Orleans Energy Ltd. ("Orleans" or the "Company") (TSX VENTURE:OEX) is pleased to
announce record results for the three month period ended March 31, 2008.
Highlights of Orleans strongest quarterly performance to-date is outlined as
follows:
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Financial Highlights Three Month Period Ended,
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March 31, March 31,
(6:1 oil equivalent conversion) 2008 2007 % Change
----------------------------------------------------------------------------
(amounts in Cdn.$ except share data)
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Petroleum and natural gas revenue (5) 19,036,171 12,187,656 56%
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Per share - basic 0.49 0.37 32%
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- diluted 0.48 0.36 33%
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Cash flow from operations (1) 9,382,715 6,066,434 55%
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Per share - basic 0.24 0.18 33%
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- diluted 0.24 0.18 33%
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Operating netback (2) ($/boe) 31.02 31.26 (1%)
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Corporate netback (2) ($/boe) 27.24 26.10 4%
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Net loss (3) (3,582,219) (912,767) 292%
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Per share - basic (0.09) (0.03) 200%
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- diluted (0.09) (0.03) 200%
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Net debt (4)- period end 31,158,355 48,403,405 (36%)
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Weighted average basic shares 39,035,932 33,148,659 18%
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Weighted average diluted shares 39,577,174 33,743,616 17%
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Issued and outstanding shares (6) 44,596,372 33,148,659 35%
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Operating Highlights
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Average daily production:
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Natural gas (mcf/d) 18,070 10,665 69%
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Liquids (Oil & NGLs) (bbls/d) 773 805 (4%)
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Oil equivalent (boe/d) 3,784 2,583 46%
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Average sales price (5):
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Natural gas ($/mcf) 8.09 8.01 1%
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Liquids (Oil & NGLs) ($/bbl) 81.57 62.07 31%
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Oil equivalent ($/boe) 55.28 52.43 5%
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E&D capital expenditures ($) 15,516,814 10,989,379 41%
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Total capital expenditures ($) 16,206,666 11,417,668 42%
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Notes:
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian generally accepted accounting principles
("GAAP"). Please refer to the enclosed MD&A for definition of cash flow
from operations.
(2) Operating netback represents average sales price less royalties,
operating costs and transportation expenses. Corporate netback
represents operating netback less general and administrative costs and
interest expense. Both measures are not recognized measures under
Canadian GAAP.
(3) Net loss includes: (i) non-cash income tax reductions and (ii) non-cash
unrealized hedging gains or losses from commodity contract settlements.
For the three month period ended March 31, 2008, the reported net loss
reflects an unrealized loss on commodity contracts associated with the
Company's hedging activities of $4.39 million.
(4) Net debt refers to outstanding bank debt plus working capital deficit
(excludes current unrealized amounts pertaining to risk management
commodity contracts). Net debt is not a recognized measure under
Canadian GAAP.
(5) Petroleum and natural gas revenue and pricing includes realized hedging
gains or losses from commodity contract settlements.
(6) Current common shares outstanding are 45,694,706, reflecting the equity
financing over-allotment option exercised April 9, 2008.
First Quarter 2008 Achievements
- Record Quarterly Production
Production in the first quarter averaged 3,784 barrels of oil equivalent ("boe")
per day, an increase of 46% over the first quarter of 2007 (2,583 boe per day)
and a 21% increase over the preceding fourth quarter of 2007 (3,132 boe per
day). Orleans' strong, quarterly production growth profile is entirely
attributable to successful internally-generated drilling activities.
- Record Revenue and Cash Flow Generation
Generated petroleum and natural gas revenue of $19.04 million in the first
quarter, an increase of 56% over the corresponding quarter in 2007. Cash flow
from operations increased by 55% to $9.38 million ($0.24 per fully diluted
share).
- Strong Internally-Generated "Drill Bit" Performance
Drilled five wells (4.7 net), on an exploration and development capital program
of $15.5 million. Operational momentum continued into the second quarter with
one (0.68 net) Kaybob Montney horizontal well drilled and cased and another
horizontal well (0.68 net) at Kaybob presently being drilled.
- Financial Flexibility
On March 13, 2008, closed a $25.2 million "bought-deal" equity financing,
enabling the Company to expand its 2008 capital expenditures and enhance its
financial flexibility. Net debt at March 31, 2008 was $31.16 million, as
compared to a credit facility of $60 million. Based on an annual review of the
borrowing base and facility amount associated with Orleans' operating credit
facility, the Company's banker recently increased the operating line of credit
to $65 million.
Operations Update
Kaybob, West Central Alberta
The Company's Kaybob property has been the focal point of growth for Orleans
over the past year. The Kaybob asset base has grown from six (4.4 net) sections
to 27.5 (25.0 net) via crown land sales and farm-ins. Orleans' lands are
strategically situated in the heart of the prolific Triassic Montney gas
fairway, which is characterized by "deep basin", resource-style, liquids-rich,
natural gas prospects. The Company intends to downspace and drill on the
majority of its lands with three horizontal wells per section. Based on
operational success and enhanced geological mapping, Orleans' current Montney
drilling inventory consists of 30 locations with a potential total inventory of
over 50 wells. In just one year of operations at Kaybob, Orleans has grown its
production from 70 boe per day to approximately 2,500 boe per day.
In the first quarter of 2008, the Company drilled four (3.7 net) horizontal
"Packers Plus" wells, encompassing two (1.7 net) wells on the western acreage
block and two (2.0 net) wells on Orleans' eastern acreage. The two (1.7 net)
wells on the western block were drilled from a common lease pad allowing for
accelerated tie-in following their completion operations. Multi-stage well bore
fractures of 130 and 150 tonnes of total displacement over four and five stages
were performed, respectively. The wells were placed on-stream in April 2008 at
initial, "flush" gross production rates of 3.7 million cubic feet ("mmcf") per
day (net 590 boe per day) and 3.6 mmcf per day (net 580 boe per day),
respectively.
The two (2.0 net) horizontal wells drilled on the eastern lands have been
completed and tested. The first well was completed with a seven stage, 160 tonne
frac with a tested gas rate of 2.3 mmcf per day (net 383 boe per day). The well
will be tied into an existing gas gathering system in the third quarter of 2008.
The second well, drilled on the most south easterly section of Orleans' Kaybob
land base south of the Athabasca River, was completed with a five stage, 25
tonne frac and is currently being evaluated.
Utilizing common lease pad drilling, Orleans has been able to conduct drilling
operations through spring break-up, a seasonal time period whereby drilling
operations are normally curtailed due to municipally-imposed road bans. Thus far
in the second quarter of 2008, Orleans has drilled and cased one (0.68 net)
additional horizontal well and is presently undergoing drilling operations on
another horizontal well (0.68 net), representing the sixth (5.1 net) Kaybob
Montney horizontal well drilled to-date in 2008. Both of these wells are
expected to be completed through multi-stage fracturing following spring
break-up.
In 2008, Orleans intends to drill 11 (9.3 net) horizontal wells on its Kaybob
lands, with eight wells targeting the western block and three wells on the
eastern block. The Company is very encouraged by the results from its Kaybob
drilling operations and its multi-year inventory of "drill ready" Montney
locations providing for significant opportunities for visible, long-term
production growth.
Pine Creek, West Central Alberta
In the first quarter of 2008, Orleans participated in the completion of a
non-operated well (0.50 net) in three separate zones. This well was brought
on-stream in March 2008 at an initial, "flush" gross production rate exceeding
two mmcf per day (net 167 boe per day). The Pine Creek area is a "deep basin",
resource-style gas prone fairway delivering multi-zone, liquids-rich, sweet
natural gas in up to seven separate horizons. Orleans has developed an
additional 17 to 20 well drilling inventory across its lands, based on approved
four wells per section down spacing, and has the ability to commingle and
produce multiple stacked formations per single well bore.
Gilby, Central Alberta
In December 2007, the Company drilled a 100% working interest Gilby Edmonton
Sand gas well, encountering multiple pay sections. This well was tied in and
brought on-stream in January 2008. Also in December 2007, Orleans received
approval to drill on reduced spacing, up to four wells per section on 14.5
sections of Company lands, yielding a future drilling inventory of 40 Edmonton
Sand wells. Orleans also received approval to drill on reduced spacing in the
Mannville, allowing for three wells per section in the Glauconite formation and
two wells per section in the Lower Mannville formation, across eight sections of
Orleans' acreage. Thus far in 2008, the Company has drilled and cased a 100%
working interest well with multi-zone potential in the Edmonton Sand, Ostracod
and Ellerslie zones. The well will be completed following spring break-up, and
upon success, will be tied into the Company's gas gathering system.
Executive Appointments
Effective May 1, 2008, the Company strengthened its executive team with the
promotion of Mr. Mark Stephen from Manager of Operations to Vice-President
Operations. Mr. Stephen has been employed with Orleans since April 2007 and has
approximately 25 years of experience in supervising and managing oilfield
operations with numerous upstream Canadian oil and gas companies. Mr. Stephen
will oversee all aspects of Orleans' production and drilling operations.
Additionally, effective May 1, 2008, the Company promoted Mr. Rick Schuster to
the position of Executive Vice-President Exploration and Development, in
recognition of his invaluable geological, technical and corporate stewardship
contributions provided to Orleans since inception in January 2005.
TSX Graduation
The Company has undertaken the process of graduating the listing of its common
shares to the Toronto Stock Exchange ("TSX") from the current TSX Venture
Exchange. The listing of Orleans' common shares on the TSX will provide the
Company with access to Canada's largest stock exchange while enhancing Orleans'
trading liquidity and visibility within the North American capital markets. This
graduation process to the TSX is anticipated to be finalized by the end of the
second quarter of 2008.
Annual Meeting of Shareholders
The Company will hold its annual general meeting of shareholders on Wednesday,
June 11, 2008 at 3:00 p.m. in the McMurray Room of the Calgary Petroleum Club
located at 319 - 5th Avenue S.W., Calgary, Alberta, Canada.
Management's Discussion & Analysis ("MD&A")
The following discussion is intended to assist the reader in understanding the
business and results of operations and financial condition of Orleans Energy
Ltd. (the "Company" or "Orleans"). This MD&A should be read in conjunction with
the unaudited interim financial statements for the three month period ended
March 31, 2008 and the audited financial statements for the year ended December
31, 2007, available in printed form on request. Unaudited financial and
operating information for the three month interim period ended March 31, 2008
("Q108"), in addition to the corresponding comparable quarterly period ended
March 31, 2007 ("Q107"), are presented within this MD&A commentary.
In this MD&A, production and reserves data is commonly stated in barrels of oil
equivalent ("boe") using a six (6) to one (1) conversion ratio when converting
thousands of cubic feet of natural gas ("mcf") to barrels of oil ("bbl") and a
one-to-one conversion ratio for natural gas liquids ("NGLs" or "ngls"). Such
conversion may be misleading, particularly if used in isolation. A boe
conversion ratio of six (6) mcf: one (1) bbl is based on energy equivalency
conversion method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead.
As an indicator of the Company's performance, the term cash flow from operations
or operating cash flow contained within the MD&A should not be considered as an
alternative to, or more meaningful than, cash flow from operating activities as
determined in accordance with Canadian generally accepted accounting principles
("GAAP"). This term does not have a standardized meaning under GAAP and may not
be comparable to other companies. Orleans believes that cash flow from
operations is a useful supplementary measure as shareholders and/or investors
may use this information to analyze operating performance, leverage and
liquidity. Cash flow from operations, as disclosed within this MD&A, represents
cash flow from operating activities before any asset retirement obligation cash
expenditures and before changes in non-cash operating activities working
capital. The Company presents cash flow from operations per share whereby per
share amounts are calculated consistent with the calculation of earnings per
share. Please refer to the table, Reconciliation of Non-GAAP Measures, contained
within this MD&A.
