TIDMCAZA
RNS Number : 0891P
Caza Oil & Gas, Inc.
14 August 2014
August 14, 2014
CAZA OIL & GAS ANNOUNCES SECOND QUARTER RESULTS
AND PROVIDES OPERATIONAL UPDATE
HOUSTON, TEXAS (Marketwire - August 14, 2014) - Caza Oil &
Gas, Inc. ("Caza" or the "Company") (TSX:CAZ) (AIM:CAZA)is pleased
to provide its unaudited financial and operational results for the
three-months ended June 30, 2014.
Unaudited Second Quarter Financial Results
-- Caza's revenues from oil and natural gas sales increased 489%
to US$6,286,049 for the three-month period ended June 30, 2014,
from US$1,067,991 for the comparative period in 2013. This also
represents a quarter-on-quarter increase of 37% compared to
US$4,591,507 in Q1 2014.
-- Adjusted EBITDA increased to US$3,269,495 for the three-month
period ended June 30, 2014, as compared to an adjusted EBITDA loss
of (US$824,891) for the comparative period in 2013. This also
represents a quarter-on-quarter increase of 65% compared to
US$2,139,210 in Q1 2014.
-- Caza's oil and natural gas liquids (NGL) production increased
495% to 65,823 bbls for the three-month period ended June 30, 2014,
from 11,059 bbls for the comparative period in 2013. This was also
an increase of 47% from 44,724 bbls in Q1 2014.
-- The Company's oil and NGL production has increased to 78% of
the Company's combined oil and natural gas production in Q2 2014
from 54% in Q2 2013.
-- Caza's natural gas production increased 100% to 111,016 Mcf
for the three-month period ended June 30, 2014, from 55,626 Mcf for
the comparative period in 2013.
-- Average net production volumes increased 320% to 937 Boe/d
for the three-month period ended June 30, 2014, from 223 Boe/d for
the comparative period in 2013, and have since increased to an
average of 1,315 Boe/d during the month of July 2014. The Company's
net aggregate production for the month of July was 40,776 Boe,
which is currently ahead of the Company's forecast.
-- Operating net back increased to US$57.84 for the three month
period ended June 30, 2014, from US$22.24 for the comparative
period in 2013.
-- The average oil price received by Caza increased 8% to
US$92.89 per bbl during the three-month period ended June 30, 2014,
from US$85.92 per bbl during the comparative period in 2013. The
average natural gas price received by Caza increased 20% to US$4.47
per Mcf during the three-month period ended June 30, 2014, from
US$3.72 per Mcf during the comparative period in 2013.
-- The average combined price received by Caza in Q2 2014
increased 1% to US$74.55 per Boe compared to US$74.45 per Boe in Q1
2014.
-- Caza had a cash and cash equivalents balance of US$3,944,944
as of June 30, 2014, as compared to US$5,082,401 at March 31, 2014.
The Company has drawn an aggregate of US$45MM from the total amount
of US$50MM available to it pursuant to its Note Purchase Agreement
with Apollo Investment Corporation, an investment fund managed by
Apollo Investment Management. These figures do not include gross
proceeds from the recent equity raise of approximately US$10
million, as mentioned below.
Second Quarter Operational Results and Recent Events
-- West Copperline Property, Lea County, New Mexico: On July 21,
2014, the Company announced results for its West Copperline 29 Fed
#4H horizontal Bone Spring development well. Under controlled
flowbackthe well produced at a peak 24 hour gross rate of 1,598
Boe, which consisted of 1,220 bbls of oil and 2.27 MMcf of natural
gas on July 16, 2014. The initial 28 day average for this well was
1,173 Boe/d gross, which consisted of 922 bbls of oil and 1.5 MMcf
of natural gas per day.
Caza now has four producing wells on this property. The West
Copperline 29 Fed #1H and #2H wells are producing from the 2(nd)
Bone Spring Sand, and the West Copperline 29 Fed #3H and #4H wells
are producing from the 3(rd) Bone Spring Sand. The West Copperline
battery has averaged 1,532 Boe/d gross from all four wells, which
consists of 1,238 bbls of oil and 1.8 MMcf of natural gas per day
during the month of August 2014. Caza currently has a 62.5% working
interest (approximate 47.25% net revenue interest) in the West
Copperline wells.
-- Gramma Ridge Property, Lea County, New Mexico: On July 21,
2014, the Company announced that the Gramma Ridge 27 State #2H
horizontal Bone Spring test well (the "27-2H well") had reached the
intended total measured depth and would be fracture stimulated
beginning on July 27, 2014. The fracture stimulation was completed
this week and included 24 stages. Production tubing is currently
being installed, and initial flowback is anticipated to begin later
this week. The market will be updated once production has
stabilized and a peak rate has been achieved. The 27-2H well is a
direct offset to the highly successful Gramma Ridge 27 State #1H
well (the "27-1H well"), as referenced below. Caza currently has a
52.5% working interest (approximate 40.82% net revenue interest) in
the Gramma Ridge 27-1H and 27-2H wells.
-- Broadcaster Property, Lea County, New Mexico (West Copperline
non-operated): On July 21, 2014, the Company announced that the the
non-operated Broadcaster 29 Fed #3H horizontal 3(rd) Bone Spring
development well was drilling ahead. The operator was preparing to
begin drilling the lateral section to a total measured depth of
approximately 15,824 feet. The well has reached the intended total
measured depth and the fracture stimulation has been scheduled for
August 24, 2014. The market will be updated once the frac has been
completed and production has stabilized. The Broadcaster property
is contiguous to the Company's West Copperline property, and this
well is a direct offset to the Company's operated West Copperline
Fed 29 #1H and #3H wells, which have eachdelivered very strong
results. Caza currently has a 25% working interest (17.63% net
revenue interest) in the Broadcaster Fed 29 #3H well.
-- On July 21, 2014, the Company announced that it had
voluntarily prepaid all amounts owing under its $4.3 million
convertible unsecured loan (the "Loan") made available by YA Global
Master SPV Ltd., an investment fund managed by Yorkville Advisors
LLC ("Yorkville"). The prepayment amount of $1,676,777 terminated
the Loan between the Company and Yorkville.
-- On July 4, 2014, the Company completed the placing of
32,679,739 common shares at a price of GBP0.18 per share
(approximately C$0.33) for gross proceeds of approximately US$10
million (approximately GBP5.9 million and C$10.7 million) from
investors in the United Kingdom.
-- Jazzmaster Property, Lea County, New Mexico: On June 26 2014,
the Company announced results for the non-operated Jazzmaster 17
State #3H horizontal Bone Spring development well. Under controlled
flowback, the well produced at a peak 24 hour rate of 650 Boe,
which consisted of 569 bbls of oil and 488 Mcf of natural gas. The
initial 30 day average for this well was 538 Boe/d gross, which
consisted of 459 bbls of oil and 471 Mcf of natural gas per day.
Caza has a 25.0% working interest (approximately 19.94% net revenue
interest) in the Jazzmaster 17 State #3H well.
-- On June 5, 2014, the Company announced that it had drawn an
advance of US$10MM pursuant to its Note Purchase Agreement with
Apollo Investment Corporation, an investment fund managed by Apollo
Investment Management. With this advance, the Company has drawn an
aggregate of US$45MM from the total facility of US$50MM.
-- Gramma Ridge Property, Lea County, New Mexico: On May 29,
2014, the Company announced the results of its Gramma Ridge 27-1H
horizontal Bone Spring test well. Under controlled flowback the
well produced at a peak 24 hour gross rate of 1,602 Boe, which
consisted of 830 bbls of oil and 4.63 MMcf of natural gas. The
initial 30 day average for this well was 877 Boe/d gross, which
consisted of 530 bbls of oil and 2.1 MMcf of natural gas. Caza
currently has a 52.5% working interest (approximate 40.82% net
revenue interest) in the Gramma Ridge 27-1H well.
-- Forehand Ranch Property, Eddy County, New Mexico: On May 29,
2014, the Company announced that it had begun a shallow pool Cherry
Canyon development program on this property. The Cherry Canyon is a
shallow oil interval in the Delaware Formation at approximately
4,000 feet vertical depth. The Company's intent was to initially
drill and frac three vertical wells, one being a pressure
maintenance well, in succession using the same rig. However, log
data obtained while drilling made an unpermitted location look more
favorable than one of the three permitted locations. Therefore, the
Company decided to drill the first two locations and release the
rig while it pursued a permit to drill the more favorable location.
The two vertical wells, Forehand Ranch 22 State #1 (the FR 22-1
well") and Forehand Ranch 27 State #4 (the "FR 27-4 well"), have
been drilled and are scheduled to be fracture stimulated this
month. The FR 27-4 well will be completed as a pressure maintenance
well, which will significantly reduce lease operating expenses at
Forehand Ranch.
The Company has four additional Cherry Canyon locations
permitted for drilling on the property, and currently has a 63%
working interest (approximate 47.25% net revenue interest) in the
FR 22-1, FR 27-4 and the four permitted Cherry Canyon
locations.
-- West Copperline Property, Lea County, New Mexico: On April
17, 2014, the Company announced the results of its West Copperline
29 Fed #2H well. Under controlled flowback, the wellproduced at a
peak 24 hour gross rate of 1,366 Boe, which consisted of 1,177 bbls
of oil and 1.133 MMcf of natural gas, on April 12, 2014. The
initial 30 day average for this well was 688 Boe/d gross, which
consisted of 534 bbls of oil and 925 Mcf of natural gas per day.
Caza currently has a 62.5% working interest (approximate 47.25% net
revenue interest) in this well.
-- Marathon Road/Lynch Property, Lea County, New Mexico: On
March 26, 2014, the Company announced the results of the
non-operated Marathon Road 15 PA Fed #1H well. Under controlled
flowback, the well produced at a rate of approximately 2,361 Boe,
which consisted of 2,032 bbls of oil and 1.974 MMcf of natural gas
on March 21, 2014. The initial 30 day average for this well was
1,974 Boe/d gross, which consisted of 1,721 bbls of oil and 1.52
MMcf of natural gas. Caza currently has a 14.7% working interest
(approximate 12.5% net revenue interest) in this well.
Forward Drilling Program and Performance Against Stated
Production Targets
-- The next scheduled wells to be drilled under the Company's
Bone Spring program are anticipated to be as follows: (i) Operated
Lennox 32 State Unit #4H (mid-August 2014); (ii) Non-operated
Marathon Road 15 OB #1H (late August 2014); (iii) Operated Gramma
Ridge 27 State #4H (early October 2014); and (iv) Non-operated
second Broadcaster well (late Q4 2014).
