Bankers Petroleum Achieves Record Production, Revenue, Funds From Operations and Net Income
CALGARY, Aug. 13 /PRNewswire-FirstCall/ — Bankers Petroleum Ltd. (TSX: BNK, AIM: BNK) is pleased to announce record production, revenue and funds from operations during the three months ended June 30, 2008.
– Average production was 6,131 boepd, 5,826 bopd from Albania and 305 boepd from its U.S. operations, representing a 12% increase from 5,452 boepd for the first quarter of 2008, and 42% higher than the 4,314 boepd for the second quarter of 2007. – Higher production and increased commodity prices resulted in revenue of $36.4 million for the quarter, up 39% as compared to $26.2 million in the preceding quarter and up 182% from $12.9 million for the same period in 2007. – Funds from operations increased to $17.9 million from $10.1 million and $4.8 million for the three months ended March 31, 2008 and the corresponding period in 2007, respectively. ALBANIA
In Albania, the average oil price was $64.36 per barrel during the second quarter of 2008 compared to $51.96 per barrel for the previous quarter and $32.89 for the same period in 2007, increases of 24% and 96% respectively.
Bankers commenced drilling operations in the Patos Marinza oil field with the spudding of its first vertical infill well in June, 2008, the first of numerous undrilled spacing units in the field that the Company interprets as being undrained areas. Two additional wells have been drilled and cased. Initial results confirm the Company’s drainage model and support its plan to drill 110 vertical horizontal wells within the field over the next three years.
Bankers acquired the remaining 50% working interest in the Kucova oil field in Albania, increasing total holdings in the field to 100%. The Company expects that an independent reserves evaluation to define the remaining reserves and production potential of the Kucova oil field will be completed by the end of August, 2008. Bankers will be focused on creating a plan of development for this field, incorporating many of the extraction techniques utilized in the Patos Marinza field.
Bankers has signed an agreement with the developers of the Port of Vlore oil export terminal for the storage and handling of its oil in a 13,000 cubic metre Company-dedicated oil tank. This storage facility will improve the Company’s export operations and allow for larger oil liftings when the terminal is ready to receive larger vessels next year.
US OPERATIONS
The Second Quarter 2008 Financial Statements and Management’s Discussion and Analysis thereon fully consolidate the activities and results of Bankers’ U.S. operations. On July 2, 2008, Bankers completed its plan of arrangement wherein all of the U.S. operations and assets were split into a new independent company, BNK Petroleum Inc. (“BKX”). BKX commenced trading on the Toronto Stock Exchange on July 10, 2008 (symbol: BKX) and all future activities related to BKX will be reported separately.
MANAGEMENT CHANGES
Richard Wadsworth, President and Chief Operating Officer, and Susan Soprovich, Vice President, Investor Relations and Corporate Governance, have left the Company to pursue other opportunities, effective August 15, 2008. Bob Cross, Chairman of Bankers commented, “on behalf of the Company, we would like to recognize the efforts and contribution made by both Richard and Susan and to wish them good luck in their future endeavours”.
Abdel F. (Abby) Badwi has been named President and Chief Executive Officer.
OUTLOOK
“I am pleased to report that the first half of this year achieved all the major components necessary to implement the Company’s strategic objectives” said Abby Badwi, President and CEO of Bankers, “We completed the divestiture of the U.S. operations so we can maintain focus on exploration and production activities in Albania. Early results of the three-year strategic plan for the Patos Marinza oil field have already provided significant growth in production and reserves. The acquisition of the Kucova oil field provides additional opportunities for expansion. We have a strong balance sheet and our capital program is designed to be fully funded from cash flow and available working capital. Our whole team is now focused on execution of our growth plans in Albania”.
——— About Bankers Petroleum Ltd.
Bankers Petroleum Ltd. is a Canadian-based oil and gas exploration and production company focused on developing large oil and gas reserves. In Albania, Bankers operates and has the full rights to develop both the Patos-Marinza and the Kucova heavy oil fields. Bankers’ shares are traded on the Toronto Stock Exchange and the AIM Market in London, England under the stock symbol BNK.
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following management’s discussion and analysis (MD&A) reports on the financial condition and results of operation of Bankers Petroleum Ltd. (Bankers or the Company) for the three and six month periods ended June 30, 2008, compared to the preceding quarter and the corresponding period in the prior 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 unaudited interim consolidated financial statements for the three and six month periods ended June 30, 2008 and the audited consolidated financial statements and MD&A for the year ended December 31, 2007. Additional information relating to Bankers, including its Annual Information Form, is on SEDAR at http://www.sedar.com/ or on the Company’s website at http://www.bankerspetroleum.com/. All dollar values are expressed in U.S. dollars, unless otherwise indicated, and are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”).
The majority of the Company’s production is heavy oil (reported in barrels), however, the Company also uses the “barrels of oil equivalent” (boe) reference in this report to reflect U.S. natural gas sales. All boe conversions are derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one barrel of oil, representing the approximate energy equivalency.
