Pearl Exploration and Production Ltd. ("Pearl" or the "Company") (TSX
VENTURE:PXX)(FIRST NORTH:PXXS) is pleased to announce the results of the three
months ended March 31, 2008.
FINANCIAL AND OPERATING HIGHLIGHTS
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Three months ended March 31
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2008 2007
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FINANCIAL ($000's, except per share data)
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Total revenue 44,015 19,422
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Cash flow from operations before working
capital changes (2) 19,452 5,039
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Per common share
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Basic and diluted ($) 0.10 0.04
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Net and comprehensive loss (3,790) (17,628)
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Per common share
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Basic and diluted ($) (0.02) (0.13)
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Capital expenditures 17,512 50,841
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Total assets 584,237 586,276
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Total long-term financial liabilities 41,682 16,211
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Working capital deficiency (7,177) (53,633)
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Shareholders' equity 486,491 458,574
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OPERATIONAL
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Daily Production
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Oil - net production (bbls/d) 8,698 4,622
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Gas - net production (mcf/d) 10,757 13,923
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Total net production (boe/d) 10,503 6,966
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Product Pricing
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Oil - average selling price per bbl ($/) 63.11 35.89
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Gas - average selling price per mcf ($) 7.79 7.32
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Weighted average sales price per boe ($) 60.50 39.02
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Royalties ($/boe) 14.58 8.43
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Operating costs (including transportation
expenses) ($/boe) 21.01 17.75
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Petroleum and Natural Gas ("PNG") Netback (3)
($/boe) 24.91 12.84
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Common Share Information
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Weighted average shares outstanding
(basic) 189,241,716 132,472,088
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Weighted average shares outstanding
(diluted) 189,241,716 132,720,698
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Shares outstanding at end of period 189,241,716 133,919,589
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Volume traded during the quarter 37,354,491 13,906,980
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Share price ($)
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High 2.80 5.20
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Low 1.43 3.90
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Close (end of period) 1.63 4.15
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(1) Oil equivalent amounts referenced have been calculated using a
conversion rate of six thousand cubic feet of natural gas to one
barrel of oil. BOEs may be misleading, particularly if used in
isolation. A BOE conversion ratio of 6 mcf:1 bbl is based on an energy
equivalency.
(2) Cash flow from operations before working capital changes and cash flow
per share do not have standardized meanings prescribed by Canadian
Generally Accepted Accounting Principles ("GAAP") and therefore may
not be comparable to similar measures used by other companies. Cash
flow from operations before working capital changes includes all cash
flow from operating activities and is calculated before changes in
non-cash working capital. Cash flow from operations before working
capital changes is reconciled with net loss on the Consolidated
Statement of Cash. Management uses these non-GAAP measurements for its
own performance measures and to provide its shareholders and investors
with a measurement of the Company's efficiency and its ability to fund
a portion of its future growth expenditures.
(3) PNG netback is a non-GAAP measure used by management as a measure of
operating efficiency and profitability and may not be comparable to
similar measures used by other companies. It is calculated by
deducting royalties, operating costs and transportation costs from
petroleum and natural gas revenues.
Message from the President
To our shareholders,
Pearl is off to a strong start in 2008. Heavy oil continues to gain a much
greater position in the world energy market and the light-to-heavy oil price
differential previously seen continues to narrow with heavy oil rapidly gaining
ground. As a result Pearl achieved a cash flow in the first quarter of just
under $20 million which is almost equal to its entire cash flow from 2007.
The Company has ramped up its efforts on its steam pilot projects in the U.S.
and Canada with the objective of converting our captured large-scale resources
into proved and probable reserves. In San Miguel we completed the conversion of
the Chittam pilot to a SAGD pilot, took delivery of a second 25 MMBtu steam
generator, completed the drilling of the five spot fractured assisted steam
technology ("FAST") pilot on the Saner ranch lease and began the development of
the horizontal FAST scheme pilot on the Saner lease as well. In our Mooney field
we drilled one successful well that tested at 230 Bbl/d and is awaiting tie-in
and have been making progress on the planning and development of a polymer based
flood. In Blackrod we are planning to drill a core well and have continued to
make progress on the SAGD pilot application and expect to submit it in the
second quarter. At Onion Lake, the 25 MMBtu steam generator was installed and
commissioned with steam going into the ground in May All of these efforts are
focused on our goal of converting our resources to reserves which we believe
will add considerable dollar value per barrel of oil in the ground and, coupled
with the current long-term bull market in oil, will create enormous shareholder
value.
In keeping with the Company's near-term focus on converting resources to proven
and probable reserves and focusing on the core areas with significant resource
conversion potential, Pearl has entered into binding agreement with a large
integrated energy company to sell some of its Canadian non-core assets for $75
million. These non-core assets currently produce approximately 3,200 boe/d, and
while that does make up approximately 30% of current production it is only 10%
of proved plus probable reserves and 3% of proved plus probable plus possible
reserves. The transaction allows the Company to eliminate its debt and dedicate
more capital and intellectual resources to its core, more value-added properties
which offer greater upside towards shareholder value. This transaction is
expected to close during the second quarter.
On the operations front, aside from the undertaking to dispose of our non-core
properties, we have been focusing on the installation of in-field infrastructure
to increase operating efficiencies and decrease operating costs in our Onion
Lake field, the results of which should be begin to show up in the second
quarter. While we are disappointed with the higher operating costs incurred in
the first quarter, which was partially due to some spillover of third party
costs from last year, we have already begun to show improving operating metrics
in the second quarter. We are pleased with the progress we have made on general
and administration costs but recognize that with our production base decreasing
due to our pending sale our G&A costs per Boe are expected to increase in the
second quarter.
All the Company's activities since inception have been solely focused on
creating shareholder value. Cash flow per share, reserves per share, NPV per
share, all have grown quarter over quarter. The Company's annual reserves
statement was completed during the quarter and over the space of one year,
proved reserves increased by 90%, probable reserves by 89% and possible reserves
by over 500%. This represents an essentially four-fold increase in the Company's
combined total 3P Reserves from 50 MMboe to over 194 MMboe.
Our founding principle is that heavy oil will play an increasingly important
role in the oil and gas industry as the ability to find significant light oil
reserves continues to decline. We have already captured a substantial heavy oil
resource base through the opportunities we pursued over the last year or two and
we will now focus on maximizing the value of these large-scale resources for our
shareholders.
