CALGARY, March 24 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX)
released its 2005 operating and financial results today. The company made
great progress in 2005. This was recognized in public capital markets as
Connacher's common shares were the top performing oil stock on the Toronto
Stock Exchange during 2005, increasing approximately 600 percent. Further
gains have been recorded in 2006. Certain information contained in this
release is forward-looking. See "Forward-looking Statements".
Highlights of the year are as follows:
- Proved and Probable recoverable reserves (2P) increased by
2,600 percent to 72.1 million boe; 3P reserves reached
112 million boe. Reserves are attributable to Connacher's conventional
properties, as estimated by DeGolyer and MacNaughton Canada Limited
("D&M"), and Pod One at Connacher's Great Divide oil sands project, as
estimated by GLJ Petroleum Consultants ("GLJ"). GLJ also recognized
best estimate prospective resources of 189.8 million barrels of oil-in
place contingent resources (359.6 million barrels on a high estimate
basis) with estimated initial best estimate recoverable resources of
83.7 million barrels (202.6 million barrels on a high estimate basis).
GLJ uses 15 meters of pay for its best estimate of resources (10
meters for its high estimate). None of the GLJ estimates incorporate
the results of Connacher's 2006 drilling program at Great Divide or
the reserves of Luke Energy Ltd. ("Luke") acquired on March 16, 2006.
All estimates are prepared in accordance with National Instrument
51-101 ("NI 51-101").
- An application was submitted for the 10,000 bbl/d Great Divide project
in Alberta's oil sands.
- $90 million of new equity was raised.
- The value of Connacher's Petrolifera holding skyrocketed with
significant new discoveries in Argentina
- Finished the year debt-free with working capital of $75 million
Subsequent to year end, Connacher:
- Acquired Luke through a Plan of Arrangement in March 2006
- Reached agreement to acquire refining assets in Montana
- Raised a further $100 million of new equity
- Saw its fully-diluted market capitalization surpass $1 billion, up
from approximately $15 million only 18 months ago.
The main development of 2005 was the recognition of the company's Great
Divide reserves. This was originally announced in August 2005. At year end,
our independent consultant GLJ reaffirmed their mid-year appraisal of our
reserves and resources at Great Divide. No recognition was given to the
current core hole program underway on our property in this region as the work
commenced subsequent to year end. Connacher intends to conduct quarterly
updates, as warranted by activity, in order to establish the magnitude of its
reserve and resource base which might be developed beyond Pod One, which is
all that is recognized in the reserve category in the two GLJ reports which
have been prepared for the company to date.
Based in part on the affirmation of its reserves by an independent
consultant, in August 2005 Connacher submitted an application to develop Pod
One (the "Great Divide Project") to the Alberta Energy and Utilities Board
("EUB") and Alberta Environment ("Environment"), with a view, on approval, to
the construction of the necessary plant and facilities and to drilling the
required horizontal well pairs to establish production of 10,000 bbl/d over a
25 year life for the project. Connacher is awaiting regulatory approval. The
company's current assessment is that at least 300 days from approval are
needed to complete the construction and commissioning of the plant.
Capital markets were receptive during 2005 and the company was able to
complete two equity financings to raise gross proceeds of $90 million. This
further strengthened our balance sheet and Connacher ended the year with no
debt, working capital of approximately $75 million and unused credit
facilities. Subsequent to year end, a further $100 million of gross proceeds
were raised from the sale of common shares from treasury at $5.25 per share.
These accretive financings reflected the company's performance and broadened
the shareholder and equity base of the company, reducing financial risk.
Connacher owns 13.3 million common shares of Petrolifera Petroleum
Limited (PDP-TSX) on a fully diluted basis. During 2005 and into early 2006,
Petrolifera made a number of significant new discoveries in Argentina.
Accordingly, Petrolifera's common share price has appreciated substantially,
benefiting Connacher. Connacher was responsible for the creation of
Petrolifera as a vehicle to liberate the value of its international holdings.
This has proven to be a successful undertaking, as the market value of
Connacher's holdings have appreciated to approximately $150 million compared
to a net cash investment of approximately $2 million. Connacher believes
Petrolifera has a positive growth outlook and remains a supportive investor.
Subsequent to year end, we have been busy. In March 2006 we closed the
purchase of Luke by way of a Plan of Arrangement. This transaction was
strategically important to Connacher as it provides access to current
production of natural gas with identifiable growth potential. As Connacher
will initially burn natural gas to make steam for its Great Divide Project,
Luke's production and reserves provide a physical hedge against volatile and
rising natural gas prices. During 2005, Luke generated revenues of
$43.5 million and cash flow from operations before non-cash items of
$26.2 million. This broadened production, reserve revenue and cash flow base
will be consolidated with Connacher's effective March 16, 2006, serving to
strengthen prospective operations. Connacher also believes there is attractive
potential associated with the Luke assets. The purchase was made for
approximately $91.5 million cash and approximately 30 million Connacher common
shares from treasury. As previously mentioned, Luke's reserves are to be
incorporated into Connacher's reserve base as at March 16, 2006. This will be
reported to Shareholders with our results for the period ended March 31, 2006
(scheduled for May 11, 2006 at the time of Connacher's scheduled Annual and
Special Meeting of Shareholders).
In conjunctions with the Luke purchase, Connacher secured a new
$55 million credit facility which remains unutilized. The company has
approximately $55 million in cash after the payment for the Luke shares and
discharge of related indebtedness, thus continuing to remain in a strong
financial position.
Connacher has also announced its intention to acquire, through its
wholly-owned subsidiary, Montana Refining Company, Inc., an 8,300 bbl/d
refinery and related assets located in Great Falls, Montana. This transaction
is scheduled to close on March 31, 2006. The purchase price is approximately
US$55 million comprised of cash and one million Connacher common shares to be
issued from treasury. Included in the assets being purchased is a considerable
inventory of refined products and other materials. Upon completion, the
refinery will serve as an equivalent to Connacher's upgrader for its Great
Divide Project, as the anticipated bitumen blend can be processed at the
refinery and it can be delivered through existing pipelines, once Connacher's
output at the Great Divide Project is connected. This strategic acquisition
accordingly provides Connacher with a hedge against the increasing volatility
and widening of crude oil price differentials for heavy oil such as will be
produced at Great Divide. In 2005, the refinery generated approximately
US$165 million of revenue, product costs of approximately US133 million, and
operating expenses of approximately US$21 million based on public information
provided by the vendor in a press release dated February 13, 2006. Connacher
is particularly pleased that most of the qualified employees who have operated
the refinery for many years will continue with the company, thus providing
access to excellent continuity and expertise. As with the Luke transaction,
this purchase strengthens the company's outlook. The purchase will be
initially financed primarily with a $US 51 million bridge loan from BNP
Paribas, a large international bank, the company's principal banker. Subject
to market conditions and final terms, it is Connacher's intention to repay
this loan with proceeds from a new term debt facility which the company will
attempt to complete after closing of the purchase. Connacher has signed a
non-binding mandate letter with BNP Paribas to raise US$148 million of term
debt in North American capital markets after the refinery purchase closes.
Surplus proceeds would be utilized to supplement the company's available cash
and cash flow to finance the construction of the Great Divide Project.
Connacher believes the Luke purchase, the refinery purchase and its 2006
equity financing initiatives will substantially reduce the risks associated
with oil sands projects. Furthermore, the current market value of Connacher's
holdings of Petrolifera further strengthens the company's overall financial
condition.
Focus will now be on execution in the construction of the plant and the
drilling of the horizontal SAGD well pairs at Great Divide once regulatory
approval is forthcoming. Additionally, we anticipate efforts will be directed
on expanding the Luke reserve and production base, primarily at Marten Creek,
Alberta; finalizing the 2006 core hole and 3D seismic programs at Great Divide
to determine whether additional potentially commercial pods have been
identified, so a new application for additional development can be considered
and then submitted to regulators; and finally, on the successful integration
of the company's refining activities into the Connacher sphere once that
transaction is completed. We will continue to monitor the growth activities of
Petrolifera as well.
During the year we added new two new directors and several new employees,
and we are continuing to consolidate and strengthen our company. Attached to
this press release is a summary highlight table for 2005 as well as the
company's Management's Discussion and Analysis ("MD&A").
We appreciate the support of our shareholders, who are now over 39,500 in
number after the Luke transaction. We are proud to have this large and
diversified shareholder base. Our common shares trade actively, providing
excellent liquidity for both buyers and sellers. We will endeavor to continue
delivering our best effort in translating performance and opportunity into
value which is recognized in the marketplace. We are well-positioned to
succeed.
As a result of a recent adjustment proposed by Canada Revenue Agency to
resource tax pools respecting assets acquired in 2002, the December 31, 2002
balance of property and equipment was increased by $850,000 and the future
income tax asset balance was reduced by $850,000. Additional depletion of
$124,000 ($72,000 net of tax) for 2002 and $92,000 ($55,000 net of tax) for
2003 was recorded as an adjustment to the opening balance of retained earnings
for 2004. There was no significant impact to the Statements of Operations for
2004 and 2005.
<<
THREE-YEAR HISTORICAL SUMMARY
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2005 2004 2003
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FINANCIAL HIGHLIGHTS
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($000 except per share amounts)
- Unaudited
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Total revenue 12,378 11,216 9,982
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Cash flow from operations(1) 4,358 2,409 3,353
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Basic, per share(1) 0.04 0.05 0.10
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Diluted, per share(1) 0.04 0.05 0.10
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Net earnings (loss) 991 (2,976) 4,055
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Basic, per share 0.01 (0.06) 0.13
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Diluted, per share 0.01 (0.06) 0.12
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Capital expenditures 16,807 17,629 35,790
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Proceeds on disposal of oil and
gas properties - 17,604 -
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Bank debt and note payable - - 12,100
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Working capital deficiency 75,427 3,549 (8,994)
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Net debt 75,511 3,914 (21,094)
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Shareholders' equity 129,108 40,375 24,055
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Total assets 134,813 46,090 53,650
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OPERATING HIGHLIGHTS
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Production
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Natural gas (mcf/d) 827 1,620 1,190
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Crude oil (bbl/d) 729 785 789
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Equivalent (boe/d)(2) 867 1,055 987
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Pricing
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Crude Oil ($/bbl) 42.33 31.42 30.03
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Natural gas ($/mcf) 1.37 3.62 2.95
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Selected Highlights ($/boe)(2)
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Weighted average sales price 36.91 28.95 27.56
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Royalties 8.16 5.54 4.98
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Operating and transportation costs 7.73 9.75 8.47
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Netback (1), (2), (3) 23.23 13.75 14.25
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Reserves (mboe)(2)(5)
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Proved 1,501 2,078 3,085
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Probable 70,598 1,763 2,489
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Possible 39,788 53,070 1,484
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Total 111,887 56,912 7,058
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COMMON SHARE INFORMATION
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Shares outstanding at end of
period (000) 139,940 89,627 45,903
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Weighted average shares
outstanding
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Basic (000) 106,114 50,908 32,362
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Diluted (000) 111,846 53,329 35,333
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Volume traded during the year
(000) 338,402 84,950 39,445
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Common share price ($)
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High 4.20 1.75 1.60
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Low 0.49 0.28 0.30
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Close, end of year 3.84 0.55 1.60
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(1) Cash flow from operations, cash flow per share and netback are not
measures that have any standardized meaning prescribed by Canadian
GAAP and therefore may not be comparable to similar measures
presented by other companies.
(2) 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 oil (6:1). The conversion is based on an energy equivalent
conversion method primarily applicable to the burner tip and does not
represent a value equivalency at the wellhead.
(3) For detailed netbacks by product type and by country, see MD&A -
"Operating Expenses and Operating Netbacks".
(4) No cash dividends were declared.
(5) 2004 reserves restated to reflect deconsolidation of Petrolifera.
Non-GAAP Measures
-----------------
Cash flow from operations before working capital changes ("cash flow"),
cash flow per share and cash flow per boe do not have standardized meanings
prescribed by GAAP and therefore may not be comparable to similar measures
used by other companies. Cash flow from operations before working capital
changes 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. Cash flow from
operations before working capital changes is reconciled with net earnings on
the Consolidated Statement of Cash Flows. Cash flow per share is calculated by
dividing cash flow by the weighted average shares outstanding, cash flow per
boe is calculated by dividing cash flow by the quantum of crude oil and
natural gas (expressed in boes) sold in the period. 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.
