Record Year of Financial and Operating Results
CALGARY, March 22 /CNW/ - Bankers Petroleum Ltd. ("Bankers" or the "Company") (TSX: BNK) (AIM: BNK) is pleased to provide its 2010 Financial Results and Outlook for 2011.
In 2010, Bankers was successful in progressing its strategic objectives and achieved record production, reserves, earnings and cash flow through its largest annual capital investment in Albania, of US$122 million.
Results at a Glance (US$000, except as noted)
Change 2010 2009
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Oil revenue 97% 170,376 86,614
Net operating income 158% 81,103 31,496
Net income (loss) 96 x 14,265 (150)
Funds generated from operations 188% 73,166 25,422
Capital expenditures 218% 122,012 38,324
December 31
-------------------
Change 2010 2009
-------------------------------------------------------------------------
Cash and deposits 58% 108,119 68,270
Working capital 74% 130,920 75,414
Total assets 53% 467,414 304,820
Bank loans (8%) 25,829 28,085
Shareholders' equity 60% 343,307 213,960
Average production (bopd) 49% 9,597 6,438
Average price ($/barrel) 32% 48.64 36.86
Netback ($/barrel) 73% 23.15 13.40
- Average production increased 49% to 9,597 bopd from 6,438 bopd in
2009. Exit production at year-end 2010 exceeded 12,100 bopd as
compared to 8,100 bopd at year-end 2009.
- A second and third drilling rig commenced operation in the Patos-
Marinza oilfield in January and July 2010, respectively. A total of
55 wells were drilled and completed in 2010, of which 50 were
horizontal oil wells.
- Reserves in Albania increased at all levels: a 30% increase in the
Original-Oil-In-Place (OOIP) assessment to 7.8 billion barrels from
6.0 billion barrels, an increase of 30% to 120 million barrels of
proved reserves and, an 11% increase to 238 million barrels of proved
plus probable reserves. Additionally, the Company's independent
reservoir engineers assigned contingent and prospective resource oil
estimates of 1.2 billion and 540 million barrels, respectively. The
corresponding net present value (NPV) after tax (discounted at 10%)
of the proved plus probable reserves increased by 30% to $2.0 billion
from $1.5 billion.
- In April 2010, the production sharing contract for the Block "F"
exploration acreage application was finalized. The area contains
several seismically defined structural and amplitude anomalies
prospective for oil and natural gas.
- On July 15, 2010, the Company completed a prospectus offering with a
syndicate of underwriters and issued an aggregate of 12,903,228
common shares at a price of CAD$7.75 per common share on a bought
deal basis, resulting in gross proceeds of $96.2 million.
- The Company continues to maintain a strong balance sheet with cash of
$108.1 million and working capital of $130.9 million at December 31,
2010 as compared to cash of $68.3 million and working capital of
$75.4 million at December 31, 2009.
OUTLOOK
For 2011, our continued focus is to increase reserves, production and maximize cash flow from operations. To achieve this, the Company will implement the following:
- Drill 66 horizontal and vertical wells and complete 120 well
reactivations and work-overs at the Patos-Marinza oilfield. A fourth
drilling rig is expected in the second quarter.
- Increase production facilities to handle our target exit production
rate of 20,000 bopd.
- 2011 will be a milestone year for thermal development of the Patos-
Marinza oilfield. Bankers will drill a vertical delineation well and
two horizontal wells designed for high pressure and temperature steam
injection, install a 25,000 BTU steam generator and all associated
production facilities.
- Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to
Vlore and construction of the receiving hub in Fier.
- Continue with the environmental stewardship and social initiatives in
our area of operations.
- Bankers is building a larger team of senior professionals to
complement its existing team of engineers, geoscientists, production
and support staff to manage another record capital program in 2011,
currently budgeted at $215 million.
For additional information, please see an updated version of the Company's corporate presentation on www.bankerspetroleum.com
Caution Regarding Forward-looking Information
Information in this news release respecting matters such as the expected future production levels from wells, future prices and netback, work plans, anticipated total oil recovery of the Patos-Marinza and Kuçova oilfields constitute forward-looking information. Statements containing forward-looking information express, as at the date of this news release, the Company's plans, estimates, forecasts, projections, expectations, or beliefs as to future events or results and are believed to be reasonable based on information currently available to the Company.
Exploration for oil is a speculative business that involves a high degree of risk. The Company's expectations for its Albanian operations and plans are subject to a number of risks in addition to those inherent in oil production operations, including: that Brent oil prices could fall resulting in reduced returns and a change in the economics of the project; availability of financing; delays associated with equipment procurement, equipment failure and the lack of suitably qualified personnel; the inherent uncertainty in the estimation of reserves; exports from Albania being disrupted due to unplanned disruptions; and changes in the political or economic environment.
Production and netback forecasts are based on a number of assumptions including that the rate and cost of well takeovers, well reactivations and well recompletions of the past will continue and success rates will be similar to those rates experienced for previous well recompletions/reactivations/development; that further wells taken over and recompleted will produce at rates similar to the average rate of production achieved from wells recompletions/reactivations/development in the past; continued availability of the necessary equipment, personnel and financial resources to sustain the Company's planned work program; continued political and economic stability in Albania; approval of the Addendum to the Plan of Development; the existence of reserves as expected; the continued release by Albpetrol of areas and wells pursuant to the Plan of Development and Addendum; the absence of unplanned disruptions; the ability of the Company to successfully drill new wells and bring production to market; and general risks inherent in oil and gas operations.
Contingent resources disclosed herein represent those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations, using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Prospective resources disclosed herein represent those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations, by application of future development projects.
Forward-looking statements and information are based on assumptions that financing, equipment and personnel will be available when required and on reasonable terms, none of which are assured and are subject to a number of other risks and uncertainties described under "Risk Factors" in the Company's Annual Information Form and Management's Discussion and Analysis, which are available on SEDAR under the Company's profile at www.sedar.com.
There can be no assurance that forward-looking statements will prove to be accurate. Actual results and future events could differ materially from those anticipated in such statements. Readers should not place undue reliance on forward-looking information and forward looking statements.
Review by Qualified Person
This release was reviewed by Abdel F. (Abby) Badwi, President & CEO of Bankers Petroleum Ltd., who is a "qualified person" under the rules and policies of AIM in his role with the Company and due to his training as a professional petroleum geologist (member of APEGGA) with over 40 years experience in domestic and international oil and gas operations.
About Bankers Petroleum Ltd.
Bankers Petroleum Ltd. is a Canadian-based oil and gas exploration and production company focused on developing large oil and gas reserves. In Albania, Bankers operates and has the full rights to develop the Patos-Marinza heavy oilfield and has a 100% interest in the Kuçova oilfield, and a 100% interest in Exploration Block F. Bankers' shares are traded on the Toronto Stock Exchange and the AIM Market in London, England under the stock symbol BNK.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (MD&A) of Bankers Petroleum Ltd.'s (Bankers or the Company) operating and financial results for the year ended December 31, 2010, compared to the preceding year, as well as information and expectations concerning the Company's outlook based on currently available information. The MD&A should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2010 and 2009, together with the notes related thereto. Additional information relating to Bankers, including its Annual Information Form (AIF), is on SEDAR at www.sedar.com and on the Company's website at www.bankerspetroleum.com. All dollar values are expressed in US dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The Company reports its heavy oil production in barrels.
This MD&A is prepared as of March 22, 2011.
NON-GAAP MEASURES
Netback per barrel and its components are calculated by dividing revenue, royalties, operating and sales and transportation expenses by the gross production volume during the period. Netback per barrel is a non-GAAP measure but it is commonly used by oil and gas companies to illustrate the unit contribution of each barrel produced.
Net operating income is similarly a non-GAAP measure that represents revenue net of royalties, operating and sales and transportation expenses. The Company believes that net operating income is a useful supplemental measure to analyze operating performance and provides an indication of the results generated by the Company's principal business activities prior to the consideration of other income and expenses.
Funds generated from operations include all cash from operating activities and are calculated before change in non-cash working capital. Reconciliation to the GAAP measure is as follows:
($000s) 2010 2009
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Cash provided by operating activities 51,452 10,931
Change in non-cash working capital 21,714 14,491
--------------------------
Funds generated from operations 73,166 25,422
--------------------------
--------------------------
The non-GAAP measures referred to above do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This MD&A offers our assessment of the Company's future plans and operations as of March 22, 2011 and contains forward-looking information. Such information is generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. Statements relating to "reserves" or "resources" are also forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources and reserves described can be profitably produced in the future. All such statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Management believes the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date hereof.
In particular, this MD&A contains forward-looking statements pertaining to the following:
- performance characteristics of the Company's oil and natural gas
properties;
- crude oil production estimates and targets;
- the size of the oil and natural gas reserves and/or resources;
- capital expenditure programs and estimates;
- projections of market prices and costs;
- supply and demand for oil and natural gas;
- environmental liabilities associated with the Company's operations in
Albania;
- amendments to the Company's petroleum agreement relating to the
Kuçova oilfield;
- expectations regarding the ability to raise capital and to
continually add to reserves through acquisitions and development; and
- treatment under governmental regulatory regimes and tax laws.
These forward-looking statements are based on a number of assumptions, including but not limited to: those set out herein and in the Company's Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information (NI 51-101 Report), availability of funds for capital expenditures, a consistent and improving success rate for well recompletions at the Patos-Marinza oilfield, the evaluation and the implementation of a successful plan of development relating to the Kuçova oilfield, increasing production as contemplated by the Plan of Development (PoD) and Addendum for the Patos-Marinza oilfield, stable costs, availability of equipment and personnel when required for the Company's operations, continuing favourable relations with Albanian governmental agencies and continuing strong demand for oil and natural gas.
Actual results could differ materially from those anticipated in such forward-looking statements as a result of the risks and uncertainties set forth below:
- general economic, market and business conditions;
- volatility in market prices for oil and natural gas;
- risks inherent in oil and gas production operations including those
relating to maintaining and increasing oil and gas production;
- uncertainties associated with estimating oil and natural gas
reserves;
- competition for, among other things, capital, acquisitions of
reserves, undeveloped lands and skilled personnel;
- incorrect assessments of the value of acquisitions;
- geological, technical, drilling and processing problems;
- fluctuations in foreign exchange or interest rates and stock market
volatility;
- rising costs of labour and equipment;
- failure to agree on terms to an amending agreement in regards to the
Kuçova oilfield on terms acceptable to the Company, or at all;
- changes in foreign laws and regulations including those related to
tax laws and incentive programs relating to the oil industry;
- environmental risks, including larger than expected environmental
liabilities associated with the Company's operations in Albania;
- the ability to implement corporate strategies;
- the ability to obtain financing;
- the state of domestic and international capital markets;
- changes in oil acquisition and drilling programs;
- failure to complete and/or realize the anticipated benefits of its
acquisitions; and
- delays resulting from, or inability to obtain, required regulatory
approvals.
The Company from time to time updates its forward-looking information based on the events and circumstances that occurred during the period and has adjusted its capital expenditure program accordingly to ensure that capital expenditures are funded by cash provided by operations, cash on hand and its available credit.
Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
BUSINESS PROFILE
Bankers Petroleum Ltd. is a Canadian-based oil exploration and production company focused on maximizing the value of its heavy oil assets in Albania. The Company is targeting growth in production and reserves through application of new and proven technologies by an experienced technical team. All revenue is currently generated from its operations in Albania, which is located northwest of Greece in South Eastern Europe.
