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| Share Name | Share Symbol | Market | Type |
|---|---|---|---|
| Centamin Plc | TSX:CEE | Toronto | 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% | 2.22 | 2.25 | 2.29 | 0 | 12:06:31 |
Hot Features
Premium
Monterey Exploration Ltd. ("Monterey" or the "Corporation") (TSX:MXL) is pleased
to provide its financial and operating results for the three and nine months
ended September 30, 2009.
Monterey's interim financial statements for the three and nine months ended
September 30, 2009 and management's discussion and analysis for the three months
ended September 30, 2009 are available on SEDAR at www.sedar.com and on
Monterey's website at www.montereyexploration.com. A copy of the Corporation's
most recent corporate presentation, dated November 2009, is available on
Monterey's website.
THIRD QUARTER 2009 HIGHLIGHTS
- Achieved average daily production for the quarter of 2,089 barrels of oil
equivalent per day ("boe/d"), a 24 percent increase compared with 1,691 boe/d
during the comparative quarter in 2008.
- Generated quarterly funds flow from operations of $0.9 million versus $3.3
million of funds flow from operations generated in the third quarter of 2008.
The reduction in funds flow from operations is primarily due to Monterey
receiving an average natural gas price of $3.17/mcf, approximately 60 percent
less than the average price of $7.94/mcf received by Monterey in the third
quarter of 2008. The 2009 third quarter and nine month funds flow from
operations per diluted share was $0.03 and $0.13 respectively.
- Completed the disposition of 3 sections of undeveloped non-core lands in the
Town area of Northeast British Columbia ("NEBC") for total net proceeds of $2.7
million. Monterey had recorded no reserves or production associated with the
disposed lands.
- Entered into and subsequent to the end of the third quarter on October 1,
2009, closed an equity offering for gross proceeds of $16.1 million through the
issuance of 8.1 million common shares of which 2.65 million common shares were
issued on a flow through basis. Monterey's estimated net debt after closing of
the offering was approximately $17 million on a $45 million credit facility
while the number of Monterey shares outstanding increased to 41,002,500 common
shares.
SUBSEQUENT DEVELOPMENTS
- Entered into a financial swap contract to sell 2,000 gigajoules per day
("GJ/d"), nearly 17 percent of the Corporation's projected 2009 fourth quarter
base production, for the term of November 1, 2009 to December 31, 2009 at an
average price of $5.32/mcf.
- Received all required regulatory approvals for the construction and
commissioning of a 28 mmcf/d natural gas processing facility at Groundbirch.
This is a significant milestone for Monterey that allows the Corporation, upon
horizontal test well success, to proceed with a full scale production
development of its Grounbirch area Montney project.
- Drilled and cased the first horizontal development well at Groundbirch to a
total measured length of 4,450 meters. Completion operations have commenced and
the drilling rig has moved and is currently drilling the second location in the
scheduled program.
FINANCIAL & OPERATING SUMMARIES
Financial: Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Production Revenue(1)(000's) $4,941 $10,652 $18,152 $24,323
Funds Flow from Operations(2):
(000's) $880 $3,345 $4,344 $11,309
Per share(3):
Basic and diluted $0.03 $0.12 $0.13 $0.43
Net Earnings (loss):
(000's) ($4,809) $1,301 ($14,468) $3,013
Per share:
Basic and diluted ($0.15) $0.05 ($0.44) $0.12
Total Capital
Expenditures(4)(000's) ($1,076) $6,124 ($1,790) $21,664
Ending Net Debt (5)(000's) $32,204 $30,358 $32,204 $30,358
Share Data:
Outstanding:
Common 32,902,500 32,902,500 32,902,500 32,902,500
----------------------------------------------------------------------------
Total basic 32,902,500 32,902,500 32,902,500 32,902,500
Stock options 3,135,666 2,770,666 3,135,666 2,770,666
----------------------------------------------------------------------------
Total diluted 36,038,166 35,673,166 36,038,166 35,673,166
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average shares
outstanding:
Basic 32,902,500 27,818,345 32,902,500 26,001,109
Diluted 33,191,051 27,818,345 33,191,051 26,001,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operations: Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Average Daily Production:
Light oil and NGL (bbl/d) 436 292 456 238
Natural gas (mcf/d) 9,918 8,400 10,995 7,392
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,089 1,691 2,289 1,470
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Unit of Production Summary:
Light oil and NGL ($/bbl) 49.82 101.08 44.10 96.25
Natural gas ($/mcf)(1) 3.17 10.24 4.18 8.87
----------------------------------------------------------------------------
Oil equivalent ($/boe)(1) 25.71 68.45 29.06 60.39
Royalties ($/boe) (4.18) (12.10) (4.69) (11.11)
Operating expenses ($/boe) (10.78) (13.16) (11.44) (13.05)
Transportation expenses
($/boe) (1.29) (1.78) (1.56) (1.70)
----------------------------------------------------------------------------
Operating income(6) ($/boe) 9.46 41.41 11.37 34.53
Unrealized gain on financial
instruments ($/boe) - (14.12) - (0.52)
General &
administrative(7)($/boe) (3.26) (4.22) (3.15) (4.08)
Net interest expense ($/boe) (1.62) (1.57) (1.26) (1.85)
----------------------------------------------------------------------------
Funds flow(2) ($/boe) 4.58 21.50 6.96 28.08
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Drilling:
Gross Wells:
Natural gas - 3 1 10
Oil - - - -
Dry & abandoned - 1 - 2
----------------------------------------------------------------------------
Total - 4 1 12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net Wells:
Natural gas - 3.0 1.0 5.9
Oil - - - -
Dry & abandoned - 0.3 - 1.3
----------------------------------------------------------------------------
Total - 3.3 1.0 7.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATIONAL UPDATE
As announced in a press release dated October 1, 2009, Monterey commenced field
operations at Groundbirch in early September and spud a 100 percent working
interest horizontal well located at 4- 30-80-20W6 on September 21, 2009. This
well has been drilled and cased on budget at a total cost estimate of $3 million
to a total measured length of 4,450m and completion operations have commenced
utilizing multi-stage fracture technology. The drilling rig has moved and is
currently drilling the second location at 2-21-80-21W6 on the 10 section
contiguous land block directly west of the 4-30 well. The second well is
currently estimated to reach total vertical depth for formation log evaluation
at the end of November and reach total horizontal length sometime in the middle
of December.
The Corporation has an agreement in place with Monterey's 25 percent working
interest partner of the jointly owned 10 section land block in the Groundbirch
project area. As a result of Monterey drilling and completing the horizontal
test well at 2-21, in addition to the 75 percent working interest already held
by the Corporation, Monterey will earn the working interest partner's 25 percent
interest in 3 contiguous sections of the 10 section block in return for a 10
percent (2.5 percent net) non-convertible gross overriding royalty in those 3
sections. This will increase Monterey's overall land holdings to 13.25 net
sections in the Montney project at Groundbirch.
The Corporation has received all required regulatory approvals from the British
Columbia Oil and Gas Commission (the "OGC") for the construction and
commissioning of a 28 mmcf/d natural gas processing facility located at
6-19-80-20 W6M. The engineering design and approval process has taken just under
one year to complete and is a significant milestone for Monterey in that it now
allows the Corporation, based upon horizontal test well success, to proceed with
full scale development of a 100 percent working interest controlled and operated
Montney natural gas project in the Groundbirch area of NEBC.
All current and remaining 2009 scheduled test wells that are drilled after
September 1, 2009 and any winter 2010 development wells drilled prior to July 1,
2010 will qualify for the 2 percent British Columbia new well royalty incentive
program announced on August 6, 2009. The British Columbia oil and gas stimulus
package has been one of the key catalysts for Monterey's operational timeline at
Groundbirch to date and it has the potential of adding up to an additional $3
million of net present value per successful well to the base economics of the
project in the first 12 months of production.
Monterey has also completed the surveying in the field for the first two
multi-well horizontal development pads and will be submitting these license
applications to the OGC in the coming weeks in preparation for potential first
half 2010 operations.
Management will continue to update shareholders on the above noted operations as
results are obtained.
OUTLOOK
Monterey is increasing the 2009 capital expenditure guidance from the existing
$15 million to $20 million based on the acceleration of exploration and
development operations in the Groundbirch area. The recent disposition of
undeveloped lands in the Town area for $2.7 million and the $16.1 million equity
offering completed in October will assist in financing the increased
expenditures through the remainder of 2009 and into early 2010.
Monterey's Management and Board of Directors are currently in the process of
reviewing the various capital projects for 2010 and once operational results
have been obtained at Groundbirch, an initial 2010 budget will be approved. In
addition to the planned expenditures directed to the operational activities in
the Groundbirch area, the Corporation, based on a continual improvement in
natural gas commodity prices may commence with the second round of horizontal
development drilling of the Gething play at Squirrel and the Cadomin resource
play at Brassey in early 2010. Monterey has licensed the next 7 development
wells for the Squirrel and Brassey area projects with the next Brassey drilling
location already constructed.
Management remains very optimistic on the future of Monterey and will continue
to execute its business plan in a manner that is focused on adding value to
Monterey's current and potential future shareholders.
Notes:
(1) Includes gain or loss on financial instruments from commodity price hedging
activities.
(2) Funds flow from operations is not defined by Canadian generally accepted
accounting principles ("GAAP") and thus is referred to as a non-GAAP measure;
other entities may calculate funds flow differently than Monterey. Funds flow
from operations is described in the Corporation's management discussion and
analysis dated September 30, 2009 and is based on cash provided by operating
activities before changes in non-cash working capital and asset retirement
expenditures.
(3) Funds flow from operations per share is not defined by Canadian GAAP and
thus is referred to as a non-GAAP measure. Funds flow from operations per share,
is described in the Corporation's management discussion and analysis, and
calculated by dividing funds flow by the weighted average number of shares
outstanding during the period consistent with the calculation of net income per
share.
(4) Total capital expenditures is not defined by Canadian GAAP and thus is
referred to as a non-GAAP measure. Total capital expenditures, is described in
the Corporation's management discussion and analysis, and is equal to the
property and equipment additions, as disclosed under Investing activities in the
Statements of Cash Flows of the Corporation financial statements, plus the
outlays in respect of oil and gas properties acquisitions and corporate
acquisitions (including the costs of the acquisition and the allocation to long
lived asset retirement ), less the net proceeds received from the disposition of
oil and gas properties.
(5) Net debt is not defined by Canadian GAAP and thus is referred to as a
non-GAAP measure. Net debt, is described in the Corporation's management
discussion and analysis, and is equal to total bank indebtedness plus capital
lease obligations and less working capital (excluding financial instrument
assets or liabilities).
(6) Operating income is not defined by GAAP and thus is referred to as a
non-GAAP measure; other entities may calculate operating income differently than
Monterey. Operating income, is described in the Corporation's management
discussion and analysis, and is calculated by deducting the sum of royalty,
operating and transportation expenses from production revenue and gains or
losses from financial instruments.
(7) Excludes capitalized general & administrative expenditures and stock-based
compensation expense.
Forward Looking Statements & Advisories
This press release contains forward-looking statements, including but not
limited to, statements concerning estimated net debt, the use of proceeds from
the equity financing completed on October 1, 2009, planned drilling and
completion operations and development of processing facilities, the receipt and
applicability of royalty incentives and the resulting impact on the Corporation,
execution of the Corporation's business plan, expectations regarding the ability
to add to reserves through exploration and development activities, projections
and costs and expenses and crude oil and natural gas production levels.
Additionally, the use of any of the words "subsequent", "estimated", "after"
"commenced", "allows", "proceed", "estimate" or "estimated", "will", "upon",
"currently", "prior", "potential", "anticipate", "continue", "expect",
"forecast", "future", "may", "project", "should", "believe" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are subject to numerous risks and uncertainties,
certain of which are beyond the Corporation's control, including the impact of
general economic conditions; volatility in market prices for crude oil and
natural gas; industry conditions; currency fluctuation; imprecision of reserve
estimates; liabilities inherent in crude oil and natural gas operations;
environmental risks; incorrect assessments of the value of acquisitions and
exploration and development programs; competition from other producers; the lack
of availability of qualified personnel or management; changes in income tax laws
or changes in tax laws and incentive programs relating to the oil and gas
industry;
hazards such as fire, explosion, blowouts, cratering, and spills, each of which
could result in substantial damage to wells, production facilities, other
property and the environment or in personal injury; stock market volatility; and
ability to access sufficient capital from internal and external sources. As a
consequence, Monterey's actual results may differ materially from those
expressed in, or implied by, the forward-looking statements. Although Monterey
believes that the expectations reflected in such forward-looking statements or
information are reasonable, undue reliance should not be placed on
forward-looking statements as the Corporation can give no assurance that such
expectations will prove to be correct. Actual results may differ materially from
those expressed or implied in any forward-looking statements made by, or on
behalf of, Monterey. In addition to other factors and assumptions which may be
identified in this press release and other documents filed by the Corporation,
assumptions have been made regarding, among other things: the impact of
increasing competition; the general stability of the economic and political
environment in which Monterey operates; the ability of the Corporation to obtain
qualified staff, equipment and services in a timely and cost efficient manner;
drilling results; the ability of the operator of the projects which the
Corporation has an interest in to operate the field in a safe, efficient and
effective manner; Monterey's ability to obtain financing on acceptable terms
including Monterey's continued access to existing credit facilities; field
production rates and decline rates; the ability to replace and expand oil and
natural gas reserves through acquisition, development or exploration; the timing
and costs of pipeline, storage and facility construction and expansion; the
ability of the Corporation to secure adequate product transportation; future oil
and natural gas prices; currency, exchange and interest rates; the regulatory
framework regarding royalties, taxes and environmental matters in the
jurisdictions in which the Corporation operates; and Monterey's ability to
successfully market its oil and natural gas products. Readers are cautioned that
the foregoing list of factors is not exhaustive. Forward-looking statements
contained in this press release are made as at the date of this press and
Monterey disclaims any intent or obligation to update publicly or to revise any
of the included forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required by applicable
securities laws.
However, in the event that subsequent events are reasonably likely to cause
actual results to differ materially from material forward-looking statements or
information previously disclosed by Monterey for a period that is not yet
complete, Monterey will provide disclosure on such events and the anticipated
impact of such events.
BOE Disclosure
Disclosure provided herein in respect of barrels of oil equivalent (boe) may be
misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf:
1 boe is based on an energy equivalency conversion method primarily applicable
at the burner tip and does not represent a value equivalency at the wellhead.
Non-GAAP Measures
Within this press release, references are made to terms commonly used in the oil
and gas industry. Management uses funds flow from operations, operating income
and capital expenditures to analyze operating performance. These measures do not
have standardized meanings prescribed by GAAP, and may not be comparable to
similar measures presented by other companies. For this press release the
measures used are: (i) Funds flow from operations is determined by using cash
flow from operations before changes in non-cash operating working capital and
asset retirement expenditures; (ii) Funds flow per basic and funds flow per
diluted share is calculated by dividing funds flow as described earlier, by the
total number of respective weighted average basic and diluted common shares
outstanding during the period; (iii) Total capital expenditures is equal to
capital expenditures plus the recorded cost of oil and gas properties of
corporate acquisitions, including the costs of the acquisition and the
allocation to long lived asset retirement; (iv) Net debt is equal to total bank
indebtedness plus capital lease obligations less/(plus) non-cash working
capital/(deficit); (v) Operating income is calculated by deducting royalties,
operating costs and transportation costs from sales revenues and hedging gains /
(losses); and (vi) total diluted or fully diluted share figures are calculated
by adding the number of common shares underlying the outstanding stock options
to the number of common shares outstanding (i.e. basic outstanding common
shares) at the respective date. For additional information concerning Monterey's
use of non-GAAP measures and reconciliations to the applicable GAAP measures,
please see Monterey's management's discussion and analysis for the three and
nine months ended September 30, 2009 available at www.sedar.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") should be read in conjunction
with Monterey's unaudited interim Financial Statements for the three month and
nine months ended September 30, 2009 and audited Financial Statements and notes
thereto for the year ended December 31, 2008. The Financial Statements have been
prepared in Canadian dollars and in accordance with Canadian generally accepted
accounting principles ("GAAP").
