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ROK Resources Inc. Interim / Quarterly Report 2021
45743_rns_2021-08-27_2fe14bd7-809e-47e0-ab21-448b715a080a.pdf
Interim / Quarterly Report
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ROK RESOURCES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
The following is management's discussion and analysis ("MD&A") of the operating and financial results of ROK Resources Inc. ("ROK" or the "Company") for the three and six months ended June 30, 2021, as compared to the three and six months ended June 30, 2020, as well as information and expectations concerning the Company's outlook based on currently available information.
This MD&A should be read in conjunction with ROK's interim condensed financial statements for the three and six months ended June 30, 2021 as well as the audited annual financial statements for the year ended December 31, 2020 (collectively, the "Financial Statements") prepared in accordance with IFRS (as defined below), together with the accompanying notes.
This MD&A contains forward-looking information about our current expectations, estimates, projections and assumptions. Additional information on the Company, its financial statements, this MD&A and other factors that could affect the Company's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).
All dollar values are expressed in Canadian dollars, unless otherwise indicated, and are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standard Board ("IASB").
This MD&A is prepared as of August 27, 2021.
NON-IFRS MEASURES
The non-IFRS measures referred to below do not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures used by other companies. Management uses this non-IFRS measurement to provide its shareholders and investors with a measurement of the Company's financial performance and are not intended to represent operating profits nor should they be viewed as an alternative to cash provided by operating activities, net income or other measures of financial performance calculated in accordance with IFRS. The reader is cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used. Funds used in operations ($) Q2 2021 Q2 2020 YTD 2021 YTD 2020 Cash used in operating activities (308,562) (177,598) (451,779) (357,569) Change in non-cash working capital 190,873 (35,290) 136,743 (12,931) Funds used in operations (117,689) (212,888) (315,036) (370,500)
Funds Used in Operations
"Funds Used in Operations" include all cash used in operating activities and are calculated before the change in noncash working capital. A reconciliation of cash used in operating activities to funds used in operations for the three and six months ended June 30, 2021 and 2020, are as follows:
| Funds used in operations ($) | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 |
|---|---|---|---|---|
| Cash used in operating activities | (308, 562) | (177, 598) | (451,779) | (357, 569) |
| Change in non-cash working capital | 190.873 | (35, 290) | 136.743 | (12, 931) |
| Funds used in operations | (117.689) | (212.888) | (315.036) | (370,500) |
Operating Income and Netback
"Operating Income" is calculated by deducting operating expense from total revenue. Total revenue is comprised of oil and gas sales, net of royalties. The Company refers to Operating Income expressed per unit of production as an "Operating Netback". "Operating Income Profit Margin" is calculated by the Company as Operating Income as a
| percentage of oil and natural gas sales. A reconciliation of the measures for the three and six months ended June | ||||
|---|---|---|---|---|
| 30, 2021 and 2020, are as follows: | ||||
| YTD 2021 | ||||
| Q2 2021 | Q2 2020 | YTD 2020 | ||
| Crude Oil and Natural Gas Sales | 709,209 | - | 1,149,236 | - |
| Royalties | (136,277) | - | (220,469) | - |
| Operating Expenses | (265,088) | - | (480,653) | - |
| Operating Income | 307,844 | - | 448,114 | - |
| Sales volume (boe) | 15,101 | - | 28,587 | - |
| Per boe | ||||
| Crude Oil and Natural Gas Sales | 46.96 | - | 40.20 | - |
| Royalties | (9.02) | - | (7.71) | - |
| Operating Expenses | (17.55) | - | (16.81) | - |
| Operating Netback per boeOperating Income Profit Margin | 20.3943.4% | -- | 15.6839.0% | -- |
BUSINESS PROFILE AND STRATEGY
The Company's head office is located in Regina, Saskatchewan, Canada, and the Company's shares are traded on the TSX Venture Exchange ("TSXV") under the trading symbol "ROK". In recent years, the Company has established its oil and gas operations in the region of Southeast Saskatchewan via the acquisition of land leases with prospective mineral rights and developed production assets.
Even though these events have improved the financial condition of the Company, the lack of positive cash inflow from operations may mean that any future strategic opportunities for the Company or the development of petroleum and natural gas properties may require additional financing to execute. The Board of Directors and management continue to develop its existing properties to maximize production from existing reserves, and have also continued to review all potential transactions available to the Company with the mission to identify viable and lucrative opportunities that may provide the best future for the Company and the shareholders with the goal to maximize shareholder value.
2020 TRANSACTIONS
Glen Ewen Asset Acquisition
On June 30, 2020, the Company closed the acquisition of certain producing petroleum and natural gas properties located within the Glen Ewen area of Southeast Saskatchewan, targeting the Midale and Frobisher Beds. The acquired assets included associated facilities and undeveloped land directly adjacent to the Company's existing land base within the project area, as well as associated liabilities relating to future abandonment obligations on well and facility sites. This contiguous area allows for cost effective development of ROK's previously undeveloped lands utilizing existing processing capacity, water disposal and pipeline infrastructure. The acquisition package also contained 27 suspended wells and 11 inactive facility sites, which continue to be evaluated for future reactivation.
2021 TRANSACTIONS
Non-Operated Carnduff Acquisition
In February 2021, the Company acquired a non-operated working interest in producing and non-producing oil and gas assets, along with an interest in a multi-well facility in Southeastern Saskatchewan. Total consideration for the
acquisition was the assumption of all liabilities associated with the acquired assets. Company estimates of future abandonment and reclamation obligations for the acquired assets are approximately $350,000.
Non-Operated Florence Asset Acquisition
In April 2021, the Company closed the acquisition of non-operated working interest in certain producing petroleum and natural gas properties located within the Florence area of Southeastern Saskatchewan. Total consideration for the acquisition is $1,500,000 in cash and 2,000,000 Class B Shares of the Company. The acquisition property is located within the Company's core operating area in Southeast Saskatchewan, targeting the Midale and Frobisher formations. The acquired assets also include associated facilities and land, as well as associated liabilities relating to future abandonment obligations on well and facility sites.
Operated Florence Asset Acquisition
In May 2021, the Company closed the acquisition of operated working interest in certain producing petroleum and natural gas properties located within the Florence area of Southeastern Saskatchewan. Total consideration for the acquisition is $2,500,000 in cash and 2,250,000 Class B Shares of ROK. The acquired assets also include associated facilities and land, as well as associated liabilities relating to future abandonment obligations on well and facility sites.
