CROCOTTA ENERGY INC. (TSX:CTA) is pleased to announce its financial and
operating results for the three months ended March 31, 2014, including condensed
interim consolidated financial statements, notes to the condensed interim
consolidated financial statements, and Management's Discussion and Analysis. All
dollar figures are Canadian dollars unless otherwise noted.
HIGHLIGHTS
-- Increased funds from operations 68% to $28.8 million in Q1 2014 from
$17.1 million in Q1 2013
-- Drilled 8.0 net successful Cardium and Bluesky wells at Edson, AB
-- Drilled 1.0 net successful Montney well in Northeast BC
-- Subsequent to March 31, 2014, increased bank credit facility to $165
million from $150 million
FINANCIAL RESULTS
Three Months Ended March 31
($000s, except per share amounts) 2014 2013 % Change
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Oil and natural gas sales 39,836 28,267 41
Funds from operations (1) 28,758 17,124 68
Per share - basic 0.30 0.19 58
Per share - diluted 0.29 0.19 53
Net earnings 9,518 2,604 266
Per share - basic and diluted 0.10 0.03 233
Capital expenditures 53,102 31,518 68
Property dispositions (400) - 100
Net debt (2) 140,696 94,590 49
Common shares outstanding (000s)
Weighted average - basic 96,728 89,261 8
Weighted average - diluted 98,248 91,670 7
End of period - basic 97,699 89,261 9
End of period - diluted 105,661 100,188 5
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(1) Funds from operations and funds from operations per share do not have
any standardized meaning prescribed by International Financial Reporting
Standards ("IFRS") and therefore may not be comparable to similar
measures used by other companies. Please refer to the Non-GAAP Measures
section in the MD&A for more details and the Funds from Operations
section in the MD&A for a reconciliation from cash flow from operating
activities.
(2) Net debt includes current liabilities (excluding risk management
contracts) and the credit facility less current assets. Net debt does
not have any standardized meaning prescribed by IFRS and therefore may
not be comparable to similar measures used by other companies. Please
refer to the Non- GAAP Measures section in the MD&A for more details.
OPERATING RESULTS Three Months Ended March 31
2014 2013 % Change
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Daily production
Oil and NGLs (bbls/d) 2,545 2,691 (5)
Natural gas (mcf/d) 38,385 36,869 4
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Oil equivalent (boe/d) 8,943 8,836 1
Revenue
Oil and NGLs ($/bbl) 89.57 67.88 32
Natural gas ($/mcf) 5.59 3.56 57
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Oil equivalent ($/boe) 49.49 35.55 39
Royalties
Oil and NGLs ($/bbl) 8.73 9.16 (5)
Natural gas ($/mcf) 0.19 0.21 (10)
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Oil equivalent ($/boe) 3.31 3.69 (10)
Production expenses
Oil and NGLs ($/bbl) 5.18 5.24 (1)
Natural gas ($/mcf) 0.92 1.09 (16)
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Oil equivalent ($/boe) 5.42 6.13 (12)
Transportation expenses
Oil and NGLs ($/bbl) 1.41 0.90 57
Natural gas ($/mcf) 0.14 0.11 27
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Oil equivalent ($/boe) 1.02 0.72 42
Operating netback (1)
Oil and NGLs ($/bbl) 74.25 52.58 41
Natural gas ($/mcf) 4.34 2.15 102
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Oil equivalent ($/boe) 39.74 25.01 59
Depletion and depreciation ($/boe) (14.61) (13.46) 9
Asset impairment ($/boe) - (0.25) (100)
General and administrative expenses
($/boe) (1.94) (1.93) 1
Share based compensation ($/boe) (0.51) (0.65) (22)
Finance expenses ($/boe) (1.68) (1.12) 50
Gain on sale of assets ($/boe) 0.50 - 100
Deferred tax expense ($/boe) (4.12) (1.32) 212
Realized loss on risk management
contracts ($/boe) (0.59) (0.58) 2
Unrealized loss on risk management
contracts ($/boe) (4.95) (2.44) 103
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Net earnings ($/boe) 11.84 3.26 263
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(1 Operating netback does not have any standardized meaning prescribed by
) IFRS and therefore may not be comparable to similar measures used by
other companies. Please refer to the Non-GAAP Measures section in the
MD&A for more details.
OPERATIONS UPDATE
In Q1 2014, Crocotta focused on expanding and exploiting both core areas and new
initiatives. Most of the drilling continues to be at Edson, while significant
capital was spent in expanding the opportunity bases at Edson, at Dawson
(Montney) and Stoddart (new oil exploration prospect).
At Edson, Crocotta drilled 9 (8.0 net) wells targeting Cardium light oil and
Bluesky liquids-rich gas and added to its infrastructure to accommodate future
growth and to maintain its current low cost structure. Approximately 87% of Q1
2014 capital excluding land was spent at Edson.
In the Montney, Crocotta drilled one upper Montney well at Sunrise and continues
to work on its plans to expand its gas plant to handle sour gas and to expand
the capacity of its current plant. In Q3 2014, Crocotta will drill an acid gas
injection well and work on regulatory applications for the expansion. It is
estimated that the plant would not be expanded and operational until late 2015.
At Stoddart in Northeast British Columbia, Crocotta purchased a well that it
intends to use for water disposal to assist in testing its new light oil play.
In 2013, Crocotta had drilled and completed a test well which produced both
light oil and water. In Q3 2014, Crocotta intends to set up water disposal and
properly evaluate the well. Crocotta has accumulated over 40 sections of land in
the general Stoddart area.
As part of an effort to expand its land base in all areas, Crocotta invested
approximately 30% of its Q1 2014 capital on land purchases. Land was purchased
in all areas noted above and will assist in Crocotta long term growth plans for
2015 and beyond.
For the remainder of 2014, Crocotta's capital will be spent on the continual
evaluation of all three areas and we look forward to reporting on new
developments as they arise.
MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
May 8, 2014
The MD&A should be read in conjunction with the unaudited interim consolidated
financial statements and related notes for the three months ended March 31, 2014
and the audited consolidated financial statements and related notes for the year
ended December 31, 2013. The unaudited interim consolidated financial statements
and financial data contained in the MD&A have been prepared in accordance with
International Financial Reporting Standards ("IFRS") in Canadian currency
(except where noted as being in another currency).
DESCRIPTION OF BUSINESS
Crocotta Energy Inc. ("Crocotta" or the "Company") is an oil and natural gas
company, actively engaged in the acquisition, development, exploration, and
production of oil and natural gas reserves in Western Canada. The Company trades
on the Toronto Stock Exchange under the symbol "CTA".
FREQUENTLY RECURRING TERMS
The Company uses the following frequently recurring industry terms in the MD&A:
"bbls" refers to barrels, "mcf" refers to thousand cubic feet, and "boe" refers
to barrel of oil equivalent. Disclosure provided herein in respect of a boe may
be misleading, particularly if used in isolation. A boe conversion rate of six
thousand cubic feet of natural gas to one barrel of oil equivalent has been used
for the calculation of boe amounts in the MD&A. This boe conversion rate is
based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead.
NON-GAAP MEASURES
This MD&A refers to certain financial measures that are not determined in
accordance with IFRS (or "GAAP"). This MD&A contains the terms "funds from
operations", "funds from operations per share", "net debt", and "operating
netback" which do not have any standardized meaning prescribed by GAAP and
therefore may not be comparable to similar measures used by other companies. The
Company uses these measures to help evaluate its performance.
Management uses funds from operations to analyze performance and considers it a
key measure as it demonstrates the Company's ability to generate the cash
necessary to fund future capital investments and to repay debt. Funds from
operations is a non-GAAP measure and has been defined by the Company as net
earnings plus non-cash items (depletion and depreciation, asset impairments,
share based compensation, non-cash finance expenses, unrealized gains and losses
on risk management contracts, and deferred income taxes) and excludes the change
in non-cash working capital related to operating activities and expenditures on
decommissioning obligations. The Company also presents funds from operations per
share whereby amounts per share are calculated using weighted average shares
outstanding, consistent with the calculation of earnings per share. Funds from
operations is reconciled from cash flow from operating activities under the
heading "Funds from Operations".
Management uses net debt as a measure to assess the Company's financial
position. Net debt includes current liabilities (excluding risk management
contracts) and the credit facility less current assets.
