Canada Southern Reports First Quarter Results.CALGARY Calgary (kăl`gərē), city (1991 pop. 710,677), S Alta., Canada, at the confluence of the Bow and Elbow rivers. The largest city in Alberta and the fastest-growing major city in Canada, Calgary is a corporate, transportation, and financial , Alberta Alberta (ălbûr`tə), province (2001 pop. 2,974,807), 255,285 sq mi (661,188 sq km), including 6,485 sq mi (16,796 sq km) of water surface, W Canada. -- Canada Canada (kăn`ədə), independent nation (2001 pop. 30,007,094), 3,851,787 sq mi (9,976,128 sq km), N North America. Canada occupies all of North America N of the United States (and E of Alaska) except for Greenland and the French islands of Southern Petroleum Ltd. (TSX TSX Toronto Stock Exchange (TSE before April, 2002) TSX Transfer from Stack Pointer to Index TSX True Space Extension :CSW CSW Commission on the Status of Women CSW Christian Solidarity Worldwide CSW Clinical Social Worker CSW College of the Southwest (New Mexico) CSW Cambridge SoundWorks (audio manufacturer) ) (NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on :CSPLF) (BOSTON Boston, town, England Boston, town (1991 pop. 26,495), E central England, on the Witham River. Boston's fame as a port dates from the 13th cent., when it was a Hanseatic port trading wool and wine. Having recovered from a decline in the 18th and 19th cent. :CSW) (PCX (1) A bitmapped graphics file format that handles monochrome, 2-bit, 4-bit, 8-bit and 24-bit color and uses RLE to achieve compression ratios of approximately 1.1:1 to 1.5:1. Images with large blocks of solid colors compress best under the RLE method. See PC Paintbrush. :CSPLF) is pleased to announce operational and financial results for the three months ended March 31, 2005.
Financial and Operating Highlights
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Three months ended March 31,
2005 2004 % Change
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Financial ($000s, except share amounts)
Gross revenues 3,037 3,470 (12)
Funds from operations(1) 1,555 2,461 (37)
Per share - basic and diluted ($) 0.11 0.17 (35)
Net income (loss) 108 1,156 (91)
Per share - basic and diluted ($) 0.01 0.08 (88)
Capital expenditures, net 9,883 1,285 669
Working capital 26,437 39,388 (33)
Total assets 62,412 51,022 22
Shareholders' equity 47,343 44,163 7
Weighted average shares outstanding (000s)
Basic 14,418 14,418 -
Diluted 14,486 14,419 1
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Operational
Sales volumes
Natural gas mcf/d 5,355 2,243 139
Oil and natural gas liquids bbl/d 36 25 45
Carried interest natural gas mcf/d 1 5,247 (100)
Combined (6:1)(2) boe/d 929 1,274 (27)
Average sales prices
Natural gas $/mcf 6.50 5.81 12
Oil and natural gas liquids $/bbl 43.70 36.39 20
Combined $/boe 39.20 34.90 12
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(1) Funds from operations is a non-GAAP measure that does not have a
standardized meaning as prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by other
oil and gas companies. We consider it an important measure as it
demonstrates our ability to generate the cash flow necessary to
fund future growth through capital investment.
(2) Barrels of oil equivalent, with natural gas converted at 6 mcf
per barrel of oil equivalent.
Summary - Kotaneelee L-38 well finished drilling during the quarter and began production in May 2005. - Net income decreased due to expected production declines and higher non-cash depletion depletion n. when a natural resource (particularly oil) is being used up. The annual amount of depletion may, ironically, provide a tax deduction for the company exploiting the resource because if the resource they are exploiting runs out, they will no longer be able charges resulting from increased drilling activity. - Capital expenditures for the quarter were $9.8 million out of the total 2005 budget of $16 million. - Drilled and cased 5 gross (2.6 net) wells for the most active quarter in recent history. - Early spring thaw in winter drilling areas delayed completion and testing of new wells, which delays the determination of proven reserve additions and consequently increased the depletion rate in the quarter. - Added 8,900 net acres to undeveloped land. Report to Shareholders The first quarter was one of the most active quarters for the company in many years. In addition to our 30.67% participation in the drilling of the Kotaneelee L-38 well, which commenced drilling in August 2004 and reached total depth in early March, we drilled two high working interest wells at Mike/Hazel, and we participated in the drilling of two partner-operated wells at Buick
Buick is a brand of automobile built in the United States, Canada, China and in Spain by General Motors Corporation. Creek. We also continued to acquire land and seismic in preparation for future drilling activities. Net income for the three month period ended March 31, 2005 was $108,000, or $0.01 per share, compared to $1.2 million, or $0.08 per share, for the same period in 2004. The decrease is largely due to lower production volumes and a higher depletion rate. Funds from operations Funds From Operations (FFO) Used by real estate and other investment trusts to define the cash flow from trust operations; earnings with depreciation and amortization added back. for the three months ended March 31, 2005 were $1.6 million, or $0.11 per share, compared to $2.5 million, or $0.17 per share, for the same period in 2004. This decrease is mainly due to the decrease in production volumes at our Kotaneelee property. The commencement of production from the Kotaneelee L-38 well on May 4, which stabilized sta·bi·lize v. sta·bi·lized, sta·bi·liz·ing, sta·bi·liz·es v.tr. 1. To make stable or steadfast. 2. at a rate of approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 17 mmcf/d, will more than offset the decline in volumes that contributed to the lower first quarter results. We expect that this will result in sales volumes, after shrinkage Shrinkage The amount by which inventory on hand is shorter than the amount of inventory recorded. Notes: The missing inventory could be due to theft, damage, or book keeping errors. , of 12.8 mmcf/d, of which our net share is 4 mmcf/d or approximately 665 boe/d. This milestone “Milemarker” redirects here. For the American indie rock band, see Milemarker (band). A milestone or kilometre sign is one of a series of numbered markers placed along a road at regular intervals, typically at the side of the road or in a median. would add approximately 70% to our first quarter average sales volumes of 929 boe/d. This is the first major production addition in many years and it provides a significant increase to our cash flow. Spring breakup breakup The division of a company into separate parts. The most famous breakup to date was the 1984 division of AT&T (formerly, American Telephone & Telegraph Company). This breakup was intended to increase competition in the communications industry. is well underway in northeast “Northeastern” redirects here. For the Boston college, see Northeastern University, Boston. Northeast or north east is the ordinal direction halfway between north and east. It is the opposite of southwest. See boxing the compass. British Columbia British Columbia, province (2001 pop. 3,907,738), 366,255 sq mi (948,600 sq km), including 6,976 sq mi (18,068 sq km) of water surface, W Canada. Geography and continues to restrict In the C programming language, the data pointed to by a pointer declared with the restrict qualifier may not be pointed to by any other pointer. This allows for more effective optimization. the movement of equipment necessary to complete and test any of the wells drilled this past winter. At Mike/Hazel, where we drilled and cased 2 gross (1.85 net) wells, early warm weather prevented us from completing and testing the wells. We are examining the alternatives to test the wells as soon as practicable practicable adj. when something can be done or performed. . At Buick Creek, we participated in the drilling of 2 gross (0.45 net) shallow This article or section may contain original research or unverified claims. Please help Wikipedia by adding references. See the for details. This article has been tagged since October 2007. Shallow means not very deep. in-fill wells, both of which were cased and are awaiting completion and testing operations later this year. During the first quarter, we acquired 4,700 net acres of land in northeast British Columbia and 4,200 net acres in southern Alberta Southern Alberta is a region located in the Canadian province of Alberta. As of the year 2004, the region's population was approximately 272,017[1][2]. . We are currently evaluating several prospects in preparation for potential drilling locations for this summer. We are continuing to execute To run a program, which causes the computer to carry out its instructions. See executable code, instruction and EXE file. execute - execution our plan and believe that our activity during the first quarter of this year contributes to building value for the benefit of all shareholders. "John W.A. McDonald" John W.A. McDonald President and Chief Executive Officer Management's Discussion and Analysis Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial Management's Discussion and Analysis should be read in conjunction conjunction, in astronomy conjunction, in astronomy, alignment of two celestial bodies as seen from the earth. Conjunction of the moon and the planets is often determined by reference to the sun. with our unaudited interim consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge and selected notes for the three months ended March 31, 2005 and 2004 and our audited consolidated financial statements and related notes for the year ended December December: see month. 31, 2004. The interim consolidated financial statements have been prepared in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting ("GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ") applicable in Canada. A reconciliation of Canadian Canadian (kənā`dēən), river, 906 mi (1,458 km) long, rising in NE New Mexico. and flowing E across N Texas and central Oklahoma into the Arkansas River in E Oklahoma. GAAP to U.S. GAAP is included in note 8 to our interim consolidated financial statements. Unless otherwise noted, all amounts are stated in Canadian dollars Noun 1. Canadian dollar - the basic unit of money in Canada; "the Canadian dollar has the image of loon on one side of the coin" loonie dollar - the basic monetary unit in many countries; equal to 100 cents , and sales volumes, production volumes and reserves are before royalties Not to be confused with Royal family. Royalties (sometimes, running royalties) are usage-based payments made by one party (the "licensee") to another (the "licensor") for ongoing use of an asset, most typically an intellectual property (IP) right. . The calculation of barrels of oil equivalent ("boe") is based on a conversion ratio of six thousand cubic feet of natural gas to one barrel barrel: see English units of measurement. of oil ("6:1") to estimate relative energy content. This conversion should be used with caution, particularly when used in isolation, since the 6 mcf:1 bbl ratio is based on an energy equivalency equivalency the combining power of an electrolyte. See also equivalent. at the burner A drive that writes write-once optical discs such as CD-Rs and DVD-Rs. A "burner" implies a one-time recording, but the term is erroneously used to refer to drives that "write" to re-recordable CD-RW and DVD-RW/+RW media as well. See burn, CD-R and DVD-R. tip and does not represent the value equivalency at the well head. This Discussion and Analysis includes references to financial measures commonly used in the oil and gas industry, such as funds from operations (expressed before changes in non-cash working capital) and funds from operations per share (using the weighted average shares outstanding consistent with the calculation of net income (loss) per share). These financial measures are not defined by GAAP and therefore are referred to as non-GAAP measures. The non-GAAP measures used by us may not be comparable to similar measures presented by other companies. We use these non-GAAP measures to evaluate the performance of the Company. The non-GAAP measures should not be considered an alternative to or more meaningful than net earnings, as determined in accordance with GAAP, as an indication of our performance. This management discussion and analysis is dated as at May 9, 2005.
