Iteration Energy announces second quarter 2005 results
Friday August 12, 2:44 am ET
(All amounts are in Canadian dollars, unless stated otherwise)
CALGARY, Aug. 12 /CNW/ - Iteration Energy Ltd. (TSX-ITX) (formerly Hawker Resources Inc.) ("Iteration" or "the Company") announced today its financial and operating results for the three and six months ended June 30, 2005.
During the quarter, management completed its technical review of the properties, implemented initiatives to reduce operating costs, and streamlined general and administrative processes. As a result, the Company is well poised for its projected exploration and development program to be undertaken in the second half of the year. At the end of the quarter, the Company had in excess of $29.0 million cash which, together with cash flow, will be more than sufficient to fund the currently defined exploration and development program for the balance of the year.
HIGHLIGHTS AND OUTLOOK FOR 2005
- Completed technical review of existing properties
- Drilling program starting on existing properties
- Budgeted third and fourth quarter CAPEX program of $36 million will be
covered from existing cash and cash flow from operations
- Zero debt
- Increased operating netbacks resulting from an increase in commodity
prices, reduced operating costs and reduced general and administration
expense
- Production expected to increase to an average of 4,030 BOE/d in the
fourth quarter
With the elimination of the debt and the acquisition of Iteration Energy Inc., the Company is poised for growth in the second half of 2005. A detailed technical review has shown numerous opportunities for reserve and volume additions on the Company's existing properties. The resulting drilling and recompletion program has been started and will continue into 2006. The Company is also pursuing new opportunities through landsales, farm-ins and strategic acquisitions.
Operating costs have been reduced during the quarter, partly as a result of the reversal of prior period operating cost accruals. However, as a result of the cost saving initiatives implemented by management, operating costs are expected to average approximately $6.00 per BOE for the second half of the year. Staff realignment has now been completed and general and administrative costs per BOE are expected to average approximately $3.00 per BOE for the second half of the year.
SUMMARY OF RESULTS
Year over year comparative results (excluding the Lavoy area, which was sold during the first quarter) are as follows:
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Three months ended Six months ended
June 30, June 30,
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2005 2004 2005 2004
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Production (BOE/d) 2,539 3,561 2,897 3,305
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Realized commodity price per BOE $ 47.84 $ 40.25 $ 43.90 $ 40.82
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Operating netbacks per BOE $ 34.65 $ 23.44 $ 27.31 $ 24.24
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Production expense per BOE $ 2.88 $ 6.29 $ 5.99 $ 5.84
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General and admin expense per BOE $ 4.35 $ 4.77 $ 5.17 $ 4.75
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Production revenue before
royalties ('000's) $ 11,052 $ 13,043 $ 23,017 $ 24,422
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Funds from operations ('000's)(1) $ 6,917 $ 9,471 $ 16,284 $ 18,600
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Funds from operations per basic
share $ 0.12 $ 0.23 $ 0.31 $ 0.46
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Net earnings (loss) $ 473 ($ 382) ($ 2,493) ($ 1,079)
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Earnings (loss) per basic share $ 0.01 ($ 0.01) ($ 0.05) ($ 0.03)
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Debt ('000's) 0 66,668
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Net undeveloped land ('000's acres) 68 87
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(1) Management uses funds flow from operations and funds flow from
operations per share (before changes in non-cash working capital and
asset retirement expenditures) to analyze operating performance and
leverage. Funds flow and funds flow per share as presented do not
have any standardized meaning prescribed by Canadian GAAP and
therefore they may not be comparable with the calculation of similar
measures for other entities. Funds flow as presented is not intended
to represent operating cash flow or operating profits for the period
nor should it be viewed as an alternative to cash flow from operating
activities, net earnings or other measures of financial performance
calculated in accordance with Canadian GAAP. All references to funds
flow and funds flow per share throughout this report are based on
cash flow from operating activities before changes in non-cash
working capital and asset retirement expenditures.
Forward Looking Statements
Certain information regarding the Company, including management's
assessment of future plans and operations, may constitute forward-looking
statements under applicable securities law and necessarily involve risks
associated with oil and gas exploration, production, marketing and
transportation such as loss of market, volatility of prices, currency
fluctuations, imprecision of reserve estimates, environmental risks,
competition from other producers and ability to access sufficient capital from
internal and external sources; as a consequence, actual results may differ
materially from those anticipated. The Company assumes no obligation to update
the forward-looking statements or to update the reasons why actual results
could differ from those contemplated by the forward-looking statements.
The TSX has not reviewed this press release and does not accept
responsibility for the accuracy of any of the data presented herein.
Iteration Energy Ltd
Iteration (www.hawkerinc.com) is an Alberta based corporation engaged in
the business of exploring for and developing oil and natural gas reserves in
Western Canada and acquiring natural resource properties. Iteration's common
shares are listed on the Toronto Stock Exchange under the symbol "ITX".
MANAGEMENT'S DISCUSSION AND ANALYSIS
August 10, 2005
The following is Management's Discussion and Analysis (MD&A) of Iteration
Energy Ltd. (formerly Hawker Resources Inc.) ("the Company or Iteration")
operating and financial results for the quarter ended June 30, 2005 as well as
information and estimates concerning the Company's future outlook based on
currently available information. This discussion should be read in conjunction
with Iteration's unaudited consolidated financial statements for the three and
six months ended June 30, 2005 and the audited consolidated financial
statements for the year ended December 31, 2004, together with accompanying
notes. Readers should also refer to Iteration's 2004 Annual Information Form
and Management's Discussion and Analysis dated March 23, 2005 for the year
ended December 31, 2004. All financial information is reported in Canadian
dollars and in accordance with Canadian generally accepted accounting
principles (GAAP) unless noted otherwise.
Certain amounts in prior periods have been reclassified to enable
comparison with the current period's presentation.
Natural gas converts to crude oil equivalent at a ratio of six thousand
cubic feet to one barrel.
Additional information about Iteration Energy Ltd. (formerly Hawker
Resources Inc.) filed with Canadian securities commissions, including periodic
quarterly and annual reports and the Annual Information Form (AIF), is
available on-line at www.sedar.com.
