FEC RESOURCES INC. (the “Company”)
MANAGEMENT DISCUSSION AND ANALYSIS
OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 2020
(all funds in US dollars unless otherwise stated)
THE FOLLOWING MANAGEMENT DISCUSSION AND ANALYSIS IS PROVIDED AS OF NOVEMBER 27, 2020 AND SHOULD BE READ IN
CONJUNCTION WITH THE CONDENSED UNAUDITED INTERIM FINANCIAL STATEMENTS AND NOTES FOR THE PERIOD ENDED SEPTEMBER 30, 2020 AND THE AUDITED FINANCIAL STATEMENTS AND NOTES FOR THE YEAR ENDED DECEMBER 31, 2019. THOSE FINANCIAL STATEMENTS HAVE
BEEN PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”).
Forward-Looking
Statements
Certain statements in this MD&A, including statements regarding the Company’s current funds
on hand being able to secure the Company for the foreseeable future, and the Company’s ability to raise new money by way of loans or the issuance of new shares to meet its working capital needs and future plans and objectives of the Company
are forward-looking information that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate; actual results and future events could differ materially from those anticipated in such
statements. Material risk factors that could cause actual results to differ materially from the forward-looking information include unforeseen expenses which the Company may incur and which expenses could cause current funds on hand to not be
adequate to secure the Company for the foreseeable future, or arrange debt or equity financing if required to meet working capital needs and other risks and uncertainties as disclosed under the heading “Risk Factors” herein. The Company has
assumed that it would not be incurring significant expenses in the short term that would exceed its current funds on hand. The reader is also cautioned that should Forum Energy Limited (“FEL”) find it necessary to raise capital to fund its
current and future business, the Company’s interest in FEL may be diluted because the Company may not have the resources to participate if provided the opportunity to do so. The reader is also cautioned that assumptions used in the
preparation of such information, while considered reasonable by the Company at the time, may prove to be incorrect. The Company has no policy for updating
forward-looking information beyond the procedures required under applicable securities laws.
Overall Performance
Forum Energy Limited (“FEL”)
As at September 30, 2020 the Company held 6,117,238 shares (5,550,000 shares at December 31, 2019) representing a
6.80% interest (6.80% at December 31, 2019) of the capital of Forum Energy, a private company, which has participating interests in eleven (11) oil and gas blocks in the Philippines through various subsidiaries. FEL’s subsidiaries are
Forum Energy Philippines Corporation
(“FEPC”), Forum (GSEC 101) Limited and Forum Exploration Inc. (FEI, 66.67% owned). FEL and the Company are both ultimately under the control of PXP Energy Corporation (“PXP”) and are therefore affiliates.
On March 23, 2017, PXP announced that it had increased its shareholdings in FEL from 48.8% to 69.5% through a debt conversion involving the
issuance of 39,350,920 new FEL shares at a price of US$0.30 per share. On the same day, an independent third party purchased 6,666,667 newly issued FEL shares at a price of US$0.30 per share for a total cash payment of US$2,000,000. The
Company did not participate in this financing transaction. These two transactions resulted in the dilution of the Company’s interest in FEL from 18.42% to 8.03%. As a result of this dilution, the Company’s investment in FEL ceased to be an
equity investment. As a result of the loss of significant influence, we recognized an unrealized gain of $1,965,000 in the statement of operations and comprehensive income for the revaluation and reclassification of the investment as
available for sale during the year. On December 6, 2017 the Company sold 1,000,000 FEL shares to our parent company, PXP, for US$0.30 per share. As a result of the sale of the shares, our interest in FEL was reduced to 6.80%.
On April 14, 2020 FEL completed a fund raising of US$2,500,000 which was achieved by FEL issuing new shares at
a price of US$0.30 each.
In advance of FEC’s Rights Offering, PXP paid FEC’s share of FEL’s financing thus allowing FEC to maintain its 6.8% interest in FEL at a
cost of approximately $170,111. On July 31, 2020, FEC settled this amount by converting it into equity on the closing of its rights offering.
The following information related to PXP or FEL has been provided to us by PXP or FEL, as we do not have direct knowledge of such
information.
PXP holds a 79.13% controlling interest in FEL, with 72.33% held directly and 6.80% held indirectly through its 78.39% shareholding of the
Company. FEL is a company incorporated under the laws of England and Wales with focus on the Philippines and has: (a) a 70% operating interest in SC 72 Recto Bank, which covers the Sampaguita natural gas discovery in offshore West Palawan,
held through Forum (GSEC 101) Limited; (b) minority interests in the SC 6 and SC 14 sub-blocks in offshore Northwest Palawan, including a 2.28% interest in the producing Galoc Field, held through FEPC; and (c) a 100% operating interest in SC
40 North Cebu held through FEPC’s 66.67%-held subsidiary FEI.
A summary of FEL’s interests are as follows:
*Ceased production on April 1, 2019.