Certain information regarding the Company contained herein may constitute
forward-looking statements within the meaning of applicable securities laws.
Forward-looking statements may include estimates, plans, expectations, opinions,
forecasts, projections, anticipates, guidance or other similar statements that
are not statements of fact. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. These statements are
subject to certain risks and uncertainties and may be based on assumptions that
could cause actual results to differ materially from those anticipated or
implied in the forward-looking statements. The Company's forward-looking
statements are expressly qualified in their entirety by this cautionary
statement.
For additional information relating to Orleans, please refer to other filings as
filed on SEDAR at www.sedar.com. All amounts are reported in Canadian dollars,
unless otherwise stated. This MD&A includes information up to and including May
14, 2008.
Business Overview
Orleans Energy Ltd. is an independent, Alberta-based crude oil and natural gas
company actively engaged in the exploration for, development and production of
natural gas, crude oil and natural gas liquids reserves within the province of
Alberta. Orleans is incorporated under the laws of Alberta and its common shares
are publicly listed and presently traded on the TSX Venture Exchange under the
trading symbol "OEX". The Company has undertaken the process of graduating the
listing of its common shares to the Toronto Stock Exchange ("TSX"). The listing
of Orleans' common shares on the TSX will provide the Company with access to
Canada's largest stock exchange while enhancing Orleans' trading liquidity and
visibility within the North American capital markets. This graduation process to
the TSX is anticipated to be finalized by the end of the second quarter of 2008.
As of May 14, 2008, Orleans' market capitalization is approximately $217
million. Current production is weighted approximately 80% natural gas and 20%
light oil and NGLs. The Company's production base is generated from five core
producing areas throughout Central Alberta (Gilby and Halkirk/Leo), West Central
Alberta (Kaybob and Pine Creek) and the Peace River Arch (Gordondale). Orleans'
asset base possesses all the prerequisites for a solid growth platform
including: (i) an extensive drilling inventory providing exposure to both light
oil and natural gas prospects within a West Central Alberta geographic corridor,
(ii) approximately 54,084 acres of high working interest (81%) undeveloped
acreage offering geologic play diversity, (iii) a long-life, proved plus
probable reserves base at December 31, 2007 of approximately 13.72 million boe
with a reserve life index exceeding 10 years and, (iv) an operated production
base allowing for year-round access.
Selected Period End and Quarterly Financial Information
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2007 Quarterly Comparison
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($000s) Q407 Q307 Q207 Q107 Q108
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Petroleum & natural gas revenue
(1) 13,413 11,905 11,635 12,188 19,036
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Cash flow from operations 5,625 4,492 5,143 6,066 9,383
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Net loss (2,096) (3,074) (128) (913) (3,582)
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Total assets - period end 203,751 201,795 194,076 191,627 214,024
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-------------------------------------------------------------------
2006 Quarterly Comparison
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($000s) Q406 Q306 Q206 Q106
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Petroleum & natural gas revenue
(1) 11,038 9,777 5,912 5,720
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Cash flow from operations 5,461 5,219 3,362 3,177
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Net earnings (loss) (17,006) (128) (1,346) 642
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Total assets - period end 188,325 192,609 180,598 55,109
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(1) Petroleum & natural gas revenue includes realized hedging gains or
losses from commodity contract settlements.
The following commentary will assist in providing the reader with factors that
have caused variations over the aforementioned quarterly results.
Petroleum and Natural Gas Production
During the first quarter of 2008, Orleans' realized a record level of average
daily production of 3,784 boe per day, an increase of 46% over 2,583 boe per day
achieved in Q107 and a marked increase of 21% over the preceding fourth quarter
2007 output of 3,132 boe per day. The Company's natural gas sales for Q108
averaged 18,070 mcf per day while crude oil and NGLs production averaged 773
bbls per day, resulting in a commodity weighting of 80% natural gas and 20%
percent light gravity crude oil and NGLs. Continued drilling and operational
success in the Montney reservoir at Kaybob in West Central Alberta was the
catalyst to the robust production levels achieved in Q108.
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Average Daily Production Natural Gas Crude Oil & NGLs Oil Equivalent
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(mcf/d) (bbls/d) (boe/d)
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Q105 1,404 325 559
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Q205 2,385 435 832
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Q305 3,231 662 1,200
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Q405 4,160 685 1,378
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Q106 3,426 576 1,147
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Q206 4,334 552 1,274
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Q306 8,349 789 2,181
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Q406 9,428 809 2,380
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Q107 10,665 805 2,583
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Q207 10,673 682 2,460
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Q307 14,002 668 3,002
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Q407 14,655 689 3,132
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Q108 18,070 773 3,784
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Q108 Production by Area Natural Gas Crude Oil & NGLs Oil Equivalent
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(mcf/d) (bbls/d) (boe/d)
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Halkirk/Leo 1,863 368 678
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Gilby/Medicine River 3,058 158 667
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Pine Creek 1,460 34 277
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Kaybob 10,229 199 1,904
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Pembina 1,285 11 226
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Gordondale/Grimshaw 175 3 32
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Q108 18,070 773 3,784
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Petroleum and Natural Gas Revenue and Commodity Pricing
Orleans' petroleum and natural gas sales may vary significantly from
period-to-period as a result of changes in commodity prices and/or production
volumes. The Company's commodity prices are driven by the prevailing worldwide
price for crude oil, spot prices applicable to its natural gas production, and
many other factors beyond its control. Historically, these prices have been
volatile and unpredictable. Presently, world oil prices are at record levels.
Robust world demand for oil and a weak U.S. dollar have fuelled the precipitous
rally in oil prices. On the natural gas pricing side of things, lower than
anticipated North American natural gas storage levels at the end of the
2007/2008 heating season (March 31), in conjunction with the aforementioned very
bullish crude oil price environment, continue to provide support for a positive
natural gas price outlook.
Orleans takes the majority of its working interest production "in kind" and it
is marketed and sold through various commodity purchasers. Orleans' crude oil is
marketed under a short-term evergreen contract with a major North American crude
oil marketer and purchaser. Orleans' crude oil has an average stream gravity of
approximately 35 degrees to 39 degrees API. A majority of the Company's natural
gas is sold as spot gas through a significant North American natural gas
marketer.
Orleans' crude oil price, including the effect of realized commodity contract
settlements, averaged $81.43 per barrel in the three month period ended March
31, 2008, an increase of 25% from the oil price of $65.37 per barrel realized in
Q107. The Company's natural gas price realization in Q108 was marginally higher
than the previous comparable Q107 of $8.01 per mcf, averaging $8.09 per mcf in
Q108.
Orleans' total petroleum and natural gas revenue for the three month period
ended March 31, 2008 amounted to $19.04 million (including the effect of
realized risk management commodity contract settlements), representing a 56%
increase from the corresponding first quarter 2007 sales amount of $12.19
million. Increased production volumes in concert with higher oil prices were the
primary reasons for higher realized revenues in Q108 vis-a-vis Q107.
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
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(includes realized commodity contract
settlements)
----------------------------------------------------------------------------
Crude oil and NGLs 5,736 4,497 28
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Natural gas 13,300 7,691 73
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Petroleum and natural gas revenue 19,036 12,188 56
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Commodity Price Risk Management
The prices the Company receives for its crude oil and natural gas production may
have a significant impact on its revenues and cash flow from operations. Any
significant price decline in commodity prices would adversely affect the amount
of funds available for capital reinvestment purposes. As such, Orleans utilizes
a risk management program to partially mitigate that risk and to ensure adequate
funds are available for planned capital activities and other commitments. As
such, from time-to-time, the Company may employ derivative financial instruments
and physical arrangements, primarily commodity price contracts, to manage
fluctuations in oil and gas market prices, which are generally put in-place with
investment grade counter-parties that Orleans believes present minimal credit
risks. The Company does not utilize derivative financial instruments for
speculative trading purposes.
Orleans periodically uses swaps and collars to hedge crude oil and natural gas
prices. Commodity swaps are settled monthly based on differences between the
prices specified in the financial instruments and the settlement prices of
futures contracts. Generally, when the applicable settlement price is less than
the price specified in the contract, Orleans receives a settlement from the
counter-party based on the difference multiplied by the contracted volume.
Similarly, when the applicable settlement price exceeds the price specified in
the contract, Orleans pays the counter-party based on the difference. The
Company generally receives a settlement from the counter-party for collars when
the applicable settlement price is less than the floor price specified in the
contract and pays a settlement to the counter-party when the settlement price
exceeds the cap or ceiling. No settlement occurs when the settlement price falls
between the floor and ceiling.
Consequently, Orleans' realized petroleum and natural gas sales are impacted by
the settlement of these transactions. The various commodity hedge contracts
in-place in Q108 resulted in a realized net loss of $308 thousand (Q107: $285
thousand gain), comprised of a $10 thousand decrease in natural gas revenue
($0.01 per mcf) and a $298 thousand decrease in crude oil and NGLs sales ($4.24
per bbl).
The following table outlines the realized results of the Company's commodity
price risk management activities in Q108:
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Q108 Q107
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Crude oil gain (loss) $ (298,465) $ 34,623
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Natural gas gain (loss) (9,590) 250,806
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Realized gain (loss) on commodity contracts $ (308,055) $ 285,429
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As further described in Note 3 to the audited financial statements for the year
ended December 31, 2007, the Company recognizes the fair value of its commodity
contracts on the balance sheet each reporting period with the change in fair
value being recognized as an unrealized gain or loss on the statement of
operations. On December 31, 2007 the fair value of the commodity contracts was a
liability of $432 thousand. As at March 31, 2008, the fair value of the
financial commodity contracts was a liability of $4.82 million, resulting in an
unrealized loss in Q108 of $4.39 million.
The following table outlines the financial commodity price contracts outstanding
during Q108. The Company has not entered into any additional commodity contracts
subsequent to March 31, 2008.
