SECOND QUARTER 2020 RESULTS & OPERATIONAL UPDATE

4.      Financial Assets and Credit Risk

 

Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. As at June 30, 2020, the Company was exposed to credit risk with respect to its accounts receivable and finance lease receivable included in other assets. The credit risk associated with the Company's finance lease receivable is minimal as the asset is secured by the underlying fixed assets, with ownership transferring to the counterparty subsequent to the final lease payment in 2022.

 

The Company's credit exposure on accounts receivable typically pertains to accrued sales revenue for monthly production volumes sold to Heritage Petroleum Limited ("Heritage") and value added taxes ("VAT") due from the Trinidad government. As at June 30, 2020, $2,953,000 of petroleum sales was included in accounts receivable, representing approximately 58 percent of the Company's consolidated accounts receivable balance (December 31, 2019 - $2,074,000 and 28 percent, respectively). $1,436,000 of the Company's consolidated accounts receivable was comprised of VAT as at June 30, 2020, which represented approximately 28 percent of the total balance (December 31, 2019 - $4,283,000 and 58 percent, respectively).

 

As at June 30, 2020, the Company determined that the average expected credit loss on the Company's accounts receivables was $nil (December 31, 2019 - $nil). The Company believes that the accounts receivable balances that are past due are ultimately collectible, as the majority are due from the Trinidad government for VAT, and although the timing of settlement is uncertain, the Company has not historically experienced any material collection issues (see Note 5).

 

The aging of accounts receivable as at June 30, 2020 and December 31, 2019 is disclosed in the following table.

 

Accounts receivable aging		June 30,  2020	December 31, 2019
Not past due		$             4,196	$             3,581
Past due (greater than 90 days)		906	3,767
Balance		$             5,102	$             7,348

 

5.      Assets Held for Trading

 

In May 2020, the Trinidad government issued the Company's Trinidad subsidiaries an aggregate $2,793,000 in bonds in lieu of payment of past due VAT receivable balances. The Company classified $2,805,000 as assets held for trading as at June 30, 2020, representing the value of the issued bonds plus accrued interest thereon (December 31, 2019 - $nil). Subsequent to June 30, 2020, the bonds were sold to a Trinidad financial institution at face value plus accrued interest.

 

6.      Exploration Assets

 

	Six months ended June 30, 2020	Year ended December 31, 2019
Balance, beginning of year	$           13,579	$             3,644
Additions	3,072	10,191
Impairment	(1)	(309)
Effect of change in foreign exchange rates	(74)	53
Balance, end of period	$           16,576	$           13,579

 

During the three and six months ended June 30, 2020, the Company recognized impairment reversals related to exploration assets of $116,000 and $28,000, respectively (2019 - impairments of $63,000 and $141,000). The impairment recoveries were based on the reversal of previously accrued East Brighton licence obligations that were updated to reflect invoices received. The accrued fees were previously impaired given the property's estimated recoverable value was $nil.

 

The June 30, 2020 exploration asset carrying value of $16,576,000 was included in the Ortoire cash-generating unit ("CGU"). No indicators of impairment were identified by the Company as at June 30, 2020.

 

7.      Property and Equipment

 

	Petroleum assets	Corporate assets	Total
Cost
Balance, January 1, 2019	$        134,308	$             1,817	$        136,125
Additions	2,324	-	2,324
Right-of-use assets	1,114	80	1,194
Derecognition of right-of-use assets	(830)	-	(830)
Decommissioning liability change in estimate	2,422	-	2,422
Effect of change in foreign exchange rates	1,031	90	1,121
Balance, December 31, 2019	$        140,369	$             1,987	$        142,356
Additions	328	-	328
Decommissioning liability change in estimate	(1,610)	-	(1,610)
Effect of change in foreign exchange rates	(692)	(91)	(783)
Balance, June 30, 2020	$        138,395	$             1,896	$        140,291
Accumulated depletion, depreciation and impairments
Balance, January 1, 2019	$           71,538	$             1,546	$           73,084
Depletion and depreciation	5,036	135	5,171
Impairments	7,594	-	7,594
Derecognition of right-of-use assets	(175)	-	(175)
Decommissioning liability change in estimate	371	-	371
Effect of change in foreign exchange rates	505	76	581
Balance, December 31, 2019	$           84,869	$             1,757	$           86,626
Depletion and depreciation	1,847	55	1,902
Impairment	19,215	-	19,215
Decommissioning liability change in estimate	344	-	344
Effect of change in foreign exchange rates	(429)	(81)	(510)
Balance, June 30, 2020	$        105,846	$             1,731	$        107,577
Carrying amounts
Balance, December 31, 2019	$           55,500	$                 230	$           55,730
Balance, June 30, 2020	$           32,549	$                 165	$           32,714