Overview
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Three months ended March 31,
($000s, except share amounts) 2005 2004 % Change
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Petroleum and natural gas sales 3,275 1,248 162
Royalties (479) (69) 594
Carried interest 2 2,006 (100)
Lease operating costs (474) (224) 112
Transportation (391) - -
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Operating netback 1,933 2,961 (35)
Interest and other income 238 284 (16)
General and administrative (637) (652) (2)
Foreign exchange gains 21 28 (25)
Current income tax expense - (160) (100)
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Funds from operations (1) 1,555 2,461 (37)
Depletion and depreciation (1,066) (761) 40
Asset retirement obligations accretion (66) (60) 10
Future income tax (170) (451) (62)
Stock-based compensation (145) (33) 339
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Net income 108 1,156 (91)
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Funds from operations per share (1):
Basic ($) 0.11 0.17 (35)
Diluted ($) 0.11 0.17 (35)
Net income per share:
Basic ($) 0.01 0.08 (88)
Diluted ($) 0.01 0.08 (88)
Average number of shares outstanding (000s):
Basic 14,418 14,418 -
Diluted 14,486 14,419 1
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(1) Funds from operations is a non-GAAP measure that does not have a
standardized meaning as prescribed by GAAP and is therefore
unlikely to be comparable to similar measures presented by other
oil and gas companies. We consider it an important measure as it
demonstrates our ability to generate the cash flow necessary to
fund future growth through capital investment.
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Three months ended March 31,
($000s) 2005 2004 % Change
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Cash flow from operating activities (GAAP) 2,142 (9,061) -
Change in non-cash working capital (GAAP) (587) 11,522 -
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Funds from operations (non-GAAP) 1,555 2,461 (37)
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Funds from Operations and Net Earnings Funds from operations for the three months ended March 31, 2005 were $1.6 million, or $0.11 per share, compared to $2.5 million, or $0.17 per share, for the same period in 2004. This decrease is mainly due to the decrease in production volumes at our Kotaneelee property. --------------------------------------------------------------------- --------------------------------------------------------------------- Funds from operations Three months ended March 31, ($000s, except per share) 2005 2004 % Change --------------------------------------------------------------------- Funds from operations 1,555 2,461 (37) Basic ($) 0.11 0.17 (35) Diluted ($) 0.11 0.17 (35) --------------------------------------------------------------------- --------------------------------------------------------------------- Net income for the three month period ended March 31, 2005 was $108,000, or $0.01 per share, compared to $1.2 million, or $0.08 per share, for the same period in 2004. The decrease is largely due to lower production volumes and a higher depletion rate. --------------------------------------------------------------------- --------------------------------------------------------------------- Net income Three months ended March 31, ($000s, except per share) 2005 2004 % Change --------------------------------------------------------------------- Net income 108 1,156 (91) Basic ($) 0.01 0.08 (88) Diluted ($) 0.01 0.08 (88) --------------------------------------------------------------------- --------------------------------------------------------------------- Impact of Conversion of Kotaneelee to a Working Interest Effective May 1, 2004, we converted our 30.67% carried interest in the Kotaneelee field to a corresponding 30.67% working interest. Although the conversion has no impact on the aggregate amounts of our share of field production and related field operating cash flow Operating cash flow Earnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. , the conversion has financial statement disclosure implications as discussed below. Prior to the conversion, the majority of our carried interest revenue related to Kotaneelee. Proceeds from carried interests represent passive net investment income in a net cash flow stream, and appropriately were recorded after the reduction of all royalties, lease operating expenses Operating expenses The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. , transportation costs, and capital expenditures. Subsequent to May 1, 2004, sales from the Kotaneelee field are being reported as working interest natural gas sales while related royalties, lease operating expenses and transportation costs are being included under their respective captions. As a result, working interest natural gas sales, royalties, lease operating expenses, and transportation costs have increased significantly over comparable periods and proceeds of carried interests has decreased accordingly. Capital expenditures for Kotaneelee are no longer a deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. from carried interest revenue but are instead recorded as capital asset additions on our balance sheet. Carried interest revenues in future periods are expected to be minimal.
Petroleum and natural gas sales and carried interest
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Three months ended March 31,
Sales volumes 2005 2004 % Change
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Natural gas
Working interest mcf/d 4,882 1,873 161
Royalty interest mcf/d 472 370 28
Carried interest mcf/d 1 5,247 (100)
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Total natural gas mcf/d 5,355 7,490 (28)
Oil and natural gas liquids bbls/d 36 25 44
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Combined (6:1) boe/d 929 1,273 (27)
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Sales volumes, on a boe basis, averaged 929 boe per day during the first quarter of 2005, down 27% from the 1,274 boe per day average in the first quarter of 2004. Expected production declines continue to affect our sales volumes for most of our areas with an average natural gas production rate in the first quarter of 2005 of 5.4 mmcf/d compared to 7.5 mmcf/d during the same quarter last year. Although our natural gas working interest volumes increased 161% over last year, this is solely the result of the conversion of our Kotaneelee carried interest to a working interest, as noted above, which is also reflected in the decrease in natural gas carried interest volumes from last year. Production from our Kotaneelee field continues to decline due to a combination of reservoir reservoir (rĕz`əvôr, -vwär), storage tank or wholly or partly artificial lake for storing water. Building an embankment or dam to preserve a supply of water for irrigation is an ancient practice; India and Egypt have many old and pressure declines and increased water production. Our average net natural gas sales from Kotaneelee during the first quarter of 2005 were 3.1 mmcf/d, or approximately 58% of our total natural gas sales, with associated gross water production of 1,963 bbl/d, compared to averages of 5.2 mmcf/d (approximately 70% of total natural gas sales) and 1,668 bbl/d, respectively, for the first quarter of 2004. The natural gas production declines were partially offset by increased royalty interest royalty interest The proportional ownership interest by the owner of oil and gas rights in income produced by the asset. See also overriding royalty interest. volumes from our Town area in northeast British Columbia. The operator drilled several successful wells in 2004 and our royalty Compensation for the use of property, usually copyrighted works, patented inventions, or natural resources, expressed as a percentage of receipts from using the property or as a payment for each unit produced. volumes for the three months ended March 31, 2005 from this area increased 28% over first quarter last year. Oil and natural gas liquids ("NGL NGL - A dialect of IGL. ") production increased 44% to 36 bbl/d in the three months ended March 31, 2005 from 31 bbl/d for the same period in 2004.