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Daily
Contract Notional
Commodity Date Type Term Volume Index Price
----------------------------------------------------------------------------
Jan '08 -
Crude Oil Oct. 15, 2007 Swap Jun '08 200 bbls W.T.I. US$ 81.56/bbl
----------------------------------------------------------------------------
Jul '08 - US$ 90.00 -
Crude Oil Mar. 3, 2008 Collar Dec '08 100 bbls W.T.I. $116.25/bbl
----------------------------------------------------------------------------
Nov '07 -
NatGas Oct. 18, 2007 Swap Mar '08 1,000 GJs AECO-C C$ 6.545 /GJ
----------------------------------------------------------------------------
Jan '08 -
NatGas Oct. 18, 2007 Swap Mar '08 1,000 GJs AECO-C C$ 6.71 /GJ
----------------------------------------------------------------------------
Jan '08 -
NatGas Oct. 31, 2007 Swap Mar '08 1,000 GJs AECO-C C$ 6.67 /GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Dec. 18, 2007 Swap Dec '08 2,000 GJs AECO-C C$ 6.55 /GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Jan. 2, 2008 Swap Dec '08 2,000 GJs AECO-C C$ 6.81 /GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Jan. 4, 2008 Swap Oct '08 1,000 GJs AECO-C C$ 6.61 /GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Jan. 7, 2008 Swap Oct '08 1,000 GJs AECO-C C$ 6.72 /GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Jan. 10, 2008 Swap Oct '08 1,000 GJs AECO-C C$ 7.01 /GJ
----------------------------------------------------------------------------
Nov '08 - C$ 7.00 -
NatGas Feb. 13, 2008 Collar Mar '09 2,000 GJs AECO-C $9.70/GJ
----------------------------------------------------------------------------
Apr '08 -
NatGas Feb 14, 2008 Swap Oct '08 1,000 GJs AECO-C C$ 7.52 /GJ
----------------------------------------------------------------------------
The following table highlights Orleans' corporate realized commodity prices
as well as market prices:
----------------------------------------------------------------------------
Q108 Q107 % Change
----------------------------------------------------------------------------
Orleans' prices (1) :
----------------------------------------------------------------------------
Natural gas ($/mcf) 8.09 8.01 1
----------------------------------------------------------------------------
Crude oil and NGLs ($/bbl) 81.57 62.07 31
----------------------------------------------------------------------------
Oil equivalent ($/boe) 55.28 52.43 5
----------------------------------------------------------------------------
Industry benchmark prices:
----------------------------------------------------------------------------
WTI Cushing oil (US$/bbl) 97.82 58.09 68
----------------------------------------------------------------------------
Edmonton Par oil ($/bbl) 97.24 67.61 44
----------------------------------------------------------------------------
Nymex gas (US$/mmbtu) 8.74 7.18 22
----------------------------------------------------------------------------
AECO gas ($/mcf) 7.91 7.26 9
----------------------------------------------------------------------------
Exchange rate (US$/C$) 0.9952 0.8534
----------------------------------------------------------------------------
(1) Orleans' reported prices include realized hedging gains or losses from
commodity contract settlements.
Petroleum and Natural Gas Royalties
Orleans' petroleum and natural gas royalties for the three month period ended
March 31, 2008 amounted to $4.13 million, resulting in a corporate effective
royalty rate of 21%. Approximately 76% of Orleans' total royalties for Q108
relate to Crown royalties with the residual 24% attributable to freehold and
overriding royalty encumbrances. The royalty rate in Q108 was higher than the
rate of 19% realized in Q107 due to a higher weighting of production derived
from Crown lands vis-a-vis freehold acreage, specifically with regards to the
Company's Kaybob asset base. Typically, effective royalty rates associated with
production on Crown lands is higher than that of freehold-based production.
Commencing in 2009, upon legislation enactment, the Company anticipates its
total royalty expense will increase as a result of the proposed royalty rate
changes announced by the Alberta government. The expected royalty expense
increase cannot be accurately quantified at this point in time.
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
----------------------------------------------------------------------------
Crown 3,150 1,508 109
----------------------------------------------------------------------------
Freehold and overrides 978 780 25
----------------------------------------------------------------------------
Total royalties 4,128 2,288 80
----------------------------------------------------------------------------
Corporate royalty rate (%) (1) 21% 19%
----------------------------------------------------------------------------
(1) Royalty rate is based on petroleum and natural gas sales, excluding any
realized hedging gains or losses from its risk management commodity
contracts settlements.
Operating Expenses
Orleans' field operating expenses, on an oil-equivalent per unit basis, are
generally impacted by the level of well bore maintenance activity, geographic
location of the Company's properties, whether oil and gas is produced, and the
underlying commodity price levels. Commodity prices directly affect operating
cost elements such as power, fuel and chemicals. The remaining primary
components, which include among other things, field labour, services and
equipment, are indirectly impacted by high price environments, which drive up
activity and demand and therefore, increase costs. All elements of operating
expenses have been increasing throughout the oil and gas industry for several
years due to industry inflationary pressures.
The Company's total field operating expenditures for the three month period
ended March 31, 2008 amounted to $3.81 million. This was considerably higher, in
aggregate, than the $2.38 million reported in the same quarterly period in 2007,
due to increased production and expanded field operations resulting from a
greater number of producing wells as compared to Q107. Notwithstanding continued
inflationary pressures exerted on Orleans' operating cost profile and the
off-lined production at Gordondale for the entire first quarter, the Company's
operating costs on a per unit basis were $11.05 per boe in Q108, 12% decrease
from the $12.57 per boe realized in the preceding fourth quarter of 2007.
At Gordondale, Orleans incurred fixed operating costs throughout Q108 despite
the complete curtailment of production from this field due to the main sales gas
pipeline being offline since December 18, 2007, thus placing upward pressure on
Q108 operating costs. Shut-in production during Q108 at Gordondale inflated the
Company's per-unit operating costs by approximately $0.43 per boe.
----------------------------------------------------------------------------
Q108 Q107 % Change
----------------------------------------------------------------------------
Total ($000s) 3,806 2,378 60
----------------------------------------------------------------------------
Per unit ($/boe) 11.05 10.23 8
----------------------------------------------------------------------------
Transportation Expenses
The Company incurs transportation costs for its produced commodities once the
commodity enters a feeder or main pipeline to the title transfer point. Orleans'
cost of transporting and distributing its crude oil and natural gas production
during Q108 amounted to $419 thousand, as compared to Q107 transportation
expenses of $255 thousand. On a unit-of-production basis, transportation costs
of $1.22 per boe in Q108 represented a per unit increase of 11% over Q107.
Increased production volumes, supplemented with increased clean oil trucking
rates, gas pipeline fuel surcharges and tariffs resulted in transportation cost
increases, both on an aggregate and per-unit basis.
General & Administrative Expenses
The Company's general and administrative ("G&A") expenses during the three month
period ended March 31, 2008, excluding the non-cash stock-based compensation
provision, amounted to $708 thousand or $2.06 on an oil-equivalent per unit
basis. In comparison, the Company's G&A expenses for Q107 totalled $540 thousand
or $2.32 per boe of production. Orleans' G&A costs in Q108 increased 31% in
absolute dollars and decreased 11% on an oil-equivalent unit basis. The primary
factor contributing to the higher aggregate G&A costs in Q108 is the expanded
operations and asset base resulting in an increase to Orleans' head office
personnel. Orleans employed 16 head office personnel in Q108, including eight
geological and engineering technical personnel, and engaged the services of
three consultants on a part-time, as needed, basis.
The Company applies the full cost method of accounting for its oil and gas
operations. Accordingly, it capitalized employee G&A and associated direct
overhead costs of its technical personnel in the amount of $417 thousand during
the three month period ended March 31, 2008 (Q107: $204 thousand).
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
----------------------------------------------------------------------------
Gross, net operator recoveries 1,125 744 51
----------------------------------------------------------------------------
Capitalized (417) (204) 104
----------------------------------------------------------------------------
Expensed 708 540 31
----------------------------------------------------------------------------
Per unit ($/boe) 2.06 2.32 (11)
----------------------------------------------------------------------------
% Capitalized 37% 27%
----------------------------------------------------------------------------
Stock-Based Compensation
Orleans utilizes the fair value method for measuring stock-based compensation
expenses. Compensation cost is measured at the grant date based on the fair
value of the option using a Black-Scholes option pricing model and is recognized
over the option vesting period. Some of the inputs to the option valuation model
are subjective, including assumptions regarding expected stock price volatility.
The Company's stock-based compensation relates entirely to the granting of stock
options. During the three month period ended March 31, 2008, the Company
recorded stock-based compensation expense of $243 thousand (Q107: $150
thousand), which was charged to general and administration expense and presented
as such on the Company's statement of operations. In Q108, the Company
capitalized $254 thousand of its stock-based compensation charges (Q107: $174
thousand). As of March 31, 2008, total unrecognized compensation cost of $2.75
million, related to 2.14 million unvested Orleans' stock options, is expected to
be recognized in future periods over the remaining vesting terms.
Interest Charges
During the three month period ended March 31, 2008, the Company incurred $537
thousand in interest charges relating to its outstanding bank indebtedness. As
at March 31, 2008, Orleans had $20.41 million of bank debt, as compared to
$44.14 million of outstanding bank indebtedness at December 31, 2007. Despite
Orleans' exploration and development capital investments exceeding its generated
cash flow from operations in Q108, the Company's bank debt decreased in Q108
primarily as a result of the $25.2 million equity financing closed on March 13,
2008. In addition to bank debt interest incurred in Q108, the Company accrued
for the federal government's levied interest charges related to Orleans' July
2007 flow-through financing exploration expenditure deductions, previously
renounced under the "look back" rules. In Q108, this interest charge was accrued
in the amount of $56 thousand and will be disbursed in the first quarter of
2009.
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
----------------------------------------------------------------------------
Interest charges 593 660 (10)
----------------------------------------------------------------------------
Depletion, Depreciation and Accretion
Orleans' depletion and depreciation expense for the three month period ended
March 31, 2008 amounted to $9.29 million. On a unit-of-production rate basis,
the depletion and depreciation provision for Q108 was $26.99 per boe, as
compared to the $28.68 per boe Q107 provision recognized. The depletion and
depreciation rate is a useful measure for evaluating finding and development
costs on proved reserves basis since the rate generally considers all
acquisition, exploration and development capital costs. The rate also considers
any additional future development costs associated with proved non-producing
reserves. Orleans' ability to efficiently discover and develop proved oil and
gas reserves in a cost-effective manner continues to be reflected in its
decreasing depletion and deprecation rate provision.
The Company's accretion expense relating to its asset retirement obligations
("ARO") amounted to $123 thousand for the three month period ended March 31,
2008 (Q107: $116 thousand).
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
----------------------------------------------------------------------------
Depletion & depreciation (1) 9,293 6,666 39
----------------------------------------------------------------------------
Per unit ($/boe) 26.99 28.68 (6)
----------------------------------------------------------------------------
ARO accretion (2) 123 116 6
----------------------------------------------------------------------------
Per unit ($/boe) 0.36 0.50 (28)
----------------------------------------------------------------------------
(1) Includes depletion of the capitalized portion of the asset retirement
obligation which was capitalized to the PP&E balance and is being
depleted over the life of the Company's proved reserves.
(2) Represents the accretion expense on the asset retirement obligation
during the respective three month periods.
Asset Retirement Obligations
As at March 31, 2008, Orleans recorded an ARO of $5.66 million for estimated
future costs to abandon the Company's oil and gas wells and to dismantle and
remove associated production facilities, as compared to $5.45 million at
December 31, 2007. For the three month period ended March 31, 2008, the ARO
liability increased by a total of $202 thousand as a result of accretion expense
of $123 thousand and $79 thousand in liabilities incurred on development
drilling activities.
Income Taxes
Orleans follows the asset and liability method of accounting for income taxes
whereby future income taxes are calculated based on temporary differences
arising from the variance between the tax basis of an asset or liability and its
PP&E carrying value. For the three months ended March 31, 2008, the Company
recorded a future income tax reduction of $1.08 million, as compared to a $166
thousand income tax reduction in the comparable first quarter of 2007.
