TIDMCAZA
RNS Number : 6278T
Caza Oil & Gas, Inc.
31 March 2016
March 31, 2016
CAZA ANNOUNCES RESULTS FOR THE YEAR ENDED DECEMBER 31, 2015
HOUSTON, TEXAS (Marketwire - March 31, 2016) - Caza Oil &
Gas, Inc. ("Caza" or "the Company") (TSX: CAZ) (AIM: CAZA) is
pleased to announce the Company's final results for the year ended
December 31, 2015.
2015 Financial and Reserve highlights include:
-- Annual revenues for the twelve month period ended December
31, 2015 decreased 56% to US$10.1 million ("MM") (US$22.9MM:
2014)
-- Quarterly revenues for the three month period ended December
31, 2015 decreased 63% to US$1.77MM (US$4.82MM for the comparable
three month period ended December 31, 2014)
-- Average production volumes for the year 2015, decreased 24%
to 706 barrels of oil equivalent ("boe") per day ("boe/d") (923
boe/d: 2014)
-- As estimated by the independent report completed by CGA (as
defined below under Reserve Data) dated as of December 31, 2015
(all reserve figures are net to Caza):
o Proven (1P) reserves increased 98.1% to 12.243 MMboe (6.18
MMboe: 2014)
o Proven plus Probable (2P) reserves increased 13.3% to 16.136
MMboe (14.24 MMboe: 2014)
o Proven plus Probable plus Possible (3P) reserves increased
42.1% to 30.658 MMboe (21.6 MMboe: 2014)
-- Raised gross debt restructuring proceeds of approximately
US$45.5 million through the placing of approximately 9,467,419,937
common shares at a price of approximately US$0.0048 (equivalent to
approximately 0.32 pence) per share (see "Recent Developments"
below)
-- Entered into a credit agreement for a five-year, senior
secured, reserve-based, revolving credit facility for a maximum of
US$100 million governed by an initial borrowing base of US$15
million (see "Recent Developments" below)
-- Cash and cash equivalents at December 31, 2015, are US$1.62MM
(US$5.2MM as at December 31, 2014)
Recent developments:
-- On December 23, 2015, Caza issued and sold to Talara
Opportunities V, LP ("Talara") an aggregate of 9,467,419,937 common
shares in the capital of the Company for aggregate consideration of
US$45.5 million. Concurrently with closing, the Company paid an
aggregate of US$43.9 million to YA Global Master SPV Ltd. and GSC
SICAV p.l.c. (the "Yorkville Parties") and to Apollo Investment
Corporation ("AIC") to extinguish all debts and obligations owed to
them by the Company and its subsidiaries, as well as all oil and
gas interests previously granted to AIC by Caza. The remaining
proceeds of the private placement were allocated to working capital
for general corporate purposes. Closing followed receipt of
requisite approvals from the TSX, including permission to rely on
the financial hardship exemption provided for in the TSX Company
Manual. Caza is currently subject to a TSX delisting review as a
result of its reliance on the financial hardship exemption.
In connection with the closing, certain members of Caza's
Management Team and the Board exchanged their exchangeable shares
of Caza Petroleum, Inc. ("Caza Petroleum") for an aggregate of
26,502,000 Common Shares, and purchased from Talara an aggregate of
176,863,889 Common Shares at an effective price of approximately
US$0.0048 (equivalent to approximately 0.32 pence) per share. In
addition, the Yorkville Parties agreed to transfer ownership of
approximately 29,878,886 Common Shares back to the Company in
connection with closing.
Immediately following such transactions, Talara held
9,290,556,048 Common Shares (representing approximately 95.3% of
the outstanding Common Shares) and members of the Management Team
held 198,707,100 Common Shares (representing approximately 2% of
the outstanding Common Shares). The Board was also reconstituted at
closing to consist of David Zusman, David Young, Andrew Heyman and
Sharon O'Shea, being Talara nominees, J. Russell Porter and
Cornelius Dupré II.
Following admission, the Company had 9,744,153,908 Common Shares
admitted to trading. The figure of 9,744,153,908 Common Shares may
be used by shareholders as the denominator for the calculations by
which they will determine if they are required to notify their
interest in, or change their interest in, the Company under the
Financial Conduct Authority's Disclosure and Transparency
Rules.
-- On January 25, 2016, Caza announced that Caza Petroleum
entered into a credit agreement for a five-year, senior secured,
reserve-based, revolving credit facility with JP Morgan Chase Bank,
N.A., as lender and administrative agent ("JPMorgan"), with JP
Morgan Securities LLC acting as sole lead arranger and sole
bookrunner of the credit facility (the "Credit Facility"). The
Credit Facility commitment was for a maximum of US$100 million
governed by an initial borrowing base of US$15 million, including a
sub-facility for the issuance of letters of credit up to a maximum
aggregate face amount of 10% of the borrowing base in effect.
Strategy
The Company's strategy is to achieve significant growth in
reserves and production through:
-- progressing material, internally generated prospects,
utilizing cash flows from existing production and exploiting Proven
plus Probable reserves; and
-- executing strategic acquisitions of assets at all stages of
the development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear
set of criteria in high-grading projects:
-- the Company seeks to retain control of project execution and
timing through the operatorship of assets;
-- assets should be close to existing established
infrastructure, allowing for quick, efficient hook-up and lower
operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the
ability to deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of
Southeast New Mexico and West Texas, which provides the Company
with low-risk, liquids-rich development opportunities from many
geologic reservoirs and play types. The Permian Basin has a vast
operational infrastructure in place. The Company is utilizing
recent advances in horizontal drilling and dynamic completion
technologies to unlock the significant resources within its asset
base and the region.
Management has focused efforts on building a core asset base in
the prolific Bone Spring/Wolfcamp play and has concluded that these
assets represent the best opportunity for the Company to deliver
production and revenue growth within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset
base within the play will not only grow the Company but will also
make it more resilient to risks associated with any single
project.
As at December 31, 2015, the Company had 226 drilling locations
and 33 gross (10.2 net) producing wells on its leasehold position
in the Bone Spring/Wolfcamp play. The majority of the Company's
leases in the play are held-by-production with no drilling
obligations. Management believes that the Company is
well-positioned with excellent assets and approximately 5,400 net
acres (13,260 gross acres), which is approximately 24,300 net
effective acres (59,670 gross effective acres) in the Bone
Spring/Wolfcamp play, and plans to continue actively monitoring
opportunities to build on Caza's current production levels and
acreage position.
The Company's Bone Spring/Wolfcamp inventory includes the
following 21 properties: Gramma Ridge, Gateway, Marathon Road, East
Marathon Road, Lennox, Forehand Ranch, Forehand Ranch South,
Jazzmaster, Mad River, Azotea Mesa, China Draw, Bradley 29, Two
Mesas, Quail Ridge, Rover, West Rover, Copperline, West Copperline,
Chaparral 33, Madera and Roja.
The Company's Bone Spring/Wolfcamp leases are mostly State and
Federal leases with primary terms between 5-10 years, many of which
are producing and help-by-production. In terms of obligations and
commitments, one producing well at any depth will hold each lease
in its entirety.
Financing
Management believes that once drilling costs come down and
commodity prices recover, accelerating and expanding drilling and
completion operations on inventoried and producing properties will
significantly increase both production and cash flows, which will
allow the Company to optimize its Bone Spring/Wolfcamp work program
and drive economies of scale.
In this regard, the Company has entered into the Credit Facility
with JPMorgan and is constantly evaluating all available financing
options that could provide the Company with sufficient leverage and
capital to adequately exploit current and future Bone
Spring/Wolfcamp opportunities.
Outlook
The Company continues to actively review its drilling
obligations for the year and continues to scale back G&A costs
and capital expenditures associated with non-obligatory wells and
direct capital towards lease maintenance wells in its Bone
Spring/Wolfcamp drilling program. However, dependent upon drilling
costs and prevailing commodity prices, the Company's objective is
to eventually accelerate and expand its drilling program in the
Bone Spring/Wolfcamp play over the next two years. A program of
this type would initially utilize the Company's current Credit
Facility with JPMorgan and excess operational cash flow to fund
further development drilling and lease purchases beyond the initial
two year period.
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
Management believes that, subject to a sufficient downward
correction to drilling costs and positive recovery to oil prices,
such a program can be accomplished by exploiting the Company's
existing asset/lease inventory. However, management will also seek
to identify appropriate corporate and asset acquisitions that may
result from the current price environment, which will enable the
Company to increase its position in the horizontal Bone
Spring/Wolfcamp plays in the Permian Basin. Accordingly, inline
with the Company's stated strategy, management's goal is to achieve
material growth in the Company's reserves and production, thereby
raising the Company's profile in the basin and allowing its value
to be maximized and, if appropriate, fully matured over the
short-to-medium term.
Net Reserve Figures by Category:
Caza reported an increase in Proven (1P) reserves at year end
2015 to 12,243.0 Mboe or an increase of 98.1%; Proven plus Probable
(2P) reserves increased at year end 2015 to 16,135.5 Mboe or an
increase of 13.3%; Proven plus Probable plus Possible (3P) reserves
increased at year end 2015 to 30,658.3 Mboe or an increase of 42.1%
(as depicted in the table below).
Net Reserve Data:
Totals may not add because of rounding. Mbbl, MMcf and Mboe
refer to thousand barrels, million cubic feet and thousand boe,
respectively.
2015 2014
--------------- ------------------------------- -------------------------------
Mbbl MMcf Mboe Mbbl MMcf Mboe
--------------- --------- --------- --------- --------- --------- ---------
Proven
Developed
Producing 1,231.8 1,208.0 1,433.1 1,392.0 1,444.6 1,632.8
--------------- --------- --------- --------- --------- --------- ---------
Non-Producing 204.8 181.8 235.1 45.6 32.6 51.0
--------------- --------- --------- --------- --------- --------- ---------
Undeveloped 5,296.8 31,667.8 10,574.8 3,218.5 7,658.9 4,495.0
--------------- --------- --------- --------- --------- --------- ---------
Total
Proven 6,733.4 33,057.5 12,243.0 4,656.1 9,136.1 6,178.8
--------------- --------- --------- --------- --------- --------- ---------
Probable 2,216.5 10,056.4 3,892.5 6,423.1 9,854.9 8,065.6
--------------- --------- --------- --------- --------- --------- ---------
Total
Proven
+ Probable 8,949.9 43,113.9 16,135.5 11,079.2 18,991.0 14,244.4
--------------- --------- --------- --------- --------- --------- ---------
Possible 10,095.1 26,566.6 14,522.8 6,156.3 7,075.1 7,335.5
--------------- --------- --------- --------- --------- --------- ---------
Total
Proven
+ Probable
+ Possible 19,044.9 69,680.5 30,658.3 17,235.5 26,066.1 21,579.9
--------------- --------- --------- --------- --------- --------- ---------
Present value cash flows of Caza's estimated net Proven and
Probable reserves as at December 31, 2015 were as follows:
Present value cash flow, net Proven plus Probable reserves: PV
10% before PV 10% after
income taxes income taxes
US$172,007.2M US$111,804.7M
The reserves data set out in this announcement (including in the
above tables) have been extracted from the CGA Report and are
disclosed, together with additional information relating to the
Company's reserves and properties, in the Company's Annual
Information Form for the year ending December 31, 2015 (to be filed
on SEDAR at www.sedar.com). The evaluation of the reserves data
included in the Annual Information Form and in the CGA Report
complies with standards set out in the Canadian Oil and Gas
Evaluation Handbook prepared jointly by the Society of Petroleum
Evaluation Engineers (Calgary Chapter) and the Canadian Institute
of Mining, Metallurgy & Petroleum (Petroleum Society).
References to the CGA Report are to the report prepared on the
Company's reserves by Cawley, Gillespie & Associates, Inc. as
of December 31, 2015, and entitled "Estimates of Reserves and
Future Revenue to the Caza Oil & Gas, Inc. Interest in Certain
Oil and Gas Properties Located in Louisiana, New Mexico, and Texas
as of December 31, 2015".
About Caza
Caza is engaged in the acquisition, exploration, development and
production of hydrocarbons in the following regions of the United
States of America through its subsidiary, Caza Petroleum, Inc.:
Permian Basin (Southeast New Mexico and West Texas).
For further information, please contact:
Caza Oil & Gas, Inc.
Michael Ford, CEO +1 432 682 7424 (Midland)
Richard Albro, VP Land and Secretary +1 281 363 4442 (Houston)
Cenkos Securities plc
Neil McDonald +44 131 220 6939 (Edinburgh)
Nick Tulloch +44 131 220 9772 (Edinburgh)
VIGO Communications
Chris McMahon +44 20 7830 9700 (London)
In accordance with AIM Rules - Guidance Note for Mining, Oil and
Gas Companies, the information contained in this announcement has
been reviewed and approved by Anthony B. Sam, Vice President
Operations of Caza who is a Petroleum Engineer and a member of The
Society of Petroleum Engineers.
The Toronto Stock Exchange has neither approved nor disapproved
the information contained herein.
Copies of the Company's financial statements for the year ended
December 31, 2015, the accompanying management's discussion and
analysis and the Company's Annual Information Form for the year
ended December 31, 2015 (which contains further information about
the Company, its principal properties and its crude oil and natural
gas reserves), will be available on SEDAR at www.sedar.com and the
Company's website at www.cazapetro.com. The Company's financial
statements have been in accordance with Canadian generally
acceptable accounting principles applicable to publicly accountable
enterprises. All dollar amounts disclosed in this press release are
disclosed in United States dollars.
ADVISORY STATEMENT
Information in this news release that is not current or
historical factual information may constitute forward-looking
statements within the meaning of securities laws. Such information
is often, but not always, identified by the use of words such as
"seek", "anticipate", "plan", "continue", "estimate", "expect",
"may", "will", "project", "predict", "potential", "targeting",
"intend", "could", "might", "should", "believe" and similar
expressions. Information regarding future exploration, development
and drilling activities (including the timing and scope thereof),
the availability, sources, use and sufficiency of funding or
capital, the ability to expand and accelerate the Company's
drilling programs and the results thereof, the ability to increase
shareholder value, future dilution and the ability to mitigate
same, the implementation and impact of the Company's strategy,
geologic and seismic interpretation, joint venture relationships,
ability to generate projects, strategic acquisitions and Caza's
ability to execute its strategic plan contained in this news
release constitutes forward-looking information within the meaning
of securities laws. Statements relating to "reserves" are deemed to
be forward-looking statements, as they involve the implied
assessment, based on certain estimates and assumptions, that the
reserves described can be profitably produced in the future.
Disclosure related to targeted internal rates of return and
internal modeling are disclosed to further an understanding of the
Company's strategies and are not projections or forecasts. Actual
rates of return are likely to differ materially.
Implicit in this information, particularly in respect of
production are assumptions regarding projected revenue and
expenses, the performance of wells, drilling and operating results,
availability of funds, asset dispositions and the ability to secure
joint venture partners and internally generate projects. These
assumptions, although considered reasonable by the Company at the
time of preparation, may prove to be incorrect. Readers are
cautioned that actual future operating results and economic
performance of the Company are subject to a number of risks and
uncertainties, including general mechanical, economic, market and
business conditions and could differ materially from what is
currently expected as set out above. Production disclosed in this
press release is provided as at the applicable date and the wells
described herein are in early stages of production. Future
production or flow rates may vary, perhaps materially. The
individual well results disclosed herein are not necessarily
indicative of long-term performance or of ultimate recovery.
For more exhaustive information on these risks and uncertainties
you should refer to the Company's most recently filed Annual
Information Form filed on SEDAR at www.sedar.com. You should not
place undue importance on forward-looking information and should
not rely upon this information as of any other date. While we may
elect to, we are under no obligation and do not undertake to update
this information at any particular time, except as required by
applicable securities laws.
The term boe may be misleading, particularly if used in
isolation. A boe conversion of six thousand cubic feet per one
barrel is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a
value equivalency at the well head.
Statements in this news release relating to net present value or
future net revenue do not represent fair
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
market value. Possible reserves are those additional reserves
that are less certain to be recovered than probable reserves. There
is a 10% probability that the quantities actually recovered will
equal or exceed the sum of proved plus probable plus possible
reserves.
Management's Report to Shareholders
Management has prepared the accompanying consolidated financial
statements of Caza Oil & Gas, Inc. in accordance with
International Financial Reporting Standards.
Management is responsible for the integrity and objectivity of
the financial statements. Where necessary, the financial statements
include estimates, which are based on management's informed
judgments. Management has established systems of internal control
that are designed to provide reasonable assurance that assets are
safeguarded from loss or unauthorized use and to produce reliable
accounting records for financial reporting purposes.
The Board of Directors is responsible for ensuring that
management fulfills its responsibilities for financial reporting
and internal control. It exercises its responsibilities primarily
through the Audit Committee. The Audit Committee meets periodically
with management and the external auditors to satisfy itself that
management's responsibilities are properly discharged, to review
the consolidated financial statements and to recommend that the
consolidated financial statements be presented to the Board of
Directors for approval.
Deloitte LLP has audited the consolidated financial statements
in accordance with Canadian generally accepted auditing standards
to enable them to express an opinion on the fairness of the
consolidated financial statements.
(signed) "William M. Ford"
Chief Executive Officer and Director
March 30, 2016
(signed) "James M. Markgraf"
Chief Financial Officer
March 30, 2016
Independent Auditor's Report
To the Shareholders of
Caza Oil & Gas, Inc.
We have audited the accompanying consolidated financial
statements of Caza Oil & Gas, Inc. which comprise the
consolidated statements of financial position as at December 31,
2015 and 2014 and the consolidated statements of net loss and
comprehensive loss, cash flows and changes in equity for the years
then ended, and a summary of significant accounting policies and
other explanatory information.
Management's Responsibility for the Consolidated Financial
Statements
Management is responsible for the preparation and fair
presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and
for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that
are free from material misstatement, whether due to fraud or
error.
Auditor's Responsibility
Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's
judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity's preparation and
fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of Caza
Oil & Gas, Inc. as at December 31, 2015 and 2014 and its
financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
(signed) "Deloitte LLP"
Chartered Professional Accountants
Calgary, Alberta
March 30, 2016
Caza Oil & Gas, Inc.
Consolidated Statements of Financial Position
(In United States Dollars)
As at December 31, 2015 2014
---------------------------------------------- ------------- --------------
Assets
Current
Cash and cash equivalents (Note 10 (c)) $1,624,080 $5,160,943
Restricted cash (Note 13) - 428,614
Accounts receivable 1,627,448 7,531,803
Derivative assets (Note 12) - 6,031,350
Prepaid and other 700,650 650,507
------------- --------------
3,952,178 19,803,217
Exploration and evaluation assets (Note
3) 7,083,676 6,247,564
Petroleum and natural gas properties and
equipment (Note 4) 66,723,489 70,914,961
------------- --------------
$77,759,343 $96,965,742
------------- --------------
Liabilities
Current
Accounts payable and accrued liabilities $5,359,873 $21,356,234
Notes payable (Note 14) - 42,366,370
Derivative liabilities (Note 12) 417,912 292,088
Decommissioning liabilities (Note 5) 7,693 95,500
------------- --------------
5,785,478 64,110,192
Decommissioning liabilities (Note 5) 1,302,359 1,508,155
------------- --------------
7,087,837 65,618,347
Subsequent Event (Note 18)
Total Equity
Share capital (Note 7(b)) 135,653,313 90,326,588
Warrants (Note 7(b)) - 156,365
Share based compensation reserve 11,285,328 11,091,817
Deficit (76,267,135) (67,061,796)
------------- --------------
Equity attributable to owners of the Company 70,671,506 34,512,974
Non-controlling interests - (3,165,579)
------------- --------------
Total equity 70,671,506 31,347,395
------------- --------------
$77,759,343 $96,965,742
------------- --------------
See accompanying notes to the consolidated financial statements
Caza Oil & Gas, Inc.
