RNS Number : 1579I
Arawak Energy Limited
14 November 2008
Arawak ENERGY LIMITEd
Whiteley Chambers, Don Street, St. Helier, Jersey JE4 9WG
LSE & TSX TRADING SYMBOL: AAK
14 NOVEMBER 2008
ARAWAK announces THIRD quarter results
Arawak Energy Limited ("Arawak" or "the Company"), the independent oil and gas company with exploration, development and production in
Kazakhstan, Russia and Azerbaijan, today announces its results for the quarter ended 30 September 2008.
Highlights:
(In US dollars unless otherwise stated)
Financial:
* Revenue of $93.6 million compared with $56.6 million in the third quarter 2007 (Q2 2008 $95.6 million)
* Sales volumes up 16% at 1,179,689 barrels of oil equivalent ("boe") versus 1,018,824 boe in the third quarter 2007 (Q2 2008
1,041,663 boe)
* Average realised oil price $79.31 per boe compared with $55.57 per boe in the third quarter 2007 (Q2 2008 $91.73 per boe)
* Royalties and taxes (excluding profits tax) increased to $36.7 million against $10.7 million in the third quarter 2007 (Q2 2008
$23.5 million)
* Net income of $6.4 million down 17% compared with to $7.8 million in the third quarter 2007 (Q2 2008 $9.3 million) after payments
in Kazakhstan of $5.4 million in taxes and $3.2 million in penalties/VAT, which may be recoverable
* Basic earnings per share 3.5 cents (Q3 2007 4.5 cents)
* Funds from operations declined to $15.6 million from $19.5 million in the third quarter 2007 (Q2 2008 $20.3 million), with capital
expenditure of $14.8 million excluding acquisitions
Operational:
* Average net production rose 7% to 11,887 barrels of oil equivalent per day ("boepd") year-on-year from 11,125 boepd, but decreased
3% from 12,199 boepd in the second quarter 2008 due to temporary regulatory constraints on production at the Akzhar and Besbolek fields in
Kazakhstan
* Development drilling resumed at Akzhar and Besbolek in October with a five rig programme following approval of development plans
* Three development wells are currently drilling or completing in North Irael and Sotchemyu-Talyu fields in Russia
* The Board of Directors (the "Board") has approved a $5.3 million investment for a gas utilisation project to supply power to
Russian field facilities
Corporate:
* On 28 October the Board recommended that shareholders take no immediate action regarding an announcement by Rosco S.A. ("Rosco"),
a subsidiary of Vitol Holding B.V., of its intention to make a cash offer for the Company subject to certain pre-conditions
Commenting on the results, Alastair McBain, Chief Executive Officer, said: "Several factors, including the steep fall in oil prices,
higher export duties and taxes in both of our producing jurisdictions as well as the curtailment of development activity in our most
prolific fields in Kazakhstan presented an extremely challenging environment in the third quarter of the year. Operationally, we mobilised
rapidly at the Akzhar and Besbolek fields once the authorities sanctioned our development plans, and in just a few weeks we are already
seeing production steadily increase. As a group, we are currently producing approximately 13,700 boepd and we fully expect to build on this
in the coming weeks.
The Board will respond to the pre-conditional offer in due course, but in the meantime our focus is on delivering our strategy to build
our business in what is now a commercially challenging, lower oil price environment."
REVIEW OF Q3 2008
Overview
While revenues continued at close to record levels in the third quarter, the unprecedented crash in world oil prices together with
higher taxes resulted in a lower net income at $6.4 million compared with the second quarter. Arawak's net production increased 7%
year-on-year but was down 2% from the average levels in the first half of the year due to the temporary suspension of development drilling
in Kazakhstan while awaiting regulatory approvals for the technical development plans for the Akzhar and Besbolek fields. The authorities in
Kazakhstan granted the development approvals in late September.
Higher crude sales from inventory boosted overall sales volumes and underpinned revenues despite falling oil prices. Revenue totalled
$93.6 million in the third quarter on sales of 1,179,689 barrels, up 65% from $56.6 million in the third quarter 2007 when sales were
1,018,824 barrels. Compared with the second quarter, revenue dipped 2% from $95.6 million when sales were 1,041,663 barrels. This was due to
the drop in world crude prices during the third quarter from a peak above $140 a barrel at the beginning of July to close to $90 a barrel by
the end of September.
Operationally, our team in Kazakhstan responded quickly to recommence drilling activities at the Akzhar and Besbolek fields following
development approvals. This was essential to Arawak's production growth this year. Production in Russia remained constant and we have
continued a steady development programme at our producing assets. We have completed five seismic acquisition programmes across our portfolio
so far this year and will commence three further surveys in the coming winter months.
Corporate
Subsequent to the end of the third quarter, Rosco, a subsidiary of Vitol Holding B.V., announced on 28 October that subject to certain
pre-conditions, it intended to make a public offer for the entire issued share capital of Arawak at a price of CAD $0.90 per share payable
in cash. Vitol Holding B.V. and its subsidiaries own an aggregate of 75,668,399 shares representing 41.4% of the issued common shares in
Arawak.
In response, the Board strongly recommends that shareholders take no immediate action to the unsolicited offer, which it views as
opportunistic and not reflecting the underlying value of Arawak.
The Board has appointed a special committee of the Board comprising the non-executive directors James Coleman, Phillip de Boos-Smith,
Nicholas Clayton and Ross Douglas for the purpose of considering the intended offer by Rosco. Arawak has engaged RBC Capital Markets as
Financial Advisers in relation to the unsolicited offer.
The Board intends to investigate and consider a variety of alternatives focused on value maximisation. The Company will keep
shareholders informed on a timely basis.
Operations
In the third quarter, the Company's net production averaged 11,887 boepd, a decline of 3% from the second quarter as a result of the
shut in of exploration wells at Akzhar and Besbolek while awaiting regulatory approvals to transition these fields into the production
phase. Since the end of September, when the authorities approved the technical plans of development, the Company has quickly mobilised five
drilling rigs to rejuvenate shut-in production and recommence drilling activities.
At Akzhar, two development wells have been drilled and put into production. These wells have confirmed the geological play and the
structural highs in the southeast wing of the field. At Besbolek, an additional two development wells have further delineated the south wing
of the field.
By early November, the resumed drilling campaign had resulted in an up-lift in Akzhar and Besbolek production to a combined 7,680 boepd,
raising the Company's total average net production to approximately 13,700 boepd with further increases expected over the remainder of the
year as additional wells are brought on stream. Three development wells each at Akzhar and Besbolek are scheduled to be in production by the
end of November. Overall we expect to have drilled ten development wells each at Akzhar and Besbolek by the end of 2008 and we remain
optimistic that the continued delineation of the fields may result in reserve movement to the proved category in our year-end reserve
report.
Production in Russia is expected to continue to increase with development drilling at the company's 50%-owned fields, North Irael and
Sotchemyu-Talyu. Two rigs are active at North Irael, where two development wells are drilling to a total depth of 2,000 metres and are
scheduled to be completed by the end of November. We also plan to commence drilling of exploration well 62 before the end of the year to
delineate a new reservoir in the North Irael block. At the more mature Sotchemyu-Talyu block, a rig is currently completing a development
well, which is expected to be in production at the end of the month.
The Board has approved the plan and budget for a $5.3 million gas-to-power project to utilise associated gas produced at North Irael and
Sotchemyu-Talyu to reduce flaring at the fields by 95%, in line with the anticipated introduction of new legislation imposing restrictions
on gas flaring. This value enhancing project will secure a continuous and reliable power supply to field facilities and will reduce electric
utility costs, which are the largest variable in operating expenses.
The Company has been successful in deferring further exploration drilling at the East Zharkamys III licence in Kazakhstan until an
ongoing 530 km 2D seismic programme has been completed, processed and interpreted. We have drilled three exploration wells in the block so
far in 2008 under the work commitment programme. Crews and equipment are being mobilised for three seismic acquisition programmes commencing
in December at the Tamdykol exploration block in Kazakhstan, and the South Sotchemyu appraisal block and the Kymbozhyuskaya exploration
licence, both in Russia. The Company plans to drill two exploration wells in Kymbozhyuskaya in the first half of 2009.
Financial overview and current outlook
Higher sales volumes during the third quarter partially offset a 14% drop in realised oil prices leading to a stabilisation of revenues
at $93.6 million close to record levels of $95.6 million in the second quarter. However, overall net income was reduced by a 56% increase in
royalty and tax payments as Arawak's obligations increased in both Russia and Kazakhstan.
Export duty in Russia is calculated taking into consideration prevailing oil prices from the preceding two months and therefore netbacks
decline during periods of falling oil prices as experienced in the third quarter. In November, the Russian government announced a 23% cut in
export duty to $287 per tonne from $372 per tonne, marking the second unscheduled reduction in two months to encourage producers to maintain
production rates and shipments. These cuts have allowed us to maintain our production levels at a positive margin and continue with our
development plans. We also welcome the government's move to revise the duty-setting mechanism to more closely follow changes in benchmark
oil prices. The revisions are expected to be announced in December.
In Kazakhstan, we continued to make payments for customs export duty on our Akzhar production in the third quarter ahead of a court
ruling at the end of September, which upheld the initial decision by the authorities exempting Akzhar from customs export duty. We are in
discussions with the authorities over the implementation of the court's decision and we believe these payments will be recovered at a later
date. Exports from our Besbolek field are expected to continue to be subject to customs export duty. The government in Kazakhstan intends
further changes to the hydrocarbon tax regime with implementation expected in early 2009. The extent of the amendments is unclear at this
point and it remains to be determined whether the changed tax environment will be applicable to Arawak's established, stabilised contracts.
The Company also took a charge of $3.2 million related to tax costs and penalties from the 40%-held Saigak production sharing agreement in
Kazakhstan. We believe that some of this charge should be recoverable from the government and under an indemnity from the previous owner.
Arawak currently has in place a credit facility of $80 million provided by European bank Calyon. Advances under this facility amounted
to $60 million at 30 September 2008 and the Company had cash balances of $69 million at that date.
Management is pleased with the Company's operational performance in the face of challenging conditions in the third quarter and plans to
continue its strategy for growth via its existing assets and by seeking other opportunities.