During the three month period ended March 31, 2008, Orleans was not subject to
any current corporate income tax due to the Company's significant tax pool
balances, which aggregate to approximately $175 million. As a result of Orleans'
sizeable tax pool position, the Company does not expect to be subject to
corporate cash income tax in the foreseeable future. The following table
outlines Orleans' tax pools as at March 31, 2008:
----------------------------------------------------------------------------
Balance
Access Rate ($ millions)
----------------------------------------------------------------------------
Canadian exploration expense (CEE) 100% $ 24.2
----------------------------------------------------------------------------
Canadian development expense (CDE) 30% 65.2
----------------------------------------------------------------------------
Canadian oil and gas property expense (COGPE) 10% 35.1
----------------------------------------------------------------------------
Undepreciated capital cost (UCC) 25% 43.4
----------------------------------------------------------------------------
Share issue costs and other 20% 7.1
----------------------------------------------------------------------------
Total $ 175.0
----------------------------------------------------------------------------
Reconciliation of Non-GAAP Measures
----------------------------------------------------------------------------
($000s except share data) Q108 Q107
----------------------------------------------------------------------------
Net loss (3,582) (913)
----------------------------------------------------------------------------
Non-cash items:
----------------------------------------------------------------------------
Depletion & depreciation 9,293 6,666
----------------------------------------------------------------------------
ARO accretion 123 116
----------------------------------------------------------------------------
Stock-based compensation 243 150
----------------------------------------------------------------------------
Unrealized loss on commodity contracts 4,390 213
----------------------------------------------------------------------------
Future income taxes (reduction) (1,084) (166)
----------------------------------------------------------------------------
Cash flow from operations 9,383 6,066
----------------------------------------------------------------------------
Per share - basic 0.24 0.18
----------------------------------------------------------------------------
Operating Cash Flow and Net Earnings
The Company's profitability and cash flow generation is primarily a function of
commodity prices, the cost to add reserves through drilling and acquisitions and
the cost to produce the Company's reserves. In the three month period ended
March 31, 2008, Orleans recorded record quarterly cash flow from operations of
$9.38 million (Q107: $6.07 million) and posted a net loss of $3.58 million
(Q107: $913 thousand net loss). The unrealized, non-cash loss of $4.39 million
associated with the Company's risk management commodity contracts impaired
Orleans' earnings generation capability in Q108.
----------------------------------------------------------------------------
($000s except share data) Q108 Q107 % Change
----------------------------------------------------------------------------
Cash flow from operations (1) 9,383 6,066 55
----------------------------------------------------------------------------
Per share - basic 0.24 0.18 33
----------------------------------------------------------------------------
Per share - diluted 0.24 0.18 33
----------------------------------------------------------------------------
Net earnings (loss) (3,582) (913) -
----------------------------------------------------------------------------
Per share - basic (0.09) (0.03) -
----------------------------------------------------------------------------
Per share - diluted (0.09) (0.03) -
----------------------------------------------------------------------------
(1) Cash flow from operations does not have any standardized meaning
prescribed by Canadian GAAP and accordingly represents cash flow from
operating activities before any asset retirement obligation cash
expenditures and before changes in non-cash operating activities working
capital. As an indicator of the Company's performance, the term cash
flow from operations or operating cash flow contained within should not
be considered as an alternative to, or more meaningful than, cash flow
from operating activities as determined in accordance with Canadian
GAAP.
Capital Expenditures
The Company's capital investments involve exploration, development and
acquisition activities, which generally include the following:
- Drilling and completing new natural gas and oil wells;
- Constructing and installing new field production infrastructure;
- Acquiring and maintaining the Company's lease acreage position and its seismic
resources;
- Enhancing existing natural gas and oil wells through well-bore re-completions;
- Acquiring additional natural gas and oil reserves and producing properties; and,
- General and administrative costs directly associated with exploration and
development activities, including payroll and other overhead expenses
attributable solely to the Company's technical employees.
In the three month period ended March 31, 2008, Orleans' total capital
investment expenditures amounted to $16.21 million (Q107: $11.42 million). In
Q108, the Company drilled five (4.7 net) wells and completed five (4.2 net) well
bores. Orleans' drilling focus in Q108 was directed towards the continued
exploration and development of its Kaybob Montney resource play. A total of four
(3.7 net) horizontal gas wells were drilled at Kaybob in Q108. Additionally, the
Company drilled and cased a 100% working interest well at Gilby with multi-zone
potential in the Edmonton Sand, Ostracod and Ellerslie zones. The well is
anticipated to be completed in the second quarter of 2008.
In 2008, the Company is presently budgeted to execute a exploration and
development capital expenditure program of approximately $47 million, excluding
any acquisitions capital. The 2008 capital program encompasses the drilling of a
total of 16 (14.3 net) operated wells, with an approximate 89% working interest.
This includes eleven (9.3 net) horizontal wells at Kaybob targeting the Triassic
Montney formation, three (3.0 net) wells at Gilby targeting the Edmonton,
Glauconite and Ellerslie formations, and two (2.0 net) wells at Gordondale
potentially encountering two new reservoirs.
Orleans' management closely monitors the exploration and development capital
program in relation to estimated cash flow from operations. Actual spending may
vary due to a variety of factors, including drilling results, natural gas and
oil prices, economic conditions, equipment availability, permitting and any
future acquisitions. The timing of most of the Company's capital expenditures is
discretionary because Orleans does not have any material capital expenditure
commitments. Consequently, the Company has a significant degree of flexibility
to adjust the level of it capital investments as circumstances warrant.
Additionally, to enhance flexibility of the Company's capital program, Orleans
typically does not enter into material long-term obligations with any of its
drilling contractors or service providers with respect to its operated natural
gas and oil properties.
The breakdown of Orleans' capital programs are outlined below:
----------------------------------------------------------------------------
($000s) Q108 Q107 % Change
----------------------------------------------------------------------------
Land 77 37 108
----------------------------------------------------------------------------
Seismic 57 260 (78)
----------------------------------------------------------------------------
Drilling & completions 13,567 6,728 102
----------------------------------------------------------------------------
Facilities & well equipment 1,816 3,965 (54)
----------------------------------------------------------------------------
Exploration & development 15,517 10,990 41
----------------------------------------------------------------------------
Other (1) 690 428 61
----------------------------------------------------------------------------
Property purchases - - -
----------------------------------------------------------------------------
Corporate acquisitions - - -
----------------------------------------------------------------------------
Total capital expenditures 16,207 11,418 42
----------------------------------------------------------------------------
(1) Q108 includes capitalized G&A of $417 thousand (Q107: $204 thousand) and
non-cash capitalized stock-based compensation of $254 thousand
(Q107: $174 thousand).
Financial Resources and Liquidity
At March 31, 2008, the Company was capitalized with a working capital deficit of
$31.16 million (December 31, 2007: $48.19 million), including bank debt of
$20.41 million (December 31, 2007: $44.14 million) and 44.6 million common
shares outstanding with a book capitalization of $159.55 million and a market
capitalization of approximately $167 million.
----------------------------------------------------------------------------
($000) March 31, 2008 December 31, 2007 % Change
----------------------------------------------------------------------------
Bank debt 20,411 44,137 (54)
----------------------------------------------------------------------------
Working capital deficit(1) 10,748 4,052 165
----------------------------------------------------------------------------
Net debt 31,159 48,189 (35)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Book capitalization (2) 159,554 137,732 16
----------------------------------------------------------------------------
Market capitalization (3) 167,236 83,033 101
----------------------------------------------------------------------------
Note 1: Reflects current assets (excluding non-cash risk management asset)
less current liabilities (excluding any outstanding bank debt and
non-cash risk management liability).
Note 2: Reflects the book value of share capital, as reported on the
Company's respective balance sheets.
Note 3: Based on the market closing price of Orleans' stock and the
outstanding number of common shares at period end.
As at March 31, 2008, the Company's revolving demand facility with a major
Canadian chartered bank provided for a borrowing base of $60 million. The
borrowing base, which is re-determined semi-annually, represents the amount that
can be borrowed from a credit standpoint based on, among other things, the
Company's current reserve report, results of operations, current and forecasted
commodity prices and the current economic environment, as confirmed by the bank.
Based on a recently conducted, annual review of the borrowing base and facility
amount associated with Orleans' operating credit facility, the Company's banker
has increased the borrowing base of the revolving demand facility to $65
million, effective May 7, 2008.
At March 31, 2008, the Company had borrowings of $20.41 million (December 31,
2007: $44.14 million) under the aforementioned bank facility and was in full
compliance with all covenant terms of the credit agreement. Despite Orleans'
exploration and development capital investments exceeding its generated cash
flow from operations in Q108, the Company's bank debt decreased in Q108
primarily as a result of the $25.2 million equity financing which closed on
March 13, 2008, discussed hereafter.
On March 13, 2008, the Company closed a "bought-deal" equity financing (the
"2008 Financing"). Pursuant to the terms of the 2008 Financing, the Company
issued 7.0 million common shares at a price of $3.60 per share for total gross
proceeds of $25.2 million.
On April 9, 2008, the Company's over-allotment option associated with the
aforementioned 2008 Financing was exercised in full by the underwriters.
Pursuant to the 2008 Financing, the Company granted the underwriters an option
("Over-Allotment Option"), exercisable for a period of 30 days following the
closing of the 2008 Financing, to purchase an additional 1,050,000 common shares
(representing 15% of the common shares issued pursuant to the 2008 Financing) at
a price of $3.60 per common share for gross proceeds of $3,780,000. Orleans
intends to use the proceeds of the Over-Allotment Option initially for general
corporate purposes. The Company presently has 45.69 million common shares issued
and outstanding.
With respect to the asset-backed commercial paper ("ABCP") market liquidity
issues, which occurred during the third quarter of 2007 in the global credit
markets as a result of the deterioration of the U.S. sub-prime mortgage market
and resulted in numerous companies, including those within the oil and gas
sector, not being able to access their funds when the ABCP became ordinarily
due, the Company has never held funds in, nor does it currently hold, ABCP.
In 2008, as in 2007, the Company expects its cash flow from operations to be its
primary source of liquidity to meet operating, general and administrative and
interest expenses, and fund planned spending on exploration and development
capital projects and undeveloped acreage. The aforementioned $65 million
revolving bank credit facility will provide another source of liquidity. The
Company anticipates that public capital markets will serve as the principal
source of funds to finance any future substantial corporate acquisitions and/or
significant property purchases. Orleans has sold equity securities in the past
and the Company expects that this source of capital will be available in the
future for acquisition purposes.
Common Share Information
----------------------------------------------------------------------------
2007 Quarterly Comparison 2008
----------------------------------------------------------------------------
Q407 Q307 Q207 Q107 Q108
----------------------------------------------------------------------------
Share Price: High $ 3.10 $ 4.00 $ 4.55 $ 4.05 $ 3.90
----------------------------------------------------------------------------
Low $ 2.05 $ 2.54 $ 3.53 $ 2.75 $ 2.20
----------------------------------------------------------------------------
Close $ 2.21 $ 2.74 $ 3.98 $ 3.70 $ 3.75
----------------------------------------------------------------------------
Avg. daily trading
volume (1) 90,524 49,887 89,663 64,247 249,132
----------------------------------------------------------------------------
Shares outstanding
- period end (2) 37,571,372 37,546,372 33,325,889 33,148,659 44,596,372
----------------------------------------------------------------------------
Weighted average
basic 37,571,100 37,014,430 33,209,828 33,148,659 39,035,932
----------------------------------------------------------------------------
Weighted average
diluted 38,019,052 37,526,046 33,833,429 33,743,616 39,577,174
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The common shares of Orleans commenced trading on the TSX Venture
Exchange on January 31, 2005. In 2008, the Company has undertaken the
process of graduating the listing of its common shares to the Toronto
Stock Exchange ("TSX"). It is anticipated the listing of Orleans'
common shares on the TSX will provide the Company with access to
Canada's largest stock exchange while enhancing Orleans' trading
liquidity and visibility within the North American capital markets.
This graduation process to the TSX is expected to be finalized by the
end of the second quarter of 2008.
(2) As of the date of this MD&A, total common shares issued and outstanding
are 45,694,706.
