Source - RNS
RNS Number : 9464I
Touchstone Exploration Inc.
14 August 2019
 

 

TOUCHSTONE ANNOUNCES RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019

 

Calgary, Alberta, August 14, 2019 - Touchstone Exploration Inc. ("Touchstone", "we", "our", "us" or the "Company") (TSX, LSE: TXP) announces its financial and operational results for the three and six months ended June 30, 2019. Selected information is outlined below and should be read in conjunction with Touchstone's June 30, 2019 unaudited interim consolidated financial statements and related Management's discussion and analysis, both of which will be available under the Company's profile on SEDAR (www.sedar.com) and the Company's website (www.touchstoneexploration.com). Unless otherwise stated, all financial amounts herein are rounded to thousands of United States dollars.    

 

Highlights

  • Achieved crude oil sales of 1,768 bbls/d and 1,944 bbls/d for the three and six months ended June 30, 2019, respectively, representing increases of 3% and 19% relative to the prior year comparative periods.
  • Generated an operating netback of $26.85 per barrel in the second quarter of 2019 and $28.20 year to date 2019.
  • Delivered funds flow from operations of $1,310,000 ($0.01 per share) and $3,740,000 ($0.02 per share) during the second quarter and year to date June 30, 2019, respectively.
  • Exited the quarter with cash of $7,250,000 and net debt of $10,010,000, representing 1.3 times net debt to trailing twelve-month funds flow from operations.
  • Subsequent to June 30, 2019, spudded the Company's first exploration well on our Ortoire property.

 

Financial and Operating Results Summary

 

 

Three months ended June 30,

% change

      Six months ended June 30,

% change

 

2019

2018

2019

2018

 

 

 

 

 

 

 

Operating Highlights

 

 

 

 

 

 

 

 

 

 

 

Average daily oil production (bbls/d)

1,768

1,717

3

1,944

1,631

19

 

 

 

 

 

 

 

Net wells drilled

-

3

n/a

-

5

n/a

 

 

 

 

 

 

 

Brent benchmark price ($/bbl)

69.01

74.53

(7)

66.03

70.67

(7)

 

 

 

 

 

 

 

Operating netback(1) ($/bbl)

 

 

 

 

 

 

Realized sales price

60.33

61.97

(3)

58.91

60.63

(3)

Royalties

(17.25)

(17.49)

(1)

(16.19)

(17.18)

(6)

Operating expenses

(16.23)

(14.90)

9

(14.52)

(15.31)

(5)

 

26.85

29.58

(9)

28.20

28.14

-

 

 

 

 

 

 

 

Financial Highlights

 

 

 

 

 

 

($000's except as indicated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Petroleum sales

9,708

9,685

-

20,723

17,897

16

 

 

 

 

 

 

 

Cash flow from operating activities

1,832

4,711

(61)

4,569

3,690

24

 

 

 

 

 

 

 

Funds flow from operations(2)

1,310

2,507

(48)

3,740

4,569

(18)

Per share - basic and diluted(1)(2)

0.01

0.02

(50)

0.02

0.04

(50)

 

 

 

 

 

 

 

Net loss

(833)

(523)

59

(1,018)

(393)

159

Per share - basic and diluted

(0.01)

(0.00)

n/a

(0.01)

(0.00)

n/a

                 

 

 

 

 

 

 

 

 

 

Notes:

(1)    Non-GAAP financial measure that does not have a standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable with the calculation of similar measures presented by other companies. See "Advisories: Non-GAAP Measures".

(2)    Additional GAAP financial measure included in the Company's consolidated statements of cash flows. See "Advisories: Non-GAAP Measures".

 

 

Three months ended June 30,

% change

      Six months ended June 30,

% change

 

2019

2018

2019

2018

 

 

 

 

 

 

 

Exploration capital expenditures

681

334

104

1,041

511

104

Development capital expenditures

315

3,506

(91)

714

6,358

(89)

 

 

 

 

 

 

 

Net debt(1) - end of period

 

 

 

10,010

8,576

17

 

 

 

 

 

 

 

Share Information (000's)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic and diluted

160,688

129,021

25

150,891

129,021

17

Outstanding shares - end of period

 

 

 

160,688

129,021

25

 

 

 

 

 

 

 

 

Note:

(1)    Non-GAAP financial measure that does not have a standardized meaning prescribed by IFRS and therefore may not be comparable with the calculation of similar measures presented by other companies. See "Advisories: Non-GAAP Measures".

 

Operating results

 

In the first half of 2019, Touchstone conducted minimal capital development activities and continued to focus on prudently managing working capital, maintaining net debt levels and preparing for the initial Ortoire exploration well that spudded on August 7, 2019. Second quarter development capital expenditures totaled $315,000 which included continuing recompletion activities.

 

Second quarter 2019 crude oil production averaged 1,768 bbls/d, a 3% increase relative to the 1,717 bbls/d produced in the second quarter of 2018. Second quarter average daily production decreased by 17% from the first quarter of 2019. First quarter 2019 volumes were buoyed by flush production from wells drilled in the fourth quarter of 2018. As this flush production declined, the Company focused on converting the wells to pump as well as recompleting initial low rate producing wells. As a result of these initiatives, various wells and associated production were off-line during the second quarter. Production from the 2018 development drilling campaign contributed an average of approximately 413 bbls/d of incremental production in the second quarter of 2019 versus 692 incremental bbls/d in the first quarter of 2019.

 

Financial results

 

Our second quarter operating netback was $26.85 per barrel compared to $29.58 per barrel in the second quarter of 2018. Realized second quarter 2019 crude oil pricing was $60.33 per barrel, 3% less than the $61.97 per barrel received in the equivalent quarter of 2018. Second quarter 2019 royalty expenses were consistent with the second quarter of 2018, both on a per barrel basis and as a percentage of petroleum sales. In comparison to the second quarter of 2018, operating expenses on a per barrel basis increased 9%, predominately due to extensive well servicing activities conducted during the three months ended June 30, 2019.

 

Touchstone generated second quarter 2019 funds flow from operations of $1,310,000 ($0.01 per share), representing a decrease of $1,197,000 or 48% from the prior year comparative period. The variance was mainly a result of increased current income taxes recorded in the 2019 second quarter, as increased supplemental petroleum tax was incurred based on minimal developmental capital activity in the second quarter of 2019. As a result, we recognized a net loss of $833,000 ($0.01 per share) in the second quarter of 2019 versus a net loss of $523,000 ($0.00 per share) in the equivalent prior year quarter.

 

Touchstone exited the second quarter with a cash balance of $7,250,000, a working capital surplus of $2,062,000 and a C$15 million principal term loan balance. Our June 30, 2019 net debt position of $10,010,000 represented net debt to trailing twelve-month funds flow from operations of 1.3 times. As a result of an extension executed in the first quarter of 2019, our credit facility does not require the commencement of principal payments until January 1, 2021, and we continued to be comfortably within the financial covenants as at June 30, 2019.

 

Paul R. Baay, President and Chief Executive Officer, commented:

 

"Touchstone continues to operate from a comfortable financial position, with stable operating netbacks and positive cash flows. Following the spudding of our Coho-1 well last week, we are fully focused on progressing our Ortoire block exploration drilling programme. Last week's announcement represents the start of a potentially transformational period in the Company's history, and we look forward to updating the market on the Coho-1 well results over the course of the next two months."

