Leucrotta Exploration Inc.
Annual Report 2017

Plain-text annual report

Q4 2017 FINANCIAL AND OPERATING RESULTS LEUCROTTA EXPLORATION INC. (TSXV – LXE) (“Leucrotta” or the “Company”) is pleased to announce its financial and operating results for the three months and year ended December 31, 2017. All dollar figures are Canadian dollars unless otherwise noted. Q4/17 HIGHLIGHTS • • • Increased production 361% to 3,802 boe/d in Q4 2017 from 824 boe/d in Q4 2016 (increased 22% from 3,123 boe/d in Q3 2017). Increased adjusted funds flow 4,653% to $4.5 million in Q4 2017 from adjusted funds flow of negative $0.1 million in Q4 2016. Tied-in Mica 9-33 and Doe 4-12 Lower Montney Turbidite wells. FINANCIAL RESULTS ($000s, except per share amounts) Oil and natural gas sales Adjusted funds flow (1) Per share - basic and diluted Net loss Per share - basic and diluted Working capital Common shares outstanding (000s) Weighted average - basic and diluted End of period - basic End of period - fully diluted Three Months Ended December 31 2016 % Change Year Ended December 31 2017 2016 % Change 2,281 320 26,844 8,844 204 2017 9,586 4,462 0.02 (5,072) (0.03) (1,657) (0.01) (98) - (4,653) 100 206 200 35 9,602 0.05 (8,222) (0.04) (996) (0.01) (1,064) (600) (12,182) (0.07) (33) (43) 93,514 22,574 314 18,660 26,063 (28) 200,486 165,227 21 189,377 165,227 200,497 227,108 165,227 189,297 15 21 20 Capital expenditures and acquisitions 15,870 11,718 (1) Adjusted funds flow and adjusted funds flow per share do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable to similar measures used by other companies. Please refer to the “Non-GAAP Measures” section in the MD&A for more details and the “Adjusted Funds Flow” section in the MD&A for a reconciliation from cash flow from (used in) operating activities. LEUCROTTA EXPLORATION INC. - 1 - 2017 YEAR END REPORT OPERATING RESULTS (1) Daily production Oil and NGLs (bbls/d) Natural gas (mcf/d) Oil equivalent (boe/d) Revenue Oil and NGLs ($/bbl) Natural gas ($/mcf) Oil equivalent ($/boe) Royalties Oil and NGLs ($/bbl) Natural gas ($/mcf) Oil equivalent ($/boe) Production expenses Oil and NGLs ($/bbl) Natural gas ($/mcf) Oil equivalent ($/boe) Transportation expenses Oil and NGLs ($/bbl) Natural gas ($/mcf) Oil equivalent ($/boe) Operating netback (2) Oil and NGLs ($/bbl) Natural gas ($/mcf) Oil equivalent ($/boe) Depletion and depreciation ($/boe) Exploration and evaluation ($/boe) General and administrative expenses ($/boe) Share based compensation ($/boe) Finance expenses ($/boe) Finance income ($/boe) Loss on sale of assets ($/boe) Deferred income tax recovery ($/boe) Net loss ($/boe) Three Months Ended December 31 2017 2016 % Change Year Ended December 31 2017 2016 % Change 1,290 15,071 3,802 61.61 1.64 27.41 7.64 0.04 2.75 6.53 0.94 5.95 2.11 0.51 2.75 45.33 0.15 15.96 (9.21) (17.84) (3.45) (1.05) (0.32) 0.42 (1.40) 2.38 (14.51) 234 3,543 824 53.60 3.46 30.08 6.99 0.16 2.68 26.24 1.76 15.02 6.04 0.47 3.71 14.33 1.07 8.67 (13.07) - (11.08) (7.11) (0.81) 1.54 - - (21.86) 451 325 361 15 (53) (9) 9 (75) 3 (75) (47) (60) (65) 9 (26) 216 (86) 84 (30) 100 (69) (85) (60) (73) 100 100 (34) 820 12,268 2,865 56.84 2.20 25.67 6.63 0.06 2.17 7.66 1.08 6.81 2.69 0.65 3.55 39.86 0.41 13.14 (9.77) (5.97) (4.32) (1.49) (0.27) 0.48 (0.47) 0.80 (7.87) 317 4,325 1,038 45.04 2.30 23.35 4.69 0.06 1.67 18.52 1.27 10.96 5.24 0.44 3.43 16.59 0.53 7.29 (13.07) - (11.11) (9.36) (0.49) 1.35 (6.77) - (32.16) 159 184 176 26 (4) 10 41 - 30 (59) (15) (38) (49) 48 3 140 (23) 80 (25) 100 (61) (84) (45) (64) (93) 100 (76) (1) “bbls” refers to barrels, “mcf” refers to thousand cubic feet, and “boe” refers to barrel of oil equivalent. Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent has been used for the calculation of boe amounts in the MD&A. This boe conversion rate is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. (2) Operating netback does not have any standardized meaning prescribed by IFRS and therefore may not be comparable to similar measures used by other companies. Please refer to the “Non-GAAP Measures” section in the MD&A for more details. LEUCROTTA EXPLORATION INC. - 2 - 2017 YEAR END REPORT MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) April 23, 2018 The MD&A should be read in conjunction with the audited financial statements and related notes for the years ended December 31, 2017 and 2016. The audited financial statements and financial data contained in the MD&A have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). All dollar amounts are expressed in Canadian currency, unless otherwise noted. DESCRIPTION OF BUSINESS Leucrotta Exploration Inc. (“Leucrotta” or the “Company”) is an oil and natural gas company, actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in northeastern British Columbia, Canada. The Company trades on the TSX Venture Exchange (“TSXV”) under the symbol “LXE”. FREQUENTLY RECURRING TERMS The Company uses the following frequently recurring industry terms in the MD&A: “bbls” refers to barrels, “mcf” refers to thousand cubic feet, and “boe” refers to barrel of oil equivalent. Disclosure provided herein in respect of a boe may be misleading, particularly if used in isolation. A boe conversion rate of six thousand cubic feet of natural gas to one barrel of oil equivalent has been used for the calculation of boe amounts in the MD&A. This boe conversion rate is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. NON-GAAP MEASURES This MD&A refers to certain financial measures that are not determined in accordance with IFRS (or “GAAP”). This MD&A contains the terms “adjusted funds flow”, “adjusted funds flow per share”, and “operating netback” which do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies. The Company uses these measures to help evaluate its performance. Management uses adjusted funds flow to analyze performance and considers it a key measure as it demonstrates the Company’s ability to generate the cash necessary to fund future capital investments and to repay debt, if any. Adjusted funds flow is a non-GAAP measure and has been defined by the Company as cash flow from (used in) operating activities excluding the change in non-cash working capital related to operating activities and expenditures on decommissioning obligations. The Company also presents adjusted funds flow per share whereby amounts per share are calculated using weighted average shares outstanding, consistent with the calculation of net loss per share. Adjusted funds flow is reconciled from cash flow from (used in) operating activities under the heading “Adjusted Funds Flow”. Management considers operating netback an important measure as it demonstrates its profitability relative to current commodity prices. Operating netback, which is calculated as average unit sales price less royalties, production expenses, and transportation expenses, represents the cash margin for every barrel of oil equivalent sold. Operating netback per boe is reconciled to net income (loss) per boe under the heading “Operating Netback”. UPDATE In Q4 2017, Leucrotta focused its efforts on the refinement of the completion techniques for the Lower Montney as well as starting to evaluate other Montney horizons on its land base. Leucrotta increased the frac intensity to 51 fracs over a mile lateral on its previously released 9-33 well and continues to monitor the two higher intensity wells that have 41 and 51 fracs respectively. Based on data collected to date, Leucrotta believes higher intensity fracs will recover incremental reserves over that of previously drilled wells with lower frac intensity and have better economic returns despite higher capital. The next three step-out/delineation wells will be completed with higher intensity fracs to further prove this thesis. From geological and other data collected, Leucrotta believes there is an oil resource in multiple zones through-out its land base. Leucrotta has drilled an Upper Montney well that it will evaluate during 2018 to potentially prove the presence of oil and commerciality of this zone. Other Montney zones above and below the Lower Montney will also be cored and evaluated for oil potential. If warranted, Leucrotta would complete existing vertical wells to gather additional data on these other potential Montney zones. Leucrotta has continued to build out the infrastructure and tie-in previously tested wells. Production has continued to increase and operating costs have continued to decline. Although the primary driver of the business plan is to delineate and evaluate the Montney, the production and related cash flow are providing meaningful capital for reinvesting. For 2018, Leucrotta plans to spend approximately $33.0 million primarily on the delineation of the Lower Montney and related infrastructure. At the end of 2017, Leucrotta had approximately $18.7 million of positive working capital, no debt, and a $20.0 million undrawn bank credit facility. Leucrotta expects to be debt-free throughout 2018 based on its opening cash balance plus projected cash flow of $15.0 million on estimated production of 3,600 boe/d. We look forward to reporting on the results of the new wells and other business developments in the near future. LEUCROTTA EXPLORATION INC. - 3 - 2017 YEAR END REPORT SUMMARY OF FINANCIAL RESULTS ($000s, except per share amounts) Oil and natural gas sales Adjusted funds flow Per share - basic and diluted Net loss Per share - basic and diluted Total assets Total long-term liabilities Working capital Three Months Ended December 31 2017 9,586 4,462 0.02 (5,072) (0.03) 2016 2,281 (98) - (1,657) (0.01) Year Ended December 31 2017 2016 2015 26,844 8,844 10,859 9,602 0.05 (8,222) (0.04) (996) (0.01) 615 - (12,182) (0.07) 11,412 0.07 313,041 241,635 253,038 8,718 6,820 6,673 18,660 26,063 45,633 The Company experienced a substantial increase in oil and natural gas sales and adjusted funds flow for the three months and year ended December 31, 2017 compared to the same periods in 2016. This was mainly due to significant production growth from successful drilling at Doe/Mica in the Montney formation during 2016 and 2017 and an increase in oil and NGLs commodity prices. The increased production and commodity prices also affected the net loss for the three months and year ended December 31, 2017, however, these positive factors were offset by a $6.2 million expense related to non-core exploration and evaluation (“E&E”) assets in Q4 2017. The decrease in working capital is mainly the net result from capital expenditures of $93.5 million during 2017 (see “Capital Expenditures”) partially offset by the $80.0 million financing in Q2 2017 (see “Liquidity and Capital Resources”). PRODUCTION Average Daily Production Oil and NGLs (bbls/d) Natural gas (mcf/d) Combined (boe/d) Three Months Ended December 31 2017 2016 % Change Year Ended December 31 2017 2016 % Change 1,290 15,071 3,802 234 3,543 824 451 325 361 820 12,268 2,865 317 4,325 1,038 159 184 176 Daily production increased substantially to 3,802 boe/d and 2,865 boe/d for the three months and year ended December 31, 2017, respectively, from 824 boe/d and 1,038 boe/d for the comparative periods in 2016. The increase in production was due to the tie-in of five previously drilled wells in Doe/Mica (8-18, 8-22, 8-4, A13-19, and A4-19) from 2016 and the drill and tie-in of Doe/Mica A8-22, 9-33 and 4-12 in 2017. Leucrotta’s production profile for the fourth quarter of 2017 saw an increase in liquids weighting over the comparative quarter in 2016. The Q4 2017 weighting was 66% natural gas (Q4 2016 - 72%) and 34% oil and NGLs (Q4 2016 - 28%). This was the result of new wells put on production in Q4 2017 being the Mica 9-33 light oil well and the Doe 4-12 liquids-rich gas well. The year ended December 31, 2016 had a slightly higher liquids weighting than 2017 due to flush production from new light oil wells at Mica and Stoddart on a much smaller production base in 2016. The 2017 weighting was 71% natural gas (December 31, 2016 - 69%) and 29% oil and NGLs (December 31, 2016 - 31%). REVENUE ($000s) Oil and NGLs Natural gas Total Average Sales Price Oil and NGLs ($/bbl) Natural gas ($/mcf) Combined ($/boe) Three Months Ended December 31 2016 % Change 535 1,152 101 1,129 320 2,281 Year Ended December 31 2017 17,011 9,833 26,844 2016 % Change 227 5,209 171 3,635 204 8,844 53.60 3.46 30.08 15 (53) (9) 56.84 2.20 25.67 45.04 2.30 23.35 26 (4) 10 2017 7,313 2,273 9,586 61.61 1.64 27.41 Revenue increased substantially to $9.6 million and $26.8 million for the three months and year ended December 31, 2017, respectively, compared to $2.3 million and $8.8 million for the comparative periods in 2016. This was mainly due to significant production growth from successful drilling at Doe/Mica in the Montney formation during 2016 and 2017 and an increase in oil and NGLs commodity prices. LEUCROTTA EXPLORATION INC. - 4 - 2017 YEAR END REPORT The following table outlines the Company’s realized wellhead prices and industry benchmarks: Commodity Pricing Three Months Ended December 31 2017 2016 % Change Year Ended December 31 2017 2016 % Change Oil and NGLs Corporate price ($CDN/bbl) Canadian light sweet ($CDN/bbl) West Texas Intermediate ("WTI") ($US/bbl) Natural gas Corporate price ($CDN/mcf) AECO price ($CDN/mcf) Exchange rate $US/$CAD exchange rate 61.61 65.68 55.40 1.64 1.72 53.60 60.76 49.29 3.46 3.11 15 8 12 (53) (45) 56.84 61.84 50.95 2.20 2.20 45.04 52.80 43.32 2.30 2.18 0.7871 0.7492 5 0.7712 