Luke Energy Third Quarter Report
Highlights
| | | | Three Months Ended | | | | | | Period Ended | |
| | | | September 30, | | | September 30, | | | September 30, | |
| | | | 2004 | | | 2003 | | | 2004 | | | 20031 | |
|
| Operating | | | | | | | | | | | | | |
| Number of Producing days | | | 92 | | | 92 | | | 274 | | | 218 | |
| Production | | | | | | | | | | | | | |
| | Oil - bopd | | | 76 | | | 88 | | | 81 | | | 88 | |
| | Gas - mcf/d | | | 5,004 | | | 395 | | | 3,494 | | | 413 | |
| | Total - boepd (6 mcf = 1 bbl) | | | 910 | | | 154 | | | 663 | | | 157 | |
| Product Prices ($Cdn) | | | | | | | | | | | | | |
| | Oil - $/bbl | | $ | 49.71 | | $ | 33.96 | | $ | 46.79 | | $ | 35.59 | |
| | Gas - $/mcf | | $ | 5.92 | | $ | 5.81 | | $ | 6.32 | | $ | 6.74 | |
| Drilling Activity | | | | | | | | | | | | | |
| | Oil wells | | | - | | | - | | | - | | | - | |
| | Gas wells | | | - | | | - | | | 8 | | | - | |
| | Dry | | | 1 | | | - | | | 3 | | | - | |
| | Total wells | | | 1 | | | - | | | 11 | | | - | |
| | Net wells | | | 1 | | | - | | | 10.5 | | | - | |
| Undeveloped lands | | | | | | | | | | | | | |
| | Net acres | | | 23,248 | | | 16,880 | | | 23,248 | | | 16,880 | |
| Financial ($Cdn)2 | | | | | | | | | | | | | |
| Gross production revenue | | $ | 3,073,085 | | $ | 487,112 | | $ | 7,088,762 | | $ | 1,289,975 | |
| Cash flow from operations3 | | $ | 1,483,948 | | $ | 772,107* | | $ | 3,328,623 | | $ | 1,127,753* | |
| | per share - basic & diluted | | $ | 0.04 | | $ | 0.02 | | $ | 0.10 | | $ | 0.04 | |
| Earnings | | $ | 282,460 | | $ | 396,483* | | $ | 621,608 | | $ | 449,555* | |
| | per share - basic and diluted | | $ | 0.01 | | $ | 0.01 | | $ | 0.02 | | $ | 0.02 | |
| Weighted average shares outstanding | | | 34,872,805 | | | 33,563,736 | | | 34,846,171 | | | 27,619,993 | |
| Shares outstanding | | | 36,180,704 | | | 34,828,946 | | | 36,180,704 | | | 34,828,946 | |
| Capital expenditures | | $ | 5,602,258 | | $ | 2,222,104 | | $ | 19,797,474 | | $ | 2,452,607 | |
| Working capital | | $ | 21,932,497 | | $ | 37,211,302 | | $ | 21,932,497 | | $ | 37,211,302 | |
| Shareholders’ equity | | $ | 47,357,633 | | $ | 42,809,415 | | $ | 47,357,633 | | $ | 42,809,415 | |
| 1 | The Company commenced operations February 26, 2003. |
| | |
| 2 | The Company changed its accounting policy for stock-based compensation resulting in the restatement of certain prior period numbers. |
| | |
| | See note 1 to the financial statements. |
| | |
| 3 | Cash flow from operations means earnings plus future taxes, depletion, depreciation and accretion, and stock-based compensation. |
| | |
| *Note: Includes a $505,000 windfall gain on the sale of marketable securities. |
Report to Shareholders
Overview
Your Company continued to show improved operational and financial results in the third quarter ended September 30, 2004.
Third quarter production was up almost sixfold to average 910 barrels of oil equivalent per day (boepd) as compared to 154 boepd a year ago. Luke Energy’s production was 92% gas and 8% oil. Subsequent to the quarter end, production is approaching 1,000 boepd. The Company’s significant production gains are attributable to our successful drilling program earlier this year at Marten Creek in northern Alberta.
