Argent FS Q3 2014 FINAL
Interim Consolidated Financial Statements As at and for the Three and Nine Month Periods Ended September 30, 2014 (Unaudited) C o nt e n t s Interim Consolidated Financial Statements Interim Consolidated Balance Sheets I n t e r i m C o n s o l i d a t e d S t a t e me n t s o f I n c o m e a n d L o s s a n d Comprehensive Income and Loss I n t e r i m C o n s o l i d a t e d S t a t e me n t o f C h a n g e s i n E q u i t y I n t e r i m C o n s o l i d a t e d S t a t e me n t o f C a s h F l o w s N o t e s t o t h e I n t e r i m C o n s o l i d a t e d F i n a n c i a l S t a t e me n t s
2 3 4 5 6-20
I NTERIM C ONSOLIDATED B ALANCE S HEETS (in thousands of Canadian dollars) (unaudited)
As at,
Note
December 31, 2013
Septem ber 30, 2014
January 1, 2013
Assets Current assets Cash
$
Trade and other receivables Risk management
5
Prepaid expenses and deposits
1,554
$
1,014
$
1,766
19,457
18,007
12,394
2,569
-
56
1,406
1,212
439
24,986
20,233
14,655
Risk management
5
299
521
-
Oil and gas properties
6
541,835
644,266
466,658
Exploration and evaluation assets
7
4,430
44,801
66,762
3,409
2,586
400
Property and equipment Total assets
$
574,959
$
712,407
$
548,475
$
30,599
$
31,185
$
27,834
Liabilities Current Liabilities Trade and other payables Distributions payable
1,270
5,289
4,232
Current portion of deferred land payment
7,840
6,382
4,976
Risk management
5
-
2,566
375
Current portion of unit based compensation
8
1,092
3,574
1,241
-
-
25,900
Forw ard purchase contract Current portion of decommissioning liability
1,035
1,079
-
41,836
50,075
64,558
81,244
34,282
Credit facility
9
121,142
Risk management
5
727
270
750 12,093 1,034
Deferred land payment Unit based compensation Convertible debentures
-
7,129
8
297
2,621
10
108,064
144,879
-
23,278
20,930
13,948
295,344
307,148
126,665
571,132
555,477
442,075
(94,447)
(70,732)
(14,566)
(262,443)
(92,931)
(5,703)
65,373
13,445
4
279,615
405,259
421,810
Decommissioning liability
Unitholders' equity Trust capital Accumulated distributions Deficit Other comprehensive income
11
Total liabilities & unitholders' equity $ 574,959 The notes are an integral part of the interim consolidated financial statements.
$
712,407
$
548,475
Commitments - see note 15 Subsequent events - see note 17
2
ARGENT ENERGY TRUST AS TO N H ILL F INANCIAL
I NTERIM C ONSOLIDATED S TATEMENTS OF L OSS AND C OMPREHENSIVE L OSS (in thousands of Canadian dollars, except per unit amounts) (unaudited)
For the three m onth period ended Note
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014
(restated, note 3) Oil and gas sales
$
less: Royalties
49,680
$
42,151
September 30, 2013
September 30, 2014
(restated, note 3) $
143,466
$
110,210
(10,957)
(9,904)
(31,467)
(26,419)
Net oil and gas revenue
38,723
32,247
111,999
83,791
Operating expenses
10,805
7,983
34,606
22,929
46
-
4,177
2,178
3,504
4,436
13,330
11,019
Ad valorem tax General and administrative expenses Unit based compensation expense (recovery)
Impairment Exploration and evaluation
2,272
(3,455)
7,529
33,335
12,930
75,177
33,191
156,053
-
156,053
-
4,610
(176)
Depreciation, depletion and amortization 6,7 7
Acquisition and divestiture expense
8,997
5,052
13,731
(13)
339
301
367
Foreign exchange loss (gain)
5
(12,058)
6,062
(12,911)
(8,457)
Risk management loss (gain)
5
(14,217)
5,160
1,022
2,190
Change in fair value of convertible debenture
10
(2,257)
(1,940)
Finance expense
12
3,754
1,971
Gain on exercise of convertible debentures Gain on sale of oil and gas properties
6
Income tax expense (recovery) $
7,650
-
(387)
-
(2,418)
-
(2,418)
-
26
Loss for the period
11,035
(3,512)
(387)
(141,858)
Loss before taxation
131
(141,884) $
(15,963)
(169,714)
23
(202)
(15,986) $
(169,512) $
(5,024)
73 (5,097)
Other comprehensive income (loss), net of tax items Change in fair value of convertible debenture
12
17,102
(2,371)
36,445
(3,943)
5
13,825
(6,325)
15,483
4,602
Item that may be reclassified subsequently to income Foreign currency translation gain (loss) Total comprehensive loss for the period
$
(110,957) $
(24,682) $
(117,584) $
(4,438)
Loss per unit Basic
13
$
(2.24) $
(0.29) $
(2.71) $
(0.10)
Diluted
13
$
(2.24) $
(0.29) $
(2.71) $
(0.13)
The notes are an integral part of the interim consolidated financial statements.
3
ARGENT ENERGY TRUST
I NTERIM C ONSOLIDATED S TATEMENTS OF C HANGE IN E QUITY (in thousands of Canadian dollars, except per unit amounts) (unaudited)
Note
Other Total Comprehensive Accumulated Accumulated Unitholders' Income Deficit Equity Trust Capital Distributions
Number of Trust Units 48,438
Balance at December 31, 2012
$ 442,075
$
4
Loss for period
-
-
-
Other comprehensive income
-
-
659
Total comprehensive income
-
-
663
$
(5,703) $ (5,097)
(14,566) $ 421,810 -
-
-
(10,800)
-
(5,097) 659 (4,438)
Reinvested distributions
2,386
23,223
-
-
-
23,223
Issue of Trust Capital
8,160
83,232
-
-
-
83,232
(4,594)
-
-
-
(4,594)
Trust unit issuance costs
-
-
Balance at September 30, 2013
Unitholder distributions
58,984
$ 543,936
$
663
$
(10,800) $
-
(55,001) $ 478,798
Balance at December 31, 2013
60,448
$ 555,477
$
13,445
$
(92,931) $
(70,732) $ 405,259
-
Loss for the period
-
-
-
Other comprehensive income
-
-
51,928
Total comprehensive income
-
-
65,373
3,005
15,542
-
36
113
-
-
-
-
-
63,489
$ 571,132
Reinvested distributions Convertible debentures exercised Unitholder distributions Balance at September 30, 2014
11
$
65,373
(40,435)
(169,512)
(40,435)
-
(169,512)
-
51,928
-
(117,584)
-
-
15,542
-
-
113
(262,443)
(23,715)
$ (262,443) $
(23,715)
(94,447) $ 279,615
The notes are an integral part of the interim consolidated financial statements.
4
ARGENT ENERGY TRUST
I NTERIM C ONSOLIDATED S TATEMENTS OF C ASH F LOW (in thousands of Canadian dollars, except per unit amounts) (unaudited)
For the three m onth period ended Note
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014
September 30, 2013
Septem ber 30, 2014
Operating Activities Loss for the period
$
(141,884) $
(15,986) $
(169,512) $
(5,097)
Adjustments for non-cash items: Finance expense
12
Depreciation, depletion and amortization Impairment Exploration expense Unit based compensation Gain on sale of oil and gas assets
6
Gain on exercise of convertible debentures Unrealized risk management loss (gain)
5
Unrealized loss (gain) on convertible debentures 10 Unrealized foreign exchange loss (gain) Cash provided by operating activities, before change in non-cash w orking capital Change in non-cash w orking capital
14
Net cash provided by operating activities
3,754
1,971
11,035
7,650 33,191
33,335
12,930
75,177
156,053
-
156,053
-
4,586
8,997
5,028
13,731 7,529
(176)
2,272
(3,455)
(2,418)
-
(2,418)
-
(387)
-
(387)
-
(15,053)
4,014
(4,469)
623
(2,257)
(1,940)
(11,595)
6,106
(12,568)
(3,512) (8,411)
23,958
18,364
54,615
45,704
(2,775)
(4,688)
(2,196)
21,183
13,676
52,419
131
(706) 44,998
Investing Activities Purchase of property and equipment
(45)
(287)
(1,394)
(589)
Additions to oil and gas properties
6
(7,028)
(35,674)
(63,454)
(87,747)
Additions to exploration and evaluation assets
7
(84)
(324)
(139)
(753)
(45,707)
(675)
(45,707)
Acquisitions, net of cash acquired
-
Deferred land payment
-
Forw ard purchase contract Proceeds on sale of oil and gas assets
-
-
(5,042)
(6,404)
(30,758)
(30,758)
-
6
10,673
-
10,673
-
Proceeds on disposition of property and equipment
1
-
12
-
Change in non-cash w orking capital
14
Net cash used in investing activities
(12,409)
(532)
(5,483)
(8,892)
(113,282)
(66,864)
4,731 (165,865)
Financing Activities Proceeds from issuance of trust units
-
83,232
-
83,232
Trust unit issue costs
-
(4,602)
-
(4,594)
Facility fees
(145)
(187)
Proceeds from convertible debentures
(277)
(536)
-
-
-
86,250
Proceeds from credit facilities
9
9,430
86,886
55,869
140,022
Repayment of credit facilities
9
(17,355)
(68,179)
(20,975)
(158,818)
(1,097)
(256)
(7,223)
(4,942)
(3,521)
(3,722)
(12,193)
(16,283)
(202)
(1)
(929)
Finance expense paid Distributions paid Change in non-cash w orking capital
14
-
Net cash (used) provided by financing activities
(6,594)
(439)
Effect of exchange rates on cash
(29)
42
Cash, beginning of period Cash, end of period
93,012
(12,730)
Change in cash
11,224
1,951 $
1,554
$
4,601
$
14,941
123,661
496
2,794
44
41
1,014
1,766
1,554
$
4,601
The notes are an integral part of the interim consolidated financial statements.
