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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| TSXV:PPE | TSX Venture | Common Stock |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
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Caza Oil & Gas, Inc. ("Caza" or the "Company") (TSX:CAZ)(AIM:CAZA), the U.S.
focused exploration, appraisal, development and production company, is pleased
to provide its unaudited financial and operational results for the six months
ended June 30, 2011.
Second Quarter Financial Highlights
-- Caza's production increased 32% to 18,130 Boe for the three-month period
ended June 30, 2011, from 13,712 Boe for the comparative period in 2010.
This represents an average daily production rate increase of 48 Boe/d
for the three month period ended June 30, 2011, 199 Boe/d as compared to
151 Boe/d for the comparative period. As anticipated, Q2 2011 production
was slightly lower than Q1 2011 (which was 23,974 Boe) due to standard
production curve declines in certain wells. Recently drilled wells that
are in various stages of completion are expected to more than make up
for the decline (see "Second Quarter Operational Highlights" below).
-- Caza had a cash balance of $24,533,451 as of June 30, 2011, as compared
to $9,375,345 at June 30, 2010 and $33,885,900 at December 31, 2010. The
increase is attributable to the placing announced on Nov 15 2010. Caza's
working capital balance at June 30, 2011, was $20,870,708 as compared to
$26,612,514 at March 31, 2011. The decrease in Caza's working capital
balance primarily represents the investments made to drill the O.B.
Ranch #2 development well in Wharton County, Texas, the Caza Elkins 3401
& 3402 wells in Midland County, Texas, and the Caza 158 #3 in Upton
County, Texas.
-- Revenues from oil and gas sales increased 112% to $843,836 for the
three-month period ended June 30, 2011, up from $398,883 for the
comparative period in 2010. The increase in revenues was primarily due
to the additional wells brought on since the comparative period. The
average combined price received by Caza increased 60% to $46.54 per Boe
during the three-month period ended June 30, 2011, from $29.09 per Boe
during the comparative period in 2010.
-- General and Administrative expenses were $1,435,156 ($1,403,088 net of
reimbursements) for the three-month period ended June 30, 2011, as
compared to $1,188,962 ($1,078,739 net of reimbursements) for the
comparative period in 2010. The change in General and Administrative
costs are a result of additional costs incurred and changes in reporting
requirements as a result of converting to the International Financial
Reporting Standards. During the three month period ended June 30, 2010,
the Company received reimbursements that resulted from certain joint
venture agreements that provided reductions in overhead costs that
expired April 8, 2010.
Second Quarter Operational Highlights
-- Drilling commenced on the O.B. Ranch #2 development well in Wharton
County, Texas in May 2011. The well reached its target depth of 13,210
feet in June 2011, and electric logs were obtained through the target
depth indicating potential pay in the Frio and targeted Cook Mountain
formations. The well was fracture stimulated at the end of July 2011,
and is currently being flowed back in order to clean up the fracture
fluids. The well has been placed on an extended well test, and the
market will be updated once stabilized flow rates have been achieved.
-- The Caza Elkins 3401 well in Midland County, Texas, reached a total
depth of 11,854 feet in June 2011. The rig was immediately moved to the
Caza Elkins 3402 location, which reached a total depth of 11,852 feet in
July 2011. Log data from both wells indicated multiple potential pay
sands for both oil and gas in the Spraberry, Wolfcamp, Strawn, Atoka and
Mississippian/Devonian formations. The fracture stimulation program for
the Caza Elkins 3401 well began on July 28, 2011. The fracture
stimulation program for the Caza Elkins 3402 well began earlier than
anticipated on August 12, 2011. Both wells are currently being flowed
back in order to clean up the fracture fluids. Caza will update the
market once initial flow rates have been established for each well.
-- The Caza 158 #3 well on the Windham property reached its target depth of
9,824 feet in June 2011, and Caza elected to participate in the
operator's proposal to complete the well. The well has been fracture
stimulated across all potentially productive intervals seen on the logs,
which include the Spraberry/Wolfcamp, Penn and Strawn formations. The
Caza 158 #3 was the fourth well drilled and completed on this property.
The Caza 158 #1, 158 #2 and 162 #1 wells are currently at various stages
in their respective fracture stimulation programs, but are all producing
oil and natural gas.
W. Michael Ford, Chief Executive Officer commented:
"I am very pleased with the progress that we have made in 2011, both
operationally and from a financial perspective. In the three months to June 30,
2011, Caza has continued to progress a busy work program, which should add
further production, reserves and cash flow to the solid platform that we have
created through our endeavours to date.
"Revenues have materially risen due to increased oil and gas production levels
and a supportive price environment. As we add production through our exploration
and development campaign, the Company and the shareholders should continue to
benefit.
"I look forward to updating the market on future exploration activities and
established flow rates associated with wells that are currently in various
stages of completion operations."
Copies of the Company's unaudited financial statements for the second quarter
ended June 30, 2011, and the accompanying management's discussion and analysis
are available on SEDAR at www.sedar.com and the Company's website at
www.cazapetro.com.
About Caza
Caza is engaged in the acquisition, exploration, development and production of
hydrocarbons in the Texas Gulf Coast (on-shore), south Louisiana, southeast New
Mexico and the Permian Basin of West Texas regions of the United States of
America through its subsidiary, Caza Petroleum, Inc.
In accordance with AIM Rules - Guidance Note for Mining, Oil and Gas Companies,
the information contained in this announcement has been reviewed and approved by
Anthony B. Sam, Vice President Operations of Caza who is a Petroleum Engineer
and a member of The Society of Petroleum Engineers.
ADVISORY STATEMENT
Information in this news release that is not current or historical factual
information may constitute forward-looking information within the meaning of
securities laws. Such information is often, but not always, identified by the
use of words such as "seek", "anticipate", "plan", "schedule", "continue",
"estimate", "expect", "may", "will", "project", "predict", "potential",
"intend", "could", "might", "should", "believe", "develop", "test",
"anticipation" and similar expressions. In particular, information regarding the
depth, timing and location of future drilling, intended production testing and
the Company's future working interests and net revenue interests in properties
contained in this news release constitutes forward-looking information within
the meaning of securities laws.
Implicit in this information, are assumptions regarding the success and timing
of drilling operations, rig availability, projected revenue and expenses and
well performance. These assumptions, although considered reasonable by the
Company at the time of preparation, may prove to be incorrect. Readers are
cautioned that actual future operations, operating results and economic
performance of the Company are subject to a number of risks and uncertainties,
including general economic, market and business conditions and could differ
materially from what is currently expected as set out above. In addition, the
geotechnical analysis and engineering to be conducted in respect of the various
wells is not complete. Future flow rates from wells may vary, perhaps
materially, and wells may prove to be technically or economically unviable. Any
future flow rates will be subject to the risks and uncertainties set out herein.
For more exhaustive information on these risks and uncertainties you should
refer to the Company's most recently filed annual information form which is
available at www.sedar.com and the Company's website at www.cazapetro.com. You
should not place undue importance on forward-looking information and should not
rely upon this information as of any other date. While we may elect to, we are
under no obligation and do not undertake to update this information at any
particular time except as may be required by securities laws.
Boe may be misleading, particularly if used in isolation. A Boe conversion ratio
of 6 Mcf : 1 bbl 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.
