NOT FOR DISTRIBUTION TO UNITED STATES NEWS WIRE SERVICES OR DISSEMINATION IN THE
UNITED STATES
Madalena Ventures Inc. ("Madalena" or the "Company") (TSX VENTURE:MVN) today
announced its financial and operating results for the three months ended March
31, 2008.
HIGHLIGHTS
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For the period ended March 31, March 31,
2008 2007
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Financial
Petroleum and natural gas revenues $ 195,309 $ 145,408
Interest income 91,628 190,056
Funds from operations(1) (305,791) (133,776)
Funds from operations per common share - basic
and diluted(1) (0.003) (0.001)
Cash flow from operating activities (122,403) (21,626)
Cash flow from operating activities - basic and
diluted (0.001) (0.000)
Net income (loss) for the period (188,767) (1,109,773)
Net income (loss) per common share - basic and
diluted (0.002) (0.010)
Capital expenditures $ 2,058,566 $ 701,188
Operations
Daily production
Oil (bbls/d) 8.7 -
Natural gas (Mcf/d) 114.1 161.0
Natural gas liquids (bbls/d) 4.5 6.0
Oil equivalent (boe/d)(2) 32.2 33.2
Average sales price
Oil ($/bbl) 94.46 -
Natural gas ($/mcf) 8.53 8.03
Natural gas liquids ($/bbl) 78.39 50.41
Operating netback per boe (6:1)
Petroleum and natural gas $ 66.66 $ 48.60
Royalties 16.98 7.35
Operating expenses 17.40 18.12
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Operating netback $ 32.28 $ 23.13
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1) Funds from operations, funds from operations per common share, and
operating netback are Non-GAAP measurements - see the discussion under
Non-GAAP Measurements above.
Highlights of the quarter include:
- Drilling begins on TT-2 well in Remada Sud area of Southern Tunisia on March
31, 2008.
- Progress towards drilling operations in Argentina continues.
- 2.45 million dollar private placement announced.
President's Message
Madalena made significant progress in developing and enhancing its existing
exploration opportunities during the first quarter of 2008. In the first quarter
of 2008 the Company completed its evaluation of the seismic programs on the
Remada Sud permit in southern Tunisia. The Remada Sud permit is located in the
Ghadames Basin and is 1.2 million acres (4,848 square kilometers) in size. The
seismic evaluation outlined several drillable features on the permit and
Madalena exercised its option to participate in the drilling of the first test
well pursuant to the terms and conditions of the Seismic Option Agreement
negotiated between Madalena and Storm Ventures International Inc. The TT 2 test
well commenced drilling on March 31, 2008. Target depth was reached at 1500
meters (4,900 feet) in the Ordovician Kasbah Leguine formation on April 16th,
2008, and a 60 meter (200 foot) core was cut through the potential reservoir.
Upon the initial review of the core, the pre-drilling expectation of
encountering a 50 meter (165 foot) potential hydrocarbon column in Ordovician
quartzites appears to have been achieved. The well was cased to total depth and
the core is currently undergoing extensive core analysis in order to determine
the optimal stimulation program for the well. The stimulation program is
currently scheduled for July 2008. Madalena has earned a 15% working interest in
approximately 600,000 acres (2,424 square kilometers) by the drilling of the
TT 2 well. Madalena retains the option to drill a second earning well to earn a
15% working interest in an additional 600,000 acres (2,424 square kilometers).
Progress on the Hammamet block in the Pelagian Basis offshore Tunisia is also
progressing well. The 3D offshore seismic program conducted in 2007 indicates
the presence of several high quality features that the Company is evaluating for
potential drilling during 2008/2009. A study of the 3D seismic program is also
ongoing to evaluate the potential reactivation of the Tazerka field located on
the Hammamet block which recovered approximately 21 million barrels of oil prior
to its deactivation. Madalena maintains the option to participate for 30% in the
drilling of a well on the Hammamet block to earn a 15% working interest in the
entire 1.1 million acre block.
