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FairWest Energy Corporation Announces First Quarter 2008 Results
(Marketwire Canada (English) Via Acquire Media NewsEdge)
CALGARY, ALBERTA--(Marketwire - May 15, 2008) - FairWest Energy Corporation ("FairWest") (TSX:FEC) is pleased to announce its first quarter financial and operations results for the first quarter ended March 31, 2008.
The following discussion is management's discussion and analysis ("MD&A") of FairWest Energy Corporation ("FairWest") operating and financial data for March 31, 2008, as well as estimates of future operating and financial performance based on information currently available. It should be read in conjunction with the audited financial statements of FairWest for the period ended December 31, 2007.
On May 23, 2007, FairWest acquired all of the issued and outstanding shares of Strike Petroleum Ltd. ("Strike"). For the purposes of this MD&A, management has included the operating and financial results of Strike from the period May 23, 2007.
On August 2, 2007, Neuberry Limited Partnership ("NLP") was registered. FairWest is the only limited partner and Neuberry Energy 2007 Ltd. ("Neuberry") is the general partner. FairWest is the sole shareholder of Neuberry. For the purposes of this MD&A the results of NLP are included as being those of FairWest from the period August 2, 2007.
The information contained herein is current as of May 14, 2008.
Basis of Presentation - The Financial Statements have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). All tabular amounts in the following discussion are in Canadian dollars unless otherwise noted. The reporting and the measurement currency is the Canadian dollar.
Non-GAAP Measurements - This MD&A contains the terms funds flow from operations and operating netback. These terms should not be considered an alternative to, or more meaningful than cash flow from operating activities or net income as determined in accordance with Canadian GAAP as an indicator of FairWest's performance. FairWest's determination of funds flow from operations may not be comparable to that reported by other companies, especially those in other industries. Funds flow from operations represents net earnings adjusted for non-cash items including depletion and depreciation, accretion and stock based compensation. FairWest evaluates its performance based on earnings and funds flow from operations. FairWest considers funds flow from operations and operating netbacks key measures that demonstrate FairWest's ability to generate the funds flow necessary to fund future growth through capital investment and to repay debt.
Operating netback is a non-GAAP measurement that represents profit margins realized by the production and sale of petroleum and natural gas. The reconciliation between operating netback and funds flows from operations can be found in the "Funds Flows from Operations" section of this MD&A.
BOE Presentation - The term barrels of oil equivalent ("BOE") may be misleading particularly if used in isolation. All BOE conversions in this report are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil. A BOE conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
Forward-Looking Statements
Statements made throughout this MD&A may contain forward-looking information including expectations of future production, components of cash flow and earnings, expected future events and/or financial results that are forward looking in nature and subject to substantial risks and uncertainties. The reader is cautioned that assumptions used in the preparation of such information may prove to be incorrect. FairWest cautions the readers that actual performance will be affected by a number of factors, as many may respond to changes in economic and political circumstances throughout the world. Events or circumstances may cause actual results to differ materially from those predicted, a result of numerous known and unknown risks, uncertainties, and other factors, many of which are beyond the control of FairWest. These risks include, but are not limited to: the risks associated with the oil and gas industry, commodity prices and exchange rate changes; industry related risks could include, but are not limited to, operational risks in exploration, development and production, delays or changes in plans, risks associated with the uncertainty of reserve estimates, health and safety risks and the uncertainty of estimates and projections of production, costs and expenses.
These external factors beyond FairWest's control may affect the marketability of oil and natural gas produced, industry conditions including changes in laws and regulations, changes in income tax regulations, increased competition, fluctuations in commodity prices, interest rates, and variations in the Canadian/United States dollar exchange rate. The reader is cautioned not to place undue reliance on this forward-looking information.
Statements throughout this MD&A that are not historical facts may be considered "forward looking statements". These forward-looking statements sometimes include words to the effect that management believes or expects a stated condition or result. All estimates and statements that describe FairWest's objectives, goals or future plans are forward looking statements. 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.
Corporate Overview
FairWest is engaged in the exploration for, and the acquisition, development and production of, oil and natural gas reserves in the provinces of Alberta and Saskatchewan.
Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Financial 2008 2007 2007(1)(2) 2007(1)
Highlights (3 Months) (3 Months) (3 Months) (3 Months)
$ $ $ $
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Revenue
Petroleum and natural gas
sales, net of royalties 3,548,583 2,456,899 2,169,122 1,516,920
Other income 45,305 84,689 634,768 11,278
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Total revenue 3,593,888 2,541,588 2,803,890 1,528,198
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Expenses
Depletion, depreciation and
amortization 3,278,885 4,731,659 2,177,154 1,759,940
Operating 1,518,887 1,368,835 1,004,415 575,953
Interest (3) 479,167 524,818 425,679 184,388
General and adminis-
trative (3) 542,070 572,199 394,003 483,752
Stock-based compensation 85,662 74,205 106,066 86,018
Part XII.6 tax 30,655 - 12,927 25,177
Loss on sale asset 3,439 47,477 378,958 -
Future income tax
(recovery) (816,035) 1,529,979 (158,401) (1,122,957)
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Total expenses 5,122,730 8,849,172 4,340,801 1,992,271
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Net income (loss) (1,528,842) (6,307,584) (1,536,911) (464,073)
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Funds flow from operations 1,023,109 75,737 966,866 258,927
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Capital expenditures (872,871) 4,669,612 7,052,703 21,299,837
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Basic earnings (loss) per
share (0.016) (0.08) (0.02) (0.007)
Diluted earnings (loss) per
share (0.016) (0.08) (0.02) (0.007)
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Share Data:
Common shares outstanding 96,742,379 96,742,379 90,242,379 87,038,340
Warrants - - - 2,400,000
Options 8,116,315 7,774,619 7,803,748 6,849,116
Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Highlights of 2008 2007 2007 2007
Operations (3 Months) (3 Months) (3 Months) (3 Months)
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Natural gas
Natural gas sales before
royalties($) 3,199,477 2,084,996 1,798,413 1,659,913
Volume -- mcf 401,526 320,560 295,157 227,589
Volume -- mcf/day 4,412 3,484 3,208 2,501
$/mcf 7.97 6.50 6.09 7.29
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Oil and NGLs
Oil and NGL sales before
royalties($) 941,345 938,899 551,680 220,735
Volume - bbl 10,997 13,694 8,295 3,696
Volume - bbl/day 121 149 90 41
$/bbl 85.60 68.56 66.51 59.72
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Barrel of oil equivalent
Total sales before
royalties($) 4,140,822 3,023,895 2,350,093 1,880,648
Volume - boe 77,918 67,121 57,488 41,628
Volume - boe/day 856 730 625 458
$/boe 53.14 45.05 40.88 45.18
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Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Financial 2007 2006 2006 2006
Highlights (3 Months) (3 Months) (3 Months) (3 Months)
$ $ $ $
----------------------------------------------------------------------------
Revenue
Petroleum and natural gas
sales, net of royalties 989,140 812,783 1,236,102 1,122,561
Other income 19,747 (1,667) - -
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Total revenue 1,008,887 811,116 1,236,102 1,122,561
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Expenses
Depletion, depreciation and
amortization 1,176,388 941,052 714,978 697,487
Operating 472,535 236,658 487,706 473,522
Interest (3) 92,791 70,925 76,230 69,422
General and adminis-
trative (3) 356,309 295,932 46,997 209,433
Stock-based compensation 73,044 100,657 114,418 72,338
Part XII.6 tax 31,861 - 1,281 43,814
Loss on sale asset - - - -
Future income tax
(recovery) (361,103) 380,089 75,027 -
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Total expenses 1,841,825 2,025,313 1,516,637 1,566,016
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Net income (loss) (832,938) (1,214,197) (280,535) (443,455)
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Funds flow from operations 55,391 215,239 623,888 326,370
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Capital expenditures 2,207,652 5,078,846 4,339,276 895,911
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Basic earnings (loss) per
share (0.014) (0.022) (0.005) (0.008)
Diluted earnings (loss) per
share (0.014) (0.022) (0.005) (0.008)
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Share Data:
Common shares outstanding 62,308,307 61,444,307 60,962,044 55,256,144
Warrants 2,400,000 3,000,000 3,000,000 3,000,000
Options 5,399,116 5,899,116 5,899,116 4,674,116
Mar. 31, Dec. 31, Sept. 30, Jun. 30,
Highlights of 2007 2006 2006 2006
