Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
In respect of the 3 months ended March 31, 2007 (the “Reporting Period”)
The following management’s discussion and analysis (“MD&A”) is management’s assessment of the historical financial and operating results of Challenger Energy Corp. (the “Company” or “Challenger”) during the period covered by the consolidated financial statements. This MD&A should be read in conjunction with the interim consolidated financial statements of the Company as at and for the 3 months ended March 31, 2007, and should also be read in conjunction with the audited consolidated financial statements and MD&A for the year ended December 31, 2006. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). All dollar figures included therein and in the following MD&A are quoted in Canadian dollars. The date of this MD&A is May 14, 2007.
Additional information relating to the Company is available on SEDAR at www.sedar.com. Challenger is listed on the TSX Venture Exchange and the American Stock Exchange under the symbol “CHQ”.
FORWARD LOOKING STATEMENTS
This disclosure includes forward-looking information on future production, project start-ups and future capital spending. Actual results or estimated results could differ materially due to changes in project schedules, operating performance, demand for oil and gas, commercial negotiations or other technical and economic factors or revisions. This disclosure also includes certain information and statements about management’s view of future events, expectations, plans and prospects that constitute forward looking statements. These statements are based upon assumptions that are subject to significant risks and uncertainties. As a result of these risks and uncertainties and a variety of factors, the actual results, expectations, achievements or performance may differ materially from those anticipated and indicated by these forward looking statements. Although the Company believes that the expectations reflected in forward-looking statements are reasonable, it can give no assurances that the expectations of any forward-looking statements will prove to be correct.
CORPORATE OVERVIEW
The Company was incorporated on August 6, 2004 pursuant to the provisions of the Canada Business Corporations Act. In February and March, 2006, the Company completed a $19.5 million private placement of 8,644,444 Units priced at $2.25 per Unit. Each unit consisted of one common share and one half of one common share purchase warrant. Each whole warrant was exercisable at a price of $2.75 per share until December 31, 2006, which was extended to February 28, 2007. Of the 4,322,222 whole warrants issued in respect to the February and March, 2006 private placement, 323,512 were exercised and 3,998,710 expired. As at May 14, 2007 there were 32,527,520 common shares outstanding.
Challenger began its natural gas exploration and production business upon incorporation. Its primary emphasis has been on exploration for natural gas offshore Trinidad and Tobago and offshore Nova Scotia. The Company also holds a 10% working interest in a gas producing well in western Canada. During the quarter ended March 31, 2007 the Company did not conduct any exploration activity on its holdings. The Company expects to commence exploration activity (spud date of first exploration well) in Trinidad and Tobago near the end of the second quarter of 2007. The Company earned production revenue in the three months ended March 31, 2007 from its 10% interest in the western Canada well.
Challenger’s business objective for the remainder of the year is to continue to fund its obligations under the participation agreement (the “Participation Agreement”) entered into with Canadian Superior Energy Inc. (“Canadian Superior”) in November, 2004. During the year ended December 31, 2006 the Company exercised its right to participate in the Participation Agreement in respect to Block 5(c), Trinidad and
Tobago. The Company has funded $10.1 million ($8.9 million US) in respect of obligations under the Participation Agreement as at March 31, 2007. Pursuant to the Participation Agreement, Challenger has the right to earn a 25% interest in Canadian Superior’s Block 5(c) revenue share by helping Canadian Superior fund exploration and development of land designated as “Block 5(c)” located offshore Trinidad and Tobago. In order to fully earn its revenue share in Block 5(c), Challenger is required to pay 1/3 of the initial costs and expenses paid by Canadian Superior relating to the initial wells and initial work program prescribed by the production-sharing contract.
OVERALL PERFORMANCE
Three months ended March 31, 2007
For the quarter ended March 31, 2007 Challenger carried on minimal operations and had minimal revenues. As at March 31, 2007 Challenger had working capital of $8.9 million, which reflects cash remaining from the private placement completed in the year ended December 31, 2006 and the exercise of 323,512 warrants at $2.75 per share in the quarter ended March 31, 2007. As at March 31, 2007, the Company has transferred $10.1 million to Canadian Superior as per the Block 5(c) Participation Agreement. The expenses of Challenger during the quarter ended March 31, 2007 related primarily to stock based compensation and professional fees and administration costs related to general corporate purposes and costs incurred in relation to the Company’s pursuit of a listing of its shares for trading on an exchange in the United States. The listing was achieved on the American Stock Exchange and trading began on January 29, 2007.
Challenger intends to continue to exercise its right to participate under the Participation Agreement entered into with Canadian Superior Trinidad and Tobago Ltd. in November, 2004 by funding one-third of the costs incurred on the initial wells and work program for a 25% interest in Canadian Superior’s revenue share.
