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March 18, 2008
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Open Range Energy Corp. (TSX:ONR) Announces 2007 Financial and Operating Results
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CALGARY, ALBERTA--(Marketwire - March 18, 2008) -
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
Open Range Energy Corp. ("Open Range" or the "Corporation") (TSX:ONR) is pleased to announce the financial and operating results for the year ended December 31, 2007. The Corporation has filed its audited financial statements and related management's discussion analysis for the year ended December 31, 2007 on www.sedar.com.
CORPORATE HIGHLIGHTS
During the year ended December 31, 2007, Open Range:
- Produced an average of 1,456 boe per day (89 percent natural gas), an 81 percent increase from the 2006 average;
- Increased year-over-year production per share by 34 percent and reserves per share by 45 percent;
- Drilled 18 (7.3 net) successful natural gas wells, of which 12 (6.2 net) wells were at its core Ansell/Sundance property;
- Drilled and cased a 3,800-metre Foothills exploratory well at Rough which encountered three potential natural gas pay zones;
- Achieved finding and development costs, including the change in future development capital, of $14.27 per proved plus probable boe of reserves added, which generated a recycle ratio of 2.4 times;
- Increased funds from operations by 147 percent and funds from operations per share by 86 percent over 2006, to $15.2 million and $0.78 per share, respectively;
- Increased operating netbacks by 21 percent over 2006, to $33.63 per boe;
- Reduced cash costs by 19 percent over 2006, to $12.61 per boe;
- Received cash payments for gains on natural gas hedging contracts of $1.5 million or $0.53 per mcf;
- Raised $19 million through two flow-through common equity financing agreements; and
- Increased undeveloped land by 17 percent from 2006 to 25,919 net acres.
Subsequent to December 31, 2007, Open Range:
- Announced the acquisition of 35 sections of contiguous land at its emerging Rough property, with an average working interest of 97 percent;
- Commenced its initial $35 million capital investment program for 2008;
- Increased its bank lines to $40 million with the National Bank of Canada; and
- Announced a $22.9 million bought-deal equity financing, with an underwriters option to purchase common shares for additional gross proceeds of $2.1 million.
FINANCIAL AND OPERATING HIGHLIGHTS
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Petroleum and natural
gas revenue(1) $ 7,097,092 $ 3,746,651 $ 23,912,043 $ 12,554,802
Funds from operations 4,582,484 1,930,915 15,158,721 6,139,697
Per basic and diluted
share 0.23 0.12 0.78 0.42
Net income (loss) (344,678) (159,899) 523,139 (927,643)
Per basic and diluted
share (0.02) (0.01) 0.03 (0.06)
Working capital (net
debt) (12,832,107) (3,281,305) (12,832,107) (3,281,305)
Capital expenditures,
net $ 9,353,992 $ 7,256,768 $ 42,003,632 $ 34,603,166
Weighted average
shares outstanding
basic and diluted 20,028,506 15,778,540 19,403,154 14,447,464
Production
Natural gas (mcf per
day) 8,862 5,111 7,733 4,357
Oil and NGL (bbls per
day) 171 81 167 80
----------------------------------------------------------------------------
Total (@ 6:1) (boe per
day) 1,648 933 1,456 806
Realized average sales
prices
Natural gas ($ per
mcf)(1) 7.29 7.19 7.13 6.81
Oil and NGL ($ per
bbl) 73.10 49.73 62.46 59.61
----------------------------------------------------------------------------
Combined average ($
per boe) 46.80 43.67 45.00 42.69
Royalties ($ per boe) (1.63) (4.95) (3.86) (6.22)
Operating costs,
including
transportation ($ per
boe) (9.42) (8.56) (7.51) (8.72)
----------------------------------------------------------------------------
Operating netback ($
per boe) 35.75 30.16 33.63 27.75
General and
administrative costs
($ per boe) (4.41) (7.17) (4.65) (6.70)
Net interest expense
($ per boe) (1.12) (0.48) (0.45) (0.18)
----------------------------------------------------------------------------
Corporate netback
($ per boe) 30.22 22.51 28.53 20.87
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes realized gains on commodity contracts.2008 PLANS AND OUTLOOK
Open Range will continue to execute its proven exploration-based strategy in 2008. The initial capital investment program is budgeted at $35 million. Open Range's planned program of 11 (6 net) wells will follow a balanced drilling strategy with approximately 70 percent of planned locations focused on development drilling and 30 percent on exploratory opportunities. The exploratory locations will focus on augmenting the development drilling inventory within the Corporation's expanding Ansell/Sundance fairway.
As announced in the Corporation's March 11, 2008 reserves update, Open Range drilled a 3,800-metre exploratory prospect in the Rough area of the Alberta Foothills in the fourth quarter of 2007. The well intersected three potential pay zones, all of them Deep Basin Cretaceous sands, and was cased as a potential natural gas well. Based on drilling response and comparison to analogous offsetting gas pools, the pay zones appear to be significantly over-pressured. The Corporation expects to commence completion and testing operations on the two deeper zones in June 2008. Open Range plans to take a measured approach to this emerging property with plans to drill a second well following successful completion of the initial earning well.
Alberta's proposed New Royalty Framework (NRF) has caused uncertainty in the energy industry and capital markets. Although the proposed changes under the NRF are to become effective January 1, 2009, the provincial government has signalled it may maintain a form of deep gas drilling incentives. Meanwhile, Open Range has reviewed the announced NRF to assess the potential impact on the Corporation. This assessment has shown that further clarification is needed with regards to the royalty changes proposed, specifically as they relate to deep natural gas drilling. It has also shown that Open Range's existing asset base could be minimally affected. This is partly due to the expected deep gas royalty adjustment and the reduced royalty burden on the Corporation's wells' stabilized production rates. Although new wells are expected to incur higher royalties due to their high initial production rates, the quality of Open Range's multi-zone asset base means that the Corporation's drilling inventory remains economic at current prices.
The Corporation is forecasting average production in 2008 of 2,000 boe per day and an exit rate of 2,350 boe per day, generating expected year-over-year volume growth of 37 percent on an absolute basis and approximately 20 to 25 percent on a per share basis. Open Range is basing plans on price assumptions of Cdn$7.13 per mcf of natural gas and Cdn$66.00 per bbl of natural gas liquids. Based on these parameters, the Corporation should generate cash flow of approximately $19.5 million in 2008.
The Annual General Meeting for Open Range Energy Corp. is scheduled to take place on Thursday, May 15th at 10:00 AM MDT in the Royal Room of the Metropolitan Conference Centre, located at 333 - 4th Avenue S.W., Calgary, AB.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following management's discussion and analysis (MD&A) is a review of operations, current financial position and outlook for Open Range Energy Corp. ("Open Range" or the "Corporation") for the year ended December 31, 2007 compared to the year ended December 31, 2006. This MD&A should be read in conjunction with the audited annual financial statements for the year ended December 31, 2007 and comparative information for the year ended December 31, 2006, along with the MD&A for the quarters ended March 31, 2007, June 30, 2007 and September 30, 2007. This MD&A is dated March 18, 2008.
BOE PRESENTATION
The use of barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and is not intended to represent a value equivalency at the wellhead.
NON-GAAP MEASUREMENTS
The terms "funds from operations", "funds from operations per share" and "operating netback" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations and operating netback are useful supplemental measurements. Open Range utilizes funds from operations to evaluate operating performance and assess leverage. The Corporation considers funds from operations to be an important measure of the results generated by its principal business activities before the consideration of how those activities are financed or how the results are taxed and before abandonment expenditures. Operating netback is a benchmark used in the oil and natural gas industry to measure the contribution of oil and natural gas sales following the deduction of royalties, operating expenses and transportation costs. Users are cautioned, however, that these measures should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.
RECONCILIATION OF CASH FLOW PER GAAP TO FUNDS FROM OPERATIONS
Open Range's method of calculating funds from operations may differ from that of other corporations and, accordingly, may not be comparable to measures used by other corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities and asset retirement expenditures incurred as the Corporation believes the uncertainty surrounding the timing of collection, payment or incurrence of these items makes them less useful in evaluating Open Range's operating performance. A summary of this reconciliation is presented as follows:
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash flow from
operating activities
(per GAAP) $ 2,867,479 $ 758,091 $ 13,590,394 $ 4,821,096
Change in non-cash
working capital 1,698,137 1,172,824 1,551,458 1,318,601
Asset retirement
expenditures 16,869 - 16,869 -
----------------------------------------------------------------------------
Funds from operations $ 4,582,485 $ 1,930,915 $ 15,158,721 $ 6,139,697
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----------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) cash flow; and (v) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Corporation's control. Such risks and uncertainties include, without limitation, risks associated with oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, increased competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, changes in federal and provincial tax laws and legislation (including the adoption of new royalty regimes), the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that the Corporation will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive and reference is made to the items under "Risk Factors" in the Corporation's Annual Information Form (AIF) for the year ended December 31, 2007. All subsequent forward-looking statements, whether written or oral, attributable to the Corporation or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this MD&A are made as at the date hereof and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
FINANCIAL AND OPERATING SUMMARY
----------------------------------------------------------------------------
Years ended December 31, 2007 2006
----------------------------------------------------------------------------
($ per boe @ ($ per boe @
($) 6:1) ($) 6:1)
----------------------------------------------------------------------------
Oil and natural gas
liquids (NGL) revenue 3,806,176 7.16 1,730,482 5.88
Natural gas revenue 18,620,122 35.04 10,776,331 36.65
Realized gain on
commodity contracts 1,485,745 2.80 47,989 0.16
----------------------------------------------------------------------------
Total 23,912,043 45.00 12,554,802 42.69
Royalties (2,053,158) (3.86) (1,829,598) (6.22)
Operating costs (3,990,860) (7.51) (2,563,607) (8.72)
----------------------------------------------------------------------------
Operating netback 17,868,025 33.63 8,161,597 27.75
General and
administrative costs (2,472,439) (4.65) (1,969,507) (6.70)
Net interest expense (236,865) (0.45) (52,393) (0.18)
----------------------------------------------------------------------------
Funds from operations 15,158,721 28.53 6,139,697 20.87
Unrealized gain (loss)
on commodity contracts (332,228) (0.63) 1,045,303 3.55
Depletion and
depreciation (13,295,728) (25.02) (7,439,802) (25.29)
Accretion of asset
retirement obligations (162,297) (0.31) (155,208) (0.53)
Stock-based
compensation (545,870) (1.03) (483,347) (1.64)
----------------------------------------------------------------------------
Earnings (loss) before
income taxes 822,598 1.54 (893,357) (3.04)
Future income tax
expense (299,459) (0.56) (34,286) (0.11)
----------------------------------------------------------------------------
Net earnings (loss) 523,139 0.98 (927,643) (3.15)
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----------------------------------------------------------------------------
DETAILED FINANCIAL ANALYSIS
PRODUCTION
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Production
Oil and NGL (bbls/d) 171 81 167 80
Natural gas (mcf/d) 8,862 5,111 7,733 4,357
----------------------------------------------------------------------------
Total (boe/d) 1,648 933 1,456 806
----------------------------------------------------------------------------
Total (boe) 151,660 85,795 531,371 294,065
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% natural gas 90 91 89 90
----------------------------------------------------------------------------
----------------------------------------------------------------------------Open Range's production for the three months and year ended December 31, 2007 increased significantly from the comparative periods in 2006. The increases in both periods resulted from the continued successful drilling activity throughout 2007. Production in the three months and year ended December 31, 2007 averaged 1,648 boe per day and 1,456 boe per day, respectively. These figures represented increases of 77 percent and 81 percent, respectively, from the average production of 933 boe per day and 806 boe per day for the respective three months and year ended December 31, 2006. Natural gas production in the three months and year ended December 31, 2007 increased to 8,862 mcf per day and 7,733 mcf per day, respectively, from 5,111 mcf per day and 4,357 mcf per day, respectively, for the three months and year ended December 31, 2006. Oil and natural gas liquids (NGL) production in the three months ended December 31, 2007 increased by 111 percent to 171 barrels per day from 81 barrels per day in the fourth quarter of 2006. For the year ended December 31, 2007, oil and NGL production increased by 109 percent to 167 boe per day from 80 boe per day in 2006.
