2008-03-31 11:40:00
Caspian Energy Inc. Announces Full Year Financial Results
TORONTO, ONTARIO–( EMWNews – March 31, 2008) –
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES.
Caspian Energy Inc. (the “Company” or “CEK”) (TSX:CEK)(AIM:CEK) announced today its financial results for the year ending December 31, 2007.
2007 highlights include:
– Sales volumes of oil and gas increased to an average of 414 boe / day in 2007 (2006 – 291 boe / day)
– The Company’s work program extension, with the Republic of Kazakhstan (“ROK”), was extended for an additional two-year period;
– Identification of a number of post-salt drilling prospects in the Triassic and Upper Permian formations in the western side of the North Block
– Discussions on the potential farm-in to one of the Company’s blocks are continuing and are making good progress;
– Petroleum revenues before transportation costs for the year ending December 31st 2007 were $6,269,118 (2006: $4,196,238); and
– For the year ending December 31st 2007, CEK’s net loss was $13,208,688 (2006: $6,437,812)
– Cash position at 31st December 2007 of $4,373,919(2006: $17,022,285)
Its audited financial statements for the period and related management’s discussion and analysis have been filed with Canadian securities regulatory authorities and are available for viewing at www.sedar.com.
2008 outlook:
– Drilling commenced on 20th March 2008 on the first exploration well, Baktygaryn #703, in the Company’s post-salt drilling program,
– A second well will be drilled following the release of the rig from #703
– Average daily production from Wells #301 and #213 over the past three months has been 608 BOPD and 329 BOPD respectively, a total of 937 BOPD
– CEK, through its 50% ownership of Aral Petroleum Capital, has work programme commitments of US$7.85m in 2008 on its licence area in Kazakhstan
– The Board of CEK note its auditors statement with respect to CEK’s ability to meet its 2008 work programme commitments and is currently reviewing strategic options in this regard, including the ongoing discussions regarding a potential farm-in and, or, a potential capital increase.
William Ramsay, Chairman and Chief Executive Officer, Caspian Energy, Inc. commented:
“We are pleased to report on 2007, a year which saw marked operational improvement on the previous period with production restarting from Well #301 and improved flow rates from Well #213 following the work-over in late 2006.
Looking forward to 2008, we are excited about our drilling in the Baktygaryn area, it is the first of a number of opportunities we have identified in this area of the North Block and should we be successful in both targets, we believe we have the potential for highly significant recoverable reserves, relative to those we have already. This is also our first chance to pursue a new strategy which we believe offers a more attractive risk profile, and at a fraction of the deep carbonate drilling costs.”
CAUTIONARY NOTE
Some of the statements and information contained in this news release may include certain estimates, assumptions and other forward-looking information. The actual performance, developments and/or results of the Company may differ materially from any or all of the forward-looking statements, which include current expectations, estimates and projections, in all or in part attributable to general economic conditions, and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including oil prices, imprecision of reserve estimates, drilling risks, future production of gas and oil, rates of inflation, changes in future costs and expenses related to the activities involving the exploration, development, production and transportation of oil, hedging, financing availability and other risks related to financial activities, and environmental and geopolitical risks. Further information which may cause results to differ materially from those projected in the forward-looking statements is contained in the Company’s filings with Canadian securities regulatory authorities. The Company disclaims any intention or obligation to update or revise forward-looking information, whether as a result of new information, future events or otherwise, except in accordance with applicable securities laws.
BUSINESS PROSPECTS AND OUTLOOK
The Company has been successful in establishing itself as an operating entity in the ROK and expects to continue to experience future growth as work develops there.
Prior to the end of the fourth quarter 2005, EZ#301 was drilled to a total depth of 4,846 metres and logged. The well was completed with the drilling rig before the rig was moved to the EZ#302 location. EZ#301 was matrix acidized and the two potentially productive hydrocarbon bearing zones were flow-tested. The lower zone (KT-2) was tested at 2,532 Bopd. The upper zone (KT-1) had difficulty maintaining an independent flow, so it was commingled with the lower zone and the well was tied-in to the Zhagabulak production facility. Subsequently, productions logs were run and it was determined that the KT-1 was producing 100 Bopd. Well 301 was undergoing a government mandated pressure survey in November 2006, when a production logging tool and cable were lost in the hole. During the second quarter, the tool and wire were recovered and the well has resumed production. Well 301 is currently producing 588 BOPD, 14 BWPD, 837 MCFD with a FTP (flowing tubing pressure) of 382 psig and a shut in casing pressure of 1,838 psig on a 12 mm choke. A pressure build-up was successfully completed in August 2007 and a xylene cleanout was pumped in November 2007 to clean out the suspected asphaltene build-up in the production tubing.
The second exploration effort, EZ#302, was spud on December 25, 2005. Acidizing and testing of the well were performed following removal of the drilling rig. The well showed indications of hydrocarbons while drilling and logging; however, the stimulation efforts failed to cause the well to flow naturally. In well 302, a workover is being evaluated to isolate the KT-2 and the lower portions of the KT-1 that exhibit higher water saturations on the logs.