SELECTED FINANCIAL INFORMATION
| | 3 months ended | | 3 months ended | |
| | March 31, 2007 | | March 31, 2006 | |
| | (unaudited) | | (unaudited) | |
| | | | | |
Total Revenue | | $ | 126,301 | | $ | 118,843 | |
Net (Loss) | | $ | (785,872 | ) | $ | (218,944 | ) |
Per Share basic | | $ | (0.03 | ) | $ | (0.01 | ) |
Per Share diluted | | $ | (0.03 | ) | $ | (0.01 | ) |
| | | | | |
Cash Expenses for the Period | | $ | 279,205 | | $ | 110,108 | |
Stock Option Compensation Expense | | $ | 516,907 | | $ | 400,604 | |
Depletion, Depreciation and Accretion | | $ | 28,109 | | $ | 26,456 | |
Total Expenses for the Period | | $ | 824,213 | | $ | 537,168 | |
Foreign Exchange (Loss) Gain | | $ | (87,960 | ) | $ | 199,381 | |
| | As at | | As at | |
| | March 31, 2007 | | December 31, 2006 | |
| | (unaudited) | | (audited) | |
Total Assets | | $ | 19,859,553 | | $ | 19,342,356 | |
Total Liabilities | | $ | 87,548 | | $ | 209,905 | |
Share Capital | | $ | 17,898,304 | | $ | 16,753,896 | |
Common Shares Outstanding | | 31,767,520 | | 31,344,008 | |
MAJOR TRANSACTIONS AFFECTING FINANCIAL RESULTS
1. On February 28, 2007, 323,512 warrants were exercised at $2.75 per warrant to acquire 323,512 common shares and 3,998,710 warrants expired. These 4,322,222 warrants were issued in February and March of 2006 in connection with a financing priced at Cdn.$2.25 per Unit for gross proceeds of approximately Cdn.$19.5 million. Each Unit consisted of one common share and one half of one common share purchase warrant. Each whole warrant entitled the holder thereof to acquire one Common Share at an exercise price of Cdn.$2.75 per share until December 31, 2006, which was subsequently extended to February 28, 2007.
RESULTS OF OPERATIONS
Revenue
Challenger’s main source of revenue is interest revenue. For the quarter ended March 31, 2007 interest revenue was $98,995, which is a $26,298 increase from first quarter of 2006 due to larger average cash balance in the quarter resulting from the February/March 2006 private placement. Interest revenue is expected to decrease as the Company continues to fund its obligations with respect to the Participation Agreement. Challenger’s net production revenue from its 10% share in the Innisfail well for the quarter ended March 31, 2007 was $27,306, a decrease of $18,840 over the prior year. This is a result of a decrease in average natural gas prices from the first quarter of 2006.
Expenses
The majority of expenses in the three month period ended March 31, 2007 were stock based compensation expenses related to stock options issued and to professional fees and office and administration expenses incurred in connection with administration of the Company. Stock based compensation in the first quarter of 2007 was $516,907, a $116,303 increase over the prior year. This increase is due to an increase in the amount of stock options issued being amortized into expense in the first quarter of 2007 compared to the first quarter of 2006.
Professional fees of $111,840 for the first quarter of 2007 was $62,782 higher than incurred in the first quarter of the previous year, largely due to the Company’s efforts to secure a public stock exchange listing in the United States. Office and Administration costs of $116,880 in the quarter ended March 31, 2007 were $66,452 higher than prior year’s first quarter due to Company’s increased corporate activities. The Company incurred additional costs in payroll and investor communications in fulfilling its public company requirements and activities.
The Company holds a large part of its cash balance in U.S. dollars (as its obligations under the Participation Agreement are due in U.S. dollars) and for the quarter ended March 31, 2007 recorded an unrealized foreign exchange loss of $87,960 reflecting an increase in the value of the Canadian dollar relative to the American dollar. In the quarter ended March 31, 2006, the unrealized foreign exchange gain was $199,381, reflecting a decrease in the value of the Canadian dollar with respect to the American dollar. This gain, in respect to future periods, is subject to change based on fluctuations in the exchange rate between Canada and the United States of America and the balance of the Company’s cash held in U.S. dollars.
LIQUIDITY
As at March 31, 2007 Challenger had cash of $8,912,295 and working capital of $8,943,603. Since inception, the majority of Challenger’s expenses have been paid out of working capital. The Company intends to finance its capital expenditures for the drilling and potential abandonment costs of the first exploration well in Trinidad and Tobago in 2007 primarily through the existing cash resources which it
currently expects to be sufficient. There can be no assurance that additional financing, which will be required for the testing and completion of the first exploration well and will also be required to pay costs for subsequent exploration wells, will be available to the Company in the future or, if it is available, that it will be on terms acceptable to the Company.
Cash Used in Operations
Challenger had minimal natural gas production during the quarter ended March 31, 2007. Established revenue sources are not sufficient to generate cash flow to cover the Company’s administrative and capital expenditure requirements. In addition, interest revenue generated from cash on hand is not sufficient to cover current general and administrative costs. Challenger was, and continues to be, in a use of cash position. The Company expects to remain in a use of cash position as it begins its exploration activities. Cash for exploration activities has been provided from financings and may be provided by additional future financings.