For further information please contact:
Arawak Energy Limited Tel: +44 (0) 20 7973 4285
Alastair D. McBain, President & Chief Executive Officer
Charles R. A. Carter, Chief Financial Officer
E-mail: info@arawakenergy.com Web: www.arawakenergy.com
Brunswick Group LLP Tel: +44 (0)20 7404 5959
Patrick Handley
JPMorgan Cazenove Limited Tel: +44 (0)20 7588 2828
Steve Baldwin
Neil Haycock
Oriel Securities Limited Tel: +44 (0)20 7710 7600
Richard Crawley
Natalie Fortescue
Notes to editors
Arawak's Common Shares are listed for trading on both the Toronto Stock Exchange and the London Stock Exchange under the symbol "AAK".
The Company is engaged in the exploration, development and production of oil and natural gas in Kazakhstan, Russia and Azerbaijan. In
Kazakhstan, the Company holds five producing fields and two exploration blocks. The Company has a 40% participating interest in the Saigak
producing block acquired in June 2008. The remaining assets are held through its 100% wholly-owned subsidiary Altius Energy Corporation
("Altius"). Altius' main producing field is Akzhar with smaller fields at Besbolek, Karataikyz and Alimbai. The two exploration blocks, East
Zharkamys III and Tamdykol, are also situated in western Kazakhstan. Arawak's producing assets in Russia are held through ZAO
PechoraNefteGas ("PNG") and LLC NK Recher-Komi ("Recher-Komi") in which Arawak has a 50% interest with the remaining interest being held by
Lundin Petroleum AB. Also in Russia, Arawak holds a 100% interest in the Kymbozhyuskaya exploration block and in the South Sotchemyu appraisal block. In Azerbaijan, the Company's asset is its interest in the
Exploration Development and Production Sharing Agreement ("EDPSA") for the South West Gobustan oil and gas fields. CGL, a company registered
in Anguilla, British West Indies, in which the Company has a 37.17% interest, holds an 80% interest in the EDPSA with the remaining 20% held
by an affiliate of SOCAR. The remaining 62.83% share in CGL is held by two affiliates of the project operator, CNPC.
This announcement includes "forward-looking statements", which are based on the opinions and estimates of management at the date the
statements are made, and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to
differ materially from those projected in the forward-looking statements. These risks and uncertainties include, but are not limited to,
risks associated with the oil and gas industry (including operational risks in development, exploration and production; delays or changes in
plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of
estimates and projections in relation to production, costs and expenses and health, safety and environmental risks), the risk of commodity
price and foreign exchange rate fluctuations, the uncertainty associated with commercial negotiations and negotiating with foreign
governments and risks associated with international activity. Although Arawak believes that its expectations represented by these forward-looking statements are reasonable, there can be no assurance
that such expectations will prove to be correct. Additionally, the estimates of reserves and future net revenue for individual properties
may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of
aggregation. A barrel of oil equivalent ("boe"), derived by converting gas to oil in the ratio of six thousand cubic feet of gas to one
barrel of oil, may be misleading, particularly if used in isolation. A boe conversion is based on an energy equivalency conversion method
primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Due to the risks, uncertainties and
assumptions inherent in forward-looking statements, prospective investors in the Company's securities should not place undue reliance on
these forward-looking statements. For a detailed description of the risks and uncertainties facing Arawak, readers should refer to Arawak's Annual Information Form as filed at www.sedar.com.
The directors confirm that to the best of their knowledge (a) the condensed set of financial statements, which has been prepared in
accordance with Canadian GAAP, gives a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;
(b) the interim management report includes a fair review of the information required by DTR 4.2.7R and (c) the interim management report
includes a fair review of the information required by DTR 4.2.8R.
MANAGEMENT'S DISCUSSION & ANALYSIS
For the three and nine months ended 30 September 2008
This report is dated 14 November 2008
The following Management's Discussion and Analysis ("MD&A") of the financial condition and results of our operations should be read in
conjunction with the consolidated financial statements of Arawak Energy Limited ("Arawak" or the "Company") and Notes relating thereto as at
and for the three and nine months ended 30 September 2008 (unaudited) and for the year ended 31 December 2007. Our financial statements have
been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and are presented in US dollars, unless
otherwise indicated.
Certain financial measures referred to in this MD&A are not prescribed by Canadian GAAP. These non-GAAP financial measures do not have
any standardised meaning and therefore may not be comparable to similar measures presented by other companies. Funds from Operations
(dollars and per share amounts) are included because some investors use this information to analyse operating performance and liquidity. The
additional information should not be considered in isolation or as a substitute for measures of performance prepared in accordance with
Canadian GAAP. Funds from operations per share and funds from operations are expressed before changes in non-cash working capital. A
reconciliation of funds from operations to cash flow from operating activities is provided within the statement of cash flows.
This MD&A uses certain terms which are specific to the oil and gas industry. These are non-GAAP terms and are defined within our
document. Except as otherwise required by the context, reference in this MD&A to "our", "we" or "us" refer to the combined business of
Arawak and all subsidiaries and associated companies.
Additional information relating to the Company is available on SEDAR at www.sedar.com and the Company's website at
www.arawakenergy.com.
OVERALL PERFORMANCE
Arawak Energy Limited ("Arawak" or the "Company") experienced a challenging environment in the third quarter of 2008 with net production
from Kazakhstan, Russia and Azerbaijan averaging 11,887 barrels of oil equivalent per day ("boepd"), up 7% from 11,125 boepd in the third
quarter 2007 but down 3% from 12,199 boepd in the second quarter of the year.
The decline was attributable to lower production rates at the Company's main producing fields in Kazakhstan, Akzhar and Besbolek, where
some wells were shut in and development drilling was suspended throughout the third quarter pending approvals from the authorities to
transition to the full development phase of the fields. Group crude output in Russia was constant in the third quarter compared with the
second-quarter period and was 8% higher than in the third quarter 2007.
Despite the third-quarter decrease in overall production levels from the second quarter, sales volumes rose 16% to 1,179,689 barrels of
oil equivalent ("boe") from 1,018,824 boe in the third quarter 2007 and increased 13% from 1,041,663 boe in the second quarter 2008. The
average realised selling price in the third quarter was $79.31 per boe compared with $55.57 in the third quarter 2007 and $91.73 in the
second quarter 2008.
Oil and gas sales revenues totalled $93.6 million in the third quarter compared with $56.6 million in the third quarter 2007 and $95.6
million in the second quarter 2008. The net income in the third quarter was $6.4 million compared with $7.8 million in the third quarter
2007 and $9.3 million in the second quarter 2008. Royalties and taxes increased considerably in the third quarter 2008 to $36.7 million
versus $10.7 million in the third quarter 2007 and $23.5 million in the second quarter 2008. The application in June of customs export duty
in Kazakstan raised Arawak's tax obligations significantly, although we believe some of this will be recovered. In Russia, the export duty
mechanism is based on prevailing oil prices from the preceding two months and therefore netbacks decline significantly in a falling oil
price environment as experienced in the quarter. The Company also recorded a one-off charge of $3.2 million related to historic tax costs
and penalties from the 40% held Saigak production sharing agreement, some of which may be recoverable.
Funds generated from operations were $15.6 million in the third quarter, compared with $19.5 million in the third quarter 2007 and $20.3
million in the second quarter 2008, and capital expenditure was $14.8 million excluding acquisitions.
In the third quarter 2008, the Azerbaijani operations contributed a loss of $0.3 million to the consolidated results of Arawak. Prior to
commencement of commercial operations in the second quarter 2007, Arawak reflected the result of its Azerbaijani operations through their
carrying value in Arawak's consolidated balance sheet.
FINANCIAL HIGHLIGHTS
(In thousands, except per share amounts)
For the three months ended September 30 2008 2007 2006
Crude oil sales $93,566 $56,619 $39,638
Net income $6,448 $7,761 $5,841
Per share - basic $0.035 $0.045 $0.034
Per share - diluted $0.035 $0.044 $0.034
Funds from operations* $15,553 $19,468 $13,960
Per share - basic $0.085 $0.111 $0.081
Per share - diluted $0.085 $0.110 $0.080
Capital expenditure $14,803 $15,692 $13,878
Shareholders' equity $209,321 $143,700 $129,729
Shares outstanding - basic 182,644 173,592 173,350
Shares outstanding - diluted 182,644 174,699 174,190
Weighted average shares - basic 182,584 173,592 173,285
Weighted average shares - diluted 182,584 174,711 174,125
1 Funds from operations is a non-GAAP measure that represents cash generated from operating activities before changes in non-cash
working capital.
2 Certain comparative figures have been restated to conform to the current financial statement presentation.
OPERATIONAL HIGHLIGHTS
For the three months ended September 30 2008 2007
Production - barrels 1,093,576 1,023,523
Average daily production - barrels 11,887 11,125
Sales - barrels 1,179,689 1,018,824
Revenue and expenses per barrel sold
Crude oil and gas sales $79.31 $55.57
Interest and other income $0.67 $0.73
Royalties and taxes ($31.09) ($10.51)
Production costs ($6.55) ($5.53)
Transportation and selling expenses ($5.70) ($5.31)
Net operating income $36.64 $34.95
netback table
The following table presents the operations and earnings netbacks on a per barrel basis calculated by dividing total Company revenues
and costs by total sales volumes.
Per barrel Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
Crude oil and gas sales 79.31 55.57 79.29 48.11
Interest and other income 0.67 0.73 0.69 0.60
Total revenue 79.98 56.30 79.98 48.71
Royalties and taxes (31.09) (10.51) (23.16) (10.82)
Production costs (6.55) (5.53) (6.65) (5.12)
Transportation and selling (5.70) (5.31) (5.72) (5.12)
expenses
Net operating income 36.64 34.95 44.45 27.65
General and administrative (5.45) (4.37) (5.55) (4.79)
expenses
Realised foreign exchange gain (1.73) 1.45 (0.48) 0.68
Interest expense (1.52) (1.32) (1.51) (1.93)
Current income tax expense (14.74) (11.78) (17.18) (7.87)
Funds from operations 13.20 18.93 19.73 13.74
Depletion, depreciation and (8.60) (10.28) (9.13) (9.76)
amortisation
Stock option compensation (0.45) (1.05) (0.37) (1.13)
Accretion expense (0.22) (0.08) (0.20) (0.09)
Loss on disposal of office (0.33) - (0.08) -
equipment
Unrealised foreign exchange 0.33 - 0.08 (0.08)
gain (loss)
Future income tax recovery 1.54 0.09 1.12 0.97
Net income 5.47 7.61 11.15 3.65
Production
Overall, the Company's production increased 7% in the third quarter 2008 versus the corresponding quarter of 2007 to 1,093,576 boe or
the equivalent of 11,887 boepd, from 1,023,523 barrels or 11,125 boepd. Production in the first nine months of 2008 increased 22% compared
with the corresponding period in 2007.
