Ithaca enjoyed a particularly successful year, the highlights of which are:
--The drilling of a successful first well on its 70% owned Athena prospect which tested at up to 1,330 barrels of oil per day ("bopd"). The well has been cased and suspended as a future producer. Prior to drilling the well, Ithaca entered into a farm-out agreement with EWE Akiengesellschaft ("EWE") for the latter to pay 45% of the well costs in return for a 20% interest. Ithaca then raised US$6.0 million from the Gemini Fund II in a non-recourse financing for the well, to be repaid out of production. As a result, Ithaca paid 28% of the costs of the well and retained a 70% interest in the project. Plans are under way to drill a second well in the third quarter of 2007 and to prepare an application for field development. --Ithaca participated in a 3-D seismic program on its 90% owned licenses in the Triton area of the Outer Moray Firth which is being interpreted in anticipation of future drilling. --Ithaca conducted a 3-D seismic program over its 60% owned Morpheus license in the Southern Gas Basin and subsequently farmed out an interest. Under the terms of the agreement, Ithaca will pay for 25% of both a well and the previously shot seismic, and will retain a 34% interest in the project. --A 2-D seismic program was conducted over the Company's 100% owned Beatrice area license. Drilling is being conducted at present. --The Company contracted for two drilling slots on a Jack-up rig and one on a Semi-submersible rig for drilling in 2007. --Ithaca was awarded 7 new blocks in the 24th Licensing Round, adding several new prospects as well as expanding existing areas of development. --Sproule International prepared an independent engineering evaluation in accordance with NI 51-101 for reserve volumes and values as at December 31, 2006. --Total Proven plus Probable plus Possible reserves net to the Company's interest were 28.50 MMBoe at December 31, 2006. Comparative numbers are not available as Possible reserves were not evaluated by Gaffney Cline & Associates in 2005. --At December 31, 2005, Ithaca's net interest in the Barbara gas property was evaluated by GCA as containing Proven reserves of 1.6 MMBoe. On re-evaluation, Sproule have chosen to reclassify the reserves as Probable and Possible as at December 31, 2006, thereby eliminating Ithaca's net Proven reserves when compared with 2005. --Total Probable reserves net to the Company's interest at December 31, 2006 were 20.02 MMBoe compared to 22.73 MMBoe at December 31, 2005, a decrease of 11.92% primarily as a result of the farmout at Athena as well as the re-evaluation of reserves at Barbara. --Possible reserves net to the Corporation's interest were evaluated by Sproule to be 8.49 MMBoe at December 31, 2006. Comparative numbers are not available as Possible reserves were not evaluated in 2005 by GCA. --Sproule evaluated the commerciality of the pools at December 31, 2006 and calculated a net present value of total Probable reserves net to Ithaca's interest, discounted at 10% per annum, of US$343.97 million before tax and a comparable after tax net present value of US$166.33 million. Total Probable and Possible reserves net to Ithaca's interest are evaluated as having a value of US$515.20 million before tax and $252.62 million after tax. The values were computed using forecast prices and costs.
--While expanding its operations in the UK North Sea, Ithaca significantly strengthened its balance sheet during 2006. --On June 5, 2006, the Company successfully completed an initial public offering raising gross proceeds of US$54.1 million listing its shares on the TSX-Venture Exchange and on June 6, 2006, on the London Stock Exchange's AIM market. --On September 18, the Company entered into an innovative financing arrangement with Gemini Fund II, raising US$6.0 million in non-recourse funding related to the Company's Athena well 14/18b-15. --On December 19, 2006, the Company closed a second equity issue, raising gross proceeds of US$45.9 million. --Property, plant and equipment increased from US$8.1 million at December 31, 2005, to US$40.3 million at December 31, 2006 primarily due to increased investment in the Company's oil and gas properties. --Working capital was significantly higher at December 31, 2006, at approximately $67.3 million versus $8.8 million for 2005. --A net loss increased to approximately US$4.3 million in 2006 from approximately US$1.0 million in 2005. The loss reflects the Corporation's increased evaluation, acquisition and exploration activity in the UK North Sea. The Corporation has been steadily increasing operations since the start of the year, and this has resulted in an increase in payroll, other administration costs and an increase in stock-based compensation expense. --Ithaca began the year with 26,798,556 common shares outstanding; and as at December 31, 2006 it had 82,904,475 common shares outstanding.
