North Peace Energy Updates Operational Progress and Provides Q2 Financial Results
Thu Aug 27, 6:03 PMCALGARY, Aug. 27 /CNW/ - North Peace Energy Corp. ("North Peace" or the "Company") releases operating and financial results for the three months and six ended June 30, 2009.
CSS Pilot Project Operations Update:
Management continues to advance North Peace's Red Earth asset to
commercial production. The pilot facility has been operational since the start
of 2009 with the principal objective of demonstrating the feasibility of
producing economic quantities of bitumen from the Company's resource and
validating economic and technical parameters to optimize the design of future
commercial development.
Steam Injection Update
- L1 Horizontal Pilot Well
- Injection was completed in April 2009
- 75,000 barrels of cold water equivalent were injected into the
well over a period of 14 weeks at an average rate of 800
bbls/day
- This represents 60% of the intended steam slug size
- L2 Horizontal Pilot Well
- Injection was completed in July 2009 and an improved steam
injection strategy was utilized compared to the L1 well
- 146,000 barrels of cold water equivalent were injected into the
well over a period of 12 weeks at an average rate of 1,700
bbls/day and a stabilized final rate of 2,100 bbls/day
- This represents 100% of the intended steam slug size
- Injection pressures in both wells indicated fracturing occurred in
the zone of interest and steam chamber containment was achieved
- The facility is not generating steam at the current time as both
wells are on oil production
- Steam injection into the L1 well will resume when its production
ceases
Production Update
- L1 Horizontal Pilot Well
- Converted to production operations in May 2009
- Cumulative oil produced as at July 31, 2009 is 7,300 barrels,
cumulative water produced is 21,000 barrels
- Peak oil rate of over 200 bbls/day was reached after six
weeks of production
- Average oil production of 80 bbls/day (May - July)
- Cumulative oil cut is 26%
- Post peak oil rate, weekly oil cuts have ranged from
35% to 55%
- Current oil production, based on field estimates, of
approximately 35 bbls/day
- Cumulative Steam to Oil Ratio ("SOR") until the end of July
2009 is 10.3
- The SOR continues to decrease as the well produces
- L2 Horizontal Pilot Well
- Converted to production operations mid-August 2009
- As expected, the early period has been dominated by water
production
- Indications of increasing oil cuts have been observed to
date
- Current oil cut is approximately 29% based on field
estimates
- Initial field estimates indicate oil production rates of
approximately 150 bbls/day
- Oil production rate continues to increase
- Peak oil production is expected to occur within the next
two months
- The production side of the pilot facility is currently handling
production from both wells
- Oil production is being trucked and sold to third parties
- The average sales price was $53.33 per barrel for June and $44.97 per
barrel for July
- No discernible sand production has been observed and produced oil
quality is approximately 10 degrees API with viscosity of 90,000
Centipoises at 16 degrees Celsius
At this early stage of pilot operations, the Company cannot make any definitive conclusions on the anticipated commercial steam injectivity or production rates. Because only 60 percent of the target steam slug size was injected into the L1 well, the expected production period will likely be shorter than anticipated and will ultimately lead to a higher than expected first cycle SOR. A refined steam injection strategy augmented by the contained heat and voidage (vacant area remaining after oil is produced) now present in the L1 well should result in significantly higher steam injection and production profiles for the second cycle. The early production results from the L2 well are positive and the aggregate data gathered from both wells over several cycles will be used in commercial development planning.
Commercial Development Update:
- Work continues on engineering for a 3,000 bbl/d pilot expansion
project
- Process design is nearing completion
- The commercial application to the ERCB should be ready for
submission early 2010
Financial Update:
- Completed a $11.6 million financing on June 23, 2009, issuing
21,109,000 common shares, 10,554,500 warrants to purchase common
shares
- Working capital of $14.3 million and no debt as at June 30, 2009
- Capital expenditures of $1.8 million in the second quarter
Louis Dufresne, President of North Peace, commented "North Peace continues to operate its pilot wells, monitoring both steam injection and bitumen production. The L1 well has produced over 7,300 barrels of oil and continues to produce. Early production data from L2 is positive and we are encouraged by the significant improvement in the well's injectivity which is likely the result of refinements in start-up procedures and steaming strategy. Operating the pilot permits us to learn a great deal about our resource and to optimize the application of CSS as a recovery process to our reservoir. We are encouraged by recent trends in oil prices and the economy, and consequently we believe the timing for us to advance our commercial development will be ideal."
Management's Discussion and Analysis of
Financial Results
This Management's Discussion and Analysis for North Peace Energy Corp.
("North Peace" or the "Company") provides analysis of the Company's financial
results for the three and six month period ended June 30, 2009. The following
information should be read in conjunction with the unaudited interim financial
statements for the three and six months ended June 30, 2009 and the audited
financial statements for the year ended December 31, 2008.
Additional information about North Peace filed with Canadian securities
commissions is available on-line at www.sedar.com.
Date of Report August 26, 2009
--------------
Overview
--------
North Peace has an early stage in-situ oil sands play in northern Alberta with an estimated 2 to 3.1 billion barrels of Discovered Petroleum Initially-In-Place. The Company has a 100% working interest in 86,400 acres of Crown oil sands leases in the Peace River area. The lands have the benefit of over 300 legacy logs and are surrounded by accessible oil and gas production infrastructure. The target Bluesky zone is a regional sand, deposited in a near shore marine environment at approximately 400 metres in depth. The initial focus area has approximately 22 sections with 10 to 16 metres of oil bearing thickness, expected to be technically sufficient to advance a 30,000 bbl/d commercial project. North Peace is currently advancing the development of its resource using a robust and proven in-situ thermal recovery process, Cyclic Steam Stimulation ("CSS"). A pilot project consisting initially of two horizontal CSS wells has been built and the facility is currently operating.
