Corval Energy Ltd.
QUARTERLY REPORT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013
Corval Energy Ltd. President’s Message
For the nine months ended September 30, 2013
- 2 -
PRESIDENT’S MESSAGE
Fellow Shareholders, I am pleased to present the Financial Statements and MD&A for the nine months ended September 30, 2013 for Corval Energy Ltd. (the "Company" or "Corval"). These materials are being emailed to all shareholders, but can also be found on our website at www.corvalenergyltd.com . If you would like a hard copy mailed to you please contact us at [email protected]. The main theme in the third quarter was the unusually wet weather conditions in Manitoba in July to mid-August that resulted in Corval curtailing its drilling program until drier conditions prevailed. This was not an easy decision to make for an emerging company, however we believe it was the correct decision in order to ensure that the wells were drilled within budget as we did not incur extra costs dragging equipment through very muddy conditions. Once the ground dried up, Corval continued its capital program. Six wells in total were drilled between late June and the end of September. Corval completed and brought on-stream five of these wells in September. Although the production increases from these successful wells had only a minor impact on the third quarter results, the impact has become apparent in the fourth quarter, as Corval’s production has climbed to over 800 barrels of oil per day (bopd), with two wells awaiting completion in late November. The third quarter of 2013 saw a slight decrease in production from the second quarter as natural declines were only partially offset by additional production brought on late in the quarter. For the quarter Corval averaged 457 bopd with associated cash flow of $2.0 million. Crude oil prices remained strong in the quarter, averaging over $100 per barrel. In addition, once the ground dried up, we completed the installation of an oil treater and associated water disposal line at the Sinclair oil battery. The installation of the oil treater and water disposal line are expected to reduce trucking costs for the Company. We are pleased that this work, completed early in October, was done for only $1.2 million and will allow for processing over 2,000 barrels of oil per day, allowing significant room for growth. Although our drilling program has been deferred, we are still planning to drill up to 17 wells and exit at a target rate of 900 to 1,000 barrels of oil per day. The Company has drilled, with a partner, three gross wells (0.75 net wells) that are currently being completed, and are moving to drill two additional operated wells, weather and government approvals permitting. In addition, we have added approximately twenty sections of land to our inventory, as we look at expanding our play in the surrounding area. We plan to drill an exploratory well in the near future to commence testing our concepts. Corval continues to be in a strong financial position, with funds currently available from our equity line, unutilized bank line, and cash flow. This will enable us to implement our 2013 and beyond capital program, as well as allowing sufficient financial flexibility to take advantage of additional opportunities that may arise in our focus area. As many of you may remember, Corval commenced operations only a year ago, on October 17, 2013. As we look back on our first year of operations, we are extremely pleased with the progress that has been made. We have accomplished what we set out to do in the first year, in terms of production growth, completing a capital program within budget, and maintaining financial flexibility. We continue to look forward to the future to continue to meet targets and provide value to our shareholders.
Corval Energy Ltd. President’s Message
For the nine months ended September 30, 2013
-3-
Sincerely,
Tom Stan President & CEO CORVAL ENERGY LTD.
Corval Energy Ltd. Financial and Operations Overview
For the nine months ended September 30, 2013
- 4 -
Financial and Operations Overview
Financial ($000s except per share amounts)
Three months
ended
September 30, 2013
($000s)
Nine months
ended
September 30, 2013
($000s)
Petroleum and natural gas sales 4,317 11,243
Funds from operations* (before changes in non-cash working capital) 1,959 5,090
Basic ($/share) 0.03 0.10
Net income (loss) 137 (794)
Basic ($/share) 0.00 (0.02)
Working capital (excluding non-cash commodity price contract asset) $2,495 $2,495
Capital expenditures
Land and seismic 51 332
Drill and complete 6,642 14,483
Equipment, facilities and other 1,817 3,744
Development capital 8,510 18,559
Exploration and evaluation 21 1,560
Property acquisitions - 3,306
Property dispositions - (1,897)
8,531 21,528
Operating
Average production (bbl/d) 457 441
Average realized price ($/bbl) 102.40 93.39
Netback ($/bbl)
Petroleum and natural gas sales 102.40 93.39
Realized loss on commodity price contract (4.58) (1.79)
Royalties (15.78) (14.05)
Operating expenses (16.92) (16.88)
Netback before workovers 65.12 60.67
Workovers (7.31) (3.64)
Operating netbacks* 57.81 57.03
Total wells drilled 5 11
Working interest wells 5 11
Land holdings (acres) 31,459 23,290
Common shares o/s at period-end (000’s) 70,391 70,391 *Note: Funds from operations and operating netbacks do not have a standardized meaning under GAAP. Refer to non-GAAP
measures in this report.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
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November 29, 2013
1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated as a shelf company on March 15, 2011, and
remained inactive until acquired by a current director of Corval on November 30, 2011. On May 15, 2012, the
Company changed its name to Corval Energy Ltd. On October 17, 2012, the Company completed a Plan of
Arrangement with Foundation Group Capital Trust, whereby it exchanged shares of the Company for trust units of
Foundation Group Development Trust (“FGDT”) held by Foundation Group Capital Trust, and subsequently,
Foundation Group Capital Trust then distributed these shares to its unitholders. Through the Plan of Arrangement,
the subsidiaries of FGDT were dissolved and the assets and liabilities were assumed by Corval.
HIGHLIGHTS
Corval started the third quarter by commencing its second phase drilling program. Three wells were drilled by
early July, and then heavy rains caused Corval to defer its drilling program. A total of six wells were drilled
from late June until the end of the third quarter. Five of these wells were completed in the quarter, and were
brought on-stream, starting in late August.
Production averaged 441 bopd for the nine months ended September 30, 2013, while cash flow was $5.1
million for the same period. Production averaged 457 bopd in the third quarter of 2013, a decrease of 17%
from the second quarter due to the natural declines from wells, prior to the new wells being brought on-
stream.
Crude oil prices in the first nine months of 2013 averaged $93.39/bbl.
Operating netbacks for the nine months were $57.03/bbl.
In order to manage exposure to fluctuating crude oil pricing, Corval fixed an additional 100 bopd at $101.35,
WTI in Canadian dollars from August 1, 2013 to July 31, 2014.
Increased bank facility in in the fourth quarter from $13.5 million to $15.0 million.
The drilling program increased production to over 800 bopd in mid-November, with two wells still to be
completed and two new partner-operated wells to be brought onstream.
ADVISORIES
Management’s discussion and analysis (“MD&A”) and results of operations should be read in conjunction with the
interim consolidated financial statements for the three and nine months ended September 30, 2013, and the
consolidated financial statements for the year ended December 31, 2012. Barrels of oil equivalent (“boe”) may be
misleading as boes are based on a relative energy content conversion of six thousand cubic feet (“mcf”) of natural
gas to one equivalent barrel (“bbl”) of oil (6 mcf = 1 bbl) when measured at burner tip and does not represent a value
equivalency at the wellhead. Production volumes reported are the Company’s interest before royalties, and all
amounts are expressed in Canadian dollars, unless otherwise stated.
