TIDMAXL
RNS Number : 9821X
Arrow Exploration Corp.
02 May 2023
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 ANNOUNCES 2022 AUDITED YEAR AND Q4 2022 RESULTS, FILING OF
AUDITED FINANCIAL STATEMENTS, MD&A AND RESERVES REPORT
CALGARY, May 2, 2023 - Arrow Exploration Corp. (AIM: AXL; TSXV:
AXL) ("Arrow" or the "Company") the high-growth operator with a
portfolio of assets across key Colombian hydrocarbon basins,
announces the filing of its Annual Audited Financial Statements and
Management's Discussion and Analysis ("MD&A") for the quarter
and year ended December 31, 2022 and the filing of its 2022
year-end reserves report, which are available on SEDAR (
www.sedar.com ) and will also shortly be available on Arrow's
website at www.arrowexploration.ca .
Full Year Highlights:
-- Recorded $25 million of total oil and natural gas revenue,
net of royalties (FY 2021: $6.5 million).
-- Generated record results from operations and an increase in
production since its listing on AIM in October 2021:
o FY 2022 EBITDA of $12.5 million (FY 2021: $0.8 million), with
Q4 2022 EBITDA of $4.5 million compared to $0.5 million in Q4
2021.
o FY 2022 average corporate production up 223% to 1,345 boe/d
(FY 2021: 461 boe/d) with Q4 average corporate production of 1,736
boe/d compared to Q4 2021 140 boe/d and Q3 2022 1,503 boe/d.
-- Realized FY 2022 corporate operating netbacks of $42.40/boe,
and $41.95/boe in Q4 2022, due in each case to increased production
and better prices of crude oil.
-- Cash position of $13 million at the end of 2022.
-- Generated positive operating cashflows in Q4 2022 of $7.5 million.
-- Proven and probable reserves at year-end 2022 increased 4% to
7.69 MMboe; representing a reserve replacement ratio of 164%.
-- Drilled two successful wells at Rio Cravo Este (RCE)
resulting in material production addittions. Successfully completed
two workovers in the RCE-1 and RCS-1 wells at Rio Cravo. These
operations targeted additional hydrocarbon bearing zones which
resulted in material production additions.
-- The East Pepper Montney gas well was tied in adding to
Canadian production. This resulted in reserve reclassification and
displays the commercial viability of drilling and completing
Montney gas wells in the Hinton Area, all of which were part of the
2022 capital program.
-- All operations delivered safely, with no accidents or environmental incidents.
Post Period End Highlights:
-- So far in 2023, the Company has drilled three development
wells on the Tapir Block, including RCE-5, RCE-4 and RCE-3, which
are all currently producing at restricted rates. Ramping production
up slowly prevents early water breakthrough in each Rio Cravo
well.
-- The 130 square kilometer 3D seismic at West Tapir has
completed and is in the hands of processors. It will take three to
four weeks to refine the data and likely another two to three weeks
to complete data interpretation. This is one of the larger 3-D
surveys done in the last few years in the Llanos Basin. Our 2-D
data set has identified a number of prospective structures. The 3-D
shoot will refine these to prospect status and provide drilling
running room for the next one to two years.
Outlook
-- Arrow has a fully funded 2023 work program totaling US$32
million targeting 10 wells. The three final Carbonera-7 (C7)wells
at RCE have been completed and are being ramped up slowly to manage
the reservoir.
-- The first Carrizales Norte well will spud shortly. Arrow then
anticipates an additional two wells to be drilled at Carrizales
Norte by year-end.
-- Arrow will then mobilize back to the RCE pad to drill at
least 2 wells targeting the Gacheta formation which was
successfully tested at commercial rates in RCE 2.
-- Arrow also plans to drill 2 development wells at the Oso
Pardo Block in the Middle Magdalena Basin.
Marshall Abbott, CEO of Arrow Exploration Corp., commented:
" 2022 was a fantastic year all around for the Company. We saw
growth in production, revenue and income and our balance sheet is
in a very healthy position to support the large capital program
planned for 2023. Looking ahead, Arrow has multiple near-term
catalysts capable of delivering material value. Currently, Arrow is
ready to spud the first well at Carrizales Norte which could have a
significant impact on the Company in both production and reserves
as well as establishing a new core area. The 3D seismic West Tapir
project has now completed shooting and is currently being processed
and is expected to further evaluate 2D recognized fault prospects.
Looking further ahead, in 2024 the Company is planning a second 3D
project on the east side of the Tapir block to evaluate other 2D
recognized prospects. The Arrow team continues to strive towards
excellence and increasing shareholder value."
FINANCIAL AND OPERATING HIGHLIGHTS
Three months Year Three months Year ended
ended December ended ended December December
(in United States dollars, except 31, 2022 December 31, 2021 31, 2021
as otherwise noted) 31, 2022
-------------------------------------- ---------------------------- ------------ ---------------- --------------
Total natural gas and crude oil
revenues, net of royalties 8,931,562 24,973,464 3,038,832 6,512,493
Funds flow from (used in) operations
(1) 1,960,289 9,493,208 (403,007) (145,503)
Funds flow from (used in) operations
(1) per share -
Basic($) 0.01 0.04 (0.00) (0.00)
Diluted ($) 0.01 0.03 (0.00) (0.00)
Net income 2,968,117 346,524 6,960,035 5,693,532
Net income per share -
Basic ($) 0.02 0.00 0.04 0.06
Diluted ($) 0.01 0.00 0.04 0.06
Adjusted EBITDA (1) 4,456,757 12,493,099 540,642 804,674
Weighted average shares outstanding:
Basic 217,784,100 215,468,129 171,345,885 94,553,391
Diluted 288,239,348 279,288,480 173,035,572 96,243,078
Common shares end of period 218,401,931 218,401,931 213,389,623 213,389,623
Capital expenditures 2,106,463 7,668,988 1,991,163 2,221,643
Cash and cash equivalents 13,060,968 13,060,968 10,878,508 10,878,508
Current assets 17,504,225 17,504,225 12,806,502 12,806,502
Current liabilities 18,820,890 18,820,890 4,800,428 4,800,428
Adjusted working capital(1) 8,223,758 8,223,758 8,006,074 8,006,074
Long-term portion of restricted
cash and deposits(2) 608,127 608,127 - -
Total assets 53,190,248 53,190,248 41,195,798 41,195,798
Operating
-------------------------------------- ---------------------------- ------------ ---------------- ------------
Natural gas and crude oil production,
before royalties
Natural gas (Mcf/d) 3,270 2,958 442 530
Natural gas liquids (bbl/d) 6 5 5 6
Crude oil (bbl/d) 1,185 847 62 367
Total (boe/d) 1,736 1,345 140 461
Operating netbacks ($/boe) (1)
Natural gas ($/Mcf) $0.57 $1.01 $1.05 $0.51
Crude oil ($/bbl) $57.88 $65.06 ($98.26) $2.85
Total ($/boe) $41.95 $42.40 ($39.03) $3.16
(1) Non-IFRS measures - see "Non-IFRS Measures" section within
the Q4 2022 MD&A
(2) Long term restricted cash not included in working
capital
2022 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, 2022, 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 2022 Company Working Interest
Gross Reserves Highlights include:
-- 3,376 Mboe of Proved Reserves ("1P Reserves");
-- 7,691 Mboe of Proved plus Probable Reserves ("2P Reserves");
-- 11,679 Mboe of Proved plus Probable plus Possible Reserves ("3P Reserves")(1) ;
-- 1P Reserves estimated net present value before income taxes
of US$57.9 million calculated at a 10% discount rate;
-- 2P Reserves estimated net present value before income taxes
of US$127.3 million calculated at a 10% discount rate; and
-- 3P Reserves estimated net present value before income taxes
of US$205.8 million calculated at a 10% discount rate.
Arrow refers readers to the Company's press release of March 29,
2023 for additional details, as well as to the Reserve Report filed
on SEDAR.
Discussion of Operating Results
During 2022, the Company increased production on the Tapir
block, from the drilling of the RCE-2 and RCS-1 wells, and the Oso
Pardo field, with its Ombu block maintaining steady production. The
West Pepper well was consistently producing throughout 2022 and the
East Pepper Well was brought on stream, increasing the Company's
natural gas production in Canada.
Average Production by Property
Average Production YTD 2022 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021
Boe/d
------------------------ --------- -------- -------- -------- -------- --------
Oso Pardo 113 115 104 112 121 123
Ombu (Capella) 182 238 215 97 177 190
Rio Cravo Este (Tapir) 551 832 860 366 136 142
Total Colombia 847 1,185 1,179 575 434 455
Fir, Alberta 82 79 82 86 73 82
Pepper, Alberta 416 472 242 319 636 181
------------------------ --------- -------- -------- -------- -------- --------
TOTAL (Boe/d) 1,345 1,736 1,503 980 1,144 719
------------------------ --------- -------- -------- -------- -------- --------
For the three months and year ended December 31, 2022, the
Company's average production was 1,736 boe/d and 1,345 boe/d,
respectively, which consisted of crude oil production in Colombia
at 1,185 boe/d and 847 bbl/d, natural gas production of 3,270 Mcf/d
and 2,958 Mcf/d, respectively, and minor amounts of natural gas
liquids from the Company's Canadian properties. The Company's Q4
2022 total production was 142% higher than its total production for
the same period in 2021.
Discussion of Financial Results
During Q4 2022 the Company continued to realize strong oil and
gas prices, as summarized below.
Three months ended
December 31
-------------------------------------
2022 2021 Change
------------------------------------- ------- ------- -------
Benchmark Prices
AECO ($/Mcf) $4.42 $3.89 14%
Brent ($/bbl) $88.59 $79.80 11%
West Texas Intermediate ($/bbl) $82.65 $77.31 7%
------------------------------------- ------- ------- -------
Realized Prices
------------------------------------- ------- ------- -------
Natural gas, net of transportation
($/Mcf) $3.66 $3.37 9%
Natural gas liquids ($/bbl) $68.28 $56.43 21%
Crude oil, net of transportation
($/bbl) $72.29 $55.50 30%
------------------------------------- ------- ------- -------
Corporate average, net of transport
($/boe)(1) $57.53 $44.15 30%
------------------------------------- ------- ------- -------
(1)Non-IFRS measure
Operating Netbacks
The Company also continued to realize positive operating
netbacks, as summarized below.