Financial and Operating Highlights
The Lavoy property was disposed of on March 24, 2005, so the production
from the Lavoy area has been excluded from prior periods for comparison
purposes. The Lavoy financial results, which have been excluded, by period,
were as follows:
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Three months ended Six months ended
June 30, June 30,
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($ Cdn thousands, except
as noted) 2005 2004 2005(1) 2004
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Operating
Gas Production
Total natural gas (bcf) - 1.2 1.3 2.5
Daily average natural gas (mcf/d) - 13,527 7,041 13,905
Average price ($/mcf) - $6.16 $6.54 $6.25
Oil and Liquids Production
Total oil and liquids (Mbbls) - 2 .8 5
Daily average oil and liquids
(bbls/d) - 24 4 29
Average price oil and liquids
($/bbl) - $33.07 $23.25 $28.62
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Daily Average Production (BOE/d) - 2,278 1,178 2,346
Revenue
Gas revenue - 7,584 8,335 15,726
Oil and liquids revenue - 71 18 150
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Total Revenue 7,655 8,353 15,876
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Expenses
Royalties - 1,783 1,600 4,088
Operating costs - 588 757 1,311
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- 2,371 2,357 5,399
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Net Production income - 5,284 5,996 10,477
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Net back per BOE $25.49 $28.13 $24.67
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(1) Production from the Lavoy property has only been included in the
financial statements for the period from January 1, 2005 to March 24,
2005. The daily average natural gas and oil/liquids production
reflected above represents production for the period the property was
owned, averaged over the six-month reporting period. Lavoy average
daily production in 2005 for the period from January 1, 2005 to
March 24, 2005 was as follows:
Natural gas (mcf/d) 15,355
Oil and liquids (bbl's/d) 9
Daily average production (BOE/d) 2,568
Financial Highlights (excluding Lavoy area, as noted above,
except as noted otherwise)
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Three months ended Six months ended
June 30, June 30,
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($ Cdn thousands, except
as noted) 2005 2004 2005 2004
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Financial
Production revenue before royalties 11,052 13,043 23,017 24,422
Per Share(1) 0.22 0.32 0.41 0.60
Funds from operations(3) 6,917 9,471 16,284 18,600
Per Share ($)(1) 0.14 0.23 0.35 0.46
Net earnings (loss) 473 (382) (2,493) (1,079)
Per Share ($)(2) 0.01 (0.01) (0.05) (0.03)
The following amounts include
Lavoy transactions:
Total assets 148,612 195,616
Debt outstanding, net of working
capital - 66,668
Capital expenditures
Exploration, development and other 3,283 3,394 8,489 26,379
Acquisitions - 164 20,667 12,709
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Shares Outstanding (thousands)
Common shares June 30 48,822 41,002
Common shares August 3, 2005 48,822 -
Weighted average - basic 48,822 41,022 46,312 40,543
Weighted average - fully
diluted(4) 50,628 - - -
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Warrants June 30 5,000 -
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Stock options June 30 4,858 843
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Stock options August 3, 2005 4,852
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(1) Based on weighted average basic and fully diluted common (in periods
of net earnings), Class A common shares and warrants outstanding for
the period.
(2) For periods with positive net earnings, per share amount based on
weighted average basis and fully diluted common, Class A common
shares and warrants outstanding for the period. For periods with a
net loss, per share amount based on basic common and Class A common
shares outstanding for the period.
(3) Management uses funds flow from operations and funds flow from
operations per share (before changes in non-cash working capital and
asset retirement expenditures) to analyze operating performance and
leverage. Funds flow and funds flow per share as presented do not
have any standardized meaning prescribed by Canadian GAAP and
therefore they may not be comparable with the calculation of similar
measures for other entities. Funds flow as presented is not intended
to represent operating cash flow or operating profits for the period
nor should it be viewed as an alternative to cash flow from operating
activities, net earnings or other measures of financial performance
calculated in accordance with Canadian GAAP. All references to funds
flow and funds flow per share throughout this report are based on
cash flow from operating activities before changes in non-cash
working capital and asset retirement expenditures.
(4) Weighted average - fully diluted common shares are not reported for
the three months ended June 30, 2004, or the six months ended
June 30, 2004 and 2005, as the Company reported a net loss for those
periods.
Operating Highlights (excluding Lavoy area, as noted above,
except as noted otherwise)
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Three months ended Six months ended
June 30, June 30,
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($ Cdn thousands, except
as noted) 2005 2004 2005 2004
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Operating
Gas Production
Total natural gas (bcf) 1.3 1.6 2.9 3.1
Daily average natural gas
(mcf/d) 13,967 17,950 15,791 17,252
Average price ($/mcf) 7.90 6.80 7.20 6.87
Oil and Liquids Production
Total oil and liquids (Mbbls) 19.2 51.3 48.0 77.9
Daily average oil and liquids
(bbls/d) 211 569 265 430
Average price oil and liquids
($/bbl) 52.78 37.39 50.73 38.21
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Daily Average Production (BOE/d) 2,539 3,561 2,897 3,305
Land
Undeveloped land holdings,
(thousands of net acres) 68 87
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Drilling (including Lavoy)
Wells drilled (net)
Gas .2 9 2.5 27
Oil - 2 - 3
Service - - - -
Dry - 1 .5 2
Total .2 12 3.0 32
Success rate (%) 100 92 83 94
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Iteration Overview
Iteration is a Canadian oil and gas company with core assets at Boundary
Lake in Northeast British Columbia and Wild River, Cold Lake, Chigwell and
Granlea in Alberta.
The Company strives to operate its properties whenever possible and to
maintain high working interests. Iteration believes this high level of
operatorship can translate to controlling costs, timing of capital outlays and
projects as well as providing competitive advantages for future opportunities.
On July 7, 2005, with the approval of the Board of Directors, Hawker
Resources Inc. changed its name to Iteration Energy Ltd. The trading symbol
for Iteration also changed to ITX.
On March 22, 2005, Iteration announced that it had concluded its
strategic review process and that it had entered into two transactions that
provide the Company with a strong foundation for future growth. The two
transactions were Iteration's acquisition of Iteration Energy Inc., a
privately held oil and natural gas company, which provided Iteration with a
new, highly experienced senior management team; and Iteration's divestiture of
its non-operated Lavoy area assets for net cash consideration of $84.5 million
to two unrelated third parties.
Acquisition of Iteration Energy Inc.
Pursuant to a share purchase agreement dated March 20, 2005, the Company
purchased on March 21, 2005 all of the issued and outstanding shares of
Iteration Energy Inc. in exchange for the issuance of 5,750,000 common shares
of Iteration and 5,000,000 performance warrants. The 5,750,000 shares of
Iteration are subject to an escrow agreement and will be released as to a
third of the issued shares on each of March 20, 2006, 2007 and 2008,
respectively. The performance warrants have a term of 42 months, an exercise
price of $2.90 per share, and are exercisable only if Iteration's share price
trades above $4.50 per share on a weighted average basis for a period of more
than 45 consecutive calendar days within the next three and one half years.