Orleans has never paid cash dividends on its common stock. The Company presently
intends to retain any earnings for the operation and expansion of its business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of dividends will depend upon the results
of the Company's operations, capital investment requirements, Orleans' financial
condition and such other factors the Company's board of directors may deem
relevant. In addition, the Company is restricted under its bank credit facility
from paying or declaring cash dividends.
Contractual Obligations and Commitments
In the normal course of business, the Company has entered into various
commitments that will have an impact on Orleans' future operations. These
commitments primarily relate to debt repayments, and operating leases relating
to its head office space and natural gas field equipment. The following table
summarizes the Company's various contractual obligations and commitments as at
March 31, 2008:
----------------------------------------------------------------------------
($000s) Less than 1 - 3 4 - 5 Beyond 5
1 Year Years Years Years Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Bank debt (1) 20,411 - - - 20,411
----------------------------------------------------------------------------
Head office lease
obligations (2) 487 1,979 1,360 227 4,053
----------------------------------------------------------------------------
Field equipment operating
leases (3) 178 - - - 178
----------------------------------------------------------------------------
Total obligations 21,076 1,979 1,360 227 24,642
----------------------------------------------------------------------------
(1) Demand revolving operating credit facility with a Canadian chartered
bank. Refer to Note 6 to the interim financial statements for the three
month period ended March 31, 2008. This facility has no specific terms
of repayment aside from the bank's right of demand and periodic review.
(2) Pertains to lease payments associated with the Company's Calgary,
Alberta head office lease entered into on February 16, 2007, including
an estimate of the Company's share of operating, utilities, property
taxes and parking for the duration of the office lease.
(3) Pertains to various monthly and short-term operating leases for nine
field natural gas compressors and one separator.
In 1996, a lawsuit was filed against the Company's predecessor, Orleans
Resources Inc. and the "procureur general du Quebec". Since the Company is of
the opinion that this lawsuit against Orleans Resources Inc. is unwarranted and
will have no material adverse effect on the Company's financial position or on
the results of operations, no provision has been recorded in this respect. If
the Company has to pay any amount in this affair, this amount will be paid by
issuing reserved common shares, at a price of $6.00 per share. The maximum
number of common shares that would have to be issued would be 666,118 shares,
representing the full lawsuit value amount of $3.996 million.
Additionally, refer to Note 8 c) to the interim financial statements for the
three month period ended March 31, 2008, which outlines the Company's
requirements to incur by December 31, 2008 flow-through share eligible Canadian
Exploration Expenditures, as defined in the Income tax Act (Canada).
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements, special purpose entities,
financing partnerships or guarantees, other than as disclosed in this section.
Orleans has certain lease agreements, as disclosed in the aforementioned
Contractual Obligations and Commitments table, which were entered into in the
normal course of business operations. All leases have been treated as operating
leases or rental arrangements whereby the lease payments are included in
operating expenses or G&A expenses depending on the nature of the lease. No
asset or liability value has been assigned to these leases on the balance sheet
as at March 31, 2008.
Related Party Transactions
A director and the corporate secretary of the Company are partners at a law firm
that provides legal services to the Company. The services were conducted in the
normal course of business operations and are measured at the exchange amount,
which is established and agreed to by the related parties based on standard
rates, time spent and costs incurred. During Q108, Orleans paid and accrued a
total of $60 thousand to this firm for legal fees and disbursements (Q107:
$nil).
Disclosure Controls and Procedures and Internal Controls Over Financial Reporting
Orleans' President and Chief Executive Officer ("CEO") and Vice President,
Finance and Chief Financial Officer ("CFO") are responsible for establishing and
maintaining disclosure controls and procedures and internal controls over
financial reporting as defined in Multilateral Instrument 52-109. The Company's
CEO and CFO have designed disclosure controls and procedures, or caused them to
be designed under their supervision, to provide reasonable assurance that
information to be disclosed by Orleans is accumulated and communicated to
management as appropriate to allow timely decisions regarding required
disclosure. The CEO and CFO have also designed internal controls over financial
reporting, or caused them to be designed under their supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Please refer to the Management's
Discussion and Analysis for the year ended 2007 for a discussion of the
Company's internal control weaknesses. During the three month period ended March
31, 2008, there have been no changes to Orleans' internal controls over
financial reporting that have materially, or are reasonably likely to,
materially affect the internal controls over financial reporting. Because of
their inherent limitations, disclosure controls and procedures and internal
controls over financial reporting may not prevent or detect misstatements, error
or fraud. Control systems, no matter how well conceived or operated, can provide
only reasonable, not absolute assurance, that the objectives of the control
system are met.
Change in Accounting Policies
Effective January 1, 2007, the Company adopted section 3855 "Financial
Instruments - Recognition and Measurement", section 3861 "Financial Instruments
- Disclosure and Presentation", section 1530 "Comprehensive Income", and section
3865 "Hedges". The standards require all financial instruments other than
held-to-maturity investments, loans and receivables to be included on a
company's balance sheet at their fair value. Held-to-maturity investments, loans
and receivables would be measured at their amortized cost. The standards create
a new statement for comprehensive income that will include changes in the fair
value of certain financial instruments. As a result of these new standards, the
Company records the fair value of its crude oil and natural gas derivative
contracts under its risk management program on the Company's balance sheet. No
restatement of prior periods occurred as a result of these new standards.
Effective January 1, 2008, the Company adopted section 3862 "Financial
Instruments - Disclosures", and section 3863 "Financial Instruments -
Presentation". These sections replaced section 3861 "Financial Instruments -
Disclosure and Presentation". The objective of section 3862 is to provide users
with information to evaluate the significance of the financial instruments on
the entity's financial position and performance, the nature and extent of risks
arising from financial instruments, and how the entity manages those risks. The
provisions of section 3863 deal with the classification of financial
instruments, related interest, dividends, losses and gains, and the
circumstances in which financial assets and financial liabilities are offset.
Refer to note 12 to the interim financial statements for the three month period
ended March 31, 2008.
Effective January 1, 2008, the Company adopted section 1535, "Capital
Disclosures", requiring disclosure of information about an entity's capital and
the objectives, policies, and processes for managing capital. Refer to note 13
to the interim financial statements for the three month period ended March 31,
2008.
Recent Accounting Pronouncements
In January 2006, the AcSB announced its decision to replace Canadian GAAP with
International Financial Reporting Standards ("IFRS") for all Canadian Publicly
Accountable Enterprises ("PAE"). On February 13, 2008, the AcSB confirmed
January 1, 2011 as the official change-over date for PAE's to commence reporting
under IFRS. Although IFRS is principles-based and uses a conceptual framework
similar to Canadian GAAP, there are significant differences and choices in
accounting policies, as well as increased disclosure requirements under IFRS.
The Company continues to monitor and assess the impact of IFRS on its financial
statements.
In February 2008, the AcSB issued section 3064, "Goodwill and Intangible
Assets", and amended section 1000, "Financial Statement Concepts" clarifying the
criteria for the recognition of assets, intangible assets and internally
developed intangible assets. Items that no longer meet the definition of an
asset are no longer recognized with assets. The standard is effective for annual
years beginning on or after October 1, 2008 and early adoption is permitted. The
Company is presently evaluating the impact these sections will have on its
results of operations and/or financial position.
Business Risks and Uncertainties
The Company's exploration and development activities are focused in the Western
Canada Sedimentary Basin within the province of Alberta, which is characterized
as being highly competitive with competitors varying in size from small junior
producers to significantly larger, fully-integrated energy companies and oil and
gas royalty trusts possessing greater financial and personnel resources. The
Company recognizes certain risks inherent in the oil and gas industry, such as
access to oil and gas services, weather-related delays with drilling and
operational plans, finding and developing oil and gas reserves at economic
costs, drilling risks, producing oil and gas in commercial quantities,
environmental and safety risks, and commodity price and political risks and
uncertainties. Orleans has engaged professional management and technical
personnel with many years of experience in the oil and gas business to address,
prudently manage and mitigate these risks.
Additional risks are outlined in the Annual Information Form ("AIF") of the
Company. The AIF can be retrieved electronically from the SEDAR system by
accessing Orleans' public filings under "Search for Public Company Documents" at
www.sedar.com.
New Greenhouse Gas and Air Emissions Legislation
The Alberta Government has introduced legislation that will enable the Province
of Alberta to regulate emissions of "greenhouse gases". The regulations require
facilities that emit over 100,000 tonnes of greenhouse gases a year to reduce
their emissions intensity by 12% starting July 1, 2007 or pay a fee based on
emissions in excess of the targeted reductions. The Federal Government has also
released its regulatory framework to reduce emissions of both greenhouse gases
and four smog-forming pollutants with targets coming into force in 2010 and
2015, respectively. Clarification surrounding the regulations is expected in the
next year with the regulations to be finalized by 2010. There are multiple
compliance mechanisms under both the Alberta and Federal plans including making
contributions to technology funds, emissions trading and offset credits. The
Company is in the process of fully evaluating the impact of these regulations,
but Orleans believes that the cost and impact on its operations will be minor.
Application of Critical Accounting Policies and Estimates
Management is required to make judgments and use estimates in the application of
generally accepted accounting principals that have a significant impact on the
financial results of the Company. Please refer to the Management's Discussion
and Analysis for the year ended 2007 for a discussion outlining these accounting
policies and practices, which are critical in determining Orleans' financial
results.
Orleans' financial statements for the interim period ended March 31, 2008 are
enclosed.
Orleans Energy Ltd. is a Calgary, Alberta-based emerging crude oil and natural
gas company, with common shares trading on the TSX Venture Exchange under the
symbol "OEX". Orleans is a team of dedicated, experienced professionals focused
on the creation of shareholder value via acquisition and development of crude
oil and natural gas assets in Alberta.
Certain information regarding the Company contained herein may constitute
forward-looking statements within the meaning of applicable securities laws.
Forward-looking statements may include estimates, plans, anticipations,
expectations, intentions, opinions, forecasts, projections, guidance or other
similar statements that are not statements of fact. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be
correct. These statements are subject to certain risks and uncertainties and may
be based on assumptions that could cause actual results to differ materially
from those anticipated or implied in the forward-looking statements. The
Company's forward-looking statements are expressly qualified in their entirety
by this cautionary statement.
In this news release, reserves and production data are commonly stated in
barrels of oil equivalent ("boe") using a six to one conversion ratio when
converting thousands of cubic feet of natural gas ("mcf") to barrels of oil
("bbl") and a one to one conversion ratio for natural gas liquids ("NGLs" or
"ngls"). Such conversion may be misleading, particularly if used in isolation. A
boe conversion ratio of 6 mcf: 1 bbl is based on energy equivalency conversion
method primarily applicable at the burner tip and does not represent a value
equivalency at the wellhead.
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Balance Sheets
----------------------------------------------------------------------------
March 31, December 31,
2008 2007
------------------------------
ASSETS (unaudited)
Current Assets
Cash and cash equivalents $ 2,308,892 $ 65,564
Accounts receivable and accrued revenues 10,147,424 9,038,271
Prepaid expenses and deposits 913,005 984,200
------------------------------
13,369,321 10,088,035
Property, plant and equipment (Note 5) 200,655,094 193,662,669
------------------------------
$ 214,024,415 $ 203,750,704
------------------------------
------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 24,117,027 $ 14,139,553
Commodity risk management (Note 12b) 4,822,463 432,470
Bank loan (Note 6) 20,410,649 44,136,979
------------------------------
49,350,139 58,709,002
Asset retirement obligations (Note 7) 5,656,435 5,454,294
Future income tax liability 4,484,022 3,708,329
------------------------------
59,490,596 67,871,625
------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 8) 159,554,047 137,732,354
Contributed surplus (Note 9c) 3,228,948 2,813,682
Deficit (8,249,176) (4,666,957)
------------------------------
154,533,819 135,879,079
------------------------------
$ 214,024,415 $ 203,750,704
------------------------------
------------------------------
Description of Business and Basis of Presentation (Notes 1 & 2)
Subsequent Events (Notes 14)
The accompanying notes to the financial statements are an integral part of
these statements.