5
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1. R e p or t i n g e n t i ty Argent Energy Trust (the "Trust" or “Argent”) is an unincorporated open-ended limited purpose trust established under the laws of the Province of Alberta on January 31, 2012. The strategy of the Trust is to acquire non-Canadian oil and gas assets in order to generate returns for its unitholders. The Trust intends to make monthly distributions of a portion of its available cash to unitholders and will reinvest remaining cash into its subsidiaries for the purposes of acquiring non-Canadian oil and gas assets, and investing in capital expenditures. Cash flow is generated by the Trust through the oil and gas assets owned and operated by the subsidiaries of the Trust. The head office, principal address and registered and records office of the Trust are located at Suite 500, 321 - 6th Avenue SW, Calgary, Alberta, T2P 3H3. Pursuant to the terms of an Administrative Services Agreement, Argent Energy Ltd. (the "Administrator"), a corporation formed under the laws of the Province of Alberta on June 9, 2011, is the Administrator of the Trust and performs all general and administrative services that are or may be required or advisable, from time to time, for the Trust. 2. B a si s of p r e p a r a t i o n Statement of compliance
The consolidated financial statements were authorized for issue in accordance with a resolution of the Board of Directors on November 11, 2014. These consolidated interim financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards (“IFRS”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”) as issued by the International Accounting Standards Board applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. The Trust has applied the same accounting policies as the annual audited IFRS consolidated financial statements for the year ended December 31, 2013, except for income tax expense for an interim period which is based on an estimated average annual effective income tax rate. The accounting policies applied in these consolidated financial statements are based on IFRS effective as of January 1, 2014. The consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2013, which have been prepared in accordance with IFRSs as issued by the IASB. These interim consolidated financial statements are presented in Canadian dollars (“CDN”), which is the Trust’s functional currency. All financial information is rounded to the nearest thousands, except per unit amounts and where otherwise indicated. The preparation of interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The key sources of estimation uncertainty were the same as those that applied to the consolidated financials for the year ended December 31, 2013. 3. S i g ni f i c a n t a c c o u n ti n g p ol i c i e s The accounting policies are consistent with those of the previous financial year except for the following retrospective adoption effective as of January 1, 2014.
6
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
3. S i g ni f i c a n t a c c o u n ti n g p ol i c i e s ( c o n ti n u e d ) Retrospective application of change in accounting policy: IFRIC 21 - Levies
International Financial Reporting Interpretation Committee (“IFRIC”) 21 Levies (“IFRIC 21”) clarified that an entity recognizes a liability for a levy when the activity that triggers payment occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarified that no liability should be anticipated before the minimum threshold is reached. The effect of the retrospective application of this policy on the three and nine month periods ended September 30, 2013 was a decrease of $0.6 million and an increase of $0.6 million, respectively, in loss due to the ad valorem taxes for the full fiscal year being required to be accrued in the first quarter results under IFRIC 21 instead of being accrued on a quarterly basis under the Trust’s previous policy. The retrospective application of the policy had no effect on the comparative balance sheets of December 31, 2013 and January 1, 2013. Future accounting changes: changes : IFRS 15 – Revenue from Contracts with Customers
In May 2014, IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 is effective for periods beginning on or after January 1, 2017 and is to be applied retrospectively. IFRS 15 clarifies the principles for recognizing revenue from contracts with customers. The Trust intends to adopt IFRS 15 in its financial statements for the annual period beginning January 1, 2017. The extent of the impact of adoption of IFRS 15 has not yet been determined. 4. D e t e r mi n a t i o n of f a i r v al u es The following table summarizes the fair value measurement information for financial assets and liabilities recorded: Carrying Amount
Septem ber 30, 2014 Risk Management (net position)
$
Convertible debentures $
December 31, 2013 Risk Management (net position)
$
Convertible debentures $
January 1, 2013 Risk Management (net position)
Fair
2,141
Fair value m easurem ents using
Value $
2,141
Level 1 $
-
Level 2 $
(108,064)
(108,064)
(108,064)
(105,923) $
(105,923) $
(108,064) $
Carrying
Fair
Amount
Value
(2,315) $
Level 1
(2,315) $
-
$
(147,194) $
(147,194) $
(144,879) $
Fair
2,141
$
Level 2
(144,879)
Value
-
-
Fair value m easurem ents using
(144,879)
Amount
Level 3 $
-
(144,879)
Carrying
2,141
Level 3
(2,315) $
-
-
-
(2,315) $
-
Fair value m easurem ents using Level 1
Level 2
Level 3
$
(1,069) $
(1,069) $
-
$
(1,069) $
-
$
(1,069) $
(1,069) $
-
$
(1,069) $
-
All assets in the above table are recurring items in the Trust’s financial statements.
7
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
4. D e t e r mi n a t i o n of f a i r v al u es ( c o n t i n u e d ) Level 1 Fair Value Measurements Level 1 fair value measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of the convertible debentures is determined based on their closing price on the Toronto Stock Exchange. Level 2 Fair Value Measurements Level 2 fair value measurements are based on inputs other than quoted prices within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 financial instruments have been valued indirectly through calculations based on market information. The Trust’s derivative contracts are measured based on quotes from the Trust's counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates. Level 3 Fair Value Measurements Level 3 fair value measurements are based on models using significant unobservable inputs. 5. F i n a n ci a l r i s k m a n a g e m e n t Overview:
The Trust’s activities expose it to a variety of financial risks that arise as a result of its operating, investing, and financing activities such as: •
Credit risk;
•
Liquidity risk;
•
Market risk;
•
Interest rate risk; and
•
Foreign exchange risk.
This note presents information about changes in the Trust’s exposure to each of the above risks since the year ended December 31, 2013.
8
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) Liquidity risk:
The following are the contractual maturities of financial liabilities including estimated interest payments as at September 30, 2014: As at Septem ber 30, 2014
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability Convertible debentures - principal - interest (i) Credit Facility - principal (ii)
- interest Deferred land payment
$ As at Decem ber 31, 2013
30,599
$
30,599
727
727
108,064
149,250
2,318
39,128
121,142
121,142
$
30,599
$
-
-
$
-
$
-
727
-
-
-
-
149,250
-
9,270
9,270
20,588
-
-
121,142
-
-
525
9,013
525
8,488
-
-
7,840
7,840
7,840
-
-
-
271,215
$
357,699
$
48,234
$
139,627
$
169,838
$
-
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability Convertible debentures - principal - interest
(i)
Credit Facility - principal - interest (ii) Deferred land payment
31,185
$
As at January 1, 2013
$
31,185
$
-
$
-
$
-
2,836
2,566
270
-
-
144,879
149,250
-
-
149,250
-
-
43,763
9,270
9,270
25,223
-
81,244
81,244
-
81,244
-
-
350
4,291
350
3,941
-
-
13,511 $
31,185
2,836
274,005
13,827 $
326,396
6,382 $
49,753
7,445 $
102,170
$
174,473
$
-
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability
$
1,125
27,834
$
27,834
1,125
375
$
-
$
750
-
$
-
-
Forw ard purchase contract
25,900
29,847
29,847
-
-
-
Credit Facility - principal
34,282
34,282
-
34,282
-
-
72
2,528
72
2,456
-
-
- interest (ii) Deferred land payment
17,069 $
(i) (ii)
9
27,834
106,282
17,909 $
113,525
4,976 $
63,104
12,933 $
50,421
$
-
$
-
Calculated based on the interest rate and repayment schedule Based on interest rate data available as at the financial reporting dates and an estimated repayment date of August 12, 2016
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) At September 30, 2014, the Trust had a working capital deficit of $16.9 million (December 31, 2013 - $29.8 million, January 1, 2013 – $49.9 million). The Trust had undrawn availability under its committed credit facility of approximately $57.1 million (December 31, 2013 - $83.0 million, January 1, 2013 - $59.2 million) providing sufficient liquidity to fund its obligations. The credit facility was renewed on June 30, 2014 and in conjunction with the renewal, the maturity date was extended to August 12, 2016. The next redetermination date was set as of October 31, 2014 but has now been extended to November 28, 2014. The lending syndicate has the ability to revise the credit facility limit as part of their redetermination process. Any significant change in the borrowing base by the lenders may adversely impact the liquidity position of the Trust. There can be no assurance provided at this time about the final credit facility limit which will be redetermined by the lending syndicate on November 28, 2014. If the credit facility limit is reduced by US$20 million (CDN$22.4 million), the undrawn credit facility limit of US$51.0 million (CDN$57.1 million) as of September 30, 2014, would be reduced to US$31.0 million (CDN$34.7 million). Under that scenario management believes that there would continue to be sufficient liquidity to fund the Trust’s obligations and compliance with its financial covenants. Market risk:
Commodity Price Risk As at September 30, 2014, the Trust has entered into the following financial contracts to mitigate the effects of fluctuating prices on a portion of its production as follows: Commodity Costless collars
Volume
Measure
Beginning
Term
Floor US$
Ceiling US$
(i)
WTI
Oil
300
bbl/d
Oct-14
Dec-14
90.00/bbl
91.70/bbl
WTI
Oil
200
bbl/d
Oct-14
Dec-14
90.00/bbl
94.65/bbl
Term
Fixed US$
Commodity
Volume
Measure
Beginning
Fixed contract sw aps WTI (ii)
Oil
1,000
bbl/d
Oct-14
Dec-14
92.29/bbl
BRENT (ii)
Oil
100
bbl/d
Oct-14
Dec-14
104.50/bbl
LLS (ii) NYMEX (iii)
Oil
1,000
bbl/d
Oct-14
Dec-14
99.65/bbl
Natural gas
7,000
MMBtu/d
Oct-14
Dec-14
4.09/MMBtu 91.11/bbl
WTI (ii)
Oil
800
bbl/d
Jan-15
Dec-15
LLS (ii)
Oil
1,200
bbl/d
Jan-15
Dec-15
92.63/bbl
NYMEX (iii)
Natural gas
6,000
MMBtu/d
Jan-15
Dec-15
4.12/MMBTU
NYMEX (iii)
Natural gas
4,000
MMBtu/d
Jan-16
Dec-16
4.06/MMBTU
Commodity
Volume
Measure
Term
Fixed US$
Sold (w rote) call options WTI Call
Oil
200
bbl/d
Jan-15
Dec-15
95.60/bbl
WTI Call
Oil
600
bbl/d
Jan-16
Dec-16
91.40/bbl
WTI Call
Oil
200
bbl/d
Jan-16
Dec-16
90.25/bbl
(i) (ii) (iii) (iv)
10
Beginning
(iv )
Represents costless collar transactions created by buying puts and selling calls (WTI or BRENT reference prices). Represents fixed price financial swap transactions with a set forward sale oil reference prices that are based on West Texas Intermediary (“WTI”), Brent or Louisiana Light Sweet (“LLS”) oil. Represents fixed price financial swap transactions based on the NYMEX natural gas forward sale reference price. Represents the selling of call options, giving the counter party the right (but not obligation) on December 31 of the year preceding the contract term to enter into fixed price financial swap transactions with a set forward sales reference price.
