unlocking patos-marinza
ANNUAL REPORT 2010
Our Keys to Success ASSETS Bankers is unlocking the untapped potential of Patos-Marinza in Albania, the largest onshore heavy oilfield in continental Europe.
TECHNOLOGY We are capitalizing on proven horizontal drilling techniques to deliver large-scale growth of recoverable oil reserves.
PEOPLE Bankers is experienced in Canadian and international heavy oil exploitation, with proven ability to maximize the value of our assets through cash, cash flow and existing credit facilities.
STEWARDSHIP Sound corporate citizenship touches every aspect of what we do. Responsible environmental clean-up leadership.
09 financial summary 10 CEO’s message 12 operations 14 reserves and resources 16 corporate stewardship 18 management’s discussion & analysis 39 management’s report 40 iindependent auditors’ report 41 consolidated financial statements 44 notes to the consolidated financial statements
BANKERS 2010 ANNUAL REPORT l 1
2
“ IN 2010, BANKERS ACHIEVED ITS EXIT RATE GUIDANCE OF MORE THAN 12,000 BOPD”
32,000
“ WITH 75 HORIZONTAL
24,000
WELLS PLANNED IN 16,000
2011, THE HORIZONTAL
9,694 5,873
6,396
2008
2009
PROGRAM HAS BECOME THE HEART OF
2010
2011(E)
2012(E)
2013(E)
Annual Average Oil Production (Patos-Marinza) (bopd)
BANKERS’ GROWTH”
BANKERS 2010 ANNUAL REPORT l 3
4
“ INCREASING PRODUCTION, RESERVES, CASH FLOW AND NET ASSET VALUE”
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Brent Price
$76.36
$78.24
$76.86
$86.46
Sales Price
$47.16
$47.12
$46.61
$53.12
(62%)
(60%)
(61%)
(61%)
60 50 40
10
capitalized on this rising optimism as
$20.98
$22.76
$21.74
$26.55
we began to UNLOCK the potential of
30 20
“ Bankers Petroleum
$5.33
$5.90
$5.07
$5.31
$10.63
$9.94
$10.40
$10.98
$9.65
$9.35
$9.16
$10.26
0
our main asset in Albania - the PatosMarinza oilfield�
Netback per Barrel Netback
Sales
Operating
Royalty*
* Actual is based on blended royalty rate; all incremental production carries a flat 11% royalty until full cost recovery.
BANKERS 2010 ANNUAL REPORT l 5
6
“ BANKERS IS MAKING A DIFFERENCE”
In 2010, Bankers completed the following HSSE&S initiatives: • Provided donations for communities of flooded areas
• Supported the publication of the study on Geothermal Resources in Albania
• Supplied diesel for Fieri Pediatric Hospital
• Supported the ART EXPO of a young Albanian artist
• Supported the Red Cross’s Education on Health and Environment Protection project • Supported the publication of Albania business guide • Supported the FIAA EXPO Conference • Supported the publication of brochures • Supported Apollon TV Project called Apollon Show
• Supported the Trade Union of Oil Workers in Patos • Supported Regional Agency of Environmental, Fier • Provided road signs to Kuman Commune • Supported Zharreza Commune to construct a football field in Zharreza village
BANKERS 2010 ANNUAL REPORT l 7
Performance TSX:BNK $9 $8 $7
$5 $4 $3 $2 $1 2009
Apr
Jul
Oct
2010
Apr
Jul
January 2, 2009
2011
March 22, 2011
1,968
73.2
1,519
25.4
2009
Oct
2010
Net Present Value at 10% (Based on total proved plus probable reserves after tax using forecast prices) ($ millions)
2009
2010
Funds Generated ($ millions)
CAD$
$6
BANKERS 2010 ANNUAL REPORT l 9
Financial Summary Year ended December 31 (US $000s, except as noted)
2010
2009
2008
2007
Financial Highlights 170,376
86,614
110,253
61,289
Net operating income
81,103
31,496
51,141
31,956
Net income (loss)
14,265
(1,587)
(1,134)
Oil revenue
(150)
73,166
25,422
41,713
24,033
122,012
38,324
78,378
45,810
Average production (bopd)
9,597
6,438
5,875
4,724
Average price ($/barrel)
48.64
36.86
51.27
35.54
Netback ($/barrel)
23.15
13.40
23.78
18.53
Funds generated from operations Capital expenditures Operational Highlights
December 31 2010
2009
Cash and deposits Working capital (deficiency)
108,119 130,920
68,270 75,414
Total assets
467,414
304,820
Bank loans Shareholders’ equity
2008
2007
20,107 (7,387)
2,599 (9,605)
214,675
204,295
25,829
28,085
28,125
30,805
343,307
213,960
125,358
139,036
120.2
92.8
69.4
50.8
Reserves Albania - crude oil (mbbl)
Proved, gross
Proved plus probable, gross
Proved, probable plus possible, gross NPV of proved plus probable ($ millions, forecast price, 10% after tax) Total number of employees
237.6
213.9
180.0
147.1
426.6
422.3
310.9
240.6
1,968
1,519
1,007
720
259
230
220
205
245
228
183
151
1,860
1,420
135
394
Share information Shares outstanding, year-end (millions) Equity market capitalization (CAD$ millions)
10
To Our Shareholders, While 2009 was a year of prudence, 2010 was a year of growth. The global economy turned around, the demand for heavy oil grew and oil prices increased from $79.39 WTI on December 31, 2009 to $91.38 WTI on December 31, 2010. Throughout the year, interest in the energy sector intensified and the equity markets were exceptionally buoyant. Bankers Petroleum capitalized on this rising optimism as we began to UNLOCK the potential of our main asset in Albania - the PatosMarinza oilfield. We contracted two additional drilling rigs, giving us three drlling rigs and one additional service rig for a total of 10 service rigs. We raised $100 million of equity capital, and we delivered the largest capital program since our inception, spending $122 million. These efforts resulted in record operational and financial performance in 2010. Other highlights of the past year included the following: • Grew production by 49% from 8,100 barrels of oil per day (bopd) to 12,100 bopd; • Increased proved reserves by 30%, from 93 million to 120 million barrels. Proved plus probable reserves increased by 11% from 214 million to 238 million barrels; • Increased cash flow from operations by 188%, from $25 million to $73 million; • Completed several agreements with new buyers to purchase Patos-Marinza crude oil at prices ranging from 66% to 68% of Brent, and resumed delivery of crude oil to the Albanian domestic refinery; and
• Signed the Block “F” exploration concession agreement in April 2010. Geological and geophysical work has since commenced. The discovery of gas on this block has the potential to significantly enhance the economics of future thermal recovery projects at our Patos-Marinza oilfield. In 2010, the Company continued the implementation of our strategic plan and drilled 50 horizontal oil wells, five vertical delineation and water disposal wells and several successful well reactivations and work-overs. Year-end production from the new horizontal wells was approximately 6,000 bopd, with another 6,000 bopd from existing well reactivations. In 2010, we also initiated plans to construct a 40 kilometre oil pipeline from Patos-Marinza to the Port of Vlore, and completed the construction of two storage tanks at the export port terminal, which will increase the Company’s crude storage capacity to 160,000 barrels. Both of these projects will reduce operating costs, enhance export efficiency and improve transport safety. 2010 marked our largest environmental clean-up initiative with the start of Sector 3 remediation trials by three different processes: thermal, biological and mechanical. Results from this pilot will help in planning and implementing an overall field clean-up program in 2011 and beyond. Cooperation with the national oil company and the Government of Albania to participate in this initiative is also underway.
“2011 WILL BE A MILESTONE YEAR FOR THERMAL DEVELOPMENT OF THE PATOS-MARINZA OILFIELD”
Abdel F. (Abby) Badwi President & Chief Executive Officer
BANKERS 2010 ANNUAL REPORT l 11
Outlook To continue to UNLOCK the depth of opportunity of our assets in Albania, we plan to do the following to increase reserves, production and maximize cash flow in 2011:
Douglas C. Urch Executive Vice President, Finance & Chief Financial Officer
• Drill 66 horizontal and vertical wells and complete 120 well reactivations and work-overs at the Patos-Marinza oilfield. A fourth drilling rig is expected in the second quarter; • Increase production facilities to handle our target exit production rate of 20,000 bopd; • 2011 will be a milestone year for thermal development of the Patos-Marinza oilfield. Bankers will drill a vertical delineation well and two horizontal wells designed for high pressure and temperature steam injection, install a 25,000 BTU steam generator and all associated production facilities;
Ian McMurtrie Executive Vice President, Exploration & Development
• Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to Vlore and construction of the receiving hub in Fier; • Initiate water flood activity at the Kuçova oilfield with one injector well and four wells equipped for production; • Kuçova field activity has commenced as part of the approved 2011 work program and budget on the first group of wells with recompletion of two production wells, a water source well and conversion of one well for water injection as part of a secondary oil recovery project. Water injection is expected to commence during the second quarter of 2011; • Drill two exploration wells on Block “F”; • Continue with the environmental stewardship and social initiatives in our area of operations; and
Eugene Christensen Vice President, Engineering
Suneel Gupta Vice President, Production & Operations
• Add several senior professionals to our team of engineers, geoscientists, production and support staff to manage our $215 million 2011 capital program. I would like to take this opportunity to thank the Bankers team. They have done an exceptional job handling our growth and managing our activities to date and have built a well-planned road map for our expansion in Albania. I would also like to thank our Board of Directors for their guidance and our shareholders for their continued support.
Mark Hodgson Vice President, Business Development
On Behalf of the Board of Directors,
Abby Badwi President & Chief Executive Officer March 22, 2011
Leonidha Çobo Vice President & Deputy General Director, Albania
12
Operations PATOS-MARINZA CONTINUES TO OPEN ITSELF UP TO NEW, MORE EFFECTIVE METHODS OF RECOVERY Bankers expanded significantly in 2010 through growth in reserves, production, capital program, infrastructure and employees. There is more expansion to come, as Patos-Marinza continues to deliver growth opportunities in new zones and across undeveloped contiguous extensions. With respect to reserves, Bankers saw a 30% increase in originaloil-in-place to 7.8 billion barrels, a 30% increase in proved reserves to 120 million barrels and an 11% increase in proved and probable reserves to 238 million barrels. The Company’s independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively.
continue to place a heavy focus on horizontal drilling and the development of waterflood and thermal recovery techniques. With 75 horizontal wells planned in 2011, the horizontal program has become the heart of Bankers’ growth. Bankers believes the shift towards more enhanced, proven recovery techniques in 2011 will be the key to unlocking the next layer of value at Patos-Marinza.
During 2011, Bankers will start several major infrastructure projects. Phase 1 of a pipeline connecting the Patos-Marinza oilfield to the Port of Vlore facility on the coast is expected to be completed in the third quarter of 2011, with construction of Phase 2 beginning in early 2012. Additionally, Bankers will be expanding its central treatment facility to handle growing production, and will be building a bridge to connect its operations north of the river to the main part of the field.
The POD for the Kuçova oilfield has been approved by the Albanian authorities. The POD has a 25 year term plus Company elected extensions to further development and production of the field.
Operationally, Bankers continues the expansion and implementation of its Plan of Development (POD), which outlines the development strategy for the Patos-Marinza oilfield over the next several years. This program includes continuing well takeovers, reactivations and recompletions. Bankers will also
Kuçova field activity has commenced as part of the approved 2011 work program and budget on the first group of wells with recompletion of two production wells, a water source well and conversion of one well for water injection as part of a secondary oil recovery project. Water injection is expected to commence during the second quarter of 2011.
BANKERS 2010 ANNUAL REPORT l 13
PATOS-MARINZA – THE DEPTH OF OPPORTUNITY CONTINUES TO EXPAND Bankers continued to expand its successful reactivation and drilling program in 2010, drilling 50 horizontal wells and achieving its exit rate guidance of more than 12,000 barrels of oil per day (bopd). The Company achieved average daily production for 2010 of 9,597 bopd, an increase of 49% over 2009 levels of 6,438 bopd.
Montenegro
One major success of the 2010 program is the successful delineation of the D1 formation as a zone that can viably be produced through horizontal rather than cold heavy oil production with sand (CHOPS). Bankers drilled five D1 wells in 2010, resulting in some of the most productive wells drilled at Patos-Marinza to date, with initial production rates in excess of 350 bopd.
Serbia
Adriatic Sea
Albania Adriatic Sea
Patos Marinza Block F
2010 was also a significant year for the forward progression of the thermal program in the western extension of the field. This part of the field was not developed previously due to the high viscosity of the oil in place. Bankers, however, believes thermal stimulation similar to analogous operations in Western Canada will increase the mobility of the oil. Thermal development is expected to result in incremental reserves and production. To this end, Bankers drilled four vertical delineation wells in the western extension and began preparations for a thermal pilot project slated to begin steam injection into the reservoir in the third quarter of 2011.
Macedonia
Fier
Kuçova p1
p2
Vlorë 0
20km
Albania Ionian Sea
Central Treatment Facility City locator Areas of Operation Geophysical leads Existing gas fields
Greece
0
100km
In the last half of 2009, 10 horizontal wells were drilled into four of the more than 20 sand packages which comprise the PatosMarinza field geology. In 2010, Bankers drilled 50 new horizontal wells, delineating an additional four zones, all yielding successful results. With an average of 135 bopd per well from the horizontal program, Bankers plans to expand both the total number of horizontal drilling locations and the pace of drilling in future years. Expansion of the program in 2011 to 75 horizontal wells will be aided by a fourth drilling rig scheduled to arrive in Albania in the second quarter of 2011.