Management continues to advance North Peace's Red Earth asset to commercial production. The pilot CSS plant has been operational since the start of 2009 with the principal objective of demonstrating the feasibility of producing economic quantities of bitumen from the Company's resource and validating economic and technical parameters to optimize the design of future commercial development.
Company and Project Overview
----------------------------
During the three months ended June 30, 2009 North Peace has completed the
following significant milestones:
- Completed a $11.6 million financing on June 23, 2009, issuing
21,109,000 common shares, 10,554,500 warrants to purchase common
shares
Subsequent to June 30, 2009 the Company has completed the following:
- Completed steam injection on the second horizontal well (L2) and
commenced production operations
Financial Results
-----------------
Quarterly Financial Information
2009 2009 2008 2008 2008
Q2($) Q1($) Q4($) Q3($) Q2($)
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Revenues 4,099 26,752 150,963 120,028 39,045
Net Loss and
Comprehensive loss 695,369 658,380 30,100 571,983 486,924
Basic and diluted
Net Loss Per share 0.012 0.012 0.001 0.012 0.013
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2008 2007 2007
Q1($) Q4($) Q3($)
---------------------------------------------------
Revenues 87,905 117,197 128,821
Net Loss and
Comprehensive loss 399,290 448,481 282,614
Basic and diluted
Net Loss Per share 0.010 0.012 0.007
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---------------------------------------------------
Results of Operations
---------------------
Interest Income
Six months ended
2009 2008 June 30,
-------------------------------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
Interest Income 4,099 26,752 39,045 30,851 126,950
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Interest income was $4,099 for the second quarter of 2009, with the
majority from redeemable term deposits bearing interest at 0.25%. The decrease
in interest income from 2008 and the first quarter of 2009 is due to lower
amounts of cash on deposit following the completion of pilot construction
coupled with lower interest rates.
Stock-based Compensation
Six months ended
2009 2008 June 30,
-------------------------------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
Stock-based
Compensation 294,031 304,870 150,651 598,901 317,027
-------------------------------------------------------------------------
Stock-based compensation was $294,031 for the three months ended June 30, 2009. The increase from the same period last year and in the year to date numbers is due 2008 stock option grants. In addition, $158,795 related to stock based compensation was capitalized during the six month period relating to consultants working directly on the capital program and pilot project.
The average fair value of the options granted during 2009 was $0.33 per option (2008 - $0.82) assuming an average volatility of 80% (2008 - 80%) on the underlying shares, a weighted average exercise price of $0.54 (2008 - $1.46), a risk-free interest rate of 2.11% - 2.23% (2007 - 2.81% - 3.35%), an expected life of 4 years (2008 - 4 years), and an expected dividend rate of nil (2008 - nil).
Administrative Expenses
Six months ended
2009 2008 June 30,
-------------------------------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
G&A expense
Salaries,
Benefits
and Consulting
Fees 217,369 201,595 170,976 418,964 347,867
Legal,
Accounting
and Audit Fees 57,367 45,269 23,112 102,636 42,748
Office rent 64,282 64,891 27,298 129,173 54,595
Other G&A 165,667 126,680 143,732 292,347 230,791
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Administrative
Expenses 504,685 438,435 365,118 943,120 676,001
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Salaries, Benefits and Consulting Fees
The increase in salaries, benefits and consulting fees from the first quarter in 2009 and the same period in 2008 is due to increased staffing as the Company continues operating the pilot project and begins to advance work on commercial development of the Red Earth assets.
Legal, Accounting and Audit Fees
The increase from the first quarter 2009 is due to additional legal work during the quarter related to the year end regulatory filings and the increase from 2008 is related to growth of the Company in size and operations.
Office Rent
Office rent for the quarter is consistent with the first quarter of 2009 and has increased from the previous year because the Company relocated to a larger office space on January 1, 2009.
Depreciation and Accretion
Six months ended
2009 2008 June 30,
-------------------------------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
Depletion,
Depreciation
and Accretion 17,780 17,742 10,200 35,522 20,136
-------------------------------------------------------------------------
The Company had depreciation expense of $17,780 for the three months ended June 30, 2009 compared to $17,742 for the first quarter of 2009 and $10,200 for the same period in 2008. The increase is due to additional expense on other assets and increased accretion expense resulting from additional asset retirement obligations being recognized and subsequently accreted.
Red Earth CSS Pilot
-------------------
The Red Earth CSS pilot commenced production at the beginning of May 2009. All revenues and expenses from the pilot have been recorded as an adjustment to the capitalized costs of the project. The daily rate for the second quarter is calculated over the full 91 days in the quarter, however since the L1 well was only producing for 61 days, the reported number is not representative. The average daily production for the month of June only was 151 bbls/day. Operating costs were incurred starting January 2009. The majority of these operating costs relate to steam generation, which began in January 2009, and fixed facility costs. Well related operating costs were incurred with first production in May 2009.
Six months ended
2009 2008 June 30,
-------------------------------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
Production (bbls/day) 62 - - 31 -
Average sales price
(CDN$/bbl) 53.33 - - 53.33 -
Revenue 218,499 - - 218,499 -
Operating Costs
& Royalties (838,490) (472,455) - (1,310,945) -
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Net operating
revenues (619,991) (472,455) - (1,092,446) -
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Liquidity and Capital Resources
-------------------------------
As at June 30, 2009 the Company had working capital of $14.3 million and no debt
On June 23, 2009 the Company completed a private placement equity offering, issuing a total of 21,109,000 units ("Units"), at a price of $0.55 per Unit for gross proceeds of approximately $11.6 million. Each Unit consists of one common share and half of one common share purchase warrant. Each full warrant entitles the holder to acquire one common share at an exercise price of $0.75 per share until December 23, 2010.
