Board Committees
MAY 11, 2006 - 09:15 ET
LETTER TO SHAREHOLDERS
In its first full quarter of operations Open Range Energy Corp. achieved its objective of substantial land capture. The Company nearly tripled gross acreage at its growing Ansell/Sundance Deep Basin exploration and development play. In addition Open Range's Q1 operations were executed with success on all levels, including drilling and casing of three gross wells, timely tie-ins of recently drilled wells, addition of infrastructure and production growth to an average of more than 700 boe per day.
Highlights of Open Range's first full quarter of operations:
- Increased land position at Ansell/Sundance from 11 gross to 30 gross sections of land with average working interest increasing to approximately 40 percent;
- Initiated 50 percent-owned 3D seismic program at Ansell/Sundance;
- Increased average production by 40 percent to 719 boe per day;
- Drilled three wells (1.24 net), two of which were at Ansell/Sundance and continued the 100 percent drilling success rate at the property;
- Contracted a drilling rig with a rated depth of 3,600 metres for a one-year term commencing June 2006;
- Identified five untested Cretaceous natural gas pay zones in producing wells at Ansell/Sundance for completion and commingling in Q2 and Q3;
- Tied-in three new wells and commissioned a Company-operated compression facility at Ansell/Sundance;
- Secured a $10 million bank line and had zero debt exiting Q1;
- Achieved relatively low operating costs (including transportation) of $6.04 per boe; and
- Evaluated several acquisition opportunities.
Land and Seismic
The Company's critical objective for the quarter was setting up exploration and development activity for the next two to three years at Ansell/Sundance. During Q1 Open Range participated in three Crown sales of parcels around Ansell/Sundance, acquiring the substantial majority of acreage on which it bid and adding 10 gross sections at 50 percent working interest. Late in Q1 the Company purchased two gross (1.4 net) sections at Crown sales in other areas. Land expenditures totalled $5.3 million, a substantial proportion of Q1 capital expenditures.
In addition to these Crown sale purchases, as previously disclosed on March 20, 2006, Open Range entered into a farm-in agreement that provides access to nine sections of land at Ansell/Sundance on a drill-to-earn basis. In total, the Company's land position in the area increased from 11 gross sections at year-end 2005 to 30 gross sections (at 40 percent average working interest) at the end of Q1 2006.
Building on the land acquisitions is a new 3-D seismic survey covering approximately two townships, which Open Range is conducting in partnership at a net cost of approximately $3.2 million. Initiation of the program occurred in Q1 and will be completed before the end of the second quarter. The survey's primary purpose is to support the Company's 2007 drilling program, which is expected to include a substantial infill drilling program on spacing of up to four wells per section.
The Company continued to evaluate opportunities on option lands provided through the November 2005 Plan of Arrangement with Daylight Energy Trust. Due to the successful results to date of internally generated prospects, as well as the high quality and extent of our core area opportunities, the initial three month option was allowed to expire. As well the Company does not anticipate executing on the remaining Daylight option lands.
Multi-zone natural gas success in Deep Basin drilling
At Ansell/Sundance Open Range drilled two successful natural gas wells in the first quarter and spudded a third well. To the end of Q1 the drilling success at this property has been 100 percent with a total of five gas wells drilled since inception. Continuing on this success, plans are well underway to drill up to seven additional wells this year with drilling operations expected to recommence in June. The Company is well positioned to control the timing and costs of its go-forward drilling strategy with the recent signing of a one-year drilling contract for Nabors Canada Rig 64.
The multi-zone natural gas potential in the Ansell/Sundance area continues to be significant with a total of five wells and seven pay zones on production at the end of the first quarter. The Cadomin anchor target is productive from all five wells. In addition to existing producing zones, the five producing wells contain a total of five untested Cretaceous gas pay zones. Open Range plans to complete these five additional pay zones in Q2 and Q3 and commingle production in the well bores. Low-cost reserve additions are expected from these operations.
Operations
Open Range achieved timely and effective execution of its Q1 operating tasks, resulting in strong growth of average daily production. Production during Q1 averaged 719 boe per day of which 4.0 mmcf was natural gas. This represents an increase of 40 percent from the Company's initial month of production in December 2005. The Ansell/Sundance property contributed 322 boe per day to the Q1 average volume. The Company's production was 93 percent natural gas. All of the production growth is attributable to successful drilling.
During the quarter the Company drilled and cased three gross (1.24 net) wells, of which two were at Ansell/Sundance. In addition, three gross wells were brought on-stream at Ansell/Sundance (including one of the newly drilled Q1 wells) and a natural gas compressor was commissioned on February 1, 2006. To date, Open Range has averaged 45 days from rig-release to initial production, enhancing funds flow and economics. The Company continues to work successfully with two large area operators to process its production on a third-party basis.
At Ansell/Sundance initial well production rates have ranged from 0.6 to 3.0 mmcf per day of natural gas plus 10-15 bbls per mmcf of natural gas liquids. Open Range has experienced very good results from its innovative well-fracturing techniques, which continue to evolve.
Financial
Since December 2005 Open Range has experienced month-by-month production growth from the ongoing tie-in of new wells at Ansell/Sundance, enhancing revenues and funds flow for the quarter. Revenue and funds flow for the quarter were $3.1 million and $1.3 million ($0.10 per basic share), respectively. Revenues and funds flow have been impacted by the recent softness in natural gas prices.
The Company recorded a net loss for the quarter, largely attributable to decreased natural gas prices and high start-up general and administrative (G&A) costs. The Company anticipates profitability improving into the second half of 2006 as drilling and associated reserve additions work toward normalizing depletion, depreciation and amortization (DD&A) rates.
First quarter operating costs of $6.04 per boe (including transportation) provided an offset to the high initial G&A costs of $9.31 per boe. Lower operating costs are a result of the Company's heavy weighting to natural gas, increased production in the first quarter, streamlining of field operations, and low maintenance costs associated with new infrastructure at Ansell/Sundance. Open Range anticipates higher operating costs in Q2 due to planned turnaround activities at Big Bend and Ansell/Sundance.
Although production price hedging is currently not an integral component of our business plan, there are times when prudence dictates protecting funds flow and capital expenditure plans. The abrupt softening of natural gas prices in Q1 led the Company to enter into a price collar on approximately 2,500 GJ per day of its natural gas production. The collar establishes a floor price of $5.00 per GJ and ceiling price of $10.50 per GJ, and extends from May 1 to December 31, 2006 providing a measure of downside funds flow protection amid softer prices arising from relatively high volume of North American natural gas storage.
Corporate Developments
The Board of Directors is pleased to announce that Mr. John Mueller, P.Eng. has been promoted to the position of Chief Operating Officer and Vice-President Engineering. Mr. Mueller brings significant operating experience to his new responsibilities. Mr. Mueller's previous title was Vice-President of Engineering and Operations.
