Annual Report
December 31, 2015
HIGHLIGHTS
Petrus Resources Ltd. ("Petrus" or the "Company") (TSX: PRQ) is pleased to report financial and operating results for the three month periods and
years ending December 31, 2015 and 2014, and provide 2015 year‐end reserves information as evaluated by Sproule Associates Limited ("Sproule").
The associated Management's Discussion and Analysis ("MD&A") and audited financial statements dated as at and for the year ended December 31,
2015 can be found at www.sedar.com.
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Petrus generated $44.6 million in funds from operations during the year, compared to $61.3 million in 2014. Commodity prices declined
significantly from the prior year; however, the Company's strong hedge position ($16.6 million realized gain in 2015) moderated its
exposure to commodity price volatility. The average benchmark natural gas price in Canada (AECO) decreased by 42% year‐over‐year
(averaging $2.69 per mcf in 2015, compared to $4.64 per mcf in 2014). The average price of Edmonton Light Sweet crude oil decreased 39%
over the same period (from $94.45 per bbl to $57.48 per bbl).
Average 2015 production was 8,762 boe per day, up from 6,032 boe per day in 2014. Production in the fourth quarter averaged 8,172 boe
per day (36% oil and liquids), a decrease of 17% compared to 9,822 boe per day (41% oil and liquids) in the fourth quarter of 2014. Since
mid‐January 2015, a portion of the Company's sales volume (affecting three of the Company's four operating areas) was restricted due to
transportation curtailments on TransCanada Corporation infrastructure. During the fourth quarter, approximately 1,300 boe per day
remained under curtailment by these third‐party transportation restrictions. Third party restrictions have been lifted since February 2016.
Reserves per share increased by 21% and 23% on a proved plus probable and total proved basis, respectively. Total proved plus probable
reserves increased from 40.6 mmboe in 2014 to 49.2 mmboe in 2015. The Company replaced 3.7 times annual production at an all‐in
annual Finding, Development and Acquisition cost of $15.40 per boe including the change in future development capital for the proved plus
probable category. Petrus ended 2015 with $402.3 million of proved plus probable reserve value before‐tax, discounted at 10%, a 17%
reduction from the December 31, 2014 report, despite a 35% reduction in forward price forecasts.
Petrus added 64.9 new net proven undeveloped and 18.7 new net probable undeveloped locations. Proved plus probable future
development costs for the December 31, 2015 report are $325 million, a $125 million increase from 2014, which was a result of new
reserve bookings.
Over the twelve month period ended December 31, 2015, Petrus invested $55.4 million in exploration and acquisition activity, down from
$443.0 million in 2014. Petrus invested $54.5 million in finding and development activities, along with $0.9 million in acquisitions (net of
dispositions). The investments were funded by cash flow and the draw down of a portion of the Company's revolving credit facility.
Petrus initiated certain financing transactions in the fourth quarter of 2015 which closed subsequent to year end. The Company entered
into an arrangement agreement (the "Arrangement Agreement") with the entity formerly called PhosCan Chemical Corp. (TSX: FOS)
("PhosCan"), Petrus Resources Corp. ("Old Petrus") and a wholly‐owned subsidiary of PhosCan pursuant to which the Company acquired all
of the outstanding shares of each of Old Petrus and PhosCan by way of a plan of arrangement (the "Arrangement") under the Business
Corporations Act (Alberta). Upon the closing of the Arrangement on February 2, 2016, each of PhosCan, which at that time held
approximately $45.4 million of cash and cash equivalents, and Old Petrus became wholly‐owned subsidiaries of Petrus. Petrus also
completed a concurrent $30 million bought deal financing (the “Bought Deal Financing”), resulting in approximately $74.2 million in net
proceeds. At closing of the Arrangement, the Petrus shares were consolidated on a 4 to 1 basis. Petrus currently has 45.3 million shares
outstanding.
Petrus received listing approval for the listing of its shares on the Toronto Stock Exchange ("TSX") under the symbol "PRQ" during the first
quarter. Petrus commenced trading on the TSX on February 8, 2016.
On March 22, 2016, upon a $40 million pay down of the Company's $90 million second lien term loan, the term loan was extended to
October 2017 at the same terms which include no prepayment penalty and an annual interest rate of the Canadian Dealer Offered Rate
(CDOR) plus 700 basis points. The Company concurrently reduced the amount drawn on its first lien revolving credit facility by $40 million.
The Company currently has hedges in place for approximately 65% of its 2016 forecast production volumes and approximately 35% of its
2017 forecast production volumes to help mitigate any further downward pressure on commodity prices.
At December 31, 2015 Petrus had 35.1 million shares outstanding (after giving effect to the 4‐to‐1 share consolidation which occurred
February 2, 2016) and was drawn $145.0 million against its $160.0 million credit facility. The Company ended the year with net debt of
$226.7 million, which was reduced to $153.0 million at March 22, 2016 as a result of the debt reductions following the Arrangement and
Bought Deal Financing.
At the end of 2015, Petrus had 248,035 net acres of undeveloped land, and a diverse drilling inventory, including economic projects at
current strip pricing.
The Petrus Board of Directors approved a base capital budget of $11.0 million for the first half of 2016, excluding acquisitions. The capital
budget includes the drilling of 4 gross (3.6 net) wells and some tie‐in and pipeline costs to optimize the Company's new gas plant in the
Ferrier area to reduce future third‐party processing fees. The capital budget is expected to be funded with a portion of cash flow.
Page | 1
SELECTED FINANCIAL INFORMATION
(000s) except per boe amounts
OPERATIONS
Average Production
Natural gas (mcf/d)
Oil (bbl/d)
NGLs (bbl/d)
Total (boe/d)
Total (boe)
Natural gas sales weighting
Realized Sales Prices
Natural gas ($/mcf)
Oil ($/bbl)
NGLs ($/bbl)
Total ($/boe)
Hedging gain (loss) ($/boe)
Operating Netback ($/boe)
Effective price
Royalty income
Royalty expense
Operating expense
Transportation expense
Operating netback (2) ($/boe)
G & A expense (1)
Net interest expense
Corporate netback (2) ($/boe)
FINANCIAL ($000s except per
share)
Oil and natural gas revenue
Cash flow from operations (2)
Cash flow operations per share(2)(4)
Net income (loss)
Net income (loss) per share (4)
Capital expenditures
Net acquisitions (dispositions)
Common shares outstanding(4)
Weighted average shares (4)
As at quarter end ($000s)
Net debt (3)
Bank debt outstanding
Bank debt available
Shareholder’s equity
Total assets
Twelve months
ended
Dec. 31, 2015
Twelve months
Ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Sept. 30, 2015
Three months
ended
June 30, 2015
Three months
ended
Mar. 31, 2015
32,088
2,838
576
8,762
3,198,158
61%
20,540
2,227
382
6,032
2,201,856
57%
2.93
52.47
25.09
29.43
5.18
34.61
0.14
(3.74)
(8.90)
(1.64)
20.47
(2.35)
(4.16)
13.96
94,587
44,639
1.27
(69,031)
(1.96)
54,469
938
35,148
35,148
226,742
235,000
12,600
243,904
555,145
4.59
87.14
45.23
50.67
0.42
51.09
0.52
(8.69)
(8.23)
(1.94)
32.75
(2.27)
(1.82)
28.66
112,705
61,250
2.30
(47,492)
(1.78)
115,218
327,746
35,148
26,680
215,048
190,000
100,000
311,760
647,304
31,217
2,380
590
8,172
751,845
64%
2.79
48.27
30.52
26.90
6.68
33.58
0.32
(3.74)
(11.00)
(1.31)
17.85
(3.08)
(5.83)
8.94
20,460
6,717
0.19
(36,425)
(1.04)
6,757
—
35,148
35,148
226,742
235,000
12,600
243,904
555,145
32,505
2,616
634
8,668
797,439
62%
2.92
50.91
16.14
27.48
4.72
32.20
0.10
(2.89)
(7.87)
(1.43)
20.11
(2.10)
(4.41)
13.60
21,991
10,838
0.31
(19,055)
(0.54)
9,041
—
35,148
35,148
226,809
233,000
34,600
280,118
595,890
33,103
2,811
560
8,890
808,947
62%
2.90
64.76
24.99
32.85
3.58
36.43
0.08
(3.73)
(9.14)
(1.93)
21.71
(2.28)
(3.91)
15.52
26,641
12,549
0.36
(7,239)
(0.21)
13,288
(125)
35,148
35,148
228,562
232,000
35,600
299,061
627,808
31,525
3,559
519
9,333
839,927
56%
3.12
47.38
29.77
30.27
5.81
36.08
0.09
(4.55)
(7.78)
(1.86)
21.98
(1.98)
(2.72)
17.28
25,495
14,535
0.41
(6,312)
(0.18)
25,383
1,063
35,148
35,148
227,607
205,000
85,000
305,912
641,547
(1) G&A expenses are shown net of capitalized general & administrative costs. Please refer to the G&A section on page 12 in the December 31, 2015 MD&A.
(2) Non-GAAP measures, including the methodology used to calculate debt-adjusted share amounts, are defined on page 8 of the December 31, 2015 MD&A.
(3) Net debt includes working capital surplus or (deficiency).
(4) All share capital instruments have been retrospectively adjusted to reflect the notional 4-to-1 share consolidation on February 2, 2016.
Page | 2
OPERATIONS UPDATE
The Petrus Board of Directors approved a base capital budget of $11.0 million for the first half of 2016. The capital budget includes the drilling of 4 gross
(3.6 net) wells and some tie‐in and pipeline costs to optimize the Company's new gas plant in the Ferrier area to reduce future third‐party processing fees.
The capital budget will be funded through a portion of cash flow.
The Company's production was significantly impacted during the year as a result of third party pipeline restrictions which limited production. To date in
2016 Petrus has been largely unaffected by these curtailments. Average fourth quarter production from the Company's four operating areas was as follows:
Average production for the
quarter ended December 31,
2015
Average Production
Natural gas (mcf/d)
Oil (bbl/d)
NGLs (bbl/d)
Total (boe/d)
11,476
457
264
2,634
31,217
2,379
590
8,172
7,066
583
59
1,819
3,003
617
29
1,147
9,672
722
238
2,572
Central Alberta
Peace River
Foothills
Ferrier
Total
Natural gas sales weighting
65%
44%
73%
63%
64%
Ferrier
Petrus established its initial position in the Ferrier area through a corporate acquisition in the third quarter of 2014. Since then Petrus has nearly doubled
its undeveloped acreage in the area and has increased total proved plus probable reserves 70% since 2014 year end. Petrus constructed a 25 mmcf per day
gas plant in 2015 which was designed to control costs and maximize value from the Company’s high liquids content gas drilling opportunities in the area.
The plant was completed during the fourth quarter and is operating as planned with ample excess capacity to enable growth. Ferrier is a low‐risk, resource‐
style play with a drilling inventory that includes economic locations at current strip pricing, and is the focus of the Company’s 2016 development activity.
Central Alberta
Petrus established its position in the Thorsby/Pembina area of Alberta through a corporate acquisition in the fourth quarter of 2014. The Company’s assets
in the area are predominantly oil with associated natural gas. Petrus owns and operates the majority of its working interest and facilities in
Thorsby/Pembina. A portion of the Central Alberta assets are on waterflood and Petrus expects to optimize the other assets by implementing waterflood
expansions to increase the economic recovery of the property.
Foothills
Petrus has low cost, low decline assets in the Foothills along with a significant amount of undeveloped land with an expansive drilling inventory at higher
commodity prices. The Company owns extensive processing infrastructure throughout the Foothills and will continued to evaluate development
opportunities in the area.
Peace River
Petrus owns legacy oil production in the Peace River area with production facilities as well as development land on which Petrus has developed a Montney
oil play. Petrus has invested in production and water disposal facilities in its Peace River area and two oil batteries with water disposal capabilities now fully
operational at Tangent and Berwyn contributing to significantly reduced operating costs and increased runtime. Petrus has initiated a pilot waterflood
program at Berwyn and expects to expand the waterflood area over the next few years.
ANNUAL GENERAL MEETING
The Company's Annual General Meeting will be held at the Riverview Room, International Hotel, 35th floor, 220‐4th Ave SW Calgary, Alberta, on Thursday
May 12, 2016 at 9:00 a.m. (Calgary time). The Information Circular, Annual Information Form and Annual Report for 2015 will be available on the SEDAR
filing system (www.sedar.com) as well as the Company's website (www.petrusresources.com).
Page | 3
PRESIDENT’S MESSAGE
At the risk of understatement, 2015 proved to be an extremely difficult year for our industry and for Petrus. The list of headwinds, from oil and gas prices,
to pipeline restrictions, uncertainty over royalties and the ever changing politics of market access and environmental regulation formed a perfect storm that
has many companies reeling.
Petrus reacted to industry conditions early in the year limiting drilling and completion capital expenditures. Oil prices rallied in the second quarter and
Petrus was able to establish significant new hedges for the balance of 2015 and 2016. These hedges proved timely as the price rally stalled in July and prices
declined through the second half of the year and into 2016 eventually reaching into the mid $20/Bbl range. By mid‐2015 also, access curtailments on the
TCPL gas transmission system significantly impacted sales volumes for industry including several Petrus properties. The resultant coincident reductions in
both sales volumes and commodity prices severely impacted cash flows.
The deteriorating industry conditions forced us in August to realign our staff levels to the new operating realities. The resulting layoffs of several of our
talented colleagues are a painful reminder of vicious industry conditions in 2015. We want to thank these families for their many contributions to Petrus
and wish them well in the future.
Operationally we continued to focus on cost optimization activities and directed capital spending to projects that would improve our operational control
and reduce future operating expense. One such project was a new operated gas compression and processing facility in our key Ferrier area. The new plant
and associated TCPL meter station were commissioned in early December and will result in much improved operational control over our product value
chain and significantly reduce third party processing expenses in the years ahead.
From a corporate perspective our primary objective was to improve the balance sheet and to complete the process of taking the company public. To this
end, in early 2016 we completed an Arrangement with Phoscan Chemical Corp together with a $30MM equity financing which brought approximately
$75MM of new capital into the company. Shortly thereafter Petrus commenced trading on the TSX under the symbol “PRQ”. The new equity puts Petrus in
a much stronger position to take advantage of opportunities and position the company to prosper in the recovery.
Although recovery seems agonizingly slow to set in, we are starting to see signs of potential rebalancing in the market. Severely reduced capital budgets in
the energy sector worldwide are beginning to result in lower production levels. Together with continuing increases in demand, lower production will lead to
rebalancing. Oil prices have recovered modestly from their recent lows and a more sustained rally would be a welcome respite. We are optimistic that the
worst is behind us.
Kevin Adair
President, CEO and Director
Page | 4
MANAGEMENT’S DISCUSSION & ANALYSIS
The following is management’s discussion and analysis ("MD&A") of the financial and operating results of Petrus Resources Ltd. (“Petrus” or the
“Company”) as at and for the three and twelve month periods ended December 31, 2015. The report is dated March 22, 2016 and should be read in
conjunction with the audited financial statements and accompanying notes for the years ended December 31, 2015 and 2014. The Company’s financial
statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") which require publicly accountable enterprises to
prepare their financial statements using International Financial Reporting Standards (“IFRS”). Readers are referred to the advisories for additional
information regarding forecasts, assumptions and other forward‐looking information contained in the “Forward Looking Information and Statements”
section of this MD&A. Readers are directed to the advisories at the end of this report regarding forward‐looking statements, BOE presentation and non‐IFRS
measures.
The principal undertaking of Petrus is the investment in energy assets. The operations of the Company consist of the acquisition, development, exploration
and exploitation of these assets. The Company’s head office is located at 2400, 240 – 4th Avenue SW, Calgary, Alberta Canada. Additional information on
Petrus, including the most recent filed Annual Information Form (“AIF”), can be accessed at www.sedar.com or from the Company’s website at
www.petrusresources.com.
FINANCING TRANSACTIONS AND RECENT DEVELOPMENTS
To improve liquidity and refinance a portion of the Company’s long term debt, Petrus completed the following financing transactions:
Plan of Arrangement and Equity Financing
Plan of Arrangement and Equity Financing
On November 29, 2015 Petrus entered into an arrangement agreement (the "Arrangement Agreement") with a company formerly named PhosCan
Chemical Corp. (TSX: FOS) ("PhosCan"), Petrus Acquisition Corp. ("New Petrus") and a wholly‐owned subsidiary of PhosCan ("Fox River Resources Corp.")
whereby New Petrus will acquire all of the outstanding shares of each of Petrus and PhosCan by way of a plan of arrangement (the "Arrangement") under
the Business Corporations Act (Alberta) (the "ABCA"). The consideration for the PhosCan shares was approximately $51 million of cash and cash equivalents
($45.4 million after adjusting for PhosCan shareholders who exercised dissent rights). Petrus announced a concurrent $30 million bought deal financing on
November 29, 2015.
On February 2, 2016 Petrus closed the Arrangement Agreement which provided $45.4 million in incremental cash and cash equivalents. The equity
financing provided Petrus with an additional $28.8 million, net of costs.
Pursuant to the Arrangement Agreement, Petrus Acquisition Corp. (“New Petrus”) acquired all of the issued and outstanding common shares of Petrus
(“Old Petrus”) (“Old Petrus Shares”) on the basis of 0.25 of a common share of New Petrus ("New Petrus Shares") for each Old Petrus Share, reflecting a
notional 4 to 1 consolidation of the Old Petrus Shares. All share capital instruments have been adjusted to reflect the Arrangement Agreement which
closed February 2, 2016. On close, the Company was renamed Petrus Resources Corp., New Petrus was renamed Petrus Resources Ltd., and PhosCan was
renamed Petrus Resources Inc.
Public Listing
Petrus listed its shares on the Toronto Stock Exchange ("TSX") under the symbol "PRQ" and the Petrus Shares commenced trading on the TSX on February 8,
2016. Pro forma the Arrangement and the Financing, there are approximately 45.3 million Petrus shares issued and outstanding.
Term Loan Extension
On March 22, 2016 Petrus amended and restated the credit agreement with the holder of the $90 million term loan. Concurrent with a $40 million pay
down of the term loan, the instrument was extended to October 2017 at the same terms which include no prepayment penalty and an annual interest rate
of the Canadian Dealer offered Rate (CDOR) plus 700 basis points.