Financial results in the third quarter were at record levels primarily as a result of increased production at Marten Creek. All of the Company’s production is unhedged and receives current market prices. Cash flow was $1,483,948 (4¢ per share) and earnings were $282,460 (1¢ per share). During the quarter the Company also completed a $3.5 million private placement of common shares at $2.65 per share on a “flow-through” basis.
Operations
Most of the Company’s current drilling opportunities are winter accessible only. As a result, Luke Energy drilled just one well in the third quarter - this was on an exploratory oil play in northeastern British Columbia which ultimately proved unsuccessful. Overall the Company’s drilling efforts so far this year have been very positive: in the nine month period Luke Energy participated in 11 gross wells (10.5 net) which resulted in eight successful gas wells. These were drilled at Marten Creek where current production is approximately 5.2 million cubic feet per day (mmcf/d) or 850 boepd to Luke Energy’s 100% interest. The Company will have additional processing capacity at Marten Creek next month when expansion of a nearby gas plant is completed, whereupon Luke Energy’s share of capacity will increase to the 5.5 - 7 mmcf/d range.
Given that most of the Company’s drilling activity since inception took place earlier this year, we commissioned a new independent engineering evaluation from Gilbert Laustsen Jung Associates Ltd. effective August 1, 2004 - basically as a scorecard to see how we have done in our first 18 months of operations. The results are attractive with 3.0 million boe of reserves added (2.2 million boe proved, and 0.8 million boe probable), primarily attributable to the Company’s drilling at Marten Creek. To achieve these results, total capital of $19 million (to June 30, 2004) was spent on land, seismic, drilling, facilities and acquisitions. This equates to finding and onstream costs of less than $6.50 per boe which are among the lowest in the oil and gas industry.
Luke Energy is continuing to buy land based on its seismic leads in the Marten Creek area. The Company’s 2-D seismic base in the area now comprises over 680 miles of data and our 100% owned land position has grown from 11,000 net acres last year to almost 27,000 acres. The Company has an option with a major company on 12,000 additional acres in the area.
In the coming winter drilling season we plan to more than double last winter’s program to 20 - 25 wells which will be a combination of both development and exploratory locations. The winter drilling program is expected to double current Marten Creek production to the 10 - 12 mmcf/d range (1,650 - 2,000 boepd).
Our efforts to find a second core area are ongoing. Although our first two wells in northeastern British Columbia were unsuccessful we continue to have a number of leads in the area and plan to drill three more wells in British Columbia before Christmas. All three are on potential gas targets.
We are also actively generating new play areas in western Alberta where our technical people have had proven experience.
We continue to emphasize growth through internally-generated prospects given the current high-priced acquisition market. Although organic growth may take longer, the ultimate results can be very positive as evidenced by Luke Energy’s favorable finding costs.
Outlook
We are now forecasting year-end cash flow of $4.5 million (13¢ per share) and earnings of $800,000 (2¢ per share). Significant growth is forecasted for next year based on record drilling activity. Cash flow in 2005 is expected to increase to over $12.5 million (35¢ per share) with earnings of $3 million (8¢ per share).
In other developments, we welcome Mary Blue to her new role as Vice-Chairman of the Company. Ms. Blue is a co-founder of Luke Energy and was formerly the Company’s President. While she will continue to be based in the Company offices, Ms. Blue plans to devote some time to outside business interests. The role of President will be assumed by the writer who will now be both President andCEO.
On Behalf of the Board
Harold V. Pedersen,
President & CEO
November 3, 2004
Management’s Discussion and Analysis
Management’s discussion and analysis (MD&A) of financial conditions and results of operations should be read in conjunction with the Company’s unaudited interim financial statements for the nine months ended September 30, 2004 and the audited financial statements and MD&A for the period ended December 31, 2003. This MD&A is based on information available at November 3, 2004. The discussion contains forward-looking statements that involves risks and uncertainties. Such information, although considered reasonable by Luke management at the time of preparation, may prove to be inaccurate and actual results may differ materially from those anticipated in the statements made.
