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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| TSXV:PPE | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
Hot Features
Premium
Caza Oil & Gas, Inc. ("Caza" or "the Company") (TSX:CAZ)(AIM:CAZA), the
exploration, appraisal, development and production company, is pleased to
announce the Company's final results for the year ended December 31, 2011.
2011 highlights include:
-- Proven reserves at December 31, 2011 increased 36% to 2.35 million (MM)
barrels of oil equivalent (boe) and proven plus probable reserves
increased by 150% to 12.12 MMboe from December 31, 2010, as estimated by
the independent report completed by NSAI (as defined below under Reserve
Data) dated as of December 31, 2011;
-- Net present value of future net revenue attributable to proved reserves
increased 63% to US$45.8MM (US$28.1MM: 2010), and proved plus probable
reserves increased 72% to US$145.2MM (US$84.3MM: 2010) (discounted 10%)
as estimated by the NSAI Report;
-- Average production volumes increased 38% to 240 boe per day (boe/d) for
the twelve month period ended December 31, 2011 (174 boe/d: 2010);
-- Revenues increased 63% to US$1.21MM for the three month period ended
December 31, 2011, (US$0.74MM for the comparable three month period
ended December 31, 2010);
-- Annual revenues increased 83% to US$4.1MM for the year 2011, (US$2.23MM:
2010).
W. Michael Ford, Chief Executive Officer commented:
"We are pleased with our progress in 2011. The latter portion of the year was
particularly positive with material increases in both production and revenues.
Caza increased its production volumes by 38% and revenues by 63% in Q4 2011, as
compared to Q4 2010, with an annual increase in revenues on the prior year of
83% in 2011. Our proven reserves also increased materially during the course of
2011. These increases were the direct result of Caza's successful drilling
operations during the year and highlight the value creating activities that
remain the focus of the operations we undertake on behalf of our shareholders.
Our cash and cash equivalents at December 31, 2011, are US$10.2MM, and our net
working capital at December 31, 2011, is US$8.84MM."
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.: Texas and Louisiana Gulf Coast (on-shore),
and the Permian Basin (West Texas and Southeast New Mexico).
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.
Copies of the Company's financial statements for the year ended December 31,
2011, the accompanying management's discussion and analysis and the Company's
Annual Information Form for the year ended December 31, 2011 (which contains
further information about the Company, its principal properties and its crude
oil and natural gas reserves), will be available on SEDAR at www.sedar.com and
the Company's website at www.cazapetro.com. The Company's financial statements
have been in accordance with Canadian generally acceptable accounting principles
applicable to publicly accountable enterprises. All dollar amounts disclosed in
this press release are disclosed in United States dollars.
Chief Executive's Statement
"We are pleased with our progress in 2011. The latter portion of the year was
particularly positive with material increases in both production and revenues.
These increases were the direct result of Caza's successful drilling operations
during the year and clearly highlight the value creating activities that remain
the focus of the operations we undertake on behalf of our shareholders.
"We were successful in the Permian Basin at our San Jacinto Wolfberry property
in Midland County, Texas. Caza, as operator, successfully engineered the
stimulation, completion and commingling of multiple pay zones and currently has
two wells on production averaging gross volumes of 170 boe/d with up to seven
additional proven undeveloped locations still to be drilled on this property.
This has added real value in the form of cash flows and proven reserves.
Notwithstanding this, more favorable investment opportunities and attractive
recent Wolfberry properties' sale prices have caused management to explore the
possibility of divesting the San Jacinto Wolfberry property. If this property is
ultimately sold, Caza intends to use the proceeds to further existing assets and
to pursue new opportunities in order to add additional shareholder value through
continued investment in suitable properties.
"We are also pleased to disclose that Caza is steadily building a position in
the very active Bone Spring horizontal play in Southeast New Mexico. As
previously announced, Caza conducted extensive production tests in the Bone
Spring formation at our Lynch Property on the Mud Slide Slim Fed Com 15-1 well,
which led to our heightened interest in this play. The Bone Spring formation in
Lea and Eddy Counties, New Mexico, contains multiple potential pay zones for oil
and liquids-rich natural gas, which include the Avalon Shale and First, Second
and Third Bone Spring Sands. Caza's current prospects in the Bone Spring play
are Lynch, Forehand Ranch, Lennox, Copperline and Mad River. We have acquired
approximately 4,000 acres in the play to date. The NSAI Report has assigned 100
viable Bone Spring horizontal drilling locations to our current leasehold
position with total proved plus probable plus possible net reserves to the
Company of 16.7 MMboe. In addition to Bone Spring potential, our leases also
have shallow Delaware potential for oil, which could be developed independently
of the Bone Spring. Caza intends to sell down to industry partners in these
prospects and participate with a manageable 25-50% interest in the wells.
"Also in Southeast New Mexico, CML, as operator, commenced drilling operations
earlier this month on the WC 35 State No. 1 well on Caza's Sombrero property in
Lea County, New Mexico. This property is targeting the Cisco formation for oil
and liquids-rich natural gas. We will update the market regarding the well in
due course.
"We continue to evaluate our 3-D seismic databases in south Texas and south
Louisiana. Caza is currently evaluating the Lewis prospect against our current
prospect inventory and looking for an operating partner to drill our Consilience
Cib Op prospect in Atchafalaya Bay later in 2012. These are high impact
prospects that carry slightly more risk than the Permian Basin oil prospects
mentioned previously, but with higher upside potential. We recognize the value
in generating and drilling high impact prospects. Our extensive 3-D seismic data
base allows us to achieve this while giving us a competitive advantage over oil
and gas exploration and production companies of similar size and value.
"The Company had development and production impairments of $10.8MM and
exploration and evaluation impairments of $6.3MM in 2011. The impairments are
largely due to low North American natural gas prices and write downs associated
with the Company's Cook Mountain leases in Wharton County, Texas, and the
Arran/Marian Baker #1 well in Acadia Parish, Louisiana.
"At Caza we are pleased with progress made in 2011, and after laying the
groundwork for continued success, we look forward to advancing the Company's
prospects and properties during the course of 2012."
Reserve Figures by Category:
Caza reported an increase in proved (1P) reserves at year end 2011 to 2.35 MMboe
or an increase of 36%; proved plus probable (2P) reserves increased at year end
2011 to 12.12 MMboe or an increase of 150%; proved plus probable plus possible
(3P) reserves increased at year end 2011 to 22.26 MMboe or an increase of 143%
(as depicted in the table below).
Reserve Data:
Totals may not add because of rounding. Mbbl, MMcf and Mboe refer to
thousand barrels, million cubic feet and thousand boe, respectively.
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Mbbl MMcf Mboe Mbbl MMcf Mboe
----------------------------------------------------------------------------
Proved Developed
----------------------------------------------------------------------------
Producing 175.6 1,950.1 500.6 140.1 1,564.9 400.9
----------------------------------------------------------------------------
Non-Producing 90.0 349.1 148.2 90.4 267.4 135.0
----------------------------------------------------------------------------
Undeveloped 1,007.7 4,170.3 1,702.8 497.1 4,199.2 1,197.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proved 1,273.3 6,469.5 2,351.6 727.5 6,031.4 1,732.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Probable 5,766.8 24,034.6 9,772.6 941.0 13,014.0 3,110.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proved + Probable 7,040.1 30,504.1 12,124.1 1,668.5 19,045.4 4,842.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Possible 5,289.8 29,062.0 10,133.5 924.7 20,441.2 4,331.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Proved + Probable +
Possible 12,329.9 59,566.0 22,257.6 2,593.4 39,486.6 9,174.4
----------------------------------------------------------------------------
Present value cash flows of Caza's estimated net proved and probable reserves as
at December 31, 2011 were:
Present value cash flow, net proved plus PV 10% before PV 10% after
probable reserves income taxes income taxes
(US$MM) (US$MM)
145.232 86.494
The reserves data set out in this announcement (including in the above tables)
have been extracted from the NSAI Report and are disclosed, together with
additional information relating to the Company's reserves and properties, in the
Company's Annual Information Form for the year ending December 31, 2011 (filed
on SEDAR at www.sedar.com). The evaluation of the reserves data included in the
Annual Information Form and in the NSAI Report complies with standards set out
in the Canadian Oil and Gas Evaluation Handbook prepared jointly by the Society
of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian Institute
of Mining, Metallurgy & Petroleum (Petroleum Society). References to the NSAI
Report are to the report prepared on the Company's reserves by Netherland,
Sewell & Associates, Inc. as of December 31, 2011, and entitled "Estimates of
Reserves and Future Revenue to the Caza Petroleum, Inc. Interest in Certain Oil
and Gas Properties Located in Louisiana, New Mexico, and Texas as of December
31, 2011".
ADVISORY STATEMENT
Information in this news release that is not current or historical factual
information may constitute forward-looking statements within the meaning of
securities laws. Such information is often, but not always, identified by the
use of words such as "seek", "anticipate", "plan", "continue", "estimate",
"expect", "may", "will", "project", "predict", "potential", "targeting",
"intend", "could", "might", "should", "believe" and similar expressions.
