(Formerly Bayou Bend Petroleum Ltd.)
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2009 and 2008
April 22, 2010
MESSAGE TO SHAREHOLDERS
Dear Shareholders:
The year 2009 was an extremely eventful year for the Corporation. After the completion of the sale of
substantially all of its U.S. oil and gas properties in May 2009 the Corporation acquired working interests
in the Pulkhana, Arbat and the K 42 blocks in the autonomous region of Kurdistan in northern Iraq. The
Corporation was renamed ShaMaran Petroleum Corp. and has emerged as a leading Kurdistan focused
oil company with a balanced portfolio of appraisal and exploration assets in this under-developed and
under-explored major oil region.
The Pulkhana block is an appraisal/development project of an oil field discovered in 1956 while the
Arbat and Block K 42 are exploration blocks which are expected to have significant potential. The
Corporation has put together an aggressive exploration and appraisal program for 2010 and is planning
to shoot 800 line kilometers of 2D seismic in the three blocks and drill an appraisal/ exploration well in
the Pulkhana block.
Operations commenced in March of this year with the start of the Pulkhana 2D seismic program. We
plan to use this data to pick the first drilling location by mid-year. Further, we have commenced the
procurement activities which should enable us to mobilize a drilling rig to the Pulkhana block before the
end of the year.
Financing
The Corporation successfully completed an equity financing in September 2009 raising $99.7 million
Canadian dollars (net of expenses). The new funds together with the existing capital were utilized to pay
the signature and capacity building bonuses for the three blocks acquired by the Corporation in
Kurdistan and will fund the work program for 2010.
Board of Directors and Management
During the year, Clinton Colden and John Zaoirny stepped down from the Board and we thank them for
the contributions made during their tenure. Alex Schneiter and Cameron Bailey joined the Board during
the year, each bringing different expertise and experience which will assist the Corporation in creating
shareholder value.
In December 2009, the Corporation undertook certain changes to management in order to strengthen
its core operations and retain individuals with the relevant depth of oil and gas experience required to
conduct ShaMaran’s operations in Kurdistan. Pradeep Kabra was promoted to the position of the
President and Chief Executive Officer replacing Keith Hill who remains the Chairman of the Board. In
addition, John Ashbridge was appointed as the Chief Operating Officer and Brenden Johnstone was
appointed as the Chief Financial Officer. John Ashbridge resigned from his position as Chief Operating
Officer in April 2010.
Suite 2101 – 885 West Georgia Street, Vancouver, BC V6C 3E8
Tel: (604) 689-7842 Fax: (604) 689-4250
The Board would like to thank Keith Hill for his stewardship of the Corporation during his tenure as Chief
Executive Officer and looks forward to his guidance in the future as the Chairman of the Board. We
would also like to thank John Ashbridge for his role in ShaMaran.
Outlook
The Corporation has gone through many changes and 2009 was the beginning of a new chapter. We
have started our operations in one of the most exciting oil provinces in the world and have the cash
resources to carry out our work program for the next year. Further, we are, based on the current
reports, optimistic that the regional government of Kurdistan and the federal government of Iraq will
come to an agreement on a possible payment mechanism for oil revenues arising from the sale of oil
produced from Kurdistan before we start producing and exporting oil from our area. This will be an
extremely positive development for the Corporation.
We are proud of the developments at ShaMaran Petroleum over the last 12 months and that we now
have an excellent team in place to carry out the operations in Kurdistan. We are beginning a campaign
that should generate shareholder value and benefit for all the stakeholders. We are grateful for your
support and are sure that we will prove ourselves worthy of your trust.
On behalf of the Board,
“Pradeep Kabra”
Pradeep Kabra
President and CEO
Suite 2101 – 885 West Georgia Street, Vancouver, BC V6C 3E8
Tel: (604) 689-7842 Fax: (604) 689-4250
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
MANAGEMENT DISCUSSION AND ANALYSIS
(Amounts in United States Dollars unless otherwise indicated)
Years Ended December 31, 2009 and 2008
Management’s discussion and analysis (“MD&A”) of the financial and operating results of
ShaMaran Petroleum Corp. (the “Company” or “ShaMaran” and formerly Bayou Bend Petroleum
Ltd) should be read in conjunction with the audited consolidated financial statements for the years
ended December 31, 2009 and 2008 and related notes thereto, prepared in accordance with
Canadian generally accepted accounting principles. The effective date of the MD&A is April 20,
2009. Additional information related to the Company is available on SEDAR at www.sedar.com
and on the Company’s web-site at www.shamaranpetroleum.com.
Overview
ShaMaran is a Canadian-based oil and gas company with interests in petroleum properties located
in the southeastern area of the autonomous region of Kurdistan in Northern Iraq (“Kurdistan”). The
Company formerly held interests in petroleum properties in the USA, operating under the name
Bayou Bend Petroleum Ltd. and traded on the TSX Venture Exchange under the symbol “BBP”. In
the fourth quarter of 2009, the Company changed its name to ShaMaran Petroleum Corp., and
commenced trading under the symbol “SNM”.
Highlights
Operating
The sale of substantially all of the Company’s oil and gas properties located in the United States in
the Gulf of Mexico was completed in the second quarter of 2009.
Agreements for three separate petroleum properties located in Kurdistan were signed on August 28,
2009, whereby the Company will pursue petroleum exploration and development operations
governed by production sharing contracts (“PSCs”) signed with the KRG. Entry into the PSCs was
approved by the Company’s shareholders and the TSX Venture Exchange on October 16, 2009.
The Company is currently in the pre-production stages of its exploration and development
campaign corresponding to the three petroleum properties located in Kurdistan. At the date of this
MD&A, the Company was in the process of acquiring 2D seismic data in the Pulkhana Block
petroleum property.
Financial
The issuance of 140 million common shares of the Company generated net proceeds of Cdn
$99,696,000 during the month of October, 2009.
1
The Company completed in October 2009 all of its Capacity Building and Signature Support
payments due to the KRG as required under its Production Sharing Contracts (PSC).
Cash balance of the Company was $63.5 million as at December 31, 2009.
Corporate
Changes to executive management of the Company were effected in December 2009 in order to
strengthen core operations and retain individuals with the relevant depth of oil and gas experience
required to conduct oil and gas operations in Kurdistan. Refer to the discussion in this MD&A
under “Changes in Directors and Officers”.
Petroleum Property Acquisitions in Kurdistan
During the year 2009 the Company acquired working interests in each of the Pulkhana Block, the
Arbat Block and Block K42 petroleum properties, all located in south eastern Kurdistan.
These petroleum properties lie within the northern extension of the Zagros Folded Belt which is
estimated to contain up to 45 billion of Iraq’s 115 billion barrels of known reserves. The Kirkuk
field lies within this fold belt trend and is one of the world’s largest, containing reserves of over 20
billion barrels of oil. The area is underexplored and is currently undergoing a major exploration
and development campaign by over 30 mid to large size international oil companies. Iraqi-
Kurdistan is one of few regions in the prolific Middle East oil province where international
operators have access to production sharing contracts which allow them to share the upside
potential with host governments.
Pulkhana Block
The Pulkhana block was one of the original four PSCs awarded in 2003. It was acquired by Petoil
Petroleum and Petroleum Products International Exploration and Production Inc (“Petoil”), a
Turkish company, and ratified by the Iraq Federal government prior to the Oil and Gas Law Of The
Kurdistan Region - Iraq, which was passed in 2007. It is an appraisal/development project of a field
which was discovered in 1956 and flowed over 2900 barrels of oil per day from a well which
entered two fractured carbonate reservoirs.
The Company is currently in the process of acquiring 250 km of two dimensional seismic data, and
plans to drill 3 appraisal wells in the first 3 year exploration sub-period in order to confirm the size
and economic viability of the development of the Pulkhana field. The Company will then have the
option to continue on to a further two year exploration sub-period and, if development is warranted,
a development period of up to 20 years.
2
The Company is the operator of the project with a 60% undivided interest in the petroleum
operations. Petoil retains a 20% interest and the KRG holds the remaining 20%. The Company is
required to pay 100% of the minimum financial commitment in respect of the first exploration sub-
period, following which the Company will pay 75% of the forward costs. Fiscal terms under the
PSC include a 10% royalty and a variable profit split based on a profitability factor to the KRG.
The Company has the right to recover costs using up to 40% of the produced oil and 50% of the
produced gas.
Capacity building bonuses (social responsibility) of $42.5 million were paid to the KRG on October
23, 2009 and 65 million common shares of ShaMaran are pending to be issued to the KRG, as part
of the Company’s cost of acquisition and social responsibility to the Kurdistan Region. In addition,
the Company paid $15 million on October 23, 2009 to Petoil under the terms of a participation
agreement, and is required to carry their costs in respect of the first exploration sub-period.
Arbat Block
The Arbat Block (formerly Block G) is located adjacent to the Miran Block of Heritage and Block 9
recently signed by Talisman Energy Corp. This 973 sq. km exploration block is part of the same
structural trend that contains the Miran West discovery of Heritage Oil Plc, and includes five
surface anticlines identified by recent field work.
Under the terms of the Arbat PSC, which was also originally approved as part of the Pulkhana
approval, the Company is obliged to acquire 350 km of 2D seismic data and drill 2 wells in the first
3 year exploration sub-period.
The Company is the operator of the project and holds a 60% undivided interest in the petroleum
operations, the KRG holds a 20% interest and the remaining 20% is a third party interest which the
KRG has the option to assign to a third party or parties . The Company is required to pay 100% of
the minimum financial commitment in respect of the first exploration sub period or until such time
as the KRG’s reserved 20% interest has been sold, following which the Company will pay 75% of
the forward costs and receive a reimbursement for 25% of the costs incurred to that date. Fiscal
terms under the PSC include a 10% royalty and a variable profit split based on a profitability factor
to the KRG. The Company has the right to recover costs using up to 45% of the produced oil and
53% of the produced gas.
Capacity building bonuses of $20 million were paid to the KRG on October 23, 2009 and 35 million
common shares of ShaMaran are pending to be issued to the KRG.
Block K42
Block K42 is located immediately north of the Pulkhana Block and is on trend with the Jambur field
situated to the north west of the Block. It is an exploration block with no seismic or surface mapped
prospects. Recent field work indicates the possibility of two buried folds in the Block.
3
The Company is a party to the K42 Option Agreement between the KRG and Oil Search (Iraq)
Limited (“OSIL”), which allows an option to the Company and OSIL to enter into with the KRG a
PSC, the terms of which have been agreed in principal, relating to the exploration and development
of petroleum resources in the Block K42 contract area located in Kurdistan.
In accordance with the Block K42 PSC, OSIL is the operator and, collectively with the Company,
represent the “Contractor”. This K42 Option Agreement requires the Contractor to conduct certain
seismic services, including the acquisition of 200 kilometers of seismic surveying, within the option
period of 18 months commencing October 1, 2009. The option to enter into a PSC may be
exercised by providing written notice to the KRG. The Contractor is to pay 100% of all the costs
incurred during the option period, 25% of which are to be paid by the Company.
