We could not find any results for:
Make sure your spelling is correct or try broadening your search.
Register for real-time alerts, custom portfolio, and market movers
| 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) is pleased to
announce the Company's final results for the year ended December 31, 2013.
2013 highlights include:
-- Annual revenues for the twelve month period ended December 31, 2013
increased 67% to US$8.31 million ("MM") for the year 2013 (US$4.97MM:
2012)
-- Quarterly revenues for the three month period ended December 31, 2013
increased 114% to US$3.38MM (US$1.58MM for the comparable three month
period ended December 31, 2012)
-- Average production volumes for the year 2013, increased 19% to 338
barrels of oil equivalent ("boe") per day ("boe/d") (285 boe/d: 2012)
-- Caza's net average production volumes between March 1 and March 15, 2014
equate to 888 boe/d, which is an increase of 44.6 % over 614 boe/d as at
December 31, 2013
-- As estimated by the independent report completed by NSAI (as defined
below under Reserve Data) dated as of December 31, 2013 (all reserve
figures are net to Caza):
-- Proven (1P) reserves increased by 83.3% to 4.44 MMboe (2.42 MMboe:
2012)
-- Proven plus Probable (2P) reserves increased by 79.2% to 19.3 MMboe
(10.8 MMboe: 2012)
-- Proven plus Probable plus Possible (3P) reserves increased by 39.1%
to 38.2 MMboe (27.4 MMboe: 2012)
-- In addition to the Company's current PDP and PDNP Bone Spring reserves,
the NSAI Report has assigned 314 viable drilling locations to the
Company's current leasehold position in the Bone Spring play with total
Proven plus Probable plus Possible net reserves to these locations of
33.9 MMboe (253 locations and 24.4 MMboe for the Company's Bone Spring
locations as at December 31, 2012)
-- Cash and cash equivalents at December 31, 2013, are US$18.5 (US$6.8MM as
at December 31, 2012)
Recent 2014 highlights:
-- On March 20, 2014, the Company commenced drilling operations on the
Gramma Ridge 27 State #1H well. The well is the initial test well on
Caza's Gramma Ridge Property and is targeting the 3rd Bone Spring Sand
interval.
-- On March 11, 2014, the Company announced the results of its West
Copperline 29 Fed #3H well in Lea County, New Mexico, which reached the
intended total measured depth of approximately 15,804 feet in the 3rd
Bone Spring Sand, was subsequently fracture stimulated and under
controlled flowback produced at a peak 24 hour gross rate of 879 bbls of
oil and 1.374 MMcf of natural gas, which equates to 1,108 boe on March
7, 2014. The well subsequently produced at the higher rate of 969 bbls
of oil and 1.21 MMcf, which equates to 1,176 boe on March 11, 2014.
-- On February 5, 2014, the Company provided a Fourth Quarter production
update highlighting the significance of the Bone Spring production to
the Company to date. The announcement forecasted Caza's net aggregate
production to reach 32,783 boe for the month of April 2014, which
equates to 1,092 boe/d. That growth is forecasted to continue through
August 2014, when net aggregate production is expected to reach 35,538
boe for the month, which equates to 1,185 boe/d. The Company continues
to progress towards meeting these forecasts and is performing in line
with Management expectations.
-- On December 19, 2013, the Company drew an advance of US$10MM pursuant to
its Note Purchase Agreement with Apollo Investment Corporation, an
Investment fund managed by Apollo Investment Management (collectively
"Apollo"). With this advance, the Company has drawn an aggregate of
US$35MM from the total facility of US$50MM.
W. Michael Ford, Chief Executive Officer commented:
"We are pleased with our significant progress in 2013. The latter portion of the
year was particularly positive with material increases in both production and
revenues. Caza increased its production volumes by 61% and revenues by 114% in
Q4 2013, as compared to Q4 2012, with an annual increase in revenues on the
prior year of 67% in 2013. Our Proven reserves also significantly increased by
more than 83% during the course of 2013. These increases were the direct result
of Caza's successful operations in the Bone Spring play during the year, and
this remains the focus of the value creating activities we undertake on behalf
of our shareholders. Additionally, Caza's Q1 2014 recent events have added
significantly to our current production figures, and we expect to continue that
trend into Q2 2014.
The Note Purchase Agreement with Apollo continues to provide the Company with
the necessary capital to drill and develop the Company's inventory of Bone
Spring properties. We believe this arrangement is an effective way to meet
short-term capital requirements needed to accelerate our highly successful Bone
Spring drilling campaign. However, we continue to actively evaluate all funding
options to ensure that the capital structure of the Company is appropriate and
sufficient to allow the Company to deliver on its stated strategy of achieving
significant growth in reserves and production and, further, that we are
utilizing the most cost effective option for the Company and the shareholders.
The Company's Bone Spring inventory has grown in 2013 and now includes the
following 19 properties: Gramma Ridge, Gateway, Marathon Road, Lennox, Forehand
Ranch, Forehand Ranch South, Jazzmaster, Mad River, Azotea Mesa, Bradley 29, Two
Mesas, Quail Ridge, Rover, West Rover, Copperline, West Copperline, Chaparral
33, Madera and Roja. The Company has acquired approximately 4,800 net acres in
the play to date. Our Bone Spring holdings continue to represent a conscious
effort by Management to invest in properties containing multiple potential pay
zones for oil and liquids-rich natural gas, which has created and should
continue to create shareholder value.
Leasing and drilling activity continues to be competitive in the play, and
initial producing well rates continue to improve with technological advances in
drilling and frac designs. The Company is well positioned in the play, and
continues to exploit opportunities to build on its current acreage position.
We made significant progress in 2013. As stated last year at this time, we laid
the groundwork for success in the Bone Spring play in 2012. Those efforts
resulted in significant growth to cashflow, revenue and reserve values in 2013,
and we intend to capitalize on that success with even greater growth during the
course of 2014."
Strategy
The Company's stated strategy for 2013 produced excellent results, and the
stated strategy for 2014 is to continue in the same vein. The Company plans to
build on the success achieved in 2013, and intends to achieve significant growth
in reserves and production through:
-- progressing material, internally generated prospects, utilizing cash
flows from existing production and exploiting Proven plus Probable
reserves; and
-- executing strategic acquisitions of assets at all stages of the
development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear set of criteria
in high-grading projects:
-- the Company seeks to retain control of project execution and timing
through the operatorship of assets;
-- assets should be close to existing established infrastructure, allowing
for quick, efficient hook-up and lower operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to
deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of West Texas and
Southeast New Mexico, the most prolific oil and gas basin in North America.
Independent forecasts predict that the Permian Basin will have the greatest oil
supply growth of any North American basin over the next five years. This
provides the Company with low-risk, liquids-rich development opportunities from
many geologic reservoirs and play types. The basin also has a vast operational
infrastructure in place. The Company is utilizing recent advances in horizontal
drilling and dynamic completion technologies to unlock the significant resources
within its asset base and the region.
Management has focused efforts on building a core asset base in the prolific
Bone Spring play and has now demonstrated that these assets represent the most
significant opportunity for the Company to deliver material production, revenue
growth and demonstrable shareholder returns within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset base within
the Bone Springs play will not only continue to grow the Company but will also
make it more resilient to single project risk.
The Company has now identified 314 drilling locations in the Bone Spring play
according to the NSAI Report. Management believes that the Company is
well-positioned with approximately 4,800 net acres in the play and continues to
actively monitor opportunities to build on Caza's current acreage position.
The Company's Bone Spring leases are mostly State and Federal leases with
primary terms between 5-10 years. In terms of obligations and commitments, one
producing well will hold each lease in its entirety.
Financing
The Company's intention is to participate in approximately 15-20 Bone Spring
play wells per annum funded from production revenues, existing cash resources
and currently available financing. However, management believes that
accelerating and expanding this drilling program will significantly increase
both production and cash flows, which will optimize the work program and drive
economies of scale.
In this regard, the Company and its advisers have been actively considering all
available financing options, including a review of possible asset sales,
joint-venture and strategic financing partner options, other debt instruments
and equity fundraisings that could provide the Company with sufficient leverage
and capital to adequately exploit current and future Bone Spring opportunities.
Outlook
The Company's objective is to capitalize on its 2013 success and embark on an
accelerated and expanded drilling program in the Bone Spring play over the next
two years. Based on the Company's Bone Spring success and its subsequent growth
in 2013, Management believes that such a program has the capacity to increase
shareholder value significantly over the period. A program of this type will
eventually require additional financing but would utilize excess operational
cash flow to fund further development drilling and lease purchases beyond the
initial two year period.
Management believes that such a program can be accomplished by exploiting the
Company's existing asset/lease inventory with minimal equity dilution to
existing shareholders. However, if appropriate, Management will also seek to
identify corporate and asset acquisitions, which will enable the Company to
increase its position in the Bone Spring play. Accordingly, in line with the
Company's stated strategy, Management's goal is to continue the Company's
significant growth in Company reserves and production, thereby raising the
Company's profile in the basin and allowing shareholder value to be maximized
and, if appropriate, fully matured over the short-to-medium term.
Net Reserve Figures by Category:
Caza reported an increase in Proven (1P) reserves at year end 2013 to 4.44 MMboe
or an increase of 83.3%; Proven plus Probable (2P) reserves increased at year
end 2013 to 19.3 MMboe or an increase of 79.2%; Proven plus Probable plus
Possible (3P) reserves increased at year end 2013 to 38.17 MMboe or an increase
of 39.1% (as depicted in the table below).
Net Reserve Data:
Totals may not add because of rounding. Mbbl, MMcf and Mboe refer to thousand
barrels, million cubic feet and thousand boe, respectively.
----------------------------------------------------------------------------
2013 2012
----------------------------------------------------------------------------
Mbbl MMcf Mboe Mbbl MMcf Mboe
----------------------------------------------------------------------------
Proven Developed
Producing 701.7 1,264.2 912.4 169.4 906.7 320.5
----------------------------------------------------------------------------
Non-Producing 49.9 269.3 94.8 106.5 421.9 176.8
----------------------------------------------------------------------------
Undeveloped 2,431.9 6,030.2 3,436.9 1,131.6 4,774.3 1,927.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven 3,183.5 7,563.7 4,444.1 1,407.6 6,102.9 2,424.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Probable 10,615.2 25,518.0 14,868.2 4,274.3 24,464.3 8,351.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven +
Probable 13,798.7 33,081.7 19,312.3 5,681.8 30,567.2 10,776.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Possible 12,772.5 36,506.6 18,857.0 8,574.4 48,577.5 16,670.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven +
Probable +
Possible 26,571.2 69,588.3 38,169.3 14,256.2 79,144.7 27,447.0
----------------------------------------------------------------------------
Present value cash flows of Caza's estimated net Proven and Probable reserves as
at December 31, 2013 were as follows:
Present value cash flow, net Proven plus PV 10% before PV 10% after
Probable reserves: income taxes income taxes
US$220.5MM US$143.3MM
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, 2013 (to be
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, 2013, 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, 2013".
About Caza
Caza is engaged in the acquisition, exploration, development and production of
hydrocarbons in the following regions of the United States of America through
its subsidiary, Caza Petroleum, Inc.: Permian Basin (West Texas and Southeast
New Mexico) and Texas and Louisiana Gulf Coast (on-shore).
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.
The Toronto Stock Exchange has neither approved nor disapproved the information
contained herein.
Copies of the Company's financial statements for the year ended December 31,
2013, the accompanying management's discussion and analysis and the Company's
Annual Information Form for the year ended December 31, 2013 (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.
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), the availability, sources, use and
sufficiency of funding or capital, the ability to expand and accelerate the
Company's drilling programs and the results thereof, the ability to increase
shareholder value, future dilution and the ability to mitigate same, the
implementation and impact of the Company's strategy, 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. Disclosure related to targeted internal
rates of return and internal modeling are disclosed to further an understanding
of the Company's strategies and are not projections or forecasts. Actual rates
of return are likely to differ materially.
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, 2013. 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 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 25, 2014
James M. Markgraf
Chief Financial Officer
March 25, 2014
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, 2013 and 2012 and the consolidated statements of net loss and
comprehensive loss, cash flows and changes in equity for the years then ended,
and a summary of significant accounting policies and other explanatory
information.
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 consolidated 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. as at December
31, 2013 and 2012 and its financial performance and its cash flows for the years
then ended in accordance with International Financial Reporting Standards.
Deloitte LLP
Chartered Accountants
Calgary, Alberta
March 25, 2014
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Caza Oil & Gas, Inc.
Consolidated Statements of Financial Position
(In United States Dollars)
As at December 31, 2013 2012
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents (Note 10(c)) $ 18,495,086 $ 6,809,640
Restricted cash (Note 13) 455,317 -
Accounts receivable 5,582,816 3,854,146
Prepaid and other 104,444 368,745
------------------------------------
24,637,663 11,032,531
Other assets - 98,336
Exploration and evaluation assets (Note
3) 7,843,846 10,085,746
Petroleum and natural gas properties and
equipment (Note 4) 46,618,635 20,552,077
------------------------------------
$ 79,100,144 $ 41,768,690
------------------------------------
------------------------------------
Liabilities
Current
Accounts payable and accrued
Liabilities $ 16,153,038 $ 8,645,896
Derivative liabilities (Notes 13 and
15) 491,044 -
Notes payable (Note 14) - 1,941,476
Unrealized loss on hedging contracts
(Note 12a) 186,463 -
Decommissioning liabilities (Note 5) 122,269 210,696
------------------------------------
16,952,814 10,798,068
Notes payable (Notes 14 and 15) 35,855,042 -
Decommissioning liabilities (Note 5) 850,365 757,102
------------------------------------
53,658,221 11,555,170
Total Equity
Share capital (Note 7(b)) 77,967,487 75,064,216
Warrants (Note 7(b)) 156,365 89,674
Share based compensation reserve 10,480,968 9,648,162
Deficit (60,759,064) (53,298,407)
------------------------------------
Equity attributable to owners of the
Company 27,845,756 31,503,645
Non-controlling interests (2,403,833) (1,290,125)
------------------------------------
Total equity 25,441,923 30,213,520
------------------------------------
$ 79,100,144 $ 41,768,690
------------------------------------
------------------------------------
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, 2013 2012
----------------------------------------------------------------------------
Revenues
Petroleum and natural gas $ 8,312,526 $ 4,969,258
Interest income 1,261 4,356
------------------------------------
8,313,787 4,973,614
------------------------------------
Expenses (Income)
Production 2,334,159 1,830,423
General and administrative 6,209,190 5,660,196
Depletion, depreciation and
amortization (Note 4) 3,435,862 3,133,108
Financing costs (Note 17) 2,516,312 55,427
Other expense (income) (Note 13) 542,783 (226,223)
Exploration and evaluation impairment
(Note 3) 1,481,691 192,935
Development and production impairment
(Note 4) - 5,904,374
Loss on disposal of assets 120,041 461,471
Realized loss on hedge contracts 15,283 -
Unrealized loss on hedging contracts 186,463 -
Remediation and maintenance - 209,902
Bad debt expense 46,368 -
------------------------------------
16,888,152 17,221,613
------------------------------------
Loss before income taxes (8,574,365) (12,247,999)
Income taxes (Note 6) - -
------------------------------------
Net loss and comprehensive loss $ (8,574,365) $ (12,247,999)
------------------------------------
------------------------------------
Attributable to:
Owners of the Company (7,460,658) (10,550,726)
Non-controlling interests (1,113,707) (1,697,273)
------------------------------------
$ (8,574,365) $ (12,247,999)
------------------------------------
------------------------------------
Net loss per share
- basic and diluted $ (0.04) $ (0.06)
------------------------------------
Weighted average shares outstanding
- basic and diluted (1) 175,085,231 164,743,667
------------------------------------
(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 Statements of Cash Flows
(In United States Dollars)
For the years ended December 31 2013 2012
----------------------------------------------------------------------------
OPERATING
Net loss $ (8,574,365) $ (12,247,999)
Adjustments for items not affecting
cash:
Depletion, depreciation and
amortization 3,435,862 3,133,108
Unwinding of the discount (Note 5) 23,503 14,986
Share-based compensation 852,406 217,506
Development and production impairment
(Note 4) - 5,904,374
Exploration and evaluation impairment
(Note 3) 1,481,693 192,935
Non-cash financing costs 569,309 -
Unrealized currency gain (39,266) -
Loss on disposal of assets 120,041 461,471
Realized loss on hedging contracts 15,283 -
Unrealized loss on hedging contracts 186,463 -
Interest income (1,261) (4,356)
Changes in derivative liabilities and
other 474,104 (36,113)
Changes in non-cash working capital
(Note 10(a)) (353,874) 770,034
----------------------------------
Cash flows used in operating activities (1,810,102) (1,594,054)
----------------------------------
FINANCING
Proceeds from issuance of shares (Notes
7 and 13) 2,647,661 -
Finance costs paid (Notes14 and 15) (3,511,146) (168,850)
Issuance of notes payable and warrants
(Notes 14 and 15) 38,628,381 2,200,000
Note principal payments (1,127,500) -
Interest received 1,261 4,356
Changes in non-cash working capital
(Note 10(a)) 326,374 (154,377)
----------------------------------
Cash flow from financing activities 36,965,031 1,881,129
----------------------------------
INVESTING
Exploration and evaluation expenditures
(Note 3) (27,977,466) (10,464,696)
Development and production expenditures
(Note 4) (1,304,691) (1,949,389)
Purchase of office furniture and
equipment (Note 4) (1,250) (1,944)
Proceeds from the sale and disposal of
assets - 5,947,500
Restricted cash (416,050) -
Partner reimbursement (Note 3) 61,364 436,649
Changes in non-cash working capital
(Note 10a) 6,168,610 2,350,269
----------------------------------
Cash flows used in investing activities (23,469,483) (3,681,611)
----------------------------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 11,685,446 (3,394,536)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 6,809,640 10,204,176
----------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,495,086 $ 6,809,640
----------------------------------
----------------------------------
See accompanying notes to the consolidated financial statements
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Caza Oil & Gas, Inc.
