Tanganyika Oil Company Ltd. (the "Company") (TSX VENTURE:TYK)(OMX:TYKS) today
announces interim operating and financial results for the first quarter ended
March 31, 2008. Unless otherwise stated, all figures contained in this report
are in United Stated Dollars.
Three Months Ended March 31, 2008 and March 31, 2007
Three Three Twelve
months months months
ended ended ended
March 31, March 31, December 31,
Financial Highlights 2008 2007 2007
---------------------------------------
Revenue 26,307,164 4,664,463 35,912,560
Net profit (loss) - Continuing
operations 825,893 (5,048,489) (21,972,725)
Per share (basic) 0.014 (0.091) (0.389)
Per share (diluted) 0.014 (0.091) (0.389)
Profit (loss) - Discontinued
operations (2) 0 1,737,892 45,006,004
Per share (basic) 0.000 0.031 0.798
Per share (diluted) 0.000 0.031 0.795
Profit (loss) for the period 825,893 (3,310,597) 23,033,279
Per share (basic) 0.014 (0.059) 0.408
Per share (diluted) 0.014 (0.059) 0.407
Cash Flow from Continuing
operations (1) 13,568,358 (99,764) 3,662,197
Per share (basic) 0.234 (0.002) 0.065
Per share (diluted) 0.234 (0.002) 0.065
Cash Flow from Discontinued
operations (1, 2) 0 316,102 69,312,772
Per share (basic) 0.000 0.006 1.228
Per share (diluted) 0.000 0.006 1.224
Total Assets 368,884,410 233,843,925 287,561,314
Working Capital, including cash 112,643,728 78,808,106 53,424,460
Working Capital, excluding cash 12,386,065 9,611,059 11,122,248
Weighted Average shares
outstanding (basic) 57,932,343 55,775,159 56,427,858
Weighted Average shares
outstanding (diluted) 58,049,186 56,581,573 56,626,839
Operational Highlights
Average daily production -
Company net (bbl/d)
Syria - Oudeh 1,788 1,099 1,140
Syria - Tishrine-Sheikh Mansour 2,351 124 468
-------------------------------------------------------------------------
Total Syria 4,139 1,223 1,608
-------------------------------------------------------------------------
Average sales price ($/bbl)
Syria
Oudeh 68.83 36.39 52.64
Tishrine 70.00 35.34 55.87
Operational costs ($/bbl)
Syria (3) 10.49 9.02 10.53
(1) Cash flow from operations is a non-GAAP measure that represents cash
generated from operating activities before changes in non-cash working
capital.
(2) On September 25, 2007 the Company sold its interest in West Gharib
Concession in Egypt. Financial results related to these assets have
been recorded as Discontinued Operations in the companies financial
statements.
(3) Gross field production cost, before deduction of operating expenses
related to base crude production, divided by gross field production.
The accompanying unaudited interim financial statements of the Company have been
prepared by and are the responsibility of the Company's management.
PRESIDENT'S MESSAGE
Tanganyika is pleased to report that record production levels and realized oil
prices have resulted in the Company recording positive earnings from continuing
operations during the first quarter of 2008.
Gross field production grew by over 32% during the first quarter of 2008,
averaging 13,399 bopd. Average realized oil prices were over $68/bbl during the
first quarter up 88% from the average price realized price in the first quarter
of 2007 of $36/bbl. World oil prices have continued to strengthen subsequent to
quarter end, reaching record highs. These production gains have been recorded
during one of the coldest winters in recent history confirming the success of
the Company's winterization program and electrical system improvements that
occurred during 2007. Production growth has continued subsequent to quarter end
with average gross field production of over 15,500 bopd during April 2008.
Production increases are in line with the 2008 production guidance provided by
the Company that projected average gross field production rates of between
17,500 and 20,000 bopd during 2008 and a targeted 2008 exit rate of between
21,400 and 27,000 bopd. The pace of production increases is expected to
accelerate with the addition of three new drilling rigs, bringing the total
number of rigs under contract to the Company to six. Two of the additional three
new rigs are now actively drilling on the Company's Syrian oil fields. The third
rig is currently in transit to Syria from China. The 2008 drilling plan
envisions three rigs actively drilling in each of the Company's development
areas.
Drilling results in both Oudeh and Tishrine were positive during the first
quarter of 2008. The Oudeh developmental drilling program continued to add
production by focusing on lower viscosity areas within the proven Shiranish B
reservoir. Additional drilling rigs are expected to provide the catalyst for
accelerated production growth at Oudeh. The Tishrine drilling program continues
to appraise and develop the West Tishrine extensions that were first reported
during the third quarter of 2007. The southwest extension of the West Tishrine
field added a significant updip area now recognized in the Company's reserve
base. A second new discovery area is the northern down-dip extensions in the
Chilou B - Jaddala reservoir of the West Tishrine field. Both West Tishrine
extension areas continue to positively impact production, reserves and validate
the trapping model making further appraisal on the Tishrine anticline very
exciting for the Company.
An additional four steam generators have arrived in Syria. Three were
operational by the end of the first quarter. The fourth is currently being
mobilized. Having ten steam generators provides the Company with a strong
platform from which it may continue to expand its enhanced oil recovery pilot
program.
As expected, 2008 is proving to be a pivotal year for the Company as we
demonstrate our ability to convert our world class reserve base into proven
producing assets capable of generating strong earnings and operating cash flow.
Signed "Gary S. Guidry"
President and CEO
May 8, 2008
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in United States Dollars unless otherwise indicated)
Three months ended March 31, 2008 and March 31, 2007
Management's discussion and analysis ("MD&A") of Tanganyika Oil Company Ltd.'s
(the "Company" or "Tanganyika") financial condition and results of operations
should be read in conjunction with the consolidated financial statements for the
three months ended March 31, 2008 and March 31, 2007 and the audited
consolidated financial statements for the period ended December 31, 2007 and
related notes therein prepared in accordance with Canadian generally accepted
accounting principles ("Canadian GAAP"). The Quarter ended March 31, 2007
included for comparison purposes has not been reviewed by our external
auditor's. The effective date of this MD&A is May 12, 2008.
Additional information relating to the Company is available on SEDAR at
www.sedar.com and on the Company's web-site at www.tanganyikaoil.com.
Overview
Tanganyika is a Canadian-based company whose common shares are traded on the TSX
Venture Exchange under the symbol "TYK". Effective February 14, 2007, the
Company's Swedish Depository Receipts commenced trading on the OMX Nordic
Exchange under the symbol "TYKS". Additional information about the Company and
its business activities, including the Company's Annual Information Form
("AIF"), is available on SEDAR at www.sedar.com or on the Company's website at
www.tanganyikaoil.com.
The Company is an international oil and gas exploration and development company
based in Canada primarily focused on its exploration and development properties
in Syria.
Syria
Oudeh Block
The Company acquired its interest in the Oudeh Block ("Oudeh") in 2003 pursuant
to a Contract for Development and Production of Petroleum with the Government of
Syria (the 'Government"). The objective of the contract, which has a term of 20
years with a provision for a five year extension, is to increase oil recovery
and crude oil production within the block by applying enhanced oil recovery
("EOR") techniques. The Company began EOR through the use of thermal (steam)
technology during 2006.
The Company has an interest in all incremental production above the base crude
oil production ("BCP") level from all new and existing wells from the time the
contract was signed. The BCP level declines at a rate of five percent per annum
calculated on a monthly basis. A table of Oudeh BCP levels for 2008 and 2009 is
below. Under the terms of the contract, the Syrian Petroleum Company ("SPC") is
responsible for reimbursing the Company for all operating costs attributable to
the BCP.
After deduction of the BCP, a royalty of 12.5 percent is deducted and submitted
to the Government. The remaining production is then shareable among the Company
and SPC as follows:
- 30 percent of the shareable crude oil production from the block is designated
as profit oil and is split among the Company and SPC. The profit oil is split 30
percent to the Company and 70 percent to SPC.
- Up to 70 percent of the shareable crude oil production is available as cost
oil to the Company to recover exploration, development and operating costs
(other than operating costs associated with the BCP that have been recovered
directly from SPC). To the extent that these costs exceed the proceeds from the
sale of cost oil in any quarter, the excess can be carried forward into
subsequent quarters.