The 2009 capital budget includes $5.5 million of drilling capital. The Company will spend $3.0 to $3.5 million of the drilling budget on between nine and eleven delineation wells in the Red Earth area. The remaining drilling capital will be allocated to other exploration locations to be determined during the third and fourth quarters. This drilling budget will fully satisfy the Company's flow-through commitment prior to year end. The budget also allocates capital to advance the commercial application to the ERCB for a 3,000 bbl/d expansion to the Pilot on the Company's Red Earth lands; the application should be ready for submission early 2010. Current working capital is sufficient to fund this capital budget, pilot operations and G&A for 2009/2010.
As at June 30, 2009, the payments due under the office lease commitment are as follows:
(Cdn $)
-------------------------------------------------------------------------
2009 96,432
2010 192,864
2011 192,864
Thereafter Nil
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On January 1, 2009 the Company entered into a new lease agreement for a larger office for $192,864 per year. The new lease will expire December 31, 2011.
As at June 30, 2009 the Company had a flow through share commitment of $6 million which is to be spent on Canadian Exploration Expenditures ("CEE") prior to December 31, 2009. As at June 30, 2009 the Company had spent approximately $542,621 on CEE towards this commitment.
Capital Expenditures
Six months ended
2009 2008 June 30,
----------------------------------------------------
Q2 Q1 Q2 2009 2008
-------------------------------------------------------------------------
Land & Lease Rentals 8,512 74,984 19,880 83,496 140,615
Drilling and
Completion 262,144 204,157 42,216 466,301 3,580,953
Geological Costs 41,845 14,626 15,906 56,471 56,299
Pilot Facilities
Construction,
equipment and
engineering 691,392 3,253,691 2,895,907 3,945,083 3,084,396
Capitalized plant
overhead and
operations 619,991 472,455 - 1,092,446 -
Other 181,311 191,035 64,730 372,346 92,043
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Total 1,805,195 4,210,948 3,038,639 6,016,143 6,954,306
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The Company is a development stage enterprise and therefore capitalizes net revenue and depreciation until the Company commences its planned commercial operations. The Company has capitalized $1,092,446 of net revenue for the six months ended June 30, 2009 related to pilot operations.
Capitalized stock-based compensation and asset retirement obligation additions are not included in the above table.
Additional Disclosure for Venture Issuers without Significant Revenues
----------------------------------------------------------------------
The Company has no expensed exploration or research and development costs. Capitalized exploration costs are related to the purchase of oil sands leases, the drilling of 17 delineation wells and the related geological assessments. Capitalized development costs relate to the construction of the Company's CSS pilot project and the drilling of two horizontal production wells.
Share Capitalization
--------------------
The following table shows the common shares, stock options, purchase
warrants and performance warrants issued and outstanding at June 30, 2009:
June 30, 2009
-------------------------------------------------------------------------
Common shares outstanding 76,179,800
Weighted average number of shares outstanding
during the period 55,887,170
Stock options outstanding 6,065,000
Performance warrants outstanding 6,300,000
$0.75 Warrants outstanding 10,554,500
$2.00 Warrants outstanding 6,666,650
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-------------------------------------------------------------------------
As at August 26, 2009, there were no changes to the amounts in the above
table.
Off Balance Sheet Arrangements
------------------------------
There were no off balance sheet arrangements, other than the office lease
commitment.
Transactions with Related Parties
---------------------------------
As at June 30, 2009, the Company accrued legal costs of $125,000 payable
to a firm in which a director is a partner. These costs were for general legal
services and legal work for the equity financing in June 2009.
Critical Accounting Estimates
-----------------------------
The preparation of financial statements requires the Company to make judgements, assumptions and estimates in the application of generally accepted accounting principles that have a significant impact on the financial results of the Company. Actual results could differ from those estimates.
Impairment of Property and Equipment
Property costs are reviewed at least annually to consider whether there are conditions that may indicate impairment. The carrying values of petroleum and natural gas properties are compared to their net recoverable amount as estimated by quantifiable evidence of the market value of similar assets or geological resources. If the carrying value is found to exceed the estimated net recoverable amount a write down will be recorded.
Asset Retirement Obligations
The Company is required to provide for future removal and restoration costs. The Company must estimate these costs in accordance with existing laws, contracts or other policies. The fair value of the liability for the Company's asset retirement obligations is recorded in the period in which it is expected to be incurred, discounted to its present value using the Company's risk-adjusted interest rate and expected inflation rate. The offset to the liability is recorded in the carrying amount of property and equipment. The liability amount is increased each reporting period due to the passage of time and the amount of accretion is charged to earnings in the period. Revisions to the estimated timing of cash flows or to the original estimated undiscounted cost could also result in an increase or decrease to the obligation. Actual costs incurred upon settlement of the retirement obligation are charged against the obligation to the extent of the liability recorded.
Income Tax Accounting
The determination of the Company's income and other tax liabilities requires interpretation of complex laws and regulations. All tax filings are subject to audit and potential reassessment after the lapse of considerable time.
Stock-Based Compensation
The Company uses the fair value method for valuing stock option grants. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. This model requires the Company's management to make estimates and assumptions for the following: dividend yield; expected volatility and risk-free rate. A zero dividend yield is used as the Company does not pay dividends; the volatility is a calculation based on a peer company comparison because of our lack of trading history and the risk-free rate is obtained from the Bank of Canada.
