FOX Translator
No data currently available.
No data currently available.
We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
Home / Markets / Industries / Energy
Thursday, August 07, 2008
Sabretooth Energy Ltd. announces second quarter operational results and additional Northeast British Columbia exploration and development details
Comtex
CALGARY, Aug. 6, 2008 (Canada NewsWire via COMTEX) ----Sabretooth Energy Ltd. ("Sabretooth" or the "Company") (TSX: "SAB") is pleased to provide a financial update on its Second Quarter 2008 results and additional details on its Northeast British Columbia activities.
Second Quarter Results
In the second quarter of 2008, the Company averaged approximately 2,360 boe/d of production, with a net back price of $40.88 per boe. The Company also spent approximately $9.5 million on capital projects and land acquisitions.
Northeast British Columbia Operational Update
Sabretooth has finished drilling its first horizontal Montney well at Red Creek. The completion of this well is scheduled for mid September with initial completion results expected by middle to late October. Capital expenditures for the remaining five months of 2008 are projected at $15.0 million and are expected to include expenditures to drill 4 horizontal and 3 vertical wells primarily on Sabretooth's existing assets at Red Creek, Mica and Gunnell/Sahtaneh.
Sabretooth's existing non-conventional Montney undeveloped land holdings total approximately 40,000 net acres, with Sabretooth's Northeast British Columbia Montney land holdings accounting for approximately 84% of that number. Sabretooth will continue to focus its exploration and development efforts on its core Montney land holdings which will provide a solid base for growth for the balance of 2008 and into 2009. Total undeveloped land holdings will be approximately 119,700 net acres once all contemplated assets divestitures are closed.
Asset Rationalization
The Company successfully closed the sale of its West Central assets on July 31, 2008 and expects to close the sale of its Fireweed assets by the middle of August. When the Fireweed asset sale is completed, the Company will have disposed of approximately 545 boe/d of production for total proceeds of $22.5 million. Current production after asset rationalization is approximately 1,900 boe/d.
Credit Facility and Debt
As a result of the asset rationalization, the Company is in the process of negotiating a revised credit facility. The revised credit facility is expected to be approximately $58.0 million and is expected to close by the middle of August. The Company expects that the 2008 capital program will be funded through cash flow from operations and bank facilities.
About Sabretooth Energy
Sabretooth Energy Ltd. is a public oil and gas exploration and development company, located in Calgary, Alberta and carrying out operations in Western Canada. Sabretooth trades on the Toronto Stock Exchange (TSX) under the symbol "SAB".
This news release contains forward-looking statements relating to the Company's plans and other aspects of the Company's anticipated future operations, strategies, financial and operating results and business opportunities. Forward-looking statements typically use words such as "anticipate", "believe", "project", "expect", "plan", "intend" or similar words suggesting future outcomes, statements that actions, events or conditions "may", "would", "could" or "will" be taken or occur in the future, or statements regarding the outlook for petroleum prices, estimated amounts and timing of capital expenditures, the timing, location and extent of future drilling operations anticipated timing and results of construction projects and project tie-ins, estimates of future production, the ability to realize the timing, on investments in ABCP, the terms of the Corporation's new credit facility, loans to be received from National Bank of Canada, if any, operating costs or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Statements regarding reserves are also forward-looking statements, as they reflect estimates as to the expectation that the deposits can be economically exploited in the future.
These statements are based on certain factors and assumptions regarding expected growth, results of operations, performance, business prospects and opportunities, the terms of the Corporation's new credit facility and the ability of the Company to realize on its investments in ABCP. While we consider these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect.
By their nature, forward-looking statements involve numerous risk and uncertainties and other factors that contribute to the possibility that the predicted outcome will not occur, including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, incorrect assessment of the value of acquisitions, failure to realize the anticipated benefits of acquisitions, delays resulting from or inability to obtain required regulatory approvals, the ability to realize on investments in ABCP and ability to access sufficient capital from internal and external sources. Readers are cautioned that the foregoing list of factors is not exhaustive.
Although Sabretooth 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. As a consequence, actual results may differ materially from those anticipated in the forward-looking statements and you should not unduly rely on forward-looking statements. The forward-looking statements contained in this news release are made as the date of this new release and the Company does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
The term barrels of oil equivalent or boe may be misleading, particularly if used in isolation. A conversion ratio for gas of 6 mcf: 1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
<< Q2 2008 Highlights ------------------------------------------------------------------------- Three Months Six Months Three Months Six Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2008 2008 2007 2007 ------------------------------------------------------------------------- Financial ($) Production revenue $ 15,559,000 $ 29,782,000 $ 4,299,000 $ 9,537,000 Realized gain (loss) on hedge $ (2,331,000) $ (2,411,000) $ 215,000 $ 270,000 Unrealized gain (loss) on hedge $ (4,715,000) $(12,698,000) $ 634,000 $ 17,000 Net income (loss) $ (2,486,000) $(13,305,000) $ 141,000 $ 4,055,000 Funds flow from operations $ 6,339,000 $ 14,072,000 $ 2,177,000 $ 4,664,000 ------------------------------------------------------------------------- Production volumes Natural gas (mcf/d) 12,422 14,098 5,140 5,781 Crude oil (bbls/d) 179 229 114 108 Natural gas liquids (bbls/d) 107 116 24 28 Total (boe/d) 2,357 2,695 995 1,100 Sales prices Natural gas ($/mcf) $ 8.91 $ 8.19 $ 7.93 $ 7.87 Natural gas, not including hedges ($/mcf) $ 10.98 $ 9.13 $ 7.47 $ 7.60 Crude oil ($/bbl) $ 125.19 $ 102.31 $ 63.55 $ 64.76 Natural gas liquids ($/bbl) $ 113.55 $ 98.73 $ 65.86 $ 61.45 Total ($/boe) $ 61.67 $ 55.81 $ 49.84 $ 49.25 Netbacks, not including unrealized hedges ($/boe) Price $ 61.67 $ 55.81 $ 49.84 $ 49.25 Royalties (6.29) (6.98) (6.38) (7.90) Transportation (1.53) (1.38) (1.54) (1.57) Operating costs (12.97) (12.12) (13.09) (10.89) ------------------------------------------------------------------------- Total $ 40.88 $ 35.33 $ 28.83 $ 28.89 ------------------------------------------------------------------------- Capital expenditures ($) ------------------------------------------------------------------------- Total capital expenditures $ 9,522,000 $ 22,126,000 $ 6,142,000 $ 20,098,000 ------------------------------------------------------------------------- Land (net acres) Developed 42,035 42,035 10,656 10,656 Undeveloped 171,619 171,619 49,927 49,927 ------------------------------------------------------------------------- Total Land 213,654 213,654 60,583 60,583 ------------------------------------------------------------------------- >>
Management's Discussion and Analysis
-------------------------------------------------------------------------
This Management's Discussion and Analysis ("MD & A") of the financial and operating results for Sabretooth Energy Limited ("Sabretooth" or the "Company") should be read in conjunction with the Company's unaudited consolidated financial statements (the "Financial Statements") and related notes for the six months ended June 30, 2008 as well as with the audited consolidated financial statements (the "Annual Financial Statements") for the year ended December 31, 2007.
This MD & A is dated August 6, 2008.
Basis of Presentation
The financial data presented below has been prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The reporting and the measurement currency is the Canadian dollar. For the purpose of calculating unit costs, natural gas is converted to a barrel equivalent ("boe") using six thousand cubic feet of natural gas equal to one barrel of oil unless otherwise stated. The term barrels of oil equivalents (BOE) may be misleading, particularly if used in isolation. A BOE conversion ratio for gas of 6 mcf:1 boe is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Non-GAAP Measurements
Within the Management Discussion and Analysis references are made to terms commonly used in the oil and gas industry. Netback is not defined by GAAP in Canada and is referred to as a non-GAAP measure. Netbacks equal total revenue less royalties, operating costs and transportation costs calculated on a boe basis. Management utilizes this measure to analyze operating performance. Total boes are calculated by multiplying the daily production by the number of days in the period.
Funds flow from operations is a non-GAAP term that represents net income (loss) adjusted for non-cash items including depletion, depreciation, accretion, future income taxes, stock-based compensation, unrealized hedge gains (losses), asset write-downs and gains (losses) on sale of assets and before adjustments for changes in working capital. The Company evaluates its performance based on earnings and funds flow from operations. The Company considers funds flow from operations a key measure as it demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. The Company's calculation of funds flow from operations may not be comparable to that reported by other companies. Funds flow from operations per share is calculated using the same weighted average number of shares outstanding used in the calculation of income (loss) per share.