Open Range is also pleased to announce the promotion of Mr. Dan Boyko to the position of Vice-President of Business Development and Exploitation. Mr. Boyko's previous title was Manager of Business Development. Mr. Boyko's has over 20 years of diverse reservoir and acquisition experience.
The company is currently in the process of recruiting an appropriate candidate to fill the vacant Chief Financial Officer and Vice-President Finance position.
Outlook
At Ansell/Sundance two wells drilled and rig-released in late Q1 and early Q2 contain three behind-pipe pay zones to be completed and tested in June. Five additional uphole zones in existing producing wells are planned for completion and commingling in the second and third quarters. Drilling with Open Range's newly contracted rig is to commence in June, as is interpretation of the two-township 3-D program.
Thus far in Q2 Open Range has also experienced success at its non-operated Ferrier property with the drilling of two gross (0.6 net) successful Ellerslie infill wells. Both wells encountered significant natural gas pay and are planned for completion in June. The infill wells are expected to result in significant net reserve additions as well as accelerated drainage of the tight natural gas reservoir.
Open Range's planned 2006 capital expenditures have been increased to $30 million, as disclosed in the press release of April 27, 2006, due mainly to drilling success which encouraged expansion to our land capture and 3D seismic programs. The Q2 drilling program is currently planned at five gross (2.0 net) wells, of which three have been drilled and cased to date, with a planned 2006 total of 16 gross (6.35 net) wells, one more than initially planned.
We continue to be confident in our 2006 forecasts for average production of 900 boe per day and an exit rate of 1,200 boe per day. First quarter drilling and production results are affirming the potential of future prospects to deliver per share growth in reserves, production and funds flow.
Management's Discussion and Analysis
Open Range Energy Corp. ("Open Range" or the "Corporation") was formed on November 30, 2005 pursuant to a Plan of Arrangement including Daylight Energy Trust and Tempest Energy Corp. Open Range was formed through the amalgamation of 1198311 Alberta Ltd. (Daylight's exploreco), 1198249 Alberta Ltd. (Tempest's exploreco), and Open Range Finance Corp., all of which were incorporated on October 13, 2005.
The following discussion and analysis is a review of operations, current financial position and outlook for the Corporation for the period from January 1, 2006 to March 31, 2006. As the Corporation commenced operations on November 30, 2005, there are no prior year comparative figures for the three months ended March 31, 2006. This information should be read in conjunction with the audited financial statements and related notes for the period from November 30, 2005 to December 31, 2005 and the unaudited financial statements for the three months ended March 31, 2006. Additional information relating to Open Range is available at www.sedar.com or on the Corporation's website at www.openrangeenergy.com.
The terms "funds from operations", "funds from operations per share" and "debt-to-cash-flow ratio" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations is a useful supplemental measure as it provides an indication of the results generated by the Corporation's principal business activities before the consideration of how those activities are financed or how the results are taxed. Users are cautioned, however, that this measure should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.
Open Range's method of calculating funds from operations may differ from that of other corporations, and accordingly it may not be comparable to measures used by those corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities. The following is reconciliation between cash flow from operating activities and funds from operations.
All barrel of oil equivalent (boe) numbers are calculated by converting one million cubic feet (mcf) of natural gas to boe at a ratio of six mcf to one boe.
This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. These include, but are not limited to: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations), changes in how those laws and regulations are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of corporations with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Open Range's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that Open Range will derive there from.
This Management's Discussion and Analysis is dated May 9, 2006.
Production
Production in Q1 averaged 719 boe per day, of which 93 percent or 4.0 mmcf per day was natural gas. First quarter production increased by 207 boe per day or 40 percent over December 2005 primarily as a result of three new wells being tied-in and brought on production at the Ansell/Sundance property, two of which were drilled in 2005. During the quarter, compression at the Ansell/Sundance 10-11 facility was installed and commissioned, which also contributed to the production increase. The compression facility is running at about 33 percent of its 10 mmcf per day design capacity, providing significant capacity for future wells. One additional Q1 well at Ansell/Sundance will be completed and brought on production in Q2 after road bans are lifted. Open Range estimates its production to average 900 boe per day in 2006, representing a 76 percent increase over the December 2005 average rate of 512 boe per day.
Open Range drilled three gross (1.24 net) gas wells in Q1 with 100 percent success. Two of the locations were at Ansell/Sundance and one location was at Pembina. Two further locations were spudded in Q1, one at Ansell/Sundance and one at Ferrier, but were not rig-released before the end of the quarter. Open Range plans to drill up to 11 additional drilling wells in 2006, most of which will be at Ansell/Sundance.
Petroleum and Natural Gas Revenues
Open Range's revenue for Q1 was driven by a combination of increased production offset by natural gas price declines. Revenues totalled $3.1 million for the first quarter, comprised mainly of natural gas sales totalling $2.8 million. Open Range received weighted average prices (before transportation and marketing fees) of $57.50 per barrel for its crude oil, $7.93 per mcf for natural gas, and $58.45 per barrel for its condensates.
These realized prices compare to the following Q1 average benchmarks: West Texas Intermediate (WTI) oil price of US$63.34 per barrel, Edmonton oil par price of $69.27 per barrel and Alberta natural gas spot price of $7.34 per mcf.
Financial Instruments
Open Range had no financial instruments in place during the first quarter of 2006.
During April 2006, Open Range entered into a natural gas hedging transaction for 2,500 GJ per day for the period May 1, 2006 through December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put (floor) and the sale of a $10.50 per GJ call (ceiling). Open Range's management considers hedging a valuable tool to offset the risk related to commodity price fluctuations.
Royalties
Royalty expenses for Q1 were $0.9 million or $13.47 per boe of production, representing 28 percent of revenue. Royalties on a per boe basis were comparable to December 2005, but have increased on a percentage of revenue basis due to the decreasing gas prices and the crown reference price lagging one month behind. For the remainder of 2006 Open Range anticipates a royalty rate of approximately 22 to 25 percent, as wells at Ansell/Sundance qualify for a deep well royalty holiday and the Corporation begins receiving gas cost allowance credits.
Operating Costs
Operating costs in Q1 were $0.4 million or $6.04 per boe of production. These costs, which include transportation and third party processing costs, combined with royalty expense, resulted in operating income of $1.9 million. Operating costs on a unit-of-production basis have decreased from $10.14 per boe incurred in December 2005 due to the Corporation streamlining its operations and increasing its average production, most of which came from its lower-cost Ansell/Sundance property. Open Range anticipates higher operating costs in Q2 due to scheduled plant turnarounds at Big Bend and Ansell/Sundance.
Other Cash Items
General and administrative (G&A) costs in Q1 totalled $0.6 million after recoveries and capitalization of $0.5 million. On a unit-of-production basis, net G&A costs were $9.31 per boe, due to high initial G&A costs on start-up and the Corporation having a full complement of management and staff in place since formation, to explore the full potential of its Deep Basin asset base. Salaries and office rent comprised approximately 62 percent of the gross G&A costs.
