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August 9, 2007
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Open Range Energy Corp. (TSX:ONR) Announces Second Quarter Operating Results
Including Record Production, Cash Flow From Operations and Earnings
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CALGARY, ALBERTA--(Marketwire - Aug. 9, 2007) -
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
Open Range Energy Corp. (TSX:ONR) ("Open Range" or the "Corporation") is pleased to announce details of its financial and operating results for the three and six months ended June 30, 2007.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Petroleum and
natural gas
revenues $ 5,555,957 $ 3,131,892 $ 9,991,800 $ 6,258,455
Funds from
operations 3,708,699 1,314,094 6,163,167 2,594,064
Per basic and
diluted share 0.19 0.09 0.33 0.19
Net earnings
(loss) 1,277,452 (720,653) 256,488 (1,128,395)
Per basic and
diluted share 0.06 (0.05) 0.01 (0.08)
Net debt 9,684,735 2,441,567 9,684,735 2,441,567
Capital
expenditures, net $ 11,284,524 $ 7,405,409 $ 23,869,797 $ 21,341,264
Weighted average
shares outstanding
Basic and diluted 19,763,841 14,084,655 18,901,963 13,808,720
Production
Natural gas (mcf
per day) 7,009 4,320 6,239 4,180
Oil and NGL (bbls
per day) 156 108 135 82
----------------------------------------------------------------------------
Total (@ 6:1) (boe
per day) 1,324 828 1,175 778
Realized average
sales prices
Natural gas ($ per
mcf) 7.43 6.28 7.62 7.06
Oil and NGL ($ per
bbl) 57.68 64.31 56.57 62.06
----------------------------------------------------------------------------
Combined average
($ per boe) 46.13 41.14 46.98 44.43
Royalties ($ per
boe) 4.32 5.12 5.60 8.96
Operating costs
($ per boe) 6.23 12.37 6.76 9.39
----------------------------------------------------------------------------
Operating netback
($ per boe) 35.58 23.65 34.62 26.08
General and
administrative
costs, net ($ per
boe) 4.78 6.51 5.63 7.66
----------------------------------------------------------------------------
Corporate netback
($ per boe) 30.80 17.14 28.99 18.42
----------------------------------------------------------------------------
----------------------------------------------------------------------------CORPORATE HIGHLIGHTS
DURING THE THREE MONTHS ENDED JUNE 30, 2007, OPEN RANGE:
- Drilled three gross (2.0 net) wells at Ansell/Sundance with a drilling success rate of 100 percent, encountering a total of 15 productive pay zones;
- Produced an average of 1,324 boe per day, a 60 percent increase from the Q2 2006 average and a 29 percent increase from the Q1 2007 average;
- Increased funds from operations by 182 percent and funds from operations per share by 111 percent over the comparable period in 2006, to $3.7 million and $0.19 per share, respectively;
- Improved operating netbacks by 50 percent from the second quarter in 2006 to $35.58 per boe, resulting from operating efficiencies;
- Recorded earnings of $1.3 million or $0.06 per share;
- Increased its bank lines to $25.5 million with the National Bank of Canada; and
- Expanded its Ansell/Sundance land position by 2,560 net acres through acquisition at an Alberta Crown land sale.
SUBSEQUENT TO JUNE 30, 2007, OPEN RANGE:
- Drilled two gross (1.0 net) wells, which were successful and encountered 10 potential productive pay zones; and
- Brought three (2.0 net) wells on-production, increasing current production to approximately 1,700 boe per day.
EXPLORATION UPDATE
During the second quarter of 2007, Open Range continued its excellent drilling results at Ansell/Sundance, with three new multi-zone natural gas wells (2.0 net) being drilled and cased. The first well (100 percent working interest) was drilled through spring break-up utilizing an existing multi-well pad. The other two (1.0 net) wells were drilled following break-up.
The three wells drilled in the second quarter intersected a combined total of 15 productive pay zones, all of which have been successfully fracture-stimulated. The quality and thickness of several of the pay zones were among the best encountered at Ansell/Sundance to date, with all the wells exhibiting excellent initial flow rates and pressures during testing. Collectively, four new pool discoveries were made in these wells, with one of these discoveries becoming the tenth commercial natural gas horizon encountered by Open Range at the property.
Open Range continued to expand its land position in the Ansell/Sundance area by acquiring a 100 percent working interest in approximately 2,500 acres through Alberta Crown land sales in the second quarter. Newly acquired and interpreted 3D seismic was used to evaluate the lands prior to the land sale. The acreage is considered highly prospective for multi-zone Deep Basin natural gas and plans are underway to drill an exploratory well on the lands in 2008. The land acquisition increases the Corporation's land holdings at Ansell/Sundance to more than 50 gross sections. More than 30 future development locations are now in inventory.
OPERATIONS UPDATE
Open Range's production averaged 1,324 boe per day in the second quarter of 2007, a 60 percent increase over the average of 828 boe per day for the comparative period in 2006. The Corporation's second quarter production was also up by 29 percent from the first quarter production average of 1,025 boe per day. The increase was a result of the tie-in of two (0.8 net) new wells at Ansell/Sundance and the return to production of one (0.5 net) well that was shut-in due to third-party capacity constraints in the first quarter of 2007.
Current net production from the Ansell/Sundance property is approximately 1,250 boe per day from 16 gross wells and a combined 41 pay zones. The production increases at Ansell/Sundance subsequent to June 30, 2007 are the result of three (2.0 net) wells drilled and completed in the first half of 2007 coming on production in July. Four (2.0 net) wells are currently waiting to be completed and are expected to come on production late in the third quarter, pending available third-party processing capacity.
The Corporation currently operates 23 mmcf per day of compression capacity at Ansell/Sundance. Open Range's significant drilling success has limited availability of third-party transportation and processing capacity in the area. As a result, Open Range is reviewing incremental natural gas delivery options to accommodate future drilling activities.
Production from the Corporation's Big Bend, Ferrier, and Garrington properties was 495 boe per day in the second quarter, little changed from the first quarter of 2007. There was no drilling activity at these properties during the second quarter of 2007.
