2021 ANNUAL RESULTS, MD&A AND RESERVES REPORT
This Announcement contains inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 ("MAR"). Upon the publication of this Announcement, this inside information is now considered to be in the public domain.
26 April 2022
NOT FOR RELEASE, DISTRIBUTION, PUBLICATION, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO OR FROM THE UNITED STATES, AUSTRALIA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE TO DO SO MIGHT CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION.
Arrow Exploration Corp.
("Arrow" or the "Company")
2021 annual RESULTS, filing of audited financial statements, MD&A and reserves report
Arrow Exploration Corp. (AIM: AXL ; TSXV: AXL), the high-growth operator with a portfolio of assets across key Colombian hydrocarbon basins, is pleased to announce the filing of its Annual Audited Financial Statements and MD&A for the year and quarter-ended December 31, 2021 and the filing of its 2021 year-end reserve report, which are available on SEDAR (www.sedar.com). All dollar figures are in U.S. dollars, except as otherwise noted.
Arrow Exploration's Audited Financial Statements together with the notes related thereto, as well as Arrow's Management's Discussion and Analysis for the years ended December 31, 2021 and 2020, will be available shortly on Arrow's website at www.arrowexploration.ca
FINANCIAL AND OPERATING HIGHLIGHTS
Financial and operating highlights for quarter include the following:
|
|
Three months ended December 31, 2021 |
Year ended December 31, 2021 |
Three months ended December 31, 2020 |
Year ended December 31, 2020 |
|
Total natural gas and crude oil revenues, net of royalties |
3,038,832 |
6,512,493 |
368,139 |
5,320,565 |
|
|
|
|
|
|
|
Funds flow from (used in) operations (1) |
(403,007) |
(145,503) |
(1,535,047) |
(4,006,609) |
|
Per share - basic ($) and diluted ($) |
(0.00) |
(0.00) |
(0.02) |
(0.06) |
|
|
|
|
|
|
|
Net income (loss) |
6,960,035 |
5,693,532 |
(7,953,001) |
(32,233,092) |
|
Per share - basic ($) and diluted ($) |
0.04 |
0.06 |
(0.12) |
(0.47) |
|
Adjusted EBITDA (1) |
540,642 |
804,674 |
(1,210,966) |
(2,903,782) |
|
Weighted average shares outstanding: |
|
|
|
|
|
Basic |
171,345,885 |
94,553,391 |
68,674,602 |
68,674,602 |
|
Diluted |
173,035,572 |
96,243,078 |
68,674,602 |
68,674,602 |
|
Common shares end of period |
213,389,623 |
213,389,623 |
68,674,602 |
68,674,602 |
|
Capital expenditures |
1,991,163 |
2,221,643 |
89,198 |
889,928 |
|
Cash and cash equivalents |
10,878,508 |
10,878,508 |
11,473,204 |
11,473,204 |
|
Current assets |
12,806,502 |
12,806,502 |
15,958,652 |
15,958,652 |
|
Current liabilities |
4,800,428 |
4,800,428 |
17,891,592 |
17,891,592 |
|
Working capital (deficit) (1) |
8,006,074 |
8,006,074 |
(1,932,940) |
(1,932,940) |
|
Long-term portion of restricted cash (2) |
- |
- |
460,283 |
460,283 |
|
Total assets |
41,195,798 |
41,195,798 |
33,532,299 |
33,532,299 |
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
|
|
|
|
|
Natural gas and crude oil production, before royalties |
|
|
|
|
|
Natural gas (Mcf/d) |
1,550 |
704 |
442 |
530 |
|
Natural gas liquids (bbl/d) |
- |
7 |
5 |
6 |
|
Crude oil (bbl/d) |
455 |
344 |
62 |
367 |
|
Total (boe/d) |
712 |
468 |
140 |
461 |
|
|
|
|
|
|
|
Operating netbacks ($/boe) (1) |
|
|
|
|
|
Natural gas ($/Mcf) |
$1.87 |
$1.51 |
$1.05 |
$0.51 |
|
Crude oil ($/bbl) |
$34.42 |
$34.35 |
($98.26) |
$2.85 |
|
Total ($/boe) |
$27.35 |
$27.55 |
($39.03) |
$3.16 |
(1) Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
(2) Long term restricted cash not included in working capital
2021 Year-End Reserves
Arrow has also filed, on SEDAR, the Company's Statement of Reserves Data and Other Oil and Gas Information, Report on Reserves Data by Independent Qualified Reserves Evaluator, and Report of Management and Directors on Oil and Gas Disclosure for the year ended December 31, 2021, as required by section 2.1 of National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (together, the "Reserve Report").
To recap, the Company's Year-End 2021 Company Gross Reserves Highlights include:
· 3,048 Mboe of Proved Reserves ("1P Reserves");
· 7,421 Mboe of Proved plus Probable Reserves ("2P Reserves");
· 11,541 Mboe of Proved plus Probable plus Possible Reserves ("3P Reserves")1;
· 1P Reserves estimated net present value before income taxes of US$29.4 million calculated at a 10% discount rate;
· 2P Reserves estimated net present value before income taxes of US$84.1 million calculated at a 10% discount rate; and
· 3P Reserves estimated net present value before income taxes of US$134 million calculated at a 10% discount rate.
Arrow refers readers to the Company's press release of March 30, 2022 for additional details, as well as to the Reserve Report filed on SEDAR.
Discussion of Operating Results
The Company's Q4 2021 average corporate production was 712 boe/d, an increase of 137 boe/d compared to Q3 2021 average corporate production of 575 boe/d, or 24%.
The increase in production quarter-over-quarter was largely attributable to the Canadian operation following the tie-in of the West Pepper well in Alberta, Canada which was brought into production in December 2021.
The Company's production on a year-to-date, sequential quarterly, and year-over-year quarterly basis is summarized below.
|
Average Production by Property (Boe/d) |
YTD 2021 |
Q4 2021 |
Q3 2021 |
Q2 2021 |
Q1 2021 |
Q4 2020 |
|
LLA-23 |
- |
|
- |
- |
- |
7 |
|
Oso Pardo |
70 |
123 |
137 |
20 |
- |
- |
|
Ombu (Capella) |
120 |
190 |
193 |
97 |
- |
- |
|
Rio Cravo Este (Tapir) |
153 |
142 |
151 |
147 |
174 |
56 |
|
Total Colombia |
344 |
455 |
481 |
264 |
174 |
62 |
|
Fir, Alberta |
76 |
82 |
94 |
67 |
68 |
78 |
|
Pepper, Alberta |
46 |
181 |
- |
- |
- |
- |
|
TOTAL (Boe/d) |
461 |
719 |
575 |
331 |
242 |
140 |
Discussion of Financial Results
During Q4 2021 the Company continued to realize strong oil and gas prices, as summarized below.
Average Benchmark and Realized Prices
|
|
Three months ended December 31 |
Years ended December 31 |
||||
|
2021 |
2020 |
Change |
2021 |
2020 |
Change |
|
|
Benchmark Prices |
|
|
|
|
|
|
|
AECO ($/Mcf) |
$3.89 |
$2.18 |
78% |
$2.91 |
$1.68 |
73% |
|
Brent ($/bbl) |
$79.80 |
$45.21 |
77% |
$70.78 |
$43.28 |
64% |
|
West Texas Intermediate ($/bbl) |
$77.31 |
$42.73 |
81% |
$68.09 |
$39.65 |
72% |
|
Realized Prices |
|
|
|
|
|
|
|
Natural gas, net of transportation ($/Mcf) |
$3.37 |
$2.48 |
35% |
$3.19 |
$1.84 |
73% |
|
Natural gas liquids ($/bbl) |
$56.43 |
$35.40 |
59% |
$54.01 |
$27.60 |
96% |
|
Crude oil, net of transportation ($/bbl) |
$55.50 |
$46.18 |
20% |
$58.62 |
$38.52 |
52% |
|
Corporate average, net of transport ($/boe)(1) |
$44.15 |
$29.47 |
50% |
$47.37 |
$33.14 |
43% |
(1) Non-IFRS measures - see "Non-IFRS Measures" section within the MD&A
The Company also realized strong operating netbacks, as summarized below.
Operating Netbacks
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
Natural Gas ($/Mcf) |
|
|
|
|
|
Revenue, net of transportation expense |
$3.37 |
$2.48 |
$3.19 |
$1.84 |
|
Royalties |
(0.34) |
(0.17) |
(0.33) |
(0.16) |
|
Operating expenses |
(1.15) |
(1.26) |
(1.35) |
(1.17) |
|
Operating netback(1) |
$1.87 |
$1.05 |
$1.51 |
$0.51 |
|
Crude oil ($/bbl) |
|
|
|
|
|
Revenue, net of transportation expense |
$55.50 |
$46.18 |
$58.62 |
$38.52 |
|
Royalties |
(3.60) |
(0.46) |
(5.37) |
(1.76) |
|
Operating expenses |
(17.48) |
(143.98) |
(18.90) |
(33.91) |
|
Operating netback(1) |
$34.42 |
($98.26) |
$34.35 |
$2.85 |
|
Corporate ($/boe) |
|
|
|
|
|
Revenue, net of transportation expense |
$44.15 |
$29.47 |
$47.37 |
33.14 |
|
Royalties |
(2.95) |
(1.16) |
(4.31) |
(1.62) |
|
Operating expenses |
(13.85) |
(67.34) |
(15.51) |
(28.36) |
|
Operating netback (1) |
$27.35 |
($39.03) |
$27.55 |
$3.16 |
(1) Non-IFRS measure
The Company experienced a decrease in operating netbacks during Q4 2021 as compared to Q3 2021, decreasing to $27.35/boe in Q4 2021 from $30.73/boe in Q3 2021. The decrease in operating netbacks is attributable to lower realized price for crude sales associated with the Company's share in its Ombu/Capella block in Q4 2021.
The Company incurred capital expenditures during Q4 2021 of $2 million mainly related to its West Pepper well. At the end of Q4 2021, the Company had a positive working capital position of $8 million, and a cash position of $10.9 million.
On October 25, 2021, the Company raised approximately £8.8 million (C$15 million), through a placing and subscription for new common shares with new investors, Canacol Energy Ltd., and executive management (together, the "Fundraising") and published an AIM Admission Document in connection with the admission of the enlarged share capital of the Company to trading on the AIM Market of the London Stock Exchange plc. The Fundraising consisted of the placement and subscription of 140,949,545 new common shares at an issue price of £0.0625 (C$0.106125) per new common share. The Company's executive management invested approximately C$1.41 million and Canacol participated in the subscription to hold 19.9% of the enlarged share capital. Investors received one warrant for every two new common shares, exercisable at C$0.15282 per new common share for 24 months from the AIM admission date (October 25, 2021). The net proceeds of the Fundraising, together with the Company's existing funds, are expected to be used to drill two wells at Rio Cravo Este, and will also be deployed in drilling the Carrizales Norte-1 exploration well.
On 24 November 2021, the Company also announced that it had raised C$395,375 on a non-brokered private placement basis through the issuance of 3,765,476 new common shares of no-par value ("Common Shares") on the same terms as the Fundraising . Investors received one warrant for every two Common Shares, exercisable for 24 months from the closing date.
For further Information, contact:
|
Arrow Exploration |
|
|
Marshall Abbott, CEO |
+1 403 651 5995 |
|
Joe McFarlane, CFO |
+1 403 818 1033 |
|
|
|
|
Arden Partners |
|
|
Ruari McGirr / Richard Johnson (Corporate) |
+44 (0)20 7614 5900 |
|
Seb Wykeham / Simon Johnson (Broking) |
|
|
|
|
|
Auctus Advisors |
|
|
Jonathan Wright (Corporate) |
+ 44 (0)7711 627449 |
|
Rupert Holdsworth Hunt (Broking) |
|
|
|
|
|
Camarco (Financial PR) |
|
|
James Crothers |
+44 (0)20 3781 8331 |
|
Rebecca Waterworth |
|
|
Billy Clegg |
|
About Arrow Exploration Corp.
Arrow Exploration Corp. (operating in Colombia via a branch of its 100% owned subsidiary Carrao Energy S.A.) is a publicly-traded company with a portfolio of premier Colombian oil assets that are under-exploited, under-explored and offer high potential growth. The Company's business plan is to expand oil production from some of Colombia's most active basins, including the Llanos, Middle Magdalena Valley (MMV) and Putumayo Basin. The asset base is predominantly operated with high working interests, and the Brent-linked light oil pricing exposure combines with low royalties to yield attractive potential operating margins. Arrow's 50% interest in the Tapir Block is contingent on the assignment by Ecopetrol SA of such interest to Arrow. Arrow's seasoned team is led by a hands-on executive team supported by an experienced board. Arrow is listed on the AIM market of the London Stock Exchange and on TSX Venture Exchange under the symbol "AXL".
Forward-looking Statements
This news release contains certain statements or disclosures relating to Arrow that are based on the expectations of its management as well as assumptions made by and information currently available to Arrow which may constitute forward-looking statements or information ("forward-looking statements") under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that Arrow anticipates or expects may, could or will occur in the future (in whole or in part) should be considered forward-looking statements. In some cases, forward-looking statements can be identified by the use of the words "continue", "expect", "opportunity", "plan", "potential" and "will" and similar expressions. The forward-looking statements contained in this news release reflect several material factors and expectations and assumptions of Arrow, including without limitation, Arrow's evaluation of the impacts of COVID-19, the potential of Arrow's Colombian and/or Canadian assets (or any of them individually), the prices of oil and/or natural gas, and Arrow's business plan to expand oil and gas production and achieve attractive potential operating margins. Arrow believes the expectations and assumptions reflected in the forward-looking statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct.
The forward-looking statements included in this news release are not guarantees of future performance and should not be unduly relied upon. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. The forward-looking statements contained in this news release are made as of the date hereof and the Company undertakes no obligations to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Neither the TSX-V nor its Regulation Services Provider (as that term is defined in the policies of the TSX-V) accepts responsibility for the adequacy or accuracy of this release.
Arrow Exploration Corp.
MANAGEMENT's DISCUSSION AND ANALYSIS
YEAR ended DECEMBER 31, 2021
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Management's Discussion and Analysis ("MD&A") as provided by the management of Arrow Exploration Corp. ("Arrow" or the "Company"), is dated as of April 25, 2022 and should be read in conjunction with Arrow's annual consolidated financial statements and related notes for the year ended December 31, 2021. Additional information relating to Arrow is available under Arrow's profile on www.sedar.com .
Advisories
Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS"), and all amounts herein are expressed in United States dollars, unless otherwise noted, and all tabular amounts are expressed in United States dollars, unless otherwise noted. Additional information for the Company may be found on SEDAR at www.sedar.com.
Advisory Regarding Forward‐Looking Statements
This MD&A contains certain statements or disclosures relating to Arrow that are based on the expectations of its management as well as assumptions made by and information currently available to Arrow which may constitute forward-looking statements or information ("forward-looking statements") under applicable securities laws. All such statements and disclosures, other than those of historical fact, which address activities, events, outcomes, results or developments that Arrow anticipates or expects may, could or will occur in the future (in whole or in part) should be considered forward-looking statements. In some cases, forward-looking statements can be identified by the use of the words "believe", "continue", "could", "expect", "likely", "may", "outlook", "plan", "potential", "will", "would" and similar expressions. In particular, but without limiting the foregoing, this MD&A contains forward-looking statements pertaining to the following: the COVID-19 pandemic and its impact; tax liability; capital management strategy; capital structure; credit facilities and other debt; performance by Canacol (as defined herein) and the Company in connection with the Note (as defined herein) and letters of credit; Arrow's costless collar structure; Arrow's interest in the OBC Pipeline (as defined herein) and the consequences thereof; cost reduction initiatives; potential drilling on the Tapir block; capital requirements; expenditures associated with asset retirement obligations; future drilling activity and the development of the Rio Cravo Este structure on the Tapir Block. Statements relating to "reserves" and "resources" are deemed to be forward-looking information, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated and can be profitably produced in the future.
The forward-looking statements contained in this MD&A reflect several material factors and expectations and assumptions of Arrow including, without limitation: current and anticipated commodity prices and royalty regimes; the impact and duration of the COVID-19 pandemic; the financial impact of Arrow's costless collar structure; availability of skilled labour; timing and amount of capital expenditures; future exchange rates; commodity prices; the impact of increasing competition; general economic conditions; availability of drilling and related equipment; receipt of partner, regulatory and community approvals; royalty rates; future operating costs; effects of regulation by governmental agencies; uninterrupted access to areas of Arrow's operations and infrastructure; recoverability of reserves; future production rates; timing of drilling and completion of wells; pipeline capacity; that Arrow will have sufficient cash flow, debt or equity sources or other financial resources required to fund its capital and operating expenditures and requirements as needed; that Arrow's conduct and results of operations will be consistent with its expectations; that Arrow will have the ability to develop its oil and gas properties in the manner currently contemplated; current or, where applicable, proposed industry conditions, laws and regulations will continue in effect or as anticipated; that the estimates of Arrow's reserves and production volumes and the assumptions related thereto (including commodity prices and development costs) are accurate in all material respects; that Arrow will be able to obtain contract extensions or fulfil the contractual obligations required to retain its rights to explore, develop and exploit any of its undeveloped properties; and other matters.
Arrow believes the material factors, expectations and assumptions reflected in the forward-looking statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct. The forward-looking statements included in this MD&A are not guarantees of future performance and should not be unduly relied upon.
Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements including, without limitation: the impact and duration of the COVID-19 pandemic; the impact of general economic conditions; volatility in commodity prices; industry conditions including changes in laws and regulations including adoption of new environmental laws and regulations, and changes in how they are interpreted and enforced; competition; lack of availability of qualified personnel; the results of exploration and development drilling and related activities; obtaining required approvals of regulatory authorities; counterparty risk; risks associated with negotiating with foreign governments as well as country risk associated with conducting international activities; commodity price volatility; fluctuations in foreign exchange or interest rates; environmental risks; changes in income tax laws or changes in tax laws and incentive programs; changes to pipeline capacity; ability to secure a credit facility; ability to access sufficient capital from internal and external sources; risk that Arrow's evaluation of its existing portfolio of development and exploration opportunities is not consistent with future results; that production may not necessarily be indicative of long term performance or of ultimate recovery; and certain other risks detailed from time to time in Arrow's public disclosure documents including, without limitation, those risks identified in Arrow's 2018 AIF, a copy of which is available on Arrow's SEDAR profile at www.sedar.com. Readers are cautioned that the foregoing list of factors is not exhaustive and are cautioned not to place undue reliance on these forward-looking statements.