Carievale Farm-In
In March 2021, the Company entered into a farmout agreement (the "Farm-In") to acquire the rights to earn certain oil and gas assets (the "Undeveloped Assets") in Southeastern Saskatchewan. ROK will participate in the drilling, completion and equipping of two earning wells, paying 70% of the costs to earn a 35% working interest in the earning wells, plus a 35% working interest in 2,900 gross acres of prospective land in the Undeveloped Assets. Furthermore, prior to March 31, 2022, ROK has the option to purchase up to a 50% interest in the Undeveloped Assets, which includes two producing oil and gas wells.
Lithium Exploration Management Agreement
In July 2021, the Company entered into an exploration management agreement wherein the Company was issued a 25% interest in a private entity which currently holds certain Subsurface Mineral Dispositions in Saskatchewan, with a focus on potential lithium resource prospects. Under the terms of the agreement, the Company earns its beneficial interest as ROK personnel will manage the following objectives of the project:
- Identify additional strategic lithium land prospects
- Complete multi-layer perforation and flow testing of a wellbore
- Obtain samples and conduct test for lithium concentrations
- Identify a location for a pilot project
- Identify a strategic partner to negotiate a lithium extraction technology pilot project
- Obtain a third party NI43-101 resource report; and
- Facilitate the completion of a preliminary economic assessment
The initial activities of this project will be wholly funded by the Company's partner (who holds the remaining 75% interest), up to $1.5 million. Any costs that exceed this financial threshold will then be proportionally financed by each partner based on their interest in the private entity. Alternatively, either partner may elect to proportionally reduce their interest in the private entity for any portion of additional costs above the threshold. These additional costs beyond the initial $1.5 million may be voluntarily paid for by the other partner who elects to participate in additional project activities, earning a proportionally increased interest in the private entity.
Beyond the involvement of ROK personnel towards the completion of project management objectives outlined above, the Company retains no financial obligations under this agreement.
COVID-19 PANDEMIC
More than a year after being declared a global pandemic by the World Health Organization in March 2020, COVID-19 continues to impact global economic conditions. Global financial markets, and commodity prices in particular, have experienced significant volatility and uncertainty. Crude oil and natural gas prices have recovered from the historic lows observed in the first two quarters of 2020 and exceeded pre-pandemic levels during the first half of 2021. While the current outlook for commodity prices is relatively strong, long-term price support from future demand remains uncertain. The scale and duration of these developments remain uncertain but could impact the Company's operations, future net earnings and cash flows given the COVID-19 pandemic is an evolving situation that will continue to have widespread implications for the Company's business environment and financial condition. Management cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact the Company's financial statements in fiscal 2021 and beyond.
LIQUIDITY AND CAPITAL RESOURCES
The Company's approach to managing liquidity is to ensure a balance between expenditure requirements and cash used in operations and working capital. As at June 30, 2021, the Company had working capital of $1.6 million ($1.6 million at December 31, 2020) comprised mostly of cash and cash equivalents. Changes in working capital have been primarily due to oil and natural gas sales, net of royalties and operating expenses, as well as general and administrative costs, business development expenses, and acquisition costs of the Company incurred during the year.
In the past year, the Company has acquired petroleum and natural gas assets with production capabilities. Until such time that these new producing assets generate sufficient cash flow to fund the Company's operations, the Company will continue to rely upon its remaining financial resources to fund administrative costs and the development of its oil and gas properties. These conditions indicate the existence of a material uncertainty that casts significant doubt about the Company's ability to continue as a going concern. While the Company intends to move forward with the development of its oil and gas assets, there is no guarantee that the Company will be successful in its exploration and development activities. The continued volatility of commodity prices and the COVID-19 global pandemic and its impact on the economy further increases the risk associated with the probability of success for the Company's oil and gas properties.
Based on current information, the Company anticipates that its working capital is sufficient to meet its expected ongoing obligation for the coming year. Any further material acquisitions would require additional financing prior to the realization of such transactions.
Debt Note Financing
In June 2021, the Company completed the first tranche of $3,500,000 of senior secured notes of the Company ("Notes"), with each Note consisting of a principal amount of $1,000 and with interest payable thereon at a rate of 14% per annum over a term of three years from the date of issuance thereof (the "Note Financing"). In July 2021, a second tranche of $500,000 of Notes was closed by the Company under the same terms. The Company has the option to fully repay the Notes at no penalty after two years from the date of issuance. Similarly, the Noteholders can demand repayment after two years from the date of issuance. Payments of interest only will be made during the first year of the term of the Notes and blended payments of interest and principal will be made during the second and third year of the term of the Notes. The Notes are secured by the assets of the Company and are senior to all other indebtedness of the Company.
In addition, 500 purchase warrants were issued to participants in the Note Financing for each $1,000 principal amount of Notes purchased, with each purchase warrant being exercisable for one Class B Share at an exercise price of $0.35 per warrant for a period of two years.
Private Placement Offerings
In May 2021, the Company completed the first closing of a private placement financing for a total of $1,790,000, whereby 8,950,000 units of the Company were issued at a price of $0.20 per unit. In June 2021, the second closing of the aforementioned private placement for a total of $410,000 through the issuance of an additional 2,050,000 was completed, bringing total gross proceeds to $2,200,000, before issuance costs, for 11,000,000 units. Each unit consists of one Class B Share in the capital of the Company and one half of one purchase warrant. Each purchase warrant is exercisable for one Class B Share at an exercise price of $0.35 per purchase warrant for a period of 2 years. Commissions were paid to various brokers and finders in an amount of approximately $56,000 plus the issuance of a total of 280,000 broker warrants, with each such broker warrant exercisable for one Class B Share at an exercise price of $0.35 per broker warrant for a period of two years.
In November 2020, the Company closed a private placement financing consisting of units of the Company at a price of $0.20 per unit for total gross proceeds of $1,392,000. Each unit consisted of one Class B Share in the capital of the Company and included one half of one Class B Share purchase warrant, with each warrant exercisable to purchase one Class B Share at a price of $0.30 for a period of twenty four months from the date of issuance. A total of 6,960,000 units were issued pursuant to the offering. The Class B Shares and warrants issued pursuant to the offering are subject to a hold period of four months and a day from the closing date. While the offering was non-brokered, $14,000 was paid in finders fees and commissions to various brokers who assisted with finding subscribers to the offering, in addition to the issuance of 70,000 broker warrants with the same terms as the purchase warrants.
In July 2020, the Company closed a private placement financing consisting of units of the Company at a price of $0.065 per unit for total gross proceeds of $500,000. Each unit consisted of one Class B Share in the capital of the Company and included one Class B Share purchase warrant, with each warrant exercisable to purchase one Class B Share at a price of $0.15 for a period of twenty four months from the date of issuance, expiring on July 31, 2022. A total of 7,692,308 units were issued pursuant to the offering. The Class B Shares and warrants issued pursuant to the offering are subject to a hold period of four months and a day from the closing date, expiring on December 1, 2020. While the offering was non-brokered, approximately $8,000 was paid in finders fees and commissions to various brokers who assisted with finding subscribers to this offering.
