SECOND QUARTER 2020 RESULTS & OPERATIONAL UPDATE
SECOND QUARTER 2020 RESULTS AND OPERATIONAL UPDATE
CALGARY, ALBERTA (August 14, 2020) - Touchstone Exploration Inc. ( " Touchstone ", "we", "our", "us" or the " Company " ) (TSX, LSE: TXP) provides an operational update and reports its unaudited financial and operating results for the three months ended June 30, 2020. Selected information is outlined below and should be read in conjunction with Touchstone's June 30, 2020 unaudited consolidated interim financial statements and related Management's Discussion and Analysis, both of which will be available on the Company's website ( www.touchstoneexploration.com ) and under the Company's profile on SEDAR ( www.sedar.com ). Unless otherwise stated, all financial amounts herein are rounded to thousands of United States dollars .
Operational and Second Quarter Highlights
· Progressed with the tie-in of our Coho-1 natural gas well, with facilities construction and pipeline preparation underway.
· Delivered average daily crude oil production of 1,396 barrels per day ("bbls/d"), compared to 1,589 bbls/d in the first quarter of 2020 and 1,768 bbls/d in the second quarter of 2019. As expected, our crude oil production has reduced due to the ongoing impact of natural declines, reflecting a strategic focus on our Ortoire exploration program which has limited capital investment and reduced discretionary field maintenance expenditures.
· Invested $1,249,000 in Ortoire exploration activities, primarily focused on Chinook-1 lease preparations and Coho-1 tie-in operations.
· Generated an operating netback of $10.73 per barrel despite realized price reductions of 36 percent and 51 percent from the prior quarter and the second quarter of 2019, respectively.
· Achieved meaningful cost reductions, with operating costs on a per barrel basis decreasing by 28 percent and general and administrative expenses declining by 33 percent relative to the second quarter of 2019.
· Recognized net loss of $2,742,000 ($0.01 per share) compared to a net loss of $9,240,000 ($0.05 per share) in the previous quarter ended March 31, 2020 and a net loss of $833,000 ($0.01 per share) in the second quarter of 2019.
· Enhanced our financial flexibility and reduced our overall cost of borrowing by refinancing our long-term debt, withdrawing $15 million of the available $20 million balance of our new term loan to repay our former $20 million Canadian dollar ("C$") term loan.
· Maintained financial flexibility amid a weak commodity price backdrop, exiting the quarter with cash of $6,891,000 and net debt of $8,466,000.
· Received approximately $2.8 million in bonds from the Trinidad government for past due value added tax balances. Subsequent to quarter-end, we sold the bonds to a financial institution at face value plus accrued interest.
· Spudded the Chinook-1 exploration well on August 13, 2020.
Paul R. Baay, President and Chief Executive Officer, commented:
"The spudding of the Chinook well marks the next phase of our Ortoire block exploration program that has already delivered two successful natural gas wells in just over a year. The Chinook well is being drilled in proximity to the original 1959 well and will further evaluate the turbidite concept eastward from the original Coho discovery. With the assistance of a 3D seismic survey, we are now expecting to move up structure to target the Herrera sands.
In addition to the initial work undertaken at Chinook, we have made progress across the Ortoire block, commissioning the previously announced Cascadura area independent reserves evaluation as well as commencing the Coho-1 tie-in project. In conjunction, we have been diligently working with the relevant government agencies to fulfill our regulatory and environmental obligations.
I am happy to report that the Company finished the period with a healthy cash position with increased financial flexibility through the new term loan, a position that has been further buoyed by monetizing our Trinidad government issued bonds in July. Finally, I would like to thank all members of our staff for their tireless work and dedication that have enabled us to keep the drilling program and facilities projects moving forward during these challenging times. "
Second Quarter Summary and Outlook
The second quarter of 2020 was an extremely challenging period for the oil and gas sector, as declines in demand caused by the COVID-19 outbreak resulted in global oversupply and volatile crude oil prices. Despite these challenges we managed our business effectively during the quarter, mitigating operational losses and progressing with the tie-in of our Coho-1 natural gas well and the drilling of our Chinook-1 exploration well. We took decisive action to protect our cash flows in the quarter, implementing cost saving initiatives that significantly lowered our operating and general and administrative expenses. We successfully adapted our work procedures to ensure operational safety and business continuity, with only minor unavoidable delays related to the pandemic.
Going forward, we remain focused on protecting the health of our employees and communities and ensuring a decisive response for our investors. Our objective remains to bring our two natural gas exploration discoveries onto production as soon as possible, which are expected to not only increase cash flow but insulate us from further crude oil price volatility from the continued effects of COVID-19. Drilling operations are ongoing at our Chinook prospect, and we anticipate drilling the Cascadura Deep location subject to maintaining ongoing liquidity targets.
The rapid decline in oil prices had a negative impact on our cash flows during the second quarter of 2020 and our projections for the balance of the year. Ongoing weakness in commodity prices resulting from COVID-19 impacts on demand and market volatility may adversely impact our future financial and operational results. With market conditions changing rapidly, there continues to be significant uncertainty around the potential effect this could have on Touchstone's operations and results, which could be material. We continue to monitor the situation and economic environment, and we will adapt our business operations and drilling program to ensure that we preserve and grow long-term shareholder value.
Operational Update
Touchstone spudded the Chinook-1 exploration well on our Ortoire exploration block on August 13, 2020 using Well Services rig #80. The Chinook-1 well is targeting hydrocarbon prospects in the Herrera formation at depths between 8,000 and 9,200 feet, the same geologic horizon that was targeted in the Company's successful Coho and Cascadura discoveries. The Chinook-1 well offsets the BW-7 and 7X wells drilled by Shell Trinidad Limited in 1959 and is targeting the same zones in which hydrocarbons were previously observed in the wells in an updip and seismically optimized location. The exploration well is expected to be drilled to a total measured depth of 9,880 feet, with drilling operations anticipated to take approximately 40 days. The Chinook-1 well is the third of four earning exploration wells under Touchstone's Ortoire Exploration and Production Licence. The Company has an 80% working interest in the well but is responsible for 100% of the drilling, completion and testing costs associated with the well. Heritage Petroleum Company Limited holds the remaining 20% working interest. There were no crude oil or natural gas reserves associated with the Chinook-1 well included in the Company's December 31, 2019 independent reserves evaluation.
We continue to work with various government organizations to finalize the facilities and tie-in of the Coho natural gas discovery. We have received initial comments for the required Certificate of Environmental Compliance ("CEC") from the Trinidad Environmental Management Authority and are currently preparing our responses. In parallel with the CEC, the contractor has commenced construction of the surface equipment along with the preparation of the materials required for the pipeline. We have also received approval to begin transportation of the coated pipe to the well location where it will be stored while awaiting final approval to commence construction.
We are also working with the National Gas Company of Trinidad and Tobago ("NGC") to identify the optimal tie-in point for petroleum volumes from the Cascadura discovery. Earlier this month a field visit was conducted with NGC to review possible pipeline routes to existing NGC facilities. Final project design is contingent upon the drilling results from Chinook-1 and Cascadura Deep, as it is anticipated that any potential additional petroleum volumes would be aggregated to one gathering system.