The third location, EZ#303 is about 5.2 km southwest of EZ#302. EZ#303 spud on May 28, 2006. The well was permitted to a depth of 5,700 metres. EZ#303 reached a total depth of 4,630 metres in a sidetrack wellbore after the initial wellbore reached a depth of 5,430 metres, but was lost due to a drill string parting, while pulling out of the hole for logging. A total of 70 meters were perforated and acidized in both the KT-1 and KT-2 intervals. A combined test of both intervals yielded water with small amounts of oil, while the separate test on the KT-1 yielded water. In well 303 a workover is being evaluated to isolate intervals and test separately to identify which perforations are producing water.
The original producing well, EZ#213, drilled and completed during the Soviet period, was reentered in November 2006 and perforations were added in the KT-1 reservoir. Due to different casing weights, problems were encountered with packer setting for the acid operation and consequently, only one-half of the productive zones were acidized. Despite the limits on the acidization, a significant improvement of daily production over the pre-workover rates was achieved. Well 213 is currently producing 300 BOPD, 43 BWPD, 428 MCFD with a flowing tubing pressure of 375 psig and a shut-in casing pressure of 1,705 psig on an 8.7 mm choke. A production survey to determine the reservoir pressures and production contribution from the KT-1 and KT-2 intervals was completed during October 2007 that showed approximately 30 BOPD from the KT-1 with the remaining production from the KT-2.
The Company has initiated the development process for East Zhagabulak. Caspian has made initial contacts with Kazakhstan design institutes for the preparation of the development program report for the development of the East Zhagabulak field.
Ongoing petrophysical analyses of all wells penetrating the below salt reservoirs is being completed and correlations of these wells will aid in the identification of future drilling locations in the North Block. Identification and acquisition of well data within the extended territory is also be evaluated for inclusion into this process.
The Baktygaryn 3-D seismic program was completed in early November 2005. PGS-GIS, in Almaty, ROK was awarded the processing contract. Due to the presence of large salt bodies in the Baktygaryn Area, the 3-D data set was processed through PSDM (Pre-Stack Depth Migration) and interpretation of this data has been completed. PSTM (Pre-Stack Time Migration) analysis, for the above salt section has also been conducted. The acquisition of the 367 kilometre regional 2-D seismic survey covering the west and north areas of the North Block and tying into the Zhagabulak and Baktygaryn 3-D seismic surveys that was completed in March 2007 has also been processed and interpreted. The Baktygaryn 3-D program and the regional 2-D program were fully interpreted at the end of October 2006. The interpreted data from all new seismic data acquired and from the earlier reprocessed Soviet-era 2-D seismic is being combined to create a geological model and identify additional leads and prospects across the North Block territory.
The Baktygaryn Area presents drilling targets in both the below salt Lower Permian and Carboniferous sections and the above salt Upper Permian and Mesozoic sections with depths ranging from approximately 400 to 2,500 metres and provides a second tier of exploration to the Company’s drilling portfolio. These targets are recognized in the forms of channel sands, traps against the Kungurian salt ridges and underneath salt overhangs.
Interpretation work on the Baktygaryn 3-D and North Block regional 2-D seismic data identified several post-salt drilling targets in the Triassic and Permian formations. Four of these targets have been permitted and locations prepared. Problems with rig preparation have delayed drilling, however, the first of these wells, located in the Baktygaryn area, spud on March 20, 2008, and will target both the Triassic and Upper Permian clastics in structures related to a salt diaper, with a total depth of 2,500 meters.
The remaining permitted locations will be drilled on schedule as the rig is released from each well. The identified locations are located in two areas in the western portion of the North Block, known as Aransay and West Kozdesay. Ongoing interpretation of the seismic data is creating a growing list of other drillable prospects and leads.
Soviet-era seismic data interpretation, mapping and the associated shallow well drilling in the Itisay, Kozdesay and West Kozdesay areas, located in the southwestern portion of the North Block, yielded minor positive tests and shows of oil associated with the post-salt sediments of Jurassic, Triassic and Upper Permian ages. A review of this data has resulted in the identification of several prospects and leads ranging from 600 to 1,800 metres in trapping positions against Permian salt ridges and under-salt overhangs. Several lines from the Company’s 2006 2-D seismic program were shot across certain of these leads and prospects to verify this premise.
Interpretation of most of the regional 2006 2-D seismic survey covering the west and north areas of the North Block has been completed. The interpreted data from all new seismic data acquired and from the earlier reprocessed Soviet-era 2-D seismic was combined to create a geological model and identify additional leads and prospects across the North Block territory. As a result of this work, some of the earlier leads and prospects in the post-salt sediments identified on vintage maps and seismic in three areas in the south western portion of the North Block, known as Itisay, Kozdesay and West Kozdesay have been confirmed and in addition several new leads and drillable prospects have been identified in trapping positions against Permian salt ridges and under salt overhangs. Drilling for these targets is expected to begin in 2008.
Future seismic activity includes a third 3-D seismic acquisition, pending the results of the upcoming drilling campaign and further ongoing 2-D seismic interpretation.