Concurrent with the forward progression of the thermal pilot project, Bankers also made significant progress on its early stage seismic reprocessing over the newly acquired Block “F”. A full scale thermal development program will require a fuel source for steam generation, and the most effective source is natural gas. Although Block “F” contains three depleted gas fields, Bankers believes there is more gas to be found in the vicinity of these fields. As a result, the Company plans to drill two exploration wells in the second half of 2011 to explore for new accumulations. Well reactivations and recompletions following the takeover from the state oil company continue to represent a significant component of Bankers’ capital development program. These wells are reconfigured with progressive cavity pumps to enhance production volumes. By the end of 2010, Bankers had 826 wells in inventory, an increase of 254 wells from the previous year.
14
2010 Albania Reserves and Resources With successful results from the Company’s horizontal drilling activities in the northern part of the Patos-Marinza oilfield, the Company is expanding the horizontal drilling program into the central, southern and western part of the field. Also, due to casing failures in old vertical wells, replacement of old vertical wells with new horizontal wells has been added to the capital program. Accordingly, in the proved plus probable development case, the number of well reactivations has been reduced to 310 wells and new horizontal wells have increased from 260 wells in the previous year’s projected capital program to 624 wells in 2011 and beyond. By the end of 2009, Bankers had drilled horizontal wells into four of the 20 stacked zones in the Patos-Marinza oilfield. Over the course of the horizontal drilling program in 2010, four new zones were drilled successfully, with the D1 delivering the highest flow rates seen to date in the field. The evaluations of the Albanian properties were conducted by RPS Energy Canada Ltd. for the Patos-Marinza oilfield and by DeGolyer and MacNaughton Canada Limited for the Kuçova oilfield.
At December 31, 2010, the Company is pleased to report proved reserves (1P) of 120 million barrels. This represents a 30% increase from December 31, 2009, after production of approximately 3.5 million barrels in 2010, representing over 11 times production replacement. Proved plus probable reserves (2P) were evaluated at 238 million barrels, an 11% increase from December 31, 2009. In the proved, probable and possible reserves (3P) case, Bankers saw a 1% increase from December 31, 2009 to 427 million barrels. All of Patos-Marinza’s 2010 reserves estimates, which represent the majority of the total figures, are from primary recovery methods alone.
Gross Oil Reserves – Using Forecast Prices (Mbbls) Gross Oil Reserves– Using Forecast Prices (Mbbls) Proved Developed Producing Developed Non-Producing Undeveloped Total Proved Probable Total Proved Plus Probable Possible Total Proved, Probable & Possible
Kuçova
Total Albania
Total Albania
17.3 99.7 117.0 109.2 226.2 168.4 394.6
3.2 3.2 8.2 11.4 20.6 32.0
17.3 102.9 120.2 117.4 237.6 189.0 426.6
22.9 69.9 92.8 121.1 213.9 208.4 422.3
%
(24) 47 30 (3) 11 (9) 1
3,552 3,033
(after tax using forecast prices) ($ millions)
1,968 1,519
Total Proved
Total Proved, Probable & Possible
2009
Patos-Marinza
Net Present Value at 10%
Total Proved Plus Probable
2010
949 526
2009
2010
BANKERS 2010 ANNUAL REPORT l 15
All recoverable reserve estimates for the Patos-Marinza oilfield represent recoverable oil from the developed part of the oilfield. The primary difference between the 2P and 3P reserve case is the productivity levels of horizontal production wells drilled to date and to be drilled within the 2011 $215 million capital program and beyond. Finding and development (F&D) costs on a 2P basis for 2010 were $5.80/bbl, however, should well productivity match the 3P case, F&D costs would drop to $3.85/bbl. In the Patos-Marinza oilfield, the original-oil-in-place resource estimate increased 32% to 7.5 billion barrels from 5.7 billion barrels in 2009. The Kuçova oilfield, acquired in 2008, has an original-oil-in-place resource estimate of 297 million barrels. A development plan has been approved and initial field activities have commenced. Contingent and prospective resource oil estimates for the mapped area, western extension and prospects beyond current mapping within the Patos-Marinza oilfield, increased as well in 2010. As of December 31, 2010, P50 contingent resource of 1.2 billion barrels, a 45% increase from 819 million barrels in 2009 and P50 prospective resource of 540 million barrels, a 47% increase from 368 million barrels in 2009 have been attributed to thermal recovery technologies to be applied to the Gorani and Driza formations and secondary water flood recovery methods in the Marinza formation.
208.4 130.9 93.5
In 2011, Bankers will continue to focus drilling activity in locations where the Company can maximize value through both production additions and increased reserves.
110.6
121.1
118.0
56.5
96.3
45.3
50.8
69.4
92.9
120.0
2006
2007
2008
2009
2010
Reserves - Primary Recovery (millions of barrels) Possible
Probable
Proved
7.8
Quantifying contingent and prospective resources at Patos-Marinza validates the Company’s plans for thermal pilot and water flood injection programs proposed for the 2011 capital program. Success of such initiatives can lead to the conversion of significant volumes of these resources to recoverable reserves and the subsequent implementation of a commercial field expansion in 2012 and beyond. Similarly to the reported reserves, Bankers is also pleased to report that the third party evaluated net present value (10% discount) on a 2P basis is $1.97 billion and on a 3P basis is $3.55 billion.
189.0
6.0 5.0
2.7 2.0
2006
2007
2008
2009
Original-Oil-in-Place (billions of barrels)
2010
16
Corporate Stewardship HEALTH, SAFETY, SECURITY, ENVIRONMENT & SOCIAL (HSSE&S) Bankers continues to significantly reduce the environmental impact of ongoing petroleum operations in the PatosMarinza oilfield in Albania. To date, the Company has taken the initiative to clean-up reactivated wells and vastly improve operating standards in the field, positively impacting safety and the environment. As the operator of the field, Bankers has demonstrated its commitment to local communities and the country as a whole by providing active leadership with regards to the clean-up of legacy damage in Albania.
Management’s dedication to the improvement in culture, including education and training for employees, open communication and contractor and Company interfaces, contributed to Bankers’ HSSE&S initiatives in 2010.
Beyond the impact of Bankers’ high standards of operating practices, 2010 was a banner year for the growth of the Company’s environmental and social maturity as a responsible operator in a foreign country. The addition of numerous environmental and social roles within the organization has resulted in a direct impact on both the progression of Bankers’ Sector 3 pilot clean-up project as well as community relations.
Bankers announced the appointment of Robert Carss as corporate Health, Safety, Social, and Environment (HSSE) Director. Robert brings 24 years of experience in Canada and internationally in the field of health, safety and environmental stewardship. Bankers remains committed to provide a safe and healthy workplace and protection of the environment.
BANKERS 2010 ANNUAL REPORT l 17
“ BANKERS REMAINS COMMITTED TO PROVIDE A SAFE AND HEALTHY WORKPLACE AND PROTECTION OF THE ENVIRONMENT”
WORKING IN THE COMMUNITY Bankers seeks to ensure that communities in which it operates share in the benefits of the oil and gas development taking place in their vicinity. In addition to creating jobs for locals and utilizing local suppliers and service providers, the Company remains committed to working with neighbouring communities to improve the quality of life for residents by funding and developing projects in education, infrastructure, culture and health. In 2010, Bankers completed the following HSSE&S initiatives: Provided donations for communities of flooded areas Provided funds for communities in the flooded areas in the Shkodra region in the northern part of Albania. Supplied diesel for Fieri Pediatric Hospital Purchased 3,500 litres of fuel for the central heating system of the Fieri Pediatric hospital during an emergency on some cold winter days. Supported the Red Cross’s Education on Health and Environment Protection project Contributed funds to overcome health and environmental issues in the Communes of Zharreza and Kallm in Fieri as part of a program initiated by the Red Cross-Fieri Branch. Supported the publication of Albania business guide Supported the FIAA EXPO Conference Sponsored the EXPO Conference in May 2010 called Albania - a New Destination for Investments. The conference was organized by the Foreign Investors Association of Albania (FIAA). Supported the publication of brochures Sponsored the publication of brochures for the National Agency on Natural Resources. Supported Apollon TV Project called Apollon Show
Supported the publication of the study on Geothermal Resources in Albania Bankers sponsored the publication of the study on Geothermal Resources in Albania and the Platform for their Exploitation, prepared by a group of professors from the Geo-Mining Faculty in Tirana. Supported the ART EXPO of a young Albanian artist Supported the organization of an ART-EXPO on jewelry designing by a talented young Albanian artist. Supported the Trade Union of Oil Workers in Patos Sponsored a documentary film on the history of crude oil in Albania titled Ari i Zi Flet. This project was initiated by the Trade Union of Oil Workers in Albania. Supported Regional Agency of Environmental, Fier Contributed to advertising by the Ministry of Environment, Forest and Water Administration in the campaign against fires in the forests. Provided road signs to Kuman Commune Supported Zharreza Commune to construct a football field in Zharreza village
.
18
Management’s Discussion and Analysis The following is management’s discussion and analysis (MD&A) of Bankers Petroleum Ltd.’s (Bankers or the Company) operating and financial results for the year ended December 31, 2010, compared to the preceding year, as well as information and expectations concerning the Company’s outlook based on currently available information. The MD&A should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2010 and 2009, together with the notes related thereto. Additional information relating to Bankers, including its Annual Information Form (AIF), is on SEDAR at www.sedar.com and on the Company’s website at www.bankerspetroleum.com. All dollar values are expressed in US dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles (GAAP). The Company reports its heavy oil production in barrels. This MD&A is prepared as of March 22, 2011.
NON-GAAP MEASURES Netback per barrel and its components are calculated by dividing revenue, royalties, operating and sales and transportation expenses by the gross production volume during the period. Netback per barrel is a non-GAAP measure but it is commonly used by oil and gas companies to illustrate the unit contribution of each barrel produced. Net operating income is similarly a non-GAAP measure that represents revenue net of royalties, operating and sales and transportation expenses. The Company believes that net operating income is a useful supplemental measure to analyze operating performance and provides an indication of the results generated by the Company’s principal business activities prior to the consideration of other income and expenses. Funds generated from operations include all cash from operating activities and are calculated before change in non-cash working capital. Reconciliation to the GAAP measure is as follows:
($000s)
2010
2009
Cash provided by operating activities
51,452
10,931
Change in non-cash working capital
21,714
14,491
Funds generated from operations
73,166
25,422
The non-GAAP measures referred to above do not have any standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures used by other companies.
CAUTION REGARDING FORWARD-LOOKING INFORMATION This MD&A offers our assessment of the Company’s future plans and operations as of March 22, 2011 and contains forward-looking information. Such information is generally identified by the use of words such as “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “believe” and similar expressions are intended to identify forward-looking statements. Statements relating to “reserves” or “resources” are also forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources and reserves described can be profitably produced in the future. All such statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Management believes the expectations reflected in those forward-looking statements are reasonable but no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this MD&A should not be unduly relied upon. These statements speak only as of the date hereof.
BANKERS 2010 ANNUAL REPORT l 19
In particular, this MD&A contains forward-looking statements pertaining to the following: • performance characteristics of the Company’s oil and natural gas properties; • crude oil production estimates and targets; • the size of the oil and natural gas reserves and/or resources; • capital expenditure programs and estimates; • projections of market prices and costs; • supply and demand for oil and natural gas; • environmental liabilities associated with the Company’s operations in Albania; • amendments to the Company’s Petroleum Agreement relating to the Kuçova oilfield; • expectations regarding the ability to raise capital and to continually add to reserves through acquisitions and development; and • treatment under governmental regulatory regimes and tax laws. These forward-looking statements are based on a number of assumptions, including but not limited to: those set out herein and in the Company’s Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information (NI 51-101 Report), availability of funds for capital expenditures, a consistent and improving success rate for well recompletions at the Patos-Marinza oilfield, the evaluation and the implementation of a successful Plan of Development relating to the Kuçova oilfield, increasing production as contemplated by the Plan of Development and Addendum for the Patos-Marinza oilfield, stable costs, availability of equipment and personnel when required for the Company’s operations, continuing favourable relations with Albanian governmental agencies and continuing strong demand for oil and natural gas. Actual results could differ materially from those anticipated in such forward-looking statements as a result of the risks and uncertainties set forth below: • general economic, market and business conditions; • volatility in market prices for oil and natural gas; • risks inherent in oil and gas production operations including those relating to maintaining and increasing oil and gas production; • uncertainties associated with estimating oil and natural gas reserves; • competition for, among other things, capital, acquisitions of reserves, undeveloped lands and skilled personnel; • incorrect assessments of the value of acquisitions; • geological, technical, drilling and processing problems; • fluctuations in foreign exchange or interest rates and stock market volatility; • rising costs of labour and equipment; • failure to agree on terms to an amending agreement in regards to the Kuçova oilfield on terms acceptable to the Company, or at all; • changes in foreign laws and regulations including those related to tax laws and incentive programs relating to the oil industry; • environmental risks, including larger than expected environmental liabilities associated with the Company’s operations in Albania; • the ability to implement corporate strategies; • the ability to obtain financing; • the state of domestic and international capital markets; • changes in oil acquisition and drilling programs; • failure to complete and/or realize the anticipated benefits of its acquisitions; and • delays resulting from, or inability to obtain, required regulatory approvals. The Company from time to time updates its forward-looking information based on the events and circumstances that occurred during the period and has adjusted its capital expenditure program accordingly to ensure that capital expenditures are funded by cash provided by operations, cash on hand and its available credit. Readers are cautioned that the foregoing lists of factors are not exhaustive. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
20
BUSINESS PROFILE Bankers Petroleum Ltd. is a Canadian-based oil exploration and production company focused on maximizing the value of its heavy oil assets in Albania. The Company is targeting growth in production and reserves through application of new and proven technologies by an experienced technical team. All revenue is currently generated from its operations in Albania, which is located northwest of Greece in South Eastern Europe. In Albania, Bankers operates and has the full rights to develop the Patos-Marinza and Kuçova oilfields pursuant to License Agreements with the Albanian National Agency for Natural Resources (AKBN) and Petroleum Agreements with Albpetrol Sh.A (Albpetrol), the state owned oil and gas corporation. The licenses became effective in March 2006 and September 2009, respectively, each having a 25 year term with an option to extend at the Company’s election for further five year increments. The Patos-Marinza oilfield is the largest onshore oilfield in continental Europe, holding approximately 7.5 billion barrels of original-oil-in-place (OOIP). The Company also has exclusive rights to exploration Block “F” (adjacent to the Patos-Marinza oilfield), a 185,000 acre oil and gas prone exploration field.
