Canada Southern Petroleum (NASDAQ:CSPLF)
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Canada Southern Posts Second Quarter Profit
CALGARY, Alberta, Aug. 13 /PRNewswire-FirstCall/ -- Canada Southern Petroleum
Ltd. (the Company) (NASDAQ/Pacific: CSPLF; Toronto/Boston: CSW) today reported
that net income for the three months ended June 30, 2004 was $570,000 ($0.04
per share) on revenues of $3.6 million, compared to $1,370,000 ($0.10 per
share) on $4.1 million for the second quarter last year.
Sales volumes continue to decline as a function of expected natural declines at
most of the Company's producing properties and increasing water influx at
Kotaneelee. For the three months ended June 30, 2004, total volumes were down
12% to 1,251 barrels of oil equivalent per day (boe/d) (converted at 6 mcf of
gas to 1 boe) from the 1,418 boe/d recorded in the same period last year.
Kotaneelee sales volumes represent 63% of the Company's total sales volumes
during the second quarter of 2004 versus 76% in the comparable period of 2003.
While the majority of the properties declined year-over-year, production gains
were recorded at the Clarke Lake and Town properties.
Operations Update
Individual Kotaneelee gross well production for the month of June 2004 was 6.8
Mmcf/d of natural gas from the B-38 well and 12.2 Mmcf/d from the I-48 well,
compared to production in June 2003 of 8.6 Mmcf/d for B-38 and 13.0 Mmcf/d for
I-48. Gross water production for the month of June 2004 was 1,517 bbls/d from
the B-38 well and 435 bbls/d from the I-48 well, compared to production in June
2003 of 1,167 bbls/d for B-38 and 113 bbls/d for I-48.
As previously disclosed, effective May 1, 2004, Canada Southern converted from
a 30.67% carried interest in the Kotaneelee gas field to a 30.67% working
interest. On May 3, 2004, the Company was served by the field operator with a
notice to commence drilling a development well in the third quarter of 2004.
Canada Southern has elected to participate to its full 30.67% working interest.
The notice from the operator to drill and case the proposed well has an
estimated gross cost of $16,738,000, of which Canada Southern's share is
approximately $5,133,000. If the drilling of the well is successful, it is
estimated that a further $3,200,000 (gross) will be incurred to complete and
tie-in the well. It is expected to spud on or about September 1, 2004 and the
operator estimates it will take approximately 150 days to drill the well.
Canada Southern is currently performing technical evaluation of its petroleum
and natural gas lease holdings in the Siphon and Mike/Hazel areas of northeast
British Columbia. The Company drilled and cased a 100% working interest gas
well at Siphon in late 2003. Several formations were completed and tested
during the first six months of 2004. The well is currently awaiting tie-in,
with initial production rates expected to be approximately 450 mcf/d (75
boe/d).
Canada Southern undertook a 25 sq. mile proprietary 3-D seismic program at
Mike/Hazel in late 2003 and the geophysical interpretation has recently been
completed. The Company may undertake drilling in the winter drilling season of
2004/2005 at Mike/Hazel depending upon the Company's consideration of the
geophysical and geological evaluations and economic analysis.
Notwithstanding earlier optimism at the 40 Mile Coulee area of southern
Alberta, where the Company drilled and cased 3 wells in the 4th quarter of
2003, the Company does not plan further activity in the area in the near
future. Evaluation and interpretation of the proprietary 2-D seismic shot in
late 2003 has yet to support further drilling initiatives in the area. While
natural gas is certainly present, current gas prices and the capital cost of
facilities and pipelines to produce these wells do not provide a sufficient
return on investment at the present time. Should gas prices increase further,
pipeline infrastructure move closer to Company lands in the area, new
geological data become available, or economics improve, Canada Southern may
revisit this decision.