Three months ended Years ended
December 31 December 31
2022 2021 2022 2021
-------------------------------- ---------- --------- -------- --------
Natural Gas ($/Mcf)
Revenue, net of transportation
expense $3.66 $3.37 $3.94 $3.19
Royalties (0.50) (0.34) (0.60) (0.33)
Operating expenses (2.59) (1.15) (2.34) (1.35)
-------------------------------- ---------- --------- -------- --------
Natural Gas Operating
netback(1) $0.57 $1.87 $1.01 $1.51
-------------------------------- ---------- --------- -------- --------
Crude oil ($/bbl)
Revenue, net of transportation
expense $72.29 $55.50 $83.10 $58.62
Royalties (6.33) (3.60) (8.81) (5.37)
Operating expenses (8.08) (17.48) (9.24) (18.90)
-------------------------------- ---------- --------- -------- --------
Crude Oil Operating netback(1) $57.88 $34.42 $65.06 $34.35
-------------------------------- ---------- --------- -------- --------
Corporate ($/boe)
Revenue, net of transportation
expense $57.53 $44.15 $60.20 $47.37
Royalties (5.34) (2.95) (6.77) (4.31)
Operating expenses (10.24) (13.85) (11.04) (15.51)
-------------------------------- ---------- --------- -------- --------
Corporate Operating netback
(1) $41.95 $27.35 $42.40 $27.55
-------------------------------- ---------- --------- -------- --------
(1) Non-IFRS measure
The operating netbacks of the Company continued to improve
during 2022 due to several factors, such as increased production
from both its Colombian and Canadian assets, and improved crude oil
and natural gas prices, which were offset by increases in royalties
and operating expenses for natural gas.
During 2022, the Company incurred $7.7 million of capital
expenditures, primarily in connection with the drilling of the
RCE-2 and RCS-1 wells, workovers in its RCE-1 and RCS-1 wells, and
its East Pepper Montney well tie in in Canada. Civil works were
completed to start drilling three more wells in Rio Cravo and in
early 2023 the Company started shooting 100 km(2) of 3D seismic in
the Tapir block to highlight existing leads and prospects for
drilling. This acceleration in operational tempo is expected
throughout 2023, funded by cash on hand and cashflow. At the end of
the year, Arrow had a cash position of $13 million, which is
expected to fund the Company's 2023 capital program.
For further Information, contact:
Arrow Exploration
Marshall Abbott, CEO +1 403 651 5995
Joe McFarlane, CFO +1 403 818 1033
Brookline Public Relations, Inc.
Shauna MacDonald +1 403 538 5645
Canaccord Genuity (Nominated Advisor
and Joint Broker)
Henry Fitzgerald-O'Connor
James Asensio
Gordon Hamilton +44 (0)20 7523 8000
Auctus Advisors (Joint Broker)
Jonathan Wright + 44 (0)7711 627449
Rupert Holdsworth Hunt
Camarco (Financial PR)
Georgia Edmonds +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
underexploited, 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 TSX Venture Exchange nor its Regulation Services
Provider (as that term is defined in policies of the TSX Venture
Exchange) accepts responsibility for the adequacy or accuracy of
this release .
Glossary
Bbl/d or bop/d: Barrels per day
$/Bbl: Dollars per barrel
Mcf/d: Thousand cubic feet of gas per day
Mmcf/d: Million cubic feet of gas per day
$/Mcf: Dollars per thousand cubic feet of gas
Mboe: Thousands of barrels of oil equivalent
Boe/d: Barrels of oil equivalent per day
$/Boe: Dollars per barrel of oil equivalent
BOE's may be misleading particularly if used in isolation. A BOE
conversion ratio of 6 Mcf: 1 bblis based on an energy equivalency
conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the wellhead.
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.
This Announcement contains inside information for the purposes
of the UK version of the market abuse regulation (EU No. 596/2014)
as it forms part of United Kingdom domestic law by virtue of the
European Union (Withdrawal) Act 2018 ("UK MAR").
Arrow Exploration Corp.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ended DECEMBER 31, 2022 AND 2021
IN UNITED STATES DOLLARS
INDEPENT AUDITOR'S REPORT
To the Shareholders of Arrow Exploration Corp.
Report of the audit of the consolidated financial statements
Opinion
We have audited the consolidated financial statements of Arrow
Exploration Corp. and its subsidiaries (the Company), which
comprise the consolidated statement of financial position as at
December 31, 2022, and the consolidated statement of operations and
comprehensive income, changes in shareholders' equity and cash
flows for the year then ended, and notes to the consolidated
financial statements, including a summary of significant accounting
policies.
In our opinion, the accompanying consolidated financial
statements present fairly, in all material respects the
consolidated financial position of the Company as at December 31,
2022, and its consolidated financial performance and consolidated
cash flows for the years then ended in accordance with
International Financial Reporting Standards (IFRSs).
Basis for opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor's responsibilities
for the audit of the consolidated 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
consolidated 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.
Key audit matter
Key audit matters are those matters that, in our professional
judgment, were of most significance in the audit of the
consolidated financial statements of the current period. This
matter was addressed in the context of the audit of the
consolidated financial statements as a whole, and in forming the
auditor's opinion thereon, and we do not provide a separate opinion
on these matters. For the matter below, our description of how our
audit addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the
Auditor's responsibilities for the audit of the consolidated
financial statements section of our report, including in relation
to this matter. Accordingly, our audit included the performance of
procedures designed to respond to our assessment of the risks of
material misstatement of the consolidated financial statements. The
results of our audit procedures, including the procedures performed
to address the matter below, provide the basis for our audit
opinion on the accompanying consolidated financial statements.
Key audit matter How our audit addressed the
key audit matter
Recoverable amount of property and equipment in the Capella
block in Colombia ("Capella") cash generating unit ("CGU") and
Canada CGU
For the year ended December 31, To test the Company's estimated
2022, an impairment reversal recoverable amounts for its Capella
of $10,409,615 was recorded with and Canada CGUs, we performed
respect to property and equipment the following procedures, among
in the Capella CGU and an impairment others:
charge of $1,388,961 was recorded * Evaluated the Company's independent reserve
with respect to property and evaluator's competence, capability, and objectivity,
equipment in the Canada CGU. as well as obtained an understanding of the work they
The Company's disclosures related performed.
to property and equipment and
impairment reversal and charges
are included in notes 2, 3, and * Involved our internal valuation specialists to assess
8 of the consolidated financial the methodology applied, and the various inputs
statements. An assessment is utilized in determining the discount rate by
made at each reporting date as referencing current industry, economic, and
to whether there are any indicators comparable company information, as well as company
for impairment or reversal of and cash-flow specific risk premiums.
previously recognized impairment.
If such indicators exist, a previously
recognized impairment loss is * Compared forecasted benchmark commodity pricing and
reversed and/or impairment charges foreign exchange rates against other third-party
are recognized. A reversal of price forecasts.
previous impairment is limited
to the extent that the carrying
amount of the asset does not * Assessed forecasted production, royalties, operating
exceed its recoverable amount, costs, and future development costs by comparing them
nor does it exceed the carrying to historical results.
amount that would have been determined,
net of depreciation, had no impairment
loss been recognized for the * Evaluated the adequacy of the relevant note
asset in prior periods. The recoverable disclosures included in the consolidated financial
amounts of the Capella and Canada statements in relation to this matter.
CGUs were determined utilizing
fair value less costs of disposal
models based on the net present
value of future cash flows based
on an independent reserve evaluation.
Auditing the Company's estimated
recoverable amounts for its Capella
and Canada CGUs was complex due
to the subjective nature of the
underlying inputs and assumptions
and the significant effect changes
in these would have on the recoverable
amount. Additionally, the evaluation
of this estimate required specialized
skills and knowledge. The primary
inputs noted in the determination
of the recoverable amount were
expected production volumes,
forecasted benchmark prices,
forecasted exchange rates, royalties,
operating costs, future development
costs, and discount rate.
Other matter
The consolidated financial statements of the Company for the
year ended December 31, 2021, were audited by another auditor who
expressed an unmodified opinion on those consolidated financial
statements on April 25, 2022.
Other information
Management is responsible for the other information. The other
information comprises:
-- Management's Discussion and Analysis
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information,
and in doing so, consider whether the other information is
materially inconsistent with the consolidated financial statements
or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
We obtained Management's Discussion & Analysis prior to the
date of this auditor's report. If, based on the work we have
performed, 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 consolidated financial statements
Management is responsible for the preparation and fair
presentation of the consolidated financial statements in accordance
with IFRSs, and for such internal control as management determines
is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to
fraud or error.
In preparing the consolidated 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 consolidated
financial statements
Our objectives are to obtain reasonable assurance about whether
the consolidated 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 generally accepted auditing
standards 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 consolidated financial
statements.
As part of an audit in accordance with Canadian generally
accepted auditing standards, we exercise professional judgment and
maintain professional skepticism throughout the audit. We also:
-- Identify and assess the risks of material misstatement of the
consolidated 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 consolidated
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 consolidated financial statements, including the disclosures,
and whether the consolidated 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 consolidated 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.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters. We
describe these matters in our auditor's report unless law or
regulation precludes public disclosure about the matter or when, in
extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of
doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this
independent auditor's report is Beth Sanford.
Calgary, Canada
April 28, 2023
Arrow Exploration Corp.