 

At June 30, 2020, the Company evaluated its petroleum assets for indicators of any potential impairment or related reversal. As a result of this assessment, no indicators were identified, and no impairment or related reversal was recorded.

 

As a result of the COVID-19 pandemic, global crude oil oversupply and the resulting drastic decrease in forecast crude oil prices compared to those at December 31, 2019, indicators of impairment were identified for all CGUs at March 31, 2020. The Company performed impairment tests on all CGUs, whereby the recoverable amount of each CGU was compared to its associated carrying value. The recoverable amounts were estimated using value in use calculations incorporating the net present value of the after-tax cash flows derived from the Company's proved developed producing reserves in 2020 and 2021 and proved plus probable oil reserves thereafter as estimated by the Company's independent reserves evaluator as at December 31, 2019 and internally adjusted to reflect updated price assumptions as of April 1, 2020. The estimated recoverable amounts used an after-tax discount rate of 20 percent. Based on the results of the impairment tests completed, the Company recognized gross non-cash impairment charges of $19,215,000.

 

Estimating the recoverable amounts of the Company's CGUs involves several assumptions and estimates which are subject to estimation uncertainty, as well as a significant degree of judgement. Changes in any of the key judgments, such as a revision in reserves, changes in forecast commodity prices, capital expenditures, operating costs or the discount rate would impact the estimated recoverable amounts.

 

8.      Financial Liabilities and Liquidity Risk

 

Liquidity risk is the risk that the Company will not be able to meet its obligations associated with its financial liabilities. While the decrease in commodity prices as a result of the COVID-19 pandemic will negatively impact the Company's financial performance and position, the Company believes that future cash flows will be adequate to meet financial obligations as they come due.

 

The Company manages liquidity risk by continuously monitoring actual and forecasted cash flows from operating, investing and financing activities and opportunities to withdraw from its existing debt facility or to issue additional equity. Given that the Company has minimal developmental work obligations and guarantees at June 30, 2020, the Company will continue to manage its capital expenditures to reflect current financial resources in the interest of sustaining long-term viability.

 

Refer to Note 9 "Term Loan", Note 16 "Capital Management" and Note 17 "Commitments" for further details regarding the Company's debt structure and capital management objectives. The following table sets forth estimated undiscounted cash outflows and financial maturities of the Company's financial liabilities as at June 30, 2020.

 

	Undiscounted cash outflows	Financial maturity by period
		Less than 1 year	1 to 3 years	Thereafter
Accounts payable and accrued liabilities	$             8,981	$             8,981	$                     -	$                     -
Income taxes payable	243	243	-	-
Term loan principal (note 9)	15,000	-	3,000	12,000
Estimated production liabilities (note 10)	1,996	276	1,361	359
Term loan interest (note 9)	5,397	1,177	2,257	1,963
Lease liabilities	212	175	37	-
Total financial liabilities	$           31,829	$           10,852	$             6,655	$           14,322

 

 

 

9.      Term Loan

 

The Company's indirectly wholly owned Trinidadian subsidiary (the "Borrower") entered into a $20 million, seven-year term credit facility arrangement (the "New Term Loan") from a Trinidad based financial institution effective June 15, 2020 (the "Effective Date"). On the Effective Date, the Borrower withdrew $15 million to satisfy the Company's obligations relating to prepaying the C$20 million Canadian based term loan (the "Retired Term Loan"). During the three and six months ended June 30, 2020, the Company incurred $180,000 in expenses and recorded a $1,158,000 revaluation loss in connection with prepaying the Retired Term Loan.