Operations (3 Months) (3 Months) (3 Months) (3 Months)
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Natural gas
Natural gas sales before
royalties($) 1,066,664 712,410 684,720 798,609
Volume -- mcf 139,359 107,425 117,637 124,906
Volume -- mcf/day 1,548 1,168 1,279 1,373
$/mcf 7.65 6.63 5.82 6.39
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Oil and NGLs
Oil and NGL sales before
royalties($) 167,384 200,811 279,390 339,172
Volume - bbl 3,041 3,541 4,261 5,050
Volume - bbl/day 34 38 46 55
$/bbl 55.04 56.71 65.57 67.16
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Barrel of oil equivalent
Total sales before
royalties($) 1,234,048 913,221 964,110 1,137,781
Volume - boe 26,268 21,445 23,867 25,868
Volume - boe/day 292 233 259 284
$/boe 46.98 42.58 40.40 43.98
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(1) Includes operations of Strike from May 23, 2007
(2) Includes operations of NLP from August 2, 2007
(3) June adjusted to reflect current reporting
Petroleum and Natural Gas Sales
The following table represents revenue, sales volumes, and average prices received from the sale of oil and natural gas liquids for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
----------------------------------------------------------------------
Revenue
Natural gas revenue ($) 3,199,477 1,066,664
Oil and natural gas liquids revenue ($) 941,345 167,384
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Petroleum and natural gas sales ($) 4,140,822 1,234,048
Royalty ($) 592,239 244,908
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Petroleum and natural gas sales, net of royalty
expense ($) 3,548,583 989,140
----------------------------------------------------------------------
Petroleum and natural gas sales ($/boe) 53.14 46.98
----------------------------------------------------------------------
Sales Volumes
Natural gas (mcf) 401,526 139,359
Oil and natural gas liquids (bbls) 10,997 3,041
Boe/d 856 292
----------------------------------------------------------------------
Average Sales Price
Natural gas ($/mcf) 7.97 7.65
Oil and natural gas liquids ($/bbl) 85.60 55.04
----------------------------------------------------------------------
Average daily production during the three month period ended March 31, 2008, was 856 boe/d, compared to 292 boe/d for the three month period ended March 31, 2007. Current production is approximately 850 boe/d.
On a period to period comparison sales volumes have almost tripled as the acquisitions made in 2007 are being optimized and the wells recompleted and drilled in the last quarter of 2007 come on production. Strong commodity prices have also had an impact on sales revenue, particularly for oil. FairWest has increased its volume of oil sales and has been able to benefit on two fronts, increased volumes and increased price. Management believes that prices for oil and gas will continue to be strong for the balance of 2008.
Royalties
The following table shows royalty expense for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Royalties ($) 592,239 244,908
% of sales 14.30 19.85
$/boe 7.60 9.32
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Royalty as a percentage of sales declined to 14.30% in the three-month period ended March 31, 2008, from 19.85% in the same period in 2007, as FairWest was able to utilize increased crown royalty deductions as compared to the prior period.
The new Alberta royalty regime will be implemented in January 2009. FairWest does not believe the impact will be significant due to the production profile of our wells.
Other Income and Gain on the Disposal of Assets
The following table shows other income and gain on the disposal of assets for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Other income ($) 45,305 19,747
Gain (loss) on disposal of assets ($) (3,439) -
--------------------------------------------------------------------
Total ($) 41,866 19,747
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For the period ended March 31, 2008, other income includes interest income of $39,224 and royalty income of $6,081. For the period ended March 31, 2007, other income is attributable to interest income of $8,547 and miscellaneous income of $11,200.
For the period ended March 31, 2008, the loss on disposal of assets relates to the sale of the Benso mining property in Ghana Africa. This property was acquired as a result of the amalgamation with Fairstar Explorations Inc. ("Fairstar") in 2005 and was disposed of in the fourth quarter of 2007. There were some additional costs of disposition that carried over to 2008.