Changes in Accounting Policies (including initial adoption)
-----------------------------------------------------------
The International Accounting Standards Board ("IASB") has issued an amendment to IFRS 1"Additional Exemptions for First-time Adopters". Included in the amendment issued in July 2009 by the IASB are transition exemptions for oil and gas companies following full cost accounting. The transition exemptions allow full cost companies to allocate their existing full cost PP&E balances using reserve values or volumes to IFRS compliant units of account without requiring retroactive adjustment, subject to an initial impairment test. The Company intends to adopt the transition exemptions.
Financial Instruments and Other Instruments
-------------------------------------------
The Company's carrying value of cash and cash equivalents, accounts
receivable and accounts payable and accruals approximates its fair value due
to the immediate or short-term maturity of these instruments.
Risks and Uncertainties
-----------------------
North Peace is exposed to operational and regulatory risks and uncertainties in the normal course of business that can influence its future financial performance. A summary of certain of these risks is set out below under "Forward-Looking Statements". Readers are cautioned that these descriptions are not exhaustive. Certain additional risks and uncertainties are discussed below.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are 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 recent downturn in the capital markets may limit the Company's ability to raise the capital necessary to undertake or complete projects capital expenditures after 2010 if the capital market conditions do not improve. If debt or equity financing is available, there is no assurance that it will be on terms acceptable to the Company.
The Company prepares periodic capital expenditure budgets, which are regularly monitored and updated as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. The Company does not have a credit facility.
Capital Markets
Based on the current working capital balance the Company currently has sufficient capital to fund corporate and operational expenses until the end of 2010. However, the recent downturn in the capital markets may limit the Company's ability to raise the capital necessary to undertake expanded operations after 2010 if the capital market conditions do not improve. If debt or equity financing is available, there is no assurance that it will be on terms acceptable to the Company. The Company has flexibility in timing future capital expenditures related to commercial development and will investigate all options to obtain the required funds to grow the Company.
Oil & Gas Prices
World prices for crude oil and natural gas have decreased significantly. The Company's CSS pilot project will continue to operate notwithstanding the prevailing commodity price environment as its purpose is to validate the economic and technical parameters of the commercial project.
Crude oil prices, while a significant factor, are one of many factors in the Company's decision to advance a commercial project. The Company will monitor commodity prices as it is evaluating production performance data from the pilot project. The Company will utilize this data and then current and anticipated crude oil and natural gas prices in evaluating the feasibility of a commercial project.
New Alberta Royalty Regime
The Province of Alberta implemented the new Royalty Framework ("NRF") on January 1, 2009. In the current pricing environment, the implementation of the NRF is not materially adverse to the economics of the Company's proposed commercial project. As the commodity price increases, the payments made to the Province of Alberta under the NRF increase, however, this is partially offset as the economics of the commercial project also improve with increased commodity prices.
Project and Company Outlook
---------------------------
During the first half of 2009 the Company was focused on pilot operations. The data collected from the pilot will be used in evaluating the feasibility of future commercial operations. Data will be collected continuously over the life of the pilot horizontal wells and used to design future commercial development.
In the second half of 2009, the Company will spend $3.0 to $3.5 million of the drilling budget on between nine and eleven delineation wells in the Red Earth area. $2.0 to $2.5 million of drilling capital will be allocated to other exploration locations to be determined during the third and fourth quarter. The Company is also investigating the possibility of adding additional development horizontal wells to the existing pilot. The decision to drill these additional wells will be based on the remaining capacity of the pilot facilities, the economic returns from the wells and obtaining the required regulatory approvals. Capital has also been allocated to advance the front-end engineering work and the regulatory approval process for a 3,000 bbl/d pilot expansion. With the current economic conditions, the 3,000 bbl/d expansion is considered to be a more economically attractive option than proceeding with the development of a 10,000 bbl/d first phase commercial project. However the 3,000 bbl/d option will still require improvements in the current commodity price environment to generate sufficient returns to justify the up-front construction costs. Cash flow from the 3,000 bbl/d expansion can then be used to fund additional commercial phases.
International Financial Reporting Standards ("IFRS")
----------------------------------------------------
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that the changeover to IFRS from Canadian GAAP will be required for publicly accountable enterprises effective for the interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. The International Accounting Standards Board ("IASB") issued an amendment to IFRS 1 "Additional Exemptions for First-time Adopters" in July 2009 for oil and gas companies following full cost accounting. This amendment will enable an entity to measure exploration and evaluation assets at the amount determined under the entity's previous accounting principles and it also provides for the measurement of oil and gas assets in the development or production phase, among other things, by allocating the amount determined by the entity's previous accounting principles to the underlying assets on a pro rata basis using reserve volumes or reserve values at the date of transition. The Canadian Securities Administrators ("CSA") has also issued Concept Paper 52-402, which requested feedback on the early adoption of IFRS as well as the use of US GAAP by domestic issuers.
The transition from current Canadian GAAP to IFRS is a significant undertaking that may materially affect the Company's reported financial position and results of operations.
The Company has not completed development of its IFRS changeover plan, which will include project structure governance, resourcing and training, analysis of key GAAP differences and a phase plan to assess accounting policies under IFRS as well as potential IFRS 1 ("First Time Adoption of IFRS") exemptions. The Company will complete its project scoping, which will include a timetable for assessing the impact on data systems, internal controls over financial reporting and business activities, such as financing and compensation arrangements in the fourth quarter of 2009.
Discovered Petroleum Initially-In-Place
---------------------------------------
Discovered Petroleum Initially-In-Place (equivalent to Discovered Resources) is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of Discovered Petroleum Initially-In-Place includes production, reserves, and contingent resources. There is no certainty that the Discovered Petroleum Initially-In-Place will ever be produced.