Non‐IFRS Measures
The Company uses non-IFRS measures to evaluate its performance which are measures not defined in IFRS. Working capital, funds flow from operations, realized prices, operating netback, adjusted EBITDA, and net debt as presented do not have any standardized meaning prescribed by IFRS and therefore may not be comparable with the calculation of similar measures for other entities. The Company considers these measures as key measures to demonstrate its ability to generate the cash flow necessary to fund future growth through capital investment, and to repay its debt, as the case may be. These measures should not be considered as an alternative to, or more meaningful than net income (loss) or cash provided by operating activities or net loss and comprehensive loss as determined in accordance with IFRS as an indicator of the Company's performance. The Company's determination of these measures may not be comparable to that reported by other companies.
Working capital is calculated as current assets minus current liabilities; funds from operations is calculated as cash flows from (used in) operating activities adjusted to exclude settlement of decommissioning obligations and changes in non-cash working capital balances; realized price is calculated by dividing gross revenue by gross production, by product, in the applicable period; operating netback is calculated as total natural gas and crude revenues minus royalties, transportation costs and operating expenditures; adjusted EBITDA is calculated as net income (loss) adjusted for interest, income taxes, depreciation, depletion, amortization and other similar non-recurring or non-cash charges; and net debt is defined as the principal amount of its outstanding debt, less working capital items.
The Company also presents funds from operations per share, whereby per share amounts are calculated using weighted- average shares outstanding consistent with the calculation of net loss and comprehensive loss per share.
A reconciliation of the non-IFRS measures is included as follows:
|
(in United States dollars) |
Three months ended December 31, 2021 |
Year ended December 31, 2021 |
Three months ended December 31, 2020 |
Year ended December 31, 2020 |
|
Net income (loss) |
6,960,035 |
5,693,532 |
(7,953,001) |
(32,233,092) |
|
Add/(subtract): |
|
|
|
|
|
Share based payments |
241,438 |
(84,668) |
906,152 |
1,169,766 |
|
Financing costs: |
|
|
|
|
|
Accretion on decommissioning obligations |
34,160 |
132,807 |
62,075 |
524,477 |
|
Interest |
246,449 |
797,943 |
418,578 |
238,230 |
|
Other |
(76,358) |
46,216 |
723,710 |
903,597 |
|
Depreciation and depletion |
511,813 |
1,622,937 |
139,014 |
2,049,411 |
|
Derivative income |
(467,507) |
(467,507) |
- |
- |
|
Gain on disposition of oil and gas properties |
- |
- |
(1,059,474) |
(1,059,474) |
|
Impairment (reversal) of oil and gas properties |
(5,617,776) |
(5,617,776) |
- |
27,263,110 |
|
Income taxes, current and deferred |
(1,291,612) |
(1,318,810) |
5,551,979 |
(1,759,807) |
|
Adjusted EBITDA (1) |
540,642 |
804,674 |
(1,210,966) |
(2,903,782) |
|
|
|
|
|
|
|
Cash flows used in operating activities |
(922,307) |
(4,506,160) |
(905,274) |
(2,298,094) |
|
Minus - Changes in non‑cash working capital balances: |
|
|
|
|
|
Trade and other receivables |
(327,190) |
(1,817,008) |
(326,360) |
(2,255,190) |
|
Restricted cash |
- |
(262,489) |
262,489 |
262,489 |
|
Taxes receivable |
(900,017) |
(940,634) |
(1,050,973) |
(689,860) |
|
Deposits and prepaid expenses |
113,602 |
244,917 |
(86,132) |
(193,813) |
|
Inventory |
(137,252) |
217,759 |
(131,013) |
(148,467) |
|
Accounts payable and accrued liabilities |
1,770,157 |
6,918,112 |
702,216 |
1,316,326 |
|
Funds flow from (used in) operations (1) |
(403,007) |
(145,503) |
(1,535,047) |
(4,006,609) |
(1) Non-IFRS measures
The term barrel of oil equivalent ("boe") is used in this MD&A. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 thousand cubic feet ("Mcf") of natural gas to one barrel of oil ("bbl") is used in the MD&A. This conversion ratio of 6:1 is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
FINANCIAL AND OPERATING HIGHLIGHTS
|
(in United States dollars, except as otherwise noted) |
Three months ended December 31, 2021 |
Year ended December 31, 2021 |
Three months ended December 31, 2020 |
Year ended December 31, 2020 |
|
Total natural gas and crude oil revenues, net of royalties |
3,038,832 |
6,512,493 |
368,139 |
5,320,565 |
|
|
|
|
|
|
|
Funds flow from (used in) operations (1) |
(403,007) |
(145,503) |
(1,535,047) |
(4,006,609) |
|
Per share - basic ($) and diluted ($) |
(0.00) |
(0.00) |
(0.02) |
(0.06) |
|
|
|
|
|
|
|
Net income (loss) |
6,960,035 |
5,693,532 |
(7,953,001) |
(32,233,092) |
|
Per share - basic ($) and diluted ($) |
0.04 |
0.06 |
(0.12) |
(0.47) |
|
Adjusted EBITDA (1) |
540,642 |
804,674 |
(1,210,966) |
(2,903,782) |
|
Weighted average shares outstanding - basic and diluted: |
|
|
|
|
|
Basic |
171,345,885 |
94,553,391 |
68,674,602 |
68,674,602 |
|
Diluted |
173,035,572 |
96,243,078 |
68,674,602 |
68,674,602 |
|
Common shares end of period |
213,389,623 |
213,389,623 |
68,674,602 |
68,674,602 |
|
Capital expenditures |
1,991,163 |
2,221,643 |
89,198 |
889,928 |
|
Cash and cash equivalents |
10,878,508 |
10,878,508 |
11,473,204 |
11,473,204 |
|
Current assets |
12,806,502 |
12,806,502 |
15,958,652 |
15,958,652 |
|
Current liabilities |
4,800,428 |
4,800,428 |
17,891,592 |
17,891,592 |
|
Working capital (deficit) (1) |
8,006,074 |
8,006,074 |
(1,932,940) |
(1,932,940) |
|
Long-term portion of restricted cash (2) |
- |
- |
460,283 |
460,283 |
|
Total assets |
41,195,798 |
41,195,798 |
33,532,299 |
33,532,299 |
|
|
|
|
|
|
|
Operating |
|
|
|
|
|
|
|
|
|
|
|
Natural gas and crude oil production, before royalties |
|
|
|
|
|
Natural gas (Mcf/d) |
1,550 |
704 |
442 |
530 |
|
Natural gas liquids (bbl/d) |
- |
7 |
5 |
6 |
|
Crude oil (bbl/d) |
455 |
344 |
62 |
367 |
|
Total (boe/d) |
712 |
468 |
140 |
461 |
|
|
|
|
|
|
|
Operating netbacks ($/boe) (1) |
|
|
|
|
|
Natural gas ($/Mcf) |
$1.87 |
$1.51 |
$1.05 |
$0.51 |
|
Crude oil ($/bbl) |
$34.42 |
$34.35 |
($98.26) |
$2.85 |
|
Total ($/boe) |
$27.35 |
$27.55 |
($39.03) |
$3.16 |
(1) Non-IFRS measures - see "Non-IFRS Measures" section within this MD&A
(2) Long term restricted cash not included in working capital
The Company
Arrow is a junior oil and gas company engaged in the acquisition, exploration and development of oil and gas properties in Colombia and Western Canada. The Company's shares trade on the TSX Venture Exchange and the London AIM exchange under the symbol AXL.
The Company and Arrow Exploration Ltd. entered into an arrangement agreement dated June 1, 2018, as amended, whereby the parties completed a business combination pursuant to a plan of arrangement under the Business Corporations Act (Alberta) ("ABCA") on September 28, 2018. Arrow Exploration Ltd. and Front Range's then wholly-owned subsidiary, 2118295 Alberta Ltd., were amalgamated to form Arrow Holdings Ltd., a wholly-owned subsidiary of the Company (the "Arrangement"). On May 31, 2018, Arrow Exploration Ltd. entered in a share purchase agreement, as amended, with Canacol Energy Ltd. ("Canacol"), to acquire Canacol's Colombian oil properties held by its wholly-owned subsidiary Carrao Energy S.A. ("Carrao"). On September 27, 2018, Arrow Exploration Ltd. closed the agreement with Canacol.
On May 31, 2018, Arrow Exploration Ltd., entered into a purchase and sale agreement to acquire a 50% beneficial interest in a contract entered into with Ecopetrol S.A. pertaining to the exploration and production of hydrocarbons in the Tapir block from Samaria Exploration & Production S.A. ("Samaria"). On September 27, 2018, Arrow Exploration Ltd. closed the agreement with Samaria. As at December 31, 2021 the Company held an interest in six oil blocks in Colombia and oil and natural gas leases in seven areas in Canada as follows:
|
|
|
Gross Acres |
Working Interest |
Net Acres |
|
COLOMBIA |
|
|
|
|
|
Tapir |
Operated |
65,125 |
50% |
32,563 |
|
Oso Pardo |
Operated |
672 |
100% |
672 |
|
Ombu |
Non-operated |
56,482 |
10% |
5,648 |
|
COR-39 |
Operated |
95,111 |
100% |
95,111 |
|
Los Picachos |
Non-operated |
52,772 |
37.5% |
19,790 |
|
Macaya |
Non-operated |
195,255 |
37.5% |
73,221 |
|
Total Colombia |
|
465,417 |
|
227,005 |
|
CANADA |
|
|
|
|
|
Ansell |
Operated |
640 |
100% |
640 |
|
Fir |
Non operated |
7,680 |
32% |
2,457 |
|
Penhold |
Non-operated |
480 |
13% |
61 |
|
Pepper |
Operated |
23,680 |
100% |
23,680 |
|
Wapiti |
Non-operated |
1,280 |
13% |
160 |
|
Total Canada |
|
33,760 |
|
26,998 |
|
TOTAL |
|
499,177 |
|
254,003 |
The Company's primary producing assets are located in Colombia in the Tapir, Oso Pardo and Ombu blocks, with natural gas production in Canada at Fir and Pepper, Alberta.
Llanos Basin
Within the Llanos Basin, the Company is engaged in the exploration, development and production of oil within the Tapir block. In the Llanos Basin most oil accumulations are associated with three-way dip closure against NNE-SSW trending normal faults and can have pay within multiple reservoirs. The Tapir block contain large areas not yet covered by 3D seismic, and in Management's opinion offer substantial exploration upside.
Middle Magdalena Valley ("MMV") Basin
Oso Pardo Field
The Oso Pardo Field is located in the Santa Isabel Block in the MMV Basin. It is a 100% owned property operated by the Company. The Oso Pardo field is located within a Production Licence covering 672 acres. Three wells have been drilled to date within the License area.
Ombu E&P Contract - Capella Conventional Heavy Oil Discovery
The Caguan Basin covers an area of approximately 60,000 km2 and lies between the Putumayo and Llanos Basins. The primary reservoir target is the Upper Eocene aged Mirador formation. The Capella structure is a large, elongated northeast-southwest fault-related anticline, with approximately 17,500 acres in closure at the Mirador level. The field is located approximately 250 km away from the nearest offloading station at Neiva, where production from Capella is trucked.
The Capella No. 1 discovery well was drilled in July 2008 and was followed by a series of development wells. The Company earned a 10% working interest in the Ombu E&P Contract by paying 100% of all activities associated with the drilling, completion, and testing of the Capella No. 1 well.
Fir, Alberta
The Company has an average non-operated 32% WI in 12 gross (3.84 net) sections of oil and natural gas rights and 17 gross (4.5 net) producing natural gas wells at Fir. The wells produce raw natural gas into the Cecilia natural gas plant where it is processed.
Pepper, Alberta
During December 2021, the Dalehurst 06-26-52-23W5 well ("West Pepper Well") located near Edson, Alberta, Canada was brought on stream. Initial stabilized production rates were 6.2 MMscf/d of natural gas, or over 1,030 boe/d, at 7,214 kPa tubing pressure, 30,048 kPa casing pressure, and with no water production.
Year ended December 31, 2021 Financial and Operational Highlights
· For the year ended December 31, 2021, Arrow recorded $6,512,493 in revenues, net of royalties, on crude oil sales of 105,759 bbls, 2,685 bbls of natural gas liquids ("NGL's") and 256,865 Mcf of natural gas sales;
· Funds used in operations of $145,503;
· Adjusted EBITDA was $804,674;
· Net income of $6,512,493;
· Resumed production in its Oso Pardo and Ombu (Capella) blocks in Colombia at the rate of 130 and 160 bbls/d, respectively (Arrow's share);
· Completed a $12 million financing and its listing at the AIM exchange in London;
· Brought on production stream the West Pepper well.
Three Months Ended December 31, 2021 Financial and Operational Highlights
· For the three months ended December 31, 2021, Arrow recorded $3,038,832 in revenues, net of royalties, on crude oil sales of 49,024 bbls, 1,004 bbls of natural gas liquids ("NGL's") and 142,404 Mcf of natural gas sales, which represents a 100% increase when compared to Q3 2021;
· Funds used in operations of $403,007;
· Adjusted EBITDA for the three months was $540,642;
· Net income of $6,960,035;
· Brought on production stream the West Pepper well.
Annual 2021 Reserve Highlights
· 3,048 Mboe of Proved Reserves, net increase of 118 Mboe compared to 2020;
· 7,421 Mboe of Proved plus Probable Reserves, net decrease of 387 Mboe;
· Proved reserves estimated net present value, before income taxes, of US$29 million using a 10% discount rate;
· Proved plus Probable Reserves estimated net present value, before income taxes, of US$84 million using a 10% discount rate
Results of Operations
The Company has significantly recovered its production and improved its operations despite the challenges from the Covid-19 pandemic, combined with improved pricing of energy commodities. These have allowed the Company to improve its balance sheet and its business profile when compared with 2020. During 2021, the Company maintained production at its RCE-1 well in the Tapir block for the whole year, with the Oso Pardo and Ombu blocks coming back on production stream in June and April, respectively. Also, during December 2021, the West Pepper Well was brought on stream with an average production of 4,162 Mcf/d of gas while active.
On December 30, 2020, the Company closed its previously announced sale of its LLA-23 block to COG Energy Ltd. for a gross cash consideration of $12.1 million consisted of a firm amount of US$11.75 million plus sale adjustments agreed within the parties. In addition to receiving the proceeds, Arrow has transferred to COG its work obligations under various letters of credit in place to guarantee work commitments on LLA-23, as well as all underlying decommissioning and environmental liabilities.
|
Average Production by Property (Boe/d) |
YTD 2021 |
Q4 2021 |
Q3 2021 |
Q2 2021 |
Q1 2021 |
Q4 2020 |
|
LLA-23 |
- |
|
- |
- |
- |
7 |
|
Oso Pardo |
70 |
123 |
137 |
20 |
- |
- |
|
Ombu (Capella) |
120 |
190 |
193 |
97 |
- |
- |
|
Rio Cravo Este (Tapir) |
153 |
142 |
151 |
147 |
174 |
56 |
|
Total Colombia |
344 |
455 |
481 |
264 |
174 |
62 |
|
Fir, Alberta |
76 |
82 |
94 |
67 |
68 |
78 |
|
Pepper, Alberta |
46 |
181 |
- |
- |
- |
- |
|
TOTAL (Boe/d) |
461 |
719 |
575 |
331 |
242 |
140 |
For the three months and year ended December 31, 2021, the Company's average production was 461 and 719 boe/d, respectively, which consisted of crude oil production in Colombia at 455 and 344 bbl/d, natural gas production of 1,550 and 704 Mcf/d, respectively, and minor amounts of natural gas liquids from the Company's Canadian properties.
Average Daily Natural Gas and Oil Production and Sales Volumes
|
|
Three months ended December 31 |
Year ended December 31 |
||
|
2021 |
2020 |
2021 |
2020 |
|
|
Natural Gas (Mcf/d) |
|
|
|
|
|
Natural gas production |
1,550 |
442 |
704 |
530 |
|
Natural gas sales |
1,550 |
442 |
704 |
530 |
|
Realized Contractual Natural Gas Sales |
1,550 |
442 |
704 |
530 |
|
Crude Oil (bbl/d) |
|
|
|
|
|
Crude oil production |
455 |
62 |
344 |
367 |
|
Inventory movements and other |
78 |
(1) |
(54) |
(6) |
|
Crude Oil Sales |
533 |
61 |
290 |
361 |
|
Corporate |
|
|
|
|
|
Natural gas production (boe/d) |
256 |
73 |
117 |
88 |
|
Natural Gas Liquids(bbl/d) |
0 |
5 |
7 |
6 |
|
Crude oil production (bbl/d) |
455 |
62 |
344 |
367 |
|
Total production (boe/d) |
712 |
140 |
468 |
461 |
|
Inventory movements and other (boe/d) |
78 |
(1) |
(54) |
(6) |
|
Total Corporate Sales (boe/d) |
789 |
139 |
414 |
455 |
During the year and three months ended December 31, 2021 the majority of production was attributed to Colombia, where all of Company's blocks were producing. In Canada, the Company has two operated and two non-operated properties located in the province of Alberta at Fir, Pepper, Harley and Wapiti.