Commenting on the 2006 results, Lawrie Payne, Chief Executive Officer, said:
"Ithaca has made a significant amount of progress in 2006. We successfully drilled and operated our first well at Athena, which has been cased for future production. We also acquired and are currently processing a significant amount of seismic data on several of the Company's properties, which is anticipated to provide future, drilling opportunities. Ithaca has been well received by capital markets, successfully completing an Initial Public Offering and a second share placement, providing sufficient funds to capitalize on the opportunities available to the Company. We have also successfully farmed out a number of licenses, providing financial leverage while exercising risk management and retaining a strong equity position in each."
Brad G. Gunn, Ithaca Energy's Chief Financial Officer commented:
"2006 was an enormous year for the Company. Assets grew by 537% and current assets grew by 648%. The financial and property assets established in 2006 places Ithaca in a strong position to develop further in 2007."
Ithaca Energy Inc. has filed its Annual Information Form for the year ended December 31, 2006, which includes the following reports required under National Instrument 51-101 Standard of Disclosure for Oil and Gas Activities: Form 51-101F1 Statement of Reserves Data and Other Oil and Gas Information; Form 51-101F2 Reports of Reserve Data by Independent Qualified Reserves Evaluators; and Form 51-101F3 Report of Management and Directors on Oil and Gas Disclosure. In addition to the Annual Information Form, the Company has also filed its Management Discussion and Analysis, and Audited Financial Statements. These documents can be found for viewing by electronic means on the System for Electronic Document and Analysis Retrieval at www.sedar.com.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION
The following is management's discussion and analysis ("MD&A") of the operating and financial results of Ithaca Energy Inc. (the "Corporation" or "Ithaca") for the year ended December 31, 2006. The information is provided as of April 30, 2007. The 2006 results have been compared to the results of 2005. All figures and the comparative figures contained herein are expressed in US dollars unless otherwise stated.
This discussion and analysis should be read in conjunction with the Corporation's audited consolidated financial statements as at December 31, 2006 and 2005 and for each of the years in the two year period ended December 31, 2006, together with the accompanying notes, and the December 31, 2006 Annual Information Form. These documents and additional information about Ithaca Energy Inc. are available on SEDAR at www.sedar.com.
BUSINESS OF THE CORPORATION
Ithaca Energy is an oil and gas exploration and development corporation active in the United Kingdom's Continental Shelf ("UKCS"). Exploration and development activities are focused on the Inner and Outer Moray Firth, the Central and Southern Gas Basin areas of the UKCS. The goal of Ithaca Energy in the near term is to achieve oil production from the development of existing discoveries on licenses held by the Corporation, to originate and participate in exploration on licenses held by the Corporation with the potential to make significant contributions to future production, and to consider other opportunities for growth as they are presented to the Corporation. The Corporation is targeting first oil production from its 70% owned Athena field and first gas from its 20% (6.7% expected unitization) interest in the Barbara gas field to commence in 2009.
In 2006, Ithaca Energy significantly expanded its operations in the UK North Sea and strengthened its balance sheet. On June 5, 2006, the Corporation successfully completed an initial public offering raising gross proceeds of $54.1 million and listed its shares on the TSX-Venture Exchange and on June 6, 2006, on the London Stock Exchange's AIM market.
Upon completion of the offering, the Corporation secured the Bredford Dolphin semi-submersible drilling rig for a well on its Athena project in the Outer Moray Firth area of the Central UK North Sea. In October 2006, Ithaca commenced and operated its first well, an appraisal of a previous oil discovery named Athena. The well tested up to 1,330 BOPD and was suspended as a future oil producer. The Corporation also participated in two 3-D seismic programs over Corporation licenses in the Triton area of the Moray Firth and Morpheus area in the Southern Gas Basin as well as a 2-D program at Beatrice in the Inner Moray Firth. The Corporation drilled one well in 2006, compared with no drilling activity in 2005 or 2004.