Forward-Looking Statements
--------------------------
Certain statements contained in this MD&A constitute forward-looking statements that 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.
In particular, this MD&A contains forward-looking statements pertaining, directly or indirectly, to the following: business and operations strategies including the operations at North Peace's pilot project and potential commencement of a subsequent commercial project.
The forward-looking statements contained in this MD&A are based on a number of expectations and assumptions that may prove to be incorrect. In addition to other assumptions identified in this MD&A, assumptions have been made regarding, among other things: that North Peace will continue to conduct its operations in a manner consistent with past operations; the continuance of existing (and in certain circumstances, proposed) tax and royalty regimes; the general continuance of current industry conditions; the accuracy of the estimates of North Peace's resource volumes; the ability of North Peace to obtain equipment, services and supplies in a timely manner and within budget to carry out its activities; the timely receipt of required regulatory approvals; the ability of North Peace to obtain financing on acceptable terms; future oil and gas prices and future cost assumptions.
No assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. Actual results could differ materially as a result of changes in North Peace's plans, changes in commodity prices, regulatory changes, general economic, market and business conditions as well as production, development and operating performance and other risks associated with oil and gas operations including anticipated success of resource prospects and the expected characteristics of resource prospects; anticipated capital requirements, project rates of return and estimated project life; estimates of original discovered resource; estimates of recovery factors; lack of diversification; and overall technical and economic feasibility of the Company's project. These statements speak only as of the date of this MD&A or as of the date specified in the documents accompanying this MD&A, as the case may be.
The Company undertakes no obligation to publicly update or revise any forward-looking statements except as expressly required by applicable securities laws.
North Peace Energy Corp.
(A Development Stage Company)
Balance Sheets, as at
(unaudited)
-------------------------------------------------------------------------
June 30, December 31,
2009 2008
(Cdn $)
-------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents (note 4) $ 14,828,094 $ 18,119,752
Accounts receivable 431,180 922,537
Prepaid expenses 37,170 86,290
-------------------------------------------------------------------------
15,296,444 19,128,579
Oil and gas properties (note 5) 60,994,347 54,875,482
Other assets 45,105 48,097
Future income tax asset - 557,477
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$ 76,335,896 $ 74,609,635
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Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accruals $ 949,856 $ 8,788,438
Asset retirement obligations (note 6) 519,771 442,303
Future income tax liability 584,520 -
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2,054,147 9,230,741
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Shareholders' equity
Equity Instruments (note 7) 76,657,353 67,158,445
Contributed surplus (note 8) 3,571,618 2,813,922
Deficit (5,947,222) (4,593,473)
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74,281,749 65,378,894
-------------------------------------------------------------------------
$ 76,335,896 $ 74,609,635
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Future Operations (note 1)
Commitments (note 10)
Signed on behalf of the Board:
"Ian Robertson", Director
"Don Garner", Director
North Peace Energy Corp.
(A Development Stage Company)
Statements of Loss, Comprehensive Loss and Deficit
(unaudited)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue
Interest Income $ 4,099 $ 39,045 $ 30,851 $ 126,950
-------------------------------------------------------------------------
4,099 39,045 30,851 126,950
-------------------------------------------------------------------------
Operating expenses
General and
administrative 504,685 365,118 943,120 676,001
Stock-based
compensation 294,031 150,651 598,901 317,027
Depletion,
depreciation and
accretion 17,780 10,200 35,522 20,136
-------------------------------------------------------------------------
816,496 525,969 1,577,543 1,013,164
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Net Loss before
taxes $ 812,397 $ 486,924 $ 1,546,692 $ 886,214
Future Income Tax
reduction (117,028) - (192,943) -
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Net Loss and
Comprehensive Loss 695,369 486,924 1,353,749 886,214
Deficit at
beginning of period 5,251,853 3,504,466 4,593,473 3,105,176
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Deficit at end of
period $ 5,947,222 $ 3,991,390 $ 5,947,222 $ 3,991,390
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Net Loss per share
(note 11)
Basic and
Diluted $ 0.012 $ 0.013 $ 0.024 $ 0.023
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North Peace Energy Corp.
(A Development Stage Company)
Statements of Cash Flows
(unaudited)
-------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2009 2008 2009 2008
-------------------------------------------------------------------------
Cash provided by
(used in):
Operating
Activities
Net Loss $ (695,369) $ (486,924) $ (1,353,749) $ (886,214)
Non-cash charges
to earnings
Depletion,
depreciation
and accretion 17,780 10,200 35,522 20,136
Stock-based
compensation 294,031 150,651 598,901 317,027
Future income
tax reduction (117,028) - (192,943) -
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(500,586) (326,073) (912,269) (549,051)
Net change in non
cash working
capital
Accounts
receivable 146,579 204,557 525,281 210,471
Prepaid expenses 24,589 (13,479) 49,120 (1,243)
Accounts payable
and accruals 27,014 14,332 (99,933) (76,636)
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(302,404) (120,663) (437,801) (416,459)
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Investing Activities
Additions to oil
and gas
properties (1,701,824) (3,038,639) (5,850,535) (6,954,306)
Other assets - (3,537) (11,919) (8,512)
Net change in non
cash working capital
Accounts
receivable (229,424) (52,600) (33,924) (124,049)
Accounts payable
and accruals (582,571) 809,039 (7,825,254) 2,006,311
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(2,513,819) (2,285,737) (13,721,632) (5,080,556)
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Financing Activities
Proceeds on issue
of common shares,
net of share issue
costs 10,782,430 50,500 10,781,170 50,500
Net change in
non cash working
capital
Accounts payable
and accruals 86,605 - 86,605 -
-------------------------------------------------------------------------
10,869,035 50,500 10,867,775 50,500
-------------------------------------------------------------------------
Increase (Decrease)
in cash and cash
equivalents 8,052,812 (2,355,900) (3,291,658) (5,446,515)
Cash and cash
equivalents,
beginning of
period 6,775,282 6,873,778 18,119,752 9,964,393
-------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 14,828,094 $ 4,517,878 $ 14,828,094 $ 4,517,878
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental
disclosure:
Interest
received $ 49,396 $ 246,413 $ 150,673 $ 308,551
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North Peace Energy Corp.