Information regarding future exploration, development and drilling activities
(including the timing and scope thereof), drilling programs, geologic and
seismic interpretation, joint venture relationships, ability to generate
projects, strategic acquisitions and Caza's ability to execute its strategic
plan contained in this news release constitutes forward-looking information
within the meaning of securities laws. Statements relating to "reserves" are
deemed to be forward-looking statements, as they involve the implied assessment,
based on certain estimates and assumptions, that the resources and reserves
described can be profitably produced in the future.
Implicit in this information, particularly in respect of production are
assumptions regarding projected revenue and expenses, the performance of wells,
drilling and operating results, availability of funds, asset dispositions and
the ability to secure joint venture partners and internally generate projects.
These assumptions, although considered reasonable by the Company at the time of
preparation, may prove to be incorrect. Readers are cautioned that actual future
operating results and economic performance of the Company are subject to a
number of risks and uncertainties, including general mechanical, economic,
market and business conditions and could differ materially from what is
currently expected as set out above. Production disclosed in this press release
is at December 31, 2011. Future production may vary, perhaps materially.
For more exhaustive information on these risks and uncertainties you should
refer to the Company's most recently filed Annual Information Form filed on
SEDAR at www.sedar.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 required by applicable
securities laws.
The estimates of reserves and future net revenue for individual properties may
not reflect the same confidence level as estimates of reserves and future net
revenue for all properties, due to the effects of aggregation.
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.
Statements in this news release relating to net present value or future net
revenue do not represent fair market value.
Management's Report to Shareholders
Management has prepared the accompanying consolidated financial statements of
Caza Oil & Gas, Inc. in accordance with International Financial Reporting
Standards.
Management is responsible for the integrity and objectivity of the financial
statements. Where necessary, the financial statements include estimates, which
are based on management's informed judgments. Management has established systems
of internal control that are designed to provide reasonable assurance that
assets are safeguarded from loss or unauthorized use and to produce reliable
accounting records for financial reporting purposes.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. It exercises its
responsibilities primarily through the Audit Committee. The Audit Committee
meets periodically with management and the external auditors to satisfy itself
that management's responsibilities are properly discharged, to review the
consolidated financial statements and to recommend that the consolidated
financial statements be presented to the Board of Directors for approval.
Deloitte & Touche LLP has audited the consolidated financial statements in
accordance with Canadian generally accepted auditing standards to enable them to
express an opinion on the fairness of the consolidated financial statements.
William M. Ford, Chief Executive Officer and Director
March 29, 2012
James M. Markgraf, Chief Financial Officer
March 29, 2012
Independent Auditor's Report
To the Shareholders of Caza Oil & Gas, Inc.
We have audited the accompanying consolidated financial statements of Caza Oil &
Gas Inc. which comprise the consolidated statements of financial position as at
December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated
statements of net loss, comprehensive loss and deficit, consolidated statements
of cash flows and the consolidated statements of changes in equity for the years
ended December 31, 2011 and December 31, 2010, and the notes to the consolidated
financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Caza Oil & Gas Inc. and
subsidiaries as at December 31, 2011, December 31, 2010 and January 1, 2010, and
its financial performance and its cash flows for the years ended December 31,
2011 and December 31, 2010 in accordance with International Financial Reporting
Standards.
Deloitte & Touche LLP, Chartered Accountants
Calgary, Alberta
March 29, 2012
Caza Oil & Gas, Inc.
Consolidated Statement of Financial Position
December 31, December 31, January 1,
(In United States dollars) 2011 2010 2010
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 10,204,176 $ 33,885,900 $ 9,268,547
Accounts receivable 3,680,998 2,554,913 3,973,085
Prepaid and other 312,704 291,517 278,914
------------------------------------------
14,197,878 36,732,330 13,520,546
Exploration and evaluation assets
(Note 3) 4,941,256 7,371,582 11,662,047
Petroleum and natural gas
properties and equipment (Note 4) 29,419,741 29,379,862 24,548,233
------------------------------------------
$ 48,558,875 $ 73,483,774 $ 49,730,826
------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 5,352,445 $ 7,362,243 $ 5,144,083
Decommissioning liabilities (Note
5) 1,052,091 807,754 706,541
------------------------------------------
6,404,536 8,169,997 5,850,624
Shareholders' Equity
Share capital (Note 7(b)) 75,064,216 75,013,680 50,293,526
Share based compensation reserve
(Note 7(d)) 9,430,656 9,363,598 5,175,086
Deficit (42,747,681) (22,700,262) (12,506,981)
------------------------------------------
Equity attributable to owners of
the Company 41,747,191 61,677,016 42,961,631
Non-controlling interests 407,148 3,636,761 918,571
------------------------------------------
Total equity 42,154,339 65,313,777 43,880,202
------------------------------------------
$ 48,558,875 $ 73,483,774 $ 49,730,826
------------------------------------------
See accompanying notes to the consolidated financial statements
On behalf of the Board:
J. Russell Porter, Director
William M. Ford, Director
Caza Oil & Gas, Inc.
Consolidated Statements of Net Loss and Comprehensive Loss
(In United States Dollars)
For the years ended December 31, 2011 2010
----------------------------------------------------------------------------
Revenues
Petroleum and natural gas $ 4,089,894 $ 2,233,682
Gain on sale of assets - 760,027
Interest income 16,535 4,723
----------------------------
4,106,429 2,998,432
----------------------------
Expenses
Production 994,040 718,186
General and administrative 5,911,834 3,574,453
Depletion, depreciation, amortization 2,974,783 2,277,384
Financing costs - unwinding of the discount 21,817 25,286
Other expense (income) (135,270) -
Development and production impairment (Note 4) 10,842,437 179,700
Exploration and evaluation impairment (Note 3) 6,339,995 3,698,514
Bad debt 433,825 -
----------------------------
27,383,461 10,473,523
----------------------------
Loss before income taxes (23,277,032) (7,475,091)
----------------------------
Income taxes (Note 6)
Current income taxes - -
Deferred income taxes - -
----------------------------
- -
----------------------------
Net loss (23,277,032) (7,475,091)
Attributable to:
Owners of the Company (20,047,419) (6,148,962)
Non-controlling interests (3,229,613) (1,326,129)
----------------------------
$(23,277,032) $ (7,475,091)
----------------------------------------------------------------------------
Net loss per share
- basic and diluted (0.14) (0.06)
----------------------------
Weighted average shares outstanding
- basic and diluted (1) 164,412,669 124,497,082
----------------------------
(1) The options and warrants have been excluded from the diluted loss per
share computation as they are anti-dilutive
See accompanying notes to the consolidated financial statements
Caza Oil & Gas, Inc.
Consolidated Statement of Cash Flows
(In United States Dollars)
For the years ended December 31, 2011 2010
----------------------------------------------------------------------------
OPERATING
Net loss for the year (23,277,032) (7,475,091)
Adjustments for items not affecting cash:
Depletion, depreciation and amortization 2,974,783 2,277,384
Unwinding of the discount 21,817 25,286
Share-based compensation 87,868 318,512
Development and production impairment 10,842,437 179,700
Exploration and evaluation impairment 6,339,995 3,698,514
Bad debt expense 433,825 -
Accounts payable write off (48,900) -
Loss (gain) on sale of assets 47,444 (760,027)
Interest income (16,535) (4,723)
Changes in non-cash working capital (Note 10(a)) (1,085,875) 350,929
------------------------
Cash flows used in operating activities (3,680,173) (1,389,516)
------------------------
FINANCING
Proceeds from issuance of shares 29,726 30,136,050
Share issuance costs - (1,545,896)
Interest received 16,535 4,723
------------------------
Cash flow from (used in) financing activities 46,261 28,594,877
INVESTING
Exploration and evaluation expenditures (9,271,394) (5,182,733)
Development and production expenditures (8,301,419) (3,389,131)
Purchase of office furniture and equipment (18,879) (77,794)
Proceeds from the sale of oil & gas assets - 1,800,000
Partner reimbursement - 988,850
Changes in non-cash working capital (Note 10a) (2,456,120) 3,272,800
------------------------
Cash flows used in investing activities (20,047,812) (2,588,008)
------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23,681,724) 24,617,353
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 33,885,900 9,268,547
------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR 10,204,176 33,885,900
------------------------
------------------------
Supplementary information (Note 10)
See accompanying notes to the consolidated financial statements
Caza Oil & Gas, Inc.
