TIDMSE.
RNS Number : 2464D
Stratic Energy Corporation
30 November 2009
NEWS RELEASE
Third Quarter 2009 Results
CALGARY and LONDON, November 30, 2009 - Stratic Energy Corporation (TSX Venture:
'SE', AIM 'SE.') ("Stratic" or the "Company") has today filed its Interim
Financial Statements and accompanying Management's Discussion and Analysis for
the quarter and nine months ended September 30, 2009. This filing can be
accessed at www.sedar.com and on the Company's website www.straticenergy.com.
All amounts below are US dollars, unless otherwise stated.
Highlights:
Disposal Program
Sale of Breagh asset completed - gross proceeds of $65 million received and
mainly used to pay down bank and other debt
Sale of Italian business to Enel Trade SpA announced - cash consideration of
EUR34.3 million ($50.9 million) due on completion which is expected late in the
first quarter of 2010; further contingent consideration of up to EUR6.6 million
($9.8 million) depending on timing of Longanesi field production commencement
West Don Development
West Don gross oil production averaged 6,743 bopd (Stratic net 1,163 bopd) for
the third quarter from two wells (second well since August)
Water injection well brought on stream in early September - injection averaging
approximately 5,000 bwpd - higher injection rates expected
Field expected to produce approximately 1.75 mmbbls gross by end 2009
Pipeline tie-back to nearby Thistle platform on schedule for completion in the
first quarter 2010
Third production well to access further reserves in the southern part of the
field under evaluation with a view to drilling in summer 2010
Updated reserves report by independent engineers Ryder Scott:
reduces gross ultimate proved and probable reserves by 9% to 18.4 mmbbls
(Stratic net 3.17 mmbbls)
increases gross remaining proved and probable reserves at end 2009 by 16% to
16.5 mmbbls (Stratic net 2.84 mmbbls) mainly due to lower than expected
production in 2009
revised peak gross production of approximately 11,000 bopd now in
2011, declining thereafter at a lower rate than originally forecast
Exploration/Appraisal and Pre-Development Assets
Crawford field development plan - alternative development concept utilizing
jack-up drilling unit with production facilities on deck being considered;
sanction of project deferred until 2010, pending completion of ongoing
pre-development study work
Bowmore - well suspended in August as a 'tight hole' for commercial reasons;
further well on the licence planned in 2010
Al Tayr 101 exploration well (Stratic operator) spudded in Syria in October and
currently operating satisfactorily at 1900 metres, with TD at 3000 metres
expected early in the New Year
West Ayazli exploration well in Turkey spudded in October and currently
operating at TD. Novel low cost completion planned to facilitate early
production of Kusuri gas bearing sands
Financial
Oil and gas sales revenues in the UK and Turkey of $9.1 million in Q3 (2008:
$2.2 million) with increase due to West Don
Net income for quarter of $13.1 million (2008: loss $13.0 million), including
recognized gain on Breagh sale of $22.5 million
Capital expenditure for the quarter of $12.9 million (2008: $19.9 million),
mainly on West Don and the Bowmore well
Cash and cash equivalents (including restricted cash) of $11.3 million at period
end (December 31, 2008: $28.2 million); bank debt (excluding letters of credit)
and convertible notes totaling $110.4 million at period end (December 31, 2008:
$118.9 million)
Discussions ongoing with Stratic's bank syndicate for the deferral of scheduled
debt repayments due at year end and the provision of additional temporary
liquidity, to be repaid from the proceeds of sale of the Italian business;
similar structure envisaged to that agreed with the banks earlier in 2009
regarding the Breagh sale
Kevin Watts, Stratic's President and Chief Executive Officer, commented: "With
the sale of our Italian business we will have met or exceeded all of the
restructuring targets we set for the company exactly twelve months ago. Once the
sale completes we will have raised more than $115 million from asset disposals,
and we will have significantly improved our balance sheet and financial
flexibility. We can then look forward to implementing a growth strategy for the
business which is less capital intensive and more appropriate for the current
credit market conditions. Furthermore, the recent performance improvements on
West Don, which are underpinned in remaining reserves and value terms by the
recent independent Ryder Scott report, are expected to continue once offshore
loading is discontinued, and allow us to look forward to the future with
increased confidence."
For further information contact:
John van der Welle, Chief Financial Officer +44 20 7766 7900
Mark Bilsland, Chief Operating Officer +44 20 7766 7900
Patrick d'Ancona, M:Communications +44 20 7153 1547
Canadian Investor Relations
Roger Fullerton +1 952 929 7243
Email: roger.fullerton@straticenergy.com
Website: www.straticenergy.com
About Stratic: Stratic Energy Corporation is a Canadian-incorporated
international oil and gas business, whose strategy has been to exploit existing
discoveries overlooked by the majors through the appraisal and development of
reserves to build a business with a growing production profile. As a result of
the worldwide credit crisis, which has particularly affected the Company in view
of the capital intensive nature of its strategy, Stratic has been involved in a
major restructuring program over the last twelve months to reduce debt levels
and create financial flexibility. In future the business will be focused on the
North Sea for its cash flow generating ability (West Don) and near term
development investment opportunity (Crawford), whereas its exploration effort
will be increased and concentrated on lower cost areas and potential company
changing opportunities. Stratic's shares are listed on the TSX Venture Exchange
in Toronto and on AIM, London and its principal operating office is in London,
UK.
Forward-looking statements
This news release contains certain forward looking statements, which involve
assumptions with respect to future plans, production levels and results, and
capital expenditures. The reader is cautioned that all such forward looking
statements involve substantial risks and uncertainties and the assumptions used
in their preparation may not prove to be correct. Stratic's actual results could
differ materially from those expressed in, or implied by, these forward looking
statements and accordingly, the forward looking statements are qualified by
reference to these cautionary statements. The forward looking statements
contained herein are made as at the date of this news release. Stratic
undertakes no obligation to update or publicly revise forward looking statements
or information unless so required by applicable securities laws.
TSX-V and AIM notifications
The TSX Venture Exchange has not reviewed and does not accept responsibility for
the adequacy or accuracy of the contents of this release.
Stratic's Chief Operating Officer, Dr Mark Bilsland BSc (geology), PhD
(petroleum petrophysics), and member of the SPE, is the qualified person who has
reviewed and approved the technical information in this announcement for the
purposes of the AIM Rules for Companies (incorporating the Guidance Note for
Mining, Oil and Gas Companies).
Interim Financial Statements
As at and for the three and nine months ended
September 30, 2009
Notice of No Auditor Review of Interim Financial Statements
In accordance with National Instrument 51-102 released by the Canadian
Securities Administrators, the Company discloses that its auditors have not
reviewed these unaudited interim financial statements as at and for the three
and nine months ended September 30, 2009 and 2008.
+--------+---------+--------+--------+--------+--------+--------+--------+--------+------------+--------+-----------+
| STRATIC ENERGY CORPORATION |
+-------------------------------------------------------------------------------------------------------------------+
| CONSOLIDATED BALANCE SHEETS |
+-------------------------------------------------------------------------------------------------------------------+
| AS AT SEPTEMBER 30, 2009 and DECEMBER 31, 2008 |
+-------------------------------------------------------------------------------------------------------------------+
| (Stated in thousands of US Dollars) |
+-------------------------------------------------------------------------------------------------------------------+
| (Unaudited) |
+-------------------------------------------------------------------------------------------------------------------+
| ASSETS |
+-------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | September | | December |
| | | | | | | | | 30, | |31, 2008 |
| | | | | | | | | 2009 | | |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| CURRENT | | | | | | | | | |
+------------------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| | Cash and cash equivalents | | | $ | | $ |
| | | | | 9,545 | | 24,067 |
+--------+---------------------------------------------+--------+-----------------+------------+--------+-----------+
| | Accounts receivable and prepaids (note 3) | | | 10,822 | | 10,798 |
+--------+---------------------------------------------+--------+-----------------+------------+--------+-----------+
| | Inventories (note 4) | | | 542 | | - |
+--------+---------------------------------------------+--------+-----------------+------------+--------+-----------+
| | Assets held for sale (note 5) | | | 1,000 | | 1,000 |
+--------+---------------------------------------------+--------+-----------------+------------+--------+-----------+
| | | | | | | | | 21,909 | | 35,865 |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| RESTRICTED CASH AND CASH EQUIVALENTS (note 7) | 1,707 | | 4,164 |
+---------------------------------------------------------------------------------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| OTHER ASSETS (note 8) | | 6,254 | | 6,231 |
+---------------------------------------------------------------+-----------------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| PROPERTY, PLANT AND EQUIPMENT (note 9) | | 285,154 | | 288,858 |
+---------------------------------------------------------------+-----------------+------------+--------+-----------+
| | | | | |
+---------------------------------------------------------------+-----------------+------------+--------+-----------+
| | | | | | | | | $ | | $ |
| | | | | | | | | 315,024 | | 335,118 |
+--------+---------+--------+--------+--------+--------+--------+-----------------+------------+--------+-----------+
| LIABILITIES AND SHAREHOLDERS' EQUITY |
+-------------------------------------------------------------------------------------------------------------------+
| CURRENT | | | | | | | | | |
+------------------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| | Accounts payable and accrued liabilities | | | $ | | $ |
| | | | | 12,051 | | 33,435 |
+--------+---------------------------------------------+-----------------+--------+------------+--------+-----------+
| | Bank loan (note 11) | 34,963 | | 6,993 |
+--------+------------------------------------------------------------------------+------------+--------+-----------+
| | | | | | | | | 47,014 | | 40,428 |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| | | | | | |
+------------------------------------------------------+-----------------+--------+------------+--------+-----------+
| CONVERTIBLE NOTES (note 10) | | | 57,288 | | 54,703 |
+------------------------------------------------------+-----------------+--------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| LONG-TERM BANK LOAN (note 11) | 13,048 | | 51,532 |
+---------------------------------------------------------------------------------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| ASSET RETIREMENT OBLIGATIONS (note 13) | | 11,610 | | 10,943 |
+------------------------------------------------------------------------+--------+------------+--------+-----------+
| | | | | |
+------------------------------------------------------------------------+--------+------------+--------+-----------+
| FUTURE INCOME TAXES | | | | 57,809 | | 55,362 |
+---------------------------------------------+--------+-----------------+--------+------------+--------+-----------+
| | | | | | | | | 186,769 | | 212,968 |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| SHAREHOLDERS' EQUITY | | | | | | |
+---------------------------------------------+--------+-----------------+--------+------------+--------+-----------+
| | Share capital (note 14) | | | | | 205,432 | | 205,432 |
+--------+---------------------------+--------+--------+-----------------+--------+------------+--------+-----------+
| | Equity component of convertible notes | | | 6,605 | | 6,236 |
| | (note 10) | | | | | |
+--------+---------------------------------------------+-----------------+--------+------------+--------+-----------+
| | Contributed surplus (note 15) | | | 20,556 | | 17,575 |
+--------+---------------------------------------------+-----------------+--------+------------+--------+-----------+
| | | | | | | |
+--------+---------------------------------------------+-----------------+--------+------------+--------+-----------+
| | Accumulated other comprehensive income (note 16) | | 7,533 | | 2,657 |
+--------+---------------------------------------------------------------+--------+------------+--------+-----------+
| | Deficit | | | | | | | (111,871) | | (109,750) |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| | | | | | | | | (104,338) | | (107,093) |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| |
+-------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | 128,255 | | 122,150 |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| | | | | | | | | | | |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| | | | | | | | | $ | | $ |
| | | | | | | | | 315,024 | | 335,118 |
+--------+---------+--------+--------+--------+--------+-----------------+--------+------------+--------+-----------+
| Future operations (note 1) | | | |
+---------------------------------------------------------------------------------+------------+--------+-----------+
| Commitments (note 20) | | | |
+---------------------------------------------------------------------------------+------------+--------+-----------+
| Subsequent events (note 21) | | | |
+---------------------------------------------------------------------------------+------------+--------+-----------+
| See accompanying notes to the consolidated financial statements | | | |
+--------+---------+--------+--------+--------+--------+--------+--------+--------+------------+--------+-----------+
+--------+--------+--------+--------+--------+--------+--------+-+-+--------+-+-+-------+-+-+-+-+-+--------+-+-+-+-+--------+
| STRATIC ENERGY CORPORATION |
+---------------------------------------------------------------------------------------------------------------------------+
| CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND DEFICIT |
+---------------------------------------------------------------------------------------------------------------------------+
| FOR THE PERIODS ENDED SEPTEMBER 30 |
+---------------------------------------------------------------------------------------------------------------------------+
| (stated in thousands of US Dollars, except per share amounts) |
+---------------------------------------------------------------------------------------------------------------------------+
| (Unaudited) |
+---------------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+--------------------+---+---+----------------+----------+
| | | | | | | | Three | | Nine months |
| | | | | | | | months | | ended September 30 |
| | | | | | | | ended | | |
| | | | | | | | September | | |
| | | | | | | | 30 | | |
+--------+--------+--------+--------+--------+--------+------------+------------------------+---+---------------------------+
| | | | | | | | 2009 | 2008 | | 2009 | 2008 |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| REVENUE | | | | | | | | | | |
+-----------------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | Petroleum and natural gas sales | | $ | $ | | $ 17,421 | $ 5,919 |
| | | | 9,060 | 2,226 | | | |
+--------+--------------------------------------------+------------+------------+-----------+---+--------------+------------+
| | Less: Royalties | | | | | (179) | (331) | | (576) | (856) |
+--------+-----------------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | Other income | | | | | 21 | 577 | | 41 | 577 |
+--------+-----------------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | Interest income | | | | | 1 | 106 | | 6 | 400 |
+--------+-----------------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | 8,903 | 2,578 | | 16,892 | 6,040 |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| EXPENSES | | | | | | | | | | |
+-----------------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | Operating costs | | | | 2,873 | 230 | | 5,171 | 933 |
+--------+--------------------------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | General and administrative | 2,360 | 1,846 | | 7,088 | 6,477 |
+--------+---------------------------------------------------------+------------+-----------+---+--------------+------------+
| | Stock-based compensation (note 15) | 960 | 2,035 | | 2,981 | 3,102 |
+--------+---------------------------------------------------------+------------+-----------+---+--------------+------------+
| | Gain on disposal of property, plant and equipment (note | (22,495) | - | | (22,495) | - |
| | 6) | | | | | |
+--------+---------------------------------------------------------+------------+-----------+---+--------------+------------+
| | Write-down of petroleum and natural gas properties | - | - | | 900 | - |
+--------+---------------------------------------------------------+------------+-----------+---+--------------+------------+
| | Depletion, depreciation and accretion | | 4,983 | 2,484 | | 9,657 | 7,509 |
+--------+--------------------------------------------+------------+------------+-----------+---+--------------+------------+
| | Financial charges (note 12) | | 7,224 | 2,374 | | 14,474 | 5,943 |
+--------+--------------------------------------------+------------+------------+-----------+---+--------------+------------+
| | Foreign exchange (gain) loss | | | (60) | (146) | | 1,237 | (24) |
+--------+-----------------------------------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | (4,155) | 8,823 | | 19,013 | 23,940 |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| INCOME (LOSS) BEFORE INCOME TAXES | | 13,058 | (6,245) | | (2,121) | (17,900) |
+-----------------------------------------------------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | Future taxes | | - | (6,741) | | - | (6,741) |
+--------+--------------------------------------------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| NET INCOME (LOSS) | | | 13,058 | (12,986) | | (2,121) | (24,641) |
+--------------------------------------------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| DEFICIT, beginning of period | | | (124,929) | (81,069) | | (109,750) | (69,414) |
+--------------------------------------------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| DEFICIT, end of period | | | | $(111,871) | $(94,055) | | $ (111,871) | $ (94,055) |
+-----------------------------------+--------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| Net income (loss) per share (note 14[d]) | | | | | | |
+-----------------------------------------------------+------------+------------+-----------+---+--------------+------------+
| Basic | | | $ | $ | | $ (0.01) | $(0.09) |
| | | | 0.05 | (0.05) | | | |
+--------------------------------------------+--------+------------+------------+-----------+---+--------------+------------+
| Diluted | | | $ | $ | | $ (0.01) | $(0.09) |
| | | | 0.04 | (0.05) | | | |
+--------------------------------------------+--------+------------+------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+------------+------------+-----------+---+--------------+------------+
| See accompanying notes to the consolidated financial statements | | | | |
+-------------------------------------------------------------------------------+-----------+---+--------------+------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+----------+--------------+-----------+---+--------------+------------+