 

Pursuant to the New Term Loan, the Borrower has the option to withdraw the remaining $5 million available balance prior to one year from the Effective Date. The New Term Loan is a senior secured syndicated loan, with the lender acting as initial lender, arranger and administrative agent. The New Term Loan bears a fixed interest rate of 7.85% per annum, compounded and payable quarterly. Principal payments commence two years from the Effective Date with twenty equal and consecutive quarterly principal repayments thereafter. Prepayments are permitted after one year with a 1.0% penalty and a 30-day notice period, and no penalty shall apply on principal repayments after three years. The New Term Loan is principally secured by a pledge of equity interests and fixed and floating security interests over all present and after acquired assets of the Borrower and its wholly owned Trinidad exploration and production subsidiary. The New Term Loan contains industry standard representations and warranties, undertakings, events of default, and financial covenants, which will be tested on an annual basis commencing with the year ended December 31, 2022.

 

At all times the Borrower must maintain a cash reserves balance of not less than the equivalent of two quarterly interest payments. Accordingly, the Company classified $589,000 as non-current restricted cash on the consolidated statement of financial position as at June 30, 2020 (December 31, 2019 - $nil).

 

The New Term Loan is measured at amortised cost, with the aggregate associated financing fees of $383,000 unwound using the effective interest rate method to the face value at maturity. The following table details the movements of the Company's term loan balances for the periods indicated.

 

	Retired Term Loan liability	New Term Loan liability	Term Loan
Balance, January 1, 2019	$           10,130	$                     -	$           10,130
Advance, net of amendment and transaction fees	3,590	-	3,590
Revaluation gain	(656)	-	(656)
Accretion	384	-	384
Effect of change in foreign exchange rates	518	-	518
Balance, December 31, 2019	$           13,966	-	$           13,966
(Payments) advances, net of fees	(14,750)	14,617	(133)
Revaluation loss on prepayment	1,158	-	1,158
Accretion	173	50	223
Effect of change in foreign exchange rates	(547)	-	(547)
Balance, June 30, 2020	$                     -	$         14,667	$           14,667

 

10.     Other Liabilities

 

In connection with the Retired Term Loan, the Company previously granted its former lender a production payment equal to 1.33 percent of petroleum sales from Trinidad land holdings, payable quarterly through October 31, 2023. Upon repayment of the Retired Term Loan, the Company and the lender agreed not to buyout the production payment liability and as such entered into an amended production payment agreement to continue the obligation under its previous terms and conditions. The production payment liability is revalued at each reporting period based on internally estimated future production and forward crude oil pricing forecasts. 

 

 

The following table details the movements of the Company's production liability for the periods indicated.

 

	Six months ended June 30, 2020	Year ended December 31, 2019
Balance, beginning of year	$                989	$                733
Revaluation loss	295	622
Payments	(141)	(404)
Effect of change in foreign exchange rates	(38)	38
Balance, end of period	$             1,105	$                989
Current (included in accounts payable and accrued liabilities)	$                158	$                220
Non-current	947	769
Other liabilities	$             1,105	$                989

 

11.     Decommissioning Liabilities and Abandonment Fund

 

Pursuant to production and exploration contracts with Heritage and the Trinidad and Tobago Minister of Energy and Energy Industries ("MEEI"), the Company is obligated to remit payments into abandonment funds based on production. The Company remits $0.25 per barrel of crude oil sold, and the funds will be used for the future abandonment of wells in the related licenced area. As at June 30, 2020, the Company classified $1,181,000 of accrued or paid fund contributions as non-current abandonment fund assets (December 31, 2019 - $1,125,000).

 

The Company estimated the net present value of the cash flows required to settle its decommissioning liabilities to be $9,645,000 as at June 30, 2020 based on an estimated inflation adjusted future liability of $21,509,000 (December 31, 2019 - $11,547,000 and $27,153,000, respectively). The following table summarizes the Company's estimated decommissioning liabilities at the end of the respective periods.

 

	Six months ended June 30, 2020	Year ended December 31, 2019
Balance, beginning of year	$           11,547	$             8,915
Liabilities incurred	9	91
Accretion expense	123	372
Revisions to estimates	(1,993)	2,108
Effect of change in foreign exchange rates	(41)	61
Balance, end of period	$             9,645	$           11,547

 

Based on currently available data, the long-term outlook for Trinidad inflation decreased from December 31, 2019, as the March 2020 inflation rate was near zero. At June 30, 2020, decommissioning liabilities were estimated using a long-term risk-free rate of 5.7 percent and a long-term inflation rate of 2.0 percent (December 31, 2019 - 5.5 percent and 3.3 percent, respectively), which reduced the estimated decommissioning provision by an aggregate $1,993,000 during the six months ended June 30, 2020.