The relatively shallow post salt targets at Baktygaryn offer a completely new series of opportunities for the Company. The 3-D and 2-D seismic data have enabled several new prospects to be identified and the Company is now in the process of selecting additional drilling locations.
Following the release of the rig from well #703, the first exploration well located in Baktygaryn, the Company intends to move drilling efforts to the eastern side of the Baktygaryn, West Kozdesay, and Aransay areas in the western part of the North Block where it will drill for Triassic and Upper Permian targets ranging from 700 to 1,400 metres. The Company is awaiting the outcome of permitting constraints and current weather conditions before it confirms the precise location of the second well.
The Company’s work program extension, with the ROK, to December 2007 has now been extended for an additional two-year period, subject to the terms of the original exploration contract. The 2008 work program commits the Company to undertake US$8.6 million of exploration expenditures prior to the close of the calendar year and the 2009 work program — US$10.5 million of exploration expenditures. Additionally, during 2008, Aral is obligated to make-up an additional US$ 7.1 million in cumulative shortfalls under the contract.
Consolidated Balance Sheet
2007 2006
$ $
Assets
Current assets
Cash and cash equivalents 4,373,919 17,022,285
Accounts receivable 935,773 672,879
Prepaids and other deposits 2,310,302 2,713,994
Inventory (note 3) 454,302 177,055
-----------------------------
8,074,296 20,586,213
Restricted cash (note 5) 253,132 194,412
Property, plant and equipment (note 4) 124,795,793 118,323,038
-----------------------------
133,123,221 139,103,663
-----------------------------
-----------------------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 3,458,427 5,305,085
Asset retirement obligation (note 5) 252,279 156,255
Loan payable (note 6) 6,947,055 -
Future income taxes (note 8) 967,400 358,848
Convertible debentures (note 7) 17,669,238 18,683,004
-----------------------------
29,294,399 24,503,192
-----------------------------
Shareholders' Equity
Share capital (note 9) 121,470,892 121,470,892
Warrants to purchase common shares (note 9) 946,508 946,508
Contributed surplus (note 11) 14,467,311 12,030,272
Deficit (33,055,889) (19,847,201)
-----------------------------
103,828,822 114,600,471
----------------------------
133,123,221 139,103,663
-----------------------------
-----------------------------
Going concern (note 1)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Loss, Comprehensive Loss and Deficit
2007 2006
$ $
Revenue
Oil and gas revenue, net 6,269,118 4,196,238
Interest 282,139 1,216,890
Other 15,614 9,401
------------------------------
6,566,871 5,422,529
------------------------------
Expenses
General and administrative 3,584,285 3,274,410
Accretion of convertible debentures (note 7) 393,312 281,168
Interest (note 7) 1,777,641 1,532,103
Operating 2,163,997 2,509,396
Transportation 487,257 205,704
Stock-based compensation (notes 10 and 11) 2,437,039 2,384,901
Foreign exchange loss (gain) 5,780,432 (813,575)
Depletion, depreciation and accretion 2,411,418 2,265,810
Gain on disposal of mining interest (note 14) - (83,332)
------------------------------
19,035,381 11,556,585
------------------------------
Loss before income taxes (12,468,510) (6,134,056)
Future income taxes 740,178 303,756
------------------------------
Net loss and comprehensive loss for the year (13,208,688) (6,437,812)
Deficit - Beginning of year (19,847,201) (13,409,389)
------------------------------
Deficit - End of year (33,055,889) (19,847,201)
------------------------------
------------------------------
Basic and diluted loss per share (note 9) (0.13) (0.07)
------------------------------
------------------------------
Going concern (note 1)
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
2007 2006
$ $
Cash provided by (used in)
Operating activities
Net loss and comprehensive loss for the year (13,208,688) (6,437,812)
Items not affecting cash
Stock-based compensation 2,437,039 2,384,901
Unrealized foreign exchange (gain) loss (3,113,236) 194,061
Depletion, depreciation and accretion 2,411,418 2,265,810
Interest on convertible debentures 1,777,641 1,522,534
Accretion of convertible debentures 393,312 281,168
Future income taxes 740,178 303,756
Gain on disposal of mining interest - (83,332)
Loss on disposal of fixed assets - 11,087
-------------------------
(8,562,336) 442,173
Changes in non-cash working capital balances (262,893) (167,064)
-------------------------
(8,825,229) 275,109
-------------------------
Financing activities
Convertible debentures - 18,240,640
Loan payable 6,947,055 (6,872,279)
Restricted cash (58,720) (57,528)
Issuance of common shares and warrants - 50,804,650
Share issue expenses - (3,782,317)
-------------------------
6,888,335 58,333,166
-------------------------
Investing activities
Acquisition of property, plant and equipment (8,991,257) (52,154,798)
Proceeds on disposal of mining interest - 81,219
Changes in non-cash working capital balances (1,720,215) 393,503
-------------------------
(10,711,472) (51,680,076)
-------------------------
(Decrease) increase in cash and cash equivalents (12,648,366) 6,928,199
Cash and cash equivalents - Beginning of year(a) 17,022,285 10,094,086
-------------------------
Cash and cash equivalents - End of year(a) 4,373,919 17,022,285
-------------------------
-------------------------
Interest received 385,076 1,216,890
(a) Cash and cash equivalents consist of cash and short term investments
with a maturity date of less than three months.