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
+---------------------------------------------------------------------------------------------------------------------------+
| FOR THE PERIODS ENDED SEPTEMBER 30 |
+---------------------------------------------------------------------------------------------------------------------------+
| (stated in thousands of US Dollars) |
+---------------------------------------------------------------------------------------------------------------------------+
| (Unaudited) |
+---------------------------------------------------------------------------------------------------------------------------+
| | | | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+--------+--------------+-------------------+--------+-------+--------+
| | | | | | | | Three | | Nine months |
| | | | | | | | months | | ended September 30 |
| | | | | | | | ended | | |
| | | | | | | | September | | |
| | | | | | | | 30 | | |
+--------+--------+--------+--------+--------+--------+--------+--------------------------+---+-----------------------------+
| | | | | | | | 2009 | 2008 | | 2009 | 2008 |
+--------+--------+--------+--------+--------+--------+--------+------------+-------------+---+--------------+--------------+
| | | | | | |
+--------------------------------------------------------------+------------+-------------+---+--------------+--------------+
| Net income (loss) | $ | $ | | $ (2,121) | $ (24,641) |
| | 13,058 | (12,986) | | | |
+--------------------------------------------------------------+------------+-------------+---+--------------+--------------+
| | | | | | | |
+--------+-----------------------------------------------------+------------+-------------+---+--------------+--------------+
| Changes in foreign currency translation on self sustaining | 4,123 | (11,441) | | 4,876 | (3,341) |
| operations (2009 net of tax of $2,104 and $2,447; 2008 - | | | | | |
| ($5,408) and ($1,977)) | | | | | |
+--------------------------------------------------------------+------------+-------------+---+--------------+--------------+
| | | | | | | |
+--------+-----------------------------------------------------+------------+-------------+---+--------------+--------------+
| Comprehensive income (loss) | $ | $ | | $ 2,755 | $ (27,982) |
| | 17,181 | (24,427) | | | |
+--------------------------------------------------------------+------------+-------------+---+--------------+--------------+
| | | | | | | | | |
+-----------------------------------+--------+--------+--------+------------+-------------+---+--------------+--------------+
| See accompanying notes to the consolidated financial statements | | | | |
+---------------------------------------------------------------------------+-------------+---+--------------+--------------+
| |
+--------+--------+--------+--------+--------+--------+--------+-+-+--------+-+-+-------+-+-+-+-+-+--------+-+-+-+-+--------+
+--------+-+-+-+--------+--------+--------+-+-+--------+---------+-+-----------+-+--------+----------+-+--------+
| STRATIC ENERGY CORPORATION |
+---------------------------------------------------------------------------------------------------------------+
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
+---------------------------------------------------------------------------------------------------------------+
| FOR THE PERIODS ENDED SEPTEMBER 30 |
+---------------------------------------------------------------------------------------------------------------+
| (stated in thousands of US Dollars) |
+---------------------------------------------------------------------------------------------------------------+
| (Unaudited) |
+---------------------------------------------------------------------------------------------------------------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+---------+---------------+--------+------------+--------+
| | | | | | | | Three months | | Nine months |
| | | | | | | | ended September | | ended September |
| | | | | | | | 30 | | 30 |
+----------+---+--------+--------+--------+---+--------+-----------------------+----------+---------------------+
| | | | | | | | 2009 | 2008 | | 2009 | 2008 |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| OPERATING ACTIVITIES | | | | | | | |
+-----------------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | Net income (loss) | | | | $ | $(12,986) | | $ | $ |
| | | | | | 13,058 | | | (2,121) | (24,641) |
+--------+-----------------------+--------+---+--------+-----------+-----------+----------+----------+----------+
| | Items not affecting cash: | | | | | | | |
+--------+--------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | | Stock-based compensation | 960 | 2,035 | | 2,981 | 3,102 |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Amortisation of deferred financing | 1,476 | 252 | | 2,074 | 951 |
| | | charges (note 12) | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Accretion of convertible notes | 342 | 279 | | 914 | 552 |
| | | liability (note 12) | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Convertible note interest paid | - | - | | 2,040 | 882 |
| | | through note issuance | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Convertible note interest paid | - | - | | - | 87 |
| | | through share issuance | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Write-down of petroleum and natural | - | - | | 900 | - |
| | | gas properties | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Depletion, depreciation | | 4,983 | 2,484 | | 9,657 | 7,509 |
| | | and accretion | | | | | | |
+--------+---+------------------------------+----------+-----------+-----------+----------+----------+----------+
| | | Gain on disposal of property, plant | (22,495) | - | | (22,495) | - |
| | | and equipment (note 6) | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Future Taxes | - | 6,741 | | - | 6,741 |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | | Foreign exchange (gain) loss on cash | (20) | 257 | | (51) | 241 |
| | | held in foreign currencies | | | | | |
+--------+---+-----------------------------------------+-----------+-----------+----------+----------+----------+
| | Change in non-cash working | | (924) | 2,086 | | 34 | 373 |
| | capital | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | Cash from (used in) operating | | (2,620) | 1,148 | | (6,067) | (4,203) |
| | activities | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | | | | | |
+--------+---------------------------------------------------------+-----------+----------+----------+----------+
| FINANCING ACTIVITIES | | | | | | | |
+-----------------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | Bank loans, net of placement costs | (31,846) | (271) | | (12,344) | (35) |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | Convertible notes, net of | | - | - | | - | 42,224 |
| | issue costs | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | Issuance of share capital, net of | - | 5 | | - | 354 |
| | issue costs | | | | | |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | Change in non-cash working | | (30) | 229 | | (98) | 462 |
| | capital | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | Cash from (used in) financing | (31,876) | (37) | | (12,442) | 43,005 |
| | activities | | | | | |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+--------+-----+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| INVESTING ACTIVITIES | | | | | | | |
+-----------------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | Acquisition of property, plant and | (12,616) | (19,852) | | (41,105) | (34,491) |
| | equipment | | | | | |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | Disposal of property, plant and | 64,519 | 1,000 | | 64,519 | 1,000 |
| | equipment | | | | | |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | (Increase) decrease in restricted cash | (345) | (2,226) | | 2,081 | (2,795) |
| | and cash equivalents | | | | | |
+--------+---------------------------------------------+-----------+-----------+----------+----------+----------+
| | Addition of other assets | | | (95) | (28) | | (107) | (97) |
+--------+--------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | Change in non-cash working | | (18,511) | 9,151 | | (21,452) | 13,947 |
| | capital | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | Cash from (used in) investing | | 32,952 | (11,955) | | 3,936 | (22,436) |
| | activities | | | | | | |
+--------+------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+--------+-----+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| Foreign exchange gain (loss) on cash held in | 20 | (257) | | 51 | (241) |
| foreign currencies | | | | | |
+------------------------------------------------------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| INCREASE (DECREASE) IN CASH AND CASH | (1,524) | (11,101) | | (14,522) | 16,125 |
| EQUIVALENTS | | | | | |
+------------------------------------------------------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| CASH AND CASH EQUIVALENTS, beginning of period | 11,069 | 30,325 | | 24,067 | 3,099 |
+------------------------------------------------------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| CASH AND CASH EQUIVALENTS, end of period | $ 9,545 | $ | | $ | $ |
| | | 19,224 | | 9,545 | 19,224 |
+------------------------------------------------------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| Cash and cash equivalents consists of: | | | | | | |
+---------------------------------------------+--------+-----------+-----------+----------+----------+----------+
| | Balances with banks | | | $ 9,536 | $ | | $ | $ 7,070 |
| | | | | | 7,070 | | 9,536 | |
+--------+--------------------------------+---+--------+-----------+-----------+----------+----------+----------+
| | Short-term | | | | 9 | 12,154 | | 9 | 12,154 |
| | deposits | | | | | | | | |
+--------+-----------------------+--------+---+--------+-----------+-----------+----------+----------+----------+
| | | | | | | | $ 9,545 | $ | | $ | $ |
| | | | | | | | | 19,224 | | 9,545 | 19,224 |
+--------+-----+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+--------+-----+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| Interest received | | | | | $ 1 | $ 106 | | $ 6 | $ 407 |
+-----------------------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| Interest paid | | | | | $ 1,137 | $ 312 | | $ | $ 1,699 |
| | | | | | | | | 3,663 | |
+-----------------------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| | | | | | | | | | | | |
+----------+---+--------+--------+--------+---+--------+-----------+-----------+----------+----------+----------+
| See accompanying notes to the consolidated financial statements | | | |
+--------+-+-+-+--------+--------+--------+-+-+--------+---------+-+-----------+-+--------+----------+-+--------+
STRATIC ENERGY CORPORATION
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2009
(tabular amounts are stated in thousands of US Dollars except share and per
share amounts)
1. INCORPORATION AND FUTURE OPERATIONS
Stratic Energy Corporation ("Stratic" or the "Company") is incorporated under
the laws of the Territory of Yukon, Canada and is an international oil and gas
business engaged, directly and through its subsidiaries, in the appraisal,
development and production of existing petroleum and natural gas discoveries,
supplemented by a moderate risk exploration program. Stratic's principal current
interests are in the United Kingdom ("UK") and Netherlands sectors of the North
Sea, Italy and the Mediterranean area, including Turkey and Syria.
In the UK sector of the North Sea, the Company has interests in two oil field
development projects, with a third having recently been sold. The most advanced
development is the West Don oil field, which has commenced production in 2009.
At the Crawford oil field, development studies are proceeding towards submission
of a field development plan for approval in 2010. In Italy, the Company has an
interest in the Longanesi gas field where a development plan has been submitted
to the authorities in early 2009, and the signature of a sale and purchase
agreement in respect of the sale of the Italian business was recently announced.
In the Netherlands, the Company has an interest in the Horizon West oil field.
In the Black Sea, offshore Turkey, the Company has completed the development of
three gas fields, which are now in production, as the initial phase of
development of discoveries made in that area, and a second phase of development
is underway.
The success of the Company's exploration and development activity is influenced
by: commodity prices, currency exchange rates, varying levels of taxation,
arranging appropriate financing and the ability of the Company to discover
economically recoverable reserves and to bring such reserves into profitable
production. Certain of its activities are also subject to significant
financial, legal and political risks. While the Company seeks to manage these
risks, certain of these factors are beyond its control.
Future operations
These consolidated financial statements have been prepared by management on a
going concern basis in accordance with Canadian generally accepted accounting
principles. The going concern basis of presentation assumes that the Company
will continue in operation for the foreseeable future and be able to realize its
assets and discharge its liabilities and commitments in the normal course of
business.
The Company, for the nine months ended September 30, 2009 and the year ended
December 31, 2008, has experienced significant losses resulting in an
accumulated deficit of $112 million at September 30, 2009, and has had negative
cash flows from operations. During 2008 and the first nine months of 2009, the
Company has invested significant capital in its North Sea oil and gas assets,
mainly on the development of the West Don field which commenced production in
April 2009 and which was largely financed with debt from its bank facilities.
The investment in the North Sea has resulted in a significant but planned
increase in net debt, although this debt was reduced in August 2009 from the $65
million proceeds of sale of the Company's Breagh field and related exploration
interests. However, the Company is not currently funded for certain other of its
operating commitments, all of which are outlined in note 20, and scheduled bank
debt repayments as further discussed below and at note 11. Failure to make any
operational payments or debt repayments as they fall due could trigger default
provisions in the Company's lending agreements.
The ability of the Company to continue to operate as a going concern is
dependent on the availability of new equity, the timing and operational success
of anticipated cash flows to be received from production on its North Sea oil
and gas assets, and the continuing support of the banking syndicate (see further
discussion below) including the availability of existing bank financing which is
linked to oil prices, field performance and the level of independently certified
oil and gas reserves. Management is also continuing with its asset disposal
programme (see note 21), and agreement was recently reached for the sale of the
Italian business for cash proceeds of approximately $51 million. This sale is
expected to complete late in the first quarter of 2010.
In July 2009 the Company executed amendment agreements with its bank syndicate
for the amendment of its previous $150 million bank loan facilities, to include
the deferral of certain repayments due in the second quarter of 2009, and the
provision of temporary additional credit, pending repayment of these and overall
bank debt reduction from the proceeds of the sale of the Breagh asset, which has
since occurred (see note 6). Under the new agreement, as from April 30, 2009 the
Borrowing Base Facility was reduced from $115 million to $95 million, including
the $5 million working capital facility.
As part of these arrangements, the Company agreed with its bank syndicate the
amendment of the $35 million Undeveloped Asset Backed Facility to increase
availability to a maximum of $51 million with use extended to general corporate
purposes. In August 2009 the Undeveloped Asset Backed Facility was repaid in
full and cancelled from the proceeds of the sale of the Breagh asset.
The terms of the Borrowing Base Facility require the Company to make a scheduled
debt repayment by December 31, 2009, for which funds are not expected to be
available as a result of the production under-performance of the West Don field
since start-up. However, the Company is currently in discussions with its bank
syndicate, to reach agreement before year-end for the amendment of the facility
to enable the deferral of this repayment until the receipt of the proceeds from
the sale of Stratic's Italian business. In addition, Stratic is seeking the
access under the facility to additional temporary credit, to cover funding
shortfalls that may arise in the period until receipt of the Italian sale
proceeds, from which any drawings of this credit line will be repaid. In
substance these amendments are similar to those undertaken in July 2009 with
regard to the Breagh sale, as described above. The bank syndicate has indicated
its intention in principle to provide the additional support as described above,
although final bank credit approval has not yet been sought, nor has a facility
amendment agreement yet been signed. This support is ultimately dependent, inter
alia, on the receipt of proceeds from the sale of the Company's Italian
business, which requires certain conditions, which are outside of the Company's
control, to be met at the sale completion (see note 21). Additional fees and
margin, yet to be agreed, will be payable to the bank syndicate for the
provision of the additional liquidity sought by the Company.
The Board believes the aforementioned courses of action and activities provide a
reasonable expectation of mitigating the adverse conditions and events which may
raise doubt about the validity of the going concern assumption used in preparing
these consolidated financial statements. Therefore, the consolidated financial
statements do not reflect the adjustments that would be necessary if the going
concern assumption were not appropriate. If the going concern assumption were
not appropriate for these consolidated financial statements, adjustments might
be necessary to the carrying values of assets and liabilities, the reported
revenues and expenses and the balance sheet classifications used.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements are stated in United States
dollars, have been prepared by management in accordance with Canadian generally
accepted accounting principles ("GAAP") following the same accounting policies
and methods of computation as the audited consolidated financial statements for
the year ended December 31, 2008 except as noted below, and include the accounts
of the Company and its wholly owned subsidiaries. The following disclosure is
incremental to the disclosure included in the annual consolidated financial
statements. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of the
Company for the year ended December 31, 2008. Preparation of the financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the period.
Actual results may differ materially from those estimates.
Specifically, the amounts recorded for the depletion and depreciation of
petroleum and natural gas assets and for the accretion of asset retirement
obligations are based on estimates. The ceiling test is based on estimates of
reserves, production rates, oil and gas prices, future costs and other relevant
assumptions. The amounts for unit-based compensation are based on estimates of
unit price and performance factors. Future income taxes are based on estimates
as to the timing of the reversal of temporary differences, and tax rates
currently substantively enacted. By their nature, these estimates are subject to
measurement uncertainty and the effect on the financial statements of changes in
such estimates in future periods could be material.
Inventories
The Company recognizes crude oil inventory held in storage tanks at the fields,
together with any crude oil in transit to the terminal or point of sale. They
are valued at the lower of cost and net realizable value. Cost is determined on
a first-in, first-out basis and relates to the direct cost of production on an
actual basis.