In Argentina, Madalena continues to make progress in the development of the
Company's exploration opportunities on the Coiron Amargo, Curamhuele, and
Cortadera exploration blocks. Seismic data analysis on a 350 square kilometer 3D
program on the Coiron Amargo block was completed in the first quarter revealing
numerous high quality drilling opportunities. The Company is currently
evaluating the availability of drilling contractors for the drilling of the
first well on Coiron Amargo with an anticipated spud date in Q3 2008 subject to
rig availability. At Curamhuele and Cortadera, the Company has finalized
negotiations with seismic contractors for the extensive 3D seismic programs
designed over both blocks. Baseline and seismic environmental evaluations are
currently ongoing on the blocks and it is anticipated the programs will commence
in Q3 2008. In addition, the Company is evaluating two existing well bores on
the Curamhuele block which will undergo testing during Q2 2008 in order to
determine the potential for productivity and reserves, and provide us with key
information for our upcoming drilling program on the block.
We are entering into an exciting period for Madalena shareholders as we begin to
actively drill and develop the opportunities that have been assembled from the
ground floor over the past two years. In Argentina, the Federal Government
recently announced a new gas incentive program for the country which will
significantly increase the netbacks for natural gas producers. A recent news
article indicates that the provinces anticipate an announcement by the Federal
Government which would also increase netbacks for oil producers. Madalena's
blocks have significant prospectivity for both oil and gas. Madalena anticipated
netback increases when it acquired the blocks in Argentina, and we believe the
timing of the announcements provides us with a competitive advantage over those
just entering the Argentine market, as well as enhanced future cash flow from
any production on the blocks.
The Management of Madalena is very excited for the future of our Company as we
move into the exploration and development phases of the Tunisian and Argentina
exploration opportunities. Operations in foreign jurisdiction generally have a
longer time frame than what is experienced in the Western Canadian Basin and we
have undertaken a thorough internal process to secure the essential contractors
and equipment required to effectively implement our exploration and drilling
programs. We appreciate the continued patience of our shareholders and we look
forward to providing you with regular updates as we move into this exciting
phase of the Company's development.
Ken Broadhurst, President and Chief Executive Officer
Madalena's 2008 first 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 months
ended March 31, 2008 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, 2007 and
the unaudited interim consolidated financial statements for the period ended
March 31, 2008. The Company's financial statements and other public disclosure
documents, including its annual information form ("AIF"), are filed on SEDAR at
www.sedar.com. The commentary in this MD&A is based on information available to
May 28, 2008. 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 Principles ("GAAP"), and may not be comparable to similar
measures reported by other companies. Management considers the terms "funds from
operations", and "funds from operations per share" to be useful supplementary
information for investors to assist them in evaluating if the Company is
generating enough funds to cover future operations and capital spending. Funds
from operations is defined as cash flow from operating activities before changes
in non-cash working capital items, as shown in the following table:
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For the periods ended March 31, March 31,
2008 2007
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Cash flow from operating activities $ (122,403) $ (21,626)
Change in non-cash working capital (183,388) (112,150)
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Funds from operations $ (305,791) $ (133,776)
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Funds from operations per share is calculated is calculated using the same
number of weighted average shares outstanding used in calculating net income per
share.
Netback and operating netback is defined as total petroleum and natural gas
revenue less royalties, operating expenses, and transportation expenses.
Management considers the terms "netback" and "operating netback" as a useful
measure for comparing the Company's price realization and cost performance
against industry competitors. There is no GAAP measure that is reasonably
comparable to operating netback or netback. See operating netbacks under the
discussion of results of operations for the calculation of operating netbacks.
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
March 31, 2008 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
financial 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 remediation
will provide, and therefore does not plan to remediate these weaknesses.
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 first quarter of 2008
that have materially affected, or are reasonable likely to materially affect the
Company's ICFR.
OVERVIEW
In the first quarter of 2008 Madalena and its partners completed their
evaluation of seismic data, selected a drilling site, and started drilling on
the TT-2 well on the Remada Sud concession in the southern part of Tunisia, near
the Libya border. On April 28, 2008 the Company announced that the well had
reached its target depth. A 60 meter (200 foot) core sample was cut and has been
sent for testing and analysis. Stimulation of the formation based on the results
of the core analysis will determine commerciality. The Company expects to
complete these tests during Q3 subject to the availability of proper equipment.