Consolidated Statements of Net Loss and Comprehensive Loss
(In United States Dollars)
For the years ended December 31, 2015 2014
--------------------------------------------- --- ------------- -------------
Revenues
Petroleum and natural gas $10,071,691 $22,945,768
Interest income 521 203
------------- -------------
10,072,212 22,945,971
------------- -------------
Expenses (Income)
Production 4,216,939 6,128,114
General and administrative 5,183,717 5,939,589
Depletion and depreciation (Note 4) 5,700,128 7,537,416
Financing costs (Note 17) 7,336,768 6,713,028
Other expense (161,169) 208,996
Exploration and evaluation impairment
(Note 3) 142,100 1,045,875
Loss on disposal of assets (notes 14
and 15) (514,445) 8,712,773
Forgiveness of debt (notes 14 and 15) (5,254,079) -
Realized loss (gain) on risk management
contracts (Note 12) (7,905,820) (147,620)
Unrealized loss (gain) on risk management
contracts (Note 12) 6,449,261 (6,217,813)
Bad debt expense - 90,091
------------- -------------
15,193,400 30,010,449
------------- -------------
Loss before income taxes (5,121,188) (7,064,478)
Income taxes (Note 6) - -
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
Net loss and comprehensive loss $(5,121,188) $(7,064,478)
------------- -------------
Attributable to:
Owners of the Company (4,337,583) (6,302,732)
Non-controlling interests (783,605) (761,746)
------------- -------------
$(5,121,188) $(7,064,478)
------------- -------------
Net loss per share
- basic and diluted ($) (0.01) (0.03)
------------- -------------
Weighted average shares outstanding
- basic and diluted (1) 456,745,886 206,941,294
------------- -------------
(1) The options and warrants have been excluded from the diluted
loss per share computation as they are anti-dilutive
See accompanying notes to the consolidated financial
statements
Caza Oil & Gas, Inc.
Consolidated Statements of Cash Flows
(In United States Dollars)
For the years ended December 31, 2015 2014
----------------------------------------------------- ------------- -------------
OPERATING
Net loss $(5,121,188) $(7,064,478)
Adjustments for items not affecting cash:
Depletion and depreciation 5,700,128 7,537,416
Unwinding of the discount (Note 5) 35,881 36,195
Share-based compensation 235,320 610,849
Non-cash financing costs 1,555,886 1,687,723
Unrealized currency gain 12,768 26,704
Unrealized loss (gain) on risk management
contracts 6,449,262 (6,217,813)
Exploration and evaluation impairment 142,100 1,045,875
(Gain)/loss on disposal of assets (509,445) 8,712,773
Interest income (521) (203)
Debt forgiveness (4,959,788) -
Changes in derivative liabilities and other (333,897) (133,455)
Changes in non-cash working capital (Note
10(a)) 3,047,172 (1,075,858)
------------- -------------
Cash flows from / (used in) operating activities 6,253,678 5,165,728
------------- -------------
FINANCING
Proceeds from issuance of shares (Note 7) 45,500,000 9,368,418
Proceeds from the issuance of notes payable
and warrants (Note 14 and15) 4,000,000 10,000,000
Note principal payments (43,745,075) (1,505,149)
Finance costs paid (Notes 14 and 15) (49,759) (740,000)
Interest received 521 203
Changes in non-cash working capital (Note
10(a)) (45,128) (491,457)
------------- -------------
Cash flow from financing activities 5,660,559 16,632,015
------------- -------------
INVESTING
Exploration and evaluation expenditures
(Note 3) (2,065,680) (38,414,099)
Development and production expenditures
(Note 4) (719,502) (2,499,689)
Purchase of office furniture and equipment
(Note 4) - (48,558)
Proceeds from sale of assets 478,274 1,555,000
Changes in non-cash working capital (Note
10(a)) (13,144,192) 4,275,460
------------- -------------
Cash flows used in investing activities (15,451,100) (35,131,886)
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,536,863) (13,334,143)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 5,160,943 18,495,086
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $1,624,080 $5,160,943
------------- -------------
See accompanying notes to the consolidated financial
statements
Caza Oil & Gas, Inc.
Consolidated Statements of Changes in Equity
(In United States Dollars)
For the years ended December 31, 2015 2014
--------------------------------------------------- ------------------ -------------------
Share Capital
Balance, beginning of year $90,326,588 $77,967,487
Issued 44,695,716 12,359,101
Conversion of exchangeable shares 918,572 -
Cancelled (287,563) -
Balance, end of year 135,653,313 90,326,588
------------------ -------------------
Warrants
Balance, beginning of year 156,365 156,365
Cancelled (156,365) -
Balance, end of year - 156,365
Share based compensation reserve
Balance, beginning of year 11,091,817 10,480,968
Share-based compensation 193,511 610,849
Balance, end of year 11,285,328 11,091,817
------------------ -------------------
Deficit
Balance, beginning of year (67,061,796) (60,759,064)
Net loss allocated to the owners of the
Company (4,337,583) (6,302,732)
Conversion of exchangeable shares (note
7) (4,867,756) -
------------------ -------------------
Balance, end of year (76,267,135) (67,061,796)
------------------ -------------------
Non-Controlling Interests
Balance, beginning of year (3,165,579) (2,403,833)
Net loss allocated to non-controlling interests (783,605) (761,746)
Reduction of non-controlling interest due
to share exchange (918,572) -
Conversion of exchangeable shares (note
7) 4,867,756 -
Balance, end of year - (3,165,579)
------------------ -------------------
Total Equity $70,671,506 $31,347,395
------------------ -------------------
See accompanying notes to the consolidated
financial statements
1. Basis of Presentation
Caza Oil & Gas, Inc. ("Caza" or the "Company") was
incorporated under the laws of British Columbia on June 9, 2006 for
the purposes of acquiring shares of Caza Petroleum Inc. ("Caza
Petroleum"). The Company and its subsidiaries are engaged in the
exploration for and the development, production and acquisition of,
petroleum and natural gas reserves. The Company's common shares are
listed for trading on the Toronto Stock Exchange trading as the
symbol "CAZ" and AIM stock exchange "AIM" as the symbol "CAZA". The
corporate headquarters of the Company is located at 10077 Grogan's
Mill Road, Suite 200, The Woodlands, Texas 77380 and the registered
office of the Company is located at Suite 2300, 550 Burrard Street
Vancouver, British Columbia, V6C 2B5.
The consolidated financial statements (the "Financial
Statements") were prepared in accordance with International
Financial Reporting Standards ("IFRS"). Caza's presentation
currency is the United States ("U.S.") dollar as the majority of
its transactions are denominated in this currency.
These consolidated financial statements were approved for
issuance by the Board of Directors on March 30, 2016.
2. Significant Accounting Policies
The consolidated financial statements have been prepared on the
historical cost basis except for certain financial instruments that
are measured at fair values, as explained in the accounting
policies below. Historical cost is generally based on the fair
value of the consideration given in exchange for assets.
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The accounting policies set out below have been applied
consistently to all years presented in these consolidated financial
statements, and have been applied consistently by the Company and
its subsidiaries.
(a) Basis of consolidation:
Subsidiaries:
Subsidiaries are entities controlled by the Company. Control
exists when the Company has the power to govern the financial and
operating policies of an entity so as to obtain benefits from its
activities. In assessing control, potential voting rights that
currently are exercisable are taken into account. The financial
statements of subsidiaries are included in the consolidated
financial statements from the date that control commences until the
date that control ceases.
Details of the Company's subsidiaries at the end of the
reporting year are as follows:
Proportion of ownership
Place of interest and voting
incorporation power held by the
Name of subsidiary and operation Company
---------------------- --------------- -------------------------
December December
31, 31,
2015 2014
---------------------- --------------- ------------ -----------
Caza Petroleum Inc. Delaware/Texas 100% 90%
Caza Operating, LLC Texas 100% 100%
Falcon Bay Operating,
LLC Texas 100% 100%
Falcon Bay Sutton
County, LLC Texas 100% 100%
The proportion not owned by the Company is shown as
non-controlling interests in these financial statements and relates
to exchangeable rights in Caza Petroleum which are held by
management and which are exchangeable into the Company's shares
(see Note 7(f)).
Jointly controlled operations and jointly controlled assets:
Many of the Company's oil and natural gas activities involve
jointly controlled assets. The consolidated financial statements
include the Company's share of these jointly controlled assets and
a proportionate share of the relevant revenue and related
costs.
Transactions eliminated on consolidation:
Intercompany balances and transactions, and any unrealized
income and expenses arising from intercompany transactions, are
eliminated in preparing the consolidated financial statements.
(b) Foreign currency:
The Company and its subsidiary companies each determines their
functional currency of the primary economic environment in which
they operate. The Company's (and its subsidiaries) functional
currency is the U.S. Dollar. Transactions denominated in a currency
other than the functional currency of the entity are translated at
the exchange rate in effect on the transaction date.
(c) Financial instruments:
Derivatives
Derivatives, including derivative liabilities and hedging
contracts, are classified as fair value through profit or loss.
Changes in the fair value of derivatives are recognized through
profit or loss.
Non-derivative financial instruments:
Non-derivative financial instruments comprise accounts
receivable, cash and cash equivalents, restricted cash, accounts
payable and accrued liabilities, and notes payable. Non-derivative
financial instruments are recognized initially at fair value.
Subsequent to initial recognition, non-derivative financial
instruments are measured as described below.
Cash and cash equivalents:
Cash and cash equivalents comprise cash on hand, term deposits
held with banks, other short-term highly liquid investments
(including money market instruments) with original maturities of
three months or less.
Financial assets at fair value through profit or loss:
An instrument is classified at fair value through profit or loss
if it is held for trading or is designated as such upon initial
recognition. Upon initial recognition attributable transaction
costs are recognized in profit or loss when incurred. Financial
instruments at fair value through profit or loss are measured at
fair value, and changes therein are recognized in profit or loss.
The Company has designated cash and cash equivalents as fair value
through profit and loss.
Loans and receivables:
Non-derivative financial instruments classified as loans and
receivables, such as accounts receivable, accounts payable and
accrued liabilities, and notes payable, are measured at amortized
cost using the effective interest method, less any impairment
losses.
(d) Evaluation and exploration assets:
Pre-license costs are expensed in the statement of operations as
incurred.
Exploration and evaluation ("E&E") costs, including the
costs of acquiring licenses and directly attributable general and
administrative costs, initially are capitalized as either tangible
or intangible exploration and evaluation assets according to the
nature of the assets acquired. The costs are accumulated in cost
centers by well, field or exploration area pending determination of
technical feasibility and commercial viability. If exploration does
not meet capitalization criteria at this time amounts are expensed
as exploration and evaluation.
Assets classified as E&E are not amortized, but are assessed
for impairment if (i) sufficient data exists to determine technical
feasibility and commercial viability, and (ii) facts and
circumstances suggest that the carrying amount exceeds the
recoverable amount. For purposes of impairment testing, exploration
and evaluation assets are allocated to cash-generating units
("CGU").
The technical feasibility and commercial viability of extracting
a mineral resource is considered to be determinable when proven
reserves are determined to exist. A review of each exploration
license or field is carried out, at least annually, to ascertain
whether proven reserves have been discovered. Upon determination of
proven reserves, exploration and evaluation assets attributable to
those reserves are first tested for impairment and then
reclassified from exploration and evaluation assets to a separate
category within tangible assets referred to as petroleum and
natural gas interests.
(e) Development and production costs:
Items of property, plant and equipment ("PPE"), which include
oil and gas development and production assets, are measured at cost
less accumulated depletion and depreciation and accumulated
impairment losses. Development and production assets are grouped
into CGU's for impairment testing.
Development costs that may be capitalized as PPE include land
acquisition costs, geological and geophysical expenses, the costs
of drilling productive wells, the cost of petroleum and natural gas
production equipment, directly attributable and incremental general
overhead and estimated abandonment costs. When significant parts of
an item of property, plant and equipment, including oil and natural
gas interests, have different useful lives, they are accounted for
as separate items.
Gains and losses on disposal of an item of property, plant and
equipment, including oil and natural gas interests, are determined
by comparing the proceeds from disposal with the carrying amount of
property, plant and equipment. The carrying amount of any replaced
or sold component is derecognized.
Maintenance:
The costs of the day-to-day servicing of property, plant and
equipment are recognized in profit or loss as incurred.
Depletion and depreciation:
The net carrying value of development or production assets is
depleted using the unit of production method by reference to the
ratio of production in the year to the related proven reserves,
taking into account estimated future development costs necessary to
bring those proved reserves into production. Future development
costs are estimated taking into account the level of development
required to produce the reserves. These estimates are reviewed by
independent reserve engineers at least annually.
Other Property and Equipment:
For other assets, depreciation is recognized in profit or loss
on a straight-line basis over the estimated useful lives of each
part of an item of property, plant and equipment. Leased assets are
depreciated over the shorter of the lease term and their useful
lives unless it is reasonably certain that the Company will obtain
ownership by the end of the lease term. Land is not
depreciated.
The estimated useful lives for other assets for the current and
comparative years are as follows:
Office equipment 5 - 7 years
Fixtures and fittings 5 - 7 years
Depreciation methods, useful lives and residual values are
reviewed at each reporting date.
(f) Impairment:
Financial assets:
A financial asset is assessed at each reporting date to
determine whether there is any objective evidence that it is
impaired. A financial asset is considered to be impaired if
objective evidence indicates that one or more events have had a
negative effect on the estimated future cash flows of that
asset.
An impairment loss in respect of a financial asset measured at
amortized cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash
flows.
All impairment losses are recognized in profit or loss. An
impairment loss is reversed if the reversal can be related
objectively to an event occurring after the impairment loss was
recognized. For financial assets measured at amortized cost the
reversal is recognized in profit or loss.
Non-financial assets:
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The carrying amounts of the Company's non-financial assets,
other than "E&E" assets and deferred tax assets, are reviewed
at each reporting date to determine whether there is any indication
of impairment. If any such indication exists, then the asset's
recoverable amount is estimated. An impairment test is completed
each year for other intangible assets that have indefinite lives or
that are not yet available for use. E&E assets are also
assessed for impairment if facts and circumstances suggest that the
carrying amount exceeds the recoverable amount and before they are
reclassified to property and equipment, as oil and natural gas
interests.
For the purpose of impairment testing, assets are grouped
together into CGUs. A CGU is a grouping of assets that generate
cash flows independently of other assets held by the Company. The
recoverable amount of an asset or a CGU is the greater of its value
in use and its fair value less costs to sell.
An impairment loss is recognized if the carrying amount of an
asset or its CGU exceeds its estimated recoverable amount.
Impairment losses are recognized in profit or loss.
Impairment losses recognized in prior years are assessed at each
reporting date for any indications that the loss has decreased or
no longer exists. An impairment loss is reversed if there has been
a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's
carrying amount does not exceed the carrying amount that would have
been determined, net of depletion and depreciation or amortization,
if no impairment loss had been recognized.
(g) Decommissioning liabilities:
The Company recognizes a decommissioning liability in the period
in which it has a present legal or constructive liability and a
reasonable estimate of the amount can be made. Liabilities are
measured based on current requirements, technology and price levels
and the present value is calculated using amounts discounted over
the useful economic life of the assets. Amounts are discounted
using a risk-free rate. On a periodic basis, management reviews
these estimates and changes, if any, will be applied prospectively.
The fair value of the estimated decommissioning liability is
recorded as a long-term liability, with a corresponding increase in
the carrying amount of the related asset. The capitalized amount is
depleted on a unit-of-production basis over the life of the proved
reserves. The liability amount is increased each reporting period
due to the passage of time and the amount of accretion is charged
to finance expense. Periodic revisions to the estimated timing of
cash flows or to the original estimated undiscounted cost can also
result in an increase or decrease to the decommissioning liability.
Actual costs incurred upon settlement of the obligation are
recorded against the decommissioning liability to the extent of the
liability recorded.
(h) Notes payable and warrants
The component parts of the notes payable (debt and warrants)
issued by the Company are classified separately as financial
liabilities and equity in accordance with the substance of the
contractual arrangements and the definitions of a financial
liability and an equity instrument.
At the date of issue, the fair value of the liability component
is estimated using the prevailing market interest rate for similar
instruments without the attached warrants. The discount on the
liability component amount is recorded as a contra amount to the
notes payable and amortized using the effective interest method
until maturity.
The amount recorded as warrants was determined by deducting the
amount of the liability component from the fair value of the
compound instrument as a whole. The warrants are classified as
equity, are not subsequently re-measured and will remain in equity
until the warrant is exercised. On exercise, the balance will be
transferred to share capital.
Transaction costs that relate to the issue of the notes payable
are allocated to the liability and equity components in proportion
to the allocation of the gross proceeds. Transaction costs relating
to the equity component are recognized directly in equity.
Transaction costs relating to the liability component are included
in the carrying amount of the liability component and are amortized
over the lives of the notes payable using the effective interest
method.
(i) Share capital:
Common shares are classified as equity. Incremental costs
directly attributable to the issue of common shares and share
options are recognized as a deduction from equity, net of any tax
effects.
(j) Share-based payments:
Equity-settled share-based payments to employees and others
providing similar services are measured at the fair value of the
equity instruments at the grant date.
The grant date fair value of options granted to employees is
recognized as share-based payment compensation expense on a graded
basis over the vesting period, within general and administrative
expenses, with a corresponding increase in share based compensation
reserve. A forfeiture rate is estimated on the grant date; however,
at the end of each reporting period, the Company revises its
estimate of the number of equity instruments expected to vest. The
impact of the revision of the original estimates, if any, is
recognized on a prospective basis.
(k) Revenue:
Revenue from the sale of oil and natural gas is recorded when
the significant risks and rewards of ownership of the product is
transferred to the buyer which is usually when legal title passes
to the external party. This is generally at the time product enters
the pipeline or any other means of transportation. Revenue is
measured net of royalties.
(l) Finance income and expenses:
Finance expense comprises interest expense on borrowings, if
any, and the unwinding of the discount on decommissioning
liabilities.
Borrowing costs incurred for the construction of qualifying
assets are capitalized during the period of time that is required
to complete and prepare the assets for their intended use or sale.
All other borrowing costs are recognized in profit or loss using
the effective interest method. The capitalization rate used to
determine the amount of borrowing costs to be capitalized is the
weighted average interest rate applicable to the Company's
outstanding borrowings during the period.
Interest income is recognized as it accrues in profit or loss,
using the effective interest method.
(m) Earnings per share:
Basic earnings per share is calculated by dividing the profit or
loss attributable to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted
earnings per share is determined by adjusting the profit or loss
attributable to common shareholders and the weighted average number
of common shares outstanding for the effects of dilutive
instruments such as options granted to employees. Diluted per share
calculations reflect the exercise or conversion of potentially
dilutive securities or other contracts to issue shares at the later
of the date of grant of such securities or the beginning of the
year. The Company computes diluted earnings per share using the
treasury stock method to determine the dilutive effect of its
options and warrants. Under this method, the diluted weighted
average number of shares is calculated assuming the proceeds that
arise from the exercise of outstanding, in-the-money options and
warrants are used to purchase common shares of the Company at their
average market price for the year. No adjustment to diluted
earnings per share or diluted shares outstanding is made if the
result of the calculations is anti-dilutive.
(n) Future accounting pronouncements
On May 28, 2014, the IASB issued IFRS 15 - Revenue from
Contracts with Customers, a new standard that specifies recognition
requirements for revenue as well as requiring entities to provide
the users of financial statements with more informative and
relevant disclosures. The standard replaces IAS 11 - Construction
Contracts and IAS 18 - Revenue as well as a number of
revenue-related interpretations. The Company will adopt the
standard for reporting periods beginning January 1, 2018 The
Company is currently evaluating the impact of adoption of this
standard and the effect on Caza's consolidated financial statements
has not yet been determined.
On January 13, 2016, the IASB published a new standard, IFRS 16,
Leases. The new standard brings most leases on balance sheet for
lessees under a single model, eliminating the distinction between
operating and financing leases. Lessor accounting however remains
largely unchanged and the distinction between operating and finance
leases is retained. The Company will adopt the standard for
reporting periods beginning January 1, 2019. The Company is
currently evaluating the impact of adoption of this standard and
the effect on Caza's consolidated financial statements has not yet
been determined.
Since November 2009, the IASB has been in the process of
completing a three phase project to replace IAS 39, "Financial
Instruments: Recognition and Measurement" with IFRS 9 "Financial
Instruments", which includes requirements for hedge accounting,
accounting for financial assets and liabilities and impairment of
financial instruments. As of February 2014, the mandatory effective
date of IFRS 9 has been tentatively set to January 1, 2018. The
Company is assessing the effect of this future pronouncement on its
financial statements.
(o) Critical accounting judgments and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates. The consolidated financial statements have, in
management's opinion, been properly prepared using careful judgment
with reasonable limits of materiality.
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The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognized in
the period in which the estimate is revised if the revision affects
only that period or in the period of the revision and future
periods if the revision affects both current and future
periods.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those
involving estimations (see below), that management has made in the
process of applying the Company's accounting policies and that have
the most significant effect on the amounts recognized in the
consolidated financial statements include:
i. Estimation of reserves
Estimates of recoverable quantities of proved and probable
reserves include judgmental assumptions and require interpretation
of complex geological and geophysical models in order to make an
assessment of the size, shape, depth and quality of reservoirs, and
their anticipated recoveries. The economic, geological and
technical factors used to estimate reserves may change from period
to period. Reserve estimates are prepared in accordance with the
Canadian Oil and Gas Evaluation Handbook and are reviewed by third
party reservoir engineers.