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) The following table summarizes the Trust’s net risk management position: December 31, 2013
Septem ber 30, 2014 Short term asset
$
2,569
Long term asset
$
-
$
2,141
(375)
(270)
(727)
Net risk management asset (liability)
-
(2,566)
-
Long term liability
56
521
299
Current liability
January 1, 2013 $
$
(750)
(2,315) $
(1,069)
The total fair value of the Trust’s unrealized risk management positions at September 30, 2014, was a net asset of $2.1 million (December 31, 2013 - $2.3 million, January 1, 2013 - $1.1 million) and has been calculated using both quoted prices in active markets and observable market-corroborated data. For the three and nine months ended September 30, 2014, risk management gains and losses were comprised of the following: For the three m onth period ended September 30, Septem ber 30, 2013 2014 Unrealized risk management loss (gain)
$
Realized risk management loss (gain) Risk management loss (gain)
$
(15,053) $
4,014
836
1,146
(14,217) $
5,160
For the nine m onth period ended September 30, Septem ber 30, 2013 2014 $
(4,469) $
$
1,022
623 1,567
5,491 $
2,190
A $1 per bbl increase in the market price of oil would have resulted in a decrease of income (loss) of approximately $0.8 million (2013 - $1.6 million) due to a change in unrealized risk management loss (gain) as a result of a change in the fair value of the Trust’s risk management position at September 30, 2014. At September 30, 2014, a $0.25 per mcf increase in the market price of gas would have resulted in decrease of income (loss) of approximately $1.1 million (2013 - $1.1 million), respectively, due to a change in the unrealized risk management loss (gain). Securities price risk The Trust’s convertible debentures are subject to securities price risk as they are traded on a public exchange. As at September 30, 2014, had the securities price of the convertible debentures increased or decreased by 1%, the income (loss) would have decreased or increased by approximately $1.1 million (2013 - $0.9 million). Foreign exchange risk: risk :
The Trust has entered into a number of CDN$/US$ forward swap contracts on US $1.0 million per month from October to December 2014 at an average rate of US $1.00 = CDN $1.11.
11
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) The average exchange rate for the nine month period ended September 30, 2014 was US $1 equal to $1.0942 (2013 – US $1 equal to $1.0236). A $0.01 increase (decrease) in the value of CDN$ versus US$ on September 30, 2014 would have decreased (increased) income (loss) by approximately $2.3 million (2013 - $2.5 million) due to the unrealized foreign exchange loss (gain) from the Trust’s inter-company loan to its US subsidiary of approximately US$213 million. Under IFRS, this inter-company loan is not part of the net investment in the subsidiary and any period end foreign exchange translation adjustment is required to be recorded in income or loss. This analysis assumes that all other variables, in particular interest rates, remain constant. The foreign exchange gain and loss recorded for the three and nine months ended September 30, 2014 was composed of the following: For the three m onth period ended Septem ber 30, 2014 Unrealized foreign exchange loss (gain)
$
Realized foreign exchange loss (gain) Foreign exchange loss (gain)
(11,595) $ (463)
$
(12,058) $
For the nine m onth period ended
September 30, 2013 6,106
Septem ber 30, 2014 $
(44) 6,062
(12,568) $ (343)
$
(12,911) $
September 30, 2013 (8,411) (46) (8,457)
The foreign currency translation gain of $13.8 million (2013 – loss of $6.3 million) and gain of $15.5 million (2013 – gain of $4.6 million) recorded in other comprehensive income for the three and nine months ended September 30, 2014, is unrealized. Under IFRS, this foreign exchange loss (gain) is part of the net investment in the subsidiary and is required to be recorded in other comprehensive income.
12
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
6. O i l a n d g a s pr o p e r t i e s Septem ber 30, 2014 December 31, 2013 Cost: Opening balance
$
Revision to estimates on decommissioning assets Additions to decommissioning assets Acquired in business
combination (i)
Additions Transferred from exploration and evaluation Sale of oil and gas assets
(ii)
Foreign exchange adjustment Closing balance
$
786,961
475,148
1,534
2,059
113
616
675
152,632
63,454
103,389
1,057
13,382
(9,660)
39,735
42,874 $
887,008
$
$
142,695
$
786,961
Accumulated depletion and Impairment: Opening balance Depletion Impairment Sale of oil and gas assets
60,131
119,392
69,266 -
(760)
Foreign exchange adjustment
8,490
74,545
4,808
9,301 $
345,173
$
142,695
Opening balance
$
644,266
$
466,658
Closing balance
$
541,835
$
644,266
Closing balance Carrying amounts:
(i)
Relates to purchase price adjustments of acquisitions completed in prior year.
(ii)
Relates to certain oil and gas properties located in Kansas which were sold for proceeds of $10.7 million leading to a gain on sale of $2.4 million for the three and nine months ended September 30, 2014.
As at September 30, 2014, the Trust recognized an impairment loss of $119.4 million, as follows: Cash Generating Unit "CGU" Eagle Ford and Austin Chalk
Septem ber 30, 2014 $
100,240
South Texas Gas
16,576
Kansas/Colorado
2,576
Total
$
119,392
The impairment on the Trust’s Eagle Ford and Austin Chalk CGU, which includes the production payment, was a result of utilizing a lower future oil price deck in the reserve calculations, widening basis differentials as well as technical revisions due to mechanical failure of two well bores and performance related issues primarily from the Trust’s Eagle Ford wells as well as the third party operated production payment. The Trust recorded an impairment on its South Texas Gas CGU and Kansas/Colorado CGU which were primarily a result of utilizing a lower future oil and gas price deck in the reserve calculations.
13
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
6. O i l a n d g a s pr o p e r t i e s ( c o nt i n u e d ) The impairment losses recognized were the difference between the carrying amount of each CGU and their fair value less costs of disposal. The fair value less costs of disposal was calculated using a discounted cash flow model based on the proved plus probable reserves using forecast oil prices and an after-tax discount rate of 9.0% and 9.5%, respectively, for the Eagle Ford and Austin Chalk CGU and South Texas Gas CGU, and a discount rate of 10% with zero tax rate for the Kansas/Colorado CGU (as this asset would be targeted by market participants which are zero tax entities). The cash flow model used is considered a level 3 fair value technique. The recoverable amount of the Eagle Ford and Austin Chalk CGU was calculated as $99.1 million and the recoverable amount of the South Texas Gas and Kansas/Colorado CGUs were calculated as $54.6 million and $37.8 million, respectively. A change of 0.5% in the discount rates for these three CGUs would result in a corresponding change in impairment expense of approximately $5.7 million. The fair value less costs of disposal calculation assumes the following forecast WTI oil sales prices in US$/bbl: 2015 $
(i)
92.50
2016 $
95.00
2017 $
95.00
2018 $
97.50
2019 $
97.50
2021 (1)
2020 $
98.54
$
100.51
+ 2% per year thereafter
7. E x pl o r a t i o n a n d e v al u a t i o n a s s et s Septem ber 30, 2014 Opening balance
$
Additions Acquired in business combination Additions related to forw ard purchase contract Impairment
44,801
December 31, 2013 $
66,762
139
906
-
3,137
-
4,061 -
(36,661)
Transferred to oil and gas properties
(1,057)
(13,382)
Expense associated w ith lease expiries
(5,028)
(20,430)
2,236
3,747
Foreign exchange adjustment Closing balance
$
4,430
$
44,801
During the three and nine months ended September 30, 2014, the Trust expensed $4.6 million (2013 - $9.0 million) and $5.0 million (2013 - $13.7 million), respectively, of exploration and evaluation assets related to leases that expired or are near expiry with no intention to renew. During the three and nine months ended September 30, 2014, the Trust recorded a $36.7 million (2013 - $nil) impairment charge related to leaseholds located in the Eagle Ford Shale and Buda formation. This non-cash impairment charge arose due to the downward revision of reserves associated with the Eagle Ford CGU, resulting in reduced prospectivity of the leasehold and substantive expenditure for further exploration in this area is not
planned.
14
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
8. U n i t b a s e d c o m p e n s a t i o n The Trust’s unit based compensation comprises the following: Septem ber 30, 2014 Short term Restricted trust units
$
Phantom unit rights
510
Long term $
582 $
1,092
69
Total $
228 $
297
579 810
$
1,389
$
3,365
Decem ber 31, 2013 Short term Restricted trust units
$
Phantom unit rights
1,952
Long term $
1,622 $
3,574
1,413
Total
1,208 $
2,621
2,830 $
6,195
January 1, 2013 Short term Restricted trust units
$
Phantom unit rights
$
470 $
a)
771
Long term
1,241
643
Total $
391 $
1,034
1,414 861
$
2,275
Restricted trust units (“RTUs”) Units
For the nine month period ended September 30, 2014 Outstanding, beginning of period
(in thousands) 771
Granted
42
Forfeited
(293)
Exercised Accumulated distributions
(195) (1)
74 399
(1) Grants based on accumulated distributions on unvested unit grants. As at September 30, 2014, no RTUs were vested that remained unexercised. All units had a fair value of $1.97 per unit as at September 30, 2014.
