Madalena Ventures Inc. ("Madalena" or the "Company") (TSX VENTURE:MVN) today
announced its financial and operating results for the three and six months ended
June 30, 2007.
Highlights
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Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
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Restated(1) Restated(1)
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Financial
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Gross revenues
petroleum and
natural gas $ 341,338 $ 51,341 $ 486,746 $ 51,341
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Interest revenues 177,874 17,303 367,930 43,823
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Funds from
operations 94,745 (251,919) (39,031) (314,432)
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Funds from
operations per
common share -
basic and diluted 0.00 (0.00) (0.00) (0.01)
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Net income (loss)
for the period (836,521) (411,987) (1,946,293) (1,360,438)
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Net income (loss)
per common share -
basic and diluted (0.01) (0.02) (0.02) (0.02)
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Capital
expenditures $ 2,496,254 $ 1,181,058 $ 3,201,088 $ 2,899,542
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Operations
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Daily production
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Oil (bbls/d) 28.3 - 14.2 -
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Natural gas (Mcf/d) 154.5 67.9 157.6 67.9
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Natural gas liquids
(bbls/d) 7.5 1.8 7.0 1.8
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Oil equivalent
(boe/d) (1) 61.6 13.1 47.5 13.1
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Average sales price
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Oil ($/bbl) 71.42 - 71.42 -
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Natural gas ($/mcf) 8.31 6.57 8.17 6.57
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Natural gas liquids
($/bbl) 58.81 65.66 54.96 65.66
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Netback per boe (6:1)
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Petroleum and
natural gas $ 60.88 $ 43.02 $ 56.61 $ 43.02
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Royalties 5.74 8.01 6.30 8.01
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Operating expenses 12.00 7.20 14.13 7.20
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Operating netback $ 43.14 $ 27.81 $ 36.18 $ 27.81
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(1) The three months ended June 30, 2006 have been restated to adjust errors
in the calculation of stock based compensation oil and gas revenues,
expenses and depletion - see Note 12 to the June 30, 2007 financial
statements
Highlights of the quarter include:
- Tunisian seismic projects advance providing promising opportunities.
- Continued activities on numerous prospects in South America.
- Additional production revenues from Alberta operations.
- Positive funds from operations achieved in second quarter.
President's Message
Significant exploration progress was made on our operations in Tunisia during Q2
2007. The 2D seismic program conducted over the Remada Sud onshore exploration
block ("Block") in the highly prospective Ghadames basin of southern Tunisia was
completed and interpreted with highly encouraging results. As a result of the
positive seismic interpretation Madalena made a press release in July 2007 that
the Company will participate in the drilling of an exploration well on the Block
with an anticipated spud date prior to year end 2007. The Block contains over
1.2 million acres in the highly prospective Ghadames basin of southern Tunisia
and has exploratory potential in the Ordovician, Silurian Acacus and Triassic
Ras Hamia formations. All three zones are proven commercially productive from
adjoining blocks in Libya or Tunisia with significant reserves potential. The 2D
seismic program conducted over the Block during Q2 2007 has also delineated
additional prospective structures which are under review by the Company for
future drilling consideration. Madalena will pay 30% of the well costs to earn a
15% working interest in approximately 600,000 acres in the Block. The first
exploration well to be drilled by Madalena on the Block will primarily target
the Ordovician formation. A Canadian drilling rig has been contracted for the
drilling of the well which is anticipated to spud near the end of 2007. Madalena
will retain the option to drill a second test well on the Block to earn an
additional 600,000 acres and the right to participate in all further development
of the Block.
Progress was also made on the Hammamet offshore block in Tunisia during Q2 2007.
The selection and award process for the offshore seismic programs was finalized
and seismic operations on the Hammamet offshore block were commenced in July.
The Hammamet offshore block is directly offset by the Oudna field which was
placed on production in December 2006 at rates in excess of 20,000 barrels of
oil per day. The 3D and 2D seismic programs have been designed to evaluate the
potential reactivation of the Tazerka field located on the Block, evaluate three
large untested structures previously recognized on the Block, and high-grade the
most prospective test well location on the Block for drilling during 2008.
In Canada, during Q2 the Company spent approximately $270,000 to fulfill
obligations relating to the 2006 joint venture entered into in the Edson and
Brazeau areas of Alberta. With the exception of low risk remedial work and
uphole development drilling opportunities, the Company does not anticipate
significant ongoing expenditures in Canada. The Company's production during the
second quarter of 2007 from the Alberta wells increased substantially as the
result of start-up production from our 9-32 Brazeau oil well, The results of
this production and an increased focus on costs resulted in Madalena receiving
positive funds from operations during the second quarter.
During Q2 2007, Madalena continued to actively evaluate exploration and
production opportunities in South America. In Argentina the Company has bid on
several provincial concessions, evaluated numerous private acquisitions for both
exploration and production opportunities, and examined farm-in prospects.
Several offers are currently outstanding on these opportunities and technical
evaluations are ongoing on new prospects. In the first quarter of 2007, the
Company announced that it had received final government approval for our branch
office in Argentina which has led to the numerous opportunities noted above and
which we believe will assist in pursuing deal opportunities in the future.
Subsequent to the end of the second quarter, Madalena received government
approval from the National Energy Secretariat registering the Company as an
operator.