BANKERS 2010 ANNUAL REPORT l 21
OVERVIEW & SELECTED ANNUAL INFORMATION ($000s, except as noted) Results at a Glance
Year ended December 31 2010
2009
2008
170,376
86,614
110,253
Net operating income
81,103
31,496
51,141
Net income (loss)
14,265
(150)
(1,587)
0.060/0.058
(0.001)
(0.009)
Financial Oil revenue
Basic/diluted earnings (loss) per share Funds generated from operations Additions to property, plant and equipment
73.2
41.7 25.4
73,166
25,422
41,713
122,012
38,324
78,378
2008
Operating Average production (bopd)
9,597
6,438
5,875
Average price ($/barrel)
48.64
36.86
51.27
Netback ($/barrel)
23.15
13.40
23.78
Average Brent oil price ($/ barrel)
79.50
61.67
97.02
2009
Funds Generated ($ millions)
December 31
170.4
2010
2009
2008
Cash and deposits
108,119
68,270
20,107
Working capital (deficiency)
130,920
75,414
(7,387)
Total assets
467,414
304,820
214,675
Bank loans
25,829
28,085
28,125
343,307
213,960
125,358
Shareholders’ equity
2010
During the year, Bankers increased its revenue, net operating income and funds generated from operations through its continued success with the horizontal drilling program and
110.3 86.6
2008
2009
2010
Oil Revenue ($ millions)
ongoing well reactivations. The average oil sales price received by the Company during the year was $48.64/bbl, a 36% increase from $36.86/bbl in 2009. Higher average oil prices, in conjunction with keeping overall production costs relatively consistent, resulted in a 73% increase in the average 2010 netback to $23.15/bbl from $13.40/bbl in 2009. On average,
81.1
the oil price received by the Company in 2010 represented approximately 61% of the Brent oil price, a modest improvement from 60% in 2009. Contracts for 2011 sales now average 65% of the Brent oil price. Oil exports increased to 85% in 2010, from 82% of total sales in
51.1 31.5
2009, with the balance supplying the domestic Albanian refineries. Consolidated capital expenditures increased to $122.0 million in 2010 as compared to $38.3 million in 2009 and $78.4 million in 2008. Shareholders’ equity increased to $343.3 million in 2010 from $214.0 million in 2009 and $125.4 million in 2008. The increase in shareholders’ equity in 2010 was due to the new equity issue in July 2010 and exercises of warrants and options throughout the year.
2008
2009
2010
Net Operating Income ($ millions)
22
Highlights Bankers accomplished several key achievements during 2010: • Average production increased 49% to 9,597 bopd from 6,438 bopd in 2009. Exit production at year-end 2010 exceeded 12,100 bopd as compared to 8,100 bopd at year-end 2009. • On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. • The Company continues to maintain a strong balance sheet with cash of $108.1 million and working capital of $130.9 million at December 31, 2010 as compared to cash of $68.3 million and a working capital of $75.4 million at December 31, 2009. • A second and third drilling rig commenced operation in the Patos-Marinza oilfield in January and July 2010, respectively. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal wells. • In April 2010, the production sharing contract for the Block “F” exploration acreage application was finalized. The area contains several seismically defined structural and amplitude anomalies prospective for oil and natural gas.
9,597
5,875
• Reserves in Albania increased at all levels: a 30% increase in original-oil-in-place (OOIP) assessment to 7.8 billion barrels from 6.0 billion barrels, an increase of 11%
6,438
to 238 million barrels of proved plus probable reserves and an increase of 1% to 427 million barrels of proved, probable and possible reserves. Additionally, the Company’s independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. The corresponding net present value (NPV) after tax (discounted at 10%) of the proved plus probable reserves
2008
2009
2010
increased by 30% to $2.0 billion from $1.5 billion.
GROWTH STRATEGY Average Production (bopd)
Bankers’ strategy is focused on petroleum assets that have long-life reserves with production growth potential. Employing its knowledge base and technical expertise, the Company is working to optimize its existing assets from the application of primary, secondary and enhanced oil recovery (EOR) extraction technologies, creating long-term value for
23.78
23.15
shareholders. This will be accomplished through the attainment of its main objectives: increasing production, reserves, funds generated from operations and net asset value. Bankers’ strategic priorities are to:
13.40
• Increase reserves and production; • Maintain a strong balance sheet by controlling debt and managing capital expenditures; • Control costs through efficient management of operations;
2008
2009
Netback ($ barrel)
2010
• Pursue new and proven technology applications to improve operations and assist exploration endeavours;
BANKERS 2010 ANNUAL REPORT l 23
• Expand infrastructure (pipelines, storage, treating capacity) to increase production capacity in a cost-effective manner; • Explore undeveloped acreage to identify and create development opportunities; • Maintain a strong focus on employee, contractor and community health and safety; and • Manage environmental and social performance to minimize negative ecological impacts and ensure continued stakeholder support. In pursuing the long-term growth strategy, Bankers is primarily focused on accessing the heavy oil upside from its Albanian assets, which includes the effective implementation of the Patos-Marinza development plan as well as applying EOR and secondary extraction techniques to increase the field’s recoverable reserves. In addition, the Company’s strategy involves identifying and acquiring other potential petroleum opportunities in Albania to increase overall value. During the year, negotiations to finalize the Production Sharing Contract for Block “F” exploration acreage were concluded. The area contains several seismically defined structures and amplitude anomalies prospective for oil and natural gas. Throughout the year, Bankers focused on achieving its priorities and implementing its capital programs in Albania. The Company funded its capital programs using funds generated from operations and existing cash. Strategic allocation of the work program and budget is designated to provide additional recoverable reserves at the Patos-Marinza and Kuçova oilfields and still achieve an appropriate growth in production.
Key Performance Indicators Key performance indicators relate to those factors that Bankers can directly affect, and are indicators of the Company’s ability to provide long-term value to its shareholders, which include optimizing the cost of operations over time, improving exploration and development and increasing operational performance through technology and best practices. Key measurements include operating costs, production volumes and safety performance. These key performance indicators are continuously reviewed and monitored. In addition, strengthening relationships with employees, governments, communities and other stakeholders are important aspects of the business for Bankers. The effective management of these relationships allows the Company to tap into new growth opportunities and efficiently develop operations for the future.
CAPABILITY TO DELIVER RESULTS Activity in the oil industry is subject to a range of external factors that are difficult to actively manage, including commodity prices, resource demand, regulator and environmental regulations and climate conditions. Bankers gives significant consideration to these factors and backs-up its strategy by employing and positioning necessary resources to deliver on its goals and commitment to increase value for shareholders. The Company focuses its capital on opportunities that provide the potential for the best returns. Comprehensive insurance policies are in place to help safeguard its assets, operations and employees. Relationships with stakeholders and key partners are carefully cultivated to assist in the Company’s future development and growth. The experiences of management and its technical team ensure that the Company can fulfill its commitment to deliver maximum value to its shareholders.
24
INDUSTRY & ECONOMIC FACTORS Commodity price and foreign exchange benchmarks for the past two years are as follows:
2010
2009
79.50
61.67
US/ Canadian dollar year-end exchange rate
0.9946
1.0466
US/ Canadian dollar average exchange rate
1.0299
1.1420
Brent average oil price ($/barrel)
The world crude oil prices strengthened during the course of 2010. Average Brent oil prices improved from $76/bbl in the first quarter to $86/bbl in the fourth quarter of 2010. In 2010, Bankers generated 85% of its crude oil revenue from sales to international markets. The remainder was sold to ARMO, an independent petroleum refinery in Albania. Both the domestic and international selling prices are based on the Brent oil price. The Company has not entered into any commodity derivative contracts as at or during the year ended December 31, 2010. The fluctuation in Canadian dollar mirrored that of oil prices in 2010. The appreciation of the Canadian dollar against its US counterpart was most significant in the second part of 2010. On an average basis, the Canadian dollar strengthened by 10% in 2010. The fluctuations in the foreign exchange currencies impacted cash and some short-term investments that are denominated in Canadian dollars. The strengthening of the Canadian dollar after the July 2010 equity financing was largely responsible for a foreign exchange gain of $5.2 million in 2010.
Significant Developments in 2010 Bankers accomplished several key achievements in 2010 in response to improvements in the commodity market. These events included expansion of the horizontal drilling program by activating a second and third rig; completion of a bought deal equity issue in July; construction of extra tankage at the Port of Vlore export terminal and the overall growth of capital programs. During the year, Bankers activated a second and third drilling rig, enabling the Company to drill additional vertical delineation wells in the western extension of the field, as well as thermal pilot wells, contributing to the growth of its horizontal programs. A total of 55 wells were drilled and completed in 2010, of which 50 were horizontal wells. On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. In 2010, Bankers commenced construction of the extra tankage at the Port of Vlore export terminal. This facility will increase the storage capacity from 80,000 barrels to 160,000 barrels, improving the export shipping logistics and enabling larger crude oil cargoes.
BANKERS 2010 ANNUAL REPORT l 25
QUARTERLY SUMMARY Below is a summary of Bankers’ performance over the last eight quarters.
2010 ($000s, except as noted)
First Quarter
Second Quarter
$/bbl Average production (bopd) Oil revenue
8,282
Third Quarter
$/bbl 9,830
Fourth Quarter
$/bbl 9,826
Year $/bbl
$/bbl
9,597
10,424
35,149
47.16
42,147
47.12
42,135
46.61
50,945
53.12
170,376
48.64
Royalties
7,190
9.65
8,367
9.35
8,284
9.16
9,841
10.26
33,682
9.62
Operating expenses
7,925
10.63
8,892
9.94
9,401
10.40
10,526
10.98
36,744
10.49
Sales and transportation
4,395
5.90
4,535
5.07
4,804
5.31
5,113
5.33
18,847
5.38
15,639
20.98
20,353
22.76
19,646
21.74
25,465
26.55
81,103
23.15
Net operating income
2009 ($000s, except as noted)
First Quarter
Second Quarter
$/bbl Average production (bopd) Oil revenue
5,864
Third Quarter
$/bbl 6,383
Fourth Quarter
$/bbl 6,258
Year $/bbl
$/bbl
6,438
7,234
13,052
24.73
20,107
34.63
23,441
40.71
30,014
45.10
86,614
36.86
Royalties
3,486
6.61
5,389
9.28
5,368
9.32
6,225
9.35
20,468
8.71
Operating expenses
5,512
10.44
5,748
9.90
6,083
10.56
7,438
11.18
24,781
10.55
Sales and transportation
1,426
2.70
2,003
3.45
2,739
4.76
3,701
5.56
9,869
4.20
Net operating income
2,628
4.98
6,967
12.00
9,251
16.07
12,650
19.01
31,496
13.40
2010 ($000s, except as noted)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
13,819
18,792
16,571
23,984
73,166
470
2,694
4,267
6,834
14,265
Basic/diluted earnings per share
0.002
0.012/0.011
0.018/0.017
0.028
0.060/0.058
General and administrative
1,926
1,789
1,927
2,613
8,255
330,371
339,661
445,774
467,414
467,414
Capital expenditures
26,700
29,262
27,991
38,059
122,012
Bank loans
26,418
27,330
23,887
25,829
25,829
Financial Funds generated from operations Net income
Total assets
26
2009 ($000s, except as noted)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year
1,265
5,998
7,371
10,788
25,422
Net income (loss)
(2,492)
(1,679)
1,708
2,313
(150)
Basic/diluted earnings (loss) per share
(0.014)
(0.009)
0.008
0.010
(0.001)
1,204
2,079
1,410
1,757
6,450
210,674
257,689
292,212
304,820
304,820
2,835
6,126
12,104
17,259
38,324
26,948
32,651
31,355
28,085
28,085
Financial Funds generated from operations
General and administrative Total assets Capital expenditures Bank loans
DISCUSSION OF OPERATING RESULTS Production, Revenue and Netback
Average production (bopd) Oil revenue ($000s)
2010
2009
%
9,597
6,438
49
170,376
86,614
97
48.64
36.86
32
9.62
8.71
10
10.49
10.55
(1)
5.38
4.20
28
23.15
13.40
73
Netback ($/bbl) Average price Royalties Operating expenses Sales and transportation Netback
During 2010, average production increased 49% to 9,597 bopd from 6,438 bopd for 2009. The exit production rate exceeded 12,100 bopd at 2010 year-end compared to 8,100 at the preceding year-end. The increase in production was due to the expansion of the drilling program, continued well reactivation program and well recompletion program focused on bringing high productivity wells on stream. In 2010, a total of 55 wells were drilled and completed, of which 50 were horizontal wells. As of December 31, 2010, the Company had 826 wells in inventory, an increase of 254 wells compared to 572 at the end of 2009. Of these 254 wells, 55 were new wells drilled during 2010 and 199 were taken over from Albpetrol as the area of development was expanded. The majority of the wells taken over during the year were part of a consolidation effort to reduce Albpetrol activities in the primary focus areas for future Bankers’ development. As such, the majority of these wells were not reactivated with progressing cavity pumping systems in 2010. Of the total 826 wells in inventory at year-end, 445 are producing wells, nine are water disposal wells and 372 are non-active wells. In April 2010, Bankers resumed its oil sales to two Albanian refineries operated by ARMO, a domestic petroleum refinery. Under the ARMO crude oil sales contract, the pricing is competitive with export sales. In 2010, Bankers exported 85% of its crude at an average price of $48.94/bbl.
