CALGARY, AB, Nov. 15, 2010 /CNW/ -- EQU: TSX, NYSE CALGARY, AB,
Nov. 15, 2010 /CNW/ - Equal Energy Ltd. ("Equal" or "the Company")
is pleased to announce its results for the third quarter ended
September 30, 2010. Q3 2010 Three months Nine months ended
Year Financial and ended September September 30 ended Operations 30
Dec. 31 Summary (in thousands 2010 Change 2009 Change except for
volumes, 2009 2010 2009 percentages and per share amounts)
FINANCIAL Revenue before unrealized 34,267 30,354 13% 109,009
103,451 5% 140,506 mark-to-market adjustment Funds from 11,402
8,366 36% 37,302 34,842 7% 46,645 operations Per share - 0.39 1.58
1.68 basic and 0.42 8% (6%) 2.22 diluted ($) Loss (7,976) (9,462)
(16%) (14,979) (32,343) (54%) (41,282) Per share - (0.45) (0.64)
(1.56) basic and (0.29) (36%) (59%) (1.95) diluted ($) Total assets
416,418 471,524 416,418 471,524 462,272 Working (40,084) (3,995)
(40,084) capital (deficit) (3,995) (35,955) including long-term
debt Convertible 116,537 114,673 116,537 114,673 114,863 debentures
Shareholders' 238,922 230,544 238,922 230,544 219,046 equity SHARES
OUTSTANDING Shares 21,353 23,551 20,737 outstanding - 27,115 21,119
basic and diluted (000s) Shares 21,573 27,673 21,573 outstanding at
27,673 21,701 period end( ) (000s) OPERATIONS Average daily
production Oil (bbls per 2,596 2,682 (3%) 2,473 2,863 (14%) 2,779
day) NGL (bbls per 2,395 2,729 (12%) 2,530 1,956 29% 2,156 day) Gas
(mcf per 22,713 26,977 (16%) 25,672 30,952 (17%) 29,657 day) Total
(boe 8,777 9,907 (11%) 9,282 9,978 (7%) 9,878 per day) A conference
call and live audio webcast to discuss these results has been
scheduled for Tuesday, November 16, 2010 at 9:00 a.m.
Mountain Time (11:00 a.m. Eastern Time). To access the call
on Tuesday, November 16, 2010, please dial 1-888-231-8191
or 647-427-7450 in Toronto. The audio webcast will be
available on the homepage of Equal's website at
www.equalenergy.ca. A replay of the conference call will be
available until 11:59 p.m. Mountain Time, November 30, 2010.
The replay may be accessed on Equal's website in the Investor
Relations section, or by dialing 1-800-642-1687 or 1-416-849-0833,
followed by pass code 19042136#. Dear Shareholders, Equal Energy
had a very active Q3 2010, as we have just completed our busiest
quarter with the drill bit since my involvement with the
corporation and we consolidated our position as a value oriented
E&P corporation by deleveraging our balance sheet through the
sale of a gassy non-core asset for net proceeds of $24.0
million. In addition, Equal completed an equity offering
which raised $35.7 million to support the ongoing capital program,
freeing up cash flow to further reduce debt. We also added to the
strength and experience of both our Board and our management team.
In addition, we are maintaining our current production guidance for
2010 and anticipate exiting the year at approximately 9,200 boe per
day. For Q3 2010, funds from operations increased by 36% to $11.4
million from $8.4 million in Q3 2009. The increase in funds
from operations is primarily the result of higher prices received
for oil, NGLs and natural gas and lower transportation costs
partially offset by higher royalties, production expenses and
G&A costs. Busiest Drilling Quarter on Record for Equal We
drilled five oil wells in Canada during Q3 including: -- Two (2.0
net) Princess Pekisko horizontal oil wells -- Two (1.7 net) Provost
Dina PPP pool horizontal oil wells -- One (1.0 net) Alliance Viking
horizontal oil well During Q3 2010, Equal also spudded a third
Lochend Cardium well, a second Alliance Viking well and an Oklahoma
Hunton liquids-rich gas well. Operational Plans for the Balance of
2010 For the rest of this year we plan to increase our pace of
drilling with up to nine additional wells. Our focus is on the
Lochend Cardium and Alliance Viking light oil resource plays where
we are seeing results at or ahead of our type curves, with
operating netbacks in the $40 to $50 per barrel range. We have as
many as five wells planned in the Alliance Viking light oil play
for Q4; with three of these drilled since the start of Q4 and two
more scheduled later in the quarter. For Q4, we plan to drill two
wells in the Lochend Cardium light oil play with one of these
already drilled and to be tied in shortly. This brings our total
light oil well count in the Lochend Cardium and Alliance Viking
light oil plays up to ten wells for 2010 which will have a positive
impact on our corporate cash flow and netback. The single Hunton
well is currently drilled and on production. The capital spending
program for the fourth quarter and into 2011 is planned at amounts
close to our cash flows with the intent of keeping debt levels
stable. Update on Equal's Hunton Oklahoma Asset During Q3 we
continued to push for legal clarification around our joint venture
agreement on the Hunton play. We have confirmation that January 24,
2011 will be the start date of the arbitration hearing. This
hearing will clarify whether the joint venture exists or not. With
clarity around this issue, we will eventually return to a more
active drilling and development program in the Hunton area. Equal
operates the Hunton play controlling approximately 42,000 net
undeveloped acres and currently producing around 5,100 boe per day.
We have identified 350 potential drilling locations and have
experienced consistently high success ratios and low finding and
development costs in the area. Our production and operatorship in
this area are not in question. We are, however, reluctant to invest
significant additional capital into the play until we have
clarification respecting our joint venture. Further, given that
this is a liquids-rich, natural gas play, with continued low
natural gas prices, we are satisfied to direct our operational
focus primarily to our light oil assets for the time being. These
light oil opportunities offer very compelling economics, higher
cash flow and improved netbacks per barrel. Deepening the Bench
Strength of Equal's Team Brian Illing joined our Board of Directors
in August, bringing us more than 30 years of oil and gas sector
experience, most recently as President & CEO of Iteration
Energy. Dell Chapman joined Equal as its new Chief Financial
Officer in September. Dell was most recently the Vice President,
Finance and Chief Financial Officer of Berens Energy Ltd, and has
accumulated well over 20 years of senior finance experience with
several of publicly-traded, Calgary-based oil and gas companies. I
believe these two individuals will be valuable contributors to our
continuing success. 2010 has been a transitional year for Equal as
we completed the restructuring process from a trust structure to
corporation. Now, I'm privileged to lead a quality team of seasoned
oil and gas professionals, backed by the guidance and support of an
experienced Board of Directors. I believe we have built a great
foundation and are now converting Equal's solid portfolio of oil
and gas assets into long term success. I'm excited about our
potential for 2011 and beyond. As always, I'd like to express my
appreciation to Equal's shareholders for their continued support,
my colleagues at Equal as they effectively execute Equal's business
plan and the Board of Directors for their continued commitment to
Equal's success. Sincerely, Don Klapko President & Chief
Executive Officer November 12, 2010 INTRODUCTION: The
following is Management's Discussion and Analysis ("MD&A") of
Equal Energy Ltd. (the "Company" or "Equal") for the nine-month
period ended September 30, 2010. This MD&A should be read
in conjunction with the MD&A and consolidated financial
statements, together with the accompanying notes, of the Company
for the year ended December 31, 2009, as well as the unaudited
interim consolidated financial statements, together with the
accompanying notes of the Company for the nine-month period ended
September 30, 2010. All amounts are stated in Canadian
dollars and are prepared in accordance with Canadian Generally
Accepted Accounting Principles ("GAAP") except where otherwise
indicated. This commentary is based on information available
to, and is dated, November 12, 2010. CONVERSION:
Natural gas volumes recorded in thousand cubic feet ("mcf") are
converted to barrels of oil equivalent ("boe") using the ratio of
six (6) thousand cubic feet to one (1) barrel of oil ("bbl").
Boe's may be misleading, particularly if used in isolation. A
boe conversion ratio of 6 mcf: 1 bbl is based on an energy
equivalent conversion method primarily applicable at the burner tip
and does not represent a value equivalent at the wellhead. NON-GAAP
TERMS: This document contains the terms "funds from
operations", "working capital" and "cash flow netback", which are
non-GAAP terms. The Company uses these measures to help
evaluate its performance. The Company considers funds from
operations a key measure for the ability of the Company to repay
debt and to fund future growth through capital investment.
The term should not be considered as an alternative to, or more
meaningful than, cash provided by operating activities as
determined in accordance with GAAP as an indicator of
performance. The Company considers cash flow netback a key
measure for the ability of the company to analyze its
operations. The term should not be considered as an
alternative to, or more meaningful than, net income or net loss as
determined in accordance with GAAP as an indicator of performance.
Funds from operations, working capital and cash flow netback, as
determined by the Company may not be comparable to that reported by
other companies. The reconciliation of funds from operations
to cash provided by operating activities and of cash flow netback
to net income or net loss can be found in the non-GAAP financial
measures section of this MD&A. The working capital
calculations can be found in the liquidity and capital resources
section of the MD&A. This MD&A also contains other terms
such as working capital including long-term debt and operating
netbacks which are not recognized measures under GAAP.
Management believes these measures are useful supplemental measures
of firstly, the total amount of current and long-term debt and
secondly, the amount of revenues received after transportation,
royalties and operating costs. Readers are cautioned, however
that these measures should not be construed as an alternative to
other terms such as current and long-term debt or net income
determined in accordance with GAAP as measures of
performance. Equal's method of calculating these measures may
differ from other entities, and accordingly, may not be comparable
measures used by other companies. FORWARD-LOOKING STATEMENTS:
Certain information contained herein may contain forward-looking
statements including management's assessment of future plans and
operations, drilling plans and timing thereof, expected production
increases from certain projects and the timing thereof, the effect
of government announcements, proposals and legislation, plans
regarding wells to be drilled, expected or anticipated production
rates, expected exchange rates, distributions and method of funding
thereof, proportion of distributions anticipated to be taxable and
non-taxable, anticipated borrowing base under credit facility,
maintenance of productive capacity and capital expenditures and the
nature of capital expenditures and the timing and method of
financing thereof, may constitute forward-looking statements under
applicable securities laws and necessarily involve risks. All
statements other than statements of historical facts contained in
this MD&A are forward-looking statements. The words
"believe", "may", "will", "estimate", "continue", "anticipate,"
"intend", "should", "plan", "expect" and similar expressions, as
they relate to the Company, are intended to identify
forward-looking statements. The Company has based these
forward-looking statements on the current expectations and
projections about future events and financial trends that the
Company believes may affect its financial condition, results of
operations, business strategy and financial needs. These
forward-looking statements are subject to uncertainties,
assumptions and a number of risks, including, without limitation,
risks associated with oil and gas exploration, development,
exploitation, production, marketing and transportation, loss of
markets, volatility of commodity prices, currency fluctuations,
imprecision of reserve estimates, environmental risks, competition
from other producers, inability to retain drilling rigs and other
services, incorrect assessment of the value of acquisitions,
failure to realize the anticipated benefits of acquisitions, delays
resulting from or inability to obtain required regulatory approvals
and ability to access sufficient capital from internal and external
sources. The recovery and reserve estimates of Equal's
reserves provided herein are estimates only and there is no
guarantee that the estimated reserves will be recovered.
Events or circumstances may cause actual results to differ
materially from those predicted, as a result of the risk factors
set out and other known and unknown risks, uncertainties, and other
factors, many of which are beyond the control of the Company.
In addition to other factors and assumptions which may be
identified herein, assumptions have been made regarding, among
other things: the impact of increasing competition; the general
stability of the economic and political environment in which the
Company operates; the timely receipt of any required regulatory
approvals; the ability of the Company to obtain qualified staff,
equipment and services in a timely and cost efficient manner;
drilling results; the ability of the operator of the projects
which the Company has an interest in to operate the field in a
safe, efficient and effective manner; the ability of the Company to
obtain financing on acceptable terms; field production rates and
decline rates; the ability to replace and expand oil and natural
gas reserves through acquisitions, development and exploration; the
timing and cost of pipeline, storage and facility construction and
expansion and the ability of the Company to secure adequate
reasonably priced transportation; future commodity oil and gas
prices; currency, exchange and interest rates; the regulatory
framework regarding royalties, taxes and environmental matters in
the jurisdictions in which the Company operates; and the ability of
the Company to successfully market its oil and natural gas
products. Readers are cautioned that the foregoing list is
not exhaustive of all factors and assumptions which have been
used. As a consequence, actual results may differ materially
from those anticipated in the forward-looking statements.
Additional information on these and other factors could effect
Equal's operations and financial results are included in reports on
file with the Canadian and United States regulatory authorities and
may be accessed through the SEDAR website (www.sedar.com), or the
EDGAR website (www.sec.gov/edgar.shtml), or at Equal's website
(www.equalenergy.ca). Furthermore, the forward-looking
statements contained herein are made as at the date hereof and
Equal does not undertake any obligation to update publicly or to
revise any of the included forward-looking statements, whether as a
result of the new information, future events or otherwise, except
as may be required by applicable securities law. Other
sections of this MD&A may include additional factors that could
adversely affect the business and financial performance. The
Company operates in a very competitive and rapidly changing
business environment. New risk factors emerge from time to
time and it is not possible for management to predict all risk
factors, nor can the Company assess the impact of all factors on
its business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those
contained in any forward-looking statements. The reader
should not rely upon forward-looking statements as predictions of
future events or performance. The Company cannot provide
assurance that the events and circumstances reflected in the
forward-looking statements will be achieved or occur.
Although the Company believes that the expectations reflected in
the forward-looking statements are reasonable, the Company cannot
guarantee future results, levels of activity, performance or
achievements. The reader is further cautioned that the preparation
of financial statements in accordance with GAAP requires management
to make certain judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses.
Estimating reserves is also critical to several accounting
estimates and requires judgments and decisions based upon available
geological, geophysical, engineering and economic data. These
estimates may change, having either a negative or positive effect
on net earnings as further information becomes available, and as
the economic environment changes. CORPORATE PROFILE Equal Energy
Ltd. is a value oriented exploration and production oil and gas
company based in Calgary, Alberta, Canada with its United States
operations office located in Oklahoma City, Oklahoma. Equal's
shares are listed on the New York Stock Exchange (EQU) and Equal's
shares and convertible debentures are listed on the Toronto Stock
Exchange (EQU, EQU.DB and EQU.DB.A). On May 31, 2010, Equal
announced that Enterra Energy Trust had completed its previously
announced Arrangement to convert from an income trust to a
corporation through a business combination pursuant to an
arrangement under the Business Corporations Act (Alberta).