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Three months ended March 31,
Revenues ($000s) 2005 2004 % Change
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Natural gas
Working interest 2,872 976 194
Royalty interest 260 189 38
Carried interest(1) 2 2,006 (100)
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Total natural gas 3,134 3,171 (1)
Oil and natural gas liquids 143 83 72
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Total 3,278 3,254 1
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(1) "Carried interest" is net of related carried interest royalties,
lease operating expenses, transportation costs, and capital.
Our gross revenue from the sale of petroleum and natural gas in the first quarter of 2005 was $3.3 million, unchanged from the same quarter last year. Working interest revenue was significantly higher at $2.9 million during this period of 2005 compared to $1.0 million in 2004. The conversion of the Kotaneelee carried interest to a working interest contributed to this increase in two ways. First, the revenue is recorded under working interest revenues in the first quarter of 2005 as opposed op·pose v. op·posed, op·pos·ing, op·pos·es v.tr. 1. To be in contention or conflict with: oppose the enemy force. 2. to carried interest revenues during the same period in 2004. Also, transportation costs after conversion are recorded separately from revenue, as an expense, whereas before conversion, they were treated as a reduction from carried interest revenue. A corresponding decrease in the carried interest revenues also results from this conversion. Overall natural gas sales were $3.1 million in the three months ended March 31, 2005, slightly lower than the $3.2 million received in the first quarter of 2004. The natural declines in our natural gas working and carried interest producing properties were somewhat offset by the increase in royalty income received from our Town property. Oil and natural gas liquids revenue rose 72% to $143,000 in the first three months of 2005 from $83,000 in the same period of 2004. This increase resulted from increased production volumes and higher product prices year-over-year.
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Three months ended March 31,
Average Sales Prices 2005 2004 % Change
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Natural gas
Working interest $/mcf 6.54 5.73 14
Royalty interest $/mcf 6.12 5.61 9
Carried interest(1) $/mcf - 5.86 -
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Total natural gas $/mcf 6.50 5.81 12
Oil and natural gas liquids $/bbl 43.70 36.39 20
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Combined (6:1) $/boe 39.20 34.90 12
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(1) The average sales price for "Carried interest" is calculated
before deducting the related carried interest royalties, lease
operating expenses, transportation costs, and capital. Carried
interest revenue for the first quarter of 2005 was not material.
The overall average price we received from the sale of our oil and gas products in the first quarter of 2005 was up 12%, to $39.20/boe, from the $34.90/boe we received in the first quarter last year. A 14% increase in the average natural gas price received for our working interest properties, $6.54 per mcf (before transportation) in 2005 versus $5.73 per mcf in 2004, contributed the majority of the gain. After transportation costs, the average price received in the first quarter of 2005 for our working interest natural gas was $5.65/mcf.
Royalties
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Three months ended March 31,
($000s) 2005 2004 % Change
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Crown royalties 372 34 1007
Freehold and GORR 106 35 203
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Total 479 69 597
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As % of working interest revenues 16% 6% 145
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Total royalties increased significantly in the first quarter of 2005, totaling $479,000 versus $69,000 in the same period of 2004. The royalties for the first quarter last year were impacted by a prior period crown royalty adjustment, which reduced the royalties for that quarter by $145,000, or approximately 14% of working interest revenues. Royalties as a percentage of working interest revenues amounted to 16% during the first quarter of 2005, compared to 20% (before the above mentioned adjustment to a prior period) during the same quarter last year. The increase in royalty dollars, for crown and freehold Freehold, borough, United States Freehold, borough (1990 pop. 10,742), seat of Monmouth co., E central N.J.; settled c.1650, called Monmouth Courthouse (1715–1801), inc. as a town 1869, as a borough 1919. and gross overriding (programming) overriding - Redefining in a child class a method or function member defined in a parent class. Not to be confused with "overloading". royalty ("GORR GORR Gross Overriding Royalty "), and the decrease in the pre-adjustment royalty rate are mainly a result of our conversion of the Kotaneelee carried interest to a working interest. The crown royalty rate for the Kotaneelee property is approximately 10%, which is lower than the rate for the balance of our working interest properties. Due to the significance of the Kotaneelee revenues and, therefore the royalties, this resulted in a lower overall corporate royalty rate.
Lease Operating Costs
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Three months ended March 31,
($000s, except per boe) 2005 2004 % Change
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Lease operating costs 474 224 112
Per working interest boe ($) 6.20 7.30 (15)
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Lease operating costs operating costs npl → gastos mpl operacionales increased 112% from $224,000 in the first quarter last year to $474,000 in the first quarter of 2005. Operating costs were higher in the first quarter this year mainly due to the conversion of our interest at Kotaneelee to a working interest in May 2004. After the conversion, operating costs from this area were recorded in lease operating costs whereas before, they were recorded net of carried interest revenues. On a boe basis, lease operating costs dropped 15% in the three months ended March 31, 2005 to $6.20 per boe from $7.30 per boe in the same period of 2004. This drop is also largely due to the conversion of Kotaneelee to a working interest, where the operating costs averaged $4.63 per boe in the first quarter of 2005.
Transportation
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Three months ended March 31,
($000s, except per boe) 2005 2004 % Change
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Transportation 391 - -
Per working interest boe ($) 5.11 - -
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Transportation costs for the three months ended March 31, 2005 amounted to $391,000. These costs result entirely from the transportation of our gas at Kotaneelee. The transportation costs for the comparative period in 2004, amounting to $265,000, were included in the carried interest revenues, as all operating costs, capital costs and royalties were netted from carried interest revenues for financial statement purposes. Transportation costs will begin to appear separately in the comparative period in the second quarter and beyond, since we converted from a carried interest to a working interest at Kotaneelee effective May 1, 2004. We do not receive sufficient information from the operators of our other working interest properties to determine the amount of related transportation costs.
Interest and other income
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Three months ended March 31,
($000s) 2005 2004 % Change
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Interest income 230 268 (14)
Other 8 16 (51)
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Total 238 284 (16)
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Interest and other income decreased 16% in the first three months of 2005 compared to the same period in 2004. Interest income decreased 14% from $268,000 to $230,000 in the three month period ended March 31, 2005 as our average monthly balance of funds available for investment was lower during the period compared to last year. This was somewhat offset by slightly higher yields in the first quarter this year versus last year.
General and Administrative
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Three months ended March 31,
($000s, except per boe) 2005 2004 % Change
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General and administrative 576 602 (4)
Legal 61 50 22
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Total 637 652 (2)
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Per boe ($) 7.62 5.63 35
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General and administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. , inclusive of inclusive of prep. Taking into consideration or account; including. legal expenses, decreased 2% in the first quarter of this year, to $637,000 from $652,000 in the same period last year. On a boe basis, costs were 35% higher during the first quarter this year as our production volumes were lower than the first quarter last year. In prior quarters we have incurred significant administrative, auditing and legal expenses with respect to new SEC and accounting rules adopted pursuant to the Sarbanes-Oxley Act See SOX. of 2002 (the "Act"). Canadian regulators are also adopting new rules. Such expenses will continue and may increase, particularly due to the requirements to document, test and audit our internal controls to comply with Section 404 of the Act, and rules adopted thereunder, that are anticipated to apply to us for the first time with respect to our annual report for the fiscal year ending December 31, 2006. No general and administrative expenses were capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. during the first quarter of 2005 and 2004.