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Operations and Comprehensive Loss
----------------------------------------------------------------------------
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
------------------------------
Revenue
Petroleum and natural gas sales $ 19,344,226 $ 11,902,227
Royalties (4,127,505) (2,288,412)
------------------------------
15,216,721 9,613,815
Realized gain (loss) on commodity contracts
(Note 12b) (308,055) 285,429
Unrealized loss on commodity contracts
(Note 12b) (4,389,993) (213,797)
------------------------------
10,518,673 9,685,447
------------------------------
Expenses
Operating 3,805,692 2,378,062
Transportation 419,152 255,204
General and administrative (Note 9b) 951,397 689,716
Interest 592,737 659,942
Depletion, depreciation and accretion 9,416,382 6,781,541
------------------------------
15,185,360 10,764,465
------------------------------
Loss before taxes (4,666,687) (1,079,018)
Future income taxes (reduction) (1,084,468) (166,251)
------------------------------
Net loss (3,582,219) (912,767)
Changes in cash flow hedges, net of tax - (135,844)
------------------------------
Comprehensive loss $ (3,582,219) $ (1,048,611)
------------------------------
------------------------------
Net loss per share (Note 10)
Basic $ (0.09) $ (0.03)
------------------------------
------------------------------
Diluted $ (0.09) $ (0.03)
------------------------------
------------------------------
The accompanying notes to the financial statements are an integral part of
these statements.
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Retained Earnings (Deficit)
----------------------------------------------------------------------------
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
------------------------------
Retained earnings (deficit), beginning of
period $ (4,666,957) $ 1,543,166
Net loss (3,582,219) (912,767)
------------------------------
Retained earnings (deficit), end of period $ (8,249,176) $ 630,399
------------------------------
------------------------------
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Accumulated Other Comprehensive Income ("AOCI")
----------------------------------------------------------------------------
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
------------------------------
AOCI, beginning of period $ - $ -
Impact of new cash flow accounting standards
on January 1, 2007 (net of tax) - 425,405
Reclassification to earnings of net gains on
commodity contracts (net of tax) - (135,844)
------------------------------
AOCI, end of period $ - $ 289,561
------------------------------
------------------------------
The accompanying notes to the financial statements are an integral part of
these statements.
----------------------------------------------------------------------------
ORLEANS ENERGY LTD.
Statements of Cash Flows
----------------------------------------------------------------------------
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
2008 2007
------------------------------
Cash provided from (used in):
Operating activities
Net loss $ (3,582,219) $ (912,767)
Items not affecting cash:
Depletion, depreciation and accretion 9,416,382 6,781,541
Stock-based compensation (Note 9) 243,027 150,114
Unrealized loss on commodity contracts
(Note 12b) 4,389,993 213,797
Future income taxes (reduction) (1,084,468) (166,251)
------------------------------
9,382,715 6,066,434
Change in non-cash working capital (Note 11) 871,572 (1,312,534)
------------------------------
10,254,287 4,753,900
------------------------------
Financing activities
Increase (decrease) in bank loan (23,726,330) 8,551,418
Exercise of stock options 20,000 -
Proceeds from share issues, net of issue
costs 23,579,957 -
------------------------------
(126,373) 8,551,418
------------------------------
Investing activities
Property, plant and equipment additions (15,952,530) (11,243,995)
Change in non-cash working capital (Note 11) 8,067,944 (2,334,470)
------------------------------
(7,884,586) (13,578,465)
------------------------------
Increase (decrease) in cash and cash
equivalents 2,243,328 (273,147)
Cash and cash equivalents, beginning of
period 65,564 273,165
------------------------------
Cash and cash equivalents, end of period $ 2,308,892 $ 18
------------------------------
------------------------------
Supplemental Cash Flow Information (Note 11)
The accompanying notes to the financial statements are an integral part of
these statements.
ORLEANS ENERGY LTD.
Notes to the Unaudited Interim Financial Statements
For the three month period ended March 31, 2008
1. Description of Business
Orleans Energy Ltd. (the "Company" or "Orleans") is actively engaged in the
exploration for, and development and production of, natural gas, natural gas
liquids and crude oil in the Western Canadian Sedimentary Basin. Orleans is
incorporated under the laws of Alberta and its common shares are traded on the
TSX Venture Exchange under the trading symbol "OEX".
2. Basis of Presentation
The interim financial statements included herein have been prepared by the
Company without audit and include all adjustments, which are, in the opinion of
management, necessary for the fair presentation of the Company's interim
results. With the exception of changes discussed in Note 3 hereafter, the
interim financial statements have been prepared following the same accounting
policies and methods of computation as the Company's audited financial
statements for the year ended December 31, 2007, and are in accordance with
Canadian generally accepted accounting principles ("GAAP"). The unaudited
interim financial statements contain disclosures, which are incremental to the
Company's audited financial statements for the year ended December 31, 2007.
Certain disclosures, which are normally required to be included in the notes to
annual financial statements, have been condensed or omitted. The interim
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto for the year ended December 31, 2007.
The financial statements include the accounts of the Company and any
wholly-owned subsidiaries. A portion of the Company's exploration, development
and production activities are conducted jointly with others and accordingly the
financial statements reflect only the Company's proportionate working interest
share in such activities. Additionally, certain of the comparative balances have
been reclassified to conform to the current period's presentation.
3. Changes in Accounting Policies
Inventories
Effective January 1, 2008, the Company adopted the Canadian Institute of
Chartered Accountants ("CICA") section 3031, "Inventories," which replaced CICA
section 3030 of the same name. The new guidance provides additional measurement
and disclosure requirements and requires the Company to reverse previous
impairment write-downs when there is a change in the situation that caused the
impairment. The transitional provisions of section 3031 provided entities with
the option of applying this guidance retrospectively and restating prior periods
in accordance with section 1506, "Accounting Changes" or adjusting opening
retained earnings and not restating prior periods. The adoption of this standard
did not have an impact on the Company's financial statements.
Financial Instruments - Disclosure and Presentation
Effective January 1, 2008, the Company adopted CICA section 3862, "Financial
Instruments - Disclosures" and CICA section 3863, "Financial Instruments -
Presentation," which replaced CICA section 3861, "Financial Instruments -
Disclosure and Presentation." Section 3862 outlines the disclosure requirements
for financial instruments and non-financial derivatives. This guidance
prescribes an increased importance on risk disclosures associated with
recognized and unrecognized financial instruments and how such risks are
managed. Specifically, section 3862 requires disclosure of the significance of
financial instruments on the Company's financial position. In addition, the
guidance outlines revised requirements for the disclosure of qualitative and
quantitative information regarding exposure to risks arising from financial
instruments. The presentation requirements under section 3863 are relatively
unchanged from the former presentation requirements under section 3861. Please
refer to Note 12, "Financial Instruments and Risk Management" for the additional
disclosures under section 3862.
Capital Disclosures
Effective January 1, 2008, the Company adopted CICA section 1535, "Capital
Disclosures." Section 1535 requires disclosure about the Company's objectives,
policies and processes for managing capital. These disclosures include a
description of what the Company manages as capital, the nature of any externally
imposed capital requirements, how the requirements are incorporated into the
Company's management of capital, whether the requirements have been complied
with, or consequences of non-compliance and an explanation of how the Company is
meeting its objectives for managing capital. In addition, quantitative
disclosures regarding capital are required. Please refer to Note 13, "Capital
Disclosures."
4. Recent Accounting Pronouncements
Goodwill and Intangible Assets
In February 2008, the AcSB issued section 3064, "Goodwill and Intangible
Assets", and amended section 1000, "Financial Statement Concepts" clarifying the
criteria for the recognition of assets, intangible assets and internally
developed intangible assets. Items that no longer meet the definition of an
asset are no longer recognized with assets. The standard is effective for annual
years beginning on or after October 1, 2008 and early adoption is permitted. The
Company is presently evaluating the impact these sections will have on its
results of operations and/or financial position.
International Financial Reporting Standards
In January 2006, the AcSB announced its decision to replace Canadian GAAP with
International Financial Reporting Standards ("IFRS") for all Canadian Publicly
Accountable Enterprises ("PAE"). On February 13, 2008, the AcSB confirmed
January 1, 2011 as the official change-over date for PAE's to commence reporting
under IFRS. Although IFRS is principles-based and uses a conceptual framework
similar to Canadian GAAP, there are significant differences and choices in
accounting policies, as well as increased disclosure requirements under IFRS.
The Company continues to monitor and assess the impact of IFRS on its financial
statements.
5. Property, Plant and Equipment
----------------------------------------------------------------------------
March 31, 2008 December 31, 2007
------------------------------------
Petroleum and natural gas properties $ 261,639,626 $ 245,355,653
Accumulated depletion (61,137,153) (51,851,778)
------------------------------------
200,502,473 193,503,875
------------------------------------
Office equipment and other 232,141 230,327
Accumulated depreciation (79,520) (71,533)
------------------------------------
152,621 158,794
----------------------------------------------------------------------------
Property, plant and equipment $ 200,655,094 $ 193,662,669
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the three month period ended March 31, 2008, certain general and
administrative overhead expenses of $671 thousand (March 31, 2007: $378
thousand) directly related to exploration and development activities were
capitalized. Included in this amount is capitalized stock-based compensation of
$254 thousand (March 31, 2007: $174 thousand), with such amount including the
future income tax liability associated with the capitalized stock-based
compensation of $70 thousand (March 31, 2007: $52 thousand).
At March 31, 2008, property, plant and equipment included $9.53 million
(December 31, 2007: $10.29 million) relating to unproved properties, which have
been excluded from the depletion calculation. Future development costs related
to proved non-producing reserves of $15.33 million (December 31, 2007: $20.08
million) have been included in the depletion calculation.
6. Bank Facility
As at March 31, 2008, the Company had a demand revolving credit facility of $60
million with a Canadian chartered bank (the "Credit Facility"). The Credit
Facility provides that advances may be made by way of direct advances, banker's
acceptances, or standby letters of credit/guarantees. Direct advances bear
interest at the bank's prime lending rate plus an applicable margin for Canadian
dollar advances and at the bank's U.S. base rate plus an applicable margin for
U.S. dollar advances. The applicable margin charged by the bank is dependent on
the Company's debt-to-trailing cash flow ratio. The banker's acceptances bear
interest at the applicable banker's acceptance rate plus a stamping fee, based
on the Company's debt-to-trailing cash flow ratio. The Credit Facility is
secured by a fixed and floating charge debenture on the assets of the Company.
The borrowing base is subject to semi-annual review by the bank. At March 31,
2008, the Company had $20.41 million of bank debt outstanding (December 31,
2007: $44.14 million).
7. Asset Retirement Obligations
Orleans' asset retirement obligations are based on the Company's net ownership
in wells and facilities and Management's estimate of the timing and expected
future costs associated with site reclamation, facilities dismantlement and the
plugging and abandonment of wells.
At March 31, 2008, the estimated present value of the total amount required to
settle the Company's asset retirement obligations was $5.66 million (December
31, 2007: $5.45 million), based on a total undiscounted future liability amount
of $13.36 million (inflation adjusted) (December 31, 2007: $13.09 million).