Unitholders of the Trust received one Equal common share for every
three Enterra Energy Trust units held. Enterra's Board of
Directors and management team continued as the Equal's Board of
Directors and management team. Immediately subsequent to the
Arrangement, former Enterra unitholders held 100 percent of the
equity in Equal and Equal effected an internal reorganization
whereby, among other things, the Trust was dissolved and the
Company received all of the assets and assumed all of the
liabilities of the Trust. Readers are referred to Enterra
Energy Trust's information circular dated April 13, 2010 for
additional information in respect of the Arrangement. The Company's
portfolio of oil and gas properties is geographically diversified
with producing properties located principally in Alberta, British
Columbia, Saskatchewan and Oklahoma. Production is comprised
of approximately 57% crude oil and natural gas liquids ("NGL") and
43% natural gas. Q3 2010 Three months Nine months ended Year
Financial and ended September September 30 ended Operations 30 Dec.
31 Summary (in thousands except for volumes, 2010 2009 Change 2010
2009 Change 2009 percentages and per share and boe amounts)
FINANCIAL Revenue before unrealized mark-to-market 34,267 30,354
13% 109,009 103,451 5% 140,506 adjustment ( (1)) Funds from
operations (() 11,402 8,366 36% 37,302 34,842 7% 46,645 (1)) Per
share - basic and 0.42 0.39 8% 1.58 1.68 (6%) 2.22 diluted((2) (3))
($) Loss (7,976) (9,462) (16%) (14,979) (32,343) (54%) (41,282) Per
share - basic and (0.29) (0.45) (36%) (0.64) (1.56) (59%) (1.95)
diluted ((2) (3)) ($) Total assets 416,418 471,524 416,418 471,524
462,272 Working capital (deficit) including (3,995) (40,084)
(3,995) (40,084) (35,955) long-term debt ((4)) Convertible 116,537
114,673 116,537 114,673 114,863 debentures Shareholders' 238,922
230,544 238,922 230,544 219,046 equity SHARES OUTSTANDING Shares
outstanding - basic and 27,115 21,353 23,551 20,737 21,119
diluted((2) (3)) (000s) Shares outstanding at 27,673 21,573 27,673
21,573 21,701 period end ((3) )(000s) OPERATIONS Average daily
production Oil (bbls per 2,596 2,682 (3%) 2,473 2,863 (14%) 2,779
day) NGL (bbls per 2,395 2,729 (12%) 2,530 1,956 29% 2,156 day) Gas
(mcf per 22,713 26,977 (16%) 25,672 30,952 (17%) 29,657 day) Total
(boe per 8,777 9,907 (11%) 9,282 9,978 (7%) 9,878 day) Exit
production Oil (bbls per 2,660 2,887 (8%) 2,660 2,887 (8%) 2,448
day) NGL (bbls per 2,411 2,549 (5%) 2,411 2,549 (5%) 2,515 day) Gas
(mcf per 23,934 26,567 (10%) 23,934 26,567 (10%) 24,802 day) Total
(boe per 9,060 9,864 (8%) 9,060 9,864 (8%) 9,097 day) Average sales
price Oil ($ per 68.00 63.68 7% 70.32 60.49 16% 62.86 bbl) NGL ($
per 38.23 25.67 49% 41.63 27.69 50% 32.17 bbl) Gas ($ per 4.59 3.30
39% 4.68 4.90 (4%) 4.75 mcf) Cash flow netback ((1)) ($ per boe)
Revenue ((5)) 42.44 33.30 27% 43.02 37.98 13% 38.97 Royalties 8.23
6.69 23% 8.83 6.62 33% 7.37 Production 11.88 8.56 39% 10.80 11.08
(3%) 10.88 expenses Transportation 0.62 0.77 (19%) 0.69 0.73 (5%)
0.70 expenses Operating 21.71 17.28 26% 22.70 19.55 16% 20.02
netback General and 5.94 4.97 20% 5.10 4.19 22% 4.36 administrative
Cash interest 3.49 3.13 12% 3.34 2.57 30% 2.66 expense Other cash
(1.84) - 100% (0.46) - 100% 0.06 costs ((6)) Cash flow 14.12 9.18
54% 14.72 12.79 15% 12.94 netback (1) Revenues before unrealized
mark-to-market adjustment, funds from operations and cash flow
netback are non-GAAP financial measures. Please refer to "Revenues"
and "Non-GAAP Financial Measures". (2) Weighted average shares
outstanding. See Note 8 in Notes to Financial Statements. (3)
Restated to reflect the three for one exchange of trust units for
common shares. (4) Working capital (deficit) including long-term
debt is a non-GAAP term and includes total bank debt, current
assets and current liabilities (excluding commodity contracts and
future income taxes). (5) Price received excludes unrealized
mark-to-market gain or loss. (6) Other cash costs include realized
foreign exchange gains and losses. QUARTERLY FINANCIAL INFORMATION
(in thousands of Canadian dollars except for per share amounts)
2010 2009 2008 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4 Revenues before unrealized
34,267 35,689 39,053 37,055 30,354 31,208 41,889 55,923
mark-to-market adjustment Funds from 11,402 11,357 14,543 11,803
8,366 8,561 17,915 23,636 operations Income (loss) (11,042)
(11,352) (1,920) (8,930) (13,259) (23,823) (12,864) 13,497 before
taxes Net income (7,976) (4,066) (2,937) (8,939) (9,462) (14,383)
(8,498) 5,907 (loss) Net income (loss) per (0.29) (0.19) (0.14)
(0.42) (0.45) (0.69) (0.42) 0.30 share basic( (1)) ($) Net income
(loss) per (0.29) (0.19) (0.14) (0.42) (0.45) (0.69) (0.42) 0.27
share diluted ((1)) ($) (1) Restated to reflect the three for one
exchange of trust units for common shares. The losses in 2010 and
2009 are mainly due to decreased prices for oil and natural
gas. The net income during Q4 2008 was the result of the
reversal of mark-to-market losses on commodity contracts during the
first half of 2008. Equal's revenue and income, like others
in the oil and gas industry, are driven by the prices of oil and
natural gas. OVERALL PERFORMANCE Average production decreased
by 11% in Q3 2010 to 8,777 boe per day when compared to Q3 2009
production of 9,907 boe per day. The decline in average
production was due primarily to natural decline rates for Equal's
wells and the disposition of non-core assets partially offset by
drilling, well optimization projects, the recognition of NGL
volumes from revised midstream contracts and acquisitions.
Equal exited the quarter with sales volumes of approximately 9,060
boe per day. The difference between the average production
rate during Q3 2010 and its exit rate is mainly due to the
additional wells drilled and brought on stream during the quarter
and some minor acquisitions contributing to the exit rate.
Overall, oil prices received in Q3 2010 increased 7% to $68.00 per
barrel from $63.68 per barrel in Q3 2009. NGL prices received
in Q3 2010 increased 49% to $38.23 per bbl from $25.67 per bbl in
Q3 2009. Gas prices received in Q3 2010 increased 39% to
$4.59 per mcf from $3.30 per mcf in Q3 2009. Production
expenses, excluding non-cash expenses, in Q3 2010 increased 39% to
$11.88 per boe compared to $8.56 per boe in Q3 2009. G&A
expenses in Q3 2010 increased 20% to $5.94 per boe from $4.97 per
boe in Q3 2009 which primarily relates to legal fees related to the
claims made by a joint venture participant in Oklahoma. Cash
interest expense increased 12% on a per boe basis to $3.49 per boe
in Q3 2010 compared to $3.13 per boe in Q3 2009 mainly due to the
lower production in Q3 2010. The overall impact was that
funds from operations in Q3 2010 increased by 36% to $11.4 million
from $8.4 million in Q3 2009 and was consistent with the funds from
operations of $11.4 million in Q2 2010. The increase in funds
from operations in Q3 2010 from Q3 2009 is primarily the result
higher prices received for oil, NGLs and natural gas and lower
transportation costs offset by higher royalties, higher production
costs and higher G&A costs. The loss for the three
months ended September 30, 2010 was $8.0 million compared to a loss
of $9.5 million from Q3 2009. The decrease in the loss was
the result of higher prices received for oil, NGLs and natural gas,
a decrease in DD&A and foreign exchange gains which were offset
by higher royalties and production expenses. Equal has further
reduced its long-term debt during the quarter to $10.0 million as
at September 30, 2010 compared to $70.0 million at the beginning of
the year mainly through the disposition of several non-core assets
which had net proceeds of $26.2 million. An equity offering which
raised net proceeds of $35.7 million was used to support the
ongoing capital program, freeing up cash flow to further reduce
debt. As a result of these transactions, working capital
including long-term debt in addition to the convertible debentures
totaled $120.5 million as at September 30, 2010. Equal's
improved balance sheet now has leverage ratios that are comparable
to its peers. SALES VOLUMES Production Three months ended
Nine months ended September 30 September 30 2010 2009 Change 2010
2009 Change Daily sales volumes - average Oil (bbls per day) 2,596
2,682 (3%) 2,473 2,863 (14%) NGL (bbls per day) 2,395 2,729 (12%)
2,530 1,956 29% Natural gas (mcf 22,713 26,977 (16%) 25,672 30,952
(17%) per day) Total (boe per day) 8,777 9,907 (11%) 9,282 9,978
(7%) Daily sales volumes - exit rate Oil (bbls per day) 2,660 2,887
(8%) 2,660 2,887 (8%) NGL (bbls per day) 2,411 2,549 (5%) 2,411
2,549 (5%) Natural gas (mcf 23,934 26,567 (10%) 23,934 26,567 (10%)
per day) Total (boe per day) 9,060 9,864 (8%) 9,060 9,864 (8%)
Sales volumes mix by product Oil 30% 27% 27% 29% NGL 27% 28% 27%
20% Natural gas 43% 45% 46% 51% 100% 100% 100% 100% Average
production for Q3 2010 decreased 11% to 8,777 boe per day compared
to 9,907 boe per day in Q3 2009 due to the natural decline rates
for Equal's wells offset by the additional wells drilled during the
last year. Q3 2010 production also decreased 8% compared to
Q2 2010 production of 9,570 boe per day mainly due to the
disposition of a non-core asset in west central Alberta which
decreased Q3 2010 production by approximately 550 boe per day
compared to Q2 2010. Average production during Q3 2010
consisted of 2,596 boe per day of oil, 2,395 boe per day of NGL and
22,713 mcf per day of natural gas, resulting in a mix of 30% oil,
27% NGL and 43% natural gas. Equal exited Q3 2010 with
production of 9,060 boe per day. Average
production for the nine months ended September 30, 2010 was 9,282
boe per day which is a decrease of 7% compared to 9,978 boe per day
during the same period in 2009. The decrease is mainly due to
the natural decline rates for Equal's wells offset by the
additional wells drilled during the last year and the assets which
were acquired during Q1 2010 and then divested at the beginning of
Q3 2010 which contributed approximately 300 boe per day of
production to the nine month period ended September 30, 2010.
For the nine months ended September 30, 2010, Equal
drilled the following 13 (10.7 net) wells with an 85% success rate:
-- 3 (2.2 net) Provost Dina PPP horizontal oil wells; -- 2 (2.0
net) Princess horizontal oil wells; -- 2 (1.7 net) Cardium
horizontal oil wells; -- 2 (0.8 net) Circus Viola horizontal oil
wells; -- 1 (1.0 net) Alliance horizontal oil well; -- 1 (1.0 net)
Primate oil well; and -- 2 (2.0 net) dry holes. Production by
Geographic Area Three months ended Nine months ended September 30,
2010 September 30, 2010 Canada U.S. Total Canada U.S. Total Daily
sales volumes - average Oil (bbls per day) 2,335 261 2,596 2,193
280 2,473 NGL (bbls per day) 102 2,293 2,395 275 2,255 2,530
Natural gas (mcf per day) 8,374 14,339 22,713 10,731 14,941 25,672
Total (boe per day) 3,833 4,944 8,777 4,257 5,025 9,282 Daily sales
volumes - exit rate Oil (bbls per day) 2,401 259 2,660 2,401 259
2,660 NGL (bbls per day) 84 2,327 2,411 84 2,327 2,411 Natural gas
(mcf per day) 8,668 15,266 23,934 8,668 15,266 23,934 Total (boe
per day) 3,930 5,130 9,060 3,930 5,130 9,060 Sales volumes mix by
product Oil 61% 5% 52% 6% NGL 3% 46% 6% 45% Natural gas 36% 49% 42%
49% 100% 100% 100% 100% Canadian Operations For the three months
ended September 30, 2010, production in Canada of 3,833 boe per day
was down 9% compared to Q3 2009 production of 4,203 boe per day due
to the natural decline rates on Equal's wells and non-core asset
divestitures which were partially offset by the wells drilled
during the last year and asset acquisitions. Q3 2010
production decreased 16% from Q2 2010 production of 4,550 boe per
day mainly due to the disposition of a non-core asset in west
central Alberta at the beginning of Q3 2010 which decreased Q3 2010
production by approximately 550 boe per day compared to Q2 2010.
For the nine months ended September 30, 2010, production in
Canada of 4,257 boe per day was down 7% compared to 4,585 boe per
day during the same period in 2009. The decrease is due to
the natural decline rates on Equal's wells and dispositions of
non-core assets that contributed approximately 315 boe per day in
the same period in 2009 which were offset primarily by the wells
drilled in the year and an acquisition in early 2010 which
contributed approximately 270 boe per day of production to the nine
months ended September 30, 2010. U.S. Operations For the
three months ended September 30, 2010, production in the United
States of 4,944 boe per day was down 13% compared to Q3 2009
production of 5,704 boe per day due to the natural decline rates on
Equal's wells. Q3 2010 production was 2% lower than Q2 2010
production of 5,020 boe per day due to low levels of drilling and
natural decline rates. Only two wells were drilled in
Oklahoma during 2010 due to the uncertainties surrounding a joint
venture participant's claim for bankruptcy protection under Chapter
11 of the United States Bankruptcy Code. For the nine months ended
September 30, 2010, production in the United States of 5,025 boe
per day was down 7% compared to 5,393 boe per day during the same
period in 2009. The decrease is due to the natural decline
rates on Equal's wells and only two wells were drilled in Oklahoma
during 2010 due to the uncertainties surrounding a joint venture
participant's claim for bankruptcy protection under Chapter 11 of
the United States Bankruptcy Code. COMMODITY PRICING Pricing
Benchmarks Three months ended Nine months ended September 30
September 30 2010 2009 Change 2010 2009 Change WTI (US$ per bbl)
76.20 68.30 12% 77.65 57.00 36% Average exchange rate: US$ to 0.96
0.91 5% 0.96 0.85 13% Cdn$1.00 WTI (Cdn$ per bbl) 79.25 75.13 5%
80.75 66.69 21% Propane, Conway, KS 42.81 29.49 45% 45.77 29.70 54%
(US$/bbl) NYMEX (US$ per 4.41 3.41 29% 4.62 3.96 17% mmbtu) NYMEX
(US$ per mcf) 4.26 3.29 29% 4.46 3.82 17% ( (1)) AECO daily index
3.36 2.78 21% 3.91 3.57 10% (Cdn$ per GJ) AECO daily index (Cdn$
per mcf)( 3.43 2.83 21% 3.99 3.64 10% (2)) (1) Conversion rate of
0.96619 mcf per mmbtu. (2) Conversion rate of 1.0194 GJ per mcf.
