RNS Number:3605H
Caspian Energy Inc
09 November 2007
CASPIAN ENERGY INC.
ANNOUNCES THIRD QUARTER 2007 FINANCIAL RESULTS AND CONTRACT EXTENSION
TORONTO, November 9, 2007 -- Caspian Energy Inc. (the "Company" or "CEK") (TSX
and AIM: CEK) announced today its financial results for the three and nine
months ending September 30, 2007. Its interim unaudited financial statements for
the period and related management's discussion and analysis have been filed with
Canadian securities regulatory authorities and are available for viewing at
www.sedar.com.
Third quarter highlights include:
* The Company's work program extension, with the Republic of Kazakhstan
("ROK"), to December 2007 has now been extended for an additional two-year
period;
* Focus on Triassic and Upper Permian targets in the western side of the
North Block has been ongoing during the third quarter. The Company has
secured a rig and drilling for these targets is expected to begin in Q4;
* Discussions on the potential farm-in to one of the Company's blocks
continue to make good progress;
* For Q3 07, petroleum revenues before transportation costs were $2,074,923
(Q3 2006: $1,421,381); and
* For the three and nine months ending September 30, 2007, CEK's net loss
was $2,295,252(Q3 2006: $1,514,083) and $9,732,159($2,885,665) respectively.
The Company's work program extension, with the ROK, to December 2007 has now
been extended for an additional two-year period, subject to the terms of the
original exploration contract. The 2008 work program commits the Company to
undertake US$8.6 million of exploration expenditures prior to the close of that
calendar year and the 2009 work program - US$10.5 million of exploration
expenditures.
For the three and nine months ending September 30, 2007, CEK's net loss was
$2,295,252 and $9,732,159, respectively. For the three and nine months ending
September 30, 2006, CEK's net loss was $1,514,083 and $2,885,665, respectively.
Large non-cash items equal to $217,906 (Q3 2006 - $1,182,872) relating to
stock-based compensation charges and $1,615,211 (Q3 2006 - $(840,497))
pertaining to foreign exchange losses contributed to the loss in Q3 2007. During
Q3 2007, the Company recorded a charge of $215,186 (in 2006 a recovery of
$500,612) pertaining to future income taxes in the Republic of Kazakhstan.
Caspian recorded charges of $461,454 pertaining to interest and $74,718
pertaining to accretion of the discount on its convertible debentures during the
2007 fiscal period. During Q3 2006, accretion of the debentures discount
amounted to $82,659.
Caspian's operations provided $65,943 of cash for the three months ended
September 30, 2007 and used $403,865 of cash for the three months ended
September 30, 2006.
At the close of Q3 2007, Caspian had working capital of $8.9 million.
For Q3 07, petroleum revenues before transportation costs were $2,074,923. For
Q3 06, petroleum revenues before transportation costs were $1,421,381.
For Q3 07, operating costs were $577,762 (Q3 06 - $349,138) and transportation
costs were $201,915 (Q3 06 - $63,737). Kazakhstan operating costs aggregated
$10.14 (Q3 06 - $9.16) per barrel and total domestic operating costs were $17.06
(Q3 06 - $9.67) per barrel. Transportation costs in Kazakhstan were $3.57 (Q3 06
- $1.67) per barrel, while the domestic segment equaled $0.21 (Q3 06 - $0.18)
per barrel. Well workovers during 2007 served to impact operating costs in
Kazakhstan.
Interest of $995,862, including $472,598 accrued on the advance to Aral, (Q3 06
- $413,236) was earned during the period.
Administrative expenses for Q3 07 and Q3 06 were $830,002 and $866,105,
respectively.
Capital expenditures of $1,873,654 were recorded for Q3 07 (Q3 06 -
$11,043,769). Since capital expenditures are composed of advances to Aral and
the expenditure of funds by Aral, whose carrying value is denominated in US
dollars, the CAD:USD exchange rate has served to reduce the magnitude of funds
recorded.
CEK today filed on SEDAR interim unaudited financial statements and MD&A with
respect to its September 30, 2007 third fiscal quarter.
The Company is an oil exploration and development corporation operating in the
Republic of Kazakhstan.
William Ramsay, Chairman and Chief Executive Officer, Caspian Energy, Inc.
commented:
"I am pleased to report that the Company's work program extension with the
Republic of Kazakhstan has now been extended for an additional two-year period,
subject to the terms of the original exploration contract. We have also secured
a rig to initiate the drilling of our Triassic - Upper Permian well programme
and the commencement of this programme is now imminent. In addition, discussions
on the potential farm-in to one of our blocks continue to make good progress."
For further information contact:
Caspian Energy Inc.
William Ramsay
President and Chief Executive Officer +44 (0)20 7861 3232
Bell Pottinger Corporate and Financial
Ann-Marie Wilkinson /Algy Rowe +44 (0)20 7861 3232
Jefferies International Limited
Toby Hayward / Jack Pryde +44 (0)20 7029 8000
CAUTIONARY NOTE
Some of the statements and information contained in this news release may
include certain estimates, assumptions and other forward-looking information.