Financial and Operating Results Summary
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Three months ended June 30, |
% change |
Six months ended June 30, |
% change |
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2020 |
2019 |
2020 |
2019 |
||
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Operating Highlights |
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Average daily oil production (bbls/d) |
1,396 |
1,768 |
(21) |
1,493 |
1,944 |
(23) |
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|
|
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Brent benchmark price ($/bbl) |
29.70 |
69.04 |
(57) |
40.23 |
66.07 |
(39) |
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Operating netback(1)($/bbl) |
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|
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Realized sales price |
29.34 |
60.33 |
(51) |
38.25 |
58.91 |
(35) |
|
Royalties |
(6.99) |
(17.25) |
(59) |
(10.66) |
(16.19) |
(34) |
|
Operating expenses |
(11.62) |
(16.23) |
(28) |
(12.67) |
(14.52) |
(13) |
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|
10.73 |
26.85 |
(60) |
14.92 |
28.20 |
(47) |
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Financial Highlights |
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($000's except as indicated) |
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Petroleum sales |
3,755 |
9,708 |
(61) |
10,453 |
20,723 |
(50) |
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Cash flow (used in) from operating activities |
(1,921) |
1,832 |
n/a |
(1,997) |
4,569 |
n/a |
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Funds flow (used in) from operations(2) |
(450) |
1,310 |
n/a |
807 |
3,740 |
(78) |
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Per share - basic and diluted(1)(2) |
(0.00) |
0.01 |
n/a |
0.00 |
0.02 |
n/a |
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Net loss |
(2,742) |
(833) |
100 |
(11,982) |
(1,018) |
100 |
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Per share - basic and diluted |
(0.01) |
(0.01) |
- |
(0.07) |
(0.01) |
100 |
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Exploration capital expenditures |
1,249 |
681 |
83 |
3,072 |
1,041 |
100 |
|
Development capital expenditures |
92 |
315 |
(71) |
312 |
714 |
(56) |
|
Total capital expenditures |
1,341 |
996 |
35 |
3,384 |
1,755 |
93 |
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|
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Working capital surplus |
|
|
|
(6,534) |
(2,062) |
100 |
|
Principal non-current balance of term loan |
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|
15,000 |
11,459 |
31 |
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Net debt(1) - end of period |
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8,466 |
9,397 |
(10) |
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Share Information (000's) |
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Weighted average shares outstanding - basic and diluted |
183,640 |
160,688 |
14 |
176,500 |
150,891 |
17 |
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Outstanding shares - end of period |
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|
184,161 |
160,688 |
15 |
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Notes:
(1) Non-GAAP financial measure that does not have a standardized meaning prescribed by International Financial Reporting Standards and therefore may not be comparable with the calculation of similar measures presented by other companies. See "Advisories: Non-GAAP Measures".
(2) Additional GAAP term included in the Company's consolidated statements of cash flows. Funds flow (used in) from operations represents net loss excluding non-cash items. See "Advisories: Non-GAAP Measures".
Operating results
In the second quarter of 2020, we invested $1,249,000 in exploration activities, as we continued with lease preparations on the Chinook-1 drill location and commenced Coho-1 well tie-in operations.
We conducted minimal developmental activity in the quarter, with average crude oil sales declining to 1,396 bbls/d, a 12 percent decrease relative to the 1,589 bbls/d produced in the first quarter of 2020 and a 21 percent reduction from 1,768 bbls/d produced in the second quarter of 2019. Our crude oil sales volumes have decreased due to the ongoing impact of natural declines associated with limited capital investment since the final two wells of the 2018 drilling program were brought onstream in January 2019. In addition, we deliberately reduced discretionary operating expenditures in the quarter in response to lower crude oil pricing, only focusing on working on high priority wells. Development capital activity for the balance of the year is expected to be minimal as we focus predominantly on our exploration program.
Financial results
We reported negative funds flow from operations of $450,000 in the second quarter of 2020 versus funds flow from operations of $1,310,000 generated in the 2019 second quarter. The decrease reflected significantly lower commodity prices as a result of the impact of the COVID-19 pandemic and a 21 percent decline in crude oil production. For the six months ended June 30, 2020, we generated funds flow from operations of $807,000 (2019 - $3,740,000).
We recorded a net loss of $2,742,000 ($0.01 per share) in the second quarter of 2020 versus a net loss of $833,000 ($0.01 per share) in the prior year equivalent quarter. The decrease was primarily attributed to a reduction of $2,947,000 in operating netbacks, driven by reduced production and realized pricing, partially offset by savings in royalties and operating costs. During the quarter, we focused on various cost-saving initiatives, as quarterly operating costs decreased 43 percent and 28 percent on an absolute and per barrel basis from the second quarter of 2019, respectively. We also reduced second quarter 2020 general and administrative expenses by 15 percent from the previous quarter and 33 percent relative to the second quarter of 2019.
We refinanced our debt in the quarter by entering into a $20 million term loan facility with a Trinidad based financial institution. $15 million was initially withdrawn to satisfy obligations related to prepaying our former C$20 million Canadian based term loan. The new credit facility does not require the commencement of principal payments until June 15, 2022, and financial covenants are not tested until the year ended December 31, 2022. By transferring our senior debt to Trinidad, the refinancing is expected to reduce our future after tax cost of borrowing from 8 percent to approximately 3.5 percent.
We exited the quarter with a working capital surplus of $6,534,000, $15 million withdrawn on our term credit facility and net debt of $8,466,000. Our liquidity is augmented by $5 million of undrawn credit capacity, with principal payments not due until the second quarter of 2022.
Touchstone Exploration Inc.
Touchstone Exploration Inc. is a Calgary based company engaged in the business of acquiring interests in petroleum and natural gas rights and the exploration, development, production and sale of petroleum and natural gas. Touchstone is currently active in onshore properties located in the Republic of Trinidad and Tobago. The Company's common shares are traded on the Toronto Stock Exchange and the AIM market of the London Stock Exchange under the symbol " TXP " . For further information about Touchstone, please visit our website at www.touchstoneexploration.com or contact:
Touchstone Exploration Inc.
Mr. Paul Baay, President and Chief Executive Officer Tel: +1 (403) 750-4487
Mr. Scott Budau, Chief Financial Officer
Mr. James Shipka, Chief Operating Officer
Shore Capital (Nominated Advisor and Joint Broker)
Nominated Advisor: Edward Mansfield / Daniel Bush / Michael McGloin Tel: +44 (0) 207 408 4090
Corporate Broking: Jerry Keen
Canaccord Genuity (Joint Broker)
Adam James / Thomas Diehl Tel: +44 (0) 207 523 8000
Camarco (Financial PR)
Nick Hennis / Billy Clegg Tel: +44 (0) 203 781 8330
Advisories
Non-GAAP Measures
This announcement contains terms commonly used in the oil and natural gas industry, including funds flow from operations, funds flow from operations per share, operating netback and net debt. These terms do not have a standardized meaning prescribed under Generally Accepted Accounting Principles ("GAAP") and may not be comparable to similar measures presented by other companies. Shareholders and investors are cautioned that these measures should not be construed as alternatives to cash flow from operating activities, net earnings, net earnings per share, total liabilities, or other measures of financial performance as determined in accordance with GAAP. Management uses these Non-GAAP measures for its own performance measurement and to provide stakeholders with measures to compare the Company's operations over time.
