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| November 6, 2008 |
| Open Range Energy Corp. Announces Third Quarter Results and Provides Operational Update |
CALGARY, ALBERTA--(Marketwire - Nov. 6, 2008) - Open Range Energy Corp. ("Open Range" or the "Corporation") (TSX:ONR) is pleased to announce its financial and operating results for the three and nine months ended September 30, 2008, to provide highlights from fourth-quarter operations undertaken to date, and to provide an operational outlook for the remainder of 2008.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Petroleum and
natural gas
revenue $ 10,282,831 $ 6,089,741 $ 31,783,599 $ 16,036,788
Funds from
operations 4,756,720 4,413,069 17,598,581 10,576,236
Per basic and
diluted share 0.17 0.22 0.69 0.55
Earnings 3,675,840 611,639 1,730,783 867,817
Per basic and
diluted share 0.13 0.03 0.07 0.05
Working capital
(net debt) (23,256,428) (6,072,922) (23,256,428) (6,072,922)
Capital expenditures,
net $ 25,804,243 $ 8,779,831 $ 51,313,833 $ 32,649,628
Weighted average
shares outstanding
basic 27,334,241 19,763,841 25,428,474 19,192,412
Weighted average
shares outstanding
diluted 27,557,113 19,763,841 25,540,076 19,192,412
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Production
Natural gas (mcf
per day) 10,696 9,545 10,358 7,353
Oil and NGL (bbls
per day) 209 225 216 165
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Total (@ 6:1)
(boe per day) 1,992 1,815 1,943 1,391
Realized average
sales prices
Natural gas
($ per mcf) 8.47 5.49 9.20 6.67
Oil and NGL
($ per bbl) 101.51 61.32 95.52 58.74
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Combined average
($ per boe) 52.64 40.85 56.53 44.28
Royalties ($ per boe) (13.90) (3.68) (11.84) (4.76)
Operating costs
($ per boe) (6.18) (5.99) (6.30) (5.93)
Transportation
costs ($ per boe) (0.75) (0.75) (0.75) (0.82)
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Operating netback
($ per boe) 31.81 30.43 37.64 32.77
G&A costs ($ per boe) (3.14) (3.47) (3.26) (4.75)
Net interest
income (expense)
($ per boe) 0.15 (0.54) (0.34) (0.17)
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Corporate netback
($ per boe) 28.82 26.42 34.04 27.85
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MESSAGE TO SHAREHOLDERS
CORPORATE UPDATE
Open Range is taking measured steps to pass through this period of financial and commodity market instability keeping its balance sheet intact, avoiding dilution of its shareholders' equity and maintaining its core drilling program at Ansell/Sundance with continued growth in natural gas volumes and reserves. The Corporation has a track record of prudent financial management and capital discipline, and an asset base of high-quality, long-life natural gas production anchored in a low cost structure with strong netbacks and cash flow.
We are reducing 2008 capital expenditures from a planned $70 million to $60 million. The $10 million cutback affects fourth quarter activities and includes releasing one of two drilling rigs active at Ansell/Sundance plus deferring a third rig to drill the Corporation's first planned horizontal Deep Basin well until the first quarter of 2009. Open Range will conduct an active fourth quarter drilling program of five (2.5 net) wells plus several tie-ins of recent wells at Ansell/Sundance, using approximately $6-$7 million in forecast quarterly cash flow plus a planned $2-$3 million of additional debt.
To the end of the third quarter Open Range had net debt of only $23.3 million compared to recently expanded bank lines of $54 million. The Corporation will exit 2008 with moderate debt and extensive unused borrowing capacity while not requiring the issuance of new equity on dilutive terms. The reduced budget and drilling still enable Open Range to maintain its 2008 guidance for average production of 2,100 boe per day and an exit rate of 2,700 boe per day.
THIRD QUARTER RESULTS
Realized natural gas prices were down by more than $2.25 per mcf from the second quarter, while royalty rates were higher due to new wells coming on-stream late in the quarter, resulting in a smaller proportion of the Corporation's production base taking advantage of royalty holidays. Combined with flat quarter-over-quarter production due to wet lease conditions having delayed drilling and completions early in the quarter, plus recording a provision for potentially uncollectible SemCanada Energy and SemCanada Crude receivables, Open Range had somewhat reduced quarter-over-quarter financial results. Highlights from the quarter ended September 30, 2008:
- Production of 1,992 boe per day, an increase of 10 percent over the third quarter of 2007. Ansell/Sundance accounted for 1,535 boe per day or 77 percent of total production, secondary properties at Ferrier, Garrington and Big Bend supplied 428 boe per day or 21 percent with minimal capital outlays, while remaining production came from the Rough discovery well;
- An active drilling program, using two rigs, totalling six gross (2.7 net) wells, all at Ansell/Sundance, achieving a success rate of 100 percent and adding a combined 29 producing zones or an average 4.8 zones per well;
- Production commenced from the Rough discovery well in the last week of September and it is currently producing at a gross rate of approximately 1.4 mmcf per day plus 40 barrels of associated natural gas liquids per mmcf, or a combined 290 boe per day (200 boe per day net);
- Capital expenditures of $25.8 million, bringing nine-month 2008 spending to $51.3 million;
- Funds from operations of $4.8 million ($0.17 per share), an increase of 8 percent over the third quarter of 2007, bringing year-to-date funds from operations to $17.6 million, a 66 percent increase from $10.6 million for the comparable period in 2007;
- Average natural gas sales price of $8.47 per mcf (not including realized hedging losses), a decline of $2.26 per mcf from the second quarter of 2008;
- A continued low cost structure, with all-in cash costs averaging just under $10 per boe of production; and
- Continued strong netbacks of $31.81 per boe.
Successive tie-ins of new wells have been driving strong production growth exiting the quarter and through October. Ansell/Sundance is currently producing 1,900 boe per day from 15 net wells. Open Range's combined production was approximately 2,500 boe per day entering November, with several additional wells awaiting tie-in.
ANSELL/SUNDANCE
Open Range conducted an exploration-focused program at its key Ansell/Sundance Deep Basin property in the third quarter, drilling six gross (2.7 net) wells utilizing two drilling rigs. The quarter's activities focused on further delineating the expanding play's resource potential by stepping out to undeveloped lands to the south, west and north of central Ansell/Sundance. Open Range drilled its second well on a northerly block, a second well on earned land in the west, and two exploratory wells to validate the development potential of nine (six net) sections of contiguous land in southern Ansell/Sundance. The southern wells encountered a combined 10 pay zones and came on production in October and are currently producing at average gross rates of approximately 2.5 mmcf per day each. The third quarter's wells were all successful and added a combined 29 producing zones.
These latest exploration discoveries confirm that the consistent high-quality multi-zone characteristics of central Ansell/Sundance extend to the perimeter of our undeveloped land in three directions. The Corporation also acquired five (4.3 net) sections of undeveloped Crown lands offsetting recent drilling. Successful drilling and land acquisitions have increased Open Range's inventory from 50 to currently 100 3D-seismically-defined locations at increased average working interest (approximately 60 net locations). This inventory can support a multi-year low-risk production growth program that could enable Ansell/Sundance volumes to more than double.
The Corporation's $10 million capital budget cut affects fourth-quarter 2008 activity at Ansell/Sundance, where the year's drilling has been reduced to 16 gross (7.6 net) wells from the previously announced 21 gross (10.2 net) wells. The deferred wells augment our inventory and can be drilled at the appropriate time. The spending reduction includes shifting the Corporation's first horizontal well utilizing multiple-stage fractures targeting the Bluesky Formation to the first quarter of 2009. Open Range remains excited at the strong potential the horizontal approach offers to enhance production profiles and capital efficiencies and to increase the recovery factor of gas-in-place.
ROUGH
In late September the Corporation's 70 percent working interest, 3,800-metre-deep Rough 15-35-38-12W5 discovery well was completed and tied into a third-party facility, commencing production from the primary target Glauconitic sandstone. The well is currently producing 1.4 mmcf per day gross plus an estimated 40 bbls gross of natural gas liquids per mmcf. The uphole Notikewin zone was also completed and will be production-tested after the Glauconitic zone has produced for three to six months. The Company intends to commingle the Glauconitic and Notikewin production in the well bore.
The exciting Rough discovery holds strong upside, including potential for long-life reserves. Open Range has accumulated a long-term land base of 39 sections at an average 94 percent working interest, almost none of which face expiries. The Corporation's ongoing technical evaluation is aimed at determining the best approach to intersecting higher-permeability areas of reservoir to achieve faster reserve recovery. This could include drilling one or more horizontal wells using multi-stage fracture stimulation, likely following one or more additional vertical delineation wells. The first delineation location has been identified and Open Range continues to assess the appropriate timing of this substantial capital commitment.
OUTLOOK
Open Range is well positioned to navigate through this unique financial market situation. The reduction of expenditures to $9 million in the fourth quarter preserve the Corporation's core drilling program at Ansell/Sundance, enabling us to explore, validate new lands and grow production. The program includes tying in five gross (2.3 net) wells drilled in the third quarter and to date in this quarter, plus drilling another two gross (0.8 net) wells before year-end. Activities continue to focus on proving up the resource potential on newer undeveloped lands outside central Ansell/Sundance.
Recent exploration successes further demonstrate the high quality of the play and increase its overall prospectivity. The latest wells have added two new commercial zones, the Nordegg and the Second White Specks, increasing to 17 the total number of producing geological horizons at Ansell/Sundance. New wells have come on-stream at rates of 1.5-3 mmcf per day gross from up to seven productive zones per well. Volumes are growing steadily, with production averaging 2,300 boe per day in October and continuing to increase in November. We continue to evaluate the optimal timing for the installation of equipment to double capacity of the Ansell/Sundance gas plant to 40 mmcf per day.
The Corporation's prudent financial management and the strengths of its asset base, including its low cash costs, low-decline production base and extensive high-quality inventory, mean that Open Range can continue to grow at a modest rate even under relatively trying conditions. We have expended all of our previous flow-through commitments, maximizing our capital expenditure flexibility. Going forward our solid cash flow base and moderate debt will allow us to avoid taking on "expensive" equity. At the same time we are actively seeking opportunities to add high-quality assets or large farm-ins that reflect current market conditions.
