Caza Oil & Gas, Inc. ("Caza" or "the Company") (TSX:CAZ)(AIM:CAZA), the
exploration, appraisal, development and production company, is pleased to
announce the Company's final results for the year ended December 31, 2012.
2012 highlights include:
-- Annual revenues increased 22% to US$4.97 million ("MM") for the year
2012, (US$4.09MM: 2011) and quarterly revenues for the three month
period ended December 31, 2012 increased 31% to US$1.58MM (US$1.21MM for
the comparable three month period ended December 31, 2011);
-- Average production volumes for the twelve month period ended December
31, 2012, increased 19% to 285 barrels of oil equivalent ("boe") per day
("boe/d") (240 boe/d: 2011);
-- As estimated by the independent report completed by NSAI (as defined
below under Reserve Data) dated as of December 31, 2012 (all reserve
figures are net to Caza):
-- Proven (1P) reserves at December 31, 2012 increased by 3.1% to 2.42
MM boe (2.35 MMboe in 2011);
-- Proven plus Probable (2P) reserves decreased by 11.1% to 10.8 MMboe
(12.1 MMboe in 2011); and
-- Proven plus Probable plus Possible (3P) reserves to the Company
increased by 23.3% to 27.4MMboe (22.3 MMboe in 2011);
-- The NSAI Report has assigned 253 (117 as at December 31, 2011) viable
drilling locations to the Company's current leasehold position in the
Bone Spring play with total Proven plus Probable plus Possible net
reserves to the Company of 24.4 MMboe (16.7 MMboe for the 117 locations
as at December 31, 2011);
-- Notwithstanding the divestiture of the San Jacinto Property and selling
down in the Company's Copperline, Lennox and Forehand Ranch Bone Spring
properties from 100% to the current levels (58.75%; 50%; and 63%
respectively), the two wells drilled on Copperline and Forehand Ranch
(Caza Ridge 14 State #3H and Forehand Ranch 27 State Com #1H
respectively) quickly replaced and surpassed the oil and natural gas
production, cash flows and reserve figures lost with the sale of San
Jacinto. The decrease in Proven plus Probable reserves outlined above is
the result of lost Probable reserves due to selling down in the
aforementioned Bone Spring properties in order to manage risk.
Management expects these figures to continue to improve as more Bone
Spring wells are drilled, completed and brought into production in 2013;
-- Cash and cash equivalents at December 31, 2012, are US$6.8MM;
-- Entered into a GBP 6 million Standby Equity Distribution Agreement
("SEDA") and a US$12 million SEDA-backed Loan Agreement with YA Global
Master SPV Ltd., an investment fund managed by Yorkville Advisors
Global, LP ("Yorkville").
Recent Developments:
-- The Lennox State Unit 32 No. 2H horizontal well (the "Well") reached the
intended total vertical depth ("TVD") of approximately 11,850 feet
subsurface on March 12, 2013, and log data was obtained. Based on
analysis of the log data, Caza and its partners are currently drilling
the lateral section of the Well through the primary objective 3rd Bone
Spring Sand to a total measured depth ("TMD") of approximately 15,150
feet. Caza has a 40.00% working interest before payout (31.88% net
revenue interest) and a 50.00% working interest after payout (39.85% net
revenue interest) in the Well. Once TMD is reached the market will be
updated and given a full operational report on the Well.
-- The Company completed a trade on March 25, 2013 in Lea County, New
Mexico with The Blanco Company ("Blanco") to acquire a 320 acre lease
from Blanco to be called the Gateway Property. Caza Petroleum currently
has a 100% working interest (77% net revenue interest) in the property.
-- On January 15, 2013, the Company completed a working interest trade
pursuant to which Caza obtained a 20% non-operated working interest (16%
net revenue interest) in two leases operated by Occidental Petroleum
Corporation covering approximately 1,680 acres in the Bone Spring play
in exchange for a 20% non-operated working interest (15.94% net revenue
interest) in Caza's Lennox Property.
W. Michael Ford, Chief Executive Officer commented:
"We are pleased with our progress in 2012. The latter portion of the year was
particularly positive with material increases in both production and revenues.
Caza increased its production volumes by 19% and revenues by 31% in Q4 2012, as
compared to Q4 2011, with an annual increase in revenues on the prior year of
22% in 2012. Our Proven reserves also increased during the course of 2012. These
increases were the direct result of Caza's successful operations in the Bone
Spring play during the year, which remains the focus of the value creating
activities we undertake on behalf of our shareholders.
We are pleased to have entered into the SEDA and the Loan Agreement with
Yorkville. These facilities provide the Company with flexible funding options,
which currently are a cost effective arrangement for obtaining capital to
develop the Company's assets, including our inventory of Bone Spring properties.
We believe this arrangement is an efficient way to meet our short-term capital
requirements.
We were successful in divesting the San Jacinto Wolfberry property in Midland
County, Texas for $6.1MM. The proceeds were used to focus on more favorable
investment opportunities in the Company's existing Bone Spring assets, namely
Copperline, Lennox and Forehand Ranch properties. Even though Caza sold down its
percentage holding in these properties, the wells drilled at Copperline and
Forehand Ranch have already replaced and surpassed the oil and natural gas
production, cash flows and Proven reserve figures lost with the sale of San
Jacinto. We look forward to updating the market on progress made at Lennox once
our intended TMD is reached.
The Company also leveraged its existing Bone Spring assets to get into new Bone
Spring opportunities. In addition to the aforementioned properties, the Company
also has acreage in the following properties: Lynch, Forehand Ranch South, Mad
River, Azotea Mesa, Bradley 29, Two Mesas, Quail Ridge, Rover, West Rover, West
Copperline, Chaparral 33, Madera and Roja. The Company has acquired
approximately 4,100 net acres in the play to date, which represents a conscious
effort by Management to add shareholder value by investing in properties
containing multiple potential pay zones for oil and liquids-rich natural gas.
Leasing and drilling activity continues to be competitive in the play, and
initial producing well rates continue to improve with technological advances in
drilling and frac designs. The Company is well positioned in the play, and
continues to exploit opportunities to build on its current acreage position.
We made significant progress in 2012, and after laying the groundwork for
continued success in the Bone Spring play, we look forward to advancing the
Company's prospects and properties during the course of 2013."
Strategy
The Company's stated strategy is to achieve significant growth in reserves and
production through:
-- progressing material, internally generated prospects, utilizing cash
flows from existing production and exploiting Proven plus Probable
reserves; and
-- executing strategic acquisitions of assets at all stages of the
development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear set of criteria
in high-grading projects:
-- the Company seeks to retain control of project execution and timing
through the operatorship of assets;
-- assets should be close to existing established infrastructure, allowing
for quick, efficient hook-up and lower operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to
deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of west Texas and
southeast New Mexico, the most prolific oil and gas basin in North America.
Independent forecasts predict that the Permian Basin will have the greatest oil
supply growth of any North American basin over the next five years. This
provides the Company with low-risk, liquids-rich development opportunities from
many geologic reservoirs and play types. The basin also has a vast operational
infrastructure in place. The Company is utilizing recent advances in horizontal
drilling and dynamic completion technologies to unlock the significant resources
within its asset base and the region.
Management has focused efforts on building a core asset base in the prolific
Bone Spring play and has concluded that these assets represent the most
significant opportunity for the Company to deliver material production, revenue
growth and demonstrable shareholder returns within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset base within
the Bone Springs play will not only grow the Company but will also make it more
resilient to any single project risk.
The Company has now identified over 253 drilling locations in the Bone Spring
play according to the NSAI Report. Management believes that the Company is
well-positioned with approximately 4,100 net acres in the play and continues to
actively monitor opportunities to build on Caza's current acreage position.
The Company's Bone Spring leases are mostly State and Federal leases with
primary terms between 5-10 years. In terms of obligations and commitments, one
producing well will hold each lease in its entirety.
Financing
The Company's near term intention is to continue to participate in 3 to 4 wells
per annum funded from production revenues, existing cash resources and currently
available financing. However, management believes that accelerating and
expanding this drilling program will significantly increase both production and
cash flows, which will optimize the work program and drive economies of scale.
In this regard, the Company and its advisers have been actively considering
alternative sources of capital, including a review of possible joint-venture and
strategic financing partner options and other debt instruments, which will
provide the Company with sufficient leverage and capital to adequately exploit
the opportunity but mitigate material equity dilution during the "value
accretion" drilling phase.
Outlook
Subject to the availability of appropriate financing, the Company's objective is
to embark on an accelerated and expanded drilling program in the Bone Spring
play over the next two years. Management believes that such a program has the
capacity to increase shareholder value significantly over the period. A program
of this type will initially require additional financing of the nature referred
to above but would utilize excess operational cash flow to fund further
development drilling and lease purchases beyond the initial two year period.
Management believes that such a program can be accomplished by exploiting the
Company's existing asset/lease inventory with minimal equity dilution to
existing shareholders. However, if appropriate, Management will also seek to
identify corporate and asset acquisitions, which will enable the Company to
increase its position in the Bone Spring play. Accordingly, in line with the
Company's stated strategy, Management's goal is to achieve significant growth in
the Company's reserves and production, thereby raising the Company's profile in
the basin and allowing shareholder value to be maximized and, if appropriate,
fully matured over the short-to-medium term.
Net Reserve Figures by Category:
Caza reported an increase in Proven (1P) reserves at year end 2012 to 2.42 MMboe
or an increase of 3.1%; Proven plus Probable (2P) reserves decreased at year end
2012 to 10.8 MMboe or a decrease of 11.1%; Proven plus Probable plus Possible
(3P) reserves increased at year end 2012 to 27.4 MMboe or an increase of 23.3%
(as depicted in the table below).
Net Reserve Data:
Totals may not add because of rounding. Mbbl, MMcf and Mboe refer to
thousand barrels, million cubic feet and thousand boe, respectively.
----------------------------------------------------------------------------
2012 2011
----------------------------------------------------------------------------
Mbbl MMcf Mboe Mbbl MMcf Mboe
----------------------------------------------------------------------------
Proven Developed
Producing 169.4 906.7 320.5 175.6 1,950.1 500.6
----------------------------------------------------------------------------
Non-Producing 106.5 421.9 176.8 90.0 349.1 148.2
----------------------------------------------------------------------------
Undeveloped 1,131.6 4,774.3 1,927.3 1,007.7 4,170.3 1,702.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven 1,407.6 6,102.9 2,424.8 1,273.4 6,469.5 2,351.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Probable 4,274.3 24,464.3 8,351.7 5,766.8 24,034.6 9,772.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven +
Probable 5,681.8 30,567.2 10,776.3 7,040.2 30,504.1 12,124.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Possible 8,574.4 48,577.5 16,670.7 5,289.8 29,062.0 10,133.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total Proven +
Probable +
Possible 14,256.2 79,144.7 27,447.0 12,329.9 59,566.0 22,257.6
----------------------------------------------------------------------------
Present value cash flows of Caza's estimated net Proven and Probable reserves as
at December 31, 2012 were as follows:
Present value cash flow, net Proven plus Probable
reserves: PV 10% before PV 10% after
income taxes income taxes
(US$MM) (US$MM)
74,789 48,587
The reserves data set out in this announcement (including in the above tables)
have been extracted from the NSAI Report and are disclosed, together with
additional information relating to the Company's reserves and properties, in the
Company's Annual Information Form for the year ending December 31, 2012 (to be
filed on SEDAR at www.sedar.com). The evaluation of the reserves data included
in the Annual Information Form and in the NSAI Report complies with standards
set out in the Canadian Oil and Gas Evaluation Handbook prepared jointly by the
Society of Petroleum Evaluation Engineers (Calgary Chapter) and the Canadian
Institute of Mining, Metallurgy & Petroleum (Petroleum Society). References to
the NSAI Report are to the report prepared on the Company's reserves by
Netherland, Sewell & Associates, Inc. as of December 31, 2012, and entitled
"Estimates of Reserves and Future Revenue to the Caza Petroleum, Inc. Interest
in Certain Oil and Gas Properties Located in Louisiana, New Mexico, and Texas as
of December 31, 2012".
About Caza
Caza is engaged in the acquisition, exploration, development and production of
hydrocarbons in the following regions of the United States of America through
its subsidiary, Caza Petroleum, Inc.: Permian Basin (West Texas and Southeast
New Mexico) and Texas and Louisiana Gulf Coast (on-shore).
In accordance with AIM Rules - Guidance Note for Mining, Oil and Gas Companies,
the information contained in this announcement has been reviewed and approved by
Anthony B. Sam, Vice President Operations of Caza who is a Petroleum Engineer
and a member of The Society of Petroleum Engineers.
Copies of the Company's financial statements for the year ended December 31,
2012, the accompanying management's discussion and analysis and the Company's
Annual Information Form for the year ended December 31, 2012 (which contains
further information about the Company, its principal properties and its crude
oil and natural gas reserves), will be available on SEDAR at www.sedar.com and
the Company's website at www.cazapetro.com. The Company's financial statements
have been in accordance with Canadian generally acceptable accounting principles
applicable to publicly accountable enterprises. All dollar amounts disclosed in
this press release are disclosed in United States dollars.
ADVISORY STATEMENT
Information in this news release that is not current or historical factual
information may constitute forward-looking statements within the meaning of
securities laws. Such information is often, but not always, identified by the
use of words such as "seek", "anticipate", "plan", "continue", "estimate",
"expect", "may", "will", "project", "predict", "potential", "targeting",
"intend", "could", "might", "should", "believe" and similar expressions.
Information regarding future exploration, development and drilling activities
(including the timing and scope thereof), the availability, sources, use and
sufficiency of funding or capital, the ability to expand and accelerate the
Company's drilling programs and the results thereof, the ability to increase
shareholder value, future dilution and the ability to mitigate same, the
implementation and impact of the Company's strategy, geologic and seismic
interpretation, joint venture relationships, ability to generate projects,
strategic acquisitions and Caza's ability to execute its strategic plan
contained in this news release constitutes forward-looking information within
the meaning of securities laws. Statements relating to "reserves" are deemed to
be forward-looking statements, as they involve the implied assessment, based on
certain estimates and assumptions, that the resources and reserves described can
be profitably produced in the future. Disclosure related to targeted internal
rates of return and internal modeling are disclosed to further an understanding
of the Company's strategies and are not projections or forecasts. Actual rates
of return are likely to differ materially.
Implicit in this information, particularly in respect of production are
assumptions regarding projected revenue and expenses, the performance of wells,
drilling and operating results, availability of funds, asset dispositions and
the ability to secure joint venture partners and internally generate projects.
These assumptions, although considered reasonable by the Company at the time of
preparation, may prove to be incorrect. Readers are cautioned that actual future
operating results and economic performance of the Company are subject to a
number of risks and uncertainties, including general mechanical, economic,
market and business conditions and could differ materially from what is
currently expected as set out above. Production disclosed in this press release
is at December 31, 2012. Future production may vary, perhaps materially.
For more exhaustive information on these risks and uncertainties you should
refer to the Company's most recently filed Annual Information Form filed on
SEDAR at www.sedar.com. You should not place undue importance on forward-looking
information and should not rely upon this information as of any other date.
While we may elect to, we are under no obligation and do not undertake to update
this information at any particular time, except as required by applicable
securities laws.
The estimates of reserves and future net revenue for individual properties may
not reflect the same confidence level as estimates of reserves and future net
revenue for all properties, due to the effects of aggregation.
The term boe may be misleading, particularly if used in isolation. A boe
conversion of six thousand cubic feet per one barrel is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the well head.
Statements in this news release relating to net present value or future net
revenue do not represent fair market value.
Management's Report to Shareholders
Management has prepared the accompanying consolidated financial statements of
Caza Oil & Gas, Inc. in accordance with International Financial Reporting
Standards.
Management is responsible for the integrity and objectivity of the financial
statements. Where necessary, the financial statements include estimates, which
are based on management's informed judgments. Management has established systems
of internal control that are designed to provide reasonable assurance that
assets are safeguarded from loss or unauthorized use and to produce reliable
accounting records for financial reporting purposes.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. It exercises its
responsibilities primarily through the Audit Committee. The Audit Committee
meets periodically with management and the external auditors to satisfy itself
that management's responsibilities are properly discharged, to review the
consolidated financial statements and to recommend that the consolidated
financial statements be presented to the Board of Directors for approval.
Deloitte LLP has audited the consolidated financial statements in accordance
with Canadian generally accepted auditing standards to enable them to express an
opinion on the fairness of the consolidated financial statements.
(signed) "William M. Ford"
Chief Executive Officer and Director
March 26, 2013
(signed) "James M. Markgraf"
Chief Financial Officer
March 26, 2013
Independent Auditor's Report
To the Shareholders of Caza Oil & Gas, Inc.
We have audited the accompanying consolidated financial statements of Caza Oil &
Gas, Inc. which comprise the consolidated statements of financial position as at
December 31, 2012 and 2011 and the consolidated statements of net loss and
comprehensive loss, consolidated statements of cash flows and the consolidated
statements of changes in equity for the years then ended, and the notes to the
consolidated financial statements.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these
consolidated financial statements in accordance with International Financial
Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those standards require that we
comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the consolidated financial statements in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient
and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of Caza Oil & Gas, Inc. and
subsidiaries as at December 31, 2012 and 2011 and its financial performance and
its cash flows for the years then ended in accordance with International
Financial Reporting Standards.