These obligations are to be settled based on the economic lives of the
underlying assets, which is currently projected to be up to 48 years. The
Company used a credit-adjusted risk free rate of 10 percent and an inflation
rate of 1.5 percent to calculate the present value of the asset retirement
obligations (December 31, 2007: credit-adjusted risk free rate of 10 percent and
an inflation rate of 1.5 percent).
----------------------------------------------------------------------------
March 31, 2008 December 31, 2007
------------------------------------
Asset retirement obligations -
beginning $ 5,454,294 $ 5,023,743
Liabilities incurred on development
activities 79,121 185,255
Liabilities released on property
dispositions - (186,031)
Liabilities settled - (33,368)
Accretion expense 123,020 464,695
----------------------------------------------------------------------------
Asset retirement obligations - ending $ 5,656,435 $ 5,454,294
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the three month period ended March 31, 2008, the Company recognized
depletion expense related to its asset retirement cost of $140 thousand (March
31, 2007: $128 thousand).
8. Share Capital
a) Authorized - Unlimited number of voting common shares.
The Company has neither declared nor paid any dividends on its common shares.
The Company intends to retain its earnings to finance growth and expand its
operations and does not anticipate paying any dividends on its common shares in
the foreseeable future.
b) Issued and outstanding
----------------------------------------------------------------------------
Total Number
of Common Shares Amount
----------------------------------------------------------------------------
Balance, December 31, 2006 33,148,659 $ 122,736,373
Issued on flow-through financing 1,500,000 8,175,000
Issued on equity financing 2,800,000 12,040,000
Combined issue costs, net tax effect
of $379,373 - (870,026)
Exercise of stock options 122,713 156,000
Flow through shares tax adjustment - (4,504,993)
----------------------------------------------------------------------------
Balance, December 31, 2007 37,571,372 $ 137,732,354
Issued on equity financing 7,000,000 25,200,000
Issue costs, net tax effect of
$465,438 - (1,154,605)
Exercise of stock options 25,000 31,781
Flow through shares tax adjustment - (2,255,483)
----------------------------------------------------------------------------
Balance, March 31, 2008 44,596,372 $ 159,554,047
----------------------------------------------------------------------------
----------------------------------------------------------------------------
c) Flow-through shares
On July 12, 2007, the Company issued 1,500,000 flow-through common shares on a
"bought-deal" basis at a price of $5.45 per share for gross proceeds of $8.175
million. Under the terms of the flow-through share agreement, the Company is
committed to spend 100 percent of the gross proceeds on qualifying exploration
expenditures prior to December 31, 2008. As at March 31, 2008, the Company had
incurred approximately $4.4 million of qualifying expenditures associated with
this equity issue with the balance of $3.78 million to be incurred by December
31, 2008.
9. Stock-Based Compensation
a) Outstanding stock options
The Company has a stock option plan for the benefit of its directors, officers,
employees and certain consultants. The Company has granted options to purchase
common shares, whereby each option permits the holder to purchase one share of
the Company at the stated exercise price. The options vest over a two-to-three
year term and are exercisable on a cumulative basis over five years. At March
31, 2008, 3,788,526 options with a weighted average exercise price of $3.13 were
outstanding and exercisable at various dates through to March 17, 2013.
Subsequent to March 31, 2008, the Company granted stock options to its officers,
directors and employees in an aggregate quantity of 254,500 options with an
exercise price of $3.75 per stock option. The stock options were granted
pursuant to the Company's stock option plan and will vest over a three-year
period with a five-year expiry.
The following table summarizes outstanding stock options as at March 31, 2008:
----------------------------------------------------------------------------
Weighted Avg.
Number Exercise Price
----------- ----------------
Outstanding - December 31, 2006 2,698,739 $ 3.40
Granted 917,500 3.33
Exercised (122,713) 0.80
Forfeited (375,500) 4.91
----------------------------------------------------------------------------
Outstanding - December 31, 2007 3,118,026 $ 3.30
Granted 709,000 2.32
Exercised (25,000) 0.80
Forfeited (13,500) 2.66
----------------------------------------------------------------------------
Outstanding - March 31, 2008 3,788,526 $ 3.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable - March 31, 2008 1,648,663 $ 2.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Exercise price range for options outstanding as at March 31, 2008:
----------------------------------------------------------------------------
Outstanding Options Exercisable Options
----------------------------------------------------------------------------
Weighted Weighted Weighted
----------------------------------------------------------------------------
Price Range Number Avg. Price Avg. Remaining Life Number Avg. Price
----------------------------------------------------------------------------
$ 0.80 - 2.21 1,268,271 $ 1.51 3.30 years 630,271 $ 0.80
$ 2.30 - 3.75 1,627,755 $ 3.25 3.38 years 724,392 $ 3.18
$ 3.90 - 5.87 892,500 $ 5.23 3.24 years 294,000 $ 5.33
----------------------------------------------------------------------------
Total 3,788,526 $ 3.13 3.32 years 1,648,663 $ 2.65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company recorded stock-based compensation expense (net of capitalization) of
$243,027 for the three month period ended March 31, 2008 (March 31, 2007:
$150,114), which was charged to general and administration expense and presented
as such on the Company's statement of operations.
The Company determined the fair value of stock options granted during the three
month period ended March 31, 2008 using the modified Black-Scholes evaluation
stock option pricing model under the following assumptions:
----------------------------------------------------------------------------
March 31, 2008 March 31, 2007
---------------- ----------------
Weighted-average fair value ($/option) 1.08 1.65
Risk-free interest rate (%) 3.25 4.04
Estimated hold period prior to exercise
(years) 5 5
Volatility in the price of Orleans
shares (%) 48.3 51.1
Dividend yield (%) Nil Nil
----------------------------------------------------------------------------
c) Contributed surplus
----------------------------------------------------------------------------
Contributed surplus - December 31, 2006 $ 1,502,963
Stock-based compensation, before capitalization 1,368,549
Exercise of stock options (57,830)
----------------------------------------------------------------------------
Contributed surplus - December 31, 2007 2,813,682
Stock-based compensation, before capitalization 427,047
Exercise of stock options (11,781)
----------------------------------------------------------------------------
Contributed surplus - March 31, 2008 $ 3,228,948
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Per Share Amounts
In the calculation of diluted per share amounts, options under the Company's
stock option plan are assumed to have been converted or exercised on the later
of the beginning of the year and the date granted. The treasury stock method is
used to determine the dilutive effect of stock options. The treasury stock
method assumes that proceeds received from the exercise of in-the-money stock
options in addition to the unrecognised stock-based compensation expense are
used to repurchase common shares at the average market price.
For the three month period ended March 31, 2008, 2.05 million stock options
(March 31, 2007: 2.23 million) were excluded in calculating the weighted average
number of diluted common shares outstanding, as they were determined to be
anti-dilutive.
----------------------------------------------------------------------------
Three Months Ended Three Months Ended
March 31, 2008 March 31, 2007
----------------------------------------
Weighted average shares outstanding:
Basic 39,035,932 33,148,659
Diluted 39,577,174 33,743,616
----------------------------------------------------------------------------
11. Supplemental Cash Flow Information
a) Increase (decrease) in non-cash working capital items
----------------------------------------------------------------------------
March 31, 2008 March 31, 2007
---------------- ----------------
Change in non-cash working capital:
Accounts receivable and other
current assets $ (1,037,958) $ 1,420,945
Accounts payable and accrued
liabilities 9,977,474 (5,067,949)
----------------------------------------------------------------------------
$ 8,939,516 $ (3,647,004)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Changes in non-cash working capital
related to:
Operating activities $ 871,572 $ (1,312,534)
Investing activities 8,067,944 (2,334,470)
----------------------------------------------------------------------------
$ 8,939,516 $ (3,647,004)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Other cash flow information
March 31, 2008 March 31, 2007
---------------- ----------------
Interest paid (net of interest income) $ 538,882 $ 399,898
----------------------------------------------------------------------------
12. Financial Instruments and Risk Management
The Company's financial assets and liabilities are comprised of cash and cash
equivalents, accounts receivable and accrued revenues, accounts payable and
accrued liabilities, commodity risk management assets and liabilities, and
current bank loan. Commodity risk management assets and liabilities arise from
the use of derivative financial instruments. Fair values of financial assets and
liabilities, summarized information related to commodity risk management
positions, and discussion of risks associated with financial assets and
liabilities are presented as follows:
a) Fair Value of Financial Assets and Liabilities
The fair values of cash and cash equivalents, accounts receivable and accrued
revenues, and accounts payable and accrued liabilities and current bank loan
approximate their carrying amount due to the short-term maturity of those
instruments. Commodity risk management assets and liabilities are considered to
be held-for-trading and as such are recorded at their estimated fair value based
on the mark-to-market method of accounting, using quoted market prices or, in
their absence, third-party market indications and forecasts. Additional
information regarding the aforementioned is disclosed in Note 3 to the Company's
audited financial statements for the year ended December 31, 2007.
The fair value of financial assets and liabilities were as follows:
----------------------------------------------------------------------------
As at March 31, 2008 As at December 31, 2007
--------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ----------- -----------
Financial Assets
----------------
Held-for-Trading:
Cash and cash
equivalents $ 2,308,892 $ 2,308,892 $ 65,564 $ 65,564
Loans and Receivables:
Accounts receivable and
accrued revenues 10,147,424 10,147,424 9,038,271 9,038,271
Financial Liabilities
---------------------
Held-for-Trading:
Commodity risk
management 4,822,463 4,822,463 432,470 432,470
Other Financial
Liabilities:
Accounts payable and
accrued liabilities 24,117,027 24,117,027 14,139,553 14,139,553
Bank loan 20,410,649 20,410,649 44,136,979 44,136,979
----------------------------------------------------------------------------
b) Commodity Risk Management Assets and Liabilities
The Company recognizes the fair value of its commodity contracts on the balance
sheet each reporting period with the change in fair value being recognized as an
unrealized gain or loss on the statement of operations. As at March 31, 2008 the
fair value of the financial commodity contracts was a liability of approximately
$4.82 million (December 31, 2007: $433 thousand liability), resulting in an
unrealized loss for the three month period ended March 31, 2008 of $4.39
million.
----------------------------------------------------------------------------
Summary of Unrealized
Commodity
Risk Management Positions As at March 31, 2008 As at December 31, 2007
------------------------- --------------------- ------------------------
Asset Liability Asset Liability
-------- ------------ --------- -----------
Commodity Prices:
Natural gas $ - $ 4,481,955 $ 32,416 $ -
Crude oil - 340,508 - 464,886
----------------------------------------------------------------------------
Total Fair Value $ - $ 4,822,463 $ 32,416 $ 464,886
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table outlines the commodity agreements that were outstanding as
at March 31, 2008 and their respective fair market valuations as determined
based on the mark-to-market method of accounting using quoted market prices. The
Company has not entered into any additional commodity contracts subsequent to
March 31, 2008.