The Company evaluates its performance based on earnings and cash flow from operations. Cash flow from operations is a non-GAAP (Generally Accepted Accounting Principle) term that represents earnings before depletion, depreciation and accretion, future income taxes and stock-based compensation. It is a key measure as it demonstrates the Company’s ability to generate the cash flow necessary to fund future growth through capital investment.
Oil and Gas Operations
| | | Three Month Ended | | Nine Months Ended | | Period Ended | |
| | | September 30, | | September 30, | | September 30, | |
| | | 2004 | | 2003 | | 2004 | | 2003 | |
|
| | | ($000’s) | | ($/boe) | | ($000’s) | | ($/boe) | | ($000’s) | | ($/boe) | | ($000’s) | | ($/boe) | |
| Production (boepd) | | | 910 | | | | | | 154 | | | | | | 663 | | | | | | 157 | | | | |
| Oil and gas revenues | | $ | 3,073 | | $ | 36.71 | | $ | 487 | | $ | 34.38 | | $ | 7,089 | | $ | 39.02 | | $ | 1,290 | | $ | 37.69 | |
| Royalties, net of ARTC | | | (557 | ) | | (6.65 | ) | | (127 | ) | | (8.97 | ) | | (1,282 | ) | | (7.05 | ) | | (325 | ) | | (9.48 | ) |
| Operating expenses | | | (635 | ) | | (7.59 | ) | | (79 | ) | | (5.58 | ) | | (1,373 | ) | | (7.56 | ) | | (183 | ) | | (5.36 | ) |
| Netback | | $ | 1,881 | | $ | 22.47 | | $ | 281 | | $ | 19.83 | | $ | 4,434 | | $ | 24.41 | | $ | 782 | | $ | 22.85 | |
The significant increase in the Company’s quarterly and year-to-date production for 2004 as compared to 2003 is the result of the first quarter 2004 drilling success at Marten Creek.
In addition, oil and gas revenues for the third quarter benefited from higher oil and gas prices. The Company’s average oil price was up 46% to $49.71 per bbl Cdn as compared to $33.96 per bbl Cdn in the third quarter of last year. Gas prices during the third quarter continued to be strong, averaging $5.92 Cdn per thousand cubic feet (mcf), up slightly from $5.81 Cdn per mcf last year.
Royalty expense for the quarter, as a percentage of production revenue, was 18% as compared to 26% last year. The lower royalty rate is attributable to the gas production at Marten Creek which is eligible for the Alberta Royalty tax credit and a reduced crown rate based on production levels.
Operating expenses for the third quarter were $7.59 per boe as compared to $5.58 per boe last year. The increase relates primarily to the higher operating expenses associated with the Marten Creek gas production of approximately $7.10 per boe. In addition, the per unit costs at Bashaw and Bassano have increased because of natural production declines while fixed costs remain unchanged.
Interest income & Gain (Loss) on Sale of Marketable Securities
Interest income of $101,835 for the third quarter was earned on the Company’s invested cash balances at a rate of approximately 2.0%. During the comparable quarter of 2003 interest income was $342,105 (approximately 3.8% of invested cash balances). Interest income is lower this year due to: a lower average invested cash balance of $20 million versus $35 million last year; and the Company earned higher rates last year investing in Government of Canada Bonds. Due to unique market conditions last year the Company realized a $505,000 gain on sale of its bonds. Earlier this year the Company discontinued investing in Government of Canada bonds due to concerns about volatility in the bond market which resulted in a loss on sale of marketable securities of $295,235 for the nine months ended September 30, 2004.
Year-to-date the Company has earned investment income, net of a loss on marketable securities, of $348,998. This represents a rate of return of approximately 1.9%.
Capital Expenditures
Capital expenditures during the third quarter of 2004 were $5.6 million. The majority of these expenditures ($4.3 million) were for land and seismic purchases in the Marten Creek and Fort St. John project areas. The balance was primarily expended on a dry hole drilled in northeast B.C. and preliminary costs in preparation for our winter drilling program at Marten Creek.
Year-to-date the Company has spent $19.8 million and expects that total 2004 capital expenditures will be approximately $29 million.
