Download - Corval quarterly report march 2013 final
Corval Energy Ltd.
QUARTERLY REPORT
FOR THE THREE MONTHS ENDED MARCH 31, 2013
Corval Energy Ltd. President’s Message For the three months ended March 31, 2013
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PRESIDENT’S MESSAGE Fellow Shareholders, I am pleased to present the Financial Statements and MD&A for the quarter ended March 31, 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 first quarter of 2013 was a very busy operational quarter for Corval. We drilled 5 wells – 3 Bakken and 2 Lodgepole and completed and brought on production 3 Lodgepole and 2 Bakken wells for a total capital expenditure of $8.7 million. The wells were put on production through the month of March and for the quarter we averaged 318 barrels of oil per day with associated cash flow of $876,000 for the quarter. In April we produced approximately 600 barrels of oil per day. There are currently road bans in place which have suspended our drilling program. We will begin drilling once road bans in Manitoba are lifted which are expected to be in early June. For the balance of the year we have a total of 12 new drills planned, the completion of the Bakken well drilled in the first quarter and the installation of an oil treater and associated water disposal line at the oil battery. The installation of the oil treater and water disposal line are expected to reduce trucking costs for the Company. Subsequent to March 31, 2013, we completed the disposition of non-core assets in Manitoba for $1.9 million and acquired core assets in Manitoba for approximately $3.3 million, increasing our key lands and providing additional drilling locations in the area. Capital expenditures for the year 2013 are expected to be approximately $30.7 million with an exit rate of approximately 1,000 barrels of oil per day. Corval continues to be in a relatively strong financial position, with funds available through our equity line, bank lines and cash flow. This will allow us to implement our 2013 capital program, as well as allowing sufficient financial flexibility to take advantage of additional opportunities that may arise in our focus area. We will continue to update you on our progress with quarterly financials, which will be posted on the website. Sincerely,
Tom Stan President & CEO CORVAL ENERGY LTD.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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Management’s Discussion and Analysis Three months ended March 31, 2013
May 24, 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 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.
Financial and Operations Overview
For the three months ended March 31, 2013
(thousands of dollars except per share amounts and shares outstanding)
Three months ended
March 31, 2013
($000s)
Cash Flow from operations * $876
Net loss $(639)
Average production (boe/d) 318 boe/d
Working capital deficit $(5,100)
Capital expenditures $000s
Exploration and evaluation $275
Land and seismic 234
Drill and complete 6,909
Property acquisitions -
Equipment, facilities and other 1,526
$8,944
Common shares o/s at period-end (000’s) 46,034
* before changes in non-cash working capital
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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HIGHLIGHTS
Corval continued with its capital program drilling 5 additional wells, and completing and tying in 5 of the
6 wells
Renegotiated a new bank facility in February, 2013 for $9.0 million
Corval exited April, 2013 in excess of 600 bopd, up from 221 bopd at the year end of 2012. Please note
that the amounts include flush production from new wells which will decline. Production stabilizes
approximately 90 days after completion.
The Company has a capital budget for the second half of 2013 for $16.5 million, which includes drilling
12 (9.5 net) wells.
This drilling program will commence after breakup, expected to be in early June, 2013.
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 months ended March 31, 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 = 1bbl) 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.
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, 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.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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Specific forward-looking statements include the following: Corval’s business strategy and focus, capital
expenditure budget, drilling plans, future debt levels, operating costs, and other financial results, source of
funding of the Company’s capital program, tax pools, future production, and decline rates.
OVERVIEW OF PERFORMANCE AND DISCUSSION OF OUTLOOK
Summary
Corval has continued its drilling activity during the three months ended March 31, 2013.
The Manitoba properties, producing light, sweet crude oil (38° API oil), had production of approximately 240
bopd at the end of 2012. During the last quarter of 2012 and the first three months of 2013, Corval drilled six
wells, and completed, equipped, and tied-in five of those wells, exiting the quarter with over 600 bopd.