(A Development Stage Company)
Notes to Financial Statements
As at and for the periods ended June 30, 2009 and 2008 (unaudited)
-------------------------------------------------------------------------
1. Nature of operation and future operations
North Peace Energy Corp. (the "Company" or "North Peace") resulted
from the amalgamation of Juno Capital Corp. and North Peace Energy
Inc. pursuant to the provisions of the Business Corporations Act
(Alberta) on February 6, 2007. The Company's principal business
activity is the exploration, exploitation and development and
production of petroleum and natural gas resources in the Province of
Alberta.
North Peace is a development stage enterprise whose principle focus
is the creation of shareholder value through the production of heavy
oil from its oil sands leases at its Red Earth project. Production
from its pilot project has commenced in the first half of 2009,
however production of commercial quantities is not expected for two
to three years.
The Company's Red Earth project contains a 100% working interest in
86,400 acres of Crown oil sands leases in the Peace River area. The
target geological zone is the Bluesky formation which is a regional
sand, deposited in a near shore marine environment at approximately
400 metres depth. North Peace is currently advancing the development
of its resource using Cyclic Steam Stimulation ("CSS"). A pilot
project consisting initially of two horizontal CSS wells has been
built and the facility is currently operating.
These financial statements are prepared on the assumption that the
Company will continue as a going concern and realize its assets and
discharge its liabilities in the normal course of business. If the
going concern assumption was not appropriate for these financial
statements, adjustments might be necessary to the carrying value of
assets and liabilities, the reported revenues and expenses and the
balance sheet classifications used.
The recoverability of the amounts shown for petroleum and natural gas
assets is dependent upon the discovery of economically recoverable
oil and gas resources and the ability of the Company to obtain
financing necessary to complete the exploration and development and
the success of future operations. Recent market events, including
disruption of credit markets and other financial systems and the
deterioration of global economic conditions have resulted in
significant declines in commodity prices and made completing
financings more difficult. As at June 30, 2009 the Company had
working capital of $14.3 million and no debt. The Company has a flow
through commitment of $6 million to be spent on Canadian Exploration
Expenditures ("CEE") prior to December 31, 2009. As at June 30, 2009
the Company had spent $542,621 towards this commitment. The Company
has sufficient working capital to satisfy its flow through
commitment.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they are 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 recent downturn in the capital markets may limit the Company's
ability to raise the capital necessary to undertake commercial
development capital expenditures after 2010 if the capital market
conditions do not improve. If debt or equity financing is available,
there is no assurance that it will be on terms acceptable to the
Company.
The Company prepares periodic capital expenditure budgets, which are
regularly monitored and updated as considered necessary. Further, the
Company utilizes authorizations for expenditures on both operated and
non-operated projects to further manage capital expenditures. The
Company does not have a credit facility.
2. Adoption of new accounting policies
The International Accounting Standards Board ("IASB") has issued an
amendment to IFRS 1 "Additional Exemptions for First-time Adopters".
Included in the amendment issued in July 2009 by the IASB are
transition exemptions for oil and gas companies following full cost
accounting. The transition exemptions allow full cost companies to
allocate their existing full cost PP&E balances using reserve values
or volumes to IFRS compliant units of account without requiring
retroactive adjustment, subject to an initial impairment test. The
Company intends to adopt the transition exemptions.
The Company is currently assessing which accounting policies will be
affected by the change to IFRS and the potential impact of these
changes on its financial position and results of operations.
3. Basis of presentation
These interim financial statements have been prepared following the
same accounting policies and methods used in the financial statements
for the year ended December 31, 2008 except as noted. These financial
statements should be read in conjunction with the audited year-end
financial statements for North Peace Energy Corp.
4. Cash and cash equivalents
Included in cash and cash equivalents is a redeemable term variable
rate deposit totaling $13.5 million which currently bears interest at
0.25 % and matures on August 7, 2009. The term deposits are fully
redeemable, without penalty, 30 days after the date of investment and
therefore classified as cash and cash equivalents.
5. Oil and gas properties
June 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Oil and gas interests $ 42,969,406 $ 42,442,785
Pilot Project
Equipment and construction 16,415,000 12,432,697
Startup costs 195,000 -
Capitalized operations 1,414,941 -
---------------------------------------------------------------------
$ 60,994,347 $ 54,875,482
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company is advancing a Cyclic Steam Stimulation ("CSS") project
on its land holdings. A pilot project consisting initially of two
horizontal CSS wells has been built and is currently operating. At
June 30, 2009, the Company has no reserves or commercial production.
Accordingly, no provision for depletion expense has been made.
Stock-based compensation for consultants of $158,795 was capitalized
during the six months ended June 30, 2009 (2008 - $93,864 recovery).
Deposits with the Energy Resources and Conservation Board of $495,382
(2008 - $126,782) were included in oil and gas properties as at June
30, 2009.
6. Asset retirement obligations
The following table represents the reconciliation of the carrying
amount of the obligation associated with the retirement of the
Company's petroleum and gas interests.
