Corval Energy Ltd.
QUARTERLY REPORT
FOR THE SIX MONTHS ENDED JUNE 30, 2013
Corval Energy Ltd. President’s Message
For the six months ended June 30, 2013
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PRESIDENT’S MESSAGE
Fellow Shareholders, I am pleased to present the Financial Statements and MD&A for the six months ended June 30, 2013 for Corval Energy Ltd. (the "Company" or "Corval"). These materials are being emailed to all shareholders but can also be found on our website at www.corvalenergyltd.com . If you would like a hard copy mailed to you please contact us at [email protected]. The second quarter of 2013 saw a significant increase in production resulting from the first quarter drilling program. For the quarter we averaged 546 barrels of oil per day with associated cash flow of $2.2 million. In April we produced over 600 barrels of oil per day. As Corval drills and completes new wells in late August, our production will once again increase. In May, 2013, the Board approved the full year capital program of $30.7 million, which includes drilling a total of 17 wells. As many of you are aware, southwest Manitoba has experienced significant and continuous rainfall from late June to mid-August. During this time, Corval was able to drill 3 wells, but the wet conditions eventually led to Corval deciding to defer further drilling and completions to ensure capital costs for the project stay within budget. The capital program was deferred about four weeks, from mid-July to mid-August, but we are pleased to report that conditions have improved in Manitoba and we are back drilling and well completions are in progress. For the third quarter, we expect to complete the 4 wells previously drilled, and drill and complete up to 5 additional wells. In addition, we plan to complete the installation of an oil treater and associated water disposal line at the oil battery. The installation of the oil treater and water disposal line are expected to reduce trucking costs for the Company. In April and May, we completed the disposition of non-core assets in Manitoba for $1.9 million and acquired core assets in Manitoba for approximately $3.3 million, increasing our key lands and providing additional drilling locations in the area. Although our drilling program has been deferred, we are still pushing to drill all 17 wells and exit at our target of 1,000 barrels of oil per day. Corval continues to be in a relatively strong financial position, with funds available through our equity line, bank lines and cash flow. This will allow us to implement our 2013 capital program, as well as allowing sufficient financial flexibility to take advantage of additional opportunities that may arise in our focus area. On June 7, 2013, Corval held its Annual General Meeting in Calgary. We thank those of you who attended, and for those of you who were not able to attend, the voting results are summarized on page 6. Sincerely,
Tom Stan President & CEO CORVAL ENERGY LTD.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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Management’s Discussion and Analysis Six months ended June 30, 2013
August 26, 2013
1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated as a shelf company on March 15, 2011, and
remained inactive until acquired by a current director of Corval on November 30, 2011. On May 15, 2012, the
Company changed its name to Corval Energy Ltd. On October 17, 2012, the Company completed a Plan of
Arrangement with Foundation Group Capital Trust, whereby it exchanged shares of the Company for trust units of
Foundation Group Development Trust (“FGDT”) held by Foundation Group Capital Trust, and subsequently,
Foundation Group Capital Trust then distributed these shares to its unitholders. Through the Plan of Arrangement,
the subsidiaries of FGDT were dissolved and the assets and liabilities were assumed by Corval.
Financial and Operations Overview
For the six months ended June 30, 2013
(thousands of dollars except per share amounts and shares outstanding)
Six months ended
June 30, 2013
($000s)
Funds from operations * $3,131
Net loss $(931)
Average production (boe/d) 432 boe/d
Working capital ** $569
Capital expenditures $000s
Exploration and evaluation $1,538
Land and seismic 281
Drill and complete 7,842
Equipment, facilities and other 1,927
Property acquisitions 3,306
Property dispositions (1,897)
$12,997
Common shares o/s at period-end (000’s) 57,462
* before changes in non-cash working capital
**excluding non-cash commodity price contract liability
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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HIGHLIGHTS
Corval continued with its capital program after break-up, drilling 3 wells prior to the very rainy, and wet
summer conditions in southwest Manitoba which delayed the capital program until mid-August. In total,
Corval has drilled six wells in the six-month period.
Production averaged 432 bopd for the six months ended June 30, 2013 while cash flow was $3.1 million for
the same period. Production averaged 546 bopd in the second quarter of 2013, an increase of 72% from the
first quarter.
Crude oil prices in the first half of 2013 averaged $88.53/bbl.
Netbacks for the six months were $56.61/bbl.
In order to manage exposure to fluctuating crude oil pricing, Corval fixed 100 bopd at $90.02/bbl at
Edmonton from May to December, 2013. After the quarter end, an additional 100 bopd was fixed at $101.35,
WTI in Canadian dollars from August 1, 2013 to July 31, 2014.
In April and May, Corval completed the disposition of non-core assets in Manitoba for $1.9 million and
acquired core assets in Manitoba for approximately $3.3 million, increasing our core land position and
providing additional drilling locations.
Increased bank facility in July, 2013 to $13.5 million
ADVISORIES
Management’s discussion and analysis (“MD&A”) and results of operations should be read in conjunction with the
interim consolidated financial statements for the three and six months ended June 30, 2013, and the consolidated
financial statements for the year ended December 31, 2012. Barrels of oil equivalent (“boe”) may be misleading as
boes are based on a relative energy content conversion of six thousand cubic feet (“mcf”) of natural gas to one
equivalent barrel (“bbl”) of oil (6 mcf = 1bbl) when measured at burner tip and does not represent a value
equivalency at the wellhead. Production volumes reported are the Company’s interest before royalties, and all
amounts are expressed in Canadian dollars, unless otherwise stated.
The financial data presented has been prepared in accordance with Canadian Generally Accepted Accounting
principles (“GAAP”), which are based on International Financial Reporting Standards (“IFRS”). Additional terms
used in this Management Discussion and Analysis are “funds from operations” or “funds used in operations”, and
“netback”. Funds from operations are presented for information purposes only, and should not be considered an
alternative to, or more meaningful than, cash flow from operating activities as determined by GAAP. Corval
determines funds from operations to be the cash flow before changes in non-cash working capital. Management
believes that in addition to net earnings, funds from operations is a useful supplemental measure to assess the
financial performance and the ability of Corval to finance future growth through capital investment. In addition,
management uses netback to analyze operating performance and leverage. Netback equals total revenue less
royalties, operating costs and transportation costs calculated on a per boe basis.
Forward-looking information
Certain information set forth in this document, including management’s assessment of future plans and operations,
contains forward-looking statements. By their nature, forward-looking statements are subject to numerous risks and
uncertainties, many of which are beyond management’s control. Those risks include, without limitation, the effect of
general economic conditions, risks associated with oil and gas exploration, development, production, marketing and
transportation, the effects of inclement weather and natural disasters, loss of markets, the fact that the Company does
not operate all of its properties, industry conditions and competition, volatility of commodity prices, currency
fluctuations, imprecision of reserve estimates, environmental risks, competition from other industry participants, the
ability to access qualified personnel and oilfield services, decisions by regulators and the ability to access sufficient
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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capital from internal and external sources. Readers are cautioned not to place undue reliance on the forward-looking
statements as the assumptions used in the preparation of such information, although considered reasonable at the
time of preparation, may prove to be imprecise. Actual results, performance or achievements could materially differ
from those expressed or implied in such forward-looking statements and accordingly, no assurance can be given that
any of the events anticipated by forward looking statements will transpire or occur, or if any of them do so, what
benefit the Company will derive therefrom.
Specific forward-looking statements include the following: Corval’s business strategy and focus, capital
expenditure budget, drilling plans, plans to install treatment and disposal facilities, land acquisitions, future debt
levels, operating and transportation costs, and other financial results, source of funding of the Company’s capital
program, future plans to draw down on Corval’s equity line, tax pools, future production, and decline rates.