Management considers operating netback an important measure as it demonstrates
its profitability relative to current commodity prices. Operating netback, which
is calculated as average unit sales price less royalties, production expenses,
and transportation expenses, represents the cash margin for every barrel of oil
equivalent sold. Operating netback per boe is reconciled to net earnings per boe
under the heading "Operating Netback".
Q1 2014 HIGHLIGHTS
-- Increased funds from operations 68% to $28.8 million in Q1 2014 from
$17.1 million in Q1 2013
-- Drilled 8.0 net successful Cardium and Bluesky wells at Edson, AB
-- Drilled 1.0 net successful Montney well in Northeast BC
-- Subsequent to March 31, 2014, increased bank credit facility to $165
million from $150 million
SUMMARY OF FINANCIAL RESULTS
Three Months Ended March 31
($000s, except per share amounts) 2014 2013 % Change
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Oil and natural gas sales 39,836 28,267 41
Funds from operations 28,758 17,124 68
Per share - basic 0.30 0.19 58
Per share - diluted 0.29 0.19 53
Net earnings 9,518 2,604 266
Per share - basic and diluted 0.10 0.03 233
Total assets 417,123 322,053 30
Total long-term liabilities 157,206 22,086 612
Net debt 140,696 94,590 49
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The Company has experienced significant growth in oil and natural gas sales,
funds from operations, and net earnings in Q1 2014 compared to Q1 2013.
Continued successful capital activity during the past year at Edson, AB and
Northeast BC combined with a significant increase in oil, NGLs, and natural gas
commodity prices and a decrease in production expenses led to increased revenue,
funds from operations, and net earnings. Total assets and net debt have also
increased period-over-period as a result of significant capital activity during
the past year.
PRODUCTION Three Months Ended March 31
2014 2013 % Change
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Average Daily Production
Oil and NGLs (bbls/d) 2,545 2,691 (5)
Natural gas (mcf/d) 38,385 36,869 4
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Combined (boe/d) 8,943 8,836 1
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Daily production of 8,943 boe/d for the three months ended March 31, 2014 was
consistent with daily production of 8,836 boe/d for the comparative period in
2013. Compared to the previous quarter, daily production in Q1 2014 decreased
slightly from 9,233 boe/d in Q4 2013 due to delays in bringing on new wells in
Northeast BC, operational difficulties with the new Northeast BC facility, and
pipeline construction delays.
Crocotta's production profile for the first quarter of 2014 was comprised of 72%
natural gas and 28% oil and NGLs, consistent with the production profile for the
year ended December 31, 2013 which was comprised of 71% natural gas and 29% oil
and NGLs.
REVENUE Three Months Ended March 31
($000s) 2014 2013 % Change
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Oil and NGLs 20,519 16,438 25
Natural gas 19,317 11,829 63
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Total 39,836 28,267 41
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Average Sales Price
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Oil and NGLs ($/bbl) 89.57 67.88 32
Natural gas ($/mcf) 5.59 3.56 57
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Combined ($/boe) 49.49 35.55 39
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Revenue totaled $39.8 million for the first quarter of 2014, up 41% from $28.3
million in the comparative period. The increase in revenue was due to
significant increases in oil, NGLs, and natural gas commodity prices.
The following table outlines the Company's realized wellhead prices and industry
benchmarks:
Commodity Pricing Three Months Ended March 31
2014 2013 % Change
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Oil and NGLs
Corporate price ($CDN/bbl) 89.57 67.88 32
Edmonton par ($CDN/bbl) 100.18 88.65 13
West Texas Intermediate ($US/bbl) 98.68 94.35 5
Natural gas
Corporate price ($CDN/mcf) 5.59 3.56 57
AECO price ($CDN/mcf) 5.42 3.20 69
Exchange rate
CDN/US dollar average exchange rate 0.9066 0.9917 (9)
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Differences between corporate and benchmark prices can be the result of quality
differences (higher or lower API oil and higher or lower heat content natural
gas), sour content, NGLs included in reporting, and various other factors.
Crocotta's differences are mainly the result of lower priced NGLs included in
oil price reporting and higher heat content natural gas production that is
priced higher than AECO reference prices. The Company's corporate average oil
and NGLs price was 89.4% of Edmonton Par price for the three months ended March
31, 2014, up from 76.6% for the comparative period in 2013. The Company
experienced an increase in realized NGLs prices for a significant portion of its
NGLs volumes at Edson, AB and Northeast BC as they were transitioned to new
marketing arrangements in June 2013 and September 2013, respectively, which
allowed the Company to access higher propane and butane prices in the United
States. Corporate average natural gas price was 103.1% of AECO price for the
three months ended March 31, 2014, down from 111.3% in the comparative period.
The decrease in realized natural gas prices was also due to gas volumes at
Edson, AB and Northeast BC being transitioned to the new marketing arrangements
in 2013, which decreased the premium received on the Company's natural gas
production.
Future prices received from the sale of the products may fluctuate as a result
of market factors. In addition, the Company may enter into commodity price
contracts to manage future cash flows. For the period ended March 31, 2014, the
realized loss on the Company's oil contracts was $0.5 million, the unrealized
loss on the oil contracts was $1.1 million, and the unrealized loss on the
natural gas contracts was $2.9 million. At March 31, 2014, the Company had the
following commodity price contracts outstanding:
Commodity Period Type of Quantity Contract
Contract Contracted Price
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Oil January 1, 2014 - Financial - 500 bbls/d WTI CDN
December 31, 2014 Swap $100.80/bbl
Oil April 1, 2014 - Financial - 500 bbls/d WTI CDN
June 30, 2014 Swap $108.00/bbl
Oil July 1, 2014 - Financial - 500 bbls/d WTI CDN
September 30, 2014 Swap $110.00/bbl
Natural Gas April 1, 2014 - Financial - 5,000 GJ/d AECO CDN
October 31, 2014 Swap $3.505/GJ
Natural Gas April 1, 2014 - Financial - 5,000 GJ/d AECO CDN
October 31, 2014 Swap $3.650/GJ
Natural Gas April 1, 2014 - Financial - 10,000 GJ/d AECO CDN
October 31, 2014 Swap $3.745/GJ
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ROYALTIES Three Months Ended March 31
($000s) 2014 2013 % Change
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Oil and NGLs 2,000 2,218 (10)
Natural gas 666 712 (6)
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Total 2,666 2,930 (9)
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Average Royalty Rate (% of sales)
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Oil and NGLs 9.7 13.5 (28)
Natural gas 3.5 6.0 (42)
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Combined 6.7 10.4 (36)
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The Company pays royalties to provincial governments (Crown), freeholders, which
may be individuals or companies, and other oil and gas companies that own
surface or mineral rights. Crown royalties are calculated on a sliding scale
based on commodity prices and individual well production rates. Royalty rates
can change due to commodity price fluctuations and changes in production volumes
on a well-by-well basis, subject to a minimum and maximum rate restriction
ascribed by the Crown. The provincial government has also enacted various
royalty incentive programs that are available for wells that meet certain
criteria, such as natural gas deep drilling, which can result in fluctuations in
royalty rates.
For the three months ended March 31, 2014, oil, NGLs, and natural gas royalties
decreased 9% to $2.7 million from $2.9 million in the comparative period. The
overall effective royalty rate for the three months ended March 31, 2014
decreased 36% to 6.7% from 10.4% in the comparative period. These decreases were
the result of royalty incentives received on new wells brought on production
during the year combined with an increase in the monthly capital cost and
processing fee deductions in 2014 compared to 2013.
PRODUCTION EXPENSES Three Months Ended March 31
2014 2013 % Change
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Oil and NGLs ($/bbl) 5.18 5.24 (1)
Natural gas ($/mcf) 0.92 1.09 (16)
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Combined ($/boe) 5.42 6.13 (12)
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Per unit production expenses for the three months ended March 31, 2014 were
$5.42/boe, down 12% from $6.13/boe for the comparative period ended March 31,
2013. The Company reduced production expenses in Northeast BC by expanding the
Company's infrastructure during the third quarter of 2013. In addition, the
Company reduced production expenses at Edson, AB and Northeast BC by
transitioning to new marketing arrangements in June 2013 and September 2013,
respectively. The Company continues to focus on opportunities to maintain
operational efficiencies to enhance operating netbacks.
