EARNINGS / Lateral Vectoral Resources reports 1st 9 months results
INTRODUCTION
This is the first quarterly report of Lateral Vector Resources Inc.
(''LVR'') subsequent to the re-organization and new focus of the Company.
The report provides updates of the post closing activities resulting from the
sale of our Canadian oil and gas assets and status reports of corporate
activities and operational overviews of our two international projects.
Although large amounts of time during the third quarter were allocated to
conclusion of our Canadian sale, substantial progress was also made in regard
to activities in China and Ukraine.
SALE OF CANADIAN ASSETS
LVR's second quarter report announced the sale of the Company's Canadian
oil and gas assets to NCE Energy Trust of Calgary. This transaction was
initiated in the second quarter of 1997, through the signing of a sale
agreement on June 10, 1997. During the third quarter, LVR's shareholders
approved the transaction by a 99.4% majority at a special shareholders meeting
held on August 15, 1997. On September 4, 1997, the parties closed the
transaction. The balance of the third quarter and the fourth quarter of 1997
have seen LVR administrative personnel focused on finalizing required
documentation and adjustments necessary to conclude the transaction.
This sale marks an important milestone in the shift in strategic
direction for LVR. The Company now has the necessary assets required to focus
on its international projects. Our balance sheet is strong. At the end of
the third quarter we have nearly $20 MM in working capital, no debt, and two
promising international projects.
CHINA - OPERATIONS
The Company's China projects are operated through Silk Energy Corp.
(''Silk''), presently 51.6% owned by LVR. The third quarter of the year
experienced the first production from these projects. Two wells in the Dagang
field were tested in July and August with initial rates between 100 and 220
BOPD. The last well was drilled in 16 days, a significant improvement from
the first two drilled last winter and 30% better than the third well which
took 24 days.
Silk's ability to cost-effectively drill and complete wells in China has
now been clearly demonstrated. During the third quarter pricing and payment
agreements were concluded with China National Oil & Gas Exploration and
Development Corporation (''CNODC'') which finalize all procedures from well
selection to payment for production. The wellhead oil price for the initial
production period was agreed to be $18.50 US per barrel.
In August, project finance specialists from New York were engaged to
assist in restructuring the ownership of Silk. The restructuring is expected
to occur in two stages: firstly, a strategic partner will be sought to
replace Sunwing Energy (which currently owns 41.2% of Silk) and secondly, a
$20 MM USD project debt facility will be pursued to further fund the projects.
For the time being, operations in China have been reduced to a minimum, with
the agreement of CNODC, and are awaiting completion of the restructuring of
Silk.
Bill Trickett, former CEO of Morgan Hydrocarbons, is providing consulting
and management services to Silk. During his tenure at Morgan, Mr. Trickett
led that company from 1000 BOPD production to more than 40,000 BOPD, including
drilling more than 700 horizontal wells. He has accepted responsibility for
building and maintaining the operational team as Silk moves forward.
LVR will continue to provide resources and advisory services to Silk
during the reorganization, which is expected to be completed in the first
quarter of 1998.
UKRAINE
In the last part of the third quarter, LVR concluded the terms for the
establishment of Oktyrka Energy Company (''OEC''). OEC will be the corporate
entity that has the rights and access to the Bugruvativske oilfield in
Ukraine. OEC will be owned 52% by UkrNafta, the Ukrainian State Oil Company,
and 48% by LVR. OEC has been created as a joint stock company which
management believes accommodates more flexibility and conforms with western
standards more closely than the joint venture structure used in many previous
Ukrainian development projects.
The General Director of OEC at startup will be a UkrNafta nominee;
however, LVR will nominate financial and technical directors who will have
veto powers over all operations and financial commitments. The board of OEC
has equal representation from UkrNafta and LVR. All major financial,
structural and operational decisions require approval of both shareholders.
In early October, the Rada (parliament) of Ukraine approved the
Bugravativske oilfield for foreign operations and special tax reductions. The
final approvals for the creation of OEC must come from the State Property
Fund. The approved process is well underway, and is expected to be completed
by mid December.
A license agreement between OEC and the State Geology committee has also
been drafted, which when concluded, will allow OEC to begin operations.
The Bugruvativske oilfield, discovered in 1978, covers an area of
approximately 15 square miles and contains an estimated 235 million barrels of
oil in place. An evaluation conducted by an independent engineering firm
engaged by LVR estimated there are 22.3 million barrels of recoverable
reserves which will not require exploratory activity. By comparison, LVR sold
4.4 million barrels of production through our arrangement with NCE. The
recovery rate of this field has been approximately 6.6%, compared to a similar
Canadian setting where one would expect a 20 to 25% recovery. Facilities are
in place for 106 wells.