(signed) "Deloitte LLP"
Chartered Accountants
Calgary, Alberta
March 26, 2013
Caza Oil & Gas, Inc.
Consolidated Statements of Financial Position
(In United States Dollars)
As at December 31, 2012 2011
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents (Note 10(c)) $ 6,809,640 $ 10,204,176
Accounts receivable 3,854,146 3,680,998
Prepaid and other 368,745 312,704
--------------------------------
11,032,531 14,197,878
Other assets 98,336 -
Exploration and evaluation assets (Note 3) 10,085,746 4,941,256
Petroleum and natural gas properties and
equipment (Note 4) 20,552,077 29,419,741
--------------------------------
$ 41,768,690 $ 48,558,875
--------------------------------
--------------------------------
Liabilities
Current
Accounts payable and accrued Liabilities $ 8,645,896 $ 5,352,445
Notes payable (Note 14) 1,941,476 -
Decommissioning liabilities (Note 5) 210,696 -
--------------------------------
10,798,068 5,352,445
Decommissioning liabilities (Note 5) 757,102 1,052,091
--------------------------------
11,555,170 6,404,536
Shareholders' Equity
Share capital (Note 7(b)) 75,064,216 75,064,216
Warrants (Note 7(b)) 89,674 -
Share based compensation reserve 9,648,162 9,430,656
Deficit (53,298,407) (42,747,681)
--------------------------------
Equity attributable to owners of the Company 31,503,645 41,747,191
Non-controlling interests (1,290,125) 407,148
--------------------------------
Total equity 30,213,520 42,154,339
--------------------------------
$ 41,768,690 $ 48,558,875
--------------------------------
--------------------------------
See accompanying notes to the consolidated financial statements
On behalf of the Board:
(signed) "J. Russell Porter" (signed) "William M. Ford"
Director Director
Caza Oil & Gas, Inc.
Consolidated Statements of Net Loss and Comprehensive Loss
(In United States Dollars)
For the years ended December 31, 2012 2011
----------------------------------------------------------------------------
Revenues
Petroleum and natural gas $ 4,969,258 $ 4,089,894
Interest income 4,356 16,535
--------------------------------
4,973,614 4,106,429
--------------------------------
Expenses (Income)
Production 1,830,423 994,040
General and administrative 5,660,196 5,911,834
Depletion, depreciation and amortization
(Note 4) 3,133,108 2,974,783
Financing costs (Note 15) 55,427 21,817
Other (income) (226,223) (135,270)
Exploration and evaluation impairment
(Note 3) 192,935 6,339,995
Development and production impairment
(Note 4) 5,904,374 10,842,437
Loss on disposal of assets 461,471 -
Remediation and maintenance 209,902 -
Bad debt - 433,825
--------------------------------
17,221,613 27,383,461
--------------------------------
Loss before income taxes (12,247,999) (23,277,032)
Income taxes (Note 6) - -
--------------------------------
Net loss and comprehensive loss $ (12,247,999) $ (23,277,032)
--------------------------------
--------------------------------
Attributable to:
Owners of the Company (10,550,726) (20,047,419)
Non-controlling interests (1,697,273) (3,229,613)
--------------------------------
$ (12,247,999) $ (23,277,032)
--------------------------------
--------------------------------
Net loss per share
- basic and diluted $ (0.07) $ (0.14)
--------------------------------
Weighted average shares outstanding
- basic and diluted(1) 164,743,667 164,412,669
--------------------------------
(1) The options and warrants have been excluded from the diluted loss per
share computation as they are anti-dilutive
See accompanying notes to the consolidated financial statements
Caza Oil & Gas, Inc.
Consolidated Statements of Cash Flows
(In United States Dollars)
For the years ended December 31 2012 2011
----------------------------------------------------------------------------
OPERATING
Net loss $ (12,247,999) $ (23,277,032)
Adjustments for items not affecting cash:
Depletion, depreciation and amortization 3,133,108 2,974,783
Unwinding of the discount (Note 5) 14,986 21,817
Share-based compensation 217,506 87,868
Development and production impairment
(Note 4) 5,904,374 10,842,437
Exploration and evaluation impairment
(Note 3) 192,935 6,339,995
Bad debt expense - 433,825
Accounts payable write off - (48,900)
Loss on disposal of assets 461,471 47,444
Interest income (4,356) (16,535)
Other (36,113) -
Changes in non-cash working capital (Note
10(a)) 770,034 (1,085,875)
--------------------------------
Cash flows used in operating activities (1,594,054) (3,680,173)
--------------------------------
FINANCING
Proceeds from issuance of shares - 29,726
Finance costs paid (168,850) -
Issuance of notes payable and warrants
(Note 14) 2,200,000 -
Interest received 4,356 16,535
Changes in non-cash working capital (Note
10(a)) (154,377) -
--------------------------------
Cash flow from financing activities 1,881,129 46,261
--------------------------------
INVESTING
Exploration and evaluation expenditures
(Note 3) (10,464,696) (9,271,394)
Development and production expenditures
(Note 4) (1,949,389) (8,301,419)
Purchase of office furniture and equipment
(Note 4) (1,944) (18,879)
Proceeds from the sale and disposal of
assets 5,947,500 -
Partner reimbursement (Note 3) 436,649 -
Changes in non-cash working capital (Note
10a) 2,350,269 (2,456,120)
--------------------------------
Cash flows used in investing activities (3,681,611) (20,047,812)
--------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,394,536) (23,681,724)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,204,176 33,885,900
--------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,809,640 $ 10,204,176
--------------------------------
--------------------------------
See accompanying notes to the consolidated financial statements
Caza Oil & Gas, Inc.
Consolidated Statements of Changes in Equity
(In United States Dollars)
For the years ended December 31, 2012 2011
----------------------------------------------------------------------------
Share Capital
Balance, Beginning of Year 75,064,216 75,013,680
Common shares issued - 50,536
--------------------------------
Balance, End of Year 75,064,216 75,064,216
--------------------------------
Warrants
--------------------------------
Issued and balance, end of year 89,674 -
--------------------------------
Share based compensation reserve
Balance, Beginning of Year 9,430,656 9,363,598
Exercise of stock options - (20,810)
Share-based compensation 217,506 87,868
--------------------------------
Balance, End of Year 9,648,162 9,430,656
--------------------------------
Deficit
Balance, Beginning of Year (42,747,681) (22,700,262)
Net loss allocated to the owners of the
Company (10,550,726) (20,047,419)
--------------------------------
Balance, End of Year (53,298,407) (42,747,681)
--------------------------------
Non-Controlling Interests
Balance, Beginning of Year 407,148 3,636,761
Net loss allocated to non-controlling
interests (1,697,273) (3,229,613)
--------------------------------
Balance, End of Year (1,290,125) 407,148
--------------------------------
Total Shareholders' Equity $ 30,213,520 $ 42,154,339
--------------------------------
--------------------------------
See accompanying notes to the consolidated financial statements
1. Basis of Presentation
Caza Oil & Gas, Inc. ("Caza" or the "Company") was incorporated under the laws
of British Columbia on June 9, 2006 for the purposes of acquiring shares of Caza
Petroleum, Inc. ("Caza Petroleum"). The Company and its subsidiaries are engaged
in the exploration for and the development, production and acquisition of,
petroleum and natural gas reserves. The Company's common shares are listed for
trading on the Toronto Stock Exchange trading as the symbol "CAZ" and AIM stock
exchange as the symbol "CAZA". The corporate headquarters of the Company is
located at 10077 Grogan's Mill Road, Suite 200, The Woodlands, Texas 77380 and
the registered office of the Company is located at Suite 1700, Park Place, 666
Burrard Street Vancouver, British Columbia, V6C 2X8.
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS"). Caza's presentation
currency is the United States ("U.S.") dollar as the majority of its
transactions are denominated in this currency.
These financial statements were approved for issuance by the Board of Directors
on March 26, 2013.
2. Significant Accounting Policies
The consolidated financial statements have been prepared on the historical cost
basis except for certain financial instruments that are measured at fair values,
as explained in the accounting policies below. Historical cost is generally
based on the fair value of the consideration given in exchange for assets.
The accounting policies set out below have been applied consistently to all
years presented in these consolidated financial statements, and have been
applied consistently by the Company and its subsidiaries.
(a) Basis of consolidation:
Subsidiaries:
Subsidiaries are entities controlled by the Company. Control exists when the
Company has the power to govern the financial and operating policies of an
entity so as to obtain benefits from its activities. In assessing control,
potential voting rights that currently are exercisable are taken into account.
The financial statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the date that
control ceases.
Details of the Company's subsidiaries at the end of the reporting year are as
follows:
----------------------------------------------------------------------------
Place of Proportion of ownership
incorporation interest and voting power
Name of subsidiary and operation held by the Company
----------------------------------------------------------------------------
December 31, December 31,
2012 2011
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Caza Petroleum Inc. Delaware/Texas 86% 86%
Caza Operating, LLC Texas 100% 100%
Falcon Bay Operating, LLC Texas 100% 100%
Falcon Bay Sutton County, LLC Texas 100% 100%
The proportion not owned by the Company is shown as non-controlling interests in
these financial statements and relates to exchangeable rights in Caza Petroleum
Inc. which are held by management and which are exchangeable into the Company's
shares (see Note 7 (e)).
Jointly controlled operations and jointly controlled assets:
Many of the Company's oil and natural gas activities involve jointly controlled
assets. The consolidated financial statements include the Company's share of
these jointly controlled assets and a proportionate share of the relevant
revenue and related costs.
Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized income and expenses
arising from intercompany transactions, are eliminated in preparing the
consolidated financial statements.
(b) Foreign currency:
The Company and its subsidiary companies each determines their functional
currency of the primary economic environment in which they operate. The
Company's (and its subsidiaries) functional currency is the U.S. Dollar.
Transactions denominated in a currency other than the functional currency of the
entity are translated at the exchange rate in effect on the transaction date.
(c) Financial instruments:
Non-derivative financial instruments:
Non-derivative financial instruments comprise accounts receivable, cash and cash
equivalents, accounts payable and accrued liabilities, and notes payable.
Non-derivative financial instruments are recognized initially at fair value.
Subsequent to initial recognition, non-derivative financial instruments are
measured as described below.
Cash and cash equivalents:
Cash and cash equivalents comprise cash on hand, term deposits held with banks,
other short-term highly liquid investments (including money market instruments)
with original maturities of three months or less.
Financial assets at fair value through profit or loss:
An instrument is classified at fair value through profit or loss if it is held
for trading or is designated as such upon initial recognition. Upon initial
recognition attributable transaction costs are recognized in profit or loss when
incurred. Financial instruments at fair value through profit or loss are
measured at fair value, and changes therein are recognized in profit or loss.
The Company has designated cash and cash equivalents as fair value through
profit and loss.
Loans and receivables:
Non-derivative financial instruments classed as loans and receivables, such as
accounts receivable, accounts payable and accrued liabilities, and notes
payable, are measured at amortized cost using the effective interest method,
less any impairment losses.
(d) Evaluation and exploration assets:
Pre-license costs are expensed in the statement of operations as incurred.
Exploration and evaluation ("E&E") costs, including the costs of acquiring
licenses and directly attributable general and administrative costs, initially
are capitalized as either tangible or intangible exploration and evaluation
assets according to the nature of the assets acquired. The costs are accumulated
in cost centers by well, field or exploration area pending determination of
technical feasibility and commercial viability. If exploration does not meet
capitalization criteria at this time amounts are expensed as exploration and
evaluation.
Assets classified as E&E are not amortized, but are assessed for impairment if
(i) sufficient data exists to determine technical feasibility and commercial
viability, and (ii) facts and circumstances suggest that the carrying amount
exceeds the recoverable amount. For purposes of impairment testing, exploration
and evaluation assets are allocated to cash-generating units ("CGU").
The technical feasibility and commercial viability of extracting a mineral
resource is considered to be determinable when proven reserves are determined to
exist. A review of each exploration license or field is carried out, at least
annually, to ascertain whether proven reserves have been discovered. Upon
determination of proven reserves, exploration and evaluation assets attributable
to those reserves are first tested for impairment and then reclassified from
exploration and evaluation assets to a separate category within tangible assets
referred to as petroleum and natural gas interests.
(e) Development and production costs:
Items of property, plant and equipment ("PPE"), which include oil and gas
development and production assets, are measured at cost less accumulated
depletion and depreciation and accumulated impairment losses. Development and
production assets are grouped into CGU's for impairment testing.
Development costs that may be capitalized as PPE include land acquisition costs,
geological and geophysical expenses, the costs of drilling productive wells, the
cost of petroleum and natural gas production equipment, directly attributable
and incremental general overhead and estimated abandonment costs. When
significant parts of an item of property, plant and equipment, including oil and
natural gas interests, have different useful lives, they are accounted for as
separate items.
Gains and losses on disposal of an item of property, plant and equipment,
including oil and natural gas interests, are determined by comparing the
proceeds from disposal with the carrying amount of property, plant and
equipment. The carrying amount of any replaced or sold component is
derecognized.
Maintenance:
The costs of the day-to-day servicing of property, plant and equipment are
recognized in profit or loss as incurred.
Depletion and depreciation:
The net carrying value of development or production assets is depleted using the
unit of production method by reference to the ratio of production in the year to
the related proven reserves, taking into account estimated future development
costs necessary to bring those proved reserves into production. Future
development costs are estimated taking into account the level of development
required to produce the reserves. These estimates are reviewed by independent
reserve engineers at least annually.
Other Property and Equipment:
For other assets, depreciation is recognized in profit or loss on a
straight-line basis over the estimated useful lives of each part of an item of
property, plant and equipment. Leased assets are depreciated over the shorter of
the lease term and their useful lives unless it is reasonably certain that the
Company will obtain ownership by the end of the lease term. Land is not
depreciated.
The estimated useful lives for other assets for the current and comparative
years are as follows:
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Office equipment 5 - 7 years
Fixtures and fittings 5 - 7 years
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Depreciation methods, useful lives and residual values are reviewed at each
reporting date.
(f) Impairment:
Financial assets:
A financial asset is assessed at each reporting date to determine whether there
is any objective evidence that it is impaired. A financial asset is considered
to be impaired if objective evidence indicates that one or more events have had
a negative effect on the estimated future cash flows of that asset.
An impairment loss in respect of a financial asset measured at amortized cost is
calculated as the difference between its carrying amount and the present value
of the estimated future cash flows.
All impairment losses are recognized in profit or loss. An impairment loss is
reversed if the reversal can be related objectively to an event occurring after
the impairment loss was recognized. For financial assets measured at amortized
cost the reversal is recognized in profit or loss.
Non-financial assets:
The carrying amounts of the Company's non-financial assets, other than "E&E"
assets and deferred tax assets, are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists,
then the asset's recoverable amount is estimated. An impairment test is
completed each year for other intangible assets that have indefinite lives or
that are not yet available for use. E&E assets are also assessed for impairment
if facts and circumstances suggest that the carrying amount exceeds the
recoverable amount and before they are reclassified to property and equipment,
as oil and natural gas interests.
For the purpose of impairment testing, assets are grouped together into CGUs. A
CGU is a grouping of assets that generate cash flows independently of other
assets held by the Company. The recoverable amount of an asset or a CGU is the
greater of its value in use and its fair value less costs to sell.
An impairment loss is recognized if the carrying amount of an asset or its CGU
exceeds its estimated recoverable amount. Impairment losses are recognized in
profit or loss.
Impairment losses recognized in prior years are assessed at each reporting date
for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the carrying amount that
would have been determined, net of depletion and depreciation or amortization,
if no impairment loss had been recognized.
(g) Decommissioning liabilities:
The Company recognizes a decommissioning liability in the period in which it has
a present legal or constructive liability and a reasonable estimate of the
amount can be made. Liabilities are measured based on current requirements,
technology and price levels and the present value is calculated using amounts
discounted over the useful economic life of the assets. Amounts are discounted
using a risk-free rate. On a periodic basis, management reviews these estimates
and changes, if any, will be applied prospectively. The fair value of the
estimated decommissioning liability is recorded as a long-term liability, with a
corresponding increase in the carrying amount of the related asset. The
capitalized amount is depleted on a unit-of-production basis over the life of
the proved reserves. The liability amount is increased each reporting period due
to the passage of time and the amount of accretion is charged to finance
expense. Periodic revisions to the estimated timing of cash flows or to the
original estimated undiscounted cost can also result in an increase or decrease
to the decommissioning liability. Actual costs incurred upon settlement of the
obligation are recorded against the decommissioning liability to the extent of
the liability recorded.
(h) Notes payable and warrants
The component parts of the notes payable (debt and warrants) issued by the
Company are classified separately as financial liabilities and equity in
accordance with the substance of the contractual arrangements and the
definitions of a financial liability and an equity instrument.
At the date of issue, the fair value of the liability component is estimated
using the prevailing market interest rate for similar instruments without the
attached warrants. The discount on the liability component amount is recorded as
a contra amount to the notes payable and amortized using the effective interest
method until maturity.
The amount recorded as warrants was determined by deducting the amount of the
liability component from the fair value of the compound instrument as a whole.
The warrants are classified as equity, are not subsequently remeasured and will
remain in equity until the warrant is exercised. On exercise, the balance will
be transferred to share capital.