TRANSPORTATION EXPENSES Three Months Ended March 31
2014 2013 % Change
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Oil and NGLs ($/bbl) 1.41 0.90 57
Natural gas ($/mcf) 0.14 0.11 27
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Combined ($/boe) 1.02 0.72 42
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Transportation expenses are mainly third-party pipeline tariffs incurred to
deliver production to the purchasers at main hubs. For the quarter ended March
31, 2014 compared to the quarter ended March 31, 2013, transportation expenses
increased 42% to $1.02/boe from $0.72/boe. The increase in oil and NGLs
transportation expenses was a result of entering into a new marketing
arrangement in June 2013 for a significant portion of the Company's NGLs
production. This resulted in a change in marketer and sales point which had
higher associated transportation expenses. The increase in natural gas
transportation expenses is due to an increase in the contracted transportation
rates in Q1 2014 compared to Q1 2013.
OPERATING NETBACK Three Months Ended March 31
2014 2013 % Change
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Oil and NGLs ($/bbl)
Revenue 89.57 67.88 32
Royalties (8.73) (9.16) (5)
Production expenses (5.18) (5.24) (1)
Transportation expenses (1.41) (0.90) 57
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Operating netback 74.25 52.58 41
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Natural gas ($/mcf)
Revenue 5.59 3.56 57
Royalties (0.19) (0.21) (10)
Production expenses (0.92) (1.09) (16)
Transportation expenses (0.14) (0.11) 27
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Operating netback 4.34 2.15 102
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Combined ($/boe)
Revenue 49.49 35.55 39
Royalties (3.31) (3.69) (10)
Production expenses (5.42) (6.13) (12)
Transportation expenses (1.02) (0.72) 42
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Operating netback 39.74 25.01 59
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During the first quarter of 2014, Crocotta generated an operating netback of
$39.74/boe, up 59% from $25.01/boe for the first quarter of 2013. Compared to
the previous quarter, operating netbacks increased 45% from $27.49/boe in Q4
2013. These increases were due to significant increases in oil, NGLs, and
natural gas commodity prices and reduced production expenses.
The following is a reconciliation of operating netback per boe to net earnings
per boe for the periods noted:
Three Months Ended March 31
($/boe) 2014 2013 % Change
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Operating netback 39.74 25.01 59
Depletion and depreciation (14.61) (13.46) 9
Asset impairment - (0.25) (100)
General and administrative expenses (1.94) (1.93) 1
Share based compensation (0.51) (0.65) (22)
Finance expenses (1.68) (1.12) 50
Gain on sale of assets 0.50 - 100
Deferred tax expense (4.12) (1.32) 212
Realized loss on risk management
contracts (0.59) (0.58) 2
Unrealized loss on risk management
contracts (4.95) (2.44) 103
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Net earnings 11.84 3.26 263
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DEPLETION AND DEPRECIATION Three Months Ended March 31
2014 2013 % Change
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Depletion and depreciation ($000s) 11,762 10,700 10
Depletion and depreciation ($/boe) 14.61 13.46 9
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Depletion and depreciation for the three months ended March 31, 2014 was
$14.61/boe, up 9% from $13.46/boe for the comparative period ended March 31,
2013. The increase was due to a significant increase in estimated future capital
costs associated with proved plus probable reserves at Edson, AB in Q1 2014
compared to Q1 2013. Depletion and depreciation in Q1 2014 was consistent with
depletion and depreciation of $14.64/boe for the previous quarter ended December
31, 2013.
ASSET IMPAIRMENT Three Months Ended March 31
2014 2013 % Change
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Asset impairment ($000s) - 199 (100)
Asset impairment ($/boe) - 0.25 (100)
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Exploration and evaluation assets and property, plant, and equipment are grouped
into cash generating units ("CGU") for purposes of impairment testing.
Exploration and evaluation assets are assessed for impairment when they are
transferred to property, plant, and equipment or if facts and circumstances
suggest that the carrying amount exceeds the recoverable amount. For property,
plant, and equipment, an impairment is recognized if the carrying value of a CGU
exceeds the greater of its fair value less costs to sell or value in use. At
March 31, 2014, there were no indicators of impairment of property, plant, and
equipment. For the three months ended March 31, 2013, total exploration and
evaluation asset impairments of $0.2 million were recognized relating to the
expiry of undeveloped land rights (CGU - Miscellaneous AB).
GENERAL AND ADMINISTRATIVE Three Months Ended March 31
($000s) 2014 2013 % Change
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G&A expenses (gross) 2,071 2,009 3
G&A capitalized (216) (187) 16
G&A recoveries (297) (290) 2
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G&A expenses (net) 1,558 1,532 2
G&A expenses ($/boe) 1.94 1.93 1
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General and administrative expenses ("G&A") of $1.94/boe for the first quarter
of 2014 were consistent with general and administrative expenses of $1.93/boe
for the first quarter of 2013.
SHARE BASED COMPENSATION Three Months Ended March 31
2014 2013 % Change
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Share based compensation ($000s) 413 515 (20)
Share based compensation ($/boe) 0.51 0.65 (22)
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The Company grants stock options to officers, directors, employees and
consultants and calculates the related share based compensation using the
Black-Scholes-Merton option pricing model. The Company recognizes the expense
over the individual vesting periods for the graded vesting awards and estimates
a forfeiture rate at the date of grant and updates it throughout the vesting
period. Share based compensation expense decreased to $0.51/boe for the three
months ended March 31, 2014 from $0.65/boe in the comparative period due to the
graded vesting of awards and timing of option issuances over the past two years.
FINANCE EXPENSES Three Months Ended March 31
($000s) 2014 2013 % Change
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Interest expense 1,195 771 55
Accretion of decommissioning obligations 161 123 31
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Finance expenses 1,356 894 52
Finance expenses ($/boe) 1.68 1.12 50
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Interest expense relates to interest incurred on amounts drawn from the
Company's credit facility. The increase in interest expense is a result of
higher amounts being drawn on the Company's credit facility in the first quarter
of 2014 compared to the first quarter of 2013. At March 31, 2014, $132.4 million
(2013 - $88.5 million) had been drawn on the Company's credit facility.
DEFERRED INCOME TAXES
Deferred income tax expense on the earnings before taxes was $3.3 million in the
first quarter of 2014 (2013 - $1.0 million). This was consistent with
expectations by applying the statutory tax rate to the earnings before taxes.
Estimated tax pools at March 31, 2014 total approximately $363.3 million
(December 31, 2013 - $341.1 million).
FUNDS FROM OPERATIONS
Funds from operations for the three months ended March 31, 2014 was $28.8
million ($0.29 per diluted share) compared to $17.1 million ($0.19 per diluted
share) for the three months ended March 31, 2013. The increase was mainly due to
a significant increase in oil, NGLs, and natural gas commodity prices which
resulted in a significant increase in revenue.
The following is a reconciliation of cash flow from operating activities to
funds from operations for the periods noted:
Three Months Ended March 31
($000s) 2014 2013 % Change
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Cash flow from operating activities
(GAAP) 24,528 17,395 41
Add back (deduct):
Decommissioning expenditures 38 84 (55)
Change in non-cash working capital 4,192 (355) 1,281
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Funds from operations (non-GAAP) 28,758 17,124 68
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NET EARNINGS
The Company had net earnings of $9.5 million ($0.10 per diluted share) for the
three months ended March 31, 2014 compared to net earnings of $2.6 million
($0.03 per diluted share) for the three months ended March 31, 2013. The
increase was mainly due to a significant increase in oil, NGLs, and natural gas
commodity prices which resulted in a significant increase in revenue.
CAPITAL EXPENDITURES Three Months Ended March 31
($000s) 2014 2013 % Change
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Land 14,879 1,220 1,120
Drilling, completions, and workovers 31,823 20,085 58
Equipment 6,019 9,746 (38)
Geological and geophysical 381 467 (18)
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Exploration and development expenditures 53,102 31,518 68
Property dispositions (400) - 100
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Net capital expenditures 52,702 31,518 67
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For the three months ended March 31, 2014, the Company had net capital
expenditures of $52.7 million compared to capital expenditures of $31.5 million
for the three months ended March 31, 2013. The increase in exploration and
development expenditures in Q1 2014 was due to an increase in capital activity
in the Company's core areas of Edson, AB and Northeast BC. During the first
quarter of 2014, Crocotta drilled a total of 10 (9.0 net) wells, which resulted
in 7 (6.0 net) oil wells and 3 (3.0 net) liquids-rich natural gas wells. In
addition, the Company sold land for cash proceeds of $0.4 million from a
non-core property.