OUTLOOK
Based on the Corporation's drilling success, strong balance sheet and natural gas hedging position achieved in the first half of 2007, Open Range has increased its capital investment program for 2007 to $40 million. The Corporation is utilizing this increase to drill an exploratory prospect in the Alberta foothills, to drill one additional gross well at Ansell/Sundance and to expand the Corporation's Deep Basin land base. Both additional wells are to be finished drilling in the fourth quarter with potential completion and tie-in activities likely occurring in the first quarter of 2008. At this time, previously stated average production guidance remains unchanged at 1,450 boe per day.
Open Range is well-positioned to continue delivering growth through drilling in the second half of 2007 despite the current natural gas market conditions. The Corporation has prudently established a successful natural gas price hedging program which sees average production of 5.5 mmcf per day hedged at an average floor price of $7.40 per mcf for the second half of 2007. The hedged volumes represent more than half of the Corporation's forecast average production for the second half. This approach to risk management has substantially mitigated the downside potential of the current natural gas price environment to Open Range.
Open Range remains prepared to accelerate activities further should natural gas prices show positive momentum. In the meantime, the Corporation continues to operate prudently with emphasis on managing debt levels, establishing operational efficiencies and continuing its growth strategy through exploratory and development drilling. This financial and operational discipline is already providing results in the form of record production, record cash flow from operations, record operating netbacks and record earnings in the second quarter of 2007.
Open Range is continuing to accumulate undeveloped land when available at its core Ansell/Sundance property, as well as crystallizing new exploration opportunities. This strategy, combined with the Corporation focusing a majority of its capital investment program on the drill bit, is designed to achieve consistent quarter-over-quarter growth while assembling an increasing supply of future development drilling inventory.
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 six-month periods ended June 30, 2007 and 2006. This MD&A should be read in conjunction with the unaudited interim financial statements for the three and six months ended June 30, 2007 and 2006, and the audited financial statements for the year ended December 31, 2006.
Open Range was formed and commenced operations on November 30, 2005. Open Range is an oil and natural gas exploration company, actively engaged in the exploration, development and acquisition of oil and natural gas primarily in the Deep Basin region of Alberta. The Corporation is traded on the Toronto Stock Exchange under the symbol "ONR".
BOE PRESENTATION
The use of barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion 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. Funds from operations provides an indication of the results generated by the Corporation's principal business activities before the consideration of how those activities are financed or how the results are taxed. 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. A summary of this reconciliation is presented as follows:
Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash flow from
operating
activities
(per GAAP) $ 4,624,227 $ 902,499 $ 6,995,300 $ 2,555,553
Change in non-cash
working capital (915,528) 411,595 (832,133) 38,511
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Funds from
operations $ 3,708,699 $ 1,314,094 $ 6,163,167 $ 2,594,064
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----------------------------------------------------------------------------FORWARD-LOOKING STATEMENTS
This MD&A contains certain forward-looking statements, which include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) cash flow; and (v) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond the Corporation's control. Such risks and uncertainties include, without limitation, risks associated with oil and natural gas exploration, development, exploitation, production, marketing and transportation, loss of markets, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, increased competition from other producers, inability to retain drilling rigs and other services, delays resulting from or inability to obtain required regulatory approvals and ability to access sufficient capital from internal and external sources, the impact of general economic conditions in Canada, the United States and overseas, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations) and changes in how they are interpreted and enforced, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of companies with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. The Corporation's actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that the Corporation will derive therefrom. Readers are cautioned that the foregoing list of factors is not exhaustive and reference is made to the items under "Risk Factors" in the Corporation's Annual Information Form (AIF) for the year ended December 31, 2006. 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.
This MD&A is dated August 9, 2007.
DETAILED FINANCIAL ANALYSIS
PRODUCTION
Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Production
Oil and NGL (bbls/d) 156 108 135 82
Natural gas (mcf/d) 7,009 4,320 6,239 4,180
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Total (boe/d) 1,324 828 1,175 778
----------------------------------------------------------------------------
% natural gas 88 87 88 90
----------------------------------------------------------------------------
----------------------------------------------------------------------------Open Range's production for the three and six months ended June 30, 2007 increased significantly from the comparative periods in 2006. The increase was a result of the successful drilling activity in the second half of 2006 and continuing throughout the first half of 2007. Production in the three and six months ended June 30, 2007 averaged 1,324 boe per day and 1,175 boe per day, respectively. This represented an increase of 60 percent and 51 percent, respectively, from the average production of 828 boe per day and 778 boe per day for the respective three and six month periods ended June 30, 2006. Natural gas production in the three and six months ended June 30, 2007 increased to 7,009 mcf per day and 6,239 mcf per day, respectively, from 4,320 mcf per day and 4,180 mcf per day, respectively, for the three and six months ended June 30, 2006. Oil and natural gas liquids (NGL) production in the three months ended June 30, 2007 increased by 44 percent to 156 barrels per day from 108 barrels per day in the second quarter of 2006. In the six months ended June 30, 2007, oil and NGL production increased 65 percent to 135 boe per day from 82 boe per day in the first half of 2006.
Open Range estimates that its average production for 2007 will be 1,450 boe per day.
OIL AND NATURAL GAS REVENUES
Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenue
Oil and NGL $ 816,198 $ 635,705 $ 1,385,991 $ 915,965
Natural gas (1) 4,739,759 2,496,187 8,605,809 5,342,490
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Total $ 5,555,957 $ 3,131,892 $ 9,991,800 $ 6,258,455
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Average realized
price
Oil and NGL ($/bbl) 57.68 64.31 56.57 62.06
Natural gas
($/mcf) 7.43 6.28 7.62 7.06
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Combined
average ($/boe) 46.13 41.14 46.98 44.43
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Benchmark pricing
Edmonton Par
(Cdn$/bbl) 72.66 79.06 70.19 74.17
Alberta Spot
(Cdn$/mcf) 7.06 5.87 7.17 6.61
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(1) Natural gas revenue includes realized gains on commodity contracts for
the three and six months ended June 30, 2007 of $20,563 and $44,753,
respectively.Revenue for the three months ended June 30, 2007 increased by 77 percent to $5.6 million from $3.1 million in the comparative period in 2006. The increase in revenue was a result of a 60 percent increase in production volumes and a 12 percent increase in the average sales price from the second quarter of 2006. In the first half of 2007, revenue increased by 60 percent to $10 million from $6.3 million in the comparative period in 2006. The increase was due to a 51 percent increase in production volumes and a 6 percent increase in the average sales price. The increase in average sales prices realized by Open Range for the three and six months ending June 30, 2007 is consistent with the increase in benchmark oil and natural gas prices. Open Range's average sales price for natural gas is at a premium to the Alberta natural gas spot benchmark price due to the high energy content of the Corporation's natural gas production.