15
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
8. U n i t b a s e d c o m p e n s a t i o n ( c o n t i n u e d ) b)
Phantom unit rights (“PURs”) Units
For the nine month period ended September 30, 2014
(in thousands)
Outstanding, beginning of period
706
Granted
365
Forfeited
(222)
Exercised Accumulated distributions
(186) (1)
92 755
(1) Grants based on accumulated distributions on unvested unit grants. As at September 30, 2014, PURs were vested that remained unexercised. All units had a fair value of $1.97 per unit as at September 30, 2014. 9. C r e d i t f a c i l i t y
For the nine month period ended September 30, 2014 Opening balance
$
81,244
Draw dow ns
55,869
Repayments
(20,975)
Facility fees incurred
(536)
Accretion of facility fees
471
Foreign exchange adjustment Closing balance
5,069 $
121,142
As at September 30, 2014, the Trust had US$109.0 million (CDN$122.1 million) outstanding under its US$160 million (CDN $179.2 million) credit facility and had an undrawn credit limit of US$51.0 million (CDN$57.1 million). The borrowing base of the credit facility is subject to semi-annual redetermination by the lenders. The credit facility was renewed on June 30, 2014 and in conjunction with the renewal, the maturity date was extended to August 12, 2016. The next redetermination date is November 28, 2014. The Trust may, at its option, borrow at a US base rate, Canadian prime rate, or at a Libor or bank acceptance rate plus applicable margin. The weighted average interest rate at September 30, 2014 was 3.70% (December 31, 2013 – 2.47%, January 1, 2013 – 4.34%). This credit facility contains a financial covenant, summarized as: (1) The Trust shall not make any distributions if the aggregate amount of any distribution and on account of subordinated debt, that are paid in cash, exceeds 115% of the available Annualized Cash Flow, as adjusted for major acquisitions, related to the reporting period; (2) The Trust shall not make any distributions if the principal amount outstanding under the credit facility is greater than 90% of the total commitment under the credit facility.
16
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
9. C r e d i t f a c i l i t y ( c o n t i n u e d ) Annualized Cash Flow means, for any period and as determined in accordance with IFRS on a consolidated basis, the cash flow from operations of the Trust, and allowing on a proforma basis for the cash flow from the beginning of such period from any material acquisition, less, without duplication, any mandatory capital expenditure requirements as provided in the "proved developed producing reserves schedule'" of the then current engineering reserve report to be made or which the Trust has made or legally committed to make in the ordinary course of business. Major acquisition means an acquisition of shares or other assets which increases the consolidated net assets (excluding current assets) of the Trust, as shown on the most current consolidated financial statements of the Trust, by more than ten percent (10%) of the borrowing base. The Trust was in compliance with this financial covenant as at September 30, 2014. 1 0. C o n v er t i bl e d e b e n t ur e s The following table outlines the changes in the convertible debentures for the nine months ended September 30, 2014: Amount Balance at December 31, 2013
$
Change in fair value due to change in credit risk
144,879 (36,445)
Change in fair value due to change in market risk
131
Convertible debentures exercised
(501)
Balance at Septem ber 30, 2014
$
108,064
The fair value of the convertible debentures on September 30, 2014, was $108.1 million (December 31, 2013 $144.9 million, January 1, 2013 - $nil) based on the September 30, 2014 closing price of the convertible debentures on the Toronto Stock Exchange. The face value of the convertible debentures at September 30, 2014 is $148.75 million (December 31, 2013 - $149.25 million). 1 1. T r u s t c a p i t a l Trust units outstanding outstanding Number of units
Amount
(in thousands) Balance December 31, 2013 Distribution reinvestment plan
60,448 $ (1)
Convertible debentures exercised Balance Septem ber 30, 2014
3,005 (2)
36 63,489 $
555,477 15,542 113 571,132
(1) During the nine month period ended September 30, 2014, the Trust issued 3.0 million units at a weighted average price of $5.17 per unit for total gross proceeds of $15.5 million under the Trust’s premium distribution and distribution reinvestment plan (the “DRIP Plan”). (2) During the nine month period ended September 30, 2014, the Trust issued 36,000 units related to the exercise of $0.5 million of convertible debentures exercisable at $13.90 per unit. The units issued had a market value of $3.14 per unit at the time of exercise.
17
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 2. Fi n a n c e e x p e n s e For the three m onth period ended
Accretion on deferred land obligation Accretion on decommissioning obligations Accretion of facility fees on revolving loan
$
Total accretion
-
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014 $
142
September 30, 2013
Septem ber 30, 2014 $
328
$
420
177
115
549
281
108
88
471
339
285
345
1,348
1,040
Interest on term credit facility
1,146
271
2,729
1,199
Interest on convertible debentures
2,323
1,353
6,958
1,651
Convertible debentures issuance costs Net finance expense
2
$
3,754
$
1,971
3,760
$
11,035
$
7,650
1 3. L o s s p e r u n i t Basic loss per unit is calculated as follows: For the three m onth period ended Septem ber 30, 2014 Loss for the period
$
Issued trust units at beginning of the period
(141,884) $
September 30, 2013 (15,986) $
For the nine m onth period ended Septem ber 30, 2014 (169,512) $
September 30, 2013 (5,097)
63,337
49,778
60,448
48,438
Effect of exercise of convertible debentures
33
-
11
-
Effect of unit issuances
42
4,609
2,059
2,260
63,412
54,387
62,518
50,698
Weighted average number of units - Basic Basic loss per unit
$
(2.24) $
(0.29) $
(2.71) $
(0.10)
Diluted loss per unit is calculated as follows: For the three m onth period ended Septem ber 30, 2014 Loss for the period
$
Net income effect from convertible debentures
$
Weighted average outstanding units - Basic Effect convertible debentures Weighted average number of units - Diluted Diluted loss per unit
(141,884) $
$
(141,884) $
September 30, 2013 (15,986) $ (15,986) $
For the nine m onth period ended Septem ber 30, 2014 (169,512) $ (169,512) $
September 30, 2013 (5,097) (1,860) (6,957)
63,412
54,387
62,518
50,698
-
-
-
2,324
63,412
54,387
62,518
53,022
(2.24) $
(0.29) $
(2.71) $
(0.13)
For the three and nine month periods ended September 30, 2014, the dilutive effect of convertible debentures, RTUs, and reinvested distributions were not included in the calculation of diluted income (loss) per share as their effect was anti-dilutive.
18
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 4. S u p pl e m e n t al c a s h f l ow i n f o r m a t i o n Changes in non-cash working capital from operating activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Trade and other receivables
$
1,770
$
(2,576) $
(500) $
(5,828)
Prepaid expenses and deposits
(300)
(763)
(131)
(895)
Unit based compensation paid
(505)
(3,686)
(1,471)
(3,686)
Decomissioning obligations
(461)
Trade and other payables
2,337
(3,279) $
(2,775) $
(4,688) $
-
(461)
9,703
367 (2,196) $
(706)
Changes in non-cash working capital from investing activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Accounts receivable
$
Trade and other payables $
-
$
(358) $
-
$
1,604
(12,409)
(174)
(5,483)
3,127
(12,409) $
(532) $
(5,483) $
4,731
Changes in non-cash working capital from financing activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Trade and other payables
$
-
$
(202) $
(1) $
(929)
1 5. C om mi t m e n t s Operating lease rentals are payable as follows:
As at, Less than one year
$
794
$
249
Betw een one and five years
5,793
5,360
More than five years
8,126
8,918
$
19
December 31, 2013
Septem ber 30, 2014
14,713
$
14,527
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 6. R el at e d p a r t y t r a n s a c t i o ns The Trust had the following related party transactions: (i)
Prior to May 21, 2014, the Trust shared a common director with Aston Hill Financial Inc. (“Aston Hill”). As at September 30, 2014, the Trust had accounts payable of $nil (2013 - $1.2 million) related to expenses incurred during the period in which Aston Hill was a related party. During the time Aston Hill was a related party, within the three and nine month periods ended September 30, 2014, the Trust incurred $nil (2013 - $500,000) and $700,000 (September 30, 2013 - $1.5 million), respectively, in administration charges, as well as $nil (September 30, 2013 - $596,000) and $224,000 (September 30, 2013 - $1.3 million), respectively, in overhead expenses for costs that were reimbursed to Aston Hill by the Trust. For the period that Aston Hill was a related party during the three and nine month periods ended September 30, 2014, the Trust incurred a $nil expense (2013 - $267,000 expense) and $270,000 recovery (2013 – expense of $1.1 million) respectively, in unit based compensation related to RTUs which were issued as a part of the Trust’s RTU plan for services rendered by Aston Hill under the Services Agreement. All expenses paid to Aston Hill are in relation to services performed in accordance with the Services Agreement.
(ii) During the nine month period ended September 30, 2014, the Trust paid US$6.0 million to satisfy their deferred land payment which was an obligation related to the acquisition of Denali Oil and Gas (“Denali”) which was completed on August 10, 2012. Denali shares common directors and a member of key management with the Trust. For the three and nine month periods ended September 30, 2014, the Trust also incurred $nil (2013 $313,000) and $nil (2013 - $508,000), respectively, in relation to overriding royalty payments related to the Eagle Ford Shale Deep Rights. As at September 30, 2014, $nil (December 31, 2013 - $54,000) of trade and other payables was related to overriding royalty payments to Denali. 1 7. S u b s e q u e n t e v e n t s Distributions
Subsequent to September 30, 2014, the Trust declared distributions of $0.02 per Trust unit for October, 2014. The Trust also issued 53,000 units pursuant to the Trust’s DRIP plan at an average a price of $1.89 per unit.