Depletion and Depreciation
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Three months ended March 31,
($000s, except per boe) 2005 2004 % Change
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Depletion and depreciation 1,066 761 40
Per boe ($) 12.75 6.57 94
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Depletion and depreciation expense increased 40% in the first three months of 2005 to $1.1 million from $761,000 in the same period of 2004. This increase is a result of increased drilling expenditures in the first quarter of this year with no corresponding reserves added in the quarter, as the inability to complete and test the winter-drilled wells due to the early spring thaw did not allow for the determination of additional proved reserves proved reserves The quantity of minerals expected to be recoverable under current economic and operating conditions. The amount of proved reserves is important in valuing the stock of a company with significant holdings in natural resources. , if any. All costs incurred in drilling the Kotaneelee L-38 well that commenced on August 22, 2004 were capitalized; however we have not recorded any depletion expense for those costs. The well represents a major development project, and as the cumulative well costs to March 31, 2005 were $9.8 million (or approximately 37% of the net book value of capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) as at March 31, 2005), inclusion of the amounts for depletion purposes would not represent a fair matching of revenues with expenses. Had we included these costs in the depletable de·plete tr.v. de·plet·ed, de·plet·ing, de·pletes To decrease the fullness of; use up or empty out. [Latin d base, depletion for the quarter ended March 31, 2005 would have been $655,000 higher. Once the results of the well are known, we will include all drilling costs in the depletable base and recognize the related reserves. The Kotaneelee L-38 well was tied in and commenced production on May 4, 2005. The well has stabilized at a rate of approximately 17 mmcf/d, resulting in expected sales volumes, after shrinkage, of 12.8 mmcf/d (4 mmcf/d net). Based on the information currently available, the Company is not yet able to estimate reserve additions for this well. The operator plans to perform a production test this summer. The Company will submit the results of the testing to its independent reserves evaluator who will prepare an estimate of recoverable proven reserves, if any, using the standards of Canadian National Instrument 51-101. If this well does not encounter sufficient additional proven reserves, we would expect to record significantly higher depletion rates in the future. We could also experience a ceiling test impairment Impairment 1. A reduction in a company's stated capital. 2. The total capital that is less than the par value of the company's capital stock. Notes: 1. This is usually reduced because of poorly estimated losses or gains. 2. that would result in a material write-down Write-Down Reducing the book value of an asset because it is overvalued compared to the market value. Notes: This is usually reflected in the company's income statement as an expense, thereby reducing net income. of our oil and gas properties and equipment. Asset Retirement Obligations Asset Retirement Obligations provide for future disposal of assets as required by SFAS 143 [1]. Firms must recognize the ARO liability in the period it was acquired, generally acquisition. Accretion The act of adding portions of soil to the soil already in possession of the owner by gradual deposition through the operation of natural causes. The growth of the value of a particular item given to a person as a specific bequest under the provisions of a will between the Asset retirement obligations accretion expense In accounting, accretion expense is the expense created when updating the present value(PV) of a financial instrument. For example, if one originally recognizes the present value of a liability at $650, which has a future value (FV) of $1000, every year one must increase the for the first three months of 2005 was $66,000 compared with $60,000 for the first three months of 2004. We have not included any asset retirement obligations for any of the 5 wells drilled this past winter drilling season. All of the wells were cased but have yet to be either completed or tested. Only upon testing of the wells will we have sufficient information to estimate the components of each well's asset retirement obligation. Stock-based Compensation Stock-based compensation expense for the three months ended March 31, 2005 was $145,000, compared to $33,000 for the same period in 2004. The increase is due to the number of options granted during 2004 that vest over a period of years. Foreign Exchange A foreign exchange gain of $21,000 was recorded in the first three months of 2005, compared to a gain of $28,000 in the first quarter last year on our U.S. dollar investments. With the relative volatility Relative volatility is a measure comparing the vapor pressures of the components in a liquid mixture of chemicals. This quantity is widely used in designing large industrial distillation processes. between the U.S and Canadian dollar, we expect to record further foreign exchange gains or losses in the future, but cannot predict either with certainty CERTAINTY, UNCERTAINTY, contracts. In matters of obligation, a thing is certain, when its essence, quality, and quantity, are described, distinctly set forth, Dig. 12, 1, 6. It is uncertain, when the description is not that of one individual object, but designates only the kind. Louis. . The value of the Canadian dollar was U.S. $.8303 at December 31, 2004 compared to U.S. $.8220 at March 31, 2005. Income Taxes The income tax provision decreased to $170,000 in the first quarter of 2005 as compared to the income tax provision of $611,000 in the first quarter of 2004. During the first quarter of 2005, our effective tax rate was 61% compared to an effective tax rate of 35% for the first quarter of 2004. The departure from the expected corporate tax rate of approximately 40% in the first quarter this year is due to the high proportion of stock-based compensation expense, which is non-tax deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). , in relation to the net income for the quarter. In 2003, we re-filed our tax returns for the taxation years of 1994 to 2002 inclusive (theory) inclusive - In domain theory, a predicate P : D -> Bool is inclusive iff For any chain C, a subset of D, and for all c in C, P(c) => P(lub C) In other words, if the predicate holds for all elements of an increasing sequence then it holds for their least upper . On March 15, 2005, we received a preliminary audit adjustment letter from Canada Revenue Agency The Canada Revenue Agency (CRA) administers:
The process of re-determining the value of property or land for tax purposes. Notes: Property is usually reassessed on an annual basis. You may request a "reassessment" if you disagree with your assessment. . Should the Notices of Reassessment be consistent with the preliminary audit adjustment letter, the benefit to us will be approximately $850,000. This would result in a one time reduction of income tax expense. Liquidity and Capital Resources We recognize the need for a strong balance sheet in order to withstand volatile With regard to computer memory, it means "temporary" and not "highly changeable," which is the usual meaning of the word. See volatile memory. 1. (programming) volatile - volatile variable. 2. (storage) volatile - See non-volatile storage. natural gas prices and to be able to capitalize on Cap´i`tal`ize on` v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. opportunities when or if they become available. At March 31, 2005, we continued to enjoy a strong balance sheet and had no bank debt with approximately $34 million of cash and cash equivalents. These funds are expected to be used for oil and gas exploration and development activities and for general corporate purposes. Net cash flow provided from operating activities during the first quarter of 2005 was $2.1 million compared to cash flow used in operating activities of $9.1 million during the first quarter of 2004. --------------------------------------------------------------------- --------------------------------------------------------------------- ($000s) --------------------------------------------------------------------- Funds from operations 1,555 Net changes in accounts receivable and other 797 Net changes in current liabilities 115 Net changes in current income taxes payable (325) --------------------------------------------------------------------- Cash flow from operating activities 2,142 --------------------------------------------------------------------- --------------------------------------------------------------------- The oil and gas business is inherently risky and capital intensive and can require significant capital and cash resources to expand and develop the business. Our current cash flow from oil and gas operations is mainly derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from the Kotaneelee field. Net field level receipts from Kotaneelee represented approximately 53% of our total net field receipts for the quarter ended March 31, 2005, compared to 68% in the same period of 2004. Kotaneelee continues to experience a decrease in formation reservoir pressure, an increase in water production, and as a result, a decrease in gas production. There is a possibility that our cash flow from Kotaneelee could either be significantly reduced or terminated ter·mi·nate v. ter·mi·nat·ed, ter·mi·nat·ing, ter·mi·nates v.tr. 1. To bring to an end or halt: at any time in the future. In an effort to extend the remaining life of the B-38 well, during the spring of 2005 the operator installed a siphon siphon (sī`fən, –fŏn), tube through which a liquid is lifted over an elevation by the pressure of the atmosphere and is then emptied at a lower level. string in order to improve the lifting of the increasing amount of water. We participated to the extent of our working interest in the operation. As the project is not yet complete, we do not know if, or to what degree, it will be successful in extending the economic life of the well. Effective May 1, 2004, we converted from a 30.67% carried interest in the Kotaneelee natural gas field to a 30.67% working interest. On May 3, 2004, we were served by the field operator with a notice to commence drilling the Kotaneelee L-38 development well in the third quarter of 2004. Subsequent to our technical evaluation The study and investigations by a developing agency to determine the technical suitability of material, equipment, or a system for use in the Military Services. See also operational evaluation. , we elected e·lect v. e·lect·ed, e·lect·ing, e·lects v.tr. 1. To select by vote for an office or for membership. 