Natural Gas and Oil Revenues
|
|
Three months ended December 31 |
Year ended December 31 |
|
||
|
2021 |
2020 |
2021 |
2020 |
||
|
Natural Gas |
|
|
|
|
|
|
Natural gas revenues |
479,232 |
100,931 |
820,430 |
356,238 |
|
|
NGL revenues |
56,657 |
17,824 |
145,019 |
58,446 |
|
|
Royalties |
(41,568) |
(12,417) |
(84,554) |
(37,122) |
|
|
Revenues, net of royalties |
494,321 |
106,338 |
880,895 |
377,562 |
|
|
Crude Oil |
|
|
|
|
|
|
Crude Oil revenues |
2,720,772 |
264,419 |
6,199,231 |
5,179,819 |
|
|
Royalties |
(176,261) |
(2,617) |
(567,633) |
(236,816) |
|
|
Revenues, net of royalties |
2,544,511 |
261,802 |
5,631,598 |
4,943,003 |
|
|
|
Three months ended December 31 |
Year ended December 31 |
|
||
|
2021 |
2020 |
2021 |
2020 |
||
|
Corporate |
|
|
|
|
|
|
Natural gas revenues |
479,232 |
100,931 |
820,430 |
356,238 |
|
|
NGL revenues |
56,657 |
17,824 |
145,019 |
58,446 |
|
|
Oil revenues |
2,720,772 |
264,419 |
6,199,231 |
5,179,819 |
|
|
Total revenues |
3,256,661 |
383,174 |
7,164,679 |
5,594,503 |
|
|
Royalties |
(217,829) |
(15,035) |
(652,187) |
(273,938) |
|
|
Natural gas and crude oil revenues, net of royalties, as reported |
3,038,832 |
368,139 |
6,512,493 |
5,320,565 |
|
Revenues for the three months and the year ended December 31, 2021 was $3,038,832 and $6,512,493, respectively, net of royalties (2020: $368,139 and $5,320,565, respectively), which represent an increase of 725% and 22%, respectively. This increase is mainly due to increased production, combined with improved pricing for energy commodities.
Average Benchmark and Realized Prices
|
|
Three months ended December 31 |
Years ended December 31 |
||||
|
2021 |
2020 |
Change |
2021 |
2020 |
Change |
|
|
Benchmark Prices |
|
|
|
|
|
|
|
AECO ($/Mcf) |
$3.89 |
$2.18 |
78% |
$2.91 |
$1.68 |
73% |
|
Brent ($/bbl) |
$79.80 |
$45.21 |
77% |
$70.78 |
$43.28 |
64% |
|
West Texas Intermediate ($/bbl) |
$77.31 |
$42.73 |
81% |
$68.09 |
$39.65 |
72% |
|
Realized Prices |
|
|
|
|
|
|
|
Natural gas, net of transportation ($/Mcf) |
$3.37 |
$2.48 |
35% |
$3.19 |
$1.84 |
73% |
|
Natural gas liquids ($/bbl) |
$56.43 |
$35.40 |
59% |
$54.01 |
$27.60 |
96% |
|
Crude oil, net of transportation ($/bbl) |
$55.50 |
$46.18 |
20% |
$58.62 |
$38.52 |
52% |
|
Corporate average, net of transport ($/boe)(1) |
$44.15 |
$29.47 |
50% |
$47.37 |
$33.14 |
43% |
The Company realized a price of $44.15 and $47.37 per boe during the three months and year ended December 31, 2021, respectively (2020: $29.47 and $33.14, respectively) as world oil prices improved during 2021 . In Canada, natural gas prices experienced a sustained increase during the same periods compared to 2020 levels.
Operating Expenses
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
2021 |
2020 |
2021 |
2020 |
|
|
Natural gas & NGL's |
218,557 |
51,090 |
347,421 |
226,530 |
|
Crude oil |
1,392,310 |
824,452 |
1,998,618 |
4,560,238 |
|
Total operating expenses |
1,610,867 |
875,542 |
2,346,039 |
4,786,768 |
|
Natural gas ($/Mcf) |
$1.15 |
$1.26 |
$1.35 |
$1.17 |
|
Crude oil ($/bbl) |
$17.48 |
$143.98 |
$18.90 |
$33.91 |
|
Corporate ($/boe)(1) |
$13.85 |
$67.34 |
$15.51 |
$28.36 |
(1)Non-IFRS measure
During the three months and year ended December 31, 2021, Arrow incurred operating expenses of $1,610,867 and $2,346,039, respectively (2020: $875,542 and $4,786,768, respectively), at an average cost of $13.85 and $15.51 per boe (2020: $67.34 and $28.36, respectively) which is reflective of the Company's increase in production and decrease in operating costs when compared to 2020 levels.
Operating Netbacks
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
Natural Gas ($/Mcf) |
|
|
|
|
|
Revenue, net of transportation expense |
$3.37 |
$2.48 |
$3.19 |
$1.84 |
|
Royalties |
(0.34) |
(0.17) |
(0.33) |
(0.16) |
|
Operating expenses |
(1.15) |
(1.26) |
(1.35) |
(1.17) |
|
Natural Gas Operating netback(1) |
$1.87 |
$1.05 |
$1.51 |
$0.51 |
|
Crude oil ($/bbl) |
|
|
|
|
|
Revenue, net of transportation expense |
$55.50 |
$46.18 |
$58.62 |
$38.52 |
|
Royalties |
(3.60) |
(0.46) |
(5.37) |
(1.76) |
|
Operating expenses |
(17.48) |
(143.98) |
(18.90) |
(33.91) |
|
Crude Oil Operating netback(1) |
$34.42 |
($98.26) |
$34.35 |
$2.85 |
|
Corporate ($/boe) |
|
|
|
|
|
Revenue, net of transportation expense |
$44.15 |
$29.47 |
$47.37 |
33.14 |
|
Royalties |
(2.95) |
(1.16) |
(4.31) |
(1.62) |
|
Operating expenses |
(13.85) |
(67.34) |
(15.51) |
(28.36) |
|
Corporate Operating netback (1) |
$27.35 |
($39.03) |
$27.55 |
$3.16 |
(1) Non-IFRS measure
The operating netbacks of the Company have improved significantly in 2021 due to several factors, such as increasing production from both its Colombian and Canadian assets , and improved crude oil and natural gas prices.
General and Administrative Expenses (G&A)
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
General & administrative expenses |
1,840,646 |
1,529,397 |
4,972,290 |
4,520,101 |
|
G&A recovered from 3rd parties |
(91,177) |
(198,154) |
(91,177) |
(198,154) |
|
Total G&A |
1,749,469 |
1,321,243 |
4,881,113 |
4,321,947 |
|
G&A per boe |
$23.72 |
108.18 |
$32.27 |
27.74 |
For the three months and year ended December 31, 2021, G&A expenses, before recoveries totaled $1,840,646 and $4,972,290, respectively (2020: $1,529,397 and $4,520,101, respectively), which represents an increase when compared to the same periods in 2020. This increase was mainly represented by increases in office expenses, salaries and compensation, as well as increase in regulatory and marketing expenses associated with the Company's listing in the London AIM market. These increases were offset by reductions in legal and other professional fees.
Listing Costs
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
Listing costs |
583,972 |
- |
583,972 |
- |
For the three months and year ended December 31, 2021, the Company incurred in listing cost of $583,972 (2020: nil) related to the listing of its shares in the AIM Market of the London Stock and Exchange.
Share-based Payments Expense
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
Share-based Payments expense |
241,438 |
906,152 |
(84,668) |
1,169,766 |
Share-based payments expense for the three months and year ended December 31, 2021 totaled $241,438 and income for $84,668, respectively (2020: $906,152 and $1,169,766, respectively). During 2021, the Company granted 11,400,000 (2020: 4,319,000) options to its key management personnel, which were offset by reversal of expenses from cancelled options due to resignations and terminations of option holders. During 2021 and 2020, the Company also recognized an increase in its share based payments expense from 13,000,000 phantom shares and 1,681,000 phantom options granted to key management personnel in 2020, according to the compensation program adopted by the Company. The share-based payments expense is the result of the progressive vesting of the options granted to the Company's employees plus the variation in the fair market value of phantom shares and phantom stock options, net of cancellations and forfeitures, according to the company's stock-based compensation plans.
Financing Costs
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
Financing expense paid or payable |
170,091 |
1,142,288 |
844,159 |
1,141,827 |
|
Non-cash financing costs |
34,160 |
62,075 |
132,807 |
524,477 |
|
Net financing costs |
$204,251 |
1,204,363 |
$976,966 |
1,666,304 |
The finance expense paid or payable represents mostly interest on the promissory note due to Canacol, as partial payment for the acquisition of Carrao Energy. On October 18, 2021, a seventh amended and restated promissory note was entered into with Canacol which includes that the new principal amount of the promissory note is $6,026,166, which bares interest at an annual rate of 15%. On August 3, 2020, Canacol agreed to forgive $918,000 of accrued interest payable to date in exchange for the Company providing full security to the Canacol over the shares of its operating subsidiaries in Panama. In addition, financing expense includes fees and interest associated with financing of standby letters of credit on certain of the Company's Colombian blocks, and interest expense on leases. The non-cash finance cost represents an increase in the present value of the decommissioning obligation for the current periods. The amount of this expense will fluctuate commensurate with the asset retirement obligation as new wells are drilled or properties are acquired or disposed.
Depletion and Depreciation
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
Depletion and depreciation |
511,813 |
139,014 |
1,662,937 |
2,049,411 |
Depletion and depreciation expense for the three months and year ended December 31, 2021 totaled $511,813 and $1,662,937, respectively (2020: $139,014 and $2,049,411, respectively). The Company uses the unit of production method and proved plus probable reserves to calculate depletion expense and this decrease is directly related with the sale of LLA-23 in late 2020.
Impairment (reversal) of Oil and Gas Properties
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
Impairment (reversal) of Oil and Gas Properties |
(5,617,776) |
- |
(5,617,776) |
27,263,110 |
As at December 31, 2021, the Company reviewed its cash-generating units ("CGU") for property and equipment and determined that there were indicators of impairment reversal previously recognized in its Tapir block in Colombia and its Canadian assets mostly driven by the recovery in energy commodity prices. The company prepared estimates of both the value in use and fair value less costs of disposal of its CGUs of its CGUs and determined that recoverable amounts exceeded their carrying value and, therefore, an impairment loss reversal of $5,617,776 is included in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021. As at March 31 2020, the Company reviewed its cash-generating unit's ("CGU") property and equipment and determined that there were indicators of impairment present related to the decrease in price forecast and reserves. The Company prepared estimates of both the value in use and fair value less costs of disposal of its CGUs and it was determined that carrying value of each CGU not exceeded its recoverable amount and, therefore, an impairment provisions of $27,263,110 was required.
Gain on Derivative Liability
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
Gain on Derivative Liability |
(467,507) |
- |
(467,507) |
- |
During 2021, the Company recorded a gain in derivative liability of $467,507 related to the valuation of its outstanding warrants issued during its AIM listing and private placement completed in 2021. These warrants provide the right to holders to convert them into common shares at a fixed price set in a currency different to the Company's functional currency and, therefore, they are considered a liability and measured at fair value with changes recognized in the statements of operations and comprehensive income (loss).
Other income
|
|
Three months ended December 31 |
Years ended December 31 |
|
||
|
|
2021 |
2020 |
2021 |
2020 |
|
|
|
|
|
|
|
|
|
Other income |
(756,242) |
(527,282) |
(2,018,382) |
(636,229) |
|
The Company reported other income of $756,242 and $2,018,382 for the three months and year ended December 31, 2021, respectively (2020: $527,282 and $636,229, respectively). These amounts have been generated from the Company's negotiations of accounts payable and debts with vendors, both in Colombia and Canada, which have resulted in reductions of amounts actually paid in cash to settle its liabilities, including a reversal of liabilities associated with the OBC settlement.
Income Taxes
|
|
Three months ended December 31 |
Years ended December 31 |
||
|
|
2021 |
2020 |
2021 |
2020 |
|
Current income tax expense |
176,238 |
72,979 |
149,040 |
64,193 |
|
Deferred income tax (recovery)expense |
(1,467,850) |
5,479,000 |
(1,467,850) |
(1,824,000) |
|
Total income tax (recovery) expense |
(1,291,612) |
5,551,979 |
(1,318,810) |
(1,759,807) |
During 2021, the Company recognized a deferred income tax asset of $4,839,785 and a deferred tax liability of $3,371,936 which represents the tax impact of temporary differences and management's estimation of current tax benefits that would be realized to compensate future taxable income. As at December 31, 2020, there was no deferred income tax recognized. The Company recognizes deferred income tax assets to the extent it believes that these assets will more likely than not be realized. The Company offsets the deferred income tax assets against the deferred income tax liability when it has the legal right to do so. In making this determination, the Company considers all available positive and negative evidence, including the reversal of all existing temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Management
The Company's objective is to maintain a capital base sufficient to provide flexibility in the future development of the business and maintain investor, creditor and market confidence. The Company manages its capital structure and makes adjustments in response to changes in economic conditions and the risk characteristics of the underlying assets. The Company considers its capital structure to include share capital, debt and working capital, excluding non-cash items. In order to maintain or adjust the capital structure, from time to time the Company may issue common shares or other securities, sell assets or adjust its capital spending to manage current and projected debt levels.
As at December 31, 2021, the Company's working capital is $8,066, 074. During 2021, the Company has made a significant effort to improve its working capital, more specifically its accounts payable, using its proceeds received from the sale of LLA-23 and additional financial resources provided by its operations. The overall improvement in energy commodity prices has also positively impacted the Company's capacity to generate sufficient financial resources to sustain its operations. These elements have also contributed to the Company's ability to complete financing transactions in 2021, in the form of fundraisings, from its existing and new investors and management is confident that additional resources would be available to the Company to close similar transactions.
As at December 31, 2021 the Company's net debt was calculated as follows:
|
|
|
December 31, 2021 |
||
|
|
|
|
|
|
|
Current assets |
|
|
$ |
12,806,502 |
|
Less: |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
3,120,777 |
|
Promissory Note - short and long term |
|
|
|
3,318,786 |
|
Net debt (1) |
|
|
$ |
6,366,939 |
(1) Non-IFRS measure
Working Capital
As at December 31, 2021 the Company's working capital was calculated as follows:
|
|
|
December 31, 2021 |
||
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and restricted cash |
|
|
$ |
10,878,508 |
|
Trade and other receivables |
|
|
|
639,582 |
|
Taxes receivable |
|
|
|
719,049 |
|
Other current assets |
|
|
|
569,363 |
|
Less: |
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
3,120,777 |
|
Lease obligation |
|
|
|
20,258 |
|
Promissory note - short term |
|
|
|
1,659,393 |
|
Working capital (1) |
|
|
$ |
8,006,074 |
(1) Non-IFRS measure
Debt Capital
The Company currently has $3.3 million in outstanding debt in the form of a promissory note payable to Canacol and a long-term debt of $31,552. On October 18, 2021, Arrow and Canacol entered into a Seventh Amended and Restated Promissory Note. The principal amendments are the following:
- The new principal amount of the promissory note is $6,026,166
- On or before October 31, 2021, the Company shall make a payment of C$ 3,900,000 plus all Canacol's expenses incurred in connection with this amendment and related matters;
- On or before December 31, 2022, the Company shall make a payment equal to 50% of the total amount outstanding of interest and principal; and
- The remaining balance of principal and interest shall be paid no later than June 30, 2023
This amendment also provided that, in the event that the Company made the payment due on October 31, 2021, Canacol agreed to forgive $658,654 for excess pipeline shipping costs, as a result of the settlement of the OBC pipeline dispute.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters of Credit ("LC's") outstanding totaling $5.2 million to guarantee work commitments on exploration blocks and other contractual commitments. Of the total, approximately $4.1 million has been guaranteed by Canacol. Under an agreement, Canacol will continue to provide security for Arrow's Letters of Credit providing that Arrow uses all reasonable efforts to replace the LC's. In the event the Company fails to secure the renewal of the letters of credit underlying the ANH guarantees, or any of them, the ANH could decide to cancel the underlying exploration and production contract for a particular block, as applicable. In this instance, the Company could risk losing its entire interest in the applicable block, including all capital expended to date and could possibly also incur additional abandonment and reclamation costs if applied by the ANH.
|
Current Outstanding Letters of Credit |
|||||
|
|
|
|
|
|
|
|
Contract |
Beneficiary |
Issuer |
Type |
Amount (US $) |
Renewal Date |
|
SANTA ISABEL |
ANH |
Carrao Energy |
Abandonment |
$643,423 |
April 14, 2022 |
|
ANH |
Canacol and Carrao |
Financial Capacity |
$1,672,162 |
June 30, 2022 |
|
|
CORE - 39 |
ANH |
Canacol |
Compliance |
$2,400,000 |
June 30, 2022 |
|
OMBU |
ANH |
Carrao Energy |
Financial Capacity |
$436,300 |
April 14, 2022 |
|
Total |
|
|
|
$5,151,885 |
|
Share Capital
As at December 31, 2021, the Company had 213,389,643 common shares, 72,474,706 warrants and 17,114,000 stock options outstanding.
CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's cash requirements to meet its financial liabilities and contractual obligations existing at December 31, 2021:
|
|
Less than 1 year |
1-3 years |
Thereafter |
Total |
|
|
|
|
|
|
||
|
Promissory Note |
$ |
1,659,393 |
1,659,393 |
- |
3,318,786 |
|
Exploration and production contracts |
- |
17,800,000 |
- |
17,800,000 |
|
|
|
$ |
1,659,393 |
19,459,393 |
- |
21,118,786 |
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia which require the Company to fulfill work program commitments and issue financial guarantees related thereto. In aggregate, the Company has outstanding exploration commitments at December 31, 2021 of $17.8 million. The Company, in conjunction with its partners, have made applications to cancel $15.5 million ($5.79 million Arrow's share) in commitments on the Macaya and Los Picachos blocks. The remaining commitments are expected to be satisfied by means of seismic work, exploration drilling and farm-outs.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was a party to an agreement with Canacol that entitles it to a 0.5% interest in OBC, which owns a pipeline system intended to link Llanos basin oil production to the Caño Limon oil pipeline system in Colombia. This agreement was part of Arrow's acquisition of Carrao from Canacol. The Company in conjunction with Canacol, notified OBC to transfer title of the shares currently in the name of Canacol to Arrow. The transfer requires approval by OBC which at the date of this MD&A had not been received.