The Company uses the proceeds from these private placement offerings and Note Financing for general corporate purposes as well as the acquisition, operation, and development of the assets in Southeastern Saskatchewan.
PETROLEUM AND NATURAL GAS PROPERTIES
ROK has an acreage position of 7,300 gross (6,500 net) acres within the Glen Ewen and Florence area of Southeast Saskatchewan. This area has historical production from both the Midale and Frobisher beds directly adjacent to the ROK acreage. Mapping of the regionally dominant SW to NE structural highs within this area has allowed for the identification of multiple drilling targets.
The recent successful application of hydraulic fracture stimulation within the Glen Ewen area has created an opportunity to apply similar completion techniques to the Midale beds throughout the Glen Ewen and Florence project areas. Although the Midale has historically been produced conventionally within the Florence area, the interbedded nature of the rock suggests that superior results would be achieved through the use of horizontal fracturing technology.
In addition to horizontal fracture exploitation of the Midale formation, the Company intends to target conventional horizontal drilling of the Frobisher beds. The ROK management team has extensive geological, geophysical and operational experience in the development of both of these plays.
OUTLOOK
Management's primary objective is to continue to move the Company forward and increase value for shareholders. With the recent asset acquisitions in the Florence and Carnduff areas, the Company has strengthened its balance sheet by adding production and cashflow, in addition to booked and unbooked drilling locations. A growth and development strategy for 2021 is underway, which may include additional strategic acquisitions, an equity raise, well reactivations and drilling and completion of new wells. The goal is to grow ROK's southeast Saskatchewan asset base, while continuing to evaluate larger scale assets that will provide long term value growth for the Company well into the future. Given the continued strengthening in oil pricing and increased optimism in the energy sector, 2021 will continue to be a busy year for the Company.
COMMITMENT SUMMARY UPDATE
Mineral Lease Commitments
The Company has financial commitments for fees and taxes related to the existing mineral leases held in Saskatchewan that equate to a total financial commitment of approximately $260,000 per year. Fees or royalties on production are only derived once production is realized on existing mineral leases.
Carievale Farm-In Commitments
In March 2021, the Company entered into the aforementioned Farm-In to acquire the rights to earn certain oil and gas assets in Southeastern Saskatchewan. Under the terms of the Farm-In, ROK must participate in the drilling, completion and equipping of two earning wells, paying 70% of the costs to earn a 35% working interest in the earning wells, plus a 35% working interest in 2,900 gross acres of prospective land in the Undeveloped Assets. The Company currently estimates related costs for the two earning wells to be $1.4 million to the Company. The first commitment well was spud on July 22, 2021. The second commitment well must be spud by October 1, 2021, under the terms of the Farm-In. Q2 2021 Q2 2020 YTD 2021 YTD 2020 Crude oil (bbl/d) 98 - 81 - NGLs (boe/d) 35 - 38 - Natural gas (Mcf/d) 201 - 233 - Total (boe/d) (1) Q2 2021 Q2 2020 YTD 2021 YTD 2020
DISCUSSION OF OPERATING RESULTS
Production
| DISCUSSION OF OPERATING RESULTS | ||||
|---|---|---|---|---|
| Production | ||||
| (1)Measures" at the end of this MD&A. | 166Barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. Refer to the section entitled "Conversion | - | 158 | - |
| Crude Oil and Natural Gas Sales | ||||
| Crude Oil | 656,481 | - | 1,024,887 | - |
| NGLsNatrual gas | 36,00316,725 | -- | 81,75842,591 | -- |
Crude Oil and Natural Gas Sales
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
|---|---|---|---|---|
| Crude Oil | 656,481 | $\overline{\phantom{a}}$ | 1,024,887 | - |
| NGLs | 36,003 | $\overline{\phantom{a}}$ | 81,758 | - |
| Natrual gas | 16.725 | $\overline{a}$ | 42.591 | - |
| Total | 709.209 | - | 1,149,236 |
Realized Sales Prices
| Realized Sales Prices | ||||
|---|---|---|---|---|
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
| Crude oil ($/bbl) | 73.77 | - | 69.89 | - |
| NGLs ($/boe) | 11.43 | - | 11.86 | - |
| Natural gas ($/Mcf) | 0.91 | - | 1.01 | - |
| Total ($/boe) | 46.96 | - | 40.20 | - |
| Royalties | ||||
| Royalties as a percentage of total oil and natural gas sales are highly sensitive to commodity prices and adjustments | ||||
| to gas cost allowance. Thus, royalty rates can fluctuate from quarter-to-quarter and year-to-year. Royalties, as a | ||||
| percentage of crude oil and natural gas sales and royalties per boe are as follows: | ||||
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
| Total royalties | 136,277 | - | 220,469 | - |
| Total royalties (% of sales) | 19.2% | - | 19.2% | - |
| Total royalties ($/boe) | 9.02 | - | 7.71 | - |
| Operating Expenses |
Royalties
| Royalties as a percentage of total oil and natural gas sales are highly sensitive to commodity prices and adjustmentsto gas cost allowance. Thus, royalty rates can fluctuate from quarter-to-quarter and year-to-year. Royalties, as apercentage of crude oil and natural gas sales and royalties per boe are as follows: | ||||
|---|---|---|---|---|
| Operating costs include expenses incurred to operate wells, gather and treat production volumes as well as costs toperform well and facility repairs and maintenance. Total operating expenses and operating expenses per boe are asfollows: | ||||
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
| Total operating expenses | 265,088 | - | 480,653 | - |
Operating Expenses
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
|---|---|---|---|---|
| Total operating expenses | 265.088 | - | 480.653 | |
| Total operating expenses ($/boe) | 17.55 | 16.81 |
General and Administrative Expenses
| Operating costs include expenses incurred to operate wells, gather and treat production volumes as well as costs toperform well and facility repairs and maintenance. Total operating expenses and operating expenses per boe are asfollows: | ||||
|---|---|---|---|---|
| A portion of operating costs pertain to gas & liquid gathering and third-party water disposal and fluid treatment.Operating cost reduction will be a focus of the Company moving forward.General and Administrative ExpensesGeneral and administrative expenses ("G&A") for the three and six months ended June 30, 2021, were $421,249 and$676,762, respectively ($156,237 and $304,753 for the three and six months ended June 30, 2020, respectively). The | ||||
| increase in G&A is due to increase in overall business activity of the Company in 2021 when compared to 2020. | ||||
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
| Professional Fees | 88,496 | 13,818 | 123,576 | 21,685 |
| Wages & Salaries | 151,894 | 104,248 | 301,939 | 209,911 |
| Fees, Rent, Investor Relations and OtherTotal | 180,859421,249 | 38,171156,237 | 251,247676,762 | 73,157304,753 |
Business Development Expenses
Business development expenses relate to business initiatives towards the promotion, development, and growth of the Company's operations and assets outside the normal course of the Company's day-to-day endeavours. For the six months ended June 30, 2021, the Company incurred business development expenses of $81,726 relating to efforts towards strategic acquisition (June 30, 2020 - $65,747).
