SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a - 16 OR 15d - 16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of May 2005
Assure Energy, Inc.
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(Registrant's name)
521 3rd Avenue, S.W., Suite 800
Calgary, Alberta T2P 3T3
Canada
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(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40F
Form 20-F|X| Form 40-F|_|
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes|_| No|X|
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b):
TABLE OF CONTENTS
1. Consolidated Financial Statements of Registrant for Years Ended
December 31, 2004 and 2003 as filed on SEDAR on May 4, 2005;
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Year Ended December 31, 2004 as filed on SEDAR on May 4,
2005;
3. Press Release Dated May 4, 2005 Announcing Filing of Audited Financial
Statements, Statement of Reserves Data and Other Oil & Gas Information as Filed
on SEDAR on May 4, 2005;
4. Statement of Reserves Data and Other Oil & Gas Information as Filed on
SEDAR on May 4, 2005;
5. Report of Registrant's Management and Directors on Reserves Data and
Other Information as Filed on SEDAR on May 4, 2005;
6. Report on Reserves Data by Independent Qualified Reserves Evaluator or
Auditor as Filed on SEDAR on May 4, 2005;
7. Certification of Annual Filings During Transaction Period by
Registrant's President and Chief Financial Officer as Filed on SEDAR on May 4,
2005.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 5, 2005 ASSURE ENERGY, INC.
By: /s/ Harvey Lalach
-----------------------
Name: Harvey Lalach
Title: President
ITEM 1
ASSURE ENERGY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2004 and 2003
(Expressed in Canadian Dollars)
--------------------------------------------------------------------------------
Auditors' Report
--------------------------------------------------------------------------------
To the Shareholders of Assure Energy, Inc.
We have audited the consolidated balance sheets of Assure Energy, Inc. as at
December 31, 2004 and 2003 and the consolidated statements of operations and
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2004 and 2003
and the results of its operations and its cash flows for the years then ended,
in accordance with Canadian generally accepted accounting principles.
As described in Note 21 of the accompanying financial statements, our auditors'
report and management's financial statements dated March 2, 2005 have been
withdrawn and revised.
Chartered Accountants
Calgary, Alberta
April 27, 2005
2
p
Assure Energy, Inc.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
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2004 2003
--------------------------------------------------------------------------------------------------------
ASSETS Note 3(b)
Current Assets
Cash $ 112,660 $ 4,628,405
Receivables 3,224,863 3,302,813
Deposits and prepaid expenses 481,542 551,296
--------------------------------------------------------------------------------------------------------
3,819,065 8,482,514
Deposits (note 5) 53,200 159,581
Investment (note 6) 927,626 899,601
Property and equipment (note 7) 34,282,243 25,551,279
--------------------------------------------------------------------------------------------------------
Total Assets $ 39,082,134 $ 35,092,975
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Payables and accrued liabilities $ 8,269,333 $ 5,801,845
Debenture payable (note 8) -- 1,250,000
Bank loan (note 9) 6,150,000 7,800,000
Due to shareholders (note 11) 2,520,372 --
Interest payable (note 10) 11,245 --
Current portion of long term debt (note 10) 978,896 830,105
--------------------------------------------------------------------------------------------------------
17,929,846 15,681,950
Long term debt (note 10) 3,131,412 4,370,595
Asset retirement obligation (note 4) 1,279,702 1,088,682
Future income taxes (note 13) 2,220,885 2,716,255
Minority interest in consolidated subsidiary -- 3,285,564
--------------------------------------------------------------------------------------------------------
24,561,845 27,143,046
--------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common shares (note 12 b) 25,256,913 15,597,103
Preferred shares (note 12 c) 3,489,521 3,489,521
Warrants (note 12 e) 2,070,001 1,976,913
Contributed surplus (note 12 b) 995,950 288,623
Currency exchange adjustment (Note 3(b)) 319,960 319,960
Deficit (17,612,056) (13,722,191)
--------------------------------------------------------------------------------------------------------
14,520,289 7,949,929
--------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 39,082,134 $ 35,092,975
========================================================================================================
Commitments and contingencies and Subsequent Events (Notes 15 and 17) The
accompanying notes are an integral part of these consolidated financial
statements.
On behalf of the Board:
Signed "Harvey Lalach" Director
----------------------
Harvey Lalach
Signed "Colin McNeil" Director
----------------------
Colin McNeil
3
Assure Energy, Inc.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian Dollars)
-------------------------------------------------------------------------------
Year ended Year ended
December 31, December 31,
2004 2003
-------------------------------------------------------------------------------
Note 3(b)
REVENUE
Petroleum and natural gas sales $ 15,976,765 $ 8,334,380
Less: royalties, net of tax credits 3,413,404 1,400,856
-------------------------------------------------------------------------------
Net petroleum and natural gas revenue 12,563,361 6,933,524
Equity income 28,025 68,531
Interest and other income (loss) (656) --
-------------------------------------------------------------------------------
12,590,730 7,002,055
-------------------------------------------------------------------------------
EXPENSES
Asset retirement obligation - accretion 78,507 (21,185)
Depletion and depreciation 6,609,732 13,308,053
Foreign exchange loss (gain) (112,242) 133,547
General and administrative 4,933,565 2,491,110
Interest 865,545 856,347
Production and operating costs 5,694,504 3,035,185
-------------------------------------------------------------------------------
18,069,611 19,803,057
-------------------------------------------------------------------------------
Loss before income taxes (5,478,881) (12,801,002)
-------------------------------------------------------------------------------
Income tax expense (recovery) - current (note 13) 38,223 (279,041)
Income tax expense - future (note 13) (1,476,501) (90,524)
-------------------------------------------------------------------------------
Total income tax expense (1,438,278) (369,565)
-------------------------------------------------------------------------------
Net loss after taxes (4,040,603) (12,431,437)
Minority interest in consolidated subsidiary 728,222 21,451
Loss on dilution (350,401) --
-------------------------------------------------------------------------------
Net loss for the year (3,662,782) (12,409,986)
Deficit, beginning of year (13,722,191) (1,164,727)
Dividends (227,083) (147,478)
-------------------------------------------------------------------------------
Deficit, end of year $(17,612,056) $(13,722,191)
===============================================================================
Earnings per share - Basic $ (0.18) $ (0.77)
Weighted average common shares outstanding
- Basic 20,489,457 16,210,220
(Diluted earnings per share have not been presented as such would be
antidilutive)
The accompanying notes are an integral part of these consolidated financial
statements
4
Assure Energy, Inc.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
--------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------------------------------------------------------------------------------------------------------------
Note 3(b)
OPERATING ACTIVITIES
Net loss for the year $ (3,662,782) $(12,409,986)
Add (deduct) items not affecting cash:
Depreciation and depletion 6,609,732 13,308,053
Asset retirement obligation - accretion 78,507 (21,185)
Minority interest (728,222) (21,451)
Future income taxes (1,476,501) (90,524)
Equity share of earnings of investment (28,025) (68,531)
Interest paid thru issuance of shares 369,226 --
Warrants issued for interest -- 129,903
Warrant expense -- 145,190
Stock compensation expense 707,327 143,433
Accrued interest payable 11,245 418,467
Consulting expense paid through the issuance of shares 33,000 --
Bad debt expense 24,346 --
Loss on dilution 350,401 --
Foreign exchange (gain) loss (112,242) 133,547
Provision for income tax -- (279,041)
----------------------------------------------------------------------------------------------------------------------
2,176,012 1,387,875
Net change in non-cash operating working capital 727,222 1,586,665
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,903,234 2,974,540
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FINANCING ACTIVITIES
Proceeds (repayments) from/to long term debt (34,174) 5,603,065
Repayment of debenture payable (1,250,000) --
Bank loan advances (repayments) (1,650,000) 1,034,850
Collection of employee advance 112,500 --
Shareholders advances 2,520,372 --
Proceeds raised by subsidiary from third parties 796,409 --
Proceeds from the issue of common stock 2,376,492 9,550,197
Foreign exchange from financing activities 112,242 --
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Net cash provided by financing activities 2,983,841 16,188,112
----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Expenditures on property and equipment (12,554,802) (4,893,000)
Net change in non-cash investing working capital 2,151,982 --
Disposition of commodity hedging -- (517,557)
Acquisition of business, net of cash acquired -- (11,043,231)
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,402,820) (16,453,788)
----------------------------------------------------------------------------------------------------------------------
Net cash flow for the year (4,515,745) 2,708,864
Cash, beginning of year 4,628,405 1,919,541
----------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 112,660 $ 4,628,405
----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements
5
1. NATURE OF THE BUSINESS AND BASIS OF PRESENTATION
Assure Energy, Inc. (the "Company" or "Assure") and its subsidiaries
are engaged in the exploration, development and production of oil and
natural gas in the Canadian provinces of Alberta, Saskatchewan and
British Columbia.
On September 11, 2003, the Company changed its state of domicile from
Delaware to Nevada. Effective February 6, 2004, the Company changed its
place of domicile from Nevada to Alberta, Canada.
On December 17, 2004 the Company acquired 8,607,661 of the issued and
outstanding common shares of Quarry not already owned by Assure for
common shares of Assure on the basis of 0.360 of an Assure common share
for each Quarry Oil & Gas Ltd. ("Quarry") common share. The acquired
Quarry shares were transferred to its wholly owned subsidiary, Assure
Holdings Inc. ("AHI"). AHI and Quarry amalgamated on December 17, 2004
pursuant to section 184(1) of the Alberta Business Corporation Act. All
warrants to acquire Quarry common shares were cancelled.
The consolidated balance sheet of Assure and its subsidiaries as at
December 31, 2004 and the accompanying consolidated statements of
operations and cash flows for the year ended December 31, 2004 and the
notes thereto are the responsibility of the Company's management.
These consolidated financial statements are presented in Canadian
dollars and have been prepared by management in accordance with
accounting principles generally accepted in Canada.
The consolidated financial statements present the results of operations
of the Company for the year ended December 31, 2004 and its wholly
owned subsidiaries, Assure Oil & Gas Corp. ("Oil & Gas") and Westerra
2000 Inc. ("Westerra"). All material inter-company accounts and
transactions have been eliminated on consolidation.
2. BUSINESS COMBINATION
On December 17, 2004, the Company acquired an additional 49.79%
interest in Quarry such that Quarry became a wholly owned subsidiary.
The Company realized a dilution loss of $350,401 upon settlement of the
carrying value attributed to the minority interest on the consolidated
balance sheet of the Company. The purchase price for the remaining
8,607,661 shares in Quarry was $5,508,903, using the closing trading
price of $0.64 for each Quarry shares. The excess of the purchase price
over the book value of Quarry's net assets of $1,692,251 is
attributable to oil and natural gas properties based on management's
best estimates.
6
2. BUSINESS COMBINATION - CONT'd
Quarry Carrying Values at December 17, 2004
-------------------------------------------
Current assets $ 3,904,700
Current Liabilities 12,410,397
------------
Working capital deficiency (8,505,697
Oil and natural gas properties 18,183,713
Other assets 978,989
Asset retirement obligation (955,020)
Future taxes payable (2,036,485)
------------
Net assets of Quarry $ 7,665,500
------------
Remaining 49.79% interest of Quarry purchased $ 3,816,652
Less: purchase price being value attributed to 3,098,758
shares of Assure Issued 5,508,903
------------
Purchase price discrepancy $ 1,692,251
------------
Purchase price discrepancy allocated to:
Property, plant and equipment $ 2,673,382
Future tax liability (981,131)
------------
Purchase price discrepancy $ 1,692,251
------------
Effective July 28, 2003, the Company acquired a total of 6,919,900
shares of Quarry Oil & Gas Ltd. ("Quarry"). The Company acquired
6,750,000 shares of Quarry pursuant to a Purchase Agreement (the
"Agreement") dated March 6, 2003 and acquired an additional 169,900
shares through market transactions. The aggregate purchase price for
the acquisition of the 6,919,900 Quarry shares, which represents
approximately 48.5% of Quarry's outstanding common stock, was
$9,611,706 (US$6,947,988) which was paid in cash (the "Acquisition").
Quarry is an oil and natural gas exploration and development company
located in Calgary, Canada with properties in Alberta and British
Columbia, Canada. Prior to the Acquisition certain non-oil and gas
assets had been transferred to a new entity, Keantha Holdings Inc.
("Keantha"), which is a Canadian subsidiary of Quarry. Quarry retained
a 49% interest in this new entity. The 49% interest was recorded by
Quarry as an investment in an unconsolidated subsidiary on an equity
basis (note 6).
The Company made the Quarry acquisition for purposes of increasing its
presence in the oil and gas industry in Canada. The 2003 acquisition of
Quarry was accounted for as a purchase. The purchase price of
$9,611,705 (US$6,947,988) was allocated to the assets acquired and
liabilities assumed based upon their fair values at the date of
acquisition. The purchase price included the excess of the fair value
over book basis of $6,164,874 (US$4,518,102) which was attributable
entirely to the oil and natural gas properties based upon an
independent evaluation of proved oil and natural gas reserves.
7
2. BUSINESS COMBINATION - CONT'd
Total consideration paid was allocated as follows:
CDN$ US$
------------------------------
Current assets $ 1,554,921 $ 1,124,002
Investment in unconsolidated subsidiary 833,636 602,608
Oil and natural gas properties 25,253,893 18,255,216
Asset retirement obligation (826,436) (597,404)
Accounts payable and accrued expenses (2,509,398) (1,813,962)
Future taxes payable (2,820,741) (2,039,022)
Notes payable bank (7,067,155) (5,108,616)
Debenture payable (1,500,000) (1,084,301)
Minority interest (3,307,014) (2,390,533)
------------------------------
Purchase price (including $250,682 (US$181,210)of bank
indebtedness in Quarry as of the acquisition date.) $ 9,611,706 $ 6,947,988
===============================
The results of operations of Quarry are included on a consolidated
basis in the Company's operating results effective July 28, 2003.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management
in accordance with generally accepted accounting principles in Canada.
a) Basis of consolidation
The consolidated financial statements of the Company have been
prepared by management. The policies adopted by the Company comply
in all material aspects with generally accepted accounting
principles in Canada. The preparation of the consolidated
financial statements requires management to make estimates and
assumptions that affect the amount reported in the consolidated
financial statements and accompanying notes. Actual results could
differ from those estimates. The consolidated financial statements
have, in management's opinion, been properly prepared using
careful judgment within reasonable limits of materiality and
within the framework of the significant accounting policies
summarized below.
The consolidated financial statements include the accounts of
Assure Energy, Inc. ("the Company" or "Assure"), and the accounts
of its wholly owned subsidiaries Assure Oil & Gas Corp. ("Oil &
Gas"), Westerra 2000 Inc. ("Westerra") and Quarry.
b) Change in reporting currency and foreign currencies
Most of the Company's operations are conducted by its Canadian
subsidiaries in Canadian dollars. As only limited operations are
conducted in United States dollars the Company adopted Canadian
dollars as its reporting currency effective January 1, 2003.
Comparative figures for the prior period have been restated using
the current rate method of currency translation as though the
Canadian dollar was the reporting currency in that period. The net
effect of adopting Canadian dollars as the Company's reporting
currency reduces the foreign currency fluctuations recorded as a
result of translating the Company's Canadian subsidiaries into US
dollars. As substantially all of the operations are now in Canada,
management is of the opinion that the Canadian dollar will more
accurately reflect the balance sheet and the net exposure in US
dollars will be appropriately recognized through the income
statement. The net exposure to the US dollar will primarily come
from US dollar denominated accounts such as cash and trade
payables. All numbers reported in these financial statements are
stated in Canadian dollars unless otherwise denoted.
8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
c) Petroleum and natural gas properties and equipment
i) Capitalized Costs
The Company follows the full cost method of accounting for its
petroleum and natural gas operations. Under this method, all
costs related to the acquisition, exploration and development
of petroleum and natural gas reserves, including asset
retirement obligations, are capitalized. Such costs include
land acquisition costs, geological and geophysical expenses,
carrying charges on non-producing properties, costs of
drilling both productive and non-productive wells, related
plant and production equipment costs, site restoration and
abandonment costs and overhead charges directly related to
acquisition, exploration and development activities.
ii) Depletion and Depreciation
The Company accounts for its petroleum and natural gas
operations in accordance with the Canadian Institute of
Chartered Accountants' ("CICA") guideline on full cost
accounting (AcG-16) in the petroleum and natural gas industry.
Capitalized costs, excluding costs related to unproved
properties, are depleted and depreciated using the
unit-of-production method based on estimated proven oil and
natural gas reserves before deduction of royalties as
determined by independent petroleum engineers. Petroleum and
natural gas reserves and production are converted to
equivalent units of crude oil using a ratio of six thousand
cubic feet of natural gas to one barrel of oil.
Costs of acquiring and evaluating unproved properties are
initially excluded from depletion calculations. These
unevaluated properties are assessed periodically to ascertain
whether impairment has occurred. When proved reserves are
assigned or the property is considered to be impaired, the
cost of the property or the amount of the impairment is added
to costs subject to depletion calculations.