Consolidated Statement of Changes in Equity
For the years ended December 31, 2011 2010
----------------------------------------------------------------------------
Share Capital
Balance, Beginning of Year 75,013,680 50,293,526
Common shares issued 50,536 28,590,154
Expired warrants - (3,870,000)
------------- -------------
Balance, End of Year 75,064,216 75,013,680
------------- -------------
Share based compensation reserve
Balance, Beginning of Year 9,363,598 5,175,086
Expired broker warrants - 3,870,000
Exercise of stock options (20,810) -
Share-based compensation 87,868 318,512
------------- -------------
Balance, End of Year 9,430,656 9,363,598
------------- -------------
Deficit
Balance, Beginning of Year (22,700,262) (12,506,981)
Additional controlling interest due to share
issuance (Note 7e) - (4,044,319)
Net loss allocated to the owners of the Company (20,047,419) (6,148,962)
------------- -------------
Balance, End of Year (42,747,681) (22,700,262)
------------- -------------
Non-Controlling Interests
Balance, Beginning of Year 3,636,761 918,571
Reduction of non-controlling interest due to
share issuance (Note 7e) - 4,044,319
Net loss allocated to non-controlling interests (3,229,613) (1,326,129)
------------- -------------
Balance, End of Year 407,148 3,636,761
------------- -------------
Total Shareholders' Equity 42,154,339 65,313,777
------------- -------------
See accompanying notes to the 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 TSX (symbol "CAZ") and AIM stock exchanges (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 consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). Canadian generally
accepted accounting principles ("Canadian GAAP") were revised to incorporate
IFRS and publicly accountable enterprises are required to apply such standards
for years beginning on or after January 1, 2011. Accordingly, these consolidated
financial statements were prepared in accordance with IFRS 1, First-time
Adoption of IFRS. The significant accounting policies set out below were
consistently applied to all the periods presented.
Canadian GAAP differs in some areas from IFRS. In preparing these consolidated
financial statements, management has amended certain accounting, valuation and
consolidation methods applied in the Canadian GAAP financial statements to
comply with IFRS. The date of transition to IFRS was January 1, 2010 and the
comparative figures for 2010 were restated to reflect these adjustments.
Reconciliations and descriptions of the effect of the transition from Canadian
GAAP to IFRS on equity, net loss and comprehensive loss are included in note 14.
The consolidated financial statements were approved and authorized by the Board
of Directors on March 29, 2012.
Caza's reporting currency is the United States ("U.S.") dollar as the majority
of its transactions are denominated in the currency.
2. Significant Accounting Policies
The accounting policies set out below have been applied consistently to all
years presented in these consolidated financial statements, and have been
applied consistently by the Company and its subsidiaries.
(a) Basis of consolidation:
Subsidiaries:
Subsidiaries are entities controlled by the Company. Control exists when the
Company has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities. In assessing control,
potential voting rights that currently are exercisable are taken into account.
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that
control ceases.
Details of the Company's subsidiaries at the end of the reporting year are as
follows.
----------------------------------------------------------------------------
Place of Proportion of ownership
incorporation interest and voting power
Name of subsidiary and operation held by the Company
----------------------------------------------------------------------------
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Caza Petroleum Inc. Delaware/Texas 86% 86%
Caza Operating, LLC Texas 100% 100%
Falcon Bay Operating, LLC Texas 100% 100%
Falcon Bay Sutton County, LLC Texas 100% 100%
The proportion not owned by the Company is shown as non-controlling interests in
these financial statements and relates to exchangeable rights in Caza Petroleum
Inc. which are held by management and which are exchangeable into the Company's
shares (see Note 7 e).
Jointly controlled operations and jointly controlled assets:
Many of the Company's oil and natural gas activities involve jointly controlled
assets. The consolidated financial statements include the Company's share of
these jointly controlled assets and a proportionate share of the relevant
revenue and related costs.
Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized income and expenses
arising from intercompany transactions, are eliminated in preparing the
consolidated financial statements.
(b) Foreign currency:
The Company and its subsidiary companies each determines their functional
currency of the primary economic environment in which they operate. The
Company's (and its subsidiaries) functional currency is the U.S. Dollar.
Transactions denominated in a currency other than the functional currency of the
entity are translated at the exchange rate in effect on the transaction date.
(c) Financial instruments:
Non-derivative financial instruments:
Non-derivative financial instruments comprise accounts receivable, cash and cash
equivalents, accounts payable and accrued liabilities. Non-derivative financial
instruments are recognized initially at fair. Subsequent to initial recognition,
non-derivative financial instruments are measured as described below.
Cash and cash equivalents:
Cash and cash equivalents comprise cash on hand, term deposits held with banks,
other short-term highly liquid investments (including money market instruments)
with original maturities of three months or less.
Financial assets at fair value through profit or loss:
An instrument is classified at fair value through profit or loss if it is held
for trading or is designated as such upon initial recognition. Upon initial
recognition attributable transaction costs are recognized in profit or loss when
incurred. Financial instruments at fair value through profit or loss are
measured at fair value, and changes therein are recognized in profit or loss.
The Company has designated cash and cash equivalents as fair value through
profit and loss.
Loans and receivables:
Non-derivative financial instruments classed as loans and receivables, such as
accounts receivable and accounts payable and accrued liabilities, are measured
at amortized cost using the effective interest method, less any impairment
losses.
(d) Evaluation and exploration assets:
Pre-license costs are expensed in the statement of operations as incurred.
Exploration and evaluation ("E&E") costs, including the costs of acquiring
licenses and directly attributable general and administrative costs, initially
are capitalized as either tangible or intangible exploration and evaluation
assets according to the nature of the assets acquired. The costs are accumulated
in cost centers by well, field or exploration area pending determination of
technical feasibility and commercial viability.
Assets classified as E&E are not amortized, but are assessed for impairment if
(i) sufficient data exists to determine technical feasibility and commercial
viability, and (ii) facts and circumstances suggest that the carrying amount
exceeds the recoverable amount. For purposes of impairment testing, exploration
and evaluation assets are allocated to cash-generating units ("CGU").
The technical feasibility and commercial viability of extracting a mineral
resource is considered to be determinable when proven reserves are determined to
exist. A review of each exploration license or field is carried out, at least
annually, to ascertain whether proven reserves have been discovered. Upon
determination of proven reserves, exploration and evaluation assets attributable
to those reserves are first tested for impairment and then reclassified from
exploration and evaluation assets to a separate category within tangible assets
referred to as petroleum and natural gas interests.
(e) Development and production costs:
Items of property, plant and equipment ("PPE"), which include oil and gas
development and production assets, are measured at cost less accumulated
depletion and depreciation and accumulated impairment losses. Development and
production assets are grouped into CGU's for impairment testing.
Development costs that may be capitalized as PPE include land acquisition costs,
geological and geophysical expenses, the costs of drilling productive wells, the
cost of petroleum and natural gas production equipment, directly attributable
and incremental general overhead and estimated abandonment costs. When
significant parts of an item of property, plant and equipment, including oil and
natural gas interests, have different useful lives, they are accounted for as
separate items.
Gains and losses on disposal of an item of property, plant and equipment,
including oil and natural gas interests, are determined by comparing the
proceeds from disposal with the carrying amount of property, plant and equipment
and are recognized within "other expenses (income)" in profit or loss. The
carrying amount of any replaced or sold component is derecognized.
Maintenance:
The costs of the day-to-day servicing of property, plant and equipment are
recognized in profit or loss as incurred.
Depletion and depreciation:
The net carrying value of development or production assets is depleted using the
unit of production method by reference to the ratio of production in the year to
the related proven reserves, taking into account estimated future development
costs necessary to bring those proved reserves into production. Future
development costs are estimated taking into account the level of development
required to produce the reserves. These estimates are reviewed by independent
reserve engineers at least annually.
Other Property and Equipment:
For other assets, depreciation is recognized in profit or loss on a
straight-line basis over the estimated useful lives of each part of an item of
property, plant and equipment. Leased assets are depreciated over the shorter of
the lease term and their useful lives unless it is reasonably certain that the
Company will obtain ownership by the end of the lease term. Land is not
depreciated.
The estimated useful lives for other assets for the current and comparative
years are as follows:
----------------------------------------------------------------------------
Office equipment 5 - 7 years
Fixtures and fittings 5 - 7 years
----------------------------------------------------------------------------
Depreciation methods, useful lives and residual values are reviewed at each
reporting date.
(f) Impairment:
Financial assets:
A financial asset is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more events have had
a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is
calculated as the difference between its carrying amount and the present value
of the estimated future cash flows.
All impairment losses are recognized in profit or loss. An impairment loss is
reversed if the reversal can be related objectively to an event occurring after
the impairment loss was recognized. For financial assets measured at amortized
cost the reversal is recognized in profit or loss.
Non-financial assets:
The carrying amounts of the Company's non-financial assets, other than "E&E"
assets and deferred tax assets, are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists,
then the asset's recoverable amount is estimated. An impairment test is
completed each year for other intangible assets that have indefinite lives or
that are not yet available for use. E&E assets are also assessed for impairment
if facts and circumstances suggest that the carrying amount exceeds the
recoverable amount and before they are reclassified to property and equipment,
as oil and natural gas interests.
For the purpose of impairment testing, assets are grouped together into CGUs. A
CGU is a grouping of assets that generate cash flows independently of other
assets held by the Company. The recoverable amount of an asset or a CGU is the
greater of its value in use and its fair value less costs to sell.