Consolidated Statements of Changes in Equity
(In United States Dollars)
For the years ended December 31, 2013 2012
----------------------------------------------------------------------------
Share Capital
Balance, Beginning of Year $ 75,064,216 $ 75,064,216
Common shares issued 2,903,271 -
------------------------------------
Balance, End of Year 77,967,487 75,064,216
------------------------------------
Warrants
Balance, Beginning of Year 89,674 -
Issued 66,691 89,674
------------------------------------
Balance, End of Year 156,365 89,674
------------------------------------
Share based compensation reserve
Balance, Beginning of Year 9,648,162 9,430,656
Exercise of stock options (19,600) -
Share-based compensation 852,406 217,506
------------------------------------
Balance, End of Year 10,480,968 9,648,162
------------------------------------
Deficit
Balance, Beginning of Year (53,298,407) (42,747,681)
Net loss allocated to the owners of
the Company (7,460,658) (10,550,726)
------------------------------------
Balance, End of Year (60,759,064) (53,298,407)
------------------------------------
Non-Controlling Interests
Balance, Beginning of Year (1,290,125) 407,148
Net loss allocated to non-controlling
interests (1,113,707) (1,697,273)
------------------------------------
Balance, End of Year (2,403,833) (1,290,125)
------------------------------------
Total Equity $ 25,441,923 $ 30,213,520
------------------------------------
------------------------------------
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 Toronto Stock Exchange trading as the symbol "CAZ" and AIM stock
exchange as the symbol "CAZA". The corporate headquarters of the Company is
located at 10077 Grogan's Mill Road, Suite 200, The Woodlands, Texas 77380 and
the registered office of the Company is located at Suite 1700, Park Place, 666
Burrard Street Vancouver, British Columbia, V6C 2X8.
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). Caza's presentation
currency is the United States ("U.S.") dollar as the majority of its
transactions are denominated in this currency.
These consolidated financial statements were approved for issuance by the Board
of Directors on March 17, 2014.
2. Significant Accounting Policies
The consolidated financial statements have been prepared on the historical cost
basis except for certain financial instruments that are measured at fair values,
as explained in the accounting policies below. Historical cost is generally
based on the fair value of the consideration given in exchange for assets.
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 held
Name of subsidiary and operation by the Company
----------------------------------------------------------------------------
December 31, December 31,
2013 2012
----------------------------------------------------------------------------
Caza Petroleum Inc. Delaware/Texas 87% 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:
Derivatives
Derivatives, including derivative liabilities and hedging contracts, are
classified as fair value through profit or loss. Changes in the fair value of
derivatives are recognized through earnings.
Non-derivative financial instruments:
Non-derivative financial instruments comprise accounts receivable, cash and cash
equivalents, restricted cash, accounts payable and accrued liabilities, and
notes payable. Non-derivative financial instruments are recognized initially at
fair value. 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 classified as loans and receivables, such
as accounts receivable, accounts payable and accrued liabilities, and notes
payable, 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. If exploration does not meet
capitalization criteria at this time amounts are expensed as exploration and
evaluation.
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. 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 a 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) Notes payable and warrants
The component parts of the notes payable (debt and warrants) issued by the
Company are classified separately as financial liabilities and equity in
accordance with the substance of the contractual arrangements and the
definitions of a financial liability and an equity instrument.
At the date of issue, the fair value of the liability component is estimated
using the prevailing market interest rate for similar instruments without the
attached warrants. The discount on the liability component amount is recorded as
a contra amount to the notes payable and amortized using the effective interest
method until maturity.
The amount recorded as warrants was determined by deducting the amount of the
liability component from the fair value of the compound instrument as a whole.
The warrants are classified as equity, are not subsequently remeasured and will
remain in equity until the warrant is exercised. On exercise, the balance will
be transferred to share capital.
Transaction costs that relate to the issue of the notes payable are allocated to
the liability and equity components in proportion to the allocation of the gross
proceeds. Transaction costs relating to the equity component are recognized
directly in equity. Transaction costs relating to the liability component are
included in the carrying amount of the liability component and are amortized
over the lives of the notes payable using the effective interest method.
(i) 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.
(j) 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 share based
compensation reserve. 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.
(k) 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.
(l) 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.
(m) 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 its options
and warrants. 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 and warrants 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.
(n) Application of new and revised International Financial Reporting Standards
(IFRSs).
Effective January 1, 2013, Caza adopted IFRS 10 "Consolidated Financial
Statements", IFRS 11 "Joint Arrangements, IFRS 12 "Disclosure of Interests in
Other Entities", and the amendments to IAS 28 "Investments in Associates and
Joint Ventures."
There were no changes to the consolidated financial statements or the
consolidation process as a result of adoption of IFRS 10. IFRS 11 classifies
interests in joint arrangements as joint ventures or joint operations depending
on the rights and obligations of the parties in the arrangement. Caza performed
a review of interests in joint arrangements and concluded that shared wells
operate as joint operations and accordingly there is no change in the accounting
for these assets as a result of adoption of this standard. As a result, there
were no changes as a result of the adoption of IFRS 12 as well.
Furthermore Caza was also required to adopt IFRS 13 "Fair Value Measurements,"
amendments to IAS 1 "Presentation of Financial Statements," amendments to IFRS 7
"Financial Instruments: Disclosures." There were no material changes as a result
of the adoption of these standards.
The Company has not applied the following new and revised IFRSs that have been
issued but are not yet effective:
The IASB has undertaken a three-phase project to replace IAS 39 "Financial
Instruments: Recognition and Measurement" with IFRS 9 "Financial Instruments."
In November 2009, the IASB issued the first phase of IFRS 9, which details the
classification and measurement requirements for financial assets. Requirements
for financial liabilities were added to the standard in October 2010. 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.
In November 2013, the IASB issued the third phase of IFRS 9 which details the
new general hedge accounting model. Hedge accounting remains optional and the
new model is intended to allow reporters to better reflect risk management
activities in the financial statements and provide more opportunities to apply
hedge accounting. The Company does not employ hedge accounting for its risk
management contracts currently in place. In July 2013, the IASB deferred the
mandatory effective date of IFRS 9 and has left this date open pending the
finalization of the impairment and classification and measurement requirements.
IFRS 9 is still available for early adoption. The full impact of the standard on
the Company's consolidated financial statements will not be known until the
project is complete.
(o) 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:
i. 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.
ii. 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.
iii. 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.
iv. Valuation of financial instruments
Caza uses valuation techniques that include inputs that are not based on
observable market data to estimate the fair value of certain types of financial
instruments. The notes provide detailed information about the key assumptions
used in the determination of the fair value of the financial instruments.
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 interest 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 interest
partners based on costs incurred and its interpretation of allowable
expenditures. Any adjustment required as a result of joint interest
partner audits are recorded in the period of the determination with
joint interest partners.
-- The provision for decommissioning liabilities 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 various inputs and assumptions used in determining the fair value of
the unrealized loss on hedging contracts and the derivative liabilities
are subject to estimation uncertainty.
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, 2013 December 31, 2012
----------------------------------------------------------------------------
Balance, beginning of year $ 10,085,746 $ 4,941,256
Additions to exploration and evaluation
assets 28,004,357 10,464,696
Transfers to property, plant and
equipment (28,764,566) (4,417,633)
Disposals of assets - (272,989)
Joint interest billing partner
reimbursements - (436,649)
Impairment (1,481,691) (192,935)
----------------------------------------------------------------------------
Balance, end of year $ 7,843,846 $ 10,085,746
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Included in the $28,004,357 additions to E&E are the costs incurred during the
year ended December 31, 2013 for the drilling the Bone Spring play in New
Mexico.
The Company impaired expired leases in the amount of $1,481,691 relating to
expiring leasehold in Southern Louisiana and East Texas. During the year ended
December 31, 2012, the Company expensed $192,935 of expiring leasehold costs
relating to the Tiree prospect located in Louisiana.
----------------------------------------------------------------------------
4.Petroleum and natural gas properties and equipment
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Development &
Production Corporate
Cost Assets Assets Total
----------------------------------------------------------------------------
Balance, December 31, 2011 $ 45,223,073 $ 826,882 $ 46,049,955
Additions 1,949,389 1,944 1,951,333
Disposal of assets (7,740,218) - (7,740,218)
Transfers from E&E 4,417,633 - 4,417,633
----------------------------------------------------------------------------
Balance, December 31, 2012 $ 43,849,877 $ 828,826 $ 44,678,703
Additions 1,399,773 1,250 1,401,023
Disposal of assets (411,614) - (411,614)
Transfers from E&E 28,764,566 - 28,764,566
Other (61,364) - (61,364)
----------------------------------------------------------------------------
Balance, December 31, 2013 $ 73,541,238 $ 830,076 $ 74,371,314
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Development &
Accumulated Depletion, Production Corporate
Depreciation and Impairment Assets Assets Total
----------------------------------------------------------------------------
Balance, December 31, 2011 $ 15,943,179 $ 687,035 $ 16,630,214
Depletion and depreciation 3,039,488 93,620 3,133,108
Disposal of assets (1,541,070) - (1,541,070)
Impairment 5,904,374 - 5,904,374
----------------------------------------------------------------------------
Balance, December 31, 2012 23,345,971 780,655 24,126,626
Depletion and depreciation 3,621,476 31,953 3,653,429
Disposal of assets (27,376) - (27,376)
Impairment - - -
----------------------------------------------------------------------------
Balance, December 31, 2013 $ 26,940,071 $ 812,608 $ 27,752,679
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amounts
At December 31, 2012 $ 20,503,906 $ 48,171 $ 20,552,077
At December 31, 2013 $ 46,601,167 $ 17,468 $ 46,618,635
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Future development costs of proved undeveloped reserves of $59,907,000 were
included in the depletion calculation at December 31, 2013 (2012 - $28,577,800).
The Company did not capitalize general and administrative expenses directly to
E&E or D&P assets in the years presented.
The Company performed an impairment test at December 31, 2013 to assess whether
the carrying value of its petroleum and natural gas properties exceeds
recoverable amount. No impairment was required to be recorded (2012 -
$5,904,374). In 2012, the impairments were primarily due to reserve valuation
changes and recorded in the West Texas and Southeast Texas CGU's in the amounts
of approximately $3.52 million and $2.65 million, respectively. In 2012, there
was a net reversal of impairment in the Company's South Louisiana CGU of
approximately $266,000 due to the remaining properties in the CGU being more oil
in nature and less susceptible to price fluctuations.
The impairment test used a 12.5% discount rate for the period ended December 31,
2013 (2012 - 13.5%). The petroleum and natural gas future prices are based on
commodity price forecasts of the Company's independent reserve evaluators for
2013 as follows:
NYMEX Natural
Year Crude Oil(1) Gas(1)
($/bbl) ($/mmbtu)
----------------------------------------------------------------------------
2014 95.54 4.192
2015 93.17 4.351
2016 92.08 4.516
2017 94.82 4.910
2018 95.44 5.348
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.
On July 18, 2012, the Company sold the San Jacinto property which includes the
Caza Elkins 3401 and 3402 wells for consideration of $5,947,500 net of the
Company incurred brokerage fees in the amount of $152,500 associated with the
sale. There were also several other small properties that were disposed during
the year resulting in an aggregate of $6,199,149 net of accumulated depletion
from Development & Production Assets, $272,989 of E&E assets and $61,285 of
decommissioning costs which were also associated with the disposals being
removed from the statement of financial position. The resulting impact of these
sales is a loss on disposal of $461,741. The closing date of the transaction was
July 31, 2012.
5. Decommissioning Liabilities
The following is the continuity schedule of the obligation associated with the
retirement of oil and gas properties:
Year ended Year ended
December 31, 2013 December 31, 2012
------------------ ------------------
Decommissioning liabilities, beginning
of year $ 967,798 $ 1,052,091
Obligations incurred 312,894 74,899
Revision in estimated cash flows and
discount rate (190,916) 181,776
Obligations settled (140,645) (355,954)
Unwinding of the discount 23,503 14,986
------------------ ------------------
Decommissioning liabilities, end of
year $ 972,634 $ 967,798
Current portion 122,269 210,696
------------------ ------------------
Long-term decommissioning liabilities 850,365 757,102
------------------ ------------------
------------------ ------------------
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 $2,083,992 (December 31, 2012 - $1,398,296). The December 31, 2013
obligation was calculated using a risk free discount rate of 3.7 percent (2012 -
2.5%) and an inflation rate of 3 percent (2012 - 3%). It is expected that these
obligations will be funded from general Company resources at the time the costs
are incurred with the majority of costs expected to occur between 2014 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.
----------------------------------------------------------------------------
2013 2012
----------------------------------
Loss before income taxes $ (8,574,365) $ (12,247,999)
Income tax (recovery) at statutory rate
of 25% (2012 - 25%) (2,143,591) (3,062,000)
Difference in statutory tax rates:
Canada vs. United States (857,436) (1,224,800)
Stock-based compensation 298,342 76,127
Other (1,181,120) 130,055
Unrecognized deferred tax assets 3,883,805 4,080,618
----------------------------------
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:
----------------------------------------------------------------------------
2013 2012
----------------------------------------------------------------------------
United States:
Deferred income tax liability (asset):
Petroleum and natural gas properties $ 12,894,704 $ 4,779,773
Decommissioning obligations (340,423) (338,729)
Net operating losses carried forward (34,179,543) (22,182,500)
----------------------------------
(21,625,262) (17,741,456)
Unrecognized deferred tax asset 21,625,262 17,741,456
----------------------------------
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 entities:
----------------------------------------------------------------------------
Expiring at December 31, Amounts
----------------------------------------------------------------------------
US
2026 1,484,777
2027 11,146,427
2028 16,409,534
2029 1,887,722
2030 9,004,333
2031 14,887,664
2032 14,704,775
2033 26,342,957
7. Share Capital and Warrants
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
December 31, 2013 December 31, 2012
Number $ Number $
------------------------------------------------------
---------------------------
Opening balance common
shares 164,743,667 $ 75,064,216 164,743,667 $ 75,064,216
Stock issuances 17,821,430 2,883,671 - -
Exercise of stock
options 400,000 19,600 - -
----------------------------------------------------------------------------
Balance, end of year 182,965,097 $ 77,967,487 164,743,667 $ 75,064,216
----------------------------------------------------------------------------
Opening balance
warrants 1,055,224 89,674 - -
Common share warrants
issued (Notes 13 and
15) 2,529,333 66,691 1,055,224 89,674
----------------------------------------------------------------------------
Balance, end of year 3,584,557(1) $ 156,365 1,055,224 $ 89,674
----------------------------------------------------------------------------
(1) 1,055,224 warrants are exercisable at $0.33 and expire on November 23,
2015 and 2,529,333 warrants are exercisable at $0.17 and expire on November
1, 2016.