Proceeds from the sale of petroleum and natural gas properties
are applied against capitalized costs, with no gain or loss
recognized, unless such a sale would result in a greater than
20% change in the depletion and depreciation rate.
Furniture and equipment is depreciated on a straight-line
basis at rates expected to write off the carrying values, net
of expected future recoveries, over the estimated useful lives
of the assets.
iii)Impairment Test
The Company applies an impairment test ("ceiling test") to
determine if capitalized costs are not recoverable and exceed
their fair value. Capitalized costs are not recoverable if
they are greater than estimated undiscounted cash flows from
future production of proven reserves plus the cost (net of
impairment) of unproved properties. Commodity prices used in
calculating estimated cash inflows are based on quoted
benchmark prices in the futures market. Costs used in
estimating cash outflows are based on expected future
production and other costs and include abandonment and site
restoration costs. An impairment loss is recognized if
capitalized costs are greater than their recoverable amount.
The impairment loss is measured as the amount by which
capitalized costs exceed the fair value of proved and probable
reserves plus the cost (net of impairment) of unproved
properties. Fair value is determined based on the present
value of future cash flows, after deducting abandonment and
site restoration costs, discounted at a risk free interest
rate, adjusted for prevailing market conditions. Any
impairment loss is charged to earnings as additional
depletion.
9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
d) Asset Retirement Obligations
The Company has adopted the new recommendation of the CICA
relating to accounting for asset retirement obligations effective
January 1, 2003. This recommendation replaces the previous method
of accounting for site restoration costs on an accrual basis. The
Company has adopted the new standard on a retroactive basis in
accordance with the CICA recommendations on Accounting Changes.
Under the new standard, a liability for the fair value of
environmental and site restoration obligations is recorded when
the obligations are incurred and the fair value can be reasonably
estimated. The obligations are normally incurred at the time the
related assets are brought into production. The fair value of the
obligations is based on the estimated cash flow required to settle
the obligations discounted using the Government of Canada Bond
Rate for the applicable term adjusted for the Company's credit
rating. The fair value of the obligations is recorded as a
liability with the same amount recorded as an increase in
capitalized costs. The amounts included in capitalized costs are
depleted using the unit-of-production method. The liability is
adjusted for accretion expense representing the increase in the
fair value of the obligations due to the passage of time. The
accretion expense is recorded as an operating expense.
e) Investments
The Company owns 39.77% (2003 - 49%) of the common shares of
Keantha Holdings Inc. ("Keantha"). The Company accounts for its
investment in Keantha using the equity method of accounting,
whereby the investment was initially recorded at cost and adjusted
to recognize after-tax income or losses and reduced by dividends
received. The investment is carried at the lower of cost or market
value, if the decrease in value is of a permanent nature.
f) Joint ventures
From time to time, certain petroleum and natural gas activities
are conducted jointly with others. These financial statements
reflect only the Company's proportionate interest in such
activities.
g) Revenue recognition
Petroleum and natural gas sales are recognized when the product is
shipped and ownership transfers.
h) Earnings per share
Earnings per share is determined based upon the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is determined by applying the treasury stock
method to the exercise of outstanding stock options and share
purchase warrants, except to the extent that the inclusion of
these items would be anti-dilutive to the resulting earnings per
share calculation.
i) Stock based compensation
Effective January 1, 2003, the Company adopted the recommendations
of the CICA Handbook Section 3870 "Stock Based Compensation and
Other Stock-Based Payments". This section was amended to require
the expensing of all stock based compensation awards for fiscal
years beginning after January 1, 2003. The Company has chosen to
adopt the recommendation prospectively thereby recording the fair
value of the stock options issued since January 1, 2003 in the
income statement using the Black-Scholes option-pricing model.
j) Future income taxes
The Company records future income taxes on the liability method of
tax accounting. Under this method, future tax assets and
liabilities are determined based on the difference between the tax
value of each asset or liability and its carrying value on the
balance sheet and are measured using substantially enacted tax
rates and laws that are expected to be in effect when the
differences reverse.
10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONT'd
k) Commodity contracts
During 2003, Quarry traded petroleum products and derivative
instruments. Quarry entered into commodity contracts in the normal
course of its business to establish future sales and purchase
prices and manage the future cash flow risk associated with price
volatility of the commodities traded. Commodity contracts may be
designated as hedges of financial risk exposure of anticipated
transactions if, both at the inception of the hedge and throughout
the hedge period, the changes in fair value of the contract
substantially offset the effect of the commodity price changes on
the anticipated transactions and if it is probable that the
transactions will occur. Quarry monitored its commodity exposures
and ensured that contracted amounts did not exceed the amounts of
underlying exposures.
Gains and losses were recognized on the delivery of the petroleum
product or settlement of the financial contract. The market value
of the outstanding commodity hedging option contracts were
determined at the reporting date and any differences from the
unamortized proceeds were recorded as an adjustment to the
unamortized portion of commodity hedging contracts. Quarry
deferred the impact of changes in the market value of these
contracts until such time as the associated transactions was
completed. In the event of early settlement or re-designation of
hedging transactions, gains or losses were deferred and brought
into income at the delivery dates originally designated. Where
anticipated transactions were no longer expected to occur, with
the effect that the risk that was hedged no longer exists,
unrealized gains and losses were recognized in income at the time
such determination is made.
Cash flows arising in respect of these contracts were recognized
under cash flow from operating activities. Quarry's commodity
contracts expired in 2003. Quarry had no commodity contracts in
place at December 31, 2003. No commodity contracts were undertaken
in 2004 by the Company or its subsidiaries.
l) Financial instruments
Financial instruments of the Company consist of cash, accounts
receivable, income taxes payable, accounts payable and accrued
liabilities, due to shareholders, the debenture payable, long term
debt and the bank loan. It is management's opinion that the
Company is not exposed to significant risks associated with these
financial instruments except as otherwise disclosed. The fair
value of these financial instruments approximates their carrying
value unless otherwise noted.
m) Measurement uncertainty
Amounts recorded for depreciation, depletion and amortization,
asset retirement costs and obligations and amounts used for
ceiling test and impairment calculations are based on estimates of
oil and natural gas reserves and future costs required to develop
those reserves. By their nature, these estimates of reserves and
the related future cash flows are subject to measurement
uncertainty, and the impact on the financial statements of future
periods could be material.
n) Foreign Currency
Most of the Company's operations are conducted by its Canadian
subsidiaries in Canadian dollars with the remainder conducted in
United States dollars. The Company converts its United States
dollar transactions using the current rate method of currency
translation. Under this method, monetary assets and liabilities
are translated at the rate of exchange in effect at the balance
sheet date and revenue and expense items are translated at the
rate of exchange in effect on the dates on which such items are
recognized in income during the period. Unrealized foreign
currency gains and losses are recognized in current period
earnings.
11
4. ASSET RETIREMENT OBLIGATION
In 2003, the Company adopted the CICA recommendation for recording of
asset retirement obligations. The asset retirement obligation of
$1,279,702 at December 31, 2004 (2003 - $1,088,682) is based on the
estimated cash flows required to settle any abandonment and site
restoration obligations relating to the Company's oil and natural gas
properties at the end of their useful lives. Payments to settle the
obligations will occur on an ongoing basis over the lives of the
related assets estimated to be for a period of up to 17 years. Cash
flows have been discounted at 7% for purposes of determining the asset
retirement obligation.
The schedule below is a reconciliation of the Company's liability for
years ended December 31, 2004 and 2003:
2004 2003
-------------------------
Present value of obligation at January 1, 2003 $ 1,088,682 $ 308,424
Acquisitions -- 750,344
New obligations during the year 112,513 51,099
Accretion expense 78,507 (21,185)
-------------------------
$ 1,279,702 $ 1,088,682
-------------------------
The Company estimates its obligations related to existing facilities
and drilling activities will be settled in periods up to 2020.
5. DEPOSITS
Deposits are $53,200 (2003 - $159,581) for well abandonments.
6. INVESTMENT
As described in Note 3(e), the Company owns 39.77% (2003 - 49%) of
Keantha and uses the equity method to account for this investment. The
balance in the investment account as at December 31, 2004 was $927,626
(2003 - $899,601). For the year ending December 31, 2004, the Company
recorded $28,025 (2003 - $68,531) as investment income from Keantha.
The fair value of this investment is not readily determinable as it is
a private company.
7. PROPERTY AND EQUIPMENT
Accumulated
Depletion and
December 31, 2004 Cost Depreciation Net Book Value
------------------------------------------------------------------------------------------------------------
Petroleum and natural gas properties and equipment $ 62,339,292 $ 28,083,446 $ 34,255,846
Furniture and equipment 124,136 97,739 26,397
------------------------------------------------------------------------------------------------------------
$ 62,463,428 $ 28,181,185 $ 34,282,243
------------------------------------------------------------------------------------------------------------
Accumulated
Depletion and
December 31, 2003 Cost Depreciation Net Book Value
------------------------------------------------------- ----------------- ---------------- -----------------
Petroleum and natural gas properties and equipment $ 46,455,696 $ 20,940,748 $ 25,514,948
Furniture and equipment 105,831 69,500 36,331
------------------------------------------------------- ----------------- ---------------- -----------------
$ 46,561,527 $ 21,010,248 $ 25,551,279
------------------------------------------------------- ----------------- ---------------- -----------------
At December 31, 2004, costs amounting to $1,169,342 (2003 - $1,493,389)
that were incurred on unproven properties have been excluded from costs
subject to depletion.
12
7. PROPERTY AND EQUIPMENT - CONT'd
The Company applied an impairment test to capitalized costs at December
31, 2004 to determine whether such costs may be recovered in the
future. Capitalized costs were compared to estimated future cash flows
from production of proven oil and natural gas reserves plus the cost
(net of impairment) of unproved properties. Commodity prices used in
the determination of cash flows were based on the following quoted
benchmark prices in the futures market adjusted for quality and
transportation differentials:
WTI (US$/bbl) Edmonton Natural gas
---- --------- ------------
(Cdn$/bbl) (Cdn$/MMBtu)
2005 44.29 51.25 6.97
2006 41.60 48.03 6.66
2007 37.09 42.64 6.21
2008 33.46 38.31 5.73
2009 31.84 36.36 5.37
2010 and thereafter escalated by 1.5% per
annum.
No impairment loss was determined in 2004 (2003 - $9,078,379) as a
result of applying the ceiling test. Impairment losses are recognized
in depletion and depreciation on the consolidated statement of
operations.
8. DEBENTURE PAYABLE
During 2004 the Company repaid a debenture payable in the amount of
$1,250,000 (2003 - $1,250,000). The debenture matured on November 1,
2004 and bore interest at the rate of 9% per annum, payable monthly. In
the prior year, the Company's subsidiary, Quarry repaid $250,000 of
this amount. The holder had the right to convert the debenture into
common shares of Quarry at any time after July 22, 2004 and prior to
maturity at a price equal to the lesser of $1.33 per share or the 10
day weighted average trading price of Quarry's common shares, not to be
lower than $0.75 per share. The equity component of this debenture had
not been segregated as the value attributable to the equity component
was not material.
9. BANK LOAN
a) Assure Energy Inc.
Effective November 15, 2004, the Company had available a $6,550,000
(December 31, 2004 $6,400,000) revolving operating demand loan facility
with a Canadian chartered bank. The facility reduces by $75,000 per
month commencing November 30, 2004 and reduces by $275,000 per month
commencing January 31, 2005. The loan bears interest at the bank's
prime rate, which was 4.25% at December 31, 2004, plus 1.5% interest
subject to a standby fee of 0.125% per annum. The Company also had
available, a $1,200,000 non-revolving acquisition and development
demand loan facility at the same bank with interest payable at the
bank's prime rate, which was 4.25% at December 31, 2004, plus 1.5%
subject to a drawdown fee of 0.375% (acquisition) or 0.50%
(development) and a standby fee of 0.125% per annum. The facilities are
secured by a $20 million debenture over all the assets of the Company.
These facilities will be reviewed no later than April 30, 2005. As at
December 31, 2004, the Company had drawn down $5,700,000 (2003 -
$7,800,000) against these facilities and this amount has been
classified as a current liability. Under the credit facility agreement
with the bank, the Company is subject to certain covenants. As at
December 31, 2004, the Company was not in compliance with the covenant
requiring it to maintain an adjusted working capital ratio of not less
than 1 to 1. The bank has not demanded payment of the loan as a result
of this covenant violation and has provided a waiver for the working
capital covenant at December 31, 2004.
13
9. BANK LOAN - CONT'd
b) Assure Oil & Gas Corp. ("Oil & Gas")
As at December 31, 2004, the Company had available, through its wholly
owned subsidiary Oil & Gas a $1,200,000 revolving, operating demand
loan facility with a Canadian chartered bank. The loan bears interest
at the bank's prime rate, which was 4.25% at December 31, 2004, plus
1.0% interest subject to a standby fee of 0.125% per annum. The Company
also had available through Oil & Gas a $450,000 non-revolving
acquisition and development demand loan facility at the same bank with
interest payable at the bank's prime rate, which was 4.25% at December
31, 2004, plus 1.25% subject to a drawdown fee of 0.25% (acquisition)
or 0.50% (development) and a standby fee of 0.125% per annum. The
facilities are secured by a $10 million debenture over all the assets
of Oil & Gas and a $10 million guarantee from Assure and Westerra.
These facilities will be reviewed no later than April 30, 2005. As at
December 31, 2004, Oil & Gas had drawn down $450,000 (2003 - $ nil)
against these facilities and this amount has been classified as a
current liability. Under the credit facility agreement with the bank,
the Company is subject to certain covenants. As at December 31, 2004,
the Company was not in compliance with the covenant requiring it to
maintain an adjusted working capital ratio of not less than 1 to 1. The
bank has not demanded payment of the loan as a result of this covenant
violation and has provided a waiver for the working capital covenant at
December 31, 2004.
Subsequent to year end, the bank loans for the Company and Oil and Gas
have been combined and refinanced subject to certain credit approval
conditions (note 17(b)).
10. LONG TERM DEBT
The Company's long term debt consists of a six-year note payable issued
by its wholly owned subsidiary Oil & Gas in the principal amount of
$800,000 (December 31, 2003 - $1,000,000) (the "CDN dollar Note") and a
six-year subordinated promissory note payable in the principal amount
of US $2,754,000, equivalent to Canadian $3,310,308 (December 31, 2003
- US $3,240,000, equivalent to Canadian $4,200,700) (the "US dollar
Note").
The CDN dollar Note was issued on December 28, 2002 and amended on June
1, 2004 and matures on December 28, 2008. The note accrues interest at
7.75 % per annum. Quarterly payments of principal and interest are due
on March 28, June 28, September 28, and December 28. The note is
subordinated to all present and future bank debt of Oil & Gas and its
subsidiaries.
The US dollar Note was issued on March 15, 2003, as amended on December
5, 2003, and further amended on June 1, 2004 and matures on March 15,
2009. The note accrues interest at 7.75% per annum. Quarterly payments
of principal and interest are due and payable in US dollars on June 15,
September 15, December 15, and March 15. The note is unsecured and is
subordinated to all present and future bank debt of the Company and its
subsidiaries. In connection with the issuance of the US dollar Note,
the Company issued 450,000 common stock purchase warrants to purchase
an equal number of the Company's common stock with an exercise price of
$3.73 (US $3.10) per share. These common stock purchase warrants may be
exercised at any time during the five years commencing July 1, 2003.
On June 1, 2004 the CDN dollar Note and the US dollar Note were amended
such that during the 20 month period immediately following the date of
amendment all principal and interest payments due to the Note Holder
under the Notes may at, the Company's option, be paid in common shares
of the Company. Following such 20 month period all principal and
interest payments due to the Note Holder under the Notes may, at the
Holder's option, be paid in common shares of the Company. For the
purposes of payments under the Notes in common shares, the common
shares will be valued at the average closing price of the Company's
common shares during the 10 day trading period immediately preceding
the due date for the payment
Principal payments of $50,000 plus $18,699 of interest due on March 28,
2004, and principal of $50,000 and $17,959 of interest due on June 28,
2004, and principal of $50,000 and $17,014 of interest due on September
28, 2004 on the CDN dollar Note were satisfied by the issue by the
Company of 12,377 common shares at US $4.21 (Cdn $5.55) per share,
12,308 common shares at US $4.10 (Cdn $5.52) per share, and 18,812
common shares at US $2.80 (Cdn $3.56) per share, respectively.
Subsequent to year end, 32,955 common shares at US $1.63 (Cdn $2.00)
per share were issued in satisfaction of principal of $50,000 and
$15,894 of interest due on December 28, 2004 on the Cdn dollar Note.