LIQUIDITY AND CAPITAL RESOURCES
Management uses net debt as a measure to assess the Company's financial position
and is reconciled as follows:
March 31, December 31,
($000s) 2014 2013 % Change
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Current liabilities (excluding risk
management contracts) 29,744 19,480 53
Credit facility 132,429 116,324 14
Less:
Current assets (21,477) (17,964) 20
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Net debt 140,696 117,840 19
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The Company had net debt of $140.7 million at March 31, 2014 compared to net
debt of $117.8 million at December 31, 2013. The increase of $22.9 million was
due to $53.1 million used for the purchase and development of oil and natural
gas properties and equipment, offset by funds from operations of $28.8 million,
shares issuances of $1.1 million relating to the exercise of stock options, and
proceeds from the sale of assets of $0.4 million.
During 2013, the Company entered into a $150 million syndicated credit facility
with three Canadian chartered banks. The credit facility consists of a $140
million revolving line of credit and a $10 million operating line of credit and
replaced the Company's previous $140 million revolving operating demand loan
credit facility. Subsequent to March 31, 2014, the Company signed an agreement
to increase the credit facility to $165 million. The syndicated facility
revolves for a 364 day period and will be subject to its next 364 day extension
by April 30, 2015. If not extended, the syndicated facility will cease to
revolve, the margins thereunder will increase by 0.50%, and all outstanding
advances will become repayable in one year from the extension date.
Advances under the syndicated facility are available by way of prime rate loans,
with interest rates between 1.00% and 2.50% over the Canadian prime lending
rate, and bankers' acceptances and LIBOR loans, which are subject to stamping
fees and margins ranging from 2.00% to 3.50% depending upon the debt to cash
flow ratio of the Company. Standby fees are charged on the undrawn syndicated
facility at rates ranging from 0.50% to 0.875%. The credit facility is secured
by a $300 million fixed and floating charge debenture on the assets of the
Company. The credit facility includes a covenant requiring the Company to
maintain a working capital ratio of not less than one-to-one. The working
capital ratio, as defined by its creditor, is calculated as current assets plus
any undrawn amounts available on its credit facility less current liabilities
(excluding risk management contracts and any current portion drawn on the credit
facility). The Company was fully compliant with this covenant at March 31, 2014.
At March 31, 2014, $132.4 million (December 31, 2013 - $116.3 million) had been
drawn on the credit facility. In addition, at March 31, 2014, the Company had
outstanding letters of guarantee of approximately $2.6 million (December 31,
2013 - $2.5 million) which reduce the amount that can be borrowed under the
credit facility. The next scheduled borrowing base review of the syndicated
facility is scheduled on or before October 31, 2014.
The ongoing global economic conditions have continued to impact the liquidity in
financial and capital markets, restrict access to financing, and cause
significant volatility in commodity prices. Despite the economic downturn and
financial market volatility, the Company continued to have access to both debt
and equity markets recently. The Company raised gross proceeds of approximately
$22.0 million from the issuance of common shares during the second quarter of
2013 and subsequent to March 31, 2014, the Company obtained an increase to its
credit facility to $165 million. The Company has also maintained a very
successful drilling program which has resulted in significant increases in
production and funds flow from operations in recent quarters. Management
anticipates that the Company will continue to have adequate liquidity to fund
budgeted capital investments through a combination of cash flow, equity, and
debt. Crocotta's capital program is flexible and can be adjusted as needed based
upon the current economic environment. The Company will continue to monitor the
economic environment and the possible impact on its business and strategy and
will make adjustments as necessary.
CONTRACTUAL OBLIGATIONS
The following is a summary of the Company's contractual obligations and
commitments at March 31, 2014:
Less than One to After
($000s) Total One Year Three Years Three Years
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities 29,744 29,744 - -
Credit facility 132,429 - 132,429 -
Risk management contracts 4,354 4,354 - -
Decommissioning obligations 24,025 85 75 23,865
Office leases 277 277 - -
Field equipment leases 367 367 - -
Firm transportation
agreements 20 8 12 -
----------------------------------------------------------------------------
Total contractual
obligations 191,216 34,835 132,516 23,865
----------------------------------------------------------------------------
OUTSTANDING SHARE DATA
The Company is authorized to issue an unlimited number of voting common shares,
an unlimited number of non-voting common shares, Class A preferred shares,
issuable in series, and Class B preferred shares, issuable in series. The voting
common shares of the Company commenced trading on the TSX on October 17, 2007
under the symbol "CTA". The following table summarizes the common shares
outstanding and the number of shares exercisable into common shares from
options:
(000s) March 31, 2014 May 8, 2014
----------------------------------------------------------------------------
Voting common shares 97,699 97,738
Stock options 7,962 7,923
----------------------------------------------------------------------------
Total 105,661 105,661
----------------------------------------------------------------------------
SUMMARY OF QUARTERLY RESULTS
Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
2014 2013 2013 2013 2013 2012 2012 2012
----------------------------------------------------------------------------
Average Daily
Production
Oil and NGLs
(bbls/d) 2,545 2,605 2,497 2,158 2,691 2,476 2,103 2,053
Natural gas
(mcf/d) 38,385 39,767 36,593 36,412 36,869 29,160 29,053 27,309
----------------------------------------------------------------------------
Combined (boe/d) 8,943 9,233 8,596 8,227 8,836 7,336 6,945 6,604
($000s, except per share amounts)
----------------------------------------------------------------------------
Oil and natural
gas sales 39,836 31,090 26,950 25,152 28,267 24,938 17,922 17,518
Funds from
operations 28,758 19,691 16,102 14,280 17,124 14,478 10,888 12,275
Per share -
basic 0.30 0.20 0.17 0.16 0.19 0.16 0.12 0.14
Per share -
diluted 0.29 0.20 0.16 0.15 0.19 0.16 0.12 0.14
Net earnings
(loss) 9,518 4,387 975 3,604 2,604 (2,082) (3,944) 1,065
Per share -
basic 0.10 0.05 0.01 0.04 0.03 (0.02) (0.04) 0.01
Per share -
diluted 0.10 0.04 0.01 0.04 0.03 (0.02) (0.04) 0.01
----------------------------------------------------------------------------
The Company has experienced significant increases in production over the
previous two years stemming from successful drilling activities at Edson, AB and
Northeast BC. In addition, oil, NGLs, and natural gas commodity prices have
gradually increased over the previous two years, with a significant increase in
Q1 2014. These production and commodity price increases have led to substantial
increases in revenue, funds from operations, and net earnings over the previous
two years. The Company had a net loss in two of the previous eight quarters
mainly as a result of asset impairments recognized in each quarter on non-core
properties.
CRITICAL ACCOUNTING ESTIMATES
Management is required to make estimates, judgments, and assumptions in the
application of IFRS that affect the reported amounts of assets and liabilities
at the date of the financial statements and revenues and expenses for the period
then ended. Certain of these estimates may change from period to period
resulting in a material impact on the Company's results from operations,
financial position, and change in financial position. The Company's significant
critical accounting estimates have not changed from the year ended December 31,
2013.
CHANGES IN ACCOUNTING POLICIES
On January 1, 2014, the Company retrospectively adopted amendments to IAS 36,
Impairment of Assets, IFRIC 21, Levies, and amendments to IAS 32, Financial
Instruments: Presentation, which had no impact on the amounts recorded in the
condensed interim consolidated financial statements.
RISK ASSESSMENT
The acquisition, exploration, and development of oil and natural gas properties
involves many risks common to all participants in the oil and natural gas
industry. Crocotta's exploration and development activities are subject to
various business risks such as unstable commodity prices, interest rate and
foreign exchange fluctuations, the uncertainty of replacing production and
reserves on an economic basis, government regulations, taxes, and safety and
environmental concerns. While management realizes these risks cannot be
eliminated, they are committed to monitoring and mitigating these risks.
Reserves and reserve replacement
The recovery and reserve estimates on Crocotta's properties are estimates only
and the actual reserves may be materially different from that estimated. The
estimates of reserve values are based on a number of variables including price
forecasts, projected production volumes and future production and capital costs.
All of these factors may cause estimates to vary from actual results.
Crocotta's future oil and natural gas reserves, production, and funds from
operations to be derived therefrom are highly dependent on the Company
successfully acquiring or discovering new reserves. Without the continual
addition of new reserves, any existing reserves the Company may have at any
particular time and the production therefrom will decline over time as such
existing reserves are exploited. A future increase in Crocotta's reserves will
depend on its abilities to acquire suitable prospects or properties and discover
new reserves.