See accompanying notes to consolidated financial statements.
Notes to the Consolidated Financial Statements December 31, 2007
1. Nature of operations and going concern
Caspian Energy Inc. (“Caspian” or the “Company”) is engaged in the exploration for and development and production of oil and gas in the Republic of Kazakhstan. Its primary operating activities are carried out through its wholly-owned subsidiary, Caspian Energy Ltd. (“Caspian Ltd.”).
Caspian’s principal assets are a 50% interest in Aral Petroleum Capital LLP (“Aral”), held by Caspian Ltd. Through its interest in Aral, Caspian has the right to explore and develop certain oil and gas properties in Kazakhstan, known as the North Block, a 3,458 square kilometre area located in the vicinity of the Kazakh pre-Caspian basin. The Company also has minor resource interests in Canada.
Aral’s exploration and development rights to the North Block were granted pursuant to the terms of an exploration contract between the government of Kazakhstan and Aral (the “Exploration Contract”). The initial three-year term of the Exploration Contract was extended for a two-year period (expiring in December 2007) and a further extension of two years to December 31, 2009 with a minimum work commitment of US $19.1 million has now been placed into effect.
Under the terms of the Exploration Contract, Aral was obligated to spend at least US $20.8 million under a minimum work program in respect of the North Block during the initial three-year term of the contract. The expenditures include processing and reinterpretation of geological and geophysical data of prior years, two dimensional and three dimensional seismic shoots and surveys, drilling exploration wells, well reactivations and well surveys and testing. The minimum work program matured at the end of calendar 2005. As of December 31, 2005, Aral’s financial obligation under the minimum work program had been discharged. The work program extension to December 2008 includes drilling three wells to a combined total of 8,500 metres with a monetary obligation of US $20.15 million. At December 31, 2007, Aral had contract shortfalls aggregating US $7.1 million. Management of Aral believes the Company is in compliance with its commitments under the Minimum Working Program and has received authorization from the Ministry of Energy and Natural Resources and other competent bodies to carry over fulfillment of the above shortfalls to the year ending December 31, 2008.
Under terms of a shareholders’ agreement dated June 25, 2004, among Caspian Ltd., Azden Management Limited (“Azden”) and Aral, Caspian was committed to fund Aral’s US $20.8 million obligation under the initial work program. This financial commitment was satisfied, in full, by the Company. In addition, Caspian Ltd. has undertaken, on a best efforts basis, to raise financing of US $84.0 million to fund Aral’s operations pursuant to the Exploration Contract. At March 31, 2007, Caspian Ltd. had discharged this undertaking.
Going concern
These financial statements have been prepared in accordance with Canadian generally accepted accounting policies (“GAAP”) applicable to a going concern, which contemplates the realization of assets and the payment of liabilities in the ordinary course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.
The Company reported a net loss of $13,208,688 and negative funds generated from operations of $8,825,229 for the year ended December 31, 2007. The Company had net working capital of $4,615,869. As a result, there is substantial doubt about the Company’s ability to continue as a going concern. The Company’s continuation is dependent upon the ability to raise capital and the success of its drilling and exploration program. The Company plans a potential rights offering, however, there can be no assurance that the Company will be successful with this offering or other initiatives it undertakes.
The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. Such adjustments could be material.
2. Significant accounting policies
The consolidated financial statements of Caspian are stated in Canadian dollars and have been prepared in accordance with Canadian GAAP.
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and short-term investments with an initial maturity date of three months or less.
Inventory
Inventory is recorded at the lower of cost calculated using the weighted average method, and net realizable value. Cost comprises direct materials and where applicable direct labour costs and those overheads which have been incurred in bringing the inventories to their present location and condition. Net realizable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Joint ventures
The Company’s oil and gas exploration and development activities are conducted mainly in Kazakhstan through its 50% interest in Aral and, accordingly, these consolidated financial statements reflect only the Company’s proportionate interest in such activities.
Property, plant and equipment
a) Capitalized costs
The Company follows the full cost method of accounting for oil and natural gas operations, whereby all costs related to the acquisition, exploration and development of petroleum and natural gas reserves are capitalized. Such costs include lease acquisition costs, geological and geophysical costs, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, the cost of petroleum and natural gas production equipment and overhead charges directly related to exploration and development activities. Proceeds from the sale of oil and gas properties are applied against capital costs, with no gain or loss recognized, unless such a sale would change the rate of depletion and depreciation by 20% or more, in which case, a gain or loss would be recorded.
b) Depletion, depreciation and amortization
The capitalized costs are depleted and depreciated using the unit-of-production method based on proven petroleum and natural gas reserves, as determined by independent consulting engineers. Oil and natural gas liquids reserves and production are converted into equivalent units of natural gas based on relative energy content on a ratio of six thousand cubic feet of gas to one barrel of oil. Significant development projects and expenditures on exploration properties are excluded from calculation of depletion prior to assessment of the existence of proved reserves.