Following is a brief description of the properties of FEL together with production details where appropriate.
SC 72 Recto Bank
FEL’s principal asset is a 70% participating interest in SC 72 (previously Geophysical Survey and Exploration Contract No. 101 (“GSEC
101”)), a petroleum license located in the Recto Bank, offshore west of Palawan Island, the Philippines. The remaining 30% of SC 72 is owned by Monte Oro Resources & Energy Inc., a company incorporated in the Philippines, who is involved
in a joint venture with FEL with respect to SC 72.
On February 15, 2010, the GSEC 101 licence was converted to Service Contract 72 and FEL immediately conducted geological and geophysical
works to further evaluate the block and to fulfill its commitment to the government. SC 72 covers 8,800 square kilometers, which is 85% of the area covered by GSEC 101.
Exploration in the area began in 1970, and in 1976, gas was discovered in the Sampaguita structure following the drilling of a well. To
date, a total of three wells have been drilled at the southwest end of the structure. Two of the wells tested gas at rates warranting further exploration.
In early 2011, FEL acquired 2,202 line-km of 2D seismic, gravity, and magnetic data over SC 72 to further define leads. Also, 565 square
kilometers of 3D seismic data were acquired over the Sampaguita Field (the “Sampaguita 3D”).
The 2D seismic data were reprocessed in 2013 and were subsequently interpreted, aided by gravity-magnetics data that were interpreted by Fugro (in 2012)
and Cosine Ltd. (in 2015). In 2015, Arex Energy produced a report on the North Bank area, located northwest of the Sampaguita Field, and estimated the prospective resources to be significant enough to continue with exploration of the
concession.
Also in October 2018, FEL started the Broadband and Pre-Stack Depth Migration (“PSDM”) reprocessing of the Sampaguita 3D seismic data with
DownUnder GeoSolutions (“DUG”), a company based in Perth, Australia, as contractor. The reprocessing work was completed in June 2019 and costs around US$490,000, including quality control supervision.
In October 2019, the Philippines’ Department of Foreign Affairs (“DFA”) announced that the Philippines and China had officially convened an
Intergovernmental Steering Committee that will supervise projects under the two countries’ joint oil and gas exploration in the West Philippine Sea. The DFA further announced that the Steering Committee held its first meeting in Beijing on
October 28, 2019. Under the Memorandum of Understanding (“MOU”), the Steering Committee will create one or more inter-Entrepreneurial Working Groups that will agree on entrepreneurial, technical, and commercial aspects of cooperation on
certain areas in the West Philippine Sea. China has appointed China National Offshore Oil Corporation (“CNOOC”) as representative to the Working Group(s). FEL will be the representative to the Working Group that will be created for SC 72.
The Steering Committee also agreed to hold the second meeting in the Philippines in early 2020, however, it was being deferred due to the COVID-19 pandemic.
On October 16, 2020, FEL received notice from the Philippine Department of Energy (“DOE”) that the force
majeure (“FM”) imposed on SC 72 on December 15, 2014 was lifted with immediate effect and that FEL was to resume exploration activities on SC 72. FEL now has 20 months from
the date of lifting of the FM to drill two (2) commitment wells. The total cost of drilling these wells depends on a number of factors, the Company’s management estimates the total work to be between US$70 million and US$100 million. It is
important to note that, to date, there has been no announcement of any agreement between FEL and CNOOC in relation to SC 72.
SC 40 North Cebu
A 100% operating interest in SC 40 is held by FEPC’s 66.67% owned subsidiary FEI.
SC 40 is located in the Visayan Basin in the central part of the Philippine Archipelago and covers an area of 340,000 hectares in the
northern part of Cebu Island and adjacent offshore areas. It contains the Libertad Gas Field and several other prospects.
A land gravity survey was conducted in the municipalities of Daanbantayan and Medellin from April 2 to 27, 2018. A total of 94 gravity
stations were acquired at a spacing of 200m to 500m. The processing and interpretation of the gravity data will be carried out in two (2) stages. The first stage is a 3D inverse grid depth modelling which was undertaken by contractor Cosine
Ltd. (“Cosine”). This was completed in early 2019. The second stage is a detailed stratigraphic 3D multi-sectional model done in-house by the FEL technical team under Cosine’s quality control supervision. During this stage, a number of
possible carbonate bodies were identified in certain areas of the block. Delineation of this features required additional data, thus a gravity survey was conducted in the first quarter of 2020.