This report is prepared as of August 13, 2008. NON-GAAP MEASURES
Netback per barrel and its components are calculated by dividing revenue, royalties, operating, 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 and operating, 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 from operations is a non-GAAP measure that represents cash provided by (used in) operating activities, as per the consolidated statements of cash flows, before changes in non-cash working capital. The Company considers this a key measure as it demonstrates its ability to generate the funds necessary for future growth. Reconciliation to the GAAP measure is as follows:
Three months ended June 30 Six months ended June 30 —————————– —————————- ($000s) 2008 2007 % 2008 2007 % ————————————————————————- Cash provided by (used in) operating activities 6,456 3,669 76 16,255 3,440 373 Change in non-cash working capital 11,464 1,123 921 11,780 4,204 180 —————————– —————————- Funds from operations 17,920 4,792 274 28,035 7,644 267 —————————– —————————- —————————– —————————-
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 August 13, 2008, and contains forward-looking information including our expected source of funds and capital expenditure referred to under “Liquidity and Capital Resources”. Such information is generally identified by the use of words such as “target”, “plans”, “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “believe” and similar expressions (including the negative thereof). By their nature, these forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond the Company’s control, including the impact of general economic conditions, volatility of commodity prices, currency fluctuations, imprecision of reserve estimates, environmental risks, taxation, royalties, regulations, competition from other industry participants, the lack of availability of qualified personnel or management, stock market volatility, and the Company’s ability to access sufficient capital from internal and external sources.
With respect to such forward-looking information contained in this MD & A, the Company has made assumptions regarding, among other things, production targets, timing of the Company’s planned work program and management’s belief as to the potential of certain properties, known and unknown risks, uncertainties and other factors which may cause the actual results of the Company and its operations to be materially different from estimated costs or results expressed or implied by such forward-looking statements.
Such factors include, among others, general risks and uncertainties associated with exploration, development, petroleum operations and risks associated with equipment procurement and equipment failure as well as those described under “Risk Factors” in the Company’s Annual Information Form and in each MD&A. Although the Company has attempted to take into account important factors that could cause actual costs or results to differ materially, there may be other factors that cause costs of the Company’s program or results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking information.
OVERVIEW Three months ended June 30 Six months ended June 30 —————————– —————————- Results at a Glance 2008 2007 % 2008 2007 % ————————————————————————- Financial ($000s, except as noted) Oil and gas revenue 36,353 12,913 182 62,597 23,652 165 Net operating income 19,609 6,176 218 33,541 10,686 214 Net income (loss) 1,050 600 75 1,356 (450) 401 Funds from operations 17,920 4,792 274 28,035 7,644 267 Additions to property, plant and equipment 36,763 23,257 58 56,330 37,271 51 Cash and cash equivalents 42,867 18,903 127 Total assets 315,631 175,550 80 Bank loans 29,004 19,471 49 Other long-term liabilities 30,790 8,059 282 Shareholders’ equity 216,631 136,596 59 Three months ended June 30 Six months ended June 30 —————————– —————————- 2008 2007 % 2008 2007 % ————————————————————————- Operating Albania – crude oil AverageÂÂ production (bopd) 5,826 4,314 35 5,522 4,351 27 Average price ($/barrel) 64.36 32.89 96 58.54 27.19 115 Netback ($/barrel) 34.63 16.14 115 29.58 11.42 159 U.S. – natural gas, natural gas liquids (NGL) and condensate(1) Average natural gas production (mcf/d) 990 – n/a 872 – n/a Average condensate & NGL production (bopd) 140 – n/a 123 – n/a Average natural gas price ($/mcf) 9.38 – n/a 8.36 – n/a Average condensate & NGL price ($/barrel) 105.97 – n/a 105.57 – n/a Netback ($/boe) 55.06 – n/a 49.13 – n/a (1) U.S. production commenced in September 2007; the U.S. operations were split from the Company pursuant to a Plan of Arrangement on July 2, 2008
Bankers achieved record production, revenues, netback and funds from operations during the three month period ended June 30, 2008 as compared to the same period in 2007:
– In Albania, average production was 5,826 bopd compared to 4,314 bopd for the same period in 2007 and 5,218 from the first quarter of 2008, an increase of 35% and 12% respectively. – Exit production for June 2008 was 5,867 bopd from the Albanian properties. – In the U.S., average gas production was 990 mcf/d compared to 762 mcf/d for the first quarter of 2008, an increase of 30%; average condensate and NGL production was 140 bopd compared to 107 bopd for the previous quarter, an increase of 31%. – On a combined basis, this represented 6,131 boepd for the second quarter of 2008, a 12% increase from 5,452 boepd for the first quarter of 2008, and 42% higher than the 4,314 bopd for the second quarter of 2007. – Higher production and increased commodity prices resulted in revenue of $36.4 million for the quarter, up 39% as compared to $26.2 million in the preceding quarter and up 182% from $12.9 million for the same period in 2007. – Net operating income improved to $19.6 million ($35.15 per barrel of oil equivalent) from $13.9 million ($28.39 per barrel of oil equivalent) in the preceding quarter and $6.2 million ($16.14 per barrel) for the same period in 2007, increases of 41% and 218% respectively. – Funds from operations increased to $17.9 million from $10.1 million and $4.8 million for the three months ended March 31, 2008 and the corresponding period in 2007, respectively. Albania
Production increases and higher commodity prices helped Bankers to receive higher overall average oil prices. The Company averaged $64.36 per barrel during the second quarter of 2008 compared to $51.96 per barrel for the previous quarter and $32.89 for the same period in 2007, increases of 24% and 96% respectively.