Consolidated Statements of Financial Position
In United States Dollars
As at Notes December December 31,
31, 2022 2021
ASSETS
Current assets
Cash $ 13,060,968 $ 10,878,508
Restricted cash and deposits 4 210,654 -
Trade and other receivables 5 2,568,290 639,582
Taxes receivable 6 801,177 719,049
Deposits and prepaid expenses 157,459 322,300
Inventory 705,677 247,063
--------------------------------------- -------------- --- ---------------------- ----------------------
17,504,225 12,806,502
--------------------------------------- -------------- --- ---------------------- ----------------------
Non-current assets
Deferred income taxes 14 872,286 4,839,785
Restricted cash and deposits 4 608,127 732,553
Exploration and evaluation 7 - 6,964,506
Property and equipment 8 34,205,610 15,852,452
--------------------------------------- -------------- --- ---------------------- ----------------------
Total Assets $ 53,190,248 $ 41,195,798
--------------------------------------- -------------- --- ---------------------- ----------------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Accounts payable and accrued
liabilities $ 5,850,823 $ 3,120,777
Lease obligation 10 41,434 20,258
Promissory note 9 1,899,294 1,659,393
Derivative liability 12 9,540,423 -
Income taxes 14 1,488,916 -
--------------------------------------- -------------- --- ---------------------- ----------------------
18,820,890 4,800,428
--------------------------------------- -------------- --- ---------------------- ----------------------
Non-current liabilities
Long-term debt - 31,552
Lease obligations 10 22,317 34,434
Other liabilities 80,484 177,500
Deferred income taxes 14 5,066,684 3,371,936
Decommissioning liability 11 3,303,301 2,470,239
Promissory note 9 - 1,659,393
Derivative liability 12 - 4,692,203
Total liabilities 27,293,676 17,237,685
--------------------------------------- -------------- --- ---------------------- ----------------------
Shareholders' equity
Share capital 13 57,810,735 56,698,237
Contributed surplus 1,570,491 1,249,418
Deficit (32,839,282) (33,185,806)
Accumulated other comprehensive
loss (645,372) (803,736)
--------------------------------------- -------------- --- ---------------------- ----------------------
Total shareholders' equity 25,896,572 23,958,113
--------------------------------------- -------------- --- ---------------------- ----------------------
Total liabilities and shareholders'
equity $ 53,190,248 $ 41,195,798
--------------------------------------- -------------- --- ---------------------- ----------------------
Commitments and contingencies (Note 15)
The accompanying notes are an integral part of these
consolidated financial statements.
On behalf of the Board:
signed "Gage Jull" Director signed "Anthony Zaidi" Director
Gage Jull Anthony Zaidi
Arrow Exploration Corp.
Consolidated Statements of Operations and Comprehensive
Income
In United States Dollars
For the years ended December 31, Notes 2022 2021
------------------------------------- ---------- ------------ --- -----------
Revenue
Oil and natural gas 18 $ 28,135,254 $ 7,164,680
Royalties 18 (3,161,790) (652,187)
------------------------------------- ------ --------------- ----------------
Total oil and natural gas revenue,
net of royalties 24,973,464 6,512,493
------------------------------------- ------ --------------- ----------------
Expenses
Operating 5,159,068 2,346,039
Administrative 6,723,201 4,881,113
Listing costs 171,328 583,972
Share-based compensation expense
(recovery) 13 582,405 (84,668)
Financing costs:
Accretion 11 199,521 132,807
Interest 9, 10 460,233 797,943
Other 330,797 46,217
Foreign exchange loss (gain) 590,034 (84,924)
Depletion and depreciation 8 5,528,489 1,622,937
Impairment reversal of oil and
gas properties, net 8 (9,020,654) (5,617,776)
Loss (gain) on derivative liability 12 5,974,674 (467,507)
Other income (163,266) (2,018,382)
------------------------------------- ------ --------------- ----------------
16,535,830 2,137,771
------------------------------------- ------ --------------- ----------------
Income before income tax 8,437,634 4,374,722
Income tax expense (recovery)
Current 14 2,428,862 149,040
Deferred 14 5,662,248 (1,467,850)
------------------------------------- ------ --------------- ----------------
8,091,110 (1,318,810)
------------------------------------- ------ --------------- ----------------
Net income 346,524 5,693,532
Other comprehensive income (loss)
Foreign exchange 158,364 (214,258)
------------------------------------- ------ --------------- ----------------
Total other comprehensive income
(loss) 158,364 (214,258)
------------------------------------- ------ --------------- ----------------
Total comprehensive income $ 504,888 $ 5,479,274
Net income per share:
Basic $ 0.00 $ 0.06
Diluted $ 0.00 $ 0.06
Weighted average shares outstanding
Basic 215,468,129 94,553,391
Diluted 279,288,480 96,243,078
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
Contributed other
Share Surplus comprehensive Deficit Total
Capital loss Equity
---------------------- --- ----------- -------------- ---------------- ------------- -----------
Balance January
1, 2022 $ 56,698,237 $ 1,249,418 $ (803,736) $ (33,185,806) $ 23,958,113
Issuances of common
shares, net 1,112,498 - - - 1,112,498
Options settled
in cash - (6,621) - - (6,621)
Net income - - - 346,524 346,524
Other comprehensive
income - - 158,364 - 158,364
Share-based compensation - 327,694 - - 327,694
Balance December
31, 2022 $ 57,810,735 $ 1,570,491 $ (645,372) $ (32,839,282) $ 25,896,572
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 - - - 5,693,532 5,693,532
Other comprehensive
loss - - (214,258) - (214,258)
Share-based compensation - (272,427) - - (272,427)
Balance December
31, 2021 $ 56,698,237 $ 1,249,418 $ (803,736) $ (33,185,806) $ 23,958,113
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, Notes 2022 2021
------------------------------------------------ ------ ------------ ------------
Cash flows provided by (used in) operating
activities:
Net income $ 346,524 $ 5,693,532
Items not involving cash:
Deferred taxes 14 5,662,248 (1,467,850)
Share-based compensation 13 327,694 (272,427)
Depletion and depreciation 8 5,528,489 1,622,937
Impairment reversal of oil and gas
properties, net 8 (9,020,654) (5,617,776)
Interest on leases 10 9,696 6,506
Interest on promissory note 9 469,258 657,953
Accretion 11 199,521 132,807
Foreign exchange (gain) loss 79,581 (195,852)
Loss (gain) on derivative liability 12 5,974,674 (467,507)
Long-term debt forgiveness (7,692) -
Payment of asset decommissioning obligations 11 (76,131) (237,826)
Changes in non--cash working capital
balances:
Restricted cash and deposits (86,228) 262,489
Trade and other receivables (1,928,707) 1,817,008
Taxes receivable (82,129) 940,634
Deposits and prepaid expenses 164,840 (244,917)
Inventory (458,613) (217,759)
Income tax payable 1,488,916 -
Accounts payable and accrued liabilities 3,445,263 (6,918,112)
----------------------------------------------- ------ ------------ ------------
Cash provided by (used in) operating
activities 12,036,550 (4,506,160)
----------------------------------------------- ------ ------------ ------------
Cash flows (used in) investing activities:
Additions to exploration and evaluation
assets - (2,840)
Additions to property and equipment 8 (7,668,988) (1,708,706)
Changes in restricted cash and deposits - (272,271)
Changes in non-cash working capital (715,217) (2,063,099)
----------------------------------------------- ------ ------------ ------------
Cash flows (used in) investing activities (8,384,205) (4,046,916)
----------------------------------------------- ------ ------------ ------------
Cash flows provided by (used in) financing
activities:
Subscription of common shares, net of
costs 13 - 11,232,473
Issuances of common shares 13 510,786 -
Payment of promissory note 9 (1,888,750) (3,111,491)
Lease payments 10 (39,697) (24,535)
Payment of long-term debt (23,076) -
Cash flows provided by (used in) financing
activities (1,440,737) 8,096,447
----------------------------------------------- ------ ------------ ------------
Effect of changes in the exchange rate
on cash (29,148) (138,067)
Increase (decrease) in cash 2,182,460 (594,696)
Cash, beginning of period 10,878,508 11,473,204
----------------------------------------------- ------ ------------ ------------
Cash, end of period 13,060,968 10,878,508
=============================================== ====== ============ ============
Supplemental information
Interest paid $ 285,205 $ 336,804
Taxes paid $ - $ -
The accompanying notes are an integral part of these
consolidated financial statements.
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 28, 2023.
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.
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. Recoverable
amounts calculated for impairment testing are based on estimates of
future commodity prices, expected volumes, quantity of reserves and
discount rates as well as future development costs, royalties, and
operating costs. These calculations require the use of estimates
and assumptions, which by their nature, are subject to measurement
uncertainty. In addition, judgment is exercised by management as to
whether there have been indicators of impairment or of impairment
reversal. Indicators of impairment or impairment reversal may
include, but are not limited to a changes in: market value of
assets, asset performance, estimate of future prices, royalties and
costs, estimated quantity of reserves and appropriate discount
rates.
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 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
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. The initial classification of
a financial asset depends upon the Company's business model for
managing its financial assets and the contractual terms of the cash
flows. There are three measurement categories into which the
Company classified its financial assets:
- Amortized Cost: Includes assets that are held within a
business model whose objective is to hold assets to collect
contractual cash flows and its contractual terms give rise on
specified dates to cash flows that represent solely payments of
principal and interest;
- Fair Value through Other Comprehensive Income ("FVOCI"):
Includes assets that are held within a business model whose
objective is achieved by both collecting contractual cash flows and
selling the financial assets, where its contractual terms give rise
on specified dates to cash flows that represent solely payments of
principal and interest; or
- Fair Value Through Profit or Loss ("FVTPL"): Includes assets
that do not meet the criteria for amortized cost or FVOCI and are
measured at fair value through profit or loss. This includes all
derivative financial instruments.
At initial recognition, the Company measures a financial asset
at its fair value and, in the case of a financial asset not at
FVTPL, including transaction costs that are directly attributable
to the acquisition of the financial asset. Transaction costs of
financial assets carried at FVTPL are recorded as an expense.
Financial assets are reclassified subsequent to their initial
recognition only if the business model for managing those financial
assets changes. The affected financial assets will be reclassified
on the first day of the first reporting period following the change
in the business model.
A financial asset is derecognized when the rights to receive
cash flows from the asset have expired or have been transferred and
the Company has transferred substantially all the risks and rewards
of ownership.
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 as they arise. The Company has recorded these
changes as derivative gain (loss) in the statement of operations
and comprehensive income. 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 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 after performing an impairment assessment. 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 as pre-license expense.
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, net of reversals. 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.
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
The Company recognizes loss allowances for Expected Credit
Losses ("ECLs") on its financial assets measured at amortized cost.
Due to the nature of its financial assets, the Company measures
loss allowances at an amount equal to expected lifetime ECLs.
Lifetime ECLs are the anticipated ECLs that result from all
possible default events over the expected life of a financial
asset. ECLs are a probability-weighted estimate of credit losses.
