FPL First Calgary

FIRST CALGARY PETROLEUMS LTD - Final Results First Calgary Petroleums Ltd. Reports Year End Results TSX: FCP LSE: FPL CALGARY, March 31 /CNW/ - First Calgary Petroleums Ltd. ("FCP" or the "Company") is pleased to report the financial results of the Company for the year ended December 31, 2004. A press release regarding the Company's December 31, 2004 reserves estimates will be issued later today. Management's Discussion and Analysis The discussion and analysis that follows is intended to provide a summary of First Calgary Petroleums Ltd.'s (FCP or the Company) activities and results over the past two years as well as its financial position and future prospects. It should be read in conjunction with the audited financial statements for the years ended December 31, 2004 and 2003. All numbers in this discussion and analysis are expressed in U.S. dollars unless otherwise indicated. Additional information is available on FCP's website at www.fcpl.ca or on SEDAR's website at www.sedar.com. Background First Calgary Petroleums Ltd. is an international oil and gas exploration company with operations in the Ledjmet Block 405b and the Rhourde Yacoub Block 406a, both of which are situated in the prolific hydrocarbon bearing Berkine Basin of Algeria. FCP's Algerian hydrocarbon agreements provide the Company five year periods to explore the blocks. Following the exploration periods, the Company will have exploitation rights for any commercial oil and gas discoveries that extend from 15 to 30 years. With FCP being in the fourth and fifth years of its Block 405b and Block 406a exploration periods, respectively, the Company's primary objective has been to grow its reserves by exploring the blocks as extensively as possible. Since acquiring the blocks, the Company has: - Acquired approximately 2,000 km(2) of 3D seismic data providing complete coverage of FCP's lands; - Drilled six successful exploration wells; - Drilled six successful appraisal wells; and - Assembled a portfolio of exploration and appraisal drilling targets. Success of an exploration company is measured by the growth in its reserves. FCP's success with the drill bit has resulted in exponential reserves growth. Given the Company's drilling success and early stage of reserves development, FCP has retained Lehman Brothers Europe Limited and Canaccord Capital Corporation to assist the Company in seeking and evaluating strategic alternatives. Hydrocarbon Agreements FCP operates in Algeria where it has the rights to explore and appraise two large acreage blocks, Ledjmet Block 405b and Rhourde Yacoub Block 406a. The Company's rights and obligations are set out in hydrocarbon agreements with Sonatrach, the national oil company of Algeria, which represents the interest of the state. The hydrocarbon agreements require FCP to conduct certain drilling and seismic activities over periods of time. The exploration and appraisal phases of the agreements that extend for five years are divided into two periods with each period containing a minimum work commitment. In each agreement, the first period was for three years, and the Company then had the option to enter a second exploration period of two years. Following the exploration and appraisal phase of each agreement, the Company and Sonatrach will obtain exploitation permits for any reserves determined to be commercial and all lands not subject to an exploitation permit will be returned to the government. Ledjmet Block 405b On Block 405b, FCP is party to a Production Sharing Contract (PSC) with Sonatrach. The PSC allocates hydrocarbon production between FCP and Sonatrach in accordance with a sliding scale formula based on such factors as production levels, product prices and project investment. Pursuant to the formula, the Company's annual share of production may range from 27.72 percent to 8.16 percent. All Algerian state royalties and income taxes are paid by Sonatrach from its share of hydrocarbon production. The first exploration period ended in December 2004 with the Company having completed all of its work commitments. FCP has committed to the two year second exploration period of the PSC. The remaining work commitment for the second exploration period includes drilling one exploration well prior to December 2006, estimated to cost $9 million. If the Company fails to satisfy this work obligation, the rights, other than for which an exploitation permit has been granted or requested, will be returned and FCP will be liable to pay Sonatrach a penalty of $6.25 million. At the end of the first exploration period, the Company was required by the PSC to relinquish 30 percent of the Block's acreage back to Sonatrach. Rhourde Yacoub Block 406a On Block 406a, FCP has a Joint Venture Agreement (JVA) with Sonatrach. The JVA allocates 49 percent of the hydrocarbon production or equivalent volume thereof to the Company. FCP is responsible for paying Algerian state royalties and income taxes on its share of production. A portion of the total recoverable natural gas reserves above a certain threshold will be considered strategic reserves and excluded by Algerian law from the JVA. The Company is in the second exploration period of the JVA, which will end in November 2005. The remaining second exploration period work commitment is the drilling of two exploration wells prior to November 2005. The cost of this commitment is estimated at $18 million. If the Company fails to satisfy this work obligation, the rights, other than for which an exploitation permit has been granted or requested, will be returned and the Company will be liable to pay Sonatrach a penalty of $12.75 million. Operations and Capital Expenditures Ledjmet Block 405b To date, FCP has acquired 3D seismic data over the entire Block (1,100 km(2)), drilled eleven wells and completed preliminary commercialization studies on the MLE field. The work completed to date on Block 405b far exceeded the first exploration period minimum work obligation. This level of activity was undertaken based upon the drilling success realized and to enable the Company to fully evaluate the exploration potential of the entire Block within the five year exploration window provided by the PSC. During 2003, FCP's activity focused on appraising the MLE discovery and investigating the exploration potential of the Block's acreage to the west of the MLE discovery with 3D seismic. The Company: - Completed and tested the MLE-2 appraisal well; - Drilled, completed and tested the MLE-3 appraisal well; - Commenced drilling operations on the MLE-4 and MLE-5 appraisal wells; and - Acquired 600 km(2) of 3D seismic immediately adjacent to and west of the MLE field. During 2004, FCP undertook an aggressive exploration drilling programme and further 3D seismic acquisition over the remainder of the Block's western acreage. The Company: - Completed and tested the MLE-4 and MLE-5 