West Texas Intermediate ("WTI") is a standard benchmark for the
price of oil and is expressed in U.S. dollars per barrel. The
propane price quoted at Conway, KS is the closest surrogate
benchmark for the blended price Equal receives for its NGL produced
in Oklahoma. The price variations at Conway, KS mirror
Equal's variations in NGL price but cannot be used to estimate
Equal's actual NGL mix due to variations in composition. In
Western Canada the benchmark is the price at the AECO hub (a
storage and pricing hub for Canadian natural gas market) and is
priced in Canadian dollars per gigajoule ("GJ"). For the
purposes of financial reporting, Equal expresses its realized
prices for oil and gas in Canadian dollars. Benchmark oil
prices for Q3 2010 increased 12% to an average of US$76.20 per bbl
WTI from US$68.30 per bbl WTI in Q3 2009 but the price increase was
largely off-set by the strengthening of the Canadian dollar which
averaged US$0.96 per Canadian dollar during Q3 2010 compared to
US$0.91 per Canadian dollar during Q3 2009. Benchmark propane
prices for Q3 2010 increased 45% to an average of US$42.81 per bbl
from US$29.49 per bbl in Q3 2009. Benchmark natural gas
prices for Q3 2010 on the NYMEX increased to an average of US$4.41
per mmbtu from US$3.41 per mmbtu in Q3 2009. In Canada, AECO
pricing also increased averaging $3.36 per GJ during Q3 2010
compared to $2.78 during Q3 2009. Average Commodity Prices Received
Three months ended Nine months ended September 30 September 30 2010
2009 Change 2010 2009 Change Oil ((1)) (Cdn$ per 65.85 64.52 2%
68.40 55.09 24% bbl) NGL (Cdn$ per bbl) 38.23 25.67 49% 41.63 27.69
50% Natural gas (Cdn$ 3.83 2.82 36% 4.21 3.61 17% per mcf) Oil
commodity contract settlements 2.15 (0.84) (356%) 1.93 5.40 (64%)
(Cdn$ per bbl) Natural gas commodity contract 0.76 0.48 58% 0.47
1.29 (64%) settlements (Cdn$ per mcf) Combined oil ((1)) 68.00
63.68 7% 70.32 60.49 16% (Cdn$ per bbl) Combined natural gas 4.59
3.30 39% 4.68 4.90 (4%) (Cdn$ per mcf) Total ((2)) (Cdn$ 42.44
33.30 27% 43.02 37.98 13% per boe) (1) Includes sulphur revenue.
(2) Price received excludes unrealized mark-to-market gain or loss.
For the three months ended September 30, 2010, the average price
received for oil by Equal, net of commodity contract settlements,
increased 7% to $68.00 per bbl from $63.68 per bbl in Q3
2009. For the three months ended September 30, 2010, the
average price received for NGLs increased 49% to $38.23 per bbl
from $25.67 per bbl in Q3 2009. The Q3 2010 average price
received for natural gas, net of commodity contract settlements,
increased 39% to $4.59 per mcf from $3.30 per mcf in Q3 2009.
For the nine months ended September 30, 2010, the average price
received for oil by Equal, net of commodity contract settlements,
increased 16% to $70.32 per bbl from $60.49 per bbl during the same
period in 2009. The average price received for NGLs for the
nine months ended September 30, 2010, increased 50% to $41.63 per
bbl from $27.69 per bbl during the same period in 2009. The
average price received for natural gas for the nine months ended
September 30, 2010, net of commodity contract settlements,
decreased 4% to $4.68 per mcf from $4.90 per mcf during the same
period in 2009. REVENUES Revenues (in thousands of Canadian dollars
except for percentages) Three months ended Nine months ended
September 30 September 30 2010 2009 Change 2010 2009 Change Oil
15,728 15,921 (1%) 46,182 43,059 7% NGL 8,425 6,444 31% 28,752
14,785 94% Natural gas 8,010 6,990 15% 29,473 30,476 (3%) Realized
gain on 2,104 999 111% 4,602 15,131 (70%) commodity contracts
Revenue before 34,267 30,354 13% 109,009 103,451 5% mark-to-market
adjustments ((1)) Unrealized (1,684) 312 (100%) 2,720 (12,407)
(122%) mark-to-market gain (loss) on commodity contracts Oil and
natural gas 32,583 30,666 6% 111,729 91,044 23% revenues (1)
Non-GAAP measure. Revenues by Geographic Area (in thousands of
Canadian dollars) Three months ended Nine months ended September
30, 2010 September 30, 2010 Canada U.S. Total Canada U.S. Total Oil
13,896 1,832 15,728 40,278 5,904 46,182 NGL 637 7,788 8,425 4,004
24,748 28,752 Natural gas 3,015 4,995 8,010 12,621 16,852 29,473
Realized gain on 691 1,413 2,104 1,737 2,865 4,602 commodity
contracts Revenue before unrealized 18,239 16,028 34,267 58,640
50,369 109,009 mark-to-market adjustments ((1)) Unrealized
mark-to-market (1,572) (112) (1,684) 2,173 547 2,720 gain (loss) on
commodity contracts Oil and natural gas 16,667 15,916 32,583 60,813
50,916 111,729 revenues (1) Non-GAAP measure. For the three month
period ended September 30, 2010, total oil and natural gas revenues
increased 6% percent to $32.6 million from $30.7 million during the
same period in 2009. For the nine month period ended
September 30, 2010, total oil and natural gas revenues increased
23% percent to $111.7 million from $91.0 million during the same
period in 2009 primarily due to unrealized gain on commodity
contracts during 2010 as opposed to the unrealized loss on
commodity contracts during 2009. Oil revenues for Q3 2010
decreased 1% to $15.7 million from $15.9 million in Q3 2009 which
was the result of a 3% decrease in production volumes offset by a
2% increase in the sales price for oil received when compared to Q3
2009. NGL revenues for the three month period ended September
30, 2010 increased 31% to $8.4 million from $6.4 million when
compared to the same period in 2009 due to the 49% increase in
sales price for NGLs received offset by a 12% decrease in
production. For the three month period ended September 30, 2010,
natural gas revenues increased 15% to $8.0 million from $7.0
million in Q3 2009 which was the result of a 36% increase in the
sales price of natural gas received offset by a 16% decrease in
production volumes when compared to Q3 2009. Oil
revenues for the nine month period ended September 30, 2010,
increased 7% to $46.2 million compared to $43.1 million which was
the result of a 24% increase in the sales price for oil received
offset by a 14% decrease in production volumes when compared the
same period in 2009. NGL revenues for the nine month period
ended September 30, 2010 increased 94% to $28.8 million from $14.8
million when compared to the same period in 2009 due to the 50%
increase in sales price for NGLs received combined with the 29%
increase in production. For the nine month period ended
September 30, 2010, natural gas revenues decreased 3% to $29.5
million from $30.5 million during the same period in 2009 which was
the result of a 17% decrease in production volumes offset by a 17%
increase in the sales price of natural gas received when compared
to the same period in 2009. For the three month period ended
September 30, 2010, the realized gain on commodity contracts
increased 111% to $2.1 million compared to $1.0 million in Q3 2009
due to the natural gas and oil hedging contracts in place compared
to the same period in 2009. For the nine month period ended
September 30, 2010, the realized gain on commodity contracts
decreased 70% to $4.6 million compared to $15.1 million due to the
natural gas and oil hedging contracts in place compared to the same
period in 2009. For the three month period ended September 30,
2010, the unrealized mark-to-market loss on commodity contracts was
to $1.7 million compared to a gain of $0.3 million during the same
period in 2009. The Q3 2010 unrealized mark-to-market gain on
commodity contracts was due to the increase in the price for
oil. During Q3 2010, the realized gain for commodity price
contracts was $2.1 million compared to a gain of $1.0 million in Q3
2009. For the nine month period ended September 30, 2010, the
unrealized mark-to-market gain on commodity contracts was $2.7
million compared to a loss of $12.4 million during the same period
in 2009. The unrealized mark-to-market gain on commodity
contracts was a result of the decrease in the price for natural gas
and the additional oil contracts entered into during the year.
During the nine month period ended September 30, 2010, the realized
gain on commodity price contracts was $4.6 million compared to a
gain of $15.1 million during the same period in 2009. COMMODITY
CONTRACTS The Company has a formal risk management policy which
permits management to use specified price risk management
strategies for up to 50% of its projected gross crude oil, natural
gas and NGL production including fixed price contracts, costless
collars and the purchase of floor price options and other
derivative instruments to reduce the impact of price volatility and
ensure minimum prices for a maximum of 24 months beyond the current
date. The program is designed to provide price protection on
a portion of Equal's future production in the event of adverse
commodity price movement, while retaining significant exposure to
upside price movements. By doing this Equal seeks to provide
a measure of stability and predictability of cash inflows.
The mark-to-market value of the commodity contracts is determined
based on the estimated fair value as at September 30, 2010 that was
obtained from the counterparty to the economic hedge. Equal
then evaluates the reasonability of this price in comparison to the
value of other commodity contracts it currently owns as well as
recently quoted prices received from other counterparties for
various commodity contracts. The Company deals with several
large, credit-worthy financial institutions to diversify its
counterparty risk. The credit worthiness of each counterparty
is assessed at the time of purchase of each financial instrument
and is regularly assessed based on any new information regarding
the counterparty. At September 30, 2010, the following
financial derivatives and fixed price contracts were
outstanding: Derivative Commodity Price ((2)) Volume (per
Period Instrument day) ((2)) Fixed Gas 6.25 5,000 mmbtu (US$/mmbtu)
(4,831 mcf) November 1, 2009 (6.04 US$/mcf) - Fixed Basis Gas
Differential 5,000 mmbtu December 31, Differential( Fixed @ $0.615
(4,831 mcf) 2010 (1)) US$/mmbtu ($0.59 US$/mcf) Gas 5.45 ($/GJ)
1,000 GJ March 1, 2010 - Fixed 5.56 ($/mcf) (981 mcf) February 28,
2011 Fixed Gas 6.22 2,000 mmbtu (US$/mmbtu) (1,932 mcf) (6.01
US$/mcf) April 1, 2010 - Fixed Basis Gas Differential 2,000 mmbtu
October 31, 2010 Differential( Fixed @ $0.40 (1,932 mcf) (1))
US$/mmbtu ($0.39 US$/mcf) Gas 5.70 2,000 mmbtu April 1, 2010 -
Fixed (US$/mmbtu) (1,932 mcf) October 31, 2010 (5.51 US$/mcf) Fixed
Basis Gas Differential January 1, 2010 Differential( Fixed @ $0.30
7,000 mmbtu - (1)) US$/mmbtu (6,763 mcf) December 31, ($0.29
US$/mcf) 2010 October 1, 2009 Fixed Oil 85.00 ($/bbl) 500 bbl -
December 31, 2010 January 1, 2010 Fixed Oil 88.00 ($/bbl) 300 bbl -
December 31, 2010 January 1, 2011 Fixed Oil 93.00 ($/bbl) 200 bbl -
December 31, 2011 January 1, 2011 Fixed Oil 94.60 ($/bbl) 200 bbl -
December 31, 2011 (1) NYMEX / Southern Star (Oklahoma) basis
differential. (2) Conversion rates of 0.96619 mcf per mmbtu and
1.0194 GJ per mcf. At September 30, 2010, the following physical
contract was outstanding: Volume (per Type of contract Commodity
Price ((1)) day)( (1)) Period 5.48 ($/GJ) 1,000 GJ March 1, 2010 -
Fixed Sale Gas (5.59 ($/mcf)) (981 mcf) February 28, 2011 (1)
Conversion rates of 0.96619 mcf per mmbtu and 1.0194 GJ per mcf. As
at September 30, 2010 the above commodity contracts had a net
mark-to-market asset position of $3.0 million which increased $2.8
million from the December 31, 2009 balance of $0.2 million.
This change relates primarily to the decrease in the price for
natural gas and the additional oil contracts entered into during
the year. Equal entered into the following commodity contracts
after September 30, 2010: Volume (per Type of contract Commodity
Price day) Period January 1, 2011 Fixed Sale Oil 89.66 ($/bbl) 200
bbl - December 31, 2011 January 1, 2011 Fixed Sale Oil 90.00
($/bbl) 200 bbl - December 31, 2011 ROYALTIES Royalties include
crown, freehold and overriding royalties, production taxes and
wellhead taxes. Royalties vary depending on the jurisdiction,
volumes that are produced, total volumes sold and the price
received. On an overall basis, royalties increased in Q3 2010
compared to Q3 2009 due to higher commodity prices for both oil and
natural gas. As a percentage of revenue before mark-to-market
adjustments, royalties were 19% for Q3 2010 and 20% for Q3
2009. Royalties (in thousands of Canadian dollars
except for percentages and per boe amounts) Three months ended Nine
months ended September 30 September 30 2010 2009 Change 2010 2009
Change Royalties 6,648 6,097 9% 22,367 18,021 24% As a percentage
of revenues before 19% 20% 21% 17% mark-to-market adjustments
Royalties per boe 8.23 6.69 23% 8.83 6.62 33% ($) Royalties by
Geographic Area (in thousands of Canadian dollars except for
percentages and per boe amounts) Three months ended Nine months
ended September 30, 2010 September 30, 2010 Canada U.S. Canada U.S.