Funds flow from (used in) operations is an additional GAAP measure included in the Company's consolidated statements of cash flows. Funds flow from operations represents net earnings (loss) excluding non-cash items. Touchstone considers funds flow from operations to be an important measure of the Company's ability to generate the funds necessary to finance capital expenditures and repay debt. The Company calculates funds flow from operations per share by dividing funds flow from operations by the weighted average number of common shares outstanding during the applicable period.
The Company uses operating netback as a key performance indicator of field results. Operating netback is presented on a total and per barrel basis and is calculated by deducting royalties and operating expenses from petroleum sales. If applicable, the Company also discloses operating netback both prior to realized gains or losses on derivatives and after the impacts of derivatives are included. Realized gains or losses represent the portion of risk management contracts that have settled in cash during the period, and disclosing this impact provides Management and investors with transparent measures that reflect how the Company's risk management program can impact netback metrics. The Company considers operating netback to be a key measure as it demonstrates Touchstone's profitability relative to current commodity prices. This measurement assists Management and investors with evaluating operating results on a historical basis.
The Company closely monitors its capital structure with a goal of maintaining a strong financial position in order to fund current operations and the future growth of the Company. The Company monitors working capital and net debt as part of its capital structure to assess its true debt and liquidity position and to manage capital and liquidity risk. Working capital is calculated as current assets minus current liabilities as they appear on the consolidated statements of financial position. Net debt is calculated by summing the Company's working capital and the principal (undiscounted) non-current amount of senior secured debt.
Forward-Looking Statements
Certain information provided in this announcement may constitute forward-looking statements within the meaning of applicable securities laws. Forward-looking information in this announcement may include, but is not limited to, statements relating to the Company's exploration plans and strategies, including anticipated drilling, timing, development, tie-in, facilities construction, and ultimate production from exploration wells; the Company's expectation regarding future demand for the Company's petroleum products and economic activity in general; the impacts of COVID-19 on the Company's business and measures taken in response thereto; uncertainty regarding COVID-19 and the impact it will have on future petroleum pricing and global financial markets; the Company's expected after tax cost of debt; and the sufficiency of resources and available financing to fund future capital expenditures and maintain financial liquidity. Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. Certain of these risks are set out in more detail in the Company's 2019 Annual Information Form dated March 25, 2020 which has been filed on SEDAR and can be accessed at www.sedar.com. The forward-looking statements contained in this announcement are made as of the date hereof, and except as may be required by applicable securities laws, the Company assumes no obligation to update publicly or revise any forward-looking statements made herein or otherwise, whether as a result of new information, future events or otherwise.
Touchstone Exploration Inc.
Consolidated Interim Statements of Financial Position (unaudited)
Stated in thousands of United States dollars
|
As at |
Note |
June 30, 2020 |
December 31, 2019 |
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Assets |
|
|
|
|
Current assets |
|
|
|
|
Cash |
|
$ 6,891 |
$ 6,182 |
|
Restricted cash |
17 |
271 |
271 |
|
Accounts receivable |
4 |
5,102 |
7,348 |
|
Assets held for trading |
5 |
2,805 |
- |
|
Crude oil inventory |
|
71 |
71 |
|
Prepaid expenses |
|
618 |
246 |
|
|
|
15,758 |
14,118 |
|
|
|
|
|
|
Exploration assets |
6 |
16,576 |
13,579 |
|
Property and equipment |
7 |
32,714 |
55,730 |
|
Restricted cash |
9 |
589 |
- |
|
Other assets |
|
193 |
496 |
|
Abandonment fund |
11 |
1,181 |
1,125 |
|
Total assets |
|
$ 67,011 |
$ 85,048 |
|
|
|
|
|
|
Liabilities |
|
|
|
|
Current liabilities |
|
|
|
|
Accounts payable and accrued liabilities |
8 |
$ 8,981 |
$ 13,928 |
|
Income taxes payable |
8 |
243 |
1,329 |
|
|
|
9,224 |
15,257 |
|
|
|
|
|
|
Lease liabilities |
|
39 |
105 |
|
Term loan |
9 |
14,667 |
13,966 |
|
Other liabilities |
10 |
947 |
769 |
|
Decommissioning liabilities |
11 |
9,645 |
11,547 |
|
Deferred income taxes |
12 |
3,092 |
13,289 |
|
Total liabilities |
|
37,614 |
54,933 |
|
|
|
|
|
|
Shareholders' equity |
|
|
|
|
Shareholders' capital |
13 |
72,654 |
61,507 |
|
Contributed surplus |
|
2,386 |
2,341 |
|
Accumulated other comprehensive loss |
|
(14,526) |
(14,598) |
|
Accumulated deficit |
|
(31,117) |
(19,135) |
|
Total shareholders' equity |
|
29,397 |
30,115 |
|
Total liabilities and shareholders' equity |
|
$ 67,011 |
$ 85,048 |
Commitments (note 17)
See accompanying notes to these unaudited consolidated interim financial statements.
Touchstone Exploration Inc.
Consolidated Interim Statements of Net Loss and Comprehensive Loss (unaudited)
Stated in thousands of United States dollars (except per share amounts)
| Note | Three months ended June 30, | Six months ended June 30, | ||
2020 | 2019 | 2020 | 2019 | ||
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Revenues |
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Petroleum sales |
| $ 3,755 | $ 9,708 | $ 10,453 | $ 20,723 |
Royalties |
| (895) | (2,776) | (2,914) | (5,695) |
Petroleum revenue |
| 2,860 | 6,932 | 7,539 | 15,028 |
Gain on financial derivatives | 15 | - | 25 | - | 25 |
Other income |
| 22 | 3 | 63 | 11 |
Total revenue |
| 2,882 | 6,960 | 7,602 | 15,064 |
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|
|
|
Expenses |
|
|
|
|
|
Operating |
| 1,487 | 2,612 | 3,462 | 5,107 |
General and administrative |
| 996 | 1,487 | 2,163 | 2,802 |
Net finance | 14 | 1,768 | 251 | 2,506 | 572 |
Foreign exchange loss | 15 | 453 | 91 | 138 | 129 |
Share-based compensation | 13 | 81 | 49 | 125 | 80 |
Depletion and depreciation | 7 | 814 | 1,249 | 1,902 | 2,700 |
Impairment (recovery) expense | 6,7 | (116) | 63 | 19,187 | 141 |
Total expenses |
| 5,483 | 5,802 | 29,483 | 11,531 |
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(Loss) earnings before income taxes |
| (2,601) | 1,158 | (21,881) | 3,533 |
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Provision for income taxes |
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|
|
Current expense |
| 252 | 1,435 | 284 | 3,053 |
Deferred (recovery) expense |
| (111) | 556 | (10,183) | 1,498 |
Total income tax expense (recovery) | 12 | 141 | 1,991 | (9,899) | 4,551 |
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Net loss |
| (2,742) | (833) | (11,982) | (1,018) |
Currency translation adjustments |
| (29) | (188) | 72 | (221) |
Comprehensive loss |
| $ (2,771) | $ (1,021) | $ (11,910) | $ (1,239) |
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Net loss per common share |
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|
Basic and diluted | 13 | $ (0.01) | $ (0.01) | $ (0.07) | $ (0.01) |
See accompanying notes to these unaudited consolidated interim financial statements.