UNREALIZED GAIN ON COMMODITY CONTRACTS
Open Range's management utilizes commodity contracts as a risk management technique to protect exploration and development economics, reduce volatility in cash flows and mitigate the unpredictable commodity price environment. During the second quarter and first half of 2007, the Corporation recorded unrealized gains on commodity contracts of $1.2 million and $11,642, respectively. These amounts represented the change in the fair value of the commodity contracts held by the Corporation during the three- and six-month periods ended June 30, 2007.
A listing of natural gas hedging contracts entered into as at June 30, 2007 is as follows:
Average Average
Monthly Monthly
AECO AECO
Spot Spot
Volume Floor Ceiling
Period (GJ/d) Type (Cdn$/GJ) (Cdn$/GJ)
----------------------------------------------------------------------------
January 1, 2007 to
December 31, 2007 2,500 Costless Collar $ 7.00 $ 10.20
January 1, 2007 to
December 31, 2007 1,250 Costless Collar $ 7.00 $ 8.00-$9.90
April 1, 2007 to
March 31, 2008 1,000 Costless Collar $ 7.00 $ 10.16
November 1, 2007 to
March 31, 2008 1,500 Costless Collar $ 7.50 $ 10.67
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For more details on these contracts refer to note 7, Commodity Price Risk
Management, in the unaudited interim financial statements for the three and
six months ended June 30, 2007.
ROYALTIES
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Royalty expense - oil
and NGL $ 336,501 $ 71,154 $ 303,529 $ 230,120
Royalty expense -
natural gas 184,271 318,945 887,743 1,031,779
----------------------------------------------------------------------------
Total $ 520,772 $ 390,099 $ 1,191,272 $ 1,261,899
$ per boe 4.32 5.12 5.60 8.96
% of sales 9 12 12 20
----------------------------------------------------------------------------Royalties totalled $0.5 million and $1.2 million for the second quarter and first half of 2007, respectively, compared to $0.4 million and $1.3 million, respectively, for the comparative periods in 2006. On a per unit of production basis, royalty costs were down by 16 percent and 38 percent from the second quarter and first half in 2006, respectively, mainly due to the receipt of deep well royalty holiday payments for wells at Ansell/Sundance. Royalties as a percentage of revenue for the six months ended June 30, 2007 also decreased to 12 percent from 20 percent in the comparative period in 2006.
Open Range anticipates an average royalty rate for 2007 of approximately 12 to 15 percent of revenue, reflecting the deep well royalty holidays being partially offset by the elimination of the Alberta Royalty Tax Credit program by the Alberta government on January 1, 2007. The Corporation expects the deep well royalty holiday to have a continuing beneficial effect on royalty expenses, due to Open Range's continued drilling of deep natural gas wells on qualifying lands.
OPERATING COSTS & NETBACK
($ per boe) Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Average realized sales
price 46.13 41.14 46.98 44.43
Royalty expenses 4.32 5.12 5.60 8.96
Operating costs
(including
transportation costs) 6.23 12.37 6.76 9.39
----------------------------------------------------------------------------
Operating netback 35.58 23.65 34.62 26.08
----------------------------------------------------------------------------The Corporation's operating netback for the second quarter and first half of 2007 increased to $35.58 per boe and $34.62 per boe, respectively, from $23.65 per boe and $26.08 per boe for the respective periods in 2006. The operating netback increased by 50 percent and 33 percent, respectively, for the three and six months ended June 30, 2007 from the respective periods in 2006. This was due to an increase in realized average sales price, a decrease in royalties and lower operating costs.
Operating costs including transportation costs were $0.8 million and $1.4 million for the three and six month periods ending June 30, 2007, respectively, compared to $0.9 million and $1.3 million for the comparative periods in 2006. On a per unit of production basis, operating costs for the second quarter and first half of 2007 were $6.23 per boe and $6.76 per boe, respectively. These amounts represent a 50 percent and 28 percent respective reduction from $12.37 per boe and $9.39 per boe for the comparative periods in 2006. The reductions are due primarily to operating efficiencies being realized at Ansell/Sundance as newly drilled wells are tied in. With production continuing to grow, Open Range expects operating costs, including transportation costs, to average approximately $7.00 per boe for the balance of 2007. Of the Corporation's operating costs, transportation costs were $0.1 million or $0.85 per boe for the second quarter and $0.2 million or $0.88 per boe for the first half of 2007.
GENERAL AND ADMINISTRATIVE (G&A) EXPENSES
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Gross $ 1,212,338 $ 1,003,965 $ 2,552,640 $ 2,087,078
Partner recovery (47,128) (86,457) (207,340) (162,903)
Capitalized G&A
costs (587,867) (405,674) (1,121,660) (809,594)
----------------------------------------------------------------------------
Net G&A $ 577,343 $ 511,834 $ 1,223,640 $ 1,114,581
$ per boe net 4.79 6.72 5.75 7.91
----------------------------------------------------------------------------G&A costs for the three months ended June 30, 2007 totalled $0.6 million or $4.79 boe after overhead recoveries and capitalization of $0.6 million. On a per boe basis G&A costs in the second quarter of 2007 declined by 29 per cent from $6.72 per boe in the second quarter of 2006. In the first half of 2007, net G&A costs per boe decreased by 27 percent to $5.75 from $7.91 in the first half of 2006. The reduction per boe was mainly due to the increased production in the second quarter of 2007 while net G&A costs grew only slightly. Capitalized G&A costs represented 48 percent of gross G&A costs in the second quarter of 2007 as the Corporation continued to focus on exploration activities and capitalized its exploration, geological and geophysical expenses.
Open Range expects its net G&A costs to average approximately $4.00 per boe for the remainder of 2007, reflecting the Corporation's continued forecast production growth combined with no significant planned increase in overall G&A spending.