The warrants vested May 7, 2005. In conjunction with this acquisition, the
Company granted 4,610,000 stock options with an exercise price of $2.90 to
employees of Iteration Energy Inc. that joined Iteration. The stock options
vest over a three-year period and expire after five years.
At the time of the acquisition of Iteration Energy Inc., the assets of
Iteration Energy Inc. included approximately $2.2 million in cash. It was also
a condition of the transaction that certain individuals of Iteration Energy
Inc. sign employment contracts with the Company. The management team acquired
brings extensive technical and operational expertise in the Western Canadian
Sedimentary Basin.
Divestiture of Lavoy Area Assets
Pursuant to two asset sale agreements dated March 21, 2005, Hawker sold
its Lavoy area assets to two unrelated third parties for cash consideration
totalling $85.0 million, with an effective date of January 1, 2005. The net
proceeds received from the asset sale was $84.5 million after adjustments for
operating results and capital expenditures between the effective date and the
closing date of March 24, 2005.
Quarterly Financial Data (excluding Lavoy (except for 2003),
as noted above)
($ thousands except per share data)
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2005 2004
----------------- -----------------------------------
Quarter ended June 30 Mar 31 Dec 31 Sept 30 June 30 Mar 31
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Revenues before
royalties 11,052 11,965 12,248 10,769 13,043 11,379
Net earnings (loss) 473 (2,966) (2,472) (1,981) (382) (697)
Net earnings (loss)
per common share
- basic (if net
loss) fully diluted
(if net earnings)
during period 0.01 (0.07) (0.06) (0.05) (0.01) (0.02)
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2003
-----------------
Quarter ended Dec 31 Sept 30
-------------------------------------
Revenues before
royalties 9,148 8,978
Net earnings (loss) 3,609 (477)
Net earnings (loss)
per common share
- basic (if net
loss) fully diluted
(if net earnings)
during period 0.13 (0.02)
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Operating Results
Net Earnings (Loss) (excluding Lavoy area, as noted above)
Iteration net earnings in the second quarter of 2005 were $0.5 million as
compared to a net loss (after adjusting for Lavoy) of $0.4 million in the
second quarter of 2004. The second quarter 2005 financial results were
impacted by decreased production, which was partially offset by higher
benchmark crude oil and natural gas prices. In addition, decreased production
expenses and general and administrative expenses (after adjusting for stock
based compensation charges) helped to offset the impact of lower actual
production during the quarter.
Operating Netback (excluding Lavoy area, as noted above)
The second quarter 2005 operating netback of $34.65/BOE increased from
$23.45/BOE in Q2, 2004 on the strength of higher realized commodity prices and
lower operating costs per BOE.
Operating Netback Three months ended June 30 Six months ended June 30
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% %
($/BOE) 2005 2004 Change 2005 2004 Change
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Production revenue 47.84 40.25 19 43.90 40.82 8
Royalties (9.86) (9.39) 5 (9.86) (9.08) 9
Operating costs (2.88) (6.29) (54) (5.99) (5.84) 3
Transportation costs (0.45) (1.12) (60) (0.76) (1.66) (54)
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Operating netback 34.65 23.45 48 27.29 24.24 13
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Production (excluding Lavoy area, as noted above)
Average daily production for the three months ended June 30, 2005
decreased by 1,022 BOE/d as compared to the three months ended June 30, 2004.
Production decreases at Boundary Lake due to normal decline were exaggerated
by the extended turn around at the Duke McMahon gas plant. However, new
production at Wild River and increased production at Cold Lake from new
drilling partially offset this decline.
Natural gas production from the Wild River area commenced in late
September 2004 and added 350 BOE/d to second quarter 2005 production
(332 BOE/d for the first six months of 2005) while the well was on production.
Average production from this property for the quarter was less as the property
was shut in for 23 days for work over requirements.
Production at Cold Lake increased by 76 BOE/d over the second quarter of
2004 due to new wells.
Third quarter production will continue to be impacted by the plant
turnaround at Boundary Lake. The McMahon plant shutdown shut in approximately
1,950 BOE/d at Boundary Lake for the period from June 22 to July 7. Production
is expected to increase to approximately 4,030 BOE/d for the fourth quarter of
2005.
Daily Production Three months ended June 30 Six months ended June 30
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% %
2005 2004 Change 2005 2004 Change
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Natural gas (Mcf/d) 13,967 17,950 (22) 15,791 17,252 (8)
Crude oil and natural
gas liquids (Bbls/d) 211 569 (63) 265 430 (38)
Total (BOE/d) 2,539 3,561 (29) 2,897 3,305 (12)
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Commodity Prices (excluding Lavoy area, as noted above)
Industry Benchmarks Three months ended June 30 Six months ended June 30
----------------------------------------------------
(Average for the % %
period) 2005 2004 Change 2005 2004 Change
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Natural gas US$/Mcf
at Henry Hub 6.94 6.10 14 6.69 5.86 14
Natural gas (Alberta
Spot) Cdn$/Mcf at AECO 7.36 7.01 5 7.14 6.71 6
WTI crude oil US$/
Barrel at Cushing 53.09 38.32 38 51.44 36.77 40
Canadian 0.3% par
crude Cdn$/barrel
at Edmonton 65.72 50.44 30 63.71 48.05 32
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Realized Three months ended June 30 Six months ended June 30
Commodity Prices -----------------------------------------------------
(Includes hedging % %
receipts & payments) 2005 2004 Change 2005 2004 Change
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Natural gas ($/Mcf) 7.90 6.80 16 7.20 6.87 5
Oil and natural gas
liquids ($/Bbl) 52.78 37.39 41 50.73 38.21 33
Total ($/BOE) 47.84 40.25 19 43.90 40.82 8
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Realized commodity prices for natural gas exceed the percentage change in
Alberta Spot prices due to the hedging loss realized by the Company in the
2004 reporting periods.
Revenue (excluding Lavoy area, as noted above)
Production revenue was $11.1 million in the second quarter of 2005,
compared with $13.0 million in the second quarter of 2004. The production
revenue decline was due to lower average daily production, (the result of
normal declines, work over work at Wild River, and the plant turn around at
Boundary Lake). However the impact of the production decline was partially
offset by netbacks for natural gas and crude oil.
