TIDMAXL
RNS Number : 2866J
Arrow Exploration Corp.
26 April 2022
This Announcement contains inside information as defined in
Article 7 of the Market Abuse Regulation No. 596/2014 ("MAR"). Upon
the publication of this Announcement, this inside information is
now considered to be in the public domain.
26 April 2022
NOT FOR RELEASE, DISTRIBUTION, PUBLICATION, DIRECTLY OR
INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO OR FROM THE UNITED
STATES, AUSTRALIA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER
JURISDICTION WHERE TO DO SO MIGHT CONSTITUTE A VIOLATION OF THE
RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION.
Arrow Exploration Corp.
("Arrow" or the "Company")
2021 annual RESULTS, filing of audited financial statements,
MD&A and reserves report
Arrow Exploration Corp. (AIM: AXL ; TSXV: AXL), the high-growth
operator with a portfolio of assets across key Colombian
hydrocarbon basins, is pleased to announce the filing of its Annual
Audited Financial Statements and MD&A for the year and
quarter-ended December 31, 2021 and the filing of its 2021 year-end
reserve report, which are available on SEDAR (www.sedar.com). All
dollar figures are in U.S. dollars, except as otherwise noted.
Arrow Exploration's Audited Financial Statements together with
the notes related thereto, as well as Arrow's Management's
Discussion and Analysis for the years ended December 31, 2021 and
2020, will be available shortly on Arrow's website at
www.arrowexploration.ca
FINANCIAL AND OPERATING HIGHLIGHTS
Financial and operating highlights for quarter include the
following:
Three months Year ended Three months Year ended
ended December December ended December December
31, 2021 31, 2021 31, 2020 31, 2020
Total natural gas and crude
oil revenues, net of royalties 3,038,832 6,512,493 368,139 5,320,565
Funds flow from (used in)
operations (1) (403,007) (145,503) (1,535,047) (4,006,609)
Per share - basic ($) and
diluted ($) (0.00) (0.00) (0.02) (0.06)
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Per share - basic ($) and
diluted ($) 0.04 0.06 (0.12) (0.47)
Adjusted EBITDA (1) 540,642 804,674 (1,210,966) (2,903,782)
Weighted average shares
outstanding:
Basic 171,345,885 94,553,391 68,674,602 68,674,602
Diluted 173,035,572 96,243,078 68,674,602 68,674,602
Common shares end of period 213,389,623 213,389,623 68,674,602 68,674,602
Capital expenditures 1,991,163 2,221,643 89,198 889,928
Cash and cash equivalents 10,878,508 10,878,508 11,473,204 11,473,204
Current assets 12,806,502 12,806,502 15,958,652 15,958,652
Current liabilities 4,800,428 4,800,428 17,891,592 17,891,592
Working capital (deficit)
(1) 8,006,074 8,006,074 (1,932,940) (1,932,940)
Long-term portion of restricted
cash (2) - - 460,283 460,283
Total assets 41,195,798 41,195,798 33,532,299 33,532,299
Operating
Natural gas and crude oil
production, before royalties
Natural gas (Mcf/d) 1,550 704 442 530
Natural gas liquids (bbl/d) - 7 5 6
Crude oil (bbl/d) 455 344 62 367
Total (boe/d) 712 468 140 461
Operating netbacks ($/boe)
(1)
Natural gas ($/Mcf) $1.87 $1.51 $1.05 $0.51
Crude oil ($/bbl) $34.42 $34.35 ($98.26) $2.85
Total ($/boe) $27.35 $27.55 ($39.03) $3.16
(1) Non-IFRS measures - see "Non-IFRS Measures" section within
this MD&A
(2) Long term restricted cash not included in working
capital
2021 Year-End Reserves
Arrow has also filed, on SEDAR, the Company's Statement of
Reserves Data and Other Oil and Gas Information, Report on Reserves
Data by Independent Qualified Reserves Evaluator, and Report of
Management and Directors on Oil and Gas Disclosure for the year
ended December 31, 2021, as required by section 2.1 of National
Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities (together, the "Reserve Report").
To recap, the Company's Year-End 2021 Company Gross Reserves
Highlights include:
-- 3,048 Mboe of Proved Reserves ("1P Reserves");
-- 7,421 Mboe of Proved plus Probable Reserves ("2P Reserves");
-- 11,541 Mboe of Proved plus Probable plus Possible Reserves ("3P Reserves")(1) ;
-- 1P Reserves estimated net present value before income taxes
of US$29.4 million calculated at a 10% discount rate;
-- 2P Reserves estimated net present value before income taxes
of US$84.1 million calculated at a 10% discount rate; and
-- 3P Reserves estimated net present value before income taxes
of US$134 million calculated at a 10% discount rate.
Arrow refers readers to the Company's press release of March 30,
2022 for additional details, as well as to the Reserve Report filed
on SEDAR.
Discussion of Operating Results
The Company's Q4 2021 average corporate production was 712
boe/d, an increase of 137 boe/d compared to Q3 2021 average
corporate production of 575 boe/d, or 24%.
The increase in production quarter-over-quarter was largely
attributable to the Canadian operation following the tie-in of the
West Pepper well in Alberta, Canada which was brought into
production in December 2021.
The Company's production on a year-to-date, sequential
quarterly, and year-over-year quarterly basis is summarized
below.
Average Production by YTD 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
Property (Boe/d)
LLA-23 - - - - 7
Oso Pardo 70 123 137 20 - -
Ombu (Capella) 120 190 193 97 - -
Rio Cravo Este (Tapir) 153 142 151 147 174 56
Total Colombia 344 455 481 264 174 62
Fir, Alberta 76 82 94 67 68 78
Pepper, Alberta 46 181 - - - -
TOTAL (Boe/d) 461 719 575 331 242 140
Discussion of Financial Results
During Q4 2021 the Company continued to realize strong oil and
gas prices, as summarized below.
Average Benchmark and Realized Prices
Three months ended Years ended
December 31 December 31
2021 2020 Change 2021 2020 Change
Benchmark Prices
AECO ($/Mcf) $3.89 $2.18 78% $2.91 $1.68 73%
Brent ($/bbl) $79.80 $45.21 77% $70.78 $43.28 64%
West Texas Intermediate
($/bbl) $77.31 $42.73 81% $68.09 $39.65 72%
Realized Prices
Natural gas, net of transportation
($/Mcf) $3.37 $2.48 35% $3.19 $1.84 73%
Natural gas liquids ($/bbl) $56.43 $35.40 59% $54.01 $27.60 96%
Crude oil, net of transportation
($/bbl) $55.50 $46.18 20% $58.62 $38.52 52%
Corporate average, net of
transport ($/boe)(1) $44.15 $29.47 50% $47.37 $33.14 43%
(1) Non-IFRS measures - see "Non-IFRS Measures" section within
the MD&A
The Company also realized strong operating netbacks, as
summarized below.
Operating Netbacks
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Natural Gas ($/Mcf)
Revenue, net of transportation
expense $3.37 $2.48 $3.19 $1.84
Royalties (0.34) (0.17) (0.33) (0.16)
Operating expenses (1.15) (1.26) (1.35) (1.17)
Operating netback(1) $1.87 $1.05 $1.51 $0.51
Crude oil ($/bbl)
Revenue, net of transportation
expense $55.50 $46.18 $58.62 $38.52
Royalties (3.60) (0.46) (5.37) (1.76)
Operating expenses (17.48) (143.98) (18.90) (33.91)
Operating netback(1) $34.42 ($98.26) $34.35 $2.85
Corporate ($/boe)
Revenue, net of transportation
expense $44.15 $29.47 $47.37 33.14
Royalties (2.95) (1.16) (4.31) (1.62)
Operating expenses (13.85) (67.34) (15.51) (28.36)
Operating netback (1) $27.35 ($39.03) $27.55 $3.16
(1) Non-IFRS measure
The Company experienced a decrease in operating netbacks during
Q4 2021 as compared to Q3 2021, decreasing to $27.35/boe in Q4 2021
from $30.73/boe in Q3 2021. The decrease in operating netbacks is
attributable to lower realized price for crude sales associated
with the Company's share in its Ombu/Capella block in Q4 2021.
The Company incurred capital expenditures during Q4 2021 of $2
million mainly related to its West Pepper well. At the end of Q4
2021, the Company had a positive working capital position of $8
million, and a cash position of $10.9 million.
On October 25, 2021, the Company raised approximately GBP8.8
million (C$15 million), through a placing and subscription for new
common shares with new investors, Canacol Energy Ltd., and
executive management (together, the "Fundraising") and published an
AIM Admission Document in connection with the admission of the
enlarged share capital of the Company to trading on the AIM Market
of the London Stock Exchange plc. The Fundraising consisted of the
placement and subscription of 140,949,545 new common shares at an
issue price of GBP0.0625 (C$0.106125) per new common share. The
Company's executive management invested approximately C$1.41
million and Canacol participated in the subscription to hold 19.9%
of the enlarged share capital. Investors received one warrant for
every two new common shares, exercisable at C$0.15282 per new
common share for 24 months from the AIM admission date (October 25,
2021). The net proceeds of the Fundraising, together with the
Company's existing funds, are expected to be used to drill two
wells at Rio Cravo Este, and will also be deployed in drilling the
Carrizales Norte-1 exploration well.
On 24 November 2021, the Company also announced that it had
raised C$395,375 on a non-brokered private placement basis through
the issuance of 3,765,476 new common shares of no-par value
("Common Shares") on the same terms as the Fundraising . Investors
received one warrant for every two Common Shares, exercisable for
24 months from the closing date.
For further Information, contact:
Arrow Exploration
Marshall Abbott, CEO +1 403 651 5995
Joe McFarlane, CFO +1 403 818 1033
Arden Partners
Ruari McGirr / Richard Johnson
(Corporate) +44 (0)20 7614 5900
Seb Wykeham / Simon Johnson (Broking)
Auctus Advisors
Jonathan Wright (Corporate) + 44 (0)7711 627449
Rupert Holdsworth Hunt (Broking)
Camarco (Financial PR)
James Crothers +44 (0)20 3781 8331
Rebecca Waterworth
Billy Clegg
About Arrow Exploration Corp.
Arrow Exploration Corp. (operating in Colombia via a branch of
its 100% owned subsidiary Carrao Energy S.A.) is a publicly-traded
company with a portfolio of premier Colombian oil assets that are
under-exploited, under-explored and offer high potential growth.
The Company's business plan is to expand oil production from some
of Colombia's most active basins, including the Llanos, Middle
Magdalena Valley (MMV) and Putumayo Basin. The asset base is
predominantly operated with high working interests, and the
Brent-linked light oil pricing exposure combines with low royalties
to yield attractive potential operating margins. Arrow's 50%
interest in the Tapir Block is contingent on the assignment by
Ecopetrol SA of such interest to Arrow. Arrow's seasoned team is
led by a hands-on executive team supported by an experienced board.
Arrow is listed on the AIM market of the London Stock Exchange and
on TSX Venture Exchange under the symbol "AXL".
Forward-looking Statements
This news release contains certain statements or disclosures
relating to Arrow that are based on the expectations of its
management as well as assumptions made by and information currently
available to Arrow which may constitute forward-looking statements
or information ("forward-looking statements") under applicable
securities laws. All such statements and disclosures, other than
those of historical fact, which address activities, events,
outcomes, results or developments that Arrow anticipates or expects
may, could or will occur in the future (in whole or in part) should
be considered forward-looking statements. In some cases,
forward-looking statements can be identified by the use of the
words "continue", "expect", "opportunity", "plan", "potential" and
"will" and similar expressions. The forward-looking statements
contained in this news release reflect several material factors and
expectations and assumptions of Arrow, including without
limitation, Arrow's evaluation of the impacts of COVID-19, the
potential of Arrow's Colombian and/or Canadian assets (or any of
them individually), the prices of oil and/or natural gas, and
Arrow's business plan to expand oil and gas production and achieve
attractive potential operating margins. Arrow believes the
expectations and assumptions reflected in the forward-looking
statements are reasonable at this time but no assurance can be
given that these factors, expectations and assumptions will prove
to be correct.
The forward-looking statements included in this news release are
not guarantees of future performance and should not be unduly
relied upon. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause
actual results or events to differ materially from those
anticipated in such forward-looking statements. The forward-looking
statements contained in this news release are made as of the date
hereof and the Company undertakes no obligations to update publicly
or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, unless so required by
applicable securities laws.
Neither the TSX-V nor its Regulation Services Provider (as that
term is defined in the policies of the TSX-V) accepts
responsibility for the adequacy or accuracy of this release.
Arrow Exploration Corp.
MANAGEMENT's DISCUSSION AND ANALYSIS
YEAR ended DECEMBER 31, 2021
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") as
provided by the management of Arrow Exploration Corp. ("Arrow" or
the "Company"), is dated as of April 25, 2022 and should be read in
conjunction with Arrow's annual consolidated financial statements
and related notes for the year ended December 31, 2021. Additional
information relating to Arrow is available under Arrow's profile on
www.sedar.com .
Advisories
Basis of Presentation
The condensed consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standards ("IFRS"), and all amounts herein are expressed in United
States dollars, unless otherwise noted, and all tabular amounts are
expressed in United States dollars, unless otherwise noted.
Additional information for the Company may be found on SEDAR at
www.sedar.com.
Advisory Regarding Forward--Looking Statements
This MD&A contains certain statements or disclosures
relating to Arrow that are based on the expectations of its
management as well as assumptions made by and information currently
available to Arrow which may constitute forward-looking statements
or information ("forward-looking statements") under applicable
securities laws. All such statements and disclosures, other than
those of historical fact, which address activities, events,
outcomes, results or developments that Arrow anticipates or expects
may, could or will occur in the future (in whole or in part) should
be considered forward-looking statements. In some cases,
forward-looking statements can be identified by the use of the
words "believe", "continue", "could", "expect", "likely", "may",
"outlook", "plan", "potential", "will", "would" and similar
expressions. In particular, but without limiting the foregoing,
this MD&A contains forward-looking statements pertaining to the
following: the COVID-19 pandemic and its impact; tax liability;
capital management strategy; capital structure; credit facilities
and other debt; performance by Canacol (as defined herein) and the
Company in connection with the Note (as defined herein) and letters
of credit; Arrow's costless collar structure; Arrow's interest in
the OBC Pipeline (as defined herein) and the consequences thereof;
cost reduction initiatives; potential drilling on the Tapir block;
capital requirements; expenditures associated with asset retirement
obligations; future drilling activity and the development of the
Rio Cravo Este structure on the Tapir Block. Statements relating to
"reserves" and "resources" are deemed to be forward-looking
information, as they involve the implied assessment, based on
certain estimates and assumptions, that the reserves and resources
described exist in the quantities predicted or estimated and can be
profitably produced in the future.
The forward-looking statements contained in this MD&A
reflect several material factors and expectations and assumptions
of Arrow including, without limitation: current and anticipated
commodity prices and royalty regimes; the impact and duration of
the COVID-19 pandemic; the financial impact of Arrow's costless
collar structure; availability of skilled labour; timing and amount
of capital expenditures; future exchange rates; commodity prices;
the impact of increasing competition; general economic conditions;
availability of drilling and related equipment; receipt of partner,
regulatory and community approvals; royalty rates; future operating
costs; effects of regulation by governmental agencies;
uninterrupted access to areas of Arrow's operations and
infrastructure; recoverability of reserves; future production
rates; timing of drilling and completion of wells; pipeline
capacity; that Arrow will have sufficient cash flow, debt or equity
sources or other financial resources required to fund its capital
and operating expenditures and requirements as needed; that Arrow's
conduct and results of operations will be consistent with its
expectations; that Arrow will have the ability to develop its oil
and gas properties in the manner currently contemplated; current
or, where applicable, proposed industry conditions, laws and
regulations will continue in effect or as anticipated; that the
estimates of Arrow's reserves and production volumes and the
assumptions related thereto (including commodity prices and
development costs) are accurate in all material respects; that
Arrow will be able
to obtain contract extensions or fulfil the contractual
obligations required to retain its rights to explore, develop and
exploit any of its undeveloped properties; and other matters.
Arrow believes the material factors, expectations and
assumptions reflected in the forward-looking statements are
reasonable at this time but no assurance can be given that these
factors, expectations and assumptions will prove to be correct. The
forward-looking statements included in this MD&A are not
guarantees of future performance and should not be unduly relied
upon.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or
events to differ materially from those anticipated in such
forward-looking statements including, without limitation: the
impact and duration of the COVID-19 pandemic; the impact of general
economic conditions; volatility in commodity prices; industry
conditions including changes in laws and regulations including
adoption of new environmental laws and regulations, and changes in
how they are interpreted and enforced; competition; lack of
availability of qualified personnel; the results of exploration and
development drilling and related activities; obtaining required
approvals of regulatory authorities; counterparty risk; risks
associated with negotiating with foreign governments as well as
country risk associated with conducting international activities;
commodity price volatility; fluctuations in foreign exchange or
interest rates; environmental risks; changes in income tax laws or
changes in tax laws and incentive programs; changes to pipeline
capacity; ability to secure a credit facility; ability to access
sufficient capital from internal and external sources; risk that
Arrow's evaluation of its existing portfolio of development and
exploration opportunities is not consistent with future results;
that production may not necessarily be indicative of long term
performance or of ultimate recovery; and certain other risks
detailed from time to time in Arrow's public disclosure documents
including, without limitation, those risks identified in Arrow's
2018 AIF, a copy of which is available on Arrow's SEDAR profile at
www.sedar.com. Readers are cautioned that the foregoing list of
factors is not exhaustive and are cautioned not to place undue
reliance on these forward-looking statements.