June 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Asset retirement obligations, beginning
of period $ 442,303 $ 215,820
Additions 64,507 212,296
Accretion 20,611 17,120
Change in estimates (7,650) (2,933)
---------------------------------------------------------------------
Asset retirement obligations, end
of period $ 519,771 $ 442,303
---------------------------------------------------------------------
---------------------------------------------------------------------
The total undiscounted amount of cash flows required to settle the
obligations as measured at June 30, 2009 is estimated to be
$1,273,466 (2008 - $1,121,365). These obligations will be settled
based on the useful lives of the underlying assets, which ranges from
one to ten years. The credit-adjusted risk free rate at which the
estimated cash flows were discounted was 8 - 10% (2008 - 8%) and the
estimated inflation rate used to project future costs was 2% (2008 -
2%).
7. Share Capital
(a) Authorized
Unlimited number of common shares
Unlimited number of first preferred shares issuable in series
Unlimited number of second preferred shares issuable in series
(b) Issued
Number
of Shares Amount
---------------------------------------------------------------------
Common Shares
Balance December 31, 2007 38,050,640 $ 42,037,961
Tax effect on previously incurred share
issue costs - 364,971
Stock Options exercised 50,500 50,500
Equity financing (i) 16,969,660 22,999,951
Share issue costs (ii) - (1,774,667)
Tax effect of share issue costs - 479,736
---------------------------------------------------------------------
Balance December 31, 2008 55,070,800 $ 64,158,452
Equity financing (iii) 21,109,000 9,393,505
Share issue costs (iv) - (828,780)
Tax effect of share issue costs - 217,738
Tax effect of flow through shares - (1,500,000)
---------------------------------------------------------------------
Balance June 30, 2009 76,179,800 $ 71,440,915
Number
of Warrants Amount
$0.75 Share Purchase Warrants
Balance December 31, 2008 - $ -
Equity financing (iii) 10,554,500 2,216,445
---------------------------------------------------------------------
Balance June 30, 2009 10,554,500 2,216,445
$2.00 Share Purchase Warrants
Balance December 31, 2007 - $ -
Equity financing (i) 6,666,650 2,999,993
---------------------------------------------------------------------
Balance December 31, 2008 and June 30, 2009 6,666,650 $ 2,999,993
Total Equity Instruments $ 76,657,353
---------------------------------------------------------------------
---------------------------------------------------------------------
i. On August 7, 2008 the Company completed a private placement
equity offering, issuing a total of 13,333,300 units
("Units"), at a price of $1.50 per Unit and 3,636,360 flow-
through common shares ("Flow-Through Shares"), at a price of
$1.65 per Flow-Through Share for gross proceeds of
approximately $26 million. Each Unit consists of one common
share and half of one common share purchase warrant. Each
full warrant entitles the holder to acquire one common share
at an exercise price of $2.00 per share until February 7,
2010.
The fair value of the warrants is $0.45 per warrant assuming
a volatility of 80% on the underlying shares, a risk-free
interest rate of 2.75%, an expected life of 1.5 years and an
expected dividend rate of 0%.
ii. Share issue costs relate to the costs incurred for the
equity issuance on August 7, 2008.
iii. On June 23, 2009 the Company completed a private placement
equity offering, issuing a total of 21,109,000 units
("Units"), at a price of $0.55 per Unit for gross proceeds
of approximately $11.6 million. Each Unit consists of one
common share and half of one common share purchase warrant.
Each full warrant entitles the holder to acquire one common
share at an exercise price of $0.75 per share until December
23, 2010.
The fair value of the warrants is $0.21 per warrant assuming
a volatility of 80% on the underlying shares, a risk-free
interest rate of 2.23%, an expected life of 1.5 years and an
expected dividend rate of 0%.
iv. Share issue costs relate to the costs incurred for the
equity issuance on June 23, 2009
(c) Stock options
Changes in the number of shares issuable under outstanding options
were as follows:
Weighted
Range of Average
Number Exercise Exercise
of options Prices Price
---------------------------------------------------------------------
Balance, December 31, 2007 2,280,500 $ 1.00 - 2.62 $ 1.43
Options exercised (50,500) 1.00 1.00
Options granted 1,830,000 1.18 - 1.50 1.46
---------------------------------------------------------------------
Balance, December 31, 2008 4,060,000 $ 1.00 - 2.62 $ 1.45
Options granted 2,455,000 0.28 - 0.55 0.54
Options forfeited (450,000) 1.00 - 1.50 1.17
---------------------------------------------------------------------
Balance, June 30, 2009 6,065,000 $ 0.28 - 2.62 $ 1.10
---------------------------------------------------------------------
---------------------------------------------------------------------
The average fair value of the options granted during 2009 was $0.33
per option (2008 - $0.82) assuming an average volatility of 80% (2008
- 80%) on the underlying shares, a weighted average exercise price of
$0.54 (2008 - $1.46), a risk-free interest rate of 2.11% - 2.23%
(2007 - 2.81% - 3.35%), an expected life of 4 years (2008 - 4 years),
and an expected dividend rate of 0% (2008 - 0%).
Stock options issued to employees vest 1/3 per year on the first,
second and third anniversary of the date of the grant. Options issued
to consultants vest at equal amounts at 6 months, 18 months and 30
months after the date of grant. All options expire 5 years after the
initial grant date.
The Company has recognized stock-based compensation of $757,696
during the six months ended June 30, 2009 and $158,795 was
capitalized to oil and gas properties.
In 2008, the Company granted 1,830,000 stock options at a weighted
average exercise price of $1.46 per share to management, employees,
consultants and directors. 475,000 of the stock options granted to
management will be exercisable only when the Company's previously
announced cyclic steam pilot project demonstrates first oil
production. These options have the same vesting terms as existing
options and vest 1/3 per year on the first, second and third
anniversary of the date of the grant.
