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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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Solana Res | LSE:SORL | London | Ordinary Share | CA8341281001 | COM SHS NPV |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 132.50 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
0 | 0 | N/A | 0 |
Solana Resources Limited ("Solana" or "the Company") - Financial Report For The Three Month Period Ended March 31, 2008 CALGARY and LONDON, May 28 /CNW/ - Solana Resources Limited (TSX-V:SOR; AIM:SORL), the Colombia focused independent oil and gas exploration and production company, today announces its results for the three month period ended March 31, 2008. These results should be read in conjunction with the Company's audited consolidated financial statements for the years ended December 31, 2007 and 2006. All numbers in this report are expressed in US dollars unless otherwise indicated. Solana (www.solanaresources.com) is an international resource company engaged in the acquisition, exploration, development and production of oil and natural gas. The Company's properties are located in Colombia, South America and are held through its wholly owned subsidiary, Solana Petroleum Exploration (Colombia) Limited. The Company is headquartered in Calgary, Alberta, Canada. Additional information (which does not form part of this announcement) is available on the Company's website at www.solanaresources.com and the SEDAR website at www.sedar.com. HIGHLIGHTS - Costayaco-2, a 560 metre crestal step out from Costayaco-1, was drilled and tested in excess of 6,600 bopd (gross) combined from the two primary horizons, the Caballos and the Villeta T. - Costayaco-3, a 960 down dip step out from Costayaco-1, was drilled and tested a maximum combined 2,543 bopd from the two primary horizons, the Caballos and the Villeta-T. - Primavera-1, testing a structure in the Guachiria block in the Llanos block was drilled and cased. Subsequent to the end of the first quarter Solana tested this well at a pump constrained rate of 650 bopd (gross) from the Carbonera C7 formation. - Palmitas-2, testing a structure in the Guachiria Sur block in the Llanos basin, was drilled and cased as a potential oil discovery. - First quarter 2008 cash flow from operating activities of $10.7 million ($0.08/share) and after tax net income of $6.5 million ($0.05/share). - First quarter 2008 capital expenditures of $13.2 million. - Cash balance of $62.4 million as at March 31, 2008. OPERATIONAL UPDATE LOWER MAGDALENA BASIN The Lower Magdalena basin is located in northwest Colombia. It covers an area of approximately 87,000 km(2) and contains Solana's Magangué block. MAGANGUE BLOCK The Magangué block is held pursuant to the Magangué Association Contract. Solana is the operator of the block with a 37.8% working interest and has partners, Ecopetrol with a 58% working interest, and Technopetrol, a Colombian company, with a 4.2% working interest. Solana operates the Guepajé gas field on the 84 km(2) Magangué block, which borders the Pacific Rubiales La Creciente block where there was a significant gas discovery, in the same productive formation as the Guepajé gas field, in 2006. This field came on production in January 2008, greatly increasing local line pressure and effectively backing out Guepajé gas production. Guepajé will remain shut in until a new compressor is sourced and installed. CATATUMBO BASIN The Catatumbo Basin is a 7,350 km(2) sub-basin, forming the southwest flank of Venezuela's prolific Maracaibo Basin. Solana has one block in the Catatumbo sub-basin. CATGUAS BLOCK Solana is the operator of the 1,591 km(2) Catguas block with a 100% working interest. In the southern 70% of the block, Trayectoria Oil and Gas, Sucursal Colombia, has a 15% beneficial interest, and a 50% beneficial interest in the remainder. The block is held under an ANH contract. Phase 1 (November 17, 2005 to May 17, 2007) commitments were fulfilled by drilling the relatively shallow Tres Curvas-1 and Cocodrilo-1 wells. Tres Curvas-1 tested a combined maximum 180 bopd from two Catatumbo formation zones and was completed as a new oilfield discovery. The well is currently awaiting permission from the Ministry of Mines and Minerals for a Long Term Test with a progressive cavity pump. Cocodrilo-1 was abandoned after failing to identify oil in commercial quantities. An extension to the phase 1 deadline, to accomplish the required activities, was requested and granted. During phase 2 (May 17, 2007 to November 17, 2008) Solana must drill one exploration well and re-enter one existing well. In the absence of a suitable re-entry candidate the requirement is to drill a second exploration well. Accordingly, two wells, testing deeper targets, are scheduled to be drilled during Q4, 2008. At the end of this phase a certain portion of this block must be relinquished. In view of the prospectivity of the block and to reduce the relinquishment area to 15%, the Company will also acquire 132 line-km of 2-D and 50 km(2) of 3-D seismic data in Q3, 2008. The 3-D seismic is designed to delineate the shallower Tres Curvas channel discovery and the 2-D to assist in selection of the second well to be drilled from the five prospects identified on a large anticlinal feature. The Natubay prospect on this anticline has already been identified as a drilling location. LLANOS BASIN The Llanos basin is located northeast of Bogota, the capital of Colombia, on the east side of the Andes Mountains. This basin covers an area of approximately 200,000 km(2) and holds Colombia's largest number of oil fields and proved oil reserves. Solana has working interests in six blocks in the Llanos Basin, covering an area of 2,015 km(2). These blocks are from North to South: Guachiria Norte, Colonia, San Pablo, Guachiria, Guachiria Sur and Garibay. These blocks are in the part of the Llanos Basin where drilling and seismic activity is generally restricted to a four-month weather window from December to March. GUACHIRIA NORTE BLOCK Solana is the Operator of the 412 km(2) Guachiria Norte block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. The block is located approximately 250 km northeast of Bogota and is subject to an ANH contract. During Phases 3 and 4 (March 21, 2007 to March 21, 2009) Solana is required to drill two exploration wells and acquire 25 km(2) of 3-D seismic data. Solana is currently