0.7553 26 17 18 (4) 1 2 Differences between corporate and benchmark prices can be the result of quality differences (higher or lower API oil and higher or lower heat content natural gas), sour content, the mix of oil and NGLs, and various other factors. Leucrotta’s differences are mainly the result of a higher proportion of lower priced NGLs. The Company’s corporate average oil and NGLs prices were 93.8% and 91.9% of Canadian light sweet prices for the three months and year ended December 31, 2017, respectively, compared to 88.2% and 85.3% for the comparative periods in 2016. Corporate average natural gas prices were 95.3% and 100.0% of AECO prices for the three months and year ended December 31, 2017, respectively, down from 111.3% and 105.5% for the comparative periods in 2016. Leucrotta’s liquids mix during the fourth quarter of 2017 was approximately 77% light oil, condensate and pentanes, 7% butane and 16% propane which was consistent with Q4 2016. Future prices received from the sale of the products may fluctuate as a result of market factors. In addition, the Company may enter into commodity price contracts to help manage future cash flows. The Company does not currently have any commodity price contracts outstanding. ROYALTIES ($000s) Oil and NGLs Natural gas Total Average Royalty Rate (% of sales) Oil and NGLs Natural gas Combined Three Months Ended December 31 2016 % Change 505 2 373 150 53 203 Year Ended December 31 2017 1,986 281 2,267 2016 % Change 266 205 258 542 92 634 13.0 4.7 8.9 (5) (49) 12 11.7 2.9 8.4 10.4 2.5 7.2 13 16 17 2017 907 54 961 12.4 2.4 10.0 The Company pays royalties to provincial governments (Crown), freeholders, which may be individuals or companies, and other oil and gas companies that own surface or mineral rights. Crown royalties are calculated on a sliding scale based on commodity prices and individual well production rates. Royalty rates can change due to commodity price fluctuations and changes in production volumes on a well-by-well basis, subject to a minimum and maximum rate restriction ascribed by the Crown. The provincial government has also enacted various royalty incentive programs that are available for wells that meet certain criteria, such as natural gas deep drilling, which can result in fluctuations in royalty rates. For the fourth quarter of 2017, oil, NGLs, and natural gas royalties totaled $1.0 million (10.0% of revenue) compared to $0.2 million (8.9% of revenue) for the comparative quarter in 2016. For the year ended December 31, 2017, oil, NGLs, and natural gas royalties totaled $2.3 million (8.4% of revenue) compared to $0.6 million (7.2% of revenue) for 2016. Oil and NGLs royalties have remained consistent at 12.4% and 11.7% for the three months and year ended December 31, 2017, respectively, compared to 13.0% and 10.4% in the comparative periods in 2016. Natural gas royalties were 2.4% and 2.9% for the three months and year ended December 31, 2017, respectively, compared to 4.7% and 2.5% in the comparative periods in 2016. The annual rate in 2017 was consistent to 2016, while the fourth quarter of 2017 decreased over the same period in 2016 due to weaker natural gas prices. LEUCROTTA EXPLORATION INC. - 5 - 2017 YEAR END REPORT Per unit production expenses decreased to $5.95/boe and $6.81/boe for the three months and year ended December 31, 2017, respectively, from $15.02/boe and $10.96/boe in the comparative periods in 2016. The large decrease was the result of increased production from successful drilling in 2016 and 2017 and the tie-in of those wells into the Company’s Doe gas plant, gaining economies of scale over the larger production base. PRODUCTION EXPENSES ($000s) Oil and NGLs Natural gas Total Average expense Oil and NGLs ($/bbl) Natural gas ($/mcf) Combined ($/boe) TRANSPORTATION EXPENSES ($000s) Oil and NGLs Natural gas Total Average expense Oil and NGLs ($/bbl) Natural gas ($/mcf) Combined ($/boe) Three Months Ended December 31 2016 % Change 38 127 83 564 575 1,139 Year Ended December 31 2017 2,293 4,827 7,120 2016 % Change 7 2,142 141 2,007 72 4,149 26.24 1.76 15.02 (75) (47) (60) 7.66 1.08 6.81 18.52 1.27 10.96 (59) (15) (38) Three Months Ended December 31 2016 % Change 93 366 240 130 152 282 Year Ended December 31 2017 805 2,910 3,715 2016 % Change 33 319 186 607 694 1,301 6.04 0.47 3.71 (65) 9 (26) 2.69 0.65 3.55 5.24 0.44 3.43 (49) 48 3 2017 776 1,306 2,082 6.53 0.94 5.95 2017 251 709 960 2.11 0.51 2.75 Transportation expenses are mainly third-party pipeline tariffs incurred to deliver production to the purchasers at main hubs. Transportation costs were $2.75/boe and $3.55/boe for the three months and year ended December 31, 2017, respectively, compared to $3.71/boe and $3.43/boe for the comparative periods in 2016. The year-to-date increase in natural gas transportation was mainly due to unutilized firm transportation for the first half of 2017. With new wells coming on-stream during the first half of 2017, the Company kept more firm transportation but those wells were tied-in later than originally expected. This issue was rectified in the second half of 2017 as the Company was able to predict timing of new wells being tied-in. The decrease in oil and NGLs transportation for the three months and year ended December 31, 2017 was the result of different sales points and sales and transportation contracts for new production in Doe/Mica in 2017. OPERATING NETBACK Three Months Ended December 31 Oil and NGLs ($/bbl) Revenue Royalties Production expenses Transportation expenses Operating netback Natural gas ($/mcf) Revenue Royalties Production expenses Transportation expenses Operating netback Combined ($/boe) Revenue Royalties Production expenses Transportation expenses Operating netback 2017 61.61 (7.64) (6.53) (2.11) 45.33 1.64 (0.04) (0.94) (0.51) 0.15 27.41 (2.75) (5.95) (2.75) 15.96 2016 % Change 53.60 (6.99) (26.24) (6.04) 14.33 3.46 (0.16) (1.76) (0.47) 1.07 30.08 (2.68) (15.02) (3.71) 8.67 15 9 (75) (65) 216 (53) (75) (47) 9 (86) (9) 3 (60) (26) 84 Year Ended December 31 2017 2016 % Change 56.84 (6.63) (7.66) (2.69) 39.86 2.20 (0.06) (1.08) (0.65) 0.41 25.67 (2.17) (6.81) (3.55) 13.14 45.04 (4.69) (18.52) (5.24) 16.59 2.30 (0.06) (1.27) (0.44) 0.53 23.35 (1.67) (10.96) (3.43) 7.29 26 41 (59) (49) 140 (4) - (15) 48 (23) 10 30 (38) 3 80 During the three months and year ended December 31, 2017, Leucrotta generated an operating netback of $15.96/boe and $13.14/boe, respectively, up from $8.67/boe and $7.29/boe for the comparative periods in 2016. The increase in Q4 2017 from Q4 2016 was mainly due to significantly lower production expenses and transportation expenses per boe as well as higher oil and NGLs pricing, which were LEUCROTTA EXPLORATION INC. - 6 - 2017 YEAR END REPORT partially offset by lower natural gas prices. Year-to-date, the increase in 2017 was mainly due to substantially higher oil and NGLs pricing and lower production expenses per boe. The following is a reconciliation of operating netback per boe to net loss per boe for the periods noted: ($/boe) Operating netback Depletion and depreciation Exploration and evaluation General and administrative expenses Share based compensation Finance expenses Finance income Loss on sale of assets Deferred income tax recovery Net loss (GAAP) Three Months Ended December 31 2017 15.96 (9.21) (17.84) (3.45) (1.05) (0.32) 0.42 (1.40) 2.38 (14.51) 2016 % Change 84 8.67 (30) (13.07) 100 - (69) (11.08) (85) (7.11) (60) (0.81) (73) 1.54 100 - 100 - (34) (21.86) DEPLETION AND DEPRECIATION Three Months Ended December 31 Depletion and depreciation ($000s) Depletion and depreciation ($/boe) 2017 3,222 9.21 2016 % Change 225 (30) 991 13.07 Year Ended December 31 2017 13.14 (9.77) (5.97) (4.32) (1.49) (0.27) 0.48 (0.47) 0.80 (7.87) 2016 % Change 80 7.29 (25) (13.07) 100 - (61) (11.11) (84) (9.36) (45) (0.49) (64) 1.35 (93) (6.77) 100 - (76) (32.16) Year Ended December 31 2017 10,212 9.77 2016 % Change 106 4,951 (25) 13.07 The Company calculates depletion on property, plant, and equipment mainly based on proved plus probable reserves. Some facilities in Stoddart and certain gas plant equipment, where the production and reserves do not represent the useful life of the assets, are depreciated over twenty years. Depletion and depreciation for the three months and year ended December 31, 2017 was $9.21/boe and $9.77/boe, respectively, down from $13.07/boe for the comparative periods in 2016. The decrease in 2017 was the result of successful drilling results adding proved plus probable reserves to the Company’s reserve base at Mica and Doe. IMPAIRMENT OF ASSETS AND EXPLORATION AND EVALUATION EXPENSE At December 31, 2017 and 2016, the Company evaluated its property, plant, and equipment CGUs for indicators of impairment or impairment reversals and as a result of this assessment, management determined that an impairment test was not required to be performed. The Company recognized an expense of $6.2 million comprised of drilling and completion costs incurred for an exploratory well in the non-Montney CGU that was uneconomic and no further expenditures are planned. GENERAL AND ADMINISTRATIVE ($000s) G&A expenses (gross) G&A capitalized G&A recoveries G&A expenses (net) G&A expenses ($/boe) Three Months Ended December 31 2017 1,411 (203) (1) 1,207 3.45 2016 % Change 26 1,119 (22) (259) (95) (20) 44 840 (69) 11.08 Year Ended December 31 2017 5,227 (775) 68 4,520 4.32 2016 % Change 11 4,725 88 (413) (164) (106) 7 4,206 (61) 11.11 General and administrative expenses (“G&A”) were $3.45/boe and $4.32/boe for the three months and year ended December 31, 2017, respectively, down from $11.08/boe and $11.11/boe for the comparative periods in 2016. G&A expenses in the year ended December 31, 2017 were consistent with 2016 but decreased substantially on a per boe basis due to increased production in 2017. SHARE BASED COMPENSATION Three Months Ended December 31 Share based compensation ($000s) Share based compensation ($/boe) 2017 367 1.05 2016 % Change (32) (85) 539 7.11 Year Ended December 31 2017 1,554 1.49 2016 % Change (56) 3,546 (84) 9.36 The Company accounts for its share based compensation plans using the fair value method. Under this method, compensation cost is charged to earnings over the vesting period for stock options and warrants granted to officers, directors, employees, and consultants with a corresponding increase to contributed surplus. The fair value of the performance warrants was determined based on a Monte Carlo simulation and the fair value of stock options and purchase warrants was measured based on the Black-Scholes-Merton option-pricing model. Share based compensation expense decreased to $0.4 million ($1.05/boe) for the fourth quarter of 2017 from $0.5 million ($7.11/boe) for the comparative quarter in 2016. Share based compensation expense decreased to $1.6 million ($1.49/boe) for the year ended December 31, 2017 from $3.5 million ($9.36/boe) in 2016. The decrease in expense is mainly due to using the graded (accelerated) amortization method whereby more expense is recognized earlier in the stock options and warrants expected life. On a per boe basis, the decrease was more pronounced due to the increase in production during 2017. During the year ended December 31, 2017, 2.6 million (December 31, 2016 - 25 thousand) stock options were granted. LEUCROTTA EXPLORATION INC. - 7 - 2017 YEAR END REPORT FINANCE EXPENSES ($000s) Interest expense Accretion of decommissioning obligations Finance expenses Finance expenses ($/boe) Three Months Ended December 31 2017 61 49 110 0.32 2016 % Change 91 69 80 (60) 32 29 61 0.81 Year Ended December 31 2017 125 162 287 0.27 2016 % Change 108 29 54 (45) 60 126 186 0.49 Interest expense increased during the three months and year ended December 31, 2017 compared to the same periods in 2016 due to the increase of the Company’s undrawn credit facility in 2017 which has increased the standby fees charged. Accretion expense has increased for the three months and year ended December 31, 2017 compared to the same periods in 2016 due to drilling activity adding more wells. FINANCE INCOME Finance income relates to interest earned on cash in the bank. For the three months and year ended December 31, 2017, finance income totaled $0.1 million and $0.5 million, respectively, consistent with $0.1 million and $0.5 million for the comparative periods in 2016. LOSS ON SALE OF ASSETS During the three months and year ended December 31, 2017, the Company sold certain gas plant equipment for cash proceeds of $1.1 million and realized a loss of $0.7 million on the disposition. The Company also disposed of a non-producing property for $nil consideration and realized a gain on disposition of $0.2 million as the book value of the properties disposed were in net liability position of $0.2 million due to the associated decommissioning obligations. During the year ended December 31, 2016, the Company sold certain gas plant equipment for cash proceeds of $4.0 million and realized a loss of $2.6 million on the disposition. DEFERRED INCOME TAXES The deferred income tax recovery of $0.8 million for the three months and year ended December 31, 2017 relates to the premium on the flow-through shares issued as the Company had incurred the entire amount with respect to qualifying Canadian exploration expenditures (see “Liquidity and Capital Resources”). The Company has not realized the net deferred income tax asset based on the independently evaluated reserve