Open Range's fourth quarter cash flow is forecast at $6-$7 million ($0.22-$0.26 per share), with year-end debt estimated at $25.5-$27.5 million. To date we have not hedged additional production for 2009. Alberta's New Royalty Framework is based on market prices, demanding careful price management to avoid higher effective royalty rates during times when market prices exceed contracted prices or costless collars.
In closing I would like to thank Open Range's dedicated team of employees and managers, who together have achieved our many operating and financial successes and have positioned the Corporation solidly to take on the current challenges. These uncertain times create stresses on a personal level, and I extend my personal gratitude to all of Open Range's people for their unwavering efforts.
On behalf of the Board of Directors,
A. Scott Dawson, President, C.E.O. and Director
Management's Discussion and Analysis
The following management's discussion and analysis (MD&A) is a review of operations, current financial position and outlook for Open Range Energy Corp. ("Open Range" or the "Corporation") for the three- and nine-month periods ended September 30, 2008 and 2007. This MD&A should be read in conjunction with the unaudited interim financial statements for the three and nine months ended September 30, 2008 and 2007, and the audited annual financial statements for the year ended December 31, 2007. This MD&A is dated November 6, 2008.
BOE PRESENTATION
The use of barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and is not intended to represent a value equivalency at the wellhead.
NON-GAAP MEASUREMENTS
The terms "funds from operations", "funds from operations per share" and "operating netback" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations and operating netback are useful supplemental measurements. Open Range utilizes funds from operations to evaluate operating performance and assess leverage. The Corporation considers funds from operations to be an important measure of the results generated by its principal business activities before the consideration of how those activities are financed or how the results are taxed and before abandonment expenditures. Operating netback is a benchmark used in the oil and natural gas industry to measure the contribution of oil and natural gas sales following the deduction of royalties, operating expenses and transportation costs. Users are cautioned, however, that these measures should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.
RECONCILIATION OF CASH FLOW PER GAAP TO FUNDS FROM OPERATIONS
Open Range's method of calculating funds from operations may differ from that of other corporations and, accordingly, may not be comparable to measures used by other corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities and asset retirement expenditures incurred. The Corporation uses this method as it believes the uncertainty surrounding the timing of collection, payment or incurrence of these items makes them less useful in evaluating Open Range's operating performance. A summary of this reconciliation is as follows:
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Cash flow from
operating activities
(per GAAP) $ 4,583,228 $ 3,727,615 $ 18,049,560 $ 10,722,915
Change in non-cash
working capital 164,940 685,454 (628,596) (146,679)
Asset retirement
expenditures 8,552 - 177,517 -
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Funds from operations $ 4,756,720 $ 4,413,069 $ 17,598,481 $ 10,576,236
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FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which are statements that include terms such as "will", "intend", "anticipate", "expect", "plan", "assume", "contemplate", "believe", "shall" and similar terms and such forward-looking statements include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) expenses; (v) cash flow; and (vi) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. While management believes the forward-looking statements are reasonable, all such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Corporation's control. Such risks and uncertainties include, without limitation, risks associated with oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, increased competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, changes in federal and provincial tax laws and legislation (including the adoption of new royalty regimes), the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities.
The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements (as a result of assumptions proving incorrect or due to the effect of risks) and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that the Corporation will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive and reference is made to the items under "Risk Factors" in the Corporation's Annual Information Form (AIF) for the year ended December 31, 2007. All subsequent forward-looking statements, whether written or oral, attributable to the Corporation or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this MD&A are made as at the date hereof and the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
DETAILED FINANCIAL ANALYSIS
PRODUCTION
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Production
Oil and NGL (bbls/d) 209 225 216 165
Natural gas (mcf/d) 10,696 9,545 10,358 7,353
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Total (boe/d) 1,992 1,815 1,943 1,391
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Total (boe) 183,242 167,009 532,343 379,711
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% natural gas 89 88 89 88
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Open Range's production for the three and nine months ended September 30, 2008 increased from the comparative periods in 2007. The increase resulted from the continued successful drilling activity in the fourth quarter of 2007 and the first nine months of 2008. Production in the three and nine months ended September 30, 2008 averaged 1,992 boe per day and 1,943 boe per day, respectively. This represented an increase of 10 percent and 40 percent, respectively, from the average production of 1,815 boe per day and 1,391 boe per day for the respective three and nine months ended September 30, 2007. Natural gas production in the three and nine months ended September 30, 2008 increased to 10,696 mcf per day and 10,358 mcf per day, respectively, from 9,545 mcf per day and 7,353 mcf per day, respectively, for the three and nine months ended September 30, 2007. Oil and natural gas liquids (NGL) production in the three months ended September 30, 2008 decreased by 7 percent to 209 barrels per day from 225 barrels per day in the third quarter of 2007. In the nine months ended September 30, 2008, oil and NGL production increased by 31 percent to 216 barrels per day from 165 barrels per day in the first nine months of 2007.
Open Range is forecasting average production of 2,100 boe per day in 2008 and expects to exit the year with production of approximately 2,700 boe per day.
OIL AND NATURAL GAS REVENUES
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
Revenue
Oil and NGL $ 1,953,087 $ 1,266,842 $ 5,665,437 $ 2,652,833
Natural gas 8,329,744 4,822,899 26,118,162 13,383,955
Realized gains (losses)
on commodity contracts (637,329) 733,410 (1,690,370) 778,163
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Total $ 9,645,502 $ 6,823,151 $ 30,093,229 $ 16,814,951
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Average realized price
Oil and NGL ($/bbl) 101.51 61.32 95.52 58.74
Natural gas ($/mcf) 8.47 5.49 9.20 6.67
Realized gains (losses)
on commodity contracts
($/mcf) (0.65) 0.84 (0.60) 0.39
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Combined average ($/boe) 52.64 40.85 56.53 44.28
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Benchmark pricing
Edmonton Par (Cdn$/bbl) 122.74 78.11 115.83 73.83
Alberta Spot (Cdn$/mcf) 7.69 5.06 8.52 6.47
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Revenue, including realized gains and losses on commodity contracts, for the three months ended September 30, 2008 increased by 41 percent to $9.6 million from $6.8 million in the comparative period in 2007. The increase in revenue resulted from a 10 percent increase in daily average production and a 29 percent increase in the combined average sales price from the third quarter of 2007. In the first nine months of 2008, revenue increased by 79 percent to $30.1 million from $16.8 million in the comparative period in 2007. The increase was due to a 40 percent increase in production and a 28 percent increase in the average sales price. The period-over-period changes in average sales prices for oil, NGL and natural gas realized by Open Range were consistent with the fluctuations in benchmark oil and natural gas prices over the same periods. Open Range's average sales price for natural gas continued to be at a premium to the Alberta natural gas spot benchmark price due to the high energy content of the Corporation's natural gas production.
Open Range realized losses on commodity contracts of $0.6 million for the three months ended September 30, 2008. These realized losses related to natural gas commodity contracts and amounted to a reduction of $0.65 per mcf on the Corporation's natural gas production for the three months ended September 30, 2008. For the nine months ended September 30, 2008 the Corporations realized a loss on commodity contracts of $1.7 million, which amounted to a reduction of $0.60 per mcf on the Corporation's natural gas production for the first nine months of 2008.
UNREALIZED LOSSES ON COMMODITY CONTRACTS
Open Range's management utilizes commodity contracts as a risk management technique to protect exploration and development economics, reduce volatility in cash flows and mitigate the unpredictable commodity price environment. For the three months ended September 30, 2008, the Corporation recorded an unrealized gain on commodity contracts of $5.7 million and for the nine months ended September 30, 2008 the Corporation recorded an unrealized loss on commodity contracts of $0.3 million. These amounts represented the change in the fair value of the commodity contracts held by the Corporation during the three- and nine-month periods ended September 30, 2008.
Natural gas hedging contracts entered into as at September 30, 2008 and 2007
are as follows:
Average Average
AECO AECO
Spot Spot
Volume Floor Ceiling
Period (GJ/d) Type (Cdn$/GJ) (Cdn$/GJ)
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Jan. to Dec. Costless
2007 2,500 Collar $ 7.00 $ 10.20
Jan. to Dec. Costless
2007 1,250 Collar $ 7.00 $ 8.00-9.90
Apr. 2007 to Costless
Mar. 2008 1,000 Collar $ 7.00 $ 10.16
Nov. 2007 to Costless
Mar. 2008 1,500 Collar $ 7.50 $ 10.67
Jan. to Dec. Costless
2008 3,000 Collar $ 6.75 $ 7.50-9.12
Apr. to Oct.
2008 1,500 Swap $ 6.46 $ 6.46
Nov. to Dec.
2008 1,500 Swap $ 7.26 $ 7.26
Apr. to Oct.
2008 1,500 Swap $ 6.50 $ 6.50
Nov. 2008 to Costless
Mar. 2009 1,500 Collar $ 6.75 $ 11.09
Jan. to Dec. Costless 9.00-
2009 1,000 Collar $ 6.50 $ 13.00
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Unrealized
Unrealized gain (loss) Unrealized Unrealized
gain (loss) for the gain (loss) gain (loss)
for the three three for the nine for the nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
Period 2008 2007 2008 2007
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Jan. to Dec.
2007 - $ (125,284) - $ (418,492)
Jan. to Dec.
2007 - (53,383) - (128,213)
Apr. 2007 to
Mar. 2008 - 10,502 $ (68,534) 220,599
Nov. 2007 to
Mar. 2008 - 158,452 (164,411) 328,034
Jan. to Dec.
2008 $ 2,124,195 619,445 (341,146) 619,446
Apr. to Oct.
2008 925,852 - 29,499 -
Nov. to Dec.
2008 486,800 - 62,664 -
Apr. to Oct.