The following is dated as of March 23, 2006 and should be read in
conjunction with the consolidated financial statements of Connacher Oil and
Gas Limited ("Connacher" or the "company") for the years ended 2005 and 2004.
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles ("GAAP") and are presented
in Canadian dollars. In the third quarter of 2005 the company discontinued
consolidating the financial and operating results of Petrolifera Petroleum
Limited as the company was no longer considered to control Petrolifera due to
the election of independent directors and other factors. The investment in
Petrolifera has since been accounted for following the equity basis of
accounting. Comparative figures have not been restated.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is dated as of March 23, 2006 and should be read in
conjunction with the consolidated financial statements of Connacher Oil and
Gas Limited ("Connacher" or the "company") for the years ended 2005 and 2004
as contained in this annual report. The consolidated financial statements have
been prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and are presented in Canadian dollars. In the third
quarter of 2005 the company discontinued consolidating the financial and
operating results of Petrolifera Petroleum Limited as the company was no
longer considered to control Petrolifera due to the election of independent
directors and other factors. The investment in Petrolifera has since been
accounted for following the equity basis of accounting. Comparative figures
have not been restated.
This MD&A provides management's view of the financial condition of the
company and the results of its operations for the reporting periods.
Information contained in this report contains forward-looking information
based on current expectations, estimates and projections of future production,
capital expenditures and available sources of financing. It should be noted
forward-looking information involves a number of risks and uncertainties and
actual results may vary materially from those anticipated by the company.
There can be no assurance that the plans, intentions or expectations upon
which these forward-looking statements are based will occur. Forward-looking
statements are subject to risks, uncertainties and assumptions, including
those discussed in the company's Annual Information Form for the year ended
December 31, 2005, which include, without limitation, changes in market
conditions, law or governing policy, operating conditions and costs, operating
performance, demand for oil and gas, price and exchange rate fluctuation,
currency controls, commercial negotiations, regulatory processes and approvals
and technical and economic factors. Although Connacher believes that the
expectations represented in such forward-looking statements are reasonable,
there can be no assurance that such expectations will prove to be correct.
The forward-looking statements contained herein are expressly qualified
in their entirety by this cautionary statement. The forward-looking statements
included in this MD&A are made as of the date of the MD&A and Connacher
undertakes no obligation to publicly update such forward-looking statements to
reflect new information, subsequent events or otherwise unless so required by
applicable securities laws. Throughout the 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. Boes
may be misleading, particularly if used in isolation.
FINANCIAL AND OPERATING REVIEW
PRODUCTION, PRICING AND REVENUE
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2005 2004 2003
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Daily production/sales volumes
Crude oil - bbl/d 729 785 789
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Natural gas -mcf/d 827 1,620 1,190
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Combined - boe/d 867 1,055 987
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Product pricing ($)
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Crude oil - per bbl 42.33 31.42 30.03
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Natural gas - per mcf 1.37 3.62 2.95
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Boe - per boe 36.91 28.95 27.56
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Revenue ($000s)
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Petroleum and natural gas 11,678 11,180 9,931
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Interest and other 700 36 51
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Total 12,378 11,216 9,982
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In 2005, total revenue increased 10 percent to $12.4 million. Petroleum
and natural gas revenues were up four percent to $11.7 million from
$11.2 million for 2004. This is primarily attributable to a 35 percent
increase in the selling price of the company's crude oil offset by a seven
percent reduction in sales volumes. Crude oil sales volumes averaged 729 bbl/d
in 2005, down from the 785 bbl/d in 2004. This decrease is principally due to
offsetting the impact of deconsolidation of Petrolifera by increased
production at Battrum, Saskatchewan, where the company successfully drilled
new wells and worked over existing wells to minimize production declines. As a
consequence of increased world oil prices this year, the company's average
crude oil selling price increased to $42.33 per barrel compared to $31.42 per
barrel in 2004. Crude oil sales represented 96 percent of the company's total
production revenue. Natural gas sales contributed $414,000. Income, primarily
earned on short-term cash deposits since closing a $75 million equity
financing in early September 2005, provided $700,000.
ROYALTIES
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2005 2004
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Total Per boe Total Per boe
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For the year ended December 31 $2,582,561 $8.16 $2,138,916 $5.54
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percentage of petroleum and
natural gas revenue 22% 19%
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Royalties represent charges against production or revenue by governments
and landowners. Royalties in 2005 were $2,583,000 ($8.16 per boe, or 22
percent of petroleum and natural gas revenue) compared to $2,139,000 in 2004
($5.54 per boe, or 19 percent of petroleum and natural gas revenue).
From year to year, royalties can change based on changes to the weighting
in the product mix which is subject to different royalty rates, and rates
usually escalate with increased product prices. The increase from 2004 to 2005
reflect market conditions.
OPERATING EXPENSES AND NETBACKS
Company Netbacks (1)
For the year ended December 31
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2005 2004 % Change
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Per Per Per
Total boe Total boe Total boe
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Average daily
production
(boe/d) 867 1,055 (18)
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Petroleum and
natural gas
revenue $11,677,649 $36.91 $11,179,404 $28.95 4 27
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Other income 700,034 2.21 36,484 0.09 1819 2356
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Total revenue 12,377,683 39.12 11,215,888 29.04 10 35
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Royalties (2,582,561) (8.16) (2,138,916) (5.54) 21 47
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Net revenue 9,795,122 30.96 9,076,972 23.50 8 32
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Operating
costs (2,445,393) (7.73) (3,765,531) (9.75) (35) (21)
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Operating
netback $7,349,729 $23.23 $5,311,441 $13.75 38 69
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(1) Calculated by dividing related revenue and costs by total boe
produced, resulting in an overall combined company netback. Netbacks
do not have a standardized meaning prescribed by GAAP and, therefore,
may not be comparable to similar measures used by other companies.
This non-GAAP measurement is a useful and widely used supplemental
measure that provides management of Connacher with performance
measures and that provides shareholders and investors with a
measurement of Connacher's efficiency and its ability to fund future
growth through capital expenditures.
For 2005 operating costs of $2,445,000 were 35 percent lower than in the
prior year, and on a per unit basis, were reduced by 21 percent to $7.73 per
boe. The reduction in operating costs, both absolutely and on a per unit
basis, reflects the company's ability to more efficiently operate its
remaining petroleum and natural gas properties, having disposed of certain
higher-cost producing properties in July 2004. This was a significant
accomplishment as, in general, the industry's cost structure has been rising.
As a result of higher product prices and lower operating costs, operating
netbacks per boe for 2005 increased 69 percent to $23.23 per boe compared to
$13.75 in 2004.
GENERAL AND ADMINISTRATIVE EXPENSES
In 2005, general and administrative ("G&A") expenses were $2.7 million
compared to $2.0 million in 2004, an increase of 35 percent from 2004,
reflecting inflationary effects, increased costs associated with being a
public company as well as increased staffing that occurred later in 2004. G&A
of $145,000 was capitalized in 2005 (2004-$70,700).
Non-cash stock-based compensation costs of $1.6 million were recorded in
2005 (2004-$181,000). These charges reflect the fair value of all stock
options granted and vested in each year. Of this amount, $1.2 million was
expensed (2004 - $181,000) and $409,000 was capitalized (2004 - nil).
FINANCE CHARGES AND FOREIGN EXCHANGE
Financing charges were $308,000 in 2005, a 60 percent reduction from the
$770,000 reported in 2004. These charges expensed in 2005 were reduced
significantly from 2004 due to debt reduction resulting from equity financings
completed in late 2004 and in 2005.
When translating and consolidating Petrolifera's foreign denominated
financial results prior to deconsolidation, the impact of fluctuations on the
Argentinean peso relative to the Canadian dollar resulted in a foreign
exchange gain of $30,000 in 2005 compared to the loss of $46,000 in 2004. The
company's main exposure to foreign currency risk relates to the pricing of its
crude oil sales, which are denominated in US dollars.
DEPLETION, DEPRECIATION AND ACCRETION ("DD&A")
DD&A expense is calculated using the unit-of-production method based on
total estimated proved reserves. DD&A in 2005 was $5.8 million, a 16 percent
decrease from last year. This equates to $18.32 per boe of production compared
to $17.81 per boe last year.
Capital costs of $11.3 million (2004 - $4.4 million) related to the Great
Divide oil sands project, which is in a pre-production state have been
excluded from depletable costs. No proved reserves have yet been assigned to
this project. Additionally, undeveloped land acquisition costs of $2.5 million
(2004 - $3.4 million) were excluded from the depletion calculation, while
future development costs of $1.8 million (2004 - $2.4 million) for proved
undeveloped reserves were included in the depletion calculation.
Included in DD&A is a charge of $165,000 (2004 - $178,000) in respect of
the company's estimated asset retirement obligations. These charges will
continue to be necessary in the future to accrete the currently booked
discounted liability of $3.1 million to the estimated total undiscounted
liability of $5.4 million over the remaining economic life of the company's
oil and gas properties.
CEILING TEST
Oil and gas companies are required to compare the recoverable value of
their oil and gas assets to their recorded carrying value at the end of each
reporting period. Excess carrying values over ceiling value are to be written
off against earnings. No write-down was required for any reporting period in
2005 or 2004.
DILUTION GAIN
In 2004 and in 2005, the company's equity interest in Petrolifera was
diluted as a result of Petrolifera issuing common shares. In November 2004,
the company's equity interest was reduced from 100 percent to 61 percent; in
March 2005 it was reduced to 40 percent, and in late 2005, it was further
reduced to 33 percent. These reductions resulted in a dilution gain to the
company of $4.5 million in 2005 and $1.4 million in 2004.
LOSS APPLICABLE TO EQUITY INTEREST IN INVESTMENTS
The loss applicable to equity interests of $27,000 in 2005 represents
Connacher's equity interest share of Petrolifera's loss since commencing to
account for Petrolifera on an equity basis in the third quarter of 2005.
TAXES
The income tax provision of $870,000 in 2005 includes a current tax
provision of $102,000 which is principally the Large Corporations Tax in
Canada and a future income tax provision of $768,000.
As a result of a recent adjustment proposed by Canada Revenue Agency to
resource tax pools respecting assets acquired in 2002, the December 31, 2002
balance of property and equipment was increased by $850,000 and the future
income tax asset balance was reduced by $850,000. Additional depletion of
$124,000 ($72,000 net of tax) for 2002 and $92,000 ($55,000 net of tax) for
2003 was recorded as an adjustment to the opening balance of retained earnings
for 2004. There was no significant impact to the Statements of Operations for
2004 and 2005.
At December 31, 2005 the company had approximately $3 million of non-
capital losses which do not expire before 2009, $38 million of deductible
resource pools and $6 million of deductible financing costs.
NET EARNINGS
For the year ended December 31
-------------------------------------------------------------------------
2005 2004 % Change
---------------------------------------------------------
Per Per Per
Total boe Total boe Total boe
-------------------------------------------------------------------------
Operating
netback $7,349,729 $23.23 $5,311,441 $13.75 38 69
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General &
administrative (2,659,599) (8.40) (2,016,578) (5.22) 32 61
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Stock-based
compensation (1,191,971) (3.77) (180,661) (0.47) 560 702
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Financing Charges (307,574) (0.97) (770,026) (1.99) (60) (51)
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Foreign exchange
gain (loss) 29,852 0.09 (45,524) (0.12) - -
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Depletion,
depreciation
and accretion (5,796,820) (18.32) (6,876,110) (17.81) (16) 3
-------------------------------------------------------------------------
Loss applicable
to non-contro-
lling interest - - (8,930) (0.02) - -
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Dilution gain 4,464,700 14.11 1,353,199 3.51 230 302
-------------------------------------------------------------------------
Equity interest
in Petrolifera
loss (27,434) (0.09) - - - -
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Income tax
recovery
(provision) (869,993) (2.75) 256,778 0.66 - -
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Net earnings
(loss) $990,890 $3.13 $(2,976,411) $(7.71) - -
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In 2005 the company reported earnings of $991,000 ($0.01 per basic and
diluted share outstanding). This compares to a net loss of $3 million or $0.06
loss per basic and diluted share for 2004. Earnings per boe produced were
$3.13 compared to a loss last year of $7.71.