INTEREST INCOME AND EXPENSE
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Interest income $ 37,591 $ 16,204 $ 89,697 $ 34,892
Interest expense 35,855 - 65,141 -
----------------------------------------------------------------------------
Net interest income $ 1,736 $ 16,204 $ 24,556 $ 34,892
$ per boe net 0.01 0.21 0.12 0.25
----------------------------------------------------------------------------Net interest income for the first half of 2007 was $24,556 or $0.12 per boe. The interest earned on available cash balances through short-term interest-bearing instruments at the beginning of the year was partially offset by interest expense paid on the Corporation's credit facility through the latter part of the first half of 2007.
Open Range's continuing exploration activity will require incurring some debt during the year. The Corporation continues to manage debt levels prudently and expects net interest expense to be relatively low for the year. Open Range's credit facility had $4.7 million drawn against it at June 30, 2007.
STOCK-BASED COMPENSATION
During the second quarter of 2007, stock-based compensation of $125,977 was expensed and $133,388 was capitalized. This resulted in total stock-based compensation for the three months ended June 30, 2007 of $259,365, compared to $173,021 for the second quarter of 2006. For the first six months of 2007 stock-based compensation of $251,888 was expensed and $248,884 was capitalized, compared to $267,900 expensed and $87,762 capitalized for the comparative six-month period in 2006. The increases in stock-based compensation expense in both reporting periods are due to the additional expense associated with the stock options granted subsequent to June 30, 2006. At June 30, 2007 there were 1,922,500 stock options outstanding compared to 1,302,000 outstanding at June 30, 2006.
DEPLETION, DEPRECIATION AND ACCRETION
Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Depletion and
depreciation $ 2,813,443 $ 1,992,215 $ 5,356,716 $ 3,535,365
Accretion 44,636 39,055 87,059 76,976
----------------------------------------------------------------------------
Total $ 2,858,079 $ 2,031,270 $ 5,443,775 $ 3,612,341
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Depletion and
depreciation ($/boe) 23.36 26.17 25.18 25.10
Accretion ($/boe) 0.37 0.51 0.41 0.55
----------------------------------------------------------------------------
Total ($/boe) 23.73 26.68 25.59 25.65
----------------------------------------------------------------------------Depletion, depreciation and accretion (DD&A) are calculated based upon cumulative capital expenditures, production rates and reserves. Open Range recorded $2.9 million or $23.73 per boe in DD&A for the three months ended June 30, 2007 compared to $2 million or $26.68 per boe for the comparative period in 2006. DD&A for the first half of 2007 increased to $5.4 million or $25.59 per boe from $3.6 million or $25.65 per boe in the first half of 2006. The per boe decrease is due to reserve additions in the first half of 2007 being partially offset by higher average production and the increased capital expenditures associated with drilling since June 30, 2006.
Open Range estimates depletion on a quarterly basis throughout the year using independent inputs such as reserve and land reports when available. Undeveloped land and seismic and salvage value of $12.8 million have been excluded in the calculation and future development costs of $2.8 million have been included in the capital base used in the calculation.
INCOME TAXES
For the quarter ended June 30, 2007 the Corporation recorded a future income tax expense of $0.6 million. In the six-month period ended June 30, 2007, a future income tax expense of $0.2 million was recorded. The Corporation does not expect to be cash taxable in 2007 based on current oil and natural gas prices and the planned capital expenditures for the year. During 2006, the Corporation issued $5.7 million in flow-through common shares. The future income tax liability associated with this flow-through share issuance was recorded during the first half of 2007.
The tax effect of the $12 million in flow-through shares issued during the first quarter of 2007 will be recorded in the first quarter of 2008 as the expenditures will be renounced to investors at that time. At June 30, 2007, the Corporation had incurred approximately $9 million of qualifying expenditures and is required to incur an additional $3 million of expenditures relating to this flow-through share issuance.
The Corporation estimates that at June 30, 2007 tax pools of $74.4 million are available for deduction against future taxable income.
EARNINGS (LOSS)
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Earnings (loss) $ 1,277,452 $ (720,653) $ 256,488 $(1,128,395)
Earnings (loss)
per basic and
diluted share 0.06 (0.05) 0.01 (0.08)
----------------------------------------------------------------------------The Corporation recorded net earnings of $1.3 million or $0.06 per basic and diluted share in the second quarter of 2007, compared to a net loss of $0.7 million or $0.05 per basic and diluted share for the comparative period in 2006. Net earnings for the six months ended June 30, 2007 were $0.3 million or $0.01 per basic and diluted share compared to a net loss of $1.1 million or $0.08 per basic and diluted share for the first half of 2006.
FUNDS FROM OPERATIONS
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Funds from
operations $ 3,708,699 $ 1,314,094 $ 6,163,167 $ 2,594,064
Funds from
operations per boe 30.79 17.26 28.98 18.42
Funds from
operations per
basic and diluted
share 0.19 0.09 0.33 0.19
----------------------------------------------------------------------------In the second quarter and first half of 2007 Open Range generated funds from operations of $3.7 million and $6.2 million, respectively, compared to $1.3 million and $2.6 million for the comparative periods in 2006. During the three months ended June 30, 2007 funds from operations increased by 182 percent and funds from operations per share increased by 111 percent from the second quarter of 2006. For the first half of 2007 funds from operations increased by 138 percent and funds from operations per share increased by 74 percent from the first half of 2006. The significant increase in funds from operations was due to stronger operating results, primarily driven by higher average production, as well as stronger netbacks which in turn were caused mainly by lower royalties and reductions to per-unit operating costs.