In Albania, Bankers operates and has the full rights to develop the Patos-Marinza and Kuçova oilfields pursuant to License Agreements with the Albanian National Agency for Natural Resources (AKBN) and Petroleum Agreements with Albpetrol Sh.A (Albpetrol), the state owned oil and gas corporation. The licenses became effective in March 2006 and September 2009, respectively, each having a 25 year term with an option to extend at the Company's election for further five year increments. The Patos-Marinza oilfield is the largest onshore oilfield in continental Europe, holding approximately 7.5 billion barrels of original-oil-in-place (OOIP). The Company also has exclusive rights to exploration Block "F" (adjacent to the Patos-Marinza oilfield), a 185,000 acre oil and gas prone exploration field.
OVERVIEW & SELECTED ANNUAL INFORMATION
($000s, except as noted) Year ended December 31
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Results at a Glance 2010 2009 2008
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Financial
Oil revenue 170,376 86,614 110,253
Net operating income 81,103 31,496 51,141
Net income (loss) 14,265 (150) (1,587)
Basic/diluted earnings (loss)
per share 0.060/0.058 (0.001) (0.009)
Funds generated from operations 73,166 25,422 41,713
Additions to property, plant and
equipment 122,012 38,324 78,378
Operating
Average production (bopd) 9,597 6,438 5,875
Average price ($/barrel) 48.64 36.86 51.27
Netback ($/barrel) 23.15 13.40 23.78
Average Brent oil price ($/barrel) 79.50 61.67 97.02
December 31
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2010 2009 2008
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Cash and deposits 108,119 68,270 20,107
Working capital (deficiency) 130,920 75,414 (7,387)
Total assets 467,414 304,820 214,675
Bank loans 25,829 28,085 28,125
Shareholders' equity 343,307 213,960 125,358
During the year, Bankers increased its revenue, net operating income and funds generated from operations through its continued success with the horizontal drilling program and ongoing well reactivations. The average oil sales price received by the Company during the year was $48.64/bbl, a 36% increase from $36.86/bbl in 2009. Higher average oil prices, in conjunction with keeping overall production costs relatively consistent, resulted in a 73% increase in the average 2010 netback to $23.15/bbl from $13.40/bbl in 2009. On average, the oil price received by the Company in 2010 represented approximately 61% of the Brent oil price, a modest improvement from 60% in 2009. Contracts for 2011 sales now average 65% of the Brent oil price. Oil exports increased to 85% in 2010, from 82% of total sales in 2009, with the balance supplying the domestic Albanian refineries.
Consolidated capital expenditures increased to $122.0 million in 2010 as compared to $38.3 million in 2009 and $78.4 million in 2008.
Shareholders' equity increased to $343.3 million in 2010 from $214.0 million in 2009 and $125.4 million in 2008. The increase in shareholders' equity in 2010 was due to the new equity issue in July 2010 and exercises of warrants and options throughout the year.
Highlights
Bankers accomplished several key achievements during 2010:
- Average production increased 49% to 9,597 bopd from 6,438 bopd in
2009. Exit production at year-end 2010 exceeded 12,100 bopd as
compared to 8,100 bopd at year-end 2009.
- On July 15, 2010, the Company completed a prospectus offering with a
syndicate of underwriters and issued an aggregate of 12,903,228
common shares at a price of CAD$7.75 per common share on a bought
deal basis, resulting in gross proceeds of $96.2 million.
- The Company continues to maintain a strong balance sheet with cash of
$108.1 million and working capital of $130.9 million at December 31,
2010 as compared to cash of $68.3 million and a working capital of
$75.4 million at December 31, 2009.
- A second and third drilling rig commenced operation in the Patos-
Marinza oilfield in January and July 2010, respectively. A total of
55 wells were drilled and completed in 2010, of which 50 were
horizontal wells.
- In April 2010, the production sharing contract for the Block "F"
exploration acreage application was finalized. The area contains
several seismically defined structural and amplitude anomalies
prospective for oil and natural gas.
- Reserves in Albania increased at all levels: a 30% increase in OOIP
assessment to 7.8 billion barrels from 6.0 billion barrels, an
increase of 11% to 238 million barrels of proved plus probable
reserves and an increase of 1% to 427 million barrels of proved,
probable and possible reserves. Additionally, the Company's
independent reservoir engineers assigned contingent and prospective
resource oil estimates of 1.2 billion and 540 million barrels,
respectively. The corresponding net present value (NPV) after tax
(discounted at 10%) of the proved plus probable reserves increased by
30% to $2.0 billion from $1.5 billion.
GROWTH STRATEGY
Bankers' strategy is focused on petroleum assets that have long-life reserves with production growth potential. Employing its knowledge base and technical expertise, the Company is working to optimize its existing assets from the application of primary, secondary and enhanced oil recovery (EOR) extraction technologies, creating long-term value for shareholders. This will be accomplished through the attainment of its main objectives: increasing production, reserves, funds generated from operations and net asset value.
Bankers' strategic priorities are to:
- Increase reserves and production;
- Maintain a strong balance sheet by controlling debt and managing
capital expenditures;
- Control costs through efficient management of operations;
- Pursue new and proven technology applications to improve operations
and assist exploration endeavours;
- Expand infrastructure (pipelines, storage, treating capacity) to
increase production capacity in a cost-effective manner;
- Explore undeveloped acreage to identify and create development
opportunities;
- Maintain a strong focus on employee, contractor and community health
and safety; and
- Manage environmental and social performance to minimize negative
ecological impacts and ensure continued stakeholder support.
In pursuing the long-term growth strategy, Bankers is primarily focused on accessing the heavy oil upside from its Albanian assets, which includes the effective implementation of the Patos-Marinza development plan as well as applying enhanced oil recovery (EOR) and secondary extraction techniques to increase the field's recoverable reserves.
In addition, the Company's strategy involves identifying and acquiring other potential petroleum opportunities in Albania to increase overall value. During the year, negotiations to finalize the Production Sharing Contract for Block "F" exploration acreage were concluded. The area contains several seismically defined structures and amplitude anomalies prospective for oil and natural gas.
Throughout the year, Bankers focused on achieving its priorities and implementing its capital programs in Albania. The Company funded its capital programs using funds generated from operations and existing cash. Strategic allocation of the work program and budget is designated to provide additional recoverable reserves at the Patos-Marinza and Kuçova oilfields and still achieve an appropriate growth in production.
Key Performance Indicators
Key performance indicators relate to those factors that Bankers can directly affect, and are indicators of the Company's ability to provide long-term value to its shareholders, which include optimizing the cost of operations over time, improving exploration and development and increasing operational performance through technology and best practices. Key measurements include operating costs, production volumes and safety performance. These key performance indicators are continuously reviewed and monitored.
In addition, strengthening relationships with employees, governments, communities and other stakeholders are important aspects of the business for Bankers. The effective management of these relationships allows the Company to tap into new growth opportunities and efficiently develop operations for the future.
CAPABILITY TO DELIVER RESULTS
Activity in the oil industry is subject to a range of external factors that are difficult to actively manage, including commodity prices, resource demand, regulator and environmental regulations and climate conditions. Bankers gives significant consideration to these factors and backs-up its strategy by employing and positioning necessary resources to deliver on its goals and commitment to increase value for shareholders. The Company focuses its capital on opportunities that provide the potential for the best returns. Comprehensive insurance policies are in place to help safeguard its assets, operations and employees. Relationships with stakeholders and key partners are carefully cultivated to assist in the Company's future development and growth. The experiences of management and its technical team ensure that the Company can fulfill its commitment to deliver maximum value to its shareholders.
INDUSTRY & ECONOMIC FACTORS
Commodity price and foreign exchange benchmarks for the past two years are as follows:
2010 2009
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Brent average oil price ($/barrel) 79.50 61.67
US/ Canadian dollar year end exchange rate 0.9946 1.0466
US/ Canadian dollar average exchange rate 1.0299 1.1420
The world crude oil prices strengthened during the course of 2010. Average Brent oil prices improved from $76/bbl in the first quarter to $86/bbl in the fourth quarter of 2010.
In 2010, Bankers generated 85% of its crude oil revenue from sales to international markets. The remainder was sold to ARMO, an independent petroleum refiner in Albania. Both the domestic and international selling prices are based on the Brent oil price. The Company has not entered into any commodity derivative contracts as at or during the year ended December 31, 2010.
The fluctuation in Canadian dollar mirrored that of oil prices in 2010. The appreciation of the Canadian dollar against its US counterpart was most significant in the second part of 2010. On an average basis, the Canadian dollar strengthened by 10% in 2010.
The fluctuations in the foreign exchange currencies impacted cash and some short-term investments that are denominated in Canadian dollars. The strengthening of the Canadian dollar after the July 2010 equity financing was largely responsible for a foreign exchange gain of $5.2 million in 2010.
Significant Developments in 2010
Bankers accomplished several key achievements in 2010 in response to improvements in the commodity market. These events included expansion of the horizontal drilling program by activating a second and third rig; completion of a bought deal equity issue in July; construction of extra tankage at the Port of Vlore export terminal and the overall growth of capital programs.
During the year, Bankers activated a second and third drilling rig, enabling the Company to drill additional vertical delineation wells in the western extension of the field, as well as thermal pilot wells, contributing to the growth of its horizontal programs. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal wells.
On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million.
In 2010, Bankers commenced construction of the extra tankage at the Port of Vlore export terminal. This facility will increase the storage capacity from 80,000 barrels to 160,000 barrels, improving the export shipping logistics and enabling larger crude oil cargoes.
QUARTERLY SUMMARY
Below is a summary of Bankers' performance over the last eight quarters.
2010
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($000s, except
as noted) First Quarter Second Quarter Third Quarter
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$/bbl $/bbl $/bbl
-------------------------------------------------------------------------
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Average production
(bopd) 8,282 9,830 9,826
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Oil revenue 35,149 47.16 42,147 47.12 42,135 46.61
Royalties 7,190 9.65 8,367 9.35 8,284 9.16
Operating expenses 7,925 10.63 8,892 9.94 9,401 10.40
Sales and
transportation 4,395 5.90 4,535 5.07 4,804 5.31
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Net operating
income 15,639 20.98 20,353 22.76 19,646 21.74
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2010
-----------------------------------
($000s, except
as noted) Fourth Quarter Year
-------------------------------------------------------
$/bbl $/bbl
-------------------------------------------------------
-------------------------------------------------------
Average production
(bopd) 10,424 9,597
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Oil revenue 50,945 53.12 170,376 48.64
Royalties 9,841 10.26 33,682 9.62
Operating expenses 10,526 10.98 36,744 10.49
Sales and
transportation 5,113 5.33 18,847 5.38
-----------------------------------
Net operating
income 25,465 26.55 81,103 23.15
-----------------------------------
-----------------------------------
2009
-----------------------------------------------------
($000s, except
as noted) First Quarter Second Quarter Third Quarter
-------------------------------------------------------------------------
$/bbl $/bbl $/bbl
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average production
(bopd) 5,864 6,383 6,258
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Oil revenue 13,052 24.73 20,107 34.63 23,441 40.71
Royalties 3,486 6.61 5,389 9.28 5,368 9.32
Operating expenses 5,512 10.44 5,748 9.90 6,083 10.56
Sales and
transportation 1,426 2.70 2,003 3.45 2,739 4.76
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Net operating
income 2,628 4.98 6,967 12.00 9,251 16.07
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2009
-----------------------------------
($000s, except
as noted) Fourth Quarter Year
-------------------------------------------------------
$/bbl $/bbl
-------------------------------------------------------
-------------------------------------------------------
Average production
(bopd) 7,234 6,438
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Oil revenue 30,014 45.10 86,614 36.86
Royalties 6,225 9.35 20,468 8.71
Operating expenses 7,438 11.18 24,781 10.55
Sales and
transportation 3,701 5.56 9,869 4.20
-----------------------------------
Net operating
income 12,650 19.01 31,496 13.40
-----------------------------------
-----------------------------------
2010
($000s, ------------------------------------------------------------
except First Second Third Fourth
as noted) Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------
Financial
Funds
generated
from operations 13,819 18,792 16,571 23,984 73,166
Net income 470 2,694 4,267 6,834 14,265
Basic/ diluted
earnings per
share 0.002 0.012/0.011 0.018/0.017 0.028/0.028 0.060/0.058
General and
administrative 1,926 1,789 1,927 2,613 8,255
Total assets 330,371 339,661 445,774 467,414 467,414
Capital
expenditures 26,700 29,262 27,991 38,059 122,012
Bank loans 26,418 27,330 23,887 25,829 25,829
2009
($000s, ------------------------------------------------------------
except First Second Third Fourth
as noted) Quarter Quarter Quarter Quarter Year
-------------------------------------------------------------------------
Financial
Funds
generated
from operations 1,265 5,998 7,371 10,788 25,422
Net income (loss) (2,492) (1,679) 1,708 2,313 (150)
Basic/ diluted
earnings (loss)
per share (0.014) (0.009) 0.008 0.010 (0.001)
General and
administrative 1,204 2,079 1,410 1,757 6,450
Total assets 210,674 257,689 292,212 304,820 304,820
Capital
expenditures 2,835 6,126 12,104 17,259 38,324
Bank loans 26,948 32,651 31,355 28,085 28,085
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DISCUSSION OF OPERATING RESULTS
Production, Revenue and Netback
2010 2009 %
-------------------------------------------------------------------------
Average production (bopd) 9,597 6,438 49
Oil revenue ($000s) 170,376 86,614 97
Netback ($/bbl)
Average price 48.64 36.86 32
Royalties 9.62 8.71 10
Operating expenses 10.49 10.55 (1)
Sales and transportation 5.38 4.20 28
-----------------------------------
Netback 23.15 13.40 73
-----------------------------------
-----------------------------------
During 2010, average production increased 49% to 9,597 bopd from 6,438 bopd for 2009. The exit production rate exceeded 12,100 bopd at 2010 year-end compared to 8,100 at the preceding year-end.