3. ACCOUNTS RECEIVABLE AND PREPAIDS
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| Trade receivables | $ 2,996 | | $ 1,381 |
+-----------------------------------------+------------------+--+------------------+
| Joint venture receivables and prepaids | 6,944 | | 8,567 |
+-----------------------------------------+------------------+--+------------------+
| Other debtors | | | 556 | | 386 |
+----------------------+----------+-------+------------------+--+------------------+
| Prepaids | | | 326 | | 464 |
+----------------------+----------+-------+------------------+--+------------------+
| | $ 10,822 | | $ 10,798 |
+-------------+--------+----------+-------+------------------+--+------------------+
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| Turkey | $ 6,679 | | $ 3,725 |
+-----------------------------------------+------------------+--+------------------+
| United Kingdom | 3,438 | | 6,729 |
+-----------------------------------------+------------------+--+------------------+
| Syria | | | 461 | | - |
+----------------------+----------+-------+------------------+--+------------------+
| Canada | | | 194 | | 247 |
+----------------------+----------+-------+------------------+--+------------------+
| Italy | | | 36 | | 35 |
+----------------------+----------+-------+------------------+--+------------------+
| Netherlands | | | 14 | | 30 |
+----------------------+----------+-------+------------------+--+------------------+
| Other | - | | 32 |
+-----------------------------------------+------------------+--+------------------+
| | $ 10,822 | | $ 10,798 |
+-------------+--------+----------+-------+------------------+--+------------------+
4. INVENTORIES
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| Crude oil inventory | $ 542 | | $ - |
+-----------------------------------------+------------------+--+------------------+
| | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
During the nine months ended September 30, 2009 $524,000 of crude oil inventory
has been recognized in expenses (2008 $nil).
5. ASSETS HELD FOR SALE
The Company has outstanding a sale agreement in respect of its petroleum and
natural gas property in Tunisia, the Chorbane permit, for $1 million. The sale
closed in October 2009.
The following table provides additional information with respect to the amounts
included in the consolidated balance sheets as assets held for sale at the lower
of cost or fair value:
+----+-----------------------------------+------------------+--+------------------+
| | | September 30, | | December 31, |
| | | 2009 | | 2008 |
+----+-----------------------------------+------------------+--+------------------+
| | | | |
+----------------------------------------+------------------+--+------------------+
| Property, plant and equipment: | | | |
+----------------------------------------+------------------+--+------------------+
| | Tunisia | $ 1,000 | | $ 1,000 |
+----+-----------------------------------+------------------+--+------------------+
| | | | | |
+----+-----------------------------------+------------------+--+------------------+
| | | $ 1,000 | | $ 1,000 |
+----+-----------------------------------+------------------+--+------------------+
6. GAIN ON DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT
In July 2009, the Company entered into a sale and purchase agreement in respect
of its 10% interest in the UK North Sea Breagh gas field, and its interests in
associated exploration licences, with an independent third party. The Breagh
asset has been sold to allow the Company to reduce bank debt and allow the
Company to focus on other core UK assets.
The sale closed on August 26, 2009 with cash received of $64.5 million, net of
disposal costs. The carrying value of the assets sold was $18.1 million,
resulting in a surplus over book value of $46.4 million. Of this $22.5 million
has been recorded as a gain in the consolidated statement of income (loss), and
$23.9 million as a reduction to property, plant and equipment in the
consolidated balance sheet.
7. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of:
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| Syria - Block XVII | | $ 1,045 | | $ 700 |
+---------------------------------+-------+------------------+--+------------------+
| UK licences | | | - | | 2,151 |
+----------------------+----------+-------+------------------+--+------------------+
| Interest payments | | | 662 | | 1,313 |
+----------------------+----------+-------+------------------+--+------------------+
| | $ 1,707 | | $ 4,164 |
+-------------+--------+----------+-------+------------------+--+------------------+
Restricted cash and cash equivalents consist of (i) deposits or advance funding
as assurance of funding for exploration and appraisal work programmes under the
terms of the relevant concessions or contracts, principally relating to
production sharing agreements in Syria; and (ii) deposits for future interest
payment obligations on the 2011 Convertible Notes required under the Company's
bank loan facilities.
8. OTHER ASSETS
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| Deferred financing charges | $ 3,239 | | $ 3,482 |
+-----------------------------------------+------------------+--+------------------+
| Other debtors | | | 1,968 | | 2,420 |
+----------------------+----------+-------+------------------+--+------------------+
| Prepayments | | | 1,047 | | 329 |
+----------------------+----------+-------+------------------+--+------------------+
| | $ 6,254 | | $ 6,231 |
+-------------+--------+----------+-------+------------------+--+------------------+
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+-------------+--------+----------+-------+------------------+--+------------------+
| | | | | | | |
+-------------+--------+----------+-------+------------------+--+------------------+
| United Kingdom | $ 3,554 | | $ 3,811 |
+-----------------------------------------+------------------+--+------------------+
| Italy | 2,221 | | 1,369 |
+-----------------------------------------+------------------+--+------------------+
| Turkey | | | 460 | | 1,032 |
+----------------------+----------+-------+------------------+--+------------------+
| Syria | | | 19 | | 19 |
+----------------------+----------+-------+------------------+--+------------------+
| | $ 6,254 | | $ 6,231 |
+-------------+--------+----------+-------+------------------+--+------------------+
9. PROPERTY, PLANT AND EQUIPMENT
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | | | | | | | | | | | |
| | | | | | | | | | Other | Petroleum | |
| | | | | | | | | | Oil | and | |
| | | | | | | | | | and | Natural | |
| | | | | | | | | | Gas | Gas | |
| | | | | | | | | |Assets |Properties | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+ + +-------------------+
| | | | | | United | | | | | | Other | |
| | | | | | | | | | | |Assets | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+ + + +----------+
| | | | | Turkey | Kingdom | Italy | Syria |Netherlands | | | | Total |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | | | | | | | | | | | | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | | | | | | | | | | | | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| Balance at December 31, 2008 | $ | $106,110 | $141,832 | $ | $ | $ 213 | $ | $ 372 | $ |
| | 14,073 | | | 5,773 | 20,485 | | 288,486 | | 288,858 |
+-----------------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | | | | | | | | | | | | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Additions | | 630 | 41,058 | 357 | 945 | 711 | 5 | 43,706 | 107 | 43,813 |
+--------+-----------------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Asset retirement | - | 35 | - | - | - | - | 35 | - | 35 |
| | obligations | | | | | | | | | |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Recoveries | (313) | - | - | - | (2,288) | - | (2,601) | - | (2,601) |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Disposal (note 6) | - | (42,249) | - | - | - | - | (42,249) | - | (42,249) |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Write-downs | (900) | - | - | | - | - | (900) | - | (900) |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Depletion and | (2,063) | (6,791) | - | - | - | - | (8,854) | (134) | (8,988) |
| | depreciation | | | | | | | | | |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | Foreign currency | - | - | 7,186 | - | - | - | 7,186 | - | 7,186 |
+--------+--------------------------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| | | | | | | | | | | | | |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
| Balance at September 30, 2009 | $ | $ | $149,375 | $ | $ | $ 218 | $ | $ 345 | $ |
| | 11,427 | 98,163 | | 6,718 | 18,908 | | 284,809 | | 285,154 |
+--------+--------+--------+--------+---------+-----------+-----------+--------+-------------+--------+------------+--------+----------+
Capitalised costs include $213.8 million (December 31, 2008 - $280.4 million),
which are not being depreciated, depleted or amortised relating to unproved
properties and projects under construction or development and $71.0 million
(December 31, 2008 - $8.1 million) relating to producing properties in the UK
and Turkey.
The Italian business is the subject of a sale agreement, as described in note
21.
At September 30, 2009 the Company applied a ceiling test to the carrying value
of its proved properties. No impairment of producing properties was required to
be recognised. The ceiling test at March 31, 2009 required an impairment of the
Company's gas development offshore Turkey. Impairment of that asset, resulting
from reduced gas prices in Turkey in 2009, was measured at $0.9 million and
charged as an expense during the three months ended March 31, 2009.
The ceiling test at September 30, 2009 used the expected future market prices as
detailed below:
+---------+-----------+-----------+-----------+----------+
| | UK | UK | Turkey | Italy |
| | $/bbl | $/mcf | $/mcf | $/mcf |
+---------+-----------+-----------+-----------+----------+
| 2009 | 68.99 | 7.70 | 7.99 | 8.79 |
+---------+-----------+-----------+-----------+----------+
| 2010 | 72.50 | 8.42 | 9.55 | 9.63 |
+---------+-----------+-----------+-----------+----------+
| 2011 | 77.25 | 8.97 | 10.14 | 10.25 |
+---------+-----------+-----------+-----------+----------+
| 2012 | 83.20 | 9.65 | 10.90 | 11.03 |
+---------+-----------+-----------+-----------+----------+
| 2013 | 89.80 | 10.41 | 11.75 | 11.90 |
+---------+-----------+-----------+-----------+----------+
| 2014 | 95.03 | 11.04 | 12.50 | 12.61 |
+---------+-----------+-----------+-----------+----------+
| 2015 | 96.97 | 11.29 | 12.86 | 12.91 |
+---------+-----------+-----------+-----------+----------+
| 2016 | 98.92 | 11.52 | 13.12 | 13.17 |
+---------+-----------+-----------+-----------+----------+
| 2017 | 100.85 | 11.75 | 13.38 | 13.42 |
+---------+-----------+-----------+-----------+----------+
| 2018 | 102.95 | 11.99 | 13.66 | 13.70 |
+---------+-----------+-----------+-----------+----------+
| 2019 | 105.00 | 12.23 | 13.93 | 13.98 |
+---------+-----------+-----------+-----------+----------+
| 2020 | 107.07 | 12.47 | 14.21 | 14.25 |
+---------+-----------+-----------+-----------+----------+
| 2021 | 109.21 | 12.72 | 14.49 | 14.54 |
+---------+-----------+-----------+-----------+----------+
| 2022 | 111.42 | 12.98 | 14.78 | 14.83 |
+---------+-----------+-----------+-----------+----------+
The market prices are estimated using the methodology described in the Company's
most recent NI 51-101 form F1 effective December 31, 2008, and have been updated
to reflect the data from the relevant published forecasts effective September
30, 2009.
10. CONVERTIBLE NOTES
8.75% Convertible Notes due 2011 ("2011 Notes")
The Company has outstanding US $15.0 million principal 8.75% unsecured
convertible notes with a final maturity date of April 27, 2011, which are
convertible into common shares of Stratic, at any time, at the option of the
Noteholder, at a price of Cdn $1.56 per share. The 2011 Notes pay interest
semi-annually on May 12 and November 12. The 2011 Noteholders may elect to
receive Stratic common shares in payment of interest, based on a 10% discount to
market prices during the 30 day period prior to the relevant payment date,
instead of cash. Interest due in May 2009 was settled through cash of $0.7
million (2008 - cash of $0.6 million and common shares of $0.1 million).
The Company can, at any time up to the maturity date, require conversion of the
2011 Notes into common shares if the price of the shares over a 25 day period
prior to giving such notice is at least Cdn $2.65 per share. The Company may
also elect to redeem the 2011 Notes at par at any time prior to their maturity.
At maturity the notes require settlement at par value with cash.
The 2011 Notes are recorded as a liability at the fair value of the obligation
without the conversion feature. This obligation to make future payments of
principal and interest was determined to be $14.0 million. The difference
between the principal amount of $15.0 million and the fair value of the
obligation was $1.0 million and has been recorded in shareholders' equity as the
fair value of the conversion feature of the notes.
Under the Company's loan facility future payments of interest on the 2011 Notes
is required to be kept in a separate bank account (see note 7).
9% Convertible Notes due 2013 ("2013 Notes")
The Company has outstanding US $47.4 million principal amount of 9% subordinated
unsecured convertible notes, with a final maturity date of April 8, 2013. The
2013 Notes rank pari passu with the 2011 Notes and both are subordinated to the
bank debt described in note 11 below. The 2013 Notes are convertible, at the
option of the 2013 Noteholders, into common shares of Stratic at a price of
US $1.00 per common share, at any time until their maturity. The 2013 Notes are
redeemable by the Company after the second anniversary of issuance, at par plus
accrued interest to the redemption date, provided that the average price of the
Company's common shares on their primary exchange for the preceding 20 trading
days is greater than Cdn $1.75 per share. Interest on the 2013 Notes is payable
semi-annually on June 30 and December 31. At the Company's option, interest may
either be paid in cash or capitalised as additional principal on the 2013 Notes,
subject to the same interest and conversion terms. At maturity the notes require
settlement at par value with cash.
The 2013 Notes are recorded as a liability at the fair value of the obligation
without the conversion feature, net of issue costs. This obligation to make
future payments of principal and interest was determined to be $41.8 million.
The difference between the principal amount of $47.4 million and the fair value
of the obligation was $5.6 million and has been recorded in shareholders' equity
as the fair value of the conversion feature of the notes.
Interest payable in June 2009 of $2.0 million was capitalised as additional
principal amount of 2013 Notes. The additional principal was allocated with $1.6
million included in debt and the balance of $0.4 million included in
shareholders' equity.
The following is a summary of the convertible notes:
+--------------------------------+------------+----------------+
| Notes |Conversion | Maturity |
| | price | |
+--------------------------------+------------+----------------+
| 8.75% Convertible Notes due | Cdn $1.56 | April 27, 2011 |
| 2011 | | |
+--------------------------------+------------+----------------+
| 9% Convertible Notes due 2013 | US $1.00 | April 8, |
| | | 2013 |
+--------------------------------+------------+----------------+
| | | |
+--------------------------------+------------+----------------+
The following table summarises the convertible note activities which include the
2011 and 2013 Notes, for the period ended September 30, 2009:
+------------------------------------+------------+------------+------------+
| | Face | Debt | Equity |
| | value | Component | Component |
+------------------------------------+------------+------------+------------+
| Balance at December 31, 2008 | $60,334 | $54,703 | $6,236 |
+------------------------------------+------------+------------+------------+
| 2013 Notes interest June 30, 2009 | 2,040 | 1,671 | 369 |
+------------------------------------+------------+------------+------------+
| Accretion | - | 914 | - |
+------------------------------------+------------+------------+------------+
| Balance at September 30, 2009 | $62,374 | $57,288 | $6,605 |
+------------------------------------+------------+------------+------------+
| | | | |
+------------------------------------+------------+------------+------------+
The following table summarises the face value and carrying value of the
convertible notes:
+--------------------------------+-----------+----------+-----------+----------+
| Notes | September 30, 2009 | December 31, 2008 |
+--------------------------------+----------------------+----------------------+
| | Face |Carrying | Face |Carrying |
| | value | value | value | value |
+--------------------------------+-----------+----------+-----------+----------+
| 8.75% Convertible Notes due | $15,000 | $14,505 | $15,000 | $14,305 |
| 2011 | | | | |
+--------------------------------+-----------+----------+-----------+----------+
| 9% Convertible Notes due 2013 | 47,374 | 42,783 | 45,334 | 40,398 |
+--------------------------------+-----------+----------+-----------+----------+
| | $62,374 | $57,288 | $60,334 | $54,703 |
+--------------------------------+-----------+----------+-----------+----------+
11. BANK LOAN
In July 2009 the Company executed amendment agreements with its bank syndicate
for the amendment of its previous $150 million bank loan facilities, to include
the deferral of certain repayments due in the second quarter of 2009, and the
provision of temporary additional credit, pending repayment of these and overall
bank debt reduction from the proceeds of the sale of the Breagh asset, which has
since occurred (see note 6). Under the new agreement, as from April 30, 2009 the
Borrowing Base Facility was reduced from $115 million to $95 million, including
the $5 million working capital facility.
As part of these arrangements, the Company agreed with its bank syndicate the
amendment of the $35 million Undeveloped Asset Backed Facility to increase
availability to a maximum of $51 million with use extended to general corporate
purposes. In August 2009 the Undeveloped Asset Backed Facility was repaid in
full and cancelled from the proceeds of the sale of the Breagh asset.
The terms of the Borrowing Base Facility require the Company to make a scheduled
debt repayment by December 31, 2009, for which funds are not expected to be
available as a result of the production under-performance of the West Don field
since start-up. However, the Company is currently in discussions with its bank
syndicate, with a view to reaching agreement before year-end for the amendment
of the facility to enable the deferral of this repayment until the receipt of
the proceeds from the sale of Stratic's Italian business (see note 21). In
addition, Stratic is seeking additional temporary credit under the facility, to
cover funding shortfalls that are expected in the period until receipt of the
Italian sale proceeds, from which any drawings of this credit line will be
repaid. In substance these amendments are similar to those undertaken in July
2009 with regard to the Breagh sale, as described above. The bank syndicate has
indicated its intention in principle to provide the additional support as
described above, although final bank credit approval has not yet been sought,
nor has a facility amendment agreement yet been signed. This support is
ultimately dependent, inter alia, on the receipt of proceeds from the sale of
the Company's Italian business which requires certain conditions, which are
outside the Company's control, to be met at the sale completion (see note 21).
Additional fees and margin, yet to be agreed, will be payable to the bank
syndicate for the provision of the additional liquidity sought by the Company.