Open Range is forecasting average production of 2,000 boe per day in 2008 and expects to exit the year with production of approximately 2,350 boe per day.
OIL AND NATURAL GAS REVENUES
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue
Oil and NGL $ 1,153,343 $ 369,692 $ 3,806,176 $ 1,730,482
Natural gas 5,236,167 3,328,970 18,620,122 10,776,331
Realized gains on
commodity contracts 707,582 47,989 1,485,745 47,989
----------------------------------------------------------------------------
Total $ 7,097,092 $ 3,746,651 $23,912,043 $ 12,554,802
----------------------------------------------------------------------------
Average realized price
Oil and NGL ($/bbl) 73.10 49.73 62.46 59.61
Natural gas ($/mcf) 6.42 7.09 6.60 6.78
Realized gains on
commodity contracts
($/mcf) 0.87 0.10 0.53 0.03
----------------------------------------------------------------------------
Combined average
($/boe) 46.80 43.67 45.00 42.69
----------------------------------------------------------------------------
Benchmark pricing
Edmonton Par
(Cdn$/bbl) 87.09 64.94 76.39 73.25
Alberta Spot
(Cdn$/mcf) 6.03 6.77 6.36 6.38
----------------------------------------------------------------------------Revenue, including realized gains on commodity contracts, for the three months ended December 31, 2007 increased by 89 percent to $7.1 million from $3.7 million in the comparative period in 2006. The increase in revenue was a result of significant realized gains on commodity contracts, a 77 percent increase in production volumes and a 7 percent increase in the combined average sales price from the fourth quarter of 2006. For the year ended December 31, 2007, revenue increased by 90 percent to $23.9 million from $12.6 million in 2006. The increase was again due to significant realized gains on commodity contracts, an 81 percent increase in production volumes and a 5 percent increase in the combined average sales price. The changes in average sales prices for oil, NGL and natural gas realized by Open Range for the three months and the year ended December 31, 2007 from the comparative periods in 2006 are consistent with the fluctuations in benchmark oil and natural gas prices over the same periods. Open Range's average sales price for natural gas is at a premium to the Alberta natural gas spot benchmark price due to the high energy content of the Corporation's natural gas production.
Open Range realized gains on commodity contracts of $0.7 million and $1.5 million for the three months and year ended December 31, 2007, respectively. These realized gains related to natural gas commodity contracts and amounted to an additional $0.87 per mcf and $0.53 per mcf on the Corporation's respective natural gas production for the three months and year ended December 31, 2007.
UNREALIZED GAINS (LOSSES) ON COMMODITY CONTRACTS
Open Range's management utilizes commodity contracts as a risk management technique to protect exploration and development economics, reduce volatility in cash flows and mitigate the unpredictable commodity price environment. During the fourth quarter, the Corporation recorded an unrealized loss on commodity contracts of $1.0 million. For the year ended December 31, 2007 the Corporation recorded an unrealized loss of $0.3 million. These amounts represented the change in the fair value of the commodity contracts held by the Corporation during the three months and year ended December 31, 2007.
Natural gas hedging contracts entered into as at March 18, 2008 are as
follows:
----------------------------------------------------------------------------
Average Average
AECO Spot AECO Spot
Volume Floor Ceiling
Period (GJ/d) Type (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
Jan. to Dec. 2,500 Costless $7.00 $10.20
2007 Collar
----------------------------------------------------------------------------
Jan. to Dec. 1,250 Costless $7.00 $ 8.00-
2007 Collar $ 9.90
----------------------------------------------------------------------------
Apr. 2007 to 1,000 Costless $7.00 $10.16
Mar. 2008 Collar
----------------------------------------------------------------------------
Nov. 2007 to 1,500 Costless $7.50 $10.67
Mar. 2008 Collar
----------------------------------------------------------------------------
Jan. to Dec. 3,000 Costless $6.75 $ 7.50-
2008 Collar $ 9.12
----------------------------------------------------------------------------
Apr. to Oct. 1,500 Swap $6.46 $ 6.46
2008
----------------------------------------------------------------------------
Nov. to Dec. 1,500 Swap $7.26 $ 7.26
2008
----------------------------------------------------------------------------
Apr. to Oct. 1,500 Swap $6.50 $ 6.50
2008
Nov. 2008 to 1,500 Costless $6.75 $11.09
Mar. 2009 Collar
Jan. to Dec. 1,000 Costless $6.50 $10.65
2009 Collar
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized Unrealized
Gain (Loss) Gain (Loss) Unrealized Unrealized
for the three for the three Gain (Loss) for Gain for the
months ended months ended the year ended year ended
December 31, December 31, December 31, December 31,
Period 2007 2006 2007 2006
----------------------------------------------------------------------------
Jan. to Dec.
2007 $ (332,449) $ (90,111) $ (750,940) $ 750,940
----------------------------------------------------------------------------
Jan. to Dec.
2007 (166,150) 61,892 (294,363) 294,363
----------------------------------------------------------------------------
Apr. 2007 to
Mar. 2008 (152,065) 294,363 68,534 -
----------------------------------------------------------------------------
Nov. 2007 to
Mar. 2008 (163,623) - 164,411 -
----------------------------------------------------------------------------
Jan. to Dec.
2008 (121,987) - 497,458 -
----------------------------------------------------------------------------
Apr. to Oct.
2008 (9,263) - (9,263) -
----------------------------------------------------------------------------
Nov. to Dec.
2008 (8,065) - (8,065) -
----------------------------------------------------------------------------
Apr. to Oct.
2008 - - - -
Nov. 2008 to
Mar. 2009 - - - -
Jan. to Dec.
2009 - - - -
----------------------------------------------------------------------------
$ (953,602) $ 266,144 $ (332,228) $ 1,045,303
----------------------------------------------------------------------------
For more details on these contracts refer to note 10, Financial Instruments,
in the audited financial statements for the year ended December 31, 2007.
ROYALTIES
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Royalty expense -
oil & NGL $ 247,016 $ 84,337 $ 885,761 $ 384,197
Royalty expense -
natural gas 278 410,601 1,167,397 1,586,348
ARTC - (70,518) - (140,947)
----------------------------------------------------------------------------
Total $ 247,294 $ 424,420 $ 2,053,158 $ 1,829,598
$ per boe 1.63 4.95 3.86 6.22
% of revenues(1) 4% 11% 9% 15%
----------------------------------------------------------------------------
(1) Revenue before realized gains on commodity contracts.Royalties totalled $0.2 million and $2.1 million for the fourth quarter and year ended December 31, 2007, respectively, compared to $0.4 million and $1.8 million, respectively, for the comparative periods in 2006. Royalties in the fourth quarter of 2007 fell as the Corporation continued to receive deep well royalty holiday payments for wells at Ansell/Sundance and actual royalty expenses recorded in the first nine months of the year came in below the Corporation's estimates. On a per unit of production basis, royalty costs for the year ended December 31, 2007 were down by 38 percent from 2006, mainly due to the Corporation's operational focus in the Deep Basin where benefits from the deep well royalty holiday program continue to be realized. Royalties as a percentage of revenue for the year ended December 31, 2007 also decreased to nine percent from 15 percent in the comparative period in 2006.
Open Range anticipates an average royalty rate for 2008 of approximately 10 percent to 15 percent of revenue, reflecting the continued beneficial effect of the deep well royalty holiday program on royalty expenses. All of the Corporation's planned 2008 drilling activity will be focused on the drilling of deep natural gas wells on lands qualifying for the existing deep well royalty holiday program.
On October 25, 2007 the Alberta government announced a New Royalty Framework that will result in changes to royalties levied on natural gas and conventional oil produced in Alberta effective January 1, 2009. The New Royalty Framework, if enacted as proposed, could increase the Corporation's average royalty rate commencing January 1, 2009, depending on transitional rules which have not yet been made available to the Corporation. The proposed changes to royalties could also have a negative impact on net earnings, funds from operations, cash flow from operating activities, operating netbacks, and reserve values, which could create uncertainty as to the recoverability of the carrying value of the Corporation's petroleum and natural gas assets.