Estimates of oil and gas reserves are inherently imprecise,
require the application of judgment and are subject to regular
revision, either upward or downward, based on new information such
as from the drilling of additional wells, observation of long-term
reservoir performance under producing conditions and changes in
economic factors, including product prices, contract terms or
development plans
Changes in reported reserves can impact property, plant and
equipment impairment calculations, estimates of depletion and the
provision for decommissioning obligations due to changes in
expected future cash flows based on estimates of proved and
probable reserves, production rates, future petroleum and natural
gas prices, future costs and the remaining lives and period of
future benefit of the related assets.
ii. Identification of cash-generating units
Management reviews the CGU determination on a periodic basis.
The recoverability of property, plant and equipment carrying values
are assessed at the CGU level. Determination of what constitutes a
CGU is subject to management judgments. The asset composition of a
CGU can directly impact the recoverability of the related
assets.
iii. Estimation of fair value of stock options
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Because the
Company's employee's stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the
fair value of its employee stock options. By their nature, these
estimates are subject to measurement uncertainty and the effect on
the consolidated financial statements of changes of estimates in
future periods could be significant.
iv. Valuation of financial instruments
Caza uses valuation techniques that include inputs that are not
based on observable market data to estimate the fair value of
certain types of financial instruments. The notes provide detailed
information about the key assumptions used in the determination of
the fair value of the financial instruments.
Key sources of estimation uncertainty
The following are the key assumptions concerning the key sources
of estimation uncertainty at the end of the reporting period, that
have a significant risk of causing adjustments to the carrying
amounts of assets and liabilities within the next financial
year.
-- Estimates of recoverable quantities of proved and probable
reserves include judgmental assumptions and the economic,
geological and technical factors used to estimate reserves may
change from period to period
-- Forward price estimates of the oil and natural gas prices are
used in the impairment model. Commodity prices have fluctuated
widely in recent years due to global and regional factors including
supply and demand fundamentals, inventory levels, weather, economic
and geopolitical factors.
-- The impairment model uses discount rate to calculate the net
present value of cash flows based on management's estimate of the
rate that incorporates the risks associated with the assets.
Changes in the general economic environment could result in
significant changes in this estimate.
-- Amounts recorded from joint interest partners are based on
the Company's interpretation of underlying agreements and may be
subject to joint approval. The Company has recorded balances due
from its joint interest partners based on costs incurred and its
interpretation of allowable expenditures. Any adjustment required
as a result of joint interest partner audits are recorded in the
period of the determination with joint interest partners.
-- The provision for decommissioning liabilities is based on
current legal and constructive requirements, technology, price
levels and expected plans for remediation. Actual costs and cash
outflows can differ from estimates because of changes in laws and
regulations, public expectations, prices and discovery and analysis
of site conditions and changes in clean-up technology.
-- The various inputs and assumptions used in determining the
fair value of the unrealized loss on hedging contracts and the
derivative liabilities are subject to estimation uncertainty.
The above judgments, estimates and assumptions relate primarily
to unsettled transactions and events as of the date of the
consolidated financial statements. Actual results could differ from
these estimates and the differences could be material.
3. Exploration and Evaluation Assets
December 31, 2015 December 31, 2014
----------------------------------------------------------------- ------------------ ------------------
Balance, beginning of year $6,247,564 $7,843,846
Additions to exploration and evaluation assets 2,065,680 38,773,781
Transfers to petroleum and natural gas properties and equipment (1,080,398) (39,198,678)
Other adjustments (7,070) -
Disposals - (125,510)
Impairment (142,100) (1,045,875)
Balance, end of year $7,083,676 $6,247,564
------------------------------------------------------------------ ------------------ ------------------
During the year ended December 31, 2015, the Company impaired
expired leases in the amount of $142,100 (2014 - $1,045,875)
relating to expiring leasehold in Southern Louisiana and East Texas
and New Mexico as well as the plugging of the CML 35 State 3H
non-operated well located in New Mexico.
4. Petroleum and Natural Gas Properties and Equipment
Development & Production ("D&P")
Cost Assets Corporate Assets Total
-------------------------------------- -------------------------------------- --------------------- -------------
Balance, December 31, 2013 $73,541,238 $830,076 $74,371,314
Additions 2,817,135 48,558 2,865,693
Disposal of assets (29,428,930) - (29,428,930)
Transfers from E&E 39,198,678 - 39,198,678
-------------------------------------- -------------------------------------- --------------------- -------------
Balance, December 31, 2014 86,128,121 878,634 87,006,755
Additions 719,502 - 719,502
Disposal of assets (5,027,801) - (5,027,801)
Other adjustments (138,617) - (138,617)
Transfers from E&E 1,080,398 - 1,080,398
Balance, December 31, 2015 $82,761,603 $878,634 $83,640,237
-------------------------------------- -------------------------------------- --------------------- -------------
Accumulated Depletion, Depreciation
and Impairment D&P Assets Corporate Assets Total
-------------------------------------- -------------------------------------- --------------------- -------------
Balance, December 31, 2013 $26,940,071 $813,127 $27,753,198
Depletion and depreciation 7,523,843 13,572 7,537,415
Disposal of assets (19,198,819) - (19,198,819)
Balance, December 31, 2014 $15,265,095 $826,699 $16,091,794
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Depletion and depreciation 5,690,207 9,921 5,700,128
Disposal of assets (4,875,174) - (4,875,174)
Impairment - - -
Balance, December 31, 2015 $16,080,128 $836,620 $16,916,748
-------------------------------------- -------------------------------------- --------------------- -------------
Carrying amounts
At December 31, 2014 $70,863,026 $51,935 $70,914,961
At December 31, 2015 $66,681,475 $42,014 $66,723,489
---------------------- --------------------- ---------------- ------------
Future development costs of proved undeveloped reserves of
$141,506,000 were included in the depletion calculation at December
31, 2015 (2014 - $76,719,200).
The Company reviewed each CGU comprising its property and
equipment at September 30, 2015 and December 31, 2015 for
indicators of impairment and determined that indicators were
present related to continued decreases in current and future oil
and natural gas prices. The company performed an impairment test at
September 30, 2015 and recorded a $17,451,220 impairment loss
associated with the New Mexico CGU, based on fair value less costs
to sell estimates as at September 30, 2015, due to declining
commodity prices. The company performed an additional impairment
test at December 31, 2015 and concluded that the reserve values
estimates at December 31, 2015 as compared to the carrying value of
its petroleum and natural gas properties justified the reversal of
the previously recorded impairment.
The key assumptions used in determining the recoverable amounts
for purposes of the impairment test were the discount rate,
commodity prices, resource volumes, future capital cost estimates,
and timing of future capital investments.
The impairment test used a 12.5% discount rate at September 30,
2015 and December 31, 2015 (2014 - 12.5%). The petroleum and
natural gas future prices for the December 31, 2015 impairment
test, are based on commodity price forecasts of the Company's
independent reserve evaluators for 2015 as follows:
NYMEX Henry Hub
WTI Crude Natural Gas(1)
Oil(1)
Year ($/bbl) ($/mmbtu)
----------------------- ------------ -----------------
2016 45.00 2.25
2017 60.00 3.00
2018 70.00 3.50
2019 80.00 4.00
2020 81.20 4.25
2021 82.42 4.31
2022 83.65 4.38
2023 84.91 4.44
2024 86.18 4.51
2025 87.48 4.58
2026 88.79 4.65
Thereafter (inflation +2.0%/yr +2.0%/yr
%)
------------------------ ------------ -----------------
(1) Prices used in the impairment test were adjusted for
commodity price differentials specific to the Company.
During the year ended December 31, 2015, the Company completed
the sales of certain oil and gas properties for total cash
consideration of $478,274 (2014 - $1,555,000), subject to final
adjustments. The sales resulted in a loss recognized in
comprehensive loss of $509,445 (2014 - $8,687,750).
5. Decommissioning Liabilities
The following is the continuity schedule of the obligation
associated with the retirement of oil and gas properties for the
years ended December 31, 2015 and December 31, 2014:
2015 2014
--------------------------------------- ----------- -----------
Decommissioning liabilities, beginning
of year $1,603,655 $972,634
Obligations incurred 12,479 501,676
Revision in estimated cash flows
and discount rate (272,029) 365,625
Obligations settled and disposed (69,934) (272,475)
Unwinding of the discount 35,881 36,195
----------------------------------------- ----------- -----------
Decommissioning liabilities, end
of year $1,310,052 $1,603,655
Current portion 7,693 95,500
----------------------------------------- ----------- -----------
Long-term decommissioning liabilities $1,302,359 $1,508,155
----------------------------------------- ----------- -----------
The undiscounted amount of cash flows, required over the
estimated reserve life of the underlying assets, to settle the
obligation, adjusted for inflation, is estimated at $2,922,088
(December 31, 2014 - $3,254,986). The December 31, 2015 obligation
was calculated using a risk free discount rate of 2.67 percent
(December 31, 2014 - 2.5%) and an inflation rate of 3 percent (2014
- 3%). The Company expects these obligations to be settled in
approximately 1 to 41 years.
6. Income taxes
The following is a reconciliation of income taxes, calculated at
the combined statutory federal and provincial income tax rates, to
the income tax recovery included in the consolidated statements of
net loss.
2015 2014
-------------------------------------- ------------- -------------
Loss before income taxes $(5,121,188) $(7,064,478)
Income tax recovery at statutory
rate of 25% (2014 - 25%) (1,280,297) (1,766,119)
Difference in statutory rates: Canada
vs. United States (512,119) (706,448)
Share-based compensation 68,012 146,178
Other 50,849 76,382
Unrecognized deferred tax assets 1,673,555 2,250,007
---------------------------------------- ------------- -------------
Provision for (recovery) of income $ - $ -
taxes
---------------------------------------- ------------- -------------
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts for income tax
purposes. The components of the Company's deferred income tax
assets and liabilities are as follows:
2015 2014
--------------------------------------- ------------ ------------
United States:
Deferred income tax liability (asset):
Petroleum and natural gas properties $22,757,290 $25,165,493
Decommissioning obligations (458,519) (561,280)
Net operating losses carried forward (47,222,957) (47,854,844)
------------ ------------
(24,924,186) (23,250,631)
Unrecognized deferred tax assets 24,924,186 23,250,631
----------------------------------------- ------------ ------------
Net deferred income tax liability $ - $ -
(asset)
----------------------------------------- ------------ ------------
The Company has the following net operating losses available to
be carried forward to offset future operating income for Caza's US
entities:
Expiring at December Amounts
31,
---------------------- --------------------------
US
2027 -
2028 7,714,942
2029 16,409,534
2030 1,887,722
2031 9,004,333
2032 14,887,664
2033 14,704,775
2034 30,358,042
2035 39,952,987
2036 -
7. Share Capital and Warrants
(a) Authorized
Unlimited number of voting common shares.
(b) Issued
December 31, 2015 December 31, 2014
Number $ Number $
--------------------------- ------------- ----------- ----------- ----------
Opening balance common
shares 236,355,884 90,326,588 182,965,097 77,967,487
Stock issuances 9,511,174,910 44,695,716 53,390,787 12,359,101
Conversion of exchangeable
shares 26,502,000 918,572 - -
Cancelled (29,878,886) (287,563) - -
Balance, end of year 9,744,153,908 135,653,313 236,355,884 90,326,588
--------------------------- ------------- ----------- ----------- ----------
Opening balance warrants 3,584,557 156,365 3,584,557 156,365
Expired (1,055,224) (89,674) - -
Cancelled (2,529,333) (66,691) - -
--------------------------- ------------- ----------- ----------- ----------
Balance, end of year - - 3,584,557 156,365
--------------------------- ------------- ----------- ----------- ----------
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
On July 4, 2014, the Company completed an equity raise of
US$9,368,418 net of issuance costs (approximately GBP5.9 million or
C$10.7 million) through the placing of 32,679,739 common shares at
a price of GBP0.18 (approximately C$0.33) per share. The Company
also issued 20,711,048 shares at an average price of $0.14 for
$2,990,683 servicing the Yorkville convertible note.
On November 4, 2015, the Company issued 24,537,897 common shares
to YA Global Masters SPV Ltd. at a price of GBP0.004649 per share
pursuant to receiving a conversion notice in accordance with the
terms of the $4.0 million convertible unsecured loan, see note
15.
On December 24, 2015, the Company closed a private placement
through a ("Lender Settlement Agreement") of 9,467,419,937 common
shares at US$0.0048 per share for gross proceeds of US$45,500,000,
issued 26,502,000 common shares of the Company in exchange of
26,502,000 exchangeable shares in Caza Petroleum held by
management. In addition, 29,878,886 common shares held by Global
Master SPV Ltd. were returned and cancelled, see note 15.
The 2,529,333 common share warrants are exercisable at $0.17 and
expire on November 1, 2016. On December 24, 2015, under the
conditions of the Lender Settlement agreement the Company cancelled
all remaining common share warrants, see note 15.
(c) Stock options
The maximum number of common shares for which options may be
granted, together with shares issuable under any other share
compensation arrangement of the Company, is limited to 10% of the
total number of outstanding common shares (plus common shares that
would be outstanding upon the exercise of all exchangeable rights)
at the time of grant of any option. The exercise price of each
option may not be less than the fair market value of the Company's
common shares on the date of grant. Except as otherwise determined
by the Board and subject to the limitation that the stock options
may not be exercised later than the expiry date provided in the
relevant option agreement but in no event later than 10 years (or
such shorter period required by a stock exchange) from their date
of grant, options cease to be exercisable: (i) immediately upon a
participant's termination by the Company for cause, (ii) 90 days
(30 days in the case of a participant engaged in investor relations
activities) after a participant's termination from the Company for
any other reason except death and (iii) one year after a
participant's death. Subject to the Board's sole discretion in
modifying the vesting of stock options, stock options will vest,
and become exercisable, as to 331/3% on the first anniversary of
the date of grant and 331/3% on each of the following two
anniversaries of the date of grant. All options granted to a
participant but not yet vested will vest immediately upon a change
of control or upon the Company's termination of a participant's
employment without cause. On December 24, 2015, under the
conditions of the Lender Settlement agreement the Company cancelled
all remaining outstanding stock options and the remaining unvested
stock based compensation expense of $109,813 was recorded.
A summary of the Company's stock option plan as the years ended
December 31, 2015 and year end December 31, 2014 presented
below:
December 31, 2015 December 31, 2014
----------------------- -----------------------
Weighted Weighted
average average
Number of Exercise Number of exercise
options price options price
-------------------------- ----------- ---------- ----------- ----------
Beginning of year 16,385,000 $0.29 15,985,000 $0.28
Granted - - 500,000 $0.22
Exercised - - - -
Cancelled 16,385,000 $0.28 100,000 $0.28
-------------------------- ----------- ---------- ----------- ----------
End of year - $0.00 16,385,000 $0.28
-------------------------- ----------- ---------- ----------- ----------
Exercisable, end of year - $0.00 14,071,661 $0.29
-------------------------- ----------- ---------- ----------- ----------
During the year ended December 31, 2015, nil (2014 - 500,000)
options were granted with a fair value of $nil (2014 - 124,500).
The fair value of these options was determined using the
Black-Sholes model with the following assumptions:
2014
---------
Dividend yield Nil
Expected volatility 177%
Risk free rate of return 1.55%
Weighted average life 3 years
Forfeiture rate Nil
(d) Long term incentive plan
The Company's 2014-2016 Inventive Performance Program consists
of three measurement periods of one, two and three years ending at
each of the respective years 2014 through 2016. Performance awards
are payable after the end of each year, based on a specified
percentage of each participant's salary determined by the amount of
the total shareholder return of the Company during each measurement
period compared to the total shareholder return of 10 companies
designated in a peer group. Subject to the discretion of the Board
of Directors, performance awards are payable one-half in cash and
one-half in common shares. Compensation expense resulting from the
Performance Program will be accrued over the term of the
program.
The Board of Directors reserved for issuance an aggregate of
4,289,608 common shares in connection with outstanding performance
awards during the three-year performance program, based on the
Company's attaining the midpoint of the payout performance range.
On March 19, 2015 the Board of Directors approved the issuance of
2,051,308 common shares for the 2014 period under the performance
program. The Company has previously recorded an expense of $201,849
to contributed surplus for these shares issued in the second
quarter of 2015. On December 24, 2015, under the conditions of the
Lender Settlement agreement the Company cancelled all remaining
outstanding undistributed performance awards.
(e) Share-based compensation reserve
The following table presents the changes in the share-based
compensation reserve:
December December
31, 31, 2014
2015
--------------------------------- --- --- ------------ -------------
Balance, beginning of year $11,091,817 $10,480,968
Share-based compensation expense 193,511 610,849
Balance, end of year $11,285,328 $ 11,091,817
------------------------------------------- ------------ -------------
(f) Non-controlling interest
Number of exchangeable rights outstanding December
31,
December
2015 31, 2014
------------------------------------------ --- --- -------------- -----------
Beginning of year 26,502,000 26,502,000
Exchanged (26,502,000) -
---------------------------------------------------- -------------- -----------
End of year (i) - 26,502,000
---------------------------------------------------- -------------- -----------
(i) Management had a non-controlling interest in the Company
which allows shares of Caza Petroleum to be exchanged into the
Company's shares at an exchange rate of 2800 to 1.
On December 24, 2015, Management exchanged 26,502,000
exchangeable shares in Caza Petroleum for a total of 26,502,000
common shares of the Company.
In 2015 and 2014, issuances of common shares had a nominal
impact on the number of exchangeable rights in the year.
8. Related Party Transactions
All related party transactions are in the normal course of
operations and have been measured at the agreed to exchange
amounts, which is the amount of consideration established and
agreed to by the related parties and which is comparable to those
negotiated with third parties
Remuneration of key management personnel of the Company, which
includes directors, officers and other key personnel, is set out
below in aggregate:
Year ended December 31, 2015 2014
------------------------ ----------- ------------
Salaries and wages $1,586,103 $1,522,926
Share-based payments 235,320 325,551
$1,821,423 $ 1,848,477
------------------------ ----------- ------------
9. Commitments and Contingencies
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
As of December 31, 2015 the Company is committed under operating
leases for its offices in the following aggregate minimum lease
payments which are shown below as operating commitments:
2016 $145,646
2017 $125,230
10. Supplementary Information
(a) Net change in non-cash working capital
Year ended December 31, 2015 2014
------------------------------ -------------- -------------
Provided by (used in)
Accounts receivable $5,904,355 $(1,948,987)
Prepaid and other (50,142) (546,063)
Accounts payable and accrued
liabilities (15,996,361) 5,203,195
-------------- -------------
$(10,142,148) $2,708,145
-------------- -------------
Summary of changes
Operating $3,047,172 $(1,075,858)
Investing (13,144,192) 4,275,460
Financing (45,128) (491,457)
-------------- -------------
$(10,142,148) $2,708,145
-------------- -------------
(b) Supplementary cash flow information
Year ended December 31, 2015 2014
------------------------- ----------- -----------
Interest paid $5,295,000 $4,940,000
Interest received 521 203
----------- -----------
(c) Cash and cash equivalents
December 31, December 31,
2015 2014
--------------------------- ---- ---------------------- ----------------------
Cash on deposit $1,554,469 $5,091,380
Money market instruments 69,611 69,563
---------------------- ----------------------
Cash and cash equivalents $1,624,080 $5,160,943
---------------------- ----------------------
The money market instruments bear interest at a rate of 0.19% as
at December 31, 2015 (December 31, 2014 - 0.010%).
11. Capital Risk Management
The Company's objectives when managing capital is to safeguard
the entity's ability to continue as a going concern, so that it can
continue to provide returns for shareholders and benefits for other
stakeholders. The Company defines capital as shareholders' equity,
working capital (excluding current portion of decommissioning
liabilities), credit facilities and notes payable when available.
The Company manages the capital structure in light of changes in
economic conditions and the risk characteristics of the underlying
assets. The Company's objective is met by retaining adequate equity
and working capital to provide for the possibility that cash flows
from assets will not be sufficient to meet future cash flow
requirements.