Royalties 3,073 3,575 10,901 11,466 As a percentage of revenues
before mark-to-market 17% 22% 19% 23% adjustments Royalties per boe
($) 8.71 7.86 9.38 8.36 During the three month period ended
September 30, 2010, royalties increased 9% to $6.6 million from
$6.1 million in Q3 2009 primarily as a result of the higher prices
received for oil and natural gas. Q3 2010 royalties decreased
6% compared to Q2 2010 royalties of $7.1 million due to lower
production. During the nine month period ended September 30,
2010, royalties increased 24% to $22.4 million from $18.0 million
from the same period in 2009 primarily as a result of the higher
prices received for oil and natural gas. PRODUCTION
EXPENSE Production Expense (in thousands Canadian dollars except
for percentages and per boe amounts) Three months ended Nine months
ended September 30 September 30 2010 2009 Change 2010 2009 Change
Production expense 9,589 7,853 22% 27,357 30,711 (11%) Non-cash
gain (100%) (loss) from power - (50) - (538) (100%) contracts Cash
production 9,589 7,803 23% 27,357 30,173 (9%) costs Production
expense 11.88 8.62 38% 10.80 11.27 (4%) per boe ($) Non-cash gain
(100%) (loss) from power - (0.06) - (0.19) (100%) contracts per boe
($) Cash production 11.88 8.56 39% 10.80 11.08 (3%) costs per boe
($) For the three months ended September 30, 2010, cash production
costs increased 39% to $11.88 per boe compared to $8.56 per boe in
Q3 2009 and increased 13% compared to $10.50 per boe in Q2
2010. For the nine months ended September 30, 2010,
cash production costs decreased 3% to $10.80 per boe compared to
$11.08 per boe for the same period in 2009. Production
Expense by Geographic Area (in thousands except for per boe
amounts) Three months ended Nine months ended September 30, 2010
September 30, 2010 Canada U.S. Canada U.S. Cash production costs
6,756 2,833 19,695 7,662 Cash production costs per boe 19.16 6.23
16.95 5.59 ($) Canadian Operations On an overall cost basis, Q3
2010 cash production costs increased by 57% to $6.8 million
compared to $4.3 million in Q3 2009 and on a per boe basis they
increased by 73% to $19.16 per boe versus $11.05 per boe in Q3
2009. The Q3 2009 operating expenses were lower than normal
due to revisions of estimates from previous periods of $1.9 million
($3.84 per boe) and an adjustment to third party processing fees
receivable dating back to 2007 for $0.4 million ($0.99 per
boe). The decrease in production during Q3 2010 compared to
Q3 2009 also contributed to the increase in production costs per
boe of $1.96 per boe. Q3 2010 production costs per boe
increased by 18% compared to Q2 2010 of $16.25 due to the decrease
in production from the sale of lower operating cost non-core assets
in west central Alberta. Current Canadian drilling targets in
the Cardium and Viking light oil resource plays have operating
costs in the $7.00 to $10.00 per boe range which should reduce the
overall per boe operating costs in the future. In
Canada for the nine months ended September 30, 2010, cash
production costs increased by 9% to $19.7 million from $18.1
million during the same period in 2009 and on a per boe basis they
increased by 17% to $16.95 per boe versus $14.50 per boe during the
same period in 2009. The increase in production expenses in
2010 is due to the 2009 comparative period having lower materials
and services costs and the deferral of discretionary well
workovers. On a per boe basis, the increase in production
expenses is also due to the decrease in production for the sale of
non-core assets in west central Alberta.
U.S. Operations In the U.S. during Q3 2010 cash production costs
decreased by 20% to $2.8 million from $3.5 million in Q3 2009 on an
overall cost basis, but on a per boe basis they decreased 7% to
$6.23 per boe versus $6.73 per boe in Q3 2009. Q3 2010
production costs per boe increased by 18% compared to Q2 2010
production costs of $5.30 per boe due to an increased number
of pump replacements in the producing wells, attributed in part to
a program to bring shut-in wells back on production due to
stronger liquids prices and quick payouts on these projects
and in part to the inherent variability in the number of
pump failures in a given quarter. In the U.S. for
the nine months ended September 30, 2010, cash production costs
decreased by 36% to $7.7 million from $12.0 million during the same
period in 2009 and on a per boe basis they decreased by 32% to
$5.59 per boe versus $8.17 per boe during the same period in
2009. The decrease in production expenses per boe from 2009
is due to decreasing water disposal rates from wells completed in
late 2008 and early 2009, deferred workover costs and lower
materials and services rates attributable to the slowdown in the
industry. TRANSPORTATION EXPENSE Transportation expense is a
function of the point of legal transfer of the product and is
dependent upon where the product is sold, production split,
location of properties as well as industry transportation rates
that are driven by supply and demand of available transport
capacity. Transportation Expense (in thousands of Canadian
dollars except for percentages and per boe amounts) Three months
ended Nine months ended September 30 September 30 2010 2009 Change
2010 2009 Change Transportation 499 705 (29%) 1,741 1,996 (13%)
expense Transportation 0.62 0.77 (19%) 0.69 0.73 (5%) expense per
boe ($) For the three months ended September 30, 2010,
transportation costs decreased 19% to $0.62 per boe from $0.77 per
boe in Q3 2009. Q3 2010 transportation expenses per boe
decreased 18% compared to $0.76 in Q2 2010. Transportation
expense has varied primarily due to changing industry costs over
time. For the nine months ended September 30, 2010, transportation
costs decreased 5% to $0.69 per boe from $0.73 per boe from the
same period in 2009. Transportation expense has varied
primarily due to changing industry costs over time. GENERAL AND
ADMINISTRATIVE EXPENSE General and administrative expense
("G&A") increased by 6% in Q3 2010 compared to Q3 2009 on a
total dollar basis and increased by 20% on a per boe basis. General
and Administrative Expense (in thousands of Canadian dollars except
for percentages and per boe amounts) Three months ended Nine months
ended September 30 September 30 2010 2009 Change 2010 2009 Change
Gross G&A expense 5,925 5,047 17% 16,699 14,966 12% Capitalized
21 29 (28%) (1,435) (854) 68% Recoveries (1,151) (542) 112% (2,335)
(2,692) (13%) G&A expense 4,795 4,534 6% 12,929 11,420 13%
G&A expense per boe 5.94 4.97 20% 5.10 4.19 22% ($) For the
three months ended September 30, 2010, G&A costs were $5.94 per
boe compared to $4.97 per boe in Q3 2009, a 20% increase primarily
due to legal fees related to the claims made by a joint venture
participant in Oklahoma which totalled $1.6 million ($1.95 per boe)
during the quarter. For the nine months ended September 30,
2010, G&A costs were $5.10 per boe compared to $4.19 per boe
during the same period in 2009. The increase in G&A is
primarily due to the costs associated with the Plan of Arrangement
which totalled $0.9 million ($0.36 per boe) and legal fees related
to the claims made by a joint venture participant in Oklahoma which
totalled $1.7 million ($0.68 per boe) during the nine months ended
September 30, 2010. Equal anticipates that the G&A costs will
decrease on an overall and per boe basis when the legal proceedings
are completed with a joint venture participant in Oklahoma which is
expected to be in the first half of 2011. INTEREST EXPENSE
Interest expense for Q3 2010 was $3.4 million which was comprised
of interest on long-term debt of $0.5 million and interest on
convertible debentures of $3.1 million less interest income of $0.2
million. Interest Expense (in thousands of Canadian except
for percentages and per boe amounts) Three months ended Nine months
ended September 30 September 30 2010 2009 Change 2010 2009 Change
Cash interest 510 1,113 (54%) 1,903 2,101 (9%) expense on long-term
debt Cash interest 2,482 2,455 1% 7,286 7,316 0% expense on
convertible debentures Cash interest income (175) (720) (76%) (718)
(2,418) (70%) Subtotal cash 2,817 2,848 (1%) 8,471 6,999 21%
interest expense Non-cash interest 564 466 21% 1,674 1,363 23%
expense on convertible debentures Total interest 3,381 3,314 2%
10,145 8,362 21% expense Cash interest 0.63 1.22 (48%) 0.75 0.77
(3%) expense per boe on long-term debt ($) Cash interest 3.07 2.69
14% 2.88 2.69 7% expense per boe on convertible debentures ($) Cash
interest income (0.22) (0.78) (72%) (0.29) (0.89) (67%) per boe ($)
Total cash interest 3.49 3.13 12% 3.34 2.57 30% expense per boe ($)
For the three months ended September 30, 2010, interest expense on
long-term debt decreased 54% to $0.5 million from $1.1 million in
Q3 2009 due to lower debt levels and lower borrowing rates on our
bank credit facility. The interest on long-term debt
decreased 38% compared to $0.8 million in Q2 2010 due to lower debt
levels. For the nine months ended September 30, 2010,
interest expense on long-term debt decreased 9% to $1.9 million
from $2.1 million in the same period in 2009 due to lower debt
levels. Equal's long-term debt balance at September 30, 2010
was $10.0 million compared to $70.0 million at the end of
2009. The average interest rate on long-term debt for the
nine and three months ended September 30, 2010 was 4.47% and 5.23%,
respectively, and the rate as of November 12, 2010 is approximately
4.01%. The interest expense on convertible debentures for the
three and nine months ended September 30, 2010 was comparable to
the same periods in 2009. Interest income for Q3 2010 decreased 76%
to $0.2 million from $0.7 million in Q3 2009 and increased 75%
compared to $0.1 million during Q2 2010. Interest income for
the nine months ended September 30, 2010 decreased 70% to $0.7
million from $2.4 million for the same period in 2009. The
decreases for the three and nine month period ended September 30,
2010 compared to the same periods in 2009 are due to uncertainty of
the collectability of the interest component on a capital lease
from a farmout participant who filed for bankruptcy protection
under Chapter 11 of the United States Bankruptcy Code.
SHARE-BASED COMPENSATION EXPENSE Share-Based Compensation Expense
(in thousands Canadian dollars except for percentages and per boe
amounts) Three months ended Nine months ended September 30
September 30 2010 2009 Change 2010 2009 Change Gross share-based
722 967 (25%) 3,259 3,263 0% compensation expense Capitalized (56)
(225) (75%) (225) (372) (40%) Share-based 666 742 (10%) 3,034 2,891
5% compensation expense Share-based 0.82 0.81 1% 1.20 1.06 13%
compensation expense per boe ($) For the three months ended
September 30, 2010, non-cash share-based compensation expense was
$0.7 million compared to $0.7 million in Q3 2009 and $1.2 million
in Q2 2010. For the nine months ended September 30, 2010,
non-cash share-based compensation expense was $3.0 million compared
to $2.9 million for the same period in 2009. DEPLETION,
DEPRECIATION AND ACCRETION ("DD&A") Depletion, Depreciation and
Accretion (in thousands of Canadian dollars except for percentages
and per boe amounts) Three months ended Nine months ended September
30 September 30 2010 2009 Change 2010 2009 Change DD&A 19,610
20,249 (3%) 59,897 67,280 (11%) DD&A per boe ($) 24.29 22.22 9%
23.64 24.70 (4%) For the three months ended September 30, 2010,
DD&A expenses decreased by 3% to $19.6 million compared to
$20.2 million in Q3 2009 and decreased 1% compared to $19.8 million
in Q2 2010. The decrease in DD&A expenses in Q3 2010
compared to Q3 2009 is mainly due to the decrease in production
during the period. DD&A expenses on a boe basis increased
9% to $24.29 in Q3 2010 from $22.22 per boe in Q3 2009 and
increased by 7% from $22.73 per boe in Q2 2010 due to the
disposition of non-core assets in west central Alberta which
occurred at the beginning of Q3 2010 and additional capital
expenditures during the year. For the nine months ended
September 30, 2010, DD&A expenses decreased 11% to $59.9
million compared to $67.3 million in the same period in 2009. The
decrease in DD&A expenses in the nine months of 2010 compared
to the same period in 2009 is mainly due to the decrease in
production and the effect of the foreign currency translation due
to the strengthening Canadian dollar on Equal's U.S.
operations. DD&A expenses on a per boe basis decreased 4%
to $23.64 per boe during 2010 compared to $24.70 per boe in same
period in 2009 mainly due to the effect of the foreign currency
translation due to the strengthening Canadian dollar on Equal's
U.S. operations. Ceiling Test Under Canadian GAAP, a ceiling test
is applied to the carrying value of the property, plant and
equipment and other assets. The carrying value is assessed to
be recoverable when the sum of the undiscounted cash flows expected
from the production of proved reserves, the lower of cost and
market of unproved properties, and the cost of major development
projects exceeds the carrying value. When the carrying value
is not assessed to be recoverable, an impairment loss is recognized
to the extent that the carrying value of assets exceeds the sum of
the discounted cash flows expected from the production of proved
and probable reserves, the lower of cost and market of unproved
properties, and the cost of major development projects. When
required the cash flows are estimated using expected future product
prices and costs which are discounted using a risk-free interest
rate. Equal completed ceiling test calculations for the
Canadian and U.S. cost centers as at September 30, 2010 to assess
the recoverability of costs recorded in respect of the petroleum
and natural gas properties. The ceiling test calculations did
not result in a write down of the Canadian cost center or the U.S.
cost center. FOREIGN EXCHANGE For the three months ended September
30, 2010, there was a foreign exchange gain of $1.6 million
compared to a loss of $0.4 million in Q3 2009 and a loss of $1.2
million in Q2 2010. For the nine months ended September 30,
2010, there was a foreign exchange gain of $1.4 million compared to
a loss of $0.3 million in the same period in 2009.
TAXES For the three months ended September 30, 2010, the future
income tax reduction was $3.5 million compared to the future income
tax reduction of $3.8 million in the same period in 2009. For
the nine months ended September 30, 2010, the future income tax
reduction was $9.9 million compared to the future income tax
reduction of $17.6 million in the same period in 2009. The federal
and provincial statutory rate was 28.2% at September 30, 2010
compared to an effective tax rate of 38.4%. The primary
reason for the variance in the effective tax rate and the statutory
tax rate is the result of the non-deductible share-based
compensation and the difference between the U.S. and Canadian tax
rates. LOSS For the three months ended September 30, 2010, the loss
was $8.0 million (loss of $0.29 per share) compared to a loss of
$9.5 million (loss of $0.45 per share) in Q3 2009 and a loss of
$4.1 million (loss of $0.19 per share) in Q2 2010. The
decrease in the loss in Q3 2010 compared to Q3 2009 was the result
of an increase in the price for oil, decrease in DD&A and
foreign exchange gains which were partially offset by higher
royalties and production expenses. For the nine months ended
September 30, 2010, the loss was $15.0 million (loss of $0.64 per
share) compared to a loss of $32.3 million (loss of $1.56 per
share) for the same period in 2009. The decrease in the loss
was the result of an increase in the price for oil, decrease in
DD&A and decrease in production costs partially offset by
higher royalties, G&A expenses and interest expense. NON-GAAP
FINANCIAL MEASURES Management uses certain key performance
indicators ("KPIs") and industry benchmarks such as cash flow
netback, funds from operations and working capital including
long-term debt to analyze financial performance. Management
feels that these KPIs and benchmarks are key measures of
profitability and overall sustainability for Equal. These
KPIs and benchmarks as presented do not have any standardized
meanings prescribed by Canadian GAAP and therefore may not be
comparable with the calculation of similar measures presented by
other entities. Cash Flow Netback Management uses cash flow
netback to analyze operating performance. Cash flow netback,
as presented, is not intended to represent an alternative to net
income (loss) or other measures of financial performance calculated
in accordance with GAAP. All references to cash flow netback
throughout this MD&A are based on the reconciliation in the
table below: Cash Flow Netback (in thousand of Canadian dollars,
except for per share and per boe amounts) Three months ended Nine
months ended September 30 September 30 2010 2009 2010 2009 Loss
(7,976) (9,462) (14,979) (32,343) Future income taxes (reduction)
(3,450) (3,797) (9,933) (17,603) Foreign exchange loss 304 431 329
309 Depletion, depreciation and 19,610 20,249 59,897 67,280
accretion Non-cash interest expense 564 466 1,674 1,363 Share based
compensation expense 666 742 3,034 2,891 Unrealized mark-to-market
loss 1,684 (263) (2,720) 12,945 (gain) on commodity contracts Funds
from operations 11,402 8,366 37,302 34,842 Total volume (mboe) 807
911 2,534 2,724 Cash flow netback (non-GAAP) ($ 14.12 9.18 14.72
12.79 per boe) Funds from Operations Management uses funds from
operations to analyze operating performance and leverage.