Production from our operations in Kazakhstan increased 9% to 662,255 barrels or the equivalent of 7,198 boepd in the third quarter
versus 610,225 barrels or 6,633 boepd for the same period in 2007.
In Russia, production increased 8% in the third quarter to 426,387 barrels or the equivalent of 4,635 boepd, versus 393,528 barrels or
4,277 boepd for the third quarter 2007.
Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
Production - boe
Kazakhstan 662,255 610,225 2,025,116 1,489,739
Russia 426,387 393,528 1,241,530 1,161,114
Azerbaijan 4,935 19,770 24,260 46,396
Total 1,093,576 1,023,523 3,290,906 2,697,249
Average daily production - boe
Kazakhstan 7,198 6,633 7,391 5,457
Russia 4,635 4,277 4,531 4,253
Azerbaijan 54 215 89 170*
Total 11,887 11,125 12,011 9,880
* Restated
sales
Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
Sales - boe
Kazakhstan 736,432 618,573 1,961,804 1,379,246
Russia 438,669 381,738 1,239,336 1,134,969
Azerbaijan 4,588 18,513 23,799 43,877
Total Arawak 1,179,689 1,018,824 3,224,939 2,558,092
Average sales price per boe
Kazakhstan $85.20 $60.64 $86.21 $52.85
Russia $70.19 $49.43 $69.01 $43.71
Azerbaijan $8.04 $12.95 $19.70 $12.98
Total Arawak $79.31 $55.57 $79.29 $48.11
Sales volume increased 16% to 1,179,689 boe in the three months ended 30 September 2008 from 1,018,824 barrels in the same period in
2007, reflecting our production growth and a draw down in crude oil inventory in the period. The average sales price received in the third
quarter 2008 increased to $79.31 per boe from $55.57 in the third quarter 2007 and decreased from $91.73 in the second quarter 2008. The
average selling price per barrel is dependent upon world benchmark and domestic prices, and is impacted by the mix between export and
domestic sales as well as between Kazakhstan and Russia as detailed in the marketing section below.
Sales composition by volume 2008 2007
Kazakhstan export 46% 48%
Russian domestic 23% 21%
Russian export 14% 17%
Kazakhstan domestic 17% 13%
Azerbaijan domestic - 1%
Total 100% 100%
marketing
The majority of Kazakhstani crude is exported by pipeline and sold as Urals Export Blend, free on board ("FOB") Odessa, Ukraine. Russian
crude is exported by pipeline and sold as Urals Export Blend FOB Primorsk, Russia. In Kazakhstan, domestic oil sales are sold either
ex-field or delivered to the local refinery. In Russia, domestic sales are sold ex-field. Azerbaijani oil is exported FOB Novorossiysk while
gas and condensate are sold ex-field.
For the three months ended 30 September 2008
Export oil sales Kazakhstan Russia Azerbaijan Total
Volume - barrels 535,866 167,900 - 703,766
Percentage of total sales by 73% 38% - 60%
country
Revenue (thousands) $51,931 $13,810 - $65,741
Average export price per barrel $96.91 $82.25 - $93.41
Domestic oil and gas sales
Volume - barrels 200,566 270,769 4,588 475,923
Percentage of total sales by 27% 62% 100% 40%
country
Revenue (thousands) $10,810 $16,978 $37 $27,825
Average domestic price per barrel $53.90 $62.70 $8.04 $58.47
For the three months ended 30 September 2007
Export oil sales Kazakhstan Russia Azerbaijan Total
Volume - barrels 490,037 170,458 1,449 661,943
Percentage of total sales by 79% 45% 8% 65%
country
Revenue (thousands) $33,760 $11,817 $92 $45,669
Average export price per barrel $68.89 $69.33 $63.41 $68.99
Domestic oil sales
Volume - barrels 128,536 211,280 17,064 356,881
Percentage of total sales by 21% 55% 92% 35%
country
Revenue (thousands) $3,751 $7,051 $148 $10,950
Average domestic price per barrel $29.18 $33.37 $8.67 $30.68
Kazakhstan
Total sales volume in Kazakhstan increased 19% in the third quarter 2008 versus the same period in 2007, as a result of a 9% production
increase and a substantial build up of inventory in the third quarter of 2007. Export sales volume increased 9% while domestic sales volume
increased 56%.
Revenues from Kazakhstan export sales increased 54% to $51.9 million from $33.8 million, due to a 9% sales volume increase to 535,866
barrels from 490,037 barrels and a 41% increase in the average export price per barrel to $96.91 from $68.89.
Domestic sales revenues in Kazakhstan increased 188%, due to a 56% increase in sales volume to 200,566 barrels from 128,535 barrels and
an 85% increase in the average domestic price per barrel to $53.90 from $29.18.
Russia
Total sales volume in Russia increased 15% in the three months ended 30 September 2008 versus the same period in 2007 as a result of an
8% increase in production and reduction in inventory. The sales mix in Russia during the third quarter 2008 was 62% domestic and 38% export,
versus 55% domestic and 45% export in the third quarter 2007.
Revenues from Russian export sales increased 17% to $13.8 million from $11.8 million, due to a 19% increase in the average export price
per barrel to $82.25 from $69.33 partially offset by a 2% decrease in the sales volume to 167,900 barrels from 170,458 barrels.
Domestic sales revenues in Russia increased 141% to $17.0 million from $7.1 million, due to an 88% increase in the average domestic
price per barrel to $62.70 from $33.37 and a 28% increase in sales volume to 270,769 barrels from 211,280 barrels.
CRUDE OIL INVENTORY
Crude oil inventory consists of amounts produced and in storage tanks at the end of each period and is recorded at the lower of cost,
determined on a weighted average basis, and net realisable value. The table below summarises the current period oil movement and inventory
balances.
For the three months ended 30 September
In barrels 2008 2007
Crude oil inventory - beginning 183,733 211,637
Production 1,093,576 1,023,523
Sales (1,179,689) (1,018,824)
Field usage and shipping losses (12,500) (12,354)
Crude oil inventory - ending 85,120 203,983
royalties and taxes
For the three months ended 30 September
In thousands of US dollars Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
Mineral resource extraction 9,893 4,371 26,861 12,779
tax
Export duties 18,426 4,918 33,442 12,574
Royalties 8,362 1,422 14,377 2,317
Total 36,681 10,711 74,680 27,670
Mineral resource extraction tax
The Company is subject to production taxes in Russia at a rate established monthly by the state based on current world oil prices. This
tax increased 97% to $22.55 per barrel sold in the third quarter 2008 from $11.45 per barrel in the same period of 2007.
Export duties
Export sales in Russia are subject to export duties with rates established by the state two months in advance based on prevailing world
oil prices. Export duties are not levied on domestic sales. These export duties increased 118% to $62.83 per barrel of Russian export sales
in the third quarter 2008 compared to $28.85 in the third quarter 2007. New export duties were introduced in May 2008 in Kazakhstan at a
fixed rate of $109 per tonne, which further increased to $203.8 from October 11 and averaged $14.40 per barrel of Kazakhstani export sales
in the third quarter 2008. The company is in discussions with the authorities in Kazakhstan regarding the recovery of customs export duty
paid in the third quarter for Akzhar field production.
Royalties
For its producing fields in Kazakhstan, Arawak pays royalties monthly to the government using stabilised rates that are graduated and
increase with cumulative annual production. As a percentage of Kazakhstan sales revenue, royalties increased to 8.3% in the third quarter
2008 from 3.8% in the third quarter 2007 mainly due to the inclusion of royalties paid on oil sales from the Saigak field.
production COSTS
Production costs increased to $6.55 per barrel sold (or $7.7 million) in the quarter ended 30 September 2008 compared with $5.53 per
barrel sold (or $5.6 million) in the third quarter 2007. The increase in production costs was due to a combination of factors including
escalating diesel fuel and electricity costs, the commencement of production operations in the Alimbai field in Kazakhstan, the Company's
share of Saigak production costs, local currency cost inflation in both Russia and Kazakhstan, and the effect of a weak US dollar increasing
local currency costs in US dollar terms.
transportation and selling COSTS
Transportation and selling expenses include pipeline, trucking and other selling costs associated with marketing and delivering crude
oil to markets. These costs increased to $6.7 million or $5.70 per barrel sold in the third quarter 2008 from $5.4 million or $5.31 per
barrel sold in the third quarter 2007 due to a combination of higher tariffs and the devaluation of the US dollar as a significant portion
of these costs are denominated in local currency.
general and administrative expenses
General and administrative expenses increased to $6.4 million in the third quarter 2008 from $4.4 million in the third quarter 2007 due
primarily to the recognition of the Company's proportion of Saigak costs and higher head office expenses.
Interest Expense
Interest expense increased to $1.8 million in the third quarter 2008 from $1.3 million in the same period in 2007 due mainly to the
interest charged on a $80 million reserve-based finance facility with Calyon, of which $60 million was draw down at 30 September 2008.
current income tax expense
Current income tax expense increased to $17.4 million or $14.74 per barrel in the third quarter 2008 versus $12.0 million or $11.78 per
barrel for the third quarter 2007, reflecting higher profitability in the current period and the higher Excess Profit Tax ("EPT") rate
reached on the Akzhar field and EPT charges this year on the Besbolek and Alimbai fields.
Arawak is subject to EPT on the Akzhar, Besbolek and Karataikyz hydrocarbon contracts in Kazakhstan at incremental tiered rates based on
each contract's cumulative internal rate of return in excess of 20%. The EPT rates for these fields range from 0 to 30%. For the Alimbai
field and East Zharkamys III block in Kazakhstan, EPT rates range from 0 to 60% and are calculated based on the ratio of net income to
deductions in excess of 20%.
FUTURE INCOME TAX
Future income tax recovery increased to $1.8 million or $1.54 per barrel in the third quarter 2008 versus $0.1 million or $0.09 per
barrel for the third quarter 2007, reflecting the movement in the temporary differences between accounting and tax books.
depletion, depreciation and amortiSation
Depletion, depreciation and amortisation expenses decreased to $8.60 per barrel (or $10.1 million) in the third quarter 2008 from $10.28
per barrel ($10.5 million) in the same period 2007. The depletion rate per barrel in a given period varies with the sales mix since
Kazakhstan sales have a higher associated depletion cost compared to Russian or Azerbaijan sales.