OPERATING COSTS AND NETBACK
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
($ per boe) 2007 2006 2007 2006
----------------------------------------------------------------------------
Average realized
sales price 46.80 43.67 45.00 42.69
Royalty expenses (1.63) (4.95) (3.86) (6.22)
Operating costs
(including
transportation
costs) (9.42) (8.56) (7.51) (8.72)
----------------------------------------------------------------------------
Operating netback 35.75 30.16 33.63 27.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------The Corporation's operating netback for the fourth quarter and year ended December 31, 2007 increased to $35.75 per boe and $33.63 per boe, respectively, from $30.16 per boe and $27.75 per boe for the comparative periods in 2006. The operating netback increased by 19 percent and 21 percent, respectively, for the three months and year ended December 31, 2007 from the respective periods in 2006. This was mainly due to an increase in realized average sales price and lower royalties.
Operating costs including transportation costs were $1.4 million and $4.0 million for the three months and year ending December 31, 2007, respectively, compared to $0.7 million and $2.6 million for the comparative periods in 2006. On a per unit of production basis, operating costs for the fourth quarter and full year of 2007 were $9.42 per boe and $7.51 per boe, respectively. These amounts represent a 10 percent increase and a 14 percent reduction, respectively, from $8.56 per boe and $8.72 per boe for the comparative periods in 2006. The increase in the fourth quarter operating costs was due mainly to increases in third-party processing fees. The reduction in the full-year results was due primarily to operating efficiencies being realized at Ansell/Sundance as newly drilled wells are tied in to existing facilities. With production continuing to grow and the construction of a new 20 mmcf per day Open Range-operated gas plant at Ansell/Sundance in the first half of 2008, Open Range expects operating costs, including transportation costs, per unit of production to come down significantly in 2008. Of the Corporation's operating costs, transportation costs were $0.1 million or $0.72 per boe for the fourth quarter and $0.4 million or $0.79 per boe for the full year of 2007.
GENERAL AND ADMINISTRATIVE (G&A) COSTS
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Gross $ 1,236,125 $ 1,347,873 $ 5,135,453 $ 4,266,283
Partner recovery (108,907) (99,089) (482,996) (356,195)
Capitalized (457,725) (633,308) (2,180,018) (1,940,581)
----------------------------------------------------------------------------
Net G&A expense $ 669,493 $ 615,476 $ 2,472,439 $ 1,969,507
Per boe net ($) 4.41 7.17 4.65 6.70
----------------------------------------------------------------------------G&A costs for the three months ended December 31, 2007 totalled $0.7 million or $4.41 per boe after overhead recoveries and capitalization of $0.6 million. On a per boe basis G&A costs in the fourth quarter of 2007 declined by 38 per cent from $7.17 per boe in the fourth quarter of 2006. For the year ended December 31, 2007, net G&A costs per boe decreased by 31 percent to $4.65 from $6.70 in 2006. The reduction per boe was mainly due to increased production in 2007 more than offsetting the impact of increased net G&A costs. Capitalized G&A costs represented 42 percent of gross G&A costs for the year ended December 31, 2007 as the Corporation continued to focus on exploration activities and capitalized its exploration, geological and geophysical expenses.
Open Range expects to reduce its net G&A costs per boe in 2008, reflecting the Corporation's continued forecast production growth combined with no significant planned increase in quarterly G&A spending.
INTEREST INCOME AND EXPENSE
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Interest income $ (8,136) $ (6,390) $ (108,829) $ (48,506)
Interest expense 178,017 47,806 345,694 100,899
----------------------------------------------------------------------------
Net interest expense $ 169,881 $ 41,416 $ 236,865 $ 52,393
$ per boe net 1.12 0.48 0.45 0.18
----------------------------------------------------------------------------Net interest expense for the three months and year ended December 31, 2007 was $169,881 or $1.12 per boe and $236,865 or $0.45 per boe, respectively. The interest earned on available cash balances through short-term interest-bearing instruments at the beginning of the year partially offset the interest expense paid on the Corporation's credit facility through the balance of 2007. The Corporation had no exposure to the Canadian Asset-Backed Commercial Paper liquidity issue during the year ended December 31, 2007.
Open Range's continuing exploration activity will require incurring additional debt during 2008. The Corporation continues to manage debt levels prudently and expects net interest expense to be relatively low for the year. Open Range had drawn $12.9 million on its credit facility at December 31, 2007.
STOCK-BASED COMPENSATION
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Total stock-based
compensation $ 277,708 $ 222,875 $ 1,056,071 $ 762,618
Capitalized
stock-based
compensation (130,686) (104,882) (510,201) (279,271)
----------------------------------------------------------------------------
Stock-based
compensation expense $ 147,022 $ 117,993 $ 545,870 $ 483,347
----------------------------------------------------------------------------
----------------------------------------------------------------------------During the fourth quarter of 2007, stock-based compensation of $147,022 was expensed and $130,686 was capitalized. This compared to $117,993 expensed and $104,882 capitalized for the fourth quarter of 2006. For the year ended December 31, 2007 stock-based compensation of $545,870 was expensed and $510,201 was capitalized, compared to $483,347 expensed and $279,271 capitalized for the year ended December 31, 2006. The increases in stock-based compensation expense were due to the additional expense associated with the stock options granted in 2007. At December 31, 2007 there were 1,926,500 stock options outstanding compared to 1,673,000 outstanding at December 31, 2006.
DEPLETION, DEPRECIATION AND ACCRETION
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Depletion and
depreciation $ 4,083,311 $ 2,271,989 $ 13,295,728 $ 7,439,802
Accretion 30,195 37,752 162,297 155,208
----------------------------------------------------------------------------
Total $ 4,113,506 $ 2,309,741 $ 13,458,025 $ 7,595,010
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion and
depreciation ($/boe) 26.92 26.48 25.02 25.29
Accretion ($/boe) 0.20 0.44 0.31 0.53
----------------------------------------------------------------------------
Total ($/boe) 27.12 26.92 25.33 25.82
----------------------------------------------------------------------------
----------------------------------------------------------------------------Depletion and depreciation are calculated based upon cumulative capital expenditures, production rates and reserves. Open Range recorded $4.1 million or $26.92 per boe in depletion and depreciation for the three months ended December 31, 2007 compared to $2.3 million or $26.48 per boe for the comparative period in 2006. Depletion and depreciation for the year ended December 31, 2007 increased to $13.3 million or $25.02 per boe from $7.4 million or $25.29 per boe for the year ended December 31, 2006. The per boe decrease is due to reserve additions in 2007 being partially offset by higher average production and the increased capital expenditures associated with drilling in 2007.
Open Range estimates depletion on a quarterly basis throughout the year using independent inputs such as reserve and land reports when available. Undeveloped land and seismic and salvage value of $16.2 million have been excluded in the calculation and future development costs of $11.7 million have been included in the capital base used in the calculation.
INCOME TAXES
Open Range did not incur any cash tax expense in 2007. Open Range does not expect to pay any cash taxes in 2008 based on current oil and natural gas prices, existing tax pools, planned capital expenditures and forecast taxable income. For the quarter ended December 31, 2007 the Corporation recorded a future income tax recovery of $0.3 million. This recovery was due to future tax rate reductions introduced during the fourth quarter. For the year ended December 31, 2007, a future income tax expense of $0.3 million was recorded. The future income tax liability associated with the Corporation's $5.7 million flow-through share issuance in 2006 was recorded during 2007.
The estimated tax pools of the Corporation are included in the table below:
----------------------------------------------------------------------------
December 31, December 31,
Maximum Annual 2007 2006
Type Deduction (millions) (millions)
----------------------------------------------------------------------------
Canadian exploration expense 100% $ 36.8 $ 18.0
Canadian development expense 30% 6.1 6.7
Undepreciated capital cost 25% 12.2 9.6
Share issue costs 20% 1.8 1.2
Canadian oil and gas property expense 10% 27.1 26.4
----------------------------------------------------------------------------
Total $ 84.0 $ 61.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------Subsequent to December 31, 2007, Open Range renounced Canadian exploration expenditures related to its 2007 flow-through share obligations that will result in reductions of the above tax pool balances by $19 million. The tax effect of these renunciations will be recorded in the first quarter of 2008.
NET EARNINGS (LOSS)
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Net earnings (loss) $ (344,678) $ (159,899) $ 523,139 $ (927,643)
Net earnings (loss)
per boe (2.27) (1.86) 0.98 (3.15)
Net earnings (loss)
per basic and diluted
share $ (0.02) $ (0.01) $ 0.03 $ (0.06)
----------------------------------------------------------------------------The Corporation recorded net earnings of $0.5 million or $0.03 per basic and diluted share for the year ended December 31, 2007, compared to a net loss of $0.9 million or $0.06 per basic and diluted share for 2006. The net loss for the three months ended December 31, 2007 was $0.3 million or $0.02 per basic and diluted share compared to a net loss of $0.2 million or $0.01 per basic and diluted share for the comparative period in 2006.
FUNDS FROM OPERATIONS AND CASH FLOW FROM OPERATING ACTIVITIES
----------------------------------------------------------------------------
Three months Three months Year Year
ended ended ended ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Funds from operations $ 4,582,484 $ 1,930,915 $ 15,158,721 $ 6,139,697
Funds from operations
per boe 30.22 22.51 28.53 20.87
Funds from operations
per basic and diluted
share 0.23 0.12 0.78 0.42
----------------------------------------------------------------------------
Cash flow from
operating activities
(per GAAP) $ 2,867,479 $ 758,091 $ 13,590,394 $ 4,821,096
----------------------------------------------------------------------------In the fourth quarter and the year ended December 31, 2007 Open Range generated funds from operations of $4.6 million and $15.2 million, respectively, compared to $1.9 million and $6.1 million for the comparative periods in 2006. During the three months ended December 31, 2007 funds from operations increased by 137 percent and funds from operations per share increased by 92 percent from the fourth quarter of 2006. For the year ended December 31, 2007 funds from operations increased by 147 percent and funds from operations per share increased by 86 percent from the same period in 2006. In the fourth quarter and the year ended December 31, 2007 Open Range recorded cash flow from operating activities of $2.9 million and $13.6 million, respectively, compared to $0.8 million and $4.8 million for the comparative periods in 2006. The significant increases in funds from operations and cash flow from operating activities were due to stronger operating results, primarily driven by higher average production, as well as stronger netbacks which in turn were caused mainly by higher average realized sales prices and lower royalties.