Forward-looking Statements
Certain statements contained within this MD & A constitute forward- looking statements. These statements related to future events or our future performance. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as "seek", "anticipate", "budget", "plan", "continue", "estimate", "expect", "forecast", "may", "will", "project", "predict", "potential", "targeting", "intend", "could", "might", "should", "believe", and similar expressions. Forward-looking statements in this MD & A include, but are not limited to, statements with respect to: the potential impact of implementation of the Alberta Royalty Framework on Sabretooth's condition and projected 2008 capital investments; its ability to realize the Company's investments in Asset Backed Commercial Paper ("ABCP") ; projections with respect to growth of natural gas production; the projected impact of land access and regulatory issues; projections relating to the volatility of crude oil prices in 2008 and beyond and reasons therefore; the Company's projected capital investment levels for 2008 and the source of funding therefore; the effect of the Company's risk management program, including the impact of derivative financial instruments; the Company's defence of lawsuits; the impact of the climate change initiatives on operating costs; the impact of Western Canada pipeline constraints; projections that the Company will fully recover from its ABCP. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.
By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecast, projects and other forward-looking statements will not occur, which may cause the Company's actual performance and financial results in future periods to differ materially from any estimates or projects of future performance or results expressed or implied by such forward-looking statements. These assumptions, risks and uncertainties include, among other things: volatility of and assumptions regarding oil and gas prices; assumptions based upon Sabretooth's current guidance; fluctuations in currency and interest rates; its ability to realize the Company's investment in ABCP; product supply and demand; market competition; risk inherent in the Company's marketing operations, including credit risks; imprecision of reserves estimates and estimates of recoverable quantities of oil, natural gas and liquids from resource plays and other sources not currently classified as proved; the Company's ability to replace and expand oil and gas reserves; the Company's ability to generate sufficient cash flow from operations to meet its current and future obligations; the Company's ability to access external sources of debt and equity capital; the timing and cost of well and pipeline constructions; the Company's ability to secure adequate product transportation; changes in royalty, tax, environmental and other laws or regulations or the interpretations of such laws or regulations; risks associated with existing and potential future lawsuits and regulatory actions made against the Company; and other risks and uncertainties described from time to time in the reports and filings made with securities regulatory authorities by Sabretooth. Statements relating to "reserves" are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources and reserves described can be profitably produced in the future.
Financial outlook information contained in this MD & A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management's assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD & A should not be used for purposes other than for which it is disclosed herein.
Although Sabretooth believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectation will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD & A are made as of the date of this MD & A, and except as required by law Sabretooth does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD & A are expressly qualified by this cautionary statement.
<< FINANCIAL RESULTS AND HIGHLIGHTS Three months Six months ended June 30, ended June 30, $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenue, net of royalties $ 4,209 $ 3,721 $ 26,360 $ 7,965 Funds flow from operations(1) $ 6,339 $ 2,177 $ 14,072 $ 4,664 Net income (loss) $ (2,486) $ 141 $ (13,305) $ 4,055 ------------------------------------------------------------------------- (1) Funds flow from operations is a non-GAAP term that represents net earnings adjusted for non-cash items including depletion and depreciation, accretion, future income taxes, stock-based compensation, unrealized hedge gains (losses), asset write-downs and gains (losses) on sale of assets. The Company evaluates its performance based on earnings and funds flow from operations. The Company considers funds flow from operations a key measure as it demonstrates the Company's ability to generate the cash flow necessary to fund future growth through capital investment and to repay debt. Summary of Funds Flow from Operations Three months Six months ended June 30, ended June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Cash From Operating Activities (Add back) deduct: $ 5,254 $ (493) $ 9,948 $ 2,737 Net change in non-cash working capital (1,085) (2,670) (4,124) (1,927) Funds flow from operations $ 6,339 $ 2,177 $ 14,072 $ 4,664 ------------------------------------------------------------------------- >>
Revenue
Gas revenue not including the realized loss on derivatives increased 194% from $7,954,000 for the six months ended June 30, 2007 to $23,433,000 for the same period in 2008. The increase in gas sales relates primarily to the 146% increase in production resulting from the acquisition, the successful drilling program, along with a slight increase of Sabretooth's natural gas price by 4%.
Oil sales increased by 236% for the six month period ending June 30, 2008 compared to the same time period in 2007 primarily due to the strengthening of Sabretooth's oil price by 58%. The increase in the oil price was the result of the significant increase in the US$ WTI.
<< Three months Six months ended June 30, ended June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Natural gas $ 12,407 $ 3,494 $ 23,433 $ 7,954 Realized gain (loss) on hedge contracts (2,331) 215 (2,411) 270 ------------------------------------------------------------------------- Total Natural gas $ 10,076 $ 3,709 $ 21,022 $ 8,224 Oil 2,042 660 4,261 1,270 Natural gas liquids 1,110 145 2,088 313 ------------------------------------------------------------------------- Total Revenue $ 13,228 $ 4,514 $ 27,371 $ 9,807 ------------------------------------------------------------------------- >>
Pricing
Both natural gas and crude oil prices rose during the second quarter. During the first 6 months of 2008 prices at AECO rose 52% from a low of $6.98/Mcf to a high of $10.60/Mcf. Sabretooth realized an average natural gas price of $8.91/Mcf during the three months ended June 30, 2008, an increase of 12% from $7.93/Mcf for the same period in 2007. The AECO daily index for the same time period increased by 44%.
The selling price for oil for the three months ended June 30, 2008, increased from $63.55/bbl to $125.19/bbl and increase of 97%, due to the increase in the US$ WTI benchmark price, partially offset by a stronger Canadian dollar.
<< Three months Six months Average Selling Price(1) ended June 30, ended June 30, ------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Natural gas (per mcf) $ 8.91 $ 7.93 $ 8.19 $ 7.87 Crude Oil (per bbl) $ 125.19 $ 63.55 $ 102.31 $ 64.76 Natural gas liquids (per bbl) $ 113.55 $ 65.86 $ 98.73 $ 61.45 ------------------------------------------------------------------------- Per boe $ 61.67 $ 49.84 $ 55.81 $ 49.25 ------------------------------------------------------------------------- (1) The average selling prices reported are after realized derivative losses and before transportation costs. Three months Six months ended June 30, ended June 30, ------------------------------------------- Benchmark Pricing 2008 2007 2008 2007 ------------------------------------------------------------------------- AECO natural gas - monthly index (CDN$/Mcf) $ 8.83 $ 7.07 $ 8.24 $ 7.03 AECO natural gas - daily index (CDN$/MCF) $ 9.67 $ 6.70 $ 8.62 $ 6.86 WTI Crude Oil (US$/bbl) $ 123.95 $ 64.94 $ 110.91 $ 61.46 Edmonton Par Price (CDN$/bbl) $ 126.38 $ 72.62 $ 112.30 $ 70.19 US$/CDN$ exchange rate $ 0.99 $ 0.93 $ 0.99 $ 0.89 >>
Production
Production increased to 2,357 boe/d in the second quarter of 2008 from 995 boe/d in the second quarter of 2007, primarily due to the 2007 corporate acquisition of Bear Ridge Resources and the successful drilling program, offset by natural declines.
Sabretooth drilled 4 wells (1.8 net) in the second quarter of 2008, focused primarily in the B.C. resource play. Five new wells came on production in the second quarter adding 65 boe/d, which was offset by three wells that paid out in the second quarter decreasing production by 85 boe/d.
Production volumes for the six months ended June 30, 2008 were 490,461 boe and averaged 2,695 boe/d compared to six months ended June 30, 2007 production volumes were 199,140 boe and averaged 1,100 boe/d.
Production volumes for the three months ended June 30, 2008 were 2,357 boe/d compared to the first quarter of 2008 which were 3,032 boe/d. The decrease was due to non-operated plant downtime and natural declines.
<< For the three For the three months ended months ended June 30, 2008 June 30, 2007 ------------------------------------------------------- Total Per day Total Per day ------------------------------------------------------------------------- Natural Gas 1,130,435 mcf 12,422 mcf/d 467,720 mcf 5,140 mcf/d Crude Oil 16,313 bbls 179 bbls/d 10,384 bbls 114 bbls/d NGLs 9,771 bbls 107 bbls/d 2,220 bbls 24 bbls/d ------------------------------------------------------------------------- Total 214,502 boe 2,357 boe/d 90,557 boe 995 boe/d ------------------------------------------------------------------------- For the six For the six months ended months ended June 30, 2008 June 30, 2007 ------------------------------------------------------- Total Per day Total Per day ------------------------------------------------------------------------- Natural Gas 2,565,809 mcf 14,098 mcf/d 1,046,409 mcf 5,781 mcf/d Crude Oil 41,645 bbls 229 bbls/d 19,612 bbls 108 bbls/d NGLs 21,154 bbls 116 bbls/d 5,126 bbls 28 bbls/d ------------------------------------------------------------------------- Total 490,461 boe 2,695 boe/d 199,140 boe 1,100 boe/d ------------------------------------------------------------------------- >>
Royalty Expense
Royalty expense in the second quarter of 2008 was $1,350,000 or 10% of revenue compared to $578,000 or 13% of revenue in the second quarter of 2007. Royalty expense for the first six months of 2008 was $3,422,000 or 13% of revenue compared to $1,572,000 or 16% of revenue for the same period in 2007. Royalty expense as a percentage of revenue is lower in the current quarter which is primarily due to an additional $800,000 of capital cost recovery credits compared to the same time period in 2007.