Non--IFRS Measures
The Company uses non-IFRS measures to evaluate its performance
which are measures not defined in IFRS. Working capital, funds flow
from operations, realized prices, operating netback, adjusted
EBITDA, and net debt as presented do not have any standardized
meaning prescribed by IFRS and therefore may not be comparable with
the calculation of similar measures for other entities. The Company
considers these measures as key measures to demonstrate its ability
to generate the cash flow necessary to fund future growth through
capital investment, and to repay its debt, as the case may be.
These measures should not be considered as an alternative to, or
more meaningful than net income (loss) or cash provided by
operating activities or net loss and comprehensive loss as
determined in accordance with IFRS as an indicator of the Company's
performance. The Company's determination of these measures may not
be comparable to that reported by other companies.
Working capital is calculated as current assets minus current
liabilities; funds from operations is calculated as cash flows from
(used in) operating activities adjusted to exclude settlement of
decommissioning obligations and changes in non-cash working capital
balances; realized price is calculated by dividing gross revenue by
gross production, by product, in the applicable period; operating
netback is calculated as total natural gas and crude revenues minus
royalties, transportation costs and operating expenditures;
adjusted EBITDA is calculated as net income (loss) adjusted for
interest, income taxes, depreciation, depletion, amortization and
other similar non-recurring or non-cash charges; and net debt is
defined as the principal amount of its outstanding debt, less
working capital items.
The Company also presents funds from operations per share,
whereby per share amounts are calculated using weighted- average
shares outstanding consistent with the calculation of net loss and
comprehensive loss per share.
A reconciliation of the non-IFRS measures is included as
follows:
Three months Year ended Three months Year ended
ended December December ended December December
(in United States dollars) 31, 2021 31, 2021 31, 2020 31, 2020
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Add/(subtract):
Share based payments 241,438 (84,668) 906,152 1,169,766
Financing costs:
Accretion on decommissioning
obligations 34,160 132,807 62,075 524,477
Interest 246,449 797,943 418,578 238,230
Other (76,358) 46,216 723,710 903,597
Depreciation and depletion 511,813 1,622,937 139,014 2,049,411
Derivative income (467,507) (467,507) - -
Gain on disposition of oil
and gas properties - - (1,059,474) (1,059,474)
Impairment (reversal) of oil
and gas properties (5,617,776) (5,617,776) - 27,263,110
Income taxes, current and
deferred (1,291,612) (1,318,810) 5,551,979 (1,759,807)
Adjusted EBITDA (1) 540,642 804,674 (1,210,966) (2,903,782)
Cash flows used in operating
activities (922,307) (4,506,160) (905,274) (2,298,094)
Minus - Changes in non--cash
working capital balances:
Trade and other receivables (327,190) (1,817,008) (326,360) (2,255,190)
Restricted cash - (262,489) 262,489 262,489
Taxes receivable (900,017) (940,634) (1,050,973) (689,860)
Deposits and prepaid expenses 113,602 244,917 (86,132) (193,813)
Inventory (137,252) 217,759 (131,013) (148,467)
Accounts payable and accrued
liabilities 1,770,157 6,918,112 702,216 1,316,326
Funds flow from (used in) operations
(1) (403,007) (145,503) (1,535,047) (4,006,609)
(1) Non-IFRS measures
The term barrel of oil equivalent ("boe") is used in this
MD&A. Boe may be misleading, particularly if used in isolation.
A boe conversion ratio of 6 thousand cubic feet ("Mcf") of natural
gas to one barrel of oil ("bbl") is used in the MD&A. This
conversion ratio of 6:1 is based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.
FINANCIAL AND OPERATING HIGHLIGHTS
Three months Year ended Three months
ended December December ended December Year ended
(in United States dollars, except 31, 2021 31, 2021 31, 2020 December
as otherwise noted) 31, 2020
Total natural gas and crude oil
revenues, net of royalties 3,038,832 6,512,493 368,139 5,320,565
Funds flow from (used in) operations
(1) (403,007) (145,503) (1,535,047) (4,006,609)
Per share - basic ($) and diluted
($) (0.00) (0.00) (0.02) (0.06)
Net income (loss) 6,960,035 5,693,532 (7,953,001) (32,233,092)
Per share - basic ($) and diluted
($) 0.04 0.06 (0.12) (0.47)
Adjusted EBITDA (1) 540,642 804,674 (1,210,966) (2,903,782)
Weighted average shares outstanding
- basic and diluted:
Basic 171,345,885 94,553,391 68,674,602 68,674,602
Diluted 173,035,572 96,243,078 68,674,602 68,674,602
Common shares end of period 213,389,623 213,389,623 68,674,602 68,674,602
Capital expenditures 1,991,163 2,221,643 89,198 889,928
Cash and cash equivalents 10,878,508 10,878,508 11,473,204 11,473,204
Current assets 12,806,502 12,806,502 15,958,652 15,958,652
Current liabilities 4,800,428 4,800,428 17,891,592 17,891,592
Working capital (deficit) (1) 8,006,074 8,006,074 (1,932,940) (1,932,940)
Long-term portion of restricted
cash (2) - - 460,283 460,283
Total assets 41,195,798 41,195,798 33,532,299 33,532,299
Operating
Natural gas and crude oil production,
before royalties
Natural gas (Mcf/d) 1,550 704 442 530
Natural gas liquids (bbl/d) - 7 5 6
Crude oil (bbl/d) 455 344 62 367
Total (boe/d) 712 468 140 461
Operating netbacks ($/boe) (1)
Natural gas ($/Mcf) $1.87 $1.51 $1.05 $0.51
Crude oil ($/bbl) $34.42 $34.35 ($98.26) $2.85
Total ($/boe) $27.35 $27.55 ($39.03) $3.16
(1) Non-IFRS measures - see "Non-IFRS Measures" section within
this MD&A
(2) Long term restricted cash not included in working
capital
The Company
Arrow is a junior oil and gas company engaged in the
acquisition, exploration and development of oil and gas properties
in Colombia and Western Canada. The Company's shares trade on the
TSX Venture Exchange and the London AIM exchange under the symbol
AXL.
The Company and Arrow Exploration Ltd. entered into an
arrangement agreement dated June 1, 2018, as amended, whereby the
parties completed a business combination pursuant to a plan of
arrangement under the Business Corporations Act (Alberta) ("ABCA")
on September 28, 2018. Arrow Exploration Ltd. and Front Range's
then wholly-owned subsidiary, 2118295 Alberta Ltd., were
amalgamated to form Arrow Holdings Ltd., a wholly-owned subsidiary
of the Company (the "Arrangement"). On May 31, 2018, Arrow
Exploration Ltd. entered in a share purchase agreement, as amended,
with Canacol Energy Ltd. ("Canacol"), to acquire Canacol's
Colombian oil properties held by its wholly-owned subsidiary Carrao
Energy S.A. ("Carrao"). On September 27, 2018, Arrow Exploration
Ltd. closed the agreement with Canacol.
On May 31, 2018, Arrow Exploration Ltd., entered into a purchase
and sale agreement to acquire a 50% beneficial interest in a
contract entered into with Ecopetrol S.A. pertaining to the
exploration and production of hydrocarbons in the Tapir block from
Samaria Exploration & Production S.A. ("Samaria"). On September
27, 2018, Arrow Exploration Ltd. closed the agreement with Samaria.
As at December 31, 2021 the Company held an interest in six oil
blocks in Colombia and oil and natural gas leases in seven areas in
Canada as follows:
Gross Acres Working Interest Net Acres
COLOMBIA
Tapir Operated 65,125 50% 32,563
Oso Pardo Operated 672 100% 672
Ombu Non-operated 56,482 10% 5,648
COR-39 Operated 95,111 100% 95,111
Los Picachos Non-operated 52,772 37.5% 19,790
Macaya Non-operated 195,255 37.5% 73,221
Total Colombia 465,417 227,005
CANADA
Ansell Operated 640 100% 640
Fir Non operated 7,680 32% 2,457
Penhold Non-operated 480 13% 61
Pepper Operated 23,680 100% 23,680
Wapiti Non-operated 1,280 13% 160
Total Canada 33,760 26,998
TOTAL 499,177 254,003
The Company's primary producing assets are located in Colombia
in the Tapir, Oso Pardo and Ombu blocks, with natural gas
production in Canada at Fir and Pepper, Alberta.
Llanos Basin
Within the Llanos Basin, the Company is engaged in the
exploration, development and production of oil within the Tapir
block. In the Llanos Basin most oil accumulations are associated
with three-way dip closure against NNE-SSW trending normal faults
and can have pay within multiple reservoirs. The Tapir block
contain large areas not yet covered by 3D seismic, and in
Management's opinion offer substantial exploration upside.
Middle Magdalena Valley ("MMV") Basin
Oso Pardo Field
The Oso Pardo Field is located in the Santa Isabel Block in the
MMV Basin. It is a 100% owned property operated by the Company. The
Oso Pardo field is located within a Production Licence covering 672
acres. Three wells have been drilled to date within the License
area.
Ombu E&P Contract - Capella Conventional Heavy Oil
Discovery
The Caguan Basin covers an area of approximately 60,000 km(2)
and lies between the Putumayo and Llanos Basins. The primary
reservoir target is the Upper Eocene aged Mirador formation. The
Capella structure is a large, elongated northeast-southwest
fault-related anticline, with approximately 17,500 acres in closure
at the Mirador level. The field is located approximately 250 km
away from the nearest offloading station at Neiva, where production
from Capella is trucked.
The Capella No. 1 discovery well was drilled in July 2008 and
was followed by a series of development wells. The Company earned a
10% working interest in the Ombu E&P Contract by paying 100% of
all activities associated with the drilling, completion, and
testing of the Capella No. 1 well.
Fir, Alberta
The Company has an average non-operated 32% WI in 12 gross (3.84
net) sections of oil and natural gas rights and 17 gross (4.5 net)
producing natural gas wells at Fir. The wells produce raw natural
gas into the Cecilia natural gas plant where it is processed.
Pepper, Alberta
During December 2021, the Dalehurst 06-26-52-23W5 well ("West
Pepper Well") located near Edson, Alberta, Canada was brought on
stream. Initial stabilized production rates were 6.2 MMscf/d of
natural gas, or over 1,030 boe/d, at 7,214 kPa tubing pressure,
30,048 kPa casing pressure, and with no water production.
Year ended December 31, 2021 Financial and Operational
Highlights
-- For the year ended December 31, 2021, Arrow recorded
$6,512,493 in revenues, net of royalties, on crude oil sales of
105,759 bbls, 2,685 bbls of natural gas liquids ("NGL's") and
256,865 Mcf of natural gas sales;
-- Funds used in operations of $145,503;
-- Adjusted EBITDA was $804,674;
-- Net income of $6,512,493;
-- Resumed production in its Oso Pardo and Ombu (Capella) blocks
in Colombia at the rate of 130 and 160 bbls/d, respectively
(Arrow's share);
-- Completed a $12 million financing and its listing at the AIM exchange in London;
-- Brought on production stream the West Pepper well.
Three Months Ended December 31, 2021 Financial and Operational
Highlights
-- For the three months ended December 31, 2021, Arrow recorded
$3,038,832 in revenues, net of royalties, on crude oil sales of
49,024 bbls, 1,004 bbls of natural gas liquids ("NGL's") and
142,404 Mcf of natural gas sales, which represents a 100% increase
when compared to Q3 2021;
-- Funds used in operations of $403,007;
-- Adjusted EBITDA for the three months was $540,642;
-- Net income of $6,960,035;
-- Brought on production stream the West Pepper well.
Annual 2021 Reserve Highlights
-- 3,048 Mboe of Proved Reserves, net increase of 118 Mboe compared to 2020;
-- 7,421 Mboe of Proved plus Probable Reserves, net decrease of 387 Mboe;
-- Proved reserves estimated net present value, before income
taxes, of US$29 million using a 10% discount rate;
-- Proved plus Probable Reserves estimated net present value,
before income taxes, of US$84 million using a 10% discount rate
Results of Operations
The Company has significantly recovered its production and
improved its operations despite the challenges from the Covid-19
pandemic, combined with improved pricing of energy commodities.
These have allowed the Company to improve its balance sheet and its
business profile when compared with 2020. During 2021, the Company
maintained production at its RCE-1 well in the Tapir block for the
whole year, with the Oso Pardo and Ombu blocks coming back on
production stream in June and April, respectively. Also, during
December 2021, the West Pepper Well was brought on stream with an
average production of 4,162 Mcf/d of gas while active.
On December 30, 2020, the Company closed its previously
announced sale of its LLA-23 block to COG Energy Ltd. for a gross
cash consideration of $12.1 million consisted of a firm amount of
US$11.75 million plus sale adjustments agreed within the parties.
In addition to receiving the proceeds, Arrow has transferred to COG
its work obligations under various letters of credit in place to
guarantee work commitments on LLA-23, as well as all underlying
decommissioning and environmental liabilities.
Average Production by Property YTD 2021 Q4 2021 Q3 2021 Q2 2021 Q1 2021 Q4 2020
(Boe/d)
LLA-23 - - - - 7
Oso Pardo 70 123 137 20 - -
Ombu (Capella) 120 190 193 97 - -
Rio Cravo Este (Tapir) 153 142 151 147 174 56
Total Colombia 344 455 481 264 174 62
Fir, Alberta 76 82 94 67 68 78
Pepper, Alberta 46 181 - - - -
TOTAL (Boe/d) 461 719 575 331 242 140
For the three months and year ended December 31, 2021, the
Company's average production was 461 and 719 boe/d, respectively,
which consisted of crude oil production in Colombia at 455 and 344
bbl/d, natural gas production of 1,550 and 704 Mcf/d, respectively,
and minor amounts of natural gas liquids from the Company's
Canadian properties.
Average Daily Natural Gas and Oil Production and Sales
Volumes
Three months ended Year ended
December 31 December 31
2021 2020 2021 2020
Natural Gas
(Mcf/d)
Natural gas
production 1,550 442 704 530
Natural gas
sales 1,550 442 704 530
Realized
Contractual
Natural
Gas Sales 1,550 442 704 530
Crude Oil
(bbl/d)
Crude oil
production 455 62 344 367
Inventory
movements and
other 78 (1) (54) (6)
Crude Oil Sales 533 61 290 361
Corporate
Natural gas
production
(boe/d) 256 73 117 88
Natural Gas
Liquids(bbl/d) 0 5 7 6
Crude oil
production
(bbl/d) 455 62 344 367
Total
production
(boe/d) 712 140 468 461
Inventory
movements and
other
(boe/d) 78 (1) (54) (6)
Total Corporate
Sales (boe/d) 789 139 414 455
During the year and three months ended December 31, 2021 the
majority of production was attributed to Colombia, where all of
Company's blocks were producing. In Canada, the Company has two
operated and two non-operated properties located in the province of
Alberta at Fir, Pepper, Harley and Wapiti.
Natural Gas and Oil Revenues
Three months ended Year ended
December 31 December 31
2021 2020 2021 2020
Natural Gas
Natural gas revenues 479,232 100,931 820,430 356,238
NGL revenues 56,657 17,824 145,019 58,446
Royalties (41,568) (12,417) (84,554) (37,122)
Revenues, net of royalties 494,321 106,338 880,895 377,562
Crude Oil
Crude Oil revenues 2,720,772 264,419 6,199,231 5,179,819
Royalties (176,261) (2,617) (567,633) (236,816)
Revenues, net of royalties 2,544,511 261,802 5,631,598 4,943,003
Three months ended Year ended
December 31 December 31
2021 2020 2021 2020
Corporate
Natural gas revenues 479,232 100,931 820,430 356,238
NGL revenues 56,657 17,824 145,019 58,446
Oil revenues 2,720,772 264,419 6,199,231 5,179,819
Total revenues 3,256,661 383,174 7,164,679 5,594,503
Royalties (217,829) (15,035) (652,187) (273,938)
Natural gas and crude oil revenues,
net of royalties, as reported 3,038,832 368,139 6,512,493 5,320,565
Revenues for the three months and the year ended December 31,
2021 was $3,038,832 and $6,512,493, respectively, net of royalties
(2020: $368,139 and $5,320,565, respectively), which represent an
increase of 725% and 22%, respectively. This increase is mainly due
to increased production, combined with improved pricing for energy
commodities.
Average Benchmark and Realized Prices
Three months ended Years ended
December 31 December 31
2021 2020 Change 2021 2020 Change
Benchmark Prices
AECO ($/Mcf) $3.89 $2.18 78% $2.91 $1.68 73%
Brent ($/bbl) $79.80 $45.21 77% $70.78 $43.28 64%
West Texas Intermediate ($/bbl) $77.31 $42.73 81% $68.09 $39.65 72%
Realized Prices
Natural gas, net of transportation
($/Mcf) $3.37 $2.48 35% $3.19 $1.84 73%
Natural gas liquids ($/bbl) $56.43 $35.40 59% $54.01 $27.60 96%
Crude oil, net of transportation
($/bbl) $55.50 $46.18 20% $58.62 $38.52 52%
Corporate average, net of transport
($/boe)(1) $44.15 $29.47 50% $47.37 $33.14 43%
The Company realized a price of $44.15 and $47.37 per boe during
the three months and year ended December 31, 2021, respectively
(2020: $29.47 and $33.14, respectively) as world oil prices
improved during 2021 . In Canada, natural gas prices experienced a
sustained increase during the same periods compared to 2020
levels.
