TIDMZEN
RNS Number : 1424Y
Zenith Energy Ltd
01 March 2017
ZENITH ANNOUNCES 3rd QUARTER RESULTS
Calgary, Alberta, March 1, 2017, Zenith Energy Ltd. ("Zenith" or
the "Company") (LSE: ZEN; TSX.V: ZEE) the dual listed international
oil & gas production company is pleased to announce its
quarterly financial results from the three months ended December
31, 2016 ("Q3-2016" or the "Quarter") and the nine months ended
December 31, 2016 ("YTD-2016").
These results were posted on SEDAR on February 28, 2017 in
accordance with TSX rules. This is the first quarterly report to be
published since the Company was admitted to trading on the London
Stock Exchange on January 11 2017 and is therefore the first set of
financials announced by the Company via the Regulatory News Service
(RNS).
Highlights
-- First full quarter of production from our asset in Azerbaijan
-- Q3 profit of $341,000 generated in Azerbaijan
-- Average production of 322 boepd across the group
-- Net loss of $1,555,692 for the three months ending December
31, 2016 which includes non-recurring costs of approx. $890,000 in
relation to London listing and options award
-- Net profit of $614,713,380 for the nine months ending December 31, 2016
Corporate Activities
-- Significant progress achieved towards LSE Main Market listing (Completed post quarter end)
-- $593,000 raised from existing investors to help fund
corporate activities towards London listing
-- Senior management team strengthened by appointment of CFO
Exciting Outlook / Subsequent Events
-- London listing achieved on January 11, 2017
-- Gross fundraising of GBP3,187,000 completed in January 2017.
-- Comprehensive Azerbaijan workover programme started in February 2017.
-- Argentine assets sold in February 2017 to strengthen balance
sheet allowing management to focus on improving profitability at
other assets
-- Re-assignment of costs of approx. $1,600,000 in Q4 post
successful fundraise and completion of the business combination of
the Azeri assets
-- Loan payment of USD$700,000 made on January 20, 2017 to significantly reduce corporate debt
-- $407,000 of convertible loan debt was converted on January
30, 2017 resulting in the issuance of 3,700,000 new shares
Andrea Cattaneo, Zenith CEO, commented:
"I am pleased to present our first set of quarterly results
since listing on the London Stock Exchange. The quarter ending
December 31, 2016 clearly evidences how Zenith is now gradually and
increasingly reaping the rewards of its oil production revenues.
The Company's primary objective emphatically remains to achieve
incremental oil production increases through a systematic field
rehabilitation programme in Azerbaijan. It should be underlined
that these financial statements also reflect one-time costs related
to the Company's recent listing on the London Stock Exchange which
will not be incurred in the future. I look forward to presenting
the next quarterly results which will further reflect the Company's
positive direction, and to updating the Market with news in
relation to the workover of well M-195 in Azerbaijan."
For further information, please contact:
José Ramón López-Portillo Chairman
Andrea Cattaneo CEO & President
Email: info@zenithenergy.ca
Telephone: +1 (587) 315-9031
Telefax: +1 (403) 775-4474
Zenith Energy Ltd.
Condensed Interim Consolidated Financial Statements
As at and for the three and nine months ended December 31, 2016
(Unaudited)
Managements' Responsibility
To the Shareholders of Zenith Energy Ltd.:
The accompanying unaudited condensed interim consolidated
financial statements of Zenith Energy Ltd. (the "Company") as at
and for the three and nine months ended December 31, 2016 have been
prepared by and are the responsibility of the management of the
Company and are approved by the board of directors of the Company.
The unaudited condensed interim consolidated financial statements
are prepared in accordance with International Financial Reporting
Standards and reflect management's best estimates and judgments
based on currently available information.
Notice of No Auditor Review of Interim Consolidated Financial
Statements
In accordance with National Instrument 51-102 released by the
Canadian Securities Administrators, the Company discloses that its
auditors have not reviewed these unaudited condensed interim
consolidated financial statements as at and for the nine months
ended December 31, 2016.
(signed) "Andrea Cattaneo" (signed) "Alan Hume"
President and Chief Executive Officer Chief Financial
Officer
February 28, 2017
Calgary, Alberta
Zenith Energy Ltd.
Condensed Interim Consolidated Statements of Changes in
Equity
(Unaudited) (Expressed in Canadian dollars)
As at December March 31,
31, 2016 2016
Note $ $
---------------------------------- ------- --------------- ------------
ASSETS
Current assets
Cash 18,476 137,982
Marketable securities 3 - 7,632
Trade and other receivables 18 1,956,334 787,477
Inventory 20 321,678 173,457
Prepaid expenses 296,177 385,504
---------------------------------- ------- --------------- ------------
2,592,665 1,492,052
Non-current assets
Property and equipment 4 1,066,398,243 14,598,089
Prepaid property and equipment
insurance 160,761 207,000
---------------------------------- ------- --------------- ------------
Total assets 1,069,151,669 16,297,141
---------------------------------- ------- --------------- ------------
LIABILITIES
Current liabilities
Trade and other payables 18 4,892,846 3,266,503
Oil share agreement 1,063,629 1,027,504
Deferred consideration
payable 4 501,836 -
Loans payable 6 1,946,338 3,210,114
Convertible notes 7 - 697,046
Notes payable 8 213,608 -
---------------------------------- ------- --------------- ----------------
8,618,257 8,201,167
Non-current liabilities
Loans payable 6 2,376,388 673,647
Convertible notes 7 525,992 -
Derivative liability 7 398,892 357,936
Deferred consideration
payable 4 287,044,416 -
Bonds 8 383,090 563,103
Decommissioning obligation 9 9,703,775 7,896,671
Deferred taxes 18 153,927,334 883,567
---------------------------------- ------- --------------- ----------------
454,359,887 10,374,924
---------------------------------- ------- --------------- ----------------
Total liabilities 462,978,144 18,576,091
---------------------------------- ------- --------------- ----------------
SHAREHOLDERS' EQUITY
Share capital 10 11,455,930 9,578,270
Warrants 11 1,509,537 1,509,537
Options 290,200 -
Contributed surplus 2,231,583 2,231,583
Accumulated other comprehensive
loss (10,381,178) (1,952,414)
Surplus / (Deficit) 601,067,453 (13,645,926)
---------------------------------- ------- --------------- ----------------
Total shareholders' equity 606,173,525 (2,278,950)
---------------------------------- ------- --------------- ----------------
Total liabilities and
shareholders' equity 1,069,151,669 16,297,141
---------------------------------- ------- --------------- ----------------
Going concern (Note 1)
Subsequent events (Note
19) Segmented information
(Note 20)
Three months ended Nine months ended
December 31 December 31
2016 2015 2016 2015
Note $ $ $ $
Revenue
Oil and gas revenue 1,676,663 271,262 2,503,961 1,803,172
Electricity revenue 240,582 - 479,995 -
Royalties - (7,521) (7,211) (115,408)
----------------------------- -------- -------------- ------------ ----------------- ------------
1,917,245 263,741 2,976,745 1,687,764
----------------------------- -------- -------------- ------------ ----------------- ------------
Expenses
Operating 1,017,487 459,763 1,802,019 1,272,597
Transportation - 2,890 1,725 56,875
General and administrative
(1) 1,901,148 641,112 3,696,671 1,981,875
Transaction costs - 35,536 - 35,536
(Gain) on sale of marketable
securities - - (3,720) -
Foreign exchange (129,957) (292,365) (220,697) (389,463)
Fair value adjustment
on marketable securities 3 - 5,058 - 21,552
Fair value adjustment
on derivative liability 7 39,531 (26,686) 39,531 (209,652)
Depletion and depreciation 319,197 55,598 523,012 249,202
----------------------------- -------- -------------- ------------ ----------------- ------------
3,147,406 880,906 5,838,541 3,018,522
----------------------------- -------- -------------- ------------ ----------------- ------------
Loss from operations (1,230,161) (617,165) (2,861,796) (1,330,758)
Gain on business combination 4 - - 771,189,297 -
Finance expense 14 (325,531) (272,305) (570,354) (775,424)
----------------------------- -------- -------------- ------------ ----------------- ------------
Net income (loss) before
tax (1,555,692) (889,470) 767,757,147 (2,106,182)
Income tax (provision) reduction
18 - - (153,043,767)
--------------------------------------- -------------- ------------ ----------------- ------------
Net (loss)/profit (1,555,692) (889,470) 614,713,380 (2,106,182)
Exchange differences on
translation on foreign operations (233,589) 721,337 (8,428,763) (88,046)
--------------------------------------- -------------- ------------ ----------------- ------------
Comprehensive (loss)/profit (1,789,281) (1,761,125) 606,284,617 (2,194,228)
----------------------------- -------- -------------- ------------ ----------------- ------------
Net Profit (loss) per
share
Basic 13 (0.03) (0.03) 10.59 (0.07)
Diluted (0.02) (0.03) 5.90 (0.07)
Weighted average shares
outstanding
Basic 13 63,284,344 33,623,814 58,619,309 30,859,060
Diluted 13 108,912,461 57,774,291 104.247,426 55,009,357
----------------------------- -------- -------------- ------------ ----------------- ------------
(1) Included in the General and Administrative expenses for
three and nine months ended December 31, 2016 are approximately
CAD$600,000 and CAD$1,600,000 non-recurrent expenses related to the
January 11th 2017 admission to the London Stock Exchange as well as
a non-cash charge of C$290,000 in relation to the award of the
6,000,000 options.
For the nine months ended Note 2016 2015
December 31
$ $
------------------------------------ ---- ------------- -----------
Operating activities
Net profit/(loss) 614,713,380 (2,106,182)
Items not involving cash:
Shares issued for services 130,810 -
Gain on sale of marketable
securities (3,720) -
Fair value adjustment on marketable
securities - 21.552
Fair value adjustment on derivative
liability 39,531 (209.652)
Gain on business combination 4 (771,189,297) -
Deferred taxation 18 - -
Depletion and depreciation 523,012 249.202
Impairment of property and
equipment 2,142 -
Options issued 290,200 -
Finance expense 194,016 383.514
Income tax expense 153,043,767 -
(2,256,160) (1.661.566)
Foreign exchange on translation 62,053 (398,404)
Change in non-cash working
capital 16 285,031 89,666
------------------------------------ ---- ------------- -----------
(1,909,076) (1,970.304)
------------------------------------ ---- ------------- -----------
Financing activities
Proceeds from issuance of
bonds 191,183 517,731
Net proceeds from loans 359,894 594,554
Repayment of notes payable - (204,315)
Proceeds from issue of share
capital, net of share issue
costs 1,325,139 637,130
Change in non-cash working
capital 16 - (30,660)
------------------------------------ ---- ------------- -----------
1,876,216 1,514,440
------------------------------------ ---- ------------- -----------
Investing activities
Proceeds on sale of marketable
securities 10,818 361,926
Purchase of marketable securities - (136,568)
Expenditures on property and
equipment (103,850) (517,993)
Change in non-cash working
capital 16 11,388 71,772
------------------------------------ ---- ------------- -----------
(81,644) (220,863)
------------------------------------ ---- ------------- -----------
Change in cash (114,504) (676,727)
Foreign exchange effect on
cash held in foreign currencies (5,002) (90,711)
Cash, beginning of period 137,982 936,499
------------------------------------ ---- ------------- -----------
Cash, end of period 18,476 169,061
------------------------------------ ---- ------------- -----------
For the nine months ended 2016 2015
December 31
Note $ $
-------------------------------------- ---------- -------------- -------------
Share capital
Balance - beginning of period 9,578,270 8,686,556
Unit private placement 10 1,577,360 637,130
Fair value of warrants - (87,200)
Conversion of convertible
notes 10 300,300 -
-------------------------------------- ---------- -------------- -------------
Balance - end of period 11,455,930 9,236,486
-------------------------------------- ---------- -------------- -------------
Warrants
Balance - beginning of period 11 1,509,537 1,245,708
Fair value of warrants - 138,100
Expiry of warrants - (93,000)
-------------------------------------- ---------- -------------- -------------
Balance - end of period 1,509,537 1,290,808
-------------------------------------- ---------- -------------- -------------
Options 12
Balance - beginning of period - -
-------------------------------------- ---------- -------------- -------------
Fair value of options issued 290,200 -
-------------------------------------- ---------- -------------- -------------
Balance - end of period 290,200 -
-------------------------------------- ---------- -------------- -------------
Contributed surplus
Balance - beginning of period 2,231,583 2,138,583
Expiry of warrants - 93,000
-------------------------------------- ---------- -------------- -------------
Balance - end of period 2,231,583 2,231,583
-------------------------------------- ---------- -------------- -------------
Accumulated other comprehensive
loss
Balance - beginning of period (1,952,414) (1,810,281)
Exchange differences on translation
of foreign operations (8,428,764) (88,046)
-------------------------------------- ---------- -------------- -------------
Balance - end of period (10,381,178) (1,898,327)
-------------------------------------- ---------- -------------- -------------
Surplus / (Deficit)
Balance - beginning of period (13,645,926) (5,971,478)
Net profit /(loss) 614,713,380 (2,106,182)
-------------------------------------- ---------- -------------- -------------
Balance - end of period 601,067,453 (8,077,660)
-------------------------------------- ---------- -------------- -------------
Total equity 606,173,525 2,782,890
-------------------------------------- ---------- -------------- -------------
1. Nature of operations and going concern
Zenith Energy Ltd. ("Zenith" or the "Company") was incorporated
pursuant to the provisions of the British Columbia Business
Corporations Act on September 20, 2007. The address of the
Company's registered office is 15th Floor, 850 - 2nd Street S.W.,
Calgary, Alberta T2P 0R8, Canada. The Company is primarily involved
in the exploration for, development of and production of oil and
natural gas properties primarily in Argentina (until February 19,
2017), Azerbaijan and Italy.
As at December 31, 2016, the Company has a working capital
deficit of $5,782,125 (March 31, 2016 - $6,709,115), negative cash
flows from operating activities of $1,909,076 (March 31, 2016 -
$2,473,767) and an accumulated surplus of $601,067,453 (March 31,
2016 deficit - $13,645,926) since its inception, and may incur
future losses in the development of its business. Current cash
resources will not be sufficient to continue the exploration and
development activities. These conditions indicate the existence of
material uncertainties that may cast doubt on the Company's ability
to continue as a going concern. Continuing operations are dependent
on the ability to obtain adequate funding to finance existing
operations, and attain future profitable operations in Azerbaijan
and Italy. Additional financing is subject to the global financial
markets and economic conditions, and volatility in the debt and
equity markets. These factors have made, and will likely continue
to make it challenging to obtain cost effective funding. There is
no assurance this capital will be available and if it is not, the
Company may be forced to curtail or suspend planned activity.
These condensed interim consolidated financial statements have
been prepared on the basis of the going concern assumption that the
Company will be able to discharge its obligations and realize its
assets in the normal course of business at the values at which they
are carried in these consolidated financial statements, and that
the Company will be able to continue its business activities.
Realization values may be substantially different from carrying
values as shown and these consolidated financial statements do not
reflect adjustments that would be necessary if the going concern
assumption were not appropriate. If the going concern basis were
not appropriate for these consolidated financial statements, then
the adjustments would be necessary in the carrying value of assets
and liabilities, the reported revenues and expenses, and the
classifications used in the consolidated statements of financial
position. These adjustments could be material.
Critical Accounting Estimates and Judgements
The Group makes estimates and assumptions concerning the future.
The resulting estimates will, by definition, seldom equal the
related achieved amounts. The estimates and assumptions that have
significant risk of causing material adjustments and assumptions to
the carrying amounts of assets and liabilities are disclosed
below.
Valuation of the assets and liabilities associated with the
Azerbaijan acquisition this assessment involves:
-- Future revenues and estimated development and exploration costs;
-- The discount rate to be applied for the purposes of deriving a recoverable value;
-- The expected tax rate; and
-- The expected oil price.
During the nine months ended December 31, 2016 the Company
recognised a value of assets and associated liabilities for its
Azerbaijan Assets acquired after the combination of the business,
including the payments due in respect of the acquisition relating
to royalties, work and exploration programmes and taxation. The
valuations of the assets and of the liabilities have been based on
the Net Present Value ("NPV") of future cash flows included in the
Competent Persons Report prepared on behalf of the Company by
Champan Petroleum Engineering Ltd. ("Chapman") and published on 15
June 2016 ("Original CPR"). The NPV of future cashflows was
discounted at a rate of 10%. The Board considers 10% an appropriate
rate of discount for the following reasons:
-- The Asset has a verified producing history as well as current production;
-- The asset is production & development with 2P reserves
(made by way of a National Instrument 51-101) based over an acreage
of 642 square kilometres comprised of different structures;
-- The Asset is low cost and onshore, presenting a low operational risk;
-- Azerbaijan has one of the world's oldest established Oil & Gas industries;
-- Azerbaijan has a stable political environment with a
government that has guaranteed and supported the licence rights of
companies operating in the Oil & Gas industry since its
independence in 1992
-- Crude oil is exported via two different pipelines, one
delivering oil to the Mediterranean Sea and the other in the Black
Sea, thereby derisking routes to market from both a political and
logistical perspective.
Any changes to the estimates may result in a material impact to
the carrying value of both the assets and liabilities, arising in
respect of the acquisition.
2. Basis of presentation
These condensed interim consolidated financial statements have
been prepared in accordance with International Financial Reporting
Standards, including International Accounting Standard 34 - Interim
Financial Reporting. The Company has consistently applied the same
accounting policies throughout all periods presented. These
condensed interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto in the Company's annual filings for the year ended March
31, 2016.
The following entities have been consolidated within the
Company's financial statements:
Entity Registered Holding
Zenith Energy Ltd. Canada Parent
Ingenieria Petrolera
del Rio de la Plata
SRL Argentina 100%
Ingenieria Petrolera
Patagonia Ltd ("IPP") US 100%
Canoel Italia SRL Italy 100%
Zenith Aran Oil Company
Limited BVI 100%
Aran Oil Operating
Company Ltd. BVI 80%
Petrolera Patagonia US 100% owned subsidiary
Corporation ("PPC") of IPP
PP Holding Inc. ("PPH") US 100% owned subsidiary
of IPP
Petrolera Patagonia Argentina 95% owned subsidiary of
SRL PPC and 5% held by PPH
The functional currency of the Company is the Canadian dollar
("CAD"); the functional currency Company's Argentine subsidiaries
is the Argentine Peso; the functional currency of the Company's
Italian subsidiary is the Euro; the functional currency of the
Company's Azerbaijan subsidiary and of the Company's United States
subsidiaries is the United States dollar. The Company's
presentation currency is the CAD. In Financial Statements, unless
otherwise noted, all dollar amounts are expressed in CAD.
References to "US$" are to United States dollars, references to
"GBP" are to Great Britain Pounds, references to "AZN" are to
Azerbaijan Manat.
b) Basis of measurement
The preparation of financial statements in compliance with IFRS
requires management to make certain critical accounting estimates.
It also requires management to exercise judgment in applying the
Company's accounting policies.
The Company makes estimates and assumptions about the future
that affect the reported amounts of assets and liabilities.
Estimates and assumptions are continually evaluated based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances. In the future, actual experience may differ from
these estimates and assumptions. The significant judgements made by
management in applying the Company's accounting policies and the
key sources of estimation uncertainty were the same as those
applied to the consolidated financial statements as at and for the
year ended March 31, 2016 and the following additional critical
judgements:
Determination that the acquisition of the Azerbaijan oil assets
is a business combination rather than an asset acquisition and the
functional currency of the acquired business is New Manat.
The effect of a change in an accounting estimate is recognized
prospectively by including it in comprehensive income in the year
of the change, if the change affects that year only, or in the year
of the change and future years, if the change affects both. The
areas involving a higher degree of judgment or complexity, or areas
where assumptions and estimates are significant to the financial
statements are discussed in Note 5 of the Company's audited
consolidated financial statements for the year ended March 31,
2016. These unaudited condensed consolidated interim financial
statements have been prepared on a historical cost basis, and are
presented in Canadian dollars, unless otherwise indicated.
These condensed interim consolidated financial statements were
authorized for issue by the Board of Directors on February 28,
2017.
3. Marketable securities
December 31 March
31
2016 2016
-------------------------- ----- --------------
GRIT shares (a) $ - $ 7,632
$ - $ 7,632
------------------------ --------------
(a) GRIT shares
As at December 31, 2016, the Company held no GRIT shares (2015 -
116,913 GRIT shares with a fair value of GBP 18,122 ($34,130)).
The Company sold all of the GRIT shares for gross cash proceeds
of $10,840 in July 2016 recognized a $3,720 gain on the sale of
marketable securities and a $745 loss on foreign exchange in the
Q2-2017 consolidated statements of loss and comprehensive loss.
4. Business combination
Azerbaijan
On January 26, 2016 the Company registered a branch of Zenith
Aran Oil Company Ltd. ("Zenith Aran"), a wholly owned subsidiary of
the Company, in Baku, Azerbaijan, to have an operating entity in
Azerbaijan for the ownership and management of the Azerbaijan oil
properties.