Capital expenditure
In the third quarter 2008 a total of $14.8 million was spent on capital expenditure compared to $15.7 million in the previous year,
excluding acquisitions. The majority of the capital expenditure was incurred in Kazakhstan ($9.2 million) and Russia ($5.3 million).
OUTSTANDING SHARE DATA
The table below sets out the Company's outstanding shares.
As at: 14 November 2008 30 September 2008 31 December 2007
Total Common Shares 182,644,452 182,644,452 173,891,865
outstanding
Stock Options 14,947,500 14,947,500 12,502,500
LIQUIDITY AND CAPITAL RESOURCES
The levels of cash, current assets and current liabilities are set out below and expressed in thousands of US dollars.
As at 30 September, 2008 31 December, 2007
Cash and cash equivalents 69,434 26,863
Current assets 114,619 66,880
Current liabilities (82,697) (88,873)
Net current assets 31,922 (21,993)
The Company's cash deposits are held principally in US dollars and are centrally managed. Surplus funds are placed on short-term
deposit. Operational funds are kept in Azerbaijan, Russia and Kazakhstan.
In May 2008, the Company's wholly owned subsidiary Altius Petroleum International BV ("Altius") signed a five-year $80 million
reserve-based finance facility with the major European bank Calyon as mandated lead arranger. The initial committed amount of this revolving
reserve-based facility is $60 million. Other lenders are in discussions to join the lending consortium and this event will trigger the
increase in the facility to the full $80 million. Altius drew down the initial amount in the second quarter of 2008. The main purposes of
the facility were to repay the existing Vitol pre-payment facility in full and to fund future developments in Kazakhstan, including the
Akzhar-Kenkiyak pipeline, which is expected to be commissioned during 2009.
Arawak's 50%-owned joint venture in Russia has a bank borrowing base facility agreement with a $60 million limit (Arawak share - $30
million). The facility is repayable via quarterly repayments of $3.45 million (Arawak share - $1.73 million). The balance outstanding as at
30 September 2008 is $23.0 million (Arawak share - $13.2 million) and at 31 December 2007 was $33.3 million (Arawak share - $11.5 million).
There are no penalties for early repayment and in certain circumstances accelerated repayments are required. The borrowing is secured by
Russian export crude oil sales and by proportionate shareholder guarantees.
With the acquisition of the Saigak field in Kazakhstan, the Company also obtained cash balances at the balance sheet date of 31 May 2008
of $15.0 million including $12.4 million generated by the asset since the effective date of the transaction of 1 January 2007.
The Company continues to seek additional business opportunities in Kazakhstan, Russia, Azerbaijan and potentially elsewhere in the
Former Soviet Union. Funding of any such further transactions will be considered on a case-by-case basis, depending on materiality and the
expected cash flow profile of the opportunity.
SUMMARY OF QUARTERLY RESULTS
The following financial data is derived from the Company's consolidated financial statements for each of the eight most recently
completed quarters.
(In thousands of US dollars except for per share amounts)
Net income (loss) per share
Quarter ended Crude oil sales Net income (loss) Basic Diluted
2008 September 30 93,566 6,448 0.035 0.035
June 30 95,556 9,297 0.053 0.053
March 31 66,580 8,473 0.049 0.049
2007 December 31 79,580 21,924 0.126 0.125
September 30 56,619 7,761 0.045 0.044
June 30 30,650 308 0.002 0.002
March 31 35,804 1,268 0.007 0.007
2006 December 31 29,123 (3,720) (0.021) (0.021)
related party transactions
All of the transactions below are recorded according to the terms of the related party contracts, which are on terms which management
believes are no more and no less favourable than those with unrelated parties. Vitol Holding B.V. and its subsidiaries, a member of the
Vitol group ("Vitol") of companies, owns 41.4% of the Company's outstanding shares.
Crude oil sales
Revenues from Russian and Kazakhstan export crude oil sales during the three months ended 30 September 2008 received from Vitol S.A.
were $59.5 million (three months ended 30 September 2007 - $22.3 million). Accounts receivable at 30 September 2008 include revenues from
export crude oil sales to Vitol S.A. of $16.7 million (31 December 2007 - $15.0 million).
Crude oil sales prepayment facility
The balance of the crude oil sales prepayment facility provided by Vitol S.A. at 30 September 2008 was nil (31 December 2007 - $45.0
million) with related interest expense for the three months ended 30 September 2008 of nil (three months ended 30 September 2007 of $0.1
million).
Transportation and selling costs
Transportation and selling costs charged by Vitol S.A. associated with export oil sales were negligible and related accounts payable and
accrued liabilities outstanding at 30 September 2008 are nil (31 December 2007 - $0.2 million).
Other transactions with shareholder
General and administrative expenses during the three months to the end of September include $0.3 million of costs reimbursed to Vitol.
These amounts were charged at cost. The balance owed to Vitol at 30 September 2008 was nil (31 December 2007 - $0.5 million).
Acquisition of Saigak Investments B.V.
On 9 June 2008, the Company completed the acquisition from Vitol of Saigak Investments B.V., a company which owns a 40% participating
interest in the Saigak field in Western Kazakhstan, the consideration for which was 8,352,587 shares in Arawak, which were issued to Vitol
B.V.
Reserve-based finance facility
In May 2008, the Company's wholly owned subsidiary Altius signed an agreement with Calyon for a five-year $80 million reserve-based
finance facility with Vitol participating as an original lender for $20 million. In the third quarter 2008, the interest payable to Calyon
in respect of the Vitol participation was $0.2 million.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Principles of consolidation
Arawak is an international oil and gas exploration, development and production company with activities in Kazakhstan, Russia and
Azerbaijan. The consolidated financial statements have been prepared in US dollars following Canadian GAAP and include the financial
statements of Arawak and its wholly-owned subsidiaries, which are registered under the laws of Jersey, Anguilla (British West Indies), The
Netherlands, Russia, Kazakhstan, Alberta (Canada), Germany, Cyprus and England & Wales. The Company announced that following a special
meeting of the Company's shareholders held on 2 April 2008, the Company continued its country of incorporation from Anguilla, British West
Indies to Jersey, Channel Islands. The Company's registered office is now Whiteley Chambers, Don Street, St. Helier, Jersey, JE4 9WG. The
Company is now incorporated under the laws of Jersey. As a consequence of the continuation and to comply with Jersey law, the Company has
also changed its name to Arawak Energy Limited. As of 1 July 2008, the Company listed its shares on the official list of the London Stock Exchange (the "LSE"). Arawak's common shares continue trading on the
Toronto Stock Exchange (the "TSX") but under the new name with the trading symbol of "AAK".
The Company's interest in Saigak and substantially all of the Company's operations in Russia and Azerbaijan are conducted through joint
ventures and accordingly these financial statements reflect only the Company's proportionate interest.
Foreign currency translation
In Kazakhstan and Azerbaijan, operations are financially and operationally integrated and the functional currency is the US dollar.
Arawak translates foreign currency denominated transactions using the temporal method whereby monetary assets and liabilities are translated
at year end rates; non-monetary assets and liabilities are translated at rates in effect on the date of the transactions; revenue and
expenses are translated at rates in effect on the date of the transaction with the exception of depreciation and amortisation, which are
translated at historic rates. Foreign exchange gains and losses are included in earnings.
The functional currency of the Russian operations is the Russian rouble as it reflects the economic substance of the underlying events
and circumstances of the self-sufficient Russian activities. Transactions and amounts are translated using the current rate method whereby
assets and liabilities are translated at the rate in effect on the balance sheet date; revenues and expenses are translated at the rate in
effect on the transaction date. Foreign exchange gains or losses are recorded as other cumulative comprehensive translation adjustments and
are recorded in accumulated other comprehensive income which is a separate component in shareholders' equity.
Oil and gas properties
Arawak follows the full cost method of accounting, whereby all costs incurred in exploring for and developing oil and gas reserves are
capitalised. Such costs include land acquisition, geological and geophysical, drilling of both productive and unproductive wells, plant and
equipment and administration costs that are reasonably allocated to these activities. Proceeds from disposals are recorded as a reduction of
the related expenditure without recognition of a gain or loss unless the disposal would result in a change of 20% or more in the depletion
rate.
Capitalised costs are accumulated on a country by-country-basis and are depreciated and depleted using the unit of production method
based upon estimated proved reserves. The carrying values of unproved properties are excluded from the depreciation and depletion
calculation.
The Company applies a ceiling test to capitalised costs to ensure that such costs do not exceed estimated future net revenues from
production of proved reserves using forecasted sales prices less expected future capital, production, royalties and asset retirement
obligation, together with the cost of unproved properties. An impairment loss is recognised when the carrying amount is not recoverable and
exceeds its fair value.
Asset retirement obligation
The Company recognises a liability for the fair value of legal obligations associated with the retirement of long-lived tangible assets
in the period incurred with a corresponding increase in the carrying amount of the related asset, which is depleted as a component of oil
and gas properties. The liability is adjusted each reporting period to reflect revisions to the estimated future cash flows and for the
passage of time. The liability accretes until the date of expected settlement of the retirement obligations. The related accretion expense
is charged to earnings. Actual expenditure incurred for site reclamation and abandonment is charged against the liability to the extent it
exists on the balance sheet with the difference recognised as a gain or loss in the period in which settlement occurs.
Use of estimates
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of commitments and contingent liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting periods. Amounts recorded for the depletion of
oil and gas properties and asset retirement obligations are based on estimates of proved reserves and future development costs. The ceiling
test is based on estimates of proved reserves, production rates, oil and gas prices and future costs. By their nature, these estimates are
subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be
material.
Income tax
The Company follows the liability method of accounting for future income taxes. Under this method, income tax assets and liabilities are
recognised based on the estimated tax effects of temporary differences in the carrying values of assets and liabilities in the financial
statements and their respective tax bases, using income tax rates enacted on the balance sheet date. The effect of a change in income tax
rates on the future income tax assets and liabilities is recognised in income or loss in the period of the change.
Stock-based compensation costs
The Company has a stock-based compensation plan. Compensation expense is based on the fair value at the grant date and recognised over
the vesting periods of the respective options with a corresponding increase to contributed surplus. Any consideration received upon exercise
of the options, together with the amount previously recognised in contributed surplus, is recorded as an increase to share capital.