14
10. LONG TERM DEBT - CONT'd
During the year ended December 31, 2004, interest of $440,677 (US
$336,061) due for the period from the date of issuance of the US dollar
Note to March 15, 2004 was satisfied by the exercise of 100,000
warrants for proceeds of $406,503 (US $310,000) and the payment in cash
by the Company of $34,174 (US $26,061). Interest of $85,929 (US
$63,292) and principal of $219,941 (US $162,000) due on June 15, 2004,
interest of $77,430 (US $60,126) and principal of $208,622 (US
$162,000) due on September 15, 2004 on the US dollar Note have been
satisfied by the issue of 53,769 common shares at $5.69 (US $4.19) per
share and the issue of 94,121 common shares at $3.04 (US $2.36) per
share respectively. Subsequent to year end, 101,202 common shares at
$2.63 (US $2.16) per share were issued in satisfaction of interest of
$68,688 (US $56,343) and principal of $197,495 (US $162,000) due on
December 15, 2004 on the US dollar Note.
11. DUE TO SHAREHOLDERS
Due to shareholders is $2,520,372 as at December 31, 2004 (2003 - $nil)
advanced from certain shareholders. The funds were advanced for general
operational purposes, are unsecured, non-interest bearing and without
fixed or agreed repayment terms and are subordinated to the bank.
12. EQUITY INSTRUMENTS
a) Authorized
Preferred Shares - 4,977,250 Blank Check non-voting Preferred
Shares, 17,500 Series A Preferred Shares and 5,250 Series B
Preferred Shares. Common Shares - 100,000,000 shares without par
value.
b) Common Shares
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------------------------------------------------------------------------------------------------
Contributed Contributed
# Shares Amount Surplus # Shares Amount Surplus
----------------------------------------------------------------------------------------------------------
Beginning balance 19,650,100 $15,597,103 $ 288,623 15,366,000 $ 6,249,437 $ -
Payment of dividend on preferred
shares (i) 68,363 300,705 - - - -
Exercise of warrants (ii) 100,000 506,503 - 1,782,100 831,824 -
Private placement (iii) 482,000 2,216,596 - 2,152,000 6,871,363 -
Payment of principal and
interest on long term debt (iv) 191,387 795,594 - 350,000 1,644,479 -
Pursuant to 2003 private
placement (v) 143,500 - - - - -
Quarry amalgamation (vi) 3,098,758 5,508,903 - - - -
Warrants expense - - - - - 145,190
Stock compensation (note 12(d)) - - 707,327 - - 143,433
To be issued for payment of
principal and interest on long
term debt (iv) 134,157 331,509
----------------------------------------------------------------------------------------------------------
Ending balance 23,868,265 $25,256,913 $ 995,050 19,650,100 $15,597,103 $ 288,623
----------------------------------------------------------------------------------------------------------
(i) During the year the Company issued 68,363 common shares to settle
dividends on Series A and B preferred share dividends as disclosed
in note 12(c).
(ii) During the year 100,000 warrants were exercised on settlement of
interest on long term debt (Note 10).
(iii) During the year, the Company issued 482,000 units consisting of
482,000 common shares at US $3.60 per share (CDN $4.73 per share)
and 482,000 warrants to purchase common shares at US $4.00 per share
(CDN $5.25 per share) were issued under a private placement. Two
officers of the Company purchased 6,000 units as part of the private
placement.
(iv) During the year the Company issued 191,387 common shares and,
subsequent to the year end the Company issued 134,157 common shares
in settlement of principal and interest payments due during the
period on long term debt as disclosed in Note 10.
15
12. EQUITY INSTRUMENTS - CONT'd
(v) During the year, the Company issued an additional 143,500 common
shares related to a private placement that closed in December 2003
in recognition of a delay in effecting registration of the
securities purchased beyond six months from the closing date.
(vi) On December 17, 2004 the Company issued 3,098,758 common shares for
the remaining 49.79% interest in Quarry as disclosed in note 2. c)
Preferred Shares
Year Ended Year Ended
December 31, 2004 December 31, 2003
--------------------------------------------------------------------------------------------------------
# Shares Amount # Shares Amount
--------------------------------------------------------------------------------------------------------
Beginning balance 22,750 $ 3,489,521 22,750 $ 3,489,521
Shares issued - - - -
--------------------------------------------------------------------------------------------------------
Ending balance 22,750 $ 3,489,521 22,750 $ 3,489,521
--------------------------------------------------------------------------------------------------------
On June 1, 2002, the Company sold 17,500 shares of Series A
Preferred Stock ("Series A") with a stated value of US $100 (CDN
$153) and a cumulative 5% dividend payable in cash or shares of
the Company's common stock raising US $1,750,000 (Cdn$2,684,247).
The Series A is convertible at the option of the holder after two
years, or if called for redemption by the Company, transferred
into units of the Company at US $1.50 per unit for every US $1 of
stated value. Units consist of one share of the Company's common
stock and one common stock purchase warrant. Each common stock
purchase warrant entitles the holder to purchase one share of the
Company's common stock exercisable at US $1.75 per share at any
time during the four year period commencing one year after the
date of issuance.
On August 27, 2002, the Company issued 5,250 shares of its
Convertible Series B Preferred Stock ("Series B") raising US
$525,000 (CDN $815,724). The Series B has a stated value of US
$100 (CDN $155), a cumulative 5% dividend payable annually in cash
or common stock of the Company, and the right to convert the
Series B into units commencing on the second anniversary of the
issuance of the Series B at US $1.75 per unit for every US $1 of
stated value of preferred stock. Each unit consists of one share
of the Company's common stock and one common stock purchase
warrant exercisable at US $2.00 per share, at any time during the
four year period commencing one year from the date of issuance of
the units.
d) Stock Options
Year Ended Year Ended
December 31, 2004 December 31, 2003
--------------------------------------------------------------------------------------------------------------
# Options Wtd Avg Wtd Avg Wtd Avg # Options Wtd Avg Wtd Avg Wtd Avg
Price Price remain life Price Price remaining
(US $) (Cdn $)(1) (yrs) (US $) (Cdn $) (life (yrs)
--------------------------------------------------------------------------------------------------------------
Options
outstanding,
beginning of period 425,000 $ 2.93 $ 3.52 3.69 320,000 $ 2.75 $ 4.34 1.6
Issued 1,120,000 3.29 3.96 305,000 3.00 3.89
Cancelled (440,000 3.40 4.09 (200,000) 2.75 3.57
--------------------------------------------------------------------------------------------------------------
Options 1,105,000 $ 3.20 $ 3.85 3.92 425,000 $ 2.93 $ 3.52 3.69
outstanding, end of
period
--------------------------------------------------------------------------------------------------------------
Options
exercisable, end of
period 442,500 $ 3.22 $ 3.87 75,000 $ 2.80 $ 3.63
--------------------------------------------------------------------------------------------------------------
(1)See exchange rates used to convert from United States to Canadian dollars in Note 17
16
12. EQUITY INSTRUMENTS - CONT'd
The fair value of options issued in 2004 was determined using an
appropriate option pricing model and the following assumptions:
expected volatility of 27% to 53%, risk free interest rate of 3.5%,
expected lives of three to five years and dividend yield of 0%. The
fair value of the options is recognized and expensed over the vesting
period of the options. During 2004 $707,327 (2003 - $143,433) was
recorded in stock compensation expense as disclosed in note 12(b) using
the Black-Scholes option-pricing model.
e) Warrants
Year Ended Year Ended
December 31, 2004 December 31, 2003
-----------------------------------------------------------------------------------------------------------------
# Warrants Amount # Warrants Amount
-----------------------------------------------------------------------------------------------------------------
Beginning balance 10,036,400 $ 1,976,913 7,200,000 $ -
Issued in connection with private placement and
investor relations 675,500 160,088 - -
Issued for investor relation services 60,000 33,000 - -
Issued on completion of equity financing - - 2,100,000 -
Subscription agreement - - 533,500 770,000
In connection with financing - - 450,000 450,000
For consulting services - - 100,000 129,903
Issued in connection with financing 1,435,000 640,000
Exercise of warrants (100,000) (100,000) (1,782,100) (12,990)
-------------------------------------------------------------------------------------------------------------------
Ending balance 10,671,900 $ 2,070,001 10,036,400 $1,976,913
-------------------------------------------------------------------------------------------------------------------
December 31, 2004 December 31, 2003
----------------------------------------------------------------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg Wtd Avg
Exercise Exercise Price Price Price
# Warrants Price (US $) (Cdn $)(1) # Warrants (US $) (Cdn $)(1)
--------------------------------------------------------------------------------------------------------------------------------
Beginning balance 10,036,400 $ 1.38 $ 1.79 7,200,000 $ 0.50 $ 0.79
Issued in connection with equity financing - - - 2,100,000 1.00 1.30
Issued in connection with subscription agreement - - - 533,500 2.50 3.24
Issued in connection with financing - - - 450,000 3.10 4.02
Issued in connection with consulting services - - - 100,000 3.00 3.89
Exercised during the year (Class A) - - - (1,772,100) 0.33 0.43
Exercised during the year (Other) - - - (10,000) 3.00 3.89
Issued in connection with financing - - - 1,435,000 4.00 5.19
Exercised in payment of interest (100,000) 3.10 3.73 - - -
Issued in connection with private placement 482,000 4.00 4.81 - - -
Issued in connection with investor relation services 60,000 4.05 4.89 - - -
Issued in connection with investor relation services 50,000 2.50 3.02 - - -
Issued in connection with private placement 143,500 4.00 4.81 - - -
--------------------------------------------------------------------------------------------------------------------------------
Ending balance 10,671,900 $ 1.54 $ 1.85 10,036,400 $ 1.38 $ 1.89
--------------------------------------------------------------------------------------------------------------------------------
During 2004, the Company has included $nil (2003 - $129,903) in general
and administrative expenses for share purchase warrants issued during
the year.
The Company's calculations for warrants during the year ended December
31, 2004 were made using an appropriate option-pricing model using the
following assumptions: expected volatility 17%, risk free interest rate
2.4%, expected life in years ranging from 1.5 - 3, and dividend yield
0%.
17
13. INCOME TAXES
As of February 6, 2004, the Company changed its domicile from Nevada to
Alberta, the net operating loss carryforwards of approximately US
$816,000 will no longer be available for use due to this change.
The Company and its wholly-owned subsidiaries have a net operating loss
of approximately $2,330,000 (2003 - $931,273) under The Income Tax Act
(Canada). These net operating losses can be carried back three years
and forward seven to 10 years to offset future taxable income. The
Company and its wholly owned subsidiaries have recorded a future tax
recovery of $1,476,501 (2003 - $90,524) for 2004.
The net future tax liability results primarily from the difference in
the tax basis and carrying value of property, plant and equipment.
Total income taxes were different than the amounts computed by applying
the statutory federal income tax rate as follows:
Year ended December 31
2004 2003
----------------------------------------------
Combined income tax rate 36.7% 36.7%
Expected income tax $ (2,010,654) $ (4,697,968)
Change in valuation allowance (111,823) 518,081
Income attributed to minority interest and equity income (277,542) (23,149)
Resource related differences, Crown 481,259 219,957
Resource related differences, Resource allowance (261,969) (202,389)
Stock based compensation 259,589 52,640
Non-deductible write down of property and equipment - 3,483,486
Expiry of losses 414,245 -
Non-deductible, non-cash items - 53,285
Other 30,394 226,492
----------------------------------------------
$ (1,476,501) $ (369,565)
----------------------------------------------
The tax effects of temporary differences that resulted in future tax
liabilities and assets at December 31, 2004 and 2003 were as follows:
2004 2003
-------------------------------------------------------
Future tax liabilities:
Property and equipment $ (2,699,906) $ (2,928,298)
Future tax assets:
Net operating losses 856,091 730,124
Share issue costs 29,188 -
Valuation allowance (406,258) (518,081)
-------------------------------------------------------
Net future tax liability $ (2,220,885) $ (2,716,255)
-------------------------------------------------------
18
14. RISK MANAGEMENT
a) Credit risk
Substantially all of the Company's accounts receivable are with
customers and joint venture partners in the oil and gas industry
and are subject to normal industry credit risks. As the Company
markets its commodities through oil and gas marketing companies,
the Company is also exposed to the risks associated with these
companies. In addition, the Company is exposed to credit risk in
its trade accounts receivable included in receivables. At year end
one company accounted for 17% of the total accounts receivable.
b) Interest rate risk management
The Company's fixed rate debt is subject to interest rate price
risk as the value will fluctuate as a result of changes in market
rates. Floating rate debt is subject to interest rate cash flow
risk as the required cash flows to service the debt will fluctuate
as a result of changes in market rates.
At December 31, 2004, the Company had fixed the interest rates on
the following interest bearing obligations:
December 31, 2004 December 31, 2003
--------------------------------------------------- ----------------------- --------------------------
Debenture payable $ - $ 1,250,000
Long term debt 4,110,308 5,200,700
--------------------------------------------------- ----------------------- --------------------------
$ 4,110,308 $ 6,450,700
--------------------------------------------------- ----------------------- --------------------------
c) Foreign currency rate risk
A significant portion of the Company's debt is denominated in the
United States dollars. The Company does not have any exposure to
any highly inflationary foreign currencies. The amount of debt
denominated in United States dollars is US$2,754,000 (2003 -
US$3,240,000). The increase or decrease in net earnings before
taxes for each 1 percent change in foreign exchange rate on the US
denominated debt amounts to approximately $28,000 (2003 - $32,000)
per annum.
15. COMMITMENTS AND CONTINGENCIES
The Company is currently involved in litigation with a former officer
of Quarry who is claiming $240,000 in respect of termination and
severance pay. The Company is contesting this claim and has not accrued
any amounts for this litigation. Examinations for discovery have
occurred and the matter is currently in abeyance as of December 31,
2004 as the plaintiff has not moved the litigation forward.
Effective August 1, 2004, the Company entered into a new lease for the
rental of office space for the period to January 31, 2007. The Company
is committed to payments of $87,720 per annum for rent plus a
proportionate share of operating costs. The Company has also entered
into a sublease that expires December 31, 2005. The Company is
committed to payments of $25,704 per annum for rent plus a
proportionate share of operating costs.
The Company is subject to various regulatory and statutory requirements
relating to the protection of the environment. These requirements, in
addition to contractual agreements and management decisions, result in
the accrual of estimated future removal and site restoration costs.
These costs are accrued based on estimates of reserves and future
costs. Any changes in these will affect future earnings. Costs
attributable to these commitments and contingencies are expected to be
incurred over an extended period of time and are to be funded mainly
from the Company's cash provided by operating activities. Although the
ultimate impact of these matters on net earnings cannot be determined
at this time, it could be material for any one-quarter or year.
The Company currently has employment agreements with certain employees
of the Company. The Employment Agreements specify that certain
employees are entitled to a lump sum severance payment in the event
that the Company is sold (Refer to note 17(c)).
19
15. COMMITMENTS AND CONTINGENCIES - CONT'd
In the ordinary course of business, the Company and its subsidiaries
enter into contracts which contain indemnification provisions, such as
loan agreements, purchase contracts, service agreements, licensing
agreements, asset purchase and sale agreements, joint venture
agreements, operating agreements, leasing agreements, land use
agreements etc. In such contracts, the Company may indemnify
counterparties to the contracts if certain events occur. These
indemnification provisions vary on an agreement by agreement basis. In
some cases, there are no pre-determined amounts or limits included in
the indemnification provisions and the occurrence of contingent events
that will trigger payment under them is difficult to predict.
Therefore, the maximum potential future amount that the Company could
be required to pay cannot be estimated.
16. RELATED PARTY TRANSACTIONS
a) Quarry Oil & Gas Ltd.
Effective June 30, 2004, Assure acquired 1,000,000 common shares
of Quarry, comprising part of the Units issued under a private
placement. On November 1, 2004, Assure advanced $1,250,000 to
Quarry. This amount is unsecured, non-interest bearing and without
fixed or agreed repayment terms. Quarry used these funds to repay
the debenture which matured on November 1, 2004 (See Note 8). On
November 10, 2004, Assure participated in a non-brokered private
placement and acquired 757,143 common shares of Quarry at $0.70.
As a result, Assure directly holds a total of 8,677,043 common
shares representing 50.2% of the total issued and outstanding
common shares of Quarry. Effective December 17, 2004 the Company
through its wholly owned subsidiary acquired the remaining 49.79%
outstanding common shares of Quarry, as disclosed in note 2.
b) Other
Included in accounts receivable is $249,938 and included in
accounts payable is $377,339 due to companies controlled by a
director of the Company appointed on December 17, 2004. These
accounts receivable and payable arise as the Company and this
director share an interest in oil and gas properties that the
Company operates.
All related party transactions have been recorded at the agreed to
exchange amount which reflects fair value.
17. SUBSEQUENT EVENTS
a) Chestermere Sale
Subsequent to year end the Company entered into a sale and
purchase agreement effective January 1, 2005 to sell the
Chestermere property for net proceeds of $5.15 million.