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Financial Position
(Unaudited)
June 30, December 31, January 1,
(In United States dollars) 2011 2010 2010
---------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 24,533,451 $ 33,885,900 $ 9,268,547
Accounts receivable 3,497,242 2,554,913 3,973,085
Prepaid and other 187,138 291,517 278,914
----------------------------------------
28,217,831 36,732,330 13,520,546
Exploration and evaluation assets
(Note 3) 8,982,431 7,371,582 11,662,047
Petroleum and natural gas
properties and equipment (Note 4) 31,049,750 29,379,862 24,548,233
----------------------------------------
$ 68,250,012 $ 73,483,774 $ 49,730,826
----------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 7,347,123 $ 7,362,243 $ 5,144,083
Decommissioning liabilities (Note
5) 797,842 807,754 706,541
----------------------------------------
8,144,965 8,169,997 5,850,624
Shareholders' Equity
Share capital (Note 6(b)) 75,016,655 75,013,680 50,293,526
Contributed surplus (Note 6(d)) 9,403,947 9,363,598 5,175,086
Deficit (as restated, Note 11) (27,222,889) (22,700,262) (12,506,981)
----------------------------------------
Equity attributable to owners of
the Company 57,197,713 61,677,016 42,961,631
Non-controlling interests (as
restated, Note 11) 2,907,334 3,636,761 918,571
----------------------------------------
Total equity 60,105,047 65,313,777 43,880,202
----------------------------------------
$ 68,250,012 $ 73,483,774 $ 49,730,826
----------------------------------------
See accompanying notes to the interim condensed consolidated financial
statements
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Comprehensive Loss
(Unaudited)
Three months ended Six months ended
June 30, June 30,
(In United States
dollars) 2011 2010 2011 2010
----------------------------------------------------------------------------
Revenue and other
Petroleum and
natural gas $ 843,836 $ 398,883 $ 1,887,779 $ 1,095,548
Gain on sale of
assets - 728,239 - 728,239
Interest income 4,346 137 13,038 300
-------------------------------------------------------
848,182 1,127,259 1,900,817 1,824,087
-------------------------------------------------------
Expenses
Production 185,439 164,395 351,735 409,100
General and
administrative 1,403,088 1,078,739 2,495,999 1,220,802
Depletion,
depreciation and
amortization 580,141 517,450 1,399,254 1,193,428
Financing costs -
unwinding of the
discount 6,597 6,322 13,194 12,643
Other expense
(income) (42,006) - (96,193) -
Development and
production
impairment - - 73,183 -
Exploration and
evaluation
impairment 292,074 - 2,915,699 3,698,514
-------------------------------------------------------
2,425,333 1,766,906 7,152,871 6,534,487
-------------------------------------------------------
Net loss (1,577,151) (639,647) (5,252,054) (4,710,400)
-------------------------------------------------------
Attributable to (as
restated, Note 11):
Owners of the
Company (1,358,110) (524,270) (4,522,627) (3,854,316)
Non-controlling
interests (219,041) (115,377) (729,427) (856,084)
-------------------------------------------------------
(1,577,151) (639,647) (5,252,054) (4,710,400)
-------------------------------------------------------
Net loss per share
- basic and diluted $ (0.01) $ (0.01) $ (0.03) $ (0.04)
-------------------------------------------------------
Weighted average
shares outstanding
- basic and diluted
(1) 164,330,813 119,319,000 164,324,939 119,319,000
-------------------------------------------------------
(1) All options and warrants have been excluded from the diluted loss per
share computation as they are anti-dilutive.
See accompanying notes to the interim condensed consolidated financial
statements
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six months ended
June 30,
(In United States dollars) 2011 2010
---------------------------------------------------------------------------
OPERATING
Net loss for the period (5,252,054) (4,710,400)
Adjustments for items not affecting cash:
Depletion, depreciation and amortization 1,399,254 1,193,428
Unwinding of the discount 13,194 12,643
Share-based compensation 41,574 43,076
Development and production impairment 73,183 -
Properties 2,915,699 3,698,514
Gain on sale of assets (54,185) (728,239)
Changes in non-cash working capital (Note 8(a)) 716,012 (429,816)
-----------------------
Cash flows used in operating activities (147,323) (920,794)
-----------------------
FINANCING
Proceeds from issuance of shares 1,750 -
-----------------------
Cash flow from (used in) financing activities 1,750 -
-----------------------
INVESTING
Exploration and evaluation expenditures (4,656,268) (2,936,255)
Development and production expenditures (2,962,647) (478,015)
Purchase of office furniture and equipment (18,879) (77,794)
Proceeds from the sale of oil & gas assets - 1,800,000
Partner reimbursement - 988,850
Changes in non-cash working capital (Note 8(a)) (1,569,082) 1,730,806
-----------------------
Cash flows used in investing activities (9,206,876) 1,027,592
-----------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,352,449) 106,798
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,885,900 9,268,547
-----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 24,533,451 9,375,345
-----------------------
Supplementary information (Note 8)
See accompanying notes to the interim condensed consolidated financial
statements
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Changes in Equity
(Unaudited)
For the six month periods ended June 30, 2011 2010
---------------------------------------------------------------------------
Share Capital
Balance, Beginning of Period 75,013,680 50,293,526
Common Shares Issued 2,975 -
Balance, End of Period 75,016,655 50,293,526
--------------------------
Contributed Surplus
Balance, Beginning of Period 9,363,598 5,175,086
Exercise of stock options (1,225) -
Share-Based Compensation 41,574 178,649
--------------------------
Balance, End of Period 9,403,947 5,353,735
--------------------------
Deficit (as restated, Note 11)
Balance, Beginning of Period (22,700,262) (12,506,981)
Net Loss (4,522,627) (3,854,316)
--------------------------
Balance, End of Period (27,222,889) (16,361,297)
--------------------------
Non-Controlling Interests (as restated, Note 11)
Balance, Beginning of Period 3,636,761 918,571
Net loss allocated to non-controlling interests (729,427) (856,084)
--------------------------
Balance, End of Period 2,907,334 62,487
--------------------------
Total Shareholders' Equity 60,105,047 39,348,451
--------------------------
See accompanying notes to the interim condensed consolidated financial
statements
1. Basis of Presentation
Caza Oil & Gas, Inc. ("Caza" or the "Company") was incorporated under the laws
of British Columbia on June 9, 2006 for the purposes of acquiring shares of Caza
Petroleum, Inc. ("Caza Petroleum"). The Company and its subsidiaries are engaged
in the exploration for and the development, production and acquisition of,
petroleum and natural gas reserves. The Company's common shares are listed for
trading on the TSX and AIM stock exchanges.
In conjunction with the Company's annual audited Consolidated Financial
Statements to be issued under International Financial Reporting Standards
("IFRS") for the year ended December 31, 2011, these interim Condensed
Consolidated Financial Statements present Caza's financial results of operations
and financial position under IFRS as at and for the three and six months ended
June 30, 2011, including 2010 comparative periods. As a result, they have been
prepared in accordance with IFRS 1, "First-time Adoption of International
Reporting Standards" and with International Accounting Standards ("IAS") 34,
"Interim Financial Reporting", as issued by the International Accounting
Standards Board ("IASB") using the accounting policies the Company expects to
adopt in its consolidated financial statements for the year ending December 31,
2011.
These interim Condensed Consolidated Financial Statements do not include all the
necessary annual disclosures in accordance with IFRS. Prior to 2011 reporting,
the Company prepared its interim and annual consolidated financial statements in
accordance with Canadian general accepted accounting principles ("Canadian
GAAP").
The preparation of these interim Condensed Consolidated Financial Statements
resulted in selected changes to Caza's accounting policies as compared to those
disclosed in the Company's annual audited Financial Statements for the period
ended December 31, 2010 issued under GAAP. A summary of the significant changes
to Caza's accounting policies is disclosed in Note 11 along with reconciliations
presenting the impact of the transition to IFRS for the comparative periods as
at January 1, 2010, as and for the six months ended June 30, 2010, and as at for
the twelve months ended December 31, 2010.
Caza's reporting currency is the United States ("U.S.") dollar as the majority
of its transactions are denominated in the currency.
2. Significant Accounting Policies
The accounting policies set out below have been applied consistently to all
years presented in these condensed 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 condensed 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
period are as follows:
----------------------------------------------------------------------------
Place of Proportion of ownership
incorporation interest and voting power
Name of subsidiary and operation power held by the Company
----------------------------------------------------------------------------
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Caza Petroleum Inc. Delaware/Texas 86% 82%
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 6 (e)).
Jointly controlled operations and jointly controlled assets:
Many of the Company's oil and natural gas activities involve jointly controlled
assets. The condensed 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
condensed consolidated financial statements.
(b) Foreign currency:
The Company, its subsidiary companies each determines their functional currency
of the primary economic environment in which they operate. The Company's (and
its subsidiaries) functional currency is the U.S. Dollar. Transactions
denominated in a currency other than the functional currency of the entity are
translated at the exchange rate in effect on the transaction date.