ADOPTION OF NEW ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
Capital Disclosures and Financial Instruments - Presentation and Disclosure
The Canadian Institute of Chartered Accountants ("CICA") issued three new accounting standards: section 1535, Capital Disclosures,
section 3862, Financial Instruments-Disclosures, and section 3863, Financial Instruments-Presentation. Section 1535 establishes disclosure
requirements about an entity's capital and how it is managed. The purpose will be to enable users of the financial statements to evaluate
objectives, policies and processes for managing capital. Sections 3862 and 3863 will replace section 3861, Financial Instruments -
Disclosure and Presentation, revising and enhancing disclosure requirements while carrying forward its presentation requirements. These new
sections will place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the
entity manages those risks. The mandatory effective date is for annual and interim periods in fiscal years beginning on or after 1 October
2007. The Company began application of these sections effective 1 January 2008.
Inventory
In June 2007, the CICA issued Section 3031 - Inventories, which supersedes Section 3030 - Inventories. The purpose of this section was
to prescribe the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognised
as an asset and carried forward until the related revenues are recognised. This Section provides guidance on the realisable value. It also
provides guidance on the cost formulas that are used to assign costs to inventories. In addition, the changes affected the classification of
certain amounts currently recorded as inventory. These recommendations are effective for the Company beginning 1 January 2008. The main
impact on the Company's financial statements of adopting this standard is that virtually all the material and supplies balance will be
classified as property, plant and equipment.
BUSINESS RISKS
As a junior oil and gas exploration, development and production company, Arawak is subject to risks and uncertainties inherent in the
oil and gas industry and to risks inherent to a company of its size and stage of development. Due to the international nature of the
Company's operations, it is subject to additional risks, including currency fluctuations, political risk, price controls and varying forms
of fiscal regimes.
Oil and gas industry risks
Risks in the oil and gas industry include price fluctuations for commodity prices, operational risks and environmental concerns. Oil and
natural gas prices have fluctuated widely during recent years and are determined by supply and demand factors. Arawak manages its operations
in order to keep exposure to these risks to reasonable levels, including the use of hedging instruments and forward sale, fixed price
contracts to hedge its exposure.
Operational risks in the oil and gas industry include exploration and reserve estimate risks, costs and availability of services and
materials, premature reservoir declines, blowouts, well bore collapse, equipment failure and other accidents and adverse weather conditions.
Arawak attempts to mitigate these risks by employing experienced field personnel, consultants and contractors.
The oil and gas industry is subject to extensive environmental and other regulation imposed by governmental authorities. Arawak has
existing policies and practices that ensure its operations conform to the standards and government regulations required for each
jurisdiction in which it operates.
Foreign currency exchange risk
Due to our operations in Kazakhstan, Russia and Azerbaijan, the Company is exposed to foreign currency fluctuations as domestic oil
sales in Kazakhstan and Russia and a large portion of local expenses are denominated in local currencies.
Credit risk
A substantial portion of accounts receivable is related to export oil sales from Russia and Kazakhstan with one major customer. This
customer also provides a crude oil prepayment facility allowing the Company to draw prepayments on future oil sales and diminishing the risk
of collection. The Company's credit risk is mitigated on domestic sales by receiving full or majority payment in advance of each sale.
Interest rate risk
The Company is exposed to interest rate cash flow risk-related to the variable interest rates on the crude oil sales prepayment
facility, long-term debt and other interest-bearing long-term liabilities.
Political and economic conditions in Kazakhstan, Russia and Azerbaijan
Whilst there have been improvements in the economic situation in Kazakhstan, Russia and Azerbaijan in recent years, their economies
continue to display some characteristics of emerging markets. These characteristics include, but are not limited to, the existence of
currencies that are not freely convertible outside of the respective countries, a low level of liquidity of debt and equity securities in
the markets and relatively high inflation.
Additionally, the oil and gas sectors in Kazakhstan, Russia and Azerbaijan are impacted by political, legislative, fiscal and regulatory
developments. The prospects for future economic stability are largely dependent upon the effectiveness of economic measures undertaken by
the respective Governments, together with legal, regulatory and political developments, which are beyond the Company's control.
The financial condition and future operations of the Company may be adversely affected by continued uncertainties in the business
environment of Kazakhstan, Russia and Azerbaijan. Management is unable to predict the extent and duration of these uncertainties, nor
quantify the impact, if any, on the financial statements.
Tax legislation and practice in Kazakhstan, Russia and Azerbaijan are in the developmental stage and are therefore subject to varying
interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied
to the transactions and activities of the Company may not coincide with that of management. As a result, transactions may be challenged by
tax authorities and the Company may be charged additional taxes, penalties and interest. Tax periods remain open to review by the tax
authorities for three to five years, however under certain circumstances a tax year may remain open longer.
Need for capital
Arawak must rely on access to debt and capital markets to supplement internally generated cash flow to fund its capital commitments and
to finance its growth plans. There can be no assurance that Arawak will be successful in obtaining the funds required to meet its capital
needs on a timely basis or, if successful, that the terms will be advantageous to Arawak.
ARAWAK ENERGY LIMITED
INTERIM CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of U.S. dollars)
Unaudited - prepared by management
As at 30 September, 2008 31 December, 2007
Note
ASSETS
Cash and cash equivalents 69,434 26,863
Accounts receivable 20,879 20,503
Inventory 11,315 5,674
Other current assets 12,991 13,840
114,619 66,880
Property and equipment 264,599 227,855
Future income tax assets 3,022 1,398
Other non-current assets 279 436
Available for sale financial 7 3,197 -
assets
385,716 296,569
LIABILITIES
Accounts payable and accrued 27,980 24,588
liabilities
Corporate income taxes payable 35,493 11,000
Crude oil sales prepayment 6 - 45,000
facility
Current portion of long term debt 8 18,150 6,900
Current portion of other long term 9 1,074 1,385
liabilities
82,697 88,873
Future income tax liabilities 14,678 11,340
Long term debt 8 51,591 9,116
Other long term liabilities 9 19,730 17,640
Asset retirement obligation 10 7,699 5,079
176,395 132,048
SHAREHOLDERS' EQUITY
Share capital 11 137,576 115,645
Contributed surplus 11 9,827 8,906
Accumulated other comprehensive 96 2,368
income
Retained earnings 61,822 37,602
209,321 164,521
Commitments and contingent 14
liabilities
385,716 296,569
See accompanying notes to the interim consolidated financial statements.
ARAWAK ENERGY LIMITED
INTERIM CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(Expressed in thousands of U.S. dollars)
Unaudited - prepared by management
For the period ended 30 Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
September
Revenue
Crude oil and gas sales 93,566 56,619 255,702 123,073
Interest and other income 786 742 2,232 1,535
94,352 57,361 257,934 124,608
Expenses
Royalties and taxes 36,681 10,711 74,680 27,670
Production costs 7,730 5,632 21,447 13,102
Transportation and selling 6,726 5,407 18,451 13,099
costs
General and administrative 6,434 4,447 17,911 12,243
expenses
Re-domiciliation and listing - - 11,741 -
expenses
Stock option compensation 526 1,068 1,191 2,897
Depletion, depreciation and 10,145 10,469 29,447 24,964
amortisation
Accretion expense 256 82 646 238
Interest expense 1,795 1,342 4,882 4,932
Foreign exchange (gain) loss 1,785 (1,472) 1,278 (1,523)
Loss on disposal of office 261 - 261 -
equipment
72,339 37,686 181,935 97,622
Income before income taxes 22,013 19,675 75,999 26,986
Current income tax 17,387 12,002 55,401 20,129
Future income tax recovery (1,822) (88) (3,622) (2,480)
15,565 11,914 51,779 17,649
Net income for the period 6,448 7,761 24,220 9,337
Retained earnings beginning of 55,374 7,917 37,602 6,341
the period
Retained earnings end of the 61,822 15,678 61,822 15,678
period
Net income per share (US$ per
share)
Basic 0.035 0.045 0.136 0.054
Diluted 0.035 0.044 0.136 0.053
See accompanying notes to the interim consolidated financial statements.
ARAWAK ENERGY LIMITED
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
(Expressed in thousands of U.S. dollars)
Unaudited - prepared by management
For the period ended 30 Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
September
Comprehensive income
Net income for the period 6,448 7,761 24,220 9,337
Other comprehensive income
Foreign currency translation (2,445) 176 (551) 394
adjustment
Loss on available for sale (1,721) - (1,721) -
financial assets, net of tax
Comprehensive income 2,282 7,937 21,948 9,731
Accumulated gains/losses on available for sale financial assets
At the beginning of the period - - - -
Gain/loss arising on (1,721) - (1,721) -
available for sale financial
assets, net of tax
At the end of the period (1,721) - (1,721) -
Accumulated other comprehensive income
Accumulated other 4,262 1,759 2,368 1,541
comprehensive income,
beginning of the period
Other comprehensive income (4,166) 176 (2,272) 394
Accumulated other 96 1,935 96 1,935
comprehensive income, end of
the period
See accompanying notes to the interim consolidated financial statements.
As at 30 September 2008 the accumulated other comprehensive income consists of foreign currency translation adjustments of $1.817
million (31 December 2007 - $2.368 million) and loss on available for sale financial assets, net of tax benefit of $1.721 million (31
December 2007 - nil).
ARAWAK ENERGY LIMITED
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in thousands of U.S. dollars)
Unaudited - prepared by management
For the period ended 30 Note Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
September
Operating Activities
Net income for the period 6,448 7,761 24,220 9,337
Items not affecting cash:
Stock option compensation 526 1,068 1,190 2,897
Depletion, depreciation and 10,145 10,469 29,447 24,964
amortisation
Accretion expense 256 82 646 238
Foreign exchange loss - 176 - 393
Future income tax recovery (1,822) (88) (3,622) (2,480)
Funds from operations 15,553 19,468 51,881 35,349
Changes in non-cash working 20,450 (4,195) 22,021 (7,081)
capital
36,003 15,273 73,902 28,268
Financing Activities
Changes in crude oil sales - 1,000 (45,000) 12,000
prepayment facility
Long term debt repayments (1,921) - (6,395) (3,550)
Proceeds from long term debt - - 60,000 -
Change in other long term - 4,538 (166) 5,632
liabilities
Proceeds from issue of common - - - 498
shares
(1,921) 5,538 8,439 14,580
Investing Activities
Purchase of available for sale 7 (4,917) - (4,917) -
financial assets
Acquisitions in Kazakhstan - (5,781) (4,122) (5,781)
Purchase of property and (14,803) (15,692) (45,956) (33,242)
equipment
(19,720) (21,473) (54,995) (39,023)
Acquisitions
Net cash acquired with - - 15,042 -
acquisitions
Effects of exchange rates on 183 - 183 -
cash and cash equivalents
Net change in cash during the 14,545 (662) 42,571 3,825
period
Cash, beginning of the period 54,889 14,150 26,863 9,663
Cash, end of the period 69,434 13,488 69,434 13,488
See accompanying notes to the interim consolidated financial statements.