-- On February 5, 2014, the Company announced its intended drill
plan, including many of the wells listed above, and the resulting
production forecast. Production growth was forecasted to continue
through August 2014, and was forecasted to reach 35,538 Boe for
that month (1,185 Boe/d). The most recent production data for the
month of July 2014, revealed the Company's net aggregate production
to be 40,776 Boe (1,315 Boe/d), which is currently ahead of the
forecasted rates.
W. Michael Ford, Chief Executive Officer commented:
"We are pleased to provide our financial and operational results
for the second quarter of 2014. Our numbers are up across the
board, both year-on year and quarter-on-quarter. Our oil and NGL
volumes are up 495% year-on-year and 47% since Q1 2014. Oil and
NGL's now comprise 78% of the Company's combined oil and natural
gas production. Additionally, our natural gas production was up
100% year-on-year. These increases have led to a 320% year-on-year
increase to the Company's average net production volumes.
Our production increases have led to significant increases in
Company revenues and adjusted EBITDA. Company revenues from oil and
natural gas sales increased 489% year-on-year and 37%
quarter-on-quarter. Our adjusted EBITDA also increased to
US$3,269,495 for the quarter compared to a loss a year ago and has
increased 65% quarter-on-quarter. These increases along with the
recently announced equity raise have allowed us to target
additional leasing in the Bone Spring play and retire the Yorkville
debt.
The Company's continued successes in the Bone Spring play and
the recent equity infusion have the Company poised for further
growth in the second half of 2014, which should continue to
generate material value for the Company and our shareholders."
Copies of the Company's unaudited financial statements for the
first quarter ended June 30, 2014, and the accompanying
management's discussion and analysis are available on SEDAR at
www.sedar.com and the Company's website at www.cazapetro.com.
About Caza
Caza is engaged in the acquisition, exploration, development and
production of hydrocarbons in the following regions of the United
States of America through its subsidiary, Caza Petroleum, Inc.:
Permian Basin (West Texas and Southeast New Mexico) and Texas and
Louisiana Gulf Coast (on-shore).
For further information, please contact:
Caza Oil & Gas, Inc.
Michael Ford, CEO +1 432 682 7424
John McGoldrick, Chairman +65 9731 7471 (Singapore)
Cenkos Securities plc
Beth McKiernan +44 131 220 9778 (Edinburgh)
Neil McDonald +44 131 220 6939 (Edinburgh)
Vigo Communications
Chris McMahon +44 20 7016 9570
Patrick d'Ancona
The Toronto Stock Exchange has neither approved nor disapproved
the information contained herein.
In accordance with AIM Rules - Guidance Note for Mining, Oil and
Gas Companies, the information contained in this announcement has
been reviewed and approved by Anthony B. Sam, Vice President
Operations of Caza who is a Petroleum Engineer and a member of The
Society of Petroleum Engineers.
ADVISORY STATEMENT
Information in this news release that is not current or
historical factual information may constitute forward-looking
information within the meaning of securities laws. Such information
is often, but not always, identified by the use of words such as
"seek", "anticipate", "plan", "schedule", "continue", "estimate",
"expect", "may", "will", "project", "predict", "potential",
"intend", "could", "might", "should", "believe", "develop", "test",
"anticipation" and similar expressions. In particular, information
regarding production revenue, future drilling or completion
operations, production and revenue growth and available sources of
financing contained in this news release constitutes
forward-looking information within the meaning of securities
laws.
Implicit in this information, are assumptions regarding the
future budgets and costs, success and timing of drilling
operations, rig availability, projected production, revenue and
expenses and well performance. These assumptions, although
considered reasonable by the Company at the time of preparation,
may prove to be incorrect. Readers are cautioned that actual future
operations, operating results and economic performance of the
Company are subject to a number of risks and uncertainties,
including general economic, market and business conditions and
could differ materially from what is currently expected as set out
above. In addition, the geotechnical analysis and engineering to be
conducted in respect of certain wells may not be complete. The flow
rates set out herein are not necessarily indicative of long term
performance or of ultimate recovery. Future flow rates from wells
may vary, perhaps materially, and wells may prove to be technically
or economically unviable. Any future flow rates will be subject to
the risks and uncertainties set out herein.
For more exhaustive information on these risks and uncertainties
you should refer to the Company's most recently filed annual
information form which is available at www.sedar.com and the
Company's website at www.cazapetro.com. You should not place undue
importance on forward-looking information and should not rely upon
this information as of any other date. While we may elect to, we
are under no obligation and do not undertake to update this
information at any particular time except as may be required by
securities laws.
GLOSSARY OF ABBREVIATIONS
Adjusted net income (loss) plus Boe/d barrels of crude equivalent
EBITDA interest, depreciation, per day
depletion, amortization,
accretion, impairment and
stock based compensation
bbl one barrel, each barrel Mcf one thousand cubic feet
representing 34.972 Imperial of natural gas
gallons or 42 U.S. gallons
bbls/d barrels per day MMcf million cubic feet of natural
gas
Boe barrels of crude oil equivalent NGL natural gas liquids
derived by converting natural
gas to crude oil in the
ratio of six thousand cubic
feet of natural gas to
one barrel of crude oil
The term Adjusted EBITDA consists of net income (loss) plus
interest, depreciation, depletion, amortization, accretion,
impairment and stock based compensation. Adjusted EBITDA is not
defined under International Financial Reporting Standards ("IFRS")
and should not be considered in isolation or as an alternative to
conventional IFRS measures. Please see the Company's Management's
Discussion & Analysis for the three and six month period ending
June 30, 2014 for a discussion of Adjusted EBITDA under the heading
"Non-IFRS Measures" and for reconciliation of Adjusted EBITDA to
net loss, which is the most directly comparable measure of
financial performance calculated under IFRS. Adjusted EBITDA should
not be considered in isolation or as an alternative to conventional
IFRS measures. Adjusted EBITDA and the underlying calculations are
not necessarily comparable or calculated in an identical manner to
a similarly titled measure of another entity.
The term boe may be misleading, particularly if used in
isolation. A boe conversion of six thousand cubic feet per one
barrel is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a
value equivalency at the well head. Given that the value ratio
based on the current price of oil as compared to natural gas is
significantly different from the energy equivalency of 6:1,
utilizing a conversion on a 6:1 basis may be misleading as an
indication of value.
Caza Oil & Gas, Inc.
Condensed Consolidated Statements of Financial Position
(Unaudited)
June 30, December 31,
(In United States dollars) 2014 2013
-------------------------------------------- ------------- --------------
Assets
Current
Cash and cash equivalents (Note 7(c)) $ 3,944,944 $ 18,495,086
Restricted cash (Note 9) 468,800 455,317
Accounts receivable 13,039,989 5,582,816
Derivative assets (Notes 9) 346,826 -
Prepaid and other 414,628 104,444
------------- --------------
18,215,187 24,637,663
Exploration and evaluation assets (Note
2) 14,189,748 7,843,846
Petroleum and natural gas properties
and equipment (Note 3) 60,224,381 46,618,635
------------- --------------
$ 92,629,316 $ 79,100,144
------------- --------------
Liabilities
Current
Accounts payable and accrued liabilities $ 20,472,283 $ 16,153,038
Derivative liabilities (Notes 9 and 11) 1,475,071 677,507
Decommissioning liabilities (Note 4) 124,438 122,269
------------- --------------
22,071,792 16,952,814
Notes payable (Notes 10 and 11) 42,851,139 35,855,042
Decommissioning liabilities (Note 4) 1,255,739 850,365
------------- --------------
66,178,670 53,658,221
Total Equity
Share capital 80,958,170 77,967,487
Warrants 156,365 156,365
Share based compensation reserve 10,716,372 10,480,968
Deficit (62,708,200) (60,759,064)
------------- --------------
Equity attributable to owners of the
Company 29,122,707 27,845,756
Non-controlling interests (2,672,061) (2,403,833)
------------- --------------
Total equity 26,450,646 25,441,923
------------- --------------
$ 92,629,316 $ 79,100,144
------------- --------------
See accompanying notes to the condensed consolidated financial
statements
Caza Oil & Gas, Inc.
Condensed Consolidated Statements of Net Loss and Comprehensive
Loss
(Unaudited)
Three months ended Six months ended
June 30, June 30,
(In United States dollars) 2014 2013 2014 2013
------------------------------------------------------ ------------- --------------- -------------- --------------
Revenue and other
Petroleum and natural gas $ 6,286,049 $ 1,067,991 $ 10,877,556 $ 2,347,287
Interest income 56 420 176 542
------------- --------------- -------------- --------------
6,286,105 1,068,411 10,877,732 2,347,829
------------- --------------- -------------- --------------
Expenses
Production 1,408,977 615,825 2,438,347 1,049,843
General and administrative 1,535,370 1,624,421 2,903,740 3,042,578
Depletion and depreciation (Notes 3 and 4) 1,859,742 578,730 3,408,097 1,153,644
Financing costs 1,554,461 460,056 3,143,900 570,422
Other expense (income) (687,490) (32,003) (669,685) 22,997
Exploration and evaluation impairment (Note 2) 322,752 740,677 322,752 740,677
Loss on disposal of assets - 120,041 - 120,041
Realized loss on risk management contracts 278,795 - 419,612 -
Unrealized loss on risk management contracts 776,648 - 1,128,333 -
------------- --------------- -------------- --------------
7,049,255 4,107,747 13,095,096 6,700,202
------------- --------------- -------------- --------------
Net loss and comprehensive loss for the period (763,150) (3,039,336) (2,217,364) (4,352,373)
------------- --------------- -------------- --------------
Attributable to:
Owners of the Company (673,466) (2,642,636) (1,949,136) (3,777,305)
Non-controlling interests (89,684) (396,700) (268,228) (575,068)
------------- --------------- -------------- --------------
$ (763,150) $ (3,039,336) $ (2,217,364) $ (4,352,373)
------------- --------------- -------------- --------------
Net loss per share
- basic and diluted (0.00) (0.02) (0.01) (0.03)
Weighted average shares outstanding
- basic and diluted (1) 199,323,039 170,879,773 193,651,712 169,777,769
============= =============== ============== ==============
(1) All options and warrants have been excluded from the diluted loss per share computation
as they are anti-dilutive.