Corporate Governance Update
As previously reported, the Company's Board of Directors has directed its
Corporate Governance and Nominating Committee to carry out a thorough review of
the Company's Articles of Association and Articles of Continuance, with a view
to updating the governance of the Company. This review, being led by Messrs.
Richard McGinity and Myron Kanik, has been ongoing since May 2004. The review
includes all aspects of the Company's Articles, including but not limited to
the Company's Nova Scotia domicile; share voting restrictions; Board structure,
qualifications, compensation and incentives; shareholder proposals and related
matters. The review is expected to culminate in the calling of a Special
Meeting of the shareholders to consider specific changes which will be
recommended by the Board of Directors. The Company currently anticipates that
the Special Meeting will be called for in the fourth quarter of 2004.
Financial Results
Effective May 1, 2004, the Company converted its 30.67% carried interest in the
Kotaneelee field to a corresponding 30.67% working interest. Although the
conversion has no impact on the aggregate amounts of the Company's share of
field production and related operating field cash flow, the conversion has
financial statement disclosure implications.
Proceeds from carried interests decreased significantly from 2003 to 2004 and
revenue from natural gas sales increased significantly during the same period.
These changes are due to a combination of production declines and related sales
over the corresponding period of the previous year, and the impact of
conversion of Kotaneelee to a working interest during the second quarter of
2004.
Proceeds from carried interests represent passive net investment income in a
net cash flow stream, and appropriately are recorded after the reduction of all
royalties, lease operating costs and capital expenditures. The conversion to a
working interest at Kotaneelee and certain of its other properties represents a
fundamental shift by the Company toward direct management of its oil and gas
assets.
As the majority of the Company's carried interest revenue (prior to conversion)
related to Kotaneelee, future carried interest revenue will decrease
significantly. Subsequent to May 1, 2004, sales (net of royalties) from the
Kotaneelee field will be reported as natural gas sales, and related operating
costs for Kotaneelee will be included in expenses under the caption "lease
operating costs". As a result, natural gas sales and lease operating expenses
will increase significantly over comparable periods.
Future capital expenditures for Kotaneelee will no longer be a deduction from
carried interest revenue but will instead be recorded as capital asset
additions on the Company's balance sheet.
Proceeds from carried interests decreased 53% to $1,470,000 during the second
quarter of 2004 from $3,101,000 in the second quarter of 2003. The decrease is
due to a combination of production declines and related sales over the
corresponding period in the previous year and the impact of conversion of the
Company's Kotaneelee carried interest to a working interest.
Canada Southern's share of carried interest natural gas sales volumes decreased
by 51% during the second quarter of 2004 from the second quarter of 2003, from
589,076 mcf to 287,611 mcf respectively. The decrease is due to both
production declines and the conversion of Kotaneelee to a working interest.
Average carried interest natural gas prices declined 16% when comparing the
second quarter of 2004 to the second quarter of 2003.
Natural gas revenue from working and royalty interest properties increased 112%
to $1,597,000 in the second quarter of 2004 from $752,000 in the second quarter
of 2003. There was a 105% increase in the working interest volumes sold and a
4% increase in the average sales price of working interest sales. The
conversion of Kotaneelee to a working interest effective May 1, 2004 was a
major component for this increase. Natural gas sales include royalty income,
which increased by 324% from $74,000 to $315,000. Royalty volumes sold
increased by 386% and the natural gas royalty sales price decreased 13% when
compared with the second quarter of 2003.
Natural gas royalty expense was significantly higher in the second quarter of
2004 at $495,000, or 28% of natural gas working interest sales, compared to
$156,000, or 19% of natural gas working interest sales, in the second quarter
of last year. This was a direct result of the Kotaneelee royalty expense being
including in working interest royalty expense subsequent to conversion. Prior
to conversion of the Kotaneelee carried interest to a working interest, the
royalty expense for that property was recorded as a reduction of carried
interest gas sales.
Oil and natural gas liquid sales from working and royalty interests increased
by 20% in the second quarter of 2004 to $77,000 compared to $64,000 in the
second quarter of 2003.
