The Company’s share of production from Cheal has generated revenue of $4,386,717 for the quarter ended June 30, 2008. Other significant revenue was joint venture recoveries and interest which totaled $297,956 for the quarter, and the sale of the Company’s PNG assets for a total sale price of $8,500,000 (and net income of $8,002,147).
For the quarter ended June 30, 2008, the Company incurred a net loss of $2,529,194 compared to a net loss of $3,243,512 for the quarter ended June 30, 2007. The decreased loss for the June 30, 2008 quarter of $714,318 was primarily attributable to:
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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The Company has discontinued its operations in Papua New Guinea during the quarter, as described earlier. There have been no extraordinary items in the past 2 years.
Liquidity and Capital resources
For the six months to June 30, 2008, the Company had a net loss of $9,097,078 (2007: $5,467,643) and accumulated deficit of $72,215,990 (2007: $46,556,306). The Company also had a working capital deficit of $15,112,965 (December 31, 2007: $29,982,748). In addition, the Company has been unable to generate net cash from operating activities for the past three years. The Company’s cash balances and working capital are not sufficient to fund all of its obligations with respect to its on-going work program requirements related to the exploration permits.
The Company is operating under a formal waiver in respect of its breaches of several covenants relating to its Investec Bank (Australia) Ltd (“Investec”) loan facility primarily as a result of delays in completing the Cheal project in accordance with previously agreed timelines. The loan facility has been renegotiated, with the key agreement being the full repayment of the facility (currently $25,373,032) on or before December 15, 2008 and hence the loan facility has been disclosed as a current liability.
The requirement to satisfy Investec raises substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. However, based on cash flow forecasts prepared by management and the independently estimated value of the Company’s oil reserves and prospective value of its other exploration properties, management believes that Company can be re-financed within the requirements of the Investec facility timetable, and leads management to conclude that the Company can continue to meet its ongoing obligations for a reasonable period of time. The forecast assumes the Company’s on-going production is sustained; oil prices remain at or about $120 per barrel; normal expenditure is maintained; and further capital raising is completed to enable the Investec loan facility to be repaid in full on or before December 15, 2008.
The Company’s consolidated interim financial statements have been prepared on a going concern basis in accordance with Canadian generally accepted accounting principles, which assumes that the Company will be able to continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. Accordingly, the consolidated financial statements do not reflect any potential reductions in the carrying values of the assets and liabilities, the reported expenses and balance sheet classification used that would be necessary if the company was unable to continue as a going concern. Such reductions could be material.
The Company had total cash and short-term deposits (excluding restricted cash) of $9.1 million at June 30, 2008.
In May 2008, the Company executed a settlement agreement with its other Cheal joint venture participant, TAG Oil Ltd., which resolved a number of disputes relating to the Cheal project development. The settlement included a net payment to a subsidiary of TAG of $1.6 million in a combination of cash, Austral stock and expected forward production from the A7 well. The Company issued 2.273 million ordinary shares to TAG, with anti-dilutive protection provided for a period of six months. In return, TAG agreed not to dispose of these shares for a period of twelve months. In addition, the Company paid TAG $229,000 (NZ$300,000) and TAG paid its $429,000 (NZ$562,353) share of the remaining Cheal facilities costs that were being withheld pending a resolution to the dispute. TAG is expected to receive an additional $250,000 payable in equal installments over twelve months from commencement of the A7 production.
In June 2008, the Company completed a private placement of 11,222,360 shares with 5,611,180 warrants attached, at a unit price of $0.50, raising $5.6 million. A unit consists of one common share and one-half share purchase warrant. Full warrants are convertible one-for-one into common stock for twelve months from closing at exercise price of $1.00.The anti-dilutive protection afforded to TAG as
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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discussed in the preceding paragraph was triggered by this placement and will be calculated at the end of the six month period, taking into account other financings that occur within that period.
In May 2008, the Company sold its PNG PPL235 (Douglas) and PPL261 assets for $5 million, and its PNG PRL 4 (Stanley) and PRL 5 assets for $3.5 million.
The Company participates in oil and gas exploration and development joint venture operations with third parties and is contractually committed under agreements to complete certain exploration programs. The Company’s management estimates that the total obligations under various joint venture agreements are $5.6 million as at June 30, 2008. In addition to this, the Company has a further obligation with respect to the outstanding balance of the two prepaid gas agreements with Vector Gas Limited (previously NGC) totaling $1.43 million and $1.75 million respectively. Further information can be found in Note 20 of the Company’s 2007 Annual Financial Statements.