Caza Oil & Gas, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six month period ended June 30, 2014 2013
(In United States dollars)
----------------------------------------------------- ------------------- --------------
OPERATING
Net loss for the period $ (2,217,364) $ (4,352,373)
Adjustments for items not affecting cash:
Depletion and depreciation 3,408,097 1,153,644
Unwinding of the discount (Note 4) 16,798 10,501
Share-based compensation 175,874 413,669
Non-cash financing costs 726,780 217,420
Unrealized currency gain - (2,172)
Exploration and evaluation impairment 322,752 740,677
Realized loss on risk management contracts 165,708 -
Unrealized loss on risk management contracts
and derivative
liabilities 608,707 -
Loss on disposal of assets - 120,041
Other expense 13,206 (20,761)
Interest income (176) (542)
Changes in non-cash working capital (Note
7(a)) (7,611,855) 1,000,502
------------------- --------------
Cash flows (used in) from operating activities (4,391,473) (719,394)
------------------- --------------
FINANCING
Proceeds from issuance of shares - 1,871,660
Proceeds from issuance of notes payable
(note 10) 10,000,000 20,000,000
Note principal payments - (632,500)
Financing Costs paid (740,000) (1,799,913)
Interest received 176 542
Changes in non-cash working capital (Note
7(a)) (111,515) 72,098
------------------- --------------
Cash flow from financing activities 9,148,661 19,511,887
------------------- --------------
INVESTING
Exploration and evaluation expenditures
(Note 2) (23,118,402) (7,514,660)
Development and production expenditures
(Note 3) (177,828) (383,966)
Purchase of office furniture and equipment
(Note 3) (1,586) (1,250)
Restricted cash - (416,048)
Partner reimbursement - 61,364
Changes in non-cash working capital (Note
7a) 3,990,486 1,757,704
------------------- --------------
Cash flows used in investing activities (19,307,330) (6,496,856)
------------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (14,550,142) 12,295,637
CASH AND CASH EQUIVALENTS, BEGINNING OF
THE PERIOD 18,495,086 6,809,640
------------------- --------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 3,944,944 $ 19,105,277
------------------- --------------
See accompanying notes to the condensed consolidated financial
statements
Caza Oil & Gas, Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
For the six month period ended June 30, 2014 2013
(In United States dollars)
--------------------------------------------------- ------------- -------------
Share Capital
Balance, beginning of period $ 77,967,487 $ 75,064,216
Common shares issued 2,990,683 2,127,268
Balance, end of period 80,958,170 77,191,484
------------- -------------
Warrants
Balance, beginning of period 156,365 89,674
Issued - -
Balance, end of period 156,365 89,674
Share based compensation reserve
Balance, beginning of period 10,480,968 9,648,162
Share-based compensation 235,404 394,071
Balance, end of period 10,716,372 10,042,233
------------- -------------
Deficit
Balance, beginning of period (60,759,064) (53,298,407)
Net loss allocated to the owners of the
Company (1,949,136) (3,777,305)
------------- -------------
Balance, end of period (62,708,200) (57,075,712)
------------- -------------
Non-Controlling Interests
Balance, beginning of period (2,403,833) (1,290,125)
Net loss allocated to non-controlling interests (268,228) (575,068)
Balance, end of period (2,672,061) (1,865,193)
------------- -------------
Total Equity $ 26,450,646 $ 28,382,486
------------- -------------
See accompanying notes to the condensed
consolidated financial statements
1. Basis of Presentation
Caza Oil & Gas, Inc. ("Caza" or the "Company") was
incorporated under the laws of British Columbia on June 9, 2006 for
the purposes of acquiring shares of Caza Petroleum, Inc. ("Caza
Petroleum"). The Company and its subsidiaries are engaged in the
exploration for and the development, production and acquisition of,
petroleum and natural gas reserves. The Company's common shares are
listed for trading on the Toronto Stock Exchange trading as the
symbol "CAZ" and AIM stock exchange as the symbol "CAZA". The
corporate headquarters of the Company is located at 10077 Grogan's
Mill Road, Suite 200, The Woodlands, Texas 77380 and the registered
office of the Company is located at Suite 1700, Park Place, 666
Burrard Street Vancouver, British Columbia, V6C 2X8.
The condensed consolidated financial statements (the "Financial
Statements") were prepared in accordance with IAS 34 - Interim
Financial Reporting using accounting policies consistent with
International Financial Reporting Standards ("IFRS").
These Financial Statements should be read in conjunction with
the Company's audited annual consolidated financial statements as
at and for the year ended December 31, 2013, which outline the
Company's significant accounting policies in Note 2 thereto, as
well as the Company's critical accounting judgments and key sources
of estimation uncertainty, which have been applied consistently in
these Financial Statements. The note disclosure requirements of
annual consolidated financial statements provide additional
disclosures to that required for the Financial Statements.
These consolidated financial statements were approved for
issuance by the Board of Directors on
August 11, 2014.
Application of new IFRS
IFRIC 21 - Levies was issued by the International Accounting
Standards Board (IASB) in May 2013 and is an interpretation of IAS
37 - Provisions, Contingent Liabilities and Contingent Assets. The
interpretation clarifies the obligating event that gives rise to a
liability to pay a levy. IFRIC 21 is effective for financial
periods beginning on or after January 1, 2014. The Company has
evaluated the impact of this interpretation on its Financial
Statements and it did not have any material impact.
2. Exploration and evaluation assets ("E&E")
June 30, December 31, 2013
2014
----------------------------------------------------------------- --------------- ------------------
Balance, beginning of the period $ 7,843,846 $ 10,085,746
Additions to exploration and evaluation assets 23,397,596 28,004,357
Transfers to petroleum and natural gas properties and equipment (16,728,942) (28,764,566)
Impairment (322,752) (1,481,691)
Balance, end of the period $ 14,189,748 $ 7,843,846
----------------------------------------------------------------- --------------- ----------------------
3. Petroleum and natural gas properties and equipment
Development & Production ("D&P")
Cost Assets Corporate Assets Total
----------------------------------- ------------------- -------------
Balance, beginning of the period $ 73,541,238 $ 830,076 $ 74,371,314
Additions 283,314 1,586 284,900
Transfers from E&E 16,728,942 - 16,728,942
Balance, end of the period $ 90,553,494 $ 831,662 $ 91,385,156
----------------------------------------- ----------------------------------- ------------------- -------------
Accumulated Depletion and Depreciation D&P Assets Corporate Assets Total
----------------------------------------- ----------------------------------- ------------------- -------------
Balance, beginning of the period $ 26,940,071 $ 812,606 $ 27,753,198
Depletion and depreciation 3,400,182 7,916 3,408,098
Balance, end of the period $ 30,340,253 $ 820,522 $ 31,160,775
----------------------------------------- ----------------------------------- ------------------- -------------
Carrying amounts
At December 31, 2013 $ 46,601,167 $ 17,468 $ 46,618,635
At June 30, 2014 $ 60,213,241 $ 11,140 $ 60,224,381
---------------------- ----------------- ---------- -------------
The Company did not capitalize general and administrative
expenses directly to E&E or petroleum and natural gas
properties and equipment assets in the periods presented. There
were no impairment indicators as of June 30, 2014 and December 31,
2013.
4. Decommissioning Liabilities
The following is the continuity schedule of the obligation
associated with the retirement of oil and gas properties:
Period ended Year ended
June 30, 2014 December 31,
2013
-------------- -------------
Decommissioning liabilities, beginning
of the period $ 972,634 $ 967,798
Obligations incurred 390,745 312,894
Revision in estimated cash flows
and discount rate - (190,916)
Obligations settled - (140,645)
Unwinding of the discount 16,798 23,503
-------------- -------------
Decommissioning liabilities, end
of the period $ 1,380,177 $ 972,634
Current portion 124,438 122,269
-------------- -------------
Long-term decommissioning liabilities $ 1,255,739 $ 850,365
-------------- -------------
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 $3,512,983
(December 31, 2013 - $2,083,992). The June 30, 2014 obligation was
calculated using a risk free discount rate of 3.7% (2013 - 3.7%)
and an inflation rate of 3% (2013 - 3%). It is expected that these
obligations will be funded from general resources of the Company at
the time the costs are incurred with the majority of costs expected
to occur between 2015 and 2030.
5. Related Party Transactions
Singular Oil & Gas Sands, LLC ("Singular") is a related
party as it is a company under common control with Zoneplan
Limited, which is a significant shareholder of Caza.
Singular participated in the drilling of the Matthys McMillan
Gas Unit #2 and the O B Ranch #1 and 2 wells located in Wharton
County, Texas. Under the terms of that agreement, Singular paid
14.01% of the drilling costs through completion to earn a 10.23%
net revenue interest on the Matthys McMillan Gas Unit #2 well and
paid 12.5% of the drilling costs to earn a 6.94% net revenue
interest on the O B Ranch #1 well. Under the terms of the agreement
of the O B Ranch #2 Singular paid 9.375% of the drilling costs to
earn approximately 6.8% net revenue interest. This participation
was in the normal course of Caza's business and on the same terms
and conditions to those of other joint interest partners. Singular
owes the Company $4,451 in joint interest partner receivables as at
June 30, 2014 (December 31, 2013 - $51,431).
All related party transactions are in the normal course of
operations and have been measured at the agreed to exchange
amounts, which is the amount of consideration established and
agreed to by the related parties and which is comparable to those
negotiated with third parties
6. Commitments and Contingencies
As of June 30, 2014, the Company is committed under operating
leases for its offices and corporate apartment in the following
aggregate minimum lease payments which are shown below as operating
commitments:
2014 $ 120,917
2015 $ 184,402
The Company is required under the Apollo Note Agreement to
convey a proportionately reducible 2% overriding royalty interest
in each lease acquired by Caza using proceeds advanced under this
agreement. These amounts are not payable until such a time that
these leases produce petroleum and natural gas revenues. See Note
10 for additional information.