The following table sets forth information about stock options
outstanding as at June 30, 2009.
Options Outstanding Options Exercisable
Weighted Weighted
Range of Average Remaining Average
Exercise Number of Price Contractual Options Price
Price Options Per Share Life (yrs) Exercisable Per Share
---------------------------------------------------------------------
$0.28 -
$0.50 50,000 $0.28 4.64 - -
$0.51 -
$1.00 3,520,000 $0.70 2.42 756,667 $1.00
$1.01 -
$2.00 2,095,000 $1.53 3.92 165,000 $1.76
$2.00 -
$3.00 400,000 $2.62 2.92 266,667 $2.62
---------------------------------------------------------------------
6,065,000 $1.11 3.12 1,188,334 $1.47
---------------------------------------------------------------------
---------------------------------------------------------------------
(d) Performance Warrants
Number of Exercise
Warrants Price
---------------------------------------------------------------------
Balance, December 31, 2007 6,300,000 $ 0.50
---------------------------------------------------------------------
Balance, December 31, 2008 and
June 30, 2009 6,300,000 $ 0.50
---------------------------------------------------------------------
Exercisable, June 30, 2009 - $ -
---------------------------------------------------------------------
---------------------------------------------------------------------
The performance warrants may be exercised the earlier of: (a)
immediately following a liquidity event whereby the Board of the
Company determines to liquidate all or substantially all of the
assets of the Company, (b) immediately following an offer to purchase
at least 66 2/3% of the outstanding common shares for cash or similar
consideration (other than pursuant to a reverse take-over) that is
received and taken up and paid for by the offeror, or (c) December
31, 2010, otherwise they expire.
The performance warrants vest immediately if (a) or (b) above occurs,
or after the shares are listed on a recognized stock exchange and all
of the following performance criteria are satisfied; (i) the Company
has a market capitalization of at least $30,000,000; (ii) at least
32,000,000 equity shares are outstanding; and (iii) the Company meets
or exceeds the minimum listing requirements of a Tier 1 Issuer as
defined in the policies of the TSX Venture Exchange (collectively the
"Performance Criteria"). If the Performance Criteria are met, the
warrants vest as follows: 2,700,000 performance warrants upon
achieving a share price of $1.00 per share, 1,800,000 performance
warrants upon achieving a share price of $1.50 per share and
1,800,000 performance warrants upon achieving a share price of $2.00
per share. Share prices are calculated based on the ten day weighted
average trading price per share of the Company.
As at June 30, 2009 all performance criteria related to the Company
have been satisfied except the minimum listing requirements for a
Tier 1 Issuer on the TSX Venture Exchange.
The fair value of the performance warrants was estimated at
$1,466,550 using the Black-Scholes option pricing model assuming
expected volatility of 90% and an expected life of between one and
three years with corresponding risk-free rates of 4.07% to 4.16%.
During 2006, all the substantive criteria were considered probable
and the $1,466,550 was expensed.
The remaining contractual life of the outstanding and exercisable
performance warrants is 1.50 years.
8. Contributed surplus
June 30, December 31,
(Cdn $) 2009 2008
---------------------------------------------------------------------
Balance, beginning of period $ 2,813,922 $ 2,131,653
Stock-based compensation
Expensed 526,806 794,233
Capitalized 58,768 183,983
Increase/(Decrease) in fair value of
non-employee options
Expensed 72,095 (18,100)
Capitalized 100,027 (277,847)
---------------------------------------------------------------------
Balance, end of period $ 3,571,618 $ 2,813,922
---------------------------------------------------------------------
---------------------------------------------------------------------
9. Related party transactions
As at June 30, 2009, the Company accrued legal costs of $125,000
payable to a firm in which a director is a partner. These costs were
for general legal services and legal work for the equity financing in
June 2009. All related party transactions are in the normal course of
operations, related party transactions entered into by the Company
have been measured at the exchange amount established and agreed to
by the related parties.
10. Commitments
As at January 1, 2009, the Company was committed under a lease for
office premises, requiring future minimum rental payments of $192,864
per annum (2007 - $82,246), expiring December 31, 2011.
The Company has a flow through share commitment of $6 million which
is to be spent on Canadian Exploration Expenditures ("CEE") prior to
December 31, 2009. As at June 30, 2009 the Company had spent $542,621
of CEE towards this commitment.
11. Loss per Share
The following is a reconciliation of basic and diluted loss per
share.
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------
2009 2008 2009 2008
---------------------------------------------------------------------
Net loss
(Cdn $) $ (695,369) $ (486,924) $ (1,353,749) $ (886,214)
Weighted
average number
of shares
outstanding 56,694,569 38,067,473 55,887,170 38,059,057
Basic loss per
share $ 0.012 $ 0.013 $ 0.024 $ 0.023
Diluted loss
per share $ 0.012 $ 0.013 $ 0.024 $ 0.023
---------------------------------------------------------------------
---------------------------------------------------------------------
The Company is in a loss position for the period, therefore all
dilutive instruments which include stock options and performance
warrants are anti-dilutive in nature.
ContactsLouis Dufresne
President & CEO
James Glessing
Vice President
Finance & CFO
North Peace Energy Corp.
630
505 - 3rd Street SW
Calgary
Alberta
T2P 3E6
Telephone (403) 262-6024
Facsimile: (403) 262-6072
E-mail: info@northpec.com
www.northpec.com Or Stephanie K Mesher
Bryan Mills Iradesso
(403) 503-0144 ext. 216
smesher@bmir.com