Interest and other income increased 165% in the second quarter of 2004 to
$499,000 from $188,000 in the second quarter of 2003. Included in other income
in the second quarter of 2004 is $300,000 received in the settlement of an
outstanding issue relating to the carried interest revenues for the Buick
Creek, Wargen and Clarke Lake properties from the year 2000. Although the
quarter ending June 30, 2004 cash balance was higher then the quarter ended
cash balance of 2003, investment yield declined from 2003 to 2004. Thus,
excluding the $300,000 settlement, investment income year over year did not
increase over that time. Interest and other income before the settlement
proceeds were 5% higher during the second quarter of 2004 compared to the
second quarter of 2003.
General and administrative costs increased 55% in the second quarter of 2004 to
$997,000 from $639,000 in the second quarter of 2003 primarily because of
increases in salaries and benefits, consultants' expenses and insurance
expense. Salaries and benefits increased 82% due to the addition of a
Controller in March 2004 and a President and Chief Executive Officer in April,
2004. Consultants' fees were higher in the second quarter of 2004 as a result
of the higher operational activity level compared to the same time period in
2003. No general and administrative expenses were capitalized during the
period. Legal expenses increased 61% during the second quarter of 2004 to
$126,000 from $79,000 during the second quarter of 2003. This increase was
mainly due to increased use of legal advisors for the Company's review of
corporate governance issues.
Lease operating costs increased 122% from $197,000 in the second quarter of
2003 to $438,000 in the second quarter of 2004. The increase was mainly due to
the addition of Kotaneelee lease operating expenses effective May 1, 2004.
Depletion, depreciation and amortization expense increased 71% in the second
quarter of 2004 to $861,000 from $502,000 in the second quarter of 2003. The
increased depletion rate is mainly due to the capital expenditures incurred
during the fourth quarter of 2003 and the first half of 2004 without, as yet,
corresponding increases in proven reserves.
Asset retirement obligations accretion expense increased by 279% to $60,000 in
the second quarter of 2004 compared with the restated amount of $16,000 in the
second quarter of 2003. The increase is mainly due to the addition of
liabilities resulting from the settlement of the Kotaneelee litigation. In
connection with the settlement, the Company agreed to be responsible for its
share of abandonment and reclamation liabilities at the Kotaneelee field when
they occur. At the time of the settlement, it was estimated that the Company's
30.67% share of the abandonment liabilities amounted to approximately
$2,400,000 (undiscounted).
Stock option expense increased 23% to $234,000 in the second quarter of 2004
compared to the restated amount of $190,000 for the comparable period in 2003
after retroactive adoption of the Canadian Institute of Chartered Accountant's
(CICA) section 3870 (Stock-based Compensation and Other Stock- based Payments."
The increase is due to the number of options issued during the first six
months of this year compared to last year. In 2004, options have been issued
to two new employees and one director, for a total of 180,000 stock options.
During the first six months of 2003, only 50,000 stock options were granted.
A foreign exchange gain of $68,000 was recorded in the second quarter of 2004,
compared to a loss of $233,000 in the second quarter of 2003 on the Company's
U.S. dollar investments. The continued strength of the U.S. dollar compared to
the Canadian dollar during the second quarter of 2004 resulted in the gain.
With the relative volatility between the U.S. and Canadian dollar, the Company
expects to record further foreign exchange losses or gains during the year.
The value of the Canadian dollar was U.S. $.7727 at December 31, 2003 compared
to U.S. $.7433 at June 30, 2004.
An income tax provision of $550,000 was recorded in the second quarter of 2004
compared to an income tax provision, as restated, of $958,000 during the second
quarter of 2003.