Stock-Based Compensation
Depletion and Depreciation
Finance Expenses
| Stock-Based Compensation | ||||
|---|---|---|---|---|
| For the six months ended June 30, 2021, the Company recorded stock-based compensation expense of $16,781($54,732 for the six months ended June 30, 2020). Stock options were granted in Q4 2019, with the vesting of theseoptions accounting for the majority of stock-based compensation expense in each respective period. | ||||
| Depletion and Depreciation | ||||
| The carrying costs for property, plant and equipment directly associated with oil and gas operations, includingestimated future development costs, are recognized as depletion expense in the statements of loss andcomprehensive loss on a unit of production basis over proved plus probable reserves. The carrying costs of office | ||||
| and computer equipment are recognized as depreciation expense in the statements of loss and comprehensive losson a straight-line or declining-balance basis.For the six months ended June 30, 2021, the Company recorded depletion expense of $361,900 ($nil for thecomparative period to June 30, 2020). Depletion is calculated based on oil and gas production on the Company'sdeveloped properties. | ||||
| Finance Expenses | ||||
| Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | |
| Interest income | (100) | (694) | (213) | (3,341) |
| Interest expense & bank charges | 905 | 536 | 1,360 | 1,069 |
| Debt interest expense | 48,329 | - | 48,329 | - |
| Accretion on debt notes | 11,694 | - | 24,732 | - |
| Accretion on decommissioning obligationsTotal | 4,38265,210 | -(158) | 4,38278,590 | -(2,272) |
FINANCIAL RISK MANAGEMENT
The Company has exposure to the following risks from its use of financial instruments:
- Credit risk
- Liquidity risk
- Market risk
This note presents information about the Company's exposure to each of the above risks and the Company's objectives, policies, and processes for measuring and managing these risks, and the Company's management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the Company's risk management framework. The Company's risk management policies are established to identify and analyze the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company's activities.
Credit risk
Credit risk reflects the risk of loss if counterparties do not fulfill their contractual obligations and arises principally from the Company's receivables from joint operations partners and petroleum and natural gas customers.
Receivables from petroleum and natural gas marketers are normally collected on the 25th day of the month following production. When production is not taken in kind, payment comes from the common stream operator and facility operator in which payment is typically received on the 25th day of the month following production. The Company's approach to mitigate credit risk associated with these balances is to maintain marketing relationships with established and reputable customers, common stream operators and facility operators that are considered to be creditworthy. The Company has not experienced any collection issues with its current common stream and facility operators.
Joint operations receivables are typically collected within two to three months of the joint operations billing being issued to the partner. The Company mitigates collection risk from joint operations receivables by obtaining partner approval of significant capital and operating expenditures prior to expenditure and, in certain circumstances, may collect cash deposits in advance of incurring financial obligations on behalf of joint operations partners. Joint operations receivables are from partners in the petroleum and natural gas industry who are subject to the risks and conditions of the industry. Significant changes in industry conditions and risks that negatively impact partners' ability to generate cash flow will increase the risk of not collecting joint operations receivables. Carrying Amount June 30, 2021 December 31, 2020 Oil and natural gas customers 470,892 250,523 Joint operations partners 20,561 18,530 Accruals and other 284,526 176,042 Total 775,979 445,095
| Carrying Amount | June 30, 2021 | December 31, 2020 |
|---|---|---|
| Oil and natural gas customers | 470,892 | 250,523 |
| Joint operations partners | 20.561 | 18,530 |
| Accruals and other | 284.526 | 176,042 |
| Total | 775,979 | 445,095 |
| on the expected credit loss of the Company and has not noted a significant impact. | The Company has considered the impact of the COVID-19 outbreak and the resulting decreases to commodity prices | |
|---|---|---|
| In determining the recoverability of trade and other receivables, the Company considers the type and age of theoutstanding receivables, the credit risk of the counterparties, and the recourse available to the Company. Themaximum exposure to credit risk for accounts receivable and accruals, net of expected credit loss at the reportingdate by type of customer was: | ||
| The Company applies the simplified approach to providing for expected credit losses as prescribed by IFRS 9, which | ||
| permits the use of lifetime expected loss provision for all accounts receivable and accrued receivables. The expectedcredit losses below also incorporate forward looking information. | ||
| Aging | June 30, 2021 | December 31, 2020 |
| 0 - 30 days | 527,922 | 431,413 |
| 30 - 90 daysGreater than 90 days | 247,631426 | 12,1651,517 |
| Expected credit loss | - | - |
The Company considers amounts outstanding greater than 90 days to be past due, unless circumstances on particular balances provide certainty of collection. Receivables normally collectible within 30 to 60 days can take longer as information requests and timing can come into effect in dealing with receivables from joint venture partners. At June 30, 2021 there were no significant receivables which were considered past due (December 31, 2020 - $nil).