Production Revenue Three months ended June 30 Six months ended June 30
before royalties -----------------------------------------------------
% %
($ thousands) 2005 2004 Change 2005 2004 Change
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Production revenue,
before hedging 11,052 14,039 (21) 23,017 25,268 (9)
Hedging loss - (996) (100) - (846) (100)
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Production revenue 11,052 13,043 (15) 23,017 24,422 (6)
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Hedging and Risk Management
In certain circ*mstances, fixed price commodity contracts or commodity
derivative contracts are used to reduce the Company's exposure to adverse
fluctuations in commodity prices to protect future cash flow used to finance
the Company's capital expenditure program. The Company uses hedge accounting
for gains and losses relating to commodity derivative contracts that settle
via net cash payment and that meet hedge criteria. These gains and losses are
recognized as part of natural gas sales concurrently with the hedged
transaction and, accordingly, no recognition of mark-to-market gains or losses
are included in income. The Company does not enter into financial instruments
for trading or speculative purposes.
At June 30, 2005 the Company did not have any commodity derivative
contracts outstanding. The following plantgate sales contract, however, was
outstanding:
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Volume Contract Price
Transaction Type (GJ/d) (GJ/d) Expiry
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Cogeneration Fuel Supply 33 $1.959 - $2.217 October 31, 2009
Royalties (excluding Lavoy area, as noted above)
Royalty expense was $2.3 million in the second quarter of 2005, compared
with $3.0 million in the second quarter of 2004. Rates per BOE were relatively
consistent between periods.
Royalties Three months ended June 30 Six months ended June 30
-----------------------------------------------------
($ thousands % %
except where noted) 2005 2004 Change 2005 2004 Change
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Royalties 2,277 3,043 (25) 5,155 5,433 (5)
Per BOE ($/BOE) 9.86 9.39 5 9.83 9.08 8
Percentage of
revenue (%) 21 23 (9) 22 22 (0)
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Production Expenses (excluding Lavoy area, as noted above)
Production expenses were $0.7 million for the second quarter of 2005,
compared with $2.0 million for the second quarter of 2004. A portion of the
decrease is due to the reversal of prior period operating cost accruals during
the quarter. Other contributing factors for the decrease during the quarter
are property shut ins (Boundary Lake, Wild River) as well as the results of
Management's cost cutting initiatives. It is Management's expectation that
operating costs for the properties will average approximately $6.00 per BOE
for the second half of the year.
Production Three months ended June 30 Six months ended June 30
Expenses -----------------------------------------------------
% %
($ thousands) 2005 2004 Change 2005 2004 Change
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Field operating costs 571 1,865 (69) 2,926 3,199 (9)
Allocated general and
administrative expenses 95 174 (45) 215 296 (27)
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Total production
expenses 666 2,039 (67) 3,141 3,495 (10)
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Production Three months ended June 30 Six months ended June 30
Expenses per BOE -----------------------------------------------------
% %
($ per BOE) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Field operating costs 2.46 5.76 (57) 5.58 5.34 4
Allocated general and
administrative
expenses 0.42 0.53 (21) 0.41 0.50 (18)
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Total production
expenses 2.88 6.29 (55) 5.99 5.84 3
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General and Administrative Expenses
General and administrative expenses, net of overhead recoveries on
operated properties, stock based compensation and bonus accruals, was
$1.0 million in the second quarter of 2005, compared with $1.5 million in the
second quarter of 2004. The reduction is a reflection the impact of staff
reductions during the quarter (and the resulting end of corresponding staff
retention premiums (which were in excess of $0.3 million during the first
quarter of 2005) and the cost cutting efforts undertaken by management to
streamline general and administrative functions within the organization. With
the anticipated additional activity contemplated by the Company during the
third and fourth quarter, staffing levels will increase, which will result in
increased staffing and administrative costs for those periods. The Company
does not expect to realize the results of those efforts, in the form of
additional production, until the fourth quarter of 2005 and the first quarter
of 2006. General and administrative costs are expected to average
approximately $3.00 per BOE for the second half of the year.
General and
Administrative Three months ended June 30 Six months ended June 30
Expenses -----------------------------------------------------
($ thousands except % %
where noted) 2005 2004 Change 2005 2004 Change
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Gross general &
administrative
expenses 1,549 2,432 (36) 3,830 4,567 (16)
Overhead recoveries (85) (234) (64) (200) (575) (65)
Allocation to
production expense (95) (174) (45) (215) (296) (27)
Capitalized overhead (363) (476) (24) (703) (853) (18)
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Net general &
administrative
expenses 1,006 1,548 (35) 2,712 2,843 (5)
Per BOE ($/BOE) 4.35 4.77 (9) 5.17 4.75 9
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Stock Based Compensation Expense
As approved by Hawker's shareholders, the Company's stock option plan was
amended effective April 1, 2004 to provide stock option holders the choice,
upon exercise, to receive a cash payment in exchange for surrendering the
option. The cash payment is equal to the appreciated value of the stock
option, as determined by the difference between the option's exercise price
and the Company's closing share price the day prior to electing to exercise
the option. For the six months ended June 30, 2005, stock based compensation
expense of $1.1 million was accrued based on the appreciated value of the
outstanding stock options as determined using the June 30, 2005 closing share
price. Future fluctuations in the stock based compensation expense or
recoveries are dependent on the movement of the Company's share price and the
number of options outstanding. Based on the June 30, 2005 share price of
$4.90, had all 4,857,697 stock options outstanding been vested, stock based
compensation expense and a corresponding liability of $9.4 million (including
the $1.1 million recognized at June 30, 2005) would have been recognized.
Interest Expense
Interest expense on current and long-term debt was nominal for the three
months ended June 30, 2005 as all bank debt of the Company was repaid at the
end of the March 2005.
Interest Expense Three months ended June 30 Six months ended June 30
-----------------------------------------------------
($ thousands except % %
where noted) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Interest expense 35 581 (94) 588 1,227 (52)
Per BOE ($/BOE) 0.15 1.09 (86) 0.80 1.20 (33)
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Depletion and Depreciation (excluding Lavoy area, as noted above)
Depletion and depreciation expense was $5.0 million for the three months
ended June 30, 2005 compared to $6.6 million for the comparable period in
2004. This decrease was due to lower production during the quarter as compared
to 2004. The depletion and depreciation rate per BOE increase was primarily
due to impact of the acquisition of Zorin, coupled with the high finding and
development costs/BOE incurred in 2004.
Depletion and
Depreciation Three months ended June 30 Six months ended June 30
Expense -----------------------------------------------------
($ thousands except % %
where noted) 2005 2004 Change 2005 2004 Change
-------------------------------------------------------------------------
Depletion and
depreciation expense 5,043 6,613 (24) 12,383 12,038 3
Per BOE ($/BOE) 21.83 20.41 7 23.62 20.12 17
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Taxes
Current tax expense for the six months ended June 30, 2005 was comprised
of:
($ thousands)
-------------------------------------------------------------------------
Capital tax 80
Part XII.6 tax 184
Capital tax differential of prior years 46
Part I tax reassessed on predecessor companies 195
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Current tax expense 505
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Capital Expenditures
The Company spent $3.3 million on exploration and development activities
during the three months ended June 30, 2005. This low level of spending
resulted from the new management conducting a thorough technical review of all
the properties in preparation for increased activity in the second half of the
year, after breakup.