Recoveries and capitalization equated to 44 percent of total G&A costs due to Open Range being in a high-growth phase with a substantial proportion of costs being directly attributable to exploration activity. Open Range expects its overall G&A costs to remain relatively flat over the short-term and to decrease on a per boe basis as production increases.
During Q1 $18,688 or $0.29 per boe of interest income was earned on available cash balances through short-term interest-bearing instruments. As the Corporation grows and continues its exploration activity management anticipates incurring some debt. However, management intends to carefully manage debt levels, which is expected to translate to relatively low interest expense.
Stock-based compensation in Q1 totalled $0.2 million, or $2.82 per boe of production. Open Range expects stock-based compensation to remain relatively flat for the balance of 2006 as the Corporation is already "staffed-up" in anticipation of future growth.
Funds from Operations
Operations in Q1 generated funds from operations of $1.3 million, or $0.10 per basic and diluted share. Funds from operations for the period from November 30, 2005 to December 31, 2005 were $0.6 million or $0.06 per basic and diluted share. On an equalized basis funds flow is down from 2005 due to the softening natural gas prices, but is partially offset by the increase in average production.
Depletion, Depreciation and Accretion
Open Range's depletion, depreciation and accretion in Q1 totalled $1.6 million or $24.43 per boe of production, an increase from $0.4 million or $22.17 per boe for 2005. The increase in the rate is due to the cost of the initial leasehold improvements done in the first quarter increasing the depreciation expense. The Corporation anticipates this rate to decrease to approximately $20-$23 per boe for the balance of the year as reserve additions from the drilling program are realized and average production increases.
Net Income
The future tax reduction amounted to $0.1 million in Q1, leaving Open Range with a loss of $0.4 million. The net loss was due primarily to decreased natural gas prices and start-up G&A costs.
Capital Expenditures
Open Range's capital program in Q1 totalled $14.0 million. The capital spending occurred almost entirely at the Ansell/Sundance property, funding the drilling and completion of two wells, initiating drilling of a third well, installation and start-up of a compression facility and equipping and tie-in of three new wells. Open Range also participated in non-operated activities with the drilling and completion of a well at its Pembina property and the spudding of a drilling location at its Ferrier property. The Corporation spent a large portion of the Q1 capital budget acquiring lands and initiating a 3D seismic program to improve its strategic position in its core Ansell/Sundance area.
Open Range's capital spending for the balance of 2006 has been budgeted at approximately $16 million, weighted toward drilling. This will bring combined capital expenditures to approximately $30 million by the end of the year.
Liquidity
Open Range had a working capital deficiency as at March 31, 2006 of $1.1 million, which will be funded through a combination of funds from operations, existing cash of $1.0 million and available debt, of which none was drawn at the end of the quarter. Open Range currently has a $10 million extendable revolving-credit facility and a $2.4 million acquisition/development facility with a Canadian chartered bank. Open Range uses bank lines to facilitate short-term liquidity management and has raised equity to reduce debt leverage and increase the Corporation flexibility.
Share Capital
As at May 9, 2006 there were 13,410,941 common shares and 1,099,000 stock options outstanding.
Subsequent to the end of the quarter, the Corporation announced that it had entered into an agreement to issue 1,000,000 flow-through common shares at a price of $5.70 per share for total gross proceeds of $5.7 million and net proceeds of approximately $5.3 million.
Subsequent to March 31, 2006 Douglas N. Penner, Vice-President of Finance and Chief Financial Officer, resigned from the Corporation for personal reasons. Open Range repurchased and subsequently cancelled Mr. Penner's 151,000 escrowed initial private placement shares at their original price of $3.10 per share for a total cost of $468,100. In addition Mr. Penner's 75,000 options have been cancelled.
Other Items
Other than the natural gas hedging transaction, subsequent to the end of the quarter there has been no change to commitments, off-balance-sheet transactions, related-party transactions, or changes in policies or critical estimates from those outlined in the 2005 MD&A.
Outlook
Open Range is amassing extensive undeveloped lands, key infrastructure, a growing seismic database and an inventory of exploration and development drilling locations in its focused Deep Basin properties. Combined, these attributes should enable the Corporation to direct its resources towards drilling and completing these locations. With only 13.4 million shares issued and outstanding, Open Range is positioned for significant per share growth in reserves, production, and funds flow.
Management's Report to Shareholders
The management of Open Range Energy Corp. is responsible for the integrity of the information contained in this quarterly report and for the consistency between the MD&A and the financial statements. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgements and have been properly reflected. The financial statements have been prepared using policies and procedures established by management and reflect fairly Open Range's financial position, results of operations and funds flow. Management has established and maintains a system of internal controls designed to ensure that financial information is reliable and accurate and to provide assurance that assets are safeguarded from loss or unauthorized use.
The Board of Directors and the Audit Committee have reviewed and approved the financial statements and the MD&A.
This Management's Discussion and Analysis is for the three-month period ended March 31, 2006 and is dated May 9, 2006.
Financial Statements of
OPEN RANGE ENERGY CORP.
March 31, 2006
OPEN RANGE ENERGY CORP.
Notes to Financial Statements
For the three months ended March 31, 2006
(Unaudited)
The interim financial statements of Open Range Energy Corp. ("Open Range" or the "Corporation") have been prepared by management in accordance with Canadian generally accepted accounting principles. The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the period ended December 31, 2005. The following disclosure is incremental to the disclosure included with the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto in the Corporation's annual report for the year ended December 31, 2005. As the Corporation commenced operations on November 30, 2005 there are no comparable figures for the three months ended March 31, 2006.
The Corporation capitalized for the three month period ended March 31, 2006 $403,920 of overhead-related costs to petroleum and natural gas properties.
Costs associated with unproven properties excluded from costs subject to depletion for the period ended March 31, 2006 totaled $8,906,000. Future development costs of proven reserves of $933,750 have been included in the depletion calculation.
2. Bank debt:
The Corporation has a $10,000,000 extendible revolving credit facility and a $2,400,000 non-revolving acquisition/development demand facility. These facilities are with a Canadian chartered bank and bear interest at bank prime rates plus one-eighth of a percent. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $25,000,000 and a general security agreement. A re-determination of the borrowing base will occur on or before August 31, 2006. As at March 31, 2006, no amounts had been drawn against the facility.
3. Asset retirement obligations:
The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $5,400,000, which will be incurred between 2006 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted risk free rate of eight percent was used to calculate the fair value of the asset retirement obligations.
(c) Stock-based compensation:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the period ended March 31, 2006: zero dividend yield; expected volatility of 40 percent; risk-free rate of 3.81 percent; and expected life of 5 years. The weighted average fair value of stock options granted during the three month period ended March 31, 2006 was $1.94 per option.
(e) Per share amounts:
Per share amounts have been calculated using the weighted average number of shares outstanding. The weighted average shares outstanding for the three month period ended March 31, 2006 were 13,378,719.