The Borrowing Base Facility has a final maturity of December 31, 2012, mainly
with a current drawn margin over US dollar Libor of 4.5%. The effective interest
rate of the overall facility for the nine months ended September 30, 2009 was
4.71%. The facility is secured by fixed charge over the shares of Stratic's
major subsidiary companies and certain operating subsidiaries and by floating
charges over the assets including project bank accounts of certain of those
major subsidiary companies and operating subsidiaries and by floating charge
over Stratic's project bank accounts. As at September 30, 2009 $48.0 million had
been utilized, mainly for the development of the West Don field. This comprises
$38.1 million under the main tranche and a further $4.9 million under the cost
over-run tranche in the facility, together with $5 million drawn under the
working capital facility.
Availability under the Borrowing Base Facility is primarily governed by a
borrowing base determined according to the net present value of certain bank
approved project cashflows and defined cover ratios. Projects approved for
inclusion in the facility currently are the West Don and South Akcakoca phase 1
developments. The borrowing base is scheduled in the normal course for a
redetermination twice a year, as of June 30 and December 31, in which the latest
independently certified reserves, production and cost profiles, together with
bank approved economic assumptions including oil and gas prices and interest
rates are used. The redetermination due as of June 30, 2009 was deferred by
agreement with the bank syndicate as part of the amendment arrangements agreed
earlier in 2009 and detailed above, and the redetermination as of the end of
2009 is currently underway incorporating the recently updated reserves for the
West Don field from Stratic's independent reporting engineers Ryder Scott; this
is expected to be finalized in December 2009. The existing redetermination
agreed with the banks as of December 31, 2008 is applicable until amended by the
current redetermination. The existing redetermination shows repayments of $15.9
million due on December 31, 2009, $14.2 million on June 30, 2010, with a final
repayment of $8.0 million at the end of 2010, making a total of $38.1 million.
In addition the $4.9 million cost over-run tranche, which was drawn in 2009
after the existing redetermination was agreed, is due for repayment by June 30,
2010, and the $5 million working capital facility drawing is due for repayment
by December 31, 2012. Accordingly $35.0 million of the facility drawings at
September 30, 2009 are shown as a current liability, and $13.0 million as a
long-term liability. In practice, the actual repayment schedule will be
variable, with projected repayments subject to periodic amendments with each
future redetermination, the inclusion or removal of projects, and also the
expected uplift of reserves of the West Don field within the facility from
proved to proved plus probable reserves at project completion, which is now
expected in 2010.
The Undeveloped Asset Backed Facility had a final maturity of March 31, 2011,
and its drawn margin over US dollar Libor was increased to 12% from July 2009,
until repayment and cancellation of the facility which occurred at the end of
August 2009. The effective interest rate of the facility for the nine months
ended September 30, 2009 was 7.72%.
Under the terms of the bank facility arrangements, the Company is required to
hold cash on deposit to cover interest payments on the 2011 Notes, which is
shown in restricted cash (note 7).
The costs incurred to establish the long-term loans have been included in
deferred financing charges on the balance sheet. The balance at September 30,
2009 was $3.2 million. During the period ended September 30, 2009, the Company
recorded additional costs of $1.8 million and amortisation of these charges
totaling $2.1 million (2008 - $1.0 million) in interest expense.
12. FINANCIAL CHARGES
During the periods ended September 30, 2009 and 2008, the Company incurred
interest charges on bank debt and convertible notes as well as fees on bank
debt, amortisation of financial charges and accretion of the convertible notes
liability as follows:
+---------------------------------------+----------+--------+--------+----------+
| | Three months |Nine months ended |
| | ended September | September 30 |
| | 30 | |
+---------------------------------------+-------------------+-------------------+
| | 2009 | 2008 | 2009 | 2008 |
+---------------------------------------+----------+--------+--------+----------+
| | | | | |
+---------------------------------------+----------+--------+--------+----------+
| Bank debt interest | $ 1,477 | $ 357 | $ | $ 1,179 |
| | | | 3,053 | |
+---------------------------------------+----------+--------+--------+----------+
| Convertible note interest | 1,393 | 1,338 | 4,088 | 2,841 |
+---------------------------------------+----------+--------+--------+----------+
| Bank debt fees | 2,328 | 148 | 3,733 | 420 |
+---------------------------------------+----------+--------+--------+----------+
| Amortisation of financial charges | 1,476 | 252 | 2,074 | 951 |
+---------------------------------------+----------+--------+--------+----------+
| Accretion of convertible notes | 342 | 279 | 914 | 552 |
| liability | | | | |
+---------------------------------------+----------+--------+--------+----------+
| Other interest | 208 | - | 612 | - |
+---------------------------------------+----------+--------+--------+----------+
| | $ 7,224 | $ | $ | $ |
| | | 2,374 | 14,474 | 5,943 |
+---------------------------------------+----------+--------+--------+----------+
The other interest arises on the agreement with the Company's gas purchaser in
Italy for the termination of its previous gas marketing arrangements, which
required Stratic to sell all its gas from Longanesi at significant
discounts. This agreement, which was recently extended, involves Stratic making
a payment by March 31, 2010 at its option of EUR12.1 million plus VAT, of which a
deposit payment of EUR0.5 million has been made and is included in other assets.
The previous gas marketing arrangements will be re-instated in the event the
option is not exercised and Stratic will forfeit its deposit of EUR0.5 million.
The interest is for the period from February to September 2009.
13. ASSET RETIREMENT OBLIGATIONS
The following table summarises changes in the asset retirement obligations for
the nine months ended September 30, 2009 and for the year ended December 31,
2008.
+------------+--------+----------+---------+------------------+--+----------------+
| | | | | Nine months | | Year ended |
| | | | | ended | | |
+------------+--------+----------+---------+------------------+--+----------------+
| | | | | September 30, | | December 31, |
| | | | | 2009 | | 2008 |
+------------+--------+----------+---------+------------------+--+----------------+
| | | | | | | |
+------------+--------+----------+---------+------------------+--+----------------+
| Asset retirement obligations - beginning | $ 10,943 | | $ 5,387 |
| of period | | | |
+------------------------------------------+------------------+--+----------------+
| Liabilities | | | 35 | | 5,044 |
| incurred | | | | | |
+---------------------+----------+---------+------------------+--+----------------+
| Accretion expense | | | 958 | | 532 |
+---------------------+----------+---------+------------------+--+----------------+
| Disposal (note 6) | (351) | | - |
+------------------------------------------+------------------+--+----------------+
| Foreign currency | | | 25 | | (20) |
+---------------------+----------+---------+------------------+--+----------------+
| Asset retirement obligations - end of | $ 11,610 | | $ 10,943 |
| period | | | |
+------------+--------+----------+---------+------------------+--+----------------+
The inflated undiscounted amount of the estimated future cash flows required to
settle the obligation is $20.1 million (December 31, 2008 - $21.0 million).
These obligations are expected to be settled in the future with a weighted
average life of approximately 8 years. The estimated future cash flows have been
discounted at the credit adjusted risk free rate in the range of 10% to 13.5%
(December 31, 2008 10% to 13.5%). As at September, 2009, no funds have been set
aside to settle these obligations.
14. SHARE CAPITAL
(a) Authorised
Unlimited number of voting common shares
Unlimited number of non-voting common shares
Unlimited number of preferred shares
(b) Issued
+--------+--------+--------+--------+--------+--------+--------+--------------+--------+---------+
| | | | | | | Number | | |
| | | | | | | of | | |
+-----------------+--------+--------+--------+--------+--------+--------------+--------+---------+
| Voting Common Shares | | | | Shares | | Stated |
| | | | | | | Value |
+-----------------------------------+--------+--------+--------+--------------+--------+---------+
| | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+--------+--------------+--------+---------+
| | | | | | | | | | |
+--------+--------+--------+--------+--------+--------+--------+--------------+--------+---------+
| Balance - September 30, 2009 and December 31, 2008 | 272,635,224 | | $ |
| | | | 205,432 |
+--------+--------+--------+--------+--------+--------+--------+--------------+--------+---------+
(c) Reserved for issuance
Stock Options
+--------+--------+--------+-------------+--------+----------+
| | | | Number | |Weighted |
| | | | of | | Avg. |
+--------+--------+--------+-------------+--------+----------+
| | | | Options | |Exercise |
| | | | | | Price |
+--------+--------+--------+-------------+--------+----------+
| | | | | | |
+--------+--------+--------+-------------+--------+----------+
| Balance - December 31, | 24,836,917 | | Cdn |
| 2008 | | | $0.97 |
+--------------------------+-------------+--------+----------+
| Issued | 8,325,000 | | Cdn |
| | | | $0.30 |
+--------------------------+-------------+--------+----------+
| Expired | (3,122,181) | | Cdn |
| | | | $1.12 |
+--------------------------+-------------+--------+----------+
| Cancelled | (4,000,000) | | Cdn |
| | | | $1.22 |
+--------------------------+-------------+--------+----------+
| Balance - September 30, | 26,039,736 | | Cdn |
| 2009 | | | $0.70 |
+--------------------------+-------------+--------+----------+
| | | | | | |
+--------+--------+--------+-------------+--------+----------+
| Exercisable - September | 17,428,201 | | Cdn |
| 30, 2009 | | | $0.84 |
+--------+--------+--------+-------------+--------+----------+
The fair value of stock options granted during the nine months ended September
30, 2009, were estimated on the date of grant and updated on each reporting
period for consultants' options, using the Black-Scholes option pricing method
with the following weighted average assumptions:
+-----------+--------+----------+--------------+--------------+--+--------------+
| | | | | | | |
+-----------+--------+----------+--------------+--------------+--+--------------+
| Risk free interest rate | 3.44% | | |
+----------------------------------------------+--------------+--+--------------+
| Expected life of the options | 10 years | | |
+----------------------------------------------+--------------+--+--------------+
| Expected volatility | 154% | | |
+----------------------------------------------+--------------+--+--------------+
| Expected dividend rate | 0% | | |
+----------------------------------------------+--------------+--+--------------+
| Weighted average fair value per option | $0.28 | | |
| granted | | | |
+-----------+--------+----------+--------------+--------------+--+--------------+
(d) Net income (loss) per share
The net income per share for the three months ended September 30, 2009 has been
calculated using the basic weighted average number of voting common shares
outstanding during the period of 272,635,224 (September 30, 2008 -
272,626,209).The net loss per share for the nine months ended September 30, 2009
has been calculated using the basic weighted average number of voting common
shares outstanding during the period of 272,635,224 (September 30, 2008 -
271,971,982). The impact of stock options totaling 26,039,736 common shares
(2008 - 25,336,917) and the 2011 and 2013 Notes which are currently convertible
into approximately 10.3 million and 47.4 million common shares, respectively
would not be dilutive for the nine months ended September 30, 2009 and 2008 and
the three months ended September 30, 2008 as the Company is in a loss position
and, therefore, the diluted weighted average number of voting common shares
equals the basic weighted average number of voting common shares. The diluted
net income per share for the three months ended September 30, 2009 has been
calculated using the basic weighted average number of voting common shares
outstanding during the period of 272,635,224 and including the impact of
convertible notes totaling 57,683,707 for total diluted shares of 330,318,931.
Diluted net income adds back $1.7 million of interest and accretion on the
convertible notes for total diluted net income of $14.8 million.
15. CONTRIBUTED SURPLUS
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| | | | | | | Nine | | Year |
| | | | | | | months | | ended |
| | | | | | | ended | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| | | | | | |September | |December |
| | | | | | | 30, 2009 | |31, 2008 |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| Balance at beginning of | | | | $ | | $ |
| period | | | | 17,575 | | 13,759 |
+--------------------------+--------+--------+--------+-----------+--------+----------+
| Stock-based compensation | | | | 2,981 | | 4,008 |
+--------------------------+--------+--------+--------+-----------+--------+----------+
| Exercise of stock | | | | - | | (192) |
| options | | | | | | |
+--------------------------+--------+--------+--------+-----------+--------+----------+
| Balance at end of period | | | | $ | | $ |
| | | | | 20,556 | | 17,575 |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
16. ACCUMULATED OTHER COMPREHENSIVE INCOME
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| | | | | | | Nine | | Year |
| | | | | | | months | | ended |
| | | | | | | ended | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| | | | | | |September | | December |
| | | | | | | 30, 2009 | | 31, 2008 |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| | | | | | | | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| Balance at beginning of | | | | $ | | $ |
| period | | | | 2,657 | | 7,034 |
| | | | | | | |
+--------------------------+--------+--------+--------+-----------+--------+----------+
| | | | | | | | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| Changes in foreign currency translation on self | 4,876 | | (4,377) |
| sustaining operations, net of tax of $2,447 (2008 - | | | |
| $2,523) | | | |
+-----------------------------------------------------+-----------+--------+----------+
| | | | | | | | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
| Balance at end of period | | | | $ | | $ |
| | | | | 7,533 | | 2,657 |
| | | | | | | |
+--------+--------+--------+--------+--------+--------+-----------+--------+----------+
17. SEGMENTED INFOMATION
Revenue is attributed to the following countries:
+---------------------------------------+----------+----------+----------+----------+
| | Three months ended | Nine months ended |
| | September 30 | September 30 |
+---------------------------------------+---------------------+---------------------+
| | 2009 | 2008 | 2009 | 2008 |
+---------------------------------------+----------+----------+----------+----------+
| | | | | |
+---------------------------------------+----------+----------+----------+----------+
| United Kingdom | $ 7,833 | $ 17 | $ 13,464 | $ 52 |
+---------------------------------------+----------+----------+----------+----------+
| Turkey | 1,070 | 2,475 | 3,426 | 5,646 |
+---------------------------------------+----------+----------+----------+----------+
| Canada | - | 86 | 2 | 342 |
+---------------------------------------+----------+----------+----------+----------+
| | $ 8,903 | $ 2,578 | $ 16,892 | $ |
| | | | | 6,040 |
+---------------------------------------+----------+----------+----------+----------+
The segmental breakdown of property, plant and equipment is shown in note 9.
The United Kingdom petroleum and natural gas sales are all purchased by a large
international oil company and the Turkey petroleum and natural gas sales are all
purchased by AKSA National Gas Wholesale.
18. FINANCIAL RISK MANAGEMENT
This note presents information about the Company's exposure to credit, liquidity
and market risks arising from its use of financial instruments and the Company's
objectives, policies and processes for measuring and managing such risks.
Further quantitative disclosures are included throughout these financial
statements.
The Board of Directors has overall responsibility for the establishment and
oversight of the Company's risk management framework. The Board has implemented
treasury and risk management policies and monitors compliance with those
policies. The treasury and risk management policies are established to identify
and analyse the relevant risks faced by the Company, to set appropriate risk
limits and controls, specify permitted risk management tools and to monitor
adherence to the policies.
(a) Global financial risk
Recent market events and conditions, including disruptions in the international
credit markets and other financial systems and the deterioration of global
economic conditions, have caused significant volatility to commodity prices.
These conditions worsened in 2008 and are continuing in 2009, causing a loss of
confidence in the global credit and financial markets and resulting in the
collapse of, and government intervention in, major banks, financial institutions
and insurers and creating a climate of greater volatility, less liquidity,
widening of credit spreads, a lack of price transparency, increased credit
losses and tighter credit conditions. Notwithstanding recent signs of improving
conditions following various actions by governments, concerns about the general
condition of the capital markets, financial instruments, banks, investment
banks, insurers and other financial institutions have caused the broader credit
markets to remain difficult, although major stock markets have recovered
somewhat from the low point earlier in 2009. These factors have negatively
impacted company valuations and will continue to impact the performance of the
global economy going forward.
(b) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Company's petroleum and natural gas
sales and joint venture activities (including potential joint liabilities for
co-venturers' share of obligations entered into on behalf of the joint
ventures). As at September 30, 2009 the Company's receivables consisted of $6.9
million (December 31, 2008 - $8.6 million) from joint venture partners, $3.0
million (December 31, 2008 - $1.4 million) of receivables from petroleum and
natural gas buyers and $0.9 million (December 31, 2008 - $0.8 million) of other
trade receivables.
Receivables from petroleum and natural gas marketers are normally collected in
the month following production. The Company's policy to mitigate credit risk
associated with these balances is to enter into contractual arrangements with
reliable purchasers with an adequate capital base. In respect of its Turkish gas
sales, the Company also benefits from bank guarantees provided by the purchaser.