BANKERS 2010 ANNUAL REPORT l 27
On average, the Company received $48.64/bbl for the year, an increase of 32% from $36.86/bbl for the preceding year. This increase was largely due to the increase in commodity prices. The average Brent oil price for 2010 was $79.50/bbl, compared to $61.67/bbl in 2009, an improvement of 29%. Oil revenue increased 97% to $170.4 million in 2010 compared to $86.6 million in 2009. The Company achieved record average production of 10,424 bopd during the fourth quarter of 2010 compared to 9,826 bopd during the preceding quarter and 7,234 bopd during the fourth quarter of 2009. In the fourth quarter of 2010, revenue increased 21% and 70%, respectively, compared to the preceding quarter and the same period in 2009. The increase was mainly due to the improvement of oil prices and increased production. The Company received an average sales price of $53.12/bbl during the fourth quarter compared to $46.61/bbl in the third quarter and $45.10/bbl over the same period in 2009, an increase of 14% and 18%, respectively. The Company exported 80% of its crude oil during the fourth quarter compared to 84% during the preceding quarter and 100% during the same period in 2009. The netback during the fourth quarter of 2010 was $26.55/bbl compared to $21.74/bbl for the preceding quarter and $19.01/bbl for the fourth quarter of 2009, an increase of 22% and 40% respectively.
Royalties Royalties in Albania are calculated pursuant to the Petroleum Agreement with Albpetrol and consist of a royalty based on Albpetrol’s pre-existing production (PEP), a 1% gross overriding royalty (ORR) on new production and a 10% royalty tax (RT) on net production. Overall royalties for the year represented 20% of oil revenue, as compared to 24% for the preceding year. The decrease was due to increased production from new wells. As a percent of revenue, the various royalty components currently represent 10% from PEP, 1% for the ORR and 9% for the RT. Fluctuations in royalty on a per barrel basis are due to changes in the underlying oil prices. Royalties for the fourth quarter were $10.26/bbl (19% of revenue) compared to $9.16/bbl (20% of revenue) during the preceding quarter and $9.35/bbl (21% of revenue) for the same period in 2009. The average royalty rate declined during the quarter as more oil was produced from new production compared to the preceding quarter and the same period in 2009.
Operating Expenses Operating expenses for the year were $10.49/bbl, slightly reduced from $10.55/bbl in 2009. On a percentage of revenue basis, operating costs represented 22% of the revenue for the year, compared to 29% for the preceding year. The improvement was due to the increase in production levels, efficiency in well servicing costs and the increase in commodity prices. Operating expenses during the fourth quarter were $10.98/bbl compared to $10.40/bbl during the third quarter and $11.18/bbl during the same period in 2009. The moderate increase in operating expenses compared to the preceding quarter was a result of increased fuel costs and increased work-over costs.
Sales and Transportation Sales and transportation (S&T) costs for the year increased to $5.38/bbl from $4.20/bbl for 2009, mainly due to the increase in export sales and facility fees during the year and increased use of diesel in blending to alleviate diluent supply limitations. S&T expenses during the fourth quarter were $5.33/bbl compared to $5.31/bbl during the preceding quarter and $5.56/bbl in the fourth quarter of 2009. The reduction in S&T compared to the same period in 2009 was mainly due to the increase of domestic sales which incurred lower S&T costs. The export sales were 80% of total sales for the fourth quarter, 84% for the preceding quarter and 100% for the same period in 2009.
28
General and Administrative Expenses General and administrative (G&A) expenses for the year were $8.3 million, net of capitalization, compared to $6.5 million in 2009, an increase of 28%. The increase in G&A resulted mainly from the currency impact of the stronger Canadian dollar in comparison to the US dollar, as well as increases in professional fees, personnel costs and travel costs. The 2010 G&A costs represented $2.36/bbl, a 14% reduction from $2.74/bbl in 2009. The reduction in G&A on a per barrel basis was attributed to the production increase in 2010. During the year, the Company capitalized $10.1 million of G&A and stock-based compensation compared to $3.9 million for the preceding year. These expenses were directly related to acquisition, exploration and development activities in Albania. Non-cash stock-based compensation expense pertaining to stock options granted to officers, directors, employees and service providers were $14.7 million (2009 – $6.5 million). Of this amount, $8.1 million (2009 – $4.5 million) was charged to earnings and $6.6 million (2009 – $2.0 million) was capitalized. G&A expenses for the fourth quarter of 2010 were $2.6 million compared to $1.9 million in the preceding quarter and $1.8 million for the same period in 2009. The increase was mainly due to strengthening of the Canadian dollar against the US dollar compared to the preceding quarter and the same period in 2009, as well as increases in personnel and travel costs during the fourth quarter of 2010.
Depletion, Depreciation and Accretion Depletion, depreciation and accretion (DD&A) expenses for the year were $27.5 million ($7.86/bbl) compared to $16.2 million ($6.90/bbl) for 2009. The increase in DD&A expenses reflects higher production in Albania and an increase in depletable assets, inclusive of higher future capital requirements. The Company’s independent reserve evaluation prepared in accordance with the National Instrument NI 51-101 assessed proved gross reserves of 120.2 million barrels at December 31, 2010, compared to 92.8 million barrels at December 31, 2009. DD&A costs for the quarter ended December 31, 2010 were $10.7 million, compared to $6.0 million for the preceding quarter and $4.4 million for the same period in 2009. The increase in DD&A reflects the higher depletion base as a result of increased future development costs, and the increase in production during the quarter. Depletion expenses represented $10.81/bbl for the quarter compared to $6.37/bbl and $6.20/bbl for the preceding quarter and the same period in 2009, respectively.
Future Income Tax Expense Future income tax liabilities result from the temporary differences between the carrying value and tax values of Albanian assets and liabilities. As of December 31, 2010, the Company recorded a $69.5 million future income tax liability, compared to $39.4 million at the end of the previous year, in relation to the Company’s Albanian assets and liabilities. The Company incurred a future income tax expense of $23.5 million for the year compared to $5.9 million for 2009 due to increased earnings. On a quarterly basis, the Company recorded a future income tax expense of $6.1 million compared to $5.5 million for the preceding quarter and $2.7 million for the same period in 2009. Bankers is presently not required to pay cash taxes in any jurisdiction. The Company’s cost recovery pool in Albania is $152.6 million. In Canada, the Company has non-capital losses of approximately $27.4 million, the benefit of which has not been recognized in the financial statements.
BANKERS 2010 ANNUAL REPORT l 29
Net Income (Loss) and Funds Generated from Operations The Company recorded net income of $14.3 million ($0.060 per share) during the year ended December 31, 2010 and a net loss of $0.2 million ($0.001 per share) for the year ended December 31, 2009. The Company realized net income of $6.8 million for the fourth quarter compared to net income of $4.3 million in the preceding quarter and $2.3 million for the same period in 2009. Funds generated from operations amounted to $73.2 million for the year ended December 31, 2010 compared to $25.4 million in 2009. The increase in funds generated from operations was mainly due to higher production and commodity prices during in the year. Funds generated from operations were $24.0 million for the fourth quarter compared to $16.6 million in the third quarter and $10.8 million for the same period in 2009.
OIL RESERVES Annually, the Company obtains independent reserves evaluations of its Albanian properties by RPS Energy Canada Ltd. (Patos-Marinza oilfield) and by DeGolyer and MacNaughton Canada Ltd. (Kuçova oilfield). At December 31, 2010, reserves increased on a total proved (1P), total proved plus probable (2P) and total proved, probable and possible (3P) basis. Changes within each reserve basis are shown below. The 2010 finding and development costs for the Albanian properties represented $10.06/bbl on a 1P basis, $5.80/bbl on a 2P basis and $3.85/bbl on a 3P basis.
Gross Oil Reserves – Using Forecast Prices (Mbbls) 2010
2009
Patos-Marinza
Kuçova
Total Albania
Total Albania
%
17,300
-
17,300
22,900
(24)
-
-
-
-
-
99,700
3,239
102,939
69,939
47
Total proved
117,000
3,239
120,239
92,839
30
Probable
109,200
8,177
117,377
121,077
(3)
Total proved plus probable
226,200
11,416
237,616
213,916
11
Possible
168,400
20,587
188,987
208,387
(9)
Total proved, probable & possible
394,600
32,003
426,603
422,303
1
Proved Developed producing Developed non-producing Undeveloped
30
Net Present Value at 10% - After Tax Using Forecast Prices ($ millions) 2010
2009
Patos-Marinza
Kuçova
Total Albania
Total Albania
%
220.0
-
220.0
149.0
48
-
-
-
-
-
710.0
19.0
729.0
376.8
93
Total proved
930.0
19.0
949.0
525.8
80
Probable
904.0
115.0
1,019.0
993.1
3
Total proved plus probable
1,834.0
134.0
1,968.0
1,518.9
30
Possible
1,278.0
306.2
1,584.2
1,513.7
5
Total proved, probable & possible
3,112.0
440.2
3,552.2
3,032.6
17
Proved Developed producing Developed non-producing Undeveloped
In the Patos-Marinza oilfield, the OOIP at the end of 2010 increased 32% to 7.5 billion barrels from 5.7 billion at the end of 2009. Additionally, the Company’s independent reservoir engineers assigned contingent and prospective resource oil estimates of 1.2 billion and 540 million barrels, respectively. This represents the initial assessment of such resources attributed to future thermal recovery technologies and secondary water flood recovery methods at the Patos-Marinza oilfield. The reserves growth is primarily attributable to increased resource levels, improved well performance, the Company’s 2010 horizontal development drilling success and increased commodity prices. This is reflected in the upgrade of 2P and 3P reserves into the 1P and 2P reserves categories, respectively, and the expansion of 3P reserves. All of Patos-Marinza’s 2010 reserves estimates are from primary recovery methods. The Company acquired the Kuçova asset in 2008 and the OOIP resource estimate is 297 million barrels. This property is currently in early stage development and there was no Company production from the Kuçova oilfield in 2010 and only minor field activities were performed. Bankers expects to commence activity in this area in 2011 utilizing a variety of extraction techniques that will lead to creation of a development plan.
BANKERS 2010 ANNUAL REPORT l 31
CAPITAL EXPENDITURES ($000s) Drilling program
2010 $
69,572
2009 $
16,451
8,439
6,704
11,175
5,549
8,310
-
Facility infrastructure
1,163
5
Water control/disposal
7,049
4,784
Environmental stewardship
1,363
82
Pipeline/sales infrastructure
7,068
715
Ecology pits/remediation
1,988
1,271
Other
3,540
2,207
2,345
556
Well reactivations Work-over program Evaluation area & thermal Base program
Field equipment $
122,012
$
38,324
Capital expenditures for the year were $122.0 million, compared to $38.3 million in the preceding year, an increase of 218%. This increase was due to the expansion of the Company’s capital programs in drilling, work-overs, reactivation and other projects. During the year, Bankers spent $69.6 million on the drilling program for 50 horizontal wells and 2 vertical wells, compared to $16.5 million in 2009 (10 horizontal wells). Bankers spent $8.4 million on well reactivations compared to $6.7 million in the previous year. The increase in well reactivation costs was a direct result of the increase of wells taken over from Albpetrol. In 2010, a total of 199 wells were taken over from Albpetrol, compared to 80 in 2009. The Company invested $8.3 million on the new evaluation area and thermal project in 2010, which consist of the drilling of 3 vertical wells and the reactivation projects, nil in 2009. Base program expenditures increased 155% during the year due to the increase in sales infrastructure, water control/disposal initiatives, environmental stewardship and facility infrastructure. Included in the year-end property, plant and equipment amounts are field equipment of casing, tubing and other equipment of $17.5 million at December 31, 2010 (2009 – $15.2 million) to be used for future drilling and reactivation programs in Albania. 250 During the fourth quarter of 2010, Bankers incurred $38.1 million in capital expenditures;
150
of the expenditures incurred on miscellaneous expenses and capitalized G&A.