On behalf of the Board,
Keith Hill, President and CEO
May 13, 2008
PEARL EXPLORATION AND PRODUCTION LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Three months ended March 31, 2008 and 2007
Management's discussion and analysis ("MD&A") of Pearl Exploration and
Production Ltd.'s (the "Company" or "Pearl") financial condition and results of
operations should be read in conjunction with the unaudited consolidated
financial statements for the three months ended March 31, 2008 and 2007 as
contained in this interim report and the MD&A and audited financial statements
for the fifteen months ended December 31, 2007 and twelve months ended September
30, 2006 contained in the Company's 2007 Financial Report. The consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") and are presented in Canadian dollars
unless otherwise indicated. The effective date of this MD&A is May 13, 2008.
Additional information relating to the Company is available on SEDAR at
www.sedar.com and on the Company's web-site at www.pearleandp.com.
Forward-Looking Statements
Certain information regarding the Company contained herein may constitute
forward-looking statements. Forward-looking statements may include estimates,
plans, expectations, opinions, forecasts, projections, guidance or other
statements that are not statements of fact. By their nature, forward-looking
statements and information involve assumptions, inherent risks and
uncertainties, many of which are difficult to predict, and are usually beyond
the control of management, that could cause actual results to be materially
different from those expressed by these forward-looking statements and
information. The Company does not undertake to update or re-issue the
forward-looking statements and information that may be contained herein, whether
as a result of new information, future events or otherwise. The Company's
forward-looking statements are expressly qualified in their entirety by this
cautionary statement.
OVERVIEW
Pearl is a Canadian-based oil and gas company whose common shares are traded on
the TSX Venture Exchange under the symbol "PXX". Pearl's main focus is large,
heavy oil projects in Canada and the USA. The Company also holds interests in a
number of natural gas properties.
Pearl's core properties in Canada include:
- Onion Lake, Saskatchewan - heavy oil;
- Mooney, Alberta - heavy oil;
- Blackrod, Alberta - Heavy oil;
The Company is also involved with several projects in the USA including:
- San Miguel, Texas - heavy oil
- Palo Duro, Texas - gas
- Fiddler Creek, Montana - heavy oil
OPERATIONS UPDATE
Onion Lake Heavy Oil Project - Saskatchewan
Activity at Onion Lake during the first quarter focused on the installation of
facilities to reduce operating costs and optimization of well operations. A fuel
gas system was installed to collect solution gas from the field and provide dry
fuel gas to the generators powering the wells. Beginning in the second quarter,
the fuel gas system will allow a majority of the field to convert to this lower
cost solution gas rather than using propane.
Engineering design continued on the sand handling and salt water disposal
facilities. It is anticipated that both facilities will become operational
during late Q3 2008. This will further reduce operating costs at Onion Lake by
reducing the amount of trucking required in the field.
Construction commenced on the Onion Lake Thermal Pilot with the facilities at
90% complete by the end of Q1 2008. First steam is anticipated by mid May 2008
with first production expected during July 2008
Mooney Heavy Oil Project - Alberta
During the first quarter, Pearl drilled one Bluesky horizontal development well
at Mooney. The well production tested at 230 Boed and was shut-in due to
infrastructure constraints. The well will be brought on production later in 2008
once tie-in is complete. This well, along with the vertical stratigraphic wells
drilled in Q4 2007 were successful in identifying multiple additional
development drilling locations.
Also during the first quarter, a second booster compressor was installed to
allow for the recovery and sales of all the produced solution gas from the
field.
Pearl is continuing work on its polymer flood enhanced oil recovery pilot.
Planning is currently focused on selection and procurement of the polymer
additive, location of the polymer plant, design and procurement of the treating
facilities and identification and distribution of source water. Pearl has
identified horizontal wells that will be converted to polymer injection and
regulatory approval is pending. Polymer flooding is expected to begin in early
Q4 2008. In addition to the polymer pilot, the water flood will be expanded from
the current single water injection well to 14 water injection wells by year end.
Blackrod Heavy Oil Project - Alberta
During 2007 the Company acquired, in two separate Crown land sales, a 35%
working interest in 15 contiguous Sections (8,960 acres) of oil sands leases
located north-central Alberta between Townships 76 - 77, Ranges 17 - 18, west of
the 4th Meridian. This project consists of a large scale heavy oil resource in
the Athabasca region with over 100 million barrels of possible net reserves
according to the Company's most recent third party reserve report. The Company
also has an additional indirect interest of approximately 8% in this project
through its approximate 18% ownership in Serrano Energy Ltd., who have a 35%
working interest in the same acreage.
The Company has plans to drill one stratigraphic core well this winter and is in
the process of preparing an application for required governmental approvals of a
thermal pilot project utilizing Steam-Assisted Gravity Drainage (SAGD)
technology. Upon confirmation of positive results from this appraisal well, and
receipt of the required regulatory approvals, a SAGD pilot comprised of single
well pair pilot and related facilities will be initiated. The Company is also
investigating the possibility of executing a shallow corehole program to further
delineate this deposit in the 2008/2009 winter season.
San Miguel Heavy Oil Project - Maverick Basin, South Texas
The San Miguel heavy oil deposit is located in South Texas near the Mexican
border and contains an estimated 2 to 3 billion barrels of oil in place in the
Area of Mutual Interest ("AMI") jointly held by the Company and its 50% partner
TXCO.
During the quarter, the Company continued with plans to convert the initial
steam injection pilot located within the Chittim "B" Area to a Steam-Assisted
Gravity Drainage (SAGD) process. Pearl participated in the successful drilling
of a horizontal producer/injector pair placed between the existing cyclic steam
wells, which will be converted to temperature monitoring wells. Pearl is
currently leading the facilities expansion project of the existing operations
and took delivery of a second 25 MMBTU steam generator at site in March that
will double steam generation capacity at the pilot. The remaining facilities
modifications will be made to integrate this equipment into the existing process
and tie-in the additional new wells to the gathering system to enable the pilot
to commence SAGD operations in the second quarter of 2008.
Field operations were initiated on the second larger production pilot (Saner
Ranch Field) approximately eight miles north of the existing pilot and will
utilize the Fracture-Assisted Steamflood Technology (FAST) technique previously
proven by Conoco. Drilling the inverted five spot well pattern was completed in
Q1 2008 and will augmented by further drilling of a horizontal line drive
pattern to compliment the inverted five well pattern. Detailed facilities
engineering continued with a contracted engineering firm to finalize facilities
layout, process, and operation with initial field construction expected to
commence in the second quarter. The production pilot will have four times the
steam capacity of the original pilot, be capable of evaluating both recovery
methods, and is projected to be operational by the second quarter of 2008.