The Company has not historically experienced any material collection issues
relating to obligations of its natural gas buyers. Where the Company acts as
operating company for a joint venture, co-venturer receivables are typically
collected within one to three months of the joint venture bill being issued to
the partner. The Company attempts to mitigate the risk from joint venture
arrangements by entering into appropriate agreements only with companies which
have the capacity to meet their share of joint venture obligations and by
ensuring that partner approvals of capital expenditures are obtained prior to
expenditure. However, ultimately the collection of the outstanding balances is
dependent on industry factors which may impact those co-venturers, such as
commodity price fluctuations, escalating costs and the risk of unsuccessful
drilling. The Company does not typically obtain collateral from joint venture
partners; however the joint venture arrangements typically create rights over
the joint venture assets in favour of non-defaulting parties in the event of
non-payment by a co-venturer and requirement for collateral arrangements have
recently become a more common feature of drilling contracts.
Cash and cash equivalents, restricted and unrestricted, consist of cash bank
balances and short-term deposits maturing in less than 90 days. The Company
manages the credit exposure related to short-term investments by selecting
counterparties with strong credit ratings, monitoring them regularly and
avoiding complex investment vehicles with higher risk such as asset-backed
commercial paper. The Company has no short-term investments at the periods ended
September 30, 2009 and December 31, 2008.
The carrying amounts of cash and cash equivalents, restricted and unrestricted,
and accounts receivable represents the maximum credit exposure. The Company does
not have an allowance for doubtful accounts as at September 30, 2009 and
December 31, 2008 and did not provide for any doubtful accounts nor was it
required to write-off any receivables during the periods ended September 30,
2009 and December 31, 2008. The Company considers none of its accounts
receivable to be past their due dates as at September 30, 2009 and December 31,
2008.
(c) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company's approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient
liquidity to meet its liabilities when due, under both normal and stressed
conditions without incurring unacceptable losses or risking harm to the
Company's reputation.
The Company prepares annual capital expenditure budgets, which are regularly
monitored and updated as considered necessary. Further, the Company utilises
authorisations for expenditures on both operated and non-operated projects to
further manage capital expenditures. To facilitate the capital expenditure
program, the Company has a revolving reserve-based credit facility and has
raised cash from the issue of convertible notes.
There is concern about the Company's ability to meet its financial obligations
discussed in note 1.
The following are the contractual maturities of financial liabilities as at
September 30, 2009:
+--------------------------------+----------+-----------+-----------+------------+
| | | Less | | |
| | | than | | |
+--------------------------------+----------+-----------+-----------+------------+
| | Total | 1 year | 1 - 2 | 2 - 5 |
| | | | years | years |
+--------------------------------+----------+-----------+-----------+------------+
| Accounts payable and accrued | $ 12,051 | $ 12,051 | $ - | $ - |
| liabilities | | | | |
+--------------------------------+----------+-----------+-----------+------------+
| Bank debt - principal | 48,011 | 34,963 | 8,048 | 5,000 |
+--------------------------------+----------+-----------+-----------+------------+
| Convertible notes - principal | 62,374 | - | 15,000 | 47,374 |
+--------------------------------+----------+-----------+-----------+------------+
| Total | $ | $ 47,014 | $ 23,048 | $ 52,374 |
| | 122,436 | | | |
+--------------------------------+----------+-----------+-----------+------------+
(d) Market risk
Market risk is the risk that changes in market prices, such as commodity prices,
foreign currency exchange rates, and interest rates will affect the Company's
net earnings, cash flows or the value of financial instruments. The objective of
market risk management is to manage and control market risk exposures within
acceptable limits, while maximising returns. Any risk mitigation transactions,
including hedging, will only be conducted in accordance with the risk management
policies that have been approved by the Board of Directors.
Commodity risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in oil and natural gas
prices. Prices for petroleum and natural gas are impacted by world economic
events that dictate the levels of supply and demand as well as by local market
issues, especially for natural gas. The Company does not currently utilise
financial derivatives to hedge against commodity price risks, in view of the
current low volumes of production, presently relating to sales of petroleum and
natural gas production in the United Kingdom and Turkey, but may use such
instruments in future as production volumes increase.
Currency risk is the risk that the fair value of future cash flows or financial
instruments will fluctuate as a result of changes in foreign currency exchange
rates. Currently the Company measures all exposures against the US dollar, which
is its reporting and functional currency. The principal currency exposures of
Stratic relate to capital expenditure commitments denominated in pounds sterling
and euros. The Company may hold cash in the currencies in which it has firmly
planned projected expenditure or enter into short term currency hedging
arrangements in order to manage such risks. All the Company's current natural
gas sales are denominated in Turkish lira; this exposure is not currently
hedged. Oil sales are denominated in US dollars, which is the functional
currency of the Company's business. The Company had no forward exchange rate
contracts in place as at or during the periods ended September 30, 2009 and
December 31, 2008.
(e) Fair value of financial instruments
The Company's financial instruments as at September 30, 2009 and December 31,
2008 consist of cash and cash equivalents, accounts receivable, deposits,
accounts payable and accrued liabilities, bank loans and convertible notes. The
fair value of cash and cash equivalents, accounts receivable, deposits and
accounts payable and accrued liabilities approximate their carrying amounts due
to their short-terms to maturity. The Company's bank loan bears interest at a
floating market rate and accordingly the fair market value approximates the
carrying value. The 2011 Notes outstanding with a face value of $15.0 million
has a fair value of $14.3 million and the 2013 Notes outstanding with a face
value of $47.4 million had a fair value of $41.5 million determined by
discounting the future contractual cash flows under the notes at discount rates
which represent borrowings presently available to the Company for notes with
similar terms and maturity.
Interest rate risk is the risk that future cash flows or the fair value of
financial instruments will fluctuate as a result of changes in market interest
rates. The Company is exposed to interest rate fluctuations on its bank debt
which bears a floating rate of interest principally applicable to US dollars. If
interest rates had been 1% higher for the nine months ended September 30, 2009,
the net loss would have increased by $0.5 million with an equal an opposite
impact had interest rates been 1% lower. The Company had no interest rate swap
or other rate management contracts in place as at or during the nine months
ended September 30, 2009.
19. CAPITAL MANAGEMENT
The Company's policy is to maintain a capital base adequate to sustain the
future development of the business including having appropriate margins for
unforeseen events, and to implement its strategic objectives and thereby deliver
returns to shareholders.
The Company manages its capital structure and makes adjustments to it in light
of changes in economic conditions, the risk characteristics of the underlying
petroleum and natural gas assets and investment requirements. The Company
considers its capital to include shareholders' equity and subordinated
convertible notes together totalling $185.5 million. This capital is
supplemented with bank debt and working capital to finance the Company's
operations. In broad terms, the Company aims over the medium-term to use equity
and similar capital for risk investments such as exploration and appraisal
expenditures, while using debt finance for a substantial proportion of
development expenditures.
The Company monitors capital requirements principally in relation to the
projected future cash flows and planned expenditures of its operations and the
current debt capacity of its assets as calculated under the relevant debt
facility agreements and expected future debt capacity of the assets. The
Company's debt capacity under its current bank facilities is linked to the
projected cash flows and reserves from certain of its oil and gas assets, as
well as continued compliance with cover ratios and covenants typical of oil and
gas industry finance, including those relating to the progress of projects.
Under existing bank and note agreements, the Company has restrictions over
incurring debt outside existing facilities, and also from making dividend
payments and distributions. In 2009 the Company has been restructuring by the
sale of certain non-core assets to focus the business, and reduce net debt. As
part of this it has amended its bank debt facilities (see note 11).
In order to facilitate the management of liquidity, the Company prepares annual
capital expenditure budgets and longer term plans, which are updated as
necessary depending on varying factors including current and forecast prices,
capital deployment and general industry conditions. The annual and updated
budgets are approved by the Board of Directors.
In order to maintain an adequate capital base the Company may from time to time
issue shares and undertake asset portfolio management. There were no changes in
the Company's approach to capital management during the period.
The Company has not paid or declared any dividends since the date of
incorporation, nor are any contemplated in the foreseeable future.
20. COMMITMENTS
The Company has the following outstanding commitments on its petroleum and
natural gas properties:
(a) In December 2005 the Company entered into a production sharing contract
("PSC") with the Syria Petroleum Company and the Syrian Government, for Block
XVII, onshore Syria (Stratic 35%). Under the terms of the PSC, the Company has a
minimum remaining obligation to drill one firm exploratory well or invest $0.7
million. The Company has posted a $0.7 million deposit as assurance of funding
its financial commitment (note 7). The obligation will be met by the drilling of
the Al Tayr 101 well which spudded in October 2009 and is currently operating.
(b) The Company, through its wholly-owned subsidiaries, Stratic Energy (UK)
Limited, Stratic Energy (North Sea) Ltd and Stratic Energy (Developments) Ltd,
has entered into the following work obligations with the UK licensing
authorities:
On Licence P1299 (Block 16/3d), containing a large part of the Cairngorm field,
the Company and its partners must drill a well to a depth of 2,500 metres or to
the basement, whichever is shallower within the initial term of the licence
(expiry December 2009) or relinquish the licence. The estimated cost of the well
net to Stratic is $8.0 million. The Company is seeking an extension to the
licence.
On Licence P1375 (Blocks 210/19a, 210/20a), the Company has a commitment to
drill an exploratory well to a depth of 1,500 metres or to the Brent formation,
whichever is the shallower, before the expiry of the initial term (December
2009) or relinquish the licence. The estimated cost of the well net to Stratic
is $13.5 million. The Company is seeking an extension to the licence.
On Licence P1465 (Blocks 15/23c; 15/24a; 15/28a; 15/29e) the Company and its
partners have a commitment to drill 2 firm wells and 2 contingent wells within
the licence period which expires April 2011 or relinquish the licence. The
estimated cost of the wells net to Stratic is up to $28.8 million, of which $7.5
million is expected to be incurred by the end of 2009 on the Bowmore well, which
was drilled in 2009.
On Licence P1614 (Block 15/30b) the Company and its partners have a commitment
to obtain and reprocess 45.3 sq km of 3D seismic data with a drill or drop
commitment to drill a well to 2,700m or water bearing Forties Formation,
whichever is shallower. The estimated cost of the seismic work net to Stratic is
$0.2 million.
On Licence P1582 (Block 20/15a) Stratic has a commitment to reprocess 230sq km
of 3D seismic data and a drill or drop commitment to drill a well to 2,440m or
Top Fulmar, whichever is the shallower. The estimated cost of the seismic data
net to Stratic is $0.2 million.
(c) In relation to Licence P1299 and Licence P1299 (Blocks 16/2b and 16/3b)
which contain the Cairngorm field the Company has entered into arrangements
pertaining to the 16/2b-5 appraisal well drilled late 2008/early 2009 under
which the well services provider has agreed to defer receipt of payment for its
services initially until July 14 , 2009, subsequently extended until August 7,
2009. Security for the deferred payment, which amounts to $15.4 million in
total, has been granted to the well services provider in an agreement entered
into in November 2008 by Stratic Energy Developments (Holdings) Ltd and Stratic
Energy (Developments) Ltd. This was in the form of a share charge granted by the
former company over its shares in the latter company, whose assets include the
Company's 10% interest in the Breagh gas discovery and part of the Company's
interests in the Cairngorm and Bowmore oil discoveries, together with a fixed
charge over the aforementioned Cairngorm and Bowmore interests. The Company has
recorded an amount of $15.4 million within accounts payable at June 30, 2009. In
July 2009 this amount was paid and the aforementioned security discharged,
following which the Breagh, Bowmore and Cairngorm interests became the subject
of first ranking security interests of the bank syndicate.
(d) In the Dutch sector of the North Sea in the 'F Quad Blocks', the Company
through its wholly owned subsidiary Grove Energy Limited, has a drill or drop
commitment to drill a well in each licence block F14, F17a, F18 and L01b by
November 2011. The estimated cost of the wells net (at a 60% interest) to
Stratic is $28.8 million.
(e) The Company has entered into an agreement with its gas purchaser in Italy
for the termination of its previous gas marketing arrangements, which required
Stratic to sell all its gas from Longanesi at significant discounts. This
agreement, which was extended on September 30, 2009 involves Stratic making a
payment by March 31, 2010 at its option of EUR11.6 million plus VAT, of which a
deposit payment of EUR0.5 million has been made and is included in other assets.
The previous gas marketing arrangements will be re-instated in the event the
option is not exercised and Stratic will forfeit its deposit of EUR0.5 million.
Stratic is required to pay interest on the balance outstanding of the option.
(f) In Turkey, the Company has applied for three production leases, one for
each of the producing fields; Akkaya, Ayazli and East Ayazli. The balance of
the two exploration licences containing the producing fields, AR/TOR-SET-TPO-POS
/3499 and 3500, not covered by the new production leases, is expected to be
reissued as new exploration licences. Under the terms of the original eight
licences, the Company and its partners were required to drill an exploration
well by 29 April 2009, which date pursuant to regulations has been finally
extended to 10 September 2009, in order to retain the current exploration
licences. Operator TPAO is currently drilling an exploration well, West
Ayazli-1, using the Saturn jack-up drilling unit which is expected to satisfy
this drilling commitment. The estimated cost of the well net to Stratic is
$2.8 million, and was paid during quarter three.
(g) In Morocco on the Guercif permit, Stratic are being fully carried on the
work obligation, with no cost to the Company, which includes seismic acquisition
of 300km of 2D data.
(h)The Company has obligations under operating leases in the UK and Italy for
office space as follows:
+-------------------------------+--------+--+-----------+
| | | | 2009 |
+-------------------------------+--------+--+-----------+
| | | | |
+-------------------------------+--------+--+-----------+
| 2009 | | | $ 69 |
+-------------------------------+--------+--+-----------+
| 2010 | | | $ 276 |
+-------------------------------+--------+--+-----------+
| 2011 | | | $ 114 |
+-------------------------------+--------+--+-----------+
| 2012 | | | $ 33 |
+-------------------------------+--------+--+-----------+
| | | | |
+-------------------------------+--------+--+-----------+
21. SUBSEQUENT EVENT
In November 2009, the Company entered into a sale and purchase agreement with
Enel Trade SpA in respect of the sale of its entire Italian business. The
Italian business has been sold to allow the Company to reduce bank debt further
and allow the Company to focus on its core assets.
The sale is for cash consideration of EUR34.3 million ($50.9 million) and the
assumption of existing obligations relating to the assets. Stratic is entitled
to receive a further payment of EUR6.6 million ($9.8 million) provided the
commencement of first production takes place by the end of 2011, reducing
pro-rata by month, with no payment due if production commences after the end of
2012. The transaction is subject to the usual industry conditions, including
regulatory approval. In particular, completion of the sale is dependent on the
following matters outside the Company's control - receipt of Ministry consent to
the transfers of the licences concerned, regulatory approval to the development
and approval to commence the associated environmental impact assessment,
anti-trust clearance and the release of security by Stratic's bank syndicate
(which has consented to the sale). Accordingly the sale is expected to close
late in the first quarter of 2010.
Stratic estimates that an after tax loss of approximately $60 million will be
recognized on the disposal at current Euro to US dollar exchange rates. The book
loss arises from the allocation of a significant proportion of the Grove Energy
acquisition cost to the Italian assets, in 2007, resulting in a property, plant
and equipment balance of $149.4 million in Italy at September 30, 2009 (see note
9).
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is Management's Discussion and Analysis ("MD&A") of the operating
and financial results of Stratic Energy Corporation ("Stratic" or the "Company")
for the three and nine months ended September 30, 2009. The discussion and
analysis should be read in conjunction with the unaudited interim consolidated
financial statements as at September 30, 2009 and for the three and nine months
ended September 30, 2009 and 2008, and the audited consolidated financial
statements and accompanying notes for the years ended December 31, 2008 and
2007.
All figures herein have been prepared in accordance with Canadian generally
accepted accounting principles and are reported in US Dollars, unless otherwise
stated.
This MD&A is dated and provided as of November 30, 2009.
The financial statements referred to above, and additional information relating
to National Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities, the Company Statement of Reserves Data and Other Oil and Gas
Information for the year ended December 31, 2008, together with the update
thereon in a Material Change Report filed on November 27, 2009, can be found at
www.sedar.com.
In the MD&A the following abbreviations are used:
bbl barrel of oil (1)
boe barrels of oil equivalent
bopd barrels of oil per day
boepd barrels of oil equivalent per day
bcf billion cubic feet of gas
bwpd barrels of water per day
DECCUK Department of Energy and Climate Change
ft feet
mmbbls million barrels of oil
mmboe million barrels of oil equivalent
mmscf million standard cubic feet of gas
mmscf/d million standard cubic feet per day of gas
mscf or mcf thousand standard cubic feet of gas
(1) Natural gas is converted to crude oil equivalent at a ratio of six thousand
standard cubic feet to one barrel. Boe may be misleading, particularly if used
in isolation. A boe conversion rate of 6 mscf: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.