SHARES OUTSTANDING
For 2005, the weighted average number of common shares outstanding was
106,113,563 (2004 - 50,907,947) and the weighted average number of diluted
shares outstanding, as calculated by the treasury stock method, was
111,845,687 (2004 - 53,328,551). The substantial increase in shares
outstanding year over year reflects the November and December 2004 issuance
from treasury of 41,706,663 common shares for gross cash proceeds of
$21.3 million and the combined September and December 2005 issues of
45,541,000 common shares for gross cash proceeds of $90 million.
As at March 23, 2006, the company had the following securities issued and
outstanding:
- 190,256,659 common shares;
- 361,057 share purchase warrants; and
- 8,641,234 share purchase options.
Details of the exercise provisions and terms of the warrants and options
are noted in the consolidated financial statements, included in this annual
report.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations before working capital changes ("cash flow"),
cash flow per share and cash flow per boe do not have standardized meanings
prescribed by GAAP and therefore may not be comparable to similar measures
used by other companies. Cash flow from operations before working capital
changes 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. Cash flow from
operations before working capital changes is reconciled with net earnings on
the Consolidated Statement of Cash Flows and below. Cash flow per share is
calculated by dividing cash flow by the weighted average shares outstanding;
cash flow per boe is calculated by dividing cash flow by the quantum of crude
oil and natural gas (expressed in boes) sold in the period. 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.
Management believes that available cash, together with proceeds from an equity
financing completed in March 2006 and new and anticipated debt facilities and
cash flow from operations before working capital changes, are expected to
provide sufficient funding for working capital purposes and for the company's
anticipated capital program in 2006. The company's only financial instruments
are accounts receivable and payable; it maintains no off-balance sheet
financial instruments.
Reconciliation of net earnings to cash flow from operations before
working capital changes:
-------------------------------------------------------------------------
Year ended December 31
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Net earnings (loss) 990,890 (2,976,411)
-------------------------------------------------------------------------
Items not involving cash:
-------------------------------------------------------------------------
Depletion, depreciation and accretion 5,796,820 6,876,110
-------------------------------------------------------------------------
Stock-based compensation 1,191,971 180,661
-------------------------------------------------------------------------
Financing charges 150,000 -
-------------------------------------------------------------------------
Future income tax provision (recovery) 768,090 (372,250)
-------------------------------------------------------------------------
Foreign exchange (gain) loss (29,852) 45,524
-------------------------------------------------------------------------
Lease inducement amortization (72,905) -
-------------------------------------------------------------------------
Dilution gain (4,464,700) (1,353,199)
-------------------------------------------------------------------------
Income applicable to non-controlling
interests - 8,930
-------------------------------------------------------------------------
Equity interest in Petrolifera loss 27,434 -
-------------------------------------------------------------------------
Cash flow from operations before working
capital changes 4,357,748 2,409,365
-------------------------------------------------------------------------
For 2005, cash flow was $4.4 million ($0.04 per basic and diluted share),
81 percent higher than $2.4 million ($0.05 per basic and diluted share) in
2004.
Cash flow per boe was $13.77 in 2005 compared to $6.24 in 2004. This
represents 37 percent of the average company selling price per boe compared to
22 percent in 2004 and an increase of 121 percent over 2004.
CAPITAL EXPENDITURES AND FINANCING ACTIVITIES
For 2005, capital expenditures totaled $16.8 million. A breakdown of
these expenditures for the year follows:
- $9.1 million, for drilling 19 oil sands delineation core holes, 7.35
net conventional oil wells and for workovers of conventional wells at
Battrum, Saskatchewan;
- $5.0 million for seismic and research studies;
- $1.7 million for property acquisitions; and
- $1.0 million for other expenditures.
Except for a commitment to incur $200,000 of capital expenditures on
behalf of joint ventures in the Tompkins area of southwest Saskatchewan, the
company's capital program is entirely discretionary and may be expanded or
curtailed based on drilling results and the availability of capital. This is
reinforced by the fact that Connacher operates most of its wells and holds an
average 92 percent working interest, providing the company with operational
and timing controls.
Great Divide Oil Sands Project, Northern Alberta
The company holds a 100 percent working interest in 70,400 acres of oil
sands leases in northern Alberta. To date, the focus has been on an
approximate 2,000 acre tract ("Pod One") on which approximately $11 million
has been invested to acquire the oil sands leases, to delineate the oil
bearing reservoir, and to prepare and file an application for regulatory
approval to develop a project capable of producing up to 10,000 bbl/d using
steam assisted gravity drainage ("SAGD"). Capital development costs for Pod
One are expected to approximate $160 million. Over 75 percent of these
forecast expenditures are anticipated to be for surface facilities with the
balance of the costs to drill the initial horizontal well pairs. Full
development of Pod One will commence upon receiving regulatory approval.
Additionally, the company is attempting to drill 50 additional delineation
wells in the 2006 winter drilling season to define further oil bearing
reservoirs on some of the remaining 68,400 acres at Great Divide.
Recent Financing
In September 2005, the company issued 40,541,000 common shares at $1.85
per share for gross proceeds of $75 million to fund a portion of its Great
Divide Oil Sands Project. Proceeds of the financing were utilized as follows:
-------------------------------------------------------------------------
As stated at
the time of As actually
the financing applied
-------------------------------------------------------------------------
Gross proceeds $75,000,850 $75,000,850
-------------------------------------------------------------------------
Underwriters commission and issue costs 4,900,000 4,877,844
-------------------------------------------------------------------------
Applied to reduce indebtedness 2,300,000 2,300,000
-------------------------------------------------------------------------
Available for Great Divide Oil Sands
Project and general corporate purposes $67,800,850 $67,823,006
-------------------------------------------------------------------------
In December 2005, the company issued five million flow-through common
shares at $3.00 per share for gross proceeds of $15 million to fund the
company's planned 50 well program in the winter of 2005-2006. Proceeds of the
financing were utilized as follows:
-------------------------------------------------------------------------
As stated at
the time of As actually
the financing applied
-------------------------------------------------------------------------
Gross proceeds $15,000,000 $15,000,000
-------------------------------------------------------------------------
Underwriters commission and issue costs 1,175,000 1,105,120
-------------------------------------------------------------------------
Available for/applied to delineation
drilling and seismic $13,825,000 $13,894,880
-------------------------------------------------------------------------
In February 2006 the company entered into financing commitment letters
with BNP Paribas, a major international bank, for the following lending
facilities:
(i) a $45 million reserve-based loan and a $10 million revolving
operating loan to finance conventional petroleum and natural gas
projects in Canada. This facility was established on March 16, 2006.
(ii) a commitment letter to secure a US$51 million bridge loan to fund a
significant portion of the proposed acquisition of the Montana
refinery. It is also anticipated this facility will be established
immediately prior to the closing of the refinery purchase, scheduled
for March 31, 2006.
BNP Paribas has also proposed a US$148 million term loan which would be
used in part to repay the US$51 million bridge loan drawn. If the proposed
term debt facility is completed on satisfactory terms, forecast surplus
proceeds would be utilized to supplement the company's available cash flow and
cash balances to finance forecast capital expenditures of the company's Great
Divide Oil Sands Project.
In March 2006 subsequent to year end 2005, the company issued 19,047,800
common shares at $5.25 per share for gross proceeds of $100 million to fund
exploration and development activities associated with conventional crude oil
and natural gas activities and the Great Divide Oil Sands Project, for general
corporate purposes, for working capital and to possibly partially fund the
acquisition of Luke Energy Ltd. Proceeds of the financing were utilized as
follows:
-------------------------------------------------------------------------
As stated at
the time of As actually
financing applied
-------------------------------------------------------------------------
Gross proceeds $100,000,950 $100,000,950
-------------------------------------------------------------------------
Underwriters commission and issue costs 6,250,000 6,250,000
-------------------------------------------------------------------------
Available for exploration and development,
general corporate purposes, for working
capital and to possibly fund a portion of
the Luke acquisition $93,750,950 $93,750,950
-------------------------------------------------------------------------
Acquisition of Luke Energy Ltd. ("Luke")
In December 2005 the company entered into a binding letter agreement to
purchase, by way of a Plan of Arrangement, all of the shares of Luke for a
cash consideration of $2.31 plus 0.75 of a Connacher common share for each
Luke common share. On March 15, 2006 the Luke shareholders voted to approve
the arrangement and on March 16, 2006 the arrangement was completed by the
payment in total of $91.5 million and the issuance of 29.7 million Connacher
common shares from treasury.
Luke is now a wholly-owned subsidiary of Connacher and produces
approximately 2,800 boe/d (90 percent natural gas), largely at Marten Creek in
northern Alberta. It operates most of its high working interest properties.
This production was considered strategic to Connacher, as it provides a
physical hedge to its initial requirements for natural gas to create steam for
the company's proposed SAGD oil sands project at Great Divide. Based on
current Luke production volumes and anticipated results of further development
programs, the Luke purchase could also provide surplus volumes for sale in the
marketplace and meet future Connacher requirements at Great Divide.
Proposed acquisition of refining assets in Montana
In March 2006, the company announced its intention to acquire all of the
assets of an 8,300 bbl/d refinery located in Great Falls, Montana, USA for
approximately US$55 million, comprised of cash and one million Connacher
common shares to be issued from treasury. Closing is scheduled for March 31,
2006, subject to normal conditions for a transaction of this nature. Full
employment of the existing workforce is expected for the continued, operation
of the refinery.
This acquisition was considered strategic to provide Connacher with
protection against wider and more volatile crude oil price differential
swings. These have become increasingly frequent in the current higher oil
price environment for the heavy oil which would be produced at Great Divide.
The refinery is anticipated to be a profitable and strong business unit which,
based on recent experience, has the potential to contribute to the company's
cash flow growth in 2006 and beyond.
RELATED PARTY TRANSACTIONS
In 2005 the company paid professional legal fees of $539,004 (2004 -
$250,800) to a law firm in which officers or directors of the company are
related parties. Transactions with the foregoing related parties occurred
within the normal course of business and have been measured at their exchange
amount on normal business terms. The exchange amount is the amount of
consideration established and agreed to by the related parties.
SIGNIFICANT ACCOUNTING POLICIES AND APPLICATION OF CRITICAL ACCOUNTING
ESTIMATES
The significant accounting policies used by the company are described
below. Certain accounting policies require that management make appropriate
decisions with respect to the formulation of estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Changes in these judgments and estimates may have a material impact on the
company's financial results and condition. The following discusses such
accounting policies and is included in the MD&A to aid the reader in assessing
the critical accounting policies and practices of the company and the
likelihood of materially different results being reported. Management reviews
it estimates regularly. The emergence of new information and changed
circumstances may result in changes to estimates which could be material and
the company might realize different results from the application of new
accounting standards promulgated, from time to time, by various rule-making
bodies.
The following assessment of significant accounting polices is not meant
to be exhaustive.
Oil and Gas Reserves
Under Canadian Securities Regulators' "National Instrument 51-101-
Standards of Disclosure for Oil and Gas Activities" ("NI 51-101") proved
reserves are those reserves that can be estimated with a high degree of
certainty to be recoverable. In accordance with this definition, the level of
certainty should result in at least a 90 percent probability that the
quantities actually recovered will equal or exceed the estimated reserves. In
the case probable reserves, which are less certain to be recovered than proved
reserves, NI 51-101 states that it must be equally likely that the actual
remaining quantities recovered will be greater or less than the sum of the
estimated proved plus probable reserves. Possible reserves are those reserves
less certain to be recovered than probable reserves. There is at least a 10
percent probability that the quantities actually recovered will exceed the sum
of proved plus probable plus possible reserves.
The oil and gas reserve estimates are made using all available geological
and reservoir data as well as historical production data. Estimates are
reviewed and revised as appropriate. Revisions occur as a result of changes in
prices, costs, fiscal regimes, reservoir performance or a change in the
company's plans. The reserve estimates are also used in determining the
company's borrowing base for its credit facilities and may impact the same
upon revision or changes to the reserve estimates. The effect of changes in
proved oil and gas reserves on the financial results and position of the
company is described under the heading "Full Cost Accounting for Oil and Gas
Activities".
FULL COST ACCOUNTING FOR OIL AND GAS ACTIVITIES
Depletion Expense
The company uses the full cost method of accounting for exploration and
development activities. In accordance with this method of accounting, all
costs associated with exploration and development are capitalized whether
successful or not. The aggregate of net capitalized costs and estimated future
development costs less estimated salvage values is amortized using the
unit-of-production method based on estimated proved oil and gas reserves.
