Petroshale (PSH)$1.34 Cdn. PSHIF. $1,204 USD.. it's a long read.. Will get to it later.. hank
CONSOLIDATED INTERIM STATEMENTS OF FINANCIAL POSITION
As at As at
(thousands of Canadian dollars) (unaudited) NOTE September 30, 2013 June 30, 2013
ASSETS
Current assets
Cash and cash equivalents $ 2,217 $ 2,192
Restricted cash 11 70 70
Accounts receivable 830 768
Fair value of financial instruments 8 4 -
Prepaid expenses 42 27
Total current assets 3,163 3,057
Non-current assets
Exploration and evaluation 4 1,880 1,910
Property and equipment 5 9,266 8,261
Total property and equipment 11,146 10,171
Fair value of financial instruments 8 5 -
Total assets $ 14,314 $ 13,228
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 1,388 $ 1,441
Note payable – related party 7 - 2,208
Total current liabilities 1,388 3,649
Non-current liabilities
Notes payable – line of credit 7 1,018 -
Note payable – related party 7 2,163 -
Decommissioning provision 6 279 283
Total liabilities 4,848 283
SHAREHOLDERS’ EQUITY
Share capital 28,948 28,948
Warrants 1,002 1,002
Contributed surplus 1,613 1,460
Deficit (22,570) (22,483)
Accumulated other comprehensive income 473 369
Total Shareholders’ equity $ 9,466 9,296
Subsequent Events 14
Total Shareholders’ equity and liabilities $ 14,314 $ 13,228
See accompanying notes to the consolidated interim financial statements.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three months ended Three months ended
(thousands of Canadian dollars) (unaudited) NOTE September 30, 2013 September 30, 2012
Revenues
Oil and natural gas revenue, net of royalties $ 1,274 $ 448
Unrealized gain on financial derivatives 9 -
Total revenue 1,283 448
Expenses
Production and operating 173 119
Depletion and depreciation 434 185
Impairment of exploration and evaluation - 1,079
General and administrative 559 268
Share based compensation 9 153 392
Total expenses 1,319 2,043
Loss from operations (36) (1,595)
Finance income - 4
Finance expense (52) -
Foreign exchange gain (loss) 1 (14)
Net finance expenses (51) (10)
Net loss for the period (87) (1,605)
Currency translation adjustment 104 293
Comprehensive income (loss) for the period $ 17 $ (1,312)
Net loss per share
Basic 10 $ 0.00 $ (0.06)
Diluted 10 $ 0.00 $ (0.06)
See accompanying notes to the consolidated interim financial statements.
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN EQUITY
For the three months ended September 30, 2013 and 2012
(unaudited)
(thousands of Canadian dollars)
Non Voting Voting
Common Shares Common Shares
Contributed
Surplus
Other
Comprehensive
Shares Amount Shares Amount Warrants Income Deficit Total
Balances, June 30, 2012 6,700,000 $ - 22,173,552 $ 28,909 $ 1,002 $ 567
$
(5) $ (1,354) $ 29,119
Share-based compensation - - - - - 392 - - 392
Net loss for the period - - - - - - - (1,605) (1,605)
Other comprehensive gain for the period - - - - - - 293 - 293
Balances, September 30, 2012 6,700,000 $ - 22,173,552 $ 28,909 $ 1,002 $ 959 $ 288 $ (2,959) $ 28,199
Balances, June 30, 2013 6,700,000 $ - 22,307,552 $ 28,948 $ 1,002 $ 1,460 $ 369 $ (22,483) $ 9,296
Share-based compensation - - - - - 153 - - 153
Net loss for the period - - - - - - - (87) (87)
Other comprehensive gain for the period - - - - - - 104 - 104
Balances, September 30, 2013 6,700,000 $ - 22,307,552 $ 28,948 $ 1,002 $ 1,613 $ 473 $(22,570) $ 9,466
See accompanying notes to the consolidated interim financial statements.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
Three months ended Three months ended
(thousands of Canadian dollars) (unaudited) September 30, 2013 September 30, 2012
Cash provided by (used in)
Operating Activities
Net loss for the period $ (87) $ (1,605)
Items not affecting cash
Depletion and depreciation 434 185
Impairment of exploration and evaluation assets - 1,079
Share based compensation 153 392
Unrealized (gain) loss on financial derivative assets (9) -
Change in non-cash working capital 134 113
625 164
Investing activities
Acquisition of property and equipment (958) -
Exploration and evaluation assets (10) (2,386)
Additions to property and equipment (613) -
(1,581) (2,386)
Financing activities
Proceeds from note payable – line of credit 973 -
973 -
Change in cash and cash equivalents 17 (2,222)
Effect of foreign exchange rates on cash and cash equivalents 8 208
Cash and cash equivalents, beginning of period 2,192 9,182
Cash and cash equivalents, end of period 2,217 7,168
See accompanying notes to the consolidated interim financial statements.
