2007 Revenue: Oil and gas sales 138,415 143,116 176,590 281,531 375,105 Average Realized Prices Crude oil and NGLs (per barrel) - 56.91 63.29 104.38 60.73 Natural gas (per MCF) 10.84 8.17 7.22 9.40 7.63
The decrease in revenue from oil and natural gas sales was due to a significant decline in production in the first six months of 2008 compared to the first half of 2007, despite the higher commodity prices for natural gas in 2008. Revenue from the second quarter of 2008 compared to the first quarter of 2008 was approximately the same as the rise in commodity prices for natural gas offset the decrease in production.
Royalties
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 Crown royalties 21,864 34,130 41,585 55,994 72,375 Gross overriding royalties 10,049 2,738 5,296 12,787 11,848 Total royalty expense 31,913 36,868 46,881 68,781 84,223
Crown royalties were significantly lower in the first half of 2008 due to the decreased production volumes on wells subject to Crown royalties. Gross overriding royalties were comparable for the same periods largely due to the increase in commodity prices for natural gas, which offset the decrease in production. The decrease in Crown royalties quarter over quarter was mainly due to the decreased production volumes on the wells subject to crown royalties. Gross overriding royalties increased primarily as a result of the increase in natural gas commodity prices.
Interest Income
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 Interest income 26,162 68,168 4,594 94,330 21,830
The Company maintains both Canadian and US investment accounts that pay interest at prime less various percentages as long as the Company maintains certain minimum account balances. The Company has increased its cash balance with regard to proceeds received from the rights offering done in the fourth quarter of 2007. The Company was therefore earning interest at higher rates and on an increased cash balance. Interest income for Q2 2008 decreased by $42,006 from Q1 2008 due to the lower cash balance on hand as $2.5 million was spent on capital projects in Argentina in the second quarter of 2008.
Production Costs
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 Production costs 13,273 26,249 26,350 39,522 67,306 $ per BOE 7.25 9.55 6.79 8.51 8.93
Production costs for the six months ended June 30, 2008 were $39,522 or $8.51 per BOE (2007 - $67,306 or $8.93 per BOE). The reduction in production costs quarter over quarter was due to lower gas compression and transportation charges resulting from the lower production volumes during the quarter.
General and Administrative (G&A) Expense
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 G&A expense 359,043 282,129 349,160 641,172 644,079
General and administrative expenditures were comparable between the first six months of 2008 and the first six months of 2007. The increase in expenses in the second quarter over the first quarter of 2008 was primarily due to increased professional fees due to continuous disclosure requirements relating to year end reporting and increased banking costs due to Argentina's Government charging a 0.6 percent transfer fee on all cash deposits and withdrawals from Argentinean bank accounts.
Pine Cliff does not have any employees at the present time but engages the services of consultants on a contract or temporary basis. Pine Cliff's subsidiary CanAmericas Energy Ltd. (CanAmericas) has also engaged the services of two individual professionals as senior management and officers of CanAmericas.
Foreign Exchange Gain (Loss)
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 Foreign exchange gain (loss) 101,624 2,310 (11,228) 103,934 (19,648)
The Company maintains foreign denominated bank accounts to facilitate its foreign operations. The gain on foreign exchange in the first half of 2008 and the loss in the first half of 2007 relates to the depreciation of the Canadian dollar from December 31, 2007 to June 30, 2008, as opposed to a foreign exchange loss in 2007 as the Canadian dollar appreciated over that period. The majority of the foreign exchange gain in the first half of the year was recorded in the second quarter of 2008 as the Canadian dollar depreciated more over that period.
Stock Based Compensation
Stock based compensation for the first half of 2008 was $206,424 (2007 - $58,520). The Company has a stock-based compensation plan. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees of the management company (see section "Related Party Transactions"), directors and consultants in respect of the Company. The Company issued 1,108,000 stock options in Pine Cliff during the fourth quarter of 2007 and only 65,000 in the first half of 2008, causing an increase in stock based compensation for 2008 over 2007. The Company estimated the 2008 stock options fair value at $33,761 ($0.52 per option) using the Black-Scholes option pricing model, assuming a weighted average risk free interest rate of 2.89 percent, weighted average expected volatility of 72.1 percent, weighted average expected life of 2.5 years and no annual dividend rate. As of June 30, 2008 approximately $321,000 of unamortized stock based compensation exists and will be amortized over two years, approximately $201,000 in 2008 and $120,000 in 2009.