appraisal wells; - Drilled, completed and tested five exploration wells; LEC-1, MZLN-1, LES-1, MZLS-1 and LEW-1; - Drilled the LES-2 appraisal well and commenced drilling operations on the MLE-6 appraisal well; and - Acquired 550 km(2) of 3D seismic. Subsequent to December 31, 2004, FCP completed testing the LES-2 appraisal well and completed drilling the MLE-6 appraisal well. Readers are referred to the map of Ledjmet Block 405b which is available on the Company's website at www.fcpl.ca. FCP's 2005 capital programme for Block 405b currently includes completion and testing of the LES-2 well and drilling the MLE-6 well, projected to cost approximately $9 million. Following completion of the strategic alternatives assessment, the Company will review its capital programme for the remainder of 2005. FCP has identified a number of exploration and appraisal drilling locations that could be pursued during 2005. Rhourde Yacoub Block 406a In 2004, FCP drilled its first discovery on the Rhourde Yacoub Block 406a, ZCH-1. Encouraged by the ZCH-1 results, FCP commenced a 613 km(2) 3D seismic programme on the Block to delineate the size of the structure and define both appraisal and further exploration drilling locations. Readers are referred to the map of Yacoub Block 406a which is available on the Company's website at www.fcpl.ca. For 2005, the capital programme currently includes completion of the 2004 3D seismic programme and the drilling of at least two exploration wells. The two exploration locations have been confirmed, site preparation is in progress and drilling operations are scheduled to commence in April. The 2005 capital expenditure budget for the Block is estimated at $20 million. Capital Expenditures The Company's 2004 capital expenditures, excluding non-cash acquisitions, on Blocks 405b and 406a totaled $108.6 million compared to $46.2 million in 2003 reflecting the increased number of wells drilled and seismic data acquired. CAPITAL EXPENDITURES (000's) 2004 2003 ------------------------------------------------------------------------- Drilling, completion and testing $ 91,595 $ 36,971 Geological and geophysical 10,690 7,466 In-country management and administration 5,193 1,400 MLE commercialization 823 42 Training bonuses 308 328 ------------------------------------------------------------------------- $ 108,609 $ 46,207 ------------------------------------------------------------------------- ------------------------------------------------------------------------- A number of factors impact the Company's capital costs. Factors affecting the drilling costs include the well location and access, surface condition, well depth and availability of services and supplies. Ongoing drilling costs are expected to range between $6 and $8 million per well for well depths ranging from 3800 to 4500 metres. Testing and completion costs have averaged $2 to $3 million per well due to multiple zones being tested and to maximize the data collected. Seismic costs are impacted by the size of the programme, location, surface condition and availability of services. Reserves Independent reservoir engineers have estimated the Company's December 31, 2004 recoverable proved, probable and possible petroleum and natural gas reserves as follows: December 31, 2004 ---------------------------------------------------------- Gross Recoverable FCP Net Recoverable Reserves Reserves ---------------------------------------------------------- Oil, Oil, Condensate Total Gas Condensate Total Gas Gas and LPG Equivalent Gas and LPG Equivalent --- ------- ---------- --- ------- ---------- (Bcf) (MMBbls) (Bcfe) (Bcf) (MMBbls) (Bcfe) Proved Undeveloped 609 77 1,073 152 22 284 Probable 1,556 249 3,050 201 49 496 ------------------------------------------------------------------------- Proved and Probable 2,165 326 4,123 353 71 780 Possible 4,825 676 8,880 567 128 1,335 ------------------------------------------------------------------------- Proved, Probable and Possible 6,990 1,002 13,003 920 199 2,115 ------------------------------------------------------------------------- ------------------------------------------------------------------------- December 31, 2003 ---------------------------------------------------------- Gross Recoverable FCP Net Recoverable Reserves Reserves ---------------------------------------------------------- Oil, Oil, Condensate Total Gas Condensate Total Gas Gas and LPG Equivalent Gas and LPG Equivalent --- ------- ---------- --- ------- ---------- (Bcf) (MMBbls) (Bcfe) (Bcf) (MMBbls) (Bcfe) Proved Undeveloped 441 52 753 110 13 187 Probable 1,192 148 2,080 153 19 269 ------------------------------------------------------------------------- Proved and Probable 1,633 200 2,833 263 32 456 Possible 2,218 326 4,177 288 43 547 ------------------------------------------------------------------------- Proved, Probable and Possible 3,851 526 7,010 551 75 1,003 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Notes: (1) The gross and net recoverable reserves volumes are estimated under the constant price case. (2) FCP's net reserves allocations are based upon the terms of the contracts relating to each block. The Ledjmet Block 405b reserves allocation is calculated annually based upon a sliding scale formula that considers capital investment, production levels and product prices. Accordingly, the net allocation can vary annually and will be dependent upon the costs, production levels and product prices realized. For Rhourde Yacoub Block 406a, FCP is allocated the equivalent of 49% of the gross production on an equivalent barrel basis. (3) Gas equivalent units have been calculated by the Company at one barrel (Bbl) for six thousand cubic feet of natural gas equivalent. Using gas equivalent units may be misleading, particularly if used in isolation. A conversion ratio of one barrel to six thousand cubic feet 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 wellhead. (4) Bcf means billion cubic feet of natural gas, Bcfe means billion cubic feet of natural gas equivalent and MMBls means millions of barrels of liquid. Liquidity and Capital Resources FCP continues to rely upon equity to fund its operations and capital programmes. In December 2004, FCP raised $70 million, net of issue costs, from the sale of 6,000,000 common shares. Additional funding is derived periodically from the exercise of stock options and common share purchase warrants. In 2004, 3,879,989 common shares were issued, resulting in $9 million in proceeds, from the exercise of options and warrants. In October 2004 FCP issued 10,150,000 common shares to acquire an overriding five per cent net profit interests that previously encumbered Blocks 405b and 406a. The fully-diluted number of shares outstanding at March 28, 2005 and December 31, 2004 were as follows: March 28, December 31, FULLY-DILUTED SHARES OUTSTANDING 2005 2004 ------------------------------------------------------------------------- Common shares 183,591,052 183,086,675 Employee stock options 7,629,501 7,629,501 Common share purchase warrants 14,408 68,785 Non-employee stock options 450,000 900,000 ------------------------------------------------------------------------- 191,684,961 191,684,961 ------------------------------------------------------------------------- ------------------------------------------------------------------------- FCP had working capital of $52.1 million at December 31, 2004. Changes in the Company's working capital are primarily a function of the timing and magnitude of its equity financings and capital expenditures, as detailed below: WORKING CAPITAL (000's) ------------------------------------------------------------------------- Working capital at December 31, 2003 $ 83,111 Equity issues 69,922 Proceeds from exercise of options and warrants 8,996 Capital expenditures (108,609) To fund operations (net) (1,305) ------------------------------------------------------------------------- Working capital at December 31, 2004 $ 52,115 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has sufficient working capital at December 31, 2004 to fund its 2005 capital programme and work commitments. Beyond the current planned expenditures and obligations, it is expected the Company will require additional capital to fund future operations and capital spending. In addition, the development of the Company's reserves through to commercial production will require significant funding that is expected to be in the form of equity, debt, joint ventures or some combination thereof. Operating Results Selected Annual Information (000's) 2004 2003 2002 ------------------------------------------------------------------------- Interest income $ 1,290 $ 638 $ 170 ------------------------------------------------------------------------- Expenses General and administrative 4,027 2,604 2,089 Stock-based compensation 5,181 4,679 405 Foreign exchange loss (gain) (1,542) 578 (21) Write-off Yemen investment - 1,035 - Algerian earthquake relief donation - 1,000 - Other expenses 189 392 17 ------------------------------------------------------------------------- 7,855 10,288 2,490 ------------------------------------------------------------------------- Net loss (6,565) (9,650) (2,320) Net loss per share (0.04) (0.07) (0.03) Share capital 377,288 165,181 40,351 Working capital 52,115 83,111 6,640 Capital assets 310,053 68,708 18,862 Other liabilities (339) (124) (22) ------------------------------------------------------------------------- Shareholders' equity $ 361,829 $ 151,695 $ 25,480 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Interest income increased $0.7 million in 2004 as a result of higher interest rates and cash and term-deposit balances from the public share offerings of $99.6 million in October 2003 and $70 million in December 2004. General and administrative expenses increased $1.4 million in 2004 as a result of higher overall operational activity in Algeria, employee levels, insurance coverage and professional fees. General and administrative expenses increased in the fourth quarter of 2004 as a result of higher employee levels and professional fees. Stock-based compensation expense increased $0.5 million in 2004 primarily from the amortization of costs associated with the vesting of options granted in the fourth quarter of 2003. The Company has recorded a foreign exchange gain of $1.5 million during 2004, due primarily to the effect of a weakening U.S. dollar on Canadian dollar and British pound cash and term-deposits held during the year. Selected Quarterly Information 2004 (000's) Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Interest income $ 386 $ 251 $ 238 $ 415 ------------------------------------------------------------------------- Expenses General and administrative 1,165 904 1,048 910 Stock-based compensation 1,442 975 1,375 1,389 Foreign exchange loss (gain) (820) (2,151) 1,137 292 Write-off Yemen investment - - - - Earthquake donation - - - - Other expenses (recovery) (102) 109 92 90 ------------------------------------------------------------------------- 1,685 (163) 3,652 2,681 ------------------------------------------------------------------------- Net income (loss) (1,299) 414 (3,414) (2,266) Net loss per share (0.01) 0.00 (0.02) (0.01) Share capital 377,288 172,895 172,376 171,897 Working capital (deficiency) 52,115 19,858 48,664 74,659 Capital assets 310,053 137,911 107,267 82,886 Other liabilities (339) (239) (174) (151) ------------------------------------------------------------------------- Shareholders' equity $361,829 $157,530 $155,757 $157,394 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2003 (000's) Q4 Q3 Q2 Q1 ------------------------------------------------------------------------- Interest income $ 315 $ 81 $ 118 $ 124 ------------------------------------------------------------------------- Expenses General and administrative 962 660 539 443 Stock-based compensation 3,579 233 214 653 Foreign exchange loss (gain) (283) (192) 633 421 Write-off Yemen investment 1,035 - - - Earthquake donation - - 1,000 - Other expenses (recovery) 253 34 97 7 ------------------------------------------------------------------------- 5,546 735 2,483 1,524 ------------------------------------------------------------------------- Net income (loss) (5,231) (654) (2,365) (1,400) Net loss per share (0.03) (0.01) (0.02) (0.01) Share capital 165,181 62,463 62,295 62,194 Working capital (deficiency) 83,111 (1,150) 10,383 19,947 Capital assets 68,708 52,106 41,061 29,085 Other liabilities (124) (92) (91) (61) ------------------------------------------------------------------------- Shareholders' equity $151,695 $ 50,864 $ 51,353 $ 48,971 ------------------------------------------------------------------------- ------------------------------------------------------------------------- In 2004, fluctuations in the quarterly net loss were primarily driven by foreign currency gains and losses. General and administrative expenses have trended higher on a quarterly basis, consistent with supporting higher operational activity in Algeria. Stock-based compensation expense was lower in the third quarter of 2004 due to the effect of stock option cancellations and higher in the fourth quarter of 2003 due to option grants. The increase in share capital in the fourth quarter of 2004 is primarily due to the December equity issue of six million shares and the acquisitions of the carried five per cent net profits interest for shares. The increase in capital assets in the fourth quarter of 2004 is the result of capital expenditures incurred on the Algerian projects and the value ascribed to the carried five per cent net profits interest acquisitions. Business Risks and Uncertainties The Company's business is subject to risks inherent in oil and gas exploration