(c) Financial instruments:
Non-derivative financial instruments:
Non-derivative financial instruments comprise accounts receivable, cash and cash
equivalents, accounts payable and accrued liabilities. Non-derivative financial
instruments are recognized initially at fair value plus any directly
attributable transaction costs. 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.
Other:
Other non-derivative financial instruments, such as accounts receivable and
accounts payable and accrued liabilities, are measured at amortized cost using
the effective interest method, less any impairment losses.
(d) Evaluation and exploration assets:
Pre-license costs are expensed in the statement of operations as incurred.
Exploration and evaluation ("E&E") costs, including the costs of acquiring
licenses and directly attributable general and administrative costs, initially
are capitalized as either tangible or intangible exploration and evaluation
assets according to the nature of the assets acquired. The costs are accumulated
in cost centers by well, field or exploration area pending determination of
technical feasibility and commercial viability.
Assets classified as E&E are not amortized, but are assessed for impairment if
(i) sufficient data exists to determine technical feasibility and commercial
viability, and (ii) facts and circumstances suggest that the carrying amount
exceeds the recoverable amount. For purposes of impairment testing, exploration
and evaluation assets are allocated to cash-generating units.
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 cash-generating units ("CGU")'s for
impairment testing.
The cost of property, plant and equipment at January 1, 2010, the date of
transition to IFRS, was determined by allocating the net costs in the full cost
pool to the areas within the CGU's according to the proven and probable reserves
of each area. Development costs that may be capitalized as PPE include land
acquisition costs, geological and geophysical expenses, the costs of drilling
productive wells, the cost of petroleum and natural gas production equipment,
directly attributable and incremental general overhead and estimated abandonment
costs. When significant parts of an item of property, plant and equipment,
including oil and natural gas interests, have different useful lives, they are
accounted for as separate items.
Gains and losses on disposal of an item of property, plant and equipment,
including oil and natural gas interests, are determined by comparing the
proceeds from disposal with the carrying amount of property, plant and equipment
and are recognized within "other expenses (income)" in profit or loss. The
carrying amount of any replaced or sold component is derecognized.
Maintenance:
The costs of the day-to-day servicing of property, plant and equipment are
recognized in profit or loss as incurred.
Depletion and depreciation:
The net carrying value of development or production assets is depleted using the
unit of production method by reference to the ratio of production in the year to
the related proven reserves, taking into account estimated future development
costs necessary to bring those proved reserves into production. Future
development costs are estimated taking into account the level of development
required to produce the reserves. These estimates are reviewed by independent
reserve engineers at least annually.
Other Property and Equipment:
For other assets, depreciation is recognized in profit or loss on a
straight-line basis over the estimated useful lives of each part of an item of
property, plant and equipment. Leased assets are depreciated over the shorter of
the lease term and their useful lives unless it is reasonably certain that the
Company will obtain ownership by the end of the lease term. Land is not
depreciated.
The estimated useful lives for other assets for the current and comparative
years are as follows:
Office equipment 5 - 7 years
Fixtures and fittings 5 - 7 years
Depreciation methods, useful lives and residual values are reviewed at each
reporting date.
(f) Impairment:
Financial assets:
A financial asset is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more events have had
a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is
calculated as the difference between its carrying amount and the present value
of the estimated future cash flows.
All impairment losses are recognized in profit or loss. An impairment loss is
reversed if the reversal can be related objectively to an event occurring after
the impairment loss was recognized. For financial assets measured at amortized
cost the reversal is recognized in profit or loss.
Non-financial assets:
The carrying amounts of the Company's non-financial assets, other than "E&E"
assets and deferred tax assets, are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists,
then the asset's recoverable amount is estimated. An impairment test is
completed each year for other intangible assets that have indefinite lives or
that are not yet available for use. E&E assets are also assessed for impairment
if facts and circumstances suggest that the carrying amount exceeds the
recoverable amount and before they are reclassified to property and equipment,
as oil and natural gas interests.
For the purpose of impairment testing, assets are grouped together into CGUs. A
CGU is a grouping of assets that generate cash flows independently of other
assets held by the Company. The recoverable amount of an asset or a CGU is the
greater of its value in use and its fair value less costs to sell.
An impairment loss is recognized if the carrying amount of an asset or its CGU
exceeds its estimated recoverable amount. Impairment losses are recognized in
profit or loss.
Impairment losses recognized in prior years are assessed at each reporting date
for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the carrying amount that
would have been determined, net of depletion and depreciation or amortization,
if no impairment loss had been recognized.
(g) Decommissioning liabilities:
The Company recognizes a decommissioning liability in the period in which it has
a present legal or constructive liability and a reasonable estimate of the
amount can be made. Liabilities are measured based on current requirements,
technology and price levels and the present value is calculated using amounts
discounted over the useful economic life of the assets. Amounts are discounted
using the risk-free rate. On a periodic basis, management reviews these
estimates and changes, if any, will be applied prospectively. The fair value of
the estimated decommissioning liability is recorded as a long-term liability,
with a corresponding increase in the carrying amount of the related asset. The
capitalized amount is depleted on a unit-of-production basis over the life of
the proved reserves. The liability amount is increased each reporting period due
to the passage of time and the amount of accretion is charged to finance expense
in the period. Periodic revisions to the estimated timing of cash flows or to
the original estimated undiscounted cost can also result in an increase or
decrease to the decommissioning liability. Actual costs incurred upon settlement
of the obligation are recorded against the decommissioning liability to the
extent of the liability recorded.
(h) Share capital:
Common shares are classified as equity. Incremental costs directly attributable
to the issue of common shares and share options are recognized as a deduction
from equity, net of any tax effects.
(i) Share based payments:
Equity-settled share-based payments to employees and others providing similar
services are measured at the fair value of the equity instruments at the grant
date.
The grant date fair value of options granted to employees is recognized as
compensation expense on a graded basis over the vesting period, within general
and administrative expenses, with a corresponding increase in contributed
surplus. A forfeiture rate is estimated on the grant date; however, at the end
of each reporting period, the Company revises its estimate of the number of
equity instruments expected to vest. The impact of the revision of the original
estimates, if any, is recognized on a prospective basis.
(j) Revenue:
Revenue from the sale of oil and natural gas is recorded when the significant
risks and rewards of ownership of the product is transferred to the buyer which
is usually when legal title passes to the external party. This is generally at
the time product enters the pipeline or any other means of transportation.
Revenue is measured net of royalties.
(k) Finance income and expenses:
Finance expense comprises interest expense on borrowings, if any, unwinding of
the discount on decommissioning liabilities and impairment losses recognized on
financial assets.
Borrowing costs incurred for the construction of qualifying assets are
capitalized during the period of time that is required to complete and prepare
the assets for their intended use or sale. All other borrowing costs are
recognized in profit or loss using the effective interest method. The
capitalization rate used to determine the amount of borrowing costs to be
capitalized is the weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
Interest income is recognized as it accrues in profit or loss, using the
effective interest method.
(l) Earnings per share:
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the period. 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 period. The Company computes diluted earnings per share
using the treasury stock method to determine the dilutive effect of securities
or other contracts. Under this method, the diluted weighted average number of
shares is calculated assuming the proceeds that arise from the exercise of
outstanding, in-the-money options are used to purchase common shares of the
Company at their average market price for the period. No adjustment to diluted
earnings per share or diluted shares outstanding is made if the result of the
calculations is anti-dilutive.
(m) Application of new and revised International Financial Reporting Standards
(IFRSs) issued but not yet effective.
The Company has not applied the following new and revised IFRSs that have been
issued but are not yet effective.
IFRS 7 (revised) "Financial Instruments: Disclosures"
IFRS 9 (revised) "Financial Instruments: Classification and Measurement"
IAS 12 (revised) "Income Taxes"
IFRS 10 (new) "Consolidated Financial Statements"
IFRS 11 (new) "Joint Arrangements"
IFRS 12 (new) "Disclosure of Interests in Other Entities"
IAS 27 (revised) "Separate Financial Statements"
IAS 28 (revised) "Investments in Associates and Joint Ventures"
IFRS 13 (new) "Fair Value Measurement"
IAS 1 (revised) "Presentation of Financial Statements"
(n) Critical accounting judgments and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the amounts reported in
the interim condensed consolidated financial statements and accompanying notes.