In Colombia, Madalena has evaluated several farm-in opportunities and is
currently applying for registration as a branch in the country. In association
with a private company, Madalena is in the process of submitting a proposal for
a technical evaluation contract. Madalena continues to evaluate potential
opportunities with existing land holders, and evaluate future opportunities
through the government licensing process.
South America is a major focus for new activity for the Company and we are
confident in our ability to evaluate and acquire prospective exploration and
production prospects for the benefit of our shareholders. I look forward to
providing you with updates and announcements throughout the remainder of 2007.
Ken Broadhurst, President and Chief Executive Officer
Madalena's 2007 second quarter financial statements and related MD&A are
available on the Company's website at www.madalena-ventures.com as well as on
the SEDAR website at www.sedar.com.
About Madalena
Madalena Ventures Inc. is an international oil and gas exploration and
development company headquartered in Calgary, Alberta, Canada. Madalena's
objective is to create value for its shareholders through the discovery, and
development of oil and gas reserves. Madalena is focused on opportunities in
Argentina and Tunisia and has production operations in Alberta. Madalena is
listed on the TSX Venture exchange under the symbol "MVN". Visit
www.madalena-ventures.com for more information.
Forward Looking Statements
Certain information set forth in this press release, including a discussion of
future plans and operations, contains forward looking statements that involve
substantial known and unknown risks and uncertainties. These forward-looking
statements are subject to numerous risks and uncertainties, some of which are
beyond management's control, including but not limited to, the impact of general
economic conditions, industry conditions, fluctuation of commodity prices,
fluctuation of foreign exchange rates, environmental risks industry competition,
availability of qualified personnel and management, stock market volatility,
timely and cost effective access to sufficient capital from internal and
external sources, as well as risks inherent in operating in foreign
jurisdictions, including varying judicial or administrative guidance on
interpreting rules and regulations and a higher degree of discretion on the part
of governmental authorities. Actual results, performance or achievement could
differ materially from those expressed in or implied by these forward-looking
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management Discussion and Analysis ("MD&A") is provided by the management
of Madalena Ventures Inc. ("Madalena" or the "Company"), for the three and six
months ended June 30, 2007 with comparative information for the corresponding
period in the prior year. This MD&A should be read in conjunction with the
Company's MD&A and audited financial statements for the year ended December 31,
2006. The Company's audited financial statements and other public disclosure
documents are filed on SEDAR at www.sedar.com. The commentary in this MD&A is
based on information available to August 27, 2007. Unless otherwise stated, all
dollar amounts are expressed in Canadian dollars.
In this MD&A, all calculations converting natural gas to barrels of oil
equivalent ("boe") have been made using a conversion ratio of six thousand cubic
feet (six "Mcf") of natural gas to one barrel of oil, unless otherwise stated.
The use of boe may be misleading, particularly if used in isolation, as the
conversion ratio of six Mcf of natural gas to one barrel of oil, is based on an
energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead.
Forward-looking Statements
This MD&A contains forward-looking statements within the meaning of applicable
securities legislation. Forward-looking statements are based on current
expectations, estimates, and projections that involve numerous risks and
uncertainties, many of which are beyond the Company's and management's control.
These risks and uncertainties could cause actual results to differ materially
from those anticipated by the Company and described in this MD&A. These risks
and uncertainties include, but are not limited to, the impact of general
economic conditions, industry conditions, fluctuation of commodity prices,
fluctuation of foreign exchange rates, imperfection of reserve estimates,
environmental risks, industry competition, availability of qualified personnel
and management, stock market volatility, and timely and cost-effective access to
sufficient capital from internal and external sources. The Company assumes no
obligation to update forward-looking statements should circumstances or
management's estimates or opinions change except as required by law.
Non-GAAP Measurements
This MD&A contains the terms "funds from operations", "funds from operations per
share", "netback", and "operating netback", which are not defined under
Generally Accepted Accounting Principals ("GAAP"), and may not be comparable to
similar measures reported by other companies. Management considers these
measures to be useful supplementary information for investors. Funds from
operations, is defined as cash flow from operating activities before changes in
non-cash working capital items. Operating netbacks are calculated as total
petroleum and natural gas revenue less royalties, operating expenses, and
transportation expenses.
Disclosure Controls and Procedures
Disclosure controls and procedures ("DC&P") are designed to provide reasonable
assurance, that information required to be disclosed by the Company in its
annual and interim filings or other reports filed or submitted under various
securities legislation, are recorded, processed, summarized, and reported within
the time limits specified by the particular securities legislation, and include
controls and procedures designed to ensure that information to be disclosed by
the Company is accumulated and communicated to management to allow timely
decisions regarding the required disclosure. The Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO") of the Company are responsible for designing
DC&P, or causing them to be designed under their supervision, to provide
reasonable assurance that material information related to the Company is made
known to them by others within the organization.
The CEO and CFO have evaluated the effectiveness of the Company's DC&P as of
June 30, 2007 and have concluded that the DC&P provide a reasonable level of
assurance that material information related to the Company is recorded,
processed, summarized, and reported in a timely fashion and that material
information is made known to them by others within the organization except as
described below.