2. To pick out; select: elect an art course. to participate to our full 30.67% working interest. The notice from the operator to drill and case the proposed well included an estimated gross cost of $16.7 million, of which our share was to be approximately $5.1 million. The well reached total depth on March 10, 2005 and due to the technical and drilling challenges experienced by the operator, gross drilling costs are estimated to be $29.5 million ($9.0 million our share). The L-38 well was completed in late March 2005 with estimated gross completion costs of $4.9 million ($1.5 million our share). As part of the completion operation the well was flowed for a short period of time. However, due to the warm weather in the area and the rapidly deteriorating de·te·ri·o·rate v. de·te·ri·o·rat·ed, de·te·ri·o·rat·ing, de·te·ri·o·rates v.tr. To diminish or impair in quality, character, or value: ice bridges, the decision was made to suspend the flow and remove the drilling rig and test equipment to avoid paying standby standby Medtalk adjective Referring to the immediate availability of a certain specialist–anesthesiologist, surgeon, who can be deployed in a medical emergency. Cf Concurrent. charges. Otherwise, the equipment would need to remain on location until approximately June June: see month. when the river is open for barging operations. Estimated additional gross costs of $4.6 million ($1.4 million our share) were incurred for surface equipment and tie-in tie-in n. One thing that is related to or connected with another. Noun 1. tie-in - a fastener that serves to join or connect; "the walls are held together with metal links placed in the wet mortar during construction" of the well for production. Total costs for the project are estimated to be $39 million ($11.9 million our share), of which approximately 82% was incurred prior to March 31, 2005 and reflected in the financial statements for the three months ended March 31, 2005. The Kotaneelee L-38 well was tied in and commenced production on May 4, 2005. The well has stabilized at a rate of approximately 17 mmcf/d, resulting in expected sales volumes, after shrinkage, of 12.8 mmcf/d (4 mmcf/d net). This initial sales volume adds approximately 70% to our first quarter 2005 average and it provides a significant increase to our cash flow. We caution that initial production rates may not be indicative indicative: see mood. of future rates. Based on the information currently available, the Company is not yet able to estimate reserve additions for this well. The operator plans to perform a production test this summer. The Company will submit the results of the testing to its independent reserves evaluator who will prepare an estimate of recoverable proven reserves, if any, using the standards of Canadian National Instrument 51-101. At this time we are not aware of, and do not expect, further drilling to occur in the Kotaneelee area in the near future. We believe that any such decision would only be considered subsequent to the receipt of positive production information from the L-38 well and a complete re-evaluation of our existing 2-D seismic data, or acquisition of new seismic data, in the area. In an effort to address the risks associated with our dependence on Kotaneelee, we have directed considerable resources toward other areas with the objective of diversifying our cash flow, production, and proven reserve base. This includes evaluating and acquiring new mineral leases in areas of interest, acquisition of either trade or proprietary 2-D and 3-D seismic and evaluating certain asset and corporate acquisitions. Given the high cost of acquisitions and their related reserves in the current market, we have concentrated our attention on growth through the drill bit. Our northeast British Columbia properties are not as risky as Kotaneelee, but cannot be considered low risk due to depth of drilling, limited period of access to surface locations, and related costs. We drilled two Company operated wells (one deep test and one shallow test) in the Mike/Hazel area of northeast British Columbia during the winter 2004/2005 drilling/construction season. As a result of three separate land transactions, we acquired additional mineral rights lands in the area. We paid 100% of the drilling and completion costs to earn 85% of the deep mineral rights on our A-19-L/94-H-2 deep test well. The cost to drill the A-19-L well was approximately $4.0 million. We also drilled the shallower A-81-H/94-H-3 well in February February: see month. 2005 on our 100% working interest lands at an estimated cost of $1.0 million. Both of these wells were drilled and cased, however as a result of an unusually short winter drilling season due to early warm weather, we were unable to gain the necessary access for well completion and production testing programs. During the quarter ended March 31, 2005, we expended ex·pend tr.v. ex·pend·ed, ex·pend·ing, ex·pends 1. To lay out; spend: expending tax revenues on government operations. See Synonyms at spend. 2. $9.9 million on capital additions as summarized below:
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended March 31,
Capital Expenditures ($000s) 2005 2004 % Change
---------------------------------------------------------------------
Land and acquisitions 1,342 278 383
Geological and geophysical 373 676 (45)
Drilling and completion 7,938 297 2573
Facilities and equipment 214 20 969
Other 16 14 11
---------------------------------------------------------------------
Total capital expenditures 9,883 1,285 669
Dispositions - - -
---------------------------------------------------------------------
Net capital expenditures 9,883 1,285 669
---------------------------------------------------------------------
---------------------------------------------------------------------
We have budgeted $16 million of capital expenditures on oil and gas activities during 2005. Any management requests for additional capital in excess of this amount would require Board of Directors approval on an individual project basis. In the near term, we expect to rely on internally generated cash flows and current cash on hand to fund our annual capital expenditure program. Additional information Additional information relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc Canada Southern may be found on our website at www.cansopet.com, on the Canadian Securities Administrators' website at www.sedar.com and on the EDGAR Edgar or Eadgar (both: ĕd`gər), 943?–975, king of the English (959–75), son of Edmund, king of Wessex. In 957 the Mercians and Northumbrians rebelled against Edgar's brother Edwy and chose Edgar as their king. section of the U.S. Securities and Exchange Commission's website at www.sec.gov See .gov and GovNet. (networking) gov - The top-level domain for US government bodies. . This document contains certain forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. relating, but not limited, to operations, financial performance, business prospects and strategies of the Company. Forward-looking for·ward-look·ing adj. Concerned with or making provision for the future: forward-looking educators; a forward-looking corporate plan. Adj. 1. information typically contains statements with words such as "anticipate", "believe", "expect", "plan", "intend" or similar words suggesting future outcomes or statements regarding an outlook on, without limitation, commodity prices, estimates of future production, the estimated amounts and timing of capital expenditures, anticipated future debt levels and royalty rates, or other expectations, beliefs, plans, objectives, assumptions or statements about future events or performance. Shareholders are cautioned not to place undue reliance on forward-looking information. By its nature, forward-looking information of the Company involves numerous assumptions, inherent risks and uncertainties both general and specific that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. These factors include, but are not limited to: the pricing of natural gas and oil; the effects of competition and pricing pressures; risks and uncertainties involving the geology geology, science of the earth's history, composition, and structure, and the associated processes. It draws upon chemistry, biology, physics, astronomy, and mathematics (notably statistics) for support of its formulations. of natural gas and oil; operational risks in exploring for, developing and producing natural gas and oil; the uncertainty of estimates and projections relating to production, costs and expenses; the significant costs associated with the exploration and development of the properties on which the Company has interests, particularly the Kotaneelee field; shifts in market demands; risks inherent in the Company's marketing operations; industry overcapacity o·ver·ca·pac·i·ty n. Too great a capacity for production of commodities or delivery of services in relation to actual need: the problem of overcapacity in many large industries. ; the strength of the Canadian economy in general; currency and interest rate fluctuations; general global and economic and business conditions; changes in business strategies; potential delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserves estimates; various events which could disrupt operations, including severe weather conditions, technological changes, our anticipation The performance of an act or obligation before it is legally due. In patent law, the publication of the existence of an invention that has already been patented or has a patent pending, of and success in managing the above risks; potential increases in maintenance expenditures; changes in laws and regulations, including trade, fiscal, environmental and regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. laws; and health, safety and environmental risks that may affect projected reserves and resources and anticipated earnings or assets. See also the information set forth under the heading "Information Concerning the Oil and Natural Gas Industry" in our 2004 Annual Information Form. Statements relating to "reserves" are deemed to be forward-looking statements as they involve the implied Inferred from circumstances; known indirectly. In its legal application, the term implied is used in contrast with express, where the intention regarding the subject matter is explicitly and directly indicated. assessment, based on certain estimates and assumptions that the reserves described can be profitably produced in the future. We caution that the foregoing list of important factors is not exhaustive. We undertake no obligation to update publicly or revise the forward-looking information provided in this document, whether as a result of new information, future events or otherwise, or the foregoing list of factors affecting this information.