- If the costs are less than the proceeds of the cost oil, the excess proceeds
are split between the Company and SPC in the same manner as profit oil.
All Syrian taxes are the responsibility of SPC from its share of profit and
excess cost oil.
Tishrine-Sheikh Mansour Fields
The Company acquired its interest in the Tishrine-Sheikh Mansour Fields
("Tishrine") in November 2004 pursuant to a Contract for Development and
Production of Petroleum with the Government. The contract was ratified in
February 2005 and the Company assumed operations on the fields in September
2005. The objective of the contract, which has a term of 20 years with a
provision for a five year extension, is to apply EOR techniques to increase
crude oil production and recoverability. The Company began EOR through the use
of thermal (steam) technology during 2006.
The Company has an interest in all incremental production above the BCP level
from all new and existing wells from the time the contract was signed. The BCP
level declines at a rate of five percent per annum calculated on a monthly
basis. A table of Tishrine BCP levels for 2008 and 2009 is below. Under the
terms of the contract, SPC is responsible for reimbursing the Company for all
operating costs attributable to the BCP.
After deduction of the BCP, a royalty of 12.5 percent is deducted and submitted
to the Government. The remaining production is then shareable among the Company
and SPC as follows:
- 52 percent of the shareable crude oil production from the block is designated
as profit oil and is split among the Company and SPC. The profit oil is split 30
percent to the Company and 70 percent to SPC.
- Up to 48 percent of the remaining crude oil production is available as cost
oil to the Company to recover exploration, development and operating costs
(other than operating costs associated with the BCP that have been recovered
directly from SPC). To the extent that these costs exceed the proceeds from the
sale of cost oil in any quarter, the excess can be carried forward into
subsequent quarters.
- If the costs are less than the proceeds of the cost oil, the excess proceeds
are split between the Company and SPC in the same manner as profit oil.
All Syrian taxes are the responsibility of SPC from its share of profit and
excess cost oil.
Base Crude Production (BCP)
--------------------------------------------------------------------------
(bbl/d) 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
--------------------------------------------------------------------------
Oudeh 860 850 830 820 828 808 790 780
--------------------------------------------------------------------------
Tishrine-Sheikh
Mansour 5,714 5,643 5,513 5,444 5,496 5,368 5,244 5,179
--------------------------------------------------------------------------
Operational Update
Syria - Additional Drilling Rigs
The Company has increased its drilling capacity, adding three additional new
drilling rigs to the three existing rigs under contract. Two of the three
additional rigs have commenced drilling activities in Syria. The third
additional rig is presently in transit from China to Syria and will commence
drilling during the second quarter. The pace of the Company's drilling activity
is planned to dramatically increase with the addition of these three rigs,
bringing the total rig capacity to six rigs. The Company's plan is to dedicate
three rigs to each development area.
Syria - Tishrine
Average gross field production during the first quarter of 2008 was 9,947 bopd
(Company net: 2,351 bopd). This represents a 36% increase in gross field
production over the fourth quarter of 2007 (267% increase on a net production
basis). The Company is very encouraged by Tishrine's growing production and
reserve base. The expectation is that production growth will accelerate with the
additional drilling rig capacity added during the first quarter of 2008.
The Company's first quarter drilling continued to focus on two new development
areas: the southwest updip extension of the West Tishrine field and the northern
down-dip extension of the West Tishrine Field. Eleven wells completed drilling
or were spud during the first quarter. Both areas continue to provide very
encouraging results. Initial oil production rates have exceeded 400 bopd in
several of the wells. It is expected that the new wells may be expected to have
initial sustainable rates of between 150 to 180 bopd. The 2008 Tishrine drilling
program is aimed at continuing to develop and appraise these exciting new West
Tishrine extensions as well as appraising the 35 kilometer long anticline with
up to 5 potentially productive geologic horizons.
First quarter results indicate that dewatering of the Jaddala formation in West
Tishrine continues to positively impact oil production. Decreasing water cuts
continue to be registered on several structurally low wells in the field since
dewatering began. It is expected that oil production will continue to improve
over the next several months as dewatering of the Jaddala formation at West
Tishrine continues with the use of deep water disposal wells into formations
below the Jaddala formation.
The reliability of the electrical power supply in Tishrine during the winter
months was excellent, demonstrating the success of upgrading the electric
infrastructure in the field. In addition, the winterization programs proved very
successful over one of the coldest winters in recent years. The Company
continued production growth during the first quarter with minimal cold weather
related production restrictions.
Syria - Oudeh
Average gross field production during the first quarter of 2008 was 3,452
barrels of oil per day (bopd) (Company net: 1,788 bopd). This represents a 25%
increase in gross field production over the fourth quarter of 2007 (36% increase
on a net production basis).
The Company's first quarter drilling program was primarily focused on new
development wells in the Shiranish reservoir. The wells were specifically
drilled in the lower viscosity areas of the field. A total of five wells
completed drilling or spud during the first quarter of 2008. All of the wells
were drilled in the Southwest area of the field, encountering excellent
Shiranish B reservoir quality, lower viscosity and excellent productive
capability. The 2008 Oudeh drilling program is aimed at continuing to develop
proven reserves in areas demonstrating lower viscosity oil characteristics.
Production is expected to grow at an accelerated rate once Oudeh has three
drilling rigs dedicated to its drilling program. The new wells drilled during
the first quarter contributed an average of over 100 bopd by the end of the
quarter. Steam injection continued through the first quarter of 2008, positively
impacting production.
Like Tishrine, the winterization program for Oudeh proved successful. Heat and
insulation had been installed at field satellite stations and the main
processing station. In addition, the new heated insulated processing tank was
successful. The new 11 kilometer export pipeline and heater station is expected
to be in service during the second quarter of 2008.
Syria - Thermal Operations
The pace of the steam pilot at both Oudeh and Tishrine continued to accelerate
during the first quarter of 2008. Four new steam generators have been delivered
to the fields in Syria, bringing the total number of steam generators available
for use in Syria to ten. All of the generators are currently steaming wells.
Plans are in place for a gas sweetening plant to be installed at Oudeh during
2008 to ensure the quality of the gas supply to the steam generators. The
engineering for the plant is complete and the procurement process is ongoing.
The steam pilot in Tishrine now includes 20 wells:
- Estimated gross cold production from these wells, assuming continued cold
production, was 617 bopd
- Actual gross thermal production was 2,590 bopd during March 2008 from these
same wells
- The steam pilot continues to focus on the Tishrine West field.
The steam pilot in Oudeh now includes 13 wells:
- Estimated gross cold production from these wells, assuming continued cold
production, was 480 bopd
- Actual gross thermal production was 694 bopd during March 2008 from these same
wells
- Thermally enhanced production is expected to increase during the second
quarter of 2008 as the Company overcomes mechanical issues related to the Oudeh
thermal project and moves toward regular high-quality steam injection cycles.
The company experienced problems during the quarter primarily related to thermal
packer and insulated tubing failures, and the resolution of these failures is
underway
- Given the viscosity of the oil in the steamed wells at Oudeh, it is expected
that successive steam cycles will yield progressively higher rates of production
North Africa
During the second quarter of 2006, the Company acquired a 50 percent interest in
a private entity which holds certain rights associated with the development of
oil and gas properties located in North Africa in exchange for 372,954 common
shares having a deemed value of $3.5 million. As part of the acquisition, the
Company agreed to fund 100 percent of the private entity's work program
obligations to a maximum of $2 million. The Company has an option to acquire the
remaining 50 percent interest in the private entity within 60 days after the
date a development lease is issued in respect of the oil and gas properties for
a purchase price of common shares of the Company having a deemed value of $6
million. The Government has yet to issue the development lease and the Company
continues to evaluate the carrying value of this property.
Company Reserves
DeGolyer and MacNaughton Canada Limited have independently evaluated the proved
and probable crude oil reserves attributable to Tanganyika's participating
interests in its Syrian properties. The following table shows the estimated
share of Tanganyika's crude oil reserves in its Syrian properties using forecast
prices and costs. The complete Statement of Reserves Data and Other Oil and Gas
Information can be found on SEDAR and on the Company's website.