December December
31, 31, 2014
2015
----------------------------------------- --- --- ------------- -------------
Cash and cash equivalents $(1,624,080) $(5,160,943)
Other current assets (2,328,098) (8,610,924)
Accounts payable and accrued liabilities
and short term note payable 5,359,873 63,722,604
Adjusted working capital $ 1,407,695 $49,950,737
Note payable -long term -
Shareholders' equity 70,671,506 31,347,395
--------------------------------------------------- ------------- -------------
Total capital $ 72,079,201 $81,298,132
--------------------------------------------------- ------------- -------------
The Company has evaluated its net working capital balance as at
December 31, 2015 and December 31, 2014. Due to long lead times on
several of the Company's exploration and development projects, from
time to time the Company secures capital to fund its investments in
petroleum and natural gas exploration projects in advance. At
December 31, 2015 the notes payable balance was reclassified to
current which created a negative working capital balance. On
February 18, 2015 the Company issued $4,000,000 under an unsecured
convertible note. During 2014, the Company issued additional notes
payable of $10.0 million. As exploration and development projects
progress the Company expects the net working capital balance may
decrease from current levels, and additional capital may be
required to fund additional projects. If the Company is
unsuccessful in raising additional capital, the Company may have to
sell or farm out certain properties. If the Company cannot sell or
farm out certain properties, it will be unable to participate with
joint interest partners and may forfeit rights to some of its
properties.
The Company prepares annual budgets, which are updated as
necessary depending on varying factors, including current and
forecast commodity prices, changes in capital structure, execution
of the Company's business plan and general industry conditions.
12. Financial Instruments
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit, and foreign exchange risks. The
Company manages its exposure to these risks by operating in a
manner that minimizes its exposure to the extent practical. Except
as noted below there have been no changes in the Company's risks,
or the objectives, policies and processes to manage these
risks.
(a) Commodity Price Risk
The Company is subject to commodity price risk for the sale of
oil and natural gas. The Company may enter into contracts for risk
management purposes only, in order to protect a portion of its
future cash flow from the volatility of oil and natural gas
commodity prices. The Company has entered into swap contracts to
limit exposure to declining crude oil prices. Under these swaps,
the Company receives or pays monthly a cash settlement on the
covered production of the difference between the swap price and the
month average of the daily closing quoted spot price per barrel of
West Texas Intermediate NYMEX crude oil. The fair value of the
Company's commodity price derivative contracts represents the
estimated amount that would be received for settling the
outstanding contracts on December 31, 2015, and will be different
than what will eventually be realized. The fair value of these
assets at a particular point in time is affected by underlying
commodity prices, expected commodity price volatility and the
duration of the contract and is determined by the expected future
settlements of the underlying commodity. The gain or loss on such
contracts is made up of two components; the realized component,
which reflects actual settlements that occurred during the period,
and the unrealized component, which represents the change in the
fair value of the contracts during the period. For the year ended
December 31, 2015 the Company recognized a realized gain of
$7,905,820 (2014 - $147,620 gain) on its settled commodity price
derivative contracts. For the year ended December 31, 2015 the
Company recorded an unrealized loss of $6,449,261 (2014 -
$6,217,813 gain) on unsettled commodity price derivative contracts.
The fair value of these contracts at December 31, 2015 was
$(417,912) (December 31, 2014 $6,031,350).
The following information presents all outstanding positions by
year for commodity financial instruments contracts.
Total
Term Product Type Volume $ Price
------------------ -------------- ------ ------------- --------
2016
January-December Differential Swap 55,906 bbls -4.25
2017
January-December Differential Swap 43,896 bbls -4.25
------------------- -------------- ------ ------------ --------
(b) Credit Risk
Credit risk arises when a failure by counter parties to
discharge their obligations could reduce the amount of future cash
inflows from financial assets on hand at the consolidated statement
of financial position date. A majority of the Company's financial
assets at the consolidated statement of financial position date
arise from natural gas liquids and natural gas sales and the
Company's accounts receivable that are with these customers and
joint venture participants in the oil & natural gas industry.
Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production. The
Company's natural gas and condensate production is sold to large
marketing companies. Typically, the Company's maximum credit
exposure to customers is revenue from two months of sales. During
the year ended December 31, 2015, the Company sold 58% (2014 - 62%)
of its natural gas and condensates to a single purchaser. These
sales were conducted on transaction terms that are typical for the
sale of natural gas and condensates in the United States. In
addition, when joint operations are conducted on behalf of a joint
interest partner relating to capital expenditures, costs of such
operations are paid for in advance to the Company by way of a cash
call to the partner of the operation being conducted.
(MORE TO FOLLOW) Dow Jones Newswires
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Caza management assesses quarterly whether there should be any
impairment of the financial assets of the Company. At December 31,
2015, the Company had past due accounts receivable from certain
joint interest partners of $102,665 which were outstanding for
greater than 60 days (December 31, 2014 - $340,342) and $98,242
that were outstanding for greater than 90 days (December 31, 2014 -
$481,887). At December 31, 2015, the Company's three largest joint
interest partners represented approximately 13%, 6% and 4% of the
Company's receivable balance (December 31, 2014 - 29%, 14% and 4%
respectively). The maximum exposure to credit risk is represented
by the carrying amount on the consolidated statement of financial
position of cash and cash equivalents, accounts receivable and
deposits.
Trade receivables disclosed above include amounts that are past
due at the end of the reporting period for which the Group has not
recognized an allowance for doubtful debts because there has not
been a significant change in credit quality and the amounts (which
include interest accrued after the receivable is more than 60 days
outstanding) are still considered recoverable. The Company manages
exposure on cash balances by holding cash with large and reputable
financial institutions. The Company also assesses the credit
worthiness of each counterparty before entering into contracts and
ensures the counterparties meet minimum credit quality
requirements.
(c) Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange
fluctuations, as certain general and administrative expenses are or
will be denominated in Canadian dollars and United Kingdom pounds
sterling. The Company's sales of oil and natural gas are all
transacted in US dollars. At December 31, 2015, the Company
considers this risk to be relatively limited and not material and
therefore does not hedge its foreign exchange risk.
(d) Fair Value of Financial Instruments
The Company has determined that the fair values of the financial
instruments consisting of cash and cash equivalents, restricted
cash, accounts receivable and accounts payable are not materially
different from the carrying values of such instruments reported on
the consolidated statement of financial position due to their
short-term nature. At December 31, 2015, the fair value of the
notes payable is $nil plus transaction costs (December 31, 2014 -
$42,366,371) which approximates net book value as interest rates
fluctuate.
IFRS establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The
three levels of the fair value hierarchy are described below:
-- Level 1: Values based on unadjusted quoted prices in active
markets that are accessible at the measurement date for identical
assets or liabilities.
-- Level 2: Values based on quoted prices in markets that are
not active or model inputs that are observable either directly or
indirectly for substantially the full term of the asset or
liability.
-- Level 3: Values based on prices or valuation techniques that
require inputs that are both unobservable and significant to the
overall fair value measurement.
The Company's cash and cash equivalents and restricted cash,
which are classified as fair value through profit or loss, are
categorized as Level 1 financial instruments.
All other financial assets are classified as loans or
receivables and are accounted for on an amortized cost basis. All
financial liabilities are classified as other liabilities. There
are no financial assets on the consolidated statement of financial
position that have been designated as available-for-sale.
The Company's derivative liabilities as described in Notes 13
and 15 are Level 2 financial instruments and commodity price
contracts are a Level 2 financial instrument.
There have been no changes to the aforementioned classifications
during the years presented.
(e) Liquidity Risk
Liquidity risk includes the risk that, as a result of our
operational liquidity requirements:
-- The Company will not have sufficient funds to settle a transaction on the due date;
-- The Company will be forced to sell assets at a value which is
less than what they are worth; or
-- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts
projected to complete the Company's existing capital expenditure
program are continuously monitored and adjusted as input variables
change. These variables include but are not limited to, available
bank lines, natural gas production from existing wells, results
from new wells drilled, commodity prices, cost overruns on capital
projects and regulations relating to prices, taxes, royalties, land
tenure, allowable production and availability of markets. As these
variables change, liquidity risks may necessitate the Company to
conduct equity issues or obtain project debt financing. The Company
also mitigates liquidity risk by maintaining an insurance program
to minimize exposure to insurable losses. The financial liabilities
as at December 31, 2015 that subject the Company to liquidity risk
are accounts payable, accrued liabilities, notes payable and
derivative liabilities. The contractual maturity of these financial
liabilities is generally the following sixty days from the receipt
of the invoices for goods of services and can be up to the
following next six months, except for the notes payable which are a
long term financial liability which is due on demand in an event of
default. Management believes that current working capital will be
adequate to meet these financial liabilities as they become
due.
13. Equity Facility
The Company entered into an Equity Adjustment Agreement (the
"Adjustment Agreement") on March 5, 2013 with Global Master SPV
Ltd., an investment fund managed by Yorkville Advisors Global, LP
("Yorkville") in conjunction with its SEDA Agreement dated November
23, 2012 with Yorkville. Pursuant to the Adjustment Agreement,
during the three months ended March 31, 2013, the Company issued
3,846,154 common shares to Yorkville at a price of GBP0.13 per
share for aggregate proceeds of GBP500,000 (US$756,451).
Under the terms of the Adjustment Agreement, if on December 31
2014 and now extended until March 31, 2016 and April 30, 2016
settling one half in each period, the common share market price
(determined as 95% of the average daily volume weighted average
price of common shares (VWAP) during the preceding 22 trading days)
is greater than GBP0.13, then Yorkville will pay to the Company the
difference multiplied by the number of New Common Shares, and if
the market price is less than GBP0.13 then the Company will pay to
Yorkville the difference multiplied by the number of New Common
Shares. This derivative liability is classified as a financial
instrument measured at fair value though profit or loss. On
December 24, 2015, as part of the Company's Lender Settlement
Agreement the Adjustment Agreement obligation and associated
derivative liability (December 31, 2014 - US$292,088 liability) was
extinguished for no consideration. The change in fair value of
US$(12,768) since December 31, 2014 is included in other income
(expenses) in the consolidated statement of net loss and
comprehensive loss. The Company had deposited in escrow GBP275,000
(US$ - $428,614) as security for this contingent payment
obligation, which had previously been recorded within restricted
cash on the consolidated statements of financial position.
14. Notes Payable - Apollo
The Company also entered into a Note Purchase Agreement (the"
Note Agreement") dated May 23, 2013 with Apollo Investment
Corporation ("the Note Holder"), an investment fund managed by
Apollo Investment Management, pursuant to which the Note Holder has
agreed to purchase from the Company up to US$50,000,000 of its
senior secured notes. The Company received US$20,000,000 at the
closing of the Note Agreement ("Tranche A Apollo Note") with an
additional drawdown of US$5,000,000, US$10,000,000 and
US$10,000,000 on September 11, 2013, December 19, 2013 and May 19,
2014, respectively. In addition to these funds, the Company will
have the ability to reinvest cash flow from program wells back into
the drilling program. In December 2015, the Company entered into a
Lender Settlement Agreement with Apollo whereby all debts and
obligations under the Note agreement and all oil and gas interest
previously granted by the Company in favour of Apollo, were
extinguished on December 24, 2015 in consideration for payments of
approximately US$41,025,000.
The outstanding balance of the Tranche A Apollo Note as at
December 31, 2015 was US$nil (December 31, 2014 - US$42,366,370)
(net of unamortized transaction costs US$nil (December 31, 2014 -
US$2,633,629). The Tranche A Apollo Note beared interest at a
floating rate of one-month LIBOR (with a floor of 2%) plus 10% per
annum, payable monthly.
15. Convertible Unsecured Loan - Yorkville
On February 18, 2015 the Company entered into an agreement in
relation to a $4.0 million convertible unsecured loan (the "Loan")
to be made available by YA Global Master SPV Ltd., an investment
fund managed by Yorkville and Global Market Neutral Strategies
SICAV P.L.C. (collectively, the "Investors"). On December 24, 2015,
the Company entered into Lender Settlement Agreement with the
investors whereby all debts and obligations under the Loan were
extinguished on December 24, 2015 in consideration for payments of
approximately US$2,500,000 and Yorkville in connection the Lender
Settlement Agreement cancelled 29,878,886 shares.
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The outstanding balance of the convertible note at December 31,
2015 was US$nil (net of unamortized transaction costs of $nil). The
outstanding principal of the Facility is convertible at the
Investors' option into Common Shares of the Company. The conversion
price, which will be determined at the date of each conversion,
will be a price per Common Share equal to either (a) 92.5% of the
volume weighted average of the volume weighted average prices
("VWAP") of the Common Shares during the 10 trading days on AIM
prior to the conversion (such conversion being restricted to a
maximum of US$1,000,000 per month) or (b) at Investors' option, a
fixed price of GBP0.12 (such conversion being subject to no maximum
amount). The Facility bears interest on outstanding principal at 8%
per annum, which interest is payable at the time of each conversion
only in Common Shares based on a conversion price equal to 92.5% of
the volume weighted average price of the VWAP of the Common Shares
during the 10 trading days on AIM prior to the interest payment
date. The Facility will mature in two years, which may be extended
up to one year by principal balance of the Facility will convert
into Common Shares at a conversion price equal to the closing price
of the Common Shares on the preceding trading day.
16. General and Administrative
During the year ended December 31, 2015 the Company incurred
general and administrative expenses in the amount of $5,183,717
(December 31, 2014 - $5,939,589) and salaries in the amount of
$2,060,592 (December 31, 2014 - $2,147,986). Share-based
compensation expense accounted for $235,320 of the general and
administrative costs for the year ended December 31, 2015 (December
31, 2014 - $417,652).
17. Financing costs
Years ended December 31, 2015 2014
----------------------------------- ----------- -----------
Unwinding of the discount (Note
5) $35,882 $36,195
Amortization of financing fees 1,298,639 1,687,723
Interest expense 6,002,247 4,989,110
----------------------------------- ----------- -----------
$7,336,768 $6,713,028
----------------------------------- ----------- -----------
18. Subsequent event
On January 25, 2016, the Company's wholly owned subsidiary, Caza
Petroleum entered into a credit agreement for a five-year, senior
secured, reserve-based, revolving credit facility (the "Credit
Facility"). Pursuant to the credit agreement, the Credit Facility
commitment is a maximum US$100.0 million, governed by an initial
borrowing base of US$15.0 million, including a sub-facility for the
issuance of letters of credit up to a maximum aggregate face amount
of 10% of the borrowing base in effect. Interest on loans under the
Credit Facility may be elected by Caza Petroleum to be based on
LIBOR or a base rate (determined as the greatest of the prime rate,
federal funds rate + 0.50% and adjusted LIBOR + 1%) from time to
time, plus a margin determined based upon utilization of the
borrowing base ranging from 2% to 3% for LIBOR loans and ranging
from 1% to 2% for base rate loans. The Credit Facility also
requires Caza Petroleum to pay a commitment fee equal to 0.50% per
annum based on the average daily unused portion of the borrowing
base. Additionally, upfront fees will be paid to the lender at
closing in an amount equal to 0.50% of the initial borrowing base.
The Credit Facility includes financial covenants tested on a
quarterly basis, including a maximum funded debt to EBITDAX ratio
of 4.0x and a minimum current asset to current liabilities ratio of
1.0x, each tested on a consolidated basis for Caza Petroleum and
its subsidiaries. The Credit Facility also includes
representations, warranties, affirmative and negative covenants,
events of default, remedial provisions and other terms that are
usual and customary for secured reserve-based credit facilities.
Subject to the borrowing base in effect, the Credit Facility is
available on a revolving basis during the period commencing on the
closing date and ending on the fifth anniversary of the closing
date, which is January 21, 2021.
The borrowing base is the loan value to be assigned to the
proved reserves attributable to the Company's proved oil and gas
properties, as evaluated in the most recent reserve report(s) and
delivered pursuant to the credit agreement. As of the closing date,
the borrowing base was set at US$15.0 million until the next
scheduled redetermination or as the borrowing base is otherwise
adjusted or redetermined. Redeterminations based on updated reserve
reports are scheduled semi-annually, and each of Caza Petroleum and
the lender have the ability to request one interim redetermination
in each six-month period between scheduled redeterminations. The
initial borrowing base redetermination will occur on July 1, 2016,
unless the borrowing base is adjusted or redetermined before such
date in accordance with the terms of the Credit Facility.
The Credit Facility is guaranteed by Caza Petroleum's wholly
owned subsidiary, Caza Operating, LLC ("Caza Operating"), and the
collateral provided to secure the Credit Facility (and any hedges
or cash management obligations owing to the lender) consists of
substantially all of Caza Petroleum's and Caza Operating's
respective now owned or hereafter acquired personal property, as
well as at least 80% of the PV-9 of their oil and gas
properties.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis ("MD&A")
of the financial results for Caza Oil & Gas, Inc. ("Caza",
"Corporation" or the "Company") should be read in conjunction with
the audited consolidated financial statements for the years ended
December 31, 2015 and 2014. Additional information relating to the
Company can be found on SEDAR at www.sedar.com. All figures herein
have been prepared in accordance with International Financial
Reporting Standards ("IFRS") unless otherwise stated. This MD&A
is dated March 30, 2016.
FORWARD LOOKING INFORMATION
In addition to historical information, the MD&A contains
forward-looking statements that are generally identifiable as any
statements that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future
events of performance (often, but not always, through the use of
words or phrases such as "will", "may", "will likely result,"
"expected," "is anticipated," "believes," "estimated," "intends,"
"plans," "projection" and "outlook"), are not historical facts and
may be forward-looking and may involve estimates, assumptions and
uncertainties which could cause actual results or outcomes to
differ materially from those expressed in such forward-looking
statements.
These statements are based on certain factors and assumptions
regarding the results of operations, the performance of projected
activities and business opportunities. Specifically, we have used
historical knowledge and current industry trends to project
budgeted expenditures for 2016 and have made certain assumptions
about the Company's ability to continue as a going concern and to
complete a financing or other strategic transaction on suitable
terms. While we consider these assumptions to be reasonable based
on information currently available to us, they may prove to be
incorrect.
Actual results achieved will vary from the information provided
herein as a result of numerous known and unknown risks and
uncertainties and other factors. Such factors include, but are not
limited to: risks associated with the Company's ability to continue
as a going concern; the Company's ability to complete a strategic
transaction; volatility of crude oil and natural gas prices and
markets; Company's stage of development; competitive conditions;
share price volatility; risks associated with crude oil and natural
gas exploration and development; risks related to the inherent
uncertainty of reserves and resources estimates; possible
imperfections in title to properties; environmental regulation and
associated risks; loss of key personnel; operating and insurance
risks; the inability to add reserves; risks associated with
industry conditions; the ability to obtain additional financing on
acceptable terms if at all; non operator activities; the inability
of investors in certain jurisdictions to bring actions to enforce
judgments; equipment unavailability; potential conflicts of
interest; risks related to operations through subsidiaries; risks
related to foreign operations; currency exchange rate risks and
other factors, many of which are beyond the control of the Company.
Accordingly, there is no representation by Caza that actual results
achieved will be the same as those set forth herein. Actual results
may vary, perhaps materially. Further, Caza undertakes no
obligation to update or revise any forward-looking statement or
statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of
unanticipated events, except as required by applicable securities
laws.
Financial outlook information contained in this MD&A, if
any, about prospective results of operations, financial position or
cash flows is based on assumptions about future events, including
economic conditions and proposed courses of action, based on
management's assessment of the relevant information currently
available. Readers are cautioned that such financial outlook
information contained in this MD&A should not be used for
purposes other than for which it is disclosed herein.
NON-IFRS MEASURES
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March 31, 2016 02:01 ET (06:01 GMT)
The financial data presented herein has been prepared in
accordance with IFRS. The Company has also used certain measures of
financial reporting that are commonly used as benchmarks within the
oil and natural gas production industry in the following MD&A
discussion. The measures are widely accepted measures of
performance and value within the industry, and are used by
investors and analysts to compare and evaluate oil and natural gas
exploration and producing entities. Most notably, these measures
include "operating netback", "funds flow from (used in) operations"
and "Adjusted EBITDA".
Operating netback is a benchmark used in the crude oil and
natural gas industry to measure the contribution of oil and natural
gas sales and is calculated by deducting royalties and operating
expenses (production, severance and transportation expenses) from
revenues. Management utilizes this measure to analyze operating
performance.
Funds flow from (used in) operations is cash flow from operating
activities before changes in non-cash working capital and certain
other items, and is used to analyze operations, performance and
liquidity. The Company considers funds flow from (used in)
operations a key measure as it demonstrates the Company's ability
to generate the cash flow necessary to fund future growth through
capital investment and to repay debt. The Company's calculation of
funds flow from operations may not be comparable to that reported
by other companies.
