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 it's financial and operating results for the three and six months
ended June 30, 2008.
HIGHLIGHTS
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Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Financial
Petroleum and natural
gas revenues $ 255,466 $ 341,338 $ 450,775 $ 486,746
Interest income 70,188 177,874 161,816 367,930
Funds from operations(1) (273,758) 94,745 (579,548) (39,031)
Funds from operations
per common share -
basic and
diluted(1) (0.002) 0.001 (0.005) -
Cash flow from
operating
activities (344,502) 56,257 (466,904) 34,630
Cash flow from
operating
activities - basic
and diluted (0.003) 0.001 (0.004) -
Net loss for the
period (528,911) (836,521) (717,678) (1,946,293)
Net loss per
common share -
basic and diluted (0.005) (0.008) (0.007) (0.018)
Capital expenditures $ 424,618 $ 2,487,592 $ 2,483,185 $ 3,188,780
Operations
Daily production
Oil (bbls/d) 11 28 10 14
Natural gas (Mcf/d) 96 155 105 158
Natural gas liquids
(bbls/d) 4 8 4 7
Oil equivalent (boe/d) 31 62 31 48
Average sales price
Oil ($/bbl) $ 121.26 $ 71.42 $ 109.48 $ 71.42
Natural gas ($/Mcf) 11.32 8.31 9.80 8.17
Natural gas liquids
($/bbl) 106.20 58.81 90.83 54.96
Oil equivalent ($/boe) $ 91.65 $ 60.88 $ 78.82 $ 56.30
Operating netback
per boe $ 43.26 $ 43.14 $ 37.62 $ 36.18
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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:
- The initial TT-2 well in Tunisia reached target depth, yielding positive test
results.
- Several prospective drilling locations identified, drilling and seismic
programs continue in Argentina.
- $2.45 million private placement completed.
President's Message
Madalena made significant progress during the second quarter 2008 in the
evaluation of its international prospects in Tunisia and Argentina.
In Tunisia, the Company's first international exploration well commenced
drilling on March 31, 2008. On April 16, 2008, the well reached total depth of
1500 meters (4,900 feet) and well logs were run. During the drilling operations
a 60 meter (197 feet) core was cut through the potential reservoir, encountering
a 50 meter (164 feet) hydrocarbon column. Analysis of the well logs, indicate
multi-zone hydrocarbon potential in the Ordovician Bir Ben Tartar, the
Ordovician Jaffara and the Silurian Tannezuft formations. Testing was conducted
on the TT2 well during the second quarter 2008, and on July 24 2008, Madalena
was pleased to report that the upper two tested intervals had attained combined
flow rates of 300 barrels per day (bbls/d) of 45 API oil. The company is
currently completing its testing operations of the Ordovician formation and
anticipates additional testing operations on the uphole Silurian Tannuzuft
formation will commence in August 2008. Upon completion of all testing
operations, the well will be temporarily suspended pending further appraisal of
the discovery and submission of a development plan to ETAP, the Tunisian
National Oil Company. Madalena has earned a 15% working interest in
approximately 600,000 acres (243,000 hectares) 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. Technical discussions are currently
underway with partners to determine the optimal location for an offshore
exploration well to be drilled on the Hammamet Block during 2009. Madalena has
the option to participate in this offshore well for 30% to earn a 15% interest
in the entire 1.1 million acre (446,000 hectares) block.
Madalena was also very active in evaluating its Argentina assets during Q2,
2008. The Company moved equipment onto the Curamhuele Block during Q2 to test
two existing shut-in wellbores located on the block. The Yapai X-1 wellbore
tested a significant flow rate of 7 million cubic feet per day (mmcf/d) of gas,
an average of 240 bbls/d of hydrocarbon liquids, and 42 bbls/d of water at a
flowing pressure of 2,350 pounds per square inch from the Mulichinco formation.
