Pine Cliff Energy Ltd. Announces Second Quarter Results
TSX - Toronto Stock Exchange
CALGARY, Aug. 29 /CNW/ - Pine Cliff Energy Ltd. (www.pinecliffenergy.com) (TSX-V:PNE) is pleased to announce its financial and operational results for the three months and six months ended June 30, 2007.
Highlights
For the periods ended
Three Months Ended Six Months Ended June 30 June 30 2007 2006 2007 2006 FINANCIAL ($) Revenue - oil and gas 176,590 108,413 375,105 400,483 Funds Flow from Operations(1) (252,435) (337,020) (418,321) (259,320) Per Share - Basic (0.01) (0.01) (0.01) (0.01) Per Share - Diluted (0.01) (0.01) (0.01) (0.01) Loss (346,274) (526,107) (616,383) (593,246) Per Share - Basic (0.01) (0.01) (0.02) (0.02) Per Share - Diluted (0.01) (0.01) (0.02) (0.02) Capital Expenditures and Acquisitions 233,648 124,236 2,430,124 256,162 Total Assets 3,946,888 4,892,079 Working Capital 182,319 3,175,577 Shareholders' Equity 3,749,025 4,589,015 OPERATIONS Oil and NGL's - Barrels Per Day 5 4 6 6 Average Price ($ per barrel) 63.29 77.45 60.73 65.00 Natural Gas - MCF Per Day 226 139 226 211 Average Price ($ per MCF) 7.22 6.37 7.63 8.54 Total Barrels Per Day(2) 41 27 42 41
(1) Funds flow from operations is not a recognized measure under GAAP.
Management believes that in addition to net loss, funds flow from
operations is a useful supplemental measure as it demonstrates the
Company's ability to generate the cash 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
including foreign exchange loss.
(2) BOE's 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.
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.
General
The Company has continued to search for investment opportunities in South America and Canada and to date has been successful in completing three farm-out arrangements whereby Pine Cliff will earn an interest in 1,164,800 gross (605,400 net) acres of prospective land. The total commitment to earn these interests is approximately $13,000,000 U.S. over the next three years. Financing by a rights offering to existing shareholders is presently being proceeded with. Pine Cliff shareholders will receive rights to subscribe for one common share for each four shares presently held and will have an additional subscription privilege to subscribe for any common shares not taken up on the exercise of rights. Pricing and material terms are to be finalized with the applicable regulators. The Company will not be proceeding with the private placement financing which was announced on July 4, 2007. The general downturn in the market has made this type of transaction difficult at acceptable pricing. For further details concerning the farm-out arrangements and financing of these arrangements, kindly refer to the applicable sections outlined below in this release.
South American Activities
In the second quarter, the Company completed its third farm-in agreement. Pine Cliff will earn an interest in 11 gross townships (252,048 acres) (net 3 townships (63,012 acres)) of land. The Company has now been successful in negotiating three separate farm-in agreements which has resulted in the acquisition of interests in 51 gross townships (1,164,800 acres) (net 27 townships (605,400 acres)) of land. These three transactions provide a large land base with the potential for a large number of drill locations. The Company is continuing with its pursuit of producing and non-producing properties internationally and domestically.
Production
Production volumes increased in the first half of 2007 to 226 MCF per day from 211 MCF per day for the first half of 2006. During the second quarter of 2006 the operator of the gas plant, where approximately 80 percent of the Company's production is processed, performed an annual turnaround in May and June resulting in having to shut in wells which caused a reduction in production. Subsequent to the completion of the turnaround, capacity restrictions resulted in the continued shut-in of the Company's production. The Company's production for the second quarter of 2007 compared to the first quarter of 2007 was approximately the same as there was no change in the number of wells on production or their relative rate of production.
Revenue
Revenue from petroleum and natural gas sales was $375,105 during the first half of 2007 compared to $400,483 for the first half of 2006. The decline was due to an approximate 11% decline in commodity prices in the first six months of 2007 compared to the first half of 2006. Revenue from the second quarter of 2007 compared to the first quarter of 2007 decreased by $21,925 due to lower commodity prices for natural gas.