The term Adjusted EBITDA consists of net income (loss) plus
interest, depreciation, depletion, amortization, accretion,
impairment and share-based compensation. Adjusted EBITDA is also
adjusted for any gains or losses from extraordinary, unusual or
non-recurring items and any gains or losses on disposition of
assets. The Company has included Adjusted EBITDA as a supplemental
disclosure because its management believes that Adjusted EBITDA
provides useful information regarding our ability to service debt
and to fund capital expenditures and provides investors a helpful
measure for comparing its operating performance with the
performance of other companies that have different financing and
capital structures or tax rates.
These measures are not defined under IFRS and should not be
considered in isolation or as an alternative to conventional IFRS
measures. These measures and their underlying calculations are not
necessarily comparable or calculated in an identical manner to a
similarly titled measure of another entity. When these measures are
used, they are defined as "Non IFRS" and should be given careful
consideration by the reader as non-IFRS financial measures do not
have a standardized meaning prescribed by IFRS and are therefore
unlikely to be comparable to similar measures presented by other
issuers.
NOTE REGARDING BOES AND MCFES
In this MD&A, barrels of oil equivalent ("boe") are derived
by converting gas to oil in the ratio of six thousand cubic feet
("Mcf") of gas to one barrel ("bbl") of oil (6 Mcf: 1 bbl) and one
thousand cubic feet of gas equivalent ("Mcfes") are derived by
converting oil to gas in the ratio of one bbl of oil to six Mcf (1
bbl: 6 Mcf). Boes and Mcfes may be misleading, particularly if used
in isolation. A boe conversion of 6 Mcf of natural gas to 1 bbl of
oil, or a Mcfe conversion ratio of 1 bbl of oil to 6 Mcf of natural
gas is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value
equivalency at the well head. Given that the value ratio based on
the current price of oil as compared to natural gas is
significantly different from the energy equivalency of 6:1,
utilizing a conversion on a 6:1 basis may be misleading as an
indication of value.
CURRENCY
References to "dollars" and "$" are to U.S. dollars. References
to "CDN$" are to Canadian dollars. References to "GBP" are to
British pounds.
STRATEGY AND ASSETS
Strategy
The Company's strategy is to achieve significant growth in
reserves and production through:
-- progressing material, internally generated prospects,
utilizing cash flows from existing production and exploiting Proven
plus Probable reserves; and
-- executing strategic acquisitions of assets at all stages of
the development cycle to facilitate longer term organic growth.
In the implementation of this strategy, the Company has a clear
set of criteria in high-grading projects:
-- the Company seeks to retain control of project execution and
timing through the operatorship of assets;
-- assets should be close to existing established
infrastructure, allowing for quick, efficient hook-up and lower
operational execution risk;
-- drilling targets in close proximity to known producing reservoirs; and
-- internal models for core projects should demonstrate the ability to deliver at least a 25% rate-of-return on investment.
Assets
The Company is primarily focused in the Permian Basin of
Southeast New Mexico and West Texas, which provides the Company
with low-risk, liquids-rich development opportunities from many
geologic reservoirs and play types. The Permian Basin has a vast
operational infrastructure in place. The Company is utilizing
recent advances in horizontal drilling and dynamic completion
technologies to unlock the significant resources within its asset
base and the region.
Management has focused efforts on building a core asset base in
the prolific Bone Spring/Wolfcamp play and has concluded that these
assets represent the best opportunity for the Company to deliver
production and revenue growth within an acceptable timeframe. The
Company expects that expanding and diversifying the producing asset
base within the play will not only grow the Company but will also
make it more resilient to risks associated with any single
project.
As at December 31, 2015, the Company had 226 drilling locations
and 33 gross (10.2 net) producing wells on its leasehold position
in the Bone Spring/Wolfcamp play. The majority of the Company's
leases in the play are held-by-production with no drilling
obligations. Management believes that the Company is
well-positioned with excellent assets and approximately 5,400 net
acres (13,260 gross acres), which is approximately 24,300 net
effective acres (59,670 gross effective acres) in the Bone
Spring/Wolfcamp play, and plans to continue actively monitoring
opportunities to build on Caza's current production levels and
acreage position.
The Company's Bone Spring/Wolfcamp inventory includes the
following 21 properties: Gramma Ridge, Gateway, Marathon Road, East
Marathon Road, Lennox, Forehand Ranch, Forehand Ranch South,
Jazzmaster, Mad River, Azotea Mesa, China Draw, Bradley 29, Two
Mesas, Quail Ridge, Rover, West Rover, Copperline, West Copperline,
Chaparral 33, Madera and Roja.
The Company's Bone Spring/Wolfcamp leases are mostly State and
Federal leases with primary terms between 5-10 years, many of which
are producing and help-by-production. In terms of obligations and
commitments, one producing well at any depth will hold each lease
in its entirety.
Financing
Management believes that once drilling costs come down and
commodity prices recover, accelerating and expanding drilling and
completion operations on inventoried and producing properties will
significantly increase both production and cash flows, which will
allow the Company to optimize its Bone Spring/Wolfcamp work program
and drive economies of scale.
In this regard, the Company has entered into the Credit Facility
with JPMorgan and is constantly evaluating all available financing
options that could provide the Company with sufficient leverage and
capital to adequately exploit current and future Bone
Spring/Wolfcamp opportunities.
Outlook
The Company continues to actively review its drilling
obligations for the year and continues to scale back G&A costs
and capital expenditures associated with non-obligatory wells and
direct capital towards lease maintenance wells in its Bone
Spring/Wolfcamp drilling program. However, dependent upon drilling
costs and prevailing commodity prices, the Company's objective is
to eventually accelerate and expand its drilling program in the
Bone Spring/Wolfcamp play over the next two years. A program of
this type would initially utilize the Company's current Credit
Facility with JPMorgan and excess operational cash flow to fund
further development drilling and lease purchases beyond the initial
two year period.
Management believes that, subject to a sufficient downward
correction to drilling costs and positive recovery to oil prices,
such a program can be accomplished by exploiting the Company's
existing asset/lease inventory. However, management will also seek
to identify appropriate corporate and asset acquisitions that may
result from the current price environment, which will enable the
Company to increase its position in the horizontal Bone
Spring/Wolfcamp plays in the Permian Basin. Accordingly, inline
with the Company's stated strategy, management's goal is to achieve
material growth in the Company's reserves and production, thereby
raising the Company's profile in the basin and allowing its value
to be maximized and, if appropriate, fully matured over the
short-to-medium term.
See "Liquidity and Capital Resources" and "Risk Factors".
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SELECT ANNUAL INFORMATION
2015 2014 2013
------------------------------------- ------------- ------------ -----------
Financial
Revenue oil & gas 10,071,691 22,945,768 8,312,526
Funds flow from (used in) operations
(1) 3,206,500 6,241,586 (1,456,228)
Per share - basic and diluted 0.01 0.03 (0.01)
Net loss (5,121,188) (7,064,478) (8,574,365)
Per share - basic and diluted (0.01) (0.03) (0.04)
Capital expenditures 2,785,181 40,962,347 29,222,045
Total assets 77,759,343 96,965,742 79,100,144
Total non-current liabilities 1,302,359 1,508,155 36,705,407
Cash and working capital (1,833,299) (49,950,737) 8,484,625
Common shares outstanding,
end of year (2) 9,744,153,908 241,107,975 209,467,097
Operations
Operating netback ($/boe) (3)
Revenue oil & gas 39.08 67.44 67.29
Severance tax and transportation
expense 3.48 5.92 5.77
Production expenses 12.88 12.09 13.12
------------------------------------- ------------- ------------ -----------
Operating netback (3) 22.72 49.43 48.40
Average daily oil production
(boe/day) 706 932 338
------------------------------------- ------------- ------------ -----------
(1) Calculated based on cash flow from operating activities
before changes in non-cash working capital and certain other items.
See "Non IFRS Measures".
(2) 2014 and 2013 Outstanding share amounts are calculated based
on the number of outstanding common shares before the addition of
26,502,000 of common shares issuable pursuant to a share exchange
and shareholders agreement among Caza and members of Caza's senior
management.
(3) Calculated by deducting royalties and operating expenses
(production, severance and transportation expenses) from revenues.
See "Non-IFRS Measures".
Operating Netback Summary (Non-IFRS)
The following table presents the Company's operating netback
which is a non-IFRS measure:
Three Months ended Twelve Months ended
December 31, December 31,
($/boe) 2015 2014 2015 2014
------------------------------ ---------- --------- ---------- ----------
Oil and natural gas revenue 33.42 58.17 39.08 67.44
Production expense (19.08) (21.19) (12.88) (12.09)
Severance expense (2.77) (4.89) (3.22) (5.78)
Transportation expense (0.63) (0.08) (0.26) (0.14)
------------------------------ ---------- --------- ---------- ----------
Operating netback (non-IFRS) 10.94 32.01 22.72 49.43
(1) Calculated by deducting royalties and operating expenses
(production, severance and transportation expenses) from revenues.
See "Non IFRS Measures
Operating netbacks for the three and twelve months ended
December 31, 2015 were $10.94/boe and $22.72/boe compared to
$32.01/boe and $49.43/boe, respectively in the previous year.
Operating netbacks in 2015 declined in comparison to prior year as
a result of the significant decrease in commodity prices and
increases in production expenses.
FINANCIAL AND OPERATING RESULTS
Petroleum and Production Revenue
Three Months ended Twelve Months ended
December 31, December 31,
2015 2014 2015 2014
------------------------ ---------- ---------- ----------- -----------
Natural gas
Production (Mcf) 47,646 63,143 203,898 416,270
Revenue ($) 135,238 247,148 609,649 1,727,567
Price ($/Mcf) 2.84 3.91 2.99 4.15
------------------------ ---------- ---------- ----------- -----------
Light/medium crude oil
Production (bbls) 38,609 62,497 200,927 244,407
Revenue ($/bbl) 1,554,297 4,324,724 9,160,159 20,472,202
Price ($/bbl) 40.26 69.20 45.59.33 83.76
------------------------ ---------- ---------- ----------- -----------
Natural gas liquids
Production (bbls) 6,302 9,894 22,798 26,430
Revenue ($/bbl) 76,780 251,587 301,883 745,999
Price ($/bbl) 12.18 25.43 13.24 28.23
------------------------ ---------- ---------- ----------- -----------
Combined
Production (boe) 52,852 82,916 257,707 340,216
Revenue ($) 1,766,315 4,823,459 10,071,691 22,945,768
Price ($/boe) 33.42 58.17 39.08 67.44
------------------------ ---------- ---------- ----------- -----------
Boe/d 574 901 706 932
Mcfe/d 3,447 5,408 4,236 5,593
------------------------ ---------- ---------- ----------- -----------
Revenues from oil and gas sales decreased by 56% to $10,071,691
for year ended December 31, 2015 compared to $22,945,768 in 2014.
The decrease is mainly due to decreases in commodity prices and
production volumes in 2015.
Average daily production decreased by 24% to 706 boe/d in 2015
from 932 boe/d in 2014. Natural gas liquids and crude oil
production made up 87% of Caza's production during 2015 with
natural gas comprising the remaining 13%. This is compared to a
total production profile comprised of 20% natural gas production in
the comparative period in 2014, reflecting a shift toward
exploration and production of oil based reserves.
Revenues from oil and gas decreased 63% to $1,766,315 for the
three-month period ended December 31, 2015 from $4,823,459 for the
three-month period ended December 31, 2014. Caza's production
volumes decreased 36% to 52,852 boe for the three-month period
ended December 31, 2015 down from 82,916 boe for the comparative
period. This represents an average daily production rate decrease
of 36% for the three-months period ended December 31, 2015 as
compared to the comparative period. The average natural gas,
natural gas liquids and crude oil price received by Caza decreased
43% to $33.42 per boe during the three-month period ended December
31, 2015 from $58.17 per boe during the comparative period. The
decrease in revenues and production volumes for the three-month
period ended December 31, 2015 from the comparative period occurred
is a result of the dramatic decrease on commodity prices and the
decreased drilling activity throughout the year.
Our future revenue and production volumes will be directly
affected by North American natural gas prices, West Texas
Intermediate crude oil prices and natural gas liquid prices, the
performance of existing wells, drilling success and the timing of
the tie-in of wells into gathering systems.
Production Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2015 2014 2015 2014
------------------------------- ---------- ---------- ---------- ----------
Severance tax ($) 146,239 405,822 831,074 1,967,498
Transportation ($) 33,516 6,737 67,869 47,066
Production ($) 1,008,237 1,756,991 3,317,996 4,113,550
------------------------------- ---------- ---------- ---------- ----------
Severance, transportation and
production ($) 1,187,992 2,169,551 4,216,939 6,128,114
Severance, transportation and
production ($/boe) 22.48 26.17 16.36 18.01
------------------------------- ---------- ---------- ---------- ----------
Severance tax is a tax imposed by states on natural resources
such as crude oil, natural gas and condensate extracted from the
ground. The tax is calculated by applying a rate to the dollar
amount of production from the property or a set dollar amount
applied to the volumes produced from the property.
During the year ended December 31, 2015, Caza incurred aggregate
production, transportation and severance expenses of $4,216,939
($16.36/boe) compared to $6,128,114 ($18.01/boe) in 2014. Such
expenses on a per boe basis have decreased during the year ended
December 31, 2015 by 9% as compared to the same period in 2014 as a
result of the decreased production costs in relation to the volumes
produced during the year. During the three-month period ended
December 31, 2015, Caza incurred aggregate production,
transportation and severance expenses of $1,187,992 or an average
per boe of $22.48. Such expenses on a per boe basis have decreased
during the three-month period by 14% as compared to the same period
in 2014 as a result of the costs incurred each period in relation
to the volumes produced during that period.
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Severance taxes and transportation expenses totaled $898,943
($3.49/boe) for the year ended December 31, 2015, as compared to
$2,014,564 ($5.92/boe) in the comparative period. Severance taxes
and the transportation expense decreased 55% as a result of the
lower commodity prices in 2015 as compared to the comparative
period. Severance taxes and transportation expenses totaled
$179,755 ($3.40/boe) for the three-month period ended December 31,
2015, as compared to $412,559 ($4.98/boe) in the comparative period
in 2014. Severance taxes and the transportation expense decreased
56% as a result of lower commodity prices as well as the decrease
in production volumes as compared to the comparative period.
Production costs on a per boe basis for the year ended December
31, 2015 were $12.88 per boe as compared to $12.09 for the
comparative period. The decrease in production costs for the year
ended December 31, 2015 occurred in part due to Company cost
savings measures implemented during the year on producing wells in
the New Mexico Bone Spring play. Production expenses for the
three-month period ended December 31, 2015 were $1,008,237 as
compared to $1,756,991 for the comparative period in 2014. Caza's
average lifting cost for the three-month period ended December 31,
2015 was $19.08 per boe versus $21.19 per boe for the comparative
period. These lower lifting costs on a per boe basis occurred as a
result of the costs savings activities implemented by the
Company.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expense in 2015 decreased
to $5,736,009 ($22.26/boe) from $7,573,611 ($22.26/boe) in the
comparative period in 2014. Depletion, depreciation and accretion
expense for the three-month period ended December 31, 2015
decreased to $735,976 ($13.93/boe) from $1,746,608 ($21.06/boe) in
the comparative period in 2014.
Three Months ended Twelve Months ended
December 31, December,
2015 2014 2015 2014
----------------------------- --------- ---------- ---------- ----------
Depletion and depreciation
($) 727,231 1,736,955 5,700,128 7,537,416
Accretion ($) 8,745 9,653 35,881 36,195
----------------------------- --------- ---------- ---------- ----------
Depletion, depreciation and
accretion ($) 735,976 1,746,608 5,736,009 7,573,611
Depletion, depreciation and
accretion ($/boe) 13.93 21.06 22.26 22.26
----------------------------- --------- ---------- ---------- ----------
The decreased depletion expense on a per boe basis for the year
ended December 31, 2015 occurred as a result of the relationship of
the costs incurred in drilling activities carried out in the New
Mexico Cash Generating Unit in relation to the associated reserves
recorded. This brought about an aggregate 41% decrease in depletion
expense for the three-month period ended December 31, 2015 as
compared to the comparative period in 2014.
Costs of unproved properties of $7,083,677 (2014 - $6,247,564)
were excluded from depreciable costs in the exploration and
evaluation assets. A proportionate amount of the carrying value
will be transferred to the depletable pool as reserves are proven
through the execution of Caza's exploration program.
Accretion expense is the increase in the present value of the
asset retirement obligation for the current period and the amount
of this expense will increase commensurate with the asset
retirement obligation as new wells are drilled or acquired through
acquisitions.
General and Administrative Expenses
Three Months ended Twelve Months ended
December 31, December 31,
2015 2014 2015 2014
-------------------------------- ---------- ---------- ---------- ----------
General and administrative
($) 1,611,452 1,779,767 5,276,917 6,158,093
General and administrative
recovery ($) (21,279) (48,031) (93,200) (218,504)
-------------------------------- ---------- ---------- ---------- ----------
Net general and administrative
($) 1,590,173 1,731,736 5,183,717 5,939,589
General and administrative
($/boe) 30.49 21.46 20.48 18.10
Net general and administrative
($/boe) 30.09 20.89 20.11 17.46
-------------------------------- ---------- ---------- ---------- ----------
Net general and administrative expenses for 2015 decreased to
$5,183,717 from $5,939,589 for 2014 showing a decrease of 13% from
the comparative period. Net general and administrative expenses for
three-month period ended December 31, 2015 decreased 8% to
$1,590,173 from $1,731,736 for the comparative period in 2014. On a
per boe basis the net general and administrative expenses increased
by 15% and 44% for the twelve and three months ended December 31,
2015, respectively. The increase is due to the decrease in
production volumes offset by the decrease in general and
administrative expenses from the comparative period in 2014. The
Company is continuing to strive to find cost savings measures in
overhead expenditures that are reflected in the lower general and
administrative costs as compared to the same periods in 2014.
Share-based compensation expense in the amount of $235,320 (2014
- $417,652) is included in general and administrative expenses for
the year ended December 31, 2015. During 2015, Caza did not
capitalize general and administrative expenses relating to
exploration and development activities. Under the conditions of the
Lender Settlement Agreement the Company forfeited all of the
remaining outstanding of stock options on December 24, 2015 (2014 -
100,000).
Income Taxes
Presently the Company does not expect to pay current taxes in
the foreseeable future based on existing tax pools, planned capital
activities and current forecasts of taxable income. However, the
Company's tax horizon will ultimately depend on several factors
including commodity prices, property dispositions, future
production, corporate expenses, and capital expenditures to be
incurred in future reporting periods. Estimated income tax losses
available to be carried forward as at January 1, 2016 with respect
to the Company's operations are as follows:
Expiring at December Amounts
31,
---------------------- -----------------------------
US
2027 -
2028 7,714,942
2029 16,409,534
2030 1,887,722
2031 9,004,333
2032 14,887,664
2033 14,704,775
2034 30,358,042
2035 39,952,987
2036 -
Gain (Loss) on Risk Management Contracts
The Company has entered into commodity price derivative
contracts to limit exposure to declining crude oil prices in
accordance with its covenants under the Note Purchase Agreement (as
defined herein). All derivative contracts are approved by
management before the Company enters into them. The Company's risk
management strategy is dictated in part by covenants in the Note
Purchase Agreement which require the Company to hedge approximately
75% of its production. The contracts limit exposure to declining
commodity prices, thereby protecting project economics and
providing increased stability of cash flows and for capital
expenditure programs. By mutual agreement with the lender the
Company has not taken on any new hedges in the current commodity
environment.
Under these contracts, the Company receives or pays monthly a
cash settlement on the covered production of the difference between
the swap price specified in the applicable contract and the month
average of the daily closing quoted spot price per barrel of West
Texas Intermediate NYMEX crude oil.
The following information presents all outstanding positions by
year for commodity financial instruments contracts.
Total
Term Product Type Volume $ Price
-------------------- -------------- ------ ------------- --------
2016
January - December Differential Swap 55,906 bbls -4.25
2017
January - December Differential Swap 43,896 bbls -4.25
--------------------- -------------- ------ ------------ --------
The fair value of the Company's commodity price derivative
contracts represents the estimated amount that would be received
for settling the outstanding contracts on December 31, 2015, and
will be different than what will eventually be realized. The fair
value of these assets at a particular point in time is affected by
underlying commodity prices, expected commodity price volatility
and the duration of the contract and is determined by the expected
future settlements of the underlying commodity. The gain or loss on
such contracts is made up of two components; the realized
component, which reflects actual settlements that occurred during
the period, and the unrealized component, which represents the
change in the fair value of the contracts during the period.