report as cash flows are not expected to be sufficient to realize the deferred income tax asset at this time. At December 31, 2017, the Company has estimated federal tax pools of $304.4 million (December 31, 2016 - $221.9 million) available for deduction against future taxable income. ADJUSTED FUNDS FLOW The following is a reconciliation of cash flow from (used in) operating activities to adjusted funds flow for the periods noted: ($000s) Cash flow from (used in) operating activities Add back (deduct): Decommissioning expenditures Change in non-cash working capital Adjusted funds flow (non-GAAP) 2017 3,294 296 872 4,462 Three Months Ended December 31 2016 % Change (449) (945) Year Ended December 31 2017 8,311 2016 % Change (2,634) (328) - 847 (98) 100 3 (4,653) 296 995 9,602 - (668) (996) 100 (249) (1,064) Adjusted funds flow for the fourth quarter of 2017 was $4.5 million ($0.02 per basic and diluted share) compared to negative adjusted funds flow of $0.1 million ($nil per basic and diluted share) for the comparative quarter in 2016. For the year ended December 31, 2017, adjusted funds flow was $9.6 million ($0.05 per basic and diluted share) compared to negative adjusted funds flow of $1.0 million ($0.01 per basic and diluted share) in 2016. The significant increase for the three months and year ended December 31, 2017 was mainly due to the increased production from successful drilling over the past two years. Production, transportation and G&A expenses are all trending lower on a per boe basis from prior quarters. Cash flow from operations increased for the three months and year ended December 31, 2017 to $3.3 million ($0.02 per basic and diluted share) and $8.3 million ($0.04 per basic and diluted share), respectively, from cash used in operations of $0.9 million ($0.01 per basic and diluted share) and $0.3 million ($nil per basic and diluted share) for the comparative periods in 2016. Consistent with adjusted funds flow, the increase was mainly due to the increased production from successful drilling over the past two years. Cash flow from operating activities differs from adjusted funds flow due to the inclusion of changes in non-cash working capital and decommissioning expenditures. LEUCROTTA EXPLORATION INC. - 8 - 2017 YEAR END REPORT NET LOSS The Company sustained net losses of $5.1 million and $8.2 million for the three months and year ended December 31, 2017, respectively, compared to $1.7 million and $12.2 million for the comparative periods in 2016. The decrease in net loss for the year ended December 31, 2017 was the result of increased production from successful drilling over the past two years and higher oil and NGLs commodity pricing in 2017. Production expenses, transportation expenses, G&A expenses, depletion and depreciation, and share based compensation are all trending lower on a per boe basis from prior quarters. These positive factors were offset by a $6.2 million expense on non-core E&E assets in Q4 2017, which resulted in an increased net loss for Q4 2017 over Q4 2016. CAPITAL EXPENDITURES ($000s) Property acquisitions Land Drilling, completions, and workovers Equipment Geological and geophysical Total expenditures Sale of gas plant equipment Three Months Ended December 31 2017 - 295 11,646 3,843 86 15,870 1,100 2016 % Change (100) 57 76 (11) (8) 35 500 188 6,619 4,318 93 11,718 Year Ended December 31 2017 35,550 1,812 34,831 20,438 883 93,514 2016 % Change 781 4,034 114 847 355 7,658 112 9,643 125 392 314 22,574 - 100 1,100 4,000 (73) During the year ended December 31, 2017, the Company completed its Mica 12-06 well and drilled and completed Mica A8-22, Mica 9- 33 and Doe 4-12. The Company also completed its infrastructure project to tie-in five previously drilled wells in Doe/Mica (8-18, 8-22, 8- 4, A13-19, and A4-19) and drilled an exploratory well at Stoddart and at Two Rivers, north of the Peace River. The Company also had net property acquisitions of $35.6 million in Q2 2017. Net assets acquired were undeveloped land in the Company’s core Doe/Mica area, adding to the land inventory of this area with a focus on the Montney formation. There were no reserves attached to any of the net acquisition lands. During the year ended December 31, 2016, the Company added Montney acreage adjacent to its Montney land base through both Crown land sales and private land acquisitions and began the pipeline system and infrastructure required to tie-in previously drilled wells to the Company’s Doe gas plant. Other capital expenditures during that period were kept to a minimum due to the low oil and natural gas commodity prices and the Company’s preference at that time to preserve its positive cash balance. LIQUIDITY AND CAPITAL RESOURCES Management uses working capital as a measure to assess the Company’s financial position and is reconciled as follows: ($000s) Current assets Less: Current liabilities Working capital December 31, 2017 December 31, 2016 % Change (18) 35,714 29,224 (10,564) 18,660 (9,651) 26,063 9 (28) At December 31, 2017, the Company had working capital of $18.7 million and $nil had been drawn on the revolving credit facility. The Company has a $20.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The revolving credit facility bears interest at prime plus a range of 0.50% to 2.50% and is secured by a $100 million fixed and floating charge debenture on the assets of the Company. The undrawn portion of the credit facility is subject to a standby fee in the range of 0.20% to 0.45%. At December 31, 2017, $nil had been drawn on the revolving credit facility. At December 31, 2017, the Company had outstanding letters of guarantee of $2.5 million which reduce the amount that can be borrowed under the credit facility. The next review of the revolving credit facility by the bank is scheduled on or before May 31, 2018. On April 26, 2017, the Company closed a bought-deal public financing for an aggregate of 33,333,400 common shares at a price of $2.25 per common share and 1,852,000 common shares on a flow-through basis at a price of $2.70 per flow-through common share for total gross proceeds of $80.0 million. The Company incurred the required Canadian exploration expenditures of $5.0 million related to the flow-through shares during the year ended December 31, 2017. The proceeds of the financing were used to fund the aforementioned net property acquisitions and the Company’s 2017 capital program. The Company has $1.0 million in a restricted corporate account to cross-guarantee a margin account for the President of the Company. The President is charged a fee by the Company and the margin account is also restricted until the cross-guarantee is removed. The margin account holds $6.6 million of securities of Leucrotta common shares and a margin payable of $1.5 million. The cross-guarantee is intended to be temporary in nature and will be removed as soon as practicable. The cross-guarantee has allowed the President to comply with corporate governance mandates. The $1.0 million has been segregated on the statement of financial position as restricted cash at December 31, 2017. Management anticipates that the Company will continue to have adequate liquidity to fund budgeted capital investments through a combination of its cash balance, cash flow, equity, and debt if required. Leucrotta’s capital program is flexible and can be adjusted as needed based upon the current economic environment. The Company will continue to monitor the economic environment and the possible impact on its business and strategy and will make adjustments as necessary. LEUCROTTA EXPLORATION INC. - 9 - 2017 YEAR END REPORT CONTRACTUAL OBLIGATIONS The following is a summary of the Company’s contractual obligations and commitments at December 31, 2017: ($000s) Accounts payable and accrued liabilities Decommissioning obligations Office lease Firm transportation agreements Total contractual obligations Total 10,564 8,718 1,311 18,990 39,583 Less than One Year 10,564 60 404 4,667 15,695 One to Three Years - - 640 14,323 14,963 After Three Years - 8,658 267 - 8,925 Transportation commitments include contracts to transport natural gas and NGLs through third-party owned pipeline systems. The Company currently has commitments of 18.3 mmcf/d escalating over time to 33.3 mmcf/d. OFF BALANCE SHEET ARRANGEMENTS The Company has certain lease arrangements, all of which are reflected in the contractual obligations and commitments table, which were entered into in the normal course of operations. All leases have been treated as operating leases whereby the lease payments are included in production expenses or general and administrative expenses depending on the nature of the lease. OUTSTANDING SHARE DATA The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non-voting common shares, Class A preferred shares, issuable in series, and Class B preferred shares, issuable in series. The voting common shares of the Company commenced trading on the TSXV on August 19, 2014 under the symbol “LXE”. The following table summarizes the common shares outstanding and the number of shares exercisable into common shares from options, warrants, and other instruments: (000s) Voting common shares Warrants Stock options Total SUMMARY OF QUARTERLY RESULTS December 31, 2017 200,497 15,141 11,470 227,108 April 23, 2018 200,517 15,141 11,475 227,133 Average Daily Production Oil and NGLs (bbls/d) Natural gas (mcf/d) Combined (boe/d) Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016 1,290 15,071 3,802 857 13,593 3,123 609 12,122 2,629 514 8,197 1,881 234 3,543 824 300 4,138 989 319 4,549 1,078 412 5,031 1,251 ($000s, except per share amounts) Oil and natural gas sales Adjusted funds flow Per share - basic and diluted 9,586 4,462 0.02 5,908 6,467 4,883 2,281 2,309 1,953 2,301 1,747 0.01 2,097 0.01 1,296 0.01 (98) - (124) - (491) - (283) - Net loss Per share - basic and diluted (5,072) (0.03) (1,549) (0.01) (723) - (878) (0.01) (1,657) (0.01) (4,994) (0.03) (2,758) (0.02) (2,773) (0.02) Production, oil and natural gas sales and adjusted funds flow increased significantly in each quarter of 2017 from the successful drilling at Doe/Mica in the Montney formation. The increased loss in Q3 2016 from Q2 2016 was the result of a loss on the sale of certain gas plant equipment of $2.6 million. The increased loss in Q4 2017 from Q3 2017 was the result of a $6.2 million expense related to non- core E&E assets. NEW STANDARDS NOT YET ADOPTED In April 2016, the IASB issued its final amendments to IFRS 15 Revenue from Contracts with Customers, which specifies how and when to recognize revenue as well as requiring entities to provide users of financial statements with more disclosure. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, and other revenue-related interpretations. IFRS 15 contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract- based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 will be effective for annual periods beginning on or after January 1, 2018. Application of the standard is mandatory and early adoption is permitted. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. The Company has substantially completed its review of its revenue streams and underlying contracts with customers and has determined that the adoption of the standard is not expected to have a material impact on the Company’s earnings. The adoption of IFRS 15 will result in expanded disclosures in the Company’s financial statements. LEUCROTTA EXPLORATION INC. - 10 - 2017 YEAR END REPORT On July 24, 2014, the IASB issued the complete IFRS 9 Financial Instruments standard to replace IAS 39 Financial Instruments: Recognition and Measurement. The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The standard introduces new requirements for classifying and measuring financial instruments and includes a new general hedge accounting standard that will provide more risk management strategies to qualify for hedge accounting. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. The Company intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. The Company has determined the IFRS 9 will not have a material impact on the measurement and carrying values of the Company’s financial instruments. On January 13, 2016, the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The Company is currently identifying contracts that will fall into the scope of the new standard and is evaluating the impact it will have on the financial statements. CRITICAL ACCOUNTING ESTIMATES Management is required to make estimates, judgments, and assumptions in the application of IFRS that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. Certain of these estimates may change from period to period resulting in a material impact on the Company’s results from operations and financial position (see note 2d in the notes to the Company’s financial statements for full descriptions of the use of estimates and judgments). RISK ASSESSMENT The acquisition, exploration, and development of oil and natural gas properties involves many risks common to all participants in the oil and natural gas industry. Leucrotta’s exploration and development activities are subject to various business risks such as unstable commodity prices, interest rate and foreign exchange fluctuations, the uncertainty of replacing production and reserves on an economic basis, government regulations, taxes, and safety and environmental concerns. While management realizes these risks cannot be eliminated, they are committed to monitoring and mitigating these risks. Reserves and reserve replacement The recovery and reserve estimates on Leucrotta’s properties are estimates only and the actual reserves may be materially different from that estimated. The estimates of reserve values are based on a number of variables including price forecasts, projected production volumes and future production and capital costs. All of these factors may cause estimates to vary from actual results. Leucrotta’s future oil and natural gas reserves, production, and funds from operations to be derived therefrom are highly dependent on the Company successfully acquiring or discovering new reserves. Without the continual addition of new reserves, any existing reserves the Company may have at any particular time and the production therefrom will decline over time as such existing reserves are exploited. A future increase in Leucrotta’s reserves will depend on its abilities to acquire suitable prospects or properties and discover new reserves. To mitigate this risk, Leucrotta has assembled a team of experienced technical professionals who have expertise operating and exploring in areas the Company has identified as being the most prospective for increasing reserves on an economic basis. To further mitigate reserve replacement risk, Leucrotta has targeted a majority of its prospects in areas which have multi-zone potential, year- round access, and lower drilling costs and employs advanced geological and geophysical techniques to increase the likelihood of finding additional reserves. Operational risks Leucrotta’s operations are subject to the risks normally incidental to the operation and development of oil and natural gas properties and the drilling of oil and natural gas wells. Continuing production from a property, and to some extent the marketing of production therefrom, are largely dependent upon the ability of the operator of the property. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk, and other price risk, such as commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns. The Company may use financial derivatives or physical delivery sales contracts to manage market risks. All such transactions are conducted within risk management tolerances that are reviewed by the Board of Directors. As required under the terms of the Company’s credit facility, the Company is subject to an upper limit on fixed price contracts of 65% of its future production up to a three year period. Foreign exchange risk The prices received by the Company for the production of oil, natural gas, and NGLs are primarily determined in reference to US dollars, but are settled with the Company in Canadian dollars. The Company’s cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. The Company currently does not have any foreign exchange contracts in place. LEUCROTTA EXPLORATION INC. - 11 - 2017 YEAR END REPORT Interest rate risk The Company is exposed to interest rate risk when it borrows funds at floating interest rates. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company’s exposure to interest rate fluctuations. The amount drawn on the Company’s credit facility at December 31, 2017 was $nil. Commodity price risk Oil and natural gas prices are impacted by not only the relationship between the Canadian and US dollar but also by world economic events that dictate the levels of supply and demand. The Company’s oil, natural gas, and NGLs production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. The Company’s cash flow from product sales will therefore be impacted by fluctuations in commodity prices. In addition, the Company may enter into commodity price contracts to manage future cash flows. At December 31, 2017, the Company did not have any commodity price contracts outstanding. Credit risk Credit risk represents the financial loss that the Company would suffer if the Company’s counterparties to a financial asset fail to meet or discharge their obligation to the Company. A substantial portion of the Company’s accounts receivable and deposits are with customers and joint interest partners in the oil and natural gas industry and are subject to normal industry credit risks. The Company generally grants unsecured credit but routinely assesses the financial strength of its customers and joint interest partners. The Company sells the majority of its production to three petroleum and natural gas marketers and therefore is subject to concentration risk. Historically, the Company has not experienced any collection issues with its oil and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest billing being issued to the partner. The Company attempts to mitigate the risk from joint interest receivables by obtaining partner approval for significant capital expenditures prior to the expenditure being incurred. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, in certain circumstances, the Company may cash call a partner in advance of expenditures being incurred. The maximum exposure to credit risk is represented by the carrying amount of cash and cash equivalents, restricted cash, and accounts receivable on the statement of financial position. At December 31, 2017, $3.2 million (78%) of the Company’s outstanding accounts receivable were current and $0.3 million (8%) were outstanding for more than 90 days. During the year ended December 31, 2017, the Company deemed $0.1 million of outstanding accounts receivable to be uncollectable (December 31, 2016 - $nil). Cash and cash equivalents consists of bank balances placed with a financial institution with strong investment grade ratings which management believes the risk of loss to be remote. 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 processes for managing liquidity risk include ensuring, to the extent possible, that it will have sufficient liquidity to meet its liabilities when they become due. The Company prepares annual, quarterly, and monthly capital expenditure budgets, which are monitored and updated as required, and requires authorizations for expenditures on projects to assist with the management of capital. In managing liquidity risk, the Company ensures that it has access to additional financing, including potential equity issuances and additional debt financing. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. The Company has a working capital balance of $18.7 million including $23.7 million of cash. Management anticipates that the Company will continue to have adequate liquidity to fund budgeted capital investments through a combination of its cash balance, cash flow, equity, and debt if required. Safety and Environmental Risks The oil and natural gas business is subject to extensive regulation pursuant to various municipal, provincial, national, and international conventions and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases, or emissions of various substances produced in association with oil and natural gas operations. Leucrotta is committed to meeting and exceeding its environmental and safety responsibilities. Leucrotta has implemented an environmental and safety policy that is designed, at a minimum, to comply with current governmental regulations set for the oil and natural gas industry. Changes to governmental regulations are monitored to ensure compliance. Environmental reviews are completed as part of the due diligence process when evaluating acquisitions. Environmental and safety updates are presented and discussed at each Board of Directors meeting. Leucrotta maintains adequate insurance commensurate with industry standards to cover reasonable risks and potential liabilities associated with its activities as well as insurance coverage for officers and directors executing their corporate duties. To the knowledge of management, there are no legal proceedings to which Leucrotta is a party or of which any of its property is the subject matter, nor are any such proceedings known to Leucrotta to be contemplated. FORWARD-LOOKING INFORMATION This document contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words “expect”, “anticipate”, “continue”, “estimate”, “may”, “will”, “should”, “believe”, “intends”, “forecast”, “plans”, “guidance” and similar expressions are intended to identify forward-looking statements or information. More particularly and without limitation, this MD&A contains forward-looking statements and information relating to the Company’s risk management program, oil, NGLs, and natural gas production, capital programs, oil, NGLs, and natural gas commodity prices, cash flow and working capital. The forward-looking statements and information are based on certain key expectations and assumptions made by the Company, including expectations and assumptions relating to prevailing commodity prices and exchange rates, applicable royalty rates and tax laws, future well production rates, the performance of existing wells, the success of drilling new wells, the availability of capital to undertake planned activities, and the availability and cost of labour and services. LEUCROTTA EXPLORATION INC. - 12 - 2017 YEAR END REPORT Although the Company believes that the expectations reflected in such forward-looking statements and information are reasonable, it can give no assurance that such expectations will prove to be correct. Since forward-looking statements and information address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, the risks associated with the oil and gas industry in general such as operational risks in development, exploration and production, delays or changes in plans with respect to exploration or development projects or capital expenditures, the uncertainty of estimates and projections relating to production rates, costs, and expenses, commodity price and exchange rate fluctuations, marketing and transportation, environmental risks, competition, the ability to access sufficient capital from internal and external sources and changes in tax, royalty, and environmental legislation. The forward-looking statements and information contained in this document are made as of the date hereof for the purpose of providing the readers with the Company’s expectations for the coming year. The forward-looking statements and information may not be appropriate for other purposes. The Company undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws. ADDITIONAL INFORMATION Additional information related to the Company may be found on the SEDAR website at www.sedar.com. LEUCROTTA EXPLORATION INC. - 13 - 2017 YEAR END REPORT INDEPENDENT AUDITORS’ REPORT To the Shareholders of Leucrotta Exploration Inc. We have audited the accompanying financial statements of Leucrotta Exploration Inc., which comprise the statements of financial position as at December 31, 2017 and December 31, 2016, the statements of operations and comprehensive loss, shareholders’ equity and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Leucrotta Exploration Inc. as at December 31, 2017 and December 31, 2016, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Chartered Professional Accountants April 23, 2018 Calgary, Canada LEUCROTTA EXPLORATION INC. - 14 - 2017 YEAR END REPORT Leucrotta Exploration Inc. Statements of Financial Position ($000s) Assets Current assets Cash and cash equivalents Restricted cash Accounts receivable Prepaid expenses and deposits Property, plant, and equipment Exploration and evaluation assets Liabilities Current liabilities Accounts payable and accrued liabilities Decommissioning obligations Shareholders' Equity Shareholders' capital Contributed surplus Deficit Commitments Note (4) (6) (7) (9) (10) (21) The accompanying notes are an integral part of these financial statements. Approved on behalf of the Board of Directors Rob Zakresky Director Tom Medvedic Director December 31 2017 December 31 2016 23,747 1,000 4,104 373 29,224 156,395 127,422 283,817 313,041 10,564 8,718 19,282 288,787 14,398 (9,426) 293,759 313,041 32,997 1,000 1,518 199 35,714 117,381 88,540 205,921 241,635 9,651 6,820 16,471 213,875 12,493 (1,204) 225,164 241,635 LEUCROTTA EXPLORATION INC. - 15 - 2017 YEAR END REPORT Leucrotta Exploration Inc. Statements of Operations and Comprehensive Loss ($000s, except per share amounts) Note Years Ended December 31 2016 2017 Revenue Oil and natural gas sales Royalties Expenses Production Transportation Depletion and depreciation Exploration and evaluation General and administrative Share based compensation Loss on sale of assets Finance income Finance expense Loss before taxes Taxes Deferred income tax recovery Net loss and comprehensive loss Net loss per share Basic and diluted 26,844 (2,267) 24,577 7,120 3,715 10,212 6,240 4,520 1,554 489 (505) 287 33,632 (9,055) 8,844 (634) 8,210 4,149 1,301 4,951 - 4,206 3,546 2,563 (510) 186 20,392 (12,182) 833 - (8,222) (12,182) (0.04) (0.07) (6) (7) (11) (5) (14) (15) (12) The accompanying notes are an integral part of these financial statements. LEUCROTTA EXPLORATION INC. - 16 - 2017 YEAR END REPORT Leucrotta Exploration Inc. Statements of Shareholders' Equity ($000s) Balance, December 31, 2015 Net loss Share based compensation Reclassification Balance, December 31, 2016 Balance, December 31, 2016 Net loss Issue of shares (net of share issue costs and flow-through share premium) Exercise of warrants and stock options Share based compensation Balance, December 31, 2017 Shareholders' Capital Contributed Surplus Reserve from common-control transaction Retained Earnings (Deficit) 283,587 - - (69,712) 213,875 213,875 - 74,774 138 - 288,787 8,405 - 4,088 - 12,493 12,493 - - (40) 1,945 14,398 (69,712) - - 69,712 - - - - - - - 10,978 (12,182) - - (1,204) (1,204) (8,222) - - - (9,426) Total Equity 233,258 (12,182) 4,088 - 225,164 225,164 (8,222) 74,774 98 1,945 293,759 The accompanying notes are an integral part of these financial statements. LEUCROTTA EXPLORATION INC. - 17 - 2017 YEAR END REPORT Leucrotta Exploration Inc. Statements of Cash Flows ($000s) Operating Activities Net loss Depletion and depreciation Exploration and evaluation Share based compensation Finance expense Interest paid Loss on sale of assets Deferred income tax recovery Decommissioning expenditures Change in non-cash working capital Financing Activities Issue of shares Share issue costs Exercise of warrants and stock options Note (6) (7) (11) (14) (14) (5) (15) (9) (20) Investing Activities Capital expenditures - property, plant, and equipment Capital expenditures - exploration and evaluation assets Property acquisitions Disposition of oil and natural gas properties and equipment Change in non-cash working capital (6) (7) (5,7) (5) (20) Change in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year The accompanying notes are an integral part of these financial statements. Years Ended December 31 2016 2017 (8,222) 10,212 6,240 1,554 287 (125) 489 (833) (296) (995) 8,311 80,001 (4,394) 98 75,705 (27,682) (30,282) (35,550) 1,100 (852) (93,266) (9,250) 32,997 23,747 (12,182) 4,951 - 3,546 186 (60) 2,563 - - 668 (328) - - - - (10,190) (8,350) (4,034) 4,000 (1,905) (20,479) (20,807) 53,804 32,997 LEUCROTTA EXPLORATION INC. - 18 - 2017 YEAR END REPORT Leucrotta Exploration Inc. Notes to the Financial Statements Years Ended December 31, 2017 and December 31, 2016 (Tabular amounts in 000s, unless otherwise stated) 1. REPORTING ENTITY Leucrotta Exploration Inc. (“Leucrotta” or the “Company”) is an oil and natural gas company, actively engaged in the acquisition, development, exploration, and production of oil and natural gas reserves in northeastern British Columbia, Canada. Leucrotta was incorporated in Alberta, Canada under the Business Corporations Act (Alberta) on June 10, 2014 under the name of 1828073 Alberta Ltd., and subsequently changed its name to Leucrotta Exploration Inc. on July 15, 2014. The Company commenced trading on the TSX Venture Exchange (“TSXV”) on August 19, 2014 under the symbol “LXE”. The Company conducts many of its activities jointly with others and these financial statements reflect only the Company’s proportionate interest in such activities. The Company’s place of business is located at 700, 639 – 5th Avenue SW, Calgary, Alberta, Canada, T2P 0M9. 2. BASIS OF PRESENTATION (a) Statement of compliance These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The financial statements were authorized for issuance by the Board of Directors on April 23, 2018. (b) Basis of measurement The financial statements have been prepared on the historical cost basis. (c) Functional and presentation currency The financial statements are presented in Canadian dollars, which is the functional currency of the Company. (d) Use of estimates and judgments The preparation of financial statements in conformity with IFRS requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the period. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur. Significant estimates and judgments made by management in the preparation of these financial statements are outlined below. Business combinations Business combinations are accounted for using the acquisition method. Under this method, the consideration transferred is allocated to the assets acquired and the liabilities assumed based on the fair values at the time of acquisition. In determining the fair value of the assets and liabilities, the Company is often required to make assumptions and estimates, such as reserves, future commodity prices, fair value of undeveloped land, discount rates, decommissioning obligations and possible outcome of any assumed contingencies. Cash-generating units (“CGU”) The Company’s assets are aggregated into CGUs for the purposes of calculating impairment. CGUs are determined based on the smallest group of assets that generate cash inflows independent of other assets or groups of assets. Determination of CGUs is subject to the Company’s judgment and is based on geographical proximity, shared infrastructure, similar exposure to market risk, materiality, and the way in which management monitors the Company’s operations. The Company reviews the composition of its CGUs at each reporting date to assess whether any changes are required in light of new facts and circumstances. Impairment Judgments are required to assess when impairment indicators exist and impairment testing is required. In determining the recoverable amount of assets, in the absence of quoted market prices, impairment tests are based on estimates of reserves, production rates, future oil and natural gas prices, future costs, discount rates, market value of land, and other relevant assumptions. (i) Reserves – Assumptions that are valid at the time of reserve estimation may change significantly when new information becomes available. Changes in forward price estimates, production costs, or recovery rates may change the economic status of reserves and may ultimately result in reserves being restated. (ii) Oil and natural gas prices – Forward price estimates are used in the cash flow model. Commodity prices can fluctuate for a variety of reasons including supply and demand fundamentals, inventory levels, exchange rates, weather, and economic and geopolitical factors. LEUCROTTA EXPLORATION INC. - 19 - 2017 YEAR END REPORT (iii) Discount rate – The discount rate used to calculate the net present value of cash flows is based on estimates of a discount rate specific to the risk of the CGU being assessed for impairment. Changes in the general economic environment could result in significant changes to this estimate. Exploration and evaluation assets The application of the Company’s accounting policy for exploration and evaluation assets requires the Company to make certain judgments as to future events and circumstances as to whether economic quantities of reserves will be found so as to assess if technical feasibility and commercial viability has been achieved. Depletion and depreciation Amounts recorded for depletion and depreciation are based on estimates of total proved and probable oil and natural gas reserves and future development capital. By their nature, the estimates of reserves, including the estimates of future prices, costs, and future cash flows, are subject to measurement uncertainty. Accordingly, the impact to the financial statements in future periods could be material. Decommissioning obligations Amounts recorded for decommissioning obligations requires the use of estimates with respect to the amount and timing of decommissioning expenditures. Actual costs and cash outflows can differ from estimates because of changes in laws and regulations, public expectations, market conditions, discovery and analysis of site conditions and changes in technology. Other provisions are recognized in the period when it becomes probable that there will be a future cash outflow. Share based compensation Compensation costs recognized for share based compensation plans are subject to the estimation of what the ultimate value will be using pricing models such as the Black-Scholes-Merton model and Monte Carlo simulations, both of which are based on significant assumptions such as volatility, expected term, and forfeiture rate. Deferred taxes Deferred taxes are based on estimates as to the timing of the reversal of temporary differences, substantively enacted tax rates, and the likelihood of assets being realized. Tax interpretations, regulations, and legislation in the various jurisdictions in which the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty. Judgments are also required to determine the likelihood of whether deferred income tax assets at the end of the reporting period will be realized from future taxable earnings. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently by the Company to all periods presented in these financial statements. (a) Joint arrangements Joint arrangements represent activities where the Company has joint control established by a contractual agreement. Joint control requires unanimous consent for financial and operational decisions (being those that significantly affect the returns of the arrangement). A joint arrangement is either a joint operation, whereby the parties have rights to the assets and obligations for the liabilities, or a joint venture, whereby the parties have rights to the net assets. For a joint operation the financial statements include the Company's proportionate share of the assets, liabilities, revenues, expenses and cash flows of the arrangement with items of a similar nature on a line-by-line basis, from the date that joint control commences until the date that joint control ceases. Joint ventures are accounted for using the equity method of accounting and recognized at cost and adjusted thereafter for the post-acquisition change in the Company's share of the joint venture’s net assets. Many of the Company’s oil and natural gas activities involve joint operations. The Company has no arrangements classified as joint ventures. (b) Financial instruments Non-derivative financial instruments The Company’s financial instruments comprise cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities, and credit facility, all of which are measured at amortized cost. Financial instruments at amortized cost are recognized initially at fair value net of any directly attributable transaction costs. Subsequent to initial recognition, financial instruments at amortized cost are measured using the effective interest method, less any impairment losses. Cash and cash equivalents and restricted cash Cash and cash equivalents and restricted cash comprise cash on hand, term deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less, measured at amortized cost. Any transaction costs are recognized in profit or loss as incurred. As at December 31, 2017 and 2016 cash and cash equivalents was comprised of cash in bank. Financial assets and liabilities are offset and the net amount presented on the statement of financial position if, and only if, the Company has a legal right to offset the amounts and intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. LEUCROTTA EXPLORATION INC. - 20 - 2017 YEAR END REPORT Derivative financial instruments From time to time, the Company may enter into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in commodity prices. These instruments are not used for trading or speculative purposes. The Company does not designate financial derivative contracts as effective accounting hedges, and thus does not apply hedge accounting, even though the Company considers all commodity contracts to be economic hedges. As a result, all financial derivative contracts are classified as fair value through profit or loss and are measured at fair value, with changes therein recognized in profit or loss. Transaction costs are recognized in profit or loss when incurred. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any tax effects. (c) Property, plant, and equipment and exploration and evaluation assets Recognition and measurement Exploration and evaluation expenditures Pre-license costs are recognized in profit or loss as incurred. Exploration and evaluation costs, including the costs of acquiring undeveloped land and drilling costs, are initially capitalized until the drilling of the well is complete and the results have been evaluated. The costs are accumulated in cost centers by well, field, or exploration area pending determination of technical feasibility and commercial viability. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proved or probable reserves are determined to exist. If proved or probable reserves are found, the accumulated costs and associated undeveloped land are transferred to property, plant, and equipment. The exploration and evaluation costs are reviewed for impairment prior to any such transfer. Exploration and evaluation assets are assessed for impairment if (i) sufficient data exists to determine technical feasibility and commercial viability, and are transferred to property, plant, and equipment, and (ii) facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For purposes of impairment testing, exploration and evaluation assets are allocated to their respective CGUs. Development and production costs Items of property, plant, and equipment, which include oil and natural gas development and production assets, are measured at cost less accumulated depletion and depreciation and accumulated impairment losses. The cost of development and production assets includes: transfers from exploration and evaluation assets, which generally include the cost to drill the well and the cost of the associated land upon determination of technical feasibility and commercial viability; the cost to complete and tie-in the well; facility costs; the cost of recognizing provisions for future restoration and decommissioning obligations; geological and geophysical costs; and directly attributable overhead. Development and production assets are grouped into CGUs for impairment testing. The Company currently has two CGUs both being located in Northeast BC, one being the Company’s Montney assets and the other being its non-Montney assets. When significant parts of an item of property, plant, and equipment, including oil and natural gas interests, have different useful lives, they are accounted for as separate items (major components). Gains and losses on disposal of an item of property, plant, and equipment, including oil and natural gas interests, are determined by comparing the proceeds from disposal with the carrying amount of property, plant, and equipment and are recognized in profit or loss. The carrying amount of any replaced or disposed item of property, plant, and equipment is derecognized. Subsequent costs Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant, and equipment are recognized as property, plant, and equipment only when they increase the future economic benefits embodied in the specific asset to which they relate. Capitalized property, plant, and equipment generally represent costs incurred in developing proved or probable reserves and bringing in or enhancing production from such reserves and are accumulated on a field or geotechnical area basis. The costs of the day-to-day servicing of property, plant, and equipment are recognized in production expenses as incurred. Non-monetary asset swaps Exchanges or swaps of property, plant, and equipment are measured at fair value unless the exchange transaction lacks commercial substance or neither the fair value of the assets given up nor the assets received can be reliably estimated. The cost of the acquired asset is measured at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident. Where fair value is not used, the cost of the acquired asset is measured at the carrying amount of the asset given up. Any gain or loss on derecognition of the asset given up is included in profit or loss. Exchanges or parts of exchanges that involve principally exploration and evaluation assets are measured at the carrying amount of the asset exchanged, reduced by the amount of any cash consideration received. No gain or loss is recognized unless the cash consideration received exceeds the carrying value of the asset held. LEUCROTTA EXPLORATION INC. - 21 - 2017 YEAR END REPORT Depletion and depreciation The net carrying value of development and production assets is depleted using the unit of production method by reference to the ratio of production in the period to the related proved plus probable reserves, taking into account the estimated future development costs necessary to bring those reserves into production and the estimated salvage value of the assets at the end of their useful lives. Future development costs are estimated taking into account the level of development required to produce the reserves. Proved plus probable reserves are estimated at least annually by independent qualified reserve evaluators and represent the estimated quantities of oil, natural gas, and natural gas liquids which geological, geophysical, and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. The Company has determined the estimated useful lives for most gas processing plants, pipeline facilities, and compression facilities to be consistent with the reserve lives of the areas for which they serve. As such, the Company includes the cost of these assets within their associated CGU for the purpose of depletion using the unit of production method. Some facilities, where the production and reserves do not represent the useful life of the assets, are depreciated over an estimated useful life of twenty years. The cost of office and other equipment is depreciated using the straight-line method over the estimated useful life of three years. Depreciation methods, useful lives, and residual values are reviewed at each reporting date and, if necessary, changes are accounted for prospectively. Leased assets Leases wherein the Company assumes substantially all the risks and rewards of ownership are classified as finance leases, when applicable. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the finance expenses and the reduction of the outstanding liability. The finance expenses are allocated to each year during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Other leases are classified as operating leases, which are not recognized on the Company’s statement of financial position. Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. The Company’s presently outstanding leases (primarily the head office lease) have been determined to be operating leases. (d) Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. All impairment losses are recognized in profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial assets measured at amortized cost, the reversal is recognized in profit or loss. Non-financial assets The carrying amounts of the Company’s non-financial assets, other than exploration and evaluation assets and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Exploration and evaluation assets are assessed for impairment when they are transferred to property, plant, and equipment or if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generate cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (a cash- generating unit or “CGU”). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs of disposal. Fair value less costs of disposal is determined to be the amount for which the asset could be sold in an arm's length transaction. In determining fair value less costs of disposal, discounted cash flows and recent market transactions are taken into account. These calculations are corroborated by valuation multiples or other available fair value indicators. Value in use is determined as the net present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Company’s continued use and can only take into account approved future development costs. Estimates of future cash flows used in the evaluation of impairment of assets are made using management’s forecasts of commodity prices and expected production volumes. The latter takes into account assessments of field reservoir performance and includes expectations about proved and unproved volumes, which are risk-weighted using geological, production, recovery, and economic projections. LEUCROTTA EXPLORATION INC. - 22 - 2017 YEAR END REPORT An impairment loss is recognized if the carrying amount of a CGU exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of CGUs are allocated to the assets in the CGUs on a pro rata basis. Impairment losses recognized in prior periods are assessed each reporting date if facts or circumstances indicate that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation, if no impairment loss had been recognized. (e) Business combinations Transactions for the purchase of assets, where the assets acquired are deemed to constitute a business, are accounted for as business combinations. Using the acquisition method, identifiable assets acquired and liabilities assumed are measured at their acquisition-date fair values. Transaction costs related to the acquisition are expensed as incurred. (f) Share based compensation The Company uses the fair value method for valuing share based compensation. Under this method, the compensation cost attributed to stock options and warrants is measured at fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options that vest. Upon the settlement of the stock options, the previously recognized value in contributed surplus is recorded as an increase to share capital. (g) Provisions Provisions are recognized when the Company has a present obligation as a result of a past event that can be estimated with reasonable certainty. Provisions are measured by estimating the cash flows that the Company would pay to be relieved of the obligation. To the extent that provisions are estimated using a present value technique, such amounts are determined by discounting the estimated future cash flows at a risk-free pre-tax rate. Provisions are not recognized for future operating losses. Decommissioning obligations The Company’s activities give rise to dismantling, decommissioning, and site disturbance remediation activities. A provision is made for the estimated cost of abandonment and site restoration and capitalized in the relevant asset category. The capitalized amount is depreciated on a unit of production basis over the life of the associated proved plus probable reserves. Decommissioning obligations are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time, changes in the estimated future cash flows underlying the obligation, and changes in the risk-free rate. The increase in the provision due to the passage of time is recognized as accretion (within finance expenses) whereas increases or decreases due to changes in the estimated future cash flows or changes in the discount rate are capitalized. Actual costs incurred upon settlement of the decommissioning obligations are charged against the provision to the extent the provision was established. (h) Revenue Revenue from the sale of oil and natural gas is recorded when the significant risks and rewards of ownership of the product are transferred to the buyer which is usually when legal title passes to the external party. (i) Finance income and expense Finance income and expense comprises interest expense, including interest on credit facility, accretion on decommissioning obligations, and interest income earned on cash in the bank. (j) Income tax Income tax expense is comprised of current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable earnings will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. LEUCROTTA EXPLORATION INC. - 23 - 2017 YEAR END REPORT (k) Per share amounts Basic per share amounts are calculated by dividing the net earnings or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted per share amounts are determined by adjusting the weighted average number of common shares outstanding during the period for the effects of dilutive instruments such as stock options granted. (l) Flow-through shares The Company, from time to time, may issue flow-through shares to finance a portion of its exploration capital expenditure program. Pursuant to the terms of the flow-through share agreements, the tax deductions associated with the exploration expenditures are renounced to the subscribers. On issuance of flow-through shares, the premium received on such shares, being the difference between the fair value ascribed to flow-through shares issued and the fair value that would have been received for common shares with no tax attributes, is recognized as a liability on the statement of financial position. When the exploration expenditures are incurred, the liability is drawn down, a deferred tax liability is recorded equal to the estimated amount of deferred income tax payable by the Company as a result of the foregone tax benefits, and the difference is recognized in profit or loss. (m) New standards and interpretations not yet adopted In April 2016, the IASB issued its final amendments to IFRS 15 Revenue from Contracts with Customers, which specifies how and when to recognize revenue as well as requiring entities to provide users of financial statements with more disclosure. IFRS 15 will replace IAS 11 Construction Contracts, IAS 18 Revenue, and other revenue-related interpretations. IFRS 15 contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. IFRS 15 will be effective for annual periods beginning on or after January 1, 2018. Application of the standard is mandatory and early adoption is permitted. The Company intends to adopt IFRS 15 in its financial statements for the annual period beginning on January 1, 2018. The Company has substantially completed its review of its revenue streams and underlying contracts with customers and has determined that the adoption of the standard is not expected to have a material impact on the Company’s earnings. The adoption of IFRS 15 will result in expanded disclosures in the Company’s financial statements. On July 24, 2014, the IASB issued the complete IFRS 9 Financial Instruments standard to replace IAS 39 Financial Instruments: Recognition and Measurement. The mandatory effective date of IFRS 9 is for annual periods beginning on or after January 1, 2018 and must be applied retrospectively with some exemptions. Early adoption is permitted. The standard introduces new requirements for classifying and measuring financial instruments and includes a new general hedge accounting standard that will provide more risk management strategies to qualify for hedge accounting. It also amends the impairment model by introducing a new ‘expected credit loss’ model for calculating impairment. The Company intends to adopt IFRS 9 in its financial statements for the annual period beginning on January 1, 2018. The Company has determined the IFRS 9 will not have a material impact on the measurement and carrying values of the Company’s financial instruments. On January 13, 2016, the IASB issued IFRS 16 Leases. The new standard is effective for annual periods beginning on or after January 1, 2019. Earlier application is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial adoption of IFRS 16. IFRS 16 will replace IAS 17 Leases. This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. The Company intends to adopt IFRS 16 in its financial statements for the annual period beginning on January 1, 2019. The Company is currently identifying contracts that will fall into the scope of the new standard and is evaluating the impact it will have on the financial statements. 