The hydrocarbons recovered from the Yapai X-1 were of high quality, measuring
between 44 API to 53 API for oil and condensates. The Curamhuele X-1 wellbore
tested 170 barrels of oil from the Lower Agrio formation over five flow periods
of between four to six hours conducted during a five day period. The wellbore
also has a significant column of additional potential hydrocarbon pay within the
Lower Agrio as well as the Mulichinco formation which has not been perforated or
tested in the Curamhuele X-1 wellbore. The company is pleased to report that the
results of the testing represent significant potential value to the
shareholders. Madalena is also pleased to report that the structural traps
encountered in both these well bores do not represent the primary prospects for
the Curamhuele block, but provide the company with a significant additional
target to supplement its near term exploration drilling plans on the block.
Madalena has a majority 70% working interest in the Curamhuele Block,
representing potentially significant upside to shareholders. The Company is
analyzing the testing data from the Curamhuele wells to evaluate the potential
development, tie-in and marketing options available, and is in the process of
shooting a 3D seismic program to further delineate the prospectivity of the
Curamhuele Block. Madalena also owns a 70% majority working interest in the
Cortadera and Coiron Amargo Blocks in the Neuquen Basin of Argentina where 3D
seismic programs and preparation of drilling locations are currently underway
with results anticipated during Q4 2008.
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. We look forward to providing our
shareholders with updates as we implement our exploration and development
program during the remainder of 2008 and 2009.
Ken Broadhurst, President and Chief Executive Officer
Madalena's 2008 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 management of
Madalena Ventures Inc. ("Madalena" or the "Company"), for the three and six
months ended June 30, 2008 and 2007. 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 August 25, 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 these measures to be
useful supplementary information. Funds from operations, is a useful measure of
how the Company generates funds to cover capital spending. Operating netback is
a useful measure for comparing prices received, royalties paid and operating
costs incurred with competitors.
Funds from operations, is defined as cash flow from operating activities before
changes in non-cash working capital items. Funds from operations per share, is
calculated using the same weighted average shares outstanding as net loss per
common share. The following table reconciles funds from operations to cash flow
from operating activities:
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Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Funds from operations $ (273,758) $ 94,745 $ (579,548) $ (39,031)
Change in non-cash
working capital (70,744) (38,488) 112,644 73,661
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Cash flow from operating
activities $ (344,502) $ 56,257 $ (466,904) $ 34,630
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Netback and operating netback is defined 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 in the Company's 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 relevant securities legislation, and include controls
and procedures designed to ensure that information is accumulated and
communicated to management to allow timely decisions regarding required
disclosures. 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.
The CEO and CFO have evaluated the effectiveness of the Company's DC&P as of
June 30, 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 in "Internal Controls over Financial Reporting" 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 accurately and fairly reflects,
in reasonable detail, the Company's transactions;
(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 Board of Directors; and
(c) provide reasonable assurance regarding prevention or timely detection of
unauthorized transactions that could have a material affect on the Company's
annual or interim financial statements.
In designing the ICFR, management has identified the following inherent weaknesses:
- A lack of segregation of incompatible duties within the accounting and
reporting function.
- A 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 believes 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
also believes that the Board of Directors and management possess significant
knowledge of all events occurring in the Company which mitigates the possibility
that a material error will occur.
There were no changes in the Company's ICFR during the first six months of 2008
that have materially affected, or are reasonable likely to materially affect the
Company's ICFR.
HIGHLIGHTS
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Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Financial
Petroleum and natural gas
revenues $ 255,466 $ 341,338 $ 450,775 $ 486,746
Interest income 70,188 177,874 161,816 367,930
Funds from operations(1) (273,758) 94,745 (579,548) (39,031)
Funds from operations per
common share -
basic and diluted(1) (0.002) 0.001 (0.005) -
Cash flow from operating
activities (344,502) 56,257 (466,904) 34,630
Cash flow from operating
activities - basic
and diluted (0.003) 0.001 (0.004) -
Net loss for the period (528,911) (836,521) (717,678) (1,946,293)
Net loss per common share
- basic and diluted (0.005) (0.008) (0.007) (0.018)
Capital expenditures $ 424,618 $ 2,487,592 $ 2,483,185 $ 3,188,780
Operations
Daily production
Oil (bbls/d) 11 28 10 14
Natural gas (Mcf/d) 96 155 105 158
Natural gas liquids
(bbls/d) 4 8 4 7
Oil equivalent (boe/d) 31 62 31 48
Average sales price
Oil ($/bbl) $ 121.26 $ 71.42 $ 109.48 $ 71.42
Natural gas ($/Mcf) 11.32 8.31 9.80 8.17
Natural gas liquids
($/bbl) 106.20 58.81 90.83 54.96
Oil equivalent ($/boe) $ 91.65 $ 60.88 $ 78.82 $ 56.30
Operating netback per
boe (1) $ 43.26 $ 43.14 $ 37.62 $ 36.18
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(1) See "Non-GAAP measurements" above.