OVERVIEW OF PERFORMANCE AND DISCUSSION OF OUTLOOK
Overview
Production for the six months ended June 30, 2013 averaged 432 bopd. The second quarter of 2013 saw a
significant increase in production resulting from the first quarter drilling program.. For the quarter, the Company
averaged 546 barrels of oil per day with associated cash flow of $2.2 million.
Crude oil pricing remained strong in the first six months of 2013, averaging $88.53/bbl in the field. Crude oil
continued strong after the quarter end, with prices (WTI in $US) remaining over $100/bbl. This, combined with
reduced operating costs has resulted in field netbacks averaging $60.00/bbl for the three months ended June 30,
2013, an increase from the first quarter average of $50.72/bbl.
In the quarter, in order to manage exposure to fluctuating crude oil pricing, Corval fixed 100 bopd at $90.02/bbl at
Edmonton from May to December, 2013. After the quarter end, an additional 100 bopd was fixed at $101.35, WTI
in Canadian dollars for August 1, 2013 to July 31, 2014.
Corval spent $2.6 million on capital expenditures in the quarter. This included costs to complete and tie-in wells
drilled in the first quarter and also to purchase land in the region. In April and May, Corval completed the
disposition of non-core assets in Manitoba for $1.9 million and acquired core assets in Manitoba for approximately
$3.3 million, increasing our core land position and providing additional drilling locations.
During the six months ended June 30, 2013, Corval used the net proceeds from its 2012 financing to repay $545,193
of promissory notes, including accrued and unpaid interest, and $7,450,000 of bank debt. In April, Corval called
$8.0 million on its line of equity. The remaining $9.0 million of the line of equity financing is available upon
request by the Company to support future capital requirements, and is expected to be called late in the third quarter
to fund the ongoing capital program.
In February, 2013, Corval was able to renegotiate its bank line to $9.0 million with a new lender. Corval’s
successful first quarter drilling program resulted in an increase to this line to $13.5 million.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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Corporate
Annual General Meeting
Corval held its annual general meeting on June 7, 2013. There were 37.2 million shares voted at the meeting,
representing 64.8% of the shares outstanding. Our Chairman, Mr. Jody Forsyth ran the meeting and all the
resolutions presented were strongly endorsed by the shareholders.
% votes in favour
i) Fixing the number of directors to be elected at the meeting at six members 99.6%
ii) Election of six directors as proposed 99.5%
iii) Appointment of Ernst & Young LLP, Chartered Accountants as auditors 99.9%
iv) The current directors of Corval are:
a. Mr. Jody Forsyth
b. Mr. Larry Evans
c. Mr. Brian Frank
d. Mr. David Eastham
e. Mr. Ron McIntosh
f. Mr. Tom Stan
After the formal part of the meeting, Mr.Tom Stan, President & CEO provided a financial and operational update for
Corval.
Grey Market Trading
Corval’s common shares are not listed, traded or quoted on any stock exchange. Registered dealers may facilitate
trades of the Company's common shares to eligible purchasers through the grey market. Since grey market securities
are not traded or quoted on an exchange or interdealer quotation system, investor's bids and offers are not collected
in a central spot so market transparency is diminished and best execution of orders is difficult. The sale of the
Company's common shares through the grey market is at the shareholder's own risk and the Company does not
endorse such trades.
The Company understands that Acumen Capital Partners Limited and AltaCorp Capital, both registered dealers,
have previously organized trades in Corval’s common shares on the grey market. Please contact these dealers with
inquiries regarding trading your common shares on the grey market.
If you are interested in selling your Corval shares, to find a contact, you may either:
i) Look on our website at www.corvalenergyltd.com;
ii) Call Tom Stan at 403-252-7671 ext. 226;
iii) E-mail us at [email protected].
Results of Operations – Second Quarter of 2013
Although Corval had been incorporated in 2011, Corval formally commenced operations in October, 2012.
Therefore, the interim consolidated financial statements and the Management’s Discussion and Analysis reflect
operations only after October 2012, and as a result, no comparative information has been provided.
Average daily sales volumes were 546 bopd and 432 bopd for the three and six months ended June 30, 2013. The
production for the second quarter of 2013 is an increase of 228 bopd from the first quarter bopd or 72%.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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Revenues, comprised entirely of oil sales, were $4,474,797, representing an average price of $90.13 per bbl for the
three-month period, and $6,926,086, representing an average price of $88.53 per bbl, for the six-month period. The
revenues for the three-month period ending June 30, 2013 were $2,023,508 higher than the three-month period
ending March 31, 2013, an 82% increase. The average price for the second quarter of 2013 was $4.38 (5%) per bbl
higher than the average price for the first quarter of 2013.
For the three and six months ended June 30, 2013, the Company had a net loss of $291,593 and $931,001
respectively. The Company incurred capital expenditures of $2,644,799 during the three-month period, primarily
related to the continuation of drilling, completing, equipping, and tying-in wells in the Sinclair area of Manitoba,
resulting in a total of $11,588,316 for the six-month period. Also during the second quarter of 2013, the Company
purchased a small property for a cost of $3,306,224, and sold a small non-core property for proceeds of $1,897,027.
Funds from operations for three and six months ended June 30, 2013 were $2,255,231 and $3,130,921 respectively.
The funds from operations for the second quarter of 2013 represents an increase of $1,379,541, or 57%, from the
first quarter of 2013 resulting from both an increase in production and an increase in the oil price.
OUTLOOK
Capital Expenditure Program - 2013
In May, 2013, the Board approved the full year capital program of $30.7 million, which includes drilling a total of
17 wells. Corval continued with its capital program in late June after break-up, drilling three wells prior to the very
rainy, and wet conditions in southwest Manitoba delaying the capital program until mid-August. This leaves an
additional eight wells to be drilled in the remainder of the year. In addition, the Company plans to continue its
program of acquiring additional land in the region, to add additional drilling locations.
In mid-August, the weather co-operated and the lands dried out enough to commence the next phase of the capital
program. This includes completing the four wells that were previously drilled, and then drilling, completing and tie-
ing in an additional three operated wells in the third quarter. In addition, two non-operated wells are expected to be
drilled in the third quarter.
Corval is now well positioned to move forward and grow in 2013. With production currently near 450 bop, and
strong crude oil prices, cash flows will remain strong.
Corval is in a unique position for a junior/emerging oil company as it is now:
i) Well financed with cash, with an $9.0 million unutilized line of equity, a $13.5 million unutilized line of credit
and good cash flows,
ii) generating solid cash flow, with light oil that generates netbacks that are currently over $60.00 per bbl,
iii) well-positioned with a strong management team, directors and major investors to take advantage of additional
opportunities that will arise in Western Canada, and
iv) continuing to capitalize on the potential of its significant multi-zone light oil resource plays in Manitoba.
IMPACT OF CURRENT ECONOMIC VOLATILITY AND UNCERTAINTY
Crude oil prices have remained very strong through the first half of 2013, and the Company has access to over $9
million through a line of equity. Corval is therefore in a good position to continue its planned capital expenditures
program. The Company will continue to monitor its funds from operations and available balance on the line of
equity, and available credit facilities to ensure its ability to meet its planned capital program for 2013 and beyond.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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RESULTS OF OPERATIONS
The following tables summarize various aspects of producing properties for the first six months of 2013.