These financing transactions reduced and extended the term of the Company's second lien debt to October 8, 2017, reduced the first lien borrowings and
provide Petrus with improved liquidity. The Company has hedge contracts in place for approximately 65% of its 2016 forecast production volume and
approximately 35% of its 2017 forecast production volume.
Page | 5
FINANCIAL AND OPERATIONAL RESULTS OF OIL AND NATURAL GAS ACTIVITIES
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Sept. 30, 2015
Three months
ended
June 30, 2015
Three months
ended
Mar. 31, 2015
Quarterly average production
Natural gas (mcf/d)
Oil (bbl/d)
NGLs (bbl/d)
Total (boe/d)
Total (boe)
Exit production (boe/d)
Exit gas weighting
Revenue (000s)
Natural Gas
Oil
NGLs
Commodity revenue
Royalty revenue
Oil and natural gas revenue
Average realized prices
Natural gas ($/mcf)
Oil ($/bbl)
NGLs ($/bbl)
Total ($/boe)
Hedging gain (loss)
Total realized ($/boe)
Average benchmark prices
Natural gas
AECO (C$/mcf)
Crude Oil
Edm Lt. (C$/ bbl)
Foreign Exchange
US$/C$
32,088
2,838
576
8,762
3,198,158
8,300
65%
34,307
54,565
5,262
94,134
453
94,587
20,540
2,227
382
6,032
2,201,856
11,200
54%
34,415
70,846
6,302
111,563
1,142
112,705
2.93
52.47
25.09
29.43
5.18
34.61
Twelve months
ended
Dec. 31, 2015
4.59
87.14
45.23
50.67
0.42
51.09
Twelve months
ended
Dec. 31, 2014
31,217
2,379
590
8,172
751,845
—
—
7,999
10,566
1,655
20,220
239
20,459
2.79
48.27
30.52
26.90
6.68
33.58
32,505
2,616
634
8,668
797,439
—
—
8,718
12,254
942
21,914
77
21,991
2.92
50.91
16.14
27.48
4.72
32.20
33,103
2,811
560
8,890
808,947
—
—
8,734
16,568
1,274
26,576
65
26,641
2.90
64.76
24.99
32.85
3.58
36.43
31,525
3,559
519
9,333
839,927
—
—
8,857
15,176
1,391
25,424
72
25,496
3.12
47.38
29.77
30.27
5.81
36.08
Three months
ended
Dec. 31, 2015
Three months
ended
Sept. 30, 2015
Three months
ended
June 30, 2015
Three months
ended
Mar. 31, 2015
2.69
57.48
0.78
4.64
94.45
0.91
2.47
52.52
0.75
2.91
54.95
0.76
2.64
69.66
0.81
2.74
52.81
0.81
OIL AND NATURAL GAS REVENUE
Average production for the fourth quarter of 2015 was 8,172 boe per day (64% natural gas), compared to 9,822 boe per day (59% natural gas) for the fourth
quarter of the prior year. Total commodity revenue decreased from $111.6 million in 2014 to $94.1 million in the year ended December 31, 2015.
Natural gas
During the three months ended December 31, 2015, the benchmark natural gas price in Canada (set at the AECO hub) decreased by 32% from the prior year
(average price of $2.47 per mcf in the fourth quarter of 2015 compared to $3.61 per mcf in the prior year). The AECO price decreased 42% from the average
annual price of $4.64 per mcf in 2014 to $2.69 per mcf in 2015.
The Company’s average realized gas price during the fourth quarter of 2015 was $2.79 per mcf compared to $3.97 per mcf in the prior year, which
represents a 30% decrease. Natural gas revenue for the fourth quarter of 2015 was $8.0 million and production of 2,871,932 mcf accounted for
approximately 64% of fourth quarter production volume and 40% of commodity revenue (compared to revenue of $12.6 million and production of
3,185,615 mcf for 59% of production volume and 36% of commodity revenue in the prior year).
The Company’s average realized gas price for the year ended December 31, 2015 was $2.93 per mcf compared to $4.59 per mcf in the prior year, which
represents a 36% decrease. Natural gas revenue for the year ended December 31, 2015 was $34.3 million and production of 11,712,014 mcf accounted for
approximately 61% of 2015 production volume and 36% of commodity revenue (compared to revenue of $34.4 million and production of 7,497,099 mcf for
57% of production volume and 31% of commodity revenue in the prior year).
Crude oil and condensate
Edmonton Light Sweet (“Edmonton”) crude oil prices decreased 30% from the fourth quarter of 2014 to the fourth quarter of 2015 ($52.52 per bbl for the
fourth quarter of 2015 compared to an average price of $75.44 per bbl for the prior period).
The average realized price of Petrus’ crude oil and condensate was $48.27 per bbl for the fourth quarter of 2015 compared to $67.47 per bbl for the same
period in the prior year. For the year ended December 31, 2015 the Company’s average realized price for crude oil and condensate decreased 40% from
2014 ($52.47 per bbl in 2015 compared to an average price of $87.14 per bbl in 2014). Petrus realized an average negative oil differential of $3.62 in 2015,
Page | 6
compared to a negative differential of $7.43 in 2014. Petrus realized a negative differential of $2.74 in the fourth quarter of 2015 compared to a negative
differential of $6.53 in the comparable period of the prior year.
Oil and condensate revenue for the fourth quarter of 2015 was $10.6 million and production of 218,902 bbl accounted for approximately 29% of total
production volume and 52% of commodity revenue (compared to revenue of $19.7 million and production of 275,812 bbl for 30% of total production
volume and 55% of commodity revenue in the fourth quarter of the prior year). Revenue decreased from the prior year as a result of the decline in
production and commodity prices from the prior year.
Oil and condensate revenue for the year ended December 31, 2015 was $54.6 million and production of 1,035,719 bbl accounted for approximately 32% of
total production volume and 58% of commodity revenue (compared to revenue of $70.9 million and production of 812,986 bbl for 37% of total production
volume and 64% of commodity revenue in the prior year). The decrease in production from 2014 to 2015 is attributed to decreased exploration and
development activity in 2015. Revenue decreased from the prior year due to lower production and lower commodity prices compared to the prior year.
Natural gas liquids (NGLs)
The Company’s NGL production mix consists of ethane, propane, butane, pentane and sulphur. The pricing received for NGL production is based on the
product mix, the fractionation process required and the demand for fractionation facilities. In the fourth quarter, Petrus’ combined realized NGL price
averaged $30.52 per bbl compared to $47.52 per bbl in the prior year. NGL revenue for the fourth quarter of 2015 was $1.7 million and production of
54,288 bbl accounted for approximately 7% of the Company’s production volume and 8% of commodity revenue in the fourth quarter (compared to
revenue of $3.2 million and production of 96,873 bbl for 10% of total production and 9% of commodity revenue for the fourth quarter of the prior year).
The decrease in NGL production and revenue is attributed to natural declines, combined with lower commodity prices.
NGL revenue for the year ended December 31, 2015 was $5.3 million and production of 210,314 bbl accounted for approximately 7% of the Company’s
production volume and 6% of commodity revenue in the year (compared to revenue of $6.3 million and production of 139,354 bbl for 6% of total
production and 5% of commodity revenue for the prior year). The decrease in NGL production and revenue is attributed to natural declines, combined with
lower commodity prices.
Royalty Revenue
Petrus records gross overriding royalty revenue for production related to land or mineral rights owned. Royalty revenue received in the fourth quarter was
$0.2 million compared to $0.4 million in the same quarter of the prior year. For the year ended December 31, 2015 Petrus earned $0.5 million, a decrease
of 17% from $0.6 million earned in the year ended December 31, 2014. The decrease is attributed to lower commodity prices and production.
Page | 7
NON-GAAP MEASURES
Petrus uses key performance indicators and industry benchmarks such as “cash flow from operations,” “operating netback,” “corporate netback,” and “net
debt” to analyze financial and operating performance. These indicators are not defined by IFRS and therefore may not be comparative to performance
measures presented by other companies. Management believes that in addition to net income, the aforementioned non‐IFRS measurements are useful
supplemental measures as they assist in the determination of the Company’s operating performance, leverage and liquidity. Investors should be cautioned,
however, that these measures should not be construed as an alternative to both net income and net cash from operating activities, which are determined in
accordance with IFRS, as indicators of the Company’s performance.
Cash Flow from Operations
Cash flow from operations represents cash flow from operating activities prior to changes in non‐cash working capital and settlement of decommissioning
obligations. Petrus evaluates its financial performance primarily on cash flow from operations and considers it a key performance indicator as it
demonstrates the Company’s ability to generate sufficient cash flow to fund capital investment and repay debt. The reconciliation between cash flow from
operations and cash flow from operating activities, as defined by IFRS, is as follows:
($000s)
Cash flow from operating activities
Changes in non‐cash working capital
Decommissioning expenditures
Cash flow from operations
Twelve months
ended
Dec 31, 2015
Twelve months
ended
Dec 31, 2014
15,525
28,779
335
44,639
80,988
(20,834)
1,096
61,250
Operating Netback
Operating netback is a common non‐GAAP metric used in the oil and gas industry which is a useful supplemental measure to evaluate the specific operating
performance by product at the oil and gas lease level. The operating netback is calculated as realized price less royalties, operating and transportation
expenses on a per unit basis.
Corporate Netback
Corporate netback is also a common non‐GAAP metric used in the oil and gas industry which evaluates the Company’s profitability at the corporate level. It
is calculated as the operating netback less cash general & administrative and finance expenses.
Net Debt
Working capital (net debt) is a non‐IFRS measure and is calculated as current assets (excluding financial derivative assets) less current liabilities (excluding
financial derivative liabilities) and bank debt. Petrus uses net debt as a key indicator of its leverage and strength of its balance sheet. The reconciliation of
net debt, as defined, is as follows:
($000s)
Current assets (excluding financial derivative assets)
Less: current liabilities (excluding financial derivative liabilities)
Less: bank debt
Working capital (net debt)
As at
Dec. 31, 2015
As at
Dec. 31, 2014
20,097
(141,839)
(105,000)
(226,742)
43,902
(69,831)
(189,119)
(215,048)
Page | 8
CASH FLOW FROM OPERATIONS AND EARNINGS
Petrus generated cash flow from operations of $6.7 million during the quarter ended December 31, 2015 ($24.6 million during the fourth quarter of 2014).
Natural gas (AECO C$/mcf) decreased 32% from the fourth quarter of 2014 to the fourth quarter of 2015, and crude oil (Edm. Lt. C$/bbl) decreased 30% for
the same period.
The Company’s cash flow from operations declined from $61.3 million generated in 2014 to $44.6 million for 2015. The decrease is attributed to a
significant decline in commodity prices. Year over year natural gas (AECO C$/mcf) decreased 42% and crude oil decreased 39%. Petrus incurred one‐time
transaction costs during the fourth quarter of 2015 in conjunction with financing activities which closed in the first quarter of 2016.
Petrus reported a net loss of $36.4 million in the fourth quarter of 2015 (compared to net loss of $63.3 million in the fourth quarter of the prior year). The
losses were incurred due to impairment charges attributed to weaker commodity prices. For the year ended December 31, 2015, Petrus reported a net loss
of $69.0 million compared to net loss of $47.5 million in the prior year. The following table provides detail on the Company’s cash flow from operations on a
barrel of oil equivalent (“boe”) basis.
Twelve months ended
Dec. 31, 2015
$000s
$/boe
Oil and natural gas revenue
Transportation
Net revenue
Royalty expense
Royalty income
Net oil and natural gas revenue
Operating expense (1)
Hedging gain (loss)
General & administrative(2)
Interest expense (3)
Cash flow from operations
94,134
(5,250)
88,884
(11,962)
453
77,375
(28,478)
16,563
(7,500)
(13,321)
44,639
29.43
(1.64)
27.79
(3.74)
0.14
24.19
(8.90)
5.18
(2.35)
(4.16)
13.96
Twelve months ended
Dec. 31, 2014
$000s
111,563
(4,279)
107,284
(19,140)
1,141
89,285
(18,130)
(918)
(4,992)
(3,995)
61,250
$/boe
50.67
(1.94)
48.73
(8.69)
0.52
40.56
(8.23)
(0.42)
(2.27)
(1.82)
27.82
Three months ended
Dec. 31, 2015
$000s
$/boe
Three months ended
Dec. 31, 2014
$000s
$/boe
20,221
(986)
19,235
(2,809)
238
16,664
(8,269)
5,020
(2,318)
(4,380)
6,717
26.90
(1.31)
25.59
(3.74)
0.32
22.17
(11.00)
6.68
(3.08)
(5.83)
8.94
35,575
(1,126)
34,449
(3,958)
423
30,914
(5,815)
3,371
(2,117)
(1,744)
24,609
39.37
(1.25)
38.12
(4.38)
0.47
34.21
(6.43)
3.73
(2.34)
(1.93)
27.25
(1) Operating expenses are presented net of processing income and overhead recoveries.
(2) G&A expenses are shown net of capitalized general & administrative costs. Please see the G&A section on page 12 in the MD&A for more detail.
(3) Interest expense is presented net of interest income.
(000s except per share)
Twelve months ended
Dec. 31, 2015
Twelve months ended
Dec. 31, 2014
Three months ended
Dec. 31, 2015
Three months ended
Dec. 31, 2014
6,717
Cash flow from operations
Cash flow from operations/share(1)
0.19
(36,425)
Net Income (loss)
Net income (loss)/share(1)
(1.04)
Common shares(1)
35,148
Weighted average shares(1)
35,148
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus.
61,250
2.30
(47,492)
(1.78)
35,148
26,680
44,639
1.27
(69,031)
(1.96)
35,148
35,148
24,609
0.70
(63,308)
(1.80)
35,148
35,142
Page | 9
RESULTS OF OPERATIONS
Royalty Expenses
Royalties are paid to the Government of Alberta and to gross overriding royalty owners. The following table shows the Company’s royalty expenses by
product category, based upon the primary product produced at the well.
Royalty Expenses ($000s)
Oil and NGLs ($000s)
% of production revenue
Natural gas (000s)
% of production revenue
Gas cost (allowance) (000s)
Gross overriding and other
Total (000s)
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
6,375
11%
2,684
8%
(2,962)
5,865
11,962
16,270
21%
6,219
18%
(6,020)
2,671
19,140
1,440
12%
406
5%
(75)
1,038
2,809
3,653
16%
2,902
23%
(4,543)
1,946
3,958
The decrease in total royalties from the fourth quarter of 2014 ($4.0 million) to the fourth quarter of 2015 ($2.8 million) is the result of lower production
levels and commodity prices.
For the year ended December 31, 2015 Petrus recorded total royalties of $12.0 million compared to $19.1 million in the prior year. The decrease is
attributed to a significant reduction in commodity prices from the prior year. Gross overriding and other royalty expenses incurred in 2015 ($5.9 million)
was significantly higher than the prior year ($2.7 million) due to the overriding royalty structure attributed to acquired properties which occurred in the
fourth quarter of 2014.
Financial Instruments
The Company utilizes commodity contracts as a risk management technique to mitigate exposure to commodity price volatility. The following table
summarizes the financial derivative contracts Petrus has outstanding as at December 31, 2015:
Natural Gas
Contract Period
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Jan. 1, 2016 to Mar. 31, 2016
Feb. 1, 2016 to Mar. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Jan. 1, 2016 to Mar. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Nov. 1, 2017 to Mar. 31, 2018
Type
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Costless Collar
Fixed price
Fixed price
Fixed price
Costless Collar
Fixed price
Fixed price
Fixed price
Fixed price
Daily Volume
6,000 GJ
6,000 GJ
4,000 GJ
2,000 GJ
5,000 GJ
2,000 GJ
2,000 GJ
2,000 GJ
6,000 GJ
2,000 GJ
5,000 GJ
5,000 GJ
2,000 GJ
2,000 GJ
6,000 GJ
5,000 GJ
4,000 GJ
5,000 GJ
7,000 GJ
5,000 GJ
Price (CAD$/GJ)
$3.74/GJ
$2.87/GJ
$2.96/GJ
$3.03/GJ
$3.26/GJ
$2.23/GJ
$2.93/GJ
$2.28/GJ
$2.75/GJ
$2.85/GJ
$2.91/GJ
$2.50‐3.15/GJ
$3.38/GJ
$3.31/GJ
$3.21/GJ
$2.75‐3.75/GJ
$2.54/GJ
$2.64/GJ
$2.84/GJ
$3.02/GJ
Page | 10
Crude Oil
Contract Period
Jan. 1, 2016 to Mar. 31, 2016
Jan. 1, 2016 to Jun. 30, 2016
Jan. 1, 2016 to Jun. 30, 2016
Jan. 1, 2016 to Dec. 31, 2016
Jan. 1, 2016 to Dec. 31, 2016
Jul. 1, 2016 to Sep. 30, 2016
Oct. 1, 2016 to Dec. 31, 2016
Jan. 1, 2017 to Mar. 31, 2017
Jan. 1, 2017 to Mar. 31, 2017
Jan. 1, 2017 to Jun. 30, 2017
Apr. 1, 2017 to Jun. 30, 2017
Jul. 1, 2017 to Sep. 30, 2017
Oct. 1, 2017 to Dec. 31, 2017
Type
Daily Volume
Price ($/Bbl)
Costless Collar
Fixed Price
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
250 Bbl
250 Bbl
250 Bbl
250 Bbl
700 Bbl
250 Bbl
250 Bbl
500 Bbl
500 Bbl
500 Bbl
400 Bbl
500 Bbl
400 Bbl
WTI $USD40.00‐75.00/Bbl
WTI $CAD 77.70/Bbl
WTI $CAD70.00‐83.40/Bbl
WTI $CAD70.00‐82.30/Bbl
WTI $CAD70.00‐75.75/Bbl
WTI $CAD70.00‐84.00/Bbl
WTI $CAD70.00‐85.00/Bbl
WTI $CAD70.00‐78.00/Bbl
WTI $CAD65.00‐71.00/Bbl
WTI $CAD70.00‐78.40/Bbl
WTI $CAD65.00‐72.70/Bbl
WTI $CAD65.00‐74.20/Bbl
WTI $CAD65.00‐75.85/Bbl
Subsequent to December 31, 2015 the Company entered into the following financial derivative contracts:
Natural Gas
Period Hedged
Apr. 1, 2016 to Dec. 31, 2016
Nov. 1, 2016 to Dec. 31, 2016
Nov. 1, 2016 to Mar. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Nov. 1, 2017 to Mar. 31, 2018
Crude Oil
Contract Period
Apr. 1, 2016 to Dec. 31, 2016
Apr. 1, 2017 to Sep. 30, 2017
Jul. 1, 2017 to Sep. 30, 2017
Oct. 1, 2017 to Mar. 31, 2018
Type
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Daily Volume
1,200 GJ
1,200 GJ
2,000 GJ
2,650 GJ
2,000 GJ
1,500 GJ
Price ($/Bbl)
Price (CAD$/GJ)
$1.77/GJ
$2.33/GJ
$2.80/GJ
$2.27/GJ
$2.65/GJ
$2.69/GJ
Daily Volume
Type
Costless collar
Fixed price
Fixed price
Costless collar
150 Bbl
300 Bbl
600 Bbl
300 Bbl
WTI $CDN40.00‐61.80/Bbl
WTI $CDN59.25/Bbl
WTI $CDN59.80/Bbl
WTI $CDN55.00‐64.02/Bbl
The impact of the contracts which were outstanding during the reporting periods are recorded as realized hedging gains (losses) and affect the Company’s
realized commodity price. The unrealized gain (loss) is recorded to demonstrate the impact of the outstanding contracts had they settled on the relative
financial reporting period date. The contracts entered had the following impact on net income:
Other Income ($000s)
Realized hedging gain (loss)
Unrealized hedging gain (loss)
Total gain (loss) on derivatives
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
16,563
(479)
16,084
(918)
17,311
16,393
5,020
3,363
8,383
3,371
15,205
18,576
Reduced commodity prices resulted in a realized hedging gain of $5.0 million during the fourth quarter of 2015, compared to a $3.4 million gain realized in
the same quarter of the prior year. The fourth quarter realized gain increased the Company’s realized price by $6.68 per boe, compared to an increase in
the prior year comparable period of $3.73 per boe. For the year ended December 31, 2015 Petrus recorded a $16.6 million realized gain on financial
derivatives compared to a $0.9 million realized loss recorded in the prior year.