Credit losses are measured as the present value of all cash
shortfalls (i.e. the difference between the cash flows due to the
entity in accordance with the contract and the cash flows that the
Company expects to receive). ECLs are discounted at the effective
interest rate of the related financial asset. The Company does not
have any financial assets that contain a financing component.
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 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.
Impairment losses recognized in respect of CGU's are allocated to
reduce the carrying amounts of 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 compensation 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 operations and comprehensive income 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.
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 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 per share
Basic earnings 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 per share is determined by dividing the net income
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
During 2022, the Company adopted amendments published by IASB to
IAS 16 Property, plant and Equipment and to IAS 37 Provisions
Contingent Liabilities and Contingent Assets. These amendments were
adopted by the Company from January 1, 2021 but they did not have a
material impact on the Consolidated Financial Statements.
Future Accounting Standards
The Company plans to adopt the following amendments to
accounting standards, issued by the IASB, that are effective for
annual periods beginning on or after January 1, 2023. The
pronouncements will be adopted on their respective effective dates
and their impact to the financial statements is currently under
assessment.
i) Amendments to IAS 8 Changes in Estimates vs Changes in
Accounting Policies: In February 2021, the IASB issued amendments
to IAS 8 Changes in Estimates vs Changes in accounting Policies, to
help distinguish changes in accounting estimates from changes in
accounting policies.
ii) Amendments to IAS 12 Income Taxes: In May 2021, the IASB
issued amendments to IAS 12 Income Taxes, which require entities to
recognize deferred tax on transaction that, on initial recognition,
give rise to equal amounts of taxable and deductible temporary
differences.
iii) Amendments to IAS 1 Presentation of Financial Statements:
In January 2020, the IASB issued amendments to IAS 1 Presentation
of Financial Statements, to clarify its requirements for the
presentation of liabilities as current or non-current in the
statements of financial position. In October 2022, the IASB issued
amendments to IAS 1, which specify the classification and
disclosure of a liability with covenants. These will be effective
on January 1, 2024.
4. Restricted Cash and deposits
December December
31 , 31, 2021
2022
-------------------------------- ---------- ---------------- -------- ----------------
Colombia (i) $ 248,462 $ 53,726
Canada (ii) 570,319 678,827
Sub-total 818,781 732,553
Long-term portion (608,127) (732,553)
Current portion of restricted 210,654 $ -
cash and deposits $
================ ================
(i) This balance is comprised of a deposit held as collateral to
guarantee abandonment expenditures related to the Tapir and Santa
Isabel blocks.
(ii) Pursuant to Alberta government regulations, the Company was
required to keep a $313,333 (CAD $424,398; 2021: $416,600) 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 $256,986 pertain to commercial deposits with
customers, lease and other deposits held in Canada.
5. Trade and other receivables
December December
31, 31, 2021
2022
--------------------------------- ---------- ---------------- -------- ----------------
Trade receivables, net of
advances $ 847,432 $ 252,141
Other accounts receivable 1,720,858 387,441
$ 2,568,290 $ 639,582
================ ================
As at December 31, 2022, other accounts receivable includes a
$1,070,825 (December 31, 2021 - $2,322) 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, 2021
2022
------------------------------------- ---------- ---------------- -------- ----------------
Value-added tax (VAT) credits
recoverable $ - $ 105,827
Income tax withholdings and
advances, net 801,177 613,222
$ 801,177 $ 719,049
================ ================
The VAT recoverable balance in 2021 pertains to non-compensated
value-added tax credits originated in Colombia as operational and
capital expenditures are incurred. The Company is entitled to
compensate or claim for the reimbursement of these VAT credits.
7. Exploration and Evaluation
December December
31, 31, 2021
2022
------------------------------ ---------- ------------------ -------- ----------------
Balance, beginning of the
period $ 6,964,506 $ 6,961,667
Additions, net - 2,839
Reclassification to Property (6,964,506) -
and Equipment
Balance, end of the period $ - $ 6,964,506
================== ================
During 2022, the Company determined the technical feasibility
and commercial viability of its Tapir assets related to the Rio
Cravo Sur-1 discovery and transferred $6,964,506 to its property
and equipment. An impairment test on this asset was prepared and no
losses were identified as a result of such test.
8. Property and Equipment
Oil and Right of
Cost Gas Properties Use and Total
Other Assets
---------------------------- --------------------- ------------------- ------------------
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
---------------------------- --------------------- ------------------- ------------------
Additions 7,663,062 50,671 7,713,733
Transfers from exploration
and evaluation assets 6,964,506 - 6,964,506
Decommissioning adjustment 756,541 - 756,541
Balance, December 31, 2022 $ 47,545,026 $ 234,156 $ 47,779,182
---------------------------- --------------------- ------------------- ------------------
Accumulated depletion and
depreciation and impairment
--------------------------------- ------------------- -------------------------- ----------------
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
--------------------------------- ------------------- --------------------- ---------------------
Depletion and depreciation 5,482,218 46,271 5,528,489
Reversals net of impairment
loss (9,020,654) - (9,020,654)
--------------------------------- ------------------- --------------------- ---------------------
Balance, December 31, 2022 $ 13,153,709 $ 161,236 $ 13,314,945
--------------------------------- ------------------- --------------------- ---------------------
Foreign exchange
--------------------------- ------------------------- ----------------- -------------------------
Balance December 31,
2020 $ 339,364 $ (4,166) $ 335,198
Effects of movements
in foreign
exchange rates (20,747) 709 (20,038)
--------------------------- ------------------------- --------------------- ------------------------
Balance December 31,
2021 $ 318,617 $ (3,457) $ 315,160
--------------------------- ------------------------- --------------------- ------------------------
Effects of movements
in foreign
exchange rates (568,525) (5,262) (573,787)
--------------------------- ------------------------- --------------------- ------------------------
Balance December 31,
2022 $ (249,908) $ (8,719) $ (258,627)
--------------------------- ------------------------- --------------------- ------------------------
Net Book Value
Balance December 31, 2021 $ 15,787,389 $ 65,063 $ 15,852,452
Balance December 31, 2022 $ 34,141,409 $ 64,201 $ 34,205,610
As at December 31, 2022, 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 Capella block in Colombia, mostly
driven by the recovery in energy commodity prices. The Company
prepared estimates of fair value less costs of disposal of its
Capella and determined that recoverable amount of the Capella field
exceeded its carrying value and, therefore, recognized an
impairment loss reversal of $10,409,615.
Additionally, as at December 31, 2022, the Company determined
there were indicators of impairment in its Canada CGU, mainly due
to revision of reserves, and prepared estimates of fair value less
costs of disposal of its Canada CGU. It was determined that
carrying value of its Canada CGU exceeded its recoverable amount
and, therefore, an impairment loss of $1,388,961 was included in
the consolidated statements of operations and comprehensive income
for the year ended December 31, 2022.
The following table outlines forecast benchmark prices and
exchange rates used in the Company's impairment test as at December
31, 2022:
Exchange AECO Spot
rate Brent Gas
Year $US / $Cdn US$/Bbl C$/MMBtu
2023 0.79 85.00 4.83
2024 0.79 82.80 4.50
2025 0.79 80.50 4.31
2026 0.79 82.00 4.42
2027 0.79 84.20 4.53
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, 2022. 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% pre-tax discount rate, which took into
account risks specific to the Capella CGU and inherent in the oil
and gas business, and a 15% pre-tac discount rate for its Canada
CGU, and provided the following recoverable values:
Recoverable Impairment
CGU Amount Loss (Reversal)
Canada 4,092,254 1,388,961
Capella 33,876,730 (10,409,615)
-------------------
(9,020,654)
===================
Effective February 9, 2023, the Agencia Nacional de
Hidrocarburos ("ANH") approved the suspension of the obligations
and operations of the OMBU contract due to force majeure
circumstances generated by the blockades and social unrest around
the Capella field. The suspension is for an initial term of three
months and the Company, together with its partner and the ANH, is
monitoring this suspension to define next steps.
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 Canada
CGU 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 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 for the year
ended December 31, 2021.
9. Promissory Note
The promissory note was issued to Canacol Energy Ltd.
("Canacol"), a related party to the Company, as partial
consideration in the acquisition of Carrao Energy S.A. from
Canacol. The promissory note bears interest at 15% per annum, and,
on October 18, 2021, Arrow and Canacol entered into a Seventh
Amended and Restated Promissory Note agreement with the following
terms:
- 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 15), which were
recognized as other income in the statement of operations and
comprehensive income. On October 27, 2021, the Company paid
$3,111,491 (C$3,900,000) to Canacol as stipulated in this seventh
amendment.
During December 2022, the Company made a payment of $1,888,750
to Canacol equivalent to 50% of the outstanding balance of the
promissory note, and its current balance of $1,899,294 is presented
as a current liability in the condensed consolidated statement of
financial position as at December 31, 2022. 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:
2022 2021
---------------- -----------
Obligation, beginning of the period $ 54,692 $ 70,842
Changes in existing lease 44,701 1,381
Lease payments (39,697) (24,535)
Interest 9,696 6,506
Effects of movements in foreign
exchange rates (5,641) 498
---------------- -----------
Obligation, end of the year $ 63,751 $ 54,692
Current portion (41,434) (20,258)
---------------- -----------
Long-term portion $ 22,317 $ 34,434
================ ===========
As at December 31, 2022, the Company has the following future
lease obligations:
Less than one year $ 45,944
2 - 5 years 22,972
--------
Total lease payments 68,916
Amounts representing interest over
the term (5,165)
--------
Present value of the net obligation $ 63,751
========
During 2022, the Company changed its lease agreement to add
space to its corporate space and its related future lease
obligation. As a result, the Company increased its right-of-use
assets and its lease obligation by $44,701.
11. 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 December
31, 31, 2021
2022
---------------- -------- ----------------
Obligation, beginning of the year $ 2,470,239 $ 2,584,907
Change in estimated cash flows 756,541 (10,173)
Payments or settlements (76,131) (237,826)
Accretion expense 199,521 132,807
Effects of movements in foreign
exchange rates (46,869) 524
---------------- -------- ----------------
Obligation, end of the year $ 3,303,301 $ 2,470,239
================ ======== ================
T he obligation was calculated using a risk-free discount rate
range of 2.50% to 3.75% in Canada (2021: 1.00% to 2.00%) and
between 3.55% and 4.13% in Colombia (2021: 8.46%) with an inflation
rate of 3.0% and 3.5%, respectively (2021: 2.0% and 4.5%). The
majority of costs are expected to occur between 2023 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 $4,480,074 (2021:
$4,222,717) .