The actual performance, developments and/or results of the Company may differ
materially from any or all of the forward-looking statements, which include
current expectations, estimates and projections, in all or in part attributable
to general economic conditions, and other risks, uncertainties and circumstances
partly or totally outside the control of the Company, including oil prices,
imprecision of reserve estimates, drilling risks, future production of gas and
oil, rates of inflation, changes in future costs and expenses related to the
activities involving the exploration, development, production and transportation
of oil, hedging, financing availability and other risks related to financial
activities, and environmental and geopolitical risks. Further information which
may cause results to differ materially from those projected in the
forward-looking statements is contained in the Company's filings with Canadian
securities regulatory authorities. The Company disclaims any intention or
obligation to update or revise forward-looking information, whether as a result
of new information, future events or otherwise, except in accordance with
applicable securities laws.
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN
THE UNITED STATES.
BUSINESS PROSPECTS AND OUTLOOK
The Company has been successful in establishing itself as an operating entity in
the ROK and expects to continue with future growth through continued work there.
Prior to the end of the fourth quarter 2005, EZ#301 was drilled to a total depth
of 4,846 metres and logged. The well was completed with the drilling rig before
the rig was moved to the EZ#302 location. EZ#301 was matrix acidized and the two
potentially productive hydrocarbon bearing zones were flow-tested. The lower
zone (KT-2) was tested at 2,532 Bopd. The upper zone (KT-1) had difficulty
maintaining an independent flow, so it was commingled with the lower zone and
the well was tied-in to the Zhagabulak production facility. Subsequently,
productions logs were ran and it was determined that the KT-1 was producing 100
Bopd. Well 301 was undergoing a government mandated pressure survey in November
2006, when a production logging tool and cable were lost in the hole. During the
second quarter, the tool and wire were recovered and the well has resumed
production. Well 301 is currently producing 742 BOPD, 8 BWPD, 998 MCFD with a
FTP (flowing tubing pressure) of 485 psig and a shut in casing pressure of 2,514
psig on a 12 mm choke. A pressure buildup was successfully completed in August
2007 and a xylene cleanout will be pumped in Q4 in order to clean out the
suspected asphaltene buildup in the production tubing.
The second exploration effort, EZ#302, was spud on December 25, 2005. Acidizing
and testing of the well were performed following removal of the drilling rig.
The well showed indications of hydrocarbons while drilling and logging; however,
the stimulation efforts failed to cause the well to flow naturally. In well 302,
a workover is being evaluated to isolate the KT-2 and the lower portions of the
KT-1 that exhibit higher water saturations on the logs.
The third location, EZ#303 is about 5.2 km southwest of EZ#302. EZ#303 spud on
May 28, 2006. The well was permitted to a depth of 5,700 metres. EZ#303 reached
a total depth of 4,630 metres in a sidetrack wellbore after the initial wellbore
reached a depth of 5,430 metres, but was lost due to a drill string parting,
while pulling out of the hole for logging. A total of 70 meters were perforated
and acidized in both the KT-1 and KT-2 intervals. A combined test of both
intervals yielded water with small amounts of oil, while the separate test on
the KT-1 yielded water. In well 303 a workover is being evaluated to isolate
intervals and test separately to identify which perforations are producing
water.
The original producing well, EZ#213, drilled and completed during the Soviet
period, was re-entered in November 2006 and perforations were added in the KT-1
reservoir. Due to different casing weights, problems were encountered with
packer setting for the acid operation and consequently, only one-half of the
productive zones were acidized. Despite the limits on the acidization, a
significant improvement of daily production over the pre-workover rates was
achieved. Well 213 is currently producing 390 BOPD, 52 BWPD, 545 MCFD with a
flowing tubing pressure of 485 psig and a shut-in casing pressure of 1,661 psig
on an 8.7 mm choke. A survey to determine the production contribution from the
KT-1 and KT-2 intervals is in progress, the results of which will be integrated
into the final analysis and ranking of potential workover strategies for wells
302 and 303.
The Company has initiated the development process for East Zhagabulak. Caspian
has made initial contacts with Kazakhstan design institutes for the preparation
of the development program report for the development of the East Zhagabulak
field.
Ongoing petrophysical analyses of all wells penetrating the below salt
reservoirs is being completed and correlations of these wells will aid in the
identification of future drilling locations in the North Block. Identification
and acquisition of well data within the extended territory is also be evaluated
for inclusion into this process.
The Baktygaryn 3-D seismic program was completed in early November 2005.
PGS-GIS, in Almaty, ROK was awarded the processing contract. Due to the presence
of large salt bodies in the Baktygaryn Area, the 3-D data set was processed
through PSDM (Pre-Stack Depth Migration) and interpretation of this data has
been completed. PSTM (Pre-Stack Time Migration) analysis, for the above salt
section has also been conducted. The acquisition of the 367 kilometre regional
2-D seismic survey covering the west and north areas of the North Block and
tying into the Zhagabulak and Baktygaryn 3-D seismic surveys that was completed
in March 2007 has also been processed and interpreted. The Baktygaryn 3-D
program and the regional 2-D program were fully interpreted at the end of
October 2006. The interpreted data from all new seismic data acquired and from
the earlier reprocessed Soviet-era 2-D seismic is being combined to create a
geological model and identify additional leads and prospects across the North B
lock territory.
The Baktygaryn Area presents drilling targets in both the below salt Lower
Permian and Carboniferous sections and the above salt Upper Permian and Mesozoic
sections with depths ranging from approximately 400 to 2,500 metres and provides
a second tier of exploration to the Company's drilling portfolio. These targets
are recognized in the forms of channel sands, traps against the Kungurian salt
ridges and underneath salt overhangs.