38
50 0
Capital Expenditures ($ millions)
2013(E)
$2.7 million on well reactivations and $6.3 million on the base program, with the balance
78
2012(E)
incurred $17.3 million in capital expenditures; $6.7 million on drilling operations,
2011(E)
expenses and capitalized G&A. By comparison, in the fourth quarter of 2009, the Company 100
200 200
122
2010
work-over program, new evaluation area and thermal projects and other miscellaneous
2009
related to the base program. The balance of the expenditures was incurred on the
200
2008
$23.4 million on drilling operations, $3.1 million on well reactivations and $5.9 million
215
32
LIQUIDITY AND CAPITAL RESOURCES At December 31, 2010, Bankers had working capital of $130.9 million (including cash and deposits totalling $108.1 million) and long-term debt of $21.8 million. As of December 31, 2009, the Company had working capital of $75.4 million and a long-term debt of $23.4 million. The improvement in working capital compared to the same period in 2009 was mainly due to the equity issuance and exercises of warrants and options throughout the year. On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. On December 31, 2010, Bankers had credit facilities totalling $136.1 million, of which only $25.8 million was utilized. The majority represents a reserve-based long-term facility of $110.0 million from the International Finance Corporation and European Bank for Reconstruction and Development, from which no advances have yet been drawn. The $26.1 million Raiffeisen Bank facility includes a revolving operating loan of $20.0 million (due in March 2012) and term loans totalling $6.1 million. Repayments of $4.6 million were made on the term loans during the year. The Company’s approach to managing liquidity is to ensure a balance between capital expenditure requirements and cash provided by operations, available credit facilities and working capital. There were approximately 245 million and 247 million shares outstanding as of December 31, 2010 and March 22, 2011, respectively. In addition, the Company had approximately 15 million stock options and 5 million warrants outstanding as of December 31, 2010. Subsequent to 2010 year-end, approximately 5 million stock options were granted and approximately 2 million stock options were exercised, generating proceeds of approximately $3.1 million. On March 22, 2011, Bankers has approximately 17 million stock options and 5 million warrants outstanding. The warrants expire on March 1, 2012 and are exercisable into common shares at CAD$2.37 per share, representing approximately CAD$11.5 million. Officers and executives of the Company represent approximately 7% ownership in the Company on a fully diluted basis. This creates an alignment with shareholders and a team that is dedicated to activities that support future value creation. In Albania, the Company considers any amounts greater than 60 days as past due. The amount past due has been received subsequent to year-end and is not considered to be impaired.
Plan of Development Bankers has no capital expenditure commitment for the Patos-Marinza oilfield under the Petroleum Agreement. The Company annually submits a work program to AKBN which includes the nature and the amount of capital expenditures to be incurred during that year. Significant deviations in this annual program from the Plan of Development will be subject to AKBN approval. The Petroleum Agreement provides that disagreements between the parties will be referred to an independent expert whose decision will be binding. The Company has the right to relinquish a portion or all of the contract area. If only a portion of the contract area is relinquished then the Company will continue to conduct petroleum operations on the portion it retains and the future capital expenditures will be adjusted accordingly.
BANKERS 2010 ANNUAL REPORT l 33
Commitments The Company has long-term lease commitments in Canada and Albania. The minimum lease payments for the next five years are $3.8 million as follows:
($000s)
Albania
Canada
Total
2011
$ 557
$ 709
$ 1,266
2012
425
541
966
2013
318
528
846
2014
318
44
362
2015
318
-
318
$ 1,936
$ 1,822
$
3,758
The Company has two term loans totalling $6.1 million with a European financial institution that is repayable in equal monthly instalments of $0.4 million until October 31, 2011 and $74,100 until April 2014. Of the amount outstanding, $4.0 million is classified as current and $2.1 million as long-term. Principal repayments of the term loan over the next four years are as follows:
($000s) 2011
$ 4,014
2012
889
2013
889
2014
296 $ 6,088
Quarterly Variability Fluctuations in quarterly results are due to a number of factors, some of which are not within the Company’s control such as seasonality and commodity prices. • Seasonality of winter operating conditions combined with the timing of transfer of wells from Albpetrol results in production increases that are typically higher in the second and third quarters. As new wells come on stream, there is a build-up period in production, higher sand production and higher well servicing costs, which is typical for heavy oil wells in the first year of production. In addition, production levels can be affected by water disposal constraints, mechanical wellbore and isolation failures, increased water production coming from shallower and deeper zones, and a shortage of rig work-over capacity and specialised well servicing equipment. • The increase in royalties is related to higher oil prices and the greater number of wells being taken over from Albpetrol, which results in higher pre-existing production. • Fluctuations of operating expenses is part of a continuing trend that results from operating efficiencies gained through greater experience in field operations and economies of scale as the proportionate share of fixed operating expenses declines with production increases.
34
CRITICAL ACCOUNTING ESTIMATES The Company’s financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). Significant accounting policies are disclosed in Note 2 to the Audited Consolidated Financial Statements. Preparation of financial statements in accordance with GAAP requires that management make estimates that affect the reported amount of assets, liabilities, revenues and expenses. The estimates used in applying these critical accounting policies are as follows:
Capitalized Costs The Company follows the full cost method of accounting for its oil properties whereby all costs associated with the exploration for and development of oil reserves are capitalized on a cost centre (country) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs.
Depletion and Depreciation Capitalized costs within each cost centre are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties. Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20% in a particular country cost centre, in which case a gain or loss on disposal is recorded. Equipment, furniture and fixtures are depreciated on the declining balance method at rates of 20 to 30%.
Income Taxes Future income taxes are recorded using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess.
Ceiling Test In accordance with the full cost accounting guideline, the Company evaluates its oil and gas assets to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved plus probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate.
BANKERS 2010 ANNUAL REPORT l 35
Asset Retirement Obligations The fair value of estimated asset retirement obligations is capitalized to property, plant and equipment in the period in which the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil properties are amortized as part of depletion and depreciation using the unit-of-production method. Increases in asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual abandonment expenditures incurred are charged against the accumulated obligation.
Stock-based compensation Compensation costs attributable to all stock options granted to employees, directors and service providers are measured at fair value at the date of grant using the Black-Scholes option pricing model and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.
RELATED PARTY TRANSACTIONS The Company had a note receivable from BKX in an amount of $2.7 million as at December 31, 2009. The full amount was received during the year ended December 31, 2010. BKX is considered a related party as BKX and the Company have common directors. The above transaction was considered to be in the normal course of business.
SUBSEQUENT EVENT In February 2011, the Company entered into financial commodity put contracts representing 4,000 barrels of oil per day at a floor price of $80 per barrel for the period January 1, 2012 to December 31, 2012.
NEW ACCOUNTING STANDARDS Transition to International Financial Reporting Standards (IFRS) Commencing on January 1, 2011 International Financial Reporting Standards (IFRS) are the generally accepted accounting principles in Canada. The changeover date of January 1, 2011 requires the restatement, for comparative purposes, of amounts reported by Bankers for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010. The project to convert to IFRS is being managed by members of the finance and accounting group, who have engaged in IFRS educational programs and continue to develop the Company’s adoption to IFRS. The Company’s auditors have been and will continue to be involved throughout the process to ensure the Company’s policies are in accordance with these new standards. In July 2009, an amendment to IFRS 1 First Time Adoption of International Reporting Standards was issued that applies to oil and gas assets. The amendment allows an entity that used full cost accounting under its current Canadian GAAP to elect, at its time of adoption, to measure exploration and evaluation assets at the amount determined under the entity’s current Canadian GAAP and to measure oil and gas assets in the development and production phases by allocating the amount determined under the entity’s current Canadian GAAP for those assets to the underlying assets pro rata using reserve volumes or reserve values as of that date. Bankers will use this exemption. IFRS 1 also provides a number of other optional exemptions and mandatory exceptions in certain areas to the general requirement for full retrospective application which are: • Business Combinations – IFRS 1 would allow the Company to use the IFRS rules for business combinations on a prospective. The Company plans to use this exemption.
36
• Share-based payments – IFRS 1 allows the Company an exemption on IFRS 2, “Share-Based Payments” to equity instruments which vested before Bankers’ transition date to IFRS. The Company will use this exemption. The transition from Canadian GAAP to IFRS is significant and may materially affect the Company’s reported financial position and results of operations. Key differences identified by the Company that will impact the financial statements and the current status of those items are noted: • Property, plant and equipment (PP&E) – This includes oil and gas assets in the development and production phases. As all oil and gas assets of the Company are in the development and production phases, the full amount will be included in PP&E and allocated to two cash generating units (CGUs). • Impairment of PP&E assets – Under IFRS, impairment tests of PP&E must be performed at the CGU level as opposed to the entire PP&E balance which is required under current Canadian GAAP through the full cost ceiling test. Impairment calculations are required to be performed using fair values of the PP&E assets and the Company will use the discounted proved plus probable reserve values for impairment tests of PP&E. The Company does not anticipate its PP&E assets to be impaired as at January 1, 2010 under IFRS. • Depletion expense – On transition to IFRS, the Company has the option to use either proved reserves or proved plus probable reserves in the depletion calculation. The Company will use proved plus probable reserves in determining depletion expense. • Share-based payments – The major difference between current Canadian GAAP and IFRS that impacts the Company is the use of an estimated forfeiture rate at grant date as opposed to recognizing the impact of forfeitures when they occur. The Company will apply a forfeiture rate of 5% to all unvested stock options at transition and the impact of this is not expected to be material. • Provisions – The major difference between the current Canadian standard and IFRS is the discount rate used to measure the asset retirement obligation (ARO). Under the current Canadian standard, a credit adjusted risk-free rate is used, whereby the IFRS allows the use of a risk-free rate when the expected cash flows are risked. There was debate within the industry on the discount rate and whether there should be a risk component to it. Based on recent comments made by the standard setters and positions within the industry, Bankers believes a risk-free rate is more appropriate. A lower discount rate will increase the ARO liability and on transition to IFRS, the corresponding impact will be charged to retained earnings or deficit. In addition to the accounting policy differences, the Company’s transition to IFRS will impact the internal controls over financial reporting, the disclosure controls and procedures and information technology (IT) systems as follows: • Internal controls over financial reporting – Based on the Company’s accounting policies under IFRS, the Company has assessed whether additional controls or changes in procedures are required. Bankers does not consider these changes to be significant. • Disclosure controls and procedures – Throughout the transition process, the Company will be assessing stakeholder’s information requirements and will ensure that adequate and timely information is provided while ensuring the Company maintains its due process regarding information that is disclosed. • IT Systems – The Company has assessed the readiness of its accounting software and has and continues to assess other system requirements that may be needed in order to perform ongoing calculations and analysis under IFRS. These changes are not considered to be significant. Management is continuing to finalize its accounting policies and choices and is continuing with its due process in regards to information that is disclosed. As such, the Company is currently unable to quantify the full impact on the financial statements of adopting IFRS. However, the Company has disclosed certain expectations above based on information known to date. Due to anticipated changes to IFRS and International Accounting Standards prior to the Company’s adoption of IFRS, certain items may be subject to change based on new facts and circumstances that arise after the date of this MD&A.
BANKERS 2010 ANNUAL REPORT l 37
INTERNAL CONTROLS The Company’s President and Chief Executive Officer (CEO) and Executive Vice President, Finance and Chief Financial Officer (CFO) are responsible for establishing and maintaining disclosure controls and procedures and internal controls over financial reporting as defined in NI 52-109. Disclosure controls and procedures have been designed to ensure that information to be disclosed by the Company is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure. The Company’s CEO and CFO have evaluated the effectiveness of the disclosure controls and procedures as at December 31, 2010 and have concluded that they are operating effectively to provide reasonable assurance that all material information relating to the Company is disclosed in a timely manner. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and compliance with generally accepted accounting principles. The CEO and CFO have evaluated the Company’s internal controls over financial reporting as at December 31, 2010 based on the framework in “Internal Control Over Financial Reporting – Guidance for Smaller Public Companies” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and have concluded they are designed and operating effectively to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with GAAP. During 2010, there have been no changes to the Company’s internal controls over financial reporting that have materially, or are reasonably likely to, materially affect the internal controls over financial reporting. Because of their inherent limitations, disclosure controls and procedures and internal controls over financial reporting may not prevent or detect misstatements, errors or fraud. Control systems, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control systems are met.
OUTLOOK For 2011, our continued focus is to increase reserves, production and maximize cash flow from operations. To achieve this, the Company will implement the following: • Drill 66 horizontal and vertical wells and complete 120 well reactivations and work-overs at the Patos-Marinza oilfield. A fourth drilling rig is expected in the second quarter. • Increase production facilities to handle our target exit production rate of 20,000 bopd. • 2011 will be a milestone year for thermal development of the Patos-Marinza oilfield. Bankers will drill a vertical delineation well and two horizontal wells designed for high pressure and temperature steam injection, install a 25,000 BTU steam generator and all associated production facilities. • Complete Phase 1 (10 kilometres) of the 40 kilometre pipeline to Vlore and construction of the receiving hub in Fier. • Continue with the environmental stewardship and social initiatives in our area of operations. • Bankers is building a larger team of senior professionals to complement its existing team of engineers, geoscientists, production and support staff to manage another record capital program in 2011, currently budgeted at $215 million.
38
Consolidated Financial Statements DECEMBER 31, 2010
BANKERS 2010 ANNUAL REPORT l 39
Management’s Report The accompanying consolidated financial statements and related financial information are the responsibility of management, and have been prepared in accordance with Canadian generally accepted accounting principles. They include certain amounts that are based on estimates and judgments relating to matters not concluded by year-end. Financial information presented elsewhere in this document is consistent with that contained in the consolidated financial statements. In management’s opinion, the consolidated financial statements have been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies adopted by management. If alternate accounting methods exist, management has chosen those policies it deems the most appropriate in the circumstances. Management has established systems of accounting and internal control that provide reasonable assurance that assets are safeguarded from loss or unauthorized use, and produce reliable accounting records for the preparation of financial information. Policies and procedures are maintained to support the accounting and internal control systems. The Company retains independent petroleum consultants, RPS Energy Canada Ltd., and DeGolyer and MacNaughton Canada Ltd., to conduct independent evaluations of the Company’s oil reserves. The independent external auditors, KPMG LLP, have conducted an examination of the consolidated financial statements on behalf of shareholders. The auditors have unrestricted access to the Company and the Audit Committee. The Board of Directors, currently composed of six independent and one non-independent directors, carries out its responsibility for the consolidated financial statements principally through its Audit Committee, consisting of four members, all of whom are independent directors. This Committee reviews the consolidated financial statements with management and the auditors, as well as recommends to the Board of Directors the external auditors to be appointed by the shareholders at each annual meeting. The Audit Committee meets at least quarterly to review and approve interim financial statements prior to their release, and recommend their approval to the Board of Directors.