 

About Touchstone

 

Touchstone Exploration Inc. is a Calgary based company engaged in the business of acquiring interests in petroleum and natural gas rights and the exploration, development, production and sale of petroleum and natural gas. Touchstone is currently active in onshore properties located in the Republic of Trinidad and Tobago. The Company's common shares are traded on the Toronto Stock Exchange and the AIM market of the London Stock Exchange under the symbol "TXP".

 

For Further Information:

 

Touchstone Exploration Inc.

Mr. Paul Baay, President and Chief Executive Officer                             Tel: +1 (403) 750-4487

Mr. Scott Budau, Chief Financial Officer

Mr. James Shipka, Chief Operating Officer

www.touchstoneexploration.com

 

Shore Capital (Nominated Advisor and Joint Broker)

Nominated Advisor: Edward Mansfield / Mark Percy / Daniel Bush           Tel: +44 (0) 207 408 4090

Corporate Broking: Jerry Keen

 

GMP FirstEnergy (Joint Broker)

Jonathan Wright / Hugh Sanderson                                                        Tel: +44 (0) 207 448 0200

 

Camarco (Financial PR)

Nick Hennis / Jane Glover                                                                      Tel: +44 (0) 203 781 8330

 

Advisories

 

Non-GAAP Measures

 

This announcement contains terms commonly used in the oil and natural gas industry, including funds flow from operations, funds flow from operations per share, operating netback and net debt. These terms do not have a standardized meaning under IFRS and may not be comparable to similar measures presented by other companies. Shareholders and investors are cautioned that these measures should not be construed as alternatives to cash flow from operating activities, net income, total liabilities, or other measures of financial performance as determined in accordance with Generally Accepted Accounting Principles ("GAAP"). Management uses these Non-GAAP measures for its own performance measurement and to provide stakeholders with measures to compare the Company's operations over time.

 

Funds flow from operations is an additional GAAP measure included in the Company's consolidated statements of cash flows. The Company calculates funds flow from operations per share by dividing funds flow from operations by the weighted average number of common shares outstanding during the applicable period.

 

The Company uses operating netback as a key performance indicator of field results. Operating netback is presented on a total and per barrel basis and is calculated by deducting royalties and operating expenses from petroleum sales. If applicable, the Company also discloses operating netback both prior to realized gains or losses on derivatives and after the impacts of derivatives are included. Realized gains or losses represent the portion of risk management contracts that have settled in cash during the period, and disclosing this impact provides Management and investors with transparent measures that reflect how the Company's risk management program can impact netback metrics. The Company considers operating netback to be a key measure as it demonstrates Touchstone's profitability relative to current commodity prices. This measurement assists Management and investors with evaluating operating results on a historical basis.

 

The Company closely monitors its capital structure with a goal of maintaining a strong financial position in order to fund current operations and the future growth of the Company. The Company monitors working capital and net debt as part of its capital structure to assess its true debt and liquidity position and to manage capital and liquidity risk. Working capital is calculated as current assets minus current liabilities as they appear on the consolidated statements of financial position. Net debt is calculated by summing the Company's working capital, long-term lease liabilities and the principal (undiscounted) amount of long-term debt.

 

Forward-Looking Statements

 

Certain information provided in this announcement may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking information in this announcement may include, but is not limited to, statements relating to the potential undertaking, timing, locations, production rates and costs of future exploration well drilling, and the sufficiency of resources and available financing to fund future exploration, drilling and completion operations. Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. Certain of these risks are set out in more detail in the Company's December 31, 2018 Annual Information Form dated March 26, 2019 which has been filed on SEDAR and can be accessed at www.sedar.com. The forward-looking statements contained in this announcement are made as of the date hereof, and except as may be required by applicable securities laws, the Company assumes no obligation to update publicly or revise any forward-looking statements made herein or otherwise, whether as a result of new information, future events or otherwise.

 

 

 

 

Interim Consolidated Statements of Financial Position (unaudited)

 

(US$ thousands)

Note

June 30, 2019

December 31, 2018

January 1, 2018

 

 

 

(note 3)

(note 3)

Assets

 10

 

 

 

Current assets

 

 

 

 

Cash

 

$7,250

$3,554

$11,089

Accounts receivable

5

9,398

11,893

6,803

Crude oil inventory

 

123

150

134

Prepaid expenses

 

551

257

378

Financial derivatives

14

196

-

-

 

 

17,518

15,854

18,404

 

 

 

 

 

Exploration assets

6

4,543

3,644

1,659

Property and equipment

3,7

62,119

63,041

50,045

Restricted cash

16

271

271

299

Other assets

 

1,199

1,330

1,486

Abandonment fund

11

1,050

966

835

Total assets

 

$86,700

$85,106

$72,728

 

 

 

 

 

Liabilities

 

 

 

 

Current liabilities

 

 

 

 

Accounts payable and accrued liabilities

8

$11,585

$16,262

$10,330

Income taxes payable

8

3,678

2,730

2,441

Term loan and associated liabilities

10

193

180

208

 

 

15,456

19,172

12,979

 

 

 

 

 

Provisions

3

-

125

53

Lease liabilities

3,9

613

-

-

Term loan and associated liabilities

10

10,878

10,683

11,657

Decommissioning liabilities

11

8,644

8,915

9,438

Deferred income taxes

 

16,544

14,994

8,185

Total liabilities

 

52,135

53,889

42,312

 

 

 

 

 

Shareholders' equity

 

 

 

 

Shareholders' capital

12

61,483

56,987

56,987

Contributed surplus

 

2,263

2,172

2,035

Accumulated other comprehensive loss

 

(14,648)

(14,427)

(14,733)

Accumulated deficit

 

(14,533)

(13,515)

(13,873)

Total shareholders' equity

 

34,565

31,217

30,416

Total liabilities and shareholders' equity

 

$86,700

$85,106

$72,728

 

Commitments and contingencies (Note 16)

See accompanying notes to these unaudited interim consolidated financial statements.

 

 

 

Interim Consolidated Statements of Comprehensive Income (Loss) (unaudited)

 

(US$ thousands, except per share amounts)

Note

Three months ended

June 30,

Six months ended

June 30,

2019

2018

2019

2018

 

 

 

(note 3)

 

(note 3)

Revenues

 

 

 

 

 

Petroleum sales

 

$9,708

$       9,685

$20,723

$17,897

Royalties

 

(2,776)

(2,734)

(5,695)

(5,071)

Petroleum revenue

 

6,932

6,951

15,028

12,826

Gain (loss) on financial derivatives

14

25

(87)

25

(143)

Other income

 

3

-

11

375

 

 

6,960

6,864

15,064

13,058

 

 

 

 

 

 

Expenses

 

 

 

 

 

Operating

 

2,612

2,329

5,107

4,520

General and administrative

 

1,487

1,449

2,802

2,822

Net finance

13

251

308

572

755

Foreign exchange loss (gain)

14

91

20

129

(249)

Share-based compensation

12

49

31

80

56

Depletion and depreciation

7

1,249

1,041

2,700

1,935

Impairment

6

63

85

141

241

Loss on decommissioning liabilities

 

-

9

-

9

 

 

5,802

5,272

11,531

10,089

 

 

 

 

 

 

Earnings before income taxes

 

1,158

1,592

3,533

2,969

 

 

 

 

 

 

Income taxes

 

 

 

 

 

Current tax expense

 

1,435

470

3,053

761

Deferred tax expense

 

556

1,645

1,498

2,601

 

 

1,991

2,115

4,551

3,362

 

 

 

 

 

 

Net loss

 

(833)

(523)

(1,018)

(393)

Currency translation adjustments

 

(188)

267

(221)

542

Comprehensive (loss) income

 

$(1,021)

$       (256)

$(1,239)

$        149

 

 

 

 

 

 

Net loss per common share

 

 

 

 

Basic and diluted

12

$(0.01)

$      (0.00)

$(0.01)

$      (0.00)

 

See accompanying notes to these unaudited interim consolidated financial statements.