and development operations. In addition, there are risks associated with the Company's development stage of operations and the foreign jurisdiction in which it operates. The Company has identified certain risks pertinent to its business including: exploration and reserve risks, drilling and operating risks, costs and availability of materials and services, capital markets and the requirement for additional capital, loss of or changes to production sharing, joint venture or related agreements, economic and sovereign risks, possibility of less developed legal systems, reliance on strategic relationships, market risk, volatility of future oil and gas prices and foreign currency risk. FCP attempts to monitor, assess and mitigate certain of these risks by retaining an experienced team of professionals and using modern technology. Further, the Company has focused its activities in a known hydrocarbon basin in a jurisdiction that has previously established long-term oil and gas ventures with foreign oil and gas companies, existing infrastructure of services and oil and gas transportation facilities, and reasonable proximity to markets. The Company also retains consultants resident in Algeria to monitor economic and political developments and to assist with operating, administrative and legal matters. There are certain risks, however, over which the Company has little or no control. Outlook As previously announced, FCP is working with its advisers identifying and considering strategic alternatives. It is not expected that any decisions with respect to the result of this process will be made prior to late April, at the earliest. The Company is moving forward with the drilling of two exploration wells on Block 406a. Further drilling and development work on Block 405b will be reviewed upon completion of the strategic alternatives assessment. Critical Accounting Policies and Estimates Petroleum and Natural Gas Operations FCP follows the full cost method to account for its petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized and accumulated in country-by-country cost centres. These capitalized costs will be depleted using the unit-of- production method based on estimates of proved reserves. The costs in cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. These capitalized costs are assessed to determine whether it is likely such costs will be recovered in the future. Costs which are not likely to be recovered in the future are written-off. Petroleum and natural gas reserves form the basis for a number of accounting estimates and support for the carrying amount of petroleum and natural gas properties. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. The Company expects that its estimates of reserves will change to reflect updated information. Reserve estimates can be revised upward or downward based on the results of future drilling, testing, production levels and economics of recovery based on cash flow forecasts. Advisory Regarding Forward-Looking Statements This discussion and analysis contains forward-looking statements. Forward-looking statements are subject to numerous known and unknown risks and uncertainties, some of which are beyond FCP's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency exchange rate fluctuations, reserve estimates, environmental risks, competition from other explorers, stock market volatility and ability to access sufficient capital. FCP's actual results could differ materially from those anticipated in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. March 28, 2005 FIRST CALGARY PETROLEUMS LTD. Consolidated Balance Sheets December 31 (Expressed in thousands of U.S. dollars) ------------------------------------------------------------------------- 2004 2003 ------------------------------------------------------------------------- Assets Current assets: Cash and short-term deposits (note 4) $ 81,874 $ 95,185 Accounts receivable 357 144 Deposits and prepaid expenses 758 326 ----------------------------------------------------------------------- 82,989 95,655 Property, plant and equipment (note 5) 310,053 68,708 ------------------------------------------------------------------------- $ 393,042 $ 164,363 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities (note 6) $ 30,874 $ 12,544 Asset retirement obligations (note 7) 339 124 Shareholders' equity: Capital stock (note 8) 377,288 165,181 Contributed surplus (note 8) 9,441 4,849 Cumulative translation adjustment 6,502 6,502 Deficit (31,402) (24,837) ----------------------------------------------------------------------- 361,829 151,695 Operations and commitments (note 3) ------------------------------------------------------------------------- $ 393,042 $ 164,363 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. FIRST CALGARY PETROLEUMS LTD. Consolidated Statements of Operations and Deficit Years ended December 31 (Expressed in thousands of U.S. dollars) ------------------------------------------------------------------------- 2004 2003 ------------------------------------------------------------------------- Revenue: Interest $ 1,290 $ 638 ----------------------------------------------------------------------- Expenses: General and administrative 4,027 2,604 Stock-based compensation (note 8) 5,181 4,679 Foreign exchange loss (gain) (1,542) 578 Capital taxes 110 347 Depreciation 67 38 Accretion of asset retirement obligations 12 7 Write-off of Yemen petroleum and natural gas properties (note 5) - 1,035 Algerian earthquake relief donation - 1,000 ----------------------------------------------------------------------- 7,855 10,288 ------------------------------------------------------------------------- Loss for the year (6,565) (9,650) Deficit, beginning of year (24,837) (15,187) ------------------------------------------------------------------------- Deficit, end of year $ (31,402) $ (24,837) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Loss per share (note 8) $ (0.04) $ (0.07) ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. FIRST CALGARY PETROLEUMS LTD. Consolidated Statements of Cash Flows Years ended December 31 (Expressed in thousands of U.S. dollars) ------------------------------------------------------------------------- 2004 2003 ------------------------------------------------------------------------- Operating activities: Loss for the year $ (6,565) $ (9,650) Items not involving cash: Stock-based compensation 5,181 4,679 Foreign exchange loss (gain) (1,612) - Depreciation 67 38 Accretion of asset retirement obligations 12 7 Write-off of Yemen petroleum and natural gas properties - 1,035 --------------------------------------------------------------------- (2,917) (3,891) Change in non-cash working capital 1,430 1,549 ----------------------------------------------------------------------- (1,487) (2,342) Financing activities: Proceeds from issuance of shares 74,242 129,372 