To mitigate this risk, Crocotta has assembled a team of experienced technical
professionals who have expertise operating and exploring in areas the Company
has identified as being the most prospective for increasing reserves on an
economic basis. To further mitigate reserve replacement risk, Crocotta has
targeted a majority of its prospects in areas which have multi-zone potential,
year-round access, and lower drilling costs and employs advanced geological and
geophysical techniques to increase the likelihood of finding additional
reserves.
Operational risks
Crocotta's operations are subject to the risks normally incidental to the
operation and development of oil and natural gas properties and the drilling of
oil and natural gas wells. Continuing production from a property, and to some
extent the marketing of production therefrom, are largely dependent upon the
ability of the operator of the property.
Financial instruments
The Company classified the fair value of its financial instruments at fair value
according to the following hierarchy based on the amount of observable inputs
used to value the instrument:
-- Level 1 - observable inputs, such as quoted market prices in active
markets
-- Level 2 - inputs, other that the quoted market prices in active markets,
which are observable, either directly or indirectly
-- Level 3 - unobservable inputs for the asset or liability in which little
or no market data exists, therefore requiring an entity to develop its
own assumptions
The fair value of derivative contracts used for risk management as shown in the
statement of financial position as at March 31, 2014 is measured using level 2
inputs. During the three months ended March 31, 2014, there were no transfers
between level 1, level 2, and level 3 classified assets and liabilities.
Market risk
Market risk is the risk that the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market prices. Market risk is
comprised of foreign currency risk, interest rate risk, and other price risk,
such as commodity price risk. The objective of market risk management is to
manage and control market price exposures within acceptable limits, while
maximizing returns. The Company may use financial derivatives or physical
delivery sales contracts to manage market risks. All such transactions are
conducted within risk management tolerances that are reviewed by the Board of
Directors.
Foreign exchange risk
The prices received by the Company for the production of crude oil, natural gas,
and NGLs are primarily determined in reference to US dollars, but are settled
with the Company in Canadian dollars. The Company's cash flow from commodity
sales will therefore be impacted by fluctuations in foreign exchange rates. The
Company currently does not have any foreign exchange contracts in place.
Interest rate risk
The Company is exposed to interest rate risk as it borrows funds at floating
interest rates. In addition, the Company may at times issue shares on a
flow-through basis. This results in the Company being exposed to interest rate
risk to the Canada Revenue Agency for interest on unexpended funds on the
Company's flow-through share obligations. The Company currently does not use
interest rate hedges or fixed interest rate contracts to manage the Company's
exposure to interest rate fluctuations.
Commodity price risk
Oil and natural gas prices are impacted by not only the relationship between the
Canadian and US dollar but also by world economic events that dictate the levels
of supply and demand. The Company's oil, natural gas, and NGLs production is
marketed and sold on the spot market to area aggregators based on daily spot
prices that are adjusted for product quality and transportation costs. The
Company's cash flow from product sales will therefore be impacted by
fluctuations in commodity prices. In addition, the Company may enter into
commodity price contracts to manage future cash flows. For the period ended
March 31, 2014, the realized loss on the Company's oil contracts was $0.5
million, the unrealized loss on the oil contracts was $1.1 million, and the
unrealized loss on the gas contracts was $2.9 million.
At March 31, 2014, the Company had the following commodity price contracts
outstanding:
Commodity Period Type of Quantity Contract
Contract Contracted Price
----------------------------------------------------------------------------
Oil January 1, 2014 - Financial - 500 bbls/d WTI CDN
December 31, 2014 Swap $100.80/bbl
Oil April 1, 2014 - June Financial - 500 bbls/d WTI CDN
30, 2014 Swap $108.00/bbl
Oil July 1, 2014 - Financial - 500 bbls/d WTI CDN
September 30, 2014 Swap $110.00/bbl
Natural Gas April 1, 2014 - Financial - 5,000 GJ/d AECO CDN
October 31, 2014 Swap $3.505/GJ
Natural Gas April 1, 2014 - Financial - 5,000 GJ/d AECO CDN
October 31, 2014 Swap $3.650/GJ
Natural Gas April 1, 2014 - Financial - 10,000 GJ/d AECO CDN
October 31, 2014 Swap $3.745/GJ
----------------------------------------------------------------------------
Credit risk
Credit risk represents the financial loss that the Company would suffer if the
Company's counterparties to a financial asset fail to meet or discharge their
obligation to the Company. A substantial portion of the Company's accounts
receivable and deposits are with customers and joint venture partners in the oil
and natural gas industry and are subject to normal industry credit risks. The
Company generally grants unsecured credit but routinely assesses the financial
strength of its customers and joint venture partners.
The Company sells the majority of its production to three petroleum and natural
gas marketers and therefore is subject to concentration risk. Historically, the
Company has not experienced any collection issues with its oil and natural gas
marketers. Joint venture receivables are typically collected within one to three
months of the joint venture invoice being issued to the partner. The Company
attempts to mitigate the risk from joint venture receivables by obtaining
partner approval for significant capital expenditures prior to the expenditure
being incurred. The Company does not typically obtain collateral from petroleum
and natural gas marketers or joint venture partners; however, in certain
circumstances, the Company may cash call a partner in advance of expenditures
being incurred.
The maximum exposure to credit risk is represented by the carrying amount of
accounts receivable on the statement of financial position. At March 31, 2014,
$18.8 million or 96.1% of the Company's outstanding accounts receivable were
current while $0.8 million or 3.9% were outstanding over 90 days but not
impaired. During the period ended March 31, 2014, the Company did not deem any
outstanding accounts receivable to be uncollectable.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due. The Company's processes for managing
liquidity risk include ensuring, to the extent possible, that it will have
sufficient liquidity to meet its liabilities when they become due. The Company
prepares annual, quarterly, and monthly capital expenditure budgets, which are
monitored and updated as required, and requires authorizations for expenditures
on projects to assist with the management of capital. In managing liquidity
risk, the Company ensures that it has access to additional financing, including
potential equity issuances and additional debt financing. The Company also
mitigates liquidity risk by maintaining an insurance program to minimize
exposure to insurable losses.
Safety and Environmental Risks
The oil and natural gas business is subject to extensive regulation pursuant to
various municipal, provincial, national, and international conventions and
regulations. Environmental legislation provides for, among other things,
restrictions and prohibitions on spills, releases, or emissions of various
substances produced in association with oil and natural gas operations. Crocotta
is committed to meeting and exceeding its environmental and safety
responsibilities. Crocotta has implemented an environmental and safety policy
that is designed, at a minimum, to comply with current governmental regulations
set for the oil and natural gas industry. Changes to governmental regulations
are monitored to ensure compliance. Environmental reviews are completed as part
of the due diligence process when evaluating acquisitions. Environmental and
safety updates are presented and discussed at each Board of Directors meeting.
Crocotta maintains adequate insurance commensurate with industry standards to
cover reasonable risks and potential liabilities associated with its activities
as well as insurance coverage for officers and directors executing their
corporate duties. To the knowledge of management, there are no legal proceedings
to which Crocotta is a party or of which any of its property is the subject
matter, nor are any such proceedings known to Crocotta to be contemplated.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company's President and Chief Executive Officer ("CEO") and Vice President
Finance and Chief Financial Officer ("CFO") are responsible for establishing and
maintaining disclosure controls and procedures and internal controls over
financial reporting as defined in Multilateral Instrument 52-109 of the Canadian
Securities Administrators.
Disclosure controls and procedures have been designed to ensure that information
required to be disclosed by the Company is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure. The Company evaluated its disclosure controls and procedures for the
year ended December 31, 2013. The Company's CEO and CFO have concluded that,
based on their evaluation, the Company's disclosure controls and procedures are
not effective due to the existence of the weakness in internal controls over
financial reporting noted below.
Internal controls over financial reporting have been designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
IFRS. The Company's internal controls over financial reporting include those
policies and procedures that: pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect transactions and disposition of
the assets; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that receipts and expenditures are
being made only in accordance with authorizations of management and directors;
and provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could have a
material effect on the annual financial statements or interim financial
statements.
The Company evaluated the effectiveness of its internal controls over financial
reporting as of December 31, 2013. In making this evaluation, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework issued in
1992. Based on their evaluation, the Company's CEO and CFO have identified
weaknesses over segregation of duties. Specifically, due to the limited number
of finance and accounting personnel at the Company, it is not feasible to
achieve complete segregation of duties with regards to certain complex and
non-routine accounting transactions that may arise. This weakness is considered
to be a common deficiency for many smaller listed companies in Canada.