2008 920,381 - 22,087 -
Nov. 2008 to
Mar. 2009 584,091 - 98,616 -
Jan. to Dec.
2009 685,620 - 85,001 -
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$ 5,726,939 $ 601,732 $ (276,224) $ 621,374
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For more details on these contracts refer to note 8, Financial Instruments,
in the interim financial statements for the three and nine months ended
September 30, 2008.
ROYALTIES
Three Three Nine Nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Royalty expense - oil &
NGL $ 346,838 $ 335,216 $ 827,787 $ 638,745
Royalty expense - natural
gas 2,200,851 279,376 5,475,053 1,167,119
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Total $ 2,547,689 $ 614,592 $ 6,302,840 $ 1,805,864
$ per boe 13.90 3.68 11.84 4.76
% of revenues(1) 25 10 20 11
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(1)Revenue before realized gains (losses) on commodity contracts.
Royalties totalled $2.5 million and $6.3 million for the third quarter and first nine months of 2008, respectively, compared to $0.6 million and $1.8 million, respectively, for the comparative periods in 2007. Royalties as a percentage of revenue increased in the third quarter and first nine months of 2008 from the comparative periods in 2007, as the Corporation had fewer newly tied-in wells receiving the beneficial effects of the deep well royalty holiday program. On a per unit of production basis, royalty costs for the three and nine months ended September 30, 2008 were up by 278 percent and 149 percent, respectively, from the comparative periods in 2007, mainly due to higher commodity prices and the majority of wells at Ansell/Sundance having fully utilized their royalty holiday entitlement, thus commencing the payment of cash royalties.
Open Range anticipates an average royalty rate for 2008 of approximately 15 percent to 20 percent of revenue. This increase in royalty rates from 2007 reflects the fact that as the Corporation continues to grow, a smaller proportion of its production base will receive the beneficial effects of the deep well royalty holiday program on royalty expenses.
On October 25, 2007 the Alberta government announced a New Royalty Framework (NRF) that will result in changes to royalties levied on natural gas and conventional oil produced in Alberta effective January 1, 2009. The Alberta government introduced several modifications to the NRF on April 10, 2008. The proposed changes to royalties will have a nominal impact on the Corporation's net earnings, funds from operations, cash flow from operating activities, operating netbacks, and reserve values.
OPERATING COSTS AND NETBACK
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
($ per boe) 2008 2007 2008 2007
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Average realized sales
price 52.64 40.85 56.53 44.28
Royalty expenses (13.90) (3.68) (11.84) (4.76)
Operating costs (6.18) (5.99) (6.30) (5.93)
Transportation costs (0.75) (0.75) (0.75) (0.82)
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Operating netback 31.81 30.43 37.64 32.77
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The Corporation's operating netback for the third quarter and first nine months of 2008 increased to $31.81 per boe and $37.64 per boe, respectively, from $30.43 per boe and $32.77 per boe for the respective periods in 2007. The operating netback increased by 5 percent and 15 percent for the three and nine months ended September 30, 2008, respectively, from the comparative periods in 2007. This was mainly due to an increase in the realized average sales price, partially offset by an increase in royalties.
Operating costs were $1.1 million and $3.4 million for the three- and nine-month periods ending September 30, 2008, respectively, compared to $1.0 million and $2.3 million for the respective periods in 2007. On a per unit of production basis, operating costs for the third quarter and first nine months of 2008 were $6.18 per boe and $6.30 per boe, respectively. These amounts represent a 3 percent and 6 percent respective increase from $5.99 per boe and $5.93 per boe for the comparative periods in 2007. With production continuing to grow and the commissioning of the new 20-mmcf-per-day Open Range-operated gas plant at Ansell/Sundance near the end of the first quarter, the Corporation expects significant operating efficiencies to be realized at Ansell/Sundance for the balance of 2008 and continuing into 2009. Consequently, Open Range expects operating costs on a per unit of production basis to decrease over this period. Transportation costs were $0.1 million or $0.75 per boe for the third quarter of 2008 and $0.4 million or $0.75 per boe for the first nine months of 2008.
GENERAL AND ADMINISTRATIVE (G&A) COSTS
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Gross $ 1,486,965 $ 1,346,689 $ 4,381,995 $ 3,899,328
Partner recovery (286,038) (166,750) (794,958) (374,089)
Capitalized (625,350) (600,633) (1,851,481) (1,722,293)
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Net G&A expense $ 575,577 $ 579,306 $ 1,735,556 $ 1,802,946
Per boe net ($) 3.14 3.47 3.26 4.75
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G&A costs for the three months ended September 30, 2008 totalled $0.6 million or $3.14 per boe after overhead recoveries and capitalization totalling just over $0.9 million. On a per boe basis G&A costs in the third quarter of 2008 declined by 10 per cent to $3.14 per boe from $3.47 per boe in the third quarter of 2007. For the first nine months of 2008, net G&A costs per boe decreased by 31 percent to $3.26 from $4.75 in the first nine months of 2007. These substantial reductions per boe for both periods were mainly due to increased production in 2008. Capitalized G&A costs represented 42 percent of gross G&A costs for both the three and nine months ended September 30, 2008 as the Corporation continued to focus on exploration activities and capitalized its exploration, geological and geophysical expenses.
Open Range expects to continue to reduce its net G&A costs per boe in 2008, reflecting the Corporation's continued forecast production growth combined with no significant planned increase in quarterly G&A spending.
INTEREST INCOME AND EXPENSE
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
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Interest income $ 31,942 $ 12,046 $ 75,452 $ 101,743
Interest expense (4,562) (102,536) (254,783) (167,677)
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Net interest income
(expense) $ 27,380 $ (90,490) $ (179,331) $ (65,934)
Per boe net ($) 0.15 (0.54) (0.34) (0.17)
----------------------------------------------------------------------------
Net interest expense for the first nine months of 2008 was $0.2 million or $0.34 per boe. The interest paid on the Corporation's revolving credit facility during the first nine months of 2008 was partially offset by the interest income earned on available cash balances through short-term interest-bearing instruments immediately following the equity financing in April 2008.
The Corporation had $7.1 million drawn on its extendable revolving credit facility at September 30, 2008. Open Range's continuing exploration activity will require incurring some debt during the balance of 2008. However, the Corporation continues to manage debt levels prudently and expects net interest expense to be relatively low for the year.
STOCK-BASED COMPENSATION
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Total stock-based
compensation $ 510,595 $ 277,591 $ 1,150,249 $ 778,363
Capitalized
stock-based
compensation (237,798) (130,631) (543,831) (379,515)
----------------------------------------------------------------------------
Stock-based
compensation
expense $ 272,797 $ 146,960 $ 606,418 $ 398,848
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the third quarter of 2008, stock-based compensation of $272,797 was expensed and $237,798 was capitalized. This resulted in total stock-based compensation for the three months ended September 30, 2008 of $510,595, compared to $277,591 for the third quarter of 2007. For the first nine months of 2008 stock-based compensation of $606,418 was expensed and $543,831 was capitalized, compared to $398,848 expensed and $379,515 capitalized for the comparative nine-month period in 2007. The increases in stock-based compensation expense were due to the additional expense associated with the stock options granted during the first nine months of 2008. At September 30, 2008 there were 2,700,000 stock options outstanding compared to 1,922,500 outstanding at September 30, 2007.
DEPLETION, DEPRECIATION AND ACCRETION
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Depletion and
depreciation $ 4,609,373 $ 3,855,701 $ 13,712,692 $ 9,212,417
Accretion 36,191 45,043 117,525 132,102
----------------------------------------------------------------------------
Total $ 4,645,564 $ 3,900,744 $ 13,830,217 $ 9,344,519
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion and
depreciation ($/boe) 25.15 23.09 25.76 24.26
Accretion ($/boe) 0.20 0.27 0.22 0.35
----------------------------------------------------------------------------
Total ($/boe) 25.35 23.36 25.98 24.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion and depreciation are calculated based upon cumulative capital expenditures, production rates and reserves. Open Range recorded $4.6 million or $25.15 per boe in depletion and depreciation for the three months ended September 30, 2008 compared to $3.9 million or $23.09 per boe for the comparative period in 2007. Depletion and depreciation for the first nine months of 2008 increased to $13.7 million or $25.76 per boe from $9.2 million or $24.26 per boe in the first nine months of 2007. The per boe increase in depletion and depreciation for the third quarter and the first nine months of 2008 is primarily due to higher average production and increased capital expenditures being partially offset by reserve additions in the respective periods.
Open Range estimates depletion on a quarterly basis throughout the year using independent inputs such as reserve and land reports when available. Undeveloped land and seismic and salvage values of $28.4 million have been excluded in the calculation and future development costs of $2.3 million have been included in the capital base used in the calculation.
INCOME TAXES
Open Range did not incur any cash tax expense in the first nine months of 2008. Open Range does not expect to pay any cash taxes in 2008 based on current oil and natural gas prices, existing tax pools, planned capital expenditures and forecast taxable income. For the quarter ended September 30, 2008 the Corporation recorded future income tax expense of $1.9 million. This was primarily due to the recording of a significant future tax expense relating to the unrealized gain on commodity contracts during the third quarter. In the nine-month period ended September 30, 2008, future income tax expense of $1.2 million was recorded. The future income tax liability associated with the Corporation's $19 million in flow-through share issuances in 2007 was also recorded in the nine months ended September 30, 2008.
The Corporation estimates that at September 30, 2008 tax pools of $100.3 million are available for deduction against future taxable income.
EARNINGS
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Earnings $ 3,675,840 $ 611,329 $ 1,730,783 $ 867,817
Earnings per
basic and
diluted share $ 0.13 $ 0.03 $ 0.07 $ 0.05
----------------------------------------------------------------------------
The Corporation recorded earnings of $3.7 million, or $0.13 per basic and diluted share for the three months ended September 30, 2008, compared to $0.6 million or $0.03 per basic and diluted share for 2007. The earnings of $3.7 million for the third quarter of 2008 are mainly attributable to the recording of a $5.7 million unrealized hedging gain.