Interpretation work on the Baktygaryn 3-D seismic data identified several
post-salt drilling targets in the Triassic and Permian formations with depths
ranging from approximately 400 to 2,500 metres. Two of these targets, with
depths of 800 and 2,500 metres, were selected for drilling, the first of which
is expected to spud in late Q4.
Soviet-era seismic data interpretation, mapping and the associated shallow well
drilling in the Itisay, Kozdesay and West Kozdesay areas, located in the
southwestern portion of the North Block, yielded minor positive tests and shows
of oil associated with the post-salt sediments of Jurassic, Triassic and Upper
Permian ages. A review of this data has resulted in the identification of
several prospects and leads ranging from 600 to 1,800 metres in trapping
positions against Permian salt ridges and under-salt overhangs. Several lines
from the Company's 2006 2-D seismic program were shot across certain of these
leads and prospects to verify this premise. Interpretation of most of the
regional 2006 2-D seismic survey covering the west and north areas of the North
Block has been completed. The interpreted data from all new seismic data
acquired and from the earlier reprocessed Soviet-era 2-D seismic was combined to
create a geological model and identify additional leads and prospects across the
North Block territory. As a result of this work, some of the earlier leads and
prospects in the post-salt sediments identified on vintage maps and seismic in
three areas in the south western portion of the North Block, known as Itisay,
Kozdesay and West Kozdesay have been confirmed and in addition several new leads
and drillable prospects have been identified in trapping positions against
Permian salt ridges and under salt overhangs. Drilling for these targets is
expected to begin early 2008.
Future seismic activity includes a third 3-D seismic acquisition, pending the
results of the upcoming drilling campaign and further ongoing 2-D seismic
interpretation.
Focus on shallower targets in the western side of the North Block has been
ongoing during the third quarter and drilling for these targets is expected to
begin in Q4.
The Company's work program extension, with the ROK, to December 2007 has now
been extended for an additional two-year period, subject to the terms of the
original exploration contract. The 2008 work program commits the Company to
undertake US$8.6 million of exploration expenditures prior to the close of that
calendar year and the 2009 work program - US$10.5 million of exploration
expenditures.
Interim Consolidated Balance Sheet
(Unaudited)
September December
30, 31,
2007 2006
$ $
(Audited)
Assets
Current assets
Cash and cash equivalents 5,805,603 17,022,285
Accounts receivable 824,219 672,879
Prepaids and other deposits 2,682,196 2,713,994
Inventory (note 3) 5,767,160 177,055
--------------------------
15,079,178 20,586,213
Restricted cash (note 2) 169,914 194,412
Property, plant and equipment (note 4) 118,729,941 118,323,038
----------------------------
133,979,033 139,103,663
----------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 6,206,598 5,305,085
Asset retirement obligation (note 5) 153,355 156,255
Loan payable (note 6) 1,500,124 -
Future income taxes 898,759 358,848
Convertible debentures (note 7) 17,660,262 18,683,004
---------------------------
26,419,098 24,503,192
---------------------------
Shareholders' Equity
Share capital (note 8) 121,470,892 121,470,892
Warrants to purchase common shares (note 8) 946,508 946,508
Contributed surplus (note 10) 14,721,895 12,030,272
Deficit (29,579,360) (19,847,201)
-----------------------------
107,559,935 114,600,471
-----------------------------
133,979,033 139,103,663
-----------------------------
See accompanying notes to consolidated financial statements.
Interim Consolidated Statement of Loss and Deficit
(Unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2007 2006 2007 2006
$ $ $ $
Revenue
Oil and gas revenue, net 2,074,923 1,421,381 4,322,320 3,531,842
Interest 995,862 413,236 2,644,047 1,007,519
Other (14,866) 4,895 (12,374) 5,460
------------------------------------------------------
3,055,919 1,839,512 6,953,993 4,544,821
------------------------------------------------------
Expenses
General and administrative 866,105 830,002 2,455,303 2,248,425
Accretion of convertible
debentures (note 7) 74,718 82,659 239,320 194,634
Interest 1,007,228 450,329 2,658,287 1,059,441
Operating 577,762 349,138 1,504,968 954,980
Transportation 201,915 63,737 386,628 82,092
Stock-based compensation (note 9) 217,906 1,182,872 2,691,623 1,794,250
Foreign exchange loss 1,615,211 840,497 4,699,400 36,297
Depletion, depreciation and
accretion 575,140 54,973 1,386,868 152,360
--------------------------------------------------------
5,135,985 3,854,207 16,022,397 6,522,479
--------------------------------------------------------
Loss before income taxes (2,080,066) (2,014,695) (9,068,404) (1,977,658)
Future income taxes (recovery) 215,186 (500,612) 663,755 908,007
---------------------------------------------------------
Net loss for the period (2,295,252) (1,514,083) (9,732,159) (2,885,665)
Deficit - Beginning of period (27,284,108) (14,780,971) (19,847,201) (13,409,389)
---------------------------------------------------------
Deficit - End of period (29,579,360) (16,295,054) (29,579,360) (16,295,054)
---------------------------------------------------------
Basic loss per share (note 8) (0.02) (0.01) (0.09) (0.03)
---------------------------------------------------------
Diluted loss per share (note 8) (0.02) (0.01) (0.09) (0.03)
---------------------------------------------------------
See accompanying notes to consolidated financial statements.