The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting
Principles (“GAAP”), which are based on International Financial Reporting Standards (“IFRS”). Additional terms
used in this Management Discussion and Analysis are “funds from operations” or “funds used in operations”, and
“netback”. Funds from operations are presented for information purposes only, and should not be considered an
alternative to, or more meaningful than, cash flow from operating activities as determined by GAAP. Corval
determines funds from operations to be the cash flow before changes in non-cash working capital. Management
believes that in addition to net earnings, funds from operations is a useful supplemental measure to assess the
financial performance and the ability of Corval to finance future growth through capital investment. In addition,
management uses netback to analyze operating performance and leverage. Netback equals total revenue less
royalties, operating costs and transportation costs calculated on a per boe basis.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-6-
Forward-looking information
Certain information set forth in this document, including management’s assessment of future plans and operations,
contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and
uncertainties, many of which are beyond management’s control. Those risks include, without limitation, the effect of
general economic conditions, risks associated with oil and gas exploration, development, production, marketing and
transportation, the effects of inclement weather and natural disasters, loss of markets, the fact that the Company does
not operate all of its properties, industry conditions and competition, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the
ability to access qualified personnel and oilfield services, decisions by regulators and the ability to access sufficient
capital from internal and external sources. Readers are cautioned not to place undue reliance on the forward-looking
statements as the assumptions used in the preparation of such information, although considered reasonable at the
time of preparation, may prove to be imprecise. Actual results, performance or achievements could materially differ
from those expressed or implied in such forward-looking statements and accordingly, no assurance can be given that
any of the events anticipated by forward looking statements will transpire or occur, or if any of them do so, what
benefit the Company will derive therefrom.
Specific forward-looking statements include the following: Corval’s business strategy and focus, capital
expenditure budget, drilling and completion plans, anticipated production levels, projected land acquisitions, future
debt levels, operating and transportation costs, and other financial results, source of funding of the Company’s
capital program, future plans to draw down on Corval’s equity line, tax pools, future production, and decline rates.
OVERVIEW OF PERFORMANCE AND DISCUSSION OF OUTLOOK
Overview
Production for the nine months ended September 30, 2013 averaged 441 bopd. The third quarter of 2013 saw a
slight decrease in production resulting from the natural decline of production from first quarter drilling program, and
a delayed start to the second and third quarter drilling program due to poor weather conditions. For the quarter, the
Company averaged 457 barrels of oil per day with associated cash flow of $2.0 million.
Crude oil pricing continues to be strong in the nine months of 2013, averaging $93.39/bbl in the field, before
recognizing losses from the hedging program. Crude oil prices have decreased after the quarter end, however prices
(WTI in $US) remain over $90.00/bbl. The Company continues to receive solid netbacks due to its high quality
crude pricing and low operating costs. The Company undertook some needed workovers, resulting in higher
operating costs of $24.23/bbl for the quarter, and lower field netbacks averaging $57.81/bbl for the three months
ended September 30, 2013, as compared to the second quarter average operating costs of $16.46/bbl and field
netbacks of $60.00/bbl.
In the quarter, Corval entered into a commodity price contract of 100 bopd at $101.35/bbl WTI converted to CDN$
from August 1, 2013 to July 31, 2014. This contract is in addition to the 100 bopd fixed at $90.02/bbl at Edmonton
from May to December, 2013 that was entered into during the second quarter.
Corval spent $8.5 million on capital expenditures in the quarter, including costs to drill five wells, and complete and
tie-in five wells, leaving the two remaining wells to be tied in during the fourth quarter. These wells were brought
on-stream late in September, resulting in September production averaging 542 bopd. Production for early
November has increased to over 800 bopd, based on field estimates, as the five new wells have produced for a
complete month.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
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During the nine months ended September 30, 2013, Corval used the net proceeds from its 2012 financing to repay
$545,193 of promissory notes, including accrued and unpaid interest, and $7,450,000 of bank debt. In April, Corval
called $8.0 million on its line of equity, and in September, the remaining $9.0 million of the line of equity financing
was called to fund the ongoing capital program.
In the fourth quarter, Corval reviewed its credit facilities with the lender, and increased its available line of credit
from $13.5 million to $15.0 million. Currently the credit line is undrawn.
Corporate
Grey Market Trading
Corval’s common shares are not listed, traded or quoted on any stock exchange. Registered dealers may facilitate
trades of the Company's common shares to eligible purchasers through the grey market. Since grey market securities
are not traded or quoted on an exchange or interdealer quotation system, investor's bids and offers are not collected
in a central spot so market transparency is diminished and best execution of orders is difficult. The sale of the
Company's common shares through the grey market is at the shareholder's own risk and the Company does not
endorse such trades.
The Company understands that Acumen Capital Partners Limited and AltaCorp Capital, both registered dealers,
have previously organized trades in Corval’s common shares on the grey market. Please contact these dealers with
inquiries regarding trading your common shares on the grey market.
If you are interested in selling your Corval shares, to find a contact, you may either:
i) Look on our website at www.corvalenergyltd.com;
ii) E-mail us at [email protected].
Results of Operations – Third Quarter of 2013
Although Corval had been incorporated in 2011, Corval formally commenced operations in October, 2012.
Therefore, the interim consolidated financial statements and the Management’s Discussion and Analysis reflect
operations only after October 2012, and as a result, no comparative information has been provided.
Average daily sales volumes were 457 bopd and 441 bopd for the three and nine months ended September 30, 2013.
The production for the third quarter of 2013 is a decrease of 90 bopd from the second quarter production or 16%.
The decline in production resulted from the natural decline of production from first quarter drilling program, and a
delayed start to the second and third quarter drilling program due to wet weather conditions in Manitoba.
Revenues, comprised entirely of oil sales, were $4,316,805, representing an average price of $102.40 per bbl for the
three-month period, and $11,242,891, representing an average price of $93.39 per bbl, for the nine-month period,
both prices prior to the impact of the hedging program. The revenues for the three-month period ending September
30, 2013 were $157,990 lower than the three-month period ending June 30, 2013, a 4% decrease. The average price
for the third quarter of 2013 was $12.27 (14%) per bbl higher than the average price for the second quarter of 2013.
For the three months ended September 30, 2013, the Company recorded a net income of $137,107, and for the nine
months, a net loss of $793,894. The Company incurred capital expenditures of $8,530,918 during the three-month
period, primarily related to the third quarter drilling program, consisting of drilling, completing, equipping, and
tying-in five wells in the Sinclair area of Manitoba. As a result, the total capital expenditures were $20,119,234 for
the nine-month period before acquisitions and divestitures.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-8-
Funds from operations for three and nine months ended September 30, 2013 were $1,959,236 and $5,090,157
respectively. The funds from operations for the third quarter of 2013 represents a decrease of $299,762, or 13%,
from the second quarter of 2013 resulting from both a decrease in production as wells from the first quarter drilling
program declined, and a delay in the second and third quarter drilling program due to poor weather conditions.
OUTLOOK
Capital Expenditure Program - 2013
In May, 2013, the Board approved the full year capital program of $30.7 million, which includes drilling a total of
17 gross wells. Corval continued with its capital program in late June after break-up, drilling three wells prior to the
very rainy and wet conditions in southwest Manitoba, which delayed the capital program until mid-August. To the
end of September, Corval drilled a total of 11 wells in 2013: five wells from the winter program, and six wells
during the second and third quarter. Late in the third quarter, five wells were completed and tied in, with another
two wells scheduled to be completed in November, 2013. Production has increased to over 800 bopd in November,
and the well performance to date is consistent with the originally projected type curves. The drilling program
includes up to an additional five wells to be drilled in the remainder of the year, weather and regulatory approvals
permitting. In addition, the Company plans to continue its program of acquiring additional land in the region, to add
additional drilling locations.
Corval is moving forward as planned, with well costs and well performance on target. With production currently
in excess of 800 bopd, and the continuation of strong crude oil prices, cash flows are expected to remain strong.
Corval is in a unique position for a junior/emerging oil company as it continues to be :
i) well-financed with cash and a $15.0 million unutilized line of credit,
ii) generating cash flows in excess of $12 million per year based on current production, of light oil which generates
netbacks that are currently over $55.00 per bbl,
iii) well-positioned with a strong management team, directors and major investors to take advantage of additional
opportunities that will arise in Western Canada, and
iv) continuing to capitalize on the potential of its significant multi-zone light oil resource plays in Manitoba.