Touchstone Exploration Inc.
Consolidated Interim Statements of Changes in Shareholders' Equity (unaudited)
Stated in thousands of United States dollars
| Shareholders' capital | Contributed surplus | Accumulated other comprehensive loss | Accumulated deficit |
Shareholders' equity |
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|
|
|
January 1, 2019 | $ 56,987 | $ 2,172 | $ (14,427) | $ (13,515) | $ 31,217 |
Comprehensive loss | - | - | (221) | (1,018) | (1,239) |
Private placement (note 13) | 4,496 | - | - | - | 4,496 |
Share-based compensation expense (note 13) | - | 80 | - | - | 80 |
Share-based compensation capitalized | - | 11 | - | - | 11 |
June 30, 2019 | $ 61,483 | $ 2,263 | $ (14,648) | $ (14,533) | $ 34,565 |
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January 1, 2020 | $ 61,507 | $ 2,341 | $ (14,598) | $ (19,135) | $ 30,115 |
Comprehensive loss | - | - | 72 | (11,982) | (11,910) |
Private placement (note 13) | 10,850 | - | - | - | 10,850 |
Share-based settlements (note 13) | 297 | (97) | - | - | 200 |
Share-based compensation expense (note 13) | - | 125 | - | - | 125 |
Share-based compensation capitalized | - | 17 | - | - | 17 |
June 30, 2020 | $ 72,654 | $ 2,386 | $ (14,526) | $ (31,117) | $ 29,397 |
See accompanying notes to these unaudited consolidated interim financial statements.
Touchstone Exploration Inc.
Consolidated Interim Statements of Cash Flows (unaudited)
Stated in thousands of United States dollars
| Note | Three months ended June 30, | Six months ended June 30, | ||
2020 | 2019 | 2020 | 2019 | ||
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Cash provided by (used in) the following activities: |
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Operating activities |
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Net loss |
| $ (2,742) | $ (833) | $ (11,982) | $ (1,018) |
Items not involving cash from operations: |
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|
| |
Non-cash gain on financial derivatives | 15 | - | (25) | - | (25) |
Unrealized foreign exchange loss | 15 | 311 | 70 | 10 | 128 |
Share-based compensation | 13 | 81 | 49 | 125 | 80 |
Depletion and depreciation | 7 | 814 | 1,249 | 1,902 | 2,700 |
Impairment (recovery) expense | 6,7 | (116) | 63 | 19,187 | 141 |
Other | 14 | 1,313 | 165 | 1,748 | 236 |
Deferred income tax (recovery) expense | 12 | (111) | 556 | (10,183) | 1,498 |
Decommissioning expenditures |
| - | 16 | - | - |
Funds flow (used in) from operations |
| (450) | 1,310 | 807 | 3,740 |
Change in non-cash working capital |
| (1,471) | 693 | (2,804) | 1,000 |
Costs related to financial derivatives | 15 | - | (171) | - | (171) |
Cash flows (used in) from operating activities |
| (1,921) | 1,832 | (1,997) | 4,569 |
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|
Investing activities |
|
|
|
|
|
Exploration asset expenditures | 6 | (1,249) | (681) | (3,072) | (1,041) |
Property and equipment expenditures | 7 | (92) | (315) | (312) | (714) |
Abandonment fund expenditures | 11 | (27) | (37) | (61) | (81) |
Proceeds from asset disposition |
| 22 | - | 45 | - |
Change in non-cash working capital |
| (1,107) | (873) | (4,001) | (2,982) |
Cash flows used in investing activities | (2,453) | (1,906) | (7,401) | (4,818) | |
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Changes in restricted cash | 9 | (589) | - | (589) | - |
Net payment of term loan | 9 | (133) | - | (133) | (112) |
Payment of production liability | 10 | (50) | (97) | (141) | (207) |
Net finance lease receipts |
| (16) | (80) | (39) | (112) |
Issuance of common shares | 13 | 139 | - | 11,044 | 4,496 |
Change in non-cash working capital |
| (34) | (11) | (60) | 3 |
Cash flows (used in) from financing activities | (683) | (188) | 10,082 | 4,068 | |
|
|
|
|
|
|
(Decrease) increase in cash |
| (5,057) | (262) | 684 | 3,819 |
Cash, beginning of period |
| 12,219 | 7,586 | 6,182 | 3,554 |
Impact of foreign exchange on foreign denominated cash balances |
| (271) | (74) | 25 | (123) |
|
|
|
|
|
|
Cash, end of period |
| $ 6,891 | $ 7,250 | $ 6,891 | $ 7,250 |
|
|
|
|
|
|
The following are included in cash flow from operating activities: |
|
|
|
| |
Interest paid in cash |
| 528 | 221 | 819 | 448 |
Income taxes paid in cash |
| 222 | 1,424 | 1,369 | 2,011 |
See accompanying notes to these unaudited consolidated interim financial statements.
Notes to the Consolidated Interim Financial Statements (unaudited)
As at June 30, 2020 and for the three and six months ended June 30, 2020 and 2019
1. Reporting Entity
Touchstone Exploration Inc. and its subsidiaries (collectively, the "Company") are engaged in the business of crude oil and natural gas exploration, development, acquisition and production. The Company is currently active in the Republic of Trinidad and Tobago ("Trinidad").
Touchstone Exploration Inc. is incorporated under the laws of Alberta, Canada with its head and principal office located at 4100, 350 7th Avenue SW, Calgary, Alberta, Canada T2P 3N9. The Company's common shares are listed on the Toronto Stock Exchange and on the AIM market of the London Stock Exchange under the symbol "TXP".
2. Basis of Preparation and Statement of Compliance
These unaudited condensed consolidated interim financial statements (the "financial statements") have been prepared in accordance with International Accounting Standard ("IAS") 34 Interim Financial Reporting using accounting policies consistent with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. These financial statements are condensed as they do not include all the information required by IFRS for annual financial statements and therefore should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2019 (the "annual financial statements"). Unless otherwise stated, amounts presented in these financial statements are denominated in United States dollars ("$" or "US$"). Certain reclassification adjustments have been made to these financial statements to conform to the current presentation.
The financial statements have been prepared on a historical cost basis, except as detailed in the accounting policies disclosed in Note 3 "Summary of Significant Accounting Policies" of the Company's annual financial statements. All accounting policies and methods of computation followed in the preparation of these financial statements are consistent with those of the previous financial year. All inter-entity transactions have been eliminated upon consolidation between the Company and any subsidiaries in these financial statements. The Company's operations are viewed as a single operating segment by the chief operating decision makers of the Company for the purposes of resource allocation and assessing performance.
These financial statements were authorized for issue by the Company's Board of Directors on August 13, 2020.
3. Recent Developments and Impacts to Use of Estimates, Judgements and Assumptions
The outbreak of COVID-19 and subsequent measures intended to limit the pandemic has contributed to significant declines and abnormal volatility of global financial markets. The pandemic has adversely affected global commercial activity and has significantly reduced worldwide demand for crude oil, resulting in global oversupply and an unprecedented level of volatility and price weakness.