Operating Expenses
The following table shows the Company’s operating expenses for the reporting periods which are shown net of processing income and overhead recoveries:
Operating Expenses ($000s)
Operating expense, net
Operating expense, net ($ per boe)
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
28,479
8.90
18,129
8.23
8,269
11.00
5,815
6.43
Operating expenses totaled $8.3 million for the fourth quarter of 2015, a 42% increase from $5.8 million recorded in the same quarter of the prior year. The
increase in aggregate net operating expenses is due to the corporate acquisitions which occurred in the fourth quarter of the prior year. The Company’s
Page | 11
operating expenses on a per boe basis for the fourth quarter were higher as a result of lower production due to third party pipeline curtailments. The
Company incurred certain additional operating expenses in the fourth quarter related to year end equalizations and processing fees.
For the year ended December 31, 2015, operating costs on a per boe basis were consistent with the prior year. New facilities and operating cost reductions
throughout Petrus’ asset base contributed to operating cost reductions.
Transportation Expenses
The following table shows transportation expenses paid in the reporting periods:
Transportation Expenses ($000s)
Transportation expense
$ per boe
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
5,250
1.64
4,279
1.94
986
1.31
1,126
1.25
Petrus pays commodity and demand charges for transporting its gas on various pipeline systems. The Company also incurs trucking costs on the portion of
its oil and natural gas liquids production that is not pipeline connected. Transportation expenses totaled $1.0 million or $1.31 per boe in the fourth quarter
of 2015 ($1.1 million or $1.25 per boe for the comparative period in the prior year). The increase in transportation costs on a per boe basis is due to third
party pipeline curtailments which required the Company to obtain transportation through other counterparties which incurred higher costs.
Transportation costs decreased year over year from $1.94 per boe for the year ended December 31, 2014 to $1.64 per boe for the same period in 2015. The
decrease is due to an increased proportion of natural gas in the Company’s production mix which attributes lower transportation costs than crude oil and
natural gas liquids.
General and Administrative Expenses
The following table illustrates the Company’s general and administrative expenses which are shown net of capitalized costs directly related to exploration
and development activities:
General and Administrative Expenses ($000s)
Gross general and administrative expense
Capitalized general and administrative
Net general and administrative expense
Share based compensation expense
Capitalized share based compensation
Total general and administrative expense, net
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
9,168
(1,668)
7,500
1,175
(520)
8,155
6,794
(1,802)
4,992
1,483
(741)
5,734
2,470
(152)
2,318
239
(165)
2,392
2,144
(27)
2,117
459
(229)
2,347
Fourth quarter 2015 gross general and administration expenses (before capitalized G&A and share based compensation), totaled $2.5 million or $3.29 per
boe (compared to $2.1 million or $2.37 per boe for the fourth quarter of 2014). Petrus incurred transaction and one‐time costs in the fourth quarter
attributed to the corporate acquisitions and financing activities which occurred late in 2015 and closed in the first quarter of 2016. One‐time costs totaled
$1.5 million (during the fourth quarter of 2014 there were $1.3 million of one‐time transaction costs incurred).
For the year ended December 31, 2015, the Company’s gross G&A costs (before capitalized G&A and share based compensation) were $9.2 million
compared to $6.8 million incurred in 2014. The increase is due to the organic growth of the Company. Gross G&A for 2014 was $3.63 per boe and in 2015
gross G&A expenses decreased to $2.87 per boe due to increased production.
Finance Expenses
The following table illustrates the Company’s finance expenses which include cash and non‐cash expenses:
Finance Expense ($000s)
Cash expenses:
Interest expense
Foreign exchange gain
Non-cash expenses:
Accretion on decommissioning obligations
Amortization of deferred financing costs
Total finance expense
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
13,366
(567)
12,799
1,261
1,216
15,276
4,007
(2)
4,005
691
—
4,696
4,510
—
4,510
353
—
4,863
1,750
—
1,750
275
—
2,025
The Company incurred total finance expenses of $4.9 million in the fourth quarter of 2015 which is comprised of $0.4 million of non‐cash accretion of its
decommissioning liability and $4.5 million of cash interest expense related to its credit facilities and term loan. In the fourth quarter of 2014, Petrus
incurred total finance expenses of $2.0 million which is comprised of $0.3 million of accretion expense and $1.8 million of cash interest expense. The
increase in interest expense is attributed to Petrus’ term loan which was advanced in the fourth quarter of 2014.
Page | 12
The Company incurred total finance expenses of $15.3 million in 2015, compared to $4.7 million in 2014. The significant increase from the prior year is due
to higher outstanding debt balances giving rise to higher cash interest expense, as well as higher accretion expense due to the higher decommissioning
liability relative to the prior year. In 2015 the Company also recognized $1.2 million related to amortization of the up‐front fees paid for the Company’s
term loan.
Depletion and Depreciation
The following table compares depletion and depreciation expenses recorded in the reporting periods:
Depletion and Depreciation ($000s)
Depletion
Depreciation
Total
Depletion ($ per boe)
Depreciation ($ per boe)
Total ($ per boe)
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
54,410
217
54,627
17.01
0.07
17.08
36,797
53
36,850
16.75
0.02
16.77
12,157
109
12,266
16.17
0.14
16.31
18,703
20
18,723
20.70
0.02
20.72
Depletion expense is calculated on a unit‐of‐production basis. This fluctuates period to period primarily as a result of changes in the underlying proved plus
probable reserve base and in the amount of costs subject to depletion, including future development costs. Such costs are segregated and depleted on a
CGU basis relative to the respective underlying proved plus probable reserve base.
Petrus recorded depletion expense in the fourth quarter of 2015 of $12.2 million or $16.17 per boe, compared to the fourth quarter of 2014, when $18.7
million or $20.70 per boe was recorded.
For the year ended December 31, 2015 Petrus recorded $54.4 million or $17.01 per boe related to depletion which represents a $0.26 per boe or 48%
increase from $36.8 million or $16.75 per boe recorded in the prior year. The Company’s depletion expense has increased from the prior year due to the
increased production and reserves base (primarily attributed to assets acquired during the fourth quarter of 2014).
Impairment
The following table illustrates impairment losses recorded in the reporting periods:
Impairment ($000s)
Impairment
Total
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
67,494
67,494
104,762
104,762
38,954
38,954
104,762
104,762
At December 31, 2015, due to a decrease in forward commodity prices and recent transaction metrics, the Company determined that indicators of
impairment exist and therefore, an impairment test was performed for all of the Company’s CGUs. The recoverable value of the Company’s CGU’s was
estimated as the fair value less costs to sell based on the net present value of before tax cash flows from crude oil and natural gas proved plus probable
reserves originally estimated by third party reserve evaluators and a discount rate of 10%.
The Company recorded property, plant and equipment impairments in the fourth quarter of 2015 of $39.0 million on two of its four CGUs (Central Alberta ‐
$5.0 million; and Foothills ‐ $34.0 million). In the fourth quarter of 2014 Petrus recorded property, plant and equipment impairments of $104.8 million on
its four CGUs (Central Alberta ‐ $60.3 million; Ferrier ‐ $26.1 million; Peace River ‐ $13.6 million; and Foothills ‐ $4.8 million). The recoverable amount at
December 31, 2015 for the two CGUs was as follows: Central Alberta ‐ $128.7 million; and Foothills ‐ $74.6 million (2014 ‐ Central Alberta ‐ $155.2 million;
Ferrier ‐ $100.2 million; Peace River ‐ $59.7 million; and Foothills ‐ $120.8 million).
For the year ended December 31, 2015 the Company recorded property, plant and equipment impairments of $67.5 million on three of its four CGUs
(Central Alberta ‐ $5.0 million; Peace River ‐ $8.8 million and Foothills ‐ $53.7 million). For the year ended December 31, 2014 Petrus recorded property,
plant and equipment impairments of $104.8 million on its four CGUs (Central Alberta ‐ $60.3 million; Ferrier ‐ $26.1 million; Peace River ‐ $13.6 million; and
Foothills ‐ $4.8 million). The recoverable amount at December 31, 2015 for the three CGUs was as follows: Central Alberta ‐ $128.7 million; Peace River ‐
$51.3 million; and Foothills ‐ $74.6 million (2014 ‐ Central Alberta ‐ $155.2 million; Ferrier ‐ $100.2 million; Peace River ‐ $59.7 million; and Foothills ‐ $120.8
million).
Page | 13
SHARE CAPITAL
The authorized share capital consists of an unlimited number of common voting shares without par value. The following table details the number of
issued and outstanding instruments for the financial periods shown:
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
(000s)
Weighted average outstanding common shares
Basic(1)
Diluted(1)
Outstanding instruments
Common shares(1)
Stock options(1)
Warrants(1)
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus.
35,148
1,454
1,569
35,148
1,529
1,602
26,680
26,680 v
35,148
35,148
35,148
35,148
35,148
1,454
1,569
Three months
ended
Dec. 31, 2014
35,143
36,128
35,148
1,529
1,602
At March 22, 2016 the Company had 45,349,192 common shares outstanding. As at March 22, 2016 the Company had 1,453,750 and 1,568,568 stock
options and performance warrants outstanding, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2015 Petrus has two debt instruments outstanding. The first is a reserve‐based, revolving credit facility with a syndicate of lenders,
comprised of an operating facility and a syndicated term‐out facility (altogether the “Revolving Credit Facility” or “RCF”). The second is a second lien term
loan (the “Term Loan”).
(a) Revolving Credit Facility
At December 31, 2015 the Company’s RCF is comprised of a $20 million operating facility and a $140 million syndicated term‐out facility. The Company has
provided collateral by way of a $600 million debenture over all of the present and after acquired property of the Company. The term‐out facility has a
revolving period that ends July 29, 2016 at which time it will either be renewed or converted to a one‐year term facility.
At December 31, 2015, the Company had a $2.4 million letter of credit outstanding against the RCF (December 31, 2014; Nil) and had drawn $145 million
against the RCF (December 31, 2014; $99.7 million).
The amount of the RCF is subject to a borrowing base review performed on a semi‐annual basis by the lenders, based primarily on reserves and commodity
prices estimated by the lenders as well as other factors. In addition, asset dispositions require majority lender consent. A decrease in the borrowing base
could result in a reduction to the available credit under the RCF.
(b) Long Term Debt
At December 31, 2015 the Company had a $90 million Term Loan outstanding which was repayable on October 8, 2016. Interest is due and payable
monthly and accrues at a per annum rate of (three‐month) the Canadian Dealer offered Rate (CDOR) plus 700 basis points.
Covenants
The following definitions are used in the covenant calculations for both debt instruments:
Debt to EBITDA Ratio
Debt is defined as Petrus’ total debt outstanding of the borrower and EBITDA means earnings before interest, taxes, depreciation and amortization.
PV10 to Net Secured Debt Ratio
Net Secured Debt means all amounts owing under the RCF and any other secured debt of Petrus, minus restricted cash and cash equivalents and “PV10”
means the discounted net present value (at a discount rate of 10%) of Petrus’ proved reserves, as adjusted for commodity swaps in effect.
Working Capital
Working Capital means Current Assets to Current Liabilities whereby Current Assets means on any date of determination, the current assets of Petrus that
would, in accordance with IFRS, be classified as of that date as current assets plus any undrawn availability under the RCF, less any non-cash amount
required to be included in current assets as the result of the application of IFRS including non-cash commodity and interest rate hedges assets and liabilities
and whereby Current Liabilities means, on any date of determination, the liabilities of Petrus that would, in accordance with IFRS, be classified as of that
date as current liabilities, excluding (a) non-cash obligations under IFRS including non-cash commodity and interest rate hedges assets and liabilities, and
(b) the current portion of long-term debt.
Working Capital Ratio means the ratio of Current Assets to Current Liabilities as defined above.
Proved Asset and PDP Asset Coverage Ratio
Means the ratio of (a) Total Adjusted Present Value or (b) PDP Present Value depending on the reserve category, to Total Debt
Whereby Total Adjusted or PDP reserve value means the present value (discounted at 10.0%) of future net revenues attributable to the respective reserve
category based on the reserve report most recently delivered to the lender.
Page | 14
The RCF carries the following covenants:
(a) The Company is unable to borrow amounts greater than the RCF limit;
(b) PV10 to Net Secured Debt Ratio will not be less than 1.25 to 1.00 and must be reported at each borrowing base redetermination date, using the
most current reserve report and the Net Secured Debt at the date of the borrowing base redetermination
The RCF and the Term Loan carry the following covenants:
a. Working Capital Ratio at the end of each fiscal quarter will not be less than 1.00 to 1.00;
b.
c.
Proved Asset Coverage Ratio will not be less than 1.25 to 1.00; and
PDP Asset Coverage Ratio will not be less than 1.00 to 1.00 whereby the asset coverage ratios must be reported at each borrowing base
redetermination date, using the most current reserve report and the Total Debt at the date of the borrowing base redetermination.
At December 31, 2015 the Company was not in breach of the covenants.
Subsequent Event
On March 22, 2016 the banking agreements related to the RCF and Term Loan were amended as follows:
(a) Maturity and repayment date of the Term Loan was extended to October 8, 2017;
(b) From March 22, 2016 to the May 2016 borrowing base redetermination, borrowings by the Company under the RCF in an aggregate amount
exceeding $120 million shall require consent of the first lien lenders;
(c) When any indebtedness under the Term Loan remains outstanding the following covenants apply to both instruments:
a.
b.
Total Debt to EBITDA Ratio shall not exceed (i) 4.0:1.0 for the period beginning April 1, 2016 and ending December 31, 2016,
and (ii) 3.5:1.0 for the period beginning January 1, 2017 and thereafter; and
Total Debt of Petrus shall not exceed $190 million, provided that, prior written consent of all of the lenders is required for
any drawdown in excess of the total RCF.
On March 22, 2016 the Company reduced the amount drawn on the RCF by $40 million (classified as current at December 31, 2015) and as a result, the
total outstanding on the RCF is $105 million in addition to a $2.4 million letter of credit outstanding against the RCF. On March 22, 2016 the Company
reduced the amount drawn on the Term Loan by $40 million. As a result, the total outstanding on the Term Loan at March 22, 2016 is $50 million.
The Company’s general capital management policy is to maintain a sufficient capital base in order to manage its business to enable the Company to increase
the value of its assets and therefore its underlying share value. The Company’s objectives when managing capital are (i) to manage financial flexibility in
order to preserve the Company’s ability to meet financial obligations; (ii) maintain a capital structure that allows Petrus the ability to finance its growth
using internally generated cash flow, and (iii) to maintain a flexible capital structure which optimizes the cost of capital at an acceptable risk level and
provides an optimal return to equity holders.
In the management of capital, Petrus includes share capital and total net debt, which is made up of debt and working capital (current assets less current
liabilities). Petrus manages its capital structure and makes adjustments in light of economic conditions and the risk characteristics of the underlying assets.
In order to maintain or adjust the capital structure, Petrus may issue new equity, increase or decrease debt, adjust capital expenditures and acquire or
dispose of assets. Petrus anticipates that it will have adequate liquidity to fund future working capital and forecasted capital expenditures in 2015 through
a combination of cash flow and current working capital. Petrus is able to modify its capital program in response to changes in commodity prices and cash
flows. Should the Company choose to expand its capital program, actual funding alternatives will be influenced by the then current market environment
and the ability to access capital on reasonable terms, balanced with the investment opportunities presented.
CAPITAL EXPENDITURES
Capital expenditures totaled $6.8 million in the fourth quarter of 2015 compared to $53.0 million in the fourth quarter of the prior year. During the fourth
quarter the majority of funds were invested in the construction of production facilities and tie‐ins. Petrus invested $55.4 million (including acquisitions net
of dispositions) in 2015, funded by cash flow from operations and utilization of its revolving credit facility. During the year Petrus drilled 5 wells (4.7 net) and
constructed a gas plant with NGL processing capability in the Ferrier area. The following table shows capital expenditures for the reporting periods
indicated. All capital is presented before decommissioning obligations:
($000s)
Drill and complete
Oil and gas equipment
Geological
Land and lease
Office
Capitalized general and administrative
Total
Acquisitions/(dispositions)
Total capital
Gross (net) wells spud
Twelve months
ended
Dec. 31, 2015
Twelve months
ended
Dec. 31, 2014
Three months
ended
Dec. 31, 2015
Three months
ended
Dec. 31, 2014
78,543
28,433
2,630
3,170
640
1,802
115,218
327,746
442,964
43 (29.3)
2,117
4,262
—
—
—
378
6,757
—
6,757
—
39,423
10,389
1,202
2,152
372
(489)
53,049
195,027
248,076
14 (10.4)
30,313
21,853
302
106
227
1,668
54,469
938
55,407
5 (4.7)
Page | 15
RESERVES
Petrus’ 2015 year end reserves were evaluated by independent reserves evaluator Sproule and Associates in accordance with the definitions, standards and
procedures contained in the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”) and National instrument 51‐101 – Standards of Disclosure for
Oil and Gas Activities (“NI 51‐101”) as of December 31, 2015. Additional reserve information as required under NI 51‐101 will be included in our Annual
Information Form which will be filed on SEDAR on or before March 30, 2016.