Canacol has finally settled a litigation with OBC in relation to ship or pay obligations with the OBC and after negotiations between the parties involved were submitted and approved by courts in Colombia. As part of the 7th amendment to the Canacol Promissory Note, the Company has been released from paying its OBC obligations for $658,654 and from any future ship or pay obligations between Canacol and the OBC.
SUMMARY OF THREE MONTHS RESULTS
|
|
2021 |
2020 |
||||||
|
|
Q4 |
Q3 |
Q2 |
Q1 |
Q4 |
Q3 |
Q2 |
Q1 |
|
Oil and natural gas sales, net of royalties |
3,038,832 |
1,684,609 |
941,620 |
847,432 |
368,140 |
207,934 |
896,011 |
3,848,478 |
|
Net income (loss) |
6,960,035 |
(21,782) |
(734,317) |
(510,405) |
(7,953,001) |
(1,390,746) |
3,168,919 |
(26,058,265) |
|
Income (loss) per share - basic and diluted |
0.04 |
(0.00) |
(0.01) |
(0.01) |
(0.12) |
(0.02) |
0.05 |
(0.38) |
|
Working capital (deficit) |
8,006,074 |
783,707 |
3,141,217 |
(2,659,690) |
(1,932,940) |
(11,086,377) |
(10,158,614) |
(2,711,756) |
|
Total assets |
41,195,798 |
25,362,323 |
25,948,551 |
27,684,920 |
33,532,299 |
46,702,911 |
47,386,940 |
43,775,967 |
|
Net capital expenditures |
1,991,163 |
148,528 |
(15,378) |
97,330 |
89,198 |
146,584 |
180,795 |
473,351 |
|
Average daily production (boe/d) |
712 |
575 |
331 |
242 |
140 |
105 |
417 |
1,159 |
The Company's oil and natural gas sales have increased during 2021 due to resuming production in its existing assets, improved in oil and gas prices and positive fluctuations in realized oil price differentials. The Company's production levels in Colombia have progressively improved in 2021. Trends in the Company's net income (loss) are also impacted most significantly by operating expenses, financing costs, income taxes, depletion, depreciation and impairment of oil and gas properties, and other income.
OUTSTANDING SHARE DATA
At April 25, 2022, the Company had the following securities issued and outstanding:
|
|
Number |
Exercise Price |
Expiry Date |
|||
|
|
|
|
|
|||
|
Common shares |
|
214,054,643 |
|
n/a |
|
n/a |
|
Warrants |
|
72,184,706 |
|
GBP 0.09 |
|
Oct. and Nov, 2023 |
|
Stock options |
|
1,050,000 |
|
CAD$ 1.15 |
|
October 22, 2028 |
|
Stock options |
|
345,000 |
|
CAD$ 0.31 |
|
May 3, 2029 |
|
Stock options |
|
1,200,000 |
|
CAD$ 0.05 |
|
March 20, 2030 |
|
Stock options |
|
2,000,000 |
|
CAD$ 0.05 |
|
April 13, 2030 |
|
Stock options |
|
3,799,998 |
|
GBP 0.07625 |
|
June 13, 2023 |
|
Stock options |
|
3,799,998 |
|
GBP 0.07625 |
|
June 13, 2024 |
|
Stock options |
|
3,800,004 |
|
GBP 0.07625 |
|
June 13, 2025 |
|
|
|
|
|
|||
OUTLOOK
In 2022, the Company is continuing to focus on improving its balance sheet and free cash flow by optimizing its sources of funds. The Company has also started its 2022 drilling campaign with at least two follow-up wells at Rio Cravo Este and potentially drilling the Carrizales Norte-1 well on the Tapir Block. The Company is also evaluating the tie-in of the East Pepper well in 2022.
On January 30, 2020, the World Health Organization declared the Coronavirus disease (COVID-19) outbreak a Public Health Emergency of International Concern and, on March 10, 2020, declared it to be a pandemic. Actions taken around the world to mitigate the spread of COVID-19, combined with OPEC's initial plan to increase global supply resulted in significant weakness and volatility in commodity prices in early 2020. The simultaneous demand and supply shocks have resulted in significant declines in product demand and pricing in the latter part of the first quarter and throughout the second and third quarter of 2020. Commodity prices began to recover in late 2020 and continued that recovery in early 2021. Although it is impossible to reliably estimate the impact of COVID-19, and OPEC's policies and the volatile commodities market, both are anticipated to have material effects on the Company's 2022 financial results relative to 2021 and 2020.
CRITICAL ACCOUNTING ESTIMATES
A summary of the Company's significant accounting policies is contained in Note 3 Annual Financial Statements. These accounting policies are subject to estimates and key judgements about future events, many of which are beyond Arrow's control. The following is a discussion of the accounting estimates that are critical to the consolidated financial statements.
Crude oil and natural gas assets - reserves estimates - Arrow retained independent third-party petroleum engineers to evaluate its crude oil and natural gas reserves, prepare an evaluation report, and report to the Reserves Committee of the Board of Directors. The process of estimating crude oil and natural gas reserves is subjective and involves a significant number of decisions and assumptions in evaluating available geological, geophysical, engineering and economic data. These estimates will change over time as additional data from ongoing development and production activities becomes available and as economic conditions affecting crude oil and natural gas prices and costs change. Reserves can be classified as proved, probable or possible with decreasing levels of likelihood that the reserves will be ultimately produced.
Reserve estimates are a key input to the Company's depletion calculations and impairment tests. Property, plant and equipment within each area are depleted using the unit-of-production method based on proved and probable reserves using estimated future prices and costs. In addition, the costs subject to depletion include an estimate of future costs to be incurred in developing proved and probable reserves. A revision in reserve estimates or future development costs could result in the recognition of higher depletion charged to net income.
Under the IFRS, the carrying amounts of property, plant and equipment are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the estimated recoverable amount is calculated. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Value in use is generally computed by reference to the present value of the future cash flows expected to be derived from production of proven and probable reserves. Exploration and evaluation ("E&E") assets will be allocated to the related CGU's to assess for impairment, both at the time of any triggering facts and circumstances as well as upon their eventual reclassification to producing assets (oil and natural gas interests in property, plant and equipment). An impairment loss is recognized in income if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Reserve, revenue, royalty and operating cost estimates and the timing of future cash flows are all critical components of the impairment test. Revisions of these estimates could result in a write-down of the carrying amount of crude oil and natural gas properties.
Decommissioning obligations - The Company recognizes the estimated fair value of the decommission liability in the period in which it is incurred and records a corresponding increase in the carrying value of the related asset. The future asset retirement obligation is an estimate based on the Company's ownership interest in wells and facilities and reflects estimated costs to complete the abandonment and reclamation as well as the estimated timing of the costs to be incurred in future periods. Estimates of the costs associated with abandonment and reclamation activities require judgement concerning the method, timing and extent of future retirement activities. The capitalized amount is depleted on a unit-of-production method over the life of the proved and probable reserves. The liability amount is increased each reporting period due to the passage of time and this accretion amount is charged to earnings in the period, which is included as a financing expense. Actual costs incurred on settlement of the decommissioning liability are charged against the liability. Judgements affecting current and annual expense are subject to future revisions based on changes in technology, abandonment timing, costs, discount rates and the regulatory environment.
Share based payments - Stock options issued to employees and directors under the Company's stock option plan are accounted for using the fair value method of accounting for stock-based compensation. The fair value of the option is recognized as a share-based payment and contributed surplus over the vesting period of the option. Share based payment is determined on the date of an option grant using the Black-Scholes option pricing model. The Black-Scholes pricing model requires the estimation of several variables including estimated volatility of Arrow's stock price over the life of the option, estimated option forfeitures, estimated life of the option, estimated risk-free rate and estimated dividend rate. A change to these estimates would alter the valuation of the option and would result in a different related share-based payment.
Income taxes - Arrow follows the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Current tax is the expect tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting period, and any adjustment to tax payable in respect to previous periods. Tax interpretations and legislation in which the Company operates are subject to change. As such, income taxes are subject to measurement uncertainty and interpretations can impact net income through current tax arising from the changes in the deferred income tax asset and liabilities.
Provisions and contingencies - The Company recognizes provisions based on an assessment of its obligations and available information. Any matters not included as provisions are uncertain in nature and cannot be reasonably estimated. The Company makes assumptions to determine whether obligations exist and to estimate the amount of obligations that we believe exist. In estimating the final outcome of litigation, assumptions are made about factors including experience with similar matters, past history, precedents, relevant financial, scientific, and other evidence and facts specific to the matter.
This determines whether a provision or disclosure in the financial statements is needed.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies is included in Note 3 Annual Financial Statements. These accounting policies are consistent with those of the previous financial year as described in Note 3 of the Annual Financial Statements.
DERIVATIVE COMMODITY CONTRACTS
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. During 2021, the Company did not have any financial derivative contract in order to manage commodity price risks.
RISKS AND UNCERTAINTIES
The Company is subject to financial, business and other risks, many of which are beyond its control and which could have a material adverse effect on the business and operations of the Company. A summary of certain risk factors relating to our business are disclosed below.
Impact of the COVID-19 Pandemic
Arrow's business, financial condition and results of operations could be materially and adversely affected by the outbreak of epidemics, pandemics and other public health crises in geographic areas in which we have operations, suppliers, customers or employees, including the recent global outbreak of COVID-19. The recent COVID-19 pandemic, and actions that may be taken by governmental authorities in response thereto, has resulted, and may continue to result in, among other things: increased volatility in financial markets and foreign currency exchange rates; disruptions to global supply chains; labour shortages; reductions in trade volumes; temporary operational restrictions and restrictions on gatherings greater than a certain number of individuals, shelter-in- place declarations and quarantine orders, business closures and travel bans; an overall slowdown in the global economy; political and economic instability; and civil unrest. In particular, the COVID-19 pandemic has resulted in, and may continue to result in, a reduction in the demand for, and prices of, hydrocarbon and other commodities that are closely linked to Arrow's financial performance, and also increases the risk that storage for crude oil and refined petroleum products could reach capacity in geographic locations in which we operate. A prolonged period of decreased demand for, and prices of, these commodities, and any applicable storage constraints, could also result in us voluntarily curtailing or shutting in production and a decrease in our refined product volumes and refinery utilization rates, which could adversely impact our business, financial condition and results of operations. Arrow is also subject to risks relating to the health and safety of our people, as well as the potential for a slowdown or temporary suspension of our operations in locations impacted by an outbreak, increased labour and fuel costs, and regulatory changes. Such a suspension in operations could also be mandated by governmental authorities in response to the COVID-19 pandemic. This could negatively impact Arrow's production volumes and revenues for a sustained period of time, which would adversely impact our business, financial condition and results of operations.
Unstable Oil and Gas Industry
Recent market events and conditions, including demand destruction resulting from the COVID-19 pandemic, global excess oil and natural gas supply, actions taken by the Organization of Petroleum Exporting Countries (OPEC), slowing growth in China and other emerging economies, market volatility and disruptions in Asia, and sovereign debt levels in various countries, have caused significant weakness and volatility in commodity prices. These events and conditions have caused a significant volatility in the valuation of oil and gas companies and a variable confidence in the oil and gas industry. Lower commodity prices may also affect the volume and value of the Company's reserves especially as certain reserves become uneconomic. In addition, in a low commodity prices environment might affect the Company's cash flow. As a result, the Company may not be able to replace its production with additional reserves and both the Company's production and reserves could be reduced on a year over year basis. Given the current market conditions, the Company may have difficulty raising additional funds or if it is able to do so, it may be on unfavourable and highly dilutive terms.
Prices, Markets and Marketing of Crude Oil and Natural Gas
Oil and natural gas are commodities whose prices are determined based on world demand, supply and other factors, all of which are beyond the control of Arrow. World prices for oil and natural gas have fluctuated widely in recent years. Any material decline in prices could result in a reduction of net production revenue. Certain wells or other projects may become uneconomic as a result of a decline in world oil prices and natural gas prices, leading to a reduction in the volume of Arrow's oil and gas reserves. Arrow might also elect not to produce from certain wells at lower prices. All of these factors could result in a material decrease in Arrow's future net production revenue, causing a reduction in its oil and gas acquisition and development activities.
In addition to establishing markets for its oil and natural gas, Arrow must also successfully market its oil and natural gas to prospective buyers. The marketability and price of oil and natural gas which may be acquired or discovered by Arrow will be affected by numerous factors beyond its control. Arrow will be affected by the differential between the price paid by refiners for light quality oil and the grades of oil produced by Arrow. The ability of Arrow to market its natural gas may depend upon its ability to acquire space on pipelines which deliver natural gas to commercial markets. Arrow will also likely be affected by deliverability uncertainties related to the proximity of its reserves to pipelines and processing facilities and related to operational problems with such pipelines and facilities and extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and many other aspects of the oil and natural gas business.
Substantial Capital Requirements; Liquidity
Arrow's cash flow from its production and sales of petroleum and natural gas may not, at all times be sufficient to fund its ongoing activities. From time to time, Arrow may require additional financing in order to carry out its oil and gas acquisition, exploration and development activities. Failure to obtain such financing on a timely basis could cause Arrow to forfeit its interest in certain properties, miss certain acquisition opportunities and reduce or terminate its operations. If Arrow's revenues from its production of petroleum and natural gas decrease as a result of lower oil and natural gas prices or otherwise, it may affect Arrow's ability to expend the necessary capital to replace its reserves or to maintain its production. If Arrow's funds from operations are not sufficient to satisfy its capital expenditure requirements, there can be no assurance that additional financing will be available to meet these requirements or available on terms acceptable to Arrow.
Arrow's lenders will be provided with security over substantially all of the assets of Arrow. If Arrow becomes unable to pay its debt service charges or otherwise commits an event of default, such as bankruptcy, these lenders may foreclose on or sell Arrow's properties. The proceeds of any such sale would be applied to satisfy amounts owed to Arrow's lenders and other creditors and only the remainder, if any, would be available to Arrow shareholders. Arrow monitors and updates its cash projection models on a regular basis which assists in the timing decision of capital expenditures. Farm-outs of projects may be arranged if capital constraints are an issue or if the risk profile dictates that the Company wishes to hold a lesser working interest position. Equity, if available and if on reasonable terms, may be utilized to help fund Arrow's capital program.
Access to Capital
Access to capital has become limited during these times of economic uncertainty. To the extent the external sources of capital become limited or unavailable. Arrow's ability to make the necessary capital investments to maintain or expand oil and gas reserves may be impaired.
Risks of Foreign Operations Generally
Most of Arrow's oil and gas properties and operations are located in a foreign jurisdiction. As such, Arrow's operations may be adversely affected by changes in foreign government policies and legislation or social instability and other factors which are not within the control of Arrow, including, but not limited to, nationalization, expropriation of property without fair compensation, renegotiation or nullification of existing concessions and contracts, the imposition of specific drilling obligations and the development and abandonment of fields, changes in energy policies or the personnel administering them, changes in oil and natural gas pricing policies, the actions of national labour unions, currency fluctuations and devaluations, exchange controls, economic sanctions and royalty and tax increases and other risks arising out of foreign governmental sovereignty over the areas in which Arrow's operations are conducted, as well as risks of loss due to civil strife, acts of war, terrorism, guerrilla activities and insurrections. Arrow's operations may also be adversely affected by laws and policies of Colombia and Canada affecting foreign trade, taxation and investment. If Arrow's operations are disrupted and/or the economic integrity of its projects is threatened for unexpected reasons, its business may be harmed. Prolonged problems may threaten the commercial viability of its operations. In addition, there can be no assurance that contracts, licenses, license applications or other legal arrangements will not be adversely affected by changes in governments in foreign jurisdictions, the actions of government authorities or others, or the effectiveness and enforcement of such arrangements. In the event of a dispute arising in connection with Arrow's operations in Colombia, Arrow 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. Arrow may also be hindered or prevented from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly, Arrow's exploration, development and production activities in Colombia could be substantially affected by factors beyond the Company's control, any of which could have a material adverse effect on Arrow. Acquiring interests and conducting exploration and development operations in foreign jurisdictions often require compliance with numerous and extensive procedures and formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities. In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity or the actions taken. Management is unable to predict the effect of additional corporate and regulatory formalities which may be adopted in the future including whether any such laws or regulations would materially increase Arrow's cost of doing business or affect its operations in any area. Arrow believes that management's experience operating both in Colombia and in other international jurisdictions helps reduce these risks. In Colombia, the government has a long history of democracy and an established legal framework that, in Arrow's opinion, minimizes political risks.
Russia-Ukraine Conflict
On February 24, 2022, Russian military forces launched a full-scale military invasion of Ukraine. In response, Ukrainian military personal and civilians are actively resisting the invasion. Many countries throughout the world have provided aid to the Ukraine in the form of financial aid and in some cases military equipment and weapons to assist in their resistance to the Russian invasion. The North Atlantic Treaty Organization ("NATO") has also mobilized forces to NATO member countries that are close to the conflict as deterrence to further Russian aggression in the region. The outcome of the conflict is uncertain and is likely to have wide ranging consequences on the peace and stability of the region and the world economy. Certain countries including Canada and the United States, have imposed strict financial and trade sanctions against Russia and such sanctions may have far reaching effects on the global economy. In addition, the German government paused the certification process for the 1,200 km Nord Stream 2 natural gas pipeline that was built to carry natural gas from Russia to Germany. As Russia is a major exporter of oil and natural gas, the disruption of supplies of oil and natural gas from Russia could cause a significant worldwide supply shortage of oil and natural gas and significantly impact pricing of oil and gas worldwide. A lack of supply and high prices of oil and natural gas could have a significant adverse impact on the world economy. The long-term impacts of the conflict and the sanctions imposed on Russia remain uncertain.