Operating Expenses
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Natural gas & NGL's 218,557 51,090 347,421 226,530
Crude oil 1,392,310 824,452 1,998,618 4,560,238
Total operating expenses 1,610,867 875,542 2,346,039 4,786,768
Natural gas ($/Mcf) $1.15 $1.26 $1.35 $1.17
Crude oil ($/bbl) $17.48 $143.98 $18.90 $33.91
Corporate ($/boe)(1) $13.85 $67.34 $15.51 $28.36
(1)Non-IFRS measure
During the three months and year ended December 31, 2021, Arrow
incurred operating expenses of $1,610,867 and $2,346,039,
respectively (2020: $875,542 and $4,786,768, respectively), at an
average cost of $13.85 and $15.51 per boe (2020: $67.34 and $28.36,
respectively) which is reflective of the Company's increase in
production and decrease in operating costs when compared to 2020
levels.
Operating Netbacks
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Natural Gas ($/Mcf)
Revenue, net of transportation
expense $3.37 $2.48 $3.19 $1.84
Royalties (0.34) (0.17) (0.33) (0.16)
Operating expenses (1.15) (1.26) (1.35) (1.17)
Natural Gas Operating netback(1) $1.87 $1.05 $1.51 $0.51
Crude oil ($/bbl)
Revenue, net of transportation
expense $55.50 $46.18 $58.62 $38.52
Royalties (3.60) (0.46) (5.37) (1.76)
Operating expenses (17.48) (143.98) (18.90) (33.91)
Crude Oil Operating netback(1) $34.42 ($98.26) $34.35 $2.85
Corporate ($/boe)
Revenue, net of transportation
expense $44.15 $29.47 $47.37 33.14
Royalties (2.95) (1.16) (4.31) (1.62)
Operating expenses (13.85) (67.34) (15.51) (28.36)
Corporate Operating netback
(1) $27.35 ($39.03) $27.55 $3.16
(1) Non-IFRS measure
The operating netbacks of the Company have improved
significantly in 2021 due to several factors, such as increasing
production from both its Colombian and Canadian assets , and
improved crude oil and natural gas prices.
General and Administrative Expenses (G&A)
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
General & administrative expenses 1,840,646 1,529,397 4,972,290 4,520,101
G&A recovered from 3(rd) parties (91,177) (198,154) (91,177) (198,154)
Total G&A 1,749,469 1,321,243 4,881,113 4,321,947
G&A per boe $23.72 108.18 $32.27 27.74
For the three months and year ended December 31, 2021, G&A
expenses, before recoveries totaled $1,840,646 and $4,972,290,
respectively (2020: $1,529,397 and $4,520,101, respectively), which
represents an increase when compared to the same periods in 2020.
This increase was mainly represented by increases in office
expenses, salaries and compensation, as well as increase in
regulatory and marketing expenses associated with the Company's
listing in the London AIM market. These increases were offset by
reductions in legal and other professional fees.
Listing Costs
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Listing costs 583,972 - 583,972 -
For the three months and year ended December 31, 2021, the
Company incurred in listing cost of $583,972 (2020: nil) related to
the listing of its shares in the AIM Market of the London Stock and
Exchange.
Share-based Payments Expense
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Share-based Payments expense 241,438 906,152 (84,668) 1,169,766
Share-based payments expense for the three months and year ended
December 31, 2021 totaled $241,438 and income for $84,668,
respectively (2020: $906,152 and $1,169,766, respectively). During
2021, the Company granted 11,400,000 (2020: 4,319,000) options to
its key management personnel, which were offset by reversal of
expenses from cancelled options due to resignations and
terminations of option holders. During 2021 and 2020, the Company
also recognized an increase in its share based payments expense
from 13,000,000 phantom shares and 1,681,000 phantom options
granted to key management personnel in 2020, according to the
compensation program adopted by the Company. The share-based
payments expense is the result of the progressive vesting of the
options granted to the Company's employees plus the variation in
the fair market value of phantom shares and phantom stock options,
net of cancellations and forfeitures, according to the company's
stock-based compensation plans.
Financing Costs
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Financing expense paid or payable 170,091 1,142,288 844,159 1,141,827
Non-cash financing costs 34,160 62,075 132,807 524,477
Net financing costs $204,251 1,204,363 $976,966 1,666,304
The finance expense paid or payable represents mostly interest
on the promissory note due to Canacol, as partial payment for the
acquisition of Carrao Energy. On October 18, 2021, a seventh
amended and restated promissory note was entered into with Canacol
which includes that the new principal amount of the promissory note
is $6,026,166, which bares interest at an annual rate of 15%. On
August 3, 2020, Canacol agreed to forgive $918,000 of accrued
interest payable to date in exchange for the Company providing full
security to the Canacol over the shares of its operating
subsidiaries in Panama. In addition, financing expense includes
fees and interest associated with financing of standby letters of
credit on certain of the Company's Colombian blocks, and interest
expense on leases. The non-cash finance cost represents an increase
in the present value of the decommissioning obligation for the
current periods. The amount of this expense will fluctuate
commensurate with the asset retirement obligation as new wells are
drilled or properties are acquired or disposed.
Depletion and Depreciation
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Depletion and depreciation 511,813 139,014 1,662,937 2,049,411
Depletion and depreciation expense for the three months and year
ended December 31, 2021 totaled $511,813 and $1,662,937,
respectively (2020: $139,014 and $2,049,411, respectively). The
Company uses the unit of production method and proved plus probable
reserves to calculate depletion expense and this decrease is
directly related with the sale of LLA-23 in late 2020.
Impairment (reversal) of Oil and Gas Properties
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Impairment (reversal) of Oil and
Gas Properties (5,617,776) - (5,617,776) 27,263,110
As at December 31, 2021, the Company reviewed its
cash-generating units ("CGU") for property and equipment and
determined that there were indicators of impairment reversal
previously recognized in its Tapir block in Colombia and its
Canadian assets mostly driven by the recovery in energy commodity
prices. The company prepared estimates of both the value in use and
fair value less costs of disposal of its CGUs of its CGUs and
determined that recoverable amounts exceeded their carrying value
and, therefore, an impairment loss reversal of $5,617,776 is
included in the consolidated statements of operations and
comprehensive income (loss) for the year ended December 31, 2021.
As at March 31 2020, the Company reviewed its cash-generating
unit's ("CGU") property and equipment and determined that there
were indicators of impairment present related to the decrease in
price forecast and reserves. The Company prepared estimates of both
the value in use and fair value less costs of disposal of its CGUs
and it was determined that carrying value of each CGU not exceeded
its recoverable amount and, therefore, an impairment provisions of
$27,263,110 was required.
Gain on Derivative Liability
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Gain on Derivative Liability (467,507) - (467,507) -
During 2021, the Company recorded a gain in derivative liability
of $467,507 related to the valuation of its outstanding warrants
issued during its AIM listing and private placement completed in
2021. These warrants provide the right to holders to convert them
into common shares at a fixed price set in a currency different to
the Company's functional currency and, therefore, they are
considered a liability and measured at fair value with changes
recognized in the statements of operations and comprehensive income
(loss).
Other income
Three months ended Years ended
December 31 December 31
2021 2020 2021 2020
Other income (756,242) (527,282) (2,018,382) (636,229)
The Company reported other income of $756,242 and $2,018,382 for
the three months and year ended December 31, 2021, respectively
(2020: $527,282 and $636,229, respectively). These amounts have
been generated from the Company's negotiations of accounts payable
and debts with vendors, both in Colombia and Canada, which have
resulted in reductions of amounts actually paid in cash to settle
its liabilities, including a reversal of liabilities associated
with the OBC settlement.
Income Taxes
Three months Years ended
ended December December 31
31
2021 2020 2021 2020
Current income tax expense 176,238 72,979 149,040 64,193
Deferred income tax (recovery)expense (1,467,850) 5,479,000 (1,467,850) (1,824,000)
Total income tax (recovery) expense (1,291,612) 5,551,979 (1,318,810) (1,759,807)
During 2021, the Company recognized a deferred income tax asset
of $4,839,785 and a deferred tax liability of $3,371,936 which
represents the tax impact of temporary differences and management's
estimation of current tax benefits that would be realized to
compensate future taxable income. As at December 31, 2020, there
was no deferred income tax recognized. The Company recognizes
deferred income tax assets to the extent it believes that these
assets will more likely than not be realized. The Company offsets
the deferred income tax assets against the deferred income tax
liability when it has the legal right to do so. In making this
determination, the Company considers all available positive and
negative evidence, including the reversal of all existing temporary
differences, projected future taxable income, tax-planning
strategies, and results of recent operations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management
The Company's objective is to maintain a capital base sufficient
to provide flexibility in the future development of the business
and maintain investor, creditor and market confidence. The Company
manages its capital structure and makes adjustments in response to
changes in economic conditions and the risk characteristics of the
underlying assets. The Company considers its capital structure to
include share capital, debt and working capital, excluding non-cash
items. In order to maintain or adjust the capital structure, from
time to time the Company may issue common shares or other
securities, sell assets or adjust its capital spending to manage
current and projected debt levels.
As at December 31, 2021, the Company's working capital is
$8,066, 074. During 2021, the Company has made a significant effort
to improve its working capital, more specifically its accounts
payable, using its proceeds received from the sale of LLA-23 and
additional financial resources provided by its operations. The
overall improvement in energy commodity prices has also positively
impacted the Company's capacity to generate sufficient financial
resources to sustain its operations. These elements have also
contributed to the Company's ability to complete financing
transactions in 2021, in the form of fundraisings, from its
existing and new investors and management is confident that
additional resources would be available to the Company to close
similar transactions.
As at December 31, 2021 the Company's net debt was calculated as
follows:
December 31,
2021
Current assets $ 12,806,502
Less:
Accounts payable and accrued liabilities 3,120,777
Promissory Note - short and long term 3,318,786
Net debt (1) $ 6,366,939
(1) Non-IFRS measure
Working Capital
As at December 31, 2021 the Company's working capital was
calculated as follows:
December 31,
2021
Current assets:
Cash and restricted cash $ 10,878,508
Trade and other receivables 639,582
Taxes receivable 719,049
Other current assets 569,363
Less:
Accounts payable and accrued liabilities 3,120,777
Lease obligation 20,258
Promissory note - short term 1,659,393
Working capital (1) $ 8,006,074
(1) Non-IFRS measure
Debt Capital
The Company currently has $3.3 million in outstanding debt in
the form of a promissory note payable to Canacol and a long-term
debt of $31,552. On October 18, 2021, Arrow and Canacol entered
into a Seventh Amended and Restated Promissory Note. The principal
amendments are the following:
- The new principal amount of the promissory note is $6,026,166
- On or before October 31, 2021, the Company shall make a
payment of C$ 3,900,000 plus all Canacol's expenses incurred in
connection with this amendment and related matters;
- On or before December 31, 2022, the Company shall make a
payment equal to 50% of the total amount outstanding of interest
and principal; and
- The remaining balance of principal and interest shall be paid no later than June 30, 2023
This amendment also provided that, in the event that the Company
made the payment due on October 31, 2021, Canacol agreed to forgive
$658,654 for excess pipeline shipping costs, as a result of the
settlement of the OBC pipeline dispute.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters
of Credit ("LC's") outstanding totaling $5.2 million to guarantee
work commitments on exploration blocks and other contractual
commitments. Of the total, approximately $4.1 million has been
guaranteed by Canacol. Under an agreement, Canacol will continue to
provide security for Arrow's Letters of Credit providing that Arrow
uses all reasonable efforts to replace the LC's. In the event the
Company fails to secure the renewal of the letters of credit
underlying the ANH guarantees, or any of them, the ANH could decide
to cancel the underlying exploration and production contract for a
particular block, as applicable. In this instance, the Company
could risk losing its entire interest in the applicable block,
including all capital expended to date and could possibly also
incur additional abandonment and reclamation costs if applied by
the ANH.
Current Outstanding Letters of Credit
Contract Beneficiary Issuer Type Amount
(US $) Renewal Date
SANTA ISABEL April 14,
ANH Carrao Energy Abandonment $643,423 2022
Canacol and Financial June 30,
ANH Carrao Capacity $1,672,162 2022
CORE - June 30,
39 ANH Canacol Compliance $2,400,000 2022
Financial April 14,
OMBU ANH Carrao Energy Capacity $436,300 2022
Total $5,151,885
Share Capital
As at December 31, 2021, the Company had 213,389,643 common
shares, 72,474,706 warrants and 17,114,000 stock options
outstanding.
CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's cash
requirements to meet its financial liabilities and contractual
obligations existing at December 31, 2021:
Less than 1 year 1-3 years Thereafter Total
Promissory Note $ 1,659,393 1,659,393 - 3,318,786
Exploration and production
contracts - 17,800,000 - 17,800,000
$ 1,659,393 19,459,393 - 21,118,786
Exploration and Production Contracts
The Company has entered into a number of exploration contracts
in Colombia which require the Company to fulfill work program
commitments and issue financial guarantees related thereto. In
aggregate, the Company has outstanding exploration commitments at
December 31, 2021 of $17.8 million. The Company, in conjunction
with its partners, have made applications to cancel $15.5 million
($5.79 million Arrow's share) in commitments on the Macaya and Los
Picachos blocks. The remaining commitments are expected to be
satisfied by means of seismic work, exploration drilling and
farm-outs.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was a party to an agreement with Canacol that
entitles it to a 0.5% interest in OBC, which owns a pipeline system
intended to link Llanos basin oil production to the Caño Limon oil
pipeline system in Colombia. This agreement was part of Arrow's
acquisition of Carrao from Canacol. The Company in conjunction with
Canacol, notified OBC to transfer title of the shares currently in
the name of Canacol to Arrow. The transfer requires approval by OBC
which at the date of this MD&A had not been received.
Canacol has finally settled a litigation with OBC in relation to
ship or pay obligations with the OBC and after negotiations between
the parties involved were submitted and approved by courts in
Colombia. As part of the 7(th) amendment to the Canacol Promissory
Note, the Company has been released from paying its OBC obligations
for $658,654 and from any future ship or pay obligations between
Canacol and the OBC.
SUMMARY OF THREE MONTHS RESULTS
2021 2020
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Oil and
natural
gas sales,
net
of royalties 3,038,832 1,684,609 941,620 847,432 368,140 207,934 896,011 3,848,478
Net income
(loss) 6,960,035 (21,782) (734,317) (510,405) (7,953,001) (1,390,746) 3,168,919 (26,058,265)
Income (loss)
per share -
basic
and diluted 0.04 (0.00) (0.01) (0.01) (0.12) (0.02) 0.05 (0.38)
Working
capital
(deficit) 8,006,074 783,707 3,141,217 (2,659,690) (1,932,940) (11,086,377) (10,158,614) (2,711,756)
Total assets 41,195,798 25,362,323 25,948,551 27,684,920 33,532,299 46,702,911 47,386,940 43,775,967
Net capital
expenditures 1,991,163 148,528 (15,378) 97,330 89,198 146,584 180,795 473,351
Average daily
production
(boe/d) 712 575 331 242 140 105 417 1,159
The Company's oil and natural gas sales have increased during
2021 due to resuming production in its existing assets, improved in
oil and gas prices and positive fluctuations in realized oil price
differentials. The Company's production levels in Colombia have
progressively improved in 2021. Trends in the Company's net income
(loss) are also impacted most significantly by operating expenses,
financing costs, income taxes, depletion, depreciation and
impairment of oil and gas properties, and other income.
OUTSTANDING SHARE DATA
At April 25, 2022, the Company had the following securities
issued and outstanding:
Number Exercise Price Expiry Date
Common shares 214,054,643 n/a n/a
Warrants 72,184,706 GBP 0.09 Oct. and Nov,
2023
Stock options 1,050,000 CAD$ 1.15 October 22,
2028
Stock options 345,000 CAD$ 0.31 May 3, 2029
Stock options 1,200,000 CAD$ 0.05 March 20,
2030
Stock options 2,000,000 CAD$ 0.05 April 13,
2030
Stock options 3,799,998 GBP 0.07625 June 13, 2023
Stock options 3,799,998 GBP 0.07625 June 13, 2024
Stock options 3,800,004 GBP 0.07625 June 13, 2025
OUTLOOK
In 2022, the Company is continuing to focus on improving its
balance sheet and free cash flow by optimizing its sources of
funds. The Company has also started its 2022 drilling campaign with
at least two follow-up wells at Rio Cravo Este and potentially
drilling the Carrizales Norte-1 well on the Tapir Block. The
Company is also evaluating the tie-in of the East Pepper well in
2022.
On January 30, 2020, the World Health Organization declared the
Coronavirus disease (COVID-19) outbreak a Public Health Emergency
of International Concern and, on March 10, 2020, declared it to be
a pandemic. Actions taken around the world to mitigate the spread
of COVID-19, combined with OPEC's initial plan to increase global
supply resulted in significant weakness and volatility in commodity
prices in early 2020. The simultaneous demand and supply shocks
have resulted in significant declines in product demand and pricing
in the latter part of the first quarter and throughout the second
and third quarter of 2020. Commodity prices began to recover in
late 2020 and continued that recovery in early 2021. Although it is
impossible to reliably estimate the impact of COVID-19, and OPEC's
policies and the volatile commodities market, both are anticipated
to have material effects on the Company's 2022 financial results
relative to 2021 and 2020.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's significant accounting policies is
contained in Note 3 Annual Financial Statements. These accounting
policies are subject to estimates and key judgements about future
events, many of which are beyond Arrow's control. The following is
a discussion of the accounting estimates that are critical to the
consolidated financial statements.