Highlights of the quarter include:
- The initial TT-2 well in Tunisia reached target depth, yielding positive test
results.
- Several prospective drilling locations identified, drilling and seismic
programs continue in Argentina.
- $2.45 million private placement completed.
OVERVIEW
In the first half of 2008 Madalena completed its evaluation of seismic data,
selected a drilling site, and started drilling on the TT-2 well on the Remada
Sud concession in southern Tunisia. The TT-2 well reached its target depth in
the second quarter of 2008. Subsequent preliminary testing of the well has
yielded positive results in the target zone in addition to potential for
hydrocarbons in two other zones. The operator is currently mobilizing equipment
to further evaluate the post-hydraulic fracture potential of the well and
determine stabilized flow rates. The up-hole potential of the well will also be
evaluated once the evaluation of the initial zone is completed.
The Argentina branch became fully operational in the first half of 2008 and the
Company continues to push towards drilling its first test wells in the Neuquen
basin. In the second quarter, the Company commenced evaluation of two existing
well bores on one of its three blocks and identified several prospective
drilling locations on a second block. The Company is currently in discussion
with contractors to secure a rig for the commencement of the drilling program by
the end of 2008. The Company also continued environmental studies, geological
site visits and seismic acquisition negotiations in connection with the planned
seismic programs on two of the Company's blocks.
On April 4, 2008 the Company 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
For the three months ended June 30, 2008, Madalena averaged production of 31
boe/d compared to 62 boe/d in the second quarter of 2007. The decrease in
production is due to natural declines in new wells brought on production in the
first and second quarters of 2007. Oil production decreased from 28 bbls/d in
the second quarter of 2007 to 11 bbls/d in the second quarter of 2008 and
natural gas production decreased from 155 Mcf/day in the second quarter of 2007
to 95 Mcf/day in the second quarter of 2008. Natural gas liquids also
experienced production declines from 8 bbls/d in the first quarter of 2007 to 4
bbls/d in the first quarter of 2008.
Natural declines also resulted in a decrease in average production to 31boe/d
for the six months ended June 30, 2008, compared to 48 boe/d for the first six
months of 2007. Oil production decreased from an average of 14 bbls/d in the six
months ended June 30, 2007 to 10 bbls/d in the first half of 2008. Natural gas
averaged 105 Mcf/d in the first six months of 2008 compared to 158 Mcf/d for the
same period in 2007. Natural gas liquids averaged 4 bbls/d in the first six
months of 2008 compared to 7 bbls/d for the same period in 2007. A portion of
the declining production can also be attributed to shut in wells during the six
months ended June 30, 2008 for repairs and maintenance.
Petroleum and natural gas revenue
Revenue for the three months ended June 30, 2008 totaled $255,466 compared to
$341,338 in the second quarter of 2007. The decrease in revenue is due to
production declines noted above, partially offset by increased realized
commodity prices consistent with market trends for oil and natural gas. In the
second quarter of 2008, Madalena received an average of $121.26/bbl for oil,
$11.32/Mcf for natural gas and $106.20/bbl for natural gas liquids, compared to
$71.42/bbl for oil, $8.31/Mcf for natural gas and $58.81/bbl for natural gas
liquids in the first quarter of 2007.
Revenue for the six months ended June 30, 2008 totaled $450,775 compared to
$486,746 for the first six months of 2007. The decrease in revenue is due to
production declines, partially offset by increased realized commodity prices,
consistent with market trends for oil and natural gas. In the first six months
of 2008, Madalena received an average of $109.48/bbl for oil, $9.80/Mcf for
natural gas and $90.83/bbl for natural gas liquids, compared to $71.42/bbl for
oil, 8.17/Mcf for natural gas and $54.96/bbl for natural gas liquids in the
first six months of 2007.