The Company held cash and cash equivalents of $1,753,051 as at June 30, 2021 (December 31, 2020 - $1,420,067). The Company manages the credit exposure related to cash and cash equivalents by selecting counter parties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due and describes the Company's ability to access cash. The impacts of the COVID-19 outbreak and the resulting impact on commodity prices has increased the liquidity risk of the Company. The Company's approach to managing liquidity is to ensure, as far as possible, that it will have sufficient cash resources in order to finance operations, fund capital expenditures, and to repay debt and other liabilities of the Company as they come due, without incurring unacceptable losses or risking harm to the Company's reputation. The Company's processes for managing liquidity risk include preparing and monitoring capital and operating budgets, coordinating, and authorizing project expenditures, and authorization of contractual agreements. The Company seeks additional financing based on the results of these processes. The budgets are updated when required as conditions change. Less than 1 year 1-2 years Thereafter Total Trade accounts payable 528,893 - - 528,893 Capital payables 9,892 - - 9,892 Debt Notes - principal 444,444 1,777,778 1,777,778 4,000,000 Debt Notes - interest 614,165 404,871 150,526 1,169,562
The following table outlines the contractual maturities of the Company's financial liabilities at June 30, 2021:
| 1,597,394 | 2,182,649 | 1,928,304 | 5,708,347 |
|---|
Market risk
Commodity price risk
| Market risk is the risk or uncertainty that changes in price, such as commodity prices, foreign exchange rates, and | |||
|---|---|---|---|
| interest rates will affect the Company's net earnings and the value of financial instruments. The objective of marketrisk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. | |||
| From time to time, the Company may utilize financial derivative contracts to manage market risks in accordance with | |||
| the risk management policy that has been approved by the Board of Directors. There were no financial contracts or | |||
| embedded derivatives outstanding at June 30, 2021 or December 31, 2020. | |||
| Commodity price risk | |||
| Commodity price risk is the risk that the fair value of the 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 US dollar, but also | |||
| by world economic events that dictate the levels of supply and demand.Despite modest recovery from the 20 year low reached in April 2020, oil prices continue to be volatile as a result offactors such as the COVID-19 outbreak. Natural gas prices have also been adversely affected by oversupply and | |||
| expectation of lower industrial demand, however the AECO gas reference price has improved relative to the | |||
| comparative period of 2020. | |||
| As of June 30 | 2021 | 2020 | % |
| WTI Cushing Oklahoma (US$/bbl) (1) | 71.25 | 38.30 | 86 |
| Canadian Light Sweet 40 API ($/bbl) (1) | 82.16 | 47.28 | 74 |
| NYMEX Henry Hub (US$/MMBtu) (1) | 3.26 | 1.70 | 92 |
| AECO 5A ($/GJ) (2)Exchange rate (CA$/US$) (1) | 3.221.22 | 1.801.36 | 79(10) |
| (1)Source: Sproule Associates Limited |
As at June 30, 2021, the Company had not entered into any derivative contracts or forward commodity sales contracts to manage its exposure to commodity price fluctuations.
Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign currency exchange rates. While the majority of the Company's financing and administrative costs will be based and paid in Canadian dollars, the Company is exposed to the risk of fluctuations in foreign exchange rates between the Canadian dollar and the US dollar (US$) given the Company's realized pricing in Canadian dollars is directly influenced by US$ denominated benchmark pricing. As at June 30, 2021, the Company had not entered into any foreign currency derivatives to manage its exposure to currency fluctuations.
Interest rate risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in prevailing market interest rates. The Company is exposed to interest rate risk on its cash and cash equivalents and short-term investments that have a floating interest rate. Fluctuations of interest rates for the periods ended June 30, 2021 and 2020, would not have had a significant impact on the financial statements.
Fair value of financial instruments
The Company's financial instruments as at June 30, 2021, include cash and cash equivalents, accounts receivable, prepaids, and accounts payable and accrued liabilities.
The Company's financial instruments recorded at fair value require disclosure about how the fair value was determined based on significant levels of inputs described in accordance with the following hierarchy:
Level 1 - inputs are based on quoted market prices in active markets that the Company has the ability to access at the measurement date.
Level 2 - inputs are based on quoted prices in the markets that are not active or based on prices that are observable for the asset or liability.
Level 3 - inputs are based on unobservable market data for the asset or liability.
The Company aims to maximize the use of observable inputs when preparing calculations of fair value. Classification of each measurement into the fair value hierarchy is based on the lowest level of input that is significant to the fair value calculation.
The fair value of cash and cash equivalents, accounts receivable, prepaids, accounts payable and accrued liabilities approximate their carrying amounts due to their short terms to maturity.
Capital management
The Company's objectives when managing capital are to ensure the Company will have sufficient financial capacity, liquidity, and flexibility to fund the Company's operations and potential strategic transactions for the foreseeable future. The Company is dependent upon funding these activities through a combination of available cash, debt and equity, which it considers to be the components of its capital structure as outlined below. To maintain or adjust the capital structure, from time to time the Company may issue or repurchase common shares or other securities, sell assets or adjust its capital spending to manage current and projected debt levels.
The Company monitors leverage and adjusts its capital structure based on its net debt level. Net debt is defined as the principal amount of its outstanding long-term obligations less working capital, as defined above. In order to facilitate the management of its net debt, the Company prepares annual budgets, which are updated as necessary depending on varying factors including current and forecast commodity prices, changes in capital structure,
| execution of the Company's business plan and general industry conditions. The annual budget is approved by theBoard of Directors and updates are prepared and reviewed as required.June 30, 2021December 31, 2020Debt Notes (14%)4,048,329- |
|---|
| Net debt (surplus)1,367,732(1,596,525)1)Calculation of working capital excludes current portion of debt as presented on the interim condensed consolidated statement of |
| Less: working capital (1)2,680,5971,596,525 |
SHAREHOLDERS' EQUITY
Common shares
| 1)Calculation of working capital excludes current portion of debt as presented on the interim condensed consolidated statement offinancial position. | ||
|---|---|---|
| The Company regularly monitors its capital structure and, as necessary, adjusts to changing economic circumstancesand the underlying risk characteristics of its assets in order to meet current and upcoming obligations andinvestments by the Company. The Company frequently reviews alternate financing options and arrangements tomeet its current and upcoming commitments and obligations. | ||
| The Company's objectives when managing capital are: (i) to maintain a flexible capital structure, which optimizes thecost of capital at acceptable risk; and (ii) to maintain investor, creditor and market confidence in order to sustain thefuture development of the business. The Company's share capital is not subject to external restrictions. | ||
| SHAREHOLDERS' EQUITY | ||
| Common shares | ||
| At June 30, 2021, the Company was authorized to issue an unlimited number of Class B Shares, with no par value,with holders of Class B Shares entitled to two votes per share and to dividends, if declared. Outstanding Class BShares as of June 30, 2021, are as follows: | Common shares | Amount |
| Balance, December 31, 2019 | 43,274,268 | 87,210,218 |
| Private placement, July 2020 | 7,692,308 | 362,012 |
| Private placement, November 2020 | 6,960,000 | 1,078,397 |
| Stock option exercise | 920,000 | 138,036 |
| Warrant exercise | 150,000 | 23,400 |
| Elimination of deficit (1) | - | (85,204,302) |
| Balance, December 31, 2020 | 58,996,576 | 3,607,761 |
| Shares issued for asset acquisitions (Note 4c, 4d) | 4,250,000 | 785,000 |
| Private placement, June 2021 | 11,000,000 | 1,875,359 |
| Stock option exercise | 225,000 | 41,147 |
| Balance, June 30, 2021 | 74,471,576 | 6,309,267 |
| (1)At the Company's annual general meeting on December 18, 2020, the shareholders of the Company approved a resolution toreduce share capital and contributed surplus for accounting purposes, without the payment of or a reduction to stated or paidup capital, by the amount of the deficit on December 31, 2019 of $116.8 million. As a result, share capital was reduced by $85.2million and contributed surplus was reduced by $31.6 million. | ||
| Warrants |
Warrants
The Company has issued and outstanding warrants exercisable to acquire Class B Shares of the Company that were issued as part of various private placement financings carried out in prior years.