Major Development Projects and Unproved Properties
Certain costs related to major development projects and unproved
properties are excluded from net capitalized costs subject to depletion until
proved reserves have been determined or their value is impaired. These costs
are reviewed quarterly and any impairment is transferred to the costs being
depleted or, if the properties are located in a cost centre where there is no
reserve base, the impairment is charged directly to income.
Full Cost Accounting Ceiling Test
The company is required to review the carrying value of all property,
plant and equipment, including the carrying value of oil and gas assets, for
potential impairment. Impairment is indicated if the carrying value of the
long-lived asset or oil and gas cost centre is not recoverable by the future
undiscounted cash flows. If impairment is indicated, the amount by which the
carrying value exceeds the estimated fair value of the long-lived asset is
charged to earnings.
The ceiling test is based on estimates of reserves, production rate,
petroleum and natural gas prices, future costs and other relevant assumptions.
By their nature these estimates are subject to measurement uncertainty and the
impact on the consolidated financial statements could be material.
Asset Retirement Obligations
The company is required to provide for future removal and site
restoration costs by estimating these costs in accordance with existing laws,
contracts or other policies. These estimated costs are charged to earnings and
the appropriate liability account over the expected service life of the asset.
When the future removal and site restoration costs cannot be reasonably
determined, a contingent liability may exist. Contingent liabilities are
charged to earnings only when management is able to determine the amount and
the likelihood of the future obligation. The company estimates future
retirement costs based on current estimates adjusted for inflation and credit
risk. These estimates are subject to management uncertainty.
Income Taxes
The company follows the liability method of accounting for income taxes.
Under this method tax assets are recognized when it is more than likely
realization will occur. Tax liabilities are recognized for temporary
differences between recorded book values and underlying tax values. Rates used
to determine asset and liability amounts are rates in future periods when the
timing differences change. The period in which a timing difference reverses
are impacted by future income and capital expenditures. Rates are also
affected by legislation changes. These components can impact the charges to
future income for taxes.
Stock-Based Compensation
The company uses the fair value method to account for stock options. The
determination of the amounts for stock-based compensation are based on
assumption of stock volatility, interest rates and the term of the option.
Assumptions by their nature are subject to measurement uncertainty.
Legal, Environment Remediation and Other Contingent Matters
In respect of these matters, the company is required to determine whether
a loss is probable based on judgment and interpretation of laws and
regulations and determine if such a loss can be estimated. When any such loss
is determined, it is charged to earnings. Management continually monitors
known and potential contingent matters and makes appropriate provisions by
charges to earnings when warranted by circumstance.
COMMITMENTS, CONTINGENCIES, GUARANTEES, CONTRACTUAL OBLIGATIONS AND OFF
BALANCE SHEET ARRANGEMENTS
The company's annual commitments under leases for office premises and
operating costs, field compression equipment, software license agreements and
other equipment are as follows: 2006 - $497,000; 2007 - $399,000; 2008 -
$549,000; 2009 - $543,000; 2010 - $224,000
Additionally, the company has various guarantees and indemnifications in
place in the ordinary course of business, none of which are expected to have a
significant impact on the company's financial statements or operations. The
company has not entered into any off-balance sheet arrangement.
CHANGES IN ACCOUNTING POLICIES
The company changed its method of accounting for stock options in 2004 to
the fair value method. Stock option expenses in 2004 reflected this change.
Also, in 2004 the company retroactively adopted the method of accounting for
asset retirement obligations. Prior year figures reflect this change. Further,
in 2004 the company commenced applying the new requirements for ceiling test
calculations. This change had no impact for 2004.
CONTROL CERTIFICATION
Connacher has designed disclosure controls and procedures to provide
reasonable assurance that material information related to the company is
included in the company's annual filings. Additionally, Connacher has
evaluated the effectiveness of the company's disclosure controls and
procedures as of the end of the filing period of December 31, 2005 and
concluded that these controls are effective.
BUSINESS RISKS
Connacher is exposed to certain risks and uncertainties inherent in the
oil and gas business. Furthermore, being a smaller independent company, it is
exposed to financing and other risks which may impair its ability to realize
on its assets or to capitalize on opportunities which might become available
to it. Additionally, through the company's investment in Petrolifera which
operates in various jurisdictions, it has become exposed to other risks
including currency fluctuations, political risk, price controls and varying
forms of fiscal regimes or changes thereto which may impair Petrolifera's
ability to conduct profitable operations.
The risks arising in the oil and gas industry include price fluctuations
for both crude oil and natural gas over which the company has limited control;
risks arising from exploration and development activities; production risks
associated with the depletion of reservoirs and the ability to market
production. Additional risks include environmental and safety concerns.
The company relies on access to capital markets for new equity to
supplement internally generated cash flow and bank borrowings to finance its
growth plans. Periodically, these markets may not be receptive to offerings of
new equity from treasury, whether by way of private placement or public
offerings. This may be further complicated by the limited market liquidity for
shares of smaller companies, restricting access to some institutional
investors. An increased emphasis on flow-through share financings may
accelerate the pace at which junior oil and gas companies become cash-taxable,
which could reduce cash flow available for capital expenditures on growth
projects. Periodic fluctuations in energy prices may also affect lending
policies of the company's banker, whether for existing loans or new
borrowings. This in turn could limit growth prospects over the short run or
may even require the company to dedicate cash flow, dispose of properties or
raise new equity to reduce bank borrowings under circumstances of declining
energy prices or disappointing drilling results.
The success of the company's capital programs as embodied in its
productivity and reserve base could also impact its prospective liquidity and
pace of future activities. Control of finding, development, operating and
overhead costs per boe is an important criterion in determining company
growth, success and access to new capital sources.
The company attempts to mitigate its business and operational risk
exposures by maintaining comprehensive insurance coverage on its assets and
operations, by employing or contracting competent technicians and
professionals, by instituting and maintaining operational health, safety and
environmental standards and procedures and by maintaining a prudent approach
to exploration and development activities. The company also addresses and
regularly reports on the impact of risks to its shareholders, writing down the
carrying values of assets that may not be recoverable.
Furthermore, the company generally relies on equity financing and a bias
towards conservative financing of its operations under normal industry
conditions to offset the inherent risks of domestic and international oil and
gas exploration, development and production activities. In the past the
company has entered into forward sale, fixed price contracts to mitigate
reduced product price risk and foreign exchange risk during periods of price
improvement, primarily with a view to assuring the availability of funds for
capital programs and to enhance the creditworthiness of its assets with its
lenders. While hedging activities may have opportunity costs when realized
prices exceed hedged pricing, such transactions are not meant to be
speculative and are considered within the broader framework of financial
stability and flexibility. Management continuously reviews the need to utilize
such financing techniques.
OUTLOOK
The company's business plan anticipates substantial growth. Emphasis will
continue to be on delineating and developing the Great Divide Oil Sands
Project in Alberta while continuing to develop the company's recently-expanded
conventional production base and profitably operating the Montana refinery,
assuming its proposed acquisition is completed as anticipated. Timing for
development and first production from the Great Divide Oil Sands Project is
subject to regulatory approvals which are beyond the control of Connacher.
There can be no assurance that regulatory approvals will be granted on
terms acceptable to the company or at all. The timing for start-up of
production is dependent on, among other things, regulatory approvals,
availability of the component equipment, access to skilled personnel and
availability of drilling rigs. Additional financing may be required for the
Great Divide Oil Sands Project, the company's conventional petroleum and
natural gas assets and for the proposed Montana refinery.
Additional information relating to Connacher, including Connacher's
Annual Information Form is on SEDAR at www.sedar.com.
QUARTERLY RESULTS
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Three Months Ended Mar 31 Jun 30 Sept 30 Dec 31
-------------------------------------------------------------------------
Financial Highlights ($000 except per share amounts) - Unaudited
-------------------------------------------------------------------------
Total revenue 3,290 3,556 2,358 1,975
-------------------------------------------------------------------------
Cash flow from operations before
working capital changes(1) 944 516 478 471
-------------------------------------------------------------------------
Basic, per share(1) 0.02 0.01 0.01 0.01
-------------------------------------------------------------------------
Diluted, per share(1) 0.02 0.01 0.01 0.01
-------------------------------------------------------------------------
Net earnings (loss) (689) (1,268) (869) (150)
-------------------------------------------------------------------------
Basic, per share (0.01) (0.03) (0.02) -
-------------------------------------------------------------------------
Diluted, per share (0.01) (0.03) (0.02) -
-------------------------------------------------------------------------
Capital expenditures 10,391 2,603 681 3,954
-------------------------------------------------------------------------
Proceeds on disposal of PNG
properties - 89 17,564 (49)
-------------------------------------------------------------------------
Bank debt 20,600 23,655 7,563 -
-------------------------------------------------------------------------
Working capital surplus
(deficiency) (9,850) (8,357) (6,644) 3,549
-------------------------------------------------------------------------
Cash on hand (net debt) (30,450) (32,012) (14,207) 3,914
-------------------------------------------------------------------------
Shareholders' equity 21,528 20,806 20,090 40,375
-------------------------------------------------------------------------
Operating Highlights
Production/sales volumes
-------------------------------------------------------------------------
Natural gas - mcf/d 2,268 1,860 1,068 1,290
-------------------------------------------------------------------------
Crude oil - bbl/d 859 1,004 636 646
-------------------------------------------------------------------------
Equivalent - boe/d(2) 1,237 1,314 814 861
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 30.41 29.46 36.58 30.68
-------------------------------------------------------------------------
Natural gas - $/mcf 4.42 5.11 2.21 1.29
-------------------------------------------------------------------------
Selected Highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average sales price 29.22 29.74 31.48 24.93
-------------------------------------------------------------------------
Other income - - 0.33 0.15
-------------------------------------------------------------------------
Royalties 5.37 5.95 6.06 4.64
-------------------------------------------------------------------------
Operating costs 10.09 11.26 8.70 7.98
-------------------------------------------------------------------------
Operating netback (Note 4) 13.76 12.53 17.05 12.47
-------------------------------------------------------------------------
Common Share Information
-------------------------------------------------------------------------
Shares outstanding at end of
period (000's) 46,153 47,368 47,668 89,627
-------------------------------------------------------------------------
Weighted average shares
outstanding for the period
-------------------------------------------------------------------------
Basic (000's) 46,067 47,042 47,400 50,908
-------------------------------------------------------------------------
Diluted (000's) 50,119 48,496 47,504 53,329
-------------------------------------------------------------------------
Volume traded during quarter
(000's) 20,706 30,108 8,880 25,256
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 1.75 1.08 0.44 0.80
-------------------------------------------------------------------------
Low 0.73 0.30 0.28 0.29
-------------------------------------------------------------------------
Close (end of period) 0.78 0.40 0.32 0.55
-------------------------------------------------------------------------
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Three Months Ended Mar 31 Jun 30 Sept 30(3) Dec 31
-------------------------------------------------------------------------
Financial Highlights ($000 except per share amounts) - Unaudited
-------------------------------------------------------------------------
Total revenue 1,857 2,796 4,183 3,542
-------------------------------------------------------------------------
Cash flow from operations before
working capital changes(1) 265 877 1,978 1,238
-------------------------------------------------------------------------
Basic, per share(1) - 0.01 0.02 0.01
-------------------------------------------------------------------------
Diluted, per share(1) - 0.01 0.02 0.01
-------------------------------------------------------------------------
Net earnings (loss) 1,673 (230) (1,034) 582
-------------------------------------------------------------------------
Basic, per share 0.02 - (0.01) -
-------------------------------------------------------------------------
Diluted, per share 0.02 - (0.01) -
-------------------------------------------------------------------------
Capital expenditures 6,047 5,649 2,870 2,241
-------------------------------------------------------------------------
Proceeds on disposal of PNG
properties - - - -
-------------------------------------------------------------------------
Bank debt - 250 - -
-------------------------------------------------------------------------
Working capital surplus
(deficiency) 5,588 854 67,440 75,427
-------------------------------------------------------------------------
Cash on hand (net debt) 8,286 2,629 67,708 75,511
-------------------------------------------------------------------------
Shareholders' equity 41,079 41,090 113,081 129,108
-------------------------------------------------------------------------
Operating Highlights
-------------------------------------------------------------------------
Production/sales volumes
-------------------------------------------------------------------------
Natural gas - mcf/d 1,328 1,416 497 86
-------------------------------------------------------------------------
Crude oil - bbl/d 629 702 808 7.75
-------------------------------------------------------------------------
Equivalent - boe/d(2) 850 938 891 789
-------------------------------------------------------------------------
Pricing
-------------------------------------------------------------------------
Crude oil - $/bbl 30.02 41.23 53.40 41.54
-------------------------------------------------------------------------
Natural gas - $/mcf 1.18 0.99 1.88 7.55
-------------------------------------------------------------------------
Selected Highlights - $/boe(2)
-------------------------------------------------------------------------
Weighted average sales price 24.04 32.35 49.48 41.61
-------------------------------------------------------------------------
Other income 0.24 0.41 1.57 7.15
-------------------------------------------------------------------------
Royalties 4.82 8.06 11.73 7.76
-------------------------------------------------------------------------
Operating costs 7.01 7.42 7.69 8.90
-------------------------------------------------------------------------
Operating netback (Note 4) 12.45 17.28 31.63 32.09
-------------------------------------------------------------------------
Common Share Information
-------------------------------------------------------------------------
Shares outstanding at end of
period (000's) 92,753 93,013 134,236 150,027
-------------------------------------------------------------------------
Weighted average shares
outstanding for the period
-------------------------------------------------------------------------
Basic (000's) 91,189 92,875 103,851 136,071
-------------------------------------------------------------------------
Diluted (000's) 94,197 95,555 106,397 142,507
-------------------------------------------------------------------------
Volume traded during quarter
(000's) 40,486 16,821 180,848 100,246
-------------------------------------------------------------------------
Common share price ($)
-------------------------------------------------------------------------
High 1.22 1.05 2.69 4.20
-------------------------------------------------------------------------
Low 0.49 0.68 0.76 1.09
-------------------------------------------------------------------------
Close (end of period) 0.93 0.82 2.54 3.84
-------------------------------------------------------------------------
(1) Cash flow from operations before working capital changes 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 from operations before working capital changes
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.