<< Three months ended Six months ended June 30, June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Royalties ($) $ 1,350 $ 578 $ 3,422 $ 1,572 ------------------------------------------------------------------------- As a % of revenue 10% 13% 13% 16% Per Unit of Production ($/boe) $ 6.29 $ 6.38 $ 6.98 $ 7.90 ------------------------------------------------------------------------- Transportation Transportation costs for the second quarter of 2008 were $329,000 or $1.53 per boe. For the six months ended June 30, 2008 transportation costs were $675,000 or $1.38 per boe. Transportation costs for the second quarter of 2007 were $140,000 or $1.54 per boe. For the six months ended June 30, 2007 transportation costs were $313,000 or $1.57 per boe. Transportation costs per boe are relatively flat quarter over quarter. Three months ended Six months ended June 30, June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Transportation $ 329 $ 140 $ 675 $ 313 Per Unit of Production ($/boe) $ 1.53 $ 1.54 $ 1.38 $ 1.57 ------------------------------------------------------------------------- >>
Operating Costs
Operating costs during the second quarter of 2008 were $2,782,000 or $12.97 per boe compared to $1,186,000 or $13.09 per boe for the same time period in 2007. For the six months ended June 30, 2008 operating costs were $5,945,000 or $12.12 per boe compared to $2,168,000 or $10.89 per boe. For the six months ended June 30, 2008, operating costs increased by 174% per boe while production increased 145% per boe/d comparing to the same period in 2007. The increase in operating costs for the second quarter was attributable to lower production while infrastructure costs remained constant.
<< Three months ended Six months ended June 30, June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Operating Costs ($) $ 2,782 $ 1,186 $ 5,945 $ 2,168 Per Unit of Production ($/boe) $ 12.97 $ 13.09 $ 12.12 $ 10.89 ------------------------------------------------------------------------- Operating Netbacks Sabretooth's netback for the second quarter of 2008 increased from $28.83 in 2007 to $40.88. For the six months ended June 30, 2008 was $35.33 compared to $28.89 in 2007. The increase in the netback for the six months ended June 30, 2008 is primarily due to the higher average selling prices attributable to higher market prices, along with lower royalty rates, and lower transportation costs. Offsetting these increases in the netback were higher operating costs, and increased derivative losses. Three months ended Six months ended June 30, June 30, ------------------------------------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Production revenue, including realized hedge gains (losses) $ 61.67 $ 49.84 $ 55.81 $ 49.25 Royalty expense (6.29) (6.38) (6.98) (7.90) Transportation (1.53) (1.54) (1.38) (1.57) Operating Costs (12.97) (13.09) (12.12) (10.89) ------------------------------------------------------------------------- Netback, $/boe $ 40.88 $ 28.83 $ 35.33 $ 28.89 ------------------------------------------------------------------------- >>
General and Administrative Expenses
General and administrative ("G & A") expenses for the second quarter of 2008, net of capitalized amounts and recoveries, were $1,452,000 or $6.77 per boe, up 191% compared to $500,000 or $5.53 per boe for 2007. For the three and six months ended June 30, 2008, Sabretooth capitalized approximately $670,000 and $1,161,000 G & A expenses respectively related to exploration and development. The increase in G & A costs per boe is attributable to increased personnel costs during the second quarter coupled with decreased production.
For the six months ended June 30, 2008 G & A expenses were $2,114,000 or $4.31 per boe compared to $1,078,000 or $5.41 per boe in 2007. Overall G & A per boe has decreased by 20% compared to 2007.
<< Three months ended Six months ended June 30, June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- G & A expense $ 1,452 $ 500 $ 2,114 $ 1,078 Per Unit of Production ($/boe) $ 6.77 $ 5.53 $ 4.31 $ 5.41 ------------------------------------------------------------------------- Interest Expense Interest expense for the second quarter was $757,000 compared to $125,000 in 2007. For the six months ended June 30, 2008 interest expense were $1,501,000 compared to $214,000 in 2007. The increase in interest expense was a result of increased bank debt in 2008 due to the Bear Ridge acquisition. Three months ended Six months ended June 30, June 30, ------------------------------------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Interest Expense ($) $ 757 $ 125 $ 1,501 $ 214 Per Unit of Production ($/boe) $ 3.53 $ 1.38 $ 3.06 $ 1.07 ------------------------------------------------------------------------- >>
Depletion, Depreciation and Amortization ("DD & A")
DD & A expense for the second quarter 2008 was $4,991,000 or $23.27 per boe compared to $2,565,000 or $28.32 in 2007. DD & A expense for the six months ended June 30, 2008 was $10,924,000 or $22.27 per boe compared to $5,858,000 or $29.42 for the same time period in 2007.
The per boe decrease in three months ended 2008 compared to the same period in 2007 is mainly due to the proved reserves developed through the Company's capital projects and the Bear Ridge acquisition.
The depletion rate is impacted by the costs to acquire, explore and develop reserves of crude oil and natural gas, known as finding, development and acquisition costs. In the early stages of exploration, capital costs may be recognized before proved reserves are fully booked leading to higher initial depletion rates. In addition higher depletion rates also result as new production often receives lower reserves assignments under National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") due to the naturally unpredictable nature of newer production.
Asset Retirement Obligations
The Company developed four new assets subject to asset retirement obligations during the second quarter of 2008, and eleven new assets for the six months ended June 30, 2008. $64,000 was recognized as an accretion expense for the second quarter of 2008, and $134,000 for the six months ended June 30, 2008. For the six months period in 2007, the Company acquired ten new assets subject to asset retirement obligations. The Company recognized accretion expense of $14,000 for the second quarter of 2007 and $28,000 for the six months ended June 30, 2007. Total asset retirement obligations recognized at June 30, 2008 is $4,275,000.
Stock Based Compensation
The Company recognizes stock based compensation expense for all stock options granted. For the three and six months ended June 30, 2008, Sabretooth recorded $216,000 (2007 - $76,000) and $550,000 (2007 - $145,000) respectively in stock based compensation expense, with a corresponding increase to contributed surplus, for stock options granted.
Common Shares Outstanding
The number of common voting shares outstanding increased by 48,000 during the second quarter of 2008.
In the first quarter of 2008 the Company granted 195,000 stock options exercisable into voting common shares of the Company. These options vest 25% the first, second, third and fourth anniversaries of grant and have a weighted average exercise price of $2.66 per share.
In the first quarter of 2008, 229,000 vested options were repurchased for approximately $104,000. The amount paid to repurchase the options was charged to contributed surplus.
In the second quarter of 2008 the Company granted 500,000 stock options exercisable into voting common shares of the Company. These options vest 25% the first, second, third and fourth anniversaries of grant and have a weighted average exercise price of $2.28 per share.
In the second quarter of 2008, 48,000 vested options were exercised for approximately $100,000. The amount paid to exercise the options was credited to share capital. $15,000 was charged to contributed surplus related to the stock based compensation recognized for the above options in previous periods; the same amount was credited to share capital.
Income Taxes
The Company has non-capital loss carry-forwards, investment tax credit carry-forwards, and Scientific Research and Development expenses available to reduce future years' income for tax purposes. The Scientific Research and Development expenses of approximately $22,704,000 available for carry-forward do not expire. The non-capital loss and investment tax credit carry-forwards expire as follows:
<< Year of expiry Non-capital losses Investment tax credits $(000's) $(000's) ------------------------------------------------------------------------- 2010 $ - $ 930 2011 - 1,280 2012 - 672 2013 - 761 2014 - 338 2025 6,168 - ----------------------------------------------- $ 6,168 $ 3,981 ----------------------------------------------- >>
In addition, the Company has UCC pools of approximately $38,000,000, COGPE pools of approximately $20,000,000, CEE pools of approximately $38,000,000, CDE pools of approximately $10,000,000, and share issuance costs of approximately $4,000,000 which can be used to reduce taxable income in the future.
As at June 30, 2008, $7,993,000 has been recognized as a future income tax asset as the Company believes, based on estimated cash flows from existing reserves, that it is more likely than not to realize these assets.
<< Capital Expenditures Three months ended Six months ended June 30, June 30, ------------------ ----------------- $(000's) 2008 2007 2008 2007 ------------------------------------------------------------------------- Land acquisition costs $ 2,889 $ 172 $ 5,272 $ 2,337 Geological & geophysical 33 634 288 1,557 Drilling, completions & workovers 4,788 3,262 12,681 11,890 Tangible equipment 1,103 1,842 2,539 3,921 Capitalized overhead 673 232 1,309 393 Office furniture & equipment 36 - 37 - ------------------------------------------------------------------------- Total capital expenditures $ 9,522 $ 6,142 $ 22,126 $ 20,098 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>
Liquidity and Capital Resources
The Company has established three credit facilities with a Canadian chartered bank. Credit Facility A is a $55,000,000 revolving operating demand loan which bears interest at the bank prime rate plus 0% to 1.5%, depending on the Company's debt to cash flow ratio. Credit Facility B is a $5,000,000 non-revolving acquisition/development demand loan, which bears interest at the bank prime rate plus 0.50%. Credit Facility C is a Revolving Demand Credit Agreement in the face amount of $18,000,000 which bears interest at the bank prime rate and will be required to be repaid in full upon the liquidation or refinancing of the Company's Asset Backed Commercial Paper ("ABCP") holdings. All credit facilities are subject to periodic review by the bank and are secured by a general assignment of book debts and a $100,000,000 demand debenture with a first floating charge over all assets of the Company as well a hypothecation/pledge of ABCP. The Company is authorized to access the credit facilities with prior approval of the Board of Directors of the Company (the "Board"). The Company is required to meet certain financial based covenants under the terms of these facilities. As at June 30, 2008, the Company has drawn $39,566,000 on Facility A, $ Nil on Facility B, and $18,000,000 on Facility C. The effective interest rate for the period ended June 30, 2008 was 5.74% (2007 - 5.40%). In the second quarter of 2008, the Company had exceeded a bank covenant which the bank has waived. The waived covenant states that the Company should not hedge more than 70% of its production under the lending agreement. For the three month period ended June 30, 2008, the Company had hedged approximately 81% of its production.