(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, 2013 and changes during the year
ended on those dates is presented below:
Year ended Year ended
December 31, 2013 December 31, 2012
--------------------------------------------------
Weighted Weighted
average average
Number of Exercise Number of exercise
Stock Options options price options price
----------------------------------------------------------------------------
Beginning of year 16,900,000 $0.28 11,140,000 $0.28
Granted - - 5,760,000 $0.28
Exercised 400,000 $0.07 - -
Forfeited 515,000 $0.45 - -
--------------------------------------------------
End of year 15,985,000 $0.28 16,900,000 $0.28
--------------------------------------------------
Exercisable, end of year 11,791,660 $0.29 8,274,995 $0.34
--------------------------------------------------
--------------------------------------------------
Number Weighted
Outstanding Average Number
as at Remaining Exercisable
Date of December Exercise Contractual Date of December
Grant 31, 2013 Price Life Expiry 31, 2013
----------------------------------------------------------------------------
January 31, January 31,
2007 1,725,000 $ 0.50 3.09 2017 1,725,000
December 12, December 12,
2007 1,500,000 $ 0.79 3.95 2017 1,500,000
April 7, 2008 500,000 $ 0.59 4.27 April 7, 2018 500,000
April 9, 2010 4,550,000 $ 0.07 6.28 April 9, 2020 4,550,000
April 12, 2010 400,000 $ 0.07 6.29 April 12, 2020 400,000
May 19, 2010 250,000 $ 0.07 6.39 May 19, 2020 250,000
September 14, September 14,
2010 20,000 $ 0.35 6.71 2020 20,000
October 12, October 12,
2011 1,500,000 $ 0.13 7.79 2021 999,999
January 31, January 31,
2012 100,000 $ 0.16 8.09 2022 33,333
December 4, December 4,
2012 5,440,000 $ 0.28 8.93 2022 1,813,328
----------------------------------------------------------------------------
15,985,000 6.71 11,791,660
----------------------------------------------------------------------------
During the year ended December 31, 2013, nil options were granted (2012 -
5,660,000 were granted at a fair value of $0.2646 per option). The fair value of
these options was determined using the Black-Sholes model with the following
assumptions:
2012
----------
Dividend yield Nil
Expected volatility 199%
Risk free rate of return 0.7%
Weighted average life 3 years
Forfeiture rate Nil
(d) Shared base compensation reserve
The following table presents the changes in the share based compensation reserve:
December 31, December 31,
2013 2012
----------------------------------------------------------------------------
Balance, beginning of year $ 9,648,162 $ 9,430,656
Exercise of stock options (19,600) -
Stock based compensation expense 852,406 217,506
----------------------------------------------------------------------------
Balance, end of year $ 10,480,968 $ 9,648,162
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(e) Non-controlling interest
December 31, December 31,
2013 2012
----------------------------------------------------------------------------
Number of exchangeable rights outstanding,
beginning and end of year (i) 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.
In 2013, issuances of common shares had a nominal impact on the number of
exchangeable rights in the year.
8. Related Party Transactions
Singular Oil & Gas Sands, LLC ("Singular") is a related party as it is a company
under common control with Zoneplan Limited, which is a significant shareholder
of Caza.
Singular participated in the drilling of the Matthys McMillan Gas Unit #2 and
the O B Ranch #1 and 2 wells located in Wharton County, Texas. Under the terms
of that agreement, Singular paid 14.01% of the drilling costs through completion
to earn a 10.23% net revenue interest on the Matthys McMillan Gas Unit #2 well
and paid 12.5% of the drilling costs to earn a 6.94% net revenue interest on the
O B Ranch #1 well. Under the terms of the agreement of the O B Ranch #2 Singular
paid 9.375% of the drilling costs to earn approximately 6.8% net revenue
interest. This participation was in the normal course of Caza's business and on
the same terms and conditions to those of other joint interest partners.
Singular owes the Company $51,431 in joint interest partner receivables as at
December 31, 2013 (December 31, 2012 - $6,337).
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,
2013 2012
----------------------------------------------------------------------------
Salaries and wages $ 1,727,200 $ 1,437,314
Short term benefits - -
Share-based payments 654,774 180,740
----------------------------------------------------------------------------
Total compensation $ 2,381,974 $ 1,618,054
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Commitments and Contingencies
As of December 31, 2013, the Company is committed under operating leases for its
offices and corporate apartment in the following aggregate minimum lease
payments which are shown below as operating commitments:
2014 $ 258,075
2015 $ 184,402
The Company is required under the Apollo Note Agreement to convey a
proportionately reducible 2% overriding royalty interest in each lease acquired
by Caza using proceeds advanced under this agreement. These amounts are not
payable until such a time that these leases produce petroleum and natural gas
revenues. See Note 14 for additional information.
10. Supplementary Information
(a) net change in non-cash working capital
Years ended December 31,
2013 2012
----------------------------------------------------------------------------
Provided by (used in)
------------------------------------------
Accounts receivable $ (1,728,669) $ (173,148)
Prepaid and other 362,637 (154,377)
Accounts payable and accrued liabilities 7,507,142 3,293,451
----------------------------------
6,141,110 $ 2,965,926
----------------------------------
Summary of changes
Operating $ (353,874) $ 770,034
Investing 6,168,610 2,350,269
Financing 326,374 (154,377)
----------------------------------
$ 6,141,110 $ 2,965,926
----------------------------------
(b) supplementary cash flow information
Year ended Year ended
December 31, 2013 December 31, 2012
----------------------------------------------------------------------------
Interest paid $ - $ -
Interest received 1,261 4,356
(c) cash and cash equivalents
December 31, December 31,
2013 2012
----------------------------------------------------------------------------
Cash on deposit $ 13,625,703 $ 6,073,807
Money market instruments 4,869,383 735,833
----------------------------------------------
Cash and cash equivalents $ 18,495,086 $ 6,809,640
----------------------------------------------
----------------------------------------------
The money market instruments bear interest at a rate of 0.010% as at December
31, 2013
(December 31, 2012 - 0.082%).
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 shareholders' equity, working capital (excluding current
portion of decommissioning liabilities), credit facilities and notes payable
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.
December 31, December 31,
2013 2012
----------------------------------------------------------------------------
Cash and cash equivalents $ (18,495,086) $ (6,809,640)
Other current assets ( 6,142,577) (4,222,891)
Accounts payable and accrued
Liabilities 16,153,038 8,645,896
Notes payable (Notes 14 and 15) - 1,941,476
----------------------------------------------------------------------------
Adjusted working capital $ (8,484,625) $ (445,159)
Note payable 35,855,042 -
Shareholders' equity 25,441,923 30,213,520
----------------------------------------------------------------------------
Total capital $ 52,812,340 $ 29,768,361
----------------------------------------------------------------------------
The Company has evaluated its net working capital balance as at December 31,
2013 and 2012. 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. During 2013, the Company
issued additional notes payable of $35.9 million. 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 interest 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. . On November 6, 2013, the Company entered
into swap contracts to limit exposure to declining crude oil prices for
approximately 75% of its production from currently producing wells. Under these
swaps, the Company receives or pays monthly a cash settlement on the covered
production of the difference between the swap price and the month average of the
daily closing quoted spot price per barrel of West Texas Intermediate NYMEX
crude oil. For the remainder of 2013 the swap covers 9,685 barrels of oil at a
swap price of $94.25. During the 12 months ending December 2014, the swap covers
40,524 barrels of oil at a swap price of $92.55. During the 12 months ending
December 2015, the swap covers 28,410 barrels of oil at a swap price of $87.05.
For the three month period ended December 31, 2013 the Company recognized a loss
of $15,283 on the swap contracts settled. At December 31, 2013 the Company
recorded an unrealized loss of $186,463 on the unsettled future contractual
obligations due to higher commodity prices.
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, 2013, the Company sold 71% (December 31, 2012 - 59%) of its natural gas and
condensates to a single purchaser. These sales were conducted on transaction
terms that are typical for the sale of natural gas and condensates in the United
States. In addition, when joint operations are conducted on behalf of a joint
interest partner relating to capital expenditures, costs of such operations are
paid for in advance to the Company by way of a cash call to the partner of the
operation being conducted.
Caza management assesses quarterly whether there should be any impairment of the
financial assets of the Company. At December 31, 2013, the Company had overdue
past due accounts receivable from certain joint interest partners of $156,426
which were outstanding for greater than 60 days (2012 - $58,757) and $17,460
that were outstanding for greater than 90 days (2012 - $170,741). At December
31, 2013, the Company's three largest joint interest partners represented
approximately 18%, 4% and 3% of the Company's receivable balance (December 31,
2012 - 34%, 19% and 11% respectively). The maximum exposure to credit risk is
represented by the carrying amount on the consolidated statement of financial
position of cash and cash equivalents, accounts receivable and deposits.
Trade receivables disclosed above include amounts that are past due at the end
of the reporting period for which the Group has not recognized an allowance for
doubtful debts because there has not been a significant change in credit quality
and the amounts (which include interest accrued after the receivable is more
than 60 days outstanding) are still considered recoverable. The Company manages
exposure on cash balances by holding cash with large and reputable financial
institutions. The Company also assesses the credit worthiness of each
counterparty before entering into contracts and ensures the counterparties meet
minimum credit quality requirements.
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, 2013, 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, restricted cash, 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. At December 31, 2013, the fair value of the
notes payable is $35,855,042 plus transaction costs which approximates net book
value as interest rates fluctuate.
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 and restricted cash, 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.
The Company's equity facility balances as described in Note 13 and the note
payable - Yorkville as described in Note 15 were recorded at fair value at the
inception date using a market interest rate for similar debt issued without the
warrants attached. The note payable - Apollo as described in Notes 14 were
recorded at fair value on issuance using a market interest rate for similar debt
issued without the overriding royalty interest attached. At December 31, 2013,
the fair value of the notes payable is recorded at amortized cost and the
carrying value approximates fair value.
The Company's derivative liabilities as described in Notes 13 and 15 are Level 2
financial instruments and commodity price contracts are a Level 2 financial
instrument.
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, 2013 that subject the Company to
liquidity risk are accounts payable, accrued liabilities, notes payable and
derivative 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, except for the notes
payable which are a long term financial liability. Management believes that
current working capital will be adequate to meet these financial liabilities as
they become due.
13. Equity Facility
On November 23, 2012 the Company entered into a GBP 6 million Standby Equity
Distribution Agreement ("SEDA Agreement") and a $12 million SEDA-backed Loan
Agreement (the "Loan" or "Loan Agreement") with YA Global Master SPV Ltd., an
investment fund managed by Yorkville Advisors Global, LP ("Yorkville"). During
2013 the Company received cash in the amount of US$2,154,211 for shares issued
under the SEDA agreement..
In 2012, Caza received an initial draw-down of $2.2 million on the Loan
Agreement and may draw a second advance of $1.8 million at its discretion.
Additional draw-downs may be made with the mutual agreement of the parties. Loan
repayment is supported by the SEDA Agreement, allowing Caza the option to issue
equity at a 5% discount to fair market value. In connection with initial
draw-down Caza issued to Yorkville 1,055,224 warrants having an exercise price
of $0.33. These warrants have been valued at US$89,674. This loan agreement was
rolled into the 4.3 million convertible loan agreement discussed below.
The Company entered into an Equity Adjustment Agreement (the "Adjustment
Agreement") on March 5, 2013 with Global Master SPV Ltd., an investment fund
managed by Yorkville Advisors Global, LP in conjunction with its SEDA Agreement
dated November 23, 2012 with Yorkville. Pursuant to the Adjustment Agreement,
during the three months ended March 31, 2013, the Company issued 3,846,154
common shares to Yorkville at a price of GBP 0.13 per share for aggregate
proceeds of GBP 500,000 (US$756,451). The Company has deposited in escrow GBP
275,000 (US$ - $455,317) as security for this contingent payment obligation,
which has been recorded within restricted cash on the consolidated statements of
financial position.
Under the terms of the Adjustment Agreement, if on December 31 2014 the common
share market price (determined as 95% of the average daily volume weighted
average price of common shares (VWAP) during the preceding 22 trading days) is
greater than GBP 0.13, then Yorkville will pay to the Company the difference
multiplied by the number of New Common Shares, and if the market price is less
than GBP 0.13 then the Company will pay to Yorkville the difference multiplied
by the number of New Common Shares. The fair value of this derivative was
calculated using Monte-Carlo Simulation at the date of issuance using inputs as
of that date and at December 31, 2013 using inputs as of December 31, 2013,
including the share price of $0.13 per share, the strike price of $0.08 per
share, risk-free interest rate of 0.91%, a dividend yield of nil, a weighted
average volatility factor of 79.3%, and an expected life of 2.8 years. The
derivative liability is classified as a financial instrument measured at fair
value though profit or loss. The fair value of the derivative liability
amounting US$330,768 as of December 31, 2013 has been included within current
liabilities on the consolidated statement of financial position, and the change
in fair value of US$275,768 since the date of issuance is included in other
expenses in the consolidated statement of net loss and comprehensive loss.
14. Notes Payable - Apollo
The Company also entered into a Note Purchase Agreement ( the "Note Agreement")
dated May 23, 2013 with Apollo Investment Corporation ("the Note Holder"), an
investment fund managed by Apollo Investment Management, pursuant to which the
Note Holder has agreed to purchase from the Company up to US$50,000,000 of its
senior secured notes. The Company received US$20,000,000 at the closing of the
Note Agreement ("Tranche A Apollo Note") with an additional drawdown of
US$5,000,000 and US$10,000,000 on September 11, 2013 and December 19, 2013,
respectively. As at December 31, 2013, the Company may draw additional advances
up to US$15,000,000 until August 23, 2014, if at the time of the advance, the
Company meets the specified minimum production and drilling cost requirements
for previous wells drilled under the program that were financed with funding
from the Note Purchase Agreement. In addition to these funds, the Company will
have the ability to reinvest cash flow from program wells back into the drilling
program.
In connection with the Tranche A Apollo Note, the Company incurred a total of
US$1,667,500 in transaction costs (consisting of US$1,540,000 in issuance costs
and US$127,500 relating to the fair value of the 2% overriding royalty conveyed
at the closing of the Note Purchase Agreement). In addition, the Company also
incurred structuring fees of US$1,659,912 in connection with the Note Purchase
Agreement. The Tranche A Apollo Note is classified as other financial
liabilities and is measured at amortized cost.
The outstanding balance of the Tranche A Apollo Note as at December 31, 2013 was
US$32,027,393 (net of unamortized transaction costs US$2,972,607). This
outstanding balance matures on May 23, 2017. The Tranche A Apollo Note bears
interest at a floating rate of one-month LIBOR (with a floor of 2%) plus 10% per
annum, payable monthly. In an event of default under the Note Purchase
Agreement, additional interest will be payable at a default rate of 5% per
annum, but only during the period of default.
The Company is required to comply with financial covenants, which are tested
quarterly, providing for specified interest coverage ratios beginning in the
quarter ending September 30, 2013, and asset coverage ratios and minimum
production, beginning in the quarter ending March 31, 2014. Furthermore, the
Company is required to maintain a limit on expenditures for general and
administrative costs.