Upon exercise of the option, the Company would acquire not less than an undivided 20% interest in
the petroleum operations in respect of the Block K42 contract area, with OSIL holding a 60%
interest and the KRG holding the remaining 20%. If either the Company or OSIL elect not to
exercise its option in respect of the Contract the other party has the option of acquiring the exiting
party’s rights and obligations.
Capacity building bonuses of $5 million were paid to the KRG on October 23, 2009. Should the
option to enter into a PSC with the KRG be exercised, an additional $20 million is to be paid by the
Company to the KRG at that time.
Other Acquisition Costs – Net Profit Interest
The Company incurred $4.5 million of acquisition costs directly related to the acquisition of its
interests in Kurdistan, and has entered into agreements for local services whereby certain third
parties are entitled to receive a net profit interest in respect of the Pulkhana Block 10 and Arbat
Block PSCs.
Netherlands Company – ShaMaran Petroleum BV
The Kurdish projects were originally identified and evaluated by Lundin Petroleum B.V. (“LUPE”),
which also provides support to the Company in terms of technical services and certain corporate
guarantees. In the fourth quarter of the year 2009, the Company completed the acquisition from
LUPE of 100% of the common shares of BBPL International BV, a company incorporated in the
Netherlands, in exchange for consideration of $1.00 in cash and 50 million shares of the Company
issued at a price of Cdn $0.67 per share, for a total purchase price of $31,965,000. The name of the
acquired company was subsequently changed to ShaMaran Petroleum BV.
Changes in Directors and Officers
On July 31, 2009, the Company accepted the resignation of John Zaozirny as a director of the
Company. Cameron Bailey and Alexandre Schneiter were subsequently appointed as directors of
the Company.
4
In December 2009, Mr. Pradeep Kabra, who originally joined the Company as Chief Operating
Officer on September 30, 2009, was promoted to President and Chief Executive Officer on
December 14, 2009, replacing Mr. Keith Hill who remains the Chairman of the Board. In addition,
John Ashbridge was appointed as the Chief Operating Officer and Mr. Brenden Johnstone was
appointed Chief Financial Officer on December 14, 2009. John Ashbridge resigned from his
position as Chief Operating Officer in April 2010.
Selected Annual Information
The following is a summary of selected financial information for the Company:
($000s, except per share data, shares)
2009
December 31
2008
Net revenues - continuing operations
Net revenues - discontinued operations
Income (loss) - continuing operations
Income (loss) - discontinued operations
Net income (loss)
Basic income (loss) per share:
Continuing operations
Discontinued operations
Diluted income (loss) per share:
Continuing operations
Discontinued operations
-
1,658
1,675
1,241
2,916
0.005
0.005
0.01
0.005
0.005
0.01
-
5,009
(5,294)
(92,756)
(98,050)
(0.02)
(0.30)
(0.32)
(0.02)
(0.30)
(0.32)
2007
-
2,729
17,375
(75,847)
(58,472)
0.06
(0.27)
(0.21)
0.06
(0.27)
(0.21)
Total assets
Working Capital Surplus
Shareholder's equity
Common shares outstanding (x 1000)
249,999
59,903
244,563
499,546
63,594
41,595
54,466
308,756
166,841
80,120
151,665
308,256
Summary of principal changes in annual information
Consistent with the refocus of operations in the year 2009, the Company acquired three petroleum
properties located in Kurdistan which, combined with the costs associated with initiating the
exploration campaign, resulted in capitalized costs of $184,953,000. To finance the acquisitions
and future operations the Company raised funds in the fourth quarter of 2009 through the issuance
of 140 million shares at Cdn $0.75 per share, resulting in gross proceeds of Cdn $105,000,000 (Cdn
$99,696,000 net of fees). As a result of these developments the assets, common shares outstanding,
and shareholders’ equity reported at the end of the current year have increased between the years
2009 and 2008. The exploration campaign relating to the Kurdish properties, which represent the
continuing operations of the Company, commenced in the fourth quarter of 2009. The continuing
operations of the Company currently have no corresponding revenue.
5
Included in the loss for the year 2008 from discontinued operations is an impairment expense of
$56,300,000, primarily related to adjustments to reflect the estimated market value of unproved
properties. This loss together with the decrease in working capital over the same period has
contributed to a significant decline in assets between the years 2008 and 2007.
Results of Continuing Operations
The various income and expenses from continuing operations are explained as follows:
Exploration costs
The Company incurred exploration costs of $636,000 for the year ended December 31, 2009 and
$nil for 2008. The exploration costs were primarily related to fees payable to a related company in
respect of a guarantee of the minimum financial obligations under the Pulkhana and Arbat PSCs,
which were provided on behalf of the Company.
Depletion, Depreciation and Amortization
Depletion, depreciation and amortization (“DD&A”) was $6,000 for the year ended December 31,
2009. For the previous year the comparable amount was $nil. DD&A corresponds to the furniture
and IT equipment at the Company’s technical and administrative office located in Vésenaz,
Switzerland.
General and Administrative Expenses
For the year ended December 31, 2009 general and administrative expenses were $2,378,000 (2008:
$469,000), the principal components of which were legal, accounting and audit fees of $652,000
(2008: $145,000), management and consulting fees of $420,000 (2008: $299,000), sponsorships of
$522,000 (2008: $nil), and $610,000 (2008: $45,000) for travel and related expenses. The additional
professional assistance and travel associated with the acquisition of the Kurdistan petroleum
properties and associated equity fundraising activities has given rise to the general increase in
general and administrative expenses relative to the comparable amounts in the year 2008.
Stock-Based Compensation
Stock-based compensation was $546,000 for the year ended December 31, 2009. The comparable
amount in 2008 was $801,000. The stock-based compensation expense in 2009 results primarily
from the issuance of 2,085,000 stock options and the vesting of stock options that were granted in
2009 and 2008. The Company uses the fair value method of accounting for stock options granted to
directors, officers, employees and consultants whereby the fair value of all stock options granted is
recorded as a charge to operations. The fair value of common share options granted is estimated on
the date of grant using the Black-Scholes option pricing model.
6
Foreign Exchange (Gain) Loss
Foreign exchange gain was $4,943,000 for the year ended December 31, 2009. The Company had a
foreign exchange loss of $5,010,000 during 2008. The gain in 2009 results from holding cash and
cash equivalents denominated in Canadian dollars, while the Canadian dollar strengthened against
the reporting currency of the Company, the United States dollar.
Interest Income
For the year ended December 31, 2009 and 2008, interest income was $310,000 and $986,000,
respectively. Interest income represents bank interest earned on cash and investments in marketable
securities. The decrease in interest income compared to 2008 results from a decrease in average
interest yielding investments held throughout the year, together with a decrease in yield on those
investments than was received in the prior year.
Tax expense
For the year ended December 31, 2009 the Company had income tax expense of $12,000, relating
to a provision for income tax on service income generated in the newly created Swiss branch entity
of ShaMaran group. There was no income tax expense reported in 2008.
Results of Discontinued Operations
The main components in revenue and expense of discontinued operations are explained as follows:
Net revenues
The Company had oil and gas sales, net of royalties, of $1,658,000 and $5,009,000 for the years
ended December 31, 2009 and 2008, respectively. The decrease in revenues is a result of the
termination of all production and corresponding sales on May 28, 2009, coinciding with the sale of
substantially all of the Company’s U.S. Gulf of Mexico properties. In addition, commodity prices
for sales during the year 2009 were lower than prices earned on 2008 sales.
Expenses
Expenses associated with the Company’s discontinued operations were $2,041,000 for the year
ended December 31, 2009. In the prior year the comparable amount was $98,835,000. The main
components of expenses in the year 2009 were operating exploration and dry-hole costs totaling
$1,592,000, general and administrative expenses of $3,072,000, as well as a reclassification of the
cumulative foreign currency translation gain of $3,282,000 previously reported as accumulated
other comprehensive income. The main components of costs and expenses in the year 2008 were
operating exploration and dry-hole costs totaling $25,418,000, general and administrative expenses
of $2,894,000, as well as impairment of property expenses of $68,556,000, which included a charge
of $56,300,000 to reflect the estimated market value of unproved properties.
7
Gain on disposal of assets from discontinued operations
In 2009 the Company had a gain of $1,600,000 on disposal of the oil and gas assets located in the
United States. The comparable amount for the year 2008 was $nil.
Selected Quarterly Information
The following is a summary of selected quarterly financial information for the Company:
($000s, except per share data)
Net revenues - continuing operations
Net revenues - discontinued operations
Income (loss) - continuing operations
Income (loss) - discontinued operations
Net income (loss)
Basic income (loss) per share:
Continuing operations
Discontinued operations
Diluted income (loss) per share:
Continuing operations
Discontinued operations
Dec 31
2009
Sep 30
2009
Jun 30
2009
Mar 31
2009
Dec 31
2008
Sep 30
2008
Jun 30
2008
Mar 31
2008
For the Quarter Ended
-
-
(1,201)
1,458
257
-
-
-
-
-
-
-
-
3,197
(42)
3,155
0.01
-
0.01
0.01
-
0.01
-
943
1,591
1,972
3,563
0.01
0.01
0.02
0.01
0.01
0.02
-
715
-
1,663
-
1,583
(1,912)
(2,147)
(4,059)
(3,523)
(68,633)
(72,156)
(815)
(15,339)
(16,154)
(0.01)
(0.01)
(0.02)
(0.01)
(0.01)
(0.02)
(0.02)
(0.22)
(0.24)
(0.02)
(0.22)
(0.24)
(0.00)
(0.05)
(0.05)
(0.00)
(0.05)
(0.05)
-
798
83
(5,876)
(5,793)
(0.00)
(0.02)
(0.02)
(0.00)
(0.02)
(0.02)
-
965
(1,039)
(2,908)
(3,947)
(0.00)
(0.01)
(0.01)
(0.00)
(0.01)
(0.01)
Summary of principal changes in fourth quarter information
In the fourth quarter of 2009, the Company commenced its exploration campaign in respect of the
Kurdish petroleum properties, constituting the continuing operations of the Company, and which
have no corresponding revenue. The net income in the fourth quarter was primarily driven by the
reclassification, on the substantial sale of its US operations, of the Company’s cumulative foreign
currency
translation gain of $3,282,000 previously reported within accumulated other
comprehensive income.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Outstanding Share Data
As of March 31, 2010, the Company had 499,546,088 shares outstanding, 4,885,000 stock options
outstanding under its stock-based compensation plan and zero warrants outstanding.
In accordance with the Kurdistan PSCs, the Company is required to issue an additional 100 million
shares to the KRG. These shares have been reported as “Shares to be issued” in the Shareholders
equity section of the consolidated balance sheet of the Company, as at December 31, 2009, as the
issuance was pending subject to certain actions to be performed by the KRG.
8
The following contingent share consideration may be payable in the future, pending the following
circumstances:
50 million common shares to the KRG within 30 days of the expiry of the first exploration
sub-period, if the Pulkhana PSC is still then in effect;
50 million common shares to LUPE upon the approval of a Pulkhana development plan.