The Company's quarterly report on Form 10-Q for the period ended June 30, 2004
has been filed today with the U.S. Securities and Exchange Commission (SEC) and
the Canadian Securities Administrators' System for Electronic Document Analysis
and Retrieval (SEDAR). This document may be obtained at the SEC's website
address of http://www.sec.gov/ or at http://www.sedar.com/. A link to the
Company's SEC and SEDAR filings can also be found on the Company website
address of http://www.cansopet.com/.
Canada Southern Petroleum Ltd. is an independent energy company based in
Calgary, Alberta, Canada. The Company is engaged in oil and gas exploration and
development, with its primary interests in producing properties in the Yukon
Territory and British Columbia, Canada. The Company's limited voting shares are
traded on the NASDAQ SmallCap Market and the Pacific Exchange, Inc. under the
symbol "CSPLF," and on the Boston Stock Exchange and the Toronto Stock Exchange
under the symbol "CSW." The Company has 14,417,770 shares outstanding.
Any statements in this release that are not historical in nature are intended
to be, and are hereby identified as "forward-looking statements" for purposes
of the "Safe Harbor Statement" under the Private Securities Litigation Reform
Act of 1995. Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements. Among these risks and
uncertainties are uncertainties as to the costs, pricing and production levels
from the properties in which the Company has interests, the extent of the
recoverable reserves at those properties, and the significant costs associated
with the exploration and development of the properties in which the Company has
interests, particularly the Kotaneelee field. The Company undertakes no
obligation to update or revise forward-looking statements, whether as a result
of new information, future events, or otherwise. The Company does caution,
however, that results in 2004 will be significantly lower than in 2003, which
were favorably affected by settlement of the Kotaneelee litigation.
Comparative, unaudited results for the three and six-month periods ended June
30, 2004 and 2003 are shown in the following condensed income statement,
statement of cash flows, and supplementary information on oil and gas producing
activities. Certain figures relating to the three and six months ended June
30, 2003 have been restated to incorporate changes resulting from the adoption
of certain accounting policies. All figures are expressed in Canadian dollars.
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND RETAINED EARNINGS (DEFICIT)
(Expressed in Canadian dollars)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
restated restated
Revenues:
Proceeds from carried
interests $1,469,792 $3,101,497 $3,475,794 $5,978,199
Natural gas sales 1,597,103 751,617 2,711,618 1,784,922
Oil and liquid sales 76,589 64,047 141,460 163,514
Interest and other
income 498,782 188,411 782,915 321,227
Total revenues 3,642,266 4,105,572 7,111,787 8,247,862
Costs and expenses:
General and
administrative 996,739 639,059 1,649,649 1,183,016
Lease operating costs 437,921 197,097 661,421 679,605
Depletion, depreciation
and amortization 861,000 502,390 1,622,000 1,037,780
Asset retirement
obligations accretion
expense 60,000 15,829 120,000 31,658
Stock option expense 233,700 189,715 267,100 195,490
Foreign exchange
(gain) loss (67,556) 232,909 (95,635) 436,814
Total costs and expenses 2,521,804 1,776,999 4,224,535 3,564,363
Income before income
taxes 1,120,462 2,328,573 2,887,252 4,683,499
Income taxes (550,000) (958,387) (1,161,000) (1,999,958)
Net Income 570,462 1,370,186 1,726,252 2,683,541