Funds from operations, as presented, is not intended to represent
cash provided by operating activities nor should it be viewed as an
alternative to cash provided by operating activities or other
measures of financial performance calculated in accordance with
GAAP. All references to funds from operations throughout this
MD&A are based on cash provided by operating activities, before
changes in non-cash working capital, as reconciled in the table
below: Funds from Operations (in thousands of Canadian dollars)
Three months ended Nine months ended September 30 September 30 2010
2009 2010 2009 Cash provided by operating 10,473 7,337 24,095
32,785 activities Changes in non-cash working 293 747 11,917 1,100
capital items Asset retirement costs incurred 636 282 1,290 957
Funds from operations 11,402 8,366 37,302 34,842 For the three
months ended September 30, 2010, funds from operations increased by
36% to $11.4 million from $8.4 million in the same period in
2009. The increase in funds from operations is primarily the
result of higher prices received for oil, NGLs and natural gas and
lower transportation costs partially offset by higher royalties,
production expenses and G&A costs. For the nine months ended
September 30, 2010, funds from operations increased by 7% to $37.3
million from $34.8 million in the same period in 2009. The
increase in funds from operations is primarily the result higher
prices received for oil, NGLs and natural gas, lower production
costs and lower transportation costs which were partially offset by
higher royalties, G&A costs and interest expense.
CAPITAL EXPENDITURES The following table represents the capital
expenditures that were paid for with cash. Capital Expenditures (in
thousands of Canadian dollars except for percentages) Three months
ended Nine months ended September 30 September 30 2010 2009 Change
2010 2009 Change Capital expenditures 19,020 9,594 98% 52,225
17,391 200% Capital expenditures - (584) (100%) - 1,641 (100%) to
be recovered Amounts recovered - (2,183) (100%) (3,503) (8,412)
(58%) under agreement Dispositions (24,002) - 100% (26,232) - 100%
Total (4,982) 6,827 (173%) 22,490 10,620 112% During the nine
months ended September 30, 2010, Equal's net capital expenditures
were $22.5 million, of which Equal spent $52.2 million in total
capital expenditures, recovered $3.5 million from the capital
recovery agreement and received $26.2 million from dispositions of
non-core properties. Expenditures in Canada for the nine
months ended September 30, 2010 totaled $39.7 million and net
proceeds from dispositions totaled $26.2 million. The major
components of these expenditures include: -- $17.7 million on
property and facility acquisitions; -- $15.0 million on wells,
drilling and workovers; -- $4.0 million on land and seismic
acquisition; -- $2.0 million facilities and other equipment
maintenance; and -- $1.0 million related to the capitalization of
certain G&A costs identified as attributable to exploration and
development activities. Expenditures in the U.S. for the nine
months ended September 30, 2010 totaled $12.5 million of which the
major expenditures include: -- $5.8 million on acquiring additional
working interest in wells from non-operated working interest
partners; -- $3.4 million related to wells, drilling and workovers;
-- $1.2 million on acquisitions of land for future development in
Oklahoma; -- $1.1 million on capital enhancements; -- $0.6 million
on inventory and other assets; and -- $0.4 million related to the
capitalization of certain G&A costs identified as attributable
to exploration and development activities. During the nine months
ended September 30, 2010, Equal received a total of $3.5 million of
principal repayments under a capital recovery agreement.
Equal's near term drilling will be focused on light oil targets in
Alberta-based Cardium and Viking resource plays which have
operating margins significantly higher than our current average
Canadian production. With this focus on light oil, Equal
expects its cash flow netback to improve as each well is
drilled. Capital expenditures are expected to approximate
funds from operations. Equal operates all of its drilling and
can dictate the pace and targets of its drilling programs,
therefore, the Company can adjust quickly to the changes in
commodity prices if necessary. Equal has an extensive
drilling inventory so can it increase capital spending in a higher
commodity price environment and has the financial flexibility to do
so with its credit facility. Equal accounts for its investment in
its U.S. operations as a self-sustaining operation which means the
capital assets associated with the U.S. operations (as well as all
other balance sheet accounts for the U.S. operations) are subject
to revaluation to the current exchange rate at each balance sheet
date. The result of this revaluation is a change in the
carrying value of the U.S. assets from period to period.
Equal has commitments for the following payments over the next five
years: Financial Instrument - Liability (in thousands of Canadian
2010 2011 2012 2013 - 2014 Total dollars) Long-term debt ((1)) - -
10,000 - 10,000 Interest on long-term debt ( 99 395 198 - 692 (2))
Convertible debentures - 80,210 39,648 - 119,858 Interest on
convertible 4,844 9,688 1,635 - 16,167 debentures Accounts payable
& accrued 24,103 - - - 24,103 liabilities Commodity contracts
199 - - - 199 Office leases ((3)) 571 2,145 458 629 3,803 Vehicle
and other operating 89 257 78 - 424 leases Total obligations 29,905
92,695 52,017 629 175,246 (1) Assumes the credit facilities are not
renewed on June 24, 2011. (2) Assumes an interest rate of 3.95%
(the rate on September 30, 2010). (3) Future office lease
commitments may be reduced by sublease recoveries totaling $0.8
million. LIQUIDITY & CAPITAL RESOURCES On July 7, 2010, Equal
closed the sale of a non-core asset which had net proceeds of $24.0
million and on July 9, 2010, Equal completed a bought deal equity
offering which raised net proceeds of $35.7 million. The
proceeds from the sale of the non-core asset were used to pay down
the bank debt and the proceeds from the equity offering were used
to support the ongoing capital program; both of which give Equal
additional financial flexibility. Development
activities and acquisitions may be funded internally through cash
flow or through external sources such as debt or the issuance of
equity. The Company finances its operations and capital
activities primarily with funds generated from operating
activities, but also through the issuance of shares, debentures and
borrowing from its credit facility. The amount of equity
Equal may raise through the issuance of shares depends on many
factors including projected cash needs, availability of funding
through other sources, share price and the state of the capital
markets. The Company believes its sources of cash, including
bank debt and the proceeds from the Q3 2010 divestiture, will be
sufficient to fund its operations and anticipated capital
expenditure program in 2010. Equal's ability to fund its
operations will also depend on operating performance and is subject
to commodity prices and other economic conditions which may be
beyond its control. The Company will monitor commodity prices
and adjust the 2010 capital expenditure program accordingly to stay
within its means. The Company operates all of its drilling
programs and as a result, can control the pace and targets of its
capital spending to react quickly to changes in cash flow to ensure
ongoing financial stability. Equal's improved cash position
and available credit facility should enable the Company to address
any economic uncertainties. Equal's capital structure at September
30, 2010 is as follows: Capitalization (in thousand of September
30, 2010 December 31, 2009 Canadian dollars except percentages)
Amount % Amount % Long-term debt 10,000 4% 70,000 24% Working
capital ((1) )excluding (6,005) (2%) (28,554) (10%) long-term debt(
) Long-term receivable - 0% (5,491) (2%) Working capital including
3,995 2% 32,955 12% long-term debt Convertible debentures 116,537
46% 114,863 39% Shares issued, at market ((2)) 130,618 52% 141,499
49% Total capitalization 251,150 100% 292,317 100% (1) Working
capital excludes commodity contracts and future income taxes. (2)
The weighted average price of Equal's shares on September 30, 2010
was $4.72 per share (December 31, 2009 - $6.54 per share per share
restated for the three trust unit for one share exchange).
Long-term Debt Long-term debt is represented by the amounts drawn
on our Bank Credit Facility. At September 30, 2010, Equal's
long-term debt was $10.0 million, a decrease of $60.0 million from
$70.0 million at December 31, 2009. Equal has credit
facilities with its banking syndicate that includes revolving and
operating credit facilities which have a borrowing capacity of
$125.0 million. Equal monitors capital using an interest
coverage ratio that has been externally imposed as part of the
credit agreement. Equal is required to maintain an interest
coverage ratio greater than 3.00 to 1.00; this ratio is calculated
as follows: As at (in thousands of Canadian dollars except for
ratios) September 30, 2010 December 31, 2009 Interest coverage
((1)): Cash flow over the prior four 63,250 61,288 quarters
Interest expenses over the prior 12,305 12,533 four quarters
Interest coverage ratio 5.16 : 1.00 4.89 : 1.00 (1) These amounts
are defined terms within the credit agreements. Working Capital The
working capital decreased by $22.5 million from December 31, 2009
mainly due to a decrease in cash of $18.9 million, a decrease in
prepaid expenses of $0.3 million and a transfer to fixed assets of
the current portion of long-term receivable ($11.2 million at
December 31, 2009 due from a joint venture participant in Oklahoma)
due to the uncertainty of its collection which were partially
offset by an increase in accounts receivable of $4.0 million and a
decrease in accounts payable of $3.9 million. As at Working
Capital (in thousands of September 30, 2010 December 31, 2009
Canadian dollars) Working capital ((1)) 6,005 28,544 (1) Working
capital excludes commodity contracts and future income taxes.
Long-term Receivable In 2006 Equal entered into a farm-out
agreement with Petroflow Energy Ltd. and its subsidiaries ("JV
Participant"), a public oil and gas company, to fund the drilling
and completion costs of the undeveloped lands in Oklahoma.
Per the agreement, JV Participant paid 100% of the drilling and
completion costs to earn 70% of Equal's interest in the well and
Equal was required to build the infrastructure to support these
wells, such as pipelines and salt water disposal wells. The
infrastructure costs incurred by Equal are recoverable from JV
Participant over three years with interest charged at a rate of 12%
per annum. Infrastructure costs incurred by Equal were
accounted for as a finance lease; therefore, the capital costs
incurred were not included in property, plant and equipment but
were recorded as current and long-term receivables. The
interest income on the long-term receivable was recorded as a
reduction in interest expense. In December 2009 Equal
delivered a notice of termination for non-performance under the
terms of the farm-out agreement with JV Participant. JV
Participant was required to maintain a certain pace of drilling to
continue its right to drill on lands owned by Equal but ceased
drilling in February 2009 and had not indicated that it will be
able to continue drilling with any certainty. Final notice of
termination of the farm-out agreement was delivered in January
2010. Management anticipates that a fee will be charged to JV
Participant for use of the infrastructure assets upon termination
of the existing arrangement as a capital disposal fee against
production from the producing wells. In April 2010, a notice
of default was sent to JV Participant which accelerated the capital
recovery amortization payments such that the entire receivable
amount is due and payable. In May 2010, subsidiaries of JV
Participant filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Equal continues to operate the
wells in which JV Participant's subsidiaries share a working
interest and will defend its rights in the bankruptcy proceedings.
Currently, Equal has entered into the process of arbitration with
the JV Participant regarding the dissolution of the farm-out
agreement. The arbitration hearings are scheduled for early
2011. As at September 30, 2010, a total of $13.0 million is
owed to Equal for infrastructure construction under the farm-out
agreement which is classified as a long-term receivable and has
been transferred to the Company's PP&E accounts. There is
also $7.2 million owed to Equal in joint interest billings which is
classified in accounts receivable. Convertible Debentures As
at September 30, 2010, Equal had $116.5 million of convertible
debentures outstanding with a face value of $119.9 million.
During Q3 2010, Equal made the necessary filings, and received the
necessary approvals, to make a normal course issuer bid for its
8.25% and 8.00% convertible debentures. The normal course
issuer bid is effective until August 5, 2011. The debentures
have the following conversion prices: -- ENT.DB - $27.75. Each
$1,000 principal amount of ENT.DB debentures is convertible into
approximately 36.04 Equal shares. Mature on December 31, 2011. --
ENT.DB.A - $20.40. Each $1,000 principal amount of ENT.DB.A
debentures is convertible into approximately 49.02 Equal shares.
Mature on June 30, 2012. As at September 30, 2010, Equal has issued
capital of 27.7 million shares outstanding. If all the
outstanding convertible debentures were converted into shares at
their respective conversion prices, a total of 32.5 million shares
would be outstanding. SHARE INFORMATION Equal is capitalized
through a combination of shares and convertible debt. Equal
also has a share option plan, restricted share plan, performance
share plan and warrants to purchase shares outstanding. The
following table outlines outstanding equity instruments:
Outstanding Share November 12, 2010 September 30, December 31, 2009
Data as at 2010 Shares 27,687,704 27,673,271 21,700,896 Share
options 1,046,152 874,752 235,331 Restricted shares 520,914 276,985
534,730 8.0% Convertible 80,210 80,210 80,210 debentures ($1,000
per debenture) 8.25% Convertible 39,648 39,648 39,648 debentures
($1,000 per debenture) OUTLOOK Equal intends to focus its Q4 2010
and Q1 2011 capital expenditures on the Alberta-based Cardium and
Viking high return light oil resource plays in order to increase
its cash flow netback. Since Equal is the operator of all of
its potential drilling targets, it can adjust to commodity prices
and dictate the pace of its drilling programs to match cash
flows. The legal matters with a joint venture participant in
Oklahoma are also expected to be resolved in Q1 2011. Equal
has been disciplined in its activities to reduce its debt and
intends to maintain its operational and financial
discipline. ENVIRONMENTAL AND CLIMATE CHANGE RISK The
oil and gas industry has a number of environmental risks and
hazards and is subject to regulation by all levels of government.