CAPITAL EXPENDITURES
----------------------------------------------------------------------------
Three months Three months Year Year
ended ended ended ended
December 31, December 31, December 31, December 31,
(millions) 2007 2006 2007 2006
----------------------------------------------------------------------------
Drilling and
completions $ 7.7 $ 4.9 $ 30.4 $ 18.8
Equipment and
facilities 0.8 1.4 5.3 3.3
Land 0.1 0.5 3.8 6.2
Other assets 0.1 (0.3) 0.1 1.7
Capitalized G&A 0.7 0.8 2.2 1.9
Geological and
geophysical - - 0.2 2.7
----------------------------------------------------------------------------
Total capital
expenditures 9.4 7.3 42.0 34.6
Capital items not
involving cash:
Stock-based
compensation 0.2 0.2 0.7 0.4
Asset retirement
obligations - - 0.2 (0.1)
----------------------------------------------------------------------------
Total capital
expenditures including
non-cash items $ 9.6 $ 7.5 $ 42.9 $ 34.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------Open Range's capital budget during both the current and previous reporting periods was focused heavily on drilling and completing wells. During the three months ended December 31, 2007, Open Range drilled two gross natural gas wells (1.3 net), one at its core Ansell/Sundance property and one at its emerging Rough property, both of which were successful. For the year ended December 31, 2007, the Corporation drilled 18 gross wells (7.3 net) with a 100 percent success rate. Facilities and equipment expenditures for the year ended December 31, 2007 relate mainly to the costs associated with connecting successful wells to existing infrastructure and the construction costs related to expanding compression capacity at Ansell/Sundance. The Corporation's average working interest on new wells during the fourth quarter of 2007 was 65 percent. Open Range's average working interest on new wells drilled at Ansell/Sundance in 2007 was 52 percent, with a combined average working interest on new wells at all the Corporation's properties of 41 percent for the same period.
----------------------------------------------------------------------------
Three months Three months
ended ended Year ended Year ended
December 31, December 31, December 31, December 31,
2007 2006 2007 2006
----------------------------------------------------------------------------
Wells drilled Gross Net Gross Net Gross Net Gross Net
----------------------------------------------------------------------------
Exploration 2 1.3 3 1.3 13 6.9 10 4.29
Development - - - - 5 0.4 5 1.12
----------------------------------------------------------------------------
Total 2 1.3 3 1.3 18 7.3 15 5.41
----------------------------------------------------------------------------
Average working
interest 65% 43.3% 40.6% 36.1%
Success rate 100% 100% 100% 100%
----------------------------------------------------------------------------
SHARE CAPITAL
----------------------------------------------------------------------------
Three months Three months Year Year
ended ended ended ended
Weighted average common December 31, December 31, December 31, December 31,
shares outstanding 2007 2006 2007 2006
----------------------------------------------------------------------------
Basic and diluted 20,028,506 15,778,540 19,403,154 14,447,464
----------------------------------------------------------------------------Options to purchase 1,926,500 common shares for the three months and year ended December 31, 2007 and options to purchase 1,673,000 common shares for the three months and year ended December 31, 2006 were not included in the computation of weighted average diluted shares outstanding because they were anti-dilutive.
----------------------------------------------------------------------------
December 31,
Outstanding securities 2007 March 18, 2008
----------------------------------------------------------------------------
Common shares 21,792,941 21,812,941
Stock options 1,926,500 2,061,500
----------------------------------------------------------------------------
Total outstanding securities 23,719,441 23,874,441
----------------------------------------------------------------------------
Proportion of outstanding securities held
by officers and directors 17% 17%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equity financings Issue price Gross
since inception Date of Issue per share Shares Issued Proceeds
----------------------------------------------------------------------------
Common shares(1) November 29, 2005 $ 3.10 2,000,000 $ 6,200,000
Common shares January 10, 2006 4.25 1,649,000 7,008,250
Flow-through
common shares May 16, 2006 5.70 1,000,000 5,700,000
Common shares November 9, 2006 3.55 2,324,300 8,251,265
Flow-through February 22, 2007
common shares 4.00 3,000,000 12,000,000
Flow-through December 20, 2007
common shares 3.45 2,029,100 7,000,395
----------------------------------------------------------------------------
Total $ 3.85 12,002,400 $ 46,159,910
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Initial private placement financingDuring 2007 Open Range raised a total of $19.0 million through flow-through common share equity issues. On March 13, 2008 the Corporation entered into an agreement to issue on a bought deal basis 2,595,300 common shares at a price of $4.20 per share and 2,400,000 flow-through common shares at a price of $5.00 per share for gross proceeds of $22.9 million. The Corporation has also agreed to grant the underwriters of this equity issuance an option to purchase an additional 500,000 common shares at a price of $4.20 per share for additional gross proceeds of $2.1 million. This private placement financing is expected to close on or about April 4, 2008. The equity issues carried out in 2007 and early 2008 will allow the Corporation to pursue its capital investment program for the year and have positioned it with financial flexibility for 2008.
During 2007 the Corporation issued 256,500 stock options to employees and officers. The options vest over three years and are exercisable into common shares at an average price of $3.51. At December 31, 2007 the Corporation had 1,926,500 options outstanding with an average exercise price of $4.08.
RELATED-PARTY AND OFF-BALANCE-SHEET TRANSACTIONS
Open Range incurred $124,000 in legal costs to a law firm in which the Chairman of the Board of Directors and the Corporate Secretary of the Corporation are partners. Of the legal costs incurred in the year ended December 31, 2007, $43,000 is included in accounts payable at December 31, 2007.
Certain officers and directors of Open Range purchased 89,200 shares as part of the equity offerings of the Corporation during the year ended December 31, 2007, for total gross proceeds of $0.3 million.
Open Range was not involved in any off-balance-sheet transactions during the year ended December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Open Range had a working capital deficiency of $12.8 million at December 31, 2007. As at December 31, 2007, Open Range had available a $25 million extendable revolving-credit facility and a $5.5 million acquisition and development facility with the National Bank of Canada. Subsequent to December 31, 2007, the Corporation's facilities were increased to $32 million and $8 million, respectively. The facilities have an effective bank rate of prime plus 0.125 percent and prime plus 0.75 percent, respectively. As at December 31, 2007, $12.9 million had been drawn on this facility. The facilities are open for review semi-annually with the next review occurring in April 2008. The facility is a borrowing base facility that is determined based on, among other things, the Corporation's reserve report, production and operating results, and current and forecast commodity prices. Pursuant to the terms of the credit facilities, the Corporation has provided the covenant that at all times its working capital ratio shall be not less than 1 to 1. The working capital ratio is defined under the terms of the facilities as current assets, including the undrawn portion of the revolving credit facility, to current liabilities, excluding any current bank indebtedness. The Corporation is in compliance with this covenant as at December 31, 2007.
----------------------------------------------------------------------------
As at
December 31,
2007
----------------------------------------------------------------------------
Bank lines available $ 30,500,000
Working capital deficiency (12,832,107)
----------------------------------------------------------------------------
Capital resources available $ 17,667,893
----------------------------------------------------------------------------
----------------------------------------------------------------------------The Corporation's initial capital expenditure budget for 2008 is $35 million. The capital program will be funded through a combination of cash flow from operations and the Corporation's credit facility. The Corporation will closely monitor the capital program with the current commodity price outlook and adjust it accordingly.
The details of the initial 2008 budget are provided in the following table:
----------------------------------------------------------------------------
(millions) 2008
----------------------------------------------------------------------------
Drilling and completions $ 26.0
Equipment and facilities 4.0
Land, seismic and capitalized G&A 5.0
----------------------------------------------------------------------------
Total $ 35.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SELECTED QUARTERLY INFORMATION
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
----------------------------------------------------------------------------
Production
Natural gas
(mcf/d) 8,862 9,545 7,009 5,460 5,111 3,951 4,368 3,990
Oil and NGL
(bbls/d) 171 225 156 115 81 74 109 54
Total (boe/d) 1,648 1,815 1,324 1,025 933 733 837 719
Total (boe) 151,660 167,009 120,451 92,251 85,795 67,420 76,132 64,717
% natural gas 90 88 88 89 91 90 87 92
----------------------------------------------------------------------------
Financial
($000s except
per share
amounts and
share numbers)
Revenue (1) 7,097 6,823 5,556 4,436 3,747 2,550 3,132 3,126
Net earnings
(loss) (345) 611 1,277 (1,020) (160) 361 (721) (408)
Net earnings
(loss) per
basic and
diluted share
($) (0.02) 0.03 0.06 (0.06) (0.01) 0.03 (0.05) (0.03)
Funds from
operations 4,583 4,413 3,709 2,454 1,931 1,615 1,314 1,280
Funds from
operations
per basic and
diluted
share ($) 0.23 0.22 0.19 0.14 0.12 0.11 0.09 0.10
Cash flow
from
operating
activities 2,867 3,728 4,624 2,371 758 1,507 903 1,653
Total assets
(end of
period) 97,517 93,289 86,746 85,984 78,656 64,303 62,759 52,821
Capital
expenditures 9,354 8,780 11,285 12,585 6,985 6,277 7,405 13,936
Weighted
average
basic and
diluted
shares
(000s) 20,029 19,764 19,764 18,031 15,779 14,410 14,085 13,379
----------------------------------------------------------------------------
Per Unit
Oil and NGL
($/bbl) 73.10 61.32 57.68 55.05 49.73 65.71 64.31 57.50
Natural gas
($/mcf) (1) 7.29 6.33 7.43 7.87 7.19 5.78 6.28 7.93
Revenue
($/boe) (1) 46.80 40.85 46.13 48.08 43.67 37.82 41.14 48.31
Operating
netback
($/boe) 35.75 30.43 35.58 33.36 30.16 28.18 23.65 28.80
----------------------------------------------------------------------------
(1) Includes realized gains on commodity contracts.Open Range's quarterly growth in production volumes, revenues, funds from operations, funds from operations per share and total assets is attributable to the active exploration and development drilling program at the Corporation's Deep Basin properties, particularly the Ansell/Sundance core area.