12. Derivative liability
Derivative liability includes warrants issued and outstanding as
follows:
December 31, December 31,
2022 2021
Warrants Number Amounts Number Amounts
Balance beginning
of the period 72,474,706 $ 4,692,303 - $ -
Issued in AIM financing
(Note 13) - - 70,474,768 5,124,985
Issues in private
placement (Note
13) - - 1,999,938 149,543
Exercised (4,637,288) (598,509) - -
Fair value adjustment - 5,974,674 - (467,507)
Foreign exchange - (528,045) (114,818)
----------- ----------- ------------------------ -----------
Balance end of the
period 67,837,418 $ 9,540,423 72,474,706 $ 4,692,203
=========== =========== ======================== ===========
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 December 31, 2022 and 2021 was estimated using
the following assumptions:
December December
31, 2022 31, 2021
------------------------------ ----------------- -----------------
Number outstanding
re-valued warrants 67,837,418 72,474,706
Fair value of warrants
outstanding GBP 0.1157 GBP 0.048
Risk free interest
rate 3.41% 0.50%
Expected life 0.82 years 1.82 years
Expected volatility 147% 160%
------------------------------ ----------------- -----------------
The following table summarizes the warrants outstanding and
exercisable at December 31, 2022:
Number
of Exercise Expiry date
warrants price
----------- ----------- --------------
GBP 0.09 October 24,
67,184,769 2023
GBP 0.09 November 22,
652,649 2023
-----------
67,837,418
===========
13. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
2022 2021
----------------------- ------------------------
Common shares Shares Amounts Shares Amounts
----------- ---------- ----------- -----------
Balance beginning of
the year 213,389,643 56,698,237 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 12) - - - (5,274,528)
Share issue costs
(iii) - - - (1,162,451)
Issued from warrants
exercised 4,637,288 1,094,574 - -
Issued from options
exercised 375,000 17,924 - -
----------- ---------- ----------- -----------
Balance at end of the
year 218,401,931 57,810,735 213,389,643 56,698,237
=========== ========== =========== ===========
(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 (a related party),
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 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,
2022 and 2021 and changes during the respective periods ended on
those dates is presented below:
December 31, 2022 December 31, 2021
------------------------------------ ------------------------------------
Weighted Weighted
average average
exercise exercise
Number Price Number price
Stock Options of options (CAD $) of options (CAD $)
--------------------------- ------------------ ---------------- ------------------ ----------------
Beginning of period 17,114,000 $0.18 6,859,000 $0.40
Granted 10,028,332 $0.27 11,400,000 $0.13
Expired/Forfeited (2,794,000) $0.12 (1,145,000) $1.04
Exercised (3,758,332) $0.11 - -
------------------ ---------------- ------------------ ----------------
End of period 20,590,000 $0.24 17,114,000 $0.18
================== ================ ================== ================
Exercisable, end
of period 3,395,000 $0.42 2,969,669 $0.46
================== ================ ================== ================
Weighted
Exercise Average Number
Price Remaining Exercisable
Date of (CAD Contractual Date of December
Grant Number Outstanding $) Life Expiry 31, 2022
------------- ------------------- --------- ------------- ------------ -------------
October Oct. 22,
22, 2018 1,050,000 $1.15 2028 1,050,000
May 3, 2019 345,000 $0.31 May 3, 2029 345,000
March 20, March 20,
2020 1,200,000 $0.05 2030 800,000
April 13, April 13,
2020 2,000,000 $0.05 2030 1,200,000
December June 13,
13, 2021 2,983,332 $0.13 2024 -
December June 13,
13, 2021 2,983,336 $0.13 2025 -
June 9, December
2022 766,665 $0.28 9, 2023 -
June 9, December
2022 766,667 $0.28 9, 2024 -
June 9, December
2022 766,668 $0.28 9, 2025 -
September March 7,
7, 2022 749,999 $0.26 2024 -
September March 7,
7, 2022 749,999 $0.26 2025 -
September March 7,
7, 2022 750,002 $0.26 2026 -
December June 13,
21, 2022 1,826,110 $0.28 2023 -
December June 13,
21, 2022 1,826,111 $0.28 2024 -
December June 13,
21, 2022 1,826,111 $0.28 2025 -
Total 20,590,000 $0.24 3.21 years 3,395,000
============= =================== ========= ============= ============ =============
During 2022, the Company recognized $327,694 as share-based
compensation expense (2021 - recovery of $272,427), with a
corresponding effect 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 as share-based compensation expense and a total $1,761,667
were used entirely 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 as share-based compensation expense and a total
$151,290 were used entirely as part of management's subscription of
shares issued in the AIM financing (see Common Shares section).
14. 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:
2022 2021
------------------ --------------------
Income before income taxes $ 8,437,634 $ 4,374,722
Corporate income tax rate 23% 23%
------------------ --------------------
Computed expected tax expense 1,940,656 $ 1,006,186
Increase (decrease) in income taxes
resulting from:
Share-based compensation 133,953 19,474
(Recognized)/unrecognized deferred
tax benefits 1,144,776 (3,871,436)
Tax rate difference on foreign
jurisdictions 2,396,640 783,741
Other permanent difference 1,601,222 (332,528)
Change in deferred tax asset 932,088 -
Foreign exchange and others (58,225) 1,075,753
Income tax expense (recovery) $ 8,091,110 $ (1,318,810)
================== ====================
As at December 31, 2022, the Company recognized a deferred
income tax asset of $872,286 and a deferred tax liability of
$5,066,684 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 35% for 2022, and at the
beginning on January 1, 2023, the Colombian government mandated an
additional tax rate of 5%, 10% or 15% for oil producers, subject to
international oil prices. The components of the Company's deferred
income tax assets and liabilities are as follows:
As at December 31 2022 2021
-------------- -----------------------
Property and equipment $ (9,089,462) $ (2,421,172)
Decommissioning liabilities and
other provisions 1,285,642 637,785
Carryforward non-capital losses 3,609,422 3,251,237
-------------- -----------------------
Net change in deferred tax $ (4,194,398) $ 1,467,850
Deferred tax liability 5,066,684 3,371,935
-------------- -----------------------
Deferred tax asset $ 872,286 $ 4,839,785
============== =======================
At December 31, 2022, the Company had non-capital losses carried
forward of approximately $47,846,426 (2021 - $63,875,000) available
to reduce future years taxable income. These losses commence
expiring in 2029. At December 31, 2022, the Company had income tax
credits and benefits, including non-capital losses, of
approximately $53,664,028 (2021 - $54,586,346) related to Canada
that were not recognized in the financial statements due to
uncertainties associated with its ability to utilize these balances
in the future.
15. 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, 2022 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,
2022:
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 (a related
party) that entitled 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.
Additionally, Canacol was in litigation with OBC in relation to
ship or pay obligations that were terminated by Canacol in July
2018 under force majeure. During 2021, negotiations between the
parties involved were finally settled and approved by the courts
and the Company does not have any further interest nor any past and
future ship or pay obligations associated with OBC.
Letters of Credit
At December 31, 2022, the Company had obligations under Letters
of Credit ("LC's") outstanding totaling $2.8 million to guarantee
work commitments on exploration blocks and other contractual
commitments. 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.
Current Outstanding Letters of Credit
Contract Beneficiary Issuer Type Amount
(US Renewal
$) Date
-------------- ------------- --------------- ------------- ----------- ----------
SANTA ISABEL April 14,
ANH Carrao Energy Abandonment $563,894 2024
Financial December
ANH Carrao Energy Capacity $1,672,162 31, 2023
CORE - June 30,
39 ANH Carrao Energy Compliance $100,000 2023
Financial April 14,
OMBU ANH Carrao Energy Capacity $436,300 2024
-------------- ------------- --------------- ------------- ----------- ----------
Total $2,772,356
===========
16. Risk Management
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. There were no derivative contracts during 2022 and
2021.
(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 join billings. 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.
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,
2022 2021
------------------- -------------------
Working capital $ (1,316,665) $ 8,006,074
Derivative liability 9,540,423 -
Non-Current portion of promissory
note - (1,659,393)
------------------- -------------------
$ 8,223,758 $ 6,346,681
=================== ===================
17. 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
2022 2021
------------------ ------------------
Salaries, severances and director
fees $ 2,389,033 $ 2,410,920
Share-based compensation 568,565 227,659
------------------ ------------------
$ 2,957,598 $ 2,638,579
================== ==================
18. 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 Canada 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 Colombia Canada Total
31, 2022
------------------------- ---- ------------------ --------------------------- --------------------
Revenue:
Oil Sales $ 23,723,228 $ - $ 23,723,228
Natural gas and liquid
sales - 4,412,026 4,412,026
Royalties (2,513,730) (648,060) (3,161,790)
Expenses (11,984,561) (13,571,923) (25,556,484)
Impairment reversal (loss)
of oil and gas properties 10,409,615 (1,388,961) 9,020,654
Taxes (8,091,110) - (8,091,110)
------------------------------- --- ------------- --------------------------- ----------------------
Net income (loss) $ 11,543,442 $ (11,196,918) $ 346,524
------------------------------- --- ------------- --------------------------- ----------------------
As at December 31, 2022 Colombia Canada Total
------------------------------- ---- ----------- --------------------------- --- -----------
Current assets $ 14,679,159 $ 2,825,066 $ 17,504,225
Non-current:
Deferred income taxes 872,286 - 872,286
Restricted cash 37,808 570,319 608,127
Exploration and evaluation - - -
Property, plant and equipment 29,270,430 4,935,180 34,205,610
------------------------------------- ----------- --------------------------- --- -----------
Total Assets $ 44,859,683 $ 8,330,565 $ 53,190,248
------------------------------- ---- ----------- --------------------------- --- -----------
Current liabilities $ 5,474,361 $ 13,346,529 $ 18,820,890
Non-current liabilities:
Deferred income taxes 5,066,684 - 5,066,684
Other liabilities 80,484 - 80,484
Lease obligation - 22,317 22,317
Decommissioning liability 2,568,141 735,160 3,303,301
Total liabilities $ 13,189,670 $ 14,104,006 $ 27,293,676
------------------------------- ---- ----------- --------------------------- --- -----------
Year ended December 31, 2021 Colombia Canada Total
------------------------------ ---- ------------ ------------ ------------
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 1,822,244 647,996 2,470,240
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
------------------------------- ---- ----------- ----------- --- -----------
Arrow Exploration Corp.