Zenith Aran was incorporated in the British Virgin Islands under
the BVI Business Companies Act, 2004, on November 27, 2015.
On March 16, 2016, the Company's wholly-owned subsidiary, Zenith
Aran, entered into a Rehabilitation, Exploration, Development and
Production Sharing Agreement ("REDPSA") with SOCAR (State Oil
Company of Azerbaijan Republic) and SOA (Socar Oil Affiliate) . The
REDPSA covers 642 square kilometres which include the active
Muradkhanli, Jafarli and Zardab oil fields located in the Lower
Kura Region, about 240 kilometres inland from the capital city of
Azerbaijan, Baku (the "Azerbaijani Operations"). Pursuant to the
terms of the REDPSA, the Company and SOA have the exclusive right
to conduct petroleum operations from the Azerbaijani Operations,
through a newly incorporated operating company, Aran Oil Operating
Company Limited (the "Aran Oil"). Aran Oil, in which Zenith has an
80% interest, is the operator of the concession, with the remaining
20% interest being held by SOA.
On June 24, 2016, the President of the Republic of Azerbaijan
signed the REDPSA into law, following approval by Parliament on
June 14, 2016. The delivery of the capital assets previously used
in respect of the petroleum operations at the Azerbaijani
Operations, from the previous operating company to Aran Oil,
physically completed in June 2016, was formally completed on August
11, 2016 with the necessary signatures on related documents
Aran Oil now has operational control of the Azerbaijani
Operations. The transfer of operational control did not involve any
interruption of petroleum production operations at the Azerbaijani
Operations.
As a part of the Handover, an inventory of equipment and
material was prepared and the volumes of oil in the pipelines and
tanks were recorded. Any revenues related to the existing oil as at
the date of Handover were allocated to SOCAR. At the time of the
formal finalitazion of the transaction the production in Azerbaijan
was about 275 barrels per day of oil, they have generated revenues
for the Company since the completion of the transfer to Aran
Oil.
The Handover involved the transfer of certain individuals
employed by the current operator of the Azerbaijani Operations to
Aran Oil. In accordance with the laws of Azerbaijan, the transfer
process involved the relevant employees being dismissed by their
previous employer (the outgoing operator of the Azerbaijani
Operations) and entering into new employment contracts with Aran
Oil. Any payments to the relevant employees arising as a result of
their dismissal by the previous operating company were for the
account of the previous operating company. In accordance with the
laws of Azerbaijan, the relevant employees have been employed by
Aran Oil with effect from the Effective Date. The form of
employment agreement follows the template prescribed by the
Azerbaijani labour code.
The capital assets which transferred to Aran Oil as part of the
Handover include production equipment, vehicles, wells, pumps,
storage facilities, tools, generators, compressors, pipelines,
offices, warehouses, buildings, rigs, yards, roads, infrastructure,
radios, tubular goods, supplies, materials and facilities. The
Company appointed a consultant in Azerbaijan to review and report
on the availability and the state of the assets prior to
Handover.
The term of the Contract Exploration Area portion of the REDPSA
is 25 years from the date of SOCAR's approval of the contractor's
development program. The term of each Area may be extended by an
additional five years at SOCAR's discretion.
The valuations of the Asset and of the liabilities have been
based on the Net Present Value ("NPV") of future cash flows
included in the Competent Persons Report prepared on behalf of the
Company by Chapman Petroleum Engineering Ltd. ("Chapman") and
published on June 15, 2016 ("Original CPR"), and in particular the
financial and economic data from page 93 to page 128.
The acquisition of Assets has been brought to account as a
business combination using the acquisition method of accounting and
resulted in a bargain purchase arising as follows:
Fair value of net assets acquired CAD$
D&P assets 1,052,765,084
Compensatory Oil* (1,997,357)
Capital Costs* (285,548,895)
Foreign Currency
Translation 7,913,703
Decommissioning
Obligations* (1,943,339)
Gain on business
combination 771,189,197
Taxation (153,043,767)
Net NPV of the
assets 618,145,430
* Amounts required to be paid under the terms of the REDPSA and
therefore in accordance with FRS3 ("Business Combinations") form
part of the acquisition amount.
D&P assets
The estimated value of the D&P assets acquired was
determined using both estimates and an independent reserve
evaluation based on oil and gas reserves discounted at 10%.
Decommissioning provisions
The fair value of decommissioning obligation assumed was
determined using the timing and estimated costs associated with the
abandonment, restoration, and reclamation of the wells and
facilities acquired, discounted at a credit adjusted rate.
On 15 June 2016, the day immediately following the acquisition
date, the decommissioning obligation assumed was remeasured using a
long term risk free rate based on the expected timing of cash
flows, in accordance with IAS 37 ("Provisions, Contingent
Liabilities and Contingent Assets"). The result was a CAD
$1,943,339 increase in the decommissioning obligation associated
with the acquired assets and the net result of the acquisition and
recognition of decommissioning liability recognition being a gain
of CAD $711,189,197 measurement adjustment in the first quarter of
year 2017 consolidated statement of income and comprehensive income
using prevailing exchange rates.
Compensatory oil
The Company has an obligation by contract to:
1. within one year following the Effective Date, deliver at no
charge to SOCAR 5% of the total production of petroleum produced
from the contract rehabilitation area in each calendar quarter;
and
2. commencing on the first anniversary of the Effective Date,
start delivering, at no charge to SOCAR, 15% of the total
production of petroleum produced from the contract rehabilitation
area in each calendar quarter, until the amount delivered is the
equivalent of 45,000 tons of "compensatory" crude oil to SOCAR.
The amount, stated as a liability, reflects the aforementioned
quantity of production to be delivered to SOCAR, valued at an
estimated production price of US$20 per barrel.
Capital Costs
At the time of the formal finalisation of the transaction the
production in Azerbaijan was approximately 275 barrels of oil per
day. Historically, production has been much greater in quantity
(Source: SOCAR). Gas is also produced, but in low quantity and is
used on-site.
The Company, which is free to sell/export oil without
restrictions, sells its oil through the Marketing and Operations
Department of SOCAR ("SOCARMO"). A commission of 1% of total sales
is payable to SOCARMO.
Between 2017 and 2019, the Company plans to workover a total of
44 existing wells in Azerbaijan which are currently inactive or
produce at low rates ( 5 STB/d) to bring rates up to 10 to 15 STB/d
per well using improved technology, non damaging fluids and
optimised treatments. It is estimated that 10 wells will be worked
over in 2017, 16 wells in 2018 and 18 wells in 2019. This programme
has commenced using the existing workover rig in the field and the
Company intends to purchase an additional modern workover rig to
optimise the workover of the wells, within the next four years.
In addition to the marginal producing wells, five non-producing
wells in the Maykop zone in the Zardab field in Azerbaijan are
expected to be worked over in 2017 and to be returned to production
once the existing wellbore and sand production issues have been
resolved.
The Company intends to acquire one modern drilling rig capable
of drilling 4,500m to carry out a fifteen year drilling programme.
It is anticipated that five new wells will be drilled in 2018 and
ten wells in each year thereafter until the anticipated drilling
programme is complete in 2032.
During the first four years of the REDPSA it is estimated that
US$2,500,000 will be spent upgrading the gathering system and
central facilities in Azerbaijan to improve safety, efficiency and
handle higher production rates. During the same period, 39 active
wells currently producing at marginal rates will be worked over at
an estimated cost averaging $50,000 per well, using the existing
workover rig.
It is anticipated that in 2017 five shut-in wells completed in
the Maykop formation will be worked over to control sand
production, at an estimated cost of US$100,000 per well, and
returning to an increase of production at a total of 200STBl/d.
It is envisaged that development drilling will commence in 2018
and continue until 2032. It has been estimated that each well with
proved reserves will cost approximately US$4,300,000. This cost
will include the direct cost of materials, fuel, salaries, etc. to
drill the well and an allocation for the purchase of one drilling
rig, well completion and tie-in.
Proved reserves are those reserves that can be estimated, by
competent professional, with a high degree of certainty to be
recoverable. The estimate of the reserves are related to a given
date, based on analysis of drilling, geological, geophysical and
engineering data; the use of established technology, and; specified
economic conditions, which are generally accepted and being
reasonable, and shall be disclosed.
Each well in the proved plus probable category is expected to
cost approximately US$5,000,000. This category of reserves includes
those additional reserves that are less certain to be recovered
than proved reserves.
In addition to the costs anticipated for the wells with proved
reserve, wells in the proved plus probable category have an
additional allocation of US$700,000 for the purchase and
maintenance of a second drilling rig and expansion and
modernisation of the field facilities.
In all 145 wells are expected to be drilled over 16 years, of
which 58 of these are anticipated to be horizontal wells.
DEFERRED CONSIDERATION PAYABLE
December 31, 2016 March 31, 2016
Compensatory Oil
Current portion 27,780 -
Non-Current portion 1,969,577 -
Capital costs
Current portion 474,056 -
Non-Current portion 285,074,839 -
As of 31 December 287,546,252 -
-------------------------------------------- -------------------------- --------------------
Deferred Condideration payable current 501,836 -
-------------------------------------------- -------------------------- --------------------
Deferred Condideration payable non-current 287,044,416 -
-------------------------------------------- -------------------------- --------------------
Total 287,546,252 -
-------------------------------------------- -------------------------- --------------------
5. Property and equipment
Furniture
D&P assets & Total
Fixtures
Cost
Balance - March
31, 2016 $ 21,612,271 $ 51,921 $ 21,664,192
Acquisition 1,052,765,084 - 1,052,765,084
Additions 84,313 19,537 103,850
Decommissioning
obligations (2,142) - (2,142)
Foreign currency
translation (822,905) (2,080) (824,985)
---------------------------- --------------- -------------------- -------------------
Balance - December
31, 2016 $ 1,073,636,621 $ 69,378 $ 1,073,705,999
---------------------------- --------------- -------------------- -------------------
Accumulated depletion and depreciation
Balance - March
31, 2016 $ (7,027,156) $ (38,947) $ (7,066,103)
Depletion and depreciation (519,762) (3,250) (523,012)
Foreign currency
translation 279,695 1,664 281,359
---------------------------- --------------- -------------------- -------------------
Balance - December
31, 2016 $ (7,267,223) $ (40,533) $ (7,307,756)
---------------------------- --------------- -------------------- -------------------
Carrying amount
March 31, 2016 $ 14,585,115 $ 12,974 $ 14,598,089
December 31, 2016 $ 1,066,369,398 $ 28,845 $ 1,066,398,243
The depletion calculation for the nine months ended December 31,
2016 included estimated future development costs of $2.7 million
for proved and probable reserves (March 31, 2016 - $2.7
million).
The Company did not identify any indicators of impairment at
December 31, 2016.
6. Loans payable
December March 31
31
2016 2016
--------------------------- ---------------------------- ------------------
USD loan payable (a) $ 2,934,252 $ 2,834,600
Euro bank debt (b) 234,143 288,422
Euro bank debt (c) 213,411 282,457
Euro loan payable (d) 309,312 478,282
First Credit Agreement 215,650 -
(e)
Second Credit Agreement 267,696 -
(f)
Third Credit Agreement 74,131 -
(g)
Fourth Credit Agreement 74,131 -
(h)
--------------------------- ---------------------------- ------------------
4,322,726 3,883,761
Current portion of loans
payable (1,946,338) (3,210,114)
--------------------------- ---------------------------- ------------------
Long-term portion of
loans payable $ 2,376,387 $ 673,647
--------------------------- ---------------------------- ------------------
a) USD loan payable
As at March 31, 2016, the Company was indebted to a third party
lender for a USD 2,185,337 ($2,866,506) loan payable secured by the
shares of its wholly owned subsidiary, IPP, and bearing fixed
interest at 10% per annum.
The loan maturity date is March 31, 2018 and the repayment
scheduled was amended in December 2016 to require a USD 700,000
(CAD$943,467) payment on January 2017 and a final payment of
approximately USD 1,485,337 on March 31, 2018.
As at December 31, 2016, $943,467 (March 31, 2016 - $2,834,600)
of principal is classified as a current liability; $2,001,952
(March 31, 2016 - $nil) of principal is classified as long-term and
$292,061 (March 31, 2016 - $156,874) of accrued interest is
included in trades and other payables.
In January 2017 the Company paid the USD 700,000 (CAD$943,467)
of the USD loan, utilising part of the proceeds from the
fundraising aligned with the listing on the London Stock Exchange
of January 11, 2017. The President, CEO and Director of the
Company, has provided a personal guarantee to the lender in respect
of the repayment of the USD Loan by the Company.
b) Euro bank debt
On August 6, 2015, the Company obtained a EUR220,000 loan
(CAD$315,986) from the GBM Banca of Rome. The loan is unsecured,
bears fixed interest at 7% per annum and is repayable in 60 monthly
payments of principal and interest until August 6, 2020.
As at December 31, 2016, the principal balance of the loan was
EUR165,250 (CAD$234,143) of which $59,587 is classified as a
current liability and $174,556 is classified as long-term.
c) Euro bank debt
On December 17, 2015, the Company obtained a EUR200,000 loan
(CAD$301,880) from Credito Valtellinese Bank of Tortona. The loan
is unsecured, bears fixed interest at 4.5% per annum and is
repayable in 42 monthly payments of principal and interest until
July 17, 2019.
As at December 31, 2016, the principal balance of the loan was
EUR150,610 (CAD$213,411) of which $80,336 is classified as a
current liability and $133,075 is classified as long-term.
d) Euro loan payable
On October 1, 2015, the Company acquired a co-generation plant
from a third party of which EUR401,148 (CAD$594,943) of the
purchase price was in the form of a loan from the seller. The loan
is secured by the co-generation plant and bears interest at 3.5%
and is repayable in 30 monthly payments of principal and interest
until March 31, 2018.
As at December 31, 2016, the principal balance of the loan was
EUR218,302 (CAD$309,312) of which $231,341 is classified as a
current liability and $77,971 is classified as long-term.
e) USD $320,000 General Line of Credit Agreement
On August 9, 2016, the Company's wholly-owned subsidiary, Zenith
Aran, entered into a general line of credit agreement with
Rabitabank Open Joint Stock Company ("Rabitabank") (the "First
Credit Agreement") up to an amount of USD $320,000, for industrial
and production purposes. The loan could be drawn down in tranches
and as at 30 September 2016 it was fully drawn down. Rabitabank can
postpone or suspend the facility if there is a decline in oil
production under the REDPSA of more than 30% from production levels
as at the date of first drawdown or if the REDPSA is terminated.
The First Credit Agreement bears interest at a rate of 12% per
annum. The loan is guaranteed by the Company. In November 2016 the
Company repaid the first tranche of the loan for the amount of
USD160,000, and as at December 31, 2016, the balance of the loan
outstanding was USD $160,000 (plus accrued interest) (CAD$215,650)
that is classified as a current liability. The loan is repayable on
February 22, 2017.
On February 22, 2017 the terms of the repayment of the First
Credit Agreement were amended and the amount of USD $160,000 (plus
accrued interest)(CAD $215,650) will be paid on March 27, 2017
f) USD $200,000 General Line of Credit Agreement
On September 30, 2016, Zenith Aran entered into a second general
line of credit agreement with Rabitabank (the "Second Credit
Agreement") up to an amount of USD $200,000. The Second Credit
Agreement bears interest at a rate of 12% per annum. The loan is
repayable in two tranches; USD $100,000 (plus accrued interest)
(CAD$133,848) is payable on January 3, 2017 and the remaining USD
$100,000 (plus accrued interest) (CAD$133,848) is payable on April
3, 2017. The loan is guaranteed by the Company. As at December 31,
2016, the full balance of the loan was outstanding and it is all
classified as a current liability.
At the date of this document the first tranche of the repayment
of the Second Credit Agreement was totally paid.
g) USD $55,000 General Line of Credit Agreement
On November 21, 2016, Zenith Aran entered into a third general
line of credit agreement with Rabitabank (the "Third Credit
Agreement") up to an amount of USD $55,000 (CAD$74,131). The Third
Credit Agreement bears interest at a rate of 12% per annum and is
repayable on February 21, 2017. The loan is guaranteed by the
Company. As at December 31, 2016, the full balance of the loan was
outstanding and it is classified as a current liability .
On February 21, 2017 the terms of the repayment of the Third
Credit Agreement were amended and the amount of USD $55,000 (plus
accrued interest)(CAD $74,130) will be paid on March 27, 2017.
h) Second USD $55,000 General Line of Credit Agreement
On November 22, 2016, Zenith Aran entered into a fouth general
line of credit agreement with Rabitabank (the "Fourth Credit
Agreement") up to an amount of USD $55,000 (CAD$74,131). The Fourth
Credit Agreement bears interest at a rate of 12% per annum and is
repayable on February 21, 2017. The loan is guaranteed by the
Company. As at December 31, 2016, the full balance of the loan was
outstanding and it is classified as a current liability .
On February 22, 2017 the terms of the repayment of the Fourth
Credit Agreement were amended and the amount of USD $55,000 (plus
accrued interest)(CAD $74,130) will be paid on March 27, 2017
i) Cayman loan payable
On November 13, 2015, the Company secured a GBP20,000,000
(CAD$40,250,000) unsecured loan facility (the "Loan") for general
corporate purposes with a Cayman Islands based Fund (the "Lender").
The Loan can be drawn by written notice given by the Company.
Subject to a satisfaction of certain conditions precedent and the
approval of the Lender, a minimum sum of GBP100,000 and up to a
maximum sum of GBP2,000,000 for each tranche can be drawn at any
time from the date of the Loan agreement for a period of 18 months
after such date. The Loan accrues interest at the rate of 12% per
annum on the amount drawn and is payable quarterly in arrears. Each
outstanding draw down is repayable on the third anniversary of the
first draw down date. The Company may prepay the loan, in whole or
in part, at any time and without penalty. A one-time fee of
GBP25,000 is payable in cash or by issuing the Lender common shares
of the Company.
As at December 31, 2016 the Company had not made any drawns on
the Loan.
7. Convertible notes
Face value Debt component Derivative
$ $ liability
$
----------------------- ---------- ------------------ ----------
Balance - March 31,
2016 730,915 697,046 357,936
Conversion (300,300) (275,000) (25,300)
New Subscriptions 167,030 140,305 26,725
Change in fair value - - 39,531
Accretion - 419 -
Foreign exchange (18,954) (36,778) -
----------------------- ---------- ------------------ ----------
Balance - December
31, 2016 578,691 525,992 398,892
----------------------- ---------- ------------------ ----------
Swiss Franc Convertible Note
As at December 31, 2016, the Company held CHF312,586 Swiss
Francs ($413,051) (March 31, 2016 - CHF540,000 Swiss Francs
($730,915)) principal amount of unsecured convertible notes bearing
interest at 1% per annum, payable in arrears in equal quarterly
installments on January 11, 2019. At any time prior to maturity and
at the option of the note holder, the principal and any unpaid
interest of a note may be converted into common shares of the
Company at a price of $0.11 per share.
Interest is accrued and presented in the amount of $337,345 as
at December 31, 2016 (March 31, 2016 - $314,597).
In June 2016, the Company issued 2,730,000 common shares on the
conversion of 225,047 Swiss Francs ($300,300) principal amount of
convertible notes (Note 10).
On November 28, 2016, the Company formalized the previously
reached agreement for the amendments of the terms of its 5%
convertible notes. The proposed amendments to the notes included an
extension of two years to the maturity date from January 11, 2017
to January 11, 2019, a reduction to the conversion price from
$0.125 per common share to $0.11 per common shares and a reduction
to the interest rate payable by the Company from 5% to 1% for the
remainder of the term. The proposed extension to the notes, and the
reduction in the conversion price and interest rate remains subject
to approval of the TSX Venture Exchange.
On January 25, 2017 the Company issued 3,700,000 shares on the
conversion of 311,067 Swiss Francs (CAD$407,000) principal amount
of convertible notes.
Outstanding CHF CAD$
debt
As of January
25, 2017
------------------ ------------------------- -------------
Principal CHF 314,953 $ 412,084
Accrued Interest CHF 249,758 $ 327,730
------------------ ------------------------- -------------
Total to be
paid CHF 564,711 $ 739,814
------------------ ------------------------- -------------
Conversion CHF CAD$
of notes Shares
------------------ ------------------------- ------------- ------------
Outstanding
principal
As of January
25, 2017 CHF 314,953 $ 412,084
Issued January
2017 3,700,000 -CHF 311,067 $ -407,000
Remaining CHF 3,886 $ 5,084
------------------ ------------------------- ------------- ------------
Changes calculated using the following
current change rate conversion (January
25, 2017)
Change Rate
CAD$/CHF 1.3084
CHF/CAD$ 0.7643
The outstanding amount of convertible note, at the date of this
document, is CHF3,886 Swiss Francs ($5,084) of principal, and
CHF249,758 (CAD$327,730) of accrued interest.