Proceeds from exercise of warrants 6,602 2,403 Proceeds from exercise of options 2,394 1,273 Issue costs (4,320) (8,453) ----------------------------------------------------------------------- 78,918 124,595 Investing activities: Capital expenditures (108,609) (46,207) Change in non-cash working capital 16,255 3,723 ----------------------------------------------------------------------- (92,354) (42,484) ------------------------------------------------------------------------- Increase (decrease) in cash and short-term deposits (14,923) 79,769 Effect of exchange rate fluctuations on cash and short-term deposits 1,612 2,994 Cash and short-term deposits, beginning of year 95,185 12,422 ------------------------------------------------------------------------- Cash and short-term deposits, end of year $ 81,874 $ 95,185 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. FIRST CALGARY PETROLEUMS LTD. Notes to Consolidated Financial Statements Years ended December 31, 2004 and 2003 (Expressed in thousands of U.S. dollars unless otherwise indicated) ------------------------------------------------------------------------- First Calgary Petroleums Ltd. (the "Company") is incorporated in Alberta under the Business Corporations Act (Alberta) and its primary business activity is the exploration for and development of petroleum and natural gas in Algeria. 1. Significant accounting policies: (a) Basis of presentation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. (b) Petroleum and natural gas operations: The Company follows the full cost method of accounting for petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized and accumulated in country-by-country cost centres. Such costs include land acquisition costs, geological and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, interest costs on major development projects and overhead charges directly related to acquisition, exploration and development activities. The costs (including exploratory dry holes) in cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. The capitalized costs are periodically assessed to determine whether it is likely such costs will be recovered in the future. To the extent there are costs which are not likely to be recovered in the future, they are written-off. The costs in cost centres from which there will be production, together with the cost of production equipment, will be depleted and depreciated on the unit-of-production method based on the estimated proved reserves after royalties. Petroleum and natural gas reserves and production will be converted into equivalent units based upon estimated relative energy content. Costs of acquiring and evaluating significant unproved properties are excluded from the depletion calculations. These unproved properties are assessed periodically to ascertain whether impairment in value has occurred. When proved reserves are assigned or the value of the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion. Petroleum and natural gas properties are subject to a ceiling test in each reporting period to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying values of the petroleum and natural gas properties. If the carrying value of the petroleum and natural gas properties is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds an estimated fair value. The fair value estimate is normally based on the sum of the discounted cash flows expected from the production of proved and probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using forecast product prices and costs and are discounted using a risk-free interest rate. Proceeds from the sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the depletion rate by more than twenty per cent. Substantially all of the Company's exploration, development and production activities are conducted jointly with others and accordingly these financial statements reflect only the Company's proportionate interest in such activities. (c) Asset retirement obligations: The Company recognizes the estimated fair value of legal obligations associated with the retirement of petroleum and natural gas properties in the period in which they are incurred. The obligation is recorded as a liability with a corresponding increase in the carrying amount of the petroleum and natural gas properties. The incremental capitalized amount will be depleted on a unit-of-production basis over the life of the proved reserves. The obligation is increased each period, or accretes, due to the passage of time and is recorded in the statement of operations. Revisions to the estimated fair value would result in an adjustment to the obligation and carrying amount of the petroleum and natural gas properties. (d) Foreign currency: All operations are considered financially and operationally integrated. Results of operations are translated to the functional currency, using average rates for revenues and expenses, except depreciation which is translated at the rate of exchange applicable to the related assets. Monetary items denominated in foreign currencies are translated to the functional currency at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Foreign exchange gains and losses are recorded in the statement of operations. (e) Stock-based compensation: The Company accounts for all stock options and warrants granted using the fair value method. Under this method, compensation expense is measured at fair value at the grant date using the Black-Scholes option pricing model and recognized over the vesting period with a corresponding increase to contributed surplus. Consideration received upon the exercise of stock options together with the amount of non-cash compensation expense recognized in contributed surplus is recorded as share capital. (f) Income taxes: The Company uses the asset and liability method of accounting for income taxes. Under this method current income taxes are recognized for the estimated income taxes payable for the current year. Future income taxes are recognized for temporary differences between the tax and accounting bases of assets and liabilities and for the benefit of losses available to be carried forward for tax purposes that are likely to be realized. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. (g) Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses including depreciation and asset retirement obligations. The ceiling test is based upon estimates of market values of unproved properties, reserves, petroleum and natural gas prices, future costs and other assumptions. (h) Per share amounts: Basic per share amounts are computed by dividing the earnings or loss by the weighted average shares outstanding during the reporting period. Diluted amounts are computed using the treasury stock method. The treasury stock method assumes that proceeds received from the exercise of in-the-money options and warrants are used to repurchase shares at the average market price for the period. The difference between the number of shares that could have been purchased at market prices in the period and the number of in-the-money options and warrants is added to the weighted average shares outstanding. 