The increase in production was due to the expansion of the drilling program, continued well reactivation program and well recompletion program focused on bringing high productivity wells on stream. In 2010, a total of 55 wells were drilled and completed, of which 50 were horizontal wells.
As of December 31, 2010, the Company had 826 wells in inventory, an increase of 254 wells compared to 572 at the end of 2009. Of these 254 wells, 55 were new wells drilled during 2010 and 199 were taken-over from Albpetrol as the area of development was expanded. The majority of the wells taken-over during the year were part of a consolidation effort to reduce Albpetrol activities in the primary focus areas for future Bankers' development. As such, the majority of these wells were not reactivated with progressing cavity pumping systems in 2010. Of the total 826 wells in inventory at year-end, 445 are producing wells, 9 are water disposal wells and 372 are non-active wells.
In April 2010, Bankers resumed its oil sales to two Albanian refineries operated by ARMO, a domestic petroleum refiner. Under the ARMO crude oil sales contract, the pricing is competitive with export sales. In 2010, Bankers exported 85% of its crude at an average price of $48.94/bbl.
On average, the Company received $48.64/bbl for the year, an increase of 32% from $36.86/bbl for the preceding year. This increase was largely due to the increase in commodity prices. The average Brent oil price for 2010 was $79.50/bbl, compared to $61.67/bbl in 2009, an improvement of 29%. Oil revenue increased 97% to $170.4 million in 2010 compared to $86.6 million in 2009.
The Company achieved record average production of 10,424 bopd during the fourth quarter of 2010 compared to 9,826 bopd during the preceding quarter and 7,234 bopd during the fourth quarter of 2009. In the fourth quarter of 2010, revenue increased 21% and 70%, respectively, compared to the preceding quarter and the same period in 2009. The increase was mainly due to the improvement of oil prices and increased production. The Company received an average sales price of $53.12/bbl during the fourth quarter compared to $46.61/bbl in the third quarter and $45.10/bbl over the same period in 2009, an increase of 14% and 18%, respectively. The Company exported 80% of its crude oil during the fourth quarter compared to 84% during the preceding quarter and 100% during the same period in 2009.
The netback during the fourth quarter of 2010 was $26.55/bbl compared to $21.74/bbl for the preceding quarter and $19.01/bbl for the fourth quarter of 2009, an increase of 22% and 40% respectively.
Royalties
Royalties in Albania are calculated pursuant to the Petroleum Agreement with Albpetrol and consist of a royalty based on Albpetrol's pre-existing production (PEP), a 1% gross overriding royalty (ORR) on new production and a 10% royalty tax (RT) on net production. Overall royalties for the year represented 20% of oil revenue, as compared to 24% for the preceding year. The decrease was due to increased production from new wells. As a percent of revenue, the various royalty components currently represent 10% from PEP, 1% for the ORR and 9% for the RT. Fluctuations in royalty on a per barrel basis are due to changes in the underlying oil prices.
Royalties for the fourth quarter were $10.26/bbl (19% of revenue) compared to $9.16/bbl (20% of revenue) during the preceding quarter and $9.35/bbl (21% of revenue) for the same period in 2009. The average royalty rate declined during the quarter as more oil was produced from new production compared to the preceding quarter and the same period in 2009.
Operating Expenses
Operating expenses for the year were $10.49/bbl, slightly reduced from $10.55/bbl in 2009. On a percentage of revenue basis, operating costs represented 22% of the revenue for the year, compared to 29% for the preceding year. The improvement was due to the increase in production levels, efficiency in well servicing costs and the increase in commodity prices.
Operating expenses during the fourth quarter were $10.98/bbl compared to $10.40/bbl during the third quarter and $11.18/bbl during the same period in 2009. The moderate increase in operating expenses compared to the preceding quarter was a result of increased fuel costs and increased workover costs.
Sales and Transportation
Sales and transportation (S&T) costs for the year increased to $5.38/bbl from $4.20/bbl for 2009, mainly due to the increase in export sales and facility fees during the year and increased use of diesel in blending to alleviate diluent supply limitations.
S&T expenses during the fourth quarter were $5.33/bbl compared to $5.31/bbl during the preceding quarter and $5.56/bbl in the fourth quarter of 2009. The reduction in S&T compared to the same period in 2009 was mainly due to the increase of domestic sales which incurred lower S&T costs. The export sales were 80% of total sales for the fourth quarter, 84% for the preceding quarter and 100% for the same period in 2009.
General and Administrative Expenses
General and administrative (G&A) expenses for the year were $8.3 million, net of capitalization, compared to $6.5 million in 2009, an increase of 28%. The increase in G&A resulted mainly from the currency impact of the stronger Canadian dollar in comparison to the US dollar, as well as increases in professional fees, personnel costs and travel costs.
The 2010 G&A costs represented $2.36/bbl, a 14% reduction from $2.74/bbl in 2009. The reduction in G&A on a per barrel basis was attributed to the production increase in 2010.
During the year, the Company capitalized $10.1 million of G&A and stock based compensation compared to $3.9 million for the preceding year. These expenses were directly related to acquisition, exploration and development activities in Albania.
Non-cash stock-based compensation expense pertaining to stock options granted to officers, directors, employees and service providers were $14.7 million (2009 - $6.5 million). Of this amount, $8.1 million (2009 - $4.5 million) was charged to earnings and $6.6 million (2009 - $2.0 million) was capitalized.
G&A expenses for the fourth quarter of 2010 were $2.6 million compared to $1.9 million in the preceding quarter and $1.8 million for the same period in 2009. The increase was mainly due to strengthening of the Canadian dollar against the US dollar compared to the preceding quarter and the same period in 2009, as well as increases in personnel and travel costs during the fourth quarter of 2010.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion (DD&A) expenses for the year were $27.5 million ($7.86/bbl) compared to $16.2 million ($6.90/bbl) for 2009. The increase in DD&A expenses reflects higher production in Albania and an increase in depletable assets, inclusive of higher future capital requirements. The Company's independent reserve evaluation prepared in accordance with the National Instrument NI 51-101 assessed proved gross reserves of 120.2 million barrels at December 31, 2010, compared to 92.8 million barrels at December 31, 2009.
DD&A costs for the quarter ended December 31, 2010 were $10.7 million, compared to $6.0 million for the preceding quarter and $4.4 million for the same period in 2009. The increase in DD&A reflects the higher depletion base as a result of increased future development costs, and the increase in production during the quarter. Depletion expenses represented $10.81/bbl for the quarter compared to $6.37/bbl and $6.20/bbl for the preceding quarter and the same period in 2009, respectively.
Future Income Tax Expense
Future income tax liabilities result from the temporary differences between the carrying value and tax values of Albanian assets and liabilities. As of December 31, 2010, the Company recorded a $69.5 million future income tax liability, compared to $39.4 million at the end of the previous year, in relation to the Company's Albanian assets and liabilities. The Company incurred a future income tax expense of $23.5 million for the year compared to $5.9 million for 2009 due to increased earnings. On a quarterly basis, the Company recorded a future income tax expense of $6.1 million compared to $5.5 million for the preceding quarter and $2.7 million for the same period in 2009. Bankers is presently not required to pay cash taxes in any jurisdiction. The Company's cost recovery pool in Albania is $152.6 million. In Canada, the Company has non-capital losses of approximately $27.4 million, the benefit of which has not been recognized in the financial statements.
Net Income (Loss) and Funds Generated from Operations
The Company recorded net income of $14.3 million ($0.060 per share) during the year ended December 31, 2010 and a net loss of $0.2 million ($0.001 per share) for the year ended December 31, 2009.
The Company realized net income of $6.8 million for the fourth quarter compared to net income of $4.3 million in the preceding quarter and $2.3 million for the same period in 2009.
Funds generated from operations amounted to $73.2 million for the year ended December 31, 2010 compared to $25.4 million in 2009. The increase in funds generated from operations was mainly due to higher production and commodity prices during in the year.
Funds generated from operations were $24.0 million for the fourth quarter compared to $16.6 million in the third quarter and $10.8 million for the same period in 2009.
OIL RESERVES
Annually, the Company obtains independent reserves evaluations of its Albanian properties by RPS Energy Canada Ltd. (Patos-Marinza oilfield) and by DeGolyer and MacNaughton Canada Ltd. (Kuçova oilfield). At December 31, 2010, reserves increased on a total proved (1P), total proved plus probable (2P) and total proved, probable and possible (3P) basis. Changes within each reserve basis are shown below. The 2010 finding and development costs for the Albanian properties represented $10.06/bbl on a 1P basis, $5.80/bbl on a 2P basis and $3.85/bbl on a 3P basis.