The Company holds ABCP that is valued at $18,003,000 at June 30, 2008. As at June 30, 2008, the Company held Canadian third party ABCP with an original cost of $24,147,000. At the dates the Company acquired these investments, they were rated R1 (High) and backed by R1 (High) rated assets and liquidity agreements. These investments matured during the third quarter of 2007 but, as a result of the liquidity issues in the ABCP market, did not settle on maturity. As a result the Company has classified its ABCP as long-term investments.
On August 16, 2007 an announcement was made by a group representing banks, asset providers and major investors that they had agreed in principle to a long-term proposal and interim agreement to convert the ABCP's into long-term floating rate notes maturing no earlier than the scheduled maturity of the underlying assets. On September 6, 2007, a Pan-Canadian restructuring committee consisting of major investors was formed. The committee was created to propose a solution to the liquidity problem affecting the ABCP and has retained legal and financial advisors to oversee the proposed restructuring process. On March 17, 2008, a court order was obtained through which a restructuring of the ABCP is expected to occur. A meeting of note holders occurred on April 25, 2008 and the restructuring plan was approved.
The ABCP in which the Company has invested has not traded in an active market since mid-August 2007 and there are currently no market quotations available.
The valuation technique used by the Company to estimate the fair value of its investments in ABCP incorporates probability-weighted discounted cash flows considering the best available public information regarding market conditions and other factors that a market participant would consider for such investments. Probability-weighted discount rates of approximately 7.10% and 12.90% were used at June 30, 2008 for the senior AA and subordinated notes respectively for this estimate and an interest rate of 2.7% was used. This evaluation resulted in a reduction of $6,144,000 to the original cost of the ABCP at June 30, 2008. The assumptions used in determining the estimated fair value reflect the public statements made by the Pan-Canadian restructuring committee that it expects the ABCP will be converted into senior AA rated and subordinated unrated long-term floating rate notes with maturities matching the maturities of the underlying assets and bearing market interest rates commensurate with the nature of the underlying assets and their associated cash flows and the credit rating and risk associated with the long-term floating rate notes. The Company estimates that it will receive 87% of the senior AA rated notes (Class A-1 and A-2) and 13% of the subordinated unrated notes (Class B and C). Assumptions have been made as to the long-term interest rates to be received from the long-term floating rate notes. The term of the notes is estimated to be approximately 7 years which approximates the maturity of the assets backing the note. Based on these assumptions, a write-down of $5,932,000 from the estimated fair value at December 31, 2007 was recognized during the period ended June 30, 2008.
The original ABCP in which the Company has invested has an interest rate of 4.52%. At June 30, 2008 there is $697,000 of interest owing to the Company after impairment allowance. If the restructuring is successful, interest will be paid out. A 36% impairment has been used to value the interest receivable.
Continuing uncertainties regarding the value of the assets which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company's investment in ABCP which would impact the Company's earnings. It is reasonably possible, based on existing knowledge, that change in future conditions in the near term could require a material change in the recognized amount. The reduction from the face value could range from $9,000,000 to $5,900,000 based on alternative reasonable assumptions, although given the nature of the information available, the amount ultimately recovered could vary outside these ranges.
On June 24, 2008 the Company's bank provided an additional credit facility to provide liquidity in respect to the ABCP. The Company will receive Restructuring Notes in exchange for the affected ABCP not backed by ineligible assets. The credit facility is structured as follows:
Tranche A: $10,910,339 revolving credit facility, which represents an amount equal to approximately 45% of the face value of the Restructuring Notes.
Tranche B: $7,273,559 revolving credit facility, which represents an amount equal to approximately 30% of the face value of the Restructuring Notes.
The borrowings under the credit facility will be first allocated to Tranche A and the balance will be allocated to Tranche B. The term is for three years with an option to extend the term to seven years on a year by year basis if agreed to by both parties. Interest is payable at the bank prime rate less 1%. The credit facility is secured by the Restructuring Notes and guarantees. The credit facility also provides for a put option allowing the Company to assign to the bank the Restructuring Notes in payment of the capital under Tranche A. The credit facility will become effective once the final approval and implementation of the restructuring plan is complete.
Contractual Obligations
Sabretooth is committed to various contractual obligations and commitments in the normal course of operations and financing activities. These are outlined as follows:
<< 1) Office Leases - The minimum annual net lease payments, exclusive of operating costs are as follows: 2008 $ 83,000 2009 165,000 2010 169,000 2011 143,000 2012 143,000 Thereafter nil ----------- $ 703,000 ----------- 2) Asset Retirement Obligations - Sabretooth is the owner of oil and natural gas wells and related surface equipments and facilities. These assets will have to be abandoned and the surface returned to its natural state. As at June 30, 2008, total estimated undiscounted future cash flows required to settle these obligations is approximately $12,505,000 which is exclusive of salvage values and adjusted for expected inflation. This estimate is subject to change based on amendments to environmental laws and as new information with respect to the Company's operations become available. Sabretooth estimates that the salvage value of its field equipments would offset a portion of its estimated future asset retirement obligations. Sabretooth does not expect to incur significant asset retirement cost obligations within the next five years. 3) Flow-through Qualifying Expenditures - Sabretooth assumed obligations related to the Bear Ridge acquisition from issuance of flow-through common shares to incur approximately $24,000,000 of qualifying expenditures before December 31, 2008 and $12,300,000 before March 31, 2009. Approximately $22,456,000 of qualifying expenditures has been incurred to June 30, 2008. The Company also has 1,050,000 CDE warrants which are exercisable at a price of $3.81 and expire March 31, 2009. If they are exercised the Company would have an obligation to spend $4,000,000 of CDE expenditures. Outstanding Share Data As of the date of this MD & A, Sabretooth had the following securities outstanding: 1) 39,114,000 common voting shares; 2) 3,306,000 stock options; and 3) 1,050,000 warrants. Quarterly Information Financial 2008 2007 ------------------------------------------------------------------------- ($ thousands except per share data) Q2 Q1 Q4 Q3 ------------------------------------------------------------------------- Production Revenues (including gains (losses) on financial commodity contract) $ 8,513 $ 6,160 $ 12,888 $ 8,547 Royalties 1,350 2,072 2,246 1,454 Operating expenses 2,782 3,163 3,647 1,955 Transportation expenses 329 346 521 244 Net income (loss) (2,486) (10,819) 217 (497) Per Share - basic (0.06) (0.28) 0.01 (0.02) Per share - diluted (0.06) (0.28) 0.01 (0.02) Funds flow 6,339 7,733 5,985 3,875 Per Share - basic 0.16 0.19 0.15 0.14 Per share - diluted 0.16 0.19 0.15 0.13 Capital expenditures, net $ 9,522 12,604 12,013 4,112 Acquisition expenditures, net - - - 24,752 ------------------------------------------------------------------------- Total expenditures $ 9,522 $ 12,604 $ 12,013 $ 28,864 ------------------------------------------------------------------------- Financial 2007 2006 ------------------------------------------------------------------------- ($ thousands except per share data) Q2 Q1 Q4 Q3 ------------------------------------------------------------------------- Production Revenues (including gains (losses) on financial commodity contract) $ 5,150 $ 4,686 $ 5,369 $ 7,485 Royalties 578 994 1,290 1,249 Operating expenses 1,186 982 944 965 Transportation expenses 140 173 198 223 Net income (loss) 141 3,914 (646) 699 Per Share - basic 0.01 0.19 (0.03) 0.04 Per share - diluted 0.01 0.18 (0.03) 0.04 Funds flow 2,177 2,487 3,095 3,192 Per Share - basic 0.11 0.12 0.16 0.17 Per share - diluted 0.10 0.12 0.15 0.17 Capital expenditures, net $ 6,142 13,956 12,281 8,633 Acquisition expenditures, net - - - - ------------------------------------------------------------------------- Total expenditures $ 6,142 $ 13,956 $ 12,281 $ 8,633 ------------------------------------------------------------------------- Operations 2008 2007 ------------------------------------------------------------------------- Q2 Q1 Q4 Q3 ------------------------------------------------------------------------- Production Volumes Natural gas (mcf/day) 12,422 15,773 17,303 10,813 Oil (bbl/day) 179 278 325 165 NGLs (bbl/day) 107 125 171 36 Total boe/day 2,357 3,032 3,380 2,003 ------------------------------------------------------------------------- Average selling price Natural gas ($/per mcf) $ 8.91 $ 7.63 $ 6.84 $ 7.12 Oil ($/per bbl) 125.19 87.57 76.55 80.61 NGLs ($/per bbl) 113.55 86.02 75.81 75.89 ------------------------------------------------------------------------- Combined ($per boe) $ 61.67 $ 51.25 $ 46.21 $ 46.91 Royalties ($per boe) 6.29 7.51 7.22 7.89 Operation expense ($per boe) 12.97 11.46 11.73 10.61 Transportation ($per boe) 1.53 1.25 1.68 1.32 ------------------------------------------------------------------------- Netback ($per boe) $ 40.88 $ 31.03 $ 25.58 $ 27.09 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Operations 2007 2006 ------------------------------------------------------------------------- Q2 Q1 Q4 Q3 ------------------------------------------------------------------------- Production Volumes Natural gas (mcf/day) 5,140 6,429 8,308 9,418 Oil (bbl/day) 114 103 49 10 NGLs (bbl/day) 24 32 21 80 Total boe/day 995 1,206 1,454 1,659 ------------------------------------------------------------------------- Average selling price Natural gas ($/per mcf) $ 7.47 $ 7.80 $ 7.09 $ 5.90 Oil ($/per bbl) 63.55 66.14 60.42 69.71 NGLs ($/per bbl) 65.86 57.67 67.11 65.71 ------------------------------------------------------------------------- Combined ($per boe) $ 49.84 $ 48.75 $ 43.96 $ 39.29 Royalties ($per boe) 6.38 9.16 9.64 8.18 Operation expense ($per boe) 13.09 9.05 7.07 6.32 Transportation ($per boe) 1.54 1.60 1.48 1.46 ------------------------------------------------------------------------- Netback ($per boe) $ 28.83 $ 28.94 $ 25.77 $ 23.33 ------------------------------------------------------------------------- ------------------------------------------------------------------------- >>