Other property, machinery and equipment are recorded at historical cost. Depreciation is calculated on a straight-line basis at the following annual rates:
Buildings 8%
Machinery and equipment 8%
Vehicles 7%
Other fixed assets 10%
c) Ceiling test
The Company follows the Canadian accounting guideline on full cost accounting. In applying the full cost guideline, Caspian calculates its ceiling test for each cost centre by comparing the carrying value of oil and natural gas properties and production equipment to the sum of undiscounted cash flows expected to result from Caspian’s proved reserves. If the carrying value is not fully recoverable, the amount of impairment is measured by comparing the carrying value of oil and gas properties and production and equipment to the estimated net present value of future cash flows from proved plus probable reserves using a risk-free interest rate and expected future prices. Any excess carrying value above the net present value of the future cash flows is recorded as a permanent impairment.
d) Unproved property
Costs of acquiring and evaluating unproven properties are initially excluded from costs subject to depletion, until it is determined whether or not proved reserves are attributable to the properties or, in the case of major development projects, commercial production has commenced, or impairment has occurred. Impairment occurs whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When proven reserves are determined or the property is considered to be impaired, the cost of the property or the amount of the impairment is added to the costs subject to depletion for that country’s cost centre.
e) Asset retirement obligation
Caspian records the fair value of asset retirement obligations (“ARO”) as a liability in the period in which it incurs a legal obligation to restore an oil and gas property, typically when a well is drilled or other equipment is put in place. The associated asset retirement costs are capitalized as part of the carrying amount of the related asset and depleted using a unit-of- production method over the life of the proved reserves. Subsequent to initial measurement of the obligations, the obligations are adjusted at the end of each reporting period to reflect the passage of time and changes in estimated future cash flows underlying the obligation. Actual costs incurred on settlement of the ARO are charged against the ARO.
Income taxes
Income taxes are calculated using the liability method of tax accounting. Temporary differences arising from the difference between the tax basis of an asset or liability and its carrying value amount on the balance sheet are used to calculate future income tax assets and liabilities. Future income tax assets and liabilities are calculated using tax rates anticipated to apply in the periods that the temporary differences are expected to reverse.
Stock-based compensation
The Company grants options to purchase common shares to employees and directors under its stock option plan. Under this standard, future awards are accounted for using the fair value of accounting for stock-based compensation. Under the fair value method, an estimate of the value of the option is determined at the time of grant using a Black-Scholes option-pricing model. The fair value of the option is recognized as an expense and contributed surplus over the vesting period of the option. Proceeds received on exercise of stock options, along with amounts previously included in contributed surplus, are credited to share capital.
Revenue recognition
Revenue from the sale of oil and natural gas is recognized based on volumes delivered to customers at contractual delivery points and rates. The costs associated with the delivery, including operating and maintenance costs, transportation, and production-based royalty expenses will be recognized in the same period in which the related revenue is earned and recorded.
Measurement uncertainty
The amounts recorded for depletion and depreciation of property, plant and equipment, the provision for asset retirement obligations and the amounts used for ceiling test calculations are based on estimates of reserves and future costs. The Company’s reserve estimates are reviewed annually by an independent engineering firm. The amounts disclosed relating to fair values of stock options issued are based on estimates of future volatility of the Company’s share price, expected lives of options, and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty.
Loss per share
Basic per share amounts are calculated using the weighted average number of shares outstanding during the period. Diluted per share amounts are calculated based on the treasury stock method whereby the weighted average number of shares is adjusted for the dilutive effect of options. The Company applies the treasury stock method for the calculation of diluted net loss per share whereby the effect of the “in the money” instruments such as stock options and warrants affect the calculation. The treasury stock method assumes that the proceeds from the exercise are used to repurchase common shares of the Company at the weighted average market price during the year.
Financial instruments
Fair values
The fair values of accounts receivable, accounts payable and accrued liabilities, and loan payable approximate their carrying values due to their short-term maturity.
Credit risk
Substantially all of the Company’s accounts receivable are due from companies in the oil and gas industry and are subject to the normal industry credit risks. The carrying value of accounts receivable reflects management’s assessment of the associated credit risks.
Foreign currency
All operations are considered financially and operationally integrated. Results of operations are translated to Canadian dollars, using average rates for revenues and expenses, except depreciation which is translated at the rate of exchange applicable to the related assets. Monetary items denominated in foreign currency are translated to Canadian dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Foreign exchange gains and losses are recorded in the statement of loss.
Adoption of new accounting policies
On January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) handbook Sections 1506 “Accounting Changes”, 1530 “Comprehensive Income”, Section 3251 “Equity”, Section 3855 “Financial Instruments – Recognition and Measurement”, Section 3861 “Financial Instruments – Disclosure and Presentation” and Section 3865 “Hedges”.
CICA Section 1530, “Comprehensive Income” – Comprehensive income is comprised of net earnings or loss and other comprehensive income (OCI). OCI is the change in a company’s net assets that results from transactions, events and circumstances from non owner sources and includes items that would not normally be included in net earnings such as unrealized gains and losses on available-for-sale investments. The Company currently does not have any OCI.
CICA Section 3251, “Equity” establishes new standards for presentation of equity and changes in equity during the period. Application of this section did not result in changes to the presentation of equity for the Company.