FUNDS FROM OPERATIONS AND CASH FLOW FROM OPERATING ACTIVITIES
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Funds from operations $ 4,756,720 $ 4,413,069 $ 17,598,481 $ 10,576,236
Funds from operations
per boe 25.96 26.42 33.06 27.85
Funds from
operations per
basic and diluted
share 0.17 0.22 0.69 0.55
----------------------------------------------------------------------------
Cash flow from
operating activities
(per GAAP) $ 4,583,228 $ 3,727,615 $ 18,049,560 $ 10,722,915
----------------------------------------------------------------------------
In the three months ended September 30, 2008 Open Range generated funds from operations of $4.8 million or $0.17 per basic and diluted share. Third-quarter 2008 funds from operations increased by 8 percent, and funds from operations per basic and diluted share decreased by 23 percent, from $4.4 million and $0.22, respectively, in the comparative period of 2007. The absolute increase is mainly due to a combination of increased production, revenues and product prices partially offset by the writing off of a portion of the Corporation's receivables from SemCanada Energy Company and SemCanada Crude Company. In the first nine months of 2008 Open Range recorded funds from operations of $17.6 million, compared to $10.6 million for the comparative period in 2007. The significant increases in funds from operations and cash flow from operating activities were due to stronger operating results, primarily driven by higher average production, as well as stronger netbacks which in turn were caused mainly by higher average realized sales prices.
CAPITAL EXPENDITURES
Three Three Nine Nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Drilling and
completions $15,412,357 $ 8,061,111 $30,342,796 $22,703,383
Equipment and
facilities 3,326,557 230,474 5,721,074 4,523,645
Land 6,545,104 16,200 12,952,192 3,773,171
Capitalized G&A 408,360 471,999 1,493,391 1,414,211
Geological and
geophysical 111,865 47 804,380 235,218
----------------------------------------------------------------------------
Total capital
expenditures $25,804,243 $ 8,779,831 $51,313,833 $32,649,628
Capital items not
involving cash:
Stock-based
compensation 329,323 179,034 742,881 520,137
Asset retirement
obligations (161,096) 49,685 (116,550) 187,723
----------------------------------------------------------------------------
Total capital
expenditures
including non-cash
items $25,972,470 $ 9,008,550 $51,940,164 $33,357,488
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Open Range's capital budget during the third quarter of 2008 was focused heavily on drilling and completing wells as well as continued land acquisition to further grow the core Ansell/Sundance property. During the first nine months of 2008, Open Range drilled 11 gross (5.3 net) natural gas wells at its core Ansell/Sundance property, all of which were successful. Facilities and equipment expenditures for the nine months ended September 30, 2008 relate mainly to the costs associated with the construction of the new 20-mmcf-per-day gross operated gas plant at Ansell/Sundance and connecting successful wells to existing infrastructure. The Corporation's average working interest on new wells during the first nine months of 2008 was 48 percent. Expenditures on land increased significantly in the first nine months of 2008 compared to the same period in 2007 as the Corporation assembled land at Rough and further expanded its land position at Ansell/Sundance.
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Wells drilled Gross Net Gross Net Gross Net Gross Net
----------------------------------------------------------------------------
Exploration 6.0 2.7 4 1.8 11 5.3 11 5.60
Development - - - - - - 5 0.35
----------------------------------------------------------------------------
Total 6.0 2.7 4 1.8 11 5.3 16 5.95
----------------------------------------------------------------------------
Average working
interest 45% 45% 48.2% 37.2%
Success rate 100% 100% 100% 100%
----------------------------------------------------------------------------
SHARE CAPITAL
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Weighted average
basic common
shares outstanding 27,334,241 19,763,841 25,428,474 19,192,412
Stock option dilution 222,872 - 111,602 -
----------------------------------------------------------------------------
Weighted average
diluted common
shares outstanding 27,557,113 19,763,841 25,540,076 19,192,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding securities Sept. 30, 2008 Nov. 6, 2008
----------------------------------------------------------------------------
Common shares 27,334,241 27,304,241
Stock options 2,700,000 2,700,000
----------------------------------------------------------------------------
Total outstanding securities 30,034,241 30,004,241
----------------------------------------------------------------------------
Proportion of outstanding securities held
by officers and directors 15% 15%
----------------------------------------------------------------------------
On April 4, 2008 Open Range closed an equity financing for gross proceeds of $25 million. Pursuant to this financing, the Corporation issued 3,095,300 common shares at a price of $4.20 per share and 2,400,000 flow-through common shares at a price of $5.00 per share. This equity issuance, combined with cash flows from ongoing operations and the Corporation's credit facilities, will allow the Corporation to pursue its capital investment program for the year and have positioned it with financial flexibility for 2008 and 2009.
During the first nine months of 2008 the Corporation issued 779,500 stock options to employees of the Corporation. The options vest over three years and are exercisable into common shares at an average price of $4.93. At September 30, 2008 the Corporation had 2,700,000 options outstanding with an average exercise price of $4.33.
On October 23, 2008 the Corporation received regulatory approval under Canadian securities laws to purchase common shares under a Normal Course Issuer Bid (the "Bid") which commenced October 28, 2008 and will terminate on October 27, 2009. Pursuant to the Bid, Open Range is entitled to purchase for cancellation, from time to time, up to a maximum of 1,366,662 common shares, which represents five percent of the issued and outstanding common shares of the Corporation. As of November 6, 2008 the Corporation has purchased and cancelled 30,000 common shares under the Bid at an average price of $1.85 per share.
RELATED-PARTY AND OFF-BALANCE-SHEET TRANSACTIONS
During the nine months period ended September 30, 2008, the Corporation incurred $132,354 in legal costs to a law firm in which the Chairman of the Board of Directors and the Corporate Secretary of the Corporation are partners. None of the legal costs incurred in the nine months ended September 30, 2008 were included in accounts payable at September 30, 2008.
Certain officers of Open Range purchased a total of 5,000 shares as part of the equity offering that closed on April 4, 2008, for total gross proceeds of $21,000.
Open Range was not involved in any off-balance-sheet transactions during the three and nine months ended September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
Open Range had a working capital deficiency of $23.3 million at September 30, 2008. As at September 30, 2008, Open Range had available a $36 million extendable revolving-credit facility and a $4 million acquisition and development facility with the National Bank of Canada. The interest rates on the facilities are calculated using the bank's prime rate plus an applicable facility margin based on the Corporation's net debt to cash flow ratio for the previous trailing calendar quarter. The facility is a borrowing base facility that is determined based on, among other things, the Corporation's reserve report, production and operating results, and current and forecast commodity prices. Pursuant to the terms of the credit facilities, the Corporation has provided the covenant that at all times its working capital ratio shall be not less than 1 to 1. The working capital ratio is defined under the terms of the facilities as current assets, including the undrawn portion of the revolving credit facility, to current liabilities, excluding any current bank indebtedness. The Corporation is in compliance with this covenant as at September 30, 2008. As at September 30, 2008, $7.1 million had been drawn on these facilities. As a result of a recently completed semi-annual credit facility review, the Corporation's credit facilities have increased by 35 percent from $40 million to $54 million. As of November 6, 2008, Open Range has a $50 million extendable revolving credit facility and a $4 million non-revolving acquisition/development demand facility. The facilities are open for review semi-annually with the next review occurring in April 2009.
The Corporation has recently experienced a collection issue with one of its purchasers of natural gas, SemCanada Energy Company, and one of its purchasers of crude oil, SemCanada Crude Company. Both companies are Canadian subsidiaries of SemGroup, L.P. which recently filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States. As of September 30, 2008, the Corporation is owed $949,462 and $97,146 from SemCanada Energy Company and SemCanada Crude Company, respectively. The Corporation has held preliminary discussions with several arms length parties with regards to the purchase and sale of the outstanding receivable balances from SemCanada Energy Company and SemCanada Crude Company. Based on these discussions and an internal evaluation of what portion, if any, of these amounts will be collectible, the Corporation has recorded a provision for bad debts of $523,304 as of September 30, 2008, which represents 50 percent of the outstanding amounts owed to it by SemCanada Energy Company and SemCanada Crude Company.
----------------------------------------------------------------------------
Bank lines available $ 54,000,000
Working capital deficiency (23,256,428)
----------------------------------------------------------------------------
Capital resources available $ 30,743,572
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As a result of current global economic and credit conditions, the Corporation's capital expenditure budget for 2008 has been prudently reduced to $60 million, a decrease from the previously revised budget of $70 million. The capital program will continue to be funded through a combination of funds from operations and the Corporation's credit facility. The Corporation is closely monitoring the current economic environment in conjunction with the commodity price outlook to determine the best course of action with regards to its 2009 capital program.
The details of the 2008 budget are provided in the following table:
2008
----------------------------------------------------------------------------
Drilling and completions $ 38,000,000
Equipment and facilities 6,000,000
Land and seismic 13,800,000
Capitalized G&A 2,200,000
----------------------------------------------------------------------------
Total $ 60,000,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SELECTED QUARTERLY INFORMATION
2008 2007
----------------------------------------------------------------------------
Q3 Q2 Q1 Q4
----------------------------------------------------------------------------
Production
Natural gas (mcf/d) 10,696 10,630 9,746 8,862
Oil and NGL (bbls/d) 209 225 216 171
Total (boe/d) 1,992 1,996 1,840 1,648
Total (boe) 183,242 181,652 167,448 151,660
% natural gas 89 89 88 90
----------------------------------------------------------------------------
Financial
($000s except per share
amounts and share numbers)
Revenue (1) 9,646 11,281 9,167 7,097
Net earnings (loss) 3,676 (31) (1,914) (345)
Per share ($)
- basic and diluted 0.13 - (0.09) (0.02)
Funds from operations 4,757 7,242 5,600 4,583
Per share ($)
- basic 0.17 0.27 0.26 0.23
- diluted 0.17 0.26 0.26 0.23
Cash flow from operating
activities 4,583 8,310 5,156 2,867
Total assets (end of period) 137,117 117,265 114,415 97,517
Capital expenditures, net 25,804 5,885 19,625 9,354
Weighted average
basic shares (000s) 27,334 27,131 21,799 20,029
Weighted average
diluted shares (000s) 27,557 27,131 21,799 20,029
----------------------------------------------------------------------------
Per Unit
Oil and NGL ($/bbl) 101.51 105.18 79.60 73.10
Natural gas ($/mcf)(1) 7.82 9.44 8.58 7.29
Revenue ($/boe)(1) 52.64 62.10 54.74 46.80
Operating netback ($/boe) 31.81 42.64 38.58 35.75
----------------------------------------------------------------------------
(1) Includes realized gains (losses) on commodity contracts.