IMPACT OF CURRENT ECONOMIC VOLATILITY AND UNCERTAINTY
Crude oil prices remained in excess of $100/bbl through to September of 2013. Increased crude oil production in
Western Canada and the United States has resulted in ongoing pipeline takeaway constraints for crude oil. Currently
Corval has not been impacted, however we continue to monitor the situation. After the quarter end, crude oil prices
(West Texas Intermediate (WTI)-$U.S.) have decreased to the $95.00 per barrel range, and the differential between
WTI and Edmonton Par price has widened from the $7.00 per barrel range to over $15.00 per barrel range. If this
differential remains wide, it would reduce Corval’s cash flow in future months. In September, the Company called
its remaining $9 million line of equity. Corval is, therefore, in a strong financial position to continue its planned
capital expenditures program. The Company will continue to monitor its funds from operations and available credit
facilities to ensure its ability to meet its planned capital program for 2013 and beyond.
RESULTS OF OPERATIONS
The following tables summarize various aspects of producing properties for the three and nine months ended
September 30, 2013.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-9-
Production
Period ended September 30, 2013 Three
months
Nine
months
Oil, condensate, & ngls – bbls/d
457
441
Production of 457 bbls/d for the third quarter decreased from 547 bbls/d during the second quarter of 2013. New
wells were brought on production in late September, which should result in increased production levels for the
fourth quarter.
Revenue
Period ended September 30, 2013 Three
months
Nine
months
Sales - oil $ 4,316,805 $ 11,242,891
Average price
Oil ($/bbl)
$ 102.40
$ 93.39
The Company’s crude oil production is light, sweet oil with an API of 38 degrees. The realized average price for the
three months ended September 30, 2013 is $12.27 per bbl (14%) higher than the price of $90.13 per bbl for the three
months ended June 30, 2013. The crude oil is priced from Cromer, Manitoba, and traded at a discount to WTI of
slightly less than $CDN $7.00/bbl over the nine month period.
Commodity price contracts / hedging
Period ended September 30, 2013 Three
months
Nine
months
Realized loss on commodity price contract (cash portion)
Unrealized gains on commodity price contract (non-cash portion) $ 192,877
(233,300)
$ 214,989
(58,800)
Total commodity price contract expense $ (40,423) $ 156,189
Per bbl
Cash portion of commodity price contract – loss (gain)
Non-cash portion of commodity price contract – loss (gain)
Total commodity price contract expense – loss (gain)
$ 4.58
($ 5.53)
($ 0.96)
$ 1.79
($ 0.49)
$ 1.30
The Company has two commodity price contracts in place. In March, Corval fixed 100 bopd at $90.02/bbl at
Edmonton from May to December, 2013. In July, 2013, an additional 100 bopd was fixed at $101.35/bbl, WTI in
Canadian dollars from August 1, 2013 to July 31, 2014.
Royalties
Period ended September 30, 2013 Three
months
Nine
months
Crown royalties
Freehold royalties $ 10,194
602,946
$ 15,360
1,520,223
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-10-
Overriding royalties 52,124 155,592
Total royalties $ 665,264 $ 1,691,175
Per boe
Percentage of revenue $ 15.78
16.1%
$ 14.05
15.3%
The royalty rate has increased in the third quarters of 2013, mainly due to prior period adjustments as a result of an
audit by a royalty holder. Most of the Company’s production is from freehold lands, which have royalty rates of
between 12.5% and 18%, and provide no incentives for drilling.
Operating and workover costs
Period ended September 30, 2013 Three
months
Nine
months
Operating costs
Expensed workovers $ 713,476
308,158
$ 2,032,166
438,424
Total operating costs $ 1,021,634 $ 2,470,590
Per bbl
Operating costs
Expensed workovers
Total operating costs
$ 16.92
$ 7.31
$ 24.23
$ 16.88
$ 3.64
$ 20.52
Operating costs averaged $24.23 and $20.52 per bbl for the three and nine months ended September, 2013
respectively. Operating costs for the three months ended September 30, 2013 consisted of $16.92 for regular
operating costs and $7.31 per bbl for expensed workovers, as compared to operating costs for the three months
ended June 30, 2013, of $15.34 for regular operating costs and $1.12 for expensed workovers, for a total of $16.46
per bbl. The Company performed 14 workovers in 2013 on wells acquired from the private trust, including
bottomhole pump and packer repairs that were required from the outset at acquisition and were necessary to
maintain production. Maintenance on the water disposal well was also done to prepare it for increased disposal
requirements. Operating costs per bbl have increased during the third quarter due to decreased production in the
quarter, but have decreased overall due to annual production increases.
Operating netbacks
Period ended September 30, 2013 Three
months
Nine
months
Per boe
Revenues
Commodity price contract expense – cash portion
Royalties
Operating costs
$ 102.40
(4.58)
(15.78)
(16.92)
$ 93.39
(1.79)
(14.05)
(16.88)
Operating netback per boe before workovers $ 65.12 $ 60.67
Workovers (7.31) (3.64)
Operating netback per boe $57.81 $57.03
The netback for the three months ended September 30, 2013 of $57.81 is 4% lower than the netback for the three
months ended June 30, 2013 of $60.00, due to the increased operating costs from workovers during the third quarter,
partly offset by the increased oil price. Netbacks for the Manitoba properties are generally higher than industry
average due to strong prices for the light sweet crude produced in the region, combined with reasonable operating
costs. The Company expects that trend to continue.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
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General and administrative expenses
Period ended September 30, 2013 Three
months
Nine
months
Human resources costs (salaries and benefits)
Professional fees
Occupancy costs
Office supplies, software, and services
Shareholder reporting
Travel
Miscellaneous general and administrative
Overhead recoveries
$ 431,683
13,944
95,483
87,822
9,886
7,532
285
(168,842)
$ 1,307,219
161,046
319,849
280,347
68,254
31,110
1,468
(393,313)
Total $ 477,793 $ 1,775,980
General and administrative expenses for the three months ended September 30, 2013 are $246,079 (34%) lower than
the three months ended June 30, 2013 due to reduced expenses over the summer months, and increased recoveries
from overhead allocations due to the capital activity during the third quarter of 2013.
Depletion and depreciation
Period ended September 30, 2013 Three
months
Nine
months
Total depreciation, depletion, and impairment
Per boe
$1,503,193
$ 35.63
$4,314,224
$ 35.84
Depletion for the three months ended September 30, 2013 decreased by $315,632 over the three months ended June
30, 2013 primarily due to production decreasing over that same period.
Funds from operations and net income (loss)
Period ended September 30, 2013 Three
months
Nine
months
Funds from operations
$/share - basic
Net income (loss)
$/share - basic
$ 1,959,236
$0.03
$ 137,107
$ 0.00
$ 5,090,157
$0.10
$(793,894)
$(0.02)
Capital Expenditures
Period ended September 30, 2013 Three
months
Nine
months
Land purchases
Geological and geophysical
Drilling and completion
Equipping and facilities
Other
$ 21
72,663
6,641,499
1,816,735
-
$ 1,472,492
419,486
14,483,253
3,716,158
27,845
Total cash expenditures
Less: Exploration and evaluation expenditures $ 8,530,918
(21,249)
$20,119,234
(1,559,573)
Total: Property, Plant, and equipment expenditures $ 8,509,669 $18,559,661
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-12-
Capital expenditures were $21,249 and $1,559,573 for exploration and evaluation assets for the three and nine
months ended September 30, 2013, and $8,509,669 and $18,559,661 for developed and producing assets for the
same respective periods. Corval drilled eleven wells during the nine-month period, and completed, equipped, and
tied-in nine wells as part of the capital program in Sinclair, Manitoba, costs of which are included in property, plant,
and equipment expenditures.