7. Supplementary Information
a) net change in non-cash working capital
June 30, 2014 June 30, 2013
------------------------------ ------------------------- -----------------------
Provided by (used in)
Accounts receivable $ (7,457,173) $ 611,085
Prepaid and other (310,186) 80,109
Accounts payable and accrued
liabilities 4,034,475 2,139,110
------------------------- -----------------------
$ (3,732,884) $ 2,830,304
------------------------- -----------------------
Summary of changes
Operating $ (7,611,855) $ 1,000,502
Investing 3,990,486 1,757,704
Financing (111,515) 72,098
$ (3,732,884) $ 2,830,304
------------------------- -----------------------
(b) supplementary cash flow information
June 30, June 30,
2014 2013
------------------- ------------ -----------------
Interest paid $ 2,240,000 $ -
Interest received 176 542
(c) cash and cash equivalents
June 30, December 31,
2014 2013
--------------------------- ------------------ ---------------------
Cash on deposit $ 3,875,403 $ 13,625,703
Money market instruments 69,541 4,869,383
------------------ ---------------------
Cash and cash equivalents $ 3,944,944 $ 18,495,086
------------------ ---------------------
The money market instruments bear interest at a rate of 0.010%
as at June 30, 2014
(December 31, 2013 - 0.010%).
8. Financial Instruments
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit, and foreign exchange risks. The
Company manages its exposure to these risks by operating in a
manner that minimizes its exposure to the extent practical. Except
as noted below there have been no changes in the Company's risks,
or the objectives, policies and processes to manage these
risks.
Commodity Price Risk
The Company is subject to commodity price risk for the sale of
natural gas. The Company may enter into contracts for risk
management purposes only, in order to protect a portion of its
future cash flow from the volatility of natural gas and natural gas
liquids commodity prices. On November 6, 2013, the Company entered
into swap contracts to limit exposure to declining crude oil prices
for approximately 75% of its production from currently producing
wells. Under these swaps, the Company receives or pays monthly a
cash settlement on the covered production of the difference between
the swap price and the month average of the daily closing quoted
spot price per barrel of West Texas Intermediate NYMEX crude oil.
These agreements cover 93,782 barrels of oil at a swap price of
$92.55, $90.04 and $96.11 during the year ending December 31, 2014
and cover 61,850 barrels of oil at a swap price of $87.05, $83.70
and $89.34 during the year ended December 31, 2015 and cover 8,428
barrels at a swap price of $85.23 during the year ended December
31, 2016. The fair value of the Company's commodity price
derivative contracts represents the estimated amount that would be
received for settling the outstanding contracts on June 30, 2014,
and will be different than what will eventually be realized. The
fair value of these assets at a particular point in time is
affected by underlying commodity prices, expected commodity price
volatility and the duration of the contract and is determined by
the expected future settlements of the underlying commodity. The
gain or loss on such contracts is made up of two components; the
realized component, which reflects actual settlements that occurred
during the period, and the unrealized component, which represents
the change in the fair value of the contracts during the period.
For the three month period ended June 30, 2014 the Company
recognized a loss of $278,795 on its settled commodity price
derivative contracts and recorded an unrealized loss of $776,648 on
unsettled commodity price derivative contracts due to higher
commodity prices.
Credit Risk
Credit risk arises when a failure by counter parties to
discharge their obligations could reduce the amount of future cash
inflows from financial assets on hand at the consolidated statement
of financial position date. A majority of the Company's financial
assets at the consolidated statement of financial position date
arise from natural gas liquids and natural gas sales and the
Company's accounts receivable that are with these customers and
joint venture participants in the oil & natural gas industry.
Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production. The
Company's natural gas and condensate production is sold to large
marketing companies. Typically, the Company's maximum credit
exposure to customers is revenue from two months of sales. During
the six month period ended June 30, 2014, the Company sold 60%
(year ended December 31, 2013 - 71%) of its natural gas and
condensates to a single purchaser. These sales were conducted on
transaction terms that are typical for the sale of natural gas and
condensates in the United States. In addition, when joint
operations are conducted on behalf of a joint interest partner
relating to capital expenditures, costs of such operations are paid
for in advance to the Company by way of a cash call to the partner
of the operation being conducted.
Caza management assesses quarterly whether there should be any
impairment of the financial assets of the Company. At June 30,
2014, the Company had overdue past due accounts receivable from
certain joint interest partners of $266,631 which were outstanding
for greater than 60 days (2013 - $156,426) and $978,413 that were
outstanding for greater than 90 days (2013 - $17,460). These
outstanding amounts due from certain joint interest partners were
received by the Company on July 16, 2014. At June 30, 2014, the
Company's three largest joint interest partners represented
approximately 25%, 17% and 1% of the Company's receivable balance
(December 31, 2013 - 18%, 4% and 3% respectively). The maximum
exposure to credit risk is represented by the carrying amount on
the consolidated statement of financial position of cash and cash
equivalents, accounts receivable and deposits.
Trade receivables disclosed above include amounts that are past
due at the end of the reporting period for which the Group has not
recognized an allowance for doubtful debts because there has not
been a significant change in credit quality and the amounts (which
include interest accrued after the receivable is more than 60 days
outstanding) are still considered recoverable. The Company manages
exposure on cash balances by holding cash with large and reputable
financial institutions. The Company also assesses the credit
worthiness of each counterparty before entering into contracts and
ensures that the counterparties meet minimum credit quality
requirements.
9. Equity Facility
The Company entered into an Equity Adjustment Agreement (the
"Adjustment Agreement") on March 5, 2013, as amended, with Global
Master SPV Ltd., an investment fund managed by Yorkville Advisors
Global, LP in conjunction with its SEDA Agreement dated November
23, 2012 with Yorkville. Pursuant to the Adjustment Agreement,
during the three months ended March 31, 2013, the Company issued
3,846,154 common shares to Yorkville Advisors Global, LP
("Yorkville") at a price of GBP0.13 per share for aggregate
proceeds of GBP500,000 (US$756,451). The Company has deposited in
escrow GBP275,000 (US$ - $455,317) as security for this contingent
payment obligation, which has been recorded within restricted cash
on the condensed consolidated statements of financial position.
Under the terms of the Adjustment Agreement, if on December 31
2014 the common share market price (determined as 95% of the
average daily volume weighted average price of common shares (VWAP)
during the preceding 22 trading days) is greater than GBP0.13, then
Yorkville will pay to the Company the difference multiplied by the
number of New Common Shares, and if the market price is less than
GBP0.13 then the Company will pay to Yorkville the difference
multiplied by the number of New Common Shares. The fair value of
this derivative was calculated using Monte-Carlo Simulation at the
date of issuance using inputs as of that date and at June 30, 2014
using inputs as of June 30, 2014, including the share price of
$0.13 per share, the strike price of $0.19 per share, risk-free
interest rate of 0.72%, a dividend yield of nil, a weighted average
volatility factor of 72.14%, and an expected life of one year. The
derivative liability is classified as a financial instrument
measured at fair value though profit or loss. The fair value of the
derivative asset amounted to US$346,826 as of June 30, 2014 (2013 -
$(330,768)) has been included within current assets on the
condensed consolidated statement of financial position, and the
change in fair value of US$677,594 since December 31, 2013 is
included in other income (expenses) in the condensed consolidated
statement of net loss and comprehensive loss.
10. Notes Payable - Apollo
The Company entered into a Note Purchase Agreement ( the "Note
Agreement") dated May 23, 2013 with Apollo Investment Corporation
("the Note Holder"), an investment fund managed by Apollo
Investment Management, pursuant to which the Note Holder has agreed
to purchase from the Company up to US$50,000,000 of its senior
secured notes. The Company received US$20,000,000 at the closing of
the Note Agreement ("Tranche A Apollo Note") with an additional
drawdown of US$5,000,000, US$10,000,000 and US$10,000,000 on
September 11, 2013, December 19, 2013 and May 19, 2014,
respectively. As at June 30, 2014, the Company may draw additional
advances up to US$5,000,000 until August 23, 2014, if at the time
of the advance, the Company meets the specified minimum production
and drilling cost requirements for previous wells drilled under the
program that were financed with funding from the Note Purchase
Agreement. In addition to these funds, the Company will have the
ability to reinvest cash flow from program wells back into the
drilling program.
The outstanding balance of the Tranche A Apollo Note as at June
30, 2014 was US$41,793,875 (net of unamortized transaction costs of
US$3,206,124) (2013 - US$32,027,392). This outstanding balance
matures on May 23, 2017. The Tranche A Apollo Note bears interest
at a floating rate of one-month LIBOR (with a floor of 2%) plus 10%
per annum, payable monthly. In an event of default under the Note
Purchase Agreement, additional interest will be payable at a
default rate of 5% per annum, but only during the period of
default.
The Company is required to comply with financial covenants,
which are tested quarterly, providing for specified interest
coverage ratios beginning in the quarter ending September 30, 2013,
and asset coverage ratios and minimum production, beginning in the
quarter ending March 31, 2014. Furthermore, the Company is required
to maintain a limit on expenditures for general and administrative
costs. The Company was complaint with this general and
administrative limit for the three month period ended June 30,
2014.
11. Notes Payable - Yorkville
On November 1, 2013 the Company entered into an agreement in
relation to a $4.3 million convertible unsecured loan (the "Loan")
from YA Global Master SPV Ltd., an investment fund managed by
Yorkville. The Loan consists of US$3.5 million of new credit
facilities along with an additional US$0.84 million that was used
to repay amounts which remain outstanding under the prior loan from
Yorkville. In connection with the Loan, the Company incurred a
total of US$304,060 in transaction costs. The Loan will mature on
November 1, 2014 and may be extended until November 16, 2016 by
Yorkville.. The Loan bears interest on outstanding principal at 8%
per annum and interest is payable quarterly only in Common Shares
based on a conversion price equal to 92.5% of the average price of
the Common Shares during the ten trading days prior to the interest
payment date. At Yorkville's option, outstanding principle of the
loan is convertible into Common Shares of the Company and the
conversion price will be a price per Common Share equal to either
(a) 92.5% of the average price of the Common Shares during the ten
trading days prior to the conversion to a maximum of $450,000 per
month or (b) at Yorkville's option, a fixed price of GBP0.14. In
connection with the Loan, Yorkville received an 8% implementation
fee and a three year warrants valued at US$72,343 (2013 - $73,865)
to purchase 2,529,333 Common Shares at an exercise price of $0.17
per share. The outstanding balance of the Loan as at June 30, 2014
was US$1,057,264 (net of unamortized transaction costs of
US$447,886) (2013 - US$3,827,650). The fair value of the derivative
liability amounting US $160,276 as of June 30, 2014 (2013 -
US$160,276) has been included within current liabilities on the
condensed consolidated statement of financial position, and the
change in fair value of US $nil since December 31, 2013 is included
in other expenses in the condensed consolidated statement of net
loss and comprehensive loss.