Notwithstanding the weaknesses identified with regards to segregation of duties,
the Company concluded that all other of its internal controls over financial
reporting were effective as of December 31, 2013. No material changes in the
Company's internal controls over financial reporting were identified during the
most recent reporting period that have materially affected, or are likely to
material affect, the Company's internal controls over financial reporting.
Because of their inherent limitations, disclosure controls and procedures and
internal controls over financial reporting may not prevent or detect
misstatements, errors, or fraud. Control systems, no matter how well conceived
or operated, can provide only reasonable, not absolute, assurance that the
objectives of the control systems are met. As a result of the weaknesses
identified in the Company's internal controls over financial reporting, there is
a greater likelihood that a material misstatement would not be prevented or
detected. To mitigate the risk of such material misstatement in financial
reporting, the CEO and CFO oversee all material and complex transactions of the
Company and the financial statements are reviewed and approved by the Board of
Directors each quarter. In addition, the Company will seek the advice of
external parties, such as the Company's external auditors, in regards to the
appropriate accounting treatment for any complex and non-routine transactions
that may arise.
FORWARD-LOOKING INFORMATION
This document contains forward-looking statements and forward-looking
information within the meaning of applicable securities laws. The use of any of
the words "expect", "anticipate", "continue", "estimate", "may", "will",
"should", "believe", "intends", "forecast", "plans", "guidance" and similar
expressions are intended to identify forward-looking statements or information.
More particularly and without limitation, this MD&A contains forward looking
statements and information relating to the Company's risk management program,
oil, NGLs, and natural gas production, capital programs, oil, NGLs, and natural
gas commodity prices, and debt levels. The forward-looking statements and
information are based on certain key expectations and assumptions made by the
Company, including expectations and assumptions relating to prevailing commodity
prices and exchange rates, applicable royalty rates and tax laws, future well
production rates, the performance of existing wells, the success of drilling new
wells, the availability of capital to undertake planned activities, and the
availability and cost of labour and services.
Although the Company believes that the expectations reflected in such
forward-looking statements and information are reasonable, it can give no
assurance that such expectations will prove to be correct. Since forward-looking
statements and information address future events and conditions, by their very
nature they involve inherent risks and uncertainties. Actual results may differ
materially from those currently anticipated due to a number of factors and
risks. These include, but are not limited to, the risks associated with the oil
and gas industry in general such as operational risks in development,
exploration and production, delays or changes in plans with respect to
exploration or development projects or capital expenditures, the uncertainty of
estimates and projections relating to production rates, costs, and expenses,
commodity price and exchange rate fluctuations, marketing and transportation,
environmental risks, competition, the ability to access sufficient capital from
internal and external sources and changes in tax, royalty, and environmental
legislation. The forward-looking statements and information contained in this
document are made as of the date hereof for the purpose of providing the readers
with the Company's expectations for the coming year. The forward-looking
statements and information may not be appropriate for other purposes. The
Company undertakes no obligation to update publicly or revise any
forward-looking statements or information, whether as a result of new
information, future events or otherwise, unless so required by applicable
securities laws.
ADDITIONAL INFORMATION
Additional information related to the Company, including the Company's Annual
Information Form (AIF), may be found on the SEDAR website at www.sedar.com.
Crocotta Energy Inc.
Condensed Consolidated Statements of Financial Position
(unaudited)
March 31 December 31
($000s) Note 2014 2013
----------------------------------------------------------------------------
Assets
Current assets
Accounts receivable 19,559 16,166
Prepaid expenses and deposits 1,918 1,798
----------------------------------------------------------------------------
21,477 17,964
Property, plant, and equipment (5) 342,536 313,142
Exploration and evaluation assets (4) 53,110 39,629
Deferred income taxes - 2,566
----------------------------------------------------------------------------
395,646 355,337
----------------------------------------------------------------------------
417,123 373,301
----------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 29,744 19,480
Risk management contracts 4,354 368
----------------------------------------------------------------------------
34,098 19,848
Credit facility (6) 132,429 116,324
Decommissioning obligations (7) 24,025 22,438
Deferred income taxes 752 -
----------------------------------------------------------------------------
191,304 158,610
Shareholders' Equity
Shareholders' capital (8) 252,471 250,563
Contributed surplus 12,672 12,970
Deficit (39,324) (48,842)
----------------------------------------------------------------------------
225,819 214,691
Subsequent event (6)
----------------------------------------------------------------------------
417,123 373,301
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
Crocotta Energy Inc.
Condensed Consolidated Statements of Operations and Comprehensive Earnings
(unaudited)
Three Months Ended March 31
($000s, except per share amounts) Note 2014 2013
----------------------------------------------------------------------------
Revenue
Oil and natual gas sales 39,836 28,267
Royalties (2,666) (2,930)
----------------------------------------------------------------------------
37,170 25,337
Realized loss on risk management
contracts (476) (458)
Unrealized loss on risk management
contracts (3,986) (1,937)
----------------------------------------------------------------------------
32,708 22,942
Expenses
Production 4,364 4,879
Transportation 819 573
Depletion and depreciation (5) 11,762 10,700
Asset impairment - 199
General and administrative 1,558 1,532
Share based compensation (9) 413 515
----------------------------------------------------------------------------
18,916 18,398
----------------------------------------------------------------------------
Operating earnings 13,792 4,544
Other Income (Expenses)
Finance expense (11) (1,356) (894)
Gain on sale of assets (4) 400 -
----------------------------------------------------------------------------
(956) (894)
----------------------------------------------------------------------------
Earnings before taxes 12,836 3,650
Taxes
Deferred income tax expense 3,318 1,046
----------------------------------------------------------------------------
Net earnings and comprehensive earnings 9,518 2,604
----------------------------------------------------------------------------
Net earnings per share
Basic and diluted 0.10 0.03
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
Crocotta Energy Inc.
Condensed Consolidated Statements of Shareholders' Equity
(unaudited)
Three Months Ended March 31
($000s) Note 2014 2013
----------------------------------------------------------------------------
Shareholders' Capital
Balance, beginning of period 250,563 228,277
Issued on exercise of stock options (8) 1,126 -
Share based compensation - exercised (8) 782 -
----------------------------------------------------------------------------
Balance, end of period 252,471 228,277
----------------------------------------------------------------------------
Contributed Surplus
Balance, beginning of period 12,970 12,026
Share based compensation - expensed (9) 413 515
Share based compensation - capitalized (9) 71 76
Share based compensation - exercised (8) (782) -
----------------------------------------------------------------------------
Balance, end of period 12,672 12,617
----------------------------------------------------------------------------
Deficit
Balance, beginning of period (48,842) (60,412)
Net earnings 9,518 2,604
----------------------------------------------------------------------------
Balance, end of period (39,324) (57,808)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Shareholders' Equity 225,819 183,086
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
Crocotta Energy Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31
($000s) Note 2014 2013
----------------------------------------------------------------------------
Operating Activities
Net earnings 9,518 2,604
Depletion and depreciation (5) 11,762 10,700
Asset impairment - 199
Share based compensation (9) 413 515
Finance expense (11) 1,356 894
Interest paid (11) (1,195) (771)
Gain on sale of assets (4) (400) -
Deferred income tax expense 3,318 1,046
Unrealized loss on risk management
contracts 3,986 1,937
Decommissioning expenditures (7) (38) (84)
Change in non-cash working capital (13) (4,192) 355
----------------------------------------------------------------------------
24,528 17,395
----------------------------------------------------------------------------
Financing Activities
Credit facility (6) 16,105 -
Revolving credit facility (6) - 19,981
Issuance of shares (8) 1,126 -
----------------------------------------------------------------------------
17,231 19,981
----------------------------------------------------------------------------
Investing Activities
Capital expenditures - property,
plant, and equipment (5) (38,255) (28,177)
Capital expenditures - exploration and
evaluation assets (4) (14,847) (3,341)
Proceeds on sale of exploration and
evaluation assets (4) 400 -
Change in non-cash working capital (13) 10,943 (5,858)
----------------------------------------------------------------------------
(41,759) (37,376)
----------------------------------------------------------------------------
Change in cash and cash equivalents - -
Cash and cash equivalents, beginning of
period - -
----------------------------------------------------------------------------
Cash and cash equivalents, end of period - -
----------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed interim
consolidated financial statements.