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Capital Expenditures Three months ended Six months ended
(including Lavoy) June 30, June 30,
($ thousands) 2005 2004 2005 2004
-------------------------------------------------------------------------
Exploration & development
expenditures 3,278 3,235 8,484 26,078
Acquisitions, net of cash acquired - 164 20,677 12,709
Other 5 159 5 301
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Total 3,283 3,558 29,166 39,088
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Management expects to spend approximately $36 million in capital
expenditures during the second half of 2005.
On March 24, 2005, Iteration closed the sale of its Lavoy area assets to
two unrelated third parties for a net cash consideration totaling
$84.5 million.
Liquidity and Capital Resources
On March 24, 2005, the Company received net proceeds from the divestiture
of the Lavoy area assets in the amount of $82.6 million. The Company
subsequently billed an additional $1.9 million for final closing adjustments.
The proceeds were used to retire bank debt, at which time the Company's credit
facility was cancelled. Remaining proceeds are reflected as cash.
The Company will be entering into preliminary discussions with Canadian
Chartered banks with the intention to establish a new credit facility in the
third quarter. However, the Company projects that cash flow plus existing cash
on hand will be sufficient to fund the anticipated capital program for the
balance of the fiscal year. Therefore, the Company does not anticipate the
need for the utilization of a credit facility this year.
Related Party Transactions
From time to time, the Company entered into contracts with service
companies that directors of Iteration (up until July 5, 2005) are also
directors of. The services and supplies, which were primarily for legal and
well monitoring services, (and totalled $878,000 for the six months ended
June 30, 2005) were invoiced to Iteration at standard industry rates.
Outlook for 2005
With the elimination of the debt and the acquisition of Iteration Energy
Inc., the Company is poised for growth in the second half of 2005. Management
has completed a detailed review of the core properties, which has shown
numerous opportunities for reserve and volume additions. These opportunities
will be exploited later in the year. The Company has plans for additional
exploration wells and continues its focus on adding new lands for future
exploration and development. The Company will continue its program of lower
operating costs on the existing properties and streamlining general and
administrative functions. The Company plans capital expenditures of
$36 Million during the second half of the year and production is expected to
increase to an average of 4,030 BOE/d for the fourth quarter.
Directors, Officers and Auditors
Current Directors and Officers of the Company are as follows:
Directors
---------
Pat Breen P. Eng. President, Foremost Income Trust Fund
Dallas Droppo Q.C. Partner, Blake, Cassels and Graydon, LLP
Jim Grenon President, Tom Capital Associates
Michael Hibberd Independent Businessman
Brian Illing P. Geol President and CEO, Iteration Energy Ltd.
Robert Waters CA Senior VP and CFO, Enerplus Resource Fund
Corporate Secretary
-------------------
Tony Grenon Managing Director, Tom Capital Associates
Officers
--------
Brian Illing President and CEO
Mark Ariss VP Exploration East
Sean Johnson CFO
Jane Mactaggart VP Exploitation
Carmen McKay-Illing VP Corporate Affairs
Kevin Stromquist VP Exploration West
Auditors
--------
Ernst & Young, LLP
Advisory - Forward-Looking Information
This MD&A contains forward-looking information with respect to Iteration
Energy Ltd. (formerly Hawker Resources Inc.)
The use of any of the words "anticipate," "continue," "estimate,"
"expect," "may," "will," "project," "should," "believe," "outlook," and
similar expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and other
factors that may cause actual results or events to differ materially from
those anticipated in our forward-looking statements. We believe the
expectations reflected in these forward-looking statements are reasonable.
However, we cannot assure the reader that these expectations will prove to be
correct. The reader should not unduly rely on forward-looking statements
included in this report. These statements speak only as of the date of the
MD&A, being August 3, 2005.
In particular, this MD&A contains forward-looking statements pertaining
to the following:
- The quantity and recoverability of our reserves;
- The timing and amount of future production;
- Prices for natural gas produced;
- Operating and other costs;
- Business strategies and plans of Management;
- Supply and demand of natural gas;
- Expectations regarding our ability to raise capital and to add to our
reserves through acquisitions as well as exploration and development;
- The focus of capital expenditures on development activity rather than
exploration;
- The sale, farming in, farming out or development of certain
exploration properties using third party resources;
- The use of development activity and acquisitions to replace and add to
reserves;
- The impact of changes in natural gas prices on cash flow after
hedging;
- Drilling plans;
- The existence, operations and strategy of the commodity price risk
management program;
- The approximate and maximum amount of forward sales and hedging to be
employed;
- The Company's acquisition strategy, and the criteria to be considered
and the benefits to be derived;
- The impact of Canadian federal and provincial governmental regulation
on the Company relative to other issuers of similar size;
- Our treatment under governmental regulatory regimes;
- The goal to sustain or grow production and reserves through prudent
management and acquisition;
- The emergence of accretive growth opportunities; and
- The Company's ability to benefit from the combination of growth
opportunities and the means to grow through the capital markets.
Our actual results could differ materially from those anticipated in our
forward-looking statements as a result of the risk factors set forth below and
elsewhere in this MD&A which include but are not limited to:
- Volatility in market prices for natural gas;
- Risks inherent in our operations;
- Uncertainties associated with estimating reserves;
- Competition for, among other things: capital, acquisitions of
reserves, undeveloped lands and skilled personnel;
- Incorrect assessments of the value of acquisitions;
- Geological, technical, drilling and process problems;
- General economic conditions including fluctuations in the price of
natural gas;
- Royalties payable in respect of Hawker's production;
- Governmental regulation of the oil and gas industry, including
environmental regulation;
- Fluctuation in foreign exchange or interest rates;
- Unanticipated operational events that can reduce production or cause
production to be shut-in or delayed;
- Stock market volatility and market valuations; and
- The need to obtain required approvals from regulatory authorities.
The above list of risk factors should not be construed as exhaustive.
Consolidated Financial Statements of
Iteration Energy Ltd. (formerly Hawker Resources Inc.)
June 30, 2005 and 2004
Iteration Energy Ltd. (formerly Hawker Resources Inc.)