 

 

 

Interim Consolidated Statements of Changes in Shareholders' Equity (unaudited)

 

(US$ thousands)

Shareholders' capital

Contributed surplus

Accumulated other comprehensive loss

Accumulated deficit

 

Shareholders'

equity

 

 

 

 

 

 

January 1, 2018 (note 3)

$56,987

$2,035

$(14,733)

$(13,873)

$30,416

Net loss

-

-

-

             (393)

(393)

Other comprehensive income

-

-

542

-

542

Share-based compensation expense (note 12)

-

56

-

-

56

Share-based compensation capitalized (note 7)

-

10

-

-

10

June 30, 2018

$56,987

$2,101

$(14,191)

$(14,266)

$30,631

 

 

 

 

 

 

January 1, 2019 (note 3)

$56,987

$2,172

$(14,427)

$(13,515)

$31,217

Net loss

-

-

-

          (1,018)

(1,018)

Other comprehensive loss

-

-

(221)

-

(221)

Private placement (note 12)

4,496

-

-

-

4,496

Share-based compensation expense (note 12)

-

80

-

-

80

Share-based compensation capitalized (note 7)

-

11

-

-

11

June 30, 2019

$61,483

$2,263

$(14,648)

$(14,533)

$34,565

 

See accompanying notes to these unaudited interim consolidated financial statements.

 

 

 

Interim Consolidated Statements of Cash Flows (unaudited)

 

(US$ thousands)

Note

Three months ended

June 30,

Six months ended

June 30,

2019

2018

2019

2018

 

 

 

(note 3)

 

(note 3)

Cash provided by (used in) the following activities:

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

Net loss for the period

 

$(833)

$(523)

$(1,018)

$(393)

Items not involving cash from operations:

 

 

 

 

Non-cash (gain) loss on financial derivatives

14

(25)

87

(25)

143

Unrealized foreign exchange loss (gain)

14

70

5

128

(276)

Share-based compensation

12

49

31

80

56

Depletion and depreciation

7

1,249

1,041

2,700

1,935

Impairment

6

63

85

141

241

Other

 

165

116

236

328

Loss on decommissioning liabilities

 

-

9

-

9

Deferred income tax expense

 

556

1,645

1,498

2,601

Decommissioning expenditures

11

16

11

-

(75)

Funds flow from operations

 

1,310

2,507

3,740

4,569

Change in non-cash working capital

 

693

2,204

1,000

(726)

Costs related to financial derivatives

14

(171)

-

(171)

(153)

Cash flow from operating activities

 

1,832

4,711

4,569

3,690

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Exploration asset expenditures

6

(681)

(334)

(1,041)

(511)

Property and equipment expenditures

7

(315)

(3,506)

(714)

(6,358)

Abandonment fund expenditures

11

(37)

(34)

(81)

(64)

Change in non-cash working capital

 

(873)

(490)

(2,982)

261

Cash flow used in investing activities

(1,906)

(4,364)

(4,818)

(6,672)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Payment of term loan production obligation

10

(97)

(97)

(207)

(179)

Term loan amendment fees

10

-

(119)

(112)

(119)

Finance lease (payments) receipts

 

(80)

58

(112)

117

Issuance of common shares

12

-

-

4,496

-

Change in non-cash working capital

 

(11)

(174)

3

(166)

Cash flow (used in) from financing activities

(188)

(332)

4,068

(347)

 

 

 

 

 

 

(Decrease) increase in cash

 

(262)

15

3,819

(3,329)

Cash, beginning of period

 

7,586

8,026

3,554

11,089

Impact of foreign exchange on foreign denominated cash balances

(74)

(5)

(123)

276

 

 

 

 

 

 

Cash, end of period

 

$7,250

$8,036

$7,250

$8,036

 

 

 

 

 

 

The following are included in cash flow from operating activities:

 

 

 

 

Interest paid in cash

 

221

226

448

454

Income taxes paid in cash

 

1,424

252

2,011

449

 

See accompanying notes to these unaudited interim consolidated financial statements.

 

Notes to the Interim Consolidated Financial Statements (unaudited)

As at June 30, 2019 and for the three and six months ended June 30, 2019 and 2018

 

1.      Reporting Entity

                                                                                                                                                  

Touchstone Exploration Inc. and its subsidiaries (collectively, the "Company") are engaged in the business of crude oil and natural gas exploration, development, acquisition and production. The Company is currently active in the Republic of Trinidad and Tobago ("Trinidad").

 

Touchstone Exploration Inc. is incorporated under the laws of Alberta, Canada with its head and principal office located at 4100, 350 7th Avenue SW, Calgary, Alberta, T2P 3N9. The Company's common shares are listed on the Toronto Stock Exchange and on the AIM market of the London Stock Exchange under the symbol "TXP".

                                                                                                                                                  

2.      Basis of Preparation and Statement of Compliance

 

These unaudited condensed interim consolidated financial statements (the "financial statements") have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. These financial statements are condensed as they do not include all the information required by IFRS for annual financial statements and therefore should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2018. Certain reclassification adjustments have been made to these financial statements to conform to the current presentation.

 

Unless otherwise stated, amounts presented in these financial statements are rounded to thousands of United States dollars ("$" or "US$), and tabular amounts are stated in thousands of United States dollars, as described further in Note 3 "Changes to Accounting Policies".

 

The financial statements have been prepared on a historical cost basis, except as detailed in the accounting policies disclosed in Note 3 "Summary of Significant Accounting Policies" of the Company's audited consolidated financial statements for the year ended December 31, 2018. All accounting policies and methods of computation followed in the preparation of these financial statements are consistent with those of the previous financial year, except as disclosed in Note 3 "Changes to Accounting Policies". There have been no significant changes to the use of estimates or judgments since December 31, 2018, except as noted in Note 4 "Use of Estimates, Judgements and Assumptions".

 

All intercompany transactions have been eliminated upon consolidation between Touchstone and its subsidiaries in these financial statements. The Company's operations are viewed as a single operating segment by the chief operating decision makers of the Company for the purposes of resource allocation and assessing performance.

        

These financial statements were authorized for issue by the Company's Board of Directors on August 13, 2019.