An impairment loss is recognized if the carrying amount of an asset or its CGU
exceeds its estimated recoverable amount. Impairment losses are recognized in
profit or loss.
Impairment losses recognized in prior years are assessed at each reporting date
for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the carrying amount that
would have been determined, net of depletion and depreciation or amortization,
if no impairment loss had been recognized.
(g) Decommissioning liabilities:
The Company recognizes a decommissioning liability in the period in which it has
a present legal or constructive liability and a reasonable estimate of the
amount can be made. Liabilities are measured based on current requirements,
technology and price levels and the present value is calculated using amounts
discounted over the useful economic life of the assets. Amounts are discounted
using the risk-free rate. On a periodic basis, management reviews these
estimates and changes, if any, will be applied prospectively. The fair value of
the estimated decommissioning liability is recorded as a long-term liability,
with a corresponding increase in the carrying amount of the related asset. The
capitalized amount is depleted on a unit-of-production basis over the life of
the proved reserves. The liability amount is increased each reporting period due
to the passage of time and the amount of accretion is charged to finance
expense. Periodic revisions to the estimated timing of cash flows or to the
original estimated undiscounted cost can also result in an increase or decrease
to the decommissioning liability. Actual costs incurred upon settlement of the
obligation are recorded against the decommissioning liability to the extent of
the liability recorded.
(h) Share capital:
Common shares are classified as equity. Incremental costs directly attributable
to the issue of common shares and share options are recognized as a deduction
from equity, net of any tax effects.
(i) Share based payments:
Equity-settled share-based payments to employees and others providing similar
services are measured at the fair value of the equity instruments at the grant
date.
The grant date fair value of options granted to employees is recognized as
compensation expense on a graded basis over the vesting period, within general
and administrative expenses, with a corresponding increase in contributed
surplus. A forfeiture rate is estimated on the grant date; however, at the end
of each reporting period, the Company revises its estimate of the number of
equity instruments expected to vest. The impact of the revision of the original
estimates, if any, is recognized on a prospective basis.
(j) Revenue:
Revenue from the sale of oil and natural gas is recorded when the significant
risks and rewards of ownership of the product is transferred to the buyer which
is usually when legal title passes to the external party. This is generally at
the time product enters the pipeline or any other means of transportation.
Revenue is measured net of royalties.
(k) Finance income and expenses:
Finance expense comprises interest expense on borrowings, if any, and the
unwinding of the discount on decommissioning liabilities.
Borrowing costs incurred for the construction of qualifying assets are
capitalized during the period of time that is required to complete and prepare
the assets for their intended use or sale. All other borrowing costs are
recognized in profit or loss using the effective interest method. The
capitalization rate used to determine the amount of borrowing costs to be
capitalized is the weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
Interest income is recognized as it accrues in profit or loss, using the
effective interest method.
(l) Earnings per share:
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is determined by
adjusting the profit or loss attributable to common shareholders and the
weighted average number of common shares outstanding for the effects of dilutive
instruments such as options granted to employees. Diluted per share calculations
reflect the exercise or conversion of potentially dilutive securities or other
contracts to issue shares at the later of the date of grant of such securities
or the beginning of the year. The Company computes diluted earnings per share
using the treasury stock method to determine the dilutive effect of securities
or other contracts. Under this method, the diluted weighted average number of
shares is calculated assuming the proceeds that arise from the exercise of
outstanding, in-the-money options are used to purchase common shares of the
Company at their average market price for the year. No adjustment to diluted
earnings per share or diluted shares outstanding is made if the result of the
calculations is anti-dilutive.
(m) Application of new and revised International Financial Reporting Standards
(IFRSs) issued but not yet effective.
The Company has not applied the following new and revised IFRSs that have been
issued but are not yet effective.
As of January 1, 2012, the Company will be required to adopt amendments to IAS 1
"Presentation of Financial Statements" which will require companies to group
together items within other comprehensive income that may be reclassified to the
net earnings section of the comprehensive income statement. The Company does not
expect a material impact as a result of the amendment.
Each of the additional new standards outlined below is effective for annual
periods beginning on or after January 1, 2013, or 2015, with early adoption
permitted. 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.
IFRS 9 (revised) "Financial Instruments: Classification and Measurement"
The result of the first phase of the IASB's project to replace IAS 39,
"Financial Instruments: Recognition and Measurement". The new standard replaces
the current multiple classification and measurement models for financial assets
and liabilities with a single model that has only two classification categories:
amortized cost and fair value.
IFRS 10 (new) "Consolidated Financial Statements"
Replaces Standing Interpretations Committee 12, "Consolidation - Special Purpose
Entities" and the consolidation requirements of IAS 27 "Consolidated and
Separate Financial Statements". The new standard replaces the existing risk and
rewards based approaches and establish control as the determining factor when
determining whether an interest in another entity should be included in the
consolidated financial statements.
IFRS 11 (new) "Joint Arrangements"
Replaces IAS 31 "Interests in Joint Ventures" along with amending IAS 28
"Investment in Associates". The new standard focuses on the rights and
obligations of an arrangement, rather than its legal form. The standard
redefines joint operations and joint ventures and requires joint operations to
be proportionately consolidated and joint ventures to be equity accounted.
IFRS 12 (new) "Disclosure of Interests in Other Entities"
Provides comprehensive disclosure requirements on interests in other entities,
including joint arrangements, associates, and special purpose vehicles. The new
disclosure requires information that will assist financial statement users in
evaluating the nature, risks and financial effects of an entity's interest in
subsidiaries and joint arrangements.
IFRS 13 (new) "Fair Value Measurement"
Provides a common definition of fair value within IFRS. The new standard
provides measurement and disclosure guidance and applies when IFRS requires or
permits the item to be measured at fair value, with limited exceptions. This
standard does not determine when an item is measured at fair value and as such
does not require new fair value measurements.
(n) Critical accounting judgments and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. The consolidated financial statements have,
in management's opinion, been properly prepared using careful judgment with
reasonable limits of materiality.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in the period of
the revision and future periods if the revision affects both current and future
periods.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those involving estimations
(see below), that management has made in the process of applying the Company's
accounting policies and that have the most significant effect on the amounts
recognized in the consolidated financial statements include:
a) Estimation of reserves
Estimates of recoverable quantities of proved and probable reserves include
judgmental assumptions and require interpretation of complex geological and
geophysical models in order to make an assessment of the size, shape, depth and
quality of reservoirs, and their anticipated recoveries. The economic,
geological and technical factors used to estimate reserves may change from
period to period. Reserve estimates are prepared in accordance with the Canadian
Oil and Gas Evaluation Handbook and are reviewed by third party reservoir
engineers.
Estimates of oil and gas reserves are inherently imprecise, require the
application of judgment and are subject to regular revision, either upward or
downward, based on new information such as from the drilling of additional
wells, observation of long-term reservoir performance under producing conditions
and changes in economic factors, including product prices, contract terms or
development plans
Changes in reported reserves can impact property, plant and equipment impairment
calculations, estimates of depletion and the provision for decommissioning
obligations due to changes in expected future cash flows based on estimates of
proved and probable reserves, production rates, future petroleum and natural gas
prices, future costs and the remaining lives and period of future benefit of the
related assets.
b) Identification of cash-generating units
Management reviews the CGU determination on a periodic basis. The recoverability
of property, plant and equipment carrying values are assessed at the CGU level.
Determination of what constitutes a CGU is subject to management judgments. The
asset composition of a CGU can directly impact the recoverability of the related
assets.
c) Estimation of fair value of stock options
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. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. By their nature, these
estimates are subject to measurement uncertainty and the effect on the
consolidated financial statements of changes of estimates in future periods
could be significant.
Key sources of estimation uncertainty
The following are the key assumptions concerning the key sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of
causing adjustments to the carrying amounts of assets and liabilities within the
next financial year.
-- Estimates of recoverable quantities of proved and probable reserves
include judgmental assumptions and the economic, geological and
technical factors used to estimate reserves may change from period to
period.
-- Forward price estimates of the oil and natural gas prices are used in
the impairment model. Commodity prices have fluctuated widely in recent
years due to global and regional factors including supply and demand
fundamentals, inventory levels, weather, economic and geopolitical
factors.
-- The impairment model uses discount rate to calculate the net present
value of cash flows based on management's estimate of the rate that
incorporates the risks associated with the assets. Changes in the
general economic environment could result in significant changes in this
estimate.
-- Amounts recorded from joint venture partners are based on the Company's
interpretation of underlying agreements and may be subject to joint
approval. The Company has recorded balances due from its joint venture
partners based on costs incurred and its interpretation of allowable
expenditures. Any adjustment required as a result of joint venture
audits are recorded in the period of the determination with joint
venture partners.
-- The provision for site restoration and abandonment is based on current
legal and constructive requirements, technology, price levels and
expected plans for remediation. Actual costs and cash outflows can
differ from estimates because of changes in laws and regulations, public
expectations, prices and discovery and analysis of site conditions and
changes in clean-up technology.