Financial instruments and risk management
The Company has the following financial instruments:
Cash and cash equivalents are designated as held-for-trading instruments and are measured at fair value. Investment in commercial paper is designated as held-for-trading and is measured at fair value with changes in fair value recognized in earnings. Accounts receivable and deposits are designated as loans and receivables and are measured at amortized cost. Accounts payable and accrued liabilities and bank indebtedness are designated as other financial liabilities and are measured at amortized cost. All risk management assets and liabilities are derivative financial instruments and classified as held-for-trading.
The Company uses various types of derivative financial instruments to manage risks associated with natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized at the time each transaction under a contract is settled. For the unrealized portion of such contracts, the Company utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counter parties to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date with unrealized gains or losses on those contracts recorded through net earnings.
An embedded derivative is a component of a contract that affects the terms in relation to another factor. These hybrid contracts are considered to consist of a "host" contract plus an embedded derivative. The embedded derivative is separated from the host contract and accounted for as a derivative only if certain conditions are met. The Company has not identified any embedded derivatives which require separate recognition and measurement.
The nature of these financial instruments and its operations expose the Company to market risk, credit risk and liquidity risk. The Company manages its exposure to these risks by operating in a manner that minimizes these risks. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Board has established policies in setting risk limits and controls and monitors these risks in relation to market conditions.
a) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Company's net earnings or the value of financial instruments. These risks are generally outside the control of the Company. The objective of the Company is to mitigate market risk exposures within acceptable limits, while maximizing returns.
Commodity price risk
--------------------
The nature of the Company's operations results in exposure to fluctuations in commodity prices. Management continuously monitors commodity prices and initiates instruments to manage exposure to these risks when it deems appropriate. As a means of managing commodity price volatility, the Company enters into various derivative financial instrument agreements and physical contracts. Collars ensure that the commodity prices realized will fall into a contracted range for a contracted sale volume based on the monthly index price. Monthly gains and losses are determined based on the differential between the AECO daily index and the AECO monthly index when the monthly index price falls in between the floor and the ceiling. Derivative financial instruments are marked-to-market and are recorded on the consolidated balance sheet as either an asset or liability with the change in fair value recognized in net earnings.
The following information presents all positions for the derivative financial instruments outstanding as at June 30, 2008.
<< ------------------------------------------------------------------------- Term Volume Price Basis ------------------------------------------------------------------------- April 1, 2008 to March 31, 2009 3,000 GJ/day $7.04 AECO ------------------------------------------------------------------------- April 1, 2008 to March 31, 2009 6,000 GJ/day $7.08 AECO ------------------------------------------------------------------------- January 1, 2008 to December 31, 2008 3,150 GJ/day $6.50 floor AECO $10.00 ceiling ------------------------------------------------------------------------- >>
Realized losses totalling $2,331,000 for the second quarter ending June 30, 2008 from derivatives was recognized in income (June 30, 2007 - $215,000 realized gain). For the six months ended June 30, 2008, the Company realized losses totalling $2,411,000 (June 30, 2007 - $270,000 realized gain). The fair value of the commodity contracts outstanding at June 30, 2008 were $(11,855,000) (December 31, 2007 - $843,000; June 30, 2007 - $966,000).
As at June 30, 2008, if the underlying natural gas price increased by $0.50/mcf, the fair value of the commodity contracts becomes $(13,075,000) resulting in an increased loss before tax of $1,220,000 ($872,000 after tax).
As at June 30, 2008, if the underlying natural gas price decreased by $0.50/mcf, the fair value of the commodity contracts becomes $(10,636,000) resulting in a decreased loss before tax of $1,219,000 ($872,000 after tax).
Foreign exchange risk
---------------------
The Company is exposed to foreign currency fluctuations as crude oil and natural gas prices are referenced to U.S. dollar denominated prices. As at June 30, 2008 the Company had no forward, foreign exchange contracts in place, nor any significant working capital items denominated in foreign currencies.
Interest rate risk
------------------
The Company is exposed to interest rate risk to the extent that changes in market interest rates impact its borrowings under the floating rate credit facilities. The floating rate debt is subject to interest rate cash flow risk, as the required cash flows to service the debt will fluctuate as a result of changes in market rates. The Company has no interest rate swaps or financial contracts in place as at or during the three months ended June 30, 2008.
As at June 30, 2008, if interest rates had been 1% lower with all other variables held constant, after tax net earnings for the period would have been $220,000 higher, due to lower interest expense. An equal opposite impact would have occurred to net earnings had interest rates been 1% higher.
b) Credit risk
The majority of the Company's accounts receivable are due from joint venture partners in the oil and gas industry and from purchasers of the Company's petroleum and natural gas production and are subject to the same industry factors such as commodity price fluctuations and escalating costs. The Company generally extends unsecured credit to these 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 they extend credit. The Company has not experienced any credit loss in the collection of accounts receivable to date.
The Company also has credit risk related to its investment in ABCP.
Receivables from petroleum and natural gas marketers are normally collected on the twenty-fifth day of the month following production. Receivables related to the sale of the Company's petroleum and natural gas production are from major marketing companies with investment grade credit ratings. The Company historically has not experienced any collection issues with its petroleum and natural gas marketers.
Joint venture receivables are typically collected within one to three months of the joint venture billings being issued to the partners. The Company attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to expenditure and issuing cash calls on large capital projects to its partners on capital projects before they commence. The Company reviews the financial status of joint venture partners before partner approval is obtained.
c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet its liabilities when they are due. The nature of the oil and gas industry is very capital intensive. As a result, the Company prepares annual capital expenditure budgets and utilizes authorizations for expenditures for projects to manage capital expenditures.
d) Fair value of financial instruments
The Company's cash and cash equivalents, accounts receivable, deposits, bank indebtedness and accounts payable and accrued liabilities approximate their carrying value due to their short terms to maturity and the floating interest rate on the Company's debt.
The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.
The fair value of the Company's investment in commercial paper is disclosed under "Liquidity and Capital Resources".
Off Balance Sheet Arrangements
The Company does not presently utilize any off-balance sheet arrangements to enhance its liquidity and capital resource positions, or for any other purpose. During the period ended June 30, 2008, the Company did not enter into any off-balance sheet transactions.