The scale and duration of these developments remain uncertain, and the full extent of the impact on the Company's operations and future financial performance is currently unknown. It will depend on future developments that are uncertain and unpredictable, including the duration and spread of COVID-19, its continued impact on capital and financial markets on a macro-scale and any new information that may emerge concerning the severity of the virus. These uncertainties may persist beyond when it is determined how to contain the virus or treat its impact. The outbreak presents uncertainty and risk with respect to the Company, its performance, and estimates and assumptions used by Management in the preparation of its financial statements.
A full list of the significant estimates and judgements made by Management in the preparation of its financial statements are included in Note 5 "Use of Estimates, Judgements and Assumptions" of the annual financial statements. The outbreak and continuing volatile market conditions have increased the complexity of estimates, judgements and assumptions used to prepare these financial statements, particularly related to the recoverability of asset carrying values and the deferred income tax provision.
Changes to any of these estimates, judgements and assumptions could result in a material adjustment to the carrying values of assets and liabilities. Estimates and underlying assumptions are reviewed on an ongoing basis, and any revisions to accounting estimates are recognized in the period in which the estimates are revised.
4. Financial Assets and Credit Risk
Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. As at June 30, 2020, the Company was exposed to credit risk with respect to its accounts receivable and finance lease receivable included in other assets. The credit risk associated with the Company's finance lease receivable is minimal as the asset is secured by the underlying fixed assets, with ownership transferring to the counterparty subsequent to the final lease payment in 2022.
The Company's credit exposure on accounts receivable typically pertains to accrued sales revenue for monthly production volumes sold to Heritage Petroleum Limited ("Heritage") and value added taxes ("VAT") due from the Trinidad government. As at June 30, 2020, $2,953,000 of petroleum sales was included in accounts receivable, representing approximately 58 percent of the Company's consolidated accounts receivable balance (December 31, 2019 - $2,074,000 and 28 percent, respectively). $1,436,000 of the Company's consolidated accounts receivable was comprised of VAT as at June 30, 2020, which represented approximately 28 percent of the total balance (December 31, 2019 - $4,283,000 and 58 percent, respectively).
As at June 30, 2020, the Company determined that the average expected credit loss on the Company's accounts receivables was $nil (December 31, 2019 - $nil). The Company believes that the accounts receivable balances that are past due are ultimately collectible, as the majority are due from the Trinidad government for VAT, and although the timing of settlement is uncertain, the Company has not historically experienced any material collection issues (see Note 5).
The aging of accounts receivable as at June 30, 2020 and December 31, 2019 is disclosed in the following table.
|
Accounts receivable aging |
|
June 30, 2020 |
December 31, 2019 |
|
|
|
|
|
|
Not past due |
|
$ 4,196 |
$ 3,581 |
|
Past due (greater than 90 days) |
|
906 |
3,767 |
|
|
|
|
|
|
Balance |
|
$ 5,102 |
$ 7,348 |
5. Assets Held for Trading
In May 2020, the Trinidad government issued the Company's Trinidad subsidiaries an aggregate $2,793,000 in bonds in lieu of payment of past due VAT receivable balances. The Company classified $2,805,000 as assets held for trading as at June 30, 2020, representing the value of the issued bonds plus accrued interest thereon (December 31, 2019 - $nil). Subsequent to June 30, 2020, the bonds were sold to a Trinidad financial institution at face value plus accrued interest.
6. Exploration Assets
|
|
Six months ended June 30, 2020 |
Year ended December 31, 2019 |
|
|
|
|
|
Balance, beginning of year |
$ 13,579 |
$ 3,644 |
|
Additions |
3,072 |
10,191 |
|
Impairment |
(1) |
(309) |
|
Effect of change in foreign exchange rates |
(74) |
53 |
|
|
|
|
|
Balance, end of period |
$ 16,576 |
$ 13,579 |
During the three and six months ended June 30, 2020, the Company recognized impairment reversals related to exploration assets of $116,000 and $28,000, respectively (2019 - impairments of $63,000 and $141,000). The impairment recoveries were based on the reversal of previously accrued East Brighton licence obligations that were updated to reflect invoices received. The accrued fees were previously impaired given the property's estimated recoverable value was $nil.
The June 30, 2020 exploration asset carrying value of $16,576,000 was included in the Ortoire cash-generating unit ("CGU"). No indicators of impairment were identified by the Company as at June 30, 2020.
7. Property and Equipment
|
|
Petroleum assets |
Corporate assets |
Total |
|
|
|
|
|
|
Cost |
|
|
|
|
Balance, January 1, 2019 |
$ 134,308 |
$ 1,817 |
$ 136,125 |
|
Additions |
2,324 |
- |
2,324 |
|
Right-of-use assets |
1,114 |
80 |
1,194 |
|
Derecognition of right-of-use assets |
(830) |
- |
(830) |
|
Decommissioning liability change in estimate |
2,422 |
- |
2,422 |
|
Effect of change in foreign exchange rates |
1,031 |
90 |
1,121 |
|
|
|
|
|
|
Balance, December 31, 2019 |
$ 140,369 |
$ 1,987 |
$ 142,356 |
|
Additions |
328 |
- |
328 |
|
Decommissioning liability change in estimate |
(1,610) |
- |
(1,610) |
|
Effect of change in foreign exchange rates |
(692) |
(91) |
(783) |
|
|
|
|
|
|
Balance, June 30, 2020 |
$ 138,395 |
$ 1,896 |
$ 140,291 |
|
|
|
|
|
|
Accumulated depletion, depreciation and impairments |
|
|
|
|
Balance, January 1, 2019 |
$ 71,538 |
$ 1,546 |
$ 73,084 |
|
Depletion and depreciation |
5,036 |
135 |
5,171 |
|
Impairments |
7,594 |
- |
7,594 |
|
Derecognition of right-of-use assets |
(175) |
- |
(175) |
|
Decommissioning liability change in estimate |
371 |
- |
371 |
|
Effect of change in foreign exchange rates |
505 |
76 |
581 |
|
|
|
|
|
|
Balance, December 31, 2019 |
$ 84,869 |
$ 1,757 |
$ 86,626 |
|
Depletion and depreciation |
1,847 |
55 |
1,902 |
|
Impairment |
19,215 |
- |
19,215 |
|
Decommissioning liability change in estimate |
344 |
- |
344 |
|
Effect of change in foreign exchange rates |
(429) |
(81) |
(510) |
|
|
|
|
|
|
Balance, June 30, 2020 |
$ 105,846 |
$ 1,731 |
$ 107,577 |
|
|
|
|
|
|
Carrying amounts |
|
|
|
|
Balance, December 31, 2019 |
$ 55,500 |
$ 230 |
$ 55,730 |
|
Balance, June 30, 2020 |
$ 32,549 |
$ 165 |
$ 32,714 |
At June 30, 2020, the Company evaluated its petroleum assets for indicators of any potential impairment or related reversal. As a result of this assessment, no indicators were identified, and no impairment or related reversal was recorded.
