Grand Banks Energy Corporation (TSX VENTURE:GBE):
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") should be read in conjunction
with the unaudited financial statements of Grand Banks Energy Corporation
("Grand Banks" or the "Company") and accompanying notes for the three months
ended March 31, 2008 and 2007.
In this MD&A, production and reserves information are commonly reported in units
of barrels of oil equivalent ("boe"). For purposes of computing such units,
natural gas is converted to equivalent barrels of oil using a conversion factor
of six thousand cubic feet to one barrel of oil. This conversion ratio of 6:1 is
based on an energy equivalent wellhead value for the individual products. Such
disclosures of boes may be misleading, particularly if used in isolation.
Readers should be aware that historical results are not necessarily indicative
of future performance.
This MD&A and the unaudited interim financial statements and accompanying notes
have been prepared by management and approved by the Audit Committee of the
Board of Directors of Grand Banks and include information to May 27, 2008.
These interim financial statements have not been reviewed or audited on behalf
of the shareholders by the Company's independent external auditors.
All financial measures presented in this Annual Report are expressed in Canadian
dollars unless otherwise indicated.
Overview
On April 29, 2008, the Company announced it had entered into an agreement with
Fairborne Energy Ltd. ("Fairborne") pursuant to which Fairborne has made an
offer (the "Offer") to acquire all of the issued and outstanding common shares
of the Company by way of a takeover bid. Under the terms of the Offer, Fairborne
will pay $2.90 cash per share and assume the Company's debt for an estimated
purchase price of $112.0 million. The Offer is be subject to certain conditions,
including the deposit of not less than 66 2/3% of the outstanding common shares
of the Company (on a fully diluted basis), receipt of regulatory approvals and
other customary conditions.
The board of directors of Grand Banks has unanimously determined that the Offer
is fair, from a financial point of view, to holders of Grand Banks common shares
and is in the best interest of Grand Banks and its shareholders. The board of
directors has unanimously resolved to recommend that the holders of Grand Banks
common shares accept the Offer and tender their Grand Banks common shares to the
Offer. A Directors' Circular setting out the recommendation of the board of
directors of Grand Banks in relation to the Offer along with the formal offer
documents were mailed to holders of securities of Grand Banks on May 7, 2008.
The Company recorded average sales of natural gas, crude oil and liquids during
the three months ended March 31, 2008 of 1,454 boe/d as compared to 792 boe/d
for the corresponding period of 2007. The sales volumes for the period rose as a
result of the production from the Tower Creek 02-21 natural gas well and from
the Company's horizontal development drilling program on its Three Forks/Torquay
light oil play along the Saskatchewan/Manitoba border.
During the first quarter of 2008, the Company continued to see strong production
performance from the Tower Creek 02-21 well and was successful in drilling three
(2.85 net) horizontal wells on its Three Forks/Torquay light oil play. First
quarter revenues, cash flow and earnings have continued to rise with higher
natural gas and oil production and strong commodity prices.
The following table summarizes the results for the three months ended
March 31, 2008 and 2007:
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For the Three Months Ended March 31, 2008 2007 Change Change
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(000s, except per share amounts) ($) ($) ($) (%)
Financial Results
Gross revenues 9,726 4,124 5,602 136
Income (loss) before income taxes 2,907 (320) 3,227 1008
Net income (loss) 1,995 (320) 2,315 723
Per share - basic 0.06 (0.01) 0.07 700
Per share - diluted 0.06 (0.01) 0.07 700
Funds flow from operations (1) 5,737 1,885 3,852 204
Per share - basic 0.18 0.06 0.12 200
Per share - diluted 0.17 0.06 0.11 183
Additions to property and
equipment 5,428 2,939 2,489 85
Proceeds on disposal of
property and equipment - - - -
Total assets 59,665 50,618 9,047 18
Working capital (deficiency) (12,227) (10,382) (1,845) (18)
Asset retirement obligation (including
current portion) 1,301 1,253 48 4
Flow-through share obligations - 2,864 (2,864) (100)
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(000s) (#) (#) (#) (%)
Share Data
Equity outstanding
Common shares 32,559 32,396 163 1
Stock options 2,514 3,121 (607) (19)
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Fully diluted 35,073 35,517 (444) (1)
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Sales Volumes (average)
Crude oil and liquids (bbls/d) 724 616 108 18
Natural gas (mcf/d) 4,382 1,056 3,326 315
Average boe/d (6:1) 1,454 792 662 84
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Product Prices (average)
Crude oil and liquids ($/bbl) 93.20 61.51 31.69 52
Natural gas ($/mcf) 9.00 7.51 1.49 20
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($/boe) ($/boe) ($/boe) (%)
Netback Analysis
Oil and gas revenue (6:1) 73.50 57.86 15.64 27
Royalty expense 12.66 11.58 1.08 9
Operating costs 10.76 9.25 1.51 16
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Netback 50.08 37.03 13.05 35
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(1) Funds flow from operations is a non-GAAP measure that represents net
income plus depletion, depreciation and accretion, stock-based
compensation, future taxes and other non-cash expenses. See further
discussion under Non-GAAP Measures in the Management's Discussion and
Analysis.
Sales Volumes
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Three Months Ended March 31,
2008 2007 Change
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(%)
Crude oil and liquids (bbls/d) 724 616 18
Natural gas (mcf/d) 4,382 1,056 315
Average boe/d (6:1) 1,454 792 84
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In the first quarter of 2008, average sales volumes on a boe basis increased by
84% due to the natural gas production at Tower Creek along with the new oil
production from Saskatchewan and Manitoba. Natural gas sales volumes increased
315% due to the 3.2 mmcf/d of new natural gas sales at Tower Creek offset by
natural production declines at the Company's other gas producing properties.
Currently gross production from the 02-21 well is over 22 mmcf/d of raw gas; the
Company's net share of sales gas is approximately 3.2 mmcf/d or 540 boe/d. Oil
and liquid sales in the first quarter increased 18% on the strength of new
production from the new wells drilled in Saskatchewan and Manitoba in the later
half of 2007 and the first quarter of 2008. These production increases were
partially offset by natural declines in production from existing wells at
Kingsford and Frys East, Saskatchewan.
All of the Company's sales volumes consisted of natural gas and light to medium
gravity crude oil, with no heavy oil.
Gross Revenues
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Crude oil and liquids 6,137 3,408 80
Natural gas 3,587 714 402
Other income 2 2 -
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9,726 4,124 136
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The 136% increase in revenues for the first quarter of 2008 was due to the 84%
higher sales volumes as noted above and the 52% increase in prices realized for
crude oil and liquids and the 20% rise in natural gas prices. The improvement in
average oil prices was due to the combination of higher world oil prices, offset
by a stronger Canadian dollar but then partially corrected by an improvement in
the overall quality of crude oil produced by the Company. The Company has not
hedged any of its production.
Royalty Expenses
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Royalty expenses 1,675 825 103
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$/boe 12.66 11.58 9
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Royalty rate 17.2% 20.0% (14)
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The increase in royalty expenses in the first quarter on a boe basis was due to
higher commodity prices offset by the new oil wells being on "royalty holiday".