Production
Period ended June 30, 2013 Three
months
Six
months
Oil, condensate, & ngls – bbls/d
546
432
Production of 432 bbls/d for the second quarter increased from 318 bbls/d during the first quarter of 2013 as a result
of additional production from the new wells drilled.
Revenue
Period ended June 30, 2013 Three
months
Six
months
Sales - oil $ 4,474,797 $ 6,926,086
Average price
Oil ($/bbl)
$ 90.13
$ 88.53
The Company’s crude oil production is light, sweet oil with an API of 38 degrees. The realized average price for the
three months ended June 30, 2013 is $4.38 per bbl (5%) higher than the price of $85.75 per bbl for the three months
ended March 31, 2013. The crude oil is priced from Cromer, Manitoba, and traded at a discount to WTI in $CDN of
approximately $7.00 over the six month period.
Commodity price contracts / hedging
Period ended June 30, 2013 Three
months
Six
months
Realized loss on commodity price contract (cash portion)
Unrealized loss on commodity price contract (non-cash portion) $ 22,112
174,500
$ 22,112
174,500
Total commodity price contract expense $ 196,612 $ 196,612
Per bbl
Cash portion of commodity price contract
Non-cash portion of commodity price contract
Total commodity price contract expense
$ 0.45
$ 3.51
$ 3.96
$ 0.28
$ 2.23
$ 2.51
The Company has two commodity price contracts in place. In March, Corval fixed 100 bopd at $90.02/bbl at
Edmonton from May to December, 2013. In July, 2013, an additional 100 bopd was fixed at $101.35, WTI in
Canadian dollars from August 1, 2013 to July 31, 2014.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-9-
Royalties
Period ended June 30, 2013 Three
months
Six
months
Crown royalties
Freehold royalties
Overriding royalties
$ 1,415
581,723
73,154
$ 5,166
917,276
103,468
Total royalties $ 656,292 $ 1,025,910
Per boe
Percentage of revenue $ 13.22
14.7%
$ 13.11
14.8%
The royalty rate has remained steady through the first and second quarters of 2013. Most of the Company’s
production is from freehold lands, which have royalty rates of between 12.5% and 18%, and provide no incentives
for drilling.
Operating and transportation costs
Period ended June 30, 2013 Three
months
Six
months
Operating costs
Expensed workovers $ 761,803
55,487
$ 1,318,690
130,266
Total operating costs $ 817,290 $ 1,448,956
Per bbl
Operating costs
Expensed workovers
Total operating costs
$ 15.34
$ 1.12
$ 16.46
$ 16.86
$ 1.67
$ 18.52
Operating costs averaged $16.46 and $18.52 per bbl for the three and six months ended June 2013 respectively.
Operating costs for the three months ended June 30, 2013 consisted of $15.34 for regular operating costs and $1.12
per bbl for expensed workovers, as compared to operating costs for the three months ended March 31, 2013, of
$19.48 for regular operating costs and $2.62 for expensed workovers, for a total of $22.10 per bbl. Workovers for
2013 included bottomhole pump and tubing repairs at several Sinclair wells. Operating costs per bbl have decreased
due to production increases.
Operating netbacks
Period ended June 30, 2013 Three
months
Six
months
Per boe
Revenues
Commodity price contract expense – cash portion
Royalties
Operating costs
$ 90.13
(0.45)
(13.22)
(15.34)
$ 88.53
(0.28)
(13.11)
(16.86)
Operating netback per boe before workovers $ 61.12 $ 58.28
Workovers (1.12) (1.67)
Operating netback per boe $60.00 $56.61
The netback for the three months ended June 30, 2013 of $60.00 is 18% higher than the netback for the three months
ended March 31, 2013 of $50.72, due to a combination of rising oil prices and decreasing operating costs per bbl.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-10-
Netbacks for the Manitoba properties are generally higher than industry average due to strong prices for the light
sweet crude produced in the region, combined with reasonable operating costs. The Company expects that trend to
continue.
General and administrative expenses
Period ended June 30, 2013 Three
months
Six
months
Human resources costs (salaries and benefits)
Professional fees
Occupancy costs
Office supplies, software, and services
Shareholder reporting
Travel
Miscellaneous general and administrative
Overhead recoveries
$ 452,644
71,771
112,874
90,698
51,327
17,719
(197)
(72,964)
$ 875,536
147,102
224,367
192,524
58,368
23,578
1,183
(224,471)
Total $ 723,872 $ 1,298,187
General and administrative expenses for the three months ended June 30, 2013 are $149,557 (26%) higher than the
three months ended March 31, 2013 due to three new staff added in February, 2013, one more staff member added
in May, costs associated with the annual general meeting held in June, 2013, and reduced recoveries from overhead
allocations due to decreased capital activity during the second quarter of 2013.
Depletion and depreciation
Period ended June 30, 2013 Three
months
Six
months
Total depreciation, depletion, and impairment
Per boe
$1,818,825
$ 36.64
$2,811,031
$ 35.93
Depletion for the three months ended June 30, 2013 increased by $826,619 over the three months ended March 31,
2013 primarily due to production increasing by 72% over that same period.
Funds from operations and net loss
Period ended June 30, 2013 Three
months
Six
months
Funds from operations
$/share - basic
Net loss
$/share - basic
$ 2,255,231
$0.05
$(291,593)
$(0.01)
$ 3,130,921
$0.06
$(931,001)
$(0.02)
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
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Capital Expenditures
Period ended June 30, 2013 Three
months
Six
months
Land purchases
Geological and geophysical
Drilling and completion
Equipping and facilities
Other
$ 1,231,244
79,086
932,608
384,710
17,151
$ 1,472,471
346,823
7,841,754
1,899,423
27,845
Total cash expenditures
Less: Exploration and evaluation expenditures $ 2,644,799
(1,263,107)
$11,588,316
(1,538,324)
Total: Property, Plant, and equipment expenditures $ 1,381,692 $10,049,992
Capital expenditures were $1,263,107 and $1,538,324 for exploration and evaluation assets for the three and six
months ended June 30, 2013, and $2,644,799 and $11,588,316 for developed and producing assets for the same
respective periods. Corval drilled six wells during the six month period, and completed, equipped, and tied-in five
wells as part of the capital program in Sinclair, Manitoba, costs of which are included in property, plant, and
equipment expenditures.
Acquisition and divestiture
a) On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of $3,306,224. The
consideration paid was determined to be equivalent to fair value.
The purchase price allocation is as follows:
$
Property, plant, and equipment
Decommissioning liability
3,340,865
(34,641)
Net assets 3,306,224
Cash consideration paid
3,306,224
b) In April, 2013, the Company disposed of their working interest in two non-core wells for cash proceeds of
$1,897,027.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-12-
SUMMARY OF QUARTERLY FINANCIAL DATA
The following table summarizes quarterly financial results:
Quarter
ended
Jun-13
$
Mar-13
$
Dec-12
$
Sep-12
$
Jun-12
$
Mar-12
$
Dec-11
$
Sept-11
$ Petroleum
and natural gas sales
4,474,797
2,451,289
1,364,553
-
-
-
-
-
Funds from
(used in) operations 2,255,231 875,690 (361,877) - - - - -
Income
(loss) (291,593) (639,408) (8,474,535) - - - - -
Production bopd
546
318
221
-
-
-
-
-
Average
price/bbl
$90.13
$85.75
$82.39
$0.00
$0.00
$0.00
$0.00
$0.00
LIQUIDITY AND CAPITAL RESERVES
The Company started 2013 with a working capital surplus of $2,802,567, which included the remaining promissory
notes of $568,828 owing. The Company raised $145,600 through the issue of 208,000 shares through a private
placement in February 2013. On April 5, 2013, the Company requested an $8 million draw from the line of equity,
which resulted in $7,510,437 in proceeds net of share issuance costs from the sale of 11,428,571 shares. Promissory
notes, valued at $545,193, were repaid during the first three months of 2013, as well as the bank loan of $7,450,000.