Alternatives to/Changing Demand for Petroleum Products
Fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to oil and natural gas, and technological advances in fuel economy and energy generation devices will reduce the demand for crude oil, natural gas and other liquid hydrocarbons. The Company cannot predict the impact of changing demand for oil and natural gas products and any major changes would have a material adverse effect on the Company's business, financial condition, results of operations and cash flow.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, for which even a combination of experience, knowledge and careful evaluation may not be able to overcome. There is no assurance that expenditures made on future exploration by Arrow will result in new discoveries of oil or natural gas in commercial quantities. It is difficult to project the costs of implementing an exploratory drilling program due to the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions such as over-pressured zones, 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.
The long-term commercial success of Arrow will depend on its ability to find, acquire, develop and commercially produce oil and natural gas reserves. No assurance can be given that Arrow will be able to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, Arrow may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs. Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and various field operating conditions may adversely affect the production from successful wells. These conditions include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions. While diligent well supervision and effective maintenance operations can contribute to maximizing production rates over time, production delays and natural reservoir performance declines cannot be eliminated and can be expected to adversely affect revenue and cash flow levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs, blow-outs, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks could have a materially adverse effect on future results of operations, liquidity and financial condition. Arrow attempts to minimize exploration, development and production risks by utilizing a technical team with extensive experience to assure the highest probability of success in its drilling efforts. The collaboration of a team of seasoned veterans in the oil and gas business, each with a unique expertise in the various upstream to downstream technical disciplines of prospect generation to operations, provides the best assurance of competency, risk management and drilling success. A full cycle economic model is utilized to evaluate all hydrocarbon prospects. Detailed geological and geophysical techniques are regularly employed including 3D seismic, petrography, sedimentology, petrophysical log analysis and regional geological evaluation.
Governmental Regulation
The oil and gas business is subject to regulation and intervention by governments in such matters as the awarding of exploration and production interests, the imposition of specific drilling obligations, environmental protection controls, control over the development and abandonment of fields (including restrictions on production) and possible expropriation or cancellation of contract rights, as well as with respect to prices, taxes, export quotas, royalties and the exportation of oil and natural gas. Such regulations may be changed from time to time in response to economic or political conditions. The implementation of new regulations or the modification of existing regulations affecting the oil and gas industry could reduce demand for oil and natural gas, increase Arrow's costs and have a material adverse effect on Arrow.
Credit Exposure
Recent economic conditions have increased the risk that certain counterparties for the Company's oil and gas sales and our joint venture partners may fail to pay. Arrow mitigates these increased risks through diversification and a review process of the credit worthiness of our counterparties. Arrow's policy to mitigate credit risk associated with product sales is to maintain marketing relationships with large, established and reputable purchasers that are considered creditworthy. Arrow has not experienced any collection issues with its petroleum and natural gas marketers. Joint venture receivables are typically collected within two to three months of the joint venture bill being issued to the partner. Arrow attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital and operating expenditures prior to expenditure and in certain circumstances may require cash deposits in advance of incurring financial obligations on behalf of joint venture partners.
Health, Safety and Environment
All phases of the oil and natural gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of federal, provincial/state and local laws and regulations. Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach of applicable environmental legislation may result in the imposition of fines and penalties, some of which may be material. Environmental legislation is evolving in a manner expected to result in stricter standards and enforcement, larger fines and liability and potentially increased capital expenditures and operating costs. The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require the Company to incur costs to remedy such discharge.
There are potential risks to the environment inherent in the business activities of the Company. Arrow has developed and implemented policies and procedures to mitigate health, safety and environment (HS&E) risks. Arrow mitigates HS&E risks by maintaining its wells and complying with all regulations. Regular field inspections are also carried out to ensure that all field personnel and third party contractors comply with all company and regulatory guidelines. An action plan has been developed to ensure inactive wells are suspended properly and abandoned in a timely fashion. The above noted policies and procedures are designed to protect and maintain the environment and to ensure that the employees, contractors, subcontractors and the public at large are kept safe at all times.
Foreign Exchange and Currency Risks
The Company is exposed to foreign exchange and currency risk as a result of fluctuations in exchange rates between Colombian peso and the Canadian dollar. Most of the Corporation's revenues and funds from financing activities are expected to be received in reference to US dollar denominated prices while a portion of its operating, capital, and general and administrative costs are denominated in the Colombian peso and the Canadian dollar.
Widespread Pandemic
The Company's foreign operations are located in areas relatively remote from local towns and villages and represent a concentration of personnel working and residing in close proximity to one another. Should an employee or visitor become infected with a serious illness that has the potential to spread rapidly, this could place Arrow's workforce at risk. The 2020 outbreak of the novel coronavirus (COVID-19) in China and other countries around the world is one example of such an illness. The Corporation takes every precaution to strictly follow industrial hygiene and occupational health guidelines. There can be no assurance that this virus or another infectious illness will not impact the Corporation's personnel and ultimately its operations.
Competition
Arrow actively competes for reserve acquisitions, exploration leases, licenses and concessions and skilled industry personnel with a substantial number of other oil and gas companies, many of which have significantly greater financial and personnel resources than Arrow. Arrow's competitors include major integrated oil and natural gas companies and numerous other independent oil and natural gas companies and individual producers and operators.
Certain of Arrow's customers and potential customers are themselves exploring for oil and natural gas, and the results of such exploration efforts could affect Arrow's ability to sell or supply oil or gas to these customers in the future. Arrow's ability to successfully bid on and acquire additional property rights, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements with customers will be dependent upon developing and maintaining close working relationships with its future industry partners and joint operators and its ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment.
Social License to Operate
Heightened public monitoring and regulation of hydrocarbon resource producers, refiners, distributors and commercial/retail sellers, especially where their activities carry the potential for having negative impacts on communities and the environment, involves varying degrees of risk to the Company's reputation, relations with landowners and regulators, and in extreme cases even the ability to operate. Arrow maintains an active website that complies with Exchange requirements for timely disclosure and together with its press releases and other SEDAR filings, is the primary means of communicating to the general public. While media attention and public perception remains largely beyond the control of Arrow's executive, employees, contractors and directors, the Company makes every effort in its corporate and field operations to engage all stakeholders in a respectful and transparent manner.
Internal Controls over Financial Reporting
The CEO and CFO, along with participation from other members of management, are responsible for establishing and maintaining adequate Internal Control over Financial Reporting ("ICFR") to provide reasonable assurance regarding the reliability of financial statements prepared in accordance with IFRS. The Company's CEO and CFO, with support of management have assessed the design and operating effectiveness of the Corporation's ICFR as at December 31, 2021 based on criteria described in "Internal Control - Integrated Framework" issued in 2013 by the Committee of Sponsoring Organization of the Treadway Commission. Based on this assessment, it was concluded that the design and operation of the Corporation's ICFR are effective as at December 31, 2021. During the three months ended December 31, 2021, there has been no change in the Corporation's ICFR that has materially affected, or is reasonably likely to materially affect, the Corporation's ICFR.
Arrow Exploration Corp.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ended DECEMBER 31, 2021 AND 2020
IN UNITED STATES DOLLARS
Independent Auditor's Report
To the Shareholders of Arrow Exploration Corp.
Opinion
We have audited the consolidated financial statements of Arrow Exploration Corp. (the "Company"), which comprise the consolidated statements of financial position as at December 31, 2021 and 2020, and the consolidated statements of operations and comprehensive income (loss), changes in shareholders' equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the "financial statements").
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2021 and 2020, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards ("IFRS").
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards ("Canadian GAAS"). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Other Information
Management is responsible for the other information. The other information comprises Management's Discussion and Analysis.
Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
We obtained Management's Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor's report. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company's financial reporting process.
Auditor's Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor's report is David Langlois.
/s/ Deloitte LLP
Chartered Professional Accountants
Calgary, Alberta
April 25, 2022
Arrow Exploration Corp.
Consolidated Statements of Financial Position
In United States Dollars
As at | Notes |
| December 31, 2021 |
| December 31, 2020 |
ASSETS |
|
|
|
|
|
Current assets |
|
|
|
|
|
Cash |
| $ | 10,878,508 | $ | 11,473,204 |
Restricted cash | 4 |
| - |
| 262,489 |
Trade and other receivables | 5 |
| 639,582 |
| 2,456,590 |
Taxes receivable | 6 |
| 719,049 |
| 1,659,683 |
Deposits and prepaid expenses |
|
| 322,300 |
| 77,382 |
Inventory |
|
| 247,063 |
| 29,304 |
|
|
| 12,806,502 |
| 15,958,652 |
Non-current assets |
|
|
|
|
|
Deferred income taxes | 16 |
| 4,839,785 |
| - |
Restricted cash | 4 |
| 732,553 |
| 460,283 |
Exploration and evaluation | 7 |
| 6,964,506 |
| 6,961,667 |
Property and equipment | 8 |
| 15,852,452 |
| 10,151,697 |
Total Assets |
| $ | 41,195,798 | $ | 33,532,299 |
|
|
|
|
| |
LIABILITIES AND EQUITY |
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 3,120,777 | $ | 12,101,989 |
Lease obligation | 10 |
| 20,258 |
| 17,279 |
Promissory note | 9 |
| 1,659,393 |
| 5,772,324 |
|
|
| 4,800,428 |
| 17,891,592 |
Non-current liabilities |
|
|
|
|
|
Long-term debt | 11 |
| 31,552 |
| 31,416 |
Lease obligation | 10 |
| 34,434 |
| 53,563 |
Other liabilities | 12 |
| 177,500 |
| 177,500 |
Deferred income taxes | 16 |
| 3,371,936 |
|
|
Decommissioning liability | 13 |
| 2,470,239 |
| 2,584,907 |
Promissory note | 9 |
| 1,659,393 |
| - |
Derivative liability | 14 |
| 4,692,203 |
| - |
Total liabilities |
|
| 17,237,685 |
| 20,738,978 |
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
|
Share capital | 15 | 56,698,237 | 50,740,292 | ||
Contributed surplus |
|
| 1,249,418 |
| 1,521,845 |
Deficit |
|
| (33,185,806) |
| (38,879,338) |
Accumulated other comprehensive loss |
|
| (803,736) |
| (589,478) |
Total shareholders' equity |
|
| 23,958,113 |
| 12,793,321 |
Total liabilities and shareholders' equity |
| $ | 41,195,798 | $ | 33,532,299 |
Commitments and contingencies (Note 17)
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board:
signed "Gage Jull" Director signed "Maria Charash" Director
Gage Jull Maria Charash
Arrow Exploration Corp.
Consolidated Statements of Operations and Comprehensive Income (Loss)
In United States Dollars
For the years ended December 31, | Notes | 2021 |
| 2020 |
| ||||||
|
|
|
|
|
|
| |||||
Revenue |
|
|
|
|
|
| |||||
Oil and natural gas | 20 | $ 7,164,680 |
| $ 5,594,503 |
| ||||||
Royalties | 20 | (652,187) |
| (273,938) |
| ||||||
|
| 6,512,493 |
| 5,320,565 |
| ||||||
Expenses |
|
|
|
|
| ||||||
Operating |
| 2,346,039 |
| 4,786,768 |
| ||||||
Administrative |
| 4,881,113 |
| 4,321,947 |
| ||||||
Listing costs | 15 | 583,972 |
| - |
| ||||||
Share based payments | 15 | (84,668) |
| 1,169,766 |
| ||||||
Financing costs: |
|
|
|
|
| ||||||
Accretion | 13 | 132,807 |
| 524,477 |
| ||||||
Interest | 9 | 797,943 |
| 238,230 |
| ||||||
Other |
| 46,217 |
| 903,597 |
| ||||||
Foreign exchange gain |
| (84,924) |
| (248,139) |
| ||||||
Depletion and depreciation | 8 | 1,622,937 |
| 2,049,411 |
| ||||||
Impairment (reversal) of oil and gas properties | 8 | (5,617,776) |
| 27,263,110 |
| ||||||
Gain on the disposal of oil and gas properties | 8 | - |
| (1,059,474) |
| ||||||
Gain on derivative liability | 14 | (467,507) |
| - |
| ||||||
Other income |
| (2,018,382) |
| (636,229) |
| ||||||
|
| 2,137,771 |
| 39,313,464 |
| ||||||
|
|
|
|
|
| ||||||
Income (loss) before income tax |
| 4,374,722 |
| (33,992,899) |
| ||||||
|
|
|
|
|
| ||||||
Income tax expense (recovery) |
|
|
|
|
| ||||||
Current | 16 | 149,040 |
| 64,193 |
| ||||||
Deferred | 16 | (1,467,850) |
| (1,824,000) |
| ||||||
|
| (1,318,810) |
| (1,759,807) |
| ||||||
|
|
|
|
|
| ||||||
Net income (loss) |
| 5,693,532 |
| (32,233,092) |
| ||||||
|
|
|
|
|
| ||||||
Other comprehensive loss |
|
|
|
|
| ||||||
Foreign exchange |
| (214,258) |
| (48,085) |
| ||||||
|
|
|
|
|
| ||||||
Net income (loss) and comprehensive income (loss) |
| $ 5,479,274 |
| $ (32,281,177) |
| ||||||
|
|
|
|
|
| ||||||
Earnings (loss) per share |
|
|
|
|
| ||||||
- basic and diluted |
| $ 0.06 |
| $ (0.47) |
| ||||||
|
|
|
|
|
| ||||||
|
|
|
|
|
| ||||||
Weighted average shares outstanding |
|
|
|
|
| ||||||
Basic |
| 94,553,391 |
| 68,674,602 |
| ||||||
Diluted |
| 96,243,078 |
| 68,674,602 |
| ||||||
The accompanying notes are an integral part of these consolidated financial statements.
Arrow Exploration Corp.
Statements of Changes in Shareholders' Equity
In United States Dollars
|
|
Share Capital |
|
Contributed Surplus |
|
Accumulated other comprehensive loss |
|
Deficit |
|
Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2021 | $ | 50,740,292 | $ | 1,521,845 | $ | (589,478) | $ | (38,879,338) | $ | 12,793,321 |
|
|
|
|
|
|
|
|
|
|
|
Subscription of common shares, net |
| 5,957,945 |
| - |
| - |
| - |
| 5,957,945 |
|
|
|
|
|
|
|
|
|
|
|
Net income for the year |
| - |
| - |
| - |
| 5,693,532 |
| 5,693,532 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the year |
| - |
| - |
| (214,258) |
| - |
| (214,258) |
|
|
|
|
|
|
|
|
|
|
|
Share based payments |
| - |
| (272,427) |
| - |
| - |
| (272,427) |
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2021 | $ | 56,698,237 | $ | 1,249,418 | $ | (803,736) | $ | (33,185,806) | $ | 23,958,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Capital |
|
Contributed Surplus |
|
Accumulated other comprehensive loss |
|
Deficit |
|
Total Equity
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 1, 2020 | $ | 50,740,292 | $ | 1,603,788 | $ | (541,393) | $ | (6,646,246) | $ | 45,156,441 |
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year |
| - |
| - |
| - |
| (32,233,092) |
| (32,233,092) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss for the year |
| - |
| - |
| (48,085) |
| - |
| (48,085) |
|
|
|
|
|
|
|
|
|
|
|
Share based payments |
| - |
| (81,943) |
| - |
| - |
| (81,943) |
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2020 | $ | 50,740,292 | $ | 1,521,845 | $ | (589,478) | $ | (38,879,338) | $ | 12,793,321 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Arrow Exploration Corp.
Consolidated Statements of Cash Flows
In United States Dollars
|
| ||
For the year ended December 31, | 2021 | 2020 | |
|
|
|
|
| Cash flows used in operating activities: |
|
|
| Net income (loss) | $ 5,693,532 | $ (32,233,092) |
| Items not involving cash: |
|
|
| Deferred taxes | (1,467,850) | (1,824,000) |
| Share based payment | (272,427) | 1,169,766 |
| Depletion and depreciation | 1,622,937 | 2,049,411 |
| Impairment (reversal) of oil and gas properties | (5,617,776) | 27,263,110 |
| Interest on leases | 6,506 | 15,435 |
| Interest on promissory note, net of forgiveness | 657,953 | (69,317) |
| Accretion | 132,807 | 524,477 |
| Foreign exchange (gain) loss | (195,852) | 176,166 |
| Gain on change in leases | - | (19,091) |
| Gain on the disposal of oil and gas properties | - | (1,059,474) |
| Gain on derivative liability | (467,507) | - |
| Payment of asset decommissioning obligations | (237,826) | - |
| Changes in non‑cash working capital balances: |
|
|
| Restricted cash | 262,489 | (262,489) |
| Trade and other receivables | 1,817,008 | 2,255,190 |
| Taxes receivable | 940,634 | 689,860 |
| Deposits and prepaid expenses | (244,917) | 193,814 |
| Inventory | (217,759) | 148,467 |
| Accounts payable and accrued liabilities | (6,918,112) | (1,316,327) |
| Cash used in operating activities | (4,506,160) | (2,298,094) |
|
|
|
|
| Cash flows (used in) provided by investing activities: |
|
|
| Additions to exploration and evaluation assets | (2,840) | - |
| Additions to property and equipment | (1,708,706) | (889,928) |
| Proceeds on the sale of property and equipment | - | 12,113,738 |
| Changes in restricted cash | (272,271) | - |
| Changes in non-cash working capital | (2,063,099) | 1,551,785 |
| Cash flows (used in) provided by investing activities | (4,046,916) | 12,775,595 |
|
|
|
|
| Cash flows provided by (used in) financing activities: |
|
|
| Subscription of common shares, net of costs | 11,232,473 | - |
| Payment of promissory note | (3,111,491) | - |
| Lease payments | (24,535) | (59,992) |
| Increase in short-term loan | - | 500,000 |
| Payment of short-term loan | - | (500,000) |
| Increase in long-term debt | - | 30,942 |
| Cash flows provided by (used in) financing activities | 8,096,447 | (29,050) |
|
|
|
|
| Effect of changes in the exchange rate on cash | (138,067) | (60,902) |
| Increase (decrease) in cash | (594,696) | 10,387,549 |
| Cash, beginning of period | 11,473,204 | 1,085,655 |
| Cash, end of period | 10,878,508 | 11,473,204 |
|
|
|
|
| Supplemental information |
|
|
| Interest paid | $ 336,804 | $ 71,709 |
| Taxes paid | $ - | $ - |
The accompanying notes are an integral part of these consolidated financial statements.