Cash flow from operations before working capital changes is
reconciled with net earnings on the Consolidated Statement of Cash
Flows and in the accompanying Management Discussion & Analysis.
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) In the third quarter of 2005, the company discontinued consolidating
the financial and operational results of Petrolifera
Petroleum Limited. Comparative figures have not been restated.
(4) Operating netback is a non-GAAP measure used by management as a
measure of operating efficiency and profitability. It is calculated
as petroleum and natural gas revenue less royalties and
operating costs.
CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT'S REPORT
To the Shareholders of Connacher Oil and Gas Limited:
The consolidated financial statements of Connacher Oil and Gas Limited
were prepared by and are the responsibility of management. The consolidated
financial statements have been prepared in conformity with Canadian generally
accepted accounting principles appropriate in the circumstances and include
some amounts that are based on managements' best estimates and judgments.
Information contained elsewhere in the Annual Report is consistent, where
applicable, with information contained in the financial statements.
The company maintains systems of internal accounting controls designed to
provide reasonable assurance that all transactions are properly recorded in
the company's books and records, that policies and procedures are adhered to
and that the assets are protected from unauthorized use. The systems of
internal accounting controls are complemented by the selection, training and
development of qualified staff. Management believes that the system of
internal controls that the company has installed has operated effectively in
2005.
The consolidated financial statements have been audited by the
independent accounting firm Deloitte & Touche LLP whose appointment is
ratified annually by the shareholders at the annual shareholders' meeting. The
independent accountants perform such tests and related procedures as they deem
necessary to arrive at an opinion on the fairness of the financial statements.
The audit committee of the board of directors periodically meets with the
independent accountants and management to satisfy itself that it is properly
discharging its responsibilities. The independent accountants have
unrestricted access to the audit committee, without management present, to
discuss the results of their examination and the quality of financial
reporting and internal accounting controls.
Signed Signed
"R.A. Gusella" "R. R. Kines"
President and Chief Executive Officer Vice President, Finance and
March 23, 2006 Chief Financial Officer
March 23, 2006
AUDITORS' REPORT
To the Shareholders of Connacher Oil and Gas Limited:
We have audited the consolidated balance sheets of Connacher Oil and Gas
Limited as at December 31, 2005 and 2004 and the consolidated statements of
operations and retained earnings and cash flows for the years then ended.
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the company as at December
31, 2005 and 2004 and the result of its operations and its cash flows for the
years then ended in accordance with Canadian generally accepted accounting
principles.
Signed,
Calgary, AB "DELOITTE & TOUCHE LLP"
March 23, 2006 Chartered Accountants
CONSOLIDATED BALANCE SHEETS
Connacher Oil and Gas Limited
December 31
2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
(Restated
Note 6)
-------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------
CURRENT
-------------------------------------------------------------------------
Cash and cash equivalents 75,510,593 3,914,181
-------------------------------------------------------------------------
Accounts receivable 1,604,948 1,773,005
-------------------------------------------------------------------------
Due from Petrolifera (Note 3(b)) 221,131 -
-------------------------------------------------------------------------
Prepaid expenses 406,748 309,062
-------------------------------------------------------------------------
77,743,420 5,996,248
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investment in Petrolifera (Note 3(b)) 10,495,532 -
-------------------------------------------------------------------------
Deferred charges (Note 4) 257,599 -
-------------------------------------------------------------------------
Property and equipment (Note 5) 45,241,510 37,265,595
-------------------------------------------------------------------------
Future income tax asset (Note 6) 1,075,038 2,828,270
-------------------------------------------------------------------------
134,813,099 46,090,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
-------------------------------------------------------------------------
CURRENT
-------------------------------------------------------------------------
Accounts payable 2,315,960 2,446,947
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Asset retirement obligations (Note 8) 3,108,538 2,905,477
-------------------------------------------------------------------------
Deferred credits (Note 9) 280,866 353,771
-------------------------------------------------------------------------
Non-controlling interests (Note 3) - 8,930
-------------------------------------------------------------------------
5,705,364 5,715,125
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------
Share capital and contributed surplus
(Note 10) 127,032,676 39,290,819
-------------------------------------------------------------------------
Retained earnings 2,075,059 1,084,169
-------------------------------------------------------------------------
129,107,735 40,374,988
-------------------------------------------------------------------------
134,813,099 46,090,113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments, contingencies and guarantees (Note 14)
Approved by the Board
Signed Signed
"D.H. Bessell", Director "C.M. Evans", Director
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
Connacher Oil and Gas Limited
Years Ended December 31
2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
(Restated
Note 6)
-------------------------------------------------------------------------
REVENUE
-------------------------------------------------------------------------
Petroleum and natural gas sales 11,677,649 11,179,404
-------------------------------------------------------------------------
Interest and other income 700,034 36,484
-------------------------------------------------------------------------
12,377,683 11,215,888
-------------------------------------------------------------------------
Royalties (2,582,561) (2,138,916)
-------------------------------------------------------------------------
9,795,122 9,076,972
-------------------------------------------------------------------------
EXPENSES
-------------------------------------------------------------------------
Operating 2,445,393 3,765,531
-------------------------------------------------------------------------
General and administrative 2,659,599 2,016,578
-------------------------------------------------------------------------
Stock-based compensation (Note 10) 1,191,971 180,661
-------------------------------------------------------------------------
Finance charges 307,574 770,026
-------------------------------------------------------------------------
Foreign exchange loss (gain) (29,852) 45,524
-------------------------------------------------------------------------
Depletion, depreciation and accretion (Note 5) 5,796,820 6,876,110
-------------------------------------------------------------------------
Dilution gain (Note 3(c)) (4,464,700) (1,353,199)
-------------------------------------------------------------------------
Equity interest in Petrolifera loss (Note 3(b)) 27,434 -
-------------------------------------------------------------------------
7,934,239 12,301,231
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) before taxes and
non-controlling interests 1,860,883 (3,224,259)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current income tax provision (recovery) 101,903 115,472
-------------------------------------------------------------------------
Future income tax provision (recovery) 768,090 (372,250)
-------------------------------------------------------------------------
869,993 (256,778)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) before non-controlling
interests 990,890 (2,967,481)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Non-controlling interests (Note 3) - 8,930
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET EARNINGS (LOSS) 990,890 (2,976,411)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS, BEGINNING OF YEAR (Note 6) 1,084,169 4,060,580
-------------------------------------------------------------------------
-------------------------------------------------------------------------
RETAINED EARNINGS, END OF YEAR 2,075,059 1,084,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE (Note 13)
-------------------------------------------------------------------------
Basic and diluted 0.01 (0.06)
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
Connacher Oil and Gas Limited
Years Ended December 31
2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Cash provided by (used in) the following
activities:
-------------------------------------------------------------------------
OPERATING
-------------------------------------------------------------------------
Net earnings (loss) 990,890 (2,976,411)
-------------------------------------------------------------------------
Items not involving cash:
-------------------------------------------------------------------------
Depletion, depreciation and accretion 5,796,820 6,876,110
-------------------------------------------------------------------------
Stock-based compensation 1,191,971 180,661
-------------------------------------------------------------------------
Financing charges 150,000 -
-------------------------------------------------------------------------
Future income tax provision (recovery) 768,090 (372,250)
-------------------------------------------------------------------------
Foreign exchange loss (gain) (29,852) 45,524
-------------------------------------------------------------------------
Dilution gain (4,464,700) (1,353,199)
-------------------------------------------------------------------------
Lease reducement amortization (72,905)
-------------------------------------------------------------------------
Income applicable to non-controlling interests - 8,930
-------------------------------------------------------------------------
Equity interest in Petrolifera loss 27,434 -
-------------------------------------------------------------------------
Cash flow from operations before working
capital changes 4,357,748 2,409,365
-------------------------------------------------------------------------
Changes in non-cash working capital
(Note 13 (b)) (484,927) (42,896)
-------------------------------------------------------------------------
3,872,821 2,366,469
-------------------------------------------------------------------------
FINANCING
-------------------------------------------------------------------------
Issue of common shares, net of share
issue costs 86,512,147 20,411,953
-------------------------------------------------------------------------
Issue of shares by Petrolifera, net of
share issue costs 6,227,717 1,385,037
-------------------------------------------------------------------------
Deferred financing costs (257,599) -
-------------------------------------------------------------------------
Increase in (repayment of) bank loans - (12,100,000)
-------------------------------------------------------------------------
Lease inducement received - 353,771
-------------------------------------------------------------------------
92,482,265 10,050,761
-------------------------------------------------------------------------
INVESTING
-------------------------------------------------------------------------
Purchase of Petrolifera shares (6,000,000) -
-------------------------------------------------------------------------
Collection of Petrolifera note 750,000 -
-------------------------------------------------------------------------
Capital expenditures (16,807,302) (17,628,534)
-------------------------------------------------------------------------
Change in non-cash working capital
(Note 13(b)) 396,109 (9,385,827)
-------------------------------------------------------------------------
Proceeds on disposal of oil and gas properties
(Note 5) - 17,604,310
-------------------------------------------------------------------------
Deposit on facilities - 279,700
-------------------------------------------------------------------------
(21,661,193) (9,130,351)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 74,693,893 3,286,879
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Impact on cash resulting from
de-consolidation of Petrolifera
(Note 3(b)) (3,097,481) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,914,181 627,302
-------------------------------------------------------------------------
-------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 75,510,593 3,914,181
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SUPPLEMENTARY INFORMATION - (Note 13)
-------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Connacher Oil and Gas Limited
Years Ended December 31. 2005 and 2004
1. FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Connacher
Oil and Gas Limited and its subsidiaries (collectively "Connacher" or the
"company") and are presented in accordance with Canadian generally
accepted accounting principles. In Canada the company is in the business
of exploring, producing and marketing conventional petroleum and natural
gas and has recently commenced exploration and development of bitumen in
the oil sands of northern Alberta. Prior to the de-consolidation of
Petrolifera in 2005 (Note 3(b)) it also conducted a conventional
petroleum and natural gas business in Argentina.
2. SIGNIFICANT ACCOUNTING POLICIES
Joint venture operations
A part of the company's activities are conducted with others, and these
consolidated financial statements reflect only the company's
proportionate interest in such activities.
Cash and cash equivalents
Cash and cash equivalents include short-term deposits with initial
maturities of three months or less.
Petroleum and natural gas operations
The company follows the full cost method of accounting whereby all costs
relating to the exploration for and development of crude oil and natural
gas reserves are capitalized on a country by country cost centre basis.