The Company’s obligations are summarized in the following table:
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Contractual and other
obligations | | Payments Due by Period (US$) |
| |
| Total | | Less than 1
year | | 1 - 3 years | | 4 - 5 years | | After 5 years |
| | | | | | | | | | | |
Operating Leases | | 522,223 | | 145,769 | | 291,126 | | 85,328 | | — |
| | | | | | | | | | | |
Joint Venture Commitments (1) | | 5,603,848 | | 2,110,778 | | 3,493,070 | | — | | — |
| | | | | | | | | | | |
Total Contractual Obligations | | 6,126,071 | | 2,256,547 | | 3,784,196 | | 85,328 | | — |
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| (1) | Joint Venture Commitments that the Company has are in respect to the Company’s share of approved permit work programs and other work obligations. These include a 69.5% share in the Cheal field development. |
Note that while these are obligations, they do not constitute liabilities required to be paid in cash. The consequences of not meeting an obligation are not clear, but are likely to include the loss of permit interest.
The Company is currently in discussions with its joint venture participants regarding permit work programs. However, these programs have yet to be approved. These discussions are in line with standard on-going business practice.
Off-Balance Sheet Arrangements
The Company has periodically reduced its exposure in oil and gas properties in relation to its permit obligations by farming-out to other participants. In June, the Company announced it had farmed down an 80 percent interest in PEP 38524, offshore Tasman Bay, to Australian Worldwide Exploration Limited (ASX:AWE). In return, AWE has undertaken to fully fund acquisition of 350km of 2D seismic within the permit. The farm-out is subject to approval of a revised work programme and of the transfer by the Ministry of Economic Development.
Related Party Transactions
Directors received a total remuneration of $44,767 during the three months to June 30, 2008 (three months to June 30, 2007; $23,500). Directors’ fees were increased in August 2007 with effect from January 1, 2007 to take account of the changed board composition and market practices, so the comparable fees eventually paid for the June 2007 quarter were $38,625.
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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Proposed Transactions
Discussions, which may in due course lead to further funding arrangements, are underway regarding the Company’s assets in New Zealand. These discussions are in line with standard on-going business practice; and as at the date of this report none have been finalized.
Critical Accounting Estimates
The Company’s financial statements are prepared in conformity with Canadian generally accepted accounting principles, which requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets, commitments and contingent liabilities at the date of the financial statements, the reported amounts of the revenues and expenses for the period reported. Specifically, estimates were utilized in calculating depletion, amortization and write-downs. Actual results could differ from these estimates and the differences could be material.
Changes in Accounting Policies including Initial Adoption
There have been no changes in accounting policies applied during the quarter ended June 30, 2008.
Changeover from Canadian GAAP to IFRS
The Company has started to develop a changeover plan to adopt International Financial Reporting Standards (IFRS) and has made application, pursuant to CSA Staff Notice 52-321, to adopt IFRS with effect from January 1, 2007 and hence prepare its first fully compliant IFRS financial statements as at December 31, 2008.
Due to the adoption of NZ IFRS by the New Zealand accounting bodies, the Company has reconciled its financial statements to NZ IFRS for the December 31, 2007 financial year. This reconciliation provides the adjustments and additional disclosures required to make the financial statements comply with all material aspects and requirements of NZ IFRS.
The Company intends to use this reconciliation as a basis for the transition from Canadian generally accepted accounting principles to Canadian International Financial Reporting Standards.
Accounting policies significantly affected are as follows:
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| 1 | Share based payments |
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| 2 | Asset retirement obligation provision |
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| 3 | Deferred tax |
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| 4 | Impairment of property and equipment |
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| 5 | Impairment of goodwill |
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| 6 | Exploration and evaluation expenditure |
Added disclosures
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| 1 | Employee costs |
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| 2 | Joint venture operations |
Impact of IFRS changeover on financial reporting
This information can be found in Note 26 of the Company’s 2007 Annual Financial Statements.
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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Financial Instruments and Other Instruments
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a) | Incentive Stock Options |
The stock options outstanding, weighted average prices and stock option compensation cost are set out in the Company’s interim financial statements for the quarter ended June 30, 2008 (see Note 10(b)).