reprocessing the existing 157 km(2) Onyx 3-D seismic survey to optimize the location of the next wells. Within this area is a significant Carbonera C5 channel target which the Company intends to test. The Company plans to drill the commitment wells prior to the March 21, 2009 deadline. COLONIA BLOCK On June 25, 2007, Solana acquired the 439 km(2) Colonia block, situated immediately to the west of the Guachiria Norte block. Solana is required to acquire 55 km(2) of 3-D seismic data and to reprocess the existing 2-D seismic data during the first phase (June 25, 2007 until June 25, 2008), and to drill one exploration well in each of the subsequent five annual phases. This block is subject to an ANH contract. The acquisition of the 3-D seismic data was completed and the data is being processed. SAN PABLO BLOCK On June 25, 2007, Solana acquired the 423 km(2) San Pablo block, situated immediately to the west of the Guachiria Sur block and to the south of the Colonia block. Solana must acquire 50 km(2) of 3-D seismic data during the first phase (June 25, 2007 until June 25, 2008) and drill one exploration well in each of the subsequent five annual phases. This block is subject to an ANH contract. 50 km(2) of 3-D seismic data was acquired in December 2007 and has been processed. This seismic clearly indicates the extension of the significant Carbonera C-5 channel prospect, identified on Guachiria Norte and Guachiria Sur, into this block. GUACHIRIA BLOCK Solana is the Operator of the 68 km(2) Guachiria block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. The block adjoins the Guachiria Norte block immediately to the South. This block was acquired from Empresa Colombiana de Petroleos SA (Ecopetrol), and is subject to a standard ANH contract plus an additional 13% royalty payable to Ecopetrol. For Phase 3 (June 1, 2006 to June 1, 2007), Ecopetrol agreed that Solana may substitute its well commitment for a 100 km(2) 3-D seismic survey, covering the block, and overlapping the southern part of the adjacent Guachiria Norte 3-D seismic survey. Data acquisition and processing were completed on time. The commitment for Phase 4 (June 1, 2007 to June 1, 2008) is to drill an exploration well. The Company drilled the Primavera-1 well during February, 2008. In May, this well was successfully tested at a pump constrained rate over a continuous 24 hour period, of 650 barrels of 40 degree API oil per day, gross, 365 bopd net of royalty to Solana, from eight feet of perforations, 6,682 to 6,690 ft, in the Carbonera C-7 formation. The well produced with a water cut of approximately 58% during this flow period. Solana's Yalea-1 well was shut-in for repairs. GUACHIRIA SUR BLOCK Solana is the Operator of the 366 km(2) Guachiria Sur block with a 100% working interest. Lewis Energy Colombia has a 30% beneficial interest in this block. The block is to the west and the south of the Guachiria block and to the south of the Guachiria Norte block. This block is subject to an ANH contract. The commitment to drill a well during Phase 2 (October 25, 2006 to October 25, 2007) was renegotiated with the ANH and was replaced by a 120 km(2) 3-D seismic survey and a commitment to drill one well during Phase 3 (October 25, 2007 to October 25, 2008). This survey was completed and covers the northern part of the block, immediately west and south of the Guachiria block. The Company drilled the Palmitas-2 well during March, 2008 resulting in a potential Carbonera structural play discovery. The well will be tested shortly after Primavera-1. GARIBAY BLOCK Solana is the Operator of the 307 km(2) Garibay block and holds a 100% working interest. The block is located approximately 170 km east of Bogota. This block is subject to an ANH contract. During Phase 2 (October 25, 2006 to October 25, 2007) Solana is required to drill one well. The ANH has approved the replacement of this program with the acquisition of 100 km(2) (39 square miles) of 3-D seismic, subject to relinquishment of 30% of the block area. This survey was completed in April 2007. During Phase 3 (October 25, 2007 to October 25, 2008), the Company is required to drill one exploration well. On November 17, 2007, Solana farmed out a 50% working interest and operatorship to Cepsa Colombia SA. Pursuant to this agreement, Solana is fully carried on the phase 3 commitment well, Topocho-1, which is currently drilling. PUTUMAYO BASIN The Putumayo basin is located in southwest Colombia and extends into Ecuador, where it is called the Oriente (Ecuador)-Maranon (Peru) Basin. It covers an area of approximately 320,000 km(2) and Solana holds interests in the Guayuyaco block and the Chaza block totalling 536 km(2) in this basin. GUAYUYACO BLOCK Solana holds a 35% non-operated net working interest in the 212 km(2) Guayuyaco block, located approximately 290 km southwest of Bogota. Gran Tierra Energy Inc. is the operator with a 35% working interest. Ecopetrol has a 30% working interest in the Guayuyaco field which was producing 492 bopd (gross), 158 bopd net of royalty to Solana, on March 31, 2008. All commitments have been fulfilled and the block is being developed further under an Association Contract. During the first quarter of 2007 Solana participated in drilling the Juanambu-1 discovery well which was productive in the Caballos, Villeta T and Rumiyaco Kg formations. The well has been completed with a jet pump and the tubing string configured to allow for production from selected zones. Pursuant to regulatory requirements, the well was intermittently tested until Ecopetrol granted "commerciality" to the Juanambu field on November 7, 2007, at which time the well was placed on continuous production. Juanambu-1 was producing 965 bopd (gross), 311 bopd net of royalty to Solana, on March 31, 2008. Trucking operations have been replaced with a six kilometre six inch flowline that went into operation on February 29, 2008. The line connects Juanambu-1 into the nearby Toroyaco facility and from there into existing infrastructure. CHAZA BLOCK Solana has a 50% working interest in the 325 km(2) Chaza block, immediately west of the Guayuyaco block. Gran Tierra, the operator, holds the other 50% in the block. The block is held under an ANH contract. During Phase 2 (June 27, 2006 to June 26, 2007) the partners drilled the Costayaco-1 discovery well which tested at a combined maximum rate of 5,906 bopd from four separate formations; the Caballos, Villeta T, Villeta