20
ARGENT ENERGY TRUST
2 3 4 5 6-20
I NTERIM C ONSOLIDATED B ALANCE S HEETS (in thousands of Canadian dollars) (unaudited)
As at,
Note
December 31, 2013
Septem ber 30, 2014
January 1, 2013
Assets Current assets Cash
$
Trade and other receivables Risk management
5
Prepaid expenses and deposits
1,554
$
1,014
$
1,766
19,457
18,007
12,394
2,569
-
56
1,406
1,212
439
24,986
20,233
14,655
Risk management
5
299
521
-
Oil and gas properties
6
541,835
644,266
466,658
Exploration and evaluation assets
7
4,430
44,801
66,762
3,409
2,586
400
Property and equipment Total assets
$
574,959
$
712,407
$
548,475
$
30,599
$
31,185
$
27,834
Liabilities Current Liabilities Trade and other payables Distributions payable
1,270
5,289
4,232
Current portion of deferred land payment
7,840
6,382
4,976
Risk management
5
-
2,566
375
Current portion of unit based compensation
8
1,092
3,574
1,241
-
-
25,900
Forw ard purchase contract Current portion of decommissioning liability
1,035
1,079
-
41,836
50,075
64,558
81,244
34,282
Credit facility
9
121,142
Risk management
5
727
270
750 12,093 1,034
Deferred land payment Unit based compensation Convertible debentures
-
7,129
8
297
2,621
10
108,064
144,879
-
23,278
20,930
13,948
295,344
307,148
126,665
571,132
555,477
442,075
(94,447)
(70,732)
(14,566)
(262,443)
(92,931)
(5,703)
65,373
13,445
4
279,615
405,259
421,810
Decommissioning liability
Unitholders' equity Trust capital Accumulated distributions Deficit Other comprehensive income
11
Total liabilities & unitholders' equity $ 574,959 The notes are an integral part of the interim consolidated financial statements.
$
712,407
$
548,475
Commitments - see note 15 Subsequent events - see note 17
2
ARGENT ENERGY TRUST AS TO N H ILL F INANCIAL
I NTERIM C ONSOLIDATED S TATEMENTS OF L OSS AND C OMPREHENSIVE L OSS (in thousands of Canadian dollars, except per unit amounts) (unaudited)
For the three m onth period ended Note
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014
(restated, note 3) Oil and gas sales
$
less: Royalties
49,680
$
42,151
September 30, 2013
September 30, 2014
(restated, note 3) $
143,466
$
110,210
(10,957)
(9,904)
(31,467)
(26,419)
Net oil and gas revenue
38,723
32,247
111,999
83,791
Operating expenses
10,805
7,983
34,606
22,929
46
-
4,177
2,178
3,504
4,436
13,330
11,019
Ad valorem tax General and administrative expenses Unit based compensation expense (recovery)
Impairment Exploration and evaluation
2,272
(3,455)
7,529
33,335
12,930
75,177
33,191
156,053
-
156,053
-
4,610
(176)
Depreciation, depletion and amortization 6,7 7
Acquisition and divestiture expense
8,997
5,052
13,731
(13)
339
301
367
Foreign exchange loss (gain)
5
(12,058)
6,062
(12,911)
(8,457)
Risk management loss (gain)
5
(14,217)
5,160
1,022
2,190
Change in fair value of convertible debenture
10
(2,257)
(1,940)
Finance expense
12
3,754
1,971
Gain on exercise of convertible debentures Gain on sale of oil and gas properties
6
Income tax expense (recovery) $
7,650
-
(387)
-
(2,418)
-
(2,418)
-
26
Loss for the period
11,035
(3,512)
(387)
(141,858)
Loss before taxation
131
(141,884) $
(15,963)
(169,714)
23
(202)
(15,986) $
(169,512) $
(5,024)
73 (5,097)
Other comprehensive income (loss), net of tax items Change in fair value of convertible debenture
12
17,102
(2,371)
36,445
(3,943)
5
13,825
(6,325)
15,483
4,602
Item that may be reclassified subsequently to income Foreign currency translation gain (loss) Total comprehensive loss for the period
$
(110,957) $
(24,682) $
(117,584) $
(4,438)
Loss per unit Basic
13
$
(2.24) $
(0.29) $
(2.71) $
(0.10)
Diluted
13
$
(2.24) $
(0.29) $
(2.71) $
(0.13)
The notes are an integral part of the interim consolidated financial statements.
3
ARGENT ENERGY TRUST
I NTERIM C ONSOLIDATED S TATEMENTS OF C HANGE IN E QUITY (in thousands of Canadian dollars, except per unit amounts) (unaudited)
Note
Other Total Comprehensive Accumulated Accumulated Unitholders' Income Deficit Equity Trust Capital Distributions
Number of Trust Units 48,438
Balance at December 31, 2012
$ 442,075
$
4
Loss for period
-
-
-
Other comprehensive income
-
-
659
Total comprehensive income
-
-
663
$
(5,703) $ (5,097)
(14,566) $ 421,810 -
-
-
(10,800)
-
(5,097) 659 (4,438)
Reinvested distributions
2,386
23,223
-
-
-
23,223
Issue of Trust Capital
8,160
83,232
-
-
-
83,232
(4,594)
-
-
-
(4,594)
Trust unit issuance costs
-
-
Balance at September 30, 2013
Unitholder distributions
58,984
$ 543,936
$
663
$
(10,800) $
-
(55,001) $ 478,798
Balance at December 31, 2013
60,448
$ 555,477
$
13,445
$
(92,931) $
(70,732) $ 405,259
-
Loss for the period
-
-
-
Other comprehensive income
-
-
51,928
Total comprehensive income
-
-
65,373
3,005
15,542
-
36
113
-
-
-
-
-
63,489
$ 571,132
Reinvested distributions Convertible debentures exercised Unitholder distributions Balance at September 30, 2014
11
$
65,373
(40,435)
(169,512)
(40,435)
-
(169,512)
-
51,928
-
(117,584)
-
-
15,542
-
-
113
(262,443)
(23,715)
$ (262,443) $
(23,715)
(94,447) $ 279,615
The notes are an integral part of the interim consolidated financial statements.
4
ARGENT ENERGY TRUST
I NTERIM C ONSOLIDATED S TATEMENTS OF C ASH F LOW (in thousands of Canadian dollars, except per unit amounts) (unaudited)
For the three m onth period ended Note
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014
September 30, 2013
Septem ber 30, 2014
Operating Activities Loss for the period
$
(141,884) $
(15,986) $
(169,512) $
(5,097)
Adjustments for non-cash items: Finance expense
12
Depreciation, depletion and amortization Impairment Exploration expense Unit based compensation Gain on sale of oil and gas assets
6
Gain on exercise of convertible debentures Unrealized risk management loss (gain)
5
Unrealized loss (gain) on convertible debentures 10 Unrealized foreign exchange loss (gain) Cash provided by operating activities, before change in non-cash w orking capital Change in non-cash w orking capital
14
Net cash provided by operating activities
3,754
1,971
11,035
7,650 33,191
33,335
12,930
75,177
156,053
-
156,053
-
4,586
8,997
5,028
13,731 7,529
(176)
2,272
(3,455)
(2,418)
-
(2,418)
-
(387)
-
(387)
-
(15,053)
4,014
(4,469)
623
(2,257)
(1,940)
(11,595)
6,106
(12,568)
(3,512) (8,411)
23,958
18,364
54,615
45,704
(2,775)
(4,688)
(2,196)
21,183
13,676
52,419
131
(706) 44,998
Investing Activities Purchase of property and equipment
(45)
(287)
(1,394)
(589)
Additions to oil and gas properties
6
(7,028)
(35,674)
(63,454)
(87,747)
Additions to exploration and evaluation assets
7
(84)
(324)
(139)
(753)
(45,707)
(675)
(45,707)
Acquisitions, net of cash acquired
-
Deferred land payment
-
Forw ard purchase contract Proceeds on sale of oil and gas assets
-
-
(5,042)
(6,404)
(30,758)
(30,758)
-
6
10,673
-
10,673
-
Proceeds on disposition of property and equipment
1
-
12
-
Change in non-cash w orking capital
14
Net cash used in investing activities
(12,409)
(532)
(5,483)
(8,892)
(113,282)
(66,864)
4,731 (165,865)
Financing Activities Proceeds from issuance of trust units
-
83,232
-
83,232
Trust unit issue costs
-
(4,602)
-
(4,594)
Facility fees
(145)
(187)
Proceeds from convertible debentures
(277)
(536)
-
-
-
86,250
Proceeds from credit facilities
9
9,430
86,886
55,869
140,022
Repayment of credit facilities
9
(17,355)
(68,179)
(20,975)
(158,818)
(1,097)
(256)
(7,223)
(4,942)
(3,521)
(3,722)
(12,193)
(16,283)
(202)
(1)
(929)
Finance expense paid Distributions paid Change in non-cash w orking capital
14
-
Net cash (used) provided by financing activities
(6,594)
(439)
Effect of exchange rates on cash
(29)
42
Cash, beginning of period Cash, end of period
93,012
(12,730)
Change in cash
11,224
1,951 $
1,554
$
4,601
$
14,941
123,661
496
2,794
44
41
1,014
1,766
1,554
$
4,601
The notes are an integral part of the interim consolidated financial statements.