Interest Income
Interest income for the three months ended June 30, 2008 totaled $70,188
compared to $177,874 for the second quarter of 2007. Interest income for the six
months ended June 30, 2008 totaled $161,816 compared to $367,930 for the same
period in 2007. The decrease in interest income in 2008 is due to the use of
excess cash in exploration and development activities, particularly in Tunisia
and Argentina.
Royalties
For the three months ended June 30, 2008, crown royalties totaled $76,218
($27.34/boe or 29.8% of revenue) compared to $19,630 ($3.50/boe or 5.8% of
revenue) for the second quarter of 2007. For the six months ended June 30, 2008,
crown royalties totaled $119,431 ($20.88/boe or 26.5% of revenue) compared to
$41,000 ($4.77/boe or 8.4% of revenue) for the same period in 2007. Crown
royalties increased in magnitude and on a per boe basis as a result of the
elimination of the crown royalty holidays associated with the Company's primary
gas producing wells. Further, additional crown royalty expense was incurred in
the second quarter of 2008 related to adjustments made by the joint venture
operator for crown royalties actually incurred in prior months as the operator
determined that a well was incorrectly subject to a royalty holiday.
For the three months ended June 30, 2008, gross overriding royalties ("GORR")
totaled $16,847 ($6.04/boe or 6.6% of revenue) compared to $12,578 ($2.24/boe or
3.7% of revenue) for the second quarter of 2007. For the six months ended June
30, 2008, GORR totaled $23,382 ($4.09/boe or 5.2% of revenue) compared to
$13,206 ($1.54/boe or 2.7% of revenue) for the same period in 2007. GORR
increased in magnitude and on a per boe basis in 2008 as a result of new
production attracting these types of royalties.
Operating expenses
Total operating expenses, including minimal transportation costs, totaled
$41,811 ($15.00/boe) for the three months ended June 30, 2008 compared to
$67,257 ($12.00/boe) for the second quarter of 2007. Total operating expenses,
including minimal transportation costs, totaled $92,801 ($16.23/boe) for the six
months ended June 30, 2008 compared to $121,474($13.91/boe) for the first half
of 2007. The decrease in the magnitude of operating expenses is due to wells
being shut-in for short intervals during the period for repairs and maintenance.
In addition, production declines have reduced operating maintenance on existing
wells. Operating expenses per boe have increased even though total operating
expenses have declined. Operating expenses per boe have increased because fixed
expenses, which do not decline as production declines, were a higher percentage
of the per boe calculation.
Operating Netbacks
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Three months ended
June 30,
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2008 2007
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Amount Per boe Amount Per boe
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Petroleum and natural gas
revenue $ 255,466 $ 91.65 $ 341,338 $ 60.88
Royalties 93,065 33.39 32,208 5.74
Operating expenses, including
transportation costs 41,811 15.00 67,257 12.00
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Operating netback $ 120,590 $ 43.26 $ 241,873 $ 43.14
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Six months ended
June 30,
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2008 2007
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Amount Per boe Amount Per boe
----------------------------------------------------- ----------------------
Petroleum and natural gas
revenue $ 450,775 $ 78.82 $ 486,746 $ 56.61
Royalties 142,812 24.97 54,208 6.30
Operating expenses, including
transportation costs 92,801 16.23 121,474 14.13
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Operating netback $ 215,162 $ 37.62 $ 311,064 $ 36.18
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Operating netbacks are a non-GAAP measure - see "Non-GAAP measurements"
above.
The Company realized an operating netback of $43.26/boe for the three months
ended June 30, 2008 compared to $43.14/boe in the second quarter of 2007. For
the six months ended June 30, 2008, the Company realized an operating netback of
$37.62/boe compared to $36.18/boe for the same period in 2007. Netbacks have
remained relatively flat as higher average sales prices have been largely offset
by higher royalty rates and increasing operating expenses on a per boe basis.