A summary of the changes in warrants is presented below:
| Weighted average | ||
|---|---|---|
| Warrants | exercise price | |
| Balance, December 31, 2019 | 6,666,667 | 0.15 |
| Purchase warrants issued, July private placement | 7,692,308 | 0.15 |
| Purchase warrants issued, November private placement | 3,480,000 | 0.30 |
| Broker warrants issued, November private placement | 70,000 | 0.30 |
| Warrants exercised | (150,000) | 0.15 |
| Balance, December 31, 2020 | 17,758,975 | 0.18 |
| Purchase warrants issued, June private placement | 5,500,000 | 0.35 |
| Broker warrants issued, June private placementPurchase warrants issued, debt note financing | 280,0001,750,000 | 0.350.35 |
| Number of warrants | Weighted average term to | Number of warrants | |
|---|---|---|---|
| Exercise prices | outstanding | expiry (years) | exercisable |
| 0.15 | 14,208,975 | 1.03 | 14,208,975 |
| 0.30 | 3,550,000 | 1.36 | 3,550,000 |
| 0.35 | 7,530,000 | 1.86 | 7,530,000 |
| 25,288,975 | 1.32 | 25,288,975 |
Stock options
| Number of warrants | Weighted average term to | Number of warrants | |
|---|---|---|---|
| Exercise prices | outstanding | expiry (years) | exercisable |
| 0.15 | 14,208,975 | 1.03 | 14,208,975 |
| 0.30 | 3,550,000 | 1.36 | 3,550,000 |
| 0.35 | 7,530,000 | 1.86 | 7,530,000 |
| 25,288,975 | 1.32 | 25,288,975 | |
| Stock options | |||
| The Company has adopted a formal rolling stock option plan whereby options can be granted from time to time to | |||
| options is presented below: | directors, officers, employees, and consultants at the discretion of the Board of Directors. The number of optionsthat can be granted is limited to 10% of the total shares issued and outstanding. A summary of the changes in stock | ||
| Weighted average | |||
| Stock options | exercise price | ||
| Balance, December 31, 2019 | 3,910,000 | 0.12 | |
| Options forfeited | (166,667) | 0.15 | |
| Expired options | (83,333) | 0.15 | |
| Options exercised | (920,000) | 0.10 | |
| Balance, December 31, 2020 | 2,740,000 | 0.13 | |
| Options exercised | (225,000) | 0.10 | |
| Balance, June 30, 2021 | 2,515,000 | 0.13 |
| Number of options | Weighted average term to | Number of options | |
|---|---|---|---|
| Exercise prices | outstanding | expiry (years) | exercisable |
| 0.10 | 915,000 | 1.91 | 915,000 |
| 0.15 | 1,600,000 | 3.43 | 1,066,666 |
| 2,515,000 | 2.88 | 1,981,666 |
No stock options were issued during the six months ended June 30, 2021.
In July 2021, the Company awarded 4,150,000 options to directors, officers, and consultants of the Company. The options are exercisable into Class B Shares of the Company at an exercise price of $0.28 per share. The options vest as to one third immediately, an additional one third vesting on the first anniversary of the date of grant, and the remaining one third vesting on the second anniversary of the date of grant. The expiry for all options is July 21, 2026.
As of the date of this MD&A, the Company maintained balances of 74,471,576 Class B Shares, 25,288,975 warrants, and 6,665,000 stock options.
NEW ACCOUNTING STANDARDS
The IASB has issued a number of new accounting standards, amendments to accounting standards, and interpretations that are effective for annual periods beginning on or after January 1, 2021. None of the accounting pronouncements are expected to have a material impact upon initial adoption. The Company will continue to evaluate the impact of the pronouncements which will be adopted on their respective effective dates.
USE OF ESTIMATES AND JUDGMENTS
The timely preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Significant estimates and judgments made by management in the preparation of these financial statements are outlined below.
Critical judgments in applying accounting policies
The following are the critical judgments that management has made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognized in the financial statements:
i) Identification of cash-generating units
The Company's assets are aggregated into cash-generating units, for the purpose of calculating impairment, based on their ability to generate largely independent cash flows. By their nature, these estimates and assumptions are subject to measurement uncertainty and may impact the carrying value of the Company's assets in future periods.
ii) Exploration and evaluation assets
The application of the Company's accounting policy for exploration and evaluation assets requires management to make certain judgments as to future events and circumstances as to whether economic quantities of reserves have been found in assessing economic and technical feasibility.
iii) Impairment of property, plant and equipment and exploration and evaluation assets
Judgments are required to assess when impairment indicators, or reversal indicators, exist and impairment testing is required. In determining the recoverable amount of assets, in the absence of quoted market prices, impairment tests are based on estimates of reserves, production rates, future oil and natural gas prices, future costs, discount rates, market value of land and other relevant assumptions.
iv) Income taxes
Judgments are made by management to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings. To the extent that assumptions regarding future profitability change, there can be an increase or decrease in the amounts recognized in respect
of deferred tax assets as well as the amounts recognized in profit or loss in the period in which the change occurs.
Key sources of estimation uncertainty
The following are the key assumptions concerning the sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing adjustments to the carrying amounts of assets and liabilities, where applicable.
i) Reserves and resource assessment
The assessment of reported recoverable quantities of proved and probable reserves and prospective resource estimates include estimates regarding production profile, commodity prices, exchange rates, remediation costs, timing and amount of future development costs, and production, transportation, and marketing costs for future cash flows. It also requires interpretation of geological and geophysical models in anticipated recoveries. The economical, geological and technical factors used to estimate reserves and prospective resources may change from period to period. Changes in reported reserves and prospective resources can impact the carrying values of the Company's petroleum and natural gas properties and exploration and evaluation assets and equipment, the calculation of depletion and depreciation, the provision for decommissioning obligations, and the recognition of deferred tax assets due to changes in expected future cash flows.