This MD&A contains forward-looking statements, non-GAAP measures, and
disclosures of barrels of oil equivalent volumes. Readers are referred to the
advisories concerning forward-looking statements, non-GAAP measures, and barrels
of oil equivalent conversions are contained under the heading "Forward Looking
Statements & Advisories". Disclosures in respect of the non-GAAP measures and
Forward Looking Statements & Advisories are contained at the end of this MD&A.
Additional information regarding Monterey Exploration Ltd. such as the audited
Financial Statements, Annual Information Form and other disclosure documents can
be found on SEDAR at www.sedar.com or on the Corporation's website
www.montereyexploration.com.
This MD&A is dated November 10, 2009.
Monterey Exploration Ltd. ("Monterey" or the "Corporation") is continued under
the Business Corporations Act (Alberta) and is engaged in the acquisition,
exploration, development and production of natural gas, natural gas liquids and
crude oil in the Western Canadian Sedimentary Basin.
FREQUENTLY USED TERMS
In this document certain terms are used frequently. For instance, Monterey
Exploration Ltd. is commonly referred to as either "Monterey" or the
"Corporation" and barrels of oil equivalent are regularly noted with the term
"boe".
Term or abbreviation
----------------------------------------------------------------------------
"boe" Barrel(s) of oil equivalent
"mcf" Thousand cubic feet
"bbl" Barrel
"GJ" Gigajoule
"LIBOR" London Interbank Offered Rate
"m" preceding a volumetric
measure 1,000 units of the volumetric measure
"mm" preceding a volumetric
measure 1,000,000 units of the volumetric measure
"NGL" Natural gas liquids
"NEBC" Northeast British Columbia
"Upper Lake" Upper Lake Oil and Gas Ltd.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the financial statements in accordance with GAAP requires
management to make estimates, judgments and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities, if any, at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. In determining
estimates required to prepare the Corporation's financial statements, management
uses available information it considers to be reasonable under the
circumstances. Readers are cautioned that actual results could differ from these
estimates. Except for the items disclosed under "Accounting Pronouncements and
Account Policy Changes", the accounting policies and estimates used to prepare
the financial statements for the three and nine months ended September 30, 2009
are consistent with those disclosed in Monterey's financial statements and MD&A
for the year ended December 31, 2008. For a detailed discussion of the
accounting policies and critical accounting estimates used please refer to the
Corporation's December 31, 2008 year ended financial statements and MD&A.
ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING POLICY CHANGES
During the first quarter of 2009, Monterey adopted CICA handbook section 3064,
Goodwill and Intangible Assets. The handbook section applies to goodwill
subsequent to initial recognition and establishes standards for the recognition,
measurement and disclosure of goodwill and intangible assets. Adoption of the
new disclosure requirement did not have an impact on the Corporation's financial
statements or disclosure in the notes to the financial statements.
The Corporation will be obligated to convert its financial statements and
changeover to international financial reporting standards ("IFRS") for interim
and annual financial statements relating to fiscal years beginning on or after
January 1, 2011. Management has taken steps to educate its staff and reviewed
its accounting systems to determine the differences between Canadian GAAP and
IFRS. An implementation plan for the changeover from Canadian GAAP to IFRS has
been prepared that calls for the determination of cash generating units,
adjustments to the accounting system and allocation of Canadian GAAP balances to
the cash generating units during the fourth quarter of 2009. Upon the completion
of the December 31, 2009 Canadian GAAP financial statements the adjustments to
convert the December 31, 2009 Canadian GAAP balance sheet to be IFRS compliant
are to be calculated. In addition, Monterey intends to prepare IFRS compliant
financial statements, excluding the notes to the financial statements for each
fiscal quarter, this will allow the Corporation to have comparative information
readily available for financial reporting when IFRS is adopted on January 1,
2011. The application of IFRS accounting policies is likely to have a material
impact on Monterey's financial statements; however Management is not able to
quantify the impacts at this time.
INTERNAL CONTROLS REPORTING
Disclosure Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer, together with other
members of Management, have designed Monterey's disclosure controls and
procedures to provide reasonable assurance that material information relating to
the Corporation is disclosed in a timely manner and free from material
misstatement. As at December 31, 2008, an evaluation of the effectiveness of
Monterey's disclosure controls and procedures was conducted in accordance with
Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual
Financial and Interim Filings, based on that evaluation, the Chief executive
Officer and the Chief Financial Officer concluded that the design and operation
of Monterey's disclosure controls and procedures were effective as at December
31, 2008.
During the nine months ended September 30, 2009, there have been no material
changes in the design or operation of the Corporation's disclosure controls and
procedures.
Internal Controls over Financial Reporting
Also in accordance with Multilateral Instrument 52-109, the Chief Executive
Officer and Chief Financial Officer of Monterey are responsible for establishing
and maintaining adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian generally accepted accounting
principles. The Chief Executive Officer and Chief Financial Officer directed the
assessment of the design and operating effectiveness of Monterey's internal
controls over financial reporting as at December 31, 2008 and based on that
assessment determined that the Corporation's internal control over financial
reporting was, in all material respects, appropriately designed and operated
effectively.
During the nine months ended September 30, 2009, there have been no material
changes in the design or operation of the Corporation's internal controls over
financial reporting.
Summary
Due to inherent limitations of a control system, including the Corporation's
disclosure controls and procedures and internal controls over financial
reporting, no matter how well conceived or operated may not prevent or detect
misstatements, errors or fraud and can only provide reasonable assurance that
the objectives of the control system are met.
SIGNIFICANT EVENTS
During the third quarter of 2009, the following items had a significant impact
on either the current or future operations of the Corporation:
- Achieved average daily production for the quarter of 2,089 barrels of oil
equivalent per day ("boe/d"), a 24 percent increase relative to the 1,691 boe
per day in the comparative quarter in 2008.
- Generated quarterly funds flow from operations of $0.9 million versus $3.3
million of funds flow from operations generated in the third quarter of 2008.
Third quarter funds flow from operations per basic and diluted share in 2009 was
$0.03.
- Finalized the disposition of 3 sections of undeveloped non-core lands in the
Town area of NEBC for total net proceeds of $2.7 million. The disposition was
used to reduce bank debt and assist with financing the Corporation's exploration
and development activities during the third quarter of 2009.
- Commenced drilling of the Corporation's first horizontal well in the
Groundbirch area of NEBC, targeting the Montney formation. Currently, the well
is being completed and tested.
- On October 1, 2009, completed the issuance of 8.1 million common shares for
total net proceeds of approximately $15.1 million. The proceeds will be used to
finance a portion of Monterey's 2009/2010 winter drilling program and for other
general corporate purposes.
- Subsequent to the end of the quarter, Monterey entered into a financial swap
contract on a total of 2,000 gigajoules per day ("GJ/d") for the term of
November 1, 2009 to December 31, 2009 at an average price of $5.32/mcf. The
2,000 GJ/d represents approximately 17 percent of the Corporation's projected
fourth quarter 2009 base production.
SUMMARY OF FINANCIAL AND OPERATING RESULTS
In $000's unless
referring to Three Three Three Nine Nine
volumetric months months months months months
measures or ended ended ended ended ended
otherwise noted Sept 30, June 30, Sept 30, Sept 30, Sept 30,
(unaudited) 2009 2009 2008 2009 2008
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 9,918 11,151 8,400 10,995 7,392
Oil and NGLs (bbl/d) 436 470 292 456 238
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,089 2,329 1,691 2,289 1,470
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf)(1) $ 3.17 $ 3.60 $ 10.24 $ 4.18 $ 8.87
Oil and NGLs ($/bbl) $ 49.82 $ 44.81 $ 101.08 $ 44.10 $ 96.25
----------------------------------------------------------------------------
Oil equivalent
($/boe)(1) $ 25.71 $ 26.42 $ 68.45 $ 29.06 $ 60.39
----------------------------------------------------------------------------
Financial:
Production revenue(1) $ 4,941 $ 5,597 $ 10,652 $ 18,152 $ 24,323
Operating income(2) $ 1,818 $ 1,842 $ 6,445 $ 7,098 $ 13,908
Funds flow from
operations(2) $ 880 $ 844 $ 3,345 $ 4,344 $ 11,309
Net earnings (loss) $ (4,809) $ (5,485) $ 1,301 $(14,468) $ 3,013
Total capital
expenditures (net of
disposition
proceeds)(2) $ (1,076) $ 1,104 $ 6,124 $ (1,790) $ 21,664
Per Share:
Funds flow from
operations per
share (2):
Basic and diluted $ 0.03 $ 0.03 $ 0.12 $ 0.13 $ 0.43
Net earnings (loss)
per share:
Basic and diluted $ (0.15) $ (0.17) $ 0.05 $ (0.44) $ 0.12
Financial Position:
Net debt (2) $ 32,204 $ 34,152 $ 30,358 $ 32,204 $ 30,358
Total assets $123,789 $131,162 $140,482 $123,789 $140,482
Total long-term
liabilities $ 4,610 $ 4,439 $ 4,122 $ 4,610 $ 4,122
Shareholders' equity $ 84,976 $ 89,657 $101,111 $ 84,976 $101,111
Share data:
Outstanding:
Common shares 32,902,500 32,902,500 32,902,500 32,902,500 32,902,500
----------------------------------------------------------------------------
Stock options 3,135,666 3,135,666 2,770,666 3,135,666 2,770,666
----------------------------------------------------------------------------
Total diluted
shares 36,038,166 36,038,166 35,673,166 36,038,166 35,673,166
----------------------------------------------------------------------------
Weighted average:
Basic 32,902,500 32,902,500 27,818,345 32,902,500 26,001,109
Diluted 33,191,051 33,136,082 27,818,345 33,191,051 26,001,109
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes processing and marketing revenue and gains / losses on
financial instruments.
(2) See non-GAAP measure section for additional disclosure.
THIRD QUARTER 2009 VERSUS SECOND QUARTER 2009
Three months Three months
ended ended Percentage
Sept 30, 2009 June 30, 2009 Change
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 9,918 11,151 (11)
Oil and NGLs (bbl/d) 436 470 (7)
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,089 2,329 (10)
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf) 3.17 3.60 (12)
Oil and NGLs ($/bbl) 49.82 44.81 11
----------------------------------------------------------------------------
Oil equivalent ($/boe) 25.71 26.42 (3)
----------------------------------------------------------------------------
Sales Volumes
For the three months ended September 30, 2009, Monterey's average daily
production was 2,089 boe/d, which is 10 percent lower than the 2,329 boe/d
average daily production for the second quarter of 2009. The decrease reflects
natural declines at the Corporation's areas as no new production was added from
exploration and development activities.
Realized Prices
Monterey's average realized natural gas price during the third quarter of 2009
was $3.17 per mcf, a decrease of 12 percent relative to the Corporation's
average realized natural gas price per mcf of $3.60 during the second quarter of
2009. Monterey's average realized liquids price for the third quarter of 2009
increased by 11 percent when compared to the second quarter.
The decrease in Monterey's average sales prices for natural gas during the third
quarter is a reflection of lower prices due to changes in the North American
demand-supply balance as a result of the current global recession and the impact
of additional production placed on-stream in the United States in 2008 and early
2009. The increase in the Corporation's average price received for its liquids
sales represents the impact of firming world oil prices as economies,
particularly in Asia, began to recover from the global recession.
Royalties
During the third quarter of 2009, the Corporation had an average royalty cost
per boe of $4.18; and $4.29 per boe in the second quarter. The decrease in
royalty costs per boe over the second quarter of 2009 was due to lower average
realized natural gas prices during the third quarter. As a percentage of
Monterey's third quarter production revenue, the Corporation's average royalty
rate remained at 16 percent, which was the same as the second quarter.
Operating Expenses
Relative to the second quarter of 2009, operating costs per boe decreased to
$10.78 from $11.93 per boe. The primary reason for the decrease during the third
quarter of 2009 is due to fewer workover operations being performed in
comparison to the previous quarter.
Transportation Costs
Transportation costs during the third quarter of 2009 decreased in relation to
the second quarter of 2009 due to lower production volumes. On a per boe basis,
the unit transportation cost for the third quarter of $1.29 per boe is nominally
lower than Monterey's transportation cost per boe of $1.50 during the second
quarter of 2009.
Operating Income
The operating income of $1.8 million for the third quarter of 2009 is slightly
less than the operating income of the prior quarter. The impacts of lower
natural gas revenue and declining production in the third quarter were largely
mitigated by reduced field operating expenses.
Monterey's third quarter realized unit operating income increased nearly 9
percent to $9.46 per boe relative to the $8.70 per boe recorded in the second
quarter of 2009. The improvement is the net result of the reduction in unit
operating expenses combined with strengthening liquids prices offset lower
natural gas prices.
Change due to:
-------------------------
Three months Three months
ended ended
($000's) Sept 30, 2009 Price/Cost Volume June 30, 2009
----------------------------------------------------------------------------
Operating Income:
Production revenue
Natural gas sales $ 2,943 (367) (371) $ 3,681
Oil and NGLs sales 1,998 201 (119) 1,916
----------------------------------------------------------------------------
4,941 5,597
Royalties 803 (20) (86) 909
Operating expenses 2,072 (220) (235) 2,527
Transportation costs 248 (41) (30) 319
----------------------------------------------------------------------------
Operating income $ 1,818 115 (139) $ 1,842
----------------------------------------------------------------------------
$/boe $ 9.46 $ 8.70
----------------------------------------------------------------------------
Depletion, Depreciation and Accretion ("DD&A")
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 June 30, 2009
----------------------------------------------------------------------------
Oil and gas properties $ 5,409 $ 6,046
Office equipment 17 16
Asset retirement accretion 179 185
----------------------------------------------------------------------------
$ 5,605 $ 6,247
----------------------------------------------------------------------------
$/boe $ 28.18 $ 29.48
----------------------------------------------------------------------------
DD&A expense for the third quarter of 2009 decreased by approximately $0.6
million over the previous quarter. The decrease in total DD&A expense was a
primarily the result of lower production volumes due to natural declines. On a
per boe basis, a favorable technical revision in the proved reserves to one of
Monterey's properties is the primary explanation for the 3 percent improvement
in the third quarter unit DD&A rate to $28.18 per boe from $29.48 per boe in the
second quarter.
General & Administrative ("G&A")
The expensed and capitalized G&A expenses totaled $1.0 million in the third
quarter of 2009 about 11 percent less than reporting for the second quarter.
Total per unit G&A costs were $5.17 per boe for the third quarter of 2009
representing a nominal decrease of $0.06 per boe relative to the second quarter
of 2009. Monterey incurred additional expenses during the second quarter
associated with the Corporation's annual public entity obligations, such as the
publishing of an annual report, annual information form and the annual meeting
of shareholders which led to incremental G&A costs.