FORWARD LOOKING STATEMENTS
Certain statements contained within this MD&A, and in certain documents
incorporated by reference into this document, constitute forward-looking
statements. These statements relate to future events or future performance. All
statements other than statements of historical fact may be forward-looking
statements. Forward-looking statements are often, but not always, identified by
the use of words such as "seek", "anticipate", "budget", "plan", "continue",
"estimate", "expect" "forecast', "may", "will", "project", "predict",
"potential", "targeting", "intend", "could", "might", "should", "believe" and
similar expressions. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in such forward-looking statements. The
Company believes the expectations reflected in those forward-looking statements
are reasonable but no assurance can be given that these expectations will prove
to be correct and such forward-looking statements included in, or incorporated
by reference into, this MD&A should not be unduly relied upon. These statements
speak only as of the date of this MD&A or as of the date specified in the
documents incorporated by reference into this MD&A, as the case may be.
This MD&A, and the documents incorporated by reference herein, contain
forward-looking statements pertaining to the following:
* the performance characteristics of our oil and natural gas properties;
* the size of our oil, natural gas liquids and natural gas reserves and production
levels;
* estimates of future cash flow;
* projections of market prices and costs;
* drilling plans and timing of drilling, recompletion and tie-in of wells;
* weighting of production between different commodities;
* commodity prices, exchange rates and interest rates;
* expected levels of royalty rates, operating costs, general and administrative
costs, costs of services and other costs and expenses;
* capital expenditure programs and other expenditures and the timing and method of
financing thereof;
* supply of and demand for oil, natural gas liquids and natural gas;
* expectations regarding our ability to raise capital and to add to reserves
through acquisitions and development;
* our acquisition and disposals strategy and the benefits to be derived therefrom;
* our ability to grow or sustain production and reserves through prudent
management;
* the emergence of accretive growth opportunities and continued access to capital
markets;
* our future operating and financial results;
* schedules and timing of certain projects and our strategy for future growth; and
* treatment under governmental and other regulatory regimes and tax, environmental
and other laws.
In particular, this MD&A contains the following forward-looking statements
pertaining to the following:
* production volumes;
* timing of cash flows;
* future oil and gas prices;
* operating costs;
* royalty rates;
* future development, exploration, and acquisition and development activities and
related expenditures;
* the amount of future asset retirement obligations;
* future liquidity and future financial capacity;
* future tax treatment of the Company; and
* future structure of the Company and its subsidiaries.
With respect to forward-looking statements contained in this MD&A and the
documents incorporated by reference herein, we have made assumptions regarding,
among other things:
* future oil and natural gas prices;
* the quality of oil and natural gas reserves and production;
* the continued availability of capital and other resources including skilled
personnel;
* the cost of expanding our licensed acreage;
* the ability to obtain equipment in a timely manner to carry out exploration,
development exploitation activities;
* the ability to obtain financing on acceptable terms;
* the ability to add production and reserves through exploration, development and
exploitation activities; and
* the continuation of the current tax and regulatory regime and other assumptions
contained in this MD&A and the documents incorporated by reference herein.
The actual results could differ materially from those anticipated in these
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this MD&A and the documents incorporated by reference into this
document:
* volatility in market prices for oil, natural gas liquids and natural gas;
* counterparty credit risk;
* access to capital;
* changes or fluctuations in oil, natural gas liquids and natural gas production
levels;
* liabilities inherent in oil and natural gas operations;
* adverse regulatory rulings, orders and decisions;
* attracting, retaining and motivating skilled personnel;
* uncertainties associated with estimating oil and natural gas reserves;
* competition for, among other things, capital, acquisitions of reserves, licence
acreage and services;
* incorrect assessments of the value of acquisitions and targeted exploration and
development assets;
* fluctuations in foreign exchange or interest rates;
* stock market volatility, market valuations and the market value of the common
shares of Stratic;
* failure to realize the anticipated benefits of acquisitions and/or disposals;
* actions by governmental or regulatory authorities including changes in royalty
and fiscal structures relating to the oil and gas industry;
* limitations on insurance;
* changes in environmental or other legislation applicable to our operations, and
our ability to comply with current and future environmental and other laws;
* geological, technical, drilling and processing problems and other difficulties
in producing oil, natural gas liquids and natural gas reserves; and
* the other factors discussed under "Business Risks and Uncertainties" in this
MD&A.
Statements relating to "reserves" or "resources" are by their nature 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.
Readers are cautioned that the foregoing lists of factors are not exhaustive.
The forward-looking statements contained in this MD&A and the documents
incorporated by reference herein are expressly qualified by this cautionary
statement. Stratic does not undertake any obligation to publicly update or
revise any forward-looking statements except as required by applicable
securities law.
OVERALL PERFORMANCE
Stratic is an international oil and gas business engaged in the appraisal,
development and production of petroleum and natural gas discoveries,
supplemented by a moderate risk exploration program. Its principal current
interests are in the United Kingdom ('UK') and Netherlands sectors of the North
Sea, Italy and the Mediterranean area, including Turkey and Syria. Production is
mainly from the West Don oil field in the UK, which commenced production in late
April 2009, together with the Company's Turkish gas business. Stratic has
undeveloped reserves in the Crawford oil field in the UK, and the Longanesi gas
field in Italy, although a sale and purchase agreement for the sale of the
Italian business has recently been signed.
Stratic's overall business performance at this early stage in its development is
best measured in terms of the progress made on its key development projects and
its success in exploration and appraisal activity, along with its ability to add
value through portfolio management. It is too soon in the industry cycle to
judge progress in financial terms, although meaningful measures such as cash
flow and earnings will become increasingly important as the Company moves
further into the production cycle.
In November 2009, the Company entered into a sale and purchase agreement with
Enel Trade SpA in respect of the sale of its entire Italian business. The
Italian business has been sold to allow the Company to reduce bank debt further
and allow the Company to focus on its core assets.
The sale is for cash consideration of EUR34.3 million ($50.9 million) and the
assumption of existing obligations relating to the assets. Stratic is entitled
to receive a further payment of EUR6.6 million ($9.8 million) provided the
commencement of first production takes place by the end of 2011, reducing
pro-rata by month, with no payment due if production commences after the end of
2012. The transaction is subject to the usual industry conditions, including
regulatory approval. In particular, completion of the sale is dependent on the
following matters outside the Company's control - receipt of Ministry consent to
the transfers of the licences concerned, regulatory approval to the development
and approval to commence the associated environmental impact assessment,
anti-trust clearance and the release of security by Stratic's bank syndicate
(which has consented to the sale). Accordingly the sale is expected to close
late in the first quarter of 2010.
The credit crisis and the recent volatility of crude oil and natural gas prices
have had a significant effect on Stratic's business, limiting access to capital
at a crucial time. The Company has therefore taken steps to re-structure its
business to reduce its capital expenditure outlook and its dependency on
external finance. Discretionary exploration and appraisal expenditure has been
cut back or deferred, overheads have been trimmed and our disposals program is
well advanced. Stratic has sold its interest in the Breagh gas discovery in the
North Sea for approximately $65 million and is awaiting completion of the $51
million sale of its business in Italy. The Company is not currently funded for
certain of its operating commitments, and scheduled bank debt repayments.
Accordingly, the Company is in discussions with its bank syndicate to defer
certain near-term debt repayments due at the end of 2009 until next year, and
for the provision of additional short-term working capital facilities, all of
which will be repaid from the Italy sales proceeds when received. The support of
the bank syndicate is ultimately dependent, inter alia, on the receipt of
proceeds from the sale of the Company's Italian business.
Progress on Stratic's developments and potential developments has been heavily
influenced by the prevailing economic conditions. Despite these challenges,
first production on the West Don development was achieved on April 28, 2009,
less than 12 months after the project was sanctioned by the UK government.
Operational delays in bringing the second production well and the water injector
well on-stream at originally planned rates have, however, meant that production
from the field has not reached the full capacity envisaged under the development
plan, which assumed that all three wells would be brought on-stream together in
the second quarter. The second production well was brought on-stream in early
August and the operator is in the process of rectifying a number of issues with
gas lift and water injection equipment to improve production. As a result of the
reduced water injection levels to date and continuing equipment issues during
2009, reservoir pressures are lower than originally anticipated, and therefore
short term peak production levels will also be lower. However future production
levels are now expected to decline more gradually, with production rates beyond
2010 expected to be substantially higher than originally planned. In the first
quarter next year the field will be tied in by pipeline to the nearby Thistle
platform, following which offshore loading will cease.
Pre-development work on the Crawford field has focused on a development concept
involving the sub-sea tie-back of four development wells to nearby
infrastructure. The operator has recently commenced work on an alternative
development concept with a view to reducing capital expenditure, amongst other
considerations. This will delay sanction of the project into 2010. Also in the
UK, the Company completed operations on the Bowmore appraisal well in August
2009, with the well being suspended under 'tight-hole' status pending further
evaluation.
In Italy, work is ongoing to facilitate completion of the sale of Stratic's
business there. In the Netherlands, in 2008 the Company decided not to proceed
with the long reach well to develop the Horizon West field against a backdrop of
rising costs and risks, and is continuing with its internal review of its
position in the country. In Turkey, the second phase of gas development in the
Company's Black Sea Akcakoca acreage is being advanced, with first gas from this
phase expected in late 2010. Gas prices remain firm in Turkey, with Stratic's
realised price a little over $8.00/mcf. An exploration well on West Ayazli is
currently operating.
In Syria, the Al Tayr 101 well was spudded by Stratic as operator in October
2009, and is currently operating. The well is expected to reach total depth
early in 2010.
Financially, Stratic had a net income for the quarter ended September 30, 2009
of $13.1 million (September 30, 2008 - net loss $13.0 million) and a net loss of
$2.1 million (September 30, 2008 - $24.6 million) for the nine months ended
September 30, 2009. The Company ended the period with cash of $11.3 million
(December 31, 2008 - $28.2 million), including restricted cash expected to be
used in operations within 12 months, bank debt of $48.0 million (December 31,
2008 - $58.5 million) and convertible notes in aggregate principal amount of
$62.4 million (December 31, 2008 - $60.3 million).
RESULTS OF OPERATIONS
The net income for the quarter ended September 30, 2009 was $13.1 million
compared with a net loss of $13.0 million for the corresponding period of 2008,
the increased profit being attributable to a $22.5 million gain on the disposal
of the UK North Sea Breagh gas field and associated exploration licences, an
increase in production revenues from the West Don field in the UK North Sea
partially offset by increased finance charges due to the higher debt levels in
2009, and an increased cost of borrowing.
The net loss for the nine months ended September 30, 2009 was $2.1 million (2008
- $17.9 million). The gain on the Breagh disposal and increased production
revenues was partially offset by increased finance charges.
Production
Production for the third quarter of 2009 totalled 1,440 boepd (2008 - 338
boepd). The increase is due to commencement of production in April 2009 from the
Company's West Don oil field in the UK. Turkish gas production declined in 2009
compared with 2008, as a result of natural depletion of the gas fields following
the initial period of flush production after the fields were first brought
on-stream in late 2007.
Production for the nine months to September 30, 2009 was 1,022 boepd (2008 - 349
boepd) with the increase attributable to production from the West Don oil field.
The decline in the Turkish gas production in the first nine months of 2009
compared with the same period in 2008 was due to natural depletion of the
reservoirs.
The following table summarises the production volumes by product:
+---------------------------------------+----------+--------+---------+----------+
| | Three months | Nine months ended |
| | ended September | September 30 |
| | 30 | |
+---------------------------------------+-------------------+--------------------+
| Production volumes | 2009 | 2008 | 2009 | 2008 |
+---------------------------------------+----------+--------+---------+----------+
| | | | | |
+---------------------------------------+----------+--------+---------+----------+
| Oil (bbl) | 107,033 | - | 204,855 | - |
+---------------------------------------+----------+--------+---------+----------+
| Natural gas (mmscf) | 152.8 | 486.3 | 444.3 | 573.6 |
+---------------------------------------+----------+--------+---------+----------+
| | | | | |
+---------------------------------------+----------+--------+---------+----------+
| Oil (bopd) | 1,163 | - | 750 | - |
+---------------------------------------+----------+--------+---------+----------+
| Natural gas (mmscf/d) | 1.66 | 2.03 | 1.63 | 2.09 |
+---------------------------------------+----------+--------+---------+----------+
| Total (boepd) | 1,440 | 338 | 1,022 | 349 |
+---------------------------------------+----------+--------+---------+----------+
| | | | | |
+---------------------------------------+----------+--------+---------+----------+
| Sales volumes | | | | |
+---------------------------------------+----------+--------+---------+----------+
| | | | | |
+---------------------------------------+----------+--------+---------+----------+
| Oil (bbl) | 115,051 | - | 196,804 | - |
+---------------------------------------+----------+--------+---------+----------+
| Natural gas (mmscf) | 152.8 | 486.3 | 444.3 | 573.6 |
+---------------------------------------+----------+--------+---------+----------+
| | | | | |
+---------------------------------------+----------+--------+---------+----------+
The difference between production volumes and sales volumes relates to inventory
held at the period end.
Revenues and royalties
Petroleum and natural gas sales revenue for the quarter was $9.1 million (2008 -
$2.2 million), the 2009 increase being due to the West Don oil sales revenue
with production starting in April 2009.
Petroleum and natural gas sales revenue for the nine months ended September 30,
2009 was $17.4 million (2008 - $5.9 million). The 2009 increase was also due to
the West Don oil sales revenue.
The following table summarises revenue and average prices by product:
+---------------------------------------+----------+--------+--------+----------+
| | Three months |Nine months ended |
| | ended September | September 30 |
| | 30 | |
+---------------------------------------+-------------------+-------------------+
| Revenue ($'000) | 2009 | 2008 | 2009 | 2008 |
+---------------------------------------+----------+--------+--------+----------+
| | | | | |
+---------------------------------------+----------+--------+--------+----------+
| Oil | 7,832 | - | 13,461 | - |
+---------------------------------------+----------+--------+--------+----------+
| Natural gas | 1,228 | 2,226 | 3,960 | 5,919 |
+---------------------------------------+----------+--------+--------+----------+
| | | | | |
+---------------------------------------+----------+--------+--------+----------+
| | 9,060 | 2,226 | 17,421 | 5,919 |
+---------------------------------------+----------+--------+--------+----------+
| | | | | |
+---------------------------------------+----------+--------+--------+----------+
| Average realized prices | | | | |
+---------------------------------------+----------+--------+--------+----------+
| | | | | |
+---------------------------------------+----------+--------+--------+----------+
| Oil ($/bbl) | 68.08 | - | 68.40 | - |
+---------------------------------------+----------+--------+--------+----------+
| Natural gas ($/mscf) | 8.04 | 11.95 | 8.91 | 10.32 |
+---------------------------------------+----------+--------+--------+----------+
Gas production is all sold under a long term contract to AKSA, a local gas
marketing company, for industrial use in Turkey. The price is based on the state
gas pipeline company's posted prices (BOTAS), which in turn are based on the
cost of imported supplies to Turkey. The oil production is all sold to a large
international oil company and its price correlates with the Brent oil price.
Royalties payable, principally to the Turkish State at a rate of 12.5%, are
shown as a deduction from revenue. There are no royalties payable in the UK for
the West Don field. Royalties in the third quarter of 2009 were $0.2 million,
compared to $0.3 million for the same period in 2008. The decrease is consistent
with decreased revenues in Turkey. Other income in the third quarter 2009 was
$0.6 million lower than in the third quarter 2008 due to 2008 including an
insurance receipt relating to a claim in Turkey from lost production principally
in 2007. Interest income for the third quarter 2009 was lower than in 2008 due
to reduced cash balances and lower interest rates. Total revenue for the quarter
was therefore $8.9 million (2008 - $2.6 million).
Royalties for the nine months ended September 30, 2009 were $0.6 million (2008 -
$0.9 million). The decrease is consistent with decreased revenues in Turkey.
Other income for the nine months ended September 30, 2009 was $0.5 million lower
than in the same period for 2008 due to 2008 including the insurance receipt in
Turkey relating to lost production principally in 2007. Interest income was
lower than in 2008 due to reduced cash balances and lower interest rates.