During the three months ended March 31, 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. The
remaining $17.1 million of the line of equity financing is available upon request by the Company to support
future capital requirements, and $8.0 million was called in April, 2013. The proceeds of the financing will
continue to be used primarily to drill development wells in Manitoba.
Corval had a line of $8.0 million, negotiated in the fall of 2012. In February, 2013, Corval was able to
renegotiate its line of credit to $9.0 million with National Bank of Canada. As Corval’s production increases,
the Company anticipates this line of credit will increase.
Results of Operations – First 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 318 bopd for the first three months of 2013. Revenues, comprised entirely of
oil sales, were $2,451,289, representing average price of $85.75 per bbl.
For the three months ended March 31, 2013, the Company had a net loss of $639,408. The Company incurred
capital expenditures of $8,943,517, primarily related to drilling, completing, equipping, and tying-in five wells
in the Sinclair area of Manitoba.
Funds from operations for first three months of 2013 were $875,690 an increase of $1,164,323 from the fourth
quarter of 2012 reflecting the increase in production.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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OUTLOOK
Capital Expenditure Program - 2013
Early in 2013, the Company presented a drilling plan to its new Board of Directors. This capital program of
$12.8 million for the first six months of 2013 was approved, and included drilling 5 horizontal wells,
completing 5 wells and up to $1.5 million for land acquisitions in the area. Upon approval, Corval continued
the program that was started in late 2012, by drilling the 6 wells and accelerating the program by completing 5
of these wells. Although it is early, the initial results are encouraging, as Corval has seen its production
increase from the initial base of 240 bopd to over 600 bopd in April. We do not expect this rate to continue, as
these horizontal wells have very steep decline rates of over 50% in the first year of production. Based on these
initial results, Corval’s Board of Directors approved a budget of $16.5 million for the remainder of 2013. This
includes drilling up to 12 wells. Based on this, Corval expects to drill immediately after breakup, which is
expected to be in early June.
Corval is now well positioned to move forward and grow in 2013. Production at the end of April, 2013 with the
new wells on-stream, is in excess of 600 bbl/d, and going forward should generate positive funds from
operations.
Corval is in a unique position for a junior/emerging oil company as it is now:
i) Well financed with cash after raising a $33.2 million line of equity in 2012,
ii) generating solid cash flow, with light oil that provides netbacks that are currently over $45.00 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) starting 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 have recovered through the early months of 2013, and the Company has access to over $17
million through a line of equity. Corval is therefore in a position to undertake its planned capital expenditures
program. The Company will continue to monitor its funds from operations and available balance on the line of
equity, 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 first three months of 2013.
Production
Three months ended March 31 2013
Oil, condensate, & ngls – bbls/d
318
Production of 318 bbls/d for the first quarter of 2013 increased from 221 bbls/d during the fourth quarter of
2012 as a result of additional production from the new wells drilled.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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Revenue
Three months ended March 31 2013
Sales - oil $ 2,451,289
Average price
Oil ($/bbl)
$ 85.75
The Company’s crude oil production is light, sweet oil with an API of 38 degrees.
Royalties
Three months ended March 31 2013
Crown royalties
Freehold royalties
Overriding royalties
$ 3,751
335,553
30,314
Total royalties $ 369,618
Per boe
Percentage of revenues $ 12.93
15.1%
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 transportation costs
Three months ended March 31 2013
Operating costs
Expensed workovers $ 556,887
74,779
Total operating costs $ 631,666
Per bbl
Operating costs
Expensed workovers
Total operating costs
$ 19.48
$ 2.62
$ 22.10
The operating costs averaged $22.10 per bbl for the three months ended March 2013, which consists of $19.48
for regular operating costs and $2.62 per bbl for expensed workovers. The workovers for 2013 included
bottomhole pump and tubing repairs at Sinclair wells 2-33 and 5-33. These workovers are a continuation of
Corval’s program to complete maintenance projects that the previous owner was unable to perform. The
operating costs per bbl going forward are expected to decrease as the Company brings on new production
during the year.