The Tower Creek well came off of royalty holiday in the later half of January,
2007. The overall royalty expense for the quarter doubled due to the increase in
sales values, the impact of which was partially offset by the royalty holiday on
the new production in Saskatchewan and Manitoba. The effective royalty rate for
the quarter declined due to the aforementioned royalty holidays.
Production Expenses
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Production Expenses 1,424 659 116
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$/boe 10.76 9.25 16
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Production expenses in the first quarter of 2008 increased by 116% over 2007 as
the result of the 84% increase in production levels and higher per unit
operating costs at Tower Creek.
Depletion, Depreciation and Accretion
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Three Months Ended March 31,
2008 2007 Change
(000s) ($) ($) (%)
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Depletion and depreciation 2,726 1,930 41
Accretion of Asset Retirement
Obligations 19 18 6
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2,745 1,948 41
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$/boe 20.74 27.34 (24)
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The increase in depletion and depreciation expense in the first quarter was due
to higher production volumes offset by the lower depletion and depreciation rate
per boe. The lower depletion rate was due to the addition of new proven oil
reserves in Saskatchewan and Manitoba in 2007 and 2008, plus the significant
conversion of probable reserves to proved reserves at Tower Creek in the later
half of 2007 and the upward revisions of reserves in 2007 and 2008 at Tower
Creek.
Interest
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Interest Expenses 186 157 18
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$/boe 1.41 2.20 (36)
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The increase in interest costs was the result of the increase in interest on
bank indebtedness related to higher outstanding balances partially offset by
lower interest rates in 2008. There was no interest in 2008 related to unspent
flow through obligations compared to $49,000 in 2007.
General and Administrative Costs
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Gross General and Administrative costs 810 669 21
Overhead recovered (117) (71) (65)
Overhead capitalized - - -
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693 598 16
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$/boe 5.24 8.39 (38)
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General and administrative costs, net of overhead recovered, for the three
months ended March 31, 2008 increased by 16% over the comparative period of
2007. This increase was due to the cost of expanded operations and management
changes resulting in higher salaries, consulting fees and associated personnel
costs. Additionally, office rent and business taxes increased with the Company
expanding its office space in the fourth quarter of 2007. The decrease in the
cost per boe in the first quarter related to the 84% increase in production
volumes.
Stock-Based Compensation
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Stock-Based Compensation 96 257 (63)
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$/boe 0.73 3.61 (80)
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Stock-based compensation costs for the first quarter of 2008 decreased $161,000
as no new stock options were issued during this period. Stock-based compensation
costs are amortized over the vesting period, which is two years from the date of
grant.
Net Income (Loss)
Grand Banks recorded net income of $1,995,000 ($0.06 per share) for the three
months ended March 31, 2008 compared with net loss of $320,000 ($0.01 per share)
for the same period in 2007.
The improvement in net earnings was due primarily to higher net sales revenues
related to gas production from Tower Creek, higher oil production from new wells
drilled and higher commodity prices. Earnings also benefited from the reduction
in depletion and depreciation rates which have improved due to lower finding and
development costs and the conversion of probable reserves to proved reserves in
2007.
Liquidity and Capital Resources
At March 31, 2008, the Company had a working capital deficiency of $12,227,000
(including $10,202,000 drawn on its revolving bank loan) and $759,000 drawn on
its non-revolving reducing term facility compared to a working capital
deficiency of $12,437,000 (including $11,213,000 drawn on its revolving bank
loan) and $855,000 drawn on its non-revolving reducing term facility at December
31, 2007. At March 31, 2008, the Company had a $19,000,000 ($19,000,000 -
December 31, 2007) revolving line of credit agreement with a Canadian financial
institution. The line of credit bears interest at prime rate plus 0.25% per
annum and the non-revolving term facility bears interest at 7.5% and is
repayable in 22 blended monthly payments of principal and interest of $37,000.
For the three months ended March 31, 2008, the Company had funds flow from
operations of $5,737,000. (See "Non-GAAP Measures.") The Company has not
declared any dividends.
Based on our December 31, 2007 reserve evaluation, the Company believes its
lines of credit could be expanded and these expanded lines of credit and funds
flow from operations are expected to exceed the Company's working capital
commitments for the forthcoming year.
Financing and Investing Activities
The Company has had discussions with its lender about increasing the amount
available under its revolving line of credit however has not pursued these
discussions given the pending takeover of the Company.
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Three Months Ended March 31,
2008 2007 Change
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(000s) ($) ($) (%)
Land & property acquisitions 126 267 (53)
Geological and geophysical 181 - -
Drilling and completion 4,296 1,288 234
Equipment and gathering 821 1,372 (40)
G&A capitalized - - -
Office equipment 4 12 (67)
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5,428 2,939 85
Proceeds of disposition - - -
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Additions to property and equipment,
net of proceeds 5,428 2,939 85
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Capital expenditures in the first quarter of 2008 were focused on the drilling,
completing and equipping of the three (2.85 net) horizontal oil wells drilled in
Manitoba. Capital spending in the first quarter of 2007 reflected lower levels
of activity as the Company focused it resources on the construction of new
production facilities at Tower Creek.
Financial Instruments
Grand Banks has not entered into any commodity or financial instrument hedges;
however, it does carry various forms of financial instruments, all of which are
recognized in the Company's financial statements. Unless otherwise indicated in
the financial statements, it is management's opinion that the Company is not
exposed to excessive interest, currency or credit risks arising from these
financial instruments. The fair values of these financial instruments
approximate their carrying values, unless otherwise indicated. The Company has
no unrecognized gains or losses on its financial instruments.
Obligations
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As of March 31, 2008 Payments Due By Period
---------------------------------------------
Less Than 1 1 - 3 4 - 5 After 5
Total Year Years Years Years
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(000s) ($) ($) ($) ($) ($)
Office lease 1,228 251 670 307 -
Natural gas transportation 789 357 432 - -
Lease rentals land 657 110 241 209 97
Asset retirement obligations 3,838 72 328 141 3,297
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Total contractual obligations 6,512 790 1,671 657 3,394
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Transactions with Related Parties
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
similar to those negotiated with third parties.
(a) The Company conducts oil and gas exploration and development activities and
related transactions with organizations managed or controlled by directors.
These transactions are negotiated and conducted using standard industry
agreements and terms. The amounts associated with these transactions are
insignificant to the operations of the Company.
(b) Included in general and administrative expenses are consulting fees of
$55,000 (2007 - $87,000) incurred with companies controlled by officers of the
Company for the three months ended March 31, 2008.
(c) Included in general and administrative expenses are legal fees of $5,000
(2007 - $8,000) incurred with a firm in which one of the Company's officers was
a partner for the three months ended March 31, 2008.
(d) Included in general and administrative expenses is $14,000 (2007 - $14,000)
paid for directors' fees to independent directors for the three months ended
March 31, 2008.
Summary of Quarterly Results
Eight-Quarter Comparison
The quarterly results are prepared without audit or review by the Company's
independent auditors. The following table summarizes the Company's financial and
operating highlights for the past eight quarters. Sales volumes are the average
for the periods shown, net to the Company, before the deduction of royalties.