Capitalized costs of petroleum and natural gas properties and related
equipment within a cost centre are depleted and depreciated using the
unit-of-production method based on estimated proved crude oil and natural
gas reserves as determined by independent consulting engineers. For the
purpose of this calculation, production and reserves of natural gas are
converted to equivalent units of crude oil based on relative energy
content (6:1).
The company applies a "ceiling test" to the net book value of petroleum
and natural gas properties to ensure that such carrying value does not
exceed the estimated fair value of the properties. The carrying value is
assessed to be recoverable when the sum of the undiscounted cash flows
expected from the production of proved reserves and the lower of cost and
market of unproved properties exceeds the carrying value. If the carrying
value is assessed to not be recoverable, the calculation compares the
carrying value to the sum of the discounted cash flows expected from the
production of proved and probable reserves and the lower of cost and
market of unproved properties. Should the carrying value exceed this sum,
an impairment loss is recognized. The cash flows are estimated using
projected future product prices and costs and are discounted using the
credit adjusted risk-free interest rate.
Costs of acquiring and evaluating unproved properties and major
development projects are excluded from costs subject to depletion and
depreciation until it is determined whether or not proved reserves are
attributable to the properties or impairment occurs. These costs are
reviewed quarterly and any impairment is transferred to the costs being
depleted or, if the properties are located in a cost centre where there
is no reserve base, the impairment is charged directly to income.
Gains or losses on sales of properties are recognized only when crediting
the proceeds to cost would result in a change of 20 percent or more in
the depletion and depreciation rate.
Furniture, equipment and leaseholds
Furniture and equipment are recorded at cost and are being depreciated on
a declining balance basis at rates of 20 percent to 30 percent per year.
Leaseholds are amortized over the lease term.
Financial instruments
Financial instruments include accounts receivable and accounts payable.
All carrying values of financial instruments approximate fair value
unless otherwise noted.
Deferred charges
Costs incurred in respect of transactions not completed have been
temporarily capitalized and will be recognized on completion of the
transactions.
Credit risk
The majority of the accounts receivable is in respect of oil and gas
operations. The company generally extends unsecured credit to customers
and therefore, the collection of accounts receivable may be affected by
changes in economic or other conditions. Management believes the risk is
mitigated by the size and reputation of the companies to which credit has
been extended. The company has not historically experienced any material
credit loss in the collection of accounts receivable.
Commodity and financial risk management
The company periodically enters into fixed price crude oil sales
contracts for the physical delivery of its crude oil to reduce the
exposure to commodity price fluctuations; and occasionally these
contracts are denominated in Canadian dollars to mitigate foreign
exchange risks. At December 31, 2005 there were no such contracts in
place. Additionally, the company's bank loans are subject to floating
interest rates.
Equity accounting
The investment in Petrolifera Petroleum Limited is accounted for on an
equity basis, whereby the carrying value reflects the company's
investment, at the lower of cost and fair value, and the company's equity
interest share of its income and losses. Any permanent decline in value
would be charged to earnings.
Foreign currency translation
The company translates its foreign denominated monetary assets and
liabilities at the exchange rate prevailing at year end. Non-monetary
assets, liabilities and related depletion and depreciation were
translated at historic rates. Revenues and expenses were translated at
the average rate of exchange for the year and any resulting foreign
exchange gains or losses are included in operations.
Asset retirement obligations
The company recognizes an asset retirement obligation liability for
abandoning oil and natural gas wells, related facilities, compressors and
gas plants, removal of equipment from leased acreage and returning such
land to its original condition by estimating and recording the fair value
of each asset retirement obligation arising in the period a well or
related asset is drilled, constructed or acquired. This fair value is
estimated using the present value of the estimated future cash outflows
to abandon the asset at the company's credit adjusted risk-free interest
rate and includes estimates for inflation. The obligation is reviewed
regularly by management based upon current regulations, costs,
technologies and industry standards. The discounted obligation is
initially capitalized as part of the carrying amount of the related oil
and natural gas properties and a corresponding liability is recognized.
The liability is accreted against income until it is settled or the
property is sold and is included as a component of depletion and
depreciation expense. The increase in oil and natural gas properties is
depleted and depreciated on the same basis as the remainder of the oil
and natural gas properties. Actual restoration expenditures are charged
to the accumulated obligation as incurred and costs for properties
disposed are removed.
Flow-through shares
The resource expenditure deductions for income tax purposes related to
exploratory and development activities funded by flow-through share
arrangements are renounced to investors in accordance with tax
legislation. Accordingly, share capital is reduced and the future income
tax asset is decreased by the tax benefits related to the expenditures at
the time they are renounced.
Revenue recognition
Petroleum and natural gas sales are recognized as revenue at the time the
respective commodities are delivered to purchasers. Gains and losses on
forward fixed price commodity contracts are included in petroleum and
natural gas sales revenue when the gain or loss occurs.
Stock-based compensation
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option pricing model. The amount is
credited to contributed surplus and expensed over the vesting period.
Upon exercise of the options, the exercise proceeds together with amounts
credited to contributed surplus, are credited to share capital.
Income taxes
The company follows the liability method of accounting for income taxes.
Under this method, income tax liabilities and assets are recognized for
the estimated tax consequences attributed to differences between the
amounts reported in the financial statements and their respective tax
bases, using substantively enacted income tax rates. The effect of a
change in income tax rates on future income tax liabilities and assets is
recognized in income in the period that the change occurs. Future tax
assets recognized are assessed by management at each balance sheet date
for impairment. Any impairment is recognized when the recovery is more
than likely and when the recovery is more than likely and through a
valuation allowance.
Measurement uncertainty
The timely preparation of the consolidated financial statements in
conformity with Canadian generally accepted accounting principles
requires that management make estimates and assumptions and use judgment
regarding the reported amounts of assets and liabilities at the date of
the consolidated financial statements and the reported amounts of
revenues and expenses during the period. Such estimates primarily relate
to unsettled transactions and events as of the date of the consolidated
financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur. Income taxes are
subject to re-assessment by tax authorities.
Amounts recorded for depreciation, depletion and accretion, asset
retirement costs and obligations, amounts used for ceiling test and
impairment calculations and amounts used in the determination of the
future tax asset are based on estimates of natural gas and crude oil
reserves and future costs required to develop those reserves. By their
nature, these estimates of reserves, including the estimates of future
prices and costs, and the related future cash flows are subject to
measurement uncertainty.
Per share amounts
Basic per share amounts are calculated using the weighted average number
of common shares outstanding for the year. The company follows the
treasury stock method to calculate diluted per share amounts. The
treasury stock method assumes that any proceeds from the exercise of
in-the-money stock options and other dilutive instruments would be used
to purchase common shares at the average market price during the period.
3. ARGENTINIAN OPERATIONS AND PETROLIFERA PETROLEUM LIMITED
(a) Reorganization of Argentinean operations
In 2004 the company reorganized its Argentinean oil and gas properties by
acquiring the non-owned 50 percent operated working interest from its
joint venture partner in an arms length transaction for US $1.5 million.
Late in 2004, Connacher incorporated a subsidiary, Petrolifera Petroleum
Limited ("Petrolifera") and sold its Argentinean assets to Petrolifera
for eight million Petrolifera common shares and a $4 million promissory
note. Concurrent with acquiring the Argentinean assets from Connacher,
Petrolifera closed a $1.5 million private placement equity financing. The
financing had the effect of reducing Connacher's equity interest in
Petrolifera from 100 percent to 61 percent, as Connacher did not
participate in the financing. The 39 percent reduction resulted in a
dilution gain to the company of $1,353,199. Immediately after the
transaction, Petrolifera paid $1.25 million in partial satisfaction of
the promissory note.
In March 2005 Petrolifera completed a $7 million private placement
financing. As Connacher did not participate in the financing, its equity
interest in Petrolifera was reduced to 40 percent from 61 percent. In
March 2005 and in consideration for the assistance provided to
Petrolifera in securing Peruvian licenses for exploratory lands and for
the provision of financial guarantees respecting Petrolifera's annual
work commitments in two licensed blocks, Connacher was granted an option
to acquire 200,000 common shares at $0.50 per share and was granted a
10 percent carried working interest ("CWI") through the drilling of the
first well on each block. Petrolifera has the right of first purchase of
this interest should Connacher elect to sell it at some future date. The
CWI is convertible at the holder's election into a two percent gross
overriding royalty on each license after the drilling of the first well
on each block. These interests were effective upon the issuance of the
licenses. The guarantees are limited to amounts specified over the terms
of the licenses. Over the first 24 months of the licenses, the guarantee
is limited to US $200,000. Connacher was subsequently indemnified by
Petrolifera for this guarantee.
(b) Deconsolidation of and investment in Petrolifera
In the third quarter of 2005 the company discontinued consolidating the
financial results of Petrolifera, as the company was no longer considered
to control Petrolifera due to the election of independent directors and
other factors. The investment in Petrolifera has since been accounted for
following the equity basis of accounting. Comparative figures have not
been restated.
The impact of not consolidating Petrolifera had the effect of reducing
the company's net assets by $4,125,653 as follows:
-------------------------------------------------------------------------
$
-------------------------------------------------------------------------
Cash (3,097,481)
-------------------------------------------------------------------------
Current assets (321,251)
-------------------------------------------------------------------------
Future income tax asset (985,000)
-------------------------------------------------------------------------
Property and equipment (4,110,144)
-------------------------------------------------------------------------
Current liabilities 381,694
-------------------------------------------------------------------------
Asset retirement obligations 442,172
-------------------------------------------------------------------------
Non-controlling interests 3,564,357
-------------------------------------------------------------------------
Changes in net assets (4,125,653)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$
-------------------------------------------------------------------------
Connacher's initial investment in Petrolifera at the time
of deconsolidation 4,125,653
-------------------------------------------------------------------------
Increases/decreases in investment:
-------------------------------------------------------------------------
Equity interest in Petrolifera's loss from the time of
deconsolidating to December 31, 2005 (27,434)
-------------------------------------------------------------------------
Collection of Promissory Note and reclassification of
amounts due from Petrolifera (1,047,058)
-------------------------------------------------------------------------
Purchase of shares in Petrolifera (Note 3(c)) 6,000,000
-------------------------------------------------------------------------
Dilution gain on shares issued by Petrolifera to
unrelated parties after de-consolidation (Note 3(c)) 1,444,371
-------------------------------------------------------------------------
Investment in Petrolifera at December 31, 2005 10,495,532
-------------------------------------------------------------------------
The company now records its investment in Petrolifera on an equity basis.
Under the terms of a Management Services Agreement with Petrolifera,
Connacher provides all management, operational, accounting and general
and administrative services necessary or appropriate to manage and
operate Petrolifera. The fee for this service was $10,000 per month prior
to Petrolifera's equity securities being listed and posted for trading on
a recognized stock exchange and $15,000 per month thereafter for a
further 18 months. The agreement may be immediately terminated for
performance failure by the aggrieved party or upon 30 days prior written
notice by Connacher, or by mutual agreement.
At December 31, 2005, Connacher was owed $221,131 for these services, and
for other amounts advanced and other amounts paid on their behalf (2004 -
$106,843).
(c) Dilution gain
Dilution gains were recognized upon changes to Connacher's equity
interest in Petrolifera that occurred during 2005, as follows:
In March 2005 Petrolifera completed a $7 million private placement
financing and repaid $2 million of the $4 million promissory note. As
Connacher did not participate in the financing, its equity interest in
Petrolifera was reduced to 40 percent from 61 percent. The 21 percent
reduction resulted in a dilution gain of $3,020,329 in the first quarter
of 2005.
In November 2005 Petrolifera completed a $21.3 million initial public
offering. Connacher purchased $6 million of the issue to bring its
ownership in Petrolifera to 35 percent. This five percent reduction in
Connacher's equity interest in Petrolifera resulted in dilution gain of
$1,636,453.
Throughout 2005, Petrolifera share purchase rights and share purchase
warrants were exercised by other investors to further reduce Connacher's
equity interest in Petrolifera to 33 percent at December 31, 2005. The
exercise of these rights and warrants generated a dilution loss in the
amount of $192,082 as these rights and warrants were exercised at a price
less than Connacher's per share carrying value of its investment in
Petrolifera.
4. DEFERRED CHARGES
Deferred charges of $257,599 relate to costs incurred in respect of
transactions not completed at December 31, 2005. These transactions are
described in Note 15, Subsequent Events. When these transactions are
completed these costs will be recognized.