Actual results could differ from those estimates. The interim condensed
consolidated financial statements have, in management's opinion, been properly
prepared using careful judgment with reasonable limits of materiality.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in the period of
the revision and future periods if the revision affects both current and future
periods.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those involving estimations
(see below), that management has made in the process of applying the Company's
accounting policies and that have the most significant effect on the amounts
recognized in the consolidated financial statements include:
a) Estimation of reserves
Estimates of recoverable quantities of proved and probable reserves include
judgmental assumptions and require interpretation of complex geological and
geophysical models in order to make an assessment of the size, shape, depth and
quality of reservoirs, and their anticipated recoveries. The economic,
geological and technical factors used to estimate reserves may change from
period to period. Reserve estimates are prepared in accordance with the Canadian
Oil and Gas Evaluation Handbook and are reviewed by third party reservoir
engineers.
Estimates of oil and gas reserves are inherently imprecise, require the
application of judgment and are subject to regular revision, either upward or
downward, based on new information such as from the drilling of additional
wells, observation of long-term reservoir performance under producing conditions
and changes in economic factors, including product prices, contract terms or
development plans.
Changes in reported reserves can impact property, plant and equipment impairment
calculations, estimates of depletion and the provision for decommissioning
obligations due to changes in expected future cash flows based on estimates of
proved and probable reserves, production rates, future petroleum and natural gas
prices, future costs and the remaining lives and period of future benefit of the
related assets.
b) Identification of cash-generating units
Management reviews the CGU determination on a periodic basis. The recoverability
of property, plant and equipment carrying values are assessed at the CGU level.
Determination of what constitutes a CGU is subject to management judgments. The
asset composition of a CGU can directly impact the recoverability of the related
assets.
c) Estimation of fair value of stock options
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. By their nature, these
estimates are subject to measurement uncertainty and the effect on the
consolidated financial statements of changes of estimates in future periods
could be significant.
Key sources of estimation uncertainty
The following are the key assumptions concerning the key sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of
causing adjustments to the carrying amounts of assets and liabilities within the
next financial year.
-- Estimates of recoverable quantities of proved and probable reserves
include judgmental assumptions and the economic, geological and
technical factors used to estimate reserves may change from period to
period.
-- Forward price estimates of the oil and natural gas prices are used in
the impairment model. Commodity prices have fluctuated widely in recent
years due to global and regional factors including supply and demand
fundamentals, inventory levels, weather, economic and geopolitical
factors.
-- The impairment model uses discount rate to calculate the net present
value of cash flows based on weighted average cost of capital estimates.
Changes in the general economic environment could result in significant
changes in this estimate.
-- Amounts recorded from joint venture partners are based on the Company's
interpretation of underlying agreements and may be subject to joint
approval. The Company has recorded balances due from its joint venture
partners based on costs incurred and its interpretation of allowable
expenditures. Any adjustment required as a result of joint venture
audits are recorded in the period of the determination with joint
venture partners.
-- The provision for site restoration and abandonment is based on current
legal and constructive requirements, technology, price levels and
expected plans for remediation. Actual costs and cash outflows can
differ from estimates because of changes in laws and regulations, public
expectations, prices and discovery and analysis of site conditions and
changes in clean-up technology.
The above judgments, estimates and assumptions relate primarily to unsettled
transactions and events as of the date of the consolidated financial statements.
Actual results could differ from these estimates and the differences could be
material.
3. Exploration and evaluation assets
----------------------------------------------------------------------------
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 7,371,582 $ 11,662,047
Additions to exploration and evaluation assets 4,671,076 3,793,883
Transfers to property, plant and equipment (144,010) (4,385,834)
Unsuccessful exploration and evaluation costs (2,916,217) (3,698,514)
----------------------------------------------------------------------------
Balance, end of period $ 8,982,431 $ 7,371,582
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the six month period ended June 30, 2011, the Company expensed $2,915,699
of exploration and evaluation costs of which $2,915,699 related to the Marian
Baker et al, No 1 drilled during the period ended March 31, 2011 that did not
encounter hydrocarbons as well as an adjustment to the valuation of the Las
Animas prospect.
4. Petroleum and natural gas properties and equipment
----------------------------------------------------------------------------
Development
& Production Corporate
Assets Assets Total
----------------------------------------------------------------------------
Cost
Balance, January 1, 2010 $ 24,205,722 $ 730,209 $ 24,935,931
Additions 3,465,058 77,794 3,542,852
Disposals (671,761) - (671,761)
Transfers from E&E 4,385,834 - 4,385,834
----------------------------------------------------------------------------
Balance, December 31, 2010 $ 31,384,853 $ 808,003 $ 32,192,856
Additions 3,026,363 18,879 3,045,242
Disposal (47,446) - (47,446)
Transfers from E&E 144,010 - 144,010
----------------------------------------------------------------------------
Balance, June 30, 2011 $ 34,507,780 $ 826,882 $ 35,334,662
----------------------------------------------------------------------------
---------------------------------------------------------------------------
Development &
Production Corporate
Assets Assets Total
---------------------------------------------------------------------------
Accumulated Depletion and
Depreciation
Balance, January 1, 2010 $ - $ 387,698 $ 387,698
Depletion and depreciation 2,094,080 151,516 2,245,596
Impairment 179,700 - 179,700
Reversal of impairment - - -
---------------------------------------------------------------------------
Balance, December 31, 2010 $ 2,273,780 $ 539,214 $ 2,812,994
Depletion and depreciation 1,325,307 73,947 1,399,254
Impairment 73,183 - 73,183
Reversal of impairment (519) - (519)
---------------------------------------------------------------------------
Balance, June 30, 2011 $ 3,671,751 $ 613,161 $ 4,284,912
---------------------------------------------------------------------------
Carrying amounts
At January 1, 2010 $ 24,205,722 $ 342,511 $ 24,548,233
At December 31, 2010 $ 29,111,073 268,789 29,379,862
At June 30, 2011 $ 30,836,029 213,721 31,049,750
Future development costs of proved undeveloped reserves of $3,288,500 were
included in the depletion calculation at June 30, 2011 and $9,292,700 for the
period ended December 31, 2010.
During the three and six months ended June 30, 2011 the Company did not
capitalized general and administrative expenses (June 30, 2010 - $39,751 and
$190,069) directly relating to exploration and development activities of which
$6,799 and 150,265 related to stock based compensation for the three and six
months ended June 30, 2010.
5. Decommissioning Liabilities
The following table presents the reconciliation of the beginning and ending
aggregate carrying amount of the obligation associated with the retirement of
oil and gas properties:
Year ended
June December 31,
30, 2011 2010
---------------------------
Decommissioning liabilities, beginning of period $ 807,754 $ 706,541
Obligations incurred 93,726 75,928
Change in estimate 113,493 -
Obligations settled (230,325) -
Unwinding of the discount 13,194 25,285
---------------------------
Decommissioning liabilities, end of period $ 797,842 $ 807,754
---------------------------
---------------------------
The undiscounted amount of cash flows, required over the estimated reserve life
of the underlying assets, to settle the obligation, adjusted for inflation, is
estimated at $907,166 (December 31, 2010 - $1,032,726). The obligation was
calculated using a risk free discount rate of 4 percent and an inflation rate of
3 percent. It is expected that this obligation will be funded from general
Company resources at the time the costs are incurred with the majority of costs
expected to occur between 2012 and 2030.