Any outstanding balances in the Note Purchase Agreement may be prepaid at the
option of the Company at any time at premiums that vary over time. The Note
Purchase Agreement is also subject to a mandatory prepayment from the proceeds
of the sale of assets and from funds received from transactions outside of the
ordinary course of business. Additionally, if in any period the Company fails to
comply with any financial or performance covenants, certain mandatory payments
are required. Outstanding balances under the Note Purchase Agreement are secured
by first-priority security interests in all of the Company's assets.
In addition to the 2% overriding royalty interest conveyed at the closing of the
Note Purchase Agreement in its properties in Eddy and Lea Counties, New Mexico,
the Company is also required to convey a proportionately reducible 2% overriding
royalty interest in each lease acquired by Caza using proceeds from the Note
Purchase Agreement. These amounts are not payable until such a time that these
leases produce petroleum and natural gas revenues.
Upon full repayment of Tranche A Apollo Note, the overriding royalty interests
will convert to a 25% net profits interest in each property, proportionately
reduced to reflect the Company's working interest as provided in the Agreement,
which will reduce to a 12.5% net profits interest at such time as the Note
Holder achieves specified investment criteria pursuant to the Note Purchase
Agreement. The Note Agreement provides for customary events of default.
Additionally, an event of default would occur upon a change of control of the
Company, which consists of (i) a shareholder acquiring more than 35% of the
Company's outstanding Common Shares, (ii) a change in the composition of the
board of directors by more than 1/3 during a 12-month period or (iii) a
termination of service by any three of the five executive officers of the
Company.
15. Notes Payable - Yorkville
On November 1, 2013 the Company entered into an agreement in relation to a $4.3
million convertible unsecured loan (the "Loan") to be made available by YA
Global Master SPV Ltd., an investment fund managed by Yorkville. The Loan
consists of $3.5 million of new credit facilities along with an additional $0.84
million that will be used to repay amounts which remain outstanding under the
prior loan from Yorkville. In connection with the Loan, the Company incurred a
total of US$304,060 in transaction costs. The Loan will mature in two years,
which may be extended to three years by Yorkville. The Loan bears interest on
outstanding principal at 8% per annum and interest is payable quarterly only in
Common Shares based on a conversion price equal to 92.5% of the average price of
the Common Shares during the ten trading days prior to the interest payment
date. At Yorkville's option, outstanding principle of the loan is convertible
into Common Shares of the Company and the conversion price will be a price per
Common Share equal to either (a) 92.5% of the average price of the Common Shares
during the ten trading days prior to the conversion to a maximum of $450,000 per
month or (b) at Yorkville's option, a fixed price of GBP 0.14. In connection
with the Loan, Yorkville received an 8% implementation fee and a three year
warrants valued at US$73,865 to purchase 2,529,333 Common Shares at an exercise
price of $0.17 per share. The fair value of this derivative was calculated using
inputs as of December 31, 2013, including the share price of $0.143 per share,
credit spread of 9.73%, a dividend yield of nil, an estimated implied volatility
factor of 40%, and an expected life of two years. The fair value of the
derivative liability amounting $160,276 as of December 31, 2013 has been
included within current liabilities on the consolidated statement of financial
position.
----------------------------------------------------------------------------
For the year ended December 31, 2013
----------------------------------------------------------------------------
Fair value notes payable $ 4,264,399
Embedded derivative (160,276)
Less : financing fees (276,473)
-------------------
Note payable $ 3,827,650
-------------------
-------------------
16. General and Administrative
During the year ended December 31, 2013 the Company incurred general and
administrative expenses in the amount of $6,209,190 (December 31, 2012 -
$5,660,196) and salaries in the amount of $2,376,209 (December 31, 2012 -
$2,136,490). Stock compensation amortization accounted for $852,406 of the
general and administrative costs for the year ended December 31, 2013 (December
31, 2012 - $217,506).
17. Financing costs
----------------------------------------------------------------------------
Years ended December 31,
2013 2012
----------------------------------------------------------------------------
Unwinding of the discount (Note 5)
$ 23,502 $ 14,986
Amortization of financing fees 604,023 19,285
Interest expense 1,888,787 21,156
--------------------------------------
Total financing costs $ 2,516,312 $ 55,427
--------------------------------------
--------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") of the financial
results for Caza Oil & Gas, Inc. ("Caza", "Corporation" or the "Company") should
be read in conjunction with the audited consolidated financial statements as at
and for the year ended December 31, 2013. Additional information relating to the
Company can be found on SEDAR at www.sedar.com. All figures herein have been
prepared in accordance with International Financial Reporting Standards ("IFRS")
unless otherwise stated. This MD&A is dated March 25, 2014.
FORWARD-LOOKING INFORMATION
In addition to historical information, the MD&A contains forward-looking
statements that are generally identifiable as any statements that express, or
involve discussions as to, expectations, beliefs, plans, objectives, assumptions
or future events of performance (often, but not always, through the use of words
or phrases such as "will", "may", "will likely result," "expected," "is
anticipated," "believes," "estimated," "intends," "plans," "projection" and
"outlook"), are not historical facts and may be forward-looking and may involve
estimates, assumptions and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking
statements.
These statements are based on certain factors and assumptions regarding the
results of operations, the performance of projected activities and business
opportunities. Specifically, we have used historical knowledge and current
industry trends to project budgeted expenditures for 2013. While we consider
these assumptions to be reasonable based on information currently available to
us, they may prove to be incorrect.
Actual results achieved will vary from the information provided herein as a
result of numerous known and unknown risks and uncertainties and other factors.
Such factors include, but are not limited to: risks associated with the
Company's stage of development; competitive conditions; share price volatility;
risks associated with crude oil and natural gas exploration and development;
risks related to the inherent uncertainty of reserves and resources estimates;
possible imperfections in title to properties; the volatility of crude oil and
natural gas prices and markets; environmental regulation and associated risks;
loss of key personnel; operating and insurance risks; the inability to add
reserves; risks associated with industry conditions; the ability to obtain
additional financing on acceptable terms if at all; non operator activities; the
inability of investors in certain jurisdictions to bring actions to enforce
judgments; equipment unavailability; potential conflicts of interest; risks
related to operations through subsidiaries; risks related to foreign operations;
currency exchange rate risks and other factors, many of which are beyond the
control of the Company. Accordingly, there is no representation by Caza that
actual results achieved during the forecast period will be the same in whole or
in part as that forecast. Further, Caza undertakes no obligation to update or
revise any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events, except as required by applicable securities
laws.
Financial outlook information contained in this MD&A about prospective results
of operations, financial position or cash flows is based on assumptions about
future events, including economic conditions and proposed courses of action,
based on management's assessment of the relevant information currently
available. Readers are cautioned that such financial outlook information
contained in this MD&A should not be used for purposes other than for which it
is disclosed herein.
NON-IFRS MEASURES
The financial data presented herein has been prepared in accordance with IFRS.
The Company has also used certain measures of financial reporting that are
commonly used as benchmarks within the oil and natural gas production industry
in the following MD&A discussion. The measures are widely accepted measures of
performance and value within the industry, and are used by investors and
analysts to compare and evaluate oil and natural gas exploration and producing
entities. Most notably, these measures include "operating netback" and "funds
flow from (used in) operations". Operating netback is a benchmark used in the
crude oil and natural gas industry to measure the contribution of oil and
natural gas sales and is calculated by deducting royalties and operating
expenses from revenues. Funds flow from (used in) operations is cash flow from
operating activities before changes in non-cash working capital, and is used to
analyze operations, performance and liquidity. These measures are not defined
under IFRS and should not be considered in isolation or as an alternative to
conventional IFRS measures. These measures and their underlying calculations are
not necessarily comparable or calculated in an identical manner to a similarly
titled measure of another entity. When these measures are used, they are defined
as "Non IFRS" and should be given careful consideration by the reader.
NOTE REGARDING BOES AND MCFES
In this MD&A, barrels of oil equivalent ("boe") are derived by converting gas to
oil in the ratio of six thousand cubic feet ("Mcf") of gas to one barrel ("bbl")
of oil (6 Mcf: 1 bbl) and one thousand cubic feet of gas equivalent ("Mcfes")
are derived by converting oil to gas in the ratio of one bbl of oil to six Mcf
(1 bbl: 6 Mcf). Boes and Mcfes may be misleading, particularly if used in
isolation. A boe conversion of 6 Mcf of natural gas to 1 bbl of oil, or a Mcfe
conversion ratio of 1 bbl of oil to 6 Mcf of natural gas is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the well head. Given that the value ratio
based on the current price of oil as compared to natural gas is significantly
different from the energy equivalency of 6:1, utilizing a conversion on a 6:1
basis may be misleading as an indication of value.
CURRENCY
References to "dollars" and "$" are to U.S. dollars and references to "CDN$" are
to Canadian dollars.
STRATEGY AND ASSETS
Strategy
The Company's strategy is to achieve significant growth in reserves and
production through:
-- progressing material, internally generated prospects, utilizing cash
flows from existing production and exploiting Proven plus Probable
reserves; and
-- executing strategic acquisitions of assets at all stages of the
development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear set of criteria
in high-grading projects:
-- the Company seeks to retain control of project execution and timing
through the operatorship of assets;
-- assets should be close to existing established infrastructure, allowing
for quick, efficient hook-up and lower operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to
deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of west Texas and
southeast New Mexico, the most prolific oil and gas basin in North America.
Independent forecasts predict that the Permian Basin will have the greatest oil
supply growth of any North American basin over the next five years. This
provides the Company with low-risk, liquids-rich development opportunities from
many geologic reservoirs and play types. The basin also has a vast operational
infrastructure in place. The Company is utilizing recent advances in horizontal
drilling and dynamic completion technologies to unlock the significant resources
within its asset base and the region.
Management has focused efforts on building a core asset base in the prolific
Bone Spring play and has concluded that these assets represent the most
significant opportunity for the Company to deliver material production, revenue
growth and demonstrable shareholder returns within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset base within
the Bone Springs play will not only grow the Company but will also make it more
resilient to any single project risk.
The Company has now identified over 325 drilling locations in the Bone Spring
play according to the NSAI Report. Management believes that the Company is
well-positioned with approximately 4,892 net acres in the play and continues to
actively monitor opportunities to build on Caza's current acreage position.
The Company's Bone Spring leases are mostly State and Federal leases with
primary terms between 5-10 years. In terms of obligations and commitments, one
producing well will hold each lease in its entirety.
Outlook
Subject to the availability of appropriate financing, the Company's objective is
to embark on an accelerated and expanded drilling program in the Bone Spring
play over the next two years. Management believes that such a program has the
potential to increase shareholder value significantly over the period. A program
of this type will initially require additional financing of the nature but would
utilize excess operational cash flow to fund further development drilling and
lease purchases beyond the initial two year period.
Management believes that such a program can be accomplished by exploiting the
Company's existing asset/lease inventory. However, if appropriate, Management
will also seek to identify corporate and asset acquisitions, which will enable
the Company to increase its position in the Bone Spring play. Accordingly, in
line with the Company's stated strategy, Management's goal is to achieve
significant growth in the Company's reserves and production, thereby raising the
Company's profile in the basin and allowing shareholder value to be maximized
and, if appropriate, fully matured over the short-to-medium term.
SELECT ANNUAL INFORMATION
2013 2012 2011
----------------------------------------------------------------------------
Financial
Revenue oil & gas 8,312,526 4,969,258 4,089,894
Funds flow from (used in)
operations (1) (1,508,501) (2,323,619) (2,577,763)
Per share - basic and diluted (0.01) (0.01) (0.02)
Net loss (8,574,365) (12,247,999) (23,277,032)
Per share - basic and diluted (0.04) (0.06) (0.14)
Capital expenditures 29,222,045 12,024,155 17,591,692
Total assets 79,100,144 41,768,690 48,558,875
Total non-current liabilities 36,705,407 757,102 1,052,091
Cash and working capital 8,484,625 445,159 8,845,433
Common shares outstanding, end of
year (2) 209,467,097 191,245,667 191,245,667
Operations
Operating netback ($/boe) (3)
Revenue oil & gas 67.29 47.72 46.64
Severance tax and transportation
expense 5.77 3.73 3.77
Production expenses 13.12 13.85 7.56
----------------------------------------------------------------------------
Operating netback (3) 48.40 30.14 35.31
Average daily oil production
(boe/day) 338 285 240
----------------------------------------------------------------------------
(1) Calculated based on cash flow from operating activities before changes
in non-cash working capital and certain other items. See "Non IFRS
Measures".
(2) Basic share amounts are calculated based on the number of outstanding
common shares plus the number of common shares issuable pursuant to a
share exchange and shareholders agreement among Caza and members of
Caza's senior management.
(3) Calculated by deducting royalties and operating costs from revenues. See
"Non-IFRS Measures".
Highlights
-- Natural gas, natural gas liquids and crude oil production increased by
19% in 2013 in comparison to 2012, averaging 338 boe per day in 2013
(includes associated condensate production). The increase was mainly due
to the Company focusing on oil rich prospects for exploration
activities.
-- A strong fourth quarter in 2013 saw production increase by 61% to 46,270
boe for the three month period ending December 31, 2013 as compared to
28,716 boe for the three month period ending December 31, 2012.
-- A strong fourth quarter in 2013 saw revenues increase by 114% to
$3,381,486 for the three month period ended December 31, 2013 as
compared to $1,580,214 for the three month period ended December 31,
2012. For the year ended December 31, 2013 revenues increased 67% to
$8,312,256 as compared to $4,969,258 for the year ended December 31,
2012.
Operating Netback Summary (Non-IFRS)
The following table presents the Company's operating netback which is a non-IFRS
measure:
Three Months ended Twelve Months ended
December 31, December 31,
(on a boe basis) 2013 2012 2013 2012
----------------------------------------------------------------------------
Oil and natural gas revenue $ 73.08 $ 55.03 $ 67.29 $ 47.72
Production expense (6.72) (3.79) (13.12) (13.85)
Severance expense (5.96) (4.28) (5.49) (3.20)
Transportation expense (0.21) (0.54) (0.28) (0.53)
----------------------------------------------------------------------------
Operating netback (non-IFRS) 60.19 46.42 48.40 30.14
The change in netbacks for the twelve months ended December 31, 2013 occurred as
a result of a revenue increase of $19.57 per/boe as compared to the previous
year. Production expenses decreased $0.73 /boe as compared to the period ended
December 31, 2012. And there was an increase in severance taxes and
transportation costs of $2.04 per boe as a result of the 41% increase in
commodity pricing as compared to the previous year.
FINANCIAL AND OPERATING RESULTS
Petroleum and Production Revenue
Three Months ended Twelve Months ended
December 31, December 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Natural gas
Production (Mcf) 72,304 74,498 248,864 346,520
Revenue ($) 322,166 287,360 943,327 982,170
Price ($/Mcf) 4.46 3.86 3.79 2.83
----------------------------------------------------------------------------
Light/medium crude
oil
Production (bbls) 32,819 14,709 75,737 42,876
Revenue ($/bbl) 3,050,368 1,226,014 7,134,709 3,795,892
Price ($/bbl) 92.95 83.35 94.20 88.72
----------------------------------------------------------------------------
Natural gas liquids
Production (bbls) 1,400 1,591 6,319 3,601
Revenue ($/bbl) 8,952 66,840 234,489 191,196
Price ($/bbl) 6.39 42.01 37.11 53.09
----------------------------------------------------------------------------
Combined
Production (boe) 46,270 28,716 123,533 104,140
Revenue ($) 3,381,486 1,580,214 8,312,526 4,969,258
Price ($/boe) 73.08 55.03 67.29 47.72
----------------------------------------------------------------------------
Boe/d 503 312 338 285
----------------------------------------------------------------------------
Mcfe/d 3,018 1,873 2,032 1,707
----------------------------------------------------------------------------
For the Company, revenues from oil and gas sales increased by 67% to $8,312,526
in 2013 up from $4,969,258 in 2012. The increase resulted from increased
production volumes brought on by new wells brought on line during 2013 and a 41%
increase in the average sales price to an average sale price of $67.29 per boe.