Pound Convertible Note
On November 22, 2016, Gunsynd Plc ("Gunsynd"), a company listed
on the London Stock Exchange's AIM market for listed securities,
invested GBPGBP100,000 (CAD$165,640) by way of subscription for
convertible unsecured loan notes bearing interest of 3% per annum
(the "GBP Convertible Notes"). The GBP Convertible Notes are
payable in arrears in quarterly instalments. At the option of
Gunsynd, the principal of the GBP Convertible Notes may be
converted into Common Shares of the Company at any time prior to
the expiry of 36 months from issuance at a price equal to CAD $0.10
per Common Share (or the initial listing price of the Common Shares
if the Company is listed on another senior stock exchange at the
time of such conversion). Subject to the GBP Convertible Notes not
having been converted, the GBP Convertible Notes mature 36 months
from the date of issuance. Unless permitted under Canadian
securities legislation, the GBP Convertible Notes cannot be traded
before the date that is four months and a day after the date of
issuance.
Interest is accrued and presented in the amount of $531 as at
December 31, 2016 (March 31, 2016 - $nil).
8. Bonds and notes payable
BONDS
Balance - March 31, 2016 $ 563,103
Fair value of warrants -
Finder's warrants -
Finder's fees -
-------------------------------------- -------------
Liability portion 563,103
Interest 49,694
Accretion 7,668
Conversion (121,411)
Repayments (43,624)
Foreign currency translation (72,341)
Balance - December 31, 2016 $ 383,090
------------------------------ ------ -------------
The bonds are secured by 99% of the oil and gas properties owned
by the Company's subsidiary, Canoel Italia SRL. The bonds bear
interest at 12% per annum, payable quarterly, until the maturity
date 36 months from the date of issuance at which time the
principal amount of bonds is repayable in full.
Each common share purchase warrant entitles the holder thereof
to purchase, subject to adjustment, one additional common share at
an exercise price of $0.25 per share for a period of 36 months from
the date of issuance. In connection with the private placement, the
Company paid a finder's fees of GBP 11,250 ($21,169) and granted
67,500 finder's warrants exercisable at $0.25 until for a period of
36 months from the date of issuance.
The grant date weighted average fair value of warrants was $0.03
per warrant ($50,900) estimated using the Black-Scholes pricing
model calculations based on the following significant
assumptions:
Risk-free interest rate 0.50% - 0.70%
Expected volatility 75%
Expected life 3 years
Dividends nil
On November 2016 the bond was partially repaid for CAD$121,411
(with related accrued interest), and within December 31, 2016 all
the outstanding accrued bond interests were paid for
CAD$70,641.
NOTES PAYABLE
On July 16, 2016, the Company's wholly owned subsidiary in
Argentina, Petrolera Patagonia S.r.l. ("PPSRL"), entered into a
loan agreement with Arpenta Sociedad de Bolsa S.A. ("Arpenta"),
pursuant to which PPSRL borrowed USD $154,000 of Bonar 2017
Argentine sovereign bonds (the "Bonds") (the "Arpenta Bond Loan").
PPSRL subsequently sold the Bonds in the market (for Argentine
pesos) to address cashflow requirements. Interest is payable on the
Arpenta Bond Loan at a rate of 4% per annum. The Arpenta Bond Loan
had a bullet repayment date of 15 December 2016, although
management at PPSRL has taken steps for the Arpenta Bond Loan to be
rolled-over (in whole) for an additional 180 day period. Repayment
of the Arpenta Bond Loan is required to be made to Arpenta in the
same Bonar 2017 Argentine sovereign bonds as were borrowed.
As at December 31, 2016, the Company had US$154,000
(CAD$207,563) (March 31, 2016 - US$nil) of notes payable.
As at December 31, 2016, the balance of notes payable is
$211,384 including accrued interest (March 31, 2016 - $nil).
Balance - March 31, 2016 $ nil
Liability portion 198,787
Interest 3,821
Foreign currency translation 9,226
Balance - December 31, 2016 $ 213,608
------------------------------ ------ -----------
9. Decommissioning obligation
The following table presents the reconciliation of the carrying
amount of the obligation associated with the reclamation and
abandonment of the Company's oil and gas properties:
Balance - March 31, 2016 $7,896,671
Acquisition 1,943,339
Accretion 128,030
Foreign currency translation (264,265)
------------------------------- ---------
Balance -December 31, 2016 $9,703,775
------------------------------- ---------
The following significant weighted average assumptions were used
to estimate the decommissioning obligation:
Undiscounted cash flows -
uninflated $17 million
Undiscounted cash flows -
inflated $1,223 million
Risk free rate 35.2%
Inflation rate 25.4%
Expected timing of cash flows 16 - 20 years
10. Share capital
Number of
shares Amount
--------------------------- ----------------------------------- ---------------
Balance - March 31, 2016 43,594,406 $ 9,578,270
Unit private placement
proceeds 20,979,747 1,877,660
Fair value of warrants - -
--------------------------- ----------------------------------- ---------------
Balance - December 31,
2016 64,574,153 $ 11,455,930
--------------------------- ----------------------------------- ---------------
(a) On April 11, 2016, the Company completed the private
placement of 6,674,775 shares at CAD$0.08 per unit for gross
proceeds of CAD$533,982. Of the 6,674,775 shares, 5,000,000 shares
were issued forming part of a unit comprising one common share and
one common share purchase warrant. Each whole common share purchase
warrant entitles the holder to acquire one common share at CAD$0.15
per common share for a period of 24 months from the date of
issuance. The remaining 1,674,775 shares were not issued with
accompanying warrants. The Company also paid aggregate finders'
fees of CAD$26,000.
(b) On April 21, 2016, the Company completed the private
placement of 3,892,875 shares at CAD$0.08 per unit for gross
proceeds of CAD$311,430. Each unit is comprised of one common share
and one common share purchase warrant. Each whole common share
purchase warrant entitles the holder to acquire one common share at
CAD$0.15 per common share for a period of 24 months from the date
of issuance. The Company also paid aggregate finders' fees of
CAD$14,181.95 and issued 179,712 warrats to certain arm's-length
parties in the connection with the Private Placement.
(c) On June 9, 2016, the Company issued 2,730,000 shares at a
deemed price of $0.11 per share in partial conversion of
convertible notes $300,300 (Note 7), and 312,500 shares at a price
of $0.10 per share creditors of the Corporation to settle debts
owing by the Company totalling $31,250.
(d) On June 16, 2016, the Company closed a non-brokered private
placement of 1,519,250 shares of the Company at a price of $0.08
per Unit for aggregate gross proceeds of $121,540. Each unit is
comprised of one common share and one common share purchase
warrant. Each Warrant will be exercisable for one Common Share at a
price of $0.15 per share for a period of 24 months from the date of
closing of the offering.
(e) On October 10, 2016, the Company closed a non-brokered
private placement of 1,906,050 Common Shares at a price of CAD
$0.10 per unit for aggregate gross proceeds of CAD $190,605. Each
unit is comprised of one Common Share and one common share purchase
warrant. Each common share purchase warrant will be exercisable for
one Common Share at a price of CAD $0.20 per share for a period of
24 months from the date of closing of the offering.
(f) On October 19, 2016, the Company issued 724,235 Common
Shares at a deemed price of CAD $0.085 per Common Share to certain
debtholders and creditors of the Company to settle debts owing by
the Company, representing an aggregate of CAD $61,585.48.
(g) On November 7, 2016, the Company closed a non-brokered
private placement of 2,745,062 Common Shares at a price of CAD
$0.12 per unit for aggregate gross proceeds of CAD $329,407.44.
Insiders of the Company subscribed for an aggregate of 2,195,475
units for aggregate subscription proceeds of CAD $263,457. Each
common share purchase warrant will be exercisable for one Common
Share at a price of CAD $0.20 per share for a period of 24 months
from the date of closing of the offering.
(h) On November 30, 2016, the Company issued 150,000 Common
Shares to certain debtholders and creditors of the Company (based
on a price of CAD$ $0.08 per share Common Share) in settlement of a
debt of GBP GBP7,000 (inclusive of accrued interest) owed by the
Company in respect of services.
11. Warrants
Weighted
Number of Amount average
warrants $ exercise
price
------------------------- ------------------------ -------------- ----------------
Balance - March 31,
2016 29,638,898 1,509,537 $ 0.23
Unit private placements
(Note 10) 17,242,724 - 0.16
Balance - December
31, 2016 46,881,622 1,509,537 $ 0.21
------------------------- ------------------------ -------------- ----------------
As at December 31, 2016 the Company had 46,881,622 warrants
outstanding and exercisable at a weighted average exercise price of
$0.21 per share with a weighted average life remaining of 2
years.
12. Stock options
The Company has a stock option plan (the "Plan") for the benefit
of directors, employees and consultants. The maximum number of
shares available under the Plan is limited to 10% of the issued and
outstanding common shares at the time of granting options. Granted
options are fully vested on the date of grant, at which time all
related share-based payment expense is recognized in the
consolidated statements of loss and comprehensive loss. Stock
options expire five years from the date of grant.
On November 18, 2016, the Company granted Options to certain of
its Directors and employees to acquire a total of 6,000,000 Common
Shares pursuant to its Stock Option Plan. Each Option granted
entitles the relevant holder to acquire one Common Share for an
exercise price of CAD $0.10 per Common Share. The expiry date of
the Options is the date falling five years from the date of
granting, namely November 18, 2021.
The following table summarizes information about the Company's
stock options outstanding as at December 31, 2016:
Number of options outstanding Weighted
and exercisable average exercise
price ($)
Balance - March 31,
2016 - -
Granted 6,000,000 0.10
Balance - December
31, 2016 6,000,000 0.10
The Stock Options Plan was approved by shareholders of the
Company at the Annual General Meeting held on January 20, 2017
On February 22, 2017 the Company announced that a Director of
the Company has exercised his stock options to purchase 1,000,000
common shares in the capital of the Company at a price of CAD$0.10
per Common Share and a total cost of CAD$100,000.
13. Per share amounts
Three months ended Nine months
December 31 ended
December 31
2016 2015 2016 2015
$ $ $ $
-------------------------- ------------------- -------------- --------------------- -----------------
Net Profit (loss) (1,789,281) (889,470) 606,284,617 (2,106,182)
-------------------------- ------------------- -------------- --------------------- -----------------
Weighted average number
of shares - basic:
Issued common shares
as at April 1 43,594,406 29,292,081 43,594,406 29,292,081
Effect of common shares
issued during the year 19,689,938 4,331,733 15,024,903 1,566,979
-------------------------- ------------------- -------------- --------------------- -----------------
63,284,344 33,623,814 58,619,309 30,859,060
----------------------------------------------- -------------- --------------------- -----------------
Basic weighted average
number of shares 63,284,344 33,623,814 58,619,309 30,859,060
Potential dilutive effect
on shares issuable under
warrants 45,628,117 24,150,477 45,628,117 24,150,477
Potential diluted weighted
average number of shares 108,912,461 57,774,291 104,247,426 55,009,537
Net Profit (loss) per
share - basic (1) (0.03) (0.03) 10.59 (0.07)
Net Profit (loss) per
share - diluted (0.02) (0.02) 5.90 (0.04)
---------------------------- --------------- ------------------ ----------------- -----------------
(1) The Company did not have any in-the-money convertible notes,
warrants and stock options during the three and nine months ended
December 31, 2016 and 2015. The effect of convertible notes,
warrants and stock options is anti-dilutive in loss periods.
14. Finance expense
Three months ended Nine months
December 31 ended
December 31
2016 2015 2016 2015
$ $ $ $
----------------------------- ------- ------- -------- --------
Interest expense 194,535 129,046 434,237 372,961
Accretion of convertible
notes (Note 7) 419 74,469 419 181,757
Accretion of bonds (Note
8) 2,547 6,049 7,668 17,228
Accretion of decommissioning
obligation (Note 9) 128,030 62,741 128,030 203,478
----------------------------- ------- ------- -------- --------
325,531 272,305 570,354 775,424
----------------------------- ------- ------- -------- --------
15. Supplemental disclosure
The condensed interim consolidated statements of profit and
comprehensive profit are prepared primarily by nature of expense
with the exception of employee compensation cost which is included
in operating and general and administrative expenses. As at
December 31, 2016 the Company and its subsidiaries had 15 full time
employees and three part time employees or consultants based in its
offices in Buenos Aires and Comodoro Rivadavia in Argentina and in
Genoa, Italy. Subsequently to the handover, dated August 11, 2016,
the Company hired an additional 201 full time employees and 1 part
time employee/consultant all based in Azerbaijan.
The following table details the amounts of total employee
compensation:
Three months ended Nine months
December 31 ended
December 31
2016 2015 2016 2015
$ $ $ $
------------------------------ ------- ------- --------- ---------
Operating 366,342 309,635 642,617 820,415
General and administrative 150,886 76,563 449,423 323,747
------------------------------ ------- ------- --------- ---------
Total employee compensation
cost 517,228 386,198 1,092,041 1,144,162
------------------------------ ------- ------- --------- ---------
16. Change in non-cash working capital
For the nine months ended 2016 2015
December 31
--------------------------------- ------------- ---- ------------
Trade and other receivables $ (1,284,754) $ (209,466)
Inventory (288,088) (154,207)
Prepaid expenses 80,355 (137,243)
Prepaid property and equipment
insurance 38,635 133,973
Trade and other payables 1,750,271 497,721
--------------------------------- ------------- ---- ------------
Total change in non-cash
working capital $ 296,419 $ 130,778
--------------------------------- ------------- ---- ------------
The change in non-cash working capital has been allocated to the
following activities:
2016 2015
--------------------------- ------------ ---- -------------
Operating $ 285,031 $ 89,666
Financing - (30,660)
Investing 11,388 71,772
--------------------------- ------------ ---- -------------
Total change in non-cash
working capital $ 296,419 $ 130,778
--------------------------- ------------ ---- -------------
17. Related party transactions
a) Included in general and administrative expenses for the three
and nine months ended December 31, 2016 is $41,983 and $121,445
(three and nine months ended December 31, 2015 - $34,902 and
$147,645), respectively, charged by a company controlled by an
officer and director of the Company for administrative services. As
at December 31, 2016, $22,961 (March 31, 2016 - $nil) was included
in trade and other payables in respect of these charges.
b) Included in trade and other payables is $nil (March 31, 2016
- $8,966) due to officers and directors of the Company in respect
of general and administrative expenditures made on behalf of the
Company for which the officers and directors will be
reimbursed.
18. Taxation
December 31, March 31,
2016 2016
CAD$ CAD$
------------- ---------------------- ---------
Current tax - -
Deferred tax 153,927,334 883,567
------------- ---------------------- ---------
Total tax 153,927,334 883,568
------------- ---------------------- ---------
The deferred tax charge for the period has arise as a result of
the acquistition of the assets in Azerbaijan.
No tax charge or credit arises on the loss for the period.
The difference between tax expense for the year and expected
income taxes based on the statutory tax rate arises as follows:
TAXATION
December 31, 2016 March 31, 2016
CAD$ CAD$
------------------------------------------------ ----------------------- ----------------
Initial Balance 883,567 2,397,623
Deferred tax reduction - (1,516,046)
Expected tax provision on business combination 153,043,767 -
As of 31 December 153,927,334 883,567
------------------------------------------------ ----------------------- ----------------
The provision for the nine months ended December 31, 2016 is
related to the expected taxation of the profitability of the assets
that the Company acquired in Azerbaijan (see note 4).
The tax (reduction) provision for the year ended March 31, 2016
is comprised of $nil of current tax expense and a $1,514,056
deferred tax reduction.
As at March 31, 2016, the Company has accumulated non-capital
losses in Canada totaling $15.2 million (2015 - $11.6 million)
which expire in varying amounts between 2028 and 2036 and $0.4
million (2015 - $0.5 million) of non-capital losses in Italy.
19. Financial risk management
The Company's activities expose it to a variety of financial
risks that arise as a result of its exploration, development,
production, and financing activities such as credit risk, liquidity
risk and market risk. This note presents information about the
Company's exposure to each of the above risks, the Company's
objectives, policies and processes for measuring and managing risk,
and the Company's management of capital. Further quantitative
disclosures are included throughout these consolidated financial
statements.
a) Credit risk
Credit risk is the risk of an unexpected loss if a customer or
counter party to a financial instrument fails to meet its
commercial obligations. The Company's maximum credit risk exposure
is limited to the carrying amount cash of $18,476 (March 31, 2016 -
$137,982) and trade and other receivables of $1,956,334 (March 31,
2016 - $787,477).
The composition of trade and other receivables is summarized in
the following table:
December 31 March
31
2016 2016
---------------------------------------- ---- ---------------
Oil and natural gas sales $1,025,306 $ 475,219
Stamp tax and other tax
withholdings 731,179 216,926
Goods and services tax 96,357 12,261
Other 103,492 83,071
---------------------------- --------- ---- ---------------
$1,956,334 $ 787,477
---------------------------- --------- ---- ---------------
The receivables related to the sale of oil and natural gas are
due from large companies who participate in the oil and natural gas
industry in Argentina, Azerbaijan and Italy. Oil and natural gas
sales receivables are typically collected in the month following
the sales month.
The Company considers its receivables to be aged as follows:
December 31 March
31
2016 2016
------------------------ ---- ---------------
Current $1,749,136 $ 542,962
90 + days 207,198 244,515
------------ --------- ---- ---------------
$1,956,334 $ 787,477
------------ --------- ---- ---------------
b) Liquidity risk
Liquidity risk is the risk that the Company will incur
difficulties meeting its financial obligations as they are due. The
Company's approach to managing liquidity is to ensure, as far as
possible, that it will have sufficient liquidity to meet its
liabilities when due, under both normal and distressed conditions
without incurring unacceptable losses or risking harm to the
Company's reputation.
As at December 31, 2016, the Company had $8,618,257 (March 31,
2016 - $8,201,167) of current liabilities for which the Company's
$18,476 (March 31, 2016 - $137,982) cash balance is insufficient to
settle the current liabilities. It is expected that further debt
and equity financings will be required in order to settle existing
current liabilities, continue development of the Company's assets
and meet future obligations. There can be no assurance that such
financings will be available to the Company.
As of December 31, 2016, the contractual cash flows, including
estimated future interest, of current and non- current financial
liabilities mature as follows:
Due on Due on Due between
or or January
Carrying Contractual before before 2018 and
amount cash flows December December November
31 ,2017 31, 2018 2020
--------------------- --- ---------------- ---------------- ---------- ------------ -------------
Trade and other
payables $ 4,892,846 4,892,846 4,892,846 - -
Oil share agreement 1,063,629 1,063,629 1,063,629 - -
Loans payable 4,322,726 5,264,699 1,973,367 3,123,648 167,684
Convertible
notes 525,992 940,058 6,313 7,035 926,710
Notes payable 213,608 213,608 213,608 - -
Bonds payable 383,090 443,511 55,995 387,516 -
-------------------------- ---------------- ---------------- ---------- ------------ -------------
$ 11,401,891 12,818,351 8,205,758 3,518,199 1,094,394
------------------------- ---------------- ---------------- ---------- ------------ -------------
c) Market risk
Market risk is the risk that changes in foreign exchange rates,
commodity prices, and interest rates will affect the Company's net
income (loss) or the value of financial instruments.
i) Currency risk
Foreign currency exchange risk is the risk that the fair value
of future cash flows will fluctuate as a result of changes in
foreign exchange rates. Foreign exchange rates to Canadian dollars
for the noted dates and periods are as follows:
Closing rate Average rate
December 31 Nine months ended
December 31
2016 2015 2016 2015
---------------- ---------------------- ------ ----------- --------
Argentine Peso 0.0853 0.1069 0.0881 0.1375
US dollar 1.3427 1.3840 1.3087 1.2908
Euro 1.4169 1.5029 1.4502 1.4256
Swiss Franc 1.3214 1.3805 1.3328 1.3365
British Pound 1.6564 2.0407 1.74064 1.9790
Azerbaijani
New Manat 0.7586 - 0.8201 -
The following represents the estimated impact on net income
(loss) of a 10% change in the closing rates as at December 31, 2016
and 2015 on foreign denominated financial instruments held by the
Company, with other variables such as interest rates and commodity
prices held constant:
For the nine months ended 2016 2015
December 31
---------------------------- -------- ---------
Argentine Peso 88,700 $ 57,150
US dollar 417,600 294,090
Euro 117,700 108,760
Swiss Franc 75,000 116,350
British Pound 53,800 55,720
Azerbaijani New Manat (53,100) -
699,700 $ 632,070
---------------------------- -------- ---------
i) 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.
As at December 31, 2016, a 5% change in the price of natural gas
produced in Italy would represent a change in net profit (loss) for
the nine months ended December 31, 2016 of approximately $2,700
(2015 loss - ($23,800)) and a 5% change in the price of electricity
produced in Italy would represent a change of net profit for the
nine months ended December 31, 2016 of approximately $24,000 (2015
- not applicable).
Oil prices in Argentina are set by the international market,
with certain variation for logistical problems and delivery date.
As at December 31, 2016, a 5% change in the price of oil would
represent a change in net income (loss) for the nine months ended
December 31, 2016 of approximately $4,000 (2015 - loss
($64,300)).