Royalties
Royalties consist of Crown royalties of $72,375 (2006 - $9,794) paid to the Province of Alberta and gross overriding royalties of $11,848 (2006 - $19,136). Crown royalties are significantly higher in the first quarter of 2007 due to the expiry of the Crown royalty holiday. Gross overriding royalties are lower mainly because of the decline in commodity prices for natural gas. Royalties for Q2 2007 consist of Crown royalties of $41,585 (Q1 2007 - $30,790) and gross overriding royalties of $5,296 (Q1 2007 - $6,552). The increase in Crown royalties is due to the Company having a full quarter of no Crown royalty holiday. Gross overriding royalties decreased mainly due to the decrease in natural gas commodity prices.
Interest Income
The Company maintains both Canadian and U.S. investment accounts that pay interest at prime less various percentages as long as the Company maintains certain minimum account balances. The Company has reduced its cash balance with the development of its South American operations and is currently earning interest at lower rates and on a reduced cash position. As fund balances are increased the rate will again increase.
Production Costs
Production costs for the six months ended June 30, 2007 were $67,306 or $8.93 per BOE (2006 - $67,930 or $9.05 per BOE). BOE's 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. The reduction in Q2 production costs ($26,350) from Q1 production costs ($40,956) was due to lower gas compression and transportation charges.
General and Administrative
General and administrative expense for the first six months of 2007 was $644,079 ($349,160 in the second quarter) compared to $569,198 for the first six months of 2006 and $294,919 for the first quarter of 2007. The primary reason for the increase in expenses in the first half of 2007 over the first half of 2006 was due to the Company incurring additional professional fees related to its activities in South America and for continuous disclosure obligations. The increase in expenses of $54,241 in the second quarter over the first quarter of 2007 was primarily due to increased professional fees for continuous disclosure obligations.
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. One of these officers is a geologist and geophysicist and the other is a geologist and engineer.
Foreign Exchange Loss
In February 2006, the Company incorporated a subsidiary company, CanAmericas to explore and develop oil and gas properties primarily in South America. CanAmericas is owned 93 percent by the Company and seven percent by a foreign private corporation ("Foreign Corp."). CanAmericas was initially financed with $1,400,000 U.S. for 5,600,000 common shares from the Company and $100,000 U.S. for 400,000 common shares from Foreign Corp. The loss on foreign exchange of $19,648 for the first half of 2007 relates to the appreciation of the Canadian dollar from December 31, 2006 to June 30, 2007, which is less than the foreign exchange loss of $54,905 in the first half of 2006 as the Company had less US funds on hand during 2007.
Stock Based Compensation
Stock based compensation for Q2 2007 was $58,520 (2006 - $112,099). The Company has a stock-based compensation plan for Pine Cliff. The Company records a compensation expense over the vesting period based on the fair value of options granted to employees, directors and consultants in respect of the Company. The Company issued 62,000 stock options in Pine Cliff during the first half of 2007. The Company estimated the stock options fair value at $18,789 ($0.30 per option) using the Black-Scholes option pricing model, assuming a weighted average risk free interest rate of 4.16 percent, weighted average expected average volatility of 60.4 percent, weighted average expected average life of 2.9 years and no annual dividend rate. The fair value of the options issued that were amortized in the first half of 2007 amounted to $4,529.
Depletion, Depreciation, and Accretion
During the first half of 2007 the Company provided $160,773 (2006 - $129,008) for depletion, depreciation and accretion of its property and equipment. The increase is related to additional production volumes in 2007. Depletion, depreciation and accretion was relatively the same from the second quarter of 2007 compared to the first quarter of 2007 as there was no significant changes in 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 $ 318,186 Foreign exploration expenditures 10 2,357,837 Share issue costs 20 83,824 Non-capital loss carry forward(x) 100 1,309,379 Canadian exploration expenditures 100 392,110 Canadian development expenditures 30 424,911 Canadian oil and gas expenditures 10 704,463 $ 5,590,710 (x) $757,797 expires 2026 and $551,582 expires 2027
Non-Controlling Interest
As described above, Foreign Corp. owns seven percent of CanAmericas. The first half loss applicable to non-controlling interest for 2007 of $23,457 (2006 - $25,746) and the Q2 2007 loss applicable to non-controlling interest of $10,798 (Q1 2007 - $12,659) relates to its share of revenues and costs associated with CanAmericas' South American activities.