SELECTED ANNUAL INFORMATION
----------------------------------------------------------------------------
Period from
November 30
Year ended Year ended to
December 31, December 31, December 31,
2007 2006 2005
----------------------------------------------------------------------------
Production
Natural gas (mcf/d) 7,733 4,357 2,800
Oil and NGL (bbls/d) 167 80 45
Total (boe/d) 1,456 806 512
Total (boe) 531,371 294,065 15,869
% natural gas 89 90 91
----------------------------------------------------------------------------
Financial
($000s except per share amounts and
share numbers)
Revenue (1) 23,912 12,555 1,207
Net earnings (loss) 523 (928) 128
Net earnings (loss) per basic and
diluted share ($) 0.03 (0.06) 0.01
Funds from operations 15,159 6,140 617
Funds from operations per basic and
diluted share ($) 0.78 0.42 0.06
Cash flow from operating activities 13,590 4,821 -
Total assets (end of period) 97,517 78,656 48,319
Total liabilities (end of period) 25,034 24,110 13,206
Capital expenditures 42,004 34,603 6,416
Weighted average basic and diluted
shares (000s) 19,403 14,447 10,467
----------------------------------------------------------------------------
Per Unit
Oil and NGL ($/bbl) 62.46 59.61 57.02
Natural gas ($/mcf) (1) 7.13 6.81 12.98
Revenue ($/boe) (1) 45.00 42.69 76.04
Operating netback ($/boe) 33.63 27.75 49.90
----------------------------------------------------------------------------
(1) Includes realized gains on commodity contracts.
CONTRACTUAL OBLIGATIONS (1),(2)
----------------------------------------------------------------------------
Less than 1-3 4-5 After 5
As at December 31, 2007 Total 1 Year Years Years Years
----------------------------------------------------------------------------
Payments for office lease $ 2,652,283 $ 909,354 $ 1,742,929 $ - $ -
Payments for office
equipment lease 41,518 12,775 25,549 3,194 -
----------------------------------------------------------------------------
Total $ 2,693,801 $ 922,129 $ 1,768,478 $ 3,194 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The Corporation has entered into farm-in agreements in the normal course
of its business which are not included in this table.
(2) The Corporation has entered into commodity contracts which are not
included in this table. For a complete listing refer to note 10,
Financial Instruments, in the audited financial statements for the year
ended December 31, 2007.RISK FACTORS
There are numerous factors, both known and unknown, that can cause actual results or events to differ materially from forecast results. Although some of these risks are discussed in this section and in the AIF, these factors should not be construed as exhaustive.
Oil and natural gas operations involve many risks that even a combination of experience, knowledge and careful evaluation may not be able to overcome. The long-term commercial success of Open Range depends on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves Open Range may have at any particular time and the production there from will decline over time as such existing reserves are exploited. A future increase in Open Range's reserves will depend not only on its ability to explore and develop any properties it may have from time to time, but also on its ability to select and acquire suitable producing properties or prospects. No assurance can be given that further commercial quantities of oil and natural gas will be discovered or acquired by Open Range.
Open Range's principal risks are finding and developing economic hydrocarbon reserves efficiently and being able to fund the capital program. The Corporation's need for capital will be both short-term and long-term in nature. Short-term working capital will be required to finance accounts receivable, drilling deposits and other similar short-term assets, while the acquisition and development of oil and natural gas properties requires large amounts of long-term capital. Open Range anticipates a $35 million capital program in 2008, with an estimated $15 million expended in the first quarter. The capital program will be funded through a combination of the recently announced equity financing, anticipated funds from operations and the bank credit facility. If any components of the business plan are missing, the Corporation may not be able to execute the entire business plan.
Open Range mitigates exploration risk by employing a team of highly qualified and experienced professionals to pursue exploration and exploitation activities and to carry out and control the capital spending program. All aspects of exploration projects are reviewed at a very early stage, including: corporate fit, environmental issues, timing, costs and reward potential. Identified risks are addressed and excessive risks are mitigated to the extent possible before any project is approved.
Open Range intends to maintain an insurance program consistent with industry practice to protect against losses due to accidental destruction of assets, well blowouts, pollution or other business interruptions. The Open Range assets are in compliance, in all material respects, with current environmental legislation and Open Range will work with government environmental agencies to maintain this level of compliance, as well as maintain a proactive approach to all safety and environmental issues.
Operational risk is mitigated by having Open Range staff address the continued development of a new or established reservoir, on a go-forward basis, using the same procedure that is used to address exploration risk. Reserves are produced based on the amount of capital employed, production practices and reservoir quality. Open Range evaluates reservoir development based on the timing and amount of additional capital required and the expected change in production volumes. Finding and development costs are controlled when capital is employed cost-effectively.
The financial risks of commodity prices, interest rates, royalty rates, government intervention or taxation levels in the oil and natural gas industry are largely beyond Open Range's control. The Corporation's approach to managing these risks is to maintain a prudent level of debt and to employ forecasting and budgeting projections. In addition, from time to time Open Range may use financial instruments to reduce corporate risk in certain situations. For a listing of commodity contracts entered into in 2007 refer to note 10, Financial Instruments, in the audited financial statements for the year ended December 31, 2007.
CRITICAL ACCOUNTING ESTIMATES
OIL AND NATURAL GAS RESERVES
Under National Instrument 51-101 (N.I. 51-101), proved reserves are those reserves that can be estimated with a high degree of certainty to be recoverable, i.e., that it is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. In accordance with this definition, the level of certainty targeted by the reporting corporation should result in at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated reserves. In the case of probable reserves, which are obviously less certain to be recovered than proved reserves, N.I. 51-101 states that it must be equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. With respect to the consideration of certainty, in order to report reserves as proved plus probable, the reporting corporation must believe that there is at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated proved plus probable reserves. The implementation of N.I. 51-101 has resulted in a more rigorous and uniform standardization of reserve evaluation.
The oil and natural gas reserve estimates are made using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance or a change in the Corporation's plans. The effect of changes in proved oil and natural gas reserves on the financial results and position of the Corporation is described under "Depletion Expense" and "Impairment of Petroleum and Natural Gas Properties" below.
FINANCIAL INSTRUMENTS
On January 1, 2007, the Corporation adopted the new Canadian accounting standards for Financial Instruments - Recognition and Measurement, Financial Instruments - Presentations and Disclosures, Hedging and Comprehensive Income. These accounting policies are detailed in note 2 to the audited financial statements for the year ended December 31, 2007. Prior periods have not been restated. The adoption of these standards did not impact the financial statements of the Corporation and did not result in any adjustments for the recognition or measurement of financial instruments as compared to the financial statements for periods prior to the adoption of these standards.
The Corporation recognizes the fair value of the unrealized portion of derivative contracts at each reporting date on the financial statements. The fair value is based on an estimate of the amounts that would have been paid to or received from counterparties to settle these instruments given future market prices and other relevant factors. As the fair value is based on a number of subjective estimates such as future prices and volatility in commodity markets, estimates could differ from actual results realized.
Effective January 1, 2008, the Corporation will be required to adopt three new accounting standards: Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. Section 1535 requires disclosure of an entity's objectives, policies and processes for managing capital, including: quantitative data about what the entity considers capital, whether the entity has complied with any capital requirements and the consequences of non-compliance if the entity has not complied. Sections 3862 and 3863 specify standards of presentation and enhanced disclosures on financial instruments. Although the Corporation is currently assessing the impact of these standards on its financial statements, it's not anticipated that the adoption of these new standards will impact the amounts reported in the Corporation's financial statements as they primarily relate to disclosure.
DEPLETION EXPENSE
The Corporation uses the full cost method of accounting for exploration and development activities. In accordance with this method of accounting, all costs associated with exploration and development are capitalized whether or not the activities funded were successful. The aggregate of net capitalized costs and estimated future development costs, less estimated salvage values, is amortized using the unit-of-production method based on estimated proved oil and natural gas reserves.
An increase in estimated proved oil and natural gas reserves would result in a corresponding reduction in depletion expense. A decrease in estimated future development costs would result in a corresponding reduction in depletion expense.
WITHHELD COSTS
Certain costs related to unproved properties may be excluded from costs subject to depletion until proved reserves have been determined or their value is impaired. These properties are reviewed quarterly to determine if proved reserves should be assigned, at which point they would be included in the depletion calculation, or in the ceiling test for impairment, for which any write-down would be charged to depletion and depreciation expense.
IMPAIRMENT OF PETROLEUM AND NATURAL GAS ASSETS
The Corporation is required to review the carrying value of all petroleum and natural gas assets for potential impairment. Impairment is indicated if the carrying value of the petroleum and natural gas assets is not recoverable by the future undiscounted funds from operations. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the property, plant and equipment is charged to earnings. The assessment of impairment is dependent on estimates of reserves, production rates, prices, future costs and other relevant assumptions.
ASSET RETIREMENT OBLIGATIONS
The Corporation is required to provide for future removal and site restoration costs. The Corporation must estimate these costs in accordance with existing laws, contracts or other policies. The fair value of the liability of $2.3 million for the Corporation's asset retirement obligation is recorded in the period in which it is expected to be incurred between 2008 and 2040, discounted to its present value using the Corporation's 4 percent credit premium added to the 4 percent risk-free interest rate and 2 percent inflation rate. The offset to the liability is recorded in the carrying amount of petroleum and natural gas properties. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of funds from operations, the original estimated undiscounted cost, the estimated inflation rate or the estimated discount rate could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.
STOCK-BASED COMPENSATION
The Corporation uses the fair value method for valuing stock option grants. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2007: zero dividend yield, average expected volatility of 52 percent, risk-free rate of 4.27 percent, and expected life of five years. The weighted-average fair value of stock options granted during the year was $1.74 per option. A zero dividend yield is used as the Corporation does not issue dividends. The volatility is a calculation based on past trading history. The risk-free rate is from the Bank of Canada. An increase in dividends would decrease the option expense and an increase in the volatility or the risk-free rate would increase the calculated expense.
LEGAL, ENVIRONMENTAL REMEDIATION AND OTHER CONTINGENT MATTERS
The Corporation is required to determine whether a loss is probable based on judgment and interpretation of laws and regulations and whether the loss can reasonably be estimated. When the loss is determined, it is charged to earnings.
The Corporation's management must continually monitor known and potential contingent matters and make appropriate provisions by charges to earnings when warranted by circumstance.
INCOME TAX ACCOUNTING
The determination of the Corporation's income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. All tax filings are subject to audit and potential reassessment after the lapse of considerable time. Future tax assets and liabilities are booked using substantively enacted future income tax rates which include rate reductions over several years. The rate used by the Corporation is based on estimated reversals of temporary differences. Accordingly, the actual income tax liability may differ significantly from that estimated and recorded by management.
DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures have been designed to ensure that information required to be disclosed by the Corporation is accumulated and communicated to the Corporation's management as appropriate to allow timely decisions regarding required disclosure. The Corporation's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the annual filings, that disclosure controls and procedures are effective to provide reasonable assurance that material information related to the Corporation is made known to them by others within the Corporation. It should be noted that while the Corporation's Chief Executive Officer and Chief Financial Officer believe that disclosure controls and procedures provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and procedures would prevent all errors and fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Chief Executive Officer and Chief Financial Officer of the Corporation are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Corporation has assessed the design of its internal controls over financial reporting as at December 31, 2007. During this process the Corporation identified weaknesses over segregation of duties. Specifically, due to the limited number of finance personnel at the Corporation it is not feasible to achieve complete segregation of incompatible duties with regards to any complex and non-routine accounting transactions that may arise. The weaknesses identified in the Corporation's internal controls over financial reporting result in a greater likelihood that a material misstatement would not be prevented or detected. No material changes in the Company's internal controls over financial reporting were identified during the year ended December 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Company's internal financial reporting processes.
As a result of the weaknesses identified, the Corporation's management and its Board of Directors are working to mitigate the risk of a material misstatement in financial reporting. At the present time, the CEO and CFO oversee all material transactions of the Corporation. As the Corporation experiences future growth, it plans to expand the number of individuals involved in the accounting function to further mitigate the risk of a material misstatement. In addition, the Audit Committee reviews on a quarterly basis the financial statements and key risks of the Corporation and queries management about significant transactions, there is a quarterly review of the financial statements by the Corporation's auditors and there is daily oversight of the accounting records by the senior management of the Corporation.
ADDITIONAL INFORMATION
Additional information relating to Open Range, including the Annual Information Form (AIF), is available on SEDAR at www.sedar.com or the Corporation's website at www.openrangeenergy.com.
AUDITED FINANCIAL STATEMENTS
Auditors' Report to the Shareholders
We have audited the balance sheets of Open Range Energy Corp. as at December 31, 2007 and 2006 and the statements of operations, comprehensive income (loss) and retained earnings (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Corporation as at December 31, 2007 and 2006 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
KPMG LLP
Chartered Accountants
Calgary, Canada
March 18, 2008
Balance Sheets
----------------------------------------------------------------------------
December 31, 2007 2006
----------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable $ 7,891,264 $ 16,900,727
Prepaid expenses and deposits 813,772 887,345
Fair value of commodity contracts
(note 10) 713,075 1,045,303
----------------------------------------------------------------------------
9,418,111 18,833,375
Future income taxes (note 8) - 1,328,179
Property, plant and equipment (note 4) 88,099,168 58,494,758
----------------------------------------------------------------------------
$ 97,517,279 $ 78,656,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 5) $ 12,855,623 $ 3,836,468
Accounts payable and accrued liabilities 9,184,239 18,278,212
Future income taxes (note 8) 210,356 -
----------------------------------------------------------------------------
22,250,218 22,114,680
Future income taxes (note 8) 440,742
Asset retirement obligations (note 6) 2,342,760 1,994,891
Shareholders' equity:
Share capital (note 7) 70,884,500 54,526,892
Contributed surplus (note 7) 1,875,405 819,334
Deficit (276,346) (799,485)
----------------------------------------------------------------------------
72,483,559 54,546,741
Commitments (note 9)
Subsequent event (note 12)
----------------------------------------------------------------------------
$ 97,517,279 $ 78,656,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Operations, Comprehensive Income (Loss) and Retained Earnings
(Deficit)
----------------------------------------------------------------------------
Years ended December 31, 2007 2006
----------------------------------------------------------------------------
Revenues:
Petroleum and natural gas $ 22,426,298 $ 12,506,813
Royalties (net of Alberta Royalty Tax
Credit) (2,053,158) (1,829,598)
Interest 108,829 48,506
Realized gain on commodity contracts
(note 10) 1,485,745 47,989
Unrealized gain (loss) on commodity
contracts (note 10) (332,228) 1,045,303
----------------------------------------------------------------------------
21,635,486 11,819,013
Expenses:
Operating 3,990,860 2,563,607
General and administrative 2,472,439 1,969,507
Stock-based compensation 545,870 483,347
Interest 345,694 100,899
Depletion and depreciation 13,295,728 7,439,802
Accretion of asset retirement obligations 162,297 155,208
----------------------------------------------------------------------------
20,812,888 12,712,370
----------------------------------------------------------------------------
Earnings (loss) before income taxes 822,598 (893,357)
Future income tax expense (note 8) 299,459 34,286
----------------------------------------------------------------------------
Net earnings (loss) and comprehensive
income (loss) 523,139 (927,643)
Retained earnings (deficit), beginning of
year (799,485) 128,158
----------------------------------------------------------------------------
Deficit, end of year $ (276,346) $ (799,485)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per share (note 7):
Basic $ 0.03 $ (0.06)
Diluted $ 0.03 $ (0.06)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Cash Flows
----------------------------------------------------------------------------
Years ended December 31, 2007 2006
----------------------------------------------------------------------------
Cash provided by (used in):
Operating:
Net earnings (loss) $ 523,139 $ (927,643)
Items not involving cash:
Depletion and depreciation 13,295,728 7,439,802
Accretion of asset retirement
obligations 162,297 155,208
Future income tax expense 299,459 34,286
Stock-based compensation 545,870 483,347
Unrealized loss (gain) on commodity
contracts 332,228 (1,045,303)
Asset retirement expenditures (16,869) -
Change in non-cash working capital (1,551,458) (1,318,601)
----------------------------------------------------------------------------
13,590,394 4,821,096
Financing:
Issue of common shares, net of issue
costs 17,853,550 19,668,094
Repurchase of common shares - (528,240)
Bank indebtedness 9,019,155 3,836,468
----------------------------------------------------------------------------
26,872,705 22,976,322
Investing:
Acquisition of property, plant and
equipment (42,003,632) (34,874,666)
Disposition of properties 12 271,500
Change in non-cash working capital 1,540,521 (222,301)
----------------------------------------------------------------------------
(40,463,099) (34,825,467)
----------------------------------------------------------------------------
Change in cash - (7,028,049)
Cash, beginning of year - 7,028,049
----------------------------------------------------------------------------
Cash, end of year $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest received $ 108,829 $ 48,506
----------------------------------------------------------------------------
Interest paid $ 345,694 $ 100,899
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash is defined as cash and cash equivalents.
See accompanying notes to financial statements.Notes to Financial Statements
Years ended December 31, 2007 and 2006
1. NATURE OF BUSINESS
Open Range Energy Corp. ("Open Range" or the "Corporation") is incorporated under the laws of the Province of Alberta. The Corporation is engaged in the acquisition of, exploration for and development of oil and natural gas in the Western Canada Sedimentary Basin.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements include the accounts of the Corporation and have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the statements and accompanying notes. As a result, actual amounts could differ from estimated amounts.
Specifically, the amounts recorded for depletion and depreciation of petroleum and natural gas properties and the provision for asset retirement obligations and abandonment costs are based on estimates. The ceiling test is based on estimates of reserves, production rates, oil and natural gas prices, future costs and other relevant assumptions. The amounts for stock-based compensation are based on estimates of risk-free rates, expected lives and volatility. The fair value estimates for derivatives are based on expected future petroleum and natural gas prices and volatility in those prices. Future income taxes are based on estimates as to the timing of the reversal of temporary differences and tax rates currently substantively enacted. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.
(a) Property, plant and equipment
The Corporation's activities are related to the acquisition of, exploration for and development of petroleum and natural gas properties. The Corporation follows the full cost method of accounting for petroleum and natural gas operations.
All costs of exploring for and developing petroleum and natural gas properties and related reserves are capitalized into a cost centre. Such costs include those related to lease acquisition, geological and geophysical activities, lease rentals on non-producing properties, drilling of productive and non-productive wells, tangible production equipment, asset retirement costs, and that portion of general and administrative expenses directly attributable to exploration and development activities. Proceeds received from the disposal of properties are normally deducted from the full cost pool without recognition of a gain or loss. When a significant portion of properties is sold, resulting in a change to the depletion rate of 20 percent or more, a gain or loss is recorded and reflected in the statement of operations.
Depletion of petroleum and natural gas properties and depreciation of production equipment, excluding costs related to unproved properties, are calculated using the unit-of-production method based upon estimated proved reserves, before royalties, as determined by independent petroleum engineers. For purposes of the calculation, natural gas reserves and production are converted to equivalent volumes of petroleum based upon relative energy content.
Costs of acquiring unproved properties are initially excluded from the full cost pool and are assessed at each reporting period to ascertain whether impairment has occurred. When proved reserves are assigned to the property or the property is considered to be impaired, the cost of the property or the amount of impairment is added to the full cost pool.
Petroleum and natural gas properties are evaluated in each reporting period to determine whether the carrying amount in a cost centre is recoverable and does not exceed the fair value of the properties in the cost centre.
The carrying amounts are assessed to be recoverable when the sum of the undiscounted cash flows expected from the production of proved reserves, the lower of cost and market of unproved properties and the cost of major development projects exceeds the carrying amount of the cost centre. When the carrying amount is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying amount of the cost centre exceeds the sum of the discounted cash flows expected from the production of proved and probable reserves, the lower of cost and market of unproved properties and the cost of major development projects of the cost centre. The cash flows are estimated using expected future product prices and costs and are discounted using a risk-free interest rate.
Other assets are recorded at cost and depreciated on a declining balance
basis using the following annual rates:
Computer hardware 30%
Office furniture and fixtures 20%
Other assets 20% (b) Interests in joint operations
A portion of the Corporation's exploration and development activities is conducted jointly with others and, accordingly, the financial statements reflect only the Corporation's proportionate interest in such activities.
(c) Cash and cash equivalents
Cash and cash equivalents are comprised of cash and all investments that are highly liquid in nature and generally have a maturity date of three months or less.
(d) Asset retirement obligations
The Corporation uses the asset retirement obligation method of recording the future cost associated with removal, site restoration and asset retirement costs. The fair value of the liability for the Corporation's asset retirement obligation is recorded in the period in which it is incurred, discounted to its present value using the Corporation's credit-adjusted, risk-free interest rate and the corresponding amount is recognized by increasing the carrying amount of petroleum and natural gas properties. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.
