Pine Cliff Energy Ltd. Announces Third Quarter Results
TSX - Toronto Stock Exchange
CALGARY, Nov. 26 /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 nine months ended September 30, 2007.
Highlights
For the periods ended Three Months Ended Nine Months Ended September 30 September 30 2007 2006 2007 2006 FINANCIAL ($) Revenue - oil and gas 95,160 90,386 470,265 490,869 Funds Flow from Operations(1) (287,764) (113,095) (706,085) (372,415) Per Share - Basic (0.01) (0.00) (0.02) (0.01) Per Share - Diluted (0.01) (0.00) (0.02) (0.01) Loss (383,510) (211,784) (999,893) (805,030) Per Share - Basic (0.01) (0.01) (0.03) (0.02) Per Share - Diluted (0.01) (0.01) (0.03) (0.02) Capital Expenditures 174,289 (3,463) 2,604,413 252,699 Total Assets 4,173,333 4,700,305 Working Capital (Deficiency) (314,684) 3,030,822 Shareholders' Equity 3,371,089 4,411,915 OPERATIONS Oil and NGL's Barrels Per Day 1 5 4 6 Average Price ($ per barrel) 75.83 61.75 62.07 65.00 Natural Gas MCF Per Day 163 131 204 184 Average Price ($ per MCF) 5.83 5.17 7.14 7.73 Total Barrels Per Day(2) 27 27 37 37
(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 continues to search for investment opportunities in South America and Canada and to date has been successful in completing three farm-in arrangements in Argentina 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 $11,240,000 U.S. over the next three years of which $2,557,495 Cdn ($2,208,066U.S.) has been expended to September 30, 2007.
The Argentina government also recently announced that it will be increasing its export tax on oil, which will have negative implications on cash netbacks for oil production. Pine Cliff will be studying these implications as details become available to determine the overall effect on its operations.
Financing by a rights offering to existing shareholders has been completed subsequent to September 30, 2007. Pine Cliff shareholders received rights to subscribe for one common share for each four shares held and had an additional subscription privilege to subscribe for any common shares not taken up on the exercise of rights. The rights offering options had an exercise price of $1.10 per share. The Company issued 8,312,654 common shares for proceeds of $9,105,969 net of $37,950 of share issue costs. For further details concerning the farm-in arrangements and financing of these arrangements, kindly refer to the applicable sections outlined below in this release.
South American Activities
The Company through its 93% owned subsidiary CanAmericas Energy Ltd. ("CanAmericas") will be participating in a three well drilling program in the Canadon Ramirez Concession. This program is scheduled to start in January 2008. CanAmericas is also planning to run a 3D seismic program on its Laguna de Piedra Concession in the first quarter of 2008. Also the Company is currently in the process of finalizing the terms and planning its work program on the exploration permit in the San Jorge Basin concessions. The terms of the commitments for all three concessions are discussed below.
Production
Production volumes increased in the nine months of 2007 to 204 MCF per day from 184 MCF per day for the nine months of 2006. During the third quarter of each year the operator of the gas plant, where approximately 80 percent of the Company's production is processed, performs an annual turnaround resulting in having to shut in wells for lengthy periods of time. The wells were shut in for a longer period in 2006 than in 2007. The Company's production for the third quarter of 2007 compared to the second quarter of 2007 decreased from 226 MCF per day to 163 MCF per day due to the turnaround.
Revenue
Revenue from petroleum and natural gas sales was $470,265 during the first nine months of 2007 compared to $490,869 for the first nine months of 2006. The decline was due to an approximate 8% decline in commodity prices in the first nine months of 2007 compared to the first three quarters of 2006. Revenue from the third quarter of 2007 compared to the second quarter of 2007 decreased by $81,430 due to a significant decrease in production (see discussion above) and lower commodity prices for natural gas.