Depletion, Depreciation and Accretion
During the first half of 2008 the Company provided $128,544 (2007 - $160,773) for depletion, depreciation and accretion of its property and equipment. The decrease is related to lower production volumes in 2008. Depletion, depreciation and accretion declined modestly from the first quarter of 2008 due to lower production volumes.
Income Taxes
The Company follows the liability method of accounting for income taxes under which the income tax provision is based on the temporary differences in the accounts calculated using income tax rates expected to apply in the year in which the temporary differences will reverse. The Company has sufficient tax pools so that it is not liable for current income tax.
The Company has the following tax pools which can be used to reduce future taxable income:
Rate of Utilization % Amount Undepreciated capital costs 25 $ 372,596 Foreign exploration expenditures 10 2,687,074 Share issue costs 20 109,311 Canadian exploration expenditures 100 392,110 Canadian development expenditures 30 260,768 Canadian oil and gas expenditures 10 622,757 Non-capital loss carry forward(x) 100 2,527,335 $ 6,971,951 (x) $750,298 expires 2026, $1,523,672 expires 2027 and $253,365 expires in 2028
Non-Controlling Interest
A private foreign company (Foreign Corp.) owns seven percent of CanAmericas. The first half loss applicable to non-controlling interest for 2008 of $25,179 (2007 - $23,457) and the Q2 2008 loss applicable to non-controlling interest of $1,837 (Q1 2008 - $23,342) relates to its share of revenues and costs associated with CanAmericas' South American activities to a maximum of its original equity investment. Until CanAmericas is producing net income there will be no further losses allocated to the non-controlling interest.
Loss
Three months ended Six months ended June 30, Mar 31, June 30, June 30, June 30, ($) 2008 2008 2007 2008 2007 Loss 295,111 317,113 346,274 612,224 616,383 Loss per share (0.01) (0.01) (0.01) (0.01) (0.02)
The loss incurred in the first half of 2008 remained at similar levels to the loss incurred in the first half of 2007 as the decrease in oil and gas revenue was offset by lower royalties, production costs, increased interest income and a foreign exchange gain as the Canadian dollar depreciated against the US dollar. The decrease in loss from Q2 2008 over Q1 2008 is primarily due to higher general and administrative costs for the Company's South American operations, which was offset by foreign exchange gains.
Funds Flow from Operations
Funds flow from operations increased to negative $302,435 in the first six months of 2008 from negative $418,321 in the first half of 2007. The increase from 2007 was due to the foreign exchange gain, increased interest income and decreased royalties and production costs, which was offset by lower oil and gas revenue. The second quarter 2008 funds flow of ($142,894) increased from the first quarter of 2008 of ($159,541) due to the increased foreign exchange gain in Q2 2008 offset partially by increased general and administrative costs regarding the Company's South American activities.
The following reconciliation compares funds flow for the first six months of 2008 and the corresponding 2007 period to the Company's cash flow from operating activities as calculated according to Canadian generally accepted accounting principles:
2008 2007 Cash flow from operating activities ($429,064) ($378,004) Items not affecting funds flow Accounts receivable 40,884 (87,854) Prepaid expenses 9,553 2,535 Accounts payable and accrued liabilities (27,742) 64,650 Foreign exchange gain (loss) 103,934 (19,648) Funds flow for the period ($302,435) ($418,321)
Related Party Transactions
Pine Cliff has a management agreement with Bonterra Energy Corp. (Bonterra Corp.), a wholly owned subsidiary of Bonterra Energy Income Trust and a company with common directors and management, to have Bonterra Corp. provide executive services (President and CEO, CFO and COO), accounting services, oil and gas administration and office administration. The management fee consists of a monthly fee of $19,800, three percent of net earnings before income taxes, $250 per month per operated producing well and $150 per month per water injector well plus out of pocket costs. Total fees for the six months ended June 30, 2008 were $118,800 (2007 - $108,000) plus minimal out of pocket costs. This agreement can be cancelled by either party by giving 90 days notice.