In September 2006, Ithaca Energy secured the GSF Galaxy II jack-up drilling rig for two wells to be drilled in 2007 and the Byford Dolphin semi-submersible drilling rig under a one-well contract which is scheduled to drill a second well at Athena in 2007.
On November 27, 2006, Ithaca received an independent engineering evaluation, prepared in accordance with National Instrument 51-101 ("NI 51-101") from Sproule International Limited of Calgary, Alberta ("Sproule"), of its 70% owned oil discovery at Athena on Block 14/18b in the Outer Moray Firth area of the UKCS. The evaluation was conducted to confirm the results of the 14/18b-15 well and comprised a comprehensive study of the wells, geology and seismic data in the area (the "Sproule October 31, 2006 Report") and estimated the Athena accumulation at October 31, 2006 to be 27.99 million barrels of gross recoverable probable undeveloped reserves or 19.59 million barrels net to Ithaca's 70% interest. These gross reserve estimates represent a 14.7% increase over gross reserves estimated previously by Gaffney Cline & Associates ("GCA") in its report dated May 15, 2006 and effective as at December 31, 2005 (the "GCA Report"). Sproule evaluated the commerciality of the pool and calculated a net present value of Probable reserves net to Ithaca's interest, discounted at 10% per annum, of $314.76 million before tax and a comparable after tax net present value of $165.44 million. Total Probable and Possible reserves are evaluated as having a value of $481.23 million before tax and $254.02 million after tax. The values were computed using escalating Brent pricing.
Ithaca Energy exited 2006 in excellent financial condition. The Corporation had high cash balances at year end as a result of two equity financings and a non-recourse unsecured funding arrangement, all of which closed in 2006. The first issue, which closed on June 5, 2006, raised gross proceeds of approximately $54.1 million, while the second equity issue, which closed on December 19, 2006, raised gross proceeds of approximately $45.9 million. These issues of common shares were used to finance the Corporation's 2006 UK North Sea appraisal and exploration drilling program, for geological and geophysical studies on Corporation Licenses and for general corporate purposes. Property, plant and equipment increased from $8.1 million at December 31, 2005, to $40.3 million at December 31, 2006.
Current liabilities increased from $1.1 million at December 31, 2005, to $7.3 million at December 31, 2006, these comprised entirely accounts payable and accrued liabilities. The Corporation had no bank debt in 2006 or comparable periods of 2005. Working capital was significantly higher at December 31, 2006, at approximately $67.3 million versus $8.8 million for 2005. The increase in share capital, shareholders equity and common shares outstanding are also a reflection of the equity financings closed in 2006. The Corporation's 2007 UK North Sea exploration and appraisal drilling program will be funded by its cash reserves and expected future farmout agreements with third parties.
The net loss of $4.3 million increased in 2006 compared with 2005 and 2004. The increase in net loss is due to increased general and administrative expenses and stock-based compensation expense.
Cash flow from operating activities was negative in 2006, as in both 2005 and 2004. Negative cash flow from operating activities result from the Corporation's activity levels in the North Sea and the commensurate overhead related to these activities. This trend is expected to continue in 2007 and 2008. Oil production from Athena and gas production from Barbara are anticipated to commence in 2009 and are expected to reverse this trend.
Sproule prepared an independent engineering evaluation, prepared in accordance with NI 51-101 for reserve volumes and values at December 31, 2006.
Total Proven plus Probable plus Possible reserves net to the Corporation's interest were 28.50 MMBoe at December 31, 2006. Comparative numbers are not available as Possible reserves were not evaluated by GCA in 2005.