CICA Section 3855, “Financial Instruments – Recognition and Measurement”, prescribes when a financial instrument is to be recognized on the balance sheet and at what amount. It also specifies how financial instrument gains and losses are to be presented. All financial instruments are classified into one of the following five categories: held for trading, held-to-maturity, loans and receivables, available-for-sale financial assets and other financial liabilities. Initial and subsequent measurement and recognition of changes in the value of financial instruments depends on their classification.
a) Held for trading financial instruments are measured at fair value. All gains and losses are included in net earnings in the period in which they arise.
b) Loans and receivables are accounted for at amortized cost using the effective interest method. Any gain or loss on the realization of the loans and receivables are recorded into earnings.
Future accounting changes
The CICA issued three new accounting standards: Section 1535, Capital Disclosures, Section 3862, Financial Instruments – Disclosures, and Section 3863, Financial Instruments – Presentation. These new standards will be effective for fiscal years beginning on or after October 1, 2007 and the Company will adopt them on January 1, 2008. The Company is in the process of evaluating the disclosure and presentation requirements of the new standards, however it is not anticipated that the earnings or financial position of the Company will be affected.
Section 1535 establishes disclosure requirements about an entity’s capital and how it is managed. The purpose will be to enable the users of the financial statements to evaluate the entity’s objectives, policies and processes for management capital.
Sections 3862 and 3863 will replace Section 3861, Financial Instruments – Disclosure and Presentation, revising and enhancing its disclosure requirements, and carrying forward unchanged its presentation requirements. These new sections will place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks.
In March 2006, the Accounting Standards Board of the CICA released its new strategic plan which proposes to abandon Canadian GAAP for public companies and effect a complete convergence to the International Financial Reporting Standards, at the end of a transitional period Canadian GAAP will cease to exist as a separate distinct basis of financial reporting for public companies. The Company will convert to these new standards according to the timetable set with these new rules. The Company will closely monitor changes arising from this convergence.
3. Inventory
2007 2006
$ $
Oil inventory 187,300 24,742
Fuel 25,748 3,522
Construction materials 2,742 4,342
Spare parts 5,004 3,425
Other materials 233,508 141,024
----------------------------
454,302 177,055
----------------------------
----------------------------
4. Property, plant and equipment
2007 2006
$ $
Petroleum and natural gas assets 126,806,121 118,334,595
Other assets 3,122,928 2,508,707
----------------------------
129,929,049 120,843,302
Accumulated depletion and depreciation (5,133,256) (2,520,264)
----------------------------
124,795,793 118,323,038
----------------------------
----------------------------
Excluded from the depletable base of oil and gas assets at December 31,
2007 are unproved properties of $72,049,847 (2006 - $65,707,839).
The Company applied the ceiling test to its capitalized assets at December
31, 2007 and 2006 and determined that there was no impairment of such
carrying costs.
WTI Crude oil price
$US/bbl
2008 90.00
2009 86.70
2010 83.20
2011 79.60
2012 78.50
The prices increase by 2% for years thereafter.
During the year ended December 31, 2007, the Company capitalized $269,548 (2006 – $506,317) of general and administrative expenses related directly to exploration and development activities.
5. Asset retirement obligation
The Company records the fair value of asset retirement obligations as a liability in the period in which it incurs the legal obligation.
The asset retirement obligation results from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Company estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations at December 31, 2007 is $261,394, which will be incurred between 2014 and 2019. A credit-adjusted risk-free rate of 16.5% was used to calculate the fair value of the asset retirement obligations, and an inflation factor of 19.0%.
A reconciliation of the asset retirement obligation is provided below:
2007 2006
$ $
Opening balance 156,255 88,900
Liabilities incurred 94,490 38,382
Accretion 19,574 4,760
Change in estimate (18,040) 24,213
------------------------
Closing balance 252,279 156,255
------------------------
------------------------
Under the terms of the Exploration Contract (note 1), the Company is required to create a fund to finance actual future restoration costs, equal to 1% of the capital costs of exploration. At December 31, 2007 and 2006, $253,132 and $194,412, respectively have been placed in a restricted bank account related to the funding requirement.
6. Loan payable
Pursuant to the Participants Agreement By and Among Azden Management Limited and Caspian Energy Ltd. and Aral Petroleum Capital Limited Liability Partnership, subsequent to reaching the US $84 million threshold on advances by Caspian to Aral, Caspian and Azden shall jointly finance, in equal proportions, the next stages of exploration by Aral. As at December 31, 2007, $6,947,055 had been advanced by Azden to Aral and is recorded as a loan payable in Aral’s accounts.
7. Convertible debentures
On March 1, 2006, the Company received US $16 million and issued 10% per annum, convertible debentures in a like amount secured with Caspian Ltd. shares. The debentures mature on March 2, 2011 and are convertible at any time and from time to time into common shares of the Company at a conversion price of $2.45 per share. The Company may repay the principal amount of the debentures, in whole or in part, or require conversion into common shares of the Company if the volume-weighted average trading price of the common shares, for 40 consecutive trading days, is at least $4.08.