SELECTED QUARTERLY INFORMATION
2007 2006
----------------------------------------------------------------------------
Q3 Q2 Q1 Q4
Production
Natural gas (mcf/d) 9,545 7,009 5,460 5,111
Oil and NGL (bbls/d) 225 156 115 81
Total (boe/d) 1,815 1,324 1,025 933
Total (boe) 167,009 120,451 92,251 85,795
% natural gas 88 88 89 91
----------------------------------------------------------------------------
Financial
($000s except per share
amounts and share numbers)
Revenue (1) 6,823 5,556 4,436 3,747
Net earnings (loss) 611 1,277 (1,020) (160)
Per share ($)
- basic and diluted 0.03 0.06 (0.06) (0.01)
Funds from operations 4,413 3,709 2,454 1,931
Per share ($)
- basic 0.22 0.19 0.14 0.12
- diluted 0.22 0.19 0.14 0.12
Cash flow from
operating activities 3,728 4,624 2,371 758
Total assets (end of period) 93,289 86,746 85,984 78,656
Capital expenditures, net 8,780 11,285 12,585 6,985
Weighted average
basic shares (000s) 19,764 19,764 18,031 15,779
Weighted average
diluted shares (000s) 19,764 19,764 18,031 15,779
----------------------------------------------------------------------------
Per Unit
Oil and NGL ($/bbl) 61.32 57.68 55.05 49.73
Natural gas ($/mcf)(1) 6.33 7.43 7.87 7.19
Revenue ($/boe)(1) 40.85 46.13 48.08 43.67
Operating netback ($/boe) 30.43 35.58 33.36 30.16
----------------------------------------------------------------------------
(1) Includes realized gains (losses) on commodity contracts.
Open Range's quarterly growth in production and total assets is attributable to the active and successful exploration and development drilling program at the Corporation's Deep Basin properties, particularly the Ansell/Sundance core area.
CONTRACTUAL OBLIGATIONS (2),(3)
Less than 1-3 4-5 After 5
As at Sept. 30, 2008 Total 1 Year Years Years Years
----------------------------------------------------------------------------
Bank
indebtedness(1) $ 7,087,800 $ 7,087,800 $ - $ - $ -
Payments for office
lease $ 2,198,442 $ 1,013,298 $ 1,185,144 $ - $ -
Payments for office
equipment lease 35,657 14,263 21,394 - -
----------------------------------------------------------------------------
Total $ 9,321,899 $ 8,115,361 $ 1,206,538 $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Amount is drawn against the Corporation's extendable revolving demand
facility. As the facility is demand in nature amounts outstanding are
classified as current liabilities implying they are due in one year or
less. Management fully expects the term of the facility to be extended.
(2) The Corporation has entered into farm-in agreements in the normal course
of its business which are not included in this table.
(3) The Corporation has entered into commodity contracts which are not
included in this table. For a complete listing refer to note 8,
Financial Instruments, in the interim financial statements for the three
and nine months ended September 30, 2008.
On December 20, 2007 the Corporation issued 2,029,100 flow-through common shares for gross proceeds of $7 million. Under the terms of the flow-through share agreements, the Corporation is required to renounce qualifying oil and natural gas expenditures in 2008 and has until December 31, 2008 to incur the expenditures. As at September 30, 2008 the Corporation had incurred $7 million of qualifying expenditures and is not required to incur any additional expenditures.
On April 4, 2008 the Corporation issued 2,400,000 flow-through common shares for gross proceeds of $12 million. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $12 million of qualifying oil and natural gas expenditures effective December 31, 2008 and has until December 31, 2009 to incur the expenditures. As at September 30, 2008 the Corporation had incurred $12 million of qualifying expenditures and is not required to incur any additional expenditures.
ACCOUNTING POLICY UPDATES
On January 1, 2008, the Corporation adopted the following standards contained in the Handbook of the Canadian Institute of Chartered Accountants (CICA): Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments Disclosures and Section 3863 - Financial Instruments Presentation. Section 1535 establishes standards for disclosing information about an entity's capital and how it is managed. This section specifies disclosure about objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with all capital requirements, and if it has not complied, the consequences of such non-compliance. Sections 3862 and 3863 establish standards for the presentation and disclosure of information that enable users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages those risks. The implementation of these new standards did not impact the Corporation's financial results, but did result in additional disclosures. Refer to note 6, Capital Management, and note 8, Financial Instruments, in the interim financial statements for the three and nine months ended September 30, 2008.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In February 2008, the CICA Accounting Standards Board (AcSB) confirmed that the convergence of Canadian GAAP to IFRS will be required for publicly accountable enterprises' interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators (CSA) has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the continued use of U.S. GAAP by domestic issuers. The eventual changeover to IFRS represents a change due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Corporation's reported financial position and results of operations.
The International Accounting Standards Board (IASB) has issued an exposure draft relating to certain amendments and exemptions to IFRS 1 in order to make it more useful to Canadian entities adopting IFRS for the first time. One such exemption relating to full cost oil and gas accounting is expected to reduce the administrative burden in the transition from the current Canadian Accounting Guideline 16 to IFRS. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late 2009. The amendment could permit the Corporation to apply IFRS prospectively to their full cost pool, rather than the retrospective assessment of capitalized exploration and development expenses, with the proviso that a ceiling test, under IFRS standards, be conducted at the transition date.
Although the Corporation has not completed the development of its IFRS changeover plan, when finalized it will include project structure and governance, resourcing and training, an analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS 1 exemptions. The Corporation anticipates completing its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, by the fourth quarter of 2008.
FINANCIAL REPORTING
The Chief Executive Officer and Chief Financial Officer of the Corporation are responsible for designing internal controls over financial reporting or causing them to be designed under their supervision in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. The Corporation has assessed the design of its internal controls over financial reporting and has not identified any weaknesses other than those disclosed in the MD&A for the year ended December 31, 2007. No material changes in the Corporation's internal controls over financial reporting were identified during the three and nine months ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Corporation's internal financial reporting processes.
During the third quarter of 2008 National Instrument 52-109 (NI 52-109) was issued and will be effective for the Corporation's December 31, 2008 year end reporting. National Instrument 52-109 requires the Corporation to, among other things, utilize an acceptable control framework to design and evaluate internal controls over financial reporting (ICFR), document the key controls, design and document an appropriate testing plan for each such key control and certify as to the operating effectiveness of its ICFR. The Corporation has reviewed NI 52-109 and has developed, and is currently executing, an action plan to ensure that it is compliant as of the effective date.
The management of Open Range is responsible for the integrity of the information contained in this quarterly report and for the consistency between the MD&A and the financial statements. In the preparation of the financial statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgments and have been properly reflected with all information available up to November 6, 2008. The financial statements have been prepared using policies and procedures established by management in accordance with Canadian GAAP and reflect fairly Open Range's financial position, results of operations and cash flow.
The Board of Directors and the Audit Committee have reviewed and approved the financial statements and the MD&A.