As a result of the COVID-19 pandemic, global crude oil oversupply and the resulting drastic decrease in forecast crude oil prices compared to those at December 31, 2019, indicators of impairment were identified for all CGUs at March 31, 2020. The Company performed impairment tests on all CGUs, whereby the recoverable amount of each CGU was compared to its associated carrying value. The recoverable amounts were estimated using value in use calculations incorporating the net present value of the after-tax cash flows derived from the Company's proved developed producing reserves in 2020 and 2021 and proved plus probable oil reserves thereafter as estimated by the Company's independent reserves evaluator as at December 31, 2019 and internally adjusted to reflect updated price assumptions as of April 1, 2020. The estimated recoverable amounts used an after-tax discount rate of 20 percent. Based on the results of the impairment tests completed, the Company recognized gross non-cash impairment charges of $19,215,000.
Estimating the recoverable amounts of the Company's CGUs involves several assumptions and estimates which are subject to estimation uncertainty, as well as a significant degree of judgement. Changes in any of the key judgments, such as a revision in reserves, changes in forecast commodity prices, capital expenditures, operating costs or the discount rate would impact the estimated recoverable amounts.
8. Financial Liabilities and Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its obligations associated with its financial liabilities. While the decrease in commodity prices as a result of the COVID-19 pandemic will negatively impact the Company's financial performance and position, the Company believes that future cash flows will be adequate to meet financial obligations as they come due.
The Company manages liquidity risk by continuously monitoring actual and forecasted cash flows from operating, investing and financing activities and opportunities to withdraw from its existing debt facility or to issue additional equity. Given that the Company has minimal developmental work obligations and guarantees at June 30, 2020, the Company will continue to manage its capital expenditures to reflect current financial resources in the interest of sustaining long-term viability.
Refer to Note 9 "Term Loan", Note 16 "Capital Management" and Note 17 "Commitments" for further details regarding the Company's debt structure and capital management objectives. The following table sets forth estimated undiscounted cash outflows and financial maturities of the Company's financial liabilities as at June 30, 2020.
|
|
Undiscounted cash outflows |
Financial maturity by period |
||
|
Less than 1 year |
1 to 3 years |
Thereafter |
||
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
$ 8,981 |
$ 8,981 |
$ - |
$ - |
|
Income taxes payable |
243 |
243 |
- |
- |
|
Term loan principal (note 9) |
15,000 |
- |
3,000 |
12,000 |
|
Estimated production liabilities (note 10) |
1,996 |
276 |
1,361 |
359 |
|
Term loan interest (note 9) |
5,397 |
1,177 |
2,257 |
1,963 |
|
Lease liabilities |
212 |
175 |
37 |
- |
|
|
|
|
|
|
|
Total financial liabilities |
$ 31,829 |
$ 10,852 |
$ 6,655 |
$ 14,322 |
9. Term Loan
The Company's indirectly wholly owned Trinidadian subsidiary (the "Borrower") entered into a $20 million, seven-year term credit facility arrangement (the "New Term Loan") from a Trinidad based financial institution effective June 15, 2020 (the "Effective Date"). On the Effective Date, the Borrower withdrew $15 million to satisfy the Company's obligations relating to prepaying the C$20 million Canadian based term loan (the "Retired Term Loan"). During the three and six months ended June 30, 2020, the Company incurred $180,000 in expenses and recorded a $1,158,000 revaluation loss in connection with prepaying the Retired Term Loan.
Pursuant to the New Term Loan, the Borrower has the option to withdraw the remaining $5 million available balance prior to one year from the Effective Date. The New Term Loan is a senior secured syndicated loan, with the lender acting as initial lender, arranger and administrative agent. The New Term Loan bears a fixed interest rate of 7.85% per annum, compounded and payable quarterly. Principal payments commence two years from the Effective Date with twenty equal and consecutive quarterly principal repayments thereafter. Prepayments are permitted after one year with a 1.0% penalty and a 30-day notice period, and no penalty shall apply on principal repayments after three years. The New Term Loan is principally secured by a pledge of equity interests and fixed and floating security interests over all present and after acquired assets of the Borrower and its wholly owned Trinidad exploration and production subsidiary. The New Term Loan contains industry standard representations and warranties, undertakings, events of default, and financial covenants, which will be tested on an annual basis commencing with the year ended December 31, 2022.
At all times the Borrower must maintain a cash reserves balance of not less than the equivalent of two quarterly interest payments. Accordingly, the Company classified $589,000 as non-current restricted cash on the consolidated statement of financial position as at June 30, 2020 (December 31, 2019 - $nil).
The New Term Loan is measured at amortised cost, with the aggregate associated financing fees of $383,000 unwound using the effective interest rate method to the face value at maturity. The following table details the movements of the Company's term loan balances for the periods indicated.
| Retired Term Loan liability | New Term Loan liability | Term Loan |
|
|
|
|
Balance, January 1, 2019 | $ 10,130 | $ - | $ 10,130 |
Advance, net of amendment and transaction fees | 3,590 | - | 3,590 |
Revaluation gain | (656) | - | (656) |
Accretion | 384 | - | 384 |
Effect of change in foreign exchange rates | 518 | - | 518 |
|
|
|
|
Balance, December 31, 2019 | $ 13,966 | - | $ 13,966 |
(Payments) advances, net of fees | (14,750) | 14,617 | (133) |
Revaluation loss on prepayment | 1,158 | - | 1,158 |
Accretion | 173 | 50 | 223 |
Effect of change in foreign exchange rates | (547) | - | (547) |
|
|
|
|
Balance, June 30, 2020 | $ - | $ 14,667 | $ 14,667 |
10. Other Liabilities
In connection with the Retired Term Loan, the Company previously granted its former lender a production payment equal to 1.33 percent of petroleum sales from Trinidad land holdings, payable quarterly through October 31, 2023. Upon repayment of the Retired Term Loan, the Company and the lender agreed not to buyout the production payment liability and as such entered into an amended production payment agreement to continue the obligation under its previous terms and conditions. The production payment liability is revalued at each reporting period based on internally estimated future production and forward crude oil pricing forecasts.
The following table details the movements of the Company's production liability for the periods indicated.
| Six months ended June 30, 2020 | Year ended December 31, 2019 |
|
|
|
Balance, beginning of year | $ 989 | $ 733 |
Revaluation loss | 295 | 622 |
Payments | (141) | (404) |
Effect of change in foreign exchange rates | (38) | 38 |
|
|
|
Balance, end of period | $ 1,105 | $ 989 |
|
|
|
Current (included in accounts payable and accrued liabilities) | $ 158 | $ 220 |
Non-current | 947 | 769 |
|
|
|
Other liabilities | $ 1,105 | $ 989 |
11. Decommissioning Liabilities and Abandonment Fund
Pursuant to production and exploration contracts with Heritage and the Trinidad and Tobago Minister of Energy and Energy Industries ("MEEI"), the Company is obligated to remit payments into abandonment funds based on production. The Company remits $0.25 per barrel of crude oil sold, and the funds will be used for the future abandonment of wells in the related licenced area. As at June 30, 2020, the Company classified $1,181,000 of accrued or paid fund contributions as non-current abandonment fund assets (December 31, 2019 - $1,125,000).