Bankers exported 60% of its crude during the second quarter of 2008 at an average price of $68.29 per barrel. In comparison, exports made up 42% of the sales during the quarter ended March 31, 2008 at an average price of $54.49 per barrel. The domestic sale price averaged $58.69 per barrel during the second quarter of 2008 as compared to $50.18 per barrel for the preceding quarter and $26.26 per barrel for the same period in 2007.
Other significant events during the quarter included: – Bankers commenced drilling operations in the Patos Marinza oil field with the spudding of its first vertical infill well in June. As the first of four wells to be drilled off a drilling pad, the well was programmed to test the potential of multiple Gorani and Driza sandstone formations within the first of numerous undrilled spacing units in the field that the Company interprets as being undrained areas. – Bankers acquired the remaining 50% working interest in the Kucova oil field in Albania, increasing total holdings in the field to 100%. The Kucova oil field has approximately 490 million barrels of oil equivalent. United States
In Oklahoma, Bankers finished fracture stimulating its fifth horizontal shale well in the Tishomingo field, the Dunn 2-1H.
– The well had an initial gross production rate of approximately 4.8 mmcfe/d, which is significantly higher than previous wells drilled by the Company. – A gathering system was installed to connect the Brock wells to the processing facility, which was completed in late March. Bankers is waiting on parts for a tap upgrade to remove current throughput restrictions into the NGPL line. – Twelve new horizontal wells were spud in the Tishomingo gas field in the quarter: eight are drilled and cased. – Several initiatives to increase capacity are underway including new gathering lines, production facilities and second-party facilities.
This MD&A fully consolidates the activities and results of Bankers’ U.S. operations. On July 2, 2008, Bankers completed its plan of arrangement whereby all of the U.S. operations and assets were split into a new independently managed company, BNK Petroleum Inc. (“BKX”). BKX commenced trading on the Toronto Stock Exchange on July 10, 2008 (symbol: BKX) and all future activities related to BKX will be reported separately.
DISCUSSION OF OPERATING RESULTS Production and Revenue Three months ended June 30 Six months ended June 30 —————————– —————————- Albania – crude oil 2008 2007 % 2008 2007 % ————————————————————————- Average production (bopd) 5,826 4,314 35 5,522 4,351 27 Average price ($/barrel) 64.36 32.89 96 58.54 27.19 115 U.S. – natural gas, condensate & NGL ————————————————————————- Average natural gas production (mcf/d) 990 – n/a 872 – n/a Average condensate & NGL production (bopd) 140 – n/a 123 – n/a Average natural gas price ($/mcf) 9.38 – n/a 8.36 – n/a Average condensate & NGL price ($/barrel) 105.97 – n/a 105.57 – n/a Oil and gas revenue ($000) ————————————————————————- Albania 34,157 12,913 165 58,833 23,652 149 U.S. 2,196 – n/a 3,764 – n/a
During the quarter, production continued to increase as more wells were re-activated in Albania, bringing the active well count to 191 from 172 in the preceding quarter. As at June 30, 2008, the Company also had 107 wells waiting for servicing and reactivation. Average production increased by 12% to 5,826 bopd during the quarter from 5,218 bopd for the preceding quarter and increased 35% from 4,314 bopd from the same period a year ago. For the six months ended June 30, 2008, average production increased by 27% to 5,522 bopd from 4,351 bopd for the comparable six months in 2007. Planned well take-overs and work overs, as well as additions from new drilling during the balance of the year, are anticipated to enable Bankers to meet its previously announced production targets of 7,000 bopd by year-end 2008.
In Albania, increased production and commodity prices helped Bankers to receive higher overall average oil revenue. The Company averaged $64.36 per barrel during the second quarter of 2008 compared to $51.96 per barrel for the previous quarter and $32.89 for the same period in 2007, increases of 24% and 96%, respectively. For the six months ended June 30, 2008, Bankers averaged $58.54 per barrel compared to $27.19 per barrel for the same period in 2007.
During the quarter, the Company exported approximately 60% of its Albanian crude oil production to two refineries in Italy at an average price of $68.29 per barrel. Exports made up 42% of sales in the preceding quarter at an average price of $54.49 per barrel. The average price for domestic sales amounted to $58.69 per barrel, compared to $50.18 per barrel during the previous quarter and $26.26 for the same period in 2007.
Oil revenue from the Albanian operations for the quarter was $34.2 million up from $24.6 million for the quarter ended March 31, 2008, and $12.9 million for the corresponding quarter a year ago, increases of 38% and 165% respectively. Oil revenue was $58.8 million for the six months ended June 30, 2008, compared to $23.7 million for the same period in 2007.
Natural gas, condensate and natural gas liquids revenues from the U.S. operations were $2.2 million for the quarter, an increase of 38% from $1.6 million for the preceding period. Production increased to 305 boepd in the second quarter from 234 boepd in the first quarter of 2008. There was no revenue from the U.S. operations in the first half of 2007.