12. Long-term Incentive Plan
On March 25, 2014, the Board of Directors of the Company
approved the 2014-2016 Incentive Performance Program, which is
implemented under the Company's long-Term Incentive Plan. The
Performance Program consists of three measurement periods of one,
two and three years ending at each of the respective years 2014
through 2016. Performance awards are payable after the end of each
year, based on a specified percentage of each participant's salary
determined by the amount of the total shareholder return of the
Company during each measurement period compared to the total
shareholder return of 10 companies designated in a peer group.
Subject to the discretion of the Board of Directors, performance
awards are payable one-half in cash and one-half in common shares.
Compensation expense resulting from the Performance Program will be
accrued over the term of each measurement period beginning in the
quarter ended June 30, 2014. Accrued compensation expense related
to the three measurement periods for the quarter ended June 30,
2014 is $119,061, consisting of the 50% cash portion of $59,531 and
the 50% share portion of $59,530, which assumes a payout based on
the Company's attaining the midpoint range of total shareholder
return compared to the peer group companies' performance.
The Board of Directors has reserved for issuance an aggregate of
4,289,608 common shares in connection with outstanding performance
awards during the three-year performance program, based on the
Company's attaining the midpoint of the payout performance range.
The number of common shares actually issued may be more or less
than 4,289,608 common shares.
13. Subsequent Events
On July 4, 2014 the Company completed an equity raise of US$10.0
million (approximately GBP5.9 million or C$10.7 million) through
the placing of 32,679,739 common shares at a price of GBP0.18
(approximately C$0.33) per share. Following admission, the Company
will have 236,355,884 common shares outstanding.
On July 21, 2014 the Company voluntarily prepaid all amounts
owed under its $4.3 million convertible unsecured loan facility
made available by YA Global Master SPV Ltd., an investment fund
managed by Yorkville Advisors LLC. The prepayment amount of
$1,676,777 consisted of the outstanding principal of $1,505,149, a
prepayment penalty of $150,515 and accrued interest of $21,113.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A")
of the financial results for Caza Oil & Gas, Inc. ("Caza",
"Corporation" or the "Company") should be read in conjunction with
the unaudited condensed consolidated financial statements as at and
for the three month period ended June 30, 2014 and the audited
consolidated financial statements and corresponding MD&A for
the year ended December 31, 2013. Additional information relating
to the Company can be found on SEDAR at www.sedar.com. All figures
herein have been prepared in accordance with International
Financial Reporting Standards ("IFRS") unless otherwise stated.
This MD&A is dated August 11, 2014.
FORWARD LOOKING INFORMATION
In addition to historical information, the MD&A contains
forward-looking statements that are generally identifiable as any
statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future
events of performance (often, but not always, through the use of
words or phrases such as "will", "may", "will likely result,",
"should", "expected," "is anticipated," "believes," "estimated,"
"intends," "plans," "projection" and "outlook"), are not historical
facts and may be forward-looking and may involve estimates,
assumptions and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such
forward-looking statements.
These statements are based on certain factors and assumptions
regarding the results of operations, the performance of projected
activities and business opportunities. Specifically, we have used
historical knowledge and current industry trends to project
budgeted expenditures for 2014. While we consider these assumptions
to be reasonable based on information currently available to us,
they may prove to be incorrect.
Actual results achieved will vary from the information provided
herein as a result of numerous known and unknown risks and
uncertainties and other factors. Such factors include, but are not
limited to: risks associated with the Company's stage of
development; competitive conditions; share price volatility; risks
associated with crude oil and natural gas exploration and
development; risks related to the inherent uncertainty of reserves
and resources estimates; possible imperfections in title to
properties; the volatility of crude oil and natural gas prices and
markets; environmental regulation and associated risks; loss of key
personnel; operating and insurance risks; the inability to add
reserves; risks associated with industry conditions; the ability to
obtain additional financing on acceptable terms if at all; non
operator activities; the inability of investors in certain
jurisdictions to bring actions to enforce judgments; equipment
unavailability; potential conflicts of interest; risks related to
operations through subsidiaries; risks related to foreign
operations; currency exchange rate risks and other factors, many of
which are beyond the control of the Company. Accordingly, there is
no representation by Caza that actual results achieved during the
forecast period will be the same in whole or in part as that
forecast. Further, Caza undertakes no obligation to update or
revise any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is
made or to reflect the occurrence of unanticipated events, except
as required by applicable securities laws.
Financial outlook information contained in this MD&A about
prospective results of operations, financial position or cash flows
is based on assumptions about future events, including economic
conditions and proposed courses of action, based on management's
assessment of the relevant information currently available. Readers
are cautioned that such financial outlook information contained in
this MD&A should not be used for purposes other than for which
it is disclosed herein.
NON-IFRS MEASURES
The financial data presented herein has been prepared in
accordance with IFRS. The Company has also used certain measures of
financial reporting that are commonly used as benchmarks within the
oil and natural gas production industry in the following MD&A
discussion. The measures are widely accepted measures of
performance and value within the industry, and are used by
investors and analysts to compare and evaluate oil and natural gas
exploration and producing entities. Most notably, these measures
include "operating netback", "funds flow from (used in) operations"
and "Adjusted EBITDA".
Operating netback is a benchmark used in the crude oil and
natural gas industry to measure the contribution of oil and natural
gas sales and is calculated by deducting royalties and operating
expenses from revenues. Funds flow from (used in) operations is
cash flow from operating activities before changes in non-cash
working capital, and is used to analyze operations, performance and
liquidity. The term Adjusted EBITDA consists of net income (loss)
plus interest, depreciation, depletion, amortization, accretion,
impairment and stock based compensation. The Company has included
Adjusted EBITDA as a supplemental disclosure because its management
believes that EBITDA provides useful information regarding our
ability to service debt and to fund capital expenditures and
provides investors a helpful measure for comparing its operating
performance with the performance of other companies that have
different financing and capital structures or tax rates.
These measures are not defined under IFRS and should not be
considered in isolation or as an alternative to conventional IFRS
measures. These measures and their underlying calculations are not
necessarily comparable or calculated in an identical manner to a
similarly titled measure of another entity. When these measures are
used, they are defined as "Non IFRS" and should be given careful
consideration by the reader.
NOTE REGARDING BOES AND MCFES
In this MD&A, barrels of oil equivalent ("boe") are derived
by converting gas to oil in the ratio of six thousand cubic feet
("Mcf") of gas to one barrel ("bbl") of oil (6 Mcf: 1 bbl) and one
thousand cubic feet of gas equivalent ("Mcfes") are derived by
converting oil to gas in the ratio of one bbl of oil to six Mcf (1
bbl: 6 Mcf). Boes and Mcfes may be misleading, particularly if used
in isolation. A boe conversion of 6 Mcf of natural gas to 1 bbl of
oil, or a Mcfe conversion ratio of 1 bbl of oil to 6 Mcf of natural
gas is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the well head. Given that the value ratio based on
the current price of oil as compared to natural gas is
significantly different from the energy equivalency of 6:1,
utilizing a conversion on a 6:1 basis may be misleading as an
indication of value.
CURRENCY
References to "dollars" and "$" are to U.S. dollars and
references to "CDN$" are to Canadian dollars.
STRATEGY AND ASSETS
Strategy
The Company's strategy is to achieve significant growth in
reserves and production through:
-- progressing material, internally generated prospects,
utilizing cash flows from existing production and exploiting Proven
plus Probable reserves; and
-- executing strategic acquisitions of assets at all stages of
the development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear
set of criteria in high-grading projects:
-- the Company seeks to retain control of project execution and
timing through the operatorship of assets;
-- assets should be close to existing established
infrastructure, allowing for quick, efficient hook-up and lower
operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of west
Texas and southeast New Mexico, the most prolific oil and gas basin
in North America. Independent forecasts predict that the Permian
Basin will have the greatest oil supply growth of any North
American basin over the next five years. This provides the Company
with low-risk, liquids-rich development opportunities from many
geologic reservoirs and play types. The basin also has a vast
operational infrastructure in place. The Company is utilizing
recent advances in horizontal drilling and dynamic completion
technologies to unlock the significant resources within its asset
base and the region.
Management has focused efforts on building a core asset base in
the prolific Bone Spring play and has concluded that these assets
represent the most significant opportunity for the Company to
deliver material production, revenue growth and demonstrable
shareholder returns within an acceptable timeframe. The Company
expects that expanding and diversifying the producing asset base
within the Bone Springs play will not only grow the Company but
will also make it more resilient to risks associated with any
single project.
The Company now has approximately 300 drilling locations plus 24
(7.31 net) producing wells in the Bone Spring play. Management
believes that the Company is well-positioned with approximately
4,800 net acres in the play and continues to actively monitor
opportunities to build on Caza's current acreage position.
The Company's Bone Spring leases are mostly State and Federal
leases with primary terms between 5-10 years. In terms of
obligations and commitments, one producing well will hold each
lease in its entirety.
Outlook
Subject to the availability of appropriate financing, the
Company's objective is to embark on an accelerated and expanded
drilling program in the Bone Spring play over the next two years.
Management believes that such a program has the potential to
increase shareholder value significantly over the period. A program
of this type will require additional financing and would utilize
excess operational cash flow to fund further development drilling
and lease purchases beyond the initial two year period.
Management believes that such a program can be accomplished by
exploiting the Company's existing asset/lease inventory. However,
if appropriate, Management will also seek to identify corporate and
asset acquisitions, which will enable the Company to increase its
position in the Bone Spring play. Accordingly, in line with the
Company's stated strategy, Management's goal is to achieve
significant growth in the Company's reserves and production,
thereby raising the Company's profile in the basin and allowing
shareholder value to be maximized and, if appropriate, fully
matured over the short-to-medium term.