Acquisition and divestiture
a) On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of $3,306,224. The
consideration paid was determined to be equivalent to fair value.
The purchase price allocation is as follows:
$
Property, plant, and equipment
Decommissioning liability
3,340,865
(34,641)
Net assets 3,306,224
Cash consideration paid
3,306,224
b) In April, 2013, the Company disposed of its working interest in two non-core wells for cash proceeds of
$1,897,027.
SUMMARY OF QUARTERLY FINANCIAL DATA
The following table summarizes quarterly financial results:
Quarter
ended
Sep-13
$
Jun-13
$
Mar-13
$
Dec-12
$
Sep-12
$
Jun-12
$
Mar-12
$
Dec-11
$ Petroleum
and natural
gas sales
4,316,805
4,474,797
2,451,289
1,364,553
-
-
-
-
Funds from (used in)
operations 1,959,236 2,255,231 875,690 (361,877) - - - -
Income (loss) 137,107 (291,593) (639,408) (8,474,535) - - - -
Production
bopd
457
546
318
221
-
-
-
-
Average
price/bbl
$102.40
$90.13
$85.75
$82.39
$0.00
$0.00
$0.00
$0.00
LIQUIDITY AND CAPITAL RESERVES
The Company started 2013 with a working capital surplus of $2,802,567, which included the remaining promissory
notes of $568,828 owing. The Company raised $145,600 through the issue of 208,000 shares through a private
placement in February 2013. On April 5, 2013, the Company requested an $8 million draw from the line of equity,
which resulted in $7,510,437 in proceeds net of share issuance costs from the sale of 11,428,571 shares. Promissory
notes, valued at $545,193, were repaid during the first three months of 2013, as well as the bank loan of $7,450,000.
The Company drilled eleven wells, and completed, equipped, and tied-in nine wells of its 2013 capital program
during the nine-month period, which comprised the majority of the $20,119,234 in property, plant, and equipment
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-13-
expenditures. On September 23, 2013, the Company requested the remaining $9 million balance from the line of
equity, which resulted in $8,507,000 in proceeds net of share issuance costs from the sale of 12,928,572 shares. The
Company closed the quarter with a working capital balance of $2,495,315 at September 30, 2013, which includes
the remaining promissory notes of $25,114 owing.
The Company considers its capital structure to include share capital, and working capital, including the bank loan.
September 30, 2013
$
Current assets* 9,851,725
Accounts payable and accrued liabilities (7,331,296)
Promissory notes (25,114)
Net working capital 2,495,315
Maximum value of bank loan
Amount drawn
13,500,000
-
Unutilized bank loan 13,500,000
Net available funds 15,995,315
*Excludes non-cash commodity price contract asset
The Company’s 2013 capital program was presented to the Board of Directors, and a capital program of $30.7
million was approved. To September 30, 2013, total capital of $21.5 million was expended, including a property
acquisition of $3.3 million and a property disposition with proceeds of $1.9 million. In April and September, 2013,
an $8.0 million and a $9.0 million draw on the line of equity, respectively, was received. The Company expects the
current available funds, bank loan, line of equity, and anticipated cash flow will be able to fund its remaining capital
program for 2013.
During the nine months ended September 30, 2013, the Company negotiated a new bank loan with a Canadian
financial institution for $9.0 million, which was increased to $13.5 million in July, 2013, and increased again
subsequent to the quarter to $15.0 million, bearing an interest rate of the Bank Prime Rate plus 0.75%. The credit
facility is subject to a periodic review, the next of which is scheduled for June 1, 2014. No funds have been drawn
from this bank loan to date.
SHARE DATA
Transactions regarding Corval’s shares, options, acquisition warrants and performance warrants are presented in the
interim consolidated financial statements as at September 30, 2013, and the consolidated financial statements at
December 31, 2012.
The Company has 70,391,054 shares outstanding as of the date of this MD&A.
LAWSUIT
The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on behalf of its
predecessor companies regarding the improper diversion of funds against a former trustee. There can be no
assurance of a favorable judgment at this time.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-14-
TRANSACTIONS WITH RELATED PARTIES
The corporate secretary is a partner in a law firm that provides legal services to the Company. For the three and nine
months ended September 30, 2013, the Company recorded $5,923 and $147,640 respectively in general and
administrative expenses related to this law firm. At September 30, 2013, $4,467 remained in accounts payable.
COMMITMENTS
The Company is carrying a lease on its office space, and another lease on the space of FGDT, which terminated on
July 31, 2013:
Total at
September 30, 2013
$
2013
2014-2018
2019-2022
35,441
760,461
494,711
Total 1,290,613
RISK FACTORS
Investors should carefully consider the risk factors set out below and consider all other information contained
herein. Additional risks and uncertainties not currently known to the management of the Company may also
have an adverse effect on the Company's business and the information set out below does not purport to be an
exhaustive summary of the risks affecting the Company.
Prices, Markets and Marketing of Crude Oil and Natural Gas The marketability and price of oil and natural gas that may be acquired or discovered by the Company is and will
continue to be affected by numerous factors beyond its control. The Company's ability to market its crude oil and
natural gas may depend upon its ability to contract capacity on pipelines that deliver products to commercial
markets. The Company may also be affected by deliverability uncertainties related to the proximity of its reserves to
pipelines and processing and storage facilities and operational problems affecting such pipelines and facilities as
well as extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the
export of oil and natural gas and many other aspects of the oil and natural gas business.
The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are
substantially dependent on prevailing prices of oil and gas. The Company's ability to borrow and to obtain additional
capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to
large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors beyond the control of the Company. These factors include economic
conditions, in the United States and Canada, product “bottlenecks” caused by transportation capacity constraints, the
actions of the OPEC and Russia, governmental regulation, political stability in the Middle East and elsewhere, the
foreign supply of oil and gas, the price of foreign imports and the availability of alternative fuel sources. Any
substantial and extended decline in the price of oil and gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations.
Project Risks
The Company will manage a variety of small and large projects in the conduct of its business. Project delays may
delay expected revenues from operations. Significant project cost over-runs could make a project uneconomic. The
Company's ability to execute projects and market oil and natural gas will depend upon numerous factors beyond the
Company's control, including:
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-15-
the availability of drilling and related equipment;
the availability of processing capacity;
the availability and proximity of pipeline capacity;
the availability of storage capacity;
the supply of and demand for oil and natural gas;
the effects of inclement weather;
unexpected cost increases;
accidental events;
the availability and productivity of skilled labour; and
the regulation of the oil and natural gas industry by various levels of government and governmental agencies.
Because of these factors, the Company may be unable to execute projects on time, on budget or at all, and may not
be able to effectively market the oil that it produces.
Availability of Drilling Equipment and Access
Oil and natural gas exploration and development activities are dependent on the availability of drilling and related
equipment (typically leased from third parties) in the particular areas where such activities will be conducted.
Demand for such limited equipment or access restrictions may affect the availability of such equipment to the
Company and may delay exploration and development activities. To the extent the Company is not the operator of
its oil and gas properties, the Company will be dependent on such operators for the timing of activities related to
such properties and will be largely unable to direct or control the activities of the operators.
Legal Proceedings
The Company may from time to time be subject to litigation and regulatory proceedings arising in the normal course
of its business. The Company cannot determine whether such litigation and regulatory proceedings will, individually
or collectively, have a material adverse effect on its business, results or operations and financial condition. To the
extent expenses incurred in connection with litigation or any potential regulatory proceeding or action (which may
include substantial fees of attorneys and other professional advisors and potential obligations to indemnify officers
and directors who may be parties to such actions) are not covered by available insurance, such expenses could
adversely affect the Company's cash position.