The Company drilled, completed, equipped, and tied-in five wells of its 2013 capital program during the six month
period, which comprised the majority of the $10,049,992 in property, plant, and equipment expenditures for the
quarter. The Company closed the quarter with a working capital balance of $394,283 at June 30, 2013, which
includes the remaining promissory notes of $24,937 owing.
The Company considers its capital structure to include share capital, and working capital, including the bank loan.
June 30, 2013
$
Current assets 3,152,563
Accounts payable and accrued liabilities (2,558,843)
Promissory notes (24,937)
Net working capital* 568,783
Maximum value of bank loan
Amount drawn
9,000,000
-
Unutilized bank loan 9,000,000
Total available line of equity
Amount drawn to June 30, 2013
31,000,000
(21,950,000)
Unutilized line of equity 9,050,000
Net available funds 18,618,783
*Excludes non-cash commodity price contract liability
The Company’s 2013 capital program was presented to the Board of Directors, and a capital program of $30.7
million was approved. To June 30, 2013, total capital of $13.0 million was expended, including a property
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-13-
acquisition of $3.3 million and a property disposition with proceeds of $1.9 million. In April, 2013, another $8.0
million draw on the line of equity was requested and received. The Company expects the current available funds,
bank loan, line of equity, and anticipated cash flow will be able to fund its remaining capital program for 2013.
During the six months ended June 30, 2013, the Company negotiated a new bank loan with a Canadian financial
institution for $9.0 million, which was increased to $13.5 million in July, 2013, bearing an interest rate of the Bank
Prime Rate plus 0.75%. The credit facility is subject to a periodic review, the next of which is scheduled for
October 1, 2013. No funds have been drawn from this bank loan to date.
SHARE DATA
Transactions regarding Corval’s shares, options, acquisition warrants and performance warrants are presented in the
interim consolidated financial statements as at June 30, 2013, and the consolidated financial statements at December
31, 2012.
The Company has 57,462,482 shares outstanding as of the date of this MD&A.
EVENTS AFTER REPORTING PERIOD
Commodity price contract
Subsequent to the quarter end, the Company entered into a financial transaction from August 1, 2013 to July 31,
2014 to fix the price of 100 barrels of oil per day at $101.35/bbl calculated as West Texas Intermediate converted to
Canadian dollars.
LAWSUIT
The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on behalf of its
predecessor companies regarding the improper diversion of funds against a former trustee. There can be no
assurance of a favorable judgment at this time.
TRANSACTIONS WITH RELATED PARTIES
The corporate secretary is a partner in a law firm that provides legal services to the Company. For the three and six
months ended June 30, 2013, the Company recorded $75,417 and $141,717 respectively in general and
administrative expenses related to this law firm. At June 30, 2013, $104,543 remained in accounts payable.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-14-
COMMITMENTS
The Company is carrying a lease on its office space, and another lease on the space of FGDT, which terminated on
July 31, 2013:
Total at
June 30, 2013
$
2013
2014-2018
2019-2022
76,639
760,461
494,711
Total 1,331,811
RISK FACTORS
Investors should carefully consider the risk factors set out below and consider all other information contained
herein. Additional risks and uncertainties not currently known to the management of the Company may also
have an adverse effect on the Company's business and the information set out below does not purport to be an
exhaustive summary of the risks affecting the Company.
Prices, Markets and Marketing of Crude Oil and Natural Gas The marketability and price of oil and natural gas that may be acquired or discovered by the Company is and will
continue to be affected by numerous factors beyond its control. The Company's ability to market its crude oil and
natural gas may depend upon its ability to contract capacity on pipelines that deliver products to commercial
markets. The Company may also be affected by deliverability uncertainties related to the proximity of its reserves to
pipelines and processing and storage facilities and operational problems affecting such pipelines and facilities as
well as extensive government regulation relating to price, taxes, royalties, land tenure, allowable production, the
export of oil and natural gas and many other aspects of the oil and natural gas business.
The Company's revenues, profitability and future growth and the carrying value of its oil and gas properties are
substantially dependent on prevailing prices of oil and gas. The Company's ability to borrow and to obtain additional
capital on attractive terms is also substantially dependent upon oil and gas prices. Prices for oil and gas are subject to
large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market
uncertainty and a variety of additional factors beyond the control of the Company. These factors include economic
conditions, in the United States and Canada, product “bottlenecks” caused by transportation capacity constraints, the
actions of the OPEC and Russia, governmental regulation, political stability in the Middle East and elsewhere, the
foreign supply of oil and gas, the price of foreign imports and the availability of alternative fuel sources. Any
substantial and extended decline in the price of oil and gas would have an adverse effect on the Company's carrying
value of its proved reserves, borrowing capacity, revenues, profitability and cash flows from operations.
Project Risks
The Company will manage a variety of small and large projects in the conduct of its business. Project delays may
delay expected revenues from operations. Significant project cost over-runs could make a project uneconomic. The
Company's ability to execute projects and market oil and natural gas will depend upon numerous factors beyond the
Company's control, including:
the availability of drilling and related equipment;
the availability of processing capacity;
the availability and proximity of pipeline capacity;
the availability of storage capacity;
the supply of and demand for oil and natural gas;
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-15-
the effects of inclement weather;
unexpected cost increases;
accidental events;
the availability and productivity of skilled labour; and
the regulation of the oil and natural gas industry by various levels of government and governmental agencies.
Because of these factors, the Company could be unable to execute projects on time, on budget or at all, and may not
be able to effectively market the oil that it produces.
Availability of Drilling Equipment and Access
Oil and natural gas exploration and development activities are dependent on the availability of drilling and related
equipment (typically leased from third parties) in the particular areas where such activities will be conducted.
Demand for such limited equipment or access restrictions may affect the availability of such equipment to the
Company and may delay exploration and development activities. To the extent the Company is not the operator of
its oil and gas properties, the Company will be dependent on such operators for the timing of activities related to
such properties and will be largely unable to direct or control the activities of the operators.
Legal Proceedings
The Company may from time to time be subject to litigation and regulatory proceedings arising in the normal course
of its business. The Company cannot determine whether such litigation and regulatory proceedings will, individually
or collectively, have a material adverse effect on its business, results or operations and financial condition. To the
extent expenses incurred in connection with litigation or any potential regulatory proceeding or action (which may
include substantial fees of attorneys and other professional advisors and potential obligations to indemnify officers
and directors who may be parties to such actions) are not covered by available insurance, such expenses could
adversely affect the Company's cash position.
Environmental Risks
All phases of the oil and natural gas business present environmental risks and hazards and are subject to
environmental regulation pursuant to a variety of international conventions and international, national, provincial,
state and local law and regulation. Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in association with oil and gas
operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and
reclaimed to the satisfaction of applicable regulatory authorities. Compliance with such legislation can require
significant expenditures and a breach of same can result in the imposition of clean-up orders, fines and/or penalties,
some of which may be material, as well as possible forfeiture of requisite approval obtained from the various
governmental authorities. The discharge of GHG emissions and other pollutants into the air, soil or water may give
rise to liabilities to governments and third parties and may require the Company to incur costs to remedy such
discharge. Although the Company believes that it is in material compliance with current applicable environmental
regulations, no assurance can be given that environmental laws will not result in a curtailment of production or a
material increase in the costs of production, development or exploration activities or otherwise adversely affect its
financial condition, results of operations or prospects.