Transaction costs that relate to the issue of the notes payable are allocated to
the liability and equity components in proportion to the allocation of the gross
proceeds. Transaction costs relating to the equity component are recognized
directly in equity. Transaction costs relating to the liability component are
included in the carrying amount of the liability component and are amortized
over the lives of the notes payable using the effective interest method.
(i) Share capital:
Common shares are classified as equity. Incremental costs directly attributable
to the issue of common shares and share options are recognized as a deduction
from equity, net of any tax effects.
(j) Share based payments:
Equity-settled share-based payments to employees and others providing similar
services are measured at the fair value of the equity instruments at the grant
date.
The grant date fair value of options granted to employees is recognized as
compensation expense on a graded basis over the vesting period, within general
and administrative expenses, with a corresponding increase in share based
compensation reserve. A forfeiture rate is estimated on the grant date; however,
at the end of each reporting period, the Company revises its estimate of the
number of equity instruments expected to vest. The impact of the revision of the
original estimates, if any, is recognized on a prospective basis.
(k) Revenue:
Revenue from the sale of oil and natural gas is recorded when the significant
risks and rewards of ownership of the product is transferred to the buyer which
is usually when legal title passes to the external party. This is generally at
the time product enters the pipeline or any other means of transportation.
Revenue is measured net of royalties.
(l) Finance income and expenses:
Finance expense comprises interest expense on borrowings, if any, and the
unwinding of the discount on decommissioning liabilities.
Borrowing costs incurred for the construction of qualifying assets are
capitalized during the period of time that is required to complete and prepare
the assets for their intended use or sale. All other borrowing costs are
recognized in profit or loss using the effective interest method. The
capitalization rate used to determine the amount of borrowing costs to be
capitalized is the weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
Interest income is recognized as it accrues in profit or loss, using the
effective interest method.
(m) Earnings per share:
Basic earnings per share is calculated by dividing the profit or loss
attributable to common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is determined by
adjusting the profit or loss attributable to common shareholders and the
weighted average number of common shares outstanding for the effects of dilutive
instruments such as options granted to employees. Diluted per share calculations
reflect the exercise or conversion of potentially dilutive securities or other
contracts to issue shares at the later of the date of grant of such securities
or the beginning of the year. The Company computes diluted earnings per share
using the treasury stock method to determine the dilutive effect of its options
and warrants. Under this method, the diluted weighted average number of shares
is calculated assuming the proceeds that arise from the exercise of outstanding,
in-the-money options and warrants are used to purchase common shares of the
Company at their average market price for the year. No adjustment to diluted
earnings per share or diluted shares outstanding is made if the result of the
calculations is anti-dilutive.
(n) Application of new and revised International Financial Reporting Standards
(IFRSs) issued but not yet effective.
The Company has not applied the following new and revised IFRSs that have been
issued but are not yet effective.
Each of the additional new standards outlined below is effective for annual
periods beginning on or after January 1, 2013 (with the exception of IFRS 9,
which is effective for annual periods beginning on or after January 1, 2015).
The Company has not yet assessed the impact, if any, that the new amended
standards will have on its financial statements or whether to early adopt any of
the new requirements.
IFRS 9 (revised) "Financial Instruments: Classification and Measurement"
The result of the first phase of the IASB's project to replace IAS 39,
"Financial Instruments: Recognition and Measurement". The new standard replaces
the current multiple classification and measurement models for financial assets
and liabilities with a single model that has only two classification categories:
amortized cost and fair value.
IFRS 10 (new) "Consolidated Financial Statements"
Replaces Standing Interpretations Committee 12, "Consolidation - Special Purpose
Entities" and the consolidation requirements of IAS 27 "Consolidated and
Separate Financial Statements". The new standard replaces the existing risk and
rewards based approaches and establish control as the determining factor when
determining whether an interest in another entity should be included in the
consolidated financial statements.
IFRS 11 (new) "Joint Arrangements"
Replaces IAS 31 "Interests in Joint Ventures" along with amending IAS 28
"Investment in Associates". The new standard focuses on the rights and
obligations of an arrangement, rather than its legal form. The standard
redefines joint operations and joint ventures and requires joint operations to
be proportionately consolidated and joint ventures to be equity accounted.
IFRS 12 (new) "Disclosure of Interests in Other Entities"
Provides comprehensive disclosure requirements on interests in other entities,
including joint arrangements, associates, and special purpose vehicles. The new
disclosure requires information that will assist financial statement users in
evaluating the nature, risks and financial effects of an entity's interest in
subsidiaries and joint arrangements.
IFRS 13 (new) "Fair Value Measurement"
Provides a common definition of fair value within IFRS. The new standard
provides measurement and disclosure guidance and applies when IFRS requires or
permits the item to be measured at fair value, with limited exceptions. This
standard does not determine when an item is measured at fair value and as such
does not require new fair value measurements.
(o) Critical accounting judgments and key sources of estimation uncertainty
The preparation of financial statements in conformity with IFRS requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. The consolidated financial statements have,
in management's opinion, been properly prepared using careful judgment with
reasonable limits of materiality.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognized in the period in which the
estimate is revised if the revision affects only that period or in the period of
the revision and future periods if the revision affects both current and future
periods.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those involving estimations
(see below), that management has made in the process of applying the Company's
accounting policies and that have the most significant effect on the amounts
recognized in the consolidated financial statements include:
i. Estimation of reserves
Estimates of recoverable quantities of proved and probable reserves include
judgmental assumptions and require interpretation of complex geological and
geophysical models in order to make an assessment of the size, shape, depth and
quality of reservoirs, and their anticipated recoveries. The economic,
geological and technical factors used to estimate reserves may change from
period to period. Reserve estimates are prepared in accordance with the Canadian
Oil and Gas Evaluation Handbook and are reviewed by third party reservoir
engineers.
Estimates of oil and gas reserves are inherently imprecise, require the
application of judgment and are subject to regular revision, either upward or
downward, based on new information such as from the drilling of additional
wells, observation of long-term reservoir performance under producing conditions
and changes in economic factors, including product prices, contract terms or
development plans.
Changes in reported reserves can impact property, plant and equipment impairment
calculations, estimates of depletion and the provision for decommissioning
obligations due to changes in expected future cash flows based on estimates of
proved and probable reserves, production rates, future petroleum and natural gas
prices, future costs and the remaining lives and period of future benefit of the
related assets.
ii. Identification of cash-generating units
Management reviews the CGU determination on a periodic basis. The recoverability
of property, plant and equipment carrying values are assessed at the CGU level.
Determination of what constitutes a CGU is subject to management judgments. The
asset composition of a CGU can directly impact the recoverability of the related
assets.
iii. Estimation of fair value of stock options
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. By their nature, these
estimates are subject to measurement uncertainty and the effect on the
consolidated financial statements of changes of estimates in future periods
could be significant.
iv. Valuation of financial instruments
Caza uses valuation techniques that include inputs that are not based on
observable market data to estimate the fair value of certain types of financial
instruments. The notes provide detailed information about the key assumptions
used in the determination of the fair value of the financial instruments.
Key sources of estimation uncertainty
The following are the key assumptions concerning the key sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of
causing adjustments to the carrying amounts of assets and liabilities within the
next financial year.
-- Estimates of recoverable quantities of proved and probable reserves
include judgmental assumptions and the economic, geological and
technical factors used to estimate reserves may change from period to
period
-- Forward price estimates of the oil and natural gas prices are used in
the impairment model. Commodity prices have fluctuated widely in recent
years due to global and regional factors including supply and demand
fundamentals, inventory levels, weather, economic and geopolitical
factors.
-- The impairment model uses discount rate to calculate the net present
value of cash flows based on management's estimate of the rate that
incorporates the risks associated with the assets. Changes in the
general economic environment could result in significant changes in this
estimate.
-- Amounts recorded from joint interest partners are based on the Company's
interpretation of underlying agreements and may be subject to joint
approval. The Company has recorded balances due from its joint interest
partners based on costs incurred and its interpretation of allowable
expenditures. Any adjustment required as a result of joint interest
partner audits are recorded in the period of the determination with
joint interest partners.
-- The provision for decommissioning liabilities is based on current legal
and constructive requirements, technology, price levels and expected
plans for remediation. Actual costs and cash outflows can differ from
estimates because of changes in laws and regulations, public
expectations, prices and discovery and analysis of site conditions and
changes in clean-up technology.
The above judgments, estimates and assumptions relate primarily to unsettled
transactions and events as of the date of the consolidated financial statements.
Actual results could differ from these estimates and the differences could be
material.
3. Exploration and evaluation assets
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December 31, December 31,
2012 2011
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Balance, beginning of year $ 4,941,256 $ 7,371,582
Additions to exploration and evaluation
assets 10,464,696 9,271,394
Transfers to property, plant and equipment (4,417,633) (5,361,725)
Disposals of assets (272,989) -
Joint interest billing partner
reimbursements (436,649) -
Impairment (192,935) (6,339,995)
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Balance, end of year $ 10,085,746 $ 4,941,256
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Included in the $10,464,696 additions to E&E are the costs incurred during the
year ended December 31, 2012 for the drilling of the Forehand Ranch 27 State Com
# 1H.
The Company impaired expired leases in the amount of $192,935 relating to the
Tiree prospect located in Louisiana.
During the year ended December 31, 2011, the Company expensed $6,339,995 of
exploration and evaluation costs of which $2,594,801 related to the Marian Baker
et al, No 1 well drilled during the three months ended March 31, 2011 that did
not encounter hydrocarbons. As well, in the year ended December 31, 2011 the
Company recognized impairment to the valuation of the Las Animas prospect in the
amount of $1,146,226. The balance of the costs expensed in 2011 related to other
leasehold and prospect expenditures that have expired or no longer provide value
for the Company.
4. Petroleum and natural gas properties and equipment
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Development &
Production Corporate
Cost Assets Assets Total
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Balance, December 31, 2010 $ 31,384,853 808,003 $ 32,192,856
Additions 8,523,939 18,879 8,542,818
Disposal of assets (47,444) - (47,444)
Transfers from E&E 5,361,725 - 5,361,725
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Balance, December 31, 2011 $ 45,223,073 826,882 $ 46,049,955
Additions 1,949,389 1,944 1,951,333
Disposal of assets (7,740,218) - (7,740,218)
Transfers from E&E 4,417,633 - 4,417,633
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Balance, December 31, 2012 $ 43,849,877 828,826 $ 44,678,703
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Development &
Accumulated Depletion, Production Corporate
Depreciation and Impairment Assets Assets Total
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Balance, December 31, 2010 $ 2,273,780 $ 539,214 $ 2,812,994
Depletion and depreciation 2,826,962 147,821 2,974,783
Impairment 10,842,437 - 10,842,437
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Balance, December 31, 2011 15,943,179 687,035 16,630,214
Depletion and depreciation 3,039,488 93,620 3,133,108
Disposal of assets (1,541,070) - (1,541,070)
Impairment 5,904,374 - 5,904,374
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Balance, December 31, 2012 $ 23,345,971 $ 780,655 $ 24,126,626
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Carrying amounts
At December 31, 2011 $ 29,279,894 139,847 $ 29,419,741
At December 31, 2012 $ 20,503,906 48,171 $ 20,552,077
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Future development costs of proved undeveloped reserves of $28,577,800 were
included in the depletion calculation at December 31, 2012 (2011 - $30,722,900).
The Company did not capitalize general and administrative expenses directly to
E&E or D&P assets in the years presented.
The Company performed an impairment test at each period end in the year ended
December 31, 2012 to assess whether the carrying value of its petroleum and
natural gas properties exceeds fair value. For the year ended December 31, 2012,
a net impairment in the amount of $5,904,374 (2011 - $10,842,437) was required
to be recorded. In 2012, the impairments were primarily due to reserve valuation
changes and recorded in the West Texas and Southeast Texas CGU's in the amounts
of approximately $3.52 million and $2.65 million, respectively. There was a net
reversal of impairment in the Company's South Louisiana CGU of approximately
$266,000 due to the remaining properties in the CGU being more oil in nature and
less susceptible to price fluctuations. In 2011, the impairment was primarily
due to changes in the Company's estimates of reserves in the Cook Mountain
formation in the Southeast Texas CGU.
The impairments were recognized using a 16% and 13.5% discount rate respectively
for the March 31, 2012 and December 31, 2012 period ends (2011 - 16%). The
petroleum and natural gas future prices are based on commodity price forecasts
of the Company's independent reserve evaluators for 2012 as follows:
NYMEX
Crude Oil(1) Natural Gas(1)
Year ($/bbl) ($/mmbtu)
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2013 93.03 3.737
2014 94.23 4.277
2015 95.23 4.711
2016 98.66 5.689
2017 100.03 5.998
Thereafter (inflation %) +2.0%/yr +2.0%/yr
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(1) Prices used in the impairment test were adjusted for commodity price
differentials specific to the Company.
On July 18, 2012, the Company sold the San Jacinto property which includes the
Caza Elkins 3401 and 3402 wells for consideration of $5,947,500 net of the
Company incurred brokerage fees in the amount of $152,500 associated with the
sale. There were also several other small properties that were disposed during
the year resulting in aggregate of $6,199,149 net of accumulated depletion from
Development & Production Assets, $272,989 of E&E assets and $61,285 of
decommissioning costs which were also associated with the disposals. The
resulting impact of these sales is a loss on disposal of $461,741. The Company
had an 85% working interest in the Caza Elkins 3401 with a 63.75% net revenue
interest. In all subsequent wells on the San Jacinto property, including the
Caza Elkins 3402 well and the remainder of the leases, Caza had a 75% working
interest and a 56.25% net revenue interest. The closing date of the transaction
was July 31, 2012.
5. Decommissioning Liabilities
The following is the continuity schedule of the obligation associated with the
retirement of oil and gas properties:
Year ended Year ended
December December
31, 2012 31, 2011
------------------------
Decommissioning liabilities, beginning of year $1,052,091 $ 807,754
Obligations incurred 74,899 131,318
Revision in estimated cash flows and discount rate 181,776 171,100
Obligations settled (355,954) (79,898)
Unwinding of the discount 14,986 21,817
------------------------
Decommissioning liabilities, end of year $ 967,798 $1,052,091
Current portion 210,696 -
------------------------
Long-term decommissioning liabilities 757,102 1,052,091
------------------------
------------------------
The undiscounted amount of cash flows, required over the estimated reserve life
of the underlying assets, to settle the obligation, adjusted for inflation, is
estimated at $1,398,296 (December 31, 2011 - $1,533,283). The December 31, 2012
obligation was calculated using a risk free discount rate of 2.5 percent (2011 -
2.5%) and an inflation rate of 3 percent (2011 - 3%). It is expected that these
obligations will be funded from general Company resources at the time the costs
are incurred with the majority of costs expected to occur between 2013 and 2030.
6. Income Taxes
The following is a reconciliation of income taxes, calculated at the combined
statutory federal and provincial income tax rates, to the income tax recovery
included in the consolidated statements of net loss.