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED BALANCE SHEETS
(in Canadian dollars)
(unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
March 31, December 31,
Note 2005 2004
---------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents 2 $ 33,949,880 $ 39,353,717
Accounts receivable 1,635,621 2,495,678
Other assets 433,054 370,011
---------------------------------------------------------------------
36,018,555 42,219,406
Oil and gas properties
and equipment 3 26,393,245 17,570,085
---------------------------------------------------------------------
Total assets $ 62,411,800 $ 59,789,491
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities and Shareholders'
Equity
Current liabilities
Accounts payable $ 5,638,497 $ 3,627,644
Accrued liabilities 3,251,610 2,810,263
Accrued income taxes payable 691,419 1,016,419
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9,581,526 7,454,326
Future income tax liability 2,739,864 2,569,864
Asset retirement obligations 4 2,747,840 2,675,743
---------------------------------------------------------------------
Total liabilities 15,069,230 12,699,933
---------------------------------------------------------------------
Shareholders' equity
Share capital 5 14,417,770 14,417,770
Contributed surplus 5 29,159,001 29,014,151
Retained earnings 3,765,799 3,657,637
---------------------------------------------------------------------
Total shareholders' equity 47,342,570 47,089,558
---------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 62,411,800 $ 59,789,491
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(in Canadian dollars)
(unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended March 31,
Note 2005 2004
---------------------------------------------------------------------
Revenues
Petroleum and natural
gas sales $ 3,275,293 $ 1,248,112
Royalties (478,703) (68,726)
Carried interest 2,372 2,006,002
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2,798,962 3,185,388
Interest and other income 237,876 284,133
---------------------------------------------------------------------
3,036,838 3,469,521
---------------------------------------------------------------------
Expenses
Lease operating costs 474,429 223,500
Transportation 1 391,081 -
General and administrative 637,039 652,910
Depletion and depreciation 1,066,000 761,000
Asset retirement
obligations accretion 66,000 60,000
Stock-based compensation 144,850 33,400
Foreign exchange gains (20,723) (28,079)
---------------------------------------------------------------------
2,758,676 1,702,731
---------------------------------------------------------------------
Income before income taxes 278,162 1,766,790
Income tax expense (170,000) (611,000)
---------------------------------------------------------------------
Net income 108,162 1,155,790
Retained earnings
- beginning of period 3,657,637 378,371
---------------------------------------------------------------------
Retained earnings
- end of period $ 3,765,799 $ 1,534,161
---------------------------------------------------------------------
---------------------------------------------------------------------
Net income per share: 6
Basic $ 0.01 $ 0.08
Diluted $ 0.01 $ 0.08
Average number of
shares outstanding:
Basic 14,417,770 14,417,770
Diluted 14,486,166 14,418,918
See accompanying notes.
CANADA SOUTHERN PETROLEUM LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Canadian dollars)
(unaudited)
---------------------------------------------------------------------
---------------------------------------------------------------------
Three months ended March 31,
Note 2005 2004
---------------------------------------------------------------------
Cash flow relating to
operating activities:
Net income $ 108,162 $ 1,155,790
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depletion and depreciation 1,066,000 761,000
Asset retirement
obligations accretion 66,000 60,000
Asset retirement
expenditures (256) (217)
Stock-based compensation 144,850 33,400
Future income
tax expense 170,000 451,000
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Funds from operations 1,554,756 2,460,973
Change in non-cash
working capital 7 587,529 (11,521,805)
---------------------------------------------------------------------
Cash flow from (used in)
operating activities 2,142,285 (9,060,832)
---------------------------------------------------------------------
Cash flow relating to
investing activities:
Additions to oil and gas
properties and equipment (9,882,806) (1,284,953)
Change in non-cash
working capital 7 2,336,684 (1,761,073)
---------------------------------------------------------------------
Cash flow used in
investing activities (7,546,122) (3,046,026)
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash flow relating to
financing activities: - -
---------------------------------------------------------------------
Decrease in cash and
cash equivalents (5,403,837) (12,106,858)
Cash and cash equivalents at
the beginning of period 39,353,717 49,082,386
---------------------------------------------------------------------
Cash and cash equivalents at
the end of period 2 $33,949,880 $36,975,528
---------------------------------------------------------------------
---------------------------------------------------------------------
See accompanying notes.
Notes to the Consolidated Financial Statements
Three months ended March 31, 2005 and 2004
(in Canadian dollars)
(unaudited)
1. Summary of significant accounting policies Significant accounting policies and basis of presentation The accompanying ac·com·pa·ny v. ac·com·pa·nied, ac·com·pa·ny·ing, ac·com·pa·nies v.tr. 1. To be or go with as a companion. 2. unaudited interim consolidated financial statements, including the accounts of Canada Southern Petroleum Ltd. ("Canada Southern" or "the Company") and its wholly-owned subsidiaries, Canpet Inc. and C.S. Petroleum Limited, have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP"). These financial statements have been prepared following the same accounting policies and methods of computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. as the annual audited consolidated financial statements for the year ended December 31, 2004. The effect of differences between these principles and accounting principles generally accepted in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. ("U.S. GAAP") is discussed in Note 8. Certain information and disclosures normally required to be included in the notes to the annual consolidated financial statements have been omitted or condensed con·dense v. con·densed, con·dens·ing, con·dens·es v.tr. 1. To reduce the volume or compass of. 2. To make more concise; abridge or shorten. 3. Physics a. . These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto there·to adv. 1. To that, this, or it. 2. Archaic In addition to that; furthermore. thereto Adverb Formal 1. to that or it 2. included in the Company's annual report for the year ended December 31, 2004. Comparative figures Certain figures presented for comparative purposes have been reclassified to conform to Verb 1. conform to - satisfy a condition or restriction; "Does this paper meet the requirements for the degree?" fit, meet coordinate - be co-ordinated; "These activities coordinate well" the current year's financial statement presentation. Transportation costs Effective January January: see month. 1, 2005, and consistent with the adoption of Canadian Institute of Chartered Accountants The Canadian Institute of Chartered Accountants (CICA) is the umbrella body for the Chartered Accountant profession in Canada and Bermuda. Membership of the CICA totals 70,000 Chartered Accountants and 8,500 students. Handbook
This article is about reference works. For the subnotebook computer, see .
The percentage of net earnings not paid out in dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders equity on the balance sheet. . For the period January 1, 2004 to April 30, 2004, when the Company was in a carried interest position at Kotaneelee, transportation costs of $263,841 are shown net of carried interest revenues and have not been reclassified. The Company does not receive sufficient information from the operators of its other minor working interest properties to determine the amount of related transportation costs. 2. Cash and cash equivalents Canada Southern considers all highly liquid short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. investments with maturities of three months or less at date of acquisition to be cash equivalents. Cash equivalents are carried at cost, which approximates market value due to their short term nature.
--------------------------------------------------------------------
--------------------------------------------------------------------
March 31, December 31,
2005 2004
--------------------------------------------------------------------
CASH $ 324,846 $ 219,353
Canadian marketable securities
(yield: 2005 - 2.6%; 2004 - 2.5%) 32,531,173 38,173,069
U.S. marketable securities
(yield: 2005 - 2.9%; 2004 - 2.4%) 1,093,861 961,295
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Total $ 33,949,880 $ 39,353,717
--------------------------------------------------------------------
--------------------------------------------------------------------
3. Oil and gas properties and equipment
The following tables provide the detail of oil and gas properties and
equipment at March 31, 2005 and December 31, 2004:
---------------------------------------------------------------------
---------------------------------------------------------------------
Depreciation,
Depletion Net Book
Cost and Write downs Value
---------------------------------------------------------------------
BALANCE,
MARCH 31, 2005
Oil and gas
properties $ 46,754,680 $ 20,445,766 $ 26,308,914
Oil and gas
properties (U.S.) 1,319,218 1,319,218 -
---------------------------------------------------------------------
48,073,898 21,764,984 26,308,914
Office equipment 206,683 122,352 84,331
---------------------------------------------------------------------
$ 48,280,581 $ 21,887,336 $ 26,393,245
---------------------------------------------------------------------
---------------------------------------------------------------------
Balance,
December 31, 2004
Oil and gas
properties $ 36,881,033 $ 19,385,766 $ 17,495,267
Oil and gas
properties (U.S.) 1,319,218 1,319,218 -
---------------------------------------------------------------------
38,200,251 20,704,984 17,495,267
Office equipment 191,170 116,352 74,818
---------------------------------------------------------------------
$ 38,391,421 $ 20,821,336 $ 17,570,085
---------------------------------------------------------------------
---------------------------------------------------------------------
As at March 31, 2005, there were $2,196,648 (2004 - $634,601) of capital assets relating to unproved properties which have been excluded from the depletion calculation. There were also $9,814,719 (2004 - $0) of capital costs relating to the drilling of a well at Kotaneelee excluded from the depletion calculation as the well was classified as a "major development project", the results of which were not known at the time of preparation of these financial statements. During the first quarter of 2005 and 2004, no indirect general and administrative expenses were capitalized.