5
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1. R e p or t i n g e n t i ty Argent Energy Trust (the "Trust" or “Argent”) is an unincorporated open-ended limited purpose trust established under the laws of the Province of Alberta on January 31, 2012. The strategy of the Trust is to acquire non-Canadian oil and gas assets in order to generate returns for its unitholders. The Trust intends to make monthly distributions of a portion of its available cash to unitholders and will reinvest remaining cash into its subsidiaries for the purposes of acquiring non-Canadian oil and gas assets, and investing in capital expenditures. Cash flow is generated by the Trust through the oil and gas assets owned and operated by the subsidiaries of the Trust. The head office, principal address and registered and records office of the Trust are located at Suite 500, 321 - 6th Avenue SW, Calgary, Alberta, T2P 3H3. Pursuant to the terms of an Administrative Services Agreement, Argent Energy Ltd. (the "Administrator"), a corporation formed under the laws of the Province of Alberta on June 9, 2011, is the Administrator of the Trust and performs all general and administrative services that are or may be required or advisable, from time to time, for the Trust. 2. B a si s of p r e p a r a t i o n Statement of compliance
The consolidated financial statements were authorized for issue in accordance with a resolution of the Board of Directors on November 11, 2014. These consolidated interim financial statements have been prepared using accounting policies consistent with International Financial Reporting Standards (“IFRS”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”) as issued by the International Accounting Standards Board applicable to the preparation of interim financial statements, including IAS 34, Interim Financial Reporting. The Trust has applied the same accounting policies as the annual audited IFRS consolidated financial statements for the year ended December 31, 2013, except for income tax expense for an interim period which is based on an estimated average annual effective income tax rate. The accounting policies applied in these consolidated financial statements are based on IFRS effective as of January 1, 2014. The consolidated interim financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2013, which have been prepared in accordance with IFRSs as issued by the IASB. These interim consolidated financial statements are presented in Canadian dollars (“CDN”), which is the Trust’s functional currency. All financial information is rounded to the nearest thousands, except per unit amounts and where otherwise indicated. The preparation of interim financial statements requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The key sources of estimation uncertainty were the same as those that applied to the consolidated financials for the year ended December 31, 2013. 3. S i g ni f i c a n t a c c o u n ti n g p ol i c i e s The accounting policies are consistent with those of the previous financial year except for the following retrospective adoption effective as of January 1, 2014.
6
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
3. S i g ni f i c a n t a c c o u n ti n g p ol i c i e s ( c o n ti n u e d ) Retrospective application of change in accounting policy: IFRIC 21 - Levies
International Financial Reporting Interpretation Committee (“IFRIC”) 21 Levies (“IFRIC 21”) clarified that an entity recognizes a liability for a levy when the activity that triggers payment occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarified that no liability should be anticipated before the minimum threshold is reached. The effect of the retrospective application of this policy on the three and nine month periods ended September 30, 2013 was a decrease of $0.6 million and an increase of $0.6 million, respectively, in loss due to the ad valorem taxes for the full fiscal year being required to be accrued in the first quarter results under IFRIC 21 instead of being accrued on a quarterly basis under the Trust’s previous policy. The retrospective application of the policy had no effect on the comparative balance sheets of December 31, 2013 and January 1, 2013. Future accounting changes: changes : IFRS 15 – Revenue from Contracts with Customers
In May 2014, IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). IFRS 15 is effective for periods beginning on or after January 1, 2017 and is to be applied retrospectively. IFRS 15 clarifies the principles for recognizing revenue from contracts with customers. The Trust intends to adopt IFRS 15 in its financial statements for the annual period beginning January 1, 2017. The extent of the impact of adoption of IFRS 15 has not yet been determined. 4. D e t e r mi n a t i o n of f a i r v al u es The following table summarizes the fair value measurement information for financial assets and liabilities recorded: Carrying Amount
Septem ber 30, 2014 Risk Management (net position)
$
Convertible debentures $
December 31, 2013 Risk Management (net position)
$
Convertible debentures $
January 1, 2013 Risk Management (net position)
Fair
2,141
Fair value m easurem ents using
Value $
2,141
Level 1 $
-
Level 2 $
(108,064)
(108,064)
(108,064)
(105,923) $
(105,923) $
(108,064) $
Carrying
Fair
Amount
Value
(2,315) $
Level 1
(2,315) $
-
$
(147,194) $
(147,194) $
(144,879) $
Fair
2,141
$
Level 2
(144,879)
Value
-
-
Fair value m easurem ents using
(144,879)
Amount
Level 3 $
-
(144,879)
Carrying
2,141
Level 3
(2,315) $
-
-
-
(2,315) $
-
Fair value m easurem ents using Level 1
Level 2
Level 3
$
(1,069) $
(1,069) $
-
$
(1,069) $
-
$
(1,069) $
(1,069) $
-
$
(1,069) $
-
All assets in the above table are recurring items in the Trust’s financial statements.
7
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
4. D e t e r mi n a t i o n of f a i r v al u es ( c o n t i n u e d ) Level 1 Fair Value Measurements Level 1 fair value measurements are based on unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of the convertible debentures is determined based on their closing price on the Toronto Stock Exchange. Level 2 Fair Value Measurements Level 2 fair value measurements are based on inputs other than quoted prices within level 1 that are observable for the asset or liability either directly or indirectly. Level 2 financial instruments have been valued indirectly through calculations based on market information. The Trust’s derivative contracts are measured based on quotes from the Trust's counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates. Level 3 Fair Value Measurements Level 3 fair value measurements are based on models using significant unobservable inputs. 5. F i n a n ci a l r i s k m a n a g e m e n t Overview:
The Trust’s activities expose it to a variety of financial risks that arise as a result of its operating, investing, and financing activities such as: •
Credit risk;
•
Liquidity risk;
•
Market risk;
•
Interest rate risk; and
•
Foreign exchange risk.
This note presents information about changes in the Trust’s exposure to each of the above risks since the year ended December 31, 2013.
8
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) Liquidity risk:
The following are the contractual maturities of financial liabilities including estimated interest payments as at September 30, 2014: As at Septem ber 30, 2014
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability Convertible debentures - principal - interest (i) Credit Facility - principal (ii)
- interest Deferred land payment
$ As at Decem ber 31, 2013
30,599
$
30,599
727
727
108,064
149,250
2,318
39,128
121,142
121,142
$
30,599
$
-
-
$
-
$
-
727
-
-
-
-
149,250
-
9,270
9,270
20,588
-
-
121,142
-
-
525
9,013
525
8,488
-
-
7,840
7,840
7,840
-
-
-
271,215
$
357,699
$
48,234
$
139,627
$
169,838
$
-
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability Convertible debentures - principal - interest
(i)
Credit Facility - principal - interest (ii) Deferred land payment
31,185
$
As at January 1, 2013
$
31,185
$
-
$
-
$
-
2,836
2,566
270
-
-
144,879
149,250
-
-
149,250
-
-
43,763
9,270
9,270
25,223
-
81,244
81,244
-
81,244
-
-
350
4,291
350
3,941
-
-
13,511 $
31,185
2,836
274,005
13,827 $
326,396
6,382 $
49,753
7,445 $
102,170
$
174,473
$
-
Carrying
Contractual
Less than
One - tw o
Tw o - five
More than
am ount
cash flow s
one year
years
years
five years
Financial liabilities: Trade and other payables
$
Risk management liability
$
1,125
27,834
$
27,834
1,125
375
$
-
$
750
-
$
-
-
Forw ard purchase contract
25,900
29,847
29,847
-
-
-
Credit Facility - principal
34,282
34,282
-
34,282
-
-
72
2,528
72
2,456
-
-
- interest (ii) Deferred land payment
17,069 $
(i) (ii)
9
27,834
106,282
17,909 $
113,525
4,976 $
63,104
12,933 $
50,421
$
-
$
-
Calculated based on the interest rate and repayment schedule Based on interest rate data available as at the financial reporting dates and an estimated repayment date of August 12, 2016
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) At September 30, 2014, the Trust had a working capital deficit of $16.9 million (December 31, 2013 - $29.8 million, January 1, 2013 – $49.9 million). The Trust had undrawn availability under its committed credit facility of approximately $57.1 million (December 31, 2013 - $83.0 million, January 1, 2013 - $59.2 million) providing sufficient liquidity to fund its obligations. The credit facility was renewed on June 30, 2014 and in conjunction with the renewal, the maturity date was extended to August 12, 2016. The next redetermination date was set as of October 31, 2014 but has now been extended to November 28, 2014. The lending syndicate has the ability to revise the credit facility limit as part of their redetermination process. Any significant change in the borrowing base by the lenders may adversely impact the liquidity position of the Trust. There can be no assurance provided at this time about the final credit facility limit which will be redetermined by the lending syndicate on November 28, 2014. If the credit facility limit is reduced by US$20 million (CDN$22.4 million), the undrawn credit facility limit of US$51.0 million (CDN$57.1 million) as of September 30, 2014, would be reduced to US$31.0 million (CDN$34.7 million). Under that scenario management believes that there would continue to be sufficient liquidity to fund the Trust’s obligations and compliance with its financial covenants. Market risk:
Commodity Price Risk As at September 30, 2014, the Trust has entered into the following financial contracts to mitigate the effects of fluctuating prices on a portion of its production as follows: Commodity Costless collars
Volume
Measure
Beginning
Term
Floor US$
Ceiling US$
(i)
WTI
Oil
300
bbl/d
Oct-14
Dec-14
90.00/bbl
91.70/bbl
WTI
Oil
200
bbl/d
Oct-14
Dec-14
90.00/bbl
94.65/bbl
Term
Fixed US$
Commodity
Volume
Measure
Beginning
Fixed contract sw aps WTI (ii)
Oil
1,000
bbl/d
Oct-14
Dec-14
92.29/bbl
BRENT (ii)
Oil
100
bbl/d
Oct-14
Dec-14
104.50/bbl
LLS (ii) NYMEX (iii)
Oil
1,000
bbl/d
Oct-14
Dec-14
99.65/bbl
Natural gas
7,000
MMBtu/d
Oct-14
Dec-14
4.09/MMBtu 91.11/bbl
WTI (ii)
Oil
800
bbl/d
Jan-15
Dec-15
LLS (ii)
Oil
1,200
bbl/d
Jan-15
Dec-15
92.63/bbl
NYMEX (iii)
Natural gas
6,000
MMBtu/d
Jan-15
Dec-15
4.12/MMBTU
NYMEX (iii)
Natural gas
4,000
MMBtu/d
Jan-16
Dec-16
4.06/MMBTU
Commodity
Volume
Measure
Term
Fixed US$
Sold (w rote) call options WTI Call
Oil
200
bbl/d
Jan-15
Dec-15
95.60/bbl
WTI Call
Oil
600
bbl/d
Jan-16
Dec-16
91.40/bbl
WTI Call
Oil
200
bbl/d
Jan-16
Dec-16
90.25/bbl
(i) (ii) (iii) (iv)
10
Beginning
(iv )
Represents costless collar transactions created by buying puts and selling calls (WTI or BRENT reference prices). Represents fixed price financial swap transactions with a set forward sale oil reference prices that are based on West Texas Intermediary (“WTI”), Brent or Louisiana Light Sweet (“LLS”) oil. Represents fixed price financial swap transactions based on the NYMEX natural gas forward sale reference price. Represents the selling of call options, giving the counter party the right (but not obligation) on December 31 of the year preceding the contract term to enter into fixed price financial swap transactions with a set forward sales reference price.