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2012 2011
--------------------------------
Loss before income taxes $ (12,247,999) $ (23,277,032)
Income tax (recovery) at statutory rate of
25% (2011 - 26.5%) (3,062,000) (6,168,413)
Difference in statutory tax rates: Canada
vs. United States (1,224,800) (1,978,548)
Stock-based compensation 76,127 30,753
Other 130,055 122,629
Unrecognized deferred tax assets 4,080,937 7,993,579
--------------------------------
Provision for (recovery) of income taxes $ - $ -
--------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The components of the
Company's deferred income tax assets and liabilities are as follows:
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2012 2011
----------------------------------------------------------------------------
United States:
Deferred income tax liability (asset):
Petroleum and natural gas properties $ 4,779,773 $ 7,705,046
Decommissioning obligations (338,729) (368,232)
Net operating losses carried forward (22,182,500) (20,997,733)
--------------------------------
(17,741,456) (13,660,919)
Unrecognized deferred tax asset 17,741,456 13,660,919
--------------------------------
Net deferred income tax liability (asset) $ - $ -
--------------------------------
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2012 2011
----------------------------------------------------------------------------
Canada: $US $US
Deferred income tax liability (asset):
Share issue costs (153,496) (237,284)
Net operating losses carried forward (1,341,217) (1,232,808)
--------------------------
(1,494,713) (1,470,092)
Unrecognized deferred tax asset 1,494,713 1,470,092
--------------------------
Net deferred income tax liability (asset) - -
--------------------------
The Company has the following net operating losses available to be carried
forward to offset future operating income for Caza's US and Canadian entities:
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Expiring at December 31, Amounts
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US Canada
2026 1,484,777 122,482
2027 11,146,427 881,294
2028 16,409,534 773,131
2029 1,887,722 922,487
2030 9,004,333 1,231,457
2031 14,887,664 1,138,507
2032 8,557,709 349,401
7. Share Capital and Warrants
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
December 31, 2012 December 31, 2011
Number $ Number $
--------------------------------------------------------
Opening balance
common shares 164,743,667 $ 75,064,216 164,319,000 $ 75,013,680
Exercise of stock
options - - 424,667 50,536
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Balance, end of year 164,743,667 75,064,216 164,743,667 75,064,216
----------------------------------------------------------------------------
Opening balance
warrants - - - -
Common share
warrants issued
(Note 14) 1,055,224 89,674 - -
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Balance, end of year 1,055,224 89,674 - -
----------------------------------------------------------------------------
(c) Stock options
The maximum number of common shares for which options may be granted, together
with shares issuable under any other share compensation arrangement of the
Company, is limited to 10% of the total number of outstanding common shares
(plus common shares that would be outstanding upon the exercise of all
exchangeable rights) at the time of grant of any option. The exercise price of
each option may not be less than the fair market value of the Company's common
shares on the date of grant. Except as otherwise determined by the Board and
subject to the limitation that the stock options may not be exercised later than
the expiry date provided in the relevant option agreement but in no event later
than 10 years (or such shorter period required by a stock exchange) from their
date of grant, options cease to be exercisable: (i) immediately upon a
participant's termination by the Company for cause, (ii) 90 days (30 days in the
case of a participant engaged in investor relations activities) after a
participant's termination from the Company for any other reason except death and
(iii) one year after a participant's death. Subject to the Board's sole
discretion in modifying the vesting of stock options, stock options will vest,
and become exercisable, as to 33 1/3% on the first anniversary of the date of
grant and 33 1/3% on each of the following two anniversaries of the date of
grant. All options granted to a participant but not yet vested will vest
immediately upon a change of control or upon the Company's termination of a
participant's employment without cause. A summary of the Company's stock option
plan as at December 31, 2012 and changes during the year ended on those dates is
presented below:
Year ended Year ended
December 31, 2012 December 31, 2011
-------------------------------------------------
Weighted Weighted
average average
Number of Exercise Number of exercise
Stock Options options price options price
----------------------------------------------------------------------------
Beginning of year 11,140,000 $ 0.28 12,635,000 $ 0.28
Granted 5,760,000 $ 0.28 1,500,000 $ 0.13
Exercised - - (424,667) $ 0.07
Forfeited - - (2,570,333) $ 0.06
-------------------------------------------------
End of year 16,900,000 $ 0.28 11,140,000 $ 0.28
-------------------------------------------------
Exercisable, end of year 8,274,995 $ 0.34 5,843,332 $ 0.45
-------------------------------------------------
-------------------------------------------------
Number Weighted Number
Outstand- Average Exercis-
ing as at Remaining able
December Exercise Contract- Date of December
Date of Grant 31, 2012 Price ual Life Expiry 31, 2012
----------------------------------------------------------------------------
January 31, 2007 1,725,000 $ 0.50 4.09 January 31, 2017 1,725,000
December 12, 2007 1,700,000 $ 0.79 4.95 December 12, 2017 1,700,000
April 7, 2008 500,000 $ 0.59 5.27 April 7, 2018 500,000
August 11, 2008 20,000 $ 0.44 5.61 August 11, 2018 20,000
April 9, 2010 5,025,000 $ 0.07 7.28 April 9, 2020 3,349,998
April 12, 2010 400,000 $ 0.07 7.29 April 12, 2020 266,666
May 19, 2010 250,000 $ 0.07 7.39 May 19, 2020 166,666
September 14, 2010 20,000 $ 0.35 7.71 September 14, 2020 13,333
October 12, 2011 1,500,000 $ 0.13 8.79 October 12, 2021 499,999
January 31, 2012 100,000 $ 0.16 9.09 January 31, 2022 33,333
December 4, 2012 5,660,000 $ 0.28 9.93 December 4, 2022 -
----------------------------------------------------------------------------
16,900,000 7.69 8,274,995
----------------------------------------------------------------------------
During the year ended December 31, 2012, 5,660,000 options (2011 - 1,500,000)
were granted at a fair value of $0.2646 per option (2011 - $0.13) and 100,000
options were granted at a fair value of $0.1599 per option. The fair value of
these options was determined using the Black-Sholes model with the following
assumptions:
2012 2011
--------------------------------------------------
Dividend yield Nil Nil
Expected volatility 199% 130%
Risk free rate of return 0.7% 0.9%
Weighted average life 3 years 3 years
Forfeiture rate Nil 18.84%
(d) Shared base compensation reserve
The following table presents the changes in the share based compensation reserve:
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Balance, beginning of year $ 9,430,656 $ 9,363,598
Exercise of stock options - (20,810)
Stock based compensation expense 217,506 87,868
----------------------------------------------------------------------------
Balance, end of year $ 9,648,162 $ 9,430,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(e) Non-controlling interest
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Number of exchangeable rights outstanding,
beginning and end of year (i) 26,502,000 26,502,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(i) Management has a non-controlling interest in the Company which allows
shares of Caza Petroleum, Inc. to be exchanged into the Company's shares at
an exchange rate of 2800 to 1.
In 2011, issuances of common shares had a nominal impact on the number of
exchangeable rights in the year.
8. Related Party Transactions
Singular Oil & Gas Sands, LLC ("Singular") is a related party as it is a company
under common control with Zoneplan Limited, which is a significant shareholder
of Caza.
Singular participates in the drilling of the Matthys McMillan Gas Unit #2 and
the O B Ranch #1 and 2 wells located in Wharton County, Texas. Under the terms
of that agreement, Singular paid 14.01% of the drilling costs through completion
to earn a 10.23% net revenue interest on the Matthys McMillan Gas Unit #2 well
and paid 12.5% of the drilling costs to earn a 6.94% net revenue interest on the
O B Ranch #1 well. Under the terms of the agreement of the O B Ranch #2 Singular
paid 9.375% of the drilling costs to earn approximately 6.8% net revenue
interest. This participation was in the normal course of Caza's business and on
the same terms and conditions to those of other joint interest partners.
Singular owes the Company $6,337 in joint interest partner receivables as at
December 31, 2012 (December 31, 2011 - $492,240).
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
comparable to those negotiated with third parties.
Remuneration of key management personnel of the Company, which includes
directors, officers and other key personnel, is set out below in aggregate:
Year ended Year ended
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Salaries and wages $ 1,437,314 $ 1,206,894
Short term benefits - -
Share-based payments 180,740 93,309
----------------------------------------------------------------------------
Total compensation $ 1,618,054 $ 1,300,203
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. Commitments and Contingencies
As of December 31, 2012, the Company is committed under operating leases for
its offices and corporate apartment in the following aggregate minimum lease
payments which are shown below as operating commitments:
2013 $ 271,965
2014 $ 258,075
2015 $ 184,402
10. Supplementary Information
a) net change in non-cash working capital
Years ended December 31,
2012 2011
----------------------------------------------------------------------------
Provided by (used in)
--------------------------------------------
Accounts receivable (173,148) (1,559,910)
Prepaid and other (154,377) (21,187)
Accounts payable and accrued liabilities 3,293,451 (1,960,898)
--------------------------------
2,965,926 (3,541,995)
--------------------------------
Summary of changes
Operating 770,034 (1,085,875)
Investing 2,350,269 (2,456,120)
Financing (154,377) -
--------------------------------
2,965,926 (3,541,995)
--------------------------------
(b) supplementary cash flow information
Year ended Year ended
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Interest paid $ - $ -
Interest received 4,356 16,535
(c) cash and cash equivalents
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Cash on deposit $ 6,073,807 $ 272,699
Money market instruments 735,833 9,931,477
--------------------------------------
Cash and cash equivalents $ 6,809,640 $ 10,204,176
--------------------------------------
--------------------------------------
The money market instruments bear interest at a rate of 0.082% as at December
31, 2012 (December 31, 2011 - 0.033%).
11. Capital Risk Management
The Company's objectives when managing capital is to safeguard the entity's
ability to continue as a going concern, so that it can continue to provide
returns for shareholders and benefits for other stakeholders. The Company
defines capital as shareholder's equity, working capital (excluding current
portion of decommissioning liabilities) and credit facilities when available.
The Company manages the capital structure in light of changes in economic
conditions and the risk characteristics of the underlying assets. The Company's
objective is met by retaining adequate equity and working capital to provide for
the possibility that cash flows from assets will not be sufficient to meet
future cash flow requirements. The Board of Directors does not establish
quantitative return on capital criteria for management; but rather promotes year
over year sustainable profitable growth.
December 31, December 31,
2012 2011
----------------------------------------------------------------------------
Cash and cash equivalents $ (6,809,640) $ (10,204,176)
Other current assets (4,222,891) (3,993,702)
Accounts payable and accrued liabilities 8,645,896 5,352,445
Notes payable 1,941,476 -
----------------------------------------------------------------------------
Adjusted working capital $ (445,159) $ (8,845,433)
Shareholders' equity $ 30,213,520 $ 42,154,339
----------------------------------------------------------------------------
Total capital
$ 29,768,361 $ 33,308,906
----------------------------------------------------------------------------
The Company has evaluated its net working capital balance as at December 31,
2012 and 2011. Due to long lead times on several of the Company's exploration
and development projects, from time to time the Company secures capital to fund
its investments in petroleum and natural gas exploration projects in advance
which has resulted in a net working capital balance. As exploration and
development projects progress the Company expects the net working capital
balance to significantly decrease from current levels, and additional capital
may be required to fund additional projects. If the Company is unsuccessful in
raising additional capital, the Company may have to sell or farm out certain
properties. If the Company cannot sell or farm out certain properties, it will
be unable to participate with joint interest partners and may forfeit rights to
some of its properties.
12. Financial Instruments
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity price,
credit, and foreign exchange risks. The Company manages its exposure to these
risks by operating in a manner that minimizes its exposure to the extent
practical.
(a) Commodity Price Risk
The Company is subject to commodity price risk for the sale of natural gas. The
Company may enter into contracts for risk management purposes only, in order to
protect a portion of its future cash flow from the volatility of natural gas and
natural gas liquids commodity prices. To date the Company has not entered into
any forward commodity contracts.
(b) Credit Risk
Credit risk arises when a failure by counter parties to discharge their
obligations could reduce the amount of future cash inflows from financial assets
on hand at the consolidated statement of financial position date. A majority of
the Company's financial assets at the consolidated statement of financial
position date arise from natural gas liquids and natural gas sales and the
Company's accounts receivable that are with these customers and joint venture
participants in the oil & natural gas industry. Industry standard dictates that
commodity sales are settled on the 25th day of the month following the month of
production. The Company's natural gas and condensate production is sold to large
marketing companies. Typically, the Company's maximum credit exposure to
customers is revenue from two months of sales. During the year ended December
31, 2012, the Company sold 58.84% (December 31, 2011 - 68.96%) of its natural
gas and condensates to a single purchaser. These sales were conducted on
transaction terms that are typical for the sale of natural gas and condensates
in the United States. In addition, when joint operations are conducted on behalf
of a joint interest partner relating to capital expenditures, costs of such
operations are paid for in advance to the Company by way of a cash call to the
partner of the operation being conducted.
Caza management assesses quarterly whether there should be any impairment of the
financial assets of the Company. At December 31, 2012, the Company had overdue
past due accounts receivable from certain joint interest partners of $58,757
which were outstanding for greater than 60 days (2011 - $135,835) and $170,741
that were outstanding for greater than 90 days (2011 - $443,466). At December
31, 2012, the Company's three largest joint interest partners represented
approximately 34%, 19% and 11% of the Company's receivable balance (December 31,
2011 - 13%, 10% and 9% respectively). The Company has sales concentration with
three significant customers each representing more than 10% of the accounts
receivable at 39.3%, 17.7% and 15.2% respectively (December 31, 2011 - 50.8%,
19.8%, 12.0% and 11.9% respectively). The maximum exposure to credit risk is
represented by the carrying amount on the consolidated statement of financial
position of cash and cash equivalents, accounts receivable and deposits.
Trade receivables disclosed above include amounts that are past due at the end
of the reporting period for which the Group has not recognized an allowance for
doubtful debts because there has not been a significant change in credit quality
and the amounts (which include interest accrued after the receivable is more
than 60 days outstanding) are still considered recoverable.
(c) Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange fluctuations, as certain
general and administrative expenses are or will be denominated in Canadian
dollars and United Kingdom pounds sterling. The Company's sales of oil and
natural gas are all transacted in US dollars. At December 31, 2012, the Company
considers this risk to be relatively limited and not material and therefore does
not hedge its foreign exchange risk.
(d) Fair Value of Financial Instruments
The Company has determined that the fair values of the financial instruments
consisting of cash and cash equivalents, accounts receivable and accounts
payable are not materially different from the carrying values of such
instruments reported on the consolidated statement of financial position due to
their short-term nature. At December 31, 2012, the fair value of the notes
payable is $2,171,061.
IFRS establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The three levels of the fair value
hierarchy are described below:
-- Level 1: Values based on unadjusted quoted prices in active markets that
are accessible at the measurement date for identical assets or
liabilities.
-- Level 2: Values based on quoted prices in markets that are not active or
model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
-- Level 3: Values based on prices or valuation techniques that require
inputs that are both unobservable and significant to the overall fair
value measurement.
The Company's cash and cash equivalents, which are classified as fair value
through profit or loss, are categorized as Level 1 financial instruments.
The Company's notes payable are categorized as Level 2 financial instruments and
were recorded at fair valued on issuance using a market interest rate for
similar debt issued without the warrants attached.
All other financial assets are classified as loans or receivables and are
accounted for on an amortized cost basis. All financial liabilities are
classified as other liabilities. There are no financial assets on the
consolidated statement of financial position that have been designated as
available-for-sale. There have been no changes to the aforementioned
classifications during the years presented.
(e) Liquidity Risk
Liquidity risk includes the risk that, as a result of our operational liquidity
requirements:
-- The Company will not have sufficient funds to settle a transaction on
the due date;
-- The Company will be forced to sell assets at a value which is less than
what they are worth; or
-- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts projected to
complete the Company's existing capital expenditure program are continuously
monitored and adjusted as input variables change. These variables include but
are not limited to, available bank lines, natural gas production from existing
wells, results from new wells drilled, commodity prices, cost overruns on
capital projects and regulations relating to prices, taxes, royalties, land
tenure, allowable production and availability of markets. As these variables
change, liquidity risks may necessitate the Company to conduct equity issues or
obtain project debt financing. The Company also mitigates liquidity risk by
maintaining an insurance program to minimize exposure to insurable losses. The
financial liabilities as at December 31, 2012 that subject the Company to
liquidity risk are accounts payable, accrued liabilities and notes payable. The
contractual maturity of these financial liabilities is generally the following
sixty days from the receipt of the invoices for goods of services and can be up
to the following next six months, except for the notes payable which are repaid
on a monthly basis for the next eleven months. Management believes that current
working capital will be adequate to meet these financial liabilities as they
become due.
13. General and Administrative
During the year ended December 31, 2012 the Company incurred general and
administrative expenses in the amount of $5,660,196 (December 31, 2011 -
$5,911,834 and salaries in the amount of $2,136,490 (December 31, 2011-
$1,651,938). Stock compensation amortization accounted for $217,506 of the
general and administrative costs for the year ended December 31, 2012 (December
31, 2011-$87,868).
14. Notes Payable
----------------------------------------------------------------------------
Years ended December 31,
2012 2011
----------------------------------------------------------------------------
Fair value notes payable $ 2,110,326 $ -
Less : financing fees (168,850) -
-------------------------------
Note payable $ 1,941,476 $ -
-------------------------------
-------------------------------
On November 23, 2012 the Company entered into a GBP 6 million Standby Equity
Distribution Agreement ("SEDA") and a $12 million SEDA-backed Loan Agreement
(the "Loan" or "Loan Agreement") with YA Global Master SPV Ltd., an investment
fund managed by Yorkville Advisors Global, LP ("Yorkville").
Caza received an initial draw-down of $2.2 million on the Loan Agreement and may
draw a second advance of $1.8 million at its discretion. Additional draw-downs
may be made with the mutual agreement of the parties. Loan repayment is
supported by the SEDA facility, allowing Caza the option to issue equity at a 5%
discount to fair market value.
The loan bears interest at a rate of 9% per annum and may be prepaid without
penalty. The loan is to be funded by way of an initial draw-down and further
supplementary draw-down amounts. The principal is repayable in monthly
installments over a period of one year from the date of advance, with repayments
weighted towards the end of each term. As a result the initial draw down is
classified as a current liability. In connection with each draw-down, Yorkville
is entitled to receive an 8% implementation fee and a specified number of Common
Share purchase warrants. The warrants have a term of three years and entitle the
holder to acquire one Common Share at an exercise price of 125% of the market
price calculated in accordance with the Loan Agreement. In connection with the
initial draw-down Caza issued to Yorkville 1,055,224 warrants having an exercise
price of $0.33 (Note 7). These warrants have been valued at $89,674.
The SEDA facility provides for Yorkville to subscribe for up to GBP 6 million of
Common Shares over a term of three years. The timing and amount of advances are
at Caza's discretion. Subject to any minimum price specified by Caza in advance,
shares sold under the SEDA are priced at 95% of the prevailing market price on
the AIM calculated in accordance with the SEDA during a 10-day pricing period,
which may be extended by mutual agreement. Unless otherwise agreed, each advance
may not exceed GBP 1 million, 400% of the average daily value traded of Caza's
Common Shares on AIM for the five trading days immediately prior to date of an
advance request or result in Yorkville holding more than 2.99% of Caza's
outstanding Common Shares. No amounts have been drawn on the SEDA facility as of
December 31, 2012.
15. Financing costs
----------------------------------------------------------------------------
Years ended December 31,
2012 2011
----------------------------------------------------------------------------
Unwinding of the discount (Note 5) $ 14,986 $ 21,817
Amortization of financing fees 19,285 -
Interest expense 21,156 -
------------------------------
Total financing costs $ 55,427 $ 21,817
------------------------------
------------------------------
16. Subsequent Event
The Company entered into an Equity Adjustment Agreement with Global Master SPV
Ltd., an investment fund managed by Yorkville Advisors Global, LP in conjunction
with its Standby Equity Distribution Agreement dated November 23, 2012 with
Yorkville. Pursuant to the Agreement, the Company issued 3,846,154 common shares
to Yorkville at a price of GBP 0.13 per share for aggregate proceeds of GBP
500,000.