Operating netbacks
Three months ended March 31 2013
Per boe
Revenues
Royalties
Operating costs
$ 85.75
(12.93)
(19.48)
Netback per boe before workovers $ 53.34
Workovers (2.62)
Netback per boe $50.72
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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Netbacks for the Manitoba properties are generally greater than industry average due to strong prices for the
light sweet crude, combined with reasonable operating costs of approximately $20.00 per bbl, excluding
workovers. The Company expects that trend to continue.
General and administrative expenses
Three months ended March 31 2013
Human resources costs (salaries and benefits)
Professional fees
Occupancy costs
Office supplies, software, and services
Shareholder reporting
Travel
Miscellaneous general and administrative
Overhead recoveries
$ 422,892
75,331
111,494
101,826
7,042
5,859
1,380
(151,507)
Total $ 574,317
Depletion and depreciation
Three months ended March 31 2013
Total depreciation, depletion, and impairment
$992,206
Funds used in operations and net loss
Three months ended March 31 2013
Funds from operations
$/share - basic
Net loss
$/share - basic
$ 875,690
$0.02
$(639,408)
$(0.01)
Capital Expenditures
Three months ended March 31 2013
Land purchases
Geological and geophysical
Drilling and completion
Equipping and facilities
Other
$ 241,227
267,737
6,909,146
1,514,713
10,694
Total cash expenditures
Less: Exploration and evaluation expenditures $ 8,943,517
(275,217)
Total: Property, Plant, and equipment expenditures $ 8,668,300
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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Capital expenditures were $275,217 for exploration and evaluation assets and $8,668,300 for developed and
producing assets for the three months ended March 31, 2013. Corval drilled, completed, equipped, and tied-in
five wells as part of the capital program in Sinclair, Manitoba, costs of which are included in property, plant,
and equipment expenditures.
SUMMARY OF QUARTERLY FINANCIAL DATA
The following table summarizes quarterly financial results:
Quarter
ended
Mar-13
$
Dec-12
$
Sep-12
$
Jun-12
$
Mar-12
$
Dec-11
$
Sept-11
$
Jun-11
$ Petroleum
and natural gas sales
2,451,289
1,364,553
-
-
-
-
-
-
Funds from
(used in)
operations 875,690 (361,877) - - - - - -
Income
(loss) (639,408) (8,474,535) - - - - - -
Production
bopd
318
221
-
-
-
-
-
-
Average
price/bbl
$85.75
$82.39
$0.00
$0.00
$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. 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, completed, equipped,
and tied-in five wells of its 2013 capital program during the quarter, which comprised the majority of the
$8,668,300 in property, plant, and equipment expenditures for the quarter. The Company closed the year with a
working capital deficit of $5,124,552 at March 31, 2013, which includes the remaining promissory notes of
$24,761 owing. On April 5, 2013, the Company requested an $8 million from the line of equity, which resulted
in $7,520,000 in proceeds net of share issuance costs from the sale of 11,428,571 shares.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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The Company monitors its capital program based on available funds, which is the combination of working
capital, the line of equity, and remaining unused bank loan, as calculated below:
March 31, 2013
$
Current assets 2,618,976
Accounts payable and accrued liabilities (7,718,767)
Promissory notes (24,761)
Net working capital (5,124,552)
Maximum value of bank loan
Amount drawn
9,000,000
-
Unutilized bank loan 9,000,000
Total available line of equity
Amount drawn to March 31, 2013
31,000,000
(13,950,000)
Unutilized line of equity 17,050,000
Net available funds 21,025,448
The Company’s 2013 capital program was presented to the Board of Directors in 2012, and the first half of
2013 capital program of $12.8 million was approved in January, 2013, of which approximately $9.0 million was
expended to March 31, 2013. Management recently obtained board approval for the second half of 2013
Capital Program of $16.5 million. The Company expects the current available funds, bank loan, line of equity,
and anticipated cash flow will be able to fund its full capital program for 2013.