Average daily production increased by 19% to 338 boe/d in 2013 from 285 boe/d in
2012. The increase was mainly due to additional wells coming on line from the
drilling program in the New Mexico Bone Spring play. Natural gas production made
up 34% of Caza's production during 2013 with natural gas liquids and crude oil
comprising the remaining 66%. This is compared to a total production profile
comprised of 55% natural gas production in 2012, reflecting a shift toward
exploration and production of oil based reserves.
Natural gas, natural gas liquids and crude oil revenues increased 114% to
$3,381,486 for the three-month period ended December 31, 2013 from $1,580,214
for the three-month period ended December 31, 2012. Caza's production volumes
increased 61% to 46,270 boe for the three-month period ended December 31, 2013
up from 28,716 boe for the comparative period. This represents an average daily
production rate increase of 61% for the three-months period ended December 31,
2013 as compared to the comparative period. The average natural gas, natural gas
liquids and crude oil price received by Caza increased 33% to $73.08 per boe
during the three-month period ended December 31, 2013 from $55.03 per boe during
the comparative period. The increase in revenues and production volumes for the
three-month period ended December 31, 2013 from the comparative period occurred
is a result of additional wells brought on line during the year in the New
Mexico Bone Spring play. Our future revenue and production volumes will be
directly affected by North American natural gas prices, West Texas Intermediate
crude oil prices and natural gas liquid prices, the performance of existing
wells, drilling success and the timing of the tie-in of wells into gathering
systems.
Production Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Severance tax ($) 275,956 123,034 678,640 332,860
Transportation ($) 9,498 15,512 34,672 55,530
Production ($) 310,782 108,841 1,620,847 1,442,033
----------------------------------------------------------------------------
Severance, transportation
and production ($) 596,236 247,387 2,334,159 1,830,423
Severance, transportation
and production ($/Boe) 12.89 8.61 18.89 17.58
----------------------------------------------------------------------------
Severance tax is a tax imposed by states on natural resources such as crude oil,
natural gas and condensate extracted from the ground. The tax is calculated by
applying a rate to the dollar amount of production from the property or a set
dollar amount applied to the volumes produced from the property.
During the year ended December 31, 2013, Caza incurred aggregate production,
transportation and severance expenses of $2,334,159 or an average per boe of
$18.89. During the year ended December 31, 2012, Caza's aggregate production,
transportation and severance expenses were $1,830,423 or an average per boe of
$17.58. Such expenses on a per boe basis have increased during the year ended
December 31, 2013 by 8% as compared to the same period in 2012.
Severance taxes and transportation expenses were $713,311 during the year and
are included in production expense. This is an increase of 84% from the prior
year's severance taxes and transportation expenses. The increases in severance
taxes and transportation expenses are a result of the 19% increase in production
levels during 2013 and the 41% increase in commodity prices on a per boe basis
as compared to the respective periods in 2012.
Severance taxes and transportation expenses totaled $285,454 ($6.17/boe) for the
three-month period ended December 31, 2013, as compared to $138,546 ($4.82/boe)
in the comparative period. Severance taxes and the transportation expense
increased 106% as a result of the higher production volumes and commodity prices
in the three month period ended December 31, 2013 as compared to the comparative
period.
Production expenses for the three-month period ended December 31, 2013 were
$310,782 as compared to $108,841 for the comparative period. Caza's average
lifting cost for the three-month period ended December 31, 2013 was $6.72 per
boe versus $3.79 per boe for the comparative period. The increase in production
costs for the year ended December 31, 2012 occurred in part due to workovers on
certain wells and the growth in producing wells in the New Mexico Bone Spring
play.
Depletion, Depreciation, Amortization and Accretion
Depletion, depreciation, amortization and accretion expense for the three-month
period ended December 31, 2013 increased to $1,250,493 ($27.03/boe) from
$1,125,438 ($39.19/boe) in the comparative period. Depletion, depreciation and
accretion expense increased to $3,459,365 ($28.00 per boe) in 2013 from
$3,148,094 ($30.23 per boe) in 2012.
Three Months ended Twelve Months ended
December 31, December 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
Depletion and depreciation
($) 1,242,198 1,122,537 3,435,862 3,133,108
Accretion ($) 8,295 2,901 23,503 14,986
----------------------------------------------------------------------------
Depletion, depreciation
and accretion ($) 1,250,493 1,125,438 3,459,365 3,148,094
Depletion, depreciation
and accretion ($/Boe) 27.03 39.19 28.00 30.23
The decreased depletion expense on a per boe basis for the period ended December
31, 2013 occurred as a result of the relationship of the costs incurred in
drilling activities carried out in the West Texas and Southeast Texas CGU's in
relation to the associated reserves recorded. This brought about an aggregate 7%
decrease in depletion expense on a per boe basis as compared to the respective
period in 2012.
Costs of unproved properties of $7,843,846 were excluded from depreciable costs
in the exploration and evaluation assets. A proportionate amount of the carrying
value will be transferred to the depletable pool as reserves are proven through
the execution of Caza's exploration program.
Accretion expense is the increase in the present value of the asset retirement
obligation for the current period and the amount of this expense will increase
commensurate with the asset retirement obligation as new wells are drilled or
acquired through acquisitions.
General and Administrative Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
General and
administrative ($) 1,807,442 1,399,714 6,372,751 5,777,933
Joint venture partner
reimbursements ($) - - - -
General and
administrative recovery
($) (44,858) (32,540) (163,561) (117,737)
----------------------------------------------------------------------------
Net general and
administrative ($) 1,762,584 1,367,174 6,209,190 5,660,196
General and
administrative ($/Boe) 39.06 48.74 51.59 55.48
Net general and
administrative ($/Boe) 38.09 47.61 50.26 54.35
----------------------------------------------------------------------------
Net general and administrative expenses for 2013 increased to $6,209,190 from
$5,660,196 for 2012 showing an increase of 10% from the comparative period. On a
boe basis the net general and administrative expenses decreased by 20% and 8%
for the respective three-month period and year ended December 31, 2013 due to
the increase in production volumes offset by the 10% increase in expenses from
the comparative period. Stock-based compensation expense in the amount of
$242,190 (2012 - $95,580) is included in general and administrative expenses for
the three-month period ended December 31, 2013 and $852,406 (2012 - $217,505) is
included for the year ended December 31, 2013. During 2013, Caza did not
capitalize general and administrative expenses relating to exploration and
development activities. Caza recorded forfeitures of 515,000 stock options for
the year ended December 31, 2013.
Income Taxes
Presently the Company does not expect to pay current taxes in the foreseeable
future based on existing tax pools, planned capital activities and current
forecasts of taxable income. However, the Company's tax horizon will ultimately
depend on several factors including commodity prices, property dispositions,
future production, corporate expenses, and capital expenditures to be incurred
in future reporting periods. Estimated income tax losses available to be carried
forward as at January 1, 2014 with respect to the Company's operations are as
follows:
---------------
Expiring at
December 31, US$
---------------
2026 1,484,777
2027 11,146,427
2028 16,409,534
2029 1,887,722
2030 9,004,333
2031 14,887,664
2032 14,704,775
2033 26,342,957
Gain (Loss) on Risk Management Contracts
The Company has entered into commodity price derivative contracts to limit
exposure to declining crude oil prices in accordance with its covenants under
the Note Purchase Agreement. All derivative contracts are approved by the board
of directors before the Company enters into them. The Company's risk management
strategy is dictated in part by covenants in the Note Purchase Agreement (as
defined herein) which require the Company to hedge approximately 75% of its
production. The contracts limit exposure to declining commodity prices, thereby
protecting project economics and providing increased stability of cash flows and
for capital expenditure programs.
Under these contracts, the Company receives or pays monthly a cash settlement on
the covered production of the difference between the swap price specified in the
applicable contract and the month average of the daily closing quoted spot price
per barrel of West Texas Intermediate NYMEX crude oil. These agreements cover
40,524 bbl of oil at a swap price of $92.55 during the year ending December 31,
2014 and cover 28,410 barrels of oil at a swap price of $87.05 during the year
ended December 31, 2015. As at December 31, 2013, approximately 75% of the
Company's oil production was subject to such arrangements.
The fair value of the Company's commodity price derivative contracts represents
the estimated amount that would be received for settling the outstanding
contracts on December 31, 2013, and will be different than what will eventually
be realized. The fair value of these assets at a particular point in time is
affected by underlying commodity prices, expected commodity price volatility and
the duration of the contract and is determined by the expected future
settlements of the underlying commodity. The gain or loss on such contracts is
made up of two components; the realized component, which reflects actual
settlements that occurred during the period, and the unrealized component, which
represents the change in the fair value of the contracts during the period.
For the three month period ended December 31, 2013 the Company recognized a loss
of $15,283 on its settled commodity price derivative contracts and recorded an
unrealized loss of $186,463 on unsettled commodity price derivative contracts
due to higher commodity prices.
Net loss
Net loss in 2013 decreased by 30% to $8,574,365 ($0.04 per share, basic and
diluted) compared to $12,247,999 ($0.06 per share, basic and diluted) in 2012.
Caza incurred a net loss of $2,851,859 for the three-month period ended December
31, 2013 as compared to a net loss of $4,384,652 during the comparative period.
The decrease in net loss during such periods was attributable to the absence of
an asset impairment in 2013 (2012 - $5,904,374), which was partially offset by
increased financing and stock compensation expenses and by aggregate losses of
$201,746 pursuant to the Company's risk management agreements in 2013.
Investments
Interest income for the three-month period ended December 31, 2013 was $244 and
$1,261 for the year ended December 31, 2013, a decrease from $4,356 during the
year ended December 31, 2012. Interest was earned on the proceeds received from
advances made pursuant the Company's credit facilities and cash on hand. Caza
invested these funds in short-term money market funds. The Company does not hold
any asset backed commercial paper.
Funds flow from (used in) operations (Non-IFRS)
The following table reconciles the non-IFRS measure "funds flow from (used in)
operations" to "net loss", the most comparable measure calculated in accordance
with IFRS. Cash flow from operations before changes in non-cash working capital
provides better information as it ignores timing differences resulting primarily
from fluctuations in payables and receivables. As such it is a common measure
used by management in the oil and gas industry.
Three Months ended Twelve Months ended
December 31, December 31,
($) 2013 2012 2013 2012
----------------------------------------------------------------------------
Net loss (2,851,859) (4,384,653) (8,574,365) (12,247,999)
Depletion, depreciation,
amortization 1,242,197 1,122,537 3,435,862 3,133,108
Accretion 8,295 2,901 23,503 14,986
Stock-based compensation 242,190 95,580 832,806 217,506
Impairment of oil & gas
properties - 3,215,868 - 5,904,374
Exploration and
evaluation expense 741,016 192,935 1,481,691 192,935
Other income 217,567 - 217,567 -
Disposal of assets - 3,456 243,592 461,471
Unrealized losses from
risk management
contracts 186,463 - 186,463 -
Unrealized losses under
Adjustment Agreement 491,044 - 491,044
Non-cash financing costs
and - - 153,336 -
----------------------------------------------------------------------------
Funds flow (used in)
operations 276,913 248,624 (1,508,501) (2,323,619)
----------------------------------------------------------------------------
Funds flow loss per
share - basic and
diluted 0.00 0.00 (0.01) (0.01)
----------------------------------------------------------------------------
The increase in funds flow from (used in) operations as compared to the previous
periods is associated with increased revenues during 2013, which was offset by
increased production expense and general and administration expense as compared
to 2012.
Capital Expenditures
Three Months ended Twelve Months ended
December 31, December 31,
By Type ($) 2013 2012 2013 2012
----------------------------------------------------------------------------
Drilling and completions 10,039,324 5,613,636 25,940,124 8,953,239
Seismic - - 126,800 -
Facilities and lease
equipment - 802,868 - 1,683,374
Office furnishings and
equipment - - 1,250 1,944
Leasehold geological
/geophysical 5,798 67,018 3,081,676 1,196,156
Other costs (recovery) (13,364) 857,588 72,195 189,442
----------------------------------------------------------------------------
Total 10,031,758 7,341,110 29,222,045 12,024,155
During the year ended December 31, 2013, Caza drilled fourteen gross wells (3.56
net) with activities concentrated in the Bone Spring play in New Mexico.
Outstanding Share Data
Caza is authorized to issue an unlimited number of common shares without par
value. Holders of common shares are entitled to one vote per share on all
matters voted on a poll by shareholders, and are entitled to receive dividends
when and if declared by the board of directors out of funds legally available
for the payment of dividends. Upon Caza's liquidation or winding up or other
distribution of its assets among its shareholders for the purpose of winding up
its affairs, holders of common shares are entitled to share pro rata in any
assets available for distribution to shareholders after payment of all
obligations of the Company. Holders of common shares do not have any cumulative
voting rights or pre-emptive rights to subscribe for any additional common
shares.
At March 24, 2014 190,352,617 common shares were issued and outstanding. Common
shares are issuable pursuant to outstanding incentive compensation options and
common share purchase warrants. In addition, the management team has the right
at any time to exchange the Caza Petroleum, Inc. ("Caza Petroleum") shares
currently held by them for an aggregate of 26,502,000 common shares.
Common shares are also issuable pursuant to a $4.3 million convertible unsecured
loan (the "Convertible Loan") dated November 5, 2013 between Caza and YA Global
Master SPV Ltd. ("Yorkville"), an investment fund managed by Yorkville Advisors
LLC. The outstanding principal of the Convertible Loan is convertible at
Yorkville's option into common shares at a conversion price per share which will
be determined at the date of each conversion. Such price shall be equal to
either (a) 92.5% of the average price of the common shares during the 10 trading
days prior to the conversion (such conversion being restricted to a maximum of
$450,000 per month) or (b) at Yorkville's option, a fixed price of GBP 0.14
(such conversion being subject to no maximum amount). The Convertible Loan will
mature on November 5, 2015, subject to Yorkville's right to extend the term by
one year. At maturity, the outstanding principal balance will convert into
common shares at a conversion price equal to the closing price of the common
shares on the preceding trading day. As conversion prices will only be
determined under the Convertible Loan when conversions occur, the number of
common shares issuable pursuant to the Conversion Note is not ascertainable at
this time.
The following table sets forth the classes and number of outstanding equity
securities of the Company and the number of issued and issuable common shares on
a fully diluted basis.
Issued and Issuable Securities
Common Shares
Issued and outstanding 190,352,617
Issuable from Exchangeable rights 26,502,000
Issuable from exercise of warrants 3,584,557
Issuable from exercise of stock options 15,985,000
Issuable pursuant to Convertible Loan -(1)
Total Common Shares issued and issuable 236,424,174
------------------------------
Warrants Issued and Outstanding
Warrants to purchase common shares
outstanding 3,584,557
Stock Options Issued
Management Stock options outstanding 15,985,000
Convertible Loan
Common shares issuable pursuant to
Convertible Loan -(1)
(1) The number of common shares issuable pursuant to the Convertible Loan is not
ascertainable at this time.
Commitments
The following is a summary of the estimated amounts required to fulfill Caza's
remaining contractual commitments as at December 31, 2013:
less than 1-3 4-5
Type of Obligation ($) Total 1 Year Years Years Thereafter
Operating leases 442,477 258,075 184,402 - -
Asset retirement
obligations 972,634 122,269 - - 850,365
----------------------------------------------------------------------------
Total contractual
commitments 1,415,111 380,344 184,402 - 850,365
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity and Capital Resources
Caza's strategy is to participate in three to four wells per annum funded from
production revenues, existing cash resources and available financing under the
Note Purchase Agreement or the SEDA (each as defined below). In the event
additional sources of financing become available the Company would consider
increases to its drilling program. The Company is focused on securing
appropriate levels of capitalization to support its business strategy. As
commodity prices or production fluctuates, the Company intends to alter its
capital program or reduce costs in order to maintain an acceptable level of
capitalization.