The above judgments, estimates and assumptions relate primarily to unsettled
transactions and events as of the date of the consolidated financial statements.
Actual results could differ from these estimates and the differences could be
material.
3. Exploration and evaluation assets
----------------------------------------------------------------------------
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of year $ 7,371,582 $ 11,662,047
Additions to exploration and evaluation assets 9,271,394 5,182,733
Transfers to property, plant and equipment (5,361,725) (4,385,834)
Disposals - (1,388,850)
Unsuccessful exploration and evaluation costs (6,339,995) (3,698,514)
----------------------------------------------------------------------------
Balance, end of year $ 4,941,256 $ 7,371,582
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the year ended December 31, 2011, the Company expensed $6,339,995 of
exploration and evaluation costs of which $2,594,801 related to the Marian Baker
et al, No 1 drilled during the three months ended March 31, 2011 that did not
encounter hydrocarbons as well as an impairment to the valuation of the Las
Animas prospect in the amount of $1,146,226. The balance of the costs expensed
related to other leasehold and prospect expenditures that have expired or no
longer prospective for the Company.
4. Petroleum and natural gas properties and equipment
Development &
Production Corporate
Assets Assets Total
----------------------------------------------------------------------------
Cost
Balance, January 1, 2010 $ 24,205,722 $ 730,209 $ 24,935,931
Additions 3,465,058 77,794 3,542,852
Disposals (671,761) - (671,761)
Transfers from E&E 4,385,834 - 4,385,834
----------------------------------------------------------------------------
Balance, December 31, 2010 $ 31,384,853 $ 808,003 $ 32,192,856
Additions 8,523,939 18,879 8,542,818
Disposal (47,444) - (47,444)
Transfers from E&E 5,361,725 - 5,361,725
----------------------------------------------------------------------------
Balance, December 31, 2011 $ 45,223,073 $ 826,882 $ 46,049,955
----------------------------------------------------------------------------
Development &
Production Corporate
Assets Assets Total
----------------------------------------------------------------------------
Accumulated Depletion and
Depreciation
Balance, January 1, 2010 $ - $ 387,698 $ 387,698
Depletion and depreciation 2,125,868 151,516 2,277,384
Impairment 179,700 - 179,700
Disposal (31,788) - (31,788)
----------------------------------------------------------------------------
Balance, December 31, 2010 $ 2,273,780 $ 539,214 $ 2,812,994
Depletion and depreciation 2,826,962 147,821 2,974,783
Impairment 10,842,437 - 10,842,437
----------------------------------------------------------------------------
Balance, December 31, 2011 $ 15,943,179 $ 687,035 $ 16,630,214
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amounts
At January 1, 2010 $ 24,205,722 $ 342,511 $ 24,548,233
At December 31, 2010 29,111,073 268,789 29,379,862
At December 31, 2011 29,279,894 139,847 29,419,741
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Future development costs of proved undeveloped reserves of $30,722,900 were
included in the depletion calculation at December 31, 2011 and $9,292,700 for
the year ended December 31, 2010.
During the year ended December 31, 2011 the Company did not capitalize general
and administrative expenses (2010 - $219,790) directly relating to exploration
and development activities, of which $nil in 2011 that (2010 - $29,681) related
to stock based compensation.
The Company performed an impairment test at December 31, 2011 to assess whether
the carrying value of its petroleum and natural gas properties exceeds fair
value. Impairment in the amount of $10,842,437 was required to be recorded as at
December 31, 2011 primarily due to changes in Company estimates of reserves in
the Cook Mountain formation in the SE Texas CGU. The December 31, 2011
impairment was recognized using a 16% discounted cash flow (December 31, 2010 -
13%, January 1, 2010 - 15%). The petroleum and natural gas future prices
(adjusted for quality differentials) are based on commodity price forecasts of
the Company's independent reserve evaluators for 2011 as follows:
NYMEX
Crude Oil(1) Natural Gas(1)
Year ($/bbl) ($/mmbtu)
----------------------------------------------------------------------------
2012 98.14 3.725
2013 98.60 4.420
2014 99.01 4.897
2015 101.08 5.601
2016 102.33 5.981
Thereafter (inflation %) +2.0%/yr +2.0%/yr
----------------------------------------------------------------------------
(1) Prices used in the impairment test were adjusted for commodity price
differentials specific to the Company.
5. Decommissioning Liabilities
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligation associated with the retirement of
oil and gas properties:
Year ended Year ended
December 31, December 31,
2011 2010
-------------- -------------
Decommissioning liabilities, beginning of year $ 807,754 $ 706,541
Obligations incurred 131,318 75,927
Revision in estimated cash flows and discount
rate 171,100 -
Obligations settled (79,898) -
Unwinding of the discount 21,817 25,286
-------------- -------------
Decommissioning liabilities, end of year $ 1,052,091 $ 807,754
-------------- -------------
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 $1,533,283 (December 31, 2010 - $1,032,726). The obligation was
calculated using a risk free discount rate of 2.5 percent (December 31, 2010 -
4.19%) and an inflation rate of 3 percent. It is expected that this obligation
will be funded from general Company resources at the time the costs are incurred
with the majority of costs expected to occur between 2012 and 2030.
6. Income Taxes
The following is a reconciliation of income taxes, calculated at the combined
statutory federal and provincial income tax rates, to the income tax recovery
included in the consolidated statements of net loss.
----------------------------------------------------------------------------
2011 2010
----------------------------
Loss before income taxes $(23,277,032) $ (7,475,091)
Income tax (recovery) at statutory rate of 28%
(2010 - 29%) (6,168,413) (2,093,026)
Difference in statutory tax rates: Canada vs.
US (1,978,548) (523,256)
Stock-based compensation 30,753 130,593
Other 122,629 (254,466)
Unrecognized deferred tax assets 7,993,579 2,740,155
----------------------------
Provision for (recovery) of income taxes $ - $ -
----------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The components of the
Company's deferred income tax assets and liabilities are as follows:
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
United States:
Deferred income tax liability (asset):
Petroleum and natural gas properties $ 7,705,046 $ 8,426,215
Asset retirement obligations (368,232) (282,714)
Net operating losses carried forward (20,997,733) (13,810,841)
----------------------------
(13,660,919) (5,667,340)
Unrecognized deferred tax asset 13,660,919 5,667,340
----------------------------
Net deferred income tax liability (asset) $ - $ -
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Canada: CDN CDN
Share issue costs (237,284) (519,974)
Net operating losses carried forward (1,232,808) (983,159)
----------------------------
(1,470,092) (1,503,133)
Unrecognized deferred tax asset 1,470,092 1,503,133
----------------------------
Net deferred income tax liability (asset) - -
----------------------------
The Company has the following net operating losses available to be carried
forward to offset future operating income for Caza's US and Canadian entities:
----------------------------------------------------------------------------
Expiring at December 31, Amounts
----------------------------------------------------------------------------
US Canada
2026 1,484,777 119,826
2027 11,146,427 862,796
2028 16,409,534 756,362
2029 1,887,722 902,459
2030 9,004,333 1,204,748
2031 20,043,796 1,085,041
7. Share Capital
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
Year Ended Year Ended
December 31, 2011 December 31, 2010
Shares Amounts Shares Amounts
Opening balance common
shares 164,319,000 $ 75,013,680 119,319,000 $ 46,423,526
Exercise of stock
options 424,667 50,536 - -
Private placement (i) - - 45,000,000 28,590,154
----------------------------------------------------------------------------
Balance end of year 164,743,667 75,064,216 164,319,000 75,013,680
----------------------------------------------------------------------------
Opening balance
warrants - - 19,800,000 3,870,000
Expired common
warrants (ii) - - (19,800,000) (3,870,000)
----------------------------------------------------------------------------
Balance end of year - - - -
----------------------------------------------------------------------------
$ 75,064,216 $ 75,013,680
----------------------------------------------------------------------------
(i) The Company issued 45,000,000 common shares in a private placement at
approximately $0.67 (United Kingdom 42 pence per common share). Pursuant to
this private placement, the Company incurred $1,545,896 of share issuance
costs.
(ii) 18,000,000 warrants for the purchase of 19,800,000 common shares
expired as at December 31, 2010
(c) Stock options
The maximum number of common shares for which options may be granted, together
with shares issuable under any other share compensation arrangement of the
Company, is limited to 10% of the total number of outstanding common shares
(plus common shares that would be outstanding upon the exercise of all
exchangeable rights) at the time of grant of any option. The exercise price of
each option may not be less than the fair market value of the Company's common
shares on the date of grant. Except as otherwise determined by the Board and
subject to the limitation that the stock options may not be exercised later than
the expiry date provided in the relevant option agreement but in no event later
than 10 years (or such shorter period required by a stock exchange) from their
date of grant, options cease to be exercisable: (i) immediately upon a
participant's termination by the Company for cause, (ii) 90 days (30 days in the
case of a participant engaged in investor relations activities) after a
participant's termination from the Company for any other reason except death and
(iii) one year after a participant's death. Subject to the Board's sole
discretion in modifying the vesting of stock options, stock options will vest,
and become exercisable, as to 33 1/3% on the first anniversary of the date of
grant and 33 1/3% on each of the following two anniversaries of the date of
grant. All options granted to a participant but not yet vested will vest
immediately upon a change of control or upon the Company's termination of a
participant's employment without cause. A summary of the Company's stock option
plan as at December 31, 2011 and changes during the year ended on those dates is
presented below.