Related Party Transactions
Namdo Management Services Ltd. (“Namdo”) provides corporate administrative support and
investor relation services to the Company under an agreement which commenced April 1, 2007.
For these services Namdo was paid $214,000 during the current year (2008: $264,000). Namdo is a
private corporation owned by a shareholder of the Company.
Mile High Holdings Ltd., a private corporation associated to a shareholder of the Company,
provided transportation services to the Company in the amount of $385,000 (2008: $nil) related to
petroleum property acquisition and fundraising activities.
During the current year, the Company incurred legal fees of $217,000 (2008: $18,000) with a law
firm in which an officer of the Company is a partner.
During the year ended December 31, 2008, the Company incurred geological and geophysical
(G&G) costs of $469,000, respectively, with a G&G firm in which an officer of the Company is a
managing partner. No charges were incurred from this firm in the current year.
The Company receives services from various subsidiary companies of Lundin Petroleum AB
(“Lundin”), a shareholder of the Company. Lundin charges during the year were $1,245,000 (2008:
$nil) which was comprised of G&G and other technical service costs of $317,000 (2008: $nil),
reimbursement for travel and related expenses of $207,000 (2008: $nil), office rental, administrative
and building services of $86,000 (2008: $nil), and fees of $635,000 (2008: $nil) relating to a
guarantee provided to the KRG on behalf of the Company in respect of its minimum financial
commitments, charged at a rate of 3% per annum, and payable semi-annually beginning 30 June
2010.
Amounts owing to related parties as at December 31, 2009 were $1,152,000 (2008: $nil). The
Company was owed no amounts by related parties at the reporting dates.
All transactions with related parties are recorded at amounts agreed to by the parties and are made
on the same terms and conditions as with non-related parties.
Liquidity and Capital Resources
Working capital at December 31, 2009, totaled $59,903,000, compared to $41,595,000 at December
31, 2008.
9
Funds provided by continuing operations were $3,574,000 for the year ended December 31, 2009
compared to funds used by continuing operations of $4,491,000 for the year 2008. The primary
source of operational funds during 2009 was from the appreciation of the Canadian cash deposits
when converted to US dollars.
Net cash provided by financing activities from continuing operations for the year ended December
31, 2009 was $96,598,000 compared to $50,000 for 2008. The source of the funds was the issuance
in the 4th quarter of 2009 of 140 million common shares of the Company.
Net cash used by investing activities in continuing operations was $91,230,000 for the year ended
December 31, 2009, compared to no movement in funds due to investing activities from continuing
operations in 2008. During the year 2009, the primary use of cash by the Company on investing
activities in continuing operations was in the acquisition of three petroleum properties in Kurdistan.
Net cash provided by discontinued operations was $9,337,000 for the year ended December 31,
2009, compared to cash used by discontinued operations of $8,852,000 in 2008. The primary source
of funds from discontinued operations in the year 2009 was proceeds from the sale of the oil and
gas properties located in the United States.
Contributed surplus increased $336,000 for the year ended December 31, 2009, compared to
$787,000 in 2008. The increase is due to stock-based compensation for the year offset by the
exercise of options. When options are granted, the Black-Scholes option value method is used to
calculate a value for the stock options. The offset to the amount that is recorded as stock
compensation expense is a credit to contributed surplus. When the options are exercised, the
applicable amounts of contributed surplus are transferred to share capital. During the year ended
December 31, 2009, 790,000 stock options were exercised. No stock options were exercised during
the year 2008.
The Company does not currently generate cash flow from its oil exploration and development
operations. The Company has relied upon the issuance of common shares to finance its ongoing oil
exploration, development and acquisition activities. Notwithstanding, the Company has sufficient
financial resources to fund operations through the 2010 fiscal year. Continuing operations are
dependent on discovery of economic oil and gas reserves and ultimately on the attainment of
profitable operations.
Commitments
The Kurdish Production Sharing Contracts contemplate a minimum financial commitment in
respect of the first exploration sub-period of $61 million for the Pulkhana and Arbat Blocks
combined. The PSCs also require funding of certain personnel, training, environmental, and
technological assistance projects, during the period the contracts are in effect. As at December 31,
2009 the commitments under the two PSCs were approximately $64 million.
10
As a party to the K42 Option Agreement the Company was required to contribute to the cost of
conducting certain seismic services, including the acquisition of 2D seismic data. The Company
estimates as at December 31, 2009 its remaining minimum commitments under the K 42 Option
Agreement to be approximately $2 million.
Financial Instruments
The Company’s financial instruments consist of cash, cash equivalents, investments, accounts
receivable, accounts payable, accrued expenses and advances from joint interest holders.
Cash, cash equivalents and investments are designated as held for trading and are therefore carried
at fair value, with unrealized gains or losses recorded in interest income.
The fair values of cash, cash equivalents, accounts receivable, accounts payable, accrued expenses
and advances from joint interest holders approximate carrying values because of the short-term
nature of these instruments. The fair values of investments are determined directly by reference to
quoted market prices.
The Company is exposed in varying degrees to a variety of financial instrument related risks.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet its contractual obligations. The Company manages its credit risk through
monitoring counterparty ratings and credit limits. The Company is mainly exposed to credit risk on
its cash and cash equivalents and accounts receivable. To manage this risk the Company maintains
its excess cash on account in instruments having a minimum credit rating of R-1 (mid) or better (as
measured by Dominion Bond Rate Services) or the equivalent thereof according to a recognized
bond rating service.
Accounts receivable are primarily with joint venture partners in the oil and gas industry and are
subject to normal industry credit risks. Joint venture receivables are typically collected within one
to two months of the joint venture bill being issued to the partner. The Company mitigates risks
arising from joint venture receivables by obtaining partner approval of capital expenditures prior to
starting a project.
Liquidity Risk
Liquidity risk is the risk that the Company will incur difficulties meeting its financial obligations as
they become due. The Company’s approach to managing liquidity is to ensure, as far as possible,
that it will have sufficient liquidity to meet its liabilities when due, without incurring unacceptable
losses or risk harm to the Company’s reputation.
The Company prepares annual capital expenditure budgets, which are regularly monitored and
updated as considered necessary. The Company requires authorizations for expenditure on both
operating and non-operating projects to further manage capital expenditures.
11
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity
prices and interest rates, will affect the Company’s net earnings or the value of financial
instruments. The objective of market risk management is to manage and control market risk
exposures within acceptable limits, while maximizing returns.
The significant market risk exposures to which the Company is exposed are foreign currency,
commodity price and interest rate risks.
Foreign currency risk – The Company maintains a substantial portion of its cash in Canadian
dollars; however, the Company’s operations are conducted predominantly in U.S. dollars. The
Company’s operating results and cash flows are affected to varying degrees by the changes in the
Canadian dollar vis-à-vis the U.S. dollar. The Company has not entered into any agreements or
purchased any instruments to hedge possible currency risks.
Commodity price risk – The prices that the Company may receive for its crude oil and natural gas
production may have a significant impact on its revenue and cash provided by operating activities.
Any significant price decline in commodity prices would adversely affect the amount of funds
available for capital reinvestment purposes. At this time the Company does not use derivative
financial instruments to manage its exposure to this risk.
Interest rate risk – The Company’s bank accounts earn interest income at variable rates. The
Company’s future interest income is exposed to changes in short-term rates.
Uncertainty of title - Although the Company conducts title reviews prior to acquiring an interest
in a property, such reviews do not guarantee or certify that an unforeseen defect in the chain of
title will not arise that may call into question the Company’s interest in the production sharing
contracts. Any uncertainty with respect to one or more of the Company’s production sharing
contracts could have a material adverse effect on the Company’s business, prospects and results
of operations.
Accounting Policies and Critical Accounting Estimates
Use of Estimates
The consolidated financial statements of the Company have been prepared by management in
accordance with accounting principles generally accepted in Canada. In preparing financial
statements, management makes informed judgments and estimates that affect the reported amounts
of assets and liabilities as of the date of the financial statements and affect the reported amounts of
revenues and expenses during the reported period. Specifically, estimates were utilized in
calculating depletion, asset retirement obligations, stock-based compensation, amortization and
impairment write-downs. Actual results could differ from these estimates and differences could be
material.
12
Accounting for Oil and Gas Operations
The Company follows the successful efforts method of accounting for its oil and gas operations.
Under this method acquisition costs of oil and gas properties, costs to drill and equip exploratory
wells that find proved reserves and costs of drilling and equipping development wells are
capitalized and subject to annual impairment testing.
Exploration well costs are initially capitalized and, if subsequently determined to have not found
sufficient reserves to justify commercial production, are charged to exploration expense.
Exploration well costs that have found sufficient reserves to justify commercial production, but
whose reserves cannot be classified as proved, continue to be capitalized as long as sufficient
progress is being made to assess the reserves and economic viability of the well and or related
project.
Capitalized costs of proved oil and gas properties are depleted using the unit of production method
based on estimated gross proved reserves of petroleum and natural gas as determined by
independent engineers. Successful exploratory wells and development costs and acquired resource
properties are depleted over proved developed reserves. Acquisition costs of unproved reserves are
not depleted or amortized while under active evaluation for commercial reserves.
Costs associated with significant development projects are depleted once commercial production
commences.
A revision to the estimate of proved reserves can have a significant impact on earnings as they are a
key component in the calculation of depreciation, depletion and accretion.
Producing properties and significant unproved properties are assessed annually, or more frequently
as economic events dictate, for potential impairment. The impairment test is initially based on
undiscounted future cash flows from proved and risk adjusted probable reserves. If an impairment
is identified, fair value is calculated as the present value of estimated expected discounted cash
flows from proved and risk-adjusted probable reserves. Any impairment loss is the difference
between the carrying value of the petroleum property and its fair value. If it is determined that the
estimated fair value is less than the net carrying amount, a write-down to the oil and gas property’s
fair value is recognized during the period, with a charge to earnings.
Estimates of future cash flows used in the evaluation of impairment of assets are performed based
on risk assessments on field and reservoir performance and include assumptions regarding
commodity prices, discount rates and future costs.
A substantial portion of the Company’s exploration and development activities are conducted
jointly with others. The financial statements reflect only the Company’s proportionate interests in
such activities.
13
The Company engaged Petrotech Engineering Ltd, an independent geoscience consultancy firm, to
evaluate 100% of the Company’s reserves data at December 31, 2009. The estimation of reserves is
subjective. Forecasts are based on engineering data, future prices, expected future rates of
production and the timing of capital expenditures, all of which are subject to uncertainties and
interpretations. All of the Company’s proved and probable oil and gas reserves at December 31,
2008, were sold to third parties during the first half of 2009, and the Company has no reserves as at
December 31, 2009.
International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that Canadian generally
accepted accounting principles (Canadian GAAP) will be converged with International Financial
Reporting Standards (IFRS) for fiscal years commencing January 1, 2011. The transition from
Canadian GAAP to IFRS will be applicable for the Company for the first quarter of 2011 when the
Company will prepare both the current and comparative financial information using IFRS. While
IFRS uses a conceptual framework similar to Canadian GAAP, there are significant differences on
recognition, measurement and disclosures.