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For the year ended December 31, 2015 the Company recognized a
realized gain of $7,905,820 (2014 - $147,620 gain) on its settled
commodity price derivative contracts. For the year ended December
31, 2015 the Company recorded an unrealized loss of $6,449,262
(2014 - $6,217,813 gain) on unsettled commodity price derivative
contracts. The fair value of these contracts at December 31, 2015
was $(417,912) (December 31, 2014 $6,031,350).
Net loss
Net loss for the year ended December 31, 2015 decreased by 28%
to $5,121,188 ($0.01 loss per share, basic and diluted) compared to
$7,064,478 ($0.03 loss per share, basic and diluted) in the
comparative period in 2014. Net gain for the three-month period
ended December 31, 2015 increased by 496% to $17,254,644 compared
to net income of $2,896,659 in the comparative period in 2014. The
annual decrease in net loss during such periods was attributable to
the recorded gain on debt forgiveness of 5,254,079 and the
7,905,820 gain from hedging contract settlements during the current
period offset by lower commodity prices and production as a result
of the slowing in drilling activity in the Bone Spring play in New
Mexico, and the unrealized hedging gain of $6,217,813 recorded in
the comparative period.
Investments
Interest income for the year and three-months ended December 31,
2015 was $521 and $118, compared to $203 and $24 respectively in
2014. Interest was earned on the proceeds received from advances
made pursuant the Company's credit facilities and cash on hand. The
Company does not hold any asset backed commercial paper.
Funds flow from (used in) operations (Non-IFRS)
The following table reconciles the non-IFRS measure "funds flow
from (used in) operations" to "cash flows from (used in) operating
activities", the most comparable measure calculated in accordance
with IFRS. Cash flow from operations before changes in non-cash
working capital provides better information as it ignores timing
differences resulting primarily from fluctuations in payables and
receivables. As such it is a common measure used by management in
the oil and gas industry.
Three Months ended Twelve Months ended
December 31, December 31,
2015 2014 2015 2014
------------------------------- ------------ ---------- ---------- ------------
Cash flows from (used in)
operating activities (1,216,089) 5,656,763 6,253,678 5,165,728
Changes in non-cash working
capital 95,311 5,270,048 3,047,172 (1,075,858)
Funds flow (used in) provided
by operations (1,311,400) 386,715 3,206,506 6,241,586
Funds gain per share - basic
and diluted 0.00 0.00 0.01 0.03
The increase in funds flow from (used in) operations as compared
to the previous period is associated with the realized gains in
hedging contracts and a decrease in general and administrative
expense offset by the decreased revenues due to lower commodity
prices during 2015.
Net Loss Compared to Adjusted EBITDA (Non-IFRS)
Three Months ended Twelve Months ended
December 31, December 31,
2015 2014 2015 2014
----------------------------------- ------------- ------------ ------------ ------------
Net loss 17,254,644 2,896,659 (5,121,188) (7,064,478)
Add Back:
Financing costs 1,630,961 1,672,656 7,300,887 6,713,028
Depletion and depreciation 727,231 1,736,435 5,700,128 7,501,221
Accretion 8,745 9,653 35,881 36,195
Share-based compensation 109,813 358,622 235,320 610,849
Exploration and evaluation
impairments 142,100 723,124 142,100 1,045,875
Development and producing
recovery (17,451,220) - - -
Changes in derivative liabilities - 688,551 (168,934) (147,620)
Long term investment plan - 5,537 - 243,659
Loss on disposal of assets (5,000) 2,069 (514,445) 8,712,773
Changes in restricted cash
exchange valuation - - 20,337 -
Debt forgiveness (5,254,079) - (5,254,079) -
Bad debt expense - 90,091 - 90,091
Unrealized loss (gain) on
hedging contacts 2,670,248 (6,192,149) 6,449,262 (6,217,813)
Adjusted EBITDA (166,557) 1,991,248 8,825,269 11,523,780
Adjusted EBITDA per share
- basic and diluted (0.00) 0.01 0.02 0.05
----------------------------------- ------------- ------------ ------------ ------------
(1) Adjusted EBITDA consists of net income (loss) plus interest,
depreciation, depletion, amortization, accretion, impairment and
stock based compensation. Adjusted EBITDA is also adjusted for any
gains or losses from extraordinary, unusual or non-recurring items
and any gains or losses on disposition of assets. See "Non IFRS
Measures".
The table above sets forth a reconciliation of Adjusted EBITDA
to net loss, which is the most directly comparable measure of
financial performance, calculated under IFRS. The decreases in
Adjusted EBITDA for the year ended December 31, 2015 as compared to
the comparative period resulted from a combination of lower
commodity prices and production, which were partially offset by
realized gains on hedges.
Capital Expenditures
Three Months ended Twelve Months ended
December 31, December 31,
By Type ($) 2015 2014 2015 2014
----------------------------------- -------- ----------- ---------- -----------
Drilling and completions 211,206 11,776,514 2,714,247 40,248,911
Seismic - - - -
Facilities and lease equipment - - - -
Office furnishings and equipment - - - 47,942
Leasehold, geological and
geophysical 9,454 22,099 70,935 70,784
Other costs (recovery) - - - 594,710
----------------------------------- -------- ----------- ---------- -----------
Total 220,660 11,798,613 2,785,182 40,962,347
----------------------------------- -------- ----------- ---------- -----------
During the year ended December 31, 2015, Caza drilled 1.0 gross
well (0.147 net) in the Bone Spring play in New Mexico reflecting
the environment brought about by a 42% drop in commodity prices as
compared to this period in 2014.
Outstanding Share Data
Caza is authorized to issue an unlimited number of common shares
without par value. Holders of common shares are entitled to one
vote per share on all matters voted on a poll by shareholders, and
are entitled to receive dividends when and if declared by the board
of directors out of funds legally available for the payment of
dividends. Upon Caza's liquidation or winding up or other
distribution of its assets among its shareholders for the purpose
of winding up its affairs, holders of common shares are entitled to
share pro rata in any assets available for distribution to
shareholders after payment of all obligations of the Company.
Holders of common shares do not have any cumulative voting rights
or pre--emptive rights to subscribe for any additional common
shares.
On November 18, 2015, the Company issued 24,537,897 common
shares to YA Global Masters SPV Ltd. at a price of GBP0.004649 per
share pursuant to receiving a conversion notice in accordance with
the terms of the $4.0 million convertible unsecured loan.
On December 24, 2015, the Company closed a private placement of
9,479,419,937 common shares at US$0.0048 per share for gross
proceeds of US$45,500,000, issued 26,502,000 common shares of the
Company in exchange of 26,502,000 exchangeable shares in Caza
Petroleum Inc. ("Caza Petroleum") held by management. In addition,
29,878,886 common shares held by Global Master SPV Ltd. were
returned and cancelled as part of the debt repayments.
The following table sets forth the classes and number of
outstanding equity securities of the Company and the number of
issued and issuable common shares on a fully diluted basis.
Issued and Issuable Securities
Common Shares
Issued and outstanding 9,744,153,908
Issuable from exchangeable rights -
Issuable from exercise of warrants -
Issuable from exercise of stock options -
Issuable from exercise of performance awards (-)
Issuable pursuant to 2015 Convertible Loan - (2)
Total Common Shares issued and issuable 9,744,153,908
Warrants Issued and Outstanding
Warrants to purchase common shares outstanding -
Stock Options Issued
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Stock options outstanding -
(1) The amount payable pursuant to the Company's performance
awards shall vary depending on the satisfaction of certain
performance thresholds. Subject to the discretion of the board of
directors, the performance awards provide that one-half of any
award shall be satisfied by a cash payment and the other half-shall
be satisfied through an issuance of common shares. The board has
authorized the issuance of up to 4,289,608 common shares in
connection with the satisfaction of outstanding performance awards.
Such number assumes that outstanding awards will be paid at the
100% level (200% being the maximum) and that half of each such
award shall be satisfied through the issuance of shares. On March
19, 2015 the Board of Directors authorized the issuance of
2,051,308 shares under this performance awards program that were
issued during May 2015 leaving a balance of 2,238,300 shares
issuable. As a result of the private placement that closed on
December 24, 2015 all unissued performance awards were
repealed.
(2) The Company's obligations under the 2015 Convertible Loan
shall ordinarily be satisfied through the issuance of common
shares. The number of common shares issuable pursuant to the 2015
Convertible Loan is not ascertainable at this time and shall vary
depending on the trading price on the Alternative Investment Market
of the London Stock Exchange of the common shares from
time-to-time. Accordingly, the common shares issuable pursuant to
the 2015 Convertible Loan are not reflected in the total number of
common shares issued and issuable as disclosed in the above table.
As a result of the private placement and the Lender Settlement
Agreement, the Convertible Loan was retired on December 24,
2015.
Commitments
The following is a summary of the estimated amounts required to
fulfill Caza's remaining contractual commitments as at December 31,
2015:
Type of Obligation Total <1 Year 1-3 Years 4-5 Years Thereafter
($)
-------------------- ---------- -------- ---------- ---------- -----------
Operating leases 270,876 - 270,876 - -
Asset retirement
obligations 1,310,051 7,693 - 5,789 1,296,569
Total contractual
commitments 1,580,927 7,693 270,876 5,789 1,296,569
-------------------- ---------- -------- ---------- ---------- -----------
Liquidity and Capital Resources
On December 24, 2015, the Company closed a private placement of
9,479,419,937 common shares at US$0.0048 per share for gross
proceeds of US$45,500,000. Concurrently with Closing, the Company
paid an aggregate of US$43.5 million to YA Global Master SPV Ltd.,
GSC SICAV p.l.c. and to Apollo Investment Corporation, to
extinguish all debts and obligations owed to them by the Company
and its subsidiaries, as well as all oil and gas interests
previously granted to Apollo by the Company. The remaining proceeds
of the Private Placement have been allocated to working capital for
general corporate purposes, including payment of transaction
expenses.
On January 25, 2016, the Company's wholly owned subsidiary, Caza
Petroleum entered into a credit agreement for a five-year, senior
secured, reserve-based, revolving credit facility (the "Credit
Facility"). Pursuant to the credit agreement, the Credit Facility
commitment is a maximum US$100.0 million, governed by an initial
borrowing base of US$15.0 million, including a sub-facility for the
issuance of letters of credit up to a maximum aggregate face amount
of 10% of the borrowing base in effect.
Completion of the Private Placement, Credit Facility and the
settlements with the Company's former lenders and certain trade
creditors, has materially improved the Company's working capital
position and cash flow through the elimination of monthly interest
payments to Apollo of approximately US$450,000 and an overriding
royalty in respect of certain of its producing assets formerly held
by Apollo. These improvements in the Company's financial position
have secured its ability to continue as a going concern, eliminated
the significant uncertainties associated with the now-terminated
Apollo credit facility and have allowed it to obtain lower cost
capital, which may be used to implement its business plan when
commodity prices improve.
At December 31, 2015, Caza had a working capital deficit of
$1,833,299 as compared to a working capital deficit of $44,306,975
as at December 31, 2014. The difference of $42,481,370 is
reconciled in the table below.
Working Capital Reconciliation ($)
Working Capital as at December 31, 2014 (44,306,975)
Funds flow used in operations 3,206,506
Proceeds from convertible loan 3,595,534
Stock issuance 637,667
Derivative valuation changes 292,088
Capital expenditures (2,785,181)
Non-cash financing costs (1,138,517)
Unrealized (loss) - hedging (6,449,262)
Sale of assets 478,274
Asset retirement obligation (7,693)
Other miscellaneous items 83,255
Debt Forgiveness 44,561,005
Total Change in Working Capital (1,833,299)
Working Capital as at December 31, 2015
Caza had a cash balance of $1,624,080 as of December 31, 2015
(December 31, 2014 - $5,160,943).
Caza's 2016 operating plan calls for participation to be funded
from operating cash flows, existing cash resources, the Credit
Facility or other appropriate sources of funding if available. In
the event additional sources of financing become available the
Company would consider increases to its drilling program. The
Company is focused on securing appropriate levels of capitalization
to support its business strategy. As commodity prices or production
fluctuates, the Company intends to alter its capital program or
reduce costs in order to maintain an acceptable level of
capitalization.
The Company prepares annual budgets, which are updated as
necessary depending on varying factors, including current and
forecast commodity prices, changes in capital structure, execution
of the Company's business plan and general industry conditions.
See "Risk Factors" below
The Company has arranged for funding under the following
agreements:
Equity raise
On December 24, 2015, the Company closed a private placement of
9,467,419,937 common shares at US$0.0048 per share for gross
proceeds of US$45,500,000.
On July 4, 2014, the Company completed an equity raise of $10.0
million (approximately GBP5.9 million and CDN$10.7 million) through
the placing of 32,679,739 common shares at a price of GBP0.18
(approximately CDN$0.33) per share.
Credit Facility
On January 25, 2016, the Company's wholly owned subsidiary, Caza
Petroleum entered into a credit agreement for a five-year, senior
secured, reserve-based, revolving Credit Facility. Pursuant to the
credit agreement, the Credit Facility commitment is a maximum
US$100.0 million, governed by an initial borrowing base of US$15.0
million, including a sub-facility for the issuance of letters of
credit up to a maximum aggregate face amount of 10% of the
borrowing base in effect. Interest on loans under the Credit
Facility may be elected by Caza Petroleum to be based on LIBOR or a
base rate (determined as the greatest of the prime rate, federal
funds rate + 0.50% and adjusted LIBOR + 1%) from time to time, plus
a margin determined based upon utilization of the borrowing base
ranging from 2% to 3% for LIBOR loans and ranging from 1% to 2% for
base rate loans. The Credit Facility also requires Caza Petroleum
to pay a commitment fee equal to 0.50% per annum based on the
average daily unused portion of the borrowing base. Additionally,
upfront fees will be paid to the lender at closing in an amount
equal to 0.50% of the initial borrowing base. The Credit Facility
includes financial covenants tested on a quarterly basis, including
a maximum funded debt to EBITDAX ratio of 4.0x and a minimum
current asset to current liabilities ratio of 1.0x, each tested on
a consolidated basis for Caza Petroleum and its subsidiaries. The
Credit Facility also includes representations, warranties,
affirmative and negative covenants, events of default, remedial
provisions and other terms that are usual and customary for secured
reserve-based credit facilities. Subject to the borrowing base in
effect, the Credit Facility is available on a revolving basis
during the period commencing on the closing date and ending on the
fifth anniversary of the closing date, which is January 21,
2021.
The borrowing base is the loan value to be assigned to the
proved reserves attributable to the Company's proved oil and gas
properties, as evaluated in the most recent reserve report(s) and
delivered pursuant to the credit agreement. As of the closing date,
the borrowing base was set at US$15.0 million until the next
scheduled redetermination or as the borrowing base is otherwise
adjusted or redetermined. Redeterminations based on updated reserve
reports are scheduled semi-annually, and each of Caza Petroleum and
the lender has the ability to request one interim redetermination
in each six-month period between scheduled redeterminations. The
initial borrowing base redetermination will occur on July 1, 2016,
unless the borrowing base is adjusted or redetermined before such
date in accordance with the terms of the Credit Facility.
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The Credit Facility is guaranteed by Caza Petroleum's wholly
owned subsidiary, Caza Operating, LLC ("Caza Operating"), and the
collateral provided to secure the Credit Facility (and any hedges
or cash management obligations owing to the lender) consists of
substantially all of Caza Petroleum's and Caza Operating's
respective now owned or hereafter acquired personal property, as
well as at least 80% of the PV-9 of their oil and gas
properties.
Caza Petroleum and Caza Operating will use the proceeds of the
loans for (i) the payment of transaction fees and expenses in
connection with the closing of the Credit Facility; and (ii)
funding the working capital, capital expenditures and other general
corporate purposes of Caza Petroleum and Caza Operating.
Convertible Loan
On February 18, 2015, the Company obtained a $5,000,000 facility
under a convertible unsecured note agreement (the"2015 Convertible
Loan") with YA Global Master SPV Ltd., an investment fund managed
by Yorkville Advisors LLC and Global Market Neutral Strategies
SICAV P.L.C. An aggregate of $4,000,000 has been advanced to Caza
under such agreement. Additional tranches may be available with the
consent of the lenders. In December 24, 2015, the Company entered
into a private placement through a Lender Settlement Agreement with
the lenders whereby all debts and obligations under the Loan were
extinguished in consideration for payments of approximately
US$2,500,000.
Note Purchase Agreement
On May 23, 2013, the Company entered into a Note Purchase
Agreement (the "Note Agreement") with Apollo, an investment fund
managed by Apollo Investment Management, pursuant to which Apollo
agreed to purchase up to $50,000,000 of senior secured notes
("Notes") from the Company. In December 2015, the Company entered
into a Lender Settlement Agreement with Apollo whereby all debts
and obligations under the Note agreement and all oil and gas
interest previously granted by the Company in favour of Apollo,
were extinguished on December 24, 2015 in consideration for
payments of approximately US$41,025,000.
Standby Equity Distribution Agreement
The Company and Yorkville are party to a GBP6 million Standby
Equity Distribution Agreement ("SEDA") dated November 23, 2012. The
SEDA allows Caza to issue equity at a 5% discount to market to fund
loan repayments or well costs in certain circumstances. As at
December 31, 2015, the company has drawn down GBPnil (December 31,
2014 - GBPnil) under the SEDA. During 2015, the Company issued nil
(2014 - nil) common shares under the SEDA at an average price of
GBPnil (2014 - GBPnil) per share for gross proceeds of $nil (2014 -
$nil). The Company did not draw down on the SEDA facility in 2015
and 2014. The SEDA expires on April 30, 2016. As a result of the
Lender Settlement Agreement with Yorkville on December 24, 2015,
the SEDA facility was cancelled.
Equity Adjustment Agreement
The Company entered into an Equity Adjustment Agreement (the
"Adjustment Agreement") on March 5, 2013 with Yorkville. Pursuant
to the Adjustment Agreement, during the three months ended March
31, 2013, the Company issued 3,846,154 common shares to Yorkville
at a price of GBP0.13 per share for aggregate proceeds of
GBP500,000. On December 24, 2015, as part of the Lender Settlement
Agreement with Yorkville the Adjustment agreement was
cancelled.
Transactions with Related Parties
All related party transactions are in the normal course of
operations and have been measured at the agreed to exchange
amounts, which is the amount of consideration established and
agreed to by the related parties and which is comparable to those
negotiated with third parties.
Caza and its subsidiary Caza Petroleum Inc. may be considered to
be "related parties" for the purposes of Multilateral Instrument
61--101 of the Canadian Securities Administrators. As a result,
Caza may be required to obtain a formal valuation or disinterested
shareholder approval before completing certain transactions with
Caza Petroleum.
Summary of Quarterly Results
Three Three Three Three
months ended months ended months ended months ended
December September
31, 30, June 30, March 31,
2015 2015 2015 2015
---------------------------------- -------------- -------------- -------------- --------------
Petroleum and natural
gas sales 1,766,315 1,996,350 2,941,812 3,367,214
Net income (loss) 17,254,644 (17,791,270) (3,309,806) (1,274,754)
Per share - basic
and diluted 0.02 (0.07) (0.01) (0.01)
Funds flow from operations
(See note) (1) 3,206,500 910,868 2,225,718 1,381,323
Per share - basic
and diluted 0.00 0.00 0.01 0.01
Net capital expenditures 220,659 195,794 563,327 1,805,400
Average daily production
(boe/d) 574 594 744 917
Weighted average shares
outstanding 1,093,736,053 247,072,290 237,960,016 237,306,302
Three Three Three Three
months ended months ended months ended months ended
December September
31, 30, June 30, March 31,
2014 2014 2014 2014
---------------------------------- -------------- -------------- -------------- --------------
Petroleum and natural
gas sales 4,823,460 7,244,752 6,286,049 4,591,507
Net income (loss) 2,896,659 (7,743,772) (763,150) (1,454,212)
Per share - basic
and diluted 0.01 (0.04) (0.01) (0.01)
Funds flow from (used
in) operations (See
note) (1) 386,715 2,634,496 2,381,414 893,286
Per share - basic
and diluted 0.00 0.01 0.01 0.00
Net capital expenditures 11,798,613 5,865,917 13,681,171 9,616,646
Average daily production
(boe/d) 901 1,210 937 685
Weighted average shares
outstanding 236,355,884 214,210,273 199,323,039 187,917,370
(1) Calculated based on cash flow from operations before changes in non-cash working capital.