CAPITAL EXPENDITURES
(millions) Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Land $ 3.7 $ 0.1 $ 3.7 $ 5.3
Seismic - 2.1 0.2 3.3
Drilling and
intangibles 6.3 4.4 14.6 9.0
Facilities and
equipment 0.8 - 4.3 0.8
Other assets - - - 2.0
Capitalized G&A and
stock-based
compensation 0.7 0.9 1.4 0.9
----------------------------------------------------------------------------
Total capital
expenditures $ 11.5 $ 7.5 $ 24.2 $ 21.5
----------------------------------------------------------------------------Open Range's capital budget during both the current and previous reporting periods was focused heavily on drilling and completing wells. During the three months ended June 30, 2007, Open Range drilled three gross natural gas wells (2.0 net) at its core Ansell/Sundance property with a 100 percent success rate. In the first half of 2007, the Corporation drilled 12 gross wells (4.15 net) with a 100 percent success rate. Facilities and equipment expenditures for the six months ended June 30, 2007 relate mainly to the costs associated with connecting successful wells to existing infrastructure and the construction costs related to expanding compression capacity at Ansell/Sundance. The Corporation's average working interest on new wells during the second quarter of 2007 was 66.7 percent, the highest of any quarter for Open Range to date. During both reporting periods the Corporation invested substantially in new land acquisitions, in order to increase its inventory of drilling locations to support anticipated future growth.
Three months ended Six months ended
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June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
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Wells drilled Gross Net Gross Net Gross Net Gross Net
----------------------------------------------------------------------------
Exploration 3.0 2.0 3.0 1.25 7.0 3.80 6.0 2.49
Development - - 5.0 1.12 5.0 0.35 5.0 1.12
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Total 3.0 2.0 8.0 2.37 12.0 4.15 11.0 3.61
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Average working
interest 66.7% 29.6% 34.6% 32.8%
Success rate 100% 100% 100% 100%
----------------------------------------------------------------------------
SHARE CAPITAL
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Weighted average
common shares
outstanding - basic
and diluted 19,763,841 14,084,655 18,901,963 13,808,720
----------------------------------------------------------------------------Options to purchase 1,922,500 common shares for the three and six months ended June 30, 2007 and 1,302,000 common shares for the three and six months ended June 30, 2006 were not included in the computation of weighted average diluted shares outstanding because they were anti-dilutive.
Outstanding securities As at August 9, 2007
----------------------------------------------------------------------------
Common shares 19,763,841
Stock options 1,922,500
----------------------------------------------------------------------------
Total outstanding securities 21,686,341
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Proportion of outstanding securities held by officers
and directors 19%
---------------------------------------------------------------------------- During the first half of 2007, Open Range raised $12 million through a flow-through common share private placement. Also in the three month periods ended March 31, 2007 and June 30, 2007, the Corporation issued 20,000 stock options and 232,500 stock options, respectively, to employees. At June 30, 2007 the Corporation had 1,922,500 stock options outstanding with an average exercise price of $4.09.
RELATED-PARTY AND OFF-BALANCE-SHEET TRANSACTIONS
Open Range was not involved in any related-party or off-balance-sheet transactions during the three and six months ended June 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Open Range had a working capital deficiency of $9.7 million at June 30, 2007. In the second quarter of 2007, the Corporation had its bank lines increased to $25.5 million following the completion of its bank's annual review of the extendable revolving credit facility and the acquisition and development facility. The facilities were increased to $20 million and $5.5 million, respectively. The Corporation's credit facilities are subject to semi-annual review with the next review scheduled to occur by the end of August 2007. The facilities are borrowing base facilities that are determined based on, among other things, the Corporation's reserve report, production and operating results, and current and forecast commodity prices.
As at June 30, 2007
----------------------------------------------------------------------------
Bank lines available $ 25,500,000
Working capital deficiency including bank indebtedness (9,684,735)
----------------------------------------------------------------------------
Capital resources available $ 15,815,265
----------------------------------------------------------------------------
----------------------------------------------------------------------------The Corporation's capital expenditure budget for 2007 is anticipated to be $40 million. The capital program has been and is expected to continue to be funded through a combination of cash flow from operations, the credit facility and the flow-through common share financing that closed in February 2007.
QUARTERLY DATA
2007 2006 2005
----------------------------------------------------------------------------
Period
from
November
30 to
December
Q2 Q1 Q4 Q3 Q2 Q1 31
----------------------------------------------------------------------------
Production
Natural gas (mcf/d) 7,009 5,460 5,111 3,951 4,320 3,990 2,800
Oil and NGL (bbls/d) 156 115 81 74 108 54 45
----------------------------------------------------------------------------
Total (boe/d) 1,324 1,025 933 733 828 719 512
% natural gas 88 89 91 90 87 92 91
Financial
($000s except per
share amounts and
share numbers)
Revenue (1) 5,556 4,436 3,699 2,550 3,132 3,126 1,207
Net earnings (loss) 1,277 (1,021) (160) 361 (721) (408) 128
Net earnings (loss)
per basic and
diluted share ($) 0.06 (0.06) (0.01) 0.03 (0.05) (0.03) 0.01
Funds from
operations 3,709 2,454 1,931 1,615 1,314 1,280 617
Funds from operations
per basic and
diluted share ($) 0.19 0.14 0.12 0.11 0.09 0.10 0.06
Total assets (end of
period) 86,746 85,984 78,656 64,303 62,759 52,821 48,319
Capital expenditures 11,285 12,585 6,985 6,277 7,405 13,936 31,300
Weighted average
basic and diluted
shares (000s) 19,764 18,031 15,779 14,410 14,085 13,379 10,467
----------------------------------------------------------------------------
(1) Revenue includes realized gains on commodity contracts.Open Range's quarterly growth in production volumes, revenues, funds from operations, funds from operations per share and total assets is attributable to the active exploration and development drilling program at the Corporation's Deep Basin properties, particularly the Ansell/Sundance core area.
CONTRACTUAL OBLIGATIONS (1)(2)
Less
than 1-3 4-5 After 5
As at June 30, 2007 ($000s) Total 1 Year Years Years Years
----------------------------------------------------------------------------
Payments for office lease 3,057 895 2,162 - -
Payments for office equipment lease 48 13 35 - -
----------------------------------------------------------------------------
Total 3,105 908 2,197 - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The Corporation has entered into farm-in agreements in the normal course
of its business, which are not included in this table.
(2) The Corporation has entered into commodity contracts, which are not
included in this table. For a complete listing refer to note 7,
Commodity Price Risk Management, in the interim financial statements for
the three and six months ended June 30, 2007.FINANCIAL INSTRUMENTS
On January 1, 2007, the Corporation adopted the new Canadian accounting standards for financial instruments - Recognition and Measurement, Financial Instruments - Presentations and Disclosures, Hedging and Comprehensive Income. These accounting policies are detailed in note 1 to the financial statements. Prior periods have not been restated. The adoption of these standards did not impact the financial statements of the Corporation and did not result in any adjustments for the recognition or measurement of financial instruments as compared to the financial statements for periods prior to the adoption of these standards.