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) The following table summarizes the Trust’s net risk management position: December 31, 2013
Septem ber 30, 2014 Short term asset
$
2,569
Long term asset
$
-
$
2,141
(375)
(270)
(727)
Net risk management asset (liability)
-
(2,566)
-
Long term liability
56
521
299
Current liability
January 1, 2013 $
$
(750)
(2,315) $
(1,069)
The total fair value of the Trust’s unrealized risk management positions at September 30, 2014, was a net asset of $2.1 million (December 31, 2013 - $2.3 million, January 1, 2013 - $1.1 million) and has been calculated using both quoted prices in active markets and observable market-corroborated data. For the three and nine months ended September 30, 2014, risk management gains and losses were comprised of the following: For the three m onth period ended September 30, Septem ber 30, 2013 2014 Unrealized risk management loss (gain)
$
Realized risk management loss (gain) Risk management loss (gain)
$
(15,053) $
4,014
836
1,146
(14,217) $
5,160
For the nine m onth period ended September 30, Septem ber 30, 2013 2014 $
(4,469) $
$
1,022
623 1,567
5,491 $
2,190
A $1 per bbl increase in the market price of oil would have resulted in a decrease of income (loss) of approximately $0.8 million (2013 - $1.6 million) due to a change in unrealized risk management loss (gain) as a result of a change in the fair value of the Trust’s risk management position at September 30, 2014. At September 30, 2014, a $0.25 per mcf increase in the market price of gas would have resulted in decrease of income (loss) of approximately $1.1 million (2013 - $1.1 million), respectively, due to a change in the unrealized risk management loss (gain). Securities price risk The Trust’s convertible debentures are subject to securities price risk as they are traded on a public exchange. As at September 30, 2014, had the securities price of the convertible debentures increased or decreased by 1%, the income (loss) would have decreased or increased by approximately $1.1 million (2013 - $0.9 million). Foreign exchange risk: risk :
The Trust has entered into a number of CDN$/US$ forward swap contracts on US $1.0 million per month from October to December 2014 at an average rate of US $1.00 = CDN $1.11.
11
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
5. F i n a n ci a l r i s k m a n a g e m e n t ( c o n t i n u e d ) The average exchange rate for the nine month period ended September 30, 2014 was US $1 equal to $1.0942 (2013 – US $1 equal to $1.0236). A $0.01 increase (decrease) in the value of CDN$ versus US$ on September 30, 2014 would have decreased (increased) income (loss) by approximately $2.3 million (2013 - $2.5 million) due to the unrealized foreign exchange loss (gain) from the Trust’s inter-company loan to its US subsidiary of approximately US$213 million. Under IFRS, this inter-company loan is not part of the net investment in the subsidiary and any period end foreign exchange translation adjustment is required to be recorded in income or loss. This analysis assumes that all other variables, in particular interest rates, remain constant. The foreign exchange gain and loss recorded for the three and nine months ended September 30, 2014 was composed of the following: For the three m onth period ended Septem ber 30, 2014 Unrealized foreign exchange loss (gain)
$
Realized foreign exchange loss (gain) Foreign exchange loss (gain)
(11,595) $ (463)
$
(12,058) $
For the nine m onth period ended
September 30, 2013 6,106
Septem ber 30, 2014 $
(44) 6,062
(12,568) $ (343)
$
(12,911) $
September 30, 2013 (8,411) (46) (8,457)
The foreign currency translation gain of $13.8 million (2013 – loss of $6.3 million) and gain of $15.5 million (2013 – gain of $4.6 million) recorded in other comprehensive income for the three and nine months ended September 30, 2014, is unrealized. Under IFRS, this foreign exchange loss (gain) is part of the net investment in the subsidiary and is required to be recorded in other comprehensive income.
12
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
6. O i l a n d g a s pr o p e r t i e s Septem ber 30, 2014 December 31, 2013 Cost: Opening balance
$
Revision to estimates on decommissioning assets Additions to decommissioning assets Acquired in business
combination (i)
Additions Transferred from exploration and evaluation Sale of oil and gas assets
(ii)
Foreign exchange adjustment Closing balance
$
786,961
475,148
1,534
2,059
113
616
675
152,632
63,454
103,389
1,057
13,382
(9,660)
39,735
42,874 $
887,008
$
$
142,695
$
786,961
Accumulated depletion and Impairment: Opening balance Depletion Impairment Sale of oil and gas assets
60,131
119,392
69,266 -
(760)
Foreign exchange adjustment
8,490
74,545
4,808
9,301 $
345,173
$
142,695
Opening balance
$
644,266
$
466,658
Closing balance
$
541,835
$
644,266
Closing balance Carrying amounts:
(i)
Relates to purchase price adjustments of acquisitions completed in prior year.
(ii)
Relates to certain oil and gas properties located in Kansas which were sold for proceeds of $10.7 million leading to a gain on sale of $2.4 million for the three and nine months ended September 30, 2014.
As at September 30, 2014, the Trust recognized an impairment loss of $119.4 million, as follows: Cash Generating Unit "CGU" Eagle Ford and Austin Chalk
Septem ber 30, 2014 $
100,240
South Texas Gas
16,576
Kansas/Colorado
2,576
Total
$
119,392
The impairment on the Trust’s Eagle Ford and Austin Chalk CGU, which includes the production payment, was a result of utilizing a lower future oil price deck in the reserve calculations, widening basis differentials as well as technical revisions due to mechanical failure of two well bores and performance related issues primarily from the Trust’s Eagle Ford wells as well as the third party operated production payment. The Trust recorded an impairment on its South Texas Gas CGU and Kansas/Colorado CGU which were primarily a result of utilizing a lower future oil and gas price deck in the reserve calculations.
13
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
6. O i l a n d g a s pr o p e r t i e s ( c o nt i n u e d ) The impairment losses recognized were the difference between the carrying amount of each CGU and their fair value less costs of disposal. The fair value less costs of disposal was calculated using a discounted cash flow model based on the proved plus probable reserves using forecast oil prices and an after-tax discount rate of 9.0% and 9.5%, respectively, for the Eagle Ford and Austin Chalk CGU and South Texas Gas CGU, and a discount rate of 10% with zero tax rate for the Kansas/Colorado CGU (as this asset would be targeted by market participants which are zero tax entities). The cash flow model used is considered a level 3 fair value technique. The recoverable amount of the Eagle Ford and Austin Chalk CGU was calculated as $99.1 million and the recoverable amount of the South Texas Gas and Kansas/Colorado CGUs were calculated as $54.6 million and $37.8 million, respectively. A change of 0.5% in the discount rates for these three CGUs would result in a corresponding change in impairment expense of approximately $5.7 million. The fair value less costs of disposal calculation assumes the following forecast WTI oil sales prices in US$/bbl: 2015 $
(i)
92.50
2016 $
95.00
2017 $
95.00
2018 $
97.50
2019 $
97.50
2021 (1)
2020 $
98.54
$
100.51
+ 2% per year thereafter
7. E x pl o r a t i o n a n d e v al u a t i o n a s s et s Septem ber 30, 2014 Opening balance
$
Additions Acquired in business combination Additions related to forw ard purchase contract Impairment
44,801
December 31, 2013 $
66,762
139
906
-
3,137
-
4,061 -
(36,661)
Transferred to oil and gas properties
(1,057)
(13,382)
Expense associated w ith lease expiries
(5,028)
(20,430)
2,236
3,747
Foreign exchange adjustment Closing balance
$
4,430
$
44,801
During the three and nine months ended September 30, 2014, the Trust expensed $4.6 million (2013 - $9.0 million) and $5.0 million (2013 - $13.7 million), respectively, of exploration and evaluation assets related to leases that expired or are near expiry with no intention to renew. During the three and nine months ended September 30, 2014, the Trust recorded a $36.7 million (2013 - $nil) impairment charge related to leaseholds located in the Eagle Ford Shale and Buda formation. This non-cash impairment charge arose due to the downward revision of reserves associated with the Eagle Ford CGU, resulting in reduced prospectivity of the leasehold and substantive expenditure for further exploration in this area is not
planned.
14
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
8. U n i t b a s e d c o m p e n s a t i o n The Trust’s unit based compensation comprises the following: Septem ber 30, 2014 Short term Restricted trust units
$
Phantom unit rights
510
Long term $
582 $
1,092
69
Total $
228 $
297
579 810
$
1,389
$
3,365
Decem ber 31, 2013 Short term Restricted trust units
$
Phantom unit rights
1,952
Long term $
1,622 $
3,574
1,413
Total
1,208 $
2,621
2,830 $
6,195
January 1, 2013 Short term Restricted trust units
$
Phantom unit rights
$
470 $
a)
771
Long term
1,241
643
Total $
391 $
1,034
1,414 861
$
2,275
Restricted trust units (“RTUs”) Units
For the nine month period ended September 30, 2014 Outstanding, beginning of period
(in thousands) 771
Granted
42
Forfeited
(293)
Exercised Accumulated distributions
(195) (1)
74 399
(1) Grants based on accumulated distributions on unvested unit grants. As at September 30, 2014, no RTUs were vested that remained unexercised. All units had a fair value of $1.97 per unit as at September 30, 2014.