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NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND NATURE OF OPERATIONS
PetroShale Inc. (formerly Algonquin Oil & Gas Limited) (the "Company") is a publicly traded resource
company formed to acquire, develop and explore for petroleum and natural gas production. The Company
currently operates in two geographic regions, Canada and the United States.
These consolidated interim financial statements include the accounts of the Company and its wholly-owned
subsidiaries, PetroShale (US), Inc., GEL Exploration Limited, Zama Production Limited, PetroShale (US)
Production, LLC (“Production LLC”) and PetroShale (US) Land 1, LLC (“Land”).
The head office of PetroShale Inc., principal address and records are located at 1801 Broadway, Suite 920,
Denver, CO 80202. The registered office of PetroShale Inc. is located at 1250, 639 Fifth Ave. S.S., Calgary,
Alberta Canada, T2P 0M9.
2. BASIS OF PREPARATION
These consolidated interim financial statements and the notes thereto should be read in conjunction with the
Company’s audited financial statements as at and for the year ended June 30, 2013, and do not include all of
the information required for full annual financial statements.
These consolidated interim financial statements are unaudited and have been prepared in accordance with
IAS 34 Interim Financial Reporting using accounting policies consistent with International Financial
Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and
interpretations of the International Financial Reporting Interpretations Committee ("IFRIC").
The accounting policies applied for the consolidated interim financial statements as at and for the three
months ended September 30, 2013 are consistent with those applied for the financial statements as at and for
the year ended June 30, 2013 which have been prepared on the basis of IFRS issued by the IASB and
interpretations of the IFRIC, except as noted below.
These consolidated interim financial statements were approved by the Company's Board of Directors on
November 21, 2013.
On January 1, 2013, the Company adopted new standards with respect to consolidations (IFRS 10), joint
arrangements (IFRS 11), fair value measurements (IFRS 13) and amendments to financial instrument
disclosures (IFRS 7). The adoption of these standards had no impact on the amounts recorded in the financial
statements as at January 1, 2013 or on the comparative periods.
3. ACQUISITIONS
Stockyard Acquisition
On August 19, 2013 the Company, in partnership with Slawson Exploration Company, Inc. (“Slawson”),
entered into a purchase and sale agreement (“Stockyard Acquisition”) with Samson Oil & Gas Limited
(“Samson” or “Seller”) to purchase certain assets within the Stockyard Creek field, southern Williams
County, North Dakota, for a purchase price of US$934,000 dollars.
The net assets to the Company consist of approximately; (i) 5.5% working interest in 106 net leased acres, (ii)
an interest in the drilled, and yet to be completed, middle Bakken Sail & Anchor well and (iii) a share of the
operating salt water gathering and disposal system.
As part of the Stockyard Acquisition, the parties acknowledge that if Samson performs certain obligations the
Company will remit an additional US$178,000 for a working interest in an additional well. As at September
30, 2013 it is unknown if Samson will meet its obligations, therefore in accordance with IFRS 37 –
Provisions, Contingent Liabilities and Contingent Assets the value of this asset has not been recorded as part
of the purchase price allocation until the occurrence of the obligations are probable.