 

3.      Changes to Accounting Policies

 

(a)     Change in presentation currency

 

The Company changed its presentation currency from Canadian dollars to United States dollars effective January 1, 2019, with retrospective application on comparative figures in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and IAS 21 Foreign Currency ("IAS 21"). The change in accounting policy was made to better reflect the Company's international business activities and to improve comparability of the Company's financial results with other internationally focused junior oil and gas companies.

The Company did not change its functional currency, nor did it change the functional currencies of any of its subsidiaries. The functional currency of the parent company is the Canadian dollar ("C$"), the functional currency of the Company's Barbadian entity is the US$, and the functional currency of its three operational Trinidadian subsidiaries is the Trinidad and Tobago dollar ("TT$").

 

For comparative purposes, historical consolidated financial statements have been restated to reflect financial results had they been presented in US$ since the Company's inception. The current and comparative results and financial position of the Company's consolidated subsidiaries that have a functional currency different from the presentation currency have been translated into the US$ presentation currency in accordance with IAS 21 as follows:     

· assets and liabilities for each statement of financial position presented were translated at the reporting date closing rate;

· shareholders' equity items for each statement of financial position presented were translated at the rates prevailing on the dates of the transactions;

· revenue and expenses and certain cash flow items for each period were translated at average monthly exchange rates (unless this was not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case revenue and expenses were translated at the dates of the transactions);

·  all resulting exchange differences were recognized in accumulated other comprehensive loss, a separate component of equity; and

·  all foreign exchange rates used were extracted from the Company's underlying financial records.

As such, the change in presentation currency does not have an economic impact on the Company's underlying operations and transactions. The change in presentation currency simply converts the consolidated financial statement amounts to US$ as described above. In addition to the comparative consolidated statement of financial position, the Company has presented a third consolidated statement of financial position as at January 1, 2018 as a result of the change in presentation currency.

 

The Company's shareholders previously approved a special resolution approving the reduction of the stated capital of the Company's common shares by an aggregate amount of up to C$150 million, which was partially implemented on November 30, 2017 thereby reducing the Company's C$ accumulated deficit to $nil. The change in presentation currency created an accumulated deficit at that time, as the Company's historical accumulated deficit balance presented in US$ exceeded the translated C$ capital reduction on November 30, 2017.

 

(b)     Adoption of IFRS 16 Leases ("IFRS 16")

 

Effective January 1, 2019, the Company adopted IFRS 16. The standard supersedes IAS 17 Leases ("IAS 17") and requires the recognition of a right-of-use ("ROU") asset and lease obligation on the statement of financial position for most leases where the entity is acting as a lessee. For lessees, IFRS 16 removes the classification of leases as either operating leases or finance leases, effectively treating all leases as finance leases. IFRS 16 allows lessors to continue with the dual classification model for recognized leases with the resultant accounting remaining unchanged from IAS 17. The Company is the lessee in the majority of its lease arrangements; however, the Company does have one material lease arrangement where it acts as the lessor.

 

The Company has elected to apply IFRS 16 using the modified retrospective approach which does not require the restatement of prior period financial information. Modified retrospective application recognizes the cumulative effect of IFRS 16 as an adjustment to opening accumulated deficit at January 1, 2019 and applies the standard prospectively. Accordingly, comparative information before adoption has not been restated and continues to be reported under IAS 17.

 

On adoption of IFRS 16, the Company recognized lease liabilities in relation to leases under the principles of the new standard measured at the present value of the remaining lease payments, discounted using the interest rate implicit in the lease or the Company's incremental borrowing rate as at January 1, 2019. The Company used a weighted average incremental borrowing rate of 8 percent to measure the present value of future lease payments on January 1, 2019. The associated ROU assets (included in property and equipment) were measured at the amount equal to the lease liability on January 1, 2019 less any amount previously recognized for office lease inducements, with no impact on opening accumulated deficit.

 

On January 1, 2019, the Company elected to utilize the following practical expedients permitted in the standard:

· the Company recognized leases with terms ending within twelve months of initial adoption as short-term leases, with lease payments recognized in the financial statements as incurred;

· on January 1, 2019, the provision for office lease inducements previously recognized was applied to the value of the associated ROU asset; and

· certain leases having similar characteristics have been measured as a portfolio by applying a single discount rate.

The Company identified ROU lease assets and liabilities related to head office space, oilfield service equipment, motor vehicles and office equipment. The following table sets forth the impact of the adoption of IFRS 16 on the consolidated statement of financial position as at January 1, 2019.

 

 

 

January 1, 2019

 

 

 

ROU asset (included in property and equipment)

 

$             1,194

 

 

 

Increase in total assets

 

$             1,194

 

 

 

Short-term portion of lease liabilities (included in accounts payable and accrued liabilities)

$                482

Provisions and accounts payable and accrued liabilities

 

(158)

Long-term portion of lease liabilities

 

                   870

 

 

 

 

Increase in total liabilities and shareholders' equity

 

$             1,194

       

 

Upon adoption of IFRS 16, lease liability amounts are now included in the Company's term loan financial covenants (see Note 10 "Term Loan and Associated Liabilities). 

 

The adoption of IFRS 16 did not affect its finance lease where the Company is the lessor.

 

Update to Significant Accounting Policies

 

The Company applied IFRS 16 using the modified retrospective approach; therefore, the comparative information provided continues to be accounted for in accordance with the Company's previous accounting policy found in the audited consolidated financial statements for the year ended December 31, 2018. The accounting policy set forth below is applicable from January 1, 2019.

 

Lease arrangements

 

The Company assesses whether an arrangement is a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

 

 

As lessee

 

When the Company is a lessee, leases are recognized as a right-of-use asset and a corresponding lease liability at the date on which the leased asset is available for use by the Company. Assets and liabilities arising from a lease are measured on a present value basis. Lease liabilities include the net present value of fixed payments, variable lease payments that are based on an index or a rate, amounts expected to be paid by the lessee under residual value guarantees, the exercise price of purchase options if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, less any lease incentives receivable. The future payments are discounted using the interest rate implicit in the lease or, when that rate cannot be readily determined, the Company's incremental borrowing rate. The Company uses a single discount rate for a portfolio of leases with reasonably similar characteristics.

 

Lease payments are allocated between the lease liability and finance expenses. Finance expenses are charged to the consolidated statements of comprehensive income (loss) over the lease term.

 

Associated ROU assets are initially measured at cost, which comprises the initial amount of the lease liability, any initial direct costs incurred, and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset, less any lease payments made at or before the commencement date. ROU assets are depreciated on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. ROU assets may be adjusted for certain remeasurements of the lease liability and impairment losses.

 

Leases that have terms of less than twelve months or leases on which the underlying asset is of low value are recognized as an expense in the consolidated statement of comprehensive income (loss) on a straight-line basis over the lease term.

 

As lessor

 

Where the Company is the lessor in a lease arrangement, the Company assesses at inception whether the lease is a finance or operating lease. Leases where the Company transfers substantially all of the risk and rewards incidental to ownership of the underlying asset are classified as financing leases. Under a finance lease, the Company records the short-term portion of the finance lease in accounts receivable and the long-term portion in other assets. Finance income related to the lease is recognized using an approach that equals a constant rate of return on the net investment of the lease. The net investment of the lease is the aggregate of the net minimum lease payments and unearned finance income discounted at the interest rate implicit in the lease. Unearned finance income is deferred and recognized in the statements of comprehensive income over the lease term. The Company recognizes lease payments received under operating leases as income on a straight-line basis over the lease term as other income.