FEL has started planning for an onshore well, Dalingding-2, to be drilled in 2021. The Company has engaged the services of an operations
geologist to prepare the geological program and prospect montage. The Dalingding Prospect is a reefal structure defined by seismic with Barili Limestone as the primary target. A well, Dalingding-1, was drilled by Cophil Exploration in 1996
and was plugged and abandoned as a dry hole with minor gas shows after reaching a total depth of 1,508 ft. Following FEL’s recent re-evaluation of the prospect, it was concluded that Dalingding-1 did not reach the Barili target, which is
estimated at 1,740 ft, or 232 ft below the well’s total depth. The current plan is to drill a well down to at least 4,000 ft to penetrate the Barili and secondary targets underneath.
In addition to the drilling of Dalingding-2, Forum plans to move the rig to Brgy. Maya, Daanbantayan, Cebu for the permanent plugging and
abandonment (“P&A”) of Forum-1X and Forum-2X wells, which were drilled in 2003.
On November 21, 2019, FEL submitted the WP&B for 2020, which includes the continuation of the Gravity Interpretation – Stage 2,
Radioactive Waste Management, and the conduct of a Land Gravity Survey. This was approved by the DOE on December 2, 2019. The radioactive wastes were safely transported from Daanbantayan, Cebu and turned over to the Philippine Nuclear
Institute in February 2020.
The current Land Gravity Survey is for the acquisition of gravity data along profiles in parts of the Municipality of Daanbantayan and Bogo
City that aims to further delineate the carbonate bodies detected in the said areas by the initial 3D gravity modelling exercise in 2019. The survey began on February 18, 2020 and was completed on March 14, 2020. A total of 84 stations, 300m
to 500m apart were acquired during the survey. FEL has completed the correction of meter readings, coordinates, and elevations of gravity stations acquired during the survey. All corrected gravity data were forwarded to a geophysical
contractor for data reduction, processing, and interpretation. The results of the gravity survey will be used to update the current depth model for northern Cebu.
SC 14 C-1 Galoc
Block C-1 Galoc has an area of 164 square kilometers and contains the producing Galoc Oil Field.
Gross production for 2019 averaged 2,045 BOPD [2018 – 3,198 BOPD]. FEPC’s share is approximately 46 BOPD [2018 – 73 BOPD]. This
represents a decline of 36.05% associated with the Galoc-4 not in production since January 2019 due to safety valve issue, as well as the cyclic production being implemented in the Galoc-3 well. For the first 9 months of 2019, the average
gross production was 2,039 BOPD [2018 – 3,240 BOPD] wherein FEPC’s share is approximately 46 BOPD [2018 – 74 BOPD].
On July 12, 2018, Tamarind Galoc Pte Ltd, a subsidiary of Singapore-based Tamarind Resources Pte Ltd (Tamarind), acquired Nido Petroleum’s
subsidiaries Galoc Production Company WLL (“GPC”) and Nido Production (Galoc) Pte Ltd, giving Tamarind 55.88% equity and operatorship of the Galoc Field.
Production forecasted for 2019 is approximately 970,000 barrels of oil. Three (3) liftings were scheduled for 2019. The first lifting was
completed on January 5, 2019 with a volume of 380,512 bbls. The second lifting was completed on June 1, 2019 with a volume of 305,697 bbls. The third and final lifting was made in November 3, 2019 with targeted volume of 307,552 bbls.
On May 7, 2020, GPC informed the DOE of the cessation of operation for Galoc Field starting September 24, 2020. This comes after GPC’s
receipt of a Notice of Termination from Rubicon Offshore International (ROI), the owner of the floating production storage and offloading (FPSO) vessel, Rubicon Intrepid. GPC has also requested approval of the initial drawdown from the fund
set-up under the DOE-approved Galoc Abandonment Plan for the implementation of the field suspension plan.
Moving forward, GPC, has relayed its full commitment to the long term future of the Galoc asset and will regularly evaluate its operations
to retain flexibility to extend its production. In September 2020, the Galoc Joint Venture negotiated with ROI for the sale of the Rubicon Intrepid that will allow Galoc Field to continue to be in production beyond the original cessation
schedule of September 24, 2020. Tamarind, which owns GPC, formed a new subsidiary, Philippines Upstream Infrastructure (PUI), to acquire the FPSO from ROI. GPC and ROI then entered into a Transition O&M contract to allow the current ROI
crew to continue managing FPSO operations during a transition period that will last for about six (6) months. Finally, GPC entered into an O&M contract with Three60 Energy, an energy services provider, that will take over FPSO operations
after the transition period. The contract will be for 24 months.