Gross Oil Reserves- Using Forecast Prices (Mbbls)
----------------------------- -------------------
2010
----------------------------- 2009
Patos- Total Total
Marinza Kuçova Albania Albania %
----------------------------------------------------- -------------------
Proved
Developed Producing 17,300 0 17,300 22,900 (24)
Developed Non-Producing 0 0 0 0 -
Undeveloped 99,700 3,239 102,939 69,939 47
----------------------------- -------------------
Total Proved 117,000 3,239 120,239 92,839 30
Probable 109,200 8,177 117,377 121,077 (3)
----------------------------- -------------------
Total Proved Plus
Probable 226,200 11,416 237,616 213,916 11
Possible 168,400 20,587 188,987 208,387 (9)
----------------------------- -------------------
Total Proved, Probable
& Possible 394,600 32,003 426,603 422,303 1
----------------------------------------------------- -------------------
Net Present Value at 10% - After Tax Using Forecast Prices ($millions)
----------------------------- -------------------
2010
----------------------------- 2009
Patos- Total Total
Marinza Kuçova Albania Albania %
----------------------------------------------------- -------------------
Proved
Developed Producing 220.0 0.0 220.0 149.0 48
Developed Non-Producing 0.0 0.0 0.0 0.0 -
Undeveloped 710.0 19.0 729.0 376.8 93
----------------------------- -------------------
Total Proved 930.0 19.0 949.0 525.8 80
Probable 904.0 115.0 1,019.0 993.1 3
----------------------------- -------------------
Total Proved Plus
Probable 1,834.0 134.0 1,968.0 1,518.9 30
Possible 1,278.0 306.2 1,584.2 1,513.7 5
----------------------------- -------------------
Total Proved, Probable
& Possible 3,112.0 440.2 3,552.2 3,032.6 17
----------------------------------------------------- -------------------
In the Patos-Marinza oilfield, the OOIP at the end of 2010 increased 32% to 7.5 billion barrels from 5.7 billion at the end of 2009. Additionally, the Company's independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. This represents the initial assessment of such resources attributed to future thermal recovery technologies and secondary water flood recovery methods at the Patos-Marinza oilfield.
The reserves growth is primarily attributable to increased resource levels, improved well performance, the Company's 2010 horizontal development drilling success and increased commodity prices. This is reflected in the upgrade of 2P and 3P reserves into the 1P and 2P reserves categories, respectively, and the expansion of 3P reserves. All of Patos-Marinza's 2010 reserves estimates are from primary recovery methods.
The Company acquired the Kuçova asset in 2008 and the OOIP resource estimate is 297 million barrels. This property is currently in early stage development and there was no Company production from the Kuçova oilfield in 2010 and only minor field activities were performed. Bankers expects to commence activity in this area in 2011 utilizing a variety of extraction techniques that will lead to creation of a development plan.
CAPITAL EXPENDITURES
($000s) 2010 2009
-------------------------------------------------------------------------
Drilling program $ 69,572 $ 16,451
Well reactivations 8,439 6,704
Work-over program 11,175 5,549
Evaluation area & thermal 8,310 -
Base program
Facility infrastructure 1,163 5
Water control/disposal 7,049 4,784
Environmental stewardship 1,363 82
Pipeline/sales infrastructure 7,068 715
Ecology pits/remediation 1,988 1,271
Other 3,540 2,207
Field equipment 2,345 556
--------------------------
$ 122,012 $ 38,324
--------------------------
--------------------------
Capital expenditures for the year were $122.0 million, compared to $38.3 million in the preceding year, an increase of 218%. This increase was due to the expansion of the Company's capital programs in drilling, work-overs, reactivation and other projects. During the year, Bankers spent $69.6 million on the drilling program for 50 horizontal wells and 2 vertical wells, compared to $16.5 million in 2009 (10 horizontal wells). Bankers spent $8.4 million on well reactivations compared to $6.7 million in the previous year. The increase in well-reactivation costs was a direct result of the increase of wells taken over from Albpetrol. In 2010, a total of 199 wells were taken over from Albpetrol, compared to 80 in 2009. The Company invested $8.3 million on the new evaluation area and thermal project in 2010, which consist of the drilling of 3 vertical wells and the reactivation projects, nil in 2009. Base program expenditures increased 155% during the year due to the increase in sales infrastructure, water control/disposal initiatives, environmental stewardship and facility infrastructure. Included in the year-end property, plant and equipment amounts are field equipment of casing, tubing and other equipment of $17.5 million at December 31, 2010 (2009 - $15.2 million) to be used for future drilling and reactivation programs in Albania.
During the fourth quarter of 2010, Bankers incurred $38.1 million in capital expenditures; $23.4 million on drilling operations, $3.1 million on well reactivations and $5.9 million related to the base program. The balance of the expenditures was incurred on the work-over program, new evaluation area and thermal projects and other miscellaneous expenses and capitalized G&A. By comparison, in the fourth quarter of 2009, the Company incurred $17.3 million in capital expenditures; $6.7 million on drilling operations, $2.7 million on well reactivations and $6.3 million on the base program, with the balance of the expenditures incurred on miscellaneous expenses and capitalized G&A.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2010, Bankers had working capital of $130.9 million (including cash and deposits totalling $108.1 million) and long-term debt of $21.8 million. As of December 31, 2009, the Company had working capital of $75.4 million and a long-term debt of $23.4 million. The improvement in working capital compared to the same period in 2009 was mainly due to the equity issuance and exercises of warrants and options throughout the year.
On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million.
On December 31, 2010, Bankers had credit facilities totalling $136.1 million, of which only $25.8 million was utilized. The majority represents a reserve-based long-term facility of $110.0 million from the International Finance Corporation and European Bank for Reconstruction and Development, from which no advances have yet been drawn. The $26.1 million Raiffeisen Bank facility includes a revolving operating loan of $20.0 million (due in March 2012) and term loans totalling $6.1 million. Repayments of $4.6 million were made on the term loans during the year.
The Company's approach to managing liquidity is to ensure a balance between capital expenditure requirements and cash provided by operations, available credit facilities and working capital.
There were approximately 245 million and 247 million shares outstanding as of December 31, 2010 and March 22, 2011, respectively. In addition, the Company had approximately 15 million stock options and 5 million warrants outstanding as of December 31, 2010. Subsequent to 2010 year-end, approximately 5 million stock options were granted and approximately 2 million stock options were exercised, generating proceeds of approximately $3.1 million. On March 22, 2011, Bankers has approximately 17 million stock options and 5 million warrants outstanding. The warrants expire on March 1, 2012 and are exercisable into common shares at CAD$2.37 per share, representing approximately CAD$11.5 million.
Officers and executives of the Company represent approximately 7 percent ownership in the Company on a fully diluted basis. This creates an alignment with shareholders and a team that is dedicated to activities that support future value creation.
In Albania, the Company considers any amounts greater than 60 days as past due. The amount past due has been received subsequent to year end and is not considered to be impaired.
Plan of Development
Bankers has no capital expenditure commitment for the Patos-Marinza oilfield under the Petroleum Agreement. The Company annually submits a work program to AKBN which includes the nature and the amount of capital expenditures to be incurred during that year. Significant deviations in this annual program from the Plan of Development will be subject to AKBN approval. The Petroleum Agreement provides that disagreements between the parties will be referred to an independent expert whose decision will be binding. The Company has the right to relinquish a portion or all of the contract area. If only a portion of the contract area is relinquished then the Company will continue to conduct petroleum operations on the portion it retains and the future capital expenditures will be adjusted accordingly.
Commitments
The Company has long-term lease commitments in Canada and Albania. The minimum lease payments for the next five years are $3.8 million as follows:
($000s) Albania Canada Total
-------------------------------------------------------------------------
2011 $ 557 $ 709 $ 1,266
2012 425 541 966
2013 318 528 846
2014 318 44 362
2015 318 - 318
------------------------------------
$ 1,936 $ 1,822 $ 3,758
------------------------------------
------------------------------------
The Company has two term loans totalling $6.1 million with a European financial institution that is repayable in equal monthly instalments of $0.4 million until October 31, 2011 and $74,100 until April 2014. Of the amount outstanding, $4.0 million is classified as current and $2.1 million as long-term. Principal repayments of the term loan over the next four years are as follows:
($000s)
------------------------------------------------------------
2011 $ 4,014
2012 889
2013 889
2014 296
----------
$ 6,088
----------
----------
Quarterly Variability
Fluctuations in quarterly results are due to a number of factors, some of which are not within the Company's control such as seasonality and commodity prices.
- Seasonality of winter operating conditions combined with the timing
of transfer of wells from Albpetrol results in production increases
that are typically higher in the second and third quarters. As new
wells come on stream, there is a build-up period in production,
higher sand production and higher well servicing costs, which is
typical for heavy oil wells in the first year of production. In
addition, production levels can be affected by water disposal
constraints, mechanical wellbore and isolation failures, increased
water production coming from shallower and deeper zones, and a
shortage of rig work-over capacity and specialised well servicing
equipment.
- The increase in royalties is related to higher oil prices and the
greater number of wells being taken over from Albpetrol, which
results in higher pre-existing production.
- Fluctuations of operating expenses is part of a continuing trend that
results from operating efficiencies gained through greater experience
in field operations and economies of scale as the proportionate share
of fixed operating expenses declines with production increases.
CRITICAL ACCOUNTING ESTIMATES
The Company's financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Significant accounting policies are disclosed in Note 2 to the Audited Consolidated Financial Statements. Preparation of financial statements in accordance with GAAP requires that management make estimates that affect the reported amount of assets, liabilities, revenues and expenses. The estimates used in applying these critical accounting policies are as follows:
Capitalized Costs
The Company follows the full cost method of accounting for its oil properties whereby all costs associated with the exploration for and development of oil reserves are capitalized on a cost centre (country) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs.
Depletion and Depreciation
Capitalized costs within each cost centre are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties.
Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20 percent in a particular country cost centre, in which case a gain or loss on disposal is recorded.
Equipment, furniture and fixtures are depreciated on the declining balance method at rates of 20 to 30 percent.
Income Taxes
Future income taxes are recorded using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess.
Ceiling Test
In accordance with the full cost accounting guideline, the Company evaluates its oil and gas assets to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved plus probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate.
Asset Retirement Obligations
The fair value of estimated asset retirement obligations is capitalized to property, plant and equipment in the period in which the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil properties are amortized as part of depletion and depreciation using the unit-of-production method.
Increases in asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual abandonment expenditures incurred are charged against the accumulated obligation.
Stock-based compensation
Compensation costs attributable to all stock options granted to employees, directors and service providers are measured at fair value at the date of grant using the Black-Scholes option pricing model and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.
RELATED PARTY TRANSACTIONS
The Company had a note receivable from BKX in an amount of $2.7 million as at December 31, 2009. The full amount was received during the year ended December 31, 2010. BKX is considered a related party as BKX and the Company have common directors. The above transaction was considered to be in the normal course of business.
SUBSEQUENT EVENT
In February 2011, the Company entered into financial commodity put contracts representing 4,000 barrels of oil per day at a floor price of $80 per barrel for the period January 1, 2012 to December 31, 2012.
NEW ACCOUNTING STANDARDS
Transition to International Financial Reporting Standards (IFRS)
Commencing on January 1, 2011 International Financial Reporting Standards (IFRS) are the generally accepted accounting principles in Canada. The changeover date of January 1, 2011 requires the restatement, for comparative purposes, of amounts reported by Bankers for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010. The project to convert to IFRS is being managed by members of the finance and accounting group, who have engaged in IFRS educational programs and continue to develop the Company's adoption to IFRS. The Company's auditors have been and will continue to be involved throughout the process to ensure the Company's policies are in accordance with these new standards.
In July 2009, an amendment to IFRS 1 First Time Adoption of International Reporting Standards was issued that applies to oil and gas assets. The amendment allows an entity that used full cost accounting under its current Canadian GAAP to elect, at its time of adoption, to measure exploration and evaluation assets at the amount determined under the entity's current Canadian GAAP and to measure oil and gas assets in the development and production phases by allocating the amount determined under the entity's current Canadian GAAP for those assets to the underlying assets pro rata using reserve volumes or reserve values as of that date. Bankers will use this exemption. IFRS 1 also provides a number of other optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective application which are:
- Business Combinations - IFRS 1 would allow the Company to use the
IFRS rules for business combinations on a prospective. The Company
plans to use this exemption.
- Share-based payments - IFRS 1 allows the Company an exemption on
IFRS 2, "Share-Based Payments" to equity instruments which vested
before Bankers' transition date to IFRS. The Company will use this
exemption.