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The purchase price is summarized as follows (in thousands):
CONSIDERATION (US$934,000) $ 965
NET ASSETS ACQUIRED AT FAIR VALUE
Property and equipment $ 972
Asset retirement obligation (7)
$ 965
4. EXPLORATION AND EVALUATION ASSETS
Exploration and evaluation (“E&E”) assets consist of the following:
(in thousands)
Petroleum and
Natural Gas
Properties
Balance as at June 30, 2012 18,909
Additions 3,159
Transfers (4,665)
Impairment (15,625)
Effect of foreign exchange rate 132
Balance as at June 30, 2013 $ 1,910
Additions 10
Transfers -
Impairment -
Effect of foreign exchange rate (40)
Balance as at September 30, 2013 $ 1,880
E&E assets represent the costs incurred on the development of wells that have not yet reached the stage of
commercial production or the determination of technical viability. Once technical feasibility and commercial
viability of production are demonstrated, E&E assets are tested for impairment and are reclassified to
property and equipment.
For the three months ended September 30, 2013 and 2012 the Company recognized $nil and $1.1 million,
respectively of impairment expense related to the MonDak project. Impairment expense related to wells that
reached technical feasibility and commercial viability was $1.1 million. There was no impairment related to
capitalized leasehold costs.
The impairment of the wells was based on the difference between the year-end net book value of the assets
and the estimated recoverable amount and was recorded as impairment expense in the statement of operations
with the offset charged against exploration and evaluation. The impairment of leasehold costs was estimated
using current economic conditions in the same geographical area with similar geologic features as the
Company’s leasehold positions.
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5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(in thousands) Office
Petroleum and
Natural Gas
Properties Total
Balance as at June 30, 2012 15 2,032 2,047
Acquisition of petroleum and natural gas properties - 5,665 5,665
Additions 21 673 694
Transfers - 4,665 4,665
Impairment (3,749) (3,749)
Depletion, depreciation and amortization (6) (1,063) (1,069)
Effect of foreign exchange rate 8 8
Balance as at June 30, 2013 $ 30 $ 8,231 $ 8,261
Acquisition of petroleum and natural gas properties - 965 965
Additions 6 594 600
Depletion, depreciation and amortization (2) (432) (434)
Effect of foreign exchange rate (1) (125) (126)
Balance as at September 30, 2013 $ 33 $ 9,233 $ 9,266
Depletion, Depreciation, Amortization and Future Development Costs
The Company recorded $434,000 and $185,000 to depreciation and depletion for the three month periods
ended September 30, 2013 and 2012, respectively, which included an estimated $1.3 million of future
development costs associated with proved plus probable undeveloped reserves.
6. DECOMMISSIONING LIABILITIES
The following table presents the decommissioning liabilities;
(in thousands)
September
30, 2013
June 30,
2013
Beginning balance $ 283 $ 207
Acquisition of petroleum and natural gas properties 7 39
Additions - 15
Revisions of estimated cash flows (13) 15
Accretion 2 6
Effect of foreign exchange rate - 1
Total 279 283
The Company's provision consists of remediation obligations resulting from its ownership interests in
petroleum assets. The total obligation is estimated based on the Company's net working interest in each well
site, estimated costs to return these sites to their original condition and costs to plug the wells and the
estimated timing of the costs to be incurred in future years.
The total undiscounted amount of estimated cash flows required to settle the obligation at September 30,
2013 is $402,000 which has been discounted at the risk free rate of approximately 3.0%, includes an inflation
factor of approximately 1.5% on the costs of decommissioning and assumes that the liabilities are settled over
the next 50 years in accordance with estimates prepared by independent engineers.
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7. LONG TERM DEBT
Revolving credit facility
On August 6, 2013 Production LLC entered into a three year US$50 million dollar revolving line of credit
with a 36 month term, expiring July 31st, 2016. The initial borrowing base is US$3.0 million secured by the
assets of Production LLC. The amount of the facility is subject to a borrowing base test performed on a
periodic basis and at least twice annually by the lenders, based primarily on reserves and using commodity
prices estimated by the lenders as well as other factors. A decrease in the borrowing base could result in a
reduction to the credit facility, which may require a repayment to the lenders. This facility includes a 1%
origination fee, a 0.5% fee on available but undrawn funds, prime plus 0.5% interest with a 4.0% interest
minimum, with no parent company guarantees. The revolving credit facility is subject to financial and nonfinancial
covenants. The financial covenants consist of an interest rate coverage ratio, which the Company
shall not permit, as of the last day of each fiscal quarter the ratio of earnings before interest, taxes,
depreciation, amortization, exploration expense and other non-cash charges to income (“EBITDAX”) to
interest expense for the four fiscal quarter period then ended, to be less than 3:00 to 1:00 and a current ratio,
which the Company shall not permit the current assets to current liabilities to be less than 1.00 to 1.00.