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Three Months Ended Jun.30, Sep.30, Dec.31,
2006 2006 2006
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Sales Volumes
Crude oil and liquids (bbls/d) 527 569 633
Natural gas (mcf/d) 1,561 1,464 1,363
Average boe/d (6:1) 787 813 860
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($) ($) ($)
Product Prices
Crude oil and liquids ($/bbl) 67.10 70.17 59.21
Natural gas ($/mcf) 6.02 5.89 6.88
Oil equivalent ($/boe) 56.86 59.68 54.48
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(000s, except per share
amounts) ($) ($) ($)
Financial Results
Gross revenues 4,088 4,469 4,315
Net income (loss) (439) 226 1,265
Per share - basic (0.01) (0.01) 0.04
Per share - diluted (0.01) (0.01) 0.04
Funds flow from
operations 2,209 2,475 2,219
Additions to property
and equipment, net
of proceeds 5,426 6,097 7,237
Total assets 42,371 44,526 52,251
Working capital (deficiency) (6,011) (9,571) (10,562)
Flow-through share
obligation 1,800 740 3,855
Asset retirement obligation 753 837 1,223
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Three Months Ended Mar.31, Jun.30, Sep.30, Dec.31, Mar.31,
2007 2007 2007 2007 2008
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Sales Volumes
Crude oil and liquids (bbls/d) 616 554 642 638 724
Natural gas (mcf/d) 1,056 1,026 3,324 4,235 4,382
Average boe/d (6:1) 792 725 1,196 1,344 1,454
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($) ($) ($) ($) ($)
Product Prices
Crude oil and liquids ($/bbl) 61.51 67.42 76.39 81.86 93.20
Natural gas ($/mcf) 7.51 7.98 5.42 6.43 9.00
Oil equivalent ($/boe) 57.86 62.81 56.07 59.14 73.50
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(000s, except per share
amounts) ($) ($) ($) ($) ($)
Financial Results
Gross revenues 4,124 4,152 6,172 7,316 9,726
Net income (loss) (320) 328 686 2,631 1,995
Per share - basic (0.01) 0.01 0.02 0.08 0.06
Per share - diluted (0.01) 0.01 0.02 0.08 0.06
Funds flow from
operations 1,885 2,086 3,289 4,266 5,737
Additions to property
and equipment, net
of proceeds 2,939 314 8,990 2,552 5,428
Total assets 50,618 53,479 56,024 56,474 59,665
Working capital (deficiency) (10,382) (8,721) (14,280) (12,437) (12,227)
Flow-through share
obligation 2,864 1,475 - - -
Asset retirement obligation 1,253 1,214 1,248 1,260 1,301
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Sales Volumes
From the second quarter of 2006 until the fourth quarter of 2006, total sales
volumes increased modestly as natural gas volume declines at Virginia Hills were
offset by new oil sales volumes from new wells at Kingsford, Saskatchewan and
Sinclair, Manitoba.
Overall natural gas and oil volumes declined in the first half of 2007 as the
Company concentrated on the tie-in of wells drilled in 2006, particularly the
Tower Creek gas discovery. The third quarter of 2007 reflected the initial
effects of the Tower Creek natural gas discovery well drilled in mid-2006, that
commenced production during the last week of June, 2007. Natural gas production
in the fourth quarter increased due to normalized operations at Tower Creek and
have remained relatively steady in the first quarter of 2008 as net sales
volumes from the Tower Creek well have average 3.2 mmcf/d. Oil production in the
first half of 2007 declined due to the lack of development drilling activity
prior to the third quarter of 2007. Oil production increased during the second
half of 2007 as horizontal development wells at Frys, Saskatchewan and Sinclair,
Manitoba were drilled and came on production throughout the third quarter.
Further increases in oil production were seen in the first quarter of 2008 as
drilling and recompletion operations continued in Manitoba.
Gross Revenues
Gross sales revenues from the second quarter of 2006 to the second quarter of
2007 remained relatively flat as changes in sales volumes were met with the
opposite change in pricing. Revenues rose in the third quarter of 2007 due to
new sales volumes from Tower Creek and the Three Forks/Torquay oil wells along
the Saskatchewan/Manitoba border. Revenues continued to rise in the fourth
quarter due to increase gas volumes from Tower Creek and higher commodity
prices. Revenues in the first quarter of 2008 continued to increase as oil
production volumes rose and commodity prices continue to increase. All of the
Company's natural gas, crude oil and liquids are sold at spot prices, which are
subject to world and North America supply and demand fundamentals.
Net Income (Loss)
The Company incurred a modest loss in the second quarter of 2006. In the third
quarter of 2006, the Company recorded net income of $226,000 as the increased
proved reserves from the Tower Creek well reduced the depletion rate. The fourth
quarter of 2006 also showed net income of $1,265,000 as a result of a lower
depletion rate combined with a future tax recovery of $1,306,000, related to the
issue of flow-through shares.
The Company recorded a net loss of $320,000 in the first quarter of 2007 as
lower sales revenues, higher general and administrative expenses and interest
costs more than offset the improvements in depletion and depreciation expense.
The net income of $328,000 recorded in the second quarter of 2007 is primarily
due to the lower depletion and depreciation expense. In the third quarter of
2007 the Company recorded net income of $686,000 on the strength of higher sales
and improved depletion and depreciation rates. This trend continue in the fourth
quarter of 2007 as higher gas sales and commodity prices combined with a future
tax recovery resulted in the largest earnings the Company has ever recorded.
Net income in the first quarter of 2008 was also bolstered by record production
levels and record oil prices along with strong gas prices and reduced depletion
and depreciation rates.
Additions to Property and Equipment
Grand Banks' capital program, focused on drilling development oil wells in
Saskatchewan mixed with exploratory natural gas wells in Alberta, has ranged
between $5,000,000 and $7,000,000 per quarter, until the first quarter of 2007
when the Company deferred some of its drilling plans to focus its capital
resources on the tie-in of wells drilled in 2006. During the second quarter of
2007, the Company completed the facilities required to place the Tower Creek
02-21 well on production. The Company also drilled one horizontal oil well in
the Frys area of Saskatchewan and started drilling a second one, both of which
came on production in July of 2007. Additionally, the Company was active on the
acquisition and divesture front in the second quarter of 2007. Firstly, after
consolidating its position in its Stoughton/Viewfield property, the Company
disposed of its interest in this property for net proceeds of nearly $8,200,000.
Secondly, Grand Banks acquired an additional 3.5% working interest in the Tower
Creek 02-21 well, facilities and related lands for $3,500,000. During the third
quarter of 2007, the Company drilled four more wells and shot two 3D seismic
programs on its Three Forks/Torquay play. The Company also abandoned the second
well it was drilling in the Tower Creek area after encountering serious hole
problems during drilling. Capital expenditures in the fourth quarter were
limited as the Company only drilled one new well and recompleted another as it
focused its resources on advancing its growth opportunities in Saskatchewan and
Manitoba by consolidating land positions and completing its technical work on
the Three Forks/Torquay play.
During the first quarter of 2008, the Company focused its capital spending on
the drilling of three new horizontal wells in Manitoba.