4. RESTRICTED CASH At December 31, 2017, the Company has $1.0 million (December 31, 2016 - $1.0 million) in a restricted corporate account to cross-guarantee a margin account for the President of the Company. The President is charged a fee by the Company and the margin account is also restricted until the cross-guarantee is removed. The margin account holds $6.6 million of securities of Leucrotta common shares and a margin payable of $1.5 million. The cross-guarantee is intended to be temporary in nature and will be removed as soon as practicable. The cross-guarantee has allowed the President to comply with corporate governance mandates. 5. PROPERTY ACQUISITIONS AND DISPOSITIONS a) Property acquisitions During the year ended December 31, 2017, the Company closed three property acquisitions for total cash consideration of $35.6 million (December 31, 2016 – three property acquisitions for $4.0 million). Net assets acquired were undeveloped land in the Company’s core area of Northeast BC adding to the Company’s undeveloped land inventory in the area with a focus on the Montney formation. b) Equipment disposition During the year ended December 31, 2017, the Company sold certain gas plant equipment for cash proceeds of $1.1 million (December 31, 2016 - $4.0 million) and realized a loss of $0.7 million on the disposition (December 31, 2016 - $2.6 million). LEUCROTTA EXPLORATION INC. - 24 - 2017 YEAR END REPORT c) Property disposition During the year ended December 31, 2017, the Company disposed of a non-producing property for $nil consideration. The Company realized a gain on disposition of $0.2 million related to the net liability disposed of being $0.2 million of decommissioning obligations. 6. PROPERTY, PLANT, AND EQUIPMENT Cost Balance, December 31, 2015 Additions Dispositions Transfer from exploration and evaluation assets Change in decommissioning obligations Capitalized share based compensation Balance, December 31, 2016 Additions Dispositions Transfer from exploration and evaluation assets Change in decommissioning obligations Capitalized share based compensation Balance, December 31, 2017 Accumulated Depletion, Depreciation, and Impairment Balance, December 31, 2015 Depletion and depreciation Balance, December 31, 2016 Depletion and depreciation Dispositions Balance, December 31, 2017 Net Book Value December 31, 2016 December 31, 2017 Total 129,411 10,190 (6,563) 10,086 21 45 143,190 27,682 (2,166) 20,911 2,271 190 192,078 Total 20,858 4,951 25,809 10,212 (338) 35,683 Total 117,381 156,395 During the year ended December 31, 2017, approximately $0.5 million (December 31, 2016 - $0.1 million) of directly attributable general and administrative costs were capitalized as expenditures on property, plant, and equipment. Depletion and depreciation The calculation of depletion and depreciation expense for the year ended December 31, 2017 included an estimated $167.6 million (December 31, 2016 - $95.7 million) for future development costs associated with proved plus probable undeveloped reserves and excluded approximately $3.7 million (December 31, 2016 - $2.8 million) for the estimated salvage value of production equipment and facilities. Impairment At December 31, 2017 and 2016, the Company evaluated its property, plant, and equipment CGUs for indicators of impairment or impairment reversals and as a result of this assessment management determined that an impairment test was not required to be performed. LEUCROTTA EXPLORATION INC. - 25 - 2017 YEAR END REPORT 7. EXPLORATION AND EVALUATION ASSETS Balance, December 31, 2015 Property acquisitions Additions Transfer to property, plant, and equipment Capitalized share based compensation Balance, December 31, 2016 Property acquisitions Additions Transfer to property, plant, and equipment Expensed Capitalized share based compensation Balance, December 31, 2017 Total 85,745 4,034 8,350 (10,086) 497 88,540 35,550 30,282 (20,911) (6,240) 201 127,422 Exploration and evaluation assets (“E&E”) consist of the Company’s exploration projects which are pending the determination of proved or probable reserves. Additions represent the Company’s share of costs incurred on exploration and evaluation assets during the period, consisting primarily of undeveloped land and drilling costs until the drilling of the well is complete and the results have been evaluated. During the year ended December 31, 2017, approximately $0.3 million (December 31, 2016 - $0.3 million) of directly attributable general and administrative costs were capitalized as expenditures on exploration and evaluation assets. The Company expensed $6.2 million of drilling and completion costs incurred for an exploratory well in the non-Montney CGU that was uneconomic and no further expenditures are planned. 8. CREDIT FACILITY The Company has a $20.0 million revolving operating demand loan credit facility with a Canadian chartered bank. The revolving credit facility bears interest at prime plus a range of 0.50% to 2.50% and is secured by a $100 million fixed and floating charge debenture on the assets of the Company. The undrawn portion of the credit facility is subject to a standby fee in the range of 0.20% to 0.45%. At December 31, 2017, $nil had been drawn on the revolving credit facility. At December 31, 2017, the Company had outstanding letters of guarantee of $2.5 million which reduce the amount that can be borrowed under the credit facility. The next review of the revolving credit facility by the bank is scheduled on or before May 31, 2018. The Company’s credit facility includes a covenant requiring the Company to maintain an adjusted working capital ratio of not less than one-to-one. The working capital ratio, as defined by its creditor, is calculated as current assets plus any undrawn amounts available on its credit facility less current liabilities excluding any current portion drawn on the credit facility. The Company was compliant with this covenant at December 31, 2017. 9. DECOMMISSIONING OBLIGATIONS The Company’s decommissioning obligations result from its ownership interest in oil and natural gas assets including well sites and gathering systems. The total decommissioning obligation is estimated based on the Company’s net ownership interest in all wells and facilities, estimated costs to abandon and reclaim the wells and facilities, and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash flows (adjusted for inflation at 2% per year) required to settle the decommissioning obligations is approximately $14.7 million (December 31, 2016 - $12.1 million) which is estimated to be incurred over the next 32 years. At December 31, 2017, a risk-free rate of 2.2% (December 31, 2016 – 2.2%) was used to calculate the net present value of the decommissioning obligations. Balance, beginning of year Provisions incurred Provisions settled Dispositions Revisions in estimated cash flows Revisions due to change of discount rates Accretion Balance, end of year Year Ended December 31, 2017 6,820 1,604 (296) (239) 435 232 162 8,718 Year Ended December 31, 2016 6,673 339 - - - (318) 126 6,820 LEUCROTTA EXPLORATION INC. - 26 - 2017 YEAR END REPORT 10. SHAREHOLDERS’ CAPITAL The Company is authorized to issue an unlimited number of voting common shares, an unlimited number of non-voting common shares, Class A preferred shares, issuable in series, and Class B preferred shares, issuable in series. No non-voting common shares or preferred shares have been issued. Voting Common Shares Balance, December 31, 2015 Reclassification of Reserve from common-control transaction Balance, December 31, 2016 Share issuances Share issue costs Flow-through share premium Exercise of warrants and stock options Balance, December 31, 2017 Number 165,227 - 165,227 35,185 - - 85 200,497 Amount 283,587 (69,712) 213,875 80,001 (4,394) (833) 138 288,787 On April 26, 2017, the Company closed a bought-deal public financing for an aggregate of 33,333,400 common shares at a price of $2.25 per common share and 1,852,000 common shares on a flow-through basis at a price of $2.70 per flow-through common share for total gross proceeds of $80.0 million. Upon issuance, the premium received on the flow-through shares, being the difference between the fair value of the flow-through shares issued and the fair value of the common shares at the date of issuance, was recognized as a liability. The Company incurred the required Canadian exploration expenditures of $5.0 million related to the flow- through shares during the year ended December 31, 2017. The proceeds of the financing were used to fund the property acquisitions (note 5) and the Company’s 2017 capital program. In connection with the arrangement on June 12, 2014 involving Crocotta Energy Inc. (“Crocotta”) and Long Run Exploration Ltd., the reserve created from the common-control transaction represents the difference between the fair value of the Leucrotta shares issued to existing Crocotta shareholders and the net book value of the acquired assets and assumed liabilities, and has been reclassified to Shareholders’ Capital as at December 31, 2016. 11. SHARE BASED COMPENSATION PLANS Stock options The Company has authorized and reserved for issuance 20.0 million common shares under a stock option plan enabling certain officers, directors, employees, and consultants to purchase common shares. The Company will not issue options exceeding 10% of the shares outstanding at the time of the option grants (the performance warrants described below are aggregated with any options for the 10% limit). Under the plan, the exercise price of each option equals the market price of the Company’s shares on the date of the grant and an option’s maximum term is ten years. At December 31, 2017, 11.5 million options were outstanding at an average exercise price of $1.25 per share. Balance, December 31, 2015 Granted Balance, December 31, 2016 Granted Exercised Balance, December 31, 2017 Number of Options 8,895 25 8,920 2,626 (76) 11,470 Weighted Average Exercise Price ($) 1.09 1.40 1.09 1.78 1.09 1.25 Exercisable, December 31, 2017 7,420 1.13 The following table summarizes the stock options outstanding and exercisable at December 31, 2017: Exercise Price $0.80 to $1.00 $1.01 to $1.30 $1.31 to $1.78 Options Outstanding Weighted Average Remaining Life (years) 1.9 1.0 4.7 2.2 Weighted Average Exercise Price 0.87 1.29 1.78 1.25 Number 4,194 4,632 2,644 11,470 Options Exercisable Number 2,782 4,632 6 7,420 Weighted Average Exercise Price 0.87 1.29 1.62 1.13 During the year ended December 31, 2017, the Company recognized $1.1 million (December 31, 2016 - $1.6 million) of share based compensation related to the stock options. At December 31, 2017 there was $1.8 million remaining as unrecognized share based compensation related to the stock options. LEUCROTTA EXPLORATION INC. - 27 - 2017 YEAR END REPORT Performance Warrants The Company has 7.5 million performance warrants outstanding to certain officers, directors, employees, and consultants to purchase common shares at an exercise price of $1.70. The performance warrants expire on August 18, 2019 and are subject to both time vesting equally over three years and performance vesting as follows: 30 day Volume Weighted Average Trading Price of the Common Shares ($) 1.87 2.04 2.21 2.38 2.55 Percentage of Warrants Vested 20% 40% 60% 80% 100% Number 7,500 (9) 7,491 Exercise Price 1.70 1.70 1.70 4,491 1.70 Balance, December 31, 2015 and 2016 Exercised Balance, December 31, 2017 Exercisable, December 31, 2017 During the year ended December 31, 2017, the Company recognized $0.5 million (December 31, 2016 - $1.4 million) of share based compensation related to the performance warrants. At December 31, 2017 there was $nil remaining as unrecognized share based compensation related to the performance warrants. No new performance warrants were granted during the year ended December 31, 2017. The remaining life of the performance warrants at December 31, 2017 is 1.6 years (December 31, 2016 – 2.6 years). Purchase Warrants The Company has 7.65 million purchase warrants outstanding to certain officers, directors, employees, and consultants to purchase common shares at an exercise price of $2.04 expiring on September 12, 2019 vesting equally over three years. Balance, December 31, 2015, 2016 and 2017 Exercisable, December 31, 2017 Number of Warrants 7,650 Exercise Price 2.04 7,650 2.04 During the year ended December 31, 2017, the Company recognized $0.4 million (December 31, 2016 - $1.1 million) of share based compensation related to the purchase warrants. At December 31, 2017 there was $nil remaining as unrecognized share based compensation related to the purchase warrants. No new purchase warrants were granted during the year ended December 31, 2017. The remaining life of the purchase warrants at December 31, 2017 is 1.7 years (December 31, 2016 – 2.7 years). Share based compensation The Company accounts for its share based compensation plans using the fair value method. Under this method, compensation cost is charged to earnings over the vesting period for stock options and warrants granted to officers, directors, employees, and consultants with a corresponding increase to contributed surplus. The fair value of the performance warrants was determined based on a Monte Carlo simulation and the fair value of purchase warrants were measured based on the Black-Scholes-Merton option-pricing model. There were no performance warrants or purchase warrants granted during the years ended December 31, 2017 and 2016. The fair value of the stock options granted was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted average assumptions: Risk-free interest rate (%) Expected life (years) Expected volatility (%) Expected dividend yield (%) Forfeiture rate (%) Weighted average fair value of options granted ($ per option) December 31, 2017 1.7 4.0 52.8 - 0.2 0.75 December 31, 2016 0.5 3.5 63.3 - 5.0 0.63 LEUCROTTA EXPLORATION INC. - 28 - 2017 YEAR END REPORT 12. PER SHARE AMOUNTS There were 11.5 million stock options, 7.7 million purchase warrants and 7.5 million performance warrants that were excluded from the weighted-average share calculations for the year ended December 31, 2017 (December 31, 2016 - 8.9 million stock options, 7.7 million purchase warrants and 7.5 million performance warrants) because they were anti-dilutive. The following table summarizes the weighted average number of shares used in the basic and diluted per share calculations: Weighted average number of shares - basic and diluted December 31, 2017 189,377 December 31, 2016 165,227 13. KEY MANAGEMENT PERSONNEL The Company considers its directors and executives to be key management personnel. The key management personnel compensation is comprised of the following: Short-term wages and benefits Share based compensation (1) Total (2,3) December 31, 2017 1,724 1,487 December 31, 2016 1,690 3,189 3,211 4,879 (1) Represents the amortization of share based compensation expense associated with the Company’s share based compensation plans granted to key management personnel inclusive of any capitalized portion. (2) Balances outstanding and payable at December 31, 2017 were $nil (December 31, 2016 - $nil). (3) At December 31, 2017, key management personnel included 12 individuals (December 31, 2016 – 12 individuals). 