Balance Sheets
As at Sept. 30, As at Dec. 31,
(Unaudited) 2008 2007
----------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable $ 9,381,468 $ 7,891,264
Prepaid expenses and deposits 971,709 813,772
Fair value of commodity contracts
(note 8) 436,851 713,075
----------------------------------------------------------------------------
10,790,028 9,418,111
Property, plant and equipment (note 2) 126,326,640 88,099,168
----------------------------------------------------------------------------
$ 137,116,668 $ 97,517,279
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 3) $ 7,087,800 $ 12,855,623
Accounts payable and accrued liabilities 26,831,969 9,184,239
Future income taxes 126,687 210,356
----------------------------------------------------------------------------
34,046,456 22,250,218
Future income taxes 6,404,233 440,742
Asset retirement obligations (note 4) 2,166,218 2,342,760
Shareholders' equity:
Share capital (note 5) 90,044,523 70,884,500
Contributed surplus (note 5) 3,000,801 1,875,405
Retained earnings (deficit) 1,454,437 (276,346)
----------------------------------------------------------------------------
94,499,761 72,483,559
Commitments (note 7)
----------------------------------------------------------------------------
$ 137,116,668 $ 97,517,279
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Operations, Comprehensive Income
and Retained Earnings (Deficit)
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Revenues:
Petroleum and
natural gas
$ 10,282,831 $ 6,089,741 $ 31,783,599 $ 16,036,788
Royalties (2,547,689) (614,592) (6,302,840) (1,805,864)
Interest 31,942 12,046 75,452 101,743
Realized gain
(loss) on
commodity
contracts (note 8) (637,329) 733,410 (1,690,370) 778,163
Unrealized gain
(loss) on commodity
contracts (note 8) 5,726,939 609,732 (276,224) 621,374
----------------------------------------------------------------------------
12,856,694 6,830,337 23,589,617 15,732,204
Expenses:
Operating 1,269,592 1,125,694 3,753,717 2,563,971
General and
administrative 575,577 579,306 1,735,556 1,802,946
Bad debts (note 8) 523,304 523,304
Stock-based
compensation 272,797 146,960 606,418 398,848
Interest 4,562 102,536 254,783 167,677
Depletion and
depreciation 4,609,373 3,855,701 13,712,692 9,212,417
Accretion of asset
retirement obligations 36,191 45,043 117,525 132,102
----------------------------------------------------------------------------
7,291,396 5,855,240 20,703,995 14,277,961
----------------------------------------------------------------------------
Earnings before
income taxes 5,565,298 975,097 2,885,622 1,454,243
Future income tax
expense 1,889,458 363,768 1,154,839 586,426
----------------------------------------------------------------------------
Net earnings and
comprehensive income 3,675,840 611,329 1,730,783 867,817
Deficit, beginning
of period (2,221,403) (542,997) (276,346) (799,485)
----------------------------------------------------------------------------
Retained earnings,
end of period $ 1,454,437 $ 68,332 $ 1,454,437 $ 68,332
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share
(note 5):
Basic $ 0.13 $ 0.03 $ 0.07 $ 0.05
Diluted $ 0.13 $ 0.03 $ 0.07 $ 0.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Cash Flows
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(Unaudited) 2008 2007 2008 2007
----------------------------------------------------------------------------
Cash provided by
(used in):
Operating:
Net earnings $ 3,675,840 $ 611,329 $ 1,730,783 $ 867,817
Items not
involving cash:
Depletion and
depreciation 4,609,373 3,855,701 13,712,692 9,212,417
Accretion of asset
retirement
obligations 36,191 45,043 117,525 132,102
Future income tax
expense 1,889,458 363,768 1,154,839 586,426
Stock-based
compensation 272,797 146,960 606,418 398,848
Unrealized loss
(gain) on commodity
contracts (5,726,939) (609,732) 276,224 (621,374)
Asset retirement
expenditures (8,552) - (177,517) -
Change in non-cash
working capital (164,940) (685,454) 628,596 146,679
----------------------------------------------------------------------------
4,583,228 3,727,615 18,049,560 10,722,915
Financing:
Issue of common
shares, net
of issue costs (7,700) 1,488 23,661,103 11,293,046
Bank indebtedness 7,087,800 5,620,013 (5,767,823) 6,517,885
----------------------------------------------------------------------------
7,080,100 5,621,501 17,893,280 17,810,931
Investing:
Acquisition of
property,
plant and equipment (25,824,243) (8,779,843) (51,333,833) (32,649,640)
Disposition of
property,
plant and equipment 20,000 12 20,000 12
Change in non-cash
working capital 11,425,388 (569,285) 15,370,993 4,115,782
----------------------------------------------------------------------------
$ (14,378,855) (9,349,116) (35,942,840) (28,533,846)
----------------------------------------------------------------------------
Change in cash (2,715,527) - - -
Cash, beginning of
period 2,715,527 - - -
----------------------------------------------------------------------------
Cash, end of period $ - $ - $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest received $ 31,942 $ 12,046 $ 75,542 $ 101,743
----------------------------------------------------------------------------
Interest paid $ 4,562 $ 102,536 $ 254,783 $ 167,677
----------------------------------------------------------------------------
Cash is defined as cash and cash equivalents. See accompanying notes to
financial statements.
Notes to Financial Statements
For the three and nine months ended September 30, 2008
(Unaudited)
The interim financial statements of Open Range Energy Corp. ("Open Range" or the "Corporation") have been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP). The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the year ended December 31, 2007, except as noted below. The following disclosure is incremental to the disclosure included with the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto in the Corporation's annual report for the year ended December 31, 2007. Certain comparative figures have been reclassified to conform to the current period's presentation.
1. CHANGE IN ACCOUNTING POLICIES
(A) FINANCIAL INSTRUMENTS AND CAPITAL MANAGEMENT
On January 1, 2008, the Corporation adopted the following standards contained in the Handbook of the Canadian Institute of Chartered Accountants (CICA): Section 1535 - Capital Disclosures, Section 3862 - Financial Instruments Disclosures and Section 3863 - Financial Instruments Presentation. Section 1535 establishes standards for disclosing information about an entity's capital and how it is managed. This section specifies disclosure about objectives, policies and processes for managing capital, quantitative data about what the entity regards as capital, whether the entity has complied with all capital requirements, and if it has not complied, the consequences of such non-compliance. Sections 3862 and 3863 establish standards for the presentation and disclosure of information that enable users to evaluate the significance of financial instruments to the entity's financial position, and the nature and extent of risks arising from financial instruments and how the entity manages those risks. The implementation of these new standards did not impact the Corporation's financial results, but did result in additional disclosures; refer to note 6 and note 8.
(B) INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
In February 2008, the CICA Accounting Standards Board (AcSB) confirmed that the convergence of Canadian GAAP to IFRS will be required for publicly accountable enterprises' interim and annual financial statements effective for fiscal years beginning on or after January 1, 2011. The AcSB issued the "omnibus" exposure draft of IFRS with comments due by July 31, 2008, wherein early adoption by Canadian entities is also permitted. The Canadian Securities Administrators (CSA) has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the continued use of U.S. GAAP by domestic issuers. The eventual changeover to IFRS represents a change due to new accounting standards. The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Corporation's reported financial position and results of operations.
The International Accounting Standards Board (IASB) has issued an exposure draft relating to certain amendments and exemptions to IFRS 1 in order to make it more useful to Canadian entities adopting IFRS for the first time. One such exemption relating to full cost oil and gas accounting is expected to reduce the administrative burden in the transition from the current Canadian Accounting Guideline 16 to IFRS. It is anticipated that this exposure draft will not result in an amended IFRS 1 standard until late 2009. The amendment could permit the Corporation to apply IFRS prospectively to its full cost pool, rather than applying the retrospective assessment of capitalized exploration and development expenses, with the proviso that a ceiling test, under IFRS standards, be conducted at the transition date.
Although the Corporation has not completed the development of its IFRS changeover plan, when finalized it will include project structure and governance, resourcing and training, an analysis of key GAAP differences and a phased plan to assess accounting policies under IFRS as well as potential IFRS 1 exemptions. The Corporation anticipates completing its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting, and business activities, such as financing and compensation arrangements, during the fourth quarter of 2008.
2. PROPERTY, PLANT AND EQUIPMENT
Sept. 30, 2008 Dec. 31, 2007
----------------------------------------------------------------------------
Petroleum and natural gas properties $ 158,711,141 $ 106,799,108
Other assets 2,404,137 2,376,006
----------------------------------------------------------------------------
161,115,278 109,175,114
Accumulated depletion and depreciation (34,788,638) (21,075,946)
----------------------------------------------------------------------------
Net book value $ 126,326,640 $ 88,099,168
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the three- and nine-month periods ended September 30, 2008, the Corporation capitalized $863,148 and $2,395,312 (September 30, 2007 - $731,264 and $2,101,808), respectively, of overhead-related costs to petroleum and natural gas properties, of which $237,798 and $543,831 (September 30, 2007 - $130,631 and $379,515), respectively, related to stock-based compensation. During the three and nine months ended September 30, 2008, the future tax liability of $91,525 and $199,050 (September 30, 2007 - $48,404 and $140,623), respectively, associated with the capitalized stock-based compensation was also capitalized.
Costs associated with unproved properties excluded from costs subject to depletion for the period ended September 30, 2008 totalled $21,183,000 (September 30, 2007 - $11,987,000). Future development costs of proved reserves of $2,268,000 at September 30, 2008 (September 30, 2007 - $1,924,000) have been included in the depletion calculation.
During the nine-month period ended September 30, 2008, the Corporation disposed of certain interests in petroleum and natural gas properties for cash of $20,000, with associated asset retirement obligations of $213,230 also eliminated.
3. BANK DEBT
The Corporation has a $50,000,000 extendable revolving credit facility and a $4,000,000 non-revolving acquisition/development demand facility. These facilities are with a Canadian chartered bank. The interest rate on the extendable revolving facility calculated using the bank's prime rate plus an applicable facility margin based on the Corporation's net debt to cash flow ratio for the previous trailing calendar quarter. The interest rate on the non-revolving facility is calculated using the bank's prime rate plus 75 basis points. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $100,000,000 and a general security agreement. Pursuant to the terms of the credit facilities, the Corporation has provided the covenant that at all times its working capital ratio shall be not less than 1 to 1. The working capital ratio is defined under the terms of the facilities as current assets, including the undrawn portion of the revolving credit facility, to current liabilities, excluding any current bank indebtedness. The Corporation is in compliance with this covenant as at September 30, 2008. The facilities are open for review semi-annually with the next review occurring in April 2009.
As at September 30, 2008, $7,087,800 (December 31, 2007 - $12,855,623) has been drawn against the revolving credit facility and no amount (December 31, 2007 - $nil) has been drawn against the non-revolving demand facility. The revolving facility had an effective interest rate of 4.75 percent at September 30, 2008 (December 31, 2007 - 6.125 percent).
4. ASSET RETIREMENT OBLIGATIONS
The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations at September 30, 2008 to be approximately $6,728,000 (December 31, 2007 - $6,578,000), to be incurred between 2008 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted, risk-free rate of 8 percent (December 31, 2007 - 8 percent) was used to calculate the fair value of the asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
Sept. 30, 2008 Dec. 31, 2007
----------------------------------------------------------------------------
Balance, beginning of period $ 2,342,760 $ 1,994,891
Liabilities incurred 96,680 202,441
Dispositions (note 2) (213,230) -
Liabilities settled (177,517) (16,869)
Accretion expense 117,525 162,297
----------------------------------------------------------------------------
Balance, end of period $ 2,166,218 $ 2,342,760
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. SHARE CAPITAL
(A) COMMON SHARES ISSUED AND OUTSTANDING
Number of shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2006 16,763,841 $ 54,526,892
Issued pursuant to flow-through share
offerings 5,029,100 19,000,395
Share issue costs (net of tax of
$334,898) - (811,947)
Tax effect of flow-through shares issued
in 2006 - (1,830,840)
----------------------------------------------------------------------------
Balance, December 31, 2007 21,792,941 $ 70,884,500
Issued pursuant to flow-through share
offerings 2,400,000 12,000,000
Issued pursuant to common share offerings 3,095,300 13,000,260
Issued pursuant to private placements 40,000 178,600
Exercise of stock options 6,000 18,250
Stock-based compensation on exercise of
stock options - 7,453
Share issue costs (net of tax of
$414,170) - (1,104,437)
Tax effect of flow-through shares issued
in 2007 - (4,940,103)
----------------------------------------------------------------------------
Balance, September 30, 2008 27,334,241 $ 90,044,523
----------------------------------------------------------------------------
----------------------------------------------------------------------------
On March 4, 2008 Open Range closed a private placement common share issuance with a new employee of the Corporation for 20,000 shares at a price of $3.10 per share for gross proceeds of $62,000. On June 17, 2008 Open Range closed a private placement common share issuance with another new employee of the Corporation for 20,000 shares at a price of $4.96 per share for gross proceeds of $99,200 plus stock-based compensation of $17,400.