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, 2006.
The management of Open Range Energy Corp. is responsible for the integrity of the information contained in this quarterly report and for the consistency between the Management's Discussion and Analysis 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 August 9, 2007. 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 Management's Discussion and Analysis.
Balance Sheets
(Unaudited) As at June 30, 2007 As at December 31, 2006
----------------------------------------------------------------------------
ASSETS
Current assets:
Accounts receivable $ 7,478,430 $ 16,900,727
Prepaid expenses and
deposits 723,291 887,345
Fair value of commodity
contracts (note 7) 1,056,945 1,045,303
----------------------------------------------------------------------------
9,258,666 18,833,375
Future income taxes - 1,328,179
Property, plant and
equipment (note 2) 77,486,980 58,494,758
----------------------------------------------------------------------------
$ 86,745,646 $ 78,656,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank indebtedness (note 3) $ 4,734,340 $ 3,836,468
Accounts payable and accrued
liabilities 14,209,061 18,278,212
----------------------------------------------------------------------------
18,943,401 22,114,680
Future income taxes 607,765 -
Asset retirement obligations
(note 4) 2,219,988 1,994,891
Shareholders' equity:
Share capital (note 5) 64,197,383 54,526,892
Contributed surplus (note 5) 1,320,106 819,334
Deficit (542,997) (799,485)
----------------------------------------------------------------------------
64,974,492 54,546,741
Commitments (note 6)
----------------------------------------------------------------------------
$ 86,745,646 $ 78,656,312
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Operations and Retained Earnings (Deficit)
(Unaudited) Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Revenues:
Petroleum and
natural gas $ 5,535,394 $ 3,131,892 $ 9,947,047 $ 6,258,455
Royalties (net of
Alberta Royalty
Tax Credit) (520,772) (390,099) (1,191,272) (1,261,899)
Interest 37,591 16,204 89,697 34,892
Realized gain on
commodity
contracts
(note 7) 20,563 - 44,753 -
Unrealized gain
(loss) on
commodity
contracts (note 7) 1,168,139 (8,453) 11,642 (8,453)
----------------------------------------------------------------------------
6,240,915 2,749,544 8,901,867 5,022,995
Expenses:
Operating 750,879 932,069 1,438,277 1,322,803
General and
administrative 577,343 511,834 1,223,640 1,114,581
Stock-based
compensation 125,977 85,259 251,888 267,900
Interest 35,855 - 65,141 -
Depletion and
depreciation 2,813,443 1,992,215 5,356,716 3,535,365
Accretion of asset
retirement
obligations 44,636 39,055 87,059 76,976
----------------------------------------------------------------------------
4,348,133 3,560,432 8,422,721 6,317,625
----------------------------------------------------------------------------
Earnings (loss)
before income
taxes 1,892,782 (810,888) 479,146 (1,294,630)
Future income tax
expense
(reduction) 615,330 (90,235) 222,658 (166,235)
----------------------------------------------------------------------------
Net earnings (loss) 1,277,452 (720,653) 256,488 (1,128,395)
Retained earnings
(deficit),
beginning of
period (1,820,449) (279,584) (799,485) 128,158
----------------------------------------------------------------------------
Deficit, end of
period $ (542,997) $ (1,000,237) $ (542,997) $ (1,000,237)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per
share (note 5):
Basic $ 0.06 $ (0.05) $ 0.01 $ (0.08)
Diluted $ 0.06 $ (0.05) $ 0.01 $ (0.08)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to financial statements.
Statements of Cash Flows
(Unaudited) Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Cash provided by
(used in):
Operating:
Net earnings
(loss) $ 1,277,452 $ (720,653) $ 256,488 $ (1,128,395)
Items not
involving cash:
Depletion and
depreciation 2,813,443 1,992,215 5,356,716 3,535,365
Accretion of
asset
retirement
obligations 44,636 39,055 87,059 76,976
Future income
tax expense
(reduction) 615,330 (90,235) 222,658 (166,235)
Stock-based
compensation 125,977 85,259 251,888 267,900
Unrealized loss
(gain) on
commodity
contracts (1,168,139) 8,453 (11,642) 8,453
Change in
non-cash
working
capital 915,528 (411,595) 832,133 (38,511)
----------------------------------------------------------------------------
4,624,227 902,499 6,995,300 2,555,553
Financing:
Issue of common
shares, net of
issue costs (3,374) 5,270,350 11,291,558 11,785,179
Bank indebtedness 4,734,340 (468,100) 897,872 (468,100)
----------------------------------------------------------------------------
4,730,966 4,802,250 12,189,430 11,317,079
Investing:
Acquisition of
property, plant
and equipment (11,284,524) (7,405,409) (23,869,797) (21,341,264)
Change in
non-cash working
capital (2,457,241) 3,025,840 4,685,067 2,768,759
----------------------------------------------------------------------------
(13,741,765) (4,379,569) (19,184,730) (18,572,505)
----------------------------------------------------------------------------
Change in cash (4,386,572) 1,325,180 - (4,699,873)
Cash, beginning of
period 4,386,572 1,002,996 - 7,028,049
----------------------------------------------------------------------------
Cash, end of
period $ - $ 2,328,176 $ - $ 2,328,176
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest received $ 37,591 $ 16,204 $ 89,697 $ 34,892
----------------------------------------------------------------------------
Interest paid $ 35,855 $ - $ 65,141 $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash is defined as cash and cash equivalents.
See accompanying notes to financial statements.
Notes to Financial Statements
For the three and six months ended June 30, 2007
(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, 2006, 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, 2006. Certain comparative figures have been reclassified to conform to the current period's presentation.
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL INSTRUMENTS
On January 1, 2007, the Corporation adopted the new Canadian accounting standards for financial instruments - recognition and measurement, financial instruments - presentations and disclosures, hedging and comprehensive income. Prior periods have not been restated.
(A) FINANCIAL INSTRUMENTS - RECOGNITION AND MEASUREMENT
This new standard requires all financial instruments within its scope, including all derivatives, to be recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available for sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when derecognized or impaired. There were no changes to the measurement of existing financial assets and liabilities at the date of adoption.