Working Capital (Deficiency)
Throughout 2006 and into the first quarter of 2008, the Company has been working
with a net working capital deficit (including revolving bank loans as a current
liability) as it has raised less flow through capital and focused more of its
operations on development activities. Exploration drilling success as well as
development drilling success has allowed the Company to prudently leverage its
balance sheet while capital spending has exceeded funds flow from operations.
The working capital deficiency at March 31, 2008 stood at $12,227,000 which
represents less than one year's funds flow from operations based on an
annualized fourth quarter funds flow from operations of $5,737,000.
Asset Retirement Obligations
The asset retirement obligations grew from $753,000 in the second quarter of
2006 to $1,301,000 in the first quarter of 2008 as the Company continued to
drill wells that are required to be abandoned and reclaimed at some point in the
future. The asset retirement obligation represents the present value of future
abandonment and reclamation cost for the Company's interest in the wells. These
amounts include the current portion of asset retirement obligations, which are
included in working capital.
Other Items
Outstanding Shares, Options and Warrants
The following table is a summary of the Company's share capital structure:
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As at March 31, May 27,
2008 2008
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(000s) (#) (#)
Common shares outstanding 32,559 32,559
Options outstanding 2,514 2,511
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Fully diluted 35,073 35,070
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Weighted
Average Weighted
Exercise Average
Shares Price Term
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(#000s) ($) (Years)
Options outstanding at December 31,
2007 2,517 1.30 4.0
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Options outstanding at March 31, 2008 2,514 1.30 3.8
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Options vested at March 31, 2008 1,990 1.28 2.8
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Accounting Policy Changes
Effective January 1, 2008 the Company adopted CICA Handbook Section 1535
"Capital Disclosures", which requires companies to disclose their objectives,
policies and processes for managing capital, and in addition, whether the
company has complied with any externally imposed capital requirements. See Note
9 (c) for related disclosure.
Effective January 1, 2008 the Company adopted CICA Handbook Section 3862
"Financial Instruments - Disclosures" and Section 3863 "Financial Instruments -
Presentation". These standards require companies to provide incremental
disclosures regarding the significance of financial instruments for the entity's
financial position and performance and the nature, extent and management of
risks arising from financial instruments to which the entity is exposed. See
Note 9 (a) for related disclosure.
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. As part of
that plan, accounting standards in Canada for public companies are expected to
converge with International Financial Reporting Standards ("IFRS") by January 1,
2011. The Company continues to monitor and assess the impact of convergence of
Canadian GAAP and IFRS.
Critical Accounting Estimates
Management is required to make judgments, assumptions and estimates in the
application of generally accepted accounting principles that have a significant
impact on the financial results of the Company.
Reserve estimates have a significant impact on income or loss, as they are a key
component in the calculation of depletion and depreciation and site restoration
costs. A change in the reserve quantity estimates will result in a corresponding
change in depletion, depreciation and site restoration costs. In addition, if
capitalized costs are determined to be in excess of the calculated ceiling,
which is based on reserve quantities and values, the excess must be written off
as an expense. The reserves and estimated future net cash flow from the assets
of Grand Banks have been independently evaluated.
Future site restoration costs are estimated and amortized over the life of
reserves. These costs were estimated by management using industry standard
guidelines. A change in estimated future site restoration costs will change the
amortization of site restoration costs included in depletion and depreciation
expense.
Non-GAAP Measures
Funds flow from operations is not a recognized measure under Canadian generally
accepted accounting principles ("GAAP"). Management believes that funds flow
from operations is a useful measure of financial performance. For the purposes
of funds flow from operations calculations, the following table reconciles the
non-GAAP financial measures "funds flow from operations" to "net income," the
most comparable measure calculated in accordance with GAAP:
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Three Months Ended March 31,
2008 2007
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(000s) ($) ($)
Net income 1,995 (320)
Adjustments for:
Depletion, depreciation and accretion 2,745 1,948
Stock-based compensation 96 257
Future income taxes 912 -
Asset retirement costs incurred (11) -
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Funds flow from operations 5,737 1,885
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Netback is the average per unit of volume for oil and gas revenues less
royalties and production costs incurred. Netback is expressed in terms of
dollars per boe and is calculated in accordance with National Instrument 51-101
Standards of Disclosure for Oil and Gas Activities.
Forward-Looking Statements
This Annual Report contains forward-looking or outlook information with respect
to Grand Banks. The use of any of the words "anticipate," "continue,"
"estimate," "expect," "may," "will," "project," "should," "believe," "outlook,"
and similar expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause actual results or events to differ materially from those
anticipated in the Company's forward-looking statements. Consequently, all of
the forward-looking statements made in this Annual Report are qualified by these
cautionary statements and there can be no assurance that actual results or
developments anticipated by the Company will be realized, or that they will have
the expected consequences or effects on the Company or its business or
operations. The Company assumes no obligation to update publicly any such
forward-looking statements, whether as a result of new information, future
events or otherwise.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of the risk factors set forth below
and elsewhere in this MD&A.
- Volatility in market prices for oil and natural gas.
- Risks inherent in the Company's operations.
- Geological, technical, drilling and processing problems.
- General economic conditions.
- Industry conditions, including fluctuation in the price of oil and natural gas.
- Governmental regulations.
- Fluctuation in foreign exchange and interest rates.
- Unanticipated events that can reduce production or cause production to be
shut-in or delayed.
- Failure to obtain industry partners and other third party consents and
approvals, when required.
- The need to obtain required approvals from regulatory authorities.
- The other factors discussed in the "Operational and Other Business Risks"
section of this MD&A.
Operational and Other Business Risks
Need to Replace and Grow Reserves
The future oil and natural gas production of Grand Banks, and therefore future
cash flows, are highly dependent upon ongoing success in exploring its current
and future undeveloped land base, exploiting the current producing properties
and acquiring or discovering additional reserves. Without reserve additions
through exploration, acquisition or development activities, reserves and
production will decline over time as reserves are depleted.
The business of discovering, developing or acquiring reserves is capital
intensive. To the extent cash flows from operations are insufficient and
external sources of capital become limited or unavailable, the ability of Grand
Banks to make the necessary capital investments to maintain and expand its oil
and natural gas reserves may be impaired.
There can be no assurance that the Company will be able to find and develop or
acquire additional reserves to replace and grow production at acceptable costs.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, which even a
combination of experience, knowledge and careful evaluation may not be able to
overcome. There is no assurance that expenditures made on future exploration by
Grand Banks will result in new discoveries of oil and natural gas in commercial
quantities. It is difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the costs associated with encountering various drilling conditions
such as over pressured zones, tools lost in the hole and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof.
The long-term commercial success of Grand Banks depends on its ability to find,
acquire, develop and commercially produce oil and natural gas reserves. No
assurance can be given that the Company will be able to continue to locate
satisfactory properties for acquisition or participation. Moreover, if such
acquisitions or participation are identified, Grand Banks may determine that
current markets, terms of acquisition and participation or pricing conditions
make such acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from
dry wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of
drilling, completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include delays in obtaining governmental approvals or
consents, shut-ins of connected wells resulting from extreme weather conditions,
insufficient storage or transportation capacity or other geological and
mechanical conditions. While diligent well supervision and effective maintenance
operations can contribute to maximizing production rate over time, production
delays and declines from normal field operating conditions cannot be eliminated
and can be expected to adversely affect revenue and cash flow levels to varying
degrees.