20
17. SUBSEQUENT EVENTS - CONT'd
b) Bank loan
On March 7, 2005, the Company, signed a term sheet outlining the
terms and conditions of proposed financing to replace the existing
bank loan. Subject to certain credit approval conditions, the
Company will have available a $7,100,000 revolving operating
demand loan facility with a Canadian chartered bank. The loan will
bear interest at the bank's prime rate, which was 4.25% at March
7, 2005, plus 2% interest subject to a standby fee of 0.125% per
annum. The Company will also have available, a $2,700,000
non-revolving development demand loan facility at the same bank
with interest payable at the bank's prime rate, which was 4.25 %
at March 7, 2005, plus 2.5% subject to a drawdown fee of 1% a
standby fee of 0.125% per annum. This facility is subject to
completion of the bank's credit approval process. The facilities
will be secured by a $10 million debenture over all the assets of
Oil & Gas, a $10 million guarantee from Assure and Westerra, and a
$40 million supplemental debenture over the major producing
petroleum and natural gas reserves of Assure, Oil & Gas, and
Westerra. These facilities will be reviewed by July 15, 2005 and
upon the Company's fiscal year end December 31, 2005, and not
later than April 30, 2006. This new facility would replace both
the Company's and Oil & Gas' facilities described in Note 9. A
commitment fee in the amount of $500,000 is also payable upon
delivery of a commitment to the Company, payable in monthly
payments of $100,000 per month commencing April 1, 2005. An
earnest fee in the amount of $50,000 will also be payable on April
1, 2005.
c) Engagement of Financial Advisor and Amendment of Employment
Agreements
On April 21, 2005 the Company engaged the services of Haywood
Securities Inc. ("Haywood") a TSE member firm, as its exclusive
financial advisor to assist the Company in evaluating strategic
alternatives to maximize shareholder value. In the event that such
alternatives result in a merger, takeover or business combination
(the "Transaction") with another company, Haywood would earn a
commission equivalent to 0.9% of the Transaction value. On April
25, 2005 the Company amended its employment agreements such that
in the event of a Transaction the Company's President and two Vice
Presidents are entitled to receive severance pay of approximately
$600,000 in the aggregate. As part of this amendment, 3 employees
of the Company were granted a total of 510,000 stock options,
exercisable at $1.25Cdn for 1 year from the date of grant.
18. EXCHANGE RATES
The United States dollar amounts have been converted into Canadian
dollar amounts for convenience purposes using either the average or the
period end exchange rates shown below:
Twelve months ended December 31, 2004 $1.2991
Twelve months ended December 31, 2003 $1.3161
As at December 31, 2004 $1.2020
As at December 31, 2003 $1.2965
As at December 31, 2002 $1.5776
19. STATEMENT OF CASH FLOWS AND NON-CASH TRANSACTIONS
a) Interest Paid
---------------------------------------------------------- ----------------------- -----------------------
2004 2003
---------------------------------------------------------- ----------------------- -----------------------
Interest Paid $ 524,873 $ 343,488
---------------------------------------------------------- ----------------------- -----------------------
b) Business acquisition
During the year, the Company purchased Quarry via the issuance of
3,098,758 shares as per Note 2.
21
19. STATEMENT OF CASH FLOWS AND NON-CASH TRANSACTIONS - CONT'd
c) Shares issued for principal and interest payments
During the year, the Company issued 191,387 shares (2003 -
350,000) for the payment of $795,594 (2003 - 1,644,479) on
principal and interest on long term debt (Note 12(b)).
d) Shares issued for payment of dividends
During the year 100,000 warrants were exercised in exchange for
the settlement of $406,503 of interest on long term debt.
e) Shares issued for payment of dividends
During the year, the Company issued 68,363 shares for the payment
of $300,705 in dividends (Note 12(b)).
20. COMPARATIVE FINANCIAL STATEMENTS
Certain comparative figures have been restated for changes in
accounting policies as discussed below and to confirm to the current
period presentation (See Note 3(b)).
As described in Note 3(b), the Company changed its reporting currency
to Canadian dollars. As the Company changed its domicile it is
reporting in accordance with Canadian generally accepted accounting
principals and will also prepare United States generally accepted
accounting principal statements.
21. REVISED FINANCIAL STATEMENTS
As a result of events subsequent to March 2, 2005, management has
withdrawn its previously issued financial statements and prepared
revised financial statements based on information available to April
27, 2005 to reflect the following:
a) Removed the going concern disclosure in Note 1 of the March 2,
2005 financial statements based on the completion of the sale of
the Chestermere property for net proceeds of $5.1million that
reduce its working capital deficiency (Note 17 (a)), finalized the
terms of its credit facility on April 1, 2005 (Note 17(b)),
obtained agreement from shareholders to subordinate their loans to
the Company's bank (Note 11) and amended the terms of the long
term debt (Note 10).
b) Disclosed details of the Company's engagement with Haywood and the
amended employment agreements.
The previously issued financial statements and auditors' report dated
March 2, 2005 were not made publicly available by management and were
only issued to the Company's banker.
22
ITEM 2
ASSURE ENERGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING RESULTS
FOR THE YEAR ENDED DECEMBER 31, 2004
--------------------------------------------------------------------------------
OVERVIEW
This Management's Discussion and Analysis ("MD&A") dated April 27, 2005, is a
review of the operating and financial activities of Assure Energy, Inc. (the
"Company" or "Assure") and its subsidiaries for the year ended December 31,
2004. This MD&A should be read in conjunction with the audited consolidated
financial statements and notes thereto of Assure for the years ended December
31, 2004 and 2003. Unless otherwise indicated, all dollar amounts in this MD&A
are Canadian dollars and have been presented in accordance with Generally
Accepted Accounting Principles.
Assure and its subsidiaries are engaged in the exploration, development and
production of oil and natural gas in the Canadian provinces of Alberta,
Saskatchewan and British Columbia. Additional information relating to the
Company can be found on the website of the United States Securities and Exchange
Commission at www.sec.gov. and on the website of the System for Electronic
Document Analysis and Retrieval (SEDAR) at www.sedar.com.
The Company's results of operations for the year ended December 31, 2004 include
the accounts of Assure Oil & Gas Corp. ("Oil & Gas"), Westerra 2000 Inc.
("Westerra"), and Quarry Oil & Gas Ltd. ("Quarry"). Assure acquired 48.5% of
Quarry, effective July 28, 2003, and increased its ownership in Quarry to
51.84%, effective June 30, 2004. Pursuant to a Plan of Arrangement, on December
17, 2004 Assure acquired 8,607,661 of the issued and outstanding common shares
of Quarry not already owned by Assure for common shares of Assure on the basis
of 0.360 of an Assure common share for each Quarry common share. The acquired
Quarry shares were transferred to its wholly owned subsidiary, Assure Holdings
Inc. ("AHI"), and AHI and Quarry amalgamated on December 17, 2004 pursuant to
section 184(1) of the Alberta Business Corporation Act. The Company and AHI also
amalgamated on December 17, 2004 pursuant to section 184(1) of the Alberta
Business Corporation Act. All warrants to acquire Quarry common shares were
cancelled.
The Company's results of operations for the year ended December 31, 2003 include
the accounts of its wholly owned subsidiaries, Oil & Gas and Westerra, and its
partially-owned subsidiary, Quarry from July 28, 2003. Assure effectively
controlled Quarry's operations and, as a result, has included the accounts of
Quarry on a consolidated basis at December 31, 2003. The interest of the
remaining Quarry shareholders in Quarry's operations is recorded as minority
interest in consolidated subsidiary in the December 31, 2003 consolidated
financial statements.
The Company's financial results depend on many factors, including, but not
limited to, commodity prices, exploration and development success, control of
capital expenditures, and operating and overhead costs. These factors impact the
Company's ability to obtain financing for its operations. Many of these factors
are outside of Assure's control. See the "Business Risks" section of the MD&A
for the year ended December 31, 2004.
Certain Measures in this MD&A do not have any standardized meaning as prescribed
by Canadian generally accepted accounting principles ("Canadian GAAP") such as
cash flow from operations, and netback and therefore are considered non-GAAP
measures. Therefore, these measures may not be comparable to similar measures
presented by other issuers. There measures have been described and presented in
this MD&A in order to provide shareholders and potential investors with
additional information regarding the Company's liquidity and its ability to
generate funds to finance its operations. Management's use of these measures has
been disclosed further in this MD&A as these measures are discussed and
presented.
1
The following Management Discussion and Analysis may contain forward-looking
statements. Forward-looking statements are based on current expectations that
involve a numbers of risks and uncertainties which could cause actual events or
results to differ materially from those reflected herein. Forward-looking
statements are based on the estimates and opinions of management of the Company
at the time the statements were made.
CHANGE IN REPORTING CURRENCY AND FOREIGN CURRENCIES
Most of the Company's operations are conducted by its Canadian subsidiaries in
Canadian dollars. As only limited operations are conducted in United States
dollars the Company adopted Canadian dollars as its reporting currency effective
January 1, 2003. Comparative figures for the prior period have been restated
using the current rate method of currency translation as though the Canadian
dollar was the reporting currency in that period. The net effect of adopting
Canadian dollars as the Company's reporting currency reduces the foreign
currency fluctuations recorded as a result of translating the Company's Canadian
subsidiaries into US dollars. As substantially all of the operations are now in
Canada, management is of the opinion that the Canadian dollar will more
accurately reflect the balance sheet and the net exposure in US dollars will be
appropriately recognized through the income statement. The net exposure to the
US dollar will primarily come from US dollar denominated accounts such as cash
and trade payables. All numbers reported in these financial statements are
stated in Canadian dollars unless otherwise denoted.
OVERALL PERFORMANCE
Revenues from oil and natural gas production, before deduction of royalties and
operating costs, increased by $7,642,385 to $15,976,765 in 2004 from $8,334,380
in 2003.
Net revenue from oil and natural gas production, after deduction of royalties
and operating costs, increased by $2,970,518 to $6,868,857 in 2004 from
$3,898,339 in 2003.
The Company's net loss decreased by $8,747,204 to $3,662,782 in 2004 from
$12,409,986 in 2003.
The Company's production increased by 28 boe/d to 1,118 boe/d in 2004 compared
to 1,090 boe/d in 2003.
2
SELECTED ANNUAL INFORMATION
The table below sets out the Company's selected annual information for the years
ended December 31, 2004, 2003 and 2002:
------------------------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------------------------
OPERATIONS
Production:
Crude oil & NGL's (Bbl/d) 715 696 36
Natural gas (Mcf/d) 2,417 2,361 860
Total (Boe/d) 1,118 1,090 179
Average sales prices:
Crude oil ($/Bbl) $ 38.95 $ 33.04 $ 37.75
Natural gas ($/Mcf) $ 6.53 $ 6.23 $ 4.33
Total ($/boe) $ 39.04 $ 34.95 $ 28.32
Royalty expense ($/ Boe) $ (8.34) $ (5.88) $ (5.27)
Operating expense ($/ Boe) $ (13.91) $ (12.73) $ (7.18)
Netback ($/ Boe) $ 16.78 $ 16.35 $ 15.87
FINANCIAL
Revenues:
Crude oil & NGL's $ 10,195,428 $ 4,390,809 $ 490,686
Natural gas 5,781,337 3,943,571 1,359,327
------------------------------------------------------------------------------------------
15,976,765 8,334,380 1,850,013
Royalty expenses (3,413,404) (1,400,856) (344,362)
Operating expenses (5,694,504) (3,035,185) (468,848)
------------------------------------------------------------------------------------------
Net revenue from oil and gas production 6,868,857 3,898,339 1,036,803
------------------------------------------------------------------------------------------
Net loss $ (3,662,782) $(12,409,986) $ (1,239,574)
------------------------------------------------------------------------------------------
Net loss per share $ (0.18) $ (0.77) $ (0.04)
------------------------------------------------------------------------------------------
Cash flow from operations before changes
in working capital* $ 2,176,012 $ 1,387,785 $ (57,520)
------------------------------------------------------------------------------------------
Capital expenditures (disposal) including
acquisition of business $ 10,402,820 $ 16,453,788 $ 5,478,451
------------------------------------------------------------------------------------------
Long term liabilities $ 6,631,999 $ 11,461,096 $ 1,112,121
------------------------------------------------------------------------------------------
Total assets $ 39,082,134 $ 35,092,975 $ 11,297,589
------------------------------------------------------------------------------------------
Dividends (Preferred Shares) $ 227,083 $ 147,478 $ --
------------------------------------------------------------------------------------------
*Cash flow from operations is not a measure that has any standardized meaning
prescribed by Canadian GAAP and is considered a non GAAP measure. Therefore this
measure may not be comparable to similar measures presented by other issuers.
This measure has been presented in this MD&A as additional information regarding
the company's liquidity and ability to generate funds to finance its operations.
Cash flow from operations is calculated by adding back non-cash items to
earnings. This number is reconciled to the net income for the year in the
consolidated statement of cash flows included in the consolidated financial
statements
NGLs - natural gas liquids
Bbls/d - barrels of oil per day
Mcf/d - thousand cubic feet per day
Mmcf/d - million cubic feet per day
Boe/d - barrels of oil equivalent per day
(A boe conversion ratio of 6 mcf: 1bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not represent
a value equivalency at the wellhead)
3
CHANGES IN ACCOUNTING POLICIES
Asset Retirement Obligations
The Company has adopted the new recommendation of the Canadian Institute of
Chartered Accountants ("CICA") relating to accounting for asset retirement
obligations effective January 1, 2003. This recommendation replaces the previous
method of accounting for site restoration costs on an accrual basis. The Company
has adopted the new standard on a retroactive basis in accordance with the CICA
recommendations on Accounting Changes. Under the new standard, a liability for
the fair value of environmental and site restoration obligations is recorded
when the obligations are incurred and the fair value can be reasonably
estimated. The obligations are normally incurred at the time the related assets
are brought into production. The fair value of the obligations is based on the
estimated cash flow required to settle the obligations discounted using the
Government of Canada Bond Rate for the applicable term adjusted for the
Company's credit rating. The fair value of the obligations is recorded as a
liability with the same amount recorded as an increase in capitalized costs. The
amounts included in capitalized costs are depleted using the unit-of-production
method. The liability is adjusted for accretion expense representing the
increase in the fair value of the obligations due to the passage of time. The
accretion expense is recorded as an operating expense.
Stock-Based Compensation
Effective January 1, 2003, the Company adopted the recommendations of the CICA
Handbook Section 3870 "Stock Based Compensation and Other Stock-Based Payments".
This section was amended to require the expensing of all stock based
compensation awards for fiscal years beginning after January 1, 2003. The
Company has chosen to adopt the recommendation prospectively thereby recording
the fair value of the stock options issued since January 1, 2003 in the income
statement using the Black-Scholes option-pricing model.
Foreign Currency
Most of the Company's operations are conducted by its Canadian subsidiaries in
Canadian dollars with the remainder conducted in United States dollars. The
Company converts its United States dollar transactions using the current rate
method of currency translation. Under this method, monetary assets and
liabilities are translated at the rate of exchange in effect at the balance
sheet date and revenue and expense items are translated at the rate of exchange
in effect on the dates on which such items are recognized in income during the
period. Unrealized foreign currency gains and losses are recognized in current
period earnings.
The United States dollar amounts have been converted into Canadian dollar
amounts for convenience purposes using either the average or the period end
exchange rates shown below:
Twelve months ended December 31, 2004 $1.2991
Twelve months ended December 31, 2003 $1.3161
As at December 31, 2004 $1.2020
As at December 31, 2003 $1.2965
As at December 31, 2002 $1.5776
CRITICAL ACCOUNTING ESTIMATES
Amounts recorded for depreciation, depletion and amortization, asset retirement
costs and obligations and amounts used for ceiling test and impairment
calculations are based on estimates of oil and natural gas reserves and future
costs required to develop those reserves. By their nature, these estimates of
reserves and the related future cash flows are subject to measurement
uncertainty, and the impact on the financial statements of future periods could
be material.
4
RESULTS OF OPERATIONS
The Company's production and operating results for the year ended December 31,
2004 include the accounts of Quarry for the 350 day period ended December 16,
2004. For the comparable period in 2003, the Company's production and operating
results include the accounts of Quarry for the period July 28, 2003 to December
31, 2003.
Production
For the year ending December 31, 2004 the average oil and NGLs production per
day increased by 19 bbls/d to 715 bbls/d compared to 696 bbls/d for the
comparable period in 2003. The increase in average oil production of 19 bbls/d
for the year ending December 31, 2004 was primarily related to the Ribstone area
which increased by 78 bbls/d over 2003. This increase was offset by natural
declines in other areas with the largest declines of 36 bbls/d and 34 bbls/d
coming from the Lloydminster area in Saskatchewan and the Chauvin area of
Alberta. The remaining 11 bbls/d increase was attributed to other areas.
The Company's oil production from the Chauvin, Ribstone, Chestermere and Enchant
areas of Alberta were 245 bbls/d, 243 bbls/d, 110 bbls/d and 32 bbls/d,
respectively. The Company's Lloydminster area of Saskatchewan produced 59 bbls/d
and 26 bbls/d were attributed to other areas.