Certain officers of Open Range purchased 5,000 shares as part of the equity offering that closed on April 4, 2008, for total gross proceeds of $21,000.
On October 23, 2008 the Corporation received regulatory approval under Canadian securities laws to purchase common shares under a Normal Course Issuer Bid (the "Bid") which commenced on October 28, 2008 and will terminate on October 27, 2009. Pursuant to the Bid, Open Range is entitled to purchase for cancellation, from time to time, up to a maximum of 1,366,662 common shares. As of November 6, 2008 the Corporation has purchased and cancelled 30,000 common shares under the Bid for total consideration of $55,500.
(B) SHARE OPTION PLAN
Under the Corporation's share option plan it may grant options to its employees for up to 2,733,424 shares, of which 2,700,000 had been granted as at September 30, 2008 (December 31, 2007 - 1,926,500). The exercise price of each option equals the market price of the Corporation's stock on the date of grant. Options have terms of five years and vest as to one-third on each of the first, second and third anniversaries of the grant date.
Nine months ended Year ended
Sept. 30, 2008 Dec. 31, 2007
----------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise Number of exercise
options price options price
----------------------------------------------------------------------------
Granted and outstanding,
beginning of period 1,926,500 $ 4.08 1,673,000 $ 4.17
Granted 779,500 4.93 256,500 3.51
Exercised (6,000) 3.04 - -
Forfeited - - (3,000) 3.53
----------------------------------------------------------------------------
Granted and outstanding, end of
period 2,700,000 4.33 1,926,500 4.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exercisable at period-end 1,124,833 $ 4.22 859,667 $ 4.32
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes information about the fixed stock options
outstanding at September 30, 2008:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted
Weighted average Weighted
Range of average contractual average
exercise Number exercise life Number exercise
prices outstanding price (years) exercisable price
----------------------------------------------------------------------------
$ 2.40 - $ 3.60 713,500 $ 3.27 3.3 203,000 $ 3.14
$ 3.61 - $ 6.06 1,986,500 4.71 3.2 921,833 4.46
----------------------------------------------------------------------------
$ 2.40 - $ 6.06 2,700,000 $ 4.33 3.2 1,124,833 $ 4.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(C) STOCK-BASED COMPENSATION
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in the nine-month period ended September 30, 2008: zero dividend yield, average expected volatility of 58 percent (December 31, 2007 - 52 percent), average risk-free interest rate of 3.14 percent (December 31, 2007 - 4.27 percent), and expected life of five years (December 31, 2007 - five years). The average fair value of stock options granted during the period was $2.57 (December 31, 2007 - $1.74) per option. The Corporation has not re-priced any stock options. The Corporation has not incorporated an estimated forfeiture rate for stock options that will not vest; rather, the Corporation accounts for actual forfeitures as they occur.
(D) CONTRIBUTED SURPLUS
----------------------------------------------------------------------------
Balance, December 31, 2006 $ 819,334
Stock-based compensation expense 1,056,071
----------------------------------------------------------------------------
Balance, December 31, 2007 $ 1,875,405
Stock-based compensation expense 1,132,849
Transfer to share capital on exercise of stock options (7,453)
----------------------------------------------------------------------------
Balance, September 30, 2008 $ 3,000,801
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(E) PER SHARE AMOUNTS
Per share amounts have been calculated using the weighted average number of shares outstanding. The following table summarizes basic and diluted common shares outstanding:
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2008 2007 2008 2007
----------------------------------------------------------------------------
Weighted
average basic common
shares outstanding 27,334,241 19,763,841 25,428,474 19,192,412
Stock option dilution 222,872 - 111,602 -
----------------------------------------------------------------------------
Weighted average
diluted common
shares outstanding 27,557,113 19,763,841 25,540,076 19,192,412
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options to purchase 749,500 and 1,797,500 common shares for the three and
nine months ended September 30, 2008 (September 30, 2007 -- 1,922,500 and
1,922,500), respectively, were not included in the computation because they
were anti-dilutive.
Options to purchase 749,500 and 1,797,500 common shares for the three and nine months ended September 30, 2008 (September 30, 2007 - 1,922,500 and 1,922,500), respectively, were not included in the computation because they were anti-dilutive.
6. CAPITAL MANAGEMENT
The Corporation's objectives when managing its capital are: maintain financial flexibility so as to preserve the ability to meet its financial obligations, and finance its growth, which may include accessing capital markets and credit facilities to fund the drilling of exploration and development wells as well as potential property or corporate acquisitions.
The Corporation manages its capital structure and adjusts it as a result of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Corporation considers its capital structure to include shareholders' equity, bank debt and working capital and is shown in the table below. In order to maintain or adjust the capital structure, the Corporation may from time to time issue shares and adjust its capital spending to manage current and forecast debt levels.
Sept. 30, 2008 Dec. 31, 2007
----------------------------------------------------------------------------
Shareholders' equity $ 94,499,761 $ 72,483,559
Bank debt 7,087,800 12,855,623
Working capital (deficiency) excluding
bank debt $ (16,168,628) $ 23,516
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation manages its capital and financing requirements using the non-GAAP financial metric of the net debt to annualized funds from operations ratio. This ratio is calculated as net debt, defined as outstanding bank debt plus or minus working capital, divided by annualized funds from operations, defined as the most recent calendar quarter's cash flow from operating activities, before the change in non-cash working capital and asset retirement expenditures incurred, multiplied by four. The Corporation's strategy is to maintain a ratio of no more than 2 to 1. This ratio may increase at certain times as a result of acquisitions. This ratio is calculated as follows:
Sept. 30, 2008 Dec. 31, 2007
----------------------------------------------------------------------------
Current liabilities $ 34,046,456 $ 22,250,218
Current assets (10,790,028) (9,418,111)
----------------------------------------------------------------------------
Net debt 23,256,428 12,832,107
----------------------------------------------------------------------------
Cash flow from operating activities 4,583,228 2,867,479
Change in non-cash working capital 164,940 1,698,137
Asset retirement expenditures 8,552 16,869
----------------------------------------------------------------------------
Quarterly funds from operations 4,756,720 4,582,485
----------------------------------------------------------------------------
Annualized funds from operations $ 19,026,880 $ 18,329,940
----------------------------------------------------------------------------
Net debt to annualized funds from
operations ratio 1.2 : 1 0.7 : 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at September 30, 2008 and December 31, 2007, the Corporation's ratio of net debt to annualized funds from operations was within the acceptable range established by the Corporation. The increase in the ratio from December 31, 2007 to September 30, 2008 is primarily due to expenditures under the 2008 capital program being incurred in the first nine months of 2008. The Corporation expects the ratio will decrease during the fourth quarter of 2008 as the Corporation anticipates an increase in funds from operations to more than offset the impact of further indebtedness incurred as a result of fourth quarter expenditures under the 2008 capital program.
The Corporation's share capital is not subject to external restrictions; however, the bank debt facilities are based on petroleum and natural gas reserves (see note 3) and covenants. The Corporation has not paid or declared any dividends since the date of incorporation, nor are any contemplated at this time.
There were no changes in the Corporation's approach to capital management during the period.
7. COMMITMENTS
(A) Future minimum lease payments relating to operating leases for office space and equipment are:
2008 $ 254,985
2009 1,030,101
2010 945,447
2011 3,566
----------------------------------------------------------------------------
$ 2,234,099
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(B) FLOW-THROUGH COMMON SHARES
On December 20, 2007 the Corporation issued 2,029,100 flow-through common shares for gross proceeds of $7,000,395. Under the terms of the flow-through share agreements, the Corporation is required to renounce qualifying oil and natural gas expenditures in 2008 and has until December 31, 2008 to incur the expenditures. As at September 30, 2008 the Corporation had incurred $7,000,395 of qualifying expenditures and is not required to incur any additional expenditures.
On April 4, 2008 the Corporation issued 2,400,000 flow-through common shares for gross proceeds of $12,000,000. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $12,000,000 of qualifying oil and natural gas expenditures effective December 31, 2008 and has until December 31, 2009 to incur the expenditures. As at September 30, 2008 the Corporation had incurred $12,000,000 of qualifying expenditures and is not required to incur any additional expenditures.
8. FINANCIAL INSTRUMENTS
The Corporation has exposure to the following risks from its use of financial instruments: credit risk, liquidity risk, and market risk.
This note presents information about the Corporation's exposure to each of the above risks and the Corporation's objectives, policies and processes for measuring and managing risk. Further qualitative disclosures are included throughout these financial statements.
(A) CREDIT RISK
Credit risk is the risk of financial loss to the Corporation if a customer or counter-party to a financial instrument fails to meet its contractual obligations, and arises principally from the Corporation's receivables from purchasers of the Corporation's natural gas, crude oil and natural gas liquids and from joint venture partners. As at September 30, 2008 the Corporation's receivables consisted of $4,884,464 (December 31, 2007 - $4,552,556) from joint venture partners, $3,352,751 (December 31, 2007 - $2,078,846) from purchasers of the Corporation's natural gas, crude oil and natural gas liquids and $1,144,253 (December 31, 2007 - $1,259,862) of other trade receivables.