Internal Controls over Financial Reporting
Internal controls over financial reporting ("ICFR") is a process designed by, or
under the supervision of, the CEO and CFO, and effected by the Company's board
of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financials statements for external purposes in accordance with Canadian GAAP,
and includes those policies and procedures that:
(a) pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and disposition of the assets of the
Company;
(b) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with Canadian GAAP, and
that receipts and expenditures are being made only in accordance with
authorizations of management and the directors; and
(c) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company's assets, that
could have a material affect on the annual or interim financial statements.
ICFR have been designed under the supervision of the CEO and CFO of Madalena to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with Canadian GAAP, however in designing the ICFR, management has identified the
following significant weaknesses inherent in the system:
- A lack of segregation of incompatible duties within the accounting and
reporting function.
- The lack of sufficient financial reporting personnel with enough technical
accounting knowledge in all areas to address all complex and non-routine
accounting transactions that may arise.
- A lack of sufficient information system controls with respect to access and
documentation of spreadsheet information.
Management is of the view that the size of the Company and cost of correcting
these inherent weaknesses does not justify the additional assurance re-mediation
will provide, and therefore does not plan to re-mediate these weaknesses at this
time. Management believes that the small size of the Company, allows the board
of directors and management to possess significant knowledge of all events
occurring in the Company which mitigates the possibility of a material error
from taking place.
There were no changes in the Company's ICFR during the three and six months
ended June 30, 2007 that have materially affected, or are reasonable likely to
materially affect the Company's ICFR.
OVERVIEW
In the second quarter of 2007 Madalena continued the process of evaluation of
seismic information on it's Tunisian interests and advanced $2,286,000 to it's
joint venture partner to complete 3D seismic programs on the Remada Sud and
Hammamet blocks in Tunisia. Evaluation of the initial 2D seismic on Remada Sud
led to an announcement in July that Madalena would participate in the drilling
of an exploratory well on the Remada Sud onshore exploration block ("Block")
containing over 1.2 million acres in the highly prospective Ghadames basin of
southern Tunisia. Madalena spent a significant amount of time in the second
quarter evaluating additional exploration and development opportunities in South
America. In Alberta the Company spent approximately $270,000 on tie-ins of
existing wells and facilities with over $100,000 of that amount spent on
completing an oil well which resulted in significant increases to Madalena's
production in the second quarter.
RESULTS OF OPERATIONS
Production
Madalena's daily production volumes averaged 61.6 boe/d for the three months
ended June 30, 2007 and 47.5 boe/d for the six months ended June 30, 2007,
compared to 13.1 boe/d for the comparable periods in 2006. Increased production
in the three months ended June 30, 2007 was attributable to the start up of
production from the 9-32 oil well in Brazeau, Alberta, which was tied in and
started producing in April. Significant increases in production rates over 2006
reflect the early stage of development of the Company in the first six months of
2006. During this period the Company was in the process of drilling the Canadian
properties which have now been tied in and are producing or have been evaluated
and shut-in.
Production Revenue
Madalena received an average of $71.42/bbl for the oil production brought on
stream in the three months ended June 30, 2007 which is slightly lower than the
average Edmonton par price per barrel of $72.61 for the quarter. The Company
received $8.31 per Mcf for the three months ended and $8.17 per Mcf for the six
months ended June 30, 2007 for natural gas compared to $6.57 per Mcf for the
three and six month periods ended June 30, 2006. The increase in natural gas
prices reflect increases posted for AECO spot prices for the three months ended
June 30, 2007 versus the comparable period for 2006. AECO spot prices averaged
$7.06 per Mcf for the three months ended June 30, 2007 and $6.00 per Mcf for the
three months ended June 30, 2006. Gas produced from the Edson and Brazeau areas
has a higher heat energy value than AECO spot prices. The Company received
$58.51 per bbl for the three months and $54.96 per bbl for the six months ended
June 30, 2007 for natural gas liquids compared to $65.66 for the same periods in
2006. The reduction in price of natural gas liquids over 2006 reflects a drop in
the average posted price of pentanes by 11% over the same production period in
2006.
Gross revenues for the three months ended June 30, 2007 were $184,159 (54%) for
oil, $116,866 (34%) for natural gas, and $40,317 (12%) for natural gas liquids,
while gross revenues for the six months ended June 30, 2007 were $184,159 (38%)
for oil, $233,108 (48%) for natural gas, and $69,484 (14%) for natural gas
liquids compared to $nil for oil, $40,604 (79%), and $10,737 (21%) for natural
gas liquids for the three and six months ended June 30, 2006.
The Company did not have any commodity pricing contracts in place at June 30, 2007.
Interest Income
Interest income for the three and six months ended June 30, 2007 amounted to
$177,874 and $367,930 respectively compared to $17,303 and $43,823 for the
comparative periods in 2006. The increase in interest income reflects the
Company's investment of funds it received from its private placement in November
2006 in low risk short term asset backed securities which are purchased at a
discount and mature at face value providing interest income at an average yield
of 4.2%.
Royalties
Crown royalties of $32,208 for the three months ended, and $54,208 for the six
months ended June 30, 2007 compared to $9,562 for the three and six months ended
June 30, 2006 result in averages of $5.74 per boe, and $6.30 per boe for the
three and six month periods ended June 30, 2007, compared to $8.01 for the same
periods in 2006. The royalty rates reflect recognition by the operator of the
Edson and Brazeau wells of reduced royalty rates under the deep well royalty
holiday program. The reduced rates also reflect low productivity wells and gas
cost allowance reductions.