General and administrative ("G&A") expenses
G&A expenses totaled $464,606 for the three months ended June 30, 2008 compared
to $325,002 for the second quarter of 2007. G&A expenses for the six months
ended June 30, 2008 totaled $939,094 compared to $718,025 for the same period in
2007. The increase in G&A expenses in 2008 is due to the increased activity in
Argentina, including increased travel costs for our Calgary-based executives and
local Argentina office expenses.
For the three months ended June 30, 2008, the Company capitalized approximately
$87,900 of G&A expenses directly related to exploration and development
activities, compared to $47,900 in the second quarter of 2007. The Company
capitalized approximately $136,000 of G&A expenses directly related to
exploration and development activities in the six months ended June 30, 2008,
compared to $79,300 in the same period in 2007. The rate at which the Company is
capitalizing G&A has increased in 2008 as a result of the increase in
exploration activity in Argentina and Tunisia.
Stock-based compensation ("SBC") expense
SBC expense in the three months ended June 30, 2008 totaled $154,845 compared to
$447,561 in the second quarter of 2007. SBC expense in 2007 reflects a large
number of stock option grants with immediate vesting, resulting in the stock
option fair value being recognized as an expense entirely in the period of the
option grant. No such options were issued in the second quarter of 2008 and SBC
expense in 2008 reflects only those stock options that are not fully vested.
SBC expense for the six months ended June 30, 2008 totaled $316,536 compared to
$1,270,952 for the same period in 2007. In addition to the impact of granting
options with immediate vesting noted above, SBC expense in 2007 reflects a one
time charge of $679,000 related to the revaluation of options that were
transferred between directors.
For the three months ended June 30, 2008, the Company capitalized approximately
$30,100 of SBC expense directly related to exploration and development
activities, compared to $8,700 in the second quarter of 2007. The Company
capitalized approximately $69,600 of SBC expenses directly related to
exploration and development activities in the six months ended June 30, 2008,
compared to $12,300 in the same period in 2007. The increase in capitalized SBC
expense in 2008 is due to additional stock options granted in the second half of
2007 to consultants directly involved in exploration activities.
At June 30, 2008, the Company has approximately $545,000 of unamortized SBC that
will be charged to income over the remaining vesting period of the outstanding
options.
Depletion, depreciation and accretion expense
Depletion and depreciation ("D&D") expense for the three months ended June 30,
2008 totaled $93,100 compared to $482,100 (including a ceiling test write down
of $278,000) in the second quarter of 2007. D&D expense for the six months ended
June 30, 2008 totaled $191,200 compared to $633,100 in the same period in 2007.
The decrease in depletion and depreciation in 2008 is due to a lower carrying
value on the Company's Canadian oil and gas properties resulting from ceiling
test write downs in the second and fourth quarters of 2007. Only the Canadian
oil and gas properties are subject to depletion as activity in Argentina and
Tunisia is considered to be in the development stage. There were no impairments
to carrying value associated with the Canadian, Argentina or Tunisia oil and gas
properties at June 30, 2008.
Accretion expense associated with the Company's asset retirement obligation
totaled $1,452 for the three months ended June 30, 2008 compared to $1,605 for
the second quarter of 2007. Accretion expense for the six months ended June 30,
2008 totaled $2,905 compared to $3,210 for the same period in 2007. There were
no significant changes to the assumptions used to calculate the asset retirement
obligation or related accretion in 2008 compared to 2007.
Foreign exchange gains (losses)
Beginning in 2008, the Company established operations in Tunisia and Argentina
and is now subject to foreign exchange rate fluctuations for account balances
denominated in US dollars and Argentine Pesos. Foreign currency fluctuations
resulted in a foreign exchange loss of $5,685 in the second quarter of 2008 and
a foreign exchange gain of $355,080 in the six months ended June 30, 2008.
Currently, the Company does not hedge its exposure to foreign currency
fluctuations.