ARAWAK ENERGY LIMITED
NOTES TO THE INTERIM FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED 30 SEPTEMBER 2008
UNAUDITED - prepared by management
All amounts are in thousands of U.S. dollars unless otherwise stated except per share amounts and number of shares.
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
Arawak Energy Limited ("Arawak" or the "Company" or the "Group") is an international oil and gas exploration, development and production
company with activities in Kazakhstan, Russia and Azerbaijan. The consolidated financial statements have been prepared in US dollars
following Canadian generally accepted accounting principles ("GAAP") and include the financial statements of Arawak and its wholly-owned
subsidiaries, which are registered under the laws of Anguilla (British West Indies), The Netherlands, Russia, Kazakhstan, Germany, Alberta
(Canada), Cyprus, England & Wales and Jersey. As of 1 July 2008, the Company listed its shares on the Official List of the London Stock
Exchange. The Company's shares are now listed on both the Toronto Stock Exchange ("TSX") and the London Stock Exchange ("LSE") under the
symbol "AAK".
Substantially all of the Company's operations in Russia and Azerbaijan are conducted through joint ventures and accordingly these
financial statements reflect only the Company's proportionate interest. Kazakhstani operations are conducted through wholly-owned
subsidiaries and a joint venture. Segmented information is summarised in Note 13.
These unaudited interim consolidated financial statements are prepared by management in accordance with Canadian GAAP and follow the
same accounting policies and methods as the audited consolidated financial statements for the year ended 31 December 2007 except as noted
below and do not contain all of the disclosures required for the annual financial statements. As a result, the unaudited interim
consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company contained
in the annual report for the year ended 31 December 2007.
Comparative figures
Certain comparative figures have been restated to conform to the current financial statement presentation.
Adoption of new accounting standards
Effective 1 January 2008, Arawak adopted the following new accounting standards issued by the Canadian Institute of Chartered
Accountants ("CICA"):
Capital Disclosures
CICA Section 1535 establishes both qualitative and quantitative disclosure requirements about an entity's capital and how it is managed.
As a result of adopting this section, Arawak is now required to disclose qualitative information about its objectives, policies and
processes for managing capital, such that users of the financial statements will be able to evaluate the Company's management of capital.
Financial Instruments
The CICA issued two new accounting standards with respect to financial instruments: Section 3862 - Financial Instruments - Disclosure,
and Section 3863 - Financial Instruments - Presentation. Section 3862, adopted by Arawak in conjunction with Section 3863, emphasises
disclosures regarding the nature and extent of the risks arising from financial instruments and how those risks are managed. Following the
requirements of Section 3855 - Financial Instruments - Recognition and Measurement, adopted 1 January 2007 this new section recommends
additional disclosures, including qualitative analysis of the financial instrument risks faced by Arawak, as well as a quantitative analysis
of the effect of changes to these risks, based on market conditions, and their potential impact on Arawak.
Available for sale financial assets
Available for sale financial assets include the Group's listed investments. These are initially recorded at the investments' fair value.
Changes in the fair value of the investment are recognised in the Statement of Comprehensive Income, net of the related tax effect, until
the asset is disposed of at which point any gains/losses are transferred to the statement of income and retained earnings.
Inventories
CICA Section 3031 provides guidance on the measurement of inventory, by providing several appropriate valuation techniques to be used in
the determination of the cost of inventory, based on the type of inventory held. The adoption of this new standard had no impact on the
measurement of inventories; however, further disclosure was required, including the carrying value of each classification of inventory, a
reconciliation of the expenses related to inventory used during the period and the disclosure of the amount of any write-downs or reversals
of previously written-down amounts, if any.
2. FUTURE CHANGES IN ACCOUNTING POLICIES
The CICA issued a new accounting standard, Section 3064 - Goodwill and Intangible Assets, which replaces Sections 3062 - Goodwill and
Other Intangible Assets and 3450 - Research and Development Costs and amended Section 1000 - Financial Statement Concepts. These accounting
standards updates will be effective for fiscal years beginning on or after 1 October, 2008 and Arawak plans to adopt them effective 1
January 2009. Section 3064 recommends standards for the recognition, measurement and disclosure of goodwill and intangible assets, including
research and development costs and Section 1000 has been amended to clarify the criteria for recognition of an asset. Arawak is in the
process of evaluating the impact of these standards.
The Accounting Standards Board of the CICA ("AcSB") has adopted a strategy to apply International Financial Reporting Standards ("IFRS")
to publicly accountable enterprises in the future. The AcSB confirmed in February 2008 that IFRS standards will replace Canadian GAAP in
2011, for profit oriented Canadian publicly accountable entities. Arawak is evaluating the potential impacts of this change in reporting
standards.
3. ACQUISITIONS
On 9 June 2008, the Company completed the acquisition of Saigak Investments B.V., a company which has a 40% participating interest in
the Saigak field in Western Kazakhstan, from Vitol B.V. Vitol is a related party and owns 41.4% of the Company's outstanding shares - please
see Note 12. The Saigak field is located approximately 120 km from the Company's existing Akzhar field in the Aktobe region of Western
Kazakhstan and is operated by Maersk Oil Kazakhstan Gmbh, which owns the remaining 60% interest. On completion, Arawak issued to Vitol B.V.
8,352,587 Common Shares in consideration for this acquisition at C$2.55, equivalent of $20.8 million.
Purchase consideration
20.8
Transaction costs
0.1
Total consideration
20.9
The total purchase price of $20.9 million was preliminarily assigned to the net assets acquired based on their fair values as follows
(in millions of US dollars):
Current assets
22.5
Property and equipment
8.9
Current liabilities
(5.5)
Future income tax
(3.5)
Other long term liabilities
(1.5)
20.9
4. Financial Instruments
The Company holds various forms of financial instruments. These financial instruments expose the Company to the following risks:
- credit risk
- market risk
- liquidity risk
Management has primary responsibility for monitoring and managing financial instrument risks under direction from the Board of Directors
(the "Board"), which has overall responsibility for establishing the Company's risk management framework.
The Company's financial instruments recognised in the unaudited consolidated balance sheet at 30 September 2008 consist of cash and cash
equivalents, accounts receivable, available for sale financial assets, indebtedness, accounts payable and accrued liabilities. Available for
sale financial assets are revalued at each balance sheet date to their fair value. The fair value of other financial instruments
approximates their carrying amounts based on the short term to maturity. Non-current portion of indebtedness approximates fair value as it
bears a market rate of interest.
Credit risk
A substantial portion of the Company's accounts receivable is concentrated with a limited number of purchasers of commodities in the oil
and gas industry and is subject to normal industry credit risk. Management considers these concentrations of credit risk to be minimal, as
commodity purchasers are major industry participants.
The company's maximum exposure to credit risk of financial assets at the balance sheet date is equivalent to their carrying value.
There are no significant financial assets that are past due or impaired.
Market risk
Market risks are as follows and unless hedged are largely outside of the control of the Company:
- Commodity prices
- Interest rates
- Foreign exchange
Commodity prices
The Company is exposed to the risk of declining prices for its crude petroleum products with a corresponding reduction in cash flow.
Reduced cash flow may result in lower levels of capital being available for field activity, thus compromising the Company's capacity to grow
production while at the same time replacing continuous decline from existing properties. In certain circumstances, usually when debt levels
are forecast to increase due to capital expenditures exceeding cash flow, or where the Company has financed, in whole or in part, an
acquisition using bank debt, the Company may enter into oil and natural gas hedging derivative contracts in order to provide stability to
future cash flow. These contracts reduce the fluctuation in production revenue by setting a minimum level for prices of future deliveries of
oil. No such hedging derivatives were in place at 30 September 2008 or 31 December 2007.
The following table summarises the sensitivity of the Company's net income to fluctuations in commodity prices. When assessing the
potential impact of the commodity price changes, the Company believes 10% volatility is a reasonable measure. The sensitivity calculation
allows for the impact of commodity prices on the amount of petroleum revenue related taxes and profit taxes, with all other variables held
constant. On this basis, the impact on net earnings would be as follows:
In thousands of US dollars
For the period ended 30 Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
September
Average realised oil price 79.31 55.57 79.27 43.17
($/boe)
10% increase 2,662 1,753 7,547 3,530
10% decrease (2,662) (1,753) (7,547) (3,530)
Interest rates
Interest applicable to the Company's bank facilities varies, and is most commonly based on variable rates, being US Dollar Libor plus a
margin. The Company is thus exposed to increased borrowing costs during periods of increasing interest rates, with a corresponding reduction
in both cash flows and project economics. The Company had no interest rate swaps or similar contracts in place at 30 September 2008 or 31
December 2007, to reduce interest rate risk.
A 1% change in the US Dollar LIBOR interest rate would impact the Company's net earnings as follows:
In thousands of US dollars
For the period ended 30 Three months 2008 Three months 2007 Nine months 2008 Nine months 2007
September
US Dollar LIBOR rates 2.80% 5.40% 3.40% 5.30%
1 % increase 221 209 638 504
1 % decrease (221) (209) (638) (504)
Foreign exchange
The foreign exchange risk relates to the Company's exposure to currencies other than the functional currency in the area of operation.
The Company's product revenues are denominated in US dollars, Russian Roubles and Kazakhstani Tenge, while costs are incurred principally in
Russian Roubles and Kazakhstani Tenge. As a result of these transactions, the Company holds various financial assets and liabilities in
foreign currencies. As at 30 September 2008 and 31 December 2007, the Company had no contracts in place to reduce foreign exchange risk. The
following tables show the foreign currency denominated financial assets and liabilities of the Group as at 30 September 2008 and 31 December
2007.