Fiddler Creek - Montana
During 2007, the Company acquired a 100% working interest in a large heavy oil
opportunity with significant resource upside potential in the Fiddler Creek area
of Montana. Pearl initiated the assessment and development of this area in
December 2007 by drilling an appraisal well, Beartooth Federal 43-33, into the
Fiddler Creek field of Stillwater County, in southern Montana. The well was
drilled into the main structure of the property, the Fiddler Creek Dome, in
order to extend the known limits of the southwestern portion of the field, and
it will be further evaluated during the first half of 2008 to validate reservoir
continuity and potential reserve additions. In addition to this well, an
existing well, Mowell #1, was re-completed for evaluation. Both wells are
connected to tank facilities to gather reservoir and production data that will
be used to confirm and complete a field development study.
The Company expects to drill an additional appraisal well following regulatory
approvals in the second half of 2008. This work is in preparation of future
field development which, beginning in 2009, is anticipated to include horizontal
development drilling in order to establish commercial production rates,
installation of production facilities, acquisition and analysis of additional
geophysical data, and examination of enhanced recovery methods.
Other Properties - Alberta, Saskatchewan
On April 24, 2008 the Company announced that it had entered into a binding
agreement with a large integrated energy company to sell certain non-core heavy
oil producing assets for $75 million. These assets, principally located in the
Lloydminster, Celtic, Pikes Peak and Thunderchild areas of Saskatchewan,
currently produce approximately 3,200 boe/d and are part of the non-core asset
package that the Company intended to sell as announced on January 8, 2008. This
deal is expected to close during the quarter ending June 30, 2008.
Other Properties - U.S.
The Company also holds interests in several other areas in the United States,
including Queen City gas fields, the West Rozel and Gunnison Wedge projects in
Utah and the Promised Land project in Montana however, there is limited or no
production from these areas and there are only minor evaluation plans
contemplated for these lands in 2008. However, the Company believes certain of
these lands, contain large resource potential and may, based upon further
evaluation, be developed in the future.
RESULTS OF OPERATIONS
Oil and Gas Production, Pricing and Revenue
Three months ended March 31
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2008 2007
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Daily production / sales volumes (1)
Oil (bbl/d) 8,698 4,622
Natural gas (mcf/d) 10,757 13,923
Combined (1) (boe/d) 10,503 6,966
Product pricing ($)
Crude oil - per bbl 63.11 35.89
Natural gas - per mcf 7.79 7.32
Combined - per boe 60.50 39.02
Revenue (000's)
PNG revenue - gross 57,830 24,464
Royalties (13,931) (5,285)
PNG revenue - net 43,899 19,179
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(i) gas production converted at 6:1
(1) Includes small amounts of NGLs not separately identified in the table
For the three months ended March 31, 2008 production increased significantly
over the prior year three-months ended March 31, 2007 which reflects the
Company's 2007 initiative to grow production through drilling and acquisitions.
Increased revenue is consistent with the increase in production and the
significantly higher market pricing for heavy oil and higher prices for natural
gas in the first quarter of 2008.
Royalties
Three months ended March 31
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2008 2007
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Royalties 13,931 5,285
as a percentage of PNG revenue 24% 22%
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Royalties represent charges against production or revenue by governments and
landowners. Royalties for the three months ended March 31, 2008 were $13.9
million in comparison to $5.3 million for the three months ended March 31, 2007.
This increase is consistent with the increase in production and revenues during
the quarter.
Royalties as a percentage of revenue increased from 22% in the quarter ended
March 31, 2007 to 24% in the quarter ended March 31, 2008 principally due to
higher prices and higher production in the Mooney property which has higher
average well rates and higher royalty rates than our production in Saskatchewan.
These percentages are consistent with industry averages.
PNG Operating Expenses and Netbacks
Three months ended March 31 2008 2007
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(000's) Total Per boe Total Per boe
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Average daily production (Boe/d) 10,503 6,966
Gross PNG revenue 57,830 60.50 24,464 39.02
Royalties (13,931) (14.58) (5,285) (8.43)
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Net PNG revenue 43,899 45.92 19,179 30.59
Operating costs (18,884) (19.76) (10,132) (16.16)
Transportation (1,197) (1.25) (999) (1.59)
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PNG netback 23,818 24.91 8,048 12.84
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Operating costs on a per boe basis averaged $19.76 for the three months ended
March 31, 2008 in comparison to $16.16 per boe for the same period in 2007. The
increase in operating costs is consistent with increased operations as compared
to prior year. Although the Company did see increased production, the per unit
cost increased more than expected due to several factors including (i) high cost
of propane; (ii) delays in focusing resources on developing efficiencies with
regards to operating costs; and (iii) $2.2 million or $2.28 per boe of 3rd party
costs that related to prior periods. Current quarter operating costs, net of
this prior period amount, totaled $17.48 per boe.
General and Administrative Expenses ("G&A")
General and administrative expenses were $3.0 million in the first quarter of
2008 compared to $2.6 million in 2007. On a per unit basis, G&A was $3.17 per
boe compared to $4.08 per boe in 2007. General and administrative costs are
consistent on a dollar basis but have decreased by $0.91 per boe from the same
period in 2007 due to the substantial increase in production and a corporate
focus on decreasing administrative costs and an overall decrease in corporate
acquisition activities.
Depletion, Depreciation and Accretion ("DD&A")
DD&A expense was $25.0 million or $26.20 per boe for the three months ended
March 31, 2008 in comparison to $17.5 million or $27.97 per boe for the three
months ended March 31, 2007.
Interest Expense
Interest expense for the three months ended March 31, 2008 was $0.3 million in
comparison to $0.4 million for the three months ended March 31, 2007. Interest
expense relates to the Company's bank debt. The Company had an average debt
level of $16.9 million and an effective interest rate of 6.66% for the three
months ended March 31, 2008.
Change in unrealized loss of gas pricing contracts
The change in unrealized loss of gas pricing contracts for the three months
ended March 31, 2007 relates to gas contracts acquired as part of the Atlas
acquisition in December, 2006.
Income Taxes
The provision for future income taxes for the quarter ended March 31, 2008 was a
recovery of $2.3 million compared to an expense of $3.5 million for the three
months ended March 31, 2007. As at March 31, 2008, the Company has recognized a
future tax asset of $4.6 million as the Company believes, based on estimated
cash flows from existing reserves, that it is more likely than not to realize
these assets.
Current tax of $0.7 million for the three months ended March 31, 2008 and $0.3
million for the same period of 2007 and is comprised primarily of Saskatchewan
capital tax and resource surcharge. The increase is consistent with higher
revenues in the current quarter.