--------------------------------------------------------------------------
Forecast Prices and Costs
--------------------------------------------------------------------------
December 31, 2007 December 31, 2006
--------------------------------------------------------------------------
Net Net
Present Present
Value of Value of
Future Future
Crude Oil Net Crude Oil Net
(million Revenue- (million Revenue-
barrels) 10% barrels) 10%
------------ Discount ------------ Discount
Gross Net ($ millions) Gross Net ($ millions)
--------------------------------------------------------------------------
Proved 185.0 67.7 1,370.0 168.3 88.8 603.0
--------------------------------------------------------------------------
Proved plus
Probable 851.4 328.5 5,726.0 764.8 428.7 2,336.0
--------------------------------------------------------------------------
Proved plus
Probable and
Possible 1,250.7 435.7 6,456.0 1,033.3 603.8 3,469.0
--------------------------------------------------------------------------
--------------------------------------------
Percent Increase (Decrease)
--------------------------------------------
Net
Present
Value of
Future
Crude Oil Net
Reserves Revenue-
------------- 10%
Gross Net Discount
--------------------------------------------
Proved 10% (24)% 127%
--------------------------------------------
Proved plus
Probable 11% (23)% 145%
--------------------------------------------
Proved plus
Probable and
Possible 21% (28)% 86%
--------------------------------------------
The net present value of future net revenue attributable to Tanganyika's Syrian
reserves increased over 120% during 2007 on both a proven and proven plus
probable basis (forecast prices and costs). This increase is attributed to both
an increase in the gross Syrian reserves and an increase in forecast world oil
prices. The 2006 reserve report used forecast future realized prices during the
term of Tanganyika's Syrian production sharing agreements ranging from $33.49 to
$48.54/bbl. In line with increased world oil prices, the 2007 reserve report now
forecasts future realized prices during the term of Tanganyika's Syrian
production sharing agreements ranging from $64.16 to $89.64/bbl. The drop in
Tanganyika's net reserves recorded during 2007 is a result of these improved
world oil prices. As prices increase, future barrels that are required for
Tanganyika to recover its costs under the production sharing agreement terms are
decreased and thus lower net reserves are recorded even though the value of the
reserves increased significantly.
Selected Quarterly Information
Three Months Ended
31-Mar 31-Dec 30-Sep 30-Jun 31-Mar 31-Dec 30-Sep 30-Jun
2008 2007 2007 2007 2007 2006 2006 2006
--------------------------------------------------------------------------
Total
revenues
($ 000) 26,307 17,379 7,041 7,035 4,457 4,638 7,217 5,128
Earnings
(loss) -
continuing
operations
($ 000) 826 (4,411) (6,858) (5,656) (5,048) (1,909) (6,721) (5,577)
Per share
basic -
continuing
operations
$/share 0.014 (0.078) (0.121) (0.100) (0.091) (0.037) (0.137) (0.121)
Per share
diluted -
continuing
operations
$/share 0.014 (0.078) (0.121) (0.100) (0.091) (0.037) (0.137) (0.121)
Earnings
(loss) -
discontinued
operations
($ 000) (2) - (1,513) 42,732 2,051 1,736 1,499 2,606 1,369
Per share
basic -
discontinued
operations
$/share (2) - (0.027) 0.754 0.036 0.031 0.029 0.053 0.030
Per share
diluted -
discontinued
operations
$/share (2) - (0.027) 0.751 0.036 0.031 0.029 0.052 0.029
Earnings
(loss)
($ 000) 826 (5,924) 35,874 (3,605) (3,311) (410) (4,115) (4,208)
Per share
basic
$/share 0.014 (0.104) 0.633 (0.064) (0.059) (0.008) (0.084) (0.091)
Per share
diluted
$/share 0.014 (0.104) 0.630 (0.064) (0.059) (0.008) (0.084) (0.091)
Cash flow
from
continuing
operations
($ 000)
(1) 13,568 3,714 (794) (982) (98) 6,756 (4,862) (5,733)
Per share
basic
$/share 0.234 0.065 (0.014) (0.017) (0.002) 0.133 (0.099) (0.124)
Per share
diluted
$/share 0.234 0.065 (0.014) (0.017) (0.002) 0.131 (0.099) (0.124)
Company
total
net
production -
continuing
operations
(bbl/d) 4,139 2,192 1,447 1,563 1,224 1,506 1,456 846
Company
total
net
production -
continuing
operations
(bbl) 377,000 202,000 133,000 142,000 110,000 139,000 133,000 77,000
(1) Cash generated from operating activities before changes in non-cash
working capital
(2) On September 25, 2007 the Company sold its interest in West Gharib
Concession in Egypt. Results for these assets have been recorded as
Discontinued Operations.
The Company's financial performance is primarily driven by oil production levels
and world oil prices. Both average Company net production and average world oil
prices were at their highest levels during the first quarter of 2008 resulting
in the first profitable quarter for Tanganyika. It is expected that Tanganyika's
future financial performance will be affected by Company net production levels
and world oil prices. The Company does not have any hedging programs that would
impact realized oil prices.
Results of Operations
The profit from continuing operations recorded during the quarter ended March
31, 2008 represents the first quarter in which Tanganyika has recorded positive
earnings. Record high net oil production combined with record high realized oil
prices to result in a $0.8 million profit from continuing operations during the
first quarter of 2008, in comparison to a loss of $5.1 million during the first
quarter of 2007. EBITDA (from continuing operations) of $9.0 million was
recorded during the first quarter of 2008, an increase of $9.9 million in
comparison to the first quarter of 2007.
Net oil production increased by 336% in comparison to the first quarter of 2007.
Oudeh's average realized oil price was 89% higher in the first quarter of 2008
than in the first quarter of 2007 and Tishrine's average realized oil price in
the first quarter of 2008 was 98% higher than in the first quarter of 2007.
Stock based compensation charges increased $0.6 million as the Company continues
to utilize its stock option plan as a method of recruiting, retaining and
motivating key personnel. A $2.9 million foreign exchange loss was recorded
during the first quarter of 2008 due to the strengthening of the US dollar in
comparison to the Canadian dollar between the date that the Company completed
its $CDN 75 million private placement in March and the period end.
Tanganyika is in the early stages of appraising and developing its Syrian oil
fields. The Company continues to add operating, technical and support staff as
required for expanding the development and appraisal programs. The reserves
potential identified by the work programs and capital deployed in Syria has been
reflected in the significant growth in reserves recognized by the third party
reserves evaluators. This is discussed in more detail in the Company's NI 51-101
reserves report as of December 31, 2007 that is filed on SEDAR (www.sedar.com).
Production
Three Three
months months Year
ended ended ending
March 31, March 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Production:
Syria:Oudeh
Gross field production (bbl) 314,175 225,779 926,361
Gross field production (bbl/d) 3,452 2,509 2,538
Company net production (bbl) (1) 162,689 98,949 416,029
Company net (bbl/day) 1,788 1,099 1,140
Syria:Tishrine-Sheikh Mansour
Gross field production (bbl) 905,219 547,470 2,434,923
Gross field production (bbl/d) 9,947 6,083 6,671
Company net production (bbl) (1) 213,902 11,166 170,999
Company net (bbl/day) 2,351 124 468
--------------------------------------------------------------------------
Syria Total
Total Company gross Syria (bbl) 1,219,394 773,249 3,361,284
Total Company gross Syria (bbl/d) 13,399 8,592 9,209
Total Company net Syria (bbl) 376,591 110,115 587,028
Total Company net Syria (bbl/d) 4,139 1,223 1,608
--------------------------------------------------------------------------
(1) Company net share of Syria's Oudeh and Tishrine production represents
the Company's share of cost and profit oil after deduction of royalty
and base crude production (i.e. incremental production).