Environmental Risks
All phases of the oil and natural gas business present environmental risks and hazards and are subject to
environmental regulation pursuant to a variety of international conventions and international, national, provincial,
state and local law and regulation. Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in association with oil and gas
operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and
reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require
significant expenditures and a breach of same can result in the imposition of clean-up orders, fines and/or penalties,
some of which may be material, as well as possible forfeiture of requisite approval obtained from the various
governmental authorities. The discharge of greenhouse gas (“GHG”) emissions and other pollutants into the air, soil
or water may give rise to liabilities to governments and third parties and may require the Company to incur costs to
remedy such discharge. Although the Company believes that it is in material compliance with current applicable
environmental regulations, no assurance can be given that environmental laws will not result in a curtailment of
production or a material increase in the costs of production, development or exploration activities or otherwise
adversely affect its financial condition, results of operations or prospects.
Permits, Licenses and Approvals
The Company's properties are held in the form of licenses and leases and working interests in licenses and leases. If
the Company or the holder of the license or lease fails to meet the specific requirement of a license or lease, the
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-16-
license or lease may terminate or expire. There can be no assurance that any of the obligations required to maintain
each license or lease will be met. The termination or expiration of the Company's licenses or leases or the working
interests relating to a license or lease may have a material adverse effect on its results of operations and business.
Land Tenure
Crude oil and natural gas located in the Canadian western provinces is owned predominantly by the respective
provincial governments. Provincial governments grant rights to explore for and produce oil and natural gas pursuant
to leases, licenses and permits for varying terms and on conditions set forth in provincial legislation including
requirements to perform specific work or make payments. Oil and natural gas located in such provinces can also be
privately owned and rights to explore for and produce such oil and natural gas are granted by lease on such terms
and conditions as may be negotiated.
Risk management / hedging
The Company may enter into agreements to receive fixed prices on its oil and natural gas production to offset the
risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in
such agreements, the Company will not benefit from such increases and the Company may nevertheless be obligated
to pay royalties on such higher prices, even though not received by it, after giving effect to such agreements.
Similarly, from time to time the Company may enter into agreements to fix the exchange rate of Canadian to United
States dollars in order to offset the risk of revenue losses if the Canadian dollar increases in value compared to the
United States dollar; however, if the Canadian dollar declines in value compared to the United States dollar, the
Company will not benefit from the fluctuating exchange rate.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, which even with a combination of experience,
knowledge and careful evaluation the Company may not be able to overcome. There is no assurance that
expenditures made on future exploration by the Company will result in new discoveries of oil in commercial
quantities. It is difficult to project the costs of implementing a drilling program due to the inherent uncertainties of
drilling in unknown formations, the costs associated with encountering various drilling conditions such as over
pressured zones and tools lost in the hole, the availability of adequately trained and experienced contractors, and
changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and
interpretations thereof.
The long-term commercial success of the Company depends on its ability to find, acquire, develop and profitably
produce oil and natural gas reserves. No assurance can be given that the Company will be able to continue to locate
satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified,
the Company may determine that current markets, terms of acquisition and participation or pricing conditions make
such acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are
productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating
costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and
various field operating conditions may adversely affect the production from successful wells. These conditions
include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme
weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.
While diligent well supervision and effective maintenance operations can contribute to maximizing production rates
over time, production delays and declines from normal field operating conditions cannot be eliminated and can be
expected to adversely affect revenue and cash flow levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and
natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs,
blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks
could have a materially adverse effect on future results of operations, liquidity and financial condition.
Corval Energy Ltd. Management Discussion and Analysis
For the nine months ended September 30, 2013
-17-
Recent economic risks
Many oil and natural gas producers are encountering difficult times with low natural gas prices and volatile
differentials on crude oil prices, and in accessing new equity capital, while credit conditions and availability may
tighten despite low interest rates. Corval is entirely positioned in exploring and producing crude oil, which has
maintained stronger pricing over the last few years. Crude oil pricing has been volatile due to world supply and
demand factors, bottlenecks in North American transportation from production areas to refining areas. These factors
have resulted in wider differentials between prices on the world market based on Brent pricing index, West Texas
Intermediate (WTI) which is the North American benchmark, and Edmonton Par price, the Canadian benchmark
price for light sweet crude oil. These factors, including volatile differentials is expected to continue in the near
future.
Access to capital The Company is dependent on access to equity or debt financing to fund working capital requirements and capital
expansion programs when operating cash flows are not sufficient to do so. To date, sufficient capital has been
obtained to meet the Company’s working capital and capital expansion requirements. Additional working capital
requirements or further capital expansion that cannot be funded through operating cash flows or current cash on
hand will require external financing, the availability of which is dependent on, for example, credit availability,
economic conditions, and commodity prices.
Additional risk factors may be found in the interim consolidated financial statements at September 30, 2013 in note
16, in the consolidated financial statements at December 31, 2012 in notes 3 and 17.
FINANCIAL INSTRUMENTS
The financial instruments are described in Note 16 in the interim consolidated financial statements as at September
30, 2013, and in Note 17 in the consolidated financial statements at December 31, 2012.
CRITICAL ACCOUNTING ESTIMATES
A summary of Corval’s use of accounting estimates and judgments are summarized in Note 2 of the audited
consolidated financial statements at December 31, 2012, and the policies for these accounting estimates continued
except for those accounting policies noted in Note 3 of the consolidated interim financial statements for the three
and nine months ended September 30, 2013. The preparation of interim consolidated financial statements in
conformity with IFRS requires management to make judgments, estimates and assumptions that affect the
application of accounting policies and the reported amounts of assets, liabilities, income and expenses, and the
accompanying disclosures. Estimates and underlying assumptions are reviewed on an ongoing basis and are based
on management’s experience, expectations of future events, and other factors that are believed to be reasonable
under the current circumstances. Uncertainty surrounding these assumptions and estimates could result in outcomes
where the results may differ from these estimates and may require material adjustments to the carrying amount of
the assets and liabilities into future periods.
Further information with respect to the Company can be found on its website at www.corvalenergyltd.com.
- 18 -
Corval Energy Ltd.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2013
These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three and nine months ended September 30, 2013 have been prepared by management and authorized for distribution to the shareholders by the Board of Directors of the Company. The Company’s external auditors have not reviewed these financial statements.
-19-
CORVAL ENERGY LTD. Interim Consolidated Statements of Financial Position
As at September 30, 2013 and December 31, 2012
Note
September 30, 2013
(unaudited) December 31,
2012
Assets Current assets:
Cash Trade and other receivables Prepaid expenses Commodity price contract
16
15
$ 7,705,067
1,978,303 168,355 58,800
$ 12,050,366
761,679 185,201
-
9,910,525
12,997,246
Exploration and evaluation Property, plant and equipment
5
4,6
1,559,573
39,464,004
- 23,528,131
Total Assets
$ 50,934,102 $ 36,525,377
Liabilities and Shareholders’ Equity
Current Liabilities: Accounts payable and accrued liabilities Bank loan Promissory notes
7 8
$ 7,331,296
- 25,114
$ 2,175,851
7,450,000 -
7,356,410 9,625,851 Promissory note Decommissioning obligations
8 9
- 2,208,199
568,828 1,807,338
Total Liabilities
9,564,609 12,002,017
Shareholders’ Equity
Share capital 10 49,092,396 32,929,358
Contributed surplus 10(d) 1,545,526 68,537
Deficit (9,268,429) (8,474,535)
Shareholders’ Equity 41,369,493 24,523,360
Total liabilities and shareholder’s equity
$ 50,934,102
$ 36,525,377
The notes are an integral part of these interim consolidated financial statements.