In addition, oil and gas operations are subject to the risks of exploration,
development and production of oil and natural gas properties, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blowouts, sour gas releases, fires and spills. Losses resulting from
the occurrence of any of these risks could have a materially adverse effect on
future results of operations, liquidity and financial condition.
Reserve Estimates
The production forecast and recoverable estimates contained in the Company's
engineering report are only estimates and the actual production and ultimate
recoverable reserves from the properties may be greater or less than the reserve
estimates of Paddock Lindstrom & Associates Ltd. ("Paddock Lindstrom").
There are numerous uncertainties inherent in estimating quantities of reserves
and cash flows to be derived from, including many factors that are beyond the
control of Grand Banks. The reserve and cash flow information set forth herein
represent estimates only. The reserves and estimated future net cash flow from
the assets of Grand Banks have been independently evaluated at December 31, 2007
and updated by management to March 31, 2008. These evaluations include a number
of assumptions relating to factors such as initial production rates, production
decline rates, ultimate recovery of reserves, timing and amount of capital
expenditure, marketability of production, future prices of oil and natural gas,
operating costs and royalties and other government levies that may be imposed
over the producing life of the reserves.
These assumptions were based on price forecasts in use at the date the relevant
evaluations were prepared and many of these assumptions are subject to change
and are beyond the control of the Company. Actual production and cash flows
derived therefrom will vary from these evaluations, and such variations could be
material. The foregoing evaluations are based in part on the assumed success of
exploitation activities intended to be undertaken in future years. The reserves
and estimated cash flows to be derived therefrom contained in such evaluations
will be reduced to the extent that such exploitation activities do not achieve
the level of success assumed in the evaluations.
Volatility of Oil and Natural Gas Prices
The operational results and financial condition of Grand Banks will be dependent
on the prices received for oil and natural gas production. Oil and natural gas
prices have fluctuated widely during recent years and are determined by supply
and demand factors, including weather and general economic conditions as well as
conditions in other oil and natural gas regions. Any decline in oil and natural
gas prices could have an adverse effect of the operations, proved reserves and
financial conditions of Grand Banks and could result in a reduction of the net
production revenue of the Company causing a reduction in its oil and gas
acquisition and development activities. In addition, bank borrowings that might
be made available to the Company are typically determined in part by the
borrowing base of the reserves of Grand Banks. A sustained material decline in
prices from historical average prices could reduce the borrowing base of the
Company, therefore reducing the bank credit available to Grand Banks and
possibly requiring that a portion of such bank debt be repaid.
Grand Banks uses the full cost method of accounting for oil and natural gas
properties. Under this accounting method, capitalized costs are reviewed on a
quarterly basis for impairment to ensure that the carrying amount of these costs
is recoverable based on expected future cash flows.
Operational Hazards and Other Uncertainties
Oil and natural gas exploration operations are subject to all the risks and
hazards typically associated with such operations, including hazards such as
fire, explosion, blowouts and oil spills, each of which could result in
substantial damage to oil and natural gas wells, production faculties, other
property and the environment or in personal injury.
In accordance with industry practice, Grand Banks is not fully insured against
all of these risks, nor are all such risks insurable. Although Grand Banks
maintains liability insurance, where available, in an amount that it considers
adequate and consistent with industry practice, the nature of these risks is
such that liabilities could exceed policy limits, in which event Grand Banks
could incur significant costs that could have a material adverse affect upon its
financial condition. Business interruption insurance may also be purchased for
selected facilities, to the extent that such insurance is available. Oil and
natural gas production operations are also subject to all the risks typically
associated with such operations, including premature decline of reservoirs and
the invasion of water into producing formations.
Oil and natural gas exploration and development activities are dependent on the
availability of drilling and related equipment in the particular areas where
such activities will be conducted. Demand for such equipment or access
restrictions may affect the availability and/or cost of such equipment to Grand
Banks and may delay exploration and development activities. To the extent Grand
Banks is not the operator of its oil and gas properties, the Company will be
dependent on other operators for timing of activities related to non-operating
properties and will be largely unable to direct or control the activities of the
operators.
Although property title reviews are completed according to industry standards
prior to the purchase of most oil and natural gas producing properties or the
commencement of drilling wells, such reviews do not guarantee or certify that an
unforeseen defect in the chain of title will not arise to defeat the claim of
Grand Banks, which could result in the reduction of the revenue received by the
Company.
Competition
There is strong competition relating to all aspects of the oil and natural gas
industry. Grand Banks actively competes for capital, skilled personnel,
undeveloped land, reserve acquisitions, access to drilling rigs, service rigs
and other equipment, access to processing facilities and pipeline and refining
capacity, and in all other aspects of its operations with a substantial number
of other organizations, many of which may have greater technical and financial
resources than Grand Banks.
Key Personnel
The success of Grand Banks depends in large measure on certain key personnel.
The loss of the services of such key personnel could have a material adverse
affect on the Company. Grand Banks does not have key person insurance in effect
for management. The contributions of these individuals to the immediate
operations of Grand Banks are likely to be of central importance. In addition,
the competition for qualified personnel in the oil and natural gas industry is
intense and there can be no assurance that the Company will be able to continue
to attract and retain all personnel necessary for the development and operation
of its business.
Environmental Risks
The oil and natural gas industry is subject to environmental regulations
pursuant to a variety of international conventions and Canadian federal,
provincial and municipal laws, regulations and guidelines. A breach of such
regulations may result in the imposition of fines or issuances of clean-up
orders in respect of Grand Banks or its assets. Such regulations may be changed
to impose higher standards and potentially more costly obligations on the
Company. There can be no assurance that future environmental costs will not have
a material adverse affect on Grand Banks.
Other Information
Additional information regarding Grand Banks Energy Corporation's reserves and
other data is available on the Company's website at www.grandbanksenergy.com and
on the Canadian Securities Administrators' System for Electronic Document
Analysis and Retrieval ("SEDAR") at www.sedar.com.
GRAND BANKS ENERGY CORPORATION
2008 First Quarter Interim Report
(Unaudited)
BALANCE SHEETS
----------------------------------------------------------------------------
March 31 December 31
2008 2007
----------------------------------------------------------------------------
(000s) ($) ($)
ASSETS
Current
Cash and cash equivalents - -
Accounts receivable 5,637 4,225
Prepaid expenses and deposits 247 291
----------------------------------------------------------------------------
5,884 4,516
Property and equipment (Note 3) 53,597 50,862
Future tax asset 184 1,096
----------------------------------------------------------------------------
59,665 56,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Revolving bank loan (Note 4) 10,202 11,213
Current portion of long-term bank loan (Note 4) 405 397
Accounts payable and accrued liabilities 7,432 5,270
Current portion of asset retirement obligation
(Note 5) 72 73
----------------------------------------------------------------------------
18,111 16,953
Long-term bank loan (Note 4) 354 458
Asset retirement obligation (Note 5) 1,229 1,187
----------------------------------------------------------------------------
19,694 18,598
----------------------------------------------------------------------------
Shareholders' Equity
Share capital (Note 6) 30,371 30,365
Share purchase loans (48) (48)
Contributed surplus (Note 7) 2,693 2,599
Retained earnings 6,955 4,960
----------------------------------------------------------------------------
39,971 37,876
----------------------------------------------------------------------------
Subsequent Event (Note 12) 59,665 56,474
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the financial statements.