Interim Consolidated Statement of Cash Flows
(Unaudited)
Three months Three months Nine months Nine months
ended ended ended ended
September September September September
30, 30, 30, 30,
2007 2006 2007 2006
$ $ $ $
Cash provided by (used in)
Operating activities
Net loss for the period (2,295,252) (1,514,083) (9,732,159) (2,885,665)
Items not affecting cash
Stock-based compensation 217,906 1,182,872 2,691,623 1,794,250
Unrealized foreign exchange
loss (gain) 1,289,389 (158,997) 4,192,333 (91,832)
Depletion, depreciation and
accretion 575,140 54,973 1,386,868 152,360
Accretion of convertible
debentures 74,718 82,659 239,320 194,634
Future income taxes (recovery) 215,186 (500,612) 663,755 908,007
Interest on convertible
debentures 461,454 449,323 1,387,246 1,052,147
Interest on inter-company
advance (472,598) - (1,204,770) -
------------------------------------------------------
65,943 (403,865) (375,784) 1,123,901
Changes in non-cash working
capital balances 185,311 1,496,595 (151,339) (378,922)
----------------------------------------------------
251,254 1,092,730 (527,123) 744,979
----------------------------------------------------
Financing activities
Convertible debentures - (90,314) - 17,652,052
Loan payable 1,500,124 (6,636,582) 1,500,124 (6,872,279)
Foreign exchange - 158,997 - 91,832
Restricted cash 8,805 5,049 24,498 2,306
Issuance of common shares and
warrants - - - 50,804,650
Share issue expenses - - - (3,782,317)
------------------------------------------------------
1,508,929 (6,562,850) 1,524,622 57,896,244
------------------------------------------------------
Investing activities
Acquisition of property, plant
and equipment (1,873,654) (11,043,769) (7,557,385) (32,375,748)
Changes in non-cash working
capital balances 293,456 (402,248) (4,656,796) (4,232,695)
--------------------------------------------------------
(1,580,198) (11,446,017) (12,214,181) (36,608,443)
--------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 179,985 (16,916,137) (11,216,682) 22,032,780
Cash and cash equivalents -
Beginning of period 5,625,618 49,043,003 17,022,285 10,094,086
------------------------------------------------------
Cash and cash equivalents -
End of period 5,805,603 32,126,866 5,805,603 32,126,866
------------------------------------------------------
Interest paid and received
Interest received 50,667 413,236 234,507 1,007,519
See accompanying notes to consolidated financial statements.
Notes to Interim Consolidated Financial Statements
(Unaudited), 30 September 2007
1 Nature of operations
Caspian Energy Inc. ("Caspian" or the "Company") is engaged in the exploration
for and development and production of oil and gas in the Republic of Kazakhstan.
Its primary operating activities are carried out through its wholly-owned
subsidiary, Caspian Energy Ltd. ("Caspian Ltd.").
Caspian's principal assets are a 50% interest in Aral Petroleum Capital LLP
("Aral"), held by Caspian Ltd. Through its interest in Aral, Caspian has the
right to explore and develop certain oil and gas properties in Kazakhstan, known
as the North Block, a 3,458 square kilometre area located in the vicinity of the
Kazakh pre-Caspian basin. The Company also has minor resource interests in
Canada.
Aral's exploration and development rights to the North Block were granted
pursuant to the terms of an exploration contract between the government of
Kazakhstan and Aral (the "Exploration Contract"). The initial three-year term of
the Exploration Contract was extended for a two-year period (expiring in
December 2007) and a further extension of two years to December 31, 2009 with a
minimum work commitment of US$19.0 million has now been effected.
Under the terms of the Exploration Contract, Aral was obligated to spend at
least US$20.8 million under a minimum work program in respect of the North Block
during the initial three-year term of the contract. The expenditures include
processing and reinterpretation of geological and geophysical data of prior
years, two dimensional and three dimensional seismic shoots and surveys,
drilling exploration wells, well reactivations and well surveys and testing. As
of December 31, 2005, Aral's financial obligation under the minimum work program
had been discharged.
Under terms of a shareholders' agreement dated June 25, 2004, among Caspian
Ltd., Azden Management Limited ("Azden") and Aral, Caspian was committed to fund
Aral's US$20.8 million obligation under the initial work program. This financial
commitment was satisfied, in full, by the Company. In addition, Caspian Ltd. has
undertaken, on a best efforts basis, to raise financing of US$84.0 million to
fund Aral's operations pursuant to the Exploration Contract. At March 31, 2007,
Caspian Ltd. had discharged this undertaking.
2 Significant accounting policies
The consolidated financial statements of Caspian are stated in Canadian dollars
and have been prepared in accordance with Canadian generally accepted accounting
principles.
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and short-term investments with
an initial maturity date of three months or less.
Inventory
Inventory is recorded at the lower of cost calculated using the weighted average
method, and net realizable value. Cost comprises direct materials and where
applicable direct labour costs and those overheads which have been incurred in
bringing the inventories to their present location and condition. Net realizable
value represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.
Joint ventures
The Company's oil and gas exploration and development activities are conducted
mainly in Kazakhstan through its 50% interest in Aral and, accordingly, these
consolidated financial statements reflect only the Company's proportionate
interest in such activities.
Property, plant and equipment
a) Capitalized costs
The Company follows the full cost method of accounting for oil and natural gas
operations, whereby all costs related to the acquisition, exploration and
development of petroleum and natural gas reserves are capitalized. Such costs
include lease acquisition costs, geological and geophysical costs, carrying
charges on non-producing properties, costs of drilling both productive and
non-productive wells, the cost of petroleum and natural gas production equipment
and overhead charges directly related to exploration and development activities.