6. Share Capital
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
Six Months Ended Year Ended
June 30, 2011 December 31, 2010
Shares Amounts Shares Amounts
Opening balance common
shares 164,319,000 $ 75,013,680 119,319,000 $ 46,423,526
Exercise of stock
options (i) 25,000 2,975
Private placement (ii) - - 45,000,000 28,590,154
----------------------------------------------------------------------------
Balance end of year 164,344,000 75,016,655 164,319,000 75,013,680
----------------------------------------------------------------------------
Opening balance
warrants - - 19,800,000 3,870,000
Expired common
warrants (iii) - - (19,800,000) (3,870,000)
----------------------------------------------------------------------------
Balance end of year - - - -
----------------------------------------------------------------------------
$ 75,016,655 $ 75,013,680
----------------------------------------------------------------------------
(i) The Company issued 25,000 common shares as a result of exercised stock
options.
(ii) The Company issued 45,000,000 common shares in a private placement at
approximately $0.67 (United Kingdom 42 pence per common share). Pursuant to
this private placement, the Company incurred $1,545,896 of share issuance
costs.
(iii) 18,000,000 warrants for the purchase of 19,800,000 common shares have
expired as at December 31, 2010.
(c) Stock options
The maximum number of common shares for which options may be granted, together
with shares issuable under any other share compensation arrangement of the
Company, is limited to 10% of the total number of outstanding common shares
(plus common shares that would be outstanding upon the exercise of all
exchangeable rights) at the time of grant of any option. The exercise price of
each option may not be less than the fair market value of the Company's common
shares on the date of grant. Except as otherwise determined by the Board and
subject to the limitation that the stock options may not be exercised later than
the expiry date provided in the relevant option agreement but in no event later
than 10 years (or such shorter period required by a stock exchange) from their
date of grant, options cease to be exercisable: (i) immediately upon a
participant's termination by the Company for cause, (ii) 90 days (30 days in the
case of a participant engaged in investor relations activities) after a
participant's termination from the Company for any other reason except death and
(iii) one year after a participant's death. Subject to the Board's sole
discretion in modifying the vesting of stock options, stock options will vest,
and become exercisable, as to 331/3% on the first anniversary of the date of
grant and 331/3% 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 June 30, 2011 and December 31, 2010 and changes during the respective
years ended on those dates is presented below:
Year ended
June 30, 2011 December 31, 2010
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Stock Options Options price Options price
----------------------------------------------------------------------------
Beginning of period 12,635,000 $ 0.28 5,371,667 $ 0.62
Granted - - 7,970,000 0.07
Exercised (25,000) 0.07 - -
Forfeited (1,070,000) 0.08 (706,667) 0.66
----------------------------------------------------
End of period 11,540,000 $ 0.29 12,635,000 $ 0.28
----------------------------------------------------
Exercisable, end of
period 6,863,331 $ 0.44 4,418,333 $ 0.63
----------------------------------------------------
Weighted
Number Out- Remaining
standing Average Number
as at Exer- Con- Exercisable
June 30, cise tractual June 30,
Date of Grant 2011 Price Life Date of Expiry 2011
---------------------------------------------------------------------------
January 31, 2007 2,025,000 $ 0.50 5.59 January 31, 2017 2,025,000
December 12, 2007 1,900,000 $ 0.79 6.46 December 12, 2017 1,900,000
April 7, 2008 500,000 $ 0.59 6.78 April 7, 2018 500,000
August 11, 2008 220,000 $ 0.44 7.12 August 11, 2018 146,666
April 9, 2010 6,225,000 $ 0.07 8.78 April 9, 2020 2,074,999
April 12, 2010 400,000 $ 0.07 8.79 April 12, 2020 133,333
May 19, 2010 250,000 $ 0.07 8.89 May 19, 2020 83,333
September 14, 2010 20,000 $ 0.35 9.22 September 14, 2020 -
----------------------------------------------------------------------------
11,540,000 7.73 6,863,331
No options were granted during the six months period ended June 30, 2011. During
the year ended December 31, 2010, 7,950,000 options were granted at a fair value
of $0.05 per option and 20,000 options were granted at a fair value of $0.24 per
option. The fair value of these options was determined using the Black-Sholes
model with the following assumptions:
-------
Dividend yield Nil
Expected volatility 115%
Risk free rate of return 4.00%
Weighted average life 3 years
Forfeiture rate 9.5%
(d) Contributed surplus
The following table presents the changes in contributed surplus:
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Balance, beginning of period $ 9,363,598 $ 5,175,086
Expired broker warrants(i) - 3,870,000
Exercise of stock options (1,225) -
Stock based compensation 41,574 318,512
----------------------------------------------------------------------------
Balance, end of period $ 9,403,947 $ 9,363,598
----------------------------------------------------------------------------
(i) During the period ended December 31, 2010 19,800,000 warrants expired
with a value of $3,870,000.
(e) Non-controlling interest
June December
30, 2011 31, 2010
----------------------------------------------------------------------------
Opening balance non-controlling interest
(exchangeable rights) (i) 26,502,000 26,502,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Balance end of period 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.
7. Related Party Transactions
The aggregate amount of expenditures made to related parties:
During the years 2010 and 2011, Singular Oil & Gas Sands, LLC ("Singular")
agreed to participate in the drilling of the Matthys McMillan Gas Unit #2 and
the O B Ranch #1 and 2 wells located in Wharton County, Texas. Under the terms
of that agreement, Singular paid 14.01% of the drilling costs through completion
to earn a 10.23% net revenue interest on the Matthys McMillan Gas Unit #2 well
and paid 12.5% of the drilling costs to earn a 6.94% net revenue interest on the
O B Ranch #1 well. Under the terms of the agreement of the O B Ranch #2 Singular
paid 9.375% of the drilling costs to earn approximately 6.8% net revenue
interest. This participation was in the normal course of Caza's business and on
the same terms and conditions to those of other joint venture partners. Singular
owes the Company $57,676 in joint venture partner receivables as at June 30,
2011 (December 31, 2010 - $19,968; January 1, 2010 - $7,819). Singular is a
related party as it is a company under common control with Zoneplan Limited,
which is a significant shareholder of Caza.
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
comparable to those negotiated with third parties.
Cash remuneration of key management personnel of the Company, which includes
directors, officers and other key personnel, is set out below in aggregate:
Six months Year
ended ended
June 30, December 31,
2011 2010
----------------------------------------------------------------------------
Salaries and wages $ 531,593 $ 1,116,451
Short term benefits - -
Share-based payments - 281,750
----------------------------------------------------------------------------
Total compensation $ 531,593 $ 1,398,201
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. Supplementary Information
(a) net change in non-cash working capital
Six months ended June 30,
2011 2010
---------------------------------------------------------------------------
Provided by (used in)
-----------------------------
Accounts receivable (942,329) 1,758,966
Prepaid and other 104,379 129,089
Accounts payable and accrued
liabilities (15,120) (587,065)
------------------------------------
(853,070) 1,300,990
------------------------------------
Summary of changes
Operating 716,012 (429,816)
Investing (1,569,082) 1,730,806
------------------------------------
(853,070) 1,300,990
------------------------------------
(b) supplementary cash flow information
Six months ended Six months ended
June 30, 2011 June 30, 2010
----------------------------------------------------------
Interest paid $ - $ -
Interest received 13,038 300
(c) cash and cash equivalents
June 30, 2011 December 31, 2010
-----------------------------------------------------------------
Cash on deposit $ 2,191,507 $ 3,010,615
Money market instruments 22,341,944 30,875,285
---------------------------------------
Cash and cash equivalents $ 24,533,451 $ 33,885,900
---------------------------------------
---------------------------------------
The money market instruments bear interest at a rate of 0.04% as at June 30,
2011 (December 31, 2010 - 0.136%). Cash on deposit is held with Wells Fargo Bank
Texas and the money market account is a fund managed by Wells Fargo Brokerage
Services, LLC investing in U.S. Treasury Bill securities.
9. Capital Risk Management
The Company's objectives when managing capital is to safeguard the entity's
ability to continue as a going concern, so that it can continue to provide
returns for shareholders and benefits for other stakeholders. The Company
defines capital as shareholder equity, working capital and credit facilities
when available. The Company manages the capital structure in light of changes in
economic conditions and the risk characteristics of the underlying assets. The
Company's objective is met by retaining adequate equity and working capital to
provide for the possibility that cash flows from assets will not be sufficient
to meet future cash flow requirements. The Board of Directors does not establish
quantitative return on capital criteria for management; but rather promotes year
over year sustainable profitable growth.