The Company estimated the net present value of the cash flows required to settle its decommissioning liabilities to be $9,645,000 as at June 30, 2020 based on an estimated inflation adjusted future liability of $21,509,000 (December 31, 2019 - $11,547,000 and $27,153,000, respectively). The following table summarizes the Company's estimated decommissioning liabilities at the end of the respective periods.
| Six months ended June 30, 2020 | Year ended December 31, 2019 |
|
|
|
Balance, beginning of year | $ 11,547 | $ 8,915 |
Liabilities incurred | 9 | 91 |
Accretion expense | 123 | 372 |
Revisions to estimates | (1,993) | 2,108 |
Effect of change in foreign exchange rates | (41) | 61 |
|
|
|
Balance, end of period | $ 9,645 | $ 11,547 |
Based on currently available data, the long-term outlook for Trinidad inflation decreased from December 31, 2019, as the March 2020 inflation rate was near zero. At June 30, 2020, decommissioning liabilities were estimated using a long-term risk-free rate of 5.7 percent and a long-term inflation rate of 2.0 percent (December 31, 2019 - 5.5 percent and 3.3 percent, respectively), which reduced the estimated decommissioning provision by an aggregate $1,993,000 during the six months ended June 30, 2020.
12. Income Taxes
The following table is a reconciliation of income taxes calculated by applying the applicable Trinidad statutory rates to net earnings before income tax expense.
| Six months ended June 30,2020 | Year ended December 31, 2019 |
|
|
|
Net loss before income taxes | $ (21,881) | $ (2,065) |
Trinidad statutory rate | 55.00% | 55.00% |
Expected income tax recovery at statutory rate | $ (12,035) | $ (1,136) |
Effect on income tax resulting from: |
|
|
Supplemental petroleum tax | 6 | 4,782 |
Deductible supplemental petroleum tax | (3) | (3,079) |
Benefit of tax assets not recognized | 710 | (1,176) |
Tax rate differential | 1,169 | 3,889 |
Other | 254 | 275 |
|
|
|
Total income tax (recovery) expense | $ (9,899) | $ 3,555 |
The net deferred income tax liability solely relates to the Company's Trinidad operations. The following table details the components of the liability for the six months ended June 30, 2020.
| December 31, 2019 | Recognized in equity | Recognized in earnings (loss) | June 30, 2020 |
|
|
|
|
|
Property and equipment | $ (21,766) | $ 44 | $ 10,621 | $ (11,101) |
Decommissioning liabilities | 638 | (2) | (151) | 485 |
Term loan | - | - | (161) | (161) |
Loss carry forwards | 5,706 | (23) | (435) | 5,248 |
Other | 2,133 | (5) | 309 | 2,437 |
|
|
|
|
|
Net deferred income tax liability | $ (13,289) | $ 14 | $ 10,183 | $ (3,092) |
The Company's June 30, 2020 net deferred tax liability includes $8,170,000 of deferred tax asset, which are reviewed at each reporting date to assess whether it is probable that the related tax benefit will be realized in the future (December 31, 2019 - $8,477,000). As at June 30, 2020, the Company estimated that future taxable income was sufficient to realize the deferred tax asset. The estimates used to determine future taxable income are subject to measurement uncertainty, and actual results could differ from estimates.
13. Shareholders' Capital
Issued and outstanding common shares
Common shares outstanding and shareholders' capital | Number of shares | Shareholders' capital |
|
|
|
Balance, January 1, 2019 | 129,021,428 | $ 56,987 |
Issued pursuant to private placement, net of fees | 31,666,667 | 4,496 |
Share-based settlements | 15,000 | 24 |
|
|
|
Balance, December 31, 2019 | 160,703,095 | $ 61,507 |
Issued pursuant to private placement, net of fees | 22,500,000 | 10,850 |
Share-based settlements | 958,000 | 297 |
|
|
|
Balance, June 30, 2020 | 184,161,095 | $ 72,654 |
The Company is authorized to issue an unlimited number of voting common shares without nominal or par value.
February 2020 private placement
On February 26, 2020, the Company completed a private placement directed toward United Kingdom institutional investors, whereby gross proceeds of $11,653,000 were raised by way of issuing 22,500,000 new common shares at a price of approximately C$0.69 per common share. Fees incurred from the private placement were $803,000, which included brokerage commissions and legal and corporate finance advisory fees, resulting in net proceeds of $10,850,000.
Equity compensation plans
The Company has a share option plan pursuant to which options to purchase common shares of the Company may be granted by the Board of Directors to directors, officers, employees and consultants of the Company. Compensation expense is recognized as the options vest. Unless otherwise determined by the Board of Directors, vesting typically occurs one third on each of the next three anniversaries of the grant date as recipients render continuous service to the Company, and the share options typically expire five years from the date of the grant.
| Number of share options | Weighted average exercise price |
|
|
|
Outstanding, January 1, 2019 | 8,534,640 | C$ 0.44 |
Granted | 2,550,000 | 0.23 |
Expired | (2,344,040) | 0.87 |
|
|
|
Outstanding, January 1, 2020 | 8,740,600 | C$ 0.26 |
Granted | 2,611,000 | 0.48 |
Exercised | (958,000) | 0.29 |
Expired | (147,500) | 2.10 |
|
|
|
Outstanding, June 30, 2020 | 10,246,100 | C$ 0.29 |
|
|
|
Exercisable, June 30, 2020 | 5,341,335 | C$ 0.22 |
The Company has an incentive share compensation option plan which provides for the grant of incentive share options to purchase common shares of the Company at a C$0.05 exercise price. A maximum of one million common shares have been approved for issuance under this plan, of which 437,625 have been historically issued under the plan as of June 30, 2020. There were no incentive share options outstanding as at June 30, 2020, and no incentive options have been awarded since 2014.
During the three and six months ended June 30, 2020, the Company recorded share-based compensation expenses of $81,000 and $125,000 in relation to share option plans, respectively (2019 - $49,000 and $80,000).
Weighted average common shares
The following table sets forth the details of weighted average common shares used in calculating net loss per common share for each of the periods indicated.
Three months ended June 30, | Six months ended June 30, | |||
| 2020 | 2019 | 2020 | 2019 |
|
|
|
|
|
Weighted average common shares, basic | 183,639,870 | 160,688,095 | 176,500,391 | 150,890,673 |
Dilutive impact of share-based compensation | - | - | - | - |
|
|
|
|
|
Weighted average common shares, diluted | 183,639,870 | 160,688,095 | 176,500,391 | 150,890,673 |
There was no dilutive impact to the weighted average number of common shares for the three and six months ended June 30, 2020, as 6.2 million and 5.5 million share options were excluded from the diluted weighted average share calculation as they were anti-dilutive, respectively (2019 - 1.3 million and 1.0 million).