Abdel F. (Abby) Badwi
Douglas C. Urch
President & Chief Executive Officer
Executive VP, Finance & Chief Financial Office
March 17, 2011
40
Independent Auditors’ Report To the Shareholders We have audited the accompanying consolidated financial statements of Bankers Petroleum Ltd., which comprise the consolidated balance sheets as at December 31, 2010 and 2009, the consolidated statements of operations, comprehensive income (loss) and retained earnings (deficit) and cash flows for the years then ended, and notes, comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Bankers Petroleum Ltd. as at December 31, 2010 and 2009, and the results of its consolidated operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants Calgary, Canada March 17, 2011
BANKERS 2010 ANNUAL REPORT l 41
BANKERS PETROLEUM LTD. CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31 (Expressed in thousands of US dollars) 2010
2009
106,619
$ 59,495
-
7,275
1,500
1,500
29,233
23,358
4,199
2,031
16,624
5,899
158,175
99,558
-
2,749
11,805
14,383
297,434
188,130
$
467,414
$ 304,820
$
23,241
$ 19,505
4,014
4,639
27,255
24,144
21,815
23,446
Asset retirement obligations (Note 7)
5,496
3,856
Future income tax liability (Note 10)
69,541
39,414
309,379
$ 206,058
1,597
1,739
28,715
16,812
3,616
(10,649)
343,307
213,960
467,414
$ 304,820
ASSETS Current assets Cash and cash equivalents (Note 12)
$
Short-term deposits Restricted cash Accounts receivable Inventory Deposits and prepaid expenses
Note receivable (Note 4) Deferred financing costs (Note 6(e)) Property, plant and equipment (Note 5)
LIABILITIES Current liabilities Accounts payable and accrued liabilities Current portion of long-term debt (Note 6)
Long-term debt (Note 6)
SHAREHOLDERS’ EQUITY Share capital (Note 8(a))
$
Warrants (Note 8(b)) Contributed surplus (Note 8(e)) Retained earnings (deficit)
$ Commitments (Note 11) Subsequent event (Note 14) See accompanying notes to consolidated financial statements.
APPROVED BY THE BOARD “Robert Cross” Director
“Eric Brown” Director
42
BANKERS PETROLEUM LTD. CONSOLIDATED STATEMENT OF OPERATIONS, COMPREHENSIVE INCOME (LOSS) AND RETAINED EARNINGS (DEFICIT) FOR THE YEARS ENDED DECEMBER 31 (Expressed in thousands of US dollars, except per share amounts) 2010
2009
$ 170,376
$ 86,614
(33,682)
(20,468)
732
824
137,426
66,970
Operating
36,744
24,781
Sales and transportation
18,847
9,869
General and administrative
8,255
6,450
Interest and bank charges
1,160
648
Interest on long-term debt
1,421
1,858
-
(347)
(5,225)
(4,586)
Stock-based compensation (Note 8(d))
8,111
4,545
Amortization of deferred financing costs (Note 6(e))
2,789
1,803
27,516
16,208
99,618
61,229
37,808
5,741
(23,543)
(5,891)
14,265
(150)
(10,649)
(10,499)
Retained earnings (deficit), end of year
$ 3,616
$ (10,649)
Basic earnings (loss) per share
$ 0.060
$
Diluted earnings (loss) per share
$ 0.058
$ (0.001)
Revenue Oil revenue Royalties Interest
Expenses
Gain on disposal of investments Foreign exchange gain
Depletion, depreciation and accretion
Income before income tax Future income tax expense (Note 10)
Net income (loss) and comprehensive income (loss) for the year Deficit, beginning of year
See accompanying notes to consolidated financial statements.
(0.001)
BANKERS 2010 ANNUAL REPORT l 43
BANKERS PETROLEUM LTD. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31 (Expressed in thousands of US dollars) 2010
2009
$ 14,265
$ (150)
27,516
16,208
2,789
1,803
Future income tax expense
23,543
5,891
Stock-based compensation
8,111
4,545
(3,058)
(2,528)
-
(347)
73,166
25,422
(21,714)
(14,491)
51,452
10,931
(122,012)
(38,324)
-
481
6,682
(3,670)
(115,330)
(41,513)
104,720
70,276
(4,333)
(2,220)
Note receivable
2,749
10,251
Short-term deposits
7,275
(4,275)
Financing costs
(211)
(2,050)
(2,256)
(40)
107,944
71,942
3,058
2,528
Increase in cash and cash equivalents
47,124
43,888
Cash and cash equivalents, beginning of year
59,495
15,607
$ 106,619
$ 59,495
Cash provided by (used in): Operating activities Net income (loss) for the year Items not involving cash: Depletion, depreciation and accretion Amortization of deferred financing costs
Unrealized foreign exchange gain Gain on disposal of investments
Change in non-cash working capital (Note 12)
Investing activities Additions to property, plant and equipment Proceeds from disposal of investments Change in non-cash working capital (Note 12)
Financing activities Issue of shares for cash Share issue costs
Decrease in long-term debt
Foreign exchange gain on cash and cash equivalents
Cash and cash equivalents, end of year (Note 12) See accompanying notes to consolidated financial statements.
44
Notes to the Consolidated Financial Statements (Expressed in US dollars) December 31, 2010 and 2009 1. NATURE OF OPERATIONS Bankers Petroleum Ltd. (the Company) is engaged in the exploration for and development and production of oil in Albania. The Company is listed on the Toronto Stock Exchange and the Alternative Investment Market (AIM) of the London Stock Exchange under the symbol BNK. The Company operates in the Albanian oilfields pursuant to Petroleum Agreements with Albpetrol Sh.A (Albpetrol), the state owned oil company, under Albpetrol’s existing license with the Albanian National Agency for Natural Resources (AKBN). The Patos-Marinza agreement and Kuçova agreement became effective in March 2006 and September 2007, respectively, and have a 25 year term with an option to extend at the Company’s election for further five year increments.
2. SIGNIFICANT ACCOUNTING POLICIES These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The principal accounting policies are outlined below: (a) Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries - Bankers Petroleum International Limited, Bankers Petroleum Albania Ltd. (BPAL) and Sherwood International Petroleum Ltd. (b) Financial instruments All financial instruments including all derivatives are recognized on the balance sheet initially at fair value. Subsequent measurement of all financial assets and liabilities except those held-for-trading and available-for-sale are measured at amortized cost determined using the effective interest rate method. Held-for-trading financial assets are measured at fair value with changes in fair value recognized in earnings. Available-for-sale financial assets are measured at fair value with changes in fair value recognized in comprehensive income and reclassified to earnings when impaired. Cash and cash equivalents and short-term deposits are held-for-trading instruments and the fair values approximate their carrying amount due to their short-term nature. Accounts receivable is classified as loans and receivables and the fair value approximates their carrying value due to the short-term nature of these instruments. The note receivable is classified as other financial assets and its fair value approximates the carrying value as it bears interest at market rate. The accounts payable and accrued liabilities are classified as other financial liabilities and the fair value approximates their carrying value due to the short-term nature of these instruments. The operating and term loans are classified as other financial liabilities and their fair value approximates their carrying value, as they bear interest at market rates. Transaction costs are frequently attributed to the issue of a financial asset or liability. The Company has selected a policy of netting all transaction costs with the related financial assets and liabilities. The Company may use derivative financial instruments from time to time to hedge its exposure to commodity price fluctuations. The Company recognizes the fair value of the derivative financial instruments on the balance sheet each reporting period. Unrealized gains and losses resulting from changes in the fair value of these instruments are recognized in net income at the end of each reporting period and realized gains and losses are recorded when the instrument is settled. The derivative financial instruments are initiated within the guidelines of the Company’s risk management policy and the Company does not enter into derivative financial instruments for trading or speculative purposes.
BANKERS 2010 ANNUAL REPORT  l  45
(c) Foreign currency translation The Company and its wholly-owned subsidiaries have a United States (US) dollar functional currency. Transactions denominated in foreign currencies are translated into US dollar equivalents at exchange rates approximating those in effect at the transaction dates. Foreign currency denominated monetary assets and liabilities are translated at the year-end exchange rate. Gains and losses arising from foreign currency translation are recognized in the statement of operations. (d) Use of estimates Timely preparation of the financial statements in conformity with Canadian generally accepted accounting principles requires that management make estimates and assumptions and use judgment regarding assets, liabilities, revenues and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results may differ from estimated amounts as future confirming events occur. In particular, the amounts recorded for depreciation and depletion of oil and natural gas properties and equipment, the provision for asset retirement obligations, the provision for future income taxes and stock-based compensation are based on estimates. The ceiling test is based on estimates of proved reserves, production rates, future commodity prices and future costs and other relevant assumptions. (e) Revenue recognition Revenue associated with the sales of the Company’s oil is recognized in income when title and risk pass to the buyer, collection is reasonably assured and the price is determinable. (f) Income taxes Future income taxes are recorded using the asset and liability method. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment or enactment occurs. To the extent that the Company does not consider it more likely than not that a future tax asset will be recovered, it provides a valuation allowance against the excess. (g) Per share amounts Basic earnings (loss) per share is calculated using the weighted-average number of common shares outstanding during the year. The Company uses the treasury stock method to compute the dilutive effect of options, warrants and similar instruments. Under this method, the dilutive effect on earnings per share is recognized on the use of the proceeds that could be obtained upon exercise of options, warrants and similar instruments. It assumes that the proceeds would be used to purchase common shares at the average market price during the period. (h) Cash and cash equivalents Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. (i) Inventory Inventory comprises of crude oil, solar and diesel stock. Inventory is valued at the lower of average cost of production and net realizable value.
46
(j) Property, plant and equipment Capitalized costs The Company follows the full cost method of accounting for its oil properties whereby all costs associated with the exploration for and development of oil reserves are capitalized on a cost centre (country) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling both productive and non-productive wells, production equipment, overhead charges directly related to acquisition, exploration and development activities and asset retirement costs. Depletion and depreciation Capitalized costs within each cost centre are depleted and depreciated on the unit-of-production method based on the estimated gross proved reserves determined by independent petroleum engineers. Depletion and depreciation is calculated using the capitalized costs, plus the estimated future costs to be incurred in developing proved reserves, net of estimated salvage value. Costs of acquiring and evaluating unproved properties are initially excluded from the depletion and depreciation calculation until it is determined whether or not proved reserves can be assigned to such properties. Proceeds from the sale of oil properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion and depreciation by more than 20% in a particular country cost centre, in which case a gain or loss on disposal is recorded. Equipment, furniture and fixtures are depreciated on the declining balance method at rates of 20 to 30%. Ceiling test In accordance with the full cost accounting guideline, the Company evaluates its oil and gas assets to determine that the costs are recoverable and do not exceed the fair value of the properties. The costs are assessed to be recoverable if the sum of the undiscounted cash flows expected from the production of proved reserves and the lower of cost and market of unproved properties exceed the carrying value of the oil and gas assets. If the carrying value of the oil and gas assets is not assessed to be recoverable, an impairment loss is recognized to the extent that the carrying value exceeds the sum of the discounted cash flows expected from the production of proved plus probable reserves and the lower of cost and market of unproved properties. The cash flows are estimated using the future product prices and costs and are discounted using the risk-free rate. Asset retirement obligations The fair value of estimated asset retirement obligations is capitalized to property, plant and equipment in the period in which the liability is incurred. Asset retirement obligations include those legal obligations where the Company will be required to retire tangible long-lived assets such as producing well sites and facilities. Asset retirement costs for oil properties are amortized as part of depletion and depreciation using the unit-of-production method. Increases in asset retirement obligations resulting from the passage of time are recorded as accretion expense. Actual abandonment expenditures incurred are charged against the accumulated obligation. (k) Stock-based compensation Compensation costs attributable to all stock options granted to employees, directors and service providers are measured at fair value at the date of grant using the Black-Scholes option pricing model and expensed over the vesting period with a corresponding increase to contributed surplus. Upon exercise of options, consideration received, together with the amount previously recognized in contributed surplus, is recorded as an increase to share capital.
BANKERS 2010 ANNUAL REPORT l 47
(l) Comparative figures Certain prior year figures have been re-classified to conform to the current year’s presentation.
3. FUTURE ACCOUNTING CHANGES International Financial Reporting Standards (IFRS) On January 1, 2011 International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) will become the generally accepted accounting principles in Canada. The adoption date of January 1, 2011 will require the restatement, for comparative purposes, of amounts reported by Bankers for the year ended December 31, 2010, including the opening balance sheet as at January 1, 2010. Bankers will release its first IFRS compliant interim financial statements for the first quarter of 2011.
4. NOTE RECEIVABLE The note receivable of nil (2009 – $2.7 million) represents the residual amount due from BNK Petroleum Inc. (BKX). BKX is considered a related party as BKX and the Company have common directors. The above transaction is considered to be in the normal course of business and has been measured at the exchange amount being the amounts agreed to by both the parties. The full amount outstanding at December 31, 2009 was received during the year ended December 31, 2010.