U and the Rumiyaco Kg. This well is currently on a long term test. Costayaco-1 was producing 3,089 bopd (gross), 1,421 bopd net of royalty to Solana, on March 31, 2008. Production is trucked to facilities at Uchupayaco that were constructed in the second half of 2007. A ten kilometre, eight inch pipeline, tying into existing infrastructure at Uchupayaco, is being built to replace trucking operations. This line is scheduled to be in operation by mid 2008. To assist with future development drilling location selection, a 70 km(2) 3-D seismic programme was acquired in December 2007. During December 2007 and January 2008, Costayaco-2 was drilled on a crestal location approximately 560 metres north of Costayaco-1 and was subsequently completed as an oil well. This well tested over 6,600 bopd (gross) from the Caballos and Villeta T sands. The secondary zone, the Villeta U sand was not tested as it showed very similar characteristics to Costayaco-1. A long term test is planned in the next four months. Costayaco-2 was producing 1,446 bopd (gross), 665 bopd net of royalty to Solana, on March 31, 2008. In February 2008, Costayaco-3 was drilled on a down dip location approximately 960 metres west south west of Costayaco-1 in an effort to find oil-water contacts (OWC). This well encountered the same reservoir sequences with similar good oil and gas shows as the other Costayaco wells. Initial log interpretations indicate hydrocarbon pay across the Rumiyaco Kg, the Villeta U, the Villeta T and the Caballos formations. A drill-stem test (DST) and flow-test (FT) program was implemented on March 19, 2008, to evaluate the Caballos Formation and the Villeta T. The Upper Caballos and the Villeta T flowed at a maximum rate combined of 2,543 bopd with only traces of water. At the end of the 36 hour test, the flow rate was still increasing. Importantly this testing program identified an OWC below 8,486 feet in the lower Caballos Formation, which is the first definitive identification of an OWC in the Costayaco field. Equally importantly, there was no evidence of an OWC in the other primary formation, the Villeta T. Costayaco-4D, a directional well drilled from Costayaco-2 with a crestal location some 540 metres north of Costayaco-2, spudded on March 17, 2008. Cores are planned for the Villeta T and Caballos sandstones with drilling expected to take until the end of May with completion and testing to follow. At least 3 more wells are planned in the field during 2008. Costayaco-1 continues to produce on long term test and at March 31, 2008 was producing 3,089 bopd (gross), 1,421 bopd net of royalty to Solana. Production is currently trucked to an offloading facility at Uchupayaco and into existing infrastructure. Trucking constraints are expected to be eliminated by mid 2008 when it is anticipated that the 10 kilometre eight inch line from Costayaco-1 to Uchupayaco will be in service. Work is underway to reduce existing infrastructure production constraints beyond Uchupayaco. It is currently anticipated that 6,000 - 9,000 bopd gross could be accommodated during the second half of 2008. A second stage of infrastructure expansion, to accommodate the anticipated increase in production from the continuing Costayaco drilling program, is currently being evaluated. OPERATING RESULTS Selected Quarterly Information The following table summarizes selected financial data for Solana for the three month periods ended March 31, 2008, and 2007. Unless otherwise noted, all currency amounts are stated in US dollars. 2008 2007 ------------------------------------------------------------------------- $ $ Production revenue, net of royalties 16,266,570 1,413,926 Operating costs 2,293,445 656,578 ------------------------------------------------------------------------- 13,973,125 757,348 ------------------------------------------------------------------------- Expenses General and administrative 1,490,599 1,061,304 Depletion, depreciation and accretion 3,504,208 1,266,908 Foreign exchange loss (gain) 510,421 25,655 Stock-based compensation 2,608,009 1,617,193 ------------------------------------------------------------------------- 8,113,237 3,971,060 ------------------------------------------------------------------------- Other income/expenses Interest and other 734,703 131,114 Income taxes (65,935) (50,000) ------------------------------------------------------------------------- 668,768 81,114 ------------------------------------------------------------------------- Net income (loss) 6,528,656 (3,132,598) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss (income) per share 0.05 (0.03) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Mar 31,2008 Dec 31,2007 ------------- ------------- $ $ Share capital 188,482,896 187,223,652 Working capital 72,305,604 70,974,442 Petroleum and natural gas properties 91,756,877 81,963,075 Total assets 175,672,064 166,641,302 Total current liabilities 9,147,319 9,307,557 Shareholders' equity 164,496,472 155,359,807 Cash dividends per share Nil Nil Results of Operations for the Three Months Ending March 31, 2008 This consolidated financial information includes the revenue and expenses of the Company for the three month periods ended March 31, 2008 and 2007. During the three month period ended March 31, 2008, revenue from operations amounted to $16,266,570. In this same period operating costs were $2,293,445 resulting in an operating profit of $13,973,125. During the three month period ended March 31, 2007, the Company generated revenue of $1,413,926. In this same period operating costs were $656,578 resulting in an operating profit of $757,348. This significant increase in operating profit is mainly due to higher Costayaco and Juanambu field production and higher oil prices during the period. The Company produced an average 1,715 boepd for the three months ended March 31, 2008 against 453 bopd for the three months ended March 31, 2007. First quarter 2008 average production was impacted by the shut in of the Guepaje gas field in early January, while a new compressor was being sourced and installed, and downtime at Juanambu-1 associated with pressure build up tests. The Company's revenue, net of royalties, operating costs and net backs for the three month period ended March 31, 2008 and 2007 are: 2008 2007 $/Boe $/Boe ---------------------------- Revenue, net of royalties 88.84 34.62 Operating cost 14.83 11.47 ---------------------------- Net 74.01 