Royalties, Direct Expenses and Netbacks Three months ended June 30 Six months ended June 30 —————————– —————————- Netback – Albania 2008 2007 % 2008 2007 % ————————————————————————- Average price ($/barrel) 64.36 32.89 96 58.54 30.03 95 Royalties 12.43 4.28 190 12.25 3.96 209 Sales and transportation 3.27 2.56 28 3.38 2.26 49 Operating 14.03 9.91 42 13.33 10.04 33 —————————– —————————- Netback ($/barrel) 34.63 16.14 115 29.58 13.77 115 —————————– —————————- —————————– —————————-
Royalties in Albania are calculated pursuant to the Petroleum Agreement with Albpetrol, and consist of Albpetrol’s pre-existing production (“PEP”) and a gross overriding royalty on new production. Royalties increased to $12.43ÂÂ per barrel (19%) from $9.05 per barrel (17%) compared to the preceding quarter and $4.28 per barrel (13%) for the corresponding period in 2007. The increase in royalties was related to higher commodity prices and, effective April 1, 2008, an increase in the gross overriding royalty to 10% of new production for the second quarter of 2008 as compared to 1% in both the first quarter of 2008 and the second quarter of 2007. Bankers had previously proposed the 9% increase in the gross overriding royalty during the cost recovery period in exchange for expanded development opportunities of the Patos Marinza oil field, which was approved by Albpetrol and awaiting Ministry approval. In the interim, the Albanian Parliament approved an amendment to the hydrocarbon fiscal system by establishing a 10% royalty tax in July 2008; Bankers does not expect the royalty tax to create an additional burden on its operations, since under Albanian Petroleum Law, amendments to the Petroleum and License Agreements will be made to mitigate any negative economic effects on the Company of changes or amendments to the fiscal terms. Increases in the domestic sales price also contributed to the per-unit increase in royalties from 2007. For the six months ended June 30, 2008, royalties increased to $12.25 per barrel from $3.96 per barrel in 2007. This was largely due to the increase in Albpetrol’s PEP combined with the previously mentioned change in royalties in 2008, both valued at the higher oil price now received for domestic sales.
Operating expenses increased to $14.03 per barrel from $12.02 per barrel in the preceding quarter and $9.91 per barrel for the same period in 2007. This increase was primarily due to significantly increased energy costs and retroactive cost adjustments for service equipment. For the six months ended June 30, 2008, operating costs have averaged $13.33 per barrel while sales and transportation costs have averaged $3.38 per barrel, increases of 33% and 49% respectively from a year ago. Sales and transportation expenses decreased slightly to $3.27 per barrel from $3.50 per barrel in the preceding quarter as a result of fluctuations in period end diluent inventory valuation.
The Company’s netback per barrel improved significantly to $34.63 per barrel from $27.39 per barrel in the preceding quarter and $16.14 per barrel for the same period in 2007. For the six months ended June 30, 2008, netback per barrel increased by 115% to $29.58 per barrel from $13.77 per barrel in the comparable 2007 period. The improvement in netback primarily resulted from higher oil prices and improved economics of higher production.
General and Administrative Expenses
General and administrative expenses (G&A) were $2.4 million for the quarter compared to the same amount for the preceding quarter and $1.8 million for the same period in 2007. G&A increased to $4.8 million for the six months ended June 30, 2008, from $3.5 million for the same period in 2007. The increase in general and administrative expenses primarily reflected increased personnel costs and higher travel expenses related to the Company’s operating and financing activities.
During the quarter, the Company capitalized general and administrative expenses of $1.3 million compared to $1.0 million for the preceding quarter and $592,000 for the same period in 2007, for activities in Albania and the United States. These expenses were directly related to acquisition, exploration and development activities.
Non-cash stock-based compensation expense pertaining to options vested and/or granted to officers, directors, employees and service providers were $4.2 million compared to $1.7 million for the preceding quarter and $605,000 for the same period in 2007. Of this amount, $3.6 million was charged to earnings during this quarter, compared to $1.4 million and $530,000 that was charged to earnings for the preceding period and the period ending June 30, 2007.
Depletion, Depreciation and Accretion
Depletion, depreciation and accretion expense for the quarter ended June 30, 2008 were $4.2 million, compared to $3.6 million for the preceding quarter and $1.9 million for the same period in 2007. The increase in depletion, depreciation and accretion expense reflects an overall increase in the depletable base, commensurate with production level for the period. Depletion expense on a per barrel basis was $5.67 for the quarter compared to $5.65 and $4.02, respectively for the preceding quarter and the same period in 2007. For the six months ended June 30, 2008, the depletion expense attributable to the Albanian production was $5.6 million ($1.08 per barrel) and $1.7 million ($6.61 per barrel) for the U.S. production.
Income Taxes June 30, Dec. 31, ($000) 2008 2007 % ————————————————————————- Net book value of property, plant and equipment (Albania) 113,645 91,600 24 Cost recovery pool (59,101) (64,800) (8) —————————- Timing difference 54,544 26,800 104 —————————- —————————- Future income tax liability (50%) 27,272 13,400 104 —————————- —————————- Three months ended June 30 Six months ended June 30 —————————– —————————- 2008 2007 % 2008 2007 % ———————————————————– Earnings before income taxes 10,082 2,337 331 15,228 2,328 554 Statutory tax rate 29.50% 32.12% (8) 29.50% 32.12% (8) —————————– —————————- 2,974 751 296 4,492 748 501 Difference in tax rates between Albania and Canada 2,736 573 377 4,496 842 434 Non-deductible expenses 1,061 170 524 1,474 479 208 Valuation allowance and other 2,261 243 830 3,410 709 381 —————————– —————————- 9,032 1,737 420 13,872 2,778 399 —————————– —————————- —————————– —————————-
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. Bankers is presently not paying cash taxes in any jurisdiction.