Crude oil and natural gas assets - reserves estimates - Arrow
retained independent third-party petroleum engineers to evaluate
its crude oil and natural gas reserves, prepare an evaluation
report, and report to the Reserves Committee of the Board of
Directors. The process of estimating crude oil and natural gas
reserves is subjective and involves a significant number of
decisions and assumptions in evaluating available geological,
geophysical, engineering and economic data. These estimates will
change over time as additional data from ongoing development and
production activities becomes available and as economic conditions
affecting crude oil and natural gas prices and costs change.
Reserves can be classified as proved, probable or possible with
decreasing levels of likelihood that the reserves will be
ultimately produced.
Reserve estimates are a key input to the Company's depletion
calculations and impairment tests. Property, plant and equipment
within each area are depleted using the unit-of-production method
based on proved and probable reserves using estimated future prices
and costs. In addition, the costs subject to depletion include an
estimate of future costs to be incurred in developing proved and
probable reserves. A revision in reserve estimates or future
development costs could result in the recognition of higher
depletion charged to net income.
Under the IFRS, the carrying amounts of property, plant and
equipment are reviewed at each reporting date to determine whether
there is any indication of impairment. If any such indication
exists, the estimated recoverable amount is calculated. For the
purpose of impairment testing, assets are grouped together into the
smallest group of assets that generates cash inflows from
continuing use that are largely independent of the cash inflows of
other assets or groups of assets (the "cash-generating unit" or
"CGU"). The recoverable amount of an asset or a CGU is the greater
of its value in use and its fair value less costs to sell. In
assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset. Value in use is generally
computed by reference to the present value of the future cash flows
expected to be derived from production of proven and probable
reserves. Exploration and evaluation ("E&E") assets will be
allocated to the related CGU's to assess for impairment, both at
the time of any triggering facts and circumstances as well as upon
their eventual reclassification to producing assets (oil and
natural gas interests in property, plant and equipment). An
impairment loss is recognized in income if the carrying amount of
an asset or its CGU exceeds its estimated recoverable amount.
Reserve, revenue, royalty and operating cost estimates and the
timing of future cash flows are all critical components of the
impairment test. Revisions of these estimates could result in a
write-down of the carrying amount of crude oil and natural gas
properties.
Decommissioning obligations - The Company recognizes the
estimated fair value of the decommission liability in the period in
which it is incurred and records a corresponding increase in the
carrying value of the related asset. The future asset retirement
obligation is an estimate based on the Company's ownership interest
in wells and facilities and reflects estimated costs to complete
the abandonment and reclamation as well as the estimated timing of
the costs to be incurred in future periods. Estimates of the costs
associated with abandonment and reclamation activities require
judgement concerning the method, timing and extent of future
retirement activities. The capitalized amount is depleted on a
unit-of-production method over the life of the proved and probable
reserves. The liability amount is increased each reporting period
due to the passage of time and this accretion amount is charged to
earnings in the period, which is included as a financing expense.
Actual costs incurred on settlement of the decommissioning
liability are charged against the liability. Judgements affecting
current and annual expense are subject to future revisions based on
changes in technology, abandonment timing, costs, discount rates
and the regulatory environment.
Share based payments - Stock options issued to employees and
directors under the Company's stock option plan are accounted for
using the fair value method of accounting for stock-based
compensation. The fair value of the option is recognized as a
share-based payment and contributed surplus over the vesting period
of the option. Share based payment is determined on the date of an
option grant using the Black-Scholes option pricing model. The
Black-Scholes pricing model requires the estimation of several
variables including estimated volatility of Arrow's stock price
over the life of the option, estimated option forfeitures,
estimated life of the option, estimated risk-free rate and
estimated dividend rate. A change to these estimates would alter
the valuation of the option and would result in a different related
share-based payment.
Income taxes - Arrow follows the balance sheet method, providing
for temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for taxation purposes. Current tax is the expect tax payable
on the taxable income for the year, using tax rates enacted or
substantially enacted at the reporting period, and any adjustment
to tax payable in respect to previous periods. Tax interpretations
and legislation in which the Company operates are subject to
change. As such, income taxes are subject to measurement
uncertainty and interpretations can impact net income through
current tax arising from the changes in the deferred income tax
asset and liabilities.
Provisions and contingencies - The Company recognizes provisions
based on an assessment of its obligations and available
information. Any matters not included as provisions are uncertain
in nature and cannot be reasonably estimated. The Company makes
assumptions to determine whether obligations exist and to estimate
the amount of obligations that we believe exist. In estimating the
final outcome of litigation, assumptions are made about factors
including experience with similar matters, past history,
precedents, relevant financial, scientific, and other evidence and
facts specific to the matter.
This determines whether a provision or disclosure in the
financial statements is needed.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is
included in Note 3 Annual Financial Statements. These accounting
policies are consistent with those of the previous financial year
as described in Note 3 of the Annual Financial Statements.
DERIVATIVE COMMODITY CONTRACTS
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit and foreign exchange risks. The
Company manages its exposure to these risks by operating in a
manner that minimizes its exposure to the extent practical. During
2021, the Company did not have any financial derivative contract in
order to manage commodity price risks.
RISKS AND UNCERTAINTIES
The Company is subject to financial, business and other risks,
many of which are beyond its control and which could have a
material adverse effect on the business and operations of the
Company. A summary of certain risk factors relating to our business
are disclosed below.
Impact of the COVID-19 Pandemic
Arrow's business, financial condition and results of operations
could be materially and adversely affected by the outbreak of
epidemics, pandemics and other public health crises in geographic
areas in which we have operations, suppliers, customers or
employees, including the recent global outbreak of COVID-19. The
recent COVID-19 pandemic, and actions that may be taken by
governmental authorities in response thereto, has resulted, and may
continue to result in, among other things: increased volatility in
financial markets and foreign currency exchange rates; disruptions
to global supply chains; labour shortages; reductions in trade
volumes; temporary operational restrictions and restrictions on
gatherings greater than a certain number of individuals,
shelter-in- place declarations and quarantine orders, business
closures and travel bans; an overall slowdown in the global
economy; political and economic instability; and civil unrest. In
particular, the COVID-19 pandemic has resulted in, and may continue
to result in, a reduction in the demand for, and prices of,
hydrocarbon and other commodities that are closely linked to
Arrow's financial performance, and also increases the risk that
storage for crude oil and refined petroleum products could reach
capacity in geographic locations in which we operate. A prolonged
period of decreased demand for, and prices of, these commodities,
and any applicable storage constraints, could also result in us
voluntarily curtailing or shutting in production and a decrease in
our refined product volumes and refinery utilization rates, which
could adversely impact our business, financial condition and
results of operations. Arrow is also subject to risks relating to
the health and safety of our people, as well as the potential for a
slowdown or temporary suspension of our operations in locations
impacted by an outbreak, increased labour and fuel costs, and
regulatory changes. Such a suspension in operations could also be
mandated by governmental authorities in response to the COVID-19
pandemic. This could negatively impact Arrow's production volumes
and revenues for a sustained period of time, which would adversely
impact our business, financial condition and results of
operations.
Unstable Oil and Gas Industry
Recent market events and conditions, including demand
destruction resulting from the COVID-19 pandemic, global excess oil
and natural gas supply, actions taken by the Organization of
Petroleum Exporting Countries (OPEC), slowing growth in China and
other emerging economies, market volatility and disruptions in
Asia, and sovereign debt levels in various countries, have caused
significant weakness and volatility in commodity prices. These
events and conditions have caused a significant volatility in the
valuation of oil and gas companies and a variable confidence in the
oil and gas industry. Lower commodity prices may also affect the
volume and value of the Company's reserves especially as certain
reserves become uneconomic. In addition, in a low commodity prices
environment might affect the Company's cash flow. As a result, the
Company may not be able to replace its production with additional
reserves and both the Company's production and reserves could be
reduced on a year over year basis. Given the current market
conditions, the Company may have difficulty raising additional
funds or if it is able to do so, it may be on unfavourable and
highly dilutive terms.
Prices, Markets and Marketing of Crude Oil and Natural Gas
Oil and natural gas are commodities whose prices are determined
based on world demand, supply and other factors, all of which are
beyond the control of Arrow. World prices for oil and natural gas
have fluctuated widely in recent years. Any material decline in
prices could result in a reduction of net production revenue.
Certain wells or other projects may become uneconomic as a result
of a decline in world oil prices and natural gas prices, leading to
a reduction in the volume of Arrow's oil and gas reserves. Arrow
might also elect not to produce from certain wells at lower prices.
All of these factors could result in a material decrease in Arrow's
future net production revenue, causing a reduction in its oil and
gas acquisition and development activities.
In addition to establishing markets for its oil and natural gas,
Arrow must also successfully market its oil and natural gas to
prospective buyers. The marketability and price of oil and natural
gas which may be acquired or discovered by Arrow will be affected
by numerous factors beyond its control. Arrow will be affected by
the differential between the price paid by refiners for light
quality oil and the grades of oil produced by Arrow. The ability of
Arrow to market its natural gas may depend upon its ability to
acquire space on pipelines which deliver natural gas to commercial
markets. Arrow will also likely be affected by deliverability
uncertainties related to the proximity of its reserves to pipelines
and processing facilities and related to operational problems with
such pipelines and facilities and extensive government regulation
relating to price, taxes, royalties, land tenure, allowable
production, the export of oil and natural gas and many other
aspects of the oil and natural gas business.
Substantial Capital Requirements; Liquidity
Arrow's cash flow from its production and sales of petroleum and
natural gas may not, at all times be sufficient to fund its ongoing
activities. From time to time, Arrow may require additional
financing in order to carry out its oil and gas acquisition,
exploration and development activities. Failure to obtain such
financing on a timely basis could cause Arrow to forfeit its
interest in certain properties, miss certain acquisition
opportunities and reduce or terminate its operations. If Arrow's
revenues from its production of petroleum and natural gas decrease
as a result of lower oil and natural gas prices or otherwise, it
may affect Arrow's ability to expend the necessary capital to
replace its reserves or to maintain its production. If Arrow's
funds from operations are not sufficient to satisfy its capital
expenditure requirements, there can be no assurance that additional
financing will be available to meet these requirements or available
on terms acceptable to Arrow.
Arrow's lenders will be provided with security over
substantially all of the assets of Arrow. If Arrow becomes unable
to pay its debt service charges or otherwise commits an event of
default, such as bankruptcy, these lenders may foreclose on or sell
Arrow's properties. The proceeds of any such sale would be applied
to satisfy amounts owed to Arrow's lenders and other creditors and
only the remainder, if any, would be available to Arrow
shareholders. Arrow monitors and updates its cash projection models
on a regular basis which assists in the timing decision of capital
expenditures. Farm-outs of projects may be arranged if capital
constraints are an issue or if the risk profile dictates that the
Company wishes to hold a lesser working interest position. Equity,
if available and if on reasonable terms, may be utilized to help
fund Arrow's capital program.
Access to Capital
Access to capital has become limited during these times of
economic uncertainty. To the extent the external sources of capital
become limited or unavailable. Arrow's ability to make the
necessary capital investments to maintain or expand oil and gas
reserves may be impaired.
Risks of Foreign Operations Generally
Most of Arrow's oil and gas properties and operations are
located in a foreign jurisdiction. As such, Arrow's operations may
be adversely affected by changes in foreign government policies and
legislation or social instability and other factors which are not
within the control of Arrow, including, but not limited to,
nationalization, expropriation of property without fair
compensation, renegotiation or nullification of existing
concessions and contracts, the imposition of specific drilling
obligations and the development and abandonment of fields, changes
in energy policies or the personnel administering them, changes in
oil and natural gas pricing policies, the actions of national
labour unions, currency fluctuations and devaluations, exchange
controls, economic sanctions and royalty and tax increases and
other risks arising out of foreign governmental sovereignty over
the areas in which Arrow's operations are conducted, as well as
risks of loss due to civil strife, acts of war, terrorism,
guerrilla activities and insurrections. Arrow's operations may also
be adversely affected by laws and policies of Colombia and Canada
affecting foreign trade, taxation and investment. If Arrow's
operations are disrupted and/or the economic integrity of its
projects is threatened for unexpected reasons, its business may be
harmed. Prolonged problems may threaten the commercial viability of
its operations. In addition, there can be no assurance that
contracts, licenses, license applications or other legal
arrangements will not be adversely affected by changes in
governments in foreign jurisdictions, the actions of government
authorities or others, or the effectiveness and enforcement of such
arrangements. In the event of a dispute arising in connection with
Arrow's operations in Colombia, Arrow may be subject to the
exclusive jurisdiction of foreign courts or may not be successful
in subjecting foreign persons to the jurisdictions of the courts of
Canada or enforcing Canadian judgments in such other jurisdictions.
Arrow may also be hindered or prevented from enforcing its rights
with respect to a governmental instrumentality because of the
doctrine of sovereign immunity. Accordingly, Arrow's exploration,
development and production activities in Colombia could be
substantially affected by factors beyond the Company's control, any
of which could have a material adverse effect on Arrow. Acquiring
interests and conducting exploration and development operations in
foreign jurisdictions often require compliance with numerous and
extensive procedures and formalities. These procedures and
formalities may
result in unexpected or lengthy delays in commencing important
business activities. In some cases, failure to follow such
formalities or obtain relevant evidence may call into question the
validity of the entity or the actions taken. Management is unable
to predict the effect of additional corporate and regulatory
formalities which may be adopted in the future including whether
any such laws or regulations would materially increase Arrow's cost
of doing business or affect its operations in any area. Arrow
believes that management's experience operating both in Colombia
and in other international jurisdictions helps reduce these risks.
In Colombia, the government has a long history of democracy and an
established legal framework that, in Arrow's opinion, minimizes
political risks.
Russia-Ukraine Conflict
On February 24, 2022, Russian military forces launched a
full-scale military invasion of Ukraine. In response, Ukrainian
military personal and civilians are actively resisting the
invasion. Many countries throughout the world have provided aid to
the Ukraine in the form of financial aid and in some cases military
equipment and weapons to assist in their resistance to the Russian
invasion. The North Atlantic Treaty Organization ("NATO") has also
mobilized forces to NATO member countries that are close to the
conflict as deterrence to further Russian aggression in the region.
The outcome of the conflict is uncertain and is likely to have wide
ranging consequences on the peace and stability of the region and
the world economy. Certain countries including Canada and the
United States, have imposed strict financial and trade sanctions
against Russia and such sanctions may have far reaching effects on
the global economy. In addition, the German government paused the
certification process for the 1,200 km Nord Stream 2 natural gas
pipeline that was built to carry natural gas from Russia to
Germany. As Russia is a major exporter of oil and natural gas, the
disruption of supplies of oil and natural gas from Russia could
cause a significant worldwide supply shortage of oil and natural
gas and significantly impact pricing of oil and gas worldwide. A
lack of supply and high prices of oil and natural gas could have a
significant adverse impact on the world economy. The long-term
impacts of the conflict and the sanctions imposed on Russia remain
uncertain.
Alternatives to/Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements,
increasing consumer demand for alternatives to oil and natural gas,
and technological advances in fuel economy and energy generation
devices will reduce the demand for crude oil, natural gas and other
liquid hydrocarbons. The Company cannot predict the impact of
changing demand for oil and natural gas products and any major
changes would have a material adverse effect on the Company's
business, financial condition, results of operations and cash
flow.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk,
for which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. There is no assurance that
expenditures made on future exploration by Arrow will result in new
discoveries of oil or natural gas in commercial quantities. It is
difficult to project the costs of implementing an exploratory
drilling program due to the inherent uncertainties of drilling in
unknown formations, the costs associated with encountering various
drilling conditions such as over-pressured zones, tools lost in the
hole and changes in drilling plans and locations as a result of
prior exploratory wells or additional seismic data and
interpretations thereof.
The long-term commercial success of Arrow will depend on its
ability to find, acquire, develop and commercially produce oil and
natural gas reserves. No assurance can be given that Arrow will be
able to locate satisfactory properties for acquisition or
participation. Moreover, if such acquisitions or participations are
identified, Arrow may determine that current markets, terms of
acquisition and participation or pricing conditions make such
acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts,
not only from dry wells, but from wells that are productive but do
not produce sufficient net revenues to return a profit after
drilling, operating and other costs. Completion of a well does not
assure a profit on the investment or recovery of drilling,
completion and operating costs. In addition, drilling hazards or
environmental damage could greatly increase the cost of operations,
and various field operating conditions may adversely affect the
production from successful wells. These conditions include delays
in obtaining governmental approvals or consents, shut-ins of
connected wells resulting from extreme weather conditions,
insufficient storage or transportation capacity or other geological
and mechanical conditions. While diligent well supervision and
effective maintenance operations can contribute to maximizing
production rates over time, production delays and natural reservoir
performance declines cannot be eliminated and can be expected to
adversely affect revenue and cash flow levels to varying
degrees.