Three Months Three Months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 June 30, 2009
----------------------------------------------------------------------------
Expensed G&A:
General and administrative expenses $ 627 $ 734
Stock-based compensation 84 82
----------------------------------------------------------------------------
Total expensed G&A $ 711 $ 816
----------------------------------------------------------------------------
$/boe $ 3.71 $ 3.85
----------------------------------------------------------------------------
Capitalized G&A:
General and administrative expenses $ 236 $ 248
Stock-based compensation and income tax
adjustment 45 45
----------------------------------------------------------------------------
Total capitalized G&A $ 281 $ 293
----------------------------------------------------------------------------
$/boe $ 1.46 $ 1.38
----------------------------------------------------------------------------
Total G&A costs $ 992 $ 1,109
----------------------------------------------------------------------------
$/boe $ 5.17 $ 5.23
----------------------------------------------------------------------------
The capitalized general and administrative costs include both general and
administrative cash expenditures and non-cash stock-based compensation
associated with exploration and development activities. The table below provides
additional disclosure of the components of capitalized general and
administrative costs.
Three Months Three Months
ended ended
(in $000's) Sept 30, 2009 June 30, 2009
----------------------------------------------------------------------------
Salaries and employment costs $ 183 $ 198
Office rent 51 48
Other general and administrative costs 2 2
----------------------------------------------------------------------------
Capitalized cash general and administrative
costs $ 236 $ 248
----------------------------------------------------------------------------
Capitalized stock-based compensation 45 45
----------------------------------------------------------------------------
Capitalized non-cash costs $ 45 $ 45
----------------------------------------------------------------------------
Total capitalized general and administrative
costs $ 281 $ 293
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest
Three Months Three Months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 June 30, 2009
----------------------------------------------------------------------------
Interest expense $ 317 $ 309
Interest income (6) (45)
----------------------------------------------------------------------------
Net interest expense $ 311 $ 264
----------------------------------------------------------------------------
$/boe $ 1.62 $ 1.25
----------------------------------------------------------------------------
The increase in the third quarter's net interest expense and unit net interest
expense per boe, relative to the second quarter of 2009 is the result of the
reduction in interest income earned on advances to regulatory authorities.
FUNDS FLOW FROM OPERATIONS
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 June 30, 2009
----------------------------------------------------------------------------
Operating income $ 1,818 $ 1,842
General and administrative expenses (1) (627) (734)
Net interest expense (311) (264)
----------------------------------------------------------------------------
Funds flow from operations $ 880 $ 844
----------------------------------------------------------------------------
Operating income per boe $ 9.46 $ 8.70
General and administrative expenses (1) (3.26) (3.46)
Net interest expense (1.62) (1.25)
----------------------------------------------------------------------------
Funds flow from operations per boe (2) $ 4.58 $ 3.99
----------------------------------------------------------------------------
(1) Excluding stock-based compensation.
(2) Funds flow from operations per boe is funds flow from operations divided
by total boe production in the period.
Monterey's funds flow from operations for the third quarter increased marginally
over funds flow from operations for the second quarter of 2009. The net result
of strengthening liquids prices and lower operating expenses offset by lower
natural gas prices and declining sales volumes explain the third quarter
increase in funds flow from operations.
Third quarter unit funds flow from operations of $4.58 per boe was 15 percent
higher than the $3.99 per boe recorded in the second quarter. The reduction in
Monterey's overall cost base is the primary reason for the improvement recorded
in the third quarter.
THIRD QUARTER 2009 VERSUS THIRD QUARTER 2008
Three months ended
Sept 30, Sept 30, Percentage
2009 2008 Change
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 9,918 8,400 18
Oil and NGLs (bbl/d) 436 292 49
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,089 1,691 23
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf) 3.17 7.94 (60)
Natural gas including financial
instruments ($/mcf) 3.17 10.24 (69)
Oil and NGLs ($/bbl) 49.82 101.08 (51)
----------------------------------------------------------------------------
Oil equivalent ($/boe) 25.71 57.06 (55)
Oil equivalent including financial
instruments ($/boe) 25.71 68.45 (62)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales Volumes
For the three months ended September 30, 2009, Monterey's average daily
production was 2,089 boe per day, an increase of 398 boe per day compared to the
average daily production for the third quarter of 2008. The increase in
production relative to the third quarter of 2008 represents production additions
resulting from new production as a result of successful drilling operations
conducted in the last half of 2008 in the Brassey, Squirrel, Laprise, Ferrybank
and Smoky areas, the impact of production enhancements resulting from Monterey
assuming operatorship of the Harmattan area oil unit in late 2008 and
incremental production from the August 29, 2008 acquisition of Upper Lake.
Realized Prices
Monterey's average wellhead natural gas price during the third quarter of 2009
was $3.17 per mcf, a decrease of 60 percent in relation to the $7.94 per mcf
average natural gas price during the comparative quarter in 2008.
The Corporation's average realized liquids price of $49.82 per barrel is a
decrease of 51 percent in comparison to the $101.08 realized in the third
quarter of 2008.
Both North American natural gas and worldwide crude oil prices were beginning to
come off near all time highs in the third quarter of 2008. In the third quarter
of 2009 record level of North American natural gas in storage, low summer
cooling demand due to a relatively temperate summer in the United States and
lack of severe weather leading to production or delivery suspensions combined to
push natural gas prices down in the third quarter of 2009. Worldwide liquids
prices have improved throughout 2009; however the lingering effect of the global
recession on the demand for commodities such as oil has meant that liquids
prices remain well below the highs of 2008.
Royalties
The royalty expense for the third quarter of 2009 was $0.8 million which is 57
percent less than in 2008. This reduced royalty expenses in 2009 reflect a
reduction in the royalty rate on the Corporation's production and the impact of
lower oil and gas prices.
Monterey's average royalty rate in the third quarter of 2009 of 16 percent of
production revenue was five percent lower than the Corporation's average royalty
rate of 21 percent recorded in 2008. The majority of production additions in
late 2008 were from oil and gas properties in British Columbia which has a
preferential royalty structure over Alberta. The Corporation's unit royalty cost
of $4.18 per boe in 2009 compares favorably to the comparative quarter of 2008
when Monterey's royalty cost per boe was $12.10, the lower unit royalties in
2009 reflect the lower commodity prices received for oil and gas production.
Operating Expenses
In the third quarter of 2009, despite a 24 percent increase in average daily
sales volumes, operating expenses totaled $2.1 and are only marginally higher
than the $2.0 million for the third quarter of 2008.
Relative to the third quarter of 2008, 2009 unit operating costs decreased by
$2.38 per boe or 18 percent to $10.78. The 2009 desirable change is explained by
Monterey's cost control activities, optimization operations completed at
Monterey's Harmattan area and the impact of new production, added in late 2008
and early 2009, having a lower unit of production operating expense than
Monterey's existing base production.
Transportation Costs
Transportation expenses for the third quarter of 2009 totaled $0.2 million,
about 10 percent lower than costs recorded in 2008. Lower costs per unit as
discussed below, offset incremental transportation costs resulting from higher
sales volumes in 2009.
Unit transportation expense of $1.29 per boe for the third quarter of 2009 is a
decrease of 28 percent from the $1.78 per boe unit transportation cost of the
third quarter of 2008. The decrease is largely explained by savings as a result
of the October 31, 2008 expiry of natural gas firm service transportation.
Operating Income
In the third quarter of 2009 operating income amounted to $1.8 million, about 72
percent less than the $6.4 million recorded in 2008. Despite the increase in
production, lower commodity prices have led to the operating income reduction.
On a per boe basis Monterey's average operating income of $9.46 per boe for the
third quarter of 2009 decreased by 77 percent when compared to the same period
of 2008. While there have been improvements in the unit operating expenses and
transportation costs the difference in the 2009 and 2008 third quarter commodity
prices had a pervasive impact on unit operating income.
Three months Change due to: Three months
ended ------------------- ended
($000's) Sept 30, 2009 Price/Cost Volume Sept 30, 2008
----------------------------------------------------------------------------
Operating Income:
Production revenue
Natural gas sales $ 2,943 (4,341) 1,115 $ 6,169
Oil and NGLs sales 1,998 (2,055) 1,342 2,711
Gain from financial
instruments - (1,772) - 1,772
----------------------------------------------------------------------------
4,941 (8,168) 2,457 10,652
Royalties 803 (1,521) 442 1,882
Operating costs 2,072 (457) 481 2,048
Transportation costs 248 (94) 65 277
----------------------------------------------------------------------------
Operating income $ 1,818 (6,096) 1,469 $ 6,445
----------------------------------------------------------------------------
$/boe $ 9.46 $ 41.41
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion, Depreciation and Accretion Expense
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Oil and gas properties $ 5,409 $ 4,004
Office equipment 17 17
Asset retirement accretion 179 79
----------------------------------------------------------------------------
$ 5,605 $ 4,100
----------------------------------------------------------------------------
$/boe $ 28.18 $ 26.35
----------------------------------------------------------------------------
In comparison to the three months ended September 30, 2008, the DD&A provision
in 2009 increased by $1.5 million to $5.6 million as a Monterey experienced of a
seven percent increase in unit DD&A costs and 23 percent growth in production
volumes.
Unit DD&A expense increased by $1.83 per boe to $28.18 per boe as exploration
activities during 2009 focused in the Groundbirch area. As at September 30, 2009
there have been no proved reserve additions resulting from the Groundbirch
operations.
General & Administrative
General and Administrative expense of $0.7 million for the third quarter of 2009
is nominally lower than the total G&A expense for the same quarter during 2008.
The combination of expensed and capitalized G&A expenses for 2009 of $1.0
million is also about the same as the amount recorded in 2008.
On a unit basis, 2009 expensed G&A costs fell 24 percent to $3.71 per boe while
capitalized G&A costs decreased by 17 percent to $1.46 per boe and total G&A
costs dropped 22 percent to $5.17 per boe. The reductions in unit expensed,
capitalized and total G&A costs represents economies of scale achieved from
higher sales volumes.
The following table summarizes the G&A costs recorded for each of the third
quarters of 2009 and 2008.
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Expensed G&A:
General and administrative expenses $ 627 $ 657
Stock-based compensation 84 100
----------------------------------------------------------------------------
Total expensed G&A $ 711 $ 757
----------------------------------------------------------------------------
$/boe $ 3.71 $ 4.87
----------------------------------------------------------------------------
Capitalized G&A:
General and administrative expenses $ 236 $ 214
Stock-based compensation 45 58
----------------------------------------------------------------------------
Total capitalized G&A $ 281 $ 272
----------------------------------------------------------------------------
$/boe $ 1.46 $ 1.75
----------------------------------------------------------------------------
Total G&A costs $ 992 $ 1,029
----------------------------------------------------------------------------
$/boe $ 5.17 $ 6.62
----------------------------------------------------------------------------
The capitalized general and administrative costs include both general and
administrative cash expenditures and non-cash stock-based compensation
associated with exploration and development activities. The table below provides
additional disclosure of the components of capitalized general and
administrative costs.
Three months Three months
ended ended
(in $000's) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Salaries and employment costs $ 183 $ 182
Office rent 51 30
Other general and administrative costs 2 2
----------------------------------------------------------------------------
Capitalized cash general and administrative
costs $ 236 $ 214
----------------------------------------------------------------------------
Capitalized stock-based compensation $ 45 $ 58
----------------------------------------------------------------------------
Total capitalized general and administrative
costs $ 281 $ 272
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Interest expense $ 317 $ 247
Interest income (6) -
----------------------------------------------------------------------------
Net interest expense $ 311 $ 247
----------------------------------------------------------------------------
$/boe $ 1.62 $ 1.57
----------------------------------------------------------------------------
Relative to 2008, the Corporation's average outstanding bank debt was higher
during the third quarter of 2009. The increased level of bank borrowings
explains the 26% growth in net interest expense in 2009.
FUNDS FLOW FROM OPERATIONS
Three months Three months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Operating income $ 1,818 $ 6,445
Unrealized gain on financial instruments - (2,196)
General and administrative expenses (1) (627) (657)
Net interest expense (311) (247)
----------------------------------------------------------------------------
Funds flow from operations $ 880 $ 3,345
----------------------------------------------------------------------------
Operating income per boe $ 9.46 $ 41.41
Unrealized gain on financial instruments - (14.12)
General and administrative expenses (1) (3.26) (4.22)
Net interest expense (1.62) (1.57)
----------------------------------------------------------------------------
Funds flow from operations per boe (2) $ 4.58 $ 21.50
----------------------------------------------------------------------------
(1) Excluding stock-based compensation.
(2) Funds flow from operations per boe is equal to funds flow from
operations divided by total boe production in the period.
The Corporation's funds flow from operations for the third quarter of 2009
totaled $0.9 million was 74 percent lower than the $3.3 million reported during
third quarter of 2008. The decrease in funds flow from operations was mainly due
to the 55 percent decrease in average sales price received and was nominally
offset by the Corporation's 23 percent increase in average sales volumes.
On a per unit basis, the 2009 third quarter funds flow from operations of $4.58
per boe is a decrease of 79 percent relative to the third quarter of 2008.
Similar to the absolute dollar figures, the reduction in 2009 is essentially due
to lower commodity prices tempered by the 23 percent growth in production
volumes.
YEAR-TO-DATE SEPTEMBER 30, 2009 VERSUS YEAR-TO-DATE SEPTEMBER 30, 2008
Nine months ended
Sept 30, Sept 30, Percentage
2009 2008 Change
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 10,995 7,392 49
Oil and NGLs (bbl/d) 456 238 92
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,289 1,470 56
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf) 4.18 9.19 (55)
Natural gas including financial
instruments ($/mcf) 4.18 8.87 (53)
Oil and NGLs ($/bbl) 44.10 96.25 (54)
----------------------------------------------------------------------------
Oil equivalent ($/boe) 29.06 62.03 (53)
Oil equivalent including financial
instruments ($/boe) 29.06 60.39 (52)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales Volumes
For the nine months ended September 30, 2009, Monterey's average daily
production was 2,289 boe per day, an 819 boe per day or 56 percent increase
compared to the average daily production for the comparative period during 2008.
The increase in production relative to 2008 represents production additions
resulting from successful drilling operations conducted since September 30, 2008
in the Brassey, Ferrybank and Smoky areas, as well as production enhancements
resulting from Monterey assuming operatorship of the Harmattan area oil unit and
production acquired as a result of the August 29, 2008 acquisition of Upper
Lake.
Realized Prices
Monterey's average natural gas price during the first nine months of 2009 was
$4.18 per mcf, a decrease of 55 percent in relation to the average natural gas
price during the comparative period during 2008, while Monterey's average
realized liquids price decreased by 54 percent in comparison to the first nine
months of 2008.
The decrease in the Corporation's average realized sales prices in 2009 is a
reflection of low commodity prices due to changes in the demand-supply balance
as a result of the lingering global recession.
Royalties
Royalty expense totaled $2.9 million for the first nine months of 2009, about 34
percent less than the $4.5 million for the same period of 2008. The difference
in royalty expense in 2009 and 2008 is explained by the reduction in realized
prices marginally offset by increase in sales volumes, as discussed above.
Monterey's average royalty rate during the nine months ended September 30, 2009
of 16 percent was two percent less than the Corporation's average royalty rate
of 18 percent recorded in 2008. The reduction in the royalty rate is due to
natural decline of on-stream wells in 2009; in the province of British Columbia
wells that have low production rates have a reduced crown royalty charged
against the resulting production revenue.