5. PROPERTY AND EQUIPMENT
-------------------------------------------------------------------------
Accumulated
Depletion,
Depreciation
and Net
Cost Amortization Book Value
$ $ $
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 59,713,556 15,552,683 44,610,873
-------------------------------------------------------------------------
Furniture, equipment and
leaseholds 1,058,286 427,649 630,637
-------------------------------------------------------------------------
61,221,842 15,980,332 45,241,510
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Petroleum and natural gas
properties and equipment 47,339,971 10,654,358 36,685,613
-------------------------------------------------------------------------
Furniture, equipment and
leaseholds 806,314 226,332 579,982
-------------------------------------------------------------------------
48,146,285 10,880,690 37,265,595
-------------------------------------------------------------------------
Included in Property and Equipment are estimated future asset retirement
costs of $1,910,894 (2004 - $1,851,300).
In July 2004 the company sold certain petroleum and natural gas
properties for gross proceeds of $17.6 million. As there was no
significant change in the rate of depletion, no gain or loss was
recognized. These financial statements reflect operating results from
these properties until the date the sale closed. The asset retirement
obligation was also reduced to reflect this disposition.
In 2004 the company acquired the non-owned 50 percent interest in an oil
and gas concession in Argentina for US $1.5 million. The purchase price
was negotiated at arms-length with the operator of the property. The
company's 100 percent interest in the properties was subsequently sold to
a related party, Petrolifera. The company's carrying value was used to
record the sale. As consideration for the properties sold, Connacher
received a $4 million promissory note and eight million Petrolifera
common shares. Immediately after the transaction, Petrolifera paid
$1.25 million in partial satisfaction of the promissory note from
proceeds of an equity sale, which reduced Connacher's interest in
Petrolifera to 61 percent (see Note 3(a)).
In 2005, the company capitalized $615,000 (2004 - $71,000) of general and
administrative expenses, including stock-based compensation of $410,000,
related to exploration and development activities and nil (2004 -
$113,000) of interest costs related to major development projects.
Capital costs of $11.2 million (2004 - $4.4 million) related to major
development projects principally related to oil sands assets in a
pre-production state have been excluded from depletable costs. No proved
reserves have been assigned to those projects. Undeveloped land
acquisition costs of $2.5 million (2004 - $3.4 million) were also
excluded from the depletion calculation.
Depletion, depreciation and accretion expense includes a charge of
$165,150 (2004 - $178,000) to accrete the company's estimated asset
retirement obligations (Note 8).
The ceiling test as at December 31, 2005 excludes $2.5 million of
undeveloped land and $11.2 million of major development projects which
have been separately evaluated by management for impairment. Based on the
ceiling test and other assessments, no impairment has been recorded at
December 31, 2005.
Connacher's oil and natural gas reserves were evaluated by qualified
evaluators as at December 31, 2005 in a report dated March 8, 2006. The
evaluation was conducted in accordance with Canadian Securities
Administrators' National Instrument 51-101 ("NI 51-101"), using the
following base price assumptions adjusted for the company's product
quality and transportation differentials:
-------------------------------------------------------------------------
WTI (at) Cushing ($US/bbl) Alberta Spot ($/mcf)
-------------------------------------------------------------------------
2006 58.00 10.37
-------------------------------------------------------------------------
2007 56.38 9.65
-------------------------------------------------------------------------
2008 52.53 8.53
-------------------------------------------------------------------------
2009 51.69 7.86
-------------------------------------------------------------------------
2010 52.72 7.12
-------------------------------------------------------------------------
+ approximately + approximately
2% thereafter 2% thereafter
-------------------------------------------------------------------------
6. INCOME TAXES
The 2005 current income tax provision of $101,903 is comprised of Large
Corporation tax of $119,059 offset by other tax recoveries of $17,156.
The 2004 tax provision of $115,172 was comprised of Argentinean income
taxes.
The following table reconciles income taxes calculated at the Canadian
statutory rate with recorded income taxes:
-------------------------------------------------------------------------
Years Ended December 31 2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Earnings (loss) before income taxes and
non-controlling interests 1,861,000 (3,284,000)
-------------------------------------------------------------------------
Canadian statutory rate 39.0% 39.1%
-------------------------------------------------------------------------
Expected income taxes (recoverable) 726,000 (1,261,000)
-------------------------------------------------------------------------
Non-deductible Canadian crown payments 555,000 692,000
-------------------------------------------------------------------------
Canadian resource allowance (371,000) (367,000)
-------------------------------------------------------------------------
Benefit (reduction) of tax deductions not
previously recognized - 269,000
-------------------------------------------------------------------------
Impact of reduction in Canadian tax rates
and other 245,000 294,000
-------------------------------------------------------------------------
Foreign taxes (recovery) (17,000) 116,000
-------------------------------------------------------------------------
Capital taxes 119,000 -
-------------------------------------------------------------------------
Tax effect of dilution gain (852,000) -
-------------------------------------------------------------------------
Non deductible stock-based compensation 465,000 -
-------------------------------------------------------------------------
Provision for taxes (recovery) 870,000 (257,000)
-------------------------------------------------------------------------
The company had the following future tax assets relating to temporary
timing differences:
-------------------------------------------------------------------------
As at December 31 2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Tax basis in excess (deficiency) of book value
of property and equipment (2,370,000) 903,000
-------------------------------------------------------------------------
Non-capital losses carried forward 1,075,000 1,925,000
-------------------------------------------------------------------------
Share issue costs 2,370,000 -
-------------------------------------------------------------------------
1,075,000 2,828,000
-------------------------------------------------------------------------
As a result of a recent adjustment proposed by Canada Revenue Agency to
resource tax pools respecting assets acquired in 2002, the December 31, 2002
balance of property and equipment was increased by $850,000 and the future
income tax asset balance was reduced by $850,000. Additional depletion of
$124,000 ($72,000 net of tax) for 2002 and $92,000 ($55,000 net of tax) for
2003 was recorded as an adjustment to the opening balance of retained earnings
for 2004. There was no significant impact to the Statements of Operations for
2004 and 2005.
At December 31, 2005 the company had approximately $3 million of
non-capital losses which do not expire before 2009, $38 million of deductible
resource pools and $6 million of deductible financing costs.
7. BANK LOANS
As at December 31, 2005, the company had available an $8.4 million
Revolving Reducing Demand Loan Facility ("LOC") with no scheduled monthly
reductions. The LOC bears interest at the bank's prime lending rate plus
3/4 percent on borrowed amounts. At December 31, 2005, the company had
not drawn any amount on this facility.
Additionally, the company had a $3 million Non-Revolving
Acquisition/Development Demand Loan Facility ("AD Facility"). At
December 31, 2005, the company had not drawn any amount on this facility.
Interest is charged at prime plus one percent on borrowed amounts of the
AD Facility.
These facilities were secured by a $50,000,000 fixed and floating charge
debenture and a general assignment of book debts.
Refer to Note 15, Subsequent Events.
8. ASSET RETIREMENT OBLIGATIONS
The following tables present the reconciliation of the beginning and
ending aggregate carrying amount of the obligation associated with the
retirement of petroleum and natural gas properties and facilities.
-------------------------------------------------------------------------
Year ended December 31 2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Asset retirement obligations, beginning of
year 2,905,477 4,784,000
-------------------------------------------------------------------------
Liabilities incurred 301,091 663,406
-------------------------------------------------------------------------
Liabilities settled with Petrolifera
deconsolidation (442,172) -
-------------------------------------------------------------------------
Liabilities settled - (206,773)
-------------------------------------------------------------------------
Liabilities disposed (24,054) (2,466,660)
-------------------------------------------------------------------------
Change in estimated future cash flows 203,046 (46,496)
-------------------------------------------------------------------------
Accretion expense 165,150 178,000
-------------------------------------------------------------------------
Asset retirement obligations, ending of period 3,108,538 2,905,477
-------------------------------------------------------------------------
At December 31, 2005 the estimated total undiscounted amount required to
settle the asset retirement obligations was $5.4 million (2004 -
$3.9 million). These obligations are expected to be settled over the
useful lives of the underlying assets, which currently extend up to
20 years into the future. This amount has been discounted using a
credit-adjusted risk-free interest rate of six percent and inflation rate
of 1.5 percent.
9. DEFERRED CREDITS
During 2004, the company received an office lease inducement which is
being amortized against office rent expense over the six year term of the
lease.
10. SHARE CAPITAL AND CONTRIBUTED SURPLUS
Authorized
The authorized share capital is comprised of the following:
- Unlimited number of common voting shares
- Unlimited number of first preferred shares
- Unlimited number of second preferred shares
Issued
Only common shares have been issued by the company.
-------------------------------------------------------------------------
Number Amount
of Shares $
-------------------------------------------------------------------------
Share Capital:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Balance , December 31, 2003 45,902,925 19,616,172
-------------------------------------------------------------------------
Issued for cash by private placement (a) 41,706,663 20,832,298
-------------------------------------------------------------------------
Assigned value of warrants issued (a) 441,700
-------------------------------------------------------------------------
Issued upon exercise of options (c) 575,000 178,236
-------------------------------------------------------------------------
Issued upon exercise of warrants (d) 1,442,155 766,788
-------------------------------------------------------------------------
Assigned value of warrants exercised (45,700)
-------------------------------------------------------------------------
Tax effect of expenditures renounced
pursuant to the issuance of flow through
common shares (e) (1,970,000)
-------------------------------------------------------------------------
Share issue costs (1,737,633)
-------------------------------------------------------------------------
Tax effect of share issue costs 673,700
-------------------------------------------------------------------------
Balance, Share Capital, December 31, 2004 89,626,743 38,755,561
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Issued for cash in public offerings (b) 45,541,000 90,000,850
-------------------------------------------------------------------------
Issued upon exercise of options (c) 981,000 665,908
-------------------------------------------------------------------------
Issued upon exercise of warrants (d) 3,791,705 1,986,388
-------------------------------------------------------------------------
Share issue costs (5,979,861)
-------------------------------------------------------------------------
Tax effect of share issue costs 2,339,300
-------------------------------------------------------------------------
Tax effect of expenditures renounced
pursuant to the issuance of flow through
common shares (2,697,500)
-------------------------------------------------------------------------
Balance, Share Capital, December 31, 2005 139,940,448 125,070,646
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contributed Surplus:
-------------------------------------------------------------------------
Balance, December 31, 2003 378,333
-------------------------------------------------------------------------
Fair value of share options granted 180,661
-------------------------------------------------------------------------
Assigned value of options exercised (23,736)
-------------------------------------------------------------------------
Balance, Contributed Surplus, December 31, 2004 535,258
-------------------------------------------------------------------------
Fair value of options granted 1,587,910
-------------------------------------------------------------------------
Assigned value of options exercised (161,138)
-------------------------------------------------------------------------
Balance Contributed Surplus, December 31, 2005 1,962,030
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Total Share Capital and Contributed Surplus:
-------------------------------------------------------------------------
December 31, 2004 39,290,819
-------------------------------------------------------------------------
December 31, 2005 127,032,676
-------------------------------------------------------------------------
(a) Private Placement - 2004
In November and December 2004 the company issued from treasury 30,000,000
common shares at $0.475 per share and 11,706,663 common shares on a flow-
through basis at $0.60 per share, renouncing resource expenditures of
$7,023,998 effective December 31, 2004. As partial compensation for
distributing the shares, selling agents were issued 2,487,368 warrants,
with each warrant entitling the holder to acquire one common share from
treasury at a price of $0.59 anytime before June 7, 2006 and 2,400
warrants exercisable at $0.61 anytime before June 7, 2006. For accounting
purposes a fair value of $441,700 was assigned to the issued warrants. In
the current year 1,005,948 of these warrants were exercised (2004-nil).
(b) Public Offerings - 2005
In September 2005 the company issued from treasury 40,541,000 common
shares at $1.85 per share. In December 2005 issued the company from
treasury another five million common shares on a flow-through basis at
$3.00 per share, renouncing resource expenditures of $15 million
effective December 31, 2005.