The following table provides a summary of the Company’s before tax reserves, as evaluated by Sproule and Associates:
Reserves and Reserve Ratio Summary
December 31, 2015
December 31, 2014
Company Interest Reserves
Proved Producing
Total Proved
Total Proved +Probable
Net Present Value Discounted at 10%
—
Proved Producing
—
Total Proved
Total Proved +Probable
—
(1)FD&A (finding, development and acquisition) cost is defined as capital costs for the time period including change in future development capital divided by change in reserves
including revisions and production for that same time period.
(2)RLI (reserve life index) is defined as total reserves by category divided by the annualized fourth quarter production.
(MBoe)
16,533
26,557
40,590
($000s)
264,310
329,415
488,480
(MBoe)
15,664
32,723
49,203
($000s)
175,796
248,095
402,338
—
—
—
—
—
—
—
—
—
FD&A(1)
$35.35
$27.44
$21.49
FD&A(1)
$23.18
$16.77
$15.40
RLI(2)
4.6
7.3
11.2
RLI(2)
5.2
10.9
16.4
In 2015 Petrus’ total company interest reserves increased 21% to 49.2 mmboe on a proved plus probable (“P+P”) basis and 23% on a total proved basis to
32.7 mmboe. The 11.8 mmboe net reserves addition in the company interest P+P category was accomplished at an all in finding, development and
acquisition (“FD&A”) cost of $15.40 per boe including the change in future development capital (“FDC”).
As part of the December 31, 2015 Sproule reserve report Petrus added 64.9 new net proven undeveloped and 18.7 new net probable undeveloped
locations. This was a result of work completed by Sproule and Petrus during 2015 to better model Petrus’ future development opportunities as prescribed
by NI 51‐101. Proved plus probable FDC for the year‐end report is $325 million which is a $126 million increased from year end 2014.
Petrus has a reserves committee, comprised of independent board members, that reviews the qualifications and appointment of the independent reserve
evaluators. The committee also reviews the procedures for providing information to the evaluators. All booked reserves are based upon annual evaluations
by the independent qualified reserve evaluators conducted in accordance with the COGE Handbook and NI 51‐101. The evaluations are conducted using all
available geological and engineering data. The reserves committee has reviewed the reserves information and approved the reserve report.
PERFORMANCE RATIOS
The following table highlights annual performance ratios for the Company from 2012 to 2015.
December 31, 2015
December 31, 2014
December 31, 2013
December 31, 2012
$35.35
4.6
5.9
$23.18
5.2
0.7
Proved Producing
FD&A ($/boe) (1)
Reserve Life Index (yr) (2)
Reserve Replacement Ratio(3)
Total Proved
FD&A ($/boe) (1)
Reserve Life Index (yr) (2)
Reserve Replacement Ratio(3)
Future Development Capital ($000s)
Total Proved + Probable
FD&A ($/boe) (1)
Reserve Life Index (yr) (2)
Reserve Replacement Ratio(3)
Future Development Capital ($000s)
(1)FD&A (finding, development and acquisition) cost is defined as capital costs for the time period including change in future development capital divided by change in reserves
including revisions and production for that same time period.
(2)RLI (reserve life index) is defined as total reserves by category divided by the annualized fourth quarter production.
(3)The reserve replacement ratio is calculated by dividing the yearly change in reserves net of production by the actual annual production for the year.
$15.4
16.4
3.7
325,325
$16.77
10.9
2.9
223,409
$21.49
11.2
12.7
199,410
$27.44
7.3
9.1
122,326
$21.57
11.0
3.2
40,864
$31.38
6.4
1.8
17,877
$34.72
4.2
1.4
$22.34
17.7
9.0
37,091
$35.13
11.0
4.9
14,469
$39.16
7.4
4.2
Page | 16
SUMMARY OF QUARTERLY RESULTS
($000s) except per share amounts
Dec. 31,
2015
Sep. 30,
2015
Jun. 30,
2015
Three months ended
Mar. 31,
2015
Dec. 31,
2014
Sep. 30,
2014
Jun. 30,
2014
Mar. 31,
2014
128
23,592
(1,303)
22,289
(4,035)
Oil and natural gas revenue
Transportation
Net revenue
Royalty expense (1)
Royalty income (1)
Net oil and natural gas revenue
Operating expense (2)
Hedging gain (loss)
General and administrative expense (3)
Interest expense (4)
Cash flow from operations
Per share – basic(5)
Net income (loss)
Per share – basic(5)
Common shares(5) (000s)
Weighted average shares(5) (000s)
Total assets
Net working capital (net debt)
25,581
(872)
24,709
(5,387)
288
19,610
(3,727)
(1,432)
(634)
(335)
13,482
0.62
2,208
0.10
21,594
21,594
257,245
(51,638)
(1) The Company re-classified gross overriding royalty expense from other income to royalty expenses in the Statement of Net Income and Comprehensive Income. The comparative
information has been re-classified to conform to current presentation.
(2) Operating expenses are presented net of processing income and overhead recoveries.
(3) General and administrative expense is presented net of capitalized G&A.
(4) Interest expense is presented net of interest income.
(5)All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus.
25,423
(1,560)
23,863
(3,825)
72
20,110
(6,536)
4,881
(1,664)
(2,256)
14,535
0.41
(6,312)
(0.18)
35,148
35,148
641,547
(227,607)
26,576
(1,561)
25,015
(3,020)
65
22,060
(7,396)
2,894
(1,843)
(3,166)
12,549
0.36
(7,239)
(0.21)
35,148
35,148
627,808
(228,562)
21,914
(1,142)
20,772
(2,308)
77
18,541
(6,277)
3,767
(1,674)
(3,519)
10,838
0.31
(19,055)
(0.54)
35,148
35,148
595,890
(226,809)
35,574
(1,126)
34,448
(3,958)
423
30,913
(5,815)
3,371
(2,117)
(1,725)
24,627
0.70
(63,308)
(1.80)
35,148
35,143
647,304
(215,049)
20,221
(986)
19,235
(2,809)
238
16,664
(8,269)
5,020
(2,318)
(4,380)
6,717
0.19
(36,425)
(1.04)
35,148
35,148
555,145
(226,742)
26,815
(979)
25,836
(5,760)
303
20,379
(4,194)
(1,496)
(797)
(614)
13,278
0.58
5,505
0.24
25,437
22,777
259,110
415
18,382
(4,395)
(1,359)
(1,446)
(1,304)
9,878
0.37
7,530
0.28
35,115
27,043
549,248
21,014
The oil and natural gas exploration and production industry is cyclical in nature. Petrus' financial position, results of operations and cash flows are affected
by commodity prices and production levels.
In the first quarter of 2014, Petrus’ production volume averaged 4,373 boe per day. The Company’s production grew significantly from that period to the
fourth quarter of 2015 as a result of asset and corporation acquisitions as well as exploration and development investment activity. Production volumes
have declined in the second half of 2015 as a result of reduced capital investment, combined with third party pipeline curtailments which have restricted
production volume.
The Corporation's funds flow from operations was $13.5 million in the first quarter of 2014 and $6.7 million in the fourth quarter of 2015. Throughout the
two year period, funds flow from operations increased with higher production levels as well as strengthened commodity prices, natural gas in particular and
more recently, declined as a result of a significant decline in commodity prices. Commodity price improvements can enable higher reinvestment in
exploration, development and acquisition activities in future periods as they increase the funds received from operations. Commodity price reductions
reduce revenues received and can challenge the economics of the Corporation's development program as the quantity of reserves may not be economically
recoverable. Petrus' reinvestment in future reserves will be dependent on its ability to obtain debt and equity financing as well as the funds it receives from
operations.
Page | 17
CRITICAL ACCOUNTING ESTIMATES
The timely preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual results may differ from these
estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which
the estimates are revised and in any future periods affected. Significant estimates and judgments made by management in the preparation of the financial
statements are outlined below.
Depletion and reserve estimates
Petroleum and natural gas assets are depleted on a unit of production basis at a rate calculated by reference to proved and probable reserves determined
in accordance with National Instrument 51‐101 ‐ Standards of Disclosure for Oil and Gas Activities (“NI 51‐101”). The calculation incorporates the estimated
future cost of developing and extracting those reserves. Proved and probable reserves are estimated using independent reservoir engineering reports and
represent the estimated quantities of crude 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. Reserves
estimates, although not reported as part of the Company’s financial statements, can have a significant effect on net income (loss), assets and liabilities as a
result of their impact on depletion and depreciation, decommissioning liabilities, deferred taxes, asset impairments and business combinations.
Independent reservoir engineers perform evaluations of the Company’s petroleum and natural gas reserves on an annual basis. The estimation of reserves
is an inherently complex process requiring significant judgment. Estimates of economically recoverable petroleum and natural gas reserves are based upon
a number of variables and assumptions such as geoscientific interpretation, production forecasts, commodity prices, costs and related future cash flows, all
of which may vary considerably from actual results. These estimates are expected to be revised upward or downward over time, as additional information
such as reservoir performance becomes available or as economic conditions change.
Impairment indicators and cash-generating units
For purposes of impairment testing, petroleum and natural gas assets are aggregated into cash‐generating units (“CGU’s”), based on separately
identifiable and largely independent cash inflows. The determination of the Company’s CGU’s is subject to judgment.
The recoverable amounts of CGU’s and individual assets have been determined based on the higher of the value‐in‐use calculations and fair values less
costs to sell. These calculations require the use of estimates and assumptions, including the discount rate, future petroleum and natural gas prices,
expected production volumes and anticipated recoverable quantities of proved and probable reserves. These assumptions are subject to change as new
information becomes available and changes in economic conditions take place. Changes may impact the estimated life of the field and economical
reserves recoverable and may require a material adjustment to the carrying value of petroleum and natural gas assets. The Company monitors internal
and external indicators of impairment relating to its tangible assets.
Technical feasibility and commercial viability of exploration and evaluation assets
The determination of technical feasibility and commercial viability, based on the presence of proved and probable reserves, results in the transfer of
assets from exploration and evaluation assets to property, plant and equipment. As discussed above, the estimate of proved and probable reserves is
inherently complex and requires significant judgment. Thus any material change to reserve estimates could affect the technical feasibility and commercial
viability of the underlying assets.
Decommissioning obligation
At the end of the operating life of the Company’s facilities and properties and upon retirement of its petroleum and natural gas assets, decommissioning
costs will be incurred by the Company. This requires judgment regarding abandonment date, future environmental and regulatory legislation, the extent
of reclamation activities, the engineering methodology for estimating cost, future removal technologies in determining the removal cost and discount
rates to determine the present value of these cash flows.
Income taxes
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in income or loss both in the
period of change, which would include any impact on cumulative provisions, and in future periods. Deferred tax assets (if any) are recognized only to the
extent it is considered probable that those assets will be recoverable. This involves an assessment of when those deferred tax assets are likely to reverse
and a judgment as to whether or not there will be sufficient taxable income available to offset the tax assets when they do reverse. This requires
assumptions regarding future profitability and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can
be an increase or decrease in the amounts recognized in respect of deferred tax assets as well as the amounts recognized in income or loss in the period in
which the change occurs. Additionally, future changes in tax laws in the jurisdictions in which the Company operates could limit the ability of the
Company to obtain tax deductions in future periods.
Measurement of share-based compensation
Share‐based compensation recorded pursuant to share‐based compensation plans are subject to estimated fair values, forfeiture rates and the future
attainment of performance criteria.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. The determination of fair value often requires management to make
assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair value of exploration and evaluation
assets and petroleum and natural gas assets acquired generally require the most judgment and include estimates of reserves acquired, forecast
benchmark commodity prices and discount rates. Changes in any of the assumptions or estimates used in determining the fair value of acquired assets
and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the purchase price allocation.
Page | 18
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently
involves the exercise of significant judgment and estimates of the outcome of future events.
ACCOUNTING POLICIES AND NEW STANDARDS
Significant accounting policies
The Company’s significant accounting policies can be read in note 3 to the Company’s audited financial statements as at and for the year ended December
31, 2015.
New standards and interpretations
In July 2014, the IASB completed the final elements of IFRS 9 “Financial Instruments.” The Standard supersedes earlier versions of IFRS 9 and completes
the IASB’s project to replace IAS 39 “Financial Instruments: Recognition and Measurement.” IFRS 9, as amended, includes a principle‐based approach for
classification and measurement of financial assets, a single ‘expected loss’ impairment model and a substantially‐reformed approach to hedge accounting.
The Standard will come into effect for annual periods beginning on or after January 1, 2018 with earlier adoption permitted. IFRS 9 will be applied by
Petrus on January 1, 2018 and the Company is currently evaluating the impact of the standard on its financial statements.
In May 2014, the IASB issued IFRS 15”Revenue from Contracts with Customers” which replaces IAS 18 “Revenue,” IAS 11 “Construction Contracts,” and
related interpretations. The standard is required to be adopted for fiscal years beginning on or after January 1, 2018, with earlier adoption permitted.
IFRS 15 will be applied by Petrus on January 1, 2018 and the Company is currently evaluating the impact of the standard on Petrus’s statements.
In January 2016, the IASB issued IFRS 16 Leases, which replaces IAS 17 Leases. For lessees applying IFRS 16, a single recognition and measurement model
for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods beginning
on or after January 1, 2019, with earlier adoption permitted. The Company is currently evaluating the impact of the standard on the Company’s financial
statements.
Page | 19
ADVISORIES
Basis of Presentation
Financial data presented below have largely been derived from the Company’s financial statement, prepared in accordance with International Financial
Reporting Standards (“IFRS”). Accounting policies adopted by the Company are set out in the notes to the audited financial statements as at and for the
twelve months ended December 31, 2015. The reporting and the measurement currency is the Canadian dollar. All financial information is expressed in
Canadian dollars, unless otherwise stated.
Forward Looking Statements
Certain information regarding Petrus set forth in this document, including management’s assessment of the Company’s future plans and operations,
contains forward-looking statements WITHIN THE MEANING OF APPLICABLE SECURITIES LAW, that involve substantial known and unknown risks and
uncertainties. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “believe” and similar expressions
are intended to identify forward-looking statements. Such statements represent Petrus’ internal projections, estimates or beliefs concerning, among other
things, an outlook on the estimated amounts and timing of capital investment, anticipated future debt, production, revenues or other expectations, beliefs,
plans, objectives, assumptions, intentions or statements about future events or performance. These statements are only predictions and actual events or
results may differ materially. Although Petrus believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee
future results, levels of activity, performance or achievement since such expectations are inherently subject to significant business, economic, competitive,
political and social uncertainties and contingencies. Many factors could cause Petrus’ actual results to differ materially from those expressed or implied in
any forward-looking statements made by, or on behalf of, Petrus.
In particular, forward-looking statements included in this MD&A include, but are not limited to, statements with respect to: the size of, and future net
revenues from, crude oil, NGL (natural gas liquids) and natural gas reserves; future prospects; the focus of and timing of capital expenditures; expectations
regarding the ability to raise capital and to continually add to reserves through acquisitions and development; access to debt and equity markets; projections
of market prices and costs; the performance characteristics of the Company’s crude oil, NGL and natural gas properties; crude oil, NGL and natural gas
production levels and product mix; Petrus’ future operating and financial results; capital investment programs; supply and demand for crude oil, NGL and
natural gas; future royalty rates; drilling, development and completion plans and the results therefrom; future land expiries; dispositions and joint venture
arrangements; amount of operating, transportation and general and administrative expenses; treatment under governmental regulatory regimes and tax
laws; estimated tax pool balances and anticipated IFRS elections and the impact of the conversion to IFRS. In addition, statements relating to “reserves” are
deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described
can be profitably produced in the future.
These forward-looking statements are subject to numerous risks and uncertainties, most of which are beyond the Company’s control, including the impact of
general economic conditions; volatility in market prices for crude oil, NGL and natural gas; industry conditions; currency fluctuation; imprecision of reserve
estimates; liabilities inherent in crude oil and natural gas operations; environmental risks; incorrect assessments of the value of acquisitions and exploration
and development programs; competition; the lack of availability of qualified personnel or management; changes in income tax laws or changes in tax laws
and incentive programs relating to the oil and gas industry; hazards such as fire, explosion, blowouts, cratering, and spills, each of which could result in
substantial damage to wells, production facilities, other property and the environment or in personal injury; stock market volatility; ability to access sufficient
capital from internal and external sources; completion of the financing on the timing planned and the receipt of applicable approvals; and the other risks.
With respect to forward-looking statements contained in this MD&A, Petrus has made assumptions regarding: future commodity prices and royalty regimes;
availability of skilled labour; timing and amount of capital expenditures; future exchange rates; the impact of increasing competition; conditions in general
economic and financial markets; availability of drilling and related equipment and services; effects of regulation by governmental agencies; and future
operating costs. Management has included the above summary of assumptions and risks related to forward-looking information provided in this MD&A in
order to provide shareholders with a more complete perspective on Petrus’ future operations and such information may not be appropriate for other
purposes. Petrus’ actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking
statements and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if
any of them do so, what benefits that the Company will derive therefrom. Readers are cautioned that the foregoing lists of factors are not exhaustive.
These forward-looking statements are made as of the date of this MD&A and the Company disclaims any intent or obligation to update any forward-looking
statements, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.
BOE Presentation
The oil and natural gas industry commonly expresses production volumes and reserves on a barrel of oil equivalent (“BOE”) basis whereby natural gas
volumes are converted at the ratio of nine thousand cubic feet to one barrel of oil. The intention is to sum oil and natural gas measurement units into one
basis for improved measurement of results and comparisons with other industry participants. Petrus uses the 6:1 BOE measure which is the approximate
energy equivalency of the two commodities at the burner tip. However, BOE’s do not represent an economic value equivalency at the wellhead and therefore
may be a misleading measure if used in isolation.