FINANCIAL AND OPERATING RESULTS
Petroleum and Production Revenue
Three months ended Six months ended
June 30, June 30,
2014 2013 2014 2013
--------------------- ---------- ---------- ----------- ----------
Natural gas
Production (Mcf) 111,016 55,626 212,725 95,368
Revenue ($) 495,733 207,152 972,711 338,452
Price ($/Mcf) 4.47 3.72 4.57 3.55
--------------------- ---------- ---------- ----------- ----------
Natural gas liquids
Production (bbls) 5,231 1,796 6,511 2,984
Revenue ($) 161,822 64,988 224,161 121,527
Price ($/bbl) 30.94 36.18 34.43 40.73
--------------------- ---------- ---------- ----------- ----------
Oil Production
Production (bbls) 60,592 9,263 104,034 21,894
Revenue ($) 5,628,494 795,821 9,680,684 1,887,308
Price ($/bbl) 92.89 85.92 93.05 86.20
--------------------- ---------- ---------- ----------- ----------
Combined
Production (Boe) 84,325 20,330 145,999 40,773
Revenue ($) 6,286,049 1,067,991 10,877,556 2,347,287
Price ($/Boe) 74.55 52.53 74.50 57.57
--------------------- ---------- ---------- ----------- ----------
Mcfe/d 5,560 1,340 4,840 1,352
Boe/d 937 223 807 225
--------------------- ---------- ---------- ----------- ----------
Natural gas, natural gas liquids and crude oil revenues
increased 489% to $6,286,049 for the three-month period ended June
30, 2014 from $1,067,991 for the three-month period ended June 30,
2013 (the "comparative period") and during the six month period
ended June 30, 2014 increased 363% from the six-month period ended
June 30, 2013. The increase resulted from increased production
volumes from new wells brought on line during late 2013 and early
2014.
Average daily production increased by 320% to 937 boe/d in the
second quarter of 2014 from 223 boe/d in the same period in 2013.
The increase was mainly due to additional wells coming on line from
the drilling program in the New Mexico Bone Spring play. Natural
gas production made up 22% of Caza's production during the three
month period ended June 30, 2014 with natural gas liquids and crude
oil comprising the remaining 78%. This is compared to a total
production profile comprised of 46% natural gas production for the
same period in 2013. Caza's production volumes increased 315% to
84,325 boe for the three-month period ended June 30, 2014 up from
20,330 boe for the comparative period.
Our future revenue and production volumes will be directly
affected by North American natural gas prices, West Texas
Intermediate crude oil prices and natural gas liquid prices, the
performance of existing wells, drilling success and the timing of
the tie-in of wells into gathering systems.
Operating Netback Summary (Non-IFRS)
The following table presents the Company's operating netback
which is a non-IFRS measure:
Three months ended Six months ended
June 30, June 30,
(on a boe basis) 2014 2013 2014 2013
------------------------------ ---------- --------- --------- --------
Oil and natural gas revenue $ 74.55 $ 52.53 $ 74.50 $ 57.57
Production expense (10.20) (23.07) (10.09) (20.61)
Severance expense (6.32) (6.65) (6.40) (4.78)
Transportation expense (0.19) (0.57) (0.22) (0.36)
------------------------------ ---------- --------- --------- --------
Operating netback (non-GAAP) 57.84 22.24 57.79 31.82
The change in netbacks for the three months ended June 30, 2014
occurred as a result of a revenue increase of $22.02 per/boe as
compared to the previous year. Production expenses decreased $12.87
/boe as compared to the period ended June 30, 2013. There was a
decrease in severance taxes and transportation costs of $ .71 per
boe for the same three month period in 2013.
Production Expenses
Three Months ended Six Months ended
June 30, June 30,
2014 2013 2014 2013
------------------------------- ----------- -------- ---------- ----------
Severance ($) 533,190 135,156 933,988 194,868
Transportation ($) 15,693 11,610 31,731 14,479
Production ($) 860,094 469,059 1,472,628 840,496
------------------------------- ----------- -------- ---------- ----------
Severance, transportation and
production ($) 1,408,977 615,825 2,438,347 1,049,843
Severance, transportation and
production ($/Boe) 16.71 30.29 16.70 25.75
------------------------------- ----------- -------- ---------- ----------
Severance tax is a tax imposed by states on natural resources
such as crude oil, natural gas and condensate extracted from the
ground. The tax is calculated by applying a rate to the dollar
amount of production from the property or a set dollar amount
applied to the volumes produced from the property.
Severance taxes and transportation expenses totaled $548,883
($6.51/boe) for the three-month period ended June 30, 2014, as
compared to $146,766 ($7.22/boe) in the comparative period.
Severance taxes and the transportation expense decreased 10% on a
per boe basis as a result of the higher production volumes and
commodity prices in the three month period ended June 30, 2014 as
compared to the comparative period.
Production expenses for the three-month period ended June 30,
2014 were $860,094 as compared to $469,059 for the comparative
period. Caza's average lifting cost for the three-month period
ended June 30, 2014 was $10.20 per boe versus $23.07 per boe for
the comparative period. The decrease in production costs for the
three months ended June 30, 2014 occurred in part due to bringing
on line higher volume wells in the New Mexico Bone Spring play that
bring about lower per boe production expenses.
Depletion, Depreciation, Amortization and Accretion
Depletion, depreciation, amortization and accretion expense for
the three-month period ended June 30, 2014 increased to $1,868,141
($22.15/boe) from $583,718 ($28.71/boe) in the comparative
period.
Three Months ended Six Months ended
June 30, June 30,
2014 2013 2014 2013
--------------------------------------- ----------- -------- ---------- ----------
Depletion and depreciation ($) 1,859,742 578,730 3,408,097 1,153,644
Accretion ($) 8,399 4,988 16,798 10,501
--------------------------------------- ----------- -------- ---------- ----------
Depletion, depreciation and accretion
($) 1,868,141 583,718 3,424,895 1,164,145
Depletion, depreciation and accretion
($/Boe) 22.15 28.71 23.46 28.55
--------------------------------------- ----------- -------- ---------- ----------
The decreased depletion expense on a per boe basis for the
period ended June 30, 2014 occurred as a result of the relationship
of the costs incurred in drilling activities carried out in the
West Texas and Southeast Texas Cash Generating Units in relation to
the associated reserves recorded. This brought about an aggregate
23% decrease in depletion expense on a per boe basis as compared to
the respective period in 2013.
Costs of unproved properties of $14,189,749 were excluded from
depreciable costs in the exploration and evaluation assets. A
proportionate amount of the carrying value will be transferred to
the depletable pool as reserves are proven through the execution of
Caza's exploration program.
Accretion expense is the increase in the present value of the
asset retirement obligation for the current period and the amount
of this expense will increase commensurate with the asset
retirement obligation as new wells are drilled or acquired through
acquisitions.
General and Administrative Expenses
Three Months ended Six Months ended
June 30, June 30,
2014 2013 2014 2013
------------------------------------- ---------- ---------- ---------- ----------
General and administrative ($) 1,598,417 1,661,298 3,010,226 3,115,189
General and administrative recovery
($) (63,047) (36,877) (106,486) (72,611)
------------------------------------- ---------- ---------- ---------- ----------
Net general and administrative
($) 1,535,370 1,624,421 2,903,740 3,042,578
General and administrative ($/Boe) 18.96 81.71 20.62 76.40
Net general and administrative
($/Boe) 18.21 79.90 19.89 74.62
------------------------------------- ---------- ---------- ---------- ----------
Net general and administrative expenses for the second quarter
2014 decreased by 5% to $1,535,370 from $1,624,421 for the same
period in 2013. On a boe basis, the net general and administrative
expenses decreased by 77% to $18.21/boe for the three-month period
ended June 30, 2014 due to the increase in production volumes.
Stock-based compensation expense in the amount of $87,470 is
included in general and administrative expenses for the three-month
period ended June 30, 2014 and $206,002 is included for the same
period in 2013. During the period ended June 30, 2014, Caza did not
capitalize general and administrative expenses relating to
exploration and development activities.
Gain (Loss) on Risk Management Contracts
The Company has entered into commodity price derivative
contracts to limit exposure to declining crude oil prices in
accordance with its covenants under the Note Purchase Agreement.
All derivative contracts are approved by management before the
Company enters into them. The Company's risk management strategy is
dictated in part by covenants in the Note Purchase Agreement (as
defined herein) which require the Company to hedge approximately
75% of its production. The contracts limit exposure to declining
commodity prices, thereby protecting project economics and
providing increased stability of cash flows and for capital
expenditure programs.
Under these contracts, the Company receives or pays monthly a
cash settlement on the covered production of the difference between
the swap price specified in the applicable contract and the month
average of the daily closing quoted spot price per barrel of West
Texas Intermediate NYMEX crude oil. These agreements cover 93,782
barrels of oil at a swap price of $92.55, $90.04 and $96.11 during
the year ending December 31, 2014 and cover 61,850 barrels of oil
at a swap price of $87.05, $83.70 and $89.34 during the year ended
December 31, 2015 and cover 8,428 barrels at a swap price of $85.23
during the year ended December 31, 2016.
The fair value of the Company's commodity price derivative
contracts represents the estimated amount that would be received
for settling the outstanding contracts on June 30, 2014, and will
be different than what will eventually be realized. The fair value
of these assets at a particular point in time is affected by
underlying commodity prices, expected commodity price volatility
and the duration of the contract and is determined by the expected
future settlements of the underlying commodity. The gain or loss on
such contracts is made up of two components; the realized
component, which reflects actual settlements that occurred during
the period, and the unrealized component, which represents the
change in the fair value of the contracts during the period.
For the three month period ended June 30, 2014 the Company
recognized a loss of $278,795 on its settled commodity price
derivative contracts and recorded an unrealized loss of $776,648 on
unsettled commodity price derivative contracts due to higher
commodity prices.
Net loss
Caza incurred a net loss of $763,151 for the three-month period
ended June 30, 2014 as compared to a net loss of $3,039,336 during
the comparative period. On a per boe basis our net loss decreased
94% from $149.50 for the period ended June 30, 2013 to $9.05 for
the second quarter in 2014. On a per share basis our net loss was
$(0.00) largely unchanged from the comparative period.
Investments
Interest income for the three-month period ended June 30, 2014
was $56, decreasing from $420 in the same period in 2013. Interest
was earned on the proceeds received from advances made pursuant the
Company's credit facilities and cash on hand. Caza invested these
funds in short-term money market funds. The Company does not hold
any asset backed commercial paper.
Funds flow from (used in) operations (Non-IFRS)
The following table reconciles the non-IFRS measure "funds flow
from (used in) operations" to "net loss", the most comparable
measure calculated in accordance with IFRS. Cash flow from
operations before changes in non-cash working capital provides
better information as it ignores timing differences resulting
primarily from fluctuations in payables and receivables. As such it
is a common measure used by management in the oil and gas
industry.