In computing diluted per share amounts, no shares were added to the weighted average number of shares outstanding during the period ended March 31, 2006 for the dilutive effect of employee stock options due to the options being anti-dilutive. Options to purchase 1,174,000 common shares were not included in the computation because they were anti-dilutive.
6. Subsequent events:
(a) Private placement:
Subsequent to March 31, 2006, the Corporation announced that it had entered into an agreement to issue 1,000,000 flow-through common shares at a price of $5.70 per share for total gross proceeds of $5,700,000.
(b) Commodity price risk management:
During April 2006, the Corporation entered into a natural gas hedging transaction for 2,500 GJ's per day for the period May 1, 2006 to December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put option and the sale of a $10.50 per GJ call option.
TSX VENTURE SYMBOL: ONR - | View Quote | View Chart | View Financials |
CALGARY, ALBERTA--(CCNMatthews - May 11, 2006) - OPEN RANGE ENERGY CORP. (TSX:ONR):
FIRST QUARTER REPORT
For the three months ended March 31, 2006
Corporate Highlights First quarter ended
March 31, 2006
Production
Crude oil and NGL (bbls per day) 54
Natural gas (mcf per day) 3,990
---------------------
Total (@6:1)(boe per day) 719
Realized average sales prices
Crude oil and NGL ($/bbl) 57.50
Natural gas ($/mcf) 7.93
---------------------
Combined average ($/boe) 48.31
Petroleum and natural gas sales $3,126,563
Funds from operations 1,279,970
Per basic share $0.10
Per diluted share $0.10
Net income (loss) (407,742)
Per basic share (0.03)
Per diluted share (0.03)
Debt Nil
Working capital (deficit) (1,144,049)
Capital expenditures $13,935,855
Shares outstanding
Shares 13,561,941
Options 1,174,000
Weighted shares outstanding
Shares 13,378,719
Options 1,167,778
Basic and diluted shares (weighted) 13,378,719
LETTER TO SHAREHOLDERS
In its first full quarter of operations Open Range Energy Corp. achieved its objective of substantial land capture. The Company nearly tripled gross acreage at its growing Ansell/Sundance Deep Basin exploration and development play. In addition Open Range's Q1 operations were executed with success on all levels, including drilling and casing of three gross wells, timely tie-ins of recently drilled wells, addition of infrastructure and production growth to an average of more than 700 boe per day.
Highlights of Open Range's first full quarter of operations:
- Increased land position at Ansell/Sundance from 11 gross to 30 gross sections of land with average working interest increasing to approximately 40 percent;
- Initiated 50 percent-owned 3D seismic program at Ansell/Sundance;
- Increased average production by 40 percent to 719 boe per day;
- Drilled three wells (1.24 net), two of which were at Ansell/Sundance and continued the 100 percent drilling success rate at the property;
- Contracted a drilling rig with a rated depth of 3,600 metres for a one-year term commencing June 2006;
- Identified five untested Cretaceous natural gas pay zones in producing wells at Ansell/Sundance for completion and commingling in Q2 and Q3;
- Tied-in three new wells and commissioned a Company-operated compression facility at Ansell/Sundance;
- Secured a $10 million bank line and had zero debt exiting Q1;
- Achieved relatively low operating costs (including transportation) of $6.04 per boe; and
- Evaluated several acquisition opportunities.
Land and Seismic
The Company's critical objective for the quarter was setting up exploration and development activity for the next two to three years at Ansell/Sundance. During Q1 Open Range participated in three Crown sales of parcels around Ansell/Sundance, acquiring the substantial majority of acreage on which it bid and adding 10 gross sections at 50 percent working interest. Late in Q1 the Company purchased two gross (1.4 net) sections at Crown sales in other areas. Land expenditures totalled $5.3 million, a substantial proportion of Q1 capital expenditures.
In addition to these Crown sale purchases, as previously disclosed on March 20, 2006, Open Range entered into a farm-in agreement that provides access to nine sections of land at Ansell/Sundance on a drill-to-earn basis. In total, the Company's land position in the area increased from 11 gross sections at year-end 2005 to 30 gross sections (at 40 percent average working interest) at the end of Q1 2006.
Building on the land acquisitions is a new 3-D seismic survey covering approximately two townships, which Open Range is conducting in partnership at a net cost of approximately $3.2 million. Initiation of the program occurred in Q1 and will be completed before the end of the second quarter. The survey's primary purpose is to support the Company's 2007 drilling program, which is expected to include a substantial infill drilling program on spacing of up to four wells per section.
The Company continued to evaluate opportunities on option lands provided through the November 2005 Plan of Arrangement with Daylight Energy Trust. Due to the successful results to date of internally generated prospects, as well as the high quality and extent of our core area opportunities, the initial three month option was allowed to expire. As well the Company does not anticipate executing on the remaining Daylight option lands.
Multi-zone natural gas success in Deep Basin drilling
At Ansell/Sundance Open Range drilled two successful natural gas wells in the first quarter and spudded a third well. To the end of Q1 the drilling success at this property has been 100 percent with a total of five gas wells drilled since inception. Continuing on this success, plans are well underway to drill up to seven additional wells this year with drilling operations expected to recommence in June. The Company is well positioned to control the timing and costs of its go-forward drilling strategy with the recent signing of a one-year drilling contract for Nabors Canada Rig 64.
The multi-zone natural gas potential in the Ansell/Sundance area continues to be significant with a total of five wells and seven pay zones on production at the end of the first quarter. The Cadomin anchor target is productive from all five wells. In addition to existing producing zones, the five producing wells contain a total of five untested Cretaceous gas pay zones. Open Range plans to complete these five additional pay zones in Q2 and Q3 and commingle production in the well bores. Low-cost reserve additions are expected from these operations.
Operations
Open Range achieved timely and effective execution of its Q1 operating tasks, resulting in strong growth of average daily production. Production during Q1 averaged 719 boe per day of which 4.0 mmcf was natural gas. This represents an increase of 40 percent from the Company's initial month of production in December 2005. The Ansell/Sundance property contributed 322 boe per day to the Q1 average volume. The Company's production was 93 percent natural gas. All of the production growth is attributable to successful drilling.
During the quarter the Company drilled and cased three gross (1.24 net) wells, of which two were at Ansell/Sundance. In addition, three gross wells were brought on-stream at Ansell/Sundance (including one of the newly drilled Q1 wells) and a natural gas compressor was commissioned on February 1, 2006. To date, Open Range has averaged 45 days from rig-release to initial production, enhancing funds flow and economics. The Company continues to work successfully with two large area operators to process its production on a third-party basis.
At Ansell/Sundance initial well production rates have ranged from 0.6 to 3.0 mmcf per day of natural gas plus 10-15 bbls per mmcf of natural gas liquids. Open Range has experienced very good results from its innovative well-fracturing techniques, which continue to evolve.