14. Net Finance Expense
| Three months ended June 30, | Six months ended June 30, | ||
2020 | 2019 | 2020 | 2019 | |
|
|
|
|
|
Interest income | $ (19) | $ (29) | $ (25) | $ (60) |
Term loan interest expense | 288 | 223 | 587 | 445 |
Term loan revaluation loss (gain) | 1,158 | - | 1,158 | (277) |
Production liability revaluation loss (gain) | 35 | (23) | 295 | 209 |
Accretion on term loan | 99 | 78 | 223 | 151 |
Accretion on decom. liabilities | 21 | 90 | 123 | 180 |
Lease liability interest expense | 5 | 24 | 10 | 50 |
Finance expense | 180 | - | 180 | - |
Other | 1 | (112) | (45) | (126) |
|
|
|
|
|
Net finance expense | $ 1,768 | $ 251 | $ 2,506 | $ 572 |
|
|
|
|
|
Cash net finance expense | $ 455 | $ 116 | $ 758 | $ 337 |
Non-cash net finance expense | 1,313 | 135 | 1,748 | 235 |
|
|
|
|
|
Net finance expense | $ 1,768 | $ 251 | $ 2,506 | $ 572 |
15. Market Risk Management
Management of cash flow variability is an integral component of the Company's business strategy. Changing business conditions are monitored regularly and, where material, reviewed with the Board of Directors to establish risk management guidelines to be used by Management. The risk exposures inherent in the movements of the price of crude oil and fluctuations in foreign exchange rates are proactively reviewed by the Company and may be managed through the use of derivative contracts as considered appropriate.
Commodity price risk
The Company's operational and financial condition are largely dependent on the commodity prices received from petroleum production. Movement in commodity prices could have a significant positive or negative effect on the Company's net earnings and cash flows. To alleviate this risk, the Company maintains a risk management strategy to protect funds flow from operations from the volatility of commodity prices. The Company's strategy focuses on the periodic use of puts, costless collars, swaps or fixed price contracts to limit exposure to fluctuations in commodity prices while allowing for participation in commodity price increases. The Company had no commodity-based risk management contracts in place during the three and six months ended June 30, 2020. The Company will continue to monitor forward commodity prices and may enter future commodity-based risk management contracts to reduce the volatility of petroleum sales and protect future development and exploration capital programs.
In April 2019, the Company purchased put option contracts from a financial institution for 800 bbls/d at a strike price of Brent $56.10 per barrel from June 1, 2019 to December 31, 2019. As at June 30, 2019, the Company recognized a financial derivative asset of $196,000 related to the put options. For the three and six months ended June 30, 2019, the Company recorded derivative gains of $25,000 and $25,000, respectively related to commodity management contracts.
Foreign currency risk
Foreign currency exchange risk arises from changes in foreign exchange rates that may affect the fair value or future cash flows of the Company's financial assets or liabilities. As the Company primarily operates in Trinidad, fluctuations in the exchange rate between the TT$ and the US$ could have a significant effect on reported results, as the sales prices of crude oil are determined by reference to US$ denominated benchmark prices and the majority of the Company's operating costs are denominated in TT$. In addition, the Company has US$ denominated debt and related interest payments. These risks are currently mitigated by the fact that the TT$ is informally pegged to the US$. The Company has further foreign exchange exposure on head office costs and production payment liabilities denominated and payable in Canadian dollars, as well as costs payable in pounds sterling required to maintain its AIM listing. Any material movements in the C$ to US$ exchange rate may have a material effect on the Company's reporting results.
The Company's foreign currency policy is to monitor foreign currency risk exposure in its areas of operations and mitigate that risk where possible by matching foreign currency denominated expenses with petroleum sales denominated in foreign currencies. The Company attempts to limit its exposure to foreign currency through collecting and paying foreign currency denominated balances in a timely fashion. The Company had no contracts in place to manage foreign currency risk as at or during the three and six months ended June 30, 2020 and year ended December 31, 2019.
16. Capital Management
The basis for the Company's capital structure is dependent on the Company's expected business growth and any changes in the business and commodity price environment. The Company's long-term goal is to fund current period decommissioning and capital expenditures necessary for the replacement of production declines using only funds flow from operations. Profitable growth activities will be financed with a combination of funds flow from operations and other sources of capital. The Company typically uses equity and term debt to raise capital.
When evaluating the Company's capital structure, Management's long-term strategy is to maintain net debt to trailing twelve-month funds flow from operations at or below a ratio of 2.0 times. While the Company may exceed this ratio from time to time, efforts are made after a period of variation to bring the measure back in line. Net debt is a Non-IFRS measure calculated by summing the Company's working capital and the principal (undiscounted) non-current amount of senior secured debt. Working capital is a Non-IFRS measure calculated as current assets minus current liabilities as they appear on the statements of financial position. Net debt is used by Management as a key measure to assess the Company's liquidity. Funds flow from operations is an additional IFRS measure included in the Company's consolidated statements of cash flows. Net debt and funds flow from operations are not standardized measures and therefore may not be comparable with the calculation of similar entities by other entities.
The Company also monitors its capital management through the net debt to net debt plus equity ratio. The Company's strategy is to utilize more equity than debt, thereby targeting net debt to net debt plus shareholders' equity at a ratio of less than 0.4 to 1. The Company's internal capital management calculations for the six months ended June 30, 2020 and year ended December 31, 2019 are set forth in the table below.
| Target measure | June 30, 2020 | December 31, 2019 |
|
|
|
|
Current assets |
| $ (15,758) | $ (14,118) |
Current liabilities |
| 9,224 | 15,257 |
Working capital (surplus) deficit |
| $ (6,534) | $ 1,139 |
Principal non-current balance of term loan |
| 15,000 | 15,364 |
|
|
|
|
Net debt |
| $ 8,466 | $ 16,503 |
Shareholders' equity |
| 29,397 | 30,115 |
|
|
|
|
Net debt plus equity |
| $ 37,863 | $ 46,618 |
|
|
|
|
Trailing twelve-month funds flow from operations(1) |
| $ 3,907 | $ 6,840 |
|
|
|
|
Net debt to funds flow from operations | at or < 2.0 times | 2.17 | 2.41 |
|
|
|
|
Net debt to net debt plus equity | < 0.4 times | 0.22 | 0.35 |
Note:
(1) Trailing twelve-month funds flow from operations as at June 30, 2020 include funds flow from operations for the six months ended June 30, 2020 plus funds flow from operations for the July 1 through December 31, 2019 interim period.
17. Commitments
The Company has minimum work obligations under various operating agreements with Heritage, exploration commitments under exploration and production agreements with the MEEI and various lease commitments for office space and equipment. The following table sets forth the Company's estimated minimum contractual capital requirements as at June 30, 2020.
| Total | Estimated payments due by year | |||
2020 | 2021 | 2022 | Thereafter | ||
|
|
|
|
|
|
Operating agreements | $ 2,834 | $ 117 | $ 953 | $ 261 | $ 1,503 |
Exploration agreements | 6,214 | 4,214 | 2,000 | - | - |
Other commitments | 248 | 101 | 147 | - | - |
|
|
|
|
|
|
Total minimum commitments | $ 9,296 | $ 4,432 | $ 3,100 | $ 261 | $ 1,503 |
Under the terms of its operating agreements, the Company must fulfill minimum work obligations on an annual basis over the specific licence term. In aggregate, the Company is obligated to drill 12 wells and perform 18 well recompletions prior to the end of 2021. As of June 30, 2020, 10 wells were drilled, and 15 well recompletions were completed with respect to these obligations. The Company has provided $271,000 in cash collateralized guarantees to Heritage to support its operating agreement work commitments as of June 30, 2020 (December 31, 2019 - $271,000).
Under the terms of its Ortoire exploration licence, the Company has drilled two of four commitment wells and must also acquire and process 85-line kilometres of 2D seismic. The initial stage of the licence expires in October 2020, and the Company has applied for an extension based on its two commercial discoveries to date.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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