For the year ending December 31, 2004 the average natural gas production per day
increased by 56 mcf/d to 2,417 mcf/d compared to 2,361 mcf/d for the comparable
period in 2003. The biggest increase came from the Currant area of British
Columbia, which increased by 700 mcf/d. The Ansell, Haynes, and Lamond areas of
Alberta increased by 65 mcf/d, 39 mcf/d, and 24 mcf/d, respectively with the
remaining increase of 40 mcf/d from other areas. The Lloydminster area of
Saskatchewan experienced the largest decrease, 423 mcf/d. The Enchant,
Chestermere and Royce areas of Alberta decreased 170 mcf/d, 118 mcf/d, and 101
mcf/d respectively.
The Company's natural gas production includes 1,179 mcf/d and 330 mcf/d,
respectively, from the West Currant and Rigel areas of British Columbia.
Lloydminster in Saskatchewan produced 349 mcf/d of natural gas. The Enchant and
Chestermere areas at production levels of 144 mcf/d and 133 mcf/d respectively,
were the largest natural gas producing areas in Alberta. The remaining natural
gas production of 282 mcf/d arose from other areas of Alberta. The production
from West Currant was added at the end of March 2004 as a result of the
Company's 2003/2004 winter drilling program.
Crude oil & NGLs production increased 12 bbls/d from 158 bbls/d in the fourth
quarter of 2003 to 170 bbls/d in the fourth quarter of 2004. Natural gas
production decreased 69 mcf/d from 589 mcf/d in the fourth quarter of 2003 to
520 mcf/d in the fourth quarter of 2004.
Prices
The average oil price realized by the Company in 2004 was $38.95 per barrel, an
increase of 18% from $33.04 per barrel in 2003. Higher average prices for oil
during 2004 compared to 2003 were the major contributing factor. All oil
producing properties experienced a price increase in 2004 over 2003 except for
the Caroline area, which saw its average oil price drop from $38.39 in 2003 to
$33.78 in 2004.
5
The average natural gas price realized by the Company in 2004 was $6.53 per mcf,
an increase of 5% from $6.23 per mcf in 2003. Similar to oil prices, average
prices for natural gas were higher in 2004 compared to 2003.
The average oil price realized by the Company in the last quarter of 2004 was
$35.11 per barrel, an increase of 22% from $28.75 per barrel in the last quarter
of 2003.
The average natural gas price realized by the Company in the last quarter of
2004 was $6.28 per mcf, an increase of 15% from $5.47 per mcf in the last
quarter of 2003.
Petroleum and natural gas sales
Revenues from oil and natural gas production, before deduction of royalties and
operating costs, increased by $7,642,385 to $15,976,765 in 2004, due primarily
to the inclusion of $6,644,873 from Quarry for 2004 ($10,659,254 December 31,
2004 less $4,014,381 August to December 2003) compared to $8,334,380 in 2003.
In the fourth quarter of 2004, revenues from oil and natural gas production,
before deduction of royalties and operating costs, increased by $542,701 to
$3,378,793 compared to $2,836,092 for the last quarter of 2003.
Royalties
Royalties increased from $1,400,856 or $5.88 per boe in 2003 to $3,413,404 or
$8.34 per boe in 2004 due primarily to the inclusion of $1,440,075 from Quarry
for 2004 ($1,985,395 December 31, 2004 less $545,320 August to December 2003).
Royalties as a percentage of revenues increased from 17% to 21%.
Royalties increased from $520,990 or $5.57 per boe in the last quarter of 2003
to $687,143 or $7.32 per boe in the last quarter of 2004.
Operating Costs
Operating costs increased by $2,659,319 to $5,694,504 in 2004 compared to
$3,035,185 in 2003 primarily due to the inclusion of $2,978,261 from Quarry
($4,478,182 December 31, 2004 less $1,499,921, August to December 2003).
Operating costs increased by $155,125 in the last quarter of 2004 to $1,363,569
compared to $1,208,444 in the last quarter of 2003.
Operating costs on a boe basis increased by $1.18 per boe from $12.73 per boe in
2003 to $13.91 per boe in 2004. Operating costs were high due to work-over costs
incurred to maintain and improve production from its properties in the Ribstone
and Chauvin areas of Alberta.
Operating costs on a boe basis increased by $1.60 per boe from $12.92 per boe in
the last quarter of 2003 to $14.52 per boe in the last quarter of 2004.
General and administrative expenses
General and administrative expenses increased $2,442,455 to $4,933,565 in 2004
partly due to the inclusion of $1,303,050 from Quarry for the year ended
December 31, 2004 compared to $2,491,110 in 2003. Excluding the effect of
Quarry, Assure O&G's general and administrative expenses increased by $1,514,301
reflecting the increase in the Company's level of activities and increased costs
relating to its regulatory filings in the United States and its application to
obtain a Canadian listing and related equity financings.
6
Interest expense
Interest expense decreased by $9,198 to $865,545 for the Company in 2004
compared to interest expense of $856,347 in 2003. Included in interest expense
for 2003 is $250,014 in respect of warrants issued in conjunction with the US
subordinated note payable. As well, interest on the US subordinated note payable
decreased $183,176 compared to last year due to a principal reduction of US
$1,260,000 on December 5, 2003 and quarterly principal repayments of US $162,000
on June 15 and September 15 of this year. The decrease due to the US
subordinated note payable was offset by an increase of approximately $51,000 in
interest expense on the Canadian note payable due to a timing difference on the
interest expense accruals last year compared to 2004.
Interest expense increased by $10,105 to $178,955 in the fourth quarter of 2004
compared to $168,850 in the fourth quarter of 2003.
Depletion and depreciation
Depletion and depreciation expense decreased by $6,698,321 to $6,609,732
compared to $13,308,053 in 2003. The decrease was mainly due to the inclusion of
$3,013,556 in 2004 from Quarry ($4,289,827 for 2004 less $1,276,271 for August
to December 2003) which offset the reduction of $9,078,379 related to last
year's ceiling test writedown. On a boe basis, depletion and depreciation was
$16.15 per boe for the year ended December 31, 2004 compared to $55.81 per boe
for the year ended December 31, 2003 which included last year's ceiling test
writedown recorded as depletion. As well, additional natural gas reserves in
West Currant added in the first half of 2004 reducing the depletion rate for
2004.
Depletion and depreciation expense decreased by $9,631,950 from $11,267,843 in
the fourth quarter of 2003 to $1,635,893 in the fourth quarter of 2004.
Excluding the ceiling test writedown of $9,078,379 recorded in the fourth
quarter of 2003, depletion and depreciation expense decreased by $553,571 from
$2,189,464 in the fourth quarter of 2003 to $1,635,893 in the fourth quarter of
2004. On a boe basis and excluding the ceiling test writedown, depletion and
depreciation was $17.42 per boe for the fourth quarter of 2004 compared to
$23.40 for the fourth quarter of 2003.
Foreign Exchange Gain (Loss)
Most of the Company's operations are conducted by its Canadian subsidiaries in
Canadian dollars with the remainder conducted in United States dollars. The
Company converts its United States dollar transactions using the current rate
method of currency translation. Under this method, monetary assets and
liabilities are translated at the rate of exchange in effect at the balance
sheet date and revenue and expense items are translated at the rate of exchange
in effect on the dates on which such items are recognized in income during the
period. Unrealized foreign currency gains and losses are recognized in current
period earnings.
In 2004, the Company realized a foreign exchange gain of $112,242 compared to a
foreign exchange loss of $133,547 in 2003.
Income Taxes
As of February 6, 2004, the Company changed its domicile from Nevada to Alberta,
the net operating loss carryforwards of approximately US $816,000 will no longer
be available for use due to this change.
The Company and its wholly-owned subsidiaries have a net operating loss of
approximately $2,330,000 (2003 - $931,273) under The Income Tax Act (Canada).
These net operating losses can be carried back three years and forward seven to
10 years to offset future taxable income. The Company and its wholly owned
subsidiaries have recorded a future tax recovery of $1,476,501 (2003 - $90,524)
for 2004.
7
The net future tax liability results primarily from the difference in the tax
basis and carrying value of property, plant and equipment.
Minority interest in consolidated subsidiary
Minority interest represents the minority interest share of the net loss of
Quarry for the period ended December 16, 2004.
Equity Income
The equity income arises from Quarry's 39.77% interest in Keantha Holdings Inc.,
a private company.
Net loss and net loss per share
Assure recorded a net loss, after deduction of depletion and other non-cash
items, of $3,662,782 or $0.18 per common share for the year ended December 31,
2004 compared to a net loss of $12,409,986 or $0.77 per common share for the
same period in 2003.
In the fourth quarter, Assure recorded a net loss, after deduction of depletion
and other non-cash items, of $963,679 or $0.05 per common share compared to a
net loss of $9,667,477 or $0.60 per common share for the fourth quarter of 2003
which includes the ceiling test writedown. Excluding the ceiling test writedown
of $9,078,379, the fourth quarter loss for 2003 was $589,098 or $0.04 per common
share.
SUMMARY OF QUARTERLY RESULTS
2004
Q4 Q3 Q2 Q1
--------------------------------- ---------------- ------------------------ ---------------- ------------------
Net petroleum and natural gas
revenue $3,087,961 $3,902,164 $2,857,986 $2,715,250
Net loss $(963,679) $(500,729) $(1,092,742) $(1,105,632)
Net loss per share - basic $(0.05) $(0.02) $(0.06) $(0.06)
--------------------------------- ---------------- ------------------------ ---------------- ------------------
2003
--------------------------------- ---------------- ------------------------ ---------------- ------------------
Q4 Q3 Q2 Q1
--------------------------------- ---------------- ------------------------ ---------------- ------------------
Net petroleum and natural gas
revenue $2,836,745 $2,047,061 $895,369 $1,154,349
Net loss $(9,667,477) $(1,538,633) $(702,989) $(500,887)
Net loss per share - basic $(0.60) $(0.09) $(0.04) $(0.03)
--------------------------------- ---------------- ------------------------ ---------------- ------------------
The financial information for each of the quarters in the year ended December
31, 2003 has been restated into Canadian dollars using the translation of
convenience method. Amounts previously reported in US Dollars have been
translated into Canadian dollars using the average exchange rate for the year
ended December 31, 2003 of Cdn $1.2991 for each US $1.00.
ACQUISITIONS
Effective June 30, 2004, the Company purchased 1,000,000 units (the "Units") of
Quarry at a price of $0.75 per Unit for a total cost of $750,000. Each Unit
consists of one common share and one warrant (a "Warrant"). Each Warrant
entitled the holder to purchase one common share of Quarry at a price of $0.80
for a period of two years. Taking into account the issuance of the 1,000,000
common shares, Quarry had 15,276,340 common shares issued and outstanding. As a
result, the Company owned and controlled a total of 7,919,900 common shares
representing 51.84% of the issued and outstanding common shares of Quarry. The
purchase price of $750,000 was allocated to the assets acquired and liabilities
assumed based upon their fair values at the date of acquisition.
8
On November 10, 2004, Quarry completed a non-brokered private placement and
issued 2,008,364 common shares at a price per share of $0.70 for gross proceeds
of $1,405,855. Assure Holdings Inc., Quarry's largest shareholder, participated
in the private placement, purchasing 757,143 common shares. These shares were
subject to a four-month hold period, ending March 10, 2005. The proceeds raised
from the private placement were used to retire certain debt obligations of
Quarry. As a result, Assure held 8,677,043 common shares of Quarry, 50.2% of the
outstanding common shares.
On December 17, 2004 the Company acquired 8,607,661 of the issued and
outstanding common shares of Quarry not already owned by Assure for common
shares of Assure on the basis of 0.360 of an Assure common share for each Quarry
Oil & Gas Ltd. ("Quarry") common share. The acquired Quarry shares were
transferred to its wholly owned subsidiary, Assure Holdings Inc. ("AHI"). AHI
and Quarry amalgamated on December 17, 2004 pursuant to section 184(1) of the
Alberta Business Corporation Act. All warrants to acquire Quarry common shares
were cancelled.
FINANCIAL RESOURCES AND LIQUIDITY
During the year ended December 31, 2004, the Company's cash decreased by
$4,515,745 compared to an increase of $2,708,864 in the prior year. The
components of the change are set out below.
Year Ended December 31 Change
2004 2003
-------------------------------------------------------------------------------------------------------
Net income after adjustment for non-cash items $ 2,176,012 $ 1,387,875 $ 788,137
Reduction (increase) in working capital 727,222 1,586,665 (859,443)
-------------------------------------------------------------------------------------------------------
Provided by operating activities 2,903,234 2,974,540 (71,306)
Used in investing activities (10,402,820) (16,453,788) 6,050,968
Provided by financing activities 2,983,841 16,188,112 (13,204,271)
-------------------------------------------------------------------------------------------------------
Net change in cash $ (4,515,745) $ 2,708,864 $ (7,224,609)
-------------------------------------------------------------------------------------------------------
Cash flow from operations
Cash flow from operations for the year ended December 31, 2004, after adjustment
for non-cash items and before changes in working capital, increased by $788,137
to $2,176,012. The contribution to cash flows from an increase of $2,970,518 in
revenues from oil and gas activities in 2004 was offset by higher general and
administrative expenses. Cash flow from operations, after an increase of
$727,222 in working capital, decreased by $71,306 from $2,974,540 for the 2003
year.
Cash flow provided by financing activities
During the year ended December 31, 2004, the Company issued 482,000 common
shares at $4.73 (US $3.60) per share and 482,000 warrants to purchase common
shares at US $4.00 per share (CDN $5.25 per share) under a private placement for
total proceeds of $2,376,492 (US $1,735,200).
In November 2004, when still a partially-owned subsidiary of the Company, Quarry
completed a non-brokered private placement raising cash proceeds of $796,409.
During the year, Quarry collected an outstanding loan from a former employee in
the amount of $112,500.
Other sources of financing were $2,520,372 advances from shareholders, which are
unsecured, non-interest bearing and have no fixed terms of repayment.
The Company reduced its demand bank loan by $1,650,000 and repaid the debenture
of $1,250,000 which matured on November 1, 2004.
Cash flow used in investing activities
9
Cash flow of $12,554,802 was used in investing activities for the Company's
capital expenditure program.
During the year ended December 31, 2004, Assure and its subsidiaries
participated in drilling 9.35 wells, as follows:
- six (five net) natural gas wells in Northeastern British Columbia. 2
wells were completed and tied-in, one well is currently being
completed and is scheduled for tie in during the 3rd quarter of 2004
and the 2 remaining wells are scheduled for completion and tie in
during the 4th quarter of 2004;
- one (0.25 net) natural gas well in Alberta that was abandoned;
- one (0.25 net) natural gas well in the Edson area of Alberta;
- three (3 net) heavy oil wells in the Lloydminster area of Alberta;
- two natural gas wells in the Enchant area, one with a 35.625%
working interest and the other with a 47.5% working interest.
In addition, the Company completed six 100% working interest oil wells in the
Ribstone area of Alberta that had been drilled in 2003.
Assure has no commitments for capital expenditures other than exploration,
drilling, completion and equipping expenditures to be incurred in the normal
course of business. The Company anticipates that these expenditures will be
funded out of existing capital resources.
The calculation of cash flow is disclosed on the Consolidated Statement of Cash
Flows in the Consolidated Financial Statements.
Working Capital
The Company had a working capital deficiency of $14,110,781 at December 31,
2004, including payables and accrued liabilities of $8,269,333, the demand bank
loan of $6,150,000, advances from shareholder of $2,520,372, current portion of
long-term debt of $978,896 and interest payable of $11,245. Assure anticipates
that it will be able to fund this deficiency out of cash flows from operations,
bank borrowings, proceeds from the sale of the Chestermere property and new
equity.
At December 31, 2003 the Company had a working capital deficiency of $7,199,436,
including payable and accrued liabilities of $5,801,845, the debenture payable
of $1,250,000, the demand bank loan of $7,800,000 and the current portion of
long-term debt of $830,105.
Demand Bank Loan - Assure
Effective November 15, 2004, the Company had available a $6,550,000 (December
31, 2004 $6,400,000) revolving operating demand loan facility with a Canadian
chartered bank. The facility reduces by $75,000 per month commencing November
30, 2004 and reduces by $275,000 per month commencing January 31, 2005. The loan
bears interest at the bank's prime rate, which was 4.25% at December 31, 2004,
plus 1.5% interest subject to a standby fee of 0.125% per annum. The Company
also had available, a $1,200,000 non-revolving acquisition and development
demand loan facility at the same bank with interest payable at the bank's prime
rate, which was 4.25% at December 31, 2004, plus 1.5% subject to a drawdown fee
of 0.375% (acquisition) or 0.50% (development) and a standby fee of 0.125% per
annum. The facilities are secured by a $20 million debenture over all the assets
of the Company. These facilities will be reviewed no later than April 30, 2005.
As at December 31, 2004, the Company had drawn down $5,700,000 (2003 -
$7,800,000) against these facilities and this amount has been classified as a
current liability.