Related Party Transactions
During the period, the Company entered into commercial business transactions with the following related parties:
<< a) A director of the Company is a partner of a law firm that provides legal services to the Company. During the six months ended June 30, 2008, the Company paid approximately $11,000 (June 30, 2007 - $15,000) to this firm for legal fees and disbursements. Additionally, $Nil is included in accounts payable and accrued liabilities, due under normal credit terms, at June 30, 2008 (December 31, 2007 - $2,000) for this firm. These expenses have been included as general and administrative expense. b) A director of the Company is the owner of a corporation that provides drilling services to the Company. During the six months ended June 30, 2008 the Company paid approximately $606,000 (June 30, 2007 - $688,000) for drilling and services, which has been included in property and equipment. Additionally, approximately $Nil is included in accounts payable and accrued liabilities, due under normal credit terms, at June 30, 2008 (December 31, 2007 - $195,000) for this firm. >>
These transactions have been recorded at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
Asset Sales
Subsequent to June 30, 2008, the Company has agreed to sell its West Central conventional assets in Alberta and Saskatchewan as well as its Fireweed property in North East British Columbia for an aggregate purchase price of $22,450,000. The sale includes approximately 545 boe/d of production and approximately 55,000 net acres of undeveloped land. The Purchase and Sale Agreements were signed on July 25 with the West Central Package closed on July 31 and the Fireweed Package scheduled to close on August 12, 2008. Certain of the sale assets totalling approximately $6,700,000 are subject to rights of first refusal, with such funds to be held in escrow until the first rights of refusal are either waived or exercised. The applicable periods for the rights of first refusal range from fifteen to thirty days, with Sabretooth expecting to receive the funds shortly thereafter.
As a result of the asset rationalization, the Company is in the process of negotiating a revised bank line. The revised credit facility will be approximately $58.0 million and is expected to close in the middle of August.
Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining the Company's disclosure controls and procedures, including adherence to the Disclosure Policy adopted by the Company. The Disclosure Policy requires all staff to keep the Company's Chief Executive Officer and Chief Financial Officer fully apprised of all material information affecting the Company so that they may evaluate and discuss this information and determine the appropriateness and timing for public release. Access to such material information by the Chief Executive Officer and Chief Financial Officer is facilitated by the fact that there are so few members of the Company's senior management and there is frequent and regular communication among all of them.
The Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as of June 30, 2008, have concluded that the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would have been known to them. It should be noted that while the Company's disclosure controls and procedures provide a reasonable level of assurance that they are effective, they do not expect that the disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Internal Controls over Financial Reporting
The Chief Executive Officer and Chief Financial Officer are also responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP.
Management has designed internal controls over financial reporting as of June 30, 2008. The relatively small size of the Company makes the identification and authorization process relatively efficient; however, during the review of the design of internal controls over financial reporting it was noted that, due to the limited number of staff at Sabretooth, it is not feasible to achieve complete segregation of incompatible duties nor does the Company have a sufficient number of finance personnel with all the technical accounting knowledge to address all complex and non-routine accounting transactions that may arise, which may lead to the possibility of inaccuracies in financial reporting. The Company has employed knowledgeable and competent accounting staff to ensure that high quality financial reporting and other internal controls over financial reporting have been designed which provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements. Management and the Board of Directors work together to mitigate the risk of a material misstatement in financial reporting; however, a control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Changes in Accounting Policies and Practices and Future Accounting
Pronouncements
Financial Instruments - Disclosures and Presentation
Effective January 1, 2008, the Company adopted two new Canadian Institute of Chartered Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial Instruments - Presentation. These Handbook sections replaced existing Handbook Section 3861, Financial Instruments - Presentation and Disclosure. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized financial instruments and how those risks are managed. Specifically, Section 3862 requires disclosure of the significance of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments. The new presentation standard carries forward the former presentation requirements.
Capital Disclosures
Effective January 1, 2008, the Company adopted Handbook Section 1535, Capital Disclosures which requires companies to disclose their objectives, policies and processes for managing capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding capital are required.
In addition, the Company has assessed new and revised accounting pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact on the Company:
Goodwill and Intangible Assets
As of January 1, 2009, the Company will be required to adopt CICA Handbook Section 3064, Goodwill and Intangible Assets, which will replace Handbook Section 3062. This new guidance reinforces a principles-based approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition under Handbook Section 1000, Financial Statement Concepts. Section 3064 clarifies the application of the concept of matching revenues and expenses in Section 1000 to eliminate the current practice of recognizing as asset items that do not meet the definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Company is currently determining the impact of this standard.
International Financial Reporting Standards
In January 2006, the CICA Accounting Standards Board adopted a strategic plan for the direction of accounting standards in Canada. As part of the plan, accounting standards in Canada for public companies will converge with International Financial Reporting Standards ("IFRS") on January 1, 2011. The Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS.
Application of Critical Accounting Estimates
The significant accounting policies used by Sabretooth are disclosed in note 2 to the Financial Statements for the period ended June 30, 2008 and notes 3 and 4 to the Annual Financial Statements for the year ended December 31, 2007. 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. Management reviews its estimates on a regular basis. The emergence of new information and changed circumstance may result in actual results or changes to estimate amounts that differ materially from current estimates. The following discussion identifies the critical accounting policies and practices of the Company and helps assess the likelihood of materially different results being reported.
Reserves
Under the NI 51-101, "Proved" reserves are defined as those reserves that can be estimated with a high degree of certainty to be recoverable. The level of certainty should result in at least a 90% probability that the quantities actually recovered will equal or exceed the estimated Proved reserves. It does not mean that there is a 90% probability that the Proved reserves will be recovered; it means that there must be at least a 90% probability that the given amount or more will be recovered. "Proved plus Probable" reserves are the most likely case and are based on a 50% certainty that they will equal or exceed the reserves estimated.
These oil and gas reserve estimates are made using all available geological and reservoir data, as well as historical production data. All of the Company's reserves were evaluated and reported on by an independent qualified reserves evaluator. However, revisions can occur as a result of various factors including: actual reservoir performance, change in price and cost forecasts or a change in the Company's plans. Reserve changes will impact the financial results as reserves are used in the calculation of depletion and are used to assess whether asset impairment occurs. Reserve changes also affect other non-GAAP measurements such as finding and development costs; recycle ratios and net asset value calculations.
Depletion
The Company follows the full cost method of accounting for oil and natural gas properties. Under this method, all costs related to the acquisition of, exploration for, and development of oil and natural gas reserves are capitalized whether successful or not. Depletion of the capitalized oil and natural gas properties and depreciation of production equipment which includes estimated future development costs less estimated salvage values are calculated using the unit-of-production method, based on production volumes in relation to estimated proved reserves.
An increase in estimated proved reserves would result in a reduction in depletion expense. A decrease in estimated future development costs would also result in a reduction in depletion expense.
Unproved Properties
The cost of acquisition and evaluation of unproved properties are initially excluded from the depletion calculation. An impairment test is performed on these assets to determine whether the carrying value exceeds the fair value. Any excess in carrying value over fair value is impairment. When proved reserves are assigned or a property is considered to be impaired, the cost of the property or the amount of the impairment will be added to the capitalized costs for the calculation of depletion.
Ceiling Test
The ceiling test is a cost recovery test intended to identify and measure potential impairment of assets. An impairment loss is recorded if the sum of the undiscounted cash flows expected from the production of the proved reserves and the lower of cost and market of unproved properties does not exceed the carrying values of the petroleum and natural gas assets. An impairment loss is recognized to the extent that the carrying value exceeds 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. The cash flows are estimated using the future product prices and costs and are discounted using the risk free rate. By their nature, these estimates are subject to measurement uncertainty and the impact on the financial statements could be material. Any impairment as a result of this ceiling test will be charged to operation as additional depletion and depreciation expense.
Asset Retirement Obligations
The Company records a liability for the fair value of legal obligations associated with the retirement of petroleum and natural gas assets. The liability is equal to the discounted fair value of the obligation in the period in which the asset is recorded with an equal offset to the carrying amount of the asset. The liability then accretes to its fair value with the passage of time and the accretion is recognized as an expense in the financial statements. The total amount of the asset retirement obligation is an estimate based on the Company's net ownership interest in all wells and facilities, the estimated costs to abandon and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The total amount of the estimated cash flows required to settle the asset retirement obligation, the timing of those cash flows and the discount rate used to calculate the present value of those cash flows are all estimates subject to measurement uncertainty. Any change in these estimates would impact the asset retirement liability and the accretion expense.
Stock Based Compensation
The Company uses fair value accounting for stock-based compensation. Under this method, all equity instruments awarded to employees and the cost of the service received as considerations are measured and recognized based on the fair value of the equity instruments issued. Compensation expense is recognized over the period of related employee service, usually the vesting period of the equity instrument awarded.
Income Taxes
The determination of income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.
Acquisition of Bear Ridge Resources Ltd.
Management makes various assumptions in determining the fair values of any acquired company's assets and liabilities in a business combination. The most significant assumptions and judgments made relate to the estimation of the fair value of Sabretooth's shares issued in the transaction and the fair value of the oil and natural gas properties acquired. To determine the fair value of the oil and gas properties we estimated oil and natural gas reserves and future prices of oil and natural gas.
ABCP
See "Liquidity and Capital Resources" section for an in-depth discussion of the estimates used to value the ABCP held by the Company.
Other Estimates
The accrual method of accounting requires management to incorporate certain estimates including estimates of revenues, royalties, and operating costs as at a specific reporting date, but for which actual revenues and costs have not yet been received. In addition, estimates are made on capital projects which are in progress or recently completed where actual costs have not been received by the reporting date. The Company obtains the estimates from the individuals with the most knowledge of the activities and from all project documentations received. The estimates are reviewed for reasonableness and compared to past performance to assess the reliability of the estimates. Past estimates are compared to actual results in order to make informed decisions on future estimates.