Proceeds from the sale of oil and gas properties are applied against capital
costs, with no gain or loss recognized, unless such a sale would change the rate
of depletion and depreciation by 20% or more, in which case, a gain or loss
would be recorded.
b) Depletion, depreciation and amortization
The capitalized costs are depleted and depreciated using the unit-of-production
method based on proven petroleum and natural gas reserves, as determined by
independent consulting engineers. Oil and natural gas liquids reserves and
production are converted into equivalent units of natural gas based on relative
energy content on a ratio of six thousand cubic feet of gas to one barrel of
oil. Significant development projects and expenditures on exploration properties
are excluded from calculation of depletion prior to assessment of the existence
of proved reserves.
Other property, machinery and equipment are recorded at historical cost.
Depreciation is calculated on a straight-line basis at the following annual
rates:
Buildings 8%
Machinery and equipment 8%
Vehicles 7%
Other fixed assets 10%
c) Ceiling test
The Company follows the Canadian accounting guideline on full cost accounting.
In applying the full cost guideline, Caspian calculates its ceiling test for
each cost centre by comparing the carrying value of oil and natural gas
properties and production equipment to the sum of undiscounted cash flows
expected to result from Caspian's proved reserves. If the carrying value is not
fully recoverable, the amount of impairment is measured by comparing the
carrying value of oil and gas properties and production and equipment to the
estimated net present value of future cash flows from proved plus probable
reserves using a risk-free interest rate and expected future prices. Any excess
carrying value above the net present value of the future cash flows is recorded
as a permanent impairment.
d) Unproved property
Costs of acquiring and evaluating unproven properties are initially excluded
from costs subject to depletion, until it is determined whether or not proved
reserves are attributable to the properties or, in the case of major development
projects, commercial production has commenced, or impairment has occurred.
Impairment occurs whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. When proven reserves are determined or
the property is considered to be impaired, the cost of the property or the
amount of the impairment is added to the costs subject to depletion for that
country's cost centre.
e) Asset retirement obligation
Caspian records the fair value of asset retirement obligations ("ARO") as a
liability in the period in which it incurs a legal obligation to restore an oil
and gas property, typically when a well is drilled or other equipment is put in
place. The associated asset retirement costs are capitalized as part of the
carrying amount of the related asset and depleted using a unit-of-production
method over the life of the proved reserves. Subsequent to initial measurement
of the obligations, the obligations are adjusted at the end of each reporting
period to reflect the passage of time and changes in estimated future cash flows
underlying the obligation. Actual costs incurred on settlement of the ARO are
charged against the ARO.
Income taxes
Income taxes are calculated using the liability method of tax accounting.
Temporary differences arising from the difference between the tax basis of an
asset or liability and its carrying value amount on the balance sheet are used
to calculate future income tax assets and liabilities. Future income tax assets
and liabilities are calculated using tax rates anticipated to apply in the
periods that the temporary differences are expected to reverse.
Stock-based compensation
The Company grants options to purchase common shares to employees and directors
under its stock option plan. Under this standard, future awards are accounted
for using the fair value of accounting for stock-based compensation. Under the
fair value method, an estimate of the value of the option is determined at the
time of grant using a Black-Scholes option-pricing model. The fair value of the
option is recognized as an expense and contributed surplus over the vesting
period of the option. Proceeds received on exercise of stock options, along with
amounts previously included in contributed surplus, are credited to share
capital.
Revenue recognition
Revenue from the sale of oil and natural gas is recognized based on volumes
delivered to customers at contractual delivery points and rates. The costs
associated with the delivery, including operating and maintenance costs,
transportation, and production-based royalty expenses will be recognized in the
same period in which the related revenue is earned and recorded.
Measurement uncertainty
The amounts recorded for depletion and depreciation of property, plant and
equipment, the provision for asset retirement obligations and the amounts used
for ceiling test calculations are based on estimates of reserves and future
costs. The Company's reserve estimates are reviewed annually by an independent
engineering firm. The amounts disclosed relating to fair values of stock options
issued are based on estimates of future volatility of the Company's share price,
expected lives of options, and other relevant assumptions. By their nature,
these estimates are subject to measurement uncertainty.
Earnings (loss) per share
Basic per share amounts are calculated using the weighted average number of
shares outstanding during the period. Diluted per share amounts are calculated
based on the treasury stock method whereby the weighted average number of shares
is adjusted for the dilutive effect of options. The Company applies the treasury
stock method for the calculation of diluted net income (loss) per share whereby
the effect of the "in the money" instruments such as stock options and warrants
affect the calculation. The treasury stock method assumes that the proceeds from
the exercise are used to repurchase common shares of the Company at the weighted
average market price during the year.
Financial instruments
Fair values
The fair values of accounts receivable, accounts payable and accrued
liabilities, and loan payable approximate their carrying values due to their
short-term maturity.
Credit risk
Substantially all of the Company's accounts receivable are due from companies in
the oil and gas industry and are subject to the normal industry credit risks.
The carrying value of accounts receivable reflects management's assessment of
the associated credit risks.
Foreign currency
All operations are considered financially and operationally integrated. Results
of operations are translated to Canadian dollars, using average rates for
revenues and expenses, except depreciation which is translated at the rate of
exchange applicable to the related assets. Monetary items denominated in foreign
currency are translated to Canadian dollars at exchange rates in effect at the
balance sheet date and non-monetary items are translated at rates of exchange in
effect when the assets were acquired or obligations incurred. Foreign exchange
gains and losses are recorded in the statement of loss.