Operating Expenses
In 2009 operating costs have totaled $7.1 million which is 36 percent higher
than the $5.3 million for the first nine months of 2008. The 2009 total reflects
the 56 percent increase in sales volumes as discussed above.
Relative to the first nine months of 2008, unit operating expenses in 2009
decreased by $1.61 per boe or 12 percent to $11.44 per boe. The decrease
achieved in 2009 is a result of increased diligence to control costs,
optimization activities completed at Monterey's Harmattan area and the impact of
new production, added in late 2008 and early 2009, having a lower unit of
production operating expense than Monterey's existing base production.
Transportation Costs
Transportation costs for the first nine months of 2009 totaled $1.0 million,
about 43 percent higher than the $0.7 million of costs recorded in 2008. Higher
production, as indicated in the sales volume discussion above, nominally offset
by lower unit transportation costs, as discussed immediately below, explain the
2009 increase.
Unit transportation costs of $1.56 per boe for the nine months ended September
30, 2009 decreased nominally by eight percent from costs incurred during the
comparative period of 2008. The October 31, 2008 expiry of natural gas firm
service transportation obligations is primarily responsible for the cost
reduction.
Operating Income
For the nine months ended September 30, 2009 operating income was $7.1 million,
about 49 percent less than the $13.9 million recorded in 2008. On a unit of
production basis Monterey's average operating income for the first nine months
of 2009 was $11.37 per boe which is 67 percent less than the $34.53 per boe
recorded in 2008. The reduction in each of the absolute dollar amount and the
per unit figure are the net result of significantly reduced oil and gas
commodity prices offset by higher sales volumes.
Nine months Change due to: Nine months
ended ------------------- ended
($000's) Sept 30, 2009 Price/Cost Volume Sept 30, 2008
----------------------------------------------------------------------------
Operating Income:
Production revenue
Natural gas sales $ 12,667 (15,018) 8,972 $ 18,713
Oil and NGLs sales 5,485 (6,486) 5,699 6,272
Gain / (loss) from
financial instruments - 662 - (662)
----------------------------------------------------------------------------
18,152 (20,842) 14,671 24,323
Royalties 2,932 (4,010) 2,468 4,474
Operating expenses 7,146 (1,007) 2,896 5,257
Transportation costs 976 (85) 377 684
----------------------------------------------------------------------------
Operating income $ 7,098 (15,740) 8,930 $ 13,908
----------------------------------------------------------------------------
$/boe $ 11.37 $ 34.53
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Depletion, Depreciation and Accretion Expense
Nine months Nine months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Oil and gas properties $ 17,959 $ 9,644
Office equipment 52 34
Asset retirement accretion 553 239
----------------------------------------------------------------------------
$ 18,564 $ 9,917
----------------------------------------------------------------------------
$/boe $ 29.72 $ 24.62
----------------------------------------------------------------------------
In comparison to the first three quarters of 2008, the DD&A provision in 2009
nearly doubled to $18.6 million. The DD&A provision increase is due to the
combination of an increase in the unit DD&A expense per boe, as discussed
immediately below and the 56 percent growth in production discussed above under
sales volumes.
Unit DD&A expense per boe increased by 21 percent to $29.72 per boe. Proved
reserves added by fourth quarter 2008 exploration and development activities and
acquired in the August 29, 2008 Upper Lake transaction had a higher average cost
relative to Monterey existing total proved reserves.
General & Administrative
Expensed General and Administrative costs, including stock-based compensation
expense for the nine months ended September 30, 2009 totaled $2.2 million and
was $0.3 million or 14 percent higher than total G&A expense for the same period
during 2008. The increase is largely due to additional costs for office space
and incremental expenses associated with Monterey being a public corporation in
2009.
The combination of expensed and capitalized G&A expenses for the first nine
months of 2009 totaled $3.1 million or 10 percent more than the same period of
2008. Consistent with the growth in expensed G&A the sources of the increase in
total G&A expenses in 2009 are higher office rental expenses and the incremental
costs of being a public entity.
On a per unit basis, 2009 expensed G&A expenses decreased 27 percent to $3.54
per boe, capitalized G&A costs decreased 35 percent to $1.38 per boe and total
G&A charges dropped 29 percent to $4.93 per boe, the decrease in each of the
expense, capitalized and total G&A expenses per boe represents economies of
scale achieved by managing an increased production base with a similar staff
count.
The following table summarizes the G&A costs recorded for each of the nine
months ended September 30, of 2009 and 2008.
Nine months Nine months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Expensed G&A:
General and administrative expenses $ 1,970 $ 1,642
Stock-based compensation 248 299
----------------------------------------------------------------------------
Total expensed G&A $ 2,218 $ 1,941
----------------------------------------------------------------------------
$/boe $ 3.54 $ 4.82
----------------------------------------------------------------------------
Capitalized G&A:
General and administrative expenses $ 731 $ 678
Stock-based compensation 134 174
----------------------------------------------------------------------------
Total capitalized G&A $ 865 $ 852
----------------------------------------------------------------------------
$/boe $ 1.38 $ 2.11
----------------------------------------------------------------------------
Total G&A costs $ 3,083 $ 2,793
----------------------------------------------------------------------------
$/boe $ 4.93 $ 6.93
----------------------------------------------------------------------------
The capitalized general and administrative costs include both general and
administrative cash expenditures and non-cash stock-based compensation
associated with exploration and development activities. The table below provides
additional disclosure of the components of capitalized general and
administrative costs.
Nine months Nine months
ended ended
(in $000's) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Salaries and employment costs $ 578 $ 572
Office rent 147 80
Other general and administrative costs 6 26
----------------------------------------------------------------------------
Capitalized cash general and administrative
costs $ 731 $ 678
----------------------------------------------------------------------------
Capitalized stock-based compensation $ 134 $ 174
----------------------------------------------------------------------------
Total capitalized general and administrative
costs $ 865 $ 852
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest
Nine months Nine months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Interest expense $ 843 $ 760
Interest income (59) (16)
----------------------------------------------------------------------------
Net interest expense $ 784 $ 744
----------------------------------------------------------------------------
$/boe $ 1.26 $ 1.85
----------------------------------------------------------------------------
Higher average bank debt during the first nine months of 2009 was offset by
lower interest rates; as such the net interest expense was only marginally
higher than the comparative period of 2008. Interest income was earned on
Monterey deposits held by regulatory authorities.
The economies of scale arising from Monterey's growth in production volumes
reduced the Corporation's 2009 unit net interest expense to $1.26 per boe,
approximately 32 percent less than the average unit cost for the first nine
months of 2008.
FUNDS FLOW FROM OPERATIONS
Nine months Nine months
ended ended
(in $000's except per boe amounts) Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Operating income $ 7,098 $ 13,908
Unrealized gain on financial instruments - (213)
General and administrative expenses (1) (1,970) (1,642)
Net interest expense (784) (744)
----------------------------------------------------------------------------
Funds flow from operations $ 4,344 $ 11,309
----------------------------------------------------------------------------
Operating income per boe $ 11.37 $ 34.53
Unrealized gain on financial instruments - (0.52)
General and administrative expenses (1) (3.15) (4.08)
Net interest expense (1.26) (1.85)
----------------------------------------------------------------------------
Funds flow from operations per boe (2) $ 6.96 $ 28.08
----------------------------------------------------------------------------
(1) Excluding stock-based compensation.
(2) Funds flow from operations per boe is equal to funds flow from
operations divided by total boe production in the period.
The Corporation's $4.3 million in funds flow from operations for the first nine
months of 2009 was 62 percent lower than the $11.3 million reported during first
nine months of 2008. The decrease was largely due to lower realized oil and gas
prices received for Monterey's sales volumes partially offset by the
Corporation's 56 percent increase in average sales volumes.
On a per unit basis, funds flow from operations of $6.96 per boe is about a 76
percent reduction relative to the first nine months of 2008. Similar to the
absolute dollar figures, the reduction in 2009 is explained by the lower
commodity prices slightly tempered by the growth in production volumes.
INCOME TAXES
During the three and nine months ended September 30, 2009 Monterey did not pay
any cash taxes and currently does not anticipate the payment of any cash income
taxes in the foreseeable future. At September 30, 2009 Monterey has tax pools
totaling approximately $192.9 million available to be utilized against future
taxable income. The tax pools include approximately $54.1 million in non-capital
losses to reduce future taxable income, $60.2 million in Canadian exploration
and development expenses, $45.2 million in oil and gas property expenses, $32.4
million in tangible expenses and $1.0 million of share issue costs.
In accordance with GAAP the financial statements do not reflect the full value
of benefit of the tax pools. In order to recognize the value of the pools in the
financial statements, the Corporation has to demonstrate consistent positive
earnings before income taxes over an extended number of fiscal periods.
Based upon the application of the September 30, 2009 tax pools against future
net funds flow from operations that will be generated from estimated proved
developed producing reserves, approximately $16.8 million of the non-capital
losses may expire unutilized at the end of 2012. Nonetheless, Management
anticipates that increased funds flow from operations resulting from future
successful exploration and development activities will reduce this risk of
non-capital losses expiring unutilized.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2009, Monterey's financial statements reflected total
capitalization of nearly $117.2 million consisting of $32.2 million in net debt
and $85.0 million in equity. Management reviews its net debt to equity ratio,
net debt to forward cash flow and net debt against total borrowings available
under Monterey's existing bank credit facility and compares the ratios to
accepted prudent financial ratios, against the ratios of similar sized publicly
listed entities operating in the upstream oil and gas exploration and
development industry and the amount of bank debt available to Monterey in the
anticipated business environment to finance opportunities and operations of the
Corporation. If any of Monterey's ratios or the amount of debt available under
the bank credit facility did not meet Management's expectations then actions
such as an equity financing, disposition of oil and gas properties, reduction of
capital expenditure programs would be undertaken to ensure the Corporation is
able to settle it obligations when due and to continue conducting its business.
Capitalization
($000's) Sept 30, 2009 Dec. 31, 2008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current deficiency $ 2,031 $ 2,414
Bank indebtedness 30,082 35,286
Obligation under capital lease 91 224
Shareholders equity 84,976 99,063
----------------------------------------------------------------------------
Total Capitalization $ 117,180 $ 136,987
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net current deficiency
As at September 30, 2009 Monterey had a net current deficiency of $2.0 million
which is $0.4 million less than the Corporation's net current deficiency on
December 31, 2008.
During the first nine months of 2009, Monterey's outstanding accounts receivable
balance has been reduced by $3.8 million as a result of an increased emphasis on
the collection of billings outstanding in excess of 60 days and the impact of
lower natural gas prices on sales of September 2009 production. Prepaid expenses
and deposits increased by $0.2 million in 2009 largely due to the recording of
stamping fees paid on guaranteed note borrowings. The accounts payable balance
is $4.0 million lower at September 30, 2009 than at December 31, 2008, this is
primarily due reduced exploration and development spending incurred during 2009.
The net effect of these items resulted in a 16 percent decrease in Monterey's
net current deficiency from the end of 2008.
Bank indebtedness
At September 30, 2009, the Corporation had total bank indebtedness of $30.1
million, resulting from Canadian $29.3 million in drawings against the credit
facility in the form of guaranteed rate notes with terms to maturity of less
than one year and $0.8 million of revolving overdraft borrowings. In addition,
Monterey has issued approximately $149,000 in letters of credit/guarantee under
the facility.
During the first quarter, at Management's request, the Corporation's lender (the
"Lender") conducted the annual review of the credit facility. As a result of the
review, Monterey and the Lender agreed to a new $45 million demand revolving
credit facility (the "Facility"). The covenants under the Facility remain
unchanged from those in the previous credit facility. The next annual review of
the Facility is scheduled to be completed prior to June 1, 2010.
Under the Facility, Monterey has the ability to borrow from the Lender up to $45
million in the form of: (i) revolving prime based and US prime based borrowing
in multiples of $25,000; (ii) issue of guaranteed notes and LIBOR borrowing
subject to minimum borrowings of $1 million and additional amounts in multiples
of $0.1 million having terms to maturity from 15 to 365 days from the date of
issue; and (iii) letters of credit/guarantee, to a cumulative maximum of $12.5
million, for a period of up to one year. The Facility maintains Monterey's
access to the previously established derivates facility, whereby the Corporation
may enter into U.S. foreign exchange forwards contracts or interest and
commodity derivatives contracts with the Lender. Covenants on Monterey's
derivatives facility continue to limit the commodity derivatives contracts
entered into by the Corporation to a maximum of 60% of Monterey's annualized
before royalty production as report in the most recently completed calendar
quarter and that the term of any commodity contract will not exceed a period of
two years.
Under the terms of the Facility, interest rates on: (i) Canadian and US dollar
prime based borrowing will be at the applicable Lender's prime lending rate plus
1.25%; (ii) on the issue of guaranteed notes or LIBOR borrowing Monterey will
pay the base rate plus a stamping fee of 2.5% per annum; and a fee equal to
1.25% per annum, payable at issue, on letters of credit/guarantee. Monterey
borrowings in excess of $40.5 million will incur interest at an additional 1%
per annum. Monterey also pays a monthly stand-by fee on the average unused
portion of the Facility at a rate of 0.35% per annum.
The Lender has the right to demand repayment of all borrowings at any time
without notice or terminate the availability of the unused portion of the
Facility five business days after serving notice to the Corporation. Monterey
has the right to draw against the Facility, repay amounts borrowed or convert
the type of borrowings subject to providing same day notice for borrowings less
than $5.0 million and one business day notice for borrowings of $5.0 million or
more.
The Facility is guaranteed by a Monterey general security agreement providing a
floating charge on all the Corporation's lands and a security interest over all
present and subsequently acquired personal property. Under the terms of the
Facility, Monterey is obligated to meet certain covenants including providing
certain financial and engineering information in a timely manner; however,
Monterey is not required to meet any specific numerical financial covenants,
such as a debt to equity ratio or minimum working capital or liquidity amounts.
Currently the undrawn amount available under the Facility and the anticipated
funds flow from operations, proceeds from the oil and the gas property
dispositions and the net proceeds of the equity issue completed after September
30, 2009 will be sufficient for Monterey to complete its planned capital
expenditure program and settle its obligations for 2009 and 2010, albeit
dependent upon the effect current exploration and development activities in the
Groundbirch area have on the amount and timing of subsequent capital spending.
In the event that business conditions deteriorated to the point where the Lender
felt that it was unable to advance all of the funds under the Facility, if
necessary, management would consider additional dispositions of non-core
properties, delay the timing of the planned exploration and development program
or consider other balance sheet measures available to Monterey to ensure that
the Corporation remains a going concern.
Share Capital
At September 30, 2009 the Corporation had 32,902,500 common shares and stock
options representing rights to issue up to an additional 3,165,666 outstanding.
As a result of the equity financing completed on October 1, 2009 the number of
outstanding shares has increased to 41,002,500 common shares and the current
number shares that may be issued underlying stock options granted is 3,255,666
common shares.
Contributed Surplus
The Corporation's contributed surplus is equal to the fair value of stock
options accrued over the vesting period of the stock options. The fair value of
the stock options is estimated at the date the options are granted using the
Black-Scholes option pricing model. When shares are issued as a result of the
exercise of stock options the fair value of the stock option reflected in
contributed surplus is credited to share capital and the contributed surplus
balance reduced.