Operating
The following table shows operating costs for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Operating ($) 1,518,887 472,535
$/boe 19.49 17.99
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FairWest's per unit operating costs have increased primarily due to extreme weather conditions during the first quarter which lowered production levels and increased maintenance costs. FairWest, on a go forward basis, expects per unit costs to decrease through the acquisition of compression facilities and the implementation of a comprehensive cost reduction program in FairWest's core operating areas. Unit operating costs will also decrease as production volumes from drilling and optimization are realized.
Interest
The following table shows interest for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Interest ($) 479,167 92,791
$/boe 6.15 3.53
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The Company uses bank debt to finance a portion of its exploration, development and acquisition activities. The Company plans to finance a portion of its future development activities and expects interest expense will increase in the future.
Part XII.6 Tax
Part XII.6 tax is levied where a company allocates income tax expenditures to a flow-through shareholder prior to the date where the actual expenditures are incurred. A total of $1,281,728 of qualified expenditures was incurred during the period ended March 31, 2008. Flow-through shares sold by FairWest in 2007 require that a further $2,549,606 of qualified expenditures be spent by December 31, 2008. FairWest believes that proposed 2008 capital expenditures will be sufficient to meet the 2007 outstanding flow-through obligations. FairWest expects to sell further flow-through shares in 2008.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Part XII.6 tax ($) 30,655 31,861
$/boe 0.39 1.21
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Funds Flow from Operations
The following table shows funds flow from operations for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Funds flow from operations ($) 1,023,109 55,391
$/boe 13.13 2.11
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Funds flow from operations was significantly higher than those from the three-month period ended March 31, 2007, increasing $11.02/boe to $13.13. This is due to the increase in sales volumes as well as strong commodity prices.
Netbacks
March 31, March 31,
2008 2007
(3 Months) (3 Months)
---------------------------------------------------------------------
Petroleum and natural gas sales 4,140,822 1,234,048
Royalties (592,239) (244,908)
Operating expense (1,518,887) (472,535)
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Operating netback ($) 2,029,696 516,605
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Petroleum and natural gas sales 53.14 46.98
Royalties (7.60) (9.32)
Operating (19.49) (17.99)
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Operating netback ($/boe) 26.05 19.67
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General and Administrative
The following table shows general and administrative expense for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
General and administrative ($) 542,070 356,309
$/boe 6.96 13.56
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In the three-month period ended March 31, 2008, general and administrative costs decreased to $6.96 per boe from $13.56 in the same period in 2007. Administrative expenses have decreased on a per unit basis as production has increased. FairWest expects this trend to continue for 2008. For the three month period ended March 31, 2008, FairWest capitalized $460,786 of overhead expenses, including $42,831 of stock-based compensation.
Stock-based compensation
The following table shows the stock-based compensation expense for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Stock-based compensation ($) 85,662 73,044
$/boe 1.10 2.78
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The stock-based compensation to March 31, 2008, was $128,493. Of this total, $85,662 was expensed and $42,831 was capitalized. The Company uses the Black-Scholes option pricing model to calculate stock-based compensation. The options vest in the period 2006 -- 2013.
Depletion, Depreciation, and Amortization
The following table shows depletion, depreciation, and amortization expense for the periods indicated.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
--------------------------------------------------------------------
Depletion, depreciation and
amortization ($) 3,278,885 1,176,388
$/boe 42.08 44.78
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Undeveloped land costs and seismic costs of $5,100,133 are excluded in the calculation of depletion and depreciation. Future development costs on proved reserves of $3,066,000 are included in the calculation of depletion and depreciation.
Income tax
Due to the existence of substantial non-capital losses and other tax deductions, FairWest did not incur any current income tax expenses during the periods ended March 31, 2008, and March 31, 2007. For the period ended March 31, 2008, FairWest had a recovery of future income taxes of $816,035. Due to the existence of non-capital losses and income tax pools, FairWest does not expect to be taxable for a minimum of three years. FairWest has estimated that the following tax pools are available at March 31, 2008, to reduce future income. Some of these tax pools include successor costs and as such must be streamed against the income associated with the properties of the company that originally incurred the expenditures.