SC 6A Octon
SC 6A Octon covers an area of 1,080 square kilometers and contains the Octon Field.
In 2018, Philodrill completed the seismic interpretation/mapping work on the northern sector of the block using the PSDM volume. The
evaluation focused on the Malajon, Salvacion, and Saddle Rock prospects. The Malajon and Saddle Rock closures were previously tested by wells which encountered good oil shows in the Galoc Clastic Unit (GCU) interval. However, no tests were
conducted in this interval due to operational constraints.
The 2019 work program included the completion of seismic attribute analysis of the North Block of SC 6A to characterize the target
reservoirs and determine their distribution in terms of porosity, thickness, and lithology. Philodrill will then conduct resource analysis, including computation of reserves, and preliminary well design and cost to mature a drilling location
in the area.
For 2020, the DOE approved a work program which consists of the following:
In June 2020, LMKR, a private petroleum technology company based in Dubai, completed a pilot study on the Malajon area using 3D seismic and
well data. The study shows the Malajon structure having a good potential and thus requires further detailed analysis. LMKR is also able to identify four (4) sand packages within the GCU after generating several elastic properties
(P-impedance, Vp/Vs, etc.).
A QI/Resevoir Characterization study was approved by the JV aimed at generating pay probability maps and identifying prospective zones that
could be targets for any future well. It will also include detailed attribute analysis as several channelized sands within the GCU have been identified during the pilot study. An amended WP&B for 2020 to cover this additional study was
approved by the DOE in July 2020.
SC 6B Bonita
SC 6B Bonita covers an area of 567 square kilometers and contains the Bonita discovery.
An in-house evaluation completed by Operator Philodrill in early 2016 shows the East Cadlao Prospect has marginal resources which cannot be
developed on a “stand-alone” basis. However, it remains prospective being near the Cadlao Field, which lies in another contract area. In view of this, the JV has requested for the reconfiguration of SC 6B to append the Cadlao Field for
possible joint development in the future. On March 14, 2018, the DOE approved the annexation of Cadlao Block to SC 6B.
On 28 June 2018, Philodrill received DOE’s approval for the assignment of Trans-Asia’s relinquished participating interest in SC 6B to the
remaining JV partners. As a result, FEL’s interest in SC 6B has increased to 8.182%.
On October 17, 2019, the FIA, Deed of Assignment and transfer of operatorship from Philodrill to Manta Oil Company Ltd. (Manta) were
approved conditionally by the DOE, requiring Manta to submit additional financial documents. Under the FIA, Manta will carry the JV up to First Oil to earn 70% interest. FEL’s interest will be reduced to 2.4546% from 8.182% upon completion
of the farm-in.
Manta is currently conducting a remapping of the Cadlao Field based on 2016 Pre-Stack Time Migration (PSTM) reprocessing of the 3D seismic
data. It is also planning to conduct PSDM reprocessing of 88 sq. km of 3D seismic data over Cadlao Field to improve the mapping of the Cadlao structure and firm-up well locations for the field’s redevelopment. Future activities will include
an evaluation of the East Cadlao Prospect as a potential drillable prospect, and the preparation of a Competent Person’s Report certifying reserves and resources estimates.
Cadlao has an estimated Recoverable Reserves (P50) of 6.32 MMBO while East Cadlao has an estimated In-Place Prospective Resources of 3.59
MMBO (Best Case).
SC 14A [Nido], SC 14B [Matinloc] & SC 14B-1 [N. Matinloc]
Production from the Nido and Matinloc Fields was terminated permanently on March 13, 2019, after producing 22,173 barrels of oil from
January to March 2019. The Nido Field accounted for 93.06% of the total while Matinloc Field contributed the remaining 6.94%. Shell Philippines was the sole buyer for the crude during the period.
Nido started oil production in 1979 while Matinloc was put in place in 1982. The final inception-to-date production figures for the two
fields are: 18,917,434 bbls for Nido and 12,582,585 bbls for Matinloc. The North Matinloc Field, which was in production from 1988 to 2017 produced a total of 649,765 bbls of oil. The total production for the three (3) fields is 32,149,784
barrels.
Seven (7) production wells in Nido (3 out of 5), Matinloc (3), and North Matinloc (1) were successfully P&A from April to May 2019. The
two remaining Nido wells, A1 and A2, were only partially abandoned due to difficulties encountered during operations. Philodrill is preparing to implement the P&A program on the two wells in September 2020. This was originally scheduled
in April 2020 but was suspended due to the community quarantine imposed on Luzon Island due to COVID-19.