Net Loss
The net loss for the quarter ended March 31, 2008 was $3.8 million in comparison
to a net loss of $17.6 million for the quarter ended March 31, 2007. The $13.8
million improvement in earnings is a result of the increased production and
revenues derived from numerous acquisitions in 2007 combined with a recovery of
future income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2008, the Company had $35.0 million of remaining credit capacity
available under its $50.0 million extendible term credit facility and $10.0
million demand revolving credit facility.
At March 31, 2008, the Company had a working capital deficiency of $7.2 million
compared to a working capital deficit of $34.2 million at December 31, 2007.
Funds from operations were $19.5 million for the three months ended March 31,
2008 compared to funds from operations of $5.0 million for the three months
ended March 31, 2007. The improvement in funds from operations is principally
due to higher production rates, higher commodity prices and lower general and
administrative expenses offset by higher operating expenses and royalties.
Net cash from financing activities for the quarter ended March 31, 2008 was
$25.0 million compared to net cash used in financing activities of $55.6 million
for the quarter ended March 31, 2007. During the current quarter the only
financing activity was an advance of $25.0 million from the Company's credit
facility. Significant financing activities from the quarter ended March 31, 2007
included (i) net repayment of $56.1 million of debt, and (iv) the exercise of
$0.5 million in stock options.
Net cash used in investing activities was $36.0 million for the three months
ended March 31, 2008 compared to $35.4 million for the three months ended March
31, 2007. The Company's investing activities included exploration, development
and lease acquisition expenditures of $17.5 million (2007 - $42.0 million).
The 2008 capital program and budget of $61.0 million has been established based
on the Company's projected cash flow for the year. In 2008, the Company intends
to focus its efforts chiefly on converting resources to reserves and increasing
operational efficiencies in core areas.
The Company may consider additional issuances of common shares or debt
instruments to assist with financing its ongoing oil and gas exploration,
development and acquisition activities to the extent that sufficient cash flow
from operations is unavailable in the future. In addition, the Company may
consider additional dispositions of non-core oil and gas assets or farming out
interests in oil and gas properties to finance its operations. Accordingly, the
Company's consolidated financial statements are presented on a going-concern
basis.
CAPITAL EXPENDITURES
Capital expenditures for the three months ended March 31, 2008 and 2007
are as follows:
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Three months ended March 31 2008 2007
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Land 391,694 602,601
Seismic 358,369 758,496
Drilling and completion 4,859,539 33,183,340
Equipment 12,420,040 6,148,772
Other 121,713 1,086,269
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Total exploration and development 18,151,355 41,779,478
Corporate acquisition - 8,809,049
Property acquisitions 146,321 252,401
Property dispositions (785,324) -
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Total capital expenditures 17,512,352 50,840,928
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RELATED PARTY TRANSACTIONS
Tanganyika Oil Company Ltd. ("Tanganyika") provides administrative and technical
services to the Company from time to time based upon time and expenses incurred
by Tanganyika. For the three months ended March 31, 2008, Tanganyika charged the
Company $40,054 (2007 - $59,111). Tanganyika and Pearl have certain directors
and officers in common.
Namdo Management Services Ltd. ("Namdo") provides executive and support services
to the Company. For the three months ended March 31, 2008, the Company paid
Namdo $45,000 (2007 - $nil). Namdo is a private corporation owned by Lukas H.
Lundin, a director of the Company.
RISKS AND UNCERTAINTIES
The Company is exposed to a number of risks and uncertainties inherent in
exploring for, developing and producing crude oil and natural gas. These risks
and uncertainties include, but are not limited to, the following:
- risk of finding and producing reserves economically;
- uncertainty associated with obtaining drilling licenses and other consents and
approvals;
- production risks associated with sour hydrocarbons;
- marketing reserves at acceptable prices;
- cost of capital risk associated with securing the needed capital to carry out
the Company's operations;
- risk of fluctuating foreign currency exchange rates;
- risk of governmental policies, social instability or other political, economic
or diplomatic developments in its operations;
- market risks associated with investing the Company's cash reserves in interest
bearing depository instruments; and
- environmental risks related to its oil and gas properties.
Many of the previously mentioned risks are beyond the Company's control, and it
is impossible to ensure that any exploration drilling program will result in
commercial operations. The Company does not currently utilize derivative
instruments to hedge its commodity price, foreign currency exchange or interest
rate risks.
Pearl strives to minimize and manage these risks in a number of ways, including:
- Employing qualified professional and technical staff;
- Communicating openly with members of the public regarding its activities;
- Concentrating in a limited number of areas;
- Utilizing the latest technology for finding and developing reserves;
- Constructing high-quality, environmentally sensitive, safe production facilities;
- Maximizing operational control of drilling and producing operations; and
ENVIRONMENTAL RISKS
All phases of the oil and natural gas business present environmental risks and
hazards and are subject to environmental regulation pursuant to a variety of
federal, provincial and local laws and regulations. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties, some of which may be material. Environmental
legislation is evolving in a manner expected to result in stricter standards and
enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. In 2002, the Government of Canada ratified the
Kyoto Protocol (the "Protocol"), which calls for Canada to reduce its greenhouse
gas emissions to specified levels. There has been much public debate with
respect to Canada's ability to meet these targets and the government's strategy
or alternative strategies with respect to climate change and the control of
greenhouse gases. Implementation of strategies for reducing greenhouse gases,
whether to meet the limits required by the Protocol or as otherwise determined,
could have a material impact on the nature of oil and natural gas operations,
including those of the Company. Given the evolving nature of the debate related
to climate change and the control of greenhouse gases and resulting
requirements, it is not possible to predict either the nature of those
requirements or the impact on the Company and its operations and financial
condition.
NEW ACCOUNTING STANDARDS ADOPTED
As disclosed in the December 31, 2007 annual audited consolidated financial
statements, on January 1, 2008, the Company adopted the new CICA Handbook
Sections 3862 "Financial Instruments - Disclosures", 3863 "Financial Instruments
- Presentation", and 1535 "Capital Disclosures". The adoption of these standards
has had no material impact on the Company's net income or cash flows. Additional
information on the implementation of these new standards can be found in Note 3
to the Interim Consolidated Financial Statements.
RECENT ACCOUNTING PRONOUNCEMENTS
Goodwill and Intangible Assets
As of January 1, 2009, Pearl will be required to adopt Section 3064 "Goodwill
and Intangible Assets", which revises the requirement for recognition,
measurement, presentation and disclosure of intangible assets and replaces the
existing Goodwill and Intangible Asset standard. The adoption of this standard
should not have a material impact on the Company's consolidated financial
statements.