In Argentina, the Company continues to push towards drilling its first test
wells in the Neuquen basin. The Company is currently in discussion with
contractors to secure a rig for the commencement of the drilling program which
is scheduled to commence in Q3 2008 subject to rig availability. Our branch in
Argentina became fully operational with the approval of the authorities to
operate financially within Argentina, in addition to the hiring of a full time
employee in Buenos Aires. Environmental studies and geological site visits are
in process and negotiations with seismic acquisition companies have been
finalized as we move towards the commencement of extensive 3D seismic programs
on two of the blocks in Argentina. Steps to evaluate and test two existing well
bores located on the Argentine concessions were also well under way in the first
quarter.
On April 4, 2008 the Company announced that it had closed a non-brokered private
placement to issue 4,375,003 common shares at $0.56 per share for total proceeds
of $2,450,000.
RESULTS OF OPERATIONS
Production
Madalena averaged 32 boe/d in the first quarter of 2008, compared to 33 boe/d
for the year the first quarter of 2007. Although there was no significant change
in the average volume per day, there was a change in the components of the
production. In Q1 of 2008 the Company averaged 9 bbls/d bbl/s of oil production
compared to no oil production in Q1 2007 because the Company's only oil
producing property did not start producing until the second quarter of 2007. Oil
production for the first quarter of 2008 is not reflective of average oil
production of approximately 18 bbls/d for the last three quarters, because a key
well was shut-in during most of February to repair a down-hole pump. Average gas
production volumes fell from 161 mcf/d in the first quarter of 2007, to 114
mcf/d in the first quarter of 2008. The reduction in gas volumes reflects normal
declines on wells that were brought on-stream in the first quarter of 2007.
Natural gas and natural gas liquids accounted for 100 percent of the Company's
production in the first quarter of 2007 and 62% in the first quarter of 2008.
Production Revenue
Madalena received an average of $94.46/bbl for oil, $8.53/Mcf for natural gas
and $78.39/bbl for natural gas liquids in the first quarter of 2008, compared to
$8.03/Mcf for natural gas and $50.41/bbl for natural gas liquids in the first
quarter of 2007. The price increases reflect world and North American price
increases and are comparable to quoted market prices of 98.93/bbl for oil,
8.11/Mcf for natural gas and 78.42/bbl for natural gas liquids once these prices
are adjusted for transportation and higher heat content values.
Revenues for the first quarter of 2008 were $74,438 (38%) for oil, $88,578 (45%)
for natural gas, and $32,293 (17%) for the first quarter of 2008, compared to
$116,242 (80%) for natural gas and $29,166 (20%) for natural gas liquids in the
first quarter of 2007.
Interest Income
Interest income for the first quarter of 2008 amounted to $91,628 compared to
$190,056 for the first quarter of 2007. Interest income declined in the first
quarter of 2008 compared to the first quarter of 2007 as more of the cash
received from the 2006 financing was used to fund the Company's exploration
activities during 2007 and the first quarter of 2008 leaving less funds
available for investment.
Royalties
Crown royalties amounted to $49,747 for the first quarter of 2008 compared to
$22,000 for the first quarter of 2007. Average royalties were $16.98/boe in the
first quarter of 2008 compared to $7.35/boe for 2007. The increase in royalty
rates reflects two deep gas wells which received royalty holidays in the first
quarter of 2007, and no longer receive these royalty reductions.
Operating expenses
Total production expenses for the first quarter of 2008 were $48,708 or
$16.62/boe compared to $52,368 or $17.50/boe for 2007. Transportation costs
amounted to $2,282 or $0.78/boe compared to $1,849 or $0.60/boe for 2007.
Production expenses decreased slightly in 2008 as there were less wells
producing. Production expenses in general are higher than anticipated due to
additional charges by the operator for unanticipated well related maintenance.
Operating Netbacks
Operating netbacks which are a non-GAAP measurement are shown in the following
table:
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For the period ended March 31, 2008 March 31, 2007
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Per Per
Netback per boe (6:1) Amount boe (6:1) Amount boe (6:1)
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Petroleum and natural gas revenue $ 195,309 $ 66.66 $ 145,408 $ 48.60
Royalties 49,747 16.98 22,000 7.35
Production expenses 48,708 16.62 52,368 17.50
Transportation costs 2,282 0.78 1,849 0.62
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Operating netback $ 94,572 $ 32.28 $ 69,191 $ 23.13
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Operating netbacks are a non-GAAP measurement see discussion under
Non-GAAP Measurements above.