Arrow Exploration Corp.
Notes to the Consolidated Financial Statements
In United States Dollars
December 31, 2021
__________________________________________________________________________________________
1. Corporate Information
Arrow Exploration Corp. ("Arrow" or "the Company") is a public junior oil and gas company engaged in the acquisition, exploration and development of oil and gas properties in Colombia and in Western Canada. The Company's shares trade on the TSX Venture Exchange and the AIM Market of the London Stock Exchange plc under the symbol AXL. The head office of Arrow is located at 550, 333 - 11th Ave SW, Calgary, Alberta, Canada, T2R 1L9 and the registered office is located at 1600, 421 - 7th Avenue SW, Calgary, Alberta, Canada, T2P 4K9.
2. Basis of Presentation
Statement of compliance
The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (IASB). The consolidated financial statements have been approved and authorized for issuance by the Board of Directors ("the Board") on April 25, 2022.
Basis of measurement
These consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments that have been measured at fair value and specifically noted within the notes to these consolidated financial statements.
Functional and presentation currency
These consolidated financial statements are presented in United States Dollars. The Canadian Dollar is the functional currency of the Company and its wholly own subsidiary Arrow Holdings Ltd. (AHL). The functional currency of the Company's subsidiaries operating in Colombia and Panama is the United States Dollar.
Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the period-end exchange rate. Non-monetary assets, liabilities, revenues and expenses are translated at exchange rates at the transaction date. Exchange gains or losses are included in the determination of net income or loss in the consolidated statements of operations and comprehensive income (loss).
Use of estimates and judgments
The preparation of consolidated financial statements requires management to make estimates and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. By their nature, estimates are subject to measurement uncertainty and changes in such estimates in future periods could require a material change in the financial statements. Accordingly, actual results may differ from the estimated amounts as future confirming events occur.
Significant estimates and judgments made by management in the preparation of these financial statements are as follows:
Exploration and evaluation assets
Exploration and evaluation assets require judgment as to whether future economic benefits exist, including the existence of proven or probable reserves and the ability to finance exploration and evaluation projects, where technical feasibility and commercial viability has not yet been determined.
Depletion and depreciation
The amounts recorded for depletion and depreciation are based on estimates of proved and probable reserves. Assumptions that are valid at the time of reserve estimation may change materially as new information becomes available. Changes in forward price estimates, production and future development costs, recovery rates or decommissioning costs may change the economic status of reserves and may ultimately result in reserves used for measurement purposes being removed from similar calculations in future reporting periods.
Cash Generating Unit ("CGU")
IFRS requires that the Company's oil and natural gas properties be aggregated into CGUs, based on their ability to generate largely independent cash flows, which are used to assess the properties for impairment. The determination of the Company's CGUs is subject to management's judgment.
Impairment of Property, plant and equipment and exploration and evaluation assets
Indicators of impairment are assessed by management using judgment, considering future plans, market conditions and commodity prices. In assessing the recoverability, each CGU's carrying value is compared to its recoverable amount, defined as the greater of its fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
Decommissioning obligations
Measurement of the Company's decommissioning liability involves estimates as to the cost and timing of incurrence of future decommissioning programs. It also involves assessment of appropriate discount rates, rates of inflation applicable to future costs and the rate used to measure the accretion charge for each reporting period. Measurement of the liability also reflects current engineering methodologies as well as current and expected future environmental legislation and standards.
Income taxes
The Company recognises deferred tax assets to the extent that it is probable that the deductible temporary differences will reverse in the foreseeable future and that sufficient taxable income will be generated in the future to recover such deferred tax assets. Assessing the recoverability of deferred tax assets requires the Company to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realise the net deferred tax assets recorded at the reporting date could be impacted. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods.
Provisions and contingencies
The Company recognizes provisions based on an assessment of its obligations and available information. Any matters not included as provisions are uncertain in nature and cannot be reasonably estimated. The Company makes assumptions to determine whether obligations exist and to estimate the amount of obligations that we believe exist. In estimating the final outcome of litigation, assumptions are made about factors including experience with similar matters, past history, precedents, relevant financial, scientific, and other evidence and facts specific to the matter. This determines whether a provision or disclosure in the financial statements is needed.
Stock-based compensation, warrants and derivative liability
The amounts recorded in respect of share purchase warrants granted and the derivative liability for warrants issued are based on the Company's estimation of their fair value, calculated using assumptions regarding the life of the option or warrant, interest rates and volatility. By their nature, these estimates and assumptions are subject to uncertainty, and the actual fair value of options or warrants may differ at any time.
3. Summary of Significant Accounting Policies
The significant accounting policies used in the preparation of these consolidated financial statements are described below and have been applied consistently by the Company.
Interests in joint arrangements
Certain of the Company's exploration and production activities are regarded as joint operations and are conducted under joint operating agreements, whereby two or more parties jointly control the assets. These consolidated financial statements reflect only the Company's share of these jointly controlled operations, and the Company's proportionate share of the relevant revenue and costs.
Subsidiaries
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Intra-group balances and transactions are eliminated in preparing the consolidated financial statements.
Financial instruments
The Company considers whether a contract contains an embedded derivative when it first becomes a party to it. Embedded derivatives are separated from the host contract which is not measured at fair value through profit or loss when the analysis shows that the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract. Financial assets and financial liabilities are recognized in the Company's statement of financial position when the Company becomes party to the contractual provisions of the instrument. Financial assets are derecognized when the contractual rights to the cash flows from the financial asset expire or when the contractual rights to those assets are transferred. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expired.
Financial assets
Financial assets are classified as financial assets at fair value through profit or loss or amortized cost, as appropriate. The Company determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each reporting date. The Company's financial assets are comprised of cash, restricted cash, trade and other receivables and deposits. Cash and restricted cash are classified as financial assets at fair value through profit or loss. Trade and other receivables, and deposits are classified and measured at amortized cost using the effective interest, less any impairment losses.
Financial liabilities
Financial liabilities are classified as financial liabilities at fair value through profit or loss or amortized cost. The Company's financial liabilities are comprised of accounts payable and accrued liabilities, promissory note and long-term debt. These are classified and measured at amortized cost using the effective interest method.
Derivative liability
The non-compensation based warrants entitle the holder to acquire a fixed number of common shares for a fixed British Pence price per share. An obligation to issue shares for a price that is not fixed in the Company's functional currency of Canadian Dollars, and that does not qualify as a share-based payment, must be classified as a derivative liability and measured at fair value with changes recognized in the statements of operations and comprehensive income (loss) as they arise. The Company has recorded these changes as derivative gain (loss) in the statement of operations and comprehensive income (loss). The transaction costs associated with exercising of the warrants are expensed when incurred.
Fair value hierarchy
The Company classifies the fair value of financial instruments according to the following hierarchy based on the amount of observable inputs used to value the instrument:
· Level 1 - Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
· Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace.
· Level 3 - Valuations in this level are those with inputs for the asset or liability that are not based on observable market data.
Share capital
Common shares are classified as equity. Incremental costs directly attributable to the issue of common shares and options are recognized as a deduction from share capital, net of any tax effects.
Exploration and evaluation assets
Pre-license costs are recognized in the statement of operations and comprehensive income (loss) as incurred. Exploration and evaluation costs include the costs of acquiring undeveloped land and drilling costs are initially capitalized until the drilling of the well is complete and the results have been evaluated. The costs are accumulated in cost centers by well, field or exploration area pending determination of technical feasibility and commercial viability. The technical feasibility and commercial viability of extracting a mineral resource is considered to be determinable when proved or probable reserves are determined to exist. If proved and/or probable reserves are found, the drilling costs and associated undeveloped land are transferred to property and equipment. When exploration and evaluation assets are determined not to be technically feasible and commercially viable, or the Company decides not to continue with its activity, the unrecoverable costs are charged to the consolidated statements of operations and comprehensive income (loss) as pre-license expense when occurs.
Property and equipment
Items of property and equipment, which include oil and gas development and production assets, are measured at cost less accumulated depletion, depreciation and accumulated impairment losses. The cost of development and production assets includes: transfers from exploration and evaluation assets, which generally include the cost to drill the well and the cost of the associated land upon determination of technical feasibility and commercial viability; the cost to complete and tie-in the wells; facility costs; the cost of recognizing provisions for future restoration and decommissioning; geological and geophysical costs; and directly attributable overheads. Development and production assets are grouped into CGU's for impairment testing. Gains and losses on disposal of an item of property and equipment, including oil and natural gas interests, are determined by comparing the proceeds from disposal with the carrying amount of property and equipment and are recognized in the statement of operations and comprehensive income (loss).
Subsequent costs:
Costs incurred subsequent to the determination of technical feasibility and commercial viability and the costs of replacing parts of property and equipment are recognized as oil and gas assets only when they increase the future economic benefits embodied in the specific asset to which they relate. All other expenditures are expensed as incurred. Such capitalized oil and natural gas assets generally represent costs incurred in developing proved and/or probable reserves and bringing in or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The carrying amount of any replaced or sold component is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in operating expenses as incurred.
Depletion and depreciation:
The net carrying value of development and production assets is depleted using the unit of production method by reference to the ratio of production in the period to the related proved plus probable reserves, taking into account estimated future development costs necessary to bring those reserves into production and the estimated salvage value of the assets at the end of their useful lives. Future development costs are estimated taking into account the level of development required to produce the reserves. Proved plus probable reserves are estimated annually by independent qualified reserve evaluators and represent the estimated quantities of crude oil, natural gas and natural gas liquids which geological, geophysical and engineering data demonstrate with a specified degree of certainty to be recoverable in future years from known reservoirs and which are considered commercially producible. Depreciation methods, useful lives and residual values are reviewed at each reporting date.
Impairment
Financial assets
A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognized in the statement of operations and comprehensive income (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 the statement of operations and comprehensive income (loss).
Non-financial assets
The carrying amounts of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. Exploration and evaluation assets are also assessed for impairment prior to being transferred to property and equipment.
For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (CGU). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs of disposal. Fair value less cost to dispose is determined as the amount that would be obtained from the sale of a CGU in an arm's length transaction between knowledgeable and willing parties. The fair value less cost to dispose of oil and gas assets is generally determined as the net present value of the estimated future cash flows expected to arise from the continued use of the CGU, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a market participant to arrive at a net present value of the CGU.
Value in use is determined as the net present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. Value in use is determined by applying assumptions specific to the Company's continued use and can only take into account approved future development costs. Estimates of future cash flows used in the evaluation of impairment of assets are made using management's forecasts of commodity prices and expected production volumes. The latter takes into account assessments of field reservoir performance and includes expectations about proved and unproved volumes, which are risk-weighted utilizing geological, production, recovery and economic projections.
An impairment loss is recognized if the carrying amount of a CGU exceeds its estimated recoverable amount. Impairment losses are recognized in the statement of operations and comprehensive income (loss). Impairment losses recognized in respect of CGU's are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. Impairment losses recognized in prior years are assessed at each reporting date to determine if facts and circumstances indicate that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation, if no impairment loss had been recognized.
Share based compensation
The Company has a share based compensation plan for which the compensation cost attributed to stock options granted is measured at the fair value at the grant date and expensed over the vesting period with a corresponding increase to contributed surplus. A forfeiture rate is estimated on the grant date and is adjusted to reflect the actual number of options or units that vest. Upon the settlement of the stock options the previously recognized value in contributed surplus is recorded as an increase to share capital.
Share based compensation granted to non-employees is measured based on the fair value of the goods or services received, except in cases where this is not reliably measurable, and then the intrinsic value of the equity instruments granted is used (i.e. the average value of the Company's shares over the service period). Share based compensation subject to performance vesting conditions is recognized based on the Company's estimated probability of achieving those performance vesting conditions determined at each reporting date.
The grant date fair value of phantom shares and phantom stock options granted to officers, employees and directors is recognized as share based payment expense with a corresponding increase in accrued liabilities on a graded vesting basis over the vesting period. Subsequent to initial recognition, the phantom shares and phantom stock options accrued liability is measured at fair value.
Provisions
A provision is recognized if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax risk-free rate that reflects current market assessments of the time value of money and the risks specific to the liability. Provisions are not recognized for future operating losses.
Decommissioning obligations
The Company's activities give rise to dismantling, decommissioning and site disturbance remediation activities. Provision is made for the estimated cost of abandonment and site restoration and capitalized in the relevant asset category. Decommissioning obligations are measured at the present value of management's best estimate of the expenditure required to settle the present obligation as at the reporting date. Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The increase in the provision due to the passage of time is recognized as accretion (within finance expense) whereas increases/decreases due to changes in the estimated future cash flows or changes in the discount rate are capitalized. Actual costs incurred upon settlement of the decommissioning obligations are charged against the provision to the extent the provision was established.
Leases
Lease arrangements which meet the criteria of a lease are recognized as right-of-use assets and lease obligation at the lease commencement date. The right-of-use asset is initially measured at cost. Subsequently, it is measured at cost less accumulated depreciation and impairment losses and adjusted for certain re-measurements of the lease obligation. The lease obligation is measured at the present value of the lease payments outstanding at the lease commencement date, discounted using the implicit rate, and when not determinable, the Company's incremental borrowing rate. The lease obligation is re-measured when there is a change in estimated future payments arising from a change in a lease term, index or rate, residual guarantee or purchase option. The assessment of whether a renewal, extension, termination or purchase option is reasonably certain to be exercised was considered, based on facts and circumstances, and has the potential to significantly impact the amount of right-of-use asset and lease obligation recognized. The Company recognizes interest expense incurred under finance leases over the lease term in the consolidated statements of comprehensive income (loss) using the effective interest rate method.
Revenue
The Company's revenues are primarily derived from the production of petroleum and natural gas. Revenue from contracts with customers is recognized when the Company satisfies a performance obligation by physically transferring the product and control to a customer. The Company satisfies its performance obligations at the point of delivery of the product and not over a period of time. Revenue is measured based on the consideration specified in contracts with customers. Revenue is recorded net of any royalties when the amount of revenue can be reliably measured and the costs incurred in respect of the transaction can be measured reliably.
Finance expenses
Finance expense comprises interest expense on borrowings, fees on letters of credit and accretion of the discount on decommissioning obligations.
Income tax
Income tax expense is comprised of current and deferred tax. Income tax expense is recognized in the statement of operations and comprehensive income (loss) except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognized on the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously. A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
Earnings (loss) per share
Basic earnings (loss) per share is calculated by dividing the net income or loss attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is determined by dividing the net income (loss) attributable to common shareholders and the weighted average number of common shares outstanding for the effects of dilutive instruments such as options and warrants granted. The number of shares included with respect to options is computed using the treasury stock method.
Recent Accounting Standards
In 2020, the IASB published phase two of its amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 - Insurance Contracts and IFRS 16 - Leases ("IFRS 16") to assist companies in applying IFRS Standards when changes are made to contractual cash flows or hedging relationships arising from the replacement of an interest rate benchmark with an alternative benchmark rate from IBOR reform. These amendments were adopted by the Company from January 1, 2021 but they did not have a material impact on the Consolidated Financial Statements.
4. Restricted Cash
|
|
|
December 31 , 2021 |
|
December 31, 2020 |
|
|
|
|
|
|
|
Colombia (i) |
$ |
53,726 |
$ |
316,216 |
|
Canada (ii) |
|
678,827 |
|
406,556 |
|
Sub-total |
|
732,553 |
|
722,772 |
|
Long-term portion |
|
(732,553) |
|
(460,283) |
|
Current portion of restricted cash |
$ |
- |
$ |
262,489 |
(i) Restricted cash is comprised of a deposit held as collateral to guarantee abandonment expenditures related to the Mateguafa and Rio Cravo Este-1 wells in the Tapir block.
(ii) Pursuant to Alberta government regulations, the Company was required to keep a $328,614 (CAD $416,600; 2020: 414,523) deposit with respect to the Company's liability rating management ("LMR"). The deposit is held by a Canadian chartered bank with interest paid to the Company on a monthly basis based on the bank's deposit rate. The remaining $350,213 pertain to commercial deposits with customers, lease and other deposits held in Canada.
5. Trade and other receivables
|
|
|
December 31, 2021 |
|
December 31, 2020 |
|
|
|
|
|
|
|
Trade receivables, net of advances |
$ |
252,141 |
$ |
99,061 |
|
Other accounts receivable |
|
387,441 |
|
2,357,529 |
|
|
$ |
639,582 |
$ |
2,456,590 |
As at December 31, 2021, other accounts receivable include $2,332 (December 31, 2020 - $2,185,890) receivable from a partner in the Tapir block and corresponds to reimbursable capital expenditures incurred on the Tapir block.
6. Taxes receivable
|
|
|
December 31, 2021 |
|
December 31, 2020 |
|
|
|
|
|
|
|
Value-added tax (VAT) credits recoverable |
$ |
105,827 |
$ |
932,282 |
|
Income tax withholdings and advances, net |
|
613,222 |
|
727,401 |
|
|
$ |
719,049 |
$ |
1,659,683 |
The VAT recoverable pertains to non-compensated value-added tax credits originated in Colombia as operational and capital expenditures are incurred. The Company is entitled to claim for the reimbursement of these VAT credits.