Environmental legislation includes, but is not limited to,
operational controls, final site restoration requirements and
increasing restrictions on emissions of various substances produced
in association with oil and natural gas operations. Compliance with
such legislation could require additional expenditures and a
failure to comply may result in fines and penalties which could, in
the aggregate, become material. INTERNAL CONTROL OVER FINANCIAL
REPORTING There were no changes in our internal control over
financial reporting during the quarter ended September 30, 2010 or
the year to date that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting. CHANGES IN ACCOUNTING POLICIES New Canadian accounting
standards related to business combinations have been issued which
will require changes to the way business combinations are
accounted. The new standards broaden the scope of business
combinations and require transaction costs to be expensed as
incurred as well as require valuing all assets and liabilities and
measuring consideration paid at the closing date. The new
Canadian standards are required for all business combinations
occurring on or after January 1, 2011 although early adoption is
allowed. Equal has not yet determined the impact on the
financial position, results of operations or cash flows. Equal has
not determined if it will adopt this standard earlier than the
required date. International Financial Reporting Standards In
2008, the Canadian Institute of Chartered Accountants confirmed
that Canadian GAAP for publicly accountable enterprises will be
converted to International Financial Reporting Standards (IFRS) on
January 1, 2011. This change in GAAP will be effective for
years beginning January 1, 2011. Equal has commenced the process to
transition from current Canadian GAAP to IFRS. It has established a
project plan and a project team. Equal has appointed internal staff
to lead the conversion project along with sponsorship from the
senior leadership team to manage this transition and to ensure
successful implementation within the required timeframe. The
project plan consists of three phases: initiation, detailed
assessment and design and implementation. Equal has completed
the first phase, which involved the development of a detailed
timeline for assessing resources and training and the completion of
a high level review of the major differences between current
Canadian GAAP and IFRS. Discussions with Equal's external auditors
have commenced and will continue throughout the subsequent phases.
Regular reporting is provided to senior management and to the Audit
Committee of the Board of Directors. Equal is currently engaged in
the detailed assessment and design phase of the project. The
detailed assessment and design phase involves a comprehensive
analysis of the impact of the IFRS differences identified in the
initial scoping assessment. In addition, an initial evaluation of
IFRS 1 transition exemptions and an analysis of financial systems
have been completed. Management has not yet finalized its
accounting policies and as such, is unable to quantify the impact
of adopting IFRS. In addition, changes to IFRS and
International Accounting Standards prior to Equal's adoption of
IFRS may affect management's decision on the accounting policies
that Equal will adopt. During the implementation phase, Equal
will execute the required changes to business processes, financial
systems, accounting policies, disclosure controls and internal
controls over financial reporting. Equal will provide
disclosures of key elements of its plan and progress on the project
as the information becomes available during the transition period.
The transition from Canadian GAAP to IFRS is a significant
undertaking that may materially affect our reported financial
position and results of operations. At this time, Equal has
identified key differences that will impact the financial
statements as follows: -- Re-classification of exploration and
evaluation ("E&E") expenditures from property, plant and
equipment ("PP&E") - Upon transition to IFRS, Equal will
re-classify all E&E expenditures that are currently included in
the PP&E balance on the Consolidated Balance Sheet. This will
consist of the book value for Equal's undeveloped land that relates
to exploration properties. E&E assets will not be depleted and
must be assessed for impairment when indicators suggest the
possibility of impairment. -- Calculation of depletion expense for
PP&E assets - Upon transition to IFRS, Equal has the option to
calculate depletion using a reserve base of proved reserves or both
proved and probable reserves, as compared to the Canadian GAAP
method of calculating depletion using only proved reserves. Equal
has not concluded at this time which method for calculating
depletion will be used. -- Impairment of PP&E assets - Under
IFRS, impairment of PP&E is generally calculated at a more
granular level than what is currently required under Canadian GAAP.
Impairment calculations will be performed at the cash generating
unit level which is expected to be at a more detailed level than
the current Canadian and U.S. full cost pools. -- Share-based
payments are expensed based on a graded vesting schedule (currently
Equal applies straight line amortization). -- Discount rates used
in calculating the asset retirement obligation are currently under
review by the IASB as there is diversity in practice when selecting
a rate. Future changes to the standards and further interpretations
of the guidance could lead to a material change in this provision
upon adoption of IFRS. Equal will disclose additional information
on the impact of the changes throughout 2010. Any amendments to
existing IFRS standards or implementation of new IFRS standards
could lead to additional changes. CRITICAL ACCOUNTING ESTIMATES
Equal has continuously evolved and documented its management and
internal reporting systems to provide assurance that accurate,
timely internal and external information is gathered and
disseminated. Equal's financial and operating results
incorporate certain estimates including: -- estimated revenues,
royalties and operating costs on production as at a specific
reporting date but for which actual revenues and costs have not yet
been received; -- estimated capital expenditures on projects that
are in progress; -- estimated depletion, depreciation and accretion
that are based on estimates of oil and gas reserves that Equal
expects to recover in the future; -- estimated fair values of
derivative contracts that are subject to fluctuation depending upon
the underlying commodity prices; -- estimated value of asset
retirement obligations that are dependent upon estimates of future
costs and timing of expenditures; and -- estimated future
recoverable value of property, plant and equipment. Equal has hired
individuals and consultants who have the skills required to make
such estimates and ensures that individuals or departments with the
most knowledge of the activity are responsible for the estimates.
Further, past estimates are reviewed and compared to actual
results, and actual results are compared to budgets in order to
make more informed decisions on future estimates. The
Equal leadership team's mandate includes ongoing development of
procedures, standards and systems to allow Equal staff to make the
best decisions possible and ensuring those decisions are in
compliance with Equal's environmental, health and safety policies.
ADDITIONAL INFORMATION Additional information relating to Equal
Energy Ltd. can be found on SEDAR at www.sedar.com, on EDGAR at
www.sec.gov/edgar.shtml, as well as on the website at
www.Equalenergy.ca. GLOSSARY AECO a storage and pricing mcf per day
thousands of cubic hub for Canadian feet of natural gas natural gas
market per day bbl or bbls barrels of oil mmbtu millions of British
Thermal Shares bbls per day barrels of oil per mmbtu per day
millions of British day Thermal Shares per day boe barrels of oil
mmcf millions of cubic equivalent (6 mcf feet of natural gas
equivalent to 1 bbl) boe per day barrels of oil Mwh megawatt-hour
equivalent per day Cdn$ Canadian dollars NGL natural gas liquids
(ethane, propane, butane and condensate) FD&A Finding
Development & NI 51-101 National Instrument Acquisition Costs
51-101 FDC Future Development NYMEX New York Mercantile Costs
Exchange GAAP Canadian Generally Q1 first quarter of the Accepted
Accounting year - January 1 to Principles March 31 GJ Gigajoule Q2
second quarter of the year - April 1 to June 30 GORR Gross
overriding Q3 third quarter of the royalty year - July 1 to
September 30 LNG Liquefied Natural Gas Q4 fourth quarter of the
year - October 1 to December 31 mbbl thousand barrels of US$ United
States dollars oil mboe thousands of barrels WTI West Texas of oil
equivalent Intermediate (oil reference price) mcf thousand cubic
feet of natural gas EQUAL ENERGY LTD. CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands of September 30, 2010 December 31, 2009
Canadian dollars) Assets Current assets Cash and cash equivalents
735 19,680 Accounts receivable (note 10) 27,663 23,677 Prepaid
expenses, deposits and 1,710 1,998 other Current portion of
long-term - 11,196 receivables (note 3) Commodity contracts (note
10) 3,167 993 33,275 57,544 Long-term receivable (note 3) 12,952
5,491 Property, plant and equipment 362,790 399,237 (note 4) Future
income tax asset 7,401 - 416,418 462,272 Liabilities Current
liabilities Accounts payable and accrued 24,103 27,997 liabilities
Commodity contracts (note 10) 199 755 Future income tax liability
837 69 25,139 28,821 Long-term debt (note 5) 10,000 70,000
Convertible debentures (note 6) 116,537 114,863 Asset retirement
obligations (note 21,065 21,055 7) Future income tax liability
4,755 8,487 177,496 243,226 Shareholders' equity (note 1 and 8)
Common shares 259,389 - Unitholders' capital - 674,106 Equity
component of convertible 3,951 3,951 debentures (note 6)
Contributed surplus 11,328 11,064 Accumulated other comprehensive
(27,114) (22,474) loss (note 9) Deficit (note 1) (8,632) (447,601)
(35,746) (470,075) 238,922 219,046 416,418 462,272 See accompanying
notes to the consolidated financial statements. EQUAL ENERGY LTD.
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS Three months
ended Nine months ended September 30 September 30 (unaudited) (in
thousands of Canadian dollars) 2010 2009 2010 2009 Revenues Oil and
natural gas 32,163 29,355 104,407 88,320 Realized gain on commodity
2,104 999 4,602 15,131 contracts (note 10) Unrealized gain/(loss)
on (1,684) 312 2,720 (12,407) commodity contracts (note 10)
Royalties (6,648) (6,097) (22,367) (18,021) 25,935 24,569 89,362
73,023 Expenses Production 9,589 7,853 27,357 30,711 Transportation
499 705 1,741 1,996 General and administrative 4,795 4,534 12,929
11,420 Interest expense (note 11) 3,381 3,314 10,145 8,362
Share-based compensation 666 742 3,034 2,891 expense (note 8)
Depletion, depreciation and 19,610 20,249 59,897 67,280 accretion
(notes 4 and 7) Foreign exchange (gain) loss (1,563) 431 (1,427)
309 36,977 37,828 113,676 122,969 Loss before income taxes (11,042)
(13,259) (24,314) (49,946) Income taxes Current 384 - 598 - Future
taxes reduction (3,450) (3,797) (9,933) (17,603) (3,066) (3,797)
(9,335) (17,603) Loss (7,976) (9,462) (14,979) (32,343) Other
comprehensive loss Foreign currency translation (7,324) (23,161)
(4,640) (37,397) adjustment (note 9) Comprehensive loss (15,300)
(32,623) (19,619) (69,740) Loss per share (note 8) - Basic and
diluted (0.29) (0.45) (0.64) (1.56) CONSOLIDATED STATEMENTS OF
DEFICIT (unaudited) (in thousands of Canadian dollars) Deficit,
beginning of period (656) (429,200) (447,601) (406,319) Reduction
of deficit on - - 453,948 - Arrangement (note 1) Loss (7,976)
(9,462) (14,979) (32,343) Deficit, end of period (8,632) (438,662)
(8,632) (438,662) See accompanying notes to the consolidated
financial statements. EQUAL ENERGY LTD. CONSOLIDATED STATEMENTS OF
CASH FLOWS Three months ended Nine months ended September 30
September 30 (unaudited) (in thousands of Canadian dollars) 2010
2009 2010 2009 Cash provided by (used in): Operating Loss (7,976)
(9,462) (14,979) (32,343) Depletion, depreciation and 19,610 20,249
59,897 67,280 accretion (notes 4 and 7) Future taxes (reduction)
(3,450) (3,797) (9,933) (17,603) Unrealized commodity contracts
1,684 (263) (2,720) 12,945 loss (gain) (note 10) Foreign exchange
loss 304 431 329 309 Share-based compensation (note 666 742 3,034
2,891 8) Non-cash interest expense on 564 466 1,674 1,363
convertible debentures Cash paid on asset retirement (636) (282)
(1,290) (957) obligations (note 7) 10,766 8,084 36,012 33,885
Changes in non-cash working (293) (747) (11,917) (1,100) capital
items 10,473 7,337 24,095 32,785 Financing Repayment of long-term
debt (54,606) (3,326) (58,495) (20,466) (note 5) Redemption of
convertible - (128) - (130) debentures Issue of shares, net of
35,661 - 35,661 - issuance costs (note 8) (18,945) (3,454) (22,834)
(20,596) Investing Property, plant and equipment (19,020) (9,594)
(52,225) (17,391) additions Capital expenditure to be - (584) -
(1,641) recovered (note 3) Repayment of long-term - 2,183 3,503
8,412 receivable (note 3) Proceeds on disposal of 24,002 - 26,232 -
property, plant and equipment Changes in non-cash working (117)
(1,525) 2,606 (6,480) capital items 4,865 (8,352) (19,884) (17,100)
Foreign exchange on financial (521) (1,406) (322) (1,588) balances
Change in cash and cash (4,128) (5,875) (18,945) (6,499)
equivalents Cash and cash equivalents, 4,863 13,014 19,680 13,638
beginning of period Cash and cash equivalents, end 735 7,139 735
7,139 of period See accompanying notes to the consolidated
financial statements. NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS (unaudited) 1. General Equal Energy Ltd. ("Equal" or the
"Company") is a value oriented exploration and production oil and
gas company. On May 31, 2010, Equal completed its previously
announced Arrangement to convert from an income trust to a
corporation through a business combination pursuant to an
arrangement under the Business Corporations Act (Alberta) and
related transactions (the "Arrangement"). Unitholders of the
Trust received one Equal common share for every three Enterra
Energy Trust units held. Enterra's Board of Directors and
management team continued as Equal's Board of Directors and
management team. Immediately subsequent to the Arrangement,
former Enterra unitholders held 100 percent of the equity in Equal
and Equal effected an internal reorganization whereby, among other
things, the Trust was dissolved and the Company received all of the
assets and assumed all of the liabilities of the Trust. The
outstanding convertible debentures of the Trust were assumed by
Equal as a result of the Arrangement and are convertible into
common shares of the Company, rather than trust units of the Trust,
at a conversion price of $27.75 per share for the 8% convertible
debentures and $20.40 for the 8.25% convertible debentures. In
connection with the Arrangement, Equal assumed all of the
obligations of the Trust in respect of outstanding equity incentive
rights. The Arrangement did not result in the acceleration of
vesting of any outstanding equity incentive rights. Upon
exercise of any outstanding trust unit option, restricted unit and
performance unit, the holders will receive one-third of one Equal
share for each pre-consolidation trust unit they would have
otherwise been entitled to receive in accordance with the Trust
Unit Option Plan and the Restricted Unit and Performance Unit
Plan. Option exercise prices were increased by three times to
reflect the unit consolidation which took place at the time of the
Arrangement. Pursuant to the Arrangement, shareholders' capital was
reduced by the amount of the deficit of the Trust on May 31, 2010
of $453.9 million. The Arrangement has been accounted for on a
continuity of interest basis and accordingly, the consolidated
financial statements for periods prior to the effective date of the
Arrangement reflect the financial position, results of operations
and cash flows as if the Company had always carried on the business
formerly carried on by the Trust. Information herein with
respect to Equal includes information in respect of the Trust prior
to completion of the Arrangement to the extent applicable unless
the context otherwise requires. 2. Basis of presentation The
interim consolidated financial statements of Equal Energy Ltd. have
been prepared by management in accordance with Canadian generally
accepted accounting principles. These interim consolidated
financial statements have been prepared following the same
accounting policies and methods used in preparing the consolidated
financial statements of the Trust for the fiscal year ended
December 31, 2009. These financial statements should be read
in conjunction with the 2009 annual consolidated financial
statements of the Trust. The interim consolidated financial
statements contain disclosures which are supplemental to the
Trust's annual consolidated financial statements. These
consolidated financial statements include the accounts of the
Company and its subsidiaries. All inter-company accounts and
transactions have been eliminated. Certain comparative figures have
been reclassified to conform to the presentation adopted in the
current period. 3. Long-term receivable In 2006 Equal entered into
a farm-out agreement with Petroflow Energy Ltd. and its
subsidiaries ("JV Participant"), a public oil and gas company, to
fund the drilling and completion costs of the undeveloped lands in
Oklahoma. Per the agreement, JV Participant paid 100% of the
drilling and completion costs to earn 70% of Equal's interest in
the well and Equal was required to build the infrastructure to
support these wells, such as pipelines and salt water disposal
wells. The infrastructure costs incurred by Equal are
recoverable from JV Participant over three years with interest
charged at a rate of 12% per annum. Infrastructure costs incurred
by Equal were accounted for as a finance lease; therefore, the
capital costs incurred were not included in property, plant and
equipment but were recorded as current and long-term
receivables. The interest income on the long-term receivable
was recorded as a reduction in interest expense. In December
2009 Equal delivered a notice of termination for non-performance
under the terms of the farm-out agreement with JV
Participant. JV Participant was required to maintain a certain
pace of drilling to continue its right to drill on lands owned by
Equal but ceased drilling in February 2009 and had not indicated
that it will be able to continue drilling with any
certainty. Final notice of termination of the farm-out
agreement was delivered in January 2010. Management
anticipates that a fee will be charged to JV Participant for use of
the infrastructure assets upon termination of the existing
arrangement as a capital disposal fee against production from the
producing wells. In April 2010, a notice of default was sent
to JV Participant which accelerated the capital recovery
amortization payments such that the entire receivable amount is due
and payable. In May 2010, subsidiaries of JV Participant
filed for bankruptcy protection under Chapter 11 of the United
States Bankruptcy Code. Equal continues to operate the wells
in which JV Participant's subsidiaries share a working interest and
will defend its rights in the bankruptcy proceedings. Currently,
Equal has entered into the process of arbitration with the JV
Participant regarding the dissolution of the farm-out agreement.