Under the credit facility agreement with the bank, the Company is subject to
certain covenants. As at December 31, 2004, the Company was not in compliance
with the covenant requiring it to maintain an adjusted working capital ratio of
not less than 1 to 1. The bank has not demanded payment of the loan as a result
of this covenant violation and has provided a waiver for the working capital
covenant at December 31, 2004 (see Subsequent event note b).
Demand Bank Loan - Oil & Gas
As at December 31, 2004, the Company had available, through its wholly owned
subsidiary Oil & Gas a $1,200,000 revolving, operating demand loan facility with
a Canadian chartered bank. The loan bears interest at the bank's prime rate,
which was 4.25% at December 31, 2004, plus 1.0% interest subject to a standby
fee of 0.125% per annum. The Company also had available through Oil & Gas a
$450,000 non-revolving acquisition and development demand loan facility at the
same bank with interest payable at the bank's prime rate, which was 4.25% at
December 31, 2004, plus 1.25% subject to a drawdown fee of 0.25% (acquisition)
or 0.50% (development) and a standby fee of 0.125% per annum. The facilities are
secured by a $10 million debenture over all the assets of Oil & Gas and a $10
million guarantee from Assure and Westerra. These facilities will be reviewed no
later than April 30, 2005.
As at December 31, 2004, Oil & Gas had drawn down $450,000 (2003 - $ nil)
against these facilities and this amount has been classified as a current
liability.
Under the credit facility agreement with the bank, the Company is subject to
certain covenants. As at December 31, 2004, the Company was not in compliance
with the covenant requiring it to maintain an adjusted working capital ratio of
not less than 1 to 1. The bank has not demanded payment of the loan as a result
of this covenant violation and has provided a waiver for the working capital
covenant at December 31, 2004 (see Subsequent event note b).
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is currently involved in litigation with a former officer of Quarry
who is claiming $240,000 in respect of termination and severance pay. The
Company is contesting this claim and has not accrued any amounts for this
litigation. Examinations for discovery have occurred and the matter is currently
in abeyance as of December 31, 2004 as the plaintiff has not moved the
litigation forward.
11
Employment Agreements
The Company currently has employment agreements with three employees
("Employees") of the Company. The employment agreements specify that the
Employees are entitled to lump sum payments in the event that the Company is
sold.
In the ordinary course of business, the Company and its subsidiaries enter into
contracts which contain indemnification provisions, such as loan agreements,
purchase contracts, service agreements, licensing agreements, asset purchase and
sale agreements, joint venture agreements, operating agreements, leasing
agreements, land use agreements etc. In such contracts, the Company may
indemnify counterparties to the contracts if certain events occur. These
indemnification provisions vary on an agreement by agreement basis. In some
cases, there are no pre-determined amounts or limits included in the
indemnification provisions and the occurrence of contingent events that will
trigger payment under them is difficult to predict. Therefore, the maximum
potential future amount that the Company could be required to pay cannot be
estimated.
CONTRACTUAL OBLIGATIONS
Description Total 2005 2006 2007 2008 2009
----------------------------------------------------------------------------------------------------------------
Operating Leases (note 1) $ 208,454 $ 113,424 $ 87,720 $ 7,310 $ -- $ --
Note Payable (note 2) 800,000 200,000 200,000 200,000 200,000 --
Subordinated Note Payable (note 3) 3,310,308 778,896 778,896 778,896 778,896 194,724
---------------------------------------------------------------------------
Total Contractual Obligations $4,318,762 $1,092,320 $1,066,616 $ 986,206 $ 978,896 $ 194,724
===========================================================================
(1) Effective August 1, 2004, the Company entered into a new lease for the
rental of office space for the period to January 31, 2007. The Company is
committed to payments of $87,720 per annum for rent plus a proportionate share
of operating costs. The Company has also entered into a sublease that expires
December 31, 2005. The Company is committed to payments of $25,704 per annum for
rent plus a proportionate share of operating costs.
(2) The Company's long-term debt consists of a six-year note payable (the "Note
Payable") issued by its wholly owned subsidiary Oil & Gas in the principal
amount of $800,000 (December 31, 2003 - $1,000,000) and a six-year Subordinated
Promissory Note Payable (the "Subordinated Note") in the principal amount of US
$2,754,000, equivalent to Canadian $3,310,308 (December 31, 2003 - US
$3,240,000, equivalent to Canadian $4,200,700).
The Note Payable was issued on December 28, 2002 and matures on December 28,
2008. The note accrues interest at 7.5% per annum. Quarterly payments of
principal and interest are due on March 28, June 28, September 28 and December
28. The note is subordinated to all present and future bank debt of Oil & Gas
and its subsidiaries.
(3) The Subordinated Note was issued on March 15, 2003, as amended on December
5, 2003, and matures on March 15, 2009. The note accrues interest at 7.75% per
annum. Quarterly payments of principal and interest are due and payable in US
dollars on March 15, June 15, September 15 and December 15. The note is
unsecured and is subordinated to all present and future bank debt of the Company
and its subsidiaries. In connection with the issuance of the Subordinated Note,
the Company issued 450,000 common stock purchase warrants to purchase an equal
number of the Company's common stock with an exercise price of $3.73 (US $3.10)
per share. These common stock purchase warrants may be exercised at any time
during the five years commencing July 1, 2003.
12
TRANSACTIONS WITH RELATED PARTIES
Quarry Oil & Gas Ltd.
Effective June 30, 2004, Assure acquired 1,000,000 common shares of Quarry,
comprising part of the Units issued under a private placement. On November 1,
2004, Assure advanced $1,250,000 to Quarry. This amount is unsecured,
non-interest bearing and without fixed or agreed repayment terms. Quarry used
these funds to repay the debenture, which matured on November 1, 2004 (See Note
8). On November 10, 2004, Assure participated in a non-brokered private
placement and acquired 757,143 common shares of Quarry at $0.70. As a result,
Assure directly holds a total of 8,677,043 common shares representing 50.2% of
the total issued and outstanding common shares of Quarry. Effective December 17,
2004 the Company through its wholly owned subsidiary acquired the remaining
49.79% outstanding common shares of Quarry, as disclosed in note 2.
Other
Included in accounts receivable is $249,938 and included in accounts payable is
$377,339 due to companies controlled by a director of the Company appointed on
December 17, 2004. These accounts receivable and payable arise as the Company
and this director share an interest in oil and gas properties that the Company
operates.
All related party transactions have been recorded at the agreed to exchange
amount, which reflects fair value.
Financial Instruments
Financial Instruments of the Company consist of cash, accounts receivable,
income taxes payable, accounts payable and accrued liabilities, due to
shareholders, debenture payable, long term debt and bank loans. The fair value
of these financial instruments approximates their carrying value. It is
management's opinion that the Company is not exposed to significant risks
associated with these financial instruments, other than foreign exchange
fluctuation on a portion of the long term debt.
BUSINESS RISKS
Operating risks and Insurance Coverage
Our business involves a variety of operating risks, including:
o Blowouts, cratering and explosions;
o Mechanical problems;
o Uncontrolled flows of oil, natural gas or well fluids;
o Fires;
o Formations with abnormal pressures;
o Pollution and other environmental risks; and
o Natural disasters
The operation of our natural gas gathering and pipeline systems also involves
various risks of explosions and environmental hazards caused by pipeline leaks
and ruptures. The location of pipelines near populated areas, including
residential areas, commercial business centers and industrial sites, could
increase these risks. Any of these events could result in loss of human life,
significant damage to property, environmental pollution, impairment of our
operations and substantial losses to us. In accordance with customary industry
practice, we maintain insurance against some, but not all, of these risks and
losses. The occurrence of any of these events not fully covered by insurance
could have a material adverse effect on our financial position and results of
operations.
13
Commodity Pricing and Risk Management Activities
Our revenues operating results, financial condition and ability to borrow funds
or obtain additional capital depend substantially on prevailing prices for
natural gas and oil. Declines in oil and gas prices may materially adversely
affect our financial condition, liquidity, ability to obtain financing and
operating results. Lower oil and gas prices also may reduce the amount of oil
and gas that we can produce economically. Historically, oil and gas prices and
markets have been volatile, with prices fluctuating widely, and they are likely
to continue to be volatile. Depressed prices in the future would have a negative
impact on our future financial results. In particular, substantially lower
prices would significantly reduce revenue and could potentially impact the
outcome of our annual impairment test.
The majority of our production is sold at market responsive prices. Generally,
if the commodity indexes fall, the prices that we receive for our production
will also decline. Therefore, the amount of revenue that we realize is partially
determined by factors beyond our control. However, management may mitigate this
price risk with the use of financial instruments.
Environmental Regulations
The Company is subject to various regulatory and statutory requirements relating
to the protection of the environment. These requirements, in addition to
contractual agreements and management decisions, result in the accrual of
estimated future removal and site restoration costs. These costs are accrued
based on estimates of reserves and future costs. Any changes in these will
affect future earnings. Costs attributable to these commitments and
contingencies are expected to be incurred over an extended period of time and
are to be funded mainly from the Company's cash provided by operating
activities. Although the ultimate impact of these matters on net earnings cannot
be determined at this time, it could be material for any one-quarter or year.
SEASONALITY TREND INFORMATION
The level of activity in the Canadian oil and gas industry is influenced by
seasonal weather patterns. Wet weather and spring thaw make the ground unstable.
Consequently, municipalities and provincial transportation departments enforce
road bans that restrict the movement of rigs and other heavy equipment, thereby
reducing activity levels. Also, certain oil and gas producing properties located
in swampy terrain are only accessible during winter months. Seasonal factors and
unexpected weather patterns may lead to declines in exploration and production
activity and increased consumer demand or changes is supply during certain
months of the year may influence the commodity prices.
SUBSEQUENT EVENTS
a) Chestermere Sale
Subsequent to year end the Company completed a sale effective January 1, 2005
for the Chestermere property for gross proceeds of $5.5 million.
b) Bank loan
On March 7, 2005, the Company, signed a term sheet outlining the terms and
conditions of proposed financing to replace the existing bank loan. Subject to
certain credit approval conditions, the Company will have available a $7,100,000
revolving operating demand loan facility with a Canadian chartered bank. The
loan will bear interest at the bank's prime rate, which was 4.25% at March 7,
2005, plus 2% interest subject to a standby fee of 0.125% per annum. The Company
will also have available, a $2,700,000 non-revolving development demand loan
facility at the same bank with interest payable at the bank's prime rate, which
was 4.25 % at March 7, 2005, plus 2.5% subject to a drawdown fee of 1% a standby
fee of 0.125% per annum. This facility is subject to completion of the bank's
credit approval process. The facilities will be secured by a $10 million
debenture over all the assets of Oil & Gas, a $10 million guarantee from Assure
and Westerra, and a $40 million supplemental debenture over the major producing
petroleum and natural gas reserves of Assure, Oil & Gas, and Westerra. These
facilities will be reviewed by July 15, 2005 and upon the Company's fiscal year
end December 31, 2005, and not later than April 30, 2006. This new facility
would replace both the Company's and Oil & Gas' facilities described in Note 9.
A commitment fee in the amount of $500,000 is also payable upon delivery of a
commitment to the Company, payable in monthly payments of $100,000 per month
commencing April 1, 2005. An earnest fee in the amount of $50,000 will also be
payable on April 1, 2005.
14
The credit approval conditions were approved on April 1, 2005 and the credit
facilities are in place as of that date.
c) Engagement of Financial Advisor and Amendment of Employment Agreementsp
On April 21, 2005 the Company engaged the services of Haywood Securities Inc.
("Haywood") a TSE member firm, as its exclusive financial advisor to assist the
Company in evaluating strategic alternatives to maximize shareholder value. In
the event that such alternatives result in a merger, takeover or business
combination (the "Transaction") with another company, Haywood would earn a
commission equivalent to 0.9% of the Transaction value. On April 25, 2005 the
Company amended its employment agreements such that in the event of a
Transaction the Company's President and two Vice Presidents are entitled to
receive severance pay of approximately $600,000 in the aggregate. As part of
this amendment, 3 employees of the Company were granted a total of 510,000 stock
options, exercisable at $1.25 Cdn for 1 year from the date of grant.
15
ITEM 3
Assure Energy, Inc., files Audited Financial Statements and Statement of
Reserves Data and other Oil & Gas Information
CALGARY, ALBERTA, May 4, 2005
Assure Energy, Inc. (OTCBB:ASURF) (FWB:ASL) (WKN 357954) ("Assure" or the
"Company") announces that it has filed its Audited Consolidated Financial
Statements and Management Discussion and Analysis for the year ended December
31, 2004. In addition, the Company has filed its Statement of Reserves Data and
other Oil & Gas Information pursuant to National Instrument 51-101 of the
Canadian Securities Administrators. The above filings are available for review
at www.sedar.com.
Assure is a junior oil and gas company with operations in British Columbia,
Alberta and Saskatchewan. Assure maintains a high working interest in its
properties and operates over 90% of its production.
Assure Energy, Inc. Harvey Lalach President (403) 266-4975
Email: hlalach@assure-energy.com
FORWARD-LOOKING STATEMENTS
This news release contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements, which are other
than statements of historical facts. These statements are subject to
uncertainties and risks including, but not limited to, product and service
demand and acceptance, changes in technology, economic conditions, the impact of
competition and pricing, government regulation, and other risks defined in this
document and in statements filed from time to time with the Securities and
Exchange Commission. All such forward-looking statements, whether written or
oral, and whether made by, or on behalf of, the Company, are expressly qualified
by these cautionary statements and any other cautionary statements which may
accompany the forward-looking statements. In addition, the Company disclaims any
obligation to update any forward-looking statements to reflect events or
circumstances after the date hereof.
1
ITEM 4
NI 51-101F1 STATEMENT OF RESERVES DATA
STATEMENT OF RESERVES DATA AND OTHER OIL AND GAS INFORMATION
The statement of reserves data and other oil and gas information set forth below
(the "Statement") is dated as follows. The effective date of the Statement is
December 31, 2004 and the preparation date of the Statement is April 26, 2005.
Disclosure of Reserves Data
The reserves data set forth below (the "Reserves Data") is based upon an
evaluation by Sproule Associates Limited. ("Sproule") with an effective date of
December 31, 2004 contained in the Sproule Report dated February 28, 2005. The
Reserves Data summarizes the crude oil, natural gas liquids and natural gas
reserves of the Corporation and the net present values of future net revenue for
these reserves using constant prices and costs and forecast prices and costs.
The Sproule Report has been prepared in accordance with the standards contained
in the COGE Handbook and the reserve definitions contained in NI 51-101. The
Corporation engaged Sproule to provide an evaluation of proved and proved plus
probable reserves and no attempt was made to evaluate possible reserves.
All of the Corporation's reserves are located in Canada and, specifically, in
the provinces of Alberta, British Columbia and Saskatchewan.
The Report of Management and Directors on Oil and Gas Disclosure and the Report
on Reserves Data by the independent qualified reserves evaluator are attached
hereto as Appendices A and B, respectively.
Disclosure provided herein in respect of BOEs may be misleading, particularly if
used in isolation. A BOE conversion ratio of 6 Mcf equals 1 Bbl is based on an
energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead.
It should not be assumed that the estimates of future net revenues presented in
the tables below represent the fair market value of the reserves. There is no
assurance that the constant prices and costs assumptions and forecast prices and
costs assumptions will be attained and variances could be material. The recovery
and reserve estimates of the Corporation's crude oil, natural gas liquids and
natural gas reserves provided herein are estimates only and there is no
guarantee that the estimated reserves will be recovered. Actual crude oil,
natural gas and natural gas liquid reserves may be greater than or less than the
estimates provided herein.
Reserves and Future Net Revenue
The following is a summary of the oil and natural gas reserves and the value of
future net revenue of Assure Energy, Inc. ("Assure") as evaluated by Sproule
Associates Limited ("Sproule"). The pricing used in the forecast and constant
price evaluations is set forth in the notes to the tables.
All evaluations of future revenue are after the deduction of future income tax
expenses, unless otherwise noted in the tables, royalties, development costs,
production costs and well abandonment costs but before consideration of indirect
costs such as administrative, overhead and other miscellaneous expenses. The
estimated future net revenue contained in the following tables do not
necessarily represent the fair market value of the Corporation's reserves. There
is no assurance that the forecast price and cost assumptions contained in the
Sproule Report will be attained and variances could be material. Other
assumptions and qualifications relating to costs and other matters are included
in the Sproule Report. The recovery and reserves estimates on the Corporation's
properties described herein are estimates only. The actual reserves on the
Corporation's properties may be greater or less than those calculated.
1
Assure Energy Inc.