The transition from Canadian GAAP to IFRS is significant and may materially affect the Company's reported financial position and results of operations. Key differences identified by the Company that will impact the financial statements and the current status of those items are noted:
- Property, plant and equipment (PP&E) - This includes oil and gas
assets in the development and production phases. As all oil and gas
assets of the Company are in the development and production phases,
the full amount will be included in PP&E and allocated to two cash
generating units (CGUs).
- Impairment of PP&E assets - Under IFRS, impairment tests of PP&E must
be performed at the CGU level as opposed to the entire PP&E balance
which is required under current Canadian GAAP through the full cost
ceiling test. Impairment calculations are required to be performed
using fair values of the PP&E assets and the Company will use the
discounted proved plus probable reserve values for impairment tests
of PP&E. The Company does not anticipate its PP&E assets to be
impaired as at January 1, 2010 under IFRS.
- Depletion expense - On transition to IFRS, the Company has the option
to use either proved reserves or proved plus probable reserves in the
depletion calculation. The Company will use proved plus probable
reserves in determining depletion expense.
- Share based payments - The major difference between current Canadian
GAAP and IFRS that impacts the Company is the use of an estimated
forfeiture rate at grant date as opposed to recognizing the impact of
forfeitures when they occur. The Company will apply a forfeiture rate
of 5% to all unvested stock options at transition and the impact of
this is not expected to be material.
- Provisions - The major difference between the current Canadian
standard and IFRS is the discount rate used to measure the asset
retirement obligation (ARO). Under the current Canadian standard, a
credit adjusted risk free rate is used, whereby the IFRS allows the
use of a risk free rate when the expected cash flows are risked.
There was debate within the industry on the discount rate and whether
there should be a risk component to it. Based on recent comments made
by the standard setters and positions within the industry, Bankers
believes a risk free rate is more appropriate. A lower discount rate
will increase the ARO liability and on transition to IFRS, the
corresponding impact will be charged to retained earnings or deficit.
In addition to the accounting policy differences, the Company's transition to IFRS will impact the internal controls over financial reporting, the disclosure controls and procedures and information technology (IT) systems as follows:
- Internal controls over financial reporting - Based on the Company's
accounting policies under IFRS, the Company has assessed whether
additional controls or changes in procedures are required. Bankers
does not consider these changes to be significant.
- Disclosure controls and procedures - Throughout the transition
process, the Company will be assessing stakeholder's information
requirements and will ensure that adequate and timely information is
provided while ensuring the Company maintains its due process
regarding information that is disclosed.
- IT Systems - The Company has assessed the readiness of its accounting
software and has and continues to assess other system requirements
that may be needed in order to perform ongoing calculations and
analysis under IFRS. These changes are not considered to be
significant.
Management is continuing to finalize its accounting policies and choices and is continuing with its due process in regards to information that is disclosed. As such, the Company is currently unable to quantify the full impact on the financial statements of adopting IFRS. However, the Company has disclosed certain expectations above based on information known to date. Due to anticipated changes to IFRS and International Accounting Standards prior to the Company's adoption of IFRS, certain items may be subject to change based on new facts and circumstances that arise after the date of this MD&A.
INTERNAL CONTROLS
The Company's President and Chief Executive Officer (CEO) and Executive Vice President, Finance and Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in NI 52-109.
Disclosure controls and procedures have been designed to ensure that information to be disclosed by the Company is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company's CEO and CFO have evaluated the effectiveness of the disclosure controls and procedures as at December 31, 2010 and have concluded that they are operating effectively to provide reasonable assurance that all material information relating to the Company is disclosed in a timely manner.
Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the Company's financial reporting and compliance with generally accepted accounting principles. The CEO and CFO have evaluated the Company's internal controls over financial reporting as at December 31, 2010 based on the framework in "Internal Control Over Financial Reporting - Guidance for Smaller Public Companies" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and have concluded they are designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. During 2010, there have been no changes to the Company's internal controls over financial reporting that have materially, or are reasonably likely to, materially affect the internal controls over financial reporting.
Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control systems are met.
OUTLOOK
For 2011, our continued focus is to increase reserves, production and maximize cash flow from operations. To achieve this, the Company will implement the following:
- Drill 66 horizontal and vertical wells and complete 120 well
reactivations and workovers at the Patos-Marinza oilfield. A fourth
drilling rig is expected in the second quarter.
- Increase production facilities to handle our target exit production
rate of 20,000 bopd.
- 2011 will be a milestone year for thermal development of the
Patos-Marinza oilfield. Bankers will drill a vertical delineation
well and two horizontal wells designed for high pressure and
temperature steam injection, install a 25,000 BTU steam generator and
all associated production facilities.
- Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to
Vlore and construction of the receiving hub in Fier.
- Continue with the environmental stewardship and social initiatives in
our area of operations.
- Bankers is building a larger team of senior professionals to
complement its existing team of engineers, geoscientists, production
and support staff to manage another record capital program in 2011,
currently budgeted at $215 million.
BANKERS PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31
(Expressed in thousands of US dollars)
-------------------------------------------------------------------------
ASSETS
2010 2009
-------------------------
Current assets
Cash and cash equivalents (Note 12) $ 106,619 $ 59,495
Short-term deposits - 7,275
Restricted cash 1,500 1,500
Accounts receivable 29,233 23,358
Inventory 4,199 2,031
Deposits and prepaid expenses 16,624 5,899
-------------------------
158,175 99,558
Note receivable (Note 4) - 2,749
Deferred financing costs (Note 6(e)) 11,805 14,383
Property, plant and equipment (Note 5) 297,434 188,130
-------------------------
$ 467,414 $ 304,820
-------------------------
-------------------------
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 23,241 $ 19,505
Current portion of long-term debt (Note 6) 4,014 4,639
-------------------------
27,255 24,144
Long-term debt (Note 6) 21,815 23,446
Asset retirement obligations (Note 7) 5,496 3,856
Future income tax liability (Note 10) 69,541 39,414
SHAREHOLDERS' EQUITY
Share capital (Note 8(a)) 309,379 206,058
Warrants (Note 8(b)) 1,597 1,739
Contributed surplus (Note 8(e)) 28,715 16,812
Retained earnings (deficit) 3,616 (10,649)
-------------------------
343,307 213,960
-------------------------
$ 467,414 $ 304,820
-------------------------
-------------------------
Commitments (Note 11)
Subsequent event (Note 14)
See accompanying notes to consolidated financial statements.
APPROVED BY THE BOARD
"Robert Cross" Director "Eric Brown" Director
-------------------- --------------------
BANKERS PETROLEUM LTD.
CONSOLIDATED STATEMENT OF OPERATIONS, COMPREHENSIVE INCOME (LOSS)
AND RETAINED EARNINGS (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31
(Expressed in thousands of US dollars, except per share amounts)
-------------------------------------------------------------------------
2010 2009
-------------------------
Revenue
Oil revenue $ 170,376 $ 86,614
Royalties (33,682) (20,468)
Interest 732 824
-------------------------
137,426 66,970
-------------------------
Expenses
Operating 36,744 24,781
Sales and transportation 18,847 9,869
General and administrative 8,255 6,450
Interest and bank charges 1,160 648
Interest on long-term debt 1,421 1,858
Gain on disposal of investments - (347)
Foreign exchange gain (5,225) (4,586)
Stock-based compensation (Note 8(d)) 8,111 4,545
Amortization of deferred financing costs
(Note 6(e)) 2,789 1,803
Depletion, depreciation and accretion 27,516 16,208
-------------------------
99,618 61,229
-------------------------
Income before income tax 37,808 5,741
Future income tax expense (Note 10) (23,543) (5,891)
-------------------------
Net income (loss) and comprehensive income
(loss) for the year 14,265 (150)
Deficit, beginning of year (10,649) (10,499)
-------------------------
Retained earnings (deficit), end of year $ 3,616 $ (10,649)
-------------------------
-------------------------
Basic earnings (loss) per share $ 0.060 $ (0.001)
-------------------------
-------------------------
Diluted earnings (loss) per share $ 0.058 $ (0.001)
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
BANKERS PETROLEUM LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(Expressed in thousands of US dollars)
-------------------------------------------------------------------------
2010 2009
-------------------------
Cash provided by (used in):
Operating activities
Net income (loss) for the year $ 14,265 $ (150)
Items not involving cash:
Depletion, depreciation and accretion 27,516 16,208
Amortization of deferred financing costs 2,789 1,803
Future income tax expense 23,543 5,891
Stock-based compensation 8,111 4,545
Unrealized foreign exchange gain (3,058) (2,528)
Gain on disposal of investments - (347)
-------------------------
73,166 25,422
Change in non-cash working capital (Note 12) (21,714) (14,491)
-------------------------
51,452 10,931
-------------------------
Investing activities
Additions to property, plant and equipment (122,012) (38,324)
Proceeds from disposal of investments - 481
Change in non-cash working capital (Note 12) 6,682 (3,670)
-------------------------
(115,330) (41,513)
-------------------------
Financing activities
Issue of shares for cash 104,720 70,276
Share issue costs (4,333) (2,220)
Note receivable 2,749 10,251
Short-term deposits 7,275 (4,275)
Financing costs (211) (2,050)
Decrease in long-term debt (2,256) (40)
-------------------------
107,944 71,942
-------------------------
Foreign exchange gain on cash and cash
equivalents 3,058 2,528
-------------------------
Increase in cash and cash equivalents 47,124 43,888
Cash and cash equivalents, beginning of year 59,495 15,607
-------------------------
Cash and cash equivalents, end of year
(Note 12) $ 106,619 $ 59,495
-------------------------
-------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(Expressed in U.S. dollars)
December 31, 2010 and 2009
-------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Bankers Petroleum Ltd. (the Company) is engaged in the exploration
for and development and production of oil in Albania. The Company is
listed on the Toronto Stock Exchange and the Alternative Investment
Market (AIM) of the London Stock Exchange under the symbol BNK.
The Company operates in the Albanian oilfields pursuant to petroleum
agreements with Albpetrol Sh.A (Albpetrol), the state owned oil
company, under Albpetrol's existing license with the Albanian
National Agency for Natural Resources (AKBN). The Patos-Marinza
agreement and Kuçova agreement became effective in March 2006 and
September 2007, respectively, and have a 25 year term with an option
to extend at the Company's election for further five year increments.
2. SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles.
The principal accounting policies are outlined below:
(a) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries - Bankers Petroleum
International Ltd., Bankers Petroleum Albania Ltd. (BPAL) and
Sherwood International Petroleum Ltd.
(b) Financial instruments
All financial instruments including all derivatives are recognized on
the balance sheet initially at fair value. Subsequent measurement of
all financial assets and liabilities except those held-for-trading
and available-for-sale are measured at amortized cost determined
using the effective interest rate method. Held-for-trading financial
assets are measured at fair value with changes in fair value
recognized in earnings. Available-for-sale financial assets are
measured at fair value with changes in fair value recognized in
comprehensive income and reclassified to earnings when impaired.
Cash and cash equivalents and short-term deposits are
held-for-trading instruments and the fair values approximate their
carrying amount due to their short-term nature. Accounts receivable
is classified as loans and receivables and the fair value
approximates their carrying value due to the short-term nature of
these instruments. The note receivable is classified as other
financial assets and its fair value approximates the carrying value
as it bears interest at market rate. The accounts payable and accrued
liabilities are classified as other financial liabilities and the
fair value approximates their carrying value due to the short-term
nature of these instruments. The operating and term loans are
classified as other financial liabilities and their fair value
approximates their carrying value, as they bear interest at market
rates.
Transaction costs are frequently attributed to the issue of a
financial asset or liability. The Company has selected a policy of
netting all transaction costs with the related financial assets and
liabilities.