Permits, Licences and Approvals
The Company's properties are held in the form of licences and leases and working interests in licences and leases. If
the Company or the holder of the licence or lease fails to meet the specific requirement of a licence or lease, the
licence or lease may terminate or expire. There can be no assurance that any of the obligations required to maintain
each licence or lease will be met. The termination or expiration of the Company's licences or leases or the working
interests relating to a licence or lease may have a material adverse effect on its results of operations and business.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-16-
Land Tenure
Crude oil and natural gas located in the Canadian western provinces is owned predominantly by the respective
provincial governments. Provincial governments grant rights to explore for and produce oil and natural gas pursuant
to leases, licences and permits for varying terms and on conditions set forth in provincial legislation including
requirements to perform specific work or make payments. Oil and natural gas located in such provinces can also be
privately owned and rights to explore for and produce such oil and natural gas are granted by lease on such terms
and conditions as may be negotiated.
Risk management / hedging
The Company may enter into agreements to receive fixed prices on its oil and natural gas production to offset the
risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in
such agreements, the Company will not benefit from such increases and the Company may nevertheless be obligated
to pay royalties on such higher prices, even though not received by it, after giving effect to such agreements.
Similarly, from time to time the Company may enter into agreements to fix the exchange rate of Canadian to United
States dollars in order to offset the risk of revenue losses if the Canadian dollar increases in value compared to the
United States dollar; however, if the Canadian dollar declines in value compared to the United States dollar, the
Company will not benefit from the fluctuating exchange rate.
Exploration, Development and Production Risks
Oil and natural gas exploration involves a high degree of risk, which even with a combination of experience,
knowledge and careful evaluation the Company may not be able to overcome. There is no assurance that
expenditures made on future exploration by the Company will result in new discoveries of oil in commercial
quantities. It is difficult to project the costs of implementing a drilling program due to the inherent uncertainties of
drilling in unknown formations, the costs associated with encountering various drilling conditions such as over
pressured zones and tools lost in the hole, the availability of adequately trained and experienced contractors, and
changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and
interpretations thereof.
The long-term commercial success of the Company depends on its ability to find, acquire, develop and profitably
produce oil and natural gas reserves. No assurance can be given that the Company will be able to continue to locate
satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified,
the Company may determine that current markets, terms of acquisition and participation or pricing conditions make
such acquisitions or participations uneconomic.
Future oil and gas exploration may involve unprofitable efforts, not only from dry wells, but from wells that are
productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs.
Completion of a well does not assure a profit on the investment or recovery of drilling, completion and operating
costs. In addition, drilling hazards or environmental damage could greatly increase the cost of operations, and
various field operating conditions may adversely affect the production from successful wells. These conditions
include delays in obtaining governmental approvals or consents, shut-ins of connected wells resulting from extreme
weather conditions, insufficient storage or transportation capacity or other geological and mechanical conditions.
While diligent well supervision and effective maintenance operations can contribute to maximizing production rates
over time, production delays and declines from normal field operating conditions cannot be eliminated and can be
expected to adversely affect revenue and cash flow levels to varying degrees.
In addition, oil and gas operations are subject to the risks of exploration, development and production of oil and
natural gas properties, including encountering unexpected formations or pressures, premature declines of reservoirs,
blow-outs, cratering, sour gas releases, fires and spills. Losses resulting from the occurrence of any of these risks
could have a materially adverse effect on future results of operations, liquidity and financial condition.
Corval Energy Ltd. Management Discussion and Analysis
For the six months ended June 30, 2013
-17-
Recent economic risks
Many oil and natural gas producers are encountering difficult times with low natural gas prices and volatile
differentials on crude oil prices, and in accessing new equity capital, while credit conditions and availability may
tighten despite low interest rates. Corval is positioned 100% in exploring and producing crude oil, which has
maintained stronger pricing over the last few years. Crude oil pricing has been volatile due to world supply and
demand factors, bottlenecks in North American transportation from production areas to refining areas. These factors
have resulted in wider differentials between prices on the world market based on Brent pricing index, West Texas
Intermediate (WTI) which is the North American benchmark, and Edmonton Par price, the Canadian benchmark
price for light sweet crude oil. These factors, including volatile differentials is expected to continue in the near
future.
Access to capital The Company is dependent on access to equity or debt financing to fund working capital requirements and capital
expansion programs when operating cash flows are not sufficient to do so. To date, sufficient capital has been
obtained to meet the Company’s working capital and capital expansion requirements. Additional working capital
requirements or further capital expansion that cannot be funded through operating cash flows or current cash on
hand will require external financing, the availability of which is dependent on, for example, credit availability,
economic conditions, and commodity prices.
Additional risk factors may be found in the interim consolidated financial statements at June 30, 2013 in note 16, in
the consolidated financial statements at December 31, 2012 in notes 3 and 17.
FINANCIAL INSTRUMENTS
The financial instruments are described in Note 16 in the interim consolidated financial statements as at June 30,
2013, and in Note 17 in the consolidated financial statements at December 31, 2012.
CRITICAL ACCOUNTING ESTIMATES
A summary of Corval’s use of accounting estimates and judgments are summarized in Note 2 of the audited
consolidated financial statements at December 31, 2012, and the policies for these accounting estimates continued
except for those accounting policies noted in Note 3 of the consolidated interim financial statements for the six
months ended June 30, 2013. The preparation of interim consolidated financial statements in conformity with IFRS
requires management to make judgments, estimates and assumptions that affect the application of accounting
policies and the reported amounts of assets, liabilities, income and expenses, and the accompanying disclosures.
Estimates and underlying assumptions are reviewed on an ongoing basis and are based on management’s
experience, expectations of future events, and other factors that are believed to be reasonable under the current
circumstances. Uncertainty surrounding these assumptions and estimates could result in outcomes where the results
may differ from these estimates and may require material adjustments to the carrying amount of the assets and
liabilities into future periods.
Further information with respect to the Company can be found on its website at www.corvalenergyltd.com.
- 18 -
Corval Energy Ltd.
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013
These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three and six months ended June 30, 2013 have been prepared by management and authorized for distribution to the shareholders by the Board of Directors of the Company. The Company’s external auditors have not reviewed these financial statements.
-19-
CORVAL ENERGY LTD. Interim Consolidated Statements of Financial Position
As at June 30, 2013 and December 31, 2012
Note
June 30, 2013
(unaudited) December 31,
2012
Assets Current assets:
Cash Trade and other receivables Prepaid expenses
16
$ 1,489,630
1,452,469 210,464
$ 12,050,366
761,679 185,201
3,152,563
12,997,246
Exploration and evaluation Property, plant and equipment
5
4,6
1,538,324
32,335,517
- 23,528,131
Total Assets
$ 37,026,404 $ 36,525,377
Liabilities and Shareholders’ Equity
Current Liabilities: Accounts payable and accrued liabilities Bank loan Promissory note Commodity price contract
7 8
15
$ 2,558,843
- 5,750
174,500
$ 2,175,851
7,450,000 - -
2,739,093 9,625,851 Promissory note Decommissioning obligations
8 9
19,187 2,044,415
568,828 1,807,338
Total Liabilities
$ 4,802,695 $ 12,002,017
Shareholders’ Equity
Share capital 10 40,585,395 32,929,358
Contributed surplus 10(d) 1,043,850 68,537
Deficit (9,405,536) (8,474,535)
Shareholders’ Equity 32,223,709 24,523,360
Total liabilities and shareholder’s equity
$ 37,026,404
$ 36,525,377
The notes are an integral part of these consolidated financial statements.