Financial
Since December 2005 Open Range has experienced month-by-month production growth from the ongoing tie-in of new wells at Ansell/Sundance, enhancing revenues and funds flow for the quarter. Revenue and funds flow for the quarter were $3.1 million and $1.3 million ($0.10 per basic share), respectively. Revenues and funds flow have been impacted by the recent softness in natural gas prices.
The Company recorded a net loss for the quarter, largely attributable to decreased natural gas prices and high start-up general and administrative (G&A) costs. The Company anticipates profitability improving into the second half of 2006 as drilling and associated reserve additions work toward normalizing depletion, depreciation and amortization (DD&A) rates.
First quarter operating costs of $6.04 per boe (including transportation) provided an offset to the high initial G&A costs of $9.31 per boe. Lower operating costs are a result of the Company's heavy weighting to natural gas, increased production in the first quarter, streamlining of field operations, and low maintenance costs associated with new infrastructure at Ansell/Sundance. Open Range anticipates higher operating costs in Q2 due to planned turnaround activities at Big Bend and Ansell/Sundance.
Although production price hedging is currently not an integral component of our business plan, there are times when prudence dictates protecting funds flow and capital expenditure plans. The abrupt softening of natural gas prices in Q1 led the Company to enter into a price collar on approximately 2,500 GJ per day of its natural gas production. The collar establishes a floor price of $5.00 per GJ and ceiling price of $10.50 per GJ, and extends from May 1 to December 31, 2006 providing a measure of downside funds flow protection amid softer prices arising from relatively high volume of North American natural gas storage.
Corporate Developments
The Board of Directors is pleased to announce that Mr. John Mueller, P.Eng. has been promoted to the position of Chief Operating Officer and Vice-President Engineering. Mr. Mueller brings significant operating experience to his new responsibilities. Mr. Mueller's previous title was Vice-President of Engineering and Operations.
Open Range is also pleased to announce the promotion of Mr. Dan Boyko to the position of Vice-President of Business Development and Exploitation. Mr. Boyko's previous title was Manager of Business Development. Mr. Boyko's has over 20 years of diverse reservoir and acquisition experience.
The company is currently in the process of recruiting an appropriate candidate to fill the vacant Chief Financial Officer and Vice-President Finance position.
Outlook
At Ansell/Sundance two wells drilled and rig-released in late Q1 and early Q2 contain three behind-pipe pay zones to be completed and tested in June. Five additional uphole zones in existing producing wells are planned for completion and commingling in the second and third quarters. Drilling with Open Range's newly contracted rig is to commence in June, as is interpretation of the two-township 3-D program.
Thus far in Q2 Open Range has also experienced success at its non-operated Ferrier property with the drilling of two gross (0.6 net) successful Ellerslie infill wells. Both wells encountered significant natural gas pay and are planned for completion in June. The infill wells are expected to result in significant net reserve additions as well as accelerated drainage of the tight natural gas reservoir.
Open Range's planned 2006 capital expenditures have been increased to $30 million, as disclosed in the press release of April 27, 2006, due mainly to drilling success which encouraged expansion to our land capture and 3D seismic programs. The Q2 drilling program is currently planned at five gross (2.0 net) wells, of which three have been drilled and cased to date, with a planned 2006 total of 16 gross (6.35 net) wells, one more than initially planned.
We continue to be confident in our 2006 forecasts for average production of 900 boe per day and an exit rate of 1,200 boe per day. First quarter drilling and production results are affirming the potential of future prospects to deliver per share growth in reserves, production and funds flow.
On behalf of the Board of Directors,
"SIGNED"
A. Scott Dawson
President, Chief Executive Officer and Director
Management's Discussion and Analysis
Open Range Energy Corp. ("Open Range" or the "Corporation") was formed on November 30, 2005 pursuant to a Plan of Arrangement including Daylight Energy Trust and Tempest Energy Corp. Open Range was formed through the amalgamation of 1198311 Alberta Ltd. (Daylight's exploreco), 1198249 Alberta Ltd. (Tempest's exploreco), and Open Range Finance Corp., all of which were incorporated on October 13, 2005.
The following discussion and analysis is a review of operations, current financial position and outlook for the Corporation for the period from January 1, 2006 to March 31, 2006. As the Corporation commenced operations on November 30, 2005, there are no prior year comparative figures for the three months ended March 31, 2006. This information should be read in conjunction with the audited financial statements and related notes for the period from November 30, 2005 to December 31, 2005 and the unaudited financial statements for the three months ended March 31, 2006. Additional information relating to Open Range is available at www.sedar.com or on the Corporation's website at www.openrangeenergy.com.
The terms "funds from operations", "funds from operations per share" and "debt-to-cash-flow ratio" in this discussion are not recognized measures under Canadian generally accepted accounting principles (GAAP). Open Range management believes that in addition to net earnings, funds from operations is a useful supplemental measure as it provides an indication of the results generated by the Corporation's principal business activities before the consideration of how those activities are financed or how the results are taxed. Users are cautioned, however, that this measure should not be construed as an alternative to net earnings determined in accordance with GAAP as an indication of Open Range's performance.
Open Range's method of calculating funds from operations may differ from that of other corporations, and accordingly it may not be comparable to measures used by those corporations. Open Range calculates funds from operations by taking cash flow from operating activities as determined under GAAP before the change in non-cash working capital related to operating activities. The following is reconciliation between cash flow from operating activities and funds from operations.
Reconciliation of "Funds from Operations" to Cash Flow per GAAP
Three months ended March 31, 2006
Funds from operations $1,279,970
Change in non-cash working capital 373,084
Cash flow from operating activities (per GAAP) $1,653,054
All barrel of oil equivalent (boe) numbers are calculated by converting one million cubic feet (mcf) of natural gas to boe at a ratio of six mcf to one boe.
This disclosure contains certain forward-looking statements that involve substantial known and unknown risks and uncertainties, certain of which are beyond Open Range's control. These include, but are not limited to: the impact of general economic conditions in Canada and the United States, industry conditions, changes in laws and regulations (including the adoption of new environmental laws and regulations), changes in how those laws and regulations are interpreted and enforced, increased competition, the lack of availability of qualified personnel or management, fluctuations in foreign exchange or interest rates, stock market volatility and market valuations of corporations with respect to announced transactions and the final valuations thereof, and obtaining required approvals of regulatory authorities. Open Range's actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do, what benefits, including the amount of proceeds, that Open Range will derive there from.
This Management's Discussion and Analysis is dated May 9, 2006.