----------------------------------------------------------------------------
Daily
Contract notional
Commodity Date Type Term Volume
----------------------------------------------------------------------------
Oct. 15, Jan '08 -
Crude Oil 2007 Swap Jun '08 200 bbls
----------------------------------------------------------------------------
Mar. 3, Jul '08 -
Crude Oil 2008 Collar Dec '08 100 bbls
----------------------------------------------------------------------------
Dec. 18, Apr '08 -
NatGas 2007 Swap Dec '08 2,000 GJs
----------------------------------------------------------------------------
Jan. 2, Apr '08 -
NatGas 2008 Swap Dec '08 2,000 GJs
----------------------------------------------------------------------------
Jan. 4, Apr '08 -
NatGas 2008 Swap Oct '08 1,000 GJs
----------------------------------------------------------------------------
Jan. 7, Apr '08 -
NatGas 2008 Swap Oct '08 1,000 GJs
----------------------------------------------------------------------------
Jan. 10, Apr '08 -
NatGas 2008 Swap Oct '08 1,000 GJs
----------------------------------------------------------------------------
Feb. 13, Nov '08 -
NatGas 2008 Collar Mar '09 2,000 GJs
----------------------------------------------------------------------------
Feb 14, Apr '08 -
NatGas 2008 Swap Oct '08 1,000 GJs
----------------------------------------------------------------------------
----------------------------------------------------------------------------
March 31,2008
Fair Market
Commodity Index Price Price Value (C$)
----------------------------------------------------------------------------
Crude Oil W.T.I. US$ 81.56/bbl US$ 81.56/bbl (359,743)
----------------------------------------------------------------------------
US$ 90.00 - US$ 90.00 -
Crude Oil W.T.I. 116.25/bbl 116.25/bbl 19,235
----------------------------------------------------------------------------
NatGas AECO-C C$ 6.55 /GJ C$ 6.55 /GJ (1,339,753)
----------------------------------------------------------------------------
NatGas AECO-C C$ 6.81 /GJ C$ 6.81 /GJ (1,198,987)
----------------------------------------------------------------------------
NatGas AECO-C C$ 6.61 /GJ C$ 6.61 /GJ (480,334)
----------------------------------------------------------------------------
NatGas AECO-C C$ 6.72 /GJ C$ 6.72 /GJ (457,106)
----------------------------------------------------------------------------
NatGas AECO-C C$ 7.01 /GJ C$ 7.01 /GJ (395,868)
----------------------------------------------------------------------------
NatGas AECO-C C$ 7.00 - 9.70 C$ 7.00 - 9.70 (315,439)
----------------------------------------------------------------------------
NatGas AECO-C C$ 7.52 /GJ C$ 7.52 /GJ (294,468)
----------------------------------------------------------------------------
Total Unrealized Loss on Commodity Risk Management Contracts (4,822,463)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
c) Risks Associated with Financial Assets and Liabilities
The Company is exposed to financial risks arising from its financial assets and
liabilities. The financial risks include credit risk, liquidity risk and market
risk relating to commodity prices, interest rates and foreign exchange rates.
Market risk is the risk that the fair value (for assets or liabilities
considered to be held-for-trading and available for sale) or future cash flows
(for assets or liabilities considered to be held-to-maturity, other financial
liabilities, and loans and receivables) of a financial instrument will fluctuate
due to movements in market prices. The objective of market risk management is to
manage and control material market price exposures within acceptable limits,
while maximizing returns. The Company's market risk, credit risk, and liquidity
risk exposures is outlined as follows:
Commodity Price Risk
The prices the Company receives for its crude oil and natural gas production may
have a significant impact on its revenues and cash provided from operating
activities. Any significant price decline in commodity prices would adversely
affect the amount of funds available for capital reinvestment purposes. As such,
the Company utilizes a risk management program to partially mitigate that risk
and to ensure adequate funds are available for planned capital activities and
other commitments. From time-to-time, the Company may employ financial
instruments to manage fluctuations in oil and gas market prices. The use of
derivative financial instruments is governed under formal policies and is
subject to limits established by the Company's Board of Directors. The Company
does not utilize derivative financial instruments for speculative purposes.
As at March 31, 2008, if crude oil prices had been US $1 per barrel and natural
gas prices $0.10 per gigajoule lower, with all other variables held constant,
net earnings for the period would have been $186 thousand higher. An equal and
opposite impact would have occurred to net earnings had oil and natural gas
prices been US $1 per barrel and $0.10 per gigajoule higher.
Interest Rate Risk
Interest rate risk is the risk that cash flow from operating activities (before
changes in non-cash working capital from operating activities) will fluctuate as
a result of changes in market interest rates. The Company's exposure to interest
rate risk relates to its bank Credit Facility, which bears a floating interest
rate. As at or during the three month period ended March 31, 2008, the Company
had no interest rate contracts in-place to mitigate exposure to interest rate
changes. For the three months ended March 31, 2008, a one percent change in
interest rates on its floating rate bank debt would change net earnings by an
estimated $76 thousand, assuming all other variables remain constant.
Foreign Exchange Risk
The Company's financial results are affected by the exchange rate between the
Canadian and U.S. dollar. Although all of the Company's petroleum and natural
gas sales are denominated in Canadian dollars, the underlying market prices in
Canada for oil and natural gas are impacted by changes in the exchange rate
between the Canadian and U.S. dollar. An increase in the value of the Canadian
dollar relative to the U.S. dollar will decrease the revenues received from the
sale of oil and gas commodities. Correspondingly, a decrease in the value of the
Canadian dollar relative to the U.S. dollar will increase the revenues received
from the sale of oil and gas commodities. The impact of such exchange rate
fluctuations cannot be accurately quantified. All of the Company's operating and
capital expenditures are in Canadian dollars. The Company had no foreign
exchange rate contracts in-place at or during the three month period ended March
31, 2008.
Credit Risk
Credit risk represents the financial loss that the Company would suffer if the
Company's counterparties to a financial instrument, in owing an amount to the
Company, fail to meet or discharge their obligation to the Company. The primary
source of credit risk for the Company arises from its accounts receivables from
joint venture partners, petroleum and natural gas marketers and commodity risk
management contract counterparties. The Company sells the majority of its
production to three petroleum and natural gas marketers and is therefore subject
to concentration risk. The Company will assess the financial strength of
petroleum and natural gas marketers prior to entering into sales contracts and
has not experienced any collection issues with its current petroleum and natural
gas marketers. Joint venture receivables are typically collected within one to
three months of the joint venture bill being issued to the partner. Collection
of outstanding joint venture receivables is dependent on industry factors
including commodity price fluctuations, escalating costs and disagreements with
partners. The Company mitigates the risk from joint venture receivables by
obtaining partner approval before significant capital expenditures are incurred.
Additionally, the Company does have the ability to withhold production from
joint venture partners in the event of non-payment.
The Company mitigates credit risk from risk management commodity contract
counterparties by primarily dealing with major financial institutions and
investment grade rated entities.
The Company has not had any credit losses in the past and the risk of financial
loss is considered low. The Company monitors the age of and investigates issues
behind its receivables that have been past due. As at March 31, 2008, the
Company's receivables outstanding for more than 90 days amounted to
approximately $1.73 million. As at March 31, 2008, the Company has no financial
assets that are impaired due to credit risk related defaults. The maximum credit
risk exposure associated with accounts receivable and accrued revenues and
commodity risk management asset is the total carrying value. The carrying value
of accounts receivable reflects Management's assessment of the credit risk
associated with these customers.
The Company's objectives, processes and policies for managing credit risk have
not changed since December 31, 2007.
Liquidity Risk
Liquidity risk is the risk the Company will encounter difficulties in meeting
its financial liability obligations. The Company's financial liabilities are
comprised of accounts payable and accrued liabilities, bank loan and commodity
risk management liabilities. The Company manages its liquidity risk through cash
and debt management. The Company frequently assesses its liquidity position and
obligations under its financial liabilities by preparing annual and quarterly
financial business plan forecasts. As disclosed in Note 13, the Company targets
a debt to annualized cash flow from operations ratio of less than two times in
order to steward the Company's overall debt position.
Since the Company operates in the upstream oil and gas industry, it requires
sufficient cash to fund capital programs necessary to maintain or increase
production, to develop reserves and to acquire strategic oil and gas assets. The
Company's capital programs are funded primarily through cash provided from
operating activities. However, during times of low oil and gas prices, a portion
of capital programs can generally be deferred. However, due to the long cycle
times and the importance to future cash flow in maintaining the Company's
production, it may be necessary to utilize alternative sources of capital to
continue the Company's strategic investment plan during periods of low commodity
prices. As a result, the Company frequently evaluates the options available with
respect to sources of long and short-term capital resources. Occasionally, the
Company will hedge a portion of its production to protect cash flow in the event
of commodity price declines. As at March 31, 2008, the Company had available an
unused committed bank credit facility in the amount of $39.59 million. The
Company believes it has sufficient funding through the use of these facilities
to meet foreseeable borrowing requirements.
The following are the contractual maturities of financial liabilities as at
March 31, 2008:
Less than 1 to less 2 to less
Financial Liabilities 1 year than 2 Years than 3 Years Thereafter
------------------------- ------------ ------------ ------------ ----------
Accounts payable and
accrued liabilities $ 24,117,027 - - -
----------------------------------------------------------------------------
Commodity risk management 4,822,463 - - -
----------------------------------------------------------------------------
Bank loan 20,410,649 - - -
----------------------------------------------------------------------------
Total $ 49,350,139 - - -
----------------------------------------------------------------------------
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13. Capital Disclosures
The Company's objectives when managing capital are: (i) to maintain a flexible
capital structure, which optimizes the cost of capital at acceptable risk; and
(ii) to maintain investor, creditor and market confidence in order to sustain
the future development of the business.
The Company manages its capital structure and makes adjustments to it in light
of changes in economic conditions and the risk characteristics of our underlying
assets. The Company considers its capital structure to include shareholders'
equity, debt and working capital. To maintain or adjust the capital structure,
the Company may from time-to-time, issue shares, raise debt and/or adjust its
capital spending to manage its current and projected debt levels.
The Company monitors its capital structure based on the current and projected
ratio of total debt (adjusted for unrealized gains or losses on risk management
commodity contracts) to annualized cash flow (before changes in non-cash working
capital from operating activities). The Company's objective is to maintain a
debt to annualized cash flow from operations ratio of less than two times. The
ratio may increase at certain times as a result of acquisitions. To facilitate
the management of this ratio, the Company prepares annual and quarterly capital
budgets and business plan forecasts, which are updated depending on varying
factors such as general market conditions and successful capital deployment. The
annual capital budget is approved by the Company's Board of Directors. To adjust
its capital structure, the Company may adjust capital spending, issue new common
shares, issue new debt or repay existing debt. As at March 31, 2008, the
Company's total debt to annualized cash flow was 83% or 0.83 times.
The Company's share capital is not subject to external restrictions. The Company
is not subject to any financial covenants in its Credit Facility agreement.
There were no changes in the Company's approach to capital management since
December 31, 2007.
14. Subsequent Events
On April 9, 2008, the Company's over-allotment option associated with its $25.2
million equity financing which closed on March 13, 2008 (the "Financing") was
exercised in full by the underwriters. Pursuant to the Financing, the Company
granted the underwriters an option ("Over-Allotment Option"), exercisable for a
period of 30 days following the closing of the Financing, to purchase an
additional 1,050,000 common shares (representing 15% of the common shares issued
pursuant to the Financing) at a price of $3.60 per common share for gross
proceeds of $3,780,000. Orleans will use the proceeds of the Over-Allotment
Option initially for general corporate purposes. The Company presently has 45.67
million common shares issued and outstanding.
Effective May 7, 2008, based on the annual review by a Canadian chartered bank
of the borrowing base and facility amount associated with the Company's Credit
Facility, the borrowing base of the Credit Facility was increased to $65.0
million. The borrowing base, which is re-determined semi-annually, represents
the amount that can be borrowed from a credit standpoint based on, among other
things, the Company's current reserve report, results of operations, current and
forecasted commodity prices and the current economic environment, as confirmed
by the bank.
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