Factors that have caused variations over the quarters:
-- During 2014 and 2015 Caza commenced drilling of 15 (5.87 net)
wells. 13 (4.75 net) of the 15 wells were completed during that
period. As at December 31, 2015, 1 (0.5 net) well is undergoing
completion activities.
-- Capital expenditures and revenues from oil, natural gas and
NGL sales decreased during the three-month period ended December
31, 2015, as a result of the effects of falling commodity
prices.
Financial Instruments
The Company holds various forms of financial instruments. The
nature of these instruments and the Company's operations expose the
Company to commodity price, credit, share price and foreign
exchange risks. The Company manages its exposure to these risks by
operating in a manner that minimizes its exposure to the extent
practical.
Commodity Price Risk
The Company is subject to commodity price risk for the sale of
natural gas and other hydrocarbons. The Company has and may in the
future enter into forward commodity contracts for risk management
purposes, in order to protect all or a portion of its future cash
flow from the volatility of hydrocarbon commodity prices or to
satisfy contractual obligations under loan or other agreements with
third parties. See "Gain (Loss) on Risk Management Contracts" for
details regarding the Company's existing forward commodity
contracts.
Credit Risk
Credit risk arises when a failure by counter parties to
discharge their obligations could reduce the amount of future cash
inflows from financial assets on hand at the consolidated statement
of financial position date. A majority of the Company's financial
assets at the consolidated statement of financial position date
arise from natural gas liquids and natural gas sales and the
Company's accounts receivable that are with these customers and
joint venture participants in the oil & natural gas industry.
Industry standard dictates that commodity sales are settled on the
25th day of the month following the month of production. The
Company's natural gas and condensate production is sold to large
marketing companies. Typically, the Company's maximum credit
exposure to customers is revenue from two months of sales. During
the year ended December 31, 2015, the Company sold 58% (2014 - 61%)
of its natural gas and condensates to a single purchaser. These
sales were conducted on transaction terms that are typical for the
sale of natural gas and condensates in the United States. In
addition, when joint operations are conducted on behalf of a joint
interest partner relating to capital expenditures, costs of such
operations are paid for in advance to the Company by way of a cash
call to the partner of the operation being conducted.
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Caza management assesses quarterly whether there should be any
impairment of the financial assets of the Company. At December 31,
2015, the Company had past due accounts receivable from certain
joint interest partners of $102,665 which were outstanding for
greater than 60 days (December 31, 2014 - $340,342) and $98,242
that were outstanding for greater than 90 days (December 31, 2014 -
$481,887). At December 31, 2015, the Company's three largest joint
interest partners represented approximately 13%, 6% and 4% of the
Company's receivable balance (December 31, 2014 - 29%, 14% and 4%
respectively). The maximum exposure to credit risk is represented
by the carrying amount on the consolidated statement of financial
position of cash and cash equivalents, accounts receivable and
deposits.
Trade receivables disclosed above include amounts that are past
due at the end of the reporting period for which the Group has not
recognized an allowance for doubtful debts because there has not
been a significant change in credit quality and the amounts (which
include interest accrued after the receivable is more than 60 days
outstanding) are still considered recoverable. The Company manages
exposure on cash balances by holding cash with large and reputable
financial institutions. The Company also assesses the credit
worthiness of each counterparty before entering into contracts and
ensures the counterparties meet minimum credit quality
requirements.
Share Price Risk
Share price risk arises under the terms of the Adjustment
Agreement. As amended, such agreement provides that, if on December
31, 2015 the common share market price is greater than GBP0.13,
then Yorkville will pay to the Company the difference multiplied by
the number of common shares issued thereunder, and, if the market
price is less than GBP0.13, then the Company will pay to Yorkville
the difference multiplied by such number of common shares. As a
result of the Lender Settlement Agreement with Yorkville on
December 24, 2015, the Adjustment Agreement was cancelled.
Foreign Currency Exchange Risk
The Company is exposed to foreign currency exchange
fluctuations, as certain general and administrative expenses are or
will be denominated in Canadian dollars and United Kingdom pounds
sterling. The Company's sales of oil and natural gas are all
transacted in US dollars. At December 31, 2015, the Company
considers this risk to be relatively limited and not material and
therefore does not hedge its foreign exchange risk.
Fair Value of Financial Instruments
The Company has determined that the fair values of the financial
instruments consisting of cash and cash equivalents, accounts
receivable and accounts payable are not materially different from
the carrying values of such instruments reported on the balance
sheet due to their short-term nature. See "Gain (Loss) on Risk
Management Contracts" and "Share Price Risk" for details regarding
the fair value of the Company's existing forward commodity and
equity adjustment contracts, respectively.
All financial assets except for cash and cash equivalents which
are classified as held for trading, are classified as either loans
or receivables and are accounted for on an amortized cost basis.
All financial liabilities are classified as other liabilities.
There are no financial assets on the balance sheet that have been
designated as available-for-sale. There have been no changes to the
aforementioned classifications in the current fiscal period ended
December 31, 2015.
Liquidity Risk
Liquidity risk includes the risk that, as a result of our
operational liquidity requirements:
-- The Company will not have sufficient funds to settle a transaction on the due date;
-- The Company will be forced to sell assets at a value which is
less than what they are worth; or
-- The Company may be unable to settle or recover a financial asset at all.
The Company's operating cash requirements including amounts
projected to complete the Company's existing capital expenditure
program are continuously monitored and adjusted as input variables
change. These variables include but are not limited to, available
bank lines, natural gas production from existing wells, results
from new wells drilled, commodity prices, cost overruns on capital
projects and regulations relating to prices, taxes, royalties, land
tenure, allowable production and availability of markets. As these
variables change, liquidity risks may necessitate the Company to
conduct equity issues or obtain project debt financing. The Company
also mitigates liquidity risk by maintaining an insurance program
to minimize exposure to insurable losses. The financial liabilities
as at December 31, 2015 that subject the Company to liquidity risk
are accounts payable, accrued liabilities, notes payable and
derivative liabilities. The contractual maturity of these financial
liabilities is generally the following sixty days from the receipt
of the invoices for goods of services and can be up to the
following next six months, except for the notes payable which are a
long term financial liability which is due on demand in an event of
default. Management believes that current working capital will be
adequate to meet these financial liabilities as they become
due.
Critical Accounting Estimates
The policies discussed below are considered particularly
important as they require management to make informed judgments,
some of which may relate to matters that are inherently uncertain.
The financial statements have been prepared in accordance with
IFRS. In preparing financial statements, management makes certain
assumptions, judgments and estimates that affect the reported
amounts of assets, liabilities, revenues and expenses. The basis
for these estimates is historical experience and various other
assumptions that management believes to be reasonable. Actual
results could differ from the estimates under different assumptions
or conditions.
Reserves - The Company engages independent qualified reserve
evaluators to evaluate its reserves each year. Reserve
determinations involve forecasts based on property performance,
future prices, future production and the timing of expenditures;
all these are subject to uncertainty. Reserve estimates have a
significant impact on reported financial results as they are the
basis for the calculation of depreciation and depletion. Revisions
can change reported depletion and depreciation and earnings;
downward revisions could result in a ceiling test write down.
Decommissioning Liabilities - The Company provides for the
estimated abandonment costs using a fair value method based on cost
estimates determined under current legislative requirements and
industry practice. The amount of the liability is affected by the
estimated cost per well, the timing of the expenditures and the
discount factor used. These estimates will change and the revisions
will impact future accretion, depletion and depreciation rates.
Income taxes - The utilization of deferred tax assets subject to
an expiry date are based on estimates of future cash flows and
profitability. By their nature, these estimates are subject to
measurement uncertainty and the effect on the financial statements
of changes of estimates in future periods could be significant.
Share-based Compensation - The Black-Scholes option pricing
model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully
transferable. This model is used to value the stock options
granted. In addition, option pricing models require the input of
highly subjective assumptions including the expected stock price
volatility. Changes in the subjective input assumptions can
materially affect the fair value estimates as reflected in the
consolidated financial statements
Certain of our accounting policies require that we make
appropriate decisions with respect to the formulation of estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. For a discussion about those
accounting policies, please refer to our annual management's
discussion and analysis and Note 2 of the corresponding audited
consolidated financial statements for the year ended December 31,
2015 available at www.sedar.com.
Future Accounting Pronouncements
On May 28, 2014, the IASB issued IFRS 15 - Revenue from
Contracts with Customers, a new standard that specifies recognition
requirements for revenue as well as requiring entities to provide
the users of financial statements with more informative and
relevant disclosures. The standard replaces IAS 11 - Construction
Contracts and IAS 18 - Revenue as well as a number of
revenue-related interpretations. The Company will adopt the
standard for reporting periods beginning January 1, 2017. The
Company is currently evaluating the impact of adoption of this
standard and the effect on Caza's consolidated financial statements
has not yet been determined.
Since November 2009, the IASB has been in the process of
completing a three phase project to replace IAS 39, "Financial
Instruments: Recognition and Measurement" with IFRS 9 "Financial
Instruments", which includes requirements for hedge accounting,
accounting for financial assets and liabilities and impairment of
financial instruments. As of February 2014, the mandatory effective
date of IFRS 9 has been tentatively set to January 1, 2018. The
Company is assessing the effect of this future pronouncement on its
financial statements.
The Company will continue to monitor standards development as
issued by the IASB and the AcSB as well as regulatory developments
as issued by the CSA, which may affect the timing, nature or
disclosure of its adoption of IFRS.
Risk Factors
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Investors should carefully consider the risk factors set out
below and consider all other information contained herein and in
the Company's other public filings before making an investment
decision. The risks and uncertainties set out below and elsewhere
in this Annual Information Form are not the only ones facing the
Corporation. Additional risks and uncertainties not presently known
to the Corporation or that the Corporation currently considers
immaterial may also impair the business and operations of the
Corporation and Caza Petroleum or cause the price of the Common
Shares to decline. If any of the following risks actually occur,
the Corporation's business may be harmed and the financial
condition and results of operations may suffer significantly. In
that event, the trading price of the Common Shares could decline
and holders of Common Shares may lose all or part of their
investment.
Stage of Development
An investment in the Corporation is subject to certain risks
related to the nature of the Corporation's business and its early
stage of development. There are numerous factors which may affect
the success of the Corporation's business which are beyond the
Corporation's control including local, national and international
economic and political conditions. The Corporation's business
involves a high degree of risk which a combination of experience,
knowledge and careful evaluation may not overcome. The Corporation
has no earnings and there can be no assurance that the
Corporation's business will be successful or profitable or that
additional commercial quantities of crude oil and natural gas will
be discovered by the Corporation. The Corporation has not paid any
dividends and it is unlikely to pay dividends in the immediate or
foreseeable future.
Substantial Capital Requirements
The Corporation anticipates making substantial capital
expenditures for the acquisition, exploration, development and
production of oil and natural gas reserves in the future. The
Corporation's current revenues are not sufficient to fund these
activities and the Corporation may not have access to the capital
necessary to undertake or complete future drilling programs. In
addition, uncertain levels of near term industry activity coupled
with the present global financial uncertainty exposes the
Corporation to additional access to capital risk. There can be no
assurance that debt or equity financing will 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 the Corporation. The inability of the
Corporation to access sufficient capital for its operations could
have a material adverse effect on the Corporation's business.
Availability of Funding and Ability to Continue as Going
Concern
The Corporation's cash flow is and may not be sufficient to fund
its ongoing activities. The Corporation currently intends to rely
on certain existing sources of funding. Availability of these is
dependent on the satisfaction of certain conditions and there can
be no assurance such sources will remain available to the
Corporation in the future. From time to time, the Corporation may
also require additional financing in order to carry out its oil and
gas acquisition, exploration and development activities. The lack
of availability of existing financing or the failure to obtain
additional financing on a timely basis could cause the Corporation
to forfeit its interest in certain properties, miss certain
acquisition opportunities and reduce or terminate its operations,
and may affect the Corporation's ability to expend the capital
required to replace its reserves or to maintain its production.
There can be no assurance that additional debt or equity financing
will be available to meet these requirements or, if available, on
terms acceptable to the Corporation. This may be complicated by the
limited market liquidity for the shares of smaller companies,
restricting access to some institutional investors. Continued
uncertainty in domestic and international credit markets could also
materially affect the Corporation's ability to access sufficient
capital for its capital expenditures and acquisitions. Furthermore,
if additional financing is raised through the issuance of equity,
control of the Corporation may change and the shareholders may
suffer dilution. The Corporation may also consider asset
dispositions or farm-out or joint venture arrangements in order to
fund or implement its exploration and development activities;
however, there can be no assurance that the Corporation will be
able to secure such dispositions or arrangements on acceptable
terms or at all. The inability of the Corporation to access
sufficient capital for its operations and/or to secure acceptable
alternative arrangements may have a material adverse effect on the
Corporation's ability to execute its business strategy and on its
business, financial condition, results of operations and prospects.
If the Corporation is unable to satisfy its obligations or
otherwise commits an event of default under its existing credit
arrangements, the Corporation's lenders may receive a judgment and
have a claim on the Corporation's assets. The proceeds of any sale
of assets would be applied to satisfy amounts owed to the
creditors. Only after the proceeds of that sale were applied
towards the debt would the remainder, if any, be available for
distribution to shareholders.
Global Financial Conditions and Recession
Market events and conditions, including disruptions in the
international credit markets and other financial systems and the
deterioration of global economic conditions, have caused
significant volatility to commodity prices. These conditions have
caused a loss of confidence in the broader U.S. and global credit
and financial markets and resulting in government intervention in
major banks, financial institutions and insurers and creating a
climate of greater volatility, less liquidity, widening of credit
spreads, a lack of price transparency, increased credit losses and
tighter credit conditions. Notwithstanding various actions by
governments, concerns about the general condition of the capital
markets, financial instruments, banks, investment banks, insurers
and other financial institutions caused the broader credit markets
to further deteriorate and stock markets to decline substantially.
Although economic conditions have improved, the recovery from the
recession has been slow in various jurisdictions including in
Europe and the United States and has been impacted by various
ongoing factors including high sovereign debt levels, concerns
regarding defaults by certain governments, particularly in Europe,
and high levels of unemployment, which continue to impact commodity
prices and to result in high volatility in the stock market.
Competitive Conditions
The oil and natural gas industry is highly competitive and Caza
and its subsidiaries compete with a substantial number of other
companies that have greater resources. Many of these companies
explore for, produce and market oil and natural gas, carry on
refining operations and market the resultant products on a
worldwide basis. The primary areas in which the Corporation and its
subsidiaries encounter substantial competition are in locating and
acquiring desirable leasehold acreage for drilling and development
operations, locating and acquiring attractive producing oil and
natural gas properties, and obtaining purchasers and transporters
of the oil and natural gas they produce. Many of these competitors
have financial, technical and other resources substantially greater
than those of the Corporation. To the extent that these companies
enjoy technological advantages, they may be able to implement new
technologies more rapidly than Caza and its subsidiaries. There is
also competition between producers of oil and natural gas and other
industries producing alternative energy and fuel. The inability to
acquire desirable properties, assets or service providers as a
result of competition may have a material adverse effect on Caza's
business, financial condition, results of operations and trading
price of the Common Shares.
Share Price Volatility
The share price of emerging companies can be highly volatile.
The price at which the Common Shares are traded and the price at
which investors may realize their Common Shares will be influenced
by a large number of factors, some specific to Caza and its
operations and some which may affect companies trading on exchanges
generally. These factors may include the performance of the
Corporation and its subsidiaries, large purchases or sales of the
Common Shares, legislative changes and general economic, political
or regulatory conditions. Prospective investors should be aware
that the value of an investment in the Corporation may go down as
well as up and that the market price of the Common Shares may not
reflect the underlying value of Caza. Investors may therefore
realize less than, or lose all of, their investment.
Crude Oil and Natural Gas Exploration and Development
Crude oil and natural gas exploration involves a high degree of
risk and there is no assurance that expenditures made on future
exploration or development activities by the Corporation and its
subsidiaries will result in discoveries of crude oil, condensate or
natural gas that are commercially or economically feasible to
produce and sell. It is difficult to project the costs of
implementing any exploratory drilling program due to the inherent
uncertainties of drilling in unknown formations, the shortages of
and delays in the availability of drilling rigs and equipment, the
costs associated with encountering various drilling conditions such
as over pressured zones and tools lost in the hole, and changes in
drilling plans and locations as a result of prior exploratory wells
or additional seismic data and interpretations thereof.
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The Corporation's operations are subject to all the risks
normally associated with the exploration, development and operation
of crude oil and natural gas properties and the drilling of crude
oil and natural gas wells, including encountering unexpected
formations or pressures, mechanical failures, premature declines of
reservoirs, environmental damage, blow outs, cratering, fires and
spills, all of which could result in personal injuries, loss of
life and damage to property of the Corporation and others. In
accordance with customary industry practice the Corporation and its
subsidiaries do maintain insurance coverage, but are not fully
insured against all risks, nor are all such risks insurable.
Environmental regulation is becoming increasingly stringent and
costs and expenses of regulatory compliance are increasing.
Exploration, appraisal and development of crude oil and natural
gas reserves are speculative and involve a significant degree of
risk. Few properties that are explored are ultimately developed
into new reserves. If at any stage the Corporation and its
subsidiaries are precluded from pursuing their exploration or
development program, or such program is otherwise not continued,
the Corporation's business, financial condition and/or results of
operations and, accordingly, the trading price of the Common Shares
is likely to be materially adversely affected.
Reserves and Future Net Revenue Estimates
There are numerous uncertainties inherent in estimating
quantities of proved, probable and possible reserves and cash flows
to be derived from reserves, including many factors beyond the
control of the Corporation. The reserves and cash flow information
set forth in this Annual Information Form represent estimates only.
The reserves and estimated future net cash flows from Caza
Petroleum's properties have been independently evaluated by NSAI in
the NSAI Report with an effective date of December 31, 2015. The
Corporation owns 100% of Caza Petroleum. This evaluation includes a
number of assumptions relating to factors such as initial
production rates, production decline rates, ultimate recovery of
reserves, timing and amount of capital expenditures, marketability
of production, future prices of crude oil and natural gas,
operating costs, abandonment and salvage values, royalties,
government levies that may be imposed over the producing life of
the reserves and reserves which are currently undiscovered but may
be discovered at a future date. These assumptions were based on
price forecasts in use at the date the relevant evaluations were
prepared and many of these assumptions are subject to change and
are beyond the control of the Corporation. Actual production and
cash flows derived there from will vary from these evaluations, and
such variations could be material. Due to the limited history of
Caza Petroleum's producing wells, a significant portion of its
reserves have not been estimated on a decline curve analysis of
production, but rather on a volumetric basis which assumes certain
characteristics of the reservoir.
The present value of estimated future net revenues referred to
herein should not be construed as the current market value of
estimated crude oil and natural gas reserves attributable to Caza
Petroleum's properties. The estimated discounted future net
revenues from reserves are based upon price and cost estimates
which may vary from actual prices and costs and such variance could
be material. Actual future net revenues will also be affected by
factors such as the amount and timing of actual production, supply
and demand for crude oil and natural gas, curtailments or increases
in consumption by purchasers and changes in governmental
regulations or taxation.
Title to Properties
At the Corporation's development stage, its primary emphasis
presently is upon acquiring oil and gas leasehold interests in its
prospects and properties for purposes of assembling drilling
prospects and drilling wells. Those leasehold interests may be
acquired by various means, including direct acquisition from the
owner of the mineral estate, farmout and farmin agreements with
current holders of leasehold interests, participation and
exploration agreements by which Caza or its subsidiaries join with
other industry participants to share the costs of acquisition,
exploration, and/or development costs, and other forms of
agreement. In the case of farmout, farmin, participation and
exploration agreements, a party may assume certain obligations to
pay certain monies, acquire leases, drill wells, and/or share in
other costs in order to acquire an interest in a given prospect or
well. Pursuant to such agreements, one party may pay or otherwise
bear the costs of another party as consideration for earning an
interest, which is known as a "carry", or a "carried interest". In
essence, the party bearing the costs in such an arrangement has a
contractual right to earn an interest in the leases, equipment, and
production associated with a given property. Once such leasehold
interests are initially earned, depending upon the agreement, a
party may relinquish or otherwise forfeit interests or the
opportunity to earn additional interests in the future if the
earning party fails to continue to bear its share of ongoing or
future obligations associated with drilling, maintenance, and
development operations.