23.15 ---------------------------- General and administrative expenses General and administrative expenses for the three month period ended March 31, 2008 amounted to $1,490,599 in comparison to $1,061,304 for the same period in 2007. This $429,295 increase is mainly due to additional salary expense associated with increased activity in Colombia. The major components of general and administrative expenses are: 2008 2007 $ $ ---------------------------- General office 69,149 107,000 Salaries and benefits 962,428 523,552 Professional fees 99,354 14,722 Public company costs 78,660 98,282 Consulting fees 179,017 200,287 Travel 101,991 117,461 Depletion, depreciation and accretion First quarter 2008 depletion, depreciation and accretion amounted to $3,504,208, compared to $1,266,908 for the same period a year ago. The depletion expense amounts to $3,446,432 (2007 - $1,193,072). This increase is due to a combination of a higher depletable base and increased production but is somewhat offset by higher proved reserves highlighted in the Company's 2007 year end reserves report. Depreciation amounts to $42,764 (2007 - $19,867) on the Company's other capital assets. Accretion expense amounting to $15,012 (2007 - $53,969) represents the increase in future estimated costs to plug and abandon the Company's petroleum and natural gas wells at the end of their useful lives. Stock-based compensation expense First quarter 2008 stock-based compensation expense associated with options increased to $585,557 from $469,135 in the first quarter of 2007 primarily due to an increase in the amortization of costs associated with the vesting of options granted throughout 2007. Additionally, stock compensation expense of $1,259,244 (2007 - $1,148,058) relating to the Breakaway acquisition shares and $763,208 (2007- Nil) relating to the Breakaway performance warrants was recognized (see Note 3 to the financial statements for the years ended December 31, 2007 and 2006). Foreign exchange The foreign exchange loss of $510,421 in the three month period ended March 31, 2008 in comparison with the loss of $25,655 in the three month period ended March 31, 2007 reflects relative currency fluctuations between the Canadian dollar, the U.S., dollar and the Colombian peso, all of which are held by the Company from time to time. Other income and expenses Other income and expenses relate to interest income in the current three month period and amount to $734,703 compared to $131,114 for the same period in 2007. This difference is due to the larger cash balances held throughout the first quarter of 2008. The income tax expense amounting to $65,935 (2007 - $50,000) is the minimum Colombian income tax obligation. It is based on presumptive income calculated as a percentage of Colombian equity levels and can be recovered against future income taxes for up to five years. Net income (loss) The $6,528,656 net income for the quarter ended March 31, 2008 compares to a net loss of $3,132,598 for the same 2007 period. The increase is mainly attributable to higher production levels and higher oil prices. Selected Quarterly Financial Information The following table sets out selected unaudited quarterly financial information of Solana and is derived from the unaudited quarterly financial statements prepared by management. Solana's interim financial statements are prepared in accordance with Canadian generally accepted accounting principles and are expressed in US dollars. ------------------------------------------------------------------------- SUMMARY OF QUARTERLY RESULTS QUARTERS ENDED Mar 31, 2008 Dec 31, 2007 Sep 30, 2007 Jun 30, 2007 $ $ $ $ Additions to Petroleum and Natural Gas properties 13,255,246 8,336,394 7,191,743 10,486,480 Total revenues 17,001,273 12,768,179 3,345,664 1,726,827 General and administrative expenses 1,490,599 1,582,711 1,165,775 1,319,363 Depletion, depreciation and accretion 3,504,208 1,558,115 2,018,435 945,635 Foreign exchange (income) loss 510,421 (385,373) 237,775 199,233 Stock-based compensation 2,608,009 9,512,159 1,302,779 1,207,881 Income (loss) after taxes 6,528,656 (999,906) (2,348,505) (2,802,217) Income (loss) per share 0.05 (0.01) (0.02) (0.05) ------------------------------------------------------------------------- Mar 31, 2007 Dec 31, 2006 Sep 30, 2006 Jun 30, 2006 $ $ $ $ Additions to Petroleum and Natural gas properties 7,274,457 7,902,112 4,402,811 8,876,927 Total revenues 1,545,040 2,049,754 3,652,608 2,797,670 General and administrative expenses 1,061,304 2,042,166 423,640 1,197,315 Depletion, depreciation and accretion 1,266,908 2,441,325 886,985 957,026 Impairment - 29,822,544 - - Foreign exchange (income) loss 25,655 160,105 (3,424,333) 870,581 Stock-based compensation 1,617,193 2,300,703 209,875 228,640 Income (loss) after taxes (3,132,598) (31,076,705) 4,989,157 (1,236,674) Income (loss) per share (0.03) (0.34) 0.05 (0.01) ------------------------------------------------------------------------- LIQUIDITY Solana's working capital increased from $70,974,442 at December 31, 2007, to $72,305,604 at March 31, 2008, largely due to the accounts receivable related to the Company's increased crude sales from production in the Costayaco and Juanambu fields in the first quarter of 2008. The Company's $62,424,185 cash balance at March 31, 2008 is committed to its planned capital expenditure program in Colombia. Most of the balance is held in accounts and term deposits with Canadian chartered banks. The Company currently has sufficient working capital to meet its work obligations. SUMMARY OF CASH INFLOWS AND OUTFLOWS The Company realized cash inflows of $12,641,364 from operations for the three months ended March 31, 2008 compared to cash outflows of $267,287 from operations for the same 2007 period. This significant increase in operating cashflow is attributable to higher production revenue (mainly from Costayaco and Juanambu production). The Company incurred investing activity cash outflows of $19,831,462 for the three month period ended March 31, 2008 as compared to $5,848,372 for the same period in 2007. The most significant cash outflow component was $13,255,246 (2006 - $7,274,457) related to petroleum and natural gas property expenditures. RELATED PARTY TRANSACTIONS The Company paid $15,244 (Cdn$15,000) in management fees in the current period ended March 31, 2008 (2007 - $12,802 Cdn$15,000) to a company controlled by a director of the Company. These