4. Asset retirement obligations
March 31, December 31,
2005 2004
--------------------------------------------------------------------
Balance - beginning of period $ 2,675,743 $ 2,436,986
Liabilities incurred 6,353 -
Asset retirement obligations
accretion 66,000 240,000
Asset retirement expenditures (256) (1,243)
--------------------------------------------------------------------
Balance - end of period $ 2,747,840 $ 2,675,743
--------------------------------------------------------------------
--------------------------------------------------------------------
The total undiscounted amount of the cash flows required to settle the Company's asset retirement obligation is estimated to be $3,940,000. The estimated cash flows have been discounted using credit-adjusted risk-free interest rates Risk-Free Interest Rate Describes return available to an investor in a security somehow guaranteed to produce that return. The risk-free interest rate compensataes the investor for the temporary sacrifice of consumption. ranging from 7% to 11%. These payments are expected to be incurred between the years 2005 and 2022.
5. Share capital
Authorized
Unlimited common shares
Unlimited first preferred shares
Unlimited second preferred shares
Issued
---------------------------------------------------------------------
---------------------------------------------------------------------
Number Share Contributed Total
Common shares of Shares Capital Surplus Capital
---------------------------------------------------------------------
Outstanding at
December 31,
2003 14,417,770 14,417,770 $28,177,451 $42,595,221
Stock-based
compensation - - 836,700 836,700
---------------------------------------------------------------------
Outstanding at
December 31,
2004 14,417,770 14,417,770 29,014,151 43,431,921
Stock-based
compensation - - 144,850 144,850
---------------------------------------------------------------------
Outstanding at
March 31,
2005 14,417,770 $14,417,770 $29,159,001 $43,576,771
---------------------------------------------------------------------
---------------------------------------------------------------------
The shares outstanding throughout 2004 and up until March 2, 2005 were limited voting Limited voting is a voting system in which electors have fewer votes than there are positions available. The positions are awarded to the candidates who receive the most votes absolutely. shares with $1.00 par value per share. Pursuant to special shareholders meetings held in late 2004, Canada Southern received final approval of the continuance The adjournment or postponement of an action pending in a court to a later date of the same or another session of the court, granted by a court in response to a motion made by a party to a lawsuit. of the Company from Nova Scotia Nova Scotia (nō`və skō`shə) [Lat.,=new Scotland], province (2001 pop. 908,007), 21,425 sq mi (55,491 sq km), E Canada. Geography to Alberta on March 2, 2005. As a result, the outstanding limited voting shares became common shares on a 1 for 1 basis. Also pursuant to the continuance, Canada Southern is authorized au·thor·ize tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es 1. To grant authority or power to. 2. To give permission for; sanction: to issue two series of preferred shares Preferred shares Preferred shares give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders. See: Preferred stock. . Stock options Under the terms of Canada Southern's 1985, 1992 and 1998 stock option plans, Canada Southern is authorized to grant options to purchase common shares at prices based on the market price of the shares as determined on the date of the grant. The options are normally issued for a period of five years from the date of grant.
A summary of stock option transactions for the three months ended
March 31, 2005 is as follows:
---------------------------------------------------------------------
---------------------------------------------------------------------
March 31, 2005
---------------------------------------------------------------------
Weighted
Average
Exercise
Options Price
---------------------------------------------------------------------
Outstanding at beginning of year 550,000 $ 6.87
Granted 10,000 6.59
---------------------------------------------------------------------
Outstanding at March 31, 2005 560,000 $ 6.87
---------------------------------------------------------------------
Exercisable at March 31, 2005 341,665 $ 6.86
---------------------------------------------------------------------
Options granted during the period ended March 31, 2005, vest 1/3 on January 26, 2006, 1/3 on January 26, 2007, and the remainder on January 26, 2008. As at March 31, 2005, there were 337,834 common shares reserved for future issuance under the stock option plans.
The following table summarizes information about stock options
outstanding at March 31, 2005:
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Weighted
Ranges Average Weighted Weighted
of Remaining Average Average
Exercise Number Term Exercise Number Exercisable
Prices Outstanding (years) Price Exercisable Price
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$ 5.50
to 5.99 100,000 4.3 $ 5.87 100,000 $ 5.87
$ 6.00
to 6.49 130,000 4.1 6.27 10,000 6.49
$ 6.50
to 6.99 165,000 2.8 6.84 110,000 6.83
$ 7.53 100,000 1.8 7.53 100,000 7.53
$ 8.64 65,000 4.7 8.64 21,665 8.64
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$ 5.50
to 8.64 560,000 3.4 $ 6.87 341,665 $ 6.86
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The fair value for stock options granted is estimated at the date of grant using a Black-Scholes option pricing model option pricing model A mathematical formula for determining the price at which an option should trade. The model expresses the value of an option as a function of the value of the underlying asset, length of time until maturity, exercise price, yields on . Option valuation models require the input of highly subjective subjective /sub·jec·tive/ (sub-jek´tiv) pertaining to or perceived only by the affected individual; not perceptible to the senses of another person. sub·jec·tive adj. 1. assumptions including the expected stock price volatility Volatility 1. A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time. 2. A variable in option pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the . A summary of the weighted average assumptions used and the resulting values for options granted in the first quarter of 2005 is as follows:
Three months ended March 31,
2005
---------------------------------------------------------------------
Assumptions:
Dividend yield 0%
Risk-free interest rate 3.52%
Expected life 5 years
Expected volatility 60.5%
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Results:
Weighted average fair value of options granted $ 3.59
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As at May 9, 2005, there were 14,417,770 common shares and 560,000
stock options outstanding.