As at December 31, 2016, a 5% change in the price of crude oil
produced in Azerbaijan would represent a change in net profit
(loss) for the nine months ended December 31, 2016 of approximately
$118,600 (2015 - not applicable).
ii) Interest rate risk
Interest rate risk is the risk that future cash flows will
fluctuate as a result of changes in market interest rates. The
Company has fixed interest convertible notes (Note 7) and bonds
payable (Note 8) and therefore is not exposed to interest rate
risk.
20. Inventory
As at December 31, 2016, there were 2,462 bbls of unsold oil
production in Argentina held in inventory, and there were 189 bbls
of unsold oil production in Azerbaijan held in inventory which were
sold in subsequent months, valued at the lower of cost or net
realizable value based on the selling prices.
The Company also have materials for maintence in inventory in
Azerbaijan, for an amount of CAD$132,231, valued at the purchase
cost.
As at March 31, 2016, inventory was comprised of 2,267 barrels
of oil valued at the lower of cost or net realizable value based on
a selling price of USD 59 (2015 - USD 60) per barrel.
INVENTORY
December 31,
2016 March 31, 2016
Inventory Inventory
Barrels CAD$ Barrels CAD$
-------------- --------------------- -------------------------- ----------------------- --------------------------
Argentina 2,462 183,852 2,267 173,547
Azerbaijan
oil
in stock 189 5,595 - -
Azerbaijan
materials
in stock - 132,231
Balance 2,651 321,678 2,267 173,547
-------------- --------------------- -------------------------- ----------------------- --------------------------
21. Subsequent events
(a) On February 22, 2017 the terms of the repayment of the First
Credit Agreement were amended and the amount of USD $160,000 (plus
accrued interest)(CAD $215,650) will be paid on March 27, 2017
(b) On February 21, 2017 the terms of the repayment of the Third
Credit Agreement were amended and the amount of USD $55,000 (plus
accrued interest)(CAD $74,130) will be paid on March 27, 2017
(c) On February 22, 2017 the terms of the repayment of the
Fourth Credit Agreement were amended and the amount of USD $55,000
(plus accrued interest)(CAD $74,130) will be paid on March 27,
2017
(d) On January 5, 2017 - The Company announced that the
Prospectus dated January 5, 2017 has been approved by the UK
Listing Authority (the "Prospectus"). The Prospectus relates to
admission of the Company's Common Shares to the standard listing
segment of the Official List and to trading on the London Stock
Exchange's Main Market ("Admission"). Admission and commencement of
dealings in the Company's Common Shares did occur on 11 January
2017.
In connection with Admission, the Company successfully placed
33,322,143 Common Shares (the "UK Placing"). Following its
book-building process, in which Common Shares were placed at
GBP0.07 (CAD$0.11) per Common Share, on completion of the UK
Placing the gross proceeds available to the Company were
approximately GBP2,332,550 (CAD$3,823,848) and the net proceeds
were approximately GBP2,015,922 (CAD$3,304,786). The Company paid
finder's fees of GBP 113,500 and issued 1,114,286 broker warrants
exercisable for 24 months from closing at a price of GBP 0.07 per
common share to certain arm's-length parties under the private
placement undertaken as part of the dual listing on the London
Stock Exchange on 11 January 2017.
(e) On January 11, 2017 - The Company announced that its entire
Common Share capital, consisting of 98,564,867 Common Shares, were
admitted to the standard listing segment of the Official List of
the FCA and to trading on the London Stock Exchange's Main Market
under the ticker symbol "ZEN".
Admission became effective and dealings commenced at 8.00 a.m.
on January 11, 2017.
The net proceeds of the UK Placing will be used by the Company
to provide additional funding for debt repayment, to provide
additional funding for the Company's development and appraisal
activities in Azerbaijan, Italy and Argentina and to provide
additional working capital.
(f) On January 24, 2017, the Company announced the signing of a
well workover contract and engagement of highly experienced local
drilling company to initiate and execute the workover of first two
wells in the programme (M-195 and M-45).
(g) In January 2017, the Company paid USD$ 700,000 (CAD$943,467)
of the USD loan, utilising part of the proceeds from the
fundraising aligned with the listing on the London Stock Exchange
of January 11, 2017.
(h) In January 2017, the Company issued 668,571 shares, at a
deemed price of GBP0.07 per share, for the settlement of a debt for
services of a senior manager of the Companty, for an amount of
GBP46,800.
(i) In January 2017, the Company incurred expenses for a total
amount of GBP306,628 (CAD$505,476) related to admission to the
London Stock Exchange listing, as follow:
Role Cost (GBP) Cost (CAD$)
---------------------------------- -------------- ------------
UK Legal Counsel to the Company GBP 100,000 $ 164,850
TSX - V share issue costs GBP 18,000 $ 29,673
Auditors & Reporting Accountants GBP 70,000 $ 115,395
Registrar GBP 1,300 $ 2,143
Legal opinion Crest GBP 5,000 $ 8,243
Prospectus Printers GBP 8,000 $ 13,188
placings payable GBP 96,128 $ 158,467
LSE Admission Fees GBP 8,200 $ 13,518
Total GBP 306,628 $ 505,476
---------------------------------- -------------- ------------
(j) In January 2017, the Company entered into an agreement to
proceed with a brokered private placement (the "Private Placement")
to raise gross proceeds of GBP 855,000 (approximately CAD$
1,408,000) through the issue of nine million (9,000,000) new common
shares of the Company ("New Common Shares") at a price of GBP 0.095
(approximately CAD$ 0.1565) per share.
In addition to the New Common Shares, under the Private
Placement each subscriber received one warrant (the "Warrant") for
every New Common Share purchased. Each Warrant shall entitle the
Warrant holder to subscribe for new Common Shares in the Company at
a price of GBP 0.15 per common share (approximately CAD$ 0.247),
exercisable at any time until 1 February 2019. The proceeds of the
Private Placement will be used to accelerate the Company's field
rehabilitation activities in Azerbaijan and increase the number of
well workovers scheduled for completion by 31 March 2018.
(k) On January 25, 2017, the Company issued 3,700,000 shares on
the conversion of 311,067 Swiss Francs (CAD$407,000) principal
amount of convertible notes.
Outstanding CHF CAD$
debt
As of January
25, 2017
------------------ ------------------------- -------------
Principal CHF 314,953 $ 412,084
Accrued Interest CHF 249,758 $ 327,730
------------------ ------------------------- -------------
Total to be
paid CHF 564,711 $ 739,814
------------------ ------------------------- -------------
Conversion CHF CAD$
of notes Shares
------------------ ------------------------- ------------- ------------
Outstanding
principal
As of January
25, 2017 CHF 314,953 $ 412,084
Issued January
2017 3,700,000 -CHF 311,067 $ -407,000
Remaining CHF 3,886 $ 5,084
------------------ ------------------------- ------------- ------------
Changes calculated using the following
current change rate conversion (January
25, 2017)
Change Rate
CAD$/CHF 1.3084
CHF/CAD$ 0.7643
The outstanding amount of convertible note, at the date of this
document, is CHF3,886 Swiss Francs ($5,084) of principal, and
CHF249,758 (CAD$327,730) of accrued interest.
(l) On February 20, 2017 the Company announced the sale of its
operations in Argentina to a group of local energy investors.
Due to a series of circumstances beyond the Company's control,
caused by the collapse of a major storage tank owned by the
Argentina's national oil company production, Zenith's Argentine
operations was still suspended and its oil production could no
longer be transported through YPF pipelines.
To date, the issues affecting the transportation of oil have not
been fully resolved and a persisting uncertainty on the
recommencement of operations has led Zenith to reconsider its
operational involvement in Argentina.
The sale of the Company's Argentina subsidiary has been fixed at
a nominal sum in recognition of the costs the new owner is expected
to incur to return these fields to production. In addition, Zenith
will no longer be liable for any environmental responsibilities or
future well abandonment obligations for the Don Alberto and Don
Ernesto fields.
Termination of activities in Argentina will enable Zenith's
management to more effectively direct its focus on its Italian
operations and especially towards Azerbaijan, where the Company's
most important assets are located, and where a systematic programme
of field rehabilitation has begun. This re-alignment reflects the
Board's aversion to operational overstretch and the Company's
preference for a strong, concentrated focus towards the achievement
of its production objectives in Azerbaijan.
(m) The Stock Options Plan (note 12) has been approved by
shareholders of the Company at the Annual General Meeting held on
January 20, 2017
(n) On February 22, 2017 the Company announced that a Director
of the Company has exercised his stock options to purchase
1,000,000 common shares in the capital of the Company at a price of
CAD$0.10 per Common Share and a total cost of CAD$100,000.
22. Operating segments
The Company's operations are conducted in one business sector,
the oil and natural gas industry. Geographical areas are used to
identify Company's reportable segments. A geographic segment is
considered a reportable segment once its activities are regularly
reviewed by the Company's management. The Company has four
reportable segments which are as follows:
-- Argentina (until February 19, 2017);
-- Azerbaijan;
-- Italy; and,
-- Other, includes corporate assets and the operations in the
Canadian and US entities. None of these individual segments meet
the quantitative thresholds for determining reportable segments in
2016 or 2015.
December 31, 2016 March 31, 2016
---------------- -------------------------------------------------------------------------- -------------------------------------------------------------------------
Other Other
Argentina Azerbaijan Italy Total Argentina Azerbaijan Italy Total
---------------- ---------- ------------- ---------- -------------------- ------------- ---------- ----------- -------------- -------------------- ----------
Property and
equipment $ 3,060,005 1,052,488,882 10,849,356 - 1,066,398,243 3,177,155 - 11,420,934 - 14,598,089
Other assets
$ 408,794 1,190,239 905,063 249,330 2,753,426 504,125 - 958,825 236,102 1,699,052
Total
liabilities
$ 4,350,857 443,662,115 7,419,521 7,545,651 462,978,144 5,377,969 - 7,134,198 6,063,924 18,576,091
Capital
expenditures
$ - 19,537 84,313 - 103,850 (236,515) - (178,406) - (414,921)
---------------- ---------- ------------- ---------- -------------------- ------------- ---------- ----------- -------------- -------------------- ----------
Three months ended
December 31
------------------------------------ --------------------------------------- ---------------------------------
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
--------- --------- ------------- ---- --------- --------- ----------- --------- ----------- ---------
Argentina Azerbaijan Italy Other Total
-------------------- ------------------- -------------------- ---------------------- ----------------------
Revenue - 83,904 1,713,838 - 203,490 187,358 - - 1,917,328 271,262
Royalties - 7,521 - - - - - - - 7,521
Operating and
transportation 278,335 441,855 650,645 - 216,557 20,798 - - 1,145,537 462,653
General and
administrative 122,570 90,960 518,648 - 199,003 159,046 1,058,848 391,106 1,899,069 641,112
Depletion and
depreciation 3,261 1,325 210,170 - 107,908 54,273 - - 321,339 55,598
Transaction
costs - - - - - 35,536 - - - 35,536
Finance and
other
(income)
expenses (2,822) (319,900) (7,599) - 11,667 51,340 105,829 226,872 107,075 (41,688)
Segment income
(loss) (401,344) (137,857) 341,974 - (331,645) (133,635) (1,164,677) (617,978) (1,555,692) (889,470)
---------------- --------- --------- ------------- ---- --------- --------- ----------- --------- ----------- ---------
Nine months ended December
31
------------------------------------ --------------------------------------- ---------------------------------------
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
--------- --------- ------------- ---- --------- --------- ----------- ----------- ------------- -----------
Argentina Azerbaijan Italy Other Total
-------------------- ------------------- -------------------- ------------------------ --------------------------
Revenue 78,527 1,283,940 2,372,160 - 533,352 519,232 - - 2,984,039 1,803,172
Royalties 7,521 115,408 - - - - - - 7,521 115,408
Operating and
transportation 546,837 1,111,690 1,021,712 - 363,018 217,782 - - 1,931,567 1,329,472
General and
administrative 301,714 501,223 790,649 - 416,572 360,136 2,185,551 1,120,516 3,694,486 1,981,875
Depletion and
depreciation 13,459 58,204 319,715 - 191,980 190,998 - - 525,154 249,202
Transaction
costs - - - - - 35,536 - - - 35,536
Finance and
other
(income)
expenses (7,260) (391,070) (618,153,818) - 36,157 87,746 236,851 501,185 (617,888,070) 197,861
Segment income
(loss) (783,744) (111,515) 618,393,902 - (474,376) (372,966) (2,422,402) (1,621,701) 614,713,380 (2,106,182)
---------------- --------- --------- ------------- ---- --------- --------- ----------- ----------- ------------- -----------
ZENITH ENERGY LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THREE AND NINE MONTHSED DECEMBER 31, 2016
This management's discussion and analysis (the "MD&A") dated
February 28, 2017 of Zenith Energy Ltd. ("Zenith" or the "Company",
is presented in Canadian dollars and should be read in conjunction
with the December 31, 2016 unaudited condensed interim consolidated
financial statements as well as the March 31, 2016 audited
consolidated financial statements of Zenith, together with the
accompanying notes.
The consolidated financial statements have been prepared by
management and approved by Zenith's Board of Directors on the
recommendation of the Audit Committee. These statements are based
on certain estimates and assumptions and involve risks and
uncertainties. Actual results may differ materially. The financial
data included in this MD&A is in accordance with International
Financial Reporting Standards ("IFRS") as issued by the
International Accounting Standards Board ("IASB") and
interpretations of the International Financial Reporting
Interpretations Committee ("IFRIC") that are effective as at April
1, 2015. The Company has presented its financial statements on a
going concern assumption, which assumes that the Company will be
able to continue to finance its operations for the foreseeable
future and will be able to realize its assets and
discharge its liabilities in the normal course of business.
Refer to the Business Risks and Uncertainties section of this
MD&A for additional information related to identified risks,
estimates and uncertainties.
The functional currency of the Company is the Canadian dollar
("CAD"); the functional currency Company's Argentine subsidiaries
is the Argentine Peso; the functional currency of the Company's
Italian subsidiary is the Euro; the functional currency of the
Company's Azerbaijan subsidiary is the Manat; and the functional
currency of the Company's United States subsidiaries
is the United States dollar. The Company's presentation currency
is the CAD. In this MD&A, unless otherwise noted, all
dollar
amounts are expressed in CAD. References to "US$" are to United
States dollars, references to "GBP" are to Great Britain
Pounds, references to "AZN" are to Azerbaijan Manat.
Additional information related to the Company's business and
activities can be found on SEDAR at www.sedar.com.
BOE Presentation - Production information is 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
("mcf") to one barrel of oil ("bbl"). This conversion ratio of 6:1
is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the wellhead. Such disclosure of boe
may be misleading, particularly if used in isolation. Readers
should be aware that historical results are not necessarily
indicative of future performance.
Special Note Regarding Non-IFRS Measures - This MD&A may
include references to certain financial measures, as described
below, which do not have standardized meanings prescribed by IFRS,
however, as these measures are commonly used in the oil and gas
industry, the Company believes that their inclusion is useful to
investors and they are measures that the Company uses to evaluate
its performance. Investors are cautioned that these non-IFRS
measures should not be construed as an alternative to the measures
calculated in accordance with IFRS, given their non-standardized
meanings; they may not be comparable to similar measures presented
by other issuers. The term "field netback" is defined as petroleum
and natural gas sales less royalties and less operating and
transportation costs. The term "funds from (used in) operations",
defined as the cash flow from operating activities, before the
change in non-cash working capital and abandonment expenditures,
should
not be considered an alternative to, or more meaningful than,
cash flow from operating activities or net income (loss)
as determined in accordance with IFRS as an indicator of
performance. The Company's determination of funds from operations
may not be comparable to that reported by other companies.
Cautionary Statement regarding Forward-Looking Information
Certain information in this MD&A is forward-looking and
related to anticipated financial performance, events and
strategies. When used in this context, words such as "will",
"anticipate", "believe", "plan", "intend", "target" and "expect" or
similar words suggest future outcomes. By their nature, such
statements are subject to significant risks, assumptions and
uncertainties, which could cause the Company's actual results and
experience to be materially different than the anticipated results.
In particular, forward-looking information and statements include,
but are not limited to: (i) expectations related to crude oil and
petroleum products prices and demand; (ii) the state of capital
markets; (iii) expectations related to operating costs in
Azerbaijan and Italy; (iv) variations in the US dollar, Euro,
Manat, and Canadian dollar exchange rates; (v) expectations related
to regulatory approvals; (vi) management's analysis of applicable
tax legislation; (vii) expectations that the currently applicable
and proposed tax laws will not change and will be implemented;
(viii) expectation that management will continue to focus its
efforts towards acquiring large exploration permits, which offer
high exploration potential and the opportunity to act as operator
at least for the initial exploration period; (ix) expectation that
management will consider acquiring additional producing assets; (x)
the capital expenditures required in order to re-commence
production on both the Torrente Vulgano and Canaldente properties;
(xi) the ability of the Company to re-commence production on both
the Torrente Vulgano and Canaldente properties by late 2017; (xii)
the price of natural gas and of the electricity in Italy; (xiii)
the ability of the Company to comply with certain regulatory
requirements in Italy; (xiv) the Company's ability to increase its
oil and gas production in the year 2017; (xv) expectations related
to the properties producing oil in Azerbaijan named Muradkanly,
Yafarli and Zardob, owned by Zenith Aran Oil Company and (xvi)
business strategy and outlook.
These statements are based on certain assumptions and analysis
made by the Company in light of its experience and perception of
historical trends, current conditions and expected future
developments and other factors it believes are appropriate. The
material factors and assumptions used to develop these
forward-looking statements include, but are not limited to: (i)
increased competition; (ii) assumption that operating costs in
Azerbaijan and Italy may be reduced in future months and that the
oil price in the international markets will continue to improve;
(iii) additional financing of the Company is subject to the global
financial markets and economic conditions; (iv) the Company will
evaluate certain properties located
within Azerbaijan and will focus on managing the properties
acquired in 2016 with the intention to increase production and cash
flows; (v) assumptions related to international oil and natural gas
prices; (vi) ability to obtain regulatory approvals; (vii) costs of
exploration and development; (viii) availability and cost of labour
and management resources; (ix) performance of contractors and
suppliers; (x) availability and cost of financing; and (xi) the
Company's business strategy and outlook.
Whether actual results, performance or achievements will conform
to the Company's expectations and predictions is subject to a
number of known and unknown risks and uncertainties which could
cause actual results to differ materially from the Company's
expectations. Such risks and uncertainties include, but are not
limited to risks and uncertainties relating to: (i) volatility of
and assumptions regarding commodity prices; (ii) product supply and
demand; (iii) market competition; (iv) risks inherent in the
Company's operations; (v) potential disruption or unexpected
technical difficulties in developing or maintaining facilities;
(vi) risks associated with technology; (vii) Company's ability to
generate sufficient cash flow from operations to meet its current
and future obligations; (viii) the Company's ability to secure
external sources of debt and equity as needed; (ix) changes in
royalty, tax, environmental, greenhouse gas, carbon, accounting and
other laws or regulations or the interpretation of such laws or
regulations; (x) political and economic conditions in the countries
in which the Company operates; (xi) terrorist threats; (xii) risks
associated with potential future lawsuits and regulatory actions
made against the Company; (xiii) the performance of counterparties
in meeting their obligations under agreements; (xiv) economic
conditions; (xv) equipment and labour shortages and inflationary
costs; (xvi) fluctuations in foreign exchange rates; (xvii) the
effect of weather conditions on operations and facilities; and
(xviii) stock market volatility.
Readers are cautioned not to place undue reliance on
forward-looking statements as actual results could differ
materially from the plans, expectations, estimates or intentions
expressed in the forward-looking statements. Forward-looking
statements are provided for the purpose of presenting information
about management's current expectations and plans relating to the
future and readers are cautioned that such statements may not be
appropriate for other purposes.
Except as required by law, the Company disclaims any intention
and assumes no obligation to update any forward-looking
statement.
Critical Accounting Estimates and Judgements
The Group makes estimates and assumptions concerning the future.
The resulting estimates will, by definition, seldom equal the
related achieved amounts. The estimates and assumptions that have
significant risk of causing material adjustments and assumptions to
the carrying amounts of assets and liabilities are disclosed
below.
Valuation of the assets and liabilities associated with the
Azerbaijan acquisition this assessment involves:
-- Future revenues and estimated development and exploration costs;
-- The discount rate to be applied for the purposes of deriving a recoverable value;
-- The expected tax rate; and
-- The expected oil price.
During the nine months ended December 31, 2016 the Company
recognised a value of assets and associated liabilities for its
Azerbaijan Assets acquired, including the payments due in respect
of the acquisition relating to royalties, work and exploration
programmes and taxation. The valuations of the assets and of the
liabilities have been based on the Net Present Value ("NPV") of
future cash flows included in the Competent Persons Report prepared
on behalf of the Company by Chapman Petroleum Engineering Ltd.