General and Administrative Expenses
General and administrative expenses for the third quarter were $498,777 ($330,785 last year) and $1,454,225 for the nine months ended September 30, 2004 ($724,126 for the period ended September 30, 2003). With the significant production increase resulting from the Marten Creek project, general and administrative expenses were down to $5.96 per boe for the third quarter as compared to $23.48 per boe last year. The Company’s current staffing levels are sufficient to continue production growth with minimal costs.
Depletion, Depreciation and Asset Retirement Obligation
The provision for depletion, depreciation and accretion for the third quarter is based on an August 1, 2004 Gilbert Lausten Reserve Report. The provision for the quarter was $732,545 ($8.75 per boe) as compared to $147,889 ($10.43 per boe) last year. This represents a substantial decrease from last year as a result of the favourable finding and development costs of the Marten Creek drilling program.
Cash Flow and Earnings
Cash flow for the quarter of $1.5 million ($0.04 per share) was double the $772,107 ($0.02 per share) reported in 2003. For the first nine months of this year the Company realized a substantial increase in cash flow to $3.3 million versus $1.1 million for the comparable period of 2003. The increase is largely due to the production growth generated by the Marten Creek drilling program. It is important to note that last year’s cash flow was skewed by a $505,000 windfall gain on the sale of marketable securities. Without this gain last year’s cash flow for the quarter and the period ended September 30, 2003 would have been $267,107 ($0.01 per share) and $622,753 ($0.02 per share) respectively.
Earnings for the three months ended September 30, 2004 were $282,460 ($0.01 per share) compared to $396,483 ($0.01 per share) last year. Earnings for the nine-month period were $621,608 or $0.02 per share versus $449,555 last year or $0.02 per share. Last year’s earnings without the windfall gain would have been a loss of $5,952 for the quarter and positive earnings of $47,120 for the period ended September 30, 2003.
Taxes
There is no current tax provision for the third quarter due to the Federal Governments’ increase in the Large Corporations tax base to $50 million.
The provision for future taxes of $295,000 for the third quarter is 51% of pre-tax earnings as compared to $158,050 or 27% of pre-tax earnings for the third quarter of 2003. The increased rate is primarily due to the 2003 third quarter capital gain on sale of marketable securities, only fifty percent of which is taxable.
Liquidity and Capital Resources
In September the Company issued 1,320,755 common shares on a tax flow-through basis at $2.65 per share for proceeds of $3.5 million. This equity financing increased the Company’s working capital to $21.9 million at September 30, 2004. Management and directors subscribed for 25% of the issue. Under the terms of the private placement the Company is committed to expend the proceeds on qualifying exploration drilling and seismic prior to December 31, 2005 and to renounce the tax benefits to the subscribers by December 31, 2004.
Based on the August 1, 2004 reserve report, the Company is presently finalizing an $11 million revolving credit facility (with a two year term out provision) with a Canadian chartered bank. Future drawings under the facility will bear interest at bank prime and are secured through a general assignment of assets and a demand debenture granting a floating charge over all assets of the Company.
The Company’s strategy continues to be focused on adding production through a combination of low to medium risk exploration projects. Although Luke Energy’s engineering group evaluates acquisition opportunities on an ongoing basis, the current capital budget does not include a forecasted acquisition due to the highly competitive acquisition market at present. Luke’s capital budget for the remainder of the year is approximately $9 million and will be funded by working capital. The capital budget for 2005 is estimated to be $41 million and will be funded by working capital, cash flow and bank debt.
At November 2, 2004 the Company has 36,181,371 common shares outstanding and 3,179,333 stock options outstanding.