June 30, December 31, January 1,
2011 2010 2010
---------------------------------------------------------------------------
Cash and cash equivalents $ 24,533,451 $ 33,885,900 $ 9,268,547
Other current assets 3,684,380 2,846,430 4,251,999
Accounts payable and
accrued liabilities (7,347,123) (7,362,243) (5,144,083)
---------------------------------------------------------------------------
Net working capital $ 20,870,708 $ 29,370,087 $ 8,376,463
Shareholders' equity $ 60,105,046 $ 65,313,777 $ 43,880,202
-----------------------------------------------
Total capital $ 39,234,338 $ 35,943,690 $ 35,503,739
---------------------------------------------------------------------------
The Company has evaluated its net working capital balance as at December 31,
2010. Due to long lead times on several of the Company's exploration and
development projects, from time to time the Company secures capital to fund its
investments in petroleum and natural gas exploration projects in advance which
has resulted in a net working capital balance. As exploration and development
projects progress the Company expects the net working capital balance to
significantly decrease from current levels, and additional capital may be
required to fund additional projects. If the Company is unsuccessful in raising
additional capital, the Company may have to sell or farm out certain properties.
If the Company cannot sell or farm out certain properties, it will be unable to
participate with joint venture partners and may forfeit rights to some of its
properties.
10. Financial Instruments
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity price,
credit, and foreign exchange risks. The Company manages its exposure to these
risks by operating in a manner that minimizes its exposure to the extent
practical.
(a) Commodity Price Risk
The Company is subject to commodity price risk for the sale of natural gas. The
Company may enter into contracts for risk management purposes only, in order to
protect a portion of its future cash flow from the volatility of natural gas and
natural gas liquids commodity prices. To date the Company has not entered into
any forward commodity contracts.
(b) Credit Risk
Credit risk arises when a failure by counter parties to discharge their
obligations could reduce the amount of future cash inflows from financial assets
on hand at the balance sheet date. A majority of the Company's financial assets
at the balance sheet 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 three and
six month ended period June 30, 2011, the Company sold 61.58% and 67.77%
respectively (three and six months ended June 30, 2010 - 55.01% and 46.98%
respectively) of its natural gas and condensates to a single purchaser. These
sales were conducted on transaction terms that are typical for the sale of
natural gas and condensates in the United States. In addition, when joint
operations are conducted on behalf of a joint venture partner relating to
capital expenditures, costs of such operations are paid for in advance to the
Company by way of a cash call to the partner of the operation being conducted.
Caza management assesses quarterly whether there should be any impairment of the
financial assets of the Company. At June 30, 2011, the Company had overdue
accounts receivable from certain joint interest partners of $21,041 which were
outstanding for greater than 60 days and $193,277 that were outstanding for
greater than 90 days. At June 30, 2011, the Company's two largest joint venture
partners represented approximately 36% and 7% of the Company's receivable
balance (December 31, 2010 25% and 15% respectively). The maximum exposure to
credit risk is represented by the carrying amount on the balance sheet of cash
and cash equivalents, accounts receivable and deposits. The Company has their
checking and money markets accounts with Wells Fargo Bank Texas, N.A. The money
market is backed by United States treasury bills.
(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 June 30, 2011, the Company
considers this risk to be relatively limited and not material and therefore does
not hedge its foreign exchange risk.
(d) Fair Value of Financial Instruments
The Company has determined that the fair values of the financial instruments
consisting of cash and cash equivalents, accounts receivable and accounts
payable are not materially different from the carrying values of such
instruments reported on the balance sheet due to their short-term nature.
IFRS establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The three levels of the fair value
hierarchy are described below:
-- Level 1: Values based on unadjusted quoted prices in active markets that
are accessible at the measurement date for identical assets or
liabilities.
-- Level 2: Values based on quoted prices in markets that are not active or
model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
-- Level 3: Values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair
value measurement.
The Company's cash and cash equivalents, which are classified as held for
trading, 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 balance
sheet that have been designated as available-for-sale. There have been no
changes to the aforementioned classifications during the periods 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 June 30, 2011 that subject the Company to liquidity
risk are accounts payable and accrued liabilities. The contractual maturity of
these financial liabilities is generally the following sixty days from the
receipt of the invoices for goods of services and can be up to the following
next six months. Management believes that current working capital will be
adequate to meet these financial liabilities as they become due.
11. Transition to IFRS
The Company has adopted IFRS effective January 1, 2010 (the "transition date")
and has prepared its opening IFRS balance sheet as at that date. Prior to the
adoption of IFRS the Company prepared its financial statements in accordance
with Canadian generally accepted accounting principles ("Canadian GAAP"). The
Company's consolidated financial statements for the year ending December 31,
2011 will be the first annual financial statements that comply with IFRS. The
Company will ultimately prepare its opening IFRS balance sheet by applying
existing IFRS with an effective date of December 31, 2011 or prior. Accordingly,
the opening IFRS balance sheet and the December 31, 2010 comparative balance
sheet presented in the consolidated financial statements for the year ending
December 31, 2011 may differ from those presented at this time.
IFRS 1 requires the presentation of comparative information as at the January 1,
2010 transition date and subsequent comparative periods as well as the
consistent and retrospective application of IFRS accounting policies. To assist
with the transition, the provisions of IFRS 1 allow for certain mandatory and
optional exemptions for first-time adopters to alleviate the retrospective
application of all IFRSs.
Elected exemptions from full retrospective application
In preparing these consolidated financial statements in accordance with IFRS 1,
"First-time Adoption of International Financial Reporting Standards" ("IFRS 1"),
the Company has applied certain of the optional exemptions from full
retrospective application of IFRS. The optional exemptions applied are described
below:
a) Deemed cost for oil and gas assets
The Company has elected to measure oil and gas assets previously recorded in the
full cost pool under Accounting Guidelines 16, "Oil and Gas Accounting - Full
Cost" ("AcG 16") of Canadian GAAP at the transition date as follows:
i) the full cost pool was allocated to development and production assets pro
rata using proved plus probable reserve values.
b) Decommissioning liabilities included in the cost of property and equipment
The Company has elected to measure decommissioning liabilities as at the
transition date in accordance with IAS 37, "Provisions, Contingent Liabilities
and Contingent Assets" ("IAS 37") and recognize directly in deficit the
difference between that amount and the carrying amount of those liabilities at
the date of transition determined under Canadian GAAP.
c) Business combinations
The Company has applied the business combinations exemption in IFRS 1 to not
apply IFRS 3, "Business Combinations" ("IFRS 3") retrospectively to past
business combinations. Accordingly, the Company has not restated business
combinations that took place prior to the transition date.
d) Share-based payment transactions
The Company has elected not to apply IFRS 2, "Share-based Payments" ("IFRS 2")
to equity instruments granted after November 7, 2002 that have not vested by the
transition date.
e) Borrowing costs
The Company has applied the borrowing costs exemption in IFRS to not apply IAS
23, "Borrowing Costs" ("IAS 23") retrospectively to past borrowing costs related
to transactions that took place prior to the transition date.
Mandatory exceptions to retrospective application
a) Estimates
Hindsight was not used to create or revise estimates and accordingly the
estimates previously made by the Company under Canadian GAAP are consistent with
their application under IFRS.
The remaining IFRS 1 exemptions were not applicable or material to the
preparation of Caza's Consolidated Balance Sheet at the date of transition on
January 1, 2010.
The following reconciliations present the adjustments made to the Company's
Canadian GAAP financial results of operations and financial position to comply
with IFRS. A summary of the significant accounting policy changes and applicable
exemptions are discussed following the reconciliations. Reconciliations include
the Company's Consolidated Balance Sheets as at January 1, 2010, June 30, 2010
and December 31, 2010, and Consolidated Statements of Earnings, Comprehensive
Loss, and Deficit for the three and six months ended June 30, 2010 and the year
ended December 31, 2010.