In thousands of US dollars
As at 30 September 2008 Financial assets and liabilities
Cash & cash AFS financial assets Accounts receivable Accounts payable, Long term debt incl.
equivalents accrued liabilities current portion
and other net
liabilities
Russian Rouble 3,808 - 1,464 10,050 -
Kazakhstan Tenge 6,694 - 318 (9,910) -
UK Pounds 513 - 540 807 -
Azerbaijan Manat 63 - - 205 -
Euros 69 - 102 - -
Canadian Dollar 39 - - 26 -
US Dollar 58,248 3,197 18,455 3,725 69,741
69,434 3,197 20,879 4,903 69,741
In thousands of US dollars
As at 31 December 2007 Financial assets and liabilities
Cash and cash AFS financial assets Accounts receivable Accounts payable, Long term debt incl.
equivalents accrued liabilities current portion
and other net
liabilities
Russian Rouble 2,166 - 2,455 2,591 -
Kazakhstan Tenge 5,781 - 1,069 7,449 -
UK Pounds 217 - 368 677 -
Azerbaijan Manat 51 - - 886 -
Euros 112 - - - -
Canadian Dollar 93 - - 15 -
US Dollar 18,443 - 16,611 14,927 16,016
26,863 - 20,503 26,545 16,016
The following table shows the effect on earnings and other comprehensive income after tax of a 10% appreciation or depreciation in the
foreign currencies against the US dollar on the above mentioned financial assets and liabilities of the Company.
In thousands of US dollars
As at 30 September 2008 30 September 2008 31 December 2007 31 December 2007
Appreciation Depreciation Appreciation Depreciation
Other comprehensive income (320) 320 - -
Net earnings 3,965 (3,775) 2,427 (1,902)
Liquidity risk
The Company has a cash forecast and budgeting process to determine the funds required to support the Company's operating requirements,
in both the short, medium and long term. Liquidity difficulties would emerge if the Company was unable to meet its financial obligations as
they fell due within normal credit terms. This may be the consequence of diminished cash flows resulting from lower product prices,
production interruptions, or unexpected operating or capital cost increases. Generally the Company will, over a reasonable period of time,
limit its capital programmes to cash flow from operations. The following table summarises the maturity of the Company's significant
financial liabilities:
In thousands of US dollars Less than 1 year 1 to 3 years 4 to 5 years After 5 years Total
Calyon loan facility 11,250 30,000 18,750 - 60,000
BNP Paribas facility 6,900 4,575 - - 11,475
Other long term liabilities 1,074 3,223 2,148 14,359 20,804
19,224 37,798 20,898 14,359 92,279
All other liabilities fall due within twelve months.
The Company has an interest in a joint venture and an associated undertaking and is responsible for partial funding of these entities,
pursuant to the terms of the joint venture and shareholder agreements. The Company does not bear direct liquidity risk for these entities.
5. Capital Management
Capital management is fundamental to the Company's objective of growing production cost-effectively. The Company's capital comprises
shareholders' equity, bank debt and working capital. Management of capital involves the preparation of an annual budget, which may only be
implemented after approval by the Company's Board. As the Company's business evolves during the fiscal year, the budget may be amended;
however, any changes are again subject to approval by the Board.
The Company's bank indebtedness is based on the Company's producing reserves and generally is not subject to restrictions which would
potentially affect the Company's operations. From time to time the Company may enter into hedging arrangements if capital programmes or
acquisitions result in a high net debt to cash flow ratio. Such arrangements provide for stability of cash flow during periods when the
Company applies cash flow to reduce its net debt.
The Company may issue share capital when debt levels are high and potentially constrain operations, usually in circumstances when the
Company has completed a large acquisition.
In thousands of US dollars
As at 30 September 2008 31 December 2007
Long term debt 51,591 9,116
Current portion of long term debt 18,150 18,150
Cash (69,434) (26,863)
Net debt 307 (10,847)
Total shareholders equity 209,321 164,521
Net debt to capitalisation 0.1% -6.6%
6. CRUDE OIL SALES PREPAYMENT FACILITY
In May 2008, the Company's wholly-owned subsidiary Altius Petroleum International BV ("Altius") signed a reserve-based financing
agreement with Calyon. This was used to repay, in full, the existing Vitol prepayment facility, which was subsequently terminated. The
balance of the Vitol facility at 30 September 2008 was therefore nil (31 December 2007 - $45.0 million). Refer to Note 12 for related party
sales made in connection with the Vitol prepayment facility.
7. AVAILABLE FOR SALE FINANCIAL ASSETS
In July and August 2008, the group acquired a 4.46 % interest in the ordinary share capital of PetroNeft Resources plc, a company listed
on the Alternative Investment Market ("AIM") of the LSE.
In thousands of US dollars
Acquired in the third quarter 2008 4,918
Fair value adjustment included in other comprehensive income (net (1,721)
of tax)
As at 30 September 2008 3,197
8. LONG-TERM DEBT
The Company's 50%-owned operating company in Russia has a bank borrowing base facility agreement carrying interest at LIBOR plus 4.4%.
The facility is repayable in equal $1.725 million quarterly payments and interest is paid quarterly. The borrowing is secured against
Russian export crude oil sales and proportionate shareholder guarantees.
The Calyon facility of $80 million (of which $60 million has been drawn) is secured against a crude oil purchase agreement between
Altius and Vitol, and is guaranteed by Arawak Energy Limited. The facility limit reduces annually and the loan must be repaid in full within
five years of the date of the agreement. Interest is paid quarterly at an interest rate of LIBOR plus 1.75%.
In thousands of US dollars
As at 30 September 2008 31 December 2007
Bank loan 71,052 16,650
Short-term portion (18,150) (6,900)
Unamortised debt issue costs (1,311) (634)
Long-term debt 51,591 9,116
9. OTHER LONG-TERM LIABILITIES
Shareholder funding of CGL
The shareholders of Commonwealth Gobustan Limited ("CGL"), the Company's joint venture in Azerbaijan, have funded the project
principally by shareholder loans. Initially, the loans were provided solely by other shareholders. Subsequently, funding has been provided
proportionately by all shareholders. The Company's proportion of CGL's liability to the other shareholders in respect of the initial loans
is recorded in other long-term liabilities.
Historical cost
The Company is obliged to reimburse the Government of Kazakhstan for historical geological and exploration expenditure incurred in its
licence areas. The outstanding amounts are deferred during the exploration periods and are payable in equal quarterly payments over the
respective production periods.
Deferred licence acquisition costs
Certain licence acquisition costs were deferred at purchase and a portion is expected to be paid in 2008.
In thousands of US dollars 30 September 2008 31 December 2007
Shareholder funding of CGL 5,931 7,755
Historical cost 10,203 10,207
Deferred licence acquisition 4,670 1,063
costs
20,804 19,025
Current portion of historical 174 133
cost
Current portion of deferred licence acquisition 900 1,252
cost
Current portion of other long-term liabilities 1,074 1,385
Other long-term liabilities 19,730 17,640
10. ASSET RETIREMENT OBLIGATION
The asset retirement obligation is estimated based on the expected costs to abandon existing wells and facilities and to restore the
existing sites, and the estimated timing of the costs to be incurred in future periods. The total undiscounted amount of the estimated cash
flows required to settle the asset retirement obligation is $13.1 million (2007 - $13.6 million), which is expected to be incurred between
2008 and 2020. The Company's credit adjusted risk free rate of 8.6% is used to calculate the net present value of the asset retirement
obligation (2007 - 10.3%) and the inflation rate of 7.8% (with the revised assumption to take into account expected US dollar inflation in
Kazakhstan versus official Tenge inflation rate in Kazakhstan) is used to calculate expected future costs (2007 - 14.5%).
In thousands of US dollars
As at 30 September 2008 31 December 2007
Balance, beginning of period 5,079 2,820
Increase in liabilities 1,446 1,446
Settlement of liabilities (68) (25)
Accretion expense 646 439
Exchange loss arising from 596 399
translation
Balance, end of period 7,699 5,079
11. SHARE CAPITAL
30 September 2008 31 December 2007
Common shares outstanding as
at:
Number of shares Amount Number of shares Amount
Issued:
Balance, beginning of period 173,891,865 115,645 171,181,702 112,626
Shares issued 8,352,587 20,815 - -
Exercise of stock options 400,000 1,116 500,000 1,092
Exchanged during period - - 2,210,163 1,927
Issued and outstanding 182,644,452 137,576 173,891,865 115,645
Exchangeable shares:
Balance, beginning of period - - 2,210,163 1,927
Exchanged - - (2,210,163) (1,927)
Exchangeable shares - - - -
outstanding
Balance, end of period 182,644,452 137,576 173,891,865 115,645
Earnings per share and Net Income per share
Per share amounts are calculated using the weighted average number of common shares outstanding during the period as follows:
Three months Nine months
For the period ended September 2008 2007 2008 2007
30
Basic 182,583,582 173,591,865 177,450,141 173,517,872
Diluted 182,583,582 174,710,926 177,840,065 174,787,875
For the purposes of calculating the weighted average number of shares, the exchangeable shares issued on 7 January 2005 have been
treated as common shares issued.
On 9 June 2008, the Company issued 8,352,587 Common Shares to Vitol B.V. upon the completion of the acquisition of Saigak Investments
B.V. from Vitol.
The granted stock options are the reconciling items between the weighted average basic and diluted number of common shares, though not
all of the outstanding stock options are dilutive.
Stock options
The Company has a stock option plan under which the board of directors may grant options for the purchase of common shares to directors,
officers, consultants and employees for up to 11,370,000 common shares. The exercise price of each option shall not be lower than the
closing price of common shares on the Toronto Stock Exchange (previously the TSX Venture Exchange) on the last trading day immediately prior
to the date the stock option is granted. The options are granted for a maximum term of five years and under the 2003 stock option plan, are
fully vested after eighteen months from the date of each grant. Options granted under the 2007 stock option plan are granted for a maximum
term of five years and are fully vested over three years from the date of each grant.