Risks and Uncertainties
The Company is engaged in the exploration, development, production and acquisition of crude oil and natural gas. This business is inherently risky and there is no assurance that hydrocarbon reserves will be discovered and economically produced. Financial risks associated with the petroleum industry include fluctuations in commodity prices, interest rates, and currency exchange rates along with the credit risk of the Company's industry partners. Operational risks include reservoir performance uncertainties, the reliance on operators of our non-operated properties, competition, environmental and safety issues, and a complex and changing regulatory environment. Sabretooth is taking steps to reduce its business risks by increasing the number of core areas it has and increasing the number of areas it operates. This will spread the operational risks over several areas, reducing the potential impact on Sabretooth of unfavourable operational issues that may occur at any one area. It will also enable Sabretooth to control the timing, direction and costs related to exploration and development activities.
Environmental and safety risks are mitigated through compliance with provincial and federal environmental and safety regulations, by maintaining adequate insurance, and by adopting appropriate emergency response and safety procedures. The Company manages commodity pricing uncertainties with a risk management program that encompasses a variety of financial instruments. These include forward sales contracts on natural gas production and financial sales contracts.
Outlook
Sabretooth's current production is approximately 1,900 boe/d post asset divestiture.
Approximately $21 million has been spent on the Company's capital programs as of June 30, 2008. Future expenditures are expected to be funded by bank debt and cash flow. A substantial amount of the Company's spending is discretionary in nature. The Company generally has a high working interest and operational control of its major properties. Therefore, timing of expenditures can be matched to financial resources.
The Company has access to credit facilities of $78 million subject to periodic review. As at August 1, 2008, the Company has drawn approximately $62 million on its operating line of credit, excluding any bank overdraft, and holds asset backed commercial paper with a face value of approximately $24.2 million.
At August 1, 2008 the marked-to-market value of the Company's financial instruments was $2.9 million unrealized loss. The marked-to-market value at June 30, 2008 was $11.9 million unrealized loss. The $9.0 million difference is due to the change in future market AECO price in Canada.
<< Sabretooth Energy Ltd. Interim Consolidated Financial Statements June 30, 2008 (Unaudited)
Sabretooth Energy Ltd. Consolidated Balance Sheets (expressed in thousands of Canadian dollars) (Unaudited) June 30, December
2008 31, 2007 ------------------------------------------------------------------------- Assets Current Assets Cash and cash
equivalents $ - $ - Accounts receivable 8,247 9,175 Deposits and prepaid expenses 1,488 1,920 Commodity contracts (note 11)
- 843 ---------------------- 9,735 11,938 Investment in commercial paper (note 3) 18,003 23,238 Property and equipment (note
4) 140,085 128,563 Future income taxes 7,993 5,871 ---------------------- $ 175,816 $ 169,610 ---------------------- ----------------------
Liabilities and Shareholders' Equity Current Liabilities Bank indebtedness (note 5) $ 61,925 $ 46,256 Accounts payables and
accrued liabilities 8,852 17,126 Commodity contracts (note 11) 11,855 - ---------------------- 82,632 63,382 Asset retirement
obligations (note 6) 4,275 4,560 ---------------------- 86,907 67,942 ---------------------- Shareholders' Equity Share capital
(note 7) 195,109 194,994 Warrants (note 7 (c)) 598 598 Contributed surplus (note 7 (g)) 3,151 2,720 Deficit (109,949) (96,644)
---------------------- 88,909 101,668 ---------------------- $ 175,816 $ 169,610 ---------------------- ----------------------
Contingency (note 9) Commitments (note 10) The accompanying notes are an integral part of these unaudited interim consolidated
financial statements. (signed) (signed) ------------------- ---------------- G. Marshall Abbott Vincent Chahley Director Director
Sabretooth Energy Ltd. Consolidated Statements of Operations, Comprehensive Income (Loss) and Deficit (expressed in thousands
of Canadian dollars except per share amounts) (Unaudited) Three months ended Six months ended June 30, June 30, ------------------
----------------- 2008 2007 2008 2007 ------------------------------------------------------------------------- Revenues Production
revenue $ 15,559 $ 4,299 $ 29,782 $ 9,537 Royalties (1,350) (578) (3,422) (1,572) Realized gain (loss) on hedge contracts
(note 11) (2,331) 215 (2,411) 270 Unrealized gain (loss) on hedge contracts (note 11) (4,715) 634 (12,698) 17 Interest on
commercial paper - - 697 - Interest and other income - 2 - 12 -------------------------------------------- 7,163 4,572 11,948
8,264 -------------------------------------------- Expenses Operating costs 2,782 1,186 5,945 2,168 Transportation 329 140
675 313 General and administrative 1,452 500 2,114 1,078 Depletion, depreciation, and amortization 4,991 2,565 10,924 5,858
Accretion expense 64 14 134 28 Interest 757 125 1,501 214 Stock-based compensation (note 7 (e)) 216 76 550 145 Write-down
on investment in commercial paper (note 3) - - 5,932 - -------------------------------------------- 10,591 4,606 27,775 9,804
-------------------------------------------- Income (loss) before income taxes (3,428) (34) (15,827) (1,540) --------------------------------------------
Income taxes (recovery) Current - (190) - (190) Future (942) 15 (2,522) (5,405) --------------------------------------------
(942) (175) (2,522) (5,595) -------------------------------------------- Net Income (Loss) and Comprehensive Income (Loss)
(2,486) 141 (13,305) 4,055 Deficit, beginning of period (107,463) (96,505) (96,644) (100,419) --------------------------------------------
Deficit, end of period $(109,949) $ (96,364) $(109,949) $ (96,364) -------------------------------------------- Net income
(loss) per share (note 7 (f)) Basic $ (0.06) $ 0.01 $ (0.34) $ 0.20 -------------------------------------------- Diluted $
(0.06) $ 0.01 $ (0.34) $ 0.19 -------------------------------------------- The accompanying notes are an integral part of
these unaudited interim consolidated financial statements. Sabretooth Energy Ltd. Consolidated Statements of Cash Flows (expressed
in thousands of Canadian dollars) (Unaudited) ------------------------------------------------------------------------- Three
months ended Six months ended June 30, June 30, -------------------- -------------------- 2008 2007 2008 2007 Cash flows from
(used in) Operating activities Net income (loss) for the period $ (2,486) $ 141 $(13,305) $ 4,055 Items not affecting cash
Depletion, depreciation, and amortization 4,991 2,565 10,924 5,858 Accretion expense 64 14 134 28 Stock-based compensation
216 76 550 145 Write-down on investment in commercial paper (note 3) - - 5,932 - Unrealized loss (gain) on hedge contracts
(note 11) 4,715 (634) 12,698 (17) Future income taxes (942) 15 (2,522) (5,405) Asset retirement expenditures (219) - (339)
- ------------------------------------------ 6,339 2,177 14,072 4,664 Net change in non-cash working capital (note 12) (1,085)
(2,670) (4,124) (1,927) ------------------------------------------ Cash from (used in) operating activities 5,254 (493) 9,948
2,737 ------------------------------------------ Investing activities Property and equipment expenditures (9,522) (6,142)
(22,126) (20,098) Net change in non-cash working capital (note 12) (2,245) 2,395 (3,487) (1,375) ------------------------------------------
Cash used in investing activities (11,767) (3,747) (25,613) (21,473) ------------------------------------------ Financing
activities Exercise of options for common shares (note 7 (d)) 100 - 100 - Repurchase of stock options (note 7 (d)) - - (104)
- Proceeds from bank indebtedness 6,413 - 15,669 - ------------------------------------------ Cash from financing activities
6,513 - 15,665 - ------------------------------------------ Decrease in cash and cash equivalents - (4,240) - (18,736) Cash
and cash equivalents, beginning of period - (10,153) - 4,343 ------------------------------------------ Cash and cash equivalents,
end of period - $(14,393) - $(14,393) ------------------------------------------ Supplemental cash flows disclosure: Interest
paid $ 757 $ 70 $ 1,501 $ 159 ------------------------------------------ Income taxes paid (recovered) $ - $ (190) $ - $ (190)
------------------------------------------ The accompanying notes are an integral part of these unaudited interim consolidated
financial statements. Sabretooth Energy Ltd. Notes to Unaudited Consolidated Financial Statements Six months ended June 30,
2008 (Unaudited) ------------------------------------------------------------------------- 1. Interim Financial Statements
- Basis of Presentation The interim consolidated financial statements of Sabretooth Energy Ltd. (the "Company") have been
prepared by management in accordance with Canadian generally accepted accounting principles and follow the same accounting
policies as the most recent audited annual consolidated financial statements, except as noted below. The interim consolidated
financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for
the year ended December 31, 2007. 2. Changes in Accounting Policies and Practices and Future Accounting Pronouncements Financial
Instruments - Disclosures and Presentation Effective January 1, 2008, the Company adopted two new Canadian Institute of Chartered
Accountants ("CICA") standards. Handbook Section 3862, Financial Instruments - Disclosures and Handbook Section 3863, Financial
Instruments - Presentation. These Handbook sections replaced existing Handbook Section 3861, Financial Instruments - Presentation
and Disclosure. The new disclosure standard increases the emphasis on the risks associated with both recognized and unrecognized
financial instruments and how those risks are managed. Specifically, Section 3862 requires disclosure of the significance
of financial instruments on the Company's financial position. In addition, the guidance outlines revised requirements for
the disclosure of qualitative and quantitative information regarding exposure to risks arising from financial instruments.