Under the terms of the Agreement, if on February 28, 2014 the common share
market price (determined as 95% of the average daily volume weighted average
price of common shares (VWAP) during the preceding 22 trading days) is greater
than GBP 0.13, then Yorkville will pay to the Company the difference multiplied
by the number of New Common Shares, and if the market price is less than GBP
0.13 then the Company will pay to Yorkville the difference multiplied by the
number of New Common Shares. The Company has deposited in escrow GBP 275,000 as
security for this contingent payment obligation.
The New Common Shares were admitted for trading on AIM effective on March 8,
2013. Following admission, the Company had 168,589,821 common shares
outstanding.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A") of the financial
results for Caza Oil & Gas, Inc. ("Caza" or the "Company") should be read in
conjunction with the audited consolidated financial statements as at and for the
year ended December 31, 2012. Additional information relating to the Company can
be found on SEDAR at www.sedar.com. All figures herein have been prepared in
accordance with International Financial Reporting Standards ("IFRS") unless
otherwise stated. This MD&A is dated March 26, 2013.
Forward-Looking Information
In addition to historical information, the MD&A contains forward-looking
statements that are generally identifiable as any statements that express, or
involve discussions as to, expectations, beliefs, plans, objectives, assumptions
or future events of performance (often, but not always, through the use of words
or phrases such as "will", "may", "will likely result," "expected," "is
anticipated," "believes," "estimated," "intends," "plans," "projection" and
"outlook"), are not historical facts and may be forward-looking and may involve
estimates, assumptions and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in such forward-looking
statements.
These statements are based on certain factors and assumptions regarding the
results of operations, the performance of projected activities and business
opportunities. Specifically, we have used historical knowledge and current
industry trends to project budgeted expenditures for 2013. While we consider
these assumptions to be reasonable based on information currently available to
us, they may prove to be incorrect.
Actual results achieved will vary from the information provided herein as a
result of numerous known and unknown risks and uncertainties and other factors.
Such factors include, but are not limited to: risks associated with the
Company's stage of development; competitive conditions; share price volatility;
risks associated with crude oil and natural gas exploration and development;
risks related to the inherent uncertainty of reserves and resources estimates;
possible imperfections in title to properties; the volatility of crude oil and
natural gas prices and markets; environmental regulation and associated risks;
loss of key personnel; operating and insurance risks; the inability to add
reserves; risks associated with industry conditions; the ability to obtain
additional financing on acceptable terms if at all; non operator activities; the
inability of investors in certain jurisdictions to bring actions to enforce
judgments; equipment unavailability; potential conflicts of interest; risks
related to operations through subsidiaries; risks related to foreign operations;
currency exchange rate risks and other factors, many of which are beyond the
control of the Company. Accordingly, there is no representation by Caza that
actual results achieved during the forecast period will be the same in whole or
in part as that forecast. Further, Caza undertakes no obligation to update or
revise any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events, except as required by applicable securities
laws.
Financial outlook information contained in this MD&A about prospective results
of operations, financial position or cash flows is based on assumptions about
future events, including economic conditions and proposed courses of action,
based on management's assessment of the relevant information currently
available. Readers are cautioned that such financial outlook information
contained in this MD&A should not be used for purposes other than for which it
is disclosed herein.
Non-IFRS Measures
The financial data presented herein has been prepared in accordance with IFRS.
The Company has also used certain measures of financial reporting that are
commonly used as benchmarks within the oil and natural gas production industry
in the following MD&A discussion. The measures are widely accepted measures of
performance and value within the industry, and are used by investors and
analysts to compare and evaluate oil and natural gas exploration and producing
entities. Most notably, these measures include "operating netback" and "funds
flow from (used in) operations". Operating netback is a benchmark used in the
crude oil and natural gas industry to measure the contribution of oil and
natural gas sales and is calculated by deducting royalties and operating
expenses from revenues. Funds flow from (used in) operations is cash flow from
operating activities before changes in non-cash working capital, and is used to
analyze operations, performance and liquidity. These measures are not defined
under IFRS and should not be considered in isolation or as an alternative to
conventional IFRS measures. These measures and their underlying calculations are
not necessarily comparable or calculated in an identical manner to a similarly
titled measure of another entity. When these measures are used, they are defined
as "non IFRS" and should be given careful consideration by the reader.
Note Regarding Boes and Mcfes
In this MD&A, barrels of oil equivalent ("boe") are derived by converting gas to
oil in the ratio of six thousand cubic feet ("Mcf") of gas to one barrel ("bbl")
of oil (6 Mcf: 1 bbl) and one thousand cubic feet of gas equivalent ("Mcfes")
are derived by converting oil to gas in the ratio of one bbl of oil to six Mcf
(1 bbl: 6 Mcf). Boes and Mcfes may be misleading, particularly if used in
isolation. A boe conversion of 6 Mcf of natural gas to 1 bbl of oil, or a Mcfe
conversion ratio of 1 bbl of oil to 6 Mcf of natural gas is based on an energy
equivalency conversion method primarily applicable at the burner tip and does
not represent a value equivalency at the well head.
Currency
References to "dollars" and "$" are to U.S. dollars and references to "CDN$" are
to Canadian dollars.
STRATEGY AND ASSETS
The Company's stated strategy is to achieve significant growth in reserves and
production through:
-- progressing material, internally generated prospects, utilizing cash
flows from existing production and exploiting Proven plus Probable
reserves; and
-- executing strategic acquisitions of assets at all stages of the
development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear set of criteria
in high-grading projects:
-- the Company seeks to retain control of project execution and timing
through the operatorship of assets;
-- assets should be close to existing established infrastructure, allowing
for quick, efficient hook-up and lower operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to
deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of west Texas and
southeast New Mexico, the most prolific oil and gas basin in North America.
Independent forecasts predict that the Permian Basin will have the greatest oil
supply growth of any North American basin over the next five years. This
provides the Company with low-risk, liquids-rich development opportunities from
many geologic reservoirs and play types. The basin also has a vast operational
infrastructure in place. The Company is utilizing recent advances in horizontal
drilling and dynamic completion technologies to unlock the significant resources
within its asset base and the region.
Management has focused efforts on building a core asset base in the prolific
Bone Spring play and has concluded that these assets represent the most
significant opportunity for the Company to deliver material production, revenue
growth and demonstrable shareholder returns within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset base within
the Bone Springs play will not only grow the Company but will also make it more
resilient to any single project risk.
The Company has now identified over 253 drilling locations in the Bone Spring
play according to the NSAI Report. Management believes that the Company is
well-positioned with approximately 4,100 net acres in the play and continues to
actively monitor opportunities to build on Caza's current acreage position.
The Company's Bone Spring leases are mostly State and Federal leases with
primary terms between 5-10 years. In terms of obligations and commitments, one
producing well will hold each lease in its entirety.
Financing
The Company's near term intention is to continue to participate in 3 to 4 wells
per annum funded from production revenues, existing cash resources and currently
available financing. However, management believes that accelerating and
expanding this drilling program will significantly increase both production and
cash flows, which will optimize the work program and drive economies of scale.
In this regard, the Company and its advisers have been actively considering
alternative sources of capital, including a review of possible joint-venture and
strategic financing partner options and other debt instruments, which will
provide the Company with sufficient leverage and capital to adequately exploit
the opportunity but mitigate material equity dilution during the "value
accretion" drilling phase.
Outlook
Subject to the availability of appropriate financing, the Company's objective is
to embark on an accelerated and expanded drilling program in the Bone Spring
play over the next two years. Management believes that such a program has the
capacity to increase shareholder value significantly over the period. A program
of this type will initially require additional financing of the nature referred
to above but would utilize excess operational cash flow to fund further
development drilling and lease purchases beyond the initial two year period.
Management believes that such a program can be accomplished by exploiting the
Company's existing asset/lease inventory with minimal equity dilution to
existing shareholders. However, if appropriate, Management will also seek to
identify corporate and asset acquisitions, which will enable the Company to
increase its position in the Bone Spring play. Accordingly, in line with the
Company's stated strategy, Management's goal is to achieve significant growth in
the Company's reserves and production, thereby raising the Company's profile in
the basin and allowing shareholder value to be maximized and, if appropriate,
fully matured over the short-to-medium term.
SELECT ANNUAL INFORMATION
2012 2011 2010
----------------------------------------------------------------------------
Financial
Revenue oil & gas 4,969,258 4,089,894 2,233,682
Funds flow from (used in)
operations(1) (2,373,619) (2,577,763) (1,735,721)
Per share - basic and diluted (0.01) (0.02) (0.01)
Net loss (12,247,999) (23,277,032) (7,451,090)
Per share - basic and diluted (0.07) (0.14) (0.06)
Capital expenditures 12,024,155 17,591,692 5,860,807
Total assets 41,768,690 48,558,875 73,483,774
Total non-current liabilities 757,102 1,052,091 627,639
Cash and working capital 445,159 8,845,433 29,370,087
Common shares outstanding, end of
year(2) 191,245,667 191,245,667 190,821,000
Operations
Operating netback ($/boe)(3)
Revenue oil & gas 47.72 46.64 35.19
Severance tax and transportation
expense 3.73 3.77 2.97
Production expenses 13.85 7.56 8.34
----------------------------------------------------------------------------
Operating netback(3) 30.14 35.31 23.88
Average daily oil production
(boe/day) 285 240 174
----------------------------------------------------------------------------
(1) Calculated based on cash flow from operating activities before changes
in non-cash working capital and certain other items. See "Non GAAP
Measures".
(2) Basic share amounts are calculated based on the number of outstanding
common shares plus the number of common shares issuable pursuant to a share
exchange and shareholders agreement (such exchangeable rights are referred
to as the "Exchangeable rights") among Caza and members of Caza's senior
management.
(3) Calculated by deducting royalties and operating costs from revenues. See
"Non-GAAP Measures".
Highlights
-- Natural gas, natural gas liquids and crude oil production increased by
19% in 2012 in comparison to 2011, averaging 285 boe per day in 2012
(includes associated condensate production). The increase was mainly due
to the Company focusing on oil rich prospects for exploration
activities.
-- A strong fourth quarter in 2012 saw production increased by 19% to
28,716 boe for the three month period ending December 31, 2012 as
compared to 24,105 boe for the three month period ending December 31,
2011.
-- A strong fourth quarter in 2012 saw revenues increased 31% to $1,580,214
for the three month period ended December 31, 2012 as compared to
$1,206,649 for the three month period ended December 31, 2011. For the
year ended December 31, 2012 revenues increased 22% to $4,969,258 as
compared to $4,089,894 for the year ended December 31, 2011.
Operating Netback Summary (Non-GAAP)
The following table presents the Company's operating netback which is a non-GAAP
measure:
Three Months ended Twelve Months ended
December 31, December 31,
(on a boe basis) 2012 2011 2012 2011
----------------------------------------------------------------------------
Oil and natural gas
revenue $ 55.03 $ 50.06 $ 47.72 $ 46.64
Production expense (3.79) (12.40) (13.85) (7.56)
Severance expense (4.28) (3.04) (3.20) (2.98)
Transportation expense (0.54) (0.52) (0.53) (0.79)
----------------------------------------------------------------------------
Operating netback (non-
GAAP) 46.42 34.10 30.14 35.31
The change in netbacks for the twelve months ended December 31, 2012 occurred as
a result of small increase in revenue of $1.08 per/boe as compared to the
previous year. Production expense increased $6.29/boe as compared to the period
ended December 31, 2011. There was a small increase in severance and
transportation of $0.04 per boe as a result of an 22% increase in revenue as
compared to the previous year.
FINANCIAL AND OPERATING RESULTS
Petroleum and Production Revenue
Three Months ended Twelve Months ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Natural gas
Production (Mcf) 74,498 84,477 346,520 342,593
Revenue ($) 287,360 301,600 982,170 1,350,674
Price ($/Mcf) 3.86 3.57 2.83 3.94
----------------------------------------------------------------------------
Light/medium crude oil
Production (bbls) 14,709 8,603 42,876 21,989
Revenue ($/bbl) 1,226,014 802,192 3,795,892 1,999,677
Price ($/bbl) 83.35 93.24 88.72 90.94
----------------------------------------------------------------------------
Natural gas liquids
Production (bbls) 1,591 1,422 3,601 8,597
Revenue ($/bbl) 66,840 102,857 191,196 739,543
Price ($/bbl) 42.01 72.34 53.09 86.03
----------------------------------------------------------------------------
Combined
Production (boe) 28,716 24,105 104,140 87,685
Revenue ($) 1,580,214 1,206,649 4,969,258 4,089,894
Price ($/boe) 55.03 50.06 47.72 46.64
----------------------------------------------------------------------------
Boe/d 312 262 285 240
----------------------------------------------------------------------------
Mcfe/d 1,873 1,572 1,707 1,441
----------------------------------------------------------------------------
For the Company, revenues from oil and gas sales increased by 22% to $4,969,258
in 2012 up from $4,089,894 in 2011. The increase resulted from increased
production volumes brought on by new wells brought on line and a 2% increase in
the average sales price to an average sale price of $47.72 per boe.
Average daily production increased by 18% to 285 boe/d in 2012 from 240 boe/d in
2011. The increase was mainly due to additional wells coming on line. Natural
gas production made up 55% of Caza's production during 2012 with natural gas
liquids and crude oil comprising the remaining 45%. This is compared to an 65%
natural gas production in 2011 showing a shift toward exploration and production
of oil based reserves.
Natural gas, natural gas liquids and crude oil revenues increased 19% to
$1,580,214 for the three-month period ended December 31, 2012 from $1,206,649
for the three-month period ended December 31, 2011. Caza's production volumes
increased 19% to 28,716 boe for the three-month period ended December 31, 2012
up from 24,105 boe for the comparative period. This represents an average daily
production rate increase of 19% for the three-months period ended December 31,
2012 as compared to the comparative period. The average natural gas, natural gas
liquids and crude oil price received by Caza increased 10% to $55.03 per boe
during the three-month period ended December 31, 2012 from $50.06 per boe during
the comparative period. The increase in revenues and production volumes for the
three-month period ended December 31, 2012 from the comparative period occurred
is a result of additional wells brought on line during the year. Our future
revenue and production volumes will be directly affected by North American
natural gas prices, West Texas Intermediate crude oil prices and natural gas
liquid prices, the performance of existing wells, drilling success and the
timing of the tie-in of wells into gathering systems. Presently the Company has
not hedged any of its production and does not have any commodity price
management programs in place.
Production Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Severance tax ($) 123,034 73,369 332,860 261,526
Transportation ($) 15,512 12,447 55,530 69,178
Production ($) 108,841 298,985 1,442,033 663,336
----------------------------------------------------------------------------
Severance, transportation and
production ($) 247,387 384,801 1,830,423 994,040
Severance, transportation and
production ($/Boe) 8.61 15.96 17.58 11.34
----------------------------------------------------------------------------
Severance tax is a tax imposed by states on natural resources such as crude oil,
natural gas and condensate extracted from the ground. The tax is calculated by
applying a rate to the dollar amount of production from the property or a set
dollar amount applied to the volumes produced from the property.
During the year ended December 31, 2012, Caza incurred aggregate production,
transportation and severance expenses of $1,830,422 or an average per boe of
$17.58. During the year ended December 31, 2011, Caza's aggregate production,
transportation and severance expenses were $994,040 or an average per boe of
$11.34. Such expenses on a per boe basis have increased during the year ended
December 31, 2012 by 55% as compared to the same period in 2011. The Company
incurred costs in the amount of $599,463 during the year ended December 31, 2012
on the San Jacinto properties that were sold in the third quarter of 2012.
Severance taxes and transportation expenses were $388,389 during the year and
are included in production expense. This is an increase of 17% from the prior
year's severance taxes and transportation expenses. The increases in severance
taxes and transportation expenses are a result of the 19% increase in production
levels during 2012 and the 2% increase in commodity prices on a per boe basis as
compared to the respective periods in 2011.
Severance taxes and transportation expenses totaled $138,546 ($4.82/boe) for the
three-month period ended December 31, 2012, as compared to $85,816 ($3.56/boe)
in the comparative period. Severance taxes and the transportation expense
increased 61% as a result of the higher production volumes and commodity prices
in the three month period ended December 31, 2012 as compared to the comparative
period.
Production expenses for the three-month period ended December 31, 2012 were
$108,841 compared to $298,985 for the comparative period. Caza's average lifting
cost for the three-month period ended December 31, 2012 was $3.79 per boe versus
$12.40 per boe for the comparative period. The decrease in production costs for
the year ended December 31, 2012 occurred in part due to costs savings achieved
as a result of the disposition of the San Jacinto properties that had high
operating costs along with the Company holding an 85% and 75% working interest
respectively in the two wells in the prospect.
Depletion, Depreciation, Amortization and Accretion
Depletion, depreciation, amortization and accretion expense for the three-month
period ended December 31, 2012 increased to $1,104,500 ($38.46/boe) from
$842,054 ($34.93/boe) in the comparative period. Depletion, depreciation and
accretion expense increased to $3,160,057 ($29.46 per boe) in 2012 from
$2,996,600 ($34.17 per boe) in 2011.