5. PROPERTY, PLANT AND EQUIPMENT The following table summarizes the Company’s property, plant and equipment as at December 31:
2010
($000s) Oil properties Equipment, furniture and fixtures
Cost
Accumulated Depletion and Depreciation
$ 363,864
$ 69,741
5,591
2,280
$ 369,455
$ 72,021
Net Book Value $
294,123 3,311
$
297,434
2009
($000s) Oil properties Equipment, furniture and fixtures
Cost
Accumulated Depletion and Depreciation
Net Book Value
$ 229,230
$ 43,217
$ 186,013
3,830
1,713
2,117
$ 233,060
$ 44,930
$ 188,130
Depletion for the year ended December 31, 2010 included $956.5 million (2009 – $382.0 million) for estimated future development costs associated with proved reserves in Albania. The Company capitalized general and administrative expenses and stock-based compensation of $10.1 million (2009 – $3.9 million) that were directly related to exploration and development activities in Albania.
48
The Company’s ceiling test calculation for the Albania cost centre, as at December 31, 2010, resulted in no impairment loss. The future prices used by the Company in estimating cash flows were based on forecasts by independent reserves evaluators, adjusted for the Company’s quality and transportation differentials. The following table summarizes the benchmark prices used in the calculation:
Year
Brent Price (US$/barrel)
2011
90.00
2012
89.50
2013
89.10
2014
89.25
2015
91.00
Average annual increase, thereafter
2%
The Company has secured $1.5 million (2009 – $1.5 million) for certain capital projects in the Kuçova oilfield. These projects are expected to be completed in 2011. At December 31, 2010, approximately $1.0 million of expenditures have been incurred towards this commitment.
6. LONG-TERM DEBT The Company has credit facilities with three international banks, including Raiffeisen Bank, the European Bank for Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), as summarized below:
Facility Amount ($000s)
Outstanding Amount December 31, 2010
December 31, 2009
19,741
$ 17,358
Raiffeisen Bank Operating loan (a)
$ 20,000
$
Term loan – 2006 (b)
3,125
3,125
6,875
Term loan – 2009 (c)
2,963
2,963
3,852
Environmental term loan (d)
10,000
-
-
Revolving loan – Tranche 1 (e)
50,000
-
-
Revolving loan – Tranche 2 (e)
50,000
-
-
25,829
$ 28,085
EBRD and IFC*
$ 136,088
$
* All facilities are equally funded.
These facilities are secured by all of the assets of BPAL, assignment of proceeds from the Albanian domestic and export crude oil sales contracts, a pledge of the common shares of BPAL and a guarantee by the Company. The credit facilities are subject to certain covenants requiring the maintenance of certain financial ratios, all of which were met as at December 31, 2010 and 2009. (a) Operating loan The operating loan is a revolving facility, has no scheduled repayments until its maturity in March 2012 and bears interest at a rate relative to the bank’s refinancing rate plus 3.5%.
BANKERS 2010 ANNUAL REPORT l 49
(b) Term loan - 2006 This term loan bears interest at the bank’s refinancing rate plus 4.5% and is repayable in equal monthly instalments of $0.3 million ending on October 31, 2011. As at December 31, 2010, the entire term loan was utilized and has been classified as current. (c) Term loan - 2009 This term loan bears interest at the bank’s refinancing rate plus 4.65% and is repayable in equal monthly instalments of $74,100 ending on April 30, 2014. As at December 31, 2010, the entire facility was utilized. Of the amount outstanding, $0.9 million is classified as current and $2.1 million as long-term. Principal repayments of the term loan over the next four years are:
($000s) 2011
$
889
2012
889
2013
889
2014
296 $
2,963
(d) Environmental term loan The $10.0 million term loan, funded equally by IFC and EBRD, is available for environmental and social programs pertinent to the Company’s activities in Albania. The interest rate is based on the London Inter-Bank Offer Rate (LIBOR) plus 4.5%. A standby fee of 0.5% is charged on the unutilized portion. At December 31, 2010, none of the facility was drawn. Principal repayments commence in April 2013 in bi-annual instalments of $0.5 million with maturity on October 15, 2017. (e) Revolving loans The revolving loans, funded equally by EBRD and IFC, consist of two $50.0 million tranches, of which Tranche I is currently available to the Company. Tranche II becomes available subject to mutual agreement among the Company, IFC and EBRD, when production exceeds 10,000 barrels of oil per day and the Brent oil price exceeds $62 per barrel for twenty consecutive trading days. The interest rate is based on LIBOR plus 4.5%. A standby fee of 2.0% is charged on the unutilized Tranche I portion and Tranche II portion, when it becomes available. At December 31, 2010, none of the facility was drawn. For each of Tranche I and Tranche II, the amounts decline to $16.5 million on October 15, 2013, $8.3 million on October 14, 2014 with final repayment due on October 15, 2015. Setup costs of $16.4 million (2009 – $16.2 million) pertaining to these facilities, including the value attributed to the share purchase warrants (Note 8(b)), have been recorded as deferred financing costs and are amortized over the life of the revolving facilities. As of December 31, 2010, $4.6 million (2009 – $1.8 million) has been amortized. For the year ended December 31, 2010, $2.8 million (2009 - $1.8 million) has been amortized and charged to earnings.
50
7. ASSET RETIREMENT OBLIGATIONS In Albania, the Company estimated the total undiscounted amount required to settle the asset retirement obligations at $31.5 million (2009 – $24.7 million). These obligations will be settled at the end of the Company’s 25 year license of which 20 years are remaining. The liability has been discounted using a credit-adjusted risk-free interest rate of 10% (2009 – 10%) and an inflation rate of 2.0% (2009 – 2.5%) to arrive at asset retirement obligations of $5.5 million as at December 31, 2010.
($000s)
2010
2009
3,856
$ 2,896
1,311
656
Revisions
(96)
-
Accretion
425
304
5,496
$ 3,856
Asset retirement obligation, beginning of year
$
Incurred
Asset retirement obligation, end of year
$
8. SHAREHOLDERS’ EQUITY (a) Share Capital Authorized Unlimited number of common shares with no par value. Issued
Number of Common Shares
Amount ($000s)
182,540,179
$ 121,907
Prospectus issue
25,143,800
38,349
Warrants exercised
19,144,502
43,731
1,443,684
4,291
-
(2,220)
228,272,165
206,058
12,903,228
96,153
Warrants exercised
1,277,267
3,381
Stock options exercised
2,342,330
8,120
-
(4,333)
Balance, December 31, 2008
Stock options exercised Share issue costs Balance, December 31, 2009 Prospectus issue
Share issue costs
Balance, December 31, 2010
244,794,990
$
309,379
On July 15, 2010, the Company completed a prospectus offering with a syndicate of underwriters and issued an aggregate of 12,903,228 common shares at a price of CAD$7.75 per common share on a bought deal basis, resulting in gross proceeds of $96.2 million. Commissions and share issue costs were $4.3 million.
BANKERS 2010 ANNUAL REPORT l 51
The following table summarizes the calculation of basic and diluted weighted average number of common shares:
2010
2009
236,726,203
206,999,279
Dilutive effect of stock options
6,947,977
-
Dilutive effect of warrants
3,294,984
-
246,969,164
206,999,279
Weighted-average number of common shares outstanding – basic
Weighted-average number of common shares outstanding – diluted
In computing diluted earnings per share for the year ended December 31, 2010, 480,000 (2009 – 4,205,000) options were excluded as the effect would be anti-dilutive. Due to the net loss in 2009, the effect of all options and warrants was anti-dilutive. (b) Warrants A summary of the changes in warrants is presented below:
Number of Warrants
Amount ($000s)
9,713,375
$ 2,088
16,000,000
14,136
(19,144,502)
(14,485)
(428,540)
-
6,140,333
1,739
(1,277,267)
(142)
4,863,066
$ 1,597
Balance, December 31, 2008 Issued Transferred to share capital on exercise Forfeited Balance, December 31, 2009 Transferred to share capital on exercise
Balance, December 31, 2010
The following table summarizes the outstanding and exercisable warrants at December 31, 2010:
Expiry Date
Number of Warrants Outstanding and Exercisable
Weighted Average Exercise Price (CAD$)
March 1, 2012
4,863,066
2.37
The Company calculated the fair value of the warrants issued during the year ended December 31, 2009 to be $14.1 million. The Company determined this amount using the Black-Scholes option pricing model assuming a risk-free interest rate of 2.1%, a dividend yield of 0%, a forfeiture rate of 0%, an expected volatility of 126% and expected life of the warrants to be one year from the date of grant. The fair value per warrant for this grant was CAD$1.01. No warrants were issued for the year ended December 31, 2010.
(c) Stock options The Company has established a “rolling” Stock Option Plan. The number of shares reserved for issuance may not exceed 10% of the total number of issued and outstanding shares and, to any one optionee, may not exceed 5% of the issued and outstanding shares on a yearly basis or 2% if the optionee is engaged in investor relations activities or is a consultant. The exercise price of each option shall not be less than the market price of the Company’s stock at the date of grant. Options issued vest one-third immediately (after three months for new employees) following the date of the grant, one-third after one year following the date of the grant, and one-third two years following the grant date.
52
A summary of the changes in stock options is presented below:
Weighted Average Number of Options Exercise Price (CAD$) Balance, December 31, 2009
12,830,002
2.39
4,140,000
6.71
Exercised
(2,342,330)
2.35
Forfeited
(113,168)
4.57
14,514,504
3.61
Granted
Balance, December 31, 2010
The following table summarizes the outstanding and exercisable options at December 31:
2010
2009 Weighted Average Remaining Contractual Exercisable Life (years)
Weighted Average Remaining Contractual Life (years)
Range of Exercise Price (CAD$)
Outstanding
1.01 - 1.50
2,283,611
2,283,611
2.7
3,144,444
2,210,930
3.7
1.51 - 2.00
4,295,167
3,330,827
2.8
4,577,390
2,557,391
3.8
2.01 - 3.00
627,223
627,223
2.1
903,168
630,939
2.8
3.01 - 3.50
645,999
645,999
0.4
1,300,000
1,300,000
1.1
3.51 - 4.00
58,334
58,334
2.6
150,000
116,666
2.3
4.01 - 4.50
1,775,001
1,775,001
2.3
1,775,000
1,183,331
3.3
4.51 - 5.00
300,000
300,000
2.5
300,000
200,000
3.5
5.01 – 6.00
499,167
310,837
3.9
680,000
226,669
4.9
6.01 – 6.50
2,840,002
919,992
4.0
-
-
-
6.51 – 7.00
550,000
183,336
4.8
-
-
-
7.01 – 7.50
160,000
53,333
4.6
-
-
-
7.51 – 9.50
480,000
159,994
4.2
-
-
-
14,514,504
10,648,487
12,830,002
8,425,926
Outstanding Exercisable
(d) Stock-based compensation Using the fair value method for stock-based compensation, the Company calculated stock-based compensation expense for the year ended December 31, 2010 as $14.7 million (2009 – $6.5 million) for the stock options granted to officers, directors, employees and service providers. Of this amount, $8.1 million (2009 – $4.5 million) was charged to earnings and $6.6 million (2009 – $2.0 million) was capitalized. The Company determined these amounts using the BlackScholes option pricing model assuming a risk-free interest rate range of 1.91% - 2.86% (2009 – 1.80% to 2.59%), a dividend yield of 0% (2009 – 0%), a forfeiture rate of 0% (2009 – 0%), an expected volatility range of 49% - 77% (2009 – 103% to 126%) and expected lives of the stock options of five years (2009 – five) from the date of grant. The weighted average fair value per option granted during the year was CAD$3.96 (2009 – CAD$1.99).
BANKERS 2010 ANNUAL REPORT l 53
(e) Contributed surplus The following table summarizes the change in contributed surplus as of December 31:
($000s)
2010
2009
16,812
$ 11,862
Stock-based compensation
14,695
6,560
Transferred to share capital on exercise
(2,792)
(1,610)
28,715
$ 16,812
Albania
Canada
Total
$ 170,376
$ -
$ 170,376
(33,682)
-
(33,682)
9
723
732
136,703
723
137,426
Operating
36,744
-
36,744
Sales and transportation
18,847
-
18,847
General and administrative
3,725
4,530
8,255
Interest and bank charges
1,160
-
1,160
Interest on long-term debt
1,421
-
1,421
Foreign exchange gain
(178)
(5,047)
(5,225)
Stock-based compensation
2,348
5,763
8,111
Amortization of deferred financing costs
2,789
-
2,789
27,357
159
27,516
94,213
5,405
99,618
42,490
(4,682)
37,808
(23,543)
-
(23,543)
Balance, beginning of year
$
Balance, end of year
$
9. SEGMENTED INFORMATION The Company defines its reportable segments based on geographic locations.
Year ended December 31, 2010 ($000s) Revenue Oil revenue Royalties Interest
Expenses
Depletion, depreciation and accretion Income (loss) before income taxes Future income tax expense Net income (loss) for the year
$ 18,947
$
(4,682)
$ 14,265
Assets, December 31, 2010
$ 360,226
$ 107,188
$ 467,414
Additions to property, plant and equipment
$ 121,852
$ 160
$ 122,012
During the year, the Albania segment recorded domestic sales of $24.8 million (2009 – $15.5 million) and export sales of $145.6 million (2009 – $71.1 million).