 

12.     Income Taxes

 

The following table is a reconciliation of income taxes calculated by applying the applicable Trinidad statutory rates to net earnings before income tax expense.

 

	Six months ended June 30, 2020	Year ended December 31, 2019
Net loss before income taxes	$         (21,881)	$            (2,065)
Trinidad statutory rate	55.00%	55.00%
Expected income tax recovery at statutory rate	$         (12,035)	$            (1,136)
Effect on income tax resulting from:
Supplemental petroleum tax	6	4,782
Deductible supplemental petroleum tax	(3)	(3,079)
Benefit of tax assets not recognized	710	(1,176)
Tax rate differential	1,169	3,889
Other	254	275
Total income tax (recovery) expense	$            (9,899)	$              3,555

 

The net deferred income tax liability solely relates to the Company's Trinidad operations. The following table details the components of the liability for the six months ended June 30, 2020.

 

	December 31, 2019	Recognized in equity	Recognized in earnings (loss)	June 30,  2020
Property and equipment	$        (21,766)	$                  44	$           10,621	$        (11,101)
Decommissioning liabilities	638	(2)	(151)	485
Term loan	-	-	(161)	(161)
Loss carry forwards	5,706	(23)	(435)	5,248
Other	2,133	(5)	309	2,437
Net deferred income tax liability	$        (13,289)	$                   14	$           10,183	$           (3,092)

 

The Company's June 30, 2020 net deferred tax liability includes $8,170,000 of deferred tax asset, which are reviewed at each reporting date to assess whether it is probable that the related tax benefit will be realized in the future (December 31, 2019 - $8,477,000). As at June 30, 2020, the Company estimated that future taxable income was sufficient to realize the deferred tax asset. The estimates used to determine future taxable income are subject to measurement uncertainty, and actual results could differ from estimates.

 

13.     Shareholders' Capital

 

Issued and outstanding common shares

 

Common shares outstanding and shareholders' capital	Number of shares	Shareholders' capital
Balance, January 1, 2019	129,021,428	$            56,987
Issued pursuant to private placement, net of fees	31,666,667	4,496
Share-based settlements	15,000	24
Balance, December 31, 2019	160,703,095	$             61,507
Issued pursuant to private placement, net of fees	22,500,000	10,850
Share-based settlements	958,000	297
Balance, June 30, 2020	184,161,095	$             72,654

 

 

 

The Company is authorized to issue an unlimited number of voting common shares without nominal or par value.

 

February 2020 private placement

 

On February 26, 2020, the Company completed a private placement directed toward United Kingdom institutional investors, whereby gross proceeds of $11,653,000 were raised by way of issuing 22,500,000 new common shares at a price of approximately C$0.69 per common share. Fees incurred from the private placement were $803,000, which included brokerage commissions and legal and corporate finance advisory fees, resulting in net proceeds of $10,850,000.

 

Equity compensation plans

 

The Company has a share option plan pursuant to which options to purchase common shares of the Company may be granted by the Board of Directors to directors, officers, employees and consultants of the Company. Compensation expense is recognized as the options vest. Unless otherwise determined by the Board of Directors, vesting typically occurs one third on each of the next three anniversaries of the grant date as recipients render continuous service to the Company, and the share options typically expire five years from the date of the grant.

 

	Number of share options	Weighted average exercise price
Outstanding, January 1, 2019	8,534,640	C$             0.44
Granted	2,550,000	0.23
Expired	(2,344,040)	0.87
Outstanding, January 1, 2020	8,740,600	C$             0.26
Granted	2,611,000	0.48
Exercised	(958,000)	0.29
Expired	(147,500)	2.10
Outstanding, June 30, 2020	10,246,100	C$             0.29
Exercisable, June 30, 2020	5,341,335	C$             0.22

 

The Company has an incentive share compensation option plan which provides for the grant of incentive share options to purchase common shares of the Company at a C$0.05 exercise price. A maximum of one million common shares have been approved for issuance under this plan, of which 437,625 have been historically issued under the plan as of June 30, 2020. There were no incentive share options outstanding as at June 30, 2020, and no incentive options have been awarded since 2014.