7. Exploration and Evaluation
|
|
|
December 31, 2021 |
|
December 31, 2020 |
|
|
|
|
|
|
|
Balance, beginning of the period |
$ |
6,961,667 |
$ |
6,961,667 |
|
Additions, net |
|
2,839 |
|
- |
|
Balance, end of the period |
$ |
6,964,506 |
$ |
6,961,667 |
8. Property and Equipment
|
Cost |
Oil and Gas Properties |
Right of Use and Other Assets |
Total |
|
Balance, December 31, 2019 |
$ 67,673,851 |
$ 374,426 |
$ 68,048,277 |
|
Additions |
780,588 |
- |
780,588 |
|
Oil and gas properties disposed |
(38,018,095) |
- |
(38,018,095) |
|
Change in right-of-use assets (Note 10) |
- |
(192,321) |
(192,321) |
|
Balance, December 31, 2020 |
$ 30,436,344 |
$ 182,105 |
$ 30,618,449 |
|
Additions |
1,734,746 |
1,380 |
1,736,126 |
|
Decommissioning adjustment |
(10,173) |
- |
(10,173) |
|
Balance, December 31, 2021 |
$ 32,160,917 |
$ 183,485 |
$ 32,344,402 |
|
Accumulated depletion and depreciation and impairment |
|
|
|
|||||||||
|
Balance, December 31, 2019 |
$ 11,423,360 |
$ 93,742 |
$ 11,517,102 |
|
||||||||
|
Depletion and depreciation |
1,995,375 |
61,893 |
2,057,268 |
|
||||||||
|
Change in right-of-use assets (Note 10) |
- |
(72,428) |
(72,428) |
|
||||||||
|
Impairment of oil and gas properties |
27,263,110 |
- |
27,263,110 |
|
||||||||
|
Accumulated depletion associated with disposed oil and gas properties |
(19,963,103) |
- |
(19,963,103) |
|
||||||||
|
Balance, December 31, 2020 |
$ 20,718,742 |
$ 83,207 |
$ 20,801,949 |
|
||||||||
|
Depletion and depreciation |
1,591,179 |
31,758 |
1,622,937 |
|
||||||||
|
Reversal of impairment losses of oil and gas properties |
(5,617,776) |
- |
(5,617,776) |
|
||||||||
|
Balance, December 31, 2021 |
$ 16,692,145 |
$ 114,965 |
$ 16,807,110 |
|
||||||||
|
Foreign exchange |
|
|
|
|
||||||||
|
Balance December 31, 2019 |
$ 221,322 |
$ (8,690) |
$ 212,632 |
|||||||||
|
Effects of movements in foreign exchange rates |
118,042 |
4,524 |
122,566 |
|||||||||
|
Balance December 31, 2020 |
$ 339,364 |
$ (4,166) |
$ 335,198 |
|||||||||
|
Effects of movements in foreign exchange rates |
(20,747) |
709 |
(20,038) |
|||||||||
|
Balance December 31, 2021 |
$ 318,617 |
$ (3,457) |
$ 315,160 |
|||||||||
|
Net Book Value |
|
|
|
|
Balance December 31, 2020 |
$ 10,056,965 |
$ 94,732 |
$ 10,151,697 |
|
Balance December 31, 2021 |
$ 15,787,389 |
$ 65,063 |
$ 15,852,452 |
On December 30, 2020, the Company closed its previously announced sale of its LLA-23 block to COG Energy Ltd. ("COG") for a gross cash consideration of $12.1 million consisted of a firm amount of $11.75 million plus sale adjustments agreed within the parties. In addition to receiving the proceeds, Arrow has transferred to COG its work obligations under various letters of credit in place to guarantee work commitments on LLA-23, as well as all the related underlying decommissioning and environmental liabilities (see Note 12 and 13).
As at December 31, 2021, the Company reviewed its cash-generating units ("CGU") for property and equipment and determined that there were indicators of impairment reversal previously recognized in its Tapir block in Colombia and its Canadian assets mostly driven by the recovery in energy commodity prices. The company prepared estimates of both the value in use and fair value less costs of disposal of its CGUs of its CGUs and determined that recoverable amounts exceeded their carrying value and, therefore, an impairment loss reversal of $5,617,776 is included in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2021. The following table outlines forecast benchmark prices and exchange rates used in the Company's impairment test as at December 31, 2021:
|
|
Exchange rate |
Brent |
AECO Spot Gas |
|
Year |
$US / $Cdn |
US$/Bbl |
C$/MMBtu |
|
2022 |
0.80 |
74.50 |
3.71 |
|
2023 |
0.80 |
72.00 |
3.28 |
|
2024 |
0.80 |
69.50 |
2.99 |
|
2025 |
0.80 |
71.00 |
3.10 |
|
2026 Thereafter (inflation %) |
0.80
|
72.00 2.0%/yr |
3.13 2.0%/yr |
The recoverable amounts were estimated at their fair value less costs of disposal, based on the net present value of the future cash flows from oil and gas reserves as estimated by the Company's independent reserve evaluator at December 31, 2021. The fair value less costs of disposal used to determine the recoverable amounts are classified as Level 3 fair value measurements as certain key assumptions are not based on observable market data but rather, the Company's best estimate. The Company used a 17.5% discount rate, which took into account risks specific to the Colombian CGUs and inherent in the oil and gas business, and 15% discount rate for its Canadian CGU, and provided the following recoverable values:
|
CGU |
Recoverable Amount |
Impairment Reversal |
|
Canada |
5,036,655 |
1,435,201 |
|
Tapir |
9,147,575 |
4,182,575 |
|
|
|
5,617,776 |
As at March 31, 2020, the Company reviewed its CGUs and determined that there were indicators of impairment present in its Colombian assets related to the decrease in prices and reserves. The company prepared estimates of both the value in use and fair value less costs of disposal of its CGUs and it was determined that carrying value of each CGU exceeded its recoverable amount and, therefore, an impairment loss of $27,263,110 is included in the consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2020. The following table outlines forecast benchmark prices and exchange rates used in the Company's impairment test as at March 31, 2020:
|
|
Exchange rate |
Brent |
|
Year |
$US / $Cdn |
US$/Bbl |
|
|
|
|
|
2020 (nine months) |
0.71 |
32.00 |
|
2021 |
0.72 |
42.00 |
|
2022 |
0.73 |
51.00 |
|
2023 |
0.75 |
58.00 |
|
2024 |
0.75 |
62.00 |
|
2025 Thereafter (inflation %) |
0.75 0.75 |
63.24 2.0%/yr |
The recoverable amounts of the Colombian CGUs at March 31, 2020 were estimated at their fair value less costs of disposal, based on the net present value of the future cash flows from oil and gas reserves as estimated by the Company's independent reserve evaluator at December 31, 2019 adjusted for production and future pricing changes during the three months ended March 31, 2020, except for the LLA-23 CGU which used observable market value from bidding offers received from independent third parties. The fair value less costs of disposal used to determine the recoverable amounts are classified as Level 3 fair value measurements as certain key assumptions are not based on observable market data but rather, the Company's best estimate. The Company used a 17.5% discount rate for the March 31, 2020 impairment test, which took into account risks specific to the Colombian CGUs and inherent in the oil and gas business, and provided the following recoverable values:
|
CGU |
Recoverable Amount |
Impairment Loss |
|
LLA-23 |
11,500,000 |
12,098,000 |
|
Capella / OMBU |
- |
10,690,000 |
|
Tapir |
5,390,000 |
4,475,110 |
|
|
|
27,263,110 |
9. Promissory Note
The promissory note was issued to Canacol Energy Ltd. ("Canacol") as partial consideration in the acquisition of Carrao Energy S.A. from Canacol. The promissory note bears interest at 15% per annum, was initially due on January 28, 2019 and has been subsequently amended and extended. On October 18, 2021, Arrow and Canacol entered into a Seventh Amended and Restated Promissory Note agreement. The principal amendments are the following:
- The new principal amount of the promissory note is $6,026,166
- On or before October 31, 2021, the Company shall make a payment of C$ 3,900,000 plus all Canacol's expenses incurred in connection with this amendment and related matters;
- On or before December 31, 2022, the Company shall make a payment equal to 50% of the total amount outstanding of interest and principal; and
- The remaining balance of principal and interest shall be paid no later than June 30, 2023
This amendment also provided that, in the event that the Company made the payment due on October 31, 2021, Canacol agreed to forgive $658,654 for excess pipeline shipping costs, as a result of the settlement of the OBC pipeline dispute (see note 17), which were recognized as other income in the statement of operations and comprehensive income (loss). On October 27, 2021, the Company paid $3,111,491 (C$3,900,000) to Canacol as stipulated in this seventh amendment.
On August 3, 2020, the Company entered into a Fifth Amended and Restated Promissory Note with Canacol. Among other amendments, Canacol has agreed to forgive $918,000 of accrued interest to date, in exchange for the Company providing full and perfected security to the Canacol over the shares of its operating subsidiaries in Panama. The interest forgiven has been recognized as interest in the statement of operations and comprehensive loss for the year ended December 31, 2020.
The Company has granted a general security interest to Canacol for the obligations under the Promissory Note.
10. Lease Obligations
A reconciliation of the discounted lease obligation is set forth below:
|
|
|
|
2021 |
2020 |
|
Obligation, beginning of the period |
|
|
$ 70,842 |
$ 260,197 |
|
Changes in existing lease |
|
|
1,381 |
(138,984) |
|
Lease payments |
|
|
(24,535) |
(59,992) |
|
Interest |
|
|
6,506 |
15,435 |
|
Effects of movements in foreign exchange rates |
|
|
498 |
(5,814) |
|
Obligation, end of the year |
|
|
$ 54,692 |
$ 70,842 |
|
|
|
|
|
|
|
Current portion |
|
|
$ 20,258 |
$ 17,279 |
|
Long-term portion |
|
|
34,434 |
53,563 |
|
|
|
|
$ 54,692 |
$ 70,842 |
As at December 31, 2021, the Company has the following future commitments associated with its office lease obligations:
|
Less than one year |
|
|
$ 24,816 |
|
2 - 5 years |
|
|
37,223 |
|
Total lease payments |
|
|
62,039 |
|
Amounts representing interest over the term |
|
|
(7,347) |
|
Present value of the net obligation |
|
|
$ 54,692 |
During 2020, the Company renegotiated its remaining lease agreement to reduce its leased corporate space and its related future lease obligation. As a result, the Company reduced its right-of-use assets in $119,893 (net) and its lease obligation in $138,984, and it recognized a gain in change of lease for $19,091 in the consolidated statement of operations and comprehensive income (loss).
11. Long-term debt
During 2020, the Company received $31,552 (CAD$40,000) from the Canadian Emergency Business Account (CEBA) program implemented by the government of Canada to provide support to small businesses affected by the COVID-19 pandemic. The loan does not bear any interest until December 2022 and is subject to a 25% forgiveness if the full balance is repaid before that date.
12. Other Liabilities
The other liabilities of the Company relate to an environmental fee in Colombia that is levied on capital projects. The fee is calculated as 1% of the project cost. The program is administered by the Colombian National Authority of Environmental Licences ("ANLA") and is levied on projects that utilize surface water or deep water wells that may have an impact on the environment. The funds are generally used in the affected communities for purposes of land purchases, biomechanical works (e.g. containment walls in rivers), reforestation, research projects and others. At December 31, 2021 the Company had provided for $177,500 (December 31, 2020 - $177,500) for the environmental fee.
13. Decommissioning Liability
The following table presents the reconciliation of the beginning and ending aggregate carrying amount of the obligation associated with the decommissioning of oil and gas properties.
|
|
December 31, 2021 |
|
December 31, 2020 |
|
Obligation, beginning of the year |
$ 2,584,907 |
|
$ 8,173,222 |
|
Change in estimated cash flows |
(10,173) |
|
(109,864) |
|
Payments or settlements |
(237,826) |
|
- |
|
Liabilities disposed |
- |
|
(6,016,514) |
|
Accretion expenses |
132,807 |
|
524,477 |
|
Effects of movements in foreign exchange rates |
524 |
|
13,586 |
|
Obligation, end of the year |
$ 2,470,239 |
|
$ 2,584,907 |
T he obligation was calculated using a risk-free discount rate range of 1.00% to 2.00% in Canada (2020: 1.50% to 2.75%) and 8.46% in Colombia (2020: 5.90%) with an inflation rate of 2.0% and 4.5%, respectively (2020: 2.0% and 2.5%). It is expected that the majority of costs are expected to occur between 2022 and 2033. 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 $4,222,717 (2020: $4,072,683) .
14. Derivative liability
Derivative liability includes warrants issued and outstanding as follows:
|
|
2021 |
2020 |
||
|
Warrants |
Number |
Amounts |
Number |
Amounts |
|
Balance beginning of the year |
- |
$ - |
- |
$ - |
|
Issued in AIM financing (Note 15) |
70,474,768 |
5,124,985 |
- |
- |
|
Issues in private placement (Note 15) |
1,999,938 |
149,543 |
- |
- |
|
Fair value adjustment |
- |
(582,225) |
- |
- |
|
Balance end of the year |
72,474,706 |
$ 4,692,303 |
- |
$ - |
Each warrant is exercisable at £0.09 per new common share for 24 months from the issuance date and are measured at fair value quarterly using the Black-Scholes options pricing model. The fair value of warrants at October and November 2021, and December 31, 2021 was estimated using the following assumptions:
|
|
October and November 2021 |
December 31, 2021 |
|
Number outstanding re-valued warrants |
72,474,768 |
72,474,706 |
|
Fair value of warrants outstanding |
£ 0.053 |
£ 0.048 |
|
Risk free interest rate |
0.50% |
0.50% |
|
Expected life |
2.00 years |
1.82 years |
|
Expected volatility |
160% |
160% |
The following table summarizes the warrants outstanding and exercisable at December 31, 2021:
|
Number of warrants |
Exercise price |
Expiry date |
|
70,474,768 |
£ 0.09 |
October 25, 2023 |
|
1,999,938 |
£ 0.09 |
November 23, 2023 |
|
72,474,706 |
|
|
15. Share Capital
(a) Authorized: Unlimited number of common shares without par value
(b) Issued:
|
|
2021 |
2020 |
||
|
Common shares |
Shares |
Amounts |
Shares |
Amounts |
|
Balance beginning of the year |
68,674,602 |
$50,740,292 |
68,674,602 |
$50,740,292 |
|
Issued in AIM financing (i) |
140,949,565 |
12,086,423 |
- |
- |
|
Issued in private placement (ii) |
3,765,476 |
308,501 |
- |
- |
|
Allocated to warrants (Note 14) |
- |
(5,274,528) |
- |
- |
|
Share issue costs (iii) |
- |
(1,162,451) |
- |
- |
|
Balance at end of the year |
213,389,643 |
56,698,237 |
68,674,602 |
$50,740,292 |
|
|
|
|
|
|
(i) On October 2021, the Company raised approximately $12 million (C$15.0 million), through a placing and subscription for new common shares with new investors, Canacol Energy Ltd. (Canacol), and executive management (the Fundraising) as part of the Company's shares admission to trade on the AIM Market of the London Stock Exchange plc. The Fundraising consisted on placement and subscription of 140,949,565 new common shares at an issue price of £0.0625 (C$0.106125) per new common share. The Company's executive management invested approximately C$ 1.41 million and Canacol participated in the subscription to hold 19.9% of the enlarged share capital. Investors received one warrant for every two new common shares, exercisable at £0.09 per new common share for 24 months from the AIM admission date (October 25, 2021).
(ii) On November 24, 2021, the Company announced that it has closed a private placement of C$395,375 for issuance of 3,765,476 new common shares and 1,999,938 warrants (see Note 14).
(iii) During 2021, the Company recognized share issue costs for $1,162,451 and listing costs of $583,972 associated with the financings completed in 2021 as per above.
(b) Stock options:
The Company has a stock option plan that provides for the issuance to its directors, officers, employees and consultants options to purchase a number of non-transferable common shares not exceeding 10% of the common shares that are outstanding. The exercise price is based on the closing price of the Company's common shares on the day prior to the day of the grant. A summary of the status of the Company stock option plan as at December 31, 2021 and 2020 and changes during the respective periods ended on those dates is presented below:
|
|
December 31, 2021 |
December 31, 2020 |
||
|
Stock Options |
Number of options |
Weighted average exercise Price (CAD $) |
Number of options |
Weighted average exercise price (CAD $) |
|
Beginning of period |
6,859,000 |
$0.40 |
5,470,000 |
$0.99 |
|
Granted |
11,400,000 |
$0.13 |
4,319,000 |
$0.05 |
|
Expired/Forfeited |
(1,145,000) |
$1.04 |
(2,930,000) |
$0.96 |
|
End of period |
17,114,000 |
$0.18 |
6,859,000 |
$0.40 |
|
Exercisable, end of period |
2,969,669 |
$0.46 |
1,530,001 |
$1.06 |
|
Date of Grant |
Number Outstanding |
Exercise Price (CAD $) |
Weighted Average Remaining Contractual Life |
Date of Expiry |
Number Exercisable December 31, 2020 |
|
October 22, 2018 |
1,050,000 |
$1.15 |
6.81 years |
Oct. 22, 2028 |
1,050,000 |
|
May 3, 2019 |
345,000 |
$0.31 |
7.34 years |
May 3, 2029 |
230,002 |
|
March 20, 2020 |
1,200,000 |
$0.05 |
8.22 years |
March 20, 2030 |
400,000 |
|
April 13, 2020 |
2,775,000 |
$0.05 |
8.29 years |
April 13, 2030 |
1,175,000 |
|
June 18, 2020 |
344,000 |
$0.05 |
8.47 years |
June 18, 2030 |
114,667 |
|
December 13, 2021 |
3,799,998 |
$0.13 |
1.45 years |
June 13, 2023 |
- |
|
December 13, 2021 |
3,799,998 |
$0.13 |
2.45 years |
June 13, 2024 |
- |
|
December 13, 2021 |
3,800,004 |
$0.13 |
3.45 years |
June 13, 2025 |
- |
|
Total |
17,114,000 |
$0.18 |
4.29 years |
|
2,969,669 |
During 2021, the Company recognized an income of $272,427 (2020 - income of $81,943) as share based payments expense, with a corresponding decrease in the contributed surplus account.
(c) Phantom shares:
During 2020, the Company adopted a phantom share program for compensation of its Directors and executives and granted 13,000,000 phantom common shares of the Company which are vested immediately at CAD $0.00 per share. During 2021, the Company recognized $259,527 (2020: $1,163,916) as share based payments expense and a total $1,761,667 were used as part of management's subscription of shares issued in the AIM financing (see Common Shares section).