International Financial Reporting Standards
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. As part of
that plan, the Accounting Standards Board confirmed in February, 2008 that
International Reporting Standards ("IFRS") will replace Canadian GAAP for
profit-oriented Canadian publicly accountable enterprises in 2011. Pearl is
assessing the potential impact of this change and developing a plan accordingly.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
The Company has, under the supervision of its chief financial officer, designed
a process for internal control over financial reporting, which process has been
effected by the Company's board of directors and management. The process was
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with the Company's GAAP and incorporates policies and procedures as
described above. There have been no changes in the Company's systems of internal
control over financial reporting that would materially affect, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
It should be noted that a control system, including the Company's disclosure and
internal controls and procedures, no matter how well conceived can provide only
reasonable, but not absolute, assurance that the objectives of the control
system will be met and it should not be expected that the disclosure and
internal controls and procedures will prevent all errors or fraud.
OUTLOOK
The Company plans to continue pursuing large resource North American heavy oil
opportunities to add to its portfolio, to seek to rationalize non-core assets,
and to focus on conversion of resources to reserves and development of its
existing interests in the USA and Canada.
BOES
Throughout this MD&A the calculation of barrels of oil equivalent (boe) is
calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas
for one barrel of oil and is based on an energy equivalence conversion method.
BOEs may be misleading, particularly if used in isolation. A boe conversion
ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method
primarily applicable at the burner tip and does not represent a value
equivalence at the wellhead.
NON-GAAP MEASURES
Included in this report are references to terms commonly used in the oil and gas
industry, such as, cash flow and funds from operations which represent cash flow
from operating activities expressed before changes in non-cash working capital,
long-term receivable and asset retirement costs incurred and are used by the
Company to analyze operating performance, leverage and liquidity. These terms do
not have standardized meanings prescribed by Generally Accepted Accounting
Principles and therefore may not be comparable with the calculations of similar
measures for other entities. Consequently, these are referred to as non-GAAP
measures.
PEARL EXPLORATION AND PRODUCTION LTD.
--------------------------------------------------------------------------
Consolidated Balance Sheet
(unaudited)
--------------------------------------------------------------------------
March 31, December 31,
2008 2007
--------------------------------------------------------------------------
Assets
Current assets
Cash $ - $ 4,799,186
Accounts receivable 43,485,113 25,134,435
Income taxes and capital taxes
receivable 2,493,212 2,618,015
Prepaid expenses and deposits 2,908,659 3,195,770
-------------- --------------
48,886,984 35,747,406
Investments (note 5) 9,362,895 9,362,895
Petroleum and natural gas
properties (note 6) 521,334,919 528,352,540
Future income tax 4,652,051 2,402,532
-------------- --------------
$ 584,236,849 $ 575,865,373
-------------- --------------
Liabilities
Current liabilities
Bank indebtedness $ 506,700 $ -
Accounts payable and accrued
liabilities 55,556,996 69,899,310
-------------- --------------
56,063,696 69,899,310
-------------- --------------
Long-term liabilities
Asset retirement obligation (note 8) 16,682,028 16,586,030
Bank loan (note 7) 25,000,000 -
-------------- --------------
97,745,724 86,485,340
Shareholders' equity
Share capital (note 10) 723,121,821 723,121,821
Contributed surplus (note 11) 9,679,244 8,778,124
Deficit (246,309,940) (242,519,912)
-------------- --------------
486,491,125 489,380,033
-------------- --------------
$ 584,236,849 $ 575,865,373
-------------- --------------
-------------- --------------
Commitments (note 13)
Contingencies (note 16)
See accompanying notes to consolidated financial statements
PEARL EXPLORATION AND PRODUCTION LTD.
--------------------------------------------------------------------------
Consolidated Statement of Operations and Deficit
(unaudited)
--------------------------------------------------------------------------
For the three months ended March 31
2008 2007
-------------- --------------
Revenue
Oil and gas sales $ 57,829,970 $ 24,463,816
Interest income 116,516 243,483
Royalties (13,931,457) (5,284,815)
-------------- --------------
44,015,029 19,422,484
-------------- --------------
Expenses
Production costs 18,883,835 10,132,434
Transportation costs 1,197,331 999,118
General and administrative 3,026,793 2,558,530
Depletion, depreciation and
accretion 25,043,131 17,537,007
Stock-based compensation 901,120 957,775
Interest 338,783 398,665
Change in unrealized loss of gas
pricing contracts - 487,760
Foreign currency exchange loss (gain) (35,685) 171,549
-------------- --------------
49,355,308 33,242,838
-------------- --------------
Loss before income taxes (5,340,279) (13,820,354)
-------------- --------------
Income taxes
Future income taxes (recovery) (2,249,519) 3,513,013
Income taxes and capital taxes 699,268 294,692
-------------- --------------
(1,550,251) 3,807,705
-------------- --------------
-------------- --------------
Net and comprehensive loss for the
period (3,790,028) (17,628,059)
-------------- --------------
Deficit, beginning of period (242,519,912) (20,577,168)
-------------- --------------
Deficit, end of period $ (246,309,940) $ (38,205,227)
-------------- --------------
Basic and diluted loss per share $ (0.02) $ (0.13)
Weighted average number of common
shares used in computing earnings
per share:
basic 189,241,716 132,472,088
diluted 189,241,716 132,720,698
See accompanying notes to consolidated financial statements
PEARL EXPLORATION AND PRODUCTION LTD.
--------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(unaudited)
--------------------------------------------------------------------------
For the three months ended March 31
2008 2007
-------------- --------------
Operating activities
Comprehensive loss $ (3,790,028) $ (17,628,059)
Items not involving cash:
Depletion, depreciation and accretion 25,043,131 17,537,007
Stock-based compensation 901,120 957,775
Future income tax (recovery) (2,249,519) 3,513,013
Change in unrealized loss of gas
pricing contracts - 487,760
Foreign exchange loss (gain) (35,685) 171,549
Abandonment costs (417,160) -
-------------- --------------
19,451,859 5,039,045
-------------- --------------
Changes in non-cash working
capital balances related to
operations (13,724,782) (862,868)
Long term accounts receivable - 1,066,758
-------------- --------------
5,727,077 5,242,935
-------------- --------------
Financing activities
Advances of bank loan 25,000,000 38,600,000
Repayments of bank loan - (94,670,719)
Exercise of stock options - 452,125
-------------- --------------
25,000,000 (55,618,594)
-------------- --------------
Investing activities
Acquisition of Cipher Exploration Inc. - (8,809,049)
Additions to petroleum and natural
gas properties (17,512,352) (42,031,879)
Changes in non-cash working capital
from investing (18,520,611) 15,469,794
-------------- --------------
(36,032,963) (35,371,134)
-------------- --------------
Net increase (decrease) in cash (5,305,886) (85,746,793)
Cash, beginning of period 4,799,186 91,058,203
-------------- --------------
Cash, end of period $ (506,700) $ 5,311,410
-------------- --------------
-------------- --------------
Supplementary Information
Interest paid $ 338,783 $ 416,641
Capital taxes paid $ 358,403 $ -
See accompanying notes to consolidated financial statements
PEARL EXPLORATION AND PRODUCTION LTD.