Year ended Year ended
December 31, 2011 December 31, 2010
Weighted Weighted
average average
Number of Exercise Number of exercise
Stock Options options price options price
----------------------------------------------------------------------------
Beginning of year 12,635,000 $ 0.28 5,371,667 $ 0.62
Granted 1,500,000 $ 0.13 7,970,000 0.07
Exercised (424,667) $ 0.07 - -
Forfeited (2,570,333) $ 0.06 (706,667) 0.66
----------------------------------------------
End of year 11,140,000 $ 0.28 12,635,000 $ 0.28
----------------------------------------------
Exercisable, end of year 5,843,332 $ 0.45 4,418,333 $ 0.63
----------------------------------------------
----------------------------------------------
Number Weighted
Outstanding Average Number
as at Remaining Exercisable
December Exercise Contractual Date of December
Date of Grant 31, 2011 Price Life Expiry 31, 2011
----------------------------------------------------------------------------
January 31, 2007 1,725,000 $0.50 5.09 January 31, 2017 1,725,000
December 12, December 12,
2007 1,700,000 $0.79 5.95 2017 1,700,000
April 7, 2008 500,000 $0.59 6.27 April 7, 2018 500,000
August 11, 2008 20,000 $0.44 6.62 August 11, 2018 20,000
April 9, 2010 5,025,000 $0.07 8.28 April 9, 2020 1,674,999
April 12, 2010 400,000 $0.07 8.29 April 12, 2020 133,333
May 19, 2010 250,000 $0.07 8.39 May 19, 2020 83,333
September 14, September 14,
2010 20,000 $0.35 8.71 2020 6,667
October 12, 2011 1,500,000 $0.13 9.79 October 12, 2021 -
----------------------------------------------------------------------------
11,140,000 7.54 5,843,332
During the year ended December 31, 2010, 7,950,000 options were granted at a
fair value of $0.05 per option and 20,000 options were granted at a fair value
of $0.24 per option. Options in the amount of 1,500,000 were granted at a fair
value of $0.13 per option during the year ended December 31, 2011. The fair
value of these options was determined using the Black-Sholes model with the
following assumptions:
2011 2010
----------------------
Dividend yield Nil Nil
Expected volatility 130% 115%
Risk free rate of return 0.9% 4.00%
Weighted average life 3 years 3 years
Forfeiture rate 13.84% 9.56%
(d) Shared base compensation reserve
The following table presents the changes in the share based compensation reserve:
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of year $ 9,363,598 $ 5,175,086
Expired broker warrants(i) - 3,870,000
Exercise of stock options (20,810) -
Stock based compensation 87,868 318,512
----------------------------------------------------------------------------
Balance, end of year $ 9,430,656 $ 9,363,598
----------------------------------------------------------------------------
(i) During the year ended December 31, 2010 19,800,000 warrants expired with
a value of $3,870,000.
(e) Non-controlling interest
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Opening balance non-controlling interest
(exchangeable rights) (i) 26,502,000 26,502,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance end of year 26,502,000 26,502,000
----------------------------------------------------------------------------
(i) Management has a non-controlling interest in the Company which allows
shares of Caza Petroleum, Inc. to be exchanged into the Company's shares at
an exchange rate of 2800 to 1.
During 2010, the non-controlling interest percentages decreased as a result of
additional issuances of shares of the subsidiary to Caza. This resulted in an
increase in Caza's deficit of $4,044,319. In 2011, issuances had a negligible
effect.
8. Related Party Transactions
The aggregate amount of expenditures made to related parties:
During the years 2010 and 2011, 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 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 venture partners. Singular
owes the Company $492,240 in joint venture partner receivables as at December
31, 2011 (December 31, 2010 - $19,968; January 1, 2010 - $7,819). Singular is a
related party as it is a company under common control with Zoneplan Limited,
which is a significant shareholder of Caza.
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.
Remuneration of key management personnel of the Company, which includes
directors, officers and other key personnel, is set out below in aggregate:
Year ended Year ended
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Salaries and wages $ 1,206,894 $ 1,110,561
Short term benefits - -
Share-based payments 93,309 207,500
----------------------------------------------------------------------------
Total compensation $ 1,300,203 $ 1,318,061
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Commitments and Contingencies
As of December 31, 2010, the Company is committed under operating leases for its
offices and corporate apartment in the following aggregate minimum lease
payments which are shown below:
2012 $ 240,812
2013 $ 95,090
2014 $ 81,200
10. Supplementary Information
(a) net change in non-cash working capital
Years ended
December 31,
2011 2010
----------------------------------------------------------------------------
Provided by (used in)
----------------------------------------------------
Accounts receivable (1,559,910) 1,418,172
Prepaid and other (21,187) (12,603)
Accounts payable and accrued liabilities (1,960,898) 2,218,160
------------------------
(3,541,995) 3,623,728
------------------------
Summary of changes
Operating (1,085,875) 350,929
Investing (2,456,120) 3,272,800
------------------------
(3,541,995) 3,623,729
------------------------
(b) supplementary cash flow information
Year ended Year ended
December 31, December 31,
2011 2010
----------------------------------------------------------------------------
Interest paid $ - $ -
Interest received 16,535 4,723
(c) cash and cash equivalents
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Cash on deposit $ 272,699 $ 3,010,615 $ 1,991,207
Money market instruments 9,931,477 30,875,285 7,277,340
---------------------------------------
Cash and cash equivalents $ 10,204,176 $ 33,885,900 $ 9,268,547
---------------------------------------
---------------------------------------
The money market instruments bear interest at a rate of 0.033% as at December
31, 2011
(December 31, 2010 - 0.136%).
11. Capital Risk Management
The Company's objectives when managing capital is to safeguard the entity's
ability to continue as a going concern, so that it can continue to provide
returns for shareholders and benefits for other stakeholders. The Company
defines capital as shareholder's equity, working capital and credit facilities
when available. The Company manages the capital structure in light of changes in
economic conditions and the risk characteristics of the underlying assets. The
Company's objective is met by retaining adequate equity and working capital to
provide for the possibility that cash flows from assets will not be sufficient
to meet future cash flow requirements. The Board of Directors does not establish
quantitative return on capital criteria for management; but rather promotes year
over year sustainable profitable growth.
December 31, December 31, January 1,
2011 2010 2010
----------------------------------------------------------------------------
Cash and cash equivalents $ 10,204,176 $ 33,885,900 $ 9,268,547
Other current assets 3,993,702 2,846,430 4,251,999
Accounts payable and accrued
liabilities (5,352,445) (7,362,243) (5,144,083)
----------------------------------------------------------------------------
Net working capital $ 8,845,433 $ 29,370,087 $ 8,376,463
Shareholders' equity $ 42,154,339 $ 65,313,777 $ 43,880,202
------------------------------------------
Total capital $ 33,308,906 $ 35,943,690 $ 35,503,739
----------------------------------------------------------------------------
The Company has evaluated its net working capital balance as at December 31,
2011. Due to long lead times on several of the Company's exploration and
development projects, from time to time the Company secures capital to fund its
investments in petroleum and natural gas exploration projects in advance which
has resulted in a net working capital balance. As exploration and development
projects progress the Company expects the net working capital balance to
significantly decrease from current levels, and additional capital may be
required to fund additional projects. If the Company is unsuccessful in raising
additional capital, the Company may have to sell or farm out certain properties.
If the Company cannot sell or farm out certain properties, it will be unable to
participate with joint venture partners and may forfeit rights to some of its
properties.
12. Financial Instruments
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity price,
credit, and foreign exchange risks. The Company manages its exposure to these
risks by operating in a manner that minimizes its exposure to the extent
practical.
(a) Commodity Price Risk
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. To date the Company has not entered into
any forward commodity contracts.
(b) 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 year ended December
31, 2011, the Company sold 68.96% (December 31, 2010 - 58.31%) 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 venture 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 December 31, 2011, the Company had overdue
accounts receivable from certain joint interest partners of $135,835 which were
outstanding for greater than 60 days and $443,466 that were outstanding for
greater than 90 days. At December 31, 2011, the Company's two largest joint
venture partners represented approximately 13% and 13% of the Company's
receivable balance (December 31, 2010 25% and 15% 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.
(c) Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange fluctuations, as certain
general and administrative expenses are or will be denominated in Canadian
dollars and United Kingdom pounds sterling. The Company's sales of oil and
natural gas are all transacted in US dollars. At December 31, 2011, the Company
considers this risk to be relatively limited and not material and therefore does
not hedge its foreign exchange risk.