Current assets shall mean all assets, in accordance with IFRS, included as current assets on the balance sheet
plus the then current unused portion of the revolving credit facility and excluding the fair value of any
financial instruments classified as current assets. Current liabilities shall mean all liabilities which would, in
accordance with IFRS, be included in current liabilities, but excluding current maturities in respect to the
revolving credit facility (both principal and interest), and the fair value of any financial instruments classified
as current liabilities. As at September 30, 2013 the Company is in compliance with all of its financial and
non-financial covenants.
As at September 30, 2013 the Company accrued approximately $5,000 of interest expense, which is included
in accounts payable.
Revolving credit facility- Related Party
On October 17, 2012 the Company entered into a debt instrument with a Trust of an individual that is both:
(i) a principal with Slawson Exploration Company, Inc. ("Slawson Exploration"), the Company’s strategic
partner in the Williston Bakken; and (ii) a principal with Alameda Energy, Inc., a shareholder of the
Company which owns 6.7 million non-voting shares of the Company. On July 25, 2013 the Company entered
into an amendment, which restructured the loan. The principal terms of the restructuring are as follows; (i)
the note shall become a US$2.1 million dollar revolving credit facility, which matures on October 12, 2014,
(ii) the loan shall include a 0.75% loan origination fee and shall bear interest of 0.5% on available but
undrawn funds and 12% on any outstanding balance with interest payments due quarterly. As security for the
payment of the indebtedness, the Company executed a mortgage, assignment of production, security
agreement and financing statement covering certain oil and gas interests.
As at September 30, 2013 the Company accrued approximately $64,000 of interest expense, which is
included in accounts payable.
8. FINANCIAL DERIVATIVE INSTRUMENTS
The Company has utilized swaps to reduce the effect of price changes on a portion of its future oil
production. A swap requires the Company to pay the counterparty if the settlement price exceeds the strike
price and the same counterparty is required to pay the Company if the settlement price is less than the strike
price. The objective of the Company’s use of derivative financial instruments is to achieve more predictable
cash flows in an environment of volatile oil and gas prices and to manage its exposure to commodity price
risk. While the use of these derivative instruments limits the downside risk of adverse price movements, such
use may also limit the Company’s ability to benefit from favorable price movements. The Company may,
from time to time, add incremental derivatives to hedge additional production, restructure existing derivative
contracts or enter into new transactions to modify the terms of current contracts in order to realize the current
value of the Company’s existing positions. The Company does not enter into derivative contracts for
speculative purposes.
The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the
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financial terms of such contracts. The Company’s derivative contracts are currently with one counterparty.
The Company has netting arrangements with the counterparty that provide for the offset of payables against
receivables from separate derivative arrangements with the counterparty.
The Company’s commodity derivative instruments are measured at fair value and are included in the
accompanying balance sheets as derivative management assets and liabilities. Unrealized gains and losses are
recorded based on the changes in the fair values of the derivative instruments. Both the unrealized and
realized gains and losses resulting from the contract settlement of derivatives are recorded in the consolidated
statement of operations.
The Company’s commodity derivative contracts as at September 30, 2013 are summarized below:
Term Type
Total
Volumes
Price
(per Bbl
$US) Reference
Fair
Value
August 1, 2013 to December 31, 2013 SWAP* 950 $ 104.00 WTI $ 2,000
September 1, 2013 to December 31, 2013 SWAP* 1,124 $ 105.70 WTI $ 4,000
January 1, 2014 to December 31, 2014 SWAP* 1,900 $ 94.25 WTI $ -
January 1, 2014 to December 31, 2014 SWAP* 2,852 $ 95.00 WTI $ 3,000
January 1, 2015 to July 31, 2015 SWAP* 1,128 $ 87.75 WTI $ -
January 1, 2015 to July 31, 2015 SWAP* 751 $ 87.25 WTI $ -
*Includes a 25% participation clause, whereby, if the floating price exceeds the fixed price the Company will
receive an amount equal to the product of 25% multiplied by the floating price minus the fixed price
multiplied by the contract quantity.