SHARE BUYBACK
In its last Information Circular, LVR described as one of the potential
uses of net proceeds from the sale of its Canadian assets, a program for the
re-purchase of up to $9.5 million of its shares. Since that time, a number of
developments have occurred or are in progress, including a significant
increase in the market value of LVR's stock, trading on quite strong monthly
volumes and at a time of extreme volatility in capital markets.
LVR management and its Board of Directors are continuing to review and
consider all relevant aspects of a potential share re-purchase program. The
Board is currently considering making application to the Toronto Stock
Exchange to conduct a normal course issuer bid through the facilities of the
TSE. If the Company decides to proceed with this bid, it would then review
the effect of the bid and assess market conditions and projected capital
requirements prior to making any decisions respecting additional share
re-purchase initiatives. Such additional re-purchases would only be considered
if the company feels that they would substantially increase shareholder value
and not adversely affect operations, including the requirements of regulators.
TSE LISTING
As outlined in previous shareholder communications, the sale of the
Company's Canadian oil and gas assets has affected LVR's ability to conform
to the listing requirements of the TSE. The key feature of the TSE's listing
requirements for oil and gas companies is the maintenance of $2 MM of proved
developed reserves. LVR continues to meet all requirements for maintenance of
its listing with the exception of the reserves requirement.
It has long been LVR's intention to meet the reserves requirement of the
TSE through application of China and Ukraine project reserves. The TSE has
now reviewed materials provided by the Company respecting these two projects
such that we believe the TSE understands our plans and the state of progress
of the projects. In order to give LVR the required time to finalize the
Ukraine agreements and licenses, and therefore an opportunity to meet the
reserves requirement, the TSE listing requirements deadline has been extended
from November 21, 1997 to March 4, 1998. Discussions with the TSE held on
October 31, 1997 confirmed that finalization of the Ukrainian project
licensing and required registrations will enable the Company to satisfy the
TSE's requirements. These approvals and registrations are expected well
within the extension period.
FUTURE
The Company's resources are focused on two high potential and long term
growth projects and our balance sheet is very strong. In the weeks and months
to come, we will focus on operational startup of these two major projects as
the basis for your newly focused, growth-oriented company.
------------------------
Wayne Goranson, P. Eng.
President and Chief Executive Officer
November 20, 1997
LATERAL VECTOR RESOURCES INC.
CONSOLIDATED BALANCE SHEET
AS AT SEPTEMBER 30
(Prepared internally without audit)
1997 1996
-----------------------------------------
ASSETS
Current assets
Cash $ 17,934,298 $ -
Accounts receivable and
advances 4,582,218 2,793,570
Prepaids 21,179 51,707
----------- -----------
22,537,695 2,845,277
Investments 14,600,879 1,760,603
Property, Plant and Equipment
(Note 1) 2,212,029 39,184,502
--------------- --------------
$ 39,350,603 $ 43,790,382
--------------- --------------
--------------- --------------
LIABILITIES
Current liabilities
Bank indebtedness $ - $ 1,350,677
Accounts payable 2,955,988 1,740,058
--------------- --------------
2,955,988 3,090,735
Provision for future
site restoration - 323,403
Long term debt - 8,932,171
--------------- --------------
2,955,988 12,346,309
Shareholders'Equity
Share capital 33,343,767 30,685,072
Retained Earnings 3,050,848 759,001
36,394,615 31,444,073
--------------- --------------
$ 39 350,603 $ 43,790,382
--------------- --------------
--------------- --------------
LATERAL VECTOR RESOURCES INC.
CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS
(Prepared internally without audit)
NINE MONTHS
ENDED
SEPTEMBER 30
1997 1996
-----------------------------------------
1997
Revenue
Oil and gas revenue $ 7,247,593 $ 10,457,655
Less: Royalty expense 1,230,963 1,849,069
--------------- --------------
6,016,630 8,608,586
--------------- --------------
Interest and other 376,113 200,124
--------------- --------------
6,392,743 8,808,710
--------------- --------------
Expenses
Well production and operating 1,639,921 2,791,513
Depreciation and depletion 2,729,635 3,530,795
General and administrative 635,526 1,094,023
Interest 590,381 332,647
Capital taxes 134,895 174,304
--------------- --------------
5,730,358 7,923,282
--------------- --------------
Income before the following: 662,385 885,428
Gain on sale of Canadian
oil & gas assets (Note 1) 1,099,916 -
Equity income (loss) 76,230 (9,201)
--------------- -------------
Net income 1,838,531 876,227
Retained earnings (Deficit),
beginning of period 1,212,317 (117,226)
Retained earnings, end of period $ 3,050,848 $ 759,001
--------------- --------------
--------------- --------------
Net income per common share
-basic $ 0.06 $ 0.03
--------------- --------------
--------------- --------------
-fully diluted $ 0.05 $ 0.03
--------------- --------------
--------------- --------------
LATERAL VECTOR RESOURCES INC.
CONSOLIDATED STATEMENT OF CHANGES IN FINANCIAL POSITION
(Prepared internally without audit)
NINE MONTHS
ENDED
SEPTEMBER 30
1997 1996
------------------------------------------
Cash provided by (used in):
Operations
Net income $ 1,838,531 $ 876,227
Items not involving cash:
Depreciation and depletion 2,729,635 3,530,795
Gain on sale of Canadian oil
& gas assets (1,099,916) -
Equity income (loss) (76,230) 9,201
--------------- --------------
Cash flow from operations 3,392,020 4,416,223
Change in non-cash
operating working capital 685,002 (305,718)
--------------- --------------
4,077,022 4,110,505
--------------- --------------
Financing
Issuance of common shares 2,412,070 17,150
Offering costs - (11,515)
Long term debt (12,569,667) 4,282,221
Change in non-cash
financing working capital - (2,316,759)
--------------- -------------
(10,157,597) 1,971,097
--------------- --------------
Investments
Investments (9,184,661) -
Proceeds on sale of investments 1,900,000 -
Proceeds on sale of property,
plant, and equipment 42,950,000 2,100,000
Expenditures for property,
plant, and equipment (7,813,034) (13,258,448)
Change in non-cash investing
working capital (3,837,432) (1,164,593)
--------------- --------------
24,014,873 (12,323,041)
--------------- --------------
Increase (Decrease) in cash 17,934,298 (6,241,439)
Cash, beginning of period - 4,890,762
Cash (Bank indebtedness), --------------- --------------
end of period $ 17,934,298 $ (1,350,677)
--------------- --------------
Cash flow from operations per share
-basic $ 0.11 $ 0.15
--------------- --------------
-fully diluted $ 0.10 $ 0.13
--------------- --------------
>>
Notes to Consolidated Financial Statements
1) On August 15, 1997, LVR shareholders approved a transaction to dispose
of the Company's Canadian oil and gas assets and associated
liabilities to NCE Energy Trust (''NCE''). The transaction closed on
September 4, 1997.
The sale includes all the Company's producing and non producing
Canadian oil and gas assets and is summarized as follows:
Gross purchase price $ 43,500,000
Purchase price adjustments 550,000
------------
Net purchase price $ 42,950,000
------------
------------
Consideration
Cash (June 10,1997) $ 3,000,000
Debt assumed (Sept.4,1997) 18,000,000
Funds placed in trust (Sept.4,1997) 2,915,000
Cash (Sept.4,1997) 19,035,000
------------
$ 42,950,000
------------
------------
The transaction has an effective date of July 1, 1997, accordingly these
financial statements reflect revenue and expenses from the assets for the six
month period ended June 30, 1997. All risks and rewards of asset ownership
transferred to NCE on July 1, 1997.
Consideration totaling $2,915,000 was placed in trust at closing
representing the value of assets subject to unresolved legal title issues.
These funds are releasable from trust as title issues are rectified. Should
clear title to these assets be unresolvable, a process exists whereby LVR
reacquires the assets for a further purchase price reduction, NCE takes the
assets at the agreed price, or NCE takes the assets with a further price
reduction. The $2,915,000 of funds held in trust have been recorded in these
financial statements as accounts receivable and advances. Subsequent to the
quarter end a total of $1,400,000 of funds hold in trust were released or
approved for release to LVR.
This transaction has resulted in a gain on sale of assets totaling
approximately $1,100,000. This amount may be affected by other purchase price
adjustments which may arise subsequent to the third quarter of 1997.
For further information: contact LVR through Bob Knight, Chairman,
(403) 531-2088, or Bruce Ryan, VP Finance and Secretary, (306)
569-1700 |