Fair value of
conversion Carrying
Face amount option Accretion Interest value
$ $ $ $ $
Debentures
issued, opening
balance 18,320,884 (1,483,805) 281,168 1,564,757 18,683,004
Accretion of
discount - - 393,312 - 393,312
Translation
adjustment (2,608,884) - - 1,201,806 (1,407,078)
------------------------------------------------------------
Balance -
December 31,
2007 15,712,000 (1,483,805) 674,480 2,766,563 17,669,238
------------------------------------------------------------
------------------------------------------------------------
8. Income taxes
Future income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The Company has provided for certain taxes based upon statutory regulations of Kazakhstan. The Company is subject to permanent tax differences due to the fact that certain expenses are not deductible for income tax purposes under Kazakh laws.
The provision for taxes differs from that computed using the combined Canadian federal and provincial statutory rate as follows:
2007 2006
$ $
Loss before income taxes (12,468,510) (6,134,056)
---------------------------
---------------------------
Expected recovery at statutory tax rate of
32.10% (2006 - 34.50%) (4,002,392) (2,116,249)
Tax rate difference of foreign jurisdiction 261,839 291,699
Non-deductible stock-based compensation 782,290 822,791
Losses for which no benefit is being recognized 3,698,441 1,128,924
Non-deductible expenses - 176,591
---------------------------
Future income taxes 740,178 303,756
---------------------------
---------------------------
The tax effects on major temporary differences that give rise to the future
tax liability are as follows:
2007 2006
$ $
Future tax asset
Tax losses available for carry forward 307,790 936,012
Other 47,244 8,562
Difference in the tax bases and carrying values
of property, plant and equipment 904,103 143,939
---------------------------
1,259,137 1,088,513
---------------------------
Future tax liability
Geological and geophysical expense (2,226,537) (1,433,712)
Other - (13,649)
---------------------------
Net future tax liability (2,226,537) (1,447,361)
---------------------------
(967,400) (358,848)
---------------------------
---------------------------
9. Share capital
Authorized
Unlimited number of voting common shares, without stated par value
Issued
Number of Amount
shares $
Issued and outstanding as at December 31, 2005 84,327,163 75,220,762
Exercise of warrants (i) 357,100 888,505
Private placement (ii) 19,609,000 49,056,442
Exercise of options (iii) 50,000 87,500
Share issue costs (iv) - (3,782,317)
---------------------------
Issued and outstanding as at December 31, 2007
and 2006 104,343,263 121,470,892
---------------------------
---------------------------
i) During the year, 357,100 broker warrants were exercised. The warrants
had an exercise price of $2.00 per common share.
ii) On April 5, 2006 a private placement of 19,609,000 common shares were
issued at $2.55 per share.
iii) On April 10, 2006, 50,000 common shares at $1.75 per were issued
pursuant to the Company's stock option plan.
iv) Share issue costs have not been tax-effected.
Stock options
The Company has a stock option plan (the “Plan”) under which it may grant options to directors, officers and employees for the purchase of up to 15% of the number of common shares from time to time. Options are granted at the discretion of the board of directors. The exercise price, vesting period and expiration period are also fixed at the time of grant at the discretion of the Board of Directors in accordance with terms of the Plan.
Changes to the Company's stock options are summarized as follows:
Weighted
average option
Number of price
options $
Balance - December 31, 2005 9,166,499 1.72
Granted 1,943,433 1.29
Exercised (50,000) 1.75
----------------------------
Balance - December 31, 2006 11,059,932 1.64
Granted 2,668,845 0.88
Expired (400,000) 2.15
----------------------------
Balance - December 31, 2007 13,328,777 1.47
----------------------------
----------------------------
Exercisable - December 31, 2007 12,895,444 1.48
----------------------------
----------------------------
The following is a summary of stock options outstanding and exercisable as
at December 31, 2007:
Options outstanding Options exercisable
-------------------------------- -----------------------------
Weighted
average
Range of remaining Weighted
exercise Options contractual average Options
price outstanding life in years exercise price exercisable
$0.75 2,079,090 1.7 $0.75 2,079,090
$0.86 800,000 4.1 $0.86 666,667
$0.89 1,868,845 4.3 $0.89 1,868,845
$1.25 1,043,433 3.7 $1.25 1,043,433
$1.34 900,000 4.0 $1.34 600,000
$1.61 843,271 2.5 $1.61 843,271
$1.75 1,100,000 2.5 $1.75 1,100,000
$2.00 1,050,000 2.0 $2.00 1,050,000
$2.15 3,644,138 1.7 $2.15 3,644,138
----------- --------------- ------------
13,328,777 $1.48 12,895,444
----------- --------------- ------------
----------- --------------- ------------
Per share amounts
The weighted average number of common shares outstanding during the period ended December 31, 2007 of 104,343,263 (2006 – 99,146,605 shares) was used to calculate loss per share amounts.
In computing diluted loss per share, no shares were added to the weighted average number of common shares outstanding during the year ended December 31, 2007 (2006 – nil) as they are anti-dilutive.