-20-
CORVAL ENERGY LTD. Interim Consolidated Statements of Loss and Comprehensive Loss For the three and six months ended June 30, 2013 and June 30, 2012
Note
Three months
ended June 30, 2013
(unaudited)
Six months ended June 30,
2013 (unaudited)
Three months
ended June 30, 2012
(unaudited)
Six months ended June 30,
2012 (unaudited)
Revenues Petroleum sales Royalties
$ 4,474,797 (656,292)
$ 6,926,086 (1,025,910)
$ - -
$ - -
3,818,505 5,900,176 - -
Expenses Operating costs General and administrative Share-based compensation Depletion and depreciation
10(d)
817,290 723,872 495,798
1,818,825
1,448,956 1,298,187
975,313 2,811,031
- - - -
- - - -
3,855,785 6,533,487 - -
Finance expenses 11 57,701 101,078 - -
Other expenses Unrealized loss on commodity price contract Realized loss on commodity price contract
15 15
174,500 22,112
174,500 22,112
- -
- -
196,612 196,612 - -
Net loss and comprehensive loss for the period
$ (291,593)
$ (931,001)
$ -
$ -
The notes are an integral part of these consolidated financial statements.
-21-
CORVAL ENERGY LTD. Interim Consolidated Statements of Changes in Equity For the three and six months ended June 30, 2013 and June 30, 2012
Note
Number of common shares
Share Capital
Contributed surplus Deficit
Total Shareholders’
Equity
Balance at January 1, 2012
10 10
$ 10
$ -
$ -
$ 10
Balance at June 30, 2012 10 $ 10 $ - $ - $ 10
Balance at January 1, 2013
45,825,911
$ 32,929,358
$ 68,537
$ (8,474,535)
$ 24,523,360
Private placements Share based expense Net loss for the period
10(a)(i) 10(d)
208,000 - -
145,600 - -
- 479,515
-
- -
(639,408)
145,600 479,515
(639,408)
Balance at March 31, 2013 46,033,911 $ 33,074,958 $ 548,052 $ (9,113,943) $ 24,509,067
Private placements Share based expense Net loss for the period
10(a)(ii)
10(d) 11,428,571
- -
7,510,437 - -
- 495,798
-
- -
(291,593)
7,510,437 495,798
(291,593)
Balance at June 30, 2013 57,462,482 $ 40,585,395 $ 1,043,850 $ (9,405,536) $ 32,223,709
The notes are an integral part of these consolidated financial statements.
-22-
CORVAL ENERGY LTD. Interim Consolidated Statements of Cash Flows For the three and six months ended June 30, 2013 and June 30, 2012
Note
Three months
ended June 30, 2013
(unaudited)
Six months ended June 30,
2013 (unaudited)
Three months
ended June 30, 2012
(unaudited)
Six months ended June 30,
2012 (unaudited)
Operating activities: Net loss for the period Add back: finance expense (cash interest disclosed in financing activities) Non-cash items: Depletion and depreciation Share based compensation Unrealized loss on commodity price contract
15
$ (291,593)
57,701
1,818,825 495,798 174,500
$ (931,001)
101,078
2,811,031 975,313 174,500
$ -
-
- -
$ -
-
- -
2,255,231 3,130,921 - - Net changes in non-cash working capital items 12 60,148 (597,792) - -
2,315,379 2,533,129 - -
Investing activities: Expenditures – property, plant, and equipment Expenditures – exploration and evaluation Acquisition of oil and gas property Disposition of oil and gas property Net changes in non-cash working capital items
4,6 5 4
12
(1,381,692)
(1,263,107) (3,306,224) 1,897,027
(4,831,203)
(10,049,992) (1,538,324) (3,306,224) 1,897,027
264,730
- -
-
- -
-
(8,885,199) (12,732,783) - -
Financing activities: Proceeds from share issuances, net of issue costs Repayment of promissory notes Repayment of bank loan Interest paid
10 8 7
7,510,437 - -
(18,160)
7,656,037 (545,193)
(7,450,000) (21,926)
- - - -
- - - -
7,492,277 (361,082) - -
Increase (decrease) in cash and cash equivalents during the period
922,457
(10,560,736)
-
-
Cash and cash equivalents, beginning of the period
567,173
12,050,366
-
-
Cash and cash equivalents, end of the period
$ 1,489,630
$ 1,489,630
$ -
$ -
The notes are an integral part of these consolidated financial statements.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
- 23 -
1. Nature of operations:
1593683 Alberta Ltd. (the “Company” or “Corval”) was incorporated on March 15, 2011. On May 15,
2012, the Company changed its name to Corval Energy Ltd. On October 17, 2012, the Company
entered into a Plan of Arrangement with Foundation Group Capital Trust, whereby it exchanged
shares of the Company for trust units of Foundation Group Development Trust (“FGDT”) held by
Foundation Group Capital Trust, and subsequently, Foundation Group Capital Trust then distributed
these shares to its unitholders. Through the Plan of Arrangement, the subsidiaries of FGDT were
dissolved and the assets and liabilities were assumed by Corval. Corval currently continues to
maintain FGDT as a continuing, but inactive, subsidiary, with 1688869 Alberta Ltd. as FGDT’s
inactive trustee.
Corval explores for and produces oil in Western Canada. Corval Energy Ltd. is domiciled in Canada
at Suite 2400, 500 – 4th Avenue SW, Calgary, Alberta T2P 2V6. These consolidated financial
statements were authorized for issue by the Board of Directors on August 26, 2013.
2. Basis of preparation:
The consolidated interim financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board
(IASB). These interim consolidated financial statements have been prepared in accordance with
IFRS applicable to the preparation of interim consolidated financial statements, including IAS 34,
Interim Financial Reporting, and have been prepared following the same accounting policies as the
annual consolidated financial statements for the year ended December 31, 2012. The disclosures
provided below are incremental to those included with the annual consolidated financial statements.
Certain information and disclosures included in the notes to the annual consolidated financial
statements are condensed herein or are disclosed on an annual basis only. Accordingly, these interim
consolidated financial statements should be read in conjunction with the annual consolidated financial
statements for the year ended December 31, 2012.
The policies applied in these interim consolidated financial statements are based on IFRS issued and
outstanding as of the date the Board of Directors approved the distribution of these statements.
The Company’s presentation currency is Canadian dollars and all amounts reported are Canadian
dollars unless otherwise noted.
These unaudited interim consolidated financial statements of Corval Energy Ltd. for the three and six
months ended June 30, 2013 have been prepared by management and authorized for distribution to
the shareholders by the Board of Directors of the Company. The Company’s external auditors have
not reviewed these financial statements.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-24-
3. Significant accounting policies
The consolidated interim financial statements have been prepared following the same accounting
policies and methods of computation as the annual consolidated financial statements for the year
ended December 31, 2012, except for these additional policies:
i) Derivative financial instruments
The Company has entered into certain commodity price contracts in order to manage the exposure to
market risks from fluctuations in commodity prices. These instruments are not used for trading or
speculative purposes. Although the Company considers all commodity contracts to be economic
hedges, the Company has not designated its financial derivative contracts as effective accounting
hedges, and thus not applied hedge accounting. As a result, all financial derivative contracts are
classified as fair value through profit or loss and are recorded on the statement of financial position at
fair value. Transaction costs are recognized in profit or loss when incurred.
See Note 15 for specific accounting disclosure.
4. Property acquisition
On May 15, 2013, the Company acquired certain assets in Manitoba for cash consideration of
$3,306,224. The acquisition was recorded as a capital expenditure. The consideration paid was
determined to be equivalent to fair value.