Quarterly Information
($000’s except per share amounts)
| | | Gross | | Cash Flow | | | | | | | |
| | | Production | | From | | Per | | Earnings | | Per | |
| | | Revenue | | Operations | | Share | | (loss) | | Share | |
|
| Q3-2004 | | $ | 3,073 | | $ | 1,484 | | $ | 0.04 | | $ | 282 | | $ | 0.01 | |
| Q2-2004 | | $ | 3,291 | | $ | 1,346 | | $ | 0.04 | | $ | 256 | | $ | 0.01 | |
| Q1-2004 | | $ | 724 | | $ | 499 | | $ | 0.01 | | $ | 83 | | $ | 0.00 | |
| Q4-2003 | | $ | 426 | | $ | 248 | | $ | 0.01 | | $ | (80 | ) | $ | (0.00 | ) |
| Q3-2003 | | $ | 487 | | $ | 772 | | $ | 0.02 | | $ | 397 | | $ | 0.01 | |
| Q2-2003 | | $ | 537 | | $ | 287 | | $ | 0.01 | | $ | 59 | | $ | 0.00 | |
| Q1-2003 | | $ | 266 | | $ | 68 | | $ | 0.01 | | $ | (6 | ) | $ | (0.00 | ) |
Quarterly Review Comments:
| | • | Earnings (loss) and earnings (loss) per share have been restated due to the retroactive change in accounting policy for stock-based compensation. This restatement resulted in a loss for the first quarter and fourth quarter of 2003. See note 1 to the interim financial statements. |
| | | |
| | • | Cash flow and earnings for the third quarter of 2003 were positively impacted by a $505,000 gain on sale of Government of Canada Bonds. |
| | | |
| | • | Financial results greatly improved starting in the second quarter of 2004 due to the onset of production from first quarter 2004 drilling program at Marten Creek. |
Balance Sheets
| | | | | | December 31, | |
| | | | September 30, | | 2003 | |
| | | | 2004 | | (audited) | |
| | | |
| |
| |
| | | | (unaudited) | | (restated1) | |
| Assets | | | | | | | |
| Current assets: | | | | | | | |
| | Cash and term deposits | | $ | 22,169,667 | | $ | 36,699,571 | |
| | Receivables | | | 1,828,902 | | | 529,815 | |
| | | | | 23,998,569 | | | 37,229,386 | |
| Capital assets | | | 26,646,516 | | | 7,998,257 | |
| | | | $ | 50,645,085 | | $ | 45,227,643 | |
| Liabilities and Shareholders’ Equity | | | | | | | |
| Current liabilities: | | | | | | | |
| | Accounts payable and accrued liabilities | | $ | 2,066,072 | | $ | 2,203,148 | |
| Future taxes | | | 826,850 | | | 98,850 | |
| Asset retirement obligations | | | 394,530 | | | 110,930 | |
| Shareholders’ equity: | | | | | | | |
| | Share capital (note 2) | | | 45,661,901 | | | 42,223,171 | |
| | Contributed surplus (note1) | | | 704,290 | | | 221,710 | |
| | Retained earnings (note1) | | | 991,442 | | | 369,834 | |
| | | | | 47,357,633 | | | 42,814,715 | |
| | | | $ | 50,645,085 | | $ | 45,227,643 | |
| 1 | See note 1 to the financial statements. |
| | |
| | See accompanying notes to financial statements. |
On behalf of the Board:
| Director | Director |
| Harold V. Pedersen | Mary C. Blue |
Statement of Earnings and Retained Earnings
| | | | Three Months Ended | | | | Period Ended | |
| | | | September 30, | | September 30, | | September 30, | |
| | | | 2004 | | 2003 | | 2004 | | 2003 | |
| | | |
| |
| |
| |
| |
| (unaudited) | | | | (restated1) | | | | (restated1) | |
| Revenue: | | | | | | | | | | | | | |
| | Oil and gas production | | $ | 3,073,085 | | $ | 487,112 | | $ | 7,088,762 | | $ | 1,289,975 | |
| | Royalties, net of ARTC | | | (557,089 | ) | | (127,082 | ) | | (1,281,557 | ) | | (324,459 | ) |
| | Gain (loss) on sale of marketable securities | | | - | | | 505,000 | | | (295,235 | ) | | 505,000 | |
| | Interest | | | 101,835 | | | 342,105 | | | 644,233 | | | 636,887 | |
| | | | | 2,617,831 | | | 1,207,135 | | | 6,156,203 | | | 2,107,403 | |
| Expenses: | | | | | | | | | | | | | |