 

(c)     Adoption of IFRIC 23 Uncertainty over Income Tax Treatments ("IFRIC 23")

 

IFRIC 23 clarifies how the recognition and measurement requirements of IAS 12 Income Taxes are applied where there is uncertainty over income tax treatments. IFRIC 23 is effective for years beginning on or after January 1, 2019. The adoption of this amendment did not have a material impact on the Company's financial statements or previously reported results.

 

(d)     Future accounting policies

 

There are no other standards or interpretations issued, but not yet effective, that the Company anticipates may have a material effect on the financial statements once adopted.

 

4.      Use of Estimates, Judgements and Assumptions

 

Leases

 

Management applies judgment in reviewing each of its contractual arrangements to determine whether the arrangement contains a lease within the scope of IFRS 16. Leases that are recognized are subject to further Management judgment and estimation in various areas specific to the contractual arrangements. In determining the lease term to be recognized, Management considers all facts and circumstances that create an economic incentive to exercise an extension option or not to exercise a termination option.

 

Lease obligations are estimated using a discount rate equal to the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. The Company's incremental borrowing rate represents the rate that the Company would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a similar economic environment.

 

5.      Financial Assets and Credit Risk

 

Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. As at June 30, 2019, the Company was exposed to credit risk with respect to its accounts receivable and other assets, which includes finance lease receivable and deferred consideration from a property disposition.

 

The credit risk associated with the Company's finance lease receivable is considered to be low as the asset is secured by the underlying fixed assets, with ownership transferring to the counterparty subsequent to the final payment. The credit risk associated with the Company's deferred consideration is also considered low as the Company is selling the counterparty's crude oil produced from the disposed assets through its facilities and currently has the right to net the quarterly payment from the gross proceeds received.

 

The Company's crude oil production is sold, as determined by market-based prices adjusted for quality differentials, to Heritage Petroleum Company Limited ("Heritage") (formerly the Petroleum Company of Trinidad and Tobago Limited). Typically, the Company's maximum credit exposure is petroleum sales for two months, of which $3,215,000 was included in accounts receivable as at June 30, 2019, which represented approximately 34 percent of the total balance (December 31, 2018 - $5,165,000 and 43 percent, respectively). In addition, $5,438,000 in value added tax due from the Trinidad government was included in accounts receivable as at June 30, 2019, which represented approximately 58 percent of the accounts receivable balance (December 31, 2018 - $6,006,000 and 51 percent, respectively).

 

As at June 30, 2019, the Company determined that the average expected credit loss on the Company's accounts receivables was nil. The Company believes that the accounts receivable balances that are past due are ultimately collectible, as the majority are due from Trinidad government agencies for value added taxes, and the Company has historically not experienced any collection issues. The aging of accounts receivable as at June 30, 2019 and December 31, 2018 is disclosed in the following table.

 

     

 

June 30,

 2019

December 31, 2018

 

 

 

 

Not past due

 

$              3,541

$              6,731

Past due (greater than 90 days)

 

                5,857

                5,162

 

 

 

 

Accounts receivable

 

$              9,398

$            11,893

6.      Exploration Assets

 

Exploration assets consist of the Company's projects in the exploration and evaluation stage which are pending determination of technical and commercial feasibility. The following table is a continuity schedule of the Company's exploration assets at the end of the respective periods.

 

 

 

Six months ended

June 30, 2019

Year ended December 31, 2018

 

 

 

 

Balance, beginning of period

 

$             3,644

$             1,659

Additions

 

               1,041

               2,557

Impairments

 

                 (157)

                 (548)

Effect of change in foreign exchange rates

 

                     15

                    (24)

 

 

 

 

Balance, end of period

 

$             4,543

$             3,644

 

During the three and six months ended June 30, 2019, $38,000 and $95,000 of general and administrative expenses were capitalized to exploration assets, respectively (2018 - $17,000 and $24,000).

 

During the three and six months ended June 30, 2019, the Company incurred $63,000 and $141,000 in lease expenses relating to its East Brighton property respectively (2018 - $92,000 and $185,000). These fees were impaired given the property's estimated recoverable value was $nil.

 

The June 30, 2019 $4,543,000 exploration asset balance was included in the Ortoire cash-generating unit. No indicators of impairment were identified by the Company as at June 30, 2019.

 

7.      Property and Equipment

 

The following table is a continuity schedule of the Company's property and equipment at the end of the respective periods.

 

 

Petroleum assets

Corporate assets

Total

 

 

 

 

Cost

 

Balance, January 1, 2018

$             1,960

Additions

                    13

Dispositions

-

Effect of change in foreign exchange rates

                (156)

 

 

 

 

Balance, December 31, 2018

$        134,308

$             1,817

$        136,125

Additions

                  631

                      -

                 631

Right-of-use assets (note 3)

1,114

80

1,194

Effect of change in foreign exchange rates

                 554

                   78

                 632

 

 

 

 

 

Balance, June 30, 2019

$        136,607

$             1,975

$        138,582

 

 

 

Accumulated depletion, depreciation and impairments

 

Balance, January 1, 2018

$             1,550

Depletion and depreciation

                  124

Impairment recoveries

-

Decommissioning obligation change in estimate

1,171

-

1,171

Effect of change in foreign exchange rates

               (128)

 

 

 

 

Balance, December 31, 2018

$           71,538

$             1,546

$           73,084

Depletion and depreciation

               2,628

                    72

               2,700

Decommissioning obligation change in estimate

371

-

371

Effect of change in foreign exchange rates

                  243

                   65

                  308

 

 

 

 

Balance, June 30, 2019

$           74,780

$             1,683

$           76,463

 

 

 

 

Carrying amounts:

 

 

 

Balance, December 31, 2018

$           62,770

$               271

$           63,041

Balance, June 30, 2019

$           61,827

$               292

$           62,119

 

As at June 30, 2019, $68,390,000 in future development costs were included in petroleum asset cost bases for depletion calculation purposes (December 31, 2018 - $68,644,000). During the three and six months ended June 30, 2019, $115,000 and $308,000 in general and administrative expenses were capitalized to property and equipment, respectively (2018 - $226,000 and $431,000). During the three and six months ended June 30, 2019, $7,000 and $11,000 in share-based compensation expenses were capitalized to property and equipment, respectively (2018 - $4,000 and $10,000). 

 

At June 30, 2019, the Company evaluated its petroleum assets for indicators of any potential impairment or related reversal. As a result of this assessment, no indicators were identified, and no impairment or related reversal was recorded.

 

(a)     Exploration and production licence

 

The Company's Palo Seco exploration and production agreement with the Trinidad and Tobago Minister of Energy and Energy Industries ("MEEI") expired on August 19, 2013. The Company is currently negotiating a renewal or extension of the licence and has permission from the MEEI to operate in the interim period. The Company has no indication that the licence will not be renewed. During the three and six months ended June 30, 2019, production volumes produced under the expired licence represented 0.6 percent and 0.5 percent of total production, respectively (2018 - 0.8 percent and 0.8 percent).