During the three months ended March 31, 2013, the Company negotiated a new bank loan with a Canadian
financial institution for $9.0 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, 2013. No funds have been
withdrawn from this bank loan to date.
The amount of the bank loan is based on petroleum and natural gas reserves with certain financial covenants.
The bank loan also contains a financial covenant that requires the Company to maintain a certain minimum
working capital ratio. The Company is compliant with all covenants.
SHARE DATA
Transactions regarding Corval’s shares, options, acquisition warrants and performance warrants are presented in
the interim consolidated financial statements as at March 31, 2013, and the consolidated financial statements at
December 31, 2012.
On April 5, 2013, the Company called another draw on its line of equity of 11,428,571 shares for proceeds of
approximately $8 million. The Company has 57,462,482 shares outstanding as of the date of this MD&A.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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EVENTS AFTER REPORTING PERIOD
Share issues
On April 5, 2013, the Company called another draw on its line of equity of approximately 11,428,571 shares for
proceeds of approximately $8 million.
Financial hedge
Subsequent to the year end, 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 at Edmonton.
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 of Foundation.
There can be no assurance of a favorable judgment at this time.
Property disposition
The Company sold its working interest in two non-core wells in Manitoba in April, 2013. Proceeds of the
disposition were $1.9 million.
Property acquisition
The Company purchased an interest in land and several wells in Manitoba in May, 2013 for approximately $3.3
million.
TRANSACTIONS WITH RELATED PARTIES
The corporate secretary is a partner in a law firm that provides legal services to the Company. For the three
months ended March 31, 2013, the Company recorded $66,300 in general and administrative expenses related
to this law firm. At March 31, 2013, $66,300 remained in accounts payable and accrued liabilities.
COMMITMENTS
The Company is carrying a lease on its office space, and another lease on the space of FGDT which expires on
July 31, 2013:
Total at
March 31, 2013
$
2013
2014-2018
2019-2022
129,351
760,461
494,711
Total 1,384,523
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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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.
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:
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 could 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
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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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 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, Licences and Approvals
The Company's properties are held in the form of licences and leases and working interests in licences and
leases. If the Company or the holder of the licence or lease fails to meet the specific requirement of a licence or
lease, the licence or lease may terminate or expire. There can be no assurance that any of the obligations
required to maintain each licence or lease will be met. The termination or expiration of the Company's licences
or leases or the working interests relating to a licence 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, licences 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.
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.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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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.
Recent economic risks
Many oil and natural gas producers are encountering difficult times with low natural gas prices and increasing
differentials on crude oil prices, and in accessing new equity capital, while credit conditions and availability
may tighten despite low interest rates. Corval is positioned 100% 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 March 31, 2013 in note
13, in the consolidated financial statements at December 31, 2012 in notes 3 and 17.
FINANCIAL INSTRUMENTS
The financial instruments are described in Note 13 in the interim consolidated financial statements as at March
31, 2013, and in Note 17 in the consolidated financial statements at December 31, 2012.
Corval Energy Ltd. Management Discussion and Analysis For the three months ended March 31, 2013
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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 through the three months ended March 31, 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.
- 16 -
Corval Energy Ltd.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2013
These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three months ended March 31, 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.