MANAGEMENT's DISCUSSION AND ANALYSIS
YEAR ended DECEMBER 31, 2022
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 28, 2023 and should be read in
conjunction with Arrow's annual consolidated financial statements
and related notes for the year ended December 31, 2022 and 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;; 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 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; changes in
income tax laws or changes in tax laws and incentive programs;
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 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 or cash provided by (used in)
operating activities or net income and comprehensive income 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.
Adjusted working capital is calculated as current assets minus
current liabilities, excluding non-cash liabilities; funds from
operations is calculated as cash flows from (used in) operating
activities adjusted to exclude 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 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 excluding non-cash liabilities.
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 income
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 31, 2022 31, 2022 31, 2021 31, 2021
dollars)
-------------------------- ----------------------------- ------------- ----------------------------- -------------
Net income 2,968,117 346,524 6,960,035 5,693,532
Add/(subtract):
Share based payments 367,693 582,405 241,438 (84,668)
Financing costs:
Accretion on
decommissioning
obligations 55,274 199,521 34,160 132,807
Interest 92,320 460,233 246,449 797,943
Other 45,693 330,797 (76,358) 46,216
Depreciation and
depletion 1,878,557 5,528,489 511,813 1,622,937
Derivative income 1,005,740 5,974,674 (467,507) (467,507)
Impairment reversal of
oil
and gas properties (9,020,654) (9,020,654) (5,617,776) (5,617,776)
Income tax expense
(recovery)
, current and deferred 7,064,017 8,091,110 (1,291,612) (1,318,810)
Adjusted EBITDA (1) 4,456,757 12,493,099 540,642 804,674
Cash flows provided by
(used
in) operating activities 7,011,946 12,036,550 (922,307) (4,506,160)
Minus - Changes in
non--cash
working capital balances:
Trade and other
receivables (1,519,574) 1,928,707 (327,190) (1,817,008)
Restricted cash 220,588 86,228 - (262,489)
Taxes receivable (279,138) 82,129 (900,017) (940,634)
Deposits and prepaid
expenses (4,412) (164,840) 113,602 244,917
Inventory 38 458,613 (137,252) 217,759
Accounts payable and
accrued
liabilities (1,980,243) (3,445,263) 1,770,157 6,918,112
Income tax payable (1,488,916) (1,488,916) - -
Funds flow from (used in)
operations (1) 1,960,289 9,493,208 (403,007) (145,503)
(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 Three months Year ended
ended December ended ended December December
(in United States dollars, except 31, 2022 December 31, 2021 31, 2021
as otherwise noted) 31, 2022
-------------------------------------- ---------------------------- ------------ ---------------- --------------
Total natural gas and crude oil
revenues, net of royalties 8,931,562 24,973,464 3,038,832 6,512,493
Funds flow from (used in) operations
(1) 1,960,289 9,493,208 (403,007) (145,503)
Funds flow from (used in) operations
(1) per share -
Basic($) 0.01 0.04 (0.00) (0.00)
Diluted ($) 0.01 0.03 (0.00) (0.00)
Net income 2,968,117 346,524 6,960,035 5,693,532
Net income per share -
Basic ($) 0.01 0.00 0.04 0.06
Diluted ($) 0.01 0.00 0.04 0.06
Adjusted EBITDA (1) 4,456,757 12,493,099 540,642 804,674
Weighted average shares outstanding:
Basic 217,784,100 215,468,129 171,345,885 94,553,391
Diluted 288,239,348 279,288,480 173,035,572 96,243,078
Common shares end of period 218,401,931 218,401,931 213,389,623 213,389,623
Capital expenditures 2,106,463 7,668,988 1,991,163 2,221,643
Cash and cash equivalents 13,060,968 13,060,968 10,878,508 10,878,508
Current assets 17,504,225 17,504,225 12,806,502 12,806,502
Current liabilities 18,820,890 18,820,890 4,800,428 4,800,428
Adjusted working capital(1) 8,223,758 8,223,758 8,006,074 8,006,074
Long-term portion of restricted
cash and deposits(2) 608,127 608,127 - -
Total assets 53,190,248 53,190,248 41,195,798 41,195,798
Operating
-------------------------------------- ---------------------------- ------------ ---------------- ------------
Natural gas and crude oil production,
before royalties
Natural gas (Mcf/d) 3,270 2,958 442 530
Natural gas liquids (bbl/d) 6 5 5 6
Crude oil (bbl/d) 1,185 847 62 367
Total (boe/d) 1,736 1,345 140 461
Operating netbacks ($/boe) (1)
Natural gas ($/Mcf) $0.57 $1.01 $1.05 $0.51
Crude oil ($/bbl) $57.88 $65.06 ($98.26) $2.85
Total ($/boe) $41.95 $42.40 ($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, 2022 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 (1) 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.
(1) The Company's interest in the Tapir block is held through a
private contract with Petrolco, who holds a 50% participating
interest in, and is the named operator of, the Tapir contract with
Ecopetrol. The formal assignment to the Company is subject to
Ecopetrol's consent. The Company is the de facto operator pursuant
to certain agreements with Petrolco (details of which are set out
in Paragraph 16.13 of the Company's AIM Admission Document dated
October 20, 2021).
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 licensed
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
The Company holds a 100% operated WI in 37 sections of Montney
P&NG rights on its Pepper asset in West Central Alberta. The
6-26-53-23W5M Montney gas well (West Pepper) is tied into the
Galloway gas plant for processing. The 3-21-52-22W5M Montney gas
well (East Pepper) is currently tied into the Sundance gas plant
for processing. The majority of lands have tenure extending into
2025.
Year ended December 31, 2022 Financial and Operational
Highlights
-- For the year ended December 31, 2022, Arrow recorded
$24,973,464 in revenues, net of royalties, on crude oil sales of
285,465 bbls, 1,946 bbls of natural gas liquids ("NGL's") and
1,079,620 Mcf of natural gas sales;
-- Funds flow from operations of $9,493,208;
-- Adjusted EBITDA was $12,493,099;
-- Net income of $346,524;
-- Drilled two wells in the Tapir block, increasing its production significantly
-- Brought on production stream the East Pepper well.
Three Months Ended December 31, 2022 Financial and Operational
Highlights
-- For the three months ended December 31, 2022, Arrow recorded
$8,931,562 in revenues, net of royalties, on crude oil sales of
120,486 bbls, 512 bbls of natural gas liquids ("NGL's") and 300,802
Mcf of natural gas sales;
-- Funds used in operations of $1,960,289;
-- Adjusted EBITDA for the three months was $4,456,757;
-- Net income of $2,968,117
Annual 2022 Reserve Highlights
-- 3,376 Mboe of Proved Reserves, net increase of 11% when compared to 2021;
-- 7,691 Mboe of Proved plus Probable Reserves, net decrease of 4% when compared to 2021;
-- Proved reserves estimated net present value, before income
taxes, of US$58 million using a 10% discount rate;
-- Proved plus Probable Reserves estimated net present value,
before income taxes, of US$127 million using a 10% discount
rate
Results of Operations
The Company has increased its production and improved its
operations combined with improved pricing of energy commodities.
These have allowed the Company to continue improving its balance
sheet and its business profile. During 2022, the Company increased
its production in its Tapir block, from the drilling of the RCE-2
and RCS-1 wells, and Oso Pardo blocks, with its Ombu block
maintaining a steady production. Also, the West Pepper well was
consistently producing throughout 2022 and the East Pepper Well was
brought on stream, increasing the Company's natural gas production
in Canada.
Average Production by Property
Average Production Boe/d YTD 2022 Q4 2022 Q3 2022 Q2 2022 Q1 2022 Q4 2021
-------------------------- --------- -------- -------- -------- -------- --------
Oso Pardo 113 115 104 112 121 123
Ombu (Capella) 182 238 215 97 177 190
Rio Cravo Este (Tapir) 551 832 860 366 136 142
Total Colombia 847 1,185 1,179 575 434 455
Fir, Alberta 82 79 82 86 73 82
Pepper, Alberta 416 472 242 319 636 181
-------------------------- --------- -------- -------- -------- -------- --------
TOTAL (Boe/d) 1,345 1,736 1,503 980 1,144 719
-------------------------- --------- -------- -------- -------- -------- --------
For the three months and year ended December 31, 2022, the
Company's average production was 1,736 and 1,345 boe/d,
respectively, which consisted of crude oil production in Colombia
at 1,185 and 847 bbl/d, natural gas production of 3,270 and 2,958
Mcf/d, respectively, and minor amounts of natural gas liquids from
the Company's Canadian properties. The Company's Q4 2022 total
production was 142% higher than its total production for the same
period in 2021.