Net Income and Funds from Operations
The Company recorded net income of $1.1 million ($0.002 per share) during the quarter compared to net income of $306,000 ($0.001 per share) for the preceding quarter and net income of $600,000 ($0.001 per share) for the same period in 2007. For the six months ended June 30, 2008, Bankers recorded net income of $1.4 million compared to a loss of $450,000 in 2007.
Bankers generated funds from operations of $17.9 million during the quarter compared to $10.1 million for the preceding quarter and $4.8 million for the same period in 2007. For the six months ended June 30, 2008, $28.0 million of funds from operations were generated compared to $7.6 million in 2007. The increase in funds from operations is attributable to production increases and higher commodity prices obtained during the period.
OPERATIONS UPDATE Albania Patos Marinza Field ——————-
New activities were initiated in the quarter as outlined in the Addendum to the Plan of Development for the Patos Marinza oil field, which calls for 110 vertical and horizontal wells to be drilled by the end of 2010. In June, Bankers commenced drilling operations in the field with the spudding of its first vertical infill well, which has been drilled and cased to a total depth of 1,343 metres. As the first of four wells to be drilled off a drilling pad, the well was programmed to test the potential of multiple Gorani and Driza sandstone formations within the first of numerous undrilled spacing units in the field that the Company interprets as being undrained areas.
Log analysis indicates that eight individual sandstone units, ranging from 3 to 18 metres of net pay, are hydrocarbon bearing with combined net pay of 39 metres. Six of the eight zones were evaluated for reservoir pressure: data confirms that the zones tested were porous and permeable reservoir quality sandstones, and that five of the six zones were at or near virgin reservoir pressure with the sixth interval demonstrating an approximate 50% pressure depletion. These positive results confirm the Company’s drainage model and support its plans to drill an additional 110 vertical and horizontal wells within the field over the next three years.
The second well on the pad reached total depth of 1,390 metres and has been cased; the third well is currently drilling. It is anticipated that it will take three more weeks to finish drilling the remaining two wells on the pad, following which completion operations will commence and the wells will be placed on production. The second and third pads have been built and are ready to drill an additional 10 wells in 2008.
In addition, technical and commercial evaluation for a second drilling rig capable of drilling horizontal wells and several service rigs tenders are complete; agreements with the winning contractors will be finalized in the next few weeks. Bankers anticipates having the rigs available for drilling and workover operations commencing in October 2008.
Export Capacity —————
Bankers has signed an agreement with the developers of the Port of Vlore oil export terminal for the storage and handling of its oil in a 13,000 cubic metre Company-dedicated oil tank. The storage facility will improve the Company’s export operations and allow for larger oil liftings when the terminal is ready to receive larger vessels next year.
Several meetings with the successful bidders of the recently announced privatization of ARMO, the Albanian refinery, have taken place. The objective of these meetings is to extend the Company’s current oil pricing agreement beyond its current term of July 2009 and develop a pricing formula that will provide the future sales price for Patos Marinza oil that is competitive with similar crudes sold in European markets. Based on discussions to date, the Company is confident that it will reach an acceptable agreement with ARMO that meets the financial and operational objectives for both firms.
Kucova Field ————
In June 2008, Bankers acquired the remaining 50% working interest in the Kucova oil field in Albania, increasing total holdings in the field to 100%, through the acquisition of 50% of the issued and outstanding securities of an independent private company, Sherwood International Petroleum Ltd. (Sherwood). The final closing was completed for a payment of $1.5 million.
Sherwood is now a wholly-owned subsidiary of Bankers and holds the exclusive right to evaluate and redevelop the Kucova heavy oil field pursuant to a Petroleum Agreement with Albpetrol Sh.A., the state-owned petroleum company, and a License Agreement with the National Agency of National Resources (AKBN). The terms of the Petroleum Agreement are substantially the same as those governing Bankers’ Petroleum Agreement for the Patos Marinza oil field in Albania.
An independent reserves evaluation to define the remaining reserves and production potential of the Kucova oil field, compliant with Canadian Security Administrators’ National Instrument 51-101, is expected to be completed in August 2008.
United States Oklahoma, Ardmore Basin – Tishomingo Gas Field ———————————————-
The fifth horizontal shale well in the Tishomingo field, the Dunn 2-1H well, was fracture stimulated in the second quarter with an initial gross production rate of 4.8 mmcfe/d. This is significantly higher than previous wells and is thought to be as a result of a modified fracture technique as a result of the experience working with this reservoir. Eight new wells were drilled and cased during the quarter and an additional four wells were spudded. Total gross production is approximately 4.0 mmcfe/d, which is limited by the tap throughput constraints.