(c) Stock Options
A summary of the company's outstanding stock option grants, as at
December 31, 2005 and 2004 and changes during those years is presented
below:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Outstanding, beginning
of year 3,988,600 0.53 2,830,000 0.45
-------------------------------------------------------------------------
Granted 5,994,000 1.94 2,138,000 0.57
-------------------------------------------------------------------------
Expired (409,000) 1.05 (404,400) 0.53
-------------------------------------------------------------------------
Exercised (981,000) 0.51 (575,000) 0.27
-------------------------------------------------------------------------
Outstanding, end of
year 8,592,600 1.49 3,988,600 0.53
-------------------------------------------------------------------------
Exercisable, end of
year 3,159,869 1.03 2,030,000 0.57
-------------------------------------------------------------------------
All stock options have been granted for a period of five years. Of the
stock options granted in 2005, 4,104,000 stock options vest one-third
upon grant, one-third one year after grant, and one-third two years after
grant and 1,890,000 stock options vest one-third one year after grant,
one-third two years after grant, and one-third three years after grant.
The table below summarizes unexercised stock options.
-------------------------------------------------------------------------
Weighted
Average
Remaining
Contractual
Life at
Number December 31,
Range of Exercise Prices Outstanding 2005
-------------------------------------------------------------------------
$0.20 - $0.70 2,285,600 3.0
-------------------------------------------------------------------------
$0.71 - $1.00 1,751,000 3.8
-------------------------------------------------------------------------
$1.01 - $1.61 2,126,000 4.4
-------------------------------------------------------------------------
$1.62 - $3.91 2,430,000 4.9
-------------------------------------------------------------------------
8,592,600
-------------------------------------------------------------------------
In 2005 a compensatory non-cash expense of $1,601,631 (2004 - $180,661)
was recorded, reflecting the fair value of stock options granted and
vested during the year. Of the current amount of $1,191,971 was expensed
and the balance was capitalized to property and equipment.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with weighted average
assumptions for grants as follows:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Risk free interest rate 3.0% 3.0%
-------------------------------------------------------------------------
Expected option life (years) 3 3
-------------------------------------------------------------------------
Expected volatility 50% 53%
-------------------------------------------------------------------------
The weighted average fair value at the date of grant of all options
granted in 2005 was $0.65 per option (2004 - $0.22).
(d) Share purchase warrants
A summary of the company's outstanding share purchase warrants, as at
December 31, 2005 and 2004 and changes during the years is presented
below:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Outstanding, beginning of year 5,300,525 4,984,145
-------------------------------------------------------------------------
Issued - 2,499,768
-------------------------------------------------------------------------
Exercised (3,791,705) (1,442,155)
-------------------------------------------------------------------------
Expired (15,000) (741,233)
-------------------------------------------------------------------------
Outstanding, end of year 1,493,820 5,300,525
-------------------------------------------------------------------------
The 1,493,820 warrants outstanding are exercisable to purchase common
shares from treasury as follows:
(i) 1,481,420 common shares at $0.59 per share until their expiry on
June 7, 2006;
(ii) 2,400 common shares at $0.61 per share until their expiry on
June 7, 2006; and
(iii) 10,000 common shares at $0.52 per share until their expiry on
December 1, 2006;
(e) Flow-through shares
In 2004 the company incurred all of its $5 million resource expenditures
commitment related to its 2003 flow-through common share financing and
recognized the related tax effect of $1,970,000.
The company renounced $7,023,998 of resource expenditures to flow-through
share investors effective December 31, 2004. The related tax effect of
those expenditures has been recorded in 2005 in the amount of $2,697,500
and the company incurred the expenditures in 2005 as required.
In 2006 the company renounced a further $15 million of resource
expenditures to flow-through investors effective December 31, 2005. The
related tax effect of those expenditures will be recorded in 2006 and the
company has until December 31, 2006 to incur those expenditures.
11. SEGMENTED INFORMATION
In Canada the company is in the business of exploring, producing and
marketing conventional petroleum and natural gas and has recently
commenced exploration and development of bitumen in the oil sands of
northern Alberta. Prior to the de-consolidation of Petrolifera in 2005
(Note 3(b)) it also conducted a conventional petroleum and natural gas
business in Argentina. The significant aspects of these operating
segments are presented below. Included in total Canadian conventional
assets is the company's carrying value of its investment in Petrolifera.
-------------------------------------------------------------------------
Canada Argentina
-------------------------------------------------------------------------
Conventional Oil Sands Total Conventional Total
-------------------------------------------------------------------------
2005
-------------------------------------------------------------------------
Revenue,
gross 11,366,293 - 11,366,293 1,011,390 12,377,683
-------------------------------------------------------------------------
Net
earnings
(loss) 1,010,116 - 1,010,116 (19,226) 990,890
-------------------------------------------------------------------------
Property
and
equip-
ment 34,058,249 11,183,261 45,241,510 - 45,241,510
-------------------------------------------------------------------------
Capital
expen-
ditures 7,959,099 7,081,078 15,040,177 1,767,125 16,807,302
-------------------------------------------------------------------------
Total
assets 123,382,911 11,183,261 134,566,172 246,927 134,813,099
-------------------------------------------------------------------------
2004
-------------------------------------------------------------------------
Revenue,
gross 10,184,516 - 10,184,516 1,031,372 11,215,888
-------------------------------------------------------------------------
Net
earnings
(Notes 2
& 8) (3,049,181) - (3,049,181) 72,770 (2,976,411)
-------------------------------------------------------------------------
Property
and
equip-
ment
(Notes 2
& 8) 30,344,486 4,102,183 34,446,669 2,818,926 37,265,595
-------------------------------------------------------------------------
Capital
expen-
ditures 12,911,038 4,102,183 17,013,221 615,313 17,628,534
-------------------------------------------------------------------------
Total
assets
(Notes 2
& 8) 38,985,544 4,102,183 43,087,727 3,002,386 46,098,113
-------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS
In 2005 the company paid professional legal fees of $539,004 (2004 -
$250,800) to a law firm in which officers or directors of the company are
related parties. Transactions with the related party occurred within the
normal course of business and have been measured at their exchange amount
on normal business terms. The exchange amount is the amount of
consideration established and agreed to with the related parties.
13. SUPPLEMENTARY INFORMATION
(a) Per share amounts
The following table summarizes the common shares used in per share
calculations.
-------------------------------------------------------------------------
For the years ended December 31 2005 2004
-------------------------------------------------------------------------
Weighed average common shares outstanding 106,113,563 50,907,942
-------------------------------------------------------------------------
Dilutive effect of stock options and stock
purchase warrants 5,732,124 2,420,609
-------------------------------------------------------------------------
Weighed average common shares outstanding
- diluted 111,845,687 53,328,551
-------------------------------------------------------------------------
(b) Net change in non-cash working capital
-------------------------------------------------------------------------
For the years ended December 31 2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Accounts receivable (276,581) 711,424
-------------------------------------------------------------------------
Petrolifera current account 61,355 -
-------------------------------------------------------------------------
Loan receivable - 135,848
-------------------------------------------------------------------------
Prepaid expenses (124,299) (12,053)
-------------------------------------------------------------------------
Accounts payable 250,707 (10,263,942)
-------------------------------------------------------------------------
Total (88,818) (9,428,723)
-------------------------------------------------------------------------
Summary of working capital changes:
-------------------------------------------------------------------------
Operations (484,927) 42,896
-------------------------------------------------------------------------
Investing 396,109 (9,385,827)
-------------------------------------------------------------------------
(88,818) 9,428,723
-------------------------------------------------------------------------
(c) Supplementary cash flow information
-------------------------------------------------------------------------
For the years ended December 31 2005 2004
-------------------------------------------------------------------------
$ $
-------------------------------------------------------------------------
Interest paid 67,179 883,026
-------------------------------------------------------------------------
Income taxes paid 2,516 76,006
-------------------------------------------------------------------------
Stock-based compensation capitalized 409,660 -
-------------------------------------------------------------------------
14. COMMITMENTS, CONTINGENCIES and Guarantees
The company's annual commitments under leases for office premises and
operating costs, field compression equipment, software license agreements
and other equipment are as follows:
2006 - $497,000; 2007 - $399,000; 2008 - $549,000; 2009 - $543,000;
2010-$224,000
Additionally, the company has various guarantees and indemnifications in
place in the ordinary course of business, none of which are expected to
have a significant impact on the company's financial statements or
operations.
15. SUBSEQUENT EVENTS
(a) February equity issuance
In February 2006 the company issued, on a private placement basis,
19,047,800 common shares from treasury at $5.25 per common share for
gross proceeds of $100 million. The proceeds were initially added to
working capital and were subsequently partially utilized to complete the
acquisition of Luke Energy Ltd.
(b) New banking facilities
Subsequent to December 31, 2005 the company has entered into new loan
agreements providing the following borrowing facilities:
(i) a $45 million reserve-based revolving loan and a $10 million
revolving operating loan to finance conventional petroleum and natural
gas projects in Canada. These facilities have a renewable one year term
and are secured by a fixed and floating charge debenture in the principal
amount of $500 million. Interest at bank prime plus 1/4 percent is to be
charged on amounts borrowed. No amounts have been drawn on these
facilities.
The LOC and AD Facility lines described in Note 7 were terminated.
(ii) A commitment letter for a US$ 51 million bridge loan has been
executed. If the loan is drawn, proceeds will be issued to partially fund
the acquisition of the Montana refinery assets, scheduled to close on
March 31, 2006. See Note 15 (d). If drawn, the loan will bear interest at
LIBOR + 1/2 percent for the first 90 days (adjusted for subsequent
quarterly periods), will be secured by a US$500 million demand debenture
and pledge agreement and should be repayable around 364 days after being
drawn.
(iii) The company has executed a mandate letter ("Mandate") with an
international bank. The Mandate contemplates the arrangement of a
US$148 million term loan, subject to completion of the acquisition of the
Montana refining assets, negotiation of satisfactory terms and acceptable
market conditions. If arranged, proceeds would be used to repay the
US$51 million bridge loan, if concluded, and for anticipated capital
expenditures at Great Divide.
(c) Luke acquisition
On March 16, 2006 the company closed the acquisition of Luke Energy Ltd.
by the payment of cash of $91.5 million, the assumption of debt of
$8 million and by issuance of 29.7 million common shares from treasury.
The debt was immediately discharged from cash balances.
(d) Montana refinery asset purchase
In March 2006 the company entered into an Asset Purchase Agreement to
acquire the assets of a refinery located in Great Falls, Montana from a
US public company. The consideration for this acquisition will be
approximately US$55 million, comprised of cash and one million common
shares from treasury. Closing is scheduled to occur on March 31, 2006.
Connacher Oil and Gas Limited is a Calgary-based oil and natural gas
exploration and production company. Its principal asset is its
100 percent ownership of the Great Divide oil sands project. Conventional
oil production and reserves are also held in Saskatchewan. In March 2006,
Luke Energy Ltd. was acquired under a Plan of Arrangement. Connacher has
also agreed to acquire an 8,300 bbl/d refinery and related assets in
Montana. This is anticipated to close on March 31, 2006. Its common
shares are listed for trading on the Toronto Stock Exchange ("CLL").
Certain information related to the company, including the MD&A attached
hereto, will be posted as required on SEDAR at www.sedar.ca.
This press release contains forward-looking statements, including but not
limited to production rates, reserves, exploration and development plans,
capital expenditures and the proposed acquisition of assets of Montana
Refining Company and resources. These statements are based on current
expectations that involve a number of risks and uncertainties, which
could cause actual results to differ from those anticipated. These risks
include, but are not limited to, risks associated with the oil and gas
industry (e.g. 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 reserve
and resource estimates and the timing and recoverability thereof; the
uncertainty of estimates and projections in relation to production, costs
and expenses and health, safety and environmental risks), the risk of
commodity price and foreign exchange rate fluctuations and, as relates to
Connacher's equity interest in Petrolifera, Connacher's risk associated
with international activity. Reserve and resource information is based
upon assumptions and forecasts set forth in the independent reserves and
resource reports of D&M and GLJ and will be summarized in Connacher's
Annual Information Form. Although Connacher believes that our
expectations represented by these forward-looking statements are
reasonable, there can be no assurance that such expectations will prove
to be correct. 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. For a description of the risks and uncertainties facing
Connacher, readers should refer to Connacher's Annual Information Form
and other public disclosure documents filed at ww.sedar.com. A barrel of
oil equivalent (boe), derived by converting gas to oil in the ratio of
six thousand cubic feet of gas to oil, and may be misleading,
particularly if used in isolation. A boe 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.
>>
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May 22, 2013, 6:18 PM EDT
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Connacher makes great progress in 2005
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