Operating netbacks increased to $32.28/boe in the first quarter of 2008,
compared to $23.13 in 2007. The increase in netbacks is because the Company
derived more of its production from its oil producing property which resulted in
higher revenue per boe in 2008 than in 2007. This higher revenue number was
offset by a more than two times increase in royalty rates per boe.
General and administrative costs
General and administrative ("G&A") costs were $474,488 for the first quarter of
2008 compared to $393,023 for the first quarter of 2007. G&A increased in 2008
as more travel time and office costs were incurred in Argentina in 2008 compared
to 2007.
The Company capitalized approximately $55,000 of G&A associated with geological
consulting and legal consulting in the first quarter of 2008, compared to
approximately $31,000 in 2007.
Stock-based compensation
Stock-based compensation expense ("SBC") in the first quarter of 2008 amounted
to $161,691 compared to $823,392 in the first quarter of 2007. The costs
recorded in the first quarter of 2008 reflect the amortization of previously
granted options over their three year vesting period whereas the costs recorded
in 2007 also reflect a one time adjustment in the amount of $679,000 for options
transferred from one director to two other directors during the quarter.
The Company capitalized $39,000 of SBC to foreign cost centers in the first
quarter of 2008 compared to $4,000 of SBC to foreign property and equipment
accounts in the fist quarter of 2007. The SBC capitalized reflects the estimated
cost of options granted to the Company's geological and legal consultants for
evaluating exploration opportunities in the foreign jurisdictions. At March 31,
2008, the Company has an estimated $1,600,000 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 and depreciation expense for petroleum and natural gas assets is
calculated using the unit-of-production method based on total estimated proved
reserves. Depreciation on office furniture and fixtures and on leasehold
improvements is calculated on a declining balance basis or on a straight line
basis at rates designed to amortize the cost of the asset over its estimated
useful life.
Depletion and depreciation expense for petroleum and natural gas assets for the
first quarter of 2008 was $94,000 compared to $147,000 for the first quarter of
2007. Depreciation for the first quarter of 2008 was $4,100 compared to $4,000
for the first quarter of 2007. Depletion and depreciation expense for petroleum
and natural gas assets decreased in the first quarter of 2008 compared to 2007
because ceiling test write downs in the second and fourth quarters of 2007
reduced the carrying value of the properties which as the basis for calculating
the unit-of-production method of depletion.
Depletion was not recorded in Argentina or Tunisia. These cost centers are
considered to be in the development stage where all costs reasonably
attributable to exploring for oil and gas in these areas are capitalized.
Management feels that the costs capitalized to date will be recoverable from
future business activities in the area.
The provision for accretion of asset retirement costs was $1,452 for the first
quarter of 2008 and $1,605 for the
first quarter of 2007.
Canadian oil and gas property carrying value
At March 31, 2008 the Company has 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 has determined
that the estimate of fair value of the properties is equal to or exceeds the
carrying value at March 31, 2008 and that no impairment charge is required.
There was no ceiling test charge in the first quarter of 2007 either.
Foreign exchange gains (losses)
In the first quarter of 2008 the Company's branch operations in Argentina became
fully operational with the opening of the branch's bank account and the addition
of a full time employee in Argentina. Also in January, the Company completed the
creation of two wholly owned subsidiaries in Barbados, and transferred the
Company's interests in the Tunisian seismic option agreements to these
subsidiaries. As a result of these operational changes, the Company now has
exposure to foreign currency exchange risk on it's investment in securities
denominated in US dollars in Canada, and on its transactions and bank accounts
in Barbados (in US dollars) and in Argentina (in Argentine pesos).
Business conducted in Tunisia, through our Barbados subsidiary, and Argentina
are considered "integrated foreign operations" for accounting purposes.
Therefore, the foreign operations financial statements are translated into
Canadian dollars using the temporal method. Under the temporal method, the
Company translates foreign denominated monetary assets and liabilities at the
exchange rate prevailing at year end; non-monetary assets, liabilities and
related depletion and depreciation are translated at historic rates; revenues
and expenses are translated at the average rate of exchange for the period; and
any resulting foreign exchange gains or losses are included in earnings.