Syrian gross production increased 32% during the first quarter of 2008 in
comparison to the fourth quarter of 2007 (926,538 bbl). This increase in gross
production resulted in an 87% increase in Tanganyika net production in
comparison to the fourth quarter of 2007 (201,586 bbl). Net production increases
are not proportionate to the increases in gross production due to the cost pools
that Tanganyika has accumulated to date from appraisal, development and enhanced
oil recovery programs in Syria. The terms of the Syrian PSAs allow for 70% of
incremental oil production to be utilized by Tanganyika for cost recovery
purposes at Oudeh and 48% of incremental production to be utilized by Tanganyika
for cost recovery purposes at Tishrine. As Tanganyika continues to aggressively
develop and appraise these fields, we expect continued significant increases in
Company net production as gross Syrian production increases.
Oil Sales
Three Three
months months Year
ended ended ending
March 31, March 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Sales of oil ($):
Syria: Oudeh 11,197,183 3,600,278 23,424,301
Tishrine 14,973,930 394,630 11,102,845
--------------------------------------------------------------------------
Total 26,171,113 3,994,908 34,527,146
--------------------------------------------------------------------------
Average oil sales price ($ per bbl):
Syria: Oudeh 68.83 36.39 52.64
Syria: Tishrine 70.00 35.34 55.87
--------------------------------------------------------------------------
Sales revenue for the three months ended March 31, 2008 was 555% higher than the
oil sales revenue during the first three months of 2007 and 51% higher than oil
sales revenue recorded during the fourth quarter of 2007 ($17,349,015).
Tanganyika recorded record high oil sales revenue during the first quarter of
2008 as a result of two factors:
- Record high quarterly net oil production from Syria, and;
- High world oil prices and Syria realized oil prices.
World oil prices have continued to strengthen subsequent to quarter end and all
futures markets indicate prices will remain strong during 2008.
Production Costs
Three Three
months months Year
ended ended ending
March 31, March 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Production Costs
Syria
Gross production costs (1) $12,795,214 $6,972,633 $35,387,795
Gross production volumes (1) 1,219,394 773,249 3,361,284
Cost per bbl $ 10.49 $ 9.02 $ 10.53
--------------------------------------------------------------------------
(1) Syria gross production costs and gross production volumes represent
100 percent costs and volumes before any deductions relating to the
base crude production.
Production costs from continuing operations for the three months ended March 31,
2008 averaged $10.49 per barrel as compared to $9.02 per barrel for the three
months ended March 31, 2007. Average per barrel production costs are expected to
improve as oil production rates increase. Expected per barrel operating expense
declines due to increased production levels were offset by several factors
including: increased diesel prices, increased electricity costs and stimulation
costs. The price of diesel per litre increased over the last few months from
approximately $.25/litre to $.93/litre as subsidies during the first quarter
were eliminated for commercial users. The increase in diesel had a negative
impact on operating costs of approximately $1.36 per bbl. Electricity rates have
increased approximately four fold for commercial users in Syria. The increase in
power has had a negative impact of approximately $.49 per bbl in the first
quarter.
Base Crude Production Recoverable Costs
BCP Operating Expense- BCP Operating Expense-
Recovery during the period Receivable at
-------------------------- -----------------------
December 31, March 31, December 31, March 31,
2007 2008 2007 2008
---------------------- -----------------------
Oudeh 3,627,000 810,000 5,340,000 5,072,000
Tishrine 11,672,000 2,943,000 18,089,000 17,030,000
---------------------------------------------- -----------------------
Total 15,299,000 3,753,000 23,429,000 22,102,000
---------------------------------------------- -----------------------
Under the terms of the Syrian production sharing agreements for Oudeh and
Tishrine, the Company is responsible for paying 100 percent of production costs
and is entitled to reimbursement of the portion of costs attributable to BCP.
During the first quarter of 2008, the Company received a $5.1 million payment
from SPC, $1.1 million for Oudeh and $4.0 million for Tishrine, related to the
reimbursement of BCP operating expenses.
Depletion
Depletion for the three month period ended March 31, 2008 was $8.1 million
compared to $4.2 million for the three month period ended March 31, 2007. During
the first quarter of 2008, depletion was approximately $6.66 per barrel for
Syria in comparison to $5.42 per barrel in the first quarter of 2007. The
Company uses the full cost method of accounting for its oil and gas activities.
In accordance with full cost accounting guidelines, all costs associated with
exploration and development are capitalized on a country by country basis
whether or not such activities were successful. The total capitalized costs and
estimated future development costs are amortized using the unit of production
method based on proved oil and gas reserves. Accordingly, revisions or changes
to estimated proved reserves will impact the depletion expense.
Interest and Other Income
Interest income was $0.1 million for the three months ended March 31, 2008
compared to $0.7 million for the three month period ended March 31, 2007. The
interest in 2007 was due to the surplus cash from a private placement in
November 2006. The Company completed a private placement on March 14, 2008 in
which they raised approximately $73.3 million USD net of placement costs.
General and Administration
General and administration costs for the three months ended March 31, 2008 were
$3.6 million compared to $2.9 million for the three month period ended March 31,
2007. The increase in year to date general and administration costs are mainly
driven by additional personnel employed in Syria as the Company ramps up its
Syrian development program. Tanganyika continues to recruit operational and
administrative personnel for its Syrian operations. The Company currently
employees over 450 persons distributed among four offices in Canada and Syria.
Key drivers of this increased headcount are the increase in rig count and steam
generation capacity.
Stock-based Compensation
The Company uses the fair value method of accounting for stock options granted
to directors, officers and employees whereby the fair value of all stock options
granted is recorded as a charge to operations. Stock based compensation for the
three months ended March 31, 2008 was $1.6 million and $1.0 million for the
three months ended March 31, 2007. The Company continues to utilize its stock
option plan as a method of recruiting, retaining and motivating key personnel.
Oil and Gas Interests
March 31, 2008
-----------------------------------------
Accumulated
Cost depletion Net book value
-----------------------------------------
Oil and Gas Interests 243,548,429 39,170,347 204,378,082
-----------------------------------------
-----------------------------------------
December 31, 2007
-----------------------------------------
Accumulated
Cost depletion Net book value
-----------------------------------------
Oil and Gas Interests 218,536,023 31,049,827 187,486,196
-----------------------------------------
-----------------------------------------
Oil and gas assets have increased $25.0 million as a result of development and
appraisal drilling and investment in oil, water and gas handling facilities on
both the Oudeh and Tishrine oil fields. Investment in oil and gas assets will
increase during 2008 due primarily to the increased number of drilling rigs.
Liquidity and Capital Resources
At March 31, 2008 the Company had a cash balance of $100.3 million compared to
$69.2 million at March 31, 2007.
Tanganyika has historically relied on private placements as a primary source of
funds for acquisition, exploration and development. During the first quarter of
2008, 5.0 million shares were issued with gross proceeds of approximately $75.0
million. Previously, in 2006, 10.3 million shares were issued with gross
proceeds of approximately $134.5 million.
As production increases in Syria, cash flow from operations will increasingly
provide the required capital for exploration and development expenditures.
However, due to potential impacts of price, production rates, pace of
development, and the costs of materials and services the Company may not
generate sufficient cash flow from operations to entirely fund the entire
appraisal and development programs out of operating cash flow and existing cash
on hand. Accordingly, the Company may in the future consider issuances of equity
securities, debt or the divestiture of assets, to assist with financing its
exploration and development activities.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Outstanding Share Data
As at May 12, 2008 the Company had 61,986,196 common shares outstanding and
3,205,517 stock options outstanding under its stock-based compensation plan.
Related Party Transactions
The Company has entered into transactions with related parties, which were
measured at the exchange amounts. Significant related party transactions were as
follows:
a) During the three months ended March 31, 2008, the Company paid $68,926 (March
31, 2007 - $46,901) to Namdo Management Services Ltd., a private corporation
owned by Lukas H. Lundin, a director of the Company, pursuant to a services
agreement.
b) During the three months ended March 31, 2007, the Company received $40,054
(March 31, 2007 - $59,111) from Pearl Exploration and Production Ltd. ("Pearl")
for administrative and other services. The Company and Pearl had certain
officers in common during the first quarter of 2008 and continue to have
directors in common.
c) During the three months ended March 31 2008, the Company received $1,820
(March 31, 2007 - $nil) from Africa Oil Corp ("AOC") for administrative and
other services. The Company and AOC had certain officers and directors in common
during the first quarter 2008 and continue to have directors in common.