fees are included in general and administrative expense. BUSINESS RISK AND UNCERTAINTIES The Company's business is subject to risks inherent in oil and gas exploration and development operations. In addition, there are risks associated with the Company's development stage of operations and the foreign jurisdiction in which it operates. The Company has identified certain risks pertinent to its business, including: exploration and reserve risks, drilling and operating risks, costs and availability of materials and services, capital markets and the requirement for additional capital, loss of or changes to production sharing, joint venture or related agreements, economic and sovereign risks, possibly of less developed legal systems, reliance on strategic relationships, market risk, volatility of future oil and gas prices and foreign currency risk. Solana attempts to monitor, assess and mitigate certain of these risks by retaining an experienced team of professionals and using modern technology. Further, the Company has focused its activities in a known hydrocarbon basin in a jurisdiction that has previously established long-term oil and gas ventures with foreign oil and gas companies, existing infrastructure of services and oil and gas transportation facilities, and reasonable proximity to markets. The Company also retains consultants resident in Colombia to monitor economic and political developments and to assist with operating, administrative and legal matters. There are certain risks, however, over which the Company has little or no control. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Petroleum and Natural Gas Operations The Company follows the full cost method of accounting for petroleum and natural gas operations, whereby all costs of exploring for and developing petroleum and natural gas reserves are capitalized in country-by-country cost centres. Such costs include land acquisition costs, geological and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, interest costs on major development projects and overhead charges directly related to acquisition, exploration and development activities. The costs (including exploratory dry holes) in cost centres from which there has been no commercial production are not subject to depletion until commercial production commences. The capitalized costs are assessed to determine whether it is likely such costs will be recovered in the future. To the extent there are costs which are not likely to be recovered in the future, they are written-off. The costs in cost centres from which there is production, together with the cost of production equipment, are depleted and depreciated on the unit-of-production method, based on the estimated proved reserves after royalties. Petroleum and natural gas reserves and production are converted into equivalent units, based upon estimated relative energy content. Costs of acquiring and evaluating significant unproved properties are excluded from the depletion calculations. These unproved properties are assessed to determine whether impairment has occurred. When proved reserves are assigned or the carrying value of the property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion. Petroleum and natural gas properties are subject to a ceiling test in each reporting period to determine that the costs are not impaired and do not exceed the fair value of the properties. The costs are assessed to be not impaired if the sum of the undiscounted cash flows expected from the production of proved reserves and the cost of unproved properties, net of impairment allowances of unproved properties exceed the carrying value of the petroleum and natural gas properties. If the carrying value of the petroleum and natural gas properties is determined to be impaired, an impairment loss is recognized to the extent that the carrying value exceeds an estimated fair value. The fair value estimate is normally based on the sum of the discounted cash flows expected from the production of proved and probable reserves plus the cost of unproved properties, net of impairment allowances. The cash flows are estimated using forecast product prices and costs and are discounted using a risk-free interest rate. Proceeds from the sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the depletion rate by more than 20%. ADVISORY REGARDING FORWARD-LOOKING STATEMENTS This report contains forward-looking statements. Forward-looking statements are subject to numerous known and unknown risks and uncertainties, some of which are beyond Solana's control, including the impact of general economic conditions, industry conditions, volatility of commodity prices, currency exchange rate fluctuations, reserve estimates, environmental risks, and competition from other explorers, stock market volatility and ability to access sufficient capital. Solana's actual costs could differ materially from those anticipated in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. SOLANA RESOURCES LIMITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS For the Three Month Periods Ended March 31, 2008 and 2007 (Unaudited) Notice to Reader: The accompanying unaudited interim consolidated financial statements of Solana Resources Limited (the "Company") for the period ended March 31, 2008, have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company. These financial statements have not been reviewed by the Company's external auditors. DATED the 27th day of May, 2008 (signed) "J. Scott Price" J. Scott Price, President and Chief Executive Officer SOLANA RESOURCES LIMITED INTERIM CONSOLIDATED BALANCE SHEETS (Unaudited) Expressed in US dollars March 31, December 31, 2008 2007 ------------- ------------- $ $ Assets Current Cash and cash equivalents 62,424,185 71,537,827 Accounts receivable - trade 15,039,596 6,671,992 - cash calls 2,546,657 1,282,170 Prepaid expenses 1,442,485 790,010 ------------- ------------- 81,452,923 80,281,999 1,178,750 3,156,750 Deposits (Note 3) 91,756,877 81,963,075 Petroleum and natural gas properties 891,663 877,051 Other capital assets 391,851 362,427 ------------- ------------- Investment (Note 4) 175,672,064 166,641,302 ------------- ------------- ------------- ------------- Liabilities Current: Accounts payable and accrued liabilities - trade 9,032,640 8,185,187 - cash calls 114,679 1,122,370 ------------- ------------- 9,147,319 9,307,557 Asset retirement obligations (Note 5) 2,028,273 1,973,938 ------------- ------------- 11,175,592 11,281,495 ------------- ------------- Shareholders'equity Share capital (Note 6) 188,482,896 187,223,652 Contributed surplus 13,111,366 11,762,601 Cumulative other comprehensive income 5,791,923 5,791,923 Deficit (42,889,713) (49,418,369) ------------- ------------- (37,097,790) (43,626,446) ------------- ------------- 164,496,472 155,359,807 ------------- ------------- 175,672,064 166,641,302 ------------- ------------- ------------- ------------- SOLANA RESOURCES LIMITED INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS), COMPREHENSIVE INCOME (LOSS) AND DEFICIT (Unaudited) Expressed in US dollars Three months ended March 31, 2008 2007 $ $ Revenue Oil and gas revenues, net of royalties 16,266,570 1,413,926 Interest 734,703 131,114 ------------- ------------- 17,001,273 1,545,040 ------------- ------------- Expenses Operating 2,293,445 656,578 General and administrative 1,490,599 1,061,304 Depletion, depreciation and accretion 3,504,208 1,266,908 Foreign exchange loss (gain) 510,421 25,655 Stock compensation expense 2,608,009 1,617,193 ------------- ------------- 10,406,682 4,627,638 ------------- ------------- Income (loss) before income taxes 6,594,591 (3,082,598) Income tax expense 65,935 50,000 ------------- ------------- Net income (loss) and comprehensive loss 6,528,656 (3,132,598) Deficit, beginning of period 49,418,369 40,135,143 ------------- ------------- Deficit, end of period 42,889,713 43,267,741 ------------- ------------- ------------- ------------- Net Income (loss) per share, basic and diluted 0.05 (0.03) ------------- ------------- ------------- ------------- SOLANA RESOURCES LIMITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Expressed in US dollars Three months ended March 31, 2008 2007 $ $ Summary of activities Operating Activities 6,528,656 (3,132,598) Income (loss) for the period Items not involving Unrealized foreign exchange loss (gain) 491 (18,790) Stock-based compensation 2,608,009 1,617,193 Depletion, depreciation and accretion 3,504,208 1,266,908 12,641,364 (267,287) Change in working capital - operating (1,923,053) 2,167,570 ------------- ------------- 10,718,311 1,900,283 ------------- ------------- Financing Activities: - - ------------- ------------- - - ------------- ------------- Investing activities: Additions to petroleum and natural gas properties (13,255,246) (7,274,457) Change in working capital - investing (8,467,416) 1,403,983 Additions to other capital assets (57,376) 22,102 Deposits 1,978,000 - Investments (29,424) - ------------- ------------- (19,831,462) (5,848,372) ------------- ------------- Foreign exchange on cash balances (491) - ------------- ------------- Net decrease in cash and cash equivalents (9,113,642) (3,948,089) Cash and cash equivalents, beginning of period 71,537,827 33,183,430 ------------- ------------- Cash and cash equivalents, end of period 62,424,185 29,235,341 ------------- ------------- ------------- ------------- Supplemental cash Flow Information - (See Note 9) SOLANA RESOURCES LIMITED Notes to the Interim Consolidated Financial Statements For the Three Month Periods Ended March 31, 2008 and 2007 (Unaudited) 1. Basis of Presentation The interim consolidated financial statements of Solana Resources Limited ("Solana" or the "Company") for the three-month periods ended March 31, 2008 and 2007 have been prepared by management in accordance with accounting principles generally accepted in Canada on the same basis as the audited consolidated financial statements as at and for the year ended December 31, 2007 except for new standards adopted as described in Note 2. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2007. 2. Changes in Accounting Policies Effective January 1, 2008, the Company adopted the new Canadian Institute of Chartered Accountants ("CICA") standards related to Section 3251, "Equity" and Section 1506, "Accounting Changes." Section 3251 replaces Section 3250, "Surplus," and describes standards for the presentation of equity and changes in equity for reporting periods as a result of the application of Section 1530, "Comprehensive Income." The only impact of Section 1506, "Accounting Changes," is to provide disclosure of when an entity has not applied a new source of GAAP that has been issued but is not yet effective. On January 1, 2008, the Company also adopted standards related to Section 3862, "Financial Instruments Disclosures", Section 3863, "Financial Instruments Presentations" and Section 1535, "Capital Disclosures". Sections 3862 and 3863 require additional disclosures regarding the significance of financial instruments to the entity's financial position and performance; and the nature, extent and management of risks arising from financial instruments to which the entity is exposed. Section 1535 establishes standards for disclosing information about the Company's capital and how it is managed. It requires disclosures of the Company's objectives, policies and processes for managing capital, the quantitative data about what the Company regards as capital, whether the Company has complied with any capital requirements and if it has not complied, the consequences of such non-compliance (see Note 13). 3. Deposits The Company has funds on deposit totaling $1,178,750 as of the end of March, 2008 and $3,156,750 as of the end of December 31, 2007, equal to 10% of work commitments on acquired Agencia Nacional de Hidrocarburos ("ANH") acreage. These funds will be returned to the Company upon completion of the work commitments on the Guachiria Norte, Catguas, Guachiria Sur, Garibay, Colonia and San Pablo blocks. 4. Investment The Company has invested, as at the end of March 2008, $391,851 (March 2007 - $362,427) in the Colombian Hydrocarbon Investment Fund ("Fund"), and expects to invest a maximum amount of $500,000. The Fund is managed by a US based fund manager who specializes in South American natural resources sector investments. The Fund is expected to have an investment period of four years. After this period, it is expected that the Fund will be wound up, and any remaining capital and any earned profits will be distributed to the investors over a maximum period of seven years. 