--------------------------------------------------------------------------------
Sproule Associates Limited
OIL AND GAS RESERVES
BASED ON CONSTANT PRICES AND COSTS
(Note: All Reserves are in Canada)
Light and Medium Heavy Oil Natural Gas Natural Gas
Oil Liquids
-----------------------------------------------------------------------------------
Gross Net Gross Net Gross Net Gross Net
(mbbl) (mbbl) (mbbl) (mbbl) (mmcf) (mmcf) (mbbl) (mbbl)
Proved Developed Producing
Total 1,380.1 1,153.0 39.9 33.7 3,630.0 2,741.0 60.2 41.2
Proved Developed Non-Producing
Total 35.1 35.0 0.0 0.0 318.0 250.0 4.4 3.1
Proved Undeveloped
Total 5.3 4.9 0.0 0.0 772.0 572.0 11.5 8.4
-------- --------- -------- -------- -------- --------- -------- --------
Total Proved
Total 1,420.4 1,192.9 39.9 33.7 4,721.0 3,561.0 76.1 52.7
Total Probable
Total 650.4 547.1 32.2 27.6 3,814.0 2,850.0 54.0 38.7
-------- --------- -------- -------- -------- --------- -------- --------
Total Proved Plus Probable
Total 2,070.8 1,740.0 72.0 61.3 8,536.0 6,411.0 130.1 91.5
-----------------------------------------------------------------------------------
NET PRESENT VALUES OF FUTURE NET REVENUE
BASED ON CONSTANT PRICES AND COSTS
(Note: All Net Present Values are in Canadian dollars)
Before Deducting Income Taxes After Deducting Income Taxes
Discounted At (%/year) Discounted At (%/year)
---------------------------------------- ----------------------------------------
0% 5% 10% 15% 20% 0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$)
------- -------- ------- ------- ------- ------- ------- ------- -------- -------
Proved Developed Producing
Total 24,703 20,961 18,436 16,584 15,153 24,545 20,808 18,288 16,441 15,013
Proved Developed Non-Producing
Total 2,190 1,468 1,059 806 638 2,190 1,468 1,059 807 639
Proved Undeveloped
Total 1,837 1,588 1,377 1,196 1,039 1,826 1,574 1,362 1,180 1,024
------- -------- ------- ------- ------- ------- ------- ------- -------- -------
Total Proved
Total 28,731 24,016 20,872 18,587 16,830 28,560 23,849 20,709 18,428 16,675
Total Probable
Total 22,139 17,125 13,881 11,583 9,874 15,183 11,698 9,434 7,821 6,615
------- -------- ------- ------- ------- ------- ------- ------- -------- -------
Total Proved Plus Probable
Total 50,870 41,141 34,753 30,170 26,703 43,744 35,547 30,143 26,249 23,291
----------------------------------------------------------------------------------------------------------------------
TOTAL FUTURE NET REVENUE
(UNDISCOUNTED)
BASED ON CONSTANT PRICES AND COSTS
AS OF DECEMBER 31, 2004
(Note: All values are in Canadian dollars)
Future
Future Net Net
Abandonment Revenue Revenue
and Before After
Operating Development Reclamation Income Income Income
Revenue Royalties Costs Costs Costs Taxes Taxes Taxes
(M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$)
Total Proved
Total 75,444 14,150 28,865 2,057 1,641 28,731 170 28,560
Total Proved
Plus Probable
Total 123,301 23,657 43,305 3,759 1,709 50,870 7,126 43,744
2
Assure Energy Inc.
--------------------------------------------------------------------------------
Sproule Associates Limited
FUTURE NET REVENUE BY PRODUCTION GROUP
BASED UPON CONSTANT PRICES AND COSTS
AS OF DECEMBER 31, 2004
(Note: All Future Net Revenues are in Canadian dollars)
Future Net Revenue
Before Income Taxes
(Discounted at
Production Group 10%/Year)
(M$)
-------------------------------------- -----------------------
Total Proved Light and medium crude oil 11,483
Heavy oil 110
Associated gas and non-associated gas 9,279
Total Proved Plus Probable Light and medium crude oil 16,998
Heavy oil 158
Associated gas and non-associated gas 17,597
OIL AND GAS RESERVES
BASED ON FORECAST PRICES AND COSTS
(Note: All Reserves are in Canada)
Light and Medium
Oil Heavy Oil Natural Gas Natural Gas Liquids
-------------------- -------------------- -------------------- ---------------------
Gross Net Gross Net Gross Net Gross Net
(mbbl) (mbbl) (mbbl) (mbbl) (mmcf) (mmcf) (mbbl) (mbbl)
-------- -------- -------- -------- -------- -------- -------- --------
Proved Developed
Producing
Total 1,452.3 1,212.4 41.0 35.0 3,514.0 2,652 57.6 39.7
Proved Developed
Non-Producing
Total 32.6 32.6 0.0 0.0 318.0 250.0 4.4 3.1
Proved Undeveloped
Total 5.3 4.9 0.0 0.0 772.0 572.0 11.5 8.4
-------- -------- -------- -------- -------- -------- -------- --------
Total Proved
Total 1,490.1 1,249.9 41.0 35.0 4,604.0 3,474.0 73.5 51.2
Total Probable
Total 727.3 612.3 23.8 20.7 3,836.0 2,858.0 55.5 39.7
-------- -------- -------- -------- -------- -------- -------- --------
Total Proved Plus
Probable
Total 2,217.4 1,862.1 64.8 55.7 8,440.0 6,331.0 129.0 91.0
-------- -------- -------- -------- -------- -------- -------- --------
NET PRESENT VALUES OF FUTURE NET REVENUE
BASED ON FORECAST PRICES AND COSTS
(Note: All Net Present Values are in Canadian dollars)
Before Deducting Income Taxes After Deducting Income Taxes
Discounted At (%/year) Discounted At (%/year)
0% 5% 10% 15% 20% 0% 5% 10% 15% 20%
(M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$)
Proved Developed Producing
Total 27,055 23,862 21,491 19,652 18,177 26,886 23,695 21,327 19,491 18,019
Proved Developed Non-Producing
Total 1,752 1,174 853 656 526 1,616 1,049 736 547 425
Proved Undeveloped
Total 1,672 1,456 1,271 1,112 972 965 776 616 479 361
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Proved
Total 30,478 26,493 23,616 21,419 19,675 29,467 25,520 22,679 20,517 18,805
Total Probable
Total 20,219 15,529 12,623 10,607 9,120 14,197 10,663 8,512 7,026 5,934
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Proved Plus Probable
Total 50,697 42,022 36,239 32,027 28,795 43,664 36,182 31,191 27,544 24,738
3
Assure Energy Inc.
--------------------------------------------------------------------------------
Sproule Associates Limited
TOTAL FUTURE NET REVENUE
(UNDISCOUNTED)
BASED ON FORECAST PRICES AND COSTS
(Note: All values are in Canadian dollars)
Future Future
Net Net
Abandonment Revenue Revenue
and Before After
Operating Development Reclamation Income Income Income
Revenue Royalties Costs Costs Costs Taxes Taxes Taxes
(M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$)
----------- ----------- ----------- ----------- ------------ ----------- ----------- -----------
Total Proved
Total 82,049 14,770 32,819 2,059 1,923 30,478 1,011 29,467
Total Proved
Plus Probable
Total 133,379 24,501 52,298 3,761 2,123 50,697 7,033 43,664
FUTURE NET REVENUE BY PRODUCTION GROUP
BASED ON FORECAST PRICES AND COSTS
(Note: All Future Net Revenues are in Canadian dollars)
Future Net Revenue
Before Income Taxes
(Discounted at
Production Group 10%/Year)
(M$)
-------------------------------------- -----------------------
Total Proved Light and medium crude oil 14,926
Heavy oil 369
Associated gas and non-associated gas 8,321
Total Proved Plus Probable Light and medium crude oil 20,359
Heavy oil 462
Associated gas and non-associated gas 15,418
Notes to Reserves Data Tables
1. Columns may not add due to rounding.
2. The crude oil, natural gas liquids and natural gas reserve estimates
presented in the Sproule Report are based on the definitions and guidelines
contained in the COGE Handbook. A summary of those definitions is set forth
below.
Reserve Categories
Reserves are estimated remaining quantities of oil and natural gas and
related substances anticipated to be recoverable from known
accumulations, from a given date forward, based on
o analysis of drilling, geological, geophysical and engineering data;
o the use of established technology; and
o specified economic conditions.
Reserves are classified according to the degree of certainty associated with the
estimates.
(a) Proved reserves are those reserves that can be estimated with a high
degree of certainty to be recoverable. It is likely that the actual
remaining quantities recovered will exceed the estimated proved
reserves.
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(b) Probable reserves are those additional reserves that are less certain
to be recovered than proved reserves. It is equally likely that the
actual remaining quantities recovered will be greater or less than the
sum of the estimated proved plus probable reserves.
Other criteria that must also be met for the categorization of reserves
are provided in the COGE Handbook.
Each of the reserve categories (proved and probable) may be divided
into developed and undeveloped categories:
(c) Developed reserves are those reserves that are expected to be recovered
from existing wells and installed facilities or, if facilities have not
been installed, that would involve a low expenditure (for example, when
compared to the cost of drilling a well) to put the reserves on
production. The developed category may be subdivided into producing and
non-producing.
(i) Developed producing reserves are those reserves that are
expected to be recovered from completion intervals open at the
time of the estimate. These reserves may be currently
producing or, if shut-in, they must have previously been on
production, and the date of resumption of production must be
known with reasonable certainly.
(ii) Developed non-producing reserves are those reserves that
either have not been on production, or have previously been on
production, but are shut-in, and the date of resumption of
production is unknown.
(d) Undeveloped reserves are those reserves expected to be recovered from
known accumulations where a significant expenditure (for example, when
compared to the cost of drilling a well) is required to render them
capable of production. They must fully meet the requirements of the
reserves classification (proved, probable) to which they are assigned.
In multi-well pools it may be appropriate to allocate total pool reserves
between the developed and undeveloped categories or to subdivide the developed
reserves for the pool between developed producing and developed non-producing.
This allocation should be based on the estimator's assessment as to the reserves
that will be recovered from specific wells, facilities and completion intervals
in the pool and their respective development and production status.
Levels of Certainty for Reported Reserves
The qualitative certainty levels referred to in the definitions above are
applicable to individual reserve entities (which refers to the lowest level at
which reserves calculations are performed) and to reported reserves (which
refers to the highest level sum of individual entity estimates for which
reserves are presented). Reported reserves should target the following levels of
certainty under a specific set of economic conditions:
(e) at least a 90 percent probability that the quantities actually
recovered will equal or exceed the estimated proved reserves; and
(f) at least a 50 percent probability that the quantities actually
recovered will equal or exceed the sum of the estimated proved plus
probable reserves.
A qualitative measure of the certainty levels pertaining to estimates prepared
for the various reserves categories is desirable to provide a clearer
understanding of the associated risks and uncertainties. However, the majority
of reserves estimates will be prepared using deterministic methods that do not
provide a mathematically derived quantitative measure of probability. In
principle, there should be no difference between estimates prepared using
probabilistic or deterministic methods.
Additional clarification of certainty levels associated with reserves estimates
and the effect of aggregation is provided in the COGE Handbook.
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3. The Alberta royalty tax credit ("ARTC") is included in the cumulative
cash flow amounts. ARTC is based on the program announced November 1989
by the Alberta government with modifications effective January 1, 1995.
The Corporation qualifies for the maximum ARTC.
4. Reasonable estimated future abandonment costs have been included by
Sproule in determining the aggregate future net revenue for existing
and future reserves wells. No allowance was made by Sproule for well
abandonment costs of non- reserves wells, site reclamation of well
sites and the abandonment and reclamation of pipelines and production
facilities.
5. Both the constant and forecast price and cost assumptions assume the
continuance of current laws and regulations.
6. The extent and character of all factual data supplied to Sproule were
accepted by Sproule as represented. No field inspections were
conducted.
7. The product prices used in the constant price and cost evaluations in
the Assure Report were as follows:
Oil: Edmonton Par 46.51 $/stb
Hardisty Bow River 24.15 $/stb
Natural Gas: Alberta AECO-C 6.75 $/Mcf
BC Index 6.68 $/Mcf
Natural Gas By-Products: Propanes 36.11 $/bbl
Butanes 39.78 $/bbl
Pentanes Plus 51.80 $/bbl
8. The pricing assumptions used in the Sproule Report with respect to net
values of future net revenue (forecast) as well as the inflation rates
used for operating and capital costs are set forth below. Sproule is an
independent qualified reserves evaluator appointed pursuant to NI
51-101.
Pentanes Butanes
Plus FOB F.O.B
Field Gate Field Gate Inflation Exchange
Light and Medium Crude Oil Natural Gas ($Cdn/bbl) ($Cdn/bbl) Rate Rate
------------------------------------------------------------------------------------------------------
[WTI [Edmonton [Cromer
Cushing Par Price Medium [AECO Gas [AECO Gas [FOB Field
Oklahoma 400 API 29.3(0) API Price Price Gate
($US/bbl)] ($Cdn/bbl)] ($Cdn/bbl)] ($Cdn/MMBtu) ($Cdn/bbl)] ($Cdn/bbl)] %/year $US/$Cdn
----------- ------------ ------------ ----------- ------------ ------------ --------- ------------
Year
Historical
2001 25.94 39.06 31.56 6.23 42.46 27.93 2.0 0.646
2002 26.09 40.12 35.46 4.04 40.80 25.39 2.7 0.637
2003 31.14 43.23 37.53 6.66 44.16 34.55 2.5 0.716
2004 41.41 52.91 45.72 6.87 53.90 41.38 2.5 0.770
Forecast
2005 44.29 51.25 44.53 6.97 52.49 38.20 2.5 0.840
2006 41.60 48.03 41.87 6.66 49.19 34.01 2.5 0.840
2007 37.09 42.64 37.27 6.21 43.67 30.20 2.5 0.840
2008 33.46 38.31 33.43 5.73 39.23 27.13 2.5 0.840
2009 31.84 36.36 31.70 5.37 37.24 25.75 1.5 0.840
Thereafter Various Escalation Rates
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RECONCILIATION OF COMPANY NET
RESERVES BY PRINCIPAL PRODUCT TYPE
BASED ON [FORECAST/CONSTANT] PRICES AND COSTS
The following table sets forth a reconciliation of the changes in Assure's light
and medium crude oil, heavy oil and associated and non-associated gas (combined)
reserves as at December 31, 2004 against such reserves as at December 31, 2003
based on the constant price and cost assumptions set forth above:
Light and Medium Oil Heavy Oil Associated and Non-Associated Gas
---------------------------------------- ----------------------------------- -------------------------------------
Net Net Net
Proved Proved Proved
Net Plus Net Plus Net Plus
Proved Probable Proved Probable Proved Probable
Net Net Plus Plus Net Net Plus Plus Net Net Plus Plus
Proved Probable Probable Possible Proved Probable ProbablePossible Proved Probable ProbablePossible
(mbbl) (mbbl) (mbbl) (mbbl) (mbbl) (mbbl) (mbbl) (mbbl) (mcf) (mcf) (mcf) (mmcf)
--------------- ----------- -------- ---------- -------- ----------- -------- ------- ----- -------- --------- --------- ---------
Canada
At December
31, 2003 1,167.0 547.1 1,714.1 - 115.3 30.0 145.3 - 1,282.0 1,476.0 2,758.0 -
Extensions - - - - - - - - - 1,111.0 1,111.0 -
Improved
Recovery - - - - - - - - - - - -
Technical
Revisions 237.7 65.2 302.9 - (70.0) (9.3) (79.3) - 1,626.7 (429.0) 1,197.7 -
Discoveries - - - - - - - - 420.7 302.0 722.7 -
Acquisitions - - - - - - - - - - - -
Dispositions - - - - - - - - - - - -
Economic
Factors - - - - - - - - - - - -
Production (154.9) - (154.9) - (10.3) - (10.3) - (655.4) - (655.4) -
------- ----- ------- ------- ---- ---- ---- ------- ------- ------- -----
At December
31, 2004 1,249.8 612.3 1,862.1 - 35.0 20.7 55.7 - 2,674.0 2,460.0 5,134.0 -
------- ----- ------- ------- ---- ---- ---- ------- ------- ------- -----
The following table sets forth changes between future net revenue estimates
attributable to net proved reserves as at December 31, 2003 against such
reserves as at December 31, 2004.
RECONCILIATION OF CHANGES IN NET PRESENT VALUES OF FUTURE NET REVENUE DISCOUNTED
AT 10% PROVED RESERVES BASED ON CONSTANT PRICES AND COSTS
Before tax After tax
2004 2004
(M$) (M$)
------------------- --------------------
Canada
Estimated Future Net Revenue at December 31, 2003 23,556 20,310
Sales and Transfers of Oil and Gas Produced, Net of Production Costs
and Royalties (6,869) (6,869)
Net Change in Prices, Production Costs and Royalties Related to Future
Production 305 305
Changes in Previously Estimated Future Development Costs (2,499) (2,499)
Changes in Estimated Future Development Costs (2,024) (2,024)
Extensions and Improved Recovery - -
Discoveries 976 976
Acquisitions of Reserves - -
Dispositions of Reserves - -
Net Change Resulting from Revisions in Quantity Estimates 5,202 5,202
Accretion of Discount 1,548 1,548
Net Change in Income Taxes for Current Period - 1,159
Net Change in Income Taxes for Future Forecast - 1,924
Miscellaneous Changes 677 677
------------------- --------------------
Estimated Future Net Revenue at December 31, 2004 20,872 20,709
------------------------------------------------------------------------------- ------------------- --------------------
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Undeveloped Reserves
The following table sets forth the volumes of proved undeveloped reserves that
were attributed for each of Assure's product types for the most recent five
financial years
Light and Medium Heavy Oil Natural Gas Oil
& NGL's (mbbl) (mbbl) (mmcf)
2000 1,169.0 - 570.0
2001 558.0 - 85.0
2002 361.0 13.2 452.0
2003 139.8 - 165.0
2004 13.3 - 572.0
Proved reserves are those reserves that can be estimated with a high degree of
certainty to be recoverable. It is likely that the actual remaining quantities
recovered will exceed the estimated reserves. Undeveloped reserves are those
reserves expected to be recovered from known accumulations where a significant
expenditure is required to render them capable of production.