The Company has commenced the process to transition from current Canadian GAAP to IFRS.
There are three phases in the process: diagnostic, detailed assessment and design and
implementation. The Company’s IFRS conversion process is progressing according to a changeover
plan and timetable established by management as follows:
Accounting policies (ongoing – to be finalized before IFRS reporting in 2011)
Based on work completed to date, management has determined that the adoption of IFRS is likely
to impact the Company’s accounting for several areas, including PP&E and income taxes. Matters
impacting accounting for PP&E include the evaluation of impairment, accounting for asset
retirement obligations, taxation and other adjustments considered to be minor.
The areas impacted by IFRS discussed above should not be regarded as a comprehensive list of
changes that will result from the transition to IFRS. Management continues to monitor the
development of standards, which are expected to change prior to 2011.
Impairments – Canadian GAAP requires a two-step approach to impairment testing. Undiscounted
cash flows are first compared to asset carrying values to determine whether impairment exists. If so,
impairment is measured by comparing asset carrying values with fair values calculated using
discounted cash flows.
IFRS uses a one-step approach to testing for and measuring of impairment, with asset carrying
values compared directly with the higher of fair value less cost to sell and value-in-use (which uses
discounted future cash flows). This could lead to additional impairment write-downs where carrying
values were previously supported under Canadian GAAP on an undiscounted cash flow basis.
IFRS may result in greater variability in net income and carrying values of PP&E.
14
Asset Retirement Obligations – Under IFRS, a change in the current market-based discount rate will
result in a change in the measurement of the provision, whereas a change in the discount rate alone
does not result in a re-measurement of the ARO liability under Canadian GAAP. As market-based
discount rates change, IFRS may result in greater volatility in an asset retirement obligation held by
the Company, the carrying values of PP&E and net income.
Income taxes – IFRS differs from Canadian GAAP for purposes of recognizing future taxes,
specifically in relation to intercompany transfers, asset acquisitions, foreign currency and other
areas. Due to these differences and the potential tax effects of other IFRS adjustments, IFRS may
cause volatility in future income tax liabilities and net income.
The Company is working to understand the practical application of those IFRS principles
considered to impact the Company, in order to quantify the IFRS opening balance sheet adjustments
as at January 1, 2010.
Control Environment (Ongoing to 2011 year end reporting)
As the transition to IFRS progresses, changes to the design and implementation of both internal
controls over financial reporting and disclosure controls are being made. Additional disclosure
controls relating to first-time adoption of IFRS are currently being implemented. The design
changes for internal controls over financial reporting will be completed and evaluated by the first
quarter of 2011 with operating effectiveness to be evaluated prior to 2011 year-end reporting.
Training and Communication (Ongoing to first quarter 2011 reporting)
Training of those accounting personnel impacted by the transition to IFRS is in process. The Audit
Committee receives quarterly updates on project status. More frequent IFRS sessions are held
among management to discuss the potential impacts of implementing IFRS.
IT Systems (Ongoing to 2011 year end reporting)
The Company is currently developing and implementing system modifications to support the
capture and reporting of IFRS financial information during 2010. Complete systems required to
support IFRS reporting are expected to be in place by the first quarter of 2011.
Business Activities (Ongoing to 2011 year end reporting)
Work has commenced to implement changes to the budgeting and forecasting systems to embed the
more significant aspects of IFRS within the Company’s planning cycle.
15
Risks and Uncertainties
The majority of ShaMaran’s assets are located in the Kurdistan Region of Iraq. ShaMaran operates
in areas which are under foreign governmental sovereignty and is therefore subject to political,
economic, and other uncertainties associated with foreign operations, which include (but are not
limited to) the exposure of the Company to a change in changes in general government policies and
legislation, change in the energy policies or in their administration, changes in fiscal terms of a
production sharing contract with the government, inability to export the petroleum produced under
contract, adverse determinations or rulings by governmental authorities, nationalization, currency
fluctuations and devaluations, as well as risks of loss due to civil strife, acts of war, guerrilla
activities and insurrections.
Political Issues
The political and security situation in Iraq is not settled and is volatile. There are major outstanding
political issues and differences between the various political factions in Iraq. These differences
could adversely impact ShaMaran’s interests in the Kurdistan region. In addition, certain borders of
the Kurdistan region of Iraq remain the subject of final determination, the result of which may have
an adverse effect on ShaMaran’s assets.
Legislative Issues
All contracts in Kurdistan issued under the Oil and Gas Law Of The Kurdistan Region - Iraq. No
federal Iraqi legislation has been enacted by the Iraq Council of Ministers (Cabinet) and Council of
Representatives (Parliament). The lack of legislation, or the enactment of federal legislation
contradictory to Kurdistan Region legislation, could have a material adverse impact on ShaMaran’s
interests in the region.
Marketing, Markets and Transportation
The export of oil and gas from the Kurdistan Region of Iraq remains subject to uncertainties which
could have an adverse impact on ShaMaran’s ability to export and market such oil and gas. Further,
ShaMaran’s ability to market its oil and gas may also depend upon its ability to secure
transportation and delivery, in view of related issues such as the proximity of its potential
production to pipelines and processing facilities. Potential government regulation relating to price,
quotas and other aspects of the oil and gas business could also have an adverse impact.
16
Exploration, Development and Production Risks
Oil and gas operations involve geological, technical and commercial risks which even a
combination of experience, knowledge and careful evaluation may not be able to overcome.
ShaMaran’s success will depend on its ability to find, appraise, develop and commercially produce
oil and gas resources and reserves. Future oil and gas exploration may involve risks relating to dry
holes, wells which do not produce sufficient petroleum to return a profit after drilling, operating and
other costs. In addition operations can be effected by drilling hazards, environmental damage, and
other field operating conditions which could adversely affect production and increase the cost of
operations. Diligent operations can contribute to maximizing production rates over time but
production delays and declines from normal field operating conditions cannot be eliminated and can
adversely affect revenue and cash flow levels.
Ability to Execute Exploration and Development Program
ShaMaran has the capacity to execute exploration and development programs in Kurdistan. It is
however possible that ShaMaran may not be able to fully execute its desired strategies because of
the need to involve and to obtain approvals from the relevant authorities.
Project Risks
ShaMaran’s ability to execute projects and market oil and gas will depend upon numerous factors
beyond ShaMaran’s complete control. Factors such as issues relating to security in the area of
operation, adverse legislation in the Kurdistan Region and/or Iraq, the regulation of the oil and gas
industry by various levels of government and governmental agencies in the Kurdistan Region
and/or Iraq could adversely impact the execution of ShaMaran’s projects.
Substantial Capital Requirements
ShaMaran anticipates making substantial capital expenditures in the future for the acquisition,
exploration, development and production of oil and gas reserves. ShaMaran’s results will impact its
access to the capital necessary to undertake or complete future drilling and development programs.
ShaMaran’s ability to access the equity or debt markets in the future may be affected by any
prolonged market instability. There can be no assurance that debt or equity financing, or future cash
(if any) generated by operations, would be available or sufficient to meet these requirements or for
other corporate purposes or, if debt or equity financing is available, that it will be on terms
acceptable to ShaMaran. The inability of ShaMaran to access sufficient capital for its operations
could have a material adverse effect on ShaMaran’s financial condition, results of operations and
prospects.
17
Additional Funding Requirements
ShaMaran’s cash balances may not be sufficient to fund its ongoing activities at all times. From
time to time, ShaMaran may require additional financing in order to carry out its oil and gas
acquisition, exploration and development activities. Failure to obtain such financing on a timely
basis could cause ShaMaran to forfeit its interest in certain properties, miss certain acquisition
opportunities and reduce or terminate its operations. ShaMaran’s ability to access the equity or debt
markets in the future may be affected by any prolonged market instability.
Dilution
ShaMaran may make future acquisitions or enter into financings or other transactions involving the
issuance of securities of ShaMaran which may be dilutive to the existing shareholders.
Outlook for the year 2010
ShaMaran’s operational activities in 2010 will focus on acquiring seismic in the Pulkhana, Arbat
and Block K42, and on commencing in the fourth quarter of 2010 the drilling of an exploration /
appraisal well located in the Pulkhana Block. The outlook for the year for the three blocks in
Kurdistan is as follows:
Pulkhana block
A total of 250 km of 2D seismic will be acquired in the Block. The seismic acquisition program
commenced in March 2010 and is expected to be completed by the end of April 2010. Processing
and interpretation of the acquired seismic data should be completed by the end of the second quarter
2010. The data will be used to identify the resource potential in the block and location of the
exploration / appraisal well to be drilled on the Pulkhana Block.
The company plans to commence the drilling of its first well in the Pulkhana block in the fourth
quarter of 2010. Procurement activities to enable the Company to achieve this have already
commenced.
Arbat Block
A total of 350 km of 2D seismic will be acquired in the Block. The seismic acquisition program will
be completed by the end of the third quarter 2010. Processing and interpretation of the acquired
seismic data should be completed by the end of 2010. The data will be used to identify the resource
potential in the Block and location of the future exploration wells in the Block.
18
Block K42
A total of 200 km of 2D seismic will be acquired in the Block. The seismic acquisition will be
completed by the end of the second quarter 2010. Processing and interpretation of the acquired
seismic data should be completed by the third quarter of 2010. Based on the results of the seismic
data acquired, the Company will decide on whether to exercise its option to enter into a Production
Sharing Contract. A decision on the exercise of the option could be taken by the end of the year or
in the first quarter of 2011.
Budget
The capital and operating budget for the year 2010 approved by the Board of Directors was for
$53.5 million. The budget contains amounts relating to the work programs and administration of the
three Kurdistan petroleum properties as follows: $39.5 million for the Pulkhana Block, $11.3
million for the Arbat Block, and $2.8 million (representing 25% of the total) for Block K42.
General
The security situation in the Kurdistan region remains stable with no major reported incidents. The
region is seeing a rapid development in infrastructure and a significant increase in the availability of
oil and gas services in the country. Management is, based on current reports, optimistic that the
regional government of Kurdistan and the federal government of Iraq will come to an agreement on
a possible payment mechanism for oil revenues arising from the sale of oil produced from
Kurdistan before the Company starts producing and exporting oil. This would be an extremely
positive development for the region.
Forward-Looking Statements
This report contains forward-looking statements concerning anticipated developments on the
Company’s operations; the adequacy of the Company’s financial resources; financial projections,
including, but not limited to, estimates of capital and operating costs, production rates, commodity
prices, exchange rates, net present values; and other events and conditions that may occur in the
future. Forward-looking statements are frequently, but not always, identified by the words such as
“expects,” “anticipates,” “believes,” “intends,” “estimates,” “potential,” “possible,” “budget” and
similar expressions, or statements that events, conditions or results “will,” “may,” “could,” or
“should” occur or be achieved. Information concerning the interpretation of drill results and reserve
estimates also may be deemed to be forward-looking statements, as such information constitutes a
prediction of what might be found to be present if and when a project is actually developed.