Bankers is working on several initiatives to increase capacity for the new wells:
– Gathering lines are being installed to connect new wells so gas can be transported to the gas plants in the area; – Upgrading to Bankers’ initial plant was on-going during the quarter with the addition of two compressors to optimize production; – An additional temporary plant is being set up in the area that will allow the Company to increase its production from the current 4.0 mmcfe/d to as much as 20.0 mmcfe/d; – Parts have been ordered to increase the throughput of the Natural Gas Pipeline Ltd.’s tap to 40 mmcfe/d from 4.0 mmcfe/d; – An agreement with Atlas pipeline has been entered into for additional processing; – An agreement with Chesapeake Energy is being finalized to have them process approximately 15 mmcf/d of production; and – The Company is fracture stimulating additional wells as additional processing capacity is attained. CAPITAL EXPENDITURES Three months ended Six months ended June 30 June 30 ————————————————————————- ($000) 2008 2007 2008 2007 ————————————————————————- Albania 17,049 14,367 30,769 24,206 United States 19,662 8,861 25,465 12,884 Canada 52 29 96 181 ————————————– Total capital expenditure – cash 36,763 23,257 56,330 37,271 ————————————– ————————————–
The Company incurred $17.0 million of capital expenditures in Albania during the quarter: $12.1 million for well re-activations, $1.5 million on the acquisition of the Kucova heavy oil field, $210,000 related to the thermal project and $446,000 on water disposal and pipeline-flowlines systems. The balance of the expenditures was related to asset acquisitions and capitalized general and administrative expenses. The Company spent $14.4 million in capital expenditures in Albania for the same period in 2007, which were mainly incurred on well re-activation and central treatment facilities.
In the U.S., the Company spent $19.7 million in the second quarter, of which $15.9 million was used to drill 13 news wells in Oklahoma. The balance of the capitalized expenditures was related to lease, gathering plants and lines and capitalized general and administrative expenses. The Company spent $8.9 million in capital expenditures in the United States for the same period in 2007 which included $2.5 million on drilling and $4.0 million on lease acquisition costs.
LIQUIDITY AND CAPITAL RESOURCES
As at June 30, 2008, Bankers had working capital of $29.9 million (including cash of $42.9 million) and a term bank loan of $8.8 million. The Company’s $30.0 million credit facility with a European financial institution was nearly fully utilized at June 30, 2008, with the revolving operating loan at $16.0 million, $1.6 million bridge facility and the four-year term loan at $12.5 million. Repayments of $2.5 million were made during the first six months of 2008 in accordance with the term loan repayment schedule. The entire bridge facility was repaid subsequent to June 30, 2008.
Bankers is examining proposals for an expansion to its existing credit facility. The additional funds will be provided under a reserve-based facility that is more closely aligned with the $205 million 10%-discounted valuation of the proved reserves at December 31, 2007.
In March 2008, the Company completed a non-brokered private placement, issuing an aggregate of 66,666,666 common shares at CAD$0.90 per share, resulting in net proceeds of $58.3 million. During the six months ended June 30, 2008, Bankers received proceeds of $9.3 million from the exercise of an aggregate of 14,883,353 options and $3.8 million from the exercise of an aggregate of 4,284,790 warrants.
Capital expenditures for Albania are estimated to be approximately $77.0ÂÂ million for 2008. Bankers anticipates that it has sufficient capital resources to fund Albania’s 2008 capital expenditure program and to meet working capital requirements through funds from operations, available credit facilities and working capital. Significant changes in expected commodity prices could impact funds from operations.
With the separation of the U.S. operations into a new independent entity in July 2008, Bankers will no longer be funding any further capital expenditures for those assets. Bankers has provided a $23.0 million guarantee to a U.S. bank as security for a new credit facility for the new entity, BNK Petroleum Inc. (“BKX”). The loan guarantee deposit that Bankers has provided to BKX is secured by a term loan agreement, is interest-bearing and will be reduced from BKX’s equity issues and reserve valuation increases. Subsequent to June 30, 2008, BKX announced a $20.4 million bought-deal private placement that is expected to close on August 14, 2008. Upon closing, up to $10.0ÂÂ million will be repaid to Bankers, thereby decreasing the loan guarantee deposit to $13.0 million.
As of June 30, 2007, the Company had working capital of $19.4 million and a term loan of $12.2 million. Bankers had a working capital deficiency of $9.6 million and a term loan of $11.3 million at December 31, 2007.
Plan of Development
Bankers has no capital expenditure commitment for the Patos Marinza oilfield under the Petroleum Agreement. Bankers 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, the Company will continue to conduct petroleum operations on the portion it retains and the future capital expenditures will be adjusted accordingly.
Commitments
The Company has long-term lease commitments in Canada, Albania and the U.S. The minimum lease payments for the next five years are $866,000 and outlined as follows:
($000) Canada Albania U.S. Total ————————————————————————- 2008 85 88 37 210 2009 169 49 56 274 2010 169 37 – 206 2011 169 – – 169 2012 7 – – 7 ————————————— 599 174 93 866 ————————————— —————————————
With the separation of the U.S. operation into a separate entity subsequent to June 30, 2008, the Company does not have any long term lease commitments in U.S. The total commitments as of August 13, 2008 were $773,000.