Restricted cash
Under the terms of the Exploration Contract, Aral has accrued 1% of the capital
costs of exploration (the "Liquidation Fund") in an amount of US $339,828 and US
$388,825 as of September 30, 2007 and December 31, 2006, (Caspian -
Cdn. $169,914 and Cdn. $194,412, respectively) and deposited the cash in a
restricted bank account. It is anticipated that the Liquidation Fund will be
used to finance the restoration of the License Area upon expiration of the
Exploration Contract, unless a production contract is awarded.
3 Inventory
September 30, December 31,
2007 2006
$ $
Drilling supplies 5,137,432 -
Oil inventory 99,769 24,742
Fuel 9,125 3,522
Construction materials 4,890 4,342
Spare parts 6,248 3,425
Other materials 509,696 141,024
--------------------------
5,767,160 177,055
--------------------------
4 Property, plant and equipment
September 30, December 31,
2007 2006
$ $
Petroleum and natural gas assets 119,668,950 118,334,595
Other assets 2,905,396 2,508,707
----------------------------
122,574,346 120,843,302
Accumulated depletion and depreciation (3,844,405) (2,520,264)
----------------------------
118,729,941 118,323,038
----------------------------
Excluded from the depletable base of oil and gas assets at September 30, 2007
are unproved properties of $74,358,989 (December 31, 2006 - $65,707,839).
Aral applied the ceiling test to its capitalized assets at September 30, 2007
and December 31, 2006 and determined that there was no impairment of such
carrying costs.
During the period ended September 30, 2007, the Company capitalized $169,705
(December 31, 2006 - $387,660) of general and administrative expenses related
directly to exploration and development activities.
5 Asset retirement obligation
The Company records the fair value of asset retirement obligations as a
liability in the period in which it incurs the legal obligation.
The asset retirement obligation results from net ownership interests in
petroleum and natural gas assets including well sites, gathering systems and
processing facilities. The Company estimates the total undiscounted amount of
cash flows required to settle its asset retirement obligations at September 30,
2007 is $167,542, which will be incurred between 2014 and 2019. A
credit-adjusted risk-free rate of 12.9% was used to calculate the fair value of
the asset retirement obligations, and an inflation factor of 8.4%.
A reconciliation of the asset retirement obligation is provided below:
September 30, December 31,
2007 2006
$ $
Opening balance 156,255 88,900
Liabilities incurred - 38,382
Accretion 13,005 4,760
Change in estimate (15,905) 24,213
-------------------------
Closing balance 153,355 156,255
-------------------------
Under the terms of the Exploration Contract (note 1), the Company is required to
create a fund to finance actual future restoration costs, equal to 1% of the
capital costs of exploration. At September 30, 2007 and December 31, 2006,
$169,914 and $194,412, respectively have been placed in a restricted bank
account related to the funding requirement.
6 Loan payable
Pursuant to the Participants Agreement By and Among Azden Management Limited and
Caspian Energy Ltd. and Aral Petroleum Capital Limited Liability Partnership,
subsequent to reaching the US $84 million threshold on advances by Caspian to
Aral, Caspian and Azden shall jointly finance, in equal proportions, the next
stages of exploration by Aral. As at September 30, 2007, $1,500,124 had been
advanced by Azden to Aral and is recorded as a loan payable in Aral's accounts.
7 Convertible debentures
On March 1, 2006, the Company received US $16 million and issued 10% per annum,
convertible debentures in a like amount. The debentures mature on March 2, 2011
and are convertible at any time and from time to time into common shares of the
Company at a conversion price of $2.45 per share. The Company may repay the
principal amount of the debentures, in whole or in part, or require conversion
into common shares of the Company if the volume-weighted average trading price
of the common shares, for 40 consecutive trading days, is at least $4.08.
Face amount Fair value Accretion Interest Carrying
$ of $ $ value
conversion $
option
$
Debentures issued,
opening balance 18,320,884 (1,483,805) 281,168 1,564,757 18,683,004
Accretion of discount - - 239,320 - 239,320
Translation adjustment (2,378,749) - - (270,559) (2,649,308)
Interest accrual - - - 1,387,246 1,387,246
---------------------------------------------------------------
Balance - September 30,
2007 15,942,135 (1,483,805) 520,488 2,681,444 17,660,262
---------------------------------------------------------------
8 Share capital
Authorized
Unlimited number of voting common shares, without stated par value
Issued
Number of Amount
shares $
Issued and outstanding as at January 31, 2005 84,122,163 75,376,278
Exercise of warrants (i) 205,000 135,300
Share issue costs (v) - (290,816)
---------------------------
Issued and outstanding as at December 31, 2005 84,327,163 75,220,762
Exercise of warrants (ii) 357,100 888,505
Private placement (iii) 19,609,000 49,056,442
Exercise of options (iv) 50,000 87,500
Share issue costs (v) - (3,782,317)
---------------------------
Issued and outstanding as at December 31, 2006 and
September 30, 2007 104,343,263 121,470,892
----------------------------
i) During the period, 205,000 warrants were exercised. The warrants had
an exercise price of $0.66 per common share.
ii) During the period, 357,100 broker warrants were exercised. The
warrants had an exercise price of $2.00 per common share.
iii) On April 5, 2006 a private placement of 19,609,000 common shares were
issued at $2.55 per share.
iv) On April 10, 2006, 50,000 common shares at $1.75 per were issued
pursuant to the Company's stock option plan.
v) Share issue costs have not been tax-effected.