Caza Petroleum and other subsidiaries of the Corporation have
entered such types of agreements with respect to many of their
principal prospects and properties, but not all. As to certain
prospects and properties, these subsidiaries have entered multiple
such agreements which may create complex earning scenarios. As a
result, the subsidiaries must perform, or continue to perform,
certain obligations in order to earn, or to retain, interests
and/or the right to earn interests in the future. As to a number of
properties and prospects, leasehold interests must be earned
through the drilling and funding of oil and gas wells upon the
respective lands. In addition, often parties to such agreements
must make participation elections, which potentially may result in
their forfeiture of interests, or alternatively, their right to
acquire additional interests resulting from forfeitures by other
parties. Such elections may occur more than once during the process
of drilling a well. The Corporation's subsidiaries future
performance under such agreements, coupled with the performance and
elections by other parties, can cause these interests to increase
or decrease over the time period during which such performance and
elections must occur.
At the exploration stage, it is a common practice in the oil and
gas industry to employ the services of landmen to review the
recorded public records on file to determine the current record
title interest owners to the mineral estate beneath a specific
tract of land. Since the mineral and surface estates can be severed
from one another, it is not uncommon for oil and gas companies to
focus on the mineral estate, for mineral leasing purposes, rather
than the surface estate. In a competitive situation, this procedure
is also utilized because the time periods necessary to order more
thorough abstracts of title and to identify the record title
ownership for mineral estates in various tracts of land could place
the company at a competitive disadvantage.
Such preliminary title reviews are useful in the determination
of apparent title to the subject lands but are subject to error and
subject to other matters of record that may burden, diminish or
defeat a company's interests in the acquired lands. Caza Petroleum
generally employs reputable landmen who are experienced in title
searches in the areas in which Caza Petroleum seeks to acquire
interests, and the work product of those landmen are ordinarily
believed to be accurate for the lands identified and pursued.
Prior to drilling a well, and after leases are secured based
upon the preliminary title investigation, a more complete title
review may be commissioned, or an abstract of title may be
acquired, for purposes of preparing a formal drilling title
opinion. Certified abstracts include copies of documents that
affect ownership under a given tract of land. Such documents may
include evidence of liens and encumbrances, defects in title,
boundary conflicts, legal proceedings, competing claims to title,
prior leases, regulatory restrictions, and similar factors. The
drilling title opinion, if any, is prepared by a title attorney,
and examines and discusses certain title elements, identifies
certain title issues, and may recommend certain steps to pursue in
resolving any such issues prior to drilling an oil or gas well.
Title opinions, if any, may be prepared prior to the actual
drilling of a well. They may, however, be commissioned prior to the
purchase of leases where the size of the tract, the amount of lease
bonus at risk, or known complexities in title warrant a detailed
investigation before acquiring leases.
Caza and its subsidiaries frequently rely upon landmen to
perform title reviews for purposes of acquiring leasehold
interests. The Corporation's subsidiaries also review the
preliminary title reviews, or title opinions if available, of
companies from which it acquires interests or with which it enters
agreements to earn such interests. In some cases, a title attorney
may be employed to review the ownership of the mineral estate prior
to acquiring leases from the owner of the mineral estate, and that
review may or may not, depending upon the circumstances, address
other estates in the lands (e.g., the surface ownership) and the
elements stated above.
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Thus, although title reviews have been and may continue to be
performed according to standard industry practice prior to the
acquisition of most crude oil and natural gas leases or rights to
acquire leases in prospects and properties or the commencement of
drilling wells, such reviews do not guarantee or preclude that an
unidentified or latent defect in the chain of title will not exist,
or that a third party claim will not arise that burdens, diminishes
or defeats the claim of the Corporation or its subsidiaries which
could result in a reduction of the revenue received by the
Corporation or its subsidiaries and could have a material adverse
effect on the Corporation's business, financial condition, results
of operations and trading price, if any, of the Common Shares. In
addition, the Corporation's subsidiaries may elect to accept
certain risks in connection with title to its oil and gas prospects
and properties, and acceptance of such risks can result in loss of
title to all or a portion of one or more given properties, title
curative costs, re-acquisition costs, and/or a reduction in the
revenue received by the Corporation or its subsidiaries and could
have a material adverse effect on the Corporation's business,
financial condition, results of operations, and trading price of
the Common Shares.
Volatility of Crude Oil and Natural Gas Prices and Markets
The Corporation's financial condition, operating results and
future growth are dependent on the prevailing prices for crude oil
and natural gas production. Historically, the markets for crude oil
and natural gas have been volatile and such markets are likely to
continue to be volatile in the future. Prices for crude oil and
natural gas are subject to large fluctuations in response to
relatively minor changes to the demand for crude oil and natural
gas, whether the result of uncertainty or a variety of additional
factors beyond the control of the Corporation. The Corporation and
its subsidiaries must periodically negotiate contracts with a
limited number of potential purchasers. The price negotiated is
influenced by the size of the crude oil or natural gas stream, the
nature of the crude oil or natural gas and its location when
produced. Any substantial decline in the prices of crude oil and
natural gas could have a material adverse effect on the Corporation
and the level of its crude oil and natural gas reserves.
Additionally, the economics of producing from some wells may change
as a result of lower prices, which could result in a suspension of
production. No assurance can be given that crude oil and natural
gas prices will be sustained at levels which will enable the
Corporation or its subsidiaries to operate profitably. The
Corporation and its subsidiaries avail themselves of forward sales
or other forms of hedging activities from time to time in
accordance with the Note Purchase Agreement with a view to
mitigating its exposure to the risk of price volatility. Such
agreements may result in sales of crude oil and natural gas which
are greater or less than the prevailing spot prices for such
products, which will result in realized or unrealized gains or
losses for the Corporation. Further details regarding these swap
arrangements are set forth in Note 12 of Caza's audited annual
financial statements for the year ending December 31, 2015.
Environmental Regulation and Risks
Extensive federal, state and local environmental laws and
regulations in the United States affect all of the operations of
the Corporation and its subsidiaries. These laws and regulations
set various standards regulating certain aspects of health and
environmental quality, provide for penalties and other liabilities
for the violation of such standards, and establish in certain
circumstances obligations to remediate current and former
facilities and locations where operations are or were conducted. In
addition, special provisions may be appropriate or required in
environmentally sensitive areas of operation. There can be no
assurance that the Corporation or its subsidiaries will not incur
substantial financial obligations in connection with environmental
compliance.
Significant liability could be imposed on the Corporation or its
subsidiaries for damages, clean-up costs or penalties in the event
of certain discharges into the environment, environmental damage
caused by previous owners of properties purchased by the
Corporation's subsidiaries or non-compliance with environmental
laws or regulations. Such liability could have a material adverse
effect on the Corporation. Moreover, the Corporation cannot predict
what environmental legislation or regulations will be enacted in
the future or how existing or future laws or regulations will be
administered or enforced. Compliance with more stringent laws or
regulations, or more vigorous enforcement policies of any
regulatory authority, could in the future require material
expenditures by the Corporation or its subsidiaries for the
installation and operation of systems and equipment for remedial
measures, any or all of which may have a material adverse effect on
the Corporation and could have a material adverse effect on the
Corporation's business, financial condition, results of operations
and trading price of the Common Shares.
Loss of Key Personnel
The Corporation depends to a large extent on the efforts and
continued employment of the Management Team, who have developed the
operations of Caza Petroleum and its predecessors since inception.
The loss of the services of these officers or other key personnel
could adversely affect the Corporation's business, and the
Corporation does not maintain key man insurance on any of these
persons. The success of drilling operations and other activities
integral to its business will depend in part on the ability to
attract and retain experienced geologists, engineers and other
professionals. Competition for experienced geologists, engineers
and some other professionals is extremely intense. The
Corporation's ability to compete in the oil and natural gas
exploration and production industry will be harmed to the extent
that the Corporation and its subsidiaries are unable to retain and
attract experienced technical personal.
Operating and Insurance Risks
The operations of the Corporation and its subsidiaries are
subject to hazards and risks inherent in drilling for, producing
and transporting crude oil and natural gas. These risks include,
among others, fires, explosions, geologic formations with abnormal
pressures, collapses of casing surrounding the drill pipe in wells,
mechanical failures, failure of oilfield drilling and service
tools, uncontrollable flows of underground natural gas, oil and
formation water, changes in below ground pressure in a formation
that causes the surface to collapse or crater, pipeline ruptures
and cement failures, and environmental hazards such as leaks,
spills and toxic discharges. These risks can cause substantial
losses resulting from personal injury or loss of life, damage and
destruction of property and equipment, pollution and other
environmental damage, regulatory investigations and penalties, and
suspension of operations. As protection against operating hazards
and in accordance with customary industry practices, the
Corporation and its subsidiaries maintain insurance coverage
against some, but not all, potential losses because the insurance
coverage is not available or because premium costs are considered
too high. Losses could occur for uninsured risks or in amounts
exceeding the insurance coverage and these losses could have a
materially adverse effect on the Corporation's business, financial
condition, results of operations and trading price of the Common
Shares.
Need to Add Reserves
The Corporation's crude oil and natural gas reserves and
production, and therefore its cash flows and earnings are highly
dependent upon the Corporation developing and increasing its
current reserve base and discovering or acquiring additional
reserves. Without the addition of reserves through exploration,
acquisition or development activities, the Corporation's reserves
and production will decline over time as reserves are depleted. To
the extent that cash flow from operations is insufficient and
external sources of capital become limited or unavailable, the
Corporation and its subsidiaries may be unable to make the capital
investments required to maintain and expand their crude oil and
natural gas reserves. There can be no assurance that the
Corporation or its subsidiaries will be able to find and develop or
acquire additional reserves to replace production at commercially
feasible costs. Failure to replace reserves could have a material
adverse effect on Caza's business, financial condition, results of
operations and trading price of the Common Shares.
Industry Conditions
The crude oil and natural gas industry is intensely competitive
and the Corporation and its subsidiaries compete with other
companies which possess greater technical and financial resources.
Many of these competitors not only explore for and produce crude
oil and natural gas, but also carry on refining operations and
market petroleum and other products on an international basis.
Crude oil and natural gas production operations are also subject to
all the risks typically associated with such operations, including
but not limited to premature decline of reservoirs and invasion of
water into producing formations.
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The marketability and price of crude oil and natural gas which
may be acquired or discovered by the Corporation or its
subsidiaries will be affected by numerous factors beyond the
control of the Corporation. Pricing of crude oil is dependent on
supply and demand for specific qualities of crude oil in specific
market areas and quality differentials are therefore subject to
change with time. The ability of the Corporation and its
subsidiaries to market any natural gas discovered may depend upon
its ability to acquire space on pipelines which deliver natural gas
to commercial markets. The Corporation is also subject to market
fluctuations in the prices of crude oil and natural gas,
uncertainties related to the delivery of its reserves to pipelines
and processing facilities and extensive government regulation
relating to prices, taxes, royalties, land tenure, allowable
production, the export of crude oil and natural gas and many other
aspects of the crude oil and natural gas business.
The Corporation and its subsidiaries are also subject to a
variety of waste disposal, pollution control and similar
environmental laws and regulations in each of the jurisdictions in
which the Corporation or its subsidiaries operate or may operate.
Environmental regulations place restrictions and prohibitions on
emissions of various substances produced concurrently with crude
oil and natural gas and can impact the selection of drilling sites
and facility locations, potentially resulting in increased capital
expenditures. The Corporation and its subsidiaries may be
responsible for abandonment and site restoration costs.
Non-Operator Activities
The Corporation's subsidiaries do not operate all of the
properties in which they have an interest. Some properties are
operated by other companies, and the Corporation and its
subsidiaries have limited ability to influence or control the
operation or future development of these non-operated properties or
the amount of capital expenditures that may be required to fund
their operation. Dependence on the operator and other working
interest owners for these projects and the limited ability to
influence or control the operation and future development of these
properties could have a material adverse effect on the realization
of targeted returns or lead to unexpected future costs.
Inability to Bring Actions or Enforce Judgments by United
Kingdom Investors
The Corporation is incorporated under the laws of Canada, and
its principal executive offices are located in the United States. A
majority of the directors and officers of the Corporation reside
principally in the United States and all or a substantial portion
of the Corporation's assets and the assets of these persons are
located outside the United Kingdom. Consequently, it may not be
possible for an investor to effect service of process within the
United Kingdom on the Corporation or those persons. Furthermore, it
may not be possible for an investor to enforce judgments obtained
in United Kingdom courts based upon the civil liability provisions
of United Kingdom securities laws or other laws of the United
Kingdom against the Corporation or those persons. There is doubt as
to the enforceability in original actions in Canadian courts of
liabilities deriving from English's securities laws, and as to the
enforceability in Canadian courts of judgments of English courts
obtained in actions based upon the civil liability provisions of
English securities laws.
Equipment Unavailability
Caza Petroleum does not own the drilling rigs and related
equipment required to develop its oil and gas properties and relies
on third parties to provide drilling and other oil field services.
Demand is high for equipment and services in the geographic areas
that Caza Petroleum has selected for exploration and development.
This demand may reduce the availability of that equipment and
services and could delay Caza Petroleum's exploration, development
and exploitation activities. The leases under which Caza Petroleum
develops properties provide time periods during which it must
generate production of oil or gas or the lease expires. Any delay
that prevented completion of drilling on leased property during the
term of the lease would require additional expenditures by Caza
Petroleum to renew the lease or possibly the loss of any benefit
from past development expenditures and future production revenue.
In addition, the high demand for equipment and services increases
the costs to Caza Petroleum of the equipment and associated
supplies and personnel. Any substantial delays to gain access to
equipment and services or material increases in costs could
adversely affect Caza Petroleum's business and financial condition
and have a material adverse effect on Caza's business, financial
condition, results of operations and trading price of the Common
Shares.
Potential Conflicts of Interest
There are potential conflicts of interest to which some of the
directors and officers of the Corporation are subject in connection
with the operations of the Corporation. Some of the directors and
officers are material shareholders of Caza Petroleum or are engaged
and will continue to be engaged in the search for crude oil and
natural gas interests on their own behalf and on behalf of other
corporations, and situations may arise where the directors and
officers will be in direct competition with the Corporation.
Conflicts of interest, if any, which arise will be subject to and
be governed by procedures prescribed by the BCBCA which require a
director or officer of a corporation who is a party to or is a
director or an officer of or has a material interest in any person
who is a party to a material contract or proposed material contract
with the Corporation, to disclose his interest and to refrain from
voting on any matter in respect of such contract unless otherwise
permitted under the BCBCA.
Operating Through Subsidiaries
The Corporation currently conducts all of its operations through
its subsidiary, Caza Petroleum. Therefore the Corporation will be
dependent on the cash flows of Caza Petroleum and its subsidiaries
to meet its obligations. The ability of Caza Petroleum and its
subsidiaries to make payments to the Corporation may be constrained
by among other things: the level of taxation, particularly
corporate profits and withholding taxes, in the jurisdiction in
which it operates.
In addition, the Corporation and Caza Petroleum may be
considered to be "related parties" for the purposes of Multilateral
Instrument 61-101 of the Canadian Securities Administrators and
Caza or Caza Petroleum may therefore be required to obtain a formal
valuation or disinterested shareholder approval before completing
certain transactions with the other party.
Risks of Foreign Operations
All of the Corporation's crude oil and natural gas properties
and operations are located in the United States. As such, the
Corporation is subject to political, economic, and other
uncertainties, including, but not limited to, changes in energy
policies, currency fluctuations and royalty and tax increases and
other risks arising out of foreign governmental sovereignty over
the areas in which the Corporation's operations are conducted, as
well as risks of loss due to terrorism. The Corporation's
operations may also be adversely affected by laws and policies of
Canada affecting foreign trade, taxation and investment. In the
event of a dispute arising in connection with the Corporation's
operations in the United States, the Corporation may be subject to
the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdictions of
the courts of Canada or enforcing Canadian judgments in such other
jurisdictions. Accordingly, the Corporation's exploration,
development and production activities in the United States could be
substantially affected by factors beyond the Corporation's control,
any of which could have a material adverse effect on the
Corporation's business, financial condition, results of operations
and trading price of the Common Shares.
Fluctuations in Foreign Currency Exchange Rates
All of the Corporation's operations are located in the United
States and all of the Corporation's sales are denominated in U.S.
dollars. The SEDA and certain conversion formulae under the
Convertible Loan Agreement are denominated in pounds sterling.
Fluctuations in the U.S. dollar or pound sterling exchange rates
may cause a negative impact on revenue and costs or on the
Corporation's ability to raise capital and could have a material
adverse impact on the Corporation's operations.
Marketability of Production
The ability to generate revenue is dependent upon Caza
Petroleum's ability to market its production. The marketability of
such production depends in part upon a variety of factors, some of
which are beyond Caza Petroleum's control. Some of these factors
include the ability to:
-- transport its crude oil and natural gas to market;
-- access processing facilities and refining capacity; and
-- obtain required regulatory approvals.
Caza Petroleum delivers oil and natural gas through pipelines
and gathering systems and on barges that it does not own. These
facilities may not be available to Caza Petroleum in the future.
Other factors influencing the marketability of production include
the nature of the crude oil produced, the availability and capacity
of production gathering systems and pipelines, U.S. federal and
state control and regulation of crude oil and natural gas
production, transportation, and export and government intervention
in the internal energy demand and supply balance. If marketability
factors change, the impact on Caza Petroleum's ability to generate
revenues and operate profitably could be substantial.
Seasonal Nature of the Business
(MORE TO FOLLOW) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
Seasonal weather conditions and lease stipulations can limit
drilling and producing activities and other oil and natural gas
operations in certain areas of the Texas Gulf Coast region. These
seasonal anomalies can increase competition for equipment, supplies
and personnel during the spring and summer months, which could lead
to shortages and increase costs or delay operations. Such cost
increases or delays could have a material adverse effect on Caza's
business, financial condition, results of operations and trading
price of the Common Shares.
Terrorism
On September 11, 2001, the United States was the target of
terrorist attacks of unprecedented scope, and the United States and
others instituted military action in response. These conditions
caused instability in world financial markets and generated global
economic instability. The continued threat of terrorism, the impact
of military and other action, including U.S. military operations in
Iraq and Afghanistan and the geopolitical conditions in the Middle
East generally may lead to continued volatility in prices for crude
oil and natural gas and could affect the markets for Caza
Petroleum's production. In addition, future acts of terrorism could
be directed against companies operating in the United States.
Further, the U.S. government has issued public warnings that
indicate that energy assets might be specific targets of terrorist
organizations. These developments have subjected Caza Petroleum's
operations to increased risks and, depending on their ultimate
magnitude, could have a material adverse effect on Caza's business,
financial condition, results of operations and trading price of the
Common Shares.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Chief Executive Officer and the Chief Financial Officer are
responsible for establishing and maintaining internal control over
financial reporting (ICFR), as such term is defined in National
Instrument 52-109 Certification of Disclosure in Issuers' Annual
and Interim Filings, for Caza. They have, as at the financial year
ended December 31, 2015, designed ICFR, or caused it to be designed
under their supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
The control framework our officers used to design Caza's ICFR is
the Internal Control -- Integrated Framework (COSO Framework)
published by The Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Under the supervision of the Chief Executive Officer and the
Chief Financial Officer, Caza conducted an evaluation of the
effectiveness of our ICFR as at December 31, 2015 based on the COSO
Framework. Based on this evaluation, the officers concluded that
Caza's ICFR was effective as of December 31, 2015.
There were no changes in our ICFR during the year end December
31, 2015 that materially affected, or are reasonably likely to
materially affect, Caza's internal control over financial
reporting.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Caza's Chief Executive Officer and Chief Financial Officer have
designed, or caused to be designed under their supervision,
disclosure controls and procedures to provide reasonable assurance
that: (i) material information relating to the Company is made
known to Caza's Chief Executive Officer and Chief Financial Officer
by others, particularly during the period in which the annual
filings are being prepared; and (ii) information required to be
disclosed by the Company in its annual filings, interim filings or
other reports filed or submitted by it under securities legislation
is recorded, processed, summarized and reported within the time
period specified in securities legislation. Such officers have
evaluated, or caused to be evaluated under their supervision, the
effectiveness of Caza's disclosure controls and procedures at the
financial year end of the Company and have concluded that the
Company's disclosure controls and procedures are effective at the
financial year end of the Company.
ADDITIONAL INFORMATION
Further information regarding the Company, including its Annual
Information Form, can be accessed under the Company's public
filings found at http://www.sedar.com and on the Company's website
at www.cazapetro.com.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SDESSFFMSEID
(END) Dow Jones Newswires
March 31, 2016 02:01 ET (06:01 GMT)
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