The arbitration hearings are scheduled for early 2011. From
JV Participant, as at September 30, 2010, a total of $13.0 million
is due under the farm-out agreement which is classified as a
long-term receivable and $7.2 million is due in joint interest
billings which is classified in accounts receivable. 4.
Property, plant and equipment (in thousands of Canadian dollars)
September 30, 2010 December 31, 2009 Petroleum and natural gas
properties, including production and processing equipment 1,095,525
1,076,903 Accumulated depletion and (732,735) (677,666)
depreciation Net book value 362,790 399,237 For the Canadian
operations, at September 30, 2010, costs of undeveloped land and
seismic of $11.7 million (December 31, 2009 - $9.8 million) were
excluded from and $2.1 million (December 31, 2009 - $1.8 million)
of future development costs were added for purposes of the
calculation of depletion expense. For the U.S. operations, at
September 30, 2010, costs of undeveloped land of $9.8 million
(December 31, 2009 - $10.3 million) were excluded from and $65.4
million (December 31, 2009 - $67.6 million) of future development
costs were added for purposes of the calculation of depletion
expense. Depletion and depreciation expense related to the
Canadian and the U.S. cost centers for the three months ended
September 30, 2010 were $11.2 million and $8.0 million respectively
(three months ended September 30, 2009 - $12.0 million and $7.8
million, respectively) and for the nine months ended September 30,
2010 were $35.5 million and $23.1 million respectively (nine months
ended September 30, 2009 - $39.2 million and $26.8 million,
respectively). During Q3 2010, a negligible amount of general
and administrative expenses (Q3 2009 - nil) and $0.2 million (Q3
2009 - $0.2 million) of share-based compensation were capitalized
and included in the cost of the petroleum and natural gas
properties. Equal completed ceiling test calculations for the
Canadian and U.S. cost centers at September 30, 2010 to assess the
recoverability of costs recorded in respect of the petroleum and
natural gas properties. The ceiling test calculations did not
result in a write down of the U.S. cost center or the Canadian cost
centre (there were no write downs in Q3 2009). 5. Long-term
debt (in thousands of Canadian September 30, 2010 December 31, 2009
dollars) Revolving credit facility 10,000 70,000 Operating credit
facility - - Long-term debt 10,000 70,000 On June 25, 2010, the
Company's Bank Syndicate completed a review of the borrowing base
which took into account the divesture on July 7, 2010 and increased
the borrowing base to $125.0 million from $110.0 million. The
next scheduled review of the borrowing base is anticipated to be
December 2010. Changes to the amount of credit available may
be made after these reviews are completed. The revolving and
operating credit facilities are secured with a first priority
charge over the assets of Equal. The maturity date of the
revolving and operating credit facilities is June 24, 2011 and
should the lenders decide not to renew the facility, the debt must
be repaid by June 24, 2012. Interest rates and standby fees for the
credit facilities are set quarterly according to a grid based on
the ratio of bank debt to cash flow with the interest rates ranging
between 2.5% to 4.5% plus the Canadian dollar BA ("Bankers
Acceptance") or U.S. dollar LIBOR rate. For any unused balance
of the credit facility, between 0.625% to 1.125% is charged as a
standby fee which is recorded in interest expense. For Q3,
2010, the base interest rate and standby fee were 2.75% and
0.6875%, respectively. As at September 30, 2010 all
borrowings under the facilities were denominated in Canadian
dollars and interest was being accrued at a rate of 3.95% per
annum. At September 30, 2010, letters of credit totaling $0.5
million reduced the amount that can be drawn under the operating
credit facility. Equal is required to maintain several
financial and non-financial covenants and an interest coverage
ratio of 3.0:1.0 as calculated pursuant to the terms of the credit
agreement. For the 12 months ended September 30, 2010, the interest
coverage ratio was 5.16 (September 30, 2009 - 5.32). Equal is in
compliance with the terms and covenants of the credit facilities as
at September 30, 2010. 6. Convertible debentures
Pursuant to the Arrangement, Equal assumed the convertible
debentures of Enterra which consisted of $80.2 million in face
value of 8.0% convertible debentures and $39.6 million in face
value of 8.25% convertible debentures. The 8% and 8.25%
convertible debentures are convertible at the option of the holder
into common shares at any time prior to the maturity date at the
conversion price of $27.75 and $20.40, respectively, per common
share. At September 30, 2010, the Company had $80.2 million in face
value of 8% convertible debentures outstanding with an estimated
fair value of $81.7 million and $39.6 million in face value of
8.25% convertible debentures outstanding with an estimated fair
value of $40.7 million. (in thousands of Canadian Equity
dollars) 8% Series 8.25% Series Total Component Balance, December
31, 77,840 37,023 114,863 3,951 2009 Accretion 887 787 1,674 -
Balance at September 30, 78,727 37,810 116,537 3,951 2010 During Q3
2010, Equal made the necessary filings, and received the necessary
approvals, to make a normal course issuer bid for its 8.25%
convertible debentures and its 8.00% convertible debentures. The
normal course issuer bid is effective until August 5, 2011.
7. Asset retirement obligations The asset retirement obligations
were estimated by management based on Equal's working interests in
its wells and facilities, estimated costs to remediate, reclaim and
abandon the wells and facilities and the estimated timing of the
costs to be incurred. At September 30, 2010, the asset retirement
obligation is estimated to be $21.1 million (December 31, 2009 -
$21.1 million), based on a total future liability of $38.9 million
(December 31, 2009 - $38.5 million). These obligations will be
settled at the end of the useful lives of the underlying assets,
which currently averages six years, but extends up to 20 years into
the future. This amount has been calculated using an inflation rate
of 2.0% and discounted using a credit-adjusted interest rate of
8.0% to 10.0%. The following table reconciles the asset retirement
obligations: (in thousands of Canadian September 30, 2010 December
31, 2009 dollars) Balance, beginning of period 21,055 22,151
Additions 114 51 Accretion expense 1,226 1,754 Acquisitions 24 24
Dispositions (10) - Costs incurred (1,290) (2,533) Foreign exchange
(54) (392) Balance, end of period 21,065 21,055 8. Shareholders'
equity a. Trust units The
following provides a continuity of the trust units from January 1,
2010 up to the Arrangement date on May 31, 2010: (in thousands of
Canadian dollars except number of shares) Number of Shares Amount
Trust Units - January 1, 2010 65,102,689 674,106 Issued under
restricted unit plan 605,337 2,091 Trust Units - prior to the
Arrangement 65,708,026 676,197
b. Common shares An unlimited number
of common shares may be issued. Issued and outstanding common
shares In connection with the Arrangement, the trust units were
exchanged for common shares of Equal on a three for one basis and
common shares was reduced by the deficit from the Trust as of May
31, 2010 of $453.9 million. The following provides a continuity of
share capital from the Arrangement date on May 31, 2010 through
September 30, 2010: (in thousands of Canadian dollars except number
of shares) Number of Shares Amount Conversion - Effected through
Plan of 21,902,530 676,197 Arrangement Reduction in common shares
for deficit - (453,948) amounts Issued under restricted share plan
157,141 904 Issued under equity offering (net of 5,613,600 36,236
issue costs/tax) Balance at September 30, 2010 27,673,271 259,389
Immediately prior to the Arrangement 65,708,026 trust units were
issued and outstanding. These trust units were exchange for
21,902,530 common shares. Contributed surplus (in thousands of
Canadian dollars) Balance at December 31, 2009 11,064 Share option
based compensation 375 Restricted and performance share
compensation 2,884 Transfer to shares on restricted share exercises
(2,995) Balance at September 30, 2010 11,328 Share options In
connection with the Arrangement, Equal assumed all of the
obligations of the Trust in respect of outstanding equity incentive
rights. The Arrangement did not result in the acceleration of
vesting of any outstanding equity incentive rights. Upon
exercise of outstanding trust unit options, holders will receive
one-third of one Equal share for each pre-consolidation trust unit
they would have otherwise been entitled to receive in accordance
with the Trust Unit Option Plan. Option exercise prices were
increased by three times to reflect the unit consolidation which
took place at the time of the Arrangement. Upon approval of the
Arrangement, Equal has a Share Option Plan where the Company may
grant share options to its directors, officers and
employees. Each share option permits the holder to purchase
one share at the stated exercise price. All options vest over a 1
to 3 year period and have a term of 4 to 5 years. The exercise
price is equal to the market price at the time of the
grant. The forfeiture rate is estimated to be 16%. The
following options have been granted: (in Canadian dollars, except
for Number of Weighted-average number of options) options((1))
exercise price ((1)) Options outstanding at December 235,331 $
19.80 31, 2009 Options granted 799,308 6.20 Options forfeited
(159,887) 11.85 Options outstanding at September 874,752 $ 8.83 30,
2010 Options exercisable at September 186,998 $ 18.47 30, 2010
(1) Restated to reflect the three for one exchange of
trust units for common shares. (in Canadian dollars, except for
number of options) Weighted Weighted average average Weighted
remaining price Exercise average contract Number of of price range
Number of exercise life options exercisable ((1)) options price in
years exercisable options $4.88 to 710,755 $ 6.00 3.08 66,667 $
5.25 $6.36 $8.19 to 113,666 8.34 2.13 70,000 8.43 $8.43 $46.47 to
50,331 49.94 0.60 50,331 49.94 $60.36 Balance at 874,752 $ 8.83
2.81 186,998 $ 18.47 September 30, 2010 (1) Restated to
reflect the three for one exchange of trust units for common
shares. Estimated fair value of stock options The estimated grant
date fair value of options was determined using the Black-Scholes
model under the following assumptions: 2010 2009 Weighted-average
fair value of options granted ($/option) 2.40 - Risk-free interest
rate (%) 1.98 0.5 Estimated hold period prior to exercise (years)
4.0 4.0 Expected volatility (%) 50 40 Expected cash distribution
yield (%) - - For the 9 month period ending September 30, 2010,
Equal granted 799,308 options (September 30, 2009 - nil).
Restricted and performance shares In connection with the
Arrangement, Equal assumed all of the obligations of the Trust in
respect of outstanding equity incentive rights. The Arrangement did
not result in the acceleration of vesting of any outstanding equity
incentive rights. Upon exercise of outstanding Restricted
Units and Performance Units, holders will receive one-third of one
Equal share for each pre-consolidation trust unit they would have
otherwise been entitled to receive in accordance with the
Restricted Unit and Performance Unit Plan. Equal has granted
restricted and performance shares to directors, officers, and
employees. Restricted shares vest over a contracted period ranging
from vesting on grant to 3 years and provide the holder with shares
on the vesting dates of the restricted shares. The shares
granted are the product of the number of restricted shares times a
multiplier. The multiplier starts at 1.0 and is adjusted each
month based on the monthly dividend of the Company divided by the
five-day weighted average price of the shares based on the New York
Stock Exchange for the period preceding the dividend
date. Equal has not paid or declared any dividends to change
the multiplier from 1.0. The forfeiture rate is estimated to
be 16%. Performance shares vest at the end of two years and provide
the holder with shares based on the same multiplier as the
restricted shares as well as a payout multiplier. The payout
multiplier ranges between 0.0 and 2.0 based on the Company's total
shareholder return compared to its peers. During 2010, there
were no performance shares outstanding. The following
restricted shares have been granted: Number of Weighted-average
grant restricted shares((1)) date fair value((1)) Restricted shares
outstanding at December 31, 2009 534,730 $ 10.41 Granted 170,529
6.15 Forfeited (69,354) 11.09 Vested (358,920) 9.13 Restricted
shares outstanding at September 30, 2010 276,985 $ 9.27 (1)
Restated to reflect the three for one exchange of trust units for
common shares. The estimated value of the restricted shares is
based on the trading price of the shares on the grant date.
Reconciliation of earnings per share calculations For the three
months ended September 30, 2010 Weighted Average (in thousands of
Canadian dollars except Shares shares and per share amounts) Loss
Outstanding Per Share Basic and diluted (7,976) 27,114,648 $ (0.29)
For the nine months ended September 30, 2010 Weighted Average (in
thousands of Canadian dollars except Shares shares and per share
amounts) Loss Outstanding Per Share Basic and diluted (14,979)
23,551,065 $ (0.64) For the three months ended September 30, 2009
Weighted (in thousands of Canadian Average dollars except shares
and per Shares share amounts) Loss Outstanding((1)) Per Share((1))
Basic and diluted (9,462) 21,352,879 $ (0.45) (1) Restated to
reflect the three for one exchange of trust units for common
shares. For the nine months ended September 30, 2009 (in thousands
of Canadian dollars except Weighted shares and per share Average
amounts) Loss Shares Outstanding((1)) Per Share((1)) Basic and
diluted (32,343) 20,737,327 $ (1.56) (1) Restated to reflect
the three for one exchange of trust units for common shares. For
the calculation of the weighted average number of diluted shares
outstanding for the three and nine months ended September 30, 2010
and 2009, all options, restricted shares and convertible debentures
were excluded, as they were anti-dilutive to the calculation.