5. Asset Retirement Obligations The following table represents the reconciliation of the Company's obligations associated with the retirement of oil and gas properties: ------------------------------------------------------------------------- Asset retirement obligations, December 31, 2007 $1,973,938 Liabilities incurred during period 39,323 Liabilities settled during period - Accretion 15,012 ------------------------------------------------------------------------- Asset retirement obligations, March 31, 2008 $2,028,273 ------------------------------------------------------------------------- These obligations will be settled at the end of the useful lives of the underlying assets, which currently extend up to 7 years into the future. This amount has been discounted using a credit-adjusted risk-free discount rate of 10% per annum, and an inflation rate of 2.5% per annum. 6. Share Capital Authorized share capital consists of an unlimited number of common shares. Number of Amount Continuity of common shares Shares $ ------------------------------------------------------------------------- Balance, December 31, 2007 123,176,792 187,223,652 Shares in escrow earned in period - 1,259,244 ------------------------------------------------------------------------- Balance, March 31, 2008 123,176,792 188,482,896 ------------------------------------------------------------------------- Continuity of contributed surplus Amount $ ------------------------------------------------------------------------- Balance, December 31, 2007 11,762,601 Stock based compensation expense 1,348,765 ------------------------------------------------------------------------- Balance, March 31, 2008 13,111,366 ------------------------------------------------------------------------- Continuity of stock options Number of Weighted Options Average Exercise Price $ ------------------------------------------------------------------------- Balance, December 31, 2007 4,625,000 1.75 0 50,000 ------------------------------------------------------------------------- 4,575,000 1.75 ------------------------------------------------------------------------- Stock-based compensation For the first quarter of 2008, stock based compensation expense of $585,557 has been recorded in the Consolidated Statement of Income, Comprehensive Income and Deficit (2007 - $469,135). The Company estimates fair value of stock options and warrants granted using the Black-Scholes option-pricing model with the following assumptions: Three months ended March 31, 2008 Risk-free interest rate (percent) 3.82 Expected life (years) 5 Volatility (percent) 102.54 Expected annual dividend per share - Additional stock-based compensation expense of $1,259,244 (2007 - $1,148,058) related with Breakaway acquisition shares and $763,208 (2007 - Nil) related to Breakaway performance warrants was recognized (see Note 3 to the annual financial statements) 7. Per-share amounts The weighted average number of common shares outstanding, basic and diluted, during the three months ended March 31, 2008, was 123,919,008 (March 31, 2007 - 95,876,792). 8. Segmented information March 31, 2008 Canada Colombia Total $ $ $ ------------------------------------------------------------------------- Revenue - 16,266,570 16,266,570 Operating costs - 2,293,445 2,293,445 ------------------------------------------ - 13,973,125 13,973,125 ------------------------------------------ General and administrative expenses 604,030 886,569 1,490,599 Depletion, depreciation, and accretion 18,259 3,485,949 3,504,208 Foreign exchange loss (gain) (952) 511,373 510,421 Stock-based compensation 2,608,009 - 2,608,009 Interest (530,143) (204,560) (734,703) ------------------------------------------ 2,699,203 4,679,331 7,378,534 ------------------------------------------ Income (loss) before taxes (2,699,203) 9,293,794 6,594,591 Income taxes - 65,935 65,935 ------------------------------------------ Next income (loss) (2,699,203) 9,227,859 6,528,656 ------------------------------------------ ------------------------------------------ Total assets 83,424,153 92,247,911 175,672,064 ------------------------------------------ ------------------------------------------ Capital expenditures - 13,255,246 13,255,246 ------------------------------------------ ------------------------------------------ March 31, 2007 Canada Colombia Total $ $ $ ------------------------------------------------------------------------- Revenue - 1,413,926 1,413,926 Operating costs - 656,578 656,578 ------------------------------------------ - 757,348 757,348 ------------------------------------------ General and administrative expenses 566,363 494,941 1,061,304 Depletion, depreciation, and accretion 6,215 1,260,693 1,266,908 Foreign exchange loss (gain) 11,928 13,727 25,655 Stock-based compensation 1,617,193 - 1,617,193 Interest (122,210) (8,904) (131,114) ------------------------------------------ 2,079,489 1,760,457 3,839,946 ------------------------------------------ Income (loss) before taxes (2,079,489) (1,003,109) (3,082,598) Income taxes - 50,000 50,000 ------------------------------------------ Net income (loss) (2,079,489) (1,053,109) (3,132,598) ------------------------------------------ ------------------------------------------ Total assets 29,993,578 72,620,704 102,614,282 ------------------------------------------ ------------------------------------------ Capital expenditures - 7,274,457 7,274,457 ------------------------------------------ ------------------------------------------ 9. Supplemental cash flow information March 31, March 31, 2008 2007 $ $ Cash represented by: Cash and cash equivalents 62,424,185 28,141,628 Demand loans - - Restricted cash - 1,093,713 ------------ ------------ 62,424,185 29,235,341 ------------ ------------ ------------ ------------ $ $ Cash interest paid - - ------------ ------------ Cash taxes paid - - ------------ ------------ 10. Related party transactions For the first three months of 2008 management fees in the amount of $15,244 (2007 - $12,802) were paid to a company controlled by a director of the Company and are included in general and administrative expenses. These fees are for services rendered in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 11. Income Taxes Subject to confirmation by taxation authorities, the Company has approximately Cdn$10.2 million ($9.94 million) of Canadian non-capital loss carry forwards which expire between 2008 and 2027 and Colombian tax losses totaling Col$78 billion ($38.6 million) which are available to be carried forward. The consolidated financial statements do not reflect the potential tax benefit of these losses, as they do not meet the more likely than not criteria. Provision for current income taxes is based on presumptive income calculated as a percentage of Colombian equity levels. These can be recovered against future income taxes for up to five years. 