On behalf of the Board of Directors:
(Signed) (Signed)
W.J. McNAUGHTON THOMAS BAMFORD
Chairman of the Audit Committee Director
STATEMENTS OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS
----------------------------------------------------------------------------
For the Three Months Ended March 31, 2008 2007
----------------------------------------------------------------------------
(000s, except per share amounts) ($) ($)
Revenue
Crude oil and liquids 6,137 3,408
Natural gas 3,587 714
Other income 2 2
----------------------------------------------------------------------------
9,726 4,124
Less: royalties (1,675) (825)
----------------------------------------------------------------------------
8,051 3,299
----------------------------------------------------------------------------
Expenses
Production 1,424 659
General and administrative 693 598
Interest 186 157
Stock-based compensation (Note 8) 96 257
Depletion, depreciation and accretion 2,745 1,948
----------------------------------------------------------------------------
5,144 3,619
----------------------------------------------------------------------------
Income (loss) before taxes 2,907 (320)
Future income taxes 912 -
----------------------------------------------------------------------------
Net income (loss) and comprehensive income (loss) for
the period 1,995 (320)
Retained earnings, beginning of period 4,960 1,635
----------------------------------------------------------------------------
Retained earnings, end of period 6,955 1,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income per share (Note 6(c))
Basic 0.06 (0.01)
Diluted 0.06 (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the financial statements.
STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------
For the Three Months Ended March 31, 2008 2007
----------------------------------------------------------------------------
(000s) ($) ($)
Cash flows from operating activities
Net income (loss) 1,995 (320)
Adjustments for:
Depletion, depreciation and accretion 2,745 1,948
Stock-based compensation 96 257
Future income taxes 912 -
Asset retirement obligations settled (Note 5) (11) -
----------------------------------------------------------------------------
5,737 1,885
Changes in non-cash operating working capital
balances (Note 11) (312) 856
----------------------------------------------------------------------------
5,425 2,741
----------------------------------------------------------------------------
Cash flows from financing activities
Issue of shares, net 4 509
Increase in long-term debt - 1,200
Repayment of long-term debt (96) (66)
Increase in revolving bank loan (1,011) (1,580)
Changes in non-cash operating working capital
balances (Note 11) - -
----------------------------------------------------------------------------
(1,103) 63
----------------------------------------------------------------------------
Cash flows from investing activities
Proceeds on disposal of property and equipment - -
Additions to property and equipment (5,428) (2,939)
Change in non-cash investing working capital
(Note 11) 1,106 135
----------------------------------------------------------------------------
(4,322) (2,804)
----------------------------------------------------------------------------
Decrease in cash and cash equivalents - -
Cash and cash equivalents, beginning of period - -
----------------------------------------------------------------------------
Cash and cash equivalents, end of period - -
----------------------------------------------------------------------------
See accompanying notes to the financial statements.
NOTES TO FINANCIAL STATEMENTS
March 31, 2008 and 2007
1. Nature of Operations
Grand Banks Energy Corporation's ("Grand Banks" or "the Company") principal
business is the exploration, development and production of crude oil and natural
gas properties. The Company was originally incorporated on June 25, 1969 under
the British Columbia Companies Act and changed its name from Pacific Amber
Resources Ltd. to Grand Banks Energy Corporation in 2003. The Company has been
continued under the Alberta Business Corporations Act. The Company's common
voting shares are listed on the TSX Venture Exchange.
The unaudited interim financial statements of the Company have been prepared by
management in accordance with Canadian generally accepted accounting principles
("GAAP"), using the same accounting policies as those set out in Note 2 to the
financial statements for the year ended December 31, 2007 except for the changes
discussed in the Note 2 below. The disclosures in these interim financial
statements are incremental to those included in the annual financial statements
and certain disclosures which are required to be included in the notes to the
annual financial statements have been condensed or omitted. The interim
financial statements should be read in conjunction with the financial statements
for the year ended December 31, 2007.
The financial statements of the Company as at March 31, 2008 and 2007 have been
compiled by management and approved by the Company's Audit Committee on May 27,
2008. These interim financial statements and MD&A have not been reviewed or
audited on behalf of the shareholders by the Company's independent external
auditors, Deloitte & Touche LLP.
2. Changes in Accounting Policies
Effective January 1, 2008 the Company adopted CICA Handbook Section 1535
"Capital Disclosures", which requires companies to disclose their objectives,
policies and processes for managing capital, and in addition, whether the
company has complied with any externally imposed capital requirements. See Note
9 (c) for related disclosure.
Effective January 1, 2008 the Company adopted CICA Handbook Section 3862
"Financial Instruments - Disclosures" and Section 3863 "Financial Instruments -
Presentation". These standards require companies to provide incremental
disclosures regarding the significance of financial instruments for the entity's
financial position and performance and the nature, extent and management of
risks arising from financial instruments to which the entity is exposed. See
Note 9 (a) for related disclosure.
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. As part of
that plan, accounting standards in Canada for public companies are expected to
converge with International Financial Reporting Standards ("IFRS") by January 1,
2011. The Company continues to monitor and assess the impact of convergence of
Canadian GAAP and IFRS.
3. Property and Equipment
----------------------------------------------------------------------------
Accumulated
Depletion and Net Book
Cost Amortization Value
----------------------------------------------------------------------------
(000s) ($) ($) ($)
March 31, 2008
Petroleum and natural gas
properties 87,233 33,724 53,509
Furniture and equipment 176 88 88
----------------------------------------------------------------------------
87,409 33,812 53,597
----------------------------------------------------------------------------
----------------------------------------------------------------------------
December 31, 2007
Petroleum and natural gas
properties 81,776 31,004 50,772
Furniture and equipment 172 82 90
----------------------------------------------------------------------------
81,948 31,086 50,862
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Future development costs relating to proved reserves of $14,586,000 (December
31, 2007 - $15,752,000) have been included in the depletion calculation. The
Company did not capitalize any general and administrative costs during the three
months ended March 31, 2008 or 2007. The Company excluded $2,947,000 (December
31, 2007 - $2,745,000) of undeveloped properties from the depletion calculation
as follows:
----------------------------------------------------------------------------
March 31 December 31
2008 2007
----------------------------------------------------------------------------
(000s) ($) ($)
Unproven costs
Land 1,665 1,599
Geological and geophysical 1,282 1,146
Drilling and completion - -
----------------------------------------------------------------------------
2,947 2,745
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The company performed a ceiling test calculation at March 31, 2008 to assess the
recoverable value of its oil and gas properties. The undiscounted value of
future net revenues from the Company's proved reserves exceeded the carrying
value of the oil and gas properties at March 31, 2008.