Following the suspension of field operations and the P&A of the wells in March 2019, Philodrill conducted the stripping and disposal of
equipment and materials aboard the production platforms from June to October 2019. In December 2019, all production platforms were turned over to the DOE which, in turn, will hand them over to the Armed Forces of the Philippines for defense
use. On June 26, 2020, a Deed of Donation and Acceptance was signed by DOE with the Department of National Defense to formalize the transfer of ownership of the Nido and Matinloc platforms to the Armed Forces of the Philippines which will
now use the platforms for defense purposes.
The P&A of the remaining Nido production wells, A-1 and A-2 wells was completed on October 5, 2020. This was originally scheduled in
April 2020 but had to be deferred due to COVID 19-related health and travel restrictions.
SC 14C-2 West Linapacan
Block C-2 has an area of 176.5 sq. km and contains the West Linapacan “A” and “B” structures.
In 2018, the JV headed by Philodrill completed mapping and interpretation work on the 3D seismic data that was reprocessed in 2014. The
study focused on the West Linapacan “B” structure, which was drilled in 1991. The JV is studying options to develop the field.
In 2019, Desert Rose Petroleum Limited (DRPL) expressed interest to re-develop the West Linapacan “A” Field through a farm-in process and
through the purchase of participating interests from companies that are willing to divest. For the divesting members, DRPL offered a nominal transaction price of US$100.00, but upon production will pay these companies :
For the farming-out companies, DRPL will shoulder the cost of redevelopment of West Linapacan “A” Field up to First Oil. In return, the
companies will further assign 75% of their remaining interest to the farminee, leaving them with a combined interest of 5%.
The Deed of Assignment (DOA) for the Sale and Purchase Agreement (SPA) has been sent out for signing by the JV partners. Once completed,
this will be transmitted to DRPL. In the meantime, Philodrill continues to prepare and compile the necessary documents that will be required for the submission to the DOE of the DOA, Farmout Agreement (FOA) and SPA. Forum is not a party to
the FOA as it opted to sell all its interest to Desert Rose.
Finally, the SC 14C2 and SC 74 consortia conducted a joint Rock Physics and QI studies over the West Linapacan and Linapacan areas using
existing 3D seismic and well data. The initial phase of the study were carried out and completed by Ikon in October 2019. The SC 14C2 JV decided not to proceed with the second phase of the QI Study in view of the impending entry of DRPL to
the SC 14C2 block.
FEL Objectives and Strategy
The core objective of FEL is to maximize the potential of its investments and its current licences to generate income, whilst at the same time
continuing to reduce administrative expenses.
FEL plans to achieve this by:
For further details regarding Forum Energy, see its 2019
financial statement package at https://find-and-update.company-information.service.gov.uk/company/05411224/filing-history
Please note that FEL is not required to file its financial statement package with Companies House in the UK until September 30 following
the end of its fiscal year which is December 31. Accordingly, the FEL financial statement package for 2020 is not expected to be available until Q3 of 2021.
Risk factors specific to FEL
The Company is exposed to certain risk factors which are specific to its investment in Forum Energy. These include the following:
Selected Annual Financial
Information Of The Company
Results of Operations
The accounts show a loss for the period ended September 30, 2020 of $142,174, or $0.00 per
share, versus a loss of $157,015 for the same period in 2019.
The difference was because of lower overall general and administration expenses.
General and Administration expense were $144,570 for the period ended September 30, 2020 versus $158,894 for the
same period in 2019. Overall expenses were lower than those experienced in the previous year. Lower professional fees offset by an increase in consulting fees mainly accounted for the difference. Professional fees were $9,540 for the
period ended September 30, 2020 versus $39,898 for the same period in the previous year due to costs resulting from a shareholder complaint. Listing and filing fees were $17,010 for the period ended September 30, 2020 versus $15,234 for the
same period in the previous year. The difference was not significant. For the period ended September 30, 2020, foreign exchange loss was $2,642 versus a loss of $3,155 for the same period in the previous year.
Balance Sheet
The Company’s current assets were $268,366 at September 30, 2020 versus $52,908 for the year
ended December 31, 2019. The difference is mainly a result of the higher cash balance, higher receivables balance and higher prepaid balance on September 30, 2020. The Company’s assets reflect the investment in FEL on a fair value basis. The
fair value of the investment in FEL is stated at $1,835,111 or $0.30 per share.
The investment in FEL represents an investment in a private company for which there is no active market and for which there are no publicly
available quoted market prices. The Company has classified its investment in FEL as Level 3 in the fair value hierarchy.