Refer to Note 11, "Financial Instruments and Risk Management" for the additional disclosures under Section 3862. The new presentation
standard carries forward the former presentation requirements. Capital Disclosures Effective January 1, 2008, the Company
adopted Handbook Section 1535, Capital Disclosures which requires companies to disclose their objectives, policies and processes
for managing capital, the nature of externally imposed capital requirements, how the requirements are incorporated into the
Company's management of capital, whether the requirements have been complied with, or consequence of noncompliance and an
explanation of how the Company is meeting its objectives for managing capital. In addition, quantitative disclosures regarding
capital are required. Refer to Note 13, "Capital Management". In addition, the Company has assessed new and revised accounting
pronouncements that have been issued that are not yet effective and determined that the following may have a significant impact
on the Company: Goodwill and Intangible Assets As of January 1, 2009, the Company will be required to adopt CICA Handbook
Section 3064, Goodwill and Intangible Assets, which will replace Handbook Section 3062. This new guidance reinforces a principles-based
approach to the recognition of costs as assets in accordance with the definition of an asset and the criteria for asset recognition
under Handbook Section 1000, Financial Statement Concepts. Section 3064 clarifies the application of the concept of matching
revenues and expenses in Section 1000 to eliminate the current practice of recognizing as asset items that do not meet the
definition and recognition criteria. Under this new guidance, fewer items meet the criteria for capitalization. The Company
is currently determining the impact of this standard. International Financial Reporting Standards In January 2006, the CICA
Accounting Standards Board adopted a strategic plan for the direction of accounting standards in Canada. As part of the plan,
accounting standards in Canada for public companies will converge with International Financial Reporting Standards ("IFRS")
on January 1, 2011. The Company continues to monitor and assess the impact of the convergence of Canadian GAAP and IFRS. 3.
Investment in Commercial Paper The Company holds Asset Backed Commercial Paper ("ABCP") that is valued at $18,003,000 at June
30, 2008. As at June 30, 2008, the Company held Canadian third party ABCP with an original cost of $24,147,000. At the dates
the Company acquired these investments, they were rated R1 (High) and backed by R1 (High) rated assets and liquidity agreements.
These investments matured during the third quarter of 2007 but, as a result of the liquidity issues in the ABCP market, did
not settle on maturity. As a result the Company has classified its ABCP as long-term investments. On August 16, 2007 an announcement
was made by a group representing banks, asset providers and major investors that they had agreed in principle to a long-term
proposal and interim agreement to convert the ABCP's into long-term floating rate notes maturing no earlier than the scheduled
maturity of the underlying assets. On September 6, 2007, a Pan-Canadian restructuring committee consisting of major investors
was formed. The committee was created to propose a solution to the liquidity problem affecting the ABCP and has retained legal
and financial advisors to oversee the proposed restructuring process. On March 17, 2008, a court order was obtained through
which a restructuring of the ABCP is expected to occur. A meeting of note holders occurred on April 25, 2008 and the restructuring
plan was approved. The ABCP in which the Company has invested has not traded in an active market since mid-August 2007 and
there are currently no market quotations available. The valuation technique used by the Company to estimate the fair value
of its investments in ABCP incorporates probability-weighted discounted cash flows considering the best available public information
regarding market conditions and other factors that a market participant would consider for such investments. Probability-
weighted discount rates of approximately 7.10% and 12.90% were used at June 30, 2008 for the senior AA and subordinated notes
respectively for this estimate and an interest rate of 2.7% was used. This evaluation resulted in a reduction of $6,144,000
to the original cost of the ABCP at June 30, 2008. The assumptions used in determining the estimated fair value reflect the
public statements made by the Pan-Canadian restructuring committee that it expects the ABCP will be converted into senior
AA rated and subordinated unrated long-term floating rate notes with maturities matching the maturities of the underlying
assets and bearing market interest rates commensurate with the nature of the underlying assets and their associated cash flows
and the credit rating and risk associated with the long-term floating rate notes. The Company estimates that it will receive
87% of the senior AA rated notes (Class A-1 and A-2) and 13% of the subordinated unrated notes (Class B and C). Assumptions
have been made as to the long-term interest rates to be received from the long-term floating rate notes. The term of the notes
is estimated to be approximately 7 years which approximates the maturity of the assets backing the note. Based on these assumptions,
a write-down of $5,932,000 from the estimated fair value at December 31, 2007 was recognized during the period ended June
30, 2008. The original ABCP in which the Company has invested has an interest rate of 4.52%. At June 30, 2008 there is $697,000
of interest owing to the Company after impairment allowance. If the restructuring is successful, interest will be paid out.
A 36% impairment has been used to value the interest receivable. Continuing uncertainties regarding the value of the assets
which underlie the ABCP, the amount and timing of cash flows and the outcome of the restructuring process could give rise
to a further change in the value of the Company's investment in ABCP which would impact the Company's earnings. It is reasonably
possible, based on existing knowledge, that change in future conditions in the near term could require a material change in
the recognized amount. The reduction from the face value could range from $9,000,000 to $5,900,000 based on alternative reasonable
assumptions, although given the nature of the information available, the amount ultimately recovered could vary outside these
ranges. On June 24, 2008 the Company's bank provided an additional credit facility to provide liquidity in respect to the
ABCP. The Company will receive Restructuring Notes in exchange for the affected ABCP not backed by ineligible assets. The
credit facility is structured as follows: Tranche A: $10,910,339 revolving credit facility, which represents an amount equal
to approximately 45% of the face value of the Restructuring Notes. Tranche B: $7,273,559 revolving credit facility, which
represents an amount equal to approximately 30% of the face value of the Restructuring Notes. The borrowings under the credit
facility will be first allocated to Tranche A and the balance will be allocated to Tranche B. The term is for three years
with an option to extend the term to seven years on a year by year basis if agreed to by both parties. Interest is payable
at the bank prime rate less 1%. The credit facility is secured by the Restructuring Notes and guarantees. The credit facility
also provides for a put option allowing the Company to assign to the bank the Restructuring Notes in payment of the capital
under Tranche A. The credit facility will become available and effective only once the final approval and implementation of
the restructuring plan is complete. 4. Property and Equipment June 30, 2008 $ (000's) -------------------------------- Accum-
ulated Depletion, Depreci- ation and Net Amortiz- Book Cost ation Value -------------------------------- Petroleum & natural
gas properties including exploration and development thereon and production equipment $ 181,996 $ 42,382 $ 139,614 Office
893 422 471 -------------------------------- $ 182,889 $ 42,804 $ 140,085 -------------------------------- December 31, 2007
$ (000's) -------------------------------- Accum- ulated Depletion, Depreci- ation and Net Amortiz- Book Cost ation Value
-------------------------------- Petroleum & natural gas properties including exploration and development thereon and
production equipment $ 159,587 $ 31,586 $ 128,001 Office 855 293 562 -------------------------------- $ 160,442 $ 31,879 $
128,563 -------------------------------- Unproved properties not subject to depletion amounted to approximately $33,673,000
at June 30, 2008 (December 31, 2007 - $28,661,000; June 30, 2007 - $11,226,000). The Company capitalized general and administrative
costs related to exploration and development of approximately $1,161,000 for the six month period ended June 30, 2008 (June
30, 2007 - $393,000). 5. Bank Indebtedness The Company has established three credit facilities with a Canadian chartered bank.
Credit Facility A is a $55,000,000 revolving operating demand loan which bears interest at the bank prime rate plus 0% to
1.5%, depending on the Company's debt to cash flow ratio. Credit Facility B is a $5,000,000 non- revolving acquisition/development
demand loan, which bears interest at the bank prime rate plus 0.50%. Credit Facility C is a Revolving Demand Credit Agreement
in the face amount of $18,000,000 which bears interest at the bank prime rate and will be required to be repaid in full upon
the liquidation or refinancing of the Company's ABCP holdings. All credit facilities are subject to periodic review by the
bank and are secured by a general assignment of book debts and a $100,000,000 demand debenture with a first floating charge
over all assets of the Company as well a hypothecation/pledge of ABCP. The Company is authorized to access the credit facilities
with prior approval of the Board of Directors of the Company (the "Board"). The Company is required to meet certain financial
based covenants under the terms of this facility. The Company is also required to hedge no more than 70% of its production
under the lending agreement. For the three month period ended June 30, 2008, the Company had hedged approximately 81% of its
production, for which it has obtained a waiver of the violation from the bank. As at June 30, 2008, the Company has drawn
$39,566,0