Loss
The loss in the first six months of 2007 was $616,383 ($346,274 in the second quarter) compared to $593,246 in the corresponding 2006 period and $270,109 in the first quarter of 2007. The loss incurred in the first half of 2007 increased from the first half of 2006 due primarily to higher general and administrative costs in respect of the Company's South American operations as well as less revenue from lower commodity prices and higher royalties due to the expiry of Crown royalty holidays early in Q1 2007. These increases in expenditures and reduction of revenues were offset by a significant future tax adjustment in 2006. The increase in loss from Q2 2007 over Q1 2007 is due to higher general and administrative costs for the Company's South American operations as well as lower commodity prices for natural gas.
Funds Flow from Operations
Funds flow from operations decreased to negative $418,321 in the first six months of 2007 from negative $259,320 in the first half of 2006. The decreases from 2006 were due to the increased activity in South America. The second quarter 2007 funds flow of ($252,435) from the first quarter of 2007 of ($165,886) was significantly higher due to further South American activities and decreased revenue from lower commodity prices for natural gas.
The following reconciliation compares funds flow for the first six months of 2007 and the corresponding 2006 period to the Company's cash flow from operating activities as calculated according to Canadian generally accepted accounting principles:
For the six month periods ending June 30, 2007 2006 Cash flow from operating activities ($378,004) $86,914 Items not affecting funds flow Accounts receivable (87,854) (287,057) Prepaid expenses 2,535 603 Accounts payable and accrued liabilities 64,650 (4,875) Foreign exchange loss (19,648) (54,905) Funds flow for the period ($418,321) ($259,320)
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 $18,000, 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, 2007 were $108,000 (2006 - $108,000) plus minimal out of pocket costs. This agreement can be cancelled by either party by giving 90 day's notice.
Liquidity and Capital Resources
As of June 30, 2007, Pine Cliff had positive working capital of $182,319 (December 31, 2006 - $2,963,513).
Subsequent to June 30, 2007 the Company has commenced a rights offering. The Company shareholders will be granted the right to purchase one common share for every four common shares held with pricing and other material terms still to be finalized in negotiations with the applicable regulators. The additional funding will be used to complete commitments for the Argentina farm-ins (as discussed below) and for further activities in Canada. The previous private placement financing which was announced on July 4, 2007, will not be completed. The general downturn in the market has made this type of financing difficult at acceptable prices.
The Company has entered into commitments in relation to its farm-ins on three parcels of land in Argentina. A summary of the commitments is provided below:
Canadon Ramirez Concession
CanAmericas has committed to pay 100% of costs totaling $5,500,000 US, including 21% Value Added Tax ("V.A.T."), for work to be conducted on the concession within two years to earn a 49% participating interest. Work in the first year includes conducting and interpreting a 75 square mile 3D seismic program and drilling three wells. In the second year of the commitment CanAmericas is committed to spend the remainder of the $5,500,000 US on drilling. The gross acreage for this concession is 47,940 acres (net 23,490 acres).
As of June 30, 2007, the Company has expended $2,391,223 CDN ($2,052,393 US) including V.A.T. of $403,995 CDN ($346,722 US) on seismic costs in respect of the Canadon Ramirez Concession. The V.A.T. amount is recoverable against V.A.T. liabilities generated on sale of petroleum production in Argentina.
Commitment by Year ($000's US)
Year Amount 2007 4,630 2008 870 5,500
San Jorge Basin Permit
CanAmericas is committed to pay 100% of costs totaling approximately $4,620,000 US including V.A.T. to conduct an aero-magnetic and aero-gravity survey over the entire permit area, a 3D seismic survey over 39 square miles in the permit area and drill four wells to earn a 60% participating interest in the entire permit. The surveys are to be completed within one year of the effective date, the first two wells are to be drilled within two years of the effective date, and the remaining two wells are to be drilled within three years of the effective date. The costs for this project are recoverable from 100 percent of cash flow obtained from the wells drilled in this work program. As of June 30, 2007, no amounts have been expended on this permit.
The administration of the Colhue Huapi concession has recently been transferred from the Federal government to the Province of Chubut. Therefore, award of title and all future concession oversight will be conducted by the Chubut Province. Since this is a new situation for the Province there is no prior standard by which to make a prediction of the length of time that the award will take. The Province is extremely busy with the transfer of responsibility for hydrocarbons from the Federal Government. Discussions with the Chubut Provincial authorities have been very positive and encouraging and indications have been given that they are likely to assign the concession to CanAmericas within the next several months. The gross acreage for this concession is 864,870 acres (net 518,920 acres).