2. Changes in accounting policies and restatement of prior periods: In the fourth quarter of 2003, the Company adopted three new accounting policies which resulted in the retroactive restatement of the previously reported 2003 interim financial statements. The new accounting policies were the change to the U.S. dollar as the Company's reporting currency, the recognition of compensation expense for stock options granted to employees after January 1, 2003 and the new accounting standard for asset retirement obligations. 3. Operations and commitments: The Company's operations are in Algeria where it has the rights to explore, appraise and develop two blocks, Yacoub Block 406a ("Block 406a") and Ledjmet Block 405b ("Block 405b"). The Company's rights and obligations in each block are set out in agreements with Sonatrach, the national oil company of Algeria. These agreements are structured such that the Company has committed to conduct certain minimum exploration activities over a period of time and in return earns an interest in commercial discoveries. (a) Block 406a: In 2000 the Company entered into a joint venture agreement with Sonatrach to explore Block 406a in the Berkine Basin. The Company is currently in the second exploration period which expires in November 2005. The remaining work obligation for the second exploration period is to drill two exploration wells, estimated to cost $18 million. If the Company fails to satisfy the work obligations, the rights, other than for areas for which an exploitation permit has been granted or requested, could be forfeited and the Company will be liable to pay Sonatrach a penalty of $12.75 million. In addition to the work commitments, the Company is obligated to pay an annual training bonus in the amount of $150 thousand for the duration of the contract. (b) Block 405b: In 2001 the Company entered into a production sharing contract with Sonatrach to explore and appraise Block 405b in the Berkine Basin. The Company is in the second exploration period which expires in December 2006. The remaining work obligation for the second exploration period is to drill one exploration well. The estimated cost of this work is $9.0 million. Should the Company fail to satisfy the work obligation of the second exploration period, the rights, other than for areas for which an exploitation permit has been granted or requested, could be forfeited and the Company will be liable to pay Sonatrach a penalty of $6.25 million. In addition to the work commitments, the Company is obligated to pay an annual training bonus in the amount of $150 thousand for the duration of the contract. The contract provides the Company with the right to appraise and develop the MLE reserves discovered with the MLE-1 well. As compensation for the right to access the MLE discovery, the Company is committed to pay Sonatrach a reserve-based access fee of $0.25 per barrel of oil equivalent calculated on the total estimated recoverable proved MLE reserves. The access fee will be determined at the time the MLE reserves are declared commercial by Sonatrach and will be payable as a deduction from Sonatrach's share of the MLE development expenditures. While the Company currently has sufficient resources to meet its required work commitments, these resources may be directed to other, optional capital programmes depending on the success of expenditures and other opportunities which become available to the Company. In addition, the development of the Company's existing reserves through to commercial production will require additional funding in the form of equity, debt, joint ventures or some combination thereof. The Company has retained Lehman Brothers Europe Limited and Canaccord Capital Corporation to assist the Company in seeking and evaluating strategic alternatives. 4. Cash and short-term deposits: The Company considers deposits in banks, certificates of deposit and short-term investments with original maturities of three months or less as cash and short-term deposits. The components of cash and short-term deposits are as follows: --------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------- Cash on deposit: U.S. dollars $ 1,833 $ 50,911 British pounds 1,574 286 Algerian dinars 577 51 Canadian dollars 482 791 Bank term deposits: British pounds 54,823 - Canadian dollars 22,079 42,644 U.S. dollars 506 502 --------------------------------------------------------------------- $ 81,874 $ 95,185 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Property, plant and equipment: --------------------------------------------------------------------- Accumulated Net book 2004 Cost depreciation value --------------------------------------------------------------------- Petroleum and natural gas properties - Algeria $ 309,751 $ - $ 309,751 Office furniture and equipment 504 202 302 --------------------------------------------------------------------- $ 310,255 $ 202 $ 310,053 --------------------------------------------------------------------- --------------------------------------------------------------------- Included in Algerian petroleum and natural gas properties is $132.6 million representing the value attributable to the 10,150,000 common shares of the Company issued in October 2004 to acquire an overriding five per cent net profits interest that previously encumbered Blocks 405b and 406a. --------------------------------------------------------------------- Accumulated Net book 2003 Cost depreciation value --------------------------------------------------------------------- Petroleum and natural gas properties - Algeria $ 68,409 $ - $ 68,409 Office furniture and equipment 440 141 299 --------------------------------------------------------------------- $ 68,849 $ 141 $ 68,708 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company held a ten per cent interest in a production sharing contract to explore Block 43 in Yemen. At December 31, 2003 the Company determined it was not prepared to fund any further activities on the block, and given the absence of a commercial discovery, wrote-off $1.0 million of costs related to the block. During the year, the Company capitalized $5.2 million (2003 - $1.4 million) of overhead charges relating directly to the exploration and development activities in Algeria. 