Pebercan's '08 Earnings Slip, Cuban Arm Gives Up Oil Facilities in Cuba
Pebercan has reported its results for the period ended December 31, 2008. All of the amounts referred to in this press release are in U.S. dollars. These results take into account the Company's plans to cease its business activities, and are thus not based on ongoing operations.
On January 14, 2009, Peberco Limited ("Peberco") signed an agreement with Cubapetroleo SA ("Cupet") relating to the premature termination of the oil production-sharing agreement and the assignment of accounts receivable (the "Agreement"). Under the Agreement, Peberco accepted the termination of the original agreement entered into on August 21, 1993 and Peberco's rights reverted to Cupet in exchange for the latter paying Peberco a net lump-sum amount of $140 million, which corresponds to 100% of Peberco's rights to Block 7.
On February 9, subsequent to the signing of the Agreement between Peberco and Cupet and the receipt of the lump-sum amount of $140 million, Peberco signed a settlement agreement with its co-partner, Sherritt International (Cuba) Oil and Gas Limited ("Sherritt"), to determine the allocations and payments required to terminate the Joint Operating Agreement. Under this agreement, Sherritt received the amount of $60.6 million.
On February 20, 2009, Pebercan announced its intention to end its normal course of business. Its remaining assets, originating from amounts paid to Peberco by Cuban authorities, will be distributed to the Company's shareholders. The Board of Directors, having set aside the necessary reserves to enable Pebercan to meet all of its obligations, will evaluate a number of alternatives for distributing the amounts to which Pebercan shareholders will be entitled.
2008 highlights (compared with 2007):
- Sales(i): - 2.1% to $116.41 millionNet earnings(ii): loss of $116.8 million
- Average selling price per barrel of $56.54 versus $42.61 in 2007
- Internal funds: -14.8% to $77.7 million(iii)
- Wells in production at the end of fiscal 2008: 43
- Total Block 7 production: 6,938 Mbbl, namely 4% less than in 2007(iv)
- Total recognized Block 7 production: 6,392 Mbbl
For the fiscal year ended December 31, 2008, Pebercan had total earnings of $116.4 million, compared with $118.9 million in 2007. Note, however, that December earnings were not recognized in 2008 earnings, given the certainty that these would not be recovered. This explains the 2.1% drop in earnings compared with 2007, and this in spite of the increase in the average price of oil.
In 2008, the average sale price for the year was $56.54/barrel, compared with $42.61/barrel in 2007. This represents a variation of 32.7%, which can be explained by the variation observed in the reference price used, i.e. Fuel Oil Gulf Coast (number sign)6.
Hence, the total recognized production for Block 7 was 6,392 Mbbl, representing a variation of -11.4% compared with 2007. As in the case of earnings, this decrease is explained by the fact that December earnings were not recognized.
Had this not been the case, total Block 7 production was 6,938,426, representing a drop of 3.9%.
During the 2008 fiscal year, management reviewed its estimates with regard to the accounts receivable payment schedule, and this so as to take into account late payments. The capitalization of accounts receivable resulted in a drop in value of $8.6 million. The Company reported a bad debt of $67.2 million in its accounts receivable. The accounts receivable balance as at December 31, 2008, i.e. $79.4 million, represents the Company's proportionate share of the net lump-sum amount to be received by Cupet.
Production costs were $6.76/barrel in 2008, compared with $6.56 in 2007. Production costs consist of the fixed and variable costs related to the maintenance of wells and surface installations. Production costs dropped 24.0% compared with 2007. It should be noted that because of late payments by Cupet, all of the Company's expenditures were significantly decreased during the year, to maintain a certain cash flow level.
In fact, during this same period, the Company's general expenses dropped by 15%.
As at December 31, 2008, the Company conducted a ceiling test of overall costs, to evaluate the fair value of its oil and gas assets. Anticipated future cash flows from the use of these assets being nil, the Company devalued its total assets and recognized a loss in value of $118.4 million.
These assumptions rest on two important factors: First, as at December 31, 2008, the commercial sale agreement with Cupet had expired and not been renewed. Also, on January 14, 2009, Peberco and Cupet signed an agreement for the termination of rights on interests in oil production and the assignment of accounts receivable. This resulted in Peberco's rights reverting to Cupet.
Moreover, under the terms of the production-sharing agreement signed with Cupet, Peberco could deduct, for fiscal purposes, amortization on its oil assets equal to its earnings from the recovery of oil rights. The accrued capital cost allowance has been much higher than the depletion amount for accounting purposes. In order to take this factor into account, Peberco recognized a liability as to future income taxes. As at December 31, 2008, subsequent to the signing of the agreement with Cupet and given the Cuban authorities' attestation that Peberco had no tax obligations to Cuba whatsoever, this provision was no longer justified. Peberco thus reversed this provision, which represented an amount of $35.4 million in its financial statements.
Given the depreciation of oil and gas assets, the provision on accounts receivable related to oil production, the reviewed estimates of obligations with regard to the retirement of oil and gas properties, and the write-off of the provision for future income taxes, Pebercan reported a net loss of $116,772,000 (-$1.56 per basic share) in 2008, compared with net earnings of $41,279,000 in 2007 ($0.55 per basic share).
Block 7's total billable production (100%) went from 7.21 million barrels in 2007 to 6.39 million barrels in 2008 (6.94 million if December 2008 production is included). This represents an average of 17,513 barrels a day.
Corresponds to the Company's percentage of production, based on its share of the fields exploited and taking into consideration the stipulations of the production-sharing agreement with regard to cost oil and profit oil (before taxes) in Cuba.
As indicated previously, there is a difference between production billed and recognized at the end of December 2008 and total production. The Company's share of the barrels produced in the fields amounts to: 2,306,977 barrels, hence 6,320 barrels/day.
As described above, on January 14, 2009, Peberco signed an agreement for the termination of rights on interests in oil production and the assignment of accounts receivable. This contract came into full effect on February 9, 2009, subsequent to the Cuban authorities' disbursement of the entire agreed upon lump sum. Following receipt of this payment, the Company signed a settlement agreement with its partner in order to determine the allocations and payments necessary to terminate the Joint Venture Agreement.
On February 20, 2009, the Company announced its intention to end its normal course of business. Its remaining assets, originating from amounts paid to Peberco by Cuban authorities, will be distributed to the Company's shareholders. The Board of Directors, having set aside the necessary reserves to enable Pebercan to meet all of its obligations, will evaluate a number of alternatives for distributing the amounts to which Pebercan shareholders will be entitled.
On February 9, 2009, the Company relinquished to Cupet all of its oil facilities in Cuba.
On February 20, 2009, the Company announced its intention to cease all commercial activities. Its remaining assets, originating from amounts paid to Peberco by Cuban authorities, will be distributed to the Company's shareholders.
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