The Company's petroleum and natural gas reserves represent the estimated quantities of petroleum, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be economically recoverable in future years from known reservoirs and which are considered commercially viable. Such reserves may be considered commercially producible if management has the intention of developing and producing them and such intention is based upon (i) a reasonable assessment of the future economics of such production; (ii) a reasonable expectation that there is a market for all or substantially all the expected petroleum and natural gas production; and (iii) evidence that the necessary production, transmission, and transportation facilities are available or can be made available. Reserves may only be considered proven and probable if the ability to produce is supported by either actual production or conclusive formation tests. Prospective resources are determined using an externally prepared valuation report which reflects estimated prospective resources and external pricing and costs assumptions reflective of the current market. The Company's petroleum and gas reserves and prospective resources are determined pursuant to National Instrument 51-101, Standard of Disclosures for Oil and Gas Activities.
ii) Decommissioning obligations
The Company estimates future remediation costs of production facilities, wells and pipelines at different stages of development and construction of assets or facilities. In most instances, removal of assets occurs many years into the future. This requires assumptions regarding abandonment date, future environmental and regulatory legislation, the extent of reclamation activities, the engineering methodology for estimating cost, future removal technologies in determining the removal cost and liability-specific discount rates to determine the present value of these cash flows.
iii) Business combinations
In a business combination, management makes estimates of the fair value of assets acquired and liabilities assumed as part of the acquisition transaction.
iv) Share-based payments
All equity-settled, share-based awards issued by the Company are recorded at fair value using the Black-Scholes option-pricing model. In assessing the fair value of equity-based compensation, estimates have to be made regarding the expected volatility in share price, option life, dividend yield, risk-free rate and estimated forfeitures at the initial grant date.
v) Tax provisions
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in profit or loss both in the period of change, which would include any impact on cumulative provisions, and in future periods. Deferred tax assets (if any) are recognized only to the extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse.
RELATED PARTY TRANSACTIONS
The Company had no related party transactions other than compensation to management that were entered into for the three and six months ended June 30, 2021 and 2020.
PRINCIPAL BUSINESS RISKS
The Company's business and results of operations are subject to a number of risks and uncertainties which include, but are not limited to, the following:
Going Concern
The Company has included a "going concern" disclosure in the notes to the Company's interim condensed financial statements for the three and six months ended June 30, 2021 (see "Going Concern" under Note 2). Current cash resources of the Company may not be sufficient to continue its business activities. In the event that the Company is unable to raise additional capital and/or attain sufficient revenues from its operations, as to which in each case there can be no assurance, the Company may not be able to continue its operations.
Crude Oil and Natural Gas Development
Exploration, development, production of oil and natural gas involves a wide variety of risks which include, but are not limited to, the uncertainty of finding oil and gas in commercial quantities, securing markets, commodity price fluctuations, exchange and interest rate exposure and changes to government regulations, including regulations relating to prices, taxes, royalties, and environmental protection. The oil and gas industry is intensely competitive and the Company competes with a large number of companies with greater resources.
The Company's ability to obtain reserves in the future will depend not only on its ability to develop its current properties, but also on its ability to acquire new prospects and producing properties. The acquisition, exploration and development of new properties also require that sufficient capital from outside sources will be available to the Company in a timely manner. The availability of equity or debt financing is affected by many factors, many of which are beyond the control of the Company.
Addition of Reserves and Resources
The Company's future crude oil and natural gas reserves, production, and cash flows to be derived therefrom are highly dependent on the Company successfully discovering and developing or acquiring new reserves and resources. The addition of new reserves and resources will depend not only on the Company's ability to explore and develop properties but also, in the case of reserves, on its ability to select and acquire suitable producing properties or prospects. There can be no assurance that the Company's exploration, development or acquisition efforts will result in the discovery and development of commercial accumulations of oil and natural gas.
Reserve Estimates
There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond the control of the Company. Estimates of reserves depend in large part upon the reliability of available geological and engineering data and require certain assumptions to be made in order to assign reserve volumes. Geological and
engineering data is used to determine the probability that a reservoir of oil and/or natural gas exists at a particular location, and whether, and to what extent, such hydrocarbons are recoverable from the reservoir. Accordingly, the ultimate reserves discovered by the Company may be significantly less than the total estimates.
Exploration Risks
The exploration of the Company's properties may from time to time involve a high degree of risk that no production will be obtained or that the production obtained will be insufficient to recover drilling and completion costs. The costs of seismic operations and drilling, completing and operating wells are uncertain to a degree. Cost overruns can adversely affect the economics of the Company's exploration programs and projects. In addition, the Company's seismic operations and drilling plans may be curtailed, delayed or cancelled as a result of numerous factors, including, among others, equipment failures, weather or adverse climate conditions, shortages or delays in obtaining qualified personnel, shortages or delays in the delivery of or access to equipment, necessary governmental, regulatory or other third party approvals and compliance with regulatory requirements.
Key Personnel
The Company's success depends in large part on the ability of its executive management team to deal effectively with complex risks and relationships and execute the Company's business plan. The members of the management team contribute to the Company's ability to obtain, generate and manage opportunities. There can be no assurance that the Company's present key personnel and directors will remain with the Company. The departure of any such key person or director may materially affect the Company's business, financial condition, results of operations, and the value of the Class B Shares.
Public Market Risk
There can be no assurance that an active trading market in the Company's securities will be sustained. The market price for the Company's securities could be subject to wide fluctuations. Factors such as commodity prices, government regulation, interest rates, share price movements of the Company's peer companies and competitors, as well as overall market movements, may have a significant impact on the market price of the securities of the Company. The stock market from time to time has experienced extreme price and volume fluctuations, which may be unrelated to the operating performance of particular companies.
Dividends
To date, the Company has not paid regular dividends on its outstanding securities and does not anticipate paying any dividends in the foreseeable future. There are no restrictions in the Company's articles or elsewhere which would prevent the Company from paying dividends. It is not contemplated that any dividends will be paid on the Class B Shares in the immediate future as it is anticipated that all available funds will be invested to finance the growth of the Company's business. The directors of the Company will determine if, and when, dividends will be declared and paid in the future from funds properly applicable to the payment of dividends based on the Company's earnings, financial position and other conditions at the relevant time. All of the Class B Shares are entitled to an equal share in any dividends declared and paid.
Failure to Maintain Listing of the Class B Shares
The Class B Shares are currently listed for trading on the facilities of the TSXV. The failure of the Company to meet the applicable listing or other requirements of the TSXV in the future may result in the Class B Shares ceasing to be listed for trading on the TSXV, which would have a material adverse effect on the value of the Class B Shares. There can be no assurance that the Class B Shares will continue to be listed for trading on the TSXV.
Structure of the Company
From time to time, the Company may take steps to organize its affairs in a manner that minimizes taxes and other expenses payable with respect to the operation of the Company and its subsidiaries. If the manner in which the Company structures its affairs is successfully challenged by a taxation or other authority, the Company and the holders of Class B Shares may be adversely affected.