CAPITAL EXPENDITURES
Three Months ended Nine Months ended
Sept 30, Sept 30, Sept 30, Sept 30,
($000's) 2009 2008 2009 2008
----------------------------------------------------------------------------
Land and lease retention $ 56 $ 307 $ 167 $ 5,271
Geological and geophysical 84 137 212 762
Drilling and completions 1,111 5,030 4,525 12,965
Production equipment and facilities 170 434 1,328 2,178
Capitalized G&A 236 213 731 677
----------------------------------------------------------------------------
Exploration and development
expenditures $ 1,657 $ 6,121 $ 6,963 $ 21,853
Property acquisitions - - - 277
Office furniture, equipment and
software 5 3 1 12
----------------------------------------------------------------------------
Capital expenditures before
dispositions $ 1,662 $ 6,124 $ 6,964 $ 22,142
Property dispositions (2,738) - (8,754) (1,267)
----------------------------------------------------------------------------
Total capital expenditures $ (1,076) $ 6,124 $(1,790) $ 20,875
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Monterey's 2009 third quarter capital spending program of $1.7 million was
almost entirely directed towards operations at Groundbirch with the commencement
of the Corporation's first horizontal well in the area in late September. In
addition, during the third quarter, 3.0 net sections of non-core undeveloped
lands in the Town area in NEBC were sold for net proceeds of approximately $2.7
million.
For the nine months ended September 30, 2009 the capital spending was primarily
directed to exploration and development activities in the Groundbirch area
consisting of drilling in the drilling and the design, consultation and
application related to a new gas processing facility. The Corporation's total
capital expenditures for the first nine months, prior to dispositions, amounted
to $7.0 million. In addition to the disposition of undeveloped lands in the Town
area discussed above, Monterey sold non-producing oil and gas properties in the
Dawson area of NEBC for $6.0 million during the first quarter of 2009.
COMMITMENTS
As at September 30, 2009 Monterey has the following contractual obligations
calling for payments totaling $40.2 million:
Recognized in Less
financial than 1 1 - 3 4 - 5 After 5
($000's) statements Year years years years Total
----------------------------------------------------------------------------
Credit facility Yes $ 30,082 $ - $ - $ - $30,082
Stamping fees Yes 153 153
Stamping fees No 120 - - - 120
Asset retirement(1) Yes 291 876 727 6,101 7,995
Operating leases No 443 1,050 378 - 1,871
----------------------------------------------------------------------------
Total $ 31,089 $ 1,926 $ 1,105 $ 6,101 $40,221
----------------------------------------------------------------------------
(1) Asset retirement costs shown are undiscounted.
The $30.1 million credit facility obligation classified as needing to be repaid
in less than one year is the Corporation's current bank debt as at September 31,
2009. Management anticipates that upon review by the bank in 2010 the Facility
will be renewed and that bank debt will continue to be outstanding and not
actually be repaid until some later time.
The stamping fees are in respect of guaranteed notes issued under the prior
credit facility; when the existing Facility was negotiated Monterey agreed to
pay an increase in the stamping fee upon maturity of each guaranteed note. In
the table above a portion of the stamping fee obligation has been accrued is
reflected in the financial statements while portion yet to be accrued is not
reflected in the financial statements as at September 30, 2009.
The Asset retirement obligation is in respect of the costs to decommission oil
and gas properties, the amount in the table above differs from the Asset
retirement obligations reflected in the September 30, 2009 financial statements
due to the fact that the $8.0 million in the above table contains the
anticipated cash payments while the financial statements reflect a discounted
figure.
Monterey is committed to future payments under an operating lease for head
office space and parking facilities totaling approximately $1.8 million until
October 30, 2014. Of this total, Monterey is committed to payments of $350,000
for each of the years from 2010 to 2013, and $292,000 in 2014. For the remainder
of 2009, the Corporation is committed to making equal monthly payments totaling
$88,000.
RELATED PARTY TRANSACTIONS
Legal Services
A director of Monterey is a partner at a law firm that provides legal services
to the Corporation. During the nine months ended September 30, 2009, the
Corporation incurred approximately $56,000 in legal services and disbursements
associated with this related party. At September 30, 2009 the Corporation's
accounts payable include an accrual of $5,000 for amounts owed to the law firm
for legal fees and disbursements which have not yet been billed.
Transactions with Shareholder
During the nine months ended September 30, 2009, the Corporation had
transactions totaling approximately $140,000 with an entity that holds
approximately 24% of the outstanding common shares of Monterey. The transactions
primarily consisted of Monterey's participation in the joint exploration,
development and production of petroleum and natural gas properties. All
transactions were completed on an arm's length basis consistent with normal
industry terms. The value of the transactions between Monterey and the related
party were recorded at the carrying amount, which approximated their fair value.
At September 30, 2009, Monterey's records include $4,000 in accounts receivable
with this shareholder.
Common Management and Directors
Certain directors of Monterey are also the directors or management of other
entities that participate in joint operations with the Corporation. Transactions
with these related parties are on terms that are consistent with parties dealing
at arm's length. For the nine months ended September 30, 2009, the aggregate
value of transactions entered into between Monterey and these entities was
approximately $1,411,000. At September 30, 2009 Monterey's records include
outstanding payables owed to the related parties of $6,000 and accounts
receivables due to Monterey of approximately $71,000.
SUBSEQUENT EVENTS
On October 1, 2009, the Corporation completed the issuance of 5,450,000 common
shares at a price of $1.85 per common share and 2,650,000 common shares on a
"flow-through" basis at a price of $2.28 per flow-through common share. Total
proceeds from the issuance of approximately $15.1 million after the deduction of
underwriters' fees as well as associated share issue costs will be used to
finance Monterey's capital expenditure program. As a result of the flow-through
share issuance, Monterey is required to renounce approximately $6.0 million of
Canadian Exploration Expense ("CEE") incurred on or before December 31, 2010.
On October 6, 2009, Monterey entered into a financial commodity price risk
management contract with the Lender. Under the terms of the contract, Monterey
has agreed to market 2,000 gigajoules of natural gas per day at a price of $5.07
per gigajoule for the period from November 1, 2009 to December 31, 2009.
OUTLOOK
Monterey is increasing the 2009 capital expenditure guidance from the existing
$15 million to $20 million based on the acceleration of exploration and
development operations in the Groundbirch area. The recent disposition of
undeveloped lands in the Town area for $2.7 million and the $16.1 million equity
offering completed in October will assist in financing the increased
expenditures through the remainder of 2009 and into early 2010.
Monterey's Management and Board of Directors are currently in the process of
reviewing the various capital projects for 2010 and once operational results
have been obtained at Groundbirch, an initial 2010 budget will be approved. In
addition to the planned expenditures directed to the operational activities in
the Groundbirch area, the Corporation, based on a continual improvement in
natural gas commodity prices may commence with the second round of horizontal
development drilling of the Gething play at Squirrel and the Cadomin resource
play at Brassey in early 2010. Monterey has licensed the next 7 development
wells for the Squirrel and Brassey area projects with the next Brassey drilling
location already constructed.
Management remains very optimistic on the future of Monterey and will continue
to execute its business plan in a manner that is focused on adding value to
Monterey's current and potential future shareholders.
SENSITIVITY ANALYSIS
Monterey's financial performance is impacted by changes in production and the
business environment. The table below indicates the key factors impacting
Monterey's financial performance for the fourth quarter of 2009. The table below
indicates Monterey's assumptions and the impact on funds flow from operations
over the fourth quarter of 2009 period as a result of a change in each key item.
Impact on
Funds flow from
Monterey operations
Variable Assumption Variance ($000's)
----------------------------------------------------------------------------
Natural gas production 9.0 - 10.0 mmcf/d 1 mmcf/d 225
Natural gas prices $4.75 mcf $1.00/mcf 725
WTI oil price $78.75US $ 1.00US 25
Foreign exchange rate $ 1.09Cdn : $1.00US $0.01Cdn 55
Bank prime lending rate 2.25% 1.00% 30
QUARTERLY SUMMARY INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited and in thousands, Three Months Ended
except for commodity prices, per ----------------------------------------
share amounts, or unless otherwise Sept 30, June 30, Mar. 31, Dec. 31,
noted) 2009 2009 2009 2008
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 9,918 11,151 11,939 10,058
Light oil and NGL (bbl/d) 436 470 461 453
----------------------------------------------------------------------------
Oil equivalent (boe/d) 2,089 2,329 2,451 2,130
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf)(1) $ 3.17 $ 3.60 $ 5.59 $ 7.35
Light oil and NGL ($/bbl) $ 49.82 $ 44.81 $ 37.84 $ 51.78
----------------------------------------------------------------------------
Oil equivalent ($/boe)(1) $ 25.71 $ 26.42 $ 34.52 $ 45.75
----------------------------------------------------------------------------
Financial:
Production revenue(1) $ 4,941 $ 5,597 $ 7,614 $ 8,965
Operating income(1) $ 1,818 $ 1,842 $ 3,438 $ 4,191
Funds flow from operations $ 880 $ 844 $ 2,620 $ 3,694
Net earnings / (loss) $ (4,809) $ (5,485) $ (4,174) $ (2,110)
Capital expenditures (net of
dispositions) $ (1,076) $ 1,104 $ (1,818) $ 10,900
Net current surplus / (deficiency) $ (2,031) $ (931) $ (2,640) $ (2,414)
Bank debt (2) $ 30,082 $ 33,221 $ 31,052 $ 35,510
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per share:
Funds flow from operations:
Basic $ 0.03 $ 0.03 $ 0.08 $ 0.11
Diluted $ 0.03 $ 0.03 $ 0.08 $ 0.11
Earnings / (loss):
Basic and diluted $ (0.15) $ (0.17) $ (0.13) $ (0.06)
----------------------------------------------------------------------------
Share data:
Outstanding:
Common shares 32,903 32,903 32,903 32,903
Non-voting common shares - - - -
----------------------------------------------------------------------------
Total outstanding 32,903 32,903 32,903 32,903
Stock options 3,136 3,136 3,136 3,136
----------------------------------------------------------------------------
Total diluted shares outstanding 36,039 36,039 36,039 36,039
----------------------------------------------------------------------------
Weighted average:
Basic 32,903 32,903 32,903 32,903
Diluted 33,191 33,136 32,933 32,904
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(unaudited and in thousands, Three Months Ended
except for commodity prices, per ----------------------------------------
share amounts, or unless otherwise Sept. 30, June 30, Mar. 31, Dec. 31,
noted) 2008 2008 2008 2007
----------------------------------------------------------------------------
Average sales volumes:
Natural gas (mcf/d) 8,400 6,598 7,168 7,969
Light oil and NGL (bbl/d) 292 181 241 212
----------------------------------------------------------------------------
Oil equivalent (boe/d) 1,691 1,280 1,435 1,540
----------------------------------------------------------------------------
Average sales prices:
Natural gas ($/mcf)(1) $ 10.24 $ 9.03 $ 7.09 $ 6.54
Light oil and NGL ($/bbl) $ 101.08 $ 105.92 $ 83.07 $ 80.32
----------------------------------------------------------------------------
Oil equivalent ($/boe)(1) $ 68.45 $ 62.03 $ 49.34 $ 44.95
----------------------------------------------------------------------------
Financial:
Production revenue(1) $ 10,652 $ 7,227 $ 6,444 $ 6,366
Operating income(1) $ 6,445 $ 4,163 $ 3,301 $ 3,126
Funds flow from operations $ 3,345 $ 4,417 $ 3,547 $ 2,588
Net earnings / (loss) $ 1,301 $ 601 $ 1,111 $ (1,101)
Capital expenditures (net of
dispositions) $ 40,930 $ 2,167 $ 12,586 $ 3,615
Net current surplus / (deficiency) $ (7,486) $ (3,961) $ (5,874) $ (1,517)
Bank debt (2) $ 22,606 $ 18,038 $ 18,227 $ 13,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Per share:
Funds flow from operations:
Basic $ 0.12 $ 0.18 $ 0.14 $ 0.11
Diluted $ 0.12 $ 0.17 $ 0.14 $ 0.11
Earnings / (loss):
Basic and diluted $ 0.05 $ 0.02 $ 0.04 $ (0.04)
----------------------------------------------------------------------------
Share data:
Outstanding:
Common shares 32,903 25,107 20,046 19,993
Non-voting common shares - - 5,061 5,061
----------------------------------------------------------------------------
Total outstanding 32,903 25,107 25,107 25,054
Stock options 2,771 2,151 2,151 2,296
----------------------------------------------------------------------------
Total diluted shares outstanding 35,674 27,258 27,258 27,350
----------------------------------------------------------------------------
Weighted average:
Basic 27,818 25,107 25,058 24,528
Diluted 27,818 25,329 25,255 24,684
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes gains and losses from financial instruments
(2) Bank debt includes obligation under capital lease
NON-GAAP MEASURES
Within this MD&A, references are made to terms commonly used in the oil and gas
industry. Management uses funds flow from operations, operating income, capital
expenditures and net debt to analyze operating performance. These measures do
not have standardized meanings prescribed by GAAP, and may not be comparable to
similar measures presented by other companies. For this MD&A the measures used
are: (i) Funds flow from operations; (ii) Operating income; (iii) Capital
expenditures; (iv) Total capital expenditures (v) Funds flow from operations per
basic and funds flow from operations per diluted share is calculated by dividing
funds flow from operations as described earlier, by the total number of
respective weighted average basic and diluted common shares outstanding during
the period; (vi) Net debt; (vii) Net current surplus (deficiency); and (viii)
Estimated forward cash flow being funds flow from operations for a particular
month adjusted for one time or extraordinary items which is then annualized.
This non-GAAP measure provides a quick and reasonably accurate estimate, under
current business conditions, of the funds flow from operations for the next
twelve months.
The following tables reconcile the non-GAAP measures used in this Management
Discussion and Analysis to the most directly comparable measure calculated in
accordance with GAAP:
Funds flow from operations
Three months Three months Nine months Nine months
ended ended ended ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Cash provided by
operating
activities $ 1,123 $ 2,873 $ 4,672 $ 10,799
Changes in
non-cash working
capital (251) 394 (742) 241
Asset retirement
expenditures 8 78 414 269
----------------------------------------------------------------------------
Funds flow from
operations $ 880 $ 3,345 $ 4,344 $ 11,309
----------------------------------------------------------------------------
Funds flow from operations is an important measure to Management and investors
because it provides a better indication of Monterey's internal funds generated
from ongoing operations, versus cash flow provided by (used in) operating
activities. Cash flow from (used in) operating activities takes into account the
net change in non-cash working capital items and asset retirement expenditures
which may vary significantly from one period to the next, are likely to be
infrequently incurred or are not considered part of normal operations.
Operating income
Three months Three months Nine months Nine months
ended ended ended ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Net earnings (loss) $ (4,809) $ 1,301 $ (14,468) $ 3,013
Add: Future income
tax expense
(recovery) - 40 - (1,708)
Add: Depreciation,
depletion and
accretion 5,605 4,100 18,564 9,917
Add: Net interest
expense 311 247 784 744
Add: General and
administrative 711 757 2,218 1,943
----------------------------------------------------------------------------
Operating income $ 1,818 $ 6,445 $ 7,098 $ 13,909
----------------------------------------------------------------------------
Management views operating income as an important measure of the Corporation's
viability and contribution from the operation of its core business and is
reflective of Monterey's gross margin.