Stock options
The Company has a stock option plan (the "Plan") under which it may grant
options to directors, officers and employees for the purchase of up to 15% of
the number of common shares from time to time. Options are granted at the
discretion of the board of directors. The exercise price, vesting period and
expiration period are also fixed at the time of grant at the discretion of the
Board of Directors in accordance with terms of the Plan.
Changes to the Company's stock options are summarized as follows:
Number of Weighted
options average
option price
$
Balance - January 31, 2005 7,173,228 1.72
Granted 1,993,271 1.69
--------------------------
Balance - December 31, 2005 9,166,499 1.72
Granted 1,943,433 1.29
Exercised (50,000) 1.75
--------------------------
Balance - December 31, 2006 11,059,932 1.64
Granted 2,668,845 0.88
Expired (400,000) 2.15
--------------------------
Balance - September 30, 2007 13,328,777 1.47
---------------------------
Exercisable - September 30, 2007 12,332,944 1.48
---------------------------
The following is a summary of stock options outstanding and exercisable as at
September 30, 2007:
Options outstanding Options exercisable
Range of exercise Options Weighted Weighted Options
price outstanding average average exercisable
remaining exercise
contractual price
life in years
$0.75 2,079,090 1.9 $0.75 2,079,090
$0.86 800,000 4.3 $0.86 666,667
$0.89 1,868,845 4.5 $0.89 1,868,845
$1.25 1,043,433 3.7 $1.25 1,043,433
$1.34 900,000 4.1 $1.34 300,000
$1.61 843,271 2.9 $1.61 843,271
$1.75 1,100,000 2.9 $1.75 1,100,000
$2.00 1,050,000 2.1 $2.00 787,500
$2.15 3,644,138 1.9 $2.15 3,644,138
--------------------------------------------------------------------------
13,328,777 $1.48 12,332,944
--------------------------------------------------------------------------
Per share amounts
The weighted average number of common shares outstanding during the period ended
September 30, 2007 of 104,343,263 (September 30, 2006 - 104,343,263 shares) was
used to calculate loss per share amounts.
In computing diluted loss per share, no shares were added to the weighted
average number of common shares outstanding during the period ended September
30, 2007 (September 30, 2006 - nil) as they are anti-dilutive. The fully-diluted
number as at September 30, 2007 was 129,037,671 shares (September 30, 2006 -
127,585,828).
Warrants
588,270 broker warrants are outstanding at September 30, 2007 and all have
vested. These warrants entitle the holder to purchase one common share at a
price of $2.77 until April 5, 2008. The fair value of the outstanding warrants
using the Black-Scholes method was $946,508 (December 31, 2006 - $946,508).
9 Stock-based compensation
Options granted to both employees and non-employees are accounted for using the
fair value method. The fair value of common share options granted in the period
ended September 30, 2007 was estimated to be $1,493,527 as at the grant date
using a Black-Scholes option-pricing model and the following assumptions:
Risk free interest rate 4%
Expected life 5 year average
Expected volatility 73 - 75%
Expected dividend yield 0%
The estimated fair value of the options is amortized to expense and credited to
contributed surplus over the option vesting period on a straight-line basis.
10 Contributed surplus
September 30, December 31,
2007 2006
$ $
Balance - Beginning of period 12,030,275 7,668,133
Stock options issued to employees, officers and
directors 2,691,623 2,384,901
Fair value of debentures conversion option - 1,483,805
Fair value of warrants expired - 493,433
---------------------------
Balance - End of period 14,721,895 12,030,272
---------------------------
The term and vesting conditions of each option may be fixed by the board when
the option is granted, but the term cannot exceed 5 years from the date upon
which the option is granted.
The options granted to directors, officers and employees may be exercised over
five years from the date of granting and expire from time to time to April 2012.
The debentures are convertible into common shares of the Company at a price of
$2.45 per share and mature on March 31, 2011.
11 Commitments
In accordance with the shareholders' agreement in respect of Aral, Caspian was
obligated to fund the initial work program of Aral pursuant to the Exploration
Contract. The minimum work program was US $20.8 million and matured at the end
of calendar 2005. As at December 31, 2005, this obligation was fully discharged.
The work program extension to December 2007 includes drilling three wells to a
combined total of 8,500 metres with a monetary obligation of US $20.6 million.
No additional seismic is required. The Company's calendar 2006 minimum work
program with the Republic of Kazakhstan was approved for US $12.2 million and
was discharged during 2006. US $8.4 million is the minimum commitment for
calendar 2007.
12 Financial instruments
Caspian's financial instruments included in the consolidated balance sheet are
comprised of cash and cash equivalents, accounts receivable, other deposits and,
accounts payable. The fair values of these financial instruments approximate
their carrying amounts due to the short-term nature of the instruments. A
substantial portion of Caspian's accounts receivable are with customers in the
oil and gas industry and are subject to normal industry credit risks.
A substantial portion of Caspian's activities are settled in foreign currencies
and consequently, the Company is subject to fluctuations in currency translation
rates.
The liability and equity components of the convertible debentures are presented
separately in accordance with their substance. The liability component is
accreted to the amount payable at maturity by way of a charge to earnings using
the effective interest method.