Notes to the Consolidated Financial Statements
(unaudited)
1. NATURE OF OPERATIONS
Pearl Exploration and Production Ltd. (collectively with its subsidiaries, the
"Company" or "Pearl") is listed and traded on the TSX Venture Exchange under the
trading symbol "PXX". The Company is engaged in the business of oil and gas
exploration and development in North America.
2. BASIS OF PRESENTATION
The interim consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Pearl E&P Canada Ltd., Pearl
Exploration and Production USA Ltd., Pearl Exploration and Production Montana
Ltd., Newmex Energy (USA) Inc., Valkyries Texas Corp., and Valkyries Texas Gas
Ltd. Both Cipher Exploration Inc. and Watch Resources Ltd. were amalgamated with
Pearl E & P Canada Ltd. on January 1, 2008.
The interim consolidated financial statements for the Company have been prepared
in accordance with accounting principles generally accepted in Canada, using the
same accounting policies and methods of computation as set out in note 3 to the
audited consolidated financial statements in the Company's Financial Report for
the fifteen months ended December 31, 2007. The disclosures provided herein are
incremental to those included with the audited consolidated financial
statements. The interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements for the fifteen
months ended December 31, 2007.
3. CHANGES IN ACCOUNTING POLICIES
As disclosed in the December 31, 2007 annual audited Consolidated Financial
Statements, on January 1, 2008, the Company adopted the following Canadian
Institute of Chartered Accountants ("CICA") Handbook Sections:
- Section 3862 "Financial Instruments - Disclosures" and Section 3863 "Financial
Instruments - Presentation", which replace Section 3861 "Financial Instruments
-- Disclosure and Presentation". The new disclosure standard increases the
emphasis on the risks associated with financial instruments and how those risks
are managed (See Note 14). The new presentation standard carries forward the
former presentation requirements.
- Section 1535 "Capital Disclosures". The new standard requires the Company to
disclose its objectives, policies and processes for managing its capital
structure (See Note 12).
4. RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 2009, the Company will be required to adopt the CICA Handbook
Section 3064, "Goodwill and Intangible Assets", which will replace the existing
Goodwill and Intangible Assets standard. The new standard revises the
requirement for recognition, measurement, presentation and disclosure of
intangible assets. The adoption of this standard should not have a material
impact on the Company's Consolidated Financial Statements.
In January 2006, the CICA Accounting Standards Board ("AcSB") adopted a
strategic plan for the direction of accounting standards in Canada. As part of
that plan, accounting standards in Canada for public companies are expected to
converge with International Financial Reporting Standards ("IFRS") for fiscal
periods commencing on or after January 1, 2011. The Company is assessing the
potential impacts of this changeover and developing its plan accordingly.
5. INVESTMENTS
----------------------------------
March 31, December 31,
2008 2007
----------------------------------
Investment in Serrano Energy Ltd.
("Serrano") $ 5,500,000 $ 5,500,000
Asset-backed commercial paper ("ABCP") 3,862,895 3,862,895
----------------------------------
$ 9,362,895 $ 9,362,895
----------------------------------
The Company owns approximately 4.0 million shares of Serrano. On April 29, 2008
Serrano entered into a transaction to acquire assets for the issuance of shares
and executed a subscription agreement to sell 2.0 million shares of Serrano for
$10.0 million, as a result, Pearl's ownership will decrease in Serrano from
approximately 37 percent to approximately 18 percent.
6. PETROLEUM AND NATURAL GAS PROPERTIES
------------------------------------------------
March 31, 2008
Accumulated
depreciation and
Cost depletion Net book value
------------------------------------------------
Petroleum and natural
gas properties $641,526,430 $121,411,501 $520,114,929
Office equipment 1,642,002 422,012 1,219,990
------------------------------------------------
$643,168,432 $121,833,513 $521,334,919
------------------------------------------------
------------------------------------------------
December 31, 2007
------------------------------------------------
Accumulated
depreciation and
Cost depletion Net book value
------------------------------------------------
Petroleum and natural gas
properties $623,916,051 $ 96,763,951 $527,152,100
Office equipment 1,520,287 319,847 1,200,440
------------------------------------------------
$625,436,338 $ 97,083,798 $528,352,540
------------------------------------------------
The depletion and ceiling test calculations have excluded the cost of unproved
properties of $61.7 million (December 31, 2007 - $61.0 million) and included the
cost of future development costs of $125.0 million (December 31, 2007 - $145.0
million).
7. BANK CREDIT FACILITY
The Company has a credit facility with a Canadian chartered bank which is
comprised of a $50 million revolving 364-day extendible term facility with a one
year term out, and a $10 million demand revolving operating facility. The
Company may borrow, repay and re-borrow advances with the aggregated outstanding
not to exceed the total credit facility. The facility bears interest at the bank
prime rate payable monthly and is secured by a general securities agreement.
The facility is subject to semi-annual reviews. The next scheduled review will
take place on May 30, 2008.
8. ASSET RETIREMENT OBLIGATION
The total future asset retirement obligation was estimated based on the
Company's net ownership interest in all wells and facilities, the estimated
costs to abandon and reclaim the wells and facilities and the estimated timing
of the costs to be incurred in future periods. The total undiscounted amount of
the estimated cash flows required to settle the asset retirement obligations is
approximately $32.4 million which will be incurred over the next 48 years with
the majority of costs incurred between 2008 and 2025. A credit adjusted
risk-free rate of 8 percent and an inflation factor of 1.5 percent was used to
calculate the fair value of the asset retirement obligation.