Abbreviations
000’s
bbl
bbl/d
bcf
boe/d
CAD
GJ
GJ/d
mbbls
thousand dollars
barrel
barrels per day
billion cubic feet
barrel of oil equivalent per day
Canadian dollar
gigajoule
gigajoules per day
thousand barrels
Page | 20
mboe
mcf
mcf/d
mmbbls
mmboe
mmcf
mmcf/d
NGLs
USD
WTI
thousand barrels of oil equivalent
thousand cubic feet
thousand cubic feet per day
million barrels
millions of barrels of oil equivalent
million cubic feet
million cubic feet per day
natural gas liquids
United States dollar
West Texas Intermediate
Page | 21
Annual Financial Statements
As at and for the years ended December 31, 2015 and 2014
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Petrus Resources Ltd.
We have audited the accompanying financial statements of Petrus Resources Ltd., which comprise the balance sheets as
at December 31, 2015 and 2014 and the statements of net loss and comprehensive loss, changes in equity and cash
flows for the years then ended, and 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 the auditors’ 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, the
auditors 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 Petrus Resources
Ltd. as at December 31, 2015 and 2014 and its financial performance and its cash flows for the years then ended, in
accordance with International Financial Reporting Standards.
Calgary, Canada
March 22, 2016
Chartered Professional Accountants
Page | 23
BALANCE SHEETS
(Expressed in 000’s of Canadian dollars)
As at
ASSETS
Current
Cash
Deposits and prepaid expenses
Accounts receivable (note 15)
Risk management asset (notes 4 and 10)
Non-current
Exploration and evaluation assets (notes 5 and 6)
Property, plant and equipment (notes 5 and 7)
LIABILITIES AND SHAREHOLDER’S EQUITY
Current
Current portion of long term debt (note 8)
Accounts payable and accrued liabilities
Risk management liability (notes 4 and 10)
Non-Current
Long term debt (note 8)
Decommissioning obligation (note 9)
Deferred income tax liability (note 16)
Shareholders’ Equity
Share capital (note 11)
Contributed surplus
Retained earnings (deficit)
See accompanying notes to the financial statements
Commitments (note 21)
Approved by the Board of Directors,
(signed) “Don T. Gray”
Don T. Gray
Chairman
December 31, 2015
December 31, 2014
1,234
1,109
17,754
13,978
34,075
88,178
432,892
521,070
555,145
130,000
11,839
45
141,884
105,000
64,357
—
311,241
346,106
6,620
(108,822)
243,904
555,145
19,524
1,042
23,336
14,609
58,511
94,073
494,720
588,793
647,304
—
69,831
197
70,028
189,119
58,634
17,763
335,544
346,106
5,445
(39,791)
311,760
647,304
(signed) “Donald Cormack”
Donald Cormack
Director
Page | 24
STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS
(Expressed in 000’s of Canadian dollars, except for share information)
REVENUE
Oil and natural gas revenue
Royalty expense
Oil and natural gas revenue, net of royalties
Other income
Net gain on financial derivatives (note 10)
EXPENSES
Operating (note 18)
Transportation expenses
General and administrative (note 19)
Share-based compensation (note 11)
Finance (note 13)
(Gain) loss on disposition of assets (note 5)
Exploration and evaluation expense (note 6)
Depletion and depreciation (note 7)
Impairment (note 7)
NET LOSS BEFORE INCOME TAXES
Deferred income tax recovery (note 16)
TOTAL NET LOSS AND COMPREHENSIVE LOSS
Net loss per common share
Basic and diluted (note 12)
See accompanying notes to the financial statements
Year ended
December 31, 2015
Year ended
December 31, 2014
94,587
(11,962)
82,625
105
16,084
98,814
28,479
5,250
7,500
655
15,276
52
6,275
54,627
67,494
185,608
86,794
17,763
112,705
(19,140)
93,565
7
16,393
109,965
18,129
4,279
4,992
741
4,696
(2,175)
1,158
36,850
104,762
173,432
63,467
15,975
69,031
47,492
1.96
1.78
Page | 25
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Expressed in 000’s of Canadian dollars)
Balance, December 31, 2013
Net income (loss)
Issuance of common shares (note 11)
Premium liability of flow-through shares (note 11)
Share-based compensation (note 11)
Share issue costs
Tax effect of share issue costs
Balance, December 31, 2014
Net income (loss)
Share-based compensation (note 11)
Balance, December 31, 2015
See accompanying notes to the financial statements
Share
Capital
Contributed
Surplus
144,339
—
205,571
(235)
—
(4,759)
1,190
346,106
—
—
346,106
3,962
—
—
—
1,483
—
—
5,445
—
1,175
6,620
Retained
Earnings
(Deficit)
7,701
(47,492)
—
—
—
—
—
(39,791)
(69,031)
—
(108,822)
Total
156,002
(47,492)
205,571
(235)
1,483
(4,759)
1,190
311,760
(69,031)
1,175
243,904
Page | 26
Year ended
December 31, 2015
Year ended
December 31, 2014
(69,031)
(47,492)
655
479
1,851
54,627
67,494
6,275
52
(17,763)
(335)
44,304
(28,779)
15,525
—
—
45,290
—
458
45,748
(938)
—
(1,358)
(53,111)
—
(24,156)
(79,563)
(18,290)
19,524
1,234
742
(17,311)
691
36,850
104,762
1,158
(2,175)
(15,975)
(1,096)
60,154
20,834
80,988
205,571
(4,759)
73,097
90,000
(881)
363,028
(29,746)
(298,000)
(6,654)
(107,922)
(642)
18,472
(424,492)
19,524
—
19,524
STATEMENTS OF CASH FLOWS
(Expressed in 000’s of Canadian dollars)
OPERATING ACTIVITIES
Net income (loss)
Adjust items not affecting cash:
Share-based compensation (note 11)
Unrealized hedging (gains) losses (note 10)
Finance expenses (note 13)
Depletion and depreciation (note 7)
Impairment (note 7)
Exploration and evaluation expense (note 6)
Loss (gain) on disposition (note 5)
Deferred income tax recovery (note 16)
Decommissioning expenditures (note 9)
Funds generated by operations
Change in operating non-cash working capital (note 17)
Cash provided by operations
FINANCING ACTIVITIES
Issuance of common shares (note 11)
Share issue costs (note 11)
Increase in bank indebtedness
Increase in long term debt
Change in financing non-cash working capital (note 17)
Cash provided by financing activities
INVESTING ACTIVITIES
Property and equipment (acquisitions) dispositions (note 5)
Corporate acquisitions (note 5)
Exploration and evaluation asset expenditures (note 6)
Petroleum and natural gas property expenditures (note 7)
Other capital expenditures
Change in investing non-cash working capital (note 17)
Cash used in investing activities
Increase (decrease) in cash
Cash, beginning of year
Cash, end of year
See accompanying notes to the financial statements
Page | 27
NOTES TO THE FINANCIAL STATEMENTS
1. NATURE OF THE ORGANIZATION
Petrus Resources Ltd. (“Petrus” or the “Company”) was incorporated under the laws of the Province of Alberta on December 13, 2010. On October 8,
2014 Petrus amalgamated its two wholly owned subsidiaries, Arriva Energy Inc. and Ravenwood Energy Corp.
The principal undertaking of Petrus is the investment in energy business-related assets. The operations of the Company consist of the acquisition,
development, exploration and exploitation of these assets. The Company’s head office is located at 2400, 240 – 4th Avenue SW, Calgary, Alberta
Canada.
On November 29, 2015 Petrus announced an equity financing involving a $30 million private placement and an arrangement agreement (the
“Arrangement Agreement”) with PhosCan Chemical Corp. (“PhosCan”) and a newly formed entity, Petrus Acquisition Corp. (“New Petrus”). The equity
financing and transactions contemplated in the Arrangement Agreement closed on February 2, 2016.
New Petrus will carry on business as Petrus Resources Ltd. As a result of Amalgamation, Petrus common shares were consolidated on the basis of 0.25
of a common share of New Petrus. New Petrus also acquired $45.4 million of PhosCan’s cash (PhosCan’s cash adjusted for the PhosCan shareholders
who exercised dissent rights) in exchange for 6.1 million New Petrus common shares.
As a result of the share consolidation all Petrus shares, performance warrants and stock options referenced in these financial statements have been
adjusted to reflect the 0.25 to 1 consolidation of Petrus common shares.
Petrus is the continuing accounting entity following the Arrangement Agreement. Accordingly the financial position and results of operations of New
Petrus will be those of Petrus presented on a continuity of interest basis.
These financial statements report the year ended December 31, 2015 and comparative period and were approved by the Company’s Audit Committee
on March 22, 2016.
2. BASIS OF PRESENTATION
(a) Statement of Compliance
These financial statements have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by
the International Accounting Standards Board (“IASB”).
(b) Measurement Basis
These financial statements were prepared on the basis of historical cost except for financial derivatives which are measured at fair value. This method
is consistent with the method used in prior years. The financial statements are presented in Canadian dollars.
(c) Critical Accounting Estimates
The timely preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that
affect the application of accounting policies and reported amounts of assets and liabilities and income and expenses. Accordingly, actual results may
differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimates are revised and in any future periods affected. Significant estimates and judgments made by management in the
preparation of the financial statements are outlined below.
Depletion and reserve estimates
Petroleum and natural gas assets are depleted on a unit of production basis at a rate calculated by reference to proved and probable reserves
determined in accordance with National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). The calculation
incorporates the estimated future cost of developing and extracting those reserves. Proved and probable reserves are estimated using
independent reservoir engineering reports and represent the estimated quantities of crude 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. Reserves estimates, although not reported as part of the Company’s financial
statements, can have a significant effect on net income (loss), assets and liabilities as a result of their impact on depletion and depreciation,
decommissioning liabilities, deferred taxes, asset impairments and business combinations. Independent reservoir engineers perform
evaluations of the Company’s petroleum and natural gas reserves on an annual basis. The estimation of reserves is an inherently complex
process requiring significant judgment. Estimates of economically recoverable petroleum and natural gas reserves are based upon a number of
variables and assumptions such as geoscientific interpretation, production forecasts, commodity prices, costs and related future cash flows, all
of which may vary considerably from actual results. These estimates are expected to be revised upward or downward over time, as additional
information such as reservoir performance becomes available or as economic conditions change.
Impairment indicators and cash-generating units
For purposes of impairment testing, petroleum and natural gas assets are aggregated into cash-generating units (“CGUs”), based on
separately identifiable and largely independent cash inflows. The determination of the Company’s CGUs is subject to judgment.
The recoverable amounts of CGU’s and individual assets have been determined based on the higher of the value-in-use calculations and fair
value less costs of disposal. These calculations require the use of estimates and assumptions, including the discount rate, future petroleum
and natural gas prices, expected production volumes and anticipated recoverable quantities of proved and probable reserves. These
Page | 28
assumptions are subject to change as new information becomes available and changes in economic conditions take place. Changes may
impact the estimated life of the field and economical reserves recoverable and may require a material adjustment to the carrying value of
petroleum and natural gas assets. The Company monitors internal and external indicators of impairment relating to its tangible assets.
Technical feasibility and commercial viability of exploration and evaluation assets
The determination of technical feasibility and commercial viability, based on the presence of proved and probable reserves, results in the
transfer of assets from exploration and evaluation assets to property, plant and equipment. As discussed above, the estimate of proved and
probable reserves is inherently complex and requires significant judgment. Thus any material change to reserve estimates could affect the
technical feasibility and commercial viability of the underlying assets.
Financial Instruments
Financial instruments are subject to valuations at the end of each reporting period. Generally the valuation is based on active and efficient
markets. However, certain financial instruments may not be traded on an efficient market or the market may disappear or be subject to
conditions that impede the efficiency of the market.
Decommissioning obligation
At the end of the operating life of the Company’s facilities and properties and upon retirement of its petroleum and natural gas assets,
decommissioning costs will be incurred by the Company. This requires judgment regarding abandonment date, future environmental and
regulatory legislation, the extent of reclamation activities, the engineering methodology for estimating cost, future removal technologies in
determining the removal cost and discount rates to determine the present value of these cash flows.
Income taxes
Tax provisions are based on enacted or substantively enacted laws. Changes in those laws could affect amounts recognized in income or loss
both in the period of change, which would include any impact on cumulative provisions, and in future periods. Changes in tax laws in the
jurisdictions in which the Company operates could limit the ability of the Company to obtain tax deductions in future periods. Income taxes
are subject to measurement uncertainty.
Measurement of share-based compensation
Share-based compensation recorded pursuant to share-based compensation plans are subject to estimated fair values, forfeiture rates and
the future attainment of performance criteria.
Business combinations
Business combinations are accounted for using the acquisition method of accounting. The determination of fair value often requires
management to make assumptions and estimates about future events. The assumptions and estimates with respect to determining the fair
value of exploration and evaluation assets and petroleum and natural gas assets acquired generally require the most judgment and include
estimates of reserves acquired, forecast benchmark commodity prices and discount rates. Changes in any of the assumptions or estimates
used in determining the fair value of acquired assets and liabilities could impact the amounts assigned to assets, liabilities and goodwill in the
purchase price allocation.
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies
inherently involves the exercise of significant judgment and estimates of the outcome of future events.
3. SIGNIFICANT ACCOUNTING POLICIES
(a) Revenue recognition
Revenue from the sale of petroleum and natural gas is recognized when volumes are delivered and title passes to an external party at contractual
delivery points and are recorded gross of transportation charges incurred by the Company.
The costs associated with the delivery, including transportation and production-based royalty expenses, are recognized in the same period in which the
related revenue is earned and recorded.
(b) Exploration & evaluation assets
Capitalization
All costs incurred after the rights to explore an area have been obtained, such as geological and geophysical costs, other direct costs of
exploration (drilling, testing and evaluating the technical feasibility and commercial viability of extraction) and appraisal and including any
directly attributable general and administration costs and share-based payments, are accumulated and capitalized as exploration and
evaluation assets.
Certain costs incurred prior to acquiring the legal rights to explore are charged directly to net income (loss).
Depletion & depreciation
Exploration and evaluation costs are not amortized prior to the conclusion of appraisal activities. At the completion of appraisal activities, if
technical feasibility is demonstrated and commercial reserves are discovered, then the carrying value of the relevant exploration and evaluation
asset will be reclassified as a property, plant and equipment asset into the CGU to which it relates, but only after the carrying value of the
relevant exploration and evaluation asset has been assessed for impairment and, where appropriate, its carrying value adjusted. Technical
feasibility and commercial viability are considered to be demonstrable when proved or probable reserves are determined to exist. If it is
Page | 29
determined that technical feasibility and commercial viability have not been achieved in relation to the exploration and evaluation assets
appraised, all other associated costs are written down to the recoverable amount in net income (loss).
Expired land leases included as undeveloped land in exploration and evaluation assets are recognized in exploration and evaluation cost in net
income (loss) upon expiry.
Impairment
Indicators of impairment of exploration and evaluation assets are assessed at each reporting date. When there are such indications, an
impairment test is carried out and any resulting impairment loss is written off to net income (loss). The recoverable amount is the greater of fair
value, less costs of disposal, or value-in-use.
(c) Property, plant and equipment
The Company’s property, plant and equipment is comprised of petroleum and natural gas assets and corporate assets.
Capitalization
Petroleum and natural gas assets are measured at cost less accumulated depletion and depreciation and accumulated impairment losses, if any.
Petroleum and natural gas assets consists of the purchase price and costs directly attributable to bringing the asset to the location and
condition necessary for its intended use. Petroleum and natural gas assets include developing and producing interests such as land acquisitions,
geological and geophysical costs, facility and production equipment, including any directly attributable general and administration costs and
share-based payments and the initial estimate of the costs of dismantling and removing an asset and restoring the site on which it was located.
Subsequent costs
Costs incurred subsequent to the determination of technical feasibility and commercial viability are recognized as developing and producing
petroleum and natural gas interests when they increase the future economic benefits embodied in the specific asset to which they relate. Such
capitalized petroleum and natural gas interests generally represent costs incurred in developing proved and/or probable reserves, and are
accumulated on a field or geotechnical area basis. The cost of day-to-day servicing of an item of petroleum and natural gas assets is expensed in
income or loss as incurred. Petroleum and natural gas assets are derecognized upon disposal or when no future economic benefits are
expected to arise from the continued use of the asset. Any gain or loss arising from the disposal of an asset, determined as the difference
between the net disposal proceeds and the carrying amount of the asset, is recognized in net income or loss.
Depletion and depreciation
The costs for petroleum and natural gas properties, including related pipelines and facilities, are depleted using a unit-of-production method
based on the commercial proved and probable reserves.
Petroleum and natural gas assets are not depleted until production commences. This depletion calculation includes actual production in the
period and total estimated proved and probable reserves attributable to the assets being depleted, taking into account total capitalized costs
plus estimated future development costs necessary to bring those reserves into production. Relative volumes of reserves and production
(before royalties) are converted at the energy equivalent conversion ratio of six thousand cubic feet of natural gas to one barrel of oil.
Proved and probable reserves are estimated using independent reservoir engineering reports and represent the estimated quantities of crude
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.
Corporate assets are recorded at cost less accumulated depreciation. Depreciation is calculated on a declining balance method so as to write off
the cost of these assets, less estimated residual values, over their estimated useful lives consistent with the treatment used for tax purposes.
Impairment
The assessment for impairment entails comparing the carrying value of the CGU with its recoverable amount: that is, the higher of fair value,
less costs of disposal, and value in use. Petrus’ property, plant and equipment are grouped into CGUs based on separately identifiable and
largely independent cash inflows considering geological characteristics, shared infrastructure and exposure to market risks. Estimates of future
cash flows used in the calculation of the recoverable amount are based on reserve evaluation reports prepared by independent reservoir
engineers.
The CGU’s are reviewed quarterly for indicators of impairment. Indicators are events or changes in circumstances that indicate that the carrying
amount may not be recoverable. If indicators of impairment exist, the recoverable amount of the CGU is estimated. If the carrying amount of
the CGU exceeds the recoverable amount, the CGU is written down with an impairment recognized in net income (loss).
The recoverable amount is the higher of fair value, less costs of disposal, and the value-in-use. Fair value, less costs of disposal, is derived by
estimating the discounted pre-tax future net cash flows. Discounted future net cash flows are based on forecasted commodity prices and costs
over the expected economic life of the reserves and discounted using market-based rates to reflect a market participant’s view of the risks
associated with the assets. Value-in-use is assessed using the expected future cash flows discounted at a pre-tax rate.