 

(b)     Private lease agreements

 

The Company is operating under a number of private lease agreements which have expired and are currently being renewed. Based on legal opinions received, the Company is continuing to recognize petroleum sales on the producing properties because the Company is the operator, is paying all associated royalties and taxes, and no title to the producing properties have been disputed. The Company currently has no indication that any of the producing expired leases will not be renewed. The continuation of production from expired private leases during the renegotiation process is common in Trinidad based on antiquated land title processes. During the three and six months ended June 30, 2019, production volumes produced under expired private lease agreements represented 1.8 percent and 1.7 percent of total production, respectively (2018 - 2.4 percent and 2.5 percent).

 

8.      Financial Liabilities and Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to meet liabilities when due, under both normal and unusual conditions without incurring unacceptable losses or jeopardizing the Company's business objectives. The Company's liquidity is dependent on the Company's expected business growth and changes in its business environment.  The Company manages this risk by continuously monitoring actual and forecasted cash flows from operating, financing and investing activities and opportunities to extend its existing debt facility or to issue additional equity. Management believes that future cash flows generated from these activities will be adequate to settle the Company's future liabilities. Given that the Company has minimal developmental work obligations and guarantees, the Company will continue to manage its capital expenditures to reflect current financial resources in the interest of sustaining long-term viability.

 

 

The following table sets forth estimated undiscounted cash outflows relating to financial liabilities as at June 30, 2019.

 

 

Undiscounted amount

 Less than 1 year

 1 to 3 years

 4 to 5 years

 

 

 

 

 

Accounts payable and accrued liabilities

$          11,585

$          11,585

$                   -

$                   -

Income taxes payable

3,678

             3,678

                     -

   -

Term loan principal

11,459

 -

3,713

7,746

Term loan production payments

 1,438

    290

709

 439

Term loan interest payments

3,129

918

1,573

638

Lease liabilities

1,226

584

518

124

 

 

 

 

 

Financial liabilities

$          32,515

$          17,055

$            6,513

$            8,947

 

Refer to Note 10 "Term Loan and Associated Liabilities" and Note 15 "Capital Management" for further details regarding the Company's debt structure and capital management objectives.

 

9.      Lease Liabilities

 

The following table details the movements of the Company's lease liabilities for the six-month period ended June 30, 2019.

 

 

 

 

Total

 

 

 

 

Balance, January 1, 2019 (note 3)

 

 

$             1,352

Interest expense

 

 

                     42

Payments

 

 

                 (274)

Effect of change in foreign exchange rates

 

 

                       8

 

 

 

 

Balance, June 30, 2019

 

 

$             1,128

 

 

 

 

Current (included in accounts payable and accrued liabilities)

 

                   515

Non-current

 

 

                   613

 

 

 

 

 

Lease liabilities

 

 

$             1,128

 

The Company has lease liabilities for head office space, oilfield service equipment, motor vehicles and office equipment. The lease contracts are effective from two to four years. Discount rates used in calculating the present values of lease payments during the three and six months ended June 30, 2019 were between 5 and 10 percent. Leases are negotiated on an individual basis and contain a wide range of varying terms and conditions. The following table details the undiscounted cash flows which include both principal and interest components of the Company's lease liabilities as at June 30, 2019.

 

 

June 30,

 2019

 

 

Less than one year

$                584

1 to 3 years

                   518

4 years

                   124

 

 

Undiscounted cash flows related to lease liabilities

$             1,226

 

Payments recognized in the financial statements relating to short-term leases for the three and six months ended June 30, 2019 were $32,000 and $64,000, respectively. These leases related to short-term motor vehicle and office equipment and were recognized in operating expenses and general administrative expenses, respectively.

 

10.     Term Loan and Associated Liabilities

 

On November 23, 2016, the Company completed an arrangement for a C$15 million, five-year term credit facility from a Canadian investment fund. The term loan bears a fixed interest rate of 8 percent per annum, compounded and payable quarterly.

 

Effective June 15, 2018, the Company and the lender entered into a Second Amending Agreement to the Credit Agreement, which extended the term loan maturity date to November 23, 2022 and extended all principal payments by one year. Effective March 29, 2019, the Company and the lender entered into a Third Amending Agreement to the Credit Agreement (the "2019 Amendment"), which extended the term loan maturity date to November 23, 2023. The Company is required to repay C$810,000 per quarter commencing on January 1, 2021 through October 1, 2023, and the then outstanding principal balance is repayable on the maturity date. As consideration for the 2019 Amendment, the Company paid the lender a financing fee of C$150,000 ($112,000).

 

In connection with the term loan, the Company granted the lender a production payment equal to 1 percent of total petroleum sales from then current Company land holdings in Trinidad. Concurrent with the execution of the 2019 Amendment, the Company and the lender extended the production payment agreement to mature on October 31, 2023 regardless of any repayment or prepayment of the term loan. The Company may prepay any principal portion of the term loan and has the option to negotiate a buyout of the future production payment obligation if the term loan balance is prepaid in full. The term loan and the Company's obligations in respect of the production payment are principally secured by fixed and floating security interests over all present and after acquired assets of the Company and its subsidiaries.

 

The debt instrument is comprised of two financial liability components: the term loan liability and the production payment liability. At inception the term loan liability was measured at fair value, net of all transaction fees, using a discount rate of 12 percent. The term loan was revalued based on the 2019 Amendment, resulting in a gain of $277,000 recognized during the six months ended June 30, 2019 (2018 - $219,000). The production payment liability is revalued at each reporting period based on internally estimated future production and forward crude oil pricing forecasts using a discount rate of 15 percent. As a result of these changes in estimates and the 2019 Amendment, a revaluation gain of $23,000 and a net revaluation loss of $209,000 were recognized during the three and six months ended June 30, 2019 (2018 - losses of $194,000 and $320,000). The following is a continuity schedule of the term loan and associated liabilities balances at the end of the respective periods.

 

 

Term loan liability

Production payment liability

Total

 

 

 

 

Balance, January 1, 2018

$           11,031

$                834

$           11,865

Revaluation (gain) loss

                 (219)

                   341

                   122

Accretion

                   301

                        -

                   301

Payments / transfers to accounts payable

                 (119)

                 (377)

                 (496)

Effect of change in foreign exchange rates

                 (864)

                    (65)

                 (929)

 

 

 

 

Balance, December 31, 2018

$           10,130

$                733

$           10,863

Revaluation (gain) loss

                 (277)

                   209

                    (68)

Accretion

                   151

                        -

                   151

Payments / transfers to accounts payable

                 (112)

                 (207)

                 (319)

Effect of change in foreign exchange rates

                   413

                     31

                   444

 

 

 

 

Balance, June 30, 2019

$           10,305

$                766

$           11,071

 

 

 

 

Current

                        -

                   193

                   193

Non-current

             10,305

                   573

             10,878

 

 

 

 

 

Term loan and associated liabilities

$           10,305

$                766

$           11,071

 

 

 

The term loan arrangement contains industry standard representations and warranties, positive and negative covenants and events of default. The financial covenants and the Company's estimated position as at June 30, 2019 are summarized in the following table.