Average Daily Natural Gas and Oil Production and Sales
Volumes
Three months ended Year ended
December 31 December 31
--------------------------------
2022 2021 2022 2021
-------------------------------- ---------- --------- ------- ------
Natural Gas (Mcf/d)
Natural gas production 3,270 1,550 2,958 704
Natural gas sales 3,270 1,550 2,958 704
Realized Contractual Natural
Gas Sales 3,270 1,550 2,958 704
-------------------------------- ---------- --------- ------- ------
Crude Oil (bbl/d)
Crude oil production 1,185 455 847 344
Inventory movements and other 238 78 (64) (54)
-------------------------------- ---------- --------- ------- ------
Crude Oil Sales 1,424 533 782 290
-------------------------------- ---------- --------- ------- ------
Corporate
Natural gas production (boe/d) 545 256 493 117
Natural Gas Liquids(bbl/d) 6 0 5 7
Crude oil production (bbl/d) 1,185 455 847 344
-------------------------------- ---------- --------- ------- ------
Total production (boe/d) 1,736 712 1,345 468
Inventory movements and other
(boe/d) 238 78 (64) (54)
-------------------------------- ---------- --------- ------- ------
Total Corporate Sales (boe/d) 1,974 789 1,280 414
-------------------------------- ---------- --------- ------- ------
During the year and three months ended December 31, 2022 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 Year ended
ended December December 31
31
-------------------------------------
2022 2021 2022 2021
------------------------------------- ----------- ----------- ------------- -----------
Natural Gas
Natural gas revenues 1,099,986 479,232 4,257,282 820,430
NGL revenues 34,978 56,657 154,744 145,019
Royalties (150,638) (41,568) (648,060) (84,554)
------------------------------------- ----------- ----------- ------------- -----------
Revenues, net of royalties 984,327 494,321 3,763,966 880,895
------------------------------------- ----------- ----------- ------------- -----------
Crude Oil
Crude Oil revenues 8,710,005 2,720,772 23,723,228 6,199,231
Royalties (762,770) (176,261) (2,513,730) (567,633)
------------------------------------- ----------- ----------- ------------- -----------
Revenues, net of royalties 7,947,235 2,544,511 21,209,498 5,631,598
------------------------------------- ----------- ----------- ------------- -----------
Corporate
Natural gas revenues 1,099,986 479,232 4,257,282 820,430
NGL revenues 34,978 56,657 154,744 145,019
Oil revenues 8,710,005 2,720,772 23,723,228 6,199,231
------------------------------------- ----------- ----------- ------------- -----------
Total revenues 9,844,970 3,256,661 28,135,254 7,164,679
Royalties (913,408) (217,829) (3,161,790) (652,187)
------------------------------------- ----------- ----------- ------------- -----------
Natural gas and crude oil revenues,
net of royalties 8,931,562 3,038,832 24,973,464 6,512,493
------------------------------------- ----------- ----------- ------------- -----------
Natural gas and crude oil revenues, net of royalties, for the
three months and the year ended December 31, 2022 was $8,931,562
and $24,973,464, respectively (2021: $3,038,832 and $6,512,493,
respectively), which represent an increase of 194% and 283%,
respectively. This significant increase is mainly due to increased
production in both segments, Colombia and Canada, combined with
improved pricing for energy commodities.
Average Benchmark and Realized Prices
Three months ended Years ended
December 31 December 31
------------------------------------
2022 2021 Change 2022 2021 Change
------------------------------------ ------- ------- ------- ------- ------- -------
Benchmark Prices
AECO ($/Mcf) $4.42 $3.89 14% $4.34 $2.91 49%
Brent ($/bbl) $88.59 $79.80 11% $98.89 $70.78 40%
West Texas Intermediate ($/bbl) $82.65 $77.31 7% $94.25 $68.09 38%
------------------------------------ ------- ------- ------- ------- ------- -------
Realized Prices
------------------------------------ ------- ------- ------- ------- ------- -------
Natural gas, net of transportation
($/Mcf) $3.66 $3.37 9% $3.94 $3.19 23%
Natural gas liquids ($/bbl) $68.28 $56.43 21% $79.52 $54.01 47%
Crude oil, net of transportation
($/bbl) $72.29 $55.50 30% $83.10 $58.62 42%
------------------------------------ ------- ------- ------- ------- ------- -------
Corporate average, net of
transport ($/boe)(1) $57.53 $44.15 30% $60.20 $47.37 27%
------------------------------------ ------- ------- ------- ------- ------- -------
(1)Non-IFRS measure
The Company realized a price of $57.53 and $60.20 per boe during
the three months and year ended December 31, 2022, respectively
(2021: $44.15 and $47.37, respectively) as commodity prices
improved during 2022 .
Operating Expenses
Three months ended Years ended
December 31 December 31
---------------------------
2022 2021 2022 2021
--------------------------- ------------ ---------- ---------- ----------
Natural gas & NGL's 778,767 218,557 2,521,700 347,421
Crude oil 973,224 1,392,310 2,637,368 1,998,618
--------------------------- ------------ ---------- ---------- ----------
Total operating expenses 1,751,991 1,610,867 5,159,068 2,346,039
--------------------------- ------------ ---------- ---------- ----------
Natural gas ($/Mcf) $2.59 $1.15 $2.34 $1.35
Crude oil ($/bbl) $8.08 $17.48 $9.24 $18.90
Corporate ($/boe)(1) $10.24 $13.85 $11.04 $15.51
--------------------------- ------------ ---------- ---------- ----------
(1)Non-IFRS measure
During the three months and year ended December 31, 2022, Arrow
incurred operating expenses of $1,751,991 and $5,159,068,
respectively (2021: $1,610,867 and $2,346,039, respectively), at an
average cost of $10.24 and $11.04 per boe (2021: $13.85 and $15.51,
respectively) which is reflective of the Company's increase in
production volumes and decrease on a per barrel basis when compared
to 2021 levels.
Operating Netbacks
Three months ended Years ended
December 31 December 31
2022 2021 2022 2021
---------------------------------- ---------- --------- -------- --------
Natural Gas ($/Mcf)
Revenue, net of transportation
expense $3.66 $3.37 $3.94 $3.19
Royalties (0.50) (0.34) (0.60) (0.33)
Operating expenses (2.59) (1.15) (2.34) (1.35)
---------------------------------- ---------- --------- -------- --------
Natural Gas Operating netback(1) $0.57 $1.87 $1.01 $1.51
---------------------------------- ---------- --------- -------- --------
Crude oil ($/bbl)
Revenue, net of transportation
expense $72.29 $55.50 $83.10 $58.62
Royalties (6.33) (3.60) (8.81) (5.37)
Operating expenses (8.08) (17.48) (9.24) (18.90)
---------------------------------- ---------- --------- -------- --------
Crude Oil Operating netback(1) $57.88 $34.42 $65.06 $34.35
---------------------------------- ---------- --------- -------- --------
Corporate ($/boe)
Revenue, net of transportation
expense $57.53 $44.15 $60.20 $47.37
Royalties (5.34) (2.95) (6.77) (4.31)
Operating expenses (10.24) (13.85) (11.04) (15.51)
---------------------------------- ---------- --------- -------- --------
Corporate Operating netback
(1) $41.95 $27.35 $42.40 $27.55
---------------------------------- ---------- --------- -------- --------
(1) Non-IFRS measure
The operating netbacks of the Company continued improving during
2022 due to several factors, such as increasing production from
both its Colombian and Canadian assets, and improved crude oil and
natural gas prices, which were offset by increases in royalties and
operating expenses for natural gas.
General and Administrative Expenses (G&A)
Three months ended Years ended
December 31 December 31
2022 2021 2022 2021
----------------------------------- ----------- ---------- ----------- ----------
General & administrative expenses 2,146,000 1,840,646 7,285,135 4,972,290
G&A recovered from 3(rd) parties (172,169) (91,177) (561,934) (91,177)
----------------------------------- ----------- ---------- ----------- ----------
Total G&A 1,973,831 1,749,469 6,723,201 4,881,113
----------------------------------- ----------- ---------- ----------- ----------
G&A per boe $11.53 $23.72 $14.39 $32.27
For the three months and year ended December 31, 2022, G&A
expenses, before recoveries totaled $2,146,000 and $7,285,135,
respectively (2021: $1,840,646 and $4,972,290, respectively), which
represents an increase when compared to the same periods in 2021.
This increase is mainly due to increased salaries and performance
bonuses paid to personnel and legal fees during 2022, as well as
increase in regulatory and marketing expenses associated with the
Company's dual listing in the London and Canadian markets. Despite
these increased expenses, and due to the Company's increased
production, there is a decrease in G&A expenses on a per barrel
basis, when compared versus 2021.
Share-based Compensation
Three months Years ended
ended December December 31
31
2022 2021 2022 2021
---------------------------------- -------- -------- -------- ---------
Share-based compensation expense
(recovery) 367,693 241,438 582,405 (84,668)
---------------------------------- -------- -------- -------- ---------
Share-based payments compensation expense for the three months
and year ended December 31, 2022 totaled $367,693 and $582,405,
respectively (2021: $241,438 and recovery of $84,668,
respectively). During 2022, the Company granted 10,028,332 options
(2021: 11,400,000) to its personnel, which were offset by reversal
of expenses from cancelled options due to resignations of option
holders. The share-based compensation expense is the result of the
progressive vesting of the options granted to the Company's
employees, plus the effect of cashless exercising, and net of
cancellations and forfeitures, according to the company's
stock-based compensation plan.
Financing Costs
Three months ended Years ended
December 31 December 31
2022 2021 2022 2021
----------------------------------- ---------- --------- -------- ---------
Financing expense paid or payable 138,013 170,091 791,030 844,159
Non-cash financing costs 55,274 34,160 199,521 132,807
----------------------------------- ---------- --------- -------- ---------
Net financing costs 193,287 204,251 990,551 $976,966
----------------------------------- ---------- --------- -------- ---------
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 SA and have decreased due to partial
payment of the outstanding balance . In addition, financing expense
includes fees and interest associated with financing of standby
letters of credit on certain of the Company's Colombian blocks. 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 Years ended
ended December December 31
31
2022 2021 2022 2021
---------------------------- ---------- -------- ---------- ----------
Depletion and depreciation 1,878,557 511,813 5,528,489 1,662,937
---------------------------- ---------- -------- ---------- ----------
Depletion and depreciation expense for the three months and year
ended December 31, 2022 totaled $1,878,557 and $5,528,489,
respectively (2021: $511,813 and $1,662,937, respectively). The
Company uses the unit of production method and proved plus probable
reserves to calculate depletion expense and this change is directly
related with the increases in units produced and reversals of
impairment recognized during 2021, which increased the depletable
base for 2022.
Impairment reversal of oil and gas properties, net
Three months Years ended
ended December December 31
31
2022 2021 2022 2021
---------------------------------- ------------ ------------ ------------ ------------
Impairment (reversal) of oil and
gas properties (9,020,654) (5,617,776) (9,020,654) (5,617,776)
---------------------------------- ------------ ------------ ------------ ------------
As at December 31, 2022, 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 Capella block in Colombia. The company
prepared estimates of fair value less costs of disposal of its
Capella CGUs and determined that recoverable amounts exceeded their
carrying value for $10,409,615, which was offset by an impairment
loss of$1,388,961 determined in its Canada CGU which was mainly
originated from a revision of reserves. As at December 31, 2021,
the Company recognized an impairment reversal of $5,617,776 related
to its Tapir and Canada CGUs.