Tax Pool $
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COGPE 8,734,065
CDE 8,448,976
CEE 12,381,196
Foreign E&D 6,141,903
UCC -- Oil & Gas Equipment 13,811,396
UCC -- Other Equipment 529,935
Financing Cost 851,907
Non-capital Loss 13,151,537
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Sub-total 64,050,915
Capital Loss 5,285,585
---------------------------------------------------------
Total $69,336,500
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Net income (loss)
The net loss for the period ended March 31, 2008 was $1,528,842. A significant item in the income statement was the future income tax recovery of $816,035 (2007 - $361,103). This amount relates to the Company's ability to utilize its significant base of non-capital losses and discretionary income tax pools.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
---------------------------------------------------------------------
Net income (loss) ($) (1,528,842) (832,938)
$/boe (19.62) (31.71)
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Capital expenditures
Net capital expenditures were ($872,871) in the three-month period ending March 31, 2008 (2007 - $2,207,652). Included in this is a disposition of a non-core asset for net proceeds of $2,660,654.
March 31, March 31,
2008 2007
(3 Months) (3 Months)
$ $
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Lease rental 43,062 25,988
Seismic 41,083 9,364
Drilling and completions 772,470 835,025
Equipping and tie-in 436,079 1,062,516
Property dispositions and adjustments (2,660,654) -
Undeveloped land acquisition 25,743 30,000
Other 8,560 22,669
Capitalized overhead 460,786 222,090
----------------------------------------------------------------------
Total ($872,871) $2,207,652
----------------------------------------------------------------------
Liquidity and Capital Resources
March 31, March 31, March 31,
2008 2008 2008
FairWest Strike
Unconsolidated Unconsolidated Total
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$ $ $
Current assets
Cash 42,547 184,894 227,441
Accounts receivable 3,119,212 1,251,301 4,370,513
Due from related parties 1,303,254 - 1,303,254
Prepaid expenses 223,241 315,366 538,607
Due from Strike 4,591,451 - 4,591,451
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Total current assets $9,279,705 $1,751,561 $11,031,266
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Current liabilities
Accounts payable 8,607,345 1,072,044 9,679,389
Arranged creditors - 1,193,985 1,193,985
Bank loans payable 5,574,253 10,678,600 16,252,853
Short term capital lease 93,528 - 93,528
Due to FairWest - 4,591,451 4,591,451
Due to related parties 473,005 118,462 591,467
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Total current liabilities $14,748,131 $17,654,542 $32,402,673
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Unconsolidated Working Capital
Deficiency ($5,468,426) ($15,902,981) ($21,371,407)
Inter-company indebtedness (4,591,451) 4,591,451 -
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Consolidated Working Capital
Deficiency ($10,059,877) ($11,311,530) ($21,371,407)
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At March 31, 2008, FairWest had $227,441 in cash and cash equivalents and a working capital deficiency of $21,371,407 including $13,740,779 of revolving bank debt and $2,512,074 of non-revolving debt. It is essential to note that the working capital deficiency is made up primarily of revolving bank loans that FairWest does not expect to have to pay down within the next 12 months.
On an unconsolidated basis, Strike is solely responsible for $11,311,530 of this working capital deficiency and there is no recourse against FairWest or its assets. FairWest has acquired $4,591,451 of Strike's unsecured debt. Strike owes another $1.2 million to unsecured creditors.
At March 31, 2008, FairWest had a $3,720,000 revolving reducing demand loan (Credit Facility A) with the National Bank of Canada. Credit Facility A has an interest rate of the banks prime lending rate plus 0.75%. As at March 31, 2008 FairWest has drawn down $3,062,179 on this credit facility. The line of credit was used to assist in acquisition, development and production, and general corporate purposes. This line reduces by $90,000 per month.
In January 2008 the National Bank provided FairWest with a non-revolving acquisition demand loan (Credit Facility B) of $1,000,000. This line reduces by $50,000 per month starting February 2008. Credit Facility B has an interest rate of the banks prime lending rate plus 1.00%. As at March 31, 2008, FairWest has drawn down $900,000 on this credit facility for optimization of wells that were primarily located on Strike lands.
At March 31, 2008, Fair West has not complied with its requirement to maintain a working capital ratio of not less than 1.0 as calculated using the bank compliance certificate form. The working capital ratio at March 31, 2008 was 0.62. The Company has asked the bank for a waiver in respect of this default.