Receivables from purchasers of the Corporation's natural gas, crude oil and natural gas liquids are normally collected on the 25th day of the month following production. The Corporation's policy to mitigate credit risk associated with these balances is to establish marketing relationships with large purchasers. The Corporation has recently experienced a collection issue with one of its purchasers of natural gas, SemCanada Energy Company, and one of its purchasers of crude oil, SemCanada Crude Company. Both companies are Canadian subsidiaries of SemGroup, L.P. which recently filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in the United States. As of September 30, 2008, the Corporation is owed $949,462 and $97,146 from SemCanada Energy Company and SemCanada Crude Company, respectively. The Corporation has held preliminary discussions with several arms length parties with regards to the purchase and sale of the outstanding receivable balances from SemCanada Energy Company and SemCanada Crude Company. Based on these discussions and an internal evaluation of what portion, if any, of these amounts will be collectible, the Corporation has recorded a provision for bad debts of $523,304 as of September 30, 2008, which represents 50 percent of the outstanding amounts owed to it by SemCanada Energy Company and SemCanada Crude Company. The Corporation is continuing to work with its legal counsel to pursue the possible sale of the outstanding receivable balances to a third party and, accordingly, will update its provision for bad debts as circumstances deem it necessary. After reviewing the facts and sequence of events in this issue, the Corporation's management has concluded that these events could not have been detected, or detected earlier, by a standard credit risk program.
Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner. The Corporation attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital expenditures prior to commencement of the joint venture project. However, the receivables are from participants in the petroleum and natural gas sector, and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs and the risk of unsuccessful drilling. In addition, further risk exists with joint venture partners as disagreements occasionally arise that increase the potential for non-collection. The Corporation does not typically obtain collateral from joint venture partners; however, the Corporation has the ability to withhold production from joint venture partners in the event of non-payment.
Cash and cash equivalents, when outstanding, consist of cash bank balances and short-term deposits maturing in less than 90 days. The Corporation manages the credit risk exposure related to short-term investments by selecting counter-parties based on credit ratings and monitoring all investments to ensure a stable return, and also by avoiding complex investment vehicles with higher risk such as asset-backed commercial paper.
Derivative assets consist of commodity contracts used to manage the Corporation's exposure to fluctuations in commodity prices. The Corporation manages the credit risk exposure related to derivative assets by selecting counter-parties based on credit ratings and financial stability and by not entering into commodity contracts for trading or speculative purposes.
The carrying amount of accounts receivable, cash and cash equivalents and the fair value of commodity contracts represents the maximum credit exposure. The Corporation has an allowance for doubtful accounts as at September 30, 2008 in the amount of $523,304 which represents 50 percent of the outstanding amounts owed to it by SemCanada Energy Company and SemCanada Crude Company.
As at September 30, 2008 the Corporation considers its receivables to be aged as follows:
----------------------------------------------------------------------------
Not past due (less than 120 days) $ 9,216,494
Past due (over 120 days) 164,974
----------------------------------------------------------------------------
Total $ 9,381,468
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(B) LIQUIDITY RISK
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they are due. The Corporation utilizes prudent cash and debt management to mitigate the likelihood of encountering difficulties in meeting its financial obligations. As disclosed in note 6, the Corporation targets a net debt to annualized funds from operations ratio of no more than 2 to 1 to manage the Corporation's overall liquidity risk.
The Corporation prepares annual capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, the Corporation utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, the Corporation has a revolving reserve-based credit facility, as disclosed in note 3, that is reviewed semi-annually by the lender. The Corporation also attempts to match its payment cycle with collection of petroleum and natural gas revenues on the 25th of each month.
The following are the contractual maturities of financial liabilities as at September 30, 2008:
Financial Liability Less than 1 year 1 to 2 years Total
----------------------------------------------------------------------------
Accounts payable and
accrued liabilities $ 26,831,969 $ - $ 26,831,969
Bank indebtedness -
principal only(1) $ 7,087,800 $ - $ 7,087,800
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Amount is drawn against the Corporation's extendable revolving demand
facility. As the facility is demand in nature amounts outstanding are
classified as current liabilities implying they are due in one year or
less. Management fully expects the term of the facility to be extended.
(C) MARKET RISK
Market risk is the risk that changes in market prices, such as commodity prices, foreign exchange rates and interest rates, will affect the Corporation's net earnings or the value of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns.
Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by not only the relationship between the Canadian and United States dollars, but also by continental and worldwide economic events and natural phenomena such as the weather, all of which influence the levels of supply and demand. The Corporation utilizes commodity contracts as a risk management technique to mitigate exposure to commodity price volatility. Because the large majority of the Corporation's production is natural gas, plus the associated natural gas liquids, all of the Corporation's current commodity contracts are for natural gas.
The following table indicates the fair value of natural gas hedging contracts outstanding as at September 30, 2008 and indicates the unrealized losses on natural gas contracts for the periods then ended:
Average
Average AECO
AECO Spot
Volume Type of Spot floor ceiling
Period (GJ/d) contract (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
Apr. 2007 to Costless
Mar. 2008 1,000 Collar $7.00 $10.16
Nov. 2007 to Costless
Mar. 2008 1,500 Collar $7.50 $10.67
Costless $7.50-
Jan. to Dec. 2008 3,000 Collar $6.75 $9.12
Apr. to Oct. 2008 1,500 Swap $6.46 $6.46
Nov. to Dec. 2008 1,500 Swap $7.26 $7.26
Apr. to Oct. 2008 1,500 Swap $6.50 $6.50
Nov. 2008 to Costless
Mar. 2009 1,500 Collar $6.75 $11.09
Costless $9.00-
Jan. to Dec. 2009 1,000 Collar $6.50 $13.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unrealized
Unrealized gains (losses)
gains for the for the nine
Fair value of three months months
contract as at ended ended
Period Sept. 30, 2008 Sept. 30, 2008 Sept. 30, 2008
----------------------------------------------------------------------------
Apr. 2007 to Mar. 2008 - - $ (68,534)
Nov. 2007 to Mar. 2008 - - (164,411)
Jan. to Dec. 2008 $ 156,312 $ 2,124,195 (341,146)
Apr. to Oct. 2008 20,236 925,852 29,499
Nov. to Dec. 2008 54,599 486,800 62,664
Apr. to Oct. 2008 22,087 920,381 22,087
Nov. 2008 to Mar. 2009 98,616 584,091 98,616
Jan. to Dec. 2009 85,001 685,620 85,001
----------------------------------------------------------------------------
$ 436,851 $ 5,726,939 $ (276,224)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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. Although substantially all of the Corporation's petroleum and natural gas sales are denominated in Canadian dollars, the underlying market prices in Canada for petroleum and natural gas are impacted by changes in the exchange rate between the Canadian and United States currency.
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Corporation is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest.
The Corporation had no forward exchange rate contracts or interest rate swap contracts in place as at or during the period ended September 30, 2008 and 2007.
The following table summarizes the sensitivity of the fair value of the Corporation's market risk management positions to fluctuations in natural gas prices and interest rates. Both such fluctuations were evaluated independently, with all other variables held constant. In assessing the potential impact of these fluctuations, the Corporation believes that the volatilities presented below are reasonable measures. Fluctuations in natural gas prices, which would impact the mark-to-market calculation of commodity contracts, and interest rates could have resulted in the following impact on the net earnings:
Net earnings
-----------------------------------
Three months ended Sept. 30, 2008
----------------------------------------------------------------------------
Increase Decrease
----------------------------------------------------------------------------
Natural gas price - change of 10% $ (236,709) $ 293,491
Interest rate - change of 10% (1) $ (1,930) $ 1,930
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As at September 30, 2008, a 10 percent change to the Corporation's
effective interest rate would be equivalent to a change of 48 basis
points or 0.48 percent in the rate charged by the Corporation's bank.
(D) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation's financial instruments as at September 30, 2008 and December 31, 2007 include cash and cash equivalents, accounts receivable, derivative contracts, accounts payable and accrued liabilities and bank debt. The fair value of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities approximates their carrying amounts due to their short terms to maturity.
The fair value of derivative contracts is determined by discounting the difference between the contracted price and published forward price curves as at the balance sheet date, using the remaining contracted petroleum and natural gas volumes.
Bank debt bears interest at a floating market rate and accordingly the fair market value approximates the carrying value.
9. RELATED-PARTY TRANSACTIONS
During the three and nine months ended September 30, 2008, the Corporation incurred $11,758 and $132,354 in legal costs (December 31, 2007 - $124,000), respectively, to a law firm in which the Chairman of the Board of Directors and the Corporate Secretary of the Corporation are partners. The legal costs incurred were in the normal course of operations and were based on the exchange value of the services provided. Of the legal costs incurred in the nine months ended September 30, 2008, no amounts are included in accounts payable at September 30, 2008 (December 31, 2007 - $43,000).
Certain officers and directors of the Corporation purchased a total of 5,000 shares as part of the equity offering that closed on April 4, 2008, for total gross proceeds of $21,000.
OPEN RANGE ENERGY CORP. IS A PUBLICLY TRADED CANADIAN ENERGY COMPANY WITH FOCUSED OPERATIONS IN THE DEEP BASIN REGION OF ALBERTA.
OPEN RANGE HAS APPROXIMATELY 27.3 MILLION COMMON SHARES ISSUED AND OUTSTANDING WHICH TRADE ON THE TSX UNDER THE SYMBOL "ONR".
Reader Advisory
This news release contains certain forward-looking statements, which include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) cash flow; and (v) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. Such risks and uncertainties include, without limitation, risks associated with oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Open Range's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, Open Range will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive. All subsequent forward-looking statements, whether written or oral, attributable to Open Range or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Furthermore, the forward-looking statements contained in this news release are made as at the date of this news release and Open Range does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.
The Toronto Stock Exchange has neither approved nor disapproved of the information contained herein. | |
| CONTACT INFORMATION:
Open Range Energy Corp.
A. Scott Dawson, P.Eng.
President and Chief Executive Officer
(403) 205-3704
or
Open Range Energy Corp.
Lyle D. Michaluk, CA
Vice President, Finance and Chief Financial Officer
(403) 262-9280
Website: www.openrangeenergy.com
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| INDUSTRY: Energy and Utilities - Oil and Gas | |
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