6. Accounts payable and accrued liabilities: --------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------- Trade payables: U.S. dollars $ 13,004 $ 8,311 Algerian dinars 3,746 711 Canadian dollars 2,151 536 British pounds 423 55 Capital accrual: U.S. dollars 11,550 2,931 --------------------------------------------------------------------- $ 30,874 $ 12,544 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Asset retirement obligations: The Company has an obligation to abandon and remediate its wells at the end of their useful lives provided Sonatrach does not elect to continue production after the hydrocarbon contracts expire. The present value of this obligation has been projected using estimates of the future costs and the timing of abandonment. At December 31, 2004 the Company estimated the present value of its asset retirement obligations to be $0.3 million (2003 - $0.1 million) based on a future liability of $1.6 million (2003 - $0.5 million). These costs are expected to be incurred near the end of the exploitation phase of the Algerian production sharing contract, being after 2030. A credit-adjusted risk-free discount rate of seven per cent and an inflation rate of two per cent were used to calculate the present value. 8. Capital stock: (a) Authorized share capital: Unlimited number of common shares without nominal or par value Unlimited number of preferred shares without nominal or par value (b) Issued share capital: --------------------------------------------------------------------- Number of Shares Amount --------------------------------------------------------------------- Common shares: --------------------------------------------------------------------- Balance, December 31, 2002 108,629,726 $ 40,351 Issued on public offering (i) 14,893,620 23,121 Issued on public offering (ii) 35,000,000 106,251 Issued on exercise of share purchase warrants (iii) 2,448,408 2,403 Issued on exercise of stock options 2,084,932 1,273 Transfer from contributed surplus on exercise of stock options and warrants - 235 Issue costs - (8,453) --------------------------------------------------------------------- Balance, December 31, 2003 163,056,686 165,181 Issued on acquisition of net profits interest (iv) 10,150,000 132,600 Issued on public offering (v) 6,000,000 74,242 Issued on exercise of share purchase warrants (vi) 1,844,424 6,602 Issued on exercise of stock options 2,035,565 2,394 Transfer from contributed surplus on exercise of stock options and warrants - 589 Issue costs - (4,320) --------------------------------------------------------------------- Balance, December 31, 2004 (vii) 183,086,675 $ 377,288 --------------------------------------------------------------------- --------------------------------------------------------------------- (i) In February 2003 the Company issued 14,893,620 common shares for gross proceeds of $23.1 million (10,807,620 common shares at C$2.35 per share and 4,086,000 common shares at pnds stlg 0.95 per share). The issue costs were $1.7 million. In conjunction with the offering, the Company issued the agents 893,617 common share purchase warrants exercisable at a purchase price of C$2.60 per share until February 12, 2004. (ii) In October 2003 the Company issued 35,000,000 common shares for gross proceeds of $106.3 million (13,838,500 common shares at C$4.00 per share and 21,161,500 common shares at pnds stlg 1.79 per share). The issue costs were $6.7 million. In conjunction with the offering, the Company issued the agents 1,750,000 common share purchase warrants exercisable at a purchase price of C$5.00 per share until April 20, 2005. (iii) In 2003 the Company issued 2,448,408 common shares pursuant to the exercise of the following common share purchase warrants: 1,368,000 at C$0.56 per share, 231,472 at C$1.11 per share and 848,936 at C$2.60 per share. (iv) In October 2004, the Company issued 10,150,000 common shares to acquire an overriding five per cent net profits interest that previously encumbered Blocks 405b and 406a. (v) In December 2004, the Company issued 6,000,000 common shares for gross proceeds of $74.2 million (4,637,192 common shares at pnds stlg 6.50 per share and 1,362,808 common shares at C$14.46 per share). The issue costs were $4.2 million. (vi) In 2004, the Company issued 1,844,424 common shares pursuant to the exercise of the following common share purchase warrants: 85,764 at C$1.11 per share, 44,681 at C$2.60 per share and 1,713,979 at C$5.00 per share. (vii) Subsequent to December 31, 2004, the Company issued 504,377 common shares pursuant to the exercise of 450,000 non-employee stock options at C$0.70 per share, 32,764 common share purchase warrants at C$1.11 per share and 21,613 common share purchase warrants at C$5.00 per share. (c) Employee stock options: Pursuant to the Stock Option Plan, the Company has 12,176,230 common shares reserved for issuance. Stock options granted under the plan have a term of five years and vesting terms are determined at the discretion of the Board, ranging between two and three years. The exercise price of each option is equal to the closing market price of the shares on the date preceding the date of the grant. The following table summarizes the changes in stock options outstanding: ----------------------------------------------------------------- Weighted Average Number of Exercise Options Price ----------------------------------------------------------------- Outstanding, December 31, 2002 7,110,033 C$ 0.88 Granted 4,180,000 4.29 Exercised (2,084,932) 0.82 Cancelled (186,700) 1.04 ----------------------------------------------------------------- Outstanding, December 31, 2003 9,018,401 2.47 Granted 880,000 9.83 Exercised (2,035,565) 1.45 Cancelled (233,335) 6.55 ----------------------------------------------------------------- Outstanding, December 31, 2004 7,629,501 C$ 3.47 ----------------------------------------------------------------- ----------------------------------------------------------------- The following table summarizes information about the options outstanding and exercisable at December 31, 2004: ------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Price Options Life Price Options Price ------------------------------------------------------------------------- C$0.50-0.95 2,173,500 1.7 years C$ 0.63 2,173,500 C$ 0.63 C$1.25-1.90 930,334 2.4 years 1.26 930,334 1.26 C$2.36-2.95 1,030,334 3.1 years 2.60 637,001 2.59 C$4.72-4.72 2,518,333 3.8 years 4.72 1,680,556 4.72 C$7.45-7.81 518,000 4.1 years 7.67 248,334 7.67 C$10.95-15.77 459,000 4.1 years 11.68 123,333 11.15 ------------------------------------------------------------------------- 7,629,501 3.0 years C$ 3.47 5,793,058 C$ 2.66 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (d) Common share purchase warrants: The following table summarizes the changes in common share purchase warrants outstanding: ----------------------------------------------------------------- Weighted Average Number of Exercise Warrants Price ----------------------------------------------------------------- Outstanding, December 31, 2002 1,718,000 C$ 0.67 Granted in connection with public offerings 2,643,617 4.19 Exercised (2,448,408) 1.32 ----------------------------------------------------------------- Outstanding, December 