 

During the three and six months ended June 30, 2020, the Company recorded share-based compensation expenses of $81,000 and $125,000 in relation to share option plans, respectively (2019 - $49,000 and $80,000).

 

 

 

Weighted average common shares

 

The following table sets forth the details of weighted average common shares used in calculating net loss per common share for each of the periods indicated.

 

Three months ended June 30,			Six months ended June 30,
	2020	2019	2020	2019
Weighted average common shares, basic	183,639,870	160,688,095	176,500,391	150,890,673
Dilutive impact of share-based compensation	-	-	-	-
Weighted average common shares, diluted	183,639,870	160,688,095	176,500,391	150,890,673

 

There was no dilutive impact to the weighted average number of common shares for the three and six months ended June 30, 2020, as 6.2 million and 5.5 million share options were excluded from the diluted weighted average share calculation as they were anti-dilutive, respectively (2019 - 1.3 million and 1.0 million).

 

14.     Net Finance Expense

 

	Three months ended June 30,		Six months ended June 30,
	2020	2019	2020	2019
Interest income	$                 (19)	$                  (29)	$                 (25)	$                  (60)
Term loan interest expense	288	223	587	445
Term loan revaluation loss (gain)	1,158	-	1,158	(277)
Production liability revaluation loss (gain)	35	(23)	295	209
Accretion on term loan	99	78	223	151
Accretion on decom. liabilities	21	90	123	180
Lease liability interest expense	5	24	10	50
Finance expense	180	-	180	-
Other	1	(112)	(45)	(126)
Net finance expense	$              1,768	$                  251	$              2,506	$                  572
Cash net finance expense	$                 455	$                  116	$                 758	$                  337
Non-cash net finance expense	1,313	135	1,748	235
Net finance expense	$              1,768	$                  251	$              2,506	$                  572

 

15.     Market Risk Management

 

Management of cash flow variability is an integral component of the Company's business strategy. Changing business conditions are monitored regularly and, where material, reviewed with the Board of Directors to establish risk management guidelines to be used by Management. The risk exposures inherent in the movements of the price of crude oil and fluctuations in foreign exchange rates are proactively reviewed by the Company and may be managed through the use of derivative contracts as considered appropriate.

 

Commodity price risk

 

The Company's operational and financial condition are largely dependent on the commodity prices received from petroleum production. Movement in commodity prices could have a significant positive or negative effect on the Company's net earnings and cash flows. To alleviate this risk, the Company maintains a risk management strategy to protect funds flow from operations from the volatility of commodity prices. The Company's strategy focuses on the periodic use of puts, costless collars, swaps or fixed price contracts to limit exposure to fluctuations in commodity prices while allowing for participation in commodity price increases. The Company had no commodity-based risk management contracts in place during the three and six months ended June 30, 2020. The Company will continue to monitor forward commodity prices and may enter future commodity-based risk management contracts to reduce the volatility of petroleum sales and protect future development and exploration capital programs.

 

In April 2019, the Company purchased put option contracts from a financial institution for 800 bbls/d at a strike price of Brent $56.10 per barrel from June 1, 2019 to December 31, 2019. As at June 30, 2019, the Company recognized a financial derivative asset of $196,000 related to the put options. For the three and six months ended June 30, 2019, the Company recorded derivative gains of $25,000 and $25,000, respectively related to commodity management contracts.

 

Foreign currency risk

 

Foreign currency exchange risk arises from changes in foreign exchange rates that may affect the fair value or future cash flows of the Company's financial assets or liabilities. As the Company primarily operates in Trinidad, fluctuations in the exchange rate between the TT$ and the US$ could have a significant effect on reported results, as the sales prices of crude oil are determined by reference to US$ denominated benchmark prices and the majority of the Company's operating costs are denominated in TT$. In addition, the Company has US$ denominated debt and related interest payments. These risks are currently mitigated by the fact that the TT$ is informally pegged to the US$. The Company has further foreign exchange exposure on head office costs and production payment liabilities denominated and payable in Canadian dollars, as well as costs payable in pounds sterling required to maintain its AIM listing. Any material movements in the C$ to US$ exchange rate may have a material effect on the Company's reporting results.