(e) Financial instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument to another entity. Upon initial recognition all financial instruments, including all derivatives, are recognized on the balance sheet at fair value. Subsequent measurement is then based on the financial instruments being classified into one of five categories: held for trading, held to maturity, loans and receivables, available for sale and other liabilities. The Corporation has designated its cash and cash equivalents as held for trading, which are measured at fair value. Accounts receivable are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities and bank debt are classified as other liabilities, which are measured at amortized cost, which is determined using the effective interest method.
The Corporation uses risk management contracts from time to time to manage its exposure to fluctuations in commodity prices. The Corporation does not enter into risk management contracts for trading or speculative purposes.
The risk management contracts are executed within the guidelines of the Corporation's risk management procedures. The contracts, when deemed appropriate, are entered into with commodities trading institutions and may include costless collars, put options or fixed price contracts. The Corporation has elected not to designate any of its risk management activities as accounting hedges and, accordingly, accounts for all derivatives using the fair value method. Under this method, gains and losses resulting from changes in the fair value of the unrealized portion of such risk management contracts are recognized in earnings when those changes occur. The fair value is based on an estimate of the amounts that would have been paid to or received from counter-parties to settle these instruments given future market prices and other relevant factors. Proceeds and costs realized from holding the contracts are recognized in earnings at the time that each transaction under a contract is settled.
The Corporation has elected to account for its physical delivery sales contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements as executory contracts on an accrual basis rather than as non-financial derivatives.
The Corporation measures and recognizes embedded derivatives separately from the host contracts when the economic characteristics and risks of the embedded derivative are not closely related to those of the host contract, when it meets the definition of a derivative and when the entire contract is not measured at fair value. Embedded derivatives are recorded at fair value.
The Corporation nets all transaction costs incurred, in relation to the acquisition of a financial asset or liability, against the related financial asset or liability. Bank debt is presented net of deferred interest payments, with interest recognized in net earnings on an effective interest basis.
The Corporation applies trade-date accounting for the recognition of a purchase or sale of cash equivalents and derivative contracts.
(f) Future income taxes
The Corporation uses the asset and liability method for calculating future income taxes. Temporary differences arising from the differences between the tax basis of an asset or liability and the carrying amount on the balance sheet are used to calculate future income tax assets or liabilities. Future income tax assets or liabilities are calculated using the currently enacted, or substantively enacted, tax rates anticipated to apply in the periods that the temporary differences are expected to reverse. A valuation allowance is recorded against any future income tax assets if it is more likely than not that the asset will not be realized.
(g) Flow-through shares
The resource expenditure deductions for income tax purposes related to exploratory and development activities funded by flow-through share arrangements are renounced to investors in accordance with tax legislation. The future tax liability and share capital are adjusted by the estimated cost of the renounced tax deductions when the expenditures are renounced.
(h) Stock-based compensation plans
The Corporation uses the fair value method for valuing stock option grants. Under this method, compensation cost attributable to all share options granted is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. Upon the exercise of the stock options, consideration received together with the amount previously recognized in contributed surplus is recorded as an increase to share capital.
(i) Revenue recognition
Petroleum and natural gas revenues are recognized when the title and risks pass to the purchaser.
(j) Per share amounts
Basic per share information is computed by dividing income by the weighted average number of common shares outstanding for the period. The treasury stock method is used to determine the diluted per share amounts, whereby any proceeds from the stock options, warrants or other dilutive instruments are assumed to be used to purchase common shares at the average market price during the period. The weighted average number of shares outstanding is then adjusted by the net change.
(k) Comparative figures
Certain comparative figures have been reclassified to conform to the current year's presentation.
3. CHANGES IN ACCOUNTING POLICIES
On January 1, 2007, the Corporation adopted the new Canadian accounting standards for financial instruments - recognition and measurement, financial instruments - presentations and disclosures, hedging and comprehensive income. Adopting these standards had no impact on the measurement of existing financial assets and liabilities.
Effective January 1, 2008, the Corporation will be required to adopt three new accounting standards in the handbook of the Canadian Institute of Chartered Accountants (CICA): Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation. Section 1535 requires disclosure of an entity's objectives, policies and processes for managing capital, including: quantitative data about what the entity considers capital, whether the entity has complied with any capital requirements and the consequences of non-compliance if the entity has not complied. Sections 3862 and 3863 specify standards of presentation and enhanced disclosures on financial instruments. Although the Corporation is currently assessing the impact of these standards on its financial statements, it is not anticipated that the adoption of these new standards will impact the amounts reported in the Corporation's financial statements as they primarily relate to disclosure.
4. PROPERTY, PLANT AND EQUIPMENT
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Petroleum and natural gas properties $ 106,799,108 $ 64,003,179
Other assets 2,376,006 2,271,797
----------------------------------------------------------------------------
109,175,114 66,274,976
Accumulated depletion and depreciation (21,075,946) (7,780,218)
----------------------------------------------------------------------------
Net book value $ 88,099,168 $ 58,494,758
----------------------------------------------------------------------------
----------------------------------------------------------------------------During 2007, the Corporation capitalized $2,690,219 (2006 - $2,219,852) of overhead-related costs to petroleum and natural gas properties, of which $510,201 (2006 - $279,271) related to stock-based compensation. The future tax liability of $183,876 (2006 - $119,388) associated with the capitalized stock-based compensation has also been capitalized.
Costs associated with unproved properties excluded from costs subject to depletion at December 31, 2007 totalled $11,209,000 (2006 - $10,152,000). Future development costs of proved reserves of $11,691,000 at December 31, 2007 (2006 - $7,264,000) have been included in the depletion calculation.
During 2006, the Corporation disposed of certain interests in petroleum and natural gas properties for cash of $271,500, with associated asset retirement obligations of $183,850 also eliminated.
The Corporation performed a ceiling test calculation at December 31, 2007 to assess the recoverable value of the petroleum and natural gas assets. As at December 31, 2007 there was no impairment required. For purposes of the ceiling test calculation, the Corporation used the January 1, 2008 commodity price forecast of its independent reserve evaluators. The following table summarizes the benchmark prices used in the calculation:
----------------------------------------------------------------------------
U.S. Open Range AECO Open Range
WTI dollar WTI oil & NGL natural natural gas
oil exchange oil price gas price
(US$/bbl) rate (Cdn$/bbl) (Cdn$/bbl) (Cdn$/mcf) (Cdn$/mcf)
----------------------------------------------------------------------------
2008 $ 92.00 $ 1.00 $ 92.00 $ 72.66 $ 6.75 $ 7.03
2009 88.00 1.00 88.00 69.46 7.55 7.86
2010 84.00 1.00 84.00 66.10 7.60 7.90
2011 82.00 1.00 82.00 64.52 7.60 7.90
2012 82.00 1.00 82.00 64.62 7.60 7.90
2013 82.00 1.00 82.00 64.73 7.60 7.91
2014 82.00 1.00 82.00 64.83 7.80 8.13
2015 82.00 1.00 82.00 64.87 7.97 8.31
2016 82.02 1.00 82.02 64.93 8.14 8.49
2017 83.66 1.00 83.66 66.34 8.31 8.67
2018 $ 85.33 1.00 $ 85.33 66.86 $ 8.48 8.86
2019 and
thereafter +2.0%/yr $ 1.00 +2.0%/yr $ 68.40 +2.0%/yr $ 9.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------5. BANK DEBT
The Corporation has a $32,000,000 extendable revolving credit facility and an $8,000,000 non-revolving acquisition/development demand facility. These facilities are with a Canadian chartered bank and bear interest at bank prime rates plus 0.125 percent per annum and bank prime rates plus 0.75 percent per annum, respectively. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $50,000,000 and a general security agreement. Pursuant to the terms of the credit facilities, the Corporation has provided the covenant that at all times its working capital ratio shall be not less than 1 to 1. The working capital ratio is defined under the terms of the facilities as current assets, including the undrawn portion of the revolving credit facility, to current liabilities, excluding any current bank indebtedness. The Corporation is in compliance with this covenant as at December 31, 2007.
As at December 31, 2007, $12,855,623 (2006 - $3,836,468) has been drawn against the revolving credit facility and no amounts (2006 - $nil) have been drawn against the non-revolving demand facility. The revolving facility had an effective interest rate of 6.125 percent at December 31, 2007 (2006 - 6.125 percent).
6. ASSET RETIREMENT OBLIGATIONS
The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations at December 31, 2007 to be approximately $6,578,000 (2006 - $5,335,000), to be incurred between 2008 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted, risk-free rate of 8 percent (2006 - 8 percent) was used to calculate the fair value of the asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Balance, beginning of year $ 1,994,891 $ 1,896,045
Liabilities incurred 202,441 127,488
Dispositions (note 4) -- (183,850)
Liabilities settled (16,869) --
Accretion expense 162,297 155,208
----------------------------------------------------------------------------
Balance, end of year $ 2,342,760 $ 1,994,891
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. SHARE CAPITAL
(a) Authorized
The authorized share capital consists of an unlimited number of common
shares without par value and an unlimited number of first preferred shares.
(b) Common shares issued and outstanding
----------------------------------------------------------------------------
Number of
Shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 11,912,941 $ 34,925,714
Issued pursuant to private placements 4,021,300 15,408,315
Issued pursuant to flow-through share offering 1,000,000 5,700,000
Share repurchase (170,400) (526,230)
Share issue costs (net of tax of $459,314) -- (980,907)
----------------------------------------------------------------------------
Balance, December 31, 2006 16,763,841 $ 54,526,892
Issued pursuant to flow-through share offerings 5,029,100 19,000,395
Share issue costs (net of tax of $334,898) -- (811,947)
Tax effect of flow-through shares issued in 2006 -- (1,830,840)
----------------------------------------------------------------------------
Balance, December 31, 2007 21,792,941 $ 70,884,500
----------------------------------------------------------------------------
----------------------------------------------------------------------------The Corporation completed two flow-through share offerings in 2007 whereby 5,029,100 common shares were issued for total gross proceeds of $19,000,395. Certain officers and directors of the Corporation purchased 89,200 common shares as part of these equity offerings during the year ended December 31, 2007, for total gross proceeds of $325,615.
On March 4, 2008 Open Range closed a private placement common share issuance with a new employee of the Corporation for 20,000 shares at a price of $3.10 per share for gross proceeds of $62,000.