On March 31, 2008, Strike had an $11,100,000 demand revolving operating credit facility with a Canadian chartered bank. The facility bears interest at the bank's prime rate plus 0.375% per annum. At March 31, 2008,
$10,678,600 was drawn on this facility. Strike has pledged as collateral a $20,000,000 first priority floating charge demand debenture over all the assets of Strike. The holder of the Strike credit facilities has no recourse against FairWest's assets. The facility is subject to Strike meeting certain debt covenants. As at March 31, 2008, Strike was in violation of its working capital covenant and its change of control covenant. The debt will be reduced through the realization of $0.4 million of ARTC's receivable and an additional $0.3 million of operating revenue. On April 18, 2008, Strike Petroleum Ltd. received a demand to repay its outstanding indebtedness with its secured lender ("Lender"). The Lender has informed Strike that as of April 17, 2008, Strike owed the Lender $10.63 million of principal and accrued interest of $0.17 million. If the amount due to the Lender is not paid, the Lender has the right to enforce its security. FairWest and Strike are pursuing ongoing negotiations with the Lender to find a satisfactory resolution of this matter.
As at March 31, 2008, FairWest has a $1,612,074 non-revolving bridge loan facility with Tallinn Capital Corporation. This facility has an 18% interest rate and is due on June 30, 2008. The proceeds from this credit facility were used to finance the property acquisition completed in August 2007. It will be repaid through the sale of producing and non-producing properties to a new limited partnership. During the quarter the Company paid a $156,000 deferred financing fee to Tallinn Capital Corporation.
FairWest sold $2.0 million of convertible debentures in 2007. Proceeds were used to decrease the working capital deficiency. The debenture pays interest at 14% annually and is paid monthly. Each debenture is convertible to one common share at $0.45. It is redeemable by FairWest after March 1, 2008, and matures October 31, 2009.
The table below sets out the number of common shares issued by FairWest
Issued Number of shares Amount
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Balance December 31, 2006 61,444,307 $ 35,050,840
Flow-through shares --@ $0.50 1,074,000 537,000
Shares issued to Strike shareholders --@
$0.40 12,164,550 4,912,886
Cost associated with Strike acquisition - (168,711)
Normal course issuer's bid (a) (20,000) (11,327)
Shares issued to Strike creditors -- part of
Plan of Arrangement 5,631,674 2,815,838
Flow-through shares --@ $0.45 9,947,848 4,476,532
Flow-through shares --@ $0.225 6,500,000 1,462,500
Less: share issuance costs - (431,467)
Plus: tax effect of share issuance costs - 129,500
Less: tax effect of flow-through renunciation (1,685,300)
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Balance December 31, 2007 96,742,379 $47,088,291
Less: share issuance costs - (39,587)
Plus: tax effect of share issuance costs - 4,749
Less: tax effect of flow-through renunciation - (424,100)
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Balance March 31, 2008 96,742,379 $46,629,353
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Changes in the number of options, with weighted average exercise prices are
summarized as follows:
March 31, 2008 December 31, 2007
-----------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
-----------------------------------------
Opening balance 7,774,619 0.487 5,899,116 0.583
Granted 725,000 0.220 3,075,000 0.351
Expired (83,304) (1.143) (149,497) (1.140)
Cancelled (300,000) (0.47) (1,050,000) (0.537)
-----------------------------------------
Closing balance 8,116,315 0.457 7,774,619 0.487
-----------------------------------------
Exercisable 2,866,315 0.594 2,949,619 0.610
As at March 31, 2008, the following options are outstanding:
Number of
common shares Exercise price
under option per option Expiry
141,315 2.319 2009
3,600,000 0.50 2010
725,000 0.51 -- 0.59 2011
2,925,000 0.22 -- 0.42 2012
725,000 0.22 2013
Related Party Transactions
The Company's operating and financial strategy involves being the operator of it core properties and holding up to a 50% working interest position in these properties. Being the operator allows the Company to manage its production base on a timely basis and hence effectively manage the operational risks associated with the business. By holding a working interest of up to 50%, the Company is able to maintain operatorship and reduce its financial risk to its each project that it holds or plans to acquire either through an acquisition or drilling. In order to pursue either an acquisition or a drilling project, the Company must find a third party or parties who does not wish to be the operator and is prepared to assume the risks associated with the remaining 50% working interest position.