 

The Company's foreign currency policy is to monitor foreign currency risk exposure in its areas of operations and mitigate that risk where possible by matching foreign currency denominated expenses with petroleum sales denominated in foreign currencies. The Company attempts to limit its exposure to foreign currency through collecting and paying foreign currency denominated balances in a timely fashion. The Company had no contracts in place to manage foreign currency risk as at or during the three and six months ended June 30, 2020 and year ended December 31, 2019.

 

16.     Capital Management

 

The basis for the Company's capital structure is dependent on the Company's expected business growth and any changes in the business and commodity price environment. The Company's long-term goal is to fund current period decommissioning and capital expenditures necessary for the replacement of production declines using only funds flow from operations. Profitable growth activities will be financed with a combination of funds flow from operations and other sources of capital. The Company typically uses equity and term debt to raise capital.

 

When evaluating the Company's capital structure, Management's long-term strategy is to maintain net debt to trailing twelve-month funds flow from operations at or below a ratio of 2.0 times. While the Company may exceed this ratio from time to time, efforts are made after a period of variation to bring the measure back in line. Net debt is a Non-IFRS measure calculated by summing the Company's working capital and the principal (undiscounted) non-current amount of senior secured debt. Working capital is a Non-IFRS measure calculated as current assets minus current liabilities as they appear on the statements of financial position. Net debt is used by Management as a key measure to assess the Company's liquidity. Funds flow from operations is an additional IFRS measure included in the Company's consolidated statements of cash flows. Net debt and funds flow from operations are not standardized measures and therefore may not be comparable with the calculation of similar entities by other entities.

 

The Company also monitors its capital management through the net debt to net debt plus equity ratio. The Company's strategy is to utilize more equity than debt, thereby targeting net debt to net debt plus shareholders' equity at a ratio of less than 0.4 to 1. The Company's internal capital management calculations for the six months ended June 30, 2020 and year ended December 31, 2019 are set forth in the table below.

 

	Target measure	June 30,  2020	December 31, 2019
Current assets		$         (15,758)	$         (14,118)
Current liabilities		9,224	15,257
Working capital (surplus) deficit		$            (6,534)	$             1,139
Principal non-current balance of term loan		15,000	15,364
Net debt		$              8,466	$           16,503
Shareholders' equity		29,397	30,115
Net debt plus equity		$            37,863	$           46,618
Trailing twelve-month funds flow from operations(1)		$              3,907	$             6,840
Net debt to funds flow from operations	at or < 2.0 times	2.17	2.41
Net debt to net debt plus equity	< 0.4 times	0.22	0.35

 

Note:

(1)    Trailing twelve-month funds flow from operations as at June 30, 2020 include funds flow from operations for the six months ended June 30, 2020 plus funds flow from operations for the July 1 through December 31, 2019 interim period.

 

17.     Commitments

 

The Company has minimum work obligations under various operating agreements with Heritage, exploration commitments under exploration and production agreements with the MEEI and various lease commitments for office space and equipment. The following table sets forth the Company's estimated minimum contractual capital requirements as at June 30, 2020.

 

	Total	Estimated payments due by year
		2020	2021	2022	Thereafter
Operating agreements	$       2,834	$          117	$          953	$          261	$       1,503
Exploration agreements	6,214	4,214	2,000	-	-
Other commitments	248	101	147	-	-
Total minimum commitments	$       9,296	$      4,432	$      3,100	$          261	$       1,503

 

Under the terms of its operating agreements, the Company must fulfill minimum work obligations on an annual basis over the specific licence term. In aggregate, the Company is obligated to drill 12 wells and perform 18 well recompletions prior to the end of 2021. As of June 30, 2020, 10 wells were drilled, and 15 well recompletions were completed with respect to these obligations. The Company has provided $271,000 in cash collateralized guarantees to Heritage to support its operating agreement work commitments as of June 30, 2020 (December 31, 2019 - $271,000).

 

Under the terms of its Ortoire exploration licence, the Company has drilled two of four commitment wells and must also acquire and process 85-line kilometres of 2D seismic. The initial stage of the licence expires in October 2020, and the Company has applied for an extension based on its two commercial discoveries to date.