In the first quarter of 2008 the Company recorded foreign exchange gains of
$360,765 on the conversion of its US dollar investments and on the conversion of
its US dollar denominated balances in the Barbados subsidiary and on its
Argentine pesos denominated balances in its Argentine branch. Currently, the
Company does not hedge against fluctuations in foreign exchange rates.
Net loss from operations
The net loss for the first quarter of 2008 was $188,767 compared to a net loss
of $1,109,773 for the first quarter of 2007. The decrease in the net loss for
2008 reflects foreign exchange gains recorded on foreign denominated cash
balances which were not present in 2007, a slight increase in general and
administrative costs over 2007 with respect to additional costs incurred in
Argentina, and decrease in stock-based compensation over 2007 with respect to a
one time charge for options transferred between directors which took place in
2007.
Income taxes
The Company has not recorded a provision for recovery of income taxes in the
first quarter of 2008 or in the first quarter of 2007.
Future income tax assets and liabilities arise due to the difference between the
tax basis of assets and their respective accounting carrying cost. At March 31,
2008 the Company has Canadian tax losses and other cumulative tax deductions in
excess of net book values. The income tax benefit of these future tax assets
have not been recognized in the financial statements as their recoverability is
uncertain at this time.
Capital Expenditures
Madalena spent $2,058,566 on petroleum and natural gas properties and office
furniture and fixtures in the first quarter of 2008 compared to $701,188 in the
first quarter of 2007. In Canada, there were less costs incurred in 2008 than in
2007 as the Edson and Brazeau area drilling programs came to an end. In
Argentina, the Company recovered approximately $360,000 of previously incurred
costs relating to its Coiron Amargo and Curamhuele blocks from our
operator/partner. The operator elected to participate in the properties under
the terms of our joint operating agreements on the properties and agreed to pay
22.22% of costs already incurred by the Company on the properties. The
expenditures incurred in Q1 2008 compared to Q1 2007 are summarized in the
following table:
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For the period ended March 31, March 31,
2008 2007
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Canada:
Oil and gas properties:
Drilling and completions $ 33,044 $ 541,052
Well equipment and production facilities 2,801 127,930
Land - 49
Office furniture and equipment 140 792
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35,985 669,823
Argentina - explorartion costs (60,057) 15,489
Tunisia - exploration costs 2,082,638 15,876
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Total capital expenditures $ 2,058,566 $ 701,188
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LIQUIDITY AND CAPITAL RESOURCES
Presently, Madalena is in the initial exploration stage on its international oil
and gas activities. The Company's main sources of revenues are Canadian oil and
gas production and interest which are insufficient to cover operating costs and
overhead, resulting in negative funds from operations. In the three months ended
March 31, 2008 the Company had negative cash flow from operations of $122,403
compared to negative $21,626 for the first quarter of 2007, and negative funds
from operations of $305,791 in the first quarter of 2008, compared to negative
funds from operations in the first quarter of 2007 of $133,776. In prior
periods, the Company raised funds from equity financings to pay for exploration
activities and overhead expenses. Continuing operations and the recovery of
property and equipment costs is dependent on the Company's ability to identify
commercial oil and gas reserves, generate profitable operations and obtain
sufficient funds to complete development activities.
At March 31, 2008 Madalena had working capital of $11,232,647 compared to
working capital of $13,236,239 at December 31, 2007. Working capital decreased
in 2008 as the Company spent its working capital on exploration activities in
Canada, Argentina and Tunisia.
The Company has agreed to work programs approved by the Province of Neuquen in
Argentina for three exploration blocks in the Province. The total work programs
call for $10,500,000 USD to be spent over three years on the three exploration
blocks granted to the Company and its partners. The Company's share of these
work programs will be 78.8% or $8,274,000. In Canada, the Company expects to
spend $380,000 on proved properties to complete its commitment on the Canadian
drilling program. All expected expenditures will be funded from the Companies
existing working capital.
On April 4, 2008, the Company announced the closing of a non-brokered private
placement for the issuance 4,375,003 common shares at $0.56 per share for total
proceeds of $2,450,000. These funds will be used to meet the Companies capital
expenditure commitments.