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
June 30, December 31,
(in thousands of dollars) 2005 2004
-------------------------------------------------------------------------
ASSETS
Current
Cash $ 29,237 $ -
Accounts receivable 10,372 10,691
Assets held for sale - 2,119
Prepaids and other current assets 1,018 2,265
-------------------------------------------------------------------------
40,627 15,075
Property, plant and equipment
(Notes 2, 3, and 5) 87,308 185,112
Goodwill (Note 2(b)) 20,677 -
Future income taxes - 2,080
-------------------------------------------------------------------------
$ 148,612 $ 202,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities $ 8,476 $ 22,103
Equipment finance obligations - 111
Capital lease obligations (Note 5) 452 436
Bank loan (Note 4) - 1,243
-------------------------------------------------------------------------
8,928 23,893
Bank loan (Note 4) - 50,275
Equipment finance obligations - 214
Capital lease obligations (Note 5) 499 729
Future income taxes 1,083 -
Leasehold inducements 580 661
Asset retirement obligations (Note 6) 4,492 8,234
-------------------------------------------------------------------------
15,582 84,006
-------------------------------------------------------------------------
Shareholders' Equity (Note 7)
Share capital 139,201 126,618
Warrants outstanding 4,166 -
Contributed surplus - 10
Deficit (10,337) (8,367)
-------------------------------------------------------------------------
133,030 118,261
-------------------------------------------------------------------------
$ 148,612 $ 202,267
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
Iteration Energy Ltd. (formerly Hawker Resources Inc.)
Consolidated Statements of Earnings (Loss) and Deficit (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
(in thousands of dollars, June 30, June 30,
except per share amount) 2005 2004 2005 2004
-------------------------------------------------------------------------
(Note 2(c)) (Note 2(c))
Revenue
Production revenue $ 11,052 $ 20,698 $ 31,369 $ 40,302
Royalties, net of
Alberta Royalty
Tax Credit (2,277) (4,826) (6,756) (9,521)
-------------------------------------------------------------------------
8,775 15,872 24,613 30,781
Interest income 120 3 137 20
Gain on sale of
investments - 1,133 - 1,133
-------------------------------------------------------------------------
8,895 17,008 24,750 31,934
-------------------------------------------------------------------------
Expenses
Production 666 2,627 3,896 4,806
Transportation 105 363 402 999
General and administrative 1,006 1,548 2,712 2,843
Stock based compensation
(Note 7 (c)) 793 - 1,071 -
Interest on current debt - - 6 -
Interest 35 581 583 1,227
Depletion and depreciation 5,043 10,921 17,857 20,582
-------------------------------------------------------------------------
7,648 16,040 26,527 30,457
-------------------------------------------------------------------------
Earnings (loss) before the
following 1,247 968 (1,777) 1,477
-------------------------------------------------------------------------
Recovery of investment
tax credits 1,409 - 1,409 -
Loss on disposal of
investment in subsidiary - - (59) -
Operating costs and
write-downs associated
with assets held for sale - (33) (4) (69)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) before taxes 2,656 935 (431) 1,408
Taxes
Future income tax (1,997) - (1,035) -
Current (186) (340) (504) (555)
-------------------------------------------------------------------------
(2,183) (340) (1,539) (555)
-------------------------------------------------------------------------
Net earnings (loss) 473 595 (1,970) 853
Deficit, beginning of
period (10,810) (6,621) (8,367) (6,879)
-------------------------------------------------------------------------
Deficit, end of period $ (10,337) $ (6,026) $ (10,337) $ (6,026)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Basic and diluted net
earnings (loss) per
common share (Note 7(e)) $ 0.01 $ 0.01 $ (0.04) $ 0.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
Iteration Energy Ltd. (formerly Hawker Resources Inc.)
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands of dollars) 2005 2004 2005 2004
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ 473 $ 595 $ (1,970) $ 853
Add (deduct) non-cash items:
Depletion, depreciation
and asset write-downs 5,043 10,921 17,857 20,582
Accretion expense 56 65 262 155
Loss on disposal of
investment in subsidiary - - 42 -
Recovery of investment
tax credits (1,409) - (1,409) -
Future income tax 1,997 - 1,035 -
Amortization of leasehold
inducements (36) - (81) -
Gain on sale of investments - (1,133) - (1,133)
Stock-based compensation
(Note 7 (c)) 793 - 1,071 75
-------------------------------------------------------------------------
6,917 10,448 16,807 20,532
Asset retirement expenditures (155) - (262) -
Net change in non-cash
working capital (Note 10) (7,645) 1,481 (14,037) 824
-------------------------------------------------------------------------
(883) 11,929 2,508 21,356
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sale of
property, plant and
equipment (Note 2 (c)) 1,926 5,321 84,535 6,039
Proceeds on disposal of
assets held for sale - - 2,119 -
Cash consideration on
acquisition of subsidiary,
net of cash acquired - - (353) -
Cash consideration on
acquisition of oil and gas
properties (Note 2) - (139) - (2,021)
Additions to oil and gas
properties (3,278) (3,235) (8,484) (26,078)
Additions to other capital
assets (5) (159) (5) (301)
Proceeds on sale of
investment - 3,633 - 3,633
Leasehold inducements
received - 68 - 137
Net change in non-cash
working capital (Note 10) (1,175) (13,079) 829 (312)
-------------------------------------------------------------------------
(2,532) (7,590) 78,641 (18,903)
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Net change in bank loan - (3,847) (51,518) (1,635)
Principal payment -
equipment finance obligation (305) - (325) -
Principal payment - capital
lease obligation (109) - (214) -
Share issue costs - (3) (38) (27)
Net change in non-cash
working capital (Note 10) 183 (489) 183 (791)
-------------------------------------------------------------------------
(231) (4,339) (51,912) (2,453)
-------------------------------------------------------------------------
Increase (decrease) in cash (3,646) - 29,237 -
Cash, beginning of period 32,883 - - -
-------------------------------------------------------------------------
Cash, end of period $ 29,237 $ - $ 29,237 $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of cash flow information (Note 10)
See accompanying notes to the consolidated financial statements
For further information, please contact Mr. Brian Illing, President and
CEO, or Mr. Sean Johnson, CFO at 403-261-6883.
Iteration Energy Ltd. (formerly Hawker Resources Inc.)
Notes to the Consolidated Financial Statements
Three and Six Months ended June 30, 2005 and 2004
(Unaudited) (Tabular amounts in thousands of dollars,
unless otherwise noted)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of Iteration Energy Ltd.
(formerly Hawker Resources Inc.), (the "Company" or "Iteration") have
been prepared in accordance with Canadian generally accepted accounting
principles and are consistent with the accounting policies and methods of
computation used in the preparation of the audited consolidated financial
statements as at December 31, 2004. The interim consolidated financial
statements contain disclosures which are supplemental to the Company's
annual financial statements. Certain disclosures, which are normally
required to be included in the notes to the annual financial statements,
have been condensed or omitted. The interim consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended
December 31, 2004.