Forward-looking statements are statements about the future and are inherently uncertain, and actual
achievements of the Company or other future events or conditions may differ materially from those
reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors,
including, without limitation, those described in this MD&A.
The Company’s forward-looking statements are based on the beliefs, expectations and opinions of
management on the date the statements are made and the Company assumes no obligation to update
such forward-looking statements in the future. For the reasons set forth above, investors should not
place undue reliance on forward-looking statements.
19
KPMG LLP
Chartered Accountants
PO Box 10426 777 Dunsmuir Street
Vancouver BC V7Y 1K3
Canada
Telephone (604) 691-3000
(604) 691-3031
Fax
www.kpmg.ca
Internet
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of ShaMaran Petroleum Corp. (formerly Bayou
Bend Petroleum Ltd.) as at December 31, 2009 and 2008 and the consolidated statements of
operations and deficit, other comprehensive income (loss) and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management. 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 plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2009 and 2008 and the results of its operations
and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
KPMG LLP (signed)
Chartered Accountants
Vancouver, Canada
March 26, 2010
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG
network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
KPMG Canada provides services to KPMG LLP.
SHAMARAN PETROLEUM CORP.
Consolidated Balance Sheets
Expressed in Thousands of United States Dollars
As at December 31
2009
2008 ¹
$
$
$
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable
Prepaid expenses and other assets
Property, plant & equipment (note 6)
Property, plant & equipment - held for sale
LIABILITIES
Current liabilities
Accounts payable and accrued expenses
Net payables to joint venture partners
Income taxes payable (note 11)
Asset retirement obligation (note 10)
Non-current liabilities
Asset retirement obligation (note 10)
Other long term liabilities
SHAREHOLDERS' EQUITY
Share capital (note 8a)
Shares to be issued (note 9)
Contributed surplus (note 8a)
Accumulated other comprehensive income (note 5)
Deficit
$
63,565
79
566
609
64,819
185,180
-
249,999
$
$
3,866
37
12
1,001
4,916
350
170
520
5,436
379,673
61,349
3,360
4
(199,823)
244,563
45,282
79
1,912
1,546
48,819
-
14,775
63,594
5,636
231
-
1,357
7,224
1,904
-
1,904
9,128
250,899
-
3,024
3,282
(202,739)
54,466
$
249,999
$
63,594
Nature of operations (note 1)
Commitments (note 15)
See accompanying notes to the consolidated financial statements.
¹ Restated - see note 2 to the consolidated financial statements.
1
SHAMARAN PETROLEUM CORP.
Consolidated Statements of Operations and Deficit
Expressed in Thousands of United States Dollars except Per Share Amounts
For the year ended
December 31
2009
2008 ¹
$
$
$
$
$
$
636
6
2,378
546
(4,943)
(1,377)
310
1,687
12
1,675
(359)
1,600
1,241
2,916
(202,739)
(199,823)
0.005
0.005
0.01
0.005
0.005
0.01
346,639
346,639
-
-
469
801
5,010
6,280
986
(5,294)
-
(5,294)
(92,756)
-
(92,756)
(98,050)
(104,689)
(202,739)
(0.02)
(0.30)
(0.32)
(0.02)
(0.30)
(0.32)
308,745
308,745
Costs and Expenses
Exploration
Depletion, depreciation and amortization
General and administrative
Stock-based compensation (note 8b)
Foreign exchange (gain) loss
Other income
Interest income
Net income (loss) before income taxes
Income tax expense (note 11)
Net income (loss) from continuing operations
Discontinued operations
Loss from operations (note 4)
Gain on asset disposals (note 4)
Net income (loss)
Deficit, beginning of year
Deficit, end of year
Basic income (loss) per share:
Continuing operations
Discontinued operations
Diluted income (loss) per share:
Continuing operations
Discontinued operations
Weighted average number of common shares:
Basic
Diluted
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
¹ Restated - see note 2 to the consolidated financial statements.
2
SHAMARAN PETROLEUM CORP.
Consolidated Statements of Other Comprehensive Income
Expressed in Thousands of United States Dollars
Net income (loss)
Other comprehensive income:
Exchange gains arising from translation of financial
statements of foreign operation
Comprehensive income (loss)
$
$
For the year ended
December 31
2009
2008
2,916
$
(98,050)
4
-
2,920
$
(98,050)
See accompanying notes to the consolidated financial statements.
3
SHAMARAN PETROLEUM CORP.
Consolidated Statements of Cash Flows
Expressed in Thousands of United States Dollars
For the year ended
December 31
2009
2008 ¹
$
1,675
$
(5,294)
6
546
(31)
(358)
1,850
(126)
12
3,574
96,598
96,598
(91,230)
(91,230)
4
8,946
9,337
18,283
45,282
63,565
93,314
334
2,348
95,996
$
$
$
-
801
-
-
2
-
-
(4,491)
50
50
-
-
-
(4,441)
(8,852)
(13,293)
58,575
45,282
-
2,056
-
2,056
Operating activities of continuing operations
Net income (loss) from continuing operations
Adjustments for non-cash items:
Depletion, depreciation and amortization
Stock-based compensation
Changes in working capital:
Accounts receivable
Prepaid expenses
Accounts payable and accrued expenses
Advances from joint venture partners
Income taxes payable
Financing activities of continuing operations
Proceeds net of costs on issuance of shares
Investing activities of continuing operations
Property, plant & equipment
Effect of exchange rate changes on cash and cash
equivalents
Cash flows from (used in) continuing operations
Cash flows from (used in) discontinued operations (note 4)
Change in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Supplemental disclosures of non-cash financing and
investing activities:
Acquisition of interests in petroleum properties
through the issuance of common stock
Interest received
Extinguishment of ARO liability on disposal of
related assets
$
$
$
See accompanying notes to the consolidated financial statements.
¹ Restated - see note 2 to the consolidated financial statements.
4
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
1. NATURE OF OPERATIONS
ShaMaran Petroleum Corp. (the “Company” and formerly Bayou Bend Petroleum
Ltd.) is incorporated under the British Columbia Business Corporations Act.
On May 28, 2009, the Company sold to a third party substantially all of its oil and
gas properties located in the United States in the Gulf of Mexico (see note 4).
On October 16, 2009, the Company changed its name to ShaMaran Petroleum Corp.
from Bayou Bend Petroleum Ltd. with an effective date of October 21, 2009. The
Company’s shares trade on the TSX Venture Exchange under the new symbol of
“SNM” (formerly “BBP”).
The Company is engaged in the business of oil and gas exploration and
development, and is currently in the pre-production stages of an exploration and
development campaign in respect of petroleum properties located in the Kurdistan
Region of Iraq. The Company conducts its operations through wholly owned
subsidiary entities.
Oil and gas operations are subject to extensive controls and regulations imposed by
various levels of government that may be amended from time to time. The
Company’s operations may require licenses and permits from various governmental
authorities in the countries in which it operates. Under the production sharing
contracts the Company has entered into, the Kurdish Regional Government is
required to assist in obtaining all permits and licenses from any government
agencies in the Kurdistan Region and from any other government administration in
Iraq. There can be no assurance that the Company will be able to obtain all
necessary licenses and permits that may be required to carry out exploration and
development of its projects.
The political and security situation in Iraq is not settled. Issues relating to
federalism and the autonomy of the various regions of Iraq could adversely impact
the Company’s interest in the Kurdistan Region, including the ability to export any
hydrocarbons as a result of our activities.
Although the Company conducts title reviews prior to acquiring an interest in a
property, such reviews do not guarantee or certify that an unforeseen defect in the
chain of title will not arise that may call into question the Company’s interest in
the production sharing contracts. Any uncertainty with respect to one or more of
the Company’s production sharing contract interests could have a material adverse
effect on the Company’s business, prospects and results of operations.
5
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
Since inception and typical of exploration and development companies, the
Company has incurred losses from operations and negative cash flows from
operating activities, and has an accumulated deficit at December 31, 2009. The
ability of the Company to successfully carry out its business plan is primarily
dependent upon the continued support of its shareholders, the discovery of
economically recoverable reserves, the resolution of remaining political disputes in
Iraq, and the ability of the Corporation to obtain financing to develop reserves.
2.
SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries.
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada. The significant accounting
policies followed by the Company have been applied consistently in the
preparation of these consolidated financial statements. These accounting
policies are summarized below.
b) Cash and Cash Equivalents
The Company considers cash and cash equivalents to include amounts held in
banks and highly liquid investments with remaining maturities at point of
purchase of 90 days or less. The Company places its excess cash and cash
equivalents with institutions of high-credit worthiness.
c) Short-term investments
Investments are accounted for at fair market value and consist of securities
backed by the full credit of the United States Government with maturities of less
than one year.
6
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
d) Property Plant and Equipment (PP&E)
i. Petroleum Properties
The Company uses the successful efforts method to account for its oil and gas
exploration and development costs. Exploration well costs are initially
capitalized and, if subsequently determined to have not found sufficient reserves
to justify commercial production, are charged to dry hole expense. Exploration
well costs that have found sufficient reserves to justify commercial production,
but those reserves cannot be classified as proved, continue to be capitalized as
long as sufficient progress is being made to assess the reserves and economic
viability of the well or related project.
Producing properties and significant unproved properties are assessed annually,
or more frequently as economic events dictate, for potential impairment. Any
impairment loss is the difference between the carrying value of the asset and its
fair value. Fair value is calculated as the present value of estimated expected
future cash flows from proved, probable and, as appropriate, possible reserves.
The Company engages independent engineers in order to determine the extent to
which it has reserves.
The Company is currently engaged in exploration operations in Kurdistan, as
described in note 6. The Company has no reserves to form the basis for an
estimate of future net cash flow from the corresponding petroleum properties.
The Company has considered the conditions in CICA Accounting Guideline 11
for impairment which includes significant unfavorable economic, legal,
the
regulatory, environmental, political and other factors. In addition,
Company’s continued execution of its business plan is a key factor considered
as part of the assessment of the recoverability of the carrying amount of the
properties. Whenever events or changes in circumstances indicate that the
carrying amount of a property in the development stage may be impaired,
capitalized costs are written down to the estimated recoverable amount. As at
December 31, 2009, $184,953,000 has been capitalized to date related to this
project. No revenues have been generated from this project to date and no
impairment was identified at December 31, 2009.
ii. Corporate PP&E
Corporate PP&E includes office equipment, furniture and other assets not used
directly in petroleum operations, which are stated at historical cost less
accumulated depreciation.
7
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
iii. Depreciation, Depletion and Amortization (DD&A)
Capitalized costs of proved oil and gas properties are depleted using the unit of
production method. For purposes of these calculations, production and reserves
of oil are converted to cubic feet of natural gas on an energy equivalent basis at
a ratio of one barrel (bbl) of oil to six thousand cubic feet (mcf) of natural gas.
Successful exploratory wells and development costs are depleted over proved
developed reserves. However, to the extent significant development costs are
incurred in connection with proved undeveloped reserves, such costs are
excluded from depletion until the reserves are developed. Acquired resource
properties with proved reserves are depleted over proved reserves. Acquisition
costs of probable reserves are not depleted or amortized while under active
evaluation for commercial reserves. Costs are transferred to depletable costs as
proved reserves are recognized. Costs associated with significant development
projects are not depleted until commercial production commences.