54
Year ended December 31, 2009 ($000s)
Albania
Canada
Total
$ 86,614
$ -
$ 86,614
(20,468)
-
(20,468)
1
823
824
66,147
823
66,970
24,781
-
24,781
Sales and transportation
9,869
-
9,869
General and administrative
3,055
3,395
6,450
Interest and bank charges
648
-
648
Interest on long-term debt
1,858
-
1,858
-
(347)
(347)
(5)
(4,581)
(4,586)
831
3,714
4,545
1,803
-
1,803
16,083
125
16,208
58,923
2,306
61,229
7,224
(1,483)
5,741
(5,891)
-
(5,891)
Net income (loss) for the year
$ 1,333
$ (1,483)
$ (150)
Assets, December 31, 2009
$ 221,503
$ 83,317
$ 304,820
Additions to property, plant and equipment
$ 38,190
$ 134
$ 38,324
Revenue Oil revenue Royalties Interest
Expenses Operating
Gain on disposal of investments Foreign exchange gain Stock-based compensation Amortization of deferred financing costs Depletion, depreciation and accretion Income (loss) before income taxes Future income tax expense
10. INCOME TAXES Future income tax expense relates to the Albanian operations and results from the following as of December 31:
($000s) Net book value of property, plant and equipment, net of asset retirement obligations
$
Cost recovery pool
2010
2009
291,681
$ 180,280
(152,599)
(101,452)
Timing difference
$
139,082
$ 78,828
Future income tax liability at 50%
$
69,541
$ 39,414
The Company’s future income tax liabilities result from the temporary differences between the carrying value and tax values of its Albanian assets and liabilities. The cost recovery pool represents deductions for income taxes in Albania. Under the terms of the Petroleum Agreements in Albania, any profit will be taxed at a rate of 50%. The provision for income taxes reported differs from the amounts computed by applying the cumulative Canadian federal and provincial income tax rates to the income before tax provision due to the following:
BANKERS 2010 ANNUAL REPORT l 55
($000s)
2010
2009
37,808
$ 5,741
28.00%
29.00%
10,586
1,665
Difference in tax rates between Albania and Canada
9,348
2,453
Non-deductible expenses
2,271
595
Valuation allowance
3,451
2,190
(2,113)
(1,012)
23,543
$ 5,891
Income before income taxes
$
Statutory tax rate
Other Future income tax expense
$
The significant components of the Company’s future income tax assets and liabilities are as follows:
($000s)
2010
2009
$ 6,847
$ 4,456
2,148
1,124
Share issue costs
882
392
Property, plant and equipment
178
(771)
(10,055)
(5,201)
$ -
$ -
$ 69,541
$ 39,414
$ 69,541
$ 39,414
Future income tax assets: Non-capital loss carry forwards Capital loss
Less: valuation allowances Future income tax assets Future income tax liabilities: Property, plant and equipment – Albania Future income tax liability
The Company has available for deduction against future Canadian taxable income, non-capital losses of approximately $27.4 million. These losses, if not utilized, will expire commencing in 2011 as follows:
($000s) 2011
$ 1,552
2015
4,166
2026
2,310
2027
5,846
2028
193
2029
5,786
2030
7,534 $ 27,387
The potential income tax benefits of these future income tax assets have been offset by a valuation allowance and have not been recorded in these financial statements.
56
11. COMMITMENTS The Company leases office premises, of which the minimum lease payments for the next five years are:
($000s) Albania
Canada
Total
2011
$ 557
$ 709
$ 1,266
2012
425
541
966
2013
318
528
846
2014
318
44
362
2015
318
-
318
$ 1,936
$ 1,822
$ 3,758
2010
2009
(5,875)
$ (5,767)
(2,168)
(443)
(10,725)
(4,668)
(2,946)
(3,613)
$
(21,714)
$ (14,491)
$
6,682
$ (3,670)
$
862
$ 3,895
105,757
55,600
$
106,619
$ 59,495
Interest paid
$
2,581
$ 2,506
Interest received
$
787
$ 1,210
The Company has debt repayment commitments as disclosed in note 6(a), 6(b) and 6(c).
12. SUPPLEMENTAL CASH FLOW INFORMATION ($000s) Operating activities Increase in current assets Accounts receivable
$
Inventory Deposits and prepaid expenses Decrease in current liabilities Accounts payable and accrued liabilities
Investing activities Increase (decrease) in current liabilities Accounts payable and accrued liabilities
Cash and cash equivalents Cash Fixed income investments
BANKERS 2010 ANNUAL REPORT l 57
13. FINANCIAL INSTRUMENTS Financial risk management Overview The Company has exposure to credit, liquidity and market risk. This note presents information about the Company’s exposure to each risk, the Company’s objectives, policies and processes for measuring and managing risk, and management of capital. The Board of Directors of the Company has the overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has implemented and monitors compliance with risk management policies. The Company’s risk management policies are established to identify and analyze the risks faced, to set appropriate risk limits and controls, and to monitor risks and adherence to market conditions and the Company’s activities. Fair value measurement The Company’s financial instruments recognized on the balance sheet consist of short-term deposits, accounts receivable, note receivable, accounts payable and accrued liabilities and long-term debt. The fair value of these instruments approximate their carrying amounts due to their short terms to maturity or the indexed rate of interest on the note receivable and long-term debt. Bankers’ cash and cash equivalents and short-term deposits are transacted in active markets. The Company classifies the fair value of these transactions according to the following hierarchy based on the amount of observable inputs used to value the instrument. Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1. Prices in Level 2 are either directly or indirectly observable as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, time value and volatility factors, which can be substantially observed or corroborated in the marketplace. Level 3 – Valuations in this level are those with inputs for the asset or liability that are not based on observable market data. The Company’s cash and cash equivalents and short-term deposits have been assessed on the fair value hierarchy described above and have been classified as Level 1.
58
Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from petroleum refineries relating to accounts receivable. As at December 31, 2010, the Company’s receivables consisted of $29.0 million (2009 – $23.1 million) of receivables from petroleum refineries and $0.2 million (2009 – $0.2 million) of other trade receivables, as summarized below:
($000s) Albania
Current $
25,590
Canada
30 – 60 days $
216 $
25,806
$
61 – 90 days
Over 90 days
Total
3,019
$ 408
$ -
$ 29,017
-
-
-
216
3,019
$ 408
$ -
$ 29,233
In Albania, the Company considers any amounts greater than 60 days as past due. The accounts receivable, included in the table, past due or not past due are not impaired. They are from counterparties with whom the Company has a history of timely collection and the Company considers the accounts receivable collectible. Domestic receivables are due by the end of the month following production and export receivables are collected within 30 days from the date of the shipment. The Company’s policy to mitigate credit risk associated with these balances is to establish marketing relationships with a variety of purchasers. The amount past due has been received subsequent to year-end and is not considered to be impaired. In Canada, no significant amounts are considered past due or impaired. The carrying amount of accounts receivable represents the maximum credit exposure. As of December 31, 2010 and December 31, 2009, the Company does not have an allowance for doubtful accounts and did not provide for any doubtful accounts nor was it required to write-off any receivables. Cash and cash equivalents consist of cash and bank balances. The Company manages the credit exposure related to shortterm investments by selecting counter parties based on credit ratings and monitors all investments to ensure a stable return, avoiding complex investment vehicles with higher risk such as asset backed commercial paper. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due. The Company’s approach to managing liquidity is to plan that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions without incurring unacceptable losses or risking harm to the Company’s reputation. The timing of cash flows relating to financial liabilities as at December 31, 2010, is as follows:
($000s) Accounts payable and accrued liabilities Operating loan Term loans Total
2011
2012
2013
2014
23, 241
$ -
$ -
$ -
-
19,741
-
-
4,014
889
889
296
$ 27,255
$ 20,630
$ 889
$ 296
$
The Company prepares annual capital expenditure budgets, which are regularly monitored and modified as considered necessary. Further, the Company utilizes authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate the capital expenditure program, the Company has a revolving credit facility with a European financial institution based in Albania, as disclosed in note 6. The Company also attempts to match its payment cycle with its collection of petroleum revenues. The Company maintains a close working relationship with the European bank that provides its credit facility. There were no increases in the existing credit facility during the year.
BANKERS 2010 ANNUAL REPORT l 59
Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, commodity prices, and interest rates will affect the Company’s net income. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while maximizing returns. Foreign currency exchange rate risk Foreign currency exchange rate risk is the risk that the fair value of future cash flows will fluctuate as a result of changes in foreign exchange rates. As at December 31, 2010, a 10% change in the foreign exchange rate of the Canadian dollar against the United States dollar, with all other variables held constant, would affect after tax net income for the year by $7.0 million (2009 – $3.8 million). The sensitivity is higher in 2010 as compared to 2009 because of an increase in Canadian dollar cash and cash equivalents outstanding. As at December 31, 2010, a 10% change in the foreign exchange rate of the Albanian Lek against the United States dollar, with all other variables held constant, would affect after tax net income for the year by $1,000 (2009 – $2,000). The sensitivity is lower in 2010 compared to 2009 because of a decrease in Albania Lek cash and cash equivalents outstanding. The Company had no forward foreign exchange rate contracts in place as at or during the years ended December 31, 2010 and 2009. Commodity price risk Commodity price risk is the risk that the value of future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for petroleum and natural gas are impacted by world economic events that dictate the levels of supply and demand. The Company’s primary revenues are from heavy oil sales in Albania, priced on a quality differential basis, to the US dollar-based Brent oil price. The Company has not entered into any commodity derivative contracts as at or during the years ended December 31, 2010 and 2009. Interest rate risk Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company is exposed to interest rate fluctuations on its bank debt which bears a floating rate of interest. As at December 31, 2010, a 10% change in the interest rate, with all other variables held constant, would affect after tax net income for the year by $0.2 million (2009 – $0.3 million).
60
Capital management The Company’s policy is to maintain a strong capital base thereby establishing investor, creditor and market confidence and to sustain future business development. The Company manages its capital structure and makes necessary adjustments in light of changes in economic conditions and the risk characteristics of the underlying petroleum and natural gas assets. The Company’s capital structure includes shareholders’ equity, bank debt and working capital. In order to maintain the capital structure, the Company may from time to time issue shares and adjust capital spending to manage current and projected debt levels. The Company monitors capital based on the ratio of debt to funds from operations. This ratio is calculated as net debt (outstanding bank debt less working capital before debt) divided by funds from operations. The Company’s strategy is to maintain a debt to funds from operations ratio of no more than 1.5 to 1. This ratio may increase at certain times as a result of acquisitions. In order to monitor this ratio, the Company prepares annual capital expenditure budgets, which are updated as necessary depending on varying factors including current and forecast prices, successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. As at December 31, 2010, the ratio of surplus in debt to funds from operations was 1.49 (2009 – 2.04). The decrease was primarily due to the increase in funds from operations during the year from $25.4 million in 2009 to $73.2 million in 2010, partially offset by an improvement in net surplus in debt from $52.0 million in 2009 to $109.1 million in 2010. The Company’s share capital is not subject to external restrictions; however, the bank debt facility is based on certain covenants, all of which were met as at December 31, 2010 and 2009. The Company has not paid or declared any dividends since the date of incorporation, nor are any contemplated in the foreseeable future.
14. SUBSEQUENT EVENT In February 2011, the Company entered into financial commodity put contracts representing 4,000 barrels of oil per day at a floor price of $80 per barrel for the period January 1, 2012 to December 31, 2012.
BANKERS 2010 ANNUAL REPORT l 61
Corporate Information DIRECTORS Robert Cross 1, 2, 3, 4, Chairman Abdel F. (Abby) Badwi Eric Brown 1, 2, 4 General Wesley K. Clark 3 Jonathan Harris 1, 2, 3 Phillip Knoll
1, 4
John Zaozirny 3 1 Member of the Audit Committee 2 Member of the Compensation Committee 3 Member of the Corporate Governance & Nominating Committee 4 Member of Reserves, Health, Safety & Environment Committee
STOCK EXCHANGE LISTING
EXECUTIVE Abdel F. (Abby) Badwi President & Chief Executive Officer Douglas C. Urch Executive VP, Finance & Chief Financial Officer Ian McMurtrie Executive Vice President, Exploration & Development Suneel Gupta Vice President, Production & Operations Eugene Christensen Vice President, Engineering Mark Hodgson Vice President, Business Development Leonidha Cobo Vice President & Deputy General Director, Albania
The Toronto Stock Exchange Trading Symbol: BNK & BNK.WT.A
AUDITORS
Alternative Investment Market (AIM) Trading Symbol: BNK
KPMG LLP Calgary, Alberta
TRANSFER AGENT AND REGISTRAR Alliance Trust Company 450, 407 – 2nd Street SW Calgary, Alberta T2P 2Y3 Email: inquiries@alliancetrust.ca
BANKERS Bank of Montreal Calgary, Alberta Raiffeisen Bank Tirana, Albania
EVALUATION ENGINEERS
International Finance Corporation (IFC) Washington, DC, USA
RPS Energy Canada Ltd. Calgary, Alberta
The European Bank for Reconstruction and Development (EBRD) London, United Kingdom
DeGolyer and MacNaughton Canada Limited Calgary, Alberta
LEGAL COUNSEL McCarthy Tétrault LLP Calgary, Alberta
Bankers is holding its Annual General Meeting from 3:00 – 4:00 p.m. on May 24, 2011 in the Viking Room at the Calgary Petroleum Club (319 - 5 Avenue SW, Calgary, Alberta).
Design: Bryan Mills Iradesso
Head Office Bow Valley Square III Suite 1700, 255 - 5 Avenue SW Calgary, Alberta, Canada T2P 3G6 Phone: 403.513.2699 Fax: 403.228.9506 investorrelations@bankerspetroleum.com www.bankerspetroleum.com