-20-
CORVAL ENERGY LTD. Interim Consolidated Statements of Loss and Comprehensive Loss For the three and nine months ended September 30, 2013 and September 30, 2012
Note
Three months
ended September 30,
2013 (unaudited)
Nine months ended
September 30, 2013
(unaudited)
Three months
ended September 30,
2012 (unaudited)
Nine months ended
September 30, 2012
(unaudited)
Revenues Petroleum sales Royalties
$ 4,316,805 (665,265)
$ 11,242,891 (1,691,175)
$ - -
$ - -
3,651,540 9,551,716 - -
Expenses Operating costs General and administrative Share-based compensation Depletion and depreciation
10(d)
1,021,634
477,793 501,676
1,503,193
2,470,590 1,775,980 1,476,989 4,314,224
- - - -
- - - -
3,504,296 10,037,783 - -
Finance expenses 11 50,560 151,638 - -
Other expenses Unrealized loss (gain) on commodity price contract Realized loss on commodity price contract
15 15
(233,300) 192,877
(58,800) 214,989
- -
- -
(40,423) 156,189 - -
Net income (loss) and comprehensive loss for the period
$ 137,107
$ (793,894)
$ -
$ -
The notes are an integral part of these interim consolidated financial statements.
-21-
CORVAL ENERGY LTD. Interim Consolidated Statements of Changes in Equity For the three and nine months ended September 30, 2013 and September 30, 2012
Note
Number of common shares
Share Capital
Contributed surplus Deficit
Total Shareholders’
Equity
Balance at January 1, 2012
10 10
$ 10
$ -
$ -
$ 10
Balance at September 30, 2012 10 $ 10 $ - $ - $ 10
Balance at January 1, 2013
45,825,911
$ 32,929,358
$ 68,537
$ (8,474,535)
$ 24,523,360
Private placements Share based expense Net loss for the period
10(a)(i),(ii)
10(d)
11,636,571 - -
7,656,037 - -
- 975,313
-
- -
(931,001)
7,656,037 975,313
(931,001)
Balance at June 30, 2013 57,462,482 $ 40,585,395 $ 1,043,850 $ (9,405,536) $ 32,223,709
Private placements Share based expense Net income for the period
10(a)(iii)
10(d) 12,928,572
- -
8,507,001 - -
- 501,676
-
- -
137,107
8,507,001 501,676 137,107
Balance at September 30, 2013 70,391,054 $ 49,092,396 $ 1,545,526 $ (9,268,429) $ 41,369,493
The notes are an integral part of these interim consolidated financial statements.
-22-
CORVAL ENERGY LTD. Interim Consolidated Statements of Cash Flows For the three and nine months ended September 30, 2013 and September 30, 2012
Note
Three months ended
September 30, 2013
(unaudited)
Nine months ended
September 30, 2013
(unaudited)
Three months ended
September 30, 2012
(unaudited)
Nine months ended September
30, 2012 (unaudited)
Operating activities: Net income (loss) for the period Add back: finance expense (cash interest disclosed in financing activities) Non-cash items: Depletion and depreciation Share based compensation Unrealized loss on commodity price contract
15
$ 137,107
50,560
1,503,193 501,676
(233,300)
$ (793,894)
151,638
4,314,224 1,476,989
(58,800)
$ -
-
- - -
$ -
-
- - -
1,959,236 5,090,157 - - Net changes in non-cash working capital items 12 92,589 (505,203) - -
2,051,825 4,584,954 - -
Investing activities: Expenditures – property, plant, and equipment Expenditures – exploration and evaluation Acquisition of oil and gas property Disposition of oil and gas property Net changes in non-cash working capital items
4,6 5 4
12
(8,509,669)
(21,249) - -
4,196,140
(18,559,661) (1,559,573) (3,306,224) 1,897,027 4,460,870
- - - - -
- - - - -
(4,334,778) (17,067,561) - -
Financing activities: Proceeds from share issuances, net of issue costs Repayment of promissory notes Repayment of bank loan Interest paid
10 8 7
8,507,001 - -
(8,611)
16,163,038 (545,193)
(7,450,000) (30,537)
- - - -
- - - -
8,498,390 8,137,308 - -
Increase (decrease) in cash and cash equivalents during the period
6,215,437
(4,345,299)
-
-
Cash and cash equivalents, beginning of the period
1,489,630
12,050,366
-
-
Cash and cash equivalents, end of the period
$ 7,705,067
$ 7,705,067
$ -
$ -
The notes are an integral part of these interim consolidated financial statements.
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
- 23 -
1. Nature of operations:
1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated on March 15, 2011. On May 15,
2012, the Company changed its name to Corval Energy Ltd. On October 17, 2012, the Company
entered into a Plan of Arrangement with Foundation Group Capital Trust, whereby it exchanged
shares of the Company for trust units of Foundation Group Development Trust (“FGDT”) held by
Foundation Group Capital Trust, and subsequently, Foundation Group Capital Trust then distributed
these shares to its unitholders. Through the Plan of Arrangement, the subsidiaries of FGDT were
dissolved and the assets and liabilities were assumed by Corval. Corval currently continues to
maintain FGDT as a continuing, but inactive, subsidiary, with 1688869 Alberta Ltd. as FGDT’s
inactive trustee.
Corval explores for and produces oil in Western Canada. Corval Energy Ltd. is domiciled in Canada
at Suite 2400, 500 – 4th Avenue SW, Calgary, Alberta T2P 2V6. These interim consolidated financial
statements were authorized for issue by the Board of Directors on November 29, 2013.
2. Basis of preparation:
The interim consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board
(IASB). These interim consolidated financial statements have been prepared in accordance with
IFRS applicable to the preparation of interim consolidated financial statements, including IAS 34,
Interim Financial Reporting, and have been prepared following the same accounting policies as the
annual consolidated financial statements for the year ended December 31, 2012. The disclosures
provided below are incremental to those included with the annual consolidated financial statements.
Certain information and disclosures included in the notes to the annual consolidated financial
statements are condensed herein or are disclosed on an annual basis only. Accordingly, these interim
consolidated financial statements should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2012.
The policies applied in these interim consolidated financial statements are based on IFRS issued and
outstanding as of the date the Board of Directors approved the distribution of these statements.
The Company’s presentation currency is Canadian dollars and all amounts reported are Canadian
dollars unless otherwise noted.
These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three and
nine months ended September 30, 2013 have been prepared by management and authorized for
distribution to the shareholders by the Board of Directors of the Company. The Company’s external
auditors have not reviewed these financial statements.
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
-24-
3. Significant accounting policies
The consolidated interim financial statements have been prepared following the same accounting
policies and methods of computation as the annual consolidated financial statements for the year
ended December 31, 2012, except for these additional policies:
i) Derivative financial instruments
The Company has entered into certain commodity price contracts in order to manage the exposure to
market risks from fluctuations in commodity prices. These instruments are not used for trading or
speculative purposes. Although the Company considers all commodity contracts to be economic
hedges, the Company has not designated its financial derivative contracts as effective accounting
hedges, and thus not applied hedge accounting. As a result, all financial derivative contracts are
classified as fair value through profit or loss and are recorded on the statement of financial position at
fair value. Transaction costs are recognized in profit or loss when incurred.
See Note 15 for specific accounting disclosure.
4. Property acquisition
On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of
$3,306,224. The acquisition was recorded as a capital expenditure. The consideration paid was
determined to be equivalent to fair value.