 

Covenant

Covenant threshold

Six months ended June 30, 2019

 

 

 

Net funded debt to equity ratio(1)

< 0.50 times

0.12 times

Net funded debt to EBITDA ratio(2)

< 2.50 times

0.42 times

 

 

 

 

Notes:

(1)    Net funded debt is defined as interest-bearing debt including lease liabilities, less cash balances. Equity is defined as book value of shareholders' equity less accumulated other comprehensive loss.

(2)    Means the ratio of net funded debt to EBITDA for the trailing twelve-month period. EBITDA is defined as net earnings before interest, income taxes and non-cash items.

 

11.     Decommissioning Liabilities and Abandonment Fund

 

The Company's decommissioning liabilities relate to future site restoration and well abandonment costs including the costs of production equipment removal and land reclamation based on current environmental regulations. The provision is estimated by Management based on the Company's net ownership interest in all wells and facilities, estimated costs to reclaim and abandon these wells and facilities, and the estimated timing of the costs to be incurred in future periods. Payments to settle the obligations occur over the operating lives of the underlying assets, estimated to be from three to twenty-two years, with the majority of the costs estimated to be incurred subsequent to 2031. The liabilities are expected to be funded from the abandonment fund and the Company's internal resources available at the time of settlement.

 

Pursuant to Heritage and MEEI production and exploration licences, the Company is obligated to remit payments into an abandonment fund based on production. The Company remits $0.25 per barrel of crude oil sold, and the funds will be used for the future abandonment of wells in the related licenced area. As at June 30, 2019, the Company classified $1,050,000 of accrued or paid fund contributions as long-term abandonment fund assets (December 31, 2018 - $966,000).

 

The Company estimated the net present value of the cash flows required to settle its decommissioning liabilities to be $8,644,000 as at June 30, 2019 based on an inflation adjusted future liability of $28,919,000 (December 31, 2018 - $8,915,000 and $31,606,000, respectively). The following table summarizes the Company's estimated decommissioning obligation provision at the end of the respective periods.

 

 

Six months ended

June 30, 2019

Year ended December 31,

2018

 

 

 

Balance, beginning of period

$             8,915

$             9,438

Liabilities incurred

     3

208

Liabilities settled

-

(66)

Accretion expense

180

262

Revision to estimates

(484)

(828)

Dispositions

-

(62)

Effect of change in foreign exchange rates

  30

   (37)

 

 

 

Balance, end of period

$             8,644

$             8,915

 

At June 30, 2019, decommissioning liabilities were valued using a long-term risk-free rate of 7.9 percent and a long-term inflation rate of 3.3 percent (December 31, 2018 - 7.9 percent and 3.7 percent, respectively).

 

 

12.     Shareholders' Capital

 

(a)     Issued and outstanding common shares

 

The Company has authorized an unlimited number of voting common shares without nominal or par value. The following table is a continuity schedule of the Company's common shares outstanding and shareholders' capital.

 

 

 

Number of shares

Balance

 

 

 

Balance, January 1, 2018 and December 31, 2018

   129,021,428

$            56,987

Issued pursuant to private placement

     31,666,667

                  4,496

 

 

 

Balance, June 30, 2019

   160,688,095

$            61,483

 

(b)     February 2019 private placement

 

On February 26, 2019, the Company completed a private placement directed toward United Kingdom institutional investors, whereby gross proceeds of $5,013,000 (£3,800,000) were raised by way of a placing of 31,666,667 new common shares at a price of C$0.21 (12 pence) per common share. Fees incurred from the private placement were $517,000, which included brokerage commissions and legal, accounting and corporate finance advisory fees. Net proceeds of the private placement were $4,496,000.

 

(c)     Share option plans

 

The Company has a share option plan pursuant to which options to purchase common shares of the Company may be granted by the Board of Directors to directors, officers, employees and consultants of the Company. The exercise price of each option may not be less than the closing price of the common shares prior to the date of grant. Compensation expense is recognized as the options vest. Unless otherwise determined by the Board of Directors, vesting typically occurs one third on each of the next three anniversaries of the date of the grant as recipients render continuous service to the Company, and the share options typically expire five years from the date of the grant. The following table summarizes the share options outstanding at the end of the respective periods.

 

                

Number of share options

Weighted average exercise price

 

 

 

Outstanding, January 1, 2018

        6,870,840

C$             0.50

Granted

        1,688,800

0.23

Forfeited

(25,000)

2.10

 

 

 

Outstanding, January 1, 2019

        8,534,640

C$             0.44

Granted

        2,550,000

                  0.23

Expired

(1,955,240)

0.89

 

 

 

Outstanding, June 30, 2019

        9,129,400

C$             0.29

 

 

 

Exercisable, June 30, 2019

        4,896,439

                 0.34

 

The Company has an incentive share compensation option plan which provides for the grant of incentive share options to purchase common shares of the Company at a C$0.05 exercise price. A maximum of one million common shares have been approved for issuance under this plan. Unless otherwise determined by the Board of Directors, vesting typically occurs one third on each of the next three anniversaries of the date of the grant, and the incentive share options typically expire five years from the date of the grant. As at June 30, 2019, 15,000 incentive share options were outstanding and exercisable with an exercise price of C$0.10 per incentive share.

The maximum number of common shares issuable on the exercise of outstanding share options and incentive share options at any time is limited to 10 percent of the issued and outstanding common shares.

 

During the three and six months ended June 30, 2019, the Company recorded share-based compensation expenses of $49,000 and $80,000 in relation to share option plans, respectively (2018 - $31,000 and $56,000).

 

(d)     Weighted average common shares

 

The weighted average common shares used in calculating net loss per common share was calculated as follows.

 

Three months ended June 30, 2019

Six months ended June 30,

 

2019

2018

2019

2018

 

 

 

 

 

Weighted average common shares, basic

160,688,095

129,021,428

150,890,673

129,021,428

Dilutive impact of share-based compensation

                      -

                      -

                      -

                      -

 

 

 

 

 

Weighted average common shares, diluted

160,688,095

129,021,428

150,890,673

129,021,428

 

There was no dilutive impact to the weighted average number of common shares for the three and six months ended June 30, 2019 and 2018, as all share options and incentive share options were excluded from the weighted average dilutive share calculations because their effect would be anti-dilutive.

 

13.     Net Finance Expenses

 

The following table summarizes net finance expenses recorded during the three and six months ended June 30, 2019 and 2018.

 

Three months ended June 30, 2019

Six months ended June 30,

 

2019

2018

2019

2018

 

 

 

 

 

Interest income

$                (29)

$                  (46)

$                (60)

$                 (90)

Term loan interest expense

                 223

                 232

                 445

                 463

Term loan revaluation gain

-

               (219)

(277)

               (219)

Production payment liability revaluation (gain) loss

                  (23)

                 194

                 209

                 320

Accretion on term loan

                   78

                   78

                 151

                 148

Accretion on decom. liabilities

                   90

                   65

                 180

                 129

Lease liability interest expense

                   24

                      -

                   50

                      -

Other

               (112)

                     4

               (126)

                     4

 

 

 

 

 

Net finance expenses

$                251

$                 308

$                572

$                 755

 

14.     Financial Derivatives and Market Risk Management

 

Management of cash flow variability is an integral component of the Company's business strategy. Changing business conditions are monitored regularly and, where material, reviewed with the Board of Directors to establish risk management guidelines to be used by Management. The risk exposures inherent in the movements of the price of crude oil and fluctuations in foreign exchange rates are proactively reviewed by the Company and may be managed through the use of derivative contracts as considered appropriate.