Management's Report on Internal Control over Financial Reporting
In connection with National Instrument 52-109 - Certification of Disclosure in Issuer's Annual and Interim Filings ("NI 52-109") adopted by each of the securities commissions across Canada, the Chief Executive Officer and Chief Financial Officer of the Company are required to file a Venture Issuer Basic Certificate with respect to the financial information contained in the unaudited interim financial statements and the audited annual financial statements and respective accompanying Management's Discussion and Analysis. The Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting, as defined in NI 52- 109.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
This MD&A offers an assessment of the Company's future plans and operations as of the date hereof and may contain forward-looking information. All statements other than statements of historical fact are forward-looking statements. Such information is generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "may", "plan", "will", "project", "should", "believe" and similar expressions. Statements relating to "reserves" or "resources" are also forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the resources and reserves described can be profitably produced in the future. All such statements involve known and unknown risks, uncertainties, and assumptions.
Management believes that the expectations reflected in the forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct. Such forward-looking information included in this MD&A should not be unduly relied upon as the plans, assumptions, intentions, or expectations upon which it is based may not occur. Actual results or events may vary from the forward-looking information. In particular, this MD&A may contain forward-looking information pertaining to the following:
- the potential of the Company's assets,
- the Company's growth strategy and opportunities,
- performance characteristics of the Company's oil properties and estimated capital commitments and probability of success,
- crude oil production and recovery estimates and targets,
- the existence and size of the oil reserves and resources,
- capital expenditure programs and estimates, including the timing of activity,
- plans for, and results of, exploration and development activities,
- projections of market prices and costs,
- the supply and demand for oil,
- expectations regarding the ability to raise equity and debt capital on acceptable terms, including the ability to negotiate and complete any agreements contemplated,
- the timing for receipt of regulatory approvals, and
- treatment of the Company under governmental regulatory regimes and tax laws.
The purpose of providing any financial outlook in this MD&A is to illustrate how the business of the Company might develop without the benefit of specific historical financial information. Readers are cautioned that this information may not be appropriate for other purposes.
The forward-looking information herein is based on certain assumptions and analysis by the management of the Company in light of its experience and perception of historical trends, current conditions and expected future developments and other factors that it believes are appropriate and reasonable under the circumstances. The forward-looking information herein is based on a number of assumptions, including but not limited to:
- the availability on acceptable terms of funds for capital expenditures,
- the availability in a cost-efficient manner of equipment and qualified personnel when required,
- the stability of the regulatory framework governing taxes and environmental matters in any jurisdiction in which the Company may conduct its business in the future,
- continuing strong demand for oil,
- the ability to market production of oil successfully to customers,
- future production levels and oil prices,
- the applicability of technologies for recovery and production of oil reserves,
- the existence and recoverability of any oil reserves,
- geological and engineering estimates in respect of resources and reserves in which the Company has an interest,
- the geography of the areas in which the Company has an interest, and
- the impact of increasing competition on the Company.
The actual results, performance and achievements of the Company could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth elsewhere in the MD&A and the following risks and uncertainties:
- global financial conditions,
- general economic, market and business conditions,
- volatility in market prices, the stock market, foreign exchange and interest rates,
- risks inherent in oil and gas operations, exploration, development and production,
- the failure by counterparties to make payments or perform their operational or other obligations to the Company in compliance with the terms of contractual arrangements between the Company and such counterparties,
- risks related to the timing of completion of the Company's projects and plans,
- uncertainties associated with estimating oil and natural gas reserves and resources,
- competition for, among other things, capital, acquisitions of resources, and skilled personnel,
- the ability to hold existing leases through drilling or lease extensions or otherwise,
- incorrect assessments of the value of acquisitions,
- claims made in respect of the Company's properties or assets,
- geological, technical, drilling and processing problems, including the availability of equipment and access to properties,
- environmental risks and hazards,
- the inaccuracy of third parties' reviews, reports and projections,
- rising costs of labour and equipment,
- the failure to engage or retain key personnel,
- changes in income tax laws or changes in tax laws and incentive programs, and
- other factors discussed under "Principal Business Risks" in this MD&A.
Readers are cautioned that the foregoing lists of assumptions, risks and uncertainties are not exhaustive. The forward-looking information contained in this MD&A is expressly qualified by this cautionary statement. The forward-looking information speaks only as of the date of this MD&A, and the Company does not undertake any obligation to publicly update or revise any forward-looking information except as required by applicable securities laws.
SELECTED QUARTERLY INFORMATION
| SELECTED QUARTERLY INFORMATION | ||||
|---|---|---|---|---|
| unaudited quarterly financial data prepared by management in accordance with IFRS. | ||||
| Quarterly Results ($) | Q2 2021 | Q1 2021 | Q4 2020 | Q3 2020 |
| Oil and natural gas sales | 709,209 | 440,027 | 322,935 | 275,513 |
| Oil and natural gas sales, net of royalties | 572,392 | 355,835 | 250,579 | 208,514 |
| Net lossNet loss per share (basic & diluted) | (394,051)(0.01) | (375,440)(0.01) | (453,404)(0.01) | (330,016)(0.01) |
| Quarterly Results ($) | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 |
| Oil and natural gas salesNet loss | -(242,700) | -(176,762) | -(393,755) | -(51,596) |
CONVERSION MEASURES AND SHORT-TERM PRODUCTION RATES
Production volumes and reserves are commonly expressed on a boe basis whereby natural gas volumes are converted at the ratio of 6 thousand cubic feet to 1 barrel of oil. Although the intention is to sum oil and natural gas measurement units into one basis for improved analysis of results and comparisons with other industry participants, boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In recent years, the value ratio based on the price of crude oil as compared to natural gas has been significantly higher than the energy equivalency of 6:1, and utilizing a conversion of natural gas volumes on a 6:1 basis may be misleading as an indication of value.
Short-term production rates can be influenced by flush production effects from fracture stimulations in horizontal wellbores and may not be indicative of longer-term production performance or ultimate recovery of reserves. Individual well performance may vary.
ABBREVIATIONS USED
| barrel | AECO | intra-Alberta Nova inventory transfer price |
|---|---|---|
| barrels per day | GJ | gigajoule |
| barrel of oil equivalent | Mcf | thousand cubic feet |
| barrels of oil equivalent per day | Mcf/d | thousand cubic feet per day |
| barrels of oil per day | MMBtu | million British thermal units |
| thousand barrels | MMcf | million cubic feet |
| thousand barrels of oil equivalent | MMcf/d million cubic feet per day | |
| Bcf | billion cubic feet | |
| thousand stock tank barrels | NGL | natural gas liquids |
| cubic metres | Cdn | Canadian |
| West Texas Intermediate | US | United States |
| MMboe million barrels of oil equivalent |