Three Months ended Six Months ended
June 30, June 30,
2014 2013 2014 2013
------------------------------------------ ---------- ------------ ------------ ------------
Net loss (763,150) (3,039,336) (2,217,363) (4,352,373)
Depletion, depreciation and amortization 1,859,743 578,730 3,408,098 1,153,644
Accretion 8,399 4,988 16,798 10,501
Stock-based compensation 87,470 186,402 235,404 394,071
Gain on sale of assets - 243,592 - 243,590
Realized loss on hedging contracts 776,648 - 1,128,332 -
Non-cash financing costs - - 98,128
Exploration and evaluation expense 322,752 740,677 322,752 740,677
Long term incentive plan 119,061 - 119,061 -
Other expense (income) derivative (678,669) - (423,693) 62,175
Funds flow (used in) provided
by operations 1,732,253 (1,284,947) 2,687,517 (1,747,715)
Funds loss per share - basic
and diluted 0.01 (0.01) 0.03 (0.01)
The increase in funds flow from (used in) operations as compared
to the previous periods is associated with increased revenues
during the first half of 2014, which was partially offset by
increased severance tax expenses and production costs.
Net Loss Compared to Adjusted EBITDA (Non-IFRS)
Three Months ended Six Months ended
June 30, June 30,
2014 2013 2014 2013
------------------------------------------ ---------- ------------ ------------ ------------
Net loss (763,150) (3,039,336) (2,217,364) (4,352,373)
Add Back:
Financing costs 1,554,461 460,056 3,143,901 570,421
Depletion, depreciation and amortization 1,859,742 578,730 3,408,097 1,153,644
Accretion 8,399 4,988 16,798 10,501
Stock-based compensation 87,470 186,402 235,404 394,071
Exploration and evaluation impairments 322,752 740,677 322,752 740,677
Changes in derivative liabilities (695,889) (688,748) 55,000
Long term investment plan 119,062 - 119,062 -
Disposal of assets - 243,592 - 243,590
Unrealized loss on hedging contacts 776,648 - 1,128,332 -
Adjusted EBITDA 3,269,495 (824,891) 5,468,234 (1,184,469)
Adjusted EBITDA per share - basic
and diluted 0.02 (0.00) 0.03 (0.01)
The table above sets forth a reconciliation of Adjusted EBITDA
to net loss, which is the most directly comparable measure of
financial performance, calculated under IFRS. The increase in
Adjusted EBITDA as compared to the comparative period resulted from
the success of the drilling program in the Bone Spring play in New
Mexico.
Capital Expenditures
Three Months ended Six Months ended
June 30, June 30,
By Type ($) 2014 2013 2014 2013
------------------------------------ ----------- ---------- ----------- ----------
Drilling and completions 13,050,583 3,733,013 22,684,537 6,355,654
Seismic - 82,800 - 126,800
Facilities and lease equipment - - - -
Office furnishings and equipment - - 1,586 1,250
Leasehold /geological /geophysical 33,963 1,465,897 15,879 1,274,234
Other costs (recovery) 596,625 (6,600) 595,815 80,574
------------------------------------ ----------- ---------- ----------- ----------
Total 13,681,171 5,275,110 23,297,817 7,838,512
During the period ended June 30, 2014, Caza drilled nine gross
wells (4.48 net) with activities concentrated in the Bone Spring
play in New Mexico.
Outstanding Share Data
Caza is authorized to issue an unlimited number of common shares
without par value. Holders of common shares are entitled to one
vote per share on all matters voted on a poll by shareholders, and
are entitled to receive dividends when and if declared by the board
of directors out of funds legally available for the payment of
dividends. Upon Caza's liquidation or winding up or other
distribution of its assets among its shareholders for the purpose
of winding up its affairs, holders of common shares are entitled to
share pro rata in any assets available for distribution to
shareholders after payment of all obligations of the Company.
Holders of common shares do not have any cumulative voting rights
or pre--emptive rights to subscribe for any additional common
shares.
At August 12, 2014, 236,355,884 common shares were issued and
outstanding. Common shares are issuable pursuant to: outstanding
incentive compensation options; common share purchase warrants;
exchange rights granted to members of management who hold shares of
Caza Petroleum, Inc. ("Caza Petroleum"); performance awards granted
pursuant to the Company's long term incentive plan; and the
Convertible Loan (as defined below). .
The following table sets forth the classes and number of
outstanding equity securities of the Company and the number of
issued and issuable common shares on a fully diluted basis.
Issued and Issuable Securities
Common Shares
Issued and outstanding 236,355,884
Issuable from Exchangable rights 26,502,000
Issuable from exercise of warrants 3,584,557
Issuable from exercise of stock options 15,985,000
Issuable from exercise of performance awards 4,289,608(1)
Total Common Shares issued and issuable 286,717,049
Warrants Issued and Outstanding
Warrants to purchase common shares outstanding 3,584,557
Stock Options Issued
Stock options outstanding 15,985,000
(1) The amount payable pursuant to the Company's performance
awards shall vary depending the satisfaction of certain performance
thresholds. Subject to the discretion of the board of directors,
the performance awards provide that one-half of any award shall be
satisfied by a cash payment and the other half-shall be satisfied
through an issuance of common shares. The board has authorized the
issuance of up to 4,289,608 common shares in connection with the
satisfaction of outstanding performance awards. Such number assumes
that outstanding awards will be paid at the 100% level (200% being
the maximum) and that half of each such award shall be satisfied
through the issuance of shares. The actual number of shares issued
pursuant to outstanding performance awards could be more or less
than 4,289,608 common shares.
Commitments
The following is a summary of the estimated amounts required to
fulfill Caza's remaining contractual commitments as at June 30,
2014:
Type of Obligation ($) Total <1 Year 1-3 Years 4-5 Years Thereafter
Operating leases 305,319 120,917 184,402 - -
Asset retirement obligations 1,380,177 124,438 - - 1,255,739
Total contractual commitments 1,685,496 245,355 184,402 - 1,255,739
--------------------------------- ---------- -------- ---------- ---------- -----------
Liquidity and Capital Resources
Caza's 2014 operating plan calls for participation in ten to
twelve wells funded from production revenues, existing cash
resources and available financing under the Note Purchase Agreement
or the SEDA (each as defined below). In the event additional
sources of financing become available, the Company would consider
increases to its drilling program. The Company is focused on
securing appropriate levels of capitalization to support its
business strategy. As commodity prices or production fluctuate or
as other circumstances dictate, the Company may alter its capital
program or reduce costs in order to maintain an acceptable level of
capitalization.
At June 30, 2014, Caza had a working capital deficit of
$2,484,863 as compared to a surplus of $8,484,624 as at December
31, 2013. This decrease of $10,969,487 in working capital from
December 31, 2013 resulted primarily from capital expenditures of
$23,297,817 in connection with drilling and lease acquisition
activities, offset by $2,687,517 funds flow from operations, the
issuance of stock in the amount of $2,062,754 and the issuance of
debt in the amount of $7,578,059. Caza had a cash balance of
$3,944,940 as of June 30, 2014.
On July 4, 2014, the Company completed an equity raise of
US$10.0 million (approximately GBP5.9 million and C$10.7 million)
through the placing of 32,679,739 common shares at a price of
GBP0.18 (approximately C$0.33) per share. The Company intends to
use the net proceeds of the Placing on its drilling program in the
Bone Spring play, for general corporate purposes and potentially
for asset acquisitions in the Bone Spring play.
Caza and its subsidiary Caza Petroleum Inc. may be considered to
be "related parties" for the purposes of Multilateral Instrument
61--101 of the Canadian Securities Administrators. As a result,
Caza or Caza Petroleum Inc. may be required to obtain a formal
valuation or disinterested shareholder approval before completing
certain transactions with the other party.
The Company has arranged for funding under the following
agreements:
Note Purchase Agreement
On May 23, 2013, the Company entered into a Note Purchase
Agreement (the "Note Agreement") with Apollo Investment Corporation
(the "Note Holder"), an investment fund managed by Apollo
Investment Management, pursuant to which the Note Holder agreed to
purchase up to US$50,000,000 of senior secured notes ("Notes") from
the Company. Under the Note Purchase Agreement, as amended, the
Company is required to comply with financial covenants, which are
tested quarterly, providing for specified interest coverage ratios
beginning in the quarter ending September 30, 2013, and asset
coverage ratios and minimum production, beginning in the quarter
ending March 31, 2014. The Company is also required to maintain a
limit on general and administrative costs. The minimum interest
coverage ratio in the Note Purchase Agreement has been amended. As
a result the Company complied with such ratio as at June 30, 2014.
. Any outstanding balances of the Notes may be prepaid at the
option of the Company at any time at premiums that vary over time.
The Note Purchase Agreement is also subject to a mandatory
prepayment from the proceeds of the sale of assets and from funds
received from transactions outside of the ordinary course of
business. Certain mandatory payments are also required if in any
period the Company fails to comply with any financial or
performance covenants. The Note Agreement provides for customary
events of default. Additionally, an event of default would occur
upon a change of control of the Company, which consists of (i) a
shareholder acquiring more than 35% of the Company's outstanding
common shares, (ii) a change in the composition of the board of
directors by more than 1/3 during a 12-month period or (iii) a
termination of service by any three of the five executive officers
of the Company. Outstanding balances under the Notes are secured by
first-priority security interests in all of the Company's
assets.
In addition to a 2% overriding royalty interest conveyed at the
closing of the Note Agreement in its properties in Eddy and Lea
Counties, New Mexico, the Company is also required to convey a
proportionately reducible 2% overriding royalty interest in each
lease acquired with proceeds from the Note Agreement. Upon full
repayment of the Notes, the overriding royalty interests will
convert to a 25% net profits interest in each property,
proportionately reduced to reflect the Company's working interest
as provided in the Note Agreement, which will reduce to a 12 1/2 %
net profits interest at such time as the Note Holder achieves
specified investment criteria pursuant to the Note Agreement.
During 2013 and through the period ended June 30, 2014, the
Company sold Notes in the aggregate principal amount of
US$45,000,000 to the Note Holder. The Company may draw additional
advances of up to US$5,000,000 until August 23, 2014, if at the
time of the advance; the Company meets the specified minimum
production and drilling cost requirements for previous wells
drilled under the program financed by the Note Purchase Agreement.
In addition to these funds, the Company has the ability to reinvest
cash flow from program wells back into the drilling program.
The outstanding balance of the Notes as at June 30, 2014 was
US$45,000,000 (exclusive of unamortized transaction costs
US$3,206,125). The Notes bear interest at a floating rate of
one-month LIBOR (with a floor of 2%) plus 10% per annum, payable
monthly and mature on May 23, 2017. In an event of default under
the Note Purchase Agreement, additional interest will be payable at
a default rate of 5% per annum, but only during the period of
default.