Operating expenses
Operating expenses for the three and six months ended June 30, 2007 amounted to
$50,430 and $102,725 or $8.99 and $11.95 per boe compared to $8,005 or $6.71 per
boe for the there and six months ended June 30, 2006. Higher operating expenses
reflect higher industry operating cost in the Western Canada basin.
Transportation costs amounted to $16,853 and $18,702, or $3.01 and $2.18 per boe
for the three and six months ended June 30, 2007 compared to $577 or $0.49 per
boe for the three and six months ended June 30, 2006. Higher transportation
costs reflect the higher cost of trucking oil from the 9-32 well compared to gas
transportation costs from low production gas wells in 2006.
Operating netbacks
Madalena realized the following operating netbacks from oil and gas operations:
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Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
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Netback per boe (6:1) Restated(1) Restated(1)
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Petroleum and natural
gas $ 60.88 $ 43.02 $ 56.61 $ 43.02
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Royalties 5.74 8.01 6.30 8.01
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Operating expenses 8.99 6.71 11.95 6.71
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Transportation 3.01 0.49 2.18 0.49
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Operating netback $ 43.14 $ 27.81 $ 36.18 $ 27.81
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(1) The three months ended March 31, 2006 have been restated to reflect an
error in the calculation of stock based compensation and record oil and
gas revenues, expenses and depletion in the proper period
The average net back for the three and six month periods ended June 30, 2007
reflects the higher oil content of production in the second quarter of 2007
compared to mostly start up natural gas and natural gas liquids production in
the same period of 2006. The Company did not have any production in the first
quarter of 2006. Madalena does not operate any of its properties.
General and administrative costs
General and administrative ("G&A") costs of $325,002, and $718,025 were incurred
for the three and six months ended June 30, 2007 compared to $302,419 and
$391,452 for the three and six months ended June 30, 2006. The increase in G&A
for 2007 over 2006 reflects that the Company had few administration expenses
while it was a mining exploration Company in the first quarter of 2006. As the
Company transitioned from a mining exploration Company to an international oil
and gas Company, it incurred more costs for increased staff, technical and
professional services, and office costs.
The Company capitalized $42,001 and $57,491 of G&A in the Argentina cost center
for the three and six months ended June 30, 2007, and capitalized $14,604 and
$34,240 to the Tunisia cost center for the three and six months ended June 30,
2007. There was no G&A capitalized in the comparative periods for 2006.
Stock-based compensation
Stock-based compensation ("SBC") expense amounted to $447,671 and $1,270,952 for
the three and six months ended June 30, 2007 compared to $130,988 and $1,044,514
for the three and six months ended June 30, 2006. SBC expenses in 2007 include
additional expenses for options granted on June 18, 2007, and a one time charge
for options transferred from one director to two other directors in the first
quarter of 2007. Accounting standards view this transaction as a forfeiture by
the transferor, and the grant of new options for the transferees. As a result
the SBC for the transferred options is left in contributed surplus as an
expense, and a new expense is recorded for the grant of the new options.
In the first quarter of 2006 the Company restated its calculation of SBC by
reducing the original SBC recorded in the accounts from $2,744,135 to $913,526,
a decrease of $1,830,609. The reduction reflects a revision to the calculation
of SBC to amortize the expense over the correct vesting period. The Company
capitalized $8,662 and $12,308 of SBC to foreign cost centers in the three and
six months ended June 30, 2007. There was no SBC capitalized in the comparative
periods for 2006. The SBC capitalized reflects the estimated cost of options
granted to the Company's geological consultant for evaluating exploration
opportunities in the foreign cost centers. At June 30, 2007, the Company has
approximately $1,342,000 of unamortized stock-based compensation costs that will
be charged to income over the remaining vesting period of the options
outstanding.
Depletion, depreciation and accretion
Depletion expense for the three and six months ended June 30, 2007 was $200,000
and $347,000 respectively compared to $26,000 for the three and six month
periods ending June 30, 2006. The increase in depletion reflects increased
production from the Canadian properties in 2007.
Depletion was not recorded in Argentina or Tunisia. These cost centers are
considered to be in the pre-production stage where all costs reasonably
attributable to exploring for oil and gas in these areas are capitalized to the
cost center. Management feels that the costs capitalized to date will be
recoverable from future business activities in the area.
Depreciation for the three and six months ended June 30, 2007 was $4,100 and was
$8,100 respectively compared to nil for the same periods in 2006, due to the
acquisition of office leaseholds and furniture and fixtures.
The provision for accretion due to the change in present values of asset
retirement costs was $1,605 for the three months ended June 30, 2007, and $3,210
for the six months ended June 30, 2007 compared to nil in 2006.
Canadian oil and gas property carrying value
At June 30, 2007 the Company estimated the fair value of its proved Canadian oil
and gas properties and compared it to the carrying value of these properties. As
a result of this estimate of value, the Company determined that the carrying
value of it's Canadian oil and gas properties exceeds the estimate of fair value
of and that an impairment charge should be calculated and recorded.