4. Bank Indebtedness
(a) Revolving Bank Loan
At March 31, 2008, the Company had a $19,000,000 (December 31, 2007 -
$19,000,000) revolving line of credit agreement with a Canadian financial
institution. The line of credit bears interest at prime plus 0.25% per annum, is
secured by the assets of the Company, and is due on demand. At March 31, 2008
the effective rate under the revolving line of credit was 5.50% (December 31,
2007 - 6.25%). At March 31, 2008, the Company was in compliance with all
covenants related to this credit facility.
(b) Long-Term Bank Loan
At March 31, 2008 the Company had drawn $759,000 (December 31, 2007 - $855,000)
on its long-term credit facility with the same Canadian financial institution.
This credit facility bears interest at 7.5%. This credit facility is fully drawn
and the outstanding balance is repayable through blended monthly payments of
interest and principal of $37,000. The balance is repayable over the next 22
months, the final installment being due January 31, 2010. This credit facility
is secured by the assets of the Company, including a specific charge on the
Tower Creek property.
5. Asset Retirement Obligation
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligation associated with the retirement of
oil and gas properties:
----------------------------------------------------------------------------
March 31 December 31
2008 2007
----------------------------------------------------------------------------
(000s) ($) ($)
Balance, beginning of year 1,260 1,223
Liabilities incurred in year 33 151
Asset retirement obligations settled (11) (111)
Liabilities disposed of in year - (75)
Accretion expense 19 72
----------------------------------------------------------------------------
1,301 1,260
Less current portion 72 73
----------------------------------------------------------------------------
Balance, end of year 1,229 1,187
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The undiscounted amount of cash flows, required over the estimated reserve life
of the underlying assets, to settle the obligation, adjusted for inflation is
estimated at $3,838,000 (2007 - $3,790,000). The obligation was calculated using
a credit-adjusted risk free discount rate of 8% and an inflation rate of 2%. It
is expected that this obligation will be funded from the Company's general
resources at the time the costs are incurred with the majority of costs expected
to occur between 2009 and 2036. No funds have been set aside to settle this
obligation.
6. Share Capital
(a) Authorized
The authorized share capital consists of an unlimited number of common
shares without nominal or par value.
(b) Issued and Outstanding
----------------------------------------------------------------------------
Shares Amount
(000s) (#) ($)
----------------------------------------------------------------------------
Balance, December 31, 2007 32,556 30,365
Issued on exercise of options (Note 6(d)) 3 4
Transfer from contributed surplus - 2
----------------------------------------------------------------------------
Balance at March 31, 2008 32,559 30,371
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(c) Per Share Amounts
The following table summarizes the calculation of basic net income (loss)
and diluted net income (loss) per share for the three months ended March
31, 2008 and 2007:
----------------------------------------------------------------------------
March 31, 2008 2007
----------------------------------------------------------------------------
(000s, except per share amounts) ($) ($)
Net income (loss) available to common shareholders 1,995 (320)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average number of common shares
Outstanding basic 32,557 32,135
Dilutive effect of stock options 596 -
----------------------------------------------------------------------------
Weighted average number of common shares
Outstanding diluted 33,153 32,135
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Income per share
Basic 0.06 (0.01)
Diluted 0.06 (0.01)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(d) Stock Options
The Option Plan allows directors, employees and consultants to be granted
incentive based compensation under the Option Plan while allowing a rolling
maximum of 10% of the number of issued and outstanding shares from time-to-time
to be granted under the Option Plan. Options may be granted under the Option
Plan at an exercise price and vesting provisions as set by the Board of
Directors of the Company from time-to-time, subject to the limitations of any
stock exchange on which the common shares are listed.
As at March 31, 2008, the Company had the following stock options
outstanding:
----------------------------------------------------------------------------
Option Weighted
Price Average
Share Per Share Exercise
Options Range Price
----------------------------------------------------------------------------
(#000s) ($) ($)
----------------------------------------------------------------------------
Outstanding, December 31, 2007 2,517 1.00 1.68 1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Granted - - -
Exercised (3) 1.40 - 1.68 1.56
Expired - - -
----------------------------------------------------------------------------
Outstanding, March 31, 2008 2,514 1.00 - 1.68 1.30
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(e) Stock Options (continued)
The following table summarizes information about the stock options
outstanding at March 31, 2008:
----------------------------------------------------------------------------
Options Outstanding Options Currently Exercisable
----------------------------------------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Share Contractual Exercise Share Contractual Exercise
Option Price Options Life Price Options Life Price
----------------------------------------------------------------------------
($) (#000s) (Years) ($) (#000s) (Years) ($)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, 2008
1.00 10 3.1 1.00 10 3.1 1.00
1.05 790 2.2 1.05 790 2.2 1.05
1.25 307 3.3 1.25 307 3.3 1.25
1.30 140 5.3 1.30 47 4.3 1.30
1.40 913 5.0 1.40 483 2.5 1.40
1.65 352 3.8 1.65 352 3.8 1.65
1.68 2 4.7 1.68 1 4.0 1.68
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2,514 3.8 1.30 1,990 2.8 1.28
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. Contributed Surplus
----------------------------------------------------------------------------
March 31 December 31
2008 2007
----------------------------------------------------------------------------
(000s) ($) ($)
Balance, beginning of period 2,599 2,448
Stock compensation costs 96 656
Transfer to share capital upon exercise of options (2) (505)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance, end of year 2,693 2,599
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Stock Compensation
The Company records stock-based compensation expense over the vesting period for
all common share options granted to employees, consultants, officers and
directors. While no stock options were granted during the three month period
ended March 31, 2008, stock-based compensation expense of $96,000 (2007 -
$257,000) was recorded using the Black-Scholes option pricing model with the
following assumptions for the options granted in 2007:
----------------------------------------------------------------------------
March 31, 2008 2007
----------------------------------------------------------------------------
Dividend yield Nil Nil
Expected volatility (%) - 45
Risk free rate of return (%) - 4.5
Weighted average life (years) - 6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Financial Instruments
(a) Financial Risk
The Company is exposed to financial risk in a range of financial instruments
including cash and cash equivalents, accounts receivable, deposits, accounts
payable and accrued liabilities, revolving bank and long-term bank loans. The
Company manages its exposure to financial risks by operating in a manner that
minimizes its exposure to the extent practical. The main financial risks
affecting the Company are discussed below:
(i) Credit Risk
Credit risk arises when a failure by counter parties to discharge their
obligations could reduce the amount of future cash inflows from financial assets
on hand at the balance sheet date. A majority of the Company's financial assets
at the balance sheet date arise from crude oil, natural gas liquids and natural
gas sales. Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production. The Company markets the
majority of its oil and natural gas to two marketers and, therefore, is subject
to concentration risk which is mitigated by the Company's policy to utilize
larger petroleum and natural gas marketers with good credit ratings and industry
reputations. In addition, when joint operations are conducted on behalf of a
joint venture partner relating to capital expenditures, costs of such operations
are paid for in advance to the Company by way of a cash call by the partner of
the operation being conducted.
The Company assesses quarterly if there should be any impairment of the
financial assets of the Corporation. During the three month period ended March
31, 2008, there was no impairment required on any of the financial assets of the
Company.