The purchase price allocation is as follows:
$
Property, plant, and equipment Decommissioning liability
3,340,865 (34,641)
Net assets 3,306,224
Cash consideration paid
3,306,224
5. Exploration and evaluation assets
Cost
September 30, 2013
$
Opening balance – January 1, 2013 Additions
- 1,559,573
Closing balance 1,559,573
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
-25-
Exploration and evaluation (“E&E”) assets consist of the Company’s undeveloped land and
exploration projects which are pending the determination of technical feasibility. For the nine months
ended September 30, 2013, $1,559,573 of E&E assets, including $198,238 of capitalized general and
administrative costs, were added consisting predominately of land acquisitions. There were no
indicators of impairment at September 30, 2013. 6. Property, plant, and equipment
Cost
September 30, 2013
$
Opening balance – January 1, 2013 Current period additions Property acquisition (Note 4) Property disposition Changes in decommissioning liability
31,506,505 18,559,661 3,340,865
(1,897,027) 246,598
Closing balance 51,756,602
Accumulated depletion, depreciation, and impairment Opening balance – January 1, 2013 Current period depletion and depreciation
7,978,374 4,314,224
Closing balance 12,292,598
Opening balance – January 1, 2013 23,528,131
Closing balance 39,464,004
Property, plant, and equipment (“PP&E”) consist of the Company’s developed and producing assets.
PP&E additions were $18,559,661 in expenditures, and $246,598 in additional decommissioning
obligations for the nine months ended September 30, 2013, and were incurred through the
Company’s drilling, completing, and equipping activities as per the Company’s 2013 capital program.
The Company acquired a small property for $3,340,865 (Note 4) and disposed of a small property for
$1,897,027 during the nine months ended September 30, 2013.
Future development costs of $7,156,047 have been included in the depletable balance for the nine
months ended September 30, 2013. The Company has not recognized any individual components
that are depreciated separately.
During the nine months ended September 30, 2013, the Company capitalized general and
administrative expenses into property, plant, and equipment of $339,081, consisting predominately of
overhead.
There were no indicators of impairment at September 30, 2013.
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
-26-
The Company has a $50 million debenture with a floating charge over all of the Company’s assets
pledged to the bank covering the loan (Note 7).
7. Bank loan:
The Company had a bank loan with an outstanding balance of $7,450,000 at the end of 2012. During
2013, the Company repaid the $7,450,000 balance of the loan, and secured new lending
arrangements with another Canadian financial institution. The new bank loan includes a revolving
operating demand loan of a maximum of $9 million and an acquisition and development demand loan
of $2.7 million. The revolving operating demand loan bears an interest rate of the Bank’s Prime Rate
plus 0.75% and a standby fee of 0.25% on the undrawn portion. The acquisition and development
loan bears an interest rate of the Bank Prime Rate plus 1.25%, and a standby fee of 0.25% of the
undrawn portion. The new bank loan is covered by a fixed and floating $50 million debenture over all
of the assets of the Company.
In July, 2013, the Company increased the revolving operating demand loan to $13.5 million and
cancelled the development demand loan. The interest rate remains at the Bank’s Prime Rate plus
0.75% and the standby fee at 0.25% of the undrawn portion. The $50 million debenture over all of
the assets of the Company also remains in place. The Company is required to comply with a working
capital financial covenant.
Subsequent to the quarter end, the Company increased the revolving operating demand loan from
$13.5 million to $15.0 million as a result of the mid-year review. The terms of the loan remained the
same, and the next review date is June 1, 2014.
As at September 30, 2013, there were no draws on the loan. 8. Promissory Notes:
The Company had promissory notes and accumulated interest of $568,828 at the end of 2012.
These notes bear a simple interest rate of 3%. The Company accrued $1,479 of additional interest
for the nine months ended September 30, 2013, and paid $545,193 of promissory notes and interest
during the three months ended March 31, 2013. The notes mature three years from date of issue,
which would occur from April to August, 2014. The notes are classified as current liabilities, as they
mature in less than one year.
Promissory notes September 30,
2013 $
Opening balance – January 1, 2013 Additional interest accrued
568,828 1,479
Notes repaid ($540,485 plus additional interest of $4,708)
570,307 (545,193)
Closing balance 25,114
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
-27-
9. Decommissioning obligations:
The decommissioning provision represents the present value of decommissioning costs relating to
the Company’s interest in oil and gas properties, which are expected to be incurred up to the time
when the properties are expected to cease operations. The Company has estimated the net present
value of the decommissioning obligations to be $2,208,199 as at September 30, 2013 based on an
undiscounted total future liability of $4,768,000 discounted at a credit-adjusted rate of 8%.
Decommissioning Obligations September 30,
2013 $
Opening balance – January 1, 2013 Additions Acquisitions Dispositions Accretion
1,807,338 262,960 34,641
(16,361) 119,621
Closing balance 2,208,199
10. Share capital:
At September 30, 2013, the Company was authorized to issue an unlimited number of common
shares.
a) Share issues:
(i) The Company raised funds through a private placement for 208,000 common shares at $0.70
per common share for total cash proceeds of $145,600.
(ii) On April 5, 2013, the Company made a call on its equity line for 11,428,571 shares at $0.70 per
common share for cash proceeds of $8,000,000 with issue costs of $489,563, for net proceeds
of $7,510,437.
(iii) On September 23, 2013, the Company made a final call on its equity line for 12,928,572 shares
at $0.70 per common share for cash proceeds of $9,050,001 with issue costs of $543,000, for
net proceeds of $8,507,001.
b) Common share options:
During the nine months ended September 30, 2013, 550,000 common share options exercisable at
$0.70 per common share option, and 320,000 common share options excercisable at $0.80 per
common share option, both expiring in five years, were issued to employees and a Board member.
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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The continuity of common share options is detailed below:
Options
Number
Exercise price
Life (in years)
Issued and outstanding – January 1, 2013 5,455,000 $0.70 4.2 Issued to June 30, 2013 Issued to September 30, 2103 Expired
550,000 320,000 (30,000)
$0.70 $0.80 $0.70
4.3 4.9 4.2
Issued and outstanding – September 30, 2013 6,295,000 $0.70 4.3
c) Performance Warrants:
During the nine months ended September 30, 2013, 210,000 performance warrants exercisable at
$0.70 per common share option, expiring in five years, were issued to a Board member. The
continuity of performance warrants is detailed below:
Performance warrants
Number
Exercise price
Life (in years)
Issued and outstanding – January 1, 2013 6,750,000 $0.70 4.2
Issued 210,000 $0.70 4.3
Issued and outstanding – September 30, 2013 6,960,000 $0.70 4.2
The performance warrants are non-transferable, have a five-year life, and vest upon the sale of
substantially all of the Company’s assets, a corporate merger or sale where the common
shareholders receive cash or publicly-traded shares, or the Company is listed on a public stock
exchange, and the value attributed to each common share of the Company upon such event exceeds
the vesting price as stipulated in the plan. The performance warrant vesting prices are described in
the table below:
Performance warrant series
Portion of performance warrant issue
Vesting price
Series 1 Series 2 Series 3 Series 4
25% 25% 25% 25%
$1.05 $1.40 $1.75 $2.10
100%
d) Contributed surplus:
The fair value at grant date is recorded as stock based compensation in profit and loss, and in
shareholders’ equity as contributed surplus, over the period of time required for the options or
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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warrants to vest. Stock based compensation of $1,476,989 was expensed during the nine months
ended September 30, 2013.