The Company may use derivative financial instruments from time to
time to hedge its exposure to commodity price fluctuations. The
Company recognizes the fair value of the derivative financial
instruments on the balance sheet each reporting period. Unrealized
gains and losses resulting from changes in the fair value of these
instruments are recognized in net income at the end of each reporting
period and realized gains and losses are recorded when the instrument
is settled. The derivative financial instruments are initiated within
the guidelines of the Company's risk management policy and the
Company does not enter into derivative financial instruments for
trading or speculative purposes.
(c) Foreign currency translation
The Company and its wholly-owned subsidiaries have a United States
(US) dollar functional currency. Transactions denominated in foreign
currencies are translated into US dollar equivalents at exchange
rates approximating those in effect at the transaction dates. Foreign
currency denominated monetary assets and liabilities are translated
at the year-end exchange rate. Gains and losses arising from foreign
currency translation are recognized in the statement of operations.
(d) Use of estimates
Timely preparation of the financial statements in conformity with
Canadian generally accepted accounting principles requires that
management make estimates and assumptions and use judgment regarding
assets, liabilities, revenues and expenses. Such estimates primarily
relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, actual results may differ from
estimated amounts as future confirming events occur.
In particular, the amounts recorded for depreciation and depletion of
oil and natural gas properties and equipment, the provision for asset
retirement obligations, the provision for future income taxes and
stock based compensation are based on estimates. The ceiling test is
based on estimates of proved reserves, production rates, future
commodity prices and future costs and other relevant assumptions.
(e) Revenue recognition
Revenue associated with the sales of the Company's oil is recognized
in income when title and risk pass to the buyer, collection is
reasonably assured and the price is determinable.
(f) Income taxes
Future income taxes are recorded using the asset and liability
method. Under the asset and liability method, future tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Future tax assets and liabilities are measured using the
enacted or substantively enacted tax rates expected to apply when the
asset is realized or the liability settled. The effect on future tax
assets and liabilities of a change in tax rates is recognized in
income in the period that substantive enactment or enactment occurs.
To the extent that the Company does not consider it more likely than
not that a future tax asset will be recovered, it provides a
valuation allowance against the excess.
(g) Per share amounts
Basic earnings (loss) per share is calculated using the
weighted-average number of common shares outstanding during the year.
The Company uses the treasury stock method to compute the dilutive
effect of options, warrants and similar instruments. Under this
method, the dilutive effect on earnings per share is recognized on
the use of the proceeds that could be obtained upon exercise of
options, warrants and similar instruments. It assumes that the
proceeds would be used to purchase common shares at the average
market price during the period.
(h) Cash and cash equivalents
Cash and cash equivalents include cash and highly liquid investments
with original maturities of three months or less.
(i) Inventory
Inventory comprises of crude oil, solar and diesel stock. Inventory
is valued at the lower of average cost of production and net
realizable value.
(j) Property, plant and equipment
Capitalized costs
-----------------
The Company follows the full cost method of accounting for its oil
properties whereby all costs associated with the exploration for and
development of oil reserves are capitalized on a cost centre
(country) basis. Such costs include land acquisition costs,
geological and geophysical expenses, carrying charges on
non-producing properties, costs of drilling both productive and
non-productive wells, production equipment, overhead charges directly
related to acquisition, exploration and development activities and
asset retirement costs.
Depletion and depreciation
--------------------------
Capitalized costs within each cost centre are depleted and
depreciated on the unit-of-production method based on the estimated
gross proved reserves determined by independent petroleum engineers.
Depletion and depreciation is calculated using the capitalized costs,
plus the estimated future costs to be incurred in developing proved
reserves, net of estimated salvage value. Costs of acquiring and
evaluating unproved properties are initially excluded from the
depletion and depreciation calculation until it is determined whether
or not proved reserves can be assigned to such properties.
Proceeds from the sale of oil properties are applied against
capitalized costs, with no gain or loss recognized, unless such a
sale would alter the rate of depletion and depreciation by more than
20 percent in a particular country cost centre, in which case a gain
or loss on disposal is recorded.
Equipment, furniture and fixtures are depreciated on the declining
balance method at rates of 20 to 30 percent.
Ceiling test
------------
In accordance with the full cost accounting guideline, the Company
evaluates its oil and gas assets to determine that the costs are
recoverable and do not exceed the fair value of the properties. The
costs are assessed to be recoverable if the sum of the undiscounted
cash flows expected from the production of proved reserves and the
lower of cost and market of unproved properties exceed the carrying
value of the oil and gas assets. If the carrying value of the oil and
gas assets is not assessed to be recoverable, an impairment loss is
recognized to the extent that the carrying value exceeds the sum of
the discounted cash flows expected from the production of proved plus
probable reserves and the lower of cost and market of unproved
properties. The cash flows are estimated using the future product
prices and costs and are discounted using the risk-free rate.
Asset retirement obligations
----------------------------
The fair value of estimated asset retirement obligations is
capitalized to property, plant and equipment in the period in which
the liability is incurred. Asset retirement obligations include those
legal obligations where the Company will be required to retire
tangible long-lived assets such as producing well sites and
facilities. Asset retirement costs for oil properties are amortized
as part of depletion and depreciation using the unit-of-production
method.
Increases in asset retirement obligations resulting from the passage
of time are recorded as accretion expense. Actual abandonment
expenditures incurred are charged against the accumulated obligation.
(k) Stock-based compensation
Compensation costs attributable to all stock options granted to
employees, directors and service providers are measured at fair value
at the date of grant using the Black-Scholes option pricing model and
expensed over the vesting period with a corresponding increase to
contributed surplus. Upon exercise of options, consideration
received, together with the amount previously recognized in
contributed surplus, is recorded as an increase to share capital.
(l) Comparative figures
Certain prior year figures have been re-classified to conform to the
current year's presentation.
3. FUTURE ACCOUNTING CHANGES
International Financial Reporting Standards ("IFRS")
On January 1, 2011 International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB) will
become the generally accepted accounting principles in Canada. The
adoption date of January 1, 2011 will require the restatement, for
comparative purposes, of amounts reported by Bankers for the year
ended December 31, 2010, including the opening balance sheet as at
January 1, 2010.
Bankers will release its first IFRS compliant interim financial
statements for the first quarter of 2011.
4. NOTE RECEIVABLE
The note receivable of nil (2009 - $2.7 million) represents the
residual amount due from BNK Petroleum Inc. (BKX). BKX is considered
a related party as BKX and the Company have common directors. The
above transaction is considered to be in the normal course of
business and has been measured at the exchange amount being the
amounts agreed to by both the parties. The full amount outstanding at
December 31, 2009 was received during the year ended December 31,
2010.
5. PROPERTY, PLANT AND EQUIPMENT
The following table summarizes the Company's property, plant and
equipment as at December 31:
2010
---------------------------------------------------------------------
Accumulated
Depletion
and Deprec- Net
($000s) Cost iation Book Value
---------------------------------------------------------------------
Oil properties $ 363,864 $ 69,741 $ 294,123
Equipment, furniture and
fixtures 5,591 2,280 3,311
---------------------------------------
$ 369,455 $ 72,021 $ 297,434
---------------------------------------
---------------------------------------
2009
---------------------------------------------------------------------
Accumulated
Depletion
and Deprec- Net
($000s) Cost iation Book Value
---------------------------------------------------------------------
Oil properties $ 229,230 $ 43,217 $ 186,013
Equipment, furniture and
fixtures 3,830 1,713 2,117
---------------------------------------
$ 233,060 $ 44,930 $ 188,130
---------------------------------------
---------------------------------------
Depletion for the year ended December 31, 2010 included
$956.5 million (2009 - $382.0 million) for estimated future
development costs associated with proved reserves in Albania.
The Company capitalized general and administrative expenses and
stock-based compensation of $10.1 million (2009 - $3.9 million) that
were directly related to exploration and development activities in
Albania.
The Company's ceiling test calculation for the Albania cost centre,
as at December 31, 2010, resulted in no impairment loss. The future
prices used by the Company in estimating cash flows were based on
forecasts by independent reserves evaluators, adjusted for the
Company's quality and transportation differentials. The following
table summarizes the benchmark prices used in the calculation:
---------------------------------------------------------------------
Brent Price
Year (US$/barrel)
---------------------------------------------------------------------
2011 90.00
2012 89.50
2013 89.10
2014 89.25
2015 91.00
Average annual increase, thereafter 2%
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company has secured $1.5 million (2009 - $1.5 million) for
certain capital projects in the Kucova oilfield. These projects are
expected to be completed in 2011. At December 31, 2010, approximately
$1.0 million of expenditures have been incurred towards this
commitment.
6. LONG-TERM DEBT
The Company has credit facilities with three international banks,
including Raiffeisen Bank, the European Bank for Reconstruction and
Development (EBRD) and the International Finance Corporation (IFC),
as summarized below:
Facility
($000s) Amount Outstanding Amount
---------------------------------------------------------------------
December 31, December 31,
2010 2009
--------------------------
Raiffeisen Bank
---------------
Operating loan (a) $ 20,000 $ 19,741 $ 17,358
Term loan - 2006 (b) 3,125 3,125 6,875
Term loan - 2009 (c) 2,963 2,963 3,852
EBRD and IFC*
---------------
Environmental term loan (d) 10,000 - -
Revolving loan -
Tranche 1 (e) 50,000 - -
Revolving loan -
Tranche 2 (e) 50,000 - -
---------------------------------------
$ 136,088 $ 25,829 $ 28,085
---------------------------------------
---------------------------------------
* all facilities are equally funded
These facilities are secured by all of the assets of BPAL, assignment
of proceeds from the Albanian domestic and export crude oil sales
contracts, a pledge of the common shares of BPAL and a guarantee by
the Company. The credit facilities are subject to certain covenants
requiring the maintenance of certain financial ratios, all of which
were met as at December 31, 2010 and 2009.
(a) Operating loan
The operating loan is a revolving facility, has no scheduled
repayments until its maturity in March 2012 and bears interest at a
rate relative to the bank's refinancing rate plus 3.5%.
(b) Term loan - 2006
This term loan bears interest at the bank's refinancing rate plus
4.5% and is repayable in equal monthly instalments of $0.3 million
ending on October 31, 2011. As at December 31, 2010, the entire term
loan was utilized and has been classified as current.
(c) Term loan - 2009
This term loan bears interest at the bank's refinancing rate plus
4.65% and is repayable in equal monthly instalments of $74,100 ending
on April 30, 2014. As at December 31, 2010, the entire facility was
utilized. Of the amount outstanding, $0.9 million is classified as
current and $2.1 million as long-term. Principal repayments of the
term loan over the next four years are:
($000s)
---------------------------------------------------------------------
2011 $ 889
2012 889
2013 889
2014 296
--------------
$ 2,963
--------------
--------------
(d) Environmental term loan
The $10.0 million term loan, funded equally by IFC and EBRD, is
available for environmental and social programs pertinent to the
Company's activities in Albania. The interest rate is based on the
London Inter-Bank Offer Rate (LIBOR) plus 4.5%. A standby fee of 0.5%
is charged on the unutilized portion. At December 31, 2010, none of
the facility was drawn. Principal repayments commence in April 2013
in bi-annual instalments of $0.5 million with maturity on October 15,
2017.
(e) Revolving loans
The revolving loans, funded equally by EBRD and IFC, consist of two
$50.0 million tranches, of which Tranche I is currently available to
the Company. Tranche II becomes available subject to mutual agreement
among the Company, IFC and EBRD, when production exceeds 10,000
barrels of oil per day and the Brent oil price exceeds $62 per barrel
for twenty consecutive trading days. The interest rate is based on
LIBOR plus 4.5%. A standby fee of 2.0% is charged on the unutilized
Tranche I portion and Tranche II portion, when it becomes available.