("Chapman") and published on 15 June 2016 ("Original CPR"). The NPV
of future cashflows was discounted at a rate of 10%. The Board
considers 10% an appropriate rate of discount for the following
reasons:
-- The Asset has a verified producing history as well as current production;
-- The asset is production & development with 2P reserves
(made by way of a National Instrument 51-101) based over an acreage
of 642 square kilometres comprised of different structures;
-- The Asset is low cost and onshore presenting a low operational risk;
-- Azerbaijan has one of the world's oldest established Oil & Gas industries;
-- Azerbaijan has a stable political environment with a
government that has guaranteed and supported the licence rights of
companies operating in the Oil & Gas industry since its
independence in 1992
-- Crude oil is exported via two different pipelines, one
delivering oil to the Mediterranean Sea and the other to the Black
Sea, thereby derisking routes to market from both a political and
logistical perspective.
Any changes to the estimates may result in a material impact to
the carrying value of both the assets and liabilities, arising in
respect of the acquisition.
Nature of Operations, Acquisition and Exploration Activities
The Company was incorporated under the Business Corporations Act
(British Columbia) ("BCBCA") on September 20, 2007. The registered
business address is 15th Floor, Bankers Court, 850 - 2nd Street
S.W., Calgary, Alberta T2P 0R8, Canada. Zenith's website is
www.zenithenergy.ca. The Company is involved in the development and
production of petroleum and natural gas fields in Azerbaijan and
Italy.
On March 10, 2010, Zenith formed Ingenieria Petrolera del Rio de
la Plata S.r.l. ("IPRP"), a wholly owned subsidiary of Zenith. IPRP
was initially incorporated in Buenos Aires, Argentina, to negotiate
management agreements to operate existing producing properties.
However, as described in following paragraphs, after Petrolera
Patagonia S.r.l. was acquired, management saw no immediate needs
for IPRP and the company was kept in a dormant state and held in
trust by Zenith's trustees in Argentina until late 2011.
On July 20, 2010, Zenith incorporated a wholly owned US
subsidiary, Ingenieria Petrolera Patagonia Ltd. ("IPP"), to act as
the potential acquirer of two US based companies controlling
Central Patagonia S.r.l., the owner of two producing oil fields in
the Chubut Province in Argentina.
On July 22, 2010, Zenith acquired two US based companies, namely
Central Patagonia Corporation (renamed Petrolera Patagonia
Corporation or "PPC") and CPC Holdings (renamed PP Holdings Inc. or
"PPH") owning respectively 95% and 5% of Central Patagonia
S.r.l. (renamed Petrolera Patagonia S.r.l. or "PPS"), thereby
acquiring two adjacent oil producing properties in Argentina.
On March 23, 2011, Zenith established Canoel Italia S.r.l.
("Italia Srl"), a wholly owned subsidiary of the Company, so that
it would have an operating entity if the Company was awarded the
oil and gas properties being posted for auction by the Ministry of
Economic Development.
On August 27, 2011, Italia Srl was awarded two gas properties,
which were previously on production but currently shut-in, at the
auction. Zenith's bid was accepted on the basis of its technical
presentation and proposed program to place the properties back on
stream. The properties are Torrente Vulgano, located in the Puglia
region, and Canaldente, located in the Basilicata region. Both
regions are located in southern Italy, which is where the majority
of hydrocarbons are produced.
In October 2011, Zenith recognized the opportunity to implement
its own completion operations and consequently decided to use the
dormant company IPRP for these operations. Management commenced the
process to transfer the shares of IPRP from Zenith's trustees to
PPC (95%) and to PPS (5%). This process was completed in May
2012.
In mid-2012, in line with the Company's strategy to increase its
involvement in Italy through its Italian subsidiary, Zenith
commenced negotiations to purchase producing and exploratory
permits from a well-established gas producing company,
Mediterranean Oil & Gas Plc, a British company with activities
in Italy, France and Malta whose shares trade on the London AIM
Stock Exchange.
On June 6, 2013, the Company completed the acquisition of
various working interests in 13 Italian producing and exploration
properties (the "Assets") from Medoilgas Italia S.P.A. and
Medoilgas Civita Limited, each a subsidiary of Mediterranean Oil
and Gas Plc (collectively, "MOG") after receiving the final
approval from the Italian Ministry of Economic Development to the
change of ownership. The Assets are comprised of (i) 6 operated
onshore gas production concessions: Masseria Grottavecchia (20%
working interest), San Teodoro (100% working interest), Torrente
Cigno (45% working interest), Misano Adriatico (100% working
interest), Sant'Andrea (40% working interest) and Masseria Petrilli
(50% working interest); (ii) 3 non-operated onshore gas production
concessions: Masseria Acquasalsa (8.8% working interest), Lucera
(13.6% working interest) and San Mauro (18% working interest)
(collectively, the "Gas Licenses"); (iii) an operated exploration
permit: Montalbano (57.15% working interest) (the "Exploration
Permit"); and (iv) 3 exploration permit applications: Serra dei
Gatti (100% working interest), Villa Carbone (50% working interest)
and Colle dei Nidi (25% working interest) (the "Exploration
Applications").
Most of the Gas Licenses are located onshore in southern Italy,
in the Regions of Puglia, Basilicata, Molise, Abruzzo and Marche.
The Exploration Permit and Exploration Applications are located in
southern Italy and cover an area of 1,285 square kilometres.
On October 1, 2015, the Company acquired co-generation equipment
and facilities from the owner of the plant that treats gas from the
Masseria Vincelli 1 well in the Torrente Cigno concession in Italy.
The acquisition enables the company to produce electricity from the
gas produced by the Masseria Vincelli 1 well and sell it directly
into the national energy grid.
In September 2015, the Company opened an office in Baku, the
capital of Azerbaijan. In October 2015, the Republic of Azerbaijan
issued a Presidential Decree which authorized the State Oil Company
of the Republic of Azerbaijan ("SOCAR") to negotiate a
Rehabilitation, Exploration, Development and Production Sharing
Agreement ("REDPSA") with Zenith pursuant to which Zenith would
receive the rights and obligations to an 80% participating interest
in current and future production from three producing onshore oil
fields named Muradkhanli, Jafarli and Zardab, known as the
Muradkhanli Block (the "Block"), covering an area of 642.4 square
kilometres.
On June 24, 2016 the President of the Republic of Azerbaijan
signed the REDPSA into law, after the approval by Parliament on the
14th of June 2016.
On August 11, 2016 the handover of the Azerbaijan assets,
physicallycompleted in June 2016, was formally completed with the
necessary signatures on related documents and the Company commenced
crude oil production of approximately 275 barrels of oil per day in
Azerbaijan under Zenith's ownership.
See Operational Update - Azerbaijan for further details.
On February 20, 2017 the Company announced the sale of its
operations in Argentina to a group of local energy investors.
Due to a series of circumstances beyond the Company's control,
caused by the collapse of a major storage tank owned by the
Argentina's national oil company production, Zenith's Argentine
operations was still suspended and its oil production could no
longer be transported through YPF pipelines.
To date, the issues affecting the transportation of oil have not
been fully resolved and a persisting uncertainty on the
recommencement of operations has led Zenith to reconsider its
operational involvement in Argentina.
The sale of the Company's Argentina subsidiary has been fixed at
a nominal sum in recognition of the costs the new owner is expected
to incur to return these fields to production. In addition, Zenith
will no longer be liable for any environmental responsibilities or
future well abandonment obligations for the Don Alberto and Don
Ernesto fields.
Termination of activities in Argentina will enable Zenith's
management to more effectively direct its focus on its Italian
operations and especially towards Azerbaijan, where the Company's
most important assets are located, and where a systematic programme
of field rehabilitation has begun. This re-alignment reflects the
Board's aversion to operational overstretch and the Company's
preference for a strong, concentrated focus towards the achievement
of its production objectives in Azerbaijan.
The Company conducted the following development and exploration
activities in Argentina, Azerbaijan and Italy as noted below:
Nine months ended
December 31
Capital additions 2016 2015
---------------------------------------------------------- ---------------------------- ----------------------------
Argentina $ - $ 256,070
Azerbaijan 19,537 -
Italy 84,313 261,923
---------------------------------------------------------- ----------------------------
$ 103,850 $ 517,993
Highlights for the nine months ended December 31, 2016 include
the following:
Operational:
-- During the nine months ended December 31, 2016, the Company
sold 20,337 mcf of natural gas and 599 bbls of condensate from its
Italian properties as compared to 89,131 mcf of natural gas and 671
bbls of condensate in the 2015 comparative period, a decrease of
77% and 11% respectively. The predominant reason for the decrease
is a change in classification from gas to electricity from the
Torrente Cigno concession. Prior to October 1, 2015, the Company
sold its 45% share of this gas to the previous electricity producer
and included such sales in oil and gas revenues. Following the
Company's acquisition of co-generation equipment and facilities on
October 1, 2015, the
Company became a new electricity producer and now classifies its
45% share of Torrente Cigno gas production as
gas sales volumes for electricity.
-- During the three and nine months ended December 31, 2016, the
Company sold 2,774 and 8,112 MWh of electricity from its Italian
properties as compared to 1,757 MWh of electricity in the three
months ended December 31, 2015 with an increase of 57%. The
electricity production in Italy started on October 1, 2015 so the
data relating the 9 months are comparable.
-- On August 11, 2016 the handover of the Azerbaijan assets,
physically completed in June 2016, was formally completed with the
necessary signatures on related documents and the Company commenced
crude oil production of approximately 275 barrels of oil per day in
Azerbaijan under Zenith's ownership. During the period from August
11 to ended December 31, 2016, the Company sold 37,583 bbls of oil
from its Azerbaijan properties. There is no comparable data for the
prior year.
The acquistition of the assets in Azerbaijan was reflected in an
immediate accretion of the gross revenues of CAD$2,372,160 for the
period from August 11 to December 31, 2016.
Financial:
-- The Company generated oil and natural gas revenue, net of
royalties, of $2,504,044 and $479,995 of electricity revenue in the
nine months ended December 31, 2016 versus $1,424,023 and $100,767,
respectively, in the comparative period. The electricity production
started on October 1, 2015, so the nine months data of the year
2015 is only related to the last three months of production.
-- The Company incurred $103,850 of capital expenditures in the
nine months ended December 31, 2016.
-- In July 2016, the Company sold 116,913 shares of GRIT for gross cash proceeds of CAD $10,818.
-- On June 14, 2016, the Company received notice that the
Parliament of the Republic of Azerbaijan ratified the
Rehabilitation, Exploration, Development and Production Sharing
Agreement ("REDPSA") for certain blocks of Azerbaijan oil fields in
which the Company holds an 80% participating interest in current
and future production.
-- In June 2016, the Company started the operation to establish
Aran Oil Operating Company Ltd., an 80% owned subsidiary of Zenith
Aran, to serve as operator of the REDPSA.
-- On August 11, 2016 the handover of the Azerbaijan technical
assets of the three fields, Muradkhanli, Jafarli and Zardab,
physicallycompleted in June 2016, was formally completed. The
delivery of the capital assets previously used in respect of the
petroleum operations at the Azerbaijani Operations, from the
previous operating company to Aran Oil, officially completed on
that date. Aran Oil now has operational control of the Azerbaijani
Operations. The transfer of operational control did not involve any
interruption of petroleum production operations at the Azerbaijani
Operations.
As a part of the Handover, an inventory of equipment and
material was prepared and the volumes of oil in the pipelines and
tanks were recorded. Any revenues related to the existing oil as at
the date of Handover were allocated to SOCAR. At the time of the
formal finalitasion of the transaction the production in Azerbaijan
was about 275 barrels per day of oil, the assets have generated
revenues for the Company since the completion of the transfer to
Aran Oil.
The Handover involved the transfer of certain individuals
employed by the current operator of the Azerbaijani Operations to
Aran Oil. In accordance with the laws of Azerbaijan, the transfer
process involved the relevant employees being dismissed by their
previous employer (the outgoing operator of the Azerbaijani
Operations) and entering into new employment contracts with Aran
Oil. Any payments to the relevant employees arising as a result of
their dismissal by the previous operating company were for the
account of the previous operating company. In accordance with the
laws of Azerbaijan, the relevant employees have been employed by
Aran Oil with effect from the Effective Date of the transaction.
The form of employment agreement follows the template prescribed by
the Azerbaijani labour code.
The capital assets which transferred to Aran Oil as part of the
Handover include production equipment, vehicles, wells, pumps,
storage facilities, tools, generators, compressors, pipelines,
offices, warehouses, buildings, rigs, yards, roads, infrastructure,
radios, tubular goods, supplies, materials and facilities. The
Company appointed a consultant in Azerbaijan to review and report
on the availability and the state of the assets prior to
Handover.
The term of the Contract Exploration Area portion of the REDPSA
is 25 years from the date of SOCAR's approval of the contractor's
development program. The term of each Area may be extended by an
additional five years at SOCAR's discretion.
The valuations of the Asset and of the liabilities have been
based on the Net Present Value ("NPV") of future cash flows
included in the Competent Persons Report prepared on behalf of the
Company by Chapman Petroleum Engineering Ltd. ("Chapman") and
published on 15 June 2016 ("Original CPR"), and in particular the
financial and economic data from page 93 to page 128.
The amount, stated as a liability, reflects this part of
production that has to be delivered to Socar, valued at the
estimated production price of US$20 per barrel.
The acquisition of Assets has been brought to account as a
business combination using the acquisition method of accounting and
resulted in a bargain purchase arising as follows:
Fair value of net assets acquired CAD$
D&P assets 1,052,765,084
Compensatory Oil* (1,997,357)
Capital Costs* (285,548,895)
Foreign Currency Translation 7,913,703
Decommissioning Obligations* (1,943,339)
Gain on business combination 771,189,197
Taxation (153,043,767)
Net NPV of the assets 618,145,430
Amounts required to be paid under the terms of the REDPSA
("Rehabilitation, Exploration, Development and Production Sharing
Agreement") and therefore in accordance with FRS3 ("Business
Combinations") form part of the acquisition amount.
D&P assets
The estimated value of the D&P assets acquired was
determined using both estimates and an independent reserve
evaluation based on oil and gas reserves discounted at 10%.
Decommissioning provisions
The fair value of decommissioning obligation assumed was
determined using the timing and estimated costs associated with the
abandonment, restoration, and reclamation of the wells and
facilities acquired, discounted at a credit adjusted rate.
On June 15, 2016, the day immediately following the acquisition
date, the decommissioning obligation assumed was remeasured using a
long term risk free rate based on the expected timing of cash
flows, in accordance with IAS 37 ("Provisions, Contingent
Liabilities and Contingent Assets"). The result was a CAD
$1,943,339 increase in the decommissioning obligation associated
with the acquired assets and the net result of the acquisition and
recognition of decommissioning liability recognition being a gain
of CAD $711,189,197 measurement adjustment in the first quarter of
year 2017 consolidated statement of income and comprehensive income
using prevailing exchange rates.
Compensatory oil
The Company have an obligation, as per the REDPSA, to:
1. within one year following the Effective Date, deliver at no
charge to SOCAR 5% of the total production of petroleum produced
from the contract rehabilitation area in each calendar quarter;
and
2. commencing on the first anniversary of the Effective Date,
start delivering, at no charge to SOCAR, 15% of the total
production of petroleum produced from the contract rehabilitation
area in each calendar quarter, until the amount delivered is the
equivalent of 45,000 tons of "compensatory" crude oil to SOCAR.
The amount, stated as a liability, reflects this part of
production that has to be delivered to SOCAR, valued at the
estimated production price of US$20 per barrel.
Capital Costs
Between 2017 and 2019, the Company plans to workover a total of
44 existing wells in Azerbaijan which are currently inactive or
produce at low rates ( 5 STB/d) to bring rates up to 10 to 15 STB/d
per well using improved technology, non damaging fluids and
optimised treatments. It is estimated that 10 wells will be worked
over in 2017, 16 wells in 2018 and 18 wells in 2019. This programme
has commenced using the existing workover rig in the field and the
Company intends to purchase an additional modern workover rig to
optimise the workover of the wells, within the next four years.
In addition to the marginal producing wells, five non-producing
wells in the Maykop zone in the Zardab field in Azerbaijan are
expected to be worked over in 2017 and to be returned to production
once the existing wellbore and sand production issues have been
resolved.
The Company intends to acquire one modern drilling rig capable
of drilling 4,500m to carry out a fifteen year drilling programme.
It is anticipated that five new wells will be drilled in 2018 and
ten wells in each year thereafter until the anticipated drilling
programme is complete in 2032.
During the first four years of the REDPSA it is estimated that
US$2,500,000 will be spent upgrading the gathering system and
central facilities in Azerbaijan to improve safety, efficiency and
handle higher production rates. During the same period, 39 active
wells currently producing at marginal rates will be worked over at
an estimated cost averaging $50,000 per well, using the existing
workover rig.
It is anticipated that in 2017 five shut-in wells completed in
the Maykop formation will be worked over to control sand
production, at an estimated cost of US$100,000 per well, and
returning to an increase of production at a total of 200STBl/d.
It is envisaged that development drilling will commence in 2018
and continue until 2032. It has been estimated that each well with
proved reserves will cost approximately US$4,000,000. This cost
will include the direct cost of materials, fuel, salaries, etc. to
drill the well and an allocation for the purchase of one drilling
rig, well completion and tie-in.
Proved reserves are those reserves that can be estimated, by a
competent professional, with a high degree of certainty to be
recoverable. The estimate of the reserves are related to a given
date, based on analysis of drilling, geological, geophysical and
engineering data; the use of established technology, and; specified
economic conditions, which are generally accepted and being
reasonable, and shall be disclosed.
Each well in the proved plus probable category is expected to
cost approximately US$5,000,000. This category of reserves includes
those additional reserves that are less certain to be recovered
than proved reserves.
In addition to the costs anticipated for the wells with proved
reserve, wells in the proved plus probable category have an
additional allocation for the purchase and maintenance of a second
drilling rig and expansion and modernisation of the field
facilities.
In all, 145 wells are expected to be drilled over 16 years, of
which 58 of these are anticipated to be horizontal wells.
-- On July 16, 2016, the Company's wholly owned subsidiary in
Argentina, Petrolera Patagonia S.r.l. ("PPSRL"), entered into a
loan agreement with Arpenta Sociedad de Bolsa S.A. ("Arpenta"),
pursuant to which PPSRL borrowed USD $154,000 (CAD$191,183) of
Bonar 2017 Argentine sovereign bonds (the "Bonds") (the "Arpenta
Bond Loan"). PPSRL subsequently sold the Bonds in the market (for
Argentine pesos) to address cashflow requirements. Interest is
payable on the Arpenta Bond Loan at a rate of 4% per annum. The
Arpenta Bond Loan has a bullet repayment date of 15 December 2016,
although management at PPSRL has taken steps for the Arpenta Bond
Loan to be rolled-over (in whole) for an additional 180 day period.
Repayment of the Arpenta Bond Loan is required to be made to
Arpenta in the same Bonar 2017 Argentine sovereign bonds as were
borrowed.
-- On August 9, 2016, the Company's wholly-owned subsidiary,
Zenith Aran, entered into a general line of credit agreement with
Rabitabank Open Joint Stock Company ("Rabitabank") (the "First
Credit Agreement") up to an amount of USD $320,000, for industrial
and production purposes. The loan could be drawn down in tranches
and as at 31 December 2016 it was fully drawn down. Rabitabank can
postpone or suspend the facility if there is a decline in oil
production under the REDPSA of more than 30% from production levels
as at the date of first drawdown or if the REDPSA is terminated.
The First Credit Agreement bears interest at a rate of 12% per
annum. The loan is guaranteed by the Company. In November 2016 the
Company repaid the first tranche of the loan for the amount of
USD160,000, and as at December 31, 2016, the balance of the loan
outstanding was USD $160,000 (plus accrued interest) (CAD$215,650).
The loan is repayable on February 22, 2017.
-- On August 29, 2016, the Company amended the terms of
repayment of the USD loan such that a USD $700,000 payment is
payable on 15 October 2016 and a final payment of approximately USD
$1,485,337 is due on 31 March 2018.
-- On 10 October, 2016 the Company closed a non-brokered private
placement of 1,906,050 Common Shares at a price of CAD $0.10 per
unit for aggregate gross proceeds of CAD $190,605. Each unit is
comprised of one Common Share and one common share purchase
warrant. Each common share purchase warrant will be exercisable for
one Common Share at a price of CAD $0.20 per share for a period of
24 months from the date of closing of the offering.
-- On 19 October, 2016, the Company issued 724,235 Common Shares
at a deemed price of CAD $0.085 per Common Share to certain
debtholders and creditors of the Company to settle debts owing by
the Company, representing an aggregate of CAD $61,585.48.
-- On September 30, 2016, Zenith Aran entered into a second
general line of credit agreement with Rabitabank (the "Second
Credit Agreement") up to an amount of USD $200,000. The Second
Credit Agreement bears interest at a rate of 12% per annum. The
loan is repayable in two tranches; USD $100,000 (plus accrued
interest) (CAD$134,781) is payable on January 3, 2017 and the
remaining USD $100,000 (plus accrued interest) (CAD$134,781) is
payable on April 3, 2017. The loan is guaranteed by the Company. As
at December 31, 2016, the full balance of the loan was outstanding.