Capital expenditures and Total capital expenditures
Three months Three months Nine months Nine months
ended ended ended ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Cash used in
investing
activities $ (1,925) $ 4,773 $ (665) $ 17,242
Change in non-cash
working capital 849 2,140 (1,125) 4,422
----------------------------------------------------------------------------
Capital expenditures $ (1,076) $ 6,913 $ (1,790) $ 21,664
Business combination
costs - (789) - (789)
----------------------------------------------------------------------------
Total capital
expenditures $ (1,076) $ 6,124 $ (1,790) $ 20,875
----------------------------------------------------------------------------
Capital expenditures measure the net cash resources directed to exploring for
and developing of oil and gas reserves along with the investment in office
furniture and equipment to support Monterey's business activities. While total
capital expenditures is comprised of capital expenditures plus the recorded cost
of oil and gas properties of corporate acquisitions, including the costs of the
acquisition and the allocation to long lived asset retirement. These measures
are each considered by Management to be better measures than capital additions
recorded under GAAP to determine the Corporation's success and efficiency in
growing its reserves and reserve value.
Capital expenditures indicate the investment customarily incurred in the
exploration and development activities and is readily comparable to other
periods. The capital additions under GAAP include non-cash adjustments, such as
long lived asset retirement costs, that impair Management's and the reader's
ability to accurately assess Monterey's performance in respect of adding
reserves organically and complemented with property acquisitions. Reserve growth
from organic and property acquisitions activities represent the typical methods
employed by the Corporation.
Total capital expenditures also include the incremental costs incurred to
increase Monterey's reserve base via business combinations. The total capital
expenditures measure is provided in addition to capital expenditures as growth
via corporate acquisition has historically been atypical of Monterey's
activities. Total capital expenditures measure assists the reader to assess the
Corporation's overall performance to increase its reserves.
Net debt
As at As at
($000's) Sept 30, 2009 Dec. 31, 2008
----------------------------------------------------------------------------
Bank indebtedness $ 30,082 $ 35,286
Less: Current assets (1,999) (5,661)
Add: Accounts payable and accrued liabilities 4,030 8,075
Add: Obligation under capital lease 91 224
----------------------------------------------------------------------------
Net debt $ 32,204 $ 37,924
----------------------------------------------------------------------------
Net debt is an important measure as it provides a measure of the net obligations
that can be reasonably expected to be settled with the Corporation's assets in
the near term. Total liabilities under GAAP, also include asset retirement
obligations as well as liabilities arising from financial instruments for which
the timing of settlement with the Corporation's existing and future assets
involve greater use of estimation and as a result the timing and amount expended
to satisfy the obligation may be subject to significant variation.
Net current deficiency
As at As at
($000's) Sept 30, 2009 Dec. 31, 2008
Current liabilities $ 34,203 $ 43,540
Less: Current assets (1,999) (5,661)
----------------------------------------------------------------------------
Working capital deficit 32,204 37,879
Less: Current portion of bank indebtedness (30,082) (35,286)
Less: Current portion of obligation under
capital lease (91) (179)
----------------------------------------------------------------------------
Net current deficiency $ 2,031 $ 2,414
----------------------------------------------------------------------------
Net current deficiency is a key measure for the Corporation as it gives a
measure of net working capital excluding unrealized financial instrument assets
and liabilities. Unrealized financial instrument assets and liabilities for
Monterey primarily consist of the estimated future settlement value of forward
financial contracts which are not necessarily indicative of the actual net cash
inflows or outflows at the settlement date of the financial instruments. As at
September 30, 2009 and December 31, 2008, Monterey did not participate in
forward financial contracts for which unrealized gains or losses would arise.
RISKS & UNCERTAINTIES
Some of the risks that Monterey is exposed to which impact Management's ability
to execute the Corporation's business plan include but are not limited to:
- Exploration, development and production activities
Monterey's success depends upon its ability to find, secure rights, acquire,
develop and commercially produce oil and natural gas reserves. Risks associated
with the exploration, finding and development and production of oil and gas
reserves is impacted by: attracting, hiring and retaining knowledgeable and
experienced staff; competition for prospective land for exploration and
development activities; geological and operational risks; application of
changing or new technologies, imprecision of reserve estimates and valuation;
timely receipt of required regulatory approvals; ability to secure or obtain
equipment, services and supplies when needed; weather; field operating risks;
and existence and ability to access production infrastructure to deliver
production to market.
Management attempts to manage and overcome these risks by careful addition of
staff, early identification and evaluation of opportunities; careful planning of
operations and development of contingency plans; developing continuing
relationships with reliable suppliers of services, equipment and supplies; and
carrying appropriate levels of insurance.
- Global financial crisis
During 2008 market conditions and events led to significant disruptions of
international credit markets and the overall deterioration of worldwide economic
conditions leading to increased volatility in markets (including financial and
product markets), reduced liquidity, widening of corporate spreads, increased
credit losses and tightening of credit conditions. Governments throughout the
world have been required to intervene in preventing the collapse of banks,
insurers and financial institutions. These conditions have impacted Monterey due
to continued volatility of commodity prices, currency exchange, interest rates,
access to and the amount of debt and equity financing available, and the
Corporation's valuations (stock market trading price and net asset value) have
been negatively impacted.
Management has attempted to mitigate the impacts of the global recession and
uncertain credit markets by disposing of non-core properties to reduce debt,
reducing the size of the capital expenditure program to approximate funds flow
from operations, fixing the cost of debt through the issue of guaranteed notes,
entering into a new credit facility that allows Monterey to continue to access
up to $45 million in borrowings from the lender and completed a $16.0 million
equity financing.
- Capital requirements
The Corporation's core business requires sufficient funds for the future
acquisition, exploration, development and production of oil and natural gas
reserves. Weak economic conditions can cause significant volatility of commodity
prices meaning that internal generation of funds or reasonable return of
investment is uncertain. In addition the global credit crisis, while recently
improving, may impact the access to, timing, amount and cost of debt thus making
Monterey's ability to conduct or complete exploration and development activities
more difficult.
Management ensures that projects are adequately evaluated to estimate viability
under challenging economic conditions. In addition development of capital
spending plans are carefully prepared and are subject to ongoing review to
ensure that sufficient financial resources are available and that projects will
earn a positive return on investment. Management manages the components of its
balance sheet, remains apprised of developments in the equity markets and
changes in the current and forecasted commodity prices to maintain financial
flexibility so that the business plans can be carried out.
- Third party credit risk
Monterey may be exposed to third party credit risk through its contractual
arrangements with joint venture partners, purchasers of production and other
parties. During challenging economic periods the Corporation's access to funds
needed to finance the ongoing business or settle obligations due may be impacted
by an increase in the amount of time required to collect or the lack of
collectability of accounts receivables.
Management mitigates this risk by entering into joint ventures or sell
production to a diverse portfolio of entities that have sufficient capital
resources and an established record of paying obligations when due. The
Corporation routinely monitors the amount and aging of accounts receivable to
improve collectability and when necessary issues cash calls to collect payment
in advance from a partner for its share of a project.
- Climate change
The determination of the impact of climate change is currently unknown and
cannot be reasonably estimated. Physical access to opportunities and timing to
conduct operations could change or become more costly. Potential new laws or
regulatory requirements to control greenhouse gases or other emissions may
increase the cost and the method of conducting exploration, development,
production and processing oil and gas. Lastly new taxes, tariffs, penalties or
costs to acquire offsetting credits as a result of finding, developing,
producing, transporting and selling oil and gas may also impair the commercial
viability of Monterey's activities or the oil and gas industry overall.
Management continues to monitor developments in this evolving area. Methods to
be used to mitigate the risks associated with climate change include: education
to understand the impact of physical changes in the environment on Monterey's
operations and new and changes to laws or regulatory requirements, and careful
planning to determine cost effective means to perform Monterey's exploration,
development and production activities and ensure compliance with laws and
regulations.
- Changes in laws and regulations
In February 2009 the Government of British Columbia announced changes to the
Deep Royalty Program under which royalty credits can be earned as a result of
the vertical depth or the length of the horizontal leg of new drills. Royalties
earned by the drilling of a well are applied against the crown royalties on
production from the well. The changes favorably adjusted the factor applied to
calculating the royalty credits earned.
On August 6, 2009 the Government of British Columbia announced an oil and gas
stimulus package consisting of four royalty and two regulatory initiatives
designed to attract investment in oil and gas activities in the province. The
royalty changes include: (i) introduction of a reduction in the royalty rate for
all wells drilled from September 2009 to June 2010 to two percent applied to the
first year's production from successful drilling; (ii) an increase of 15% in the
Deep Well royalty credits that are earned by drilling natural gas wells; (iii)
reduction in the depth of horizontal wells to 1,900 meters to qualify a well as
eligible for the Deep Royalty Credit Program; and (iv) allocation of an
additional $50 million that can be earned in infrastructure royalty credits as a
result of investment in oil and gas roads and pipelines. The regulatory
initiatives include permission for commingling production and amendments to the
drilling license regulation.
The royalty rate reduction and the changes in the Deep Well Royalty Credit
Program announced by the province of British Columbia will favorably impact the
planned and future operations of Monterey by improving the economical viability
future drilling, particularly horizontal wells to be drilled in the Groundbirch,
Brassey and Squirrel areas of NEBC. The enhancement to the infrastructure
royalty credit program may offset a portion of the Corporation's investment in
the construction of a gas plant in the Groundbirch area.
On October 25, 2007 the Government of Alberta released the New Royalty Framework
("NRF") outlining revisions to its crown royalty program that became effective
on January 1, 2009. To mitigate the impact of unintended consequences resulting
for the NRF the Government of Alberta has introduced a number of programs,
including: (i) In April 2008, the Government of Alberta announced a new program
to support exploration and development of deep oil and gas reserves that would
be uneconomic under the NRF. The incentives associated with the new program
applies to oil exploration wells and natural gas wells having depths greater
than 2,000 meters and 2,500 meters, respectively; (ii) on November 19, 2008 the
Government of Alberta introduced a five-year transitional royalty program to
promote new drilling. Companies that drill new conventional oil or natural gas
wells between the depths of 1,000 and 3,500 meters, will be granted a one-time
option per well to adopt the new transitional rates or those outlined in the
NRF. The transitional royalty rates for conventional oil will range from 10
percent to 39 percent, and transitional royalty rates for conventional gas will
range from five percent to 30 percent. These transitional rates have lower
maximum royalty rates in comparison to royalty rates under the NRF which range
from zero to 50 percent on oil production and five percent to 50 percent for
natural gas production; (iii) on March 3, 2009, the Government of Alberta
announced a three-point incentive program to stimulate new and continued
economic activity in Alberta which included a drilling royalty credit for new
conventional oil and natural gas wells and a new royalty incentive program.
Under the drilling royalty credit program a $200 per meter royalty credit will
be available on new conventional oil and gas wells drilled between April 1, 2009
and March 31, 2010. The new well incentive program will apply to wells beginning
production of conventional oil and natural gas between April 1, 2009 and March
31, 2010 and provides for a maximum 5% royalty rate for the first 12 months of
production, up to a maximum of 50,000 barrels of oil or 500 mmcf of natural gas;
and (iv) on June 25, 2009 the Alberta government announced that it would be
extending the terms of the drilling royalty credit and new royalty incentive
programs which were originally announced in March 2009, by one year, thereby
extending the expiry of both programs by one year from March 2010 to March 2011.
Approximately 19 percent of the Corporation's production is from wells located
in the province of Alberta; furthermore Monterey's Alberta production is largely
from low productivity and shallow depth wells; and the majority of Monterey's
drilling operations have historically been conducted in the province of British
Columbia. As a result the regulatory changes in the province of Alberta outlined
above will only have a nominal impact on Monterey's current operations.
Nonetheless the Corporation's ability to attract investment capital for future
investment in Alberta may be impacted by the negative effect the NRF will have
on the economics of capital projects located in the province of Alberta.
FORWARD LOOKING STATEMENTS & ADVISORIES
(Certain information regarding Monterey set forth in this MD&A, including but
not limited to Management's expectations regarding the timing of its IFRS change
over plans, expectations regarding its financial capabilities, continued
availability of debt financing, expectations regarding tax pool expiries,
expectations concerning future funds flow from operations, future exploration
and development activities, planned capital expenditures, treatment under
royalty regimes, plans regarding the development of the Corporation's project
inventory and expectations relating to production levels and forecast production
may constitute forward-looking statements under applicable securities laws and
regulations involve substantial known and unknown risks and uncertainties. The
use of any of the words "anticipate", "continue", "depends", "estimate",
"expect", "may", "will", "project", "should", "believe", "would", "potential"
and similar expressions are intended to identify forward-looking statements.
Such statements represent Monterey's internal projections, estimates or beliefs
concerning, among other things, an outlook on the estimated amounts and timing
of capital expenditures, anticipated future debt, revenues or other
expectations, beliefs, plans, objectives, assumptions, intentions or statements
about future events or performance. These statements are only predictions and
actual events or results may differ materially. In addition, statements relating
to "reserves" or "resources" 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. Although Monterey believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievement since such expectations are
inherently subject to significant business, economic, competitive, political and
social uncertainties and contingencies. Many factors could cause Monterey's
actual results to differ materially from those expressed or implied in any
forward-looking statements made by, or on behalf of, Monterey.
The forward-looking statements included in this MD&A also include, but are not
limited to, statements with respect to the size of, and future net revenues
from, crude oil and natural gas reserves; the focus of capital expenditures;
expectations regarding the ability to raise capital and to continually add to
reserves through acquisitions and development; projections of market prices and
costs; the performance characteristics of Monterey's crude oil and natural gas
properties; crude oil and natural gas production levels; Monterey's future
operating and financial results; expectations regarding Monterey's capital
expenditure programs; supply and demand for crude oil and natural gas; average
royalty rates; development drilling; amount of general and administrative
expenses; treatment under governmental regulatory regimes and tax laws; the risk
of non-capital losses expiring unutilized; and expectations regarding operating
costs.
These forward-looking statements are subject to numerous risks and
uncertainties, certain of which are beyond the Corporation's control, including
the impact of general economic conditions; volatility in market prices for crude
oil and natural gas; industry conditions; volatility of commodity prices;
currency fluctuation; imprecision of reserve estimates; liabilities inherent in
crude oil and natural gas operations; environmental risks; incorrect assessments
of the value of acquisitions and exploration and development programs;
competition from other producers; the lack of availability of qualified
personnel or management; changes in income tax laws or changes in tax laws and
incentive programs relating to the oil and gas industry; hazards such as fire,
explosion, blowouts, cratering, and spills, each of which could result in
substantial damage to wells, production facilities, other property and the
environment or in personal injury; stock market volatility; and ability to
access sufficient capital from internal and external sources.
With respect to forward-looking statements contained in this MD&A, Monterey has
made assumptions regarding: the success of exploration and development
activities, the impact of increasing competition; the general stability of the
economic and political environment in which Monterey operates; the ability of
the Corporation to retain or obtain qualified staff, equipment and services in a
timely and cost efficient manner; drilling results; the ability of the operator
of the projects which the Corporation has an interest in to operate the field in
a safe, efficient and effective manner; Monterey's ability to obtain financing
on acceptable terms; field production rates and decline rates; the ability to
replace and expand oil and natural gas reserves through acquisition, development
or exploration; the timing and costs of pipeline, storage and facility
construction and expansion; the ability of the Corporation to secure adequate
product transportation; future oil and natural gas prices; currency, exchange
and interest rates; the regulatory framework regarding royalties, taxes and
environmental matters in the jurisdictions in which the Corporation operates;
and Monterey's ability to successfully market its oil and natural gas products.