Basis of Consolidation
These consolidated financial statements include the accounts of
Iteration, its wholly owned subsidiary and its partnership.
2. ACQUISITIONS AND DISPOSITIONS
(a) Mar Oil Company
During January 2005, the Company disposed of its wholly owned subsidiary,
Mar Oil Company. Iteration received as consideration an unsecured
promissory note with a maximum $1,000,000 conditional principal amount,
based on the value of the proven reserves as of July 1, 2006, discounted
at 15%, on the lands held by Mar Oil Company plus net working interest
revenue received on these lands to July 1, 2006. The promissory note is
payable in annual installments, calculated based on cash flow from the
lands, commencing on August 31, 2007.
The promissory note may be prepaid in full by the purchaser by the
payment of (i) $250,000 by June 30, 2005; (ii) $350,000 after
July 1, 2005 and on or before December 31, 2005; or (iii) $500,000 after
January 1, 2006 and on or before June 30, 2006.
The Company did not assign value to the promissory note on the disposal
of Mar due to the unsecured nature of the promissory note and
uncertainties with regard to its ultimate repayment. A loss on the
disposition of Mar in the amount of $58,000 was recognized.
(b) Iteration Energy Inc.
On March 21, 2005 the Company acquired all of the shares of Iteration
Energy Inc. The acquisition was accounted for by the purchase method and
the purchase price was allocated as follows:
Allocation of purchase price:
Cash $ 2,175
Goodwill 20,677
-------------------------------------------------------------------------
Total purchase price $ 22,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consideration was comprised of :
Issue of 5,750,000 common shares using an ascribed value of
$2.81 per share $ 16,158
Issue of 5,000,000 warrants using an ascribed value of
$0.8332 per warrant 4,166
Cash 2,528
-------------------------------------------------------------------------
Total consideration $ 22,852
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The value of the common shares issued for the acquisition of Iteration
Energy Inc. was based on the average closing price of the Company's
shares on the five trading days preceding the closing of the transaction.
The results of operations for Iteration Energy Inc. have been included in
the consolidated financial statements since March 21, 2005.
The fair value of the warrants granted was estimated to be $4,166,000 as
at the date of grant using the Black-Scholes option pricing model and the
following weighted average assumptions:
-------------------------------------------------------------------------
Risk-free interest rate (%) 3.75
Expected life (years) 3.50
Expected volatility (%) 35.72
Expected dividend yield (%) -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(c) Sale of Lavoy Area Properties
On March 24, 2005, with an effective date of January 1, 2005, the Company
sold its Lavoy area properties to two unrelated third parties for gross
proceeds totaling $85,000,000. After adjustments for operating results
and capital expenditures for the period between the effective date and
the closing date, the Company received net proceeds of $84,535,000. The
proceeds were applied to eliminate bank debt, with the remaining proceeds
applied to working capital.
Operating results from the Lavoy area are included in the consolidated
financial statements from January 1, 2005 to March 24, 2005, the closing
date of the sale. No gain or loss on the disposition was recognized as
crediting the net proceeds to capital costs did not result in a change of
20 percent or more in the depletion and depreciation rate.
3. PROPERTY, PLANT AND EQUIPMENT
-------------------------------------------------------------------------
June 30, December 31,
2005 2004
-------------------------------------------------------------------------
Oil and gas properties $ 157,056 $ 237,009
Other 594 589
-------------------------------------------------------------------------
157,650 237,598
Less accumulated depletion and depreciation 70,342 52,486
-------------------------------------------------------------------------
$ 87,308 $ 185,112
-------------------------------------------------------------------------
-------------------------------------------------------------------------
At June 30, 2005, unproved properties and seismic amounting to
$12,846,000 (December 31, 2004: $21,416,000) have been excluded from the
depletion and depreciation calculation. Future development costs on
proven undeveloped reserves of $ nil (December 31, 2004: $1,633,000) are
included in the depletion and depreciation calculation.
For the three month period ended June 30, 2005, the Company capitalized
$363,000 (three months ended June 30, 2004: $476,000) of overhead
directly related to exploration and development activities. For the six
month period ended June 30, 2005, the Company capitalized $703,000 (six
months ended June 30, 2004: $853,000) of overhead directly related to
exploration and development activities.
Property, plant and equipment include assets under capital lease having a
carrying value of $1,137,000 as at June 30, 2005.
4. BANK LOAN
The Company applied proceeds received from the sale of its Lavoy area
property disposition (see note 2(c)) to repay all amounts outstanding
under its extendible revolving term credit facility, at which time the
facility was cancelled.
5. CAPITAL LEASE OBLIGATIONS
During 2004, the Company entered into an agreement to lease a new
compressor for a two-year term. It is anticipated that the Company will
purchase the compressor at the end of the two-year term and has accounted
for this lease as a capital lease. Assets under capital lease amounting
to $1,277,000 are included in property, plant and equipment and
depreciated with other equipment costs on the unit of production method.
The interest rate implicit in the lease is 7.35%. Future minimum lease
payments under the capital lease are as follows:
-------------------------------------------------------------------------
Current $ 452
Thereafter 499
-------------------------------------------------------------------------
$ 951
-------------------------------------------------------------------------
-------------------------------------------------------------------------
6. ASSET RETIREMENT OBLIGATIONS
The total future asset retirement obligations were estimated by
management based on the Company's net working interest in all wells and
facilities, estimated costs to reclaim and abandon wells and facilities
and the estimated timing of the costs to be incurred in future periods.
The Company estimates the undiscounted cash flows related to asset
retirement obligations, adjusted for inflation, to be incurred over the
estimated reserve life of the underlying assets will total approximately
$9,062,000. The fair value at June 30, 2005 is $4,492,000 using a
discount rate of six percent and an inflation rate of two percent. As at
June 30, 2005, no funds have been set aside to settle this obligation.