Loss (gain) on Derivative Liability
Three months Years ended
ended December December 31
31
2022 2021 2022 2021
------------------------------------- ---------- ---------- ---------- ----------
Loss (gain) on Derivative Liability 1,005,740 (467,507) 5,974,674 (467,507)
------------------------------------- ---------- ---------- ---------- ----------
During the three months and the year ended December 31, 2022,
the Company recorded a loss in derivative liability of $1,005,740
and $5,974,674, respectively (2021: gain 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.
Other income
Three months Years ended
ended December December 31
31
2022 2021 2022 2021
------------------------------------ ----------- ----------- ---------- --------------
Other income (110,669) (756,242) (163,266) (2,018,382)
------------------------------------ ----------- ----------- ---------- --------------
The Company reported other income of $110,669 and $163,266 for
the three months and year ended December 31, 2022, respectively
(2021: $756,242 and $2,018,382, respectively). During 2021, the
Company's recognized other income from 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 ended Years ended
December 31 December 31
2022 2021 2021 2021
---------------------------------------- ---------- ------------ ---------- -------------
Current income tax expense 1,401,769 176,238 2,428,862 149,040
Deferred income tax expense (recovery) 5,662,248 (1,467,850) 5,662,248 (1,467,850)
---------------------------------------- ---------- ------------ ---------- -------------
Total income tax expense (recovery) 7,064,017 (1,291,612) 8,091,110 (1,318,810)
---------------------------------------- ---------- ------------ ---------- -------------
During 2022, the Company recognized a total income tax expense
of $8,091,110 (2021: recovery of $1,318,810) which consisted on
$2,428,862 of current income tax expense (2021: $149,940) and
$5,662,248 of deferred income tax expense (2021: recovery of
$1,467,850). This increase is mainly caused by the significant
improvement of the Company's net taxable income, especially in
Colombia, when compared versus 2021. During 2022, the Company has
recognized a deferred income tax asset balance of $872,286 (2021:
$4,839,785) and a deferred tax liability balance of $5,066,684
(2021: $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.
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 adjusted working capital. 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, 2022, the Company has an adjusted working
capital of $8,223,758. The Company has continued improving its
working capital, using its operational cash flows to continue
growing 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
and growth.
As at December 31, 2022 the Company's net debt was calculated as
follows:
December 31,
2022
-------------------------------------------------------- ------------ ---------------------------------------
Current assets $ 17,504,225
Less:
Accounts payable and accrued liabilities 5,850,823
Promissory Note 1,899,294
Income taxes 1,488,916
------------------------------------------------------------------------------------------ -------------------
Net debt (1) $ 8,265,192
---------------------------------------------------------------------- ---------------- -------------------
(1) Non-IFRS measure
Adjusted Working Capital
As at December 31, 2022 the Company's adjusted working capital
was calculated as follows:
December 31,
2021
--------------------------------------------------------- ------------ ---------------------------------------
Current assets:
Cash and restricted cash $ 13,060,968
Restricted cash and deposits 210,654
Trade and other receivables 2,568,290
Taxes receivable 801,177
Other current assets 863,136
Less:
Accounts payable and accrued liabilities 5,850,823
Lease obligation 41,434
Promissory note 1,899,294
Income tax payable 1,488,916
------------------------------------------------------------------------------------------- -------------------
Working capital(1) $ 8,223,758
----------------------------------------------------------------------- ---------------- -------------------
(1) Non-IFRS measure
Debt Capital
As of December 31, 2022, the Company currently has $1.9 million
in outstanding debt in the form of a promissory note payable to
Canacol and its final payment is due no later than June 30,
2023.
Letters of Credit
At December 31, 2022, the Company had obligations under Letters
of Credit ("LC's") outstanding totaling $2.7 million to guarantee
work commitments on exploration blocks and other contractual
commitments. 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 $563,894 2024
Financial December
ANH Carrao Energy Capacity $1,672,162 31, 2023
CORE - June 30,
39 ANH Carrao Energy Compliance $100,000 2023
Financial April 14,
OMBU ANH Carrao Energy Capacity $436,300 2024
-------------- ------------- --------------- ------------- ----------- ----------
Total $2,772,356
===========
Share Capital
As at December 31, 2022, the Company had 218,401,931 common
shares, 67,837,418 warrants and 20,590,000 stock options
outstanding.
RELATED PARTIES
The following table provides a summary of the Company's
Director's compensation paid during the year ended December 31,
2022:
Salary Bonus Stock-Based
Director or Annual Compensation
Fee Total
G. Jull 309,000 250,000 126,296 685,296
M. Abbott 309,000 250,000 149,785 708,785
M. Charash 66,000 109,500 25,546 201,046
G. Carnie 66,000 109,500 25,546 201,046
R. Sharma 66,000 - 61,610 127,610
A. Zaidi 66,000 - 55,224 121,224
---------------- ----------- -------- ----------- ------------
Total 882,000 719,000 444,007 2,045,007
---------------- ----------- -------- ----------- ------------
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, 2022:
Less than
1 year 1-3 years Thereafter Total
------------------------ ------------------------------------- ---------------------- ---------------------- ----------------------
Promissory
Note $ 1,899,294 - - 1,899,294
Exploration and production
contracts - 17,800,000 - 17,800,000
---------------------------------------- --------------------- ---------------------- ---------------------- ----------------------
$ 1,899,294 17,800,000 - 19,699,294
--------------------------------------- --------------------- ---------------------- ---------------------- ----------------------
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, 2022 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, and its $12 million commitment at its COR-39
block.
SUBSEQUENT EVENTS
Effective February 9, 2023, the Agencia Nacional de
Hidrocarburos ("ANH") approved the suspension of the obligations
and operations of the OMBU contract due to force majeure
circumstances generated by the blockades and social unrest around
the Capella field. The suspension is for an initial term of three
months and the Company, together with its partner and the ANH, is
monitoring this suspension to define next steps.
SUMMARY OF THREE MONTHS RESULTS
2022 2021
Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
Oil and
natural
gas sales,
net
of royalties 8,931,562 7,614,336 5,024,604 3,911,329 3,038,832 1,684,609 941,620 847,432
Net income
(loss) 2,968,117 2,041,955 768,318 (5,431,865) 6,960,035 (21,782) (734,317) (510,405)
Income (loss)
per share -
basic 0.01 0.02 0.00 (0.03) 0.04 (0.00) (0.01) (0.01)
diluted 0.01 0.00 0.00 (0.02) 0.04 (0.00) (0.01) (0.01)
Working
capital
(deficit) (1,316,665) 7,392,310 5,594,027 7,657,938 8,006,074 783,707 3,141,217 (2,659,690)
Total assets 53,190,248 46,979,259 42,670,153 39,914,240 41,195,798 25,362,323 25,948,551 27,684,920
Net capital
expenditures 2,106,463 4,836,860 2,777,611 725,665 1,991,163 148,528 (15,378) 97,330
Average daily
production
(boe/d) 1,736 1,503 980 1,144 712 575 331 242
------------ ------------ ------------ ------------ ------------ ------------ ----------- ------------
The Company's oil and natural gas sales have increased during
2022 due to increased 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 during 2021 and 2022. Trends in the
Company's net income 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 27, 2023, the Company had the following securities
issued and outstanding:
Exercise
Number Price Expiry Date
------------------------- ------------------------- ------------------------- ---------------------------
Common shares 228,979,841 n/a n/a
Warrants 57,259,507 GBP 0.09 Oct. and Nov,
2023
Stock options 750,000 CAD$ 1.15 October 22,
2028
Stock options 270,000 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 2,983,332 GBP 0.07625 June 13, 2024
Stock options 2,983,336 GBP 0.07625 June 13, 2025
Stock options 766,665 CAD$0.28 December 9,
2023
Stock options 766,667 CAD$0.28 December 9,
2024
Stock options 766,668 CAD$0.28 December 9,
2025
Stock options 416,666 CAD$0.26 March 7, 2024
Stock options 416,666 CAD$0.26 March 7, 2025
Stock options 416,668 CAD$0.26 March 7, 2026
Stock options 1,826,110 GBP 0.1675 June 13, 2023
Stock options 1,826,111 GBP 0.1675 June 13, 2024
Stock options 1,826,111 GBP 0.1675 June 13, 2025
Stock options 216,667 GBP 0.1925 July 23, 2024
Stock options 216,667 GBP 0.1925 July 23, 2025
Stock options 216,666 GBP 0.1925 July 23, 2026
OUTLOOK
During 2022, the Company deployed a portion of the capital
raised at the time of the Admission to AIM on a successful two well
drilling campaign at Rio Cravo on the Tapir Block. These results,
and the subsequent generation of positive cashflows in Q3 and Q4
2022, provide Arrow with the funds required for its $32 million
capital program for 2023, including drilling of 10 wells, seismic
acquisition and the development of production facilities.
To date, the Company has already drilled three wells at Rio
Cravo, which have added an additional 1,500 boe/d and is currently
moving its drilling rig to the Carrizales Norte location on the
Tapir Block, confirming Arrow's commitment to increase production
and shareholder value. The Company is able to support the planned
2023 CAPEX program with current cash on hand and cashflow from
operations.
Arrow continues to focus on growth and improving its balance
sheet and free cash flow.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's critical accounting estimates 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
2022, 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.
Unstable Oil and Gas Industry
Recent market events and conditions, including demand
destruction resulting from the COVID-19 pandemic, constant changes
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.
Social risks
The Company's activities are subject to social risks, including
protests or blockades by groups located near some of the Company's
operations. Despite the fact that the Company is committed to
operating in a socially responsible manner, the Company may face
opposition from local communities and non-governmental
organizations with respect to its current and future projects,
which could adversely affect the Company's business, results of
operations and financial condition. No certainty can be given that
the Company will be able to reach an agreement with the different
communities or special interest groups, such as environmentalists
and ethnic communities. Reaching such an agreement may also incur
unanticipated costs. The Company could also be exposed to similar
delays due to opposition from local communities in other countries
where the Company carries out its activities.
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.
Global 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. The past 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. 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 a 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.
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, 2022 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, 2022. During the three months
ended December 31, 2022, 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.
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END
FR NKDBKFBKDCPK
(END) Dow Jones Newswires
May 02, 2023 02:00 ET (06:00 GMT)
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