The $12.5 million term loan is repayable in equal monthly installments over a 48-month period commencing January 1, 2008. Of the amount outstanding, $3.75 million was classified as a current liability and $8.75 million as long-term debt. Principal repayments of the term loan over the next four years are as follows:
($000) ————————————————————————- 2008 1,875 2009 3,750 2010 3,750 2011 3,125 ——– 12,500 ——– ——– QUARTERLY SUMMARY Below is a summary of Bankers’ performance over the last eight quarters. 2007 ————————————– ($000s, except as noted) Third Quarter Fourth Quarter ————————————————————————- $/boe $/boe ————————————————————————- Albania – crude oil ————————————————————————- Average production (bopd) 4,753 5,429 ————————————————————————- Oil revenue 16,239 37.14 21,398 42.84 Royalties 1,922 4.40 2,207 4.42 Sales and transportation 1,068 2.44 1,332 2.67 Operating expenses 4,535 10.37 5,303 10.93 ————————————– Net operating income 8,714 19.93 12,556 24.82 ————————————– ————————————– 2008 ————————————– ($000s, except as noted) First Quarter Second Quarter ————————————————————————- $/boe $/boe ————————————————————————- Albania – crude oil ————————————————————————- Average production (bopd) 5,218 5,826 ————————————————————————- Oil revenue 24,676 51.96 34,157 64.36 Royalties 4,298 9.05 6,601 12.43 Sales and transportation 1,664 3.50 1,727 3.27 Operating expenses 5,706 12.02 7,693 14.03 ————————————– Net operating income 13,008 27.39 18,136 34.63 ————————————– ————————————– 2006 ————————————————————————- ($000s, except as noted) Third Quarter Fourth Quarter ————————————————————————- $/boe $/boe ————————————————————————- Albania – crude oil ————————————————————————- Average production (bopd) 3,776 4,113 ————————————————————————- Oil revenue 9,240 26.63 9,250 24.44 Royalties 1,055 3.04 1,149 3.04 Sales and transportation 728 2.10 670 1.77 Operating expenses 3,141 9.05 3,737 9.88 ————————————– Net operating income 4,316 12.44 3,694 9.75 ————————————– ————————————– 2007 ————————————————————————- ($000s, except as noted) First Quarter Second Quarter ————————————————————————- $/boe $/boe ————————————————————————- Albania – crude oil ————————————————————————- Average production (bopd) 4,388 4,314 ————————————————————————- Oil revenue 10,739 27.19 12,913 32.89 Royalties 1,440 3.65 1,682 4.28 Sales and transportation 775 1.96 1,007 2.56 Operating expenses 4,014 10.16 4,048 9.91 ————————————– Net operating income 4,510 11.42 6,176 16.14 ————————————– ————————————– 2007 ————————————– Third Quarter Fourth Quarter ————————————————————————- U.S. – natural gas, condensate & NGL ————————————————————————- Average natural gas production (mcf/d) 127 492 Average condensate & NGL production (bopd) 15 37 ————————————————————————- Average natural gas price ($/mcf) 5.18 5.91 Average condensate & NGL price ($/barrel) 59.08 73.35 ————————————– Net operating income 120 407 ————————————– ————————————– 2008 ————————————– First Quarter Second Quarter ————————————————————————- U.S. – natural gas, condensate & NGL ————————————————————————- Average natural gas production (mcf/d) 762 990 Average condensate & NGL production (bopd) 107 140 ————————————————————————- Average natural gas price ($/mcf) 8.17 9.38 Average condensate & NGL price ($/barrel) 105.03 105.97 ————————————– Net operating income 924 1,473 ————————————– ————————————– * U.S. production commenced in September 2007; the U.S. operations were split from the Company pursuant to a Plan of Arrangement on July 2, 2008 2007 ————————————– ($000s, except as noted) Third Quarter Fourth Quarter ————————————– ————————————————————————- Average production (boepd) 4,789 5,548 ————————————————————————- Oil and gas revenue 16,392 22,061 General and administrative 1,975 2,853 Funds from operations 6,420 10,072 Net income (loss) 264 (2,156) Basic and diluted earnings (loss) per share(1) 0.002 (0.015) Total assets 185,652 204,295 Bank loans 25,967 30,850 2008 ————————————– ($000s, except as noted) First Quarter Second Quarter ————————————– ————————————————————————- Average production (boepd) 5,452 6,131 ————————————————————————- Oil and gas revenue 26,244 36,353 General and administrative 2,422 2,392 Funds from operations 10,115 17,920 Net income (loss) 306 1,050 Basic and diluted earnings (loss) per share(1) 0.002 0.006 Total assets 272,469 315,631 Bank loans 30,218 29,004 2006 ————————————– Third Quarter Fourth Quarter ————————————– ————————————————————————- Average production (bopd) 3,776 4,113 ————————————————————————- Oil and gas revenue 9,240 9,250 General and administrative 1,422 1,820 Funds from operations 2,950 1,588 Net income (loss) (208) (107) Basic and diluted earnings (loss) per share(1) (0.002) (0.001) Total assets 127,106 138,030 Bank loans – 6,772 2007 ————————————– First Quarter Second Quarter ————————————– ————————————————————————- Average production (bopd) 4,388 4,314 ————————————————————————- Oil and gas revenue 10,739 12,913 General and administrative 1,659 1,824 Funds from operations 2,852 4,792 Net income (loss) (1,050) 600 Basic and diluted earnings (loss) per share(1) (0.007) 0.004 Total assets 168,005 175,550 Bank loans 15,987 19,471 (1) Subsequent to June 30, 2008, the Company completed the consolidation of its shares on the basis of one (1) new post-consolidation share for each three (3) pre-consolidation shares. The computations of basic and diluted earnings (loss) per share for all the periods presented are based on the new number of shares after giving effect to the share consolidation. OUTSTANDING SHARE DATA
There were approximately 538 million and 548 million shares outstanding as at June 30, 2008 and August 13, 2008, respectively, on a pre-consolidation basis. In addition, the Company had approximately 68 million and 57 million stock options and warrants outstanding as of the same dates.