- 17 -
CORVAL ENERGY LTD. Interim Consolidated Statements of Financial Position
As at March 31, 2013 and December 31, 2012
Note
March 31, 2013
(unaudited)
December 31, 2012
Assets Current assets:
Cash Trade and other receivables Prepaid expenses
13
$ 567,173
1,819,111 232,692
$ 12,050,366
761,679 185,201
2,618,976
12,997,246
Exploration and evaluation Property, plant and equipment
3 4
275,217
31,321,117
- 23,528,131
Total Assets
$ 34,215,310 $ 36,525,377
Liabilities and Shareholders’ Equity
Current Liabilities: Accounts payable and accrued liabilities Bank loan
5
$ 7,718,767
-
$ 2,175,851
7,450,000
7,718,767 9,625,851 Promissory notes Decommissioning obligations
6 7
24,761 1,962,715
568,828 1,807,338
Total Liabilities
$ 9,706,243 $ 12,002,017
Shareholders’ Equity
Share capital 8 33,074,958 32,929,358
Contributed surplus 8(d) 548,052 68,537
Deficit (9,113,943) (8,474,535)
Shareholders’ Equity 24,509,067 24,523,360
Total liabilities and shareholder’s equity
$ 34,215,310
$ 36,525,377
The notes are an integral part of these consolidated financial statements.
-18-
CORVAL ENERGY LTD. Interim Consolidated Statements of Loss and Comprehensive Loss For the three months ended March 31, 2013 and March 31, 2012
Note
Three months
ended March 31, 2013
(unaudited)
Three months ended March 31,
2012
Revenues Petroleum sales Royalties
$ 2,451,289 (369,618)
$ - -
2,081,671 - Expenses Operating costs General and administrative Share-based compensation Depletion and depreciation
8
631,666 574,315 479,515 992,206
- - - -
2,677,702 -
Finance expenses 9 43,377 -
Net loss and comprehensive loss for the period
$ (639,408)
$ -
The notes are an integral part of these consolidated financial statements.
-19-
CORVAL ENERGY LTD. Interim Consolidated Statements of Changes in Equity For the three months ended March 31, 2013 and March 31, 2012
Note
Number of common shares
Share Capital
Contributed surplus Deficit
Total Shareholders’
Equity
Balance at January 1, 2012
8 10
$ 10
$ -
$ -
$ 10
Balance at March 31, 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
208,000 - -
145,600 - -
- 479,515
-
- -
(639,408)
145,600 479,515
(639,408)
Balance at March 31, 2013 46,033,911 $ 33,074,958 $ 548,052 $ (9,113,943) $ 24,509,067
The notes are an integral part of these consolidated financial statements.
-20-
CORVAL ENERGY LTD. Interim Consolidated Statements of Cash Flows For the three months ended March 31, 2013 and March 31, 2012
Note
Three months
ended March 31, 2013
(unaudited)
Three months ended March 31,
2012
Operating activities: Net loss for the period Add back: finance expense (interest disclosed in financing activities) Non-cash items: Depletion and depreciation Share based compensation
$ (639,408)
43,377
992,206 479,515
$ -
-
- -
875,690 - Net changes in non-cash working capital items 10 (657,940) -
217,750 -
Investing activities: Expenditures – property, plant, and equipment Expenditures – exploration and evaluation Net changes in non-cash working capital items
4 3 10
(8,668,300) (275,217) 5,095,933
- -
-
(3,847,584) -
Financing activities: Proceeds from share issuances, net of issue costs Repayment of promissory notes Repayment of bank loan Interest paid
8 6 5
145,600 (545,193)
(7,450,000) (3,766)
- - - -
(7,853,359) -
Decrease in cash and cash equivalents during the period
(11,483,193)
-
Cash and cash equivalents, beginning of the period
12,050,366
-
Cash and cash equivalents, end of the period
$ 567,173
$ -
The notes are an integral part of these consolidated financial statements.
- 21 -
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.
Corval explores for and produces oil in Alberta and Manitoba, Canada. Corval Energy Ltd. is
domiciled in Canada at Suite 2400, 500 – 4th Avenue SW, Calgary, Alberta T2P 2V6. The
distribution to the shareholders of the Company of these consolidated financial statements was
authorized by the Board of Directors on May 24, 2013.