Three Months ended Twelve Months ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
Depletion and depreciation ($) 1,122,537 842,054 3,133,108 2,974,783
Accretion ($) 2,901 5,454 14,986 21,817
----------------------------------------------------------------------------
Depletion, depreciation and
accretion ($) 1,125,438 847,508 3,148,094 2,996,600
Depletion, depreciation and
accretion ($/Boe) 39.19 35.16 30.23 34.17
----------------------------------------------------------------------------
The increased depletion expense for the period ended December 31, 2012 occurred
as a result of the relationship of the costs incurred in drilling activities
carried out in the West Texas and Southeast Texas CGU's in relation to the
associated reserves recorded. This brought about an aggregate 5% increase in
depletion expense as compared to the respective period in 2011 but on a per boe
basis the depletion expense decreased by 12%.
Costs of unproved properties of $10,085,746 were excluded from depreciable costs
in the exploration and evaluation assets. A proportionate amount of the carrying
value will be transferred to the depletable pool as reserves are proven through
the execution of Caza's exploration program.
Accretion expense is the increase in the present value of the asset retirement
obligation for the current period and the amount of this expense will increase
commensurate with the asset retirement obligation as new wells are drilled or
acquired through acquisitions.
General and Administrative Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2012 2011 2012 2011
----------------------------------------------------------------------------
General and administrative
($) 1,399,714 2,194,268 5,777,933 6,090,488
Joint venture partner
reimbursements ($) - - - -
General and administrative
recovery ($) (32,540) (38,536) (117,737) (178,654)
----------------------------------------------------------------------------
Net general and
administrative ($) 1,367,174 2,155,732 5,660,196 5,911,834
General and administrative
($/Boe) 48.74 91.03 55.48 69.46
Net general and
administrative ($/Boe) 47.61 89.43 54.35 67.42
----------------------------------------------------------------------------
Net general and administrative expenses for 2012 decreased to $5,660,196 from
$5,911,834 for 2011 showing a decrease of 4% from the comparative period. On a
boe basis the net general and administrative expenses decreased by 46% and 19%
for the respective three-month period and year ended December 31, 2012 due to
the increase in production volumes along with the small decrease in expenses
from the comparative period.
During 2012, Caza did not capitalize general and administrative expenses
relating to exploration and development activities. Stock-based compensation
expense in the amount of $95,580 (2011 - $43,385) is included in general and
administrative expenses for the three-month period ended December 31, 2012 and
$217,504 (2011 - $87,867) is included for the year ended December 31, 2012. Caza
recorded no forfeitures in stock options for the year ended December 31, 2012.
Income Taxes
Presently the Company does not expect to pay current taxes in the foreseeable
future based on existing tax pools, planned capital activities and current
forecasts of taxable income. However, the Company's tax horizon will ultimately
depend on several factors including commodity prices, property dispositions,
future production, corporate expenses, and capital expenditures to be incurred
in future reporting periods. Estimated income tax losses available to be carried
forward as at January 1, 2011 with respect to the Company's operations are as
follows:
----------------------------------------------------------------------------
Expiring at December 31, Amounts
----------------------------------------------------------------------------
US CDN
2026 1,484,777 121,240
2027 11,146,427 872,794
2028 16,409,534 756,285
2029 1,887,722 913,105
2030 9,004,333 1,218,960
2031 14,887,664 1,085,041
2032 8,557,709 346,350
Net loss
Net loss in 2012 decreased by 39% to $12,247,999 ($0.07 per share, basic and
diluted) compared to $23,277,032 ($0.14 per share, basic and diluted) in 2011.
Caza incurred a net loss of $6,357,564 for the three-month period ended December
31, 2012 as compared to a net loss of $15,001,507 during the comparative period.
During the year ended December 31, 2012 the Company recorded impairments and
exploration and evaluation expenditures in the amount of $5,904,374 (2011 -
$17,182,432) due to changes in estimates in reserve values and weaker natural
gas commodity prices. The decrease in net loss for the year ended December 31,
2012 as compared to the previous period was due principally to the change in
impairments that were recorded in each year.
Investments
Interest income for the three-month period ended December 31, 2012 was $1,610
and $4,356 for the year ended December 31, 2012, a decrease from $16,535 during
the year ended December 31, 2011. Interest was earned on the proceeds received
from the sale of the San Jacinto properties. Caza invested the proceeds from
these financings in short-term money market funds. The Company does not hold any
asset backed commercial paper.
Funds flow from (used in) operations (Non-GAAP)
The following table reconciles the non-GAAP measure "funds flow from (used in)
operations" to "net loss", the most comparable measure calculated in accordance
with GAAP. Cash flow from operations before changes in non-cash working capital
provides better information as it ignores timing differences resulting primarily
from fluctuations in payables and receivables. As such it is a common measure
used by management in the oil and gas industry.
Three Months ended Twelve Months ended
December 31, December 31,
($) 2012 2011 2012 2011
----------------------------------------------------------------------------
Net loss (4,384,653) (15,001,507) (12,247,999) (23,277,032)
Depletion, depreciation,
amortization 1,122,537 842,054 3,133,108 2,974,783
Accretion 2,901 5,454 14,986 21,817
Stock-based compensation 95,580 43,385 217,506 87,868
Impairment of oil & gas
properties 3,215,868 12,538,478 5,904,374 17,182,432
Exploration and
evaluation expense 192,935 192,935
Other income - (48,900) - (48,900)
Disposal of assets 3,456 461,471 47,444
Bad debt expense - 433,825 - 433,825
----------------------------------------------------------------------------
Funds flow (used in)
operations 248,624 (1,187,211) (2,323,619) (2,577,763)
----------------------------------------------------------------------------
Funds flow loss per
share - basic and
diluted 0.00 (0.01) (0.01) (0.02)
----------------------------------------------------------------------------
The increase in the change in funds flow provided in operations as compared to
the previous period is associated with the sale of the San Jacinto properties
and decreased general and administrative expenses during the current year.
Capital Expenditures
Three Months ended Twelve Months ended
December 31, December 31,
By Type ($) 2012 2011 2012 2011
----------------------------------------------------------------------------
Drilling and completions 5,613,636 3,313,571 8,953,239 14,162,354
Seismic - (303,269) - (300,532)
Facilities and lease
equipment 802,868 560,361 1,683,374 2,396,391
Office furnishings and
equipment - - 1,944 18,879
Leasehold geological
/geophysical 67,018 (2,907) 1,196,156 139,352
Other costs (recovery) 857,588 180,084 189,442 1,175,248
----------------------------------------------------------------------------
Total 7,341,110 3,747,840 12,024,155 17,591,692
----------------------------------------------------------------------------
During the year ended December 31, 2012, Caza drilled seven gross wells (1.40
net) with activities concentrated in the Bone Spring play in New Mexico.
Outstanding Share Data
Caza is authorized to issue an unlimited number of common shares without par
value. At March 26, 2013 168,589,821 common shares were issued and outstanding.
In addition, the management team has the right at any time to exchange the Caza
Petroleum, Inc. ("Caza Petroleum") shares currently held by them for an
aggregate of 26,502,000 common shares.
Holders of common shares are entitled to one vote per share on all matters voted
on a poll by shareholders, and are entitled to receive dividends when and if
declared by the board of directors out of funds legally available for the
payment of dividends. Upon Caza's liquidation or winding up or other
distribution of its assets among its shareholders for the purpose of winding up
its affairs, holders of common shares are entitled to share pro rata in any
assets available for distribution to shareholders after payment of all
obligations of the Company. Holders of common shares do not have any cumulative
voting rights or pre-emptive rights to subscribe for any additional common
shares.
The following table sets forth the classes and number of outstanding equity
securities of the Company and the number of issued and issuable common shares on
a fully diluted basis.
Issued and Issuable
Securities
Common Shares
Issued and outstanding 164,743,667
Issuable from Exchangable rights 26,502,000
Issuable from exercise of warrants -
Issuable from exercise of stock options 16,900,000
--------------------
Total Common Shares issued and issuable 208,145,667
--------------------
Warrants Issued and Outstanding
Warrants to purchase common shares outstanding 1,055,224
Stock Options Issued
Management Stock options outstanding 16,900,000
Commitments
The following is a summary of the estimated amounts required to fulfill Caza's
remaining contractual commitments as at December 31, 2012:
Type of Obligation less than 1 1-3 4-5
($) Total Year Years Years Thereafter
----------------------------------------------------------------------------
Operating leases 714,442 271,965 442,477 - -
Asset retirement
obligations 1,415,351 210,696 13,600 30,954 1,160,101
----------------------------------------------------------------------------
Total contractual
commitments 2,129,793 482,661 456,077 30,954 1,160,101
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity and Capital Resources
At December 31, 2012, Caza had a working capital surplus of $445,159 as compared
to $8,845,433 as at December 31, 2011 and $29,370,087 as at December 31, 2010.
This decrease of $8,400,274 in working capital from December 31, 2011 resulted
primarily from capital expenditures of $12,024,155 in drilling and lease
acquisition activities and $2,323,619 in funds flow used in operations offset by
sale proceeds from the San Jacinto properties of $5,947,500. Caza had a cash
balance of $6,809,640 as of December 31, 2012. The current working capital
surplus of $445,159 does not include the decommissioning liabilities of
$210,696.
In addition, on November 23, 2012 the Company entered into a GBP 6 million
Standby Equity Distribution Agreement ("SEDA") and a US$12 million SEDA-backed
Loan Agreement with YA Global Master SPV Ltd., an investment fund managed by
Yorkville Advisors Global, LP ("Yorkville"). These facilities will provide Caza
flexibility for future capital funding and meeting the costs of continued
drilling of the Bone Spring play in New Mexico. Caza received an initial
draw-down of US$2.2 million on the loan agreement and may draw a second advance
of US$1.8 million at its discretion. Additional draw-downs may be made with the
mutual agreement of the parties. Loan repayment is supported by the SEDA
facility, allowing Caza the option to issue equity at a 5% discount to market to
fund any loan repayment as well as any balance of well costs.
The Company's investing activities during the year ended December 31, 2012
consisted primarily of expenditures on its capital program. Management
anticipates that the Company has adequate cash reserves to fund its funds flow
deficiency and budgeted capital expenditures for the next 12 months. The Company
may choose to reduce budgeted capital expenditures and in the past has employed
reductions in general and administrative costs. The Company is continuing to
monitor its general and administrative costs.
The Company's near term intention is to continue to participate in three to four
wells per annum funded from production revenues, existing cash resources and
currently available financing. However, management believes that accelerating
and expanding this drilling program will significantly increase both production
and cash flows, which will optimize the work program and drive economies of
scale.
In this regard, the Company and its advisers have been actively considering
alternative sources of capital, including a review of possible joint-venture and
strategic financing partner options and other debt instruments, which will
provide the Company with sufficient leverage and capital to adequately exploit
the opportunity but mitigate material equity dilution during the "value
accretion" drilling phase. In the event additional sources of financing were
available to be obtained the Company would consider increases to its drilling
program.
Caza and its subsidiary Caza Petroleum Inc. may be considered to be "related
parties" for the purposes of Multilateral Instrument 61-101 of the Canadian
Securities Administrators. As a result, Caza or Caza Petroleum Inc. may be
required to obtain a formal valuation or disinterested shareholder approval
before completing certain transactions with the other party.
Transactions with Related Parties
All related party transactions are in the normal course of operations and have
been measured at the agreed to exchange amounts, which is the amount of
consideration established and agreed to by the related parties and which is
comparable to those negotiated with third parties.
In 2010, Singular Oil & Gas Sands, LLC ("Singular") agreed to participate in the
drilling of the Matthys McMillan Gas Unit #2 and the O B Ranch #1 wells located
in Wharton County, Texas. Under the terms of that agreement, Singular paid
14.01% of the drilling costs through completion to earn a 10.23% net revenue
interest on the Matthys McMillan Gas Unit #2 well and paid 12.5% of the drilling
costs to earn a 6.94% net revenue interest on the O B Ranch #1 well. This
participation was in the normal course of Caza's business and on the same terms
and conditions to those of other joint venture partners. Singular is a related
party as it is a company under common control with Zoneplan Limited, which is a
significant shareholder of Caza.
Summary of Quarterly Results
Three
Three months Three Three
months ended months months
ended September ended ended
December 31, 30, June 30, March 31,
2012 2012 2012 2012
----------------------------------------------------------------------------
Petroleum and natural
gas sales 1, 580,214 902,622 1,093,694 1,392,728
Net income (loss) (4,384,653) (2,203,998) (1,967,238) (3,692,110)
Per share - basic and
diluted (0.03) (0.01) (0.01) (0.02)
Funds flow from
operations (See note)
(1) 248,624 3,375,257 (1,297,649) (348,016)
Per share - basic and
diluted 0.00 0.02 (0.01) (0.00)
Net capital expenditures 7,341,110 2,391,421 1,352,748 938,874
Average daily production
(boe/d) 312 239 276 311
Weighted average shares
outstanding 164,743,667 164,743,667 164,743,667 164,743,667
Three
Three months Three Three
months ended months months
ended September ended ended
December 31, 30, June 30, March 31,
2011 2011 2011 2011
----------------------------------------------------------------------------
Petroleum and natural
gas sales 1,206,649 995,466 843,836 1,043,943
Net income (loss) (15,001,507) (3,023,471) (1,577,151) (3,674,903)
Per share - basic and
diluted (0.07) (0.02) (0.01) (0.02)
Funds flow from (used
in) operations (See
note)(1) (1,187,211) (527,218) (692,089) (186,450)
Per share - basic and
diluted (0.01) (0.00) (0.00) (0.00)
Net capital expenditures 3,747,840 6,206,058 5,051,468 2,571,123
Average daily production
(boe/d) 262 233 199 266
Weighted average shares
outstanding 164,595,841 164,400,380 164,344,000 164,319,000
(1) Calculated based on cash flow from operations before changes in non-cash
working capital.
Factors that have caused variations over the quarters:
-- The Company drilled thirteen gross (4.93 net) wells in Texas, New Mexico
and Louisiana during 2011 and 2012 of which ten gross (4.13 net) wells
were completed and one gross (0.548 net) was undergoing completion
activities and one gross (0.25 net) did not encounter hydrocarbons.
-- Caza grew it's prospect inventory and related leasehold costs in
prospects located in Texas and south east New Mexico.
Financial Instruments
The Company holds various forms of financial instruments. The nature of these
instruments and the Company's operations expose the Company to commodity price,
credit, and foreign exchange risks. The Company manages its exposure to these
risks by operating in a manner that minimizes its exposure to the extent
practical.
Commodity Price Risk
The Company is subject to commodity price risk for the sale of natural gas and
other hydrocarbons. The Company may enter into contracts for risk management
purposes only, in order to protect a portion of its future cash flow from the
volatility of hydrocarbon commodity prices. To date the Company has not entered
into any forward commodity contracts.
Credit Risk
Credit risk arises when a failure by counter parties to discharge their
obligations could reduce the amount of future cash inflows from financial assets
on hand at the balance sheet date. A majority of the Company's financial assets
at the balance sheet date arise from crude oil, natural gas liquids and natural
gas sales and the Company's accounts receivable that are with these customers
and joint venture participants in the oil and natural gas industry. Industry
standard dictates that commodity sales are settled on the 25th day of the month
following the month of production. The Company's natural gas, natural gas
liquids and crude oil production is sold to large marketing companies.
Typically, the Company's maximum credit exposure to customers is revenue from
two months of sales. During the year ended December 31, 2012, the Company sold
59% (December 31, 2011 - 69%) of its natural gas, natural gas liquids and crude
oil to a single purchaser. These sales were conducted on transaction terms that
are typical for the sale of natural gas, natural gas liquids and crude oil in
the United States. In addition, when joint operations are conducted on behalf of
a joint venture partner relating to capital expenditures, costs of such
operations are paid for in advance to the Company by way of a cash call by the
partner of the operation being conducted.
Caza management assesses quarterly if there should be any impairment of the
financial assets of the Company. At December 31, 2012, the Company had overdue
accounts receivable from certain joint interest partners of $58,757 which were
outstanding for greater than 60 days and $170,741 that were outstanding for
greater than 90 days. At December 31, 2012, the Company's two largest joint
venture partners represented approximately 19% and 11% of the Company's
receivable balance respectively (December 31, 2011 - 13% and 10% respectively).
The maximum exposure to credit risk is represented by the carrying amount on the
balance sheet of cash and cash equivalents and accounts receivable.
Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange fluctuations, as certain
general and administrative expenses are or will be denominated in Canadian
dollars and United Kingdom pounds sterling. The Company's sales of oil and
natural gas are all transacted in US dollars. At December 31, 2010, the Company
considers this risk to be relatively limited and not material; therefore it does
not hedge its foreign exchange risk.
Fair Value of Financial Instruments
The Company has determined that the fair values of the financial instruments
consisting of cash and cash equivalents, accounts receivable and accounts
payable are not materially different from the carrying values of such
instruments reported on the balance sheet due to their short-term nature.
All financial assets except for cash and cash equivalents which are classified
as held for trading, are classified as either loans or receivables and are
accounted for on an amortized cost basis. All financial liabilities are
classified as other liabilities. There are no financial assets on the balance
sheet that have been designated as available-for-sale. There have been no
changes to the aforementioned classifications in the current fiscal period ended
December 31, 2010.