14. FINANCE EXPENSE Finance expense includes the following: Interest expense Accretion of decommissioning obligations Finance expense 15. INCOME TAXES December 31, 2017 125 162 287 December 31, 2016 60 126 186 The provision for income taxes in the statements of operations and comprehensive loss reflects an effective tax rate which differs from the expected statutory tax rate. The differences were accounted for as follows: Loss before taxes Statutory income tax rate Expected income tax recovery Increase (decrease) in income tax recovery resulting from: Share based compensation and other non-deductible amounts Expenditures renounced under flow-through shares Change in statutory income tax rate Change in unrecognized deferred income tax asset Flow-through share premium Income tax recovery December 31, 2017 9,055 26.5% 2,400 December 31, 2016 12,182 26.5% 3,228 (439) (1,350) 160 (771) - 833 833 (953) - - (2,275) - - - The tax rate consists of the combined federal and provincial statutory tax rates for the Company for the years ended December 31, 2017 and December 31, 2016. The change in the statutory income tax rate at December 31, 2017 is due to the British Columbia corporate tax rate increasing from 11.0% to 12.0% effective January 1, 2018. At December 31, 2017 and 2016, the Company has an unrecognized net deferred income tax asset based on the independently evaluated reserve report as cash flows are not expected to be sufficient to realize the deferred income tax asset at this time. At December 31, 2017, the Company has estimated federal tax pools of $304.4 million (December 31, 2016 - $221.9 million) available for deduction against future taxable income. LEUCROTTA EXPLORATION INC. - 29 - 2017 YEAR END REPORT Unrecognized deductible temporary differences are as follows: Oil and natural gas properties and equipment Decommissioning obligations Share issue costs Non-capital losses Unrecognized deductible temporary differences Non-capital losses of $4.5 million will expire between 2035 and 2036. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS December 31, 2017 13,387 8,718 4,804 4,454 31,363 December 31, 2016 11,913 6,820 1,381 4,454 24,568 Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities The fair value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities at December 31, 2017 and December 31, 2016 approximated their carrying value due to their short term to maturity. The Company classified the fair value of its financial instruments at fair value according to the following hierarchy based on the amount of observable inputs used to value the instrument: • • • Level 1 – observable inputs, such as quoted market prices in active markets Level 2 – inputs, other that the quoted market prices in active markets, which are observable, either directly or indirectly Level 3 – unobservable inputs for the asset or liability in which little or no market data exists, therefore requiring an entity to develop its own assumptions During the years ended December 31, 2017 and 2016, there were no transfers between level 1, level 2, and level 3 classified assets and liabilities. 17. FINANCIAL RISK MANAGEMENT The Company’s activities expose it to a variety of financial risks that arise as a result of its exploration, development, production, and financing activities. The Company employs risk management strategies and policies to ensure that any exposure to risk is in compliance with the Company’s business objectives and risk tolerance levels. Risk management is ultimately established by the Board of Directors and is implemented by management. As required under the terms of the Company’s credit facility, the Company is subject to an upper limit on fixed price contracts of 65% of its future production up to a three year period. Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of foreign currency risk, interest rate risk, and other price risk, such as commodity price risk. The objective of market risk management is to manage and control market price exposures within acceptable limits, while maximizing returns. The Company may use financial derivatives or physical delivery sales contracts to manage market risks. All such transactions are conducted within risk management tolerances that are reviewed by the Board of Directors. Foreign exchange risk The prices received by the Company for the production of oil, natural gas, and NGLs are primarily determined in reference to US dollars, but are settled with the Company in Canadian dollars. The Company’s cash flow from commodity sales will therefore be impacted by fluctuations in foreign exchange rates. The Company does not currently have any foreign exchange contracts in place. Interest rate risk The Company is exposed to interest rate risk when it borrows funds at floating interest rates. The Company currently does not use interest rate hedges or fixed interest rate contracts to manage the Company’s exposure to interest rate fluctuations. The amount drawn on the Company’s credit facility at December 31, 2017 was $nil. Commodity price risk Oil and natural gas prices are impacted by not only the relationship between the Canadian and US dollar but also by world economic events that dictate the levels of supply and demand. The Company’s oil, natural gas, and NGLs production is marketed and sold on the spot market to area aggregators based on daily spot prices that are adjusted for product quality and transportation costs. The Company’s cash flow from product sales will therefore be impacted by fluctuations in commodity prices. A $1.00/boe increase or decrease in commodity prices would have impacted the net loss by approximately $1.0 million for the year ended December 31, 2017 (December 31, 2016 - $0.4 million). The Company did not enter into commodity price contracts to manage future cash flows as at December 31, 2017. Credit risk Credit risk represents the financial loss that the Company would suffer if the Company’s counterparties to a financial asset fail to meet or discharge their obligation to the Company. A substantial portion of the Company’s accounts receivable and deposits are with customers and joint interest partners in the oil and natural gas industry and are subject to normal industry credit risks. The LEUCROTTA EXPLORATION INC. - 30 - 2017 YEAR END REPORT Company generally grants unsecured credit but routinely assesses the financial strength of its customers and joint interest partners. The Company sells the majority of its production to three petroleum and natural gas marketers and therefore is subject to concentration risk. Historically, the Company has not experienced any collection issues with its oil and natural gas marketers. Joint interest receivables are typically collected within one to three months of the joint interest billing being issued to the partner. The Company attempts to mitigate the risk from joint interest receivables by obtaining partner approval for significant capital expenditures prior to the expenditure being incurred. The Company does not typically obtain collateral from petroleum and natural gas marketers or joint interest partners; however, in certain circumstances, the Company may cash call a partner in advance of expenditures being incurred. The maximum exposure to credit risk is represented by the carrying amount of cash and cash equivalents, restricted cash, and accounts receivable on the statement of financial position. At December 31, 2017, $3.2 million (78%) of the Company’s outstanding accounts receivable were current and $0.3 million (8%) were outstanding for more than 90 days. During the year ended December 31, 2017, the Company deemed $0.1 million of outstanding accounts receivable to be uncollectable (December 31, 2016 - $nil). Cash and cash equivalents consists of bank balances placed with a financial institution with strong investment grade ratings which management believes the risk of loss to be remote. 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 processes for managing liquidity risk include ensuring, to the extent possible, that it will have sufficient liquidity to meet its liabilities when they become due. The Company prepares annual, quarterly, and monthly capital expenditure budgets, which are monitored and updated as required, and requires authorizations for expenditures on projects to assist with the management of capital. In managing liquidity risk, the Company ensures that it has access to additional financing, including potential equity issuances and additional debt financing. The Company also mitigates liquidity risk by maintaining an insurance program to minimize exposure to insurable losses. See note 21 for a summary of contractual commitments at December 31, 2017. The Company’s accounts payable and accrued liabilities are all due within the current operating period. 18. CAPITAL MANAGEMENT The Company’s objectives when managing capital are to maintain a flexible capital structure, which optimizes the cost of capital at an acceptable risk, and to maintain investor, creditor, and market confidence to sustain future development of the business. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. The Company considers its capital structure to include shareholders’ equity and working capital (current assets less current liabilities). To maintain or adjust the capital structure, the Company may, from time to time, issue shares, raise debt, or adjust its capital spending to manage its current and projected debt levels. Shareholders' equity Working capital December 31, 2017 293,759 18,660 December 31, 2016 225,164 26,063 In addition, management prepares annual, quarterly, and monthly budgets, which are updated depending on varying factors such as general market conditions and successful capital deployment. The Company’s share capital is not subject to external restrictions, however, the Company’s credit facility includes a covenant requiring the Company to maintain a working capital ratio of not less than one-to-one (see note 8). There were no changes in the Company’s approach to capital management from the previous year. 19. SUPPLEMENTAL DISCLOSURES Presentation of expenses The Company’s statements of operations and comprehensive loss is prepared primarily by nature of expense, with the exception of employee compensation costs which are included in general and administrative expenses. Included in general and administrative expenses for the year ended December 31, 2017 are $3.3 million of wages and benefits (December 31, 2016 - $3.1 million). LEUCROTTA EXPLORATION INC. - 31 - 2017 YEAR END REPORT 20. SUPPLEMENTAL CASH FLOW INFORMATION Restricted cash Accounts receivable Prepaid expenses and deposits Accounts payable and accrued liabilities Change in non-cash working capital Relating to: Investing Operating Change in non-cash working capital December 31, 2017 - (2,586) (174) 913 (1,847) December 31, 2016 1,131 1,017 71 (3,456) (1,237) (852) (995) (1,847) (1,905) 668 (1,237) 21. COMMITMENTS The following is a summary of the Company’s commitments at December 31, 2017: Office lease Firm transportation agreements 2018 404 4,667 5,071 2019 320 7,894 8,214 2020 320 6,429 6,749 2021 267 - 267 2022 - Thereafter - - - - - Total 1,311 18,990 20,301 Transportation commitments include contracts to transport natural gas and NGLs through third-party owned pipeline systems. The Company currently has commitments of 18.3 mmcf/d escalating over time to 33.3 mmcf/d. LEUCROTTA EXPLORATION INC. - 32 - 2017 YEAR END REPORT 

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