The first tranche of the Second Credit Agreement, for an amount of
USD $100,000 (plus accrued interest) (CAD$134,781) was paid.
-- On November 7, 2016, the Company completed a non-brokered
private placement of 2,745,062 units of the Company at a price of
$0.12 per Unit for aggregate gross proceeds of $329,407.44.
Insiders of the Company subscribed for an aggregate of 2,195,475
Units for aggregate subscription proceeds of $263,457. Each Unit is
comprised of one common share in the capital of Zenith and one
Common Share purchase warrant. Each Warrant will be exercisable for
one Common Share at a price of $0.20 per share for a period of 24
months from the date of closing of the offering.
-- On November 21, 2016, Zenith Aran entered into a third
general line of credit agreement with Rabitabank (the "Third Credit
Agreement") up to an amount of USD $55,000 (CAD$74,130). The Third
Credit Agreement bears interest at a rate of 12% per annum and is
repayable on February 21, 2017. The loan is guaranteed by the
Company. As at December 31, 2016, the full balance of the loan was
outstanding..
-- On November 22, 2016, Zenith Aran entered into a fouth
general line of credit agreement with Rabitabank (the "Fourth
Credit Agreement") up to an amount of USD $55,000 (CAD$74,130). The
Fourth Credit Agreement bears interest at a rate of 12% per annum
and is repayable on February 21, 2017. The loan is guaranteed by
the Company. As at December 31, 2016, the full balance of the loan
was outstanding .
-- In December 2016 the Company amended the repayment of the USD
700,000 of the USD loan to January 2017.
-- On November 22, 2016, Gunsynd Plc ("Gunsynd") a company
listed on the London Stock Exchange's AIM market for listed
securities, invested GBP100,000 by way of subscription for
convertible unsecured loan notes bearing interest of 3% per annum.
Interest on the New Convertible Notes is payable in arrears in
quarterly instalments. At the option of Gunsynd, the principal of
the New Convertible Notes may be converted into Common Shares of
the Company at any time prior to the expiry of 36 months from
issuance at a price equal to CAD $0.10 per Common Share (or the
initial listing price of the Common Shares if the Company is listed
on another senior stock exchange at the time of such conversion).
Subject to the New Convertible Notes not having been converted, the
New Convertible Notes mature 36 months from the date of issuance.
Unless permitted under Canadian securities legislation, the New
Convertible Notes cannot be traded before the date that is four
months and a day after the date of issuance. This operation is
subject to TSXV approval.
-- On November 23, 2016, the Company issued 150,000 Common
Shares to a certain debtholder of the Company to settle debts owing
by the Company (based on a price of CAD$ $0.08 per share Common
Share) in settlement of a debt of GBP GBP7,000 (inclusive of
accrued interest) owed by the Company in respect of services
provided by the debtholder.
-- On November 28, 2016, the Company formalized the previously
reached agreement for the amendments of the terms of its 5%
convertible unsecured debenture (convertible notes). The proposed
amendments to the Debenture will include an extension of two years
to the maturity date from January 11, 2017 to January 11, 2019, a
reduction to the conversion price from $0.125 per common share to
$0.11 per common shares and a reduction to the interest rate
payable by the Company from 5% to 1% for the remainder of the term.
The proposed extension to the Debenture, and the reduction in the
conversion price and interest rate remains subject to approval of
the TSX Venture Exchange.
-- In November 2016 the bond was partially repaid for
CAD$121,411 (with related accrued interest), and by December 31,
2016 all the outstanding accrued bond interests were paid for
CAD$70,641.
Corporate and Administrative:
-- The Company continues to improve its accounting and
administrative functions within the organization.
-- In November 2016 the Company hired Mr. Alan Hume as its new CFO.
-- On November 21, 2016 the Company granted Options to certain
of its Directors and employees to acquire a total of 6,000,000
Common Shares pursuant to its Stock Option Plan. Each Option
granted entitles the relevant holder to acquire one Common Share
for an exercise price of CAD $0.10 per Common Share. The expiry
date of the Options is the date falling five years from the date of
grant, being 21 November 2021.
Subsequent event highlights:
(m) On January 5, 2017 - The Company announced that the
Prospectus dated January 5, 2017 has been approved by the UK
Listing Authority (the "Prospectus"). The Prospectus relates to
admission of the Company's Common Shares to the standard listing
segment of the Official List and to trading on the London Stock
Exchange's Main Market ("Admission"). Admission and commencement of
dealings in the Company's Common Shares did occur on 11 January
2017.
In connection with Admission, the Company successfully placed
33,322,143 Common Shares (the "UK Placing"). Following its
book-building process, in which Common Shares were placed at
GBP0.07 (CAD$0.11) per Common Share, on completion of the UK
Placing the gross proceeds available to the Company were
approximately GBP2,332,550 (CAD$3,823,848) and the net proceeds
were approximately GBP2,015,922 (CAD$3,304,786). The Company paid
finder's fees of GBP 113,500 and issued 1,114,286 broker warrants
exercisable for 24 months from closing at a price of GBP 0.07 per
common share to certain arm's-length parties under the private
placement undertaken as part of the dual listing on the London
Stock Exchange on 11 January 2017.
(n) On January 11, 2017 - The Company announced that its entire
Common Share capital, consisting of 98,564,867 Common Shares, were
admitted to the standard listing segment of the Official List of
the FCA and to trading on the London Stock Exchange's Main Market
under the ticker symbol "ZEN".
Admission became effective and dealings commenced at 8.00 a.m.
on January 11, 2017.
The net proceeds of the UK Placing will be used by the Company
to provide additional funding for debt repayment, to provide
additional funding for the Company's development and appraisal
activities in Azerbaijan, Italy and Argentina and to provide
additional working capital.
(o) On January 24, 2017 the Company announced the signing of a
well workover contract and engagement of highly experienced local
drilling company to initiate and execute the workover of first two
wells in the programme (M-195 and M-45).
(p) In January 2017 the Company paid the USD 700,000
(CAD$943,467) of the USD loan, utilising part of the proceeds from
the fundraising aligned with the listing on the London Stock
Exchange of January 11, 2017.
(q) In January 2017 the Company issued 668,571 shares, at a
deemed price of GBP0.07 per share, for the settlement of a debt for
services of a senior manager of the Companty, for an amount of
GBP46,800.
(r) In January 2017 the Company incurred in expenses for a total
amount of GBP306,628 (CAD$505,476), related to the admission to the
London Stock Exchange listing, as follow:
Role Cost (GBP) Cost (CAD$)
---------------------------------- -------------- ------------
UK Legal Counsel to the Company GBP 100,000 $ 164,850
TSX - V share issue costs GBP 18,000 $ 29,673
Auditors & Reporting Accountants GBP 70,000 $ 115,395
Registrar GBP 1,300 $ 2,143
Legal opinion Crest GBP 5,000 $ 8,243
Prospectus Printers GBP 8,000 $ 13,188
placings payable GBP 96,128 $ 158,467
LSE Admission Fees GBP 8,200 $ 13,518
Total GBP 306,628 $ 505,476
---------------------------------- -------------- ------------
(s) In January 2017 the Company entered into an agreement to
proceed with a brokered private placement (the "Private Placement")
to raise gross proceeds of GBP 855,000 (approximately CAD$
1,408,000) through the issue of nine million (9,000,000) new common
shares of the Company ("New Common Shares") at a price of GBP 0.095
(approximately CAD$ 0.1565) per share.
In addition to the New Common Shares, under the Private
Placement each subscriber received one warrant (the "Warrant") for
every New Common Share purchased. Each Warrant shall entitle the
Warrant holder to subscribe for new Common Shares in the Company at
a price of GBP 0.15 per common share (approximately CAD$ 0.247),
exercisable at any time until 1 February 2019. The proceeds of the
Private Placement will be used to accelerate the Company's field
rehabilitation activities in Azerbaijan and increase the number of
well workovers scheduled for completion by 31 March 2018.
(t) On January 25, 2017 the Company issued 3,700,000 shares on
the conversion of 311,067 Swiss Francs (CAD$407,000) principal
amount of convertible notes.
Outstanding CHF CAD$
debt
As of January
25, 2017
------------------ ------------------------- -------------
Principal CHF 314,953 $ 412,084
Accrued Interest CHF 249,758 $ 327,730
------------------ ------------------------- -------------
Total to be
paid CHF 564,711 $ 739,814
------------------ ------------------------- -------------
Conversion CHF CAD$
of notes Shares
------------------ ------------------------- ------------- ------------
Outstanding
principal
As of January
25, 2017 CHF 314,953 $ 412,084
Issued January
2017 3,700,000 -CHF 311,067 $ -407,000
Remaining CHF 3,886 $ 5,084
------------------ ------------------------- ------------- ------------
Changes calculated using the following
current change rate conversion (January
25, 2017)
Change Rate
CAD$/CHF 1.3084
CHF/CAD$ 0.7643
The outstanding amount of the convertible note at the date of
this document is CHF3,886 Swiss Francs ($5,084) of principal, and
CHF249,758 (CAD$327,730), of accrued interest.
(u) On February 20, 2017 the Company announced the sale of its
operations in Argentina to a group of local energy investors.
Due to a series of circumstances beyond the Company's control,
caused by the collapse of a major storage tank owned by Yacimientos
Petrolíferos Fiscales ("YPF"), Argentina's national oil company,
Zenith's Argentine operations were still suspended and its oil
production could no longer be transported through YPF
pipelines.
The sale of the Company's Argentina subsidiary has been fixed at
a nominal sum in recognition of the costs the new owner is expected
to incur to return these fields to production. In addition, Zenith
will no longer be liable for any environmental responsibilities or
future well abandonment obligations for the Don Alberto and Don
Ernesto fields.
Termination of activities in Argentina will enable Zenith's
management to more effectively direct its focus on its Italian
operations and especially towards Azerbaijan, where the Company's
most important assets are located, and where a systematic programme
of field rehabilitation has begun. This re-alignment reflects the
Board's aversion to operational overstretch and the Company's
preference for a strong, concentrated focus towards the achievement
of its production objectives in Azerbaijan.
(v) The Stock Options Plan (note 12 of the Financial Statement)
has been approved by shareholders of the Company at the Annual
General Meeting held on January 20, 2017
(w) On February 22, 2017 the Company announced that a Director
of the Company has exercised his stock options to purchase
1,000,000 common shares in the capital of the Company at a price of
CAD$0.10 per Common Share and a total cost of CAD$100,000.
(x) On February 22, 2017 the terms of the repayment of the First
Credit Agreement were amended and the amount of USD $160,000 (plus
accrued interest)(CAD $215,650) will be paid on March 27, 2017
(y) On February 21, 2017 the terms of the repayment of the Third
Credit Agreement were amended and the amount of USD $55,000 (plus
accrued interest)(CAD $74,130) will be paid on March 27, 2017
(z) On February 22, 2017 the terms of the repayment of the
Fourth Credit Agreement were amended and the amount of USD $55,000
(plus accrued interest)(CAD $74,130) will be paid on March 27,
2017
OPERATIONAL UPDATE
ARGENTINA
The main assets of PPS on which the Company has focused its
development efforts, are two producing fields, Alberto and Don
Ernesto, (the "Producing Fields"). The two Producing Fields are
located in the Patagonia region of Southern Argentina, and
specifically in the San Jorge basin, Chubut Province, within the
area of Comodoro Rivadavia. The ownership of these two fields were
granted to PPS under old mining codes (the "Mining Codes") under
which the licenses do not have an expiry date. The wells on the
Producing Fields are connected to battery tanks through existing
infrastructure, which is now partially owned by PPS.
The Company's share of estimated total proved plus probable oil
net reserves were assessed at 545,000 bbls as of March 31,
2016.
Proved reserves are those reserves that can be estimated with a
high degree of certainty to be recoverable. Probable reserves are
those additional reserves that are less certain to be recovered
than proved reserves. It is equally likely that the actual
remaining quantities recovered will be greater or less than the sum
of the estimated proved + probable reserves.
Oil prices in Argentina were the result of complicated formulas
that are set by refineries based on instructions or decrees from
the government as crude oil and petroleum products prices are set
by the Government at variable levels in Argentina. The price for
the oil produced in the Chubut province, called Escalante, which
represents the largest quantity of oil produced in Argentina, has
gradually increased from US$42.00 per bbl in early 2010 to US$63.00
per bbl in December 2013 followed by an increase to US$67.00 per
bbl for the majority of 2014 and a decrease to an average of
US$60.00 per bbl in 2015. In December 2015 through March 2016,
Escalante crude was set at US$59 per bbl. From April 2016 oil
prices in Argentina are set by the international market, with
certain variation for logistical problems and delivery date.
On February 20, 2017 the Company announced the sale of its
operations in Argentina to a group of local energy investors. Due
to a series of circumstances beyond the Company's control, caused
by the collapse of a major storage tank owned by the Argentina's
national oil company production, Zenith's Argentine operations was
still suspended and its oil production could no longer be
transported through YPF pipelines.
The sale of the Company's Argentina subsidiary has been fixed at
a nominal sum in recognition of the costs the new owner is expected
to incur to return these fields to production. In addition, Zenith
will no longer be liable for any environmental responsibilities or
future well abandonment obligations for the Don Alberto and Don
Ernesto fields.
ITALY
In August 2009, the Italian Ministry of Economic Development
posted an invitation for bidding on three previously producing gas
properties owned and operated by Eni, the Italian multinational oil
and gas company. Zenith's wholly owned subsidiary, Canoel Italia
Srl ("Canoel Italia"), participated in the bidding process for two
properties and was later selected as one of the finalists for
both.
On August 30, 2011, the Company announced that the Italian
"Ministero per lo Sviluppo Economico" (the Ministry of Economic
Development) confirmed in writing that Zenith's technical
submission and proposal to re-establish production from the two
properties was successful.
These two natural gas properties are in proximity to each other
and are located in southern Italy, an area which is currently
producing a large portion of Italian hydrocarbons. The first
property, named "Torrente Vulgano", is located in the Puglia
Region, while the second one, named "Canaldente", and is located in
the Basilicata Region. Both properties are already connected to the
Italian national gas distribution grid; therefore, there is no need
to install new gas pipelines.
The Torrente Vulgano and Canaldente properties were previously
produced by Eni. Before the agreement to return the field to the
Ministry of Economic Development, in the last 4 years of production
(1997-2000), the Torrente Vulgano property was producing an average
of 7,900 standard cubic meters (m3) per day (278,949 standard cubic
feet (mcf) per day, using a conversion rate of 1 m3 = 35.31
mcf).
Canoel Italia will have to comply with certain Italian
regulatory obligations before field start-up. Production will
commence after all the necessary approvals have been received,
which the Company expects to occur by late 2016. However, there are
no assurances that production of the Torrente Vulgano and
Canaldente properties will be at the same levels that they were
previously producing. It is worth noting that the Canaldente
reservoir appears to be a good candidate for gas storage when the
well will be eventually shut-in at the end of commercial
production.
On August 27, 2011, Canoel Italia was approved in its role as
operator by the Italian relevant authorities and is currently
submitting environmental reports and conducting the final
assessment of on-site equipment.
On June 6, 2013, the Company completed the acquisition of
various working interests in 13 Italian producing and exploration
properties from Medoilgas Italia S.P.A. and Medoilgas Civita
Limited, each a subsidiary of Mediterranean Oil and Gas Plc after
receiving the final approval from the Italian Ministry of Economic
Development to the change of ownership.
On October 1, 2015, the Company acquired co-generation equipment
and facilities which will enable the company to produce electricity
from the gas produced by the Masseria Vincelli 1 well and sell it
directly into the national energy grid.
The Company's share of estimated total proved plus probable
natural gas net reserves were assessed at 16,622 Mmscf and
condensate net reserves were assessed at 261 Mbbls as of March 31,
2016.
AZERBAIJAN
On June 8, 2015, the Company and SOCAR (State Oil Company of
Azerbaijan Republic) executed a confidential memorandum of
understanding ("MOU") regarding the Muradhanli Block. Formal
approval of the MOU and permission to disclose was subsequently
granted by the President of Azerbaijan through Decree No. 1439
dated October 7, 2015 ("Presidential Decree") which authorised
SOCAR to prepare and execute a Rehabilitation, Exploration,
Development and Production Sharing Agreement ("REDPSA") for the
Muradhanli Block between the Company and SOCAR on behalf of the
Republic of Azerbaijan.
The REDPSA was executed on March 16, 2016 between SOCAR, Zenith
Aran and SOCAR Oil Affiliate ("SOA"), a 100% owned subsidiary of
SOCAR. The REDPSA became effective on June 20, 2016, upon
ratification by the Parliament of the Republic of Azerbaijan
whereby the REDPSA and the Company's rights and obligations under
the REDPSA became binding in law in Azerbaijan.
The REDPSA covers approximately 642 square kilometres (or 248
square miles) and include the active Muradkhanli, Jafarli and
Zardab oil fields located in the Lower Kura Region, about 300
kilometres inland from the city of Baku, Azerbaijan. Pursuant to
the REDPSA, the Company holds an 80% participating interest both
the Contract Rehabilitation Area and the Contract Exploration Area;
SOA holds the remaining 20% participating interest. Together, the
Company and SOA will form the contractor group.
The term of the Contract Rehabilitation Area portion of the
REDPSA is 25 years from the date of SOCAR's approval of the
contractor's rehabilitation and production program which occurred
in August 2016. The term of the Contract Exploration Area portion
of the REDPSA is 25 years from the date of SOCAR's approval of the
contractor's development program. The term of each Area may be
extended by an additional five years at the option of SOCAR
On June 14, 2016 the Agreement on the Rehabilitation,
Exploration, Development and Production Sharing ("REDPSA") for the
Block Including the Muradkhanly, Yafarli and Zardob Oil Fields in
the Republic of Azerbaijan has been ratified by the Azerbaijan
Parliament.
In June 2016, the Company started the operation to establish
Aran Oil Operating Company Ltd., an 80% owned subsidiary of Zenith
Aran, to serve as operator of the REDPSA.
On June 24, 2016 the President of the Republic of Azerbaijan
signed the REDPSA into law, after the approval by Parliament on the
14th of June 2016.
On August 11, 2016 the handover of the Azerbaijan assets,
physically completed in June 2016, formally completed with the
necessary signatures on related documents.
On August 11, 2016 the Company commenced crude oil production of
approximately 275 barrels of oil per day in Azerbaijan under
Zenith's ownership.
OTHER ACTIVITIES
In addition to its activities discussed above, the Company is
evaluating the acquisition of other production opportunities in
established oil production environments.
Financial Perfomance
The following table summarizes key financial indicators for the
three and nine months ended December 31:
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Oil and gas revenue, net of royalties ($) 1,676,663 263,741 2,496,750 1,687,764
Oil and gas revenue, net of royalties - per
boe ($) 62.99 48.20 55.61 51.45
48.20
Total daily oil and gas sales volumes per boe 295.87 59 164 119
Electricity revenue($) 240,582 n.a. 479,995 n.a.
Electricity gas sales volumes per mcf ($) 4.83 n.a. 3.90 n.a.
Net income (loss) ($) (1,555,692) (889,470) 614,713,380 (2,106,182)
Net income (loss) per share - basic ($) (0.03) (0.03) 10.59 (0.07)
Net income (loss) per share - diluted ($) (0.02) (0.02) 5.90 (0.04)
Capital expenditures ($) 72,646 258,476 103,850 517,993
Weighted average number of shares - basic 63,284,344 33,623,814 58,619,309 30,859,060
Weighted average number of shares - diluted 108,912,461 57,774,291 104,247,426 55,009,357
Production
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Total volumes
Oil (bbls) (1) 25,733 1,232 40,192 17,279
Condensate (bbls) (3) 139 141 599 671
Gas (mcf) (2) 4,470 12,838 20,337 77,379
Total oil and gas sales volumes (boe) 26,618 3,513 44,901 30,847
Electricity (gas) sales volumes (mcf) 18,160 11,752 54,434 11,752
Total sales volumes (boe) 29,565 5,472 53,973 32,806
Daily volumes
Oil (bbls/day) (1) 283 13 150 63
Condensate (bbls/day) 2 2 2 2
Gas (mcf/day) 50 143 75 286
Total daily oil and gas sales volumes (boe/day) 296 39 164 113
Daily gas sales volumes for electricity (mcf)(mcf/day) 202 21 202 44
Total daily sales volumes (boe/day) 318 60 198 120
(1) During the three and nine months ended December 31, 2016,
the Company sold 11,807 and 25,775 bbls of oil from its properties
in Azerbaijan. This data is not comparable to the past year.
It is important to note that the data regarding the nine months
includes the oil production from August 11 to December 31,
2016.
At the end of December 2016, there were 2,462 bbls of unsold oil
production in Argentina held in inventory. The oil held in
inventory at the end of the period correspond to the same existing
quantity as of 30 September 2016, due to the lack of production of
this quarter. The average daily production rate for the three and
nine months ended December 31, 2015 was 13 bbls and 63 bbls of oil
per day, respectively.