Accordingly, an essential part of the Company's business strategy is to create related private companies and limited partnerships who are prepared to jointly participate with the Company in drilling operations and acquisitions. At all times a director of FairWest is also a director of the private companies and the general partner of the limited partnerships. In the case of the private companies, the Company holds a 25% equity interest in the private companies and the private companies farmin on the Company's exploration opportunities. In the case of the limited partnerships, the Company sells oil and gas properties to the limited partnerships at fair market value and the Company and the limited partnership jointly exploit the properties that are acquired. The Company provides management services to the private companies and allocates a portion of its corporate overhead to these parties. After two years from the date of the funding of the private companies and the limited partnerships, the Company holds the right to acquire the private companies and limited partnership interests at fair market value.
(a) ExploreCo Energy Inc.
On January 31, 2006, the Company entered into a joint venture with ExploreCo Energy Inc. ("ExploreCo"). The terms of the joint venture allow ExploreCo to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by ExploreCo. As at March 31, 2008, FairWest owned 874,000 ExploreCo common shares at a total price of $262,200. The remaining 791,667 options have expired.
ExploreCo owes FairWest $738,303 at March 31, 2008, being amounts owing from joint venture billings, in the normal course of business. This account is paid as the joint venture billings are received by ExploreCo. Interest is charged at prime plus 1.25% .
(b) Petrovest Exploration & Production Corporation
In November 2006, the Company entered into a joint venture with Petrovest Exploration & Production Corporation ("Petrovest"). The terms of the joint venture allow Petrovest to participate in the exploration for and development of defined oil and gas opportunities for up to 25% of FairWest's share of these properties. FairWest's participation is limited by the amount of equity raised by Petrovest.
In November 2006, Petrovest granted the Company the option to acquire 999,000 common shares of Petrovest at a purchase price of $0.30 per share. The options vest at a rate of one option for every $3.00 of third party subscriptions raised by Petrovest and expire 30 days from date of vesting. As at March 31, 2008, 380,001 options vested and were exercised by FairWest at a total price of $114,000. At March 31, 2008, Petrovest is owed by FairWest $181,237. Interest is being charged at prime plus 1.25% .
(c) Bluestone Resources Inc.
Bluestone Resources Inc. ("Bluestone") is a company controlled by Jim Gettis, President & CEO of FairWest. Bluestone is a joint venture partner and a royalty owner. FairWest owes Bluestone $805 at March 31, 2008. Bluestone pays its account as joint venture billings are received.
(d) Garrington Limited Partnership
Garrington Production Corporation ("GPC") is the general partner of the Garrington Limited Partnership ("GLP"). A director of FairWest is a controlling shareholder of GPC. At March 31, 2008, an amount of $242,322 is due from GLP of which $307,798 is a note receivable. The balance due to GLP is their share of revenue net of capital from joint venture billings. Interest on the note payable is charged at 8% and interest on the balance is prime plus 1.25% .
An amount of $500 is due from GPC. This amount relates to an administrative charge.
(e) Gowling LaFleur Henderson LLP ("Gowlings")
An amount of $117,908 is owed to Gowlings, Calgary office in relation to the Strike acquisition. A director of the Company is a partner in the Gowlings Calgary office.
(f) NBC Technologies Inc.
An amount of $226,041 is due to NBC Technologies Inc ("NBC"). and is in the normal course of business. NBC provides drilling, completion and production optimization services to the Company. NBC Technologies Inc. is controlled by a director of FairWest.
(g) Neutral Creek Limited Partnership
Effective November 1, 2007, NLP sold oil and gas properties at fair market value to Neutral Creek Limited Partnership ("NCLP") for $891,293 payable in cash in the amount of $661,293 and an interest bearing promissory note of $230,000. The promissory note bears interest at an annual rate of 7%. The transaction was not in the normal course of operations and was recorded at fair value as determined by an independent evaluation. The note was paid out in January, 2008. Total interest paid by NCLP to NLP was $1,364 (2007 - $2,647). Effective March 31, 2008, NLP sold additional property to NCLP for gross proceeds of $2,900,000. The sale was paid for in cash and an interest bearing note payable of $588,200 remaining. The note was paid out in April, 2008. Any amount due or from NCLP is in the normal course of operations arising from NCLP's participation as a joint venture partner and is measured at the exchange amounts.