The purchase price allocation is as follows:
$
Property, plant, and equipment Decommissioning liability
3,340,865 (34,641)
Net assets 3,306,224
Cash consideration paid
3,306,224
5. Exploration and evaluation assets
Cost
June 30, 2013 $
Opening balance – January 1, 2013 Additions
- 1,538,324
Closing balance 1,538,324
Exploration and evaluation (“E&E”) assets consist of the Company’s undeveloped land and
exploration projects which are pending the determination of technical feasibility. For the six months
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-25-
ended June 30, 2013, $1,538,324 of E&E assets, including $31,874 of capitalized general and
administrative costs, were added consisting predominately of land acquisitions. There were no
indicators of impairment at June 30, 2013. 6. Property, plant, and equipment
Cost
June 30, 2013 $
Opening balance – January 1, 2013 Current period additions Property acquisition (Note 4) Property disposition Changes in decommissioning liability
31,506,505 10,049,992 3,340,865
(1,897,027) 124,587
Closing balance 43,124,922
Accumulated depletion, depreciation, and impairment Opening balance – January 1, 2013 Current period depletion and depreciation
7,978,374 2,811,031
Closing balance 10,789,405
Opening balance – January 1, 2013 23,528,131
Closing balance 32,335,517
Property, plant, and equipment (“PP&E”) consist of the Company’s developed and producing assets.
PP&E additions were $10,049,992 in expenditures, and $124,587 in additional decommissioning
obligations for the six months ended June 30, 2013, and were incurred through the Company’s
drilling, completing, and equipping activities as per the Company’s 2013 capital program. The
Company acquired a small property for $3,340,865 (Note 4) and disposed of a small property for
$1,897,027 during the six months ended June 30, 2013.
Future development costs of $10,810,115 have been included in the depletable balance for the six
months ended June 30, 2013. The Company has not recognized any individual components that are
depreciated separately.
During the six months ended June 30, 2013, the Company capitalized general and administrative
expenses into property, plant, and equipment of $175,012, consisting predominately of overhead.
There were no indicators of impairment at June 30, 2013.
The Company has a $50 million debenture with a floating charge over all of the Company’s assets
pledged to the bank covering the loan (Note 7).
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-26-
7. Bank loan:
The Company had a bank loan with an outstanding balance of $7,450,000 at the end of 2012. During
2013, the Company repaid the $7,450,000 balance of the loan, and secured new lending
arrangements with another Canadian financial institution. The new bank loan includes a revolving
operating demand loan of a maximum of $9 million and an acquisition and development demand loan
of $2.7 million. The revolving operating demand loan bears an interest rate of the Bank’s Prime Rate
plus 0.75% and a standby fee of 0.25% on the undrawn portion. The acquisition and development
loan bears an interest rate of the Bank Prime Rate plus 1.25%, and a standby fee of 0.25% of the
undrawn portion. The new bank loan is covered by a fixed and floating $50 million debenture over all
of the assets of the Company.
Subsequent to June, 2013, the Company increased the revolving operating demand loan to $13.5
million and cancelled the development demand loan. The interest rate remains at the Bank’s Prime
Rate plus 0.75% and the standby fee at 0.25% of the undrawn portion. The $50 million debenture
over all of the assets of the Company also remains in place. The Company is required to comply with
a working capital financial covenant, and the next review is scheduled for October 1, 2013.
As at June 30, 2013, there were no draws on either of the loans. 8. Promissory Notes:
The Company had promissory notes and accumulated interest of $568,828 at the end of 2012.
These notes bear a simple interest rate of 3%. The Company accrued $1,302 of additional interest
and paid $545,193 of promissory notes and interest during the three months ended March 31, 2013.
The notes mature three years from date of issue, which would occur April to August, 2014. Notes of
$5,750 were classified as current liabilities, as they mature in less than one year.
Promissory notes June 30,
2013 $
Opening balance – January 1, 2013 Additional interest accrued
568,828 1,302
Notes repaid ($540,485 plus additional interest of $4,708)
570,130 (545,193)
Closing balance Less: Current promissory notes
24,937 (5,750)
Long-term promissory notes 19,187
9. Decommissioning obligations:
The decommissioning provision represents the present value of decommissioning costs relating to
the Company’s interest in oil and gas properties, which are expected to be incurred up to the time
when the properties are expected to cease operations. The Company has estimated the net present
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-27-
value of the decommissioning obligations to be $2,044,415 as at June 30, 2013 based on an
undiscounted total future liability of $4,445,000 discounted at a credit-adjusted rate of 8%.
Decommissioning Obligations June 30,
2013 $
Opening balance – January 1, 2013 Additions Acquisitions Dispositions Accretion
1,807,338 140,948 34,641
(16,361) 77,849
Closing balance 2,044,415
10. Share capital:
At June 30, 2013, the Company was authorized to issue an unlimited number of common shares.
a) Share issues:
(i) The Company raised funds through a private placement for 208,000 common shares at $0.70
per common share for total cash proceeds of $145,600.
(ii) On April 5, 2013, the Company made a call on its equity line for 11,428,571 shares at $0.70 per
common share for cash proceeds of $8,000,000 with issue costs of $489,563, for net proceeds
of $7,510,437. The remaining equity line at January 1, 2013 was $17,050,000, and after this
draw, now stands at $9,050,000.
b) Common share options:
During the six months ended June 30, 2013, 550,000 common share options exercisable at $0.70 per
common share option, expiring in five years, were issued to employees and a Board member. The
continuity of common share options is detailed below:
Options
Number
Exercise price
Life (in years)
Issued and outstanding – January 1, 2013 5,455,000 $0.70 4.5
Issued to June 30, 2013 550,000 $0.70 4.6
Issued and outstanding – June 30, 2013 6,005,000 $0.70 4.5
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-28-
c) Performance Warrants:
During the six months ended June 30, 2013, 210,000 performance warrants exercisable at $0.70 per
common share option, expiring in five years, were issued to a Board member. The continuity of
performance warrants is detailed below:
Performance warrants
Number
Exercise price
Life (in years)
Issued and outstanding – January 1, 2013 6,750,000 $0.70 4.5
Issued 210,000 $0.70 4.6
Issued and outstanding – June 30, 2013 6,960,000 $0.70 4.5
The performance warrants are non-transferable, have a five-year life, and vest upon the sale of
substantially all of the Company’s assets, a corporate merger or sale where the common
shareholders receive cash or publicly-traded shares, or the Company is listed on a public stock
exchange, and the value attributed to each common share of the Company upon such event exceeds
the vesting price as stipulated in the plan. The performance warrant vesting prices are described in
the table below:
Performance warrant series
Portion of performance warrant issue
Vesting price
Series 1 Series 2 Series 3 Series 4
25% 25% 25% 25%
$1.05 $1.40 $1.75 $2.10
100%
d) Contributed surplus:
The fair value at grant date is recorded as stock based compensation in profit and loss, and in
shareholders’ equity as contributed surplus, over the period of time required for the options or
warrants to vest. Stock based compensation of $975,313 was expensed during the six months ended
June 30, 2013.