Number of options Weighted average
exercise price
Outstanding 31 December 2006 10,785,000 CAD 2.50
Granted 15 June 2007 3,042,500 CAD 2.69
Exercised (500,000) CAD 1.89
Cancelled (825,000) CAD 2.73
Outstanding 31 December 2007 12,502,500 CAD 2.56
Granted 25 June 2008 2,845,000 CAD 2.60
Exercised (400,000) CAD 2.10
Outstanding 31 December 2008 14,947,500 CAD 2.58
The numbers of stock options outstanding and exercisable at 30 September are as follows:
Options outstanding Options exercisable
Number outstanding Average remaining Number outstanding Average remaining life
life in years in years
14,947,500 2.9 13,319,178 2.7
Contributed surplus
As at: 30 September 2008 31 December 2007
Balance, beginning of period 8,906 5,617
Stock based compensation expense 1,190 3,560
Exercised options (269) (271)
Balance, end of period 9,827 8,906
The fair value of each option granted is estimated on the date of grant using the Black-Scholes options pricing model with the following
assumptions:
2008 2007
Fair value of options granted ($ per share) CAD 0.92 CAD 0.90
Expected life (years) 2.0 2.0
Risk-free interest rate (%) 4.5% 4.5%
Expected volatility (%) 99.3% 102.7%
Expected dividend yield (%) 0.0% 0.0%
* Restated - The 2007 assumptions are restated to reflect those in use at year end
12. RELATED PARTY BALANCES AND TRANSACTIONS
All of the transactions below are recorded according to the terms of the related party contracts, which are on terms which management
believes are no more and no less favourable than those with unrelated parties. Vitol Holding B.V. and its subsidiaries, a member of the
Vitol group ("Vitol") of companies, owns 41.4% of the Company's outstanding shares.
a) Crude oil sales
Revenues from Russian and Kazakhstan export crude oil sales during the three months ended 30 September 2008 received from Vitol S.A.
were $59.5 million (three months ended 30 September 2007 - $22.3 million). Accounts receivable at 30 September 2008 include revenues from
export crude oil sales to Vitol S.A. of $16.7 million (31 December 2007 - $15.0 million).
b) Crude oil sales prepayment facility
The balance of the crude oil sales prepayment facility provided by Vitol S.A. at 30 September 2008 was nil (31 December 2007 - $45.0
million) with related interest expense for the three months ended 30 September 2008 of nil (three months ended 30 September 2007 of $0.1
million).
c) Transportation and selling costs
Transportation and selling costs charged by Vitol S.A. associated with export oil sales were negligible and related accounts payable and
accrued liabilities outstanding at 30 September 2008 are nil (31 December 2007 - $0.2 million).
d) Other transactions with shareholder
General and administrative expenses during the nine months of 2008 include $0.3 million of costs reimbursed to the Vitol group. These
amounts were charged at cost. The balance owed to the Vitol group at 30 September 2008 was nil (31 December 2007 - $0.5 million).
e) Acquisition of Saigak Investments B.V.
On 9 June 2008 the Company completed the acquisition from Vitol of Saigak Investments B.V., a company which owns a 40% participating
interest in the Saigak field in Western Kazakhstan, the consideration for which was 8,352,587 shares in Arawak, which were issued to Vitol
B.V.
f) Reserve-based finance facility
In May 2008, the Company's wholly owned subsidiary Altius signed an agreement with Calyon for a five-year $80 million reserve-based
finance facility with Vitol participating as an original lender for $20 million. In the third quarter 2008, the interest payable to Calyon
in respect of the Vitol participation was $0.2 million.
13. SEGMENTED INFORMATION
The Company's commercial activities concentrated in Kazakhstan, Russia and Azerbaijan are considered separate business segments for
operational and presentation purposes. The accounting policies of the segments are the same as those described in the summary of significant
accounting policies.
The tables below set out key financial data for the Company by geographical segment (in thousands of US dollars). The amounts for
general and administrative costs for the nine months ended 30 September 2008 are stated after the recharge of a proportion of corporate
costs to the Kazakhstani business segment. The corresponding figures for 2007 do not include any recharge to the Kazakhstani business
segment.
Kazakhstan Russia Azerbaijan Other Total
For the three months ended 30 September,
2008
Revenue:
Crude oil sales 62,740 30,789 37 - 93,566
Interest and other income 405 224 - 157 786
Expenses:
Royalties and taxes 16,077 20,604 - - 36,681
Production costs 4,662 3,062 6 - 7,730
Transportation and selling 5,958 768 - - 6,726
costs
General and administrative 3,883 736 152 1,663 6,434
Stock option compensation - - - 526 526
Depletion, depreciation and 7,239 2,782 49 75 10,145
amortisation
Accretion expense 155 86 15 - 256
Interest expense 1,225 158 149 263 1,795
Foreign exchange (gain) loss (288) 1,949 - 124 1,785
Loss on disposal of office 261 - - - 261
equipment
Current income tax 16,719 668 - - 17,387
Future income tax recovery (1,519) (303) - - (1,822)
Net income 8,773 505 (334) (2,495) 6,448
For the nine months ended 30 September, 2008
Revenue:
Crude oil sales 169,711 85,522 469 - 255,702
Interest and other income 1,154 638 - 440 2,232
Expenses:
Royalties and taxes 22,093 52,587 - - 74,680
Production costs 13,561 7,507 99 280 21,447
Transportation and selling 16,194 2,257 - - 18,451
costs
General and administrative 10,145 3,685 427 3,654 17,911
Re-domiciliation and listing - - - 11,741 11,741
expenses
Stock option compensation - - - 1,191 1,191
Depletion, depreciation and 19,134 9,840 219 254 29,447
amortisation
Accretion expense 392 254 - - 646
Interest expense 2,576 1,387 474 445 4,882
Foreign exchange loss 706 546 - 26 1,278
Loss on disposal of office 261 261
equipment
Current income tax 51,844 3,557 - - 55,401
Future income tax recovery (2,798) (824) - - (3,622)
Net income 36,757 5,364 (750) (17,151) 24,220
As at September 30, 2008
Property and equipment 167,463 61,834 33,130 2,172 264,599
Total assets 242,247 97,671 33,711 12,087 385,716
Total liabilities 128,090 28,608 7,337 12,360 176,395
Kazakhstan Russia Azerbaijan Other Total
For the three months ended 30 September
2007
Revenue:
Crude oil and gas sales 37,511 18,869 239 - 56,619
Interest and other income 470 245 - 27 742
Expenses:
Royalties and taxes 1,422 9,289 - - 10,711
Production costs 3,867 1,764 1 - 5,632
Transportation and selling 4,816 591 - - 5,407
costs
General and administrative 1,290 673 281 2,203 4,447
Stock option compensation - - - 1,068 1,068
Depletion, depreciation and 6,824 3,392 156 97 10,469
amortisation
Accretion expense 37 45 - - 82
Interest expense 993 673 - (324) 1,342
Foreign exchange loss (gain) (197) (1,617) - 342 (1,472)
Current income tax 10,293 1,709 - - 12,002
Future income tax recovery 490 (578) - - (88)
Net income 8,146 3,173 (199) (3,359) 7,761
For the nine months ended 30 September 2007
Revenue:
Crude oil and gas sales 72,892 49,612 569 - 123,073
Interest and other income 732 341 - 462 1,535
Expenses:
Royalties and taxes 2,317 25,353 - - 27,670
Production costs 8,291 4,651 160 - 13,102
Transportation and selling 11,375 1,724 - - 13,099
costs
General and administrative 3,539 1,977 572 6,155 12,243
Stock option compensation - - - 2,897 2,897
Depletion, depreciation and 14,649 9,729 381 205 24,964
amortisation
Accretion expense 110 128 - - 238
Interest expense 2,895 2,338 - (301) 4,932
Foreign exchange loss (gain) (91) (1,874) - 442 (1,523)
Current income tax 16,842 3,287 - - 20,129
Future income tax recovery (636) (1,844) - - (2,480)
Net income 14,333 4,484 (544) (8,936) 9,337
As at 30 September 2007
Property and equipment 122,762 58,125 33,244 1,319 215,450
Total assets 160,180 75,373 34,116 4,245 273,914
Total liabilities 82,488 34,674 10,253 2,799 130,214
14. COMMITMENTS AND CONTINGENT LIABILITIES
Excess profit tax
Arawak is subject to Excess Profit Tax ("EPT") on the Akzhar, Besbolek and Karataikyz hydrocarbon contracts in Kazakhstan at incremental
tiered rates based on each contract's cumulative internal rate of return in excess of 20%. The EPT rates for these fields range from 0% to
30%. For the Alimbai and East Zharkamys III fields in Kazakhstan, EPT rates range from 0% to 60% and are calculated based on the ratio of
net income to deductions in excess of 20%. During 2008 the Company accrued $14.5 million for the Akzhar field and $5.3 million for Besbolek
and Alimbai fields.
Political and economic conditions in Russia, Kazakhstan and Azerbaijan
Whilst there have been improvements in the economic situation in Russia and Kazakhstan in recent years, their economies continue to
display some characteristics of emerging markets. These characteristics include, but are not limited to, the existence of currencies that
are not freely convertible outside of the respective countries, a low level of liquidity of debt and equity securities in the markets and
relatively high inflation.
Additionally, the oil and gas sectors in Russia, Kazakhstan and Azerbaijan are impacted by political, legislative, fiscal and regulatory
developments. The prospects for future economic stability are largely dependent upon the effectiveness of economic measures undertaken by
the Governments, together with legal, regulatory and political developments, which are beyond the Company's control.
The financial condition and future operations of the Company may be adversely affected by continued uncertainties in the business
environment of Russia, Kazakhstan and Azerbaijan. Management is unable to predict the extent and duration of these uncertainties, nor
quantify the impact, if any, on these financial statements.
Taxation
Tax legislation and practice in Russia, Kazakhstan and Azerbaijan are in the developmental stage and are therefore subject to varying
interpretations and frequent changes, which may be retroactive. Furthermore, the interpretation of tax legislation by tax authorities as
applied to the transactions and activities of the Company may not coincide with that of management. As a result, transactions may be
challenged by tax authorities and the Company may be charged additional taxes, penalties and interest. Tax periods remain open to review by
the tax authorities for three to five years; however under certain circumstances a tax year may remain open longer.
15. SUBSEQUENT EVENTS
Rosco S.A. ("Rosco"), a subsidiary of Vitol Holding B.V., announced on 28 October that subject to certain pre-conditions, it intended to
make a public offer for the entire issued share capital of Arawak at a price of CAD $0.90 per share payable in cash. Vitol Holding B.V. and
its subsidiaries own an aggregate of 75,668,399 shares representing 41.4% of the issued common shares in Arawak.
In response, the Board strongly recommends that shareholders take no immediate action to the unsolicited offer, which it views as
opportunistic and not reflecting the underlying value of Arawak.
The Board has appointed a special committee of the Board comprising the non-executive directors James Coleman, Phillip de Boos-Smith,
Nicholas Clayton and Ross Douglas for the purpose of considering the intended offer by Rosco. Arawak has engaged RBC Capital Markets as
Financial Advisers in relation to the unsolicited offer.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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