TRANSACTIONS WITH RELATED PARTIES
During the first quarter of 2008 there were no transactions with related
parties. In the first quarter ended March 31, 2007 two directors of the Company
were also directors of a public exploration company with which Madalena was
engaged in joint venture operations. All of the Company's oil and gas revenues,
royalties and operating expenses for the first quarter of 2007 were derived from
this joint venture. At March 31, 2007 the Company had accounts payable due to
this joint venture partner of $271,943. In the fall of 2007, the two directors
of Madalena resigned from the other public company. In the first quarter of 2007
the Company used the services of a law firm in which one of the directors was a
partner. During the quarter ended March 31, 2007 the Company expended $55,000 on
services obtained from this firm. In the fall of 2007 Madalena's director
resigned from the law firm.
SHARE INFORMATION
The Company has 107,368,699 common shares, 10,180,000 stock options and
12,577,625 warrants to purchase common shares outstanding at March 31, 2008.
There was no common stock issued during the first quarter of 2008 compared to
477,250 common shares which were issued in the first quarter of 2007 pursuant to
the exercise of warrants.
At May 28, 2008 the Company had 111,743,702 common shares, 10,180,000 stock
options outstanding. On May 2, 2008 all of the outstanding warrants to purchase
common shares expired without being exercised.
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.
NEW ALBERTA ROYALTY REGIME
In October of 2007 the Government of Alberta announced that it would be altering
the royalty regime in the province effective January 1, 2009. At December 31,
2007 the Company evaluated the affect of the increased royalty rates on its
existing reserves with the assistance of a group of independent petroleum
engineers. At December 31, 2007 the Government had not yet clarified the details
of all aspects of the royalty changes, therefore the independent group of
petroleum engineers provided a range of estimated affects of the royalties on
the Company's production. The evaluation concluded that the Company's future
cash flow could be reduced by a range of values of between approximately
$358,000 and $179,000 on a undiscounted future cash flow basis. The Company
believes that these estimates have not changed as of March 31, 2008. At December
31, 2007 the impact of these changes were included in the ceiling test
calculation so no additional charges would be anticipated from the increased
royalties.
CONTRACTUAL OBLIGATIONS
The Company has committed to a lease for office premises terminating on June 15,
2011. The estimated obligation at March 31, 2008, including operating costs at
current levels, is $391,734. The Company has agreed to work programs approved by
the Province of Neuquen in Argentina for three exploration blocks in the
Province. The total work programs call for $10,500,000 USD to be spent over
three years on the three exploration blocks granted to the Company and its
partners. The Company's share of these work programs will be 78.8 % or
$8,274,000. In Argentina the Company has committed to two apartment leases, one
expires in December of 2008, and the other expires in October of 2009.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
Significant accounting policies used by Madalena are disclosed in note 2 to the
December 31, 2007 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 during the first quarter of 2008.
CHANGES IN ACCOUNTING POLICIES
Principles of Consolidation
In the first quarter of 2008 the Company adopted the Canadian accounting
standard for "Consolidated Financial Statements" which requires the
consolidation of all wholly owned subsidiaries and elimination of all
inter-company balances. The standard was adopted in the first quarter of 2007 as
the Company created two wholly owned subsidiaries in Barbados and sold its
interests in the Tunisian seismic option agreements to the subsidiaries.
Foreign Currency Translation
In the first quarter of 2008 the Company adopted the Canadian accounting
standard for "Foreign Currency Translation". In the first quarter of 2008 the
Company incorporated wholly owned subsidiaries in Barbados to carry on its
Tunisian business, and completed the implementation of its Argentine branch
operations. Business conducted in Tunisia and Argentina is considered to be an
"integrated foreign operation" for accounting purposes and, therefore, the
foreign operations financial statements are translated into Canadian dollars
using the temporal method. Under the temporal method, the Company translates
foreign denominated monetary assets and liabilities at the exchange rate
prevailing at period end; non-monetary assets, liabilities and related
depletion, depreciation, and accretion are translated at historic rates;
revenues and expenses are translated at the average rate of exchange for the
period; and any resulting foreign exchange gains or losses are included in
earnings.
Capital disclosures
On January 1, 2008 the Company adopted the new Canadian accounting standard for
"Capital Disclosures" which requires disclosure of objectives, policies and
processes for defining and managing capital. Note 3 to the unaudited March 31,
2008 consolidated financial statements contains further disclosures with respect
to this standard.