2. Basis of preparation:
The consolidated interim 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
months ended March 31, 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 Consolidated Financial Statements For the three months ended March 31, 2013
-22-
3. Exploration and evaluation assets
Cost
March 31, 2013 $
Opening balance – January 1, 2013 Additions
- 275,217
Closing balance – March 31, 2013 275,217
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 three months
ended March 31, 2013, $275,217 of E&E assets, predominately undeveloped land acquisitions, were
added. There were no indicators of impairment at March 31, 2013. 4. Property, plant, and equipment
March 31, 2013 $
Cost Opening balance – January 1, 2013 Current period additions Changes in decommissioning liability
31,506,505 8,668,300
116,892
Closing balance – March 31, 2013 40,291,697
Accumulated depletion, depreciation, and impairment Opening balance – January 1, 2013 Current period depletion and depreciation
7,978,374 992,206
Closing balance – March 31, 2013 8,970,580
Net property, pProperty, plant, and equipment Opening balance – January 1, 2013
23,528,131
Closing balance – March 31, 2013 31,321,117
Property, plant, and equipment (“PP&E”) consist of the Company’s developed and producing assets.
PP&E additions were $8,668,300 in expenditures and $116,892 in additional decommissioning
obligations for the three months ended March 31, 2013, and were incurred through the Company’s
drilling, completing, and equipping activities as per the Company’s 2013 capital program.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-23-
Future development costs of $10,825,931 have been included in the depletable balance for the three
months ended March 31, 2013. The Company has not recognized any individual components that are
depreciated separately.
During the three months ended March 31, 2013 the Company capitalized general and administrative
expense in the amount of $96,968 consisting predominately of overhead.
There were no indicators of impairment at March 31, 2013.
5. Bank loan:
The Company had a bank loan with an outstanding balance of $7,450,000 at the end of 2012. During
the three months ended March 31, 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. As at March 31, 2013, there were no
draws on either of the new loans. The Company is required to comply with a working capital financial
covenant, with the next review scheduled for June 1, 2013. 6. 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 $1,126 of additional interest
and paid $545,193 of promissory notes and interest during the three months ended March 31, 2013.
Promissory notes March 31,
2013 $
Opening balance – January 1, 2013 Additional interest accrued
568,828 1,126
Notes repaid ($540,485 plus additional interest of $4,708)
569,954 (545,193)
Closing balance – March 31, 2013 24,761
7. 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
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-24-
value of the decommissioning obligations to be $1,962,715 as at March 31, 2013 based on an
undiscounted total future liability of $4,340,000 discounted at a credit-adjusted rate of 8%.
Decommissioning Obligations March 31,
2013 $
Opening balance – January 1, 2013 Additions Accretion
1,807,338 116,892
38,485
Closing balance 1,962,715
8. Share capital:
At March 31, 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, subsequent to the quarter end, 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 $480,000, for net proceeds of $7,520,000. The remaining equity line at January 1,
2013 was $17,050,000, and after this draw, now stands at $9,050,000.
b) Common share options:
During the three months ended March 31, 2013, 550,000 common share options exercisable at $0.70
per common share option, expiring in five years, were issued to employees and an independent
advisor. 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 4.7
Issued to March 31, 2013 550,000 $0.70 4.8
Issued and outstanding – March 31, 2013 6,005,000 $0.70 4.7
c) Performance Warrants:
During the three months ended March 31, 2013, 210,000 performance warrants exercisable at $0.70
per common share option, expiring in five years, were issued to an independent advisor. The
continuity of performance warrants is detailed below:
Performance warrants
Number
Exercise price
Life (in years)
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-25-
Issued and outstanding – January 1, 2013 6,750,000 $0.70 4.7
Issued to March 31, 2013 210,000 $0.70 4.8
Issued and outstanding – March 31, 2013 6,960,000 $0.70 4.7
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
warrants to vest. Stock based compensation of $479,515 was expensed during the three months
ended March 31, 2013.