Royalties
Royalties consist of Crown royalties of $86,166 (2006 - ($3,544)) paid to (recovered from) the Province of Alberta and gross overriding royalties of $19,186 (2006 - $22,833). Crown royalties are significantly higher in the first three quarters of 2007 due to the expiry of the Crown royalty holiday. In 2007 gross overriding royalties are lower mainly because of the decline in commodity prices for natural gas. Royalties for Q3 2007 consist of Crown royalties of $13,791 (Q2 2007 - $41,585) and gross overriding royalties of $7,338 (Q2 2007 - $5,296). The decrease in Crown royalties is due to the decrease in production of natural gas and prices. Gross overriding royalties increased mainly due to an allocation of a prior year adjustment of $2,538 by the operator.
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 did not earn interest during Q3. With the funds received as a result of the rights offering the Company will again receive interest income commencing in Q4.
Production Costs
Production costs for the nine months ended September 30, 2007 were $99,363 or $9.91 per BOE (2006 - $91,066 or $9.14 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 increase in Q3 production costs ($32,057) from Q2 production costs ($26,350) was due to the payment of annual rents related to surface and mineral leases in Q3.
General and Administrative
General and administrative expense for the first nine months of 2007 was $959,336 ($315,257 in the third quarter) compared to $789,640 for the first nine months of 2006 and $349,160 for the second quarter of 2007. The primary reason for the increase in expenses in the first three quarters of 2007 over the first three quarters of 2006 was due to the Company incurring additional professional fees related to its activities in South America and for continuous disclosure obligations. The decrease in expenses of $33,903 in the third quarter over the second quarter of 2007 was primarily due to reduced administrative activities in South America and fewer 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. CanAmericas has on a full time basis engaged the services of two professionals as senior management and officers of CanAmericas.
Foreign Exchange Gain (Loss)
In February 2006, the Company incorporated 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. Further Canadian funds, from Pine Cliff, have also been loaned to CanAmericas and converted to US funds. The funds held in US cash have caused a loss in foreign exchange as the Canadian dollar appreciated against the US dollar in 2007 and 2006. The first nine months of 2007 the Company had a foreign exchange loss of $34,129 ($52,157 - 2006).
Stock Based Compensation
Stock based compensation for the first three quarters of 2007 was $88,043 (2006 - $175,061). 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 102,000 stock options in Pine Cliff during the nine months of 2007. The Company estimated the stock options fair value at $44,712 ($0.44 per option) using the Black-Scholes option pricing model, assuming a weighted average risk free interest rate of 4.35 percent, weighted average expected average volatility of 62.7 percent, weighted average expected average life of 2.8 years and no annual dividend rate.
Depletion, Depreciation, and Accretion
During the first three quarters of 2007 the Company provided $223,260 (2006 - $183,337) for depletion, depreciation and accretion of its property and equipment. The increase is related to additional production volumes in 2007. Depletion, depreciation and accretion decreased in the third quarter of 2007 ($62,487) compared to the second quarter of 2007 ($81,167) due to reduced production volumes, caused by downtime in the gas plant, where approximately 80 percent of the Company's production is processed as the operator performed an annual turnaround in Q3.
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 and its subsidiaries have the following tax pools which can be used to reduce their future taxable income:
Rate of Utilization % Amount Undepreciated capital costs 25 $324,237 Foreign exploration expenditures 10 2,557,496 Share issue costs 20 126,145 Non-capital loss carry forward(x) 100 1,646,551 Canadian exploration expenditures 100 392,110 Canadian development expenditures 30 427,201 Canadian oil and gas expenditures 10 728,371 $6,202,111 (x)$757,797 expires 2026 and $888,754 expires 2027
Non-Controlling Interest
As described above, Foreign Corp. owns seven percent of CanAmericas. The first nine months loss applicable to non-controlling interest for 2007 of $28,495 (2006 - $36,716) and the Q3 2007 loss applicable to non-controlling interest of $7,264 (Q2 2007 - $8,572) relates to its share of revenues and costs associated with CanAmericas' South American activities.