In addition, oil and gas operations are subject to the risks of
exploration, development and production of oil and natural gas
properties, including encountering unexpected formations or
pressures, premature declines of reservoirs, blow-outs, sour gas
releases, fires and spills. Losses resulting from the occurrence of
any of these risks could have a materially adverse effect on future
results of operations, liquidity and financial condition. Arrow
attempts to minimize exploration, development and production risks
by utilizing a technical team with extensive experience to assure
the highest probability of success in its drilling efforts. The
collaboration of a team of seasoned veterans in the oil and gas
business, each with a unique expertise in the various upstream to
downstream technical disciplines of prospect generation to
operations, provides the best assurance of competency, risk
management and drilling success. A full cycle economic model is
utilized to evaluate all hydrocarbon prospects. Detailed geological
and geophysical techniques are regularly employed including 3D
seismic, petrography, sedimentology, petrophysical log analysis and
regional geological evaluation.
Governmental Regulation
The oil and gas business is subject to regulation and
intervention by governments in such matters as the awarding of
exploration and production interests, the imposition of specific
drilling obligations, environmental protection controls, control
over the development and abandonment of fields (including
restrictions on production) and possible expropriation or
cancellation of contract rights, as well as with respect to prices,
taxes, export quotas, royalties and the exportation of oil and
natural gas. Such regulations may be changed from time to time in
response to economic or political conditions. The implementation of
new regulations or the modification of existing regulations
affecting the oil and gas industry could reduce demand for oil and
natural gas, increase Arrow's costs and have a material adverse
effect on Arrow.
Credit Exposure
Recent economic conditions have increased the risk that certain
counterparties for the Company's oil and gas sales and our joint
venture partners may fail to pay. Arrow mitigates these increased
risks through diversification and a review process of the credit
worthiness of our counterparties. Arrow's policy to mitigate credit
risk associated with product sales is to maintain marketing
relationships with large, established and reputable purchasers that
are considered creditworthy. Arrow has not experienced any
collection issues with its petroleum and natural gas marketers.
Joint venture receivables are typically collected within two to
three months of the joint venture bill being issued to the partner.
Arrow attempts to mitigate the risk from joint venture receivables
by obtaining partner approval of significant capital and operating
expenditures prior to expenditure and in certain circumstances may
require cash deposits in advance of incurring financial obligations
on behalf of joint venture partners.
Health, Safety and Environment
All phases of the oil and natural gas business present
environmental risks and hazards and are subject to environmental
regulation pursuant to a variety of federal, provincial/state and
local laws and regulations. Environmental legislation provides for,
among other things, restrictions and prohibitions on spills,
releases or emissions of various substances produced in association
with oil and natural gas operations. The legislation also requires
that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory
authorities. Compliance with such legislation can require
significant expenditures and a breach of applicable environmental
legislation may result in the imposition of fines and penalties,
some of which may be material. Environmental legislation is
evolving in a manner expected to result in stricter standards and
enforcement, larger fines and liability and potentially increased
capital expenditures and operating costs. The discharge of oil,
natural gas or other pollutants into the air, soil or water may
give rise to liabilities to governments and third parties and may
require the Company to incur costs to remedy such discharge.
There are potential risks to the environment inherent in the
business activities of the Company. Arrow has developed and
implemented policies and procedures to mitigate health, safety and
environment (HS&E) risks. Arrow mitigates HS&E risks by
maintaining its wells and complying with all regulations. Regular
field inspections are also carried out to ensure that all field
personnel and third party contractors comply with all company and
regulatory guidelines. An action plan has been developed to ensure
inactive wells are suspended properly and abandoned in a timely
fashion. The above noted policies and procedures are designed to
protect and maintain the environment and to ensure that the
employees, contractors, subcontractors and the public at large are
kept safe at all times.
Foreign Exchange and Currency Risks
The Company is exposed to foreign exchange and currency risk as
a result of fluctuations in exchange rates between Colombian peso
and the Canadian dollar. Most of the Corporation's revenues and
funds from financing activities are expected to be received in
reference to US dollar denominated prices while a portion of its
operating, capital, and general and administrative costs are
denominated in the Colombian peso and the Canadian dollar.
Widespread Pandemic
The Company's foreign operations are located in areas relatively
remote from local towns and villages and represent a concentration
of personnel working and residing in close proximity to one
another. Should an employee or visitor become infected with a
serious illness that has the potential to spread rapidly, this
could place Arrow's workforce at risk. The 2020 outbreak of the
novel coronavirus (COVID-19) in China and other countries around
the world is one example of such an illness. The Corporation takes
every precaution to strictly follow industrial hygiene and
occupational health guidelines. There can be no assurance that this
virus or another infectious illness will not impact the
Corporation's personnel and ultimately its operations.
Competition
Arrow actively competes for reserve acquisitions, exploration
leases, licenses and concessions and skilled industry personnel
with a substantial number of other oil and gas companies, many of
which have significantly greater financial and personnel resources
than Arrow. Arrow's competitors include major integrated oil and
natural gas companies and numerous other independent oil and
natural gas companies and individual producers and operators.
Certain of Arrow's customers and potential customers are
themselves exploring for oil and natural gas, and the results of
such exploration efforts could affect Arrow's ability to sell or
supply oil or gas to these customers in the future. Arrow's ability
to successfully bid on and acquire additional property rights, to
discover reserves, to participate in drilling opportunities and to
identify and enter into commercial arrangements with customers will
be dependent upon developing and maintaining close working
relationships with its future industry partners and joint operators
and its ability to select and evaluate suitable properties and to
consummate transactions in a highly competitive environment.
Social License to Operate
Heightened public monitoring and regulation of hydrocarbon
resource producers, refiners, distributors and commercial/retail
sellers, especially where their activities carry the potential for
having negative impacts on communities and the environment,
involves varying degrees of risk to the Company's reputation,
relations with landowners and regulators, and in extreme cases even
the ability to operate. Arrow maintains an active website that
complies with Exchange requirements for timely disclosure and
together with its press releases and other SEDAR filings, is the
primary means of communicating to the general public. While media
attention and public perception remains largely beyond the control
of Arrow's executive, employees, contractors and directors, the
Company makes every effort in its corporate and field operations to
engage all stakeholders in a respectful and transparent manner.
Internal Controls over Financial Reporting
The CEO and CFO, along with participation from other members of
management, are responsible for establishing and maintaining
adequate Internal Control over Financial Reporting ("ICFR") to
provide reasonable assurance regarding the reliability of financial
statements prepared in accordance with IFRS. The Company's CEO and
CFO, with support of management have assessed the design and
operating effectiveness of the Corporation's ICFR as at December
31, 2021 based on criteria described in "Internal Control -
Integrated Framework" issued in 2013 by the Committee of Sponsoring
Organization of the Treadway Commission. Based on this assessment,
it was concluded that the design and operation of the Corporation's
ICFR are effective as at December 31, 2021. During the three months
ended December 31, 2021, there has been no change in the
Corporation's ICFR that has materially affected, or is reasonably
likely to materially affect, the Corporation's ICFR.
Arrow Exploration Corp.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ended DECEMBER 31, 2021 AND 2020
IN UNITED STATES DOLLARS
Independent Auditor's Report
To the Shareholders of Arrow Exploration Corp.
Opinion
We have audited the consolidated financial statements of Arrow
Exploration Corp. (the "Company"), which comprise the consolidated
statements of financial position as at December 31, 2021 and 2020,
and the consolidated statements of operations and comprehensive
income (loss), changes in shareholders' equity and cash flows for
the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies
(collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 2021 and 2020, and its financial
performance and its cash flows for the years then ended in
accordance with International Financial Reporting Standards
("IFRS").
Basis for Opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards ("Canadian GAAS"). Our responsibilities
under those standards are further described in the Auditor's
Responsibilities for the Audit of the Financial Statements section
of our report. We are independent of the Company in accordance with
the ethical requirements that are relevant to our audit of the
financial statements in Canada, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other
information comprises Management's Discussion and Analysis.
Our opinion on the financial statements does not cover the other
information and we do not and will not express any form of
assurance conclusion thereon. In connection with our audit of the
financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the
other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.
We obtained Management's Discussion and Analysis prior to the
date of this auditor's report. If, based on the work we have
performed on this other information, we conclude that there is a
material misstatement of this other information, we are required to
report that fact in this auditor's report. We have nothing to
report in this regard.
Responsibilities of Management and Those Charged with Governance
for the Financial Statements
Management is responsible for the preparation and fair
presentation of the financial statements in accordance with IFRS,
and for such internal control as management determines is necessary
to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible
for assessing the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless management
either intends to liquidate the Company or to cease operations, or
has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial
Statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian GAAS will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with Canadian GAAS, we
exercise professional judgment and maintain professional skepticism
throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain
audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal
control.
-- Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company's internal control.
-- Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related disclosures
made by management.
-- Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Company's
ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in
our auditor's report to the related disclosures in the financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor's report. However, future events or
conditions may cause the Company to cease to continue as a going
concern.
-- Evaluate the overall presentation, structure and content of
the financial statements, including the disclosures, and whether
the financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
-- Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Company to express an opinion on the financial statements. We
are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit
opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies
in internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and
other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this
independent auditor's report is David Langlois.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Alberta
April 25, 2022
Arrow Exploration Corp.
Consolidated Statements of Financial Position
In United States Dollars
As at Notes December 31, December 31,
2021 2020
ASSETS
Current assets
Cash $ 10,878,508 $ 11,473,204
Restricted cash 4 - 262,489
Trade and other receivables 5 639,582 2,456,590
Taxes receivable 6 719,049 1,659,683
Deposits and prepaid expenses 322,300 77,382
Inventory 247,063 29,304
12,806,502 15,958,652
Non-current assets
Deferred income taxes 16 4,839,785 -
Restricted cash 4 732,553 460,283
Exploration and evaluation 7 6,964,506 6,961,667
Property and equipment 8 15,852,452 10,151,697
Total Assets $ 41,195,798 $ 33,532,299
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued
liabilities $ 3,120,777 $ 12,101,989
Lease obligation 10 20,258 17,279
Promissory note 9 1,659,393 5,772,324
4,800,428 17,891,592
Non-current liabilities
Long-term debt 11 31,552 31,416
Lease obligation 10 34,434 53,563
Other liabilities 12 177,500 177,500
Deferred income taxes 16 3,371,936
Decommissioning liability 13 2,470,239 2,584,907
Promissory note 9 1,659,393 -
Derivative liability 14 4,692,203 -
Total liabilities 17,237,685 20,738,978
Shareholders' equity
Share capital 15 56,698,237 50,740,292
Contributed surplus 1,249,418 1,521,845
Deficit (33,185,806) (38,879,338)
Accumulated other comprehensive
loss (803,736) (589,478)
Total shareholders' equity 23,958,113 12,793,321
Total liabilities and shareholders'
equity $ 41,195,798 $ 33,532,299
Commitments and contingencies (Note 17)
The accompanying notes are an integral part of these
consolidated financial statements.
On behalf of the Board:
signed "Gage Jull" Director signed "Maria Charash" Director
Gage Jull Maria Charash
Arrow Exploration Corp.
Consolidated Statements of Operations and Comprehensive Income
(Loss)
In United States Dollars
For the years ended December 31, Notes 2021 2020
Revenue
Oil and natural gas 20 $ 7,164,680 $ 5,594,503
Royalties 20 (652,187) (273,938)
6,512,493 5,320,565
Expenses
Operating 2,346,039 4,786,768
Administrative 4,881,113 4,321,947
Listing costs 15 583,972 -
Share based payments 15 (84,668) 1,169,766
Financing costs:
Accretion 13 132,807 524,477
Interest 9 797,943 238,230
Other 46,217 903,597
Foreign exchange gain (84,924) (248,139)
Depletion and depreciation 8 1,622,937 2,049,411
Impairment (reversal) of oil and
gas properties 8 (5,617,776) 27,263,110
Gain on the disposal of oil and
gas properties 8 - (1,059,474)
Gain on derivative liability 14 (467,507) -
Other income (2,018,382) (636,229)
2,137,771 39,313,464
Income (loss) before income tax 4,374,722 (33,992,899)
Income tax expense (recovery)
Current 16 149,040 64,193
Deferred 16 (1,467,850) (1,824,000)
(1,318,810) (1,759,807)
Net income (loss) 5,693,532 (32,233,092)
Other comprehensive loss
Foreign exchange (214,258) (48,085)
Net income (loss) and comprehensive
income (loss) $ 5,479,274 $ (32,281,177)
Earnings (loss) per share
- basic and diluted $ 0.06 $ (0.47)
Weighted average shares outstanding
Basic 94,553,391 68,674,602
Diluted 96,243,078 68,674,602
The accompanying notes are an integral part of these
consolidated financial statements.
Arrow Exploration Corp.
Statements of Changes in Shareholders' Equity
In United States Dollars
Accumulated
Share Contributed other
Capital Surplus comprehensive Deficit Total
loss Equity
Balance January
1, 2021 $50,740,292 $1,521,845 $(589,478) $(38,879,338) $12,793,321
Subscription of
common shares,
net 5,957,945 - - - 5,957,945
Net income for
the year - - - 5,693,532 5,693,532
Comprehensive
loss for the year - - (214,258) - (214,258)
Share based payments - (272,427) - - (272,427)
Balance December
31, 2021 $56,698,237 $1,249,418 $(803,736) $(33,185,806) $23,958,113
Accumulated
Share Contributed other
Capital Surplus comprehensive Deficit Total
loss Equity
Balance January
1, 2020 $50,740,292 $1,603,788 $(541,393) $(6,646,246) $45,156,441
Net loss for the
year - - - (32,233,092) (32,233,092)
Comprehensive
loss for the year - - (48,085) - (48,085)
Share based payments - (81,943) - - (81,943)
Balance December
31, 2020 $50,740,292 $1,521,845 $(589,478) $(38,879,338) $12,793,321
The accompanying notes are an integral part of these
consolidated financial statements.
Arrow Exploration Corp.
Consolidated Statements of Cash Flows
In United States Dollars
For the year ended December 31, 2021 2020
Cash flows used in operating activities:
Net income (loss) $ 5,693,532 $ (32,233,092)
Items not involving cash:
Deferred taxes (1,467,850) (1,824,000)
Share based payment (272,427) 1,169,766
Depletion and depreciation 1,622,937 2,049,411
Impairment (reversal) of oil and gas
properties (5,617,776) 27,263,110
Interest on leases 6,506 15,435
Interest on promissory note, net of
forgiveness 657,953 (69,317)
Accretion 132,807 524,477
Foreign exchange (gain) loss (195,852) 176,166
Gain on change in leases - (19,091)
Gain on the disposal of oil and gas
properties - (1,059,474)
Gain on derivative liability (467,507) -
Payment of asset decommissioning obligations (237,826) -
Changes in non--cash working capital
balances:
Restricted cash 262,489 (262,489)
Trade and other receivables 1,817,008 2,255,190
Taxes receivable 940,634 689,860
Deposits and prepaid expenses (244,917) 193,814
Inventory (217,759) 148,467
Accounts payable and accrued liabilities (6,918,112) (1,316,327)
Cash used in operating activities (4,506,160) (2,298,094)
Cash flows (used in) provided by investing
activities:
Additions to exploration and evaluation
assets (2,840) -
Additions to property and equipment (1,708,706) (889,928)
Proceeds on the sale of property and
equipment - 12,113,738
Changes in restricted cash (272,271) -
Changes in non-cash working capital (2,063,099) 1,551,785
Cash flows (used in) provided by investing
activities (4,046,916) 12,775,595
Cash flows provided by (used in) financing
activities:
Subscription of common shares, net of
costs 11,232,473 -
Payment of promissory note (3,111,491) -
Lease payments (24,535) (59,992)
Increase in short-term loan - 500,000
Payment of short-term loan - (500,000)
Increase in long-term debt - 30,942
Cash flows provided by (used in) financing
activities 8,096,447 (29,050)
Effect of changes in the exchange rate
on cash (138,067) (60,902)
Increase (decrease) in cash (594,696) 10,387,549
Cash, beginning of period 11,473,204 1,085,655
Cash, end of period 10,878,508 11,473,204
Supplemental information
Interest paid $ 336,804 $ 71,709
Taxes paid $ - $ -
The accompanying notes are an integral part of these
consolidated financial statements.
Arrow Exploration Corp.
Notes to the Consolidated Financial Statements
In United States Dollars
December 31, 2021
__________________________________________________________________________________________
1. Corporate Information
Arrow Exploration Corp. ("Arrow" or "the Company") is a public
junior oil and gas company engaged in the acquisition, exploration
and development of oil and gas properties in Colombia and in
Western Canada. The Company's shares trade on the TSX Venture
Exchange and the AIM Market of the London Stock Exchange plc under
the symbol AXL. The head office of Arrow is located at 550, 333 -
11th Ave SW, Calgary, Alberta, Canada, T2R 1L9 and the registered
office is located at 1600, 421 - 7th Avenue SW, Calgary, Alberta,
Canada, T2P 4K9.
2. Basis of Presentation
Statement of compliance
The Company prepares its consolidated financial statements in
accordance with International Financial Reporting Standards
("IFRS") as issued by the International Accounting Standards Board
(IASB). The consolidated financial statements have been approved
and authorized for issuance by the Board of Directors ("the Board")
on April 25, 2022.
Basis of measurement
These consolidated financial statements have been prepared on a
historical cost basis except for certain financial instruments that
have been measured at fair value and specifically noted within the
notes to these consolidated financial statements.