Critical Accounting Estimates
The preparation of financial statements in conformity with Canadian GAAP
requires management to make judgments, assumptions and estimates that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and revenues and
expenses for the period reported. The significant accounting policies used by
the Company are disclosed in the Notes to the Consolidated Financial Statements.
Management believes that the most critical accounting policies that may have an
impact on the Company's financial results relate to the accounting for its oil
and gas interests. Amounts recorded for depletion and the impairment test are
based on estimates of proved reserves, production rates, oil prices, future
costs and other relevant assumptions. Actual results could differ materially
from such estimates.
Proved Oil and Gas Reserves
Under National Instrument 51-101 ("NI 51-101") detailed rules have been
developed to provide uniform reserves recognition criteria within the oil and
gas industry in Canada. However, the process of estimating oil and gas reserves
is inherently judgmental. Technical reserves estimates are made using available
geological and reservoir data as well as production performance data. As new
data becomes available, reserves estimates may change. Reserves estimates are
also impacted by economic conditions, primarily commodity prices. As economic
conditions change, production may be added or may become uneconomical and no
longer qualify for reserves recognition.
Depletion
The Company uses the full cost method of accounting for its oil and gas
activities. In accordance with the full cost accounting guideline, all costs
associated with exploration and development are capitalized on a country by
country basis whether or not such activities were successful. The total
capitalized costs and estimated future development costs are amortized using the
unit-of-production method based on proved oil and gas reserves. Accordingly,
revisions or changes to estimated proved reserves will impact the depletion
expenses.
Impairment of Oil and Gas Interests
The Company's capitalized oil and gas interests are subject to impairment tests
on a country by country basis. Impairment is indicated if the undiscounted
estimated future cash flows from proved reserves at oil and gas prices in effect
at the balance sheet date plus the cost of unproved properties less any
impairment is less than the carrying value of the oil and gas interests. The
impairment test requires management to make assumptions regarding cash flows
into the distant future and is based on estimates of proved reserves.
New Accounting Pronouncements and Changes in Accounting Policies
As disclosed in the December 31, 2007 annual audited Consolidated Financial
Statements, on January 1, 2008, the Company adopted the following Canadian
Institute of Chartered Accountants handbook Sections 3031 "Inventories", section
3862 "Financial Instruments - Disclosures", section 3863 "Financial Instruments
- Presentation", and section 1535 "Capital Disclosures".
Section 1535 establishes disclosure requirements about an entity's capital and
how it is managed. The purpose is to enable users of the financial statements to
evaluate the Company's objectives, policies and processes for managing capital.
Sections 3862 and 3863 replaced section 3861, Financial Instruments - Disclosure
and Presentation, revising and enhancing its disclosure requirements, and
carrying forward unchanged its presentation requirements. These new sections
place increased emphasis on disclosures about the nature and extent of risks
arising from financial instruments and how the Company manages those risks.
Section 3031, Inventories, replaced section 3030, Inventories. This new standard
provides more extensive guidance on measurement, and expands disclosure
requirements to increase transparency. The Corporation's accounting policy for
inventories is consistent with measurement requirements in the new standard and
therefore results of the Corporation will not be impacted; however, additional
disclosures will be required in relation to inventories carried at net
realizable value, the amount of inventories recognized as an expense, and the
amount of any write downs of inventories.
Risks and Uncertainties
The Company is exposed to a number of risks and uncertainties inherent in
exploring for, developing and producing crude oil and natural gas. These risks
and uncertainties are disclosed in detail in the Company's December 31, 2007
Annual Report and Annual Information Form.
Controls and Procedures
Disclosure controls and procedures
The Chief Executive Officer and the Chief Financial Officer are responsible for
establishing and maintaining the Company's disclosure controls and procedures.
They are assisted in this responsibility by the Company's management team.
Disclosure controls and procedures have been designed to ensure that information
required to be disclosed by the Company is accumulated and communicated to our
management as appropriate to allow timely decisions regarding required
disclosures.
It should be noted that while the Chief Executive Officer and Chief Financial
Officer believe that the Company's disclosure controls and procedures provide a
reasonable level of assurance and that they are effective, they do not expect
that the disclosure controls will prevent all errors and 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 control over financial reporting
The Chief Executive Officer and the Chief Financial Officer are 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.
An evaluation of the design effectiveness of the Company's internal controls
over financial reporting as at December 31, 2007, was performed under the
supervision of the Chief Executive Officer and the Chief Financial Officer, with
the assistance of the management team. The Chief Executive Officer and the Chief
Financial Officer have concluded, as at the date of this MD&A, that the
Company's internal controls over financial reporting have been designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with Canadian GAAP.
The Company's internal controls over financial reporting may not prevent or
detect all errors, misstatements and fraud. The design of internal controls must
also take into account resource constraints. A control system, including the
Company's internal controls over financial reporting, no matter how well
conceived or operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met.
During 2008, there have been no changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
have materially affected, the Company's internal control over financial
reporting.
Forward Looking Statements
This MD&A may contain forward-looking statements and information.
Forward-looking statements are statements that are not historical fact and are
generally identified by words such as believes, anticipates, expects, estimates
or similar words suggesting future outcomes. By their nature, forward-looking
statements and information involve assumptions, inherent risks and
uncertainties, many of which are difficult to predict, and are usually beyond
the control of management, that could cause actual results to be materially
different from those expressed by these forward-looking statements and
information. Risks and uncertainties include, but are not limited to, risk with
respect to general economic conditions, regulations and taxes, civil unrest,
corporate restructuring and related costs, capital and operating expenses,
pricing and availability of financing and currency exchange rate fluctuations.
Readers are cautioned that the assumptions used in the preparation of such
information, although considered reasonable at the time of preparation, may
prove to be imprecise and, as such, undue reliance should not be placed on
forward-looking statements.
Non-GAAP Measures
Certain measures in this MD&A do not have any standardized meaning as prescribed
Canadian GAAP such as Cash Flow from Operations, EBITDA and Cash Flows and
therefore are considered non-GAAP measures. These measures may not be comparable
to similar measures presented by other issuers. These measures have been
described and presented in this MD&A in order to provide shareholders and
potential investors with additional information regarding the Company's
liquidity and its ability to generate funds to finance its operations.
Management's use of these measures has been disclosed further in this MD&A as
these measures are discussed and presented.
Outlook
The investment Tanganyika has made to date on Syrian operations in acquiring and
processing 3D seismic on both Oudeh and Tishrine, conducting successful cyclical
steam pilots and its ongoing appraisal and development drilling led to increased
oil reserve figures for the third consecutive year in 2007.
With an increased investment in drilling rigs, workover rigs and steam
generation capacity, 2008 activities are focused on increasing production rates
from proved developed reserves, converting existing undeveloped proved and
probable reserves into production and continuing to appraise and better define
the hydrocarbon potential of both Oudeh and Tishrine. Production has been
continuously increasing over the past two quarters and the Company believes
continued production increases may be expected during 2008. The outlook for
realized oil prices is positive and offsets the increased energy costs that are
facing all industries. Ongoing facilities investments will aim to stabilize the
electricity supply, improve the quality of the gas fuel supply, improve water
handling and injection and decrease the susceptibility of production to cold
winter surface temperatures. Ongoing recruiting efforts will be focused on
attracting experienced international heavy oil personnel to the Company.
KEY DATA
Three months Three months Year ended
ended Mar 31, ended Mar 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Return on equity, % (1) 0.30% -1.64% 10.40%
Return on capital employed, % (2) 0.34% -1.63% 10.84%
Debt/equity ratio, % (3) 0% 0% 0%
Equity ratio, % (4) 86% 86% 84%
Share of risk capital, % (5) 86% 86% 84%
Yield, % (6) 0% 0% 0%
(1) Return on equity is defined as the Company's net results divided by
average shareholders' equity (the average over the financial period).
(2) Return on capital employed is defined as the Company's profit before
tax and minority interest plus interest expense plus/less exchange
differences on financial loans divided by the total average capital
employed (the average balance sheet total less non interest-bearing
liabilities).