At December 31, 2005, Ithaca's net interest in the Barbara gas property was evaluated by GCA as containing Proven reserves of 1.6 MMBoe. Sproule have chosen to reclassify the reserves as Probable and Possible as at December 31, 2006, thereby eliminating Ithaca's net Proven reserves when compared with 2005.
Total Probable reserves net to the Corporation's interest at December 31, 2006 were 20.02 MMBoe compared to 22.73 MMBoe at December 31, 2005, a decrease of 11.92%. While total Proven and Probable gross reserves increased, Proven and Probable reserves net to the Corporation decreased in 2006 due to a farmout at Athena, and a technical revision of reserves at Barbara.
Possible reserves net to the Corporation's interest were evaluated by Sproule to be 8.49 MMBoe at December 31, 2006. Comparative numbers are not available as Possible reserves were not evaluated in 2005 by GCA.
Sproule evaluated the commerciality of the pools at December 31, 2006 and calculated net present value of total Probable reserves net to Ithaca's interest, discounted at 10% per annum, of $343.97 million before tax and a comparable after tax net present value of $166.33 million. Total Probable and Possible reserves net to Ithaca's interest are evaluated as having a value of $515.20 million before tax and $252.62 million after tax. The values were computed using forecast prices and costs.
Complete disclosure of the Corporation's reserves as reported under the guidelines of NI 51-101 can be found in the Corporation's Annual Information Form dated April 27, 2007, as filed on SEDAR at www.sedar.com.
Ithaca Energy's primary focus in 2007 will be the appraisal and development of its 70% owned Athena oil field. In addition, the Corporation will continue its UK North Sea exploration and appraisal drilling program on its Basil, Morpheus, Carna, and Manuel prospects subject to rig availability and securing partner participation. To complete its 2007 development, appraisal, and exploration program, the Corporation has set a capital budget of 4 wells and $55 million.
Ithaca Energy has been able to execute its business plan for the UK North Sea in large part by its ability to access capital through the issuance of equity. The Corporation anticipates that no further equity issues will be required for its planned activities in 2007; however significant capital, beyond current resources, will be required to further the Corporation's anticipated development activities in 2008.
SELECTED ANNUAL INFORMATION
The consolidated financial statements of the Corporation and the financial data contained in MD&A are prepared in accordance with Canadian Generally Accepted Accounting Principles ("GAAP"). The consolidated financial statements include the accounts of Ithaca Energy Inc. and its wholly owned subsidiary Ithaca Energy (UK) Limited. All inter-company transactions and balances have been eliminated on consolidation. Part of the Corporation's North Sea oil and gas activities are carried out jointly with others, and the consolidated financial statements reflect only the Corporation's proportionate interest in such activities.
The Corporation's reporting currency is US dollars ("$"); unless indicated otherwise, all amounts are presented in US dollars. The accounting records of the Corporation's foreign subsidiary are maintained in US dollars.
RESULTS OF OPERATIONS
The Corporation has had no revenue from operations to date. For the year ended December 31, 2006, the Corporation had a net loss of $4,306,335 compared to a net loss of $1,017,304 for the year ended December 31, 2005. The results reflect the Corporation's increased evaluation, acquisition and exploration activity in the UK North Sea. The Corporation has been steadily increasing operations since the start of the year, and this has resulted in an increase in payroll and other administration costs.
Interest income in the periods under review resulted from interest on bank accounts and short-term deposits, as the Corporation had cash balances due to funds raised. The income is significantly higher in the third quarter than in the previous period as the Corporation was able to invest a portion of the funds raised in the initial public offering. The Corporation holds the majority of its cash reserves in foreign currencies, and is therefore exposed to losses arising from exchange rate fluctuations. In addition, the Corporation issued stock options to Directors and employees in August 2006, which resulted in a stock based compensation charge of $771,962. The total charge for options in 2005 was $112,000.