Production
Production in Q1 averaged 719 boe per day, of which 93 percent or 4.0 mmcf per day was natural gas. First quarter production increased by 207 boe per day or 40 percent over December 2005 primarily as a result of three new wells being tied-in and brought on production at the Ansell/Sundance property, two of which were drilled in 2005. During the quarter, compression at the Ansell/Sundance 10-11 facility was installed and commissioned, which also contributed to the production increase. The compression facility is running at about 33 percent of its 10 mmcf per day design capacity, providing significant capacity for future wells. One additional Q1 well at Ansell/Sundance will be completed and brought on production in Q2 after road bans are lifted. Open Range estimates its production to average 900 boe per day in 2006, representing a 76 percent increase over the December 2005 average rate of 512 boe per day.
Drilling Activity
Three months ended March 31, 2006
Exploration Development Total Success Rate Average W.I.
Gross Net Gross Net Gross Net
3.0 1.24 0 0 3.0 1.24 100% 41.3%
Open Range drilled three gross (1.24 net) gas wells in Q1 with 100 percent success. Two of the locations were at Ansell/Sundance and one location was at Pembina. Two further locations were spudded in Q1, one at Ansell/Sundance and one at Ferrier, but were not rig-released before the end of the quarter. Open Range plans to drill up to 11 additional drilling wells in 2006, most of which will be at Ansell/Sundance.
Petroleum and Natural Gas Revenues
Open Range's revenue for Q1 was driven by a combination of increased production offset by natural gas price declines. Revenues totalled $3.1 million for the first quarter, comprised mainly of natural gas sales totalling $2.8 million. Open Range received weighted average prices (before transportation and marketing fees) of $57.50 per barrel for its crude oil, $7.93 per mcf for natural gas, and $58.45 per barrel for its condensates.
These realized prices compare to the following Q1 average benchmarks: West Texas Intermediate (WTI) oil price of US$63.34 per barrel, Edmonton oil par price of $69.27 per barrel and Alberta natural gas spot price of $7.34 per mcf.
Financial Instruments
Open Range had no financial instruments in place during the first quarter of 2006.
During April 2006, Open Range entered into a natural gas hedging transaction for 2,500 GJ per day for the period May 1, 2006 through December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put (floor) and the sale of a $10.50 per GJ call (ceiling). Open Range's management considers hedging a valuable tool to offset the risk related to commodity price fluctuations.
Royalties
Royalty expenses for Q1 were $0.9 million or $13.47 per boe of production, representing 28 percent of revenue. Royalties on a per boe basis were comparable to December 2005, but have increased on a percentage of revenue basis due to the decreasing gas prices and the crown reference price lagging one month behind. For the remainder of 2006 Open Range anticipates a royalty rate of approximately 22 to 25 percent, as wells at Ansell/Sundance qualify for a deep well royalty holiday and the Corporation begins receiving gas cost allowance credits.
Operating Costs
Operating costs in Q1 were $0.4 million or $6.04 per boe of production. These costs, which include transportation and third party processing costs, combined with royalty expense, resulted in operating income of $1.9 million. Operating costs on a unit-of-production basis have decreased from $10.14 per boe incurred in December 2005 due to the Corporation streamlining its operations and increasing its average production, most of which came from its lower-cost Ansell/Sundance property. Open Range anticipates higher operating costs in Q2 due to scheduled plant turnarounds at Big Bend and Ansell/Sundance.
Corporate Average Netbacks
($ per boe except production figures) Q1/2006
Average production (boe per day) 719 (93% gas)
Average realized sales price $48.31
Royalty expenses 13.47
Operating costs 6.04
------------------------------------------------------------------------
Average netback from production 28.80
G&A and Interest 9.02
------------------------------------------------------------------------
Funds flow $19.78
Other Cash Items
General and administrative (G&A) costs in Q1 totalled $0.6 million after recoveries and capitalization of $0.5 million. On a unit-of-production basis, net G&A costs were $9.31 per boe, due to high initial G&A costs on start-up and the Corporation having a full complement of management and staff in place since formation, to explore the full potential of its Deep Basin asset base. Salaries and office rent comprised approximately 62 percent of the gross G&A costs.
Recoveries and capitalization equated to 44 percent of total G&A costs due to Open Range being in a high-growth phase with a substantial proportion of costs being directly attributable to exploration activity. Open Range expects its overall G&A costs to remain relatively flat over the short-term and to decrease on a per boe basis as production increases.
During Q1 $18,688 or $0.29 per boe of interest income was earned on available cash balances through short-term interest-bearing instruments. As the Corporation grows and continues its exploration activity management anticipates incurring some debt. However, management intends to carefully manage debt levels, which is expected to translate to relatively low interest expense.
Stock-based compensation in Q1 totalled $0.2 million, or $2.82 per boe of production. Open Range expects stock-based compensation to remain relatively flat for the balance of 2006 as the Corporation is already "staffed-up" in anticipation of future growth.
Funds from Operations
Operations in Q1 generated funds from operations of $1.3 million, or $0.10 per basic and diluted share. Funds from operations for the period from November 30, 2005 to December 31, 2005 were $0.6 million or $0.06 per basic and diluted share. On an equalized basis funds flow is down from 2005 due to the softening natural gas prices, but is partially offset by the increase in average production.
Depletion, Depreciation and Accretion
Open Range's depletion, depreciation and accretion in Q1 totalled $1.6 million or $24.43 per boe of production, an increase from $0.4 million or $22.17 per boe for 2005. The increase in the rate is due to the cost of the initial leasehold improvements done in the first quarter increasing the depreciation expense. The Corporation anticipates this rate to decrease to approximately $20-$23 per boe for the balance of the year as reserve additions from the drilling program are realized and average production increases.
Net Income
The future tax reduction amounted to $0.1 million in Q1, leaving Open Range with a loss of $0.4 million. The net loss was due primarily to decreased natural gas prices and start-up G&A costs.
Capital Expenditures
Open Range's capital program in Q1 totalled $14.0 million. The capital spending occurred almost entirely at the Ansell/Sundance property, funding the drilling and completion of two wells, initiating drilling of a third well, installation and start-up of a compression facility and equipping and tie-in of three new wells. Open Range also participated in non-operated activities with the drilling and completion of a well at its Pembina property and the spudding of a drilling location at its Ferrier property. The Corporation spent a large portion of the Q1 capital budget acquiring lands and initiating a 3D seismic program to improve its strategic position in its core Ansell/Sundance area.
Open Range's capital spending for the balance of 2006 has been budgeted at approximately $16 million, weighted toward drilling. This will bring combined capital expenditures to approximately $30 million by the end of the year.
Capital Expenditure Summary
(millions)
Three months ended 2006
March 31, 2006 Estimate
------------------------------------------------------------------------
Land $ 5.3 $ 5.3
Seismic 1.2 3.3
Drilling and intangibles 4.7 17.4
Facilities and equipment 0.8 2.0
Corporate assets 2.0 2.0
------------------------------------------------------------------------
Total $14.0 $30.0
------------------------------------------------------------------------
Liquidity
Open Range had a working capital deficiency as at March 31, 2006 of $1.1 million, which will be funded through a combination of funds from operations, existing cash of $1.0 million and available debt, of which none was drawn at the end of the quarter. Open Range currently has a $10 million extendable revolving-credit facility and a $2.4 million acquisition/development facility with a Canadian chartered bank. Open Range uses bank lines to facilitate short-term liquidity management and has raised equity to reduce debt leverage and increase the Corporation flexibility.