Total revenue for the nine months ended September 30, 2009 was $16.9 million
(2008 - $6.0 million).
Expenses
Operating costs for the quarter were $2.9 million (2008 - $0.2 million)
reflecting the increase in production from the commencement of the West Don
field. Depletion, depreciation and accretion expense was $5.0 million (2008 -
$2.5 million) calculated on a unit of production basis. The effect on the
depletion, depreciation and accretion charge in 2009 compared with 2008, from
the West Don field was reduced by lower depreciation in 2009 for the Turkey gas
field due to lower production and a proved reserve increase in the Turkish
assets in the fourth quarter of 2008.
Operating costs for the nine months ended September 30, 2009 were $5.2 million
(2008 - $0.9 million) and depletion, depreciation and accretion expense was $9.7
million (2008 - $7.5 million). The increase in the operating costs and
depletion, depreciation and accretion charge in 2009 compared with the similar
period in 2008 is principally due to the increased production from the West Don
field. The increase in the depletion, depreciation and accretion charge from the
West don field is partially offset by a decrease in Turkey from a combination of
lower production and the proved reserve increase in the fourth quarter 2008. The
ceiling tests carried out at March 31, 2009 indicated the requirement for an
impairment in the Turkish asset of $0.9 million, due to a reduction in forecast
Turkish gas prices. No impairment was required from the ceiling tests carried
out at September 30, 2009.
The components of general and administrative costs and non-cash stock-option
expense are shown in the table below:
+--------+--------+--------+--------+--------+--------+---------+--------+
| | | | Three months | | Nine months |
| | | |ended September | | ended September |
| | | | 30 | | 30 |
+--------+--------+--------+-----------------+--------+------------------+
| | | | 2009 | 2008 | | 2009 | 2008 |
+--------+--------+--------+--------+--------+--------+---------+--------+
| | | | $'000 | $'000 | | $'000 | $'000 |
+--------+--------+--------+--------+--------+--------+---------+--------+
| | | | | | | | |
+--------+--------+--------+--------+--------+--------+---------+--------+
| General and | 2,758 | 2,207 | | 8,173 | 7,323 |
| administrative expense | | | | | |
+--------------------------+--------+--------+--------+---------+--------+
| Amounts recovered and | (398) | (361) | | (1,085) | (846) |
| amount capitalised | | | | | |
+--------------------------+--------+--------+--------+---------+--------+
| Total general and | 2,360 | 1,846 | | 7,088 | 6,477 |
| administrative | | | | | |
+--------------------------+--------+--------+--------+---------+--------+
| | | | | | | | |
+--------+--------+--------+--------+--------+--------+---------+--------+
| Stock compensation costs | 960 | 2,035 | | 2,981 | 3,102 |
| charged over vesting | | | | | |
| period | | | | | |
+--------+--------+--------+--------+--------+--------+---------+--------+
The increase in general and administrative expenses in 2009 is principally due
to an increase in advisors' fees relating to the Company's financing
arrangements. Stock-based compensation costs were lower in the third quarter
2009 compared with the similar 2008 period due to stock options issued in July
2008. Stock-based compensation for the nine months ended September 30, 2009 is
similar to the same period in 2008 due to stock options being issued in June
2009 and July 2008.
During the quarter ended September 30, 2009 the Company incurred financial
charges of $7.2 million compared with $2.4 million for the comparative period in
2008, due principally to higher average levels of bank debt mainly resultant
from the development of the West Don field in the UK North Sea, increased bank
fees arising on the renegotiated bank facility and increased amortization of
financial charges due to the repayment and cancellation of the Undeveloped Asset
Backed Bank Facility in 2009, eighteen months ahead of maturity.
During the nine months ended September 30, 2009 the Company incurred financial
charges of $14.5 million compared with $5.9 million for the comparative period
in 2008. The increase is due to higher debt levels, increased bank fees,
increased amortization of financial charges and a full nine months interest on
the 2013 Convertible Notes issued in April 2008.
The Company recorded a foreign exchange gain for the quarter ended September 30,
2009 of $0.1 million (2008 - $0.1 million).
The Company recorded a foreign exchange loss for the nine months ended September
30, 2009 of $1.2 million (2008 - $nil) principally arising on certain working
capital balances which are denominated in pounds sterling, which strengthened
against the US dollar.
The current tax expense for the three and nine months ended September 30, 2009
is nil (2008: nil) due to the availability of tax losses and allowances. The
future tax expense for the three and nine months ended September 30, 2009 is nil
(2008: $6.7 million). The 2008 expense is due to the tax rate for energy
companies in Italy that have a turnover greater than EUR25 million increasing by
5.5% to 38.25%. This principally relates to temporary differences arising on
the acquisition accounting adjustments in 2007 for the Italian assets in Grove
Energy Limited.
The net income for the third quarter ended September 30, 2009 was $13.1 million
(2008 - net loss $13.0 million). The basic net income per share for the quarter
was 5 cents (2008 - loss 5 cents). The diluted net income per share for the
quarter was 4 cents (2008 - loss 5 cents).
The net loss for the nine months ended September 30, 2009 was $2.1 million (2008
- $24.6 million). The basic and diluted net loss per share for the nine months
was 1 cent (2008 - 9 cents).
Included in comprehensive loss is a currency translation gain of $4.9 million
(2008 - loss $3.3 million) in respect of the Company's Italian operation, which
has a euro functional currency, as the euro has strengthened against the US
dollar in the nine month period.
OPERATIONS UPDATE
United Kingdom sector of the North Sea
Production from West Don averaged 1,163 bopd (6,743 bopd gross) in the third
quarter, marginally up on the previous quarter production of 1,075 bopd (6,233
gross) as since August 7, 2009, the field has been producing from two wells.
Production potential during the period was substantially higher than the average
production reported due to ongoing commissioning problems with the gas lift
system, general plant instability and an eleven day tanker disconnection during
poor weather conditions in September.
The West Don water injection well was brought on stream on September 9, 2009,
and despite having tested injection rates of up to 18,000 bwpd using the rig
pumps on the Stena Spey the lower rated pumps on the Northern Producer have only
been able to inject at an average of approximately 5,000 bwpd. Once the
commissioning work on the Don South West water injection wells is completed, the
pressure rating of the system will be upgraded for a trial period. Operator
Petrofac is confident that if the trial period proves successful in lifting
injection rates, the upgrade can be made more permanent. Recent bottom hole
pressure trends at the WPA production well suggest that water injection, even at
current injection rates, is starting to have a positive effect on production
levels.
Capital expenditure for the initial phase of the development is nearly complete
now, with only the investment on the tie-in to Thistle remaining, which is on
track for completion in the first quarter of 2010. Review of the recent well
data and production performance, particularly in the light of the decision to
sidetrack the West Don injection well up dip, suggests that there is
considerable merit in drilling a third production well in the southern part of
the field. This well was included in the Field Development Plan as a contingent
well location, and is expected to access further reserves from the southern
sector of the field as well as accelerate production from the central sector.
The drilling of this well is estimated to cost $11.0 million net to Stratic, and
is under evaluation by the West Don partnership.
Stratic has published a revised estimate of reserves for the field following a
review of the development well data and production performance to date by the
Company's independent engineering consultant, the Ryder Scott Company ("Ryder
Scott"). Anomalously low water salinities in the field have resulted in a
reduction of oil initially in place (OIIP) of approximately 10%, however
recovery factors are unchanged. Gross ultimate recoverable reserves have been
reduced 11% from 13.3 million barrels (2.3 net to Stratic) to 11.8 million
barrels (2.03 mmbbls net to Stratic) at the proved level, and 9% from 20.3
million barrels to 18.4 million barrels (3.17 mmbbls net to Stratic) at the
proved and probable level.
As a result of the ongoing commissioning problems during 2009, production
expectations for full year 2009, are substantially reduced to approximately 1.75
million barrels against an original target of between 5.8 and 6.1 million
barrels. Future production is expected to peak in 2011 at just below 11,000 bopd
(gross) as a result of the third production well, and decline thereafter. at a
much lower rate. Net remaining reserves at December 31, 2009 are expected to be
1.72 million barrels at the proved level and 2.84 million barrels at the proved
and probable level, respectively 33% and 16% higher than originally estimated.
On the Crawford field (Stratic 19%), operator Fairfield has completed the final
draft of the technical component of the field development plan assuming a single
tertiary production well and three multi- fractured horizontal wells in the
Triassic drilled from a semi-submersible drilling unit, with subsea completions
on the wells tied back to the East Brae platform for processing and export.
Whilst this option is commercially viable, the operator has identified the
possibility of using a lower cost jack-up drilling unit and installing the
production facilities on deck. This reduces the drilling costs as well as the
completion and processing costs, but will increase operating costs. The obvious
benefits of reduced capital expenditure are being investigated in more detail,
with sanction of whichever option proves the most attractive now expected in
2010.
The Nippon operated Bowmore appraisal well (Stratic 15%) was suspended as a
'tight-hole' pending further analysis. The well data has value in the context of
the highly prospective acreage surrounding Bowmore, and so the results will not
be published. The partnership is planning to drill a further well on the licence
in 2010.
Discussions continue with potential farm-in partners on Stratic's 100% owned
Quad 210 licence and 16/3d Cairngorm Block. The results of the farm-out process
will dictate the Company's drilling plans on this acreage for 2010.
Netherlands sector of the North Sea
There has been no substantive activity, pending completion of an ongoing
internal review of future plans for Stratic's interests in the Horizon West
field (P8a: Stratic 60% and operator; Horizon West field: post unitization
Stratic 48%, Chevron operator), and the F Quad Blocks (F14, F16, F17a, F18,
L101a, shallow horizons only: Stratic 60%), in the Netherlands.
Italy
On November 5, 2009 Stratic announced its agreement to sell its entire business
in Italy, including the Longanesi gas field development, to Enel.
Operational activity on Longanesi (formerly Abbadesse) (Stratic 33.5% pre
development cost share) has been negligible. We are awaiting the consent of the
Ministry to commence our application for environmental clearance (VIA).
Turkey
Production from the South Akcakoca phase 1 development of the Akkaya, Ayazli and
East Ayazli fields (Stratic 12.25%) averaged 13.6 mmscf/d during the third
quarter (277 boepd net to Stratic), down from 14.5 mmscf/d in the second
quarter. Production continues on a steady decline, but was boosted by opening
the chokes at Akkaya in late July and at Ayazli 3A in late August to maintain
production at a level of approximately 14 mmscf/d. At the end of September the
balance of the behind pipe gas intervals in the East Ayazli 1 well were
perforated, increasing gross production to over 17.0 mmscf/d.
Stratic's realised gas price averaged $8.04/mcf in the third quarter, broadly in
line with the second quarter ($8.38/mcf).
The phase 2 project for development of the Akcakoca discoveries continues to
advance with the project well under way. The fabrication of the jacket and deck
has commenced. Float out and offshore installation, including a pipeline tie-in
to the existing export system, is expected in summer 2010 with first gas
scheduled for the fourth quarter of 2010.
The West Ayazli well spudded on October 9, 2009 and is currently operating at
total depth. The well drilled through the Kusuri sandstones in the 12.1/4"
section, encountered gas bearing sands in the Akcakoca member from 598m. The
main producing sand in the Ayazli field, the A sand, was pressure depleted in
this well, indicating communication with the Ayazli field. It was agreed not to
complete and tie back the well to the Ayazli platform (gross cost $10 million),
but instead to perforate undepleted gas bearing sands lower in the Kusuri
formation and allow them to cross flow into the A sands, and hence recover the
gas through the existing Ayazli wells. This novel completion is estimated to
cost about $1.5 million gross. The well is currently running substantially under
the dry hole cost estimate of $23.1 million gross ($2.8 million net to Stratic).
TPAO have recently proposed drilling a second well at East Akkaya immediately
following the West Ayazli well. Stratic have voted against this location on the
grounds of there being no strong amplitude anomaly, suggesting a lack of gas
saturated sandstones at this location. The Akcakoca partners have voted in
favour of the well, and Stratic has exercised its right of 'non-consent' and
will not participate in the well, or be entitled to any hydrocarbon produced
from the well if successful.
Syria
On Block XVII (Stratic 35%, operator), the Al Tayr 101 well spudded on October
7, 2009. The well, which is currently drilling ahead in 12 ¼" hole, is expected
to encounter the primary Kurrachine Dolomite target in late December and reach
target depth at approximately 3,000 metres early in January 2010.
Morocco
No substantive activity has occurred since the last quarterly report.
Slovenia
No substantive activity has occurred since the last quarterly report.
.
CAPITAL EXPENDITURES
During the three months ended September 30, 2009, the Company incurred
expenditures of $12.9 million on its oil and gas properties, principally in the
UK North Sea. The UK expenditure was principally in respect of development work
on the West Don field and appraisal drilling on the Bowmore discovery.
An analysis of petroleum and natural gas expenditures for the nine months ended
September 30, 2009 and 2008 is shown below:
+--------+--------+--------+--------+--------+---------+----------+----------+--------+-------------+--------+----------+
| In $'000s | | | | | | | | Other | |
+-----------------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | United | | | | Oil | |
| | | | | | | | | | and | |
| | | | | | | | | | Gas | |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | Turkey | Kingdom | Italy | Syria |Netherlands |Assets | Total |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| Balance at January 1, 2008 | $20,179 | $29,740 | $147,334 | $4,527 | $38,110 | $652 | $240,542 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| Additions during the period: | | | | | | |
+------------------------------------------------------+----------+----------+--------+-------------+--------+----------+
| Drilling | 156 | 9,925 | - | - | - | - | 10,081 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Construction and facilities | 923 | 15,813 | - | - | - | - | 16,736 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Seismic activities | - | 1,078 | - | 35 | - | - | 1,113 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Geological and geophysical | - | 259 | 20 | 85 | 726 | - | 1,090 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Technical and administrative | 328 | 1,474 | 671 | 251 | 2,681 | 9 | 5,414 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Consultancy and other | 55 | 136 | 88 | 40 | 187 | 5 | 511 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | 1,462 | 28,685 | 799 | 411 | 3,594 | 14 | 34,945 |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | |
+------------------------------------------------------+----------+----------+--------+-------------+--------+----------+
| Recoveries | - | - | - | - | - | (454) | (454) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Depletion and depreciation | (7,022) | - | - | - | - | - | (7,022) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Foreign currency | - | - | (5,257) | - | - | - | (5,257) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | (7,022) | - | (5,257) | - | - | (454) | (12,733) |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| Balance at September 30, 2008 | $14,619 | $58,425 | $142,856 | $4,938 | $41,704 | $212 | $262,754 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+-----------------+--------+---------+----------+----------+--------+-------------+--------+----------+
| Balance at January 1, 2009 | $14,073 | $106,110 | $141,832 | $5,773 | $20,485 | $213 | $288,486 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+--------+-----------------+---------+----------+----------+--------+-------------+--------+----------+
| Additions during the period: | | | | | | |
+------------------------------------------------------+----------+----------+--------+-------------+--------+----------+
| Drilling | | | 122 | 28,746 | - | 691 | - | - | 29,559 |
+-----------------+--------+-----------------+---------+----------+----------+--------+-------------+--------+----------+
| Construction and facilities | 321 | 9,850 | 8 | - | - | - | 10,179 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Seismic activities | - | 15 | - | - | - | - | 15 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Geological and geophysical | - | 38 | 1 | - | 6 | - | 45 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Technical and administrative | 187 | 2,260 | 327 | 244 | 705 | 5 | 3,728 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Consultancy and other | - | 149 | 21 | 10 | - | - | 180 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | 630 | 41,058 | 357 | 945 | 711 | 5 | 43,706 |
+--------+--------+--------+-----------------+---------+----------+----------+--------+-------------+--------+----------+
| Add (deduct) other items | | | | | | |
+------------------------------------------------------+----------+----------+--------+-------------+--------+----------+
| Asset retirement obligations | - | 35 | - | - | - | - | 35 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Recoveries | (313) | - | - | - | (2,288) | - | (2,601) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Disposal | - | (42,249) | - | - | - | - | (42,249) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Write downs | (900) | - | - | - | - | - | (900) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Depletion and depreciation | (2,063) | (6,791) | - | - | - | - | (8,854) |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| Foreign currency | - | - | 7,186 | - | - | - | 7,186 |
+--------------------------------------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | (3,276) | (49,005) | 7,186 | - | (2,288) | - | (47,383) |
+--------+--------+--------+-----------------+---------+----------+----------+--------+-------------+--------+----------+
| | | | | | | | | | | |
+--------+--------+--------+-----------------+---------+----------+----------+--------+-------------+--------+----------+
| Balance at September 30, 2009 | $11,427 | $98,163 | $149,375 | $6,718 | $18,908 | $218 | $284,809 |
+--------+--------+--------+--------+--------+---------+----------+----------+--------+-------------+--------+----------+
The disposal relates to the Company's sale of the UK North Sea Breagh field and
related exploration licences. The Italian business is the subject of a sale
agreement which has not completed yet. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity depends upon cashflow from operations, existing
committed credit facilities and convertible loan notes, existing cash resources
and the receipt of proceeds from planned asset disposals.