Financial instruments disclosure and presentation
On January 1, 2008 the Company adopted the new Canadian accounting standards for
"Financial Instruments Disclosures" and "Financial Instruments � Presentation".
These standards require disclosure of the significance of financial instruments
to an entity's financial position and performance, the risks associated with the
financial instruments, and how the entity manages the risks. There was no
financial impact on these financial statements as a result of implementing these
new standards. Additional disclosures have been provided in note 3 to the
unaudited March 31, 2008 consolidated financial statements.
NEW ACCOUNTING PRONOUNCEMENTS
Over the next three years GAAP will be modified to converge with International
Financial Reporting Standards ("IFRS"). The date of convergence to IFRS is
January 1, 2011. On May 9, 2008 the Canadian Securities Administrators issued
staff notice 52-320 which provides guidance on the disclosure of changes in
expected accounting policies related to the change over to IFRS. The policy
indicates that an issuer should disclose certain information in its interim and
annual MD&A's three years prior to the change over on January 1, 2011, if, at
the time of preparing the MD&A the issuer has developed an IFRS change over
plan. The Company has not yet developed a comprehensive accounting conversion
plan but will continue to monitor and assess the impact of the convergence on
its financial statements and financial position.
In February of 2008 a new accounting standard for "Goodwill and Intangible
Assets" was introduced which will require implementation on January 1, 2009. The
Company currently has no Goodwill or Intangible Assets, and will evaluate the
impact of the new standard if these assets are acquired.
OUTLOOK
For the remainder of 2008, the Company will work towards implementing its
exploration program on a number of opportunities identified on its blocks in
Argentina. In Tunisia the Company will work with its partners to evaluate test
results from the Remada Sud well and determine the commercial viability of the
well. The Company will also work to evaluate additional international
opportunities as they are presented.
QUARTERLY FINANCIAL INFORMATION
The following table summarizes certain information for the previous eight
quarters. For the periods ended March 31, 2006, December 31, 2005, September 30,
2005, and June 30, 2005 there was no production and therefore sales volumes and
per unit information has not been shown.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31, December 31, September 30, June 30,
2008 2007 2007 2007
----------------------------------------------------------------------------
Sales Volumes:
Oil (bbl/d) 9 18 8 28
Natural gas (mcf/d) 114 136 180 155
Natural gas liquids (bbl/d) 5 6 7 8
Barrels of oil equivalent
(boe/d) 32 47 45 62
----------------------------------------------------------------------------
Per unit information:
Oil price ($bbl) 94.46 77.07 78.66 71.42
Natural gas price ($/mcf) 8.53 6.32 6.04 8.31
Natural gas liquids price
($/bbl) 78.39 65.82 65.26 58.81
Oil equivalent price
($/boe) 66.66 56.75 48.38 60.88
Operating net back
($/boe) 32.28 31.74 25.38 43.14
----------------------------------------------------------------------------
Financial:($ except for
share info)
Revenue:
Petroleum and natural gas
revenues 195,309 245,704 200,514 341,338
Interest Income 91,628 128,382 164,981 177,874
Income (loss) from
continuing operations (188,767) (3,624,808) (462,486) (836,521)
Basic and diluted per
share (0.002) (0.030) (0.000) (0.008)
Net income (loss) (188,767) (3,624,808) (462,486) (836,521)
Basic and diluted per
share (0.002) (0.030) (0.000) (0.008)
Capital expenditures 2,058,566 2,079,747 92,069 2,487,592
Shares outstanding
(000's) 107,369 107,369 107,369 107,369
Working capital 11,232,647 13,236,239 15,144,359 15,380,251
----------------------------------------------------------------------------
March 31, December 31, September 30, June 30,
2007 2006 2006 2006
----------------------------------------------------------------------------
Sales Volumes:
Oil (bbl/d) -
Natural gas (mcf/d) 161 198 109 68
Natural gas liquids (bbl/d) 6 7 2 2
Barrels of oil equivalent
(boe/d) 33 40 20 13
----------------------------------------------------------------------------