Share Capital
As at May 9, 2006 there were 13,410,941 common shares and 1,099,000 stock options outstanding.
Common Shares
------------------------------------------------------------------------
Closing December 31, 2005 11,912,941
January 10, 2006 private placement 1,649,000
Closing March 31, 2006 13,561,941
Proportion held by management and directors 20%
------------------------------------------------------------------------
Weighted Shares March 31, 2006 December 31, 2005
------------------------------------------------------------------------
Weighted Common Shares 13,378,719 10,467,302
Stock option dilution (treasury method) Nil Nil
Weighted diluted shares outstanding 13,378,719 10,467,302
------------------------------------------------------------------------
Q1 2006 Stock Option Activity
Opening Issued Exercised Cancelled Closing
------------------------------------------------------------------------
1,034,000 140,000 Nil Nil 1,174,000
Average price Average price Average price
of $4.61 of $4.75 of $4.63
------------------------------------------------------------------------
Subsequent to the end of the quarter, the Corporation announced that it had entered into an agreement to issue 1,000,000 flow-through common shares at a price of $5.70 per share for total gross proceeds of $5.7 million and net proceeds of approximately $5.3 million.
Subsequent to March 31, 2006 Douglas N. Penner, Vice-President of Finance and Chief Financial Officer, resigned from the Corporation for personal reasons. Open Range repurchased and subsequently cancelled Mr. Penner's 151,000 escrowed initial private placement shares at their original price of $3.10 per share for a total cost of $468,100. In addition Mr. Penner's 75,000 options have been cancelled.
Other Items
Other than the natural gas hedging transaction, subsequent to the end of the quarter there has been no change to commitments, off-balance-sheet transactions, related-party transactions, or changes in policies or critical estimates from those outlined in the 2005 MD&A.
Common Share Trading information
------------------------------------------------------------------------
High Low Close Avg. Price Average Daily Volume
------------------------------------------------------------------------
January 5.01 4.25 4.81 4.59 121,733
February 5.00 3.61 3.91 4.39 65,325
March 4.80 3.65 4.55 4.19 57,530
Q1, 2006 5.01 3.61 4.55 4.44 81,033
------------------------------------------------------------------------
Summary Quarterly Information
Revenue Net Income Basic and Diluted
($ millions) ($ millions) Earnings per share ($)
Period ended December
31, 2005 1.2 0.1 0.01
Three months ended
March 31, 2006 3.1 (0.4) (0.03)
Outlook
Open Range is amassing extensive undeveloped lands, key infrastructure, a growing seismic database and an inventory of exploration and development drilling locations in its focused Deep Basin properties. Combined, these attributes should enable the Corporation to direct its resources towards drilling and completing these locations. With only 13.4 million shares issued and outstanding, Open Range is positioned for significant per share growth in reserves, production, and funds flow.
Management's Report to Shareholders
The management of Open Range Energy Corp. is responsible for the integrity of the information contained in this quarterly report and for the consistency between the MD&A and the financial statements. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates have been based on careful judgements and have been properly reflected. The financial statements have been prepared using policies and procedures established by management and reflect fairly Open Range's financial position, results of operations and funds flow. Management has established and maintains a system of internal controls designed to ensure that financial information is reliable and accurate and to provide assurance that assets are safeguarded from loss or unauthorized use.
The Board of Directors and the Audit Committee have reviewed and approved the financial statements and the MD&A.
This Management's Discussion and Analysis is for the three-month period ended March 31, 2006 and is dated May 9, 2006.
Financial Statements of
OPEN RANGE ENERGY CORP.
March 31, 2006
OPEN RANGE ENERGY CORP.
Balance Sheets
(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,002,996 $ 7,028,049
Accounts receivable 6,328,915 8,665,108
Prepaid expenses and deposits 796,481 613,783
------------------------------------------------------------------------
8,128,392 16,306,940
Future income taxes 1,266,401 1,022,539
Petroleum and natural gas properties(note 1) 43,426,546 30,989,097
------------------------------------------------------------------------
$ 52,821,339 $ 48,318,576
------------------------------------------------------------------------
------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 9,272,441 $ 11,309,933
Asset retirement obligations (note 3) 1,978,710 1,896,045
Shareholders' equity:
Share capital (note 4) 41,608,405 34,925,714
Contributed surplus (note 4) 241,367 58,726
Retained earnings (deficit) (279,584) 128,158
------------------------------------------------------------------------
41,570,188 35,112,598
Commitments (note 5)
Subsequent events (note 6)
------------------------------------------------------------------------
$ 52,821,339 $ 48,318,576
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to financial statements.
Approved on behalf of the Board:
(Signed) Dean R. Jensen Director
(Signed) Kenneth S. Woolner Director
OPEN RANGE ENERGY CORP.
Statements of Operations and Retained Earnings (Deficit)
For the three months ended March 31, 2006
(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Revenues:
Petroleum and natural gas $ 3,126,563
Royalties (net of Alberta Royalty Tax Credit) (871,800)
Interest 18,688
------------------------------------------------------------------------
2,273,451
Expenses:
Operating 390,734
General and administrative 602,747
Stock-based compensation 182,641
Depletion, depreciation and accretion 1,581,071
------------------------------------------------------------------------
2,757,193
------------------------------------------------------------------------
Loss before income taxes (483,742)
Future income tax reduction 76,000
------------------------------------------------------------------------
Net loss (407,742)
Retained earnings, beginning of period 128,158
------------------------------------------------------------------------
Deficit, end of period $ (279,584)
------------------------------------------------------------------------
------------------------------------------------------------------------
Loss per share (note 4):
Basic $ (0.03)
Diluted $ (0.03)
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes to financial statements.
OPEN RANGE ENERGY CORP.
Statement of Cash Flows
For the three months ended March 31, 2006
(Unaudited)
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash provided by (used in):
Operating:
Net loss $ (407,742)
Items not involving cash:
Depletion, depreciation and accretion 1,581,071
Future income tax reduction (76,000)
Stock-based compensation 182,641
------------------------------------------------------------------------
1,279,970
Change in non-cash working capital 373,084
------------------------------------------------------------------------
1,653,054
Financing:
Issue of common shares, net of issue costs 6,514,829
Investing:
Petroleum and natural gas properties (13,935,855)
Change in non-cash working capital (257,081)
------------------------------------------------------------------------
(14,192,936)
------------------------------------------------------------------------
Decrease in cash (6,025,053)
Cash, beginning of period 7,028,049
------------------------------------------------------------------------
Cash, end of period $ 1,002,996
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Interest received $ 18,688
------------------------------------------------------------------------
------------------------------------------------------------------------
Cash is defined as cash and cash equivalents.