At June 30, 2007 the Company calculated an estimate of impairment in the amount
of $278,000. To calculate this impairment, the Company used an estimate of net
present value of the proved plus probable reserves using a 5% discount rate at
December 31, 2006 (as determined by an independent group of petroleum engineers
at December 31, 2006), and adjusted that value for production during the six
months ended June 30, 2007, for the affect of reduced forecast prices for
natural gas posted by an independent group of petroleum engineers, and for the
estimated value of additional reserves of approximately 39,000 boe arising from
an additional re-completion of one of the Canadian wells. The impairment of
$278,000 has been included in depletion for the three months ended June 30,
2007, resulting in a total depletion of $478,000.
Loss from discontinued operations, distribution of assets, dividends, and gain
on sale of marketable securities
In 2006 the Company decided to focus on International oil and gas exploration
and development opportunities. In August of 2006 the Company received final
approval to complete a plan of arrangement to distribute the mining exploration
business, and marketable securities related to that business, to its
shareholders. In the year ended December 31, 2006 the company identified $58,662
of legal costs relating to the plan of arrangement that were removed from G&A
and shown separately as a loss from discontinued operations. In the three and
six months ended June 30, 2006, $3,080 of the costs related to the discontinued
operations were recorded separately in the financial statements.
On November 15, 2004 the Company declared a dividend in specie with respect to
shares of Planet Exploration Inc. ("Planet"). Each shareholder of the Company at
November 15, 2004 became entitled to receive 0.675 Planet shares for each
Madalena share owned at November 15, 2004, subject to the shareholder fulfilling
certain conditions. During 2006, and prior to the completion of the plan of
arrangement, the Company distributed 96,963 Planet shares to shareholders that
had fulfilled the conditions. The fair market value of the shares at the date of
the distribution (determined from the trading value of the shares on the TSX
Venture exchange) is recorded as dividends paid in kind, and any gain or loss on
the disposition of the Planet shares is recorded as a gain on sale of marketable
securities. During the year ended December 31, 2006 the Company recorded $51,716
of dividends in kind and $45,016 of gain on sale of marketable securities.
$29,710 of dividends in kind and $27,588 of gain on sale of marketable
securities were recorded in the first quarter of 2006 and in the six months
ended June 30, 2006. At August 22, 2006 any Planet shares that had not been
distributed by the Company were transferred to Great Bear Resources Ltd. who
assumed the obligation to distribute the shares if the shareholders fulfilled
the commitment specified in the dividend in specie.
Net loss from operations
The net loss for the thee months ended June 30, 2007 amounted to $836,521, and
the net loss for the six months ended June 30, 2007 was $1,946,293 compared to a
net loss of $411,987 and $1,360,438 for the three and six months ended June 30,
2006. Although net revenues from oil and gas production and interest income have
increased 8 to 9 times over the previous periods, depletion (including the write
down of costs incurred on the Canadian properties) has eliminated that increase.
In addition stock based compensation increased by 3 times in the three months
ended June 30, 2007 over 2006 as additional expenses for the options granted
June 18, 2007 were recorded. Over all, the Company has maintained a positive
cash flow despite the charges for depletion and stock based compensation.
Income taxes
The Company has no provision for income taxes in 2007 or 2006. At December 31,
2006 the Company has tax pools available to deduct against income as follows:
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Non capital loss carryforwards 3,567,983
Share issue costs 1,399,715
Asset retirement obligations 80,262
Property and equipment 7,596,680
ACRI 45,354
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Future income tax assets and liabilities arise due to the difference between the
tax basis of assets and their respective accounting carrying cost. The Company's
tax basis of its assets exceeds its accounting carrying costs which results in a
net future tax asset. The benefit of the future tax assets of the Company have
not been recognized in the Company as it is not more likely than not that the
benefit of the assets will be realized in the carry forward period.
Capital Expenditures
Madalena spent $2,496,254 on petroleum and natural gas properties and office
furniture and fixtures in the three months ended June 30, 2007 and $3,201,088 in
the six months ended June 30, 2007 compared to $1,718,484 and $2,899,452 in the
comparative periods for 2006. The expenditures incurred in 2007 compared to 2006
are summarized in the following table:
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Three months ended Six months ended
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June 30, June 30, June 30, June 30,
2007 2006 2007 2006
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Canada:
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Oil and gas
properties:
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Drilling and
intangible
completions $ 117,332 $ 1,716,237 $ 658,384 $ 2,879,111
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Tangible completion
and facilities 152,767 - 280,697 -
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Land - - 49 -
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Asset retirement
obligations - - - -
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Office furniture and
equipment 510 - 1,302 -
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Mining properties - 2,247 - 20,341
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Argentina -
prospecting costs (75,139) - (59,764) -
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Tunisia - prospecting
costs 2,300,784 - 2,320,420 -
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Total capital
expenditures $ 2,496,254 $ 1,718,484 $ 3,201,088 $ 2,899,452
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LIQUIDITY AND CAPITAL RESOURCES
Presently, Madalena has limited production and therefore limited cash flow from
operations. The Company currently relies on funds from equity financing to pay
for exploration activities and overhead expenses. Continuing operations and the
recovery of property and equipment costs is dependent on Madalena's ability to
identify commercial oil and gas reserves, generate profitable operations and
obtain sufficient funds to complete development activities.