At the end of December 2016, there were 189 bbls of unsold oil
production in Azerbaijan held in inventory which were sold in
subsequent months. Total oil sales, transfers of produced volumes
to Termap Oil Storage and oil held in inventory at the end of the
period correspond to an average daily production rate for the three
months ended December 31, 2016 of 283 bbls of oil per day. The
average daily production rate is not comparable with past year.
(2) During the three and nine months ended December 31, 2016,
the Company sold 4,470 and 20,337 mcf of natural gas from its
Italian properties as compared 24,590 and 89,131 mcf of natural gas
in the 2015 comparative period, with a decrese of 72% and 74%. The
predominant reason for the decrease is a change in classification
from gas to electricity from the Torrente Cigno concession. Prior
to October 1, 2015, the Company sold its 45% share of this gas to
the previous electricity producer and included such sales in oil
and gas revenues. Following the Company's acquisition of
co-generation equipment and facilities on October 1, 2015, the
Company became the new electricity producer and now classifies its
45% share of Torrente Cigno gas production as gas sales volumes for
electricity.
(3) During the three and nine months ended December 31, 2016,
the Company sold 140 and 599 bbls of condensate from its Italian
properties as compared to 141 and 671 bbls of condensate in the
2015 comparative period, with a decrease of nil% and 11%
respectively.
During the three and nine months ended December 31, 2016, the
Company sold 2,774 and 8,112 MWh of electricity from its Italian
properties as compared to 1,757 MWh of electricity in the three
months ended December 31, 2015 with an increase of 57%. The
electricity production in Italy started on October 1, 2015 so no
data relating the 9 months are comparable.
Argentina Oil Production
The decrease in oil production and sales in the three and nine
months ended December 31, 2016 is a result of lost production due
to the collapse of the storage tank (state owned) occurred in late
2015, used by the company, and the subsequent temporary
interruption of production in Argentina.
On February 20, 2017 the Company announced the sale of its
operations in Argentina to a group of local energy investors.
Azerbaijan Oil Production
On March 16, 2016, the Company's wholly-owned subsidiary, Zenith
Aran, entered into the REDPSA with SOCAR and SOA. The REDPSA covers
642 square kilometres which include the active Muradkhanli, Jafarli
and Zardab oil fields located in the Lower Kura Region, about 300
kilometres inland from the city of Baku, in Azerbaijan (the
"Azerbaijani Operations").
The delivery of the capital assets previously used in respect of
the petroleum operations at the Azerbaijani Operations, from the
previous operating company to Aran Oil, officially completed on
August 11, 2016, and the production started under Zenit's
ownership. The Company now has operational control of the
Azerbaijani Operations. The transfer of operational control did not
involve any interruption of petroleum production operations at the
Azerbaijani Operations.
Following successful handover on August 11, 2016 production
under Zenith ownership commenced at the Azeri operations.
Production has been relatively consistent at an average of about
275 barrels per day resulting in 14,010 bbls for the period and
gross revenue of CAD $659,000.
During the period from August 11 to September 30, 2016 the
Company achieved a production of about 275 barrels of oil per day,
although they have produced much larger quantities previously
(Source: SOCAR). Gas is also produced, but in low quantities and is
used onsite.
The Company, which is free to sell/export oil without
restrictions, sells its oil through the Marketing and Operations
Department of SOCAR ("SOCARMO"). A commission of 1% of total sales
is payable to SOCARMO.
In the subsequent months the Company has achieved an increase of
production. The current production from the assets in Azerbaijan is
approximately 295 barrels of oil per day.
During the three and nine months ended December 31, 2016, the
Company sold 11,807 and 25,775 bbls of oil from its properties in
Azerbaijan. This data is not comparable to the past year.
It is important to note that the data regarding the nine months
includes the oil production from August 11 to December 31,
2016.
Italy Gas Production
During the three and nine months ended December 31, 2016, the
Company sold 4,470 and 20,337 mcf of natural gas from its Italian
properties as compared 24,590 and 89,131 mcf of natural gas in the
2015 comparative period, with a decrese of 72% and 74%. The
predominant reason for the decrease is a change in classification
from gas to electricity from the Torrente Cigno concession. Prior
to October 1, 2015, the Company sold its 45% share of this gas to
the previous electricity producer and included such sales in oil
and gas revenues. Following the Company's acquisition of
co-generation equipment and facilities on October 1, 2015, the
Company became the new electricity producer and now classifies its
45%
share of Torrente Cigno gas production as gas sales volumes for
electricity.
Daily gas sales volumes for electricity from Torrente Cigno per
day for three months and nine months enede December 31, 2016 were
202 mcf/d.
Italy Condensate Production
During the three and nine months ended December 31, 2016, the
Company sold 140 and 599 bbls of condensate from its Italian
properties as compared to 141 and 671 bbls of condensate in the
2015 comparative period, with a decrease of nil% and 11%
respectively.
Italy Electricity Production
During the three and nine months ended December 31, 2016 the
Company sold 2,774 and 8,112 MWh of electricity from its Italian
properties as compared to 1,757 MWh of electricity in the three
months ended December 31, 2015 with an increase of 57%. The
electricity production in Italy started on October 1, 2015 so no
data relating the 9 months are comparable.
Prior to October 1, 2015, the Company sold its gas volumes from
the Torrente Cigno area in Italy for approximately $1.44/mcf to the
previous owner of the co-generation plant who then converted the
gas to electricity and as a result earned a much higher rate. The
Company acquired this plant on October 1, 2015 to improve revenue
generation and margins. Although the Company continues to supply
its Torrente Cigno gas volumes to the co-generation plant, as plant
owner, the Company now earns higher revenues on those gas
volumes.
The Electricity production remained steady for all the quarters
since the acquisition of the cogeneration plant, as detailed in the
following table.
Italy Electricity Production Production MWh
I quarter 2017 2,718
II quarter 2017 2,620
III quarter 2017 2,774
Revenues
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Commodity Prices
Oil and gas prices
Oil (Argentina $/bbl) nil 68.10 63.08 74.31
Oil (Azerbainan $/bbl) 63.67 n.a. 57.29 n.a.
Condensate ($/bbl) 73.69 69.97 65.48 74.07
Gas ($/mcf) 6.23 5.98 5.40 4.77
Total oil and gas ($/boe) 64.35 55.61
Electricity ($/mcf) 8.82 8.57 13.24 8.57
Revenues (CAD$)
Oil and gas revenue
Oil (Argentina) nil 83,904 77,636 1,283,940
Oil (Azerbainan) 1,638,547 n.a. 2,277,341 n.a.
Condensate (Italy) 10,276 9,880 39,209 49,731
Gas (Italy) 27,840 76,711 109,775 368,734
Total oil and gas (CAD$) 1,676,663 2,503,961
Electricity (CAD$) 240,582 100,767 479,995 100,767
Total (CAD$) 1,917,245 271,262 2,983,956 1,803,172
Oil Revenue
Gross oil revenue earned in Argentina was $nil for the three
months ended December 31, 2016 versus $83,904 in the comparative
three-month 2015 period and $77,636 for the nine months ended
December 31, 2016 versus $1,283,940 for the comparative nine-month
2015 period. The decrease in oil production and sales in the three
and nine months ended December 31, 2016 is a result of lost
production due to the collapse of the storage tank (state owned)
occurred in late 2015, used by the Company, and the subsequent
temporary interruption of production in Argentina. On February 20,
2017 the Company announced the sale of its operations in Argentina
to a group of local energy investors.
Gross oil revenue earned in Azerbaijan was $1,638,547 for the
three months ended December 31, 2016. This period is not comparable
with past year comparative three and nine months with production in
Azerbaijan commencing on 11 August 2016.
Condensate Revenue
The price per bbl received for condensate during the three and
nine months ended December 31, 2016 was $73.69 per bbl and $65.48
per bbl, respectively, as compared to $69.97 per bbl and $74.47 per
bbl earned on condensate sales during
the three and nine months ended December 31, 2015, respectively.
The condensate price per bbl in the last three months is higher in
the 2016 periods due to an increase in the base price of Brent
crude which is used in the formulas to establish the
price of condensate.
Gas Revenue
The price per mcf received for natural gas is higher in the
three and nine months ended December 31, 2016 as compared to the
three and nine months ended December 31, 2015 due primarily to the
effect of gas sales volumes from the Torrente Cigno
area being reclassified to the electricity market .
In general, gas prices are also impacted by fluctuations in the
base price of Europens gas rates which is used in the formulas to
establish the price of natural gas.
Electricity Revenue
The difference in the gross revenues achieved is only for the
electricity selling price that is determed by the market.
Italy Electricity Production Production MWh Gross Revenues Average Price Euro/MWH
I quarter 2017 2,718 $ 140,813 $ 51.80
---------------
II quarter 2017 2,620 $ 141,848 $ 54.14
---------------
III quarter 2017 2,774 $ 194,767 $ 70.21
---------------
In the fourth quarter 2017 the selling price is higher than the
previous quarters, but due to the weater conditions in the South of
Italy, and the related problems, the production was stopped from 10
of January to 15 February 2017 when it recommenced.
Royalties and Operating Expenses
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Royalties ($) n.a. 7,521 7,211 115,408
% of Argentine revenues (1) n.a. 9% 9% 9%
$/bbl of oil n.a. 6.10 0.50 6.68
$/boe (total Company) n.a. 1.37 0.30 3.52
Operating and transportation ($)
Argentina 278,325 441,855 547,054 1,111,690
Azerbaijan 650,635 n.a. 1,021,702 n.a.
Italy 88,527 20,798 234,988 217,782
Total 1,017,487 462,653 1,803,744 1,329,472
Argentina $/bbl n.a. 358.64 n.a. 64.34
Azerbaijan $/bbl 25.28 n.a. 25.70 n.a.
Italy $/boe 23.10 4.91 17.99 14.03
Total $/boe 34.41 84.56 33.42 40.53
(1) Royalties are charged on Argentine oil revenues only.
Royalties
Royalties in the three and nine months ended December 31, 2016
are not comparable to the three and nine months ended December 31,
2015 due to the lack of sales during the quarter in Argentina.
No royalties are charged on the Azerbaijan oil production and on
the Italian productions.
Operating and transportation costs
Argentina operating costs per bbl are lower in the three nine
months ended December 31, 2016 due primarily to the decrease in
sales volumes resulting from a temporary shut-down of
production.
Operating costs per boe for the nine months ended December 31,
2016 are lower than the nine months ended December 31, 2015 due a
decrease in joint venture concession expense as a result of
operational efficiencies and continued monitoring of
operations.
Netbacks
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Argentina ($/bbl)
Revenue n.a. 68.10 66.85 74.31
Royalties n.a. (6.10) (0.50) (6.68)
Operating expenses n.a. (358.64) (231.40) (64.34)
Field netback n.a. (296.64) (165.20) 3.29
Azerbaijan ($/bbl)
Revenue 63.67 n.a. 57.29 n.a.
Operating expenses (25.28) n.a. (25.70) n.a.
Field netback 38.39 n.a. 31.59 n.a.
Italy ($/boe)
Revenue 72.73 44.19 48.15 33.44
Operating expenses (23.10) (4.91) (17.99) (14.03)
Field netback 49.63 39.28 30.16 19.41
Total Company ($/boe)
Revenue 64.85 49.58 55.29 54.97
Royalties n.a. (1.37) (0.30) (3.52)
Operating expenses (34.41) (84.56) (33.42) (40.53)
Field netback 30.44 (36.35) 21.57 10.92
General and Administrative Expenses ("G&A")
General and administrative expenses for the three and nine
months ended December 31 are composed of the following:
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Professional fees 558,537 120,908 1,378,631 430,662
Office 308,088 28,009 588,363 385,771
Administrative 111,726 175,292 300,702 379,880
Salaries and benefits 692,004 93,424 990,541 338,331
Travel 230,793 223,479 438,434 447,231
1,901,148 641,112 3,696,671 1,981,875
G&A expenses increased by 196% in the three months ended
December 31, 2016 versus the 2015 comparative period and increased
by 86% in the nine months ended December 31, 2016 versus the 2015
comparative period. Included in the General and Administrative
expenses for three and nine months ended December 31, 2016 are
approximately CAD$600,000 and CAD$1,600,000 non-recurrent expenses
related to the January 11th 2017 admission to the London Stock
Exchange as well as a non-cash charge of C$290,000 in relation to
the award of the 6,000,000 options.
Professional fees were higher in the three and nine months ended
December 31, 2016 due to business development and fundraising
activities. Office expenses are higher in the three and nine months
ended December 31, 2016 than the 2015 comparative periods due to an
increase in Canadian, Azerbaijan, Italian and Argentine office
costs. Administrative expenses were higher in the three and nine
months ended December 31, 2015 due to director fees charged in
Italy for which there are no charges in the 2016 periods. Salaries
and benefits are higher in the three months ended December 31, 2016
than the comparative 2015 period due to the addition of a senior
executive salaries in Azerbaijan. Salaries and benefits are lower
in the nine months ended December 31, 2016 as the increase in
salaries was offset by the lack of bonuses in the 2016 period.
Travel costs are higher in the three and nine months ended December
31, 2016 due to an increase in travel activities, particularly in
relation to negotiations in Azerbaijan and the establishment of an
Azerbaijan office.
No general and administrative expenses were capitalized in the
nine months ended December 31, 2016 and 2015.
Depletion and depreciation
Three months Nine months ended
ended December 31
December 31
2016 2015 2016 2015
Argentina - 1,325 11,317 58,204
Azerbaijan 209,172 n.a. 319,715 n.a.
Italy 110,025 54,273 191,980 190,998
Total 319,197 55,598 523,012 249,202
Argentina $/bbl n.a. 1.08 9.75 3.37
Azerbaijan $/bbl 8.13 n.a. 8.04 n.a.
Italy $/boe 28.71 12.80 14.70 12.30
Total $/boe 10.80 10.16 9.69 7.60
The depletion rate for Argentine properties in the nine months
ended December 31, 2016 is lower than the comparative 2015 period
due to the decrease in oil production in the 2016 period.
The depletion rate for the Italian properties in the nine months
ended December 31, 2016 is lower than comparative 2015 period due
to the impairment of the Italian assets calculated in the year
2016.
Oil production commenced in Azerbaijan during the period. There
is no 2015 comparative period.
The Company did not identify any indicators of impairment with
respect to its Italian or Argentine CGUs as at December 31,
2016.
Net income (loss)
The Company reported net loss of ($1,555,692) and net income of
$614,713,380 for the three and nine months ended December 31, 2016
versus net losses of ($889,470) and ($2,106,182) for the three and
nine months ended December 31, 2015.
SUMMARY OF QUARTERLY INFORMATION
The following is a summary of selected financial information for
the Company for the past eight quarters.
Net
Net revenue income (loss) Per share (*)
$ $ $
2017
Third quarter ended December 31, 2016 1,917,245 (1,555,692) (0.03)
Second quarter ended September 30, 2016 817,996 ($1,150,014) (0.02)
First quarter ended June 30, 2016 241,504 617,418,886 0.11
2016
Fourth quarter ended March 31, 2016 251,319 (5,568,266) (0.14)
Third quarter ended December 31, 2015 284,408 (889,470) (0.03)
Second quarter ended September 30, 2015 524,996 (868,697) (0.03)
First quarter ended June 30, 2015 899,027 (348,015) (0.01)
2015
Fourth quarter ended March 31, 2014 987,353 (984,864) (0.04)
1 The sum of quarterly amounts per share may not add to the
year-to-date figure due to rounding.
-- In the third quarter 2017 the Company recorded the first full
quarter of the oil production in Azerbaijan, that has been
consistent; in fact the revenues of the Company are more than
double of almost last 10 quarters.
-- In the second quarter 2017, following successful handover on
August 11, 2016 production under Zenith ownership commenced at the
Azeri operations. Production has been relatively consistent at
circa 275 barrels per day resulting in bbls for the period 14,010
and gross revenue of CAD $659,000
-- Net revenues decreased in the first quarter 2017 due to a
lack of oil sales. Net loss excluding Gain on business combination
increased due to the decrease in net revenues combined with an
increase in general and administrative expenses.
-- Net revenue decreased in the fourth quarter 2016 due to a
lack of oil sales offset by an increase in electricity revenue. Net
loss increased due primarily to an increase in G&A expenses and
inventory impairment and $5,025,000 of
impairment related to the Company's Italian properties.
-- Net revenue decreased in the third quarter ended December 31,
2015 due to a decrease in sales volumes, primarily oil sales
volumes, combined with a decrease in the price earned for oil. Net
loss increased due to the decrease in net revenues combined with an
increase general and administrative expenses.
-- Net revenue decreased in the second quarter ended December
31, 2015 due to a decrease in sales volumes and in commodity prices
for natural gas and NGLs. Net loss increased due to the decrease in
net revenues combined with an increase in operating costs.
-- Net revenue decreased in the first quarter ended June 30,
2015 due to a decrease in both sales volumes and commodity prices.
Net loss decreased as compared to the previous quarter due a
decrease in general and administrative expenses and a net foreign
exchange gain in the quarter.
-- Net revenue decreased in the fourth quarter ended March 31,
2015 due to a decrease in oil sales volumes. Net loss increased due
to the decrease in net revenue combined with increases in general
and administrative expenses, unrealized loss on foreign exchange
and finance expenses.
Liquidity Risk and Capital Resources
As at December 31, 2016 the Company has a working capital
deficit of $6,025,592 (March 31, 2016 - $6,709,115), negative cash
flows from operating activities of $1,909,076 (March 31, 2016 -
$2,473,767) and an accumulated surplus of $601,067,453 (March 31,
2016 - deficit - $13,645,926). During the three and nine months
ended December 31, 2016, the Company incurred $59,505 and $517,993
on capital expenditures.
As at December 31, 2016, the Company had $8,618,257 (March 31,
2016 - $8,201,167) of current liabilities for which the Company's
$18,476 (March 31, 2016 - $137,982) cash balance is insufficient to
settle the current liabilities.
As of December 31, 2016, the contractual cash flows, including
estimated future interest, of current and non-current financial
liabilities mature as follows:
Due on Due on Due between
or or January
Carrying Contractual before before 2018 and
amount cash flows December December November
31 ,2017 31, 2018 2020
--------------------- --- ---------------- ---------------- ---------- ------------ -------------
Trade and other
payables $ 4,892,846 4,892,846 4,892,846 - -
Oil share agreement 1,063,629 1,063,629 1,063,629 - -
Loans payable 4,322,726 5,264,699 1,973,367 3,123,648 167,684
Convertible
notes 525,992 940,058 6,313 7,035 926,710
Notes payable 213,608 213,608 213,608 - -
Bonds payable 383,090 443,511 55,995 387,516 -
-------------------------- ---------------- ---------------- ---------- ------------ -------------
$ 11,401,891 12,818,351 8,205,758 3,518,199 1,094,394
------------------------- ---------------- ---------------- ---------- ------------ -------------
Note: the deferred consideration payable related to
opportunities of development in Azerbaijan for the Company, but
they are not commitments.
Subsequent Events
-- On January 5, 2017, the Company announced that the Prospectus
dated January 5, 2017, has been approved by the UK Listing
Authority (the "Prospectus"). The Prospectus relates to admission
of the Company's Common Shares to the standard listing segment of
the Official List and to trading on the London Stock Exchange's
Main Market ("Admission"). Admission and commencement of dealings
in the Company's Common Shares began on January 11, 2017.
In connection with Admission, the Company successfully placed
33,322,143 Common Shares (the "UK Placing"). Following its
book-building process, in which Common Shares were placed at
GBP0.07 (CAD$0.11) per Common Share, on completion of the UK
Placing the gross proceeds available to the Company were
approximately GBP2,332,550 (CAD$3,823,848) and the net proceeds
were approximately GBP2,015,922 (CAD$3,304,786). The Company paid
finder's fees of GBP 113,500 and issued 1,114,286 broker warrants
exercisable for 24 months from closing at a price of GBP 0.07 per
common share to certain arm's-length parties under the private
placement undertaken as part of the dual listing on the London
Stock Exchange on 11 January 2017.
-- On January 11, 2017 - The Company announced that its entire
Common Share capital, consisting of 98,564,867 Common Shares, were
admitted to the standard listing segment of the Official List of
the FCA and to trading on the London Stock Exchange's Main Market
under the ticker symbol "ZEN".
Admission became effective and dealings commenced at 8.00 a.m.
on January 11, 2017.
The net proceeds of the UK Placing will be used by the Company
to provide additional funding for debt repayment, to provide
additional funding for the Company's development and appraisal
activities in Italy and Azerbaijan, and to provide additional
working capital.
-- On January 24, 2017, the Company announced the signing of a
well workover contract and engagement of highly experienced local
drilling company to initiate and execute the workover of first two
wells in the programme (M-195 and M-45).
-- In January 2017, the Company paid the USD$ 700,000
(CAD$943,467) of the USD loan, utilising part of the proceeds from
the fundraising aligned with the listing on the London Stock
Exchange of January 11, 2017.