The carrying value of accounts receivable and deposits approximates their fair
value due to the relatively short periods to maturity on these instruments. The
maximum exposure to credit risk is represented by the carrying amount on the
balance sheet. There are no material financial assets that the Company considers
past due.
As at March 31, 2008, the Company considers its accounts receivable to be
aged as follows:
----------------------------------------------------------------------------
Aging
----------------------------------------------------------------------------
(000 s) ($)
Current (less than 90 days) 5,085
Past due (more than 90 days) 552
----------------------------------------------------------------------------
Total 5,637
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(ii) Market Risk
Foreign Exchange Risk
The prices received by the Company for the production of crude oil, natural gas
and natural gas liquids are primarily determined in reference to U.S. dollars
but are settled with the Company in Canadian dollars. The Company's cash flow
from commodity sales will therefore be impacted by fluctuations in foreign
exchange rates. A $0.01 increase or decrease in the Canadian / U.S. exchange
rate would have impacted the cash flow of the Company for the three months ended
March 31, 2008 by approximately $81,000. The Company considers this risk to be
limited and therefore does not hedge its foreign exchange risk.
Interest Rate Risk
Interest rate risk refers to the risk that the value of a financial instrument
or cash flows associated with the instrument will fluctuate due to changes in
market interest rates. The Company is exposed to interest rate risk as it
borrows funds at floating interest rates as disclosed in Note 4. The Company
currently does not use interest rate hedges or fixed interest rate contracts to
manage the Company's exposure to interest rate fluctuations.
A 1% increase or decrease in interest rates would have impacted the cash flow of
the Company during the quarter ended March 31, 2008 by approximately $28,000.
Commodity Price Risk
Commodity price risk is the risk that the fair value of future cash flows will
fluctuate as a result of changes in commodity prices. Significant changes in
commodity prices can materially impact the Company's borrowing base supporting
its revolving bank loan credit facility. Lower commodity prices can also reduce
the Company's ability to raise capital. Commodity prices are impacted by world
economic events that dictate the levels of supply and demand. The Company may
attempt to mitigate commodity price risk from time to time through the use of
financial derivatives however currently has not done so.
(iii) Liquidity Risk
Liquidity risk includes the risk that, as a result of our operational liquidity
requirements:
- The Company will not have sufficient funds to settle a transaction on the due
date;
- The Company will be forced to sell financial assets at a value which is less
than what they are worth; or
- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts projected to
complete our existing capital expenditure program are continuously monitored and
adjusted as input variables change. These variables include but are not limited
to, available bank lines, oil and natural gas production from existing wells,
results from new wells drilled, commodity prices, cost overruns on capital
projects and changes to government regulations relating to prices, taxes,
royalties, land tenure, allowable production and availability of markets. As
these variables change, liquidity risks may necessitate the need for the Company
to conduct equity issues or obtain project debt financing. The Company also
mitigates liquidity risk by maintaining an insurance program to minimize
exposure to insurable losses.
At March 31, 2008, the Company was in compliance with its banking covenants
regarding working capital and net debt to annualized quarterly cash flow. The
working capital covenant requires the ratio of current assets to current
liabilities (excluding bank debt) to be maintained at a minimum level of
1.0:1.0. At March 31, 2008, the ratio was 2.0:1.0. The net debt to annualized
quarterly cash flow covenant requires the ratio of net debt to annualized
quarterly cash flow not to exceed 2.5:1.0. At March 31, 2008 the ratio was
0.5:1.0.
(b) Fair Value of Financial Instruments
The Company's financial instruments as at March 31, 2008 include cash and cash
equivalents, accounts receivable, deposits, accounts payable and accrued
liabilities, revolving bank and long-term bank loans. The fair value of cash and
cash equivalents, accounts receivable, advances and accounts payable and accrued
liabilities approximate their carrying value due to their short term to
maturity. The Company's revolving bank loan bears interest at a floating market
rate and accordingly the fair market value approximates the carrying value. The
fixed rate long-term bank loan, which has a carrying value of $759,000 at March
31, 2008, has a fair value of $773,000.
(c) Capital Management
The Company's capital structure consists of shareholders' equity, a revolving
bank loan, a long-term bank loan and working capital. The Company's objectives
when managing its capital structure is to safeguard the entity's ability to
continue as a going concern, so that it can continue to provide returns for
shareholders and benefits for other stakeholders. The Company sets the amount of
capital in proportion to risk. The Company manages the capital structure and
makes adjustments to it in light of changes in economic conditions and the risk
characteristics of the underlying assets. The Company's objective is met by
retaining adequate equity to provide for the possibility that cash flows from
assets will not be sufficient to meet future cash flow requirements. The Board
of Directors does not establish quantitative return on capital criteria for
management; but rather promotes year over year sustainable profitable growth.
The Company is not subject to any externally imposed capital requirements other
than covenants on its revolving line of credit facility with its lender to
maintain its working capital ratio (excluding bank debt) at a minimum level of
1.0:1.0 and its net debt to annualized quarterly cash flow ratio at a maximum
level of 2.5:1.0.
10. Related Party Transactions
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
similar to those negotiated with third parties. The Company had the following
related party transactions:
(a) The Company conducts oil and gas exploration and development activities and
related transactions with organizations managed or controlled by directors.
These transactions are negotiated and conducted using standard industry
agreements and terms. The amounts associated with these transactions are
insignificant to the operations of the Company.
(b) Included in general and administrative expenses are consulting fees of
$55,000 (2007 - $87,000) incurred with companies controlled by officers of the
Company for the three months ended March 31, 2008.
(c) Included in general and administrative expenses are legal fees of $5,000
(2007 - $8,000) incurred with a firm in which one of the Company's officers was
a partner for the three months ended March 31, 2008.
(d) Included in general and administrative expenses is $14,000 (2007 - $14,000)
paid for directors' fees to independent directors for the three months ended
March 31, 2008.
11. Statement of Cash Flows
(a) Changes in non-cash working capital balances are comprised of the
following:
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March 31, 2008 2007
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(000s) ($) ($)
Accounts receivable (1,412) 1,310
Prepaid expenses and deposits 44 38
Accounts payable and accrued liabilities 2,162 (357)
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794 991
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Less amounts related to investing activities 1,106 135
Less amounts related to financing activities - -
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Amounts related to operating activities (312) 856
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(b) In the three months ended March 31, 2008, the cash interest paid was
$258,000 (2007 - $179,000).
12. Subsequent Event
On April 29, 2008, the Company announced it had entered into an agreement with
Fairborne Energy Ltd. ("Fairborne") pursuant to which Fairborne has made an
offer (the "Offer") to acquire all of the issued and outstanding common shares
of the Company by way of a takeover bid. Under the terms of the Offer, Fairborne
will pay $2.90 cash per share and assume the Company's debt for an estimated
purchase price of $112.0 million. The Offer is subject to certain conditions,
including the deposit of not less than 66 2/3% of the outstanding common shares
of the Company (on a fully diluted basis), receipt of regulatory approvals and
other customary conditions. The formal offer documents were mailed to holders of
securities of Grand Banks on May 7, 2008.
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