Corporate PP&E are depreciated using the straight-line method at annual rates
of 20% to 25%.
e) Asset Retirement Obligations
The fair value of the statutory, contractual or legal liability associated with the
retirement and reclamation of oil and gas properties is recorded when incurred,
with a corresponding increase to the carrying amount of the related petroleum
properties. The increase to capitalized costs is depleted to earnings on a unit of
production basis over the life of the proved reserves for each property.
Subsequent changes in the estimated fair value of the asset retirement obligation
(ARO) are capitalized and depleted over the remaining useful life of the
underlying petroleum properties.
ARO liabilities are carried at their discounted present value and are accreted
over time for the change in their present value. Actual expenditures incurred
are charged against the accumulated obligation.
f) Revenue Recognition
Revenues from the sale of petroleum and natural gas are recorded when title
passes to an external party and collection is reasonably assured.
8
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
g) Income Taxes
The Company follows the asset and liability method of accounting for income
taxes. Under this method current income taxes are recognized for the estimated
income taxes payable for the current year. Future income taxes are recognized
for temporary differences between the tax and accounting basis of assets and
liabilities and for the benefit of losses available to be carried forward for tax
purposes that are likely to be realized.
Future tax assets and liabilities are measured using enacted or substantively
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
of future tax assets and liabilities of a change in tax rates is recognized in
income in the period that included the date of enactment or substantive
enactment.
h) Stock-Based Compensation
All stock-based awards made to employees and non-employees are measured
and recognized using a fair value based method. Accordingly, the fair value of
the options at the date of the grant is determined and charged to operations, with
the offsetting credit to contributed surplus, on a straight-line basis over the
vesting period. If and when the stock options are ultimately exercised, the
applicable amounts of contributed surplus are transferred to share capital.
i) Loss per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the year. The computation of diluted earnings per share assumes the
conversion, exercise or contingent issuance of securities only when such
conversion, exercise or issuance would have a dilutive effect on earnings per
share. The dilutive effect of outstanding options and warrants and their
equivalents is reflected in diluted earnings per share by application of the
treasury stock method. The treasury stock method assumes that the proceeds
received from the exercise of in-the-money stock options are used to repurchase
common shares at the average market price for the reporting period.
j) Joint Interests
Substantially all of the Company’s exploration and development activities are
conducted jointly with others. Accordingly, the financial statements reflect only
the Company’s proportionate interest in such activities.
9
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
k) Use of Estimates
The preparation of consolidated financial statements in accordance with
Canadian GAAP requires that management make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. These
estimates are subject to measurement uncertainty. Actual results could differ
from and affect the results reported in these consolidated financial statements.
In the accounting for oil and gas interests, amounts recorded for depletion and
amounts used for impairment test calculations are based on estimates of oil and
gas reserves and future cash flows, including development costs. By their
nature, the estimates of reserves and the related future cash flows are subject to
measurement uncertainty and the impact on the consolidated financial
statements of future periods could be material.
l) Foreign Currency Translation
Activities denominated in currencies other than the U.S. dollar are translated
using the temporal method. Under this method, monetary assets and liabilities
denominated in other currencies are translated into U.S. dollars at the exchange
rate in effect at the balance sheet date. Non-monetary assets and liabilities
denominated in other currencies are translated at rates in effect on the dates the
assets were acquired or liabilities were assumed. Revenues and expenses are
translated at rates approximating exchange rates in effect at the time of the
transactions. Gains and losses on translation are reflected in the Statement of
Operations and Deficit.
The accounts of the Company’s self-sustaining foreign operations are translated
into U.S. dollars using the current rate method. Assets and liabilities are
translated at the exchange rate in effect at the balance sheet date and revenue
and expenses are translated at exchange rates which approximate those
prevailing at the transaction dates. Gains or losses arising from the translation of
the financial statements of the self-sustaining foreign operations are deferred in
the accumulated other comprehensive income account in shareholders’ equity.
m) Certain prior year information has been reclassified to conform with the current
year’s presentation.
10
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
n) New Accounting Standards
(i) Financial instruments:
Effective for fiscal years ending on or after September 30, 2009, the Company
has adopted the enhanced disclosure requirements of amended CICA Section
3862, Financial Instruments - Disclosures. Refer to note 13 for fair value
measurement disclosures using a fair value hierarchy that reflects the
significance of the inputs in making the measurements.
(ii) Goodwill and intangible assets:
On January 1, 2009, the Company adopted the new requirements of the CICA
Handbook Section 3064, Goodwill and Intangible Assets. This new
accounting standard, which applies to fiscal years beginning on or after
October 1, 2008, replaces Section 3062, Goodwill and Other Intangible
Assets. Section 3064 expands on the standards for recognition, measurement,
and disclosure of goodwill and intangible assets. The adoption of this new
standard did not have any impact on the Company’s financial statements,
disclosures, or results of operations.
(iii) Credit risk and the fair value of financial assets and liabilities:
On January 23, 2009, the CICA Emerging Issues Committee (EIC) issued
EIC-173, Credit Risk and the Fair Value of Financial Assets and Liabilities.
EIC-173 is effective for interim and annual financial statements ending on or
after January 20, 2009. EIC-173 provides guidance which requires that an
entity consider its own credit risk and the credit risk of counterparties when
determining the fair value of financial assets and liabilities. Adoption of this
guidance is to be applied retrospectively without restatement to prior periods.
The Company has evaluated the impact of this new standard and concluded
that it does not have a material impact on its financial statements.
11
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
3.
FUTURE ACCOUNTING STANDARDS
a) International Financial Reporting Standards
In February 2008, the Canadian Accounting Standards Board confirmed that
Canadian generally accepted accounting principles (Canadian GAAP) will be
converged with International Financial Reporting Standards (IFRS) for fiscal
years commencing January 1, 2011. The transition from Canadian GAAP to
IFRS will be applicable for the Company for the first quarter of 2011 when the
Company will prepare both the current and comparative financial information
using IFRS. While IFRS uses a conceptual framework similar to Canadian
GAAP, there are significant differences on recognition, measurement and
disclosures. While the effects of IFRS have not yet been fully determined, the
Company has identified a number of key areas which are likely to be impacted
by changes in accounting policy and disclosures, including the accounting for
petroleum properties and taxation.
b) Business Combinations
The CICA recently issued Handbook Section 1582, Business Combinations,
which replaces Handbook Section 1581, Business Combinations, and
establishes revised standards for the recognition, measurement, presentation and
disclosure of business acquisitions. This new standard will become effective for
business combinations for which the acquisition date is on or after the beginning
of the first annual reporting period beginning on or after January 1, 2011. The
Company has determined that adoption of this standard will not have an impact
on the Company’s financial statements.
c) Consolidated Financial Statements and Non-Controlling Interests
The CICA recently issued Handbook Section 1601, Consolidated Financial
Statements, and Handbook Section 1602, Non-Controlling Interests. These new
sections will replace Handbook Section 1600, Consolidated Financial
Statements, and establishes new guidance in respect of accounting for non-
controlling interests in a subsidiary and for the preparation of consolidated
financial statements. These new sections apply to interim and annual
consolidated financial statements for years beginning on or after January 1,
2011. The Company has determined that adoption of these sections will not
have an impact on the Company’s financial statements.
12
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
4. DISCONTINUED OPERATIONS
On May 28, 2009, the Company sold to a third party substantially all of its
petroleum properties located in the United States in the Gulf of Mexico. The sale of
these properties, including corresponding asset retirement obligations, was for
$12,487,000 in cash. Not included in the purchase price is a deferred payment of up
to $8,000,000, which is contingent based on proved reserves as defined at
December 31, 2010. The sale resulted in a gain of $1,600,000 reported in the
consolidated statement of operations and deficit.
The results of discontinued operations in the Consolidated Statement of Operations
and Deficit for the years ended December 31 were as follows:
$
2009
2008
$
1,658
-
1,658
761
810
21
200
12
447
3,072
(3,282)
2,041
24
(359)
-
6,723
(1,714)
5,009
2,202
10,500
12,716
68,556
55
1,912
2,894
-
98,835
1,070
(92,756)
-
(359)
1,600
1,241
$
(92,756)
-
(92,756)
$
Revenues
Oil and gas sales
Royalties
Costs and Expenses
Operating
Exploration
Dry hole costs
Impairment of properties
Accretion
Depletion, depreciation and amortization
General and administrative
Reclassification of cumulative foreign
currency translation gain (note 5)
Other income
Interest income
Net loss before income taxes
Income tax expense
Discontinued operations
Loss from operations
Gain on asset disposals
13
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
The cash flows relating to discontinued operations in the Consolidated Statement of
Cash Flows for the years ended December 31 were as follows:
Operating activities of discontinued operations
Income (loss) from discontinued operations
Adjustments for non-cash items:
2009
2008
$
1,241
$
(92,756)
Depletion, depreciation and amortization
Impairment of properties
Dry hole costs
Accretion
Reclassification of cumulative foreign
currency translation gain (note 5)
Gain on asset disposals
Asset retirement obligation
Changes in working capital:
Accounts receivable
Prepaid expenses
Accounts payable and accrued expenses
Advances from joint venture partners
Investing activities of discontinued operations
Property, plant & equipment
Proceeds from sale of assets
Investments, net
$
447
200
21
12
(3,282)
(1,600)
426
1,377
1,295
(2,151)
163
(1,851)
(1,299)
12,487
-
11,188
9,337
$
1,912
68,556
12,716
55
-
-
1,292
1,197
(917)
(11,918)
(163)
(20,026)
(20,803)
-
31,977
11,174
(8,852)
5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is comprised as follows:
As at January 1
Reclassification of cumulative foreign
currency translation gain
Gain on currency translation of the financial
statements of a foreign operation
As at December 31
$
$
2009
3,282
$
2008
3,282
(3,282)
4
4
$
-
3,282
14
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
The 2009 financial statements of ShaMaran Petroleum BV, The Hague, Collonge
Bellerive Branch have been translated from the functional currency of Swiss Francs
into the reporting currency of the Company, with a resulting currency translation
gain of $4,000.
Consistent with the sale during the year 2009 of substantially all of its petroleum
properties located in the United States, the Company has reclassified the cumulative
foreign exchange translation gain which originated in the year 2007. Accordingly,
the amount is reflected in the 2009 loss from discontinued operations included in
the Consolidated Statement of Operations and Deficit.
6.
PROPERTY PLANT AND EQUIPMENT
Property plant and equipment is comprised as follows:
December 31, 2009:
Petroleum properties - Kurdistan
Corporate PP&E
December 31, 2008:
Petroleum properties - USA
Corporate PP&E
PP&E - held for sale
Cost
184,953
233
185,186
Cost
19,717
229
19,946
Accumulated
DD&A
-
(6)
(6)
Accumulated
DD&A
(5,108)
(63)
(5,171)
$
$
$
$
$
$
$
$
$
$
$
$
Net
184,953
227
185,180
Net
14,609
166
14,775
During 2009 the Company sold its petroleum properties located in the United
States. The remaining United States located petroleum properties retained by the
Company are carried at $nil cost. Refer to note 4 for additional information.