(d) Fair Value of Financial Instruments
The Company has determined that the fair values of the financial instruments
consisting of cash and cash equivalents, accounts receivable and accounts
payable are not materially different from the carrying values of such
instruments reported on the consolidated statement of financial position due to
their short-term nature.
IFRS establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The three levels of the fair value
hierarchy are described below:
-- Level 1: Values based on unadjusted quoted prices in active markets that
are accessible at the measurement date for identical assets or
liabilities.
-- Level 2: Values based on quoted prices in markets that are not active or
model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
-- Level 3: Values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair
value measurement.
The Company's cash and cash equivalents, which are classified as fair value
through profit or loss, are categorized as Level 1 financial instruments.
All other financial assets are classified as loans or receivables and are
accounted for on an amortized cost basis. All financial liabilities are
classified as other liabilities. There are no financial assets on the
consolidated statement of financial position that have been designated as
available-for-sale. There have been no changes to the aforementioned
classifications during the years presented.
(e) Liquidity Risk
Liquidity risk includes the risk that, as a result of our operational liquidity
requirements:
-- The Company will not have sufficient funds to settle a transaction on
the due date;
-- The Company will be forced to sell assets at a value which is less than
what they are worth; or
-- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts projected to
complete the Company's existing capital expenditure program are continuously
monitored and adjusted as input variables change. These variables include but
are not limited to, available bank lines, natural gas production from existing
wells, results from new wells drilled, commodity prices, cost overruns on
capital projects and regulations relating to prices, taxes, royalties, land
tenure, allowable production and availability of markets. As these variables
change, liquidity risks may necessitate the Company to conduct equity issues or
obtain project debt financing. The Company also mitigates liquidity risk by
maintaining an insurance program to minimize exposure to insurable losses. The
financial liabilities as at December 31, 2011 that subject the Company to
liquidity risk are accounts payable and accrued liabilities. The contractual
maturity of these financial liabilities is generally the following sixty days
from the receipt of the invoices for goods of services and can be up to the
following next six months. Management believes that current working capital will
be adequate to meet these financial liabilities as they become due.
13. General and Administrative
During the year ended December 31, 2011 the Company incurred general and
administrative expenses in the amount of $5,911,834 (December 31, 2010 -
$3,574,453). Consulting and professional expenses in the amount $2,369,637 for
the year ended December 31, 2011 (December 31, 2010 - $1,596,737) made up the
largest expenditure for the year. Salaries in the amount of $2,136,490 as
compared to $1,651,938 for the comparative period were incurred during the year
ended December 31, 2010. Reimbursements of general and administrative expenses
were received during the year ended December 31, 2010 in the amount of $725,720
as a result of certain joint venture agreements that were not in effect during
2011.
14. Transition to IFRS
For all periods up to and including the year ended December 31, 2010, the
Company prepared its financial statements in accordance with previous GAAP. The
Accounting Standards Board confirmed that IFRS will replace previous GAAP for
financial periods beginning January 1, 2011 with restatement required for
comparative purposes of amounts reported for year ended December 31, 2010,
including the opening statement of financial position as at January 1, 2010.
The Company has adopted IFRS effective January 1, 2010 (the "transition date")
and has prepared its opening IFRS consolidated statement of financial position
as at that date. IFRS 1 requires the presentation of comparative information as
at the January 1, 2010 transition date and subsequent comparative periods as
well as the consistent and retrospective application of IFRS accounting
policies. To assist with the transition, the provisions of IFRS 1 allow for
certain mandatory and optional exemptions for first-time adopters to alleviate
the retrospective application of all IFRSs.
Elected exemptions from full retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1,
"First-time Adoption of International Financial Reporting Standards" ("IFRS 1"),
the Company has applied certain of the optional exemptions from full
retrospective application of IFRS. The optional exemptions applied are described
below.
a) Deemed cost for oil and gas assets
The Company has elected to measure oil and gas assets previously recorded in the
full cost pool under Accounting Guidelines 16, "Oil and Gas Accounting - Full
Cost" ("AcG 16") of Canadian GAAP at the transition date as follows:
(i) the full cost pool was allocated to development and production assets pro
rata using proved plus probable reserve values.
b) Decommissioning liabilities included in the cost of property and equipment
The Company has elected to measure decommissioning liabilities as at the
transition date in accordance with IAS 37, "Provisions, Contingent Liabilities
and Contingent Assets" ("IAS 37") and recognize directly in deficit the
difference between that amount and the carrying amount of those liabilities at
the date of transition determined under Canadian GAAP.
c) Business combinations
The Company has applied the business combinations exemption in IFRS 1 to not
apply IFRS 3, "Business Combinations" ("IFRS 3") retrospectively to past
business combinations. Accordingly, the Company has not restated business
combinations that took place prior to the transition date.
d) Share-based payment transactions
The Company has elected not to apply IFRS 2, "Share-based Payments" ("IFRS 2")
to equity instruments granted after November 7, 2002 that have not vested by the
transition date.
e) Borrowing costs
The Company has applied the borrowing costs exemption in IFRS to not apply IAS
23, "Borrowing Costs" ("IAS 23") retrospectively to past borrowing costs related
to transactions that took place prior to the transition date.
Mandatory exceptions to retrospective application
a) Estimates
Hindsight was not used to create or revise estimates and accordingly the
estimates previously made by the Company under Canadian GAAP are consistent with
their application under IFRS.
The remaining IFRS 1 exemptions were not applicable or material to the
preparation of Caza's consolidated statement of financial position at the date
of transition on January 1, 2010.
The following reconciliations present the adjustments made to the Company's
Canadian GAAP financial results of operations and financial position to comply
with IFRS. A summary of the significant accounting policy changes and applicable
exemptions are discussed following the reconciliations. Reconciliations include
the Company's Consolidated Equity and Statement of Financial Positions as at
January 1, 2010 and December 31, 2010, and the Consolidated Statement of
Comprehensive Loss for the year ended December 31, 2010.
Caza Oil & Gas, Inc.
Reconciliation of Equity and Financial Position
As at January 1, 2010
Effect of
Canadian Transition to
GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 9,268,547 $ - $ 9,268,547
Accounts receivable 3,973,085 - 3,973,085
Prepaid and other 278,914 - 278,914
Exploration and evaluation assets - 11,662,047 11,662,047
Petroleum and natural gas
properties and equipment 36,201,223 (11,652,990) 24,548,233
------------------------------------------
Total Assets $ 49,721,769 $ 9,057 $ 49,730,826
------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 5,144,083 $ - $ 5,144,083
Decommissioning liabilities 549,450 157,091 706,541
------------------------------------------
Total Liabilities 5,693,533 157,091 5,850,624
Equity
Share capital 51,212,097 (918,571) 50,293,526
Share based compensation reserve 4,805,074 370,012 5,175,086
Deficit (11,988,935) (518,046) (12,506,981)
Non-controlling interest - 918,571 918,571
------------------------------------------
Total Equity 44,028,236 (148,034) 43,880,202
------------------------------------------
Total Liabilities and Equity $ 49,721,769 $ 9,057 $ 49,730,826
------------------------------------------
Caza Oil & Gas, Inc.
Reconciliation of Equity and Financial Position
As at December 31, 2010
Effect of
Canadian Transition to
GAAP IFRS IFRS
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 33,885,900 $ - $ 33,885,900
Accounts receivable 2,554,913 - 2,554,913
Prepaid and other 291,517 - 291,517
Exploration and evaluation assets - 7,371,582 7,371,582
Petroleum and natural gas
properties and equipment 39,637,241 (10,257,379) 29,379,862
------------------------------------------
Total Assets $ 76,369,571 $ (2,885,797) $ 73,483,774
------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 7,362,243 $ - $ 7,362,243
Decommissioning liabilities 627,639 180,115 807,754
------------------------------------------
Total Liabilities 7,989,882 180,115 8,169,997
Equity
Share capital 75,932,251 (918,571) 75,013,680
Share based compensation reserve 9,190,226 173,372 9,363,598
Deficit (16,742,788) (5,957,474) (22,700,262)
Non-controlling interest - 3,636,761 3,636,761
------------------------------------------
Total Equity 68,379,689 (3,065,912) 65,313,777
------------------------------------------
Total Liabilities and Equity $ 76,369,571 $ (2,885,797) $ 73,483,774
------------------------------------------
Caza Oil & Gas, Inc.
Consolidated Statement of Comprehensive Loss
Year ended December 31, 2010
Previous Effect of
Canadian Transition to
GAAP IFRS IFRS
----------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 2,233,682 $ - $ 2,233,682
Interest and other income 4,723 - 4,723
Gain on sale of assets - 760,027 760,027
------------------------------------------
$ 2,238,405 $ 760,027 $ 2,998,432
------------------------------------------
Expenses
Production $ 718,186 $ - $ 718,186
General and administrative 3,626,789 (52,336) 3,574,453
Depletion, depreciation,
amortization, accretion and
impairment 2,647,283 (2,647,283) -
Depletion, depreciation and
amortization - 2,277,384 2,277,384
Financing costs - unwinding of
the Discount - 25,286 25,286
Exploration and evaluation
impairment - 3,698,514 3,698,514
Development impairment 179,700 179,700
------------------------------------------
6,992,258 3,481,265 10,473,523
------------------------------------------
Net loss and comprehensive loss $ (4,753,853) $ (2,721,238) $ (7,475,091)
------------------------------------------
The following discussion explains the significant differences between Caza's
previous GAAP accounting policies and those applied by the Company under IFRS.