For purposes of determining fair value of the investment in FEL, the Company considered valuation techniques described in IFRS 13 – Fair
Value Measurement. In respect of the investment in FEL, management considered the fair value of $1,835,111 to be indicative of the fair value of the investment in FEL as there have been no changes in the circumstances that would change
management’s assessment of fair value.
The determination of fair value was based upon the most recent third party financing that took place while SC 72 was
under FM.
There were no transfers between level 3 and the other levels in the hierarchy during 2020 or 2019.
PROPERTY, PLANT AND EQUIPMENT
Summary of Quarterly Results
Selected Financial Data
(in ‘000, except EPS)
Liquidity
The Company’s working capital at September 30, 2020 was $202,477 versus a deficit of $(69,208) at December 31, 2019 and shareholders’
equity was $2,383,877 at September 30, 2020 (December 31, 2019: $1,635,378). The change was due to the completion of the Company’s previously mentioned Rights Offering.
Management considers that the current economic environment is difficult and the outlook for oil and gas exploration
companies presents significant challenges in terms of raising funds through issuance of shares. Previously, to the extent necessary, the Company disposed of quantities of its shareholdings in FEL to PXP under terms that are consistent with
the best interests of all shareholders, in order to finance its operations. More recently the Company has issued new shares under a rights offering scheme to raise new capital to fund its operations.
Management currently believes that it is in the best interest of all shareholders that management explores the
issuance of new shares or debt to fund its future operations.
The Company is not required to directly contribute capital to any of the projects in which it has an indirect or direct interest.
Cash used in operating activities for the period ended September 30, 2020 was $210,533 versus $167,745 for the same period in 2019 mainly
as a result of the differences described above.
Cash provided by financing activities was $759,943 for the period ended September 30, 2020 versus $Nil for the same period in the previous
year. The increase was due to the completion of the Company’s Rights Offering.
Third Quarter
During the third quarter, there were no significant events. The Company experienced only basic operating costs. The Company does not
experience seasonal fluctuations in its business and there were no dispositions of any business segments.
Since the Company has no revenue, the Company will need to continue to raise funds through either debt,
equity or the sale of assets in order to continue its operations or participate in other projects. The Company currently has no plans to sell any more of its FEL shares and will be reliant on debt or equity issuances for future funding
requirements.
Since the delisting of FEL from the London Stock Exchange,
there is no liquidity via a public market for the FEL shares. As the Company is wholly reliant on the information disclosed by PXP concerning the business of FEL, the Company may not be able to obtain information necessary to facilitate a
wider sales process and may be reliant on significant shareholders of PXP for the disposition of any of its FEL shares. Management has looked at all options including raising funds to operate and participate in future FEL financings by way
of debt or equity financings. Given the current share price of the Company, and given that any external financings may have been extremely dilutive, the Company completed a rights offering to raise funds to sustain operations. The Company closed the rights offering on July 31, 2020 and raised approximately $846,750.
On January 22, 2020, the Company received $150,000 from its parent company, PXP, as a working capital loan. The loan
was non-interest bearing, unsecured and due on demand. The loan was repaid on August 7, 2020.
On April 14, 2020 FEL completed a fund raising of $2,500,000 which was achieved by FEL issuing new shares at a price of US$0.30 each.
In advance of FEC’s Rights Offering, PXP paid FEC’s share of FEL’s financing thus allowing FEC to maintain its 6.8% interest in FEL at a
cost of approximately $170,111. On July 31, 2020 the Company converted into equity this rights offering advance from PXP.
On August 7, 2020 the Company increased its investment in FEL by purchasing 6.8% of the loan currently due by
FEL to PXP amounting to $346,202 plus accrued interest of $939. This loan is unsecured, due on December 31, 2021 and bears interest at an annual rate of 3.5% plus LIBOR which is payable on a quarterly basis. For the period ended September 30,
2020 accrued interest was $2,275.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements in existence as of this date.
Transactions with Related Parties
During the period ended September 30, 2020, general and administrative expenses included key management personnel
compensation totaling $51,000 (2019: $36,000).
On January 22, 2020, the Company received $150,000 from its parent company, PXP, as a working capital loan.
The
loan is non-interest bearing, unsecured and due on demand.
On April 14, 2020, PXP advanced approximately $170,111 directly to FEL on the Company’s behalf allowing the Company to participate in a
fund raising by FEL so that the Company could maintain its 6.8% interest. The advance was considered an advance against the Company’s stock rights offering. Subsequent to the end of the quarter the advance was settled by the issuance of new
common shares from treasury at the same price as the rights offering price.