In the quarter ended June 30, 2008, the Company granted 80,000 stock options at an exercise price of $0.49.
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b) | Share Purchase Warrants |
No warrants previously issued have been exercised during the three months to June 30, 2008.
In conjunction with the common share placement in June 2008, the Company issued 5,611,180 warrants. The warrants are convertible one-for-one into common stock for twelve months from closing at an exercise price of $1.00.
The Company entered into a series of forward sales contracts in 2006 for the future sale of crude oil produced from the Cheal field. The contracts were entered into in connection with the raising of long-term debt. As a condition of the restructuring of the loan facility, these contracts were closed out on May 27, 2008, funded by a short term loan of $17.8 million from Investec Bank, repayable on or before December 15, 2008. A series of $90 put options covering 114,000 barrel over the period September 2008 to August 2009 inclusive were purchased at the same time.
On September 20, 2007, the Company privately placed 7,692,308 preferred shares at a price of $1.30 per share, for total financing proceeds of $10 million.
The preferred shares are convertible one-for-one into the Company’s common shares for a three-year period and have a fixed dividend of 8% a year, payable six monthly.
The Company has reached an agreement in principle with the holders of the preferred shares for the exchange of the preferred shares for convertible debentures, with effect from January 1, 2008. The convertible debentures have similar commercial terms, but would not be entitled to any voting rights. The exchange will be subject to a number of conditions precedent including negotiation of definitive agreements with the Company as well as subordination agreement between the preferred shareholders and Investec, and the approval of the TSX-V.
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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Other MD&A Requirements
Additional information relating to the Company is available onwww.sedar.com.
Outstanding Share Data (as at June 30, 2008):
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Class and Series
of Security | | Number
outstanding | | Expiry Date of
Convertible
Securities | | Relevant Terms |
| | | | | | | |
Common shares | | 59,467,829 | | | | |
| | | | | | | |
Incentive Stock
Options | | 834,176 | | Various | | Exercisable for 1 common share each from $0.49 to $2.50, vesting over periods of 18, 24 or 36 months. |
| | (vested) | | (October 15, 2008 to June 30, 2013) | |
| | | | | | |
| | 150,000
| | September 30, 2009 | | In conjunction with the preferred share issue, priced at $1.30 with a two year term (extending to three years when permitted by TSX policies) |
| | (vested) | | | |
| | | | | | |
| | 1,123,329
| | Various | | Exercisable for 1 common share each from $0.49 to $2.50, vesting over periods of 18, 24 or 36 months. |
| | (unvested) | | (October 15, 2008 to June 30, 2013) | |
| | | | | | | |
Share Purchase
Warrants | | 2,500,000 | | December 21, 2008 | | In conjunction with the debt facility, the Company issued 2,500,000 share warrants priced at $2.11 with a term of two years from December 21, 2006. In the event that these are exercised, proceeds are first applied to any outstanding Junior tranche debt. |
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| | 12,500,000 | | February 28, 2009 | | In conjunction with the common share placement in February 2008, the Company issued 12,500,000 warrants. The warrants are convertible one-for-one into common stock for twelve months from closing at an exercise price of $2.25 |
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| | 5,611,180 | | September 26, 2009 | | In conjunction with the common share placement in June 2008, the Company issued 5,611,180 warrants. The warrants are convertible one-for-one into common stock for fifteen months from closing at an exercise price of $1.00 |
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AUSTRAL PACIFIC ENERGY LTD. |
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(Expressed in United States Dollars) |
(Unaudited – Prepared by Management) |
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For the Period Ended June 30, 2008 |
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Preferred Shares /
Convertible
Debentures | | 7,692,308 | | September 20, 2010 | | Convertible one-for-one into the Company’s common shares for a three-year period and have a fixed dividend of 8% a year, payable six monthly. Agreement in principle to exchange preferred shares for convertible debentures, with effect from January 1, 2008. |
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“Thompson Jewell”
Chief Executive Officer
This quarterly report contains forward-looking statements that are based on management’s expectations and assumptions. They include statements preceded by words and phrases such as “intend”, “believe”, “will be expected”, “is estimated”, “plans”, “anticipates”, or stating that certain actions, events or results “will”, “may” or “could” be taken, occur or be achieved. Forward-looking statements are based on expectations, estimates and projections at the time the statements are made that involve a number of risks and uncertainties which could cause actual results or events to differ materially from those anticipated.
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