(3) Debt/equity ratio is defined as the Company's interest-bearing
liabilities in relation to shareholders' equity.
(4) Equity ratio is defined as the Company's shareholders' equity,
including minority interest, in relation to balance sheet total.
(5) Share of risk capital is defined as the sum of the Company's
shareholders' equity and deferred taxes, including minority interest,
in relation to balance sheet total.
(6) Yield is defined as dividend in relation to quoted share price at the
end of the financial period.
Since the Company has no interest bearing debt, the interest coverage ratio and
operating cash flow/interest ratio have not been included as they are not
meaningful.
DATA PER SHARE
Three months Three months Year ended
ended Mar 31, ended Mar 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Shareholders' equity, USD (1) 5.13 3.60 4.25
Operating cash flow including
discontinued operations,
USD (2) 0.30 0.08 0.26
Cash flow from operations
including discontinued
operations (3) 0.23 0.05 0.20
Earnings including
discontinued operations (4) 0.014 (0.059) 0.408
Earnings including
discontinued operations
(fully diluted) (5) 0.014 (0.059) 0.408
Dividend - - -
Quoted price at the end of
the financial period 17.30 19.64 18.25
P/E-ratio (6) 1,213.5 (330.9) 44.7
Number of shares at
financial period end 61,971,196 56,107,996 56,938,696
Weighted average number of
shares for the financial
period (7) 57,932,343 55,775,159 56,427,858
Weighted average number of
shares for the financial
period (fully diluted) (5, 7) 58,049,186 56,581,573 56,626,839
(1) Shareholders' equity per share defined as the Company's equity divided
by the number of shares at period end.
(2) Operating cash flow per share defined as the Company's operating
income less production costs and less current taxes divided by the
weighted average number of shares for the financial period.
(3) Cash flow from operations per share defined as cash flow from
operations in accordance with the consolidated summarized cash flow
statements divided by the weighted average number of shares for the
financial period.
(4) Earnings per share defined as the Company's net results divided by the
weighted average number of shares for the financial period.
(5) Earnings per share defined as the Company's net results divided by the
weighted average number of shares for the financial period after
considering the dilution effect of outstanding options and warrants.
(6) P/E-ratio defined as quoted price at the end of the period divided by
earnings per share.
(7) Weighted average number of shares for the financial period is defined
as the number of shares at the beginning of the financial period with
new issue of shares weighted for the proportion of the period they are
in issue.
Tanganyika Oil Company Ltd.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(expressed in U.S. dollars)
March 31, December 31,
2008 2007
ASSETS $ $
----------- -----------
Current assets
Cash 100,257,663 42,302,212
Restricted cash (Note 2) 780,474 148,271
Advances to contractors 6,178,490 6,727,904
Accounts receivable and other assets 49,076,780 45,829,461
Inventory 5,826,121 2,462,836
Prepaid expenses 1,473,505 1,694,757
----------- -----------
163,593,033 99,165,441
Oil and gas interests (note 5) 204,378,082 187,486,196
Property, plant and equipment 913,295 909,677
----------- -----------
368,884,410 287,561,314
----------- -----------
----------- -----------
LIABILITIES
Current liabilities
Accounts payable and other accrued
liabilities 50,949,305 45,740,981
----------- -----------
50,949,305 45,740,981
SHAREHOLDERS' EQUITY
Share capital (Note 6) 316,265,183 242,458,322
Contributed surplus (Note 7) 10,342,837 8,860,819
Accumulated other comprehensive income 689,624 689,624
Deficit (9,362,539) (10,188,432)
----------- -----------
317,935,105 241,820,333
----------- -----------
368,884,410 287,561,314
----------- -----------
----------- -----------
Approved by the Directors:
(signed) "William A. Rand" (signed) "Keith Hill"
Director Director
Tanganyika Oil Company Ltd.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
(expressed in U.S. dollars)
Accumulated
Other
Comprehensive
Share Contributed income
Capital Surplus Deficit (loss) Total
--------------------------------------------------------------------------
As at
December
31,
2006 $228,236,373 $ 6,201,643 $(33,221,711) $ (175,745) $201,040,560
Issue
of
shares 3,111,695 - - - 3,111,695
Stock-
based
compen-
sation 895,785 104,813 - - 1,000,598
Loss for
the
period - - (3,310,597) - (3,310,597)
----------------------------------------------------------------
As at
March
31, 2007 232,243,853 6,306,456 (36,532,308) (175,745) 201,842,256
----------------------------------------------------------------
Issue of
shares 8,161,105 - - - 8,161,105
Stock-
based
compen-
sation 2,053,365 2,554,363 - - 4,607,728
Profit for
the period - - 26,343,876 - 26,343,876
Discontinued
operations
(Note 4) - - - 865,369 865,369
----------------------------------------------------------------
As at
December
31, 2007 242,458,322 8,860,819 (10,188,432) 689,624 241,820,333
----------------------------------------------------------------
Issue of
shares 73,712,470 - - - 73,712,470
Stock-
based
compen-
sation 94,391 1,482,018 - - 1,576,409
Profit for
the period - - 825,893 - 825,893
----------------------------------------------------------------
As at
March
31, 2008 $316,265,183 $10,342,837 $ (9,362,539) $ 689,624 $317,935,105
----------------------------------------------------------------
Tanganyika Oil Company Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(expressed in U.S. dollars)
Three Three
months months Year
ended ended ended
March 31, March 31, December 31,
2008 2007 2007
----------- ----------------- -----------
(restated - note 4)
Revenue
Sale of oil 26,171,113 3,994,908 34,527,146
Interest income 136,051 669,555 1,385,414
----------- ----------------- -----------
26,307,164 4,664,463 35,912,560
----------- ----------------- -----------
Expenses
Production costs 9,042,654 1,864,251 20,088,262
Depletion 8,120,520 4,178,728 19,369,735
General and
administration 3,594,371 2,863,731 13,834,551
Stock-based
compensation
(note 8) 1,576,409 1,000,598 5,608,326
Interest and bank
charges 101,781 36,245 150,514
Depreciation 114,687 165,983 656,861
Foreign exchange
(gain) loss 2,930,849 (396,584) (1,822,964)
----------- ----------------- -----------
25,481,271 9,712,952 57,885,285
----------- ----------------- -----------
Profit (loss) for
the period before
discontinued
operations 825,893 (5,048,489) (21,972,725)
Discontinued
operations (note 4) - 1,737,892 45,006,004
----------- ----------------- -----------
Profit (loss) for
the period 825,893 (3,310,597) 23,033,279
Deficit - beginning
of period (10,188,432) (33,221,711) (33,221,711)
----------- ----------------- -----------
Deficit - end of
period (9,362,539) (36,532,308) (10,188,432)
----------- ----------------- -----------
----------- ----------------- -----------
Other comprehensive
income - - -
----------- ----------------- -----------
Comprehensive income
(loss) for the period 825,893 (3,310,597) 23,033,279
----------- ----------------- -----------
----------- ----------------- -----------
Profit (loss) per share -
Continuing operations
Basic 0.014 (0.091) (0.389)
Diluted 0.014 (0.091) (0.389)
Profit per share -
Discontinued operations
Basic - 0.031 0.798
Diluted - 0.031 0.795
Weighted average number
of shares outstanding
Basic 57,932,343 55,775,159 56,427,858
Diluted 58,049,186 56,581,573 56,626,839
Tanganyika Oil Company Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(expressed in U.S. dollars)
Three Three
months months Year
ended ended ended
March 31, March 31, December 31,
2008 2007 2007
----------- ----------------- -----------
(restated - note 4)
Cash flows from operating
activities
Profit (loss) for the
period excluding
discontinued operations 825,893 (5,048,489) (21,972,725)
Items not affecting cash
Stock-based compensation 1,576,409 1,000,598 5,608,326
Depreciation 114,687 165,983 656,861
Depletion 8,120,520 4,178,728 19,369,735
Realized foreign
exchange loss (gain) 2,930,849 (396,584) (1,822,964)
----------- ----------------- -----------
13,568,358 (99,764) 1,839,233
Funds provided from
discontinued operations - 2,347,803 7,782,239
----------- ----------------- -----------
13,568,358 2,248,039 9,621,472
Changes in non-cash
operating working
capital
Changes in non-cash
working capital
related to
operations (2,553,959) (10,168,379) (22,478,501)
Discontinued
operations (Note 4) - (1,264,787) 6,579,489
----------- ----------------- -----------
(2,553,959) (11,433,166) (15,899,012)
----------- ----------------- -----------
11,014,399 (9,185,127) (6,277,540)
----------- ----------------- -----------
Cash flows from
investing activities
Additions to oil and
gas interests (25,012,406) (20,701,838) (119,406,790)
Additions to property,
plant and equipment (118,305) (69,499) (509,816)
Pledge for bank
guarantee released - - 900,000
Cash security for
letters of credit (632,203) - (148,271)
Changes in non-cash
working capital
related to investing
activities 1,922,345 4,279,876 9,665,009
Discontinued
operations (Note 4) - (766,914) 54,951,044
----------- ----------------- -----------
(23,840,569) (17,258,375) (54,548,824)
----------- ----------------- -----------
Cash flows from
financing activities
Issuance of common
shares 73,712,470 3,111,695 11,272,799
Effect of exchange
rate changes on cash
and cash equivalents
denominated in foreign
currency (2,930,849) 396,584 1,822,964
----------- ----------------- -----------
Increase (decrease)
in cash 57,955,451 (22,935,223) (47,730,601)
Cash - beginning of
period 42,302,212 90,032,813 90,032,813
----------- ----------------- -----------
Cash - end of period 100,257,663 67,097,590 42,302,212
----------- ----------------- -----------
----------- ----------------- -----------
Supplementary
information
Interest paid $ Nil $ Nil $ Nil
Taxes paid $ Nil $ Nil $ Nil
Tanganyika Oil Company Ltd.