On August 7, 2020 the Company increased its investment in FEL by purchasing 6.8% of the loan currently due by FEL to PXP amounting to
$346,202 plus accrued interest of $939. This loan is unsecured, due on December 31, 2021 and bears interest at an annual rate of 3.5% plus LIBOR which is payable on a quarterly basis. For the period ended September 30, 2020 accrued interest
was $2,275.
During the nine-month period ended September 30, 2020, the Company paid $5,016 for PXP filing fees related to the Right Offering.
Critical Accounting Estimates and Judgments
The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and
judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these
estimates and assumptions.
The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income/loss in the period of
the change, if the change affects that period only, or in the period of the change and future periods, if the change affects both.
The determination of the fair value of the Company’s investment in FEL is a significant accounting estimate.
Standards, Amendments and Interpretations Not Yet Effective
The Company has prepared its financial statements in accordance with IFRS as issued by the International Accounting Standards Board
(“IASB”). IFRS represents standards and interpretations approved by the IASB and are comprised of IFRS, International Accounting Standards (“IAS’s”), and interpretations issued by the IFRS Interpretations Committee (“IFRIC’s”) and the former
Standing Interpretations Committee (“SIC’s”). The financial statements have been prepared in accordance with IFRS standards and interpretations effective as of September 30, 2020.
New IFRS standards and interpretations or changes to existing standards with future effective dates are either not applicable or not
expected to have a significant impact on the financial statements of the Company.
Financial Instruments and Risk Management
The Company is exposed through its operations to the following financial risks:
In common with all other businesses, the Company is exposed to risks that arise from its use of financial instruments. This note describes
the Company’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout this management discussion and analyis.
There have been no substantive changes in the Company’s exposure to financial instrument risks, its objectives, polices and processes for
managing those risks or the methods used to measure them from previous years unless otherwise stated in the note below.
General Objectives, Policies and Procedures
The Board of Directors has overall responsibility for the determination of the Company’s risk management objectives and policies and,
whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Company’s finance function. The Board of
Directors receive quarterly reports from the Company’s Chief Financial Officer through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets.
The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Company’s
competitiveness and flexibility. Further details regarding these policies are set out below.
Market risk is the risk that the fair
value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices are comprised
of foreign currency risk, interest rate risk and equity and commodity price risk.
Foreign currency exchange risk
The Company is exposed to foreign currency fluctuations for general and administrative transactions denominated in
Canadian Dollars. The majority of the Company’s cash is kept in U.S. dollars. As at September 30, 2020, the Company had an insignificant amount of cash denominated in Canadian dollars that was subject to exchange rate fluctuations between the
Canadian dollar and the U.S. dollar. As at September 30, 2020, the Company held financial liabilities of $30,646 that are denominated in Canadian dollars that would be subject to exchange rate fluctuations between Canadian dollars and U.S.
dollars.
The Company maintains cash deposits in one chartered Canadian bank which, from time to time, exceed the amount of
depositors insurance available in each respective account. Management assesses the financial condition of this bank and believes that the possibility of any credit loss is minimal. The maximum exposure of credit risk is the Company’s cash
deposit $245,756 (December 31, 2019: $42,548) and receivables of $12,275 (December 31, 2019: $3,072).
Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company
does not generate cash from operations but rather, the Company will, from time to time, issue shares via equity placements, borrow funds from an affiliated company or undertake to sell a portion of its investment in the shares of FEL should
it be necessary to raise funds.
At this time, the Company has no new business plans and if it continues to act as a holding company of FEL shares,
there is a risk it will receive no return from that investment unless alternate sources of funding are found.
The Company manages liquidity by maintaining cash balances available to meet its anticipated operational needs.
Liquidity requirements are managed based on expected cash flow to ensure that there is adequate capital to meet short-term and long-term obligations. The Company has in place a planning and budgeting process to help determine the funds
required to support the Company’s normal operating requirements on an ongoing basis and its growth plans. At September 30, 2020, the Company’s accounts payable and accrued liabilities were $65,889, all of which fall due for payment within
twelve months of the date of the statement of financial position. On September 30, 2020, the Company was owed $346,202 principal plus interest of $939 paid to PXP on purchase of a loan to FEL. In addition, the Compamy was owed accrued
interest totalling $2,275 for the period from purchase of the loan to September 30, 2020.
The carrying values of accounts payable and accrued liabilities and short term loans approximate their fair values
due to the relatively short periods to maturity of the instruments.