6. Net income per share
The following table outlines the calculation of basic and diluted net
income per share using the treasury stock method:
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Three months ended March 31,
2005 2004
---------------------------------------------------------------------
Net income $ 108,162 $ 1,155,790
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Weighted average common
shares outstanding 14,417,770 14,417,770
Effect of dilutive stock options 68,396 1,148
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14,486,166 14,418,918
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---------------------------------------------------------------------
Basic earnings per share $ 0.01 $ 0.08
Diluted earnings per share $ 0.01 $ 0.08
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---------------------------------------------------------------------
7. Supplemental disclosure of cash flow information
Changes in non-cash working capital were as follows:
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---------------------------------------------------------------------
Three months ended March 31,
2005 2004
---------------------------------------------------------------------
Decrease (increase) in
non-cash working capital:
Accounts receivable 860,057 (531,297)
Other assets (63,044) (31,326)
Accounts payable 2,010,853 (1,844,765)
Accrued liabilities 441,347 (1,123,187)
Accrued income taxes payable (325,000) (9,752,303)
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Net change in non-cash
working capital $ 2,924,213 $ (13,282,878)
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Relating to:
Operating activities $ 587,529 $ (11,521,805)
Investing activities 2,336,684 (1,761,073)
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$ 2,924,213 $ (13,282,878)
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---------------------------------------------------------------------
Other cash flow information:
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---------------------------------------------------------------------
Three months ended March 31,
2005 2004
---------------------------------------------------------------------
Cash taxes paid $ 325,000 $ 9,943,000
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8. U. S. GAAP differences
The reconciliation of net income between Canadian and U.S. GAAP is
summarized in the table below:
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---------------------------------------------------------------------
Three months ended March 31,
2005 2004
---------------------------------------------------------------------
Net income - Canadian GAAP $ 108,162 $ 1,155,790
Change in income taxes (c) - (26,400)
Net income - U.S. GAAP 108,162 1,129,390
Change in value of available for
sale securities (b) 20,429 9,318
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Other comprehensive income $ 128,591 $ 1,138,708
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U.S. GAAP - net income per share
Basic $ 0.01 $ 0.08
Diluted $ 0.01 $ 0.08
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Average number of
shares outstanding:
Basic 14,417,770 14,417,770
Diluted 14,486,166 14,418,918
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---------------------------------------------------------------------
The balance sheet information for the Canadian and U.S. GAAP
differences is summarized in the table below:
---------------------------------------------------------------------
---------------------------------------------------------------------
March 31, 2005 December 31, 2004
---------------------------------------------------------------------
Canadian U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
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Current assets
(b) $ 36,018,555 $ 36,132,682 $ 42,219,406 $ 42,307,342
Oil and gas
properties and
equipment 26,393,245 26,393,245 17,570,085 17,570,085
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$ 62,411,800 $ 62,525,927 $ 59,789,491 $ 59,877,427
---------------------------------------------------------------------
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Current
liabilities $ 9,581,526 $ 9,581,526 $ 7,454,326 $ 7,454,326
Future income
tax liability
(b) 2,739,864 2,745,626 2,569,864 2,570,957
Asset retirement
obligations 2,747,840 2,747,840 2,675,743 2,675,743
Share capital and
contributed
surplus (a) 43,576,771 43,576,771 43,431,921 45,217,294
Retained earnings
(a) 3,765,799 3,765,799 3,657,637 1,872,264
Accumulated other
comprehensive
income (b) - 108,365 - 86,843
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$ 62,411,800 $ 62,525,927 $ 59,789,491 $ 59,877,427
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---------------------------------------------------------------------
(a) Stock-based compensation For U.S. GAAP reporting purposes, Canada Southern elected to adopt the fair value expense recognition provisions of Financial Accounting Standards (FAS) 123 "Accounting for Stock-based Compensation" and has reported using the modified mod·i·fy v. mod·i·fied, mod·i·fy·ing, mod·i·fies v.tr. 1. To change in form or character; alter. 2. prospective method. This method provides prospective expense recognition for all new awards and the unvested portion of awards granted subsequent to January 1, 1995. As a result, the cumulative effects of stock option grants from 1995 to January 1, 2004 were recorded as an opening adjustment to retained earnings and shareholders equity. This is in contrast to Canadian GAAP where prior periods were restated. (b) Other comprehensive income Classifications within other comprehensive income relate to unrealized gains Unrealized Gain A profit that results from holding on to an asset rather than cashing it in and using the funds. Notes: Let's say you own a stock that has doubled, but you haven't sold it yet. This is said to be an unrealized gain. on certain investments in equity securities. During 1998, the Company wrote down the value of its interest in the Tapia Canyon, California Canyon is a tiny unincorporated community located in Contra Costa County, California, in the East Bay Hills between Oakland and Moraga in the San Francisco Bay Area. The community is mainly traversed by Pinehurst Road and Canyon Road. heavy oil project to a nominal value Nominal Value The stated value of an issued security that remains fixed, as opposed to its market value, which fluctuates. Notes: When referring to fixed-income securities, the nominal value is also the face value. . During August 1999, the project was sold and the Company received shares of stock in the purchaser. The purchaser has become a public company (Sefton For the suburb of Sydney, Australia, see . The Metropolitan Borough of Sefton is a metropolitan borough of Merseyside, England. Its local authority is Sefton Metropolitan Borough Council. Resources, Inc), which is listed on the London Stock Exchange London Stock Exchange London marketplace for securities. It was formed in 1773 by a group of stockbrokers who had been doing business informally in local coffeehouses. (trading symbol Trading symbol See: Ticker symbol "SER Ser serine. Ser abbr. serine SER smooth endoplasmic reticulum. Ser serine. "). At March 31, 2005, the Company owned approximately 0.6% (December 31, 2004 - 0.6%) of Sefton Resources, Inc. ("Sefton") with a fair market value of $114,127 (December 31, 2004 - $87,936) and a carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. of $1.00. Under U.S. GAAP, the Sefton shares would be classified as available-for-sale securities and recorded at fair value at March 31, 2005. This would result in other comprehensive income for the three month periods ended March 31, 2005 and 2004. In addition, the balance sheet would reflect Marketable Securities Marketable Securities Very liquid securities that can be converted into cash quickly at a reasonable price. Notes: Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has in the amount of $114,127 (December 31, 2004 - $87,936) with a corresponding credit to Shareholders' Equity Shareholders' Equity A firms' total assets minus its total liabilities. Equivalently, it is share capital plus retained earnings minus treasury shares. Shareholders' equity is the amount by which a company is financed through common and preferred shares. - Accumulated other comprehensive income In 1997 the Financial Accounting Standards Board issued a Statement on Financial Accounting Standards entitled “Comprehensive Income”. This statement required all income statement items to be reported either as a regular item in the income statement and or a special item as in the same amount. (c) Future income taxes Under Canadian GAAP, the benefits of substantively sub·stan·tive adj. 1. Substantial; considerable. 2. Independent in existence or function; not subordinate. 3. Not imaginary; actual; real. 4. enacted income tax rate reductions can be recorded, however under FASB FASB See: Financial Accounting Standards Board FASB See Financial Accounting Standards Board (FASB). 109 the benefits attributable attributable emanating from or pertaining to attribute. attributable proportion see attributable risk (below). attributable risk to income tax rate changes can only be recorded when enacted. As at March 31, 2004, U.S. GAAP requires the recognition of an additional $26,400 of future income tax expense and liability.
Corporate Information
Directors Head Office
Richard C. McGinity (1) (2) 250, 706 - 7th Avenue SW
School Street Capital Group Calgary, AB T2P 0Z1
Crowheart, Wyoming Tel: (403) 269-7741
Fax: (403) 261-5667
Arthur B. O'Donnell (1) (2) Email: info@cansopet.com
Retired Businessman
West Hartford, Connecticut Website
Myron F. Kanik (1) (2) (3) www.cansopet.com
Kanik & Associates Ltd.
Calgary, Alberta Auditors
Raymond P. Cej (1) (2) (3) Ernst & Young LLP
BA Energy Inc. Suite 1000, Ernst & Young Tower
Calgary, Alberta 440 - 2nd Avenue SW
Calgary, AB T2P 0Z1
John W.A. McDonald (3) www.ey.ca
Canada Southern Petroleum Ltd.
Calgary, Alberta Legal Counsel
(1) Member of the Audit Canada
Committee Blake, Cassels & Graydon LLP
Suite 3500, East Tower, Bankers
(2) Member of the Corporate Hall
Governance and Nominating 855 - 2nd Street SW
Committee Calgary, AB T2P 4J8
(3) Member of the Operations United States
Committee Murtha Cullina LLP
29th Floor, City Place I
Officers 185 Asylum Street
Hartford, CT 06103-3469
John W.A. McDonald
President & Chief Executive Evaluation Engineers
Officer Gilbert Laustsen Jung Associates
Ltd.
Randy L. Denecky 4100, 400 - 3rd Avenue SW
Chief Financial Officer Calgary, AB T2P 4H2
& Treasurer
Stock Transfer Agent
Patrick C. Finnerty
Corporate Secretary American Stock Transfer & Trust
59 Maiden Lane
Employees New York, NY 10038
Tel: (800) 937-5449
Butch Schindel
Geologist Stock Exchange Listing
NASDAQ: CSPLF
Todd Klippenstein Pacific Exchange: CSPLF
Controller The Toronto Stock Exchange: CSW
Boston Exchange: CSW
Angela Clark
Senior Accountant
Shelly Houben
Office Administrator
Abbreviations
bbl barrels
bbl/d barrels per day
mbbl 1,000 barrels
boe barrels of oil equivalent (6:1)
boe/d barrels of oil equivalent per day (6:1)
mboe 1,000 Barrels of oil equivalent (6:1)
mcf 1,000 cubic feet
mcf/d 1,000 cubic feet per day
mmcf 1,000,000 cubic feet
mmcf/d 1,000,000 cubic feet per day
bcf billion cubic feet
NGL natural gas liquids
Canada Southern Petroleum Ltd. (TSX:CSW) (NASDAQ:CSPLF) |
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