-- In January 2017, the Company issued 668,571 shares, at a
deemed price of GBP0.07 per share, for the settlement of a debt for
services of a senior manager of the Companty, for an amount of
GBP46,800.
-- In January 2017, the Company incurred in expenses for a total
amount of GBP306,628 (CAD$505,476), related to the admission to the
London Stock Exchange listing, as follow:
Role Cost (GBP) Cost (CAD$)
---------------------------------- -------------- ------------
UK Legal Counsel to the Company GBP 100,000 $ 164,850
TSX - V share issue costs GBP 18,000 $ 29,673
Auditors & Reporting Accountants GBP 70,000 $ 115,395
Registrar GBP 1,300 $ 2,143
Legal opinion Crest GBP 5,000 $ 8,243
Prospectus Printers GBP 8,000 $ 13,188
placings payable GBP 96,128 $ 158,467
LSE Admission Fees GBP 8,200 $ 13,518
Total GBP 306,628 $ 505,476
---------------------------------- -------------- ------------
-- In January 2017 the Company entered into an agreement to
proceed with a brokered private placement (the "Private Placement")
to raise gross proceeds of GBP 855,000 (approximately CAD$
1,408,000) through the issue of nine million (9,000,000) new common
shares of the Company ("New Common Shares") at a price of GBP 0.095
(approximately CAD$ 0.1565) per share.
In addition to the New Common Shares, under the Private
Placement each subscriber received one warrant (the "Warrant") for
every New Common Share purchased. Each Warrant shall entitle the
Warrant holder to subscribe for new Common Shares in the Company at
a price of GBP 0.15 per common share (approximately CAD$ 0.247),
exercisable at any time until February 1, 2019. The proceeds of the
Private Placement will be used to accelerate the Company's field
rehabilitation activities in Azerbaijan and increase the number of
well workovers scheduled for completion by March 31, 2018.
-- On January 25, 2017, the Company issued 3,700,000 shares on
the conversion of 311,067 Swiss Francs (CAD$407,000) principal
amount of convertible notes.
Outstanding CHF CAD$
debt
As of January
25, 2017
------------------------------ -------------------- ---------------------
Principal CHF 314,953 $ 412,084
Accrued Interest CHF 249,758 $ 327,730
------------------------------ -------------------- ---------------------
Total to be
paid CHF 564,711 $ 739,814
------------------------------ -------------------- ---------------------
Conversion CHF CAD$
of notes Shares
------------------------------ -------------------- --------------------- ------------------
Outstanding
principal
As of January
25, 2017 CHF 314,953 $ 412,084
Issued January
2017 3,700,000 -CHF 311,067 $ -407,000
Remaining CHF 3,886 $ 5,084
------------------------------ -------------------- --------------------- ------------------
Changes calculated using the following current change rate conversion (January 25, 2017)
Change Rate
CAD$/CHF 1.3084
CHF/CAD$ 0.7643
The outstanding amount of convertible note, at the date of this
document, is CHF3,886 Swiss Francs ($5,084) of principal, and
CHF249,758 (CAD$327,730) of accrued interest.
-- On February 20, 2017, the Company announced the sale of its
operations in Argentina to a group of local energy investors.
Due to a series of circumstances beyond the Company's control,
caused by the collapse of a major storage tank owned by Yacimientos
Petrolíferos Fiscales ("YPF"), Argentina's national oil company,
Zenith's Argentine operations were still suspended and its oil
production could no longer be transported through YPF
pipelines.
To date, the issues affecting the transportation of oil have not
been fully resolved and a persisting uncertainty on the
recommencement of operations has led Zenith to reconsider its
operational involvement in Argentina.
The sale of the Company's Argentina subsidiary has been fixed at
a nominal sum in recognition of the costs the new owner is expected
to incur to return these fields to production. In addition, Zenith
will no longer be liable for any environmental responsibilities or
future well abandonment obligations for the Don Alberto and Don
Ernesto fields.
Termination of activities in Argentina will enable Zenith's
management to more effectively direct its focus on its Italian
operations and especially towards Azerbaijan, where the Company's
most important assets are located, and where a systematic programme
of field rehabilitation has begun. This re-alignment reflects the
Board's aversion to operational overstretch and the Company's
preference for a strong, concentrated focus towards the achievement
of its production objectives in Azerbaijan.
-- The Stock Options Plan (note 12 of the Financial Statement)
has been approved by shareholders of the Company at the Annual
General Meeting held on January 20, 2017.
-- On February 22, 2017, the Company announced that a Director
of the Company has exercised his stock options to purchase
1,000,000 common shares in the capital of the Company at a price of
CAD$0.10 per Common Share and a total cost of CAD$100,000.
-- On February 22, 2017, the terms of the repayment of the First
Credit Agreement were amended and the amount of USD $160,000 (plus
accrued interest)(CAD $215,650) will be paid on March 27, 2017.
-- On February 21, 2017, the terms of the repayment of the Third
Credit Agreement were amended and the amount of USD $55,000 (plus
accrued interest)(CAD $74,130) will be paid on March 27, 2017.
-- On February 22, 2017, the terms of the repayment of the
Fourth Credit Agreement were amended and the amount of USD $55,000
(plus accrued interest)(CAD $74,130) will be paid on March 27,
2017.
Going Concern
As at December 31, 2016, the Company has a working capital
deficit and an accumulated deficit, and may incur future losses in
the development of its business. Current cash resources will not be
sufficient to continue development activities. These matters raise
significant doubt about the ability of the Company to continue to
meet its obligations as they become due. It is expected that
further debt and equity financings will be required in order to
settle existing current liabilities, continue development of the
Company's assets and meet future obligations. Additional financing
is subject to the global financial markets and economic conditions,
and volatility in the debt and equity markets. These factors have
made, and will likely continue to make it challenging to obtain
cost effective funding. There is no assurance this capital will be
available and if it is not, the Company may be forced to curtail or
suspend planned activity.
The Company's unaudited condensed interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which assumes
that the Company will be able to realize its assets and meet its
obligations and continue its operations for the foreseeable future.
Realization values may be substantially different from carrying
values as shown and the consolidated financial statements do not
reflect adjustments that would be necessary if the going concern
assumption were not appropriate. If the going concern basis were
not appropriate for the consolidated financial statements, then the
adjustments would be necessary in the carrying value of assets and
liabilities, the reported revenues and expenses, and the balance
sheet classifications used.
Shares and Convertible, Exercisable and Exchangeable
Securities
The Company is authorized to issue an unlimited number of common
shares and an unlimited number of preferred shares issuable in
series.
As at December 31, 2016 and the date of this MD&A, the
Company's issued share capital and the outstanding securities that
are convertible or exercisable for any voting or equity securities
of the Company are as follows:
Number of
common shares Number of warrants Number of stock options
Balance - March 31, 2016 43,594,406 29,638,898 -
Issued 20,979,747 17,242,724 6,000,000
Expired - - -
Balance - December 31, 2016 64,574,153 46,881,622 6,000,000
Issued 46,690,714 1,114,286 -
Expired - - -
Balance - Date of MD&A 111,264,867 47,995,908 6,000,000
(a) On January 5, 2017 - The Company announced that the
Prospectus dated January 5, 2017 has been approved by the UK
Listing Authority (the "Prospectus"). The Prospectus relates to
admission of the Company's Common Shares to the standard listing
segment of the Official List and to trading on the London Stock
Exchange's Main Market ("Admission"). Admission and commencement of
dealings in the Company's Common Shares did occur on 11 January
2017.
In connection with Admission, the Company successfully placed
33,322,143 Common Shares (the "UK Placing"). Following its
book-building process, in which Common Shares were placed at
GBP0.07 (CAD$0.11) per Common Share, on completion of the UK
Placing the gross proceeds available to the Company were
approximately GBP2,332,550 (CAD$3,823,848) and the net proceeds
were approximately GBP2,015,922 (CAD$3,304,786). The Company paid
finder's fees of GBP 113,500 and issued 1,114,286 broker warrants
exercisable for 24 months from closing at a price of GBP 0.07 per
common share to certain arm's-length parties under the private
placement undertaken as part of the dual listing on the London
Stock Exchange on 11 January 2017.
(b) In January 2017 the Company issued 668,571 shares, at a
deemed price of GBP0.07 per share, for the settlement of a debt for
services of a senior manager of the Companty, for an amount of
GBP46,800.
(c) On January 11, 2017 - The Company announced that its entire
Common Share capital, consisting of 98,564,867 Common Shares, was
admitted to the standard listing segment of the Official List of
the FCA and to trading on the London Stock Exchange's Main Market
under the ticker symbol "ZEN".
Admission became effective and dealings commenced at 8.00 a.m.
on January 11, 2017.
(d) On January 25, 2017 the Company issued 3,700,000 shares on
the conversion of 311,067 Swiss Francs (CAD$407,000) principal
amount of convertible notes.
(e) In January 2017 the Company has entered into an agreement to
proceed with a brokered private placement (the "Private Placement")
to raise gross proceeds of GBP 855,000 (approximately CAD$
1,408,000) through the issue of nine million (9,000,000) new common
shares of the Company ("New Common Shares") at a price of GBP 0.095
(approximately CAD$ 0.1565) per share.
In addition to the New Common Shares, under the Private
Placement each subscriber will receive one warrant (the "Warrant")
for every New Common Share purchased. Each Warrant shall entitle
the Warrant holder to subscribe for new Common Shares in the
Company at a price of GBP 0.15 per common share (approximately CAD$
0.247), exercisable at any time until 1 February 2019. The proceeds
of the Private Placement will be used to accelerate the Company's
field rehabilitation activities in Azerbaijan and increase the
number of well workovers scheduled for completion by 31 March
2018.
Related Party Transactions
Related party transactions during the three and nine months
ended December 31, 2016 and 2015 not disclosed elsewhere in this
MD&A are as follows:
a) Included in general and administrative expenses for the three
and nine months ended December 31, 2016 is $41,983 and $121,445
(three and nine months ended December 31, 2015 - $34,902 and
$147,645), respectively, charged by a company controlled by an
officer and director of the Company for administrative services. As
at December 31, 2016, $22,961 (March 31, 2016 - $nil) was included
in trade and other payables in respect of these charges.
b) Included in trade and other payables is $nil (March 31, 2016
- $8,966) due to officers and directors of the Company in respect
of general and administrative expenditures made on behalf of the
Company for which the officers and directors will be
reimbursed.
Off-Balance Sheet Arrangements
The Company has not entered into any off-balance sheet financing
arrangements.
Outlook
As noted earlier, the Company's cash and cash equivalent balance
is not sufficient to meet the Company's obligations and additional
funds will have to be raised through the issuance of debt and
equity financing. There is no assurance that such additional funds
can be raised on reasonable terms, or at all.
The Company plans to continue to focus on both international oil
and natural gas exploration opportunities as well as continuing its
search for smaller producing assets in North America, Italy,
Argentina and Azerbaijan. Management intends to focus its efforts
toward acquiring large exploration permits, which offer high
exploration potential and the opportunity to act as operator.
The Company's plans for fiscal 2017 include:
(a) Italy: After the acquisition of 9 producing licenses and 4
exploration applications from Mediterranean Oil & Gas Plc.,
Zenith has evaluated drilling opportunities on these permits and
will formalize plans to either participate directly in such
potential operations or farm-out its interest to third parties. The
company's technical team has conducted in depth geological,
geophysical and engineering evaluations on all these properties.
Natural gas from two properties which is not suitable for
transportation in the national pipeline grid will now be produced
to generate electricity with the use of gas turbines. New seismic
data has defined a very interesting structure on the Macchia Nuova
property and plans are being made to drill this prospect in the
future. Drilling plans for side-track drilling operations at the
Masseria Petrilli property and drilling of a new well at the San
Teodoro field are also being evaluated. These activities are
expected to increase Zenith's gas production in Italy.
Submission of extensive environmental reports relating to the
commencement of production of the Torrente Vulgano and Canaldente
gas properties has been completed and preliminary approval has been
received. The Company is now looking forward to finally place on
production these wells after the final approval is received.
Production of natural gas from the Torrente Vulgano and Canaldente
properties is now expected to commence in late 2017.
Improvements of facilities at San Teodoro will be completed by
the tie-in of new dehydration equipment. While the field has been
capable of production, a lack of regional infrastructure had
limited additional expansion in the past. In December 2014, Zenith
reached an agreement with Basengas S.r.l., a successful retail
marketer of natural gas within Italy, to handle forthcoming
production from this 100% owned field, which is anticipated to
restart production in September 2017. Production from the existing
wellbore is expected to commence at 3,000 cubic meters/day (106
mcf/d or 18 boed), increasing Zenith's current daily production in
Italy by 25%, to over 100 boepd. Costs of the refurbishment and
commencing production are anticipated at EUR300,000 and will be
paid through an equipment leasing facility.
Zenith is also evaluating the possibility of drilling a deviated
well into the crestal area of the Torrente Salsola structure, where
the Company has a 100% working interest, in order to unlock
residual reserves. The Company has an ambitious plan to enhance the
Italian daily gas production rate in the Puglia Region by 100%
through a technical program employing additional workovers.
Zenith is drawing together an innovative plan for the
exploitation of the Traetta 1 well in the Masseria Grottavecchia
concession (20% working interest) through the sweetening of the
produced gas so that it can be sold through the national pipeline
grid. This development plan will be submitted to the relevant
authorities in Italy for their analysis and required prior
approval. Approval is expected to be received in September
2017.
(b) Azerbaijan: On June 20, 2016, the REDPSA ("Rehabilitation,
Exploration, Development and Production Sharing Agreement") for the
Block in the Republic of Azerbaijan was ratified by the Parliament
of the Republic of Azerbaijan and converted into an official law of
the country signed by the President of the Republic of Azerbijan.
The Block covers an area of 642.4 square kilometres, and at the
time of the formal finalitazion of the transaction the production
in Azerbaijan was about 275 barrels per day of oil, having however
produced significantly larger quantities in previous years. Minor
quantities of natural gas are also produced and used on-site. In
the subsequent months the Company has achieved an increase in
production. The current production from the assets in Azerbaijan is
approximately 295 barrels of oil per day.
The terms of the Contract Rehabilitation Area section of the
REDPSA is 25 years from the date of SOCAR's approval of the
contractor's rehabilitation and production programme which is
anticipated to occur in late 2016. The terms of the Contract
Exploration Area section of the REDPSA is 25 years from the date of
SOCAR's approval of the contractor's development programme. The
terms of each Area may be extended by an additional five years by
SOCAR.
Zenith's corporate office in Baku, the capital of Azerbaijan, is
a two and a half hour drive from the operational office presently
used to manage the producing fields, which are in the southern
region of Azerbaijan. Azeri management familiar with the properties
will initially be supplemented by new technical and operational
personnel from Zenit. The Company will, however, also begin to
actively identify international management and specialists willing
to relocate to Azerbaijan as part of its strategy to increase
production at the Block. Zenith Aran, the Company's wholly-owned
subsidiary, will act as the operating entity for the management of
the Azerbaijan oil operations..
On August 11, 2016, the handover of the Azerbaijan assets,
physicallycompleted in June 2016, was formally completed with the
necessary signatures on related documents and the Company commenced
crude oil production of approximately 275 barrels of oil per day in
Azerbaijan under Zenith's ownership. The Company plans to evaluate
the
performance of key wells and will then implement a program of
work-overs and facilities improvements.
The Company, which is free to sell/export oil without
restrictions, sells its oil through the Marketing and Operations
Department of SOCAR ("SOCARMO"). A related commission of 1% of
total sales is payable to SOCARMO.
Between 2017 and 2019, the Company plans to workover a total of
44 existing wells in Azerbaijan which are currently inactive or
produce at low rates ( 5 STB/d) to bring rates up to 10 to 15 STB/d
per well using improved technology, non damaging fluids and
optimised treatments. It is estimated that 10 wells will be worked
over in 2017, 16 wells in 2018 and 18 wells in 2019. This programme
has commenced using the existing workover rig in the field and the
Company intends to purchase an additional modern workover rig to
optimise the workover of the wells, within the next four years.
In addition to the marginal producing wells, five non-producing
wells in the Maykop zone in the Zardab field in Azerbaijan are
expected to be worked over in 2017 and to be returned to production
once the existing wellbore and sand production issues have been
resolved.
The Company intends to acquire one modern drilling rig capable
of drilling 4,500m to carry out a fifteen year drilling programme.
It is anticipated that five new wells will be drilled in 2018 and
ten wells in each year thereafter until the anticipated drilling
programme is complete in 2032.
During the first four years of the REDPSA it is estimated that
US$2,500,000 will be spent upgrading the gathering system and
central facilities in Azerbaijan to improve safety, efficiency and
handle higher production rates. During the same period, 39 active
wells currently producing at marginal rates will be worked over at
an estimated cost averaging $50,000 per well, using the existing
workover rig.
It is anticipated that in 2017 five shut-in wells completed in
the Maykop formation will be worked over to control sand
production, at an estimated cost of US$100,000 per well, and
returning to an increase of production at a total of 200STBl/d.
On January 24, 2017 the Company announced the signing of a well
workover contract and engagement of highly experienced local
drilling company to initiate and execute the workover of first two
wells in the programme (M-195 and M-45).
It is envisaged that development drilling will commence in 2018
and continue until 2032. It has been estimated that each well with
proved reserves will cost approximately US$4,000,000. This cost
will include the direct cost of materials, fuel, salaries, etc. to
drill the well and an allocation for the purchase of one drilling
rig, well completion and tie-in.
Proved reserves are those reserves that can be estimated, by
competent professional, with a high degree of certainty to be
recoverable. The estimate of the reserves are related to a given
date, based on analysis of drilling, geological, geophysical and
engineering data; the use of established technology, and; specified
economic conditions, which are generally accepted and being
reasonable, and shall be disclosed.
Each well in the proved plus probable category is expected to
cost approximately US$5,000,000. This category of reserves includes
those additional reserves that are less certain to be recovered
than proved reserves.
In addition to the costs anticipated for the wells with proved
reserve, wells in the proved plus probable category have an
additional allocation for the purchase and maintenance of a second
drilling rig and expansion and modernisation of the field
facilities.
In all, 145 wells are expected to be drilled over 16 years, of
which 58 of these are anticipated to be horizontal wells
Contractual Obligations and Commitments
In the ordinary course of business, the Company and its
subsidiaries may enter into contracts which contain indemnification
provisions, such as service agreements, leasing agreements, asset
purchase and sale agreements, joint venture agreements, operating
agreements, and land use agreements. In such contracts, the Company
may indemnify counterparties to the contracts if certain events
occur. These indemnification provisions vary on an agreement by
agreement basis. In some cases, there are no pre-determined amounts
or limits included in the indemnification provisions and the
occurrence of contingent events that will trigger payment under
them is difficult to predict. Therefore, the maximum potential
future amount that the Company could be required to pay cannot be
estimated.
The Company subleases premises in London, UK, under an operating
lease on a month to month basis which requires payments of
approximately $50,000 per annum.
Business Risks and Uncertainties
The Company has production operations in Azerbaijan and Italy
and its primary focus is the success of its production
activities in these countries. Some of the Company's operations
and related assets are located in countries which carry a higher
degree of political and economic risk.
The prices of Oil and natural gas have fluctuated considerably
in recent years and are determined based on world demand,
supply and other factors, all of which are beyond the Company's
control.
The Company operates in the petroleum, natural gas and
electricity industry which is subject to numerous risks that can
affect the amount of cash flow from operating activities and the
ability to grow. These risks include but are not limited to:
-- Global economic uncertainty;
-- Risks associated with operating in foreign jurisdictions;
-- Competition with more established companies and the availability of services;
-- Volatility in commodity pricing, exchange and interest rates;
-- Government and regulatory risk with respect to royalty and income tax regimes;
-- Operation risks that may affect the quality and recoverability of reserves;
-- Geological risks associated with accessing and recovering new quantities of reserves;
-- Ability to capitalize on farm-in and farm-out opportunities as they arise;
-- Production risks associated with the ability to extract
commercial quantities of petroleum and natural gas;
-- Transportation risk with respect to the ability to transport
petroleum and natural gas to market;
-- Third party credit risk and the resulting ability to collect amounts owed;
-- Capital markets risk and the ability to finance future growth;
-- Uncertainty as to the nature of evolving environmental
legislation that is likely to result in stricter standards and
enforcement ;
-- Environmental risk with respect to the ability to remedy
spills, releases or emissions of various substances produced in
association with petroleum and natural gas operations.
The Company will seek to minimize these business risks by:
-- Employing management, technical staff and consultants with extensive industry experience;
-- Maintaining a low cost structure;
-- Maintaining prudent financial practices;
-- Controlling timing and magnitude of operating and capital costs;
-- Working with established industry partners;
-- Maintaining insurance in accordance with industry standards
to address the risk of liability for pollution, blow-outs, property
damage, personal injury and other hazards.
Other
Additional information related to the Company's business and
activities can be found on SEDAR at www.sedar.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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(END) Dow Jones Newswires
March 01, 2017 02:44 ET (07:44 GMT)
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