On October 16, 2009, the Company completed the acquisition of working interests
in three separate exploration and development blocks with the Kurdistan Regional
Government (“KRG”) in the southeastern area of the autonomous region of
Kurdistan in Northern Iraq. In exchange for the working interests the Company
paid to various parties cash consideration totaling $90.1 million, and has an
obligation as at December 31, 2009 to issue 100 million common shares to the
KRG. As of December 31, 2009 these shares remain un-issued by the Company
and have been presented as “Shares to be issued” within Shareholder’s Equity at a
value of $61.3 million. Refer to note 15 for additional information on the working
interests.
The acquisition of a company during the year 2009, as described in note 7, has
resulted in the capitalization of $31,965,000 in petroleum property costs.
15
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
No depletion has been attributed to the costs of petroleum properties located in
Kurdistan, as the related operations are currently in the pre-production exploration
stage and, currently, there is no corresponding production or reserves.
7. ACQUISITION
On October 22, 2009 the Company completed the acquisition from Lundin
Petroleum B.V. (“LUPE”) of 100% of the common shares of BBPL International
BV, a company incorporated in the Netherlands, in exchange for consideration of
$1.00 in cash and 50 million common shares of the Company issued at a price of
Cdn $0.67 per share, for a total purchase price of $31,965,000 The entire purchase
price has been allocated to the petroleum properties located in Kurdistan, as
described in note 6. An additional 50 million common shares of the Company are
issuable to LUPE at such time as a development plan on one of the petroleum
properties is approved. The name of the acquired company was subsequently
changed to ShaMaran Petroleum BV.
8.
SHARE CAPITAL AND CONTRIBUTED SURPLUS
a. Share capital and contributed surplus are comprised as follows:
No. Shares
Share Capital
Contributed
Surplus
Authorized: Unlimited common shares
without par value
Balance - December 31, 2007
Issued - warrants exercised
Warrants exercised
Stock options granted
Balance - December 31, 2008
Issued - private placement
Issued - acquisition
Issued - options excercised
Stock options granted
Balance - December 31, 2009
308,256,088 $ 250,835 $ 2,237
-
500,000
(14)
-
801
-
308,756,088
3,024
140,000,000
50,000,000
790,000
-
499,546,088
50
14
-
250,899
96,250
31,966
558
-
379,673
(210)
546
3,360
$
$
On October 20, 2009, the Company closed a private placement of 140 million
common shares at a price of Cdn $0.75 per share. Gross proceeds of the
offering were Cdn $105,000,000 (Cdn $99,696,000 net of related fees).
On October 22, 2009, the Company issued 50 million common shares at a price
of Cdn $0.67 per share as consideration in the acquisition of a Dutch subsidiary,
as indicated in note 7.
16
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
b. Share Options
The Company has an established share purchase option plan whereby a
committee of the Company’s board of directors may, from time to time, grant
up to a total of 10% of the issued share capital to directors, officers, employees
or consultants. The number of shares under option at any specific time to any
one optionee shall not exceed 5% of the issued and outstanding common shares
of the Company. The term of any options granted under the plan will be fixed
by the Board of Directors and may not exceed five years from the date of grant.
All options granted are subject to a four month hold period from the date of
granting. Vesting terms are at the discretion of the Board of Directors. All
issued stock options have terms of three to five years and vest over periods of
up to three years. The exercise price of an option is not less than the closing
price on the TSX Venture Exchange (“the Exchange”) on the last trading day
preceding the grant date, less the applicable discount, provided that the exercise
price will not be less than Cdn $0.10 per share.
Movement in stock options issued and outstanding is as follows:
Outstanding at December 31, 2007
Granted
Expired
Cancelled/Forfeited
Outstanding at December 31, 2008
Granted
Exercised
Cancelled/Forfeited
Outstanding at December 31, 2009
Number of Options
3,215,000
3,660,000
(250,000)
(5,000)
6,620,000
2,085,000
(790,000)
(3,805,000)
4,110,000
Weighted Average
Exercise Price
Cdn $1.37
Cdn $0.48
Cdn $0.75
Cdn $2.15
Cdn $0.90
Cdn $0.66
Cdn $0.48
Cdn $0.93
Cdn $0.82
At December 31, 2009, 2,425,000 options are exercisable at an average exercise
price of Cdn $0.82 per share with a weighted average remaining life of 2.38
years.
The incentive stock options issued and outstanding are as follows:
Expiry Date
March 27, 2010
April 24, 2011
January 18, 2012
September 10, 2014
September 30, 2014
Number Outstanding
at December 31, 2009
490,000
1,235,000
300,000
1,375,000
710,000
4,110,000
Exercise Prices
Cdn $2.15
Cdn $0.48
Cdn $1.20
Cdn $0.67
Cdn $0.64
17
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
Stock Based Compensation
The Company recognizes compensation expense on stock options granted to
both employees and non-employees using the fair value method at the date of
grant, which the Company records as an expense. The stock option
compensation expense is calculated using the Black-Scholes option pricing
model. The weighted average fair value of options granted and the assumptions
used in their determination are as follows.
Expected dividend yield
Risk-free interest rate (weighted average)
Expected stock price volatility (weighted average)
Expected option life in years (weighted average)
Grant date fair value (weighted average)
2009
0%
3.32%
85.77%
3.98
Cdn $0.48
2008
0%
3.06%
94.24%
3.00
Cdn $0.29
Stock option compensation expense for the current year was $546,000 (2008:
$801,000).
Option pricing models require the input of highly subjective assumptions
including the expected price volatility. Changes in the subjective input
assumptions can materially affect the fair value estimate, and therefore the
existing models do not necessarily provide a reliable single measure of the fair
value of the Company’s stock options.
c. Warrants
As at January 1, 2008, the Company had share purchase warrants outstanding to
purchase 500,000 shares at Cdn $0.10 per share, exercisable by January 9, 2008.
These warrants were subsequently exercised on January 8, 2008. As at
December 31, 2009 the Company had no share purchase warrants outstanding.
9.
SHARES TO BE ISSUED
During the Annual General Meeting of the Company held on October 16, 2009 the
shareholders passed a resolution ratifying and approving certain production sharing
contracts with the Kurdistan Regional Government (the “KRG”), which resulted in
an obligation for the Company to issue 100 million common shares to the KRG as
consideration in exchange for the interests in the corresponding petroleum
properties, indicated in note 6. The share price at close of business on October 16,
2009 was Cdn $0.63 which has resulted in total consideration of $61,349,000 (Cdn
$63,000,000). At December 31, 2009 the issuance of the shares was pending subject
to certain actions to be performed by the KRG.
18
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
10. ASSET RETIREMENT OBLIGATION
the Company’s remaining net ownership
The total future asset retirement obligation relates to the remaining interests the
Company holds in petroleum properties located in the United States, and was
estimated based on
in
corresponding 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 Company estimates that the remaining asset retirement obligations
will be settled between the years 2010 and 2012. A discount factor of 2% was used
to calculate the fair value of the asset retirement obligation.
Changes to the asset retirement obligation were as follows:
interest
Balance, beginning of year
Liabilities incurred during the year
Revisions of estimated cash flows
Liabilities settled during the year
Accretion
Balance, end of year
2009
2008
$
$
3,261
-
426
(2,348)
12
1,351
$
$
1,914
753
673
(134)
55
3,261
11.
INCOME TAXES
a. Income tax expense:
The provision for income taxes reflects an effective tax rate which differs from
Federal and Provincial statutory tax rates. The main differences for the years
ended December 31, are as follows:
$
Income (loss) from continuing operations
Corporate income tax rate
Computed income tax expense (recovery)
Increase (decrease) resulting from:
Non-taxable foreign exchange gain
Share issuance costs charged to share capital
Non-deductible compensation expense
Foreign tax rate difference
Effect of change in tax rates
Change in valuation allowance
Effect of change in foreign exchange rates
Other
Income tax expense from continuing operations$
¹ Restated – see note 2.
19
2009
2008 ¹
$
1,687
30.0%
506
(5,294)
31.0%
(1,641)
(1,482)
(1,402)
164
12
448
2,254
(446)
(42)
12
$
-
-
248
-
188
954
483
(232)
-
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
The components of the future income tax assets as at December 31, are as
follows:
Non-capital losses
Share issue costs carried forward
Properties - tax basis over carrying value
Exploration expenses
Future income tax assets before allowance
Valuation allowance
Future income tax asset
$
$
2009
60,366
2,033
1,160
764
64,323
(64,323)
-
$
$
2008
24,045
1,311
35,544
685
61,585
(61,585)
-
In the year 2009 the Company acquired petroleum properties with tax bases
below the carrying value, resulting in a corresponding future tax liability. The
Company has assigned a value of $nil to the future tax liability, as this tax shall
be discharged under the terms of the Production Sharing Contracts (see also
notes 7 and 15).
b. The Company has tax losses and costs as at December 31, which are available
to apply to future taxable income as follows:
Canadian losses from operations
Canadian exploration expenses
Canadian unamortized share issue costs
U.S. Federal losses from operations
U.S. Federal - tax basis in excess of carrying
values of properties
Total
$
$
$
2009
7,401
3,057
7,577
167,188
2008
1,527
2,636
4,545
67,565
3,315
188,538
101,556
177,829
$
The Canadian losses from operations may be used to offset future Canadian
taxable income and will expire over the period from 2014 to 2029. The
Canadian exploration expenses may be carried forward indefinitely to offset
future taxable Canadian income. Canadian unamortized share issue costs may
offset future taxable Canadian income of years 2010 to 2013. The U.S. Federal
losses are available to offset future taxable income in the United States through
2029.
20
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
12. RELATED PARTY TRANSACTIONS
Namdo Management Services Ltd. (“Namdo”) provides corporate administrative
support and investor relation services to the Company under an agreement which
commenced April 1, 2007. For these services Namdo was paid $214,000 during the
current year (2008: $264,000). Namdo is a private corporation owned by a
shareholder of the Company.
Mile High Holdings Ltd., a private corporation associated to a shareholder of the
Company, provided transportation services to the Company in the amount of
$385,000 (2008: $nil) related to petroleum property acquisition and fundraising
activities.
During the current year, the Company incurred legal fees of $217,000 (2008:
$18,000) with a law firm in which an officer of the Company is a partner.
During the year ended December 31, 2008, the Company incurred geological and
geophysical (G&G) costs of $469,000, respectively, with a G&G firm in which an
officer of the Company is a managing partner. No charges were incurred from this
firm in the current year.