11. Finance expenses:
Finance expenses
Three months ended June 30,
2013 $
Six months ended June 30,
2013 $
Interest on bank loan 18,161 21,927 Interest on promissory notes (note 8) 176 1,302
Accretion of decommissioning liabilities (note 9) 39,364 77,849
Finance expenses total 57,701 101,078
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-29-
12. Supplemental cash flow information:
Changes in non-cash working capital is comprised of:
Three months ended June 30,
2013 $
Six months ended June 30,
2013 $
Changes in: Trade and other receivables 366,642 (690,790)
Prepaid expenses 22,228 (25,263) Accounts payable and accrued liabilities (5,159,925) 382,991
(4,771,055) (333,062)
Allocated to: Operating 60,148 (597,792) Investing (4,831,203) 264,730
(4,771,055) (333,062)
13. Related party:
The corporate secretary is a partner in a law firm that provides legal services to the Company. For
the three and six months ended June 30, 2013, the Company recorded $75,417 and $141,717
respectively in general and administrative expenses related to this law firm. At June 30, 2013,
$104,543 remained in accounts payable.
14. Capital management:
The Company considers its capital structure to include share capital, and working capital, including
the bank loan.
June 30, 2013 $
Current assets 3,152,563 Accounts payable and accrued liabilities (2,558,843) Promissory notes (24,937)
Net working capital* 568,783
Maximum value of bank loan (note 7) Amount drawn
9,000,000 -
Unutilized bank loan 9,000,000
Total available line of equity Amount drawn to June 30, 2013
31,000,000 (21,950,000)
Unutilized line of equity 9,050,000
Net available funds 18,618,783
*Excludes non-cash commodity price contract
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-30-
The Company’s 2013 capital program was presented to the Board of Directors, and a capital program
of $30.7 million was approved. To June 30, 2013, total capital of $13.0 million was expended,
including a property acquisition of $3.3 million and a property disposition with proceeds of $1.9
million. In April, 2013, another $8.0 million draw on the line of equity was requested and received.
The Company expects the current available funds, bank loan, line of equity, and anticipated cash flow
will be able to fund its remaining capital program for 2013.
During the six months ended June 30, 2013, the Company negotiated a new bank loan with a
Canadian financial institution for $9.0 million, which was increased to $13.5 million in July, 2013,
bearing an interest rate of the Bank Prime Rate plus 0.75%. The credit facility is subject to a periodic
review, the next of which is scheduled for October 1, 2013 (note 7). No funds have been withdrawn
from this bank loan to date.
15. Commodity price contracts
During the six months ended June 30, 2013, the Company entered into a commodity swap contract
for 100 barrels of oil per day at an exercise price of $90.02 at Edmonton per barrel settling monthly
from May 1, 2013 to December 31, 2013. The Company incurred a realized loss of $22,112, and an
unrealized loss of $174,500, for the six months ended June 30, 2013.
Subsequent to the quarter end, the Company entered into a financial transaction from August 1, 2013
to July 31, 2014 to fix the price of 100 barrels of oil per day at $101.35/bbl calculated as West Texas
Intermediate converted to Canadian dollars.
16. Financial risk management:
The Company’s financial assets and liabilities are comprised of cash, trade and other receivables,
accounts payable, promissory notes, and the bank loan. The main purpose of these financial
instruments is to manage short-term cash flow and raise finances for the Company’s capital
expenditure program.
The carrying value of these financial instruments approximates their fair value due to their short term
nature. Substantially all of the promissory notes were repaid (note 8), and therefore the carrying value
approximates their fair value.
The Company is exposed to a variety of financial risks arising from its exploration, development,
production, and financing activities such as:
■ credit risk;
■ liquidity risk; and
■ market risk.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-31-
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 joint venture partners and oil and natural gas marketers.
June 30, 2013 $
Amounts due from marketers Joint venture GST receivable
1,428,720 3,006
20,743
Total 1,452,469
The need for impairment of receivables is analyzed at each reporting date on an individual basis for
major clients. At June 30, 2013, no impairment was deemed necessary, so no allowance for doubtful
accounts was recognized.
As at June 30, 2013, the Company’s trade and other receivables are aged as follows:
June 30, 2013 $
Current 30 – 60 days 60 – 90 days Over 90
1,415,037 6,734
- 30,698
Total 1,452,469
Liquidity risk:
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall
due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always
have sufficient liquidity to meet its liabilities when due. As disclosed in Note 14, the Company
manages its liquidity by monitoring its capital program and comparing that to its available funds.
Market risk:
Market risk is the risk that changes in market prices will affect the Company’s income or the value of
the financial instruments. Market risk is comprised of three types of risk: commodity price risk, interest
rate risk, and currency risk.
Commodity price risk:
The Company’s cash flow sensitivity to commodity price changes is based on the assumption that
the crude oil prices changes 10%, resulting in a change of $8.82/bbl, and a cash flow change of
$587,183 in the same direction (increase or decrease) of the price change.
Corval Energy Ltd. Notes to the Consolidated Financial Statements For the six months ended June 30, 2013
-32-
In February 2013, the Company entered into a financial transaction from May 1, 2013 to
December 31, 2013 to fix the price of 100 bbl/d of oil at $90.02/bbl CDN at Edmonton (Note 15).
Subsequent to the quarter end, the Company entered into a financial transaction from August 1,
2013 to July 31, 2014 to fix the price of 100 barrels of oil per day at $101.35/bbl calculated as
West Texas Intermediate converted to Canadian dollars (Notes 15 and18).
Interest rate risk:
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market
interest rates, and relates primarily to the Company’s outstanding line of credit. As at June 30,
2013, the Company did not carry a balance on its line of credit, so the interest rate risk is $nil.
Currency risk:
The Company has no financial instruments denominated in a foreign currency, and no contracts
in place to reduce the foreign exchange risk.
17. Commitments:
The Company is carrying a lease on its office space, and another lease on the space of FGDT, which
terminated on July 31, 2013:
Total at June 30, 2013
$
2013 2014-2018 2019-2022
76,639 760,461 494,711
Total 1,331,811
18. Lawsuit:
The Company filed a statement of claim for $730,000 with the Court of Queen’s Bench of Alberta on
behalf of its predecessor companies regarding the improper diversion of funds against a former
trustee. There can be no assurance of a favorable judgment at this time.
19. Events after reporting period:
Commodity price contract (Note 15)
Subsequent to the quarter end, the Company entered into a financial transaction from August 1, 2013
to July 31, 2014 to fix the price of 100 barrels of oil per day at $101.35/bbl calculated as West Texas
Intermediate converted to Canadian dollars.
Corval Energy Ltd. General Information
- 33 -
Directors Jody Forsyth
(2)(3) - Chairman
Larry Evans (1)(2)
Brian Frank
(1)(3)
Ron McIntosh (2)(3)
Thomas Stan David Eastham
(1)
(1) Audit committee (2) Reserves, health, safety and environment committee (3) Corporate governance and compensation committee
Officers Thomas Stan President, and Chief Executive Officer James Screaton ,CA Vice President, Finance and Chief Financial Officer Lavern Rankin Vice-President, Engineering and Operations Dale Timmons Vice-President, Exploration Richard Press Vice-President, Land and Business Development Shannon Gangl Corporate secretary Burnet, Duckworth, and Palmer LLP
Head Office Suite 2400, 500 – 4
th Avenue SW
Calgary, Alberta, Canada T2P 2V6 Telephone: 403-252-7671 Website: www.corvalenergyltd.com
Solicitor Burnet, Duckworth, and Palmer LLP 2400, 525 – 8
th Avenue SW
Calgary, Alberta, Canada T2P 1G1
Bankers National Bank of Canada 311 – 6 Avenue SW Calgary, Alberta, Canada T2P 3H2
Auditor Ernst & Young Canada LLP 1000, 440 – 2
nd Street SW
Calgary, Alberta, Canada T2P 5E9
Reserve Engineers Sproule Associates Limited 900, 140 – 4th Avenue SW Calgary, Alberta, Canada T2P 3N3
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