At June 30, 2007 Madalena had working capital of $15,380,251 compared to
$5,890,005 at June 30, 2006 and $18,309,436 at December 31, 2006. Working
capital at June 30, 2007 increased compared to June 30, 2006 as a result of the
issuance of common stock from private placements in November of 2006 and the
issuance of shares on the exercise of stock options and warrants during 2006. In
the six months ended June 30, 2007 the Company received $238,625 on the exercise
of warrants and $60,000 on the exercise of options. The Company has no debt at
June 30, 2007. Capital expenditures in the first quarter of 2007 were funded
entirely from working capital.
The Company is committed to a seismic exploration program in Tunisia for 2007.
The Company expects to incur an additional $2,100,000 during 2007 on the seismic
program and approximately $3,000,000 on drilling an exploration well in early
2008. In Canada, the Company expects to spend an additional $25,000 on
re-completion of a well completions and tie-ins in the Brazeau area in 2007. All
expected expenditures will be funded from the Companies existing working
capital.
TRANSACTIONS WITH RELATED PARTIES
Two directors of the Company are also directors of a public exploration company
with which Madalena is in engaged in joint venture operations. All of the
Company's oil and gas revenues, royalties and operating expenses are derived
from this joint venture. At June 30, 2007 the Company has accounts payable due
to this joint venture partner of $185,953.
The Company utilizes the services of a law firm in which one of the directors is
a partner. During the three and six months ended June 30, 2007 the Company
expended $19,200 and $74,700 respectively on services obtained from this firm.
SHARE INFORMATION
The Company has 107,368,699 common shares, 10,050,000 stock options and
14,086,940 warrants to purchase common shares outstanding at June 30, 2007.
During the three months ended June 30, 2007 the Company issued 500,000 common
shares pursuant to the exercise of options by a director at $0.12 per share,
granted incentive stock options to directors, officers, employees, and
consultant to purchase up to 2,150,000 shares of the Company at $0.60 per share,
and had 500,000 warrants to purchase common shares at a price of $1.25 per share
expire. In the six months ended June 30, 2007, in addition to the items noted
for the three months ended June 30, 2007, the Company issued 477,250 commons
shares at $0.50 per share pursuant to the exercise of warrants, and had 7,500
warrants to acquire common shares at a price of $0.50 per common share expire.
During the six months ended June 30, 2006 the Company issued 12,000,000 common
shares at $0.50 per share and 1,000,000 common shares at $1.00 per share
pursuant to private placements, 5,350,000 common shares at $0.80 per share
pursuant to warrants exercised, 1,500,000 common shares at $0.12 per share and
200,000 common shares at $0.41 per share pursuant to stock options exercised be
departing directors.
At August 27, 2007 the Company had 107,368,699 common shares, 10,050,000 stock
options and 14,086,940 outstanding.
BUSINESS RISKS
The oil and gas industry involves inherent risks which include but are not
limited to the uncertainty of the exploration process and finding new reserves,
securing markets for production from existing reserves, commodity price
fluctuations, exchange rate fluctuations, interest rate changes, and changes in
government regulations related to pricing, royalties, taxes, land fees,
allowable production volumes, and environmental requirements. The oil and
natural gas industry is intensely competitive and the Company competes with a
number of companies that may have better access to capital.
The Company's ability to increase reserves in the future will depend on its
ability to select and acquire suitable prospects and the funds required to
develop those prospects in a timely fashion. The ability of equity or debt
financing is affected by many factors, some of which are not controllable by the
Company.
The Company is focused on the international oil and gas exploration market.
Conducting oil and gas exploration and development activities in foreign
jurisdictions creates inherent risks in addition to oil and gas exploration
risks which include but are not limited to currency instability, potential civil
disturbances, currency and funds movement controls, price controls, political
instability, changes in foreign ownership restrictions, and potential
expropriation of property.
For addition detail regarding the Company's risks and uncertainties, refer to
the Company's most recent AIF on SEDAR at www.sedar.com.
CONTRACTUAL OBLIGATIONS
The Company has committed to a lease for office premises terminating on June 15,
2010. The estimated obligation at June 30, 2007, including operating costs at
current levels, is $357,436 in total.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Significant accounting policies used by Madalena are disclosed in note 2 to the
December 31, 2006 audited financial statements. Preparing financial statements
in accordance with Canadian GAAP requires management to make judgments and
estimates with respect to the critical accounting policies. Changes to these
judgments and estimates could have a material effect on the Company's financial
statements and financial position. There were no changes to Madalena's critical
accounting estimates.
CHANGES IN ACCOUNTING POLICIES
In 2007 the Company adopted new accounting standards for "Accounting Changes",
"Comprehensive Income", "Equity", "Financial Instruments - Recognition and
Measurement", "Financial Instruments - Disclosure and Presentation", and
"Hedges". Financial statements for prior periods have not been restated as a
result of the adoption of these policies except as described below. For a
detailed discussion of the accounting policies adopted please refer to Note 2 of
the financial statements for the three and six month periods ended June 30,
2007.
Financial Instruments
The Company's financial instruments consist of cash, asset backed debt
securities, guaranteed investment certificates, accounts receivable, accounts
payable, and accrued liabilities. At June 30, 2007, the carrying value of the
cash, guaranteed investment certificates, accounts receivable, accounts payable,
and accrued liabilities, approximated their fair value due to their short-term
nature. The Company has no bank indebtedness.