Liquidity Risk
Liquidity risk includes the risk that, as a result of our operational liquidity
requirements:
-- The Company will not have sufficient funds to settle a transaction on
the due date;
-- The Company will be forced to sell financial assets at a value which is
less than what they are worth; or
-- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts projected to
complete the Company's existing capital expenditure program are continuously
monitored and adjusted as input variables change. These variables include but
are not limited to, natural gas production from existing wells, results from new
wells drilled, commodity prices, cost overruns on capital projects and
regulations relating to prices, taxes, royalties, land tenure, allowable
production and availability of markets. As these variables change, liquidity
risks may necessitate the Company to conduct equity issues or obtain project
debt financing. The Company also mitigates liquidity risk by maintaining an
insurance program to minimize exposure to insurable losses. The financial
liabilities as at December 31, 2009 that are subject to liquidity risk are
accounts payable and accrued liabilities. The contractual maturity of these
financial liabilities is generally the following sixty days from the receipt of
the invoices for goods of services and can be up to the following next six
months. Management believes that the Company's current working capital will be
adequate to support these financial liabilities.
Critical Accounting Estimates
The policies discussed below are considered particularly important as they
require management to make informed judgments, some of which may relate to
matters that are inherently uncertain. The financial statements have been
prepared in accordance with Canadian IFRS. In preparing financial statements,
management makes certain assumptions, judgments and estimates that affect the
reported amounts of assets, liabilities, revenues and expenses. The basis for
these estimates is historical experience and various other assumptions that
management believes to be reasonable. Actual results could differ from the
estimates under different assumptions or conditions.
Reserves - The Company engages independent qualified reserve evaluators to
evaluate its reserves each year. Reserve determinations involve forecasts based
on property performance, future prices, future production and the timing of
expenditures; all these are subject to uncertainty. Reserve estimates have a
significant impact on reported financial results as they are the basis for the
calculation of depreciation and depletion. Revisions can change reported
depletion and depreciation and earnings; downward revisions could result in a
ceiling test write down.
Decommissioning Liabilities - The Company provides for the estimated abandonment
costs using a fair value method based on cost estimates determined under current
legislative requirements and industry practice. The amount of the liability is
affected by the estimated cost per well, the timing of the expenditures and the
discount factor used. These estimates will change and the revisions will impact
future accretion, depletion and depreciation rates.
Income taxes - The utilization of future tax assets subject to an expiry date
are based on estimates of future cash flows and profitability. By their nature,
these estimates are subject to measurement uncertainty and the effect on the
financial statements of changes of estimates in future periods could be
significant.
Stock based Compensation - The Black-Scholes option pricing model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. This model is used to value the stock
options granted. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Changes in
the subjective input assumptions can materially affect the fair value estimates
as reflected in the consolidated financial statements
Recent Accounting Pronouncements
The Company has assessed new and revised accounting pronouncements that have
been issued that are not yet effective and determined that the following may
have a significant impact on the Company:
Each of the additional new standards outlined below is effective for annual
periods beginning on or after January 1, 2013 (with the exception of IFRS 9,
which is effective for annual periods beginning on or after January 1, 2015).
The Company has not yet assessed the impact, if any, that the new amended
standards will have on its financial statements or whether to early adopt any of
the new requirements.
IFRS 9 (revised) "Financial Instruments: Classification and Measurement"
The result of the first phase of the IASB's project to replace IAS 39,
"Financial Instruments: Recognition and Measurement". The new standard replaces
the current multiple classification and measurement models for financial assets
and liabilities with a single model that has only two classification categories:
amortized cost and fair value.
IFRS 10 (new) "Consolidated Financial Statements"
Replaces Standing Interpretations Committee 12, "Consolidation - Special Purpose
Entities" and the consolidation requirements of IAS 27 "Consolidated and
Separate Financial Statements". The new standard replaces the existing risk and
rewards based approaches and establish control as the determining factor when
determining whether an interest in another entity should be included in the
consolidated financial statements.
IFRS 11 (new) "Joint Arrangements"
Replaces IAS 31 "Interests in Joint Ventures" along with amending IAS 28
"Investment in Associates". The new standard focuses on the rights and
obligations of an arrangement, rather than its legal form. The standard
redefines joint operations and joint ventures and requires joint operations to
be proportionately consolidated and joint ventures to be equity accounted.
IFRS 12 (new) "Disclosure of Interests in Other Entities"
Provides comprehensive disclosure requirements on interests in other entities,
including joint arrangements, associates, and special purpose vehicles. The new
disclosure requires information that will assist financial statement users in
evaluating the nature, risks and financial effects of an entity's interest in
subsidiaries and joint arrangements.
IFRS 13 (new) "Fair Value Measurement"
Provides a common definition of fair value within IFRS. The new standard
provides measurement and disclosure guidance and applies when IFRS requires or
permits the item to be measured at fair value, with limited exceptions. This
standard does not determine when an item is measured at fair value and as such
does not require new fair value measurements.
The Company will also continue to monitor standards development as issued by the
IASB and the AcSB as well as regulatory developments as issued by the CSA, which
may affect the timing, nature or disclosure of its adoption of IFRS.
RISK FACTORS
The risks and uncertainties set out below and elsewhere in this Annual
Information Form are not the only ones facing the Company. Additional risks and
uncertainties not presently known to the Company or that the Company currently
considers immaterial may also impair the business and operations of the Company
and Caza Petroleum and cause the price of the Common Shares to decline. If any
of the following risks actually occur, the Company's business may be harmed and
the financial condition and results of operations may suffer significantly. In
that event, the trading price of the Common Shares could decline and holders of
Common Shares may lose all or part of their investment.
Stage of Development
An investment in the Company is subject to certain risks related to the nature
of the Company's business and its early stage of development. There are numerous
factors which may affect the success of the Company's business which are beyond
the Company's control including local, national and international economic and
political conditions. The Company's business involves a high degree of risk
which a combination of experience, knowledge and careful evaluation may not
overcome. The Company has no earnings and there can be no assurance that the
Company's business will be successful or profitable or that additional
commercial quantities of crude oil and natural gas will be discovered by the
Company. The Company has not paid any dividends and it is unlikely to pay
dividends in the immediate or foreseeable future.
Substantial Capital Requirements
The Company anticipates making substantial capital expenditures for the
acquisition, exploration, development and production of oil and natural gas
reserves in the future. The Company's current revenues may not be sufficient to
fund these activities and the Company may not have access to the capital
necessary to undertake or complete future drilling programs. In addition,
uncertain levels of near term industry activity coupled with uncertainty in the
global credit market exposes the Company to additional access to capital risk.
There can be no assurance that debt or equity financing will be available or
sufficient to meet these requirements or for other corporate purposes or, if
debt or equity financing is available, that it will be on terms acceptable to
the Company. The inability of the Company to access sufficient capital for its
operations could have a material adverse effect on the Company's business
financial condition, results of operations and prospects.
Additional Funding Requirements
The Company's cash flow is and may not be sufficient to fund its ongoing
activities at all times. From time to time, the Company may require additional
financing in order to carry out its oil and gas acquisition, exploration and
development activities. Failure to obtain such financing on a timely basis could
cause the Company to forfeit its interest in certain properties, miss certain
acquisition opportunities and reduce or terminate its operations, and may affect
the Company's ability to expend the capital required to replace its reserves or
to maintain its production. There can be no assurance that additional debt or
equity financing will be available to meet these requirements or, if available,
on terms acceptable to the Company. This may be complicated by the limited
market liquidity for the shares of smaller companies, restricting access to some
institutional investors. Continued uncertainty in domestic and international
credit markets could also materially affect the Company's ability to access
sufficient capital for its capital expenditures and acquisitions. Furthermore,
if additional financing is raised through the issuance of equity, control of the
Company may change and the shareholders may suffer dilution. The Company may
also consider asset dispositions or farm-out or joint venture arrangements in
order to fund or implement its exploration and development activities; however,
there can be no assurance that the Company will be able to secure such
dispositions or arrangements on acceptable terms or at all. The inability of the
Company to access sufficient capital for its operations and/or to secure
acceptable alternative arrangements may have a material adverse effect on the
Company's ability to execute its business strategy and on its business,
financial condition, results of operations and prospects.
Global Credit Crisis and Recession
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 continued in 2009, causing a loss of confidence
in the broader U.S. and 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 various actions by
governments, concerns about the general condition of the capital markets,
financial instruments, banks, investment banks, insurers and other financial
institutions caused the broader credit markets to further deteriorate and stock
markets to decline substantially. Although economic conditions improved towards
the latter portion of 2009 and in 2010, as anticipated, the recovery from the
recession has been slow in various jurisdictions including in Europe and the
United States and has been impacted by various ongoing factors including
sovereign debt levels and high levels of unemployment which continue to impact
commodity prices and to result in high volatility in the stock market.
Competitive Conditions
The oil and natural gas industry is highly competitive and Caza and its
subsidiaries compete with a substantial number of other companies that have
greater resources. Many of these companies explore for, produce and market oil
and natural gas, carry on refining operations and market the resultant products
on a worldwide basis. The primary areas in which the Company and its
subsidiaries encounter substantial competition are in locating and acquiring
desirable leasehold acreage for drilling and development operations, locating
and acquiring attractive producing oil and natural gas properties, and obtaining
purchasers and transporters of the oil and natural gas they produce. Many of
these competitors have financial, technical and other resources substantially
greater than those of the Company. To the extent that these companies enjoy
technological advantages, they may be able to implement new technologies more
rapidly than Caza and its subsidiaries. There is also competition between
producers of oil and natural gas and other industries producing alternative
energy and fuel. The inability to acquire desirable properties, assets or
service providers as a result of competition may have a material adverse effect
on Caza's business, financial condition, results of operations and trading price
of the Common Shares.
Share Price Volatility
The share price of emerging companies can be highly volatile. The price at which
the Common Shares are traded and the price at which investors may realize their
Common Shares will be influenced by a large number of factors, some specific to
Caza and its operations and some which may affect companies trading on exchanges
generally. These factors may include the performance of the Company and its
subsidiaries, large purchases or sales of the Common Shares, legislative changes
and general economic, political or regulatory conditions. Prospective investors
should be aware that the value of an investment in the Company may go down as
well as up and that the market price of the Common Shares may not reflect the
underlying value of Caza. Investors may therefore realize less than, or lose all
of, their investment.
Crude Oil and Natural Gas Exploration and Development
Crude oil and natural gas exploration involves a high degree of risk and there
is no assurance that expenditures made on future exploration or development
activities by the Company and its subsidiaries will result in discoveries of
crude oil, condensate or natural gas that are commercially or economically
feasible. It is difficult to project the costs of implementing any exploratory
drilling program due to the inherent uncertainties of drilling in unknown
formations, the shortages of and delays in the availability of drilling rigs and
equipment, the costs associated with encountering various drilling conditions
such as over pressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof.
The Company's operations are subject to all the risks normally associated with
the exploration, development and operation of crude oil and natural gas
properties and the drilling of crude oil and natural gas wells, including
encountering unexpected formations or pressures, mechanical failures, premature
declines of reservoirs, environmental damage, blow outs, cratering, fires and
spills, all of which could result in personal injuries, loss of life and damage
to property of the Company and others. In accordance with customary industry
practice the Company and its subsidiaries do maintain insurance coverage, but
are not fully insured against all risks, nor are all such risks insurable.
Environmental regulation is becoming increasingly stringent and costs and
expenses of regulatory compliance are increasing.
Exploration, appraisal and development of crude oil and natural gas reserves is
speculative and involves a significant degree of risk. Few properties that are
explored are ultimately developed into new reserves. If at any stage the Company
and its subsidiaries are precluded from pursuing their exploration or
development program, or such program is otherwise not continued, the Company's
business, financial condition and/or results of operations and, accordingly, the
trading price of the Common Shares is likely to be materially adversely
affected.
Reserves and Resources Estimates
There are numerous uncertainties inherent in estimating quantities of proved,
probable and possible reserves and prospective reserves and cash flows to be
derived from reserves, including many factors beyond the control of the Company.
The reserves, resources and cash flow information set forth in this Annual
Information Form represent estimates only. The reserves, resources and estimated
future net cash flows from Caza Petroleum's properties have been independently
evaluated by NSAI in the NSAI Report with an effective date of December 31,
2012. The Company owns 86.14% of Caza Petroleum with the balance held by the
Management Team. This evaluation includes a number of assumptions relating to
factors such as initial production rates, production decline rates, ultimate
recovery of reserves, timing and amount of capital expenditures, marketability
of production, future prices of crude oil and natural gas, operating costs,
abandonment and salvage values, royalties, government levies that may be imposed
over the producing life of the reserves and reserves which are currently
undiscovered but may be discovered at a future date. These assumptions were
based on price forecasts in use at the date the relevant evaluations were
prepared and many of these assumptions are subject to change and are beyond the
control of the Company. Actual production and cash flows derived there from will
vary from these evaluations, and such variations could be material. Due to the
limited history of Caza Petroleum's producing wells, a significant portion of
its reserves have not been estimated on a decline curve analysis of production,
but rather on a volumetric basis which assumes certain characteristics of the
reservoir.
The present value of estimated future net cash flows referred to herein should
not be construed as the current market value of estimated crude oil and natural
gas reserves attributable to Caza Petroleum's properties. The estimated
discounted future net cash flows from reserves are based upon price and cost
estimates which may vary from actual prices and costs and such variance could be
material. Actual future net cash flows will also be affected by factors such as
the amount and timing of actual production, supply and demand for crude oil and
natural gas, curtailments or increases in consumption by purchasers and changes
in governmental regulations or taxation.
Title to Properties
At the Company's development stage, its primary emphasis presently is upon
acquiring oil and gas leasehold interests in its prospects and properties for
purposes of assembling drilling prospects and drilling wells. Those leasehold
interests may be acquired by various means, including direct acquisition from
the owner of the mineral estate, farmout and farmin agreements with current
holders of leasehold interests, participation and exploration agreements by
which Caza or its subsidiaries join with other industry participants to share
the costs of acquisition, exploration, and/or development costs, and other forms
of agreement. In the case of farmout, farmin, participation and exploration
agreements, a party may assume certain obligations to pay certain monies,
acquire leases, drill wells, and/or share in other costs in order to acquire an
interest in a given prospect or well. Pursuant to such agreements, one party may
pay or otherwise bear the costs of another party as consideration for earning an
interest, which is known as a "carry", or a "carried interest". In essence, the
party bearing the costs in such an arrangement has a contractual right to earn
an interest in the leases, equipment, and production associated with a given
property. Once such leasehold interests are initially earned, depending upon the
agreement, a party may relinquish or otherwise forfeit interests or the
opportunity to earn additional interests in the future if the earning party
fails to continue to bear its share of ongoing or future obligations associated
with drilling, maintenance, and development operations.
Caza Petroleum and other subsidiaries of the Company have entered such types of
agreements with respect to many of their principal prospects and properties, but
not all. As to certain prospects and properties, these subsidiaries have entered
multiple such agreements which may create complex earning scenarios. As a
result, the subsidiaries must perform, or continue to perform, certain
obligations in order to earn, or to retain, interests and/or the right to earn
interests in the future. As to a number of properties and prospects, leasehold
interests must be earned through the drilling and funding of oil and gas wells
upon the respective lands. In addition, often parties to such agreements must
make participation elections, which potentially may result in their forfeiture
of interests, or alternatively, their right to acquire additional interests
resulting from forfeitures by other parties. Such elections may occur more than
once during the process of drilling a well. The Corporation's subsidiaries
future performance under such agreements, coupled with the performance and
elections by other parties, can cause these interests to increase or decrease
over the time period during which such performance and elections must occur.
At the exploration stage, it is a common practice in the oil and gas industry to
employ the services of landmen to review the recorded public records on file to
determine the current record title interest owners to the mineral estate beneath
a specific tract of land. Since the mineral and surface estates can be severed
from one another, it is not uncommon for oil and gas companies to focus on the
mineral estate, for mineral leasing purposes, rather than the surface estate. In
a competitive situation, this procedure is also utilized because the time
periods necessary to order more thorough abstracts of title and to identify the
record title ownership for mineral estates in various tracts of land could place
the company at a competitive disadvantage.
Such preliminary title reviews are useful in the determination of apparent title
to the subject lands but are subject to error and subject to other matters of
record that may burden, diminish or defeat a company's interests in the acquired
lands. Caza Petroleum employs reputable landmen who are experienced in title
searches in the areas in which Caza Petroleum seeks to acquire interests, and
the work product of those landmen are ordinarily believed to be accurate for the
lands identified and pursued.
Prior to drilling a well, and after leases are secured based upon the
preliminary title investigation, a more complete title review is generally
commissioned, or an abstract of title is acquired, for purposes of preparing a
formal drilling title opinion. Certified abstracts include copies of documents
that affect ownership under a given tract of land. Such documents may include
evidence of liens and encumbrances, defects in title, boundary conflicts, legal
proceedings, competing claims to title, prior leases, regulatory restrictions,
and similar factors. The drilling title opinion, prepared by a title attorney,
thoroughly examines and discusses such title elements, identifies title issues,
and recommends steps to pursue in resolving any such issues prior to drilling an
oil or gas well. Title opinions are ordinarily prepared prior to the actual
drilling of a well. They may, however, be commissioned prior to the purchase of
leases where the size of the tract, the amount of lease bonus at risk, or known
complexities in title warrant a detailed investigation before acquiring leases.