(d) Phantom stock options:
During 2020, the Company adopted a phantom stock option program for compensation of its executives and granted 1,681,000 phantom stock options of the Company which are vested in equal parts over the three following years after granted. During 2021, the Company recognized $34,450 (2020: $87,794) as share based payments expense and a total $151,290 were used as part of management's subscription of shares issued in the AIM financing (see Common Shares section).
16. Income taxes
The provision for income taxes varies from the amount that would be computed by applying the expected tax rate to income loss before income taxes. The principal reasons for differences between such expected income tax expense and the amount actually recorded are as follows:
|
|
2021 |
2020 |
|
Income (loss) before income taxes |
$ 4,374,722 |
$ (33,992,899) |
|
Corporate income tax rate |
23% |
24% |
|
Computed expected tax expense (recovery) |
$ 1,006,186 |
$ (8,158,296) |
|
Increase (decrease) in income taxes resulting from: |
|
|
|
Share based compensation |
19,474 |
280,744 |
|
(Recognized)/unrecognized deferred tax benefits |
(3,871,436) |
5,116,588 |
|
Tax rate difference on foreign jurisdictions |
783,741 |
(2,487,409) |
|
Other permanent difference |
(332,528) |
(363,362) |
|
Foreign exchange and others |
1,075,753 |
3,851,928 |
|
Income tax recovery |
$ (1,318,810) |
$ (1,759,807) |
During 2021, the Company recognized a deferred income tax asset of $4,839,785 and a deferred tax liability of $3,371,936 which represents the tax impact of temporary differences and management's estimation of current tax benefits that would be realized to compensate future taxable income, due to an increase in forecast commodity prices, at substantially enacted tax rates. In Colombia, the enacted tax rate is 31% for 2021, and the Colombian government mandated an increase in the tax rate to 35% from 30% beginning on January 1, 2022. The components of the Company's deferred income tax assets and liabilities are as follows:
|
As at December 31 |
2021 |
2020 |
|
Property and equipment |
$ (2,421,172) |
$ (624,325) |
|
Decommissioning liabilities and other provisions |
637,785 |
624,325 |
|
Carryforward non-capital losses |
3,251,236 |
- |
|
Net change in deferred tax |
$ 1,467,850 |
$ - |
|
Deferred tax liability |
3,371,935 |
- |
|
Deferred tax asset |
$ 4,839,785 |
$ - |
At December 31, 2021, the Company had non-capital losses carried forward of approximately $63,875,000 (2020 - $48,492,000) available to reduce future years taxable income. These losses commence expiring in 2029. At December 31, 2021, the Company had income tax credits and benefits of approximately $54,586,346 (2020 - $47,527,000) related to Canada and Colombia that were not recognized in the financial statements due to uncertainties associated with its ability to utilize these balances in the future.
17. Commitments and Contingencies
Exploration and Production Contracts
The Company has entered into a number of exploration contracts in Colombia which require the Company to fulfill work program commitments and issue financial guarantees related thereto. In aggregate, the Company has outstanding exploration commitments at December 31, 2021 of $17.8 million. T he Company, in conjunction with its partners, have made applications to cancel $15.5 million ($5.8 million Arrow's share as per table below) in commitments on the Macaya and Los Picachos blocks. The remaining commitments are expected to be satisfied by means of seismic work, exploration drilling and farm-outs. Presented below are the Company's exploration and production contractual commitments at December 31, 2021:
|
Block |
|
Less than 1 year |
1-3 years |
Thereafter |
Total |
|
COR-39 |
|
- |
12,000,000 |
- |
12,000,000 |
|
Los Picachos |
|
- |
1,970,000 |
- |
1,970,000 |
|
Macaya |
|
- |
3,830,000 |
- |
3,830,000 |
|
Total |
|
- |
17,800,000 |
- |
17,800,000 |
Contingencies
From time to time, the Company may be involved in litigation or has claims sought against it in the normal course of business operations. Management of the Company is not currently aware of any claims or actions that would materially affect the Company's reported financial position or results from operations. Under the terms of certain agreements and the Company's by-laws the Company indemnifies individuals who have acted at the Company's request to be a director and/or officer of the Company, to the extent permitted by law, against any and all damages, liabilities, costs, charges or expenses suffered by or incurred by the individuals as a result of their service.
Oleoducto Bicentenario de Colombia ("OBC") Pipeline
The Company was party to an agreement with Canacol that entitles it to a 0.5% interest in OBC, which owns a pipeline system intended to link Llanos basin oil production to the Caño Limon oil pipeline system in Colombia. Likewise, Canacol was in litigation with OBC in relation to ship or pay obligations that were terminated by Canacol in July 2018 under force majeure. On March 27, 2019, the court in charge of the case ruled in favor of the OBC and opined that the obligations under the ship or pay contract remained in force. Subsequently, on May 13, 2019, Canacol filed an appeal at the State Council, a higher-level court in the Colombian judiciary system, requesting annulment of this ruling. Likewise, in July 2019, OBC has also started litigation against Canacol for not honouring its ship or pay obligations under the contract. During 2021, negotiations between the parties involved were finally settled and approved by the courts and the Company has been cleared from any past and future ship or pay obligations associated with OBC.
Letters of Credit
At December 31, 2021, the Company had obligations under Letters of Credit ("LC's") outstanding totaling $5.2 million to guarantee work commitments on exploration blocks and other contractual commitments. Of the total, approximately $4.1 million has been guaranteed by Canacol. Under an agreement, Canacol will continue to provide security for Arrow's Letters of Credit providing that Arrow uses all reasonable efforts to replace the LC's. In the event the Company fails to secure the renewal of the letters of credit underlying the ANH guarantees, or any of them, the ANH could decide to cancel the underlying exploration and production contract for a particular block, as applicable. In this instance, the Company could risk losing its entire interest in the applicable block, including all capital expended to date and could possibly also incur additional abandonment and reclamation costs if applied by the ANH.
|
Current Outstanding Letters of Credit |
|||||
|
|
|
|
|
|
|
|
Contract |
Beneficiary |
Issuer |
Type |
Amount (US $) |
Renewal Date |
|
SANTA ISABEL |
ANH |
Carrao Energy |
Abandonment |
$643,423 |
April 14, 2022 |
|
ANH |
Canacol and Carrao |
Financial Capacity |
$1,672,162 |
June 30, 2022 |
|
|
CORE - 39 |
ANH |
Canacol |
Compliance |
$2,400,000 |
June 30, 2022 |
|
OMBU |
ANH |
Carrao Energy |
Financial Capacity |
$436,300 |
April 14, 2022 |
|
Total |
|
|
|
$5,151,885 |
|
18. 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.
(a) Commodity price risk
Commodity price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in commodity prices. Lower commodity prices can also impact the Company's ability to raise capital. Commodity prices for crude oil are impacted by world economic events that dictate the levels of supply and demand. From time to time the Company may attempt to mitigate commodity price risk through the use of financial derivatives.
i) Financial Derivative Contracts
During 2020, the Company had one financial derivative contract in order to manage commodity price risk. This instrument was not used for trading or speculative purposes. Arrow had not designated its financial derivative contract as effective accounting hedge, but the Company considered the commodity contract to be an effective economic hedge. The financial derivative contract was recorded on the statements of financial position at fair value, with the changes in fair value being recognized as an unrealized gain or loss in the statement of operations and comprehensive income (loss). This contract was terminated during 2020.
The estimated fair value of the derivative financial instrument in Level 2 at each measurement date have been determined based on appropriate internal valuation methodologies and/or third party indications. Level 2 fair values determined using valuation models require the use of assumptions concerning the amount and timing of future cash flows and discount rates. In determining these assumptions, the Company primarily relied on external, readily-observable quoted market inputs as applicable, including crude oil forward benchmark commodity prices and volatility, and discounted to present value as appropriate. The resulting fair value estimates may not necessarily be indicative of the amounts that could be realized or settled. The realized gain on risk management activities is included as part of revenues in the consolidated statements of operations and comprehensive income (loss). The gains on risk management activities for the period are comprised as follows:
|
|
For the years ended December 31 |
|
|
|
|
2021 |
2020 |
|
|
Realized risk management gain on commodity contract settled |
$ - |
$ 1,288,523 |
|
|
Unrealized gain on commodity contract outstanding |
- |
- |
|
|
|
$ - |
$ 1,288,523 |
|
(b) Credit Risk
Credit risk reflects the risk of loss if counterparties do not fulfill their contractual obligations. The majority of the Company's account receivable balances relate to petroleum and natural gas sales and balances receivables with partners in areas operated by the Company. The Company's policy is to enter into agreements with customers that are well established and well financed entities in the oil and gas industry such that the level of risk is mitigated. In Colombia, a significant portion of the sales is with a producing company under an existing sale/offtake agreement with prepayment provisions and priced using the Brent benchmark. The Company's trade account receivables primarily relate to sales of crude oil and natural gas, which are normally collected within 25 days (in Canada) and up to 15 days in advance (in Colombia) of the month of production. Other accounts receivable mainly relate to balances owed by the Company's partner in one of its blocks, and are mainly recoverable through production. The Company has historically not experienced any collection issues with its customers and partners.
(c) Market Risk
Market risk is comprised of two components: foreign currency exchange risk and interest rate risk.
i) Foreign Currency Exchange Risk
The Company operates on an international basis and therefore foreign exchange risk exposures arise from transactions denominated in currencies other than the United States dollar. The Company is exposed to foreign currency fluctuations as it holds cash and incurs expenditures in exploration and evaluation and administrative costs in foreign currencies. The Company incurs expenditures in Canadian dollars, United States dollars and the Colombian peso and is exposed to fluctuations in exchange rates in these currencies. There are no exchange rate contracts in place.
ii) Interest Rate Risk
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is not currently exposed to interest rate risk as it borrows funds at a fixed coupon rate of 15% on the promissory notes.
(d) Liquidity Risk
Liquidity risk includes the risk that, as a result of the Company's 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 financial 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.
The Company's approach to managing its liquidity risk is to ensure, within reasonable means, sufficient liquidity to meet its liabilities when due, under both normal and unusual conditions, without incurring unacceptable losses or jeopardizing the Company's business objectives.
During 2020, one of the Company's subsidiary secured a bridge loan with CEDCO (a subsidiary of COG Energy Ltd., the LLA-23 purchaser) for $500,000 which assisted the Company in meeting its near-term financial obligations. The loan had an annual interest rate of 6% and was repayable upon the earliest of: (i) the closing of the LLA-23 sale, or (ii) the receipt of certain Value-Added Tax ("VAT") refunds in Colombia, or (iii) where the closing of the LLA-23 sale is delayed after December 31, 2020 or does not occur, or where is terminated, either in cash or through the delivery of an equivalent value of crude oil produced from the LLA-23 Block and the Tapir Block. The balance of this bridge loan and interest was fully paid in November 2020.
The Company prepares annual capital expenditure budgets which are monitored regularly and updated as considered necessary. Petroleum and natural gas production is monitored daily to provide current cash flow estimates and the Company utilizes authorizations for expenditures on projects to manage capital expenditures. Any funding shortfall may be met in a number of ways, including, but not limited to, the issuance of new debt or equity instruments, further expenditure reductions and/or the introduction of joint venture partners.
(e) Capital Management
The Company's objective is to maintain a capital base sufficient to provide flexibility in the future development of the business and maintain investor, creditor and market confidence. The Company manages its capital structure and makes adjustments in response to changes in economic conditions and the risk characteristics of the underlying assets. The Company considers its capital structure to include share capital, bank debt (when available), promissory notes and working capital, defined as current assets less current liabilities. In order to maintain or adjust the capital structure, from time to time the Company may issue common shares or other securities, sell assets or adjust its capital spending to manage current and projected debt levels. The Company monitors leverage and adjusts its capital structure based on its net debt level. Net debt is defined as the principal amount of its outstanding debt, less working capital items. In order to facilitate the management of its net debt, the Company prepares annual budgets, which are updated as necessary depending on varying factors including current and forecast crude oil prices, changes in capital structure, execution of the Company's business plan and general industry conditions. The annual budget is approved by the Board of Directors and updates are prepared and reviewed as required.
The Company's capital includes the following:
|
|
December 31, 2021 |
December 31, 2020 |
|
Working capital, before promissory note |
$ 8,006,074 |
$ (1,932,940) |
|
Non-Current portion of promissory note |
(1,659,393) |
- |
|
|
$ 6,346,681 |
$ (1,932,940) |
19. Key Management Personnel
The Company has determined that key management personnel consists of its executive management and its Board of Directors. In addition to the salaries and fees paid to key management, the Company also provides compensation to both groups under its share-based compensation plans. Compensation expenses paid to key management personnel were as follows:
|
|
Years ended December 31 |
|
|
|
2021 |
2020 |
|
Salaries, severances and director fees |
$ 2,410,920 |
$ 447,152 |
|
Share based payments |
227,659 |
1,169,766 |
|
|
$ 2,638,579 |
$ 1,616,918 |
20. Segmented Information
The Company has two reportable operating segments: Colombia and Canada. The Company, through its operating segments, is engaged primarily in oil exploration, development and production, and the acquisition of oil and gas properties. The Canadian segment is also considered the corporate segment. The following tables show information regarding the Company's segments for the years ended and as at December 31:
|
Year ended December 31, 2021 |
|
Colombia |
|
Canada |
|
Total |
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
Oil Sales |
$ |
6,199,231 |
$ |
- |
$ |
6,199,231 |
|
Natural gas and liquid sales |
|
- |
|
965,449 |
|
965,449 |
|
Royalties |
|
(567,633) |
|
(84,554) |
|
(652,187) |
|
Expenses |
|
(3,282,997) |
|
(4,472,550) |
|
(7,755,547) |
|
Impairment reversal of oil and gas properties |
|
4,182,575 |
|
1,435,201 |
|
5,617,776 |
|
Taxes |
|
1,318,810 |
|
- |
|
1,318,810 |
|
Net income (loss) |
$ |
7,849,986 |
$ |
(2,156,454) |
$ |
5,693,532 |
|
As at December 31, 2021 |
|
Colombia |
|
Canada |
|
Total |
|
|
|
|
|
|
|
|
|
Current assets |
$ |
5,198,545 |
$ |
7,607,957 |
$ |
12,806,502 |
|
Non-current: |
|
|
|
|
|
|
|
Deferred income taxes |
|
4,839,785 |
|
- |
|
4,839,785 |
|
Restricted cash |
|
53,726 |
|
678,827 |
|
732,553 |
|
Exploration and evaluation |
|
6,964,506 |
|
- |
|
6,964,506 |
|
Property, plant and equipment |
|
9,876,172 |
|
5,976,280 |
|
15,852,452 |
|
Total Assets |
$ |
26,932,734 |
$ |
14,263,064 |
$ |
41,195,798 |
|
|
|
|
|
|
|
|
|
Current liabilities |
$ |
1,550,665 |
$ |
3,249,763 |
$ |
4,800,428 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
Long-term debt |
|
- |
|
31,552 |
|
31,552 |
|
Lease obligation |
|
- |
|
34,434 |
|
34,434 |
|
Other liabilities |
|
177,500 |
|
- |
|
177,500 |
|
Deferred income taxes |
|
3,371,935 |
|
- |
|
3,371,935 |
|
Decommissioning liability |
|
1,822,243 |
|
647,996 |
|
2,470,239 |
|
Promissory note |
|
- |
|
1,659,393 |
|
1,659,393 |
|
Derivative liability |
|
- |
|
4,692,203 |
|
4,692,203 |
|
Total liabilities |
$ |
6,922,344 |
$ |
10,315,341 |
$ |
17,237,685 |
|
Year ended December 31, 2020 |
|
Colombia |
|
Canada |
|
Total |
||
|
|
|
|
|
|
|
|
||
|
Revenue: |
|
|
|
|
|
|
||
|
Oil Sales |
$ |
5,179,819 |
$ |
- |
$ |
5,179,819 |
||
|
Natural gas and liquid sales |
|
- |
|
414,684 |
|
414,684 |
||
|
Royalties |
|
(236,816) |
|
(37,122) |
|
(273,938) |
||
|
Expenses |
|
(9,831,878) |
|
(3,277,950) |
|
(13,109,828) |
||
|
Impairment of oil and gas properties |
|
(27,263,110) |
|
- |
|
(27,263,110) |
||
|
Gain on sale of oil and gas properties |
|
1,059,474 |
|
- |
|
1,059,474 |
||
|
Taxes |
|
1,759,807 |
|
- |
|
1,759,807 |
||
|
Net loss |
$ |
(29,332,704) |
$ |
(2,900,388) |
$ |
(32,233,092) |
||
|
As at December 31, 2020 |
|
Colombia |
|
Canada |
|
Total |
||
|
|
|
|
|
|
|
|
||
|
Current assets |
$ |
14,859,186 |
$ |
1,099,466 |
$ |
15,958,652 |
||
|
Non-current: |
|
|
|
|
|
|
||
|
Restricted cash |
|
53,727 |
|
406,556 |
|
460,283 |
||
|
Exploration and evaluation |
|
6,961,667 |
|
- |
|
6,961,667 |
||
|
Property and equipment |
|
7,016,982 |
|
3,134,715 |
|
10,151,697 |
||
|
Total Assets |
$ |
28,891,562 |
$ |
4,640,737 |
$ |
33,532,299 |
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
||
|
Current liabilities |
$ |
8,622,577 |
$ |
9,269,015 |
$ |
17,891,592 |
||
|
Non-current liabilities: |
|
|
|
|
|
|
||
|
Other liabilities |
|
177,500 |
|
- |
|
177,500 |
||
|
Lease obligation |
|
- |
|
53,563 |
|
53,563 |
||
|
Decommissioning liability |
|
2,081,083 |
|
503,824 |
|
2,584,907 |
||
|
Long-term debt |
|
- |
|
31,416 |
|
31,416 |
||
|
Total liabilities |
$ |
10,881,160 |
$ |
9,857,818 |
$ |
20,738,978 |
||
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