The Company has designated its investments in asset backed debt securities,
which are included in cash and cash equivalents, as held-for-trading financial
assets at January 1, 2007. The fair value of these assets has been determined at
June 30, 2007 based on trading prices for these instruments. The following table
provides information on the fair value, carrying value, maturity value, maturity
date, and interest yield of the asset backed debt securities at June 30, 2007.
The increase in fair value has been recorded as interest income in the statement
of operations for the three six months ended June 30, 2007.
----------------------------------------------------------------------------
As at June 30, 2007
Fair Value
Maturity at June 30, Interest
Cost Value Yield 2007 Income
----------------------------------------------------------------------------
Ridge Trust
discount note due
July 23, 2007 $ 5,134,964 $ 5,156,000 4.27% $ 5,141,089 $ 6,125
Care Trust
discount note due
July 12, 2007 1,407,235 1,413,000 4.27% 1,410,818 3,583
Stars Trust
discount note due
August 15, 2007 7,664,131 7,754,000 4.28% 7,709,128 44,997
----------------------------------------------------------------------------
$14,206,330 $14,323,000 $14,261,035 $ 54,705
----------------------------------------------------------------------------
----------------------------------------------------------------------------
News articles published subsequent to June 30, 2007 suggest that asset backed
securities are at risk of not being paid on maturity. The above noted securities
are different from the securities mentioned in the press in that they are not
extendable, they are not issued by any of the financial organizations implicated
and they are products of one of the major Canadian banks. The Company received
full and complete payment of all of the above securities on the maturity dates
noted above.
Restatement of comparative information
The comparative information for the three and six months ended June 30, 2006 has
been retrospectively restated to correct errors in the calculation of stock
based compensation, revenues, expenses, royalties and depletion. The stock based
compensation expense failed to reflect the correct vesting period, and certain
oil and gas revenues, expenses, and depletion were recorded in the wrong period.
The following tables provide information on the amount of the correction for the
three and six months ended June 30, 2006.
----------------------------------------------------------------------------
Amount Adjusted
Reported Balance
Restated amounts for the For June 30, For June 30,
Three months ended June 30, 2006 2006 Adjustments 2006
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
Petroleum and natural gas $ 32,761 18,580 $ 51,341
----------------------------------------------------------------------------
Royalties (9,488) (74) (9,562)
----------------------------------------------------------------------------
23,273 18,506 41,779
----------------------------------------------------------------------------
Interest 17,303 17,303
----------------------------------------------------------------------------
40,576 18,506 59,082
----------------------------------------------------------------------------
Expenses:
----------------------------------------------------------------------------
Operating 5,555 3,027 8,582
----------------------------------------------------------------------------
General and administrative 333,401 (30,982) 302,419
----------------------------------------------------------------------------
Stock based compensation 146,730 (15,742) 130,988
----------------------------------------------------------------------------
Depletion, depreciation and
accretion - 26,000 26,000
----------------------------------------------------------------------------
485,686 (17,697) 467,989
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss before the undernoted (445,110) 36,203 (408,907)
----------------------------------------------------------------------------
Gain on sale marketable securities 27,902 (27,902) -
----------------------------------------------------------------------------
Income (loss) from continuing
operations (417,208) 8,301 (408,907)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss from discontinued operations
(note 3) - (3,080) (3,080)
----------------------------------------------------------------------------
Net income (loss) for the period (417,208) 5,221 (411,987)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deficit - beginning of the period (4,731,839) 1,830,609 (2,901,230)
----------------------------------------------------------------------------
Distribution of assets (note 3)
----------------------------------------------------------------------------
Dividend paid in kind - -
----------------------------------------------------------------------------
Deficit - end of period $ (5,149,047) 1,835,830 $ (3,313,217)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount Adjusted
Reported Balance
Restated amounts for the For June 30, For June 30,
Six months ended June 30, 2006 2006 Adjustments 2006
----------------------------------------------------------------------------
Revenue:
----------------------------------------------------------------------------
Petroleum and natural gas $ 32,761 18,580 $ 51,341
----------------------------------------------------------------------------
Royalties (9,488) (74) (9,562)
----------------------------------------------------------------------------
23,273 18,506 41,779
----------------------------------------------------------------------------
Interest 43,823 43,823
----------------------------------------------------------------------------
67,096 18,506 85,602
----------------------------------------------------------------------------
Expenses:
----------------------------------------------------------------------------
Operating 5,555 3,027 8,582
----------------------------------------------------------------------------
General and administrative 422,434 (30,982) 391,452
----------------------------------------------------------------------------
Stock based compensation 2,890,865 (1,846,351) 1,044,514
----------------------------------------------------------------------------
Depletion, depreciation and
accretion - 26,000 26,000
----------------------------------------------------------------------------
3,318,854 (1,848,306) 1,470,548
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss before the undernoted (3,251,758) 1,866,812 (1,384,946)