At December 31, 2010, none of the facility was drawn. For each of
Tranche I and Tranche II, the amounts decline to $16.5 million on
October 15, 2013, $8.3 million on October 14, 2014 with final
repayment due on October 15, 2015. Setup costs of $16.4 million (2009
- $16.2 million) pertaining to these facilities, including the value
attributed to the share purchase warrants (Note 8(b)), have been
recorded as deferred financing costs and are amortized over the life
of the revolving facilities. As of December 31, 2010, $4.6 million
(2009 - $1.8 million) has been amortized. For the year ended December
31, 2010, $2.8 million (2009 - $1.8 million) has been amortized and
charged to earnings.
7. ASSET RETIREMENT OBLIGATIONS
In Albania, the Company estimated the total undiscounted amount
required to settle the asset retirement obligations at $31.5 million
(2009 - $24.7 million). These obligations will be settled at the end
of the Company's 25-year license of which 20 years are remaining. The
liability has been discounted using a credit-adjusted risk-free
interest rate of 10% (2009 - 10%) and an inflation rate of 2.0% (2009
- 2.5%) to arrive at asset retirement obligations of $5.5 million as
at December 31, 2010.
($000s) 2010 2009
---------------------------------------------------------------------
Asset retirement obligation,
beginning of year $ 3,856 $ 2,896
Incurred 1,311 656
Revision (96) -
Accretion 425 304
--------------------------
Asset retirement obligation,
end of year $ 5,496 $ 3,856
--------------------------
--------------------------
8. SHAREHOLDERS' EQUITY
(a) Share capital
Authorized
Unlimited number of common shares with no par value.
Issued
Number of Amount
Common Shares ($000s)
---------------------------------------------------------------------
Balance, December 31, 2008 182,540,179 $ 121,907
Prospectus issue 25,143,800 38,349
Warrants exercised 19,144,502 43,731
Stock options exercised 1,443,684 4,291
Share issue costs - (2,220)
--------------------------
Balance, December 31, 2009 228,272,165 206,058
Prospectus issue 12,903,228 96,153
Warrants exercised 1,277,267 3,381
Stock options exercised 2,342,330 8,120
Share issue costs - (4,333)
--------------------------
Balance, December 31, 2010 244,794,990 $ 309,379
--------------------------
--------------------------
(a) Share capital (cont'd)
On July 15, 2010, the Company completed a prospectus offering with a
syndicate of underwriters and issued an aggregate of 12,903,228
common shares at a price of CAD$7.75 per common share on a bought
deal basis, resulting in gross proceeds of $96.2 million. Commissions
and share issue costs were $4.3 million.
The following table summarizes the calculation of basic and diluted
weighted average number of common shares:
2010 2009
---------------------------------------------------------------------
Weighted-average number of common shares
outstanding - basic 236,726,203 206,999,279
Dilutive effect of stock options 6,947,977 -
Dilutive effect of warrants 3,294,984 -
--------------------------
Weighted-average number of common shares
outstanding - diluted 246,969,164 206,999,279
--------------------------
--------------------------
In computing diluted earnings per share for the year ended December
31, 2010, 480,000 (2009 - 4,205,000) options were excluded as the
effect would be anti-dilutive. Due to the net loss in 2009, the
effect of all options and warrants was anti-dilutive.
(b) Warrants
A summary of the changes in warrants is presented below:
Number of Amount
Warrants ($000s)
---------------------------------------------------------------------
Balance, December 31, 2008 9,713,375 $ 2,088
Issued 16,000,000 14,136
Transferred to share capital on exercise (19,144,502) (14,485)
Forfeited (428,540) -
--------------------------
Balance, December 31, 2009 6,140,333 1,739
Transferred to share capital on exercise (1,277,267) (142)
--------------------------
Balance, December 31, 2010 4,863,066 $ 1,597
--------------------------
--------------------------
The following table summarizes the outstanding and exercisable
warrants at December 31, 2010:
---------------------------------------------------------------------
Number of Warrants Weighted Average Exercise
Expiry Date Outstanding and Exercisable Price (CAD$)
--------------------------------------------------------------------
March 1, 2012 4,863,066 2.37
The Company calculated the fair value of the warrants issued during
the year ended December 31, 2009 to be $14.1 million. The Company
determined this amount using the Black-Scholes option pricing model
assuming a risk free interest rate of 2.1%, a dividend yield of 0%, a
forfeiture rate of 0%, an expected volatility of 126% and expected
life of the warrants to be one year from the date of grant. The fair
value per warrant for this grant was CAD$1.01. No warrants were
issued for the year ended December 31, 2010.
(c) Stock Options
The Company has established a "rolling" Stock Option Plan. The number
of shares reserved for issuance may not exceed 10% of the total
number of issued and outstanding shares and, to any one optionee, may
not exceed 5% of the issued and outstanding shares on a yearly basis
or 2% if the optionee is engaged in investor relations activities or
is a consultant. The exercise price of each option shall not be less
than the market price of the Company's stock at the date of grant.
Options issued vest one-third immediately (after three months for new
employees) following the date of the grant, one-third after one year
following the date of the grant, and one-third two years following
the grant date.
A summary of the changes in stock options is presented below:
Weighted Average
Number of Exercise
Options Price (CAD$)
---------------------------------------------------------------------
Balance, December 31, 2009 12,830,002 2.39
Granted 4,140,000 6.71
Exercised (2,342,330) 2.35
Forfeited (113,168) 4.57
------------------------------------
Balance, December 31, 2010 14,514,504 3.61
------------------------------------
------------------------------------
The following table summarizes the outstanding and exercisable
options at December 31:
2010 2009
----------------------------- -----------------------------
Weighted Weighted
Average Average
Remaining Remaining
Range of Contrac- Contrac-
Exercise tual tual
Price Out- Exer- Life Out- Exer- Life
(CAD$) standing cisable (years) standing cisable (years)
------------------------------------------- -----------------------------
1.01 - 1.50 2,283,611 2,300,277 2.7 3,144,444 2,210,930 3.7
1.51 - 2.00 4,295,167 3,330,827 2.8 4,577,390 2,557,391 3.8
2.01 - 3.00 627,223 627,223 2.1 903,168 630,939 2.8
3.01 - 3.50 645,999 645,999 0.4 1,300,000 1,300,000 1.1
3.51 - 4.00 58,334 58,334 2.6 150,000 116,666 2.3
4.01 - 4.50 1,775,001 1,775,001 2.3 1,775,000 1,183,331 3.3
4.51 - 5.00 300,000 300,000 2.5 300,000 200,000 3.5
5.01 - 6.00 499,167 310,837 3.9 680,000 226,669 4.9
6.01 - 6.50 2,840,002 919,992 4.0 - - -
6.51 - 7.00 550,000 183,336 4.8 - - -
7.01 - 7.50 160,000 53,333 4.6 - - -
7.51 - 9.50 480,000 159,994 4.2 - - -
---------------------- ----------------------
14,514,504 10,665,153 12,830,002 8,425,926
---------------------- ----------------------
---------------------- ----------------------
(d) Stock-based Compensation
Using the fair value method for stock-based compensation, the Company
calculated stock-based compensation expense for the year ended
December 31, 2010 as $14.7 million (2009 - $6.5 million) for the
stock options granted to officers, directors, employees and service
providers. Of this amount, $8.1 million (2009 - $4.5 million) was
charged to earnings and $6.6 million (2009 - $2.0 million) was
capitalized. The Company determined these amounts using the Black-
Scholes option pricing model assuming a risk free interest rate range
of 1.91% - 2.86% (2009 - 1.80% to 2.59%), a dividend yield of 0%
(2009 - 0%), a forfeiture rate of 0% (2009 - 0%), an expected
volatility range of 49% - 77% (2009 - 103% to 126%) and expected
lives of the stock options of five years (2009 - five) from the date
of grant. The weighted average fair value per option granted during
the year was CAD$3.96 (2009 - CAD$1.99).
(e) Contributed Surplus
The following table summarizes the change in contributed surplus as
of December 31:
($000s) 2010 2009
---------------------------------------------------------------------
Balance, beginning of year $ 16,812 $ 11,862
Stock-based compensation 14,695 6,560
Transferred to share capital on exercise (2,792) (1,610)
--------------------------
Balance, end of year $ 28,715 $ 16,812
--------------------------
--------------------------
9. SEGMENTED INFORMATION
The Company defines its reportable segments based on geographic
locations.
Year ended December 31, 2010
($000s) Albania Canada Total
---------------------------------------------------------------------
Revenue
Oil revenue $ 170,376 $ - $ 170,376
Royalties (33,682) - (33,682)
Interest 9 723 732
---------------------------------------
136,703 723 137,426
---------------------------------------
Expenses
Operating 36,744 - 36,744
Sales and transportation 18,847 - 18,847
General and administrative 3,725 4,530 8,255
Interest and bank charges 1,160 - 1,160
Interest on long-term debt 1,421 - 1,421
Foreign exchange gain (178) (5,047) (5,225)
Stock-based compensation 2,348 5,763 8,111
Amortization of deferred
financing costs 2,789 - 2,789
Depletion, depreciation and
accretion 27,357 159 27,516
---------------------------------------
94,213 5,405 99,618
---------------------------------------
Income (loss) before income
taxes 42,490 (4,682) 37,808
Future income tax expense (23,543) - (23,543)
---------------------------------------
Net income (loss) for the year $ 18,947 (4,682) $ 14,265
---------------------------------------
---------------------------------------
Assets, December 31, 2010 $ 360,226 $ 107,188 $ 467,414
---------------------------------------
---------------------------------------
Additions to property, plant
and equipment $ 121,852 $ 160 $ 122,012
---------------------------------------
---------------------------------------
During the year, the Albania segment recorded domestic sales of $24.8
million (2009 - $15.5 million) and export sales of $145.6 million
(2009 - $71.1 million).
Year ended December 31, 2009
($000s) Albania Canada Total
---------------------------------------------------------------------
Revenue
Oil revenue $ 86,614 $ - $ 86,614
Royalties (20,468) - (20,468)
Interest 1 823 824
---------------------------------------
66,147 823 66,970
---------------------------------------
Expenses
Operating 24,781 - 24,781
Sales and transportation 9,869 - 9,869
General and administrative 3,055 3,395 6,450
Interest and bank charges 648 - 648
Interest on long-term debt 1,858 - 1,858
Gain on disposal of investments - (347) (347)
Foreign exchange gain (5) (4,581) (4,586)
Stock-based compensation 831 3,714 4,545
Amortization of deferred
financing costs 1,803 - 1,803
Depletion, depreciation and
accretion 16,083 125 16,208
---------------------------------------
58,923 2,306 61,229
---------------------------------------
Income (loss) before income
taxes 7,224 (1,483) 5,741
Future income tax expense (5,891) - (5,891)
---------------------------------------
Net income (loss) for the year $ 1,333 $ (1,483) $ (150)
---------------------------------------
---------------------------------------
Assets, December 31, 2009 $ 221,503 $ 83,317 $ 304,820
---------------------------------------
---------------------------------------
Additions to property, plant
and equipment $ 38,190 $ 134 $ 38,324
---------------------------------------
---------------------------------------
10. INCOME TAXES
Future income tax expense relates to the Albanian operations and
results from the following as of December 31:
($000s) 2010 2009
---------------------------------------------------------------------
Net book value of property, plant and
equipment, net of asset retirement
obligations $ 291,681 $ 180,280
Cost recovery pool (152,599) (101,452)
--------------------------
Timing difference $ 139,082 $ 78,828
--------------------------
--------------------------
Future income tax liability at 50% $ 69,541 $ 39,414
--------------------------
--------------------------
The Company's future income tax liabilities result from the temporary
differences between the carrying value and tax values of its Albanian
assets and liabilities.