31, 2003 1,913,209 4.70 Exercised (1,844,424) 4.76 ----------------------------------------------------------------- Outstanding, December 31, 2004 68,785 C$ 3.15 ----------------------------------------------------------------- ----------------------------------------------------------------- At December 31, 2004, all of the 68,785 common share purchase warrants outstanding are exercisable; 36,021 expire on April 19, 2005 and the remaining 32,764 expire on June 9, 2007. (e) Non-employee stock options: In 2002 the Company granted consultants options to acquire 900,000 common shares at a price of C$0.70 per share. At December 31, 2004, all of these options remain outstanding, are fully vested and expire January 24, 2007. (f) Stock-based compensation expense: For the year ended December 31, 2004, the Company recorded $5.2 million (2003 - $4.7 million) as stock-based compensation expense with a corresponding increase in contributed surplus. The fair value of the options granted in 2004 was estimated to be C$5.34 per option (2003 - C$3.02) and was determined using the Black-Scholes option pricing model with the following weighted average assumptions: expected volatility of 81 per cent (2003 - 88 per cent) , risk-free interest rate of 3.7 per cent (2003 - 4.35 per cent) and expected lives of 3 years (2003 - 5 years). No compensation expense was recorded on options granted to employees prior to January 1, 2003. Had options granted to employees in 2002 been accounted for using the fair value method, net loss for the year ended December 31, 2004 would have been higher by $0.1 million (2003 - $0.3 million). The pro forma fair values were determined using the Black-Scholes option pricing model with the following assumptions: expected volatility of 95 per cent, risk-free interest rate of 5 per cent and expected lives of 5 years. (g) Contributed surplus: The changes in contributed surplus balance are as follows: ----------------------------------------------------------------- 2004 2003 ----------------------------------------------------------------- Balance, beginning of year $ 4,849 $ 405 Options granted 5,181 4,679 Options and warrants exercised (589) (235) ----------------------------------------------------------------- Balance, end of year $ 9,441 $ 4,849 ----------------------------------------------------------------- ----------------------------------------------------------------- (h) Per share amounts: The loss per share is based on the weighted average shares outstanding for the year. The weighted average shares outstanding for 2004 was 167,749,193 (2003 - 130,088,467). The effect upon conversion of outstanding options and warrants is anti-dilutive. 9. Income taxes: Income tax expense differs from the amount that would be computed by applying the Canadian federal and provincial statutory income tax rates to the loss for the year as follows: --------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------- Loss for the year $ (6,565) $ (9,650) Statutory tax rate 38.6% 40.6% Expected income tax recovery at statutory rate (2,534) (3,918) Increase (decrease) resulting from: Non-deductible stock-based compensation 2,000 1,900 Increase in valuation allowance 1,811 2,624 Share issue costs (1,313) (923) Other 36 317 --------------------------------------------------------------------- $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- The components of the potential future income tax asset at December 31 are summarized below: --------------------------------------------------------------------- 2004 2003 --------------------------------------------------------------------- Operating losses $ 4,115 $ 2,304 Property, plant and equipment 3,211 3,405 Share issue costs 3,255 3,061 --------------------------------------------------------------------- 10,581 8,770 Less: valuation allowance (10,581) (8,770) --------------------------------------------------------------------- $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- 10. Financial instruments: The Company is exposed to foreign currency fluctuations as it holds Canadian dollar and British pound cash and short-term deposits and accounts payable. In addition, a portion of the Company's operating activities are conducted in Canadian dollars. There are no exchange rate contracts in place. The fair value of the Company's financial instruments, including cash and short-term deposits, accounts receivable and accounts payable and accrued liabilities approximate their carrying values due to their short terms to maturity. 11. Leases: The Company is committed to office and equipment leases over the next five years as follows: 2005 $ 389 2006 277 2007 232 2008 17 2009 2 12. Segmented information: The Company's activities are conducted in two geographic segments: Canada and Algeria. All activities relate to exploration and development of petroleum and natural gas in Algeria. 2004 Canada Algeria Yemen Total --------------------------------------------------------------------- Revenue $ 1,290 $ - $ - $ 1,290 Expenses 7,855 - - 7,855 --------------------------------------------------------------------- Loss for the year (6,565) - - (6,565) --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 67 $ 241,142 $ - $ 241,209 --------------------------------------------------------------------- --------------------------------------------------------------------- Assets $ 81,991 $ 311,051 $ - $ 393,042 --------------------------------------------------------------------- --------------------------------------------------------------------- 2003 Canada Algeria Yemen Total --------------------------------------------------------------------- Revenue $ 638 $ - $ - $ 638 Expenses 8,183 1,070 1,035 10,288 --------------------------------------------------------------------- Loss for the year (7,545) (1,070) (1,035) (9,650) --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures $ 94 $ 45,881 $ 232 $ 46,207 --------------------------------------------------------------------- --------------------------------------------------------------------- Assets $ 95,506 $ 68,857 $ - $ 164,363 --------------------------------------------------------------------- --------------------------------------------------------------------- Capital expenditures in 2004 include the non-cash acquisitions of the overriding five per cent net profits interest of $132.6 million. For further information: contact Kenneth C. Rutherford, Vice President, Finance & Chief Financial Officer, FIRST CALGARY PETROLEUMS LTD., Suite 900, 520 - 5 Avenue SW, Calgary, AB, T2P 3R7, tel: (403) 264-6697, fax: (403) 264-3955, email: info(at)fcpl.ca, web site: www.fcpl.ca; European contacts: Jim Joseph, COLLEGE HILL, Tel: +44 (0) 207 457 2020; Carina Corbett, 4C COMMUNICATIONS LTD., Tel: +44 (0) 207 907 4761 (FCP.) END DATASOURCE: FIRST CALGARY PETROLEUMS LTD

Copyright