9. SHARE CAPITAL
The Company has an employee stock option plan under which employees and directors are eligible to receive
option grants (“Stock Options”). The total aggregate amount of Stock Options that can be issued cannot
exceed ten percent of the outstanding Common Shares. Stock Options granted under the plan have a term of
five years to expiry and have various vesting periods up to three years.
The following table summarizes the stock option activity:
Number of
Options
Weighted
Average
Exercise Price
Balance as at June 30, 2012 1,441,281 $ 1.50
Granted 443,470 0.29
Exercised - -
Forfeited - -
Expired - -
Balance as at June 30, 2013 and September 30, 2013 1,884,751 $ 1.22
The Company uses the fair value method to account for all stock-based awards granted to employees, officers
and directors. The estimated fair value of these stock options granted during the year was determined using
the Black Scholes option pricing model and is recorded as a charge to income over the vesting period
with a corresponding increase to contributed surplus. During the three months ended September 30, 2013
and 2012 the Company recorded $153,000 and $392,000, respectively for stock based expense.
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10. NET LOSS PER COMMON SHARE
The following table presents the Company’s net loss per common share;
(thousands, except for per share data)
September
30, 2013
September
30, 2012
Net loss for the period $ 87 $ (1,605)
Weighted average number of basic and diluted common shares: 29,007,552 28,873,552
Net income (loss) per weighted average basic and diluted common share $ (0.00) $ (0.06)
There were no vested in-the-money Stock Options as at September 30, 2013, therefore basic and diluted
shares are the same.
11. COMMITMENTS
The Company has an outstanding letter of credit in favor of the Ministry of Natural Resources in the amount
of $58,000. As security for this letter of credit, the Company has set aside $58,000 in cash at the financial
institution that issued the letter of credit. In addition, the Company has set aside $12,000 as cash security for
two credit cards held by the Company.
The Company leases its office space in Ontario, Canada from a company owned by the President of GEL
Exploration Limited. The Company is committed to rental payments of $11,100 per year expiring November
30, 2015. The Company also leases office space in Denver, Colorado and is committed to monthly payments
of $950 per month commencing April 1, 2012 and expiring on April 30, 2014.
12. RELATED PARTY TRANSACTIONS
Related party transactions are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
An overriding royalty in the amount of $6,000 was paid to the President of GEL Exploration Limited and
$1,000 for rent and utilities for each of the three month periods ended September 30, 2013 and 2012.
The Company paid $45,000 for accounting and CFO services to a company that the Chief Financial Officer
has an ownership interest in and is the President for the three month period ended September 30, 2013. There
were no payments to this company for the three month period ended September 30, 2012.
11
13. SEGMENT DISCLOSURES
The Company operates in one industry segment, the production of petroleum and natural gas and the
exploration and development of oil and gas properties.
The Company and its subsidiaries operate in two geographical segments, Canada and the United States.
Three Months Ended Three Months Ended
(in thousands) September 30, 2013 September 30, 2012
Revenue
Canada $ 249 $ 216
United States 1,025 232
$ 1,274 $ 448
Loss for period
Canada $ (122) $ (847)
United States 35 (758)
$ (87) $ (1,605)
Three Months Ended Year Ended
(in thousands) September 30, 2013 June 30, 2013
Exploration and evaluation assets
Canada $ – $ –
United States 1,880 1,910
$ 1,880 $ 1,910
Property and equipment
Canada $ 1,763 $ 1,812
United States 7,503 6,449
$ 9,266 $ 8,261
14. SUBSEQUENT EVENTS
On October 31, 2013, Evan Genaud resigned as a Director, President and Chief Executive Officer of
PetroShale Inc. and James D. Fair was named interim Chief Executive Officer. Payment of USD$250,000
was made to Mr. Genaud with respect to cessation of employment. All of the stock options that were granted
to Mr. Genaud were forfeited.
The Company entered into the following hedging agreements subsequent to the three months ended
September 30, 2013:
Term Type
Total
Volumes
Price
(per Bbl $US) Reference
November 1, 2013 to December 31, 2013 SWAP 1,220 $ 96.44 WTI
January 1, 2014 to December 31, 2014 SWAP 4,380 $ 93.81 WTI
January 1, 2015 to December 31, 2015 Collar 4,745 $75 floor /
$96.25 cap WTI