On July 30, 2008, the Company completed the consolidation of its shares on the basis of one (1) new post-consolidation share for each three (3) pre-consolidation shares.
Post consolidation, the Company had approximately 179 million and 183 million shares outstanding as at June 30, 2008 and August 13, 2008, respectively. Bankers also had approximately 23 million and 19 million stock options and warrants outstanding as of the same dates.
PRINCIPAL BUSINESS RISKS
Bankers’ business and results of operations are subject to a number of risks and uncertainties, including but not limited to the following:
Exploration, development, production and marketing of oil and natural gas involves a wide variety of risks which include but are not limited to the uncertainty of finding oil and gas in commercial quantities, securing markets for existing reserves, commodity price fluctuations, exchange and interest rate exposure and changes to government regulations, including regulations relating to prices, taxes, royalties and environmental protection. The oil and gas industry is intensely competitive and the Company competes with a large number of companies with greater resources.
Bankers’ ability to increase its reserves in the future will depend not only on its ability to develop its current properties but also on its ability to acquire new prospects and producing properties. The acquisition, exploration and development of new properties also require that sufficient capital from outside sources will be available to the Company in a timely manner. The availability of equity or debt financing is affected by many factors many of which are beyond the control of the Company.
Bankers has a significant investment in Albania. There are a number of risks associated with conducting foreign operations over which the Company has no control, including political instability, potential and actual civil disturbances, ability to repatriate funds, changes in laws affecting foreign ownership and existing contracts, environmental regulations, oil and gas prices, production regulations, royalty rates, income tax law changes, potential expropriation of property without fair compensation and restriction on exports. Additional risks that may affect the Company and its operations are set out in its AIF filed under the Company’s profile on http://www.sedar.com/.
SUBSEQUENT EVENTS
Pursuant to shareholder approval at the Annual and Special General Meeting on June 27, 2008, the Company completed its plan of arrangement in July by which all of the Company’s U.S. operations and assets were transferred into a new, independent company: BNK Petroleum Inc. (“BKX”). BKX commenced trading on the Toronto Stock Exchange (symbol: BKX) on July 10, 2008. The rationale behind this is to allow the two companies to focus on their respective core businesses. The Directors believe that this transaction will allow shareholders to realize additional value from their holdings in the Company. Details were as follows:
– Shareholders of the Company received shares of BKX on a proportional basis to their interest in Bankers: one (1) share in BKX for every ten (10) common shares held in Bankers. – The Company’s outstanding common share purchase warrants were adjusted to reflect the valuation impact of the BKX spinout in accordance with the terms of the applicable warrant indenture. – The Purchase Warrants listed under the symbol BNK.WT had their exercise price share adjusted from CAD$0.95 to CAD$0.83 per Bankers share. – The Purchase Warrants listed under the symbol BNK.WT.A had their exercise price adjusted from CAD$0.90 to CAD$0.79 per Bankers share. – The Company’s unlisted common share purchase warrants and stock options were also adjusted in accordance with the same formula applied to the listed purchase warrants. – As of June 30, 2008, the Company incurred $2.4 million of restructuring costs pertaining to the completion of the above transaction, which has been charged to retained earnings (deficit). The transaction is considered a distribution to shareholders, and accordingly, no gain or loss has been realized. – The pro forma balance sheet as at June 30, 2008 is as follows: PRO FORMA CONSOLIDATED BALANCE SHEET AS AT JUNE 30, 2008 (Unaudited, expressed in Thousands of United States dollars) ————————————————————————- ASSETS Bankers Bankers excluding Consolidated BKX BKX —————————– Current assets Cash and cash equivalents $ 42,867 $ 351 $ 42,516 Investments 2,278 – 2,278 Notes receivable – – 10,535 Accounts receivable 39,109 16,451 22,658 Crude oil inventory 1,454 – 1,454 Deposits and prepaid expenses 3,651 2,441 1,210 —————————– 89,359 19,243 80,651 Property, plant and equipment 226,272 105,830 120,442 —————————– $315,631 $125,073 $201,093 —————————– —————————– LIABILITIES Current liabilities Operating loans $ 16,504 $ – $ 16,504 Notes payable – 10,535 – Accounts payable and accrued liabilities 39,206 17,262 21,944 Current portion of term loan 3,750 – 3,750 —————————– 59,460 27,797 42,198 Term loan 8,750 – 8,750 Asset retirement obligations 3,518 609 2,909 Future income tax liability 27,272 – 27,272 SHAREHOLDERS’ EQUITY Share capital 211,768 97,472 114,296 Warrants 2,264 – 2,264 Contributed surplus 10,845 1,591 9,254 Deficit (9,404) (2,396) (7,008) Accumulated other comprehensive income 1,158 – 1,158 —————————– 216,631 96,667 119,964 —————————– $315,631 $125,073 $201,093 —————————– —————————-