----------------------------------------------------------------------------
Gain on sale marketable securities 55,490 (27,902) 27,588
----------------------------------------------------------------------------
Income (loss) from continuing
operations (3,196,268) 1,838,910 (1,357,358)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss from discontinued operations
(note 3) - (3,080) (3,080)
----------------------------------------------------------------------------
Net income (loss) for the period (3,196,268) 1,835,830 (1,360,438)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Deficit - beginning of the period (1,923,069) (1,923,069)
----------------------------------------------------------------------------
Distribution of assets (note 3)
----------------------------------------------------------------------------
Dividend paid in kind (29,710) (29,710)
----------------------------------------------------------------------------
Deficit - end of period $ (5,149,047) 1,835,830 $ (3,313,217)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per common share
- basic and diluted
----------------------------------------------------------------------------
Continuing operations $ (0.05) $ (0.02)
----------------------------------------------------------------------------
Discontinued operations $ - $ (0.00)
----------------------------------------------------------------------------
$ (0.05) $ (0.02)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Average number of shares:
----------------------------------------------------------------------------
Basic and Diluted 62,718,187 62,718,187
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comparative information for previously issued quarterly results has been
restated to reflect the above mentioned errors. A summary of the changes to net
income (loss) for each period compared to previously published information is
shown in the following table:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restated quarterly March 31, June 30, Sept 30, Dec 31,
financial information 2006 2006 2006 2006
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss)
previously reported (2,779,060) (417,208) (416,154) (2,796,247)
----------------------------------------------------------------------------
Adjustments to
previously stated
amounts in net income
(loss)
----------------------------------------------------------------------------
Stock based
compensation 1,830,609 15,742 - (99,178)
----------------------------------------------------------------------------
Petroleum and natural
gas revenues - 18,580 (18,580) -
----------------------------------------------------------------------------
Royalties - (74) 74 -
----------------------------------------------------------------------------
Operating expenses - (3,027) 3,027 -
----------------------------------------------------------------------------
Depreciation - (26,000) 26,000 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Restated net income
(loss) (948,451) (411,987) (405,633) (2,895,425)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OUTLOOK
For the remainder of 2007, the Company will focus on pursuing oil and gas
exploration activities in Argentina, completing its commitments for seismic
exploration activities in Tunisia, and evaluating drilling and completion
activities presented to it by the operator of the Edson and Brazeau area wells
in Canada.
QUARTERLY FINANCIAL INFORMATION
The following table summarizes certain information for the previous eight
quarters. For the periods ended March 31, 2006, December 31, 2005, and September
30, 2005, there was no production and therefore sales volumes and per unit
information has not been shown.
Restated(1) Restated(1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept 30,
2007 2007 2006 2006
----------------------------------------------------------------------------
Sales Volumes:
Oil (bbl/d) 28
Natural gas (mcf/d) 155 161 198 109
Natural gas liquids
(bbl/d) 8 6 7 2
Barrels of oil
equivalent (boe/d) 62 33 40 20
----------------------------------------------------------------------------
Per unit
information:
Oil price ($bbl) 71.42
Natural gas price
($/mcf) 8.31 8.03 7.54 5.75
Natural gas liquids
price ($/bbl) 58.81 50.41 51.65 62.47
Oil equivalent
price ($/boe) 60.88 48.60 46.39 37.01
Operating net back
($/boe) 43.14 23.15 25.11 32.57
----------------------------------------------------------------------------
Financial:($ except
for share info)
Revenue:
Interest Income $ 177,874 $ 190,056 $ 147,948 $ 94,762
Gain on disposal
of marketable
securities - - - 17,429
Petroleum and
natural gas
revenues 341,338 145,408 171,532 67,475
Income (loss) from
continuing
operations (836,521) (1,146,773) (2,892,752) (352,724)
Basic and diluted
per share (0.01) (0.01) (0.03) (0.00)
Net income (loss) (836,521) (1,146,773) (2,895,425) (405,633)
Basic and diluted
per share (0.01) (0.01) (0.03) (0.01)
Capital
expenditures $ 2,496,254 $ 701,188 $ 1,471,112 $ 5,398,608
Shares outstanding
(000's) 107,369 106,869 106,391 71,586
Working capital $ 15,380,251 $ 17,713,097 $ 18,309,436 $ 274,561
----------------------------------------------------------------------------
Restated(1) Restated(1)
June 30, March 31, Dec. 31, Sept 30,
2006 2006 2005 2005
----------------------------------------------------------------------------
Sales Volumes:
Natural gas (mcf/d) 68
Natural gas liquids
(bbl/d) 2
Barrels of oil
equivalent (boe/d) 13
----------------------------------------------------------------------------
Per unit information:
Natural gas price
($/mcf) 6.57
Oil and natural gas
liquids price ($/bbl) 65.66
Oil equivalent price
($/boe) 43.02
Operating net back
($/boe) 27.81
----------------------------------------------------------------------------
Financial:($ except
for share info)
Revenue:
Interest Income $ 17,303 26,520 $ 18,225 $ -
Gain on disposal of
marketable
securities - 27,588 4,839 20,869
Petroleum and
natural gas
revenues 51,341 - - -
Income (loss) from
continuing
operations (408,907) (948,451) (214,081) 20,869
Basic and diluted
per share (0.01) (0.06) (0.01) 0.00
Net income (loss) (411,987) (948,451) (280,045) (35,160)
Basic and diluted
per share (0.01) (0.06) (0.01) (0.00)
Capital expenditures 1,718,484 1,181,058 133,108 56,782
Shares outstanding
(000's) 71,471 66,521 51,421 35,471
Working capital 5,874,256 6,490,488 1,769,182 1,067,411
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The information for quarters ended in 2006 have been restated to reflect
adjustments noted in the Accounting Changes information above.
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