General and administrative expenses increased significantly in 2006 versus 2005 and 2004 due to increases in staffing levels, support and activity required for the Athena development and ongoing geological and geophysical evaluation activities on the Corporation's exploration and appraisal projects. General and administrative expenses are expected to rise again in 2007. The single most significant expense item in 2006 was stock-based compensation. As in 2006 and prior years, the Corporation continued its compensation policy of combining share options with competitive salaries and benefits packages to attract the best-qualified staff. The Corporation continued to issue share options during the year as its share equity base expanded and as it added new employees. Stock-based compensation expense is not expected to increase as rapidly in 2007 as in prior years.
Activity Summary in the UK North Sea
Greater Beatrice Area
The Greater Beatrice Area is located in shallow waters in the Inner Moray Firth area. Ithaca owns a 100% interest in a License surrounding the Talisman owned Beatrice oilfield on which have been identified several prospects including Basil, Polly and Manuel. During 2006 Ithaca acquired significant geological and geophysical data and conducted new 2-D seismic which has been used to further evaluate the prospects. The Corporation has paid a deposit of $18.0 million to secure a jack-up drilling rig for two wells one of which is planned on this property in the first half of 2007. The Corporation is currently in the process of identifying potential partners to fund the further exploration, appraisal and development of this property.
Triton / Poseidon
This 90% owned property is located in the Outer Moray Firth. Work undertaken during the year included the acquisition of a large 3-D seismic survey, for which the Corporation paid $4.3 million. The seismic processing and interpretation is in progress and preliminary results have been favorable. It is expected that a well will be drilled on the property in 2008.
This 60% owned property is located in the Southern North Sea Gas Basin and contains multiple prospects. Work undertaken during the year included the acquisition of a 3-D seismic survey and data processing at a net cost $2.4 million. Seismic interpretation continues and is expected to be completed by the third quarter of 2007. On March 27, 2007, Ithaca announced a farmout under which a well will be drilled before the end of the first quarter to test the leman Sandstone on the block. Ithaca will recover approximately $1 million expended on the seismic, will pay 25.33% of the well and will retain a 34% interest in the license. It is anticipated that a well will be drilled on the property in the last half of 2007 or the first quarter of 2008.
Ithaca owned a 90% interest in License P 1293 covering Block 14/18b located in the Outer Moray Firth area of the UK Continental Shelf which contained a previous oil discovery called Athena. The appraisal and development of this property was the major focus for the Corporation during 2006. In the 4th quarter the Corporation successfully drilled its first well on the project. The well was cased and suspended for future production. This well was financed through a partial farmout to another party, the raising of $6 million of non-recourse mezzanine funds and with corporate funds. The well was drilled at a net cost to the Corporation of $16.2 million while the Corporation retained a 70% interest in the project. This, together with continued development planning activities and seismic acquisition on the other properties, resulted in a significant cash outflow for investing activities during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Total cash inflow from financing activities in the year ended December 31, 2006 was $98.0 million, primarily as a result of the initial public offering and an additional equity offering in December 2006. In addition, the Corporation obtained a $6.0 million contribution from Gemini Oil & Gas Fund II, L.P. This unsecured funding will be repaid from payments on future production from the Corporation's Athena property. These funds have been used for the development of the Athena project. Ithaca has the option to buy out the payment obligation by making a lump sum payment to Gemini at certain milestones.
During the year ended December 31, 2006 there was a cash outflow from operating activities of $21.2 million compared to a cash outflow from operating activities of $0.8 for the corresponding period in 2005. This significant increase is due to the payment during the first half of 2007 of an $18.0 million deposit to secure the services of a drilling rig. This amount will be capitalized as part of oil and gas properties when the drilling work is completed. The Corporation expects to have a cash outflow from operating activities for at least the next two years.
The Corporation's prospects are dependent upon the investment of significant capital sums into its development and exploration projects. With the capital raised pursuant to the Offerings and the UK Placings, management believes that the Corporation will be able to exploit opportunities in its existing portfolio, and also to pursue new ventures that are consistent with its business plan. The Corporation expects to continue to develop the existing licenses held and to acquire new licenses through participation in future licensing rounds and farm-ins from third parties.
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