 

 

(a)     Commodity price risk

 

The nature of crude oil operations exposes the Company to risks associated with commodity prices. The Company maintains a risk management strategy to protect funds flow from operations from the volatility of commodity prices. The Company's strategy focuses on the periodic use of puts, costless collars, swaps or fixed price contracts to limit exposure to fluctuations in commodity prices while allowing for participation in commodity price increases.

 

In April 2019, the Company purchased put option contracts from a financial institution for 800 bbls/d at a strike price of Brent US$56.10 per barrel from June 1, 2019 to December 31, 2019. The options may be settled on a monthly basis during the option exercise period. The June 2019 options expired out of the money.

 

The Company recognized the $171,000 premium for the put options as a derivative financial asset. The financial derivatives are subsequently recorded at their estimated fair value based on the difference between the contracted price and the period-end forward price using quoted market prices. As at June 30, 2019, the Company recognized a financial derivative asset of $196,000 related to the put options (December 31, 2018 - $nil). For the three and six months ended June 30, 2019, the Company recorded derivative gains of $25,000 and $25,000, respectively (2018 - losses of $87,000 and $143,000) related to commodity management contracts.

 

(b)     Foreign currency risk

 

Foreign currency exchange risk arises from changes in foreign exchange rates that may affect the fair value or future cash flows of the Company's financial assets or liabilities. As the Company primarily operates in Trinidad, fluctuations in the exchange rate between the TT$ and the US$ could have a significant effect on reported results, as the sales prices of crude oil are determined by reference to US$ denominated benchmark prices and the majority of the Company's operating costs are denominated in TT$. This is currently mitigated by the fact that the TT$ is informally pegged to the US$. The Company is also subject to foreign exchange exposure relating to Canadian head office expenses and its term loan, which are denominated in C$. Any material movements in the C$ to US$ exchange rate may have a material effect on the Company's reporting results. The Company also has foreign exchange exposure on costs denominated in pounds sterling required to maintain its AIM listing.

 

The Company's foreign currency policy is to monitor foreign currency risk exposure in its areas of operations and mitigate that risk where possible by matching foreign currency denominated expenses with petroleum sales denominated in foreign currencies. The Company attempts to limit its exposure to foreign currency through collecting and paying foreign currency denominated balances in a timely fashion. The Company had no contracts in place to manage foreign currency risk as at or during the three and six months ended June 30, 2019 and 2018. 

 

During the three and the six months ended June 30, 2019, the C$ depreciated 4% and the TT$ weakened by 1% relative to the US$ in comparison to the equivalent periods of 2018, respectively. As a result, the Company recorded foreign exchange losses of $91,000 and $129,000 during the three and six months ended June 30, 2019, respectively (2018 - loss of $20,000 and gain of $249,000). The majority of the 2019 translation differences in each period were unrealized in nature and may be reversed in the future as a result of fluctuations in prevailing exchange rates.

 

15.     Capital Management

 

The basis for the Company's capital structure is dependent on the Company's expected business growth and any changes in the business and commodity price environment. The Company's long-term goal is to fund current period decommissioning and capital expenditures necessary for the replacement of production declines using only funds flow from operations. Profitable growth activities will be financed with a combination of funds flow from operations and other sources of capital. The Company typically uses equity and term debt to raise capital.

 

The Company's objective is to maintain net debt to trailing twelve-month funds flow from operations at or below a ratio of 2.0 times. Net debt is a Non-IFRS measure calculated by summing the Company's working capital and the principal (undiscounted) amounts of long-term debt and lease liabilities. Working capital is a Non-IFRS measure calculated as current assets minus current liabilities as they appear on the consolidated statements of financial position. Net debt is used by Management as a key measure to assess the Company's liquidity. Funds flow from operations is an additional GAAP measure included in the Company's consolidated statements of cash flows.

 

The Company also monitors its capital management through the net debt to net debt plus equity ratio. The Company's strategy is to utilize more equity than debt, thereby targeting net debt to net debt plus shareholders' equity at a ratio of less than 0.4 to 1. The Company's internal capital management calculations for the six months ended June 30, 2019 and the year ended December 31, 2018 are summarized below.

 

 

Target measure

June 30,

 2019

December 31, 2018

 

 

 

 

Current assets

 

$         (17,518)

$        (15,854)

Current liabilities

 

15,456

19,172

Working capital (surplus) deficit

 

$           (2,062)

$              3,318

Principal long-term portion of term loan

 

             11,459

             11,004

Long-term lease liabilities

 

613

-

 

 

 

 

Net debt

 

$            10,010

$            14,322

Shareholders' equity

 

             34,565

             31,217

 

 

 

 

Net debt plus equity

 

$            44,575

$            45,539

 

 

 

 

Trailing twelve-month funds flow from operations(1)

 

$              7,585

$              8,414

 

 

 

 

Net debt to funds flow from operations

< 2.0 times

                  1.3

                  1.7

 

 

 

 

Net debt to net debt plus equity

< 0.4 times

                  0.2

                  0.3

 

Note:

(1)    Trailing twelve-month funds flow from operations as at June 30, 2019 include funds flow from operations for the six months ended June 30, 2019 plus funds flow from operations for the July 1, 2018 through December 31, 2018 interim period.

 

16.     Commitments and Contingencies

 

The Company has minimum work obligations under various operating agreements with Heritage, exploration commitments under exploration and production agreements with the MEEI and various lease commitments for office space and equipment.

 

The following table outlines the Company's estimated minimum contractual capital requirements as at June 30, 2019.

 

 

 Total

 2019

 2020

 2021

Thereafter

 

 

 

 

 

 

Operating agreements

$        3,169

$          154

$          884

$        296

$  1,835

Exploration agreements

       10,192

         2,922

         7,270

                  -

                  -

Office leases

            714

            136

            300

            278

                  -

Equipment leases

            263

            111

            146

                 6

                  -

 

 

 

 

 

 

Minimum payments

$      14,338

$        3,323

$        8,600

$        580

$       1,835

 

Under the terms of its operating agreements, the Company must fulfill minimum work obligations on an annual basis over the specific licence term. In aggregate, the Company is obligated to drill 12 wells and perform 18 well recompletions prior to the end of 2021. As of June 30, 2019, 10 wells were drilled, and 15 well recompletions were completed with respect to these obligations. The Company has provided $271,000 in cash collateralized guarantees to Heritage to support its operating agreement work commitments (December 31, 2018 - $271,000). The balance is classified as long-term restricted cash on the consolidated statements of financial position.

 

Under the terms of its exploration licences, the Company must drill five wells prior to the end of December 31, 2020; none of which have been completed as of June 30, 2019.

 


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