Net loss and other comprehensive loss
The Company realized a net loss of $528,911 for the three months ended June 30,
2008, compared to a net loss of $836,521 in the second quarter of 2007. The net
loss for the six months ended June 30, 2008 totaled $717,678, compared to a net
loss of $1,946,293 for the same period in 2007. The net loss in 2007 was largely
due to one time charges related to the write down of the Company's Canadian oil
and gas properties and stock compensation expense noted previously. Increased
commodity prices and the foreign exchange gain recorded by the Company in the
first six months of 2008 also reduced the net loss by partially offsetting
production declines and increased royalty and G&A expense.
Income taxes
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
has Canadian tax losses and other cumulative tax deductions in excess of net
book values, but to date, has not recognized the income tax benefit of these
future tax assets as their recoverability is uncertain at this time.
Capital expenditures
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Three months ended Six months ended
June 30, June 30,
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2008 2007 2008 2007
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Canada oil and gas properties
Drilling and completions $ (2,975) $ 117,332 $ 30,069 $ 658,384
Well equipment and
production facilities 561 152,767 3,362 280,697
Land - - - 49
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Total Canada oil and gas
properties (2,414) 270,099 33,431 939,130
Argentina pre-production
costs 427,032 (80,597) 366,976 (65,107)
Tunisia pre-production
costs - 2,297,580 2,082,638 2,313,455
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424,618 2,487,082 2,483,045 3,187,478
Office furniture and
equipment 510 140 1,302
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Total capital expenditures $ 424,618 $ 2,487,592 $2,483,185 $ 3,188,780
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Madalena spent $424,618 on petroleum and natural gas properties and office
furniture and fixtures in the second quarter of 2008 compared to $2,487,592 in
the second quarter of 2007. For the six months ended June 30, 2008 the Company
incurred $2,483,185 on capital expenditures compared to $3,188,780 in the first
six months of 2007. In Canada, the Edson and Brazeau area drilling programs were
completed at the end of 2007 resulting in less capital expenditures in 2008. In
Argentina, the Company incurred additional costs as the seismic and exploration
work on the Argentine properties continued. In 2007 the Company recovered
certain exploration costs in Argentina from one of its operating partners
resulting in a negative expenditure. In Tunisia the Company incurred costs in
2008 to drill an exploration well compared to costs incurred in 2007 for seismic
exploration activities.
LIQUIDITY AND CAPITAL RESOURCES
Madalena is in the initial exploration stage on its international oil and gas
prospects. The Company earns interest income on its excess cash and has revenue
related to its Canadian oil and gas properties, but the cash generated from
these activities is not always sufficient to cover operating costs and other
overhead. The Company had negative funds from operations in the three months
ended June 30, 2008 totaling $273,758 compared to positive funds from operations
of $94,745 in the second quarter of 2007. The Company had negative funds from
operation of $579,548 in the six months ended June 30, 2008, compared to
negative funds from operations of $39,031 for the same period in 2007 (funds
from operations is a non-GAAP measurement - see the paragraph on non-GAAP
measurements above for a comparison to cash flow from operations).
At June 30, 2008 Madalena had working capital of $12,978,586 (including
$12,916,049 in cash and cash equivalents) compared to $13,236,239 (including
$13,082,472 in cash and cash equivalents) at December 31, 2007. The decrease in
working capital at June 30, 2008 is due to funding on-going exploration and
development activities, primarily in Argentina and Tunisia, offset by working
capital received from the private placement.
Historically, the Company raised funds from equity financings to fund
exploration and development activities and overhead expenses. The Company's
ability to continue operations will be dependant on identifying commercial oil
and gas reserves, generating profitable operations and raising sufficient
capital to complete planned exploration and development activities.
On April 4, 2008, the Company closed 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 Company's capital expenditure
commitments.
TRANSACTIONS WITH RELATED PARTIES
There were no transactions with related parties for the three or six months
ended June 30, 2008. During the three and six months ended June 30, 2007 two
directors of the Company were also directors of a company that was a joint
interest owner and operator of Madalena's Canadian oil and gas properties. This
company is no longer the operator, or joint interest owner of any of Madalena's
oil and gas properties. At June 30, 2007 the Company had accounts payable of
$185,953 due to this related party.