See accompanying notes to financial statements.
OPEN RANGE ENERGY CORP.
Notes to Financial Statements
For the three months ended March 31, 2006
(Unaudited)
The interim financial statements of Open Range Energy Corp. ("Open Range" or the "Corporation") have been prepared by management in accordance with Canadian generally accepted accounting principles. The interim financial statements have been prepared following the same accounting policies and methods of computation as the financial statements for the period ended December 31, 2005. The following disclosure is incremental to the disclosure included with the annual financial statements. These interim financial statements should be read in conjunction with the financial statements and notes thereto in the Corporation's annual report for the year ended December 31, 2005. As the Corporation commenced operations on November 30, 2005 there are no comparable figures for the three months ended March 31, 2006.
1. Petroleum and natural gas properties:
------------------------------------------------------------------------
------------------------------------------------------------------------
Accumulated Net Book
March 31, 2006 Cost Depletion Value
------------------------------------------------------------------------
Petroleum and natural gas
properties $ 45,310,112 $ 1,883,566 $ 43,426,546
------------------------------------------------------------------------
------------------------------------------------------------------------
December 31, 2005
------------------------------------------------------------------------
Petroleum and natural gas
properties $ 31,329,513 $ 340,416 $ 30,989,097
------------------------------------------------------------------------
------------------------------------------------------------------------
The Corporation capitalized for the three month period ended March 31, 2006 $403,920 of overhead-related costs to petroleum and natural gas properties.
Costs associated with unproven properties excluded from costs subject to depletion for the period ended March 31, 2006 totaled $8,906,000. Future development costs of proven reserves of $933,750 have been included in the depletion calculation.
2. Bank debt:
The Corporation has a $10,000,000 extendible revolving credit facility and a $2,400,000 non-revolving acquisition/development demand facility. These facilities are with a Canadian chartered bank and bear interest at bank prime rates plus one-eighth of a percent. The credit facilities are secured by a first fixed and floating charge debenture in the minimum face amount of $25,000,000 and a general security agreement. A re-determination of the borrowing base will occur on or before August 31, 2006. As at March 31, 2006, no amounts had been drawn against the facility.
3. Asset retirement obligations:
The Corporation's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites, gathering systems and processing facilities. The Corporation estimates the total undiscounted amount of cash flows required to settle its asset retirement obligations is approximately $5,400,000, which will be incurred between 2006 and 2040. The majority of the costs will be incurred between 2020 and 2040. A credit-adjusted risk free rate of eight percent was used to calculate the fair value of the asset retirement obligations.
A reconciliation of the asset retirement obligations is provided below:
------------------------------------------------------------------------
------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------------------------------------------------------------------
Balance, beginning of period $ 1,896,045 $ -
Transfer through Plan of Arrangement - 1,199,710
Accretion expense 37,921 13,000
Liabilities incurred 44,744 48,490
Revisions to estimates - 634,845
------------------------------------------------------------------------
Balance, end of period $ 1,978,710 $ 1,896,045
------------------------------------------------------------------------
------------------------------------------------------------------------
4. Share capital:
(a) Issued and outstanding:
------------------------------------------------------------------------
------------------------------------------------------------------------
Number of
Shares Amount
------------------------------------------------------------------------
Common shares:
Issued on incorporation 1 $ 1
Issued pursuant to private placement 2,000,000 6,200,000
Issued pursuant to Plan of Arrangement 8,407,108 23,889,068
Share issue costs (net of tax of $24,605) - (47,571)
Share repurchase (3,300) (10,230)
For cash on exercise of warrants 1,509,132 4,678,309
Stock-based compensation on exercise of
warrants - 216,137
------------------------------------------------------------------------
Balance, December 31, 2005 11,912,941 $ 34,925,714
Issued pursuant to private placement 1,649,000 7,008,250
Share issue costs (net of tax of $167,862) - (325,559)
------------------------------------------------------------------------
Balance, March 31, 2006 13,561,941 $ 41,608,405
------------------------------------------------------------------------
------------------------------------------------------------------------
(b) Share option plan:
------------------------------------------------------------------------
------------------------------------------------------------------------
Period ended Period ended
March 31, 2006 December 31, 2005
-------------------- --------------------
Weighted Weighted
Number average Number average
of exercise of exercise
options price options price
------------------------------------------------------------------------
Stock options outstanding,
beginning of period 1,034,000 $ 4.61 - $ -
Granted 140,000 4.75 1,034,000 4.61
------------------------------------------------------------------------
Stock options outstanding,
end of period 1,174,000 $ 4.63 1,034,000 $ 4.61
------------------------------------------------------------------------
------------------------------------------------------------------------
Exercisable at period-end - $ - - $ -
------------------------------------------------------------------------
------------------------------------------------------------------------
(c) Stock-based compensation:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during the period ended March 31, 2006: zero dividend yield; expected volatility of 40 percent; risk-free rate of 3.81 percent; and expected life of 5 years. The weighted average fair value of stock options granted during the three month period ended March 31, 2006 was $1.94 per option.
(d) Contributed surplus:
------------------------------------------------------------------------
------------------------------------------------------------------------
Compensation expense $ 34,050
Expired warrants 24,676
------------------------------------------------------------------------
Balance, December 31, 2005 58,726
Compensation expense 182,641
------------------------------------------------------------------------
Balance, March 31, 2006 $ 241,367
------------------------------------------------------------------------
(e) Per share amounts:
Per share amounts have been calculated using the weighted average number of shares outstanding. The weighted average shares outstanding for the three month period ended March 31, 2006 were 13,378,719.
In computing diluted per share amounts, no shares were added to the weighted average number of shares outstanding during the period ended March 31, 2006 for the dilutive effect of employee stock options due to the options being anti-dilutive. Options to purchase 1,174,000 common shares were not included in the computation because they were anti-dilutive.
5. Commitments:
Future minimum lease payments relating to operating lease commitments
are:
------------------------------------------------------------------------
------------------------------------------------------------------------
2006 $ 618,426
2007 824,568
2008 824,568
2009 824,568
2010 824,568
------------------------------------------------------------------------
$ 3,916,698
------------------------------------------------------------------------
------------------------------------------------------------------------
6. Subsequent events:
(a) Private placement:
Subsequent to March 31, 2006, the Corporation announced that it had entered into an agreement to issue 1,000,000 flow-through common shares at a price of $5.70 per share for total gross proceeds of $5,700,000.
(b) Commodity price risk management:
During April 2006, the Corporation entered into a natural gas hedging transaction for 2,500 GJ's per day for the period May 1, 2006 to December 31, 2006. This transaction consisted of the purchase of a $5.00 per GJ put option and the sale of a $10.50 per GJ call option.
Open Range Energy Corp.
A. Scott Dawson, P.Eng.
President and Chief Executive Officer
(403) 205-3704
Website: www.openrangeenergy.com