Management has included the above summary of assumptions and risks related to
forward-looking information provided in this MD&A in order to provide readers
with a more complete perspective on Monterey's future operations and such
information may not be appropriate for other purposes. Monterey's actual
results, performance or achievement could differ materially from those expressed
in, or implied by, these forward-looking statements and, accordingly, no
assurance can be given that any of the events anticipated by the forward-looking
statements will transpire or occur, or if any of them do so, what benefits that
Monterey will derive there from. Readers are cautioned that the foregoing lists
of factors are not exhaustive. These forward-looking statements are made as of
the date of this MD&A and Monterey disclaims any intent or obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or results or otherwise, other than as required by applicable
securities laws.
However, in the event that subsequent events are reasonably likely to cause
actual results to differ materially from material forward-looking statements or
information previously disclosed by Monterey for a period that is not yet
complete, Monterey will provide disclosure on such events and the anticipated
impact of such events.
MONTEREY EXPLORATION LTD.
Financial Statements
For the three and nine months ended September 30, 2009
MANAGEMENT'S REPORT
The accompanying financial statements of Monterey Exploration Ltd. ("Monterey"
or the "Corporation") have been prepared by Management in accordance with
Canadian generally accepted accounting principles.
Management is responsible for the integrity of the financial information.
Internal control systems are designed and maintained to provide reasonable
assurance that assets are safeguarded from loss or unauthorized use and to
produce reliable accounting records for financial reporting purposes.
Management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses for the period.
These estimates and assumptions are based on Management's best information and
judgment and, in the near term are not expected to materially change the
recorded amounts of assets, liabilities, revenues and expenses. The financial
statements have been prepared using policies and procedures established by
Management and outlined in the notes to the accompanying financial statements
and reflect fairly the Corporation's financial condition and results of
operations.
The Board of Directors is responsible for ensuring that Management fulfills its
responsibilities for financial reporting and internal control. The Board
exercises this responsibility through the Audit Committee of the Board of
Directors, with assistance from the Reserve Committee regarding the annual
independent evaluation of Monterey's petroleum and natural gas reserves. The
Audit Committee meets regularly with Management and the independent auditors to
ensure that Management's responsibilities are properly discharged, to review the
financial statements and recommend that the financial statements be presented to
the Board of Directors for approval. The Audit Committee also considers the
independence of the external auditors, reviews the services provided and the
fees charged by the external auditors. The external auditors have access to the
Audit Committee without the presence of Management.
The Audit Committee of the Board of Directors reviewed the unaudited financial
statements of Monterey Exploration Ltd. as at September 30, 2009 as compiled by
Management. The Board of Directors on the recommendation of the Audit Committee
has approved these financial statements.
(signed) "Patrick D. Manuel" (signed) "David M. Fisher"
Patrick D. Manuel David M. Fisher
President & Chief Executive Officer Vice President, Finance & Chief
Financial Officer
November 10, 2009
MONTEREY EXPLORATION LTD.
Balance Sheets
($000's)
(unaudited)
September 30, December 31,
2009 2008
----------------------------------------------------------------------------
Assets
Current assets:
Accounts receivable $ 1,193 $ 4,980
Prepaid expenses and deposits 806 681
----------------------------------------------------------------------------
1,999 5,661
Property and equipment (Note 4) 121,790 141,458
----------------------------------------------------------------------------
$ 123,789 $ 147,119
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (Note 5) $ 30,082 $ 35,286
Accounts payable and accrued liabilities 4,030 8,075
Obligation under capital lease 91 179
----------------------------------------------------------------------------
34,203 43,540
Obligation under capital lease - 45
Asset retirement obligations (Note 6) 4,610 4,471
Shareholders' equity:
Share capital (Note 7) 92,944 92,944
Contributed surplus (Note 7) 4,059 3,678
Retained earnings (deficit) (12,027) 2,441
----------------------------------------------------------------------------
84,976 99,063
----------------------------------------------------------------------------
Commitment (Note 11)
Subsequent events (Note 13)
$ 123,789 $ 147,119
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes to the interim unaudited financial statements
Approved on behalf of the Board:
(signed) "Chris G. Webster" (signed) "William V. Bradley"
Director Director
MONTEREY EXPLORATION LTD.
Statements of Earnings (Loss) and Retained Earnings (Deficit)
($000's)
(unaudited)
Three months ended Nine months ended
----------------------- ---------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Revenues:
$ 4,941 $ 8,880 Production $ 18,152 $ 24,985
(803) (1,882) Royalties (2,932) (4,474)
Gain (loss) on financial
- 1,772 instruments - (662)
6 - Interest 59 16
----------------------------------------------------------------------------
4,144 8,770 15,279 19,865
----------------------------------------------------------------------------
Expenses:
2,072 2,048 Operating 7,146 5,257
248 277 Transportation costs 976 685
711 757 General and administrative 2,218 1,941
317 247 Interest 843 760
Depreciation, depletion and
5,605 4,100 accretion 18,564 9,917
----------------------------------------------------------------------------
8,953 7,429 29,747 18,560
----------------------------------------------------------------------------
Earnings (loss) before
(4,809) 1,341 income taxes: (14,468) 1,305
Future income tax recovery
- (40) (expense) (Note 9) - 1,708
----------------------------------------------------------------------------
(4,809) 1,301 Net earnings (loss) (14,468) 3,013
Retained earnings (deficit),
(7,218) 3,250 beginning of period 2,441 1,538
----------------------------------------------------------------------------
Retained earnings (deficit),
$(12,027) $ 4,551 end of period $ (12,027) $ 4,551
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings (loss) per
share (Note 7)
$ (0.15) $ 0.05 Basic and diluted $ (0.44) $ 0.12
See accompanying notes to the interim unaudited financial statements
MONTEREY EXPLORATION LTD. Statements of Cash Flows
($000's) (unaudited)
Three Months ended Nine Months ended
----------------------- ---------------------
Sept 30, Sept 30, Sept 30, Sept 30,
2009 2008 2009 2008
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
$(4,809) $ 1,301 Net earnings (loss) $(14,468) $ 3,013
Items not requiring cash from
operations:
Unrealized financial instrument
- (2,196) gain - (212)
84 100 Stock-based compensation 248 299
Depreciation, depletion and
5,605 4,100 accretion 18,564 9,917
Future income tax expense
- 40 (recovery) - (1,708)
(8) (78) Asset retirement expenditures (414) (269)
Change in non-cash working
251 (394) capital items (Note 10) 742 (241)
----------------------------------------------------------------------------
1,123 2,873 4,672 10,799
----------------------------------------------------------------------------
Financing activities:
Increase (decrease) in bank
(3,003) 2,099 indebtedness (5,204) 6,512
(45) (14) Obligation under capital lease (133) (14)
Issue of common shares net of
- (211) share issue costs - (88)
Change in non-cash working
- 26 capital items (Note 10) - 26
----------------------------------------------------------------------------
(3,048) 1,900 (5,337) 6,436
----------------------------------------------------------------------------
Investing activities:
Oil and natural gas property
- - acquisitions - (277)
Oil and natural gas property
2,738 - dispositions 8,754 1,267
- (789) Corporate transaction costs - (789)
(1,662) (6,124) Property and equipment additions (6,964) (21,865)
Change in non-cash working
849 2,140 capital items (Note 10) (1,125) 4,422
----------------------------------------------------------------------------
1,925 (4,773) 665 (17,242)
----------------------------------------------------------------------------
- - Change in cash - (7)
- - Cash, beginning of period - 7
----------------------------------------------------------------------------
$ - $ - Cash, end of period $ - $ -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental cash flow information (Note 10)
See accompanying notes to the interim unaudited financial statements
MONTEREY EXPLORATION LTD.
Notes to the interim unaudited Financial Statements
For the three and nine months ended September 30, 2009
1. NATURE OF OPERATIONS
Monterey Exploration Ltd. (the "Corporation" or "Monterey") is incorporated
under the Business Corporations Act (Alberta) and is engaged in the acquisition,
exploration, development and production of natural gas, natural gas liquids and
crude oil in the Western Canadian Sedimentary Basin.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of presentation
Management has prepared the interim unaudited financial statements in accordance
with Canadian generally accepted accounting principles following the same
accounting policies and methods of their application as the Corporation's
financial statements for the year ended December 31, 2008, except as described
in note 2(b). The interim unaudited financial statements and notes thereto
should be read in conjunction with Monterey's financial statements for the year
ended December 31, 2008. All amounts are stated in thousands of Canadian
dollars, except where otherwise indicated.
b) Changes in accounting policies
On January 1, 2009, Monterey adopted Section 3064 "Goodwill and Other Intangible
Assets" issued by the CICA. Under the new accounting standard, criteria for the
recognition, measurement and disclosure of Goodwill and Other Intangible Assets
are clarified. Adoption of the new accounting standard did not result in changes
to Monterey's financial statements or note disclosures.
On January 1, 2011, the Corporation will be required to adopt International
Financial Reporting Standards ("IFRS") and prepare its financial statements
under this new set of standards, thereby replacing the preparation of Monterey's
financial statements using Canadian generally accepted accounting principles.
3. FINANCIAL INSTRUMENTS
At September 30, 2009, Monterey's financial instruments include accounts
receivable, accounts payable, bank indebtedness and obligation under capital
lease. The Corporation's financial instruments have been classified accordingly:
loans and receivables - accounts receivable, and other liabilities - accounts
payable, bank indebtedness and obligation under capital lease.
Monterey's loans and receivables are recorded at their amortized cost.
Monterey has exposure to market risk, credit risk, and liquidity risk. A
discussion of how the Corporation is exposed to and manages each type of risk is
noted below:
a) Market risk
(i) Commodity price risk:
The Corporation is primarily exposed to market risk in the form of commodity
price volatility. Monterey's objective for commodity price risk management is to
ensure that sufficient protection exists to enable the Corporation to meet
planned capital expenditures in the event of downward movements in commodity
prices. The Corporation's Board of Directors ("Board") has authorized Management
to enter into forward financial and physical risk management contracts on
Monterey's production. Management may, subject to approval by the Corporation's
Board, commit up to 50 percent of Monterey's annualized, production before
royalties as reported in the most recently completed calendar quarter to forward
risk management contracts. In addition, the term of any commodity contract
cannot exceed a period of two years.
As at, and during the three and nine months ended September 30, 2009, the
Corporation did not enter into any fixed price derivative contracts associated
with future production. The Corporation's policy when entering into derivative
financial instruments has been to initially record derivative financial
instruments at their fair value, and subsequently mark to market at the end of
each reporting period. Subsequent to September 30, 2009, Monterey entered into a
financial commodity price risk management contract, please see note 13 for the
terms of the contract.
(ii) Interest rate risk:
Monterey's capital and operating expenditures are funded by any combination of
the following: bank indebtedness, working capital, cash flow from operations and
the issuance of equity. To the extent that expenditures are funded by incurring
additional bank indebtedness, the Corporation has a contractual obligation to
repay those funds borrowed plus interest on those borrowings. Changes in
Canadian interest rates result in variation in the interest expense on funds
borrowed by the Corporation.
At September 30, 2009, Monterey had bank indebtedness of approximately $30.1
million. Assuming that the Corporation maintained its existing bank indebtedness
for one year, a 1.00% change in Canadian interest rates would result in a
variance of approximately $0.3 million in Monterey's annualized interest
expense.
b) Credit risk
A substantial majority of Monterey's petroleum and natural gas production is
marketed under standard industry terms, with a pre-arranged monthly settlement
day for payment of revenues from Monterey's purchasers of its sales volumes. In
addition, Monterey may conduct oil and gas operations jointly, as both the
operator or as a participant, with partners. As a result, the Corporation is
exposed to credit risk as a financial loss would result if Monterey's customers
or joint venture partners failed to meet their contractual obligations to
reimburse the Corporation for its accounts receivables. At September 30, 2009,
Monterey had approximately $71,000 in accounts receivable that were over 90
days, with the majority of receivables outstanding for less than 30 days.
At September 30, 2009, Monterey did not have a provision for doubtful accounts
as the majority of its receivables have been outstanding for less than 30 days,
and the Corporation has a favorable collection history.
c) Liquidity risk
Liquidity risk is the risk that Monterey cannot meet its financial obligations
as they come due. During times of extreme downward volatility in commodity
prices, the Corporation manages this risk by maintaining net debt (bank debt
plus capital lease obligation and non-cash working capital deficit or less
non-cash working capital surplus) below the total amount of borrowings available
under the Corporation's credit facility. The Corporation may reduce its net debt
through the issuance of equity, the disposal of assets or by reducing
anticipated capital expenditures to an amount less than cash flow generated from
operations.
In order to control the Corporation's exposure to liquidity risk, Monterey has
actively taken steps to manage its bank indebtedness, including: year-to-date
dispositions of non-core undeveloped oil and gas properties for approximate net
cash proceeds of $8.8 million; renewed its credit facility of $45.0 million
until May 2010; and subsequent to the third quarter, completed an equity
issuance for net cash proceeds of $15.1 million.
4. PROPERTY AND EQUIPMENT
Accumulated
depletion and
($000's) Cost depreciation Net book value
----------------------------------------------------------------------------
Oil and natural gas properties $ 173,468 $ 51,901 $ 121,567
Office furniture and equipment 387 164 223
----------------------------------------------------------------------------
September 30, 2009 $ 173,855 $ 52,065 $ 121,790
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated
depletion and
($000's) Cost depreciation Net book value
----------------------------------------------------------------------------
Oil and natural gas properties $ 175,118 $ 33,935 $ 141,183
Office furniture and equipment 387 112 275
----------------------------------------------------------------------------
December 31, 2008 $ 175,505 $ 34,047 $ 141,458
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the nine months ended September 30, 2009, Monterey capitalized, to the
cost of oil and natural gas properties, approximately $731,000 of general and
administrative expenses that were directly related to exploration and
development activities (year ended December 31, 2008 -$1,279,000). This amount
includes approximately $133,000 (year ended December 31, 2008 -$258,000) of
non-cash expenditures associated with stock-based compensation expenses.
Undeveloped property costs of $8,503,000 were excluded from the depletion and
depreciation calculation of oil and natural gas properties at September 30, 2009
(year ended December 31, 2008 - $9,718,000). Future costs of $14,881,000 to
develop proved undeveloped reserves have been included in the depletion and
depreciation calculation of oil and natural gas properties at June 30, 2009
(year ended December 31, 2008 - $24,042,000).
5. BANK INDEBTEDNESS, BANK DEBT & DERIVATIVES FACILITY
The Corporation has access to a demand revolving credit facility (the
"Facility") of $45 million and a derivatives facility with a Canadian banking
institution (the "Lender"). The Facility permits Canadian and U.S. dollar
borrowings to finance the Corporation's operations. As at September 30, 2009,
Monterey had bank indebtedness of approximately $30.1 million, primarily in the
form of guaranteed rate notes with terms to maturity of less than one year. In
addition, the Corporation has issued approximately $149,000 in letters of
credit/guarantee under the Facility.
Under the Facility, Monterey has the ability to borrow from the Lender up to $45
million in the form of: (i) revolving prime based and US prime based borrowing
in multiples of $25,000; (ii) issue of guaranteed notes and LIBOR borrowing
subject to minimum borrowings of $1 million and additional amounts in multiples
of $0.1 million having terms to maturity from 15 to 365 days from the date of
issue; and (iii) letters of credit/guarantee, to a cumulative maximum of $12.5
million, for a period of up to one year. The Facility permits Monterey's access
to a derivates facility, whereby the Corporation may enter into U.S. foreign
exchange forwards contracts or interest and commodity derivatives contracts with
the Lender. Covenants on Monterey's derivatives facility limit the commodity
derivatives contracts entered into by the Corporation to a maximum of 60% of
Monterey's annualized before royalties production as reported in the most
recently completed calendar quarter and that the term of any commodity contract
will not exceed a period of two years.