During the three and six months ended June 30, 2007 the Company used the
services of a law firm in which one of the directors was a partner. During the
three and six months ended June 30, 2007 the Company incurred $19,200 and
$74,700 respectively of legal services at market rates from the law firm.
SHARE INFORMATION
At June 30, 2008 and August 25, 2008, the Company has 111,743,702 common shares
and 10,130,000 stock options outstanding. In the second quarter of 2008 the
Company completed a private placement resulting in the issuance of 4,375,003
common shares and all previously outstanding warrants to purchase common shares
expired unexercised.
BUSINESS RISKS
The Company's ability to increase reserves will depend on its ability to select
and acquire suitable prospects and to secure the capital to develop those
prospects in a timely fashion. The oil and gas industry is inherently risky and
there is no assurance that oil and gas reserves will be discovered or
economically produced. Inherent operational risks include, but are not limited
to, securing markets for production, complex regulatory and environmental
requirements, uncertainties related to reservoir performance, and competition.
Inherent financial risks include, but are not limited to, access to capital and
fluctuations in commodity prices, interest rates and foreign currency exchange
rates.
The Company is focused on the international oil and gas exploration market.
Conducting oil and gas exploration and development activities in foreign
jurisdictions creates additional inherent 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. With the
assistance of an independent petroleum engineering firm, the Company evaluated
the affect of the increased royalty rates on its existing reserves at December
31, 2007. 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
undiscounted future cash flow could be reduced by approximately $179,000 to
$358,000. The Company believes that these estimates have not changed as of June
30, 2008. At December 31, 2007 the impact of these changes were included in the
ceiling test calculation so no additional impairment charges are anticipated
from the increased royalties.
CONTRACTUAL OBLIGATIONS
The Company has a lease commitment for its Calgary, Canada head office through
June 15, 2011. The total estimated remaining lease payments at June 30, 2008,
including operating costs, is approximately $362,000.
The Company has lease commitments for two apartments in Argentina which expire
in October and December of 2009. The total estimated remaining lease payments at
June 30, 2008 are USD$23,000. In the second quarter of 2008 the Company entered
into a lease agreement for office space in Argentina which will expire in 2011.
The total estimated remaining lease payments at June 30, 2008 is USD$80,000.
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 USD$10.5 million to be spent over three years on the three exploration
blocks. The Company's share of these work programs will be 78.8 % or USD$8.3
million.
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 and second quarters 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 conjunction with the
creation of two wholly owned Barbados subsidiaries on January 1, 2008 to which
the Company sold its interests in the Tunisian seismic option agreements.
Foreign currency translation
In the first quarter of 2008 the Company commenced operations in Tunisia and
Argentina. Both locations are considered to be an "integrated foreign operation"
for accounting purposes and their financial results are translated into Canadian
dollars using the temporal method. Accordingly, the Company translates foreign
denominated monetary assets and liabilities at the exchange rate prevailing at
the period end; non-monetary assets, liabilities and related depletion,
depreciation and accretion are translated at historic rates; and revenues and
expenses are translated at the rate in effect at the time of the transaction.
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. There was no financial impact as a
result of implementing this new 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
those risks. There was no financial impact as a result of implementing these new
standards.
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 three years prior to the January 1, 2011 change over, 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.
OUTLOOK
For the remainder of 2008, the Company will continue its exploration program on
its blocks in Argentina, complete its evaluation of two wellbores on one of its
blocks in Argentina and look for opportunities to produce from these wellbores.
In Tunisia, the Company will work with its partners to complete testing of its
Remada Sud well and determine its commercial viability and potential for
development of additional zones. The Company will also work to evaluate
additional international opportunities as they are presented.
QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
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As at and for the June, 30 March 31, December 31, September 30,
three months ended 2008 2008 2007 2007
----------------------------------------------------------------------------
Operations
Daily production
Oil (bbl/d) 11 9 18 8
Natural gas (mcf/d) 96 114 136 180
Natural gas
liquids (bbl/d) 4 5 6 7
Oil equivalent (boe/d) 31 32 47 45
Average sales price
Oil price ($bbl) $ 121.26 $ 94.46 $ 77.07 $ 78.66
Natural gas price
($/mcf) 11.32 8.53 6.32 6.04
Natural gas liquids
price ($/bbl) 106.20 78.39 65.82 65.26
Oil equivalent
price ($/boe) 91.65 66.66 56.75 48.38
Operating net back
($/boe) $ 43.26 $ 32.28 $ 31.74 $ 25.38
Financial
Petroleum and natural
gas revenues $ 255,466 $ 195,309 $ 245,704 $ 200,514
Interest income 70,188 91,628 128,382 164,981
Loss from continuing
operations (528,911) (188,767) (3,624,808) (462,486)
Basic and diluted
per share (0.005) (0.002) (0.030) -
Net loss (528,911) (188,767) (3,624,808) (462,486)
Basic and diluted
per share (0.005) (0.002) (0.030) -
Capital expenditures 424,618 2,058,566 2,079,747 92,069
Working capital $12,978,586 $11,232,647 $13,236,239 $15,144,359
Shares outstanding
(000's) 111,744 107,369 107,369 107,369
----------------------------------------------------------------------------
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
As at and for the June, 30 March 31, December 31, September 30,
three months ended 2007 2007 2006(1) 2006(1)
----------------------------------------------------------------------------
Operations
Daily production
Oil (bbl/d) 28 -
Natural gas (mcf/d) 155 161 198 109
Natural gas liquids
(bbl/d) 8 6 7 2
Oil equivalent (boe/d) 62 33 40 20
Average sales price
Oil price ($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
Petroleum and natural
gas revenues $ 341,338 $ 145,408 $ 171,532 $ 67,475
Interest income 177,874 190,056 147,948 94,762
Loss from continuing
operations (836,521) (1,109,773) (2,892,752) (352,724)
Basic and diluted
per share (0.008) (0.010) (0.032) (0.005)
Net loss (836,521) (1,109,773) (2,895,425) (405,633)
Basic and diluted
per share (0.008) (0.010) (0.032) (0.006)
Capital expenditures 2,487,592 701,188 1,471,112 5,398,608
Working capital $15,380,251 $17,713,097 $18,309,436 $ 274,561
Shares outstanding
(000's) 107,369 106,869 106,391 71,586
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(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. Net loss and other
comprehensive loss in the three months ended December 31, 2006 was
increased by $99,178 as a result of understated stock based
compensation. The loss from continuing operations and net loss and
other comprehensive loss in the three months ended September 30, 2006
was decreased by $10,521 as a result of understated, on a net basis,
oil and gas revenues, royalties, operating costs, and depletion.
DIRECTORS HEAD OFFICE LOCATION
Raymond G. Smith Suite 200, 441 - 5(th) Avenue S.W.
Chairman, Calgary, Alberta, Canada
Madalena Ventures Inc. T2P 2V1
Kenneth L. Broadhurst LEGAL COUNSEL
President and Chief Executive Burnet, Duckworth and Palmer LLP
Officer, Calgary, Alberta
Madalena Ventures Inc.
Dwayne H. Warkentin BANKERS
Sr. Vice President and Chief BMO Bank of Montreal
Operating Officer,
Madalena Ventures Inc.
Ving Y. Woo AUDITORS
Independent Businessman KPMG LLP
Calgary, Alberta
Michael J. Lock INDEPENDENT ENGINEERS
President, GLJ Petroleum Consultants
Upsilon Holdings Ltd.
J. G. (Jeff) Lawson REGISTRAR AND TRANSFER AGENT
Managing Director, Blackmont Capital Inquiries regarding change of address,
Inc registered shareholdings, stock
transfers or lost certificates should
James K. Wilson be directed to:
VP Finance, CFO and Corporate Computershare Trust Company of Canada
Secretary, Calgary, Alberta
Grizzly Resources Ltd.
OFFICERS STOCK EXCHANGE LISTING
Kenneth L. Broadhurst TSX Venture Exchange
President and Chief Executive Trading Symbol: "MVN"
Officer
Dwayne H. Warkentin
Senior Vice President and Chief
Operating Officer
Gregory J. Ford
Vice President, Finance and Chief
Financial Officer
Madalena Energy (TSXV:MVN)
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