At December 31, 2013, Caza had a working capital surplus of $8,484,625 as
compared to $445,159 as at December 31, 2012 and $8,484,625 as at December 31,
2011. This increase of $8,039,466 in working capital from December 31, 2012
resulted primarily from drawdowns from credit facilities in the amount of
$38,880,012 offset by capital expenditures of $29,222,045 in connection with
drilling and lease acquisition activities, $1,508,501 in funds flow used in
operations and the derivative liabilities of $110,000. Caza had a cash balance
of $18,495,086 as of December 31, 2013. The current working capital surplus of
$8,484,625 does not include the decommissioning liabilities of $122,269.
Caza and its subsidiary Caza Petroleum Inc. may be considered to be "related
parties" for the purposes of Multilateral Instrument 61-101 of the Canadian
Securities Administrators. As a result, Caza or Caza Petroleum Inc. may be
required to obtain a formal valuation or disinterested shareholder approval
before completing certain transactions with the other party.
During the year ended December 31, 2013, the Company secured funding under the
following agreements:
Note Purchase Agreement
On May 23, 2013, the Company entered into a Note Purchase Agreement (the "Note
Agreement") with Apollo Investment Corporation (the "Note Holder"), an
investment fund managed by Apollo Investment Management, pursuant to which the
Note Holder agreed to purchase up to US$50,000,000 of senior secured notes
("Notes") from the Company. Under the Note Purchase Agreement, the Company is
required to comply with financial covenants, which are tested quarterly,
providing for specified interest coverage ratios beginning in the quarter ending
September 30, 2013, and asset coverage ratios and minimum production, beginning
in the quarter ending March 31, 2014. The Company is also required to maintain a
limit on general and administrative costs. Due to drilling delays, the Company
did not satisfy the minimum interest coverage ratio for the periods ended
September 30 and December 31, 2013. These have been waived by Apollo. The
Company and Apollo are discussing an amendment regarding this ratio to account
for the drilling delays. Any outstanding balances of the Notes may be prepaid at
the option of the Company at any time at premiums that vary over time. The Note
Purchase Agreement is also subject to a mandatory prepayment from the proceeds
of the sale of assets and from funds received from transactions outside of the
ordinary course of business. Certain mandatory payments are also required if in
any period the Company fails to comply with any financial or performance
covenants. The Note Agreement provides for customary events of default.
Additionally, an event of default would occur upon a change of control of the
Company, which consists of (i) a shareholder acquiring more than 35% of the
Company's outstanding common shares, (ii) a change in the composition of the
board of directors by more than 1/3 during a 12-month period or (iii) a
termination of service by any three of the five executive officers of the
Company. Outstanding balances under the Notes are secured by first-priority
security interests in all of the Company's assets.
In addition to a 2% overriding royalty interest conveyed at the closing of the
Note Agreement in its properties in Eddy and Lea Counties, New Mexico, the
Company is also required to convey a proportionately reducible 2% overriding
royalty interest in each lease acquired with proceeds from the Note Agreement.
Upon full repayment of the Notes, the overriding royalty interests will convert
to a 25% net profits interest in each property, proportionately reduced to
reflect the Company's working interest as provided in the Note Agreement, which
will reduce to a 12 1/2% net profits interest at such time as the Note Holder
achieves specified investment criteria pursuant to the Note Agreement.
During 2013, the Company sold an aggregate of Notes in the aggregate principal
amount of US$35,000,000 to the Note Holder. The Company may draw additional
advances of up to US$15,000,000 until August 23, 2014, if at the time of the
advance, the Company meets the specified minimum production and drilling cost
requirements for previous wells drilled under the program financed by the Note
Purchase Agreement. In addition to these funds, the Company has the ability to
reinvest cash flow from program wells back into the drilling program.
The outstanding balance of the Notes as at December 31, 2013 was US$35,000,000
(exclusive of unamortized transaction costs US$2,972,607). The Notes bear
interest at a floating rate of one-month LIBOR (with a floor of 2%) plus 10% per
annum, payable monthly and mature on May 23, 2017. In an event of default under
the Note Purchase Agreement, additional interest will be payable at a default
rate of 5% per annum, but only during the period of default.
In connection with the sale of the Notes, the Company incurred a total of
US$1,667,500 in transaction costs (consisting of US$1,540,000 in issuance costs
and US$127,500 relating to the fair value of the 2% overriding royalty conveyed
at the closing of the Note Purchase Agreement). In addition, the Company also
incurred structuring fees of US$1,659,912 in connection with the Note Purchase
Agreement. The Notes are classified as other financial liabilities and are
measured at amortized cost.
Standby Equity Distribution Agreement
The Company and Yorkville are party to a GBP 6 million Standby Equity
Distribution Agreement ("SEDA") dated November 23, 2012. The SEDA allows Caza to
issue equity at a 5% discount to market to fund loan repayments or well costs in
certain circumstances. As at December 31, 2013, the company has drawn down an
aggregate of GBP 1,450,000 under the SEDA. During 2013, the Company issued
13,975,276 common shares under the SEDA at an average price of GBP 0.965 per
share for gross proceeds of $2,154,210. The SEDA expires on November 23, 2015.
Convertible Loan
On November 1, 2013, the Company borrowed $4,338,264 from Yorkville pursuant to
the Convertible Loan. Loan proceeds of $838,264 were used to pay off the
remaining balance of the Company's US$12 million SEDA backed Loan Agreement with
Yorkville. The Convertible Loan bears interest on outstanding principal at 8%
per annum and interest is payable only in common shares based on a conversion
price equal to 92.5% of the average price of the common shares during the ten
trading days prior to the interest payment date. The amounts outstanding under
the Convertible Loan Agreement shall generally be satisfied through the issuance
of common shares to the lender, although upon default the Convertible Loan may
become due and payable in certain circumstances. As at December 31, 2013, the
principal amount of the Convertible Loan had not been converted, in whole or in
part.
Equity Adjustment Agreement
The Company entered into an Equity Adjustment Agreement (the "Adjustment
Agreement") on March 5, 2013 with Yorkville. Pursuant to the Adjustment
Agreement, during the three months ended March 31, 2013, the Company issued
3,846,154 common shares to Yorkville at a price of GBP 0.13 per share for
aggregate proceeds of GBP 500,000. The proceeds were subject to adjustment as
more particularly described under the heading "Share Price Risk".
Transactions with Related Parties
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
comparable to those negotiated with third parties.
In 2010, Singular Oil & Gas Sands, LLC ("Singular") agreed to participate in the
drilling of the Matthys McMillan Gas Unit #2 and the O B Ranch #1 wells located
in Wharton County, Texas. Under the terms of that agreement, Singular paid
14.01% of the drilling costs through completion to earn a 10.23% net revenue
interest on the Matthys McMillan Gas Unit #2 well and paid 12.5% of the drilling
costs to earn a 6.94% net revenue interest on the O B Ranch #1 well. This
participation was in the normal course of Caza's business and on the same terms
and conditions to those of other joint venture partners. Singular is a related
party as it is a company under common control with Zoneplan Limited, which is a
significant shareholder of Caza.
Summary of Quarterly Results
Three
Three months Three Three
months ended months months
ended September ended ended
December 31, 30, June 30, March 31,
2013 2013 2013 2013
----------------------------------------------------------------------------
Petroleum and natural
gas sales 3,381,486 2,583,753 1,067,991 1,279,297
Net income (loss) (2,851,860) (1,370,132) (3,039,336) (1,313,035)
Per share - basic and
diluted (0.01) (0.01) (0.02) (0.01)
Funds flow from
operations (See note)
(1) 276,913 (128,852) (1,277,772) (378,779)
Per share - basic and
diluted 0.00 (0.00) (0.00) (0.00)
Net capital expenditures 10,031,758 19,190,280 5,275,110 2,563,409
Average daily production
(boe/d) 503 397 223 230
Weighted average shares
outstanding 182,965,097 177,701,939 170,879,773 165,867,263
Three
Three months Three Three
months ended months months
ended September ended ended
December 31, 30, June 30, March 31,
2012 2012 2012 2012
----------------------------------------------------------------------------
Petroleum and natural
gas sales 1, 580,214 902,622 1,093,694 1,392,728
Net income (loss) (4,384,653) (2,203,998) (1,967,238) (3,692,110)
Per share - basic and
diluted (0.03) (0.01) (0.01) (0.02)
Funds flow from(used in)
operations (See note)
(1) 248,624 (926,578) (1,297,649) (348,016)
Per share - basic and
diluted 0.00 0.02 (0.01) (0.00)
Net capital expenditures 7,341,110 2,391,421 1,352,748 938,874
Average daily production
(boe/d) 312 239 276 311
Weighted average shares
outstanding 164,743,667 164,743,667 164,743,667 164,743,667
1. Calculated based on cash flow from operations before changes in non-cash
working capital.
Factors that have caused variations over the quarters:
-- Revenues have fluctuated as a result of changes in the Company's
production and in commodity prices;
-- Revenues and operating netback (Non-IFRS) have generally increased as a
result of the Company's increased oil production;
-- Net loss in 2012 increased as a result of asset write-downs;
-- Leasehold costs increased due to a growing prospect inventory in Texas
and south east New Mexico; and
-- Capital expenditures increased during the second half of 2013 as the
Company deployed capital made available under the Note Purchase
Agreement and other funding arrangements.
Financial Instruments
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity price,
credit, share price and foreign exchange risks. The Company manages its exposure
to these risks by operating in a manner that minimizes its exposure to the
extent practical.
Commodity Price Risk
The Company is subject to commodity price risk for the sale of natural gas and
other hydrocarbons. The Company has and may in the future enter into forward
commodity contracts for risk management purposes, in order to protect all or a
portion of its future cash flow from the volatility of hydrocarbon commodity
prices or to satisfy contractual obligations under loan or other agreements with
third parties. See "Gain (Loss) on Risk Management Contracts" for details
regarding the Company's existing forward commodity contracts.
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 balance sheet date. A majority of the Company's financial assets
at the balance sheet date arise from crude oil, natural gas liquids and natural
gas sales and the Company's accounts receivable that are with customers and
joint venture participants in the oil and 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, natural gas
liquids and crude oil 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, 2013, the Company sold
71% (December 31, 2012 - 59%) of its natural gas, natural gas liquids and crude
oil to a single purchaser. These sales were conducted on transaction terms that
are typical for the sale of natural gas, natural gas liquids and crude oil 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 by the
partner of the operation being conducted.
Caza management assesses quarterly if there should be any impairment of the
financial assets of the Company. At December 31, 2013, the Company had overdue
accounts receivable from certain joint interest partners of $156,426 which were
outstanding for greater than 60 days and $17,460 that were outstanding for
greater than 90 days. At December 31, 2013, the Company's two largest joint
venture partners represented approximately 18% and 4% of the Company's
receivable balance respectively (December 31, 2012 - 34% and 19% respectively).
The maximum exposure to credit risk is represented by the carrying amount on the
balance sheet of cash and cash equivalents and accounts receivable.
Share Price Risk
Share price risk arises under the terms of the Adjustment Agreement. As amended,
such agreement provides that, if on December 31, 2014 the common share market
price is greater than GBP 0.13, then Yorkville will pay to the Company the
difference multiplied by the number of common shares issued thereunder, and, if
the market price is less than GBP 0.13, then the Company will pay to Yorkville
the difference multiplied by such number of common shares.
The fair value of this derivative was calculated as at December 31, 2013 using
inputs as of that date, including the share price, the strike price and the
estimated volatility over the remaining term. The derivative liability is
classified as a financial instrument measured at fair value though profit or
loss. The fair value and unrealized loss of this derivative liability was
$330,768 as of December 31, 2013
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, 2013, the Company
considers this risk to be relatively limited and not material; therefore it does
not hedge its foreign exchange risk.
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 balance sheet due to their short-term nature. See
"Gain (Loss) on Risk Management Contracts" and "Share Price Risk" for details
regarding the fair value of the Company's existing forward commodity and equity
adjustment contracts, respectively
All financial assets except for cash and cash equivalents which are classified
as held for trading, are classified as either 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 balance
sheet that have been designated as available-for-sale. There have been no
changes to the aforementioned classifications in the current fiscal period ended
December 31, 2010.
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 financial assets at a value which is
less than what they are worth; or
-- The Company may be unable to settle or recover a financial asset 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, 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, 2013 that are subject 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 the Company's current working capital will be
adequate to support these financial liabilities.
Critical Accounting Estimates
The policies discussed below are considered particularly important as they
require management to make informed judgments, some of which may relate to
matters that are inherently uncertain. The financial statements have been
prepared in accordance with Canadian IFRS. In preparing financial statements,
management makes certain assumptions, judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses. The basis for
these estimates is historical experience and various other assumptions that
management believes to be reasonable. Actual results could differ from the
estimates under different assumptions or conditions.
Reserves - The Company engages independent qualified reserve evaluators to
evaluate its reserves each year. Reserve determinations involve forecasts based
on property performance, future prices, future production and the timing of
expenditures; all these are subject to uncertainty. Reserve estimates have a
significant impact on reported financial results as they are the basis for the
calculation of depreciation and depletion. Revisions can change reported
depletion and depreciation and earnings; downward revisions could result in a
ceiling test write down.
Decommissioning Liabilities - The Company provides for the estimated abandonment
costs using a fair value method based on cost estimates determined under current
legislative requirements and industry practice. The amount of the liability is
affected by the estimated cost per well, the timing of the expenditures and the
discount factor used. These estimates will change and the revisions will impact
future accretion, depletion and depreciation rates.
Income taxes - The utilization of future tax assets subject to an expiry date
are based on estimates of future cash flows and profitability. By their nature,
these estimates are subject to measurement uncertainty and the effect on the
financial statements of changes of estimates in future periods could be
significant.
Stock based Compensation - The Black-Scholes option pricing model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. This model is used to value the stock
options granted. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Changes in
the subjective input assumptions can materially affect the fair value estimates
as reflected in the consolidated financial statements
Recent Accounting Pronouncements
The Company has assessed new and revised accounting pronouncements that have
been issued that are not yet effective and determined that the following may
have a significant impact on the Company
Each of the additional new standards outlined below is effective for annual
periods beginning on or after January 1, 2013 (with the exception of IFRS 9,
which is effective for annual periods beginning on or after January 1, 2015).
The Company has not yet assessed the impact, if any, that the new amended
standards will have on its financial statements or whether to early adopt any of
the new requirements.
Effective January 1, 2013, Caza adopted IFRS 10 "Consolidated Financial
Statements", IFRS 11 "Joint Arrangements, IFRS 12 "Disclosure of Interests in
Other Entities", and the amendments to IAS 28 "Investments in Associates and
Joint Ventures."
There were no changes to the consolidated financial statements or the
consolidation process as a result of adoption of IFRS 10. IFRS 11 classifies
interests in joint arrangements as joint ventures or joint operations depending
on the rights and obligations of the parties in the arrangement. Caza performed
a review of interests in joint arrangements and concluded that shared wells
operate as joint operations and accordingly there is no change in the accounting
for these assets as a result of adoption of this standard. As a result, there
were no changes as a result of the adoption of IFRS 12 as well.
Furthermore Caza was also required to adopt IFRS 13 "Fair Value Measurements,"
amendments to IAS 1 "Presentation of Financial Statements," amendments to IFRS 7
"Financial Instruments: Disclosures." There were no material changes as a result
of the adoption of these standards.
The Company will also continue to monitor standards development as issued by the
IASB and the AcSB as well as regulatory developments as issued by the CSA, which
may affect the timing, nature or disclosure of its adoption of IFRS.
RISK FACTORS
Investors should carefully consider the risk factors set out below and consider
all other information contained herein and in the Company's other public filings
before making an investment decision. The risks and uncertainties set out below
and elsewhere in this Annual Information Form are not the only ones facing the
Corporation. Additional risks and uncertainties not presently known to the
Corporation or that the Corporation currently considers immaterial may also
impair the business and operations of the Corporation and Caza Petroleum or
cause the price of the Common Shares to decline. If any of the following risks
actually occur, the Corporation's business may be harmed and the financial
condition and results of operations may suffer significantly. In that event, the
trading price of the Common Shares could decline and holders of Common Shares
may lose all or part of their investment.