12. Commitments The Company has remaining minimum exploration commitments of $35,174,667 to be met during 2008. 13. Financial and capital risk management The Company undertakes transactions in a range of financial instruments including the following categories: March 31, December 31, 2008 2007 $ $ Held for trading (a): Cash and cash equivalents 62,424,185 71,537,827 Loans & receivables (b): Accounts receivables 17,586,253 7,954,162 Prepaid expenses 1,442,485 790,010 Available for sale (c): Investments 391,851 362,427 Other financial liabilities (b): Accounts payable 9,147,319 9,307,557 Asset retirement obligations 2,028,273 1,973,938 (a) Measured at fair value which equals the carrying value. (b) Measured at amortized costs using the effective interest method which is not significantly different to the carrying values due to the short maturity term of these financial instruments. (c) Measured at cost as the fair value is not readily available. The Company's activities results in exposure to a number of financial risks, including the following: Market risk The nature of crude oil and natural gas operations in Colombia expose the Company to fluctuations in commodity prices. The Company does not manage these risks through the use of derivative instruments. Credit risk A substantial portion of the Company's accounts receivable are with customers in the petroleum industry and are subject to normal industry credit risks. The carrying amount of accounts receivable reflects management's assessment of the credit risk associated with these customers. Crude oil production is sold, as determined by market based prices adjusted for quality differentials, to the Colombian state oil company, Ecopetrol. Revenues are denominated in United States dollars. Typically, the Company's maximum credit exposure to customers is revenue from two months' sales. Foreign currency exchange risk The Company is exposed to foreign currency fluctuations as certain expenditures and expenses are denominated in Colombian pesos and Canadian dollars. Capital risk management The Company's objectives when managing capital are to: 1. maintain financial flexibility in order to preserve the ability to meet exploration and other commitments. 2. maintain a capital structure that allows multiple financing options. 3. maintain an optimal capital structure to reduce the cost of capital. 4. deploy capital to provide an appropriate investment return to shareholders; The Company defines its capital as follows: 1. cash, cash equivalents and short term investments 2. shareholders' equity 3. revolving secured credit facility. The Company's financial strategy is designed and formulated to maintain a flexible capital structure consistent with the objectives stated above and to respond to changes in economic conditions and the risk characteristics of underlying assets. The Company may issue new shares or adjust its debt level to meet these objectives. The Company monitors capital on the basis of its gearing ratio calculated as net debt divided by total capital. Net debt is calculated as total interest bearing financial assets and financial liabilities (including derivatives financial instruments) less cash and cash equivalents. Total capital is calculated as shown in the balance sheet plus net debt. The Company is also subject to financial covenants pursuant to the credit facility secured through its wholly owned subsidiary, Solana Colombia. These covenants are measured on a quarterly basis. The Company is currently in compliance with all financial covenants. Abbreviations Cdn Canadian U.S. United States Col. Colombian Pesos WTI West Texas Intermediate bbl barrel bopd barrels of oil per day mbbls thousand barrels mmbbls million barrels mcf thousand cubic feet mcfpd thousand cubic feet per day mmcf million cubic feet mmcfpd million cubic feet per day boe (x)barrel of oil equivalent boepd (x)barrel of oil equivalent per day NGL natural gas liquids $mm million dollars TSX-V TSX Venture Exchange LSE London Stock Exchange AIM Alternative Investment Market Of the London Stock Exchange MD&A Management's Discussion and Analysis GAAP Generally Accepted Accounting Principles G&A General and Administrative Expenses (x) A boe conversion ratio of 6 mcf (equal sign) 1 bbl has been used. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Corporate Information Directors Nominated Adviser Raymond P. Antony, Chair (1)(2)(3)(4) Nabarro Wells & Co. Limited Grant Howard, Director (1)(3)(4) Roy H. Hudson, Director (3)(4) Keith J. Jackson, Director (1)(4) UK Broker Luis Miguel Morelli, Director (4) Tristone Capital Limited J. Scott Price, Director, President & CEO (2)(4) (1) Audit Committee (2) Reserves Committee (3) Corporate Governance and Compensation Committee (4) Health, Environment and Safety Committee Management J. Scott Price, President & CEO Glenn Van Doorne, COO Ricardo Montes, CFO Trading Symbols TSX-V: SOR LSE (AIM): SORL Transfer Agents Valiant Trust Company Auditor Deloitte & Touche LLP Legal Counsel Davis LLP Banker Royal Bank of Canada Offices Head Office: Subsidiary: ------------ ----------- Suite 100, 522 - 11th Avenue S.W. Solana Petroleum Exploration Calgary, Alberta, T2R OC8 (Colombia) Limited Canada Regatta Office Park, West Bay Road, Tel.: 403-770-1822 P.O.Box 1106 Gran Cayman, KYl-1205, Cayman Islands Fax.: 403-770-1826 Tel.: 345-949-3977 Branch: ------- Solana Petroleum Exploration Colombia Limited Calle 113 No. 7-21, Of 706 Torre A, Edificio Teleport Bogota, D.C. Colombia Tel: 011 571 629 1636 Fax: 011 571 629 1704 For further information: ENQUIRIES: Solana Resources Limited: Scott Price, jsp(at)solanaresources.com, (403) 770-1822; Ricardo Montes, rmontes(at)solanaresources.com, (403) 619-7911; Nabarro Wells & Co. Limited (Nominated Adviser): Robert Lo, RobertLo(at)nabarro-wells.co.uk; Marc Cramsie, MarcCramsie(at)nabarro-wells.co.uk, +44 20 7634 4705; Tristone Capital Limited (UK Broker): Nick Morgan, nmorgan(at)tristonecapital.com, +44 207 355 5800; Pelham Public Relations: Charles Vivian, charles.vivian(at)pelhampr.com, +44 207 743 6672; James MacFarlane, james.macfarlane(at)pelhampr.com, +44 207 743 6375 (SORL) END
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