Loss
The loss in the first nine months of 2007 was $999,893 ($383,510 in the third quarter) compared to $805,030 in the corresponding 2006 period and $346,274 in the second quarter of 2007. The loss incurred in the first three quarters of 2007 increased from the first three quarters 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 reduction in 2007 of future taxes of $94,000 and a reduction in stock based compensation expense of $87,000. The increase in loss from Q3 2007 over Q2 2007 is due to lower production and commodity prices for natural gas.
Funds Flow from Operations
Funds flow from operations decreased to negative $706,085 in the first nine months of 2007 from negative $372,415 in the first nine months of 2006. The decreases from 2006 were due to the increased activity in South America, higher crown royalty payments and less interest income earned. Negative funds flow in the third quarter of 2007 of ($287,764) compared to the second quarter of 2007 of ($252,435) was higher due to less revenue because of lower production and lower commodity prices for natural gas, which was partially offset by lower administrative costs with regard to its South American activities.
The following reconciliation compares funds flow for the first nine 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:
2007 2006 Cash flow from operating activities ($550,285) ($149,734) Items not affecting funds flow Due from related party - (16,006) Accounts receivable (111,059) (217,258) Prepaid expenses 20,444 (1,048) Accounts payable and accrued liabilities (31,056) 28,500 Due to related party - 165 Asset retirement obligations settled - 35,123 Foreign exchange loss (34,129) (52,157) Funds flow for the period ($706,085) ($372,415)
Related Party Transactions
Due to a delay in financing caused by changing plans to finance by a private placement to a rights offering the Company required interim short term loans and as of September 30, 2007 the Company had borrowed a total of $500,000 from the President and CEO of the Company. Subsequent to September 30, 2007 after completion of the rights offering this amount has been repaid. The loan carried interest of Canadian prime plus 1%. The proceeds were used to cover operations expenses until the completion of the rights offering.
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 nine months ended September 30, 2007 were $162,000 (2006 - $162,000) 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 September 30, 2007, Pine Cliff had working capital of ($314,684) (December 31, 2006 - $2,963,513). As mentioned above under the "General" heading the Company has completed a rights offering resulting in net proceeds of approximately $9.1 million. These funds will be used to fund future exploration and development and property acquisitions in Canada and internationally.
The farm-in arrangements for two of the concessions in Argentina by CanAmericas required guarantees for the commitments that were made. Prior to completion of the rights offering these guarantees of $3,690,000 US by means of letters of guarantee were secured by guarantees from the president and the chief operating officer of the Company. The line of credit bears interest at US or CDN prime plus 2% per annum. Subsequent to September 30, 2007 the secured guarantee from the officers of the Company is no longer required and has been cancelled and has been replaced with a cash restriction on CanAmericas' cash to maintain a minimum balance of 1.25 times the amount of outstanding letters of guarantees and letters of credit.
As of September 30, 2007 CanAmericas has issued letters of guarantee in the amount of $3,411,618 US.
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 in note 8 to the financial statements.
Additional information relating to the Company may be found on SEDAR.COM. as well as on the Company's website at www.pinecliffenergy.com or by contacting George F. Fink, President, and CEO or Garth E. Schultz, Vice President - Finance, and CFO at (403) 269-2289 or by fax at (403) 265-7488.
PINE CLIFF ENERGY LTD. CONSOLIDATED BALANCE SHEETS As at September 30, 2007 (unaudited) and December 31, 2006
2007 2006 Assets Current Cash (Note 2) $302,297 $2,915,020 Accounts receivable 73,942 185,001 Prepaid expenditures 23,098 2,654 399,337 3,102,675 Property and Equipment (Note 5) Property and equipment 4,453,300 1,848,887 Accumulated depletion and depreciation (679,304) (457,552) Net Property and Equipment 3,773,996 1,391,335 $4,173,333 $4,494,010 Liabilities Current Accounts payable and accrued liabilities $210,684 $139,162 Due to related party (Note 3) 503,337 - 714,021 139,162