Per unit information:
Oil price ($bbl) - - - -
Natural gas price ($/mcf) 8.03 7.54 5.75 6.57
Oil and natural gas
liquids price ($/bbl) 50.41 51.65 62.47 65.66
Oil equivalent price
($/boe) 48.60 46.39 37.01 43.02
Operating net back
($/boe) 23.15 25.11 32.57 27.81
----------------------------------------------------------------------------
Financial:($ except for
share info)
Revenue:
Petroleum and natural gas
revenues 145,408 171,532 67,475 51,341
Interest Income 190,056 147,948 94,762 17,303
Income (loss) from
continuing operations (1,109,773) (2,892,752) (352,724) (408,907)
Basic and diluted per
share (0.010) (0.032) (0.005) (0.007)
Net income (loss) (1,109,773) (2,895,425) (405,633) (411,987)
Basic and diluted per
share (0.010) (0.032) (0.006) (0.007)
Capital expenditures 701,188 1,471,112 5,398,608 1,718,484
Shares outstanding
(000's) 106,869 106,391 71,586 71,471
Working capital 17,713,097 18,309,436 274,561 5,874,256
----------------------------------------------------------------------------
(1)Comparative information for 2006 has been re-stated to reflect
adjustments to stock-based compensation, oil and gas revenues, royalties,
operating costs, and depletion. Stock-based compensation was overstated in
Q2 by $15,742, and was understated in Q4 by 99,178. Oil and gas revenues,
royalties, operating costs, and depletion, a net amount of negative
($10,521), was moved from the three months ended September 30, 2006 to the
three months ended June 30, 2006.
Summary of Quarterly Results
Production volumes for the previous eight quarters have been variable as the
Company started producing from oil and gas wells at various times during the
quarters, initially at high rates of production and then at rates that trended
downward as pressures and flow rates from the wells declined. In the first
quarter of 2008 production from the Company's only oil well was half of the
previous quarter production as the well was shut-in for repairs. The oil well
began producing at very high rates in June of 2007, declined in the third
quarter and then increased in the fourth quarter with the assistance of pumping
equipment.
Petroleum and natural gas revenues over the quarters are reflective of the
production volatility and fluctuations in prices received as indicated by the
per unit pricing information. Interest income increased in Q4 of 2006 and Q1 of
2007 as the Company invested proceeds from its November, 2006 financing, and
then declines as funds are used for capital expenditures.
Net losses per period are variable, with the variability influenced by
depletion, depreciation and accretion, which includes ceiling test impairment
charges in Q4, 2007 Q2, 2007 and Q4, 2006, and stock-based compensation which is
influenced by charges for options granted and changes in options granted.
Working capital has declined over the quarters as the Company spends the funds
it raised in 2006 on exploration and development activities in Canada, Tunisia,
and Argentina. Capital expenditures are influenced by many factors including the
availability of services and equipment.
DIRECTORS
Raymond G. Smith
Chairman
Madalena Ventures Inc.
Kenneth L. Broadhurst
President and Chief Executive Officer,
Madalena Ventures Inc.
Dwayne H. Warkentin
Sr. Vice President and Chief Operating Officer,
Madalena Ventures Inc.
Ving Y. Woo LEGAL COUNSEL
Independent Businessman Burnet, Duckworth and Palmer LLP
Calgary, Alberta
Michael J. Lock BANKERS
President, BMO Bank of Montreal
Upsilon Holdings Ltd.
J. G. (Jeff) Lawson
Managing Director Blackmont Capital Inc. AUDITORS
KPMG LLP
James K. Wilson Calgary, Alberta
VP Finance, CFO and Corporate Secretary,
Grizzly Resources Ltd. INDEPENDENT ENGINEERS
GLJ Petroleum Consultants
OFFICERS
Kenneth L. Broadhurst REGISTRAR AND TRANSFER AGENT
President and Chief Executive Officer Inquiries regarding change of
address, registered
Dwayne H. Warkentin shareholdings, stock transfers
Senior Vice President and Chief or lost certificates should be
Operating Officer directed to:
Gregory J. Ford Computershare Trust Company of
Vice President, Finance and Chief Canada
Financial Officer Calgary, Alberta
STOCK EXCHANGE LISTING
TSX Venture Exchange
Trading Symbol: "MVN"
Madalena Energy (TSXV:MVN)
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