Retained earnings
(deficit) - beginning
of period 1,534,161 (15,358,392) 378,371 (16,671,747)
Retained earnings
(deficit) -
end of period $2,104,623 $(13,988,206) $2,104,623 $(13,988,206)
Net income per share:
Basic $0.04 $0.10 $0.12 $0.19
Diluted $0.04 $0.10 $0.12 $0.19
Average number of shares
outstanding:
Basic 14,417,770 14,417,770 14,417,770 14,417,770
Diluted 14,420,429 14,417,770 14,419,394 14,417,770
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in Canadian dollars)
(unaudited)
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
restated restated
Cash flows from
operating activities:
Net income $ 570,462 $1,370,186 $ 1,726,252 $2,683,541
Adjustments to reconcile
net income to net cash
provided from (used in)
operating activities:
Depletion depreciation,
and amortization 861,000 502,390 1,622,000 1,037,780
Future income tax
expense (recovery) (86,000) 958,387 365,000 1,449,958
Asset retirement
obligations accretion
expense 60,000 15,829 120,000 31,658
Asset retirement
expenditures (663) (28,671) (880) (165,953)
Stock option expense 233,700 189,715 267,100 195,490
Funds provided from
operations 1,638,499 3,007,836 4,099,472 5,232,474
Change in current
assets and liabilities:
Accounts receivable 1,437,719 464,926 906,422 (493,639)
Other assets 147,860 96,176 116,534 143,116
Accounts payable (223,573) (230,486) (2,068,338) (196,729)
Accrued liabilities 73,250 (195,786) (1,049,937) 1,185,315
Accrued Income taxes
payable 605,003 -- (9,147,300) --
Net cash provided
from (used in)
operations 3,678,758 3,142,666 (7,143,147) 5,870,537
Cash flows used in
investing activities:
Additions to oil and
gas properties (770,489) (553,496) (2,055,442) (1,092,618)
Net cash used in
investing activities (770,489) (553,496) (2,055,442) (1,092,618)
Increase (decrease)
in cash and cash
equivalents 2,908,269 2,589,170 (9,198,589) 4,777,919
Cash and cash
equivalents at
the beginning of
period 36,975,528 21,643,202 49,082,386 19,454,453
Cash and cash
equivalents at
the end of
period $ 39,883,797 $ 24,232,372 $ 39,883,797 $24,232,372
CANADA SOUTHERN PETROLEUM LTD.
Supplementary Oil and Gas Data
(Expressed in Canadian dollars)
(unaudited)
Six-month periods ended June 30,
Total Sales Volumes 2004 2003 Change % Change
(before royalties)
Carried interests (mcf) 765,147 1,249,075 (483,928) (39%)
Carried interests (bbls) 96 74 22 30%
Natural gas (mcf) 581,166 361,601 219,565 61%
Oil and liquids (bbls) 5,227 5,377 (150) (3%)
boe (6 mcf = 1 boe) 229,709 273,897 (44,188) (16%)
boe per day 1,262 1,513 (251) (17%)
mcfe (1 bbl = 6 mcfe) 1,378,251 1,643,382 (265,131) (16%)
mcfe per day 7,573 9,079 (1,506) (17%)
Sales mix:
Natural gas (mcf) 98% 98% -- 0%
Oil and natural gas
liquids (mcfe) 2% 2% -- 0%
Netback analysis for carried interest sales:
Carried interests (per mcfe)
Sales $5.83 $ 6.36 (.53) (8%)
Royalties (.62) (.90) .28 (31%)
Transportation (.37) (.48) .11 (23%)
Net Sales 4.84 4.98 (.14) (3%)
Lease operating expenses (.29) (.20) (.09) 45%
Carried interest capital (.01) -- (.01) --
Field netback $4.54 $ 4.78 (.24) (5%)
Netback analysis for working and royalty interest sales:
Working and royalty interests (per mcfe)
Sales $5.62 $ 6.48 (.86) (13%)
Royalties (.96) (1.53) .57 (37%)
Net Sales 4.66 4.95 (.29) (6%)
Lease operating expenses (1.08) (1.73) .65 (37%)
Field netback $3.58 $ 3.22 .36 11%
Definition of Terms
boe = barrel of oil equivalent
mcfe = thousand cubic feet equivalent
mcf = thousand cubic feet of natural gas
bbl = barrel of oil
DATASOURCE: Canada Southern Petroleum Ltd.
CONTACT: Randy Denecky, Chief Financial Officer, Canada Southern
Petroleum Ltd., +1-403-269-7741
Web site: http://www.cansopet.com/