Impairments of property, plant and equipment are reversed when there is significant evidence that the impairment has been reversed, but only
to the extent of what the carrying amount would have been had no impairment been recognized.
(d) Business combinations
Business combinations are accounted for using the acquisition method. Identifiable assets acquired and liabilities and contingent liabilities assumed in a
business combination are measured at their fair values at the acquisition date. The cost of an acquisition is measured as the fair value of the assets
Page | 30
given, equity instruments issued and liabilities incurred or assumed at the acquisition date. The excess of the cost of the acquisition over the fair value
of the identifiable assets, liabilities and contingent liabilities acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of
the net assets of the subsidiary acquired, the difference is recognized immediately in net income (loss). Transaction costs associated with a business
combination are expensed as incurred.
(e) Decommissioning obligations
The Company’s activities give rise to dismantling, decommissioning and reclamation requirements. Costs related to these abandonment activities are
estimated by management in consultation with the Company’s engineers based on risk-adjusted current costs which take into consideration current
technology in accordance with existing legislation and industry practices.
Decommissioning obligations are measured at the present value of the best estimate of expenditures required to settle the obligations at the reporting
date. When the fair value of the liability is initially measured, the estimated cost, discounted using a risk-free rate, is capitalized by increasing the
carrying amount of the related petroleum and natural gas assets. The increase in the provision due to the passage of time, or accretion, is recognized as
a finance expense. Increases and decreases due to revisions in the estimated future cash flows are recorded as adjustments to the carrying amount of
the related petroleum and natural gas assets.
Actual costs incurred upon settlement of the liability are charged against the obligation to the extent that the obligation was previously established. The
carrying amount capitalized in petroleum and natural gas assets is depleted in accordance with the Company’s depletion policy. The Company reviews
the obligation at each reporting date and revisions to the estimated timing of cash flows, discount rates and estimated costs will result in an increase or
decrease to the obligations. Any difference between the actual costs incurred upon settlement of the obligation and recorded liability is recognized as
an increase or reduction in income.
(f) Finance expenses
Finance expense may be comprised of interest expense on borrowings, acquisition related (transaction) costs, foreign exchange expenses and accretion
of the discount on decommissioning obligations.
(g) Financial instruments
Non-derivative financial instruments
Non-derivative financial instruments are comprised of cash, accounts receivables, deposits, accounts payable and long term debt. Non-
derivative financial instruments are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial
recognition, non-derivative financial instruments are measured based on their classification. The Company has made the following
classifications:
•
•
•
Cash is classified as held for trading.
Accounts receivable are classified as loans and receivables and are measured at amortized cost using the effective interest method.
Accounts payable and long term debt are classified as other liabilities and are measured at amortized cost using the effective interest
method.
Risk Management Contracts
The Company enters into risk management contracts in order to manage its exposure to market risks from fluctuations in commodity prices,
foreign exchange rates and interest rates in the normal course of operations. Petrus has not designated its risk management contracts as
effective hedges, and thus has not applied hedge accounting, even though it considers most of these contracts to be economic hedges. As a
result, all risk management contracts are classified as fair value through profit or loss and are recorded at fair value on the balance sheet with
changes in fair value recorded in the statement of income (loss) and comprehensive income (loss). The fair values of these derivative
instruments are generally based on an estimate of the amounts that would be paid or received to settle these instruments at the balance
sheet date.
(h) Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance of common shares are recognized as a reduction in share
capital, net of any tax effects.
(i) Flow-through shares
The resources expenditure deductions for income tax purposes related to exploratory activities funded by flow-through shares are renounced to
investors in accordance with tax legislation. Upon issuance of a flow-through share, a liability is recognized representing the premium paid on flow-
through common shares over regular common shares. This liability is reduced as the expenditures are incurred and tax attributes are renounced.
(j) Income taxes
The Company’s income tax expense is comprised of current and deferred tax. Income tax expense is recognized through income or loss except to the
extent that it relates to items recognized directly in equity, in which case the related income taxes are also recognized in equity.
Current tax is the expected tax payable on taxable income for the period, 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 temporary differences between the carrying amounts of assets and liabilities in the financial statements and the
corresponding tax basis used in the computation of taxable income. Deferred tax liabilities are generally recognized for all taxable temporary
differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable income
will be available against which those deductible temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at the end
Page | 31
of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the
asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is expected to be settled or
the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
(k) Joint arrangements
A portion of the Company’s exploration, development and production activities are conducted jointly with others through unincorporated joint
operations. These financial statements reflect only the Company’s proportionate interest of these joint operations and the proportionate share of the
relevant revenue and related costs.
(l) Share-based compensation
Share-based compensation expense is determined based on the estimated fair value of shares on the date of grant. Forfeitures are estimated at the
grant date and are subsequently adjusted to reflect actual forfeitures. The expense is recognized over the service period, with a corresponding increase
to contributed surplus. The Company capitalizes the qualifying portion of share-based compensation expense directly attributable to the exploration
and development activities of exploration and evaluation assets and petroleum and natural gas assets, with a corresponding decrease to share-based
compensation expense. At the time the stock options or performance warrants are exercised, the issuance of common shares is recorded as an increase
to shareholders’ capital and a corresponding decrease to contributed surplus.
(m) Earnings per share
Earnings per share are presented for basic and diluted earnings. Basic per share information is computed by dividing the net income (loss) for the period
attributable to equity owners of the Company by the weighted average number of common shares outstanding during the period. The weighted
average number of shares for diluted earnings per share information is calculated using the treasury stock method whereby it is assumed that proceeds
obtained upon exercise of performance warrants and stock options would be used to purchase common shares at the average market price during the
period. The treasury stock method also assumes that the deemed proceeds related to unrecognized share-based payments expense are used to
repurchase shares at the average market price during the period. Under the treasury stock method, stock options and share warrants have a dilutive
effect only when the average market price of the common shares during the period exceeds the exercise price of the options or warrants (they are "in-
the-money"). Exercise of in-the-money stock options and share warrants is assumed at the beginning of the year or date of issuance, if later. Should the
Company have a loss for the period, stock options and share warrants would be anti-dilutive and therefore will have no effect on the determination of
loss per share.
(n) Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at the inception date, whether
fulfillment of the arrangement is dependent on the use of a specific asset or the arrangement conveys a right to use an asset. Leases which transfer
substantially all the risks and benefits of ownership to the Company are classified as finance leases. The leased asset is recognized at the lower of the
fair value of the leased property or the present value of the minimum lease payments. Finance lease assets are depreciated over the shorter of the
estimated useful life of the asset or the lease term. Other leases are classified as operating leases and payments are amortized on a straight-line basis
over the lease term.
(o) New standards and interpretations
In July 2014, the IASB completed the final elements of IFRS 9 “Financial Instruments.” The Standard supersedes earlier versions of IFRS 9 and
completes the IASB’s project to replace IAS 39 “Financial Instruments: Recognition and Measurement.” IFRS 9, as amended, includes a principle-based
approach for classification and measurement of financial assets, a single ‘expected loss’ impairment model and a substantially-reformed approach to
hedge accounting. The Standard will come into effect for annual periods beginning on or after January 1, 2018 with earlier adoption permitted. IFRS 9
will be applied by Petrus on January 1, 2018 and the Company is currently evaluating the impact of the standard on its financial statements.
In May 2014, the IASB issued IFRS 15” Revenue from Contracts with Customers” which replaces IAS 18 “Revenue,” IAS 11 “Construction Contracts,”
and related interpretations. The standard is required to be adopted for fiscal years beginning on or after January 1, 2018, with earlier adoption
permitted. IFRS 15 will be applied by Petrus on January 1, 2018 and the Company is currently evaluating the impact of the standard on its financial
statements.
In January 2016, the IASB issued IFRS 16 “Leases”, which replaces IAS 17 “Leases”. For lessees applying IFRS 16, a single recognition and measurement
model for leases would apply, with required recognition of assets and liabilities for most leases. The standard will come into effect for annual periods
beginning on or after January 1, 2019, with earlier adoption permitted. The Company is currently evaluating the impact of the standard on its
financial statements.
4. DETERMINATION OF FAIR VALUES
A number of the Company’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and
liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.
Petroleum and natural gas properties and equipment and exploration and evaluation assets
The fair value of petroleum and natural gas properties and equipment recognized in a business combination and for impairment testing, is
based on market values. The market value of petroleum and natural gas properties and equipment is the estimated amount for which property,
plant and equipment could be exchanged on the acquisition date between a willing buyer and a willing seller in an arm’s length transaction
after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of oil and
Page | 32
natural gas interests (included in petroleum and natural gas properties and equipment) and intangible exploration and evaluation assets is
estimated with reference to the discounted cash flow expected to be derived from oil and natural gas production based on externally prepared
reserve reports. The risk-adjusted discount rate is specific to the asset with reference to general market conditions. The fair value less cost to
dispose value used to determine the recoverable amount of the impaired petroleum and natural gas properties are classified as Level 3 fair
value measurements. Refer to “Financial Instruments” section below for fair value hierarchy classifications.
Derivatives
The fair value of commodity price risk management contracts is determined by discounting the difference between the contracted prices and
published forward price curves as at the balance sheet date, using the remaining contracted oil and natural gas volumes and a risk-free interest
rate (based on published government rates). The fair value of options is based on option models that use published information with respect to
volatility, prices and interest rates.
Share-based payments
The fair value of employee share-based payments is measured using a Black-Scholes option-pricing model. Measurement inputs include share
price on measurement date, exercise price of the instrument, expected volatility in share price (based on weighted average historic volatility
adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical
experience and general option holder behavior), expected dividend yield, risk-free interest rate (based on government bonds) and estimated
forfeiture rate at the initial grant date.
Financial Instruments
The Company’s fair value measurements require disclosure about how the fair value was determined based on significant levels of inputs
described in the following hierarchy:
•
•
•
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are
those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or
indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for
commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.
Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.
Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement within the
fair value hierarchy level. The Company’s cash is considered Level 1 and the financial instruments are considered Level 2.
5. ACQUISITIONS AND DISPOSITIONS
a. Property acquisitions and dispositions
Business combination
On January 20, 2015 Petrus closed an acquisition of petroleum and natural gas assets in the Ferrier area of Alberta, for total cash consideration of $4.4
million, net of adjustments. The transaction was accounted for as a business combination using the acquisition method whereby the net assets acquired
and the liabilities assumed are recorded at fair value. The acquisition was financed by way of the Company’s revolving credit facility. Acquisition related
costs, which relate to professional fees, are charged to finance expenses in the Statement of Net Income (Loss).
Petrus obtained resource tax pools equal to the total net assets acquired of $4.4 million.
The following table summarizes the net assets acquired pursuant to the acquisition:
Fair value of net assets acquired $000s
Exploration and evaluation assets
Petroleum and natural gas properties and equipment
Decommissioning obligations
Total net assets acquired
1,136
3,313
(91)
4,358
Property disposition
On February 6, 2015 Petrus closed the disposition of non-core petroleum and natural gas assets in the Pembina area of Alberta for total cash consideration
of $7.7 million after post-closing adjustments. The Company recorded a loss of $0.05 million on the divestiture.
Business combination
On February 6, 2015 Petrus closed an acquisition of petroleum and natural gas assets in the Ferrier area of Alberta for total cash consideration of $4.4
million, net of adjustments. The transaction was accounted for as a business combination using the acquisition method whereby the net assets acquired
and the liabilities assumed were recorded at fair value. The acquisitions were financed by way of the Company’s revolving credit facility. Acquisition
related costs, which relate to professional fees, are charged to finance expenses in the Statement of Net Income (Loss).
Petrus obtained resource tax pools equal to the total net assets acquired of $4.4 million.
Page | 33
The following table summarizes the net assets acquired pursuant to the acquisition:
Fair value of net assets acquired $000s
Exploration and evaluation assets
Petroleum and natural gas properties and equipment
Decommissioning obligations
Total net assets acquired
1,063
3,921
(631)
4,353
From the date of their respective acquisitions to December 31, 2015, the above business combinations contributed approximately $0.7 million of revenue
and $0.5 million of operating income. If the acquisitions had taken place at January 1, 2015, the proforma incremental revenue and operating income
(defined as revenue, net of royalties, less operating and transportations costs) of the Company for the year ended December 31, 2015 would have been
approximately $0.8 million and $0.6 million, respectively. The proforma information is not necessarily indicative of the results of operations that would
have resulted had the acquisitions been effective on the dates indicated, or future results.
Property disposition
On May 7, 2015 Petrus closed the disposition of non-core exploration and evaluation assets in the Ferrier area of Alberta for total cash consideration of $0.1
million.
Business combination
On February 28, 2014 Petrus closed an acquisition of petroleum and natural gas assets in the central Alberta foothills, for total cash consideration of $19.1
million, net of adjustments. The transaction was accounted for as a business combination using the acquisition method whereby the net assets acquired
and the liabilities assumed are recorded at fair value. The acquisition was financed by way of the Company’s revolving credit facility. Acquisition related
costs, which relate to professional fees, are charged to finance expenses in the Statement of Net Income (Loss).
Petrus obtained resource tax pools equal to the total net assets acquired of $19.1 million. Neither deferred tax nor goodwill was recorded in conjunction
with the acquisition.
The following table summarizes the net assets acquired pursuant to the acquisition:
Fair value of net assets acquired $000s
Exploration and evaluation assets
Petroleum and natural gas properties and equipment
Decommissioning obligations
Total net assets acquired
5,446
17,058
(3,391)
19,113
From the date of acquisition to December 31, 2014, the assets contributed approximately $6.9 million of revenue and $4.1 million of operating income. If
the acquisition had taken place at January 1, 2014, the proforma incremental revenue and operating income (defined as revenue, net of royalties, less
operating and transportations costs) of the Company for the year ended December 31, 2014 would have been approximately $8.9 million and $5.3 million,
respectively. The proforma information is not necessarily indicative of the results of operations that would have resulted had the acquisitions been
effective ono the dates indicated, or future results.
Royalty interest disposition
On August 29, 2014 Petrus closed the disposition of non-core royalty interest properties for total cash consideration of $4.2 million after post-closing
adjustments. The Company recorded a gain of $2.2 million on the divestiture during the year ended December 31, 2014.
Business combination
On September 5, 2014 Petrus closed an acquisition of petroleum and natural gas assets in the Ferrier area of Alberta and on November 7, 2014 Petrus
closed a minor acquisition of petroleum and natural gas assets in the Peace River area of Alberta, for total cash consideration of $14.9 million, net of
adjustments. The transactions were accounted for as business combinations using the acquisition method whereby the net assets acquired and the
liabilities assumed were recorded at fair value. The acquisitions were financed by way of the Company’s revolving credit facility. Acquisition related costs,
which relate to professional fees, are charged to finance expenses in the Statement of Net Income (Loss).
Petrus obtained resource tax pools equal to the total net assets acquired of $14.9 million. Neither deferred tax nor goodwill was recorded in conjunction
with the acquisition.
The following table summarizes the net assets acquired pursuant to the acquisition:
Fair value of net assets acquired $000s
Exploration and evaluation assets
Petroleum and natural gas properties and equipment
Decommissioning obligations
Total net assets acquired
10,864
7,703
(3,695)
14,872
From the date of acquisition to December 31, 2014, the assets contributed approximately $0.7 million of revenue and $0.4 million of operating income. If
the acquisition had taken place at January 1, 2014, the proforma incremental revenue and operating income (defined as revenue, net of royalties, less
operating and transportations costs) of the Company for the twelve months ended December 31, 2014 would have been approximately $2.4 million and
Page | 34
$1.6 million, respectively. The proforma information is not necessarily indicative of the results of operations that would have resulted had the acquisitions
been effective on the dates indicated, or future results.
b. Corporate acquisitions and dispositions
(i) Arriva Energy Inc.
On September 8, 2014 Petrus acquired all of the issued and outstanding shares of Arriva Energy Inc. (“Arriva”) at a price of $2.05 per share. As
consideration Petrus paid $103 million in cash by way of its revolving credit facility. Transaction costs of $0.2 million were charged to general &
administrative expenses. Arriva was a privately held entity with oil and natural gas operations in the Ferrier area of Alberta, Canada. Petrus acquired the
business in order to establish a core operating area in this geographic location as well as to provide accretive, liquids rich natural gas weighted petroleum
and natural gas assets to Petrus.
Results from Arriva operations are included in the Company’s financial statements from the closing date of the transaction. Petrus obtained the tax base of
the identifiable assets and liabilities of Arriva at pre-acquisition amounts and obtained tax basis for the cost of the shares acquired. No goodwill was
recorded in connection with the acquisition. The temporary differences gave rise to an $18.5 million deferred tax liability.
The acquisition has been accounted for using the acquisition method based on fair values.
Fair value of net assets acquired $000s
Accounts receivable
Other current assets
Current liabilities
Petroleum and natural gas properties and equipment
Exploration and evaluation assets
Bank debt
Decommissioning obligations
Deferred income tax liability
Risk management liability
Total net assets acquired
Cash consideration
Excess of net assets acquired over consideration
593
1,520
(1,042)
113,908
8,809
—
(2,330)
(18,450)
(8)
103,000
103,000
—
From the date of acquisition to December 31, 2014, the acquisition contributed approximately $5.7 million of revenue and $3.7 million of operating income.
If the acquisition had taken place at January 1, 2014, the proforma incremental revenue and operating income defined as revenue, net of royalties, less
operating and transportations costs of the Company for the year ended December 31, 2014 would have been approximately $15.0 million and $10.1 million,
respectively. The proforma information is not necessarily indicative of the results of operations that would have resulted had the acquisitions been
effective on the dates indicated, or future results.
(ii) Ravenwood Energy Corp.
On October 8, 2014 Petrus acquired all of the issued and outstanding common shares of Ravenwood for $195 million, inclusive of debt and transaction
costs. Ravenwood was a privately held entity with oil and natural gas operations in the Thorsby and Pembina areas of Alberta, Canada and was controlled
by a shareholder of Petrus. Petrus acquired the business in order to establish a core operating area in this geographic location as well as to provide
accretive, oil weighted petroleum and natural gas assets to Petrus. Transaction costs of $0.4 million were incurred in conjunction with the acquisition and
relate to professional service fees. These transaction costs were recorded in the Statement of Net Income (Loss) as general & administrative expenses. The
transaction was accounted for as a business combination using the acquisition method whereby the net assets acquired and the liabilities assumed are
recorded at fair value. The acquisition was financed by way of a Term Loan (note 8) as well as proceeds from the Company’s equity issuances (note 11).