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Financial Position
As at January 1, 2010
Effect of
Canadian Transition
GAAP to IFRS IFRS
---------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 9,268,547 $ - $ 9,268,547
Accounts receivable 3,973,085 - 3,973,085
Prepaid and other 278,914 - 278,914
Exploration and evaluation
assets - 11,662,047 11,662,047
Petroleum and natural gas
properties and equipment 36,201,223 (11,652,990) 24,548,233
--------------------------------------------
Total Assets $ 49,721,769 $ 9,057 $ 49,730,826
--------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 5,144,083 $ - $ 5,144,083
Decommissioning liabilities 549,450 157,091 706,541
--------------------------------------------
Total Liabilities 5,693,533 157,091 5,850,624
Equity
Share capital 51,212,097 (918,571) 50,293,526
Contributed surplus 4,805,074 370,012 5,175,086
Deficit (11,988,935) (518,046) (12,506,981)
Non-controlling interest - 918,571 915,571
--------------------------------------------
Total Equity 44,028,236 (148,034) 43,880,202
--------------------------------------------
Total Liabilities and Equity $ 49,721,769 $ 9,057 $ 49,730,826
--------------------------------------------
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Financial Position
As at June 30, 2010
Effect of
Canadian Transition
GAAP to IFRS IFRS
---------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 9,375,345 $ - $ 9,375,345
Accounts receivable 2,214,119 - 2,214,119
Prepaid and other 149,825 - 149,825
Exploration and evaluation
assets - 9,646,511 9,646,511
Petroleum and natural gas
properties and equipment 35,796,827 (12,476,349) 23,320,478
--------------------------------------------
Total Assets $ 47,536,116 $ (2,829,838) $ 44,706,278
--------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 4,557,018 $ - $ 4,557,018
Decommissioning liabilities 639,689 161,120 800,809
--------------------------------------------
Total Liabilities 5,196,707 161,120 5,357,827
Equity
Share capital 51,212,097 (918,571) 50,293,526
Contributed surplus 5,125,478 228,257 5,353,735
Deficit (13,998,166) (2,363,131) (16,361,297)
Non-controlling interest - 62,487 62,487
--------------------------------------------
Total Equity 42,339,409 (2,990,958) 39,348,451
--------------------------------------------
Total Liabilities and Equity $ 47,536,116 $ (2,829,838) $ 44,706,278
--------------------------------------------
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Financial Position
As at December 31, 2010
Effect of
Canadian Transition
GAAP to IFRS IFRS
---------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 33,885,900 $ - $ 33,885,900
Accounts receivable 2,554,913 - 2,554,913
Prepaid and other 291,517 - 291,517
Exploration and evaluation
assets - 7,371,582 7,371,582
Petroleum and natural gas
properties and equipment 39,637,241 (10,257,379) 29,379,862
--------------------------------------------
Total Assets $ 76,369,571 $ (2,885,797) $ 73,483,774
--------------------------------------------
Liabilities
Current
Accounts payable and accrued
liabilities $ 7,362,243 $ - $ 7,362,243
Decommissioning liabilities 627,639 180,115 807,754
--------------------------------------------
Total Liabilities 7,989,882 180,115 8,169,997
Equity
Share capital 75,932,251 (918,571) 75,013,680
Contributed surplus 9,190,226 173,372 9,363,598
Deficit (16,742,788) (5,957,474) (22,700,262)
Non-controlling interest - 3,636,761 3,636,761
--------------------------------------------
Total Equity 68,379,689 (3,065,912) 65,313,777
--------------------------------------------
Total Liabilities and Equity $ 76,369,571 $ (2,885,797) $ 73,483,774
--------------------------------------------
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Comprehensive Loss
Three months ended June 30, 2010
Effect of
Canadian Transition
GAAP to IFRS IFRS
---------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 398,883 $ - $ 398,883
Gain on sale of assets - 728,239 728,239
Interest income 137 - 137
--------------------------------------------
$ 399,020 $ 728,239 $ 1,127,259
--------------------------------------------
Expenses
Production $ 164,395 $ - $ 164,395
General and administrative 1,068,032 10,707 1,078,739
Depletion, depreciation,
amortization, accretion and
impairment 646,820 (646,820) -
Depletion, depreciation and
amortization - 517,450 517,450
Financing costs - unwinding
of the discounts - 6,322 6,322
1,879,247 (112,341) 1,766,906
--------------------------------------------
Net loss and comprehensive
loss $ (1,480,227) $ 840,580 $ (639,647)
--------------------------------------------
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Comprehensive Loss
Six months ended June 30, 2010
Effect of
Canadian Transition to
GAAP IFRS IFRS
---------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 1,095,548 $ - $ 1,095,548
Gain on sale of assets - 728,239 728,239
Interest income 300 - 300
--------------------------------------------
$ 1,095,848 $ 728,239 $ 1,824,087
--------------------------------------------
Expenses
Production $ 409,100 $ - $ 409,100
General and administrative 1,274,181 (53,380) 1,220,801
Depletion, depreciation,
amortization, accretion and
impairment 1,421,798 (1,421,798) -
Depletion, depreciation and
amortization - 1,193,429 1,193,429
Financing costs - unwinding
of the discounts - 12,643 12,643
Exploration and evaluation
impairment - 3,698,514 3,698,514
--------------------------------------------
3,105,079 3,429,408 6,534,487
--------------------------------------------
Net loss and comprehensive
loss $ (2,009,231) $ (2,701,169) $ (4,710,400)
Caza Oil & Gas, Inc.
Condensed Consolidated Statement of Comprehensive Loss
Year ended December 31, 2010
Previous Effect of
Canadian Transition to
GAAP IFRS IFRS
---------------------------------------------------------------------------
Revenue
Petroleum and natural gas $ 2,233,682 $ - $ 2,233,682
Interest and other income 4,723 - 4,723
Gain on sale of assets - 728,239 728,239
--------------------------------------------
$ 2,238,405 $ 728,239 $ 2,966,644
--------------------------------------------
Expenses
Production $ 718,186 $ - $ 718,186
General and administrative 3,626,789 (108,124) 3,518,665
Depletion, depreciation,
amortization, accretion and
impairment 2,647,283 (2,647,283) -
Depletion, depreciation and
amortization - 2,277,384 2,277,384
Financing costs - unwinding
of the Discount - 25,286 25,286
Exploration and evaluation - 3,698,514 3,698,514
Development impairment 179,700 179,700
--------------------------------------------
6,992,258 3,425,477 10,417,735
--------------------------------------------
Net loss and comprehensive
loss $ (4,753,853) $ (2,697,238) $ (7,451,091)
The following discussion explains the significant differences between Caza's
previous GAAP accounting policies and those applied by the Company under IFRS.
IFRS policies have been retrospectively and consistently applied except where
specific IFRS 1 optional and mandatory exemptions permitted an alternative
treatment upon transition to IFRS for first-time adopters. The descriptive note
captions below correspond to the adjustments presented in the preceding
reconciliations.
Exploration and Evaluation Assets ("E&E")
Under Canadian GAAP, Caza followed AcG-16 under which all costs directly
associated with the acquisition of, the exploration for, and the development of
natural gas and liquids reserves were capitalized on a prospect cost basis.
Costs accumulated within each prospect were depleted using the
unit-of-production method based on proved reserves determined using estimated
future prices and costs. Upon transition to IFRS, the Company was required to
adopt new accounting policies for exploration and development activities.
Under IFRS, exploration and evaluation costs are those expenditures for an area
where technical feasibility and commercial viability has not yet been
determined. Development costs include those expenditures for areas where
technical feasibility and commercial viability has been determined. Caza adopted
the IFRS 1 exemption whereby the Company deemed its January 1, 2010 IFRS asset
costs to be equal to its previous GAAP historical property, plant and equipment
net book value. Accordingly, exploration and evaluation costs were deemed equal
to the unproved properties balance and the development costs were deemed equal
to the full cost pool balance.
Under IFRS, exploration and evaluation costs are presented on separate line
items on the Consolidated Balance Sheet. Under Canadian GAAP these assets are
included in the general balance of property and natural gas properties and
equipment.
Exploration and evaluation assets at January 1, 2010 were determined to be
$11,662,047, representing the unproved properties balance under Canadian GAAP.