Functional and presentation currency
These consolidated financial statements are presented in United
States Dollars. The Canadian Dollar is the functional currency of
the Company and its wholly own subsidiary Arrow Holdings Ltd.
(AHL). The functional currency of the Company's subsidiaries
operating in Colombia and Panama is the United States Dollar.
Monetary assets and liabilities denominated in foreign
currencies are translated to the functional currency at the
period-end exchange rate. Non-monetary assets, liabilities,
revenues and expenses are translated at exchange rates at the
transaction date. Exchange gains or losses are included in the
determination of net income or loss in the consolidated statements
of operations and comprehensive income (loss).
Use of estimates and judgments
The preparation of consolidated financial statements requires
management to make estimates and use judgment regarding the
reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as at the date of the financial
statements and the reported amounts of revenues and expenses during
the periods presented. By their nature, estimates are subject to
measurement uncertainty and changes in such estimates in future
periods could require a material change in the financial
statements. Accordingly, actual results may differ from the
estimated amounts as future confirming events occur.
Significant estimates and judgments made by management in the
preparation of these financial statements are as follows:
Exploration and evaluation assets
Exploration and evaluation assets require judgment as to whether
future economic benefits exist, including the existence of proven
or probable reserves and the ability to finance exploration and
evaluation projects, where technical feasibility and commercial
viability has not yet been determined.
Depletion and depreciation
The amounts recorded for depletion and depreciation are based on
estimates of proved and probable reserves. Assumptions that are
valid at the time of reserve estimation may change materially as
new information becomes available. Changes in forward price
estimates, production and future development costs, recovery rates
or decommissioning costs may change the economic status of reserves
and may ultimately result in reserves used for measurement purposes
being removed from similar calculations in future reporting
periods.
Cash Generating Unit ("CGU")
IFRS requires that the Company's oil and natural gas properties
be aggregated into CGUs, based on their ability to generate largely
independent cash flows, which are used to assess the properties for
impairment. The determination of the Company's CGUs is subject to
management's judgment.
Impairment of Property, plant and equipment and exploration and
evaluation assets
Indicators of impairment are assessed by management using
judgment, considering future plans, market conditions and commodity
prices. In assessing the recoverability, each CGU's carrying value
is compared to its recoverable amount, defined as the greater of
its fair value less costs of disposal and value in use. In
assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of money
and the risks specific to the asset.
Decommissioning obligations
Measurement of the Company's decommissioning liability involves
estimates as to the cost and timing of incurrence of future
decommissioning programs. It also involves assessment of
appropriate discount rates, rates of inflation applicable to future
costs and the rate used to measure the accretion charge for each
reporting period. Measurement of the liability also reflects
current engineering methodologies as well as current and expected
future environmental legislation and standards.
Income taxes
The Company recognises deferred tax assets to the extent that it
is probable that the deductible temporary differences will reverse
in the foreseeable future and that sufficient taxable income will
be generated in the future to recover such deferred tax assets.
Assessing the recoverability of deferred tax assets requires the
Company to make significant estimates related to expectations of
future taxable income. Estimates of future taxable income are based
on forecast cash flows from operations and the application of
existing tax laws. To the extent that future cash flows and taxable
income differ significantly from estimates, the ability of the
Company to realise the net deferred tax assets recorded at the
reporting date could be impacted. In addition, future changes in
tax laws could limit the ability of the Company to obtain tax
deductions in future periods.
Provisions and contingencies
The Company recognizes provisions based on an assessment of its
obligations and available information. Any matters not included as
provisions are uncertain in nature and cannot be reasonably
estimated. The Company makes assumptions to determine whether
obligations exist and to estimate the amount of obligations that we
believe exist. In estimating the final outcome of litigation,
assumptions are made about factors including experience with
similar matters, past history, precedents, relevant financial,
scientific, and other evidence and facts specific to the matter.
This determines whether a provision or disclosure in the financial
statements is needed.
Stock-based compensation, warrants and derivative liability
The amounts recorded in respect of share purchase warrants
granted and the derivative liability for warrants issued are based
on the Company's estimation of their fair value, calculated using
assumptions regarding the life of the option or warrant, interest
rates and volatility. By their nature, these estimates and
assumptions are subject to uncertainty, and the actual fair value
of options or warrants may differ at any time.
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of
these consolidated financial statements are described below and
have been applied consistently by the Company.
Interests in joint arrangements
Certain of the Company's exploration and production activities
are regarded as joint operations and are conducted under joint
operating agreements, whereby two or more parties jointly control
the assets. These consolidated financial statements reflect only
the Company's share of these jointly controlled operations, and the
Company's proportionate share of the relevant revenue and
costs.
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial
statements of subsidiaries are included in the Consolidated
Financial Statements from the date that control commences until the
date that control ceases. The accounting policies of subsidiaries
have been changed when necessary to align them with the policies
adopted by the Group. Intra-group balances and transactions are
eliminated in preparing the consolidated financial statements.
Financial instruments
The Company considers whether a contract contains an embedded
derivative when it first becomes a party to it. Embedded
derivatives are separated from the host contract which is not
measured at fair value through profit or loss when the analysis
shows that the economic characteristics and risks of embedded
derivatives are not closely related to those of the host contract.
Financial assets and financial liabilities are recognized in the
Company's statement of financial position when the Company becomes
party to the contractual provisions of the instrument. Financial
assets are derecognized when the contractual rights to the cash
flows from the financial asset expire or when the contractual
rights to those assets are transferred. Financial liabilities are
derecognized when the obligation specified in the contract is
discharged, cancelled or expired.
Financial assets
Financial assets are classified as financial assets at fair
value through profit or loss or amortized cost, as appropriate. The
Company determines the classification of its financial assets at
initial recognition and, where allowed and appropriate,
re-evaluates this designation at each reporting date. The Company's
financial assets are comprised of cash, restricted cash, trade and
other receivables and deposits. Cash and restricted cash are
classified as financial assets at fair value through profit or
loss. Trade and other receivables, and deposits are classified and
measured at amortized cost using the effective interest, less any
impairment losses.
Financial liabilities
Financial liabilities are classified as financial liabilities at
fair value through profit or loss or amortized cost. The Company's
financial liabilities are comprised of accounts payable and accrued
liabilities, promissory note and long-term debt. These are
classified and measured at amortized cost using the effective
interest method.
Derivative liability
The non-compensation based warrants entitle the holder to
acquire a fixed number of common shares for a fixed British Pence
price per share. An obligation to issue shares for a price that is
not fixed in the Company's functional currency of Canadian Dollars,
and that does not qualify as a share-based payment, must be
classified as a derivative liability and measured at fair value
with changes recognized in the statements of operations and
comprehensive income (loss) as they arise. The Company has recorded
these changes as derivative gain (loss) in the statement of
operations and comprehensive income (loss). The transaction costs
associated with exercising of the warrants are expensed when
incurred.
Fair value hierarchy
The Company classifies the fair value of financial instruments
according to the following hierarchy based on the amount of
observable inputs used to value the instrument:
-- Level 1 - Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active
markets are those in which transactions occur in sufficient
frequency and volume to provide pricing information on an ongoing
basis.
-- Level 2 - Pricing inputs are other than quoted prices in
active markets included in Level 1. Prices in Level 2 are either
directly or indirectly observable as of the reporting date. Level 2
valuations are based on inputs, including quoted forward prices for
commodities, time value and volatility factors, which can be
substantially observed or corroborated in the marketplace.
-- Level 3 - Valuations in this level are those with inputs for
the asset or liability that are not based on observable market
data.
Share capital
Common shares are classified as equity. Incremental costs
directly attributable to the issue of common shares and options are
recognized as a deduction from share capital, net of any tax
effects.
Exploration and evaluation assets
Pre-license costs are recognized in the statement of operations
and comprehensive income (loss) as incurred. Exploration and
evaluation costs include the costs of acquiring undeveloped land
and drilling costs are initially capitalized until the drilling of
the well is complete and the results have been evaluated. The costs
are accumulated in cost centers by well, field or exploration area
pending determination of technical feasibility and commercial
viability. The technical feasibility and commercial viability of
extracting a mineral resource is considered to be determinable when
proved or probable reserves are determined to exist. If proved
and/or probable reserves are found, the drilling costs and
associated undeveloped land are transferred to property and
equipment. When exploration and evaluation assets are determined
not to be technically feasible and commercially viable, or the
Company decides not to continue with its activity, the
unrecoverable costs are charged to the consolidated statements of
operations and comprehensive income (loss) as pre-license expense
when occurs.
Property and equipment
Items of property and equipment, which include oil and gas
development and production assets, are measured at cost less
accumulated depletion, depreciation and accumulated impairment
losses. The cost of development and production assets includes:
transfers from exploration and evaluation assets, which generally
include the cost to drill the well and the cost of the associated
land upon determination of technical feasibility and commercial
viability; the cost to complete and tie-in the wells; facility
costs; the cost of recognizing provisions for future restoration
and decommissioning; geological and geophysical costs; and directly
attributable overheads. Development and production assets are
grouped into CGU's for impairment testing. Gains and losses on
disposal of an item of property and equipment, including oil and
natural gas interests, are determined by comparing the proceeds
from disposal with the carrying amount of property and equipment
and are recognized in the statement of operations and comprehensive
income (loss).
Subsequent costs:
Costs incurred subsequent to the determination of technical
feasibility and commercial viability and the costs of replacing
parts of property and equipment are recognized as oil and gas
assets only when they increase the future economic benefits
embodied in the specific asset to which they relate. All other
expenditures are expensed as incurred. Such capitalized oil and
natural gas assets generally represent costs incurred in developing
proved and/or probable reserves and bringing in or enhancing
production from such reserves, and are accumulated on a field or
geotechnical area basis. The carrying amount of any replaced or
sold component is derecognized. The costs of the day-to-day
servicing of property and equipment are recognized in operating
expenses as incurred.
Depletion and depreciation:
The net carrying value of development and production assets is
depleted using the unit of production method by reference to the
ratio of production in the period to the related proved plus
probable reserves, taking into account estimated future development
costs necessary to bring those reserves into production and the
estimated salvage value of the assets at the end of their useful
lives. Future development costs are estimated taking into account
the level of development required to produce the reserves. Proved
plus probable reserves are estimated annually by independent
qualified reserve evaluators and represent the estimated quantities
of crude oil, natural gas and natural gas liquids which geological,
geophysical and engineering data demonstrate with a specified
degree of certainty to be recoverable in future years from known
reservoirs and which are considered commercially producible.
Depreciation methods, useful lives and residual values are reviewed
at each reporting date.
Impairment
Financial assets
A financial asset is assessed at each reporting date to
determine whether there is any objective evidence that it is
impaired. A financial asset is considered to be impaired if
objective evidence indicates that one or more events have had a
negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at
amortized cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows
discounted at the original effective interest rate. Individually
significant financial assets are tested for impairment on an
individual basis. The remaining financial assets are assessed
collectively in groups that share similar credit risk
characteristics. All impairment losses are recognized in the
statement of operations and comprehensive income (loss). An
impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was
recognized. For financial assets measured at amortized cost the
reversal is recognized in the statement of operations and
comprehensive income (loss).
Non-financial assets
The carrying amounts of the Company's non-financial assets are
reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the
asset's recoverable amount is estimated. Exploration and evaluation
assets are also assessed for impairment prior to being transferred
to property and equipment.
For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (CGU). The
recoverable amount of an asset or a CGU is the greater of its value
in use and its fair value less costs of disposal. Fair value less
cost to dispose is determined as the amount that would be obtained
from the sale of a CGU in an arm's length transaction between
knowledgeable and willing parties. The fair value less cost to
dispose of oil and gas assets is generally determined as the net
present value of the estimated future cash flows expected to arise
from the continued use of the CGU, including any expansion
prospects, and its eventual disposal, using assumptions that an
independent market participant may take into account. These cash
flows are discounted by an appropriate discount rate which would be
applied by such a market participant to arrive at a net present
value of the CGU.
Value in use is determined as the net present value of the
estimated future cash flows expected to arise from the continued
use of the asset in its present form and its eventual disposal.
Value in use is determined by applying assumptions specific to the
Company's continued use and can only take into account approved
future development costs. Estimates of future cash flows used in
the evaluation of impairment of assets are made using management's
forecasts of commodity prices and expected production volumes. The
latter takes into account assessments of field reservoir
performance and includes expectations about proved and unproved
volumes, which are risk-weighted utilizing geological, production,
recovery and economic projections.
An impairment loss is recognized if the carrying amount of a CGU
exceeds its estimated recoverable amount. Impairment losses are
recognized in the statement of operations and comprehensive income
(loss). Impairment losses recognized in respect of CGU's are
allocated first to reduce the carrying amount of any goodwill
allocated to the CGU and then to reduce the carrying amounts of the
other assets in the CGU on a pro rata basis. Impairment losses
recognized in prior years are assessed at each reporting date to
determine if facts and circumstances indicate that the loss has
decreased or no longer exists. An impairment loss is reversed if
there has been a change in the estimates used to determine the
recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the
carrying amount that would have been determined, net of depletion
and depreciation, if no impairment loss had been recognized.
Share based compensation
The Company has a share based compensation plan for which the
compensation cost attributed to stock options granted is measured
at the fair value at the grant date and expensed over the vesting
period with a corresponding increase to contributed surplus. A
forfeiture rate is estimated on the grant date and is adjusted to
reflect the actual number of options or units that vest. Upon the
settlement of the stock options the previously recognized value in
contributed surplus is recorded as an increase to share
capital.
Share based compensation granted to non-employees is measured
based on the fair value of the goods or services received, except
in cases where this is not reliably measurable, and then the
intrinsic value of the equity instruments granted is used (i.e. the
average value of the Company's shares over the service period).
Share based compensation subject to performance vesting conditions
is recognized based on the Company's estimated probability of
achieving those performance vesting conditions determined at each
reporting date.
The grant date fair value of phantom shares and phantom stock
options granted to officers, employees and directors is recognized
as share based payment expense with a corresponding increase in
accrued liabilities on a graded vesting basis over the vesting
period. Subsequent to initial recognition, the phantom shares and
phantom stock options accrued liability is measured at fair
value.
Provisions
A provision is recognized if, as a result of a past event, the
Company has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are
determined by discounting the expected future cash flows at a
pre-tax risk-free rate that reflects current market assessments of
the time value of money and the risks specific to the liability.
Provisions are not recognized for future operating losses.
Decommissioning obligations
The Company's activities give rise to dismantling,
decommissioning and site disturbance remediation activities.
Provision is made for the estimated cost of abandonment and site
restoration and capitalized in the relevant asset category.
Decommissioning obligations are measured at the present value of
management's best estimate of the expenditure required to settle
the present obligation as at the reporting date. Subsequent to the
initial measurement, the obligation is adjusted at the end of each
period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation. The increase in the
provision due to the passage of time is recognized as accretion
(within finance expense) whereas increases/decreases due to changes
in the estimated future cash flows or changes in the discount rate
are capitalized. Actual costs incurred upon settlement of the
decommissioning obligations are charged against the provision to
the extent the provision was established.
Leases
Lease arrangements which meet the criteria of a lease are
recognized as right-of-use assets and lease obligation at the lease
commencement date. The right-of-use asset is initially measured at
cost. Subsequently, it is measured at cost less accumulated
depreciation and impairment losses and adjusted for certain
re-measurements of the lease obligation. The lease obligation is
measured at the present value of the lease payments outstanding at
the lease commencement date, discounted using the implicit rate,
and when not determinable, the Company's incremental borrowing
rate. The lease obligation is re-measured when there is a change in
estimated future payments arising from a change in a lease term,
index or rate, residual guarantee or purchase option. The
assessment of whether a renewal, extension, termination or purchase
option is reasonably certain to be exercised was considered, based
on facts and circumstances, and has the potential to significantly
impact the amount of right-of-use asset and lease obligation
recognized. The Company recognizes interest expense incurred under
finance leases over the lease term in the consolidated statements
of comprehensive income (loss) using the effective interest rate
method.
Revenue
The Company's revenues are primarily derived from the production
of petroleum and natural gas. Revenue from contracts with customers
is recognized when the Company satisfies a performance obligation
by physically transferring the product and control to a customer.
The Company satisfies its performance obligations at the point of
delivery of the product and not over a period of time. Revenue is
measured based on the consideration specified in contracts with
customers. Revenue is recorded net of any royalties when the amount
of revenue can be reliably measured and the costs incurred in
respect of the transaction can be measured reliably.
Finance expenses
Finance expense comprises interest expense on borrowings, fees
on letters of credit and accretion of the discount on
decommissioning obligations.
Income tax
Income tax expense is comprised of current and deferred tax.
Income tax expense is recognized in the statement of operations and
comprehensive income (loss) except to the extent that it relates to
items recognized directly in equity, in which case it is recognized
in equity. Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or substantively
enacted at the reporting date, and any adjustment to tax payable in
respect of previous years. Deferred tax is recognized on the
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for taxation purposes. Deferred tax is not recognized on the
initial recognition of assets or liabilities in a transaction that
is not a business combination. In addition, deferred tax is not
recognized for taxable temporary differences arising on the initial
recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to
be applied to temporary differences when they reverse, based on the
laws that have been enacted or substantively enacted by the
reporting date. Deferred tax assets and liabilities are offset if
there is a legally enforceable right to offset, and they relate to
income taxes levied by the same tax authority on the same taxable
entity, or on different tax entities, but they intend to settle
current tax liabilities and assets on a net basis or their tax
assets and liabilities will be realized simultaneously. A deferred
tax asset is recognized to the extent that it is probable that
future taxable profits will be available against which the
temporary difference can be utilized. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that
it is no longer probable that the related tax benefit will be
realized.
Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the
net income or loss attributable to common shareholders by the
weighted average number of common shares outstanding during the
period. Diluted earnings (loss) per share is determined by dividing
the net income (loss) attributable to common shareholders and the
weighted average number of common shares outstanding for the
effects of dilutive instruments such as options and warrants
granted. The number of shares included with respect to options is
computed using the treasury stock method.
Recent Accounting Standards
In 2020, the IASB published phase two of its amendments to IFRS
9, IAS 39, IFRS 7, IFRS 4 - Insurance Contracts and IFRS 16 -
Leases ("IFRS 16") to assist companies in applying IFRS Standards
when changes are made to contractual cash flows or hedging
relationships arising from the replacement of an interest rate
benchmark with an alternative benchmark rate from IBOR reform.
These amendments were adopted by the Company from January 1, 2021
but they did not have a material impact on the Consolidated
Financial Statements.
4. Restricted Cash
December December
31 , 31, 2020
2021
Colombia (i) $ 53,726 $ 316,216
Canada (ii) 678,827 406,556
Sub-total 732,553 722,772
Long-term portion (732,553) (460,283)
Current portion of restricted
cash $ - $ 262,489
(i) Restricted cash is comprised of a deposit held as collateral
to guarantee abandonment expenditures related to the Mateguafa and
Rio Cravo Este-1 wells in the Tapir block.
(ii) Pursuant to Alberta government regulations, the Company was
required to keep a $328,614 (CAD $416,600; 2020: 414,523) deposit
with respect to the Company's liability rating management ("LMR").
The deposit is held by a Canadian chartered bank with interest paid
to the Company on a monthly basis based on the bank's deposit rate.
The remaining $350,213 pertain to commercial deposits with
customers, lease and other deposits held in Canada.
5. Trade and other receivables
December December
31, 31, 2020
2021
Trade receivables, net of
advances $ 252,141 $ 99,061
Other accounts receivable 387,441 2,357,529
$ 639,582 $ 2,456,590
As at December 31, 2021, other accounts receivable include
$2,332 (December 31, 2020 - $2,185,890) receivable from a partner
in the Tapir block and corresponds to reimbursable capital
expenditures incurred on the Tapir block.
6. Taxes receivable
December December
31, 31, 2020
2021
Value-added tax (VAT) credits
recoverable $ 105,827 $ 932,282
Income tax withholdings and
advances, net 613,222 727,401
$ 719,049 $ 1,659,683
The VAT recoverable pertains to non-compensated value-added tax
credits originated in Colombia as operational and capital
expenditures are incurred. The Company is entitled to claim for the
reimbursement of these VAT credits.
7. Exploration and Evaluation
December December
31, 31, 2020
2021
Balance, beginning of the
period $ 6,961,667 $ 6,961,667
Additions, net 2,839 -
Balance, end of the period $ 6,964,506 $ 6,961,667
8. Property and Equipment
Oil and Gas Right of
Cost Properties Use and Total
Other Assets
Balance, December 31,
2019 $ 67,673,851 $ 374,426 $ 68,048,277
Additions 780,588 - 780,588
Oil and gas properties
disposed (38,018,095) - (38,018,095)
Change in right-of-use
assets (Note 10) - (192,321) (192,321)
Balance, December 31,
2020 $ 30,436,344 $ 182,105 $ 30,618,449
Additions 1,734,746 1,380 1,736,126
Decommissioning adjustment (10,173) - (10,173)
Balance, December 31,
2021 $ 32,160,917 $ 183,485 $ 32,344,402
Accumulated depletion
and depreciation and impairment
Balance, December 31,
2019 $ 11,423,360 $ 93,742 $ 11,517,102
Depletion and depreciation 1,995,375 61,893 2,057,268
Change in right-of-use
assets (Note 10) - (72,428) (72,428)
Impairment of oil and
gas properties 27,263,110 - 27,263,110
Accumulated depletion
associated with disposed
oil and gas properties (19,963,103) - (19,963,103)
Balance, December 31,
2020 $ 20,718,742 $ 83,207 $ 20,801,949
Depletion and depreciation 1,591,179 31,758 1,622,937
Reversal of impairment
losses of oil and gas
properties (5,617,776) - (5,617,776)
Balance, December 31,
2021 $ 16,692,145 $ 114,965 $ 16,807,110
Foreign exchange
Balance December 31,
2019 $ 221,322 $ (8,690) $ 212,632
Effects of movements
in foreign
exchange rates 118,042 4,524 122,566
Balance December 31,
2020 $ 339,364 $ (4,166) $ 335,198
Effects of movements
in foreign (20,038)
exchange rates (20,747) 709
Balance December 31,
2021 $ 318,617 $ (3,457) $ 315,160
Net Book Value
Balance December 31, 2020 $ 10,056,965 $ 94,732 $ 10,151,697
Balance December 31, 2021 $ 15,787,389 $ 65,063 $ 15,852,452
On December 30, 2020, the Company closed its previously
announced sale of its LLA-23 block to COG Energy Ltd. ("COG") for a
gross cash consideration of $12.1 million consisted of a firm
amount of $11.75 million plus sale adjustments agreed within the
parties. In addition to receiving the proceeds, Arrow has
transferred to COG its work obligations under various letters of
credit in place to guarantee work commitments on LLA-23, as well as
all the related underlying decommissioning and environmental
liabilities (see Note 12 and 13).
As at December 31, 2021, the Company reviewed its
cash-generating units ("CGU") for property and equipment and
determined that there were indicators of impairment reversal
previously recognized in its Tapir block in Colombia and its
Canadian assets mostly driven by the recovery in energy commodity
prices. The company prepared estimates of both the value in use and
fair value less costs of disposal of its CGUs of its CGUs and
determined that recoverable amounts exceeded their carrying value
and, therefore, an impairment loss reversal of $5,617,776 is
included in the consolidated statements of operations and
comprehensive income (loss) for the year ended December 31, 2021.
The following table outlines forecast benchmark prices and exchange
rates used in the Company's impairment test as at December 31,
2021:
Exchange AECO Spot
rate Brent Gas
Year $US / $Cdn US$/Bbl C$/MMBtu
2022 0.80 74.50 3.71
2023 0.80 72.00 3.28
2024 0.80 69.50 2.99
2025 0.80 71.00 3.10
2026 0.80 72.00 3.13
Thereafter (inflation 2.0%/yr 2.0%/yr
%)
The recoverable amounts were estimated at their fair value less
costs of disposal, based on the net present value of the future
cash flows from oil and gas reserves as estimated by the Company's
independent reserve evaluator at December 31, 2021. The fair value
less costs of disposal used to determine the recoverable amounts
are classified as Level 3 fair value measurements as certain key
assumptions are not based on observable market data but rather, the
Company's best estimate. The Company used a 17.5% discount rate,
which took into account risks specific to the Colombian CGUs and
inherent in the oil and gas business, and 15% discount rate for its
Canadian CGU, and provided the following recoverable values:
Recoverable Impairment
CGU Amount Reversal
Canada 5,036,655 1,435,201
Tapir 9,147,575 4,182,575
5,617,776
As at March 31, 2020, the Company reviewed its CGUs and
determined that there were indicators of impairment present in its
Colombian assets related to the decrease in prices and reserves.
The company prepared estimates of both the value in use and fair
value less costs of disposal of its CGUs and it was determined that
carrying value of each CGU exceeded its recoverable amount and,
therefore, an impairment loss of $27,263,110 is included in the
consolidated statements of operations and comprehensive income
(loss) for the year ended December 31, 2020. The following table
outlines forecast benchmark prices and exchange rates used in the
Company's impairment test as at March 31, 2020:
Exchange Brent
rate
Year $US / $Cdn US$/Bbl
2020 (nine months) 0.71 32.00
2021 0.72 42.00
2022 0.73 51.00
2023 0.75 58.00
2024 0.75 62.00
2025 0.75 63.24
Thereafter (inflation 0.75 2.0%/yr
%)
The recoverable amounts of the Colombian CGUs at March 31, 2020
were estimated at their fair value less costs of disposal, based on
the net present value of the future cash flows from oil and gas
reserves as estimated by the Company's independent reserve
evaluator at December 31, 2019 adjusted for production and future
pricing changes during the three months ended March 31, 2020,
except for the LLA-23 CGU which used observable market value from
bidding offers received from independent third parties. The fair
value less costs of disposal used to determine the recoverable
amounts are classified as Level 3 fair value measurements as
certain key assumptions are not based on observable market data but
rather, the Company's best estimate. The Company used a 17.5%
discount rate for the March 31, 2020 impairment test, which took
into account risks specific to the Colombian CGUs and inherent in
the oil and gas business, and provided the following recoverable
values:
Recoverable Impairment
CGU Amount Loss
LLA-23 11,500,000 12,098,000
Capella /
OMBU - 10,690,000
Tapir 5,390,000 4,475,110
27,263,110
9. Promissory Note
The promissory note was issued to Canacol Energy Ltd.
("Canacol") as partial consideration in the acquisition of Carrao
Energy S.A. from Canacol. The promissory note bears interest at 15%
per annum, was initially due on January 28, 2019 and has been
subsequently amended and extended. On October 18, 2021, Arrow and
Canacol entered into a Seventh Amended and Restated Promissory Note
agreement. The principal amendments are the following:
- The new principal amount of the promissory note is $6,026,166
- On or before October 31, 2021, the Company shall make a
payment of C$ 3,900,000 plus all Canacol's expenses incurred in
connection with this amendment and related matters;
- On or before December 31, 2022, the Company shall make a
payment equal to 50% of the total amount outstanding of interest
and principal; and
- The remaining balance of principal and interest shall be paid no later than June 30, 2023
This amendment also provided that, in the event that the Company
made the payment due on October 31, 2021, Canacol agreed to forgive
$658,654 for excess pipeline shipping costs, as a result of the
settlement of the OBC pipeline dispute (see note 17), which were
recognized as other income in the statement of operations and
comprehensive income (loss). On October 27, 2021, the Company paid
$3,111,491 (C$3,900,000) to Canacol as stipulated in this seventh
amendment.
On August 3, 2020, the Company entered into a Fifth Amended and
Restated Promissory Note with Canacol. Among other amendments,
Canacol has agreed to forgive $918,000 of accrued interest to date,
in exchange for the Company providing full and perfected security
to the Canacol over the shares of its operating subsidiaries in
Panama. The interest forgiven has been recognized as interest in
the statement of operations and comprehensive loss for the year
ended December 31, 2020.
The Company has granted a general security interest to Canacol
for the obligations under the Promissory Note.
10. Lease Obligations
A reconciliation of the discounted lease obligation is set forth
below:
2021 2020
Obligation, beginning of the period $ 70,842 $ 260,197
Changes in existing lease 1,381 (138,984)
Lease payments (24,535) (59,992)
Interest 6,506 15,435
Effects of movements in foreign
exchange rates 498 (5,814)
Obligation, end of the year $ 54,692 $ 70,842
Current portion $ 20,258 $ 17,279
Long-term portion 34,434 53,563
$ 54,692 $ 70,842
As at December 31, 2021, the Company has the following future
commitments associated with its office lease obligations:
Less than one year $ 24,816
2 - 5 years 37,223
Total lease payments 62,039
Amounts representing interest over
the term (7,347)
Present value of the net obligation $ 54,692
During 2020, the Company renegotiated its remaining lease
agreement to reduce its leased corporate space and its related
future lease obligation. As a result, the Company reduced its
right-of-use assets in $119,893 (net) and its lease obligation in
$138,984, and it recognized a gain in change of lease for $19,091
in the consolidated statement of operations and comprehensive
income (loss).
11. Long-term debt
During 2020, the Company received $31,552 (CAD$40,000) from the
Canadian Emergency Business Account (CEBA) program implemented by
the government of Canada to provide support to small businesses
affected by the COVID-19 pandemic. The loan does not bear any
interest until December 2022 and is subject to a 25% forgiveness if
the full balance is repaid before that date.
12. Other Liabilities
The other liabilities of the Company relate to an environmental
fee in Colombia that is levied on capital projects. The fee is
calculated as 1% of the project cost. The program is administered
by the Colombian National Authority of Environmental Licences
("ANLA") and is levied on projects that utilize surface water or
deep water wells that may have an impact on the environment. The
funds are generally used in the affected communities for purposes
of land purchases, biomechanical works (e.g. containment walls in
rivers), reforestation, research projects and others. At December
31, 2021 the Company had provided for $177,500 (December 31, 2020 -
$177,500) for the environmental fee.
13. Decommissioning Liability
The following table presents the reconciliation of the beginning
and ending aggregate carrying amount of the obligation associated
with the decommissioning of oil and gas properties.
December 31, December
31, 2020
2021
Obligation, beginning of the year $ 2,584,907 $ 8,173,222
Change in estimated cash flows (10,173) (109,864)
Payments or settlements (237,826) -
Liabilities disposed - (6,016,514)
Accretion expenses 132,807 524,477
Effects of movements in foreign
exchange rates 524 13,586
Obligation, end of the year $ 2,470,239 $ 2,584,907
T he obligation was calculated using a risk-free discount rate
range of 1.00% to 2.00% in Canada (2020: 1.50% to 2.75%) and 8.46%
in Colombia (2020: 5.90%) with an inflation rate of 2.0% and 4.5%,
respectively (2020: 2.0% and 2.5%). It is expected that the
majority of costs are expected to occur between 2022 and 2033. The
undiscounted amount of cash flows, required over the estimated
reserve life of the underlying assets, to settle the obligation,
adjusted for inflation, is estimated at $4,222,717 (2020:
$4,072,683) .
14. Derivative liability
Derivative liability includes warrants issued and outstanding as
follows:
2021 2020
Warrants Number Amounts Number Amounts
Balance beginning of
the year - $ - - $ -
Issued in AIM financing
(Note 15) 70,474,768 5,124,985 - -
Issues in private
placement (Note 15) 1,999,938 149,543 - -
Fair value adjustment - (582,225) - -
Balance end of the
year 72,474,706 $ 4,692,303 - $ -
Each warrant is exercisable at GBP0.09 per new common share for
24 months from the issuance date and are measured at fair value
quarterly using the Black-Scholes options pricing model. The fair
value of warrants at October and November 2021, and December 31,
2021 was estimated using the following assumptions:
October and
November December 31,
2021 2021
Number outstanding
re-valued warrants 72,474,768 72,474,706
Fair value of warrants
outstanding GBP 0.053 GBP 0.048
Risk free interest
rate 0.50% 0.50%
Expected life 2.00 years 1.82 years
Expected volatility 160% 160%
The following table summarizes the warrants outstanding and
exercisable at December 31, 2021:
Number of
warrants Exercise price Expiry date
GBP 0.09 October 25,
70,474,768 2023
GBP 0.09 November 23,
1,999,938 2023
72,474,706
15. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
2021 2020
Common shares Shares Amounts Shares Amounts
Balance beginning of
the year 68,674,602 $50,740,292 68,674,602 $50,740,292
Issued in AIM financing
(i) 140,949,565 12,086,423 - -
Issued in private
placement (ii) 3,765,476 308,501 - -
Allocated to warrants
(Note 14) - (5,274,528) - -
Share issue costs
(iii) - (1,162,451) - -
Balance at end of the
year 213,389,643 56,698,237 68,674,602 $50,740,292
(i) On October 2021, the Company raised approximately $12
million (C$15.0 million), through a placing and subscription for
new common shares with new investors, Canacol Energy Ltd.
(Canacol), and executive management (the Fundraising) as part of
the Company's shares admission to trade on the AIM Market of the
London Stock Exchange plc. The Fundraising consisted on placement
and subscription of 140,949,565 new common shares at an issue price
of GBP0.0625 (C$0.106125) per new common share. The Company's
executive management invested approximately C$ 1.41 million and
Canacol participated in the subscription to hold 19.9% of the
enlarged share capital. Investors received one warrant for every
two new common shares, exercisable at GBP0.09 per new common share
for 24 months from the AIM admission date (October 25, 2021).
(ii) On November 24, 2021, the Company announced that it has
closed a private placement of C$395,375 for issuance of 3,765,476
new common shares and 1,999,938 warrants (see Note 14).
(iii) During 2021, the Company recognized share issue costs for
$1,162,451 and listing costs of $583,972 associated with the
financings completed in 2021 as per above.