(B) DERIVATIVES
The Corporation uses various types of derivative financial instruments to manage risks associated with natural gas price fluctuations. These instruments are not used for trading or speculative purposes. Proceeds and costs realized from holding the related contracts are recognized as revenues at the time that each transaction under a contract is settled. For the unrealized portion of such contracts, the Corporation utilizes the fair value method of accounting. The fair value is based on an estimate of the amounts that would have been paid to or received from counterparts to settle these instruments given future market prices and other relevant factors. The method requires the fair value of the derivative financial instruments to be recorded at each balance sheet date with unrealized gains or losses on these contracts recorded through net earnings.
The Corporation has elected to account for its commodity sales and other non-financial contracts, which were entered into and continue to be held for the purpose of receipt or delivery of non-financial items in accordance with its expected purchase, sale or usage requirements, as executory contracts on an accrual basis rather than as non-financial derivatives. Prior to adoption of the new standards, physical receipt and delivery contracts did not fall within the scope of the definition of a financial instrument and were also accounted for as executory contracts.
(C) EMBEDDED DERIVATIVES
On adoption, the Corporation elected to recognize, as separate assets and liabilities, only for those embedded derivatives in hybrid instruments issued, acquired or substantively modified after January 1, 2003. The Corporation did not identify any material embedded derivatives which required separate recognition and measurement.
(D) OTHER COMPREHENSIVE INCOME
The new standards establish a new statement of comprehensive income, which is comprised of net earnings and other comprehensive income. As the Corporation currently has no comprehensive income items requiring disclosure this statement of comprehensive income is not required.
There are also two new Canadian accounting standards that have been issued which will require additional disclosure in the Corporation's financial statements commencing January 1, 2008 concerning the Corporation's financial instruments as well as its capital and how it is managed.
2. PROPERTY, PLANT AND EQUIPMENT
June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Petroleum and natural gas properties $ 88,325,284 $ 64,003,179
Other assets 2,298,630 2,271,797
----------------------------------------------------------------------------
90,623,914 66,274,976
Accumulated depletion and depreciation (13,136,934) (7,780,218)
----------------------------------------------------------------------------
Net book value $ 77,486,980 $ 58,494,758
----------------------------------------------------------------------------
----------------------------------------------------------------------------During the three and six month periods ended June 30, 2007, the Corporation capitalized $721,255 and $1,370,544 (June 30, 2006 - $897,356), respectively, of overhead-related costs to petroleum and natural gas properties, of which $133,388 and $248,884 (June 30, 2006 - $87,762), respectively, related to stock-based compensation. The future tax liability of $42,844 and $92,219 (June 30, 2006 - $41,528) associated with the capitalized stock-based compensation has also been capitalized for the three and six months ended June 30, 2007, respectively.
Costs associated with unproved properties excluded from costs subject to depletion as at June 30, 2007 totalled $12,784,000 (June 30, 2006 - $10,520,000). Future development costs of proved reserves of $2,769,000 at June 30, 2007 (June 30, 2006 - $671,000) have been included in the depletion calculation.
During 2006, the Corporation disposed of certain interests in petroleum and natural gas properties for cash of $271,500, eliminating associated asset retirement obligations of $183,850.
3. BANK DEBT
The Corporation has a $20,000,000 extendable revolving credit facility and a $5,500,000 non-revolving acquisition/development demand facility with a Canadian chartered bank. These facilities bear interest at the bank's prime rate plus 0.125 percent per annum and the bank's prime rate plus 0.75 percent per annum, respectively. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $50,000,000 and a general security agreement. The Corporation's credit facilities are subject to semi-annual review with the next review scheduled to occur by the end of August 2007. As at June 30, 2007 $4,734,340 (December 31, 2006 - $3,836,468) had been drawn against the revolving credit facility and $nil (December 31, 2006 - $nil) had been drawn against the non-revolving demand facility.
The revolving facility had an effective interest rate of 6.125 percent at June 30, 2007 (December 31, 2006 - 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 as at June 30, 2007 is approximately $6,294,000 (December 31, 2006 - $5,335,000), to be incurred between 2007 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted, risk-free interest rate of 8 percent (2006 - 8 percent) was used to calculate the fair value of the asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
Six months ended Year ended
June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Balance, beginning of period $ 1,994,891 $ 1,896,045
Liabilities incurred 138,038 127,488
Dispositions (note 2) - (183,850)
Accretion expense 87,059 155,208
----------------------------------------------------------------------------
Balance, end of period $ 2,219,988 $ 1,994,891
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. SHARE CAPITAL
(A) ISSUED AND OUTSTANDING
Number of Shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2005 11,912,941 $ 34,925,714
Issued pursuant to private placements 4,021,300 15,408,315
Share repurchase (170,400) (526,230)
Issued pursuant to flow-through share
offering 1,000,000 5,700,000
Share issue costs (net of tax of
$459,314) - (980,907)
----------------------------------------------------------------------------
Balance, December 31, 2006 16,763,841 $ 54,526,892
Issued pursuant to flow-through share
offering 3,000,000 12,000,000
Share issue costs (net of tax of
$209,773) - (498,669)
Tax effect of flow-through shares
issued in 2006 - (1,830,840)
----------------------------------------------------------------------------
Balance, June 30, 2007 19,763,841 $ 64,197,383
----------------------------------------------------------------------------
----------------------------------------------------------------------------(B) SHARE OPTION PLAN
Under the Corporation's share option plan it may grant options to its employees for up to 1,976,384 shares, of which 1,922,500 had been granted as at June 30, 2007 (December 31, 2006 - 1,673,000). 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 date of grant.