13 Segmented information
The Company's activities are conducted in two geographic segments: Canada and
Kazakhstan. All activities relate to exploration for and development of
petroleum and natural gas.
Canada Kazakhstan Total
$ $ $
Revenue
Oil and gas revenue, net 30,302 4,292,018 4,322,320
Interest 2,644,047 - 2,644,047
Other - (12,374) (12,374)
-----------------------------------------
2,674,349 4,279,644 6,953,993
------------------------------------------
Expenses
General and administrative 2,113,473 341,830 2,455,303
Accretion of convertible debentures 239,320 - 239,320
Interest 1,402,048 1,256,239 2,658,287
Operating 10,166 1,494,802 1,504,968
Transportation 259 386,369 386,628
Stock-based compensation 2,691,623 - 2,691,623
Foreign exchange loss (gain) 12,302,072 (7,602,672) 4,699,400
Depletion, depreciation and accretion 3,750 1,383,118 1,386,868
Future income taxes - 663,755 663,755
-------------------------------------------
18,762,711 (2,076,559) 16,686,152
-------------------------------------------
Net (loss) income for the period (16,088,362) 6,356,203 (9,732,159)
-------------------------------------------
Assets
Current assets 4,146,118 10,933,060 15,079,178
Restricted cash - 169,914 169,914
Property, plant and equipment, net 30,423 118,699,518 118,729,941
-------------------------------------------
4,176,541 129,802,492 133,979,033
-------------------------------------------
Liabilities 18,301,563 8,117,534 26,419,097
-------------------------------------------
14 Reconciliation of International Financial Reporting Standards
Accounting practices under Canadian GAAP and International Financial Reporting
Standards ("IFRS") are, as they affect these financial statements, substantially
the same except for the following:
Property and equipment
Under Canadian GAAP, an impairment loss should be recognized when the carrying
amount of a cost centre is not recoverable and exceeds its fair value. The
carrying amount is not recoverable if the carrying amount exceeds the sum of the
undiscounted cash flows expected to result from its use and eventual
disposition. Unproved properties and major development projects are included in
this recoverability test. A cost centre impairment loss should be measured as
the amount by which the carrying amount of assets capitalized in a cost centre
exceeds the sum of:
* the fair value of proved and probable reserves; and
* the costs (less any impairment) of unproved properties that have been
subject to a separate test for impairment and contain no probable reserves
For costs beyond the exploration and evaluation stage, IFRS requires (i) an
impairment to be recognized when the recoverable amount of an asset (cash
generating unit) is less than the carrying amount; (ii) the impairment loss to
be determined as the excess of the carrying amount above the recoverable amount
(the higher of fair value less costs to sell and value in use, calculated as the
present value of future cash flows from the asset), rather than the excess of
the carrying amount above the undiscounted future cash flows of the asset; and
(iii) the reversal of an impairment loss when the recoverable amount changes. A
ceiling test based on cash generating units did not reveal the need for an
impairment charge.
For exploration and evaluation costs, IFRS 6 has been adopted effective January
1, 2005. IFRS 6 allows for continued application of an entity's existing policy
with respect to accounting for exploration and evaluation costs.
Impairment of long-lived assets
Under Canadian GAAP, a long-lived asset should be tested for recoverability
whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable. An impairment loss should be recognized when the
carrying amount of a long-lived asset is not recoverable and exceeds its fair
value. Under IFRS, the carrying amounts of the Company's assets, other than oil
and gas properties, inventories and deferred tax assets, are reviewed at each
balance sheet date to determine whether there is any indication of impairment.
If any such indication exists, the assets' recoverable amounts are estimated. An
impairment loss is recognized when the carrying amount of an asset exceeds its
recoverable amount. Impairment losses, if any, are recognized in the income
statement. This difference in accounting policy has no impact on these financial
statements.
Under Canadian GAAP, the carrying amount of a long-lived asset is not
recoverable if the carrying amount exceeds the sum of the undiscounted cash
flows expected to result from its use and eventual disposition. This assessment
is based on the carrying amount of the asset at the date it is tested for
recoverability, whether it is in use or under development. Under IFRS, the
recoverable amount of the Company's assets other than oil and gas properties is
the greater of their net selling price and value in use. In assessing value in
use, the estimated future cash flows are discounted to their present value using
a pre-tax discount rate that reflect current market assessments of the time
value of money and the risks specific to the asset. For an asset that does not
generate cash inflows largely independent of those from other assets, the
recoverable amount is determined for the cash-generating unit to which the asset
belongs. This difference in accounting policy has no impact on these financial
statements.
In respect of impairment of assets other than oil and gas properties, under
Canadian GAAP, an impairment loss is not reversed if the fair value subsequently
increases. For IFRS, an impairment loss may be reversed if there has been a
change in the estimates used to determine the recoverable value.
An impairment loss, on assets other than oil and gas properties, is only
reversed to the extent that the asset's carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. This difference in
accounting policy has no impact on these financial statements.
Asset retirement obligation
In re-measuring an asset retirement obligation for the passage of time, Canadian
GAAP requires re-measurement based on the risk-free rate that existed when the
liability was initially measured. IFRS requires the use of current market
assessed interest rates in each estimate. This difference did not result in a
material reconciling item.
Inventory
Under Canadian GAAP, the Company measures its supplies inventory at the lower of
historical cost or net replacement cost. Under IFRS, the lower of cost or net
realizable value principle would apply. This difference did not result in a
material reconciling item.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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