In connection with the sale of the Notes, the Company incurred a
total of US$1,667,500 in transaction costs (consisting of
US$1,540,000 in issuance costs and US$127,500 relating to the fair
value of the 2% overriding royalty conveyed at the closing of the
Note Purchase Agreement). In addition, the Company also incurred
structuring fees of US$2,359,912 in connection with the Note
Purchase Agreement. The Notes are classified as other financial
liabilities and are measured at amortized cost.
Standby Equity Distribution Agreement
The Company and Yorkville are party to a GBP6 million Standby
Equity Distribution Agreement ("SEDA") dated November 23, 2012. The
SEDA allows Caza to issue equity at a 5% discount to market to fund
loan repayments or well costs in certain circumstances. As at June
30, 2013, the company has drawn down an aggregate of GBP1,450,000
under the SEDA. During 2013, the Company issued 13,975,276 common
shares under the SEDA at an average price of GBP0.965 per share for
gross proceeds of $2,154,210. The SEDA expires on November 23,
2015. The Company did not draw down on the SEDA facility during the
first six months of 2014.
Convertible Loan
On November 1, 2013, the Company borrowed $4,338,264 from
Yorkville pursuant to the Convertible Loan. As at June 30, 2014,
principal payments of $2,833,115 had been applied to the
Convertible Loan, leaving a remaining balance of $1,505,149. On
July 21, 2014, the Company voluntarily prepaid all amounts owed
under the Convertible Loan. The prepayment amount of $1,676,777
consisted of the outstanding principal of $1,505,149, a prepayment
penalty of $150,515 and accrued interest of $21,113.
Equity Adjustment Agreement
The Company entered into an Equity Adjustment Agreement (the
"Adjustment Agreement") on March 5, 2013 as amended with Yorkville
in conjunction with the SEDA. Pursuant to the Adjustment Agreement,
during the three months ended June 30, 2013, the Company issued
3,846,154 common shares to Yorkville at a price of GBP0.13 per
share for aggregate proceeds of GBP500,000. The proceeds were
subject to adjustment as more particularly described under note 9
of the Company's financial statements for the three month period
ending June 30, 2014.
Transactions with Related Parties
All related party transactions are in the normal course of
operations and have been measured at the agreed to exchange
amounts, which is the amount of consideration established and
agreed to by the related parties and which is comparable to those
negotiated with third parties.
In 2010, Singular Oil & Gas Sands, LLC ("Singular") agreed
to participate in the drilling of the Matthys McMillan Gas Unit #2
and the O B Ranch #1 wells located in Wharton County, Texas. Under
the terms of that agreement, Singular paid 14.01% of the drilling
costs through completion to earn a 10.23% net revenue interest on
the Matthys McMillan Gas Unit #2 well and paid 12.5% of the
drilling costs to earn a 6.94% net revenue interest on the O B
Ranch #1 well. This participation was in the normal course of
Caza's business and on the same terms and conditions to those of
other joint venture partners. Singular is a related party as it is
a company under common control with Zoneplan Limited, which is a
significant shareholder of Caza.
Summary of Quarterly Results
Three Three Three Three
months
months ended months ended months ended ended
September
June 30, March 31, December 31, 30,
2014 2014 2013 2013
---------------- -------------------------- --------------------------- ------------------------ ------------------------------
Petroleum and
natural
gas sales 6,286,049 4,591,507 3,381,486 2,583,753
Net income
(loss) (763,150) (1,454,212) (2,851,860) (1,370,132)
Per
share -
basic
and
diluted (0.01) (0.01) (0.01) (0.01)
Funds flow from
operations
(See note) (1) 1,732,253 895,735 276,913 (128,852)
Per
share -
basic
and
diluted 0.00 0.00 0.00 (0.00)
Net capital
expenditures 13,681,171 9,616,646 10,031,758 19,190,280
Average daily
production
(boe/d) 937 685 503 397
Weighted
average shares
outstanding 199,323,039 187,917,370 182,965,097 177,701,939
Three Three Three Three
months
months ended months ended months ended ended
September
June 30, March 31, December 31, 30,
2013 2013 2012 2012
---------------- -------------------------- --------------------------- ------------------------ ------------------------------
Petroleum and
natural
gas sales 1,067,991 1,279,296 1, 580,214 902,622
Net income
(loss) (3,039,336) (1,313,035) (4,384,653) (2,203,998)
Per
share -
basic
and
diluted (0.02) (0.01) (0.03) (0.01)
Funds flow
from(used
in) operations
(See
note) (1) (1,277,772) (378,779) 248,624 (926,578)
Per
share -
basic
and
diluted (0.00) (0.00) 0.00 0.02
Net capital
expenditures 5,275,110 2,563,410 7,341,110 2,391,421
Average daily
production
(boe/d) 223 230 312 239
Weighted
average shares
outstanding 170,879,773 165,867,263 164,743,667 164,743,667
(1) Calculated based on cash flow from operations before changes
in non-cash working capital.
Factors that have caused variations over the quarters:
-- Revenues and operating netback (Non-IFRS) has generally
increased as a result of the Company's increased oil
production.
-- During 2013 and through the period ended June 30, 2014 Caza
drilled 22 (8.140 net) wells completing 17 (5.728 net) wells, with
one well (0.525 net) drilling and 3 (1.885 net) wells undergoing
completion activities as at June 30, 2014.
-- Capital expenditures increased during the second half of 2013
and the first quarter of 2014 as the Company deployed capital made
available under the Note Purchase Agreement and other funding
arrangements.
Financial Instruments
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit, share price 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. See notes 8 and 9 of the Company's financial statements
for the three month period ended June 30, 2014 and the disclosure
under the heading "Gain (Loss) on Risk Management Contracts" herein
for further details of the Company's financial instruments.
Critical Accounting Estimates
The policies discussed below are considered particularly
important as they require management to make informed judgments,
some of which may relate to matters that are inherently uncertain.
The financial statements have been prepared in accordance with
Canadian IFRS. In preparing financial statements, management makes
certain assumptions, judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses. The
basis for these estimates is historical experience and various
other assumptions that management believes to be reasonable. Actual
results could differ from the estimates under different assumptions
or conditions.
Reserves - The Company engages independent qualified reserve
evaluators to evaluate its reserves each year. Reserve
determinations involve forecasts based on property performance,
future prices, future production and the timing of expenditures;
all these are subject to uncertainty. Reserve estimates have a
significant impact on reported financial results as they are the
basis for the calculation of depreciation and depletion. Revisions
can change reported depletion and depreciation and earnings;
downward revisions could result in a ceiling test write down.
Decommissioning Liabilities - The Company provides for the
estimated abandonment costs using a fair value method based on cost
estimates determined under current legislative requirements and
industry practice. The amount of the liability is affected by the
estimated cost per well, the timing of the expenditures and the
discount factor used. These estimates will change and the revisions
will impact future accretion, depletion and depreciation rates.
Income taxes - The utilization of future tax assets subject to
an expiry date are based on estimates of future cash flows and
profitability. By their nature, these estimates are subject to
measurement uncertainty and the effect on the financial statements
of changes of estimates in future periods could be significant.
Stock based Compensation - The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully
transferable. This model is used to value the stock options
granted. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price
volatility. Changes in the subjective input assumptions can
materially affect the fair value estimates as reflected in the
consolidated financial statements
Critical Accounting Estimates
Certain of our accounting policies require that we make
appropriate decisions with respect to the formulation of estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. For a discussion about those
accounting policies, please refer to our annual management's
discussion and analysis and Note 2 of the corresponding audited
consolidated financial statements for the year ended December 31,
2013 available at www.sedar.com
Recent Accounting Pronouncements
The Company has assessed new and revised accounting
pronouncements that have been issued that are not yet effective and
determined that the following may have a significant impact on the
Company
Each of the additional new standards outlined below is effective
for annual periods beginning on or after January 1, 2013 (with the
exception of IFRS 9, which is effective for annual periods
beginning on or after January 1, 2015). The Company has not yet
assessed the impact, if any, that the new amended standards will
have on its financial statements or whether to early adopt any of
the new requirements.
Effective January 1, 2013, Caza adopted IFRS 10 "Consolidated
Financial Statements", IFRS 11 "Joint Arrangements, IFRS 12
"Disclosure of Interests in Other Entities", and the amendments to
IAS 28 "Investments in Associates and Joint Ventures."
There were no changes to the consolidated financial statements
or the consolidation process as a result of adoption of IFRS 10.
IFRS 11 classifies interests in joint arrangements as joint
ventures or joint operations depending on the rights and
obligations of the parties in the arrangement. Caza performed a
review of interests in joint arrangements and concluded that shared
wells operate as joint operations and accordingly there is no
change in the accounting for these assets as a result of adoption
of this standard. As a result, there were no changes as a result of
the adoption of IFRS 12 as well.
Furthermore Caza was also required to adopt IFRS 13 "Fair Value
Measurements," amendments to IAS 1 "Presentation of Financial
Statements," amendments to IFRS 7 "Financial Instruments:
Disclosures." There were no material changes as a result of the
adoption of these standards.
The Company will also continue to monitor standards development
as issued by the IASB and the AcSB as well as regulatory
developments as issued by the CSA, which may affect the timing,
nature or disclosure of its adoption of IFRS.
RISK FACTORS
For a discussion about risk and uncertainties, please refer to
our Management's Discussion and Analysis and Annual Information
Form for the year ended December 31, 2014 available at
www.sedar.com.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer are
responsible for establishing and maintaining internal control over
financial reporting (ICFR), as such term is defined in National
Instrument 52-109 Certification of Disclosure in Issuers' Annual
and Interim Filings, for Caza. They have designed ICFR, or caused
it to be designed under their supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with IFRS. There were no changes in our ICFR during the
period beginning on April 1, 2014 and ending on June 30, 2014 that
materially affected, or are reasonably likely to materially affect,
Caza's internal control over financial reporting.
It should be noted that a control system, including the
Company's disclosure and internal controls and procedures, no
matter how well conceived can provide only reasonable, but not
absolute assurance that the objectives of the control system will
be met and it should not be expected that the disclosure and
internal controls and procedures will prevent all errors or
fraud.
ADDITIONAL INFORMATION
Further information regarding the Company, including its Annual
Information Form, can be accessed under the Company's public
filings found at http://www.sedar.com and on the Company's website
at www.cazapetro.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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