Crocotta Energy Inc.
Notes to the Condensed Interim Consolidated Financial Statements
Three Months Ended March 31, 2014
(Tabular amounts in 000s, unless otherwise stated)
1. REPORTING ENTITY
Crocotta Energy Inc. ("Crocotta" or the "Company") is an oil and natural gas
company, actively engaged in the acquisition, development, exploration, and
production of oil and natural gas reserves in Western Canada. The Company
conducts many of its activities jointly with others and these condensed interim
consolidated financial statements reflect only the Company's proportionate
interest in such activities. The Company currently has one wholly-owned
subsidiary.
The Company's place of business is located at 700, 639 - 5th Avenue SW, Calgary,
Alberta, Canada, T2P 0M9.
2. BASIS OF PRESENTATION
(a) Statement of compliance
These condensed interim consolidated financial statements have been prepared in
accordance with International Accounting Standard ("IAS") 34, Interim Financial
Reporting and accordingly do not include all of the information required in the
preparation of annual consolidated financial statements. The condensed interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes for the year ended December
31, 2013.
The condensed interim consolidated financial statements were authorized for
issuance by the Board of Directors on May 8, 2014.
(b) Basis of measurement
The condensed interim consolidated financial statements have been prepared on
the historical cost basis except for risk management contracts, which are
measured at fair value.
(c) Functional and presentation currency
The condensed interim consolidated financial statements are presented in
Canadian dollars, which is the functional currency of the Company and its
subsidiary.
(d) Use of estimates and judgments
The preparation of the condensed interim consolidated financial statements in
conformity with IFRS requires management to make estimates and use judgment
regarding the reported amounts of assets and liabilities as at the date of the
interim consolidated financial statements and the reported amounts of revenues
and expenses during the period. By their nature, estimates are subject to
measurement uncertainty and changes in such estimates in future periods could
require a material change in the interim consolidated financial statements.
Accordingly, actual results may differ from the estimated amounts as future
confirming events occur. The significant estimates and judgments made by
management in the preparation of these condensed interim consolidated financial
statements were consistent with those applied to the consolidated financial
statements as at and for the year ended December 31, 2013.
3. SIGNIFICANT ACCOUNTING POLICIES
The condensed interim consolidated financial statements have been prepared
following the same accounting policies as the audited consolidated financial
statements for the year ended December 31, 2013 with the exception of the new
policies adopted below. The accounting policies have been applied consistently
by the Company to all periods presented in these condensed interim consolidated
financial statements.
On January 1, 2014, the Company retrospectively adopted amendments to IAS 36,
Impairment of Assets, IFRIC 21, Levies, and amendments to IAS 32, Financial
Instruments: Presentation, which had no impact on the amounts recorded in the
condensed interim consolidated financial statements.
4. EXPLORATION AND EVALUATION ASSETS
Total
----------------------------------------------------------------------------
Balance, December 31, 2012 28,302
Additions 60,576
Transfer to property, plant, and equipment (48,610)
Impairment (639)
----------------------------------------------------------------------------
Balance, December 31, 2013 39,629
Additions 14,847
Transfer to property, plant, and equipment (1,366)
----------------------------------------------------------------------------
Balance, March 31, 2014 53,110
----------------------------------------------------------------------------
Exploration and evaluation assets consist of the Company's exploration projects
which are pending the determination of proved or probable reserves. Additions
represent the Company's share of costs incurred on exploration and evaluation
assets during the period, consisting primarily of undeveloped land and drilling
costs until the drilling of the well is complete and the results have been
evaluated. Included in the $14.8 million of additions during the three months
ended March 31, 2014 were additions of $0.2 million related to the Edson AB CGU,
$13.7 million related to the Northeast BC CGU, and $0.9 million related to the
Miscellaneous AB CGU.
During the first quarter of 2014, the Company sold land for proceeds of $0.4
million (CGU - Miscellaneous AB) and recorded a gain on sale of $0.4 million as
the net book value was $nil.
5. PROPERTY, PLANT, AND EQUIPMENT
Cost Total
----------------------------------------------------------------------------
Balance, December 31, 2012 331,642
Additions 66,694
Transfer from exploration and evaluation assets 48,610
Change in decommissioning obligation estimates 687
Capitalized share based compensation 207
----------------------------------------------------------------------------
Balance, December 31, 2013 447,840
Additions 38,255
Transfer from exploration and evaluation assets 1,366
Change in decommissioning obligation estimates 1,464
Capitalized share based compensation 71
----------------------------------------------------------------------------
Balance, March 31, 2014 488,996
----------------------------------------------------------------------------
Accumulated Depletion, Depreciation, and Impairment Total
----------------------------------------------------------------------------
Balance, December 31, 2012 89,939
Depletion and depreciation 44,596
Impairment 163
----------------------------------------------------------------------------
Balance, December 31, 2013 134,698
Depletion and depreciation 11,762
----------------------------------------------------------------------------
Balance, March 31, 2014 146,460
----------------------------------------------------------------------------
Net Book Value Total
----------------------------------------------------------------------------
December 31, 2012 241,703
December 31, 2013 313,142
March 31, 2014 342,536
----------------------------------------------------------------------------
During the three months ended March 31, 2014, approximately $0.2 million (2013 -
$0.2 million) of directly attributable general and administrative costs were
capitalized as expenditures on property, plant, and equipment.
Depletion and depreciation
The calculation of depletion and depreciation expense for the three months ended
March 31, 2014 included an estimated $305.1 million (2013 - $215.3 million) for
future development costs associated with proved plus probable undeveloped
reserves and excluded approximately $12.8 million (2013 - $13.4 million) for the
estimated salvage value of production equipment and facilities.
6. CREDIT FACILITY
During 2013, the Company entered into a $150 million syndicated credit facility
with three Canadian chartered banks. The credit facility consists of a $140
million revolving line of credit and a $10 million operating line of credit and
replaced the Company's previous $140 million revolving operating demand loan
credit facility. Subsequent to March 31, 2014, the Company signed an agreement
to increase the credit facility to $165 million. The syndicated facility
revolves for a 364 day period and will be subject to its next 364 day extension
by April 30, 2015. If not extended, the syndicated facility will cease to
revolve, the margins thereunder will increase by 0.50%, and all outstanding
advances will become repayable in one year from the extension date.
Advances under the syndicated facility are available by way of prime rate loans,
with interest rates between 1.00% and 2.50% over the Canadian prime lending
rate, and bankers' acceptances and LIBOR loans, which are subject to stamping
fees and margins ranging from 2.00% to 3.50% depending upon the debt to cash
flow ratio of the Company. Standby fees are charged on the undrawn syndicated
facility at rates ranging from 0.50% to 0.875%. The credit facility is secured
by a $300 million fixed and floating charge debenture on the assets of the
Company. The credit facility includes a covenant requiring the Company to
maintain a working capital ratio of not less than one-to-one. The working
capital ratio, as defined by its creditor, is calculated as current assets plus
any undrawn amounts available on its credit facility less current liabilities
(excluding risk management contracts and any current portion drawn on the credit
facility). The Company was fully compliant with this covenant at March 31, 2014.
At March 31, 2014, $132.4 million (December 31, 2013 - $116.3 million) had been
drawn on the credit facility. In addition, at March 31, 2014, the Company had
outstanding letters of guarantee of approximately $2.6 million (December 31,
2013 - $2.5 million) which reduce the amount that can be borrowed under the
credit facility. The next scheduled borrowing base review of the syndicated
facility is scheduled on or before October 31, 2014.
7. PROVISIONS - DECOMMISSIONING OBLIGATIONS
The Company's decommissioning obligations result from its ownership interest in
oil and natural gas assets including well sites and gathering systems. The total
decommissioning obligation is estimated based on the Company's net ownership
interest in all wells and facilities, estimated costs to abandon and reclaim the
wells and facilities, and the estimated timing of the costs to be incurred in
future periods. The total undiscounted amount of the estimated cash flows
(adjusted for inflation at 2% per year) required to settle the decommissioning
obligations is approximately $34.3 million which is estimated to be incurred
over the next 27 years. At March 31, 2014, a risk-free rate of 2.8% (December
31, 2013 - 3.1%) was used to calculate the net present value of the
decommissioning obligations.