The acquisition has been accounted for using the acquisition method as follows:
Fair value of net assets acquired $000s
Cash
Accounts receivable
Other current assets
Risk management asset
Current liabilities
Petroleum and natural gas properties and equipment
Exploration and evaluation assets
Bank debt
Decommissioning obligations
Deferred income tax liability
Risk management liability
Total net assets acquired
Cash consideration
Excess of net assets acquired over consideration
30,703
7,177
1,191
177
(22,429)
226,524
12,706
(28,249)
(20,169)
(11,825)
(806)
195,000
195,000
—
From the date of acquisition to December 31, 2014, the acquisition contributed approximately $13 million of revenue and $8.9 million of operating income.
If the acquisition had taken place at January 1, 2014, the proforma incremental revenue and operating income defined as revenue, net of royalties, less
Page | 35
operating and transportations costs of the Company for the year ended December 31, 2014 would have been approximately $55.2 million and $43.7 million,
respectively. The proforma information is not necessarily indicative of the results of operations that would have resulted had the acquisitions been effective
on the dates indicated, or future results.
6. EXPLORATION AND EVALUATION ASSETS
$000s
Balance, December 31, 2013
Additions
Property acquisitions (note 5)
Corporate acquisitions (note 5)
Exploration and evaluation expense
Capitalized G&A and share-based compensation
Transfers to property, plant and equipment
Balance, December 31, 2014
Additions
Property acquisitions (note 5)
Property dispositions (note 5)
Exploration and evaluation expense
Capitalized G&A and share-based compensation
Transfers to property, plant and equipment
Balance, December 31, 2015
50,529
5,753
16,310
21,514
(1,158)
1,272
(147)
94,073
941
2,199
(217)
(6,275)
547
(3,090)
88,178
Exploration and evaluation assets consist of Petrus’ undeveloped land and exploration and development projects which are pending the determination
of technical feasibility. Additions represent the Company’s share of costs incurred on these assets during the period. For the year ended December 31,
2015 the Company incurred $6.3 million of exploration and evaluation expense in the Statement of Net Income (Loss) and Comprehensive Income
(Loss) which relates to expiring undeveloped land in non-core properties (2014 - $1.2 million).
During the year ended December 31, 2015 the Company capitalized $0.5 million (2014 - $1.3 million) of general & administrative expenses (“G&A”)
directly attributable to exploration activities. Included in this amount is non-cash share-based compensation of $0.1 million (2014 - $0.4 million).
7. PROPERTY, PLANT AND EQUIPMENT
$000s
Balance, December 31, 2013
Additions
Property acquisitions (note 5)
Property (dispositions) (note 5)
Corporate acquisitions (note 5)
Capitalized G&A and share-based compensation
Transfers from exploration and evaluation assets
Depletion & depreciation
Increase in decommissioning provision (note 9)
Impairment loss
Balance, December 31, 2014
Additions
Property acquisitions (note 5)
Property dispositions (note 5)
Capitalized G&A and share-based compensation
Transfers from exploration and evaluation assets (note 6)
Depletion & depreciation
Increase in decommissioning provision (note 9)
Impairment loss
Balance, December 31, 2015
Cost
Accumulated
DD&A
175,891
107,662
17,675
(2,880)
317,935
1,272
147
—
43,492
—
661,194
51,860
6,512
(10,781)
1,641
3,090
—
4,798
—
718,314
(25,678)
—
—
816
—
—
—
(36,850)
—
(104,762)
(166,474)
—
—
3,173
—
—
(54,627)
—
(67,494)
(285,422)
Net book value
150,213
107,662
17,675
(2,064)
317,935
1,272
147
(36,850)
43,492
(104,762)
494,720
51,860
6,512
(7,608)
1,641
3,090
(54,627)
4,798
(67,494)
432,892
Estimated future development costs of $325.3 million (2014 - $199.4 million) associated with the development of the Company’s proved plus probable
undeveloped reserves were included with the costs subject to depletion. During the year ended December 31, 2015 the Company capitalized $1.6
million (2014 - $1.3 million) of general & administrative expenses (“G&A”) directly attributable to development activities. Included in this amount is
non-cash share-based compensation of $0.4 million (2014 - $0.3 million).
For the year ended December 31, 2015, the Company recorded property, plant and equipment impairments of $67.5 million, resulting from a decline in
oil and natural gas price forecasts on three of its four CGUs; Central Alberta - $5.0 million; Peace River - $8.8 million; and Foothills - $53.7 million (2014 -
$104.8; Central Alberta - $60.3 million; Ferrier - $26.1 million; Peace River - $13.6 million; and Foothills - $4.8 million). The recoverable amounts of the
Company’s CGUs were estimated at fair value less costs of disposal, based on the net present value of pre-tax cash flows from oil and natural gas
reserves, using reserve values estimated by independent reserve evaluators. The recoverable amount for each of the Company’s four CGUs was as
Page | 36
follows: Central Alberta - $128.7 million; Ferrier - $139.9 million; Peace River - $51.3 million; and Foothills - $74.6 million (2014 - Central Alberta -
$155.2 million; Ferrier - $100.2 million; Peace River - $59.7 million; and Foothills - $120.8 million).
In calculating the net present values of cash flows from oil and natural gas reserves, the Company used a pre-tax discount rate of 10% and the following
forward commodity price estimates:
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Remainder
(1)
As at December 31, 2015, a one percent change in pre-tax discount rate is estimated to change the impairment by approximately $9.4 million; a
$1.00/Bbl change in the price of oil is estimated to change the impairment by approximately $4.8 million; and a $0.10/mcf change in the price of natural
gas is estimated to change the impairment by approximately $5.5 million.
Oil (CDN$/bbl)(1) AECO Gas (CDN$/mcf)
2.25
2.95
3.42
3.91
4.20
4.28
4.35
4.43
4.51
4.59
4.67
1.5%/yr
55.20
69.00
78.43
89.41
91.71
93.08
94.48
95.90
97.34
98.80
100.28
+1.5%/yr
Source: Sproule Canadian price forecasts ($CDN/bbl) for Canadian Light Sweet Crude
8. DEBT
At December 31, 2015 Petrus has two debt instruments outstanding. The first is a reserve-based, revolving credit facility with a syndicate of lenders.
The total facility is comprised of an operating facility and a syndicated term-out facility (altogether the “Revolving Credit Facility” or “RCF”). The
second is a second lien term loan (the “Term Loan”).
(a) Revolving Credit Facility
At December 31, 2015 the Company’s RCF is comprised of a $20 million operating facility and a $140 million syndicated term-out facility. The Company
has provided collateral by way of a $600 million debenture over all of the present and after acquired property of the Company. The term-out facility
has a revolving period that ends July 29, 2016 at which time it will either be renewed or converted to a one-year term facility.
At December 31, 2015, the Company had a $2.4 million letter of credit outstanding against the RCF (December 31, 2014; Nil) and had drawn $145
million against the RCF (December 31, 2014; $99.7 million).
The amount of the RCF is subject to a borrowing base review performed on a semi-annual basis by the lenders, based primarily on reserves and
commodity prices estimated by the lenders as well as other factors. In addition, asset dispositions require majority lender consent. A decrease in the
borrowing base could result in a reduction to the available credit under the RCF.
(b) Long Term Debt
At December 31, 2015 the Company had a $90 million Term Loan outstanding which was repayable on October 8, 2016. Interest is due and payable
monthly and accrues at a per annum rate of (three-month) the Canadian Dealer offered Rate (CDOR) plus 700 basis points.
Covenants
The following definitions are used in the covenant calculations for both debt instruments:
Debt to EBITDA Ratio
Debt is defined as Petrus’ total debt outstanding of the borrower and EBITDA means earnings before interest, taxes, depreciation and amortization.
PV10 to Net Secured Debt Ratio
Net Secured Debt means all amounts owing under the RCF and any other secured debt of Petrus, minus restricted cash and cash equivalents and “PV10”
means the discounted net present value (at a discount rate of 10%) of Petrus’ proved reserves, as adjusted for commodity swaps in effect.
Working Capital
Working Capital means Current Assets to Current Liabilities whereby Current Assets means on any date of determination, the current assets of Petrus that
would, in accordance with IFRS, be classified as of that date as current assets plus any undrawn availability under the RCF, less any non-cash amount
required to be included in current assets as the result of the application of IFRS including non-cash commodity and interest rate hedges assets and liabilities
and whereby Current Liabilities means, on any date of determination, the liabilities of Petrus that would, in accordance with IFRS, be classified as of that
date as current liabilities, excluding (a) non-cash obligations under IFRS including non-cash commodity and interest rate hedges assets and liabilities, and
(b) the current portion of long-term debt.
Working Capital Ratio means the ratio of Current Assets to Current Liabilities as defined above.
Page | 37
Proved Asset and PDP Asset Coverage Ratio
Means the ratio of (a) Total Adjusted Present Value or (b) PDP Present Value depending on the reserve category, to Total Debt
Whereby Total Adjusted or PDP reserve value means the present value (discounted at 10.0%) of future net revenues attributable to the respective reserve
category based on the reserve report most recently delivered to the lender.
The RCF carries the following covenants:
(a) The Company is unable to borrow amounts greater than the RCF limit;
(b) PV10 to Net Secured Debt Ratio will not be less than 1.25 to 1.00 and must be reported at each borrowing base redetermination date, using
the most current reserve report and the Net Secured Debt at the date of the borrowing base redetermination
The RCF and the Term Loan carry the following covenants:
a. Working Capital Ratio at the end of each fiscal quarter will not be less than 1.00 to 1.00;
b.
c.
Proved Asset Coverage Ratio will not be less than 1.25 to 1.00; and
PDP Asset Coverage Ratio will not be less than 1.00 to 1.00 whereby the asset coverage ratios must be reported at each borrowing
base redetermination date, using the most current reserve report and the Total Debt at the date of the borrowing base
redetermination.
At December 31, 2015 the Company was not in breach of the covenants.
Subsequent Event
On March 22, 2016 the banking agreements related to the RCF and Term Loan were amended as follows:
(a) Maturity and repayment date of the Term Loan was extended to October 8, 2017;
(b) From March 22, 2016 to the May 2016 borrowing base redetermination, borrowings by the Company under the RCF in an aggregate amount
exceeding $120 million shall require consent of the first lien lenders;
(c) When any indebtedness under the Term Loan remains outstanding the following covenants apply to both instruments:
a.
b.
Total Debt to EBITDA Ratio shall not exceed (i) 4.0:1.0 for the period beginning April 1, 2016 and ending December 31, 2016, and
(ii) 3.5:1.0 for the period beginning January 1, 2017 and thereafter; and
Total Debt of Petrus shall not exceed $190 million, provided that, prior written consent of all of the lenders is required for any
drawdown in excess of the total RCF.
On March 22, 2016 the Company reduced the amount drawn on the RCF by $40 million (classified as current at December 31, 2015) and as a result,
the total outstanding on the RCF is $105 million in addition to a letters of credit against the RCF which total $2.8 million. On March 22, 2016 the
Company reduced the amount drawn on the Term Loan by $40 million. As a result, the total outstanding on the Term Loan at March 22, 2016 is $50
million.
9. DECOMMISSIONING OBLIGATION
The decommissioning liability was estimated based on the Company’s net ownership interest in all wells and facilities, the estimated costs to abandon
and reclaim the wells and facilities and the estimated timing of the costs to be incurred in future periods. The estimated future cash flows have been
discounted using an average risk free rate of 2.04 percent and an inflation rate of 2 percent (December 31, 2014; 2.33 percent and 2 percent,
respectively). Changes in estimates in 2015 are due to the decrease in discount rate from 2.33 percent to 2.04 percent at December 31, 2015 and
changes in estimated well life due to revised commodity price forecasts. The Company has estimated the net present value of the decommissioning
obligations to be $64.4 million as at December 31, 2015 ($58.6 million at December 31, 2014). The undiscounted, uninflated total future liability at
December 31, 2015 is $64.8 million ($61.8 million at December 31, 2014). The payments are expected to be incurred over the operating lives of the
assets. The following table reconciles the decommissioning liability:
$000s Balance, December 31, 2013
Property acquisitions (note 5)
Corporate acquisitions (note 5)
Liabilities incurred
Liabilities settled
Change in estimates
Accretion expense
Balance, December 31, 2014
Property acquisitions (note 5)
Property dispositions (note 5)
Liabilities incurred
Liabilities settled
Change in estimates
Accretion expense
Balance, December 31, 2015
Page | 38
15,547
7,086
22,498
7,009
(1,096)
6,899
691
58,634
723
(517)
543
(335)
4,048
1,261
64,357
10. FINANCIAL RISK MANAGEMENT
The Company utilizes commodity contracts as a risk management technique to mitigate exposure to commodity price volatility. The following table
summarizes the financial derivative contracts Petrus has outstanding as at December 31, 2015:
Natural Gas
Contract Period
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Nov. 1, 2015 to Mar. 31, 2016
Jan. 1, 2016 to Mar. 31, 2016
Feb. 1, 2016 to Mar. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Apr. 1, 2016 to Oct. 31, 2016
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Nov. 1, 2016 to Mar. 31, 2017
Jan. 1, 2016 to Mar. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Nov. 1, 2017 to Mar. 31, 2018
Crude Oil
Contract Period
Jan. 1, 2016 to Mar. 31,2016
Jan. 1, 2016 to Jun. 30, 2016
Jan. 1, 2016 to Jun. 30, 2016
Jan. 1, 2016 to Dec. 31, 2016
Jan. 1, 2016 to Dec. 31, 2016
Jul. 1, 2016 to Sep. 30, 2016
Oct. 1, 2016 to Dec. 31, 2016
Jan. 1, 2017 to Mar. 31, 2017
Jan. 1, 2017 to Mar. 31, 2017
Jan. 1, 2017 to Jun. 30, 2017
Apr. 1, 2017 to Jun. 30, 2017
Jul. 1, 2017 to Sep. 30, 2017
Oct. 1, 2017 to Dec. 31, 2017
Risk Management Asset and Liability
$000s At December 31, 2015
Commodity derivatives
$000s At December 31, 2014
Commodity derivatives
Type
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Costless Collar
Fixed price
Fixed price
Fixed price
Costless Collar
Fixed price
Fixed price
Fixed price
Fixed price
Daily Volume
6,000 GJ
6,000 GJ
4,000 GJ
2,000 GJ
5,000 GJ
2,000 GJ
2,000 GJ
2,000 GJ
6,000 GJ
2,000 GJ
5,000 GJ
5,000 GJ
2,000 GJ
2,000 GJ
6,000 GJ
5,000 GJ
4,000 GJ
5,000 GJ
7,000 GJ
5,000 GJ
Price (CAD$/GJ)
$3.74/GJ
$2.87/GJ
$2.96/GJ
$3.03/GJ
$3.26/GJ
$2.23/GJ
$2.93/GJ
$2.28/GJ
$2.75/GJ
$2.85/GJ
$2.91/GJ
$2.50 – 3.15/GJ
$3.38/GJ
$3.31/GJ
$3.21/GJ
$2.75 – 3.75/GJ
$2.54/GJ
$2.64/GJ
$2.84/GJ
$3.02/GJ
Type
Daily Volume
Price ($/Bbl)
250 Bbl
250 Bbl
250 Bbl
250 Bbl
700 Bbl
250 Bbl
250 Bbl
500 Bbl
100 Bbl
500 Bbl
400 Bbl
500 Bbl
400 Bbl
WTI $USD40.00-75.00/Bbl
WTI $CAD77.70/Bbl
WTI $CAD70.00-83.40/Bbl
WTI $CAD70.00-82.30/Bbl
WTI $CAD70.00-75.75/Bbl
WTI $CAD70.00-84.00/Bbl
WTI $CAD70.00-85.00/Bbl
WTI $CAD70.00-78.00/Bbl
WTI $CAD65.00-71.00/Bbl
WTI $CAD70.00-78.40/Bbl
WTI $CAD65.00-72.70/Bbl
WTI $CAD65.00-74.20/Bbl
WTI $CAD65.00-75.85/Bbl
Current Asset
13,978
13,978
Current Asset
14,609
14,609
Current Liability
45
45
Current Liability
197
197
Costless Collar
Fixed Price
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Costless Collar
Page | 39
Subsequent to December 31, 2015 the Company entered into the following financial derivative contracts:
Natural Gas
Period Hedged
Apr. 1, 2016 to Dec. 31, 2016
Nov. 1, 2016 to Dec. 31, 2016
Nov. 1, 2016 to Mar. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Apr. 1, 2017 to Oct. 31, 2017
Nov. 1, 2017 to Mar. 31, 2018
Crude Oil
Contract Period
Apr. 1, 2016 to Dec. 31, 2016
Apr. 1, 2017 to Jun 30, 2017
Jul. 1, 2017 to Sep. 30, 2017
Oct. 1, 2017 to Mar. 31, 2018
Type
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Fixed price
Daily Volume
1,200 GJ
1,200 GJ
2,000 GJ
2,650 GJ
2,000 GJ
1,500 GJ
Price (CAD$/GJ)
$1.77/GJ
$2.33/GJ
$2.80/GJ
$2.27/GJ
$2.65/GJ
$2.69/GJ
Type
Daily Volume
Price ($/Bbl)
Costless collar
Fixed price
Fixed price
Costless collar
150 Bbl
300 Bbl
600 Bbl
300 Bbl
WTI $CDN40.00-61.80/Bbl
WTI $CDN59.25/Bbl
WTI $CDN59.80/Bbl
WTI $CDN55.00-64.02/Bbl
Earnings Impact of Realized and Unrealized Gains (Losses) on Commodity Financial Instruments
$000s
Realized gain (loss)
Unrealized gain (loss)
Year ended
Dec. 31, 2015
16,563
(479)
16,084
Year ended
Dec. 31, 2014
(918)
17,311
16,393
11. SHARE CAPITAL
Authorized
The authorized share capital consists of an unlimited number of common voting shares without par value.