The cost recovery pool represents deductions for income taxes in
Albania. Under the terms of the petroleum agreements in Albania, any
profit will be taxed at a rate of 50 percent.
The provision for income taxes reported differs from the amounts
computed by applying the cumulative Canadian federal and provincial
income tax rates to the income before tax provision due to the
following:
($000s) 2010 2009
---------------------------------------------------------------------
Income before income taxes $ 37,808 $ 5,741
Statutory tax rate 28.00% 29.00%
--------------------------
10,586 1,665
Difference in tax rates between Albania
and Canada 9,348 2,453
Non-deductible expenses 2,271 595
Valuation allowance 3,451 2,190
Other (2,113) (1,012)
--------------------------
Future income tax expense $ 23,543 $ 5,891
--------------------------
--------------------------
The significant components of the Company's future income tax assets
and liabilities are as follows:
($000s) 2010 2009
---------------------------------------------------------------------
Future income tax assets
Non-capital loss carry forwards $ 6,847 $ 4,456
Capital loss 2,148 1,124
Share issue costs 882 392
Property, plant and equipment 178 (771)
Less: valuation allowances (10,055) (5,201)
--------------------------
Future income tax assets $ - $ -
--------------------------
--------------------------
Future income tax liabilities
Property, plant and equipment - Albania $ 69,541 $ 39,414
--------------------------
Future income tax liability $ 69,541 $ 39,414
--------------------------
--------------------------
The Company has available for deduction against future Canadian
taxable income, non-capital losses of approximately $27.4 million.
These losses, if not utilized, will expire commencing in 2011 as
follows:
($000s)
---------------------------------------------------------------------
2011 $ 1,552
2015 4,166
2026 2,310
2027 5,846
2028 193
2029 5,786
2030 7,534
-------------
$ 27,387
-------------
-------------
The potential income tax benefits of these future income tax assets
have been offset by a valuation allowance and have not been recorded
in these financial statements.
11. COMMITMENTS
The Company leases office premises, of which the minimum lease
payments for the next five years are:
($000s) Albania Canada Total
---------------------------------------------------------------------
2011 $ 557 $ 709 $ 1,266
2012 425 541 966
2013 318 528 846
2014 318 44 362
2015 318 - 318
---------------------------------------
$ 1,936 $ 1,822 $ 3,758
---------------------------------------
---------------------------------------
The Company has debt repayment commitments as disclosed in note 6(a),
6(b) and 6(c).
12. SUPPLEMENTAL CASH FLOW INFORMATION
($000s) 2010 2009
---------------------------------------------------------------------
Operating activities
Increase in current assets
Accounts receivable $ (5,875) $ (5,767)
Inventory (2,168) (443)
Deposits and prepaid expenses (10,725) (4,668)
Decrease in current liabilities
Accounts payable and accrued liabilities (2,946) (3,613)
--------------------------
$ (21,714) $ (14,491)
--------------------------
--------------------------
Investing activities
Increase (decrease) in current liabilities
Accounts payable and accrued liabilities $ 6,682 $ (3,670)
--------------------------
--------------------------
Cash and cash equivalents
Cash $ 862 $ 3,895
Fixed income investments 105,757 55,600
--------------------------
$ 106,619 $ 59,495
--------------------------
--------------------------
Interest paid $ 2,581 $ 2,506
--------------------------
--------------------------
Interest received $ 787 $ 1,210
--------------------------
--------------------------
13. FINANCIAL INSTRUMENTS
Financial risk management
Overview
The Company has exposure to credit, liquidity and market risk. This
note presents information about the Company's exposure to each risk,
the Company's objectives, policies and processes for measuring and
managing risk, and management of capital.
The Board of Directors of the Company has the overall responsibility
for the establishment and oversight of the Company's risk management
framework. The Board has implemented and monitors compliance with
risk management policies. The Company's risk management policies are
established to identify and analyze the risks faced, to set
appropriate risk limits and controls, and to monitor risks and
adherence to market conditions and the Company's activities.
Fair value measurement
The Company's financial instruments recognized on the balance sheet
consist of short-term deposits, accounts receivable, note receivable,
accounts payable and accrued liabilities and long-term debt. The fair
value of these instruments approximate their carrying amounts due to
their short terms to maturity or the indexed rate of interest on the
note receivable and long-term debt.
Bankers' cash and cash equivalents and short-term deposits are
transacted in active markets. The Company classifies the fair value
of these transactions according to the following hierarchy based on
the amount of observable inputs used to value the instrument.
Level 1 - Quoted prices are available in active markets for identical
assets or liabilities as of the reporting date. Active markets are
those in which transactions occur in sufficient frequency and volume
to provide pricing information on an ongoing basis.
Level 2 - Pricing inputs are other than quoted prices in active
markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date. Level 2 valuations
are based on inputs, including quoted forward prices for commodities,
time value and volatility factors, which can be substantially
observed or corroborated in the marketplace.
Level 3 - Valuations in this level are those with inputs for the
asset or liability that are not based on observable market data.
The Company's cash and cash equivalents and short-term deposits have
been assessed on the fair value hierarchy described above and have
been classified as Level 1.
Credit risk
Credit risk is the risk of financial loss to the Company if a
customer or counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Company's
receivables from petroleum refineries relating to accounts
receivable. As at December 31, 2010, the Company's receivables
consisted of $29.0 million (2009 - $23.1 million) of receivables from
petroleum refineries and $0.2 million (2009 - $0.2 million) of other
trade receivables, as summarized below:
30 - 60 61 - 90 Over 90
($000s) Current days days days Total
---------------------------------------------------------------------
Albania $25,590 $ 3,019 $ 408 $ - $29,017
Canada 216 - - - 216
-----------------------------------------------------
$25,806 $ 3,019 $ 408 $ - $29,233
-----------------------------------------------------
-----------------------------------------------------
In Albania, the Company considers any amounts greater than 60 days as
past due. The accounts receivable, included in the table, past due or
not past due are not impaired. They are from counterparties with whom
the Company has a history of timely collection and the Company
considers the accounts receivable collectible. Domestic receivables
are due by the end of the month following production and export
receivables are collected within 30 days from the date of the
shipment. The Company's policy to mitigate credit risk associated
with these balances is to establish marketing relationships with a
variety of purchasers. The amount past due has been received
subsequent to year end and is not considered to be impaired.
In Canada, no significant amounts are considered past due or
impaired.
The carrying amount of accounts receivable represents the maximum
credit exposure. As of December 31, 2010 and December 31, 2009, the
Company does not have an allowance for doubtful accounts and did not
provide for any doubtful accounts nor was it required to write-off
any receivables.
Cash and cash equivalents consist of cash and bank balances. The
Company manages the credit exposure related to short-term investments
by selecting counter parties based on credit ratings and monitors all
investments to ensure a stable return, avoiding complex investment
vehicles with higher risk such as asset backed commercial paper.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they are due. The Company's approach to
managing liquidity is to plan that it will have sufficient liquidity
to meet its liabilities when due, under both normal and stressed
conditions without incurring unacceptable losses or risking harm to
the Company's reputation.
The timing of cash flows relating to financial liabilities as at
December 31, 2010, is as follows:
($000s) 2011 2012 2013 2014
---------------------------------------------------------------------
Accounts payable and accrued
liabilities $23,241 $ - $ - $ -
Operating loan - 19,741 - -
Term loans 4,014 889 889 296
---------------------------------------
Total $27,255 $20,630 $ 889 $ 296
---------------------------------------
---------------------------------------
The Company prepares annual capital expenditure budgets, which are
regularly monitored and modified as considered necessary. Further,
the Company utilizes authorizations for expenditures on both operated
and non-operated projects to further manage capital expenditures. To
facilitate the capital expenditure program, the Company has a
revolving credit facility with a European financial institution based
in Albania, as disclosed in note 6. The Company also attempts to
match its payment cycle with its collection of petroleum revenues.
The Company maintains a close working relationship with the European
bank that provides its credit facility. There were no increases in
the existing credit facility during the year.
Market Risk
Market risk is the risk that changes in market prices, such as
foreign exchange rates, commodity prices, and interest rates will
affect the Company's net income. The objective of market risk
management is to manage and control market risk exposures within
acceptable limits, while maximizing returns.
Foreign currency exchange rate risk
Foreign currency exchange rate risk is the risk that the fair value
of future cash flows will fluctuate as a result of changes in foreign
exchange rates. As at December 31, 2010, a 10% change in the foreign
exchange rate of the Canadian dollar against the United States
dollar, with all other variables held constant, would affect after
tax net income for the year by $7.0 million (2009 - $3.8 million).
The sensitivity is higher in 2010 as compared to 2009 because of an
increase in Canadian dollar cash and cash equivalents outstanding.
As at December 31, 2010, a 10% change in the foreign exchange rate of
the Albanian Lek against the United States dollar, with all other
variables held constant, would affect after tax net income for the
year by $1,000 (2009 - $2,000). The sensitivity is lower in 2010
compared to 2009 because of a decrease in Albania Lek cash and cash
equivalents outstanding.
The Company had no forward foreign exchange rate contracts in place
as at or during the years ended December 31, 2010 and 2009.
Commodity price risk
Commodity price risk is the risk that the value of future cash flows
will fluctuate as a result of changes in commodity prices. Commodity
prices for petroleum and natural gas are impacted by world economic
events that dictate the levels of supply and demand. The Company's
primary revenues are from heavy oil sales in Albania, priced on a
quality differential basis, to the US dollar-based Brent oil price.
The Company has not entered into any commodity derivative contracts
as at or during the years ended December 31, 2010 and 2009.
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate
as a result of changes in market interest rates. The Company is
exposed to interest rate fluctuations on its bank debt which bears a
floating rate of interest. As at December 31, 2010, a 10% change in
the interest rate, with all other variables held constant, would
affect after tax net income for the year by $0.2 million (2009 - $0.3
million).
Capital management
The Company's policy is to maintain a strong capital base thereby
establishing investor, creditor and market confidence and to sustain
future business development. The Company manages its capital
structure and makes necessary adjustments in light of changes in
economic conditions and the risk characteristics of the underlying
petroleum and natural gas assets. The Company's capital structure
includes shareholders' equity, bank debt and working capital. In
order to maintain the capital structure, the Company may from time to
time issue shares and adjust capital spending to manage current and
projected debt levels.
The Company monitors capital based on the ratio of debt to funds from
operations. This ratio is calculated as net debt (outstanding bank
debt less working capital before debt) divided by funds from
operations. The Company's strategy is to maintain a debt to funds
from operations ratio of no more than 1.5 to 1. This ratio may
increase at certain times as a result of acquisitions. In order to
monitor this ratio, the Company prepares annual capital expenditure
budgets, which are updated as necessary depending on varying factors
including current and forecast prices, successful capital deployment
and general industry conditions. The annual and updated budgets are
approved by the Board of Directors.
As at December 31, 2010, the ratio of surplus in debt to funds from
operations was 1.49 (2009 - 2.04). The decrease was primarily due to
the increase in funds from operations during the year from $25.4
million in 2009 to $73.2 million in 2010, partially offset by an
improvement in net surplus in debt from $52.0 million in 2009 to
$109.1 million in 2010.
The Company's share capital is not subject to external restrictions;
however, the bank debt facility is based on certain covenants, all of
which were met as at December 31, 2010 and 2009. The Company has not
paid or declared any dividends since the date of incorporation, nor
are any contemplated in the foreseeable future.
14. SUBSEQUENT EVENT
In February 2011, the Company entered into financial commodity put
contracts representing 4,000 barrels of oil per day at a floor price
of $80 per barrel for the period January 1, 2012 to December 31,
2012.