Caza and its subsidiaries frequently rely upon landmen to perform title reviews
for purposes of acquiring leasehold interests. The Company's subsidiaries also
reviews the preliminary title reviews, or title opinions if available, of
companies from which it acquires interests or with which it enters agreements to
earn such interests. In some cases, a title attorney may be employed to review
the ownership of the mineral estate prior to acquiring leases from the owner of
the mineral estate, and that review may or may not, depending upon the
circumstances, address other estates in the lands (e.g., the surface ownership)
and the elements stated above.
Thus, although title reviews have been and will continue to be performed
according to standard industry practice prior to the acquisition of most crude
oil and natural gas leases or rights to acquire leases in prospects and
properties or the commencement of drilling wells, such reviews do not guarantee
or preclude that an unidentified or latent defect in the chain of title will not
exist, or that a third party claim will not arise that burdens, diminishes or
defeats the claim of the Company or its subsidiaries which could result in a
reduction of the revenue received by the Company or its subsidiaries and could
have a material adverse effect on the Company's business, financial condition,
results of operations and trading price, if any, of the Common Shares. In
addition, the Company's subsidiaries may elect to accept certain risks in
connection with title to its oil and gas prospects and properties, and
acceptance of such risks can result in loss of title to all or a portion of one
or more given properties, title curative costs, re acquisition costs, and/or a
reduction in the revenue received by the Company or its subsidiaries and could
have a material adverse effect on the Company's business, financial condition,
results of operations, and trading price of the Common Shares.
Volatility of Crude Oil and Natural Gas Prices and Markets
The Company's financial condition, operating results and future growth are
dependent on the prevailing prices for crude oil and natural gas production.
Historically, the markets for crude oil and natural gas have been volatile and
such markets are likely to continue to be volatile in the future. Prices for
crude oil and natural gas are subject to large fluctuations in response to
relatively minor changes to the demand for crude oil and natural gas, whether
the result of uncertainty or a variety of additional factors beyond the control
of the Company. The Company and its subsidiaries must periodically negotiate
contracts with a limited number of potential purchasers. The price negotiated is
influenced by the size of the crude oil or natural gas stream, the nature of the
crude oil or natural gas and its location when produced. Any substantial decline
in the prices of crude oil and natural gas could have a material adverse effect
on the Company and the level of its crude oil and natural gas reserves.
Additionally, the economics of producing from some wells may change as a result
of lower prices, which could result in a suspension of production. No assurance
can be given that crude oil and natural gas prices will be sustained at levels
which will enable the Company or its subsidiaries to operate profitably. From
time to time the Company or its subsidiaries may avail itself of forward sales
or other forms of hedging activities with a view to mitigating its exposure to
the risk of price volatility.
Environmental Regulation and Risks
Extensive federal, state and local environmental laws and regulations in the
United States affect all of the operations of the Company and its subsidiaries.
These laws and regulations set various standards regulating certain aspects of
health and environmental quality, provide for penalties and other liabilities
for the violation of such standards, and establish in certain circumstances
obligations to remediate current and former facilities and locations where
operations are or were conducted. In addition, special provisions may be
appropriate or required in environmentally sensitive areas of operation. There
can be no assurance that the Company or its subsidiaries will not incur
substantial financial obligations in connection with environmental compliance.
Significant liability could be imposed on the Company or its subsidiaries for
damages, clean up costs or penalties in the event of certain discharges into the
environment, environmental damage caused by previous owners of properties
purchased by the Company's subsidiaries or non compliance with environmental
laws or regulations. Such liability could have a material adverse effect on the
Company. Moreover, the Company cannot predict what environmental legislation or
regulations will be enacted in the future or how existing or future laws or
regulations will be administered or enforced. Compliance with more stringent
laws or regulations, or more vigorous enforcement policies of any regulatory
authority, could in the future require material expenditures by the Company or
its subsidiaries for the installation and operation of systems and equipment for
remedial measures, any or all of which may have a material adverse effect on the
Company and could have a material adverse effect on the Company's business,
financial condition, results of operations and trading price of the Common
Shares.
Loss of Key Personnel
The Company depends to a large extent on the efforts and continued employment of
the Management Team, who have developed the operations of Caza Petroleum and its
predecessors since inception. The loss of the services of these officers and
other key personnel could adversely affect the Company's business, and the
Company does not maintain key man insurance on any of these persons. The success
of drilling operations and other activities integral to its business will depend
in part on the ability to attract and retain experienced geologists, engineers
and other professionals. Competition for experienced geologists, engineers and
some other professionals is extremely intense. The Company's ability to compete
in the oil and natural gas exploration and production industry will be harmed to
the extent that the Company and its subsidiaries are unable to retain and
attract experienced technical personal.
Operating and Insurance Risks
The operations of the Company and its subsidiaries are subject to hazards and
risks inherent in drilling for, producing and transporting crude oil and natural
gas. These risks include, among others, fires, explosions, geologic formations
with abnormal pressures, collapses of casing surrounding the drill pipe in
wells, mechanical failures, failure of oilfield drilling and service tools,
uncontrollable flows of underground natural gas, oil and formation water,
changes in below ground pressure in a formation that causes the surface to
collapse or crater, pipeline ruptures and cement failures, and environmental
hazards such as leaks, spills and toxic discharges. These risks can cause
substantial losses resulting from personal injury or loss of life, damage and
destruction of property and equipment, pollution and other environmental damage,
regulatory investigations and penalties, and suspension of operations. As
protection against operating hazards and in accordance with customary industry
practices, the Company and its subsidiaries maintains insurance coverage against
some, but not all, potential losses because the insurance coverage is not
available or because premium costs are considered too high. Losses could occur
for uninsured risks or in amounts exceeding the insurance coverage and these
losses could have a materially adverse effect on the Company's business,
financial condition, results of operations and trading price of the Common
Shares.
Need to Add Reserves
The Company's crude oil and natural gas reserves and production, and therefore
its cash flows and earnings are highly dependent upon the Company developing and
increasing its current reserve base and discovering or acquiring additional
reserves. Without the addition of reserves through exploration, acquisition or
development activities, the Company's reserves and production will decline over
time as reserves are depleted. To the extent that cash flow from operations is
insufficient and external sources of capital become limited or unavailable, the
Company and its subsidiaries may be unable to make the capital investments
required to maintain and expand their crude oil and natural gas reserves. There
can be no assurance that the Company or its subsidiaries will be able to find
and develop or acquire additional reserves to replace production at commercially
feasible costs. Failure to replace reserves could have a material adverse effect
on Caza's business, financial condition, results of operations and trading price
of the Common Shares.
Industry Conditions
The crude oil and natural gas industry is intensely competitive and the Company
and its subsidiaries compete with other companies which possess greater
technical and financial resources. Many of these competitors not only explore
for and produce crude oil and natural gas, but also carry on refining operations
and market petroleum and other products on an international basis. Crude oil and
natural gas production operations are also subject to all the risks typically
associated with such operations, including but not limited to premature decline
of reservoirs and invasion of water into producing formations.
The marketability and price of crude oil and natural gas which may be acquired
or discovered by the Company or its subsidiaries will be affected by numerous
factors beyond the control of the Company. Pricing of crude oil is dependent on
supply and demand for specific qualities of crude oil in specific market areas
and quality differentials are therefore subject to change with time. The ability
of the Company and its subsidiaries to market any natural gas discovered may
depend upon its ability to acquire space on pipelines which deliver natural gas
to commercial markets. The Company is also subject to market fluctuations in the
prices of crude oil and natural gas, uncertainties related to the delivery of
its reserves to pipelines and processing facilities and extensive government
regulation relating to prices, taxes, royalties, land tenure, allowable
production, the export of crude oil and natural gas and many other aspects of
the crude oil and natural gas business.
The Company and its subsidiaries are also subject to a variety of waste
disposal, pollution control and similar environmental laws and regulations in
each of the jurisdictions in which the Company or its subsidiaries operate or
may operate. Environmental regulations place restrictions and prohibitions on
emissions of various substances produced concurrently with crude oil and natural
gas and can impact the selection of drilling sites and facility locations,
potentially resulting in increased capital expenditures. The Company and its
subsidiaries may be responsible for abandonment and site restoration costs.
Non Operator Activities
The Company's subsidiaries do not operate all of the properties in which they
have an interest. Some properties are operated by other companies, and the
Company and its subsidiaries have limited ability to influence or control the
operation or future development of these non operated properties or the amount
of capital expenditures that may be required to fund their operation. Dependence
on the Operator and other working interest owners for these projects and the
limited ability to influence or control the operation and future development of
these properties could have a material adverse effect on the realization of
targeted returns or lead to unexpected future costs.
Inability to Bring Actions or Enforce Judgments by United Kingdom Investors
The Company is incorporated under the laws of Canada, and its principal
executive offices are located in the United States. A majority of the directors
and officers of the Company reside principally in the United States and all or a
substantial portion of the Company's assets and the assets of these persons are
located outside the United Kingdom. Consequently, it may not be possible for an
investor to effect service of process within the United Kingdom on the Company
or those persons. Furthermore, it may not be possible for an investor to enforce
judgments obtained in United Kingdom courts based upon the civil liability
provisions of United Kingdom securities laws or other laws of the United Kingdom
against the Company or those persons. There is doubt as to the enforceability in
original actions in Canadian courts of liabilities deriving from English's
securities laws, and as to the enforceability in Canadian courts of judgments of
English courts obtained in actions based upon the civil liability provisions of
English securities laws.
Equipment Unavailability
Caza Petroleum does not own the drilling rigs and related equipment required to
develop its oil and gas properties and relies on third parties to provide
drilling and other oil field services. Demand is high for equipment and services
in the geographic areas that Caza Petroleum has selected for exploration and
development. This demand may reduce the availability of that equipment and
services and could delay Caza Petroleum's exploration, development and
exploitation activities. The leases under which Caza Petroleum develops
properties provide time periods during which it must generate production of oil
or gas or the lease expires. Any delay that prevented completion of drilling on
leased property during the term of the lease would require additional
expenditures by Caza Petroleum to renew the lease or possibly the loss of any
benefit from past development expenditures and future production revenue. In
addition, the high demand for equipment and services increases the costs to Caza
Petroleum of the equipment and associated supplies and personnel. Any
substantial delays to gain access to equipment and services or material
increases in costs could adversely affect Caza Petroleum's business and
financial condition and have a material adverse effect on Caza's business,
financial condition, results of operations and trading price of the Common
Shares.
Potential Conflicts of Interest
There are potential conflicts of interest to which some of the directors and
officers of the Company are subject in connection with the operations of the
Company. Some of the directors and officers are material shareholders of Caza
Petroleum or are engaged and will continue to be engaged in the search for crude
oil and natural gas interests on their own behalf and on behalf of other
corporations, and situations may arise where the directors and officers will be
in direct competition with the Company. Conflicts of interest, if any, which
arise will be subject to and be governed by procedures prescribed by the BCBCA
which require a director or officer of a corporation who is a party to or is a
director or an officer of or has a material interest in any person who is a
party to a material contract or proposed material contract with the Company, to
disclose his interest and to refrain from voting on any matter in respect of
such contract unless otherwise permitted under the BCBCA.
Operating Through Subsidiaries
The Company currently conducts all of its operations through its subsidiary,
Caza Petroleum. Therefore the Company will be dependent on the cash flows of
Caza Petroleum and its subsidiaries to meet its obligations. The ability of Caza
Petroleum and its subsidiaries to make payments to the Company may be
constrained by among other things: the level of taxation, particularly corporate
profits and withholding taxes, in the jurisdiction in which it operates.
In addition, the Company and Caza Petroleum may be considered to be "related
parties" for the purposes of Multilateral Instrument 61-101 of the Canadian
Securities Administrators and Caza or Caza Petroleum may therefore be required
to obtain a formal valuation or disinterested shareholder approval before
completing certain transactions with the other party.
Risks of Foreign Operations
All of the Company's crude oil and natural gas properties and operations are
located in the United States. As such, the Company is subject to political,
economic, and other uncertainties, including, but not limited to, changes in
energy policies, currency fluctuations and royalty and tax increases and other
risks arising out of foreign governmental sovereignty over the areas in which
the Company's operations are conducted, as well as risks of loss due to
terrorism. The Company's operations may also be adversely affected by laws and
policies of Canada affecting foreign trade, taxation and investment. In the
event of a dispute arising in connection with the Company's operations in the
United States, the Company may be subject to the exclusive jurisdiction of
foreign courts or may not be successful in subjecting foreign persons to the
jurisdictions of the courts of Canada or enforcing Canadian judgments in such
other jurisdictions. Accordingly, the Company's exploration, development and
production activities in the United States could be substantially affected by
factors beyond the Company's control, any of which could have a material adverse
effect on the Company's business, financial condition, results of operations and
trading price of the Common Shares.
Fluctuations in Foreign Currency Exchange Rates
All of the Company's operations are located in the United States and all of the
Company's sales are denominated in U.S. dollars. Fluctuations in the U.S. dollar
exchange rates may cause a negative impact on revenue and costs and could have a
material adverse impact on the Company's operations.
Marketability of Production
The ability to generate revenue is dependent upon Caza Petroleum's ability to
market its production. The marketability of such production depends in part upon
a variety of factors, some of which are beyond Caza Petroleum's control. Some of
these factors include the ability to:
-- transport its crude oil and natural gas to market;
-- access processing facilities and refining capacity; and
-- obtain required regulatory approvals.
Caza Petroleum delivers oil and natural gas through pipelines and gathering
systems and on barges that it does not own. These facilities may not be
available to Caza Petroleum in the future. Other factors influencing the
marketability of production include the nature of the crude oil produced, the
availability and capacity of production gathering systems and pipelines, U.S.
federal and state control and regulation of crude oil and natural gas
production, transportation, and export and government intervention in the
internal energy demand and supply balance. If marketability factors change, the
impact on Caza Petroleum's ability to generate revenues and operate profitably
could be substantial.
Seasonal Nature of the Business
Seasonal weather conditions and lease stipulations can limit drilling and
producing activities and other oil and natural gas operations in certain areas
of the Texas Gulf Coast region. These seasonal anomalies can increase
competition for equipment, supplies and personnel during the spring and summer
months, which could lead to shortages and increase costs or delay operations.
Such cost increases or delays could have a material adverse effect on Caza's
business, financial condition, results of operations and trading price of the
Common Shares.
Terrorism
On September 11, 2001, the United States was the target of terrorist attacks of
unprecedented scope, and the United States and others instituted military action
in response. These conditions caused instability in world financial markets and
generated global economic instability. The continued threat of terrorism, the
impact of military and other action, including U.S. military operations in Iraq
and Afghanistan and the geopolitical conditions in the Middle East generally may
lead to continued volatility in prices for crude oil and natural gas and could
affect the markets for Caza Petroleum's production. In addition, future acts of
terrorism could be directed against companies operating in the United States.
Further, the U.S. government has issued public warnings that indicate that
energy assets might be specific targets of terrorist organizations. These
developments have subjected Caza Petroleum's operations to increased risks and,
depending on their ultimate magnitude, could have a material adverse effect on
Caza's business, financial condition, results of operations and trading price of
the Common Shares.
Internal Control Over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer are responsible for
establishing and maintaining internal control over financial reporting (ICFR),
as such term is defined in National Instrument 52-109 Certification of
Disclosure in Issuers' Annual and Interim Filings, for Caza. They have, as at
the financial year ended December 31, 2012, designed ICFR, or caused it to be
designed under their supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with IFRS. The control framework our
officers used to design Caza's ICFR is the Internal Control -- Integrated
Framework (COSO Framework) published by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Under the supervision of the Chief Executive Officer and the Chief Financial
Officer, Caza conducted an evaluation of the effectiveness of our ICFR as at
December 31, 2012 based on the COSO Framework. Based on this evaluation, the
officers concluded that Caza's ICFR was effective as of December 31, 2012.
There were no changes in our ICFR during the year ended December 31, 2012 that
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Caza's Chief Executive Officer and Chief Financial Officer have designed, or
caused to be designed under their supervision, disclosure controls and
procedures to provide reasonable assurance that: (i) material information
relating to the Company is made known to Caza's Chief Executive Officer and
Chief Financial Officer by others, particularly during the period in which the
annual filings are being prepared; and (ii) information required to be disclosed
by the Company in its annual filings, interim filings or other reports filed or
submitted by it under securities legislation is recorded, processed, summarized
and reported within the time period specified in securities legislation. Such
officers have evaluated, or caused to be evaluated under their supervision, the
effectiveness of Caza's disclosure controls and procedures at the financial year
end of the Company and have concluded that the Company's disclosure controls and
procedures are effective at the financial year end of the Company.
FOR FURTHER INFORMATION PLEASE CONTACT:
Caza Oil & Gas, Inc.
Michael Ford
CEO
+1 432 682 7424
Caza Oil & Gas, Inc.
John McGoldrick
Chairman
+65 9731 7471 (Singapore)
www.cazapetro.com
Cenkos Securities plc
Jon Fitzpatrick
+44 20 7397 8900 (London)
Cenkos Securities plc
Neil McDonald
+44 131 220 6939 (Edinburgh)
VSA Capital Limited
Andrew Raca
+44 20 3005 5004
VSA Capital Limited
Malcolm Graham-Wood
+44 20 3005 5012
M:Communications
Chris McMahon
+44 20 7920 2330
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