The current economic and financial market conditions due to the global credit
market crisis, including recent oil price volatility, have resulted in the
Company's ability to raise additional capital being extremely constrained in
both the debt and equity markets. In response to these conditions and
circumstances, management has reduced its capital expenditure program to minimum
levels consistent with its licence and contractual obligations, has restructured
and is seeking to restructure further its bank debt to defer certain repayments,
increase near term liquidity and in due course reduce indebtedness by repaying
debt from disposal proceeds (as further detailed below).
In July the Company announced it had entered into a sale agreement for its
interests in the UK North Sea Breagh field and surrounding exploration acreage,
for consideration of approximately $65 million. The sale was completed in late
August 2009, and was largely used to pay down bank debt. In November 2009 a sale
agreement for the sale of Stratic's Italian business was executed, for
consideration of $51 million, plus contingent payments of up to approximately
$10 million. The transaction is subject to the usual industry conditions,
including regulatory approval. In particular, completion of the sale is
dependent on the following matters outside the Company's control - receipt of
Ministry consent to the transfers of the licences concerned, regulatory approval
to the development and approval to commence the associated environmental impact
assessment, anti-trust clearance and the release of security by Stratic's bank
syndicate (which has consented to the sale). Accordingly the sale is expected to
close late in the first quarter of 2010.
Currently Stratic does not have sufficient liquidity to meet its expenditure
obligations and scheduled debt repayments due at the end of 2009. The ability of
the Company to continue to operate as a going concern is therefore dependent on
the availability of new equity, the timing and operational success of
anticipated cashflows including from disposals, and the continuing support of
its bank syndicate including availability of existing bank financing.
Cash and cash equivalents
As at September 30, 2009 the Company had cash and cash equivalents of $9.5
million (December 31, 2008 - $24.1 million). The Company had a further $1.0
million of cash and cash equivalents held as deposits against work commitments
on its oil and gas properties, which will become available as the relevant work
is carried out, and $0.7 million of restricted cash relating to future interest
payments on the 2011 convertible notes as required by the Company's bank loan
facilities. The Company does not hold any asset-backed commercial paper.
Debt facilities
In July 2009 the Company executed amendment agreements with its bank syndicate
for the amendment of its previous $150 million bank loan facilities, to include
the deferral of certain repayments due in the second quarter of 2009, and the
provision of temporary additional credit, pending repayment of these and overall
bank debt reduction from the proceeds of the sale of the Breagh asset, which has
since occurred. Under the new agreement, as from April 30, 2009 the Borrowing
Base Facility was reduced from $115 million to $95 million, including the $5
million working capital facility.
As part of these arrangements, the Company agreed with its bank syndicate the
amendment of the $35 million Undeveloped Asset Backed Facility to increase
availability to a maximum of $51 million with use extended to general corporate
purposes. In August 2009 the Undeveloped Asset Backed Facility was repaid in
full and cancelled from the proceeds of the sale of the Breagh asset.
The terms of the Borrowing Base Facility require the Company to make a scheduled
debt repayment by December 31, 2009, for which funds are not expected to be
available as a result of the production under-performance of the West Don field
since start-up. However, the Company is currently in discussions with its bank
syndicate, with a view to reaching agreement before year-end for the amendment
of the facility to enable the deferral of this repayment until the receipt of
the proceeds from the sale of Stratic's Italian business. In addition, Stratic
is seeking additional temporary credit under the facility, to cover funding
shortfalls that are expected in the period until receipt of the Italian sale
proceeds, from which any drawings of this credit line will be repaid. In
substance these amendments are similar to those undertaken in July 2009 with
regard to the Breagh sale, as described above. The bank syndicate has indicated
its intention in principle to provide the additional support as described above,
although final bank credit approval has not yet been sought, nor has a facility
amendment agreement yet been signed. This support is ultimately dependent, inter
alia, on the receipt of proceeds from the sale of the Company's Italian business
which requires certain conditions, which are outside the Company's control, to
be met at sale completion. Additional fees and margin, yet to be agreed, will be
payable to the bank syndicate for the provision of the additional liquidity
sought by the Company.
The Borrowing Base Facility has a final maturity of December 31, 2012, mainly
with a current drawn margin over US dollar Libor of 4.5%. The effective interest
rate of the overall facility for the nine months ended September 30, 2009 was
4.71%. The facility is secured by fixed charge over the shares of Stratic's
major subsidiary companies and certain operating subsidiaries and by floating
charges over the assets including project bank accounts of certain of those
major subsidiary companies and operating subsidiaries and by floating charge
over Stratic's project bank accounts. As at September 30, 2009 $48.0 million had
been utilized, mainly for the development of the West Don field. This comprises
$38.1 million under the main tranche and a further $4.9 million under the cost
over-run tranche in the facility, together with $5 million drawn under the
working capital facility.
Availability under the Borrowing Base Facility is primarily governed by a
borrowing base determined according to the net present value of certain bank
approved project cashflows and defined cover ratios. Projects approved for
inclusion in the facility currently are the West Don and South Akcakoca phase 1
developments. The borrowing base is scheduled in the normal course for a
redetermination twice a year, as of June 30 and December 31, in which the latest
independently certified reserves, production and cost profiles, together with
bank approved economic assumptions including oil and gas prices and interest
rates are used. The redetermination due as of June 30, 2009 was deferred by
agreement with the bank syndicate as part of the amendment arrangements agreed
earlier in 2009 and detailed above, and the redetermination as of the end of
2009 is currently underway incorporating the recently updated reserves for the
West Don field from Stratic's independent reporting engineers Ryder Scott; this
is expected to be finalized in December 2009. The existing redetermination
agreed with the banks as of December 31, 2008, is applicable until amended by
the current redetermination. The existing redetermination shows repayments of
$15.9 million due on December 31, 2009, $14.2 million on June 30, 2010, with a
final repayment of $8.0 million at the end of 2010, making a total of $38.1
million. In addition the $4.9 million cost over-run tranche, which was drawn in
2009 after the existing redetermination was agreed, is due for repayment by June
30, 2010, and the $5 million working capital facility drawing is due for
repayment by December 31, 2012. Accordingly $35.0 million of the facility
drawings at September 30, 2009 are shown as a current liability, and $13.0
million as a long-term liability. In practice, the actual repayment schedule
will be variable, with projected repayments subject to periodic amendments with
each future redetermination, the inclusion or removal of projects, and also the
expected uplift of reserves of the West Don field within the facility from
proved to proved plus probable reserves at project completion, which is now
expected in 2010.
The Undeveloped Asset Backed Facility had a final maturity of March 31, 2011,
and its drawn margin over US dollar Libor was increased to 12% from July 2009,
until repayment and cancellation of the facility which occurred at the end of
August 2009. The effective interest rate of the facility for the nine months
ended September 30, 2009 was 7.72%.
Stratic also has subordinated unsecured convertible loan notes outstanding
totaling $62.4 million, comprising $15.0 million principal amount outstanding
under the 8.75% convertible notes due for repayment in 2011, and $47.4 million
principal amount outstanding under the 9% convertible notes due in 2013.
At September 30, 2009 Stratic has total drawings on its bank facilities and
convertible notes of $110.4 million and net drawings (after deducting cash) of
$99.1 million.
Contractual obligations
The contractual obligations for which the Company is responsible are as follows:
+--------------------------+------------+----------+----------+----------+----------+
| As at September 30, | | Less | 2- 3 | 4 - 5 | After 5 |
| 2009: | | than | | | |
+--------------------------+------------+----------+----------+----------+----------+
| ($'000) | Total | 1 year | years | years | years |
+--------------------------+------------+----------+----------+----------+----------+
| | | | | | |
+--------------------------+------------+----------+----------+----------+----------+
| Convertible notes and | 79,457 | 5,576 | 24,020 | 49,861 | - |
| interest | | | | | |
+--------------------------+------------+----------+----------+----------+----------+
| Bank loan | 48,011 | 34,963 | 8,048 | 5,000 | - |
+--------------------------+------------+----------+----------+----------+----------+
| Payments for office | 440 | 224 | 208 | 8 | - |
| lease | | | | | |
+--------------------------+------------+----------+----------+----------+----------+
| Purchase obligations | 5,945 | 5,945 | - | - | - |
+--------------------------+------------+----------+----------+----------+----------+
| Asset retirement | 20,127 | 82 | - | 5,625 | 14,420 |
| obligations | | | | | |
+--------------------------+------------+----------+----------+----------+----------+
| | 153,980 | 46,790 | 32,276 | 60,494 | 14,420 |
+--------------------------+------------+----------+----------+----------+----------+
Share capital
As at September 30, 2009, and at the date of this MD&A, Stratic had 272,635,224
common shares outstanding. Securities outstanding as at September 30, 2009 that
can be converted into common shares included 25,339,736 incentive stock options
held by current employees and 700,000 other stock options, as well as $15
million principal amount of 2011 notes convertible into common shares at Cdn
$1.56 per share and $47.4 million principal amount of 2013 notes convertible
into common shares at $1.00 per share.
DERIVATIVES FINANCIAL INSTRUMENTS AND HEDGING
Stratic has no derivative financial instruments outstanding as at September 30,
2009. In order to provide a partial hedge of financial obligations denominated
in foreign currencies, Stratic continues to maintain part of its cash resources
in Canadian dollars, euros and pounds sterling. However, the Company policy is
to retain other surplus funds in US dollars, the reporting currency and
principal currency of operations. Stratic may in the future, from time to time,
undertake limited hedging operations in respect of exposures to commodity price,
currency and interest rate fluctuations.
SUMMARY OF QUARTERLY INFORMATION
The following table summarises selected quarterly financial information.
+--------------+---+----------+--------------+----------+----------+
| Quarter | | Total | Net | Net income (loss) |
| ended: | | | | per share |
+--------------+---+----------+--------------+---------------------+
| | | Revenue | Income | basic | diluted |
| | | | (Loss) | | |
+--------------+---+----------+--------------+----------+----------+
| | | $'000 | $'000 | | |
+--------------+---+----------+--------------+----------+----------+
| Sep 30, 2009 | | 8,903 | 13,058 | $ 0.05 | $ 0.04 |
+--------------+---+----------+--------------+----------+----------+
| Jun 30, 2009 | | 6,812 | (8,371) | (0.03) | (0.03) |
+--------------+---+----------+--------------+----------+----------+
| Mar 31, 2009 | | 1,177 | (6,808) | (0.02) | (0.02) |
+--------------+---+----------+--------------+----------+----------+
| Dec 31, 2008 | | 1,673 | (15,696) | (0.06) | (0.02) |
+--------------+---+----------+--------------+----------+----------+
| Sep 30, 2008 | | 2,579 | (12,986) | (0.05) | (0.05) |
+--------------+---+----------+--------------+----------+----------+
| Jun 30, 2008 | | 2,414 | (6,509) | (0.02) | (0.02) |
+--------------+---+----------+--------------+----------+----------+
| Mar 31, 2008 | | 1,048 | (5,146) | (0.02) | (0.02) |
+--------------+---+----------+--------------+----------+----------+
| Dec 31, 2007 | | 975 | (33,073) | (0.12) | (0.12) |
+--------------+---+----------+--------------+----------+----------+
Revenues, operating costs and depreciation increased from June 2009 due to the
start up of the West Don field in the UK North Sea. Revenues increased from mid
2007 due to the start-up of gas production offshore Turkey. Revenue for the
third quarter 2008 includes an insurance receipt of $0.6 million due to 2007
lost production in Turkey. Depletion and depreciation expense also increased in
mid 2007 with the commencement of production, more than offsetting the
production revenues. The loss for the fourth quarter 2007 included an impairment
charge of $29.4 million on the petroleum and natural gas properties in Turkey
due to a downward revision in estimated reserves and a credit for a future tax
reduction of $6.9 million from a reduction in the corporate tax rate in Italy.
The loss for the third quarter 2008 includes a future tax charge of $6.7 million
from an increase in the corporate tax rate in Italy for energy companies. The
loss for the fourth quarter 2008 includes an impairment charge of $21.2 million
on the petroleum and natural gas properties in the Netherlands due to a downward
revision in reserves and uncertainty over a development plan for the Horizon
West asset and a related future tax reduction of $10.6 million. The loss for the
second quarter 2009 includes increased financial charges totaling $4.5 million
due to increased borrowing and higher debt facility costs. The net income for
the third quarter 2009 includes a gain of $22.5 million from the disposal of the
UK North Sea Breagh gas discovery and financial charges of $7.2 million due to
increased costs of borrowing and the early repayment of the Undeveloped Asset
Backed Bank facility.
RELATED PARTY TRANSACTIONS
The Company was not involved in any related party transactions during the period
ended September 30, 2009.
CRITICAL ACCOUNTING ESTIMATES
The significant accounting policies used by the Company are disclosed in note 2
to the audited Consolidated Financial Statements for the year ended December 31,
2008. Certain accounting policies require that management make appropriate
decisions with respect to the formulation of estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses.
Management reviews its estimates on a regular basis. The emergence of new
information and changed circumstance may result in actual results or changes to
estimated amounts that differ materially from current estimates. A detailed
discussion of the critical accounting policies and practices of the Company
which helps to assess the likelihood of materially different results being
reported is disclosed in the 2008 annual Management's Discussion and
Analysis.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed the
changeover to IFRS from Canadian GAAP will be required for publicly accountable
enterprises for interim and annual financial statements effective for fiscal
years beginning on or after January 1, 2011, including comparatives for 2010.
In response the Company will perform a review of the significant areas of
difference in order to identify all specific Canadian GAAP and IFRS differences
and select ongoing IFRS policies. Key areas addressed will also be reviewed to
determine any information technology issues, the impact on internal controls
over financial reporting and the impact on business activities including the
effect, if any, on covenants and compensation arrangements.
The Company will also continue to monitor standards development as issued by the
International Accounting Standards Board and the AcSB as well as regulatory
developments as issued by the Canadian Securities Administrators, which may
affect the timing, nature or disclosure of its adoption of IFRS.
In July 2009 an amendment to IFRS 1 First Time Adoption of International
Reporting Standards was issued that applies to oil and gas assets. The amendment
allows an entity that used full cost accounting under its previous GAAP to elect
to measure oil and gas assets including exploration and evaluation assets and
development and production assets at values determined under their previous GAAP
with development and production assets being allocated pro rata using reserve
volumes or reserve values as of the date of adoption, providing that all assets
are tested for impairment on adoption.
FUTURE ACCOUNTING CHANGES
In May 2009, the CICA amended Section 3862, 'Financial Instruments -
Disclosures' to include additional disclosure requirements about fair value
measurement for financial instruments and liquidity risk disclosures. These
amendments require a three level hierarchy that reflects the significance of the
inputs used in making the fair value measurements. Fair value of assets and
liabilities included in Level 1 are determined by reference to quoted prices in
active markets for identical assets and liabilities. Assets and liabilities in
Level 2 include valuations using inputs other than quoted prices for which all
significant outputs are observable, either directly or indirectly. Level 3
valuations are based on inputs that are unobservable and significant to the
overall fair value measurement. These amendments are effective on December 31,
2009.
BUSINESS RISKS AND UNCERTAINTIES
Stratic, like all companies in the international oil and gas industry, operates
in environments subject to inherent risks. Many such uncertainties are beyond
the ability of a company to control - particularly those associated with
exploring for, and developing, economic quantities of hydrocarbons; volatile
commodity prices; foreign exchange; governmental regulations and tax systems and
environmental matters. In addition, the Company participates in selected
international exploration ventures of high potential that expose it to certain
political and business risks. The Company's business is affected by these risks
to the same degree as any other participant in the international oil and gas
industry. Further, although Stratic maintains an insurance program in line with
industry practice, not all risks may reasonably be insured against.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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Stratic Energy (LSE:SE.)
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