As discussed elsewhere in this MD&A, there is a risk of continued dilution of the Company’s interest in FEL
should it either need to sell shares of FEL to raise operating funds, or not participate in any future share issuance financings undertaken by FEL. Currently there are no plans to sell any of the Company’s FEL shares to fund operations.
There is a risk that shareholders may be diluted should the Company need to raise additional operating funds through debt or equity financings.
On April 14, 2020, FEL completed a fund raising of US$2,500,000 which was achieved by FEL issuing new shares at a
price of US$0.30 each.
PXP paid FEC’s share of FEL’s financing thus allowing FEC to maintain its 6.8% interest in FEL at a cost of
approximately $170,111. This amount was converted into equity of the Company on July 31, 2020 in conjunction with the closing of FEC’s Rights Offering.
On August 7, 2020 the Company increased its investment in FEL by purchasing 6.8% of the loan currently due by FEL to
PXP amounting to $346,202 plus accrued interest of $939. This loan is unsecured, due on December 31, 2021 and bears interest at an annual rate of 3.5% plus LIBOR which is payable on a quarterly basis. For the period ended September 30, 2020
accrued interest was $2,275.
Other Risk Factors
As a holding company with an interest in FEL, the Company’s business is indirectly subject to risks inherent in oil
and gas exploration and development operations. In addition, there are risks associated with FEL’s stage of operations and the foreign jurisdiction in which it or FEL may operate or invest. The Company has identified certain risks pertinent
to its investment including: exploration and reserve risks, uncertainty of reserve estimates, ability to exploit successful discoveries, drilling and operating risks, title to properties, costs and availability of materials and services,
capital markets and the requirement for additional capital, market perception, loss of or changes to production sharing, joint venture or related agreements, economic
and sovereign risks, possibility of less developed legal systems, corporate and regulatory formalities, environmental regulation, reliance on strategic relationships, market risk, competition, dependence on key personnel, volatility of future
oil and gas prices and foreign currency risk.
Since the delisting of FEL from the London
Stock Exchange, there is no liquidity via a public market for the FEL shares. As the Company is wholly reliant on the information disclosed by PXP concerning the business of FEL, the Company may not be able to obtain information necessary
to facilitate a wider sales process and may be reliant on significant shareholders of PXP for the disposition of any of its FEL shares. Management has looked at all options including raising funds to operate and participate in future FEL
financings by way of debt or equity financings. Given the current share price of the Company, and given that any external financings may have been extremely dilutive, the Company completed a Rights Offering to raise funds to
sustain operations. The Company closed the rights offering on July 31, 2020 and raised
approximately $846,750. In addition, on July 31, 2020, the Company converted into equity a rights offering advance from PXP in the amount of approximately $170,111.
Capital Management
The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide an adequate return
to shareholders.
The capital of the Company consists of the items included in shareholders’ equity and cash net of debt obligations. On September 30,
2020, the Company was owed a total of $349,416 for a loan to FEL including accrued interest. The Company’s Board of Directors approves management’s annual capital expenditures plans and reviews and approves any material debt borrowing plans
proposed by the Company’s management.
As at September 30, 2020, the Company had no externally imposed capital requirements nor were there any changes in the Company’s approach
to capital management during the year.
General and administration
The
following table shows the detailed breakdown of the components of general and administration expenditures.
Other MD&A Requirements
Disclosure of Outstanding Share Data
As At September 30, 2020
There were no options outstanding as at September 30, 2020.
There
were no warrants outstanding as at September 30, 2020.
Additional information on the Company is
available at www.sedar.com.
On October 16, 2020 FEL received a letter from the DOE lifting the FM on
SC 72 and directed FEL to resume exploration activities on SC 72. It is anticipated that FEL will now submit a revised work program to the DOE. As at the date of this report there has been no announcement of any agreement between FEL and
CNOOC, making it difficult to forecast the capital requirement of FEL to enable it to meet its requirements.
FEL anticipates lower revenues from the Galoc Field due to the Galoc-4 shut-in, normal decline in production of other
wells as Galoc reaches its end of life, and depressed oil price due to economic slowdown brought about by the COVID-19 pandemic.
The Company has limited cash resources and required additional capital to allow it to continue to
trade, maintain its 6.8% interest in FEL, or invest in any new projects.
Looking Forward
This discussion contains "forward looking statements" as per Section 21E of the US Securities
and Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.
Management is currently reviewing many options and there is no assurance that they will not make decisions other than those now contemplated. The Company is subject to political risks and operational risks identified in documents filed with
the Securities and Exchange Commission, including changing and depressed oil prices, unsuccessful drilling results, change of government and political unrest in its main area of operations.