Warrants
588,270 broker warrants are outstanding at December 31, 2007 and all have vested. These warrants entitle the holder to purchase one common share at a price of $2.77 until April 5, 2008. The fair value of the outstanding warrants using the Black-Scholes method was $946,508 (2006 – $946,508).
10. Stock-based compensation
Options granted to both employees and non-employees are accounted for using the fair value method. The fair value of common share options granted in the year ended December 31, 2007 was estimated to be $1,638,489 as at the grant date using a Black-Scholes option-pricing model and the following assumptions:
Risk free interest rate 4.11 - 4.27%
Expected life 5 year average
Expected volatility 84 - 89%
Expected dividend yield 0%
The estimated fair value of the options is amortized to expense and credited to contributed surplus over the option vesting period on a straight-line basis.
11. Contributed surplus
2007 2006
$ $
Balance - Beginning of year 12,030,272 7,668,133
Stock options issued to employees, officers
and directors 2,437,039 2,384,901
Fair value of debentures conversion option - 1,483,805
Fair value of warrants expired - 493,433
-------------------------
Balance - End of year 14,467,311 12,030,272
-------------------------
-------------------------
The term and vesting conditions of each option may be fixed by the board when the option is granted, but the term cannot exceed 5 years from the date upon which the option is granted.
The options granted to directors, officers and employees may be exercised over five years from the date of granting and expire from time to time to April 2012.
The debentures are convertible into common shares of the Company at a price of $2.45 per share and mature on March 31, 2011.
12. Commitments
In accordance with the shareholders’ agreement in respect of Aral, Caspian was obligated to fund the initial work program of Aral pursuant to the Exploration Contract. The minimum work program was US $20.8 million and matured at the end of calendar 2005. As at December 31, 2005, this obligation was fully discharged. The work program extension to December 2007 includes drilling three wells to a combined total of 8,500 metres with a monetary obligation of US $20.15 million. No additional seismic is required. The work program extension to December 2009 includes drilling seven wells to a combined total of 8,500 metres with a monetary obligation of US $19.085 million. The Company’s calendar 2006 minimum work program with the Republic of Kazakhstan was approved for US $12.2 million and was discharged during 2006. The Company’s calendar 2007 work program was approved for US $8.4 million with amendment for another US $23.7 million). At December 31, 2007, Aral had contract shortfalls aggregating US $7.1 million. Management of Aral believes the Company is in compliance with its commitments under the Minimum Working Program and has received authorization from the Ministry of Energy and Natural Resources and other competent bodies to carry over fulfillment of the above shortfalls to the year ending December 31, 2008.
13. Financial instruments
Caspian’s financial instruments included in the consolidated balance sheet are comprised of cash and cash equivalents, accounts receivable, other deposits and, accounts payable. The fair values of these financial instruments approximate their carrying amounts due to the short-term nature of the instruments. A substantial portion of Caspian’s accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks.
A substantial portion of Caspian’s activities are settled in foreign currencies and consequently, the Company is subject to fluctuations in currency translation rates.
The liability and equity components of the convertible debentures are presented separately in accordance with their substance. The liability component is accreted to the amount payable at maturity by way of a charge to earnings using the effective interest method.
14. Disposal of mining interest
On November 1, 2006, the Company executed a Letter of Intent to dispose of its interest in a mining property located in Noyon Township, Quebec, Canada for consideration of $150,000. The property was not consistent with the Company’s business objective. The transaction was completed in December 2006 and resulted in a book gain of $83,332.
15. Segmented information
The Company’s activities are conducted in two geographic segments: Canada and Kazakhstan. All activities relate to exploration for and development of petroleum and natural gas.
Canada Kazakhstan Total
$ $ $
Revenue
Oil and gas revenue, net 40,249 6,228,869 6,269,118
Interest 282,139 - 282,139
Other - 15,614 15,614
----------------------------------------
322,388 6,244,483 6,566,871
----------------------------------------
Expenses
General and administrative 2,910,834 673,451 3,584,285
Accretion of convertible
debentures 393,312 - 393,312
Interest 1,777,641 - 1,777,641
Operating 12,075 2,151,922 2,163,997
Transportation 342 486,915 487,257
Stock-based compensation 2,437,039 - 2,437,039
Foreign exchange loss (gain) 14,763,369 (8,982,937) 5,780,432
Depletion, depreciation and
accretion 5,000 2,406,418 2,411,418
Future income taxes - 740,178 740,178
----------------------------------------
22,299,612 (2,524,053) 19,775,559
----------------------------------------
Net (loss) income for the year (21,977,224) 8,768,536 (13,208,688)
----------------------------------------
----------------------------------------
Assets
Current assets 3,557,712 4,516,584 8,074,296
Restricted cash - 253,132 253,132
Property, plant and equipment, net 29,173 124,766,620 124,795,793
----------------------------------------
3,586,885 129,536,336 133,123,221
----------------------------------------
----------------------------------------
Liabilities 18,130,131 10,720,986 28,851,117
----------------------------------------
----------------------------------------
16. Reconciliation of International Financial Reporting Standards
Accounting practices under C
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For more information, please contact Caspian Energy Inc. or Bell Pottinger Corporate and Financial or Jefferies International Limited |
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