Outlook
FairWest drilled two wells in the first quarter. One is being tied in and will be on production in the second quarter. One is still being evaluated. FairWest is continuing with production optimization on the Strike lands and has worked over several wells which have increased production. FairWest is also optimizing production on the properties acquired in the third quarter which has contributed to increased production.
FairWest has made two offers to acquire $3.0 million of oil and gas properties in the Provost areas of Alberta. The acquisitions are expected to close by the end of May 2008. This acquisition will add approximately 85 barrels of oil production per day and 300 thousand cubic feet per day of natural gas production. FairWest has arranged bridge financing to close these acquisitions and expects to sell up to 50% of the properties acquired to a newly created limited partnership and independent third parties. The proceeds from the sales will be used to repay the bridge financing.
The Company's operating and financial strategy involves being the operator of it core properties and holding up to a 50% working interest position in these properties. Being the operator allows the Company to manage its production base on a timely basis and hence effectively manage the operational risks associated with the business. By holding a working interest of up to 50%, the Company is able to maintain operatorship and reduce its financial risk to its each project that it holds or plans to acquire either through an acquisition or drilling. In order to pursue either an acquisition or a drilling project, the Company must find a third party or parties who does not wish to be the operator and is prepared to assume the risks associated with the remaining 50% working interest position.
Accordingly, an essential part of the Company's business strategy is to create related private companies and limited partnerships who are prepared to jointly participate with the Company in drilling operations and acquisitions. At all times a director of FairWest is also a director of the private companies and the general partner of the limited partnerships. In the case of the private companies, the Company holds a 25% equity interest in the private companies and the private companies farmin on the Company's exploration opportunities. In the case of the limited partnerships, the Company sells oil and gas properties to the limited partnerships at fair market value and the Company and the limited partnership jointly exploit the properties that are acquired. The Company provides management services to the private companies and allocates a portion of its corporate overhead to these parties. After two years from the date of the funding of the private companies and the limited partnerships, the Company holds the right to acquire the private companies and limited partnership interests at fair market value.
FairWest's ability to fully exploit and carry out its planned exploration and development program is contingent upon the continuation of favorable commodity prices, the maintenance of its existing reserve and production base and internally generated cash flow from operations. For the year ended December 31, 2008 the Company's external engineering reports call for the expenditure of $3,396,000 to develop its proved resource base and $5,686,000 to develop its proved and probable reserve base. A portion of this capital has been expended in the first quarter of 2008. The cash flow from operations under the expected proved and proved plus probable case together with planned property sales and an increase in our bank line of credit is more than sufficient to cover the anticipated capital expenditures. In the event that there is a material drop in commodity prices or a material reduction in FairWest's reserve and production base, FairWest will either curtail some of its planned exploration and development activities or it will sell a portion of its existing assets to fund its capital expenditure program.
On April 18, 2008, the Company received correspondence from counsel for Strike's secured lender (the "Lender") that constituted a demand for Strike to repay its outstanding indebtedness to the Lender. The Lender informed Strike that as of April 17, 2008, Strike owed the Lender $10.63 million of principal and accrued interest of $0.17 million. The Company has determined that the value of Strike's oil and gas assets is less than the indebtedness to the Lender. The Company, Strike and the Lender are currently in negotiations to settle this matter. If no agreement is reached, the secured lender could exercise its right under the lending agreement to take back Strike's oil and gas assets. The potential affect to the Company would be to decrease the Company's property and equipment assets and decrease the bank loan by $10.6 million.
FairWest believes global, North American and domestic supply and demand factors will result in continuing strong prices for crude oil and natural gas at current levels for 2008. FairWest expects the US$/CDN$ exchange rate to remain volatile. It expects to reduce operating costs on a per unit basis. FairWest's general and administrative expenses will increase on an absolute basis and as production rises it is expected that per unit cost will decrease substantially.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the President and Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure.
An evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was conducted as of March 31, 2008, by and under the supervision of management, including the CEO and CFO. Based on this evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures as defined by Multilateral Instrument 52-109, Certification of Disclosure in Issuers' Annual and Interim Filings, are effective to ensure that information required to be disclosed in reports filed or submitted under Canadian securities legislation is recorded, processed, summarized an | | |
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