The following table sets forth the volumes of probable undeveloped reserves that
were attributed for each of Assure's product types for the most recent five
financial years and in the aggregate before such time:
Light and Medium Heavy Oil Natural Gas Oil
& NGL's (mbbl) (mbbl) (mmcf)
2000 588.0 - 346.0
2001 483.0 - 175.0
2002 480.9 43.0 2,123.0
2003 673.1 30.0 2,071.0
2004 652.0 20.7 2,858.0
Probable reserves are those additional reserves that are less certain to be
recovered than proved reserves. It is likely that the actual remaining
quantities recovered will be greater or less than the sum of the estimated
proved plus probable reserves.
Undeveloped reserves are those reserves expected to be recovered from known
accumulations where a significant expenditure is required to render them capable
of production.
These reserves will continue to be evaluated to identify drilling prospects in
the Company's core areas.
Future Development Costs
The following table sets forth development costs deducted in the estimation of
the Corporation's future net revenue attributable to the reserve categories
noted below:
FUTURE DEVELOPMENT COSTS
Total Proved Total Proved
Total Proved Total Proved Plus Probable Plus Probable
Estimated Using Estimated Using Estimated Using Estimated Using
Constant Prices Forecast Prices Constant Prices Forecast Prices
and Costs and Costs and Costs and Costs
(M$) (M$) (M$) (M$)
---------------- ---------------- ---------------- ----------------
Canada
2005 2,045 2,045 3,747 3,747
2006 - - - -
2007 - - - -
2008 - - - -
2009 13 14 13 14
---------------- ---------------- ---------------- ----------------
Total for all years undiscounted 2,058 2,059 3,760 3,761
---------------- ---------------- ---------------- ----------------
Total for all years discounted at
10%/year 2,029 2,029 3,695 3,696
================ ================ =============== ================
Future development costs are expected to be funded primarily from cash flows
from oil and gas producing activities, bank and other borrowings, and proceeds
of equity issues.
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Significant Factors or Uncertainties
A general discussion of the significant factors or uncertainties affecting
reserves data is contained in Assure's Management Discussion and Analysis for
the year ended December 31, 2004 in the section entitled "Critical Accounting
Estimates" which discussion is incorporated herein by reference.
Oil and Gas Properties and Wells
The following table sets forth the number of wells in which Assure held a
working interest as at December 31, 2004:
Oil Natural Gas
------------------------- -----------------------
Gross(1) Net(1) Gross(1) Net(1)
--------- ------- -------- -------
Location -Alberta
Producing 25 25 16 8
Non-producing 34 34 2 2
Location -British Columbia
Producing - - 6 4.3
Non-producing - - 8 5
Location -Saskatchewan
Producing 8 4.8 8 4.8
Non-producing 4 2.4 6 3.6
A brief description of Assure's properties follows:
Buick, British Columbia
Over the past year, Assure has assembled 21 sections (approximately 13,000 gross
acres - 7,500 net) of undeveloped land through Crown land sales farm-in lands.
Assure has an average 61% working interest in the area with two shut-in gas
wells.
Currant/Osborne, British Columbia
Currant/Osborne are natural gas properties located approximately 50 miles north
of Fort St. John which has oil and natural gas prospects in multiple formations.
The property is adjacent to the Westcoast pipeline.
o Assure has a 50% to 100% working interest in 13 sections of land
Flatrock, British Columbia
Flatrock is an oil play within the B.C. Farm-in Agreement lands offering
year-round access. Natural gas prospects are also being developed at this
property.
o Assure has a 60% working interest in four sections of land.
Rigel, British Columbia
Assure has an average 75% working interest in 6 sections of land which are
located approximately 20 miles from the West Currant property, situated within
prolific trends in the Gething, Baldonnel, and Halfway Formations.
o Assure has a 100% working interest in a standing gas well and an
average 55% working interest in two other producing gas well.
Doe East
The Doe Prospect area is located approximately 70 miles northwest of Grande
Prairie, Alberta and approximately six miles east of the British
Columbia/Alberta border.
o Assure has a 25% working interest in 1.0 section of land
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Golden Spike, Alberta
Golden Spike, located 15 miles southwest of Edmonton, is prospective for light
oil from the Leduc and Nisku Formations as well as gas from the Basal Quartz
formation.
o Assure has a 100% working interest in one section of land with four
shut-in wells, one producing gas well and one producing oil well.
Ansell, Alberta
Assure has a 25% working interest in one section of land located in Ansell,
Alberta which produces from the Notikewin formation.
Chauvin/Ribstone, Alberta
The Chauvin property, located in East Central Alberta, produces oil from highly
porous, waterflood-supported sandstone including the Sparky, GP, and
Lloydminster Formations.
o Assure has a 100% working interest in 3.75 sections of land.
Lloydminster, Alberta
Assure owns working interests, subject to Crown and various overriding royalties
in two oil and two natural gas wells assigned reserves located in Township 50,
Ranges 1 and 2, W4M.
o Assure has an average 55% working interest.
Lloydminster, Saskatchewan
Assure owns working interests, subject to Crown and various overriding royalties
in 5.5 sections of land in Lloydminster, Saskatchewan
o Working interest ranges from 21.8% to 100%
Enchant
Assure acquired 6.5 sections of land in the Enchant Area of Alberta located at
Townships 15 Range 16 W4M and is productive from the Glauconitic and Livingstone
formations.
o Assure has working interest ranging from 17% to 95%
Caroline
Assure has interests in the Caroline area of Alberta located in Section 29-33-4
W5M.
o Assure has a 16.8% working interest in one section of land
Royce
Assure has interests in the Royce area of Alberta located in Section 26-83-7
W6M.
o Assure has a 16.8% working interest in one section of land.
Assure also has minor interests in the Lomond, Hamburg, Haynes and North Killam
areas of Alberta.
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Capital Expenditures
The following table summarizes the capital expenditures made by Assure on oil
and natural gas properties for the year ended December 31, 2004.
Property Acquisition Costs Exploration Costs Development Costs
($) ($) ($)
------------------------------------------ ----------------- -----------------
Proved Properties Unproved Properties
-------------------- -------------------
Canada 49,704 374,753 5,072 8,818,607
Exploration and Development Activities
The following table sets forth the number of exploratory and development wells
which Assure completed during its 2004 financial year:
Exploratory Wells Development Wells
--------------------------- -------------------------------
Gross(1) Net(1) Gross(1) Net(1)
------------- ---------- ----------- --------
Canada
Oil Wells - - 3 3
Gas Wells - - 9 6.1
Service Wells - - - -
Dry Holes - - 1 0.25
Total Completed Wells - - 13 9.35
Assure's current and likely exploration and development activities in Canada are
as follows:
o Three wells have been licensed in the Buick area which the Company
anticipates will be drilled in Quarter three and Quarter four of
2005.
o Two wells are licensed in the Osborne area of Northeast British
Columbia plus an additional three potential location on the recent
purchased by Assure in the Osborne area.
o Lands at Buick Creek will continue to be developed and exploited.
Properties with No Attributable Reserves
The company's developed and undeveloped landholdings as at December 31, 2004,
are set forth in the following table:
Undeveloped Developed Total
-------------------------- ------------------------------ -------------------------
Gross(1) Net(2) Gross(1) Net(2) Gross(1) Net(2)
---------- ------------ -------------- ------------ ----------- ----------
Alberta 7872 3071 241 165 8113 3236
British Columbia 17371 10636 1354 751 18725 11387
---------- ------------ -------------- ------------ ----------- ----------
Total 25243 13707 1595 916 26838 14623
Notes:
(1) "Gross" means the total number of acres in which we have an interest.
(2)"Net" means the aggregate of the percentage working interests we have in the
gross acres.
Abandonment and Reclamation Costs
Asset retirement obligations are estimated by the Company's engineers. As at
December 31, 2004, the Company's estimated future cash flows to settle asset
retirement obligations are $3,122,932 (undiscounted) and $1,279,702 (discounted
at 7.6%) for 117 wells. The amount of the estimated future cash flows to settle
asset retirement obligations was not deducted in estimating future net revenue.
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Tax Horizon
The company is not taxable for the year ended December 31, 2004.
Production Estimates
The following table sets forth the volume of production estimated for 2005:
Light and Medium Oil Heavy Oil Natural Gas Natural Gas Liquids
(mbbl) (mbbl) (mmcf) (mbbl)
--------------------- ---------------------- ---------------------- ---------------------
Canada 150.1 16.8 2,147.9 6.0
Production History
The following table sets forth certain information in respect of production,
product prices received, royalties, production costs and netbacks received by
the Corporation for each quarter of its most recently completed financial year:
Year Ended Three Months Three Months Three Months Three Months
December 31, Ended March 31, Ended June 30, Ended September Ended December
2004 2004 2004 30, 2004 31, 2004
------------- -------------- ------------- --------------- ---------------
Canada
Average Daily Production
Light and Medium Oil 656 717 652 668 598
& NGL's (bbl/d)
Heavy Oil (bbl/d) 59 46 28 82 78
Natural Gas (mcf/d) 2,417 1,960 2,751 2,915 2,067
Average Net Prices
Received
Light and Medium Oil $39.73 $35.11 $39.10 $44.32 $40.70
& NGL's ($/bbl)
Heavy Oil ($/bbl) $30.49 $27.57 $30.10 $35.19 $27.38
Natural Gas ($/mcf) $6.53 $5.69 $6.84 $6.21 $6.36
Royalties
Total ($/boe) $8.34 $10.26 $7.74 $7.51 $8.01
------------- -------------- ------------- --------------- ---------------
Production Costs
Total ($/boe) $13.91 $11.58 $11.75 $16.00 $16.21
------------- -------------- ------------- --------------- ---------------
Netback Received
Average field netback
($/boe) $16.78 $12.70 $20.80 $17.75 $15.44
============= ============== ============= =============== ===============
12
ITEM 5
Report of Management and Directors on Reserves Data and Other Informationp
Management of Assure Energy, Inc. (the "Company") are responsible for the
preparation and disclosure of information with respect to the Company's oil and
gas activities in accordance with securities regulatory requirements. This
information includes reserves data, which consist of the following:
(a) (i) proved and proved plus probable oil and gas
reserves estimated as at December 31, 2004 using
forecast prices and costs; and
(ii) the related estimated future net revenue; and
(b) (i) proved oil and gas reserves estimated as at
December 31, 2004 using constant prices and costs;
and
(ii) the related estimated future net revenue.
Sproule & Associates Limited ("Sproule"), an independent qualified reserves
evaluator has evaluated the Company's reserve data. The report of the
independent qualified reserves evaluator will be filed with securities
regulatory authorities concurrently with this report.
The Reserves Committee of the board of directors of the Company has
(a) reviewed the Company's procedures for providing information to the
independent qualified reserves evaluator;
(b) met with the independent qualified reserves evaluator to determine
whether any restrictions affected the ability of the independent
qualified reserves evaluator to report without reservation; and
(c) reviewed the reserves data with management and the independent
qualified reserves evaluator.
The Reserves Committee of the board of directors has reviewed the Company's
procedures for assembling and reporting other information associated with oil
and gas activities and has reviewed that information with management. The board
of directors has on the recommendation of the Reserves Committee approved
(a) the content and filing with securities regulatory authorities of the
reserves data and other oil and gas information;
(b) the filing of the report of the independent qualified reserves
evaluator on the reserves data; and
1
(c) the content and filing of this report.
Because the reserves data are based on judgments regarding fixture events,
actual results will vary and the variations may be material.
(Signed) "Harvey Lalach"
--------------------------------
Harvey Lalach, President & CEO
(Signed) "Colin McNeil"
--------------------------------
Colin McNeil, Director
(Signed) "James Golla"
--------------------------------
James Golla, Director
February 28, 2005
2
ITEM 6
Form 51-101F2
Report on Reserves Data
by Independent Qualified Reserves Evaluator or Auditor
Report on Reserves Data
To the Board of Assure Energy Inc. (the "Company"):
1. We have evaluated the Company's Reserves Data as at December 31, 2004.
The reserves data consist of the following:
(a) (i) proved and proved plus probable oil and gas reserves
estimated as at December 31, 2004 using forecast prices
and costs; and
(ii)the related estimated future net revenue; and
(b) (i) proved oil and gas reserve quantities were estimated
as at December 31, 2004 using constant prices and costs;
and
(ii)the related estimated future net revenue.
2. The Reserves Data are the responsibility of the Company's management.
Our responsibility is to express an opinion on the Reserves Data based
on our evaluation.
We carried out our evaluation in accordance with standards set out in
the Canadian Oil and Gas Evaluation Handbook (the "COGE Handbook"),
prepared jointly by the Society of Petroleum Evaluation Engineers
(Calgary Chapter) and the Canadian Institute of Mining, Metallurgy &
Petroleum (Petroleum Society).
1
3. Those standards require that we plan and perform an evaluation to
obtain reasonable assurance as to whether the reserves data are free of
material misstatement. An evaluation also includes assessing whether
the reserves data are in accordance with principles and definitions
presented in the COGE Handbook.
4. The following table sets for the estimated future net revenue
attributed to proved plus probable reserves, estimated using forecast
prices and costs on a before tax basis and calculated using a discount
rate of 10%, included in the reserves data of the Company evaluated by
us as of December 31, 2004, and identifies the respective portions
thereof that we have audited, evaluated and reviewed and reported on to
the Company's management and Board of Directors:
--------------------- ------------------------------- ----------------- ------------------------------------------------------
Net Present Value of Future Net Revenue
(10% Discount Rate)
--------------------- ------------------------------- ----------------- ------------------------------------------------------
Independent Description Location of
Qualified Reserves And Preparation Date of Reserves Audited Evaluated Reviewed Total
-Evaluator or Auditor Evaluation Report (Country) (MS) (M$) (M$) (M$)
-------------------- ------------------------------- ----------------- ------------ -------------- ------------- ------------
Sproule Evaluation of the P&NG Canada
Reserves of Assure Energy
Inc., as of December 31,
2004, prepared January to
February 2005.
Total Nil 36,239 Nil 36,239
--------------------- ------------------------------- ----------------- ------------ ------------- ------------- -------------
5. In our opinion, the reserves data evaluated by us have, in all
material respects, been determined and are presented in accordance
with the COGE Handbook.
6. We have no responsibility to update the report referred to in
paragraph 4 for events and circumstances occurring after its
preparation date.
7. Because the reserves data are based on judgments regarding future
events, actual results will vary and the variations may be
material.
2
Executed as to our report referred to above:
Sproule Associates Limited
Calgary, Alberta
February 28, 2005 /s/ Robert N. Johnson
-----------------------------------------
Robert N. Johnson P.Eng.,
Manager, Engineering, and
Corporate Secretary
/s/ Michael W. Maughan
-----------------------------------------
Michael W. Maughab, C.P.G., P.Geol.
for Manager, Geoscience, and Associate
/s/ Harry J. Helwerda
-----------------------------------------
Harry J. Helwerda, P.Eng.
Vice-President, Engineering,
Canada and U.S.
3
ITEM 7
FORM 52-109FT1
CERTIFICATION OF ANNUAL FILINGS DURING TRANSACTION PERIOD
I, Harvey Lalach, President and Chief Financial Officer of Assure Energy,
Inc. ("Assure"), certify that:
1. I have reviewed the annual filings (as this term is defined in
Multilateral Instrument 52-109 Certificate of Disclosure in
Issuers' Annual and Interim Filings) of Assure (the issuer),
for the period ending December 31, 2004;
2. Based on my knowledge, the annual filings do not contain any
untrue statement of a material fact or omit to state a
material fact required to be stated or that is necessary to
make a statement not misleading in light of the circumstances
under which it was made, with respect to the period covered by
the annual filings; and
3. Based on my knowledge, the annual financial statements
together with the other financial information included in the
annual filings fairly present in all material respects the
financial condition, results of operations and cash flows of
the issuer, as of the date and for the periods presented in
the annual filings.
April 27, 2005
(Signed) "Harvey Lalach"
-------------------------------------
Harvey Lalach
President and Chief Financial Officer
1