Notes to the Consolidated Financial Statements
For the Three months ended March 31, 2008 and March 31, 2007
(Unaudited)
(in US Dollars)
1. Basis of Presentation
The interim consolidated financial statements for Tanganyika Oil Company Ltd.
(collectively with its subsidiaries, the "Company") have been prepared in
accordance with accounting principles generally accepted in Canada, using the
same accounting policies and methods of computation as set out in note 2 to the
audited consolidated financial statements in the Company's Annual Report for the
period ended December 31, 2007. The disclosures provided herein are incremental
to those included with the audited consolidated financial statements. The
interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements for the period ended December 31,
2007.
2. Restricted Cash
Restricted cash includes outstanding balances relating to letters of credit
issued to various suppliers for operations in Syria. At March 31, 2008, an
amount of $780,474 (December 31, 2007 - $148,271) is restricted as security for
letters of credit.
3. Changes in Accounting Policy
On January 1, 2008, the Company adopted four new accounting standards that were
issued by the Canadian Institute of Chartered Accountants: Handbook Section
3031, Inventories, Handbook Section 1535, Capital Disclosures, Section 3862,
Financial Instruments - Disclosures, and Section 3863, Financial Instruments -
Presentation. These standards have been applied prospectively; accordingly,
comparative amounts for prior periods have not been restated.
(a) Inventories
Section 3031, Inventories, which replaced section 3030, Inventories provides
more extensive guidance on measurement, and expands disclosure requirements to
increase transparency. The adoption of this standard has had no impact on the
Company's Consolidated Financial Statements.
(b) Capital Disclosures and Financial Instruments - Presentation and Disclosure
Sections 3862 and 3863 replaced section 3861, Financial Instruments - Disclosure
and Presentation, revising and enhancing its disclosure requirements, and
carrying forward unchanged its presentation requirements. These new sections
place increased emphasis on disclosures about the nature and extent of risks
arising from financial instruments and how the Company manages those risks. The
adoption of this standard has had no impact on the Company's Consolidated
Financial Statements.
Section 1535 establishes disclosure requirements about the Company's capital and
how it is managed. The purpose is to enable users of the financial statements to
evaluate the Company's objectives, policies and processes for managing capital
(See Note 11).
4. Discontinued Operations
The assets and liabilities related to discontinued operations have been
reclassified as assets or liabilities of discontinued operations on the
Consolidated Balance sheets. Operating results related to these assets and
liabilities have been included in Discontinued Operations on the Consolidated
Statements of Operations and Comprehensive Income.
On September 5, 2007, the Company entered into an agreement with a third party
for the sale of its West Gharib oil and gas interests. The sale price of the
interests was $70.0 million, including estimated net working capital of $10.9
million. The transaction is subject to a final statement of adjustments,
scheduled to be completed in May, 2008. Tanganyika has provided indemnities to
the purchaser commensurate with a transaction of this type.
The sale closed September 25, 2007. The Company no longer owns any West Gharib
oil and gas assets. The West Gharib assets have been accounted for as
discontinued operations in accordance with GAAP. Results of the operations have
been included in the financial statements up to the closing date of the sale
(the date control was transferred to the purchaser).
The Company recorded an estimated gain on disposition of $40.0 million during
the twelve months ended December 31, 2007. The gain recorded on disposition is
subject to change as a result of the final closing statement of adjustments.
Three Months Ended Twelve Months Ended
March 31, March 31, December 31,
2008 2007 2007
Revenue
Sale of oil - 2,812,097 9,256,198
Interest income - 8,296 19,160
Other income - 33,438 64,383
------------------- -------------------
- 2,853,831 9,339,741
Expenses
Production costs - 432,106 1,314,011
Depletion - 579,656 1,792,743
Depreciation - 30,255 89,780
General and administration - 73,919 243,006
Foreign exchange gain - (416) (496)
Other expenses - 419 981
------------------- -------------------
- 1,115,939 3,440,025
------------------- -------------------
- 1,737,892 5,899,716
Gain on disposition - - 39,971,657
------------------- -------------------
Income - 1,737,892 45,871,373
------------------- -------------------
Comprehensive loss - cumulative
translation adjustment - - (865,369)
------------------- -------------------
Profit of discontinued operations - 1,737,892 45,006,004
------------------- -------------------
5. Oil and Gas Interests
March 31, 2008
----------------------------------------
Accumulated
Cost depletion Net book value
----------------------------------------
Oil and Gas Interests 243,548,429 39,170,347 204,378,082
----------------------------------------
----------------------------------------
December 31, 2007
----------------------------------------
Accumulated
Cost depletion Net book value
----------------------------------------
Oil and Gas Interests 218,536,023 31,049,827 187,486,196
----------------------------------------
----------------------------------------
6. Share Capital
(a) The authorized and issued share capital is as follows:
Authorized - Unlimited number of common shares without par value
Issued and outstanding:
March 31, 2008
--------------------------------------------------------------------------
Number Amount
--------------------------------------------------------------------------
Balance, beginning of year 56,938,696 $ 242,458,322
Private placements, net 5,000,000 73,291,772
Exercise of options 32,500 515,089
--------------------------------------------------------------------------
Balance, end of period 61,971,196 $ 316,265,183
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the period ended March 31, 2008, the Company completed a private
placement consisting of 5,000,000 common shares at CDN $15.00 for net proceeds
of $73.3 million.
7. Contributed Surplus
March 31, December 31,
2008 2007
--------------------------------------------------------------------------
Balance, beginning of year 8,860,819 6,201,643
Stock based compensation 1,576,409 5,608,326
Transfer to share capital on exercise of options (94,391) (2,949,150)
--------------------------------------------------------------------------
Balance, end of period 10,342,837 8,860,819
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Stock Option Information
March 31, 2008
--------------------------------------------------------------------------
Weighted
Average
Outstanding Exercise
Options Price CDN$
--------------------------------------------------------------------------
Outstanding, beginning of year 2,743,850 17.18
Granted 646,100 12.92
Exercised (32,500) 12.97
Cancelled or expired (101,333) 18.11
--------------------------------------------------------------------------
Outstanding, end of period 3,256,117 16.35
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Employee stock options are measured at their fair value on the date of the grant
and recognized on a straight line basis as an expense over the vesting period,
if any, applicable to the options. The fair value of the options granted to
consultants is recognized immediately.