(c) Share option plan
Under the Corporation's share option plan it may grant options to its employees for up to 2,179,294 shares, of which 1,926,500 had been granted as at December 31, 2007 (2006 - 1,673,000). The exercise price of each option equals the market price of the Corporation's stock on the date of grant and options have terms of five years and vest as to one-third on each of the first, second and third anniversaries from the date of grant.
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
----------------------------------------------------------------------------
Granted and outstanding,
beginning of year 1,673,000 $ 4.17 1,034,000 $ 4.61
Granted 256,500 3.51 780,000 3.65
Forfeited (3,000) 3.53 (141,000) 4.55
----------------------------------------------------------------------------
Granted and outstanding,
end of year 1,926,500 4.08 1,673,000 4.17
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at year-end 859,667 $ 4.32 302,666 $ 4.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes information about the fixed stock options
outstanding at December 31, 2007:
----------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted Weighted
Range of average average average
exercise Number exercise contractual Number exercise
prices outstanding price life (years) exercisable price
----------------------------------------------------------------------------
$2.40-$3.60 689,500 $ 3.27 4.0 144,667 $ 3.14
$3.61-$4.75 1,237,000 $ 4.53 3.0 715,000 $ 4.57
----------------------------------------------------------------------------
$2.40-$4.75 1,926,500 $ 4.08 3.4 859,667 $ 4.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------(d) Stock-based compensation
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in the year ended December 31, 2007: zero dividend yield, average expected volatility of 52 percent (2006 - 41 percent), risk-free rate of 4.27 percent (2006 - 4.04 percent), and expected life of five years (2006 - five years). The fair value of stock options granted during the period was $1.74 (2006 - $1.53) per option. The Corporation has not re-priced any stock options. The Corporation has not incorporated an estimated forfeiture rate for stock options that will not vest; rather, the Corporation accounts for actual forfeitures as they occur.
(e) Contributed surplus
----------------------------------------------------------------------------
Balance, December 31, 2005 $ 58,726
Stock-based compensation expense 762,618
Excess of share redemption amount over share
stated amount (note 7(b)) (2,010)
----------------------------------------------------------------------------
Balance, December 31, 2006 819,334
Stock-based compensation expense 1,056,071
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 1,875,405
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(f) Per share amounts
Per share amounts have been calculated using the weighted average number of
shares outstanding. The following table summarized basic and diluted common
shares outstanding:
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Weighted average basic and diluted common
shares outstanding 19,403,154 14,447,464
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options to purchase 1,926,500 common shares for the year ended December 31,
2007 (2006 - 1,673,000) were not included in the computation because they
were anti-dilutive.
8. INCOME TAXES
The difference between the expected tax provision obtained by applying the
combined federal and provincial income tax rate for 2007 of 32.12 percent
(2006 - 34.50 percent) to earnings (loss) before income taxes and the
reported income tax provision is summarized below:
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Earnings (loss) before income taxes $ 822,598 $ (893,357)
Statutory tax rate 32.12% 34.50%
----------------------------------------------------------------------------
Computed income taxes at the statutory tax rate $ 264,218 $ (308,208)
Increase (decrease) in taxes resulting from:
Non-deductible Crown charges -- 169,509
Other non-deductible expenses 12,643 11,477
Resource allowance -- (99,269)
Stock-based compensation 175,333 166,731
Future tax rate changes (129,243) 105,134
Other (23,492) (11,088)
----------------------------------------------------------------------------
Future income taxes $ 299,459 $ 34,286
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The components of the net future income tax liability and asset are as
follows:
----------------------------------------------------------------------------
2007 2006
----------------------------------------------------------------------------
Future tax assets (liabilities):
Petroleum and natural gas assets $ (1,557,107) $ 719,795
Asset retirement obligations 594,575 580,096
Share issue costs 521,790 364,040
Unrealized gain on commodity contracts (210,356) (335,752)
----------------------------------------------------------------------------
Future income tax asset (liability) $ (651,098) $ 1,328,179
----------------------------------------------------------------------------
----------------------------------------------------------------------------
No taxes were paid during the years ended December 31, 2007 or 2006.
9. COMMITMENTS
(a) Future minimum lease payments relating to operating leases for office
space and equipment are:
----------------------------------------------------------------------------
2008 $ 922,129
2009 922,129
2010 846,349
2011 3,194
----------------------------------------------------------------------------
$ 2,693,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------(b) Flow-through common shares
On February 22, 2007 the Corporation issued 3,000,000 flow-through common shares for gross proceeds of $12,000,000. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $12,000,000 of qualifying oil and natural gas expenditures effective December 31, 2007 and has until December 31, 2008 to incur the expenditures. As at December 31, 2007 the Corporation had incurred $12,000,000 of qualifying expenditures and is not required to incur any additional expenditures.
On December 20, 2007 the Corporation issued 2,029,100 flow-through common shares for gross proceeds of $7,000,395. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $7,000,395 of qualifying oil and natural gas expenditures effective December 31, 2007 and has until December 31, 2008 to incur the expenditures. As at December 31, 2007 the Corporation had not incurred any qualifying expenditures and is required to incur $7,000,395 of expenditures in 2008.
10. FINANCIAL INSTRUMENTS
(a) Foreign currency exchange risk
The Corporation is exposed to foreign currency fluctuations as crude oil and natural gas prices received are referenced to U.S. dollar-denominated prices.
(b) Credit risk
A substantial portion of the Corporation's accounts receivable are with customers and joint venture partners in the oil and natural gas industry and are subject to normal industry credit risks. Purchasers of the Corporation's natural gas, crude oil and natural gas liquids are subject to an internal credit review to minimize the risk of non-payment.
(c) Interest rate risk
The Corporation is exposed to interest rate risk to the extent that bank debt is at a floating rate of interest.
(d) Fair value of financial instruments
The fair values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity. The Corporation's bank debt bears interest at a floating market rate and, accordingly, the fair market value approximates the carrying value.
(e) Commodity price risk management
The following table indicates the fair value of natural gas hedging contracts outstanding as at December 31, 2007 and indicates the unrealized gains (losses) and realized gains on natural gas contracts for the year then ended:
Average Average
AECO AECO Spot
Volume Type of Spot Floor Ceiling
Period (GJ/d) Contract (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
Jan. to Dec. 2007 2,500 Costless $7.00 $10.20
Collar
Jan. to Dec. 2007 1,250 Costless $7.00 $ 8.00-
Collar $ 9.90
Apr. 2007 to Mar. 2008 1,000 Costless $7.00 $10.16
Collar
Nov. 2007 to Mar. 2008 1,500 Costless $7.50 $10.67
Collar
Jan. to Dec. 2008 3,000 Costless $6.75 $ 7.50-
Collar $ 9.12
Apr. to Oct. 2008 1,500 Swap $6.46 $ 6.46
Nov. to Dec. 2008 1,500 Swap $7.26 $ 7.26
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized
Gains (Losses) Realized Gains
Fair Value of for the year for the year
Contract as at ended ended
December 31, December 31, December 31,
Period 2007 2007 2007
----------------------------------------------------------------------------
Jan. to Dec. 2007 $ -- $ (750,940) $ 715,215
Jan. to Dec. 2007 -- (294,363) 357,607
Apr. 2007 to Mar. 2008 68,534 68,534 279,635
Nov. 2007 to Mar. 2008 164,411 164,411 133,288
Jan. to Dec. 2008 497,458 497,458 --
Apr. to Oct. 2008 (9,263) (9,263) --
Nov. to Dec. 2008 (8,065) (8,065) --
----------------------------------------------------------------------------
$ 713,075 $ (332,228) $ 1,485,745
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation has also entered into the following natural gas hedging
transactions subsequent to December 31, 2007:
Average AECO Average AECO
Volume Spot Floor Spot Ceiling
Period (GJ/d) Type of Contract (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
Apr. to Oct. 2008 1,500 Swap $6.50 $6.50
Nov. 2008 to Mar. 2009 1,500 Costless Collar $6.75 $11.09
Jan. to Dec. 2009 1,000 Costless Collar $6.50 $10.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------11. RELATED-PARTY TRANSACTIONS
During 2007, the Corporation incurred $124,000 in legal costs (2006 - $132,000) to a law firm in which the Chairman of the Board of Directors and the Corporate Secretary of the Corporation are partners. Of the legal costs incurred in the year ended December 31, 2007, $43,000 is included in accounts payable at December 31, 2007 (2006 - $nil).
12. SUBSEQUENT EVENT
On March 13, 2008 the Corporation entered into an agreement to issue on a bought-deal basis 2,595,300 common shares at a price of $4.20 per share and 2,400,000 flow-through common shares at a price of $5.00 per share for gross proceeds of $22,900,260. The Corporation has also agreed to grant the underwriters of this equity issuance an option to purchase an additional 500,000 common shares at a price of $4.20 per share. This equity issuance is expected to close on or about April 4, 2008. The Corporation will be required to renounce $12,000,000 of qualifying oil and natural gas expenditures effective December 31, 2008 and will have until December 31, 2009 to incur the expenditures.
OPEN RANGE ENERGY CORP. IS A PUBLICLY TRADED CANADIAN ENERGY COMPANY WITH FOCUSED OPERATIONS IN THE DEEP BASIN REGION OF ALBERTA.
OPEN RANGE HAS APPROXIMATELY 21.8 MILLION COMMON SHARES ISSUED AND OUTSTANDING WHICH TRADE ON THE TSX UNDER THE SYMBOL "ONR".
Reader Advisory
This news release contains certain forward-looking statements, which include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) cash flow; and (v) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. Such risks and uncertainties include, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, changes in federal and provincial tax laws and legislation (including the adoption of new royalty regimes), increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Open Range's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that Open Range will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive. All subsequent forward-looking statements, whether written or oral, attributable to Open Range or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Open Range does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
Disclosure provided herein in respect of barrel(s) of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein.
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CONTACT INFORMATION:
Open Range Energy Corp.
A. Scott Dawson, P.Eng.
President and Chief Executive Officer
(403) 205-3704
or
Open Range Energy Corp.
Lyle D. Michaluk, CA
Vice President, Finance and Chief Financial Officer
(403) 262-9280
Website: www.openrangeenergy.com
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INDUSTRY: Energy and Utilities - Oil and Gas
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