OUTSTANDING SHARE DATA
Challenger is authorized to issue an unlimited number of Common Shares without nominal or par value, of which, as of the date hereof, there are 32,527,520 (Dec. 31, 2006 – 31,344,008) shares outstanding. The shares are fully paid and non-assessable. Challenger also is authorized to issue an unlimited number of preferred shares, issuable in series. In addition, as of the date hereof there are 4,710,000 options and 1,050,000 warrants (Dec. 31, 2005 – 1,800,000 options and 1,500,000 warrants) to purchase Common Shares outstanding.
The following table summarizes the Common Shares issued from December 31, 2005 to the date hereof There are no preferred shares outstanding.
| | Number of | |
| | Common | |
Description | | Shares | |
| | | |
Balance at December 31, 2005 | | 22,599,564 | |
2006 Private Placements of Common Shares | | 8,644,444 | |
Warrants Exercised | | 100,000 | |
Balance at December 31, 2006 | | 31,344,008 | |
Warrants Exercised | | 423,512 | |
Balance at March 31, 2007 | | 31,767,520 | |
Options Exercised | | 510,000 | |
Warrants Exercised | | 250,000 | |
Balance at May 14, 2007 | | 32,527,520 | |
CAPITAL RESOURCES
In the quarter ended March 31, 2007, Challenger increased its capital resources by $422,158. Common Share proceeds of $894,658 were raised as a result of exercising of warrants (see “Major Transactions Affecting Financial Results”), the Company invested $60,903 of its investment towards Block 5 (c) in Trinidad and Tobago, $323,637 was used in the business, largely in connection with its working capital change (decrease in accounts payable and accrual balance from December 31, 2006 to March 31, 2007) and with professional fees and office and administration costs.
In the three months ended March 31, 2006, Challenger increased its capital resources by $18,210,111 as a result of issuance of Units for $17,991,388 (net of issue costs) in a private placement (see “Major
Transactions Affecting Financial Results”). $83,562 was generated in the business, which was largely due to change in working capital, and $64,220 was used in the acquisition of assets.
BUSINESS RISKS
Companies engaged in the oil and gas industry are exposed to a number of business risks, comprised of and including, but not restricted to timing, estimates and/or projections, which may or can be described as business, operational and/or financial risks, many of which are outside of Challenger’s control. More specifically, without restricting the generality thereof, these may be, can be and/or included risks of economically finding reserves and producing oil and gas in commercial quantities, marketing the production, commodity prices and interest rate fluctuations and environmental and safety risks. In order to mitigate these risks, the Company endeavours to participate in projects with companies that employ a base of experienced qualified personnel, including operational, technical and financial personnel, and maintains an insurance program that is consistent with industry standards.
Challenger is dependent upon raising financing from third parties in order to continue it exploration program beyond its first exploration well to spud in the June of 2007. There is no guarantee that such financing will be available on commercially suitable terms or at all. Failure to obtain additional financing would prevent Challenger from actively participating in opportunities.
RELATED PARTY TRANSACTIONS
Mr. Gregory Noval is the Chief Executive Officer and a Director of Canadian Superior and is the Chairman, a Director and a shareholder of Challenger. Mr. Agustin Aparicio is employed by Challenger as the Company’s exploration manager and is also employed by Canadian Superior Energy Inc. as a consultant. Therefore, the agreements between Challenger and Canadian Superior may be considered related party transactions. As at the quarter ended March 31, 2007 Challenger has advanced $10.1 million to Canadian Superior in respect to its one-third share of costs toward the first exploration well, which is expected to spud in June of 2007. For further detail of related party transactions see note 8 to the interim consolidated financial statements for the quarter ended March 31, 2007.
CRITICAL ACCOUNTING ESTIMATES
These financial statements are prepared in conformity with Canadian GAAP, which requires management to make informed judgements and estimates that affect reported amounts of assets and liabilities and disclosure of contingent assets, commitments and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the Reporting Periods.
OUTLOOK
At March 31, 2007 Challenger had positive working capital and sufficient capital resources to cover its expected expenses and projected administrative expenses through the third quarter of 2007. Management is pleased with the success of its 2006 and 2007 to date financings which raised gross proceeds of approximately $21.4 million and the initiation of funding its obligations in respect to Block 5(c) in Trinidad and Tobago under the Participation Agreement with Canadian Superior. Payments aggregating to an amount of $10.1 million as at March 31, 2007 have been made to Canadian Superior. The financings will support the ongoing funding of anticipated obligations for the first exploration well in Trinidad and Tobago during the second and third quarter of 2007 which management expects to be spud in June 2007. Management is optimistic that opportunities for exploration for oil and gas in offshore Trinidad and Tobago will attract further financing for the Company’s growth as required.