| | Operating | | | 635,106 | | | 79,043 | | | 1,373,355 | | | 183,444 | |
| | General and administrative | | | 498,777 | | | 330,785 | | | 1,454,225 | | | 724,126 | |
| | Stock-based compensation | | | 173,943 | | | 69,685 | | | 494,200 | | | 106,689 | |
| | Interest | | | - | | | - | | | - | | | 2,680 | |
| | Depletion, depreciation and accretion | | | 732,545 | | | 147,889 | | | 1,432,815 | | | 327,659 | |
| | | | | 2,040,371 | | | 627,402 | | | 4,754,595 | | | 1,344,598 | |
| Earnings before taxes | | | 577,460 | | | 579,733 | | | 1,401,608 | | | 762,805 | |
| Taxes: | | | | | | | | | | | | | |
| | Current | | | - | | | 25,200 | | | - | | | 69,400 | |
| | Future | | | 295,200 | | | 158,050 | | | 780,000 | | | 243,850 | |
| | | | | 295,000 | | | 183,250 | | | 780,000 | | | 313,250 | |
| Earnings | | $ | 282,460 | | $ | 396,483 | | $ | 621,608 | | $ | 449,555 | |
| Retained earnings, beginning of period | | $ | 708,982 | | $ | 90,076 | | $ | 583,926 | | $ | - | |
| Change in accounting policy (note 1) | | | - | | | (37,004 | ) | | (214,092 | ) | | - | |
| Retained earnings, restated | | | 708,982 | | | 53,072 | | | 369,834 | | | 449,555 | |
| Retained earnings, end of period | | $ | 991,442 | | $ | 449,555 | | | 991,442 | | | 449,555 | |
| Weighted average number of common shares outstanding | | | 34,872,805 | | | 33,563,736 | | | 34,846,171 | | | 27,619,993 | |
| Earnings per share | | | | | | | | | | | | | |
| | - basic and diluted | | $ | 0.01 | | $ | 0.01 | | $ | 0.02 | | $ | 0.02 | |
| 1 | See note 1 to the financial statements. |
| | |
| | See accompanying notes to financial statements. |
Statement of Cash Flow
| | | | | | Three Months Ended | | | | Period Ended | |
| | | | | | September 30, | | September 30, | | September 30, | |
| | | | | | 2004 | | 2003 | | 2004 | | 2003 | |
| | | | |
| |
| |
| |
| |
| (unaudited) | | | | (restated1) | | | | (restated1) | |
| Cash provided by (used in): | | | | | | | | | | | | | |
| Operating: | | | | | | | | | | | | | |
| | | Earnings for the period | | $ | 282,460 | | $ | 396,483 | | $ | 621,608 | | $ | 449,555 | |
| | | Items not affecting cash: | | | | | | | | | | | | | |
| | | | Depletion, depreciation and accretion | | | 732,545 | | | 147,889 | | | 1,432,815 | | | 327,659 | |
| | | | Future taxes | | | 295,000 | | | 158,050 | | | 780,000 | | | 243,850 | |
| | | | Stock-based compensation | | | 173,943 | | | 69,685 | | | 494,200 | | | 106,689 | |
| Cash flow from operations | | | 1,483,948 | | | 772,107 | | | 3,328,623 | | | 1,127,753 | |
| | | Change in non-cash working capital | | | (124,782 | ) | | 125,843 | | | (495,593 | ) | | 53,891 | |
| | | | | | | 1,359,166 | | | 897,950 | | | 2,833,030 | | | 1,181,644 | |
| Financing: | | | | | | | | | | | | | |
| | Common shares issued, net of issue costs | | | 3,350,000 | | | 3,445,168 | | | 3,350,000 | | | 38,536,156 | |
| | Stock options exercised | | | 2,430 | | | - | | | 25,110 | | | - | |
| | Initial common shares redeemed for cash | | | - | | | - | | | - | | | (100 | ) |
| | | | | | | 3,352,430 | | | 3,445,168 | | | 3,375,110 | | | 38,536,056 | |
| Investing: | | | | | | | | | | | | | |
| | | Additions to capital assets | | | (5,602,258 | ) | | (2,222,104 | ) | | (19,797,474 | ) | | (2,452,607 | ) |
| | | Increase in marketable securities | | | - | | | (3,565,268 | ) | | - | | | (3,565,268 | ) |
| | | Change in non-cash working capital | | | 247,574 | | | 268,051 | | | (940,570 | ) | | 346,411 | |
| | | | | | | (5,354,684 | ) | | (5,519,321 | ) | | (20,738,044 | ) | | (5,671,464 | ) |