(b) Stock options:
The Company has a stock option plan that provides for the
issuance to its directors, officers, employees and consultants
options to purchase a number of non-transferable common shares not
exceeding 10% of the common shares that are outstanding. The
exercise price is based on the closing price of the Company's
common shares on the day prior to the day of the grant. A summary
of the status of the Company stock option plan as at December 31,
2021 and 2020 and changes during the respective periods ended on
those dates is presented below:
December 31, 2021 December 31, 2020
Weighted Weighted
average average
exercise exercise
Number Price Number price
Stock Options of options (CAD $) of options (CAD $)
Beginning of period 6,859,000 $0.40 5,470,000 $0.99
Granted 11,400,000 $0.13 4,319,000 $0.05
Expired/Forfeited (1,145,000) $1.04 (2,930,000) $0.96
End of period 17,114,000 $0.18 6,859,000 $0.40
Exercisable, end
of period 2,969,669 $0.46 1,530,001 $1.06
Weighted
Exercise Average Number
Price Remaining Exercisable
Date of Number (CAD Contractual Date of December
Grant Outstanding $) Life Expiry 31, 2020
October Oct. 22,
22, 2018 1,050,000 $1.15 6.81 years 2028 1,050,000
May 3,
May 3, 2019 345,000 $0.31 7.34 years 2029 230,002
March 20, March 20,
2020 1,200,000 $0.05 8.22 years 2030 400,000
April 13, April 13,
2020 2,775,000 $0.05 8.29 years 2030 1,175,000
June 18, June 18,
2020 344,000 $0.05 8.47 years 2030 114,667
December June 13,
13, 2021 3,799,998 $0.13 1.45 years 2023 -
December June 13,
13, 2021 3,799,998 $0.13 2.45 years 2024 -
December June 13,
13, 2021 3,800,004 $0.13 3.45 years 2025 -
Total 17,114,000 $0.18 4.29 years 2,969,669
During 2021, the Company recognized an income of $272,427 (2020
- income of $81,943) as share based payments expense, with a
corresponding decrease in the contributed surplus account.
(c) Phantom shares:
During 2020, the Company adopted a phantom share program for
compensation of its Directors and executives and granted 13,000,000
phantom common shares of the Company which are vested immediately
at CAD $0.00 per share. During 2021, the Company recognized
$259,527 (2020: $1,163,916) as share based payments expense and a
total $1,761,667 were used as part of management's subscription of
shares issued in the AIM financing (see Common Shares section).
(d) Phantom stock options:
During 2020, the Company adopted a phantom stock option program
for compensation of its executives and granted 1,681,000 phantom
stock options of the Company which are vested in equal parts over
the three following years after granted. During 2021, the Company
recognized $34,450 (2020: $87,794) as share based payments expense
and a total $151,290 were used as part of management's subscription
of shares issued in the AIM financing (see Common Shares
section).
16. Income taxes
The provision for income taxes varies from the amount that would
be computed by applying the expected tax rate to income loss before
income taxes. The principal reasons for differences between such
expected income tax expense and the amount actually recorded are as
follows:
2021 2020
Income (loss) before income taxes $ 4,374,722 $ (33,992,899)
Corporate income tax rate 23% 24%
Computed expected tax expense (recovery) $ 1,006,186 $ (8,158,296)
Increase (decrease) in income taxes
resulting from:
Share based compensation 19,474 280,744
(Recognized)/unrecognized deferred
tax benefits (3,871,436) 5,116,588
Tax rate difference on foreign
jurisdictions 783,741 (2,487,409)
Other permanent difference (332,528) (363,362)
Foreign exchange and others 1,075,753 3,851,928
Income tax recovery $ (1,318,810) $ (1,759,807)
During 2021, the Company recognized a deferred income tax asset
of $4,839,785 and a deferred tax liability of $3,371,936 which
represents the tax impact of temporary differences and management's
estimation of current tax benefits that would be realized to
compensate future taxable income, due to an increase in forecast
commodity prices, at substantially enacted tax rates. In Colombia,
the enacted tax rate is 31% for 2021, and the Colombian government
mandated an increase in the tax rate to 35% from 30% beginning on
January 1, 2022. The components of the Company's deferred income
tax assets and liabilities are as follows:
As at December 31 2021 2020
Property and equipment $ (2,421,172) $ (624,325)
Decommissioning liabilities and
other provisions 637,785 624,325
Carryforward non-capital losses 3,251,236 -
Net change in deferred tax $ 1,467,850 $ -
Deferred tax liability 3,371,935 -
Deferred tax asset $ 4,839,785 $ -
At December 31, 2021, the Company had non-capital losses carried
forward of approximately $63,875,000 (2020 - $48,492,000) available
to reduce future years taxable income. These losses commence
expiring in 2029. At December 31, 2021, the Company had income tax
credits and benefits of approximately $54,586,346 (2020 -
$47,527,000) related to Canada and Colombia that were not
recognized in the financial statements due to uncertainties
associated with its ability to utilize these balances in the
future.
17. Commitments and Contingencies
Exploration and Production Contracts
The Company has entered into a number of exploration contracts
in Colombia which require the Company to fulfill work program
commitments and issue financial guarantees related thereto. In
aggregate, the Company has outstanding exploration commitments at
December 31, 2021 of $17.8 million. T he Company, in conjunction
with its partners, have made applications to cancel $15.5 million
($5.8 million Arrow's share as per table below) in commitments on
the Macaya and Los Picachos blocks. The remaining commitments are
expected to be satisfied by means of seismic work, exploration
drilling and farm-outs. Presented below are the Company's
exploration and production contractual commitments at December 31,
2021:
Less than
Block 1 year 1-3 years Thereafter Total
COR-39 - 12,000,000 - 12,000,000
Los Picachos - 1,970,000 - 1,970,000
Macaya - 3,830,000 - 3,830,000
Total - 17,800,000 - 17,800,000
Contingencies
From time to time, the Company may be involved in litigation or
has claims sought against it in the normal course of business
operations. Management of the Company is not currently aware of any
claims or actions that would materially affect the Company's
reported financial position or results from operations. Under the
terms of certain agreements and the Company's by-laws the Company
indemnifies individuals who have acted at the Company's request to
be a director and/or officer of the Company, to the extent
permitted by law, against any and all damages, liabilities, costs,
charges or expenses suffered by or incurred by the individuals as a
result of their service.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was party to an agreement with Canacol that entitles
it to a 0.5% interest in OBC, which owns a pipeline system intended
to link Llanos basin oil production to the Caño Limon oil pipeline
system in Colombia. Likewise, Canacol was in litigation with OBC in
relation to ship or pay obligations that were terminated by Canacol
in July 2018 under force majeure. On March 27, 2019, the court in
charge of the case ruled in favor of the OBC and opined that the
obligations under the ship or pay contract remained in force.
Subsequently, on May 13, 2019, Canacol filed an appeal at the State
Council, a higher-level court in the Colombian judiciary system,
requesting annulment of this ruling. Likewise, in July 2019, OBC
has also started litigation against Canacol for not honouring its
ship or pay obligations under the contract. During 2021,
negotiations between the parties involved were finally settled and
approved by the courts and the Company has been cleared from any
past and future ship or pay obligations associated with OBC.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters
of Credit ("LC's") outstanding totaling $5.2 million to guarantee
work commitments on exploration blocks and other contractual
commitments. Of the total, approximately $4.1 million has been
guaranteed by Canacol. Under an agreement, Canacol will continue to
provide security for Arrow's Letters of Credit providing that Arrow
uses all reasonable efforts to replace the LC's. In the event the
Company fails to secure the renewal of the letters of credit
underlying the ANH guarantees, or any of them, the ANH could decide
to cancel the underlying exploration and production contract for a
particular block, as applicable. In this instance, the Company
could risk losing its entire interest in the applicable block,
including all capital expended to date and could possibly also
incur additional abandonment and reclamation costs if applied by
the ANH.
Current Outstanding Letters of Credit
Contract Beneficiary Issuer Type Amount
(US $) Renewal Date
SANTA ISABEL April 14,
ANH Carrao Energy Abandonment $643,423 2022
Canacol and Financial June 30,
ANH Carrao Capacity $1,672,162 2022
CORE - June 30,
39 ANH Canacol Compliance $2,400,000 2022
Financial April 14,
OMBU ANH Carrao Energy Capacity $436,300 2022
Total $5,151,885
18. Financial Instruments
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit and foreign exchange risks. The
Company manages its exposure to these risks by operating in a
manner that minimizes its exposure to the extent practical.
(a) Commodity price risk
Commodity price risk is the risk that the fair value or future
cash flows of a financial instrument will fluctuate as a result of
changes in commodity prices. Lower commodity prices can also impact
the Company's ability to raise capital. Commodity prices for crude
oil are impacted by world economic events that dictate the levels
of supply and demand. From time to time the Company may attempt to
mitigate commodity price risk through the use of financial
derivatives.
i) Financial Derivative Contracts
During 2020, the Company had one financial derivative contract
in order to manage commodity price risk. This instrument was not
used for trading or speculative purposes. Arrow had not designated
its financial derivative contract as effective accounting hedge,
but the Company considered the commodity contract to be an
effective economic hedge. The financial derivative contract was
recorded on the statements of financial position at fair value,
with the changes in fair value being recognized as an unrealized
gain or loss in the statement of operations and comprehensive
income (loss). This contract was terminated during 2020.
The estimated fair value of the derivative financial instrument
in Level 2 at each measurement date have been determined based on
appropriate internal valuation methodologies and/or third party
indications. Level 2 fair values determined using valuation models
require the use of assumptions concerning the amount and timing of
future cash flows and discount rates. In determining these
assumptions, the Company primarily relied on external,
readily-observable quoted market inputs as applicable, including
crude oil forward benchmark commodity prices and volatility, and
discounted to present value as appropriate. The resulting fair
value estimates may not necessarily be indicative of the amounts
that could be realized or settled. The realized gain on risk
management activities is included as part of revenues in the
consolidated statements of operations and comprehensive income
(loss). The gains on risk management activities for the period are
comprised as follows:
For the years
ended
December 31
2021 2020
Realized risk management gain
on commodity contract settled $ - $ 1,288,523
Unrealized gain on commodity contract - -
outstanding
$ - $ 1,288,523
(b) Credit Risk
Credit risk reflects the risk of loss if counterparties do not
fulfill their contractual obligations. The majority of the
Company's account receivable balances relate to petroleum and
natural gas sales and balances receivables with partners in areas
operated by the Company. The Company's policy is to enter into
agreements with customers that are well established and well
financed entities in the oil and gas industry such that the level
of risk is mitigated. In Colombia, a significant portion of the
sales is with a producing company under an existing sale/offtake
agreement with prepayment provisions and priced using the Brent
benchmark. The Company's trade account receivables primarily relate
to sales of crude oil and natural gas, which are normally collected
within 25 days (in Canada) and up to 15 days in advance (in
Colombia) of the month of production. Other accounts receivable
mainly relate to balances owed by the Company's partner in one of
its blocks, and are mainly recoverable through production. The
Company has historically not experienced any collection issues with
its customers and partners.
(c) Market Risk
Market risk is comprised of two components: foreign currency
exchange risk and interest rate risk.
i) Foreign Currency Exchange Risk
The Company operates on an international basis and therefore
foreign exchange risk exposures arise from transactions denominated
in currencies other than the United States dollar. The Company is
exposed to foreign currency fluctuations as it holds cash and
incurs expenditures in exploration and evaluation and
administrative costs in foreign currencies. The Company incurs
expenditures in Canadian dollars, United States dollars and the
Colombian peso and is exposed to fluctuations in exchange rates in
these currencies. There are no exchange rate contracts in
place.
ii) Interest Rate Risk
Interest rate risk is the risk that future cash flows will
fluctuate as a result of changes in market interest rates. The
Company is not currently exposed to interest rate risk as it
borrows funds at a fixed coupon rate of 15% on the promissory
notes.
(d) Liquidity Risk
Liquidity risk includes the risk that, as a result of the
Company's operational liquidity requirements:
-- The Company will not have sufficient funds to settle a transaction on the due date;
-- The Company will be forced to sell financial assets at a
value which is less than what they are worth; or
-- The Company may be unable to settle or recover a financial asset.
The Company's approach to managing its liquidity risk is to
ensure, within reasonable means, sufficient liquidity to meet its
liabilities when due, under both normal and unusual conditions,
without incurring unacceptable losses or jeopardizing the Company's
business objectives.
During 2020, one of the Company's subsidiary secured a bridge
loan with CEDCO (a subsidiary of COG Energy Ltd., the LLA-23
purchaser) for $500,000 which assisted the Company in meeting its
near-term financial obligations. The loan had an annual interest
rate of 6% and was repayable upon the earliest of: (i) the closing
of the LLA-23 sale, or (ii) the receipt of certain Value-Added Tax
("VAT") refunds in Colombia, or (iii) where the closing of the
LLA-23 sale is delayed after December 31, 2020 or does not occur,
or where is terminated, either in cash or through the delivery of
an equivalent value of crude oil produced from the LLA-23 Block and
the Tapir Block. The balance of this bridge loan and interest was
fully paid in November 2020.
The Company prepares annual capital expenditure budgets which
are monitored regularly and updated as considered necessary.
Petroleum and natural gas production is monitored daily to provide
current cash flow estimates and the Company utilizes authorizations
for expenditures on projects to manage capital expenditures. Any
funding shortfall may be met in a number of ways, including, but
not limited to, the issuance of new debt or equity instruments,
further expenditure reductions and/or the introduction of joint
venture partners.
(e) Capital Management
The Company's objective is to maintain a capital base sufficient
to provide flexibility in the future development of the business
and maintain investor, creditor and market confidence. The Company
manages its capital structure and makes adjustments in response to
changes in economic conditions and the risk characteristics of the
underlying assets. The Company considers its capital structure to
include share capital, bank debt (when available), promissory notes
and working capital, defined as current assets less current
liabilities. In order to maintain or adjust the capital structure,
from time to time the Company may issue common shares or other
securities, sell assets or adjust its capital spending to manage
current and projected debt levels. The Company monitors leverage
and adjusts its capital structure based on its net debt level. Net
debt is defined as the principal amount of its outstanding debt,
less working capital items. In order to facilitate the management
of its net debt, the Company prepares annual budgets, which are
updated as necessary depending on varying factors including current
and forecast crude oil prices, changes in capital structure,
execution of the Company's business plan and general industry
conditions. The annual budget is approved by the Board of Directors
and updates are prepared and reviewed as required.
The Company's capital includes the following:
December 31, December 31,
2021 2020
Working capital, before promissory
note $ 8,006,074 $ (1,932,940)
Non-Current portion of promissory
note (1,659,393) -
$ 6,346,681 $ (1,932,940)
19. Key Management Personnel
The Company has determined that key management personnel
consists of its executive management and its Board of Directors. In
addition to the salaries and fees paid to key management, the
Company also provides compensation to both groups under its
share-based compensation plans. Compensation expenses paid to key
management personnel were as follows:
Years ended December 31
2021 2020
Salaries, severances and director
fees $ 2,410,920 $ 447,152
Share based payments 227,659 1,169,766
$ 2,638,579 $ 1,616,918
20. Segmented Information
The Company has two reportable operating segments: Colombia and
Canada. The Company, through its operating segments, is engaged
primarily in oil exploration, development and production, and the
acquisition of oil and gas properties. The Canadian segment is also
considered the corporate segment. The following tables show
information regarding the Company's segments for the years ended
and as at December 31:
Year ended December 31, Colombia Canada Total
2021
Revenue:
Oil Sales $ 6,199,231 $ - $6,199,231
Natural gas and liquid
sales - 965,449 965,449
Royalties (567,633) (84,554) (652,187)
Expenses (3,282,997) (4,472,550) (7,755,547)
Impairment reversal of
oil and gas properties 4,182,575 1,435,201 5,617,776
Taxes 1,318,810 - 1,318,810
Net income (loss) $7,849,986 $(2,156,454) $5,693,532
As at December 31, 2021 Colombia Canada Total
Current assets $5,198,545 $7,607,957 $12,806,502
Non-current:
Deferred income taxes 4,839,785 - 4,839,785
Restricted cash 53,726 678,827 732,553
Exploration and evaluation 6,964,506 - 6,964,506
Property, plant and equipment 9,876,172 5,976,280 15,852,452
Total Assets $26,932,734 $14,263,064 $41,195,798
Current liabilities $ 1,550,665 $3,249,763 $4,800,428
Non-current liabilities:
Long-term debt - 31,552 31,552
Lease obligation - 34,434 34,434
Other liabilities 177,500 - 177,500
Deferred income taxes 3,371,935 - 3,371,935
Decommissioning liability 1,822,243 647,996 2,470,239
Promissory note - 1,659,393 1,659,393
Derivative liability - 4,692,203 4,692,203
Total liabilities $6,922,344 $10,315,341 $17,237,685
Year ended December 31, Colombia Canada Total
2020
Revenue:
Oil Sales $5,179,819 $ - $5,179,819
Natural gas and liquid
sales - 414,684 414,684
Royalties (236,816) (37,122) (273,938)
Expenses (9,831,878) (3,277,950) (13,109,828)
Impairment of oil and
gas properties (27,263,110) - (27,263,110)
Gain on sale of oil and
gas properties 1,059,474 - 1,059,474
Taxes 1,759,807 - 1,759,807
Net loss $(29,332,704) $(2,900,388) $(32,233,092)
As at December 31, 2020 Colombia Canada Total
Current assets $ 14,859,186 $1,099,466 $15,958,652
Non-current:
Restricted cash 53,727 406,556 460,283
Exploration and evaluation 6,961,667 - 6,961,667
Property and equipment 7,016,982 3,134,715 10,151,697
Total Assets $ 28,891,562 $4,640,737 $33,532,299
Current liabilities $ 8,622,577 $9,269,015 $17,891,592
Non-current liabilities:
Other liabilities 177,500 - 177,500
Lease obligation - 53,563 53,563
Decommissioning liability 2,081,083 503,824 2,584,907
Long-term debt - 31,416 31,416
Total liabilities $ 10,881,160 $9,857,818 $20,738,978
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FR XELLLLZLLBBV
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