Stage of Development
An investment in the Corporation is subject to certain risks related to the
nature of the Corporation's business and its early stage of development. There
are numerous factors which may affect the success of the Corporation's business
which are beyond the Corporation's control including local, national and
international economic and political conditions. The Corporation's business
involves a high degree of risk which a combination of experience, knowledge and
careful evaluation may not overcome. The Corporation has no earnings and there
can be no assurance that the Corporation's business will be successful or
profitable or that additional commercial quantities of crude oil and natural gas
will be discovered by the Corporation. The Corporation has not paid any
dividends and it is unlikely to pay dividends in the immediate or foreseeable
future.
Substantial Capital Requirements
The Corporation anticipates making substantial capital expenditures for the
acquisition, exploration, development and production of oil and natural gas
reserves in the future. The Corporation's current revenues are not sufficient to
fund these activities and the Corporation may not have access to the capital
necessary to undertake or complete future drilling programs. In addition,
uncertain levels of near term industry activity coupled with the present global
financial uncertainty exposes the Corporation to additional access to capital
risk. There can be no assurance that debt or equity financing will be available
or sufficient to meet these requirements or for other corporate purposes or, if
debt or equity financing is available, that it will be on terms acceptable to
the Corporation. The inability of the Corporation to access sufficient capital
for its operations could have a material adverse effect on the Corporation's
business.
Availability of Funding
The Corporation's cash flow is and may not be sufficient to fund its ongoing
activities. The Corporation currently intends to rely on certain existing
sources of funding. Availability of these is dependent on the satisfaction of
certain conditions and there can be no assurance such sources will remain
available to the Corporation in the future. From time to time, the Corporation
may also require additional financing in order to carry out its oil and gas
acquisition, exploration and development activities. The lack of availability of
existing financing or the failure to obtain additional financing on a timely
basis could cause the Corporation to forfeit its interest in certain properties,
miss certain acquisition opportunities and reduce or terminate its operations,
and may affect the Corporation's ability to expend the capital required to
replace its reserves or to maintain its production. There can be no assurance
that additional debt or equity financing will be available to meet these
requirements or, if available, on terms acceptable to the Corporation. This may
be complicated by the limited market liquidity for the shares of smaller
companies, restricting access to some institutional investors. Continued
uncertainty in domestic and international credit markets could also materially
affect the Corporation's ability to access sufficient capital for its capital
expenditures and acquisitions. Furthermore, if additional financing is raised
through the issuance of equity, control of the Corporation may change and the
shareholders may suffer dilution. The Corporation may also consider asset
dispositions or farm-out or joint venture arrangements in order to fund or
implement its exploration and development activities; however, there can be no
assurance that the Corporation will be able to secure such dispositions or
arrangements on acceptable terms or at all. The inability of the Corporation to
access sufficient capital for its operations and/or to secure acceptable
alternative arrangements may have a material adverse effect on the Corporation's
ability to execute its business strategy and on its business, financial
condition, results of operations and prospects. If the Corporation is unable to
satisfy its obligations or otherwise commits an event of default under its
existing credit arrangements, the Corporation's lenders may receive a judgment
and have a claim on the Corporation's assets. The proceeds of any sale of assets
would be applied to satisfy amounts owed to the creditors. Only after the
proceeds of that sale were applied towards the debt would the remainder, if any,
be available for distribution to shareholders.
Global Financial Conditions and Recession
Market events and conditions, including disruptions in the international credit
markets and other financial systems and the deterioration of global economic
conditions, have caused significant volatility to commodity prices. These
conditions have caused a loss of confidence in the broader U.S. and global
credit and financial markets and resulting in government intervention in major
banks, financial institutions and insurers and creating a climate of greater
volatility, less liquidity, widening of credit spreads, a lack of price
transparency, increased credit losses and tighter credit conditions.
Notwithstanding various actions by governments, concerns about the general
condition of the capital markets, financial instruments, banks, investment
banks, insurers and other financial institutions caused the broader credit
markets to further deteriorate and stock markets to decline substantially.
Although economic conditions have improved, the recovery from the recession has
been slow in various jurisdictions including in Europe and the United States and
has been impacted by various ongoing factors including high sovereign debt
levels, concerns regarding defaults by certain governments, particularly in
Europe, and high levels of unemployment, which continue to impact commodity
prices and to result in high volatility in the stock market.
Competitive Conditions
The oil and natural gas industry is highly competitive and Caza and its
subsidiaries compete with a substantial number of other companies that have
greater resources. Many of these companies explore for, produce and market oil
and natural gas, carry on refining operations and market the resultant products
on a worldwide basis. The primary areas in which the Corporation and its
subsidiaries encounter substantial competition are in locating and acquiring
desirable leasehold acreage for drilling and development operations, locating
and acquiring attractive producing oil and natural gas properties, and obtaining
purchasers and transporters of the oil and natural gas they produce. Many of
these competitors have financial, technical and other resources substantially
greater than those of the Corporation. To the extent that these companies enjoy
technological advantages, they may be able to implement new technologies more
rapidly than Caza and its subsidiaries. There is also competition between
producers of oil and natural gas and other industries producing alternative
energy and fuel. The inability to acquire desirable properties, assets or
service providers as a result of competition may have a material adverse effect
on Caza's business, financial condition, results of operations and trading price
of the Common Shares.
Share Price Volatility
The share price of emerging companies can be highly volatile. The price at which
the Common Shares are traded and the price at which investors may realize their
Common Shares will be influenced by a large number of factors, some specific to
Caza and its operations and some which may affect companies trading on exchanges
generally. These factors may include the performance of the Corporation and its
subsidiaries, large purchases or sales of the Common Shares, legislative changes
and general economic, political or regulatory conditions. Prospective investors
should be aware that the value of an investment in the Corporation may go down
as well as up and that the market price of the Common Shares may not reflect the
underlying value of Caza. Investors may therefore realize less than, or lose all
of, their investment.
Crude Oil and Natural Gas Exploration and Development
Crude oil and natural gas exploration involves a high degree of risk and there
is no assurance that expenditures made on future exploration or development
activities by the Corporation and its subsidiaries will result in discoveries of
crude oil, condensate or natural gas that are commercially or economically
feasible to produce and sell. It is difficult to project the costs of
implementing any exploratory drilling program due to the inherent uncertainties
of drilling in unknown formations, the shortages of and delays in the
availability of drilling rigs and equipment, the costs associated with
encountering various drilling conditions such as over pressured zones and tools
lost in the hole, and changes in drilling plans and locations as a result of
prior exploratory wells or additional seismic data and interpretations thereof.
The Corporation's operations are subject to all the risks normally associated
with the exploration, development and operation of crude oil and natural gas
properties and the drilling of crude oil and natural gas wells, including
encountering unexpected formations or pressures, mechanical failures, premature
declines of reservoirs, environmental damage, blow outs, cratering, fires and
spills, all of which could result in personal injuries, loss of life and damage
to property of the Corporation and others. In accordance with customary industry
practice the Corporation and its subsidiaries do maintain insurance coverage,
but are not fully insured against all risks, nor are all such risks insurable.
Environmental regulation is becoming increasingly stringent and costs and
expenses of regulatory compliance are increasing.
Exploration, appraisal and development of crude oil and natural gas reserves is
speculative and involves a significant degree of risk. Few properties that are
explored are ultimately developed into new reserves. If at any stage the
Corporation and its subsidiaries are precluded from pursuing their exploration
or development program, or such program is otherwise not continued, the
Corporation's business, financial condition and/or results of operations and,
accordingly, the trading price of the Common Shares is likely to be materially
adversely affected.
Reserves and Future Net Revenue Estimates
There are numerous uncertainties inherent in estimating quantities of proved,
probable and possible reserves and cash flows to be derived from reserves,
including many factors beyond the control of the Corporation. The reserves and
cash flow information set forth in this Annual Information Form represent
estimates only. The reserves and estimated future net cash flows from Caza
Petroleum's properties have been independently evaluated by NSAI in the NSAI
Report with an effective date of December 31, 2013. The Corporation owns 87.35%
of Caza Petroleum with the balance held by the Management Team. This evaluation
includes a number of assumptions relating to factors such as initial production
rates, production decline rates, ultimate recovery of reserves, timing and
amount of capital expenditures, marketability of production, future prices of
crude oil and natural gas, operating costs, abandonment and salvage values,
royalties, government levies that may be imposed over the producing life of the
reserves and reserves which are currently undiscovered but may be discovered at
a future date. These assumptions were based on price forecasts in use at the
date the relevant evaluations were prepared and many of these assumptions are
subject to change and are beyond the control of the Corporation. Actual
production and cash flows derived there from will vary from these evaluations,
and such variations could be material. Due to the limited history of Caza
Petroleum's producing wells, a significant portion of its reserves have not been
estimated on a decline curve analysis of production, but rather on a volumetric
basis which assumes certain characteristics of the reservoir.
The present value of estimated future net revenues referred to herein should not
be construed as the current market value of estimated crude oil and natural gas
reserves attributable to Caza Petroleum's properties. The estimated discounted
future net revenues from reserves are based upon price and cost estimates which
may vary from actual prices and costs and such variance could be material.
Actual future net revenues will also be affected by factors such as the amount
and timing of actual production, supply and demand for crude oil and natural
gas, curtailments or increases in consumption by purchasers and changes in
governmental regulations or taxation.
Title to Properties
At the Corporation's development stage, its primary emphasis presently is upon
acquiring oil and gas leasehold interests in its prospects and properties for
purposes of assembling drilling prospects and drilling wells. Those leasehold
interests may be acquired by various means, including direct acquisition from
the owner of the mineral estate, farmout and farmin agreements with current
holders of leasehold interests, participation and exploration agreements by
which Caza or its subsidiaries join with other industry participants to share
the costs of acquisition, exploration, and/or development costs, and other forms
of agreement. In the case of farmout, farmin, participation and exploration
agreements, a party may assume certain obligations to pay certain monies,
acquire leases, drill wells, and/or share in other costs in order to acquire an
interest in a given prospect or well. Pursuant to such agreements, one party may
pay or otherwise bear the costs of another party as consideration for earning an
interest, which is known as a "carry", or a "carried interest". In essence, the
party bearing the costs in such an arrangement has a contractual right to earn
an interest in the leases, equipment, and production associated with a given
property. Once such leasehold interests are initially earned, depending upon the
agreement, a party may relinquish or otherwise forfeit interests or the
opportunity to earn additional interests in the future if the earning party
fails to continue to bear its share of ongoing or future obligations associated
with drilling, maintenance, and development operations.
Caza Petroleum and other subsidiaries of the Corporation have entered such types
of agreements with respect to many of their principal prospects and properties,
but not all. As to certain prospects and properties, these subsidiaries have
entered multiple such agreements which may create complex earning scenarios. As
a result, the subsidiaries must perform, or continue to perform, certain
obligations in order to earn, or to retain, interests and/or the right to earn
interests in the future. As to a number of properties and prospects, leasehold
interests must be earned through the drilling and funding of oil and gas wells
upon the respective lands. In addition, often parties to such agreements must
make participation elections, which potentially may result in their forfeiture
of interests, or alternatively, their right to acquire additional interests
resulting from forfeitures by other parties. Such elections may occur more than
once during the process of drilling a well. The Corporation's subsidiaries
future performance under such agreements, coupled with the performance and
elections by other parties, can cause these interests to increase or decrease
over the time period during which such performance and elections must occur.
At the exploration stage, it is a common practice in the oil and gas industry to
employ the services of landmen to review the recorded public records on file to
determine the current record title interest owners to the mineral estate beneath
a specific tract of land. Since the mineral and surface estates can be severed
from one another, it is not uncommon for oil and gas companies to focus on the
mineral estate, for mineral leasing purposes, rather than the surface estate. In
a competitive situation, this procedure is also utilized because the time
periods necessary to order more thorough abstracts of title and to identify the
record title ownership for mineral estates in various tracts of land could place
the company at a competitive disadvantage.
Such preliminary title reviews are useful in the determination of apparent title
to the subject lands but are subject to error and subject to other matters of
record that may burden, diminish or defeat a company's interests in the acquired
lands. Caza Petroleum generally employs reputable landmen who are experienced in
title searches in the areas in which Caza Petroleum seeks to acquire interests,
and the work product of those landmen are ordinarily believed to be accurate for
the lands identified and pursued.
Prior to drilling a well, and after leases are secured based upon the
preliminary title investigation, a more complete title review may be
commissioned, or an abstract of title may be acquired, for purposes of preparing
a formal drilling title opinion. Certified abstracts include copies of documents
that affect ownership under a given tract of land. Such documents may include
evidence of liens and encumbrances, defects in title, boundary conflicts, legal
proceedings, competing claims to title, prior leases, regulatory restrictions,
and similar factors. The drilling title opinion, if any, is prepared by a title
attorney, and examines and discusses certain title elements, identifies certain
title issues, and may recommend certain steps to pursue in resolving any such
issues prior to drilling an oil or gas well. Title opinions, if any, may be
prepared prior to the actual drilling of a well. They may, however, be
commissioned prior to the purchase of leases where the size of the tract, the
amount of lease bonus at risk, or known complexities in title warrant a detailed
investigation before acquiring leases.
Caza and its subsidiaries frequently rely upon landmen to perform title reviews
for purposes of acquiring leasehold interests. The Corporation's subsidiaries
also review the preliminary title reviews, or title opinions if available, of
companies from which it acquires interests or with which it enters agreements to
earn such interests. In some cases, a title attorney may be employed to review
the ownership of the mineral estate prior to acquiring leases from the owner of
the mineral estate, and that review may or may not, depending upon the
circumstances, address other estates in the lands (e.g., the surface ownership)
and the elements stated above.
Thus, although title reviews have been and may continue to be performed
according to standard industry practice prior to the acquisition of most crude
oil and natural gas leases or rights to acquire leases in prospects and
properties or the commencement of drilling wells, such reviews do not guarantee
or preclude that an unidentified or latent defect in the chain of title will not
exist, or that a third party claim will not arise that burdens, diminishes or
defeats the claim of the Corporation or its subsidiaries which could result in a
reduction of the revenue received by the Corporation or its subsidiaries and
could have a material adverse effect on the Corporation's business, financial
condition, results of operations and trading price, if any, of the Common
Shares. In addition, the Corporation's subsidiaries may elect to accept certain
risks in connection with title to its oil and gas prospects and properties, and
acceptance of such risks can result in loss of title to all or a portion of one
or more given properties, title curative costs, re-acquisition costs, and/or a
reduction in the revenue received by the Corporation or its subsidiaries and
could have a material adverse effect on the Corporation's business, financial
condition, results of operations, and trading price of the Common Shares.
Volatility of Crude Oil and Natural Gas Prices and Markets
The Corporation's financial condition, operating results and future growth are
dependent on the prevailing prices for crude oil and natural gas production.
Historically, the markets for crude oil and natural gas have been volatile and
such markets are likely to continue to be volatile in the future. Prices for
crude oil and natural gas are subject to large fluctuations in response to
relatively minor changes to the demand for crude oil and natural gas, whether
the result of uncertainty or a variety of additional factors beyond the control
of the Corporation. The Corporation and its subsidiaries must periodically
negotiate contracts with a limited number of potential purchasers. The price
negotiated is influenced by the size of the crude oil or natural gas stream, the
nature of the crude oil or natural gas and its location when produced. Any
substantial decline in the prices of crude oil and natural gas could have a
material adverse effect on the Corporation and the level of its crude oil and
natural gas reserves. Additionally, the economics of producing from some wells
may change as a result of lower prices, which could result in a suspension of
production. No assurance can be given that crude oil and natural gas prices will
be sustained at levels which will enable the Corporation or its subsidiaries to
operate profitably. The Corporation and its subsidiaries avail themselves of
forward sales or other forms of hedging activities from time to time in
accordance with the Note Purchase Agreement with a view to mitigating its
exposure to the risk of price volatility. Such agreements may result in sales of
crude oil and natural gas which are greater or less than the prevailing spot
prices for such products, which will result in realized or unrealized gains or
losses for the Corporation. Further details regarding these swap arrangements
are set forth in Note 12 of Caza's audited annual financial statements for the
year ending December 31, 2013.