Changes to asset retirement obligation were as follows:
----------------------------------
March 31, December 31,
2008 2007
----------------------------------
Asset retirement obligation at
beginning of period $ 16,586,030 $ 3,772,479
Liabilities acquired through
acquisitions, net of dispositions - 9,822,642
Liabilities incurred during the period 219,742 2,987,539
Actual remediation expenses (417,160) (1,164,822)
Accretion 293,416 1,168,192
----------------------------------
Asset retirement obligation at
end of period $ 16,682,028 $ 16,586,030
----------------------------------
9. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2008 the Company entered into the
following transactions with related parties in the normal course of business,
which are recorded at the exchange amount established and agreed to by the
related parties:
(a) The Company paid $40,054 (2007 - $59,111) to Tanganyika Oil Company Ltd.
("Tanganyika") for administrative and other services. The Company and Tanganyika
have certain officers and directors in common.
(b) The Company paid $45,000 (2007 - $nil) to Namdo Management Services Ltd.
("Namdo") for executive and support services pursuant to a services agreement.
Namdo is a private corporation owned by Lukas H. Lundin, a director of the
Company.
10. SHARE CAPITAL
(a) Authorized:
The Company is authorized to issue an unlimited number of common shares.
(b) Common Shares Issued:
Number of Shares Attributed Value
---------------- ----------------
Balance as at March 31, 2008
and December 31, 2007 189,241,716 $ 723,121,821
---------------- ----------------
(c) Warrants Outstanding:
Weighted average
Number of whole exercise price
warrants per share
--------------------------------------------------------------------------
Balance as at March 31, 2008
and December 31, 2007 4,091,800 $ 0.98
--------------------------------------------------------------------------
(i) Four million warrants were issued pursuant to the San Miguel acquisition in
November 2005. Each warrant entitles the holder thereof to purchase an
additional common share of the Company at a price of $1.00, exercisable from the
date the San Miguel heavy oil project achieves an average daily producing rate
of 5,000 barrels of oil per day, averaged over 30 consecutive days, until
November 18, 2008.
(ii) In connection with the December, 2005 Palo Duro acquisition, the Company
issued 270,000 warrants. This number was subsequently reduced by 66% to 91,800
when the vendor exercised a back-in right on March 3, 2006. Each remaining
warrant provides the warrant holder with the right to receive an additional
common share of the Company, within 75 days of September 15, 2008, for no
additional consideration, if the average production rate per well drilled in the
Palo Duro shale gas project is at least 1.5 million cubic feet equivalent per
day, based on the initial 60 days of production. The number of warrants
ultimately issued will be reduced pro rata to the actual average production rate
if the actual average production rate per well drilled by September 15, 2008 is
less than 1.5 million cubic feet equivalent per day.
11. STOCK-BASED COMPENSATION
The Company has a stock option plan (the "plan") for directors, officers,
consultants and employees of the Company and its subsidiaries. A total of
18,924,172 stock options are authorized to be issued under the plan. Stock
options have terms of two to five years, vest over periods of up to three years
and are exercisable at the market prices of the shares on the dates that the
options were granted. All of the options are subject to a four-month "hold"
period.
The continuity of stock options issued and outstanding is as follows:
Weighted Average
Number of Options Exercise Price $
-------------------------------------
Outstanding December 31, 2007 7,726,357 3.98
Granted 72,000 2.37
Cancelled (393,886) 4.24
Expired (1,060,000) 3.81
----------------- ----------------
Outstanding at March 31, 2008 6,344,471 3.97
----------------- ----------------
The following stock options were outstanding at March 31, 2008:
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted- Weighted- Weighted- Weighted-
Range of Average Average Average Average
Exercise Exercise Life Exercise Life
Prices ($) Number Price ($) (Years) Number Price ($) (Years)
--------------------------------------------------------------------------
1.59-4.00 2,949,333 2.81 4.58 83,333 3.39 1.53
4.01-5.00 1,105,804 4.48 2.67 797,804 4.40 2.05
5.01-6.00 2,237,667 5.17 3.32 942,333 5.20 2.77
6.01-8.94 51,667 7.02 0.08 51,667 7.02 0.08
--------------------------------------------------------------------------
6,344,471 3.97 3.77 1,875,137 4.83 2.33
--------------------------------------------------------------------------
Compensation expense for the three month period of $901,120, net of recovery of
$15,575 for cancelled stock options, has been recorded in the Consolidated
Statements of Operations and Deficit for the quarter ended March 31, 2008 (2007
- $1,521,122). The fair value of common share options granted is estimated on
the date of grant using the Black-Scholes option pricing model. The weighted
average fair value of options granted during 2008 and the assumptions used in
their determination are as noted below:
Three Months Ended
March 31, 2008
------------------
Weighted average fair value of stock options
granted (per option) $ 1.00
Expected life of stock options (years) 3.00
Volatility (weighted average) 59%
Risk free rate of return (weighted average) 3.18%
Expected dividend yield 0%
March 31, December 31,
Contributed surplus continuity 2008 2007
----------------------------------
Balance, beginning of the period $ 8,778,124 $ 4,791,060
Stock-based compensation 916,695 4,636,916
Stock-based compensation allocated
to contributed surplus as part of
Watch acquisition - 575,448
Recovery of expense on cancelled
stock options (15,575) (590,137)
Transfer to share capital on
exercise of options - (635,163)
-------------- --------------
Balance, end of period $ 9,679,244 $ 8,778,124
-------------- --------------
12. CAPITAL MANAGEMENT
The Company's capital management strategy is designed to minimize the use of
long term debt and maintaining positive working capital. This strategy should
provide the financial flexibility to fund the Company's capital program and
profitable growth opportunities.
Financial covenants associated with the Company's credit facility are reviewed
regularly and controls are in place to maintain compliance with these covenants.
The Company complied with all covenants for the three months ended March 31,
2008.
13. COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The Company enters into commitments and contractual obligations in the normal
course of business, including the purchase of services, farm-in agreements,
royalty agreements, operating agreements, transportation agreements, processing
agreements, right of way agreements and lease agreements for vehicles.
The Company has a nine-year operating lease for office space.
--------------------------------------------------------------------------
Subsequent
2008 2009 2010 2011 2012 to 2012
--------------------------------------------------------------------------
Office
rent $813,570 $1,084,760 $1,084,760 $1,152,557 $1,220,355 $4,576,331
--------------------------------------------------------------------------
The Company has contracted drilling rig services over the next two years. In the
event that the Company does not utilize the minimum contracted days, the Company
would be obligated to pay the rig operators a variable rate based on days not
utilized under the contracts. The maximum commitment at March 31, 2008 related
to these contracts is approximately $11.9 million, which can be reduced by
farm-outs to other operators.