| Increase (decrease) in cash | | | (643,088 | ) | | (1,176,203 | ) | | (14,529,904 | ) | | 34,046,236 | |
| Cash position, beginning of period | | 22,812,755 | | | 35,222,539 | | | 36,699,571 | | | 100 | |
| Cash position, end of period | | $ | 22,169,667 | | $ | 34,046,336 | | $ | 22,169,667 | | $ | 34,046,336 | |
| 1 | See note 1 to the financial statements. |
| | |
| | Cash position includes cash and term deposits net of bank indebtedness. |
| | |
| | See accompanying notes to financial statements. |
Notes to Financial Statements
The interim financial statements of Luke Energy Ltd. (the “Company”) have been prepared by management in accordance with accounting principles generally accepted in Canada. The interim financial statements have been prepared following the same accounting policies and methods of computation as the audited financial statements for the period ended December 31, 2003. The disclosures provided below are incremental to those included in the December 31, 2003 audited financial statements.
| | 1. | Change in accounting policy: |
| | | |
| | | Stock-based compensation: |
| | | |
| | | Pursuant to the amended accounting pronouncement for stock-based compensation, the Company changed its accounting policy from the intrinsic method to the fair value method to account for options granted to employees under the stock option plan. Application of the fair value method results in recognition of compensation expense in the statement of earnings (previously provided as note disclosure) with a corresponding amount to contributed surplus. The new method was applied retroactively with restatement of prior period financial statements. The change resulted in a reduction in earnings of $173,943 ($0.01 per share) for the three months ended September 30, 2004 and $67,450 ($0.00 per share) for the three months ended September 30, 2003; the earnings reduction for the nine months ended September 30, 2004 was $494, 200 ($0.01 per share) and $104,454 for the period ended September 30, 2003 ($0.00 per share). |
| | | |
| | 2. | Share capital: |
| | | |
| | | The Company is authorized to issue an unlimited number of common shares together with an unlimited number of preferred shares issuable in series. |
| | | |
| | | Common shares issued and outstanding: |
| | | Number of Shares | | Amount | |
| | |
| |
| |
| Balance at December 31, 2003 | | | 34,828,949 | | $ | 42,223,171 | |
| Issued through private placement of flow-through shares | | | 1,320,755 | | | 3,500,000 | |
| Share issue costs | | | - | | | (150,000 | ) |
| Future tax effect of the share issue costs | | | - | | | 52,000 | |
| Exercise of stock options | | | 31,000 | | | 36,730 | |
| Balance September 30, 2004 | | | 36,180,704 | | $ | 45,661,901 | |
| | | In September 2004, the Company issued 1,320,755 common shares on a tax flow-through basis at $2.65 per share for proceeds of $3.5 million. Management and directors subscribed for 25% of the issue. Under the terms of the private placement the Company is committed to expend the proceeds on qualifying exploration drilling and seismic prior to December 31, 2005 and renounce the tax benefits to the subscribers by December 31, 2004. |
| | | Stock-based Compensation Plan |
| | | |
| | | Pursuant to Luke Energy’s Stock Option Plan, the Company was entitled to reserve for issuance and grant stock options to a maximum of 3.3 million shares on a cumulative basis (not to exceed 10% of the issued and outstanding shares on an undiluted basis). Options granted under the plan to-date have a term of five years to expiry. Options vest equally over a three-year period starting on the first anniversary date of the grant. The exercise price of each option equals the market price of the Company’s common shares on the date of the grant. |