The weighted average estimated fair value of the options granted during the
period ended March 31, 2008 was $4.78 per option, determined using the
Black-Scholes option pricing model with the following assumptions:
--------------------------------------------------------------------------
March 31, December 31,
2008 2007
--------------------------------------------------------------------------
Risk-free rate 3.526% 4.15% - 4.85%
Expected life 2.25 years 1 - 3 years
Estimated volatility in the market price of
common shares 60% 45% - 55%
Expected dividend rate 0% 0%
--------------------------------------------------------------------------
9. Related Party Transactions
The Company has entered into transactions with related parties, which were
measured at the exchange amounts. Significant related party transactions were as
follows:
a) During the three months ended March 31, 2008, the Company paid $68,926 (March
31, 2007 - $46,901) to Namdo Management Services Ltd., a private corporation
owned by Lukas H. Lundin, a director of the Company, pursuant to a services
agreement.
b) During the three months ended March 31, 2007, the Company received $40,054
(March 31, 2007 - $59,111) from Pearl Exploration and Production Ltd. ("Pearl")
for administrative and other services. The Company and Pearl had certain
officers in common during the first quarter of 2008 and continue to have
directors in common.
c) During the three months ended March 31 2008, the Company received $1,820
(March 31, 2007 - $nil) from Africa Oil Corp ("AOC") for administrative and
other services. The Company and AOC had certain officers and directors in common
during the first quarter 2008 and continue to have officers and directors in
common.
10. Supplemental Cash Flow Information
Three Three Twelve
months months months
ending ending ending
March 31, March 31, December 31,
2008 2007 2007
--------------------------------------------------------------------------
Changes in non-cash
Working capital:
Accounts receivable and other
assets and advances (2,697,905) (8,466,614) (25,948,106)
Inventory (3,363,285) - (2,462,836)
Prepaid expenses 221,252 (156,997) (1,220,935)
Accounts payable and accrued
liabilities 5,208,324 2,735,108 16,818,384
-------------------------------------
(631,614) (5,888,503) (12,813,493)
Changes in non-cash working
capital relating to:
Operating activities (2,553,959) (10,168,379) (22,478,501)
Investing activities 1,922,345 4,279,876 9,665,009
-------------------------------------
(631,614) (5,888,503) (12,813,492)
-------------------------------------
11. Capital Structure
The Company's objective when managing capital is to maintain an appropriate debt
to equity ratio consistent with the stage of development of the Company's
proven, producing oil and gas reserve base.
The Company's capital structure is comprised of Shareholders' Equity. As oil
production increases in Syria, cash flow from operations is expected to
increasingly provide required capital for exploration and development
activities. However, due to potential impacts of price, production rates, pace
of development, and the costs of materials and services the Company may not
generate sufficient cash flow from operations to entirely fund the entire Syrian
appraisal and development programs out of operating cash flow and existing cash
on hand. Accordingly, the Company will evaluate the stage of development of its
proven and producing oil reserves and consider issuing equity or debt to provide
additional financing for its planned exploration and development activities. The
Company issued equity during the first quarter of 2008 (See Note 6).
12. Summary of Significant Differences Between Canadian GAAP and International
Financial Reporting Standards (IFRS)
The Company's consolidated financial statements have been prepared in accordance
with Canadian GAAP, which differ in certain material respects from International
Financial Reporting Standards ("IFRS"). The principal difference between
Canadian GAAP and IFRS from a measurement perspective, as applied to the
Company's consolidated financial statements is asset impairment.
a) Impairment of oil and gas interests
Under Canadian GAAP, each cost centre should be assessed for impairment as at
each annual balance sheet date or whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. An impairment loss
should be recognized when the carrying amount of a cost centre is not
recoverable and exceeds its fair value. The carrying amount is not recoverable
if the carrying amount exceeds the sum of the undiscounted cash flows expected
to result from its use and eventual disposition. Unproved properties and major
development projects are included in this recoverability test. A cost centre
impairment loss should be measured as the amount by which the carrying amount of
assets capitalized in a cost centre exceeds the sum of: the fair value of proved
and probable reserves; and the costs (less any impairment) of unproved
properties that have been subject to a separate test for impairment and contain
no probable reserves. IFRS requires (i) an impairment to be recognized when the
recoverable amount of an asset (cash generating unit) is less than the carrying
amount; (ii) the impairment loss is determined as the excess of the carrying
amount above the recoverable amount (the higher of fair value less costs to sell
and value in use, calculated as the present value of future cash flows from the
asset); and (iii) the reversal of an impairment loss when the recoverable amount
changes. The differences in accounting policy described above had no impact on
these financial statements.
b) Oil and gas interest
The Company follows the full cost method of accounting for oil and gas interest,
as set out in AcG 16 issued by the CICA. Under this method, all costs related to
exploration and development of oil and gas reserves are capitalized and
accumulated in country-by-country cost centres. For purposes of reporting in
accordance with IFRS, the Company has early adopted IFRS 6, Exploration For and
Evaluation of Mineral Resources, which permits an entity to continue applying
its existing policy in respect of exploration and evaluation costs. Under IFRS,
once commercial reserves are established and technically feasibility for
extraction is demonstrated, the related capitalized costs are allocated to cash
generating units. This difference in accounting policy had no impact on the
Company's financial statements. The Company's Syrian assets are considered to be
in the exploration and evaluation stage as the Company is still determining the
technical feasibility and commercial viability of these assets. Accordingly, the
Company continues to account for the Syrian assets under its existing accounting
policies.
c) Impairment of long lived assets
Under Canadian GAAP, a long-lived asset should be tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. An impairment loss should be recognized when the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value. Under IFRS, the carrying amounts of the Company's assets, other than oil
and gas properties, are reviewed at each balance sheet date to determine whether
there is any indication of impairment. If any such indication exists, the
assets' recoverable amounts are estimated. An impairment loss is recognized when
the carrying amount of an asset exceeds its recoverable amount. Impairment
losses, if any, are recognized in the income statement. Under Canadian GAAP, the
carrying amount of a long-lived asset is not recoverable if the carrying amount
exceeds the sum of the undiscounted cash flows expected to result from its use
and eventual disposition. This assessment is based on the carrying amount of the
asset at the date it is tested for recoverability, whether it is in use or under
development. Under IFRS, the recoverable amount of the Company's assets other
than oil and gas properties is the greater of their net selling price and value
in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset. For an asset that does not generate cash inflows largely independent
of those from other assets, the recoverable amount is determined for the cash
generating unit to which the asset belongs. In respect of impairment of assets
other than oil and gas properties, under Canadian GAAP, an impairment loss is
not reversed if the fair value subsequently increases. For IFRS, an impairment
loss may be reversed if there has been a change in the estimates used to
determine the recoverable value. An impairment loss, on assets other than oil
and gas properties, is only reversed to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net
of depreciation or amortization, if no impairment loss had been recognized. The
differences in accounting policy described above had no impact on these
financial statements.
13. Presentation
Certain figures for prior years have been reclassified in the financial
statements to conform to the current year's presentation.
SUPPLEMENTARY INFORMATION
1. LIST OF DIRECTORS AND OFFICERS AT MARCH 31, 2008
a. Directors
Lukas H. Lundin (4)
Gary S. Guidry (4)
Bryan Benitz (1, 2, 3)
John H. Craig (2, 3)
Hakan Ehrenblad
Keith Hill (1, 4)
William A. Rand (1, 2, 3)
(1) Audit Committee
(2) Corporate Governance Committee
(3) Compensation Committee
(4) Reserves Committee
b. Officers:
Lukas H. Lundin, Chairman
Gary S. Guidry, President and CEO
Ian Gibbs, CFO
Diane Phillips, Corporate Secretary
2. FINANCIAL INFORMATION
The report for the second quarter 2008 will be published on or before
August 14, 2008.
3. OTHER INFORMATION
Address (Corporate Office)
#700, 444 -- 7th Avenue S.W.
Calgary, Alberta T2P 0X8
Canada
Telephone: 1.403.663.2999
Fax: 1.403.261.1007
Website: www.tanganyikaoil.com
The corporate number of the Company is 318368-8
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