This resulted in a reclassification of $11,662,047 from petroleum and natural
gas properties to exploration and evaluation assets on Caza's Consolidated
Balance Sheet as at January 1, 2010 (December 31, 2010 - $7,371,582; June 30,
2010 - $9,646,511). As at the date of transition, the Company tested all of its
exploration and evaluation assets for impairment and determined no impairment
charges were necessary.
Under Canadian GAAP, exploration and evaluation costs were capitalized as
property and equipment in accordance with the CICA's full cost accounting
guidelines. Under IFRS, Caza capitalizes these costs initially as exploration
and evaluation assets. Once technical feasibility and commercial viability of
the area has been determined, the costs are transferred from exploration and
evaluation assets to property, plant and equipment. Under IFRS, unrecoverable
exploration and evaluation costs associated with an area and costs incurred
prior to obtaining the legal rights to explore are expensed.
During the twelve months ended December 31, 2010, Caza transferred $4,563,375
(six months ended June 30, 2010 - $178,513) of exploration and evaluation costs
to petroleum and natural gas properties and expensed $3,878,214 (three and six
months ended June 30, 2010 - $3,520,972) of unsuccessful exploration and
evaluation assets and $12,047 in direct exploration costs.
Depreciation, depletion, amortization and accretion ("DD&A")
Development costs at January 1, 2010 were deemed to be $24,205,722, representing
the depletable pool balance under previous GAAP. Consistent with Canadian GAAP,
these costs are capitalized as petroleum and natural gas properties under IFRS.
Under Canadian GAAP, development costs were depleted using the
unit-of-production method calculated on for each country's cost centers (Caza
only had one cost center under Canadian GAAP). Under IFRS, development costs are
depleted using the unit-of-production method calculated at the CGU level. The
IFRS 1 exemption permitted the Company to allocate development costs to the
CGU's using proved and probable reserves values for each area as at January 1,
2010. Depleting on an area basis under IFRS resulted in a $352,671 decrease to
Caza's DD&A expense for the twelve months ended December 31, 2010 (three and six
months ended June 30, 2010 - $165,495).
Impairments
Under Canadian GAAP, an impairment was recognized if the carrying amount of the
full cost pool exceeded the undiscounted cash flows expected from the production
of the proved reserves. If the carrying amount of the full cost pool was less
than these cash flows, an impairment was recognized as the amount by which the
carrying value exceeded the sum of the discounted cash flows expected from the
production of the proved and probable reserves. Impairments recognized under
previous GAAP were not reversed.
Under IFRS, an impairment is recognized if the carrying value exceeds the
recoverable amount for a cash-generating unit. Prospect areas are aggregated
into cash-generating units based on their ability to generate independent cash
flows. If the carrying value of the cash-generating unit exceeds the recoverable
amount, the cash-generating unit is written down with an impairment recognized
in net earnings. Impairments recognized under IFRS are reversed when there has
been a subsequent increase in the recoverable amount. Impairment reversals are
recognized in net earnings and the carrying amount of the cash-generating unit
is increased to its revised recoverable amount as if no impairment had been
recognized for the prior periods.
At the date of transition, January 1, 2010, the Company recognized an impairment
of $nil on its petroleum and natural gas properties which was recorded directly
to the opening deficit.
For the twelve months ended December 31, 2010, Caza recognized impairments of
$3,878,214 relating to the Company's exploration activities (six months ended
June 30, 2010 - $3,698,514). The impairment recognized was based on the
difference between the December 31, 2010 net book value of the assets and the
recoverable amount. The recoverable amount was determined using fair value less
costs to sell based on discounted future cash flows of proved and probable
reserves using forecast prices and costs. Under Canadian GAAP, these assets were
included in the full cost pool ceiling test, which was not impaired at December
31, 2010.
Divestitures (gain on sale of assets)
Under Canadian GAAP, proceeds from divestitures of producing assets were
deducted from the full cost pool without recognition of a gain or loss unless
the sale resulted in a change to the depletion rate of 20 percent or greater, in
which case a gain or loss was recorded.
Under IFRS, gains or losses are recorded on divestitures and are calculated as
the difference between the proceeds and the net book value of the asset
disposed. For the twelve months ended December 31, 2010, Caza recognized a
$728,239 net gain on divestitures under IFRS compared to previous GAAP results.
The net gain arose from the sale of the Glass Ranch properties in Texas.
Decommissioning liabilities
Under Canadian GAAP, asset retirement obligations, referred to as
decommissioning liabilities, were measured as the estimated fair value of the
retirement and decommissioning expenditures expected to be incurred. The
obligations were discounted using a credit adjusted risk free rate. Liabilities
were not remeasured to reflect period end discount rates.
Under IFRS, the decommissioning liabilities are measured as the best estimate of
the expenditure to be incurred and requires that the decommissioning liabilities
be remeasured using the period end discount rate. Under IFRS, a risk free rate
is used to discount the obligations.
In conjunction with the IFRS 1 exemption regarding assets discussed above, Caza
was required to remeasure its decommissioning liabilities upon transition to
IFRS and recognize the difference in the opening deficit. The application of
this exemption and the change in discount rates used resulted in a $157,091
increase to the decommissioning liabilities on Caza's Consolidated Balance Sheet
as at January 1, 2010.
Subsequent IFRS remeasurements of the obligation are recorded through petroleum
and natural gas properties and equipment with an offsetting adjustment to the
decommissioning liabilities. As at December 31, 2010, excluding the January 1,
2010 adjustment, Caza's decommissioning liabilities increased by $23,025 (three
and six months ended June 30, 2010 - $ $2,015 and $4,030 respectively), which
primarily reflects the remeasurement of the obligation using Caza's discount
rate of 4.19 percent as at December 31, 2010.
Share based payments
Under Canadian GAAP, Caza accounted for certain stock-based compensation plans
whereby the obligation and compensation costs were amortized over the vesting
period using the straight line method. For these stock-based compensation plans,
IFRS requires the compensation expense for share-based payments be fair valued
using an option pricing model, such as the Black-Scholes-Merton model, at each
reporting date using the graded method of amortization.
Accordingly, upon transition to IFRS, the Company recorded a fair value
adjustment of $370,012 as at January 1, 2010 to increase the contributed surplus
with a corresponding charge to the opening deficit. Caza elected not to use the
IFRS 1 exemption whereby the liabilities for share-based payments that had
vested or settled prior to January 1, 2010 were not required to be
retrospectively restated. Subsequent IFRS fair value adjustments are capitalized
as appropriate to petroleum and natural gas properties or E&E assets or expensed
to exploration and evaluation expenses, and administrative expenses with an
offsetting adjustment to contributed surplus.
In addition to the January 1, 2010 adjustment discussed above the IFRS
remeasurement costs subsequent to transition decreased the contributed surplus
by $196,639 as at December 31, 2010 (three and six months ended June 30, 2010 -
$77,666 and $141,754 respectively) in comparison to previous GAAP.
Non-controlling interests
Under Canadian GAAP, the exchangeable rights as described in Note 6(e) were
recorded as share capital due to Emerging Issues Committee No. 151 as the rights
met the required conditions for this classification. However, under IFRS, the
exchangeable rights represent a non-controlling interest in a subsidiary. As a
result, there are differences in presentation within shareholders' equity and
the statement of comprehensive loss. Additionally, under IFRS, net loss per
share is calculated on the total weighted average number of common shares
outstanding, excluding the exchangeable rights.
In the course of preparing these condensed consolidated financial statements
management identified an error in the application of IFRS on initial adoption.
The Company had previously retrospectively recognized its non-controlling
interest upon initial adoption of IFRS at January 1, 2010. Management has
determined that a prospective application should have been applied. The impact
is that non-controlling interest within equity understated by approximately $2.5
million with deficit overstated by a corresponding amount as at January 1, 2010
(December 31, 2010 - $6.4 million). Additionally, the net loss attributable to
non-controlling interests for the year ended December 31, 2010 was overstated by
$0.3 million with the offset to the net loss attributable to owners of the
Company. This has been corrected in these condensed consolidated financial
statements and the notes thereto.
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