11. Finance expenses:
Finance expenses
Three months ended
September 30, 2013
$
Nine months ended
September 30, 2013
$
Interest on bank loan 8,611 30,538 Interest on promissory notes (note 8) 177 1,479
Accretion of decommissioning liabilities (note 9) 41,772 119,621
Finance expenses total 50,560 151,638
12. Supplemental cash flow information:
Changes in non-cash working capital is comprised of:
Three months ended
September 30, 2013
$
Nine months ended
September 30, 2013
$
Changes in: Trade and other receivables (525,833) (1,216,623)
Prepaid expenses 42,109 16,846 Accounts payable and accrued liabilities 4,772,453 5,155,444
4,288,729 3,955,667
Allocated to: Operating 92,589 (505,203) Investing 4,196,140 4,460,870
4,288,729 3,955,667
13. Related party:
The corporate secretary is a partner in a law firm that provides legal services to the Company. For
the three and nine months ended September 30, 2013, the Company recorded $5,923 and $147,640
respectively in general and administrative expenses related to this law firm. At September 30, 2013,
$4,467 remained in accounts payable.
14. Capital management:
The Company considers its capital structure to include share capital, and working capital, including
the bank loan.
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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September 30, 2013 $
Current assets* 9,851,725 Accounts payable and accrued liabilities (7,331,296) Promissory notes (25,114)
Net working capital 2,495,315
Maximum value of bank loan Amount drawn
13,500,000 -
Unutilized bank loan 13,500,000
Net available funds 15,995,315
*Excludes non-cash commodity price contract asset
The Company’s 2013 capital program was presented to the Board of Directors, and a capital program
of $30.7 million was approved. To September 30, 2013, total capital of $21.5 million was expended,
including a property acquisition of $3.3 million and a property disposition with proceeds of $1.9
million. In April and September, 2013, an $8.0 million and a $9.0 million draw on the line of equity,
respectively, were received. The Company expects the current available funds, bank loan, line of
equity, and anticipated cash flow will be able to fund its remaining capital program for 2013.
During the nine months ended September 30, 2013, the Company negotiated a new bank loan with a
Canadian financial institution for $9.0 million, which was increased to $13.5 million in July, 2013,
bearing an interest rate of the Bank Prime Rate plus 0.75%. The credit facility is subject to a periodic
review, the next of which is scheduled for October 1, 2013. No funds have been drawn from this
bank loan to date.
Subsequent to the quarter end, the Company increased the revolving operating demand loan from
$13.5 million to $15.0 million as a result of the mid-year review. The terms of the loan remained the
same, and the next review date is June 1, 2014.
15. Commodity price contracts
During the nine months ended September 30, 2013, the Company entered into two commodity swap
contracts each for 100 barrels of oil per day. The first contract fixes the price at $90.02 of crude oil at
Edmonton per barrel settling monthly from May 1, 2013 to December 31, 2013. The second contract
fixes the price of crude oil at $101.35/bbl calculated as West Texas Intermediate converted to
Canadian dollars from August 1, 2013 to July 31, 2014. The Company recognized realized losses for
the three and six months ended September 30, 2013 of $192,877 and $214,989 respectively, and
unrealized gains of $233,300 and $58,800 for the same periods.
16. Financial risk management:
The Company’s financial assets and liabilities are comprised of cash, trade and other receivables,
accounts payable, promissory notes, and the bank loan. The main purpose of these financial
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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instruments is to manage short-term cash flow and raise finances for the Company’s capital
expenditure program.
The carrying value of these financial instruments approximates their fair value due to their short term
nature. Substantially all of the promissory notes were repaid (note 8), and therefore the carrying value
approximates their fair value.
The Company is exposed to a variety of financial risks arising from its exploration, development,
production, and financing activities such as:
■ credit risk;
■ liquidity risk; and
■ market risk.
Credit risk:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial
instrument fails to meet its contractual obligations, and arises principally from the Company’s
receivables from joint venture partners and oil and natural gas marketers.
September 30, 2013 $
Amounts due from marketers Joint venture GST receivable
1,727,477 44,412
206,414
Total 1,978,303
The need for impairment of receivables is analyzed at each reporting date on an individual basis for
major clients. At September 30, 2013, no impairment was deemed necessary, so no allowance for
doubtful accounts was recognized.
As at September 30, 2013, the Company’s trade and other receivables are aged as follows:
September 30, 2013 $
Current 30 – 60 days 60 – 90 days Over 90
1,922,909 5,390
18,920 31,084
Total 1,978,303
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall
due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always
have sufficient liquidity to meet its liabilities when due. As disclosed in Note 14, the Company
manages its liquidity by monitoring its capital program and comparing that to its available funds.
Market risk:
Market risk is the risk that changes in market prices will affect the Company’s income or the value of
the financial instruments. Market risk is comprised of three types of risk: commodity price risk, interest
rate risk, and currency risk.
Commodity price risk:
The Company’s cash flow sensitivity to commodity price changes is based on the assumption that
the crude oil prices changes 10%, resulting in a change of $9.18/bbl, and a cash flow change of
$933,675 in the same direction (increase or decrease) of the price change.
In February 2013, the Company entered into a financial transaction from May 1, 2013 to
December 31, 2013 to fix the price of 100 bbl/d of oil at $90.02/bbl CDN at Edmonton. In July
2013, the Company entered into a financial transaction from August 1, 2013 to July 31, 2014 to
fix the price of 100 barrels of oil per day at $101.35/bbl calculated as West Texas Intermediate
converted to Canadian dollars (Note 15).
Interest rate risk:
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market
interest rates, and relates primarily to the Company’s outstanding line of credit. As at September
30, 2013, the Company did not carry a balance on its line of credit, so the interest rate risk is $nil.
Currency risk:
The Company has no financial instruments denominated in a foreign currency, and no contracts
in place to reduce the foreign exchange risk.
17. Commitments:
The Company is carrying a lease on its office space, and another lease on the space of FGDT, which
terminated on July 31, 2013:
Total at September 30, 2013
$
2013 2014-2018 2019-2022
35,441 760,461 494,711
Total 1,290,613
Corval Energy Ltd. Notes to the Interim Consolidated Financial Statements For the nine months ended September 30, 2013
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18. Lawsuit:
The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on
behalf of its predecessor companies regarding the improper diversion of funds against a former
trustee. There can be no assurance of a favorable judgment at this time.
19. Events after reporting period:
Bank loan (Note 7)
Subsequent to the quarter end, the Company increased the revolving operating demand loan from
$13.5 million to $15.0 million as a result of the mid-year review. The terms of the loan remained the
same, and the next review date is June 1, 2014.
Corval Energy Ltd. General Information
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Directors Jody Forsyth
(2)(3) - Chairman
Larry Evans (1)(2)
Brian Frank
(1)(3)
Ron McIntosh (2)(3)
Thomas Stan David Eastham
(1)
(1) Audit committee (2) Reserves, health, safety and environment committee (3) Corporate governance and compensation committee
Officers Thomas Stan President, and Chief Executive Officer James Screaton ,CA Vice President, Finance and Chief Financial Officer Lavern Rankin Vice-President, Engineering and Operations Dale Timmons Vice-President, Exploration Richard Press Vice-President, Land and Business Development Shannon Gangl Corporate secretary Burnet, Duckworth, and Palmer LLP
Head Office Suite 2400, 500 – 4
th Avenue SW
Calgary, Alberta, Canada T2P 2V6 Telephone: 403-252-7671 Website: www.corvalenergyltd.com
Solicitor Burnet, Duckworth, and Palmer LLP 2400, 525 – 8
th Avenue SW
Calgary, Alberta, Canada T2P 1G1
Bankers National Bank of Canada 311 – 6 Avenue SW Calgary, Alberta, Canada T2P 3H2
Auditor Ernst & Young Canada LLP 1000, 440 – 2
nd Street SW
Calgary, Alberta, Canada T2P 5E9
Reserve Engineers Sproule Associates Limited 900, 140 – 4th Avenue SW Calgary, Alberta, Canada T2P 3N3