IFRS policies have been retrospectively and consistently applied except where
specific IFRS 1 optional and mandatory exemptions permitted an alternative
treatment upon transition to IFRS for first-time adopters. The descriptive note
captions below correspond to the adjustments presented in the preceding
reconciliations.
Exploration and Evaluation Assets ("E&E")
Under Canadian GAAP, Caza followed AcG-16 under which all costs directly
associated with the acquisition of, the exploration for, and the development of
natural gas and liquids reserves were capitalized on a prospect cost basis.
Costs accumulated within each prospect were depleted using the
unit-of-production method based on proved reserves determined using estimated
future prices and costs. Upon transition to IFRS, the Company was required to
adopt new accounting policies for exploration and development activities.
Under IFRS, exploration and evaluation costs are those expenditures for an area
where technical feasibility and commercial viability has not yet been
determined. Development costs include those expenditures for areas where
technical feasibility and commercial viability has been determined. Caza adopted
the IFRS 1 exemption whereby the Company deemed its January 1, 2010 IFRS asset
costs to be equal to its previous GAAP historical property, plant and equipment
net book value. Accordingly, exploration and evaluation costs were deemed equal
to the unproved properties balance and the development costs were deemed equal
to the full cost pool balance.
Under IFRS, exploration and evaluation costs are presented on separate line
items on the consolidated statement of financial position. Under Canadian GAAP
these assets are included in the general balance of property and natural gas
properties and equipment.
Exploration and evaluation assets at January 1, 2010 were determined to be
$11,662,047, representing the unproved properties balance under Canadian GAAP.
This resulted in a reclassification of $11,662,047 from petroleum and natural
gas properties to exploration and evaluation assets on Caza's consolidated
statement of financial position as at January 1, 2010 (December 31, 2010 -
$7,371,582). As at the date of transition, the Company tested all of its
exploration and evaluation assets for impairment and determined no impairment
charges were necessary.
Under Canadian GAAP, exploration and evaluation costs were capitalized as
property and equipment in accordance with the CICA's full cost accounting
guidelines. Under IFRS, Caza capitalizes these costs initially as exploration
and evaluation assets. Once technical feasibility and commercial viability of
the area has been determined, the costs are transferred from exploration and
evaluation assets to property, plant and equipment. Under IFRS, unrecoverable
exploration and evaluation costs associated with an area and costs incurred
prior to obtaining the legal rights to explore are expensed.
During the year ended December 31, 2010, Caza transferred $4,385,834 of
exploration and evaluation costs to petroleum and natural gas properties and
expensed $3,698,514 of unsuccessful exploration and evaluation assets and
$12,047 in direct exploration costs.
Depreciation, depletion, amortization and accretion ("DD&A")
Development costs at January 1, 2010 were deemed to be $24,548,233, representing
the depletable pool balance under previous GAAP. Consistent with Canadian GAAP,
these costs are capitalized as petroleum and natural gas properties under IFRS.
Under Canadian GAAP, development costs were depleted using the
unit-of-production method calculated on for each country's cost centers (Caza
only had one cost center under Canadian GAAP). Under IFRS, development costs are
depleted using the unit-of-production method calculated at the CGU level. The
IFRS 1 exemption permitted the Company to allocate development costs to the
CGU's using proved and probable reserves values for each area as at January 1,
2010. Depleting on an area basis under IFRS resulted in a $369,899 decrease to
Caza's DD&A expense for the year ended December 31, 2010.
Impairments
Under Canadian GAAP, an impairment was recognized if the carrying amount of the
full cost pool exceeded the undiscounted cash flows expected from the production
of the proved reserves. If the carrying amount of the full cost pool was less
than these cash flows, an impairment was recognized as the amount by which the
carrying value exceeded the sum of the discounted cash flows expected from the
production of the proved and probable reserves. Impairments recognized under
previous GAAP were not reversed.
Under IFRS, an impairment is recognized if the carrying value exceeds the
recoverable amount for a cash-generating unit. Prospect areas are aggregated
into cash-generating units based on their ability to generate independent cash
flows. If the carrying value of the cash-generating unit exceeds the recoverable
amount, the cash-generating unit is written down with an impairment recognized
in net earnings. Impairments recognized under IFRS are reversed when there has
been a subsequent increase in the recoverable amount. Impairment reversals are
recognized in net earnings and the carrying amount of the cash-generating unit
is increased to its revised recoverable amount as if no impairment had been
recognized for the prior periods.
At the date of transition, January 1, 2010, the Company recognized an impairment
of $nil on its petroleum and natural gas properties which was recorded directly
to the opening deficit.
For the year ended December 31, 2010, Caza recognized impairments of $179,700
relating to the Company's development and production activities. The impairment
recognized was based on the difference between the December 31, 2010 net book
value of the assets and the recoverable amount. The recoverable amount was
determined using fair value less costs to sell based on discounted future cash
flows of proved and probable reserves using forecast prices and costs. Under
Canadian GAAP, these assets were included in the full cost pool ceiling test,
which was not impaired at December 31, 2010.
Divestitures (gain on sale of assets)
Under Canadian GAAP, proceeds from divestitures of producing assets were
deducted from the full cost pool without recognition of a gain or loss unless
the sale resulted in a change to the depletion rate of 20 percent or greater, in
which case a gain or loss was recorded.
Under IFRS, gains or losses are recorded on divestitures and are calculated as
the difference between the proceeds and the net book value of the asset
disposed. For the year ended December 31, 2010, Caza recognized a $728,239 net
gain on divestitures under IFRS compared to previous GAAP results. The net gain
arose from the sale of the Glass Ranch properties in Texas.
Decommissioning liabilities
Under Canadian GAAP, asset retirement obligations, referred to as
decommissioning liabilities, were measured as the estimated fair value of the
retirement and decommissioning expenditures expected to be incurred. The
obligations were discounted using a credit adjusted risk free rate. Liabilities
were not remeasured to reflect year end discount rates.
Under IFRS, the decommissioning liabilities are measured as the best estimate of
the expenditure to be incurred and requires that the decommissioning liabilities
be remeasured using the year end discount rate. Under IFRS, a risk free rate is
used to discount the obligations.
In conjunction with the IFRS 1 exemption regarding assets discussed above, Caza
was required to remeasure its decommissioning liabilities upon transition to
IFRS and recognize the difference in the opening deficit. The application of
this exemption and the change in discount rates used resulted in a $157,091
increase to the decommissioning liabilities on Caza's consolidated statement of
financial position as at January 1, 2010.
Subsequent IFRS remeasurements of the obligation are recorded through petroleum
and natural gas properties and equipment with an offsetting adjustment to the
decommissioning liabilities. As at December 31, 2010, excluding the January 1,
2010 adjustment, Caza's decommissioning liabilities increased by $23,024, which
primarily reflects the remeasurement of the obligation using Caza's discount
rate of 4.19 percent as at December 31, 2010.
Share based payments
Under Canadian GAAP, Caza accounted for certain stock-based compensation plans
whereby the obligation and compensation costs were amortized over the vesting
period using the straight line method. For these stock-based compensation plans,
IFRS requires the compensation expense for share-based payments be fair valued
using an option pricing model, such as the Black-Scholes-Merton model, at each
reporting date using the graded method of amortization.
Accordingly, upon transition to IFRS, the Company recorded a fair value
adjustment of $370,012 as at January 1, 2010 to increase the share based
compensation reserve with a corresponding charge to the opening deficit. Caza
elected not to use the IFRS 1 exemption whereby the liabilities for share-based
payments that had vested or settled prior to January 1, 2010 were not required
to be retrospectively restated. Subsequent IFRS fair value adjustments are
capitalized as appropriate to petroleum and natural gas properties or E&E assets
or expensed to exploration and evaluation expenses, and administrative expenses
with an offsetting adjustment to the share based compensation reserve.
In addition to the January 1, 2010 adjustment discussed above the IFRS
remeasurement costs subsequent to transition increased the share based
compensation reserve by $173,372 as at December 31, 2010 in comparison to
previous GAAP.
Non-controlling interests
Under Canadian GAAP, the exchangeable rights as described in Note 7(e) were
recorded as share capital due to Emerging Issues Committee No. 151 as the rights
met the required conditions for this classification. However, under IFRS, the
exchangeable rights represent a non-controlling interest in a subsidiary. As a
result, there are differences in presentation within shareholders' equity and
the statement of comprehensive loss. Additionally, under IFRS, net loss per
share is calculated on the total weighted average number of common shares
outstanding, excluding the exchangeable rights.
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