15
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
8. U n i t b a s e d c o m p e n s a t i o n ( c o n t i n u e d ) b)
Phantom unit rights (“PURs”) Units
For the nine month period ended September 30, 2014
(in thousands)
Outstanding, beginning of period
706
Granted
365
Forfeited
(222)
Exercised Accumulated distributions
(186) (1)
92 755
(1) Grants based on accumulated distributions on unvested unit grants. As at September 30, 2014, PURs were vested that remained unexercised. All units had a fair value of $1.97 per unit as at September 30, 2014. 9. C r e d i t f a c i l i t y
For the nine month period ended September 30, 2014 Opening balance
$
81,244
Draw dow ns
55,869
Repayments
(20,975)
Facility fees incurred
(536)
Accretion of facility fees
471
Foreign exchange adjustment Closing balance
5,069 $
121,142
As at September 30, 2014, the Trust had US$109.0 million (CDN$122.1 million) outstanding under its US$160 million (CDN $179.2 million) credit facility and had an undrawn credit limit of US$51.0 million (CDN$57.1 million). The borrowing base of the credit facility is subject to semi-annual redetermination by the lenders. The credit facility was renewed on June 30, 2014 and in conjunction with the renewal, the maturity date was extended to August 12, 2016. The next redetermination date is November 28, 2014. The Trust may, at its option, borrow at a US base rate, Canadian prime rate, or at a Libor or bank acceptance rate plus applicable margin. The weighted average interest rate at September 30, 2014 was 3.70% (December 31, 2013 – 2.47%, January 1, 2013 – 4.34%). This credit facility contains a financial covenant, summarized as: (1) The Trust shall not make any distributions if the aggregate amount of any distribution and on account of subordinated debt, that are paid in cash, exceeds 115% of the available Annualized Cash Flow, as adjusted for major acquisitions, related to the reporting period; (2) The Trust shall not make any distributions if the principal amount outstanding under the credit facility is greater than 90% of the total commitment under the credit facility.
16
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
9. C r e d i t f a c i l i t y ( c o n t i n u e d ) Annualized Cash Flow means, for any period and as determined in accordance with IFRS on a consolidated basis, the cash flow from operations of the Trust, and allowing on a proforma basis for the cash flow from the beginning of such period from any material acquisition, less, without duplication, any mandatory capital expenditure requirements as provided in the "proved developed producing reserves schedule'" of the then current engineering reserve report to be made or which the Trust has made or legally committed to make in the ordinary course of business. Major acquisition means an acquisition of shares or other assets which increases the consolidated net assets (excluding current assets) of the Trust, as shown on the most current consolidated financial statements of the Trust, by more than ten percent (10%) of the borrowing base. The Trust was in compliance with this financial covenant as at September 30, 2014. 1 0. C o n v er t i bl e d e b e n t ur e s The following table outlines the changes in the convertible debentures for the nine months ended September 30, 2014: Amount Balance at December 31, 2013
$
Change in fair value due to change in credit risk
144,879 (36,445)
Change in fair value due to change in market risk
131
Convertible debentures exercised
(501)
Balance at Septem ber 30, 2014
$
108,064
The fair value of the convertible debentures on September 30, 2014, was $108.1 million (December 31, 2013 $144.9 million, January 1, 2013 - $nil) based on the September 30, 2014 closing price of the convertible debentures on the Toronto Stock Exchange. The face value of the convertible debentures at September 30, 2014 is $148.75 million (December 31, 2013 - $149.25 million). 1 1. T r u s t c a p i t a l Trust units outstanding outstanding Number of units
Amount
(in thousands) Balance December 31, 2013 Distribution reinvestment plan
60,448 $ (1)
Convertible debentures exercised Balance Septem ber 30, 2014
3,005 (2)
36 63,489 $
555,477 15,542 113 571,132
(1) During the nine month period ended September 30, 2014, the Trust issued 3.0 million units at a weighted average price of $5.17 per unit for total gross proceeds of $15.5 million under the Trust’s premium distribution and distribution reinvestment plan (the “DRIP Plan”). (2) During the nine month period ended September 30, 2014, the Trust issued 36,000 units related to the exercise of $0.5 million of convertible debentures exercisable at $13.90 per unit. The units issued had a market value of $3.14 per unit at the time of exercise.
17
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 2. Fi n a n c e e x p e n s e For the three m onth period ended
Accretion on deferred land obligation Accretion on decommissioning obligations Accretion of facility fees on revolving loan
$
Total accretion
-
For the nine m onth period ended
September 30, 2013
Septem ber 30, 2014 $
142
September 30, 2013
Septem ber 30, 2014 $
328
$
420
177
115
549
281
108
88
471
339
285
345
1,348
1,040
Interest on term credit facility
1,146
271
2,729
1,199
Interest on convertible debentures
2,323
1,353
6,958
1,651
Convertible debentures issuance costs Net finance expense
2
$
3,754
$
1,971
3,760
$
11,035
$
7,650
1 3. L o s s p e r u n i t Basic loss per unit is calculated as follows: For the three m onth period ended Septem ber 30, 2014 Loss for the period
$
Issued trust units at beginning of the period
(141,884) $
September 30, 2013 (15,986) $
For the nine m onth period ended Septem ber 30, 2014 (169,512) $
September 30, 2013 (5,097)
63,337
49,778
60,448
48,438
Effect of exercise of convertible debentures
33
-
11
-
Effect of unit issuances
42
4,609
2,059
2,260
63,412
54,387
62,518
50,698
Weighted average number of units - Basic Basic loss per unit
$
(2.24) $
(0.29) $
(2.71) $
(0.10)
Diluted loss per unit is calculated as follows: For the three m onth period ended Septem ber 30, 2014 Loss for the period
$
Net income effect from convertible debentures
$
Weighted average outstanding units - Basic Effect convertible debentures Weighted average number of units - Diluted Diluted loss per unit
(141,884) $
$
(141,884) $
September 30, 2013 (15,986) $ (15,986) $
For the nine m onth period ended Septem ber 30, 2014 (169,512) $ (169,512) $
September 30, 2013 (5,097) (1,860) (6,957)
63,412
54,387
62,518
50,698
-
-
-
2,324
63,412
54,387
62,518
53,022
(2.24) $
(0.29) $
(2.71) $
(0.13)
For the three and nine month periods ended September 30, 2014, the dilutive effect of convertible debentures, RTUs, and reinvested distributions were not included in the calculation of diluted income (loss) per share as their effect was anti-dilutive.
18
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 4. S u p pl e m e n t al c a s h f l ow i n f o r m a t i o n Changes in non-cash working capital from operating activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Trade and other receivables
$
1,770
$
(2,576) $
(500) $
(5,828)
Prepaid expenses and deposits
(300)
(763)
(131)
(895)
Unit based compensation paid
(505)
(3,686)
(1,471)
(3,686)
Decomissioning obligations
(461)
Trade and other payables
2,337
(3,279) $
(2,775) $
(4,688) $
-
(461)
9,703
367 (2,196) $
(706)
Changes in non-cash working capital from investing activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Accounts receivable
$
Trade and other payables $
-
$
(358) $
-
$
1,604
(12,409)
(174)
(5,483)
3,127
(12,409) $
(532) $
(5,483) $
4,731
Changes in non-cash working capital from financing activities is comprised of: For the three m onth period ended September 30, 2013
Septem ber 30, 2014
For the nine m onth period ended September 30, 2013
Septem ber 30, 2014
Source/(use) of cash: Trade and other payables
$
-
$
(202) $
(1) $
(929)
1 5. C om mi t m e n t s Operating lease rentals are payable as follows:
As at, Less than one year
$
794
$
249
Betw een one and five years
5,793
5,360
More than five years
8,126
8,918
$
19
December 31, 2013
Septem ber 30, 2014
14,713
$
14,527
ARGENT ENERGY TRUST
N OTES TO THE I NTERIM C ONSOLIDATED F INANCIAL S TATEM ENTS For the three and nine month periods ended September 30, 2014 (tabular amounts are in thousands of Canadian dollars except unit and per unit information) (unaudited)
1 6. R el at e d p a r t y t r a n s a c t i o ns The Trust had the following related party transactions: (i)
Prior to May 21, 2014, the Trust shared a common director with Aston Hill Financial Inc. (“Aston Hill”). As at September 30, 2014, the Trust had accounts payable of $nil (2013 - $1.2 million) related to expenses incurred during the period in which Aston Hill was a related party. During the time Aston Hill was a related party, within the three and nine month periods ended September 30, 2014, the Trust incurred $nil (2013 - $500,000) and $700,000 (September 30, 2013 - $1.5 million), respectively, in administration charges, as well as $nil (September 30, 2013 - $596,000) and $224,000 (September 30, 2013 - $1.3 million), respectively, in overhead expenses for costs that were reimbursed to Aston Hill by the Trust. For the period that Aston Hill was a related party during the three and nine month periods ended September 30, 2014, the Trust incurred a $nil expense (2013 - $267,000 expense) and $270,000 recovery (2013 – expense of $1.1 million) respectively, in unit based compensation related to RTUs which were issued as a part of the Trust’s RTU plan for services rendered by Aston Hill under the Services Agreement. All expenses paid to Aston Hill are in relation to services performed in accordance with the Services Agreement.
(ii) During the nine month period ended September 30, 2014, the Trust paid US$6.0 million to satisfy their deferred land payment which was an obligation related to the acquisition of Denali Oil and Gas (“Denali”) which was completed on August 10, 2012. Denali shares common directors and a member of key management with the Trust. For the three and nine month periods ended September 30, 2014, the Trust also incurred $nil (2013 $313,000) and $nil (2013 - $508,000), respectively, in relation to overriding royalty payments related to the Eagle Ford Shale Deep Rights. As at September 30, 2014, $nil (December 31, 2013 - $54,000) of trade and other payables was related to overriding royalty payments to Denali. 1 7. S u b s e q u e n t e v e n t s Distributions
Subsequent to September 30, 2014, the Trust declared distributions of $0.02 per Trust unit for October, 2014. The Trust also issued 53,000 units pursuant to the Trust’s DRIP plan at an average a price of $1.89 per unit.
20
ARGENT ENERGY TRUST