The Company receives services from various subsidiary companies of Lundin
Petroleum AB (“Lundin”), a shareholder of the Company. Total Lundin charges
during the year were $1,245,000 (2008: $nil), being comprised of G&G and other
technical service costs of $317,000 (2008: $nil), reimbursement for travel and
related expenses of $207,000 (2008: $nil), office rental, administrative and building
services of $86,000 (2008: $nil), and fees of $635,000 (2008: $nil) relating to a
guarantee provided to the KRG on behalf of the Company in respect of its
minimum financial commitments (see note 15a), charged at a rate of 3% per annum,
and payable semi-annually beginning 30 June 2010.
All transactions with related parties are recorded at amounts agreed to by the parties
and are made on the same terms and conditions as with non-related parties.
Amounts owing to related parties as at December 31, 2009 were $1,152,000 (2008:
$nil), and include $635,000 (2008: $nil) payable to Lundin in respect of a guarantee
on the terms described above. All other amounts owing were due on standard terms
of net-30 days. The Company was owed no amounts by related parties at the
reporting dates.
21
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company’s financial instruments consist of cash and cash equivalents, short-
term investments, accounts receivable, accounts payable, accrued expenses and
advances from joint interest holders.
Cash and cash equivalents and investments are designated as held for trading and
therefore carried at fair value, with unrealized gain or loss recorded in interest
income.
The carrying amounts reported in the consolidated balance sheet for short term
financial assets and liabilities, which includes accounts receivable, accounts
payable, accrued expenses and advances from joint interest holders approximate fair
values due to the immediate or short-term maturities of these financial instruments.
The following is a classification of fair value measurements recognized in the
consolidated balance sheet using a fair value hierarchy that reflects the significance
of the inputs used in making the measurements.
Financial assets
Fair value measurement at reporting date using:
December 31,
2009
Quoted prices in
active markets
identical assets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Held-for trading securities:
Cash and cash equivalents
Short-term investments
Total
$
$
63,565
79
63,644
$
$
63,565
79
63,644
$
$
-
-
-
$
$
-
-
-
The Company is exposed in varying degrees to a variety of financial instrument
related risks.
Credit Risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty
to a financial instrument fails to meet its contractual obligations. The Company
manages its credit risk through its counterparty ratings and credit limits. The
Company is mainly exposed to credit risk on its cash and cash equivalents and
accounts receivable. To manage this risk the Company maintains its excess cash on
account in instruments having a minimum credit rating of R-1 (mid) or better (as
measured by Dominion Bond Rate Services) or the equivalent thereof according to
a recognized bond rating service.
22
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
Accounts receivable are primarily with joint venture partners in the oil and gas
industry and are subject to normal industry credit risks. Joint venture receivables
are typically collected within one to two months of the joint venture bill being
issued to the partner. The Company mitigates the risk from joint venture
receivables by obtaining partner approval of capital expenditures prior to starting a
project.
Liquidity Risk
Liquidity risk is the risk that the Company will incur difficulties meeting its
financial obligations as they become due. The Company’s approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, without incurring unacceptable losses or risk harm to the
Company’s reputation.
The Company prepares annual capital expenditure budgets, which are regularly
monitored and updated as considered necessary. The Company uses authorizations
for expenditures on both operating and non-operating projects to further manage
capital expenditures.
Market Risk
Market risk is the risk that changes in market prices, such as foreign exchange rates,
commodity prices and interest rates, will affect the Company’s net earnings or the
value of financial instruments. The objective of market risk management is to
manage and control market risk exposures within acceptable limits, while
maximizing returns.
The significant market risk exposures to which the Company is exposed are foreign
currency, commodity price and interest rate risks.
Foreign currency risk – The Company maintains a portion of its cash in Canadian
dollars. The Company’s operations are conducted in U.S. dollars. The Company’s
operating results and cash flows are affected to varying degrees by the changes in
the Canadian dollar vis-à-vis the U.S. dollar. Company expenditures are incurred
predominately in U.S. dollars. The Company has not entered into any agreements
or purchased any instruments to hedge possible currency risks.
At December 31, 2009, the Company had $58,338,000 denominated in Canadian
dollars. As of December 31, 2009, with other variables unchanged, a 1%
strengthening of the U.S. dollar against the Canadian dollar would decrease the net
income by $552,000 due to this financial asset.
23
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
Commodity price risk – The prices that the Company received for its crude oil and
natural gas production may have had a significant impact on its revenue and cash
provided by operating activities. Any significant price decline in commodity prices
would have adversely affected the amount of funds available for capital
reinvestment purposes. The Company did not use derivative financial instruments
to manage its exposure to this risk.
Interest rate risk – The Company’s bank accounts earn interest income at variable
rates. The Company’s future interest income is exposed to changes in short-term
rates. At December 31, 2009, the Company had $58,338,000 denominated in
Canadian dollars. As of December 31, 2009, with other variables unchanged, a
0.25% weakening of the interest rate on Canadian funds on deposit would decrease
the net income by approximately $145,000 due to this financial asset.
14. CAPITAL DISCLOSURE
The Company’s objective when managing capital is to safeguard the Company’s
ability to continue as a going concern such that it can provide returns for
shareholders and benefits for other stakeholders.
The Company considers its capital structure to include shareholders’ equity and
working capital. The Company manages the capital structure and makes
adjustments to it in the light of changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or adjust its capital
structure, the Company may issue new shares or sell assets to settle liabilities. The
Company is not subject to externally imposed capital requirements.
The components of the Company’s capital structure as at December 31, are as
follows:
Current assets
Current liabilities
Working capital
Shareholders' equity
2009
2008
$
$
$
64,819
(4,916)
59,903
244,563
$
$
$
48,819
(7,224)
41,595
54,466
24
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
15. COMMITMENTS AND CONTINGENCIES
a. Production Sharing Contracts (“PSC”):
The Company entered into two PSCs during the year 2009, which govern its
petroleum operations in two separate petroleum exploration and development
properties, the Pulkhana Block 10 and the Arbat Block, located in the Kurdistan
Region of Iraq.
Under the terms of the Pulkhana PSC, the Company holds a 60% undivided interest
in the petroleum operations, Petoil Petroleum and Petroleum Products International
Exploration and Production Inc (“Petoil”) holds a 20% interest and the remaining
20% is held by the Kurdistan Regional Government (the “KRG”). The Company is
required to pay 100% of the minimum financial commitment in respect of the first
exploration sub-period, which is 36 months from the commencement of the PSC
with option to extend by one year. Under the terms of the Pulkhana PSC, the
Company is the operator and collectively with Petoil, represent the “Contractor”.
Under the terms of the Arbat PSC, the Company holds a 60% undivided interest in
the petroleum operations, the KRG holds a 20% interest and the remaining 20% is a
third party interest which the KRG has the option to assign to a third party or
parties. The Company is required to pay 100% of the minimum financial
commitment in respect of the first exploration sub-period or until such time as the
KRG’s reserved 20% interest has been sold, following which the Company will pay
75% of the forward costs and receive a reimbursement for 25% of the costs incurred
to that date. Under the terms of the Arbat PSC, the Company is the operator and
represents the “Contractor”.
The PSCs contemplate a minimum financial commitment of $61 million in respect
of the first exploration sub-period for the Pulkhana and Arbat Blocks combined.
The PSCs also require the Contractor to fund certain personnel, training,
environmental, and technological assistance projects, during the period over which
the contracts are in effect. As at December 31, 2009 the commitments under the two
PSCs were approximately $64 million.
All qualifying petroleum costs incurred by the Contractor shall be recovered from a
portion of available petroleum production, defined under the terms of the PSCs. At
any time during the exploration period the Contractor has the right to terminate the
PSCs, by surrendering the entire contract area.
25
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
b. Amendment and Novation Agreement to the Block K42 Option Agreement
(“K42 Option Agreement”)
During the year 2009 the Company became party to the K42 Option Agreement
between the KRG and Oil Search (Iraq) Limited (“OSIL”), which allows an option
to the Company and OSIL to enter into with the KRG a PSC relating to the
exploration and development of petroleum resources in the Block K42 contract area
located in Kurdistan Region of Iraq, the terms of which have been agreed in
principle.
In accordance with the K42 Block PSC, OSIL is the operator and, collectively with
the Company, represent the “Contractor”. Upon exercise of the option, the
Company would acquire not less than an undivided 20% interest in the petroleum
operations in respect of the K42 Block contract area, with OSIL holding a 60%
interest and the KRG holding the remaining 20%. If either the Company or OSIL
elect not to exercise its option in respect of the Contract the other party has the
option of acquiring the exiting party’s rights and obligations.
This K42 Option Agreement requires the Contractor to conduct certain seismic
services, including the acquisition of 200 kilometers of seismic surveying, within
the option period of 18 months commencing October 1, 2009, which is extendable
for a further three months. Provided that the seismic services are completed prior to
the expiry of the option period, the option to enter into a PSC may be exercised by
providing written notice to the KRG. The Contractor is to pay 100% of all the costs
incurred during the option period, 25% of which are to be paid by the Company.
The Company estimates its remaining minimum commitments under the K 42
Option Agreement to be approximately $2 million as at December 31, 2009.
All qualifying petroleum costs incurred by the Contractor during the option period
would be recoverable from a portion of available petroleum production, defined
under the terms of the PSC.
c. Net Profit Interest
The Company has entered into agreements for local services whereby certain third
parties are entitled to receive a net profit interest in respect of the Pulkhana Block
10 and Arbat Block PSCs.
26
SHAMARAN PETROLEUM CORP.
(formerly Bayou Bend Petroleum Ltd.)
Expressed in United States Dollars Unless Otherwise Noted
(Tabular Amounts in Thousands, except Share and Per Share Amounts)
d. Other commitments
The Company has leases for office space which expire during the year 2010. As at
December 31, 2009 the future minimum commitments relating to office leases was
$69,000.
27
SHAMARAN PETROLEUM CORP.
DIRECTORS
CORPORATE INFORMATION
Keith C. Hill
Director, Chairman
Vancouver, British Columbia
Brian D. Edgar
Director
Vancouver, British Columbia
CORPORATE OFFICE
885 West Georgia Street
Suite 2101
Vancouver, British Columbia V6C 3E8
Telephone: +1-604-689-7842
Facsimile: +1-604-689-4250
Website: www.shamaranpetroleum.com
Gary S. Guidry
Director
Calgary, Alberta
Alexandre Schneiter
Director
Anieres, Switzerland
J. Cameron Bailey
Director
Calgary, Alberta
OFFICERS
Pradeep Kabra
President & Chief Executive Officer
Geneva, Switzerland
Brenden Johnstone
Chief Financial Officer
Geneva, Switzerland
Kevin E. Hisko
Corporate Secretary
Vancouver, British Columbia
OPERATIONS OFFICE
5 Chemin de la Pallanterie
1222 Vésenaz
Switzerland
Telephone: +41-22-560-8600
Facsimile: +41-22-560-8601
BANKER
HSBC Bank Canada
Vancouver, British Columbia
AUDITOR
KPMG
Vancouver, British Columbia
TRANSFER AGENT
Computershare Trust Company of Canada
Vancouver, British Columbia
STOCK EXCHANGE LISTING
TSX Venture Exchange
Trading Symbol: SNM
INVESTOR RELATIONS
Sophia Shane
Vancouver, British Columbia
28