9. Finance expenses:
Finance expenses
Three months ended March 31,
2013 $
Interest on bank loan 3,766 Interest on promissory notes (note 6) 1,126
Accretion of decommissioning liabilities (note 7) 38,485
Finance expenses total 43,377
10. Supplemental cash flow information:
Changes in non-cash working capital is comprised of:
March 31, 2013
$
Changes in: Trade and other receivables (1,057,432)
Prepaid expenses (47,491) Accounts payable and accrued liabilities 5,542,916
4,437,993
Allocated to: Operating (657,940) Investing 5,095,933
4,437,993
11. Related party:
The corporate secretary is a partner in a law firm that provides legal services to the Company. For
the three months ended March 31, 2013, the Company recorded $66,300 in general and
administrative expenses related to this law firm. At March 31, 2013, $66,300 remained in accounts
payable and accrued liabilities.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-26-
12. Capital management:
The Company considers its capital structure to include share capital, and working capital, including
the bank loan.
March 31, 2013 $
Current assets 2,618,976 Accounts payable and accrued liabilities (7,718,767) Promissory notes (24,761)
Net working capital (5,124,552)
Maximum value of bank loan (note 5) Amount drawn
9,000,000 -
Unutilized bank loan 9,000,000
Total available line of equity Amount drawn to March 31, 2013
31,000,000 (13,950,000)
Unutilized line of equity 17,050,000
Net available funds 21,025,448
The Company’s 2013 capital program was presented to the Board of Directors in 2012, and the first
half of 2013 capital program of $12.8 million was approved in January, 2013, of which approximately
$9.0 million was expended to March 31, 2013. Management recently obtained board approval for the
second half of 2013 Capital Program of $16.5 million. In April, 2013, another $8.0 million draw on the
line of equity was requested and received. The Company expects the current available funds, bank
loan, line of equity, and anticipated cash flow will be able to fund its full capital program for 2013.
During the three months ended March 31, 2013, the Company negotiated a new bank loan with a
Canadian financial institution for $9.0 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,
2013 (note 5). No funds have been withdrawn from this bank loan to date. 13. Financial risk management:
The Company’s financial assets and liabilities are comprised of cash, trade and other receivables,
accounts payable and the bank loan. The main purpose of these financial 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 6), and therefore the carrying value
approximates their fair value.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-27-
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.
March 31, 2013 $
Amounts due from marketers Joint venture GST receivable
1,349,655 120,749 348,707
Total 1,819,111
The need for impairment of receivables is analyzed at each reporting date on an individual basis for
major clients. At March 31, 2013, no impairment was deemed necessary, so no allowance for
doubtful accounts was recognized.
As at March 31, 2013, the Company’s trade and other receivables are aged as follows:
March 31, 2013 $
Current 30 – 60 days 60 – 90 days Over 90
1,737,671 17,789 23,521 40,130
Total 1,819,111
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 12, the Company
manages its liquidity by monitoring its capital program and comparing that to its available funds.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-28-
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 $8.57/bbl, and a cash flow change of
$208,167 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.
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 March 31,
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.
14. Commitments:
The Company is carrying a lease on its office space, and another lease on the space of FGDT:
Total at March 31, 2013
$
2013 2014-2018 2019-2022
129,351 760,461 494,711
Total 1,384,523
15. Events after reporting period:
Share issues (Note 8)
On April 5, 2013, the Company called another draw on its line of equity of approximately 11,428,571
shares for proceeds of approximately $8 million.
Financial hedge (Note 13)
Subsequent to the year end, 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 at Edmonton.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the three months ended March 31, 2013
-29-
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.
Property disposition
The Company sold its working interest in two wells in Manitoba in April, 2013. Proceeds of the
disposition were $1.9 million.
Property acquisition
The Company purchased an interest in land and several wells in Manitoba in May, 2013 for
approximately $3.3 million.
Corval Energy Ltd. General Information
- 30 -
Directors Jody Forsyth
(2)(3) - Chairman
Larry Evans (1)(2)
Brian Frank
(1)(3)
Ron McIntosh (2)(3)
Thomas Stan (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 Burnet, Duckworth, and Palmer LLP Corporate secretary
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