Six Months Ended Year ended
June 30, December 31,
2005 2004
-------------------------------------------------------------------------
Balance, beginning of period $ 8,234 $ 3,499
Increase in liabilities 131 4,440
Settlement of liabilities (262) -
Decrease in liabilities due to property
dispositions (3,873) -
Accretion expense 262 295
-------------------------------------------------------------------------
Balance, end of period $ 4,492 $ 8,234
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. SHARE CAPITAL
(a) Common Shares Issued
-------------------------------------------------------------------------
Number of
Shares Amount
-------------------------------------------------------------------------
Balance, January 1, 2005 43,071,681 $ 126,618
Issued on acquisition of Iteration (Note 2(b)) 5,750,000 16,158
Share issue costs, net of tax effect - (25)
Tax benefits renounced - (3,550)
-------------------------------------------------------------------------
Balance, June 30, 2005 48,821,681 $ 139,201
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(b) Flow-Through Shares
During 2004, the Company issued common shares on a flow-through basis for
gross proceeds of $10,558,000 to finance certain oil and gas expenditures
to be incurred in 2005. The renouncement of these expenditures was made
to the purchasers of these shares in 2005 and accordingly, share capital
has been reduced by the amount of the tax benefits associated with these
expenditures. The corresponding future tax liability was also recognized
in 2005.
(c) Stock Options
The Company has a stock option plan that provides for the issuance of
options to its directors, officers, employees and non-employees to
acquire up to 10% of the issued and outstanding common shares. The dates
on which options vest are set by the Board of Directors at the time of
grant. The exercise price of an option granted is the closing price of
the Company's stock on the last trading date prior to the grant date. The
dates on which options expire are also set by the Board of Directors at
the time of grant and cannot exceed ten years.
Outstanding stock options to acquire common shares through the stock
option plan are as follows:
-------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------
Weighted Weighted
average average
Number of exercise price Number of exercise price
Options $ Options $
-------------------------------------------------------------------------
Outstanding at
January 1 747,200 4.93 444,001 4.74
Granted 4,810,0000 2.93 433,700 5.10
Surrendered for
cancellation (126,665) 3.57 - -
Forfeited (572,838) 4.40 (34,500) 4.48
-------------------------------------------------------------------------
Outstanding at
June 30 4,857,697 3.05 843,201 4.94
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options
exercisable at
June 30 111,010 7.16 99,334 8.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information about the stock options
outstanding at June 30, 2005:
-------------------------------------------------------------------------
Weighted
Number average Weighted Number Weighted
outstanding remaining average exercisable average
Range of June 30, contractual exercise June 30, exercise
exercise prices 2005 life (years) price $ 2005 price $
-------------------------------------------------------------------------
$2.90 to $4.00 4,694,665 4.68 2.91 76,665 3.45
$4.01 to $5.00 121,666 4.37 4.76 13,889 4.68
$5.01 to $9.00 31,990 3.82 5.36 11,080 5.48
$9.01 to $30.00 1,563 3.92 17.20 1,563 17.20
$30.01 to $90.00 7,813 3.46 48.33 7,813 48.33
-------------------------------------------------------------------------
4,857,697 4.67 3.05 111,010 7.16
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Subsequent to June 30, 2005, an additional 27,000 options were granted at
a weighted average grant price of $5.17. These options vest over a period
of 5 years. In addition, subsequent to month end 28,333 options with a
weighted average grant price of $4.92 were exercised.
As approved by Iterations's shareholders, the Company's stock option plan
was amended effective April 1, 2004 to provide stock option holders the
choice, upon exercise, to receive a cash payment in exchange for
surrendering the option. The cash payment is equal to the appreciated
value of the stock option as determined based on the difference between
the option's exercise price and the Company's share price at the time of
exercise. For the period ended June 30, 2005, stock based compensation
expense of $1,071,000 (period ended June 30, 2004: $75,000), relating to
stock options was recognized based on the appreciated value of the
outstanding stock options, as determined using the June 30, 2005 closing
share price. Additional stock based compensation expense or recoveries in
future periods are dependent on the movement of the Company's share price
and the number of options outstanding. Based on the June 30, 2005 share
price of $4.90, had all of the 4,857,697 stock options outstanding been
vested, stock based compensation expense and a corresponding liability of
$9,361,500 would have been recognized.
(d) Warrants
Warrants to purchase 5,000,000 common shares at $2.90 were issued to
Iteration Energy Inc. shareholders. The warrants vest the first day after
the common shares of the Company have traded at a weighted average price
of not less than $4.50 per common share for any 45 consecutive calendar
days within a 42-month period. The warrants expire on September 21, 2008.
On May 7, 2005, all of the warrants vested.
(e) Per Share Amounts
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Weighted average common
shares outstanding 48,821,681 41,021,681 46,312,012 40,543,443
Effect of dilutive
warrants 1,806,167 - - -
-------------------------------------------------------------------------
Weighted average diluted
common shares
outstanding 50,627,848 41,021,681 46,312,012 40,543,443
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Stock options have not been included in the determination of weighted
average diluted common shares outstanding as the options have a cash
settlement feature. In addition, the dilution effect of warrants was not
included for the six months ended June 30, 2005, as a net loss is
reported for that period.
8. RELATED PARTY TRANSACTIONS
From time to time, the Company entered into contracts with service
companies that directors of Iteration (up until July 5, 2005) are also
directors of. The services and supplies were invoiced to Iteration at
standard company prices.
All transactions were recorded at their exchange amounts.
9. FINANCIAL INSTRUMENTS
The following plant gate sales contracts were outstanding as at
June 30, 2005:
-------------------------------------------------------------------------
Transaction Type Volume (GJ/d) Contract Price(GJ/d) Expiry
-------------------------------------------------------------------------
Cogeneration Fuel Supply 33 $1.959 - $2.217 October 31,
2009
Based on independent price forecasts, had this contract been closed on
June 30, 2005, a loss of $232,000 would have been realized.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Changes in non-cash working capital were comprised of the following:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Accounts receivable $ 156 $ 1,373 $ 318 $ 203
Prepaids and other current
assets 706 (352) 1,247 (377)
Accounts payable and accrued
liabilities (9,499) (13,082) (14,590) 5,172
Less working capital
deficiency acquired - (26) - (1,000)
-------------------------------------------------------------------------
Net change $ (8,637) $ (12,087) $ (13,025) $ (279)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net change by activity:
Operating $ (7,645) $ 1,481 $ (14,037) $ 824
Investing (1,175) (13,079) 829 (312)
Financing 183 (489) 183 (791)
-------------------------------------------------------------------------
Net change $ (8,637) $ (12,087) $ (13,025) $ (279)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Additional information:
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
-------------------------------------------------------------------------
Cash interest paid $ 35 $ 575 $ 583 $ 1,386
Cash taxes paid 306 653 547 653
11. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
presentation adopted for the current period.
12. SUBSEQUENT EVENTS
On July 7, 2005, Hawker Resources Inc. changed its name to Iteration
Energy Ltd.
For further information
please contact Mr. Brian Illing, President and CEO, or Mr. Sean Johnson, CFO at (403) 261-6883
--------------------------------------------------------------------------------
Source: Iteration Energy Ltd.
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