14. FINANCIAL INSTRUMENTS
The Company does not utilize derivative instruments to manage risks. The Company
is exposed to the following risks related to financial assets and liabilities:
(a) Commodity price risk
The Company is exposed to risks associated with fluctuating commodity prices. At
this time, the Company does not use derivative financial instruments to manage
its exposure to this risk.
(b) Foreign currency exchange risk
The Company is exposed to risks arising from fluctuations in foreign currency
exchange rates and the volatility of those rates. This exposure primarily
relates to: (i) certain expenditure commitments, deposits, accounts receivable,
and accounts payable which are denominated in US dollars, and (ii) its
operations in the United States.
(c) Fair values
The carrying amounts of financial instruments comprising cash, accounts
receivable and accounts payable approximate their fair value due to the
immediate or short-term nature of these financial instruments.
(d) Credit Risk
The Company's accounts receivable are with customers and joint venture partners
in the petroleum and natural gas business and are subject to normal credit
risks. Management believes that there is no unusual exposure associated with the
collection of the receivables due to the size and reputation of the companies
and to the continuing joint venture relationship.
(e) Interest Rate Risk
The Company is exposed to interest rate risk in relation to interest expense on
its revolving credit facility.
15. SEGMENTED INFORMATION
The Company presently has one reportable business segment, that being oil and
gas exploration and development. The Company's operations are carried on in the
following geographic locations:
Three Months Ended March 31, 2008
--------------------------------------------------------------------------
Canada USA Consolidated
--------------------------------------------------------------------------
Total revenues, net of royalties 43,636,265 378,764 44,015,029
Expenses 49,136,834 254,159 49,390,993
Foreign currency gain (4,346) (31,339) (35,685)
--------------------------------------
Net income (loss) before income
taxes (5,496,223) 155,944 (5,340,279)
Income taxes (recovery) (1,558,889) 8,638 (1,550,251)
--------------------------------------
Net income (loss) (3,937,334) 147,306 (3,790,028)
--------------------------------------
--------------------------------------
Segment assets 529,678,611 54,558,238 584,236,849
--------------------------------------
Segment petroleum and natural
gas properties 471,533,653 49,801,266 521,334,919
--------------------------------------
Capital additions 13,395,156 4,117,196 17,512,352
--------------------------------------
Three Months Ended March 31, 2007
--------------------------------------------------------------------------
Canada USA Consolidated
--------------------------------------------------------------------------
Total revenues, net of royalties 19,089,051 333,433 19,422,484
Expenses 32,354,459 716,830 33,071,289
Foreign currency loss 171,549 - 171,549
--------------------------------------
Loss before income taxes (13,436,957) (383,397) (13,820,354)
Income taxes (recovery) 3,807,705 - 3,807,705
--------------------------------------
Net loss (17,244,662) (383,397) (17,628,059)
--------------------------------------
--------------------------------------
Segment assets 552,465,267 33,810,777 586,276,044
Goodwill 159,863,578 - 159,863,578
--------------------------------------
Segment petroleum and natural
gas properties 356,947,547 32,303,208 389,250,755
--------------------------------------
Capital additions 47,001,871 3,839,057 50,840,928
--------------------------------------
16. CONTINGENCIES
(a) In connection with the November, 2007 property acquisition from PetroHunter,
the Company may be required to pay a performance payment of US $12.5 million in
cash at such time as either: (i) production from the assets reaches 5,000 bopd;
or (ii) proven reserves from the assets is greater than 50 million barrels of
oil, if either condition is met prior to November 6th, 2010. In addition,
consideration of 960,025 Pearl common shares will be payable if the Company and
certain third party owners agree to terms acceptable to Pearl for the
acquisition of leases included in the deal. In the event that the Company fails
to reach an agreement with the third party by May 31, 2008 the performance
payment will be reduced to $9.8 million and the contingent shares will remain
unissued. At this time the Company does not anticipate that the additional
leases will be acquired and as such it is unlikely that the additional payment
will be made.
(b) Four million warrants were issued pursuant to the San Miguel property
acquisition in November 2005. Each warrant entitles the holder thereof to
purchase an additional common share of the Company at a price of $1.00,
exercisable from the date the San Miguel heavy oil project achieves an average
daily producing rate of 5,000 barrels of oil per day, averaged over 30
consecutive days, until November 18, 2008.
(c) In connection with the December, 2005 Palo Duro property acquisition, the
Company has 91,800 warrants outstanding, entitling the holder to receive an
additional Pearl common share within 75 days of September 15, 2008, for no
additional consideration, if the average production rate per well drilled in the
Palo Duro shale gas project is at least 1.5 million cubic feet equivalent per
day, based on the initial 60 days of production. The number of warrants
ultimately issued will be reduced pro rata to the actual average production rate
if the actual average production rate per well drilled by September 15, 2008 is
less than 1.5 million cubic feet equivalent per day.
(d) Pursuant to the January, 2006 property acquisition agreement between the
Company and Valkyries, the Company is required to pay additional consideration
to Valkyries if specified properties have additional net proved reserves within
two years of the closing of the transaction. The additional consideration would
be calculated as US $1.00 per barrel of additional reserves. As at March 31,
2008 the Company owes consideration of $21,000 to Valkyries.
17. SUBSEQUENT EVENTS
On April 24, 2008 the Company announced that it had entered into a binding
agreement with a large integrated energy company to sell certain non-core heavy
oil producing assets for $75 million. These assets, principally located in the
Lloydminster, Celtic, Pikes Peak and Thunderchild areas of Saskatchewan,
currently produce approximately 3,200 boe/d and are part of the non-core asset
package that the Company intended to sell as announced on January 8, 2008. This
deal is expected to close during the quarter ending June 30, 2008.
18. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the
presentation adopted in 2008.
Pearl Exploration and Production Ltd. is a public company focused on delivering
disciplined growth by establishing a North American portfolio of heavy oil
projects with an emphasis on large resource opportunities. Additional
information on Pearl is available on the Company's website at
www.pearleandp.com.
Pearl's Certified Advisor on First North is E. Ohman J:or Fondkommission AB.
Forward-looking statements: This document contains statements about expected or
anticipated future events and financial results that are forward-looking in
nature and as a result, are subject to certain risks and uncertainties, such as
general economic, market and business conditions, the regulatory process and
actions, technical issues, new legislation, competitive and general economic
factors and conditions, the uncertainties resulting from potential delays or
changes in plans, the occurrence of unexpected events, and the Company's
capability to execute and implement its future plans. Actual results may differ
materially from those projected by management. For such statements, we claim the
safe harbour for forward-looking statements within the meaning of the Private
Securities Legislation Reform Act of 1995.
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