Issued and Outstanding
Common shares $000s except share amounts
Balance, December 31, 2013
Common shares issued under private placement (a)
Flow-through shares issued, net of premium (a)
Common shares issued under private placement (b)
Flow-through shares issued, net of premium (b)
Common shares issued under private placement (c)
Common shares issued under private placement (d)
Share issue costs
Tax effect of share issue costs
Balance, December 31, 2014 and 2015
Number of Shares (1)
Amount
21,594,150
3,814,000
28,750
4,446,181
50,000
5,181,319
33,750
—
—
35,148,150
144,339
49,582
374
71,139
800
82,901
540
(4,759)
1,190
346,106
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
Share Issuances
(a) On June 2, 2014 the Company issued 3,814,000 common shares at a price of $13.00 per share and 28,750 flow-through shares at a price of
$15.60 per share for total gross proceeds of $50.0 million. Of the issuance price, $2.60 per share or $0.1 million was determined to be the
premium on the flow-through shares. The common shares issued were subject to a restricted hold period which expired on October 3, 2014.
(b) On September 5, 2014 the Company issued 4,446,181 common shares at a price of $16.00 per share and 50,000 flow-through shares at a price of
$19.20 per share for total gross proceeds of $72.1 million. Of the issuance price, $3.20 per share or $0.2 million was determined to be the
premium on the flow-through shares. The common shares issued are subject to a restricted hold period which expired on January 6, 2015.
(c) On September 23, 2014 the Company issued 5,181,319 common shares at a price of $16.00 per share for total gross proceeds of $82.9 million.
The common shares issued are subject to a restricted hold period which expired on January 24, 2015.
(d) On October 15, 2014 the Company issued 33,750 common shares at a price of $16.00 per share for total gross proceeds of $0.5 million. The
common shares issued are subject to a restricted hold period which expired on February 15, 2015
SHARE-BASED COMPENSATION
Performance Warrants
The Company has issued performance warrants to employees, consultants and directors of the Company. Performance warrants were granted and vest
based on three criteria, time (one third vest per year), market (one third vest as certain share price hurdles are achieved) and employment or service.
The warrants expire five years from the date of issuance. Upon exercise of the warrants the Company will settle the obligation by issuing common
shares of the Company. The shares to be offered consist of common shares of the Company`s authorized but unissued common shares. The aggregate
number of shares issuable upon the exercise of all warrants granted shall not exceed 20% of the 8,028,254 issued and outstanding shares as at April 30,
2012. At December 31, 2015, 1,568,568 (December 31, 2014; 1,601,901) performance warrants were issued and outstanding.
Page | 40
Balance, December 31, 2013
Forfeited or expired
Balance, December 31, 2014
Forfeited or expired
Balance, December 31, 2015
Exercisable, December 31, 2015
Number of Outstanding
Warrants
(1)
1,605,651
(3,750)
1,601,901
(33,333)
1,568,568
916,558
Weighted Average
Exercise Price ($)
$8.07
$8.00
$8.07
$8.00
$8.07
$8.33
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
The following tables summarize information about the performance warrants granted since inception:
Range of Exercise Price
$8.00 - $9.00
Warrants Outstanding
Warrants Exercisable (1)
(1)
Weighted
average
remaining life
(years)
Number
exercisable
1.01
1.01
916,558
916,558
Weighted
average
exercise price
$8.33
$8.33
Weighted
average
remaining life
(years)
1.07
1.07
Number
granted
1,568,568
1,568,568
Weighted
average
exercise price
$8.07
$8.07
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
Stock Options
The Company has a stock option plan in place whereby it may issue stock options to employees, consultants and directors of the Company. The
aggregate number of shares that may be acquired upon exercise of all options granted pursuant to the plan shall, at any date or time of determination,
be equal to ten percent (10%) of the number that is equal to (i) the number of the Company’s basic common shares then issued and outstanding; minus
(ii) a number equal to five (5) times the number of common shares that are issuable upon exercise of the then outstanding performance warrants minus
(iii) a number equal to fifty percent (50%) of the number of Common Shares that have previously been issued upon the exercise of performance
warrants. The options vest based on time (one third vest per year starting on the date of grant) and expire five years from the date of issuance. At
December 31, 2015, 1,453,750 (December 31, 2014; 1,528,750) stock options were outstanding. The summary of stock option activity is presented
below:
Balance, December 31, 2013
Forfeited or expired
Granted
Balance, December 31, 2014
Granted
Forfeited or expired
Balance, December 31, 2015
Exercisable, December 31, 2015
Number of stock
options (1)
Weighted Average
Exercise Price ($)
1,088,750
(11,250)
451,250
1,528,750
126,250
(201,250)
1,453,750
992,167
$7.36
$15.00
$12.72
$8.79
$14.00
$8.50
$9.28
$7.46
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
The following tables summarize information about the stock options granted since inception:
Range of Exercise Price
Stock Options Outstanding (1)
Stock Options Exercisable (1)
$7.00 - $8.00
$8.01 - $11.00
$11.01 - $16.00
Number
granted
918,750
147,500
387,500
1,453,750
Weighted
average
exercise price
$7.00
$9.61
$14.01
$9.19
Weighted
average
remaining life
(years)
Number
exercisable
1.46
3.09
3.76
2.25
909,667
26,250
56,250
992,167
Weighted
average
exercise price
$6.99
$9.51
$14.04
$7.46
Weighted
average
remaining life
(years)
1.46
2.90
3.66
1.62
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
The weighted average fair value of each stock option granted in 2015 of $4.96 (2014 - $4.48) per option is estimated on the date of grant using the
Black-Scholes pricing model with the following weighted average assumptions:
Risk free interest rate
Expected life (years)
Estimated volatility of underlying common shares (%)
Estimated forfeiture rate
Expected dividend yield (%)
Page | 41
Year ended 2015
Year ended 2014
1.20% - 1.40%
5
50%
20%
0%
1.20% - 1.40%
5
50%
20%
0%
Petrus estimated the volatility of the underlying common shares by analyzing the volatility of peer group companies with similar corporate structure, oil
and gas assets and size.
The following table summarizes the Company’s share-based compensation costs:
$000s
Expensed in net loss
Capitalized to exploration and evaluation assets
Capitalized to property, plant and equipment
Total share-based compensation
2015
655
130
390
1,175
2014
741
371
371
1,483
12. EARNINGS PER SHARE
Earnings per share amounts are calculated by dividing the net income for the period attributable to the common shareholders of the Company by the
weighted average number of common shares outstanding during the year.
Net loss for the year ($000s)
Weighted avg number of common shares – basic(1) (000s)
Weighted avg number of common shares – diluted(1) (000s)
Net loss per common share – basic
Net loss per common share – diluted
Year ended
December 31, 2015
(69,031)
35,148
35,148
(1.96)
(1.96)
Year ended
December 31, 2014
(47,492)
26,680
26,680
(1.78)
(1.78)
(1) All share capital instruments have been retrospectively adjusted to reflect the notional 4 to 1 consolidation of the existing Petrus shares by New Petrus as described in Note 1.
In computing net loss per share for the year ended December 31, 2015, 1,568,568 warrants and 1,453,750 stock options were considered however no
instruments were added to the calculation as their impact is anti-dilutive (December 31, 2014, 1,601,901 warrants and 1,528,7501 stock options were
considered however no instruments were added to the calculation as their impact is anti-dilutive).
13. FINANCE EXPENSES
The components of finance expenses are as follows:
$000s
Cash:
Interest
Foreign exchange
Non cash:
Accretion on decommissioning obligations (note 9)
Amortization of deferred financing costs
Total finance expenses
14. CAPITAL MANAGEMENT
2015
2014
13,366
(567)
12,799
1,261
1,216
15,276
4,007
(2)
4,005
691
—
4,696
The Company’s general capital management policy is to maintain a sufficient capital base in order to manage its business to enable the Company to
increase the value of its assets and therefore its underlying share value. The Company’s objectives when managing capital are (i) to manage financial
flexibility in order to preserve the Company’s ability to meet financial obligations; (ii) maintain a capital structure that allows Petrus the ability to
finance its growth using internally generated cashflow and (iii) to maintain a flexible capital structure which optimizes the cost of capital at an
acceptable risk level and provides an optimal return to equity holders.
In the management of capital, Petrus includes share capital and total net debt, which is made up of debt and working capital (current assets less current
liabilities). Petrus manages its capital structure and makes adjustments in light of economic conditions and the risk characteristics of the underlying
assets. In order to maintain or adjust the capital structure, Petrus may issue new equity, increase or decrease debt, adjust capital expenditures and
acquire or dispose of assets (refer to Note 8 for restrictions).
15. FINANCIAL INSTRUMENTS
Risks associated with Financial Instruments
Credit risk
The Company may be exposed to certain losses in the event that counterparties to financial instruments fail to meet their obligations in accordance
with agreed terms. The Company mitigates this risk by entering into transactions with highly rated major financial institutions and by routinely assessing
the financial strength of its customers.
At December 31, 2015, financial assets on the balance sheet are comprised of cash, deposits, risk management assets and accounts receivable. The
maximum credit risk associated with these financial instruments is the total carrying value.
The Company’s accounts receivable are with customers and joint venture partners in the petroleum and natural gas business and are subject to normal
credit risk. Concentration of credit risk is mitigated by marketing the Company’s production to reputable and financially sound purchasers under normal
industry sale and payment terms. As is common in the petroleum and natural gas industry in western Canada, Petrus’ receivables relating to the sale of
Page | 42
petroleum and natural gas are received on or about the 25th day of the following month. Of the $17.8 million of accounts receivable outstanding at
December 31, 2015 (December 31, 2014; $23.3 million), $15.7 million is owed from 21 parties (December 31, 2014 - $16.6 million from 19 parties), and
the majority of the balance was received subsequent to year end. At December 31, 2015 Petrus recorded a $0.2 million allowance for doubtful
accounts (2014 - $nil). As at December 31, 2015 and 2014, approximately 90% of Petrus’ accounts receivable were all aged less than 90 days and the
Company does not anticipate any significant collection issues.
The Company’s cash and risk management assets are with chartered Canadian banks and the Company does not consider the assets to carry material
credit risk.
Liquidity risk
Liquidity risk relates to the risk the Company will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by
cash as they become due. The Company’s approach to managing liquidity risk is to ensure, as much as possible, that it will have sufficient liquidity to
meet its’ short-term and long-term financial obligations when due, under both normal and unusual conditions without incurring unacceptable losses or
risking harm to the Company’s reputation. The financial liabilities on its balance sheet consist of accounts payable, bank indebtedness, long term debt,
risk management liabilities and accrued liabilities. The Company anticipates it will continue to have adequate liquidity to fund its financial liabilities
through its future cash flows.
Typically the Company ensures that it has sufficient cash on demand to meet expected operational expenses for a normal period. To achieve this
objective, the Company prepares monthly operational and capital expenditure budgets, which are regularly monitored and updated as considered
necessary. Further, the Company has a hedging policy in order to reduce commodity price volatility related to its cashflows. The Company utilizes
authorizations for expenditures on operated and non-operated projects to further manage capital expenditures. The Company also attempts to match
its payment cycle with collection of oil and natural gas revenue on the 25th day of each month. The Company monitors its net debt position and
forecasts its debt covenants to ensure appropriate measures are taken to continue to meet its debt covenants. The Company is not in breach of any
covenant however reduction in forecast cashflow or an increase in total debt could result in a breach of covenant. Furthermore, continued
deterioration of forward commodity price forecasts could result in a reduction to the Company’s reserve values which could also result in a breach of a
covenant under the Company’s banking agreements.
At December 31, 2015, the Company had a $160 million Revolving Credit Facility, of which $12.6 million was undrawn (December 31, 2014, the
Company had a $200 million credit facility of which $100 million was undrawn). On March 22, 2016 Petrus reduced its RCF borrowings by $40 million
using equity proceeds therefore the total amount drawn was $105 million. The banking agreement related to the RCF was amended and as of March
22, 2016, the Company requires lender consent to borrow in excess of $120 million. Petrus anticipates it will continue to have adequate liquidity to
fund its financial liabilities through its future funds from operations and available bank room on its Revolving Credit Facility. The Company is exposed to
the risk of reductions to its borrowing base for purposes of the RCF or Term Loan. The next scheduled borrowing base redetermination date for the RCF
is May 31, 2016.
The following are the contractual maturities of financial liabilities as at December 31, 2015:
Total
$000s
Accounts payable
Bank indebtedness
Long term debt(1)
Total
(1) On March 22, 2016 the maturity and repayment date was extended to October 8, 2017.
11,839
145,000
90,000
246,839
< 1 year
11,839
40,000
90,000
141,839
1-5 years
—
105,000
—
105,000
Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company’s cash and accounts
receivable are not exposed to significant interest rate risk given their short-term or liquid nature. The revolving credit facility and long term debt are
exposed to interest rate cash flow risk as the instruments are priced on a floating interest rate subject to fluctuations in market interest rates. The
remainder of Petrus’ financial assets and liabilities are not exposed to interest rate risk. A 1% change in the Canadian prime interest rate in the year
ended December 31, 2015 would have changed net income (loss) by approximately $2.1 million, which relates to interest expense on the average
outstanding revolving credit facility and long term debt during the year, assuming that all other variables remain constant (year ended December 31,
2014 – $1.1 million). The Company considers this risk to be limited.
Commodity Price Risk
Commodity price risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in commodity prices. A significant change in
commodity prices can materially impact the Company’s borrowing base limit under its revolving credit facility and may reduce the Company’s ability to
raise capital. Commodity prices for petroleum and natural gas are not only influenced by Canadian and United States demand, but also by world events
that dictate the levels of supply and demand.
For the year ended December 31, 2015, it is estimated that a $0.25/mcf change in the price of natural gas would have changed net income (loss) by $3.1
million (year ended December 31, 2014 - $1.9 million). For the year ended December 31, 2015, it is estimated that a $5.00/CDN WTI/bbl change in the
price of oil would have changed net income (loss) by $5.5 million (year ended December 31, 2014 - $4.1 million).
Page | 43
16. DEFERRED INCOME TAXES
$000s
Income (loss) before taxes
Combined federal and provincial tax rate
Computed “expected” tax expense (recovery)
Increase/(decrease) in taxes resulting from:
Permanent items
Tax impact of flow-through shares
Impact of rate change
True up and other
Unrecognized deferred income tax asset
Deferred tax expense (recovery)
Effective tax rate
2015
2014
(86,794)
26.0%
(22,566)
177
—
633
918
3,075
(17,763)
20.6%
(63,467)
25%
(15,867)
680
352
—
(1,140)
—
(15,975)
25.2%
The components of the Company’s deferred tax position at December 31, 2015 and 2014 are as follows:
$000s
Net book value of assets in excess of tax pools
Asset retirement obligations
Share issuance costs
Non capital loss carry-forwards
Unrealized hedging gain
Deferred tax liability
2015
2014
(32,774)
17,376
967
18,193
(3,762)
—
(44,507)
14,658
1,449
14,240
(3,603)
(17,763)
As at December 31, 2015, Petrus did not recognize income tax assets from non-capital losses of $11.5 million (December 31, 2014 – nil).
The Company had non-capital losses of approximately $81.8 million (2014 - $56.7 million) which may be applied against future income for Canadian tax
purposes. These non-capital losses expire in 2025 and onwards.
17. SUPPLEMENTAL CASH FLOW INFORMATION
The following table reconciles the changes in non-cash working capital as disclosed in the statements of cash flows:
$000s
Source (use) in non-cash working capital:
Accounts receivable
Deposits and prepaid expenses
Accounts payable and accrued liabilities
Working capital deficiency acquired
Operating activities
Financing activities
Investing activities
2015
2014
5,582
(67)
(57,992)
—
(52,477)
(28,779)
458
(24,156)
(12,455)
(739)
58,858
(7,239)
38,425
20,834
(881)
18,472
Page | 44
18. OPERATING EXPENSES
The Company’s gross operating expenses for 2015 were $31.2 million (December 31, 2014; $20.7 million) which includes $8.5 million of processing,
gathering and compression charges (December 31, 2014; $7.9 million).
The Company generated processing income recoveries of $2.7 million (December 31, 2014; $2.6 million) which reduced the Company’s reported gross
operating expenses to $28.5 million for the year ended December 31, 2015 ($18.1 million for the year ended December 31, 2014).
19. GENERAL AND ADMINISTRATIVE EXPENSES
The Company’s general and administrative expenses consisted of the following expenditures:
$000s
Salaries and benefits
Subscriptions and licenses
Office costs
Legal, accounting and consulting
Transaction costs
Capitalized general and administrative
20. RELATED PARTY TRANSACTIONS
2015
4,098
161
2,441
1,104
1,364
(1,668)
7,500
2014
3,604
490
552
1,127
1,021
(1,802)
4,992
The Company consider its directors and officers to be key management personnel. The following table outlines transactions with key management
personnel:
$000s
Salaries and wages
Short term employee benefits
Share based compensation, gross
2015
900
31
761
1,692
2014
711
26
472
1,209
21. COMMITMENTS
The commitments for which the Company is responsible are as follows:
$000s
Corporate office lease
Total commitments
Total
3,150
3,150
< 1 year
910
910
1-5 years
2,240
2,240
Page | 45
CORPORATE INFORMATION
OFFICERS
Kevin L. Adair, P. Eng.
President and Chief Executive Officer
DIRECTORS
Don T. Gray
Chairman
Calgary, Alberta
SOLICITOR
Burnet, Duckworth & Palmer LLP
Calgary, Alberta
Neil Korchinski, P. Eng.
Vice President, Engineering and
Chief Operating Officer
Kevin L. Adair
Calgary, Alberta
AUDITOR
Ernst & Young LLP
Chartered Professional Accountants
Calgary, Alberta
Cheree Stephenson, CA
Vice President, Finance and
Chief Financial Officer
Patrick Arnell
Calgary, Alberta
INDEPENDENT RESERVE EVALUATORS
Sproule and Associates
Calgary, Alberta
Donald Cormack
Calgary, Alberta
BANKERS
TD Securities
Calgary, Alberta
Brian Minnehan
Irving, Texas
Macquarie Bank Limited
Houston, Texas
Jeff Zlotky
Irving, Texas
Stephen White
Calgary, Alberta
TRANSFER AGENT
Computershare Trust Company
Calgary, Alberta
HEAD OFFICE
2400, 240 – 4th Avenue S.W.
Calgary, Alberta T2P 5H4
Phone: 403-984-9014
Fax: 403-984-2717
Peter Verburg
Calgary, Alberta
WEBSITE
www.petrusresources.com
Page | 46