Six months ended Year ended
June 30, 2007 December 31, 2006
----------------------------------------------------------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------------------------------------------------------------------------
Granted and outstanding,
beginning of period 1,673,000 $ 4.17 1,034,000 $ 4.61
Granted 252,500 3.52 780,000 3.65
Forfeited (3,000) 3.53 (141,000) 4.55
----------------------------------------------------------------------------
Granted and outstanding,
end of period 1,922,500 4.09 1,673,000 4.17
----------------------------------------------------------------------------
Exercisable at period-end 412,333 $ 4.39 302,666 $ 4.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table summarizes information about the fixed stock options
outstanding at June 30, 2007:
Options Outstanding Options Exercisable
----------------------------------------------------------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life (years) Exercisable Price
----------------------------------------------------------------------------
$2.65 - $3.40 454,000 $ 3.12 4.3 - $ -
$3.60 - $4.75 1,468,500 $ 4.39 3.7 412,333 $ 4.39
----------------------------------------------------------------------------
$2.65 - $4.75 1,922,500 $ 4.09 3.9 412,333 $ 4.39
----------------------------------------------------------------------------
----------------------------------------------------------------------------(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 during the six month period ended June 30, 2007: zero dividend yield, average expected volatility of 52 percent (December 31, 2006 - 41 percent), risk-free interest rate of 4.31 percent (December 31, 2006 - 4.04 percent), and expected life of five years (December 31, 2006 - five years). The fair value of stock options granted during the period was $1.75 per option (December 31, 2006 - $1.53 per option). The Corporation has not re-priced any stock options. The Corporation has not incorporated an estimated forfeiture rate for stock options that will not vest; rather, the Corporation accounts for actual forfeitures as they occur.
(D) CONTRIBUTED SURPLUS
----------------------------------------------------------------------------
Balance, December 31, 2005 $ 58,726
Stock-based compensation expense 762,618
Excess of share redemption amount over share stated
amount (note 5 (a)) (2,010)
----------------------------------------------------------------------------
Balance, December 31, 2006 $ 819,334
Stock-based compensation expense 500,772
----------------------------------------------------------------------------
Balance, June 30, 2007 $ 1,320,106
----------------------------------------------------------------------------
---------------------------------------------------------------------------- (E) PER SHARE AMOUNTS
Per share amounts have been calculated using the weighted average number of shares outstanding during the period. The following table details the basic and diluted common shares outstanding:
Three months ended Six months ended
----------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2007 2006 2007 2006
----------------------------------------------------------------------------
Weighted average
basic and diluted
common shares
outstanding 19,763,841 14,084,655 18,901,963 13,808,720
----------------------------------------------------------------------------
----------------------------------------------------------------------------Options to purchase 1,922,500 common shares for the three and six months ended June 30, 2007 (June 30, 2006 - 1,302,000) were not included in the computation because they were anti-dilutive.
6. COMMITMENTS
(A) Future minimum payments relating to operating leases for office space
and equipment are:
----------------------------------------------------------------------------
2007 $ 453,777
2008 907,554
2009 907,554
2010 832,989
2011 3,194
----------------------------------------------------------------------------
$ 3,105,068
----------------------------------------------------------------------------
----------------------------------------------------------------------------(B) FLOW-THROUGH COMMON SHARES
On February 22, 2007 the Corporation issued 3,000,000 flow-through common shares for gross proceeds of $12,000,000. Under the terms of the flow-through share agreements, the Corporation is required to renounce the $12,000,000 of qualifying oil and natural gas expenditures effective December 31, 2007 and has until December 31, 2008 to incur the expenditures. As at June 30, 2007 the Corporation had incurred $8,950,000 of qualifying expenditures and is required to incur an additional $3,050,000 of expenditures.
7. COMMODITY PRICE RISK MANAGEMENT
On June 23, 2006, the Corporation entered into a natural gas hedging transaction for 2,500 GJ per day for the period January 1, 2007 to December 31, 2007. This transaction consisted of the purchase of a $7.00 per GJ put option and the sale of a $10.20 per GJ call option. During the three and six months ended June 30, 2007 there were net settlement payments to the Corporation of $10,823 and $26,950, respectively, relating to this contract. The Corporation would have received $457,733 if the contract had been settled at June 30, 2007 (December 31, 2006 - $750,940).
On November 20, 2006, the Corporation entered into a natural gas hedging transaction for 1,250 GJ per day for the period January 1, 2007 to December 31, 2007. This transaction consisted of the purchase of a $7.00 per GJ put option, the sale of an $9.90 per GJ call option for the period January 1, 2007 to March 31, 2007, the sale of an $8.00 per GJ call option for the period April 1, 2007 to October 31, 2007 and the sale of a $9.90 per GJ call option for the period November 1, 2007 to December 31, 2007. During the three and six months ended June 30, 2007 there were net settlement payments to the Corporation of $5,411 and $13,474, respectively, relating to this contract. The Corporation would have received $219,533 if the contract had been settled at June 30, 2007 (December 31, 2006 - $294,363).
On February 8, 2007, the Corporation entered into a natural gas hedging transaction for 1,000 GJ per day for the period April 1, 2007 to March 31, 2008. This transaction consisted of the purchase of a $7.00 per GJ put option and the sale of a $10.16 per GJ call option. During the three and six months ended June 30, 2007 there was a net settlement payment to the Corporation of $4,329 relating to this contract for each period. The Corporation would have received $210,097 if the contract had been settled at June 30, 2007.
On February 8, 2007, the Corporation entered into a natural gas hedging transaction for 1,500 GJ per day for the period November 1, 2007 to March 31, 2008. This transaction consisted of the purchase of a $7.50 per GJ put option and the sale of a $10.67 per GJ call option. During the three and six months ended June 30, 2007 there were no net settlement payments relating to this contract. The Corporation would have received $169,582 if the contract had been settled at June 30, 2007.
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 19.8 MILLION COMMON SHARES ISSUED AND OUTSTANDING WHICH TRADE ON THE TSX UNDER THE SYMBOL "ONR".
Reader Advisory
This news release contains certain forward-looking statements, which include assumptions with respect to (i) production; (ii) future capital expenditures; (iii) funds from operations; (iv) cash flow; and (v) debt levels. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. All such forward-looking statements involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. Such risks and uncertainties include, without limitation, risks associated with oil and 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.
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CONTACT INFORMATION:
Open Range Energy Corp.
A. Scott Dawson, P.Eng.
President and Chief Executive Officer
(403) 205-3704
or
Open Range Energy Corp.
Lyle D. Michaluk, CA
Vice President, Finance and Chief Financial Officer
(403) 262-9280
Website: www.openrangeenergy.com
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INDUSTRY: Energy and Utilities - Oil and Gas
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