Environmental Regulation and Risks
Extensive federal, state and local environmental laws and regulations in the
United States affect all of the operations of the Corporation and its
subsidiaries. These laws and regulations set various standards regulating
certain aspects of health and environmental quality, provide for penalties and
other liabilities for the violation of such standards, and establish in certain
circumstances obligations to remediate current and former facilities and
locations where operations are or were conducted. In addition, special
provisions may be appropriate or required in environmentally sensitive areas of
operation. There can be no assurance that the Corporation or its subsidiaries
will not incur substantial financial obligations in connection with
environmental compliance.
Significant liability could be imposed on the Corporation or its subsidiaries
for damages, clean-up costs or penalties in the event of certain discharges into
the environment, environmental damage caused by previous owners of properties
purchased by the Corporation's subsidiaries or non-compliance with environmental
laws or regulations. Such liability could have a material adverse effect on the
Corporation. Moreover, the Corporation cannot predict what environmental
legislation or regulations will be enacted in the future or how existing or
future laws or regulations will be administered or enforced. Compliance with
more stringent laws or regulations, or more vigorous enforcement policies of any
regulatory authority, could in the future require material expenditures by the
Corporation or its subsidiaries for the installation and operation of systems
and equipment for remedial measures, any or all of which may have a material
adverse effect on the Corporation and could have a material adverse effect on
the Corporation's business, financial condition, results of operations and
trading price of the Common Shares.
Loss of Key Personnel
The Corporation depends to a large extent on the efforts and continued
employment of the Management Team, who have developed the operations of Caza
Petroleum and its predecessors since inception. The loss of the services of
these officers or other key personnel could adversely affect the Corporation's
business, and the Corporation does not maintain key man insurance on any of
these persons. The success of drilling operations and other activities integral
to its business will depend in part on the ability to attract and retain
experienced geologists, engineers and other professionals. Competition for
experienced geologists, engineers and some other professionals is extremely
intense. The Corporation's ability to compete in the oil and natural gas
exploration and production industry will be harmed to the extent that the
Corporation and its subsidiaries are unable to retain and attract experienced
technical personal.
Operating and Insurance Risks
The operations of the Corporation and its subsidiaries are subject to hazards
and risks inherent in drilling for, producing and transporting crude oil and
natural gas. These risks include, among others, fires, explosions, geologic
formations with abnormal pressures, collapses of casing surrounding the drill
pipe in wells, mechanical failures, failure of oilfield drilling and service
tools, uncontrollable flows of underground natural gas, oil and formation water,
changes in below ground pressure in a formation that causes the surface to
collapse or crater, pipeline ruptures and cement failures, and environmental
hazards such as leaks, spills and toxic discharges. These risks can cause
substantial losses resulting from personal injury or loss of life, damage and
destruction of property and equipment, pollution and other environmental damage,
regulatory investigations and penalties, and suspension of operations. As
protection against operating hazards and in accordance with customary industry
practices, the Corporation and its subsidiaries maintain insurance coverage
against some, but not all, potential losses because the insurance coverage is
not available or because premium costs are considered too high. Losses could
occur for uninsured risks or in amounts exceeding the insurance coverage and
these losses could have a materially adverse effect on the Corporation's
business, financial condition, results of operations and trading price of the
Common Shares.
Need to Add Reserves
The Corporation's crude oil and natural gas reserves and production, and
therefore its cash flows and earnings are highly dependent upon the Corporation
developing and increasing its current reserve base and discovering or acquiring
additional reserves. Without the addition of reserves through exploration,
acquisition or development activities, the Corporation's reserves and production
will decline over time as reserves are depleted. To the extent that cash flow
from operations is insufficient and external sources of capital become limited
or unavailable, the Corporation and its subsidiaries may be unable to make the
capital investments required to maintain and expand their crude oil and natural
gas reserves. There can be no assurance that the Corporation or its subsidiaries
will be able to find and develop or acquire additional reserves to replace
production at commercially feasible costs. Failure to replace reserves could
have a material adverse effect on Caza's business, financial condition, results
of operations and trading price of the Common Shares.
Industry Conditions
The crude oil and natural gas industry is intensely competitive and the
Corporation and its subsidiaries compete with other companies which possess
greater technical and financial resources. Many of these competitors not only
explore for and produce crude oil and natural gas, but also carry on refining
operations and market petroleum and other products on an international basis.
Crude oil and natural gas production operations are also subject to all the
risks typically associated with such operations, including but not limited to
premature decline of reservoirs and invasion of water into producing formations.
The marketability and price of crude oil and natural gas which may be acquired
or discovered by the Corporation or its subsidiaries will be affected by
numerous factors beyond the control of the Corporation. Pricing of crude oil is
dependent on supply and demand for specific qualities of crude oil in specific
market areas and quality differentials are therefore subject to change with
time. The ability of the Corporation and its subsidiaries to market any natural
gas discovered may depend upon its ability to acquire space on pipelines which
deliver natural gas to commercial markets. The Corporation is also subject to
market fluctuations in the prices of crude oil and natural gas, uncertainties
related to the delivery of its reserves to pipelines and processing facilities
and extensive government regulation relating to prices, taxes, royalties, land
tenure, allowable production, the export of crude oil and natural gas and many
other aspects of the crude oil and natural gas business.
The Corporation and its subsidiaries are also subject to a variety of waste
disposal, pollution control and similar environmental laws and regulations in
each of the jurisdictions in which the Corporation or its subsidiaries operate
or may operate. Environmental regulations place restrictions and prohibitions on
emissions of various substances produced concurrently with crude oil and natural
gas and can impact the selection of drilling sites and facility locations,
potentially resulting in increased capital expenditures. The Corporation and its
subsidiaries may be responsible for abandonment and site restoration costs.
Non-Operator Activities
The Corporation's subsidiaries do not operate all of the properties in which
they have an interest. Some properties are operated by other companies, and the
Corporation and its subsidiaries have limited ability to influence or control
the operation or future development of these non-operated properties or the
amount of capital expenditures that may be required to fund their operation.
Dependence on the operator and other working interest owners for these projects
and the limited ability to influence or control the operation and future
development of these properties could have a material adverse effect on the
realization of targeted returns or lead to unexpected future costs.
Inability to Bring Actions or Enforce Judgments by United Kingdom Investors
The Corporation is incorporated under the laws of Canada, and its principal
executive offices are located in the United States. A majority of the directors
and officers of the Corporation reside principally in the United States and all
or a substantial portion of the Corporation's assets and the assets of these
persons are located outside the United Kingdom. Consequently, it may not be
possible for an investor to effect service of process within the United Kingdom
on the Corporation or those persons. Furthermore, it may not be possible for an
investor to enforce judgments obtained in United Kingdom courts based upon the
civil liability provisions of United Kingdom securities laws or other laws of
the United Kingdom against the Corporation or those persons. There is doubt as
to the enforceability in original actions in Canadian courts of liabilities
deriving from English's securities laws, and as to the enforceability in
Canadian courts of judgments of English courts obtained in actions based upon
the civil liability provisions of English securities laws.
Equipment Unavailability
Caza Petroleum does not own the drilling rigs and related equipment required to
develop its oil and gas properties and relies on third parties to provide
drilling and other oil field services. Demand is high for equipment and services
in the geographic areas that Caza Petroleum has selected for exploration and
development. This demand may reduce the availability of that equipment and
services and could delay Caza Petroleum's exploration, development and
exploitation activities. The leases under which Caza Petroleum develops
properties provide time periods during which it must generate production of oil
or gas or the lease expires. Any delay that prevented completion of drilling on
leased property during the term of the lease would require additional
expenditures by Caza Petroleum to renew the lease or possibly the loss of any
benefit from past development expenditures and future production revenue. In
addition, the high demand for equipment and services increases the costs to Caza
Petroleum of the equipment and associated supplies and personnel. Any
substantial delays to gain access to equipment and services or material
increases in costs could adversely affect Caza Petroleum's business and
financial condition and have a material adverse effect on Caza's business,
financial condition, results of operations and trading price of the Common
Shares.
Potential Conflicts of Interest
There are potential conflicts of interest to which some of the directors and
officers of the Corporation are subject in connection with the operations of the
Corporation. Some of the directors and officers are material shareholders of
Caza Petroleum or are engaged and will continue to be engaged in the search for
crude oil and natural gas interests on their own behalf and on behalf of other
corporations, and situations may arise where the directors and officers will be
in direct competition with the Corporation. Conflicts of interest, if any, which
arise will be subject to and be governed by procedures prescribed by the BCBCA
which require a director or officer of a corporation who is a party to or is a
director or an officer of or has a material interest in any person who is a
party to a material contract or proposed material contract with the Corporation,
to disclose his interest and to refrain from voting on any matter in respect of
such contract unless otherwise permitted under the BCBCA.
Operating Through Subsidiaries
The Corporation currently conducts all of its operations through its subsidiary,
Caza Petroleum. Therefore the Corporation will be dependent on the cash flows of
Caza Petroleum and its subsidiaries to meet its obligations. The ability of Caza
Petroleum and its subsidiaries to make payments to the Corporation may be
constrained by among other things: the level of taxation, particularly corporate
profits and withholding taxes, in the jurisdiction in which it operates.
In addition, the Corporation and Caza Petroleum may be considered to be "related
parties" for the purposes of Multilateral Instrument 61-101 of the Canadian
Securities Administrators and Caza or Caza Petroleum may therefore be required
to obtain a formal valuation or disinterested shareholder approval before
completing certain transactions with the other party.
Risks of Foreign Operations
All of the Corporation's crude oil and natural gas properties and operations are
located in the United States. As such, the Corporation is subject to political,
economic, and other uncertainties, including, but not limited to, changes in
energy policies, currency fluctuations and royalty and tax increases and other
risks arising out of foreign governmental sovereignty over the areas in which
the Corporation's operations are conducted, as well as risks of loss due to
terrorism. The Corporation's operations may also be adversely affected by laws
and policies of Canada affecting foreign trade, taxation and investment. In the
event of a dispute arising in connection with the Corporation's operations in
the United States, the Corporation may be subject to the exclusive jurisdiction
of foreign courts or may not be successful in subjecting foreign persons to the
jurisdictions of the courts of Canada or enforcing Canadian judgments in such
other jurisdictions. Accordingly, the Corporation's exploration, development and
production activities in the United States could be substantially affected by
factors beyond the Corporation's control, any of which could have a material
adverse effect on the Corporation's business, financial condition, results of
operations and trading price of the Common Shares.
Fluctuations in Foreign Currency Exchange Rates
All of the Corporation's operations are located in the United States and all of
the Corporation's sales are denominated in U.S. dollars. The SEDA and certain
conversion formulae under the Convertible Loan Agreement are denominated in
pounds sterling. Fluctuations in the U.S. dollar or pound sterling exchange
rates may cause a negative impact on revenue and costs or on the Corporation's
ability to raise capital and could have a material adverse impact on the
Corporation's operations.
Marketability of Production
The ability to generate revenue is dependent upon Caza Petroleum's ability to
market its production. The marketability of such production depends in part upon
a variety of factors, some of which are beyond Caza Petroleum's control. Some of
these factors include the ability to:
-- transport its crude oil and natural gas to market;
-- access processing facilities and refining capacity; and
-- obtain required regulatory approvals.
Caza Petroleum delivers oil and natural gas through pipelines and gathering
systems and on barges that it does not own. These facilities may not be
available to Caza Petroleum in the future. Other factors influencing the
marketability of production include the nature of the crude oil produced, the
availability and capacity of production gathering systems and pipelines, U.S.
federal and state control and regulation of crude oil and natural gas
production, transportation, and export and government intervention in the
internal energy demand and supply balance. If marketability factors change, the
impact on Caza Petroleum's ability to generate revenues and operate profitably
could be substantial.
Seasonal Nature of the Business
Seasonal weather conditions and lease stipulations can limit drilling and
producing activities and other oil and natural gas operations in certain areas
of the Texas Gulf Coast region. These seasonal anomalies can increase
competition for equipment, supplies and personnel during the spring and summer
months, which could lead to shortages and increase costs or delay operations.
Such cost increases or delays could have a material adverse effect on Caza's
business, financial condition, results of operations and trading price of the
Common Shares.
Terrorism
On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope, and the United States and others instituted military action
in response. These conditions caused instability in world financial markets and
generated global economic instability. The continued threat of terrorism, the
impact of military and other action, including U.S. military operations in Iraq
and Afghanistan and the geopolitical conditions in the Middle East generally may
lead to continued volatility in prices for crude oil and natural gas and could
affect the markets for Caza Petroleum's production. In addition, future acts of
terrorism could be directed against companies operating in the United States.
Further, the U.S. government has issued public warnings that indicate that
energy assets might be specific targets of terrorist organizations. These
developments have subjected Caza Petroleum's operations to increased risks and,
depending on their ultimate magnitude, could have a material adverse effect on
Caza's business, financial condition, results of operations and trading price of
the Common Shares.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer are responsible for
establishing and maintaining internal control over financial reporting (ICFR),
as such term is defined in National Instrument 52-109 Certification of
Disclosure in Issuers' Annual and Interim Filings, for Caza. They have, as at
the financial year ended December 31, 2013, designed ICFR, or caused it to be
designed under their supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with IFRS. The control framework our
officers used to design Caza's ICFR is the Internal Control -- Integrated
Framework (COSO Framework) published by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Under the supervision of the Chief Executive Officer and the Chief Financial
Officer, Caza conducted an evaluation of the effectiveness of our ICFR as at
December 31, 2013 based on the COSO Framework. Based on this evaluation, the
officers concluded that Caza's ICFR was effective as of December 31, 2013.
There were no changes in our ICFR during the year ended December 31, 2013 that
materially affected, or are reasonably likely to materially affect, Caza's
internal control over financial reporting.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Caza's Chief Executive Officer and Chief Financial Officer have designed, or
caused to be designed under their supervision, disclosure controls and
procedures to provide reasonable assurance that: (i) material information
relating to the Company is made known to Caza's Chief Executive Officer and
Chief Financial Officer by others, particularly during the period in which the
annual filings are being prepared; and (ii) information required to be disclosed
by the Company in its annual filings, interim filings or other reports filed or
submitted by it under securities legislation is recorded, processed, summarized
and reported within the time period specified in securities legislation. Such
officers have evaluated, or caused to be evaluated under their supervision, the
effectiveness of Caza's disclosure controls and procedures at the financial year
end of the Company and have concluded that the Company's disclosure controls and
procedures are effective at the financial year end of the Company.
ADDITIONAL INFORMATION
Further information regarding the Company, including its Annual Information
Form, can be accessed under the Company's public filings found at
http://www.sedar.com and on the Company's website at www.cazapetro.com.
FOR FURTHER INFORMATION PLEASE CONTACT:
Caza Oil & Gas, Inc.
Michael Ford
CEO
+1 432 682 7424
Caza Oil & Gas, Inc.
John McGoldrick
Chairman
+65 9731 7471 (Singapore)
www.cazapetro.com
Cenkos Securities plc
Beth McKiernan
+44 131 220 9778 (Edinburgh)
Cenkos Securities plc
Neil McDonald
+44 131 220 6939 (Edinburgh)
VIGO Communications
Chris McMahon
Patrick d'Ancona
+44 20 7920 2330
1 Year Pacific Paradym Energy Inc. Chart |
1 Month Pacific Paradym Energy Inc. Chart |
It looks like you are not logged in. Click the button below to log in and keep track of your recent history.
Support: +44 (0) 203 8794 460 | support@advfn.com
By accessing the services available at ADVFN you are agreeing to be bound by ADVFN's Terms & Conditions