9. Accumulated other comprehensive loss (in thousands of Canadian
dollars) Opening balance, December 31, 2009 (22,474) Cumulative
translation of self-sustaining operations (4,640) Balance at
September 30, 2010 (27,114) Accumulated other comprehensive income
(loss) is comprised entirely of currency translation adjustments on
the U.S. operations. 10. Risk management (a) Fair value of
financial instruments Equal classifies the fair value measurements
of its financial instruments recognized at fair value in the
balance sheet according to the following hierarchy based on the
amount of observable inputs used to value the instrument. --
Level 1 - Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active
markets are those in which transactions occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis. -- Level 2 - Pricing inputs are other than quoted prices in
active markets included in Level 1. Prices in Level 2 are either
directly or indirectly observable as of the reporting date. Level 2
valuations are based on inputs, including quoted forward prices for
commodities, time value and volatility factors, which can be
substantially observed or corroborated in the marketplace. -- Level
3 - Valuations in this level are those with inputs for the asset or
liability that are not based on observable market data. The
carrying values of cash and cash equivalents, accounts receivable
and accounts payable and accrued liabilities approximated fair
value at September 30, 2010 as the amounts were short term in
nature or bore interest at floating rates. The long-term debt
approximates fair value as interest rates and margins are
reflective of current market rates. The fair value of the
convertible debentures is disclosed in Note 6. These assets
and liabilities are not presented in the following tables. As
at September 30, 2010, the only asset or liability measured at fair
value on a recurring basis are the commodity contracts. The
following tables provide fair value measurement information for
such assets and liabilities as of September 30, 2010. As at
September 30, 2010 Fair Value Measurements Using: (in thousands of
Carrying Fair Canadian dollars) Amount Value Level 1 Level 2 Level
3 Commodity contracts 3,167 3,167 - 3,167 - asset Commodity
contracts (199) (199) - (199) - liability Commodity contracts 2,968
2,968 - 2,968 - (net) (b) Financial risk management In the
normal course of operations, Equal is exposed to various market
risks such as liquidity, credit, interest rate, foreign exchange
and commodity risk. To manage these risks, management determines
what activities must be undertaken to minimize potential exposure
to risks. The objectives of Equal to managing risk are as
follows: Objectives: -- maintaining sound financial condition; --
financing operations; and -- ensuring liquidity in the Canadian and
U.S. operations. In order to satisfy the objectives above, Equal
has adopted the following policies: -- prepare budget documents at
prevailing market rates to ensure clear, corporate alignment to
performance management and achievement of targets; -- recognize and
observe the extent of operating risk within the business; --
identify the magnitude of the impact of market risk factors on the
overall risk of the business and take advantage of natural risk
reductions that arise from these relationships; and -- utilize
financial instruments, including derivatives to manage the
remaining residual risk to levels that are within the risk
tolerance of the Company. The policy objective with respect to the
utilization of derivative financial instruments is to selectively
mitigate the impact of fluctuations in commodity prices. The
use of any derivative instruments is carried out in accordance with
approved limits as authorized by the board of directors and imposed
by external financial covenants. It is not the intent of Equal
to use financial derivatives or commodity instruments for trading
or speculative purposes and no financial derivatives have been
designated as accounting hedges. Equal's process to manage changes
in risks has not changed from the prior period. (i) Market risks
Oil and gas commodity price risks Equal is exposed to fluctuations
in natural gas and crude oil prices. Equal has entered into
commodity contracts and fixed price physical contracts to minimize
the exposure to fluctuations in crude oil and natural gas prices.
At September 30, 2010, the following financial derivative contracts
are outstanding: Derivative Volume (per Instrument Commodity Price
day) Period Fixed Gas 6.25 5,000 mmbtu (US$/mmbtu) November 1, 2009
- Fixed Basis Differential December 31, Differential( Gas Fixed @
$0.615 5,000 mmbtu 2010 (1)) US$/mmbtu Fixed March 1, 2010 - Gas
5.45 ($/GJ) 1,000 GJ February 28, 2011 Fixed Gas 6.22 2,000 mmbtu
(US$/mmbtu) April 1, 2010 - Fixed Basis Differential October 31,
2010 Differential( Gas Fixed @ $0.40 2,000 mmbtu (1)) US$/mmbtu
Fixed Gas 5.70 2,000 mmbtu April 1, 2010 - (US$/mmbtu) October 31,
2010 Fixed Basis Differential January 1, 2010 Differential( Gas
Fixed @ $0.30 7,000 mmbtu - (1)) US$/mmbtu December 31, 2010 Fixed
October 1, 2009 Oil 85.00 ($/bbl) 500 bbl - December 31, 2010 Fixed
January 1, 2010 Oil 88.00 ($/bbl) 300 bbl - December 31, 2010 Fixed
January 1, 2011 Oil 93.00 ($/bbl) 200 bbl - December 31, 2011 Fixed
January 1, 2011 Oil 94.60 ($/bbl) 200 bbl - December 31, 2011 (1)
NYMEX / Southern Star (Oklahoma) basis differential. At September
30, 2010, the following physical contract was outstanding: Type of
contract Commodity Price Volume (per day) Period March 1, 2010 -
Fixed Sale Gas 5.48 ($/GJ) 1,000 GJ February 28, 2011 The gains
(losses) during the period from the commodity contracts are
summarized in the table below. (in thousands of Canadian Three
months ended Three months ended dollars) September 30, 2010
September 30, 2009 Realized commodity contracts gain 2,104 999
Unrealized commodity contracts (1,684) 263 gain (loss) Net gain on
commodity contracts 420 1,262 (in thousands of Canadian Nine months
ended Nine months ended dollars) September 30, 2010 September 30,
2009 Realized commodity contracts gain 4,602 15,131 Unrealized
commodity contracts 2,720 (12,945) gain (loss) Net gain on
commodity contracts 7,322 2,186 The following sensitivities show
the impact to pre-tax net income for the nine months ended
September 30, 2010 related to commodity contracts of the respective
changes in crude oil, natural gas and fixed basis differential.
Increase (decrease) to pre-tax net income Decrease in market
Increase in market price price ($1.00 per bbl and (in thousands of
($1.00 per bbl and $0.50 per mcf) Canadian dollars) $0.50 per mcf)
Crude oil derivative 704 (704) contracts Natural gas derivative 456
(456) contracts Decrease in Increase in differential differential
price price ($0.02 per mcf) ($0.02 per mcf) Fixed basis (22) 22
differential contracts Foreign exchange currency risks Equal is
exposed to foreign currency risk as approximately 54% of its
production is from the U.S. division. In addition, the
Canadian division has commodity derivatives denominated in U.S.
dollars. Equal has not entered into any foreign exchange
derivative contracts to mitigate its currency risks as at September
30, 2010. Changes in the U.S. to Canadian foreign exchange rates
with respect to the U.S. division affect other comprehensive income
as the division is considered a self-sustaining foreign
operation. The following financial instruments were
denominated in U.S. dollars as at September 30, 2010: Canadian
division U.S. division (in thousands of dollars) (in U.S. dollars)
(in U.S. dollars) Cash and cash equivalents - 1,752 Accounts
receivable - 17,683 Long-term receivable - 12,587 Commodity
contracts 1,548 (193) Accounts payable (66) (7,774) Long-term debt
- - Net exposure 1,482 24,055 Effect of a $0.02 increase in U.S. to
Cdn exchange rate: Increase to pre-tax net income 30 - Increase to
other comprehensive - 481 income Effect of a $0.02 decrease in U.S.
to Cdn exchange rate: Decrease to pre-tax net income (30) -
Decrease to other comprehensive - (481) income Interest rate risk
Interest rate risk arises on the outstanding long-term debt that
bears interest at floating rates. Equal has not entered into
any derivative contracts to mitigate the risks related to
fluctuations in interest rates as at September 30, 2010. The
following sensitivities show the impact to pre-tax net income for
the nine months ended September 30, 2010 of the respective changes
in market interest rates (increase / (decrease)). Change to
pre-tax net income (in thousands of Canadian 1% decrease in market
1% increase in market dollars) interest rates interest rates
Interest on long-term debt 427 (427) The convertible debentures
bear interest at fixed rates. (ii) Credit risk Credit risk is
the risk of loss if counterparties do not fulfill their contractual
obligations and arises principally from trade, joint venture
receivables, long-term receivables as well as any derivative
financial instruments in a receivable position. Equal does
not hold any collateral from counterparties. The maximum
exposure to credit risk is the carrying amount of the related
amounts receivable. The significant balances receivable are set out
below. Accounts receivable include trade receivables, joint
venture receivables and non-aging accounts such as cash calls,
taxes receivable and operating advances. (in thousands of Canadian
dollars) September 30, 2010 December 31, 2009 Accounts receivable -
trade 21,583 15,398 Accounts receivable - joint 1,934 1,033 venture
Accounts receivable - other 5,979 8,400 Allowance for doubtful
accounts (1,833) (1,154) 27,663 23,677 Current portion of long-term
- 11,196 receivables Long-term receivables 12,952 5,491 Should
Equal determine that the ultimate collection of a receivable is in
doubt based on the processes for managing credit risk, it will
provide the necessary provision in its allowance for doubtful
accounts with a corresponding charge to earnings. If Equal
subsequently determines an account is uncollectible, the account is
written off with a corresponding decrease in the allowance for
doubtful accounts. As described in Note 3, Equal has a
long-term receivable with a JV Participant of $13.0 million and
included in trade accounts receivable is $7.2 million due from JV
Participant, of which, $6.1 million is past due over 90 days.
The credit risk with JV Participant is mitigated by the ability of
Equal to request the midstreamer to withhold a portion of JV
Participant's share of revenues until such time as the amounts
receivable are paid or the revenues withheld exceeds the amounts
owed to Equal. In addition, Equal has placed liens on various
assets owned by JV Participant to mitigate the collection
risk. A provision for doubtful accounts has not been recorded
on the amounts receivable from JV Participant due to the liens in
place on the various assets. The aging of accounts receivable
is set out below: (in thousands of Canadian dollars) As at
September 30, 2010 Trade Joint Venture Current 14,489 480 Over 30
days 862 765 Over 60 days 99 140 Over 90 days 6,133 549 21,583
1,934 The credit quality of financial assets has been assessed and
adequately evaluated for impairment based on historical information
about the nature of the counterparties. Purchasers of the natural
gas, crude oil and natural gas liquids comprise a substantial
portion of accounts receivable. A portion of accounts
receivable are with joint venture partners in the oil and gas
industry. Equal takes the following precautions to reduce
credit risk: -- the financial strength of the counterparties is
assessed; -- the total exposure is reviewed regularly and extension
of credit is limited; and -- collateral may be required from some
counterparties. (iii) Liquidity risks Liquidity risk is the
risk that Equal will not be able to meet its financial obligations
as they are due. Equal mitigates this risk through actively
managing its capital, which it defines as unitholders' equity,
convertible debentures and long-term debt less cash and cash
equivalents. Management of liquidity risk over the short and
longer term, includes continual monitoring of forecasted and actual
cash flows to ensure sufficient liquidity to meet financial
obligations when due and maintaining a flexible capital management
structure. Equal strives to balance the proportion of debt
and equity in its capital structure given its current oil and gas
assets and planned investment opportunities. All financial
liabilities have short-term maturities with the exception of the
long-term debt (Note 5) and the convertible debentures (Note 6), as
set out below: Financial Instrument - Liability (in thousands of
Canadian dollars) 2010 2011 2012 2013 - 2014 Total Fair Value
Long-term debt ( (1)) - - 10,000 - 10,000 10,000 Interest on
long-term debt ( (2)) 99 395 198 - 692 692 Convertible - 80,210
39,648 - 119,858 122,428 debentures Interest on 4,844 9,688 1,635 -
16,167 16,167 convertible debentures Accounts payable & 24,103
- - - 24,103 24,103 accrued liabilities Commodity contracts 199 - -
- 199 199 Total obligations 29,245 90,293 51,481 - 171,019 173,589
(1) Assumes the credit facilities are not renewed on June 24,
2011. (2) Assumes an interest rate of 3.95% (the rate on
September 30, 2010). 11. Interest expense During the three and nine
month periods ending September 30, 2010 and 2009, Equal's interest
expense was comprised of the following below. Three months ended
Nine months ended September September 30 30 (in thousands of 2010
2009 2010 2009 Canadian dollars) Interest on long-term 510 1,113
1,903 2,101 debt Interest on 3,046 2,921 8,960 8,679 convertible
debentures Interest income (175) (720) (718) (2,418) 3,381 3,314
10,145 8,362 (in thousands of Canadian dollars September 30, 2010
December 31, 2009 except for ratios) Interest coverage: Cash flow
over the prior four quarters ((1)) 63,250 61,288 Interest expenses
over the prior 12,305 12,533 four quarters Interest coverage ratio
((2)) 5.16 : 1.00 4.89 : 1.00
(1) These amounts are defined terms
within the credit agreements. (2) The
minimum interest coverage ratio required under the terms of the
credit facilities is 3.00:1.00. As at September 30, 2010 and
December 31, 2009, Equal complied with the terms of the credit
facilities. There have been no changes to Equal's capital
structure, objectives, policies and processes since December 31,
2009. 12. Segmented information Equal has one operating segment
that is divided amongst two geographical areas. The following
is selected financial information from the two geographic
areas. Three months ended Nine months ended September
September 30 30 (in thousands of 2010 2009 2010 2009 Canadian
dollars) Revenue Canada 16,667 18,160 60,813 44,422 U.S. 15,916
12,506 50,916 46,622 32,583 30,666 111,729 91,044 Property, plant
and equipment Canada 170,633 197,637 U.S. 192,157 216,821 362,790
414,458 pbDon Klapko/bbr/ President and CEObr/ (403) 263-0262 or
(877) 263-0262/p p align="justify"bDell Chapman/bbr/ Chief
Financial Officerbr/ (403) 538-3580/p p align="justify"a
href="mailto:info@equalenergy.ca"info@equalenergy.ca/abr/ a
href="http://www.equalenergy.ca"www.equalenergy.ca/a/p
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