Three Months Ended Year Ended
March 31, 2014 December 31, 2013
----------------------------------------------------------------------------
Balance, beginning of period 22,438 21,852
Provisions incurred 705 2,253
Provisions disposed - (80)
Provisions settled (38) (691)
Revisions 759 (1,486)
Accretion 161 590
----------------------------------------------------------------------------
Balance, end of period 24,025 22,438
----------------------------------------------------------------------------
8. SHAREHOLDERS' CAPITAL
The Company is authorized to issue an unlimited number of voting common shares,
an unlimited number of non-voting common shares, Class A preferred shares,
issuable in series, and Class B preferred shares, issuable in series. No
non-voting common shares or preferred shares have been issued.
Voting Common Shares Number Amount
----------------------------------------------------------------------------
Balance, December 31, 2012 89,261 228,277
Exercise of stock options 1,409 3,399
Share issuances 6,042 21,983
Share issue costs, net of future tax effect of $0.2
million (749)
Flow-through share premium (2,347)
----------------------------------------------------------------------------
Balance, December 31, 2013 96,712 250,563
Exercise of stock options 987 1,908
----------------------------------------------------------------------------
Balance, March 31, 2014 97,699 252,471
----------------------------------------------------------------------------
9. SHARE BASED COMPENSATION PLANS Stock options
The Company has authorized and reserved for issuance 9.8 million common shares
under a stock option plan enabling certain officers, directors, employees, and
consultants to purchase common shares. The Company will not issue options
exceeding 10% of the shares outstanding at the time of the option grants. Under
the plan, the exercise price of each option equals the market price of the
Company's shares on the date of the grant. The options vest over a period of
three years and an option's maximum term is 5 years. At March 31, 2014, 8.0
million options are outstanding at exercise prices ranging from $1.10 to $3.46
per share.
The number and weighted average exercise price of stock options are as follows:
Number of Weighted Average
Options Exercise Price ($)
----------------------------------------------------------------------------
Balance, December 31, 2012 8,601 2.09
Granted 1,717 2.77
Exercised (1,409) 1.46
Forfeited (60) 2.83
----------------------------------------------------------------------------
Balance, December 31, 2013 8,849 2.32
Granted 100 2.85
Exercised (987) 1.14
----------------------------------------------------------------------------
Balance, March 31, 2014 7,962 2.47
----------------------------------------------------------------------------
For the stock options exercised during the first quarter of 2014, the weighted
average share price of the Company's common shares at the date of exercise was
$3.39 per share (2013 - $2.95 per share).
The following table summarizes the stock options outstanding and exercisable at
March 31, 2014:
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Price Number Life Price Number Price
----------------------------------------------------------------------------
$1.10 to $2.00 1,554 1.1 1.32 1,554 1.32
$2.01 to $3.00 5,667 2.7 2.66 3,516 2.57
$3.01 to $3.46 741 2.8 3.44 479 3.46
----------------------------------------------------------------------------
7,962 2.4 2.47 5,549 2.29
----------------------------------------------------------------------------
Share based compensation
The Company accounts for its share based compensation plans using the fair value
method. Under this method, compensation cost is charged to earnings over the
vesting period for stock options granted to officers, directors, employees, and
consultants with a corresponding increase to contributed surplus.
The fair value of the stock options granted were estimated on the date of grant
using the Black-Scholes-Merton option pricing model with the following weighted
average assumptions:
Three Months Ended March 31
2014 2013
----------------------------------------------------------------------------
Risk-free interest rate (%) 1.5 1.2
Expected life (years) 4.0 4.0
Expected volatility (%) 48.4 62.7
Expected dividend yield (%) - -
Forfeiture rate (%) 5.7 6.2
Weighted average fair value of options granted
($ per option) 1.11 1.34
----------------------------------------------------------------------------
10. PER SHARE AMOUNTS
The following table summarizes the weighted average number of shares used in the
basic and diluted net earnings per share calculations:
Three Months Ended March 31
2014 2013
----------------------------------------------------------------------------
Weighted average number of shares - basic 96,728 89,261
Dilutive effect of share based compensation
plans 1,520 2,409
----------------------------------------------------------------------------
Weighted average number of shares - diluted 98,248 91,670
----------------------------------------------------------------------------
For the three months ended March 31, 2014, 2.5 million stock options (2013 - 2.3
million) were anti-dilutive and were not included in the diluted earnings per
share calculation.
11. FINANCE EXPENSES
Finance expenses include the following:
Three Months Ended March 31
2014 2013
----------------------------------------------------------------------------
Interest expense (note 6) 1,195 771
Accretion of decommissioning obligations (note
7) 161 123
----------------------------------------------------------------------------
Finance expenses 1,356 894
----------------------------------------------------------------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS Derivatives
The fair value of risk management contracts is determined by discounting the
difference between the contracted price and published forward curves as at the
statement of financial position date using the remaining contracted volumes and
a risk-free interest rate (based on published government rates).
The Company classified the fair value of its financial instruments at fair value
according to the following hierarchy based on the amount of observable inputs
used to value the instrument:
-- Level 1 - observable inputs, such as quoted market prices in active
markets
-- Level 2 - inputs, other that the quoted market prices in active markets,
which are observable, either directly or indirectly
-- Level 3 - unobservable inputs for the asset or liability in which little
or no market data exists, therefore requiring an entity to develop its
own assumptions
The fair value of derivative contracts used for risk management as shown in the
statement of financial position as at March 31, 2014 is measured using level 2
inputs. During the three months ended March 31, 2014, there were no transfers
between level 1, level 2, and level 3 classified assets and liabilities.
Financial assets and liabilities are only offset if the Company has the legal
right to offset and intends to settle on a net basis or settle the asset and
liability simultaneously. The following table summarizes the gross asset and
liability positions of the Company's risk management contracts that are offset
on the statement of financial position:
March 31, 2014 December 31, 2013
----------------------------------------------------------------------------
Gross liability (4,428) (447)
Gross asset 74 79
----------------------------------------------------------------------------
Net liability (4,354) (368)
----------------------------------------------------------------------------
13. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended March 31
2014 2013
----------------------------------------------------------------------------
Accounts receivable (3,393) (1,402)
Prepaid expenses and deposits (120) 173
Accounts payable and accrued liabilities 10,264 (4,274)
----------------------------------------------------------------------------
Change in non-cash working capital 6,751 (5,503)
----------------------------------------------------------------------------
Relating to:
Investing (4,192) (5,858)
Operating 10,943 355
----------------------------------------------------------------------------
Change in non-cash working capital 6,751 (5,503)
----------------------------------------------------------------------------
CORPORATE INFORMATION
OFFICERS AND DIRECTORS
Robert J. Zakresky, CA BANK
President, CEO & Director National Bank of Canada
1800, 311 - 6th Avenue SW
Nolan Chicoine, MPAcc, CA Calgary, Alberta T2P 3H2
VP Finance & CFO
Terry L. Trudeau, P.Eng.
VP Operations & COO TRANSFER AGENT
Valiant Trust Company
Weldon Dueck, BSc., P.Eng. 310, 606 - 4th Street SW
VP Business Development Calgary, Alberta T2P 1T1
R.D. (Rick) Sereda, M.Sc., P.Geol.
VP Exploration
LEGAL COUNSEL
Helmut R. Eckert, P.Land Gowling Lafleur Henderson LLP
VP Land 1600, 421 - 7th Avenue SW
Calgary, Alberta T2P 4K9
Larry G. Moeller, CA, CBV
Chairman of the Board
Daryl H. Gilbert, P.Eng. AUDITORS
Director KPMG LLP
2700, 205 - 5th Avenue SW
Don Cowie Calgary, Alberta T2P 4B9
Director
Brian Krausert
Director INDEPENDENT ENGINEERS
GLJ Petroleum Consultants Ltd.
Gary W. Burns 4100, 400 - 3rd Avenue SW
Director Calgary, Alberta T2P 4H2
Don D. Copeland, P.Eng.
Director
Brian Boulanger
Director
Patricia Phillips
Director
FOR FURTHER INFORMATION PLEASE CONTACT:
Crocotta Energy Inc.
Robert J. Zakresky
President & CEO
(403) 538-3736
Crocotta Energy Inc.
Nolan Chicoine
VP Finance & CFO
(403) 538-3738
Crocotta Energy Inc.
Suite 700, 639 - 5th Avenue SW
Calgary, Alberta T2P 0M9
(403) 538-3737
(403) 538-3735 (FAX)
www.crocotta.ca
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