Under the Facility interest rates on: (i) Canadian and US dollar prime based
borrowing will be at the applicable Lender's prime lending rate plus 1.25%; (ii)
on the issue of guaranteed notes or LIBOR borrowing Monterey will pay the base
rate plus a stamping fee of 2.5% per annum; and a fee equal to 1.25% per annum,
payable at issue, on letters of credit/guarantee. Monterey borrowings in excess
of $40.5 million will incur interest at an additional 1% per annum. Monterey
also pays a monthly stand-by fee on the average unused portion of the Facility
at a rate of 0.35% per annum.
The Lender has the right to demand repayment of all borrowings at any time
without notice or terminate the availability of the unused portion of the
Facility five business days after serving notice to the Corporation. Monterey
has the right to draw against the Facility, repay amounts borrowed or convert
the type of borrowings subject to providing same day notice for borrowings less
than $5.0 million and one business day notice for borrowings of $5.0 million or
more.
The Facility is guaranteed by a Monterey general security agreement providing a
floating charge on all the Corporation's lands and a security interest over all
present and subsequently acquired personal property. Monterey is obligated to
meet certain covenants including providing certain financial and engineering
information in a timely manner; however, Monterey is not required to meet any
specific numerical financial covenants, such as a debt to equity ratio or
minimum working capital or liquidity amounts. The next review of the Facility
will be completed prior to June 2010.
Upon maturity of certain borrowings in the form of guaranteed notes in March
2010, the Corporation will pay the Lender $0.3 million in respect of stamping
fee adjustments.
6. ASSET RETIREMENT OBLIGATIONS
Monterey's asset retirement obligation results from net ownership interests in
oil and natural gas properties including well sites, gathering systems,
compression and processing facilities. The Corporation estimates that at
September 30, 2009 the total undiscounted amount of cash flows required to
settle its asset retirement obligations is approximately $8.0 million (inflation
adjusted). The timing for settlement of these obligations is based on the
economic lives of the underlying assets. The majority of the costs associated
with the asset retirement obligations are anticipated to be incurred between the
next 15 to 20 years. Monterey used a credit-adjusted risk-free rate of 8.75% and
an inflation rate of 2% to calculate the fair value of the asset retirement
obligations.
The changes in the asset retirement obligation for the three and nine months
ended September 30, 2009, are as follows:
Three months ended Nine months ended
($000's) Sept 30, 2009 Sept 30, 2009
----------------------------------------------------------------------------
Balance, beginning of period $ 4,439 $ 4,471
Liabilities incurred and acquired - 10
Liabilities disposed - (10)
Accretion expense 179 553
Liabilities settled (8) (414)
----------------------------------------------------------------------------
Balance, end of period $ 4,610 $ 4,610
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. SHARE CAPITAL
a) Authorized
Monterey is authorized to issue an unlimited number of common shares and
unlimited number of non-voting common shares.
b) Issued
Common shares Number ($000's)
----------------------------------------------------------------------------
Share capital, September 30, 2009 and December
31, 2008 32,902,500 $ 92,944
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On October 1, 2009 Monterey issued 8,100,000 shares as a result of an equity
offering, for additional details on the issuance, see Note 13. The October 1,
2009 issue will increase the number of common shares outstanding to 41,002,500
shares.
c) Stock options
Monterey has established a stock option plan whereby employees, management,
directors and consultants may be granted options to purchase common shares.
Options granted vest in equal amounts annually over a three-year period and
expire five years from the date of grant. The stock options outstanding may not
exceed 10% of the outstanding common shares.
From time to time, Monterey will impose a Black-out Period on employees,
management, directors and consultants that hold stock options granted by
Monterey which prohibits the exercise of stock options prior to the public
dissemination of material information concerning the Corporation.
During the second quarter, Monterey's shareholders approved certain amendments
to the Corporation's stock option plan. The key amendments approved by
Monterey's shareholders include: i) extension of the expiry date of stock
options which would otherwise expire within any "Black-out Period" by 10
business days from the date that the Black-out Period ends, ii) provide the
stock option grantee with the right to request, approval of the request at the
sole discretion of the Corporation, to settle exercised stock options in
exchange for a cash payment equal to the number of common shares that would be
otherwise issued multiplied by the difference between the current market price
of Monterey's common shares and the stock option exercise price, iii) in the
event the Corporation sells or merges all or substantially all of the property
or assets of Monterey to another party, this party shall be required to assume
the obligations of stock option grants previously granted under the stock option
plan, iv) Monterey's board of directors may make certain changes to the
Corporation's stock option plan without shareholder approval, provided that the
stock option plan may not be amended without shareholder approval in the case of
increases in the percentage of the common shares issuable on the exercise of
stock option grants in excess of 10 percent of the issued and outstanding common
shares of Monterey, extend the expiry date of any outstanding stock option held
by insiders, permit an optionholder to transfer or assign stock options to a new
beneficial holder, increase the number of common shares that may be granted to
insiders in excess of existing restrictions under the stock option plan or to
amend the amending or discontinuance provisions of the stock option plan.
During the nine months ended September 30, 2009 the Corporation did not grant
any stock options to acquire common shares. In addition, no stock options were
exercised resulting in the issue of common shares, and no stock options expired
or were cancelled.
The following table provides a summary of the outstanding stock options as at
September 30, 2009:
Weighted
average
exercise price
Number ($ per share)
----------------------------------------------------------------------------
Outstanding, September 30, 2009 and December 31,
2008 3,135,666 $2.12
----------------------------------------------------------------------------
The following table summarizes the stock options outstanding and
exercisable under the stock option plan at September 30, 2009:
Options outstanding Options exercisable
----------------------------------------------------------------------------
Number Weighted Number
outstanding average Weighted exercisable Weighted
Range of at remaining average at average
exercise Sept 30, contractual exercise Sept 30, exercise
prices 2009 life price 2009 price
----------------------------------------------------------------------------
$0.55 535,000 4.2 $0.55 - $0.55
$ 2.00 - $2.90 2,479,666 2.4 $2.39 1,681,002 $2.36
$3.49 121,000 2.3 $3.49 80,667 $3.49
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3,135,666 2.7 $2.12 1,761,669 $2.41
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d) Stock-based compensation
The Corporation uses the fair value based method for the determination of the
stock-based compensation costs. The fair value of each option granted was
estimated on the date of grant using the Black-Scholes option pricing model.
e) Contributed surplus
The following table reconciles the contributed surplus at September 30, 2009:
($000's)
----------------------------------------------------------------------------
Balance, December 31, 2008 $ 3,678
Stock-based compensation recognized during 2009 381
----------------------------------------------------------------------------
Balance, September 30, 2009 $ 4,059
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f) Per share amounts
For the three and nine months ended September 30, 2009 there was 32,902,500
basic and 33,191,051 diluted weighted average shares outstanding. For the three
months ended September 30, 2008 there was 27,818,345 basic and diluted weighted
average shares outstanding. For the nine months ended September 30, 2008 there
was 26,001,109 basic and diluted weighted average shares outstanding.
8. CAPITAL DISCLOSURES
Monterey's objectives for managing its capital consist of:
a. Providing an adequate level of return to shareholders of the Corporation,
relative to the risk of Monterey's assets.
b. Preserving a strong balance sheet with sufficient capital from shareholders
to develop existing and prospective assets.
Monterey's main objective is to build a profitable growing energy corporation.
As such, the Corporation's primary capital management objective is to promote
investor, lender and stakeholder confidence that Monterey is able to meet its
obligations and will continue to carry on its business.
Monterey manages its capital structure by issuing new equity or debt, adjusting
planned capital spending, or through the sale of assets to reduce debt.
Processes primarily utilized to effectively manage capital include ongoing
calculation of certain key financial benchmarks such as total liabilities to
equity ratio, that net debt is less than funding available under the Facility
and net debt (as described under Liquidity risk in Note 3) to forward cash flow
(also described under Liquidity risk in Note 3) ratio, and comparing the
Corporation's benchmarks figures against: (i) accepted prudent financial
management benchmarks; (ii) the benchmark figures of similar sized publicly
listed entities operating in the Canadian upstream oil and gas industry; and
(iii) the anticipated business environment, opportunities and the operations of
the Corporation. In addition to the key financial ratios Monterey will also
periodically review other measures such as net asset value, funds flow from
operations per share and debt adjusted funds flow from operations per share to
provide additional indications that the Corporation's capital structure supports
investor, lender and stakeholder confidence.
As at September 30, 2009, Monterey's benchmark figures of total liability to
equity ratio was 0.46 and the net debt of $32.2 million was less than the $45
million in funding available under the Facility, and both of these measures meet
the Corporation's management control limits. However Monterey's net debt to
forward cash flow ratio exceeded the control limit of 2.5
Low natural gas prices during the three month period ending September 30, 2009
resulting from the record levels of North American natural gas in storage due to
a combination of industrial user demand reductions associated with the current
global recession, lower level of cooling demand due to the relatively benign
North American summer in 2009 and the absence of recent severe weather events
that cause natural gas production or delivery outages. The combined result of
these factors has meant that Monterey's net debt to forward cash ratio objective
of 2.5 is not reasonably attainable at this time. The Corporation has and will
continue to take various actions to reduce Monterey's net debt. Recent
indications of a recovery in the overall economy could lead to more desirable
natural gas prices and potentially an improvement in the Corporation's net debt
to forward cash flow ratio.
Actions taken during 2009 by Monterey's management to reduce net debt and meet
the capital management objectives discussed above include: disposition of
non-core oil and gas properties for net proceeds of $8.8 million, renewal of the
Facility to eliminate the risks in respect of the cost and the amount of bank
debt borrowing available to the Corporation, and subsequent to September 30,
2009 and as disclosed in Note 13, Monterey completed the issuance of equity for
net proceeds of $15.1 million and the forward sale of production.
9. INCOME TAXES
The provision for income tax differs from the result that would be obtained by
applying the applicable statutory federal and provincial income tax rates to net
earnings before income taxes. This difference results from the following items
for the nine months ended September 30, 2009 and September 30, 2008:
($000's) 2009 2008
----------------------------------------------------------------------------
Earnings (loss) before income taxes $ (14,468) $ 1,305
Combined federal and provincial statutory tax rate 29.30% 30.22%
----------------------------------------------------------------------------
Expected income tax recovery (expense) (4,239) 394
Increase (decrease) resulting from the tax effect of:
Stock-based compensation expense 73 90
Other 2 3
Effect of change in enacted income tax rate 410 10
Change in valuation allowance 3,754 (2,205)
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Income tax recovery $ - $ (1,708)
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The components of the Corporation's future income tax assets and
liabilities, as at September 30, 2009 and December 31, 2008 are as follows:
($000's) 2009 2008
----------------------------------------------------------------------------
Future income tax assets:
Property and equipment $ 3,971 $ -
Share issue costs 288 416
Non-capital losses 14,803 15,966
Asset retirement obligation 1,163 1,148
Valuation allowance (20,225) (16,471)
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- 1,059
Future income tax liability:
Property and equipment - (1,059)
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Net future income tax asset $ - $ -
----------------------------------------------------------------------------
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At September 30, 2009, subject to confirmation by income tax authorities,
Monterey has approximately $192,851,000 of income tax deductions, including
non-capital losses of approximately $54,119,000, available for application
against future taxable income. The benefit of which has not been included in
these financial statements.
The Corporation's non-capital losses, if not utilized, expire as
follows:
($000's)
----------------------------------------------------------------------------
2009 $ 9,150
2010 15,986
2011 28,318
2012 665
----------------------------------------------------------------------------
Non-capital losses available $ 54,119
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10. SUPPLEMENTAL CASH FLOW INFORMATION
a) Change in non-cash working capital items:
Three months Three months Nine months Nine months
ended ended ended ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Change in non-cash
working capital:
Accounts
receivable $ 611 $ 122 $ 3,787 $ 1,143
Prepaid expenses
and deposits 304 330 (125) (887)
Accounts payable 185 1,320 (4,045) 3,951
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$1,100 $1,772 $ (383) $ 4,207
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Changes in non-cash
working capital
related to:
Operating activities $ 251 $ (394) $ 742 $ (241)
Financing activities - 26 - 26
Investing activities 849 2,140 (1,125) 4,422
----------------------------------------------------------------------------
$1,100 $1,772 $ (383) $ 4,207
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b) Supplementary cash flow information:
Three months Three months Nine months Nine months
ended ended ended ended
($000's) Sept 30, 2009 Sept 30, 2008 Sept 30, 2009 Sept 30, 2008
----------------------------------------------------------------------------
Cash interest paid $ 87 $ 159 $ 667 $ 561
Cash taxes paid - - - -
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11. COMMITMENT
Monterey is committed to future payments under an operating lease for head
office space and parking facilities totaling approximately $1.8 million until
October 30, 2014. Of this total, Monterey is committed to equal monthly payments
totaling $88,000 over the remainder of 2009, $350,000 for each of the years from
2010 to 2013, and $292,000 in 2014.
12. RELATED PARTY TRANSACTIONS
a) Legal services
A director of Monterey is a partner at a law firm that provides legal services
to the Corporation. During the nine months ended September 30, 2009, the
Corporation incurred approximately $56,000 in legal services and disbursements
associated with this related party. At September 30, 2009 the Corporation's
accounts payable include an accrual of $5,000 for amounts owed to the law firm
for legal fees and disbursements which have not yet been billed.
b) Transactions with shareholder
During the nine months ended September 30, 2009, the Corporation had
transactions totaling approximately $140,000 with an entity that holds
approximately 24% of the outstanding common shares of Monterey. The transactions
primarily consisted of Monterey's participation in the joint exploration,
development and production of petroleum and natural gas properties. All
transactions were completed on an arm's length basis consistent with normal
industry terms. The value of the transactions between Monterey and the related
party were recorded at the carrying amount, which approximated their fair value.
At September 30, 2009, Monterey's records include $4,000 in accounts receivable
with this shareholder.
c) Common management and directors
Certain directors of Monterey are also the directors or management of other
entities that participate in joint operations with the Corporation. Transactions
with these related parties are on terms that are consistent with parties dealing
at arm's length. For the nine months ended September 30, 2009, the aggregate
value of transactions entered into between Monterey and these entities was
approximately $1,411,000. At September 30, 2009 Monterey's records include
outstanding payables owed to the related parties of $6,000 and accounts
receivables due to Monterey of approximately $71,000.
13. SUBSEQUENT EVENTS
On October 1, 2009, the Corporation completed the issuance of 5,450,000 common
shares at a price of $1.85 per common share and 2,650,000 common shares on a
"flow-through" basis at a price of $2.28 per flow-through common share. Total
proceeds from the issuance of approximately $15.1 million after the deduction of
underwriters' fees as well as associated share issue costs will be used to
finance Monterey's capital expenditure program. As a result of the flow-through
share issuance, Monterey is required to renounce approximately $6.0 million of
Canadian Exploration Expense ("CEE") on or before December 31, 2009 and incur a
similar amount of CEE on or before December 31, 2010.
On October 6, 2009, Monterey entered into a financial commodity price risk
management contract with the Lender. Under the terms of the contract, Monterey
has agreed to market 2,000 gigajoules of natural gas per day at a price of $5.07
per gigajoule for the period from November 1, 2009 to December 31, 2009.
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