| | | |
| | | A summary of the status of the plan at September 30, 2004, and changes during the period ended are presented below: |
| | | | | Weighted | |
| | | | | Average | |
| | | Number | | Exercise | |
| | | of Options | | Price | |
| | |
| |
| |
| Stock options, beginning of period | | | 2,665,000 | | $ | 1.52 | |
| Granted | | | 366,000 | | $ | 2.19 | |
| Exercised | | | (31,000 | ) | $ | 0.81 | |
| Stock options, end of period | | | 3,000,000 | | $ | 1.61 | |
| Exercisable, end of period | | | 667,333 | | $ | 1.48 | |
| | | The following table summarizes information about the stock options outstanding at September 30, 2004: |
| | | | Options Outstanding at | |
| | | | September 30, 2004 | |
| | | |
| |
| | | | | | Weighted | | | |
| | | | | | Average | | Weighted | |
| | | | | | Remaining | | Average | |
| | | | Number | | Contractual | | Exercise | |
| | | | of Options | | Life | | Price | |
| | | |
| |
| |
| |
| Range of exercise prices: | | | | | | | | | | |
| | Less than $1.00 | | | 644,000 | | | 3.39 | | $ | 0.81 | |
| | $1.00 to $2.00 | | | 1,990,000 | | | 3.94 | | $ | 1.77 | |
| | Greater than $2.00 | | | 366,000 | | | 4.81 | | $ | 2.19 | |
| | | | | 3,000,000 | | | 3.93 | | $ | 1.61 | |
| | | The fair value of each stock option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5%, dividend yield of 0%, expected life of 5 years, and volatility of 45%. The fair value of options issued in the nine month period ended September 30, 2004 was calculated at $370,145. |
| | 3. | Supplemental Cash Flow Information: |
| | | |
| | | Amounts actually paid during the period relating to interest expense and capital taxes are as follows: |
| | | | | Nine Months | | | |
| | | Three Months Ended | | Ended | | Period Ended | |
| | | September 30, | | September 30, | | September 30, | |
| | | 2004 | | 2003 | | 2004 | | 2003 | |
| | |
| |
| |
| |
| |
| Interest paid | | $ | - | | $ | - | | $ | - | | $ | 2,680 | |
| Capital taxes paid | | $ | - | | $ | - | | $ | - | | $ | - | |
Corporate Information
Directors Ronald L. Belsher1,2 Calgary, Alberta Mary C. Blue Vice-Chairman Calgary, Alberta David Crevier1,3 Montreal, Quebec Alain Lambert2 Montreal, Quebec Hugh Mogensen1 Chairman Victoria, B.C. Harold V. Pedersen2 President & CEO Calgary, Alberta Lyle D. Schultz3 Calgary, Alberta J. Ronald Woods1,3 Toronto, Ontario 1 Audit & Reserves Committee 2 Compensation Committee 3 Corporate Governance Committee | | Management Harold V. Pedersen President & CEO Mary C. Blue Vice-Chairman Rob E. Wollmann Vice-President, Exploration Kevin Lee Vice-President, Engineering Carrie McLauchlin Vice-President, Finance & CFO Peter W. Abercrombie Vice-President, Land Ruth A. DeGama Manager, Production Services Chris von Vegesack Corporate Secretary Head Office 1200, 520 - 5 Avenue S.W. Calgary, Alberta T2P 3R7 Telephone: (403) 261-4811 Facsimile: (403) 261-4818 Website: www.lukeenergy.com | | Stock Exchange Listing Toronto Stock Exchange Trading Symbol: LKE Registrar and Transfer Agent Valiant Trust Company Calgary, Alberta Telephone: (403) 233-2801 Bankers Bank of Montreal Calgary, Alberta Auditors KPMG LLP Calgary, Alberta Evaluation Engineers Gilbert Laustsen Jung Associates Ltd. Calgary, Alberta Solicitors Burnet, Duckworth & Palmer LLP Calgary, Alberta Colby, Monet, Demers, Delage & Crevier Montreal, Quebec |
